10-Q 1 pacommerce3-02q.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 March 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ 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: 1,982,802 Common shares outstanding at 04/30/02 ----------------------------------------------- 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 March 31, 2002, and December 31, 2001 Consolidated Statements of Income (Unaudited).......................4 Three months ended March 31, 2002 and March 31, 2001 Consolidated Statements of Stockholders' Equity (Unaudited)........5 Three months ended March 31, 2002 and March 31, 2001 Consolidated Statements of Cash Flows (Unaudited)...................6 Three months ended March 31, 2002, and March 31, 2001 Notes to Consolidated Financial Statements (Unaudited)..............7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.........17 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................18 Item 6a. Exhibits Exhibit 11.........................................................18 Item 6b. Reports on Form 8-K................................................18 Signatures.........................................................20 2 Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited)
----------------------------------------------------------------------------------------------------------------------------- March 31, December 31, ( in thousands, except share amounts) 2002 2001 ----------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 17,612 $ 21,555 Federal funds sold 28,700 4,300 ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents 46,312 25,855 Securities, available for sale at fair value 108,114 107,315 Securities, held to maturity at cost (fair value 2002: $103,444; 2001: $102,427 ) 104,610 103,349 Loans, held for sale (fair value 2002: $3,269; 2001: $7,733 ) 3,253 7,661 Loans receivable : Real estate: Commercial mortgage 144,873 142,969 Construction and land development 32,729 32,863 Residential mortgage 57,566 48,415 Tax-exempt 2,882 2,676 Commercial business 45,728 42,399 Consumer 31,685 36,551 Lines of credit 34,893 36,801 ---------------------------------------------------------------------------------------------------------- 350,356 342,674 Less: Allowance for loan losses 4,785 4,544 ---------------------------------------------------------------------------------------------------------- Net loans receivable 345,571 338,130 Premises and equipment, net 21,998 21,587 Accrued interest receivable 3,314 3,542 Other assets 5,917 2,451 ---------------------------------------------------------------------------------------------------------- Total assets $ 639,089 $ 609,890 ----------------------------------------------------------------------------------------------------------------------------- Liabilities Deposits : Noninterest-bearing $ 115,262 $ 105,171 Interest-bearing 473,109 456,567 ---------------------------------------------------------------------------------------------------------- Total deposits 588,371 561,738 Accrued interest payable 901 837 Other liabilities 2,551 1,722 Long term debt 13,000 13,000 ---------------------------------------------------------------------------------------------------------- Total liabilities 604,823 577,297 ----------------------------------------------------------------------------------------------------------------------------- Stockholders' Preferred stock - Series A noncumulative; $10.00 par value Equity 1,000,000 shares authorized; 40,000 shares issued and outstanding 400 400 Common stock - $1.00 par value; 10,000,000 shares authorized; issued and outstanding - 2002: 1,906,796; 2001: 1,881,960 1,907 1,882 Surplus 25,993 25,263 Retained earnings 6,412 5,159 Accumulated other comprehensive income (loss) (446) (111) ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 34,266 32,593 ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 639,089 $ 609,890 -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 3 Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Unadutied)
------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, -------------------------------- (in thousands, except per share amounts) 2002 2001 ------------------------------------------------------------------------------------------------------------------ Interest Loans receivable, including fees : Income Taxable $ 6,600 $ 6,483 Tax - exempt 22 37 Securities : Taxable 3,145 2,307 Tax - exempt 27 14 Federal funds sold 79 302 --------------------------------------------------------------------------------------------------- Total interest income 9,873 9,143 ------------------------------------------------------------------------------------------------------------------ Interest Deposits 3,236 4,169 Expense Long-term debt 339 138 --------------------------------------------------------------------------------------------------- Total interest expense 3,575 4,307 --------------------------------------------------------------------------------------------------- Net interest income 6,298 4,836 Provision for loan losses 435 285 --------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,863 4,551 ------------------------------------------------------------------------------------------------------------------ Noninterest Service charges and other fees 1,564 1,345 Income Other operating income 127 126 Gain on sale of securities available for sale 0 52 Gain on sale of loans 132 204 --------------------------------------------------------------------------------------------------- Total noninterest income 1,823 1,727 ------------------------------------------------------------------------------------------------------------------ Noninterest Salaries and employee benefits 2,666 2,298 Expenses Occupancy 527 515 Furniture and equipment 347 339 Advertising and marketing 587 390 Data processing 426 311 Postage and supplies 209 212 Audits , regulatory fees and assessments 109 99 Other 876 730 --------------------------------------------------------------------------------------------------- Total noninterest expenses 5,747 4,894 --------------------------------------------------------------------------------------------------- Income before income taxes 1,939 1,384 Provision for federal income taxes 649 461 --------------------------------------------------------------------------------------------------- Net income $ 1,290 $ 923 ------------------------------------------------------------------------------------------------------------------ Net income per common share : Basic $ 0.67 $ 0.49 Diluted 0.60 0.45 ------------------------------------------------------------------------------------------------------------------
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, 2000 $ 400 $ 1,749 $ 20,861 $ 4,334 $ (676) $ 26,668 Comprehensive income: Net income - - - 923 - 923 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - 550 550 ------------- Total comprehensive income 1,473 Dividends declared on preferred stock - - - (20) - (20) Common stock issued under stock option plans - 9 44 - - 53 Income tax benefit of stock options exercised - - 59 - - 59 Common stock issued under employee stock purchase plan - - 3 - - 3 Proceeds from issuance of common stock in connection with dividend reinvestment and stock purchase plan - 2 69 - - 71 Other - - 12 (12) - - ------------------------------------------------------------------------------------------------------------------------------------ March 31, 2001 $ 400 $ 1,760 $ 21,048 $ 5,225 $ (126) $ 28,307 ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Preferred Common Retained Comprehensive ( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total ------------------------------------------------------------------------------------------------------------------------------------ Balance : December 31, 2001 $ 400 $ 1,882 $ 25,263 $ 5,159 $ (111) $ 32,593 Comprehensive income: Net income - - - 1,290 - 1,290 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - (335) (335) ------------- Total comprehensive income 955 Dividends declared on preferred stock - - - (20) - (20) Common stock issued under stock option plans - 14 184 - - 198 Income tax benefit of stock options exercised - - 106 - - 106 Common stock issued under employee stock purchase plan - - 2 - - 2 Proceeds from issuance of common stock in connection with dividend reinvestment and stock purchase plan - 11 421 - - 432 Other - - 17 (17) - - ------------------------------------------------------------------------------------------------------------------------------------ March 31, 2002 $ 400 $ 1,907 $ 25,993 $ 6,412 $ (446) $ 34,266 ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 5 Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, ( in thousands ) 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 1,290 $ 923 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 435 285 Provision for depreciation and amortization 348 343 Deferred income taxes (87) (112) Amortization of securities premiums and accretion of discounts, net 143 45 Net gain on sale of securities available for sale 0 (52) Proceeds from sale of loans 11,147 12,286 Loans originated for sale (6,604) (13,400) Gain on sales of loans (132) (204) Stock granted under stock purchase plan 2 3 Decrease (increase) in accrued interest receivable and other assets (2,866) 216 Increase in accrued interest payable and other liabilities 893 709 ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 4,569 1,042 ------------------------------------------------------------------------------------------------------------------------------- Investing Activities Securities held to maturity : Proceeds from principal repayments and maturities 5,720 1,133 Purchases (7,011) (28,681) Securities available for sale : Proceeds from principal repayments and maturities 10,500 5,515 Proceeds from sales 0 7,497 Purchases (11,919) (10,023) Proceeds from sale of loans receivable 0 3,282 Net increase in loans receivable (7,876) (13,943) Purchases of premises and equipment (759) (796) ------------------------------------------------------------------------------------------------------------ Net cash (used) by investing activities (11,345) (36,016) ------------------------------------------------------------------------------------------------------------------------------- Financing Activities Net increase in demand deposits, interest checking, money market and savings deposits 32,469 18,063 Net increase (decrease) in time deposits (5,836) 21,526 Proceeds from common stock options exercised 198 53 Proceeds from common stock purchase and dividend reinvestment plans 432 71 Cash dividends on preferred stock and cash in lieu of fractional shares (30) (20) ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 27,233 39,693 ------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 20,457 4,719 Cash and cash equivalents at beginning of year 25,855 39,649 ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 46,312 $44,368 ------------------------------------------------------------------------------------------------------------ See accompanying notes.
6 PENNSYLVANIA COMMERCE BANCORP, INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) Note 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Pennsylvania Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiaries Commerce Bank/Harrisburg, N.A. ("the Bank"), Commerce Capital Harrisburg Trust I, and Commerce Capital Harrisburg Trust II. All material intercompany accounts and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the three month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The Company may, from time to time, make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including the annual report and Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, and intentions, that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Company's control). The words may, could, should, would, believe, anticipate, estimate, expect, intend, plan, and similar expressions are intended to identify forward-looking statements. The following factors, among others could cause the Company's financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policy, including interest rate policies of the Board of the Federal Reserve System; inflation; interest rate, market and monetary fluctuations; the timely development of competitive new products and services by the Company and the acceptance of such products and services by customers; the willingness of customers to substitute competitors' products and services and vice versa; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance); technological changes; future acquisitions; the expense savings and revenue enhancements from acquisitions being less than expected; the growth and profitability of the Company's noninterest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. 7 The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company. For further information, refer to the financial statements and footnotes thereto included in the Pennsylvania Commerce Bancorp, Inc., Annual Report for the year ended December 31, 2001. Note 2. SIGNIFICANT ACCOUNTING POLICIES Stock Dividends and Per Share Data On January 30, 2002, the Board of Directors declared a 5% stock dividend on common stock outstanding, paid on February 25, 2002, to stockholders of record on February 11, 2002. Payment of the stock dividend resulted in the issuance of 89,805 additional common shares and cash of $9,870 in lieu of fractional shares. The effect of the 5% common stock dividend has been recorded as of December 31, 2001. Recently Issued FASB Statements In July of 2001, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations", which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement will become effective for the Company on January 1, 2003. Adoption of these statements is not expected to have a material impact on the Company's financial condition or results of operations. Note 3. COMMITMENTS AND CONTINGENCIES The Company is subject to certain routine legal proceedings and claims arising in the ordinary course of business. It is management's opinion that the ultimate resolution of these claims will not have a material adverse effect on the Company's financial position and results of operations. Future Branch Facilities The Company has purchased the building at 101 North Second Street, City of Harrisburg, Dauphin County, Pennsylvania and is currently constructing a full-service branch office in this building. The Company plans Grand Opening Ceremonies for this branch in June 2002. The Company has entered into a land lease for the premises located in front of the Camp Hill Mall at 32nd Street and Trindle Road in the Borough of Camp Hill, Cumberland County, Pennsylvania. The Company is currently constructing a full-service branch office on this land. The land lease commenced in April 2002 and has a term of 20 years. Annual rent payments equal $125,000 and will commence August 2002. Rent is subject to change on terms set forth in the lease agreement. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's financial statements and accompanying notes. OVERVIEW Net income for the quarter increased 40% to $1.3 million as compared to $923,000 for the first quarter of 2001 and total revenues increased by 24% to $8.1 million for the quarter. Diluted net income per common share increased 33% to $0.60 from $0.45 per share in the first quarter a year ago (after adjusting for a 5% common stock dividend paid in February 2002). At March 31, 2002, the Company had total assets of $639.1 million, total loans (including loans held for sale) of $353.6 million, and total deposits of $588.4 million. RESULTS OF OPERATIONS Average Balances and Average Interest Rates Interest earning assets averaged $579.3 million for the first quarter of 2002 as compared to $459.9 million for the same period in 2001. Approximately $55.7 million, or 47%, of this increase was in average loans outstanding and $63.7 million, or 53%, was in average investment securities and federal funds sold. The yield on earning assets for the first quarter of 2002 was 6.88%, a decrease of 115 basis points (bps) from the comparable period in 2001. This decrease was mainly the result of eleven decreases in short-term interest rates totaling 475 bps by the Federal Reserve Board during 2001. The growth in interest earning assets was funded primarily by an increase in the average balance of deposits of $87.4 million. Interest-bearing liabilities increased from $386.9 million during the first quarter of 2001 to $482.5 million during the first quarter of 2002. Average savings deposits increased $49.2 million over first quarter a year ago, average public funds deposits increased $37.4 million and average non-interest bearing demand deposits increased by $24.5 million. Average time deposits decreased $16.6 million during the quarter as compared to the first quarter one year ago. The average rate paid on these liabilities for the first quarter of 2002 was 3.00%, a decrease of 151 basis points from the comparable period in 2001. The Company's aggregate cost of funding sources was 2.50% for the first quarter of 2002, a decrease of 130 basis points from the prior year. This is the result of a decrease in the average rates paid on all interest bearing deposits partially offset by the issuance of $8.0 million of long-term debt in September 2001, which bears interest at a higher rate than the Company's deposits. Net Interest Income and Net Interest Margin Net interest income is the difference between interest income earned on assets and interest expense incurred on liabilities used to fund those assets. Interest earning assets primarily include loans and securities. Liabilities used to fund such assets include deposits, borrowed funds, and long-term debt. Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs. 9 Interest income increased by $730,000, or 8%, over the first quarter of 2001. Interest expense for the first quarter of 2002 decreased by $733,000, or 17%, compared to the first quarter of 2001. Net interest income for the first quarter of 2002 increased by $1.5 million, or 30%, over the same period in 2001. Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on earning assets and the average rate incurred on interest-bearing liabilities. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets. The Company's net interest rate spread was 3.88% during the first quarter of 2002 compared to 3.52% during the same period of the previous year. The net interest margin increased by 15 basis points from 4.23% for the first quarter 2001 to 4.38% during the first quarter of 2002. Noninterest Income Noninterest income for the first quarter of 2002 increased by $96,000, or 6%, over the same period in 2001. Recurring core noninterest income increased by 16% from $1.5 million in the first quarter of 2001 to $1.7 million for the same period in 2002. The increase is attributable to service charges and fees associated with servicing a higher volume of deposit accounts and transactions. Included in noninterest income for the first three months of 2002 is nonrecurring income of $95,000, as a result of a $95,000 gain on the sale of student loans. Included in noninterest income for the first three months of 2001 is nonrecurring income of $234,000, comprised of an $102,000 gain on the sale of student loans, an $80,000 gain from the sale of Small Business Administration loans, and a $52,000 gain on sale of securities available for sale. Noninterest Expenses For the first quarter of 2002, noninterest expenses increased by $853,000, or 17%, over the same period in 2001. Staffing levels and related expenses increased as a result of servicing more deposit and loan customers and processing a higher volume of transactions. Staffing and occupancy expenses also increased as a result of opening two branch offices in March 2001 and October 2001, respectively. In addition, staffing and occupancy expenses increased in preparation for the spring branch opening of the Downtown Harrisburg branch. A comparison of noninterest expense for certain categories for the three months ended March 31, 2002, and March 31, 2001, is presented in the following paragraphs. Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $368,000, or 16%, for the first quarter of 2002 over the first quarter of 2001. This increase is consistent with increases in staff levels necessary to handle Company growth from first quarter 2001 to first quarter 2002, including the additional staff of the branch offices opened in March 2001 and October 2001. Occupancy expenses of $527,000 were $12,000 higher for the first quarter of 2001 than for the three months ended March 31, 2001. Increased occupancy expenses primarily are a result of the two branch offices opened in 2001 and preparation of the branch opening in spring 2002 offset by rental income earned at the Downtown Harrisburg location. 10 Advertising and marketing expenses totaled $587,000 for the three months ended March 31, 2002, an increase of $197,000, or 51% from the first quarter of 2001. This increase was primarily the result of increased advertising efforts in each of the Company's markets. These markets will continue to expand as the branch network grows. Data processing expenses of $426,000 were $115,000, or 37%, higher in the first quarter of 2002 than the three months ended March 31, 2001. The increase was due to a combination of increased costs associated with processing additional transactions (due to growth in number of accounts) and an increase in data processing support costs. Audits and regulatory fees increased by $10,000, or 10%, from $99,000 for the first quarter of 2001 to $109,000 for the first quarter of 2002. This increase is a result of higher Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) assessments. Both assessment calculations, which are based upon deposit size, continue to increase as the Company's deposit balances grow. Other noninterest expenses increased by $146,000, or 20%, for the three-month period ended March 31, 2002, as compared to the same period in 2001. Components of the increase include telephone services for new branch locations, higher loan expenses due to an increase in loan volume, higher provisions for non-credit related losses, an increase in Pennsylvania Shares Tax which is based on the Bank's equity, and increased insurance costs. One key measure used to monitor progress in controlling overhead expenses is the ratio of net noninterest expenses to average assets. Net noninterest expenses equal noninterest expenses (excluding foreclosed real estate expenses) less noninterest income (exclusive of nonrecurring gains), divided by average assets. This ratio equaled 2.61% for the three months ended March 31, 2002, less than the 2.77% reported for the three months ended March 31, 2001. Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses (excluding foreclosed real estate expenses) to net interest income plus noninterest income (excluding nonrecurring gains). For the quarter ended March 31, 2002, the operating efficiency ratio was 71.5%, compared to 77.2% for the similar period in 2001. Provision for Federal Income Taxes The provision for federal income taxes was $649,000 for the first quarter of 2002 as compared to $461,000 for the same period in 2001. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 33.5% for the first three months of 2002 and 33.3% for the same period in 2001. Net Income and Net Income Per Share Net income for the first quarter of 2002 was $1.3 million, an increase of $367,000, or 40%, over the $923,000 recorded in the first quarter of 2001. The increase was due to an increase in net interest income of $1.5 million, an increase in noninterest income of $96,000, offset partially by an increase in noninterest expenses of $853,000, an increase of $150,000 in the provision for loan losses, and an increase of $188,000 in the provision for income taxes. Basic earnings per common share, after adjusting for a 5% common stock dividend paid in February 2002, increased to $0.67 per common share for the first quarter of 2002 compared to $0.49 for the same period in 2001. Diluted earnings per common share were $0.60 for the first quarter of 2002 and $0.45 for the same period in 2001. 11 Return on Average Assets and Average Equity Return on average assets (ROA) measures the Company's net income in relation to its total average assets. The Company's annualized ROA for the first quarter of 2002 was 0.84% as compared to 0.75% for the first quarter of 2001. For purposes of calculating ROA, average assets have been adjusted to exclude gross unrealized appreciation or depreciation on securities available for sale. Return on average equity (ROE) indicates how effectively the Company can generate net income on the capital invested by its stockholders. ROE is calculated by dividing net income by average stockholders' equity. For purposes of calculating ROE, average stockholders' equity includes the effect of unrealized appreciation or depreciation, net of income taxes, on securities available for sale. The annualized ROE for the first quarter of 2002 was 15.50%, as compared to 13.60% for the first quarter of 2001. FINANCIAL CONDITION Securities During the first three months of 2002, securities available for sale increased by $799,000 (net of unrealized depreciation) from $107.3 million at December 31, 2001 to $108.1 million at March 31, 2002. This resulted from the purchase of $11.9 million in securities, partially offset by $10.5 million in principal repayments. The securities available for sale portfolio is comprised of U.S. Treasury Notes, U.S. Government agency securities, mortgage-backed securities, AAA Whole Loan CMO securities, corporate debt, and equity securities. The weighted average life of the securities available for sale portfolio was 6.3 years at March 31, 2002 with a weighted average yield of 6.30%. During the first three months of 2002, securities held to maturity increased from $103.3 million to $104.6 million primarily as a result of the purchase of $7.0 million in securities, offset by principal repayments of $5.7 million. The securities held in this portfolio include U.S. Government agency securities, tax-exempt municipal bonds, AAA Whole Loan CMO securities, corporate debt securities, and mortgage-backed securities. The weighted average life of the securities held to maturity portfolio was 7.2 years at March 31, 2002 with a weighted average yield of 6.36%. Federal funds sold increased by $24.4 million during the first three months of 2002. Total securities and federal funds sold aggregated $241.4 million at March 31, 2002, and represented 38% of total assets. The average yield on the combined securities portfolio for the first three months of 2002 was 6.29%, as compared to 6.66% for the similar period of 2001. The average yield earned on federal funds sold during the first three months of 2002 was 1.64%, down 379 basis points from 5.43% earned during the first three months of 2001. The decrease in the yield on federal funds sold is a result of eleven decreases in short-term interest rates by the Federal Reserve Bank for a total of 475 bps between January 1, 2001 and December 31, 2001. Loans Held for Sale Loans held for sale are comprised of student loans, Small Business Administration loans, and residential mortgage loans, which the Company 12 originates with the intention of selling in the future. During the first three months of 2002, total loans held for sale decreased by $4.4 million, from $7.7 million at December 31, 2001 to $3.3 million at March 31, 2002. The change was the result of the sale of $6.3 million of student loans and the sale of $4.7 million of residential loans, offset by originations of $6.6 million in new loans held for sale. Loans held for sale represented 1% of total assets at December 31, 2001 and at March 31, 2002. Loans Receivable During the first three months of 2002, total loans receivable increased by $7.7 million from $342.7 million at December 31, 2001, to $350.4 million at March 31, 2002. Loans receivable represented 60% of total deposits and 55% of total assets at March 31, 2002, as compared to 61% and 56%, respectively, at December 31, 2001. Loan and Asset Quality and Allowance for Loan Losses Total nonperforming assets (nonperforming loans and foreclosed real estate, excluding loans past due 90 days or more and still accruing interest) at March 31, 2002, were $1.4 million, or 0.22%, of total assets as compared to $888,000, or 0.15%, of total assets at December 31, 2001. Foreclosed real estate totaled $107,000 at March 31, 2002, and $12,000 as of December 31, 2001. The summary table below presents information regarding nonperforming loans and assets as of March 31, 2002 and 2001 and December 31, 2001.
Nonperforming Loans and Assets --------------------------------------------------------------------------------------------- ((dollars in thousands) March 31, December 31, March 31, 2002 2001 2001 --------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 444 $ 127 $ 299 Consumer 15 116 8 Real estate: Construction 0 0 0 Mortgage 835 633 794 --------------------------------------------------------------------------------------------- Total nonaccrual loans 1,294 876 1,101 Restructured loans 0 0 0 --------------------------------------------------------------------------------------------- Total nonperforming loans 1,294 876 1,101 Foreclosed real estate 107 12 42 --------------------------------------------------------------------------------------------- Total nonperforming assets 1,401 888 1,143 --------------------------------------------------------------------------------------------- Loans past due 90 days or more 0 0 0 --------------------------------------------------------------------------------------------- Total nonperforming assets and Loans past due 90 days or more $1,401 $ 888 $1,143 --------------------------------------------------------------------------------------------- Nonperforming loans to total loans 0.37% 0.26% 0.37% Nonperforming assets to total assets 0.22% 0.15% 0.22% ---------------------------------------------------------------------------------------------
13 The following table sets forth information regarding the Company's provision and allowance for loan losses.
Allowance for Loan Losses --------------------------------------------------------------------------------------------- (dollars in thousands) 3 Months Year Ending Ending December 31, March 31, 2001 2002 --------------------------------------------------------------------------------------------- Balance at beginning of period $ 4,544 $ 3,732 Provisions charged to operating expenses 435 1,469 --------------------------------------------------------------------------------------------- 4,979 5,201 Recoveries of loans previously charged-off: Commercial 11 3 Consumer 0 21 Real estate 1 0 --------------------------------------------------------------------------------------------- Total recoveries 12 24 Loans charged-off: Commercial 22 475 Consumer 41 85 Real estate 143 121 --------------------------------------------------------------------------------------------- Total charged-off 206 681 --------------------------------------------------------------------------------------------- Net charge-offs 194 657 --------------------------------------------------------------------------------------------- Balance at end of period $ 4,785 $ 4,544 --------------------------------------------------------------------------------------------- Net charge-offs as a percentage of Average loans outstanding 0.05% 0.21% --------------------------------------------------------------------------------------------- Allowance for loan losses as a percentage of Period-end loans 1.37% 1.33% ---------------------------------------------------------------------------------------------
Deposits Total deposits at March 31, 2002 were $588.4 million, up $26.6 million, or 5%, over total deposits of $561.7 million at December 31, 2001. The average balances and weighted average rates paid on deposits for the first three months of 2002 and 2001 are presented in the following table.
--------------------------------------------------------------------------------------------- Three Months Ended March 31, --------------------------------------------------------------------------------------------- 2002 2001 --------------------------------------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Rate Balance Rate --------------------------------------------------------------------------------------------- Demand deposits: Noninterest-bearing $ 103,911 $ 79,389 Interest-bearing (money 129,423 1.38% 91,332 2.99% market and checking) Savings 172,780 2.13 121,210 3.72 Time deposits 167,220 4.58 169,316 5.71 --------------------------------------------------------------------------------------------- Total deposits $ 573,334 $ 461,247 ---------------------------------------------------------------------------------------------
14 Interest Rate Sensitivity The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates. The Company's risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Company's asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies. The guidelines established by ALCO are reviewed by the Company's Board of Directors. An interest rate sensitive asset or liability is one that, within a defined period, either matures or experiences an interest rate change in line with general market interest rates. Historically, the most common method of estimating interest rate risk was to measure the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (GAP), typically one year. Under this method, a company is considered liability sensitive when the amount of its interest-bearing liabilities exceeds the amount of its interest-earning assets within the one year horizon. However, assets and liabilities with similar repricing characteristics may not reprice at the same time or to the same degree. As a result, the Company's GAP does not necessarily predict the impact of changes in general levels of interest rates on net interest income. Management believes the simulation of net interest income in different interest rate environments provides a more meaningful measure of interest rate risk. Income simulation analysis captures not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them. The Company's income simulation model analyzes interest rate sensitivity by projecting net income over the next 24 months in a flat rate scenario versus net income in alternative interest rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Company's model projects a 200 basis point increase and a 100 basis point decrease during the next year, with rates remaining constant in the second year. Historically, the Company's Asset/Liability Committee (ALCO) policy has established that income sensitivity will be considered acceptable if overall net income volatility in a plus 200 or minus 200 basis point scenario is within 15% of net income in a flat rate scenario in the first year and 30% using a two year planning window. At March 31, 2002, the Company projected its interest rate risk using a plus 200 and minus 100 basis point scenario. During 2001, the Federal Reserve lowered short-term interest rates by 475 basis points, pushing the Federal Funds rate down to 1.75% from 6.5% at year-end 2000, the lowest level in over 40 years. The Company's ALCO believed it was more realistic to measure current risk assuming a minus 100 point scenario, as a minus 200 basis point reduction would be unlikely given that current short-term market interest rates are already below 2.00%. At March 31, 2002, the Company's income simulation model indicates net income would increase 0.2% and decrease 1.6% in the first year and over a two-year time frame, respectively, if rates decreased 100 basis 15 points. The model projects that net income would decrease by 0.8% and increase 0.1% in the first year and over a two-year time frame, respectively, if rates increased as described above. All of these forecasts are within an acceptable level of interest rate risk per the policies established by ALCO. The market value of equity model reflects certain estimates and assumptions regarding the impact on the market value of the Company's assets and liabilities given an immediate 200 basis point change in interest rates. One of the key assumptions is the market value assigned to the Company's core deposits, or the core deposit premium. The studies have consistently confirmed management's assertion that the Company's core deposits have stable balances over long periods of time, and are generally insensitive to changes in interest rates. Thus, these core deposit balances provide an internal hedge to market fluctuations in the Company's fixed rate assets. Management believes the core deposit premiums produced by its market value of equity model at March 31, 2002 provide an accurate assessment of the Company's interest rate risk. Management also monitors interest rate risk by utilizing a market value of equity model. The model assesses the impact of a change in interest rates on the market value of all the Company's assets and liabilities, as well as any off balance sheet items. The model calculates the market value of the Company's assets and liabilities in excess of book value in the current rate scenario, and then compares the excess of market value over book value given an immediate 200 basis point increase in rates and a 100 basis point decrease in rates. The Company's ALCO policy indicates that the level of interest rate risk is unacceptable if the immediate change would result in the loss of 60% or more of the excess of market value over book value in the current rate scenario. At March 31, 2002, the market value of equity indicates an acceptable level of interest rate risk. Liquidity Liquidity management involves the ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth and reduce assets to meet deposit withdrawals, to maintain reserve requirements, and to otherwise operate the Company on an ongoing basis. Liquidity needs are generally met by converting assets into cash or obtaining sources of additional funding, mainly deposits. Liquidity sources from asset categories are provided primarily by cash and federal funds sold, and the cash flow from the amortizing securities and loan portfolios. The primary source of liquidity from liability categories is the generation of additional core deposit balances. Additionally, the Company has established secondary sources of liquidity consisting of federal funds lines of credit, repurchase agreements, and borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if needed. As of March 31, 2002, the total potential liquidity for the Company through these secondary sources was $194 million. In view of the primary and secondary sources as previously mentioned, management believes that the Company is capable of meeting its anticipated liquidity needs. Capital Adequacy At March 31, 2002, stockholders' equity totaled $34.3 million, up 5.1% over stockholders' equity of $32.6 million at December 31, 2001. Stockholders' equity at March 31, 2002 included $446,000 gross unrealized losses, net of income taxes, on securities available for sale. Excluding this unrealized loss, gross stockholders' equity increased by $2.0 million from $32.7 million at December 31, 2001, to $34.7 million at March 31, 2002 due principally to retained net income. On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust I, a newly formed Delaware business trust subsidiary of the Company. Proceeds of 16 this offering were downstreamed to Commerce Bank/Harrisburg, N.A., the Company's wholly owned banking subsidiary, to be used for additional capitalization purposes. All $5.0 million of the Trust Capital Securities qualify as Tier 1 capital for regulatory capital purposes. On September 28, 2001, the Company issued $8.0 million of 10.00% Trust Capital Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust II, a newly formed Delaware business trust subsidiary of the Company. Proceeds of this offering were downstreamed to Commerce Bank/Harrisburg, N.A., the Company's wholly owned banking subsidiary, to be used for additional capitalization purposes. At March 31, 2002, $6.6 million of the Trust Capital Securities qualify as Tier 1 capital for regulatory capital purposes and the remaining $1.4 million qualifies as Tier 2 capital. Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Total capital may be comprised of total Tier 1 capital plus limited life preferred stock, qualifying debt instruments, and the allowance for loan losses. The following table provides a comparison of the Company's risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated:
----------------------------------------------------------------------------------------------------------------------------- To Be Well Capitalized Under Prompt Corrective March 31, December 31, For Capital Action Provisions 2002 2001 Adequacy Purposes ----------------------------------------------------------------------------------------------------------------------------- Risk-Based Capital Ratios: Total 11.72% 11.78% 8.00% 10.00% Tier 1 10.34 10.22 4.00 6.00 Leverage ratio 7.43 7.33 4.00 5.00 (to average assets) -----------------------------------------------------------------------------------------------------------------------------
At March 31, 2002, the consolidated capital levels of the Company and of the subsidiary bank (Commerce) met the definition of a "well capitalized" institution. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk principally includes interest rate risk, which is discussed in the Management's Discussion and Analysis section above. While the fed funds rate and National Prime fell 475 basis points between January 1, 2001 and December 31, 2001, the Company's net interest margin has remained fairly stable. Commerce's net interest margin for the first quarter 2002 was 4.38%, up 15 basis points over 4.23% for the first quarter 2001. Currently, Commerce has 73% of its deposits in non-interest bearing, interest checking, and saving accounts, which it considers core deposits. Because of this, these accounts have historically contributed significantly to the net interest margin. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to certain routine legal proceedings and claims arising in the ordinary course of business. It is management's opinion the ultimate resolution of these claims will not have a material adverse effect on the Company's financial position and results of operations. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibits Computation of Net Income Per Share..................................Exhibit 11 (b.) Reports on Form 8-K On February 15, 2002, the Company filed a form 8-K announcing the following information: Effective February 15, 2002, Gary L. Nalbandian, the current Chairman of the Board of Directors of Pennsylvania Commerce Bancorp, Inc. and its one wholly-owned bank subsidiary, Commerce Bank/Harrisburg, N.A., was elected to the additional positions of President and Chief Executive Officer of the Company and the Bank. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf be the undersigned thereunto duly authorized. PENNSYLVANIA COMMERCE BANCORP, INC. (Registrant) 05/13/02 /s/ Gary L Nalbandian ------------------------- ---------------------------------------- (Date) Gary L. Nalbandian President/CEO 05/13/02 /s/ Mark A. Zody ------------------------- ---------------------------------------- (Date) Mark A. Zody Executive Vice President Chief Financial Officer 20