Item
1.
Business
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 the annual report on Form 10-K and
the exhibits thereto), in its reports to stockholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995.
These
forward-looking statements include statements with respect to the Company’s
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions that are subject to significant risks and uncertainties and are
subject to change based on various factors (some of which are beyond the
Company’s control). The words “may”, “could”, “should”, “would”,
“believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan” and similar
expressions are intended to identify forward-looking statements. The
following factors, among others, including those discussed in Item 1A “Risk
Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in this annual report on Form 10-K,
could cause the Company’s financial performance to differ materially from that
expressed in such forward-looking statements:
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the
strength of the United States economy in general and the strength of the
local economies in which the Company conducts
operations;
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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;
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inflation;
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interest
rate, market and monetary fluctuations;
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the
timely development of competitive new products and services by the Company
and the acceptance of such products and services by
customers;
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the
willingness of customers to substitute competitors’ products and services
for the Company’s products and services and vice versa;
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the
impact of changes in financial services’ laws and regulations (including
laws concerning taxes, banking, securities and
insurance);
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the
impact of the rapid growth of the Company;
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the
Company’s dependence on Commerce Bancorp, Inc. to provide various services
to the Company;
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changes
in the Company’s allowance for loan losses;
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effect
of terrorists attacks and threats of actual war;
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unanticipated
regulatory or judicial proceedings;
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changes
in consumer spending and saving habits;
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and
the success of the Company at managing the risks involved in the
foregoing.
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Because
such forward-looking statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any
forward-looking statements, whether written or oral, that may be made from time
to time by or on behalf of the Company. For information, concerning
events or circumstances after the date of this report, refer to the Company’s
filings with the Securities and Exchange Commission (“SEC”).
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. (the “Bank”). 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 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. On September 29,
2006, the Company issued $15 million of 7.75% Trust Capital Securities through
Commerce Harrisburg Capital Trust III (“Trust III”), 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 $15 million of the Trust Capital securities qualifies as
Tier 1 Capital for regulatory capital purposes.
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. For additional information
concerning Commerce Bancorp, Inc., refer to the discussion in Item 1A “Risk
Factors” included in this annual report on Form 10-K.
As of
December 31, 2007, the Company had approximately $2.0 billion in assets, $1.6
billion in deposits, $1.2 billion in total net loans (including loans held for
sale), and $112 million in stockholders’ equity. The Bank is a member of the
Federal Reserve System 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 total revenues (net interest income plus
noninterest income) were $82.3 million and the Company recorded $7.0 million in
net income for the year ended December 31, 2007.
The
Company’s principal executive offices are located at 3801 Paxton Street,
Harrisburg, Pennsylvania 17111, and its telephone number is (800)
653-6104.
As of
December 31, 2007, the Company had 922 employees, of which 701 were full-time
employees. Management believes the Company’s relationship with its employees is
good.
Commerce
Bank/Harrisburg
The
Company has one reportable segment, consisting of Commerce Bank/Harrisburg,
N.A., as described in Note 1of the Notes to Consolidated Financial Statements
included at Item 8 of this Report.
On July
13, 1984, Commerce Bank/Harrisburg filed an application to establish a
state-chartered banking institution with the Pennsylvania Department of Banking.
On September 7, 1984, the Bank 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, the Bank 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.
The Bank
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 store
office network.
Service
Area
The Bank
offers its lending and depository services from its main office in Lemoyne,
Pennsylvania, and its thirty-two other full-service stores located in
Cumberland, Dauphin, York, Berks, Lancaster and Lebanon Counties,
Pennsylvania.
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,
commercial 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. The Bank 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 the Bank. 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.
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
store network matures. The Company’s store concept uses
a
prototype or standardized store office building, convenient locations and active
marketing, all designed to attract retail deposits. While the Company has not
announced plans to open any new stores in 2008 it does intend to continue to
open multiple stores over the next several years with a goal of 50 to 55
total stores by year-end 2012. It has been the Company’s experience that
most newly opened store offices incur operating losses during the first 16 to 24
months of operations and become 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, and its business is
not seasonal.
Competitive
Business Conditions / Competitive Position
The
Company’s current primary service area, the south central Pennsylvania area,
including portions of Cumberland, Dauphin, York, Berks, Lancaster 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 the Bank. 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. Among those institutions, the
Bank has a share of approximately 5% of the bank deposits in its market
area.
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 the Bank does not directly offer (but which the Bank may offer indirectly
through other institutions). Many institutions, by virtue of their greater total
capital, can have substantially higher lending limits than the
Bank.
In
commercial transactions, the Bank’s legal lending limit to a single borrower
(approximately $23.1 million as of December 31, 2007) enables it to compete
effectively for the business of smaller companies. However, this legal lending
limit is lower than that of some of the Bank’s 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. As of the end of 2007, all participations totaled
approximately
$18.2
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
Sarbanes-Oxley Act of 2002 implemented a broad range of corporate governance,
accounting and reporting measures for companies that have securities registered
under the Securities Exchange Act of 1934, such as the Company. Specifically,
the Sarbanes-Oxley Act and the various regulations promulgated thereunder,
established, among other things: (i) new requirements for audit committees,
including independence, expertise, and responsibilities; (ii) additional
responsibilities regarding financial statements for the Chief Executive Officer
and Chief Financial Officer of the reporting company; (iii) new standards
for auditors and the regulation of audits, including independence provisions
that restrict non-audit services that accountants may provide to their audit
clients; (iv) increased disclosure and reporting obligations for the
reporting company and their directors and executive officers, including
accelerated reporting of stock transactions and a prohibition on trading during
pension blackout periods; (v) a prohibition on personal loans to directors
and officers, except certain loans made by insured financial institutions on
non-preferential terms and in compliance with other bank regulatory
requirements; and (vi) a range of new and increased civil and criminal
penalties for fraud and other violations of the securities laws
.
The Company has addressed the
requirements imposed by regulations relating to the Sarbanes-Oxley Act,
including forming a Nominating and Corporate Governance Committee (and
establishing its charter), adopting a Code of Ethics applicable to the Company’s
Chief Executive Officer, Chief Financial Officer and principal accounting
officer (in addition to the Code of Conduct already in place for all employees
and Board Members of the Company), and meeting NASDAQ’s and the SEC’s procedural
and disclosure requirements.
In 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
non-banking companies in a holding company organization.
The
Company is subject to the provisions of the Bank Holding Company Act of 1956, as
amended and to supervision and examination by the Federal Reserve Bank ("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 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. The Bank is currently rated
“satisfactory” under the Community Reinvestment Act. The Company and the Bank
are both 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. Management believes, as of December 31, 2007,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. Also, at December 31, 2007, the consolidated capital levels of
the Company and of the Bank met the definition of a “well-capitalized” financial
institution. For further discussion regarding capital adequacy, please refer to
Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” as well as Note 15 of Notes to Consolidated Financial Statements
for December 31, 2007 included in Item 8 in this annual report on Form
10-K.
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
tying arrangements in connection with the extension of credit or provision for
any property or service. Thus, an affiliate of the Company, such as the Bank,
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 Bank or
other subsidiaries of the Company, or (ii) the customer’s refraining from doing
business with a competitor of the Bank, the Company or of its
subsidiaries. The Company or the Bank 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
payment of dividends to the Company, 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 store offices.
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 the Bank 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).
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.
On
January 29, 2007, the Bank entered into a written agreement with the OCC
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed with the SEC on February 2, 2007). The Bank is fully cooperating
with the OCC in implementing plans and procedures to address the matters
identified by the regulator
.
On
February 5, 2008, pursuant to a Stipulation and Consent to the Issuance of a
Consent Order, the bank consented and agreed to the issuance of a
Consent Order (“Order”) by the OCC. Among other things, the Order requires
the Bank to obtain prior approval for certain transactions between the Bank and
current directors and executive officers and certain other parties; provide
reports to the OCC on a quarterly basis regarding certain transactions between
the
Bank
and current directors and executive officers and certain other parties; provide
to the OCC for review a plan describing and evaluating whether the Bank should
seek to terminate certain contracts with current directors, executive officers
or certain other parties; and provide additional information regarding real
estate related transactions with current directors, executive officers or
certain other parties. The Bank neither admitted nor denied
wrongdoing in consenting to the Order and was released from any potential claims
and charges that the OCC could have asserted against the Bank with respect to
real estate related activity entered into, commenced, or engaged in between the
Bank and directors, executive officers or certain other parties, and which had
been disclosed by the Bank and known to the OCC at the date of the
Order. The foregoing description of the Order is qualified in its
entirety by reference to the terms of the Order, which is attached hereto as
Exhibit 10.1 and incorporated by reference herein.
As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Company’s business is particularly susceptible to being
affected by federal and state legislation and regulations, which may affect the
cost of doing business.
The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (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. 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.
Available
Information
The Company makes available free of
charge under the Investor Relations link on the Company’s website,
www.commercepc.com
,
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after the
Company
electronically files such material with, or furnishes to, the
SEC. Additionally, the SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at the web address,
www.sec.gov
.
Item
1A.
Risk
Factors
The
Company’s financial results are subject to a number of risks. The factors
discussed below highlight risks that management believes are most relevant to
the Company’s current operations. This list does not capture all risks
associated with the Company’s business. Additional risks, including those that
generally affect the banking and financial services industries and those that
management currently believes are immaterial may also negatively impact the
Company’s liquidity, financial position, or results of operations.
We
plan to continue to grow rapidly and there are risks associated with rapid
growth.
Over the
past five years we have experienced significant growth in net income, assets,
loans and deposits, all of which have been achieved through organic growth. We
intend to continue to rapidly expand our business and operations.
Subject
to regulatory approvals, we are targeting to open 15-20 new stores over the next
five years. The cost to construct and furnish a new store will be approximately
$3.1 million, excluding the cost to lease or purchase the land on which the
store is located. Our ability to manage growth successfully will depend on our
ability to attract qualified personnel and maintain cost controls and asset
quality while attracting additional loans and deposits on favorable terms, as
well as on factors beyond our control, such as economic conditions and
competition. If we grow too quickly and are not able to attract qualified
personnel, control costs and maintain asset quality, this continued rapid growth
could materially adversely affect our financial performance.
We
are dependent on Commerce Bancorp, Inc. (“Bancorp”).
Pursuant
to the Network Agreement between us, the Bank, and Bancorp, which was last
amended in September 2004, we have the right to use the "Commerce Bank" name and
the "America's Most Convenient Bank" logo, among others, within the territory
prescribed by the Network Agreement (the Pennsylvania counties of Adams, Berks,
Bradford, Carbon, Centre, Clinton, Columbia, Cumberland, Dauphin, Franklin,
Fulton, Huntingdon, Juniata, Lackawanna, Lancaster, Lebanon, Luzerne, Lycoming,
Mifflin, Monroe, Montour, Northumberland, Perry, Pike, Potter, Schuylkill,
Snyder, Sullivan, Susquehanna, Tioga, Union, Wayne, Wyoming, and York). As of
December 31, 2007, Bancorp owned approximately 10.6% of our common stock, 100%
of our Series A preferred stock, warrants that entitle Commerce of New Jersey to
purchase 287,332 shares (adjusted for common stock dividends) of our common
stock only upon our "change of control" (as defined in "Description of Our
Capital Stock - Warrants") and 100% of our Trust Capital Securities. Under the
Network Agreement, Bancorp, through its subsidiary, Commerce Bank, N.A., a
national bank located in Cherry Hill, New Jersey, provides various services to
the Bank including: maintaining the computer wide area network; proof and
encoding services; deposit and loan account statement rendering; data
processing; and advertising support. The Bank may only use these services in the
territory prescribed by the Network Agreement. This restriction limits our
growth to these areas as long as we are a party to the Network
Agreement.
Bancorp
can terminate the Network Agreement upon 360 days prior notice (a) on a fifth
anniversary date of the Network Agreement (the next fifth anniversary date is
January 1, 2010); (b) upon our
change of
control; or (c) upon the occurrence of specified events. If the Network
Agreement is terminated, we will no longer be able to continue to operate under
the Commerce name or logos. In addition, if the Network Agreement is terminated,
there can be no assurance that our operations would not be disrupted or that we
could obtain or provide these services at similar cost, which could materially
and adversely affect our business, results of operations and financial
condition. Any material adverse change to the business, results of operations
and financial condition of Bancorp could have a material adverse effect on our
business, results of operations and financial condition.
On
October 2, 2007, Bancorp and The Toronto-Dominion Bank (“TD”) entered into an
Agreement and Plan of Merger pursuant to which TD will acquire Bancorp and
Bancorp will become a wholly-owned subsidiary of TD. The merger is expected to
be completed by April 2008. At this time, it is not possible to determine the
impact this will have with respect to the services provided to us by Bancorp.
Commerce Bank/Harrisburg management has a contingency plan which will be
implemented if it becomes necessary to outsource the services currently provided
to us by Bancorp to another third party provider. Also, to date, discussions
have not occurred nor have decisions been made with respect to our ability to
continue to operate under the Commerce name or logos in the future.
Changes
in interest rates could reduce our income and cash flows.
Our
operating income and net income depend to a great extent on our net interest
margin, i.e., the difference between the interest yields we receive on loans,
securities and other interest earning assets and the interest rates we pay on
interest-bearing deposits and other liabilities. These rates are highly
sensitive to many factors beyond our control, including competition, general
economic conditions and monetary and fiscal policies of various governmental and
regulatory authorities, including the Board of Governors of the Federal Reserve
System, referred to as "FRB." If the rate of interest we pay on our
interest-bearing deposits and other liabilities increases more than the rate of
interest we receive on loans, securities and other interest earning assets, our
net interest income, and therefore our earnings, could be adversely affected.
Our earnings could also be adversely affected if the rates on our loans and
other investments fall more quickly than those on our deposits and other
liabilities.
We
operate in a highly regulated environment; changes in laws and regulations and
accounting principles may adversely affect us.
We are
subject to extensive regulation, supervision, and legislation which govern
almost all aspects of our operations. The laws and regulations applicable to the
banking industry could change at any time and are primarily intended for the
protection of customers, depositors and the deposit insurance funds. Any changes
to these laws or any applicable accounting principles may negatively impact our
results of operations and financial condition. While we cannot predict what
effect any presently contemplated or future changes in the laws or regulations
or their interpretations would have on us, these changes could be materially
adverse to our investors and shareholders.
"Anti-takeover"
provisions may make it more difficult for a third party to acquire control of
us, even if the change in control would be beneficial to
shareholders.
We are a
Pennsylvania corporation. Anti-takeover provisions in Pennsylvania law and our
articles of incorporation and bylaws could make it more difficult for a third
party to acquire control of us. These provisions could adversely affect the
market price of our common stock and could reduce the amount that shareholders
might receive if we are sold. For example, our articles of
incorporation
provide that our board of directors may issue up to 960,000 shares of preferred
stock without shareholder approval, subject to the rights of the outstanding
preferred shares. In addition, "anti-takeover" provisions in our articles of
incorporation and federal and state laws, including Pennsylvania law, may
restrict a third party's ability to obtain control of the Company and may
prevent shareholders from receiving a premium for their shares of our common
stock.
Our
common stock is not insured by any governmental agency and, therefore,
investment in it involves risk.
Our
common stock is not a deposit account or other obligation of any bank, and is
not insured by the FDIC, or any other governmental agency, and is subject to
investment risk, including possible loss.
Our
common stock is currently traded on the NASDAQ Global Select Market. During the
twelve months ended December 31, 2007, the average daily trading volume for our
common stock was approximately 7,000 shares.
The sale
of a large number of these shares could adversely affect our stock price and
could impair our ability to raise capital through the sale of equity securities.
Sales of our common stock could adversely affect the market price of our common
stock and could impair our future ability to raise capital through the sale of
equity securities. As of December 31, 2007, there were 6,313,663 shares of our
common stock outstanding. Most of these shares are available for resale in the
public market without restriction, except for shares held by our affiliates.
Generally, our affiliates may either sell their shares under a registration
statement or in compliance with the volume limitations and other requirements
imposed by Rule 144 adopted by the SEC.
In
addition, as of December 31, 2007, we had the authority to issue up to
approximately 340,000 shares of our common stock under our stock option plans
and 292,000 shares under our Dividend Reinvestment and Stock Purchase Plan.
Additionally, we had outstanding warrants to purchase 287,332 shares of our
common stock.
Our
executive officers, directors and other five percent or greater shareholders own
a significant percentage of our company, and could influence matters requiring
approval by our shareholders.
As of
December 31, 2007, our executive officers and directors as a group owned and had
the right to vote approximately 24.5% of our outstanding stock and other five
percent or greater shareholders owned and had the right to vote approximately
19.7% of our outstanding common stock. These shareholders, acting together,
would be able to influence matters requiring approval by our shareholders,
including the election of directors. This concentration of ownership might also
have the effect of delaying or preventing a change of control of Pennsylvania
Commerce.
Item
1B.
Unresolved
Staff Comments
None.