-----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, FFgHbKMX4bG3tLmarBPiTmcEDqmX7M0p4UhKskyDllAZWL6N0yqQLWCk6gIjuCiu CD5LEARD5S5yTljd19O6Wg== 0000950159-03-000955.txt : 20031114 0000950159-03-000955.hdr.sgml : 20031114 20031114151622 ACCESSION NUMBER: 0000950159-03-000955 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 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: 031003869 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 pacomm9-30q.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, 2003 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 2,158,406 Common shares outstanding at 10/31/03 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.....................................................................3 September 30, 2003 (Unaudited), and December 31, 2002 Consolidated Statements of Income (Unaudited)...................................................4 Three months ended September 30, 2003 and September 30, 2002 Nine months ended September 30, 2003 and September 30, 2002 Consolidated Statements of Stockholders' Equity (Unaudited)....................................5 Nine months ended September 30, 2003 and September 30, 2002 Consolidated Statements of Cash Flows (Unaudited)...............................................6 Nine months ended September 30, 2003, and September 30, 2002 Notes to Consolidated Financial Statements (Unaudited)..........................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................12 Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................23 Item 4. Controls and Procedures........................................................................23 PART II. OTHER INFORMATION Item 1. Legal Proceedings..............................................................................24 Item 2. Changes in Securities and Use of Proceeds......................................................24 Item 3. Defaults Upon Senior Securities................................................................24 Item 4. Submission of Matters to a Vote of Securities Holders..........................................24 Item 5. Other Information..............................................................................24 Item 6a. Exhibits.......................................................................................24 Item 6b. Reports on Form 8-K............................................................................25 Signatures.....................................................................................26
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Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets ============================================================================================================================= September 30, December 31, 2003 2002 ( in thousands, except share amounts) (unaudited) - ----------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 30,110 $ 30,950 Federal funds sold 54,000 44,500 ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents 84,110 75,450 Securities, available for sale at fair value 215,844 205,436 Securities, held to maturity at cost (fair value 2003: $175,336; 2002: $101,036 ) 175,278 97,625 Loans, held for sale 8,609 10,514 Loans receivable, net of allowance for loan losses (allowance 2003: $5,777; 2002: $5,146) 428,940 363,735 Restricted investments in bank stock 2,913 2,045 Premises and equipment, net 35,140 26,409 Other assets 7,136 5,384 ---------------------------------------------------------------------------------------------------------- Total assets $ 957,970 $ 786,598 ============================================================================================================================= Liabilities Deposits : Noninterest-bearing $ 169,996 $ 127,199 Interest-bearing 724,612 599,756 ---------------------------------------------------------------------------------------------------------- Total deposits 894,608 726,955 Other liabilities 2,673 3,831 Long term debt 13,000 13,000 ---------------------------------------------------------------------------------------------------------- Total liabilities 910,281 743,786 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 - 2003: 2,155,612; 2002: 2,117,089 2,156 2,117 Surplus 32,967 31,909 Retained earnings 11,620 6,866 Accumulated other comprehensive income 546 1,520 ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 47,689 42,812 ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 957,970 $ 786,598 =============================================================================================================================
See accompanying notes. 3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) ============================================================================================================================ Three Months Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ (in thousands, except per share amounts) 2003 2002 2003 2002 Interest Loans receivable, including fees : Income Taxable $ 6,953 $ 6,769 $ 20,314 $19,968 Tax - exempt 47 31 158 72 Securities : Taxable 3,650 3,776 11,731 10,535 Tax - exempt 120 26 332 80 Federal funds sold 69 186 209 348 --------------------------------------------------------------------------------------------------------------- Total interest income 10,839 10,788 32,744 31,003 - ---------------------------------------------------------------------------------------------------------------------------- Interest Deposits 2,349 3,276 7,777 9,774 Expense Other borrowed money 1 0 1 0 Long-term debt 339 339 1,017 1,015 --------------------------------------------------------------------------------------------------------------- Total interest expense 2,689 3,615 8,795 10,789 --------------------------------------------------------------------------------------------------------------- Net interest income 8,150 7,173 23,949 20,214 Provision for loan losses 350 375 1,200 1,090 --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 7,800 6,798 22,749 19,124 - ---------------------------------------------------------------------------------------------------------------------------- Noninterest Service charges and other fees 2,077 1,747 5,809 4,875 Income Other operating income 99 105 285 359 Gain on sale of securities available for sale 288 0 288 0 Gain on sale of loans 185 142 674 331 --------------------------------------------------------------------------------------------------------------- Total noninterest income 2,649 1,994 7,056 5,565 - ---------------------------------------------------------------------------------------------------------------------------- Noninterest Salaries and employee benefits 4,120 3,336 11,403 8,918 Expenses Occupancy 856 653 2,425 1,739 Furniture and equipment 517 417 1,361 1,123 Advertising and marketing 662 560 1,580 1,733 Data processing 485 462 1,587 1,411 Postage and supplies 264 202 718 614 Other 1,309 954 3,594 2,975 --------------------------------------------------------------------------------------------------------------- Total noninterest expenses 8,213 6,584 22,668 18,513 --------------------------------------------------------------------------------------------------------------- Income before income taxes 2,236 2,208 7,137 6,176 Provision for federal income taxes 710 741 2,305 2,072 --------------------------------------------------------------------------------------------------------------- Net income $ 1,526 $ 1,467 $ 4,832 $ 4,104 ============================================================================================================================ Net income per common share : Basic $ 0.70 $ 0.69 $ 2.23 $ 1.97 Diluted 0.65 0.63 2.07 1.80 ============================================================================================================================
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, 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 of 99,408 shares issued under stock option plans - 100 1,475 - - 1,575 Income tax benefit of stock options exercised - - 332 - - 332 Common stock of 360 shares issued under employee stock purchase plan - - 16 - - 16 Proceeds from issuance of 17,957 shares 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 ================================================================================================================================ Accumulated Other Preferred Common Retained Comprehensive ( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total - -------------------------------------------------------------------------------------------------------------------------------- Balance : December 31, 2002 $ 400 $ 2,117 $ 31,909 $ 6,866 $ 1,520 $ 42,812 Comprehensive income: Net income - - - 4,832 - 4,832 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - (974) (974) Total comprehensive income 3,858 Dividends declared on preferred stock - - - (60) - (60) Common stock of 24,274 shares issued under stock option plans - 24 379 - - 403 Income tax benefit of stock options exercised - - 151 - - 151 Common stock of 100 shares issued under employee stock purchase plan - - 3 - - 3 Proceeds from issuance of 13,696 shares of common stock in connection with dividend reinvestment and stock purchase plan - 14 508 - - 522 Other (issuance of 453 shares of common stock) - 1 17 (18) - - - -------------------------------------------------------------------------------------------------------------------------------- September 30, 2003 $ 400 $ 2,156 $ 32,967 $ 11,620 $ 546 $ 47,689 ================================================================================================================================
See accompanying notes. 5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) =================================================================================================================================== Nine Months Ended September 30, ( in thousands ) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 4,832 $ 4,104 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,200 1,090 Provision for depreciation and amortization 1,313 1,106 Deferred income taxes 292 (146) Amortization of securities premiums and accretion of discounts, net 2,290 478 Net gain on sale of securities available for sale (288) 0 Proceeds from sale of loans 90,945 39,563 Loans originated for sale (88,366) (41,039) Gain on sales of loans (674) (331) Stock granted under stock purchase plan 3 16 Increase in accrued interest receivable and other assets (1,397) (3,627) Increase (decrease) in accrued interest payable and other liabilities (1,158) 1,716 ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,992 2,930 - ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities Securities held to maturity : Proceeds from principal repayments and maturities 35,530 21,797 Purchases (113,251) (29,121) Securities available for sale : Proceeds from principal repayments and maturities 159,182 45,146 Purchases (172,984) (109,121) Net increase in loans receivable (66,405) (24,438) Purchases of restricted investments in bank stock (868) 0 Purchases of premises and equipment (10,044) (4,649) ---------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (168,840) (100,386) - ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities Net increase in demand deposits, interest checking, money market and savings deposits 168,605 160,082 Net increase (decrease) in time deposits (952) 9,683 Proceeds from common stock options exercised 403 1,575 Proceeds from common stock purchase and dividend reinvestment plans 522 741 Cash dividends on preferred stock and cash in lieu of fractional shares (70) (70) ---------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 168,508 172,011 ---------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 8,660 74,555 Cash and cash equivalents at beginning of year 75,450 25,855 ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 84,110 $100,410 ================================================================================================================
See accompanying notes. 6 PENNSYLVANIA COMMERCE BANCORP, INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (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, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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 on 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, 2002. Note 2. SIGNIFICANT ACCOUNTING POLICIES Stock Dividends and Per Share Data On January 24, 2003, the Board of Directors declared a 5% stock dividend on common stock outstanding, paid on February 24, 2003, to stockholders of record on February 7, 2003. Payment of the stock dividend resulted in the issuance of 101,030 additional common shares and cash of $9,550 in lieu of fractional shares. The effect of the 5% common stock dividend has been recorded as of December 31, 2002. Stock Option Plan The Company accounts for the stock option plan under the recognition and measurements principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement 123, "Accounting for Stock-Based Compensation," to stock-based compensation for three months ended and nine months ended September 30, 2003 and 2002: Three Months Nine months Ended September 30, Ended September 30, - -------------------------------------------------------------------------------- (in thousands) 2003 2002 2003 2002 ----- ----- ----- ----- Net income: As reported $1,526 $1,467 $4,832 $4,104 Total stock-based compensation cost, net of tax, that would have been included in the determination of net income if the fair value based method had been applied to all awards (276) (359) (708) (1,077) ----- ----- ----- ------- Pro-forma 1,250 1,108 4,124 3,027 Reported earnings per share: Basic $0.70 $0.69 $2.23 $1.97 Diluted 0.65 0.63 $2.07 $1.80 Pro-forma earnings per share: Basic $0.57 $0.52 $1.90 $1.45 Diluted 0.53 0.47 1.76 $1.32 8 New Accounting Standards In April 2003, the Financial Accounting Standards Board issued Statement No. 149, "Amendment of Statement No. 133, Accounting for Derivative Instruments and Hedging Activities". This statement clarifies the definition of a derivative and incorporates certain decisions made by the Board as part of the Derivatives Implementation Group process. This statement is effective for contracts entered into or modified, and for hedging relationships designated after September 30, 2003 and should be applied prospectively. The provisions of the Statement that relate to implementation issues addressed by the Derivatives Implementation Group that have been effective should continue to be applied in accordance with their respective effective dates. In May 2003, the Financial Accounting Standards Board issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of these instruments were previously classified as equity. This Statement was effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective beginning July 1, 2003. Adoption of these statements does not have or is not expected to have a material impact on the Company's financial condition or results of operations. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under certain specified guarantees. FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies." In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability or equity security of the guaranteed party, which would include standby letters of credit. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of this Interpretation, including, among others, guarantees related to commercial letters of credit and loan commitments. The disclosure requirements of FIN 45 require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The accounting recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did not have a significant impact on the Company's financial condition or results of operations. Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company had $7.6 million of standby letters of credit as of September 30, 2003. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. The majority of these standby letters of credit expire within the next twelve 9 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2003 for guarantees under standby letters of credit issued after December 31, 2002 is not material. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". This interpretation provides new guidance for the consolidation of variable interest entities (VIEs) and requires such entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among parties involved. The interpretation also adds disclosure requirements for investors that are involved with unconsolidated VIEs. The disclosure requirements apply to all financial statements issued after January 31, 2003. The consolidation requirements apply immediately to VIEs created after January 31, 2003 and are effective for fiscal years ending after December 15, 2003 or for the first interim period ending after December 15, 2003 for VIEs acquired before February 1, 2003. The adoption of this interpretation did not have a significant 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 entered into a land lease for a premises located at Kohn Road and Progress Avenue in Susquehanna Township, in Dauphin County, Pennsylvania. The Company is currently constructing a full-service branch office on this land and plans Grand Opening Ceremonies for this branch in December 2003. The Company has entered into a land lease for a premises located on Derry Street in Swatara Township, in Dauphin County, Pennsylvania. The Company is currently constructing a full-service branch office on this land and plans Grand Opening Ceremonies for this branch in December 2003. 10 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 September 30, September 30, (in thousands) 2003 2002 2003 2002 ------------------------------ ------------------------------- Unrealized holding gains (losses) on available for sale securities occurring during the period $(1,535) $ 636 $(1,764) $ 2,624 Reclassification adjustment for gains included in net income 288 0 288 0 ------- ------- ------- ------- Net unrealized gains (losses) (1,247) 636 (1,476) 2,624 Tax effect 424 (216) 502 (892) ------- ------- ------- ------- Other comprehensive income (loss) $ (823) $ 420 $ (974) $ 1,732 ======= ======= ======= =======
11 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 Total revenues (net interest income plus other income) increased by 18% to $10.8 million for the quarter as compared to third quarter of 2002 and net income for the quarter increased 4% to $1.53 million as compared to $1.47 million for the third quarter of 2002. Diluted net income per common share increased 3% to $0.65 from $0.63 per share in the third quarter a year ago (after adjusting for a 5% common stock dividend paid in February 2003). At September 30, 2003, the Company had total assets of $958 million, total net loans (including loans held for sale) of $438 million, and total deposits of $895 million. RESULTS OF OPERATIONS Average Balances and Average Interest Rates Interest earning assets averaged $794.6 million for the third quarter of 2003 as compared to $665.3 million for the same period in 2002. Approximately $59.5 million, or 46%, of this increase was in average loans outstanding and $69.8 million, or 54%, was in average investment securities and federal funds sold. The yield on earning assets for the third quarter of 2003 was 5.41%, a decrease of 102 basis points (bps) from the comparable period in 2002. This decrease resulted primarily from decreased yields in the loan and investment portfolios due to the overall level and timing of changes in general market interest rates present during the third quarter of 2003 versus the same period one year ago. The growth in interest earning assets was funded primarily by an increase in the average balance of interest-bearing deposits of $121.5 million over the third quarter 2002. Average interest-bearing liabilities increased from $554.1 million during the third quarter of 2002 to $676.1 million during the third quarter of 2003. Average savings deposits increased $39.2 million over third quarter a year ago, average public funds deposits increased $44.2 million, average interest bearing demand deposits increased by $22.0 million, average non-interest bearing demand deposits increased by $31.0 million, and average time deposits increased $16.1 million during the quarter as compared to the third quarter one year ago. The average rate paid on interest-bearing liabilities for the third quarter of 2003 was 1.58%, a decrease of 101 basis points from the comparable period in 2002, similar to the decreased yield on earning assets. The Company's aggregate cost of funding sources was 1.34% for the third quarter of 2003, a decrease of 81 basis points from the prior year. This is primarily the result of a decrease in the average rates paid on all interest bearing deposits. Interest earning assets for the first nine months averaged $765.9 million versus $620.9 million for the comparable period in 2002. The yield on earning assets decreased to 5.72% during the first nine months of 2003, from 6.67% for the first nine months of 2002. The level of average interest-bearing liabilities increased from $516.1 million 12 for the first nine months of 2002 to $652.8 million for the first nine months of 2003. The Company's cost of funds for the first nine months of 2003 was 1.54%, down 78 basis points from 2.32% for the comparable period in the prior year. 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 $51,000 over the third quarter of 2002. Interest expense for the third quarter of 2003 decreased by $926,000, or 26%, from the third quarter of 2002. Net interest income for the third quarter of 2003 increased by $977,000, or 14%, over the same period in 2002. 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 3.83% during the third quarter of 2003 compared to 3.84% during the same period of the previous year. The net interest margin decreased by 21 basis points from 4.28% for the third quarter 2002 to 4.07% during the third quarter of 2003. For the first nine months ended September 30, 2003, interest income increased by $1.7 million, or 6%, over the same period in 2002. Interest expense for the first nine months of 2003 totaled $8.8 million, a decrease of $2.0 million, or 18%, from the first nine months of 2002. Net interest income for the first nine months of 2003 increased by $3.7 million, or 18%, over the same period in 2002. The Company's net interest margin decreased 17 basis points from 4.35% for the first nine months of 2002 to 4.18% for the first nine months of 2003. Provision for Loan Losses The provision for loan losses was $350,000 for the third quarter of 2003 as compared to $375,000 for the same period in 2002. The provision was $1.2 million and $1.1 million for the nine months ended September 30, 2003 and 2002, respectively. The increase in the provision for the nine month period is primarily related to the growth in loan receivables. The allowance for loan losses as a percentage of period-end loans was 1.33% at September 30, 2003 as compared to 1.40% and 1.44% at December 31, 2002 and September 30, 2002, respectively. Noninterest Income Noninterest income for the third quarter of 2003 increased by $655,000, or 33%, over 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, an increase of the gain on the sale of loans and a gain on the sale of securities available for sale. Noninterest income for the first nine months of 2003 increased by $1.5 million, 13 or 27% over the same period in 2003. The increase is attributable to similar reasons as previously stated. Included in noninterest income for the first nine months of 2003 is nonrecurring income of $455,000, comprised of $167,000 gain on the sale of student loans and $288,000 gain on sale of securities available for sale. 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. Excluding these transactions, recurring core noninterest income for the first nine months of 2003 totaled $6.6 million as compared to $5.5 million for the first nine months of 2002, an increase of 21%. The increase is mainly attributable to additional service charges and fees associated with servicing a higher volume of deposit accounts and transactions. Noninterest Expenses For the third quarter of 2003, noninterest expenses increased by $1.6 million, or 25%, over the same period in 2002. 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 five additional branch offices, one each in August 2002, December 2002, June 2003, July 2003, and September 2003, respectively. A comparison of noninterest expenses for certain categories for the three months ended September 30, 2003, and September 30, 2002, is presented in the following paragraphs. Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $784,000, or 24%, for the third quarter of 2003 over the third quarter of 2002. This increase is consistent with increases in staff levels necessary to handle Company growth from third quarter 2002 to third quarter 2003, including the additional staff of the branch offices opened in the period August 2002 through September 2003. In addition, staffing expenses increased in preparation for two branch openings scheduled for December 2003. Occupancy expenses of $856,000 were $203,000 higher for the third quarter of 2003 than for the three months ended September 30, 2002. Increased occupancy expenses primarily are a result of the five branch offices opened between August 2002 and September 2003, along with expanding the Loan Production Office (LPO) in the Harrisburg Region in the Spring of 2003 and with opening a bigger LPO in the York region during the summer of 2003. Furniture and equipment expenses of $517,000 were $100,000, or 24%, higher for the third quarter of 2003 than the three months ended September 30, 2002. This increase was the result of higher levels of depreciation costs for furniture and equipment incurred with the addition of five new branches opened during the last 14 months and the expansion/addition of the new LPO offices. Advertising and marketing expenses totaled $662,000 for the three months ended September 30, 2003, an increase of $102,000, or 18%, from the third quarter of 2002. This increase was primarily the result of having two grand opening celebrations of new branches during the third quarter of 2003 versus one grand opening celebration during the third quarter of 2002. Also, both of the new offices opened in the third quarter marked the Company's initial entry into the Berk's County market and thus additional expense was incurred to market this new Region. Data processing expenses of $485,000 were $23,000, or 5%, higher in the third quarter of 2003 than the three months ended September 30, 2002. The increase was due to increased costs associated with processing additional transactions due to growth in number of accounts. 14 Postage and supplies expenses of $264,000 were $62,000 higher for the third quarter of 2003 than for the three months ended September 30, 2002. This was due to a combination of increased usage of supplies with the addition of five new branches and growth in the volume of customers and customer transaction statements. Other noninterest expenses increased by $355,000, or 37%, for the three-month period ended September 30, 2003, as compared to the same period in 2002. Components of the increase include higher volume and service costs of coin and currency delivery, higher loan related expenses due to an increase in loan volume, greater checkbook printing expenses due to an increase in new accounts, higher audit and regulatory fees due to additional requirements imposed by enactment of legislation by Regulatory Agencies to address corporate governance, and an increase in travel and entertainment expense. For the first nine months of 2003, total noninterest expenses increased by $4.2 million, or 22%, over the comparable period in 2002. A comparison of noninterest expenses for certain categories for these two periods is discussed below. Salary expense and employee benefits increased by $2.5 million, or 28%, over the first nine months of 2002. 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 404 at September 30, 2002 to 508 at September 30, 2003 as well as the addition of new staff to operate the new branches opened in August 2002, December 2002, June 2003, July 2003, and September 2003. Occupancy and furniture & equipment expenses for the first nine months of 2003 were $924,000, or 32%, higher for the first nine months of 2003 over the similar period in 2002. The majority of the increase is the result of costs associated with the opening of five new branch facilities during the last 14 months. Additionally, Commerce increased the office space at the Lemoyne Loan Production Office during the first quarter of 2003 and the York Loan Production Office during the summer of 2003. Advertising and marketing expenses totaled $1.6 million for the nine months ended September 30, 2003, a decrease of $153,000, or 9%, from the first nine months of 2002. This decrease was primarily the result of redirecting marketing initiatives to the latter part of 2003 in conjunction with the planned grand opening celebrations. The Company's markets will continue to expand as the branch network grows. Data processing expenses increased $176,000, or 12%, for the first nine months of 2003 as compared to the first nine months of 2002. The increase is the result of processing higher volumes of customer transactions. Other noninterest expenses for the first nine months of 2003 were $3.6 million compared to $3.0 million for the similar period in 2002. 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 audit and regulatory fees due to additional requirements imposed by enactment of legislation by Regulatory Agencies to address corporate governance, increased checkbook printing costs due to an increase in new accounts, and an increase in travel and entertainment expense. One key measure used to monitor progress in controlling overhead expenses is the 15 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 2.64% for the three months ended September 30, 2003, up slightly over the 2.55% reported for the three months ended September 30, 2002, and 2.55% for the first nine months of 2003 compared to 2.60% for the first nine months of 2002. 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, 2003, the operating efficiency ratio was 77.9%, compared to 71.9% for the similar period in 2002. For the nine months ended September 30, 2003, this ratio was 74.0%, compared to 71.9% for the nine months ended September 30, 2002. Provision for Federal Income Taxes The provision for federal income taxes was $710,000 for the third quarter of 2003 as compared to $741,000 for the same period in 2002. For the nine months ended September 30, the provision was $2.3 million and $2.1 million for 2003 and 2002, respectively. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 32.3% for the first nine months of 2003 and 33.5% for the same period in 2002. Net Income and Net Income Per Share Net income for the third quarter of 2003 was $1.53 million, an increase of $59,000, or 4%, over the $1.47 million recorded in the third quarter of 2002. The increase was due to an increase in net interest income of $977,000, an increase in noninterest income of $655,000, a decrease of $25,000 in the provision for loan losses, a decrease of $31,000 in the provision for income taxes, offset partially by an increase in noninterest expenses of $1.63 million. Net income for the first nine months of 2003 was $4.8 million compared to $4.1 million recorded in the first nine months of 2002. The increase was due to an increase in net interest income of $3.7 million, an increase in noninterest income of $1.5 million, offset partially by an increase in noninterest expenses of $4.2 million, an increase of $110,000 in the provision for loan losses, and an increase of $233,000 in the provision for income taxes. Basic earnings per common share, after adjusting for a 5% common stock dividend paid in February 2003, increased 13% to $2.23 per common share for the first nine months of 2003 compared to $1.97 for the same period in 2002. Diluted earnings per common share were $2.07 for the first nine months of 2003 and $1.80 for the same period in 2002, an increase of 15%. 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 2003 was 0.69% as compared to 0.81% for the third quarter of 2002. The ROA for the first nine months of 2003 was 0.77% compared to 0.82% for the first nine months of 2002. 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 16 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 2003 was 13.28%, as compared to 14.49% for the third quarter of 2002. The annualized ROE for the first nine months of 2003 was 14.30%, as compared to 14.82% for the first nine months of 2002. FINANCIAL CONDITION Securities During the first nine months of 2003, securities available for sale increased by $10.4 million from $205.4 million at December 31, 2002 to $215.8 million at September 30, 2003. This resulted from the purchase of $173.0 million in securities, partially offset by $158.9 million in principal repayments. The securities available for sale portfolio are comprised of U.S. Government agency securities, mortgage-backed securities, collateralized mortgage obligations, and corporate debt. The duration of the securities available for sale portfolio was 3.4 years at September 30, 2003 with a weighted average yield of 3.80%. During the first nine months of 2003, securities held to maturity increased from $97.6 million to $175.3 million primarily as a result of the purchase of $113.2 million in securities, offset by principal repayments of $35.5 million. The securities held in this portfolio include U.S. Government agency securities, tax-exempt municipal bonds, collateralized mortgage obligations, corporate debt securities, and mortgage-backed securities. The duration of the securities held to maturity portfolio was 5.9 years at September 30, 2003 with a weighted average yield of 5.54%. Federal funds sold increased $9.5 million during the first nine months of 2003. Total securities and federal funds sold aggregated $445.1 million at September 30, 2003, and represented 46% of total assets. The average yield on the combined securities portfolio for the first nine months of 2003 was 4.58%, as compared to 6.08% for the similar period of 2002. The average yield earned on federal funds sold during the first nine months of 2003 was 1.06%, down 59 basis points from 1.65% earned during the first nine months of 2002. The decrease in the yield on federal funds sold is a result of a 50 basis point decrease by the Federal Reserve Board in the fourth quarter of 2002. The decrease in the yield in the investment portfolio is partially due to the overall level and timing of changes in general market interest rates. Loans Held for Sale Loans held for sale are comprised of student loans and residential mortgage loans, which the Company originates with the intention of selling in the future. During the first nine months of 2003, total loans held for sale decreased $1.9 million, from $10.5 million at December 31, 2002 to $8.6 million at September 30, 2003. The change was the result of the sale of $6.8 million of student loans and the sale of $83.5 million of residential loans, offset by originations of $88.4 million in new loans held for sale. Loans held for sale represented 1.3% of total assets at December 31, 2002 and 0.9% of total assets at September 30, 2003. Loans Receivable During the first nine months of 2003, total gross loans receivable increased by 17 $65.8 million from $368.9 million at December 31, 2002, to $434.7 million at September 30, 2003. Loans receivable represented 49% of total deposits and 45% of total assets at September 30, 2003, as compared to 51% and 47%, respectively, at December 31, 2002. Loan and Asset Quality and Allowance for Loan Losses Total nonperforming assets (nonperforming loans, foreclosed real estate, and loans past due 90 days or more and still accruing interest) at September 30, 2003, were $1.5 million, or 0.15%, of total assets as compared to $1.8 million, or 0.23%, of total assets at December 31, 2002. Foreclosed real estate totaled $238,000 at September 30, 2003, and $118,000 as of December 31, 2002. The summary table below presents information regarding nonperforming loans and assets as of September 30, 2003 and 2002 and December 31, 2002.
Nonperforming Loans and Assets ================================================================================================ (dollars in thousands) September 30, December 31, September 30, 2003 2002 2002 - ------------------------------------------------------------------------------------------------ Nonaccrual loans: Commercial $ 214 $ 958 $ 1,261 Consumer 108 42 43 Real estate: Construction 0 0 0 Mortgage 195 599 716 - ------------------------------------------------------------------------------------------------ Total nonaccrual loans 517 1,599 2,020 Loans past due 90 days or more and still accruing 707 55 23 Restructured loans 0 0 0 - ------------------------------------------------------------------------------------------------ Total nonperforming loans 1,224 1,654 2,043 Foreclosed real estate 238 118 138 - ------------------------------------------------------------------------------------------------ Total nonperforming assets 1,462 $1,772 2,181 - ------------------------------------------------------------------------------------------------ Nonperforming loans to total loans 0.28% 0.45% 0.55% Nonperforming assets to total assets 0.15% 0.23% 0.27% ================================================================================================
Nonaccrual commercial loans are comprised of six loans at September 30, 2003. Management's Allowance for Loan Loss Committee has reviewed the composition of the nonaccrual loans and believes adequate collateralization exists. 18 The following table sets forth information regarding the Company's provision and allowance for loan losses.
Allowance for Loan Losses =============================================================================================================== (dollars in thousands) Nine months Year Ending Nine months Ending December 31, Ending September 30, 2002 September 30, 2003 2002 - --------------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 5,146 $ 4,544 $ 4,544 Provisions charged to operating expenses 1,200 1,435 1,090 - --------------------------------------------------------------------------------------------------------------- 6,346 5,979 5,634 Recoveries of loans previously charged-off: Commercial 28 93 89 Consumer 82 2 2 Real estate 115 21 20 - --------------------------------------------------------------------------------------------------------------- Total recoveries 225 116 111 Loans charged-off: Commercial (323) (561) (205) Consumer (184) (70) (66) Real estate (287) (318) (204) - --------------------------------------------------------------------------------------------------------------- Total charged-off (794) (949) (475) - --------------------------------------------------------------------------------------------------------------- Net charge-offs (569) (833) (364) - --------------------------------------------------------------------------------------------------------------- Balance at end of period $ 5,777 $ 5,146 $ 5,270 - --------------------------------------------------------------------------------------------------------------- Net charge-offs as a percentage of 0.14% 0.23% 0.10% Average loans outstanding Allowance for loan losses as a percentage of Period-end loans 1.33% 1.40% 1.44% ===============================================================================================================
Premises and Equipment During the first nine months of 2003, premises and equipment increased by $8.7 million, or 33%, from $26.4 million at December 31, 2002 to $35.1 million at September 30, 2003. The majority of the increase was a result from the purchase of land for new branch sites, furniture and equipment for the additional space at the Lemoyne and York Loan Processing Offices, furniture and equipment for the new branches that opened in June 2003, July 2003 and September 2003, and preliminary costs for the future branch sites, offset by the provision for depreciation and amortization. 19 Deposits Total deposits at September 30, 2003 were $894.6 million, up $167.7 million, or 23%, over total deposits of $727.0 million at December 31, 2002. The average balances and weighted average rates paid on deposits for the first nine months of 2003 and 2002 are presented in the following table.
============================================================================================== Nine months Ended September 30, 2003 2002 - ---------------------------------------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Rate Balance Rate - ---------------------------------------------------------------------------------------------- Demand deposits: Noninterest-bearing $ 138,548 $ 111,921 Interest-bearing (money market and checking) 227,754 0.91% 138,287 1.36% Savings 232,059 1.06 190,300 2.09 Time deposits 179,894 3.26 174,557 4.13 - ---------------------------------------------------------------------------------------------- Total deposits $ 778,255 $ 615,065 ==============================================================================================
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 Company's Board of Directors reviews the guidelines established by ALCO. 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, 2003, the Company projected its interest rate risk using a plus 200 and minus 100 basis point scenario. During 2002 and 2001, the Federal Reserve lowered short-term interest rates by 525 basis points, pushing the Federal Funds rate down to 1.25% from 6.5% at year-end 2001, the 20 lowest level in over 50 years. The Company's ALCO believed it was a better measure of 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, 2003, the Company's income simulation model indicates net income would increase by 2.5% in the first year and decrease by 2.2% over a two-year time frame, if rates decreased 100 basis points as compared to an increase of 0.4% and decrease of 4.2%, respectively, at September 30, 2002. The model projects that net income would decrease by 1.3% and increase by 10.1% in the first year and over a two-year time frame, respectively, if rates increased 200 basis points, as compared to a increase of 3.9% and an increase of 13.4%, respectively, at September 30, 2002. All of these forecasts are within an acceptable level of interest rate risk per the policies established by ALCO. Management also monitors interest rate risk by utilizing a market value of equity model. The model assesses the impact of a change in interest rates on the market value of all the Company's assets and liabilities, as well as any off balance sheet items. The model calculates the market value of the Company's assets and liabilities in excess of book value in the current rate scenario, and then compares the excess of market value over book value given an immediate 200 basis point 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, 2003, the market value of equity indicates an acceptable level of interest rate risk. 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. Using an independent consultant, the Company has completed and updated comprehensive core deposit studies in order to assign its own core deposit premiums as permitted by regulation. The studies have consistently confirmed management's assertion that the Company's core deposits have stable balances over long periods of time, are relatively insensitive to changes in interest rates and have significant longer average lives and durations than the Company's loans and investment securities. 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, 2003 provide an accurate assessment of the Company's 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 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, 21 2003, the total potential liquidity for the Company through these secondary sources was $251 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, 2003, stockholders' equity totaled $47.7 million, up 11% over stockholders' equity of $42.8 million at December 31, 2002. Stockholders' equity at September 30, 2003 included $546,000 of gross unrealized gains, net of income taxes, on securities available for sale. Excluding these unrealized gains, gross stockholders' equity increased by $5.9 million from $41.3 million at December 31, 2002, to $47.2 million at September 30, 2003 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 Bank'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 2003 2002 Adequacy Purposes Action Provisions - ------------------------------------ ---------------- ----------------- -------------------------- -------------------------- Risk-Based Capital Ratios: Tier 1 10.12% 11.11% 4.00% 6.00% Total 11.10 12.17 8.00 10.00 Leverage ratio (to average assets) 6.81 6.97 4.00 5.00 ==============================================================================================================================
The consolidated capital ratios at September 30, 2003 are not materially different to the Bank's capital ratios. At September 30, 2003, the consolidated capital levels of the Company and of the Bank met the definition of a "well capitalized" institution. 22 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 550 basis points between January 1, 2001 and September 30, 2003, the Company's net interest margin has remained fairly stable. Commerce's net interest margin for the first nine months of 2003 was 4.18%, a difference of 17 basis points from 4.35% for the first nine months of 2002. 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. Item 4. Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 23 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, 2003. Item 3. Defaults Upon Senior Securities No items to report for the quarter ending September 30, 2003. Item 4. Submission of Matters to a Vote of Securities Holders No items to report for the quarter ending September 30, 2003. Item 5. Other Information No items to report for the quarter ending September 30, 2003. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibits
Articles of Incorporation (incorporated by reference to Form 10-K filed March 31, 2003)..........................................................Exhibit 3 (i) Bylaws (incorporated by reference to Form 10-K filed March 31, 2003)..........................................................Exhibit 3(ii) Amendment to Network Agreement, including original Network Agreement, by and among Commerce Bancorp, Inc., Pennsylvania Commerce Bancorp, Inc. and Commerce Bank/Harrisburg, ...........................................................................Exhibit 10 Computation of Net Income Per Share......................................................................Exhibit 11 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer......................................Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer......................................Exhibit 31.2 Section 1350 Certification of Chief Executive Officer..................................................Exhibit 32.1 Section 1350 Certification of Chief Financial Officer..................................................Exhibit 32.2
24 (b.) Reports on Form 8-K On July 23, 2003, the Company filed a form 8-K announcing the following information: On July 23, 2003, Pennsylvania Commerce Bancorp, Inc. issued a press release reporting financial results for its second quarter of 2003. 25 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) 11/14/03 /s/ Gary L. Nalbandian - ------------------------- ----------------------------------------- (Date) Gary L. Nalbandian President/CEO 11/14/03 /s/ Mark A. Zody - ------------------------- ----------------------------------------- (Date) Mark A. Zody Chief Financial Officer 26 EX-10 3 ex10.txt EXHIBIT 10 Commerce Bancorp, Inc. NETWORK AGREEMENT THIS AGREEMENT is made as of the 1st day of January, 1997 between Commerce Bancorp, Inc., a New Jersey corporation ("Bancorp") and Commerce Bank/Harrisburg, a Pennsylvania banking association ("Member"). Bancorp has expended a considerable amount of time, effort and money to develop a system of banking (the "System") comprised of the procedures, trade secrets and other information which relate to the banking business as either originated or adopted by Bancorp. Member desires to become a member of the Commerce Network and have access to the System. In consideration of the mutual promises contained herein and intending to be legally bound, the parties hereto agree as follows: 1. Grant of Membership and Term. 1.1 Bancorp grants to Member a non-exclusive membership in the Commerce Network and all of the rights and privileges of membership set forth herein. 1.2 Subject to the termination provisions contained herein, the term of this Network Agreement shall be perpetual. 2. Fees. 2.1 Member shall on or before the tenth day of each and every month during the term of this Network Agreement, pay to Bancorp a monthly fee in an amount equal to the sum of one tenth of one percent (.001) of the assets of the Member on the last day of the immediately preceding month ("Assets") less than or equal to twenty-five million dollars ($25,000,000), plus five one hundredths of one percent (.0005) of the Assets in excess of twenty-five million dollars ($25,000,000), but less than fifty million dollars ($50,000,000) plus twenty-five one thousandths of one percent (.00025) of the Assets in excess of fifty million dollars ($50,000,000) but less than two hundred fifty million dollars ($250,000,000) plus one thousandths of one percent (.0001) of the Assets in excess of two hundred fifty million dollars ($250,000,000), divided by twelve. 3. Use of Network Proprietary Marks. 3.1 During the term of this Network Agreement, the Member shall have the limited, nonexclusive license to use the Network's Proprietary Marks and System within the territory described on Exhibit "A" attached to this Network Agreement and only in connection with the operation of Member's Bank pursuant to this Network Agreement. The limited, nonexclusive license granted herein includes only such Network Proprietary Marks as are set forth in Exhibit "B" attached to this Network Agreement and the Network Proprietary Marks which may hereafter be designated in writing by Bancorp as part of the Commerce Network. 3.2 The Member will not represent in any manner that it has any ownership in the Network Proprietary Marks. Member's use of the Network Proprietary Marks shall not create in its favor any right, title or interest in or to the Network Proprietary Marks but that all of such use shall inure to the benefit of Bancorp. -2- 3.3 Member agrees that, during the term of, and after the expiration or termination of this Network Agreement, Member shall use its best efforts not to commit, directly or indirectly, an act of infringement or contest or aid in contesting the validity or ownership of the Network's Proprietary Marks, or take any other action in derogation of the Network's Proprietary Marks. 3.4 Member shall promptly notify Bancorp of any claim, demand, or cause of action based upon or arising from any attempt by any other person, entity, firm or corporation to use the Network's Proprietary Marks, or any colorable variation of the Network's Proprietary Marks, in which Bancorp has or claims a proprietary interest. Member shall notify Bancorp promptly of any litigation instituted by any person, entity, firm, corporation or governmental agency against Bancorp or Member involving the Network's Proprietary Marks. Bancorp has the right to control any administrative proceeding or litigation involving the Network's Proprietary Marks. If Bancorp undertakes the defense or prosecution of any proceeding or litigation involving the Network's Proprietary Marks, Member agrees to cooperate, execute any and all documents and to do such acts as may, in the opinion of counsel for Bancorp, be necessary to carry out such defense or prosecution. Bancorp shall undertake the defense or prosecution of any proceeding or litigation involving the Network's Proprietary Marks which Bancorp shall reasonably determine to be in the best interests of Bancorp, Member and the other members, if any, of the Commerce Network. -3- 3.5 As each and every detail of the System is important to Member, Bancorp and the other members, if any, of the Commerce Network, in order to develop and maintain high standards of quality and service, and hence to protect the reputation and goodwill of all member banks, Member shall observe such reasonable requirements with respect to trademark, trade name or service mark registration notices as Bancorp may from time to time direct in writing; provided, however, that Member shall be free to use at anytime all such other proprietary marks as it deems necessary and/or desirable. 4. Obligations of Bancorp. 4.1 Bancorp shall: (a) at the request of Member, advise and consult with Member during normal business hours on matters relating to the System; (b) continue to develop, promote and protect the good will and reputation of the System; (c) provide Member with approved local advertising and marketing plans and materials, including, without limitation, newspaper mats, radio commercial tapes, television commercial prints, sales aids, and other promotional and marketing materials. (d) provide Member with marketing assistance; (e) conduct periodic meetings of Bancorp and its Network Members to review and improve the System; and (f) make available to Member, upon request, back- office and other support services at an hourly rate equal to 1.5 -4- times the actual salary costs to Bancorp for providing such services to Member. 5. Obligations of Member. 5.1 Member shall comply with all federal, state and local laws, ordinances and regulations affecting the ownership or operation of Member's Bank. 5.2 As support for the payment of the fees set forth in Section 2.1 hereof, on or before the fifth day of each month, Member shall submit to Bancorp a report of the amount of assets of the Member on the last day of the immediately preceding month. 5.3 Member shall submit to Bancorp, within 45 days after the end of each calendar quarter, financial statements relating to Member's Bank for the quarter, and consisting of at least a balance sheet, a statement of profit and loss, and such other reports as Bancorp may from time to time reasonably request. Said financial statement shall be certified by Member's chief executive officer and chief financial officer and shall be prepared according to generally accepted accounting principles consistently applied. 6. Advertising of Member's Bank. 6.1 Member shall be free to develop and use any and all advertising or promotional materials it deems in the best interest of Member whether or not such materials were provided to it hereunder. 7. Transfer and Assignment. 7.1 All rights and interests of Member arising from this Network Agreement are personal to Member and Member shall not, -5- without Bancorp's prior written consent, voluntarily or involuntarily, by operation of law or otherwise, transfer, sell, assign, dispose of or encumber its interest in this Network Agreement, and any purported sale, assignment, transfer or encumbrance shall be null and void. 7.2 This Network Agreement shall inure to the benefit of Bancorp, its successors and assigns, and Bancorp shall have the right to sell, assign or transfer all or any part of its interests herein to any person or legal entity. 8. Default and Termination. 8.1 The occurrence of any of the following events shall constitute a default under this Network Agreement: (a) If Member shall misuse the System, or otherwise materially impair the goodwill associated therewith; (b) If Member shall fail to remit to Bancorp any payments when due; (c) If Member shall fail to submit to Bancorp the financial or other information required under this Network Agreement; (d) If a change in control of Member shall have occurred or be contemplated; (e) If Member otherwise violates the terms of this Network Agreement; and (f) If the authority of Member or Member's Bank to engage in banking is suspended or terminated. -6- Anything in this Section 8 to the contrary notwithstanding, it shall not be a default by Member under this Network Agreement if (i) Member shall choose not to use advertising, methods of operations and/or trademarks provided to it by Bancorp under and/or pursuant to this Network Agreement; and/or (ii) Member shall choose to use any advertising, methods of operations and/or trademarks not provided to it by Bancorp under and/or pursuant to this Network Agreement. 8.2 Upon the occurrence of any of the events set forth in Section 8.1, Bancorp may, without prejudice to any other rights or remedies contained in this Network Agreement or provided by law or equity, terminate this Network Agreement upon thirty days prior written notice. In addition, Bancorp may terminate this Network Agreement without cause upon ninety days prior written notice to Member. 8.3 Member may terminate this Network Agreement upon six months prior written notice to Bancorp by (i) making payment to Bancorp of an amount equal to the fee due to Bancorp pursuant to Section 2.1 for the six month period immediately preceding such notice and (ii) fulfilling all of Member's obligations hereunder. 8.4 Member agrees that upon termination of this Network Agreement, Member shall immediately cease to be a member of the Commerce Network and without limitation the following shall occur: (a) Member shall immediately cease to operate the former member premises as a Member Bank and shall not thereafter directly or indirectly represent to the public that it is a member -7- bank or hold itself out as a present or former member of the Commerce Network. (b) Member shall immediately cease to use, by advertising or in any manner whatsoever, any Network Proprietary Marks. In particular, without limitation, Member shall cease to use all signs, fixtures, equipment, advertising materials, stationery, forms, containers and any other articles which display in any form the Network's Proprietary Marks. (c) Member agrees, if it operates any bank or other business, not to use any reproduction, counterfeit, copy or colorable imitation of the Network's Proprietary Marks in conjunction with such other business which is likely to cause confusion or mistake or to deceive, and further agrees not to utilize any trade dress or designation of origin or description or representation which falsely suggests or represents an association or connection with the Commerce Network. Further, Member shall make such modifications or alterations to the former member premises immediately upon termination of this Network Agreement as may be necessary to prevent the operation of any business thereon by itself or others in derogation of the Commerce Network. (d) Member shall immediately pay all sums owing to Bancorp hereunder. (e) Member shall pay to Bancorp all damages, costs and expenses, including attorneys' fees and costs, incurred by Bancorp subsequent to the termination or expiration of this Network -8- Agreement, in obtaining injunctive or other relief for the enforcement of any portion of this Network Agreement. 8.5 Upon termination of this Network Agreement, Bancorp shall have the right to purchase at a mutually agreed price, but in no event less than Member's book value, in whole or in part, at any time for thirty days after termination, any or all signs, fixtures, equipment, advertising materials, stationery, forms and any other articles which display in any form the Network's Proprietary Marks or indicia of origin associated with the System. 9. Arbitration of Disputes. 9.1. Any controversy or claims arising out of or relating to this Network Agreement shall be subject to arbitration in Camden, New Jersey conducted by three arbitrators pursuant to the Rules of the American Arbitration Association. The judgment of the arbitrators may be entered in any court having jurisdiction. Each party shall be responsible for the payment of his or its legal expenses and the fees and expenses of arbitration except that the arbitrators shall be paid by the party selected by the arbitrators as a part of their judgment. The arbitrators shall have no authority to alter or modify any provision of this Network Agreement or to render an award which by its terms results in such an alteration or modification. 10. Independent Contractors and Indemnification. 10.1 This Network Agreement does not constitute Member an agent, legal representative, joint venturer, partner, employee or servant of Bancorp for any purpose whatsoever. It is understood -9- and agreed that Member shall be an independent contractor and is in no way authorized to make any contract, agreement, warranty or representation on behalf of Bancorp or to create any obligation, express or implied, on behalf of Bancorp. 10.2 Under no circumstances shall Bancorp be liable for any act, omission, contract, debt or other obligation of Member. Member shall indemnify and hold harmless Bancorp against any such claim and the cost (including attorneys' fees and costs) of defending against such claims arising from, as a result of, or in connection with, Member's operation as a member of the Commerce Network. 11. Effect of Waiver. No failure to exercise any power reserved to it in this Network Agreement, or to insist upon compliance by Member with any obligation or condition of this Network Agreement, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Bancorp's right to demand exact compliance with the terms of this Network Agreement at any time or from time to time. Waiver by Bancorp of any particular default by Member shall not affect or impair Bancorp' s right in respect of any subsequent default of the same or of a different nature nor shall any delay, forbearance, or omission of Bancorp to exercise any power or right arising out of any breach or default by Member of any of the terms, provisions, or covenants of this Network Agreement, affect or impair Bancorp's right, nor shall such constitute a waiver by Bancorp of any preceding breach by Member of -10- any terms, provisions, conditions or covenants of this Network Agreement. 12. Notices. Any notices required hereunder shall be in writing and shall be sent by personal delivery or by certified or registered mail, return receipt requested, directed to the address of the addressee listed on the signature page of this Network Agreement. 13. Entire Agreement. This Network Agreement constitutes the entire agreement between Bancorp and Member concerning the grant and conditions of membership in the Commerce Network and supersedes all prior agreements. There are no oral representations, inducements, promises or agreements between the parties not embodied herein which are of any force or effect with reference to this Network Agreement or otherwise. No amendment, change or variance from this Network Agreement shall be binding on either party unless executed in writing by both parties. 14. Captions. The captions to each Section herein are used for convenience only and shall not be considered part of this Network Agreement nor used in interpreting the provisions contained herein. 15. Applicable Laws and Regulations. Bancorp and Member acknowledge that they are both subject to numerous federal and state laws and regulations. Furthermore, Bancorp and Member acknowledge that anything in this Network Agreement to the contrary notwithstanding, it is the intent of the -11- parties to this Network Agreement that Bancorp shall not exercise or attempt to exercise a controlling influence over the management or policies of Member or any of its subsidiaries; or attempt to influence Member's or any of its subsidiaries' dividend policies, loan, credit or investment decisions; pricing of services; personnel decisions; operations activities, including the location of any offices or branches or their hours of operation, etc; or any similar activities or decisions of Member or any of its subsidiaries; and to the extent necessary, the parties hereby agree to amend this Network Agreement so that at all times during the term of this Network Agreement, Bancorp shall not be deemed to "control" or "be in control of" Member within the meaning of the Federal Bank Holding Company Act of 1956, as amended, or any other similar federal, state or local law, rule or regulation. 16. Applicable Law. 16.1 This Network Agreement shall be interpreted and construed under the laws of the state of New Jersey and considered as a contract made and to be performed in the state of New Jersey. 16.2 No right or remedy herein conferred upon or reserved to Bancorp is exclusive of any other right or remedy herein or by law or equity provided or permitted but each shall be cumulative of any other right or remedy provided in this Network Agreement. 17. Representations. NO REPRESENTATION, PROMISE, GUARANTEE OR WARRANTY WAS MADE TO INDUCE THE EXECUTION HEREOF OR IN CONNECTION HEREWITH WHICH IS NOT EXPRESSLY CONTAINED HEREIN. MEMBER RECOGNIZES THAT NEITHER -12- BANCORP NOR ANY OTHER PERSON CAN GUARANTEE MEMBER'S SUCCESS. BY THE EXECUTION AND ACCEPTANCE OF THIS NETWORK AGREEMENT, THE PARTIES HERETO ACKNOWLEDGE THAT THEY HAVE READ THE SAME AND UNDERSTAND EACH PROVISION HEREOF. IN WITNESS WHEREOF, the parties intending to be legally bound, have duly executed, sealed and delivered this Network Agreement. MEMBER: COMMERCE BANK/HARRISBURG BY: /s/ James T. Gibson James T. Gibson, President Address of Member: 100 Senate Avenue East Pennsboro Township Camp Hill, PA 17011 APPROVED AND ACCEPTED: COMMERCE BANCORP, INC. By: /s/ Vernon W. Hill Vernon W. Hill, II, President -13- EXHIBIT "A" The territory currently covered by telephone area code 717 as it exists on the date hereof regardless of whether or not such territory shall be changed and/or modified after the date hereof. EXHIBIT "B" [GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED] AMENDMENT TO NETWORK AGREEMENT This Amendment to Network Agreement, dated as of April [ ], 2002 (this "Amendment"), is by and between Commerce Bancorp, Inc., a New Jersey corporation ("Bancorp"), Commerce Bank/Harrisburg, N. A., a national banking association ("Commerce Harrisburg"), and Pennsylvania Commerce Bancorp, Inc., a Pennsylvania corporation ("PA Bancorp"). (PA Bancorp and Commerce Harrisburg are hereinafter both individually and collectively referred to as a "Member"). RECITALS Since its formation Commerce Harrisburg has been a member of Bancorp's network of banks (the "Commerce Network") and obtained access to Bancorp's system of banking comprised of the procedures, trade secrets and other information which related to the banking business as either originated or adopted by Bancorp (the "System"). On January 1, 1997, Bancorp and Commerce Harrisburg entered into a Network Agreement (the "Network Agreement") by which Commerce Harrisburg continued its status as a member of the Commerce Network. The parties hereto now wish to add PA Bancorp as a party to the Network Agreement and to amend the Network Agreement as provided herein. NOW, THEREFORE, in consideration of the premises, covenants and agreements set forth in this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agree as follows: 1. Amendment to Exhibit "A" set forth in Section 3.1. Exhibit "A" set forth in Section 3.1 of the Network Agreement is hereby amended and restated in its entirety as follows: EXHIBIT "A" The territory shall consist of the Pennsylvania counties of Adams; Berks; Bradford; Carbon; Centre; Clinton; Columbia; Cumberland; Dauphin; Franklin; Fulton; Huntingdon; Juniata; Lackawanna; Lancaster; Lebanon; Luzerne; Lycoming; Mifflin; Monroe; Montour; Northumberland; Perry; Pike; Potter; Schuylkill; Snyder; Sullivan; Susquehanna; Tioga; Union; Wayne; Wyoming; and York. 2. Amendment to Section 3.5. Section 3.5 of the Network Agreement is hereby amended as follows: the "provided, however" clause set forth in the last sentence of Section 3.5 of the Network Agreement is hereby deleted in its entirety. 3. New Section 3.6. New Section 3.6 of the Network Agreement is hereby added to read in its entirety as follows: 3.6 Member shall not, without the express prior written consent of Bancorp, display any trademark, service mark, trade name, insignia or logotype not expressly authorized by Bancorp for use by Member in connection with the use or operation of the System, including, without limitation, those of any other person, firm or corporation. 4. Amendment to Section 4.1(f). Section 4.1(f) of the Network Agreement is hereby amended and restated in its entirety as follows: (f) Upon Member's request, Bancorp may (but is not obligated to) provide additional support services including, without limitation, data processing, facilities management, and such other support services upon which Member and Bancorp may from time to time mutually agree; provided, however, that additional support services not provided by Bancorp may be provided by third parties subject to the prior approval of Bancorp, which approval shall not be unreasonably withheld. Fees for such additional services shall be negotiated in good faith and may be subject to separate agreements or may be agreed-upon amendments to this Network Agreement. 5. New Section 5.4. New Section 5.4 of the Network Agreement is hereby added to read in its entirety as follows: 5.4 Member shall operate its business in strict compliance with standard procedures, polices, rules and regulations established by Bancorp ("Operating Procedures"), as the same may be amended and revised from time to time, including without limitation, the offering of similar products and services, the operation of all branch offices and facilities consistent with the System (including without limitation the hours of operations) and the making of all interbank transfers between Member and Bancorp's bank subsidiaries transparent so as to make the operations of Member's branch offices appear to the public to be identical to those of Bancorp. Bancorp may at any time and from time to time modify the Operations Procedures by the addition, deletion or other modification to the provisions thereof, provided that such modifications shall be made to the extent necessary or desirable in the sole judgment of Bancorp to protect the Proprietary Marks, comply with any applicable statute or judicial or administrative decision, improve the quality of service furnished to customers or to improve the operational efficiency of the Network and/or the System. Unless otherwise specified, modifications to Operating Procedures shall become effective fifteen days after delivery of written notice thereof to Member. 6. Delete Section 6. Section 6 of the Network Agreement is hereby deleted in its entirety. 7. Amendment to Section 8.1. The last paragraph of Section 8.1 of the Network Agreement which begins with "Anything in this Section 8 etc." is hereby deleted in its entirety. 8. Amendment to Section 8.2. Section 8.2 of the Network Agreement is hereby amended and restated in its entirety as follows: 8.2 Upon the occurrence of any of the events set forth in Section 8.1, Bancorp may, without prejudice to any other rights or remedies contained in this Network Agreement or provided by law or equity, terminate this Network Agreement upon 90 days prior written notice, provided, however, that if the event of default is under Sections 8.1(a), (b), (c) and/or (e), Bancorp shall give Member written notice of the event of default and provide Member with 15 days to cure such event of default. In addition, Bancorp may terminate this Network Agreement without cause upon 180 days prior written notice to Member. 9. New Section 8.4(f). A new section 8.4(f) is hereby added to read in its entirety as follows: (f) Member shall promptly execute and file with applicable government agencies or offices a notice of its intent to cease conducting its business under the name "Commerce Bank", or any colorable variation thereof, and shall revoke and cancel any registration of such name with relevant government agencies. 10. New Section 8.6. A new Section 8.6 is hereby added to read in its entirety as follows: 1 Member acknowledges and agrees that the System is comprised of valuable trade secrets and confidential information of Bancorp, the unauthorized disclosure or use of which could harm Bancorp such that money damages could not reasonably compensate it. Accordingly, upon termination of this Agreement and for a period of five years thereafter, Member shall not, nor shall its officers, directors, principal stockholders, employees, agents or representatives: (i) disclose, directly or indirectly, in whole or in part, any aspect or methodology of the System without Bancorp's express, prior written permission; or (ii) use, without Bancorp's express, prior written permission, any aspect or feature (or portion thereof) of the System in connection with the banking business throughout the world. 1. Member. For all purposes, the term "Member" contained in the Network Agreement, as amended by this Amendment, shall be deemed to include Commerce Harrisburg and PA Bancorp, and each of them hereby agrees to be so bound. 2. Counterparts. This Amendment may be executed in several counterparts, and all such executed counterparts will constitute the same agreement. 3. Defined Terms. Initially capitalized terms used and not defined in this Amendment have the meanings ascribed to them in the Network Agreement. 4. Full Force and Effect. Except as amended hereby, the Network Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties to this Amendment have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. Commerce Bancorp, Inc. By: /s/ Vernon W. Hill Vernon W. Hill, II, President Pennsylvania Commerce Bancorp, Inc. By: /s/ Gary L. Nalbandian Gary L. Nalbandian, President Commerce Bank/Harrisburg, N. A. Address of Member By: /s/ Gary L. Nalbandian Gary L. Nalbandian, President 100 Senate Avenue East Pennsboro Township Camp Hill, PA 17011 EX-11 4 ex11.txt EXHIBIT 11 Exhibit 11.
Pennsylvania Commerce Bancorp, Inc. Computation of Net Income Per Share =================================================================================================== For the Quarter Ended September 30, 2003 - --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount - --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $1,526,000 Preferred stock dividends (20,000) ---------- Income available to common stockholders 1,506,000 2,150,494 $0.70 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 172,280 ------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $1,506,000 2,322,774 $0.65 =================================================================================================== For the Nine months Ended September 30, 2003 - --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount - --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $4,832,000 Preferred stock dividends (60,000) ---------- Income available to common stockholders 4,772,000 2,138,045 $2.23 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 165,702 ------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $4,772,000 2,303,747 $2.07 =================================================================================================== 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 2,093,367 $0.69 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 201,172 ------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $1,447,000 2,294,539 $0.63 =================================================================================================== 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 2,047,788 $1.97 - --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 204,090 ------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $4,044,000 2,251,878 $1.80 ===================================================================================================
EX-31 5 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer I, Gary L. Nalbandian, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pennsylvania Commerce Bancorp, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)): (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Not Applicable (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Gary L. Nalbandian - ---------------------------- Gary L. Nalbandian President and Chief Executive Officer EX-31 6 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer I, Mark A. Zody, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pennsylvania Commerce Bancorp, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)): (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Not Applicable (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Mark A. Zody - ------------------------------ Mark A. Zody Chief Financial Officer EX-32 7 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 Certification of Chief Executive Officer of Pennsylvania Commerce Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The undersigned hereby certifies, 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 Dated: November 14, 2003 A signed original of this written statement required by Section 906 has been provided to Pennsylvania Commerce Bancorp, Inc. and will be retained by Pennsylvania Commerce Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 Certification of Chief Financial Officer of Pennsylvania Commerce Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The undersigned hereby certifies, 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/ Mark A. Zody - ------------------------------------------------ Mark A. Zody, Chief Financial Officer Dated: November 14, 2003 A signed original of this written statement required by Section 906 has been provided to Pennsylvania Commerce Bancorp, Inc. and will be retained by Pennsylvania Commerce Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----