-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CcQcELR9I42qRHudhQQm8lHdBO3sm7KtM7NI8D27vlg2lch4EqHHpTFVSHVGcL14 OGSuhfbC58lvEk1n/sPX/w== 0000950159-02-000702.txt : 20021114 0000950159-02-000702.hdr.sgml : 20021114 20021114153301 ACCESSION NUMBER: 0000950159-02-000702 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA COMMERCE BANCORP INC CENTRAL INDEX KEY: 0001085706 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251834776 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-78445 FILM NUMBER: 02824945 BUSINESS ADDRESS: STREET 1: 100 SENATE AVE CITY: CAMP HILL STATE: PA ZIP: 17001-8599 BUSINESS PHONE: 7179755630 MAIL ADDRESS: STREET 1: 100 SENATE AVE CITY: CAMP HILL STATE: PA ZIP: 17001-8599 10-Q 1 pac9-02q.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 September 30, 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: 2,004,777 Common shares outstanding at 10/31/02 ------------------------------------------------- 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 September 30, 2002, and December 31, 2001 Consolidated Statements of Income (Unaudited).........................4 Three months ended September 30, 2002 and September 30, 2001 Nine months ended September 30, 2002 and September 30, 2001 Consolidated Statements of Stockholders' Equity (Unaudited)..........5 Nine months ended September 30, 2002 and September 30, 2001 Consolidated Statements of Cash Flows (Unaudited).....................6 Nine months ended September 30, 2002, and September 30, 2001 Notes to Consolidated Financial Statements (Unaudited)................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk...........20 Item 4. Controls and Procedures..............................................21 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................21 Item 2. Changes in Securities and Use of Proceeds............................21 Item 3. Defaults Upon Senior Securities......................................21 Item 4. Submission of Matters to a Vote of Securities Holders................21 Item 5. Other Information....................................................21 Item 6a. Exhibits.............................................................22 Item 6b. Reports on Form 8-K..................................................22 Signatures...........................................................23 Certifications.......................................................24 2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------- September 30, December 31, ( in thousands, except share amounts) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 29,210 $ 21,555 Federal funds sold 71,200 4,300 ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents 100,410 25,855 Securities, available for sale at fair value 173,553 107,315 Securities, held to maturity at cost (fair value 2002: $113,759; 2001: $102,427 ) 110,556 103,349 Loans, held for sale (fair value 2002: $9,534; 2001: $7,733 ) 9,471 7,661 Loans receivable : Real estate: Commercial mortgage 147,784 142,969 Construction and land development 32,779 32,863 Residential mortgage 62,130 48,415 Tax-exempt 4,199 2,676 Commercial business 49,083 42,399 Consumer 34,292 36,551 Lines of credit 36,481 36,801 ---------------------------------------------------------------------------------------------------------- 366,748 342,674 Less: Allowance for loan losses 5,270 4,544 ---------------------------------------------------------------------------------------------------------- Net loans receivable 361,478 338,130 Premises and equipment, net 25,130 21,587 Accrued interest receivable 3,828 3,542 Other assets 5,385 2,451 ---------------------------------------------------------------------------------------------------------- Total assets $ 789,811 $ 609,890 - ----------------------------------------------------------------------------------------------------------------------------- Liabilities Deposits : Noninterest-bearing $ 132,722 $ 105,171 Interest-bearing 598,781 456,567 ---------------------------------------------------------------------------------------------------------- Total deposits 731,503 561,738 Accrued interest payable 789 837 Other liabilities 3,486 1,722 Long term debt 13,000 13,000 ---------------------------------------------------------------------------------------------------------- Total liabilities 748,778 577,297 - ----------------------------------------------------------------------------------------------------------------------------- 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: 2,000,112; 2001: 1,881,960 2,000 1,882 Surplus 27,826 25,263 Retained earnings 9,186 5,159 Accumulated other comprehensive income (loss) 1,621 (111) ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 41,033 32,593 ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 789,811 $ 609,890 ============================================================================================================================= See accompanying notes . 3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Unadutied) - -------------------------------------------------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------------------------------------------ (in thousands, except per share amounts) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Interest Loans receivable, including fees: Income Taxable $ 6,769 $ 6,728 $ 19,968 $19,838 Tax - exempt 31 28 72 98 Securities : Taxable 3,776 2,824 10,535 7,833 Tax - exempt 26 27 80 67 Federal funds sold 186 106 348 509 ------------------------------------------------------------------------------------------------------------------ Total interest income 10,788 9,713 31,003 28,345 - -------------------------------------------------------------------------------------------------------------------------------- Interest Deposits 3,276 3,831 9,774 11,899 Expense Other borrowed money 0 2 0 13 Long-term debt 339 145 1,015 422 ------------------------------------------------------------------------------------------------------------------ Total interest expense 3,615 3,978 10,789 12,334 ------------------------------------------------------------------------------------------------------------------ Net interest income 7,173 5,735 20,214 16,011 Provision for loan losses 375 405 1,090 1,005 ------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 6,798 5,330 19,124 15,006 - -------------------------------------------------------------------------------------------------------------------------------- Noninterest Service charges and other fees 1,747 1,420 4,875 4,182 Income Other operating income 105 124 359 369 Gain on sale of securities available for sale 0 0 0 52 Gain on sale of loans 142 52 331 314 ------------------------------------------------------------------------------------------------------------------ Total noninterest income 1,994 1,596 5,565 4,917 - -------------------------------------------------------------------------------------------------------------------------------- Noninterest Salaries and employee benefits 3,336 2,411 8,918 7,143 Expenses Occupancy 653 542 1,739 1,608 Furniture and equipment 417 335 1,123 1,043 Advertising and marketing 560 410 1,733 1,190 Data processing 462 351 1,411 973 Postage and supplies 202 228 614 638 Audits, regulatory fees and assessments 112 102 330 299 Other 842 774 2,645 2,271 ------------------------------------------------------------------------------------------------------------------ Total noninterest expenses 6,584 5,153 18,513 15,165 ------------------------------------------------------------------------------------------------------------------ Income before income taxes 2,208 1,773 6,176 4,758 Provision for federal income taxes 741 592 2,072 1,586 ------------------------------------------------------------------------------------------------------------------ Net income $ 1,467 $ 1,181 $ 4,104 $ 3,172 ================================================================================================================================ Net income per common share : Basic $ 0.72 $ 0.63 $ 2.07 $ 1.68 Diluted 0.66 0.56 1.89 1.52 ================================================================================================================================ 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 - - - 3,172 - 3,172 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - 1,588 1,588 ---------- Total comprehensive income 4,760 Dividends declared on preferred stock - - - (60) - (60) Common stock issued under stock option plans - 14 133 - - 147 Income tax benefit of stock options exercised - - 75 - - 75 Common stock issued under employee stock purchase plan - - 8 - - 8 Proceeds from issuance of common stock in connection with dividend reinvestment and stock purchase plan - 10 337 - - 347 Other - - 12 (12) - - - ---------------------------------------------------------------------------------------------------------------------------------- September 30, 2001 $ 400 $ 1,773 $ 21,426 $ 7,434 $ 912 $ 31,945 ==================================================================================================================================
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 - - - 4,104 - 4,104 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - 1,732 1,732 ---------- Total comprehensive income 5,836 Dividends declared on preferred stock - - - (60) - (60) Common stock issued under stock option plans - 100 1,475 - - 1,575 Income tax benefit of stock options exercised - - 332 - - 332 Common stock issued under employee stock purchase plan - - 16 - - 16 Proceeds from issuance of common stock in connection with dividend reinvestment and stock purchase plan - 18 723 - - 741 Other - - 17 (17) - - - ---------------------------------------------------------------------------------------------------------------------------------- September 30, 2002 $ 400 $ 2,000 $ 27,826 $ 9,186 $ 1,621 $ 41,033 ================================================================================================================================== See accompanying notes . 5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, ( in thousands ) 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 4,104 $ 3,172 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,090 1,005 Provision for depreciation and amortization 1,106 1,055 Deferred income taxes (146) (194) Amortization of securities premiums and accretion of discounts, net 478 164 Net gain on sale of securities available for sale 0 (52) Proceeds from sale of loans 39,563 39,619 Loans originated for sale (41,039) (40,509) Gain on sales of loans (331) (314) Stock granted under stock purchase plan 16 8 Increase in accrued interest receivable and other assets (3,627) (622) Increase in accrued interest payable and other liabilities 1,716 470 -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,930 3,802 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities Securities held to maturity : Proceeds from principal repayments and maturities 21,797 13,169 Purchases (29,121) (59,750) Securities available for sale : Proceeds from principal repayments and maturities 45,146 28,899 Proceeds from sales 0 7,497 Purchases (109,121) (49,965) Proceeds from sale of loans receivable 0 3,255 Net increase in loans receivable (24,438) (37,928) Purchases of premises and equipment (4,649) (4,404) -------------------------------------------------------------------------------------------------------- Net cash used by investing activities (100,386) (99,227) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities Net increase in demand deposits, interest checking, money market and savings deposits 160,082 90,165 Net increase in time deposits 9,683 1,290 Proceeds from issuance of long-term debt 0 8,000 Proceeds from common stock options exercised 1,575 147 Proceeds from common stock purchase and dividend reinvestment plans 741 347 Cash dividends on preferred stock and cash in lieu of fractional shares (70) (60) -------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 172,011 99,889 -------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 74,555 4,464 Cash and cash equivalents at beginning of year 25,855 39,649 -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 100,410 $ 44,113 ======================================================================================================== See accompanying notes . 6
PENNSYLVANIA COMMERCE BANCORP, INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 nine-month period ended September 30, 2002, are not necessarily indicative of the results that may be expected for the year ending 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. In June 2002, the Financial Accounting Standards Board issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity (including certain costs incurred in a restructuring)." This statement delays recognition of these costs until liabilities are incurred and requires fair value measurement. It does not impact the recognition of liabilities incurred in connection with a business combination or the disposal of long-lived assets. The provisions of this statement are effective for exit or disposal activities initiated after December 31, 2002. In October 2002, the Financial Accounting Standards Board issued Statement No. 147, "Acquisitions of Certain Financial Institutions." This statement provides guidance on accounting for the acquisition of a financial institution, including the acquisition of part of a financial institution. The statement defines criteria for determining whether the acquired financial institution meets the conditions for a "business combination". If the acquisition meets the conditions of a "business combination", the specialized accounting guidance under Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" will not apply after September 30, 2002 and the amount of the unidentifiable intangible asset will be reclassified to goodwill upon adoption of Statement No. 147. The transition provisions were effective on October 1, 2002. 8 Adoption of these statements will not 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 entered into a land lease for the premises located in front of the Carlisle Commons at Noble Boulevard and South Hanover Street in the Borough of Carlisle, Cumberland County, Pennsylvania. The land lease has a term of 30 years with annual rent payments beginning in September 2003 or upon the opening of the branch for business. Rent is subject to change on terms set forth in the lease agreement. Note 4. COMPREHENSIVE INCOME Comprehensive income for the Company consists of net income and unrealized gains or losses on available for sale securities and is presented in the consolidated statement of stockholders' equity. Unrealized securities gains or losses and the related tax impact included in comprehensive income are as follows:
Three Months Ended Nine months Ended (in thousands) September 30, September 30, 2002 2001 2002 2001 ------- ------- ------- ------- Unrealized holding gains on available for sale securities occurring during the period $ 636 $ 1,606 $ 2,624 $ 2,458 Reclassification adjustment for gains included in net income 0 0 0 (52) ------- ------- ------- ------- Net Unrealized Gains 636 1,606 2,624 2,406 Tax effect (216) (546) (892) (818) ------- ------- ------- ------- Other Comprehensive Income $ 420 $ 1,060 $ 1,732 $ 1,588 ======= ======= ======= =======
9 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 24% to $1.5 million as compared to $1.2 million for the third quarter of 2001 and total revenues (net interest income plus other income) increased by 25% to $9.2 million for the quarter. Diluted net income per common share increased 18% to $0.66 from $0.56 per share in the third quarter a year ago (after adjusting for a 5% common stock dividend paid in February 2002). At September 30, 2002, the Company had total assets of $789.8 million, total loans (including loans held for sale) of $376.2 million, and total deposits of $731.5 million. RESULTS OF OPERATIONS Average Balances and Average Interest Rates Interest earning assets averaged $665.3 million for the third quarter of 2002 as compared to $505.6 million for the same period in 2001. Approximately $47.5 million, or 30%, of this increase was in average loans outstanding and $112.2 million, or 70%, was in average investment securities and federal funds sold. The yield on earning assets for the third quarter of 2002 was 6.43%, a decrease of 118 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 $130.1 million. Interest-bearing liabilities increased from $419.1 million during the third quarter of 2001 to $554.1 million during the third quarter of 2002. Average savings deposits increased $57.6 million over third quarter a year ago, average public funds deposits increased $57.9 million and average non-interest bearing demand deposits increased by $24.7 million. Average time deposits decreased $2.2 million during the quarter as compared to the third quarter one year ago. The average rate paid on these liabilities for the third quarter of 2002 was 2.59%, a decrease of 118 basis points from the comparable period in 2001. The Company's aggregate cost of funding sources was 2.15% for the third quarter of 2002, a decrease of 97 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. Interest earning assets for the first nine months averaged $620.9 million versus $483.6 million for the comparable period in 2001. The yield on earning assets decreased to 6.67% during the first nine months of 2002, from 7.84% for the first nine months of 2001. The level of average interest-bearing liabilities increased from $401.8 million for the first nine months of 2001 to $516.2 million for the first nine months of 2002. The Company's cost of funds for the first nine months of 2002 was 2.32%, down 109 basis points from 3.41% for the comparable period in the prior year. 10 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, interest bearing liabilities, related yields and associated funding costs. Interest income increased by $1.1 million, or 11%, over the third quarter of 2001. Interest expense for the third quarter of 2002 decreased by $363,000, or 9%, compared to the third quarter of 2001. Net interest income for the third quarter of 2002 increased by $1.4 million, or 25%, 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 3.84% during the third quarter of 2002 compared to 3.84% during the same period of the previous year. The net interest margin decreased by 21 basis points from 4.49% for the third quarter 2001 to 4.28% during the third quarter of 2002. For the first nine months ended September 30, 2002, interest income increased by $2.7 million, or 9%, over the same period in 2001. Interest expense for the first nine months of 2002 totaled $10.8 million, a decrease of $1.5 million, or 13%, from the first nine months of 2001. Net interest income for the first nine months of 2002 increased by $4.2 million, or 26%, over the same period in 2001. The Company's net interest margin decreased from 4.42% for the first nine months of 2001 to 4.35% for the first nine months of 2002. Noninterest Income Noninterest income for the third quarter of 2002 increased by $398,000, or 25%, over the same period in 2001. The increase is attributable to service charges and fees associated with servicing a higher volume of deposit accounts and transactions. Included in noninterest income for the first nine months of 2002 is nonrecurring income of $95,000, as a result of a gain on the sale of student loans. Included in noninterest income for the first nine months of 2001 is nonrecurring income of $233,000, comprised of a $102,000 gain on the sale of student loans, a $79,000 gain from the sale of Small Business Administration loans, and a $52,000 gain on sale of securities available for sale. Excluding these transactions, recurring core noninterest income for the first nine months of 2002 totaled $5.5 million as compared to $4.7 million for the first nine months of 2001, an increase of 17%. The increase is mainly attributable to additional service charges and fees associated with servicing a higher volume of deposit accounts and transactions. 11 Noninterest Expenses For the third quarter of 2002, noninterest expenses increased by $1.4 million, or 28%, 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 three additional branch offices, one each in October 2001, June 2002, and August 2002, respectively. A comparison of noninterest expense for certain categories for the three months ended September 30, 2002, and September 30, 2001, is presented in the following paragraphs. Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $925,000, or 38%, for the third quarter of 2002 over the third quarter of 2001. This increase is consistent with increases in staff levels necessary to handle Company growth from third quarter 2001 to third quarter 2002, including the additional staff of the branch offices opened in October 2001, June 2002, and August 2002. Occupancy expenses of $653,000 were $111,000 higher for the third quarter of 2002 than for the three months ended September 30, 2001. Increased occupancy expenses primarily are a result of the branch offices opened in October 2001, June 2002, and August 2002 offset by rental income earned at the Downtown Harrisburg location. Furniture and equipment expenses of $417,000 were $82,000, or 24% higher for the third quarter of 2002 then the three months ended September 30, 2001. This increase was the result of higher levels of depreciation costs for furniture and equipment incurred with the addition of three new branches opened during the last 12 months. Advertising and marketing expenses totaled $560,000 for the three months ended September 30, 2002, an increase of $150,000, or 37% from the third quarter of 2001. This increase was primarily the result of increased advertising efforts in each of the Company's markets along with grand opening celebrations at the newly opened branches in Red Lion, PA, downtown Harrisburg, and Camp Hill. The Company's markets will continue to expand as the branch network grows. Data processing expenses of $462,000 were $111,000, or 32%, higher in the third quarter of 2002 than the three months ended September 30, 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. Also, during the first quarter 2002, Commerce converted its check statement processing function to an image system as an added convenience for our customers. The increased data processing costs to implement this system are expected to result in lower supplies expense and postage expense in the future than would have been incurred with continued paper checking statement processing. Audits and regulatory fees increased by $10,000, or 10%, from $102,000 for the third quarter of 2001 to $112,000 for the third 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 $68,000, or 9%, for the three-month period ended September 30, 2002, as compared to the same period in 2001. 12 Components of the increase include increase in volume and service costs of coin and currency delivery, and higher loan related expenses due to an increase in loan volume. For the first nine months of 2002, total noninterest expenses increased by $3.3 million, or 22% over the comparable period in 2001. A comparison of noninterest expense for certain categories for these two periods is discussed below. Salary expense and employee benefits increased by $1.8 million, or 25%, over the first nine months of 2001. The increase was due to normal increases and additional salary and benefits costs due to an increase in the level of full-time equivalent employees from 301 at September 30, 2001 to 404 at September 30, 2002 as well as the addition of new staff to operate the new branches opened in October 2001, June 2002, and August 2002. Occupancy and furniture & equipment expenses for the first nine months of 2002 were $211,000, or 8%, higher for the first nine months of 2002 over the similar period in 2001. The increase is the result of costs associate with the opening of three new branch facilities during the last 12 months. Advertising and marketing expenses totaled $1.7 million for the first nine months of 2002, an increase of $543,000, or 46%, over the similar period of 2001. This increase was primarily the result of increased advertising efforts in each of the Company's markets along with grand opening celebrations at the newly opened branches in Red Lion, PA, downtown Harrisburg, and Camp Hill. The Company's markets will continue to expand as the branch network grows. Data processing expenses increased $438,000, or 45%, for the first nine months of 2002 as compared to the first nine months of 2001. The increase is the result of the previously mentioned higher data processing support costs and processing higher volumes of customer transactions. Audit and regulatory fees increased by $31,000, or 10%, for the first nine months of 2002 over the same period in 2001. This increase is a result of higher Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) assessments, both of which are calculated on levels of deposits. Other noninterest expenses for the first nine months of 2002 were $2.6 million compared to $2.3 million for the similar period in 2001. Components of the increase include increase in volume and service costs of coin and currency delivery, higher loan expenses due to an increase in loan volume, higher provisions for non-credit related losses, and increased insurance costs offset by a decrease in checkbook printing 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 2.55% for the three months ended September 30, 2002, less than the 2.58% reported for the three months ended September 30, 2001, and 2.60% for the nine months of 2002 compared to 2.68% for the first nine months of 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 September 30, 2002, the operating efficiency ratio was 71.9%, compared to 70.3% for the similar period in 2001. For the nine months ended September 30, 2002, this ratio was 71.9% compared to 73.3% for the nine months ended September 30, 2001. 13 Provision for Federal Income Taxes The provision for federal income taxes was $741,000 for the third quarter of 2002 as compared to $592,000 for the same period in 2001. For the nine months ended September 30, the provision was $2.1 million and $1.6 million for 2002 and 2001, respectively. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 33.6% for the first nine months of 2002 and 33.3% for the same period in 2001. Net Income and Net Income Per Share Net income for the third quarter of 2002 was $1.5 million, an increase of $286,000, or 24%, over the $1.2 million recorded in the third quarter of 2001. The increase was due to an increase in net interest income of $1.4 million, an increase in noninterest income of $398,000, offset partially by an increase in noninterest expenses of $1.4 million, a decrease of $30,000 in the provision for loan losses, and an increase of $149,000 in the provision for income taxes. Net income for the first nine months of 2002 was $4.1 million as compared to $3.2 million recorded in the first nine months of 2001.The increase was due to an increase in net interest income of $4.2 million, an increase in noninterest income of $648,000, offset partially by an increase in noninterest expenses of $3.3 million, an increase of $85,000 in the provision for loan losses, and an increase of $486,000 in the provision for income taxes. Basic earnings per common share, after adjusting for a 5% common stock dividend paid in February 2002, increased 23% to $2.07 per common share for the first nine months of 2002 compared to $1.68 for the same period in 2001. Diluted earnings per common share were $1.89 for the first nine months of 2002 and $1.52 for the same period in 2001, an increase of 24%. Return on Average Assets and Average Equity Return on average assets (ROA) measures the Company's net income in relation to its total average assets. The Company's annualized ROA for the third quarter of 2002 was 0.81% as compared to 0.86% for the third quarter of 2001. The ROA for the first nine months of 2002 and 2001 was 0.82% and 0.81%, respectively. For purposes of calculating ROA, average assets have been adjusted to exclude gross unrealized appreciation or depreciation on securities available for sale. Return on average equity (ROE) indicates how effectively the Company can generate net income on the capital invested by its stockholders. ROE is calculated by dividing net income by average stockholders' equity. For purposes of calculating ROE, average stockholders' equity includes the effect of unrealized appreciation or depreciation, net of income taxes, on securities available for sale. The annualized ROE for the third quarter of 2002 was 14.49%, as compared to 15.30% for the third quarter of 2001. The annualized ROE for the first nine months of 2002 was 14.82%, as compared to 14.62% for the first nine months of 2001. 14 FINANCIAL CONDITION Securities During the first nine months of 2002, securities available for sale increased by $66.2 million from $107.3 million at December 31, 2001 to $173.5 million at September 30, 2002. This resulted from the purchase of $109.1 million in securities, partially offset by $45.1 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 CMO securities, corporate debt, and equity securities. The weighted average life of the securities available for sale portfolio was 3.5 years at September 30, 2002 with a weighted average yield of 5.45%. During the first nine months of 2002, securities held to maturity increased from $103.3 million to $110.6 million primarily as a result of the purchase of $29.1 million in securities, offset by principal repayments of $21.8 million. The securities held in this portfolio include U.S. Government agency securities, tax-exempt municipal bonds, AAA CMO securities, corporate debt securities, and mortgage-backed securities. The weighted average life of the securities held to maturity portfolio was 6.1 years at September 30, 2002 with a weighted average yield of 6.19%. Federal funds sold increased by $66.9 million during the first nine months of 2002. Total securities and federal funds sold aggregated $355.3 million at September 30, 2002, and represented 45% of total assets. The average yield on the combined securities portfolio for the first nine months of 2002 was 6.08%, as compared to 6.61% for the similar period of 2001. The average yield earned on federal funds sold during the first nine months of 2002 was 1.65%, down 296 basis points from 4.61% earned during the first nine months of 2001. The decrease in the yield in the investment securities portfolio and 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 originates with the intention of selling in the future. During the first nine months of 2002, total loans held for sale increased by $1.8 million, from $7.7 million at December 31, 2001 to $9.5 million at September 30, 2002. The change was the result of the sale of $6.3 million of student loans and the sale of $32.9 million of residential loans, offset by originations of $41.0 million in new loans held for sale. Loans held for sale represented 1.2% of total assets at December 31, 2001 and at September 30, 2002. Loans Receivable During the first nine months of 2002, total loans receivable increased by $24.0 million from $342.7 million at December 31, 2001, to $366.7 million at September 30, 2002. Loans receivable represented 50% of total deposits and 46% of total assets at September 30, 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 September 30, 2002, were $2.2 million, or 0.27%, of total assets as compared to $888,000, or 0.15%, of total assets at December 31, 2001. Foreclosed real estate totaled $138,000 at September 30, 2002, and $12,000 as of December 31, 2001. 15 The summary table below presents information regarding nonperforming loans and assets as of September 30, 2002 and 2001 and December 31, 2001.
Nonperforming Loans and Assets - ------------------------------------------------------------------------------------------------- (dollars in thousands) September 30, December 31, September 30, 2002 2001 2001 - ------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 1,261 $ 127 $ 348 Consumer 43 116 61 Real estate: Construction 0 0 0 Mortgage 716 633 808 - ------------------------------------------------------------------------------------------------- Total nonaccrual loans 2,020 876 1,217 Restructured loans 0 0 0 - ------------------------------------------------------------------------------------------------- Total nonperforming loans 2,020 876 1,217 Foreclosed real estate 138 12 12 - ------------------------------------------------------------------------------------------------- Total nonperforming assets 2,158 888 1,229 Loans past due 90 days or more 23 0 4 - ------------------------------------------------------------------------------------------------- Total nonperforming assets and Loans past due 90 days or more $ 2,181 $ 888 $ 1,233 - ------------------------------------------------------------------------------------------------- Nonperforming loans to total loans 0.55% 0.26% 0.37% Nonperforming assets to total assets 0.27% 0.15% 0.21% =================================================================================================
Nonaccrual commercial loans are comprised of seven loans including one loan for approximately $660,000 at September 30, 2002. The Allowance for Loan Loss Committee has reviewed the composition of the nonaccrual loans and believes adequate collateralization exists. 16 The following table sets forth information regarding the Company's provision and allowance for loan losses.
Allowance for Loan Losses - ---------------------------------------------------------------------------------------------- (dollars in thousands) 9 Months Year Ending Ending December 31, September 30, 2001 2002 - ---------------------------------------------------------------------------------------------- Balance at beginning of period $ 4,544 $ 3,732 Provisions charged to operating expenses 1,090 1,469 - ---------------------------------------------------------------------------------------------- 5,634 5,201 Recoveries of loans previously charged-off: Commercial 89 3 Consumer 2 21 Real estate 20 0 - ---------------------------------------------------------------------------------------------- Total recoveries 111 24 Loans charged-off: Commercial 205 475 Consumer 66 85 Real estate 204 121 - ---------------------------------------------------------------------------------------------- Total charged-off 475 681 - ---------------------------------------------------------------------------------------------- Net charge-offs 364 657 - ---------------------------------------------------------------------------------------------- Balance at end of period $ 5,270 $ 4,544 - ---------------------------------------------------------------------------------------------- Net charge-offs as a percentage of Average loans outstanding 0.10% 0.21% Allowance for loan losses as a percentage of Period-end loans 1.44% 1.33% ==============================================================================================
Deposits Total deposits at September 30, 2002 were $731.5 million, up $169.8 million, or 30%, over total deposits of $561.7 million at December 31, 2001. The average balances and weighted average rates paid on deposits for the first nine months of 2002 and 2001 are presented in the following table.
- ---------------------------------------------------------------------------------------------- Nine months Ended September 30, 2002 2001 - ---------------------------------------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Rate Balance Rate - ---------------------------------------------------------------------------------------------- Demand deposits: Noninterest-bearing $ 111,921 $ 88,738 Interest-bearing (money market and checking) 138,287 1.36% 101,300 2.50% Savings 190,300 2.09 134,303 3.20 Time deposits 174,557 4.13 160,667 5.65 - ---------------------------------------------------------------------------------------------- Total deposits $ 615,065 $ 485,008 ==============================================================================================
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 17 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 September 30, 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 September 30, 2002, the Company's income simulation model indicates net income would increase 0.38% in the first year and decrease 4.21% over a two-year time frame, respectively, if rates decreased 100 basis points. The model projects that net income would increase by 3.91% in the first year and increase 13.35% over a two-year time frame, respectively, if rates increased by 200 basis points. Subsequent to the quarter ended September 30, 2002, the Federal Reserve Board decreased the overnight federal funds rate by 50 basis points from 1.75% to 1.25%. The effect of this rate decrease has been captured in the Company's Income Simulation modeling as of September 30, 2002. 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 18 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 September 30, 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 September 30, 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. The Company experienced a significant increase in cash and cash equivalents during the third quarter of 2002 in the form of federal funds sold. During the second half of September, the Company experienced exceptionally strong growth in public fund deposits, some of which are short-term in nature. Management has earmarked a certain amount of these funds to be deployed into new loan growth and investment purchases during the fourth quarter of 2002. The amount established as short-term deposits will remain in federal funds sold. Additionally, the Company has established secondary sources of liquidity consisting of federal funds lines of credit, repurchase agreements, and borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if needed. As of September 30, 2002, the total potential liquidity for the Company through these secondary sources was $230 million. In view of the primary and secondary sources as previously mentioned, management believes that the Company is capable of meeting its anticipated liquidity needs. Capital Adequacy At September 30, 2002, stockholders' equity totaled $41.0 million, up 26% over stockholders' equity of $32.6 million at December 31, 2001. Stockholders' equity at September 30, 2002 included $1.6 million of gross unrealized gains, net of income taxes, on securities available for sale. Excluding these unrealized gains, gross stockholders' equity increased by $6.7 million from $32.7 million 19 at December 31, 2001, to $39.4 million at September 30, 2002 due to retained net income and the proceeds from the stock option and stock purchase plans. 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. Proceeds of this offering were downstreamed to the Bank 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. Proceeds of this offering were downstreamed to the Bank to be used for additional capitalization purposes. All $8.0 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 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 September 30, December 31, For Capital Under Prompt Corrective 2002 2001 Adequacy Purposes Action Provisions - ----------------------------------------------------------------------------------------------------------------------------- Risk-Based Capital Ratios: Total 11.83% 11.78% 8.00% 10.00% Tier 1 10.75 10.22 4.00 6.00 Leverage ratio 7.34 7.33 4.00 5.00 (to average assets) - -----------------------------------------------------------------------------------------------------------------------------
At September 30, 2002, the consolidated capital levels of the Company and of the Bank 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 federal funds rate and the National Prime Rate 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 nine months of 2002 was 4.35%, a difference of 7 basis points over 4.42% for the first nine months of 2001. Currently, Commerce has 76% 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. 20 Item 4. Controls and Procedures Within the 90 days prior to the filing of this report, the Chief Financial Officer, under the supervision of the Chief Executive Officer, has evaluated the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the Company's periodic reports is accumulated and communicated to management as appropriate to allow timely decisions by management regarding required disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date that the Company completed its evaluation. 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 2. Changes in Securities and Use of Proceeds No items to report for the quarter ending September 30, 2002. Item 3. Defaults Upon Senior Securities No items to report for the quarter ending September 30, 2002. Item 4. Submission of Matters to a Vote of Securities Holders No items to report for the quarter ending September 30, 2002. Item 5. Other Information No items to report for the quarter ending September 30, 2002. 21 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 No reports on Form 8-K were filed during the quarter ended September 30, 2002. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf be the undersigned thereunto duly authorized. PENNSYLVANIA COMMERCE BANCORP, INC. (Registrant) 11/14/02 /s/ Gary L. Nalbandian - ------------------------- ---------------------------------------- (Date) Gary L. Nalbandian President/CEO 11/14/02 /s/ Mark A. Zody - ------------------------- ---------------------------------------- (Date) Mark A. Zody Executive Vice President Chief Financial Officer 23 Certification of Chief Executive Officer and Chief Financial Officer of Pennsylvania Commerce Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that: o The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and o The information contained in the report fairly represents, in all material respects, the company's financial condition and results of operations. /s/ Gary L. Nalbandian - ------------------------------------------------ Gary L. Nalbandian, Chief Executive Officer /s/ Mark A. Zody - ------------------------------------------------ Mark A. Zody, Chief Financial Officer Dated: November 14, 2002 24 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Gary L. Nalbandian, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pennsylvania Commerce Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2002 /s/ Gary L. Nalbandian - ----------------- --------------------------------------- Date Gary L. Nalbandian President and Chief Executive Officer 25 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark A. Zody, Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pennsylvania Commerce Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2002 /s/ Mark A. Zody - ----------------- ------------------------------------------ Date Mark A. Zody Vice President and Chief Financial Officer 26 EX-11 3 ex11.txt Exhibit 11.
Pennsylvania Commerce Bancorp, Inc. Computation of Net Income Per Share - --------------------------------------------------------------------------------------------------- For the Quarter Ended September 30, 2002 - --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount - --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $1,467,000 Preferred stock dividends (20,000) ---------- Income available to common stockholders 1,447,000 1,993,683 $0.72 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 191,592 ---------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $1,447,000 2,185,275 $0.66 =================================================================================================== For the Nine months Ended September 30, 2002 - --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount - --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $4,104,000 Preferred stock dividends (60,000) ---------- Income available to common stockholders 4,044,000 1,950,275 $2.07 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 194,371 ---------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $4,044,000 2,144,646 $1.89 =================================================================================================== For the Quarter Ended September 30, 2001 - --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount - --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $1,181,000 Preferred stock dividends (20,000) ---------- Income available to common stockholders 1,161,000 1,854,986 $0.63 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 199,337 ---------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $1,161,000 2,054,323 $0.56 =================================================================================================== For the Nine months Ended September 30, 2001 - --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount - --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $3,172,000 Preferred stock dividends (60,000) ---------- Income available to common stockholders 3,112,000 1,849,631 $1.68 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 193,550 ---------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $3,112,000 2,043,181 $1.52 ===================================================================================================
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