-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SWZvIFYVEs+w6+maF0QiwUoEcMPqoR2ZQBi5Q4Il5q0N5aBUkGTz2DObVeDtS8ha WGn5LrZgQAgjUMdUdZT6Fw== 0000950159-03-000293.txt : 20030331 0000950159-03-000293.hdr.sgml : 20030331 20030331164044 ACCESSION NUMBER: 0000950159-03-000293 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA COMMERCE BANCORP INC CENTRAL INDEX KEY: 0001085706 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251834776 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-78445 FILM NUMBER: 03631403 BUSINESS ADDRESS: STREET 1: 100 SENATE AVE CITY: CAMP HILL STATE: PA ZIP: 17001-8599 BUSINESS PHONE: 7179755630 MAIL ADDRESS: STREET 1: 100 SENATE AVE CITY: CAMP HILL STATE: PA ZIP: 17001-8599 10-K 1 pacommerce10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002. or ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . Commission File #333-78445 -------------------------- PENNSYLVANIA COMMERCE BANCORP, INC. ---------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1834776 ------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 100 Senate Avenue, P.O. Box 8599, Camp Hill, Pennsylvania 17011-8599 -------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (717) 975-5630 ------------------------------------------------------------------ Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $1.00 par value ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X ) 1 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ----- --------- The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the Company's most recently completed second fiscal quarter, June 30, 2002 is $54,186,902. The number of shares of the registrant's common stock, par value $1.00 per share, outstanding as of February 28, 2003 was 2,126,614. DOCUMENTS INCORPORATED BY REFERENCE: Part II incorporates certain information by reference from the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2002 (the "Annual Report"). Part III incorporates certain information by reference from the registrant's Proxy Statement for the Annual Meeting of Shareholders. - ------------------ 2
PENNSYLVANIA COMMERCE BANCORP, INC. FORM 10-K CROSS-REFERENCE INDEX Page Part I. Item 1. Business.................................................................4 Item 2. Properties..............................................................10 Item 3. Legal Proceedings.......................................................11 Item 4. Submission of Matters to a Vote of Security Holders (This item is omitted since no matters were submitted to a vote of security holders during the fourth quarter of 2002.) Part II. Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................................................................11 Item 6. Selected Financial Data.................................................13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (The information required by this item is incorporated by reference from the Company's 2002 Annual Report.) ...............................................................14 Item 7A. Quantitative and Qualitative Disclosures about Market Risk (The information required by this item is incorporated by reference from the Company's 2002 Annual Report.) .........................................14 Item 8. Financial Statements and Supplementary Data (The information required by this item is incorporated by reference from the Company's 2002 Annual Report.) ...............................................................14 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure (This item is omitted since it is not applicable.) .................................................14 Part III. Item 10. Directors and Executive Officers of the Registrant .....................14 Item 11. Executive Compensation .................................................14 Item 12. Security Ownership of Certain Beneficial Owners and Management..........14 Item 13. Certain Relationships and Related Transactions The information required by Part III has been omitted since it will be contained in the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the election of directors at the Company's 2003 Annual Meeting. Part IV. Item 14. Controls and Procedures.................................................14 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................................15 Signatures ......................................................................16
3 Part I. Item 1. Business - ----------------- Forward-Looking Statements Pennsylvania Commerce Bancorp, Inc. (the "Company") may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including the Annual Report and this 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 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 rates, 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 statement, whether written or oral, that may be made from time to time by or on behalf of the Company. General Pennsylvania Commerce Bancorp, Inc. (the "Company") is a Pennsylvania business corporation, which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). The Company was incorporated on April 23, 1999 and became an active bank holding company on July 1, 1999 through the acquisition of 100% of the outstanding shares of Commerce Bank/Harrisburg, N.A. On June 15, 2000, the Company issued $5 million of 11.00% Trust Capital Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware business trust subsidiary of the Company. Proceeds of this offering were invested in Commerce Bank/Harrisburg, N.A., the company's wholly owned banking subsidiary. All $5 million of the Trust Capital Securities qualify as Tier 1 capital for regulatory capital purposes. On 4 September 28, 2001, the Company issued $8 million of 10.00% Trust Capital Securities through Commerce Harrisburg Capital Trust II ("Trust II"), a newly formed Delaware business trust subsidiary of the Company. Proceeds of this offering were invested in Commerce Bank/Harrisburg, N.A., the company's wholly owned banking subsidiary. All $8 million of the Trust Capital Securities qualify as Tier 1 capital for regulatory capital purposes. Except as otherwise indicated, all references herein to the Company include Commerce Bank/Harrisburg, N.A. (also referred to as "Commerce" or the "Bank"), Commerce Harrisburg Capital Trust I and Commerce Harrisburg Capital Trust II. The Company is a member of the Commerce Bancorp, Inc. Network (the "Network") and has the exclusive right to use the "Commerce Bank" name and the "America's Most Convenient Bank" logo within its primary service area. The Network provides certain marketing and support services to the Bank. As of December 31, 2002, the Company had approximately $787 million in assets, $727 million in deposits, $379 million in total loans (including loans held for sale), and $43 million in stockholders' equity. The Bank is a member of the Federal Reserve System (FRB) and substantially all of the Bank's deposits are insured up to applicable limits by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by law. The Company's principal executive offices are located at 100 Senate Avenue, Camp Hill, Pennsylvania 17011, and its telephone number is (717) 975-5630. As of December 31, 2002, the Company had 502 employees, of which 382 were full-time employees. Management believes the Company's relationship with its employees is good. Commerce Bank/Harrisburg On July 13, 1984, Commerce Bank/Harrisburg (Commerce) filed an application to establish a state-chartered banking institution with the Pennsylvania Department of Banking. On September 7, 1984, Commerce was granted preliminary approval of its application, and on September 11, 1984, was incorporated as a Pennsylvania state-chartered banking institution under the laws of the Commonwealth of Pennsylvania. The Bank opened for business on June 1, 1985. On October 7, 1994, Commerce was converted from a Pennsylvania state-chartered banking institution to a national banking association under the laws of the United States of America and changed its name to "Commerce Bank/Harrisburg, National Association." The Bank's conversion was consummated pursuant to preliminary and conditional approval of the conversion granted by the Office of the Comptroller of the Currency (OCC) on July 5, 1994 in response to a letter of intent to convert to a national bank filed by the Bank with the OCC on April 6, 1994. Commerce provides a full range of retail and commercial banking services for consumers and small and mid-sized companies. The Bank's lending and investment activities are funded principally by retail deposits gathered through its retail branch office network. Service Area The Bank offers its lending and depository services from its Corporate Office in Camp Hill, Pennsylvania, and its seventeen full-service branch offices located in Cumberland, Dauphin, York, and Lebanon Counties, Pennsylvania. 5 Retail and Commercial Banking Activities The Bank provides a broad range of retail banking services and products including free personal checking accounts and business checking accounts (subject to a minimum balance), regular savings accounts, money market accounts, interest checking accounts, fixed rate certificates of deposit, individual retirement accounts, club accounts, debit card services, and safe deposit facilities. Its services also include a full range of lending activities including commercial construction and real estate loans, land development and business loans, business lines of credit, consumer loan programs (including installment loans for home improvement and the purchase of consumer goods and automobiles), home equity and Visa Gold card revolving lines of credit, overdraft checking protection, student loans and automated teller facilities. The Bank also offers construction loans and permanent mortgages for homes. Commerce is a participant in the Small Business Administration Loan Program and is an approved lender for qualified applicants. The Bank directs its commercial lending principally toward businesses that require funds within the Bank's legal lending limit, as determined from time to time, and that otherwise do business and/or are depositors with Commerce. The Bank also participates in inter-bank credit arrangements in order to take part in loans for amounts that are in excess of its lending limit or to limit the concentration of lending to any individual. In consumer lending, the Bank offers various types of loans, including revolving credit lines, automobile loans, and home improvement loans. The Company has focused its strategy for growth primarily on the further development of its community-based retail-banking network. The objective of this corporate strategy is to build earnings growth potential for the future as the retail branch office network matures. The Company's branch concept uses a prototype or standardized branch office building, convenient locations and active marketing, all designed to attract retail deposits. Using this prototype branch concept, the Company plans to open five new branch offices in each of the next five years. It has been the Company's experience that each newly opened branch office incurs operating losses during the first 12 to 15 months of operations and becomes profitable thereafter. The Company's retail approach to banking emphasizes a combination of long-term customer relationships, quick responses to customer needs, active marketing, convenient locations, free checking for customers maintaining certain minimum balances and extended hours of operation. The Company is not dependent on any one or more major customers. Competitive Business Conditions / Competitive Position The Company's current primary service area, the central Pennsylvania area, including portions of Cumberland, Dauphin, York and Lebanon Counties, is characterized by intense competition for banking business. The Bank competes with local commercial banks as well as numerous regionally based commercial banks, most of which have assets, capital, and lending limits larger than that of Commerce. The Bank competes with respect to its lending activities as well as in attracting demand, savings, and time deposits with other commercial banks, savings banks, insurance companies, regulated small loan companies, credit unions, and with issuers of commercial paper and other securities such as shares in money market funds. Other institutions may have the ability to finance wide-ranging advertising campaigns, and to allocate investment assets to regions of highest yield and demand. Many institutions offer services such as trust services and international banking which Commerce does not directly offer (but which the Bank may offer indirectly through other institutions). Many institutions, by virtue of their greater 6 total capital, can have substantially higher lending limits than Commerce. In commercial transactions, the Bank's legal lending limit to a single borrower (approximately $8.8 million as of December 31, 2002) enables it to compete effectively for the business of smaller companies. However, this legal lending limit is considerably lower than that of various competing institutions and thus may act as a constraint on the Bank's effectiveness in competing for financing in excess of these limits. In consumer transactions, the Bank believes it is able to compete on a substantially equal basis with larger financial institutions because it offers longer hours of operation, personalized service and competitive interest rates on savings and time accounts with low minimum deposit requirements. In order to compete with other financial institutions both within and beyond its primary service area, the Bank uses, to the fullest extent possible, the flexibility which independent status permits. This includes an emphasis on specialized services for the small businessperson and professional contacts by the Bank's officers, directors and employees, and the greatest possible efforts to understand fully the financial situation of relatively small borrowers. The size of such borrowers, in management's opinion, often inhibits close attention to their needs by larger institutions. The Bank may seek to arrange for loans in excess of its lending limit on a participation basis with other financial institutions, including Commerce Bank, N.A. As of the end of 2002, all participations totaled approximately $23.7 million. Participations are used to more fully service customers whose loan demands exceed the Bank's lending limit. The Bank endeavors to be competitive with all competing financial institutions in its primary service area with respect to interest rates paid on time and savings deposits, its overdraft charges on deposit accounts, and interest rates charged on loans. Supervision and Regulation The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to the Company. The regulatory framework is intended primarily for the protection of depositors, other customers and the Federal Deposit Insurance Funds and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the company. The Company The Company is subject to the jurisdiction of the Securities and Exchange Commission ("SEC") and of state securities commissions for matters relating to the offering and sale of its securities and is subject to the SEC's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. The Company is subject to the provisions of the Bank Holding Company Act of 1956, as amended. The Company is subject to supervision and examination by the Federal Reserve Board ("FRB"). Under the Bank Holding Company Act, the Company must secure the prior approval of the FRB before it may own or control, directly or indirectly, more than 5% of the voting shares or 7 substantially all of the assets of any institution, including another bank (unless it already owns a majority of the voting stock of the bank). Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. Commerce is currently rated "satisfactory" under the Community Reinvestment Act. The Company is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may also make examinations of the Company and any or all of its subsidiaries. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or provision for any property or service. Thus, an affiliate of the Company, such as Commerce, may not condition the extension of credit, the lease or sale of property or furnishing of any services on (i) the customer's obtaining or providing some additional credit, property or services from or to the Company or other subsidiaries of the Company, or (ii) the customer's refraining from doing business with a competitor of Commerce, the Company or of its subsidiaries. The Company, or Commerce may impose conditions to the extent necessary to reasonably assure the soundness of credit extended. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on (i) any extension of credit to the bank holding company or any of its subsidiaries, (ii) investments in the stock or other securities of the bank holding company, and (iii) taking the stock or securities of the bank holding company as collateral for loans to any borrower. The Bank As a nationally chartered commercial banking association, the Bank is subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency (OCC) and is required to furnish quarterly reports to the OCC. The Bank is a member of the Federal Reserve System. The Bank's deposits are insured by the FDIC up to applicable legal limits. Some of the aspects of the lending and deposit business of the Bank that are regulated by these agencies include personal lending, mortgage lending and reserve requirements. The Bank is also subject to numerous federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions. The approval of the OCC is required for the establishment of additional branch offices. Since March 4, 1990, the Bank is able to establish branches within any county in Pennsylvania. Under the Change in Banking Control Act of 1978, subject to certain exceptions, no person may acquire control of the Bank without giving at least sixty days prior written notice to the OCC. Under this Act and its regulations, control of the Bank is generally presumed to be the power to vote ten percent (10%) or more of the Common Stock. The OCC is empowered to disapprove any such acquisition of control. The amount of funds that Commerce may lend to a single borrower is limited generally under the National Bank Act to 15% of the aggregate of its capital, surplus and undivided profits and capital securities (all as defined by statute and regulation). 8 The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Company. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal and state legislation and regulations, which may affect the cost of doing business. Recent Legislation On November 12, 1999, the Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act of 1999) became law. The law permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. Also, no regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Financial Services Modernization Act defines "financial in nature" to include: securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating. Except for the increase in competitive pressures faced by all banking organizations that is a likely consequence of the Act, the Company believes that the legislation and implementing regulations are likely to have a more immediate impact on large regional and national institutions than on community-based institutions engaged principally in traditional banking activities. Because the legislation permits bank holding companies to engage in activities previously prohibited altogether or severely restricted because of the risks they posed to the banking system, implementing regulations impose strict and detailed prudential safeguards on affiliations among banking and nonbanking companies in a holding company organization. The USA Patriot Act imposes additional obligations on U.S. financial institutions, including banks, to implement policies, procedures and controls, which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank applications. National Monetary Policy In addition to being affected by general economic conditions, the earnings and growth of the Company are affected by the policies of regulatory authorities, including the OCC, the FRB and the FDIC. An important function of the FRB is to regulate the money supply and credit conditions. 9 Among the instruments used to implement these objectives are open market operations in U.S. Government securities, setting the discount rate, and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings, and growth of the Company cannot be predicted. Environmental Laws The costs and effects of compliance with environmental laws, federal, state and local, on the Company are minimal. Item 2. Properties - ------------------- The following table summarizes the Company's branch network by region. Remote service facilities (stand-alone ATM's) are excluded.
Branch Offices Branch Name Location Own /Lease Term Ending ----------- -------- --------- ----------- West Shore Region Senate Avenue Office Camp Hill, Pennsylvania Lease 2005 Hampden Centre Mechanicsburg, Pennsylvania Lease 2008 Simpson Ferry Mechanicsburg, Pennsylvania Own Carlisle Carlisle, Pennsylvania Own Cedar Cliff Camp Hill, Pennsylvania Own Wertzville Enola, Pennsylvania Lease 2021 Camp Hill Mall Camp Hill, Pennsylvania Lease 2022 Carlisle Commons Carlisle, Pennsylvania Lease 2022 East Shore Region Colonial Park Harrisburg, Pennsylvania Lease 2007 Mountain Road Harrisburg, Pennsylvania Lease 2012 Hummelstown Hummelstown, Pennsylvania Own Palmyra Palmyra, Pennsylvania Lease 2021 Downtown Harrisburg Harrisburg, Pennsylvania Own York Region York Crossing York, Pennsylvania Lease 2016 Queen Street York, Pennsylvania Own Prospect Street York, Pennsylvania Lease 2017 Route 30 York, Pennsylvania Own Red Lion Red Lion, Pennsylvania Own Administration Offices & Loan Production Offices (LPO) Office Name Location Own /Lease Term Ending ----------- -------- ---------- ----------- Operations Center Mechanicsburg, Pennsylvania Lease 2008 Lemoyne LPO Lemoyne, Pennsylvania Lease 2004 York LPO York, Pennsylvania Lease 2003 Carlisle LPO Carlisle, Pennsylvania Lease 2003
10 Item 3. Legal Proceedings - --------------------------------- The Company is subject to certain 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. Part II. Item 5. Market For Registrant's Common Equity - ----------------------------------------------------- and Related Shareholder Matters ------------------------------- The Company's common stock trades on the NASDAQ Small Cap Market tier of The NASDAQ Stock Market under the symbol COBH. The preferred stock is not traded on any market. 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 7, 2003 and February 11, 2002. As of February 28, 2003, there were approximately 600 holders of record of the Company's common stock. Sales Price Quarter Ended: High Low ------------------------------------------------------------ December 31, 2002 $ 42.02 $ 32.99 September 30, 2002 46.00 35.48 June 30, 2002 51.43 39.33 March 31, 2002 40.00 33.79 ------------------------------------------------------------ December 31, 2001 $ 34.92 $ 30.83 September 30, 2001 32.42 29.80 June 30, 2001 33.67 29.52 March 31, 2001 33.67 24.83 ------------------------------------------------------------ Dividends and Dividend History The Company distributed to stockholders 5% stock dividends in December 1992, and annually from 1994 through 2003, and anticipates the distribution of stock dividends in the future. The Company also distributed to stockholders a two-for-one stock split (payable in the form of a 100% stock dividend) on August 7, 1995. Neither the Company nor the Bank has declared or paid cash dividends on its common stock since the Bank began operations in June 1985. The Board of Directors intends to follow a policy of retaining earnings for the purpose of increasing the Company's capital for the foreseeable future. Although the Board of Directors anticipates establishing a cash dividend policy in the future, no assurance can be given that cash dividends will be paid. 11 The holders of Common Stock of the Company are entitled to receive dividends as may be declared by the Board of Directors with respect to the Common Stock out of funds of the Company. While the Company is not subject to certain restrictions on dividends and stock redemptions applicable to a bank, the ability of the Company to pay dividends to the holders of its Common Stock will depend to a large extent upon the amount of dividends paid by the Bank to the Company. The ability of the Company to pay dividends on its Common Stock in the future will depend on the earnings and the financial condition of the Bank and the Company. The Company's ability to pay dividends will be subject to the prior payment by the Company of principal and interest on any debt obligations it may incur in the future as well as other factors that may exist at the time. Regulatory authorities restrict the amount of cash dividends the Bank can declare without prior regulatory approval. Presently, the Bank cannot declare a dividend in excess of its accumulated retained earnings. Information on the Comapny's equity compensation plans is incorporated by reference to the Company's definitive proxy statement for the 2003 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission before April 30, 2003. 12 Item 6. Selected Financial Data - -------------------------------------- Pennsylvania Commerce Bancorp, Inc. Selected Financial Data
Year Ended December 31, (dollars in thousands, except per share data) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA ------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 786,598 $ 609,890 $ 480,086 $ 378,913 $ 319,323 Loans held for sale 10,514 7,661 5,329 5,301 5,641 Loans receivable (gross) 368,881 342,674 290,252 216,105 167,121 Securities available for sale 205,436 104,722 90,633 82,522 95,439 Securities held to maturity 97,625 103,349 33,812 29,039 11,493 Federal funds sold 44,500 4,300 22,800 0 11,900 Deposits 726,955 561,738 446,583 348,546 297,737 Long-term debt and other borrowed money 0 0 0 8,300 0 Trust preferred securities 13,000 13,000 5,000 0 0 Stockholder's equity 42,812 32,593 26,668 20,378 20,445 INCOME STATEMENT - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 27,701 $ 22,054 $ 17,477 $ 14,676 $ 11,276 Provision for loan losses 1,435 1,469 1,050 762 542 Noninterest income 7,707 6,607 5,362 4,558 4,061 Noninterest operating expenses 25,428 20,512 16,189 13,756 11,471 Income before income taxes 8,545 6,680 5,600 4,716 3,324 Net income 5,674 4,448 3,714 3,103 2,218 PER COMMON SHARE DATA - ------------------------------------------------------------------------------------------------------------------------------- Net income: Basic $ 2.71 $ 2.24 $ 1.90 $ 1.59 $ 1.13 Diluted 2.48 2.04 1.78 1.49 1.05 Book Value 19.73 15.97 13.29 10.16 10.25 SELECTED PERFORMANCE RATIOS - ------------------------------------------------------------------------------------------------------------------------------- Return on average assets 0.82 % 0.82 % 0.88 % 0.89 % 0.80 % Return on average stockholders equity 14.86 14.85 16.59 15.18 11.50 Net interest margin 4.29 4.40 4.49 4.59 4.49 SELECTED LIQUIDITY AND CAPITAL RATIOS - ------------------------------------------------------------------------------------------------------------------------------- Average loans to average deposits 56.91 % 63.25 % 65.12 % 60.24 % 60.26 % Average Stockholders' equity to average total assets 5.49 5.54 5.29 5.86 6.94 Risk based capital: Tier 1 11.16 10.22 9.90 9.91 10.83 Total 12.22 11.78 11.04 11.12 12.02 Leverage Capital 7.00 7.33 6.92 6.28 6.50 ASSET QUALITY - ------------------------------------------------------------------------------------------------------------------------------- Net charge-offs to average loans outstanding 0.23 % 0.21 % 0.06 % 0.08 % 0.01 % Non-performing loans to total year-end loans 0.43 0.26 0.29 0.32 0.16 Non-performing assets to total year-end assets 0.22 0.15 0.18 0.18 0.09 Allowance for loan losses to total year-end loans 1.40 1.33 1.29 1.31 1.34 Allowance for loan losses to non-performing loans 321.83 518.72 448.02 415.35 808.70
13 Item 7. Management's Discussion and Analysis of - ------------------------------------------------------------- Financial Condition and Results of Operations --------------------------------------------- The information required by this item is incorporated by reference from the Company's 2002 Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------------- The information required by this item is incorporated by reference from the Company's 2002 Annual Report. Item 8. Financial Statements and Supplementary Data - --------------------------------------------------------- The information required by this item is incorporated by reference from the Company's 2002 Annual Report. Item 9. Changes and Disagreements with Accountants on - ----------------------------------------------------------- Accounting and Financial Disclosure ------------------------------------ This item is omitted since it is not applicable. Part III. Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------------ Item 11. Executive Compensation - -------------------------------------- Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------------ Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------------- Information responsive to these items is incorporated by reference to the Company's definitive proxy statement for the 2003 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission before April 30, 2003. Part IV. Item 14. Controls and Procedures - --------------------------------------- Within the 90 days prior to the filing of this report, the Chief Financial Officer, under the supervision of the Chief Executive Officer, has evaluated the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the Company's periodic reports is accumulated and communicated to management as appropriate to allow timely decisions by management regarding required disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date that the Company completed its evaluation. 14 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------- (a)(1) Financial Statements are incorporated by reference in Part II, Item 8 hereof: Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules (This item is omitted since information required is either not applicable or is included in the footnotes to the Annual Financial Statements.) (a)(3) Exhibits: 3.1. Articles of Incorporation, of the Company as amended (A) 3.2. By - Laws, of the Company as amended 4. Commerce Harrisburg Capital Trust I and Commerce Harrisburg Capital Trust II (Instruments defining the rights of the holders of trust capital securities issued and sold by the Company are not attached, as the amount of such securities is less than 10% of the consolidated assets of the Company and its subsidiaries, and the securities have not been registered. The Company agrees to provide copies of such instruments to the SEC upon request.) 10.1. The Company's 1990 Directors Stock Option Plan (B) 10.2. The Company's 1996 Employee Stock Option Plan (C) 10.3. Warrant Agreement and Warrant No. 1 of Commerce Bank/Harrisburg dated October 7, 1988 10.4. Amendment No. 1 to the Stock and Warrant Purchase Agreement 10.5. The Company's 2001 Directors Stock Option Plan (D) 11. Calculation of EPS (The information required by this item appears in Note 13 of the Consolidated Financial Statements of the Company's 2002 Annual Report and is incorporated by reference herein.) 13. Pennsylvania Commerce Bancorp, Inc. 2002 Annual Report to Shareholders 21. Subsidiaries of the Company (incorporated by reference from PART I, Item 1. "BUSINESS" of this Report on Form 10-K.) 23. Consent of Beard Miller Company LLP. 99.1 Certification by Gary L. Nalbandian, CEO, under section 906 of the Sarbanes Oxley Act 99.2 Certification by Mark A. Zody, CFO, under Section 906 of the Sarbanes Oxley Act (b) Reports on Form 8-K There were no reports on Form 8-K filed in the fourth quarter of 2002. (A) Incorporated by reference from Appendix "A" and Appendix "B", respectively, of the Prospectus of the Company's Registration Statement on Form S-4 filed with the SEC on May 14, 1999. (B) Incorporated by reference from Exhibit 4 of the Company's Registration Statement on Form S-4 filed with the SEC on July 1, 1999. (C) Incorporated by reference from Exhibit 4 of the Company's Registration Statement on Form S-4 filed with the SEC on July 1, 1999. (D) Incorporated by reference from the Company's Definitive Proxy Statement for its 2000 Annual Meeting of Shareholders, Appendix A thereto. Item 16. 15 Signatures ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 2003 Pennsylvania Commerce Bancorp, Inc, By /s/ Gary L. Nalbandian ------------------------------- Gary L. Nalbandian Chairman and President Date: March 31, 2003 By /s/ Mark A. Zody ---------------------------------- Mark A. Zody Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------------------------------------------- ------------------------------------------ ----------------------- /s/ Gary L. Nalbandian Chairman of the Board, President and March 31, 2003 - --------------------------------------------- Director (Principal Executive Officer) Gary L. Nalbandian /s/ Alan R. Hassman Director March 31, 2003 - --------------------------------------------- Alan R. Hassman March 31, 2003 /s/ Michael A. Serluco Director - --------------------------------------------- Michael A. Serluco /s/ Samir J. Srouji, M.D. Director March 31, 2003 - --------------------------------------------- Samir J. Srouji, M.D. Director /s/ James R. Adair March 31, 2003 - --------------------------------------------- James R. Adair /s/ Howell C. Mette Director March 31, 2003 - --------------------------------------------- Howell C. Mette /s/ Douglas S. Gelder Director March 31, 2003 - --------------------------------------------- Douglas S. Gelder
16 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Gary L. Nalbandian, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Pennsylvania Commerce Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Gary L. Nalbandian ------------------------------------------ March 31, 2003 Gary L. Nalbandian - -------------- President and Chief Executive Officer Date 17 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark A. Zody, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Pennsylvania Commerce Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 31, 2003 - ------------------------ Date /s/ Mark A. Zody ------------------------------------------ Mark A. Zody Chief Financial Officer 18 EX-3.(II) 3 exhibit3-2.txt EXHIBIT 3.2 BYLAWS OF PENNSYLVANIA COMMERCE BANCORP, INC. ARTICLE 1 CORPORATION OFFICE Section 1.1 The Corporation shall have and continuously maintain in Pennsylvania a registered office which may, but need not, be the same as its place of business and at an address to be designated from time to time by the Board of Directors. Section 1.2 The Corporation may also have offices at such other places as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE 2 SHAREHOLDERS MEETINGS Section 2.1 All meetings of the shareholders shall be held at such place or places within or without the Commonwealth of Pennsylvania as may be fixed from time to time by the Board of Directors. Section 2.2 The annual meeting of the shareholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held at such time as the Board of Directors shall fix. Any business which is a proper subject for shareholder action may be transacted at the annual meeting, irrespective of whether the notice of said meeting contains any reference thereto, except as otherwise provided by applicable law. Section 2.3 Special meetings of the shareholders may be called at any time by the President, the Chairman of the Board, a majority of the Board of Directors or by shareholders entitled to cast at least one-third of the votes which all shareholders are entitled to cast at any particular meeting. If such request is addressed to the Secretary, it shall be signed by the persons making the same and shall state the purpose or purposes of the proposed meeting. Upon receipt of any such request, it shall be the duty of the Secretary to call a special meeting of the shareholders to be held at a time, not less than ten nor more than sixty days thereafter, as the Secretary may fix. If the Secretary shall neglect or refuse to issue such call within five days from the receipt of such request, the person or persons making the request may issue the call. Section 2.4 Written notice of all meetings other than adjourned meetings of shareholders, stating the place, date and hour, and, in case of special meetings of shareholders, the purpose thereof, shall be served upon, or mailed, postage prepaid, or telegraphed, charges prepaid, at least ten days before such meeting, unless a greater period of notice is required by statute or by these Bylaws, to each shareholder entitled to vote thereat at such address as appears on the transfer books of the Company. 1 Section 2.5 Notice of any proposal by a shareholder which the shareholder desires to submit for a vote at the Company's annual meeting must be submitted to the Company's Secretary at the Company's registered address no later than 120 calendar days prior to the anniversary of the date of the Company's proxy materials released to shareholders for the previous year's annual meeting. The notice must include the name and residence address of the notifying shareholder, the number of shares of the Company owned by notifying shareholder, and a description of the basis for the proposal. A proposal not submitted in the manner or within the time provided herein shall not be included on the agenda for the annual meeting and shall not be deemed to have been submitted on a timely basis. ARTICLE 3 QUORUM OF SHAREHOLDERS Section 3.1 The presence, in person or by proxy of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast on the particular matter shall constitute a quorum for purposes of considering such matter, and unless otherwise provided by statute the acts of such shareholders at a duly organized meeting shall be the acts of the shareholders. If, however, any meeting of shareholders cannot be organized because of lack of a quorum, those present in person, or by proxy shall have the power, except as otherwise provided by statute, to adjourn the meeting to such time and place as they may determine, without notice other than an announcement at the meeting, until the requisite number of shareholders for a quorum shall be present in person or by proxy except that in the case of any meeting called for the election of directors such meeting may be adjourned only for periods not exceeding 15 days as the holders of a majority of the shares present in person or by proxy shall direct, and those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors. At any adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the original meeting if a quorum had been present. The shareholders present in person or by proxy at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. ARTICLE 4 VOTING RIGHTS Section 4.1 Except as may be otherwise provided by statute or by the Articles of Incorporation, at every shareholders meeting, every shareholder entitled to vote shall have the right to one vote for every share having voting power standing in his name on the books of the Corporation on the record date fixed for the meeting. No share shall be voted at any meeting if any installment is due and unpaid thereon. Section 4.2 When a quorum is present at any meeting the voice vote of the holders of a majority of the stock having voting power, present in person or by proxy shall decide any questions brought before such meeting except as provided differently by statute or by the Articles of Incorporation. Section 4.3 Upon demand made by a shareholder entitled to vote at any election for directors before the voting begins, the election shall be by ballot. 2 ARTICLE 5 PROXIES Section 5.1 Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder or his duly authorized attorney in fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Corporation. No unrevoked proxy shall be valid after 11 months from the date of its execution, unless a longer time is expressly provided therein, but in no event shall a proxy, unless coupled with an interest, be voted after three years from the date of its execution. A proxy shall not be revoked by the death or incapacity of the maker, unless before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the Corporation. ARTICLE 6 RECORD DATE Section 6.1 The Board of Directors may fix a time not more than ninety (90) days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case, only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date fixed as aforesaid. If no record date is fixed by the Board of Directors for the determination of shareholders entitled to receive notice of, and vote at, a shareholders meeting, transferees of shares which are transferred on the books of the Corporation within ten (10) days next preceding the date of such meeting shall not be entitled to notice of or to vote at such meeting. ARTICLE 7 JUDGES OF ELECTION Section 7.1 In advance of any meeting of shareholders, the Board of Directors may appoint judges of election, who need not be shareholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the Chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of judges shall be one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present and entitled to vote shall determine whether one or three judges are to be appointed. No person who is a candidate for office shall act as a judge. The judges of election shall perform all such acts as may be proper to conduct the election or vote, and such other 3 duties as may be prescribed by statute, with fairness to all shareholders, and if requested by the Chairman of the meeting or any shareholder or his proxy, shall make a written report of any matter determined by them and execute a certificate of any fact found by them. If there are three judges of election, the decision, act or certificate of a majority shall be the decision, act or certificate of all. ARTICLE 8 DIRECTORS Section 8.1 Any shareholder who intends to nominate or to cause to have nominated any candidate for election to the Board of Directors (other than any candidate proposed by the Corporation's then existing Board of Directors) shall so notify the Chairman of the Board of the Corporation in writing not less than forty-five (45) days prior to the date of any meeting of shareholders called for the election of directors. Such notification shall contain the following information to the extent known by the notifying shareholder: (a) the name and address of each proposed nominee; (b) the age of each proposed nominee; (c) the principal occupation of each proposed nominee; (d) the number of shares of the Corporation owned by each proposed nominee; (e) the total number of shares that to the knowledge of the notifying shareholder will be voted for each proposed nominee; (f) the name and residence address of the notifying shareholder; and (g) the number of shares of the Corporation owned by the notifying shareholder. Any nomination for director not made in accordance with this Section shall be disregarded by the Chairman of the meeting, and votes cast for each such nominee shall be disregarded by the judges of election. In the event that the same person is nominated by more than one shareholder, if at least one nomination for such person complies with this Section, the nomination shall be honored and all votes cast for such nominee shall be counted. Section 8.2 No person shall be eligible to be elected as a director if he or she shall have attained the age of seventy-five (75) on or prior to the date of his or her election. Any director of this corporation who attains the age of seventy-five (75) shall cease to be a director (without any action on his or her part) at the close of business on the day prior to the date of the next shareholders' meeting at which directors are to be elected regardless of whether or not his term as director would otherwise expire at such shareholders' meeting. 4 Section 8.3 The number of directors that shall constitute the whole Board of Directors shall be not less than five (5) nor more than twenty-five (25). The Board of Directors may from time to time fix the number of directors. The Directors shall be natural persons of full age and need not be residents of Pennsylvania or shareholders of the Corporation. Section 8.4 The directors shall be elected at the annual meeting of shareholders. Each director shall be elected for a term of one (1) year, and until his successor is elected and qualified. Section 8.5 The Board of Directors may declare vacant the office of a director if he is declared of unsound mind by an order of court or convicted of felony or for any other proper cause of or, within thirty days after notice of election, he does not accept such office either in writing or by attending a meeting of the Board of Directors. ARTICLE 9 VACANCIES ON BOARD OF DIRECTORS Section 9.1 Vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority vote of the remaining members of the Board of Directors, though less than a quorum, and each person so appointed shall be a director until the expiration of the present term of office of the directors. ARTICLE 10 POWERS OF BOARD OF DIRECTORS Section 10.1 The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised and done by the shareholders. Section 10.2 The Board of Directors shall have the power and authority to appoint an Executive Committee and such other committees as may be deemed necessary by the Board of Directors for the efficient operation of the Corporation. The Executive Committee shall consist of the Chairman of the Board, if any, the President and not less than two nor more than six other directors (which other directors shall not be employees of the Corporation or any of its subsidiaries). The Executive Committee shall meet at such time as may be fixed by the Board of Directors, or upon call of the Chairman of the Board or the President. A majority of members of the Executive Committee shall constitute a quorum. The Executive Committee shall have and exercise the authority of the Board of Directors in the intervals between the meetings of the Board of Directors as far as may be permitted by law. ARTICLE 11 MEETINGS OF THE BOARD OF DIRECTORS Section 11.1 An organization meeting may be held immediately following the annual shareholders meeting without the necessity of notice to the directors to constitute a legally convened 5 meeting, or the directors may meet at such time and place as may be fixed by either a notice or waiver of notice or consent signed by all of such directors. Section 11.2 Regular meetings of the Board of Directors shall be held at such time and in such place consistent with applicable law as the Board of Directors shall, from time to time, designate or as may be designated in any notice from the Chairman or President. Section 11.3 Special meetings of the Board of Directors may be called by the Chairman of the Board or the President on one day's notice to each director, either personally or by mail, telegram or telephone; special meetings shall be called by the Chairman of the Board of the President in like manner and on like notice upon the written request of three directors. Section 11.4 At all meetings of the Board of Directors, a majority of the directors shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or as permitted herein. ARTICLE 12 COMPENSATION OF DIRECTORS Section 12.1 No director shall be entitled to any salary as such; but the Board of Directors may fix, from time to time, a reasonable annual fee for acting as a director and a reasonable fee to be paid each director for his or her services in attending meetings of the Board or meetings of committees appointed by the Board. The Corporation may reimburse directors for expenses related to their duties as a member of the Board. ARTICLE 13 OFFICERS Section 13.1 The officers of the Corporation shall be elected by the Board of Directors at its organization meeting and shall be a President, a Secretary and a Treasurer. At its option, the Board of Directors may elect a Chairman of the Board. The Board of Directors may also elect one or more Vice Presidents and such other officers and appoint such agents as it shall deem necessary, who shall hold their offices for such terms, have such authority and perform such duties as may from time to time be prescribed by the Board of Directors. Any two or more offices may be held by the same person. Section 13.2 The compensation of all officers of the Corporation shall be fixed by the Board of Directors. 6 Section 13.3 The Board of Directors may remove any officer or agent elected or appointed, at any time and within the period, if any, for which such person was elected or employed whenever in the Board of Directors' judgment it is in the best interests of the Corporation, and all persons shall be elected and employed subject to the provisions hereof. If the office of any officer becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. ARTICLE 14 THE CHAIRMAN OF THE BOARD Section 14.1 The Chairman of the Board shall preside at all meetings of the shareholders and directors. He/she shall supervise the carrying out of the policies adopted or approved by the Board of Directors. He/she shall have general executive powers, as well as the specific powers conferred by the Bylaws. He/she shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him/her by the Board of Directors. ARTICLE 15 THE PRESIDENT Section 15.1 The President shall be the chief executive officer of the Corporation; shall have general and active management of the business of the Corporation; shall see that all orders and resolutions of the Board of Directors are put into effect, subject, however, to the right of the Board of Directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer or officers of the Corporation; shall execute bonds, mortgages and other contracts requiring a seal under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. In the absence or incapacity of the Chairman of the Board, the President shall preside at meetings of the shareholders and the directors. If there is no Chairman of the Board, the President shall have and exercise all powers conferred by these Bylaws or otherwise of the Chairman of the Board. ARTICLE 16 THE VICE PRESIDENT Section 16.1 The Vice President or, if more than one, the Vice Presidents in the order established by the Board of Directors shall, in the absence or incapacity of the President, exercise all the powers and perform the duties of the President. The Vice Presidents, respectively, shall also have such other authority and perform such other duties as may be provided in these Bylaws or as shall be determined by the Board of Directors or the President. Any Vice President may, in the discretion of the Board of Directors, be designated as "executive," "senior," or by departmental or functional classification. 7 ARTICLE 17 THE SECRETARY Section 17.1 The Secretary shall attend all meetings of the Board of Directors and of the shareholders and keep accurate records thereof in one or more minute books kept for that purpose and shall perform the duties customarily performed by the secretary of a corporation and such other duties as may be assigned to him/her by the Board of Directors or the President. ARTICLE 18 THE TREASURER Section 18.1 The Treasurer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall perform such other duties as may be assigned to him/her by the Board of Directors or the President. He/she shall give bond in such sum and with such surety as the Board of Directors may from time to time direct. ARTICLE 19 ASSISTANT OFFICERS Section 19.1 Each assistant officer shall assist in the performance of the duties of the officer to whom he/she is assistant and shall perform such duties in the absence of the officer. He/she shall perform such additional duties as the Board of Directors, the President or the officer to whom he/she is assistant may from time to time assign him/her. Such officers may be given such functional title as the Board of Directors shall from time to time determine. ARTICLE 20 INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 20.1 The Corporation shall indemnify any director, officer and/or employee, or any former director, officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, officer and/or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another bank, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him/her in connection with such action, suit or proceeding if he/she acted in good faith and in a manner he/she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his/her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he/she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his/her conduct was unlawful. 8 Section 20.2 The Corporation shall indemnify any director, officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with, any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer and/or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another bank, partnership, joint venture, trust or other enterprise against amounts paid in settlement and expenses (including attorneys' fees) actually and reasonably incurred by him/her in connection with the defense or settlement of, or serving as a witness in, such action or suit if he/she acted in good faith and in a manner he/she reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any such claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his/her duty to the Corporation. Section 20.3 Except as may be otherwise ordered by a court, there shall be a presumption that any director, officer and/or employee is entitled to indemnification as provided in this Bylaw unless either a majority of the directors who are not involved in such proceedings ("disinterested directors"), or, if there are less than three disinterested directors, then the holders of one-third of the outstanding shares of the Corporation determine that the person is not entitled to such presumption by certifying such determination in writing to the Secretary of the Corporation. In such event the disinterested director(s) or, in the event of certification by shareholders, the Secretary of the Corporation shall request of independent counsel, who may be the outside general counsel of the Corporation, a written opinion as to whether or not the parties involved are entitled to indemnification under this Bylaw. Section 20.4 Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer and/or employee to repay such amount unless it shall ultimately be determined that he/she is entitled to be indemnified by the Corporation as authorized in this Bylaw. Section 20.5 The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any agreement, vote of shareholders, or disinterested directors, or otherwise, both as to action in his/her official, capacity which serving as a director, officer, and/or employee, or as to any action in another capacity while holding such office. The Board of Directors, may, by resolution, provide for additional indemnification or advancement of expenses to or for any director, officer, and/or employee of the Corporation provided said indemnification is not inconsistent with the provisions of these Bylaws, the Articles of Incorporation of the Corporation, applicable provisions of the Business Corporation Law of 1988, as amended, or other applicable provisions of law. The indemnification provided by this Article shall continue as to a person who has ceased to be a director, officer and/or employee and shall inure to the benefit of the heirs and personal representatives of such person. Section 20.6 No director of the Corporation shall be personally liable for monetary damages as such for any action taken, or any failure to take any action in the director's capacity as a director of the Corporation or pursuant to the request of the Corporation unless (i) the director has breached or failed to perform the duties of his/her office as set forth in the Business Corporation Law 9 of 1988, as amended, or other applicable provisions of law, and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. This Bylaw shall not apply to the responsibility or liability of a director for the payment of taxes pursuant to local, state, or federal law, or to the responsibility or liability of a director pursuant to any criminal statute. Section 20.7 This Corporation may, by act of the Board of Directors, create a fund to secure or insure its indemnification obligations under these Bylaws, the Articles of Incorporation of the Corporation, any resolution of Directors or agreement or vote of shareholders as authorized in Section 20.5 of this Bylaw, applicable provisions of the Business Corporation Law of 1988, as amended, or other applicable provisions of law. ARTICLE 21 SHARE CERTIFICATES Section 21.1 The share certificates of the Corporation shall be numbered and registered in a share register as they are issued; shall bear the name of the registered holder, the number and class of shares represented thereby, the par value of each share or a statement that such shares are without par value, as the case may be; shall be signed by the President or a Vice President and the Secretary or the Treasurer or any other person properly authorized by the Board of Directors, and shall bear the corporate seal, which seal may be a facsimile engraved or printed. Where the certificate is signed by a transfer agent or a registrar, the signature of any corporate officer on such certificate may be a facsimile engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. ARTICLE 22 TRANSFER OF SHARES Section 22.1 Upon surrender to the Corporation of a share certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate canceled and the transfer recorded upon the share register of the Corporation. No transfer shall be made if it would be inconsistent with the provisions of Article 8 of the Pennsylvania Uniform Commercial Code. ARTICLE 23 LOST CERTIFICATES Section 23.1 Where a shareholder of the Corporation alleges the loss, theft or destruction of one or more certificates for shares of the Corporation and requests the issuance of a substitute certificate therefor, the Board of Directors may direct a new certificate of the same tenor and for the same number of shares to be issued to such person upon such person's making of an affidavit in form satisfactory to the Board of Directors setting forth the facts in connection therewith, provided that prior to the receipt of such request the Corporation shall not have either registered a transfer of such certificate or received notice that such certificate has been acquired by a bona fide purchaser. 10 Then authorizing such issue of a new certificate the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his/her heirs or legal representatives, as the case may be, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form and sum and with surety or sureties, with fixed or open penalty, as shall be satisfactory to the Board of Directors, as indemnity, for any liability or expense which it may incur by reason of the original certificate remaining outstanding. ARTICLE 24 DIVIDENDS Section 24.1. The Board of Directors may, from time to time, at any duly convened regular or special meeting or by unanimous consent in writing, declare and pay dividends upon the outstanding shares of capital stock of the Corporation in cash, property or shares of the Corporation, as long as any dividend shall not be in violation of law or the Articles of Incorporation. Section 24.2 Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as the Board of Directors shall believe to be for the best interest of the Corporation, and the Board of Directors may reduce or abolish any such reserve in the manner in which it was created. ARTICLE 25 FINANCIAL REPORT TO SHAREHOLDERS Section 25.1 The President and the Board of Directors shall present at each annual meeting of the shareholders a full and complete statement of the business and affairs of the Corporation for the preceding year. ARTICLE 26 INSTRUMENTS Section 26.1 All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the President or the Board of Directors may from time to time designate. Section 26.2 All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments and documents may be signed, executed, acknowledged, verified, delivered or accepted, including those in connection with the fiduciary powers of the Corporation, on behalf of the Corporation, by the President or other persons as may be designated by him. 11 ARTICLE 27 FISCAL YEAR Section 27.1 The fiscal year of the Corporation shall begin on the first day of January in each year and end on the thirty-first day of December in each year. ARTICLE 28 NOTICES AND WAIVERS THEREOF Section 28.1 Whenever, under the provisions of applicable law or of the Articles of Incorporation or of these Bylaws, written notice is required to be given to any person, it may be given to such person either personally or by sending a copy thereof through the mail or by telegram, charges prepaid, to his/her address appearing on the books of the corporation or supplied by him/her to the Corporation for the purpose of notice. If the notice is sent by mail or telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to such person. Such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting of shareholders, the general nature of the business to be transacted. Section 28.2 Any written notice required to be given to any person may be waived in writing signed by the person entitled to such notice whether before or after the time stated therein. Attendance of any person entitled to notice, whether in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where any person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Where written notice is required of any meeting, the waiver thereof must specify the purpose only if it is for a special meeting of shareholders. ARTICLE 29 AMENDMENTS Section 29.1. These Bylaws may be altered, amended or repealed by the affirmative vote of the holders of eighty (80%) percent of the outstanding shares of Common Stock at any regular or special meeting duly convened after notice to the shareholders of that purpose, or by a majority vote of the members of the Board of Directors at any regular or special meeting thereof duly convened after notice to the directors of that purpose, subject always to the power of the shareholders to change such action of the Board of Directors by the affirmative vote of the holders of eighty (80%) percent of the outstanding shares of Common Stock. 12 EX-13 4 exhibit13.txt EXHIBIT 13 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. Application of Critical Accounting Policies - -------------------------------------------------------------------------------- The reporting of the Company's financial condition and results of operations is impacted by the application of accounting policies by management. Certain accounting policies are particularly sensitive and require significant judgments, estimates and assumptions to be made by management in matters that are inherently uncertain. The Company's accounting policies are detailed in Note 1 to the financial statements. The audit committee to the board of directors has approved these policies. The Company's provision for loan losses and the level of the allowance for loan losses involve significant estimates by management in evaluating the adequacy of the allowance for loan losses. The allowance for loan losses is increased by a charge to the provision for loan losses. Management's evaluation is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. While management uses available information to make such evaluations, future adjustments to the allowance and the provision for loan losses may be necessary if economic conditions or loan credit quality differ substantially from the assumptions used in making the evaluation. As permitted by SFAS No. 123, the Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion (APB) No. 25. Under APB No. 25, no compensation expense is recognized in the income statement related to any options granted under the Company's stock option plans. The pro forma impact to net income and earnings per share that would occur if compensation expense was recognized, based on the estimated fair value of the options on the date of grant, is disclosed in the notes to the consolidated financial statements. The Company intends to continue to account for stock-based compensation in this manner unless there is more specific guidance issued by the Financial Accounting Standards Board or unless a clear consensus develops in the financial services industry on the application of accounting methods. 2002 Overview - -------------------------------------------------------------------------------- In 2002, the Company continued its strong financial performance by posting record levels of total assets, deposits and loans. Total assets grew by $177 million, or 29%, to $787 million and total deposits increased $165 million, or 29%, to $727 million. Core deposit growth was exceptionally strong, increasing $162 million, or 31%, from $525 million to $687 million. Net income was up 28% in 2002 to $5.7 million from $4.4 million for 2001 and total revenues increased by 24% to a record level of $35.4 million. Diluted net income per common share increased 22% to $2.48 from $2.04 per share in 2001 (after adjusting for a 5% common stock dividend declared in January 2003). In June, the Company opened a new branch at 101 North Second Street, Harrisburg, Pennsylvania, a new branch in August at 3201 Trindle Road, Camp Hill, Pennsylvania, and another new branch in December at 20 Knoble Boulevard, Carlisle, Pennsylvania. This brings the Bank's total number of full-service branches to 18. The Company plans to construct five additional branches in 2003. 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, 2002, 2001 and 2000 and presents the daily average interest rates earned on assets and the daily average interest rates paid on liabilities for such periods. During 2002, average interest-earning assets were $645.1 million, an increase of $144.0 million, or 29%, over 2001. This was the result of an increase in the average balance of investment securities of $81.5 million, an increase in the average balance of federal funds sold of $14.4 million, and an increase in the average balance of loans receivable of $48.1 million. The growth in the average balance of interest earning assets was funded primarily by an increase in the average balance of deposits (including noninterest bearing demand deposits) of $140.4 million. The yield on total interest-earning assets decreased by 112 basis points in 2002 from 7.63% to 6.51%. The decrease resulted primarily from decreased yields in the loan and investment portfolios due to the overall level and timing of changes in general market interest rates during 2002 as compared to 2001. The Federal Reserve Board (FRB) lowered short-term market interest rates eleven times throughout 2001 and an additional 50 basis points in 2002 for a total decrease of 525 basis points (bps). As a result, the Company experienced lower yields on interest-earning assets in 2002 from 2001 as well as a lower cost of funds in 2002 versus the prior year. 1
Management's Discussion and Analysis of Financial Condition and Results of Operations Table 1 - --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (dollars in thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------------- Securities: Taxable $246,230 $14,514 5.89% $165,013 $10,860 6.58% $121,833 $ 8,025 6.59% Tax-exempt 1,995 107 5.36 1,743 94 5.38 795 44 5.51 - --------------------------------------------------------------------------------------------------------------------------------- Total securities 248,225 14,621 5.89 166,756 10,954 6.57 122,628 8,069 6.58 Federal funds sold 31,833 508 1.59 17,399 641 3.68 11,707 760 6.49 Loans receivable: Mortgage and construction 241,647 18,408 7.62 212,117 18,013 8.49 178,937 15,852 8.86 Commercial loans and lines of credit 83,971 5,670 6.75 69,815 5,810 8.32 47,747 4,691 9.82 Consumer 35,851 2,677 7.47 32,305 2,709 8.39 26,640 2,293 8.61 Tax-exempt 3,598 111 3.09 2,711 120 4.43 1,833 109 5.94 - --------------------------------------------------------------------------------------------------------------------------------- Total loans receivable 365,067 26,866 7.36 316,948 26,652 8.41 255,157 22,945 8.99 - --------------------------------------------------------------------------------------------------------------------------------- Total earning assets $645,125 $41,995 6.51% $501,103 $38,247 7.63% $389,492 $31,774 8.16% - --------------------------------------------------------------------------------------------------------------------------------- Sources of Funds Interest-bearing deposits: Regular savings $197,225 $ 3,857 1.96% $141,350 $ 4,168 2.95% $108,131 $ 4,219 3.90% Interest checking 10,590 125 1.18 7,955 165 2.07 8,696 339 3.90 Money market 145,851 1,923 1.32 100,394 2,261 2.25 71,764 2,288 3.19 Time deposits 118,899 5,595 4.71 126,389 7,133 5.64 104,983 5,422 5.17 Public funds time 54,165 1,440 2.66 33,642 1,693 5.03 25,833 1,688 6.54 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 526,730 12,940 2.46 409,730 15,420 3.76 319,407 13,956 4.37 Short-term borrowings 12 0 1.46 330 13 3.94 696 42 5.91 Trust Capital Securities 13,000 1,354 10.41 7,082 760 10.73 2,708 299 11.07 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 539,742 14,294 2.65 417,142 16,193 3.88 322,811 14,297 4.43 Noninterest-bearing funds (net) 105,383 83,961 66,681 - --------------------------------------------------------------------------------------------------------------------------------- Total sources to fund earning assets $645,125 14,294 2.22 $501,103 16,193 3.23 $389,492 14,297 3.67 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income and margin $27,701 4.29% $22,054 4.40% $17,477 4.49% - --------------------------------------------------------------------------------------------------------------------------------- Other Balances Cash & due from banks $ 23,022 $ 18,904 $ 14,806 Other assets 27,190 20,951 18,734 Total assets 695,337 540,958 423,032 Noninterest-bearing demand deposits 114,758 91,352 72,413 Other liabilities 2,657 2,508 5,419 Stockholders' equity 38,180 29,956 22,389 - --------------------------------------------------------------------------------------------------------------------------------- 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.
2 Management's Discussion and Analysis of Financial Condition and Results of Operations The aggregate cost of interest-bearing liabilities decreased 123 basis points from 3.88% in 2001 to 2.65% in 2002. The average rate paid on savings deposits decreased by 99 basis points, from 2.95% in 2001 to 1.96% in 2002 and the average rate paid on interest checking accounts decreased from 2.07% in 2001 to 1.18% in 2002. For time deposits the average rate paid was 4.71%, down 93 basis points from 2001 and public funds experienced a decrease of 237 basis points in 2002 on the average rate paid. The majority of the Company's public funds are deposits of 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 decreased 101 basis points in 2002 from 3.23% to 2.22%. This decrease resulted primarily from lower average rates paid on total interest bearing deposits as well as a $23.4 million increase in the average of noninterest-bearing demand deposits. Net Interest Income and Net Interest Margin Net interest income is the difference between interest income earned on assets and interest expense incurred on liabilities used to fund those assets. Interest earning assets primarily include loans and securities. Liabilities used to fund such assets include deposits 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 2002 increased $5.6 million, or 26%, over 2001 to $27.7 million. Interest income on earning assets totaled $42.0 million, an increase of $3.7 million, or 10%, over 2001. The majority of this increase was related to volume increases in the securities and loans receivable portfolios partially offset by lower interest rates on interest earning assets. Interest expense for 2002 decreased $1.9 million, or 12% from $16.2 million in 2001 to $14.3 million in 2002. This decrease was
Table 2 - ------------------------------------------------------------------------------------------------------------------- 2002 v. 2001 2001 v. 2000 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 $4,793 $(1,139) $3,654 $ 2,847 $ (12) $ 2,835 Tax-exempt 13 0 13 51 (1) 50 Federal funds sold 231 (364) (133) 210 (329) (119) Interest on loans receivable: Mortgage and construction 2,240 (1,845) 395 2,823 (662) 2,161 Commercial 956 (1,096) (140) 1,835 (716) 1,119 Consumer 265 (297) (32) 475 (59) 416 Tax-exempt 27 (36) (9) 39 (28) 11 - ------------------------------------------------------------------------------------------------------------------- Total interest income 8,525 (4,777) 3,748 8,280 (1,807) 6,473 - ------------------------------------------------------------------------------------------------------------------- Interest expense: Regular savings 1,088 (1,399) (311) 976 (1,027) (51) Interest checking 31 (71) (40) (15) (159) (174) Money market plus 596 (934) (338) 647 (674) (27) Time deposits (363) (1,175) (1,538) 1,218 493 1,711 Public funds 544 (797) (253) 395 (390) 5 Short-term borrowings (5) (8) (13) (15) (13) (28) Trust Capital Securities 617 (23) 594 451 9 460 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 2,508 (4,407) (1,899) 3,657 (1,761) 1,896 - ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) $6,017 $ (370) $5,647 $4,623 $ (46) $4,577 - ------------------------------------------------------------------------------------------------------------------- (1)Changes due to both volume and rate have been allocated to volume changes.
3 Management's Discussion and Analysis of Financial Condition and Results of Operations primarily related to the reduction in interest rates on the deposit products partially offset by the increases in the Company's average level of deposits and long-term debt. 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 interest-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 increased to 3.86% in 2002 from 3.75% in 2001 and the net interest margin decreased 11 basis points from 4.40% to 4.29%. 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. Noninterest Income Noninterest income for 2002 increased by $1.1 million, or 17%, over 2001 to $7.7 million. The increase was due primarily to increased "core" other operating income 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 $493,000 in 2002 and $354,000 in 2001 on the sale of residential and student loans. Also included in noninterest income were net securities gains of $0 for 2002 and $52,000 for 2001. Noninterest Expenses Noninterest expenses totaled $25.4 million for 2002, an increase of $4.9 million, or 24%, over 2001. Staffing levels, occupancy, furniture and equipment, and related expenses increased as a result of opening three full service branches in 2002. A comparison of noninterest expense for certain categories for 2002 and 2001 is presented below. Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $3.0 million, or 32%, in 2002 over 2001. This increase was consistent with an increase in the level of full-time equivalent employees from 334 at December 31, 2001 to 424 at year-end 2002. The increased level of expenses includes the impact of salary and benefit costs associated with the additional staff for the three new branch offices opened in June, August and December 2002, respectively. Occupancy expenses totaled $2.4 million in 2002, an increase of $270,000, or 13%, over 2001 while furniture and equipment expenses increased by $121,000, or 9%, to $1.5 million. The full year impact of the two branch offices opened in 2001 along with three additional branches opened in 2002, contributed to the increases in occupancy and furniture and equipment expenses in 2002 over 2001. Advertising and marketing expenses were $2.2 million for 2002, an increase of $459,000, or 27%, over 2001. The increase was primarily the result of increased advertising efforts in each of the Company's markets. The Company's markets include Lebanon, Dauphin, Cumberland, and York Counties. With expansion into the Berk's County area in 2003, the Company will continue to see increases in advertising and marketing expenses. The Company will continue to have multiple markets in which to advertise its products. Data processing expenses increased by $577,000, or 44%, in 2002 over 2001. The primary increase was due to costs associated with processing additional transactions as a result of growth in the number of accounts serviced. Another contributing factor was the Company outsourced the proof, check clearing, and customer statement and processing functions in 2002. As a result, the Company experienced greater costs in the data processing area but achieved offsetting savings in postage, stationery and supplies and correspondent bank charges. Postage and supplies expenses of $862,000 were $16,000, or 2%, higher than the prior year. The increase in postage and supplies expenses was attributed to the growth in the number of account statements mailed to customers offset by reduced postage rates incurred as a direct result of converting to imaged customer statements. Audits, regulatory fees, and assessments for 2002 increased by $83,000, or 21%, from 2001. This was primarily due to the increase in the yearly assessments by the Office of the Comptroller of the Currency for examinations and the Federal Deposit Insurance Corporation for deposit insurance coverage. Both assessment calculations, which are based on deposit size, continue to increase as the Company's deposit balances grow. Other noninterest expenses totaled $3.6 million for 2002, compared to $3.2 million for 2001. The increase included increased loan expenses of $83,000, increased legal expenses of $100,000, increased business development expenses of $88,000 and increased provisions for non-credit-related losses of $72,000. The Company's current strategic plan calls for the construction of five additional new branch offices in 2003. The costs associated with these planned offices will continue to result in higher levels of staff, facilities, and related expenses in 2003 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 4 Management's Discussion and Analysis of Financial Condition and Results of Operations (exclusive of non-recurring gains). This ratio equaled 2.55% for 2002, compared to 2.60% for 2001. 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 2002 and 2001, the operating efficiency ratio was 71.9%. Provision for Income Taxes The provision for income taxes was $2.9 million for 2002, compared to $2.2 million for 2001. The effective tax rate, which is the ratio of income tax expense to income before taxes, was 33.6% in 2002 and 33.4% in 2001. 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 2002 and 2001. 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, 2002, deferred tax assets amounted to $1.8 million and deferred tax liabilities amounted to $1.4 million. 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. Management currently anticipates future earnings will be adequate to utilize the net deferred tax assets. Net Income and Net Income Per Share Net income for 2002 rose to a record $5.7 million, an increase of $1.3 million, or 28%, over the $4.4 million recorded in 2001. This increase was due to an increase in net interest income of $5.6 million, an increase in noninterest income of $1.1 million, a decrease in the provision for loan losses of $34,000, partially offset by an increase in noninterest expenses of $4.9 million and an increase of $639,000 in the provision for income taxes. Basic earnings per common share, after adjusting for a 5% common stock dividend declared in January 2003, increased by 21% to $2.71 per share, compared to $2.24 in 2001. Diluted earnings per common share were $2.48 for 2002 and $2.04 for 2001 after adjusting for the 5% common stock dividend declared in January 2003. 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 2002 and 2001 was 0.82%. 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 2002 was 14.86%, compared to 14.85% for 2001. Results of Operations - -------------------------------------------------------------------------------- 2001 versus 2000 Net income for 2001 rose to a record $4.4 million, an increase of $734,000, or 20%, over the $3.7 million recorded in 2000. Diluted earnings per common share increased by 14% to $2.04 for 2001 over $1.78 for 2000 after adjusting for the 5% common stock dividend declared in January 2002 and 2003. Net interest income for 2001 increased $4.6 million, or 26%, over 2000 to $22.1 million. Interest income on earning assets totaled $38.2 million, an increase of $6.5 million, or 20%, over 2000. Interest expense for 2001 increased by $1.9 million, or 13%, to $16.2 million from $14.3 million. The Company's net interest rate spread increased to 3.75% in 2001 from 3.73% in 2000 and the net interest margin decreased 9 basis points from 4.49% to 4.40%. Noninterest income for 2001 increased by $1.2 million, or 23%, over 2000 to $6.6 million. Included in total noninterest income were gains of $354,000 in 2001 and $370,000 in 2000 on the sale of residential, student, and Small Business Administration loans. Noninterest expenses totaled $20.5 million for 2001, an increase of $4.3 million, or 27%, over 2000. Staffing levels, occupancy, furniture and equipment, and related expenses increased as a result of opening two full service branches in Spring and Fall 2001. Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $2.0 million, or 27%, in 2001 over 2000. This increase was consistent with 5 Management's Discussion and Analysis of Financial Condition and Results of Operations an increase in the level of full-time equivalent employees from 266 at December 31, 2000 to 334 at year-end 2001. Occupancy expenses totaled $2.1 million in 2001, an increase of $351,000, or 20%, over 2000 while furniture and equipment expenses increased by $310,000, or 28%, to $1.4 million. Advertising and marketing expenses were $1.7 million for 2001, an increase of $271,000, or 19%, over 2000. Data processing expenses increased by $349,000, or 36%, in 2001 over 2000. Postage and supplies expenses of $846,000 were $187,000, or 28%, higher than the prior year. Audits, regulatory fees, and assessments for 2001 increased by $53,000, or 15%, from 2000. Other noninterest expenses totaled $3.2 million for 2001, compared to $2.4 million for 2000. 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 investment securities portfolio consists primarily of U.S. Government agency and mortgage-backed obligations. These securities have very little, if any, credit risk because
Table 3 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 Due Under 1 Year Due 1-5 Years Due 5-10 Years Due Over 10 Years Total (dollars in thousands) Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield - ------------------------------------------------------------------------------------------------------------------------------ Available for Sale U.S. Government Agency obligations -- -- -- -- $ 1,997 5.82% $ 10,310 6.48% $ 12,307 6.37% Mortgage-backed obligations -- -- $ 647 7.64% 11,903 3.90 172,243 4.46 184,793 4.43 Corporate debt securities -- -- -- -- -- -- 6,033 7.76 6,033 7.76 - ------------------------------------------------------------------------------------------------------------------------------ Total available for sale $-- --% $ 647 7.64% $13,900 4.17% $188,586 4.68% $203,133 4.65% - ------------------------------------------------------------------------------------------------------------------------------ Held to Maturity U.S. Government Agency obligations -- -- $ 999 6.30% -- -- $ 9,006 6.92% $10,005 6.86% Municipal obligations -- -- -- -- -- -- 1,996 5.37 1,996 5.37 Mortgage-backed obligations -- -- 1,799 7.20 $ 4,833 5.11% 57,277 5.98 63,909 5.95 Corporate debt securities -- -- 2,008 6.35 11,100 6.68 8,607 7.51 21,715 6.97 - ------------------------------------------------------------------------------------------------------------------------------ Total held to maturity $-- --% $4,806 6.66% $15,933 6.19% $76,886 6.30% $97,625 6.26% - ------------------------------------------------------------------------------------------------------------------------------ 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.
6 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 or are AAA rated. 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, 2002, the weighted average life of the Company's securities portfolio was 2.5 years compared to 6.7 years at December 31, 2001. The weighted average life of the portfolio is calculated by estimating the average rate of repayment of the underlying collateral of the security. 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, 2002 or 2001. Securities available for sale increased by $97.7 million in 2002 (excluding the effect of unrealized gains or losses) primarily as a result of purchases of $176.9 million, offset by principal repayments and maturities of $78.5 million. The securities available for sale portfolio is comprised of U.S. Government Agency securities, mortgage-backed securities, AAA Whole Loan CMO securities, and corporate debt securities. At December 31, 2002, the unrealized gains on securities available for sale included in stockholders' equity totaled $1.5 million, net of tax, compared to unrealized losses of $111,000, net of tax, at December 31, 2001. The weighted average anticipated maturity of the securities available for sale portfolio was 2.3 years at December 31, 2002, with a weighted average yield of 4.65%. During 2002, securities held to maturity decreased by $5.7 million as a result of purchases of $29.1 million offset by principal repayments of $34.7 million. The securities held in this portfolio include U.S. Government Agency securities, tax-exempt municipal bonds, AAA Whole Loan CMO securities, corporate debt securities and mortgage-backed securities. The weighted average anticipated maturity of the securities held to maturity portfolio was 3.2 years at December 31, 2002, with a weighted average yield of 6.26%. The contractual maturity distribution and weighted average yield of the Company's available for sale and held to maturity portfolios at December 31, 2002 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 affected on tax-exempt obligations. Loan Portfolio - -------------------------------------------------------------------------------- The table below summarizes the composition of the loan portfolio of the Company by type as of December 31, for each of the years 1998 through 2002. 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 and personal guarantees of the principals involved. Construction loans are primarily used for single-family residential properties. Financing is provided against firm agreements of sale, with speculative construction normally limited to one or two samples per project.
Table 4 - -------------------------------------------------------------------------------------------------------------------- December 31, (in thousands) 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Commercial real estate, construction and land development loans $175,993 $175,832 $158,707 $120,008 $ 81,949 Residential real estate mortgage loans 66,190 48,415 41,314 34,681 31,694 Tax-exempt loans 5,629 2,676 2,786 342 395 Commercial, industrial and other business loans 49,226 42,399 31,490 21,228 19,614 Consumer loans 34,598 36,551 30,691 22,764 20,868 Lines of credit 37,245 36,801 25,264 17,082 12,601 - -------------------------------------------------------------------------------------------------------------------- Total loans $368,881 $342,674 $290,252 $216,105 $167,121 - --------------------------------------------------------------------------------------------------------------------
7 Management's Discussion and Analysis of Financial Condition and Results of Operations The commercial loan portfolio is comprised primarily of 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 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 2002, total gross loans increased by $29.1 million from $350.3 million at December 31, 2001, to $379.4 million at December 31, 2002, including $10.5 million of loans held for sale on December 31, 2002 and $7.7 million of loans held for sale on December 31, 2001. The loans held for sale represent student loans and certain residential loans that management intends to sell and reinvest in higher yielding loans and securities. The increase in loans receivable in 2002 was primarily in residential and commercial business. Loans receivable represented 51% of total deposits and 47% of total assets at December 31, 2002, excluding the loans held for sale, compared to 61% and 56%, respectively, at December 31, 2001. 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, 2002, are presented in the following table. Concentrations of Credit Risk The largest portion of loans, 39%, 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 $176.0 million at December 31, 2002, compared to $175.8 million at December 31, 2001. 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. Non-Performing Loans and Assets Total non-performing assets (non-performing loans and foreclosed real estate) at December 31, 2002, were $1.8 million, or 0.23%, of total assets as compared to $888,000, or 0.15%, of total assets at December 31, 2001. Foreclosed real estate totaled $118,000 as of December 31, 2002, and $12,000 as of December 31, 2001. Total non-performing loans (non-accrual loans and restructured loans) at December 31, 2002 were $1.7 million compared to
Table 5 - -------------------------------------------------------------------------------------------------------------- December 31, 2002 - -------------------------------------------------------------------------------------------------------------- Due Under Due 1-5 Due Over (in thousands) One Year Years Five Years Total - -------------------------------------------------------------------------------------------------------------- Real estate: Commercial mortgage $ 9,331 $39,949 $ 95,679 $144,959 Construction and land development 18,873 7,492 4,669 31,034 Residential mortgage 3,767 9,767 52,656 66,190 Tax-exempt 418 3,239 1,972 5,629 - -------------------------------------------------------------------------------------------------------------- 32,389 60,447 154,976 247,812 Commercial 23,309 19,195 6,722 49,226 Consumer 11,173 13,156 10,269 34,598 Lines of credit 37,245 0 0 37,245 - -------------------------------------------------------------------------------------------------------------- Total loans $104,116 $92,798 $171,967 $368,881 - -------------------------------------------------------------------------------------------------------------- Interest rates: Predetermined $ 32,546 $75,252 $158,500 $266,298 Floating 71,570 17,546 13,467 102,583 - -------------------------------------------------------------------------------------------------------------- Total loans $104,116 $92,798 $171,967 $368,881 - --------------------------------------------------------------------------------------------------------------
8 Management's Discussion and Analysis of Financial Condition and Results of Operations $876,000 a year ago. Total delinquent loans (those loans 30 days or more delinquent) as a percentage of total loans were 0.68% at December 31, 2002, compared to 0.34% at December 31, 2001. 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. At December 31, 2002, loans past due 90 days and still accruing interest amounted to $55,000 compared to $0 at December 31, 2001. Foreclosed real estate totaled $118,000 as of December 31, 2002 as compared to $12,000 as of December 31, 2001. These properties have been written down to the lower of cost or fair value less disposition costs. The Company obtains updated appraisals on non-performing loans secured by real estate. In those instances where appraisals reflect reduced collateral values, an evaluation of the borrower's overall financial condition is made to determine the need for possible write-downs or appropriate additions to the allowance for loan losses. The following table summarizes information regarding non-performing loans and non-performing assets as of December 31, 1998 through 2002. Allowance for Loan Losses The allowance for loan losses is a reserve established through charges to expense in the form of a provision for loan losses and reduced by loan charge-offs net of recoveries. Charge-offs occur when loans are deemed to be uncollectible. Management has established an allowance for loan losses that they believe is adequate for estimated inherent losses in the current loan portfolio. In conjunction with an internal loan review function that operates independently of the lending function, management monitors the loan portfolio to identify risks on a timely basis so that an appropriate allowance can be maintained. 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, which typically include a review of the allowance for loan losses as an important part of the examination process. In establishing the allowance, management evaluates individual large classified loans and nonaccrual loans, and determines an aggregate reserve for those loans based on that review. An allowance for the remainder of the loan portfolio is also determined based on historical loss experience within the components of the portfolio. These allocations may be modified if current condi-
Table 6 - --------------------------------------------------------------------------------------------------------------------- December 31, (dollars in thousands) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 958 $127 $300 $119 $227 Consumer 42 116 162 244 23 Real estate:Construction 0 0 0 0 0 Mortgage 599 633 371 321 25 - --------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 1,599 876 833 684 275 Loans past due 90 days or more and still accruing 55 0 0 20 1 Restructured loans 0 0 0 0 0 - --------------------------------------------------------------------------------------------------------------------- Total non-performing loans 1,654 876 833 704 276 Foreclosed real estate 118 12 42 12 11 - --------------------------------------------------------------------------------------------------------------------- Total non-performing assets $1,772 $888 $875 $716 $287 - --------------------------------------------------------------------------------------------------------------------- Non-performing loans to total loans 0.45% 0.26% 0.29% 0.32% 0.16% Non-performing assets to total assets 0.23% 0.15% 0.18% 0.18% 0.09% - --------------------------------------------------------------------------------------------------------------------- Interest income received on nonaccrual loans $ 79 $ 33 $ 52 $ 38 $ 5 - --------------------------------------------------------------------------------------------------------------------- Interest income that would have been recorded under the original terms of the loans $193 $ 89 $ 96 $ 66 $ 22
9 Management's Discussion and Analysis of Financial Condition and Results of Operations tions indicate that loan losses may differ from historical experience, based on factors and changes in portfolio mix and volume. In addition, an unallocated portion of the allowance is established for losses inherent in the loan portfolio, which have not been identified by the more quantitative processes described above. This determination inherently involves a higher degree of subjectivity, and considers risk factors that may not have yet manifested themselves in the Company's historical loss experience. Those factors include changes in levels and trends of charge-offs, delinquencies and nonaccrual loans, trends in volume and term loans, changes in underwriting standards and practices, portfolio mix, tenure of the loan officers and management, changes in credit concentrations, and national and local economic trends and conditions. While the allowance for loan losses is maintained at a level believed to be adequate by management for estimated losses in the loan portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change. Changes in these estimates may impact the provisions charged to expense in future periods. The Company recorded provisions of $1.4 million to the allowance for loan losses for 2002 compared to $1.5 million for 2001. During 2002, net charge-offs amounted to $833,000, or 0.23%, of average loans outstanding for the year, compared to $657,000, or 0.21%, of average loans outstanding for 2001. The allowance for loan losses increased as a percentage of loans receivable from 1.33% of total loans outstanding at December 31, 2001, to 1.40% of total loans outstanding and provided coverage of 311% of non-performing loans. The table below presents, for the years 1998 through 2002, information regarding the Company's provision and allowance for loan losses.
Table 7 - ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, (dollars in thousands) 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Balance at beginning of year $4,544 $3,732 $2,841 $2,232 $1,699 Provisions charged to operating expenses 1,435 1,469 1,050 762 542 - ---------------------------------------------------------------------------------------------------------------- 5,979 5,201 3,891 2,994 2,241 - ---------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged-off: Commercial 93 3 6 8 4 Consumer 2 21 8 4 3 Real estate 21 0 0 1 0 - ---------------------------------------------------------------------------------------------------------------- Total recoveries 116 24 14 13 7 - ---------------------------------------------------------------------------------------------------------------- Loans charged-off: Commercial (561) (475) (1) (150) (2) Consumer (70) (85) (95) (10) (14) Real estate (318) (121) (77) (6) (0) - ---------------------------------------------------------------------------------------------------------------- Total charged-off (949) (681) (173) (166) (16) - ---------------------------------------------------------------------------------------------------------------- Net charge-offs (833) (657) (159) (153) (9) - ---------------------------------------------------------------------------------------------------------------- Balance at end of year $5,146 $4,544 $3,732 $2,841 $2,232 - ---------------------------------------------------------------------------------------------------------------- Net charge-offs to average loans outstanding 0.23% 0.21% 0.06% 0.08% 0.01% Allowance for loan losses to year-end loans 1.40% 1.33% 1.29% 1.31% 1.34% - ----------------------------------------------------------------------------------------------------------------
10 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, 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- % Gross % Gross % Gross % Gross % Gross (dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans - -------------------------------------------------------------------------------------------------------------------------------- Commercial loans and lines of credit $2,428 23.45% $ 986 23.20% $ 178 19.20% $ 155 17.73% $ 400 19.28% Consumer 452 9.38 157 10.67 143 10.57 224 10.53 150 12.49 Real estate, construction and land development: Commercial 1,698 47.84 3,240 50.38 3,286 54.61 2,335 55.69 1,582 49.27 Residential 568 19.33 161 15.75 125 15.62 127 16.05 100 18.96 - -------------------------------------------------------------------------------------------------------------------------------- Total $5,146 100.00% $4,544 100.00% $3,732 100.00% $2,841 100.00% $2,232 100.00% - --------------------------------------------------------------------------------------------------------------------------------
Deposits Total deposits at December 31, 2002, were $727.0 million, up $165.3 million, or 29%, over total deposits of $561.7 million at December 31, 2001. The Company remains a deposit-driven financial institution with emphasis on core deposit accumulation and retention as a basis for sound growth and profitability. The Company regards core deposits as all deposits other than public certificates of deposits. Deposits in the various core categories, increased $162.1 million, or 31%, in 2002 over 2001. Total deposits averaged $641.5 million for 2002, an increase of $140.4 million, or 28%, over the 2001 average of $501.1 million. The average balance on noninterest-bearing demand deposits increased in 2002 by $23.4 million, or 26%, compared to the prior year. The average balance of interest bearing demand accounts (money market and interest checking accounts) for 2002 increased by $48.1 million, or 44%, over the average balance for the prior year. The average total balance of all savings accounts was $197.2 million, a $55.9 million, or 40%, increase over the average balance for 2001. The average balance of all time deposits in 2002 was $173.1 million, an increase of $13.0 million, or 8%, over the average balance for 2001. For 2002, the cost of total deposits was 2.02% as compared to 3.08% in 2001. 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. The average balances and weighted average rates paid on deposits for 2002, 2001 and 2000 are presented below.
Table 9 - ------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2002 Average 2001 Average 2000 Average (dollars in thousands) Balance/Rate Balance/Rate Balance/Rate - ------------------------------------------------------------------------------------------------------------------------- Demand deposits: Noninterest-bearing $114,758 $ 91,352 $ 72,413 Interest-bearing (money market and checking) 156,441 1.30% 108,349 2.24% 80,460 3.26% Savings 197,225 1.96 141,350 2.95 108,131 3.90 Time 173,064 4.06 160,031 5.52 130,816 5.44 - ------------------------------------------------------------------------------------------------------------------------- Total deposits $641,488 $501,082 $391,820 - -------------------------------------------------------------------------------------------------------------------------
11 Management's Discussion and Analysis of Financial Condition and Results of Operations The remaining maturity for certificates of deposit of $100,000 or more as of December 31, 2002, 2001 and 2000 is presented in Table 10. Table 10 - ------------------------------------------------------------- (in thousands) 2002 2001 2000 - ------------------------------------------------------------- 3 months or less $31,591 $32,092 $41,554 3 to 6 months 20,462 17,493 4,771 6 to 12 months 16,390 9,028 7,541 Over 12 months 11,427 16,292 13,515 - ------------------------------------------------------------- Total $79,870 $74,905 $67,381 - ------------------------------------------------------------- Interest Rate Sensitivity The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates. The Company's risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Company's asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies. The Company's Board of Directors reviews the guidelines established by ALCO. 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, 2002.
Table 11 - -------------------------------------------------------------------------------------------------------------------------------- December 31, 2002 - -------------------------------------------------------------------------------------------------------------------------------- 1 - 90 91 - 180 181 - 365 1 - 5 Beyond 5 (in thousands) Days Days Days Years Years Total - -------------------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans receivable $119,955 $ 5,551 $11,978 $ 75,071 $164,383 $376,938 Securities 49,520 39,704 54,693 96,064 57,705 297,686 Federal funds sold 44,500 0 0 0 0 44,500 - -------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 213,975 45,255 66,671 171,135 222,088 719,124 - -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Transaction accounts 129,679 0 0 0 301,650 431,329 Time deposits 49,620 33,101 45,337 40,369 0 168,427 Trust capital securities 0 0 0 0 13,000 13,000 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 179,299 33,101 45,337 40,369 314,650 612,756 - -------------------------------------------------------------------------------------------------------------------------------- Period GAP 34,676 12,154 21,334 130,766 (92,562) $106,368 - -------------------------------------------------------------------------------------------------------------------------------- Cumulative GAP $ 34,676 $46,830 $68,164 $198,930 $106,368 - -------------------------------------------------------------------------------------------------------------------------------- Notes: Nonaccrual loans, deferred fees on loans and overdrafts have been excluded in the loans receivable balances. Securities are reported at par for purposes of this table.
12 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 income over the next 24 months in a flat rate scenario versus net income in alternative interest rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Company's model projects a 200 basis point increase and a 100 basis point decrease during the next year, with rates remaining constant in the second year. Historically, the Company's Asset/Liability Committee (ALCO) policy has established that income sensitivity will be considered acceptable if overall net income volatility in a plus 200 or minus 200 basis point scenario is within 15% of net income in a flat rate scenario in the first year and 30% using a two year planning window. At December 31, 2002, the Company projected its interest rate risk using a plus 200 and minus 100 basis point scenario. During 2002 and 2001 combined, the Federal Reserve lowered short-term interest rates by 525 basis points, pushing the Federal Funds rate down to 1.25% at year-end 2002, the lowest level in over 50 years. The Company's ALCO believed it was a better measure of current risk assuming a minus 100 point scenario, as a minus 200 basis point reduction would be unlikely given that current short-term market interest rates are already below 2.00%. At December 31, 2002, the Company's income simulation model indicates net income would decrease 0.5%, or $39,000, and 5.2%, or $1.0 million, in the first year and over a two-year time frame, respectively, if rates decreased 100 basis points as compared to an increase of 4.1% and 5.5%, respectively, at December 31, 2001. The model projects that net income would increase by 5.4%, or $414,000, and 16.8%, or $3.3 million, in the first year and over a two-year time frame, respectively, if rates increased as described above, as compared to an increase of 0.5% and 5.3%, respectively, at December 31, 2001. All of these forecasts are within an acceptable level of interest rate risk per the policies established by ALCO. The market value of equity model reflects certain estimates and assumptions regarding the impact on the market value of the Company's assets and liabilities given an immediate 200 basis point change in interest rates. One of the key assumptions is the market value assigned to the Company's core deposits, or the core deposit premium. The Company has completed and updated comprehensive core deposit studies in order to assign its own core deposit premiums as permitted by regulation. The studies have consistently confirmed management's assertion that the Company's core deposits have stable balances over long periods of time, and are generally insensitive to changes in interest rates. Thus, these core deposit balances provide an internal hedge to market fluctuations in the Company's fixed rate assets. Management believes the core deposit premiums produced by its market value of equity model at December 31, 2002 provide an accurate assessment of the Company's interest rate risk. Management also monitors interest rate risk by utilizing a market value of equity model. The model assesses the impact of a change in interest rates on the market value of all the Company's assets and liabilities, as well as any off balance sheet items. The model calculates the market value of the Company's assets and liabilities in excess of book value in the current rate scenario, and then compares the excess of market value over book value given an immediate 200 basis point increase in rates and a 100 basis point decrease in rates. The Company's ALCO policy indicates that the level of interest rate risk is unacceptable if the immediate change would result in the loss of 60% or more of the excess of market value over book value in the current rate scenario. At December 31, 2002, 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 $162.1 million, or 31%, in 2002. 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, 2002, the total potential liquidity for the Company through these secondary sources was $231 million. In view of the primary and secondary sources as previously mentioned, management believes the Company is capable of meeting its anticipated liquidity needs. 13 Management's Discussion and Analysis of Financial Condition and Results of Operations Off-Balance Sheet Arrangements and Aggregate Contractual Obligations The following table represents the Company's on-and-off balance sheet aggregate contractual obligations to make future payments as of December 31, 2002:
Table 12 - ----------------------------------------------------------------------------------------------------- December 31, 2002 - ----------------------------------------------------------------------------------------------------- 1 Year Over 1 Over 3 Over 5 (in thousands) or Less to 3 Years to 5 Years Years Total - ----------------------------------------------------------------------------------------------------- Time Deposits $128,058 $24,038 $16,331 $ 0 $168,427 Trust Capital Securities 0 0 0 13,000 13,000 Operating Leases 1,195 2,039 1,619 6,164 11,017 - ----------------------------------------------------------------------------------------------------- Total $129,253 $26,077 $17,950 $19,164 $192,444 - -----------------------------------------------------------------------------------------------------
In addition, the Company, in the conduct of ordinary business operations routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for the early termination of the contract. Management is not aware of any additional commitments or contingent liabilities, which may have a material adverse impact on the liquidity or capital resources of the Company. The Company is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. 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 2002 and 2001 to meet short-term liquidity needs. For 2002, other borrowed money averaged $12,000 as compared to $330,000 in 2001. The average rate paid on the Company's short-term borrowings was 1.46% during 2002 and 3.94% in 2001. Short-term borrowings totaled $0 at December 31, 2002 and 2001. Long-Term Debt Long-term debt consists of Trust Capital Securities through Commerce Harrisburg Capital Trust I and Commerce Harrisburg Capital Trust II, Delaware business trust subsidiaries of the Company. At December 31, 2002, all of the Capital Trust Securities qualified as Tier I capital for regulatory capital purposes. Proceeds of the trust capital securities are for general corporate purposes, including additional capitalization of the Company's wholly-owned banking subsidiary. Reference should be made to Note 10 in the Notes to the consolidated Financial Statements for further analysis of the Company's long-term debt. Long-term debt totaled $13.0 million at December 31, 2002 and 2001. Stockholders' Equity and Capital Adequacy At December 31, 2002, stockholders' equity totaled $42.8 million, up $10.2 million, or 31%, over stockholders' equity at December 31, 2001. This increase was due to the Company's net income for the year, shares issued under stock purchase and stock option plans, and unrealized appreciation on securities available for sale. Stockholders' equity as a percent of total assets was 5.44% at December 31, 2002, compared to 5.34% at December 31, 2001. 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 13 provides a comparison of the Bank's risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated. At December 31, 2002, 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%. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations
Table 13 - ----------------------------------------------------------------------------------------------------------- To Be Well- Capitalized Under Actual December 31, For Capital Prompt Corrective 2002 2001 Adequacy Purposes Action Provisions - ----------------------------------------------------------------------------------------------------------- Tier 1 Capital 11.11% 10.67% 4.00% 6.00% Total Capital 12.17 11.73 8.00 10.00 Leverage ratio (to average assets) 6.97 7.65 4.00 5.00 - -----------------------------------------------------------------------------------------------------------
The Company's common stock is listed for trading on the NASDAQ Small Cap Market under the symbol COBH. 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. 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 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. 15
Consolidated Balance Sheets December 31, (in thousands, except share amounts) 2002 2001 - --------------------------------------------------------------------------------------------------------- Assets - --------------------------------------------------------------------------------------------------------- Cash and due from banks $ 30,950 $ 21,555 Federal funds sold 44,500 4,300 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents 75,450 25,855 Securities, available for sale at fair value 205,436 104,722 Securities, held to maturity at cost (fair value 2002: $101,036; 2001: $102,427 ) 97,625 103,349 Loans, held for sale 10,514 7,661 Loans receivable, net of allowance for loan losses (allowance 2002: $5,146; 2001: $4,544) 363,735 338,130 Restricted investments in bank stock 2,045 2,593 Premises and equipment, net 26,409 21,587 Accrued interest receivable 3,675 3,542 Other assets 1,709 2,451 - ---------------------------------------------------------------------------------------------------------- Total assets $786,598 $609,890 - ---------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - --------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing $127,199 $105,171 Interest-bearing 599,756 456,567 - ---------------------------------------------------------------------------------------------------------- Total deposits 726,955 561,738 Accrued interest payable 832 837 Other liabilities 2,999 1,722 Trust capital securities 13,000 13,000 - ---------------------------------------------------------------------------------------------------------- Total liabilities 743,786 577,297 - ---------------------------------------------------------------------------------------------------------- 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 2002: 2,117,089; 2001: 1,881,960) 2,117 1,882 Surplus 31,909 25,263 Retained earnings 6,866 5,159 Accumulated other comprehensive income (loss) 1,520 (111) - ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 42,812 32,593 - ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $786,598 $609,890 - ----------------------------------------------------------------------------------------------------------
See accompanying notes 16
Consolidated Statements of Income Year Ended December 31, (in thousands, except per share amounts) 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Interest Income Loans receivable, including fees: Taxable $26,755 $26,532 $22,836 Tax-exempt 111 120 109 Securities: Taxable 14,514 10,860 8,025 Tax-exempt 107 94 44 Federal funds sold 508 641 760 - ---------------------------------------------------------------------------------------------------------------------- Total interest income 41,995 38,247 31,774 - ---------------------------------------------------------------------------------------------------------------------- Interest Expense - ---------------------------------------------------------------------------------------------------------------------- Deposits 12,940 15,420 13,956 Other 0 13 42 Trust capital securities 1,354 760 299 - ---------------------------------------------------------------------------------------------------------------------- Total interest expense 14,294 16,193 14,297 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 27,701 22,054 17,477 Provision for loan losses 1,435 1,469 1,050 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 26,266 20,585 16,427 - ---------------------------------------------------------------------------------------------------------------------- Noninterest Income - ---------------------------------------------------------------------------------------------------------------------- Service charges and other fees 6,766 5,660 4,564 Other 448 541 428 Gain on sales of securities available for sale 0 52 0 Gain on sales of loans 493 354 370 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest income 7,707 6,607 5,362 - ---------------------------------------------------------------------------------------------------------------------- Noninterest Expenses - ---------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits 12,491 9,486 7,485 Occupancy 2,403 2,133 1,782 Furniture and equipment 1,523 1,402 1,092 Advertising and marketing 2,181 1,722 1,451 Data processing 1,890 1,313 964 Postage and supplies 862 846 659 Audits, regulatory fees and assessments 484 401 348 Other 3,594 3,209 2,408 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 25,428 20,512 16,189 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 8,545 6,680 5,600 Provision for income taxes 2,871 2,232 1,886 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 5,674 $ 4,448 $ 3,714 - ---------------------------------------------------------------------------------------------------------------------- Net Income per Common Share - ---------------------------------------------------------------------------------------------------------------------- Basic $2.71 $2.24 $1.90 Diluted 2.48 2.04 1.78 - ---------------------------------------------------------------------------------------------------------------------- See accompanying notes
17 Consolidated Statements of Stockholders' Equity
Accumulated Other Preferred Common Retained Comprehensive (dollars in thousands) Stock Stock Surplus Earnings Income (Loss) Total - -------------------------------------------------------------------------------------------------------------------------------- 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 6,037 ----- Dividends declared on preferred stock - - - (80) - (80) Common stock of 12,693 shares issued under stock option plans - 13 71 - - 84 Income tax benefit of stock options exercised - - 30 - - 30 Common stock of 240 shares issued under employee stock purchase plan - - 6 - - 6 Proceeds from issuance of 8,890 shares of common stock in connection with dividend reinvestment and stock purchase plan - 9 210 - - 219 5% common stock dividend and cash paid in lieu of fractional shares (82,909 shares issued) - 83 2,348 (2,437) - (6) - -------------------------------------------------------------------------------------------------------------------------------- December 31, 2000 $400 $1,749 $20,861 $4,334 $ (676) $26,668 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income - - - 4,448 - 4,448 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - 565 565 ----- Total comprehensive income 5,013 ----- Dividends declared on preferred stock - - - (80) - (80) Common stock of 23,231 shares issued under stock option plans - 24 193 - - 217 Income tax benefit of stock options exercised - - 78 - - 78 Common stock of 290 shares issued under employee stock purchase plan - - 9 - - 9 Proceeds from issuance of 20,016 shares of common stock in connection with dividend reinvestment and stock purchase plan - 20 678 - - 698 5% common stock dividend and cash paid in lieu of fractional shares (89,378 shares issued) - 89 3,444 (3,543) - (10) - -------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 $400 $1,882 $25,263 $5,159 $ (111) $32,593 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income - - - 5,674 - 5,674 Change in unrealized gains (losses) on securities, net of reclassification adjustment - - - - 1,631 1,631 ----- Total comprehensive income 7,305 ----- Dividends declared on preferred stock - - - (80) - (80) Common stock of 112,379 shares issued under stock option plans - 113 1,625 - - 1,738 Income tax benefit of stock options exercised - - 378 - - 378 Common stock of 440 shares issued under employee stock purchase plan - - 19 - - 19 Proceeds from issuance of 21,733 shares of common stock in connection with dividend reinvestment and stock purchase plan - 22 846 - - 868 5% common stock dividend and cash paid in lieu of fractional shares (100,577 shares issued) - 100 3,778 (3,887) - (9) - ------------------------------------------------------------------------------------------------------------------------------- December 31, 2002 $400 $2,117 $31,909 $6,866 $ 1,520 $42,812 - -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes
18
Consolidated Statements of Cash Flows Year Ended December 31, (in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 5,674 $ 4,448 $ 3,714 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,435 1,469 1,050 Provision for depreciation and amortization 1,484 1,403 1,202 Deferred income taxes 68 (251) (281) Amortization of securities premiums and accretion of discounts, net 926 219 193 Gains on sale of securities available for sale 0 (52) 0 Proceeds from sales of loans 67,794 48,887 19,813 Loans originated for sale (70,154) (50,944) (19,705) Gains on sales of loans (493) (354) (370) Stock granted under stock purchase plan 19 9 6 (Increase) decrease in accrued interest receivable and other assets 74 (742) (1,345) Increase in accrued interest payable and other liabilities 1,272 724 143 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,099 4,816 4,420 Investing Activities - ----------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Proceeds from principal repayments and maturities 34,681 18,589 2,608 Purchases (29,121) (88,112) (7,398) Securities available for sale: Proceeds from principal repayments and maturities 77,946 43,922 7,501 Proceeds from sales 0 7,497 0 Purchases (176,945) (64,833) (12,268) (Purchase) redemption of restricted investments in bank stock 548 (305) (158) Proceeds from sales of loans receivable 0 3,255 6,449 Net increase in loans receivable (27,040) (56,254) (80,521) Proceeds from sale of premises and equipment 0 0 743 Purchases of premises and equipment (6,306) (6,353) (4,174) - ----------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (126,237) (142,594) (87,218) Financing Activities - ----------------------------------------------------------------------------------------------------------------------- Net increase in demand, interest checking, money market, and savings deposits 159,992 102,383 68,145 Net increase in time deposits 5,225 12,772 29,892 Net decrease in other borrowed money 0 0 (8,300) Proceeds from issuance of trust capital securities 0 8,000 5,000 Proceeds from common stock options exercised 1,738 217 84 Proceeds from common stock purchase and dividend reinvestment plan 868 698 219 Cash dividends on preferred stock and cash in lieu of fractional shares (90) (86) (83) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 167,733 123,984 94,957 - ----------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 49,595 (13,794) 12,159 Cash and cash equivalents at beginning of year 25,855 39,649 27,490 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at year-end $ 75,450 $ 25,855 $ 39,649 - ----------------------------------------------------------------------------------------------------------------------- See accompanying notes.
19 Notes to Consolidated Financial Statements December 31, 2002 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 subsidiaries Commerce Bank/Harrisburg, N.A. (Commerce or Bank), Commerce Harrisburg Capital Trust I and Commerce Harrisburg Capital Trust II. 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, Commerce 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 accounting principles generally accepted in the United States of America. 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. 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. 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 20 Notes to Consolidated Financial Statements 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 comprised of residential loans and 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. Restricted Investments in Bank Stock Restricted investments in bank stock include stock in the Federal Home Loan Bank (FHLB) and Federal Reserve Bank. Federal law requires a member institution of the FHLB system to hold stock of its district FHLB according to a predetermined formula. The stock is carried at cost. 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 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 31, 2003. 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, 2002, 2001, and 2000 for interest was $14.3 million, $16.2 million, and $14.0 million, respectively. Income taxes paid totaled $2.6 million, $2.4 million, and $2.2 million in 2002, 2001, and 2000, respectively. Recently Issued FASB Statements In July of 2001, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations", which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement became effective for the Company on January 1, 2003. 21 Notes to Consolidated Financial Statements In July 2002, the Financial Accounting Standards Board issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement delays recognition of these costs until liabilities are incurred, rather than the date of commitment to the plan, and requires fair value measurement. It does not impact the recognition of liabilities incurred in connection with a business combination or the disposal of long-lived assets. The provisions of this statement are effective for exit or disposal activities after December 31, 2002. In October 2002, the Financial Accounting Standards Board issued Statement No. 147, "Acquisitions of Certain Financial Institutions." This statement provides guidance on accounting for the acquisition of a financial institution, including the acquisition of part of a financial institution. The statement defines criteria for determining whether the acquired financial institution meets the conditions for a "business combination". If the acquisition meets the conditions of a "business combination", the specialized accounting guidance under Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" will not apply after September 30, 2002 and the amount of any unidentifiable intangible asset will be classified to goodwill upon adoption of Statement No.147. The transition provisions were effective on October 1, 2002. Adoption of these statements did not have or is not expected to have a material impact on the Company's financial condition or results of operations. 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. 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 2002 and 2001 was approximately $4.3 million and $2.3 million, respectively. 3. Securities - -------------------------------------------------------------------------------- The amortized cost and fair value of securities are summarized in the following tables.
- ------------------------------------------------------------------------------------------------------------ December 31, 2002 - ------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------ Available for Sale U.S. Government Agency securities $ 12,307 $ 204 $ 0 $ 12,511 Mortgage-backed securities 184,793 2,203 (526) 186,470 Corporate debt securities 6,033 422 0 6,455 - ------------------------------------------------------------------------------------------------------------ Total $203,133 $2,829 $(526) $205,436 - ------------------------------------------------------------------------------------------------------------ Held to Maturity U.S. Government Agency securities $ 10,005 $ 525 $ 0 $ 10,530 Municipal securities 1,996 79 0 2,075 Mortgage-backed securities 63,909 2,284 (8) 66,185 Corporate debt securities 21,715 795 (264) 22,246 - ------------------------------------------------------------------------------------------------------------ Total $ 97,625 $3,683 $(272) $101,036 - ------------------------------------------------------------------------------------------------------------
22 Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------------------------------- December 31, 2001 - ------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------- Available for Sale U.S. Treasury securities $ 1,001 $ 8 $ 0 $ 1,009 U.S. Government Agency securities 17,487 134 (4) 17,617 Mortgage-backed securities 77,269 203 (468) 77,004 Corporate debt securities 9,133 39 (80) 9,092 - ------------------------------------------------------------------------------------------------------- Total $104,890 $384 $ (552) $104,722 - ------------------------------------------------------------------------------------------------------- Held to Maturity U.S. Government Agency securities $ 5,987 $ 73 $ (33) $ 6,027 Municipal securities 1,994 43 (15) 2,022 Mortgage-backed securities 73,611 172 (789) 72,994 Corporate debt securities 21,757 95 (468) 21,384 - ------------------------------------------------------------------------------------------------------- Total $103,349 $383 $(1,305) $102,427 - -------------------------------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at December 31, 2002 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 $ 0 $ 0 Due after one year through five years 3,007 3,139 0 0 Due after five years through ten years 11,100 11,316 1,997 2,060 Due after ten years 19,609 20,396 16,343 16,906 - ---------------------------------------------------------------------------------------------------------- 33,716 34,851 18,340 18,966 Mortgage-backed securities 63,909 66,185 184,793 186,470 - ---------------------------------------------------------------------------------------------------------- Total $97,625 $101,036 $203,133 $205,436 - ----------------------------------------------------------------------------------------------------------
There were no sales of securities available for sale in 2002. Gross gains of $53,000 and gross losses of $1,000 were realized on sales of securities available for sale in 2001. There were no sales of securities available for sale in 2000. At December 31, 2002 and 2001, securities with a fair value of $200.1 million and $117.7 million respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. 23 Notes to Consolidated Financial Statements 4. Loans Receivable and Allowance for Loan Losses - -------------------------------------------------------------------------------- A summary of loans receivable is as follows: - ----------------------------------------------------------------- December 31, (in thousands) 2002 2001 - ----------------------------------------------------------------- Real Estate: Commercial Mortgage $144,959 $142,969 Construction and land development 31,034 32,863 Residential Mortgage 66,190 48,415 Tax-Exempt 5,629 2,676 Commercial Business 49,226 42,399 Consumer 34,598 36,551 Lines of Credit 37,245 36,801 - ----------------------------------------------------------------- 368,881 342,674 Less: Allowance for Loan Losses 5,146 4,544 - ----------------------------------------------------------------- Net Loans Receivable $363,735 $338,130 - ----------------------------------------------------------------- The following is a summary of the transactions in the allowance for loan losses. - ----------------------------------------------------------------- Year Ended December 31, (in thousands) 2002 2001 2000 - ----------------------------------------------------------------- Balance at beginning of year $4,544 $3,732 $2,841 Provision charged to expense 1,435 1,469 1,050 Recoveries 116 24 14 Loans charged off (949) (681) (173) - ----------------------------------------------------------------- Balance at end of year $5,146 $4,544 $3,732 - ----------------------------------------------------------------- At December 31, 2002 and 2001, the recorded investment in loans considered to be impaired under FASB Statement No.114 "Accounting by Creditors for Impairment of a Loan" totaled $1.5 million and $531,000, respectively, all of which are included in nonperforming loans. As of December 31, 2002, impaired loans have a related allowance for loan losses of $90,000. As of December 31, 2001, no impaired loans required an allowance for loan losses. Impaired loans averaged approximately $1.5 million, $531,000, and $267,000 during 2002, 2001, and 2000, respectively. Actual interest income recorded on these loans amounted to $79,000, $33,000, and $52,000 during 2002, 2001 and 2000, respectively. At December 31, 2002 and 2001, the recorded investment in nonaccrual loans was $1.6 million and $876,000, respectively. The recorded investment in past due loans greater than 90 days and still accruing was $55,000 and $0 at December 31, 2002 and 2001, respectively. 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 $8.5 million and $9.0 million at December 31, 2002 and 2001, respectively. During 2002, $5.4 million of new loans were made and repayments totaled $5.9 million. 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. Letter of credit commitments 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) 2002 2001 - ----------------------------------------------------------------- Commitments to grant loans $ 1,628 $ 8,913 Unfunded commitments of existing loans 68,105 65,302 Standby letters of credit 7,265 7,640 - ----------------------------------------------------------------- Total $76,998 $81,855 - ----------------------------------------------------------------- 24 Notes to Consolidated Financial Statements 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 $193 million at December 31, 2002. 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) 2002 2001 - ----------------------------------------------------------------- Land $ 4,211 $ 4,211 Buildings 19,941 15,732 Leasehold improvements 1,919 1,772 Furniture, fixtures, and equipment 8,956 7,529 - ----------------------------------------------------------------- 35,027 29,244 Less accumulated depreciation and amortization 8,618 7,657 - ----------------------------------------------------------------- $26,409 $21,587 - ----------------------------------------------------------------- Land, buildings, and equipment are leased under noncancelable operating lease agreements that expire at various dates through 2022. Total rental expense for operating leases in 2002, 2001, and 2000 was $1,084,000, $908,000, and $739,000, respectively. At December 31, 2002, future minimum lease payments for noncancelable operating leases are payable as follows: - ----------------------------------------------------------------- (in thousands) - ----------------------------------------------------------------- 2003 $1,195 2004 1,139 2005 900 2006 804 2007 815 Thereafter 6,164 - ----------------------------------------------------------------- Total minimum lease payments $11,017 - ----------------------------------------------------------------- 8. Deposits - -------------------------------------------------------------------------------- The composition of deposits is as follows: - ----------------------------------------------------------------- December 31, (in thousands) 2002 2001 - ----------------------------------------------------------------- Demand $127,199 $105,171 Interest checking and money market 214,293 126,851 Savings 217,036 166,514 Time certificates $100,000 or more 79,870 74,905 Other time certificates 88,557 88,297 - ----------------------------------------------------------------- $726,955 $561,738 - ----------------------------------------------------------------- At December 31, 2002, the scheduled maturities of time deposits are as follows: - ----------------------------------------------------------------- (in thousands) - ----------------------------------------------------------------- 2003 $128,058 2004 15,407 2005 8,631 2006 5,361 2007 10,970 - ----------------------------------------------------------------- $168,427 - ----------------------------------------------------------------- 9. Other Borrowed Money - -------------------------------------------------------------------------------- The Bank has a line of credit commitment from the Federal Home Loan Bank (FHLB) for borrowings up to $170 million. No amounts were outstanding on this line as of December 31, 2002 and 2001. Certain qualifying assets of the Bank collateralize the line. In addition, the Bank has a line of credit of $5.5 million and availability under two repurchase agreements to borrow up to $55.0 million, all of which were available as of December 31, 2002. 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 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 25 Notes to Consolidated Financial Statements 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 qualified as Tier 1 capital for regulatory capital purposes. On September 28, 2001, the Company issued $8,000,000 of 10% Trust Capital Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust II (the Trust II), a Delaware business trust subsidiary. The issuance of the Trust Capital Securities has similar properties as the Trust I. The Trust Capital Securities evidence a preferred ownership interest in the Trust II 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 with similar terms as in the Trust I. The Trust Capital Securities are scheduled to mature on September 28, 2031. The Trust Capital Securities may be redeemed in whole or in part at the option of the Company on or after September 28, 2011 at 105.00% of the principal plus accrued interest, if any. The redemption price declines by 0.50% on September 28 of each year from 2012 through 2021 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 $8,000,000 of the Trust Capital Securities qualified as Tier 1 capital for regulatory capital purposes. 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) 2002 2001 2000 - ----------------------------------------------------------------- Provision at statutory rate on pre-tax income $2,905 $2,271 $1,904 Tax-exempt income on loans and investments (74) (73) (52) Other 40 34 34 - ----------------------------------------------------------------- $2,871 $2,232 $1,886 - ----------------------------------------------------------------- The components of income tax expense are as follows: - ----------------------------------------------------------------- Year Ended December 31, (in thousands) 2002 2001 2000 - ----------------------------------------------------------------- Current $2,803 $2,483 $2,167 Deferred 68 (251) (281) - ----------------------------------------------------------------- $2,871 $2,232 $1,886 - ----------------------------------------------------------------- The components of the net deferred tax assets were as follows: - ----------------------------------------------------------------- December 31, (in thousands) 2002 2001 - ----------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $1,749 $1,545 Unrealized losses on securities 0 57 Other 41 18 - ----------------------------------------------------------------- Total deferred tax assets 1,790 1,620 - ----------------------------------------------------------------- Deferred tax liabilities: Unrealized gains on securities (783) 0 Premises and equipment (583) (296) Prepaid expenses (83) (75) - ----------------------------------------------------------------- Total deferred tax liabilities (1,449) (371) - ----------------------------------------------------------------- Net deferred tax assets $ 341 $1,249 - ----------------------------------------------------------------- Income taxes of $0, $18,000 and $0 were recognized on net securities gains in 2002, 2001, and 2000 respectively. 12. Stockholders' Equity - -------------------------------------------------------------------------------- At December 31, 2002, 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 136,825 shares (adjusted for common stock dividends) of the Company's common stock, exercisable at $7.30 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 2002 or 2001. 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). 26 Notes to Consolidated Financial Statements The Company has 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 total of 22,173 and 20,306 common shares were issued pursuant to this plan in 2002 and 2001, respectively. At December 31, 2002, the Company had reserved approximately 447,000 common shares to be issued in connection with the plan. On January 30, 2002, the Board of Directors declared a 5% common stock dividend payable on February 25, 2002, to stockholders of record on February 11, 2002. On January 24, 2003, the Board of Directors declared a 5% common stock dividend payable on February 24, 2003, to stockholders of record on February 7, 2003. All common stock and per share data included in these financial statements have been restated for these stock dividends. 13. Earnings per Share (continued) - -------------------------------------------------------------------------------- All options outstanding were included in the computation of diluted EPS for the year ended December 31, 2002, because the options' exercise price was lower than the average market price of the common shares. Options to purchase 87,375 shares of common stock at $32.66 were outstanding during 2001. They were not included in the computation of diluted EPS for the year ended December 31, 2001, because the options' exercise price was greater than the average market price of the common shares. Options to purchase 43,788 shares of common stock at $22.38, options to purchase 49,060 shares at $22.53, options to purchase 76,259 shares at $25.49, options to purchase 10,262 shares at $21.27, and options to purchase 10,262 shares of common stock at $24.29 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. 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) 2002 2001 2000 Per Share Per Share Per Share Income Shares Amount Income Shares Amount Income Shares Amount - ---------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Net income $5,674 $4,448 $3,714 Preferred stock dividends (80) (80) (80) - ---------------------------------------------------------------------------------------------------------------------------- Income available to common stockholders 5,594 2,063 $2.71 4,368 1,946 $2.24 3,634 1,914 $1.90 - ---------------------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Stock options 189 194 130 - ---------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Income available to common stockholders plus assumed conversions $5,594 2,252 $2.48 $4,368 2,140 $2.04 $3,634 2,044 $1.78 - ----------------------------------------------------------------------------------------------------------------------------
27 Notes to Consolidated Financial Statements 14. Stock Option Plans - -------------------------------------------------------------------------------- The 1996 Employee Stock Option Plan covers 502,256 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 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 commenced January 1, 2001 and replaced the 1990 Directors' Stock Option Plan, which expired December 31, 2000. The Plan covers 115,762 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 1,710 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 adopted the disclosure-only provisions of Standards of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation costs have been recognized for options granted in 2002, 2001, and 2000. 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, (in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Net income: As reported $5,674 $4,448 $3,714 Total stock-based compensation cost, net of tax, that would have been included in the determination of net income if the fair value based method had been applied to all awards (1,434) (952) (608) - -------------------------------------------------------------------------------- Pro-forma $4,240 $3,496 $3,106 - -------------------------------------------------------------------------------- Reported earnings per share: Basic $2.71 $2.24 $1.90 Diluted 2.48 2.04 1.78 - -------------------------------------------------------------------------------- Pro-forma earnings per share: Basic $2.02 $1.75 $1.58 Diluted 1.85 1.59 1.48 - -------------------------------------------------------------------------------- The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001, and 2000 respectively: risk-free interest rates of 4.7%, 4.8% and 5.7%; volatility factors of the expected market price of the Company's common stock of .33, .28, and .48; weighted-average expected life of the options of 10 years; and no cash dividends. Had compensation costs for stock options granted in 2002, 2001 and 2000 been determined based on the fair value at the grant dates for awards under the plan consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 2002, 2001 and 2000 would have been reduced to the proforma amounts indicated. 28 Notes to Consolidated Financial Statements Stock options transactions under the Plans were as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted Avg. Weighted Avg. Weighted Avg. Options Exercise Price Options Exercise Price Options Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 550,225 $18.73 482,925 $15.57 424,176 $13.62 Granted 13,862 36.42 99,621 31.82 88,258 24.09 Exercised (118,078) 14.73 (25,265) 8.52 (14,811) 5.63 Forfeited (24,587) 30.59 (7,056) 24.03 (14,698) 20.45 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 421,422 $19.75 550,225 $18.73 482,925 $15.57 - ----------------------------------------------------------------------------------------------------------------------------------- Exercisable at December 31 374,379 $18.33 Options available for grant at December 31 270,112 Weighted-average fair value of options granted during the year $18.84 $18.53 $14.38 - ----------------------------------------------------------------------------------------------------------------------------------- Exercise prices for options outstanding as of December 31, 2002 are presented in the following table. - ----------------------------------------------------------------------------------------------------------------------------------- As of December 31, 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Options Weighted Avg. Weighted Avg. Options Weighted Avg. Outstanding Exercise Price Contractual Life Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- Options with exercise prices ranging from $4.39 to $15.00 155,490 $ 9.01 3.1 Years 155,490 $ 9.01 Options with exercise prices ranging from $15.01 to $25.00 124,930 21.48 6.1 Years 121,465 21.55 Options with exercise prices ranging from $25.01 to $37.86 141,002 30.05 8.7 Years 97,424 29.18 - ----------------------------------------------------------------------------------------------------------------------------------- Total options outstanding with exercise prices ranging from $4.39 to $37.86 421,422 $19.75 5.8 Years 374,379 $18.33 - -----------------------------------------------------------------------------------------------------------------------------------
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, 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2002, 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 on the next page. There are no conditions or events since that notification that management believes have changed the Bank's category. 29 Notes to Consolidated Financial Statements The following table presents the risk-based and leverage capital amounts and ratios at December 31, 2002 and 2001 for the Company and the Bank.
- ----------------------------------------------------------------------------------------------------------------------------------- To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------------------------- Company As of December 31, 2002 Risked based capital ratios: Total capital $59,438 12.22% => $38,907 => 8.0% N/A N/A Tier 1 capital 54,292 11.16 => 19,454 => 4.0 N/A N/A Leverage ratio 54,292 7.00 => 31,012 => 4.0 N/A N/A - ----------------------------------------------------------------------------------------------------------------------------------- Bank As of December 31, 2002 Risked based capital ratios: Total capital $59,160 12.17% => $38,897 => 8.0% => $48,622 => 10.0% Tier 1 capital 54,014 11.11 => 19,449 => 4.0 => 29,173 => 6.0 Leverage ratio 54,014 6.97 => 30,988 => 4.0 => 38,735 => 5.0 - ----------------------------------------------------------------------------------------------------------------------------------- Company As of December 31, 2001 Risked based capital ratios: Total capital $50,248 11.78% => $34,124 => 8.0% N/A N/A Tier 1 capital 43,606 10.22 => 17,062 => 4.0 N/A N/A Leverage ratio 43,606 7.33 => 23,796 => 4.0 N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ Bank As of December 31, 2001 Risked based capital ratios: Total capital $50,045 11.73% => $34,130 => 8.0% => $42,663 => 10.0% Tier 1 capital 45,501 10.67 => 17,065 => 4.0 => 25,598 => 6.0 Leverage ratio 45,501 7.65 => 23,786 => 4.0 => 29,733 => 5.0 - ------------------------------------------------------------------------------------------------------------------------------------
30 Notes to Consolidated Financial Statements 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 2002, 2001, and 2000, the Company's matching contribution was established at 25% of the employees' salary deferral. The amount charged to expense was $98,000, $84,000, and $42,000 in 2002, 2001, and 2000, 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 other comprehensive income item that the Company presently has is unrealized gains (losses) on securities available for sale. - ----------------------------------------------------------------- Year Ended December 31, (in thousands) 2002 2001 2000 - ----------------------------------------------------------------- Unrealized holding gains (losses) arising during the year $2,471 $ 908 $3,520 Less reclassification adjustment for gains included in net income 0 52 0 - ----------------------------------------------------------------- Net unrealized gains 2,471 856 3,520 Tax (expense) (840) (291) (1,197) - ----------------------------------------------------------------- Net of tax amount $1,631 $ 565 $2,323 - ----------------------------------------------------------------- 18. Commitments and Contingencies - -------------------------------------------------------------------------------- The Company has entered into an agreement to purchase the land at 3951 Union Deposit Road, Harrisburg, Dauphin County, Pennsylvania. The Company plans to construct a full-service branch on this property to be opened in late Spring 2003. The Company has entered into an agreement to purchase the land at 15 Lorane Road in conjunction with the purchase of 5140 Perkiomen Avenue, Reading, Berks County, Pennsylvania. The Company plans to construct a full-service branch on these properties to be opened in Summer 2003. 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. (an 8.2% 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, proof and encoding services, deposit account statement rendering, MAC/VISA card processing, data processing, and advertising support. The Company paid approximately $1.3 million, $622,000, and $414,000 for services provided by Commerce Bancorp, Inc. during 2002, 2001, and 2000, respectively. Insurance premiums and commissions, which are paid to a subsidiary of Commerce Bancorp, Inc., are included in the total amount paid. The Company routinely sells loan participations to Commerce Bank, N.A. and at December 31, 2002 and 2001, approximately $8.6 million and $12.4 million, respectively, of these participations were outstanding. A former director of the Company is Chairman of the Board of Commerce Bank, N.A. The Company purchased certain services from a business owned by the spouse of the former director in 2002, 2001 and 2000 in the amounts of $267,000, $215,000, and $130,000, respectively. A federal funds line of credit was established with Commerce Bank N.A. in the amount of $5.5 million, which could be drawn upon if needed. The balance at December 31, 2002 and 2001 on this line was $0. A law firm in which a director of the Company is a partner received professional fees totaling $290,000, $258,000, and $137,000 during 2002, 2001, and 2000, respectively. The Company paid commissions for real estate services to a company owned by the Chairman of the Board of the Company of $0, $74,000, and $48,000 in 2002, 2001, and 2000, respectively. 31 Notes to Consolidated Financial Statements 20. Fair Value of Financial Instruments - -------------------------------------------------------------------------------- FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments" (FAS 107), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. 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. 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. Loans with significant collectibility concerns were fair valued on a loan-by-loan basis utilizing a discounted cash flow method or the fair market value of the underlying collateral. Restricted Investments in Bank Stock The carrying amounts reported approximate those assets' fair value. 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. 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. 32 Notes to Consolidated Financial Statements The carrying amounts and fair values of the Company's financial instruments as of December 31 are presented in the following table.
- --------------------------------------------------------------------------------------------------------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - --------------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 75,450 $ 75,450 $ 25,855 $ 25,855 Securities 303,061 306,472 208,071 207,149 Loans, net (including loans held for sale) 374,249 393,618 345,791 346,968 Restricted invetments in bank stock 2,045 2,045 2,593 2,593 Accrued interest receivable 3,675 3,675 3,542 3,542 - --------------------------------------------------------------------------------------------------------------------------- Financial liabilities: Deposits $726,955 $726,070 $561,738 $562,626 Long-term debt 13,000 15,231 13,000 14,573 Accrued interest payable 832 832 837 837 - --------------------------------------------------------------------------------------------------------------------------- Off-balance sheet instruments: Standby letters of credit $ 0 $ 0 $ 0 $ 0 Commitments to extend credit 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------
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 presentation (in thousands, except per share amounts):
- ------------------------------------------------------------------------------------------------------------- Three Months Ended December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------------- 2002 Interest income $10,992 $10,788 $10,342 $9,873 Interest expense 3,505 3,615 3,599 3,575 Net interest income 7,487 7,173 6,743 6,298 Provision for loan losses 345 375 280 435 Net securities gains 0 0 0 0 Provision for income taxes 799 741 682 649 Net income 1,570 1,467 1,347 1,290 Net income per share: Basic $0.73 $0.69 $0.65 $0.64 Diluted 0.69 0.63 0.58 0.57 - ------------------------------------------------------------------------------------------------------------- 2001 Interest income $ 9,902 $ 9,713 $ 9,489 $9,143 Interest expense 3,859 3,978 4,049 4,307 Net interest income 6,043 5,735 5,440 4,836 Provision for loan losses 464 405 315 285 Net securities gains 0 0 0 52 Provision for income taxes 646 592 533 461 Net income 1,276 1,181 1,068 923 Net income per share: Basic $0.65 $0.60 $0.53 $0.46 Diluted 0.59 0.53 0.49 0.43 - -------------------------------------------------------------------------------------------------------------
33 Notes to Consolidated Financial Statements 22. Condensed Financial Statements of Parent Company - -------------------------------------------------------------------------------- Balance Sheets December 31, (in thousands) 2002 2001 - -------------------------------------------------------------------------------- ASSETS Cash $ 252 $ 148 Investment in subsidiaries: Banking subsidiary 55,534 45,400 Non-banking subsidiaries 600 600 Other assets 128 117 - -------------------------------------------------------------------------------- Total Assets $56,514 $46,265 - -------------------------------------------------------------------------------- LIABILITIES Long-term debt $13,000 $13,000 Other liabilities 702 672 - -------------------------------------------------------------------------------- Total liabilities 13,702 13,672 - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 400 400 Common stock 2,117 1,882 Surplus 31,909 25,263 Retained earnings 6,866 5,159 Accumulated other comprehensive loss 1,520 (111) - -------------------------------------------------------------------------------- Total stockholders' equity 42,812 32,593 - -------------------------------------------------------------------------------- Total Liabilities & Stockholders' Equity $56,514 $46,265 - --------------------------------------------------------------------------------
Statements of Income Year Ended December 31, (in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------- Income: Dividends from bank subsidiary $1,226 $ 794 $ 393 Interest income 62 32 12 - ----------------------------------------------------------------------------------------------------------------- 1,288 826 405 - ----------------------------------------------------------------------------------------------------------------- Expenses: Interest expense 1,416 793 312 Other 258 213 187 - ----------------------------------------------------------------------------------------------------------------- 1,674 1,006 499 - ----------------------------------------------------------------------------------------------------------------- Loss before income (taxes) benefit and equity in undistributed net income of subsidiaries (386) (180) (94) Income (taxes) benefit 548 331 165 - ----------------------------------------------------------------------------------------------------------------- 162 151 71 Equity in undistributed net income of bank subsidiary 5,512 4,297 3,643 - ----------------------------------------------------------------------------------------------------------------- Net income $5,674 $4,448 $3,714 - -----------------------------------------------------------------------------------------------------------------
34
Notes to Consolidated Financial Statements Statements of Cash Flows Year Ended December 31, (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Operating Activities: Net Income $ 5,674 $ 4,448 $ 3,714 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of financing costs 6 10 5 Increase in other liabilities 30 385 287 Equity in undistributed net income of bank subsidiary (5,512) (4,297) (3,643) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 198 546 363 - ---------------------------------------------------------------------------------------------------------------------- Investing Activities: Investment in bank subsidiary (2,610) (8,786) (5,303) Investment in nonbank subsidiaries 0 (400) (200) - ---------------------------------------------------------------------------------------------------------------------- Net cash (used) by investing activities (2,610) (9,186) (5,503) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from common stock options exercised 1,738 217 84 Proceeds from issuance of long term debt 0 8,000 5,000 Proceeds from issuance of common stock under stock purchase plan 868 698 219 Costs of issuing long term debt 0 (53) (68) Cash dividends on preferred stock and cash in lieu of fractional shares (90) (86) (83) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,516 8,776 5,152 - ---------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 104 136 12 Cash and cash equivalents at beginning of the year 148 12 0 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 252 $ 148 $ 12 - ----------------------------------------------------------------------------------------------------------------------
35 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, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ Beard Miller Company LLP Harrisburg, Pennsylvania January 31, 2003 EX-23 5 exhibit23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF BEARD MILLER COMPANY LLP INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statements (Forms S-8, File Nos. 333-82085, 333-82083, 333-87313, 333-61634 and 333-61636 and Form S-3, File No. 333-87329) of our report, dated January 31, 2003, relating to the consolidated financial statements of Pennsylvania Commerce Bancorp, Inc. incorporated by reference in its Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ BEARD MILLER COMPANY LLP Harrisburg, Pennsylvania March 26, 2003 EX-99 6 exhibit99-1.txt EXHIBIT 99.1 Certification of Chief Executive Officer of Pennsylvania Commerce Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K, that: o The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and o The information contained in the report fairly represents, in all material respects, the company's financial condition and results of operations. /s/ Gary L. Nalbandian - ------------------------------------------------ Gary L. Nalbandian, Chief Executive Officer Dated: March 31, 2003 EX-99 7 exhibit99-2.txt EXHIBIT 99.2 Certification of Chief Financial Officer of Pennsylvania Commerce Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K, that: o The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and o The information contained in the report fairly represents, in all material respects, the company's financial condition and results of operations. /s/ Mark A. Zody - ------------------------------------------------ Mark A. Zody, Chief Financial Officer Dated: March 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----