10-Q 1 pacommerce10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2004 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: 2,309,209 Common shares outstanding at 3/31/04 ----------------------------------------------------------------------- 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 March 31, 2004 (Unaudited), and December 31, 2003 Consolidated Statements of Income (Unaudited)...................................................4 Three months ended March 31, 2004 and March 31, 2003 Consolidated Statements of Stockholders' Equity (Unaudited)....................................5 Three months ended March 31, 2004 and March 31, 2003 Consolidated Statements of Cash Flows (Unaudited)...............................................6 Three months ended March 31, 2004, and March 31, 2003 Notes to Consolidated Financial Statements (Unaudited)..........................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................11 Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................20 Item 4. Controls and Procedures........................................................................20 PART II. OTHER INFORMATION Item 1. Legal Proceedings..............................................................................20 Item 2. Changes in Securities and Use of Proceeds......................................................21 Item 3. Defaults Upon Senior Securities................................................................21 Item 4. Submission of Matters to a Vote of Securities Holders..........................................21 Item 5. Other Information..............................................................................21 Item 6a. Exhibits.......................................................................................21 Item 6b. Reports on Form 8-K............................................................................21 Signatures
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Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets ----------------------------------------------------------------------------------------------------------------- March 31, December 31, 2004 2003 ( dollars in thousands, except share amounts) (unaudited) ----------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 27,271 $ 37,715 Federal funds sold 0 0 ------------------------------------------------------------------------------------------------ Cash and cash equivalents 27,271 37,715 Securities, available for sale at fair value 293,348 275,400 Securities, held to maturity at cost (fair value 2004: $214,128; 2003: $201,568 ) 210,209 199,863 Loans, held for sale 7,552 9,164 Loans receivable, net of allowance for loan losses (allowance 2004: $6,519; 2003: $6,007) 507,156 469,937 Restricted investments in bank stock 5,542 5,227 Premises and equipment, net 38,687 38,178 Other assets 7,461 16,505 ------------------------------------------------------------------------------------------------ Total assets $ 1,097,226 $ 1,051,989 ================================================================================================================= Liabilities Deposits : Noninterest-bearing $ 177,960 $ 170,414 Interest-bearing 759,257 736,113 ------------------------------------------------------------------------------------------------ Total deposits 937,217 906,527 Other borrowed money 88,500 79,000 Junior subordinated debt 13,600 0 Trust capital securities 0 13,000 Other liabilities 4,054 3,738 ------------------------------------------------------------------------------------------------ Total liabilities 1,043,371 1,002,265 ----------------------------------------------------------------------------------------------------------------- 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 - 2004: 2,309,209 ; 2003: 2,291,805 2,309 2,292 Surplus 39,438 38,725 Retained earnings 9,427 7,758 Accumulated other comprehensive income 2,281 549 ------------------------------------------------------------------------------------------------ Total stockholders' equity 53,855 49,724 ------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 1,097,226 $ 1,051,989 =================================================================================================================
See accompanying notes . 3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) ----------------------------------------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- (dollars in thousands, except per share amounts) 2004 2003 ---------------------------------------------------------------------------------------------------------- Interest Loans receivable, including fees : Income Taxable $ 7,618 $ 6,478 Tax - exempt 70 57 Securities : Taxable 6,089 4,068 Tax - exempt 101 91 Federal funds sold 0 84 --------------------------------------------------------------------------------------- Total interest income 13,878 10,778 ---------------------------------------------------------------------------------------------------------- Interest Deposits 2,267 2,835 Expense Other borrowed money 289 0 Long-term debt 354 339 --------------------------------------------------------------------------------------- Total interest expense 2,910 3,174 --------------------------------------------------------------------------------------- Net interest income 10,968 7,604 Provision for loan losses 575 325 --------------------------------------------------------------------------------------- Net interest income after provision for loan losses 10,393 7,279 ---------------------------------------------------------------------------------------------------------- Noninterest Service charges and other fees 2,241 1,804 Income Other operating income 90 98 Gain on sale of loans 255 289 --------------------------------------------------------------------------------------- Total noninterest income 2,586 2,191 ---------------------------------------------------------------------------------------------------------- Noninterest Salaries and employee benefits 5,369 3,532 Expenses Occupancy 1,124 797 Furniture and equipment 548 398 Advertising and marketing 711 444 Data processing 611 515 Postage and supplies 288 238 Other 1,466 1,104 --------------------------------------------------------------------------------------- Total noninterest expenses 10,117 7,028 --------------------------------------------------------------------------------------- Income before income taxes 2,862 2,442 Provision for federal income taxes 934 794 --------------------------------------------------------------------------------------- Net income $ 1,928 $ 1,648 ======================================================================================= Net income per common share : Basic $ 0.83 $ 0.73 Diluted 0.76 0.68 ========================================================================================================== See accompanying notes . 4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Unaudited) ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Preferred Common Retained Comprehensive ( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total ---------------------------------------------------------------------------------------------------------------------------------- Balance : December 31, 2002 $ 400 $2,117 $ 31,909 $ 6,866 $ 1,520 $ 42,812 Comprehensive income: Net income - - - 1,648 - 1,648 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - (362) (362) ------------- Total comprehensive income 1,286 Dividends declared on preferred stock - - - (20) - (20) Common stock of 12,163 shares issued under stock option plans - 12 146 - - 158 Income tax benefit of stock options exercised - - 92 - - 92 Common stock of 40 shares issued under employee stock purchase plan - - 1 - - 1 Proceeds from issuance of 4,023 shares of common stock in connection with dividend-reinvestment and stock purchase plan - 4 146 - - 150 5 % common stock dividend and cash paid in lieu of fractional shares - 1 17 (18) - - ---------------------------------------------------------------------------------------------------------------------------------- March 31, 2003 $ 400 $2,134 $ 32,311 $ 8,476 $ 1,158 $ 44,479 ================================================================================================================================== Accumulated Other Preferred Common Retained Comprehensive ( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total ------------------------------------------------------------------------------------------------------------------------------------ Balance : December 31, 2003 $ 400 $2,292 $ 38,725 $ 7,758 $ 549 $ 49,724 Comprehensive income: Net income - - - 1,928 - 1,928 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - 1,732 1,732 ------------- Total comprehensive income 3,660 Dividends declared on preferred stock - - - (20) - (20) Common stock of 13,071 shares issued under stock option plans - 13 161 - - 174 Income tax benefit of stock options exercised - - 135 - - 135 Common stock of 90 shares issued under employee stock purchase plan - - 4 - - 4 Proceeds from issuance of 3,881 shares of common stock in connection with dividend reinvestment and stock purchase plan - 4 182 - - 186 5 % common stock dividend and cash paid in lieu of fractional shares (362 shares issued) - - 231 (239) - (8) ---------------------------------------------------------------------------------------------------------------------------------- March 31, 2004 $ 400 $2,309 $ 39,438 $ 9,427 $ 2,281 $ 53,855 ================================================================================================================================== See accompanying notes .
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Pennsylvania Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) ----------------------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, ( in thousands ) 2004 2003 ----------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 1,928 $ 1,648 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 575 325 Provision for depreciation and amortization 577 401 Deferred income taxes 67 16 Amortization of securities premiums and accretion of discounts, net 287 676 Proceeds from sale of loans 20,662 23,756 Loans originated for sale (18,795) (19,914) Gain on sales of loans (255) (289) Stock granted under stock purchase plan 4 1 (Increase) decrease in other assets 8,354 (392) Increase (decrease) in other liabilities 316 (570) ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 13,720 5,658 ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities Securities held to maturity : Proceeds from principal repayments and maturities 4,714 11,079 Purchases (15,007) (32,722) Securities available for sale : Proceeds from principal repayments and maturities 24,954 38,781 Purchases (40,143) (82,437) Net increase in loans receivable (37,794) (14,221) Purchases of restricted investments in bank stock (315) (322) Purchases of premises and equipment (1,086) (3,567) ---------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (64,677) (83,409) ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities Net increase in demand deposits, interest checking, money market and savings deposits 7,280 19,115 Net increase in time deposits 23,410 28,289 Net increase in short-term borrowings 9,500 0 Proceeds from common stock options exercised 174 158 Proceeds from dividend reinvestment and common stock purchase plans 186 150 Cash dividends on preferred stock and cash in lieu of fractional shares (37) (30) ---------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 40,513 47,682 ---------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (10,444) (30,069) Cash and cash equivalents at beginning of year 37,715 75,450 ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 27,271 $ 45,381 ---------------------------------------------------------------------------------------------------------------- See accompanying notes .
6 PENNSYLVANIA COMMERCE BANCORP, INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 (Unaudited) Note 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Pennsylvania Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiary Commerce Bank/Harrisburg, N.A. ("the Bank"). All material intercompany accounts and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the three-month period ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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. 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 7 statements and footnotes thereto included in the Pennsylvania Commerce Bancorp, Inc., Annual Report for the year ended December 31, 2003. Note 2. SIGNIFICANT ACCOUNTING POLICIES Stock Dividends and Per Share Data On January 23, 2004 the Board of Directors declared a 5% stock dividend on common stock outstanding, paid on February 24, 2004, to stockholders of record on February 6, 2004. Payment of the stock dividend resulted in the issuance of approximately 109,000 additional common shares and cash of $16,592 in lieu of fractional shares. The effect of the 5% common stock dividend has been recorded as of December 31, 2003. 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 March 31, 2004 and 2003: Three Months Ended March 31, -------------------------------------------------------------------------------- (in thousands) 2004 2003 ---- ---- Net income: As reported $ 1,928 $ 1,648 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 (187) (155) --------- --------- Pro-forma 1,741 1,493 Reported earnings per share: Basic $ 0.83 $ 0.73 Diluted 0.76 0.68 Pro-forma earnings per share: Basic $ 0.75 $ 0.66 Diluted 0.68 0.61 New Accounting Standards In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" which was revised in December 2003. 8 This Interpretation provides guidance for the consolidation of variable interest entities (VIEs). The Company's wholly owned subsidiaries, Commerce Capital Harrisburg Trust I and Commerce Capital Harrisburg Trust II, (the "Trusts") qualify as variable interest entities under FIN 46. The Trusts issued mandatory redeemable preferred securities (Trust Preferred Securities) to third-party investors and loaned the proceeds to the Company. The Trusts hold, as their sole asset, subordinated debentures issued by the Company. FIN 46 required the Company to deconsolidate the Trusts from the consolidated financial statements as of March 31, 2004. There has been no restatement of prior periods. The impact of this deconsolidation was to increase junior subordinated debentures by $13.6 million and reduce the trust capital securities line item by $13.0 million that had represented the trust preferred securities of the Trusts. The Company's equity interest in the trust subsidiaries of $600,000, which had previously been eliminated in consolidation, is now reported in "Other assets" as of March 31, 2004. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them. The adoption of FIN 46 did not have an impact on the Company's results of operations or liquidity. Adoption of this statement does not have or is not expected to have a material impact on the Company's financial condition or results of operations. Note 3. COMMITMENTS AND CONTINGENCIES The Company is subject to certain routine legal proceedings and claims arising in the ordinary course of business. It is management's opinion that the ultimate resolution of these claims will not have a material adverse effect on the Company's financial position and results of operations. Future Facilities The Company has entered into an agreement to purchase the land located at the corner of Friendship Road and TecPort Drive in Swatara Township, Dauphin County, Pennsylvania. The Company plans to construct a Headquarters/Operations Facility on this property to be opened in 2005. 9 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 ------------------ March 31, --------- (in thousands) 2004 2003 ------- ------- Unrealized holding gains (losses) on available for sale securities occurring during the period $ 2,624 $ (548) Reclassification adjustment for gains included in net income 0 0 ------- ------- Net unrealized gains (losses) 2,624 (548) Tax effect (892) 186 ------- ------- Other comprehensive income (loss) $ 1,732 $ (362) ======= ======= Note 5. GUARANTEES The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company, generally, holds collateral and/or personal guarantees supporting these commitments. The Company had $8.6 million of standby letters of credit as of March 31, 2004. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of March 31, 2004 for guarantees under standby letters of credit issued is not material. 10 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 38% to $13.6 million for the quarter as compared to first quarter of 2003 and net income for the quarter increased 17% to $1.9 million as compared to $1.6 million for the first quarter of 2003. Diluted net income per common share increased 12% to $0.76 from $0.68 per share in the first quarter a year ago (after adjusting for a 5% common stock dividend paid in February 2004). At March 31, 2004, the Company had total assets of $1.1 billion, total net loans (including loans held for sale) of $515 million, and total deposits of $937 million. RESULTS OF OPERATIONS Average Balances and Average Interest Rates Interest earning assets averaged $993.4 million for the first quarter of 2004 as compared to $737.4 million for the same period in 2003. Approximately $118 million, or 46%, of this increase was in average loans outstanding and $138 million, or 54%, was in average investment securities. The yield on earning assets for the first quarter of 2004 was 5.60%, a decrease of 31 basis points (bps) from the comparable period in 2003. 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 first quarter of 2004 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 million over the first quarter 2003. Average interest-bearing liabilities increased from $633 million during the first quarter of 2003 to $849 million during the first quarter of 2004. Average savings deposits increased $27 million over first quarter a year ago, average public funds deposits increased $36 million, average interest bearing demand deposits increased by $43 million, average non-interest bearing demand deposits increased by $39 million, and average time deposits increased $15 million during the quarter as compared to the first quarter one year ago. The average rate paid on interest-bearing liabilities for the first quarter of 2004 was 1.38%, a decrease of 65 basis points from the comparable period in 2003. The Company's aggregate cost of funding sources was 1.18% for the first quarter of 2004, a decrease of 57 basis points from the prior year. This is primarily the result of a decrease in the average rates paid on all interest bearing deposits. Net Interest Income and Net Interest Margin Net interest income is the difference between interest income earned on assets and interest expense incurred on liabilities used to fund those assets. Interest earning assets primarily include loans and investment securities. Liabilities used to fund such assets include deposits, borrowed funds, and long-term 11 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 $3.1 million, or 29%, over the first quarter of 2003. Interest income on loans outstanding increased by 18% over the first quarter of 2003 and interest income on investment securities increased by 49% over the same period. Total interest expense for the first quarter of 2004 decreased by $264,000, or 8%, from the first quarter of 2003. Interest expense on deposits decreased by $568,000, or 20%, during the first quarter of 2004 from the first three months of 2003. This was offset by an increase of interest expense on other borrowed money of $289,000. Net interest income for the first quarter of 2004 increased by $3.4 million, or 44%, over the same period in 2003. 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 4.22% during the first quarter of 2004 compared to 3.88% during the same period of the previous year. The net interest margin increased by 26 basis points from 4.16% for the first quarter 2003 to 4.42% during the first quarter of 2004. Provision for Loan Losses The provision for loan losses was $575,000 for the first quarter of 2004 as compared to $325,000 for the same period in 2003. The increase in the provision for the three-month period is primarily related to the growth in loan receivables. The allowance for loan losses as a percentage of period-end loans was 1.27% at March 31, 2004 as compared to 1.26% and 1.42% at December 31, 2003 and March 31, 2003, respectively. Noninterest Income Noninterest income for the first quarter of 2004 increased by $395,000, or 18%, over the same period in 2003. The increase is attributable to service charges and fees associated with servicing a higher volume of deposit accounts and transactions, offset by a decrease in the gain on the sale of loans and other miscellaneous operating income. Included in noninterest income for the first three months of 2004 is nonrecurring income of $119,000, as a result of the gain on the sale of student loans. Included in noninterest income for the first three months of 2003 is nonrecurring income of $167,000 as a result of a gain on the sale of student loans. Excluding these transactions, recurring core noninterest income for the first three months of 2004 totaled $2.5 million as compared to $2.0 million for the first three months of 2003, an increase of 22%. 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 first quarter of 2004, noninterest expenses increased by $3.1 million, or 44%, over the same period in 2003. 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 12 also increased as a result of opening five additional branch offices, one each in June 2003, July 2003, and September 2003, respectively and two in December 2003. A comparison of noninterest expenses for certain categories for the three months ended March 31, 2004, and March 31, 2003, is presented in the following paragraphs. Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $1.8 million, or 52%, for the first quarter of 2004 over the first quarter of 2003. This increase is consistent with increases in staff levels necessary to handle Company growth from first quarter 2003 to first quarter 2004, including the additional staff of the branch offices opened in the period June 2003 through December 2003. Occupancy expenses of $1.1 million were $327,000 higher for the first quarter of 2004 than for the three months ended March 31, 2003. Increased occupancy expenses primarily are a result of the five branch offices opened between June 2003 and December 2003, along with expanding the Loan Production Office (LPO) in the Harrisburg Region in the Spring of 2003 and opening a new and larger LPO in the York region during the summer of 2003. Furniture and equipment expenses of $548,000 were $150,000, or 38%, higher for the first quarter of 2004 then the three months ended March 31, 2003. 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 12 months and the expansion/addition of the new LPO offices. Advertising and marketing expenses totaled $711,000 for the three months ended March 31, 2004, an increase of $267,000, or 60%, from the first quarter of 2003. Advertising and marketing expenses increased due to additional marketing initiatives in all of our markets and the addition of the Berks County market, which occurred in the summer of 2003 when we opened two branches in this market. Data processing expenses of $611,000 were $96,000, or 19%, higher in the first quarter of 2004 than the three months ended March 31, 2003. The increase was due to increased costs associated with processing additional transactions due to growth in number of accounts serviced. Postage and supplies expenses of $288,000 were $50,000, or 21%, higher for the first quarter of 2004 than for the three months ended March 31, 2003. 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 $362,000, or 33%, for the three-month period ended March 31, 2004, as compared to the same period in 2003. Components of the increase include: o higher telecommunication and data line expenses due to the addition of five new branches; o higher loan related expenses due to a 34% increase in loan volume over the past 12 months; o greater checkbook printing expenses due to an increase in the number of new accounts opened; o an increase in the provision for other losses and differences; and o an increase in audit, exams and shareholder expenses. 13 One key measure used to monitor progress in controlling overhead expenses is the ratio of net noninterest expenses to average assets. Net noninterest expenses equal noninterest expenses (excluding foreclosed real estate expenses) less noninterest income (exclusive of nonrecurring gains), divided by average assets. This ratio equaled 2.88% for the three months ended March 31, 2004, up over the 2.51% reported for the three months ended March 31, 2003. Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses (excluding foreclosed real estate expenses) to net interest income plus noninterest income (excluding nonrecurring gains). For the quarter ended March 31, 2004, the operating efficiency ratio was 75.1%, compared to 72.7% for the similar period in 2003. Provision for Federal Income Taxes The provision for federal income taxes was $934,000 for the first quarter of 2004 as compared to $794,000 for the same period in 2003. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 32.6% for the first three months of 2004 and 32.5% for the same period in 2003. Net Income and Net Income Per Share Net income for the first quarter of 2004 was $1.9 million, an increase of $280,000, or 17%, over the $1.6 million recorded in the first quarter of 2003. The increase was due to an increase in net interest income of $3.4 million, an increase in noninterest income of $395,000, offset partially by an increase in noninterest expenses of $3.1 million, a $250,000 increase in the provision for loan losses, and an increase of $140,000 in the provision for income taxes. Basic earnings per common share, after adjusting for a 5% common stock dividend paid in February 2004, increased 14% to $0.83 per common share for the first three months of 2004 compared to $0.73 for the same period in 2003. Diluted earnings per common share were $0.76 for the first three months of 2004 and $0.68 for the same period in 2003, an increase of 12%. Return on Average Assets and Average Equity Return on average assets (ROA) measures the Company's net income in relation to its total average assets. The Company's annualized ROA for the first quarter of 2004 was 0.73% as compared to 0.83% for the first quarter of 2003. For purposes of calculating ROA, average assets have been adjusted to exclude gross unrealized appreciation or depreciation on securities available for sale. Return on average equity (ROE) indicates how effectively the Company can generate net income on the capital invested by its stockholders. ROE is calculated by dividing net income by average stockholders' equity. For purposes of calculating ROE, average stockholders' equity includes the effect of unrealized appreciation or depreciation, net of income taxes, on securities available for sale. The annualized ROE for the first quarter of 2004 was 14.87%, as compared to 15.20% for the first quarter of 2003. 14 FINANCIAL CONDITION Securities During the first three months of 2004, securities available for sale increased by $17.9 million from $275.4 million at December 31, 2003 to $293.3 million at March 31, 2004. This resulted from the purchase of $40.1 million in securities, partially offset by $25.0 million in principal repayments. The securities available for sale portfolio is comprised of U.S. Government agency securities, mortgage-backed securities, collateralized mortgage obligations, and corporate debt securities. The duration of the securities available for sale portfolio was 3.0 years at March 31, 2004 with a weighted average yield of 4.87%. During the first three months of 2004, securities held to maturity increased from $199.9 million to $210.2 million primarily as a result of the purchase of $15.0 million in securities, offset by principal repayments of $4.7 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 5.2 years at March 31, 2004 with a weighted average yield of 5.58%. Total securities aggregated $503.6 million at March 31, 2004, and represented 46% of total assets. The average yield on the combined securities portfolio for the first three months of 2004 was 5.08%, as compared to 5.44% for the similar period of 2003. 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 three months of 2004, total loans held for sale decreased $1.6 million, from $9.2 million at December 31, 2003 to $7.6 million at March 31, 2004. The change was the result of the sale of $7.0 million of student loans and the sale of $13.5 million of residential loans, offset by originations of $18.9 million in new loans held for sale. Loans held for sale represented 0.9% of total assets at December 31, 2003 and 0.7% of total assets at March 31, 2004. Loans Receivable During the first three months of 2004, total gross loans receivable increased by $37.7 million from $475.9 million at December 31, 2003, to $513.7 million at March 31, 2004. The majority of the growth was in commercial real estate and commercial business loans. Loans receivable represented 55% of total deposits and 47% of total assets at March 31, 2004, as compared to 53% and 45%, respectively, at December 31, 2003. 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 March 31, 2004, were $1.7 million, or 0.15%, of total assets as compared to $1.4 million, or 0.13%, of total assets at December 31, 2003. Foreclosed real estate totaled $236,000 at March 31, 2004 and December 31, 2003. 15 The summary table below presents information regarding nonperforming loans and assets as of March 31, 2004 and 2003 and December 31, 2003.
Nonperforming Loans and Assets ---------------------------------------------------------------------------------------------- (dollars in thousands) March 31, December 31, March 31, 2004 2003 2003 ---------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 104 $ 143 $ 197 Consumer 24 68 91 Real estate: Construction 159 159 0 Mortgage 1,056 417 421 ---------------------------------------------------------------------------------------------- Total nonaccrual loans 1,343 787 709 Loans past due 90 days or more and still accruing 112 385 175 Restructured loans 0 0 0 ---------------------------------------------------------------------------------------------- Total nonperforming loans 1,455 1,172 884 Foreclosed real estate 236 236 281 ---------------------------------------------------------------------------------------------- Total nonperforming assets 1,691 $1,408 1,165 ---------------------------------------------------------------------------------------------- Nonperforming loans to total loans 0.28% 0.25% 0.23% Nonperforming assets to total assets 0.15% 0.13% 0.14% ==============================================================================================
Nonaccrual commercial loans are comprised of nine loans at March 31, 2004. Management's Allowance for Loan Loss Committee has reviewed the composition of the nonaccrual loans and believes adequate collateralization exists. The following table sets forth information regarding the Company's provision and allowance for loan losses.
Allowance for Loan Losses ----------------------------------------------------------------------------------------------------------- (dollars in thousands) Three months Year Ending Three months Ending December 31, Ending March 31, 2004 2003 March 31, 2003 ----------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 6,007 $ 5,146 $ 5,146 Provisions charged to operating expenses 575 1,695 325 ---------------------------------------------------------------------------------------------------------- 6,582 6,841 5,471 Recoveries of loans previously charged-off: Commercial 27 66 0 Consumer 34 85 2 Real estate 0 115 8 ---------------------------------------------------------------------------------------------------------- Total recoveries 61 266 10 Loans charged-off: Commercial 0 (483) (0) Consumer (121) (331) (7) Real estate (3) (286) (40) ---------------------------------------------------------------------------------------------------------- Total charged-off (124) (1,100) (47) ---------------------------------------------------------------------------------------------------------- Net charge-offs (63) (834) (37) ---------------------------------------------------------------------------------------------------------- Balance at end of period $ 6,519 $ 6,007 $ 5,434 ---------------------------------------------------------------------------------------------------------- Net charge-offs as a percentage of 0.01% 0.20% 0.01% Average loans outstanding Allowance for loan losses as a percentage of Period-end loans 1.27% 1.26% 1.42% ==========================================================================================================
16 Premises and Equipment During the first three months of 2004, premises and equipment increased by $509,000, or 1%, from $38.2 million at December 31, 2003 to $38.7 million at March 31, 2004. The increase was a result of leasehold improvements and furniture and equipment purchases necessary for additions to staff and replacing certain fixed assets offset by the provision for depreciation and amortization. Other Assets During the first three months of 2004, other assets decreased by $9.0 million from $16.5 million at December 31, 2003, to $7.5 million at March 31, 2004. The change was primarily the result of the sale of committed securities included as other assets at December 31, 2003, with a fair market value of $9.2 million. The proceeds from the sale were received in the first quarter of 2004. Deposits Total deposits at March 31, 2004 were $937.2 million, up $30.7 million, or 3%, over total deposits of $906.5 million at December 31, 2003. The average balances and weighted average rates paid on deposits for the first three months of 2004 and 2003 are presented in the following table.
Three months Ended March 31, 2004 2003 ----------------------------------------- ------------------------- -------------------------- Average Average Average Average (dollars in thousands) Balance Rate Balance Rate ----------------------------------------- ------------ ------------ ------------- ------------ Demand deposits: Noninterest-bearing $ 162,541 $ 124,009 Interest-bearing (money market and checking) 294,609 0.84% 203,617 0.98% Savings 249,939 0.89 225,011 1.23 Time deposits 197,096 2.24 191,778 3.51 ----------------------------------------- ------------ ------------ ------------- ------------ Total deposits $ 904,185 $ 744,415 ========================================= ============ ============ ============= ============
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. 17 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. The Company's Asset/Liability Committee (ALCO) policy has established that income sensitivity will be considered acceptable if overall net income volatility in a plus 200 or minus 200 basis point scenario is within 15% of net income in a flat rate scenario in the first year and 30% using a two year planning window. At March 31, 2004, the Company's income simulation model indicates net income would be higher by 0.1% in the first year and lower by 5.9% over a two-year time frame, if rates decreased 100 basis points as compared to higher by 0.04% and lower by 5.4%, respectively, at March 31, 2003. The model projects that net income would by lower by 4.1% and higher by 1.8% in the first year and over a two-year time frame, respectively, if rates increased 200 basis points, as compared to higher by 4.2% and 17.1%, respectively, at March 31, 2003. 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 March 31, 2004, 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 March 31, 2004 provide an accurate assessment of the Company's interest rate risk. 18 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 March 31, 2004, the total potential liquidity for the Company through these secondary sources was $362 million. In view of the primary and secondary sources as previously mentioned, management believes that the Company is capable of meeting its anticipated liquidity needs. Capital Adequacy At March 31, 2004, stockholders' equity totaled $53.9 million, up 8% over stockholders' equity of $49.7 million at December 31, 2003. Stockholders' equity at March 31, 2004 included $2.3 million of gross unrealized gains, net of income taxes, on securities available for sale. Excluding these unrealized gains, gross stockholders' equity increased by $2.4 million from $49.2 million at December 31, 2003, to $51.6 million at March 31, 2004 due to retained net income and the proceeds from the sale of stock under the Company's 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. 19 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 Under Prompt Corrective March 31, December 31, For Capital Action Provisions 2004 2003 Adequacy Purposes ------------------------------ ---------------- ----------------- -------------------------- -------------------------- Risk-Based Capital Ratios: Tier 1 9.37% 9.49% 4.00% 6.00% Total 10.33 10.42 8.00 10.00 Leverage ratio 6.01 6.14 4.00 5.00 (to average assets) ------------------------------ ---------------- ----------------- -------------------------- --------------------------
The consolidated capital ratios at March 31, 2004 are not materially different to the Bank's capital ratios. At March 31, 2004, the consolidated capital levels of the Company and of the Bank met the definition of a "well capitalized" institution. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk principally includes interest rate risk, which is discussed in the Management's Discussion and Analysis section above. The Company's net interest margin has remained fairly stable. Commerce's net interest margin for the first three months of 2004 was 4.42%, a difference of 26 basis points over 4.16% for the first three months of 2003. Currently, Commerce has 78% of its deposits in non-interest bearing, interest checking, and saving accounts, which it considers core deposits. These accounts, which have a relatively low cost of deposits, 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 March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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. 20 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities No items to report for the quarter ending March 31, 2004. Item 3. Defaults Upon Senior Securities No items to report for the quarter ending March 31, 2004. Item 4. Submission of Matters to a Vote of Securities Holders No items to report for the quarter ending March 31, 2004. Item 5. Other Information No items to report for the quarter ending March 31, 2004. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibits Computation of Net Income Per Share...........................Exhibit 11 (b.) Reports on Form 8-K On January 23, 2004, the Company filed a form 8-K announcing the following information: On January 23, 2004, Pennsylvania Commerce Bancorp, Inc. declared a 5% stock dividend on the Company's common stock outstanding. The dividend was paid on Feb. 24, 2004 to shareholders of record Feb. 6, 2004. On January 27, 2004, the Company filed a form 8-K announcing the following information: On January 27, 2004, Pennsylvania Commerce Bancorp, Inc. issued a press release reporting financial results for its fourth quarter of 2003. On January 29, 2004, the Company filed a form 8-K announcing the following information: On January 28, 2004, Pennsylvania Commerce Bancorp, Inc. announced the appointment of John J. Cardello, CPA, to the Board of Directors of the Company and its subsidiary bank, Commerce Bank/Harrisburg, N.A., expanding the board to eight members. 21 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) 5/14/04 /s/ Gary L. Nalbandian ------------------------- ----------------------------------------- (Date) Gary L. Nalbandian President/CEO 5/14/04 /s/ Mark A. Zody ------------------------- ----------------------------------------- (Date) Mark A. Zody Chief Financial Officer 22
Exhibit 11. Pennsylvania Commerce Bancorp, Inc. Computation of Net Income Per Share ==================================================================================================== For the Quarter Ended March 31, 2004 --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $1,928,000 Preferred stock dividends (20,000) -------- Income available to common stockholders 1,908,000 2,301,558 $0.83 --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 216,635 ------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $1,908,000 2,518,193 $0.76 ==================================================================================================== For the Quarter Ended March 31, 2003 --------------------------------------------------------------------------------------------------- Income Shares Per Share Amount --------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net income $1,648,000 Preferred stock dividends (20,000) -------- Income available to common stockholders 1,628,000 2,230,844 $0.73 --------------------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 171,533 ------- Diluted Earnings Per Share: Income available to common stockholders plus assumed conversions $1,628,000 2,402,377 $0.68 ====================================================================================================
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