EX-13 2 0002.txt
Pennsylvania Commerce Bancorp, Inc. Selected Financial Data Year Ended December 31, (dollars in thousands, except per share data) 2000 1999 1998 1997 1996 BALANCE SHEET DATA: Total assets $ 480,086 $ 378,913 $ 319,323 $ 239,829 $ 198,282 Loans held for sale 5,329 5,301 5,641 6,816 12,953 Loans receivable (gross) 290,252 216,105 167,121 134,459 103,739 Securities available for sale 92,921 84,652 96,993 48,512 43,088 Securities held to maturity 33,812 29,039 11,493 12,239 13,524 Federal funds sold 22,800 0 11,900 14,325 3,850 Deposits 446,583 348,546 297,737 220,224 182,572 Long-term debt and other borrowed money 0 8,300 0 0 1,000 Trust preferred securities 5,000 0 0 0 0 Stockholders' equity 26,668 20,378 20,445 18,318 13,275 INCOME STATEMENT DATA: Net interest income $ 17,477 $ 14,676 $ 11,276 $ 9,308 $ 7,851 Provision for loan losses 1,050 762 542 150 90 Noninterest income 5,362 4,558 4,061 2,740 1,700 Noninterest operating expenses 16,189 13,756 11,471 9,078 7,079 Income before income taxes 5,600 4,716 3,324 2,820 2,382 Net income 3,714 3,103 2,218 1,892 1,602 PER COMMON SHARE DATA: Net income: Basic $2.09 $1.76 $1.25 $1.15 $1.07 Diluted 1.96 1.64 1.15 1.04 1.01 Book value 14.65 11.20 11.30 10.12 8.53 SELECTED PERFORMANCE RATIOS: Return on average assets 0.88% 0.89% 0.80% 0.91% 0.94% Return on average stockholders' equity 16.59 15.18 11.50 11.86 12.77 Net interest margin 4.49 4.59 4.49 4.92 5.05 SELECTED LIQUIDITY AND CAPITAL RATIOS: Average loans to average deposits 65.12% 60.24% 60.26% 63.83% 69.29% Stockholders' equity to total year-end assets 5.55 5.38 6.40 7.64 6.70 Risk based capital: Tier 1 9.90 9.91 10.83 12.20 11.44 Total 11.04 11.12 12.02 13.36 13.29 Leverage ratio 6.92 6.28 6.50 7.85 7.10 ASSET QUALITY: Net charge-offs to average loans outstanding 0.06% 0.08% 0.01% 0.11% (0.05)% Non-performing loans to total year-end loans 0.29 0.32 0.16 0.43 0.37 Non-performing assets to total year-end assets 0.18 0.18 0.09 0.35 0.19 Allowance for loan losses to total year-end loans 1.29 1.31 1.34 1.26 1.62 Allowance for loan losses to non-performing loans 448.02 415.35 808.70 290.92 436.27
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 consolidated balance sheets and statements of income. This section should be read in conjunction with the Company's consolidated financial statements and accompanying notes. 2000 OVERVIEW In 2000, the Company continued its strong financial performance by posting record levels of total assets, deposits and loans. Total assets grew by $101 million, or 27%, to $480 million and total deposits increased $98 million, or 28%, to $447 million. Total loans also experienced strong growth of $74 million, or 34%, in 2000 from $221 million to $295 million. Net income was up 20% in 2000 to $3.7 million from $3.1 million for 1999 and total revenues increased by 19% to a record level of $22.8 million. Diluted net income per common share increased 20% to $1.96 from $1.64 per share in 1999 (after adjusting for a 5% common stock dividend declared in January 2001). In June, the Company opened a new branch at 1120 Carlisle Road, Camp Hill, Pennsylvania and another new branch in October in the Palmyra Shopping Center on Route 422 in Palmyra, Pennsylvania. This brings the Bank's total number of full-service branches to 13. The October opening was the introduction of the Bank into a new market in Lebanon County. During the fourth quarter of 2000, the Bank began construction of its fourteenth branch in East Pennsboro Township, Enola, Pennsylvania. Grand opening ceremonies were held on March 31, 2001. RESULTS OF OPERATIONS Average Balances and Average Interest Rates Table 1 on the following page sets forth balance sheet items on a daily average basis for the years ended December 31, 2000, 1999 and 1998 and presents the daily average interest rates earned on assets and the daily average interest rates paid on liabilities for such periods. During 2000, average interest earning assets were $389.5 million, an increase of $69.8 million, or 22%, over 1999. This was the result of an increase in the average balance of securities of $7.6 million and an increase in the average balance of loans receivable of $59.6 million. The growth was funded primarily by an increase in the average balance of deposits of $67.6 million. The growth in interest earning assets was also partly funded by an increase in long-term debt, reflecting the issuance of $5 million of Trust Capital Securities in June 2000. The yield on total interest earning assets increased by 46 basis points in 2000 to 8.16%. The increase resulted primarily from increased yields in the loan and investment portfolios due to the overall level and timing of changes in general market interest rates during 2000 as compared to 1999. The Federal Reserve Board (FRB) raised short-term market interest rates three times in the first half of 2000 for a total increase of 100 basis points (bps). This followed three 25 bp increases by the FRB in the second half of 1999. As a result, the company experienced higher yields on interest earning assets in 2000 over 1999 as well as a higher cost of funds in 2000 over the prior year. The aggregate cost of interest-bearing liabilities increased 62 basis points in 2000 to 4.43% from 3.81% in 1999. The average rate paid on savings deposits increased by 100 basis points, from 2.90% in 1999 to 3.90% in 2000 and the average rate paid on time deposits was 5.17%, up 13 basis points over 1999. The average rate paid on interest checking accounts increased from 3.76% in 1999 to 3.90% in 2000. The average rate paid on public funds time deposits increased by 143 basis points in 2000. The majority of the Company's public funds are deposits of the Commonwealth of Pennsylvania and local school districts and municipalities. These deposits are repriced at maturity based upon an average of rates paid for comparable time deposits by several financial institutions in the Central Pennsylvania market. The Company's aggregate cost of funding sources increased 56 basis points in 2000 to 3.67% over 3.11%. This is the result of an increase in the average rate paid on total interest bearing deposits as well as the issuance of long-term debt, which bears interest at a higher rate than the Company's deposits. 3 Management's Discussion and Analysis of Financial Condition and Results of Operations
TABLE 1 -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (dollars in thousands) 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate --------------------------------------------------------------------------------------------------------------------------------- Securities: Taxable $ 121,833 $ 8,025 6.59% $ 114,992 $ 7,405 6.44% $ 84,056 $ 5,593 6.65% Tax-exempt 795 44 5.51 0 0 0.00 150 7 4.61 --------------------------------------------------------------------------------------------------------------------------------- Total securities 122,628 8,069 6.58 114,992 7,405 6.44 84,206 5,600 6.65 Federal funds sold 11,707 760 6.49 9,129 447 4.83 12,420 658 5.23 Loans receivable: Mortgage and construction 178,937 15,852 8.86 136,325 11,685 8.57 110,033 9,836 8.94 Commercial loans and lines of credit 47,747 4,691 9.82 36,267 3,254 8.97 23,539 2,193 9.32 Consumer 26,640 2,293 8.61 22,629 1,806 7.98 20,755 1,709 8.23 Tax-exempt 1,833 109 5.94 365 20 5.52 415 23 5.52 --------------------------------------------------------------------------------------------------------------------------------- Total loans receivable 255,157 22,945 8.99 195,586 16,765 8.57 154,742 13,761 8.89 --------------------------------------------------------------------------------------------------------------------------------- Total earning assets $ 389,492 $ 31,774 8.16% $ 319,707 $ 24,617 7.70% $ 251,368 $20,019 7.96% --------------------------------------------------------------------------------------------------------------------------------- Sources of Funds Interest-bearing deposits: Regular savings $ 108,131 $ 4,219 3.90% $ 78,465 $ 2,272 2.90% $ 69,959 $ 2,378 3.40% Interest checking 8,696 339 3.90 9,779 368 3.76 27,842 750 2.69 Money market 71,764 2,288 3.19 49,855 1,111 2.23 11,081 249 2.25 Time deposits 104,983 5,422 5.17 107,928 5,444 5.04 89,452 4,880 5.46 Public funds time 25,833 1,688 6.54 14,105 721 5.11 8,835 486 5.49 --------------------------------------------------------------------------------------------------------------------------------- Total interest- bearing deposits 319,407 13,956 4.37 260,132 9,916 3.81 207,169 8,743 4.22 Short-term borrowings 696 41 5.91 460 25 5.35 0 0 0.00 Long-term debt 2,708 300 11.07 0 0 0.00 0 0 0.00 --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 322,811 14,297 4.43 260,592 9,941 3.81 207,169 8,743 4.22 Noninterest-bearing funds (net) 66,681 59,115 44,199 --------------------------------------------------------------------------------------------------------------------------------- Total sources to fund earning assets $389,492 14,297 3.67 $319,707 9,941 3.11 $ 251,368 8,743 3.48 --------------------------------------------------------------------------------------------------------------------------------- Net interest income and margin $ 17,477 4.49% $ 14,676 4.59% $ 11,276 4.49% --------------------------------------------------------------------------------------------------------------------------------- Other Balances Cash & due from banks $ 14,806 $ 12,740 $ 11,787 Other assets 18,734 16,122 14,746 Total assets 423,032 348,569 277,901 Noninterest-bearing demand deposits 72,413 64,082 49,636 Other liabilities 5,419 3,459 1,816 Stockholders' equity 22,389 20,436 19,280 --------------------------------------------------------------------------------------------------------------------------------- Notes: Nonaccrual loans have been included in the average loan balances. Securities include securities available for sale and securities held to maturity. Securities available for sale are carried at amortized cost for purposes of calculating the average rate received on taxable securities above. Yields on tax-exempt securities are not computed on a taxable equivalent basis.
4 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 and borrowed funds. Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs. Net interest income for 2000 increased $2.8 million, or 19%, over 1999 to $17.5 million. Interest income on earning assets totaled $31.8 million, an increase of $7.2 million, or 29%, over 1999. The majority of this increase was related to volume increases in the securities and loans receivable portfolios. Interest expense for 2000 increased by $4.4 million, or 44%, to $14.3 million from $9.9 million. 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 decreased from 3.89% in 1999 to 3.73% in 2000 and the net interest margin decreased 10 basis points from 4.59% to 4.49%. Table 2 demonstrates the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.
TABLE 2 --------------------------------------------------------------------------------------------------------------------------------- 2000 v. 1999 1999 v. 1998 Increase (Decrease) Increase (Decrease) Due to Changes in (1) Due to Changes in (1) (in thousands) Volume Rate Total Volume Rate Total --------------------------------------------------------------------------------------------------------------------------------- Interest on securities: Taxable $448 $172 $620 $1,988 $(176) $1,812 Tax-exempt 44 0 44 (7) 0 (7) Federal funds sold 161 152 313 (161) (50) (211) Interest on loans receivable: Mortgage and construction 3,772 395 4,167 2,256 (407) 1,849 Commercial 1,129 308 1,437 1,143 (82) 1,061 Consumer 344 143 487 149 (52) 97 Tax-exempt 87 2 89 (3) 0 (3) --------------------------------------------------------------------------------------------------------------------------------- Total interest income 5,985 1,172 7,157 5,365 (767) 4,598 --------------------------------------------------------------------------------------------------------------------------------- Interest expense: Regular savings 1,162 785 1,947 244 (350) (106) Interest checking (43) 14 (29) (680) 298 (382) Money market plus 698 479 1,177 864 (2) 862 Time deposits (162) 140 (22) 940 (376) 564 Public funds 765 202 967 269 (34) 235 Short-term borrowings 13 3 16 25 0 25 Long-term debt 300 0 300 0 0 0 --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 2,733 1,623 4,356 1,662 (464) 1,198 --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) $3,252 $(451) $2,801 $3,703 $(303) $3,400 --------------------------------------------------------------------------------------------------------------------------------- (1)Changes due to both volume and rate have been allocated to volume changes. 5
Management's Discussion and Analysis of Financial Condition and Results of Operations Noninterest Income Noninterest income for 2000 increased by $804,000, or 18%, over 1999 to $5.4 million. The increase was due primarily to increased "core" other operating income, which rose $1.0 million, or 25%, from 1999. This increase was attributable to service charges and fees associated with servicing a higher volume of deposit and loan accounts. Included in total noninterest income were gains of $370,000 in 2000 and $654,000 in 1999 on the sale of residential, student, and Small Business Administration loans. Also included in noninterest income were net securities gains of $0 for 2000 and $1,000 for 1999. Noninterest Expenses Noninterest expenses totaled $16.2 million for 2000, an increase of $2.4 million, or 18%, over 1999. Staffing levels, occupancy, furniture and equipment, and related expenses increased as a result of opening two full service branches in Summer and Fall 2000. A comparison of noninterest expense for certain categories for 2000 and 1999 is presented below. Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $1.3 million, or 21%, in 2000 over 1999. This increase was consistent with an increase in the level of full-time equivalent employees from 231 at December 31, 1999 to 266 at year-end 2000. The increased level of expenses includes the impact of salary and benefit costs associated with the additional staff for the two new branch offices opened in June and October 2000. Occupancy expenses totaled $1.8 million in 2000, an increase of $131,000, or 8%, over 1999 while furniture and equipment expenses increased by $155,000, or 17%, to $1.1 million. The impact of the two branch offices opened in 2000 contributed to the increases in occupancy and furniture and equipment expenses in 2000 over 1999. Increased equipment depreciation is another contributing factor to the increase in furniture and equipment expenses. The depreciation increase is a result of an upgrade of computer equipment for platform personnel at the Bank's other 11 branches. Advertising and marketing expenses were $1.5 million for 2000, an increase of $192,000, or 15%, over 1999. The increase was primarily the result of increased advertising efforts in each of the Company's markets. The Company entered into the Lebanon County market through the opening of the Palmyra Branch in October 2000. Going forward, the Company will continue to have multiple markets in which to advertise its products. Data processing expenses increased by $28,000, or 3%, in 2000 over 1999. The increase was due to costs associated with processing additional transactions as a result of growth in the number of accounts serviced offset by reduced data transmission and telephone costs. The reduced costs were the result of renegotiated contracts with telecommunications vendors. Postage and supplies expenses of $659,000 were $130,000, or 25%, higher than the prior year. The increase in postage expenses resulted from the growth in the number of account statements mailed to customers. The increase in supplies expense was a result of increased usage of such items related to additional staff levels as well as an increase in the number of accounts serviced. Audits, regulatory fees, and assessments for 2000 increased by $88,000, or 34%, from 1999. The primary reasons were the increase in the yearly assessment by the Office of the Comptroller of the Currency for examinations and the Federal Deposit Insurance Corporation. Both assessment calculations, which are based on deposit size, continue to increase as the Company's deposit balances grow. Other noninterest expenses totaled $2.4 million for 2000, compared to $2.0 million for 1999. The majority of this increase was due to increased provisions for non-credit related losses and increased expenses associated with the processing of coin for the Penny Arcade Coin counters, installed at our branches during 2000, offered at no charge to all customers and non-customers. The Company's current strategic plan calls for the construction of three additional new branches in 2001. The costs associated with these planned offices will continue to result in higher levels of staff, facilities, and related expenses in 2001 and in future periods. One key measure used to monitor progress in controlling overhead expenses is the ratio of net noninterest expenses to average assets. Net noninterest expenses equal noninterest expenses (excluding other real estate expenses) less noninterest income (exclusive of non-recurring gains). This ratio equaled 2.64% for 2000, compared to 2.75% for 1999. Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses (excluding other real estate expenses) to net interest income plus noninterest income (excluding non-recurring gains). For 2000, the operating efficiency ratio was 71.9%, compared to 73.0% for 1999. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations Provision for Federal Income Taxes The provision for federal income taxes was $1.9 million for 2000, compared to $1.6 million for 1999. The effective tax rate, which is the ratio of income tax expense to income before taxes, was 34% in 2000 and in 1999. Reference should be made to Note 11 of the Notes to Consolidated Financial Statements for an additional analysis of the provision for income taxes for 2000 and 1999. In accordance with Statement of Financial Accounting Standard No. 109 (SFAS No. 109), "Accounting for Income Taxes", income taxes are accounted for under the liability method. Under the liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement and tax bases of existing assets and liabilities. At December 31, 2000, deferred tax assets amounted to $1.6 million and deferred tax liabilities amounted to $315,000. Deferred tax assets are realizable primarily through carryback of existing deductible temporary differences to recover taxes paid in prior years, and through future reversal of existing taxable temporary differences. Net Income and Net Income Per Share Net income for 2000 rose to a record $3.7 million, an increase of $611,000, or 20%, over the $3.1 million recorded in 1999. This increase was due to an increase in net interest income of $2.8 million and an increase in noninterest income of $804,000, offset by an increase in the provision for loan losses of $288,000, an increase in noninterest expenses of $2.4 million, and an increase of $273,000 in the provision for income taxes. Basic earnings per common share, after adjusting for a 5% common stock dividend declared in January 2001, increased by 19% to $2.09 per share, compared to $1.76 in 1999. Diluted earnings per common share were $1.96 for 2000 and $1.64 for 1999 after adjusting for the 5% common stock dividend declared in January 2001. Reference should be made to Note 13 in the Notes to Consolidated Financial Statements for an analysis of earnings per share. 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 ROA for 2000 was 0.88%, compared to 0.89% in 1999. For purposes of calculating ROA, average assets have been adjusted to exclude the effect of net unrealized gains (losses) 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 gains (losses), net of income taxes, on securities available for sale. Reference should be made to Note 3 in the Notes to Consolidated Financial Statements for an analysis of securities available for sale. The Company's ROE for 2000 was 16.59%, compared to 15.18% for 1999. RESULTS OF OPERATIONS 1999 VERSUS 1998 Net income for 1999 was $3.1 million, an increase of $885,000, or 40%, over the $2.2 million recorded in 1998. Basic earnings per common share, after adjusting for a 5% common stock dividend declared in January 2001 and 2000, increased by 41% to $1.76 per share, compared to $1.25 per common share for 1998. Diluted earnings per common share were $1.64 for 1999 and $1.15 for 1998 after adjusting for the 5% common stock dividends declared in January 2001 and 2000. Net interest income for 1999 was $14.7 million, up $3.4 million, or 30%, over 1998. Interest income on earning assets totaled $24.6 million, an increase of $4.6 million, or 23%, over 1998. Interest expense for 1999 increased by $1.2 million, or 14%, to $9.9 million from $8.7 million. The Company's net interest rate spread increased to 3.89% in 1999 from 3.74% in 1998 and the net interest margin increased by 10 basis points from 4.49% to 4.59%. Noninterest income for 1999 increased by $476,000, or 12%, over 1998 to $4.5 million. Included in noninterest income for 1999 were gains of $654,000 compared to $500,000 in 1998. Also included in noninterest income were securities gains of $1,000 for 1999 and $386,000 for 1998. Noninterest expenses totaled $13.7 million for 1999, an increase of $2.3 million, or 20%, over 1998. The full-year impact of the two branch offices opened in 1998 contributed to the increases in noninterest expenses in 1999 over 1998. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Salary expenses and employee benefits increased by $1.1 million, or 22%, in 1999 over 1998. This increase was consistent with the increase in the level of full-time equivalent employees from 206 at December 31, 1998 to 231 at year-end 1999. Occupancy expenses totaled $1.7 million in 1999, an increase of $203,000, or 14%, over 1998, while furniture and equipment expenses increased by $90,000, or 11%, to $937,000. Advertising and marketing expenses were $1.3 million for 1999, an increase of $214,000, or 20%, over 1998. Data processing expenses increased by $164,000, or 21%, in 1999 over 1998. Postage and supplies expenses of $529,000 were $58,000, or 12%, higher than the prior year. Audits, regulatory fees, and assessments for 1999 increased by $60,000, or 30%, from 1998. Other noninterest expenses totaled $2.0 million for 1999, compared to $1.6 million for 1998. The increase was attributable to increased telephone expenses and loan expenses. FINANCIAL CONDITION Securities Securities are purchased and sold as part of the overall asset and liability management function at Pennsylvania Commerce Bancorp, Inc. The classification of all securities is determined at the time of purchase. Securities expected to be held for an indefinite period of time are classified as securities available for sale and are carried at fair value. Decisions by management to purchase or sell these securities are based on an assessment of financial and economic conditions, including changes in prepayment risks and interest rates, liquidity needs, capital adequacy, collateral requirements for pledging, alternative asset and liability management strategies, tax considerations, and regulatory requirements. Securities are classified as held to maturity if, at the time of purchase, management has both the intent and ability to hold the securities until maturity. Securities held to maturity are carried at amortized cost. Sales of securities in this portfolio should only occur in unusual and rare situations where significant unforeseeable changes in circumstances may cause a change in intent. Examples of such instances would include deterioration in the issuer's creditworthiness that is evidently supportable and significant or a change in tax law that eliminates or reduces the tax-exempt status of interest (but not the revision of marginal tax rates applicable to interest income). Held to maturity securities cannot be sold based upon any of the decisions used to sell securities available for sale as listed above. Reference should be made to Note 3 in the Notes to Consolidated Financial Statements for further analysis of the Company's securities portfolio. The Company's securities portfolio, which includes both the available for sale and held to maturity securities, consists primarily of U.S. Government agency and mortgage-backed obligations. These securities have very little, if any, credit risk because they are either backed by the full faith and credit of the U.S. Government or their principal and interest payments are guaranteed by an agency of the U.S. Government. These investment securities carry fixed rate coupons that do not change over the life of the securities. Since most securities are purchased at premiums or discounts, their yield and average life will change depending on any change in the estimated rate of prepayments. The Company amortizes premiums and accretes discounts over the estimated average life of the securities. Changes in the estimated average life of the securities portfolio will lengthen or shorten the period in which the premium or discount must be amortized or accreted, thus affecting the Company's securities yields. At December 31, 2000, the weighted average life of the Company's securities portfolio was 6.8 years compared to 5.4 years at December 31, 1999. The weighted average life of the portfolio is calculated by estimating the average rate of repayment of the underlying collateral of the security. U.S. Government mortgage-backed obligations historically experience repayment rates in excess of the scheduled repayments, causing a shorter weighted average life of the security. The Company's securities portfolio contained no "high-risk" securities or derivatives as of December 31, 2000 or 1999. Securities available for sale increased by $4.7 million in 2000 (excluding the effect of unrealized gains or losses) primarily as a result of purchases of $12.2 million, offset by principal repayments and maturities of $7.3. The securities available for sale portfolio is comprised of U.S. Treasury securities, U.S. Government Agency securities, mortgage-backed securities, 8 Management's Discussion and Analysis of Financial Condition and Results of Operations corporate debt securities, and equity securities. At December 31, 2000, the unrealized losses on securities available for sale included in stockholders' equity totaled $676,000, net of tax, compared to unrealized losses of $3.0 million, net of tax, at December 31, 1999. The weighted average maturity of the securities available for sale portfolio was 6.9 years at December 31, 2000, with a weighted average yield of 6.75%. During 2000, securities held to maturity increased by $4.8 million as a result of purchases of $7.4 million of mortgage-backed securities offset by principal repayments of $2.5 million. The securities held in this portfolio include U.S. Government Agency securities, and mortgage-backed securities. The weighted average maturity of the securities held to maturity portfolio was 6.5 years at December 31, 2000, with a weighted average yield of 6.57%. The contractual maturity distribution and weighted average yield of the Company's available for sale and held to maturity portfolios at December 31, 2000 are summarized in Table 3. Weighted average yield is calculated by dividing income within each maturity range by the outstanding amount of the related investment and has not been tax effected on tax-exempt obligations.
TABLE 3 ============================================================================================================================== December 31, 2000 Due Under 1 Year Due 1-5 Years Due 5-10 Years Due Over 10 Years Total ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield ------------------------------------------------------------------------------------------------------------------------------ Available for Sale U.S. Government: Treasury securities $ 1,000 5.83% $ 1,005 6.13% $ 2,005 5.98% Agency obligations 6,002 6.64 $ 10,991 7.09% $ 14,000 6.75% 30,993 6.85 Agency mortgage- backed obligations 284 6.17 6,560 6.91 48,692 6.64 55,536 6.67 Corporate debt securities 3,123 7.76 3,123 7.76 Equity securities 2,288 6.73 2,288 6.73 ------------------------------------------------------------------------------------------------------------------------------ Total available for sale $ 1,000 5.83% $ 7,291 6.53% $ 17,551 7.02% $ 68,103 6.72% $93,945 6.75% ============================================================================================================================== Held to Maturity U.S. Government: Agency obligations $ 3,998 6.11% $ 2,484 6.61% $ 1,960 6.86% $ 8,442 6.42% Municipal obligations 1,000 5.55 1,000 5.55 Agency mortgage- backed obligations 1,404 5.80 7,751 6.78 15,215 6.68 24,370 6.66 ------------------------------------------------------------------------------------------------------------------------------ Total held to maturity $ 0 0.00% $ 5,402 6.01% $ 10,235 6.74% $ 18,175 6.64% $33,812 6.57% ============================================================================================================================== Note: Securities available for sale are carried at amortized cost in the table above for purposes of calculating the weighted average yield received on such securities. 9
Management's Discussion and Analysis of Financial Condition and Results of Operations Loan Portfolio The following table summarizes the composition of the loan portfolio of the Company by type as of December 31, for each of the years 1996 through 2000.
TABLE 4 ================================================================================================================================= December 31, (in thousands) 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------------------------------- Commercial real estate, construction and land development loans $ 158,707 $ 120,008 $ 81,949 $ 76,339 $ 63,872 Residential real estate mortgage loans 41,314 34,681 31,694 21,414 13,060 Tax-exempt loans 2,786 342 395 442 784 Commercial, industrial and other business loans 31,490 21,228 19,614 9,231 7,642 Consumer loans 30,691 22,764 20,868 17,839 9,768 Lines of credit 25,264 17,082 12,601 9,194 8,613 -------------------------------------------------------------------------------------------------------------------------------- Total loans $ 290,252 $ 216,105 $ 167,121 $ 134,459 $ 103,739 =================================================================================================================================
The Company manages risk associated with its loan portfolio through diversification, underwriting policies and procedures that are reviewed and updated on at least an annual basis, and ongoing loan monitoring efforts. The commercial real estate portfolio includes owner-occupied (owner occupies greater than 50% of the property), other commercial real estate and construction loans. Owner-occupied and other commercial real estate loans generally have five-year call provisions. Construction loans are primarily used for residential single family properties. Financing is provided against firm agreements of sale, with speculative construction normally limited to one or two samples per project. The commercial loan portfolio is comprised primarily of amortizing loans to small businesses in the Southern Central Pennsylvania market area. Business assets, personal guarantees, and/or personal assets of the borrower generally secure these loans. The consumer loan portfolio is comprised primarily of student loans and loans secured by first and second mortgage liens on residential real estate. The Company's loan portfolio is generally nonhomogeneous in that the loans have different interest rates, repayment options, maturities, collateral requirements, etc. During 2000, total loans increased by $74.2 million from $221.4 million at December 31, 1999, to $295.6 million at December 31, 2000, including $5.3 million of loans held for sale on December 31, 2000 and December 31, 1999. The loans held for sale represent student loans that Company's management intends to sell and reinvest in higher yielding loans and securities. The increase in loans receivable in 2000 was primarily in commercial real estate, lines of credit and real estate construction and land development. Loans receivable represented 65% of total deposits and 60% of total assets at December 31, 2000, excluding the loans held for sale, compared to 62% and 57%, respectively, at December 31, 1999. The maturity ranges of the loan portfolio and the amounts of loans with predetermined interest rates and floating interest rates in each maturity range, as of December 31, 2000, are presented in the following table. TABLE 5 ================================================================================ December 31, 2000 Due Under Due 1-5 Due Over (in thousands) One Year Years Five Years Total -------------------------------------------------------------------------------- Real estate: Commercial mortgage $ 13,803 $ 32,663 $ 81,462 $ 127,928 Construction and land development 15,709 9,639 5,431 30,779 Residential mortgage 1,473 7,121 32,720 41,314 Tax-exempt 241 1,754 791 2,786 -------------------------------------------------------------------------------- 31,226 51,177 120,404 202,807 Commercial 8,284 17,780 5,426 31,490 Consumer 13,757 12,201 4,733 30,691 Lines of credit 25,264 0 0 25,264 -------------------------------------------------------------------------------- Total loans $ 78,531 $ 81,158 $ 130,563 $ 290,252 -------------------------------------------------------------------------------- Interest rates: Predetermined $ 29,880 $ 64,829 $ 121,138 $ 215,847 Floating 48,651 16,329 9,425 74,405 -------------------------------------------------------------------------------- Total loans $ 78,531 $ 81,158 $ 130,563 $ 290,252 ================================================================================ Concentrations of Credit Risk The largest portion of loans, 55%, on the Company's balance sheet is for commercial real estate related loans. The Company's commercial real estate loan portfolio is principally to borrowers throughout Cumberland, Dauphin, Lebanon, and York counties of Pennsylvania where it has full-service branch locations. Commercial real estate, construction, and land development loans aggregated $158.7 million at December 31, 2000, compared to $120.0 million at December 31, 1999. Commercial real estate loans are collateralized by the related project (principally office building, multi-family residential, land development, and other properties) and the Company generally requires loan-to-value ratios of no greater than 80%. Collateral requirements on such loans are determined on a case-by-case basis based on managements' credit evaluations of the respective borrowers. 10 Management's Discussion and Analysis of Financial Condition and Results of Operations Loan and Asset Quality Total non-performing assets (non-performing loans and other real estate) at December 31, 2000, were $875,000, or 0.18%, of total assets as compared to $716,000, or 0.18%, of total assets at December 31, 1999. Other real estate owned totaled $42,000 as of December 31, 2000, and $12,000 as of December 31, 1999. The Company's loan portfolio has continued to perform extremely well over the past few years. Total delinquent loans (those loans 30 days or more delinquent) as a percentage of total loans were 0.31% at December 31, 2000, compared to 0.38% at December 31, 1999. The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more, unless the loan is both well-secured and in the process of collection. Allowance for Loan Losses The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. Management has established an allowance for loan losses that they believe is adequate for estimated losses in the current loan portfolio. Based on an evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to the Board of Directors, indicating any changes in the allowance since the last review and any recommendations as to adjustments in the allowance. In making the evaluation, management considers the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of loans charged-off for the period, the amount of non-performing loans and related collateral security, and the evaluation of the loan portfolio by external loan review. These factors led to decisions in all periods presented to provide amounts greater than net charge-offs. Charge-offs occur when loans are deemed to be uncollectible. The Company recorded provisions of $1.0 million to the allowance for loan losses for 2000 compared to $762,000 for 1999. During 2000, net charge-offs amounted to $159,000, or 0.06%, of average loans outstanding for the year, compared to $153,000, or 0.08%, of average loans outstanding for 1999. The allowance for loan losses decreased as a percentage of loans receivable from 1.31% of total loans outstanding at December 31, 1999, to 1.29% of total loans outstanding. The following table summarizes information regarding non-performing loans and non-performing assets as of December 31, 1996 through 2000.
TABLE 6 =================================================================================== December 31, (dollars in thousands) 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------- Nonaccrual loans: Commercial $300 $119 $227 $ 53 $ 78 Consumer 162 244 23 3 59 Real estate: Construction 0 0 0 0 0 Mortgage 371 321 25 528 249 ----------------------------------------------------------------------------------- Total nonaccrual loans 833 684 275 584 386 Loans past due 90 days or more 0 20 1 0 0 Restructured loans 0 0 0 0 0 ----------------------------------------------------------------------------------- Total non-performing loans 833 704 276 584 386 Other real estate 42 12 11 264 0 ----------------------------------------------------------------------------------- Total non-performing assets $875 $716 $287 $848 $386 ----------------------------------------------------------------------------------- Non-performing loans to total loans 0.29% 0.32% 0.16% 0.43% 0.37% Non-performing assets to total assets 0.18% 0.18% 0.09% 0.35% 0.19% ----------------------------------------------------------------------------------- Interest income received on nonaccrual loans $ 52 $ 38 $ 5 $ 37 $ 29 ----------------------------------------------------------------------------------- Interest income that would have been recorded under the original terms of the loans $ 96 $ 66 $ 22 $ 53 $ 41 ===================================================================================
The table below sets forth information regarding the Company's provision and allowance for loan losses.
TABLE 7 ============================================================================================================= Year Ended December 31, (dollars in thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 2,841 $ 2,232 $ 1,699 $ 1,684 $ 1,544 ------------------------------------------------------------------------------------------------------------- Provisions charged to operating expenses 1,050 762 542 150 90 ------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged-off: Commercial 6 8 4 5 62 Consumer 8 4 3 1 3 Real estate 0 1 0 1 0 ------------------------------------------------------------------------------------------------------------- Total recoveries 14 13 7 7 65 ------------------------------------------------------------------------------------------------------------- Loans charged-off: Commercial 1 150 2 51 2 Consumer 95 10 14 84 13 Real estate 77 6 0 7 0 ------------------------------------------------------------------------------------------------------------- Total charged-off 173 166 16 142 15 ------------------------------------------------------------------------------------------------------------- Net charge-offs (recoveries) 159 153 9 135 (50) ------------------------------------------------------------------------------------------------------------- Balance at end of year $ 3,732 $ 2,841 $ 2,232 $ 1,699 $ 1,684 ------------------------------------------------------------------------------------------------------------- Net charge-offs (recoveries) to average loans outstanding 0.06% 0.08% 0.01% 0.11% (0.05)% Allowance for loan losses to year-end loans 1.29% 1.31% 1.34% 1.26% 1.62% ============================================================================================================= 11
Management's Discussion and Analysis of Financial Condition and Results of Operations Allocation of the Allowance for Loan Losses The following table details the allocation of the allowance for loan losses to the various categories. The allocation is made for analytical purposes and it is not necessarily indicative of the categories in which future credit losses may occur. The total allowance is available to absorb losses from any segment of loans.
TABLE 8 =============================================================================================================================== Allowance for Loan Losses at December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------- % Gross % Gross % Gross % Gross % Gross (dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------------------------------------------------------------------------------------------------------------------------------- Commercial loans and lines of credit $ 178 19.20% $ 155 17.73% $ 400 19.28% $ 233 13.70% $ 274 15.67% Consumer 143 10.57 224 10.53 150 12.49 225 13.27 180 9.42 Real estate, construction and land development: Commercial 3,286 54.61 2,335 55.69 1,582 49.27 970 57.10 1,105 62.32 Residential 125 15.62 127 16.05 100 18.96 271 15.93 125 12.59 ------------------------------------------------------------------------------------------------------------------------------- Total $ 3,732 100.00% $2,841 100.00% $ 2,232 100.00% $ 1,699 100.00% $ 1,684 100.00% ===============================================================================================================================
Deposits Total deposits averaged $391.8 million for 2000, an increase of $67.6 million, or 21%, over the 1999 average of $324.2 million. The average balance on noninterest-bearing demand deposits increased in 2000 by $8.3 million, or 13%, compared to the prior year. The average total balance of all savings account products was $108.1 million, a $29.7 million, or 38%, increase over the average balance for 1999. The average balance of interest-bearing demand accounts (money market and interest checking accounts) for 2000 increased by $20.8 million, or 35%, over the average balance for the prior year. The average balance of all time deposits in 2000 was $130.8 million, an increase of $8.8 million, or 7%, over the average balance for 1999. The Company believes that its record of sustaining core deposit growth is reflective of the Company's retail approach to banking which emphasizes a combination of free checking accounts, convenient branch locations, extended hours of operation, quality service, and active marketing. Core deposits, which consist of all deposits other than public certificates of deposits, increased $87.8 million, or 26%, in 2000 over 1999. The remaining maturity for certificates of deposit of $100,000 or more as of December 31, 2000 is presented in Table 9. TABLE 9 ------------------------------------------------------------------- (in thousands) 2000 ------------------------------------------------------------------- 3 months or less $ 41,554 3 to 6 months 4,771 6 to 12 months 7,541 Over 12 months 13,515 ------------------------------------------------------------------- Total $ 67,381 ------------------------------------------------------------------- Total deposits at December 31, 2000, were $446.6 million, up $98.0 million, or 28%, over total deposits of $348.5 million at December 31, 1999. The average balances and weighted average rates paid on deposits for 2000, 1999 and 1998 are presented in Table 10. 12 Management's Discussion and Analysis of Financial Condition and Results of Operations
TABLE 10 ----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 Average 1999 Average 1998 Average (dollars in thousands) Balance/Rate Balance/Rate Balance/Rate ----------------------------------------------------------------------------------------------------------------------------- Demand deposits: Noninterest-bearing $ 72,413 $ 64,082 $ 49,636 Interest-bearing (money market and checking) 80,460 3.26% 59,634 2.48% 38,923 2.57% Savings 108,131 3.90 78,465 2.90 69,959 3.40 Time 130,816 5.44 122,033 5.05 98,287 5.46 ----------------------------------------------------------------------------------------------------------------------------- Total deposits $ 391,820 $ 324,214 $ 256,805 -----------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates. The Company's risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Company's asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies. The guidelines established by ALCO are reviewed by the Company's Board of Directors. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. Historically, the most common method of estimating interest rate risk was to measure the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time ("GAP"), typically one year. Under this method, a company is considered liability sensitive when the amount of its interest-bearing liabilities exceeds the amount of its interest-earning assets within the one year horizon. However, assets and liabilities with similar repricing characteristics may not reprice at the same time or to the same degree. As a result, the Company's GAP does not necessarily predict the impact of changes in general levels of interest rates on net interest income. Table 11 shows the GAP position for the Company as of December 31, 2000.
TABLE 11 ------------------------------------------------------------------------------------------------------------------------------- December 31, 2000 1 - 90 91 - 180 181 - 365 1 - 5 Beyond 5 (in thousands) Days Days Days Years Years Total ------------------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans receivable $ 85,331 $ 5,954 $ 8,855 $ 65,106 $ 125,284 $ 290,530 Securities 3,436 3,436 7,872 55,057 55,010 124,811 Federal funds sold 22,800 0 0 0 0 22,800 ------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 111,567 9,390 16,727 120,163 180,294 438,141 ------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Transaction accounts 48,275 13,739 27,478 83,442 37,642 210,576 Trust Preferred securities 0 0 0 0 5,000 5,000 Time deposits 55,783 12,049 21,595 61,003 0 150,430 ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 104,058 25,788 49,073 144,445 42,642 366,006 ------------------------------------------------------------------------------------------------------------------------------- Period GAP 7,509 (16,398) (32,346) (24,282) 137,652 $ 72,135 ------------------------------------------------------------------------------------------------------------------------------- Cumulative GAP $ 7,509 $ (8,889) $ (41,235) $ (65,517) $ 72,135 ------------------------------------------------------------------------------------------------------------------------------- 13
Management's Discussion and Analysis of Financial Condition and Results of Operations 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 interest income over the next 24 months in a flat rate scenario versus net income in alternative interest rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Company's model projects a proportionate 200 basis point change during the next year, with rates remaining constant in the second year. The Company's Asset/Liability Committee (ALCO) policy has established that income sensitivity will be considered acceptable if overall net income volatility in a plus or minus 200 basis point scenario is within 15% of net income in a flat rate scenario in the first year and 30% using a two year planning window. At December 31, 2000, the Company's income simulation model indicates net income would increase 1.7% and 3.7% in the first year and over a two year time frame, respectively, if rates decreased as described above, as compared to an increase of 3.9% and 3.7%, respectively, at December 31, 1999. The model projects that net income would decrease by 0.4% and increase by 0.3% in the first year and over a two year time frame, respectively, if rates increased as described above, as compared to a decrease of 8.6% and 9.5%, respectively, at December 31, 1999. All of these forecasts are within an acceptable level of interest rate risk per the policies established by ALCO. Management also monitors interest rate risk by utilizing a market value of equity model. The model assesses the impact of a change in interest rates on the market value of all the Company's assets and liabilities, as well as any off balance sheet items. The model calculates the market value of the Company's assets and liabilities in excess of book value in the current rate scenario, and then compares the excess of market value over book value given an immediate 200 basis point change in rates. The Company's ALCO policy indicates that the level of interest rate risk is unacceptable if the immediate 200 basis point change would result in the loss of 60% or more of the excess of market value over book value in the current rate scenario. At December 31, 2000, the market value of equity indicates an acceptable level of interest rate risk. Liquidity Liquidity management involves the Company's 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 sources from asset categories are provided primarily by cash, 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. As previously mentioned, total core deposits increased by $87.8 million, or 26%, in 2000. Additionally, the Company has established secondary sources of liquidity consisting of federal funds lines of credit, repurchase agreements, and borrowing capacity at the Federal Home Loan Bank which can be drawn upon if needed. As of December 31, 2000, the total potential liquidity for the Company through these secondary sources was $130 million. In view of the primary and secondary sources as previously mentioned, management believes the Company is capable of meeting its anticipated liquidity needs. Short-Term Borrowings Short-term borrowings, or other borrowed money, which consists of securities sold under agreement to repurchase and federal funds purchased, were used occasionally in 2000 and 1999 to meet short-term liquidity needs. For 2000, other borrowed money averaged $696,000 as compared to $460,000 in 1999. The average rate paid on the Company's short-term borrowings was 5.91% during 2000 and 5.35% in 1999. At December 31, 2000, short-term borrowings totaled $0 and $8.3 million at December 31, 1999. During 1999, these funds were used to purchase additional cash to have on hand throughout the branch network as preparation for possible customer demands for large sums of cash close to year-end related to Year 2000 (Y2K) fears. Subsequent to year-end, cash on hand was reduced to normal levels and the borrowed funds were repaid. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations Stockholders' Equity and Capital Adequacy At December 31, 2000, stockholders' equity totaled $26.7 million, up 31% over stockholders' equity at December 31, 1999. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", requires that unrealized gains or losses, net of the tax effect, on securities classified available for sale be reflected as a separate component of stockholders' equity. As a result, stockholders' equity at December 31, 2000 included $676,000 unrealized losses, net of income taxes, on securities available for sale. Excluding these unrealized losses, gross stockholders' equity increased by $3.9 million, or 17%, from $23.4 million at December 31, 1999, to $27.3 million at December 31, 2000, principally as a result of retained net income. 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. Table 12 provides a comparison of the Company's risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated. At December 31, 2000, the consolidated capital levels of the Company and of the subsidiary bank (Commerce) met the definition of a "well capitalized" institution, i.e., a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital ratio exceeding 10%.
TABLE 12 ----------------------------------------------------------------------------------------------------------------------------- To Be Well- Prompt Corrective Actual December 31, For Capital Capitalized Under 2000 1999 Adequacy Purposes Action Provisions ----------------------------------------------------------------------------------------------------------------------------- Total Capital 11.04% 11.12% 8.00% 10.00% Tier 1 Capital 9.90 9.91 4.00 6.00 Leverage ratio (to average assets) 6.92 6.28 4.00 5.00 -----------------------------------------------------------------------------------------------------------------------------
The Company offers a Dividend Reinvestment and Stock Purchase Plan by which dividends on the Company's Common Stock and optional cash payments of up to $5,000 per quarter (subject to change) may be invested in Common Stock at a 3% discount (subject to change) to the market price and without payment of brokerage commissions. Year 2000 The Company is not aware of any problems resulting from Year 2000 issues, either with its internal systems or the products and services of third parties (including loan and deposit customers). The total cost of the entire Year 2000 compliance process, including internal and external personnel and any required hardware or software modifications was approximately $100,000. Forward-Looking Statements The Company may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report and Form 10-K and the exhibits hereto and thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Company's control). The words "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company's financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies 15 Management's Discussion and Analysis of Financial Condition and Results of Operations in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB"); 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 for the Company's 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. Impact of Inflation and Changing Prices Interest rates have a more significant impact on the Company's performance than do the effects of general levels of inflation, since most of the Company's assets and liabilities are monetary in nature. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services as measured by the Consumer Price Index. The liquidity and maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels. 16
Consolidated Balance Sheets December 31, (in thousands, except share amounts) 2000 1999 ASSETS Cash and due from banks $ 16,849 $ 27,490 Federal funds sold 22,800 0 ----------- ----------- Cash and cash equivalents 39,649 27,490 Securities, available for sale at fair value 92,921 84,652 Securities, held to maturity at cost (fair value 2000: $33,661; 1999: $27,877 ) 33,812 29,039 Loans, held for sale (fair value 2000: $5,409; 1999: $5,380) 5,329 5,301 Loans receivable: Real estate: Commercial mortgage 127,931 101,550 Construction and land development 30,776 18,458 Residential mortgage 41,314 34,681 Tax-exempt 2,786 342 Commercial business 31,490 21,228 Consumer 30,691 22,764 Lines of credit 25,264 17,082 ----------- ----------- 290,252 216,105 Less: Allowance for loan losses 3,732 2,841 ----------- ----------- Net loans receivable 286,520 213,264 Premises and equipment, net 16,637 14,408 Accrued interest receivable 2,936 2,105 Other assets 2,282 2,654 ------------- ----------- Total assets $ 480,086 $ 378,913 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 85,577 $ 69,495 Interest-bearing 361,006 279,051 ----------- ----------- Total deposits 446,583 348,546 Accrued interest payable 834 567 Other liabilities 1,001 1,122 Long-term debt 5,000 0 Other borrowed money 0 8,300 ----------- ----------- Total liabilities 453,418 358,535 Stockholders' Equity: Preferred stock - Series A noncumulative; $10.00 par value; 1,000,000 shares authorized; 40,000 shares issued and outstanding 400 400 Common stock - $1.00 par value; 10,000,000 shares authorized; (issued and outstanding 2000: 1,749,045; 1999: 1,644,313) 1,749 1,644 Surplus 20,861 18,196 Retained earnings 4,334 3,137 Accumulated other comprehensive income (loss) (676) (2,999) ------------ ------------ Total stockholders' equity 26,668 20,378 ----------- ----------- Total liabilities and stockholders' equity $ 480,086 $ 378,913 =========== =========== 17
See accompanying notes Consolidated Statements of Income
Year Ended December 31, (in thousands, except per share amounts) 2000 1999 1998 INTEREST INCOME Loans receivable, including fees: Taxable $ 22,836 $ 16,745 $ 13,738 Tax-exempt 109 20 23 Securities: Taxable 8,025 7,405 5,593 Tax-exempt 44 0 7 Federal funds sold 760 447 658 ----------- ----------- ----------- Total interest income 31,774 24,617 20,019 INTEREST EXPENSE Deposits 13,956 9,916 8,743 Other 341 25 0 ----------- ----------- ----------- Total interest expense 14,297 9,941 8,743 ----------- ----------- ----------- Net interest income 17,477 14,676 11,276 Provision for loan losses 1,050 762 542 ----------- ----------- ----------- Net interest income after provision for loan losses 16,427 13,914 10,734 NONINTEREST INCOME Service charges and other fees 4,564 3,538 2,897 Other 428 365 278 Gain on sale of securities available for sale 0 1 386 Gain on sale of loans 370 654 500 ----------- ----------- ----------- Total noninterest income 5,362 4,558 4,061 NONINTEREST EXPENSES Salaries and employee benefits 7,485 6,180 5,048 Occupancy 1,782 1,651 1,448 Furniture and equipment 1,092 937 847 Advertising and marketing 1,451 1,259 1,045 Data processing 964 936 772 Postage and supplies 659 529 471 Audits, regulatory fees and assessments 348 260 200 Other 2,408 2,004 1,640 ----------- ----------- ----------- Total noninterest expenses 16,189 13,756 11,471 ----------- ----------- ----------- Income before income taxes 5,600 4,716 3,324 Provision for federal income taxes 1,886 1,613 1,106 ----------- ----------- ----------- Net income $ 3,714 $ 3,103 $ 2,218 =========== =========== =========== NET INCOME PER COMMON SHARE Basic $2.09 $1.76 $1.25 Diluted 1.96 1.64 1.15 See accompanying notes 18
Consolidated Statements of Stockholders' Equity Accumulated Other Preferred Common Retained Comprehensive ( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total -------------------------------------------------------------------------------------------------------------------------------- December 31, 1997 $ 400 $ 1,475 $ 14,407 $ 1,708 $ 328 $ 18,318 Comprehensive income: Net income - - - 2,218 - 2,218 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - (114) (114) ------------ Total comprehensive income 2,104 Dividends declared on preferred stock - - - (80) - (80) Common stock issued under stock option plans - 8 38 - - 46 Income tax benefit of stock options exercised - - 64 - - 64 5% common stock dividend and cash paid in lieu of fractional shares - 74 2,219 (2,300) - (7) ----------- ----------- ----------- ------------ ----------- ------------ December 31, 1998 400 1,557 16,728 1,546 214 20,445 Comprehensive income: Net income - - - 3,103 - 3,103 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - (3,213) (3,213) ------------ Total comprehensive income (loss) (110) Dividends declared on preferred stock - - - (80) - (80) Common stock issued under stock option plans - 6 61 - - 67 Income tax benefit of stock options exercised - - 8 - - 8 Common stock issued under employee stock purchase plan - 1 19 - - 20 Common stock issued under dividend reinvestment and stock purchase plan - 2 29 - - 31 5% common stock dividend and cash paid in lieu of fractional shares - 78 1,351 (1,432) - (3) ----------- ----------- ----------- ------------ ----------- ------------ December 31, 1999 400 1,644 18,196 3,137 (2,999) 20,378 Comprehensive income: Net income - - - 3,714 - 3,714 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - 2,323 2,323 ----------- Total comprehensive income (loss) 6,037 Dividends declared on preferred stock - - - (80) - (80) Common stock issued under stock option plans - 13 71 - - 84 Income tax benefit of stock options exercised - - 30 - - 30 Common stock issued under employee stock purchase plan - - 6 - - 6 Common stock issued under dividend reinvestment and stock purchase plan - 9 210 - - 219 5% common stock dividend and cash paid in lieu of fractional shares - 83 2,348 (2,437) - (6) ----------- ----------- ----------- ------------ ----------- ------------ December 31, 2000 $ 400 $ 1,749 $ 20,861 $ 4,334 $ (676) $ 26,668 =========== =========== =========== =========== ============ =========== See accompanying notes. 19
Consolidated Statements of Cash Flows Year Ended December 31, ( in thousands ) 2000 1999 1998 OPERATING ACTIVITIES Net income $ 3,714 $ 3,103 $ 2,218 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,050 762 542 Provision for depreciation and amortization 1,202 1,119 1,040 Deferred income taxes (281) (185) (183) Amortization of securities premiums and accretion of discounts, net 193 311 225 Net gain on sale of securities available for sale 0 (1) (386) Proceeds from sales of loans 19,813 38,913 59,425 Loans originated for sale (19,705) (38,339) (57,750) Gains on sales of loans and other real estate owned (370) (654) (522) Stock granted under stock purchase plan 6 20 0 Increase in accrued interest receivable and other assets (1,345) 106 (362) (Decrease) increase in accrued interest payable and other liabilities 143 548 (83) ----------- ----------- ------------ Net cash provided by operating activities 4,420 5,703 4,164 INVESTING ACTIVITIES Securities held to maturity: Proceeds from principal repayments and maturities 2,608 2,517 4,703 Purchases (7,398) (20,105) (3,998) Securities available for sale: Proceeds from principal repayments and maturities 7,343 14,484 19,306 Proceeds from sales 0 5,357 22,141 Purchases (12,268) (12,638) (89,900) Proceeds from sale of loans receivable 6,449 9,847 0 Net increase in loans receivable (80,521) (58,563) (32,648) Proceeds from sale of premises and equipment 743 0 0 Purchases of premises and equipment (4,174) (2,107) (3,151) ------------ ------------ ------------ Net cash used by investing activities (87,218) (61,208) (83,547) FINANCING ACTIVITIES Net increase in demand, interest checking, money market, and savings deposits 68,145 41,681 39,213 Net increase in time deposits 29,892 9,128 38,300 Net increase (decrease) in other borrowed money (8,300) 8,300 0 Proceeds from Issuance of Trust preferred securities 5,000 0 0 Proceeds from common stock options exercised 84 67 46 Proceeds from common stock purchase and dividend reinvestment plan 219 31 0 Cash dividends on preferred stock and cash in lieu of fractional shares (83) (87) (85) ------------ ------------ ------------ Net cash provided by financing activities 94,957 59,120 77,474 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 12,159 3,615 (1,909) Cash and cash equivalents at beginning of year 27,490 23,875 25,784 ----------- ----------- ----------- Cash and cash equivalents at year-end $ 39,649 $ 27,490 $ 23,875 =========== =========== =========== See accompanying notes.
20 Notes to Consolidated Financial Statements December 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and 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. (Commerce or Bank). All material intercompany transactions have been eliminated. The Holding Company was formed July 1, 1999 and is subject to regulation of the Federal Reserve Bank. The company is a one-bank holding company headquartered in Camp Hill, Pennsylvania and provides full banking services through its subsidiary Commerce Bank. Commerce operates under a national bank charter and provides full banking services. As a national bank, the Bank is subject to regulation of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The area served by the Bank is principally South Central Pennsylvania. Estimates The financial statements are prepared in conformity with generally accepted accounting principles. These principles require management to make estimates and assumptions that affect reported amounts of assets and liabilities and require disclosure of contingent assets and liabilities. In the opinion of management, all adjustments considered necessary for fair presentation have been included and are of a normal, recurring nature. Actual results could differ from those estimates. Securities Securities classified as held to maturity are those debt securities that the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over the estimated average life of the securities. Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the estimated average life of the securities. Equity securities are comprised of stock in the Federal Reserve Bank and the Federal Home Loan Bank. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Loans Receivable Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Bank is generally amortizing these amounts over the contractual life of the loan. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Allowance for Loan Losses The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. 21 Notes to Consolidated Financial Statements The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. Loans Held for Sale Loans held for sale are largely comprised of student loans that the Company originates with the intention of selling in the future. These loans are carried at the lower of cost or estimated fair value. Advertising Costs The Company follows the policy of charging the costs of advertising to expense as incurred. Income Taxes Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance, when in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment. Bank Premises and Equipment Bank premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is charged to operations over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Depreciation and amortization are determined on the straight-line method. Per Share Data Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. Per share amounts have been adjusted to give retroactive effect to stock dividends declared through January 19, 2001. Off Balance Sheet Financial Instruments In the ordinary course of business, the Company has entered into off balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded on the balance sheet when they become payable by the borrower to the Company. Cash Flow Information For purposes of the statements of cash flows, the Company considers cash and due from banks and federal funds sold as cash and cash equivalents. Generally, federal funds are purchased and sold for one-day periods. Cash paid during the years ended December 31, 2000, 1999, and 1998 for interest was $14.0 million, 22 Notes to Consolidated Financial Statements $9.9 million, and $8.7 million respectively. Income taxes paid totaled $2.15 million, $1.70 million, and $1.15 million in 2000, 1999, and 1998, respectively. Recently Issued FASB Statements In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (as amended by Statement Nos. 137 and 138), "Accounting for Derivative Instruments and Hedging Activities". This statement and its amendments establish accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and require that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. The Statement requires that changes in the fair value of derivatives be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. The Company adopted the Statement on January 1, 2001. The adoption of the statement did not have a significant impact on the financial condition or results of operations of the Company. In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement replaces SFAS No. 125 of the same name. It revises the standards of securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This Statement is to be applied prospectively with certain exceptions. Other than these exceptions, earlier or retroactive application of its accounting provision is not permitted. The adoption of the Statement is not expected to have a significant impact on the Company. Segment Reporting Commerce acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business and government customers. Through its branches, the Company offers a full array of commercial and retail financial services. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful. Reclassifications Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform with the 2000 presentation format. Such reclassifications had no impact on the Company's net income. 2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances maintained for 2000 and 1999 was approximately $909,000 and $1.2 million, respectively. 23 Notes to Consolidated Financial Statements 3. SECURITIES The amortized cost and fair value of securities are summarized in the following tables.
=============================================================================================================================== December 31, 2000 ------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------------- Available for Sale U.S. Treasury securities $ 2,005 $ 14 $ 0 $ 2,019 U.S. Government Agency securities 30,993 73 (500) 30,566 Mortgage-backed securities 55,536 45 (669) 54,912 Corporate debt securities 3,123 13 0 3,136 ------------------------------------------------------------------------------------------------------------------------------- Subtotal 91,657 145 (1,169) 90,633 Equity securities 2,288 0 0 2,288 ------------------------------------------------------------------------------------------------------------------------------- Total $ 93,945 $ 145 $ (1,169) $ 92,921 ------------------------------------------------------------------------------------------------------------------------------- Held to Maturity U.S. Government Agency securities $ 8,442 $ 23 $ (44) $ 8,421 Municipal securities 1,000 10 0 1,010 Mortgage-backed securities 24,370 76 (216) 24,230 ------------------------------------------------------------------------------------------------------------------------------- Total $ 33,812 $ 109 $ (260) $ 33,661 =============================================================================================================================== December 31, 1999 ------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------------- Available for Sale U.S. Treasury securities $ 2,005 $ 0 $ (10) $ 1,995 U.S. Government Agency securities 23,999 0 (1,575) 22,424 Mortgage-backed securities 57,908 1 (2,697) 55,212 Corporate debt securities 3,154 0 (263) 2,891 ------------------------------------------------------------------------------------------------------------------------------- Subtotal 87,066 1 (4,545) 82,522 Equity securities 2,130 0 0 2,130 ------------------------------------------------------------------------------------------------------------------------------- Total $ 89,196 $ 1 $ (4,545) $ 84,652 ------------------------------------------------------------------------------------------------------------------------------- Held to Maturity U.S. Government Agency securities $ 5,998 $ 0 $ (159) $ 5,839 Mortgage-backed securities 23,041 0 (1,003) 22,038 ------------------------------------------------------------------------------------------------------------------------------- Total $ 29,039 $ 0 $ (1,162) $ 27,877 ===============================================================================================================================
The amortized cost and fair value of debt securities at December 31, 2000 by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.
=============================================================================================================================== Held to Maturity Available for Sale Amortized Fair Amortized Fair (in thousands) Cost Value Cost Value ------------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 0 $ 0 $ 1,000 $ 1,004 Due after one year through five years 3,998 3,997 7,007 7,001 Due after five years through ten years 2,484 2,480 10,991 11,002 Due after ten years 2,960 2,954 17,123 16,714 ------------------------------------------------------------------------------------------------------------------------------- 9,442 9,431 36,121 35,721 Mortgage-backed securities 24,370 24,230 55,536 54,912 ------------------------------------------------------------------------------------------------------------------------------- Total $ 33,812 $ 33,661 $ 91,657 $ 90,633 ===============================================================================================================================
24 Notes to Consolidated Financial Statements There were no sales of securities available for sale in 2000. Gross gains of $8,000 and gross losses of $7,000 were realized on sales of securities available for sale in 1999. Gross gains of $395,000 and gross losses of $9,000 were realized on sales of securities available for sale in 1998. At December 31, 2000 and 1999, securities with a carrying value of $87.0 million and $43.1 million respectively were pledged to secure public deposits and for other purposes as required or permitted by law. 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Certain directors and executive officers of the Company, including their associates and companies, have loans with the Bank. Such loans were made in the ordinary course of business at the Bank's normal credit terms including interest rate and collateralization, and do not represent more than a normal risk of collection. Total loans to these persons and companies amounted to approximately $7.8 million and $4.9 million at December 31, 2000 and 1999, respectively. During 2000, $5.1 million of new loans were made and repayments totaled $2.2 million. The following is a summary of the transactions in the allowance for loan losses. ====================================================================== Year Ended December 31, (in thousands) 2000 1999 1998 ---------------------------------------------------------------------- Balance at beginning of year $ 2,841 $ 2,232 $ 1,699 Provision charged to expense 1,050 762 542 Recoveries 14 13 7 Loans charged off (173) (166) (16) ---------------------------------------------------------------------- Balance at end of year $ 3,732 $ 2,841 $ 2,232 ====================================================================== Information with respect to impaired loans as of and for the year ended December 31 is as follows: ====================================================================== (in thousands) 2000 1999 1998 ---------------------------------------------------------------------- Recorded investment: Requiring an allowance for loan losses $ 0 $ 0 $ 0 Not requiring an allowance for loan losses 833 684 275 ---------------------------------------------------------------------- Total $833 $684 $275 ====================================================================== Average recorded investment $512 $686 $234 Interest income recognized 52 38 7 ====================================================================== 25 Notes to Consolidated Financial Statements 5. LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT Loan commitments are made to accommodate the financial needs of Commerce's customers. Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate the customers' normal course of business transactions. Historically, almost all of the Bank's standby letters of credit expire unfunded. Both types of lending arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank's normal credit policies. Collateral (e.g., securities, receivables, inventory, and equipment) is obtained based on management's credit assessment of the customer. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank's maximum exposure to credit loss for loan commitments (unfunded loans and unused lines of credit, including home equity lines of credit) and standby letters of credit outstanding were as follows: =========================================================== December 31, (in thousands) 2000 1999 ----------------------------------------------------------- Commitments to grant loans $ 1,620 $ 4,330 Unfunded commitments of existing loans 62,407 46,376 Standby letters of credit 10,318 2,863 ----------------------------------------------------------- Total $74,345 $53,569 =========================================================== 6. CONCENTRATIONS OF CREDIT RISK The Company's loan portfolio is principally to borrowers throughout Cumberland, Dauphin, York, and Lebanon counties of Pennsylvania where it has full-service branch locations. Commercial real estate loans and loan commitments for commercial real estate projects aggregated $181 million at December 31, 2000. Commercial real estate loans are collateralized by the related project (principally office buildings, multifamily residential, land development, and other properties) and the Company generally requires loan-to-value ratios of no greater than 80%. Collateral requirements on such loans are determined on a case-by-case basis based on management's credit evaluations of the respective borrowers. 7. BANK PREMISES, EQUIPMENT AND LEASES A summary of premises and equipment is as follows:
=================================================================================================== December 31, (in thousands) 2000 1999 --------------------------------------------------------------------------------------------------- Land $ 3,152 $ 3,842 Buildings 11,796 9,290 Leasehold improvements 1,666 1,576 Furniture, fixtures, and equipment 6,301 4,793 --------------------------------------------------------------------------------------------------- 22,915 19,501 Less accumulated depreciation and amortization 6,278 5,093 --------------------------------------------------------------------------------------------------- $ 16,637 $ 14,408 ===================================================================================================
26 Notes to Consolidated Financial Statements Land, buildings, and equipment are leased under noncancelable operating lease agreements that expire at various dates through 2021. Total rental expense for operating leases in 2000, 1999, and 1998 was $739,000, $673,000, and $602,000, respectively. At December 31, 2000, future minimum lease payments for noncancelable operating leases are payable as follows: ------------------------------------------------------------- (in thousands) ------------------------------------------------------------- 2001 $ 873 2002 699 2003 652 2004 646 2005 475 Thereafter 3,844 ------------------------------------------------------------- Total minimum lease payments $ 7,189 ============================================================= 8. DEPOSITS The composition of deposits is as follows: -------------------------------------------------------------------- December 31, (in thousands) 2000 1999 -------------------------------------------------------------------- Demand $ 85,577 $ 69,495 Interest checking and money market 93,885 70,546 Savings 116,691 87,967 Time certificates $100,000 or more 67,381 51,519 Other time certificates 83,049 69,019 -------------------------------------------------------------------- $446,583 $348,546 ==================================================================== At December 31, 2000, the scheduled maturities of time deposits are as follows: ============================================================= (in thousands) ------------------------------------------------------------- 2001 $ 89,428 2002 24,932 2003 30,022 2004 4,307 2005 1,741 ------------------------------------------------------------- $ 150,430 ============================================================= 9. OTHER BORROWED MONEY The Bank has a line of credit commitment from the Federal Home Loan Bank (FHLB) for borrowings up to $104 million. No amounts were outstanding on this line as of December 31, 2000 and 1999. Certain qualifying assets of the Bank collateralize the line. At December 31, 1999, other borrowed money consisted of $5.3 million of federal funds purchased and $3.0 million of securities sold under agreements to repurchase, which were overnight funds. Securities with a fair value of $3.1 million were pledged as collateral for the securities sold under agreements to repurchase as of December 31, 1999. 10. LONG-TERM DEBT On June 15, 2000, the Company issued $5,000,000 of 11% Trust Capital Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust I (the Trust), a newly formed Delaware business trust subsidiary. The Trust Capital Securities evidence a preferred ownership interest in the Trust, of which the Company owns 100% of the common equity. The proceeds from the issuance of the Trust Capital Securities were invested in substantially similar Junior Subordinated Debt of the Company. The Company unconditionally guarantees the Trust Capital Securities. Interest on the debt is payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year. The Trust Capital Securities are scheduled to mature on June 15, 2030. The Trust Capital Securities may be redeemed in whole or in part at the option of the Company on or after June 15, 2010 at 105.50% of the principal plus accrued interest, if any. The redemption price declines by 0.55% on June 15 of each year from 2011 through 2020 at which time the securities may be redeemed at 100% of the principal plus accrued interest, if any, to the date fixed for redemption, subject to certain conditions. All $5,000,000 of the Trust Capital Securities qualify as Tier 1 regulatory capital purposes. 27 Notes to Consolidated Financial Statements 11. INCOME TAXES A reconciliation of the provision for income taxes and the amount that would have been provided at statutory rates is as follows: --------------------------------------------------------------------------- Year Ended December 31, (in thousands) 2000 1999 1998 --------------------------------------------------------------------------- Provision at statutory rate on pre-tax income $ 1,904 $ 1,603 $ 1,130 Tax-exempt income on loans and investments (52) (6) (9) Other 34 16 (15) --------------------------------------------------------------------------- $ 1,886 $ 1,613 $ 1,106 =========================================================================== The components of income tax expense are as follows: ----------------------------------------------------------------- Year Ended December 31, (in thousands) 2000 1999 1998 ----------------------------------------------------------------- Current $ 2,167 $ 1,798 $ 1,289 Deferred (281) (185) (183) ----------------------------------------------------------------- $ 1,886 $ 1,613 $ 1,106 ================================================================= The components of the net deferred tax assets were as follows:
-------------------------------------------------------------------------------------- December 31, (in thousands) 2000 1999 -------------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 1,236 $ 934 Unrealized losses on securities 348 1,545 Other 20 3 -------------------------------------------------------------------------------------- Total deferred tax assets 1,604 2,482 -------------------------------------------------------------------------------------- Deferred tax liabilities: Premises and equipment (236) (226) Prepaid expenses (79) (51) -------------------------------------------------------------------------------------- Total deferred tax liabilities (315) (277) -------------------------------------------------------------------------------------- Net deferred tax assets $ 1,289 $ 2,205 ======================================================================================
Income taxes of $0, $0, and $131,000 were recognized on net securities gains in 2000, 1999, and 1998 respectively. 12. STOCKHOLDERS' EQUITY At December 31, 2000, Commerce Bancorp, Inc., owned 40,000 shares of the Company's Series A $10 par value noncumulative nonvoting preferred stock and warrants that entitle the holder to purchase 124,105 shares (adjusted for common stock dividends) of the Company's common stock, exercisable at $8.05 per share (adjusted for common stock dividends), in the event of a "change in control" (as defined in the Warrant Agreement). Such warrants are fully transferable and expire on October 7, 2008. None of these warrants were exercised during 2000 or 1999. The preferred stock is redeemable at the option of the Company at the price of $25 per share plus any unpaid dividends. Dividends on the preferred stock are payable quarterly at a rate of $2 per share per annum (see Note 15). During the 4th quarter of 1999, the Company implemented a dividend reinvestment and stock purchase plan. Holders of common stock may participate in the plan in which reinvested dividends and voluntary cash payments of up to $5,000 per quarter (subject to change) may be reinvested in additional common shares at a 3% discount (subject to change) from the current market price. Employees who have been continuously employed for at least one year are also eligible to participate in the plan under the same terms as listed above for shareholders. A 28 Notes to Consolidated Financial Statements total of 9,031 and 1,527 common shares were issued pursuant to this plan in 2000 and in 1999 respectively. At December 31, 2000, the Company had reserved approximately 489,000 common shares to be issued in connection with the plan. On January 21, 2000, the Board of Directors declared a 5% common stock dividend payable on February 18, 2000, to stockholders of record on February 4, 2000. Payment of the stock dividend resulted in the issuance of 78,342 additional common shares. On January 19, 2001, the Board of Directors declared a 5% common stock dividend payable on February 16, 2001, to stockholders of record on February 2, 2001. Payment of the stock dividend will result in the issuance of 83,492 additional common shares. All common stock and per share data included in these financial statements have been restated for these stock dividends. 13. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share.
=============================================================================================================================== For the Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------------- (in thousands except per share amounts) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------- Per Share Per Share Per Share Income Shares Amount Income Shares Amount Income Shares Amount ------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Net income $ 3,714 $ 3,103 $ 2,218 Preferred stock dividends (80) (80) (80) ------------------------------------------------------------------------------------------------------------------------------- Income available to common stockholders 3,634 1,736 $2.09 3,023 1,720 $1.76 2,138 1,713 $1.25 ------------------------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Stock options 118 124 140 ------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Income available to common stockholders plus assumed conversions $ 3,634 1,854 $1.96 $ 3,023 1,844 $1.64 $ 2,138 1,853 $1.15 ===============================================================================================================================
Options to purchase 39,718 shares of common stock at $24.68, options to purchase 44,499 shares at $24.84, options to purchase 69,170 shares at $28.10, options to purchase 9,308 shares at $23.45, and options to purchase 9,308 shares of common stock at $26.78 were outstanding during 2000. They were not included in the computation of diluted EPS for the year ended December 31, 2000, because the options' exercise price was greater than the average market price of the common shares. Options to purchase 48,899 shares of common stock at $24.84, options to purchase 41,055 shares at $24.68 and options to purchase 9,308 shares of common stock at $26.78 were outstanding during 1999. They were not included in the computation of diluted EPS for the year ended December 31, 1999, because the options' exercise price was greater than the average market price of the common shares. No options were excluded from the computation of diluted EPS for the year ended December 31, 1998. 14. STOCK OPTION PLANS The 1996 Employee Stock Option Plan covers 255,560 authorized shares of common stock reserved for issuance upon exercise of options granted or available for grant to officers and key employees and will expire on December 31, 2005. The Plan provides that the option price of qualified incentive stock options will be fixed by the Board of Directors, but will not be less than 100% of the fair market value of the stock at the date of grant. In addition, the Plan provides 29 Notes to Consolidated Financial Statements that the option price of nonqualified stock options (NQSO's) also will be fixed by the Board of Directors, however for NQSO's the option price may be less than 100% of the fair market value of the stock at the date of grant. Options granted are exercisable one year after the date of grant, subject to certain vesting provisions, and expire ten years after the date of grant. In 2000, the Company's shareholders approved the adoption of the 2001 Directors' Stock Option Plan. The Plan commences January 1, 2001 and replaces the 1990 Directors' Stock Option Plan which expired December 31, 2000. The Plan covers 105,000 authorized shares of common stock reserved for issuance upon exercise of options granted or available for grant to directors and will expire on December 31, 2010. Under the Company's Directors' Stock Option Plan, each Director of the Company who is not regularly employed on a salaried basis by the Company shall be entitled to an option to acquire 1,551 shares of the Company's common stock during each year in which the Director serves on the Board. The Plan provides that the option price will be fixed by the Board of Directors, but will not be less than 100% of the fair market value of the stock on the date of the grant. Options granted are exercisable from the earlier of (1) one year after the date of the option grant, or (2) the date of a change in control of the Bank. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee and director stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro-forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999, and 1998 respectively: risk-free interest rates of 5.7%, 6.0% and 4.5%; volatility factors of the expected market price of the Company's common stock of .48, .24, and .25; weighted-average expected life of the options of 10 years; and no cash dividends. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro-forma information is presented in the following table. ================================================================ Year ended December 31, 2000 1999 1998 ---------------------------------------------------------------- Net income (in thousands): As reported $3,714 $3,103 $2,218 Pro-forma 3,106 2,570 1,694 ---------------------------------------------------------------- Reported earnings per share: Basic $2.09 $1.76 $1.25 Diluted 1.96 1.64 1.15 ---------------------------------------------------------------- Pro-forma earnings per share: Basic $1.74 $1.45 $0.94 Diluted 1.63 1.35 0.87 ================================================================ Stock options transactions under the Plans were as follows:
=============================================================================================================================== Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------- Weighted Avg. Weighted Avg. Weighted Avg. Options Exercise Price Options Exercise Price Options Exercise Price ------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 384,741 $ 15.02 331,632 $13.70 280,618 $ 11.03 Granted 80,053 26.56 66,975 21.88 63,879 24.57 Exercised (13,435) 6.21 (6,945) 9.71 (10,047) 5.90 Forfeited (13,332) 22.54 (6,921) 24.08 (2,818) 11.27 ------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 438,027 $ 17.17 384,741 $ 15.02 331,632 $ 13.70 ------------------------------------------------------------------------------------------------------------------------------- Exercisable at December 31 339,915 $ 14.54 Options available for grant at December 31 14,229 Weighted-average fair value of options granted during the year $ 15.82 $ 9.87 $ 10.42 =============================================================================================================================== 30
Notes to Consolidated Financial Statements Exercise prices for options outstanding as of December 31, 2000 are presented in the following table.
=============================================================================================================================== As of December 31, 2000 ------------------------------------------------------------------------------------------------------------------------------- Options Weighted Avg. Weighted Avg. Options Weighted Avg. Outstanding Exercise Price Contractual Life Exercisable Exercise Price ------------------------------------------------------------------------------------------------------------------------------- Options with exercise prices ranging from $4.83 to $10.00 162,246 $ 6.80 3.6 Years 162,246 $ 6.80 Options with exercise prices ranging from $10.01 to $20.00 51,748 15.93 6.8 Years 42,440 15.91 Options with exercise prices ranging from $20.01 to $28.10 224,033 24.97 8.6 Years 135,229 23.40 ------------------------------------------------------------------------------------------------------------------------------- Total options outstanding with exercise prices ranging from $4.83 to $28.10 438,027 $ 17.17 6.7 Years 339,915 $ 14.54 ===============================================================================================================================
15. REGULATORY MATTERS Regulatory authorities restrict the amount of cash dividends the Bank can declare without prior regulatory approval. Presently, the Bank cannot declare a cash dividend in excess of its accumulated retained earnings. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2000, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2000, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The following table presents the Bank's risk-based and leverage capital amounts and ratios at December 31, 2000 and 1999. The consolidated capital ratios are not materially different to the Bank's capital ratios. 31 Notes to Consolidated Financial Statements
================================================================================================================= To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------------------------------------------------- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------------------------------------------------- As of December 31, 2000 Risked based capital ratios: Total capital $36,088 11.04% => $26,139 => 8.0% => $32,674 =>10.0% Tier 1 capital 32,356 9.90 => 13,069 => 4.0 => 19,604 => 6.0 Leverage ratio 32,356 6.92 => 18,700 => 4.0 => 23,374 => 5.0 ----------------------------------------------------------------------------------------------------------------- As of December 31, 1999 Risked based capital ratios: Total capital $26,218 11.12% => 18,864 => 8.0% => $ 23,580 =>10.0% Tier 1 capital 23,377 9.91 => 9,432 => 4.0 => 14,148 => 6.0 Leverage ratio 23,377 6.28 => 14,894 => 4.0 => 18,618 => 5.0 =================================================================================================================
16. EMPLOYEE BENEFIT PLAN The Company has established a 401(k) Retirement Savings Plan for all of its employees who meet eligibility requirements. Employees may contribute up to 15% of their salary to the Plan. The Company will provide a discretionary matching contribution for up to 6% of each employee's salary. For 2000, 1999, and 1998, the Company's matching contribution was established at 25% of the employees' salary deferral. The amount charged to expense was $42,000, $31,000, and $62,000 in 2000, 1999, and 1998, respectively. 17. COMPREHENSIVE INCOME Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income. The only comprehensive income item that the Company presently has is unrealized gains (losses) on securities available for sale. The federal income taxes allocated to the unrealized gains (losses) are presented in the table below. The reclassification adjustments included in comprehensive income are also presented.
========================================================================================================== Year ended December 31, (in thousands) 2000 1999 1998 ---------------------------------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the year $ 3,520 $ (4,868) $ 214 Less reclassification adjustment for gains (losses) included in net income 0 1 386 ---------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) 3,520 (4,869) (172) Tax (expense) benefit (1,197) 1,656 58 ---------------------------------------------------------------------------------------------------------- Net of tax amount $ 2,323 $ (3,213) $ (114) ==========================================================================================================
18. COMMITMENTS AND CONTINGENCIES The Company has entered into a land lease for the premises located in the East Penn Center, on Wertzville Road in East Pennsboro Township, Cumberland County, Pennsylvania. The Company is constructing a full-service branch on this land to be opened in Spring 2001. The land lease commenced June 26, 2000 and has an initial term of 20 years. In addition, the Company has the option to renew the land lease for four additional 5-year terms. Initial annual rent payments equal $55,000 and will commence March 1, 2001. Rent is subject to change on terms set forth in the lease agreement. 32 Notes to Consolidated Financial Statements The Company has entered into a lease for office space located in Carlisle, Pennsylvania. The Company opened a loan production office in the premises on January 1, 2001. The lease commenced December 2000 and has an initial term of 2 years. In addition, the Company has the option to renew the lease for three additional 1-year terms. Initial annual rent payments, which total $11,120, began on January 1, 2001. Rent is subject to change based on terms set forth in the lease agreement. In addition, the Company is also 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. 19. RELATED PARTY TRANSACTIONS Commerce Bancorp, Inc. (a 9.05% shareholder of common stock and 100% shareholder of Series A preferred stock of the Company), through a subsidiary (Commerce Bank, N.A., a national bank located in Cherry Hill, New Jersey), provides various services to the Company. These services include maintenance to the branch LAN network, loan review services, MAC/VISA card processing, data processing, and advertising support. Insurance premiums and commissions which are paid to a subsidiary of Commerce Bancorp, Inc, are included in the total amount paid. The Company paid approximately $414,000, $344,000, and $325,000 for services provided by Commerce Bancorp, Inc. during 2000, 1999, and 1998, respectively. The Company routinely sells loan participations to Commerce Bank, N.A. and at December 31, 2000, approximately $11.6 million of these participations were outstanding. A director of the Company is Chairman of the Board of Commerce Bank, N.A. The Company obtained interior design services for $76,000, $16,000, and $17,000 in 2000, 1999, and 1998, respectively, from a business owned by the spouse of the director. Additionally, the business received commissions of approximately $54,000, $21,000, and $66,000 in 2000, 1999, and 1998, respectively, on furniture and facility purchases made directly by the Company. The Company leases land for one of its branches from a limited partnership in which the director is a 20% limited partner. Total payments on the land lease for 2000, 1999 and 1998 were $50,000. The Company engaged a company owned by the director to prepare the building sites for the branches constructed in 1998. Total payments made in 1998 were $20,000. A law firm in which a director of the Company is a partner received professional fees totaling $137,000, $149,000, and $104,000 during 2000, 1999, and 1998, respectively. The Company leases land for a billboard owned by the Company from a director. Total payments on the land lease for 2000, 1999, and 1998 were $24,000. The Company paid commissions for real estate services to a company owned by the Chairman of the Board of the Company of $48,000, $65,000, and $0 in 2000, 1999, and 1998 respectively. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions: Cash and cash equivalents: The carrying amounts reported approximate those assets' fair value. 33 Notes to Consolidated Financial Statements Securities: Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans Receivable For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans receivable were estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Accrued Interest Receivable and Payable The carrying amount of accrued interest receivable and payable approximate their fair values. Deposit Liabilities The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits. Other Borrowed Money The carrying amount of this debt approximates its fair value. Long-term Debt The fair values for long-term debt were estimated using the interest rate currently available from the related party that holds the existing debt. Off-balance Sheet Instruments Fair values for the Company's off-balance sheet instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The carrying amounts and fair values of the Company's financial instruments as of December 31 are presented in the following table.
=============================================================================================================================== 2000 1999 Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value ------------------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 39,649 $ 39,649 $ 27,490 $ 27,490 Securities 126,733 126,582 113,691 112,529 Loans, net (including loans held for sale) 291,849 287,228 218,565 216,984 Accrued interest receivable 2,936 2,936 2,105 2,105 ------------------------------------------------------------------------------------------------------------------------------- Financial liabilities: Deposits $ 446,583 $ 448,622 $ 348,546 $ 348,891 Other borrowed money 0 0 8,300 8,300 Long-term debt 5,000 5,471 0 0 Accrued interest payable 834 834 567 567 ------------------------------------------------------------------------------------------------------------------------------- Off-balance sheet instruments: Standby letters of credit $ 0 $ 0 $ 0 $ 0 Commitments to extend credit 0 0 0 0 -------------------------------------------------------------------------------------------------------------------------------
34 Notes to Consolidated Financial Statements 21. Quarterly Financial Data (unaudited) The following represents summarized unaudited quarterly financial data of the Company which in the opinion of management, reflects adjustments (comprising only normal recurring accruals) necessary for fair presentaton (in thousands, except per share amounts):
----------------------------------------------------------------------------------------------------------------- Three Months Ended ----------------------------------------------------------------------------------------------------------------- December 31 September 30 June 30 March 31 ----------------------------------------------------------------------------------------------------------------- 2000 Interest income $8,917 $8,465 $7,554 $6,838 Interest expense 4,210 3,939 3,285 2,863 Net interest income 4,707 4,526 4,269 3,975 Provision for loan losses 285 255 255 255 Net investment securities gains 0 0 0 0 Provision for federal income taxes 568 472 444 402 Net income 1,064 1,014 863 773 Net income per share: Basic $ 0.59 $ 0.57 $ 0.49 $ 0.44 Diluted 0.56 0.53 0.46 0.41 1999 Interest income $6,689 $6,424 $5,923 $5,581 Interest expense 2,769 2,528 2,360 2,284 Net interest income 3,920 3,896 3,563 3,297 Provision for loan losses 160 232 190 180 Net investment securities gains 0 0 0 1 Provision for federal income taxes 487 480 330 316 Net income 935 923 636 609 Net income per share: Basic $ 0.55 $ 0.52 $ 0.35 $ 0.34 Diluted 0.51 0.49 0.33 0.31 35
Notes to Consolidated Financial Statements 22. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Balance Sheets ---------------------------------------------------------------------------------------------------------- (in thousands) December 31, December 31, 2000 1999 ---------------------------------------------------------------------------------------------------------- ASSETS Cash $ 12 $ 0 Investment in subsidiaries: Banking subsidiary 31,680 20,378 Non-banking subsidiary 200 0 Other assets 63 0 ---------------------------------------------------------------------------------------------------------- Total Assets $ 31,955 $ 20,378 ---------------------------------------------------------------------------------------------------------- LIABILITIES Long-term debt $ 5,000 $ 0 Other liabilities 287 0 ---------------------------------------------------------------------------------------------------------- Total liabilities 5,287 0 ---------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 400 400 Common stock 1,749 1,644 Surplus 20,861 18,196 Retained earnings 4,334 3,137 Accumulated other comprehensive loss (676) (2,999) ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 26,668 20,378 ---------------------------------------------------------------------------------------------------------- Total Liabilities & Stockholders' Equity $ 31,955 $ 20,378 ----------------------------------------------------------------------------------------------------------
Statements of Income ---------------------------------------------------------------------------------------------------------------- (in thousands) Year Ended For the Period July 1. December 31 to December 31, 2000 1999 ---------------------------------------------------------------------------------------------------------------- Income: Dividends from bank subsidiary $ 393 $ 40 Interest income 12 0 ------------------------------------------------------------------------------------------------------------- 405 40 ------------------------------------------------------------------------------------------------------------- Expenses: Interest expense 312 0 Other 187 0 ------------------------------------------------------------------------------------------------------------- 499 0 ------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) and equity in undistributed net income of subsidiaries (94) 40 Income taxes (benefit) 165 0 ------------------------------------------------------------------------------------------------------------- Income (loss) before equity in undistributed net income of subsidiaries 71 40 ------------------------------------------------------------------------------------------------------------- Equity in undistributed net income of bank subsidiary 3,643 1,818 ------------------------------------------------------------------------------------------------------------- Net income $ 3,714 $ 1,858 ------------------------------------------------------------------------------------------------------------- 36
Notes to Consolidated Financial Statements 22. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued) Statements of Cash Flows
--------------------------------------------------------------------------------------------------------------------------- (in thousands) Year Ended For the Period July 1. December 31 to December 31, 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net Income $ 3,714 $ 1,858 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of financing costs 5 0 Increase in other liabilities 287 0 Equity in undistributed net income of bank subsidiary (3,643) (1,818) ----------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by operating activities 363 40 ----------------------------------------------------------------------------------------------------------------------- Investing Activities: Investment in bank subsidiary (5,303) (57) Investment in nonbank subsidiary (200) 0 ----------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (5,503) (57) ----------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from common stock options exercised 84 26 Proceeds from issuance of long term debt 5,000 0 Proceeds from issuance of common stock under stock purchase plan 219 31 Costs of issuing long term debt (68) 0 Cash dividends on preferred stock and cash in lieu of fractional shares (83) (40) ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 5,152 17 ---------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 12 0 Cash and cash equivalents at beginning of the year 0 0 ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 12 $ 0 ---------------------------------------------------------------------------------------------------------------------- 37
Independent Auditor's Report To the Board of Directors Pennsylvania Commerce Bancorp, Inc. Camp Hill, Pennsylvania We have audited the accompanying consolidated balance sheets of Pennsylvania Commerce Bancorp, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Commerce Bancorp, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Beard Miller Company LLP Harrisburg, Pennsylvania February 2, 2001 38 Corporate Information Headquarters Pennsylvania Commerce Bancorp, Inc. 100 Senate Avenue Camp Hill, PA 17011 Annual Shareholders' Meeting Pennsylvania Commerce Bancorp, Inc.'s annual shareholders meeting will be held on Friday May 18, 2001 at 9:00 am at the following location: West Shore Country Club 100 Brentwater Road Camp Hill, PA 17011 Contacts Analysts, portfolio managers, and others seeking financial information about Pennsylvania Commerce Bancorp, Inc. should contact: Mark A. Zody, Chief Financial Officer at (717) 975-5630 News media representatives and others seeking general corporate information should contact: James T. Gibson, President/CEO, or Gary L. Nalbandian, Chairman at (717) 975-5630 Shareholders seeking assistance with stock records should contact: Deborah Miller Shareholder Relations at (717) 972-2870 Dividend Reinvestment and Stock Purchase Plan Pennsylvania Commerce Bancorp, Inc. offers its shareholders a convenient plan to increase their investment in the Company. Through the Dividend Reinvestment and Stock Purchase Plan, holders of common stock may have their dividends and voluntary cash payments of up to $5,000 per quarter (subject to change) reinvested in additional common shares at a 3% discount (subject to change) from the market price and without brokerage fees, commissions, or service charges. Shareholders not enrolled in this plan, as well as brokers and custodians who hold stock for clients, may receive a plan prospectus and enrollment card by contacting Deborah Miller at (717) 972-2870. Annual Report and Form 10-K Additional copies of Pennsylvania Commerce Bancorp, Inc.'s Annual Report and Form 10-K are available without charge by writing: Pennsylvania Commerce Bancorp, Inc. Shareholder Relations 100 Senate Avenue Camp Hill, PA 17011 NASDAQ Symbol Shares of Pennsylvania Commerce Bancorp, Inc. common stock are traded nationally under the symbol COBH in the Over-The-Counter Small Cap Market and are listed in NASDAQ Quotations. Common Stock Prices The following table sets forth the prices for which common stock has traded during the last two (2) fiscal years on the NASDAQ Small Cap Market. The prices per share have been adjusted to reflect common stock dividends of 5% with record dates of February 2, 2001 and February 4, 2000. As of December 31, 2000, there were approximately 400 holders of record of the Company's common stock. Quarter Ended: High Low ------------------------------------------------------------ March 31, 2000 $ 24.76 $ 15.82 June 30, 2000 22.98 20.48 September 30, 2000 25.71 21.43 December 31, 2000 27.86 22.14 ------------------------------------------------------------ March 31, 1999 $ 27.44 $ 24.40 June 30, 1999 26.08 24.04 September 30, 1999 24.38 20.41 December 31, 1999 22.68 19.05 ------------------------------------------------------------ Transfer and Dividend Paying Agent/Registrar Pennsylvania Commerce Bancorp, Inc. 100 Senate Avenue Camp Hill, PA 17011 39