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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-26744
PATRIOT BANK CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 232820537
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
High and Hanover Streets, Pottstown, Pennsylvania 19464-9963
(Address of principal executive offices) (Zip Code)
(610) 323-1500
(Registrant's telephone number, including area code)
Not Applicable
(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 Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,185,274 shares of common
stock were outstanding as of November 13, 2002.
1
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets at September 30, 2002
and December 31, 2001
Consolidated Statements of Income for the Three-Month and Nine-Month
Periods ended September 30, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the
Periods ended September 30, 2002 and December 31, 2001
Consolidated Statements of Cash Flows for the Nine-Month
Periods ended September 30, 2002 and 2001
Consolidated Statements of Comprehensive Income for the Three-Month
and Nine-Month Periods ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4 CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
Items 1 through 6
SIGNATURES
CERTIFICATIONS
2
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
September 30, December 31,
---------------------------
2002 2001
------------- ------------
(unaudited)
ASSETS
Cash and due from banks $ 16,972 $ 14,218
Interest-earning deposits in other financial institutions 8,665 7,248
--------- -----------
Total cash and cash equivalents 25,637 21,466
Investment and mortgage-backed securities available for sale 279,453 247,612
Investment and mortgage-backed securities held to maturity
(market value of $0 and $43,078 at September 30, 2002
and December 31, 2001, respectively) -- 43,637
Loans held for sale 5,999 6,652
Loans and leases receivable, net of allowance for credit loss of
$6,628 and $6,199 at September 30, 2002 and December 31, 2001,
respectively 629,691 642,940
Premises and equipment, net 6,622 6,758
Accrued interest receivable 3,682 3,988
Real estate and other property owned 619 349
Cash surrender value of life insurance 17,988 17,305
Goodwill 8,765 8,688
Amortizing intangible assets 3,387 3,943
Other assets 5,136 6,732
--------- -----------
Total assets $ 986,979 $ 1,010,070
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 533,166 $ 533,863
FHLB advances 347,174 387,179
Repurchase agreements 10,236 --
Trust preferred debt securities 20,500 18,000
Advances from borrowers for taxes and insurance 1,639 3,329
Other liabilities 7,601 5,993
--------- -----------
Total liabilities 920,316 948,364
--------- -----------
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued at September 30, 2002 and December 31, 2001, respectively -- --
Common stock, no par value, 20,000,000 shares authorized, 6,560,436 and
6,555,436 issued at September 30, 2002 and December 31, 2001, respectively -- --
Additional Paid in capital 57,393 57,867
Common stock acquired by ESOP, 314,944 and 334,225 shares at amortized cost at
September 30, 2002 and December 31, 2001, respectively (1,683) (1,819)
Common stock acquired by MRP, 9,193 and 5,650 shares at amortized
cost at September 30, 2002 and December 31, 2001, respectively (109) (68)
Retained earnings 12,528 8,598
Treasury stock, 377,248 and 235,833 at cost at September 30, 2002
and December 31, 2001, respectively (5,056) (3,051)
Accumulated other comprehensive income 3,590 179
--------- -----------
Total stockholders' equity 66,663 61,706
--------- -----------
Total liabilities and stockholders' equity $ 986,979 $ 1,010,070
========= ===========
The accompanying notes are an integral part of these statements.
3
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
Three-Month Period Ended Nine-Month Period Ended
September 30,
-------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited)
INTEREST INCOME
Interest-earning deposits $ 7 $ 71 $ 67 $ 489
Investment and mortgage-backed securities 4,295 4,931 13,076 16,595
Loans and leases 12,281 13,505 37,212 41,230
-------- -------- -------- --------
Total interest income 16,583 18,507 50,355 58,314
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 3,341 6,330 11,239 22,512
Short-term borrowings 953 808 3,208 1,531
Long-term borrowings 4,668 5,382 14,245 16,947
-------- -------- -------- --------
Total interest expense 8,962 12,520 28,692 40,990
-------- -------- -------- --------
Net interest income before provision for
credit losses 7,621 5,987 21,663 17,324
Provision for credit losses (1,200) (500) (2,875) (1,450)
-------- -------- -------- --------
Net interest income after provision for
credit losses 6,421 5,487 18,788 15,874
-------- -------- -------- --------
NON-INTEREST INCOME
Service fees, charges and other operating income 1,378 1,502 3,943 4,139
Gain (loss) on sale of real estate acquired through
foreclosure (1) 2 (33) (14)
Gain on sale of investment and mortgage-backed
securities available for sale 183 -- 317 503
Mortgage banking gains 425 487 1,222 1,313
-------- -------- -------- --------
Total non-interest income 1,985 1,991 5,449 5,941
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,246 2,480 9,208 7,102
Office occupancy and equipment 994 1,107 2,991 3,412
Professional services 412 260 877 615
Marketing & advertising 226 275 558 608
Deposit processing 281 284 815 816
Goodwill amortization -- 183 -- 547
Core deposit intangible amortization 121 121 363 364
Office supplies & postage 178 159 537 449
Other operating expense 443 402 1,372 1,421
-------- -------- -------- --------
Total non-interest expense 5,901 5,271 16,721 15,334
-------- -------- -------- --------
Income before taxes and cumulative effect of
change in accounting principle 2,505 2,207 7,516 6,481
Income taxes 493 629 1,684 1,822
-------- -------- -------- --------
Income before cumulative effect of change
in accounting principle 2,012 1,578 5,832 4,659
Cumulative effect of change in accounting principle, net of
($105,000) in income tax -- -- -- (204)
-------- -------- -------- --------
Net income $ 2,012 $ 1,578 $ 5,832 $ 4,455
======== ======== ======== ========
Basic Earnings Per Share:
Income before cumulative effect of change in accounting principle $ 0.34 $ 0.27 $ 0.97 $ 0.79
Cumulative effective of change in accounting principle -- -- -- (.03)
-------- -------- -------- --------
Net Income $ 0.34 $ 0.27 $ 0.97 $ 0.76
======== ======== ======== ========
Dilutive Earnings Per Share:
Income before cumulative effect of change in accounting principle $ 0.32 $ 0.26 $ 0.93 $ 0.78
Cumulative effective of change in accounting principle -- -- -- (.03)
-------- -------- -------- --------
Net Income $ 0.32 $ 0.26 $ 0.93 $ 0.75
======== ======== ======== ========
Dividends Per Share $ .1025 $ .0900 $ .2950 $ .2775
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
4
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, unaudited)
Accumulated
Additional Other
Number of Paid-in Retained Treasury Comprehensive
Shares Capital ESOP MRP Earnings Stock Income (Loss) Total
------ ------- ---- --- -------- ----- ------------- -----
BALANCE AT JANUARY 1, 2001 5,784 $ 58,174 $(1,999) $(241) $ 4,833 $(4,043) $(4,924) $ 51,800
Release and amortization
of MRP 52 42 -- 173 -- -- -- 215
Release of ESOP shares 26 58 180 -- -- -- -- 238
Sale of stock associated with
Employee Stock Purchase Plan 7 -- -- -- -- 59 -- 59
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- 5,103 5,103
Exercise of stock options 111 (407) -- -- -- 933 526
Net income -- -- -- -- 6,099 -- -- 6,099
Cash dividends paid -- -- -- -- (2,334) -- -- (2,334)
------ -------- ------- ----- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 2001 5,980 $ 57,867 $(1,819) $ (68) $ 8,598 $(3,051) $ 179 $ 61,706
------ -------- ------- ----- -------- ------- ------- --------
Common stock issued 5 70 -- -- -- -- -- 70
Common stock acquired by MRP (5) -- -- (70) -- -- -- (70)
Release and amortization of MRP 1 -- -- 29 -- -- -- 29
Purchase of Treasury Stock (199) -- -- -- -- (2,777) -- (2,777)
Release of ESOP shares 19 123 136 -- -- -- -- 259
Sale of stock associated with
Employee Stock Purchase Plan 7 -- -- -- -- 91 -- 91
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- 3,411 3,411
Exercise of stock options 51 (667) -- -- -- 680 -- 13
Stock awards -- -- -- -- -- 1 -- 1
Net income -- -- -- -- 5,832 -- -- 5,832
Cash dividends paid -- -- -- -- (1,902) -- -- (1,902)
------ -------- ------- ----- -------- ------- ------- --------
BALANCE AT SEPTEMBER 30, 2002 5,859 $ 57,393 $(1,683) $(109) $ 12,528 $(5,056) $ 3,590 $ 66,663
------ -------- ------- ----- -------- ------- ------- --------
The accompanying notes are an integral part of these statements.
5
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine-Month Period Ended
-----------------------
September 30,
-------------
2002 2001
-------- ---------
OPERATING ACTIVITIES
Net Income $ 5,832 $ 4,455
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and accretion of
Deferred loan origination fees (594) (45)
Premiums and discounts (595) (1,483)
MRP shares 30 166
Goodwill -- 547
Amortizing intangibles 556 364
Provision for credit losses 2,875 1,450
Release of ESOP shares 259 170
Gain on sale of securities available for sale (317) (194)
Losses on real estate owned and other repossessed assets 191 53
Depreciation of premises and equipment 958 1,191
Loss on disposition of equipment 57 --
Mortgage loans originated for sale (58,520) (53,947)
Mortgage loans sold 59,173 60,400
Increase in deferred income taxes (940) (2,377)
Increase in cash surrender value of life insurance (683) (587)
Decrease in accrued interest receivable 306 936
Decrease (increase) in other assets (133) 288
Increase in other liabilities 1,531 4,819
-------- ---------
Net cash provided by operating activities 9,986 16,206
-------- ---------
INVESTING ACTIVITIES
Loan originations and principal payments on loans, net 9,612 (1,590)
Proceeds from the sale of securities - available for sale 25,328 49,830
Proceeds from the maturity of securities - available for sale 76,864 39,357
Proceeds from the maturity of securities - held to maturity 11,638 27,178
Purchase of securities - available for sale (95,039) (29,149)
Proceeds from sale of real estate owned 892 1,341
Purchase of premises and equipment (914) (333)
Proceeds from sale of premises and equipment 35 16
-------- ---------
Net cash provided by investing activities 28,416 86,650
-------- ---------
FINANCING ACTIVITIES
Net decrease in deposits (697) (115,310)
Repayment of short term borrowings (4,764) (22,651)
Funding of trust preferred securities 2,500 --
Proceeds from long term borrowings -- 30,343
Repayment of long term borrowings (25,005) --
Decrease in advances from borrowers for taxes and insurance (1,690) (1,352)
Cash paid for dividends (1,902) (1,879)
Purchase of treasury stock (2,777) --
Proceeds from the sale of stock associated with Employee Stock Purchase Plan 91 36
Proceeds from the exercise of stock options 13 525
-------- ---------
Net cash used in financing activities (34,231) (110,288)
-------- ---------
Net increase (decrease) in cash and cash equivalents 4,171 (7,432)
Cash and cash equivalents at beginning of year 21,466 27,076
-------- ---------
Cash and cash equivalents at the end of the period $ 25,637 $ 19,644
======== =========
Supplemental Disclosures
Cash paid for interest on deposits $ 11,173 $ 22,275
======== =========
Cash paid for income taxes $ 1,475 $ 1,194
======== =========
Transfers from loans and leases to real estate owned $ 1,353 $ 1,533
======== =========
Transfer securities from held to maturity to available for sale $ 31,537 $ 220,471
======== =========
The accompanying notes are an integral part of these statements.
6
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three-Month Period Ended Nine-Month Period Ended
------------------------ -----------------------
September 30,
--------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 2,012 $1,578 $ 5,832 $ 4,455
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized gains associated with change in accounting
principle -- -- -- 3,000
Unrealized holding gains arising during the period 3,486 3,704 3,620 4,007
Less: Reclassification adjustment for gains included
in net income (121) -- (209) (128)
------- ------ ------- --------
Comprehensive income $ 5,377 $5,282 $ 9,243 $ 11,334
======= ====== ======= ========
The accompanying notes are an integral part of these statements.
7
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2002
Note 1 - General
The accompanying financial statements of Patriot Bank Corp. and
Subsidiaries ("Patriot") include the accounts of the parent company, Patriot
Bank Corp. and its wholly-owned subsidiaries, Patriot Bank and Patriot
Investment Company. All material intercompany balances and transactions have
been eliminated in consolidation. These financial statements have been prepared
in accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, the
consolidated financial statements reflect all adjustments (which consist of
normal recurring accruals) necessary for a fair presentation of the results for
the unaudited periods. The results of operations for the three-month and
nine-month period ended September 30, 2002 are not necessarily indicative of the
results which may be expected for the entire year. The consolidated financial
statements should be read in conjunction with the annual report on Form 10-K for
the year ended December 31, 2001.
8
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2002
Note 2 - Investment And Mortgage-Backed Securities
The amortized cost and estimated fair value of investment and
mortgage-backed securities are as follows:
September 30, 2002 December 31, 2001
------------------------------------------- --------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
cost gain loss value cost gain loss value
--------- ---------- ---------- ----- --------- ---------- ---------- -----
(in thousands)
AVAILABLE FOR SALE:
Investment securities
U.S. treasury and
government agency
Securities $ 62,753 $ 883 $ 589 $ 63,047 $ 31,475 $ 2 $ 1,640 $ 29,837
Corporate debt securities 19,832 2 1,999 17,835 16,582 27 1,656 14,953
FHLMC preferred stock 67,595 4,144 -- 71,739 42,762 2,184 53 44,893
FHLB stock 19,058 -- -- 19,058 19,359 -- -- 19,359
Equity securities 9,595 960 259 10,296 5,845 31 433 5,443
Mortgage-backed securities
FHLMC 31,645 765 -- 32,410 5,194 13 10 5,197
FNMA 36,390 1,248 10 37,628 45,466 124 144 45,446
GNMA 100 14 -- 114 120 12 -- 132
Collateralized mortgage obligations:
FHLMC 12,872 114 -- 12,986 44,879 566 193 45,252
FNMA 13,058 162 -- 13,220 33,632 582 70 34,144
Other 1,115 5 -- 1,120 2,938 18 -- 2,956
-------- -------- -------- -------- -------- -------- -------- --------
Total securities available for
sale $274,013 $ 8,297 $ 2,857 $279,453 $248,252 $ 3,559 $ 4,199 $247,612
======== ======== ======== ======== ======== ======== ======== ========
HELD TO MATURITY:
Investment securities
U.S. Treasury and
government agency
securities $ -- $ -- $ -- $ -- $ 14,388 $ 342 $ 226 $ 14,504
Corporate debt securities -- -- -- -- 1,000 1 -- 1,001
Mortgage-backed securities
FHLMC -- -- -- -- 1,661 27 36 1,652
FNMA -- -- -- -- 1,680 80 51 1,709
GNMA -- -- -- -- 2,245 57 65 2,237
Collateralized mortgage
Obligations
FHLMC -- -- -- -- 16,187 264 834 15,617
FNMA -- -- -- -- 6,476 53 171 6,358
-------- -------- -------- -------- -------- -------- -------- --------
Total securities held to maturity $ -- $ -- $ -- $ -- $ 43,637 $ 824 $ 1,383 $ 43,078
======== ======== ======== ======== ======== ======== ======== ========
Pursuant to an interest rate risk strategy to reduce the asset sensitivity of
the bank, certain adjustable rate held to maturity securities were sold.
Consequently, the remaining held to maturity portfolio of $31,537,000 has been
reclassified to available for sale.
9
Note 3 - Loans Receivable
Loans receivable are summarized as follows:
September 30, December 31,
-----------------------------
2002 2001
------------- ------------
(in thousands)
Comercial portfolio:
Commercial loans $ 306,820 $ 283,848
Commercial leases 79,670 77,838
Consumer portfolio:
Home equity loans 69,503 66,834
Other consumer loans 7,769 8,614
Mortgage portfolio:
Secured by real estate loans $ 160,172 $ 206,467
Construction loans 10,856 4,605
--------- ---------
Total loans and leases receivable, gross 634,790 648,206
Less deferred loan origination costs 1,529 933
Allowance for credit losses (6,628) (6,199)
--------- ---------
Total loans and leases receivable, net $ 629,691 $ 642,940
========= =========
Note 4 - Deposits
Deposits are summarized as follows:
September 30, December 31,
-----------------------------
Deposit type 2002 2001
------------- ------------
(in thousands)
NOW $ 42,308 $ 30,951
Money market 141,102 135,214
Savings accounts 67,456 45,534
Non-interest-bearing demand 39,070 38,235
--------- ---------
Total demand, transaction, money
market and savings deposits 289,936 249,934
Certificates of deposits 243,230 283,929
--------- ---------
Total deposits $ 533,166 $ 533,863
========= =========
10
NOTE 5 - Earnings per share
For Three-Months Ended September 30, 2002 For Nine-Months Ended September 30, 2002
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
BASIC EPS
Net Income available to common
Stockholders $2,012 5,954 $0.34 $5,832 5,987 $0.97
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 325 (.02) -- 284 (.04)
------ ----- ----- ------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed conversions $2,012 6,279 $0.32 $5,832 6,271 $0.93
====== ===== ===== ====== ===== =====
For Three-Months Ended September 30, 2001 For Nine-Months Ended September 30, 2001
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Net Income available to common
Stockholders $1,578 5,902 $0.27 $4,455 5,867 $0.76
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 180 (.01) -- 112 (.01)
------ ----- ----- ------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed conversions $1,578 6,082 $0.26 $4,455 5,979 $0.75
====== ===== ===== ====== ===== =====
11
Note 6 - Segment Reporting
Patriot has three reportable segments: Patriot Bank, Patriot Mortgage and
Patriot Commercial Leasing Corporation. Patriot Bank operates a community
banking network with seventeen community banking offices providing deposits and
loan services to customers. Patriot Mortgage is a mortgage banking unit which
sells residential mortgages into the secondary market to generate fee income.
Patriot Commercial Leasing Corporation (Patriot Leasing) is a small ticket
leasing company.
The following table highlights income statement and balance sheet
information for each of the segments at or for the three-month and nine-month
periods ended September 30, 2002 and 2001 (in thousands).
For the three-month period ended September 30, 2002 For the nine-month period ended September 30, 2002
--------------------------------------------------- --------------------------------------------------
PATRIOT PATRIOT PATRIOT CONSOLIDATED PATRIOT PATRIOT PATRIOT CONSOLIDATED
BANK MORTGAGE LEASING PATRIOT BANK MORTGAGE LEASING PATRIOT
Net interest income $ 6,805 $ 156 $ 660 $ 7,621 $ 19,191 $ 436 $ 2,036 $ 21,663
Other income 1,307 413 265 1,985 3,613 1,016 820 5,449
Total net income 1,946 106 (40) 2,012 5,470 179 183 5,832
Total assets 890,589 15,285 81,105 986,979 890,589 15,285 81,105 986,979
Total loans and leases,
gross 539,979 15,141 79,670 634,790 539,979 15,141 79,670 634,790
For the three-month period ended September 30, 2001 For the nine-month period ended September 30, 2001
--------------------------------------------------- --------------------------------------------------
PATRIOT PATRIOT PATRIOT CONSOLIDATED PATRIOT PATRIOT PATRIOT CONSOLIDATED
BANK MORTGAGE LEASING PATRIOT BANK MORTGAGE LEASING PATRIOT
Net interest income $ 5,358 $ 66 $ 563 $ 5,987 $ 15,402 $ 182 $ 1,740 $ 17,324
Other income 1,270 394 327 1,991 3,763 1,108 1,070 5,941
Total net income 1,354 49 175 1,578 3,863 35 557 4,455
Total assets 950,581 6,786 74,097 1,031,464 950,581 6,786 74,097 1,031,464
Total loans and leases,
gross 574,724 6,762 73,217 654,703 574,724 6,762 73,217 654,703
Patriot Mortgage's net income includes support allocations of $166,000 and
$497,000 for the three-month and nine-month periods ended September 30, 2002
compared to $152,000 and $457,000 for the same periods in 2001. Patriot
Mortgage's funding is based off the 30-day FHLB average. The cost of funds was
$64,000 and $146,000 for the three-month and nine-month periods ended September
30, 2002 compared to $62,000 and $187,000 for the same periods in 2001.
Patriot Leasing's net income includes an internal charge of $60,000 and $180,000
for the three-month and nine-month periods ended September 30, 2002 and 2001.
Patriot Leasing's funding is based off a three year average of the 3 year FHLB
average plus a spread. The cost of funds to Patriot Leasing for the first
nine-months in 2002 was $1,246,000 and $3,674,000 for the three-month and
nine-month periods ended September 30, 2002 compared to $1,126,000 and
$3,292,000 for the same periods in 2001.
12
Note 7 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement as amended by SFAS No. 137
in June 1999 and SFAS No. 138 in June 2000 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of certain exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment; (b) a hedge of
the exposure to variable cash flows of a forecasted transaction; or (c) a hedge
of foreign currency exposure. Patriot adopted SFAS No. 133 on January 1, 2001.
At the time of adoption, Patriot reclassified approximately $220,471,000 of
fixed rate mortgage backed securities, CMO's and agency securities from held to
maturity to available for sale resulting in a net of tax increase of
approximately $3,000,000 in accumulated other comprehensive income. Patriot
typically has not used derivative instruments and currently holds no positions
that had further impact on earnings, financial condition or equity. During 2001,
Patriot sold $30,333,000 of the securities reclassified resulting in a
cumulative change in accounting principle with a net after tax impact of a
$204,000 loss.
Note 8 - Accounting for Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. The Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements, including requirements for periodic impairment evaluation.
The provisions of the Statement are required to be applied starting with fiscal
years beginning after December 15, 2001, except that goodwill and intangible
assets acquired after June 30, 2001, will be subject immediately to the
non-amortization and amortization provisions of the Statement. The Statement is
required to be applied at the beginning of an entity's fiscal year and to be
applied to all goodwill and other intangible assets recognized in its financial
statements at that date. Patriot adopted Statement No. 142 in January 2002.
Patriot has completed its evaluation and, based on this evaluation, there was no
indication of transitional impairment losses as of the date of adoption on its
operations.
As of the date of adoption, Patriot had unamortized goodwill in the amount
of $8.7 million, which will be subject to the transition provisions of SFAS No.
142. Amortization expenses related to goodwill was $0 and $183,000 for the three
months ended September 30, 2002 and 2001, and $0 and $547,000 for the nine
months ended September 30, 2002 and 2001, respectively.
A summary of goodwill and amortizing intangible assets at September 30, 2002 is
as follows:
As of September 30, 2002
(in thousands)
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Goodwill (non-amortizing) $ 10,963 $ 2,198 $ 8,765
Amortization expense of other intangible assets for the nine months ended
September 30, 2002 is as follows (in thousands):
As of September 30, 2002
(in thousands)
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------ ------------ ------
Amortizing intangibles:
Core Deposit Intangible $ 4,606 $ 1,608 $ 2,998
Originated Mortgage Servicing Rights $ 664 $ 275 $ 389
-------- -------- --------
Total amortizing intangibles $ 5,270 $ 1,883 $ 3,387
======== ======== ========
13
The estimated amortization expense of intangible assets for each of the five
succeeding fiscal years is as follows:
Estimated annual amortization expense (in thousands)
For the year ended December 31, 2002 486
2003 465
2004 433
2005 433
2006 433
Note 9 - Accounting for Asset Retirement Obligations
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. It is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Earlier application is encouraged. Patriot
does not expect the adoption of this Statement to have an impact on it's
earnings, financial condition, or equity.
Note 10 - Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. This Statement supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. However, this
Statement retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in distribution to owners) or is classified as held for sale.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with earlier application encouraged. The provisions of this
Statement generally are to be applied prospectively. The adoption of this
Statement did not have any impact on Patriot's earnings, financial condition, or
equity.
Note 11 - Reporting Gains and Losses from Extinguishment of Debt
In April 2002, the FASB issued Statement No. 145, "Reporting Gains and Losses
from Extinguishment of Debt". This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications. It is effective for financial statements issued for
fiscal years beginning after May 15, 2002, and interim periods within those
fiscal years. The adoption of this Statement did not have an impact on Patriot's
earnings, financial condition, or equity.
Note 12 - Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Patriot does not expect the adoption of this
Statement to have a significant impact on its earnings, financial condition, or
equity.
14
Note 13 - Acquisitions of Certain Financial Institutions
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
of businesses within the scope of this Statement. In addition, this Statement
amends Statement No. 144 to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement No. 144 requires for other long-lived assets that are
held and used.
With some exceptions, the requirements of Statement No. 147 are effective
October 1, 2002. The adoption of this Statement did not have an impact on
Patriot's earnings, financial condition, or equity.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information, this discussion and analysis of
Patriot Bank Corp. and Subsidiaries (Patriot) contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to those
discussed in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. Patriot undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
GENERAL. Patriot reported diluted earnings per share of $.32 and net
income of $2,012,000 for the three-month period ended September 30, 2002
compared to diluted earnings per share of $.26 and net income of $1,578,000 for
the three month period ended September 30, 2001. Diluted earnings per share for
the nine-month period ending September 30, 2002 was $.93 and net income of
$5,832,000 compared with $.75 and net income of $4,455,000 for the nine-month
period ended September 30, 2001. Return on average equity was 12.06%, for the
three-month period ended September 30, 2002 compared to 10.67%, for the
three-month period ended September 30, 2001.
NET INTEREST INCOME. Net interest income for the three-month and
nine-month periods ended September 30, 2002 was $7,621,000 and $21,663,000
compared to $5,987,000 and $17,324,000 for the same periods in 2001. The
increase in net interest income is primarily due to the impact of decreases in
market rates on Patriot's funding sources and Patriot's strategy to reduce
investments, mortgage-backed securities and mortgage loans and the level of
wholesale funding. The decreases in market rates on Patriot's funding sources
outpaced the decrease in rates on assets and, as a result, expanded Patriot's
net interest margin. Patriot's net interest margin (net interest income as a
percentage of average interest-earning assets) for the three-month and
nine-month periods ended September 30, 2002 was 3.50% and 3.29% compared to
2.61% and 2.40% for the same period in 2001.
Interest on loans and leases was $12,281,000 and $37,212,000 for the
three-month and nine-month periods ended September 30, 2002 compared to
$13,505,000 and $41,230,000 for the same periods in 2001. The average balance of
loans was $639,368,000 with an average yield of 7.75% for the nine-month period
ended September 30, 2002 compared to an average balance of $655,172,000 with an
average yield of 8.37% for the same period in 2001. The decrease in average
balance is primarily due to Patriot allowing mortgages to run-off, offset by
aggressive marketing of commercial loans and leases. The decrease in average
yield is primarily a result of a decrease in interest rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $4,295,000 and $13,076,000 for the three-month and nine-month
periods ended September 30, 2002 compared to $4,931,000 and $16,595,000 for the
same periods in 2001. The average balance of the investment portfolio was
$296,462,000 with an average yield of 6.50% for the nine-month period ended
September 30, 2002 compared to an average balance of $342,947,000 with an
average yield of 6.81% for the same period in 2001. The decrease in average
balance is primarily due to Patriot allowing the investment portfolio to
amortize so it can be replaced with generally higher-yielding commercial loans
and leases. The decrease in average yield is related to general decreases in
market rates on adjustable rate securities.
Interest on total deposits was $3,341,000 and $11,239,000 for the
three-month and nine-month periods ended September 30, 2002 compared to
$6,330,000 and $22,512,000 for the same periods in 2001. The average balance of
total deposits was $521,330,000 with an average cost of 2.86% for the nine-month
period ended September 30, 2002 compared to an average balance of $587,874,000
with an average cost of 5.12% for the same period in 2001. The decrease in
average balance is primarily the result of an decrease in Patriot's jumbo
certificates of deposit, offset by aggressive marketing of money market
accounts, transaction-based deposit accounts and other certificates of deposit.
The overall decrease in the average cost on deposits was primarily the result of
a decrease in interest rates and emphasis placed on lower cost money market and
transaction based deposit accounts.
Interest on borrowings was $5,621,000 and $17,453,000 for the three-month
and nine-month periods ended September 30, 2002 compared to $6,190,000 and
$18,478,000 for the same periods in 2001. The average balance of borrowings was
$411,321,000 with an average cost of 5.60% for the nine-month period ended
September 30, 2002 compared to an average balance of $419,212,000 with a cost of
5.82% for the same period in 2001. The decrease in average balance was primarily
due to borrowings being repaid by proceeds received on the run-off of the
mortgage loan portfolio and growth in Patriot's branch deposits. The decrease in
the yield on borrowings was the result of a decrease in interest rates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was
$1,200,000 and $2,875,000 for the three-month and nine-month periods ended
September 30, 2002 compared to $500,000 and $1,450,000 for the same period in
2001. The increased provision was the result of increased commercial loan and
lease outstandings, higher charge-offs as well as an increase in delinquency and
non-performing loans. An allowance for credit losses is maintained at a level
that represents management's best estimate of known and inherent losses in the
loan and lease portfolio. Management's periodic evaluation of the allowance for
credit losses is based upon evaluation of individual loans and leases, the
overall risk characteristics of the various portfolio segments, regression
analyses using past loss experience, current and projected financial status and
creditworthiness of its borrowers, the adequacy of collateral, the level and
nature of non-performing loans, current economic conditions, the results of the
most recent
16
regulatory examination and other relevant factors. This evaluation is inherently
subjective. While management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for credit losses. Such agencies may
require Patriot to recognize additions to the allowance for credit losses based
on their judgments of information, which is available to them at the time of
their examinations.
Patriot's total loans consist of four distinct portfolios. Each of which is
monitored and analyzed seperately.
The mortgage loan portfolio is seasoned as Patriot has been in the
mortgage lending business for many years and has sold substantially all new
mortgage originations in the past two years. Patriot's mortgage loans are
generally well collateralized and historically Patriot has experienced minimal
losses on these loans. Because of Patriot's consistent history in mortgage
lending and the long-term nature of this portfolio, Patriot predominately relies
upon an internal regression analysis, which uses historical data to estimate
losses that are inherent in the portfolio.
The consumer loan portfolio consists of mostly home equity loans and
home equity lines of credit. The consumer loan portfolio is also mature as
Patriot has been in consumer lending business for many years. As with mortgage
lending, Patriot predominantly uses an internal regression analysis, which uses
historical data to estimate losses that are inherent in the portfolio.
Patriot entered the commercial lending business in 1996 and has
grown the portfolio into a substantial portion of total loans. Patriot uses
historical data to prepare regression models to monitor trends of charge-offs
and recoveries and establish appropriate allowance levels. Patriot also closely
monitors local economic and business trends relative to its commercial lending
portfolio to estimate the effect those trends may have on potential losses.
Patriot's commercial loan portfolio contains some loans that are substantially
larger than the loans within other portfolios. The potential loss associated
with an individual loan could have a significant impact on the allowance and
charge-off levels at Patriot. Therefore, Patriot closely monitors these loans
and will specifically reserve for individual loans which exhibit weakness.
Patriot entered the commercial leasing business in 1998 principally
through the acquisition of Keystone Leasing. Patriot's leasing portfolio has a
short, approximately 3 to 4 year life. Patriot performs an internal regression
analysis on this portfolio using historical data (including Keystone Leasing
data). Patriot also closely monitors regional and national economic business
trends relative to its commercial leasing portfolio to estimate the effects
those trends may have on potential losses.
Patriot's levels of delinquencies and non-performing assets have
increased somewhat but compare favorably with industry averages. At September
30, 2002 Patriot's non-performing assets were .60% of total assets compared to
..45% at the end of the same period in 2001. Additionally, Patriot had $9,200,000
in loans and leases, which were 30 days or more delinquent representing 1.43% of
Patriot's total loan and lease portfolios compared to $7,845,000 and 1.19%,
respectively, at the end of the same period in 2001.
NON-INTEREST INCOME. Total non-interest income was $1,985,000 and
$5,449,000 for the three-month and nine-month periods ended September 30, 2002
compared to $1,991,000 and $5,941,000 for the same periods in 2001. The decrease
in non-interest income for the nine-month period,was primarily due to $317,000
in gains recognized on the sale of investment securities available for sale
during 2002 versus $503,000 in gains recognized on the sale of investment
securities available for sale during 2001 as well as a small decline in mortgage
banking gains. Non-interest income also includes recurring non-interest income
such as loan and deposit fees, mortgage banking gains, ATM fees, and income from
bank owned life insurance, that are consistent with the prior period.
NON-INTEREST EXPENSE. Total non-interest expense was $5,901,000 and
$16,721,000 for the three-month and nine-month periods ended September 30, 2002
compared to $5,271,000 and $15,334,000 for the same periods in 2001. The
increases in non-interest expense was primarily due to higher compensation costs
due to increases in staffing associated with branch deposit growth and
commercial lending offset by the elimination of $547,000 of goodwill
amortization.
INCOME TAX PROVISION. The income tax provision was $493,000 and $1,684,000
for the three-month and nine-month periods ended September 30, 2002 compared to
$629,000 and $1,822,000 for the same periods in 2001. The effective tax rate was
19.68% and 22.41% for the three-month and nine-month periods ended September 30,
2002 compared to 28.50% and 28.11% for the same periods in 2001. The decreases
in the effective tax rate was primarily due to the elimination of non-deductible
goodwill amortization expense in 2002. Additionally, Patriot purchased certain
tax beneficial securities during the fourth quarter of 2001 and throughout 2002.
FINANCIAL CONDITION
LOAN AND LEASE PORTFOLIO. Patriot's primary portfolio loan products are
commercial loans, small ticket commercial leases, fixed-rate and adjustable-rate
residential mortgage loans and home equity loans and lines of credit. Patriot
also offers residential construction loans and other consumer loans. At
September 30, 2002 Patriot's total loan portfolio was $629,691,000, compared to
a total loan portfolio of $642,940,000 at December 31, 2001. The decrease in the
loan portfolio is primarily the result of Patriot allowing mortgages to run-off,
offset by an emphasis placed on increasing commercial lending and leasing
relationships.
17
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at September 30, 2002
were $25,637,000 compared to $21,466,000 at December 31, 2001. The increase in
cash balances is associated with timing differences in borrowing activity and
investment prepayments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment securities consist
primarily of U.S. agency securities, mortgage-backed securities which are
generally insured or guaranteed by either FHLMC, FNMA or the GNMA and
collateralized mortgage obligations. Total investment and mortgage-backed
securities at September 30, 2002 were $279,453,000 compared to $291,249,000 at
December 31, 2001. The decrease in investment and mortgage-backed securities was
primarily due to $113,513,000 of normal investment prepayments, sales and
maturities offset by the purchase of $95,000,000 of available for sale
securities. Pursuant to an interest rate risk strategy to reduce the asset
sensitivity of the bank, certain adjustable rate held to maturity securities
were sold. Consequently, the remaining held to maturity portfolio of $31,537,000
has been reclassified to available for sale.
OTHER ASSETS. Other assets at September 30, 2002 were $5,136,000 compared
to $6,732,000 at December 31, 2001. The decrease in other assets was primarily
attributable to an adjustment in Patriot's deferred tax position associated with
unrealized securities gains offset by normal growth in the cash value on bank
owned life insurance.
DEPOSITS. Deposits are primarily attracted from within Patriot's market
area through the offering of various deposit instruments, including NOW
accounts, money market accounts, savings accounts, certificates of deposit and
retirement savings plans. Patriot also attracts jumbo certificates of deposit.
Total deposits at September 30, 2002 were $533,166,000 compared to $533,863,000
at December 31, 2001. While total deposit balances remained consistent with the
prior period, Patriot's core deposit balances increased by approximately
$40,000,000 which was offset by a decline in certificates of deposit balances.
18
BORROWINGS. Patriot utilizes borrowings as a source of funds for its asset
growth and its asset/liability management. Patriot is eligible to obtain
advances from the FHLB upon the security of the FHLB common stock it owns and
certain of its residential mortgages and mortgage-backed securities, provided
certain standards related to creditworthiness have been met. Patriot may also
utilize repurchase agreements to meet its liquidity needs. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions fluctuates from time to time in accordance with
the policies of the FHLB. Total borrowings at September 30, 2002 were
$377,910,000 compared to $405,179,000 at December 31, 2001. The decrease was
primarily associated with borrowings that matured during the year and were
repaid.
OTHER LIABILTIIES. Other Liabilities at September 30, 2002 were $7,601,000
compared to $5,993,000 at December 31, 2001. The increase in balance is
primarily the result of the accrual of Patriot's corporate income taxes as a
result from Patriot's net operating income offset by timing differences in
payable accounts.
STOCKHOLDERS' EQUITY. Total stockholders' equity was $66,663,000 at
September 30, 2002 compared to $61,706,000 at December 31, 2001. The increase in
balance is due to earnings and accumulated other comprehensive income offset by
dividends paid to shareholders' and the repurchase of stock.
19
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is based on management's ongoing evaluation of
the loan portfolio and reflects an amount considered by management to be its
best estimate of known and inherent losses in the portfolio. Management
considers a variety of factors when establishing the allowance, such as the
impact of current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of loan review and related classifications, and
historic loss rates. In addition, certain individual loans which management has
identified as problematic are specifically provided for, based upon an
evaluation of the borrower's perceived ability to pay, the estimated adequacy of
the underlying collateral and other relevant factors. Consideration is also
given to examinations performed by regulatory agencies. Although provisions have
been established and segmented by type of loan, based upon management's
assessment of their differing inherent loss characteristics, the entire
allowance for losses on loans is available to absorb further loan losses in any
category.
Management uses significant estimates to determine the allowance for loan
losses. Since the allowance for loan losses is dependent, to a great extent, on
conditions that may be beyond Patriot's control, it is at least reasonably
possible that management's estimate of the allowance for loan losses and actual
results could differ in the near term.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for loan losses. They may require additions to
the allowance based upon their judgements about information available to them at
the time of examination.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established against deferred tax assets
when in the judgement of management, it is more likely than not that such
deferred tax assets will not become available. Based on management's evaluation
of the likelihood of realization, no valuation allowance has been established.
Because the judgement about the level of future taxable income is dependent to a
great extent on matters that may, at least in part be beyond Patriot's control,
it is at least reasonably possible that management's judgement about the need
for a valuation allowance for deferred taxes could change in the near term.
REAL ESTATE OWNED (REO) AND OTHER REPOSSESSED PROPERTY
Real estate owned is defined to include real estate Patriot acquires
through foreclosure. REO is recorded on Patriot's books at the lower of
Patriot's carrying value in the loan or the fair value of the property as of the
date of transfer to REO. Any excess of the recorded investment in the loan over
the fair market value is charged against Patriot's loan loss reserve.
Other repossessed property consists of mostly leased equipment returned to
Patriot at the end of the lease. The off-lease equipment is recorded on
Patriot's books at the lower of Patriot's carrying value in the lease or the
fair value of the equipment as of the date of transfer to other repossessed
property. Any excess of the recorded investment in the lease over the fair
market value is taken as a loss on Patriot's books. Additionally, valuation of
REO and other repossessed property is dependent to a great extent on current
economic, market and geographic conditions, and that may, at least in part be
beyond Patriot's control. It is at least reasonably possible that management's
estimates included in the valuation of REO and other repossessed property could
change in the near term. Patriot's current judgement is that the valuation of
REO and other repossessed property remains appropriate at September 30, 2002.
20
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances and repurchase agreements. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
During the three-month and nine-month period ended September 30, 2002,
significant liquidity was provided by the maturity, principal repayment and sale
of investment and mortgage-backed securities. These funds were invested in new
securities. Additional liquidity was used to repay borrowings.
At September 30, 2002, Patriot had outstanding loan commitments of
$68,350,000. Patriot anticipates that it will have sufficient funds available to
meet its loan origination commitments. Certificates of deposit which are
scheduled to mature in one year or less from September 30, 2002 totaled
$133,328,000.
CAPITAL RESOURCES. FDIC regulations currently require companies to maintain a
minimum leverage capital ratio of not less than 3% of tier 1 capital to total
adjusted assets, a tier 1 capital ratio of not less than 4% of risk-adjusted
assets, and a minimum risk-based total capital ratio (based upon credit risk) of
not less than 8%. The FDIC requires a minimum leverage capital requirement of 3%
for institutions rated composite 1 under the CAMEL rating system. For all other
institutions, the minimum leverage capital requirement is 3% plus at least an
additional 1% to 2% (100 to 200 basis points). A bank is considered
"well-capitalized" if it maintains a minimum leverage capital ratio of not less
than 5% of tier 1 capital to total adjusted assets, a tier 1 capital ratio of
not less than 6% of risk adjusted assets, and a minimum risk-based total capital
ratio (based upon credit risk) of not less than 10%. At September 30, 2002,
Patriot Bank's and Patriot Bank Corp.'s capital ratios exceeded all requirements
to be considered well capitalized. The following table sets forth the capital
ratios of Patriot Bank Corp., Patriot Bank and the current regulatory
requirements at September 30, 2002:
To Be To Be
Actual Adequately Capitalized Well-Capitalized
------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2002
Total capital (to risk-weighted assets)
Patriot Bank Corp. $80,605 12.63% $51,070 8% $63,838 10%
Patriot Bank 79,370 12.46% 50,970 8% 63,712 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 71,811 11.25% 25,535 4% 38,303 6%
Patriot Bank 70,479 11.06% 25,485 4% 38,228 6%
Tier I capital (to average assets)
Patriot Bank Corp. 71,811 7.25% 39,644 4% 49,555 5%
Patriot Bank 70,479 7.11% 39,644 4% 49,555 5%
21
MANAGEMENT OF INTEREST RATE RISK. The principal objective of Patriot's
interest rate risk management function is to evaluate the interest rate risk
included in certain on and off balance sheet accounts, determine the level of
risk appropriate given Patriot's business focus, operating environment, capital
and liquidity requirements and performance objectives, and manage the risk
consistent with Board approved guidelines. Through such management, Patriot
seeks to reduce the vulnerability of its net interest income to changes in
interest rates. Patriot monitors its interest rate risk as such risk relates to
its operating strategies. Patriot's Board of Directors has established an
Asset/Liability Committee comprised of senior management and directors, which is
responsible for reviewing its asset/liability and interest rate position and
making decisions involving asset/liability considerations. The Asset/Liability
Committee meets regularly and reports trends and Patriot's interest rate risk
position to the Board of Directors.
In an effort to reduce interest rate risk at the beginning of the fourth
quarter of 2002, Patriot restructured components of its balance sheet as
follows: restructured $34 million in MBS securities with elevated prepayment
characteristics at a gain; prepaid $50 million in FHLB borrowings with a
prepayment penalty in order to provide more appropriate funding for adjustable
assets. The results of these transactions are anticipated to be relatively
neutral to results for the fourth quarter 2002. Due to the forward looking
nature of the following interest rate risk discussion these transactions are
included in these discussions.
Patriot uses three complementary methods to analyze and measure interest
rate risk as part of the overall management of interest rate risk. They are
income simulation modeling, estimates of economic value of equity, and static
gap analysis. The combination of these three methods provides a reasonably
comprehensive summary of the levels of interest rate risk of Patriot when
exposed to time factors and changes in interest rate environments.
Income simulation modeling is utilized in measuring Patriot's interest
rate risk and managing its interest rate sensitivity. Income simulation
considers not only the impact of changing market interest rates on forecasted
net interest income, but also other factors such as yield curve relationships,
the volume and mix of assets and liabilities, customer preferences and general
market conditions.
Through the use of income simulation modeling Patriot has calculated an
estimate of net interest income for the year ending September 30, 2003, based
upon the assets, liabilities and off-balance sheet financial instruments in
existence at September 30, 2002. Patriot has also estimated changes to that
estimated net interest income based upon interest rates rising or falling in
monthly increments ("rate ramps"). Rate ramps assume that all interest rates
increase or decrease in monthly increments evenly throughout the period modeled.
The following table reflects the estimated percentage change in estimated net
interest income for the year ending September 30, 2003 resulting from changes in
interest rates.
September 30,2002
Rate ramp to interest rates % change
--------------------------- -----------------
+2% (0.42)%
-2% (1.86)%
Economic value of equity (EVE) estimates the discounted present value of
asset and liability cash flows. Discount rates are based upon market prices for
comparable assets and liabilities. As part of this evaluation Patriot has
contracted with an independent consultant to perform an extensive core deposit
analysis to appropriately estimate the discounted present value of the retail
deposit franchise. Upward and downward rate shocks are used to measure
volatility in relation to such interest rate movements in relation to an
unchanged environment. This method of measurement primarily evaluates the longer
term repricing risks and options in Patriot's balance sheet. Patriot has
established policy limits for upward and downward rate shocks of 20% of economic
value of equity at risk for every 100 basis points of interest rate shock.
Additionally Patriot has a policy limit that the ratio of EVE adjusted equity to
EVE adjusted assets will be maintained above a 5% ratio. The following table
reflects the estimated economic value of equity at risk and the ratio of EVE
adjusted equity to EVE adjusted assets at September 30, 2002, resulting from
shocks to interest rates. September 30,2002
Percent change EVE Equity/
Rate shock from base EVE Assets
---------- --------- ----------
+2% -11.38% 11.09%
+1% -4.30% 11.66%
Base 11.87%
-1% -6.08% 10.97%
-2% -16.15% 9.65%
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period.
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The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 2002, which are
anticipated, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Loan amounts reflect principal balances expected to
be repaid and/or repriced as a result of contractual amortization and
anticipated prepayments of adjustable-rate loans and fixed-rate loans and as a
result of contractual rate adjustments on adjustable-rate loans. Estimated
prepayment rates were applied to mortgage loans and mortgage-backed securities
based upon industry expectations. Core deposit decay rates have been estimated
based upon a historical analysis of core deposit trends. With the exceptions
noted above, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth the gap and cumulative gap as a percentage of total assets at
September 30, 2002:
0-90 91-180 181-365
Days Days Days
---- ---- ----
September 30,2002
GAP to Total Assets -0.52% 5.05% 2.56%
Cumulative GAP to Total Assets -0.52% 4.53% 7.09%
As shown above, Patriot has a positive gap (interest sensitive assets are
greater than interest sensitive liabilities) within the next year, which
generally indicates that an increase in rates may lead to an increase in net
interest income and a decrease in rates may lead to a decrease in net interest
income. Interest sensitivity gap analysis measures whether assets or liabilities
may reprice but does not capture the ability to reprice or the range of
potential repricing on assets or liabilities. Thus indications based on a
positive or negative gap position need to be analyzed in conjunction with other
interest rate risk management tools.
Patriot's management believes that the assumptions and combination of
methods utilized in evaluating estimated net interest income are reasonable;
however, the interest rate sensitivity of Patriot's assets, liabilities and
off-balance sheet financial instruments as well as the estimated effect of
changes in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from the experience on which the assumptions were based.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Patriot's principal
executive officer and principal financial officer have concluded that
Patriot's disclosure controls and procedures (as defined in Rule 13a-14(C)
under the Securities Exchange Act of 1934, as amended), based on their
evaluation of these controls and procedures as of a date within (90) days
prior to the filing date of this form 10-Q, are effective.
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(b) Changes in Internal Controls. There have been no significant changes in
Patriot's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation thereof,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
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PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
There are various claims and lawsuits in which Patriot is
periodically involved incidental to the Patriot's business, which in the
aggregate involve amounts which are believed by management to be immaterial to
the financial condition, equity, and results of operations of Patriot.
Item 2 CHANGES IN SECURITIES
Not applicable.
Item 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5 OTHER INFORMATION
Not applicable.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Following exhibits are filed as part of this report.
- Exhibit 99.1 Section 302 Certifications
- Exhibit 99.2 Section 906 Certifications
(b) Reports filed on Form 8K
none
- ----------
* Incorporated herein by reference into this document from the exhibits to
Form S-1, Registration Statement, filed on September 1, 1995 as amended
Registration No. 33-96530.
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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.
PATRIOT BANK CORP.
(Registrant)
Date November 13, 2002 /s/ RICHARD A. ELKO
-------------------------------------
Richard A. Elko
President and Chief Executive Officer
Date November 13, 2002 /s/ JAMES G. BLUME
-------------------------------------
James G. Blume
Senior Vice President and
Chief Financial Officer
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