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,
2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
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:
|
6,496,028
Common shares outstanding at
4/30/2009
|
PENNSYLVANIA
COMMERCE BANCORP, INC.
INDEX
|
|
Page
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Balance Sheets (Unaudited)
|
|
|
March
31, 2009 and March 31,
2008
|
|
|
|
|
|
Consolidated
Statements of Income (Unaudited)
|
|
|
Three
months ending March 31, 2009 and March 31, 2008
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity (Unaudited)
|
|
|
Three
months ending March 31, 2009 and March 31, 2008
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
Three
months ending March 31, 2009 and March 31, 2008
|
|
|
|
|
|
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
|
|
|
|
|
|
Signatures
|
|
Part
I – FINANCIAL INFORMATION
Item
1. Financial Statements
Pennsylvania
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
|
(in
thousands, except share and per share amounts)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Assets
|
Cash
and cash equivalents
|
|
$
|
39,517
|
|
|
$
|
49,511
|
|
|
Securities,
available for sale at fair value
|
|
|
328,868
|
|
|
|
341,656
|
|
|
Securities,
held to maturity at cost
|
|
|
|
|
|
|
|
|
|
(fair
value 2009: $144,214; 2008: $154,357)
|
|
|
141,742
|
|
|
|
152,587
|
|
|
Loans,
held for sale
|
|
|
42,055
|
|
|
|
41,148
|
|
|
Loans
receivable, net of allowance for loan losses
|
|
|
|
|
|
|
|
|
|
(allowance
2009: $16,231; 2008: $16,719)
|
|
|
1,430,105
|
|
|
|
1,423,064
|
|
|
Restricted
investments in bank stocks
|
|
|
21,630
|
|
|
|
21,630
|
|
|
Premises
and equipment, net
|
|
|
87,994
|
|
|
|
87,059
|
|
|
Other
assets
|
|
|
23,390
|
|
|
|
23,872
|
|
|
Total
assets
|
|
$
|
2,115,301
|
|
|
$
|
2,140,527
|
|
Liabilities
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
310,219
|
|
|
$
|
280,556
|
|
|
Interest-bearing
|
|
|
1,358,398
|
|
|
|
1,353,429
|
|
|
Total
deposits
|
|
|
1,668,617
|
|
|
|
1,633,985
|
|
|
Short-term
borrowings and repurchase agreements
|
|
|
236,525
|
|
|
|
300,125
|
|
|
Long-term
debt
|
|
|
79,400
|
|
|
|
79,400
|
|
|
Other
liabilities
|
|
|
11,762
|
|
|
|
12,547
|
|
|
Total
liabilities
|
|
|
1,996,304
|
|
|
|
2,026,057
|
|
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 –
2009:
6,491,499; 2008: 6,446,421
|
|
|
6,491
|
|
|
|
6,446
|
|
|
Surplus
|
|
|
74,211
|
|
|
|
73,221
|
|
|
Retained
earnings
|
|
|
52,500
|
|
|
|
51,683
|
|
|
Accumulated
other comprehensive loss
|
|
|
(14,605
|
)
|
|
|
(17,280
|
)
|
|
Total
stockholders’ equity
|
|
|
118,997
|
|
|
|
114,470
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,115,301
|
|
|
$
|
2,140,527
|
|
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)
|
|
2009
|
|
|
2008
|
|
Interest
|
Loans
receivable, including fees:
|
|
|
|
|
|
|
Income
|
Taxable
|
|
$
|
18,812
|
|
|
$
|
19,574
|
|
|
Tax-exempt
|
|
|
999
|
|
|
|
640
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,477
|
|
|
|
7,927
|
|
|
Tax-exempt
|
|
|
16
|
|
|
|
16
|
|
|
Total
interest income
|
|
|
25,304
|
|
|
|
28,157
|
|
Interest
|
Deposits
|
|
|
4,332
|
|
|
|
6,447
|
|
Expense
|
Short-term
borrowings
|
|
|
426
|
|
|
|
1,911
|
|
|
Long-term
debt
|
|
|
1,209
|
|
|
|
1,216
|
|
|
Total
interest expense
|
|
|
5,967
|
|
|
|
9,574
|
|
|
Net interest
income
|
|
|
19,337
|
|
|
|
18,583
|
|
|
Provision
for loan losses
|
|
|
3,200
|
|
|
|
975
|
|
|
Net
interest income after
provision
for loan losses
|
|
|
16,137
|
|
|
|
17,608
|
|
Noninterest
|
Service
charges and other fees
|
|
|
5,646
|
|
|
|
5,676
|
|
Income
|
Other
operating income
|
|
|
175
|
|
|
|
141
|
|
|
Gains
(losses) on sales of loans
|
|
|
(322
|
)
|
|
|
176
|
|
|
Total
noninterest income
|
|
|
5,499
|
|
|
|
5,993
|
|
Noninterest
|
Salaries
and employee benefits
|
|
|
9,999
|
|
|
|
8,881
|
|
Expenses
|
Occupancy
|
|
|
2,024
|
|
|
|
2,074
|
|
|
Furniture
and equipment
|
|
|
1,011
|
|
|
|
1,052
|
|
|
Advertising
and marketing
|
|
|
520
|
|
|
|
837
|
|
|
Data
processing
|
|
|
2,034
|
|
|
|
1,705
|
|
|
Postage
and supplies
|
|
|
473
|
|
|
|
532
|
|
|
Regulatory
assessments and related fees
|
|
|
782
|
|
|
|
1,138
|
|
|
Telephone
|
|
|
698
|
|
|
|
596
|
|
|
Core
system conversion/branding
|
|
|
588
|
|
|
|
0
|
|
|
Merger/acquisition
|
|
|
230
|
|
|
|
0
|
|
|
Other
|
|
|
2,268
|
|
|
|
2,086
|
|
|
Total
noninterest expenses
|
|
|
20,627
|
|
|
|
18,901
|
|
|
Income
before taxes
|
|
|
1,009
|
|
|
|
4,700
|
|
|
Provision
for federal income taxes
|
|
|
172
|
|
|
|
1,494
|
|
|
Net
income
|
|
$
|
837
|
|
|
$
|
3,206
|
|
|
Net
Income per Common Share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
$
|
0.50
|
|
|
Diluted
|
|
|
0.13
|
|
|
|
0.49
|
|
|
Average
Common and Common
Equivalent
Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,465
|
|
|
|
6,327
|
|
|
Diluted
|
|
|
6,518
|
|
|
|
6,495
|
|
See
accompanying notes.
Pennsylvania
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(unaudited)
(
in thousands, except share amounts)
|
|
|
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
|
|
(
in thousands except share amounts)
|
Preferred
Stock
|
Common
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
(Loss)
|
Total
|
|
Balance:
January 1, 2009
|
$
400
|
$
6,446
|
$
73,221
|
$
51,683
|
$
(17,280)
|
$
114,470
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
837
|
-
|
837
|
|
Change
in unrealized gains on
securities,
net of tax
|
-
|
-
|
-
|
-
|
2,675
|
2,675
|
|
Total
comprehensive income
|
|
|
|
|
|
3,512
|
|
Dividends
declared on preferred stock
|
-
|
-
|
-
|
(20)
|
-
|
(20)
|
|
Common
stock of 26,543 shares issued
under
stock option plans, including
tax
benefit of $51
|
-
|
27
|
341
|
-
|
-
|
368
|
|
Common
stock of 230 shares issued
under
employee stock purchase plan
|
-
|
-
|
4
|
-
|
-
|
4
|
|
Proceeds
from issuance of 18,305 shares
of
common stock in connection with
dividend
reinvestment and stock
purchase
plan
|
-
|
18
|
292
|
-
|
-
|
310
|
|
Common
stock share-based awards
|
-
|
-
|
353
|
-
|
-
|
353
|
|
Balance,
March 31, 2009
|
$
400
|
$
6,491
|
$
74,211
|
$
52,500
|
$
(14,605)
|
$
118,997
|
|
See
accompanying notes.
Pennsylvania
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
|
|
|
|
Three
Months Ending
March
31,
|
|
|
(in
thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
Net
income
|
|
$
|
837
|
|
|
$
|
3,206
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
3,200
|
|
|
|
975
|
|
|
Provision
for depreciation and amortization
|
|
|
1,190
|
|
|
|
1,269
|
|
|
Deferred
income taxes
|
|
|
284
|
|
|
|
(326
|
)
|
|
Amortization
of securities premiums and accretion of discounts, net
|
|
|
213
|
|
|
|
144
|
|
|
Proceeds
from sales of loans originated for sale
|
|
|
34,267
|
|
|
|
13,883
|
|
|
Loans
originated for sale
|
|
|
(35,496
|
)
|
|
|
(18,721
|
)
|
|
(Gains)
losses on sales of loans originated for sale
|
|
|
322
|
|
|
|
(176
|
)
|
|
Stock-based
compensation
|
|
|
353
|
|
|
|
231
|
|
|
Amortization
of deferred loan origination fees and costs
|
|
|
503
|
|
|
|
438
|
|
|
(Increase)
decrease in other assets
|
|
|
(1,508
|
)
|
|
|
207
|
|
|
Increase
(decrease) in other liabilities
|
|
|
(785
|
)
|
|
|
1,563
|
|
|
Net
cash provided by operating activities
|
|
|
3,380
|
|
|
|
2,693
|
|
Investing
Activities
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
Proceeds
from principal repayments, calls and maturities
|
|
|
10,832
|
|
|
|
67,772
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
Proceeds
from principal repayments, calls and maturities
|
|
|
16,703
|
|
|
|
12,133
|
|
|
Proceeds
from sales of loans receivable
|
|
|
2,819
|
|
|
|
0
|
|
|
Net
increase in loans receivable
|
|
|
(13,563
|
)
|
|
|
(58,015
|
)
|
|
Net
purchase of restricted investments in bank stock
|
|
|
0
|
|
|
|
770
|
|
|
Proceeds
from sale of foreclosed real estate
|
|
|
270
|
|
|
|
0
|
|
|
Purchases
of premises and equipment
|
|
|
(2,125
|
)
|
|
|
(301
|
)
|
|
Net
cash provided by investing activities
|
|
|
14,936
|
|
|
|
22,359
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
Net
decrease in demand, interest checking, money market, and savings
deposits
|
|
|
(6,763
|
)
|
|
|
(37,744
|
)
|
|
Net
increase in time deposits
|
|
|
41,395
|
|
|
|
56,947
|
|
|
Net
decrease in short-term borrowings
|
|
|
(63,600
|
)
|
|
|
(39,935
|
)
|
|
Proceeds
from common stock options exercised
|
|
|
317
|
|
|
|
145
|
|
|
Proceeds
from dividend reinvestment and common stock purchase plan
|
|
|
310
|
|
|
|
154
|
|
|
Tax
benefit on exercise of stock options
|
|
|
51
|
|
|
|
62
|
|
|
Cash
dividends on preferred stock
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
Net
cash used in financing activities
|
|
|
(28,310
|
)
|
|
|
(20,391
|
)
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(9,994
|
)
|
|
|
4,661
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
49,511
|
|
|
|
50,955
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
39,517
|
|
|
$
|
55,616
|
|
See
accompanying notes.
PENNSYLVANIA
COMMERCE BANCORP, INC.
NOTES
TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(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, 2008. 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, 2008. The results for the
three months ended March 31, 2009 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2009.
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 2009 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 March 31, 2009 and 2008,
respectively: risk-free interest rates of 2.3% and 3.3%; volatility factors
of the expected market price of the Company's common stock of .30 and .29;
weighted average expected lives of the options of 8.3 years for both years; and
no cash dividends. The calculated weighted average fair value of options granted
using these assumptions for March 31, 2009 and 2008 was $6.10 and $10.68 per
option, respectively. In the first quarter of 2009, the Company granted 170,850
options to purchase shares of the Company’s stock at an exercise price of $16.17
per share.
The
Company recorded compensation expense of approximately $353,000 and $231,000
during the three months ended March 31, 2009 and March 31, 2008,
respectively.
Note
3. NEW ACCOUNTING STANDARDS
FASB
Statement No. 141 (R) “Business Combinations” was issued in December of
2007. This Statement establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The Statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will impact business combinations which occur after January 1,
2009.
Given that FASB Statement No. 141(R) requires the expensing of
direct acquisition costs, the Company expensed such costs in 2008 and in the
first quarter of 2009 that were incurred in conjunction with the pending
acquisition described in Note 4 and will continue to expense such costs as
incurred.
In April
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. FAS 157-4,
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly
(FSP FAS
157-4). FASB Statement 157,
Fair Value Measurements
,
defines fair value as the price that would be received to sell the asset or
transfer the liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. FSP FAS 157-4 provides additional guidance
on determining when the volume and level of activity for the asset or liability
has significantly decreased. The FSP also includes guidance on identifying
circumstances when a transaction may not be considered orderly.
FSP FAS
157-4 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has been a
significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with Statement 157.
This FSP
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of the
evidence to determine whether the transaction is orderly. The FSP provides a
list of circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given
little, if any, weight when estimating fair value.
This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS 157-4 must also early adopt
FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
. The Company is currently
evaluating the potential impact this FSP will have on its consolidated financial
statements.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
(FSP FAS 115-2 and FAS
124-2). FSP FAS 115-2 and FAS 124-2 clarifies the interaction
of the factors that should be considered when determining whether a debt
security is other-than-temporarily impaired. For debt securities, management
must assess whether (a) it has the intent to sell the security and
(b) it is more likely than not that it will be required to sell the
security prior to its anticipated recovery. These steps are done before
assessing whether the entity will recover the cost basis of the investment.
Previously, this assessment required management to assert it has both the intent
and the ability to hold a security for a period of time sufficient to allow for
an anticipated recovery in fair value to avoid recognizing an
other-than-temporary impairment. This change does not affect the need to
forecast recovery of the value of the security through either cash flows or
market price.
In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation
and amount of the other-than-temporary impairment recognized in the income
statement. The other-than-temporary impairment is separated into (a) the
amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from
the debt
security (the credit loss) and (b) the amount of the total
other-than-temporary impairment related to all other factors. The amount of the
total other-than-temporary impairment related to the credit loss is recognized
in earnings. The amount of the total other-than-temporary impairment related to
all other factors is recognized in other comprehensive income.
This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS 115-2 and FAS 124-2 must also
early adopt FSP FAS 157-4. The Company is currently evaluating the
potential impact these pronouncements will have on its consolidated financial
statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value
of Financial Instruments
(FSP FAS 107-1 and APB 28-1). FSP FAS
107-1 and APB 28-1 amends FASB Statement No. 107,
Disclosures about Fair Value of
Financial Instruments
, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion
No. 28,
Interim Financial
Reporting
, to require those disclosures in summarized financial
information at interim reporting periods.
This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also
early adopt FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2
.
The Company is currently evaluating the potential
impact these prounoucements will have on its consolidated 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, 2009, the Company had $433 million in unused commitments. Management does
not anticipate any material losses as a result of these
transactions.
On
November 10, 2008, Commerce announced it had entered into a services agreement
with Fiserv Solutions, Inc. (Fiserv). The agreement, effective November 7, 2008,
is for a period of seven years, subject to automatic renewal for additional
terms of two years unless either party gives the other written notice of
non-renewal at least 180 days prior to the expiration date of the term. The
agreement will allow the Bank to transition to Fiserv many of the services that
have been provided by Commerce Bank, N.A., now known as TD Bank, N.A. The
initial investment with Fiserv is $3.4 million with an expected obligation for
support, license fees and processing services of $24.6 million over the next
seven years. The various services include: core system hosting, item processing,
deposit and loan processing, electronic banking, data warehousing and other
banking functions. The transition is expected to be completed either late second
quarter or early third quarter 2009.
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 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. There were no reclassification adjustments included in comprehensive
income for the periods presented.
|
|
Three
Months Ended
March
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Unrealized
holding gains (losses) arising during
the
period
|
|
$
|
4,115
|
|
|
$
|
(8,889
|
)
|
Income
tax effect
|
|
|
(1,440
|
)
|
|
|
3,111
|
|
Net
of tax amount
|
|
$
|
2,675
|
|
|
$
|
(5,778
|
)
|
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 $39.0 million of standby letters
of credit at March 31, 2009. 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, 2009 for guarantees under standby letters of credit
issued.
Note
7. PENDING ACQUISITION
On
November 10, 2008, the Company announced it had entered into a definitive
agreement to acquire Philadelphia-based Republic First Bancorp, Inc.
("Republic First") in a tax-free all stock transaction. The combined
company will have total assets exceeding $3 billion and a network of 45 branches
in Central Pennsylvania, Metro Philadelphia and Southern New
Jersey.
On April
29, 2009, the contractual deadline for the completion of the merger of Republic
First into the Company was extended until July 31, 2009. The
extension
was contemplated by the merger agreement and will allow the parties additional
time to obtain required regulatory approvals for the merger.
Either the Company or Republic First, provided it is not responsible
for the delay, may terminate the merger agreement if the merger is not completed
by July 31, 2009. Shareholders of Republic First and the
Company approved the merger on March 18, 2009 and March 19, 2009,
respectively.
Note
8. FAIR VALUE DISCLOSURE
The
Company uses its best judgment in estimating the fair value of the Company’s
financial instruments; however, there are inherent weaknesses in any estimation
technique due to assumptions that are susceptible to significant change.
Therefore, for substantially all financial instruments, the fair value estimates
herein are not necessarily indicative of the amounts the Company could have
realized in a sale transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective period-ends and
have not been re-evaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each
period-end.
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 on a recurring basis at March 31, 2009 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.
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
thousands)
|
|
March
31,
2009
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Securities
available for sale
|
|
$
|
328,868
|
|
|
$
|
-
|
|
|
$
|
328,868
|
|
|
$
|
-
|
|
As of
March 31, 2009, the Company does not have any liabilities that are measured at
fair value on a recurring basis.
For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
were as follows:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(
in thousands)
|
|
December
31,
2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Securities
available for sale
|
|
$
|
341,656
|
|
|
$
|
-
|
|
|
$
|
341,656
|
|
|
$
|
-
|
|
For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at March 31, 2009 are
as follows:
(in
thousands)
|
|
March
31,
2009
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Impaired
loans
|
|
$
|
10,042
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,042
|
|
Foreclosed
assets
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
989
|
|
Total
|
|
$
|
11,031
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,031
|
|
For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31,
2008 were as follows:
(in
thousands)
|
|
December
31,
2008
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Impaired
loans
|
|
$
|
9,034
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,034
|
|
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. 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 remained
extremely volatile during the first three months of 2009, similar to the second
half of 2008 due to extraordinary economic and market dislocations. 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.
Loans
accounted for under SFAS No. 114 – Loans included in the table above are
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 any valuation allowance as determined under SFAS 114.
Foreclosed
assets – Fair value of real estate acquired 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.
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 ability to successfully transition all services currently
provided to it by TD Bank, N.A. and Commerce Bancorp LLC (formerly
Commerce Bancorp, Inc.) to the Company’s new service provider, Fiserv
Solutions, Inc.
|
|
|
|
·
the receipt of a $6
million fee from TD Bank if the transition of all services is completed by
the required dates as called for in the Transition Agreement between the
two parties;
|
|
|
|
·
whether the transactions
contemplated by the merger agreement with Republic First will be approved
by the applicable federal, state and local regulatory
authorities;
|
|
|
|
·
the
Company’s ability to complete the proposed merger with Republic First
Bancorp, Inc., to integrate successfully Republic First’s assets,
liabilities, customers, systems and management personnel into the
Company’s operations, and to realize expected cost savings and revenue
enhancements within expected timeframes;
|
|
|
|
·
the
possibility that expected Republic First merger-related charges are
materially greater than forecasted or that final purchase price
allocations based on fair value of the acquired assets and liabilities at
the effective date of the merger and related adjustments to yield and/or
amortization of the acquired assets and liabilities are materially
different from those forecasted;
|
|
|
|
·
adverse
changes in the Company’s or Republic First’s loan portfolios and the
resulting credit risk-related losses and
expenses;
|
|
|
|
·
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;
|
|
|
|
·
general
economic or business conditions, either nationally, regionally or in the
communities in which either the Company or Republic First does business,
may be less favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for
credit;
|
|
·
continued levels of loan quality
and volume origination;
|
|
|
|
·
the adequacy of loss
reserves;
|
|
|
|
·
the impact of
changes in financial services’ laws and regulations (including laws
concerning taxes, banking, securities and insurance);
|
|
|
|
·
the
willingness of customers to substitute competitors’ products and services
for the Company’s products and services and vice
versa;
|
|
|
|
·
unanticipated
regulatory or judicial proceedings;
|
|
|
|
·
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;
|
|
|
|
·
changes in
consumer spending and saving habits relative to the financial services we
provide;
|
|
|
|
·
effect of
terrorists attacks and threats of actual war;
|
|
|
|
·
and the success of the
Company at managing the risks involved in the
foregoing.
|
Because
such forward-looking statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. The foregoing list of important factors is not exclusive and you are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of 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, concerning events or circumstances after
the date of this report, refer to the Company’s filings with the Securities and
Exchange Commission (“SEC”).
EXECUTIVE
SUMMARY
Total
revenues for the three months ended March 31, 2009 were $24.8 million, up
$260,000 or 1%, over the same period in 2008. Net income for the first quarter
of 2009 was $837,000 compared to $3.2 million recorded in the first quarter of
2008 and diluted net income per share for the quarter totaled $0.13 vs. $0.49
per share recorded during the first quarter of 2008.
The
decreases in net income and net income per share were a direct result of higher
provisions to the Bank’s allowance for loan losses combined with an increase in
noninterest expenses associated with planning, training and testing for the
conversion of core processing, item processing and network infrastructure
services to a new service provider. Also impacting first quarter 2009 results
were expenses associated with our pending acquisition of and merger with
Republic First Bancorp.
For the
first quarter of 2009, our total net loans (including loans held for sale)
increased by $7.9 million, or 1%, from $1.46 billion at December 31, 2008 to
$1.47 billion at March 31, 2009. This growth was net of the sale of $12.2
million of student loans during the first three months of 2009. Excluding the
effects of this sale, our total net loans grew by $20.1 million during the first
quarter. Over the past twelve months, total net loans including loans held for
sale, grew by $249.8 million, or 20%, to $1.47 billion. This growth was
represented across most loan categories, reflecting a continuing commitment to
the credit needs of our customers and our market footprint. Our loan to deposit
ratio, which includes loans held for sale, was 88% at March 31, 2009 compared to
90% at December 31, 2008.
Total
deposits increased $34.6 million, or 2%, from $1.63 billion at December 31, 2008
to $1.67 billion at March 31, 2009. During this period, our total commercial and
retail deposits increased by $17.1 million while total public deposits increased
$17.5 million. Of particular significance is that $29.7 million, or 86%, of this
growth was in noninterest-bearing deposits. Over the past twelve
months,
total deposits increased by $88.5 million, or 6%, while core deposits grew
$112.5 million, or 7%, to $1.66 billion.
Total
borrowings decreased by $63.6 million from $379.5 million at December 31, 2008
to $315.9 million at March 31, 2009, primarily as a result of deposit growth
combined with principal paydowns in the securities portfolio. Of the total
borrowings at March 31, 2009, $236.5 million were short-term and $79.4 million
were considered long-term.
Nonperforming
assets and loans past due 90 days at March 31, 2009 totaled $30.4 million, or
1.44%, of total assets, as compared to $27.9 million, or 1.30% of total assets,
at December 31, 2008 and $4.3 million, or 0.22%, of total assets one year ago.
The Company’s first quarter provision for loan losses totaled $3.2 million, as
compared to $975,000 recorded in the first quarter of 2008. The
increase in the provision for loan losses over the prior year is a result of the
Company’s strong gross loan growth (excluding loans held for sale)
of $231.5
million over the past twelve months as well as the increase in the level of
nonperforming loans from March 31, 2008 to March 31, 2009.
The
allowance for loan losses totaled $16.2 million as of March 31, 2009, an
increase of $4.6 million, or 40%, over the total allowance at March 31,
2008. The allowance represented 1.12% and 0.96% of gross loans
outstanding at March 31, 2009 and 2008, respectively.
The
allowance for loan losses decreased by $488,000 from $16.7 million at December
31, 2008 to $16.2 million at March 31, 2009. The decrease was the result
of $3.7 million of net charge-offs, partially offset by an additional provision
for loan losses of $3.2 million. The allowance represented 1.12% of gross
loans outstanding at March 31, 2009 compared to 1.16% of gross loans at December
31, 2008.
Total net
charge-offs for the first quarter were $3.7 million vs. $90,000 for the first
quarter of 2008. Two separate loan charge-offs, totaling $3.6
million, accounted for 97% of total net charge-offs for the quarter and a total
reserve associated with there two loans of $2.2 million at December 31,
2008.
The
financial highlights for the first quarter of 2009 compared to the same period
in 2008 are summarized below.
(in
millions, except per share amounts and where indicated
otherwise)
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,115.3
|
|
|
$
|
1,957.8
|
|
|
|
8
|
%
|
Total
loans (net)
|
|
|
1,430.1
|
|
|
|
1,203.2
|
|
|
|
19
|
|
Total
deposits
|
|
|
1,668.6
|
|
|
|
1,580.1
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
24.8
|
|
|
$
|
24.6
|
|
|
|
1
|
%
|
Total
noninterest expenses
|
|
|
20.6
|
|
|
|
18.9
|
|
|
|
9
|
|
Net
income (in thousands)
|
|
|
837
|
|
|
|
3,206
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.13
|
|
|
$
|
0.49
|
|
|
|
(73
|
)%
|
In the
future we expect that we will continue our pattern of expanding our footprint
not only with the aforementioned acquisition of Republic First but also by
branching into contiguous areas of our new and existing markets, and by filling
gaps between existing store locations. Accordingly, we anticipate notable
balance sheet and revenue growth as a result of the expansion. Additionally, we
expect to incur direct acquisition expenses as we consummate the merger with
Republic First including expenses to combine the operations of the two
companies. We also anticipate that the upcoming core system conversion and
rebranding initiative will result in significant increased levels of expense. We
anticipate that these initiatives will primarily be funded through cash
generated from operations, our existing funding sources and the $6 million fee
to be received from TD Bank if all services are transitioned away by July 15,
2009. Operating results for 2009 and the years that follow could also be heavily
impacted by the overall state of the local and global economy.
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, 2008.
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 losses existing in
the 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 monthly, 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 necessary 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 and the volatility of forecasted net credit losses.
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 calculating and the 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 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;
|
·
|
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;
and
|
·
|
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
.
Effective
January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB)
Statement No. 123(R), “Share-Based Payment,” (“FAS 123(R)”) using the modified
prospective method. FAS 123(R) requires compensation costs related to
share-based payment transactions to be recognized in the income statement (with
limited exceptions) based on the grant-date fair value of the stock-based
compensation issued. Compensation costs are recognized over the period that an
employee provides service in exchange for the award. The
grant-date fair value and ultimately the amount of compensation expense
recognized is dependent upon certain assumptions we make such as the expected
term the options will remain outstanding, the volatility and dividend yield of
our company stock and risk free interest rate. This critical Accounting policy
is more fully described in Note 14 of the Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Other than
Temporary Impairment of 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 changes in the general market condition of the industry in which the
investment is related, (2) the financial condition and near-term prospects of
the issuer, (3) the seniority of the tranche owned by the Bank in relation to
the entire bond issue, (4) current prepayment behavior, (5) current credit
agency ratings, (6) the credit support available in the bond structure to absorb
losses, and (7) each of the following with respect to the underlying collateral:
(a) delinquency percentages and trends, (b) weighted average loan-to-value
ratios, (c) weighted average FICO scores, and (d) the level of foreclosure and
OREO activity. Also considered is 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.
Fair Value
Measurements
.
Effective
January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value
Measurements (“FAS 157”), which defines fair value, establishes a framework for
measuring fair value under Generally Accepted Accounting Principles and expands
disclosures about fair value measurements. Under FAS 157,
the Company is
required to disclose the fair value of financial assets and liabilities that are
measured at fair value within the fair value hierarchy prescribed by FAS No.
157. The fair value hierarchy prioritizes the inputs to valuation
techniques
used to measure fair value, giving the highest 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). These disclosures appear in Note 8 of the
Notes to Consolidated Financial
Statem
ents described in this interim report on Form 10-Q for the period
ended March 31, 2009. Judgment is involved not only with deriving the estimated
fair values but also with classifying the particular assets recorded at fair
value in the fair value hierarchy. Estimating the fair value of
impaired loans or the value of collateral securing foreclosed assets requires
the use of significant unobservable inputs (level 3 measurements). At March 31,
2009, the fair value of assets based on level 3 measurements constituted 3% of
the total assets measured at fair value. The fair value of collateral securing
impaired loans or constituting foreclosed assets is generally determined based
upon independent third party appraisals of the properties, recent offers, or
prices on comparable properties in the proximate vicinity. Such
estimates can differ significantly from the amounts the Company would ultimately
realize from the loan or disposition of underlying collateral.
The
Company’s available for sale investment security portfolio constitutes 97% of
the total assets measured at fair value and is primarily classified as a level 2
fair value measurement (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). Management utilizes third party service
providers to aid in the determination of the fair value of the portfolio. If
quoted market prices are not available, fair values are generally based on
quoted market prices of comparable instruments. 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 from matrix pricing on
similar securities.
RESULTS
OF OPERATIONS
Average
Balances and Average Interest Rates
Interest-earning
assets averaged $2.02 billion for the first quarter of 2009, compared to $1.81
billion for the same period in 2008. For the quarter ended March 31, total loans
receivable including loans held for sale, averaged $1.49 billion in 2009 and
$1.20 billion in 2008, respectively. For the same two quarters, total securities
averaged $527.0 million and $617.9 million, respectively.
The
overall net growth in interest-earning assets was funded primarily by a $124.9
increase in the average balance of total deposits. Total interest-bearing
deposits averaged $1.33 billion for the first quarter of 2009, compared to $1.25
billion for the first quarter of 2008 while average net noninterest bearing
deposits increased by $43.2 million over the first quarter one year
ago. Also funding the growth in interest earning assets was an
increase in the average level of short-term borrowings. Short-term
borrowings, which consists of overnight advances from the Federal Home Loan
Bank, securities sold under agreements to repurchase and overnight federal funds
lines of credit, averaged $308.1 million for the first quarter of 2009 versus
$230.7 million for the same quarter of 2008.
The
fully-taxable equivalent yield on interest-earning assets for the first quarter
of 2009 was 5.14%, a decrease of 112 basis points (“bps”) from the
comparable period in 2008. This decrease resulted from lower yields on our loan
and securities portfolios during the first quarter of 2009 as compared to the
same period in 2008. Floating rate loans represent approximately 32% of our
total loans receivable portfolio. The majority of these loans are tied to the
New York prime lending rate which decreased 200 bps during the first quarter of
2008 and subsequently decreased another 200 bps throughout the remainder of
2008, following similar decreases in the overnight federal funds rate by the
Federal Open Market Committee. Approximately $100 million, or 20%, of our
investment securities have a floating interest rate and provide a yield that
consists of a fixed spread tied to the one month London Interbank Offered Rate
("LIBOR") interest rate. The average one month LIBOR interest rate decreased
approximately
283 bps from the average rate of 3.29% during the first quarter 2008 compared to
the average rate of 0.46% for the first quarter of 2009.
As a
result of the extremely low level of current general market interest rates,
including the one-month LIBOR and the New York prime lending rate, we expect the
yields we receive on our interest-earning assets will continue to be lower
throughout 2009 than in 2008.
The
average rate paid on our total interest-bearing liabilities for the first
quarter of 2009 was 1.41%, compared to 2.46% for the first quarter of 2008. Our
deposit cost of funds decreased 56 bps from 1.43% in the first quarter of 2008
to 0.87% for the first quarter of 2009. The average cost of short-term
borrowings decreased from 3.28% in the first quarter of 2008 to 0.55% in the
first quarter of 2009. The aggregate average cost of all funding sources for the
Company was 1.20% for the first quarter of 2009, compared to 2.11% for the same
quarter of the prior year. The dramatic decrease in the Company’s deposit cost
of funds is primarily related to the lower level of general market interest
rates present during the first quarter as compared to the same period in 2008.
At March 31, 2009, approximately $508 million, or 30%, of our total deposits
were those of local municipalities, school districts, not-for-profit
organizations or corporate cash management customers, where the interest rates
paid are indexed to either the 91-day Treasury bill, the overnight federal funds
rate, or 30-day LIBOR interest rate. Late during the third quarter and early
fourth quarter each year our indexed deposits experience seasonally high growth
in balances and can comprise as much as 43% of our total deposits during those
periods. The average interest rate of the 91-day Treasury bill decreased from
2.19% in the first quarter of 2008 to 0.22% in the first quarter of 2009 thereby
significantly reducing the average interest rate paid on these deposits. The
decrease in the Company’s borrowing cost of funds is primarily related to the
decrease in the overnight federal funds interest rate which decreased by 200 bps
over the past four quarters.
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, on a fully tax-equivalent basis, for the first quarter of 2009
increased by $947,000, or 5%, over the same period in 2008. This increase was a
result of continued strong loan growth combined with a reduction on interest
rates paid on deposits and short-term borrowing sources. Interest income, on a
tax-equivalent basis, on interest-earning assets totaled $25.9 million for the
first quarter of 2009, a decrease of $2.7 million, or 9%, from
2008. Interest income on loans receivable, on a tax-equivalent basis,
decreased by $211,000, or 1%, from the first quarter of 2008. This decrease was
the result of a $3.0 million increase in loan interest income due to a higher
level of loans receivable outstanding partially offset by a $3.2 million
decrease due to lower interest rates associated with our floating rate loans and
new fixed rate loans generated over the past 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 $2.5 million, or 31%, for the first quarter of
2009 as compared to the same period last year. This was a result of a decrease
in the average balance of the investment securities portfolio of $90.9 million,
or 15%, from the first quarter one year ago combined with the fact that the
average rate earned on those securities decreased 97 bps from first quarter 2008
to first quarter 2009.
Due to
the significant decrease in short-term interest rates that occurred throughout
the past twelve months, the cash flows from principal repayments on the
investment securities portfolio accelerated dramatically. These cash flows 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 $3.6 million, or 38%, from $9.6 million
in 2008 to $6.0 million in 2009. Interest expense on deposits decreased by $2.1
million, or 33%, from the first quarter of 2008 while interest expense on
short-term borrowings decreased by $1.5 million, or 78%, for the same
period.
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 3.73% during the first quarter of 2009
compared to 3.80% 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 decreased
21 bps, from 4.15% for the first quarter of 2008 to 3.94% for the first quarter
of 2009, as a result of the decreased yield on interest earning assets partially
offset by the decrease in the cost of funding sources as previously
discussed.
Provision
for Loan Losses
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.
We recorded provisions of $3.2 million to the allowance for loan losses for the
first quarter of 2009 as compared to $975,000 for the first quarter of 2008. The
increase in the provision for loan losses over the prior year is a result of the
Company’s strong loan growth of $231.5 million over the past twelve months,
combined with the increase in the level of non-performing loans at March 31,
2009, the amount of net charge-offs incurred during the first quarter of
2009 as well as other qualitative factors which management considers
relevant in assessing the level of risk associated with the loan portfolio.
F
rom
December 31, 2008 to March 31, 2009, total nonperforming loans increased from
$27.1 million to $29.4 million. Total nonperforming loans at March 31, 2008 were
$3.8 million. Nonperforming assets as a percentage of total assets
increased from 1.30% at December 31, 2008 to 1.44% at March 31, 2009. This same
ratio was 0.22% at March 31, 2008. See the sections in this Management’s
Discussion and Analysis on asset quality and the allowance for loan losses for
further discussion regarding nonperforming loans and our methodology for
determining the provision for loan losses.
Net loan
charge-offs for the first quarter of 2009 were $3.7 million, or 0.26% of average
loans outstanding, compared to net charge-offs of $90,000, or 0.01% of average
loans outstanding, for the same period in 2008. Two separate loans charged off
during the first quarter of 2009, totaling $3.6 million, accounted for 97% of
total net charge-offs for the quarter. The Company had made a specific reserve
allocation of $1.8 million on one of those loans during the fourth quarter of
2008. The second loan that had a partial charge-off in the first
quarter of 2009 was determined to be impaired at December 31, 2008 but did not
have a specific reserve allocated to it at December 31, 2008. During the
first quarter, management determined that, based upon facts and circumstances
regarding the borrower which had changed since December 31, 2008, a
charge-off was necessary in the amount of $1.8 million on this loan. The
allowance for loan losses as a percentage of period-end gross loans outstanding
was 1.12% at March 31, 2009, as compared to 1.16% at December 31, 2008, and
0.96% at March 31, 2008.
Noninterest
Income
Noninterest
income for the first quarter of 2009 decreased by $494,000, or 8%, from the
same period in 2008. Core noninterest income, comprised primarily of deposit
service charges and fees, totaled $6.1 million, an increase of $133,000, or 2%,
over the first quarter of 2008. Noninterest income for the first quarter of 2009
included $322,000 of net losses on sales of loans compared to net gains of
$176,000 on sales of loans during the first quarter of 2008. This was the result
of a $627,000 loss on
the sale
of student loans offset partially by a $305,000 gain on the sale of residential
loans. The loss on the sale of student loans was related to management’s
decision to sell a $12.2 million portion of the Bank’s student loan portfolio
due to the low level of yields on those loans combined with a higher level of
servicing costs and an illiquid market for such sales.
Noninterest
Expenses
For the
first quarter of 2009, noninterest expenses increased by $1.7 million, or 9%,
over the same period in 2008. Staffing levels, data processing costs and related
expenses increased to service more deposit and loan customers and process a
higher volume of transactions. Additionally, costs associated with our pending
acquisition of Republic First, the pending core system conversion and transition
of services from TD Bank to a new service provider as well as our rebranding
initiatives all served to increase our noninterest expense levels in the first
quarter of 2009 compared to prior periods. A comparison of noninterest expenses
for certain categories for the three months ended March 31, 2009 and March 31,
2008 is presented in the following paragraphs.
Salary
and employee benefits expenses, which represent the largest component of
noninterest expenses, increased by $1.1 million, or 13%, for the first quarter
of 2009 over the first quarter of 2008. This increase includes the impact of
additional staffing in our operations and information technology departments to
facilitate the conversion processes as well as to handle functions that are
currently performed by TD Bank but will be performed in-house, post-conversion.
The increase was also partially a result of higher overall benefit plan costs as
well as additional expense related to the issuance of stock options to directors
and employees.
Occupancy
expenses totaled $2.0 million for the first quarter of 2009, a decrease of
$50,000, or 2%, from the first quarter of 2008, while furniture and equipment
expenses decreased 4%, or $41,000, from the first quarter of 2008. The decrease
was related to lower levels of depreciation on fixed assets as compared to the
first quarter one year ago.
Advertising
and marketing expenses totaled $520,000 for the three months ending March 31,
2009, a decrease of $317,000, or 38%, from the same period in 2008. This is
primarily due to lower brand promotional activity given the anticipated
rebranding efforts expected to occur mid-year 2009.
Data
processing expenses increased by $329,000, or 19%, in the first quarter of 2009
over the three months ended March 31, 2008. The increase was due to costs
associated with processing additional transactions as a result of the growth in
the number of accounts serviced combined with enhancements to some current
systems in preparation for our conversion of processing from TD Bank to our new
service provider, Fiserv.
Regulatory
assessments and related fees totaled $782,000 for the first quarter of 2009 and
were $356,000, or 31%, lower than for the first quarter of 2008. Included in
total regulatory expenses for the first quarter of 2008 were costs incurred to
address the matters identified by the Office of the Comptroller of the Currency
(“OCC”) in a formal written agreement and a consent order which the Bank entered
into with the OCC in 2007 and 2008, respectively. Both the formal written
agreement and the consent order between the Bank and the OCC were
terminated on November 7, 2008.
Offsetting
this decrease in regulatory compliance costs was an increase in the amount of
FDIC premiums paid by the Bank for deposit insurance from $427,000 for the first
quarter of 2008 to $735,000 for the first quarter of 2009, an increase of
$308,000, or 72%. The Bank, like all financial institutions whose deposits are
guaranteed by the FDIC, pays a quarterly premium for such deposit coverage. For
2009, the FDIC has increased these premium rates significantly over prior years.
The new rates, as currently in effect, are projected to increase the Bank’s
expense for such coverage in 2009 by $1.3 million over the level incurred in
2008. Also, the FDIC has announced its intention to assess a one-time emergency
deposit premium fee on all covered institutions in 2009 to bolster the level of
the Deposit Insurance Fund which is available to cover possible future bank
failures. The
Company
will be required to accrue for this one-time assessment in the second quarter of
2009 and make payment in the third quarter.
Included
in noninterest expenses for the first quarter of 2009 was $588,000 related to
planning and training for the conversion of core processing, item processing and
network infrastructure services from our current service provider, TD Bank, to
our new service provider, Fiserv. This conversion is planned for mid-2009. Also
included in noninterest expenses for the quarter was $230,000 associated with
the Company’s pending acquisition of Republic First which is expected to close
upon regulatory approval. We expect to incur significant additional costs
associated with both the conversion of systems and the acquisition of Republic
First throughout the remainder of 2009.
Other
noninterest expenses increased by $225,000, or 7%, for the three-month period
ended March 31, 2009, compared to the same period in 2008. Components of the
increase included costs related to lending expenses and costs associated with
our gift card product.
One key
measure that management utilizes to monitor progress in controlling overhead
expenses is the ratio of annualized 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 2009 this ratio
equaled 2.88% and for the first quarter of 2008 this ratio equaled 2.66%.
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, 2009,
the operating efficiency ratio was 83.1%, compared to 76.9% for the similar
period in 2008. The increase in the operating efficiency ratio primarily relates
to the increase in noninterest expense relating to merger and acquisitions,
conversion and rebranding activities in 2009 vs. 2008.
Provision
for Federal Income Taxes
The
provision for federal income taxes was $172,000 for the first quarter of 2009,
compared to $1.5 million for the same period in 2008. The effective tax rate for
the first three months of 2009 was 17.0% as compared to 31.8% for the first
three months of 2008. This decrease in effective tax rate and the corresponding
provision during 2009 was primarily due to lower pretax income and
a greater proportion of tax exempt interest income on investments and loans
to total pretax income. The Company’s statutory rate was 35% in both 2008 and in
2009.
Net
Income and Net Income per Share
Net
income for the first quarter of 2009 was $837,000, a decrease of $2.4 million,
or 74%, from the $3.2 million recorded in the first quarter of 2008. The
decrease was due to a $754,000 increase in net interest income and a $1.3
million decrease in the provision for income taxes, more than offset by a
$494,000 decrease in noninterest income, a $2.2 million increase in the
provision for loan losses, and a $1.7 million increase in noninterest
expenses.
Basic
earnings per common share were $0.13 for the first quarter of 2009, compared to
$0.50 for the first quarter of 2008. Diluted earnings per common share decreased
73%, to $0.13, for the first quarter of 2009, compared to $0.49 for the first
quarter of 2008.
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 2009 was 0.16%, compared to
0.66% for the first quarter of 2008. 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 annualized net income by average
stockholders' equity. The ROE was 2.91% for the first quarter of 2009, compared
to 11.39% for the first quarter of 2008. Both ROA and ROE for the first quarter
of 2009 were directly impacted by the lower level of net income compared to the
same period in 2008.
FINANCIAL
CONDITION
Securities
During
the first three months of 2009, the total investment securities portfolio
decreased by $23.6 million from $494.2 million to $470.6 million. Due to the
significant decrease in short-term market interest rates that occurred
throughout the past twelve months, the cash flows from principal repayments on
the investment securities portfolio accelerated dramatically. These
funds were used to fund the strong loan growth rather than redeploy these cash
flows back into investment securities at a reduced net interest spread.
Additionally, the unrealized loss on available for sale securities decreased by
$4.1 million from $26.6 million at December 31, 2008 to $22.5 million at March
31, 2009 as a result of improving market values in both agency and non-agency
securities.
During
the first three months of 2009, securities available for sale ("AFS") decreased
by $12.8 million, from $341.7 million at December 31, 2008 to $328.9 million at
March 31, 2009 as a result of principal repayments of $16.7 million and a $4.1
million decrease in unrealized losses. The AFS portfolio is comprised of U.S.
Government agency securities, mortgage-backed securities and collateralized
mortgage obligations. At March 31, 2009, the unrealized loss on securities
available for sale included in stockholders’ equity totaled $14.6 million, net
of tax, compared to $17.3 million at December 31, 2008. The weighted average
life of the AFS portfolio at March 31, 2009 was approximately 4.2 years compared
to 4.9 years at December 31, 2008 and the duration was 3.4 years at March 31,
2009 compared to 4.0 years at December 31, 2008. The current weighted average
yield was 4.21% at March 31, 2009 compared to 4.19% at December 31,
2008.
During
the first three months of 2009, securities held to maturity
("HTM") decreased by $10.9 million from $152.6 million to $141.7 million as
a result of principal repayments. 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 weighted average life of the HTM portfolio at March 31, 2009 was
approximately 3.5 years compared to 4.1 years at December 31, 2008 and the
duration was 3.0 years at March 31, 2009 compared to 3.4 years at December 31,
2008. The current weighted average yield was 5.02% at both March 31, 2009 and
December 31, 2008.
Total
investment securities aggregated $470.6 million, or 22%, of total assets at
March 31, 2009 as compared to $494.2 million, or 23%, of total assets at
December 31, 2008.
The
average fully-taxable equivalent yield on the combined investment securities
portfolio for the first three months of 2009 was 4.18% as compared to 5.15% for
the similar period of 2008.
Our
investment securities portfolio consists primarily of U.S. Government agency
securities, U.S. Government sponsored agency mortgage-backed obligations and
private-label collateralized mortgage obligations (CMO’s). The securities of the
U.S. Government sponsored agencies and the U.S. Government mortgage-backed
securities have little, if any, credit risk because they are either backed by
the full faith and credit of the U.S. Government or their principal and interest
payments are guaranteed by an agency of the U.S. Government. Private label CMO’s
are not backed by the full faith and credit of the U.S. Government nor are their
principal and interest payments guaranteed. Historically, most private label
CMO’s have carried a AAA insurance rating on the underlying issuer, however, the
subprime mortgage problems and collapse in the residential housing market in the
U.S. throughout 2008 have led to ratings downgrades and subsequent
other-than-temporary impairment of many types of CMO’s.
The
unrealized losses in the Company’s investment portfolio at March 31, 2009 were
associated with two different types of securities. The first type includes ten
floating rate government agency sponsored collateralized mortgage obligations
(CMO’s), all of which have yields that are indexed to a spread over the one
month LIBOR. Management believes that the unrealized losses on the Company’s
investment in these federal agency CMO’s were caused by the overall very low
level of market interest rates, including LIBOR. The Company purchased those
investments at a discount relative to their face amount, and the contractual
cash flows of those
investments
are guaranteed by an agency of the U.S. government. Accordingly, it is expected
that the securities would not be settled at a price less than the amortized cost
of the Company’s investment. Because management believes the decline in fair
value is attributable to changes in interest rates and not credit quality, and
because the Company has the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, the Company does not consider
those investments to be other-than-temporarily impaired at March 31,
2009.
The
second type of security in the Company’s investment portfolio with unrealized
losses at March 31, 2009 were private label CMO’s. As of March 31,
2009, the Bank owned thirty-two such securities in its investment portfolio
with a total book value of $149.1 million. Management performs periodic
assessments of these securities for other-than-temporary impairment. See
Application of Critical Accounting Policies earlier in this quarterly report on
Form 10-Q for a list of considerations management utilizes in its assessment. To
help with this assessment, management requested an independent third party (the
third party) with expertise regarding CMO securities to prepare an analysis of
all private-label CMO’s held in the Bank’s investment portfolio. The
third party produced a book which detailed historical performance for each CMO
dating back to the bonds issuance as well as a separate collateral default
analysis with various levels of loss severity for each bond. The third party
also assigned each bond to one of five risk categories based upon their
knowledge and analysis of the bonds. They ranked fourteen of the
Bank’s private-label CMO’s as low risk, twelve of them as low to mid risk, none
of them as mid risk, three of them as mid to high risk and three were rated as
high risk. Management discussed the characteristics and performance
of each of the high risk bonds with a CMO analyst employed by the third party to
gain better insight into the risks and probability of loss potential associated
with each bond.
While
each of these three bonds has experienced an increase in delinquency,
foreclosure and OREO activity, none has yet experienced default rates high
enough, in management’s opinion, to warrant impairment of the tranche owned by
the Bank at this time. Also, at this time there appears to be
sufficient credit support built into the structure of each bond to absorb losses
ranging from 6% to 8% of the remaining balance before impairment could begin to
affect the tranches owned by the Bank.
Management
also applied a pricing methodology as permitted by FAS #157(3) to the Bank’s
entire private-label CMO portfolio in an effort to provide what may be more
reasonable pricing of these bonds at March 31, 2009 in a more normalized trading
market. The results produced much higher market prices as of
March 31, 2009 than were obtained by way of matrix pricing the securities with
street bids. Although the accounting guidance would permit the Bank
to utilize these higher prices, management has elected to utilize the lower
matrix pricing for its financial statements.
In
summary, based upon a detailed analysis, management does not believe that the
decreased market prices associated with any of the Bank’s private label CMO
investments represent other-than-temporary impairment as of March 31,
2009.
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. 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, 2008 and March 31, 2009,
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
$42.1 million at March 31, 2009 and $41.2 million at December 31, 2008. At March
31, 2009, loans held for sale were comprised of $35.9
million
of student loans and $6.2 million of residential mortgages as compared to $34.4
million of student loans, $2.9 million of SBA loans and $3.9 million of
residential loans at December 31, 2008. The change was the result of sales of
$12.2 million in student loans and $22.4 million in residential loans, offset by
originations of $35.5 million in new loans held for sale. Loans held
for sale, as a percent of total assets, were approximately 2% at March 31, 2009
and at December 31, 2008.
Loans
Receivable
During
the first three months of 2009, total gross loans receivable increased by $6.6
million, from $1.44 billion at December 31, 2008, to $1.45 billion at March 31,
2009. Gross loans receivable represented 87% of total deposits and 68% of total
assets at March 31, 2009, as compared to 88% and 67%, respectively, at December
31, 2008.
The
following table reflects the composition of the Company’s loan
portfolio.
(dollars
in thousands)
|
|
As
of
3/31/2009
|
|
|
%
of Total
|
|
|
As
of
3/31/2008
|
|
|
%
of Total
|
|
|
$
Increase
|
|
|
%
Increase
|
|
Commercial
|
|
$
|
448,898
|
|
|
|
31
|
%
|
|
$
|
377,149
|
|
|
|
31
|
%
|
|
$
|
71,749
|
|
|
|
19
|
%
|
Owner-Occupied
|
|
|
271,151
|
|
|
|
19
|
|
|
|
269,629
|
|
|
|
22
|
|
|
|
1,522
|
|
|
|
1
|
|
Total
Commercial
|
|
|
720,049
|
|
|
|
50
|
|
|
|
646,778
|
|
|
|
53
|
|
|
|
73,271
|
|
|
|
11
|
|
Consumer
/ Residential
|
|
|
318,476
|
|
|
|
22
|
|
|
|
309,873
|
|
|
|
26
|
|
|
|
8,603
|
|
|
|
3
|
|
Commercial
Real Estate
|
|
|
407,811
|
|
|
|
28
|
|
|
|
258,207
|
|
|
|
21
|
|
|
|
149,604
|
|
|
|
58
|
|
Gross
Loans
|
|
|
1,446,336
|
|
|
|
100
|
%
|
|
|
1,214,858
|
|
|
|
100
|
%
|
|
$
|
231,478
|
|
|
|
19
|
%
|
Less:
Allowance for loan losses
|
|
|
(16,231
|
)
|
|
|
|
|
|
|
(11,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loans
|
|
$
|
1,430,105
|
|
|
|
|
|
|
$
|
1,203,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
and Asset Quality
Nonperforming
assets include nonperforming loans and foreclosed real estate. Nonperforming
assets at March 31, 2009, were $30.4 million, or 1.44%, of total assets as
compared to $27.9 million, or 1.30%, of total assets at December 31, 2008. Total
nonperforming loans (nonaccrual loans, loans past due 90 days and still accruing
interest and restructured loans) were $29.4 million at March 31, 2009 compared
to $27.1 million at December 31, 2008. Foreclosed real estate totaled $989,000
at March 31, 2009 and $743,000 at December 31, 2008. At March 31, 2009,
thirty-two loans were in the nonaccrual commercial category ranging from $1,000
to $3.1 million and twenty-four loans were in the nonaccrual commercial real
estate category ranging from $18,000 to $5.8 million. At December 31, 2008,
twenty-two loans were in the nonaccrual commercial category ranging from $11,000
to $3.1 million and eighteen loans were in the nonaccrual commercial real estate
category ranging from $22,000 to $6.6 million. Loans past due 90 days or more
and still accruing was $0 at both March 31, 2009 and at December 31, 2008.
Management’s Allowance for Loan Loss Committee has performed a detailed review
of the nonperforming loans and of the collateral related to these credits and
believes the allowance for loan losses remains adequate for the level of risk
inherent in the loan portfolio.
Impaired
loans requiring a specific allocation totaled $12.2 million at March 31, 2009.
This was a decrease of $530,000 compared to impaired loans requiring a specific
allocation at December 31, 2008. From December 31, 2008, there were thirteen
loans added totaling $1.5 million to the loans requiring a specific allocation
and one loan totaling $1.9 million that no longer required a specific
allocation at March 31, 2009. Additional loans of $7.2 million, considered by
our internal loan review department as potential problem loans at March 31,
2009, have been evaluated as to risk exposure in determining the adequacy for
the allowance for loan losses. Additional loans that were evaluated as to risk
exposure went from $8.8 million at December 31, 2008 to $7.2 million at March
31, 2009, representing a $1.6 million decrease.
The table
below presents information regarding nonperforming loans and assets at March 31,
2009 and 2008 and at December 31, 2008.
|
|
Nonperforming
Loans and Assets
|
(dollars
in thousands)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
March
31,
2008
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,479
|
|
|
|
$
|
6,863
|
|
|
|
$
|
1,158
|
|
|
Consumer
|
|
|
724
|
|
|
|
|
492
|
|
|
|
|
120
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
7,870
|
|
|
|
|
7,646
|
|
|
|
|
284
|
|
|
Mortgage
|
|
|
12,348
|
|
|
|
|
12,121
|
|
|
|
|
2,183
|
|
|
Total
nonaccrual loans
|
|
|
29,421
|
|
|
|
|
27,122
|
|
|
|
|
3,745
|
|
|
Loans
past due 90 days or more and still accruing
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
15
|
|
|
Restructured
loans
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Total
nonperforming loans
|
|
|
29,421
|
|
|
|
|
27,122
|
|
|
|
|
3,760
|
|
|
Foreclosed
real estate
|
|
|
989
|
|
|
|
|
743
|
|
|
|
|
588
|
|
|
Total
nonperforming assets
|
|
$
|
30,410
|
|
|
|
$
|
27,865
|
|
|
|
$
|
4,348
|
|
|
Nonperforming
loans to total loans
|
|
|
2.03
|
|
%
|
|
|
1.88
|
|
%
|
|
|
0.31
|
|
%
|
Nonperforming
assets to total assets
|
|
|
1.44
|
|
%
|
|
|
1.30
|
|
%
|
|
|
0.22
|
|
%
|
Nonperforming
loan coverage
|
|
|
55
|
|
%
|
|
|
62
|
|
%
|
|
|
309
|
|
%
|
Nonperforming
assets / capital plus allowance for
loan
losses
|
|
|
22
|
|
%
|
|
|
21
|
|
%
|
|
|
4
|
|
%
|
Allowance
for Loan Losses
The
following table sets forth information regarding the Company’s provision and
allowance for loan
l
osses.
|
|
Allowance
for Loan Losses
|
|
|
|
Three
Months
Ending
|
|
|
Year
Ending
|
|
|
Three
Months
Ending
|
|
(dollars
in thousands)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
March
31,
2008
|
|
Balance
at beginning of period
|
|
$
|
16,719
|
|
|
$
|
10,742
|
|
|
$
|
10,742
|
|
Provisions
charged to operating expense
|
|
|
3,200
|
|
|
|
7,475
|
|
|
|
975
|
|
|
|
|
19,919
|
|
|
|
18,217
|
|
|
|
11,717
|
|
Recoveries
of loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3
|
|
|
|
145
|
|
|
|
124
|
|
Consumer
|
|
|
1
|
|
|
|
25
|
|
|
|
6
|
|
Real
Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
recoveries
|
|
|
4
|
|
|
|
170
|
|
|
|
130
|
|
Loans
charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(3,685
|
)
|
|
|
(1,426
|
)
|
|
|
(165
|
)
|
Consumer
|
|
|
(7
|
)
|
|
|
(173
|
)
|
|
|
(38
|
)
|
Real
Estate
|
|
|
-
|
|
|
|
(69
|
)
|
|
|
(17
|
)
|
Total
charged-off
|
|
|
(3,692
|
)
|
|
|
(1,668
|
)
|
|
|
(220
|
)
|
Net
charge-offs
|
|
|
(3,688
|
)
|
|
|
(1,498
|
)
|
|
|
(90
|
)
|
Balance
at end of period
|
|
$
|
16,231
|
|
|
$
|
16,719
|
|
|
$
|
11,627
|
|
Net
charge-offs as a percentage of average loans
outstanding
|
|
|
0.26
|
%
|
|
|
0.11
|
%
|
|
|
0.01
|
%
|
Allowance
for loan losses as a percentage of period-end
loans
|
|
|
1.12
|
%
|
|
|
1.16
|
%
|
|
|
0.96
|
%
|
The
Company recorded provisions of $3.2 million to the allowance for loan losses
during the first quarter of 2009, compared to $975,000 for the same period in
2008. Net charge-offs for the quarter totaled $3.7 million, or 0.26%, of average
loans outstanding compared to $220,000, or 0.01%, for the same period last
year.
The
allowance for loan losses as a percentage of total loans receivable was 1.12% at
March 31, 2009, compared to 1.16% at December 31, 2008; primarily due to the
increased provision for loan losses throughout the first three months of
2009.
Premises
and Equipment
During
the first three months of 2009, premises and equipment increased by $935,000, or
1%, from $87.1 million at December 31, 2008 to $88.0 million at March 31, 2009.
This increase was due to, purchases of $1.9 million offset by depreciation and
amortization on existing assets of $1.2 million.
Other
Assets
Other
assets decreased by $482,000 from December 31, 2008 to March 31, 2009 primarily
the result of an increase in prepaid expenses offset by a decrease in the net
tax effect on the unrealized loss on the available for sale investment portfolio
in which the loss decreased the first quarter of 2009.
Deposits
Total
deposits at March 31, 2009 were $1.67 billion, up $34.6 million from total
deposits of $1.63 billion at December 31, 2008. Core deposits totaled
$1.66 billion at March 31, 2009, compared to $1.63 billion at December 31, 2008.
During the first three months of 2009, core consumer deposits increased $72.9
million, or 10%, core commercial deposits decreased $55.8 million while core
government deposits increased by $15.9 million. Total noninterest bearing
deposits increased by $29.7 million, from $280.6 million at December 31, 2008 to
$310.2 million at March 31, 2009.
The
average balances and weighted average rates paid on deposits for the first three
months of 2009 and 2008 are presented in the table below.
|
|
Three
Months Ending March 31,
|
|
|
|
2009
|
|
|
2008
|
|
(in
thousands)
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
Demand
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
285,580
|
|
|
|
|
|
$
|
270,345
|
|
|
|
|
Interest-bearing
(money market and checking)
|
|
|
722,248
|
|
|
|
0.93
|
%
|
|
|
706,625
|
|
|
|
1.91
|
%
|
Savings
|
|
|
345,498
|
|
|
|
0.65
|
|
|
|
349,976
|
|
|
|
1.38
|
|
Time
deposits
|
|
|
259,681
|
|
|
|
3.31
|
|
|
|
189,141
|
|
|
|
4.01
|
|
Total
deposits
|
|
$
|
1,613,007
|
|
|
|
|
|
|
$
|
1,516,087
|
|
|
|
|
|
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, 2009, short-term borrowings totaled $236.5 million as compared to $300.1
million at December 31, 2008. The average rate paid on the short-term borrowings
was 0.55% during the first three months of 2009, compared to an average rate
paid of 3.28% during the first three months of 2008. 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 2008 as previously discussed in this Form
10-Q.
Long-Term
Debt
Long-term
debt totaled $79.4 million at March 31, 2009 and December 31, 2008. 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, 2009, 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 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, 2009, stockholders’ equity totaled $119.0 million, up $4.5 million from
$114.5 million at December 31, 2008. Stockholders’ equity at March 31, 2009
included $14.6 million of unrealized losses, net of income tax benefits, on
securities available for sale. Excluding these unrealized losses, gross
stockholders’ equity increased by $1.9 million, or 1%, from $131.8 million at
December 31, 2008, to $133.6 million at March 31, 2009 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 average 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, 2009, 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,
2009
|
|
|
December
31, 2008
|
|
|
Minimum
For
Adequately
Capitalized
Requirements
|
|
|
Minimum
For
Well-Capitalized
Requirements
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based
Tier 1
|
|
|
9.43
|
%
|
|
|
9.67
|
%
|
|
|
4.00
|
%
|
|
|
6.00
|
%
|
Risk-based
Total
|
|
|
10.38
|
|
|
|
10.68
|
|
|
|
8.00
|
|
|
|
10.00
|
|
Leverage
ratio
(to
average assets)
|
|
|
7.52
|
|
|
|
7.52
|
|
|
|
3.00
- 4.00
|
|
|
|
5.00
|
|
The
consolidated capital ratios of the Company at March 31, 2009 were as follows:
leverage ratio of 7.59%, Tier 1 capital to risk-weighted assets of 9.51% and
total capital to risk-weighted assets of 10.47%.
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 100 bp decrease during the next year, with
rates remaining constant in the second year. The 100 basis point decrease
scenario represents a change in risk measurement adopted by management in the
second quarter of 2008. For the time period September 2005 through March 2008,
management used a 200 basis point decrease as its risk measurement analytic due
to the higher level of short-term interest rates. As a result of decreases in
short-term interest rates totaling 500 bps between December 31, 2006 and
December 31, 2008, management feels that a scenario monitoring a 200 basis point
decrease in interest rates from their current level is no longer feasible, and a
100 basis point decreasing interest rate scenario is more appropriate going
forward.
Our ALCO
policy has established that income sensitivity will be considered acceptable if
overall net interest income volatility in a plus 200 or minus 100 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, 2009 of a plus 200 and minus 100 basis point (bp) change in interest rates
to the impact at March 31, 2008 in the same scenarios.
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
|
|
12
Months
|
|
|
24
Months
|
|
|
12
Months
|
|
|
24
Months
|
|
Plus
200
|
|
|
1.9
|
%
|
|
|
4.4
|
%
|
|
|
(1.4
|
)%
|
|
|
(0.1
|
)%
|
Minus
100
|
|
|
(1.0
|
)
|
|
|
(3.0
|
)
|
|
|
1.0
|
|
|
|
0.3
|
|
Minus
200
|
|
|
-
|
|
|
|
-
|
|
|
|
1.4
|
|
|
|
(0.4
|
)
|
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 purchasing floating
rate investment securities to collateralize growth in government deposits,
altering the mix of deposits by product, utilizing risk management instruments
such as interest rate swaps and caps, or extending the maturity structure of the
Bank’s short-term borrowing position.
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 100 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. At
March 31, 2009, the market value of equity calculation, when utilizing the
normal practice of valuing all investments based on spot prices obtained in the
marketplace, indicates an unacceptable level of interest rate risk in the plus
200 basis point scenario. It is the Bank’s opinion that spot prices
for securities in the Private Label CMO portfolio at March 31, 2009 were not
indicative of their true fair value, as the marketplace for these instruments
was displaced. The Bank estimated alternative fair values for Private
Label CMOs, incorporating acceptable methodology outlined in FAS
157(3). When utilizing the results of this alternative fair value
methodology, the negative variability in the market value of equity in the plus
200 basis point scenario is reduced by approximately 42%, and is within
acceptable limits. The market value of equity in the minus 100 basis
point scenario is within acceptable policy limits utilizing either traditional
valuation methodology or the alternative methodology for Private Label
CMOs.
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 100 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,
2009 provide an accurate assessment of our interest rate risk. At March 31,
2009, the average life of our core deposit transaction accounts was 7.0 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 certain securities in the Company’s investment
portfolio, the Company would not be inclined to act on a sale of such 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,
2009, our total potential liquidity through these secondary sources was $679.4
million, of which $392.9 million was currently available, as compared to $277.7
million available out of our total potential liquidity of $627.7 million at
December 31, 2008. The $51.7 million increase in potential liquidity was
entirely due to an increase in borrowing capacity at the Federal Home Loan Bank
(FHLB). FHLB borrowing capacity is determined based on asset levels
on a quarterly lag, with the increase reflecting the Bank’s strong loan growth
in the fourth quarter of 2008. The $63.6 million reduction in
utilization of this capacity resulted as deposit growth and investment portfolio
run-off outpaced loan growth in the first quarter of 2009.
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 errors 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, 2009 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, 2009 from the risk
factors disclosed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008 previously filed with the SEC.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
No items
to report for the quarter ended March 31, 2009.
Item
3. Defaults Upon Senior Securities.
No items
to report for the quarter ended March 31, 2009.
Item
4. Submission of Matters to a Vote of Securities
Holders.
No items
to report for the quarter ended March 31, 2009.
Item
5. Other Information.
No items
to report for the quarter ended March 31, 2009.
Item
6. Exhibits.
|
|
10.1
|
Employment Agreement dated February 23, 2009 with
Gary L. Nalbandian (incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed
with the SEC on February 27, 2009)*
|
10.2
|
Employment Agreement dated February 23, 2009 with
Mark A. Zody (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed
with the SEC on February 27, 2009)*
|
10.3
|
Form
of Employment Agreement
February 23,
2009
with Messrs.
Mark A. Ritter, D. Scott Huggins and James
R.
Ridd (incorporated by reference to Exhibit
10.3
to the Company’s Current Report
on Form 8-K filed with the SEC on February 27,
2009)*
|
10.4
|
Description of base salaries for 2009 and bonuses
and discretionary option awards to the Company’s named executive officers
for the year ended December 31, 2008 is incorporated by reference to Item
5.02 of the Company’s Current Report on Form 8-K, filed with the SEC on
February 26, 2009*
|
10.5
|
Description of cash bonus awarded to the Company’s
chief executive officer for the year ended December 31, 2008 is
incorporated by reference to Item 5.02 of the Company’s Current Report on
Form 8-K, filed with the SEC on March 26, 2009*
|
|
|
|
|
|
|
|
|
*Denotes
a compensatory plan or arrangement
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)
|
|
|
|
|
05/11/09
|
|
/s/
Gary L. Nalbandian
|
(Date)
|
|
Gary
L. Nalbandian
|
|
|
President/CEO
|
|
|
|
|
|
|
05/11/09
|
|
/s/
Mark A. Zody
|
(Date)
|
|
Mark
A. Zody
|
|
|
Chief
Financial Officer
|
|
|
|
EXHIBIT
INDEX
|
|
10.1
|
Employment Agreement dated February 23, 2009 with
Gary L. Nalbandian (incorporated by reference to Exhibit 10.1
0
to the
Company’s Current Report on Form 8-K filed with the SEC on February 27,
2009)*
|
|
|
10.2
|
Employment Agreement dated February 23, 2009 with
Mark A. Zody (incorporated by reference to Exhibit 10.
11
to the
Company’s Current Report on Form 8-K filed with the SEC on February 27,
2009)*
|
10.3
|
Form
of Employment Agreement
February 23,
2009
with Messrs.
Mark A. Ritter, D. Scott Huggins and James
R.
Ridd (incorporated by reference to Exhibit
10.
12
to the Company’s Current Report on Form 8-K filed
with the SEC on February 27, 2009)*
|
10.4
|
Description of base salaries for 2009 and bonuses
and discretionary option awards to the Company’s named executive officers
for the year ended December 31, 2008 is incorporated by reference to Item
5.02 of the Company’s Current Report on Form 8-K, filed with the SEC on
February 26, 2009*
|
10.5
|
Description of cash bonus awarded to the Company’s
chief executive officer for the year ended December 31, 2008 is
incorporated by reference to Item 5.02 of the Company’s Current Report on
Form 8-K, filed with the SEC on March 26, 2009*
|
|
|
|
|
|
|
|
|
*Denotes
a compensatory plan or arrangement
37