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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 March 31, 2003
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: 6,670,309 shares of
common stock were outstanding as of May 9, 2003.
1
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION 3
Item 1 FINANCIAL STATEMENTS (Unaudited) 3
Consolidated Balance Sheets at March 31, 2003
and December 31, 2002 3
Consolidated Statements of Income for the Three-Month Periods
ended March 31, 2003 and 2002 4
Consolidated Statements of Shareholders' Equity for the
Periods ended March 31, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows for the Three-Month
Period ended March 31, 2003 and 2002 6
Consolidated Statements of Comprehensive Income (Loss) for the
Three-Month Period ended March 31, 2003 and 2002 8
Notes to Consolidated Financial Statements 9
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 17
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
Item 4 CONTROLS AND PROCEDURES 24
PART II OTHER INFORMATION
Items 1 through 6 25
SIGNATURES 26
CERTIFICATIONS 27
EXHIBITS 29
2
ITEM 1 FINANCIAL STATEMENTS
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
ASSETS
Cash and cash due from banks $ 19,271 $ 15,741
Interest earning deposits in other financial institutions 2,516 1,098
----------- ------------
Total cash and cash equivalents 21,787 16,839
Securities available for sale 344,707 315,868
Loans held for sale 3,455 4,314
Loans and leases receivable, net of allowance for credit loss of $7,258
and $6,922 at March 31, 2003 and December 31, 2002, respectively 593,702 611,295
Premises and equipment, net 8,029 7,612
Accrued interest receivable 3,558 3,946
Real estate owned and other repossessed property 250 404
Cash surrender value life insurance 18,415 18,208
Goodwill 12,252 8,777
Amortizing intangible assets 2,982 3,137
Other assets 4,386 4,743
----------- ------------
TOTAL ASSETS $ 1,013,523 $ 995,143
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 567,659 $ 519,120
FHLB advances and federal funds 305,171 368,173
Repurchase agreements 41,040 14,210
Advances from borrowers for taxes and insurance 2,318 2,208
Trust preferred securities 20,500 20,500
Other liabilities 7,486 4,987
----------- ------------
Total liabilities 944,174 929,198
SHAREHOLDERS' EQUITY
Preferred stock. $.01 par value, 5,000,000 shares authorized,
None issued at March 31, 2003 and December 31, 2002, respectively - -
Common stock. No par value, 20,000,000 shares authorized, 7,216,480 and
7,216,480 shares issued at March 31, 2003 and December 31, 2002, respectively - -
Additional paid-in capital 57,696 57,611
Common stock acquired by ESOP, 332,293 and 339,364 shares at cost at March 31,
2003 and December 31, 2002, respectively (1,621) (1,638)
Common stock acquired by MRP, 7,989 and 9,051 shares at amortized Cost at March
31, 2003 and December 31, 2002, respectively (87) (98)
Retained earnings 15,217 13,855
Treasury stock acquired, 466,135 and 516,174 shares at cost at March 31, 2003
and December 31, 2002, respectively (5,746) (6,441)
Accumulated other comprehensive income 3,890 2,656
----------- ------------
Total shareholders' equity 69,349 65,945
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,013,523 $ 995,143
=========== ============
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
March 31,
- ------------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------
(unaudited)
INTEREST INCOME
Interest-earning deposits $ 6 $ 48
Investment securities 4,196 4,411
Loans and leases 11,130 12,498
------- -------
Total interest income 15,332 16,957
------- -------
INTEREST EXPENSE
Deposits 3,140 4,283
Short-term borrowings 800 1,127
Long-term borrowings 3,616 4,771
------- -------
Total interest expense 7,556 10,181
------- -------
Net interest income before provision for credit losses 7,776 6,776
Provision for credit losses 1,100 675
------- -------
Net interest income after provision for credit losses 6,676 6,101
------- -------
NON-INTEREST INCOME
Service fees on deposits 862 600
Fees on loans and leases 426 354
Investment gains / (losses) 556 --
Gain on the sale of loans and leases 704 311
BOLI 210 234
Patriot Advisors' commissions 478 123
Loss on the disposition of borrowings (588) --
Other non-interest income (2) --
------- -------
Total non-interest income 2,646 1,661
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,903 2,977
Occupancy and equipment 1,090 1,041
Professional services 326 217
Advertising 163 127
Deposit processing 289 246
Amortization of intangible assets 121 121
Office supplies & postage 209 170
Other operating expense 580 433
------- -------
Total non-interest expense 6,681 5,333
------- -------
Income before taxes 2,641 2,429
Income tax expense 541 589
------- -------
NET INCOME $ 2,100 $ 1,840
======= =======
Earnings per share - basic $ 0.33 $ 0.28
======= =======
Earnings per share - diluted $ 0.31 $ 0.27
======= =======
Dividends per share $ 0.11 $ 0.08
======= =======
The accompanying notes are an integral part of these statements.
4
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, unaudited)
ACCUMULATED
ADDITIONAL OTHER
NUMBER PAID-IN RETAINED TREASURY COMPREHENSIVE
OF SHARES CAPITAL ESOP MRP EARNINGS STOCK INCOME TOTAL
--------- ---------- --------- -------- -------- --------- ------------- -------
BALANCE AT JANUARY 1, 2002 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... 2 -- -- 40 -- -- -- 40
Purchase of treasury stock........ (293) -- -- -- -- (4,189) -- (4,189)
Release of ESOP shares............ 26 172 181 -- -- -- -- 353
Sale of stock associated with
ESPP............................ 9 -- -- -- -- 118 -- 118
Change in unrealized gains on
securities available for sale,
net of taxes.................... -- -- -- -- -- -- 2,477 2,477
Exercise of stock options......... 50 (498) -- -- -- 680 -- 182
Stock awards...................... -- -- -- -- -- 1 -- 1
Net income........................ -- -- -- -- 7,698 -- -- 7,698
Cash dividends paid............... -- -- -- -- (2,441) -- -- (2,441)
----- --------- -------- ------- -------- --------- -------- -------
BALANCE AT DECEMBER 31, 2002 5,774 $ 57,611 $ (1,638) $ (98) $ 13,855 $ (6,441) $ 2,656 $65,945
===== ========= ======== ======= ======== ========= ======== =======
Release and amortization of MRP... 1 -- -- 11 -- -- -- 11
Purchase of treasury stock........ (7) -- -- -- -- (106) -- (106)
Release of ESOP shares............ 7 85 17 -- -- -- -- 102
Sale of stock associated with
ESPP............................ 2 -- -- -- -- 30 -- 30
Change in unrealized gains on
securities available for sale,
net of taxes.................... -- -- -- -- -- -- 1,234 1,234
Exercise of stock options......... -- -- -- -- -- 13 -- 13
Issuance of stock for
acquisitions.................... 50 -- -- -- -- 758 -- 758
Stock dividend 10%................ 583 -- -- -- -- -- -- --
Net income........................ -- -- -- -- 2,100 -- -- 2,100
Cash dividends paid............... -- -- -- -- (738) -- -- (738)
----- --------- -------- ------- -------- --------- -------- -------
BALANCE AT MARCH 31, 2003 6,410 $ 57,696 $ (1,621) $ (87) $ 15,217 $ (5,746) $ 3,890 $69,349
===== ========= ======== ======= ======== ========= ======== =======
The accompanying notes are an integral part of these statements.
5
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
THREE-MONTHS PERIOD ENDED MARCH 31,
-----------------------------------
2003 2002
------------- --------------
OPERATING ACTIVITIES
Net Income $ 2,100 $ 1,840
Adjustments to reconcile net income to net cash provided by operating
activities Amortization and accretion of:
Deferred loan origination fees (295) (234)
Premiums and discounts (4) (365)
MRP shares 11 9
Core deposit intangible 121 121
Provision for credit losses 1,100 675
Release of ESOP shares 102 78
Gain on sale of investment securities (556) --
Loss on disposition of borrowings 588 --
Loss on sale and write down of real estate owned and other repossessed
assets 32 165
Depreciation of premises and equipment 345 343
Mortgage loans originated for sale (28,627) (18,598)
Mortgage loans sold 29,486 18,568
Deferred income tax benefit (expense) (277) (142)
Increase in cash surrender value of life insurance (207) (232)
Decrease in accrued interest receivable 388 186
(Increase) decrease in other assets 167 (83)
Increase (decrease) in other liabilities 404 (407)
----------- ---------
Net cash provided by operating activities 4,878 1,924
----------- ---------
INVESTING ACTIVITIES
Loan originations & principal payments on loans, net 16,657 5,719
Proceeds from the sale of securities - available for sale 11,082 --
Proceeds from the maturity of securities - available for sale 40,953 27,749
Proceeds from the maturity of securities - held to maturity -- 6,932
Purchase of securities - available for sale (78,446) (39,231)
Proceeds from sale of real estate owned 255 280
Cash paid in business combination (803) --
Purchase of premises and equipment (716) (224)
----------- ---------
Net cash (used in) provided by investing activities (11,018) 1,225
----------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 48,539 (3,922)
Repayment of short term borrowings (63,589) --
Proceeds from short term repurchase agreements 26,831 --
Repayment of long term borrowings (2) (1)
Increase in advances from borrowers for taxes and insurance 110 610
Cash paid for dividends (738) (617)
Proceeds from the sale of stock associated with ESPP 30 24
Proceeds from the exercise of stock options 13 13
Purchase of treasury stock (106) --
----------- ---------
Net cash provided by (used in) financing activities 11,088 (3,893)
----------- ---------
Increase (decrease) in cash and cash equivalents 4,948 (744)
Cash and cash equivalents at beginning of the period 16,839 21,466
----------- ---------
Cash and cash equivalents at end of the period $ 21,787 $ 20,722
=========== =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 2,865 $ 4,254
Cash paid for income taxes $ 862 $ --
Transfers from loans and leases to real estate owned and other
repossessed property $ 133 $ 211
6
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands, unaudited)
SUPPLEMENTAL DISCLOSURES (CONTINUED)
On January 3, 2003, Patriot purchased the stock of Bonds & Paulus Associates,
Inc. for $458,000 plus contingent consideration to be paid in shares of Patriot
Bank Corp. common stock based upon future revenues of Bonds & Paulus. Of the
$458,000, $115,000 was paid in cash and 22,810 shares of Patriot Bank Corp.
common stock having a value of $343,000 were issued at closing. In conjunction
with the acquisition of Bonds & Paulus Associates, Inc., liabilities were
assumed as follows:
Fair value of assets acquired $ 1,671.0
Cash paid (115.0)
Stock issued (343.0)
--------
Liabilities assumed $ 1,213.0
On January 17, 2003, Patriot purchased the stock of Pension Benefits Inc. for
$829,000 plus contingent consideration to be paid in shares of Patriot Bank
Corp. common stock based upon future revenues of Pension Benefits, Inc. Of the
$829,000, $414,500 was paid in cash and 27,338 shares of Patriot Bank Corp.
common stock were issued at closing. In conjunction with the acquisition of
Pension Benefits Inc., liabilities were assumed as follows:
Fair value of assets acquired $ 2,114.0
Cash paid (414.5)
Stock issued (414.5)
--------
Liabilities assumed $ 1,285.0
The accompanying notes are an integral part of these statements.
7
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE-MONTH PERIOD
ENDED MARCH 31,
------------------------
2003 2002
-------- --------
(IN THOUSANDS)
Net Income............................................................ $ 2,100 $ 1,840
Other comprehensive income (loss).....................................
Unrealized gains on securities.......................................
Unrealized gains associated with change in accounting principle.... -- --
Unrealized holding gains (losses) arising during the period........ 1,234 (2,573)
Less: Reclassification adjustment for gains included in net income
Net gains on the sale of investment securities..................... (556) --
Income tax expense associated with net gains on the sale of
investment securities........................... .................. 189 --
-------- ---------
Comprehensive income (loss)........................................... $ 2,967 $ (733)
======== =========
8
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
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 period ended March 31, 2003 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, 2002. All share
amounts, including earnings per share, have been restated to reflect the effect
of the 10% stock dividend paid in April 2003.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The requirements of Statement No. 148 are effective
for fiscal years ending after December 15, 2002, except for financial reports
containing condensed financial statements for interim periods. Patriot continues
to account for stock based compensation under APB No. 25. If Statement No. 123
would have been applied it would have had the following impact:
THREE-MONTH PERIOD ENDED,
MARCH 31
-------------------------
2003 2002
---- ----
(IN THOUSANDS)
Net income, as reported $ 2,100 $ 1,840
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (46) (17)
------- -------
Pro forma net income $ 2,054 $ 1,823
======= =======
Earnings per share:
Basic - as reported $ .33 $ .28
======= =======
Basic - pro forma $ .32 $ .28
======= =======
Diluted - as reported $ .31 $ .27
======= =======
Diluted - pro forma $ .30 $ .27
======= =======
9
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of investment and
mortgage-backed securities are as follows:
- --------------------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
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 $ 38,128 $ 414 $ 189 $ 38,353 $ 66,304 $ 599 $ 652 $ 66,251
Corporate debt securities 22,649 436 1,327 21,758 22,724 131 1,467 21,388
FHLMC preferred stock 84,641 3,889 -- 88,530 67,626 3,715 -- 71,341
FHLB and FRB stock 19,177 -- -- 19,177 17,949 -- -- 17,949
Equity securities 17,136 1,455 147 18,444 6,647 799 164 7,282
Mortgage-backed securities
FHLMC 59,329 806 -- 60,135 67,523 700 81 68,142
FNMA 95,148 610 118 95,640 55,821 373 67 56,127
GNMA 71 9 -- 80 96 13 -- 109
Collateralized mortgage
obligations:
FHLMC 90 2 -- 92 2,960 18 -- 2,978
FNMA 2,404 53 -- 2,457 3,689 105 -- 3,794
Other 41 -- -- 41 505 2 -- 507
--------- ---------- ----------- -------- --------- ---------- ---------- --------
Total securities available for
Sale $ 338,814 $ 7,674 $ 1,781 $344,707 $ 311,844 $ 6,455 $ 2,431 $315,868
========= ========== =========== ======== ========= ========== ======== ========
10
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
March 31, December 31,
- -------------------------------------------------------------------------------
Composition of loan portfolio 2003 2002
- -------------------------------------------------------------------------------
(in thousands)
Comercial Portfolio:
Commercial loans $ 320,112 $ 315,537
Commercial leases 75,630 77,138
Consumer Portfolio:
Home equity 70,213 72,400
Consumer 7,382 7,724
Mortgage Portfolio:
Residential mortgages $ 116,742 $ 135,632
Construction 9,302 8,220
--------- ------------
Total loans and leases, gross 599,381 616,651
Deferred loan costs 1,579 1,566
Allowance for credit losses (7,258) (6,922)
--------- ------------
Total loans and leases, net $ 593,702 $ 611,295
========= =========
NOTE 4 - DEPOSITS
Deposits are summarized as follows:
March 31, December 31,
- -------------------------------------------------------------------------------
Deposit type 2003 2002
- -------------------------------------------------------------------------------
(in thousands)
NOW $ 32,754 $ 31,505
Money market 149,803 143,564
Savings accounts 67,881 59,029
Non-interest-bearing demand 55,503 53,471
--------- ------------
Total demand, transaction, money
market and savings deposits 305,941 287,569
Certificates of deposits 261,718 231,551
--------- ------------
Total deposits $ 567,659 $ 519,120
========= ============
11
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
NOTE 5 - EARNINGS PER SHARE
The dilutive effect of stock options is excluded from basic earnings
per share but included in the computation of diluted earnings per share.
For Three-Months Ended March 31, 2003
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands)
BASIC EPS
Net Income available to common
Shareholders $ 2,100 6,413 $ 0.33
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 337 (.02)
----------- ------------- ---------
DILUTED EPS
Net income available to common
shareholders $ 2,100 6,750 $ 0.31
=========== ============= =========
For Three-Months Ended March 31, 2002
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands)
BASIC EPS
Net Income available to common
shareholders $ 1,840 6,597 $ 0.28
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 207 (.01)
----------- ------------- ---------
DILUTED EPS
Net income available to common
shareholders $ 1,840 6,804 $ 0.27
=========== ============= =========
NON-DILUTIVE OPTIONS. Patriot had 1,375 and 11,000 non-dilutive options at March
31, 2003 and 2002, respectively.
12
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
NOTE 6 - SEGMENT REPORTING
The Company has four reportable segments: Banking, Mortgage Banking,
Financial Advisors and Commercial Leasing. Banking operates a network of 16
community banking offices providing deposit and loan services to customers.
Mortgage Banking originates and sells residential mortgages into the secondary
market to generate fee income. Financial Advisors results for the three month
period ended March 31, 2002, reflect only brokerage services. In January 2003,
Patriot completed its acquisition of two companies, which is disclosed in Note
11 - Business Combinations. As a result of these business combinations,
Financial Advisors' now offers wealth and investment management, pension
benefits, and insurance services in addition to brokerage services. The impact
of these two acquisitions was $4,062,000 to total assets and $412,000 to other
income for the first quarter of 2003. Commercial Leasing originates small ticket
leases.
The following table highlights income statement and balance sheet
information for each of the segments at or for the three-month period ended
March 31, 2003 and 2002.
AT OR FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2003
---------------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- ------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 6,710 $ 80 $ 10 $ 976 $ 7,776
Other income 1,300 505 478 363 2,646
Total net income 1,474 184 22 420 2,100
Total assets 928,705 3,493 4,874 76,451 1,013,523
Total loans and leases, gross 521,875 3,455 -- 75,630 600,960
Intersegment interest income / (expense) (978) 80 10 888 --
---------------------------------------------------------------
AT OR FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2002
---------------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- ------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 5,952 $ 135 $ 2 $ 687 $ 6,776
Other income 985 261 123 292 1,661
Total net income 1,526 146 46 122 1,840
Total assets 918,092 6,716 583 79,763 1,005,154
Total loans and leases, gross 563,613 6,682 -- 79,249 649,544
Intersegment interest income / (expense) (1,338) 135 2 1,201 --
---------------------------------------------------------------
13
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
NOTE 7 - ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of non-amortizing and amortizing intangible assets is as follows:
MARCH 31, 2003 DECEMBER 31, 2002
------------------------------------------ ------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED NET CARRYING CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------------------------------------ ------------------------------------------
(IN THOUSANDS)
Non-amortizing intangible assets:
Goodwill $ 14,450 $ 2,198 $ 12,252 $ 10,975 $ 2,198 $ 8,777
Amortizing intangible assets:
Core deposit intangible 4,606 1,850 2,756 4,606 1,729 2,877
Originated mortgage servicing rights 664 438 226 664 404 260
------------------------------------------ ------------------------------------------
Total amortizing intangible assets 5,270 2,288 2,982 5,270 2,133 3,137
------------------------------------------ ------------------------------------------
Total intangible assets $ 19,720 $ 4,486 $ 15,234 $ 16,245 $ 4,331 $ 11,914
========================================== ==========================================
Aggregate amortization expense for the three-month period ended March 31 is as
follows:
2003 2002
---- ----
(IN THOUSANDS)
Amortization expense......................... $ 155 $ 143
The estimated amortization expense of intangible assets for each of the five
succeeding fiscal years is as follows:
FOR THE YEAR ENDED ESTIMATED EXPENSE
(IN THOUSANDS)
December 31, 2003.......................................... $ 574
December 31, 2004.......................................... 487
December 31, 2005.......................................... 462
December 31, 2006.......................................... 448
December 31, 2007.......................................... 296
The changes in the carrying amount of goodwill are as follows:
MARCH 31, 2003 DECEMBER 31, 2002
(IN THOUSANDS)
Balance at the beginning of period ..................... $ 8,777 $ 8,688
Goodwill acquired ...................................... 3,475 89
Amortization expense ................................... -- --
-------------- -------------------
Balance at the end of period............................ $ 12,252 $ 8,777
============== =================
14
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
NOTE 8 - 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. The adoption of this statement did
not have an impact on Patriot's earnings, financial condition, or equity.
NOTE 9 - 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 10 - 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. This Statement 146
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of this Statement did not have an impact on
Patriot's earnings, financial condition, or equity.
15
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2003
NOTE 11 - BUSINESS COMBINATIONS
WEALTH MANAGEMENT FIRM ACQUISITION. On January 3, 2003, Patriot completed the
acquisition of Bonds & Paulus Associates, Inc. (Bonds & Paulus), a wealth
management firm headquartered in Chester County, Pennsylvania. Founded in 1993,
Bonds & Paulus is a registered investment advisory firm, providing investment
advisory and financial planning services to high net-worth individuals and
families. Bonds & Paulus was merged into Patriot Advisors, a division of Patriot
Bank Corp. that provides a full range of wealth and investment management
services. The acquisition will be accounted for as a purchase. Bonds & Paulus
was purchased for $458,000 plus contingent consideration to be paid in shares of
Patriot Bank Corp. common stock based upon future revenues of Bonds & Paulus. Of
the $458,000, $115,000 was paid in cash and 22,810 shares of Patriot Bank Corp.
common stock having a value of $343,000 were issued at closing. Based upon
current revenue, the total purchase price will approximate $1,300,000.
PENSION BENEFITS SERVICE PROVIDER ACQUISITION. On January 17, 2003, Patriot
completed the acquisition of Pension Benefits, Inc., a pension benefits service
provider headquartered in West Chester, Pennsylvania. Founded in 1986, Pension
Benefits Inc. is a third party administrator and a registered investment
advisory firm, providing comprehensive retirement plan solutions to businesses.
Pension Benefits, Inc. was merged into Patriot Advisors, a division of Patriot
Bank Corp. The acquisition will be accounted for as a purchase. Pension
Benefits, Inc. was purchased for $829,000 plus contingent consideration to be
paid in shares of Patriot Bank Corp. common stock based upon future revenues of
Pension Benefits, Inc. Of the $829,000, $414,500 was paid in cash and 27,338
shares of Patriot Bank Corp. common stock were issued at closing. Based upon
current revenue, the total purchase price will approximate $1,600,000.
Supplemental pro forma information that discloses the results of operations for
Patriot Bank Corp. and its subsidiaries for the three-month period ended March
31, 2003 to the same period in 2002 is provided below. The pro forma information
assumes the business combinations of Bonds & Paulus Associates, Inc. and Pension
Benefits, Inc. had been completed as of the beginning of each period and
illustrates the impact on Patriot's non-interest Income, net income and EPS for
each period.
THREE-MONTH PERIOD ENDED
MARCH 31,
2003 2002
---- ----
(IN THOUSANDS)
Revenue $ 18,034 $ 19,007
Net Income $ 2,129 $ 1,844
======== ========
Earnings per share - basic $ 0.33 $ 0.28
======== ========
Earnings per share - diluted $ 0.32 $ 0.27
======== ========
16
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. 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.
SUMMARY. Patriot reported diluted earnings per share of $.31 and net income
of $2,100,000 for the three-month period ended March 31, 2003 compared to
diluted earnings per share of $.27 and net income of $1,840,000 for the three
month period ended March 31, 2002. Earnings per share has been restated to
reflect the effect of the 10% stock dividend paid in April 2003. Return on
average equity was 12.50%, for the three-month period ended March 31, 2003
compared to 12.05%, for the three-month period ended March 31, 2002.
NET INTEREST INCOME. Net interest income for the three-month period ended
March 31, 2003 was $7,776,000 compared to $6,776,000 for the same period in
2002. Patriot's net interest margin (net interest income as a percentage of
average interest-earning assets) was 3.68% for the three-month period ended
March 31, 2003 compared to 3.06% for the same period in 2002. The decreases in
market rates on Patriot's funding sources outpaced decreases in the rates on
assets and, as a result, expanded Patriot's net interest margin.
Interest on loans and leases was $11,130,000 for the three-month period
ended March 31, 2003 compared to $12,498,000 for the same period in 2002. The
average balance of loans was $606,089,000 with an average yield of 7.39% for the
three-month period ended March 31, 2003 compared to an average balance of
$641,840,000 with an average yield of 7.83% for the same period in 2002. The
decrease in average balance is primarily due to Patriot allowing residential
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
market rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $4,196,000 for the three-month period ended March 31, 2003
compared to $4,411,000 for the same period in 2002. The average balance of the
investment portfolio was $317,869,000 with an average yield of 6.15% for the
three-month period ended March 31, 2003 compared to an average balance of
$290,201,000 with an average yield of 6.61% for the same period in 2002. The
increase in average balance is primarily due to Patriot investing funds from the
repayment of residential mortgage loans. The decrease in average yield is
related to general decreases in market rates on adjustable rate securities and
the purchase of tax beneficial securities.
Interest on total deposits was $3,140,000 for the three-month period ended
March 31, 2003 compared to $4,283,000 for the same period in 2002. The average
balance of total deposits was $541,821,000 with an average cost of 2.32% for the
three-month period ended March 31, 2003 compared to an average balance of
$528,303,000 with an average cost of 3.26% for the same period in 2002. The
inrease in average balance is primarily the result of aggressive marketing of
money market and transaction-based deposit accounts offset by a decrease in the
average balance of Patriot's certificate of deposit accounts. The overall
decrease in the average cost on deposits was primarily the result of a decrease
in market rates, a reduction in higher costing certificate of deposit accounts
and emphasis placed on lower cost core deposit accounts.
Interest on borrowings was $4,416,000 for the three-month period ended
March 31, 2003 compared to $5,898,000 for the same periods in 2002. The average
balance of borrowings was $371,319,000 with an average cost of 4.76% for the
three-month period ended March 31, 2003 compared to an average balance of
$405,826,000 with a cost of 5.81% for the same period in 2002. The decrease in
average balance was primarily due to borrowings being replaced with branch
deposit growth. The decrease in the yield on borrowings was the result of a
decrease in interest rates and the result of the repayment of borrowed funds
with a higher cost of funds.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was $1,100,000 for
the three-month period ended March 31, 2003 compared to $675,000 for the same
period in 2002. Net of charge-offs of $764,000 for the quarter-ended March 31,
2003, this represented an addition of $336,000 to the allowance for losses,
which totaled $7,258,000 at March 31, 2003. 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 the amount necessary
to absorb 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 portfolios, 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. In addition, regulatory
authorities, as an integral part of their examinations, periodically review the
allowance for credit losses. They may require additions to the allowance based
upon their judgements about information available to them at the time of
examination. Although
17
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 credit losses. Since the allowance for credit losses is dependent,
to a great extent, on conditions that may be beyond Patriot's control,
management's estimate of the allowance necessary to absorb credit losses and
actual credit losses could differ.
Patriot's total loans consist of four distinct portfolios, each of which is
monitored and analyzed separately.
RESIDENTIAL MORTGAGE LOANS. The residential 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 three years. Compared to
December 31, 2002, the level of non-performing assets in the mortgage portfolio
decreased during the first quarter of 2003 in correlation to the overall
mortgage portfolio. The ratio of non-performing assets to the total mortgage
portfolio remained relatively stable during these periods. Management believes
current levels can be attributed to the current recessionary phase of the credit
cycle and a relatively low reference point in previous years' balances.
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
that uses historical data to estimate losses inherent in the portfolio.
CONSUMER LOANS. Consumer loans consist mostly of home equity loans and home
equity lines of credit. The consumer loan portfolio also is mature as Patriot
has been in the consumer lending business for many years. As with mortgage
lending, Patriot predominantly uses an internal regression analysis that uses
historical data to estimate losses inherent in the portfolio.
COMMERCIAL LOANS. 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. Compared to December
31, 2002, the level of non-performing assets in the commercial lending portfolio
decreased slightly during the first quarter of 2003. Patriot closely monitors
local economic and business trends relative to its commercial lending portfolio
to estimate the effect those trends may have on losses. Patriot's commercial
loan portfolio contains some loans that are substantially larger than the loans
within its other portfolios. The 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 specifically reserves for
individual loans which exhibit weakness.
COMMERCIAL LEASES. Patriot entered the commercial leasing business in 1998
principally through the acquisition of Keystone Financial Leasing (KFL).
Patriot's leasing portfolio has a short, approximately 3-year life. Patriot
performs an internal regression analysis on this portfolio using historical data
(including KFL data). Patriot also closely monitors regional and national
economic business trends relative to its commercial leasing portfolio to
estimate the effect those trends may have on losses. During 2002, Patriot
experienced an increase in the level of charge-offs in the commercial leasing
portfolio. Patriot attributes the increase to a general weakness in the overall
economy, relatively low previous year charge-offs and higher delinquency trends
in certain sectors of the portfolio. In response to the elevated charge-offs,
Patriot enhanced it's policies, procedures and resources related to the credit
administration of the leasing portfolio. The result of these enhancements has
been a steady improvement in delinquencies, and non-performing and charged-off
leases in the latter part of 2002 and the first quarter of 2003.
Patriot's percentage of loan loss reserves to total loans increased from 1.11%
at December 31, 2002, to 1.20% at March 31, 2003, which correlates to Patriot's
growth in its higher risk commercial loan portfolio. During the first quarter of
2003, Patriot's overall loan and lease portfolios decreased from $611,295,000 at
December 31, 2002, to $593,702,000. The decrease in the loan portfolios was
attributed to the run-off of residential mortgage loans which was offset by
growth in the commercial loan portfolio. At March 31, 2003, Patriot had
$10,216,000 in loans and leases which were 30 days or more delinquent which
represented 1.69% of Patriot's total loan and lease portfolio compared to
$6,989,000 or 1.08% at March 31, 2002. Based on the growth in the commercial
loan portfolio and the increased level of delinquent loans and leases,
management determined a provision of $1,100,000 was necessary to adequately
address the losses inherent in Patriot's loan and lease portfolios. Patriot
believes that the allowance provides for known and inherent credit losses at
March 31, 2003.
18
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NON-INTEREST INCOME. Total non-interest income was $2,646,000 for the
three-month period ended March 31, 2003 compared to $1,661,000 for the same
period in 2002. The increase in non-interest income was derived from three
sources:
Non-Interest income from the gains on the sale of loans and leases was $704,000
for the three-month period ended March 31, 2003 compared to $311,000 for the
same period in 2002. This increase was primarily due to mortgage banking gains
associated with higher volumes. Gains recognized on the sale of the guaranteed
portion of Small Business Administration loans contributed to this increase as
well.
Patriot Advisors, a division of Patriot Bank Corp., provided $478,000 in
non-interest income during the three-month period ended March 31, 2003 compared
to $123,000 for the same period in 2002. This increase in Patriot Advisors'
non-interest income can be attributed to the acquisitions of Bonds & Paulus
Associates, Inc. and Pension Benefits, Inc., which occurred during the first
quarter of 2003.
Non-Interest income from serivce fees on deposits was $862,000 for the
three-month period ended March 31, 2003 compared to $600,000 for the same period
in 2002. The increase in service fees on deposits was a result of the
implementation of an overdraft privilege product which was implemented during
the third quarter of 2002.
During the first quarter of 2003, Patriot prepaid a FHLB $15,000,0000 advance
with a rate of 6.28% and a scheduled maturity of December 4, 2003. As such,
Patriot recorded a $588,000 loss, which was the prepayment penalty for repaying
this advance early. This transaction in conjunction with $556,000 of investment
gains recognized on the sale of $10,526,000 of securities allowed Patriot to
improve its interest rate risk profile.
NON-INTEREST EXPENSE. Total non-interest expense was $6,681,000 for the
three-month period ended March 31, 2003 compared to $5,333,000 for the same
period in 2002. The increase in non-interest expense was primarily due to
$925,000 of higher compensation costs associated with increases in staffing.
Patriot's two acquisitons during the first quarter of 2003 as well as service
requirements associated with branch deposit and commercial lending growth caused
the increases in staffing. Increased legal expenses related to the collection
and workout of delinquent loans and leases and fraud issues also contributed to
the increase. Other non-interest expenses such as occupancy and equipment,
advertising, deposit processing and office supplies and postage were also higher
during the first quarter of 2003 as compared to the same period in 2002, which
can be attributed to normal recurring expenses associated with Patriot's two
acquisitions during the first quarter of 2003.
INCOME TAX PROVISION. The income tax provision for the first quarter of
2003 was $541,000 compared to $589,000 for the same period in 2002. The
effective tax rate was 20.48% for three-month period ended March 31, 2003
compared to 24.25% for the same period in 2002. The decrease in the effective
tax rate was due to greater tax exempt interest from tax-beneficial securities.
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. Patriot has
sold substantially all new residential mortgage (fixed and adjustable rate)
originations since 2000. At March 31, 2003, Patriot's total loan portfolio was
$593,702,000, compared to $611,295,000 at December 31, 2002. The decrease in the
loan portfolio was primarily the result of Patriot allowing residential
mortgages to run-off, offset by an emphasis placed on increasing commercial
lending and leasing relationships.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at March 31, 2003 were
$21,787,000 compared to $16,839,000 at December 31, 2002. The increase in cash
balances was primarily due to temporary timing differences.
SECURITIES. Investment securities consist of US Treasury and government
agency securities, and corporate debt and equity securities. Mortgage-backed
securities consist of securities generally issued by either the FHLMC, FNMA or
the Government National Mortgage Association ("GNMA"). Collateralized Mortgage
Obligations ("CMOs") consist of securities issued by the FHLMC, FNMA or private
issuers. Total investment and mortgage-backed securities at March 31, 2003 were
$344,707,000 compared to $315,868,000 at December 31, 2002. The increase in
investment and mortgage-backed securities was primarily due to the purchase of
$78,446,000 of available for sale securities offset by investment amortization
and maturities.
19
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OTHER ASSETS. Other assets at March 31, 2003 were $4,386,000 compared to
$4,743,000 at December 31, 2002. The decrease in other assets was primarily
attributable to adjustments to Patriot's deferred tax position related to the
increase of unrealized gains on investments.
DEPOSITS. Deposits are primarily attracted from within Patriot's market
area through the offering of various deposit instruments, including checking
accounts, money market accounts, savings accounts, certificates of deposit and
retirement savings plans. Patriot also solicits brokered deposits from various
sources. Total deposits at March 31, 2003 were $567,659,000 compared to
$519,120,000 at December 31, 2002. Of this increase, $30,167,000 was related to
growth in certificates of deposits and $18,372,000 was related to an increase in
core deposits.
FHLB ADVANCES AND FEDERAL FUNDS. Patriot utilizes borrowings as a source of
funds for its growth strategy and its asset/liability management. Patriot is
eligible to obtain advances from the FHLB upon the security of certain loan
portfolios, mortgage-backed securities, and investment securities, provided
certain standards related to creditworthiness have been met. 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. Patriot also uses Federal Funds as a funding source.
Federal Funds are transactions that are typically between financial institutions
and are short-term unsecured borrowings. Total FHLB advances and federal funds
borrowed at March 31, 2003 were $305,171,000 compared to $368,173,000 at
December 31, 2002. The decrease in FHLB advances and federal funds was
associated with the repayment of short-term FHLB advances. During the first
quarter of 2003, FHLB advances were replaced with repurchase agreements and
deposit growth as they were repaid.
During the first quarter of 2003, Patriot prepaid a FHLB $15,000,0000 advance
with a rate of 6.28% and a scheduled maturity of December 4, 2003. As a result,
Patriot recorded a $588,000 loss, which was the prepayment penalty for repaying
this advance early. This transaction, in conjunction with $556,000 of investment
gains recognized on the sale of $10,526,000 of securities, allowed Patriot to
improve its interest rate risk profile.
REPURCHASE AGREEMENTS. Patriot uses repurchase agreements as a funding
source. Repurchase agreements are generally short-term obligations
collateralized by government agency and other securities. Total repurchase
agreements at March 31, 2003 were $41,040,000 compared to $14,210,000 at
December 31, 2002. The increase in repurchase agreements was primarily due to
the addition of $30,668,000 of brokered repurchase agreements offset by a
decrease in customer repurchase agreements. The increase in repurchase
agreements replaced FHLB advances that were repaid during the first quarter of
2003.
OTHER LIABILTIIES. Other Liabilities at March 31, 2003 were $7,486,000
compared to $4,987,000 at December 31, 2002. The increase in other liabilities
was primarily attributable to the accrual of contingent consideration associated
with the purchase of Bonds and Paulus Associates, Inc. and Pension Benefits Inc.
SHAREHOLDERS' EQUITY. Total shareholders' equity was $69,349,000 at March
31, 2003 compared to $65,945,000 at December 31, 2002. The increase was
primarily a result of net income and an increase in accumulated other
comprehensive income offset by cash dividends paid and the repurchase of shares
of Patriot Bank Corp. common stock.
20
PATRIOT BANK CORP. AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOSSES ON LOANS AND LEASES
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 the amount necessary to absorb 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 portfolios, 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. In
addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for credit losses. They may require additions
to the allowance based upon their judgements about information available to them
at the time of examination. 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 credit
losses. Because the allowance for credit losses is dependent, to a great extent,
on conditions that may be beyond Patriot's control, management's estimate of the
amount necessary to absorb allowance for credit losses and actual credit losses
could differ. Patriot's current judgement is that the valuation of the allowance
for the losses on loans and leases remains appropriate at March 31, 2003.
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
basis, 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 would be 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. At March 31, 2003, 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 possible that management's judgement about the
need for a valuation allowance for deferred taxes could change in the future.
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 that are beyond Patriot's control. It
is possible that management's estimates included in the valuation of REO and
other repossessed property could change in the future. Patriot's current
judgement is that the valuation of REO and other repossessed property remains
appropriate at March 31, 2003.
21
PATRIOT BANK CORP. AND SUBSIDIARIES
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, Federal Funds 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 first quarter of 2003, $52,033,000 of liquidity was provided from the
repayment and sale of securities. Additional liquidity of $48,539,000 was
provided by deposit growth, $26,831,000 by short-term repurchase agreements and
$16,657,000 from the repayment of loans. These funds were used to purchase
$78,446,000 of investment securities, repay $63,001,000 of short-term borrowings
and fund $4,575,000 of commercial loans.
At March 31, 2003, Patriot had outstanding loan commitments of $60,066,000.
Patriot anticipates that it will have sufficient funds available to meet its
loan commitments. Certificates of deposit that are scheduled to mature in one
year or less from March 31, 2003, totaled $144,650,000. Based upon historical
experience, Patriot expects that substantially all of the maturing certificates
of deposit will be retained at maturity, excluding brokered certificates in the
amount of $39,492,000.
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 CAMELS 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 March 31, 2003, 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
March 31, 2003:
To Be To Be
Actual Adequately Capitalized Well Capitalized
------ ---------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 2003
Total capital (to risk weighted assets)
Patriot Bank Corp. $ 80,546 12.59% $ 51,161 8% $ 63,951 10%
Patriot Bank 80,927 12.66% 51,158 8% 63,948 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 70,949 11.09% 25,580 4% 38,370 6%
Patriot Bank 71,266 11.14% 25,579 4% 38,369 6%
Tier I capital (to average assets)
Patriot Bank Corp. 70,949 7.30% 38,856 4% 48,570 5%
Patriot Bank 71,266 7.31% 38,995 4% 48,743 5%
22
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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's Board of Directors has established an Asset/Liability
Committee, 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.
The Company 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 level of interest rate risk of the Company 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 the company has calculated an
estimate of net interest income for the year ending March 31, 2004, based upon
the assets, liabilities and off-balance sheet financial instruments in existence
at March 31, 2003. 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, with a
floor of 25bp. The following table reflects the estimated percentage change in
estimated net interest income for the year ending March 31, 2004 resulting from
changes in interest rates.
Rate ramp to interest rates % change
- --------------------------- --------
+2% .17%
-2% (1.05%)
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 the company 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 an unchanged interest rate environment. This method of
measurement primarily evaluates the longer term repricing risks and options in
the Company's balance sheet. The Company 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 the Company 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 March 31, 2003, resulting from shocks to interest rates.
Percent change EVE Equity/
Rate shock from base EVE Assets
- ---------- --------- ----------
+2% 1.59% 10.96%
+1% 2.91% 10.87%
Base 10.35%
-1% -9.41% 9.23%
-2% -15.24% 8.50%
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 re-price within that time period. The interest rate
sensitivity gap is defined as the difference
23
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
between the amount of interest-earning assets maturing or re-pricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that time period.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2003, which are
anticipated, based upon certain assumptions, to re-price or mature in each of
the future time periods shown. Loan amounts reflect principal balances expected
to be repaid and/or re-priced 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 re-price or mature
during a particular period were determined in accordance with the earlier of
term to re-pricing 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
March 31, 2003:
0-90 91-180 181-365
Days Days Days
----- ------ -------
GAP to Total Assets 10.86% -.33% 0.91%
Cumulative GAP to Total Assets 10.86% 10.53% 11.43%
As shown above, the company has a positive cumulative 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 based on
market conditions or the magnitude of the change in the 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.
The Company'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 the Company'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
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.
(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.
24
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
There are various claims and lawsuits in which Patriot is
periodically involved incidental to 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 the Company.
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 906 Certifications
(b) Reports filed on Form 8K
none
25
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 May 9, 2003 _____________________________________
Richard A. Elko
President and Chief Executive Officer
Date May 9, 2003 _____________________________________
James G. Blume
Senior Vice President and
Chief Financial Officer
26
CERTIFICATIONS
I, Richard A. Elko, Chief Executive Officer of Patriot Bank Corp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Patriot Bank
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Richard A. Elko
-------------------------------
Chief Executive Officer
27
CERTIFICATIONS (Continued)
I, James G. Blume , Chief Financial Officer of Patriot Bank Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Patriot Bank
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9 2003
/s/ James G. Blume
-------------------------------
Chief Financial Officer
28