UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[ X
]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended
|
March
31, 2008
|
|
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 Number:
|
000-50961
|
|
|
PENNSYLVANIA
COMMERCE BANCORP, INC.
|
|
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
|
25-1834776
|
(State
or other jurisdiction of incorporation or organization)
|
|
(IRS
Employer Identification No.)
|
3801
Paxton Street, P.O. Box 4999, Harrisburg, PA
|
|
17111-0999
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Large
accelerated filer
|
[ ]
|
|
Accelerated
filer
|
[X]
|
|
Non-accelerated
filer
|
[ ]
|
|
Smaller
Reporting Company
|
[
]
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock,
as
of the latest practicable date:
|
6,340,924
Common shares outstanding at
4/30/08
|
PENNSYLVANIA
COMMERCE BANCORP, INC.
INDEX
|
|
Page
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Balance Sheets (Unaudited)
|
|
|
March
31, 2008 and December 31,
2007
|
|
|
|
|
|
Consolidated
Statements of Income (Unaudited)
|
|
|
Three
months ending March 31, 2008 and March 31, 2007
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity (Unaudited)
|
|
|
Three
months ending March 31, 2008 and March 31, 2007
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
Three
months ending March 31, 2008 and March 31, 2007
|
|
|
|
|
|
Notes
to Interim Consolidated Financial Statements (Unaudited)
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
and
Results of
Operations
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
|
|
Item
4.
|
Controls
and
Procedures
|
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior
Securities
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Securities Holders
|
|
|
|
|
Item
5.
|
Other
Information
|
|
|
|
|
Item
6.
|
Exhibits
|
|
|
|
|
|
|
|
Part
I – FINANCIAL INFORMATION
Item
1. Financial
Statements
Pennsylvania
Commerce Bancorp, Inc. and
Subsidiaries
Consolidated
Balance Sheets (unaudited)
|
(dollars
in thousands, except share and per share amounts)
|
|
March
31, 2008
|
|
December
31,
2007
|
|
Assets
|
Cash
and due from banks
|
$
|
55,616
|
$
|
50,955
|
|
|
Federal
funds sold
|
|
0
|
|
0
|
|
|
Cash
and cash equivalents
|
|
55,616
|
|
50,955
|
|
|
Securities,
available for sale at fair value
|
|
365,949
|
|
387,166
|
|
|
Securities,
held to maturity at cost
|
|
|
|
|
|
|
(fair
value 2008: $189,563; 2007: $256,248)
|
|
189,655
|
|
257,467
|
|
|
Loans,
held for sale
|
|
19,157
|
|
14,143
|
|
|
Loans
receivable, net of allowance for loan losses
|
|
|
|
|
|
|
(allowance
2008: $11,627; 2007: $10,742)
|
|
1,203,231
|
|
1,146,629
|
|
|
Restricted
investments in bank stocks
|
|
17,464
|
|
18,234
|
|
|
Premises
and equipment, net
|
|
88,339
|
|
89,307
|
|
|
Other
assets
|
|
18,432
|
|
15,110
|
|
|
Total
assets
|
$
|
1,957,843
|
$
|
1,979,011
|
|
Liabilities
|
Deposits:
|
|
|
|
|
|
|
Noninterest-bearing
|
$
|
295,340
|
$
|
271,894
|
|
|
Interest-bearing
|
|
1,284,759
|
|
1,289,002
|
|
|
Total
deposits
|
|
1,580,099
|
|
1,560,896
|
|
|
Short-term
borrowings and repurchase agreements
|
|
177,400
|
|
217,335
|
|
|
Long-term
debt
|
|
79,400
|
|
79,400
|
|
|
Other
liabilities
|
|
10,608
|
|
9,045
|
|
|
Total
liabilities
|
|
1,847,507
|
|
1,866,676
|
|
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 –
2008:
6,332,335;
2007:
6,313,663
|
|
6,332
|
|
6,314
|
|
|
Surplus
|
|
71,185
|
|
70,610
|
|
|
Retained
earnings
|
|
42,048
|
|
38,862
|
|
|
Accumulated
other comprehensive loss
|
|
(9,629)
|
|
(3,851)
|
|
|
Total
stockholders’ equity
|
|
110,336
|
|
112,335
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
1,957,843
|
$
|
1,979,011
|
|
See
accompanying notes.
Pennsylvania
Commerce Bancorp, Inc. and
Subsidiaries
Consolidated
Statements of Income (unaudited)
|
|
|
Three
Months Ending
|
|
(in
thousands,
|
|
|
March
31,
|
|
except
per share amounts)
|
|
|
|
|
2008
|
|
2007
|
Interest
|
Loans
receivable, including fees:
|
|
|
|
|
|
|
|
Income
|
Taxable
|
|
|
|
$
|
19,574
|
$
|
17,989
|
|
Tax-exempt
|
|
|
|
|
640
|
|
403
|
|
Securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
|
|
7,927
|
|
9,379
|
|
Tax-exempt
|
|
|
|
|
16
|
|
16
|
|
Total
interest income
|
|
|
|
|
28,157
|
|
27,787
|
Interest
|
Deposits
|
|
|
|
|
6,447
|
|
11,679
|
Expense
|
Short-term
borrowings
|
|
|
|
|
1,911
|
|
2,219
|
|
Long-term
debt
|
|
|
|
|
1,216
|
|
661
|
|
Total
interest expense
|
|
|
|
|
9,574
|
|
14,559
|
|
Net interest
income
|
|
|
|
|
18,583
|
|
13,228
|
|
Provision
for loan losses
|
|
|
|
|
975
|
|
480
|
|
Net
interest income after provision for loan losses
|
|
|
|
|
17,608
|
|
12,748
|
Noninterest
|
Service
charges and other fees
|
|
|
|
|
5,676
|
|
4,502
|
Income
|
Other
operating income
|
|
|
|
|
141
|
|
171
|
|
Gains
on sales of loans
|
|
|
|
|
176
|
|
326
|
|
Gains
on calls of securities
|
|
|
|
|
0
|
|
171
|
|
Total
noninterest income
|
|
|
|
|
5,993
|
|
5,170
|
Noninterest
|
Salaries
and employee benefits
|
|
|
|
|
8,881
|
|
8,398
|
Expenses
|
Occupancy
|
|
|
|
|
2,074
|
|
1,835
|
|
Furniture
and equipment
|
|
|
|
|
1,052
|
|
955
|
|
Advertising
and marketing
|
|
|
|
|
837
|
|
786
|
|
Data
processing
|
|
|
|
|
1,705
|
|
1,475
|
|
Postage
and supplies
|
|
|
|
|
532
|
|
539
|
|
Regulatory
assessments and related fees
|
|
|
|
|
1,138
|
|
187
|
|
Telephone
|
|
|
|
|
596
|
|
564
|
|
Other
|
|
|
|
|
2,086
|
|
1,751
|
|
Total
noninterest expenses
|
|
|
|
|
18,901
|
|
16,490
|
|
Income
before income taxes
|
|
|
|
|
4,700
|
|
1,428
|
|
Provision
for federal income taxes
|
|
|
|
|
1,494
|
|
316
|
|
Net
income
|
|
|
|
$
|
3,206
|
$
|
1,112
|
|
Net
Income per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
0.50
|
$
|
0.18
|
|
Diluted
|
|
|
|
|
0.49
|
|
0.17
|
|
Average
Common and Common Equivalent Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
6,327
|
|
6,167
|
|
Diluted
|
|
|
|
|
6,495
|
|
6,408
|
See
accompanying notes.
Pennsylvania
Commerce Bancorp, Inc. and
Subsidiaries
Consolidated
Statements of Stockholders’ Equity (unaudited)
(dollars
in thousands)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Surplus
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive (Loss)
|
|
|
Total
|
|
Balance:
January 1, 2007
|
|
$
|
400
|
|
|
$
|
6,149
|
|
|
$
|
67,072
|
|
|
$
|
31,941
|
|
|
$
|
(4,454
|
)
|
|
$
|
101,108
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,112
|
|
|
|
-
|
|
|
|
1,112
|
|
Change
in unrealized gains on securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,631
|
|
|
|
1,631
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,743
|
|
Dividends
declared on preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
Common
stock of 37,476 shares issued under stock option plans, including tax
benefit of $0
|
|
|
-
|
|
|
|
37
|
|
|
|
551
|
|
|
|
-
|
|
|
|
-
|
|
|
|
588
|
|
Common
stock of 60 shares issued under employee stock purchase
plan
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Proceeds
from issuance of 14,086 shares of common stock in connection with dividend
reinvestment and stock purchase plan
|
|
|
-
|
|
|
|
14
|
|
|
|
373
|
|
|
|
-
|
|
|
|
-
|
|
|
|
387
|
|
Common
stock share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
Balance,
March 31, 2007
|
|
$
|
400
|
|
|
$
|
6,200
|
|
|
$
|
68,130
|
|
|
$
|
33,033
|
|
|
$
|
(2,823
|
)
|
|
$
|
104,940
|
|
(dollars
in thousands)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Surplus
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive (Loss)
|
|
|
Total
|
|
Balance:
January 1, 2008
|
|
$
|
400
|
|
|
$
|
6,314
|
|
|
$
|
70,610
|
|
|
$
|
38,862
|
|
|
$
|
(3,851
|
)
|
|
$
|
112,335
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,206
|
|
|
|
-
|
|
|
|
3,206
|
|
Change
in unrealized losses on securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,778
|
)
|
|
|
(5,778
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,572
|
)
|
Dividends
declared on preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
Common
stock of 12,273 shares issued under stock option plans, including tax
benefit of $62
|
|
|
-
|
|
|
|
12
|
|
|
|
195
|
|
|
|
-
|
|
|
|
-
|
|
|
|
207
|
|
Common
stock of 30 shares issued under employee stock purchase
plan
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Proceeds
from issuance of 6,369 shares of common stock in connection with dividend
reinvestment and stock purchase plan
|
|
|
-
|
|
|
|
6
|
|
|
|
148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
Common
stock share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
231
|
|
Balance,
March 31, 2008
|
|
$
|
400
|
|
|
$
|
6,332
|
|
|
$
|
71,185
|
|
|
$
|
42,048
|
|
|
$
|
(9,629
|
)
|
|
$
|
110,336
|
|
See
accompanying notes.
Pennsylvania
Commerce Bancorp, Inc. and
Subsidiaries
Consolidated
Statements of Cash Flows (unaudited)
|
|
|
Three
Months Ending
March
31,
|
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
Operating
Activities
|
Net
income
|
$
|
3,206
|
$
|
1,112
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
Provision
for loan losses
|
|
975
|
|
480
|
|
|
Provision
for depreciation and amortization
|
|
1,269
|
|
1,152
|
|
|
Deferred
income taxes
|
|
(326)
|
|
(196)
|
|
|
Amortization
of securities premiums and accretion of discounts, net
|
|
144
|
|
163
|
|
|
Net
gains on calls of securities
|
|
0
|
|
(171)
|
|
|
Proceeds
from sales of loans originated for sale
|
|
13,883
|
|
20,620
|
|
|
Loans
originated for sale
|
|
(18,721)
|
|
(14,881)
|
|
|
Gains
on sales of loans originated for sale
|
|
(176)
|
|
(326)
|
|
|
Stock-based
compensation
|
|
231
|
|
132
|
|
|
Amortization
of deferred loan origination fees and costs
|
|
438
|
|
453
|
|
|
Decrease
in other assets
|
|
207
|
|
2,828
|
|
|
Increase
in other liabilities
|
|
1,563
|
|
1,473
|
|
|
Net
cash provided by operating activities
|
|
2,693
|
|
12,839
|
|
Investing
Activities
|
Securities
held to maturity:
|
|
|
|
|
|
|
Proceeds
from principal repayments and maturities
|
|
67,772
|
|
51,242
|
|
|
Purchases
|
|
0
|
|
(35,005)
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
Proceeds
from principal repayments and maturities
|
|
12,133
|
|
16,246
|
|
|
Net
increase in loans receivable
|
|
(58,015)
|
|
(74,345)
|
|
|
Net
(purchase) redemption of restricted investments in bank
stock
|
|
770
|
|
(2,198)
|
|
|
Proceeds
from sale of premises and equipment
|
|
0
|
|
62
|
|
|
Purchases
of premises and equipment
|
|
(301)
|
|
(3,176)
|
|
|
Net
cash provided by (used in) investing activities
|
|
22,359
|
|
(47,174)
|
|
|
|
|
|
|
|
|
Financing
Activities
|
Net
decrease in demand, interest checking, money market, and savings
deposits
|
|
(37,744)
|
|
(45,011)
|
|
|
Net
increase (decrease) in time deposits
|
|
56,947
|
|
(11,405)
|
|
|
Net
increase (decrease) in short-term borrowings
|
|
(39,935)
|
|
83,200
|
|
|
Proceeds
from common stock options exercised
|
|
145
|
|
588
|
|
|
Proceeds
from dividend reinvestment and common stock purchase plan
|
|
154
|
|
387
|
|
|
Tax
benefit on exercise of stock options
|
|
62
|
|
0
|
|
|
Cash
dividends on preferred stock
|
|
(20)
|
|
(20)
|
|
|
Net
cash (used in) provided by financing activities
|
|
(20,391)
|
|
27,739
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
4,661
|
|
(6,596)
|
|
|
Cash
and cash equivalents at beginning of year
|
|
50,955
|
|
52,500
|
|
|
Cash
and cash equivalents at end of period
|
$
|
55,616
|
$
|
45,904
|
|
See
accompanying notes.
PENNSYLVANIA
COMMERCE BANCORP, INC.
NOTES
TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
Note
1. CONSOLIDATED
FINANCIAL STATEMENTS
The
consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles (“GAAP”) in the United States have been condensed or
omitted pursuant to such rules and regulations. These consolidated financial
statements were prepared in accordance with GAAP for interim financial
statements and with instructions for Form 10-Q and Regulation S-X Section
210.10-01. Further information on the Company’s accounting policies are
available in Note 1 (Significant Accounting Policies) of the
Notes to Consolidated Financial
Statements
included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007. The accompanying consolidated financial statements
reflect all adjustments that are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented. Such
adjustments are of a normal, recurring nature.
These
consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007. The results for the
three months ended March 31, 2008 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2008.
The
consolidated financial statements include the accounts of Pennsylvania Commerce
Bancorp, Inc. and its consolidated subsidiaries. All material intercompany
transactions have been eliminated. Certain amounts from prior years have been
reclassified to conform to the 2008 presentation. Such reclassifications had no
impact on the Company’s net income.
Note
2. STOCK-BASED
COMPENSATION
The fair
value of each option grant was established at the date of grant using the
Black-Scholes option pricing model. The Black-Scholes model used the following
weighted-average assumptions for 2008 and 2007, respectively: risk-free
interest rates of 3.3% and 4.7%; volatility factors of the expected market price
of the Company's common stock of .29 and .19; weighted average expected lives of
the options of 8.3 years and 8.2 years; and no cash dividends. The calculated
weighted average fair value of options granted using these assumptions for 2008
and 2007 was $10.68 per option and $10.21 per option, respectively. In the first
quarter of 2008, the Company granted 169,775 options to purchase shares of the
Company’s stock at an exercise price of $27.00 per share.
The
Company recorded compensation expense of approximately $231,000 and $132,000
during the three months ended March 31, 2008 and March 31, 2007,
respectively.
Note
3. NEW
ACCOUNTING STANDARDS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 applies to other accounting pronouncements that require or permit
fair value measurements. SFAS No. 157 was effective for our Company January 1,
2008. The implementation of SFAS No. 157 did not have a material impact on our
consolidated financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and
Financial
Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected will be recognized in earnings at each
subsequent reporting date. SFAS No. 159 was effective for our Company January 1,
2008. The Company elected not to adopt the provisions of SFAS No.
159.
In June
2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires
companies to recognize the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees
for nonvested equity-classified employee share-based payment awards as an
increase to additional paid-in capital. EITF 06-11 was effective for our Company
beginning January 1, 2008. The adoption of EITF Issue No. 06-11 did not have a
significant impact on our consolidated financial statements.
FASB
statement No. 160 “Noncontrolling Interests in Consolidated Financial
Statements—an amendment of ARB No. 51” was issued in December of 2007. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a company’s fiscal year
beginning after December 15, 2008. The Company believes that this new
pronouncement will have an immaterial impact on the Company’s financial
statements in future periods.
Staff
Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff's views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments." Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. SAB 109
did not have a material impact on the Company’s financial
statements.
Note
4. COMMITMENTS
AND CONTINGENCIES
The
Company is subject to certain routine legal proceedings and claims arising in
the ordinary course of business. It is management’s opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company’s financial position and results of operations.
In the
normal course of business, there are various outstanding commitments to extend
credit, such as letters of credit and unadvanced loan commitments. At March
31, 2008, the Company had $435 million in unused commitments. Management does
not anticipate any losses as a result of these transactions.
Future
Facilities
The
Company owns a parcel of land at the corner of Carlisle Road and Alta Vista Road
in Dover Township, York County, Pennsylvania. The Company plans to construct a
full-service store on this property to be opened in the future.
The
Company has entered into a land lease for the premises located at 2121 Lincoln
Highway East, East Lampeter Township, Lancaster County, Pennsylvania. The
Company plans to construct a full-service store on this property to be opened in
the future.
The
Company has purchased land at 105 N. George Street, York City, York County,
Pennsylvania. The Company plans to open a store on this property to be opened in
the future.
Note
5. OTHER
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 component that the Company presently has is
unrealized gains (losses) on securities available for sale. The federal income
taxes allocated to the unrealized gains (losses) are presented in the following
table. The reclassification adjustments included in comprehensive income are
also presented.
|
|
Three
Months Ending
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Unrealized
holding gains (losses) arising during the period
|
|
$
|
(8,889
|
)
|
|
$
|
2,471
|
|
Less
reclassification adjustment for losses on securities available for sale
included in net income
|
|
|
0
|
|
|
|
0
|
|
Net
unrealized gains (losses)
|
|
|
(8,889
|
)
|
|
|
2,471
|
|
Income
tax effect
|
|
|
3,111
|
|
|
|
(840
|
)
|
Net
of tax amount
|
|
$
|
(5,778
|
)
|
|
$
|
1,631
|
|
Note
6. GUARANTEES
The
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit. Standby letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Generally, when issued, letters of
credit have expiration dates within two years. The credit risk associated with
letters of credit is essentially the same as that of traditional loan
facilities. The Company generally requires collateral and/or personal guarantees
to support these commitments. The Company had $39.6 million of standby letters
of credit at March 31, 2008. Management believes that the proceeds obtained
through a liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payment required under the
corresponding letters of credit. There was no current amount of the liability at
March 31, 2008 for guarantees under standby letters of credit
issued.
Note
7. REGULATORY
MATTERS
On
February 5, 2008, pursuant to a Stipulation and Consent to the Issuance of a
Consent Order, Commerce Bank/Harrisburg, N.A., (the “Bank”), a wholly owned
subsidiary of Pennsylvania Commerce Bancorp, Inc., consented and agreed to the
issuance of a Consent Order (“Order”) by the Office of the Comptroller of the
Currency (the “OCC”), the Bank’s primary regulator. 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.
Note
8. FAIR
VALUE DISCLOSURE
With the
adoption of FASB Statement No. 157 (“SFAS No. 157”), the Company is
required to disclose the fair value of an asset which represents the exit price
of which the Company would receive if it were to sell the asset in an orderly
transaction between market participants. Under SFAS No. 157, fair
value measurements are not adjusted for transaction costs. SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the higher
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurement) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:
Level 1 –
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
Level 2 –
Quoted prices in markets that are not active, or inputs that are observable,
either directly or indirectly, for substantially the full term of the asset or
liability;
Level 3 –
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable.
The
following table sets forth the Company’s financial assets and liabilities that
were measured at fair value at March 31, 2008 by level within the fair value
hierarchy. As required by SFAS No. 157, financial assets are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.
(dollars
in thousands)
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
Description
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Available
for sale securities
|
|
$
|
365,949
|
|
|
$
|
-
|
|
|
$
|
365,949
|
|
|
$
|
-
|
|
Foreclosed
assets
|
|
|
588
|
|
|
|
-
|
|
|
|
-
|
|
|
|
588
|
|
Impaired
loans
|
|
|
916
|
|
|
|
-
|
|
|
|
-
|
|
|
|
916
|
|
Total
|
|
$
|
367,453
|
|
|
$
|
-
|
|
|
$
|
365,949
|
|
|
$
|
1,504
|
|
Securities
available for sale – fair values for securities available for sale were based
upon a market approach. Securities that are debenture bonds and pass through
mortgage backed investments that are not quoted on an exchange, but are traded
in active markets, were obtained through third party data service providers who
use matrix pricing on similar securities.
Loans
accounted for under SFAS No. 114 – loans included in the above table were those
that were accounted for under SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, in which the Corporation has measured impairment generally
based on the fair value of the loan’s collateral. Fair value is generally
determined based upon independent third party appraisals of the properties, or
discounted cash flows based upon the expected proceeds. These assets are
included as Level 3 fair
values,
based upon the lowest level of input that is significant to the fair value
measurements. The fair value consists of the loan balances less its valuation
allowance as determined under SFAS 114.
Foreclosed
assets – fair value of real estate owned through foreclosure was based on
independent third party appraisals of the properties, recent offers, or prices
on comparable properties. These values were determined based on the sales prices
of similar properties in the proximate vicinity.
During
the period there were no assets or liabilities that were required to be
re-measured on a nonrecurring basis.
The
following table presents additional information about assets measured at fair
value on a recurring basis and for which the Company has utilized Level 3 inputs
to determine fair value (in thousands):
(dollars
in thousands)
|
|
Foreclosed
Assets
|
|
|
Impaired
Loans
|
|
Beginning
balance December 31, 2007
|
|
$
|
489
|
|
|
$
|
1,006
|
|
Net
unrealized gain (loss)
|
|
|
(110
|
)
|
|
|
-
|
|
Transfers
in
|
|
|
209
|
|
|
|
356
|
|
Transfers
out
|
|
|
-
|
|
|
|
(446
|
)
|
Ending
balance March 31, 2008
|
|
$
|
588
|
|
|
$
|
916
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of
|
|
Operations.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
analyzes the major elements of the Company’s balance sheets and statements of
income. This section should be read in conjunction with the Company's financial
statements and accompanying notes.
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 Form 10-Q 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 discussed in this Form 10-Q and in the Company’s Form 10-K, could cause
the Company’s financial performance to differ materially from that expressed or
implied in such forward-looking statements:
·
|
the
Company’s dependence on TD Commerce Bancorp, Inc. (and Commerce Bank,
N.A.) to provide various services to the Company and the costs associated
with securing alternate providers of such
services;
|
·
|
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
impact of the extraordinary economic and market dislocations on the fair
value market prices of investment
securities;
|
·
|
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);
|
·
|
changes
in the Company’s allowance for loan
losses;
|
·
|
the
effect of terrorists attacks and threats of actual
war;
|
·
|
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 cautions that any such forward-looking statements are not guarantees
of future performance and involve known and unknown risks, uncertainties and
other factors which may cause the Company’s actual results, performance, or
achievements to differ materially from the future results, performance, or
achievements the Company has anticipated in such forward-looking statements. You
should note that many factors, some of which are discussed in this Form 10-Q,
could affect the Company’s future financial results and could cause those
results to differ materially from those expressed or implied in the Company’s
forward-looking statements contained or incorporated by reference in this
document. 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 on subsequent events, refer to the
Company’s filings with the SEC.
EXECUTIVE
SUMMARY
Total
revenues for the three months ended March 31, 2008 were $24.6 million, up $6.2
million, or 34%, over the same period in 2007. Net income for the first quarter
was $3.2 million, a 188% increase over the first quarter in 2007 and diluted net
income per share for the quarter totaled $0.49, a 188% increase over the $0.17
per share recorded during the first quarter of 2007.
The
increases in net income and related net income per share were due to a higher
level of net interest income and noninterest income offset by higher levels of
provision for loan loss, noninterest expenses and income taxes. The increase in
net interest income was a result of continued strong loan growth combined with
significant improvement in the Company’s net interest margin. Net income results
for the first three months of 2008 included the expense impact of our three new
stores opened during the third quarter of 2007.
For the
first quarter of 2008, our total net loans (including loans held for sale)
increased by $61.6 million, from $1.16 billion at December 31, 2007 to $1.22
billion at March 31, 2008. This growth was represented across most loan
categories, reflecting a continuing commitment to the credit needs of our market
areas. Our loan to deposit ratio, which includes loans held for sale, was 78% at
March 31, 2008 compared to 75% at December 31, 2007.
Total deposits increased
$19.2 million, from $1.56 billion at December 31, 2007 to $1.58 billion at March
31, 2008. During the first three months of 2008, our total commercial and retail
deposits increased by $72.3 million while total public deposits decreased $53.1
million during the same period.
The
Company’s public deposit behavior is very seasonal and typically we see these
deposit balances decrease in the first two quarters and increase dramatically in
the third and fourth quarters of each calendar year.
Total
borrowings decreased by $39.9 million from $296.7 million at December 31, 2007
to $256.8 million at March 31, 2008, primarily as a result of a reduction in
short-term borrowings funded by the growth in total deposits and a reduction in
the level of total investment securities, net of funds used for loan growth. Of
the total borrowings at March 31, 2008, $177.4 million were short-term and $79.4
million were considered long-term.
During
the first quarter of 2008, the Company continued to benefit from an improved net
interest margin as a result of further steepening of the United States Treasury
yield curve. The return to a more “normal” shaped yield curve was fostered by
three decreases in the overnight federal funds interest rate during the quarter
totaling 200 basis points (“bps”).
The
decreases in the federal funds rate have led to a lower level of interest rates
associated with our overnight short-term borrowings as well as a lower yield on
the 91-day Treasury bill to which approximately 38% of our deposits are priced.
As a result, the Company continued to experience a lower cost of deposits and
lower cost of borrowings, thereby improving our net interest margin. In 2008, we
expect some level of continued growth in our overall level of net interest
income as a result of an anticipated lower level of interest expense associated
with a decrease in our overall total cost of
funding
sources. The Company’s net interest margin for the first quarter improved 47 bps
over the previous quarter and 103 bps over the same quarter one year ago to
4.07%.
The
financial highlights for 2008 compared to 2007 are summarized
below.
(dollars
in millions, except per share amounts)
|
|
March
31,
2008
|
|
|
March
31,
2007
|
|
|
%
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,957.8
|
|
|
$
|
1,898.6
|
|
|
|
3
|
%
|
Total
loans (net)
|
|
|
1,203.2
|
|
|
|
1,046.4
|
|
|
|
15
|
|
Total
deposits
|
|
|
1,580.1
|
|
|
|
1,560.4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
24.6
|
|
|
$
|
18.4
|
|
|
|
34
|
%
|
Net
income
|
|
|
3.2
|
|
|
|
1.1
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.49
|
|
|
$
|
0.17
|
|
|
|
188
|
%
|
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
Our
accounting policies are fundamental to understanding Management’s Discussion and
Analysis of Financial Condition and Results of Operations. Our accounting
policies are more fully described in Note 1 of the
Notes
to Consolidated Financial Statements
described in
the Company’s annual report on Form 10-K for the year ended December 31, 2007.
Our consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. These principles
require our management to make estimates and assumptions about future events
that affect the amounts reported in our consolidated financial statements and
accompanying notes. Since future events and their effects cannot be determined
with absolute certainty, actual results may differ from those estimates.
Management makes adjustments to its assumptions and estimates when facts and
circumstances dictate. We evaluate our estimates and assumptions on an ongoing
basis and predicate those estimates and assumptions on historical experience and
on various other factors that are believed to be reasonable under the
circumstances. Management believes the following critical accounting policies
encompass the more significant assumptions and estimates used in preparation of
our consolidated financial statements.
Allowance
for Loan Losses.
The allowance
for loan losses represents the amount available for estimated probable losses
existing in our loan portfolio. While the allowance for loan losses is
maintained at a level believed to be adequate by management for estimated losses
in the loan portfolio, the determination of the allowance is inherently
subjective, as it involves significant estimates by management, all of which may
be susceptible to significant change.
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
estimates and assumptions used in making the evaluations. The use of different
assumptions could materially impact the level of the allowance for loan losses
and, therefore, the provision for loan losses to be charged against earnings.
Such changes could impact future financial results.
We
perform periodic, systematic reviews of our loan portfolios to identify
potential losses and assess the overall probability of collection. These reviews
include an analysis of historical default and loss experience, which results in
the identification and quantification of loss factors. These loss factors are
used in determining the appropriate level of allowance to cover the estimated
probable losses in various loan categories. Management judgment involving the
estimates of loss factors can be impacted by many variables, such as the number
of years of actual default and loss history included in the
evaluation.
The
methodology used to determine the appropriate level of the allowance for loan
losses and related
provisions
differs for commercial and consumer loans and involves other overall
evaluations. In addition, significant estimates are involved in the
determination of the appropriate level of allowance related to impaired loans.
The portion of the allowance related to impaired loans is based on either (1)
discounted cash flows using the loan’s effective interest rate, (2) the fair
value of the collateral for collateral-dependent loans, or (3) the observable
market price of the impaired loan. Each of these variables involves judgment and
the use of estimates. In addition to periodic estimation and testing of loss
factors, we periodically evaluate qualitative factors which
include:
·
|
changes
in lending policies and procedures, including changes in underwriting
standards and collection, charge-off and recovery practices not considered
elsewhere in estimating credit
losses;
|
·
|
changes
in the volume and severity of past due loans, the volume of nonaccrual
loans and the volume and severity of adversely classified or graded
loans;
|
·
|
changes
in the nature and volume of the portfolio and in the terms of
loans;
|
·
|
changes
in the value of underlying collateral for collateral-dependent
loans;
|
·
|
changes
in the quality of the institution’s loan review
system;
|
·
|
changes
in the experience, ability and depth of lending management and other
relevant staff;
|
·
|
the
existence and effect of any concentrations of credit and changes in the
level of such concentrations; and
|
·
|
changes
in international, national, regional and local economic and business
conditions and developments that affect the collectibility of the
portfolio, including the condition of various market
segments;
|
·
|
the
effect of other external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the
institution’s existing portfolio.
|
Management
judgment is involved at many levels of these evaluations.
An
integral aspect of our risk management process is allocating the allowance for
loan losses to various components of the loan portfolio based upon an analysis
of risk characteristics, demonstrated losses, industry and other segmentations
and other more judgmental factors.
Stock-Based
Compensation.
This critical Accounting policy is more fully
described in Note 1 of the Notes to Consolidated Financial Statements included
in our Annual Report on From 10-K for the year ended December 31,
2007.
Other
Than Temporary Impairment on investment securities
.
We
perform periodic reviews of the fair value of the securities in the Company’s
investment portfolio and evaluate individual securities for declines in fair
value that may be other than temporary. If declines are deemed other than
temporary, an impairment loss is recognized against earnings and the security is
written down to its current fair value.
In
estimating other-than-temporary impairment losses, management considers (1)
Adverse change in the general market condition of the industry which the
investment is related, (2) the financial condition and near-term prospects of
the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
RESULTS
OF OPERATIONS
Average
Balances and Average Interest Rates
Interest-earning
assets averaged $1.81 billion for the first quarter of 2008, compared to $1.73
billion for the same period in 2007. For the quarter ended March 31, total loans
receivable including loans held for sale, averaged $1.20 billion in 2008 and
$1.02 billion in 2007, respectively. For the same two quarters, total securities
averaged $617.9 million and $706.3 million, respectively.
The
growth in interest-earning assets was funded by an increase in the average
balance of net noninterest-bearing deposits, which increased from $234.5 million
for the first quarter of 2007 to $257.7 million for the first quarter of 2008 as
well as an increase in the level of average short-term borrowings from $165.3
million in the first quarter of 2007 to $230.7 million in the first quarter of
2008. Long-term debt, which includes $50.0 million in Federal Home Loan Bank
(“FHLB”) advances known as convertible select borrowings and junior subordinated
debt averaged $79.4 million in the first quarter of 2008 compared to $29.4
million in the first quarter of 2007. Total interest-bearing deposits averaged
$1.24 billion for the first quarter of 2008, compared to $1.30 billion for the
first quarter of 2007.
The
fully-taxable equivalent yield on interest-earning assets for the first quarter
of 2008 was 6.26%, a decrease of 23 basis points (“bps”) from the
comparable period in 2007. This decrease resulted from lower yields on our
floating rate loans and securities during the first quarter of 2008 as compared
to the same period in 2007 which are tied to a floating rate index.
Approximately 13% of our investment securities have a floating interest rate and
provide a yield that consists of a fixed spread tied to the one month LIBOR
interest rate. Our floating rate loans represent approximately 35% of our total
loans receivable portfolio. The majority of these loans are tied to the New York
prime lending rate which decreased 100 bps during the second half of 2007 and
subsequently decreased another 200 bps during the first quarter of 2008,
following similar decreases in the overnight federal funds rate by the Federal
Open Market Committee. Going forward, we expect these three decreases in the
prime lending rate will somewhat decrease our interest income received from our
floating rate loan portfolio.
The
average rate paid on total interest-bearing liabilities for the first quarter of
2008 was 2.46%, compared to 3.94% for the first quarter of 2007. Our deposit
cost of funds decreased from 2.74% in the first quarter of 2007 to 1.43% for the
first quarter of 2008. The aggregate average cost of all funding sources for the
Company was 2.11% for the first quarter of 2008, compared to 3.41% for the same
quarter of the prior year. The average cost of short-term borrowings decreased
from 5.37% in the first quarter of 2007 to 3.28% in the first quarter of 2008.
The reason for the decrease in the Company’s deposit cost of funds and borrowing
cost of funds is primarily related to the decrease in the average interest yield
tied to the United States 91-day Treasury bill. The average interest rate of the
91-day Treasury bill decreased from 4.90% in the first quarter of 2007 to 1.36%
in the first quarter of 2008 thereby significantly reducing the average interest
rate paid on our indexed deposits. At March 31, 2008, approximately $606
million, or 38%, of our total deposits are those of local municipalities, school
districts, not-for-profit organizations or corporate cash management customers,
which are indexed to the 91-day Treasury bill.
Net
Interest Income and Net Interest Margin
Net
interest income is the difference between interest income and interest expense.
Interest income is generated from interest earned on loans, investment
securities and other interest-earning assets. Interest expense is paid on
deposits and borrowed funds. Changes in net interest income and net interest
margin result from the interaction between the volume and composition of
interest-earning assets, related yields and associated funding costs. Net
interest income is our primary source of earnings. There are several factors
that affect net interest income, including:
·
|
the
volume, pricing mix and maturity of earning assets and interest-bearing
liabilities;
|
·
|
market
interest rate fluctuations; and
|
Net
interest income for the first quarter of 2008 increased by $5.4 million, or 40%,
over the same period in 2007. The majority of this increase was related to a 17%
increase in the balance of average loans receivable. This increase was a result
of continued strong loan growth combined with significant improvement in the
Company’s net interest margin. The improvement in net interest margin is the
result of a marked reduction in the Company’s deposit and total cost of funds.
Interest income on interest-earning assets totaled $28.2 million for the first
quarter of 2008, an increase of $370,000, or 1%, over 2007. Interest income on
loans receivable increased by $1.8 million, or 10%, over the first quarter of
2007.
The
growth was the result of a $2.8 million increase in loan interest income due to
a higher level of loans receivable outstanding partially offset by a $1.1
million decrease due to lower interest rates associated with our floating rate
loans and new fixed rate loans generated over the previous twelve months. The
lower rates are a direct result of the decreases in the New York prime lending
rate following similar decreases in the federal funds rate.
Interest income on the investment securities portfolio decreased by $1.5
million, or 16%, for the first quarter of 2008 as compared to the same period
last year. This was primarily a result of a decrease in the average balance of
investment securities of $88.4 million, or 13%, from the first quarter one year
ago. Due to the yield curve environment that was present throughout the majority
of the past six months, the cash flows from principal repayments on the
investment
securities
portfolio were used to fund the continued strong loan growth and were not
redeployed back into the securities portfolio. Interest expense for the first
quarter decreased $5.0 million, or 34%, from $14.6 million in 2007 to $9.6
million in 2008. Interest expense on deposits decreased by $5.2 million, or 45%,
from the first quarter of 2007 while interest expense on short-term borrowings
decreased by $308,000, or 14%, for the same period. Interest expense on
long-term debt totaled $1.2 million for the first quarter of 2008 compared to
$661,000 for the same period in 2007. This was the direct result of adding two
convertible select borrowing products during the third quarter of 2007. See the
Long-Term Debt section later in this Form 10-Q for further discussion on the
convertible select borrowings. See Note 10 in the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2007 for further discussion of our Trust Capital
securities.
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. Our net interest rate spread on a
fully taxable-equivalent basis was 3.80% during the first quarter of 2008
compared to 2.55% during the same period in the previous year. Net interest
margin represents the difference between interest income, including net loan
fees earned, and interest expense, reflected as a percentage of average
interest-earning assets. The fully tax-equivalent net interest margin increased
107 bps, from 3.08% for the first quarter of 2007 to 4.15% for the first quarter
of 2008, as a result of the decreased cost of funding sources as previously
discussed.
Provision
for Loan Losses
We
recorded provisions of $975,000 to the allowance for loan losses for the first
quarter of 2008 as compared to $480,000 for the first quarter of 2007.
Management undertakes a rigorous and consistently applied process in order to
evaluate the allowance for loan losses and to determine the level of provision
for loan losses, as previously stated in the Application of Critical Accounting
Policies. Net loan charge-offs for the first quarter of 2008 were $90,000, or
0.01%, of average loans outstanding, compared to net charge-offs of $173,000, or
0.02%, for the same period in 2007. The allowance for loan losses as a
percentage of period-end loans was 0.96% at March 31, 2008, as compared to 0.93%
at December 31, 2007, and 0.95% at March 31, 2007.
From
December 31, 2007 to March 31, 2008, total non-performing loans increased from
$2.9 million to $3.8 million. Non-performing assets as a percentage of
total assets increased slightly from 0.17% at December 31, 2007 to 0.22% at
March 31, 2008. See the section in this Management’s Discussion and Analysis on
the allowance for loan losses for further discussion regarding our methodology
for determining the provision for loan losses.
Noninterest
Income
Noninterest
income for the first quarter of 2008 increased by $823,000, or 16%, over the
same period in 2007. Deposit service charges and fees increased by 26%, from
$4.5 million for the first quarter of 2007 to $5.7 million in the first quarter
of 2008. The increase is mainly attributable to additional income associated
with servicing a higher volume of deposit and loan accounts. The largest
increase in noninterest income was revenue relating to Visa® check card
transactions, which increased by $492,000 in the first quarter of 2008 compared
to the same period in 2007. Noninterest income for the first quarter of 2008
included $176,000 of gains on the sale of residential loans compared to
$193,000 gains on the sale of residential loans during the first quarter 2007.
Included in noninterest income for the first quarter of 2007 were gains on the
sale of student loans of $128,000 and gains on the call of investment securities
of $171,000.
Noninterest
Expenses
For the
first quarter of 2008, noninterest expenses increased by $2.4 million, or 15%,
over the same
period in
2007. The increase in noninterest expenses for the quarter was widespread across
several categories, reflecting the Company’s continued growth. This increase
includes the impact of the new stores we opened in mid-July, mid-August and
mid-September of 2007. Included in regulatory assessment and related fees
expenses for 2008 were costs incurred to address the matters identified by
the Office of the Comptroller of the Currency (“OCC”) in the formal written
agreement which the Bank entered into with the OCC on January 29, 2007 as well
as costs incurred during the first quarter of 2008 with respect to the Consent
Order entered into with the OCC on February 5, 2008.
Going
forward, and based upon our current knowledge, management does not expect
expenses related to these two regulatory orders to be as high as the first
quarter of 2008.
Also, regulatory
assessment and related fees expenses for the first quarter of 2008 include a
significant impact for premiums related to Federal Deposit Insurance
Corporation, (“FDIC”) deposit insurance coverage which was offset the first
quarter of 2007 by a one time credit. Beginning January 1, 2007, the FDIC began
charging insured Banks for such coverage for the first time since 1997. Banks
which were in operation and paying deposit insurance premiums during 1997 and
prior received a one time credit in 2007 based upon premiums paid during those
previous years. Commerce utilized 100% of this credit during the first quarter
of 2007 to partially reduce its expense costs and therefore incurred a full
quarter’s worth of FDIC premiums during the remaining three quarters of
2007, the first quarter of 2008 and will continue to do so going forward as
well. Also, staffing levels, data processing costs and related expenses
increased as a result of servicing more deposit and loan customers and
processing a higher volume of transactions
. A comparison of noninterest
expenses for certain categories for the three months ended March 31, 2008 and
March 31, 2007 is presented in the following paragraphs.
Salary
and employee benefits expenses, which represent the largest component of
noninterest expenses, increased by $483,000, or 6%, for the first quarter of
2008 over the first quarter of 2007. The increased level of these expenses
reflects the impact associated with the additional staff for the new stores
opened in mid-July 2007, mid-August 2007 and mid-September 2007.
Occupancy
expenses totaled $2.1 million for the first quarter of 2008, an increase of
$239,000, or 13%, over the first quarter of 2007, while furniture and equipment
expenses increased 10%, or $97,000, over the first quarter of 2007. The three
stores opened in the past nine months contributed to the increases in occupancy,
furniture, and equipment expenses.
Advertising
and marketing expenses totaled $837,000 for the three months ending March 31,
2008, an increase of $51,000, or 7%, over the same period in 2007.
Data
processing expenses increased by $230,000, or 16%, in the first quarter of 2008
over the three months ended March 31, 2007. The primary increases were due to
costs associated with processing additional transactions as a result of growth
in the number of accounts serviced, the costs associated with processing for
three additional stores and enhancements to existing systems.
Postage
and supplies expenses of $532,000 remained constant with only a minimal decrease
of $7,000, or 1%, below the first quarter of 2007.
Regulatory
assessments and related fees of $1.1 million were $951,000 higher for the first
quarter of 2008 than for the first quarter of 2007. This increase is primarily
due to the reinstatement of FDIC charges and regulatory expenses and related
fees as previously discussed. The Company anticipates the regulatory assessments
and related fees will remain level in future periods in 2008.
Telephone
expenses of $596,000 were $32,000 higher, or 6%, for the first quarter of 2008
compared to the first quarter of 2007.
Other
noninterest expenses increased by $335,000, or 19%, for the three-month period
ended March 31, 2008, compared to the same period in 2007. Components of the
increase included expenses related to legal expenses, bank shares tax, coin
shipment expenses due to our popular and convenient Penny Arcade machines
located in all of our stores and other miscellaneous expenses.
One key
measure that management utilizes to monitor progress in controlling overhead
expenses is
the ratio
of net noninterest expenses to average assets. For purposes of this calculation,
net noninterest expenses equal noninterest expenses less noninterest income. For
the first quarter of 2008, this ratio equaled 2.7% compared to 2.5% for the
first quarter of 2007.
Another
productivity measure utilized by management is the operating efficiency ratio.
This ratio expresses the relationship of noninterest expenses to net interest
income plus noninterest income. For the quarter ending March 31, 2008, the
operating efficiency ratio was 76.9%, compared to 89.6% for the similar period
in 2007. The improvement in the operating efficiency ratio is primarily due to
the significant increase in our net interest income as a result of the
improvement in our net interest margin. Our operating efficiency ratio remains
above our peer group primarily due to our strong growth and aggressive expansion
activities and our strong customer service focused model.
Provision
for Federal Income Taxes
The
provision for federal income taxes was $1.5 million for the first quarter of
2008, compared to $316,000 for the same period in 2007. The effective tax rate
for the first quarter of 2008 was 31.8% as compared to 22.1% for the first three
months of 2007. This increase in effective tax rate and the corresponding
provision during 2008 was primarily due to higher pre-tax income and a lower
proportion of tax exempt interest income on investments and loans to total
pretax income.
Net
Income and Net Income Per Share
Net
income for the first quarter of 2008 was $3.2 million, an increase of $2.1
million, or 188%, from the $1.1 million recorded in the first quarter of 2007.
The increase was due to a $5.4 million increase in net interest income, and an
$823,000 increase in noninterest income, offset by a $495,000 increase in the
provision for loan losses, a $2.4 million increase in noninterest expenses and a
$1.2 million increase in the provision for income taxes.
Basic
earnings per common share were $0.50 for the first quarter of 2008, compared to
$0.18 for the first quarter of 2007. Diluted earnings per common share increased
188%, to $0.49, for the first quarter of 2008, compared to $0.17 for the first
quarter of 2007.
Return
on Average Assets and Average Equity
Return on
average assets (“ROA”) measures our net income in relation to our total average
assets. Our annualized ROA for the first quarter of 2008 was 0.66%, compared to
0.24% for the first quarter of 2007. Return on average equity (“ROE”) indicates
how effectively we can generate net income on the capital invested by our
stockholders. ROE is calculated by dividing net income by average stockholders'
equity. The annualized ROE was 11.39% for the first quarter of 2008, compared to
4.39% for the first quarter of 2007. Both ROA and ROE for the first quarter of
2008 were impacted by the improved interest rate environment and the resulting
impact on our net interest income.
FINANCIAL
CONDITION
Securities
During
the first three months of 2008, the total investment securities portfolio
decreased by $89.0
million
from $644.6 million to $555.6 million. There were no purchases of new
securities during the first three months of 2008 as compared to $35.0 million
during the first three months of 2007. Due to the yield curve environment that
was present throughout the majority of the past twelve months, the cash flows
from principal repayments on the investment securities portfolio were used to
fund the continued strong loan growth and to reduce the level of average
short-term borrowings rather than redeploy these cash flows back into investment
securities at a minimal net interest spread.
During
the first three months of 2008, securities available for sale decreased by $21.2
million, from $387.2 million at December 31, 2007 to $365.9 million at March 31,
2008 as a result of principal repayments of $12.1 million and a $9.0 million
increase in unrealized losses. The securities available
for sale
portfolio is comprised of U.S. Government agency securities, mortgage-backed
securities and collateralized mortgage obligations. The duration of the
securities available for sale portfolio was 3.9 years at March 31, 2008 compared
to 4.0 years at December 31, 2007. The current weighted average yield was 4.88%
at March 31, 2008 compared to 5.28% at December 31, 2007.
During
the first three months of 2008, securities held to maturity decreased by $67.8
million from $275.5 million to $189.7 million as a result of principal
repayments, maturities and calls of $67.8 million. The securities held in this
portfolio include U.S. Government agency securities, tax-exempt municipal bonds,
collateralized mortgage obligations, corporate debt securities and
mortgage-backed securities. The duration of the securities held to maturity
portfolio was 3.4 years at March 31, 2008 and 3.7 years at December 31, 2007.
The current weighted average yield was 5.36% at March 31, 2008 and 5.32% at
December 31, 2007, respectively.
Total
securities aggregated $556 million, or 28%, of total assets at March 31, 2008 as
compared to $645 million, or 33%, of total assets at December 31,
2007.
The
average fully-taxable equivalent yield on the combined securities portfolio for
the first three months of 2008 was 5.15% as compared to 5.32% for the similar
period of 2007.
We
perform periodic reviews of the securities in the Company’s investment portfolio
for declines in fair value that may be other than temporary. Fair value at March
31, 2008 was determined based upon external quotes obtained from reputable
third-party broker/dealers. When position-specific quotes were not utilized,
fair value was based on quotes of comparable bonds. The market for certain
securities held in the Company’s available for sale portfolio was extremely
volatile during the first quarter of 2008 due to extraordinary economic and
market dislocations. As a result of this volatility, the market prices for many
types of securities at March 31, 2008 were much lower than at December 31, 2007
due to the distressed market conditions. Management has reviewed such securities
for continued and constant receipt of scheduled principal and interest payments
as well as credit-rating adjustments. Based upon this review, management does
not believe any individual unrealized loss as of March 31, 2008 represents
other-than-temporary impairment. The unrealized losses on these securities are
primarily the result of changes in the liquidity levels in the market in
addition to changes in general market interest rates and not by material changes
in the credit characteristics of the investment securities portfolio. In
addition, at March 31, 2008, management had the positive intent and ability to
hold these securities to recovery or maturity.
Loans
Held for Sale
Loans
held for sale are comprised of student loans and selected residential loans the
Company originates with the intention of selling in the future. Occasionally,
loans held for sale also include selected Small Business Administration (“SBA”)
loans and business and industry loans that the Company decides to sell. These
loans are carried at the lower of cost or estimated fair value, calculated in
the aggregate. Depending on market conditions, the Bank typically sells its
student loans during the first quarter of each year, however, for 2008, the Bank
plans to sell its student loan portfolio during the second or third quarter
under what is expected to be more favorable market conditions. At the present
time, the Bank’s residential loans are originated with the intent to sell to the
secondary market unless the loan is nonconforming to the secondary market
standards or if we agree not to sell the loan due to a customer’s request. The
residential mortgage loans that are designated as held for sale are sold to
other financial institutions in correspondent relationships. The sale of these
loans takes place typically within 30 days of funding. At December 31, 2007 and
March 31, 2008, there were no past due or impaired residential mortgage loans
held for sale. SBA loans are held in the Company’s loan receivable portfolio
unless or until the Company’s management determines a sale of certain loans is
appropriate. At the time such a decision is made, the SBA loans are moved from
the loans receivable portfolio to the loans held for sale portfolio. Total loans
held for sale were $19.2 million at March 31, 2008 and $14.1 million at December
31, 2007. At December 31, 2007, loans held for sale were comprised of $11.4
million of student loans and $2.7 million of residential mortgages as compared
to $17.6 million of student loans and $1.6 million of residential loans at March
31, 2008. The change was the result of sales of $13.7 million of residential
loans, offset by originations of $18.7 million in new loans held for sale. Loans
held for sale, as a percent of total assets, represented approximately 1.0% at
March 31, 2008 and 0.7% at December 31, 2007.
Loans
Receivable
During
the first three months of 2008, total gross loans receivable increased by $57.5
million, from $1.16 billion at December 31, 2007, to $1.21 billion at March 31,
2008. The growth was widespread across most loan categories. Gross loans
receivable represented 77% of total deposits and 62% of total assets at March
31, 2008, as compared to 74% and 58%, respectively, at December 31,
2007.
The
following table reflects the composition of the Company’s loan
portfolio.
(dollars
in thousands)
|
|
As
of
3/31/2008
|
|
|
%
of Total
|
|
|
As
of
3/31/2007
|
|
|
%
of Total
|
|
|
$
Increase
|
|
|
%
Increase
|
|
Commercial
|
|
$
|
377,149
|
|
|
|
31
|
%
|
|
$
|
322,957
|
|
|
|
31
|
%
|
|
$
|
54,192
|
|
|
|
17
|
%
|
Owner-Occupied
|
|
|
174,477
|
|
|
|
14
|
|
|
|
124,120
|
|
|
|
12
|
|
|
|
50,357
|
|
|
|
41
|
|
Total
Commercial
|
|
|
551,626
|
|
|
|
45
|
|
|
|
447,077
|
|
|
|
43
|
|
|
|
104,549
|
|
|
|
23
|
|
Consumer
/ Residential
|
|
|
309,873
|
|
|
|
26
|
|
|
|
286,746
|
|
|
|
27
|
|
|
|
23,127
|
|
|
|
8
|
|
Commercial
Real Estate
|
|
|
353,359
|
|
|
|
29
|
|
|
|
322,614
|
|
|
|
30
|
|
|
|
30,745
|
|
|
|
10
|
|
Gross
Loans
|
|
|
1,214,858
|
|
|
|
100
|
%
|
|
|
1,056,437
|
|
|
|
100
|
%
|
|
$
|
158,421
|
|
|
|
15
|
%
|
Less:
Allowance for loan losses
|
|
|
(11,627
|
)
|
|
|
|
|
|
|
(9,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loans
|
|
$
|
1,203,231
|
|
|
|
|
|
|
$
|
1,046,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
and Asset Quality and Allowance for Loan Losses
Nonperforming
assets include nonperforming loans and foreclosed real estate. Nonperforming
assets at March 31, 2008, were $4.3 million, or 0.22%, of total assets as
compared to $3.4 million, or 0.17%, of total assets at December 31, 2007. Total
nonperforming loans (nonaccrual loans, loans past due 90 days and still accruing
interest and restructured loans) were $3.7 million at March 31, 2008 compared to
$2.9 million at December 31, 2007. Foreclosed real estate totaled $588,000 at
March 31, 2008 and $489,000 at December 31, 2007. At March 31, 2008, ten loans
were in the nonaccrual commercial category ranging from $11,000 to $584,000 and
thirteen loans were in the nonaccrual commercial real estate category ranging
from $25,000 to $644,000. At December 31, 2007, nine loans were in the
nonaccrual commercial category ranging from $11,000 to $140,000 and one loan was
in the nonaccrual commercial real estate category for $177,000. Overall, asset
quality, as measured in terms of nonperforming assets to total assets, coverage
ratios and nonperforming assets to stockholders’ equity, remains
strong.
Impaired
loans requiring a specific allocation totaled $916,000 at March 31, 2008. This
was a decrease of $90,000 compared to impaired loans requiring a specific
allocation at December 31, 2007. From December 31, 2007, there were three loans
added totaling $356,000 to the loans requiring a specific allocation and four
loans totaling $446,000 that no longer required a specific allocation at March
31, 2008.
The table
below presents information regarding nonperforming loans and assets at March 31,
2008 and 2007 and at December 31, 2007.
|
|
Nonperforming
Loans and Assets
|
(dollars
in thousands)
|
|
March
31,
2008
|
|
|
December
31,
2007
|
|
|
March
31,
2007
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,158
|
|
|
|
$
|
534
|
|
|
|
$
|
945
|
|
|
Consumer
|
|
|
120
|
|
|
|
|
57
|
|
|
|
|
19
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
284
|
|
|
|
|
385
|
|
|
|
|
394
|
|
|
Real
Estate
|
|
|
2,183
|
|
|
|
|
1,959
|
|
|
|
|
2,207
|
|
|
Total
nonaccrual loans
|
|
|
3,745
|
|
|
|
|
2,935
|
|
|
|
|
3,565
|
|
|
Loans
past due 90 days or more and still accruing
|
|
|
15
|
|
|
|
|
0
|
|
|
|
|
0
|
|
|
Renegotiated
loans
|
|
|
0
|
|
|
|
|
0
|
|
|
|
|
0
|
|
|
Total
nonperforming loans
|
|
|
3,760
|
|
|
|
|
2,935
|
|
|
|
|
3,565
|
|
|
Foreclosed
real estate
|
|
|
588
|
|
|
|
|
489
|
|
|
|
|
300
|
|
|
Total
nonperforming assets
|
|
$
|
4,348
|
|
|
|
$
|
3,424
|
|
|
|
$
|
3,865
|
|
|
Nonperforming
loans to total loans
|
|
|
0.31
|
|
%
|
|
|
0.25
|
|
%
|
|
|
0.34
|
|
%
|
Nonperforming
assets to total assets
|
|
|
0.22
|
|
%
|
|
|
0.17
|
|
%
|
|
|
0.20
|
|
%
|
Nonperforming
loan coverage
|
|
|
309
|
|
%
|
|
|
366
|
|
%
|
|
|
280
|
|
%
|
Nonperforming
assets / capital plus allowance for loan losses
|
|
|
4
|
|
%
|
|
|
3
|
|
%
|
|
|
3
|
|
%
|
Management’s
Allowance for Loan Loss Committee reviewed the composition of the nonaccrual
loans and believes adequate collateralization exists. Additional loans of $15.1
million, considered by our internal loan review department as problem loans at
March 31, 2008, have been evaluated as to risk exposure in determining the
adequacy for the allowance for loan losses.
The
following table sets forth information regarding the Company’s provision and
allowance for loan losses.
|
|
Allowance
for Loan Losses
|
(dollars
in thousands)
|
|
Three
Months Ending
March
31,
2008
|
|
|
Year
Ending December 31,
2007
|
|
|
Three
Months Ending
March
31,
2007
|
|
Balance
at beginning of period
|
|
$
|
10,742
|
|
|
|
$
|
9,685
|
|
|
|
$
|
9,685
|
|
|
Provisions
charged to operating expense
|
|
|
975
|
|
|
|
|
1,762
|
|
|
|
|
480
|
|
|
|
|
|
11,717
|
|
|
|
|
11,447
|
|
|
|
|
10,165
|
|
|
Recoveries
of loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
124
|
|
|
|
|
11
|
|
|
|
|
1
|
|
|
Consumer
|
|
|
6
|
|
|
|
|
53
|
|
|
|
|
5
|
|
|
Real
Estate
|
|
|
0
|
|
|
|
|
8
|
|
|
|
|
8
|
|
|
Total
recoveries
|
|
|
130
|
|
|
|
|
72
|
|
|
|
|
14
|
|
|
Loans
charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(165
|
)
|
|
|
|
(634
|
)
|
|
|
|
(176
|
)
|
|
Consumer
|
|
|
(38
|
)
|
|
|
|
(69
|
)
|
|
|
|
(9
|
)
|
|
Real
Estate
|
|
|
(17
|
)
|
|
|
|
(74
|
)
|
|
|
|
(2
|
)
|
|
Total
charged-off
|
|
|
(220
|
)
|
|
|
|
(777
|
)
|
|
|
|
(187
|
)
|
|
Net
charge-offs
|
|
|
(90
|
)
|
|
|
|
(705
|
)
|
|
|
|
(173
|
)
|
|
Balance
at end of period
|
|
$
|
11,627
|
|
|
|
$
|
10,742
|
|
|
|
$
|
9,992
|
|
|
Net
charge-offs as a percentage of average loans outstanding
|
|
|
0.01
|
|
%
|
|
|
0.07
|
|
%
|
|
|
0.02
|
|
%
|
Allowance
for loan losses as a percentage of period-end loans
|
|
|
0.96
|
|
%
|
|
|
0.93
|
|
%
|
|
|
0.95
|
|
%
|
Restricted
Investments in Bank Stock
During
the first three months of 2008, restricted investments in Bank stock decreased
by $770,000, or 4%, from $18.2 million at December 31, 2007 to $17.5 million at
March 31, 2008. The decrease was in the balance of the Federal Home Loan Bank
(“FHLB”) stock balance needed to cover the short-term borrowings at the FHLB
which are discussed elsewhere in this Form 10-Q.
Premises
and Equipment
During
the first three months of 2008, premises and equipment decreased by $1.0
million, or 1%, from $89.3 million at December 31, 2007 to $88.3 million at
March 31, 2008. The decrease in premises and equipment was due to the
depreciation and amortization on existing assets of $1.3 million, partially
offset by purchases of $301,000.
Other
Assets
Other
assets increased by $3.3 million from December 31, 2007 to March 31, 2008
primarily the result of an increase in net deferred tax assets due to the
increase in unrealized losses on the available for sale investment
portfolio.
Deposits
Total
deposits at March 31, 2008 were $1.58 billion, up $19.2 million from total
deposits of $1.56 billion at December 31, 2007. The Company has experienced
lower than normal deposit growth during the first three months of 2008 as
compared to prior years. During the first quarter of 2008, management continued
its strategy that it undertook in 2007 not to match certain “high rate” pricing
on
deposits which has been present in our marketplace. As a result, we have
experienced some runoff of such higher rate deposit balances although this
pricing discipline has served to stabilize and even lower our deposit cost of
funds, thereby helping to increase net interest income and improve our net
interest margin. Total deposits averaged $1.52 billion for the quarter
ended March 31, 2008, down $44.6 million, or 3%, below average total
deposits for the quarter ended March 31, 2007.
The
average balances and weighted average rates paid on deposits for the first three
months of 2008 and 2007 are presented in the table below.
|
|
Three
Months Ending March 31,
|
|
|
|
2008
|
|
|
2007
|
|
(dollars
in thousands)
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
Demand
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
270,345
|
|
|
|
|
|
$
|
262,022
|
|
|
|
|
Interest-bearing
(money market and checking)
|
|
|
706,625
|
|
|
|
1.91
|
%
|
|
|
700,697
|
|
|
|
3.97
|
%
|
Savings
|
|
|
349,976
|
|
|
|
1.38
|
|
|
|
377,735
|
|
|
|
2.67
|
|
Time
deposits
|
|
|
189,141
|
|
|
|
4.01
|
|
|
|
220,253
|
|
|
|
4.30
|
|
Total
deposits
|
|
$
|
1,516,087
|
|
|
|
|
|
|
$
|
1,560,707
|
|
|
|
|
|
Short-Term
Borrowings
Short-term
borrowings used to meet temporary funding needs consist of short-term and
overnight advances from the Federal Home Loan Bank, securities sold under
agreements to repurchase and overnight federal funds lines of credit. At March
31, 2008, short-term borrowings totaled $177.4 million as compared to $196.0
million at March 31, 2007 and $217.3 million at December 31, 2007. The average
rate paid on the short-term borrowings was 3.28% during the first three months
of 2008, compared to an average rate paid of 5.37% during the first three months
of 2007. The decreased rate paid on the borrowings is a direct result of the
decreases in short-term interest rates implemented by the Federal Reserve Board
during the second half of 2007 as previously discussed in this Form 10-Q. Also,
as previously discussed in this Form 10-Q, we expect this average borrowing rate
to be significantly lower during the remainder of 2008 as a result of the recent
decreases in the overnight federal funds rate.
Long-Term
Debt
Long-term
debt totaled $79.4 million at both March 31, 2008 and December 31, 2007, as
compared to $29.4 million at March 31, 2007. Our long-term debt consisted of
Trust Capital Securities through Commerce Harrisburg Capital Trust I, Commerce
Harrisburg Capital Trust II and Commerce Harrisburg Capital Trust III, our
Delaware business trust subsidiaries as well as longer-term borrowings through
the FHLB of Pittsburgh. At March 31, 2008, all of the Capital Trust Securities
qualified as Tier I capital for regulatory capital purposes for both the Bank
and the Company. Proceeds of the trust capital securities were used for general
corporate purposes, including additional capitalization of our wholly-owned
banking subsidiary. As part of the Company’s Asset/Liability management
strategy, management utilized the Federal Home Loan Bank convertible select
borrowing product during 2007 with the purchase of a $25.0 million borrowing
with a 5 year maturity and a six month conversion term at an initial interest
rate of 4.29% and a $25.0 million borrowing with a 2 year maturity and a three
month conversion term at an initial interest rate of 4.49%.
Stockholders’
Equity and Capital Adequacy
At March
31, 2008, stockholders’ equity totaled $110.3 million, down 2% from
stockholders’ equity of $112.3 million at December 31, 2007. Stockholders’
equity at March 31, 2008 included $9.6 million of unrealized losses, net of
income taxes, on securities available for sale. Excluding these unrealized
losses, gross stockholders’ equity increased by $3.8 million, or 3%, from $116.2
million
at
December 31, 2007, to $120.0 million at March 31, 2008 as a result of retained
net income and the proceeds from common stock issued through our stock option
and stock purchase plans.
Banks are
evaluated for capital adequacy based on the ratio of capital to risk-weighted
assets and total assets. 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-weighted assets. Tier 1 capital includes common
stockholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings. Total capital includes total Tier 1
capital, limited life preferred stock, qualifying debt instruments and the
allowance for loan losses. The capital standard based on total assets, also
known as the “leverage ratio,” requires all, but the most highly-rated, banks to
have Tier 1 capital of at least 4% of total average assets. At March 31, 2008,
the Bank met the definition of a “well-capitalized” institution.
The
following table provides a comparison of the Bank’s risk-based capital ratios
and leverage ratios to the minimum regulatory requirements for the periods
indicated.
|
|
March
31,
2008
|
|
December
31,
2007
|
|
Minimum
For
Adequately
Capitalized
Requirements
|
|
|
Minimum
For
Well-Capitalized
Requirements
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based
Tier 1
|
|
|
9.96
|
%
|
|
|
10.02
|
%
|
|
|
4.00
|
%
|
|
|
6.00
|
%
|
Risk-based
Total
|
|
|
10.75
|
|
|
|
10.77
|
|
|
|
8.00
|
|
|
|
10.00
|
|
Leverage
ratio
(to
average assets)
|
|
|
7.56
|
|
|
|
7.24
|
|
|
|
3.00
- 4.00
|
|
|
|
5.00
|
|
The
consolidated capital ratios of Pennsylvania Commerce Bancorp, Inc. at March 31,
2008 were as follows: leverage ratio of 7.59%, Tier 1 capital to risk-weighted
assets of 9.99% and total capital to risk-weighted assets of
10.77%.
Interest
Rate Sensitivity
Our 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 our asset/liability management activities is to maximize net
interest income while maintaining acceptable levels of interest rate risk. Our
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. Our Board of Directors reviews the
guidelines established by ALCO.
Our
management believes the simulation of net interest income in different interest
rate environments provides a 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.
Our
income simulation model analyzes interest rate sensitivity by projecting net
interest income over the next twenty-four months in a flat rate scenario versus
net interest income in alternative interest rate scenarios. Our management
continually reviews and refines its interest rate risk management process in
response to the changing economic climate. Currently, our model projects a 200
basis point (“bp”) increase and a 200 bp decrease during the next year, with
rates remaining constant in the second year.
Our ALCO
policy has established that income sensitivity will be considered acceptable if
overall net interest income volatility in a plus 200 or minus 200 bp scenario is
within 4% of net interest income
in a flat
rate scenario in the first year and 5% using a two-year planning
window.
The
following table compares the impact on forecasted net interest income at March
31, 2008 of a plus 200 and minus 200 basis point (bp) change in interest rates
to the impact at March 31, 2007 in the same scenarios.
|
|
March
31, 2008
|
|
|
March
31, 2007
|
|
|
|
12
Months
|
|
|
24
Months
|
|
|
12
Months
|
|
|
24
Months
|
|
Plus
200
|
|
|
(1.6
|
)%
|
|
|
(0.4
|
)%
|
|
|
(3.2
|
)%
|
|
|
(1.7
|
)%
|
Minus
200
|
|
|
1.6
|
|
|
|
(0.1
|
)
|
|
|
3.6
|
|
|
|
1.5
|
|
The
forecasted net interest income variability in all interest rate scenarios
indicate levels of future interest rate risk within the acceptable parameters
per the policies established by ALCO. Management continues to evaluate
strategies in conjunction with the Company’s ALCO to effectively manage the
interest rate risk position. Such strategies could include adjusting the
investment leverage position funded by short-term borrowings, altering the mix
of deposits by product, adjusting the mismatch between short-term
interest-sensitive assets and liabilities and the potential use of risk
management instruments such as interest rate swaps and caps.
We used
many assumptions to calculate the impact of changes in interest rates, including
the proportionate shift in rates. Our actual results may not be similar to the
projections due to several factors including the timing and frequency of rate
changes, market conditions and the shape of the interest rate yield curve.
Actual results may also differ due to our actions, if any, in response to the
changing interest rates.
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 our assets and liabilities, as well as any off-balance sheet items. The
model calculates the market value of our 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 bp increase or 200 bp decrease in
interest rates. Our ALCO policy indicates that the level of interest rate risk
is unacceptable if the immediate change would result in the loss of 40% or more
of the excess of market value over book value in the current rate scenario.
Management lowered this percentage from 50% to 40% in the first quarter of 2007
to more prudently limit the market valuation risk exposure of the Company. The
revised risk parameter reflects management’s historical practice of implementing
strategies that limit the Company’s exposure to market valuation fluctuations.
At March 31, 2008, the market value of equity indicates an acceptable level of
interest rate risk.
The
market value of equity model reflects certain estimates and assumptions
regarding the impact on the market value of our assets and liabilities given an
immediate plus 200 or minus 200 bp change in interest rates. One of the key
assumptions is the market value assigned to our core deposits, or the core
deposit premiums. Using an independent consultant, we have completed and updated
comprehensive core deposit studies in order to assign core deposit premiums to
our deposit products as permitted by regulation. The studies have consistently
confirmed management’s assertion that our core deposits have stable balances
over long periods of time, are generally insensitive to changes in interest
rates and have significantly longer average lives and durations than our loans
and investment securities. Thus, these core deposit balances provide an internal
hedge to market fluctuations in our fixed rate assets. Management believes the
core deposit premiums produced by its market value of equity model at March 31,
2008 provide an accurate assessment of our interest rate risk. At March 31,
2008, the average life of our core deposit transaction accounts was 11.3 years.
Liquidity
The
objective of liquidity management is to ensure our ability to meet our financial
obligations.
These
obligations include the payment of deposits on demand at their contractual
maturity, the repayment of borrowings as they mature, the payment of lease
obligations as they become due, the ability to fund new and existing loans and
other funding commitments and the ability to take advantage of new business
opportunities. Our ALCO is responsible for implementing the policies and
guidelines of our board-governing liquidity.
Liquidity
sources are found on both sides of the balance sheet. Liquidity is provided on a
continuous basis through scheduled and unscheduled principal reductions and
interest payments on outstanding loans and investments. Liquidity is also
provided through the following sources: the availability and maintenance of a
strong base of core customer deposits, maturing short-term assets, the ability
to sell investment securities, short-term borrowings and access to capital
markets.
Liquidity
is measured and monitored daily, allowing management to better understand and
react to balance sheet trends. On a quarterly basis, our board of directors
reviews a comprehensive liquidity analysis. The analysis provides a summary of
the current liquidity measurements, projections and future liquidity positions
given various levels of liquidity stress. Management also maintains a detailed
liquidity contingency plan designed to respond to an overall decline in the
condition of the banking industry or a problem specific to the
Company.
The Company’s investment
portfolio consists mainly of mortgage-backed securities and collateralized
mortgage obligations that do not have stated maturities. Cash flows from such
investments are dependent upon the performance of the underlying mortgage loans
and are generally influenced by the level of interest rates. As rates increase,
cash flows generally decrease as prepayments on the underlying mortgage loans
slow. As rates decrease, cash flows generally increase as prepayments increase.
In the current distressed market environment which has adversely impacted the
pricing on the securities, in the Company's investment portfolio, the Company
would not be inclined to act on a sale of available for sale securities for
liquidity purposes.
If the
Company attempted to sell certain securities of its investment portfolio,
current economic conditions and the lack of a liquid market could affect the
Company’s ability to sell those securities, as well as the value the Company
would be able to realize.
The
Company and the Bank’s liquidity are managed separately. On an unconsolidated
basis, the principal source of our revenue is dividends paid to the Company by
the Bank. The Bank is subject to regulatory restrictions on its ability to pay
dividends to the Company. The Company’s net cash outflows consist principally of
interest on the trust-preferred securities, dividends on the preferred stock and
unallocated corporate expenses.
We also
maintain secondary sources of liquidity which can be drawn upon if needed. These
secondary sources of liquidity include federal funds lines of credit, repurchase
agreements and borrowing capacity at the Federal Home Loan Bank. At March 31,
2008, our total potential liquidity through these secondary sources was $735.8
million, of which $508.4 million was currently available, as compared to $426.8
million available out of our total potential liquidity of $694.2 million at
December 31, 2007.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
Our
exposure to market risk principally includes interest rate risk, which was
previously discussed. The information presented in the Interest Rate Sensitivity
subsection of Part I, Item 2 of this Report, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, is incorporated by
reference into this Item 3.
Item
4. Controls
and Procedures
Quarterly evaluation of the Company’s
Disclosure Controls and Internal Controls.
As of the end of the period
covered by this quarterly report, the Company has evaluated the effectiveness of
the design and operation of its “disclosure controls and procedures”
(“Disclosure Controls”). This evaluation (“Controls Evaluation”) was done under
the supervision and with the participation of management, including the Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).
Limitations on the Effectiveness of
Controls
. The Company’s management, including the CEO and CFO, does not
expect that their Disclosure Controls or their “internal controls and procedures
for financial reporting” (“Internal Controls”) will prevent all error and all
fraud. The Company’s Disclosure Controls are designed to provide reasonable
assurance that the information provided in the reports we file under the
Exchange Act, including this quarterly Form 10-Q report, is appropriately
recorded, processed and summarized. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls is also based in part upon certain assumptions about the
likelihood of future events and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate. The
Company conducts periodic evaluations to enhance, where necessary, its
procedures and controls.
Based
upon the Controls Evaluation, the CEO and CFO have concluded that, subject to
the limitations noted above, there have not been any changes in the Company’s
disclosure controls and procedures for the quarter ended March 31, 2008 that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting. Additionally, the CEO and
CFO have concluded that the Disclosure Controls are effective in reaching a
reasonable level of assurance that management is timely alerted to material
information relating to the Company during the period when its periodic reports
are being prepared.
Item
4T. Controls
and Procedures
Not
applicable.
Part
II -- OTHER INFORMATION
Item
1. Legal
Proceedings.
We are
not party to any material pending legal proceeding, other than the ordinary
routine litigation incidental to our business.
Item
1A.
Risk Factors.
No
material changes to report for the quarter ending March 31, 2008 from the risk
factors disclosed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007 previously filed with the SEC.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
No items
to report for the quarter ending March 31, 2008.
Item
3. Defaults
Upon Senior Securities.
No items
to report for the quarter ending March 31, 2008.
Item
4. Submission
of Matters to a Vote of Securities Holders.
No items
to report for the quarter ending March 31, 2008.
Item
5. Other
Information.
No items
to report for the quarter ending March 31, 2008.
Item
6. Exhibits.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PENNSYLVANIA
COMMERCE BANCORP, INC.
|
(Registrant)
|
|
|
|
|
5/12/08
|
|
/s/
Gary L. Nalbandian
|
(Date)
|
|
Gary
L. Nalbandian
|
|
|
President/CEO
|
|
|
|
|
|
|
5/12/08
|
|
/s/
Mark A. Zody
|
(Date)
|
|
Mark
A. Zody
|
|
|
Chief
Financial Officer
|
|
|
|
EXHIBIT
INDEX
30
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