UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999.
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
PENNSYLVANIA COMMERCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1834776
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Senate Avenue, P.O. Box 8599, Camp Hill, Pennsylvania 17011-8599
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(Address of principal executive offices)
Registrant's telephone number including area code: (717) 975-5630
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Securities registered under Section 12 (b) of the Exchange Act:
None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $1.00 par value
-----------------------------
(Title of Class)
NASDAQ Small Cap Market
(Name of Each Exchange on Which Registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
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The aggregate market value of voting stock held by non-affiliates of
the registrant is $23,438,200. (1)
The number of shares of the Issuer's common stock, par value $1.00 per
share, outstanding as of March 17, 2000 was 1,648,744.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II incorporates certain information by reference from the
registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1999 (the "Annual Report"). Part III incorporates certain information by
reference from the registrant's Proxy Statement for the Annual Meeting of
Shareholders.
______________________
(1) The aggregate dollar amount of the voting stock set forth equals
the number of shares of the registrant's Common Stock outstanding, reduced by
the amount of Common Stock held by executive officers, directors, and
shareholders owning in excess of 10% of the registrant's Common Stock,
multiplied by the last sale price for the registrant's Common Stock on March 17,
2000. The information provided shall in no way be construed as an admission that
the officer, director, or 10% shareholder in the registrant may be deemed an
affiliate of the registrant or that such person is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for the record
keeping purpose of the Securities and Exchange Commission.
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PENNSYLVANIA COMMERCE BANCORP, INC.
FORM 10-K CROSS-REFERENCE INDEX
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Page
Part I.
Item 1. Business..............................................................................5
Item 2. Properties...........................................................................11
Item 3. Legal Proceedings....................................................................14
Item 4. Submission of Matters to a Vote of Security Holders (This item is
omitted since no matters were submitted to a vote of security
holders during the fourth quarter of 1999.)
Part II.
Item 5. Market Price for the Registrant's Common Equity and
Related Shareholder Matters......................................................15
Item 6. Selected Financial Data
(The information required by this item is set forth on the
inside cover page of the Company's 1999 Annual Report.)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(The information required by this item is incorporated by
reference from the Company's 1999 Annual Report.)
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
(The information required by this item is incorporated by
reference from the Company's 1999 Annual Report.)
Item 8. Financial Statements and Supplementary Data
(The information required by this item is incorporated by
reference from the Company's 1999 Annual Report.)
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure (This item is omitted since it is not applicable.)
Part III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information required by the items in this Part III has been
omitted since it will be contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A.
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Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements: Balance Sheets, Statements of Income,
Statements of Stockholders' Equity, and Statements of Cash Flows
(a)(2) Financial Statement Schedules (This item is omitted since
information required is either not applicable or is included in
the footnotes to the Annual Financial Statements.)
(a)(3) Exhibits:
2. Agreement and Plan of Reorganization of Commerce Bank/Harrisburg,
National Association, dated April 23, 1999 (A)
3. i. Articles of Incorporation, as amended (A)
3.ii. By - Laws, as amended (B)
10. i. The Company's 1990 Directors Stock Option Plan (C)
10.ii. The Company's 1996 Employee Stock Option Plan (D)
10 iii. Warrant Agreement and Warrant No. 1 of Commerce Bank/Harrisburg
dated October 7, 1988
10 iv. Amendment No. 1 to the Stock and Warrant Purchase Agreement
11. Calculation of EPS
(The information required by this item appears in Note 12 of the
Consolidated Financial Statements of the Company's 1999 Annual
Report.)
13. Pennsylvania Commerce Bancorp, Inc. 1999 Annual Report to
Shareholders
21. Subsidiaries of the Company (incorporated by reference from
PART I, Item 1. "BUSINESS" of this Report on Form 10-K.)
23. Consent of Beard & Company Inc.
27. The Registrants Financial Data Schedule.
(b) There were no reports on Form 8-K filed in the fourth quarter of 1999
________________________
(A) Incorporated by reference from Appendix "A" and Appendix "B",
respectively, of the Prospectus of the Company's Registration
Statement on Form S-4 filed with the SEC on May 14, 1999.
(B) Incorporated by reference from Exhibit 3(b) of the Company's
Registration Statement on Form S-4 filed with the SEC on May 14,
1999.
(C) Incorporated by reference from Exhibit 4 of the Company's
Registration Statement on Form S-4 filed with the SEC on July 1,
1999.
(D) Incorporated by reference from Exhibit 4 of the Company's
Registration Statement on Form S-4 filed with the SEC on July 1,
1999.
Item 15. Signatures.......................................................................................16
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Part I.
Item 1. Business
General
Pennsylvania Commerce Bancorp, Inc. (the "Company") is a Pennsylvania
business corporation, which is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). The
Company was incorporated on April 23, 1999 and became an active bank holding
company on July 1, 1999 through the acquisition of 100% of the outstanding
shares of Commerce Bank/Harrisburg, N.A. Currently, the Company's only activity
is its ownership of the Bank. Except as otherwise indicated, all references
herein to the Company include Commerce Bank/Harrisburg, N.A. (also referred to
as "Commerce" or the "Bank").
The Company is a member of the Commerce Bancorp, Inc. Network (the
"Network") and has the exclusive right to use the "Commerce Bank" name and the
"Yes Bank" logo within its primary service area. The Network provides certain
marketing and support services to the Bank.
As of December 31, 1999, the Company had approximately $379 million in
assets, $349 million in deposits, $221 million in total loans, and $20 million
in stockholders' equity. The Bank is a member of the Federal Reserve System
(FRB) and substantially all of the Bank's deposits are insured up to applicable
limits by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance
Corporation (FDIC) to the fullest extent permitted by law.
As of December 31, 1999, the Company had 276 employees, of which 200
were full-time employees. Management believes the Company's relationship with
its employees is good.
Commerce Bank/Harrisburg
On July 13, 1984, Commerce Bank/Harrisburg (Commerce) filed an
application to establish a state-chartered banking institution with the
Pennsylvania Department of Banking. On September 7, 1984, Commerce was granted
preliminary approval of its application, and on September 11, 1984, was
incorporated as a Pennsylvania state-chartered banking institution under the
laws of the Commonwealth of Pennsylvania. The Bank opened for business on June
1, 1985.
On October 7, 1994, Commerce was converted from a Pennsylvania
state-chartered banking institution to a national banking association under the
laws of the United States of America and changed its name to "Commerce
Bank/Harrisburg, National Association." The Bank's conversion was consummated
pursuant to preliminary and conditional approval of the conversion granted by
the Office of the Comptroller of the Currency (OCC) on July 5, 1994 in response
to a letter of intent to convert to a national bank filed by the Bank with the
OCC on April 6, 1994.
Commerce provides a full range of retail and commercial banking
services for consumers and small and mid-sized companies. The Bank's lending and
investment activities are funded principally by retail deposits gathered through
its retail branch office network.
Service Area
The Bank offers its lending and depository services from its Main
Office in Camp Hill, Pennsylvania, and its ten full-service branch offices
located in Mechanicsburg, Colonial Park, Lower Paxton Township, Hummelstown,
York, and Carlisle, Pennsylvania. The Bank currently considers its primary
service area to include the central Pennsylvania area, including portions of
Dauphin, Cumberland, and York Counties, Pennsylvania.
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Retail and Commercial Banking Activities
The Bank provides a broad range of retail banking services and products
including free personal checking accounts and business checking accounts
(subject to a minimum balance), regular saving accounts, money market accounts,
interest checking accounts, fixed rate certificates of deposit, individual
retirement accounts, club accounts, and safe deposit facilities. Its services
also include a full range of lending activities including commercial
construction and real estate loans, land development and business loans,
business lines of credit, consumer loan programs (including installment loans
for home improvement and the purchase of consumer goods and automobiles), home
equity and Visa Gold card revolving lines of credit, overdraft checking
protection, student loans and automated teller facilities. The Bank also offers
construction loans and permanent mortgages for homes. Commerce is a participant
in the Small Business Administration Loan Program and is an approved lender for
qualified applicants.
The Bank directs its commercial lending principally toward businesses
that require funds within the Bank's legal lending limit, as determined from
time to time, and that otherwise do business and/or are depositors with
Commerce. The Bank also participates in inter-bank credit arrangements in order
to take part in loans for amounts that are in excess of its lending limit. In
consumer lending, the Bank offers various types of loans, including revolving
credit lines, automobile loans, and home improvement loans.
The Company has focused its strategy for growth primarily on the
further development of its community-based retail-banking network. The objective
of this corporate strategy is to build earnings growth potential for the future
as the retail branch office network matures. The Company's branch concept uses a
prototype or standardized branch office building, convenient locations and
active marketing, all designed to attract retail deposits. Using this prototype
branch concept, the Company plans to open two new branch offices in each of the
next five years. It has been the Company's experience that each newly opened
branch office incurs operating losses during the first 18 to 20 months of
operations and becomes profitable thereafter. The Company's retail approach to
banking emphasizes a combination of long-term customer relationships, quick
responses to customer needs, active marketing, convenient locations, free
checking for customers maintaining certain minimum balances and extended hours
of operation.
The Company is not dependent on any one or more major customers.
Competitive Business Conditions / Competitive Position
The Company's current primary service area, the central Pennsylvania
area, including portions of Dauphin, Cumberland, and York Counties, is
characterized by intense competition for banking business. The Bank competes
with local commercial banks as well as numerous regionally based commercial
banks, most of which have assets, capital, and lending limits larger than that
of Commerce. The Bank competes with respect to its lending activities as well as
in attracting demand, savings, and time deposits with other commercial banks,
savings banks, insurance companies, regulated small loan companies, credit
unions, and with issuers of commercial paper and other securities such as shares
in money market funds.
Other institutions may have the ability to finance wide-ranging
advertising campaigns, and to allocate investment assets to regions of highest
yield and demand. Many institutions offer services such as trust services and
international banking which Commerce does not directly offer (but which the Bank
may offer indirectly through other institutions). Many institutions, by virtue
of their greater
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total capital, can have substantially higher lending limits than Commerce.
In commercial transactions, the Bank's legal lending limit to a single
borrower (approximately $3,930,000 as of December 31, 1999) enables it to
compete effectively for the business of smaller companies. However, this legal
lending limit is considerably lower than that of various competing institutions
and thus may act as a constraint on the Bank's effectiveness in competing for
financing in excess of these limits.
In consumer transactions, the Bank believes it is able to compete on a
substantially equal basis with larger financial institutions because it offers
longer hours of operation, personalized service and competitive interest rates
on savings and time accounts with low minimum deposit requirements.
In order to compete with other financial institutions both within and
beyond its primary service area, the Bank uses, to the fullest extent possible,
the flexibility which independent status permits. This includes an emphasis on
specialized services for the small businessperson and professional contacts by
the Bank's officers, directors and employees, and the greatest possible efforts
to understand fully the financial situation of relatively small borrowers. The
size of such borrowers, in management's opinion, often inhibits close attention
to their needs by larger institutions. The Bank may seek to arrange for loans in
excess of its lending limit on a participation basis with other financial
institutions in order more fully to service customers whose loan demands exceed
the Bank's lending limit.
The Bank endeavors to be competitive with all competing financial
institutions in its primary service area with respect to interest rates paid on
time and saving deposits, its overdraft charges on deposit accounts, and
interest rates charged on loans.
Supervision and Regulation
The following discussion sets forth certain of the material elements of
the regulatory framework applicable to bank holding companies and their
subsidiaries and provides certain specific information relevant to the Company.
The regulatory framework is intended primarily for the protection of depositors,
other customers and the Federal Deposit Insurance Funds and not for the
protection of security holders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. A change in
applicable statutes, regulations or regulatory policy may have a material effect
on the business of the company.
The Company
The Company is subject to the jurisdiction of the Securities and
Exchange Commission ("SEC") and of state securities commissions for matters
relating to the offering and sale of its securities and is subject to the SEC's
rules and regulations relating to periodic reporting, reporting to shareholders,
proxy solicitation and insider trading.
The Company is subject to the provisions of the Bank Holding Company
Act of 1956, as amended. The Company is subject to supervision and examination
by the Federal Reserve Board ("FRB"). Under the Bank Holding Company Act, the
Company must secure the prior approval of the FRB before it may own or control,
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any institution, including another bank (unless it already owns
a majority of the voting stock of the bank).
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Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions.
Commerce is currently rated "satisfactory" under the Community Reinvestment Act.
The Company is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of the Company and any or all of its subsidiaries.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit or provision for any property or service. Thus, an affiliate of the
Company, such as Commerce may not condition the extension of credit, the lease
or sale of property or furnishing of any services on (i) the customer's
obtaining or providing some additional credit, property or services from or to
the Company or other subsidiaries of the Company, or (ii) the customer's
refraining from doing business with a competitor of Commerce, the Company or of
its subsidiaries. The Company or Commerce may impose conditions to the extent
necessary to reasonably assure the soundness of credit extended.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on (i) any extension of credit
to the bank holding company or any of its subsidiaries, (ii) investments in the
stock or other securities of the bank holding company, and (iii) taking the
stock or securities of the bank holding company as collateral for loans to any
borrower.
The Bank
As a nationally chartered commercial banking association, the Bank is
subject to regulation, supervision and regular examination by the Office of the
Comptroller of the Currency (OCC) and is required to furnish quarterly reports
to the OCC. The Bank is a member of the Federal Reserve System. The Bank's
deposits are insured by the FDIC up to applicable legal limits. Some of the
aspects of the lending and deposit business of the Bank that are regulated by
these agencies include personal lending, mortgage lending and reserve
requirements. The Bank is also subject to numerous federal, state and local laws
and regulations which set forth specific restrictions and procedural
requirements with respect to the extension of credit, credit practices, the
disclosure of credit terms and discrimination in credit transactions.
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The approval of the OCC is required for the establishment of additional
branch offices. Since March 4, 1990, the Bank is able to establish branches
within any county in Pennsylvania.
Under the Change in Banking Control Act of 1978, subject to certain
exceptions, no person may acquire control of the Bank without giving at least
sixty days prior written notice to the OCC. Under the Change in Banking Control
Act of 1978 and the regulations promulgated thereunder, control of the Bank is
generally presumed to be the power to vote ten percent (10%) or more of the
Common Stock. The OCC is empowered to disapprove any such acquisition of
control.
Under the Pennsylvania Banking Code of 1965, subject to certain
exceptions, no person may acquire control of more than 10 percent (10%) of the
outstanding voting shares of the Bank without the prior written approval of the
Pennsylvania Department of Banking.
The amount of funds that Commerce may lend to a single borrower is
limited generally under the National Bank Act to 15% of the aggregate of its
capital, surplus and undivided profits and capital securities (all as defined by
statute and regulation).
The OCC has authority under the Financial Institutions Supervisory Act
to prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Company.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal and state legislation and regulations which may
affect the cost of doing business.
Recent Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act
of 1999) which will, effective March 11, 2000, permit bank holding companies to
become financial holding companies and thereby affiliate with securities firms
and insurance companies and engage in other activities that are financial in
nature. A bank holding company may become a financial holding company if each of
its subsidiary banks is well capitalized, is well managed and has at least a
satisfactory rating under the Community Reinvestment Act, by filing a
declaration that the bank holding company wishes to become a financial holding
company. Also effective March 11, 2000, no regulatory approval will be required
for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve Board. The Financial Services Modernization Act defines
"financial in nature" to include: securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. A national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed
and has at least a satisfactory Community Reinvestment Act rating. The specific
effects of the enactment of the Financial Services Modernization Act on the
banking industry in general and on the Company in particular has yet to be
determined due to the fact that the Financial Services Modernization Act was
only recently adopted.
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National Monetary Policy
In addition to being affected by general economic conditions, the
earnings and growth of the Company are affected by the policies of regulatory
authorities, including the OCC, the FRB and the FDIC. An important function of
the FRB is to regulate the money supply and credit conditions. Among the
instruments used to implement these objectives are open market operations in
U.S. Government securities, setting the discount rate, and changes in reserve
requirements against bank deposits. These instruments are used in varying
combinations to influence overall growth and distribution of credit, bank loans,
investments and deposits, and their use may also affect interest rates charged
on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The effects of such policies upon the future
business, earnings, and growth of the Company cannot be predicted.
The costs and effects of compliance with environmental laws, federal,
state and local, on the Company are minimal.
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Item 2. Properties
Main Office
The main office of Commerce is located on the east side of the ground
floor of the Senate Plaza, Erford Road and Senate Avenue, East Pennsboro
Township, Camp Hill, Pennsylvania. The Bank leases and occupies 10,792 square
feet on the ground floor, containing a banking floor, lobby, administrative
offices, and executive offices. The Bank has constructed its own leasehold
improvements in the main office.
This lease commenced January 1, 1985 and had an initial term of 5 years
with three 5-year options to renew. The Bank renegotiated the lease to provide
for a ten-year term. The Bank currently pays an annual rent of $209,365. The
lease contains a provision for incremental rental increases.
Under the lease, the Bank is required to pay its pro rata share of the
increase in operating expenses and property taxes of the building over and above
the building's operational expenses and property taxes for the calendar year
ending December 31, 1983. The Bank's pro rata share of the total building is
4.79%. At the present time, the Bank's monthly pro rata share of these expenses
is $1,311. Leasehold improvements and interior furnishings are the
responsibility of the Bank.
The Bank has also leased an additional area on the Senate Plaza site
for a drive-in kiosk at an annual rent of $6,992. The drive-in kiosk is an
independent facility built and maintained at Commerce's sole cost and expense.
Operations Facilities
Operations Center
The operations center is located on the northwest side of the second
floor of 3 Crossgates Drive, Hampden Township, Mechanicsburg, Pennsylvania. The
Bank leases and occupies 8,535 square feet of office space on the second floor.
The original lease for 5,235 square feet of office space commenced March 1, 1994
and had an initial term of 5 years with three 3-year renewal options. The Bank
exercised its option to renew the lease for the first 3-year renewal period in
1999. The Bank has constructed leasehold improvements in the office space at the
lessor's expense.
In February 1996, the Bank signed a lease for an additional 3,300
square feet of office space. The initial term of this lease is three years with
three 3-year renewal options. The Bank exercised its option to renew the lease
for the first 3-year renewal period in 1999. The Bank has constructed leasehold
improvements in this space at it own expense. The Bank currently pays a combined
annual rent for this location of $90,300. The leases contain provisions for
incremental rent increases.
Loan Production Offices
(1) The Bank leases an office at 4 Lemoyne Drive, Suite 100, Lemoyne
Borough, Lemoyne, Pennsylvania, as a loan production office. The lease for 1,885
square feet of office space commenced October 1, 1998, and has an initial term
of 2 years with a year-to-year renewal option. The Bank has constructed
leasehold improvements in the office space at its own expense. The Bank
currently pays annual rent of $28,020. The lease contains provisions for
incremental rent increases.
(2) The Bank leases an office at 205-2 St. Charles Way, York
Township,York, Pennsylvania, as a loan production office. The lease for 1,496
square feet of office space commenced December 1, 1998, and had an initial term
of 1 year with three 1-year renewal options. The Bank exercised its first 1-year
renewal option in December 1999. The Bank has constructed leasehold improvements
in the office space at its own expense. The Bank currently pays annual rent of
$19,062.
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The lease contains provisions for incremental rent increases.
Branch Facilities
4700 Jonestown Road, Lower Paxton Township, Harrisburg, PA 17109-6216
The Bank entered into a land lease for the premises located at 4700
Jonestown Road, Harrisburg, Pennsylvania, consisting of a 36,007 square foot
lot. The Bank has constructed a full service branch on this land.
The land lease commenced on July 1, 1987, and has an initial term of 20
years. In addition, The Bank has an option to renew the land lease for three
additional 5-year terms. The Bank currently pays an annual rent of $40,000. Rent
is subject to increase on the terms set forth in the lease agreement.
4860 Carlisle Pike, Hampden Township, Mechanicsburg, PA 17055-3026
The Bank entered into a land lease for the premises located at 4860
Carlisle Pike, Mechanicsburg, Pennsylvania. The Bank constructed a full service
branch on this land.
The land lease commenced on October 1, 1988, and has an initial term of
20 years. In addition, the Bank has an option to renew the land lease for four
additional 5-year terms. The Bank currently pays an annual rent of $36,000. Rent
is subject to increase on the terms set forth in the lease agreement.
6071 Allentown Boulevard, Lower Paxton Township, Harrisburg, PA 17112-2673
The Bank entered into a land lease for the premises located at 6071
Allentown Boulevard, Harrisburg, Pennsylvania. The Bank constructed a full
service branch on this land.
The land lease commenced on January 1, 1992 and has an initial term of
20 years. In addition, the Bank has an option to renew the land lease for six
additional 5-year terms. The Bank currently pays an annual rent of $47,000. Rent
is subject to increase on the terms set forth in the lease agreement.
600 Walton Avenue, Derry Township, Hummelstown, PA 17036
The Bank purchased the parcel of land located at 600 Walton Avenue,
Hummelstown, Pennsylvania. The Bank constructed a full service branch office on
this land.
2160 South Queen Street, York, York County, Pennsylvania
The Bank purchased the parcel of land located at 2160 South Queen
Street, York, Pennsylvania. The Bank constructed a full service branch office on
this land.
2100 York Crossing Drive, West Manchester Township, York, York County,
Pennsylvania
The Bank entered into a land lease for the premises located at 2100
York Crossing Drive, York, Pennsylvania. The Bank constructed a full service
branch on this land.
The land lease commenced on April 23, 1996 and has an initial term of
20 years. In addition, the Bank has an option to renew the land lease for four
additional 5-year terms. The Bank currently pays an annual rent of $50,000. Rent
is subject to increase on the terms set forth in the lease agreement.
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1098 Haines Road, Springettsbury Township, York, York County, Pennsylvania
The Bank entered into a land lease for the premises located at 1098
Haines Road, York, Pennsylvania. The Bank constructed a full service branch on
this land.
The land lease commenced on April 1, 1997 and has an initial term of 20
years. In addition, the Bank has an option to renew the land lease for one
additional 5-year term and a term of four years, eleven months thereafter. The
Bank currently pays annual rent of $51,000. Rent is subject to increase on the
terms set forth in the lease agreement.
5032 Simpson Ferry Road, Lower Allen Twp., Mechanicsburg, Cumberland County,
Pennsylvania
The Bank purchased the parcel of land at 5032 Simpson Ferry Road,
Mechanicsburg, Pennsylvania. The Bank constructed a full service branch office
on this land.
55 Arsenal Road, Manchester Township, York, York County, Pennsylvania
The Bank purchased the parcel of land located at 55 Arsenal Road in
Manchester Township, York, Pennsylvania. The Bank constructed a full service
branch office on this land.
65 Ashland Avenue, Borough of Carlisle, Carlisle, Cumberland County,
Pennsylvania
The Bank purchased the parcel of land located at 65 Ashland Avenue in
the Borough of Carlisle, Carlisle, Pennsylvania. The Bank constructed a full
service branch office on this land.
1120 Carlisle Road, Lower Allen Township, Camp Hill, Cumberland County,
Pennsylvania
The Bank has purchased the parcel of land located at 1120 Carlisle Road
in Lower Allen Township, Camp Hill, Pennsylvania. The Bank intends to construct
a full service branch office on this land by June 2000.
Palmyra Shopping Center, Borough of Palmyra, Palmyra, Lebanon County,
Pennsylvania
The Bank has entered into a land lease for the premises located on lot
#2, in the Palmyra Shopping Center, on Route #422 in Palmyra, Pennsylvania. The
Bank intends to construct a full service branch office on this land in the year
2000.
The land lease commenced on September 13, 1999 and has an initial term
of 20 years. In addition, the Bank has an option to renew the land lease for
four additional 5-year terms. Initial annual rent payments equal $60,000 and
will commence on the opening of the branch for business. Rent is subject to
increase on the terms set forth in the lease agreement.
In the opinion of management, the interest of the Company is adequately
covered by insurance in each of the above properties.
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Item 3. Legal Proceedings
In prior years the Bank had reported on a multi-count lender liability
complaint against the Bank seeking unspecified damages. The Bank believed that
the complaint was without merit. The complaint was resolved with the Bank
borrower in the second quarter of 1999, with nominal costs to the Bank. In July
1999, the borrower withdrew the complaint.
In addition, the Company is also subject to certain other 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.
14
<PAGE>
Part II.
Item 5. Market Price For the Registrant's Common Equity
and Related Shareholder Matters
Since August 25, 1994, the Company's common stock has traded on the
NASDAQ Small Cap Market tier of The NASDAQ Stock Market under the symbol COBH.
Prior to that time, there was no established market for the Company's common
stock. The preferred stock is not traded on any market.
The following table sets forth the prices for which common stock has
traded during the last two (2) fiscal years on the NASDAQ Small Cap Market. The
prices per share have been adjusted to reflect common stock dividends of 5% with
record dates of February 4, 2000 and January 29, 1999. As of December 31, 1999,
there were approximately 400 holders of record of the Company's common stock.
Sales Price
Quarter Ended: High Low
-----------------------------------------------------------
March 31, 1999 $ 28.81 $ 25.62
June 30, 1999 27.38 25.24
September 30, 1999 25.60 21.43
December 31, 1999 23.81 20.00
------------------------------------------------------------
March 31, 1998 $ 27.21 $ 23.76
June 30, 1998 31.29 26.08
September 30, 1998 34.47 27.21
December 31, 1998 28.12 25.40
------------------------------------------------------------
Dividends and Dividend History
Neither the Company nor the Bank has declared or paid cash dividends on
its common stock since the Bank began operations in June 1985.
The holders of Common Stock of the Company are entitled to receive
dividends as may be declared by the Board of Directors with respect to the
Common Stock out of funds of the Company. While the Company is not subject to
certain restrictions on dividends and stock redemptions applicable to a bank,
the ability of the Company to pay dividends to the holders of its Common Stock
will depend to a large extent upon the amount of dividends paid by the Bank to
the Company.
The ability of the Company to pay dividends on its Common Stock in the
future will depend on the earnings and the financial condition of the Bank and
the Company. The Company's ability to pay dividends will be subject to the prior
payment by the Company of principal and interest on any debt obligations it may
incur in the future as well as other factors that may exist at the time.
Regulatory authorities restrict the amount of cash dividends the Bank
can declare without prior regulatory approval. Presently, the Bank cannot
declare a dividend in excess of its accumulated retained earnings.
15
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Pennsylvania Commerce Bancorp, Inc,
Date: March 17, 2000 By /s/ James T Gibson
----------------------------
James T. Gibson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Gary L. Nalbandian Chairman of the Board March 17, 2000
Gary L. Nalbandian
/s/ James T. Gibson President, Chief Executive Officer March 17, 2000
James T. Gibson and Director (Principal Executive
Officer)
/s/ Alan R. Hassman Director March 17, 2000
Alan R. Hassman
/s/ Michael A. Serluco Director March 17, 2000
Michael A. Serluco
/s/ Samir J. Srouji, M.D. Director March 17, 2000
Samir J. Srouji, M.D.
/s/ Mark A. Zody Executive Vice President (Chief March 17, 2000
Mark A. Zody Financial Officer and Principal
Accounting Officer)
</TABLE>
16
WARRANT AGREEMENT
WARRANT AGREEMENT dated October 7, 1988, between COMMERCE
BANK/HARRISBURG, a Pennsylvania banking corporation (hereinafter called the
"Bank") as its own Warrant Agent, and COMMERCE BANCORP, INC., a New Jersey
business corporation (hereinafter called "Commerce").
WHEREAS, the Bank proposes to issue and sell to Commerce
40,000 shares of a new class of Bank non-cumulative preferred stock, par value
$10.00 per share (the "Preferred Stock") and warrants (the "Warrants") to
purchase in the aggregate 40,000 shares of the Bank's common stock, par value
$6.25 per share (the "Common Stock"); and
WHEREAS, the Preferred Stock will be issued as a certificate
for Preferred Stock ("Stock Certificate") legended as set forth in Section 4
hereof to indicate that as legended the Warrants will only be redeemable in
whole and not in part with the Preferred Stock and that until the Warrants
become exercisable they may only be transferred in tandem with the Preferred
Stock, and the Warrants will be represented by a Warrant Certificate ("Warrant
Certificate") issued hereunder which will also indicate that the Warrants will
only be redeemable in whole and in part with the Preferred Stock and that until
the Warrants become exercisable they may only be transferred in tandem with the
Preferred Stock; and
WHEREAS, the Bank desires to set forth the terms and
conditions of the issuance, registration, transfer, exchange, redemption and
exercise of Warrants.
NOW, THEREFORE, in consideration of the premises and the
agreements herein set forth, and intending to be legally bound hereby to
Commerce and any of the future holders of the Warrants, the Bank agrees:
1. Warrants and Form of Warrant Certificates.
A. The text of the Warrant Certificate and of the
form of election to exercise Warrants and purchase shares of Common Stock
thereunder shall be substantially in the form as set forth in Exhibit A attached
hereto which text is hereby incorporated in this Agreement by reference as
though fully set forth herein.
B. Each Warrant shall entitle the registered holder
of the Warrant Certificate representing such Warrant, subject to the provisions
of this Agreement, to purchase, upon the exercise thereof, one fully paid and
non-assessable share of Common Stock at the Warrant Price specified in Section
9. The per share Warrant Price and the number of shares issuable upon exercise
of a Warrant are subject to adjustment upon the occurrence of certain events,
all as hereinafter provided.
<PAGE>
C. Each Warrant Certificate shall be executed on
behalf of the Bank by the manual signature of the present or any future Chairman
of the Board, President or Vice President of the Bank, and attested by the
manual signature of the present or any future Secretary or Assistant Secretary
of the Bank.
2. Countersignature and Registration.
A. The Bank shall maintain a book (the "Warrant
Register") for the transfer and registration of Warrants. The Warrant
Certificate shall be issued in registered form only. Until the Warrants become
exercisable as provided in this Agreement, the Bank shall initially issue and
register the Warrants in the name of the registered holder(s) of the Preferred
Stock in such denominations and otherwise in accordance with the written order
of the registered owner of the Preferred Stock, signed by the Chairman of the
Board, President or any Vice President and the Secretary or Assistant Secretary
of the Bank and deliver Warrant Certificates evidencing the same. If and when
the Warrants become exercisable as provided in this Agreement, the Bank shall at
all times issue and register the Warrants in the Warrant Registry in the name of
the registered holder(s) thereof in such denominations and otherwise in
accordance with the written order of the registered owner thereof, signed by the
Chairman of the Board, President or any Vice President and the Secretary or
Assistant Secretary of the Bank and deliver Warrant Certificates evidencing the
same. Each Warrant Certificate shall be dated the date of its signature.
B. Prior to due presentment for registration of
transfer of any Warrant Certificate, the Bank may deem and treat the person in
whose name such Warrant Certificate shall be registered upon the Warrant
Register (the "registered holder") as the absolute owner of such Warrant
Certificate and of each Warrant represented thereby (notwithstanding any
notation of ownership or other writing on the Warrant Certificate made by anyone
other than the Bank), for the purpose of any exercise thereof, or any
distribution to the holder thereof, and for all other purposes, the Bank shall
not be affected by any notice to the contrary.
3. Transfers and Exchanges.
A. Subject to the provisions of this Agreement
(including specifically, but not limited to, Section 19 hereof) and the
provisions of Section 9 of that certain Stock and Warrant Purchase Agreement
dated as of April 29, 1988 by and between the Bank and Commerce, the Bank shall
transfer, from time to time, any outstanding Warrants upon the Warrant Register,
upon presentation of the following: (1) the Warrant Certificate representing the
Warrants to be transferred, properly endorsed and accompanied by appropriate
instructions for transfer; and (2) payment, in cash or by check, bank draft or
postal or express money order payable to the order of the Bank, in United States
currency, of an amount equal to any stamp or other tax or government charge
required to be paid in connection with the transfer thereof. The proposed
transferee of the Warrants shall provide such information and shall execute such
other documents as the Bank shall reasonably request in connection with such
transfer. Upon any such
2
<PAGE>
transfer, a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants shall be issued to the transferee and the
surrendered Warrant Certificate shall be cancelled.
B. Warrant Certificates may be surrendered to the
Bank, together with a written, request for exchange, and thereupon the Bank
shall issue in exchange therefor one or more new Warrant Certificates as
requested by the registered holder of the Warrant Certificate or Certificates so
surrendered, representing an equal aggregate number of Warrants.
C. The Bank shall not be required to effect any
registration of an original issuance transfer or exchange which will result in
the issuance of a Warrant Certificate for a fraction of a Warrant.
D. No service charge shall be made by any exchange or
registration of transfer of Warrant Certificates.
4. Redemptions and Transfers with Preferred Stock.
A. The right to receive Preferred Stock and Warrants
shall be evidenced only by a legended Stock Certificate and Warrant Certificate
which, prior to a "change in control" of the Bank (as defined in Section 5
hereof) may be combined, exchanged, redeemed or transferred upon the records of
the Bank as transfer agent ("Transfer Agent"), only as a unit, and the right to
receive the Warrants may not be split up, combined, redeemed, exchanged or
transferred separately from the Preferred Stock. On and after a "change in
control" of the Bank shall have occurred, Warrants, subject to the provisions of
this Agreement and the provisions of Section 9 of that certain Stock and Warrant
Purchase Agreement dated as of April 29, 1988 by and between the Bank and
Commerce, may be combined, exchanged, or transferred upon the records of the
Bank as Transfer Agent separately from the Preferred Stock and the right to
receive the Warrants may be split up, combined, exchanged, or transferred
separately from the Preferred Stock; provided, however, that regardless of
whether or not a "change in control" of the Bank shall have occurred the
Preferred Stock and Warrants may not be redeemed separately. Each such Stock
Certificate shall bear a legend in the following form:
"Prior to a "change in control" of the Bank (as defined in
that certain Warrant Agreement dated October 7, 1988 by and
between the Bank and Commerce Bancorp, Inc.), each share of
Preferred Stock, par value $10.00 per share ("Preferred
Stock"), evidenced hereby may be combined, exchanged, redeemed
or transferred only with one Common Stock Purchase Warrant to
purchase one share of Common Stock and the right to receive
Preferred Stock and warrants may not be split up, combined,
exchanged, redeemed or transferred separately. On or after a
"change in control" of the Bank shall have occurred Common
Stock Purchase Warrants may
3
<PAGE>
be split up, combined, exchanged or transferred separately
from the Preferred Stock; provided, however, that regardless
of whether or not a "change in control" of the Bank shall have
occurred the Preferred Stock and Common Stock Purchase
Warrants may not be redeemed separately." The Bank will give
all Warrant holders prompt written notice of when a "change in
control" of the Bank has occurred.
5. Duration and Exercise of Warrants.
A. Subject to the provisions of this Agreement
(including specifically, but not limited to, Section 19 hereof), each registered
holder of one or more Warrants shall have the right to purchase from the Bank
(and the Bank shall issue and sell to such registered holder) after a "change in
control" of the Bank (as hereinafter defined) shall have occurred and prior to
the Expiration Date (as hereinafter defined) the number of shares of Common
Stock to which the Warrants represented by such Warrant Certificates are at the
time entitled hereunder.
B. For purposes of this Agreement, a "change in
control" of the Bank shall have been deemed to conclusively occur when any of
the following events shall have occurred without prior written consent of the
registered holders of Warrant Certificates representing no less than a majority
of the Warrants:
(1) a change in at least four members of the
Bank's Board of Directors or the addition of four or more new members to the
Bank's Board of Directors or any combination of the foregoing, within any two
calendar year period; or
(2) a person or group acting in concert as
described in section 13(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (other than a bank or bank holding company as defined in
the Federal Bank Holding Company Act of 1956, as amended) proposes to hold or
acquire beneficial ownership within the meaning of Rule 13(d)(3) promulgated
under the Exchange Act of a number of voting shares of the Bank which
constitutes either (i) more than twenty-five percent of the Bank's outstanding
voting shares or more than ten percent of the Bank's outstanding voting shares
if immediately after such acquisition no other person will own a greater
proportion of the Bank's outstanding voting shares or (ii) more than ten percent
of the Bank's outstanding voting shares, if any of the Bank's voting shares are
subject to the registration requirements of Section 12 of the Exchange Act.
(3) a bank or bank holding company (other than
the Acquirer and its subsidiaries) as defined in the Federal Bank Holding
Company Act of 1956, as amended, proposes, either directly or indirectly, (i) to
hold or acquire beneficial ownership within the meaning of Rule 13(d)(3)
promulgated under the Exchange Act of a number of voting shares of the Bank
which constitutes more than five percent of the Bank's outstanding voting
shares, (ii) to acquire all or substantially all of the assets of the Bank or
(iii) to merge or consolidate with the
4
<PAGE>
Bank, including a merger through the purchase of assets and assumption of
liabilities. For purposes of subparagraph (2) of this Section 5B. the term
"proposes to hold or acquire" and for purposes of subparagraph (3) of this
Section 5B., the term "proposes, either directly or indirectly, to hold or
acquire or to merge" shall mean when a person or group acting in concert has (A)
the right to acquire or merge (whether such right is exercisable immediately or
only after the passage of time or upon the receipt of such regulatory approvals
as is required by applicable law) pursuant to an agreement, arrangement or
understanding (whether or not in writing) or upon the exercise or conversion of
rights, exchange rights, warrants or options or otherwise; (B) commenced tender
or exchange offer with respect to the voting shares of the Bank or securities
convertible or exchangeable into voting shares of the Bank; or (C) the right to
vote pursuant to any agreement, arrangement or understanding (whether or not in
writing); provided, however, that such person or group acting in concert, shall
not be deemed to have acquired such shares if the agreement, arrangement or
understanding to vote such securities arises solely from a revocable proxy
either (i) given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable rules and regulations of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and is not also
then reportable on Schedule 13D under the Exchange Act or any comparable or
successor report or (ii) given in response to a proxy or consent solicitation
made in connection with the Bank's annual meeting of shareholders and in which
the only matter to be voted on is the election of the Bank's Board of Directors.
C. The Warrants may be exercised in accordance with
their terms at any time after a "change in control" of the Bank shall have
occurred and will expire unless sooner redeemed as provided in Section 9 hereof,
at 5:00 p.m. New York time on October 7, 2008 (the "Expiration Date"). Each
Warrant not exercised during said period shall become void and all rights
thereunder and all rights in respect thereof under this Agreement shall cease at
the end of such period.
D. Subject to the provisions of this Agreement
(including specifically, but not limited to, Section 19 hereof), each registered
holder of Warrants shall have the right to purchase from the Bank (and the Bank
shall issue and sell to such registered holder of Warrants) the whole number of
fully paid and non-assessable shares of Common Stock specified in such Warrants
(subject to adjustment as provided in this Agreement), free of all preemptive
rights of stockholders, upon surrender to the Bank at its principal office in
the Township of East Pennsboro, Pennsylvania of the certificate representing
such Warrant, with the form of election to purchase duly filed in and signed,
and upon payment to the Bank of the full Warrant Price, determined in accordance
with the provisions of Section 9 of this Agreement, for each share of Common
Stock as to which the Warrant is exercised. Payment of such Warrant Price shall
be made in either (i) cash, or by check, bank draft or postal or express money
order, payable in United States currency, to the order of the Bank or (ii)
certificates representing shares of Preferred Stock which will be valued at the
greater of $25 per share or such other price per share as is mutually agreed to
between the Bank and the registered holder of the Warrant which is being
exercised or (iii) any combination of cash and shares of Preferred Stock valued
as provided
5
<PAGE>
in clause (ii), at the principal office of the Bank. Upon such surrender of
Warrant Certificates and payment of the Warrant Price as aforesaid, the Bank
shall issue and cause to be delivered with all reasonable dispatch to or upon
the written order of the registered holder of such Warrants and in such name or
names as such registered holder may designate, a certificate or certificates for
the number of full shares of Common Stock so purchased upon the exercise of such
Warrants subject to Section 10 of this Agreement in respect to any fraction of a
share of Common Stock otherwise issuable upon the surrender.
E. Certificate or certificates representing shares of
Common Stock shall be deemed to have been issued and any person so designated to
be named therein shall be deemed to have become a holder of record of such
shares as of the date of the surrender of such Warrants and payment of the
Warrant Price; provided, however, that if, at the date of surrender of such
Warrants and payment of the Warrant Price, the transfer books for the Common
Stock or other class of stock purchasable upon the exercise of such Warrants
shall be closed, the certificates for the shares in respect of which such
Warrants are then exercised shall be issuable as of the date on which such books
shall next be opened and until such date the Bank shall be under no duty to
deliver any certificate for such shares and any person named in such certificate
shall not be deemed to have become a holder of record of such shares.
F. The rights of purchase represented by the Warrants
shall be exercisable, at the election of the registered holders thereof, either
as an entirety or from time to time for part only (in whole shares) of the
number of shares of Common Stock specified therein and, in the event that any
Warrant is exercised in respect of less than all the shares specified therein at
any time after a "change in control" of the Bank shall have occurred and prior
to the Expiration Date, a new Warrant Certificate or Certificates will be issued
to such registered holder for the remaining number of shares specified in the
Warrant Certificates so surrendered.
G. The required to be reserved require, in the
opinion state law or applicable Bank covenants that if any Common Stock for
purposes of exercise of Warrants of its counsel, under any Federal or governing
rule or regulation of any national securities exchange or automated quotation
system, registration with or approval of any governmental authority, or listing
on any such national securities exchange or automated quotation system before
such shares may be issued upon exercise, the Bank will in good faith and as
expeditiously as possible endeavor to cause such shares to be duly registered,
approved or listed on the relevant national securities exchange or automated
quotation system, as the case may be.
6. Payment of Taxes. The Bank will pay all documentary stamp
taxes attributable to the initial issuance of shares of Common Stock issuable
upon the exercise of Warrants.
7. Mutilated or Missing Warrants. In case any of the Warrant
Certificates shall be mutilated, lost, stolen or destroyed, the Bank shall issue
and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant Certificate, or in lieu of and
6
<PAGE>
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent right or
interest; but only upon receipt of evidence satisfactory to the Bank of such
loss, theft or destruction of such Warrant Certificate.
8. Reservation of Common Stock, etc. There has been reserved,
and the Bank shall at all times keep reserved, out of the authorized and
unissued shares of Common Stock, a number of shares of Common Stock sufficient
to provide for the exercise of the rights of purchase represented by the
Warrants, and the Transfer Agent (if other than the Bank) for the Common Stock
and every subsequent Transfer Agent for any shares of the Bank's capital stock
issuable upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares as shall be requisite for such purpose. The Bank
will keep a copy of this Agreement on file with the Transfer Agent for the
Common Stock and with every subsequent Transfer Agent for any shares of the
Bank's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. All Warrant Certificates surrendered in the
exercise of the rights thereby evidenced shall be cancelled and such cancelled
Warrant Certificates, with the forms of election to purchase on the reverse side
thereof duly filled in an signed, shall constitute sufficient evidence of the
number of shares of Common Stock which have been issued upon the exercise of
such warrants.
9. Warrant Price; Adjustments; Redemption.
A. The Warrant Price at which Common Stock shall be
purchasable upon exercise of warrants shall be, from the date a "change in
control" of the Bank shall have occurred until the Expiration Date, $25.00 per
share of Common Stock, or if adjusted or changed as provided in this Section,
shall be such price as so adjusted or changed ("Warrant Price").
B. The Warrant Price and the number of shares
issuable upon exercise or redemption of the Warrants shall be subject to
adjustments as follows:
(1) In case the Bank shall (i) pay a dividend in
Common Stock or make a distribution in Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of Common Stock or (iv) issue, by reclassification of its Common
Stock, other securities of the Bank (including any such reclassification in
connection with a consolidation or merger in which the Bank is the surviving
corporation), the number of ,shares of Common Stock purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the holder of
each Warrant shall be entitled to receive the kind and number of shares of
Common Stock or other securities of the Bank which it would have owned or have
been entitled to receive after the happening of any of the events described
above, had such Warrants been exercised immediately prior to the happening of
such event or any record date with respect thereto. An adjustment made pursuant
to this subparagraph (1) shall become effective immediately after the effective
date of such event retroactive to the record date, if any, for such event. Such
adjustment shall be made successively whenever any event listed above shall
occur.
7
<PAGE>
(2) In case the Bank shall issue rights, options
or warrants to all holders of its outstanding Common Stock, entitling them to
subscribe for or purchase Common Stock at a price per share which is lower at
the record date mentioned below than the then current market price per share of
Common Stock (as defined in subparagraph (7) below), the number of shares of
Common Stock thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of shares of Common Stock theretofore
purchasable upon exercise of each Warrant by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, options or warrants plus, the number of additional
shares of Common Stock offered for subscription or purchase, and of which the
denominator shall be the number of Shares of Common Stock outstanding on the
date of issuance of such rights, options or warrants plus the number of shares
which could be purchased at the current market price per share of Common Stock
at such record date with: (i) the aggregate purchase price of the total number
of shares of Common Stock so offered for subscription or purchase, plus (ii) any
consideration received by the Bank for such rights, options or warrants. Such
adjustment shall be made whenever such rights, options or warrants are issued,
and shall become effective immediately after the record date for the determi
nation of stockholders entitled to receive such rights, options or warrants.
(3) In case the Bank shall distribute to all
holders of its Common Stock (including any such distribution made in connection
with a consolidation or merger in which the Bank is the continuing corporation)
evidences of its indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned surplus and
dividends or distributions referred to in subparagraph (1) above or in the
paragraph immediately following this paragraph) or rights, options or warrants,
or convertible or exchangeable securities containing the right to subscribe for
or purchase Common Stock (excluding those referred to in and subparagraph (2)
above), then in each case the number of shares of Common Stock thereafter
purchasable upon the exercise of each Warrant shall be determined by multiplying
the number of shares of Common Stock theretofore purchasable upon the exercise
of each Warrant by a fraction, of which the numerator shall be the then current
market price per share of Common Stock (as defined in subparagraph (7) below) on
the date of such distribution, and of which the denominator shall be the then
current market price per share of Common Stock, less the then fair market value
of the portion of the assets or evidences of indebtedness so distributed or of
such subscription rights, options or warrants, or of such convertible or
exchangeable securities applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become effective
on the date of distribution retroactive to the record date for the determination
of stockholders entitled to receive such distribution.
In the event of a distribution by the Bank to
all holders of its shares of Common Stock of a subsidiary or securities
convertible into or exercisable for such stock, then in lieu of an adjustment in
the number of shares of Common Stock purchasable upon the exercise of each
Warrant, the holder of each Warrant, upon the exercise thereof at any time after
such distribution, shall be entitled to receive from the Bank, such subsidiary
or both, as the Bank shall
8
<PAGE>
determine, the stock or other securities to which such holder would have been
entitled if such holder had exercised such Warrants immediately prior thereto,
all subject to further adjustment as provided in this section 9; provided,
however, that no adjustment in respect of cash dividends or interest on such
stock or other securities shall be made during the term of a Warrant or upon the
exercise of a Warrant.
(4) In case the Bank shall issue shares of
Common Stock (excluding shares issued (i) in any of the transactions described
in subparagraph (1) above, (ii) upon conversion or exchange of other securities
convertible into or exchangeable for shares of Common Stock, (iii) to the Bank's
employees under bona fide stock option or employee benefit plans or incentive
arrangements adopted or approved by the Bank's Board of Directors, if such
shares would otherwise be included in this subparagraph (4) (but only to the
extent that the aggregate number of shares excluded hereby and issued after the
date hereof, shall not exceed 10% of the Bank's shares of Common Stock
outstanding at the time of any issuance), (iv) upon exercise of the Warrants or
the warrants or options issued prior to the date hereof, or (v) as consideration
to shareholders of another corporation when any such corporation is acquired,
merged into or becomes part of the Bank or a subsidiary of the Bank in n arm's
length transaction between the Bank and an unaffiliated third party in
proportion to their stockholdings of such corporation immediately prior to such
transaction, upon such transaction), for a consideration per share less than the
current market price per share (as defined in subparagraph (7) below) on the
date the Bank fixes the offering price of such additional shares, then in each
case the number of shares of Common Stock thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number of shares
of Common Stock theretofore purchasable by a fraction, of which the numerator
shall be the number 'of shares of Common Stock outstanding immediately after the
issuance of such additional shares, and of which the denominator shall be the
total number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares plus the number of shares of Common Stock
which the aggregate consideration received (determined as provided in
subparagraph (6) below) for the issuance of such additional shares would
purchase at such then current market price per share of Common Stock. Such
adjustment shall be made successively whenever such an issuance is made.
(5) In case the Bank shall issue any securities
convertible into or exchangeable for its shares of Common Stock (excluding
securities; issued in transactions described above) for a consideration per
share of Common Stock initially deliverable upon conversion or exchange of such
securities (determined as provided in subparagraph (6) below) less than the
current market price per share (as defined in subparagraph (7) below) in effect
immediately prior to the issuance of such securities, then in each case the
number of shares of Common Stock thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of shares of Common
Stock theretofore purchasable by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the maximum number of shares of Common Stock of the Bank deliverable upon
conversion of or in exchange for such securities at the initial conversion or
exchange price or rate, and of which the denominator shall be the number of
shares of Common
9
<PAGE>
Stock outstanding immediately prior to the issuance of such securities plus the
number of shares of Common Stock which the aggregate consideration received or
to be received (determined as provided in subparagraph (6) below) for such
securities would purchase at such then current market price per share of Common
Stock. Such adjustment shall be made successively whenever such an issuance is
made.
(6) For purposes of any computation respecting
consideration received pursuant to subparagraphs (4) and (5) above, the
following shall apply:
(i) in the case of the issuance of shares of
Common Stock for cash, the consideration shall be the amount of such cash,
provided that in no case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Bank for any underwriting of the
issue or otherwise in connection therewith;
(ii) in the case of the issuance of shares of
Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market value
thereof; and
(iii) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Bank for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Bank upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (i) and (ii) of this subparagraph (6)).
(7) For the purpose of any computation under
subparagraphs (2), (3), (4) and (5) of this Section 9, the then current market
price per share of Common Stock at any date shall be the average of the daily
closing prices for twenty consecutive trading days commencing five trading days
before the date of such computation. The daily closing price shall be the last
such reported sales price regular way or, in case no such reported sale takes
place on such day, the average of the closing bid and asked prices regular way
for such day, in each case on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading or, if not
listed or admitted to trading, the average of the closing bid and asked prices
of the shares of Common Stock in the over-the-counter market as reported by
NASDAQ or the last sale price of the shares of Common Stock as quoted in the
NASDAQ National Market System or any comparable system, or if not approved for
quotation on NASDAQ or any comparable system, the average of the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Bank for that
purpose.
(8) Whenever the number of shares of Common Stock
purchasable upon the exercise of each Warrant is adjusted, as herein provided,
the Warrant Price payable upon exercise of each Warrant shall be adjusted by
multiplying such Warrant Price
10
<PAGE>
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of shares of Common Stock purchasable upon the exercise of each
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of shares of Common Stock purchasable immediately thereafter.
(9) No adjustment in the number of Shares of Common
Stock purchasable upon the exercise of each Warrant need be made under
subparagraphs (2) and (3) if the Bank issues or distributes to each holder of
Warrants the rights, options, warrants or convertible or exchangeable
securities, or evidences of indebtedness or assets referred to in those
subparagraphs which each holder of Warrants would have been entitled to receive
had the Warrants been exercised immediately prior to the happening of such event
or the record date with respect thereto. No adjustment need be made for a change
in the par value of the shares of Common Stock.
(10) No adjustment in the number of shares of Common
Stock purchasable hereunder shall be required unless such adjustment would
require an increase or decrease of at least one percent in the number of shares
of Common Stock purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this subparagraph (10) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest
one-thousandth of a share.
(11) If any capital reorganization or
reclassification of the capital stock of the Bank, or consolidation or merger of
the Bank with or into another corporation, or the sale of all or substantially
all of its assets to another corporation shall be effected, then, as a condition
of such reorganization, reclassification, consolidation, merger or sale, lawful
and adequate provision shall be made whereby the holder of each Warrant then
outstanding shall thereafter have the right to purchase and receive on exercise
of such Warrant upon the basis and upon the terms and conditions specified in
this Agreement and in lieu of the shares of the Common fore purchasable and
Warrant, such shares Stock of the Bank immediately thereto receivable upon the
exercise of such of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
purchasable and receivable upon the exercise of such Warrant had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provision shall be made with respect to the
rights and interests of the registered holders of the Warrants to the end that
the provisions of this Agreement (including, without limitation, provision for
adjustment of the Warrant Price or the Redemption Price (as hereinafter
defined), and of the number of shares issuable upon the exercise of Warrants)
shall thereafter be applicable as nearly as may be in relation to any shares of
stock, securities, or assets thereafter deliverable upon exercise of Warrants.
The Bank shall not effect any such consolidation, merger or sale, unless, prior
to or simultaneously with the consummation thereof, the successor corporation
(if other than the Bank) resulting from such consolidation or merger or the
corporation purchasing such assets
11
<PAGE>
shall assume, by written instrument, the obligation to deliver to the holder of
each Warrant such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holders may be entitled to purchase.
C. The Bank shall have the option to redeem all but
not less than all of the Warrants at any time in accordance with the provisions
of this Paragraph C, on or after January 1, 1990 until the Expiration Date at a
redemption price equal to the positive difference, if any, between the "current
market price" of the Common Stock (as defined in subparagraph B.(7) hereof) and
the Warrant Price ("Redemption Price") or, if adjusted as provided in paragraph
D of this Section 9, such price as so adjusted. The Warrants may not be redeemed
by the Bank prior to January 1, 1990. The Warrants may not be redeemed except in
conjunction with the redemption of all of the Preferred Stock. For the purpose
of this paragraph C, the following provisions, inclusive, shall also be
applicable:
(1) The election of the Bank to redeem Warrants
shall be evidenced by a resolution of the Bank's Board of Directors, certified
by the Secretary or any Assistant Secretary of the Bank. Such resolution shall
specify that all of the Warrants are to be redeemed and the date on which the
Warrants are to be redeemed (such date being hereinafter called the "Redemption
Date"). The Bank may not elect to redeem less than all Warrants then
outstanding. The Redemption Date shall in all cases correspond to the redemption
date for the Preferred Stock.
(2) The Bank shall together with the redemption
notice for the Preferred Stock, not less than thirty days nor more than sixty
days prior to the Redemption Date, mail a copy of the Notice of Redemption by
first class mail, postage prepaid, to each registered holder of a Warrant. The
notice shall provide:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) that all then outstanding Warrants are to
be redeemed,
(iv) that on the Redemption Date the Redemption
Price will become due and payable upon presentation and surrender of the Warrant
Certificates evidencing such Warrants,
(v) the Warrant Price then in effect and the
date on which the right to exercise such Warrants will expire (assuming the
Warrants are then exercisable),the Redemption Date, the Redemption Price, that
all then outstanding Warrants,
(vi) assuming the Warrants are then exercisable,
that the Warrants called for redemption may nonetheless be exercised prior to
the close of business on the fifth business day prior to the Redemption Date and
that the Bank has the right, in its discretion,
12
<PAGE>
to permit Warrants to be exercised after the close of business on that date but
before the close of business on the Redemption Date, and
(vii) the place where the Warrants are to be
surrendered against payment of the Redemption Price.
(3) On or prior to any Redemption Date, the Bank
shall deposit in a special account, an amount in legal tender of the United
States of America for public and private debts, sufficient to pay the Redemption
Price of all Warrants.
(4) Notice of Redemption having been mailed as
hereinbefore provided and the Bank having prior to the Redemption Date deposited
for that purpose an amount in cash sufficient to redeem all the Warrants, which
shall not have been exercised prior to the close of business on the fifth
business day prior to the Redemption Date, or such later date as the Bank, in
its discretion, permits, shall become null and void and the holders thereof
shall have no rights with respect thereto other than the right to receive the
Redemption Price.
(5) In the event any Warrant shall not be so paid
upon presentation and surrender thereof for redemption, such Warrant shall,
until paid, bear interest from the Redemption Date at the rate of 11% per annum
commencing 30 days after the Redemption Date or (if later) 30 days after the
presentation and surrender of the Warrant for redemption.
(6) In the event any Warrants called for redemption
are exercised prior to the close of business on the fifth business day prior to
the Redemption Date (assuming the Warrants are then exercisable), or such later
date as the Bank, in its discretion, permits, any monies which shall have been
deposited for redemption of Warrants and which are not required for that purpose
by reason of such exercise shall be promptly repaid to the Bank.
D. In the event of any adjustments (or readjustments) of
the Warrant Price pursuant to the provisions of paragraph B of this Section 9,
the Redemption Price shall be adjusted to a price (rounded to the nearest whole
cent) calculated by dividing the product of (1) the Redemption Price in effect
immediately prior to such adjustment of the Warrant Price and (2) the Warrant
Price in effect as a result of such adjustment, by the Warrant Price in effect
immediately prior to such adjustment.
E. Irrespective of any adjustments or changes of the
Warrant Price or adjustments in the Redemption Price or the number or kind of
securities issuable upon exercise of Warrants, Warrant Certificates theretofore
or thereafter issued may continue to express the same Warrant Price, Redemption
Price (if stated), and number of shares of Common Stock as are stated in the
similar Warrant Certificates previously issued.
13
<PAGE>
F. Whenever there is an adjustment in the Warrant Price
and the Redemption Price or in the number or kind of securities issuable upon
exercise of the Warrants, or both, as provided in this Section 9, the Bank shall
(a) issue a certificate signed by the Chairman of the Board, President or a Vice
President of the Bank and by, the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Bank, showing in detail the facts
requiring such adjustment and the Warrant Price and the Redemption Price, and
number and kind of securities issuable upon exercise of each Warrant after such
adjustment; and (b) cause a notice stating that such adjustment has been
effected and stating the Warrant Price and the Redemption Price then in effect
and the number and kind of securities issuable upon exercise of each Warrant to
be sent by First Class mail, postage prepaid, to each registered holder of a
Warrant Certificate at his address as it appears on the Warrant Register.
G. The Warrant Price shall not be adjusted or changed and
the Redemption Price and the number of shares issuable upon exercise of a
Warrant shall not be adjusted except in the manner and only upon the occurrence
of the event heretofore specifically referred to in this Section 9.
10. Fractional Interests.
A. The Bank shall not be required to issue fractions of
shares of Common Stock on the exercise of Warrants as heretofore provided. If
any fraction of a share of Common Stock would, except for the provisions of this
Section, be issuable on the exercise of any Warrant, the Bank will (i) if the
fraction of a share otherwise issuable is equal to or less than one-half,
round-down and issue to the registered holder only the whole number of shares of
Common Stock to which the registered holder is entitled or (ii) if the fraction
of a share otherwise issuable is greater than one-half, round-up and issue to
the registered holder one additional shares of Common Stock in addition to the
largest whole number of shares of Common Stock to which the registered holder is
otherwise entitled.
B. If the Bank redeems any of the Warrants as heretofore
provided and the Warrants provide for the issuance of a fractional share of
Common Stock, the Bank shall pay to the registered holder only the product of
(i) the largest whole number of shares of Common Stock to which the registered
holder is otherwise entitled and (ii) the Redemption Price then in effect.
11. Rights of Warrant Holders as Stockholders.
Nothing contained in this Agreement or in any of the Warrants
shall be construed as conferring upon the registered holders thereof the-right
to vote or to consent or to receive notice as stockholders in respect of the
meetings of stockholders or the election of Directors of the Bank or any other
matter, or any rights whatsoever as stockholders of the Bank.
14
<PAGE>
12. Inspection of this Agreement. The Bank shall keep copies
of this Agreement available for inspection by registered holders of Warrant
Certificates during normal business hours at its principal office in the
Township of Pennsboro, Pennsylvania.
13. Notices.
A. Any notice pursuant to this Agreement to be given by
the registered holder of any Warrant to the Bank shall be sufficiently given or
made if sent by first- class mail, postage prepaid, addressed (until another
address is designated in writing by the Bank) as follows:
Commerce Bank/Harrisburg
Erford Road and Senate Avenue
East Pennsboro Township
Camp Hill, PA 17011
Attn: President
14. Supplements and Amendments. The Bank may, from time to
time, by supplemental agreement or amendment make any changes or corrections in
this Agreement without the approval of any of the registered holders of Warrants
(i) that they shall deem appropriate to cure any ambiguity or to correct or
supplement any defective or inconsistent provision of manifest mistake or error
herein contained; or (ii) that they may deem necessary or desirable and which
shall not in either case adversely affect the rights, privileges or immunities
of the registered holders of Warrant Certificates; but this Agreement shall not
otherwise be modified, supplemented or altered in any respect (except to extend
the Expiration Date) except with the consent in writing of the registered
holders of Warrant Certificates representing not less than a majority of the
Warrants outstanding.
15. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Bank shall bind and inure to the benefit
of their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate as of the
close of business on October 7, 2008 or such earlier date upon which all
Warrants have been exercised.
15
<PAGE>
17. Governing Law. This Agreement and each Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the Commonwealth of Pennsylvania and for all purposes shall be construed
in accordance with the laws of said Commonwealth.
18. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Bank, and
the registered holders of the Warrants, any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Bank and the registered holders of the Warrants.
19. Violation of Laws or Regulations: Conditions on
Exercise of Warrant.
A. Nothing contained herein shall be deemed to
require the Bank, or the registered holders of the Warrants to violate any
federal, state or local laws or regulations in the performance of this
Agreement.
B. A Warrant is not exercisable until all the
following events occur and during the following periods of time:
(1) Until such Warrant and the Common Stock to
be issued upon the exercise of such Warrant are approved and/or registered with
such federal, state and local regulatory bodies or agencies and securities
exchanges as the Bank may deem necessary or desirable;
(2) During any period of time in which the Bank
deems that the exercisability of a Warrant, the offer to sell the Common Stock
issued upon exercise of such Warrant, or the sale thereof, may violate a
federal, state, local or securities exchange rule, regulation or law, or require
the Bank or any class of its securities, or the transaction, to be
16
<PAGE>
registered under any such rule, regulation or law, or may cause the Bank to be
legally obligated to issue or sell more shares than the Bank is legally entitled
to issue or sell.
20. Descriptive Headings. The descriptive headings of the
several sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, all as of the day and year first above written.
(SEAL) COMMERCE BANK/HARRISBURG
Attest: /s/ Howell C. Mette BY: /s/ James Gibson
----------------------- -----------------
Howell C. Mette, James Gibson,
Secretary President
(SEAL) COMMERCE BANCORP, INC.
Attest: /s/ Peter Musumeci BY: Vernon W. Hill, II
----------------------- -------------------
Peter Musumeci, Vernon W. Hill, II,
Asst. Secretary President
17
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: ss.
COUNTY OF :
On this day of , 1988, before me, the undersigned officer, personally
appeared James Gibson, who acknowledged himself to be the President of Commerce
Bank/Harrisburg, a Pennsylvania banking corporation, and that he as such, being
authorized to do so, executed the foregoing instrument for the purposes therein
contained by signing the name of the corporation by himself as President.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
------------------------
Notary Public
My Commission Expires:
18
<PAGE>
Warrant Number 1 Shares Deliverable Upon Exercise
40,000
Registered Holder
Commerce Bancorp, Inc.
THIS WARRANT WILL BE VOID IF NOT EXERCISED ON OR PRIOR TO 5:00 P.M., NEW YORK
TIME, ON OCTOBER 7, 2008, OR, IF SOONER CALLED FOR REDEMPTION IF NOT EXERCISED
ON OR PRIOR TO THE CLOSE OF BUSINESS ON THE FIFTH BUSINESS DAY PRIOR TO THE DATE
FIXED FOR REDEMPTION, UNLESS BANK, IN ITS DISCRETION, PERMITS EXERCISE AT A
LATER DATE.
PRIOR TO A "CHANGE IN CONTROL" OF THE BANK, AS SUCH TERM IS DEFINED IN THE
WARRANT AGREEMENT REFERRED TO HEREIN, EACH COMMON STOCK PURCHASE WARRANT
EVIDENCED HEREBY MAY BE COMBINED, EXCHANGED, REDEEMED OR TRANSFERRED ONLY WITH
ONE SHARE OF BANK PREFERRED STOCK, PAR VALUE $10.00 PER SHARE, AND THE RIGHT TO
RECEIVE WARRANTS AND PREFERRED STOCK MAY NOT BE SPLIT UP, COMBINED, EXCHANGED,
REDEEMED OR TRANSFERRED SEPARATELY. ON OR AFTER A "CHANGE IN CONTROL" OF THE
BANK SHALL HAVE OCCURRED, COMMON STOCK PURCHASE WARRANTS EVIDENCED HEREBY MAY BE
SPLIT UP, COMBINED, EXCHANGED OR TRANSFERRED SEPARATELY FROM THE PREFERRED
STOCK; PROVIDED, HOWEVER, THAT REGARDLESS OF WHETHER OR NOT A "CHANGE IN
CONTROL" OF THE BANK SHALL HAVE OCCURRED THE PREFERRED STOCK AND COMMON STOCK
PURCHASE WARRANTS EVIDENCED HEREBY MAY NOT BE REDEEMED SEPARATELY.
THIS WARRANT MAY ONLY BE EXERCISED AFTER A "CHANGE IN CONTROL" OF THE BANK HAS
OCCURRED.
COMMERCE BANK/HARRISBURG
Common Stock Purchase Warrant
THIS CERTIFIES that, for value received, Commerce Bank/ Harrisburg, a
Pennsylvania banking corporation (hereinafter called the "Bank"), will, upon the
surrender of this Warrant to the Bank at its principal office in the Township of
East Pennsboro, Pennsylvania, provided, and only if, this Warrant shall be so
surrendered after a "change in control" of the Bank shall have occurred (as such
term is defined in the Warrant Agreement) and on or prior to 5:00 p.m., New York
time, on October 7, 2008, sell and deliver, or cause to be sold or delivered, to
the registered holder or registered assigns, the above number of fully paid and
nonassessable shares of the Bank's Common Stock, par value $6.25 per share
("Common Stock"), evidenced by a certificate therefor and upon payment of the
full warrant price for the number of whole shares of Common Stock issuable upon
exercise of this Warrant; provided, however, that as set forth in the Warrant
Agreement, the Bank has the right, at any time prior to the exercise hereof, to
redeem this
1
<PAGE>
Warrant in whole only, and not in part, from January 1, 1990, until 5:00 p.m.,
New York time, on October 7, 2008, for the Redemption Price set forth in the
Warrant Agreement for each share of Common Stock then issuable, upon the
exercise of this Warrant. This Warrant may not be redeemed by the Bank prior to
January 1, 1990.
Under certain conditions set forth in paragraph B of Section 9 of said
Warrant Agreement, the number of shares of the Common Stock purchasable upon the
exercise of this Warrant may be increased or reduced and the warrant price and
the price at which this Warrant may be redeemed may be adjusted or securities
other than shares of said Common Stock may become purchasable in lieu thereof
upon the exercise of this Warrant.
Subject to adjustment and change as aforesaid, the warrant price at
which said Common Stock shall be purchasable upon the exercise of Warrants shall
be $25.00 per share of Common stock. As provided in the Warrant Agreement, the
warrant price is payable upon the exercise of this Warrant, either in (i) cash,
or by check, bank draft or postal or express money order, payable in United
States dollars, to the order of the Bank, or (ii) certificates representing
shares of Preferred Stock which will be valued at the greater of $25 per share
or such other price per share as is mutually agreed to between the Bank and the
registered holder of the Warrant which is being exercised or (iii) any
combination of cash and shares of Preferred Stock valued as provided in clause
(ii), at the principal office of the Bank.
The right of purchase represented by this Warrant is exercisable as an
entirety or from time to time in part only.
Upon the exercise of this Warrant the form of election to purchase must
be duly executed and the accompanying instructions for the registration and
delivery of Common Stock must be completed.
This Warrant is issued under and the rights represented hereby are
subject to the terms and provisions contained in the Warrant Agreement, dated
October 7, 1988, of the Bank all terms and provisions of which the registered
holder of this Warrant, by acceptance hereof, assents. Reference is hereby made
to said Warrant Agreement for a more complete statement of the rights and
limitations of rights of the registered holder hereof, and the rights and
obligations of the corporation thereunder. Copies of said Warrant Agreement are
on file at the principal office of the Bank in the Township of East Pennsboro,
Pennsylvania.
The Bank shall not be required upon the exercise of this Warrant to
issue fractions of shares, but shall, as provided in Section 10 of the Warrant
Agreement, (i) if the fraction of a share otherwise issuable is equal to or less
than one-half, round-down and issue only the largest whole number of shares of
Common stock to which the warrantholder is entitled of (ii) if the fraction of a
share otherwise issuable is greater than one-half, round-up and issue an
additional share of Common Stock in addition to the largest whole number of
shares of Common Stock to which the warrantholder is otherwise entitled.
2
<PAGE>
In the event that this Warrant shall not be exercised on or prior to
5:00 p.m., New York time, on October 7, 2008, or if sooner called for
redemption, as provided in said Warrant Agree ment, before the close of business
on the fifth business day prior to the date fixed for redemption, unless the
Bank, in its discretion, permits exercise at a later date, this Warrant shall
become void and all the registered holder's rights hereunder shall cease.
This Warrant is transferable at the principal office of the Bank in the
Township of East Pennsboro, Pennsylvania by the registered holder hereof in
person or by attorney duly authorized in writing, but only in the manner and
subject to the limitations provided in said Warrant Agreement and upon surrender
of this Warrant with the form of assignment on the reverse side hereof duly
completed and executed. This Warrant is transferable from time to time in whole
or in part. Upon any such transfer, one or more new Warrant Certificates
representing the right to purchase an equal aggregate number of shares of Common
Stock will be issued to the transferee(s) in exchange for this Warrant.
If this Warrant shall be surrendered for exercise within any period
during which the transfer books for the Common Stock or other class of stock
purchasable upon the exercise of this Warrant are closed for any purpose, the
Bank shall not be required to make delivery of certificates for shares
purchasable upon such exercise until the date of the reopening of said transfer
books.
IN WITNESS WHEREOF, Commerce Bank/Harrisburg has caused this Warrant to
be signed manually by its President or one of its Vice Presidents and by its
Treasurer or its Secretary, and its corporate seal to be affixed hereunto or
imprinted hereon.
Dated: October 7, 1988
COMMERCE BANK/HARRISBURG
(SEAL) BY: /s/ James Gibson
James Gibson, President
ATTEST: /s/ Howell C. Mette
--------------------
Howell C. Mette, Secretary
3
<PAGE>
[FORM OF ELECTION TO PURCHASE)
TO: COMMERCE BANK/HARRISBURG
c/o Erford Road and Senate Avenue
East Pennsboro Township
Camp Hill, PA 17011
The undersigned hereby irrevocably elects to exercise Warrants
represented by this Warrant Certificate, and to purchase the Common Stock
issuable upon the exercise of such Warrants, and requests that certificates for
such shares be issued in the name of
____________________________________________________________________
(Name)
____________________________________________________________________
(Address including Zip Code)
____________________________________________________________________
(Social Security or other identifying number)
and be delivered to ________________________________________________
(Name)
at__________________________________________________________________
(Address including Zip Code)
and, if said number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of and delivered to, the undersigned at the
address stated below.
The undersigned hereby delivers to the Bank an opinion of counsel, that
the proposed exercise of this Warrant does not violate applicable securities
laws or require registration under any such laws of the Bank, any class of its
securities or the transaction. The undersigned acknowledges that the counsel
rendering the opinion and the form and substance of the opinion must be
satisfactory to the Bank.
Dated: , 19
--------------
Name of Warrantholder:
Address (including Zip Code):
_________________________________
_________________________________
_________________________________
Signature:_______________________
4
<PAGE>
ASSIGNMENT
For value received hereby sell, assign and transfer unto the Warrants
represented by this Warrant Certificate, together with all right, title and
interest therein, and do hereby irrevocably constitute and appoint attorney, to
transfer this Warrant Certificate on the books of the Bank, with full power of
substitution.
The undersigned hereby delivers to Bank an opinion of counsel,
reasonably acceptable to Bank, that the proposed assignment of these Warrants
does not violate applicable securities laws.
Dated: , 19
--------------
Signature:_______________________
5
AMENDMENT NO. 1 TO THE
STOCK AND WARRANT PURCHASE AGREEMENT
Amendment No. 1 dated October 7, 1988 to the Stock and Warrant Purchase
Agreement dated as of April 29, 1988 between Commerce Bank/Harrisburg, a
Pennsylvania banking corporation (the "Bank"), and Commerce Bancorp, Inc., a New
Jersey business corporation (the "Acquiror").
BACKGROUND
As of April 29, 1988, the Bank and the Acquiror entered into a Stock
and Warrant Purchase Agreement (the "Agreement") whereby the Bank proposed to
issue and sell to the Acquiror and the Acquiror proposed to purchase from the
Bank 40,000 shares of a new class of Bank cumulative preferred stock and
warrants to purchase in the aggregate 40,000 shares of the Bank's common stock,
all upon the terms and subject to the conditions therein set forth. The Bank and
the Acquiror desire to amend certain of the rights and relative preferences of
the Bank cumulative preferred stock so as to make, among other changes, the
preferred stock non- cumulative.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and intending to be legally bound hereby, the parties hereto
agree as follows:
1. The relative rights and preferences of the Preferred Stock (as such
term is defined in the Agreement) are hereby amended to read in their entirety
as set forth in Exhibit "A" attached hereto and made a part hereof.
2. All references to the Bank cumulative preferred stock and Preferred
Stock in the Agreement, the Warrant Agreement or any other document and/or
instrument to be executed in connection with or pursuant to the Agreement shall
hereinafter refer to the preferred stock whose rights and relative preferences
are set forth in Exhibit "A" attached hereto and made a part hereof.
3. Except as specifically amended herein, the Agreement and all other
documents and/or instruments to be executed in connection with or pursuant to
the Agreement remain unchanged and in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1
to be duly executed all as of the day and year first above written.
(SEAL) COMMERCE BANK/HARRISBURG
Attest: /s/ Howell C. Mette By: /s/ James Gibson
------------------------------ -----------------
Secretary President
(SEAL) COMMERCE BANCORP, INC.
Attest: /s/ By: /s/ Vernon W. Hill, II
------------------------------ -----------------------
Secretary President
<PAGE>
EXHIBIT "A"
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
COMMERCE BANK/HARRISBURG
Pursuant to the provisions of the Pennsylvania Consolidated Statutes
Annotated: 7 Pa. C.S.A. Section 1202, relating to the issuance of shares in
classes and series, and the authority conferred on the Board of Directors by the
Articles of Incorporation to make divisions and determinations with respect to
the issuance of shares in classes or series, Commerce Bank/Harrisburg executes
the following Certificate of Amendment to its Articles of Incorporation:
1. The name of the corporation is Commerce Bank/Harrisburg.
2. A copy of the resolution of the Board of Directors required
by the Pennsylvania Consolidated Statutes Annotated: Pa. C.S.A. Section 1202(f),
setting forth the actions of the Board of Directors and establishing and
designating 40,000 shares of Series A Non-Cumulative Preferred Stock and
determining the relative rights, preferences and limitations thereof is attached
hereto as Exhibit A.
3. Said resolution was adopted by a vote of a majority of the
directors present at a meeting thereof duly convened and held on , 1988 , at
which meeting a quorum was at all times present and voting.
4. The Articles of Incorporation of Commerce Bank/Harrisburg
are hereby amended so that the designation and number of shares of Series A
Non-Cumulative Preferred Stock, and the relative rights, preferences and
limitations thereof, are as stated in said resolution.
IN WITNESS WHEREOF, Commerce Bank/Harrisburg has caused this
Certificate of Amendment to its Articles of Incorporation to be signed by its
President and Secretary this 7th day of October 1988.
COMMERCE BANK/HARRISBURG
By:______________________________
James Gibson, President
______________________________
Howell C. Mette, Secretary
<PAGE>
EXHIBIT A
Resolution of the Board of Directors determining the
designation and number of the Series A Non-Cumulative
Preferred Stock, par value $10.00 per share,
and the relative rights, preferences and limitations thereof.
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Bank (the "Board") by the provisions of
Article Fifth of the Articles of Incorporation of the Bank and the provisions of
The Pennsylvania Consolidated Statutes Annotated: 7 Pa. C.S.A. Section 1202, the
Board hereby creates a series of preferred stock, par value $10.00 per share,
and determines the designation and number of shares which constitute such series
and the relative rights, preferences and limitations of such series as follows:
1. Designation and Number of Shares. The series of preferred stock
shall be designated as "Series A Non-Cumulative Preferred Stock" (hereinafter
called "Series A Preferred Stock") and shall consist of a total of 40,000 shares
par value $10.00 per share.
2. Dividends. The holders of the Series A Preferred stock shall be
entitled to receive preferential dividends in cash, when, as and if declared by
the Board of Directors out of the funds of the Bank legally available at the
time for the payment of dividends, at a rate of $2.00 per share per annum, and
no more, payable quarterly on the thirtieth (30th) day of January, April, July
and October to holders of record of Series A Preferred Stock at the close of
business on the last day of the preceding month, before any dividend or other
distribution on (i) any equity securities ranking junior to the Series A
Preferred Stock as to the payment of dividends or other distributions ("Junior
Stock") and (ii) ("Common Stock"); provided, however, may, at any time and from
time to of the Series A Preferred Stock dividend fifteen (15) days before or
after those which event the first dividend payable after each such change in the
payment date shall be adjusted accordingly on a daily basis from the dividend
payment date last preceding such change. The first dividend payment date of the
Series A Preferred Stock shall be October 30, 1988.
Dividends on each share of Series A Preferred Stock outstanding shall
be non- cumulative, whether or not in any fiscal year there shall be any funds
of the Bank legally available for the payment of such dividends, so that if in
any fiscal year or years, dividends in whole or in part are not paid upon the
Series A Preferred Stock, unpaid dividends shall not accumulate as against the
holder(s) of the Common Stock or any Junior Stock, so that except as set forth
in paragraphs 3 and 4 hereof no sums in any later years shall be paid to the
holder(s) of the Series A Preferred Stock with respect to any prior year or
years when dividends were not paid, and so that in no event shall the holder(s)
of the Series A Preferred Stock receive dividends of more than $2.00 per share
in any fiscal year.
The date on which the Bank shall initially issue a share of Series A
Preferred Stock shall be deemed to be the "date of issuance" of such share
regardless of the number of times the transfer of such share shall be made on
the Bank's stock transfer records and regardless of the number of certificates
which may be issued to evidence such share.
<PAGE>
If, in any quarterly dividend period or periods, full dividends upon
the outstanding Series A Preferred Stock at the dividend rate set forth herein
shall not have been paid or set apart for payment, then, until such payment is
made or set apart, (i) no dividends or other distributions shall be declared and
paid or set apart for payment upon any equity securities of the Bank other than
securities which have a dividend payment preference superior to the Series A
Preferred Stock; (ii) the Bank and its subsidiaries, if any, shall be prohibited
from repurchasing, redeeming or otherwise acquiring any of the Bank's preferred
stock ranking on a parity with the Series A Preferred Stock or any of the Common
Stock or any Junior Stock; and (iii) the Bank shall be prohibited from issuing
any preferred stock which ranks superior to or on parity with the Series A
Preferred stock as to the payment of dividends and other distributions. If, at
any time, the Bank shall pay less than the total amount of dividends then
payable on the then-outstanding Series A Preferred Stock and on any
then-outstanding class or series of stock of the Bank which ranks on a parity
with the Series A Preferred Stock as to the payment of dividends and other
distributions ("Parity Stock"), the aggregate payment to all holders of Series A
Preferred Stock and to all holders of Parity Stock shall be distributed among
all such holders so that an amount ratably in proportion to the respective
annual dividend rates fixed thereon shall be paid with respect to each
outstanding share of Series A Preferred Stock and Parity Stock.
Holders of the Series A Preferred Stock shall not be entitled to
participate in any dividends or other distributions (cash, stock or otherwise)
declared or paid on or with respect to any Common Stock, Junior Stock or any
other class of stock or equity security of the Bank or any series of any such
class.
3. Liquidation. In the event of the liquidation, dissolution or winding
up of the Bank, whether voluntary or involuntary, after all creditors of the
Bank shall have been paid in full, the holders of the outstanding Series A
Preferred Stock shall be entitled to receive an amount equal to $25.00 per share
plus an amount equal to the sum of (i) all unpaid dividends thereon which shall
have been declared but not paid and (ii) all dividends which were not paid on
the Series A Preferred Stock or will not be paid on the Series A Preferred Stock
(whether or not there were any funds legally available for the payment of
dividends at that time) to the date for the payment of such distribution amount
(collectively the "Unpaid Dividends") together with interest on the Unpaid
Dividends as set forth below before any distribution of assets shall be made to
the holder(s) of any Common Stock or Junior Stock. The Unpaid Dividends shall
bear interest at a rate per annum equal to 10% from the date any such Unpaid
Dividends would have been paid in accordance with paragraph 2 hereof (whether or
not there were any funds legally available for the payment of dividends at that
time). If, upon any dissolution, liquidation or winding up of the Bank, the net
assets of the Bank shall be insufficient to pay the holders of all outstanding
shares of Series A Preferred Stock and Parity Stock the full amounts to which
they respectively shall be entitled, the holders of each such stock shall share
ratably in any distribution of assets according to the respective amounts which
would be payable in respect of such stock upon such distribution if all amounts
payable on or with respect to all stock were paid in full.
Neither consolidation or merger of the Bank with any corporation, nor
the sale of all or part of the Bank's assets for cash, securities or other
property, nor the purchase or redemption by
2
<PAGE>
the Bank of any class of stock permitted by the Articles of Incorporation or any
amendment thereof, shall be deemed a liquidation, dissolution or winding up of
the Bank. Holders of the Series A Preferred Stock shall not be entitled, upon
the liquidation, dissolution or winding up of the Bank, to receive any amounts
with respect to such stock other than the amounts referred to in this paragraph
3. Nothing contained herein shall be deemed to prevent the redemption or
purchase of the Series A Preferred Stock permitted by paragraph 4 herein prior
to liquidation, dissolution or winding up.
4. Redemption. The shares of Series A Preferred Stock shall be
redeemable at the option of the Bank, in whole only and not in part, at any
time, upon payment of the respective redemption price set forth herein;
provided, however, that such shares shall not be redeemable prior to January 1,
1990.
If redeemed in the
12-month period Then the Redemption
beginning January 1, 1990 Price shall be
------------------------- ----------------
1990 $26.50
1991 26.25
1992 26.00
1993 25.75
1994 25.50
1995 25.25
1996 and thereafter 25.00
plus an amount equal to the sum of (i) all unpaid dividends thereon which shall
have been declared but not paid and (ii) all dividends which were not paid on
the Series A Preferred Stock or will not be paid on the Series A Preferred Stock
(whether or not there were any funds legally available for the payment of
dividends at that time) to the date to and including the date fixed for
redemption (collectively the "Unpaid Dividends") together with interest on the
Unpaid Dividends as set forth below. The Unpaid Dividends shall bear-interest at
a rate per annum equal to 10% from the date any such Unpaid Dividend would have
been paid in accordance with paragraph 2 hereof (whether or not there were any
funds legally available for the payment of dividends at that time) (all of the
foregoing amounts being collectively hereinafter referred to as the "Redemption
Price).
Notice of the proposed redemption of Series A Preferred Stock shall be
given by the Bank by first class mail, postage prepaid, at least thirty (30)
days and not more than sixty (60) days prior to the date fixed for such
redemption, to the holders of record of all of the shares of Series A Preferred
Stock at their respective addresses appearing on the books of the Bank. Any
notice which is mailed as herein provided shall be conclusively presumed to have
been duly given, whether or not the holder receives such notice.
On and after the date fixed in the notice of redemption as the date of
redemption (unless default shall be made by the Bank in providing money for the
payment of the aggregate Redemption Price) , or if the Bank shall so elect, on
and after the date (which date shall be the date of redemption or prior thereto)
on which the Bank shall deposit, separate and apart from its
3
<PAGE>
other funds in trust for the pro rata benefit of the holders of the Series A
Preferred Stock so as to be and continue to be available therefor, with a bank
or trust company (other than the Bank or a subsidiary of the Bank) doing
business in the State of New Jersey or the Commonwealth of Pennsylvania, as
"Paying Agent", money sufficient in amount to pay, at the office of the Paying
Agent on the redemption date, the aggregate Redemption Price of the shares of
Series A Preferred Stock (provided the notice of redemption shall state the name
and address of the Paying Agent and the intention of the Bank to deposit said
money on or before the date of redemption with the Paying Agent), and,
notwithstanding that any certificate for shares of Series A Preferred Stock
shall not have been surrendered for cancellation, the shares represented thereby
shall no longer be deemed outstanding and all rights of the holders thereof as
stockholders of the Bank shall cease and terminate, except the right to receive
from the Bank or Paying Agent, as the case may be, the Redemption Price. At any
time on or after the redemption date, or if the Bank shall deposit the money for
such redemption prior to the redemption date, then at any time on or after the
date of deposit, the respective holders of record of the Series A Preferred
Stock shall be entitled to receive the Redemption Price upon actual delivery to
the Bank or the Paying Agent, as the case may be, of certificates for the
shares, such certificates, if required, to be duly endorsed in blank. Any money
deposited with the Paying Agent which remains unclaimed by the holders of shares
of Series A Preferred Stock at the end of five full calendar years after the
redemption date shall be paid by the Paying Agent to the Bank, and thereafter
the holders of the shares of the Series A Preferred Stock shall look only to the
Bank for payment.
5. Voting Rights.
(a) Except as otherwise set forth in this resolution and
except in statutory proceedings in which, and then only to the extent to which,
their vote is at the time required by law, the holders of shares of Series A
Preferred Stock shall have no right to vote at, to participate in, or to receive
any notice of any meeting of the shareholders of the Bank. Except as otherwise
set forth in this paragraph 5, on any matter on which the holders of Series A
Preferred Stock shall be entitled to vote, they shall be entitled to one vote
for each share held.
(b) If and whenever quarterly dividends on the Series A
Preferred Stock shall not have been paid in full for four quarterly dividends
(whether or not consecutive) or more with respect to quarterly dividend payments
on the Series A Preferred Stock which are payable on and after March 1, 1990,
the holders of Series A Preferred Stock shall be entitled to notice of all
meetings of the shareholders of the Bank and to full voting rights (together
with holders of Common Stock but not as separate class unless otherwise required
by law) at all meetings and on all matters including, without limitation, the
election of directors of the Bank, and each share of Series A Preferred Stock
shall be entitled to two votes. At such time as the dividend on the Series A
Preferred Stock for the then current quarterly dividend period shall have been
declared and paid or set apart for payment and the immediately preceding three
quarterly dividends on the Series A Preferred Stock shall have been paid, all
voting rights of the Series A Preferred Stock ; granted by this subparagraph (b)
shall terminate.
(c) If and whenever the Bank fails to comply with any of the
"Capital Adequacy Guidelines" or similar type regulations (including, without
limitation, the "Risk-Based
4
<PAGE>
Capital Guidelines"), as amended from time to time, which are established by the
primary regulator of the Bank or the Bank's overall condition as determined by
the primary regulator of the Bank is determined to be marginal or
unsatisfactory, the holders of Series A Preferred Stock shall be entitled to
notice of all meetings of the shareholders of the Bank and to full voting rights
(together with holders of Common Stock but not as separate class unless
otherwise required by law) at all meetings and on all matters including, without
limitation, the election of directors of the Bank, and each share of Series A
Preferred Stock shall be entitled to two votes. At such time as the Bank
complies with the "Capital Adequacy Guidelines" or similar type regulations
(including, without limitation, the "Risk-Based Capital Guidelines"), as amended
from time to time, which are established by the primary regulator of the Bank or
the Bank's overall condition as determined by the Bank's primary regulator
ceases to be marginal or unsatisfactory all voting rights of the Series A
Preferred Stock granted by this subparagraph (c) shall terminate. For, purposes
of this subparagraph (c), the terms "marginal" and "unsatisfactory" with respect
to the Bank's overall condition as determined by the primary regulator of the
Bank shall mean a composite rating under the Uniform Financial Institutions
Rating System of 4 or 5, or such similar or comparable composite rating of the
Bank's overall condition pursuant to any successor composite rating system as is
then in use by the primary regulator of the Bank.
(d) So long as any of the Series A Preferred Stock remains
outstanding, the Bank will not, either directly or through merger or
consolidation with any other corporation, without the affirmative vote at a
meeting or the written consent with or without a meeting of the holders of at
least fifty percent (50%) in number of the shares of the series A Preferred
Stock then outstanding voting separately as a class:
(i) amend, alter or repeal any of the preferences,
special rights or powers of the shares of Series A Preferred Stock or any of the
provisions of the Articles of Incorporation so as to affect them adversely,
(ii) authorize any reclassification of the Series A
Preferred Stock, or
(iii) issue any class or classes of the equity
securities of the Bank which have a dividend payment or liquidation payment
preference equal or superior to the Series A Preferred Stock (including by means
of the reissuance of shares reacquired by the Bank by repurchase, redemption or
upon conversion).
6. Reissuance of Shares. Shares of Series A Preferred Stock which have
been redeemed or purchased, shall have the status of authorized and unissued
shares of preferred stock and may be reissued as part of the series of which
they were originally a part or may be reissued as part of a new series of the
preferred stock to be created by resolution or resolutions of the Board or as
part of any other series of preferred stock, all subject to the conditions or
restrictions on issuance set forth in any resolution or resolutions adopted by
the Board providing for the issue of any series of preferred stock.
5
<TABLE>
<CAPTION>
Selected Financial Data
Year Ended December 31,
(dollars in thousands, except per share data) 1999 1998 1997 1996 1995
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets $ 378,913 $ 319,323 $ 239,829 $ 198,282 $ 159,769
Loans held for sale 5,301 5,641 6,816 12,953 0
Loans receivable (gross) 216,105 167,121 134,459 103,739 100,361
Securities available for sale 84,652 96,993 48,512 43,088 22,249
Securities held to maturity 29,039 11,493 12,239 13,524 11,037
Federal funds sold 0 11,900 14,325 3,850 12,875
Deposits 348,546 297,737 220,224 182,572 145,957
Long-term debt and other borrowed money 8,300 0 0 1,000 1,000
Stockholders' equity 20,378 20,445 18,318 13,275 11,806
INCOME STATEMENT:
Net interest income $ 14,676 $ 11,276 $ 9,308 $ 7,851 $ 7,226
Provision for loan losses 762 542 150 90 170
Noninterest income 4,531 4,055 2,740 1,700 1,258
Noninterest operating expenses 13,729 11,465 9,078 7,079 6,126
Income before income taxes 4,716 3,324 2,820 2,382 2,188
Net income 3,103 2,218 1,892 1,602 1,473
PER COMMON SHARE DATA:
Net income: Basic $1.85 $1.31 $1.20 $1.12 $1.25
Diluted 1.72 1.21 1.09 1.05 1.19
Book value 11.76 11.87 10.63 8.96 7.95
SELECTED PERFORMANCE RATIOS:
Return on average assets 0.89% 0.80% 0.91% 0.94% 1.05%
Return on average stockholders' equity 15.18 11.50 11.86 12.77 16.88
Net interest margin 4.59 4.49 4.92 5.05 5.57
SELECTED LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits 60.24% 60.26% 63.83% 69.29% 68.87%
Stockholders' equity to total year-end assets 5.38 6.40 7.64 6.70 7.39
Risk based capital: Tier 1 9.91 10.83 12.20 11.44 11.57
Total 11.12 12.02 13.36 13.29 13.62
Leverage ratio 6.28 6.50 7.85 7.10 7.79
ASSET QUALITY:
Net charge-offs to average loans outstanding 0.08% 0.01% 0.11% (0.05)% 0.08%
Nonperforming loans to total year-end loans 0.32 0.16 0.43 0.37 0.16
Nonperforming assets to total year-end assets 0.18 0.09 0.35 0.19 0.10
Allowance for loan losses to total year-end loans 1.31 1.34 1.26 1.62 1.54
Allowance for loan losses to nonperforming loans 415.35 808.70 290.92 436.27 941.46
</TABLE>
1
<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 consolidated balance
sheets and statements of income. This section should be read in conjunction with
the Company's financial statements and accompanying notes.
1999 OVERVIEW
1999 was highlighted by another year of continued strong financial performance
for Commerce Bank and by the formation of Pennsylvania Commerce Bancorp, Inc., a
Pennsylvania business corporation which reorganized Commerce into a one-bank
holding company. Total assets grew by $60 million, or 19%, to $379 million and
total deposits increased $51 million, or 17%, to $349 million. Total loans also
experienced strong growth of $49 million, or 28%, in 1999 from $172 million to
$221 million.
Net income was up a record 40% in 1999 to $3.1 million from $2.2 million for
1998 and total revenues increased by 25% to a record level of $19.2 million.
Diluted net income per common share increased 42% to $1.72 from $1.21 per share
in 1998 (after adjusting for a 5% common stock dividend declared in January
2000).
The formation of Pennsylvania Commerce Bancorp, Inc., a one-bank holding company
became effective July 1, 1999. The holding company structure will provide
Commerce with the flexibility necessary to continue expanding, opening new
branches and to pursue other future opportunities for growth. The holding
company exchanged one (1) share of its common stock for each share of Commerce
Bank common stock in a tax-free exchange. The Reorganization was accounted for
as a pooling of interests and received regulatory and shareholder approvals.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Table 1 on the following page sets forth balance sheet items on a daily average
basis for the years ended December 31, 1999, 1998 and 1997 and presents the
daily average interest rates earned on assets and the daily average interest
rates paid on liabilities for such periods. During 1999, average interest
earning assets were $319.7 million, an increase of $68.3 million, or 27%, over
1998. This was the result of an increase in the average balance of securities of
$30.7 million and an increase in the average balance of loans receivable of
$40.8 million. The growth was funded by an increase in the average balance of
deposits of $67.4 million.
The yield on total interest earning assets decreased by 26 basis points in 1999
to 7.70%. The decrease resulted primarily from decreased yields in the loan and
investment portfolios due to the overall level and timing of changes in general
market interest rates during 1999 as compared to 1998.
The aggregate cost of interest-bearing liabilities decreased 41 basis points in
1999 to 3.81% from 4.22% in 1998. The average rate paid on savings deposits
decreased by 50 basis points, from 3.40% in 1998 to 2.90% in 1999 and the
average rate paid on time deposits was 5.04%, down 42 basis points from 1998.
Conversely, the average rate paid on interest checking accounts, increased from
2.69% in 1998 to 3.76% in 1999. The average rate paid on public funds time
deposits decreased by 38 basis points in 1999. The majority of the Company's
public funds are deposits of the Commonwealth of Pennsylvania and local school
districts and municipalities. These deposits are repriced at maturity based upon
an average of rates paid for comparable time deposits by several financial
institutions in the Central Pennsylvania market.
The Company's aggregate cost of funding sources decreased 37 basis points in
1999 to 3.11% from 3.48%. This is primarily the result of the decrease in the
average rate paid on total interest bearing deposits combined with a 29%
increase in average noninterest-bearing deposits.
2
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Taxable $ 114,992 $ 7,405 6.44% $ 84,056 $ 5,593 6.65% $ 56,820 $ 3,995 7.03%
Tax-exempt 0 0 0.00 150 7 4.61 747 35 4.68
- -------------------------------------------------------------------------------------------------------------------------------
Total securities 114,992 7,405 6.44 84,206 5,600 6.65 57,567 4,030 7.00
Federal funds sold 9,129 447 4.83 12,420 658 5.23 9,778 540 5.52
Loans receivable:
Mortgage
and construction 136,325 11,685 8.57 110,033 9,836 8.94 86,539 8,028 9.28
Commercial loans
and lines of credit 36,267 3,254 8.97 23,539 2,193 9.32 17,278 1,651 9.55
Consumer 22,629 1,806 7.98 20,755 1,709 8.23 17,188 1,435 8.35
Tax-exempt 365 20 5.52 415 23 5.52 832 62 7.51
- -------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 195,586 16,765 8.57 154,742 13,761 8.89 121,837 11,176 9.17
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 319,707 $ 24,617 7.70% $ 251,368 $ 20,019 7.96% $ 189,182 $ 15,746 8.32%
- -------------------------------------------------------------------------------------------------------------------------------
Sources of Funds
Interest-bearing deposits:
Regular savings $ 78,465 $ 2,272 2.90% $ 69,959 $ 2,378 3.40% $ 63,100 $ 2,429 3.85%
Interest checking 9,779 368 3.76 27,842 750 2.69 25,850 668 2.59
Money market 49,855 1,111 2.23 11,081 249 2.25 3,036 80 2.63
Time deposits 107,928 5,444 5.04 89,452 4,880 5.46 57,449 3,144 5.47
Public funds time 14,105 721 5.11 8,835 486 5.49 1,489 80 5.40
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits 260,132 9,916 3.81 207,169 8,743 4.22 150,924 6,401 4.24
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 460 25 5.35 0 0 0.00 197 11 5.58
Long-term debt 0 0 0.00 0 0 0.00 159 26 16.35
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 260,592 9,941 3.81 207,169 8,743 4.22 151,280 6,438 4.26
Noninterest-bearing
funds (net) 59,115 44,199 37,902
- -------------------------------------------------------------------------------------------------------------------------------
Total sources to fund
earning assets $ 319,707 9,941 3.11 $ 251,368 8,743 3.48 $ 189,182 6,438 3.40
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income
and margin $ 14,676 4.59% $ 11,276 4.49% $ 9,308 4.92%
- -------------------------------------------------------------------------------------------------------------------------------
Other Balances
Cash & due from banks $ 12,740 $ 11,787 $ 8,748
Other assets 16,122 14,746 10,966
Total assets 348,569 277,901 208,896
Noninterest-bearing
demand deposits 64,082 49,636 39,951
Other liabilities 3,459 1,816 1,709
Stockholders' equity 20,436 19,280 15,956
- -------------------------------------------------------------------------------------------------------------------------------
Notes: Nonaccrual loans have been included in the average loan balances.
Securities include securities available for sale and securities held to
maturity. Securities available for sale are carried at amortized cost for
purposes of calculating the average rate received on taxable securities above.
Yields on tax-exempt securities are not computed on a taxable equivalent basis.
</TABLE>
4
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income earned on assets
and interest expense incurred on liabilities used to fund those assets. Interest
earning assets primarily include loans and securities. Liabilities used to fund
such assets include deposits and borrowed funds. Changes in net interest income
and margin result from the interaction between the volume and composition of
earning assets, related yields and associated funding costs.
Net interest income for 1999 increased $3.4 million, or 30%, over 1998 to $14.7
million. Interest income on earning assets totaled $24.6 million, an increase of
$4.6 million, or 23%, over 1998. The majority of this increase was related to
volume increases in the securities and loans receivable portfolios. Interest
expense for 1999 increased by $1.2 million, or 14%, to $9.9 million from $8.7
million.
Changes in net interest income are frequently measured by two statistics: net
interest rate spread and net interest margin. Net interest rate spread is the
difference between the average rate earned on earning assets and the average
rate incurred on interest-bearing liabilities. Net interest margin represents
the difference between interest income, including net loan fees earned, and
interest expense, reflected as a percentage of average earning assets. The
Company's net interest rate spread increased to 3.89% in 1999 from 3.74% in 1998
and the net interest margin increased 10 basis points from 4.49% to 4.59%.
Table 2 demonstrates the relative impact on net interest income of changes in
the volume of earning assets and interest-bearing liabilities and changes in
rates earned and paid by the Company on such assets and liabilities. For
purposes of this table, nonaccrual loans have been included in the average loan
balances.
<TABLE>
<CAPTION>
TABLE 2
- -------------------------------------------------------------------------------------------------------------------------------
1999 v. 1998 1998 v. 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in (1) Due to Changes in (1)
(in thousands) Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest on securities:
Taxable $1,988 $(176) $1,812 $1,813 $(215) $1,598
Tax-exempt (7) 0 (7) (28) 0 (28)
Federal funds sold (161) (50) (211) 139 (21) 118
Interest on loans receivable:
Mortgage and construction 2,256 (407) 1,849 2,100 (292) 1,808
Commercial 1,143 (82) 1,061 583 (41) 542
Consumer 149 (52) 97 293 (19) 274
Tax-exempt (3) 0 (3) (22) (17) (39)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 5,365 (767) 4,598 4,878 (605) 4,273
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Regular savings 244 (350) (106) 232 (283) (51)
Interest checking (680) 298 (382) 56 26 82
Money market plus 864 (2) 862 181 (12) 169
Time deposits 940 (376) 564 1,742 (6) 1,736
Public funds 269 (34) 235 405 1 406
Short-term borrowings 25 0 25 (11) 0 (11)
Long-term debt 0 0 0 (26) 0 (26)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,662 (464) 1,198 2,579 (274) 2,305
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) $3,703 $(303) $3,400 $2,299 $(331) $1,968
- -------------------------------------------------------------------------------------------------------------------------------
(1)Changes due to both volume and rate have been allocated to volume changes.
</TABLE>
5
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Noninterest Income
Noninterest income for 1999 increased by $476,000, or 12%, over 1998 to $4.5
million. The increase was due primarily to increased "core" other operating
income, which rose $728,000, or 23%, from 1998. This increase was attributable
to service charges and fees associated with servicing a higher volume of deposit
and loan accounts. Included in total noninterest income were gains of $654,000
in 1999 and $500,000 in 1998 on the sale of residential, student, and Small
Business Administration loans. Also included in noninterest income were net
securities gains of $1,000 for 1999 and $386,000 for 1998. The Company recorded
losses of $27,000 and $6,000 in 1999 and 1998 respectively on the sale of Other
Real Estate Owned (OREO), net of expenses.
Noninterest Expenses
Noninterest expenses totaled $13.7 million for 1999, an increase of $2.3
million, or 20%, over 1998. Staffing levels, occupancy, furniture and equipment,
and related expenses increased as a result of opening two Loan Production
Offices in December 1998. Also contributing to the increase was the full-year
impact of the two branch offices that opened in April and August 1998. A
comparison of noninterest expense for certain categories for 1999 and 1998 is
presented below.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $1.1 million, or 22%, in 1999 over 1998. This
increase was consistent with an increase in the level of full-time equivalent
employees from 206 at December 31, 1998 to 231 at year-end 1999. The increased
level of expenses includes the full-year impact of salary and benefit costs
associated with the additional staff for the two new branch offices opened in
April and August 1998.
Occupancy expenses totaled $1.7 million in 1999, an increase of $203,000, or
14%, over 1998 while furniture and equipment expenses increased by $90,000, or
11%, to $937,000. The full-year impact of the two branch offices opened in 1998
along with the two Loan Production Offices opened in December 1998, contributed
to the increases in occupancy and furniture and equipment expenses in 1999 over
1998.
Advertising and marketing expenses were $1.3 million for 1999, an increase of
$214,000, or 20%, over 1998. The increase was primarily the result of increased
advertising efforts in each of the Company's markets. Going forward, the Company
will continue to have multiple markets in which to advertise its products.
Data processing expenses increased by $164,000, or 21%, in 1999 over 1998. The
increase was due to costs associated with processing additional transactions as
a result of growth in the number of accounts serviced combined with the costs
associated with the increased volume of users of our Home Banking product. The
Home Banking product is offered to our customers at no charge. Also included in
the increase were expenses of $60,000 incurred with development and
implementation of the Company's new website, www.commercepc.com.
Postage and supplies expenses of $529,000 were $58,000, or 12%, higher than the
prior year. The increase in postage expenses resulted from the growth in the
number of account statements mailed to customers. The increase in supplies
expense was a result of increased usage of such items related to additional
staff levels as well as an increase in the number of accounts serviced.
Audits, regulatory fees, and assessments for 1999 increased by $60,000, or 30%,
from 1998. The primary reason was the increase in the yearly assessment by the
Office of the Comptroller of the Currency for examinations. The assessment
calculation, which is based on deposit size, continues to increase as the
Company's deposit balances grow.
Other noninterest expenses totaled $2.0 million for 1999, compared to $1.6
million for 1998. The majority of this increase was due to the following:
o increased provisions for non-credit related losses
o increased correspondent bank charges due to an increase in the volume of
items processed, and
o one time nonrecurring expenses associated with the formation of the new
Holding Company, Pennsylvania Commerce Bancorp, Inc.
The Company's current strategic plan calls for the construction of two
additional new branches in 2000. The costs associated with these planned offices
will continue to result in higher levels of staff, facilities, and related
expenses in 2000 and in future periods.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expenses to average assets. Net noninterest expenses
equal noninterest expenses (excluding other
6
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
real estate expenses) less noninterest income (exclusive of non-recurring
gains). This ratio equaled 2.75% for 1999, compared to 2.80% for 1998. Another
productivity measure is the operating efficiency ratio. This ratio expresses the
relationship of noninterest expenses (excluding other real estate expenses) to
net interest income plus noninterest income (excluding non-recurring gains). For
1999, the operating efficiency ratio was 73.0%, compared to 76.7% for 1998.
Provision for Federal Income Taxes
The provision for federal income taxes was $1.6 million for 1999, compared to
$1.1 million for 1998. The effective tax rate, which is the ratio of income tax
expense to income before taxes, was 34% in 1999 and 33% in 1998. The tax rate
for 1998 was less than the federal statutory rate of 34%, primarily because of
tax-exempt securities and loan income. Reference should be made to Note 10 of
the Notes to Financial Statements for an additional analysis of the provision
for income taxes for 1999 and 1998.
In accordance with Statement of Financial Accounting Standard No. 109 (SFAS No.
109), "Accounting for Income Taxes", income taxes are accounted for under the
liability method. Under the liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to temporary
differences between the financial statement and tax bases of existing assets and
liabilities.
At December 31, 1999, deferred tax assets amounted to $2.5 million and deferred
tax liabilities amounted to $277,000. Deferred tax assets are realizable
primarily through carryback of existing deductible temporary differences to
recover taxes paid in prior years, and through future reversal of existing
taxable temporary differences.
Net Income and Net Income Per Share
Net income for 1999 rose to a record $3.1 million, an increase of $885,000, or
40%, over the $2.2 million recorded in 1998. This increase was due to an
increase in net interest income of $3.4 million and an increase in noninterest
income of $476,000, offset by an increase in the provision for loan losses of
$220,000, an increase in noninterest expenses of $2.3 million, and an increase
of $507,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
declared in January 2000, increased by 41% to $1.85 per share, compared to $1.31
in 1998. Diluted earnings per common share were $1.72 for 1999 and $1.21 for
1998 after adjusting for the 5% common stock dividend declared in January 2000.
Reference should be made to Note 12 in the Notes to Financial Statements for an
analysis of earnings per share.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's ROA for 1999 was 0.89%, compared to
0.80% in 1998.
For purposes of calculating ROA, average assets have been adjusted to exclude
the effect of net unrealized gains (losses) on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized gains (losses), net of income taxes, on securities available for
sale. Reference should be made to Note 3 in the Notes to Financial Statements
for an analysis of securities available for sale. The Company's ROE for 1999 was
15.18%, a 32% increase over the 11.50% for 1998.
RESULTS OF OPERATIONS 1998 VERSUS 1997
Net income for 1998 was $2.2 million, an increase of $326,000, or 17%, over the
$1.9 million recorded in 1997.
Basic earnings per common share, after adjusting for a 5% common stock dividend
declared in January 2000 and 1999, increased by 9% to $1.31 per share, compared
to $1.20 per common share for 1997. Diluted earnings per common share were $1.21
for 1998 and $1.09 for 1997 after adjusting for the 5% common stock dividends
declared in January 2000 and 1999.
Net interest income for 1998 was $11.3 million, up $2.0 million, or 21%, over
1997. Interest income on earning assets totaled $20.0 million, an increase of
$4.3 million, or 27%, over 1997. Interest expense for 1998 increased by $2.3
million, or 36%, to $8.7 million from $6.4 million.
The Company's net interest rate spread decreased to 3.74% in 1998 from 4.06% in
1997 and the net interest margin
7
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
decreased by 43 basis points from 4.92% to 4.49%.
Noninterest income for 1998 increased by $1.3 million, or 48%, over 1997 to $4.1
million. Included in noninterest income for 1998 were gains of $500,000 compared
to $501,000 in 1997. Also included in noninterest income were securities gains
of $386,000 for 1998 and $39,000 for 1997. The Company recorded a loss of $6,000
in 1998 and a gain of $46,000 on the sale of OREO, net of expenses, in 1997.
Excluding the above mentioned items, recurring noninterest income increased by
$1.0 million, or 47%, in 1998 over 1997. The increase was attributable to
service charges and fees associated with servicing a higher volume of deposit
and loan accounts. Noninterest expenses totaled $11.5 million for 1998, an
increase of $2.4 million, or 26%, over 1997. The addition of two new branch
offices in 1998 and the full-year impact of the two branch offices opened in
1997 contributed to the increases in noninterest expenses in 1998 over 1997.
Salary expenses and employee benefits increased by $1.2 million, or 33%, in 1998
over 1997. This increase was consistent with the increase in the level of
full-time equivalent employees from 169 at December 31, 1997 to 206 at year-end
1998. Occupancy expenses totaled $1.4 million in 1998, an increase of $234,000,
or 19%, over 1997, while furniture and equipment expenses increased by $173,000,
or 26%, to $847,000.
Advertising and marketing expenses were $1.0 million for 1998, an increase of
$105,000, or 11%, over 1997. Data processing expenses increased by $140,000, or
22%, in 1998 over 1997. Postage and supplies expenses of $471,000 were $106,000,
or 29%, higher than the prior year.
Audits, regulatory fees, and assessments for 1998 increased by $15,000, or 8%,
from 1997. Other noninterest expenses totaled $1.6 million for 1998, compared to
$1.3 million for 1997. The increase was attributable to increased telephone
expenses and loan expenses.
FINANCIAL CONDITION
Securities
Securities are purchased and sold as part of the overall asset and liability
management function at Pennsylvania Commerce Bancorp, Inc. The classification of
all securities is determined at the time of purchase. Securities expected to be
held for an indefinite period of time are classified as securities available for
sale and are carried at fair value. Decisions by management to purchase or sell
these securities are based on an assessment of financial and economic
conditions, including changes in prepayment risks and interest rates, liquidity
needs, capital adequacy, collateral requirements for pledging, alternative asset
and liability management strategies, tax considerations, and regulatory
requirements.
Securities are classified as held to maturity if, at the time of purchase,
management has both the intent and ability to hold the securities until
maturity. Securities held to maturity are carried at amortized cost. Sales of
securities in this portfolio should only occur in unusual and rare situations
where significant unforeseeable changes in circumstances may cause a change in
intent. Examples of such instances would include deterioration in the issuer's
creditworthiness that is evidently supportable and significant or a change in
tax law that eliminates or reduces the tax-exempt status of interest (but not
the revision of marginal tax rates applicable to interest income). Held to
maturity securities cannot be sold based upon any of the decisions used to sell
securities available for sale as listed above. Reference should be made to Note
3 in the Notes to Financial Statements for further analysis of the Company's
securities portfolio.
The Company's securities portfolio, which includes both the available for sale
and held to maturity securities, consists primarily of U.S. Government agency
and mortgage-backed obligations. These securities have very little, if any,
credit risk because they are either backed by the full faith and credit of the
U.S. Government or their principal and interest payments are guaranteed by an
agency of the U.S. Government. These investment securities carry fixed rate
coupons that do not change over the life of the securities. Since most
securities are purchased at premiums or discounts, their yield and average life
will change depending on any change in the estimated rate of prepayments. The
Company amortizes premiums and accretes discounts over the estimated average
life of the securities. Changes in the estimated average life of the securities
8
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
portfolio will lengthen or shorten the period in which the premium or discount
must be amortized or accreted, thus affecting the Company's securities yields.
At December 31, 1999, the weighted average life of the Company's securities
portfolio was 5.4 years compared to 4.0 years at December 31, 1998. The weighted
average life of the portfolio is calculated by estimating the average rate of
repayment of the underlying collateral of the security. U.S. Government
mortgage-backed obligations historically experience repayment rates in excess of
the scheduled repayments, causing a shorter weighted average life of the
security. The Company's securities portfolio contained no "high-risk" securities
or derivatives as of December 31, 1999 or 1998.
Securities available for sale decreased by $7.5 million in 1999 (excluding the
effect of unrealized gains or losses) primarily as a result of purchases of
$12.6 million offset by principal repayments and maturities of $14.5 million and
proceeds from sales of $5.4 million. The securities available for sale portfolio
is comprised of U.S. Treasury securities, U.S. Government Agency securities,
mortgage-backed securities, corporate debt securities, and equity securities. At
December 31, 1999, the unrealized depreciation in securities available for sale
included in stockholders' equity totaled $3.0 million, net of tax, compared to
unrealized appreciation of $214,000, net of tax, at December 31, 1998. The
weighted average maturity of the securities available for sale portfolio was 5.1
years at December 31, 1999, with a weighted average yield of 6.63%.
During 1999, securities held to maturity increased by $17.5 million as a result
of purchases of $20.0 million of mortgage-backed securities offset by principal
repayments of $2.5 million. The securities held in this portfolio include U.S.
Government Agency securities, and mortgage-backed securities. The weighted
average maturity of the securities held to maturity portfolio was 6.4 years at
December 31, 1999, with a weighted average yield of 6.50%.
In concert with the Company's liquidity and asset/liability management
strategies, $5.4 million of mortgage-backed securities were sold in 1999 at a
net pre-tax gain of $1,000. The proceeds of the sale were used to purchase
shorter term mortgage-backed securities in order to reduce the Company's
interest rate. The contractual maturity distribution and weighted average yield
of the Company's available for sale and held to maturity portfolios at December
31, 1999 are summarized in Table 3. Weighted average yield is calculated by
dividing income within each maturity range by the outstanding amount of the
related investment and has not been tax effected on tax-exempt obligations.
9
<PAGE>
<TABLE>
<CAPTION>
TABLE 3
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 Due Under 1 Year Due 1-5 Years Due 5-10 Years Due Over 10 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands) Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
U.S. Government:
Treasury securities $ 1,004 5.63% $ 1,001 5.82% $ 2,005 5.72%
Agency obligations 2,000 6.10 $ 7,999 6.61% $ 14,000 6.74% 23,999 6.64
Agency mortgage-
backed obligations 347 6.17 2,126 6.34 55,435 6.63 57,908 6.62
Corporate debt securities 3,154 7.72 3,154 7.72
Equity securities 2,130 6.28 2,130 6.28
- --------------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 1,004 5.63% $ 3,348 6.02% $ 10,125 6.55% $ 74,719 6.69% $ 89,196 6.63%
- --------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government:
Agency obligations $ 1,998 6.23% $ 3,000 6.14% $ 1,000 7.00% $ 5,998 6.31%
Agency mortgage-
backed obligations 6,338 6.20 16,703 6.67 23,041 6.54
- --------------------------------------------------------------------------------------------------------------------------------
Total held to maturity $ 0 0.00% $ 1,998 6.23% $ 9,338 6.19% $ 17,703 6.69% $ 29,039 6.50%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Securities available for sale are carried at amortized cost in the table
above for purposes of calculating the weighted average yield received on such
securities.
Loan Portfolio
The following table summarizes the composition of the loan portfolio of the
Company by type as of December 31, for each of the years 1995 through 1999.
<TABLE>
<CAPTION>
TABLE 4
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
(in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial real estate, construction and
land development loans $ 120,008 $ 81,949 $ 76,339 $ 63,872 $ 60,829
Residential real estate mortgage loans 34,681 31,694 21,414 13,060 11,651
Tax-exempt loans 342 395 442 784 822
Commercial, industrial and other business loans 21,228 19,614 9,231 7,642 7,821
Consumer loans 22,764 20,868 17,839 9,768 13,043
Lines of credit 17,082 12,601 9,194 8,613 6,195
- -------------------------------------------------------------------------------------------------------------------------------
Total loans $ 216,105 $ 167,121 $ 134,459 $ 103,739 $ 100,361
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company manages risk associated with its loan portfolio through
diversification, underwriting policies and procedures that are reviewed and
updated on at least an annual basis, and ongoing loan monitoring efforts. The
commercial real estate portfolio includes owner-occupied (owner occupies greater
than 50% of the property), other commercial real estate and construction loans.
Owner-occupied and other commercial real estate loans generally have five-year
call provisions. Construction loans are primarily used for residential single
family properties. Financing is provided against firm agreements of sale, with
speculative construction normally limited to one or two samples per project.
The commercial loan portfolio is comprised primarily of amortizing loans to
small businesses in the Southern Central Pennsylvania market area. Business
assets, personal guarantees, and/or personal assets of the borrower generally
secure these loans. The consumer loan portfolio is comprised primarily of
student loans and loans secured by first and second mortgage liens on
residential real estate. The Company's loan portfolio is generally
nonhomogeneous in that the loans have different interest rates, repayment
options, maturities, collateral requirements, etc.
During 1999, total loans increased by $48.6 million from $172.8 million at
December 31, 1998, to $221.4
10
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
million at December 31, 1999, including $5.3 million of loans held for sale on
December 31, 1999 and $5.6 million at December 31, 1998. The loans held for sale
represent student loans that Company's management intends to sell and reinvest
in higher yielding loans and securities. The increase in loans receivable in
1999 was primarily in commercial real estate, lines of credit and real estate
construction and land development. Loans receivable represented 62% of total
deposits and 57% of total assets at December 31, 1999, excluding the loans held
for sale, compared to 56% and 52%, respectively, at December 31, 1998.
The maturity ranges of the loan portfolio and the amounts of loans with
predetermined interest rates and floating interest rates in each maturity range,
as of December 31, 1999, are presented in the following table.
<TABLE>
<CAPTION>
TABLE 5
- ------------------------------------------------------------------------------------------
December 31, 1999
Due Under Due 1-5 Due Over
(in thousands) One Year Years Five Years Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate:
Commercial mortgage $ 22,988 $ 25,211 $ 53,351 $101,550
Construction and
land development 11,803 831 5,824 18,458
Residential mortgage 1,069 6,912 26,700 34,681
Tax-exempt 30 206 106 342
- ------------------------------------------------------------------------------------------
35,890 33,160 85,981 155,031
Commercial 7,984 9,893 3,351 21,228
Consumer 10,368 9,938 2,458 22,764
Lines of credit 17,010 58 14 17,082
- ------------------------------------------------------------------------------------------
Total loans $ 71,252 $ 53,049 $ 91,804 $216,105
- ------------------------------------------------------------------------------------------
Interest rates:
Predetermined $ 22,159 $ 53,049 $ 91,804 $167,012
Floating 49,093 0 0 49,093
- ------------------------------------------------------------------------------------------
Total loans $ 71,252 $ 53,049 $ 91,804 $216,105
- ------------------------------------------------------------------------------------------
</TABLE>
Concentrations of Credit Risk
The largest portion of loans, 55%, on the Company's balance sheet is for
commercial real estate related loans. The Company's commercial real estate loan
portfolio is principally to borrowers throughout Cumberland, Dauphin and York
counties of Pennsylvania where it has full-service branch locations. Commercial
real estate, construction, and land development loans aggregated $120.0 million
at December 31, 1999, compared to $81.9 million at December 31, 1998. Commercial
real estate loans are collateralized by the related project (principally office
building, multi-family residential, land development, and other properties) and
the Company generally requires loan-to-value ratios of no greater than 80%.
Collateral requirements on such loans are determined on a case-by-case basis
based on managements' credit evaluations of the respective borrowers.
Loan and Asset Quality
Total nonperforming assets (nonperforming loans and other real estate) at
December 31, 1999, were $716,000, or 0.18%, of total assets as compared to
$287,000, or 0.09%, of total assets at December 31, 1998. Other real estate
owned totaled $12,000 as of December 31, 1999, and $11,000 as of December 31,
1998. The Company's loan portfolio has continued to perform extremely well over
the past few years. Total delinquent loans (those loans 30 days or more
delinquent) as a percentage of total loans were 0.38% at December 31, 1999,
compared to 0.50% at December 31, 1998. The Company generally places a loan on
nonaccrual status and ceases accruing interest when loan payment performance is
deemed unsatisfactory and the loan is past due 90 days or more, unless the loan
is both well-secured and in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has established
an allowance for loan losses that they believe is adequate for estimated losses
in the current loan portfolio. Based on an evaluation of the loan portfolio,
management presents a quarterly review of the allowance for loan losses to the
Board of Directors, indicating any changes in the allowance since the last
review and any recommendations as to adjustments in the allowance. In making the
evaluation, management considers the results of recent regulatory examinations,
the effects on the loan portfolio of current economic indicators and their
probable impact on borrowers, the amount of loans charged-off for the period,
the amount of nonperforming loans and related collateral security, and the
evaluation of the loan portfolio by external loan review. These factors led to
decisions in all periods presented to provide amounts greater than net
charge-offs. Charge-offs occur when loans are deemed to be uncollectible.
The Company recorded provisions of $762,000 to the allowance for loan losses for
1999 compared to $542,000 for 1998. During 1999, net charge-offs amounted to
$153,000, or 0.08%, of average loans outstanding for the year, compared to
$9,000, or 0.01%, of average loans outstanding for 1998. The allowance for loan
losses decreased as a percentage of loans receivable from 1.34% of total loans
outstanding at December 31, 1998, to 1.31% of total loans
11
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
outstanding. With the exclusion of the governmental guaranteed portion of the
Small Business Administration loans, the allowance for loan losses as a
percentage of total loans is 1.36% of total loans outstanding at December 31,
1999. The following table summarizes information regarding nonperforming loans
and nonperforming assets as of December 31, 1995 through 1999.
<TABLE>
<CAPTION>
TABLE 6
- ---------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------
Nonaccrual loans:
<S> <C> <C> <C> <C> <C>
Commercial $119 $227 $ 53 $ 78 $ 55
Consumer 244 23 3 59 5
Real estate: Construction 0 0 0 0 0
Mortgage 321 25 528 249 104
- ---------------------------------------------------------------------------------
Total nonaccrual loans 684 275 584 386 164
Loans past due 90 days or more 20 1 0 0 0
Restructured loans 0 0 0 0 0
- ---------------------------------------------------------------------------------
Total nonperforming loans 704 276 584 386 164
Other real estate 12 11 264 0 0
- ---------------------------------------------------------------------------------
Total nonperforming assets $716 $287 $848 $386 $164
- ---------------------------------------------------------------------------------
Nonperforming loans
to total loans 0.32% 0.16% 0.43% 0.37% 0.16%
Nonperforming assets
to total assets 0.18% 0.09% 0.35% 0.19% 0.10%
- ---------------------------------------------------------------------------------
Interest income received on
nonaccrual loans $ 38 $ 5 $ 37 $ 29 $ 1
- ---------------------------------------------------------------------------------
Interest income that would have
been recorded under the
original terms of the loans $ 66 $ 22 $ 53 $ 41 $ 23
- ---------------------------------------------------------------------------------
</TABLE>
The table below sets forth information regarding the Company's provision and
allowance for loan losses.
<TABLE>
<CAPTION>
TABLE 7
- ------------------------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,232 $ 1,699 $ 1,684 $ 1,544 $ 1,448
Provisions charged to
operating expenses 762 542 150 90 170
- ------------------------------------------------------------------------------------------------
2,994 2,241 1,834 1,634 1,618
- ------------------------------------------------------------------------------------------------
Recoveries of loans
previously charged-off:
Commercial 8 4 5 62 13
Consumer 4 3 1 3 5
Real estate 1 0 1 0 0
- ------------------------------------------------------------------------------------------------
Total recoveries 13 7 7 65 18
- ------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial 150 2 51 2 20
Consumer 10 14 84 13 6
Real estate 6 0 7 0 66
- ------------------------------------------------------------------------------------------------
Total charged-off 166 16 142 15 92
- ------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 153 9 135 (50) 74
- ------------------------------------------------------------------------------------------------
Balance at end of year $ 2,841 $ 2,232 $ 1,699 $ 1,684 $ 1,544
- ------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) to
average loans outstanding 0.08% 0.01% 0.11% (0.05)% 0.08%
Allowance for loan losses to
year-end loans 1.31% 1.34% 1.26% 1.62% 1.54%
- ------------------------------------------------------------------------------------------------
</TABLE>
Allocation of the Allowance for Loan Losses
The following table details the allocation of the allowance for loan losses to
the various categories. The allocation is made for analytical purposes and it is
not necessarily indicative of the categories in which future credit losses may
occur. The total allowance is available to absorb losses from any segment of
loans.
<TABLE>
<CAPTION>
TABLE 8
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses at December 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross % Gross % Gross
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans
and lines of credit $ 155 17.73% $ 400 19.28% $ 233 13.70% $ 274 15.67% $ 220 13.96%
Consumer 224 10.53 150 12.49 225 13.27 180 9.42 185 13.00
Real estate, construction
and land development:
Commercial 2,335 55.69 1,582 49.27 970 57.10 1,105 62.32 936 61.43
Residential 127 16.05 100 18.96 271 15.93 125 12.59 203 11.61
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 2,841 100.00% $2,232 100.00% $ 1,699 100.00% $ 1,684 100.00% $ 1,544 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Deposits
Total deposits averaged $324.2 million for 1999, an increase of $67.4 million,
or 26%, over the 1998 average of $256.8 million. The average balance on
noninterest-bearing demand deposits increased in 1999 by $14.4 million, or 29%,
compared to the prior year. The average total balance of all savings account
products was $78.5 million, a $8.5 million, or 12%, increase over the average
balance for 1998. The average balance of interest-bearing demand accounts (money
market and interest checking accounts) for 1999 increased by $20.7 million, or
53%, over the average balance for the prior year. The average balance of all
time deposits in 1999 was $122.0 million, an increase of $23.7 million, or 24%,
over the average balance for 1998.
The Company believes that its record of sustaining core deposit growth is
reflective of the Company's retail approach to banking which emphasizes a
combination of free checking accounts, convenient branch locations, extended
hours of operation, quality service, and active marketing. Core deposits, which
consist of all deposits other than certificates of deposit in excess of
$100,000, increased $42.4 million, or 17%, in 1999 over 1998.
The remaining maturity for certificates of deposit of $100,000 or more as of
December 31, 1999 is presented in Table 9.
TABLE 9
- -------------------------------------------------------------
(in thousands) 1999
- -------------------------------------------------------------
3 months or less $ 35,491
3 to 6 months 5,089
6 to 12 months 3,158
Over 12 months 7,781
- -------------------------------------------------------------
Total $ 51,519
- -------------------------------------------------------------
Total deposits at December 31, 1999, were $348.5 million, up $50.8 million, or
17%, over total deposits of $297.7 million at December 31, 1998. The average
balances and weighted average rates paid on deposits for 1999, 1998 and 1997 are
presented in Table 10.
<TABLE>
<CAPTION>
TABLE 10
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1999 Average 1998 Average 1997 Average
(dollars in thousands) Balance/Rate Balance/Rate Balance/Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Noninterest-bearing $ 64,082 $ 49,636 $ 39,951
Interest-bearing (money market and checking) 59,634 2.48% 38,923 2.57% 28,886 2.59%
Savings 78,465 2.90 69,959 3.40 63,100 3.85
Time 122,033 5.05 98,287 5.46 58,938 5.47
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 324,214 $ 256,805 $ 190,875
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest Rate Sensitivity
The management of interest rate sensitivity seeks to avoid fluctuating net
interest margins and to provide consistent net interest income through periods
of changing interest rates.
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with those
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the
13
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
amount of its interest-earning assets within the one year horizon. However,
assets and liabilities with similar repricing characteristics may not reprice at
the same time or to the same degree. As a result, the Company's GAP does not
necessarily predict the impact of changes in general levels of interest rates on
net interest income. Table 11 shows the GAP position for the Company as of
December 31, 1999.
<TABLE>
<CAPTION>
TABLE 11
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
1 - 90 91 - 180 181 - 365 1 - 5 Beyond 5
(in thousands) Days Days Days Years Years Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable $ 55,319 $ 5,004 $ 7,286 $ 53,436 $ 96,617 $ 217,662
Securities 3,063 3,064 7,127 47,652 54,233 115,139
Federal funds sold 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 58,382 8,068 14,413 101,088 150,850 332,801
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Transaction accounts 36,235 10,374 20,747 62,974 28,186 158,516
Other money borrowed 8,300 0 0 0 0 8,300
Time deposits 54,283 12,910 21,489 31,857 0 120,539
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 98,818 23,284 42,236 94,831 28,186 287,355
- -------------------------------------------------------------------------------------------------------------------------------
Period GAP (40,436) (15,216) (27,823) 6,257 122,664 $ 45,446
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP $ (40,436) $ (55,652) $ (83,475) $ (77,218) $ 45,446
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Management believes the simulation of net interest income in different interest
rate environments provides a more meaningful measure of interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net income in alternative interest rate scenarios. Management continually
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate 200 basis point change during the next year, with rates remaining
constant in the second year.
The Company's Asset/Liability Committee (ALCO) policy has established that
income sensitivity will be considered acceptable if overall net income
volatility in a plus or minus 200 basis point scenario is within 15% of net
income in a flat rate scenario in the first year and 30% using a two year
planning window. At December 31, 1999, the Company's income simulation model
indicates net income would increase 3.9% and 3.7% in the first year and over a
two year time frame, respectively, if rates decreased as described above, as
compared to a decrease of 3.8% and 8.9%, respectively, at December 31, 1998. The
model projects that net income would decrease by 8.6% and 9.5% in the first year
and over a two year time frame, respectively, if rates increased as described
above, as compared to a decrease of 3.0% and 1.3%, respectively, at December 31,
1998. All of these forecasts are within an acceptable level of interest rate
risk per the policies established by ALCO.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point change in rates. The Company's ALCO policy indicates that the level
of interest rate risk is unacceptable if the immediate 200 basis point change
would result in the loss of 60% or more of the excess of market value over book
value in the current rate scenario. At December 31, 1999, the market value of
equity indicates an acceptable level of interest rate risk.
Liquidity
Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth and reduce
assets to meet deposit withdrawals, to maintain reserve requirements, and to
otherwise operate the Company on an ongoing basis. Liquidity sources from asset
categories are provided primarily by cash, federal funds sold, and the cash flow
from the amortizing securities and loan portfolios. The primary source of
liquidity from liability categories is the generation of additional core deposit
balances. As previously mentioned, total core deposits increased by $42.4
million, or 17%, in 1999.
Additionally, the Company has established secondary sources of liquidity
consisting of federal funds lines of credit, repurchase agreements, and
borrowing capacity at the Federal Home Loan Bank which can be drawn upon if
needed. As of December 31, 1999, the total potential liquidity for the Company
through these secondary sources was $145 million. In view of the primary and
secondary sources as previously mentioned, management believes the Company is
capable of meeting its anticipated liquidity needs.
Short-Term Borrowings
Short-term borrowings, or other borrowed money, which consists of securities
sold under agreement to repurchase and federal funds purchased, were used
occasionally in 1999 to meet short-term liquidity needs. For 1999, other
borrowed money average $460,000 as compared to $0 in 1998. The average rate paid
on the Company's short-term borrowings was 5.35% during 1999. At December 31,
1999, short-term borrowings totaled $8.3 million. These funds were used to
purchase additional cash to have on hand throughout the branch network as
preparation for possible customer demands for large sums of cash close to
year-end related to Year 2000 (Y2K) fears. Subsequent to year-end, cash on hand
was reduced to normal levels and the borrowed funds were repaid.
Stockholders' Equity and Capital Adequacy
At December 31, 1999, stockholders' equity totaled $20.4 million, the same as
stockholders' equity at December 31, 1998. SFAS No. 115, "Accounting for
15
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Certain Investments in Debt and Equity Securities", requires that unrealized
gains or losses, net of the tax effect, on securities classified available for
sale be reflected as a separate component of stockholders' equity. As a result,
stockholders' equity at December 31, 1999 included $3.0 million unrealized loss,
net of income taxes, on securities available for sale. Excluding these
unrealized losses, gross stockholders' equity increased by $3.2 million, or 16%,
from $20.2 million at December 31, 1998, to $23.4 million at December 31, 1999,
principally as a result of retained net income.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital may be comprised of total Tier 1 capital
plus limited life preferred stock, qualifying debt instruments, and the
allowance for loan losses.
Table 12 provides a comparison of the Company's risk-based capital ratios and
leverage ratios to the minimum regulatory requirements for the periods
indicated.
At December 31, 1999, the consolidated capital levels of the Company and of the
subsidiary bank (Commerce) met the definition of a "well capitalized"
institution, i.e., a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6%, and a total risk-based capital ratio exceeding 10%.
<TABLE>
<CAPTION>
TABLE 12
- -------------------------------------------------------------------------------------------------------------------------------
To Be Well-
Capitalized Under
Actual December 31, For Capital Prompt Corrective
1999 1998 Adequacy Purposes Action Provisions
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital 11.12% 12.02% 8.00% 10.00%
Tier 1 Capital 9.91 10.83 4.00 6.00
Leverage ratio (to average assets) 6.28 6.50 4.00 5.00
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's common stock is listed for trading on the NASDAQ Stock Exchange
under the symbol COBH. As of February 29, 2000, there was approximately 400
holders of record of the Company's common stock. The Company offers a Dividend
Reinvestment and Stock Purchase Plan by which dividends on the Company's Common
Stock and optional cash payments of up to $5,000 per quarter (subject to change)
may be invested in Common Stock at a 3% discount (subject to change) to the
market price and without payment of brokerage commissions.
Year 2000
Over the past two years, the Company has described and reported on the progress
of its plans to be ready for the Year 2000 date change. In 1999, the company
completed all necessary remediation and testing of systems. As a result of the
detailed planning and implementation efforts, we are pleased to report the
Company experienced no disruptions in mission critical or non-mission critical
information and technology systems, and believe those systems successfully
responded to the Year 2000 date change. The Company is not aware of any problems
resulting from Year 2000 issues, either with its internal systems or the
products and services of third parties (including loan and deposit customers).
The total cost of the entire Year 2000 compliance process, including internal
and external personnel and any required hardware or software modifications was
approximately $100,000.
Forward-Looking Statements
The Company may from time to time make written or oral "forward-looking
statements," including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Annual Report and Form 10-K
and the exhibits hereto and thereto), in its reports to stockholders and in
other communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
16
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such forward-looking statements: the strength
of the United States economy in general and the strength of the local economies
in which the Company conducts operations; the effects of, and changes in, trade,
monetary and fiscal policies, including interest rate policies of the Board of
Governors of the Federal Reserve System (the "FRB"); inflation; interest rate,
market and monetary fluctuations; the timely development of competitive new
products and services by the Company and the acceptance of such products and
services by customers; the willingness of customers to substitute competitors'
products and services for the Company's products and services and vice versa;
the impact of changes in financial services' laws and regulations (including
laws concerning taxes, banking, securities and insurance); technological
changes; future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Impact of Inflation and Changing Prices
Interest rates have a more significant impact on the Company's performance than
do the effects of general levels of inflation, since most of the Company's
assets and liabilities are monetary in nature. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services as measured by the Consumer Price Index. The liquidity and maturity
structure of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels.
17
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands, except share amounts) 1999 1998
ASSETS
<S> <C> <C>
Cash and due from banks $ 27,490 $ 11,975
Federal funds sold 0 11,900
--------- ---------
Cash and cash equivalents 27,490 23,875
Securities, available for sale at fair value 84,652 96,993
Securities, held to maturity at cost
(fair value 1999: $27,877; 1998: $11,524 ) 29,039 11,493
Loans, held for sale (fair value 1999: $5,380; 1998: $5,726) 5,301 5,641
Loans receivable:
Real estate:
Commercial mortgage 101,550 68,663
Construction and land development 18,458 13,286
Residential mortgage 34,681 31,694
Tax-exempt 342 395
Commercial business 21,228 19,614
Consumer 22,764 20,868
Lines of credit 17,082 12,601
--------- ---------
216,105 167,121
Less: Allowance for loan losses 2,841 2,232
--------- ---------
Net loans receivable 213,264 164,889
Premises and equipment, net 14,408 13,420
Accrued interest receivable 2,105 1,824
Other assets 2,654 1,188
--------- ---------
Total assets $ 378,913 $ 319,323
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 69,495 $ 60,699
Interest-bearing 279,051 237,038
--------- ---------
Total deposits 348,546 297,737
Accrued interest payable 567 518
Other liabilities 1,122 623
Other borrowed money 8,300 0
--------- ---------
Total liabilities 358,535 298,878
Stockholders' Equity:
Preferred stock - Series A noncumulative; $10.00 par value;
1,000,000 shares authorized; 40,000 shares issued and outstanding 400 400
Common stock - $1.00 par value; 10,000,000 shares authorized;
(issued and outstanding 1999: 1,644,523; 1998: 1,557,375) 1,644 1,557
Surplus 18,196 16,728
Retained earnings 3,137 1,546
Accumulated other comprehensive income (loss) (2,999) 214
--------- ---------
Total stockholders' equity 20,378 20,445
--------- ---------
Total liabilities and stockholders' equity $ 378,913 $ 319,323
========= =========
See accompanying notes.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Year Ended December 31,
(in thousands, except per share amounts) 1999 1998 1997
INTEREST INCOME Loans receivable, including fees:
<S> <C> <C> <C>
Taxable $ 16,745 $ 13,738 $ 11,114
Tax-exempt 20 23 62
Securities:
Taxable 7,405 5,593 3,995
Tax-exempt 0 7 35
Federal funds sold 447 658 540
-------- -------- --------
Total interest income 24,617 20,019 15,746
INTEREST EXPENSE
Deposits 9,916 8,743 6,401
Long-term debt 0 0 26
Other 25 0 11
-------- -------- --------
Total interest expense 9,941 8,743 6,438
-------- -------- --------
Net interest income 14,676 11,276 9,308
Provision for loan losses 762 542 150
-------- -------- --------
Net interest income after provision for loan losses 13,914 10,734 9,158
NONINTEREST INCOME
Service charges and other fees 3,538 2,897 1,937
Other 365 278 217
Gain on sale of securities available for sale 1 386 39
Other real estate (net) (27) (6) 46
Gain on sale of loans 654 500 501
-------- -------- --------
Total noninterest income 4,531 4,055 2,740
NONINTEREST EXPENSES
Salaries and employee benefits 6,180 5,048 3,808
Occupancy 1,651 1,448 1,214
Furniture and equipment 937 847 674
Advertising and marketing 1,259 1,045 940
Data processing 936 772 632
Postage and supplies 529 471 365
Audits, regulatory fees and assessments 260 200 185
Other 1,977 1,634 1,260
-------- -------- --------
Total noninterest expenses 13,729 11,465 9,078
-------- -------- --------
Income before income taxes 4,716 3,324 2,820
Provision for federal income taxes 1,613 1,106 928
-------- -------- --------
Net income $ 3,103 $ 2,218 $ 1,892
======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 1.85 $ 1.31 $ 1.20
Diluted 1.72 1.21 1.09
See accompanying notes.
</TABLE>
19
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997 $ 400 $ 1,180 $ 9,949 $ 1,864 $ (118) $ 13,275
-----------
Comprehensive income:
Net income - - - 1,892 - 1,892
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 446 446
-----------
Total comprehensive income 2,338
Dividends declared on preferred stock - - - (80) - (80)
Proceeds from exercise of common
stock warrants - 201 2,531 - - 2,732
Common stock issued under stock
option plans - 24 15 - - 39
Income tax benefit of stock options
exercised - - 19 - - 19
5% common stock dividend and cash
paid in lieu of fractional shares - 70 1,893 (1,968) - (5)
----------- ----------- ----------- ------------ ----------- ------------
Balance: December 31, 1997 400 1,475 14,407 1,708 328 18,318
Comprehensive income:
Net income - - - 2,218 - 2,218
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (114) (114)
------------
Total comprehensive income 2,104
Dividends declared on preferred stock - - - (80) - (80)
Common stock issued under stock
option plans - 8 38 - - 46
Income tax benefit of stock options
exercised - - 64 - - 64
5% common stock dividend and cash
paid in lieu of fractional shares - 74 2,219 (2,300) - (7)
----------- ----------- ----------- ------------ ----------- ------------
Balance: December 31, 1998 400 1,557 16,728 1,546 214 20,445
Comprehensive income:
Net income - - - 3,103 - 3,103
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (3,213) (3,213)
------------
Total comprehensive income (loss) (110)
Dividends declared on preferred stock - - - (80) - (80)
Common stock issued under
stock option plans - 6 61 - - 67
Income tax benefit of
stock options exercised - - 8 - - 8
Common stock issued under employee
stock purchase plan - 1 19 - - 20
Proceeds from issuance of common
stock in connection with
dividend reinvestment and stock
purchase plan - 2 29 - - 31
5% common stock dividend and cash
paid in lieu of fractional shares - 78 1,351 (1,432) - (3)
----------- ----------- ----------- ------------ ----------- ------------
Balance: December 31, 1999 $ 400 $ 1,644 $ 18,196 $ 3,137 $ (2,999) $ 20,378
=========== =========== =========== =========== ============ ===========
See accompanying notes.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Year Ended December 31,
( in thousands ) 1999 1998 1997
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,103 $ 2,218 $ 1,892
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 762 542 150
Provision for depreciation and amortization 1,119 1,040 827
Deferred income taxes (185) (183) 29
Amortization of securities premiums and accretion of discounts, net 311 225 103
Net (gain) loss on sale of securities available for sale (1) (386) (39)
Proceeds from sales of loans 38,913 59,425 29,770
Loans originated for sale (38,339) (57,750) (23,132)
Gains on sales of loans and other real estate owned (654) (522) (532)
Stock granted under stock purchase plan 20 0 0
Increase in accrued interest receivable and other assets 106 (362) (203)
(Decrease) increase in accrued interest payable and other liabilities 548 (83) (136)
-------- -------- --------
Net cash provided by operating activities 5,703 4,164 8,729
INVESTING ACTIVITIES
Securities held to maturity:
Proceeds from principal repayments and maturities 2,517 4,703 1,244
Purchases (20,105) (3,998) 0
Securities available for sale:
Proceeds from principal repayments and maturities 14,484 19,306 7,194
Proceeds from sales 5,357 22,141 8,057
Purchases (12,638) (89,900) (20,022)
Proceeds from sale of loans receivable 9,847 0 0
Net increase in loans receivable (58,563) (32,648) (30,809)
Purchases of premises and equipment (2,107) (3,151) (3,806)
-------- -------- --------
Net cash used by investing activities (61,208) (83,547) (38,142)
FINANCING ACTIVITIES
Net increase in demand, interest checking,
money market, and savings deposits 41,681 39,213 19,874
Net increase in time deposits 9,128 38,300 17,778
Net increase in borrowed money 8,300 0 0
Repayment of long-term debt 0 0 (1,000)
Proceeds from common stock warrants exercised 0 0 2,732
Proceeds from common stock options exercised 67 46 39
Proceeds from common stock purchase and dividend reinvestment plan 31 0 0
Cash dividends on preferred stock and cash in lieu of fractional shares (87) (85) (80)
-------- -------- --------
Net cash provided by financing activities 59,120 77,474 39,343
-------- -------- --------
Increase (decrease) in cash and cash equivalents 3,615 (1,909) 9,930
Cash and cash equivalents at beginning of year 23,875 25,784 15,854
-------- -------- --------
Cash and cash equivalents at year-end $ 27,490 $ 23,875 $ 25,784
======== ======== ========
See accompanying notes.
</TABLE>
21
<PAGE>
Notes to Financial Statements
December 31, 1999
1. Significant Accounting Policies
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. (the company) and its wholly-owned subsidiary Commerce
Bank/Harrisburg, N.A. (Commerce). All material intercompany transactions have
been eliminated. The Holding Company was formed July 1, 1999 and is subject to
regulation of the Federal Reserve Bank.
The company is a one-bank holding company headquartered in Camp Hill,
Pennsylvania and provides full banking services through its subsidiary Commerce
Bank. Commerce operates under a national bank charter and provides full banking
services. As a national bank, the Bank is subject to regulation of the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
The area served by the Bank is principally South Central Pennsylvania.
Estimates
The financial statements are prepared in conformity with generally accepted
accounting principles. These principles require management to make estimates and
assumptions that affect reported amounts of assets and liabilities and require
disclosure of contingent assets and liabilities. In the opinion of management,
all adjustments considered necessary for fair presentation have been included
and are of a normal, recurring nature. Actual results could differ from those
estimates.
Securities
Securities classified as held to maturity are those debt securities that the
Company has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs, or general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over the estimated
average life of the securities.
Securities classified as available for sale are those debt securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses are
reported in other comprehensive income, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings. Premiums and discounts are recognized
in interest income using the interest method over the estimated average life of
the securities. Equity securities are comprised of stock in the Federal Reserve
Bank and the Federal Home Loan Bank.
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date.
Loans Receivable
Loans generally are stated at their outstanding unpaid principal balances net of
an allowance for loan losses and any deferred fees or costs. Interest income is
accrued on the unpaid principal balance. Loan origination fees net of certain
direct origination costs are deferred and recognized as an adjustment of the
yield (interest income) of the related loans. The Company is generally
amortizing these amounts over the contractual life of the loan.
A loan is generally considered impaired when it is probable the Company will be
unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. The accrual of interest is
discontinued when the contractual payment of principal or interest has become 90
days past due or management has serious doubts about further collectability of
principal or interest, even though the loan is currently performing. A loan may
remain on accrual status if it is in the process of collection and is either
guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid
interest credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's judgment as
to the collectability of principal. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance with
the contractual terms for a reasonable period of time, and the ultimate
collectability of the total contractual principal and interest is no longer in
doubt.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged against income.
22
<PAGE>
Notes to Financial Statements
Loans deemed to be uncollectible are charged against the allowance for loan
losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flows using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
certain collateral dependent loans. By the time a loan becomes probable of
foreclosure, it has been charged down to fair value, less estimated costs to
sell.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows expected to be received on
impaired loans.
Loans Held for Sale
Loans held for sale are largely comprised of student loans that the Company
originates with the intention of selling in the future. These loans are carried
at the lower of cost or estimated fair value.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense
as incurred.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance, when in the opinion of management, it is more likely than not that
some portion or all the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted through the provision for income taxes for
the effects of changes in tax laws and rates on the date of enactment.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is charged to operations over the estimated
useful lives of the respective assets. Leasehold improvements are amortized over
the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Depreciation and amortization are determined
on the straight-line method.
Per Share Data
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued as
well as any adjustments to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
Per share amounts have been adjusted to give retroactive effect to stock
dividends declared through January 21, 2000.
Off Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commercial letters of credit, and standby letters of credit. Such financial
instruments are recorded on the balance sheet when they become payable by the
borrower to the Company.
Cash Flow Information
For purposes of the statements of cash flows, the Company considers cash and due
from banks and federal funds sold as cash and cash equivalents. Generally,
federal funds are purchased and sold for one-day periods. Cash paid during the
years ended December 31, 1999, 1998, and 1997 for interest was $9.9 million,
$8.7 million, and $6.3 million respectively.
Recently Issued FASB Statement
In July 1999, the Financial Accounting Standards Board issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133." Statement No. 137 delays the effective date required for adoption of
Statement No. 133 by one year. Therefore, the Company is required to adopt the
statement on January 1, 2001. The adoption of the statement is not expected to
have a significant impact on the financial condition or results of operations of
the Company.
23
<PAGE>
Notes to Financial Statements
Segment Reporting
Commerce acts as an independent community financial services provider, and
offers traditional banking and related financial services to individual,
business and government customers. Through its branches, the Company offers a
full array of commercial and retail financial services.
Management does not separately allocate expenses, including the cost of funding
loan demand, between the commercial and retail operations of the Company. As
such, discrete financial information is not available and segment reporting
would not be meaningful.
2. Restrictions on Cash and Due From Bank Accounts
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances maintained for 1999
and 1998 was approximately $1.2 million and $2.3 million, respectively.
3. Securities
The amortized cost and fair value of securities are summarized in the following
tables.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury securities $ 2,005 $ 0 $ (10) $ 1,995
U.S. Government Agency securities 23,999 0 (1,575) 22,424
Mortgage-backed securities 57,908 1 (2,697) 55,212
Corporate debt securities 3,154 0 (263) 2,891
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 87,066 1 (4,545) 82,522
Equity securities 2,130 0 0 2,130
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 89,196 $ 1 $ (4,545) $ 84,652
- -------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government Agency securities $ 5,998 $ 0 $ (159) $ 5,839
Mortgage-backed securities 23,041 0 (1,003) 22,038
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 29,039 $ 0 $ (1,162) $ 27,877
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury securities $ 2,008 $ 24 $ 0 $ 2,032
U.S. Government Agency securities 19,998 55 (18) 20,035
Mortgage-backed securities 69,924 238 (65) 70,097
Corporate debt securities 3,184 91 0 3,275
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 95,114 408 (83) 95,439
Equity securities 1,554 0 0 1,554
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 96,668 $ 408 $ (83) $ 96,993
- -------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government Agency securities $ 2,000 $ 0 $ 0 $ 2,000
Mortgage-backed securities 9,493 53 (22) 9,524
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 11,493 $ 53 $ (22) $ 11,524
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1999 by
contractual maturity are shown in the following table. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations.
24
<PAGE>
Notes to Financial Statements
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 $ 1,004 $ 1,000
Due after one year through five years 1,998 1,961 3,001 2,915
Due after five years through ten years 3,000 2,910 7,999 7,694
Due after ten years 1,000 968 17,154 15,701
- -------------------------------------------------------------------------------------------------------------------------------
5,998 5,839 29,158 27,310
Mortgage-backed securities 23,041 22,038 57,908 55,212
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 29,039 $ 27,877 $ 87,066 $ 82,522
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $8,000 and gross losses of $7,000 were realized on sales of
securities available for sale in 1999. Gross gains of $395,000 and gross losses
of $9,000 were realized on sales of securities available for sale in 1998. Gross
gains of $39,000 were realized on sales of securities available for sale in
1997.
At December 31, 1999 and 1998, securities with a carrying value of $43.1 million
and $25.6 million respectively were pledged to secure public deposits and for
other purposes as required or permitted by law.
4. Loans Receivable and Allowance for Loan Losses
Certain directors and executive officers of the Company, including their
associates and companies, have loans with Commerce Bank. Such loans were made in
the ordinary course of business at the Bank's normal credit terms including
interest rate and collateralization, and do not represent more than a normal
risk of collection. Total loans to these persons and companies amounted to
approximately $4.9 million and $5.2 million at December 31, 1999 and 1998,
respectively. During 1999, $2.2 million of new loans were made and repayments
totaled $2.5 million.
The following is a summary of the transactions in the allowance for loan losses.
- ---------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Balance at beginning of year $ 2,232 $ 1,699 $ 1,684
Provision charged to expense 762 542 150
Recoveries 13 7 7
Loans charged off (166) (16) (142)
- ---------------------------------------------------------------
Balance at end of year $ 2,841 $ 2,232 $ 1,699
- ---------------------------------------------------------------
Information with respect to impaired loans as of and for the year ended December
31 is as follows:
- -----------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------
Recorded investment:
Requiring an allowance
for loan losses $ 0 $ 0 $ 0
Not requiring an allowance
for loan losses 684 275 585
- -----------------------------------------------------------------
Total $ 684 $ 275 $ 585
- -----------------------------------------------------------------
Average recorded investment $ 686 $ 234 $ 576
Interest income recognized 38 7 37
- -----------------------------------------------------------------
25
<PAGE>
Notes to Financial Statements
5. Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of Commerce's
customers. Standby letters of credit commit the Bank to make payments on behalf
of customers when certain specified future events occur. They primarily are
issued to facilitate the customers' normal course of business transactions.
Historically, almost all of the Bank's standby letters of credit expire
unfunded.
Both types of lending arrangements have credit risk essentially the same as that
involved in extending loans to customers and are subject to the Bank's normal
credit policies. Collateral (e.g., securities, receivables, inventory, and
equipment) is obtained based on management's credit assessment of the customer.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.
The Bank's maximum exposure to credit loss for loan commitments (unfunded loans
and unused lines of credit, including home equity lines of credit) and standby
letters of credit outstanding were as follows:
- ---------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------
Commitments to grant loans $ 4,330 $ 2,854
Unfunded commitments
of existing loans 46,376 30,568
Standby letters of credit 2,863 4,126
- ---------------------------------------------------------------
Total $ 53,569 $ 37,548
- ---------------------------------------------------------------
6. Concentrations of Credit Risk
The Company's loan portfolio is principally to borrowers throughout Cumberland,
Dauphin, and York counties of Pennsylvania where it has full-service branch
locations. Commercial real estate loans and loan commitments for commercial real
estate projects aggregated $143 million at December 31, 1999.
Commercial real estate loans are collateralized by the related project
(principally office buildings, multifamily residential, land development, and
other properties) and the Company generally requires loan-to-value ratios of no
greater than 80%. Collateral requirements on such loans are determined on a
case-by-case basis based on management's credit evaluations of the respective
borrowers.
7. Premises and Equipment
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,842 $ 2,516
Buildings 9,290 9,033
Leasehold improvements 1,576 1,450
Furniture, fixtures, and equipment 4,793 4,566
- ---------------------------------------------------------------------------------------------------------
19,501 17,565
Less accumulated depreciation and amortization 5,093 4,145
- ---------------------------------------------------------------------------------------------------------
$ 14,408 $ 13,420
- ---------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Notes to Financial Statements
8. Deposits
The composition of deposits is as follows:
- ----------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ----------------------------------------------------------------
Demand $69,495 $60,699
Interest checking and money market 70,546 52,964
Savings 87,967 72,664
Time certificates $100,000 or more 51,519 43,148
Other time certificates 69,019 68,262
- ----------------------------------------------------------------
$348,546 $297,737
- ----------------------------------------------------------------
At December 31, 1999, the scheduled maturities of time deposits are as follows:
- ----------------------------------------------
(in thousands)
- ----------------------------------------------
2000 $ 88,681
2001 13,075
2002 4,584
2003 8,348
2004 5,850
- ----------------------------------------------
$ 120,538
- ----------------------------------------------
9. Other Borrowed Money
Other borrowed money consisted of securities sold under agreements to
repurchase, which were overnight in maturity and federal funds purchased. The
following table represents information for other borrowed money as of December
31, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Average
(in thousands) Amount Rate
- --------------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase $ 3,000 6.25%
Federal funds purchased 5,300 4.50
- --------------------------------------------------------------------------------------
$ 8,300
- --------------------------------------------------------------------------------------
Average amount outstanding $ 460 5.35%
Maximum month-end balance 8,300
- --------------------------------------------------------------------------------------
</TABLE>
Securities with a fair value of $3.1 million were pledged as collateral for the
securities sold under agreements to repurchase. The securities underlying the
agreement were under the Bank's control. The Bank has a line of credit
commitment from the Federal Home Loan Bank (FHLB) for borrowings up to $120
million. No amounts were outstanding on this line as of December 31, 1999 and
1998. Certain qualifying assets of Commerce Bank collateralize the line.
10. Income Taxes
A reconciliation of the provision for income taxes and the amount that would
have been provided at statutory rates is as follows:
- -------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------
Provision at statutory
rate on pre-tax income $ 1,603 $ 1,130 $ 959
Tax-exempt income on
loans and investments (6) (9) (30)
Other 16 (15) (1)
- -------------------------------------------------------------------
$ 1,613 $ 1,106 $ 928
- -------------------------------------------------------------------
The components of income tax expense are as follows:
- ---------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Current $ 1,798 $ 1,289 $ 899
Deferred (185) (183) 29
- ---------------------------------------------------------------
$ 1,613 $ 1,106 $ 928
- ---------------------------------------------------------------
27
<PAGE>
Notes to Financial Statements
The components of the net deferred tax assets were as follows:
- -------------------------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 934 $ 727
Unrealized losses on securities 1,545 0
Other 3 13
- -------------------------------------------------------------------------------
Total deferred tax assets 2,482 740
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment (226) (218)
Prepaid expenses (51) (47)
Unrealized gains on securities 0 (111)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (277) (376)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 2,205 $ 364
- -------------------------------------------------------------------------------
Income taxes paid totaled $1,703,000, $1,153,000, and $861,000 in 1999, 1998,
and 1997, respectively. Income taxes of $0, $131,000, and $13,000 were
recognized on net securities gains in 1999, 1998, and 1997 respectively.
11. Stockholders' Equity
At December 31, 1999, Commerce Bancorp, Inc., owned 40,000 shares of the
Company's Series A $10 par value noncumulative nonvoting preferred stock and
warrants that entitle the holder to purchase 118,195 shares (adjusted for common
stock dividends) of the Company's common stock, exercisable at $8.45 per share
(adjusted for common stock dividends), in the event of a "change in control" (as
defined in the Warrant Agreement). Such warrants are fully transferable and
expire on October 7, 2008. None of these warrants were exercised during 1999 or
1998. The preferred stock is redeemable at the option of the Company at the
price of $25 per share plus any unpaid dividends. Dividends on the preferred
stock are payable quarterly at a rate of $2 per share per annum (see Note 14).
During the 4th quarter of 1999, the Company implemented a dividend reinvestment
and stock purchase plan. Holders of common stock may participate in the plan in
which reinvested dividends and voluntary cash payments of up to $5,000 per
quarter (subject to change) may be reinvested in additional common shares at a
3% discount (subject to change) from the current market price. Employees who
have been continuously employed for at least one year are also eligible to
participate in the plan under the same terms as listed above for shareholders. A
total of 1,527 common shares were purchased pursuant to this plan in 1999. At
December 31, 1999, the Company had reserved approximately 498,000 common shares
to be issued in connection with the plan.
On January 15, 1999, the Board of Directors declared a 5% common stock dividend
payable on February 19, 1999, to stockholders of record on January 29, 1999.
Payment of the stock dividend resulted in the issuance of 73,952 additional
common shares.
On January 21, 2000, the Board of Directors declared a 5% common stock dividend
payable on February 18, 2000, to stockholders of record on February 4, 2000.
Payment of the stock dividend will result in the issuance of 78,342 additional
common shares.
All common stock and per share data included in these financial statements have
been restated for these stock dividends.
28
<PAGE>
Notes to Financial Statements
12. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 3,103 $2,218 $1,892
Preferred stock dividends (80) (80) (80)
- -------------------------------------------------------------------------------------------------------------------------------
Income available to
common stockholders 3,023 1,638 $1.85 2,138 1,632 $1.31 1,812 1,504 $1.20
Effect of dilutive securities:
Warrants 0 0 44
Stock options 118 133 118
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income available to
common stockholders
plus assumed conversions $ 3,023 1,756 $1.72 $ 2,138 1,765 $1.21 $ 1,812 1,666 $1.09
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 46,570 shares of common stock at $26.08, options to purchase
39,100 shares at $25.92 and options to purchase 8,864 shares of common stock at
$28.12 were outstanding during 1999. They were not included in the computation
of diluted EPS for the year ended December 31, 1999, because the options'
exercise price was greater than the average market price of the common shares.
No options were excluded from the computation of diluted EPS for the year ended
December 31, 1998.
Options to purchase 45,643 shares of common stock at $25.92 were outstanding
during 1997. They were not included in the computation of diluted EPS for the
year ended December 31, 1997 because the options' exercise price was greater
than the average market price of the common shares.
13. Stock Option Plans
In 1996, the Company's shareholders approved the adoption of the 1996 Employee
Stock Option Plan. The Plan covers 243,390 authorized shares of common stock
reserved for issuance upon exercise of options granted or available for grant to
officers and key employees and will expire on December 31, 2005. The Plan
provides that the option price of qualified incentive stock options will be
fixed by the Board of Directors, but will not be less than 100% of the fair
market value of the stock at the date of grant. In addition, the Plan provides
that the option price of nonqualified stock options (NQSO's) also will be fixed
by the Board of Directors, however for NQSO's the option price may be less than
100% of the fair market value of the stock at the date of grant. Options granted
are exercisable one year after the date of grant, subject to certain vesting
provisions, and expire ten years after the date of grant.
Under the Company's Directors' Stock Option Plan, each Director of the Company
who is not regularly employed on a salaried basis by the Company shall be
entitled to an option to acquire 1,477 shares of the Company's common stock
during each year in which the Director serves on the Board. The Plan covers
147,744 authorized shares of common stock and will expire on December 31, 2000.
The Plan provides that the option price will be fixed by the Board of Directors,
but will not be less than 100% of the fair market value of the stock on the date
of the grant. Options granted are exercisable from the earlier of (1) one year
after the date of the option grant, or (2) the date of a change in control of
the Bank.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee and director stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee and
29
<PAGE>
Notes to Financial Statements
director stock options. Under APB 25, because the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro-forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1999, 1998,
and 1997 respectively: risk-free interest rates of 6.0%, 4.5% and 5.8%;
volatility factors of the expected market price of the Company's common stock of
.24, .25, and .34; weighted-average expected life of the option of 10 years; and
no cash dividends.
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's
pro-forma information is presented in the following table.
- ----------------------------------------------------------------
Year ended December 31,
1999 1998 1997
- ----------------------------------------------------------------
Net income (in thousands):
As reported $3,103 $2,218 $1,892
Pro-forma 2,570 1,694 1,635
- ----------------------------------------------------------------
Reported earnings per share:
Basic $1.85 $1.31 $1.20
Diluted 1.72 1.21 1.09
- ----------------------------------------------------------------
Pro-forma earnings per share:
Basic $1.57 $0.99 $1.03
Diluted 1.46 0.91 0.93
- ----------------------------------------------------------------
Stock options transactions under the Plans were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 315,839 $ 14.39 267,255 $11.58 253,643 $ 8.27
Granted 63,786 22.97 60,837 25.80 54,509 23.32
Exercised (6,614) 10.20 (9,569) 6.20 (35,260) 5.90
Forfeited (6,591) 25.28 (2,684) 11.83 (5,637) 11.89
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 366,420 $ 15.77 315,839 $ 14.39 267,255 $ 11.58
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 286,032 $ 13.63 243,623 $ 11.22 203,078 $ 8.31
Options available for grant at December 31 121,560
Weighted-average fair value
of options granted during the year $ 10.36 $ 10.94 $ 12.69
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 are presented in
the following table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
Options Weighted Avg. Weighted Avg. Options Weighted Avg.
Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options with exercise prices
ranging from $5.08 to $10.00 166,464 $ 7.04 4.3 Years 166,464 $ 7.04
Options with exercise prices
ranging from $10.01 to $20.00 41,635 16.70 7.2 Years 39,873 16.71
Options with exercise prices
ranging from $20.01 to $28.12 158,320 24.70 9.1 Years 79,695 25.85
- -------------------------------------------------------------------------------------------------------------------------------
Total options outstanding with exercise
prices ranging from $5.08 to $28.12 366,420 $ 15.77 6.7 Years 286,032 $ 13.63
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Notes to Financial Statements
14. Regulatory Matters
Regulatory authorities restrict the amount of cash dividends the Bank can
declare without prior regulatory approval. Presently, the Bank cannot declare a
cash dividend in excess of its accumulated retained earnings.
The Company and the Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1999, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the following
table. The consolidated capital ratios are identical to the Bank's capital
ratios.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital greater than greater than greater than greater than
(to risk-weighted assets) $26,218 11.12% or equal to $18,864 or equal to 8.0% or equal to $23,580 or equal to 10.0%
Tier 1 capital greater than greater than greater than greater than
(to risk-weighted assets) 23,377 9.91 or equal to 9,432 or equal to 4.0 or equal to 14,148 or equal to 6.0
Tier 1 capital greater than greater than greater than greater than
(to average assets) 23,377 6.28 or equal to 14,894 or equal to 4.0 or equal to 18,618 or equal to 5.0
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998
Total capital greater than greater than greater than greater than
(to risk-weighted assets) $22,463 12.02% or equal to $14,946 or equal to 8.0% or equal to $18,683 or equal to 10.0%
Tier 1 capital greater than greater than greater than greater than
(to risk-weighted assets) 20,231 10.83 or equal to 7,473 or equal to 4.0 or equal to 11,210 or equal to 6.0
Tier 1 capital greater than greater than greater than greater than
(to average assets) 20,231 6.50 or equal to 12,447 or equal to 4.0 or equal to 15,559 or equal to 5.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15. Employee Benefit Plan
The Company has established a 401(k) Retirement Savings Plan for all of its
employees who meet eligibility requirements. Employees may contribute up to 15%
of their salary to the Plan. The Company will provide a discretionary matching
contribution for up to 6% of each employee's salary. For 1999, 1998, and 1997,
the Company's matching contribution was established at 25% of the employees'
salary deferral. The amount charged to expense was $31,000, $62,000, and $28,000
in 1999, 1998, and 1997, respectively.
16. Comprehensive Income
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income are components of comprehensive
income.
31
<PAGE>
Notes to Financial Statements
The only comprehensive income item that the Company presently has is unrealized
gains (losses) on securities available for sale. The federal income taxes
allocated to the unrealized gains (losses) are presented in the table below. The
reclassification adjustments included in comprehensive income are also
presented.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year ended December 31,
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year $(4,868) $ 214 $ 715
Less reclassification adjustment for gains (losses)
included in net income 1 386 39
- -----------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (4,869) (172) 676
Tax (expense) benefit 1,656 58 (230)
- -----------------------------------------------------------------------------------------------------------
Net of tax amount $(3,213) $ (114) $ 446
- -----------------------------------------------------------------------------------------------------------
</TABLE>
17. LEASES
Land, buildings, and equipment are leased under noncancelable operating lease
agreements that expire at various dates through 2019. Total rental expense for
operating leases in 1999, 1998, and 1997 was $673,000, $602,000, and $527,000,
respectively. At December 31, 1999, future minimum lease payments for
noncancelable operating leases are payable as follows:
- --------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------
2000 $ 635
2001 656
2002 581
2003 574
2004 358
Thereafter 3,483
- --------------------------------------------------------------
Total minimum lease payments $ 6,287
- --------------------------------------------------------------
18. Contingencies
The Company has purchased the parcel of land at 1120 Carlisle Road, Camp Hill,
Pennsylvania, and intends to construct a full-service branch office on this land
in the year 2000. The Company has entered into a contract to build the branch
office in the amount of $600,000.
The Company has entered into a land lease for the premises located on lot #2, in
Palmyra Shopping Center, on Route #422 in Palmyra, Pennsylvania. The Company
intends to construct a full-service branch office on this land in the year 2000.
The land lease commenced September 13, 1999 and has an initial term of 20 years.
In addition, the Company has an option to renew the land lease for four
additional 5-year terms. Initial annual rent payments equal $60,000 and will
commence on the opening of the branch for business. Rent is subject to change on
terms set forth in the lease agreement.
In addition, the Company is also subject to certain routine legal proceedings
and claims arising in the ordinary course of business. It is management's
opinion that the ultimate resolution of these claims will not have a material
adverse effect on the Company's financial position and results of operations.
19. Related Party Transactions
Commerce Bancorp, Inc. (a 9.17% shareholder of common stock and 100% shareholder
of Series A preferred stock of the Company), through a subsidiary (Commerce
Bank, N.A., a national bank located in Cherry Hill, New Jersey), provides
various services to the Company. These services include maintenance to the
branch LAN network, loan review services, MAC/VISA card processing, data
processing, and advertising support. Insurance premiums and commissions are also
included in these services which are paid to a subsidiary of Commerce Bancorp,
Inc. The Company paid approximately $344,000, $325,000, and $210,000 for
services provided buy Commerce Bancorp, Inc. during 1999, 1998, and 1997,
respectively. The Company routinely sells loan participations to Commerce Bank,
N.A. and at December 31, 1999, approximately $8.6 million of these
participations were outstanding.
32
<PAGE>
Notes to Financial Statements
A director of the Company is Chairman of the Board of Commerce Bank, N.A. The
Company obtained interior design services for $16,000, $17,000, and $27,000 in
1999, 1998, and 1997, respectively, from a business owned by the spouse of the
director. Additionally, the business received commissions of approximately
$21,000, $66,000, and $109,000 in 1999, 1998, and 1997, respectively, on
furniture and facility purchases made directly by the Company. The Company
leases land for one of its branches from a limited partnership in which the
director is a 20% limited partner. Total payments on the land lease for 1999,
1998 and 1997 were $50,000. The Company engaged a company owned by the director
to prepare the building sites for the branches constructed in 1998 and 1997.
Total payments made in 1998 and 1997 were $20,000 respectively. During 1997, the
Board of Directors approved the purchase of land for one of its branches from a
company in which the director is a 50% owner. The contract price of the land was
$664,000.
A law firm in which a director of the Company is a partner received professional
fees totaling $149,000, $104,000, and $115,000 during 1999, 1998, and 1997,
respectively.
The Company leases land for a billboard owned by the Company from a director.
Annual lease payments are $24,000, and lease payments made during 1999, 1998,
and 1997 totaled $24,000, $24,000, and $16,000, respectively.
The Company paid commissions for real estate services to a company owned by the
Chairman of the Board of the Company of $65,000, $0, and $25,000 in 1999, 1998,
and 1997 respectively.
20. Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been re-evaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets and liabilities. Due to a wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The Company, in estimating its fair value
disclosures for financial instruments, used the following methods and
assumptions:
Cash and cash equivalents:
The carrying amounts reported approximate those assets' fair value.
Securities:
Fair values of securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans receivable were estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and payable approximate their
fair values.
33
<PAGE>
Notes to Financial Statements
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest-bearing and
noninterest-bearing checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates of deposit
to a schedule of aggregated expected monthly maturities on time deposits.
Other Borrowed Money
The carrying amount of this debt approximates its fair value.
Off-balance Sheet Instruments
Off-balance sheet instruments of the Company consist of letters of credit, loan
commitments, and unfunded lines of credit. Fair values for the Company's
off-balance sheet instruments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The carrying amounts and fair values of
the Company's financial instruments as of December 31 are presented in the
following table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 27,490 $ 27,490 $ 23,875 $ 23,875
Securities 113,691 112,529 108,486 108,517
Loans, net (including loans held for sale) 218,565 216,984 170,530 173,241
Accrued interest receivable 2,105 2,105 1,824 1,824
- -------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $ 348,546 $ 348,891 $ 297,737 $ 298,489
Other borrowed money 8,300 8,300 0 0
Accrued interest payable 567 567 518 518
- -------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet instruments:
Standby letters of credit $ 0 $ 0 $ 0 $ 0
Commitments to extend credit 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
21. Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the
Company which in the opinion of management, reflects adjustments (comprising
only normal recurring accruals) necessary for fair presentaton (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
- -------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Interest income $6,689 $6,424 $5,923 $5,581
Interest expense 2,769 2,528 2,360 2,284
Net interest income 3,920 3,896 3,563 3,297
Provision for loan losses 160 232 190 180
Net investment securities gains 0 0 0 1
Provision for federal income taxes 487 480 330 316
Net income 935 923 636 609
Net income per share:
Basic $ 0.57 $ 0.55 $ 0.37 $ 0.36
Diluted 0.53 0.51 0.35 0.33
1998
Interest income $5,509 $5,262 $4,837 $4,411
Interest expense 2,384 2,397 2,079 1,883
Net interest income 3,125 2,865 2,758 2,528
Provision for loan losses 165 150 120 107
Net investment securities gains 0 128 0 258
Provision for federal income taxes 326 248 232 300
Net income 653 492 469 604
Net income per share:
Basic $ 0.38 $ 0.29 $ 0.28 $ 0.36
Diluted 0.35 0.27 0.26 0.33
</TABLE>
35
<PAGE>
Notes to Financial Statements
22. Condensed Financial Statements of the Parent Company
<TABLE>
<CAPTION>
Balance Sheet
----------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1999
----------------------------------------------------------------------------------
Assets
<S> <C>
Investment in Bank subsidiary $ 20,378
----------------------------------------------------------------------------------
$ 20,378
----------------------------------------------------------------------------------
Stockholders' equity $ 20,378
----------------------------------------------------------------------------------
$ 20,378
----------------------------------------------------------------------------------
Statement of Income
----------------------------------------------------------------------------------
For the Period
July 1, 1999 to
(dollars in thousands) December 31, 1999
----------------------------------------------------------------------------------
Dividends from bank subsidiary $ 40
Equity in undistributed net income of bank subsidiary 1,818
----------------------------------------------------------------------------------
Net Income $1,858
----------------------------------------------------------------------------------
Statement of Cash Flows
----------------------------------------------------------------------------------
For the Period
July 1, 1999 to
(dollars in thousands) December 31, 1999
----------------------------------------------------------------------------------
Operating activities:
Net Income $ 1,858
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed net income of bank subsidiary (1,818)
----------------------------------------------------------------------------------
Net cash provided by operating activities 40
Investing Activities:
Investment in bank subsidiary (57)
----------------------------------------------------------------------------------
Net cash used in investing activities (57)
Financing Activities:
Proceeds from common stock options exercised 26
Proceeds from stock purchase and dividend reinvestment plans 31
Cash dividends on preferred stock (40)
----------------------------------------------------------------------------------
Net cash provided by financing activities 17
----------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents 0
Cash and cash equivalents at July 1, 1999 0
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 0
----------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Notes to Financial Statements
Independent Auditor's Report
To the Board of Directors
Pennsylvania Commerce Bancorp, Inc.
Camp Hill, Pennsylvania
We have audited the accompanying consolidated balance sheets of Pennsylvania
Commerce Bancorp, Inc. and its subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pennsylvania
Commerce Bancorp, Inc. and its subsidiary as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Beard & Company, Inc.
Harrisburg, Pennsylvania
February 4, 2000
37
<PAGE>
Notes to Financial Statements
Headquarters
Pennsylvania Commerce Bancorp, Inc.
100 Senate Avenue
Camp Hill, PA 17011
Annual Shareholders' Meeting
Pennsylvania Commerce Bancorp, Inc.'s annual shareholders meeting will be held
on Friday May 19, 2000 at 9:00 am at the following location:
Hilton Harrisburg and Towers
One North Second Street
Harrisburg, PA 17102
Contacts
Analysts, portfolio managers, and others seeking financial information about
Pennsylvania Commerce Bancorp, Inc. should contact:
Mark A. Zody,
Chief Financial Officer
at (717) 975-5630
News media representatives and others seeking general corporate information
should contact:
James T. Gibson, President/CEO, or
Gary L. Nalbandian, Chairman
at (717) 975-5630
Shareholders seeking assistance with stock records should contact:
Deborah Miller
Shareholder Relations
at (717) 972-2870
Dividend Reinvestment and Stock Purchase Plan
Pennsylvania Commerce Bancorp, Inc. offers its shareholders a convenient plan to
increase their investment in the Company. Through the Dividend Reinvestment and
Stock Purchase Plan, holders of common stock may have their dividends and
voluntary cash payments of up to $5,000 per quarter (subject to change)
reinvested in additional common shares at a 3% discount (subject to change) from
the market price and without brokerage fees, commissions, or service charges.
Shareholders not enrolled in this plan, as well as brokers and custodians who
hold stock for clients, may receive a plan prospectus and enrollment card by
contacting Deborah Miller at (717) 972-2870.
Annual Report and Form 10-K
Additional copies of Pennsylvania Commerce Bancorp, Inc.'s Annual Report and
Form 10-K are available without charge by writing:
Pennsylvania Commerce Bancorp, Inc.
Shareholder Relations
100 Senate Avenue
Camp Hill, PA 17011
NASDAQ Symbol
Shares of Pennsylvania Commerce Bancorp, Inc. common stock are traded nationally
under the symbol COBH in the Over-The-Counter Small Cap Market and are listed in
NASDAQ Quotations.
Common Stock Prices
The following table sets forth the prices for which common stock has traded
during the last two (2) fiscal years on the NASDAQ Small Cap Market. The prices
per share have been adjusted to reflect common stock dividends of 5% with record
dates of February 4, 2000 and January 29, 1999. As of December 31, 1999, there
were approximately 400 holders of record of the Company's common stock.
Quarter Ended: High Low
- ----------------------------------------------------------
March 31, 1999 $ 28.81 $ 25.62
June 30, 1999 27.38 25.24
September 30, 1999 25.60 21.43
December 31, 1999 23.81 20.00
- ----------------------------------------------------------
March 31, 1998 $ 27.21 $ 23.76
June 30, 1998 31.29 26.08
September 30, 1998 34.47 27.21
December 31, 1998 28.12 25.40
- ----------------------------------------------------------
Transfer and Dividend Paying Agent/Registrar
Pennsylvania Commerce Bancorp, Inc.
100 Senate Avenue
Camp Hill, PA 17011
EXHIBIT 23
CONSENT OF BEARD & COMPANY, INC.
We hereby consent to the incorporation by reference in the Registration
Statements (Forms S-8, File Nos. 333-82085, 333-82083 and 333-87313 and Form
S-3, File No. 333-87329) of our report dated February 4, 2000, relating to the
consolidated financial statements of Pennsylvania Commerce Bancorp, Inc.
incorporated by reference in its Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ BEARD & COMPANY, INC.
Harrisburg, Pennsylvania
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001085706
<NAME> PENNSYLVANIA COMMERCE BANCORP INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 27,490
<INT-BEARING-DEPOSITS> 279,051
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,039
<INVESTMENTS-CARRYING> 29,039
<INVESTMENTS-MARKET> 27,877
<LOANS> 216,105
<ALLOWANCE> 2,841
<TOTAL-ASSETS> 378,912
<DEPOSITS> 348,546
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,989
<LONG-TERM> 0
0
400
<COMMON> 1,644
<OTHER-SE> 18,334
<TOTAL-LIABILITIES-AND-EQUITY> 378,913
<INTEREST-LOAN> 16,765
<INTEREST-INVEST> 7,865
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,617
<INTEREST-DEPOSIT> 9,916
<INTEREST-EXPENSE> 9,941
<INTEREST-INCOME-NET> 14,676
<LOAN-LOSSES> 762
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 13,729
<INCOME-PRETAX> 4,716
<INCOME-PRE-EXTRAORDINARY> 4,716
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,103
<EPS-BASIC> 1.85
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 7.70
<LOANS-NON> 684
<LOANS-PAST> 20
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 12
<ALLOWANCE-OPEN> 2,232
<CHARGE-OFFS> 166
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 2,841
<ALLOWANCE-DOMESTIC> 2,841
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
