10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2000 ------------- 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 small business issuer as specified in its charter) Pennsylvania 25-1834776 ------------------------------------- ----------------------------- (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 100 Senate Avenue, P.O. Box 8599, Camp Hill, PA 17001-8599 -------------------------------------------------------------- (Address of principal executive offices) (717) 975-5630 ---------------------------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------ State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,652,608 Common shares outstanding at 7/31/00 Transitional Small Business Disclosure Format (check one): Yes No X ---- ----- PENNSYLVANIA COMMERCE BANCORP, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets (Unaudited)...............................3 June 30, 2000, and December 31, 1999 Consolidated Statements of Income (Unaudited).........................4 Three months ended June 30, 2000 and June 30, 1999 Six months ended June 30, 2000 and June 30, 1999 Consolidated Statement of Stockholders' Equity (Unaudited)...........5 Six months ended June 30, 2000 and June 30, 1999 Consolidated Statements of Cash Flows (Unaudited).....................6 Six months ended June 30, 2000, and June 30, 1999 Notes to Consolidated Financial Statements (Unaudited)................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................9 Item 3. Quantitative and Qualitative Disclosures about Market Risk...........19 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................19 Item 4. Submission of Matters to a Vote of Securities Holders................20 Item 6a. Exhibits Exhibit 11...........................................................20 Exhibit 27...........................................................20 Item 6b. Reports on Form 8-K..................................................20 Signatures...........................................................22 2 Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited)
============================================================================================================================= June 30, December 31, ( in thousands, except share amounts) 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 15,093 $ 27,490 Federal funds sold 14,050 0 ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents 29,143 27,490 Securities, available for sale at fair value 81,370 84,652 Securities, held to maturity at cost (fair value 2000: $31,466; 1999: $27,877 ) 32,875 29,039 Loans, held for sale (fair value 2000: $2,157; 1999: $5,380 ) 2,134 5,301 Loans receivable : Real estate: Commercial mortgage 115,513 101,550 Construction and land development 25,403 18,458 Residential mortgage 38,523 34,681 Tax-exempt 805 342 Commercial business 24,839 21,228 Consumer 26,327 22,764 Lines of credit 21,479 17,082 ---------------------------------------------------------------------------------------------------------- 252,889 216,105 Less: Allowance for loan losses 3,278 2,841 ---------------------------------------------------------------------------------------------------------- Net loans receivable 249,611 213,264 Premises and equipment, net 15,747 14,408 Accrued interest receivable 2,337 2,105 Other assets 3,525 2,654 ---------------------------------------------------------------------------------------------------------- Total assets $ 416,742 $ 378,913 ============================================================================================================================= Liabilities Deposits : Noninterest-bearing $ 74,616 $ 69,495 Interest-bearing 312,910 279,051 ---------------------------------------------------------------------------------------------------------- Total deposits 387,526 348,546 Accrued interest payable 686 567 Other liabilities 1,686 1,122 Trust preferred securities 5,000 0 Other borrowed money 0 8,300 ---------------------------------------------------------------------------------------------------------- Total liabilities 394,898 358,535 ----------------------------------------------------------------------------------------------------------------------------- Stockholders' Preferred stock - Series A noncumulative; Equity $10.00 par value; 1,000,000 shares authorized; 40,000 shares issued and outstanding 400 400 Common stock - $1.00 par value; 10,000,000 shares authorized; issued and outstanding - 2000: 1,652,608; 1999: 1,644,523 1,653 1,644 Surplus 18,320 18,196 Retained earnings 4,733 3,137 Accumulated other comprehensive income (loss) (3,262) (2,999) ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 21,844 20,378 ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 416,742 $ 378,913 =============================================================================================================================
See accompanying notes . 3 Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)
--------------------------------------------------------------------------------------------------------------------------------- Three Months Six Months Ended June 30, Ended June 30, --------------------------------------------------------- (in thousands, except per share amounts) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Interest Loans receivable, including fees: Income Taxable $ 5,441 $ 3,926 $ 10,306 $ 7,704 Tax - exempt 10 5 20 10 Securities : Taxable 1,963 1,853 3,906 3,525 Tax - exempt 14 0 16 0 Federal funds sold 126 139 144 265 -------------------------------------------------------------------------------------------------------------- Total interest income 7,554 5,923 14,392 11,504 --------------------------------------------------------------------------------------------------------------------------------- Interest Deposits 3,256 2,358 6,082 4,639 Expense Other 29 2 66 5 -------------------------------------------------------------------------------------------------------------- Total interest expense 3,285 2,360 6,148 4,644 -------------------------------------------------------------------------------------------------------------- Net interest income 4,269 3,563 8,244 6,860 Provision for loan losses 255 190 510 370 -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 4,014 3,373 7,734 6,490 --------------------------------------------------------------------------------------------------------------------------------- Noninterest Service charges and other fees 1,128 860 2,104 1,647 Income Other operating income 108 90 215 167 Gain on sale of securities available for sale 0 0 0 1 Gain on sale of loans 87 59 199 287 -------------------------------------------------------------------------------------------------------------- Total noninterest income 1,323 1,009 2,518 2,102 --------------------------------------------------------------------------------------------------------------------------------- Noninterest Salaries and employee benefits 1,860 1,553 3,574 2,945 Expenses Occupancy 427 407 844 821 Furniture and equipment 232 232 479 454 Advertising and marketing 420 345 840 690 Data processing 272 229 469 453 Postage and supplies 163 119 322 258 Audits, regulatory fees and assessments 86 48 170 105 Other 570 483 1,072 975 -------------------------------------------------------------------------------------------------------------- Total noninterest expenses 4,030 3,416 7,770 6,701 -------------------------------------------------------------------------------------------------------------- Income before income taxes 1,307 966 2,482 1,891 Provision for federal income taxes 444 330 846 646 -------------------------------------------------------------------------------------------------------------- Net income $ 863 $ 636 $ 1,636 $ 1,245 --------------------------------------------------------------------------------------------------------------------------------- Net income per common share: Basic $ 0.51 $ 0.37 $ 0.97 $ 0.74 Diluted 0.48 0.35 0.91 0.68 =================================================================================================================================
See accompanying notes. 4 Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Unaudited)
------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Preferred Common Retained Comprehensive ( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total ------------------------------------------------------------------------------------------------------------------------------- Balance : December 31, 1998 $ 400 $ 1,557 $ 16,728 $ 1,546 $ 214 $ 20,445 Comprehensive income: Net income - - - 1,245 - 1,245 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - (2,111) (2,111) --------- Total comprehensive income (866) Dividends declared on preferred stock - - - (40) - (40) Common stock issued under stock option plans - 3 45 - - 48 ------------------------------------------------------------------------------------------------------------------------------- Balance : June 30, 1999 $ 400 $ 1,560 $ 16,773 $ 2,751 $ (1,897) $ 19,587 ------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Preferred Common Retained Comprehensive ( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total ------------------------------------------------------------------------------------------------------------------------------- Balance : December 31, 1999 $ 400 $ 1,644 $ 18,196 $ 3,137 $ (2,999) $ 20,378 Comprehensive income: Net income - - - 1,636 - 1,636 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - (263) (263) --------- Total comprehensive income 1,373 Dividends declared on preferred stock - - - (40) - (40) Common stock issued under stock option plans - 4 21 - - 25 Income tax benefit of stock options exercised - - 19 - - 19 Common stock issued under employee stock purchase plan - - 3 - - 3 Proceeds from issuance of common stock in connection with dividend reinvestment and stock purchase plan - 5 81 - - 86 ------------------------------------------------------------------------------------------------------------------------------- Balance : June 30, 2000 $ 400 $ 1,653 $ 18,320 $ 4,733 $ (3,262) $ 21,844 -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes . 5 Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
----------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, ( in thousands ) 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 1,636 $ 1,245 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 510 370 Provision for depreciation and amortization 554 569 Deferred income taxes (194) (94) Amortization of securities premiums and accretion of discounts, net 100 178 Net (gain) on sale of securities available for sale 0 (1) Net proceeds from sale of loans 11,629 30,159 Loans originated for sale (8,356) (26,673) Gain on sales of loans and other real estate owned (199) (289) Stock granted under stock purchase plan 3 0 Increase (decrease) in accrued interest receivable and other assets (753) 122 Increase in accrued interest payable and other liabilities 683 796 ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,613 6,382 ----------------------------------------------------------------------------------------------------------------------------- Investing Activities Securities held to maturity : Proceeds from principal repayments and maturities 1,109 1,359 Purchases (4,955) (15,135) Securities available for sale : Proceeds from principal repayments and maturities 2,951 8,401 Proceeds from sales 0 5,357 Purchases (158) (11,637) Proceeds from sale of loans receivable 455 2,534 Net increase in loans receivable (37,220) (29,626) Purchases of premises and equipment (1,893) (593) ---------------------------------------------------------------------------------------------------------- Net cash (used) by investing activities (39,711) (39,340) ----------------------------------------------------------------------------------------------------------------------------- Financing Activities Net increase in demand deposits, interest checking, money market and savings deposits 27,703 15,228 Net increase (decrease) in time deposits 11,277 15,028 Proceeds from issuance of Trust Preferred Securities 5,000 0 Increase (Decrease) in borrowed money (8,300) 0 Proceeds from common stock options exercised 25 48 Proceeds from common stock purchase and dividend reinvestment plans 86 0 Cash dividends on preferred stock (40) (40) ---------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 35,751 30,264 ---------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 1,653 (2,694) Cash and cash equivalents at beginning of year 27,490 23,875 ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 29,143 $21,181 ==========================================================================================================
See accompanying notes . 6 PENNSYLVANIA COMMERCE BANCORP, INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) Note 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Pennsylvania Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiaries Commerce Bank/Harrisburg, N.A. ("the Bank") and Commerce Capital Harrisburg Trust I. All material intercompany accounts and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the six month period ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. In addition to historical information, this Form 10-Q Report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. For further information, refer to the financial statements and footnotes thereto included in the Pennsylvania Commerce Bancorp, Inc., Annual Report for the year ended December 31, 1999. Note 2. SIGNIFICANT ACCOUNTING POLICIES Stock Dividends and Per Share Data On January 21, 2000, the Board of Directors declared a 5% stock dividend on common stock outstanding, paid on February 18, 2000, to stockholders of record on February 4, 2000. Payment of the stock dividend resulted in the issuance of 78,342 additional common shares and cash of $3,250 in lieu of fractional shares. The effect of the 5% common stock dividend has been recorded as of December 31, 1999. Recently Issued FASB Statement In June 2000, the Financial Accounting Standards Board issued Statement No. 138, "Accounting 7 for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133." Statement No. 138 adds to the guidance of Statement No. 133. The adoption of the statement is not expected to have a significant impact on the financial condition or results of operations of the Company. Note 3. COMMITMENTS AND CONTINGENCIES The Company is subject to certain legal proceedings and claims arising in the ordinary course of business. It is management's opinion that the ultimate resolution of these claims will not have a material adverse effect on the Company's financial position and results of operations. Future Branch Facilities The Company has entered into a land lease for the premises located on lot #2, in Palmyra Shopping Center, on Route #422 in Palmyra, Pennsylvania. The Company intends to construct a full-service branch office on this land in the year 2000. The land lease commenced September 13, 1999 and has an initial term of 20 years. In addition, the Company has an option to renew the land lease for four additional 5-year terms. Initial annual rent payments equal $60,000 and will commence on the opening of the branch for business. Rent is subject to change on terms set forth in the lease agreement. The Company has entered into a land lease for the premises located in the East Penn Center, on Wertzville Road in East Pennsboro Township, Cumberland County, Pennsylvania. The Company intends to construct a full-service branch office on this land in the year 2000. The land lease commenced June 26, 2000 and has an initial term of 20 years. In addition, the Company has an option to renew the land lease for four additional 5-year terms. Initial annual rent payments equal $55,000 and will commence the month after final township approvals are complete. Rent is subject to change on terms set forth in the lease agreement. The Company has also amended an existing lease (originally dated February 1996) at the Operations Center located at 3 Crossgate Drive, Mechanicsburg, Pennsylvania. The amendment expands the square footage under this lease from 3,300 square feet to 5,453 square feet. The initial term of this lease was three years with three 3-year renewal options. The Company exercised its option to renew the lease for the first 3-year renewal period in 1999. The amendment will become effective September 1, 2000 and has the same terms and options as the original lease. In addition, the Company has an option to renew the building lease for four additional 2-year terms. Additional annual rent payments equal $24,760 and will commence on 9/1/00. Rent is subject to change on terms set forth in the agreement. Note 4. TRUST CAPITAL SECURITIES On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware business trust subsidiary of the Company. Proceeds of this offering were earmarked for additional capitalization of Commerce Bank/Harrisburg, N.A., the Company's wholly-owned banking subsidiary. All $5.0 million of the Trust Capital Securities qualify as Tier 1 capital for regulatory capital purposes. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's financial statements and accompanying notes. OVERVIEW Net income for the quarter increased 36% to $863,000 as compared to $636,000 for the second quarter of 1999 and total revenues increased by 22% to $5.6 million for the quarter. Diluted net income per common share increased 37% to $0.48 from $0.35 per share in the second quarter a year ago (after adjusting for a 5% common stock dividend paid in February 2000). At June 30, 2000, the Company had total assets of $416.7 million, total loans (including loans held for sale) of $255.0 million, and total deposits of $387.5 million. RESULTS OF OPERATIONS Net Interest Income and Net Interest Margin The largest source of the Company's income is net interest income. Net interest income is the difference between interest income earned on assets and interest expense incurred on liabilities used to fund those assets. Interest earning assets primarily include loans and securities. The principal source of funding for such assets is deposits. Interest income increased by $1.6 million, or 28%, over the second quarter of 1999. Interest earning assets averaged $371.7 million for the second quarter of 2000 as compared to $312.7 million for the same period in 1999. Approximately $58.8 million, or 99%, of this increase was in average loans outstanding. The yield on earning assets for the second quarter of 2000 was 8.17%, an increase of 55 basis points over the comparable period in 1999. Interest expense for the second quarter of 2000 increased by $925,000, or 39%, compared to the second quarter of 1999. This increase was primarily attributable to an increase in the level of average interest-bearing liabilities from $251.8 million during the second quarter of 1999 to $306.2 million during the second quarter of 2000. Average savings deposits increased $28.6 million over second quarter a year ago, average public funds deposits increased $25.6 million and average noninterest bearing demand deposits increased by $5.5 million, while average time deposits (excluding public funds) decreased by $8.3 million. The average rate paid on these liabilities for the second quarter of 2000 was 4.31%, an increase of 56 basis points from the comparable period in 1999. The Company's aggregate cost of funds was 3.55% for the second quarter of 2000, an increase of 51 basis points over the prior year. Net interest income for the second quarter of 2000 increased by $706,000, or 20%, over the same period in 1999. Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on earning assets and the average rate incurred on interest-bearing liabilities. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets. The Company's 9 net interest rate spread was 3.86% during the second quarter of 2000 compared to 3.87% during the same period of the previous year. The net interest margin increased by 4 basis points from 4.58% for the second quarter 1999 to 4.62% during the second quarter of 2000. For the six months ended June 30, 2000, interest income increased by $2.9 million, or 25%, over the same period in 1999. As with the second quarter, the increase for the first six months was mostly related to the volume increases in the level of average loans outstanding along with the increase in the level of yields earned on those assets. Interest earning assets for the first six months of 2000 averaged $358.0 million versus $304.1 million for the comparable period in 1999. The yield on those assets increased to 8.08% during the first half of 2000, from 7.63% for the first half of 1999. Interest expense for the first six months of 2000 totaled $6.1 million, an increase of $1.5 million, or 32%, over the first six months of 1999. The level of average interest-bearing liabilities increased from $247.3 million for the first half of 1999 to $294.7 million for the first six months of 2000. The Company's cost of funds for the first half of 2000 was 3.45%, up 37 basis points from 3.08% for the comparable period in the prior year. Net interest income for the first six months of 2000 increased by $1.4 million, or 20%, over the same period in 1999. The Company's net interest margin increased to 4.63% for the first six months of 2000, from 4.55% for the first half of 1999. Noninterest Income Noninterest income for the second quarter of 2000 increased by $314,000, or 31%, from the same period in 1999. Recurring core noninterest income increased by 24% from $1.0 million in the second quarter of 1999 to $1.2 million for the same period in 2000. The increase is attributable to service charges and fees associated with servicing a higher volume of deposit accounts and transactions. Included in noninterest income for the first six months of 2000 is nonrecurring income of $179,000 as a result of an $87,000 gain on the sale of student loans and $92,000 gain from the sale of Small Business Administration loans. Included in noninterest income for the first six months of 1999 is nonrecurring income of $202,000, comprised of a $106,000 gain on the sale of student loans, net securities gains of $1,000, and $95,000 income from the sale of Small Business Administration loans. Excluding these transactions, recurring core noninterest income for the first six months of 2000 totaled $2.3 million as compared to $1.9 million for the first half of 1999, an increase of 23%. The increase is mainly attributable to additional service charges and fees associated with servicing a higher volume of deposit accounts and transactions. Noninterest Expenses For the second quarter of 2000, noninterest expenses increased by $614,000, or 18%, over the same period in 1999. Staffing levels and related expenses increased as a result of servicing more deposit and loan customers and processing a higher volume of transactions. Staffing and occupancy expenses also increased as a result of opening one branch office in June 2000. A comparison of noninterest expense for certain categories for the three months ended June 30, 2000, and June 30, 1999, is presented in the following paragraphs. Salary expenses and employee benefits, which represent the largest component of noninterest 10 expenses, increased by $307,000, or 20%, for the second quarter of 2000 over the second quarter of 1999. This increase is consistent with increases in staff levels necessary to handle Company growth from second quarter 1999 to second quarter 2000, including the additional staff of the branch office opened in June 2000. Occupancy and furniture & equipment expenses of $659,000 were $20,000, or 3%, higher for the second quarter of 2000 than for the three months ended June 30, 1999. Advertising and marketing expenses totaled $420,000 for the three months ended June 30, 2000, an increase of $75,000, or 22%, over the second quarter of 1999. This increase was primarily the result of increased advertising efforts in each of the Company's markets. These markets will continue to expand as the branch network grows. Data processing expenses of $272,000 for the second quarter of 2000 were $43,000, or 19%, more than the second quarter of 1999. The increase was due to a combination of increased costs associated with processing additional transactions (due to growth in number of accounts), and the costs associated with the increase in volume of users of our Home Banking product which is offered to our customers at no charge. Postage and supplies expense of $163,000 represented a $44,000, or 37%, increase from the second quarter of the prior year. This was due to increased usage of stationery and supplies, and postage related to growth in volume of customers and customer transaction statements. Audits and regulatory fees increased by $38,000, or 79%, from $48,000 for the second quarter of 1999 to $86,000 for the second quarter of 2000. This increase is a result of higher Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) assessments, both of which are calculated on levels of deposits. Another contributing factor for the increase is the additional requirements for reporting necessary for the Bank Holding Company, which was formed on July 1, 1999. Other noninterest expenses increased by $87,000, or 18%, for the three-month period ended June 30, 2000, as compared to the same period in 1999. The increase includes higher provisions for non-credit related losses, an increase in customer/employee relations and entertainment expenses, and costs associated with processing coin for Penny Arcade Coin counters, installed in first and second quarters of 2000, which is offered at no charge to our customers. For the first six months of 2000, total noninterest expenses increased by $1.1 million, or 16% over the comparable period in 1999. A comparison of noninterest expense for certain categories for these two periods is discussed below. Salary expense and employee benefits increased by $629,000, or 21%, over the first six months of 1999. The increase was due to normal salary adjustments and additional salary and benefits costs due to an increase in the level of full-time equivalent employees from 238 at June 30, 1999 to 269 at June 30, 2000. Occupancy and furniture & equipment expenses for the first six months of 2000 were $48,000, or 4%, higher for the second half of 2000 over the similar period in 1999. Advertising and marketing expenses totaled $840,000 for the first six months ended June 30, 2000, an increase of $150,000, or 22%, over the first half of 1999. This increase was primarily 11 the result of advertising in multiple markets. These markets will continue to expand as the branch network grows. Data processing expenses increased $16,000, or 4%, for the first six months of 2000 as compared to the first half of 1999. The increase in data processing is the result of increased costs associated with processing higher volumes of customer transactions (due to growth in number of accounts), and the costs associated with the increase in volume of users of our Home Banking product. Postage and office supplies increased $64,000, or 25%, over the first six months of 1999. The increase in postage expenses resulted from the growth in number of account statements mailed to customers. The increase in supplies expense is a result of increased usage of such items related to additional staff levels as well as an increase in the number of accounts serviced. Other noninterest expenses for the first six months of 2000 were $1.1 million compared to $975,000 for the similar period in 1999. Loan expenses increased $18,000 over the first six months in 1999, as result of an increase in volume of the loan portfolio. The remaining increase was associated with other general costs over similar expenses during the first six months of 1999. One key measure used to monitor progress in controlling overhead expenses is the ratio of net noninterest expenses to average assets. Net noninterest expenses equal noninterest expenses (excluding other real estate expenses) less noninterest income (exclusive of nonrecurring gains), divided by average assets. This ratio equaled 2.77% for the three months ended June 30, 2000, slightly less than 2.83% for the three months ended June 30, 1999, and 2.81% for the first six months of 2000 compared to 2.91% for the comparable period in 1999. Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses (excluding other real estate expenses) to net interest income plus noninterest income (excluding nonrecurring gains). For the quarter ended June 30, 2000, the operating efficiency ratio was 73.10% compared to 74.63% for the similar period in 1999. For the six months ended June 30, 2000, this ratio was 73.42% compared to 76.46% for the six months ended June 30, 1999. Provision for Federal Income Taxes The provision for federal income taxes was $444,000 for the second quarter of 2000 as compared to $330,000 for the same period in 1999. For six months ended June 30, the provision was $846,000 and $646,000 for 2000 and 1999 respectively. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 34% for the first six months of 1999 and 2000. Net Income Net income for the second quarter of 2000 was $863,000, an increase of $227,000, or 36%, over the $636,000 recorded in the second quarter of 1999. The increase was due to an increase in net interest income of $706,000, an increase in noninterest income of $314,000, offset partially by an increase in noninterest expenses of $614,000, an increase of $65,000 in the provision for loan losses, and an increase of $114,000 in the provision for income taxes. Net income for the first six months of 2000 was $1.6 million as compared to $1.2 million recorded in the first six months of 1999. The increase was due to an increase in net interest income of $1.4 million, an increase in noninterest income of $416,000, offset partially by an increase in noninterest 12 expenses of $1.1 million, an increase of $140,000 in the provision for loan losses, and an increase of $200,000 in the provision for income taxes. Basic earnings per common share, after adjusting for a 5% common stock dividend paid in February 2000, increased to $0.51 per common share for the second quarter of 2000 compared to $0.37 for the same period in 1999. Diluted earnings per common share were $0.48 for the second quarter of 2000 and $0.35 for the same period in 1999. Basic earnings per common share, for the first six months of the year, after adjusting for a 5% common stock dividend paid in February 2000, increased to $0.97 per common share as compared to $0.74 per common share for the first half of 1999. Diluted earnings per common share were $0.91 for the first half of 2000 and $0.68 for the same period in 1999. Return on Average Assets and Average Equity Return on average assets (ROA) measures the Company's net income in relation to its total average assets. The Company's annualized ROA for the second quarter of 2000 was 0.86% as compared to 0.75% for the second quarter of 1999. The ROA for the first six months of 2000 and 1999 was 0.85% and 0.76%, respectively. For purposes of calculating ROA, average assets have been adjusted to exclude gross unrealized appreciation or depreciation on securities available for sale. Return on average equity (ROE) indicates how effectively the Company can generate net income on the capital invested by its stockholders. ROE is calculated by dividing net income by average stockholders' equity. For purposes of calculating ROE, average stockholders' equity includes the effect of unrealized appreciation or depreciation, net of income taxes, on securities available for sale. The annualized ROE for the second quarter of 2000 was 16.36%, as compared to 12.48% for the second quarter of 1999. The annualized ROE for the first six months of 2000 was 15.82%, as compared to 12.28% for the first six months of 1999. FINANCIAL CONDITION Securities During the first six months of 2000, securities available for sale decreased by $3.2 million (net of unrealized depreciation) from $84.6 million at December 31, 1999 to $81.4 million at June 30, 2000 primarily as a result of $3.0 million in principal repayments on mortgage-backed securities and U.S. Government agency securities. The securities available for sale portfolio is comprised of U.S. Treasury Notes, U.S. Government agency securities, mortgage-backed securities, trust preferred debt securities, and equity securities. The weighted average life of the securities available for sale portfolio was 7.6 years at June 30, 2000 with a weighted average yield of 6.64%. During the first six months of 2000, securities held to maturity increased from $29.0 million to $32.9 million primarily as a result of the purchase of $5.0 million in tax-exempt and mortgage-backed securities, offset by principal repayments of $1.1 million. The securities held in this portfolio include U.S. Government agency securities, tax-exempt, and mortgage-backed securities. The weighted average life of the securities held to maturity portfolio was 7.1 years at June 30, 2000 with a weighted average yield of 6.65%. 13 Federal funds sold increased by $14.1 million during the first six months of 2000 from $0 at December 31, 1999. Total securities and federal funds sold aggregated $128.3 million at June 30, 2000, and represented 31% of total assets. The average yield on the combined securities portfolio for the first six months of 2000 was 6.64%, as compared to 6.38% for the similar period of 1999. The average yield earned on federal funds sold during the first six months of 2000 was 6.18%, up 154 basis points from 4.64% earned during the first six months of 1999. The large increase in the yield on federal funds sold is a result of five 25 basis point increases and one 50 basis point increase in this rate by the Federal Reserve Bank between June 30, 1999 and May 16, 2000. Loans Held for Sale Loans held for sale are comprised of student loans and residential mortgage loans that the Company originates with the intention of selling in the future. During the first six months of 2000, total loans held for sale decreased by $3.2 million from $5.3 million at December 31, 1999, to $2.1 million at June 30, 2000. The decrease was the result of the sale of $6.5 million of student loans and the sale of $5.0 million of residential loans, offset by originations of $8.3 million in new loans held for sale. Loans held for sale represented 1% of total assets at December 31, 1999 and .5% at June 30, 2000. Loans Receivable During the first six months of 2000, total loans receivable increased by $36.8 million from $216.1 million at December 31, 1999, to $252.9 million at June 30, 2000. Loans receivable represented 65% of total deposits and 61% of total assets at June 30, 2000, as compared to 62% and 57%, respectively, at December 31, 1999. Loan and Asset Quality and Allowance for Loan Losses Total nonperforming assets (nonperforming loans and other real estate, excluding loans past due 90 days or more and still accruing interest) at June 30, 2000, were $526,000, or 0.13%, of total assets as compared to $696,000, or 0.18%, of total assets at December 31, 1999. Other real estate owned totaled $12,000 at June 30, 2000, the same as December 31, 1999. 14 The following summary presents information regarding nonperforming loans and assets as of June 30, 2000 and 1999 and December 31, 1999.
Nonperforming Loans and Assets ----------------------------------------------------------------------------------------------- (dollars in thousands) June 30, December 31, June 30, 2000 1999 1999 ----------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 120 $ 119 $ 35 Consumer 180 244 63 Real estate: Construction 0 0 30 Mortgage 214 321 132 ----------------------------------------------------------------------------------------------- Total nonaccrual loans 514 684 260 Restructured loans 0 0 0 ----------------------------------------------------------------------------------------------- Total nonperforming loans 514 684 260 Other real estate 12 12 92 ----------------------------------------------------------------------------------------------- Total nonperforming assets 526 696 352 ----------------------------------------------------------------------------------------------- Loans past due 90 days or more 0 20 0 ----------------------------------------------------------------------------------------------- Total nonperforming assets and Loans past due 90 days or more $ 526 $ 716 $ 352 ----------------------------------------------------------------------------------------------- Nonperforming loans to total loans 0.20% 0.32% 0.13% Nonperforming assets to total assets 0.13% 0.18% 0.10% ===============================================================================================
The following table sets forth information regarding the Company's provision and allowance for loan losses.
Allowance for Loan Losses ----------------------------------------------------------------------------------------------- (dollars in thousands) June 30, December 31, 2000 1999 ----------------------------------------------------------------------------------------------- Balance at beginning of period $ 2,841 $ 2,232 Provisions charged to operating expenses 510 762 ----------------------------------------------------------------------------------------------- 3,351 2,994 Recoveries of loans previously charged-off: Commercial 4 8 Consumer 7 4 Real estate 0 1 ----------------------------------------------------------------------------------------------- Total recoveries 11 13 Loans charged-off: Commercial 0 150 Consumer 84 10 Real estate 0 6 ----------------------------------------------------------------------------------------------- Total charged-off 84 166 ----------------------------------------------------------------------------------------------- Net charge-offs 73 153 ----------------------------------------------------------------------------------------------- Balance at end of period $ 3,278 $ 2,841 ----------------------------------------------------------------------------------------------- Net charge-offs as a percentage of Average loans outstanding 0.03% 0.08% Allowance for loan losses as a percentage of Period-end loans 1.30% 1.31% ===============================================================================================
15 Deposits Total deposits at June 30, 2000, were $387.5 million, up $39.0 million, or 11%, over total deposits of $348.5 million at December 31, 1999. The average balances and weighted average rates paid on deposits for the first six months of 2000 and 1999 are presented in the following table.
---------------------------------------------------------------------------------------------- Six months Ended June 30, 2000 1999 ---------------------------------------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Rate Balance Rate ---------------------------------------------------------------------------------------------- Demand deposits: Noninterest-bearing $ 68,187 $ 61,249 Interest-bearing (money market and checking) 69,319 2.88% 54,323 2.32% Savings 99,133 3.77 74,372 2.80 Time deposits 124,446 5.22 118,406 5.08 ---------------------------------------------------------------------------------------------- Total deposits $ 361,085 $ 308,350 ==============================================================================================
Interest Rate Sensitivity The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates. The Company's risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Company's asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies. The guidelines established by ALCO are reviewed by the Company's Board of Directors. An interest rate sensitive asset or liability is one that, within a defined period, either matures or experiences an interest rate change in line with general market interest rates. Historically, the most common method of estimating interest rate risk was to measure the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (GAP), typically one year. Under this method, a company is considered liability sensitive when the amount of its interest-bearing liabilities exceeds the amount of its interest-earning assets within the one year horizon. However, assets and liabilities with similar repricing characteristics may not reprice at the same time or to the same degree. As a result, the Company's GAP does not necessarily predict the impact of changes in general levels of interest rates on net interest income. Management believes the simulation of net interest income in different interest rate environments provides a more meaningful measure of interest rate risk. Income simulation analysis captures not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, 16 but also of proposed strategies for responding to them. The Company's income simulation model analyzes interest rate sensitivity by projecting net interest income over the next 24 months in a flat rate scenario versus net income in alternative interest rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Company's model projects a proportionate 200 basis point change during the next year, with rates remaining constant in the second year. The Company's ALCO policy has established that income sensitivity will be considered acceptable if overall net income volatility in a plus or minus 200 basis point scenario is within 15% of net income in a flat rate scenario in the first year and 30% using a two year planning window. At June 30, 2000, the Company's income simulation model indicates net income would increase 2.8% and 4.6% in the first year and over a two year time frame, respectively, if rates decreased as described above, as compared to an increase of 2.2% and 2.3%, respectively, at June 30, 1999. The model projects that net income would decrease by 1.9% and 1.45% in the first year and over a two year time frame, respectively, if rates increased as described above, as compared to a decrease of 6.7% and 7.8%, respectively, at June 30, 1999. All of these forecasts are within an acceptable level of interest rate risk per the policies established by ALCO. Management also monitors interest rate risk by utilizing a market value of equity model. The model assesses the impact of a change in interest rates on the market value of all the Company's assets and liabilities, as well as any off balance sheet items. The model calculates the market value of the Company's assets and liabilities in excess of book value in the current rate scenario, and then compares the excess of market value over book value given an immediate 200 basis point change in rates. The Company's ALCO policy indicates that the level of interest rate risk is unacceptable if the immediate 200 basis point change would result in the loss of 60% or more of the excess of market value over book value in the current rate scenario. At June 30, 2000, the market value of equity model indicates an acceptable level of interest rate risk. Liquidity Liquidity management involves the ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth and reduce assets to meet deposit withdrawals, to maintain reserve requirements, and to otherwise operate the Company on an ongoing basis. Liquidity needs are generally met by converting assets into cash or obtaining sources of additional funding, mainly deposits. Liquidity sources from asset categories are provided primarily by cash and federal funds sold, and the cash flow from the amortizing securities and loan portfolios. The primary source of liquidity from liability categories is the generation of additional core deposit balances. Additionally, the Company has established secondary sources of liquidity consisting of federal funds lines of credit, repurchase agreements, and borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if needed. As of June 30, 2000, the total potential liquidity for the Company through these secondary sources was $141 million. In view of the primary and secondary sources as previously mentioned, management believes that the Company is capable of meeting its anticipated liquidity needs. 17 Capital Adequacy At June 30, 2000, stockholders' equity totaled $21.8 million, up 7.2% over stockholders' equity of $20.4 million at December 31, 1999. Stockholders' equity at June 30, 2000 included $3.3 million in unrealized depreciation, net of income taxes, on securities available for sale. Excluding this unrealized depreciation, gross stockholders' equity increased by $1.7 million from $23.4 million at December 31, 1999, to $25.1 million at June 30, 2000 due principally to retained net income. On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware business trust subsidiary of the Company. Proceeds of this offering were downstreamed to Commerce Bank/Harrisburg, N.A., the Company's wholly-owned banking subsidiary, to be used for additional capitalization purposes. All $5.0 million of the Trust Capital Securities qualify as Tier 1 capital for regulatory capital purposes. Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Total capital may be comprised of total Tier 1 capital plus limited life preferred stock, qualifying debt instruments, and the allowance for loan losses. The table below provides a comparison of the Company's risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated:
--------------------------------------------------------------------------------------------------------------------------- To Be Well Capitalized Under Prompt June 30, December 31, For Capital Adequacy Corrective Action 2000 1999 Purposes Provisions --------------------------------------------------------------------------------------------------------------------------- Risk-Based Capital Ratios: Tier 1 10.66% 9.91% 4.00% 6.00% Total 11.82 11.12 8.00 10.00 Leverage Total 7.45 6.28 4.00 5.00 ---------------------------------------------------------------------------------------------------------------------------
At June 30, 2000, the consolidated capital levels of the Company and of the subsidiary bank (Commerce) met the definition of a "well capitalized" institution. Year 2000 Over the past two years, the Company has described and reported on the progress of its plans to be ready for the Year 2000 date change. In 1999, the Company completed all necessary remediation and testing of systems. As a result of the detailed planning and implementation efforts, we are pleased to report the Company experienced no disruptions in mission critical or non-mission critical information and technology systems, and believe those systems successfully responded to the Year 2000 date change. The Company is not aware of any problems resulting from Year 2000 issues, either with its internal systems or the products and services of third parties (including loan and deposit customers). The total cost of the entire Year 2000 compliance process, including internal and external personnel and any required hardware or software modifications was approximately $100,000. 18 Forward-Looking Statements The Company may, from time to time, make written or oral "forward-looking statements, " including statements contained in the Company's filings with the Securities and Exchange Commission (including the annual report and Form 10-K and the exhibits hereto and thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, and intentions, that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Company's control). The words may, could, should, would, believe, anticipate, estimate, expect, intend, plan, and similar expressions are intended to identify forward-looking statements. The following factors, among others could cause the Company's financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policy, including interest rate policies of the Board of the Federal Reserve System; inflation; interest rate, market and monetary fluctuations; the timely development of competitive new products and services by the Company and the acceptance of such products and services by customers; the willingness of customers to substitute competitors' products and services and vice versa; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance); technological changes; future acquisitions; the expense savings and revenue enhancements from acquisitions being less than expected; the growth and profitability of the Company's noninterest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk has not changed significantly since December 31, 1999. The market risk principally includes interest rate risk, which is discussed in the Management's Discussion and Analysis above. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to certain legal proceedings and claims arising in the ordinary course of 19 business. It is management's opinion that the ultimate resolution of these claims will not have a material adverse effect on the Company's financial position and results of operations. Item 4. Submission of Matters to a Vote of Securities Holders The Annual Meeting of the Company's Shareholders was held on May 19, 2000. The items of business approved by the shareholders at the Annual Meeting were (i) the election of eight directors for one-year terms, and (ii) the approval of the 2001 Directors' Stock Option Plan. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibits Computation of Net Income Per Share..................................Exhibit 11 Financial Data Schedule..............................................Exhibit 27 (b.) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2000. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf be the undersigned thereunto duly authorized. PENNSYLVANIA COMMERCE BANCORP, INC. (Registrant) 8/10/00 /s/ James T. Gibson ------------------------- -------------------------------------- (Date) James T. Gibson President/CEO 8/10/00 /s/ Mark A. Zody ------------------------- -------------------------------------- (Date) Mark A. Zody Executive Vice President Chief Financial Officer 22