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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, 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: 6,625,686 shares of
common stock were outstanding as of November 12, 2003.
1
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION 3
Item 1 FINANCIAL STATEMENTS (Unaudited) 3
Consolidated Balance Sheets at September 30, 2003
and December 31, 2002 3
Consolidated Statements of Income for the Three and Nine-Month Periods
ended September 30, 2003 and 2002 4
Consolidated Statements of Shareholders' Equity for the
Periods ended September 30, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows for the nine-month periods
ended September 30, 2003 and 2002 6
Consolidated Statements of Comprehensive Income for the
Three and Nine-Month Periods ended September 30, 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 24
Item 4 CONTROLS AND PROCEDURES 26
PART II OTHER INFORMATION
Items 1 through 6 27
SIGNATURES 28
EXHIBITS 29
2
ITEM 1 FINANCIAL STATEMENTS
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(unaudited)
ASSETS
Cash and cash due from banks $ 16,355 $ 15,741
Interest earning deposits in other financial institutions 2,777 1,098
------------ ------------
Total cash and cash equivalents 19,132 16,839
Securities available for sale 334,627 315,868
Loans held for sale 3,648 4,314
Loans and leases receivable, net of allowance for credit loss of $6,809 and
$6,922 at September 30, 2003 and December 31, 2002, respectively 593,955 611,295
Premises and equipment, net 10,396 7,612
Accrued interest receivable 3,410 3,946
Real estate owned and other repossessed property 667 404
Cash surrender value life insurance 18,808 18,208
Goodwill 12,136 8,777
Amortizing intangible assets 3,478 3,137
Other assets 10,864 4,743
------------ ------------
TOTAL ASSETS $ 1,011,121 $ 995,143
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 623,988 $ 519,120
FHLB advances and federal funds 249,455 368,173
Repurchase agreements 46,270 14,210
Advances from borrowers for taxes and insurance 1,217 2,208
Trust preferred debt securities 20,500 20,500
Other liabilities 6,220 4,987
------------ ------------
Total liabilities 947,650 929,198
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized,
None issued at September 30, 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 September 30, 2003 and December 31, 2002,
respectively - -
Additional paid-in capital 68,186 57,611
Common stock acquired by ESOP, 318,154 and 339,364 shares at cost at September
30, 2003 and December 31, 2002, respectively (1,587) (1,638)
Common stock acquired by MRP, 5,867 and 9,051 shares at amortized Cost at
September 30, 2003 and December 31, 2002, respectively (65) (98)
Retained earnings 7,212 13,855
Treasury stock acquired, 595,924 and 516,174 shares at cost at September 30,
2003 and December 31, 2002, respectively (9,146) (6,441)
Accumulated other comprehensive income (1,129) 2,656
------------ ------------
Total shareholders' equity 63,471 65,945
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,011,121 $ 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)
(unaudited)
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Interest-earning deposits $ 3 $ 7 $ 13 $ 67
Investment securities 3,839 4,295 12,088 13,076
Loans and leases 10,455 12,281 32,227 37,212
--------- --------- --------- ---------
Total interest income 14,297 16,583 44,328 50,355
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 3,135 3,341 9,513 11,239
Short-term borrowings 188 953 1,466 3,208
Long-term borrowings 3,257 4,668 10,430 14,245
--------- --------- --------- ---------
Total interest expense 6,580 8,962 21,409 28,692
--------- --------- --------- ---------
Net interest income before provision for credit losses 7,717 7,621 22,919 21,663
Provision for credit losses 900 1,200 2,900 2,875
--------- --------- --------- ---------
Net interest income after provision for credit losses 6,817 6,421 20,019 18,788
--------- --------- --------- ---------
NON-INTEREST INCOME
Service fees on deposits 898 709 2,678 1,957
Fees on loans and leases 506 320 1,373 914
Gain on the sale of available-for-sale investments 434 183 1,366 317
Gain on the sale of loans and leases 469 425 1,918 1,221
BOLI 195 230 608 690
Patriot Advisors' commissions 552 53 1,532 265
Loss on the disposition of borrowings -- -- (725) --
Other non-interest income 41 65 78 85
--------- --------- --------- ---------
Total non-interest income 3,095 1,985 8,828 5,449
--------- --------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,282 3,246 12,249 9,208
Occupancy and equipment 1,081 994 3,244 2,991
Professional services 186 412 789 877
Advertising 209 226 545 558
Deposit processing 301 281 884 815
Amortization of intangible assets 126 121 397 363
Office supplies & postage 237 178 672 537
Other operating expense 867 443 2,169 1,372
--------- --------- --------- ---------
Total non-interest expense 7,289 5,901 20,949 16,721
--------- --------- --------- ---------
Income before taxes 2,623 2,505 7,898 7,516
Income tax expense 484 493 1,509 1,684
--------- --------- --------- ---------
NET INCOME $ 2,139 $ 2,012 $ 6,389 $ 5,832
========= ========= ========= =========
Earnings per share - basic $ 0.34 $ 0.31 $ 1.01 $ 0.88
========= ========= ========= =========
Earnings per share - diluted $ 0.32 $ 0.29 $ 0.95 $ 0.85
========= ========= ========= =========
Dividends per share $ 0.1300 $ 0.1128 $ 0.3591 $ 0.3245
========= ========= ========= =========
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 share.............. 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.... 3 -- -- 33 -- -- -- 33
Purchase of treasury stock......... (264) -- -- -- -- (4,612) -- (4,612)
Release of ESOP shares............. 21 309 51 -- -- -- -- 360
Sale of stock associated with
ESPP............................. 6 -- -- -- -- 98 -- 98
Change in unrealized gains
on securities available
for sale, net of taxes........ -- -- -- -- -- -- (3,785) (3,785)
Exercise of stock options.......... 123 (362) -- -- -- 1,051 -- 689
Issuance of stock for
acquisitions..................... 50 -- -- -- -- 758 -- 758
Stock dividend 583 10,628 -- -- (10,628) -- -- --
Net income......................... -- -- -- -- 6,389 -- -- 6,389
Cash dividends paid................ -- -- -- -- (2,404) -- -- (2,404)
----- --------- -------- ------- -------- -------- --------- --------
BALANCE AT SEPTEMBER 30, 2003 6,296 $ 68,186 $ (1,587) $ (65) $ 7,212 $ (9,146) $ (1,129) $ 63,471
===== ========= ======== ======= ======== ======== ========= ========
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,
-------------------------------------
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 6,389 $ 5,832
Adjustments to reconcile net income to net cash provided by
operating activities
Amortization and accretion of:
Deferred loan origination costs (fees) 617 (594)
Premiums (discounts) 709 (595)
MRP shares 33 30
Intangible assets 397 556
Provision for credit losses 2,900 2,875
Release of ESOP shares 360 259
Gain on the sale of available-for-sale investments (1,366) (317)
Loss on disposition of borrowings 725 --
Loss on sale and write down of real estate owned and other
repossessed assets 25 191
Depreciation of premises and equipment 1,098 958
Loss on disposition of equipment -- 57
Mortgage loans originated for sale (103,232) (58,520)
Mortgage loans sold 103,898 59,173
Deferred income tax expense (benefit) 107 (940)
Increase in cash surrender value of life insurance (600) (683)
Decrease in accrued interest receivable 536 306
Increase in other assets (5,783) (133)
(Increase) decrease in other liabilities (1,325) 1,531
-------------- -------------
Net cash provided by operating activities 5,488 9,986
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations & principal payments on loans, net 12,562 9,612
Proceeds from the sale of securities - available for sale 45,815 25,328
Proceeds from the maturity of securities - available for sale 84,711 76,864
Proceeds from the maturity of securities - held to maturity -- 11,638
Purchase of securities - available for sale (154,361) (95,039)
Proceeds from sale of real estate owned 971 892
Cash paid in business combinations, net (1,034) --
Purchase of premises and equipment, net of sales (3,836) (879)
-------------- -------------
Net cash (used in) provided by investing activities (15,172) 28,416
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 104,868 (697)
Repayment of short term borrowings (117,725) (4,764)
Funding of trust preferred securities -- 2,500
Proceeds from short term repurchase agreements 32,060 --
Repayment of long term borrowings (6) (25,005)
Decrease in advances from borrowers for taxes and insurance (991) (1,690)
Cash paid for dividends to shareholders (2,404) (1,902)
Proceeds from the sale of stock associated with Employee
Stock Purchase Plan 98 91
Proceeds from the exercise of stock options 689 13
Purchase of treasury stock (4,612) (2,777)
-------------- -------------
Net cash provided by (used in) financing activities 11,977 (34,231)
-------------- -------------
Increase in cash and cash equivalents 2,293 4,171
Cash and cash equivalents at beginning of the period 16,839 21,466
-------------- -------------
Cash and cash equivalents at end of the period $ 19,132 $ 25,637
============== =============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest on deposits $ 9,490 $ 11,173
Cash paid for income taxes $ 2,529 $ 1,475
Transfers from loans and leases to real estate owned and other
repossessed property $ 1,259 $ 1,353
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
On September 5, 2003, Patriot purchased the stock of Tyler Wealth Counselors for
$650,000 in cash. In conjunction with the acquisition of Tyler Wealth Counselors
liabilities were assumed as follows:
Fair value of assets acquired $ 687.0
Cash paid (650.0)
Stock issued --
-----------
Liabilities assumed $ 37.0
The accompanying notes are an integral part of these statements.
7
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- ------- -------- -------
(IN THOUSANDS)
Net Income...................................................................... $ 2,139 $ 2,012 $ 6,389 $ 5,832
Other comprehensive (loss) income ..............................................
Unrealized gains on securities...............................................
Unrealized holding (losses) gains arising during the period, net of tax... (4,759) 3,486 (2,883) 3,620
Less: Reclassification adjustment for gains included in net income
Net gains on the sale of investment securities............................ (434) (183) (1,366) (317)
Income tax expense associated with net gains on the sale of
investment securities.................................................. 128 62 464 108
-------- ------- -------- -------
Comprehensive (loss) income..................................................... $ (2,926) $ 5,377 $ 2,604 $ 9,243
======== ======= ======== =======
8
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 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, Patriot Investment Company and
Patriot Advisors, Inc. 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 and nine-month
periods ended September 30, 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,
SEPTEMBER 30
-------------------------
2003 2002
---- ----
(IN THOUSANDS)
Net income, as reported $ 2,139 $ 2,012
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (45) (42)
--------- --------
Pro forma net income $ 2,094 $ 1,970
========= ========
Earnings per share:
Basic - as reported $ .34 $ .31
========= ========
Basic - pro forma $ .33 $ .30
========= ========
Diluted - as reported $ .32 $ .29
========= ========
Diluted - pro forma $ .31 $ .29
========= ========
NINE-MONTH PERIOD ENDED,
SEPTEMBER 30
------------------------
2003 2002
--------- --------
(IN THOUSANDS)
Net income, as reported $ 6,389 $ 5,832
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (136) (89)
-------- -------
Pro forma net income $ 6,253 $ 5,743
======== ========
Earnings per share:
Basic - as reported $ 1.01 $ .88
======== =======
Basic - pro forma $ .98 $ .87
======== =======
Diluted - as reported $ .95 $ .85
======== =======
Diluted - pro forma $ .93 $ .83
======== ========
9
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2003
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
September 30, 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 $ 28,292 $ 189 $ 255 $ 28,226 $ 66,304 $ 599 $ 652 66,251
Corporate debt
securities 19,765 420 960 19,225 22,724 131 1,467 21,388
FHLMC preferred stock 84,802 609 2,142 83,269 67,626 3,715 -- 71,341
FHLB and FRB stock 15,874 -- -- 15,874 17,949 -- -- 17,949
Equity securities 17,064 115 374 16,805 6,647 799 164 7,282
Mortgage-backed securities
FHLMC 52,548 470 345 52,673 67,523 700 81 68,142
FNMA 117,231 1,051 502 117,780 55,821 373 67 56,127
GNMA 63 8 -- 71 96 13 -- 109
Collateralized mortgage
obligations:
FHLMC 33 -- -- 33 2,960 18 -- 2,978
FNMA 666 5 -- 671 3,689 105 -- 3,794
Other -- -- -- -- 505 2 -- 507
-------- ---------- ---------- --------- --------- --------- -------- ---------
Total securities available
for Sale $ 336,338 $ 2,867 $ 4,578 $ 334,627 $ 311,844 $ 6,455 $ 2,431 $ 315,868
========= ========== ========== ========= ========== ========= ======== =========
10
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2003
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
Composition of loan portfolio September 30, 2003 December 31, 2002
- ----------------------------------------------------------------------------
(in thousands)
Commercial Portfolio:
Commercial loans $ 326,544 $ 315,537
Commercial leases 79,289 77,138
Consumer Portfolio:
Home equity 91,157 72,400
Consumer 5,688 7,724
Mortgage Portfolio:
Residential mortgages $ 85,377 $ 135,632
Construction 11,148 8,220
---------- --------
Total loans and leases, gross 599,203 616,651
Deferred loan costs 1,561 1,566
Allowance for credit losses (6,809) (6,922)
---------- ---------
Total loans and leases, net $ 593,955 $ 611,295
========== =========
NOTE 4 - DEPOSITS
Deposits are summarized as follows:
Composition of deposits September 30, 2003 December 31, 2002
- -------------------------------------------------------------------------------
(in thousands)
NOW $ 34,552 $ 31,505
Money market 209,182 143,565
Savings accounts 85,823 59,029
Non-interest-bearing demand 57,859 53,471
---------- ---------
Total demand, transaction, money
market and savings deposits 387,416 287,570
Certificates of deposits 236,572 231,550
--------- --------
Total deposits $ 623,988 $ 519,120
========== =========
11
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 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 September 30, 2003 For Nine-Months Ended September 30, 2003
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------- ----------- ------------- -------
(in thousands, except per share data) (in thousands, except per share data)
BASIC EPS
Net Income available to common
Shareholders $ 2,139 6,292 $ 0.34 $ 6,389 6,357 $ 1.01
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 413 (.02) -- 395 (.06)
------- ----- -------- ------- ----- --------
DILUTED EPS
Net income available to common
shareholders $ 2,139 6,705 $ 0.32 $ 6,389 6,752 $ 0.95
======= ===== ======== ======= ===== ========
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
----------- ------------- --------- ----------- ------------- ---------
(in thousands, except per share data) (in thousands, except per share data)
BASIC EPS
Net Income available to common
Shareholders $ 2,012 6,550 $ 0.31 $ 5,832 6,586 $0.88
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 357 (.02) -- 312 (.03)
------- ----- ------ ------- ----- -----
DILUTED EPS
Net income available to common
shareholders $ 2,012 6,907 $ 0.29 $ 5,832 6,898 $ 0.85
======= ===== ====== ======= ===== ======
NON-DILUTIVE OPTIONS. Patriot had 5,000 and 235,000 non-dilutive options at
September 30, 2003 and 2002, respectively.
12
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 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 and nine-month
period ended September 30, 2002, reflect only brokerage services. In January
2003, Patriot completed its acquisition of two companies and another acquisition
in September 2003, which is disclosed in Note 13 - 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 three acquisitions was $5,689,000 to
total assets and $472,000 and $1,337,000 to other income for the three-month and
nine-months periods ended 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 and nine-month periods
ended September 30, 2003 and 2002.
AT OR FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- ------- -------- ---------- ----------
(IN THOUSANDS)
Net interest income $ 6,512 $ 63 $ 32 $ 1,110 $ 7,717
Other income 1,898 350 552 295 3,095
Total net income 1,698 63 (64) 442 2,139
Total assets 920,153 3,685 6,617 80,666 1,011,121
Total loans and leases, net 514,666 3,648 -- 79,289 597,603
Intersegment interest income / (expense) 673 63 32 (768) --
AT OR FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- ------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 19,554 $ 219 $ 48 $ 3,098 $ 22,919
Other income 4,898 1,388 1,533 1,009 8,828
Total net income 4,770 459 (108) 1,268 6,389
Total assets 920,153 3,685 6,617 80,666 1,011,121
Total loans and leases, net 514,666 3,648 -- 79,289 597,603
Intersegment interest income / (expense) 2,199 219 48 (2,465) --
AT OR FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- ------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 6,633 $ 91 $ 3 $ 894 $ 7,621
Other income 1,249 418 53 265 1,985
Total net income 1,780 176 (30) 86 2,012
Total assets 899,122 6,032 720 81,105 986,979
Total loans and leases, net 550,021 5,999 -- 79,670 635,690
Intersegment interest income / (expense) 921 91 3 (1,015) --
AT OR FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- ------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 18,769 $ 267 $ 7 $ 2,620 $ 21,663
Other income 3,277 1,087 265 820 5,449
Total net income 4,747 442 2 641 5,832
Total assets 899,122 6,032 720 81,105 986,979
Total loans and leases, net 550,021 5,999 -- 79,670 635,690
Intersegment interest income / (expense) 2,817 267 7 (3,091) --
13
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2003
NOTE 7 - ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of non-amortizing and amortizing intangible assets is as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------------ ------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------------------------------------ ------------------------------------------
(IN THOUSANDS)
Non-amortizing intangible assets:
Goodwill $ 14,334 $ 2,198 $ 12,136 $ 10,975 $ 2,198 $ 8,777
Amortizing intangible assets:
Core deposit intangible 4,606 2,085 2,521 4,606 1,729 2,877
Customer lists 826 41 785 -- -- --
Originated mortgage servicing
rights 664 492 172 664 404 260
------------------------------------ -------------------------------------
Total amortizing intangible
assets 6,096 2,618 3,478 5,270 2,133 3,137
------------------------------------ -------------------------------------
Total intangible assets $ 20,430 $ 4,816 $ 15,614 $ 16,245 $ 4,331 $ 11,914
==================================== =====================================
Aggregate amortization expense for the three and nine-month periods ended
September 30 is as follows:
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Amortization expense........... $ 159 $ 207 $ 484 $ 556
The estimated amortization expense of intangible assets for each of the five
succeeding fiscal years is as follows:
ESTIMATED EXPENSE
FOR THE YEAR ENDED (IN THOUSANDS)
December 31, 2003.............. $ 671
December 31, 2004.............. 580
December 31, 2005.............. 520
December 31, 2006.............. 505
December 31, 2007.............. 498
The changes in the carrying amount of goodwill reported by segment are as
follows:
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
----------------------------------------------------
(IN THOUSANDS)
Balance as of January 1, 2002 6,909 -- -- 1,779 8,688
Goodwill acquired during the year -- -- -- 89 89
Impairement losses -- -- -- -- --
Balance as of December 31, 2002 6,909 -- -- 1,868 8,777
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
-----------------------------------------------------
(IN THOUSANDS)
Balance as of January 1, 2003 6,909 -- -- 1,868 8,777
Goodwill acquired during the year -- -- 3,324 35 3,359
Impairement losses -- -- -- -- --
Balance as of September 30, 2003 6,909 -- 3,324 1,903 12,136
14
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 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. 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.
NOTE 11 - AMENDMENTS OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including derivatives embedded
in other contracts and hedging activities. This Statement amends Statement No.
133 for decisions made by the FASB as part of its Derivatives Implementation
Group process. This Statement also amends Statement No. 133 to incorporate
clarifications of the definition of a derivative. This Statement is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003. The adoption of this Statement did not have an impact on
Patriot's earnings, financial condition, or equity.
NOTE 12 - ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Some of the provisions of
this Statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, "Elements of Financial Statements". The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. Effective for
financial instruments entered into or modified after May 31, 2003 and otherwise,
is effective at the beginning of the first interim period after June 15, 2003.
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)
September 30, 2003
NOTE 13 - 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 subsidiary of
Patriot Bank Corp. that provides a full range of wealth and investment
management services. The acquisition was 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.
Goodwill arising from the transaction totaled $1,209,000. An additional $343,000
of intangible assets acquired were assigned to customer lists subject to
amortization and having a 15-year weighted-average useful life.
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 subsidiary of Patriot
Bank Corp. The acquisition was 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. Goodwill arising
from the transaction totaled $1,431,000. An additional $442,000 of intangible
assets acquired were assigned to customer lists subject to amortization and
having a 15-year weighted-average useful life.
TYLER WEALTH COUNSELORS ACQUISITION. On September 5, 2003, Patriot completed the
acquisition of Tyler Wealth Counselors, a wealth management firm headquartered
in Chester County, Pennsylvania. Tyler Wealth Counselors is a registered
investment advisory firm, providing investment advisory and financial planning
services to individuals and families. Tyler Wealth Counselors was merged into
Patriot Advisors, a subsidiary of Patriot Bank Corp. that provides a full range
of wealth and investment management services. The acquisition was accounted for
as a purchase. Tyler Wealth Counselors was purchased for $650,000 in cash.
Supplemental pro forma information that discloses the results of operations for
Patriot Bank Corp. and its subsidiaries for the three and nine-month periods
ended September 30, 2003 to the same period in 2002 is provided below. The pro
forma information assumes the business combinations of Bonds & Paulus
Associates, Inc., Pension Benefits, Inc. and Tyler Wealth Counselors 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 NINE-MONTH PERIOD ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
------------------------ -----------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 17,489 $ 19,214 $ 53,258 $ 57,743
Net Income $ 2,166 $ 2,017 $ 6,425 $ 5,846
======== ======== ======== ========
Earnings per share - basic $ 0.34 $ 0.31 $ 1.01 $ 0.89
======== ======== ======== ========
Earnings per share - diluted $ 0.32 $ 0.29 $ 0.95 $ 0.85
======== ======== ======== ========
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 $.32 and net
income of $2,139,000 for the three-month period ended September 30, 2003
compared to diluted earnings per share of $.29 and net income of $2,012,000 for
the three month period ended September 30, 2002. Diluted earnings per share for
the nine-month period ending September 30, 2003 was $.95 and net income of
$6,389,000 compared with $.85 and net income of $5,832,000 for the nine-month
period ended September 30, 2002. Return on average equity was 13.53%, for the
three-month period ended September 30, 2003 compared to 12.06%, for the
three-month period ended September 30, 2002.
During the third quarter of 2003, Patriot's internal control process
uncovered what is believed to be a defalcation perpetrated by a mid-level
supervisory employee within Patriot's credit card operation. The defalcation
includes an alleged theft and the alleged falsification and destruction of
accounting records as well as the concealment of credit card delinquencies and
bankruptcies.
The total amount of the alleged theft is approximately $982,000. The
company maintains an insurance policy that management and its legal counsel
believe covers the majority of the alleged theft. Additionally, Patriot recorded
an after-tax charge of $367,000 related to the deductible on that insurance
policy and losses and operating expenses associated with the falsification and
destruction of accounting records. The alleged defalcation included the
concealment of approximately $475,000 of unsecured customer bankruptcies, which,
since they were not material to any prior period, were charged off during the
third quarter through Patriot's loan loss reserve. The alleged defalcation also
included the concealment of approximately $350,000 of delinquent credit card
receivables, which are now being subjected to normal collection procedures.
Additional charge-offs may result from these delinquent accounts.
NET INTEREST INCOME. Net interest income for the three and nine-month
periods ended September 30, 2003 was $7,717,000 and $22,919,000 compared to
$7,621,000 and $21,663,000 for the same periods in 2002. The increase in net
interest income was primarily due to the decreases in market rates paid on
Patriot's funding sources outpacing decreases in the rates earned on interest
earning assets. As a result, Patriot's net interest margin has expanded.
Patriot's net interest margin (net interest income as a percentage of average
interest-earning assets) for the three and nine-month periods ended September
30, 2003 was 3.63% and 3.60% compared to 3.50% and 3.29% for the same periods in
2002.
Interest on loans and leases was $10,455,000 and $32,227,000 for the
three and nine-month periods ended September 30, 2003 compared to $12,281,000
and $37,212,000 for the same periods in 2002. The average balance of loans was
$594,723,000 with an average yield of 7.22% for the nine-month period ended
September 30, 2003 compared to an average balance of $639,368,000 with an
average yield of 7.75% for the same period in 2002. The decrease in average
balance is primarily due to Patriot allowing residential mortgages to run-off,
offset by growth in consumer and commercial loans. During the nine-month period
ended September 30, 2003, the residential mortgage loan portfolio decreased
$47,327,000 while Patriot's other loan and lease portfolios increased
$29,879,000. 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 $3,839,000 and $12,088,000 for the three and
nine-month periods ended September 30, 2003 compared to $4,295,000 and
$13,076,000 for the same periods in 2002. The average balance of the investment
portfolio was $333,838,000 with an average yield of 5.65% for the nine-month
period ended September 30, 2003 compared to an average balance of $296,462,000
with an average yield of 6.50% 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 new
security purchases at lower yields as well as general decreases in market rates
on adjustable rate securities. Some of these security purchases have been tax
beneficial securities so even though Patriot's yield may be lower, Patriot's tax
expense is lower as well.
Interest on total deposits was $3,135,000 and $9,513,000 for the three
and nine-month periods ended September 30, 2003 compared to $3,341,000 and
$11,239,000 for the same periods in 2002. The average balance of total deposits
was $581,592,000 with an average cost of 2.16% for the nine-month period ended
September 30, 2003 compared to an average balance of $521,330,000 with an
average cost of 2.86% for the same period in 2002. The increase in average
balance is primarily the result of aggressive marketing of money market and
transaction-based deposit accounts through new and existing branches. 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.
17
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest on borrowings was $3,445,000 and $11,896,000 for the
three-month and nine-month periods ended September 30, 2003 compared to
$5,621,000 and $17,453,000 for the same periods in 2002. The average balance of
borrowings was $339,858,000 with an average cost of 4.62% for the nine-month
period ended September 30, 2003 compared to an average balance of $411,321,000
with a cost of 5.60% 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 cost of borrowings was the result of a decrease in
interest rates and the result of restructured borrowed funds with a higher cost
of funds. During the nine-month period of 2003, Patriot prepaid $55,000,0000 in
FHLB borrowings and restructured $72,000,000 in FHLB borrowings.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was
$900,000 and $2,900,000 for the three-month and nine-month periods ended
September 30, 2003 compared to $1,200,000 and $2,875,000 for the same period in
2002. Net charge-offs for the three and nine-month periods-ended September 30,
2003, were $1,433,000 and $3,013,000. The combination of these items represented
a decrease of $533,000 and $113,000 to the allowance for credit losses for the
three and nine-month periods-ended September 30, 2003, which totaled $6,809,000
at September 30, 2003. Patriot's total loans consist of four distinct
portfolios, each of which is monitored and analyzed separately. The allowance
for credit losses is based on management's ongoing evaluation of the loan
portfolios and reflects an amount considered by management to be its best
estimate of the amount necessary to absorb known and inherent losses in the
portfolios. 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 allowance
necessary to absorb credit losses and actual credit losses could differ.
RESIDENTIAL MORTGAGE LOANS. The residential mortgage loan portfolio is seasoned
because Patriot has been in the mortgage lending business for many years, but
has sold substantially all new mortgage originations in the past three 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
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.
During the third quarter Patriot uncovered an employee defalcation involving its
credit card portfolio. One of the components of the defalcation was the
manipulation of delinquency reports distributed to Patriot's collection
department. As such Patriot charged-off $475,000 in credit card balances during
the third quarter of 2003 and is in the process of working out $350,000 in
current delinquencies that may lead to additional charge-offs in the fourth
quarter. This elevated charge-off level, which management believes to be an
aberration, should not have a material effect on the required levels of reserve
for the total loan 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 from $3,893,000 to $2,933,000 at September 30, 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 that exhibit weakness.
18
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
COMMERCIAL LEASES. Patriot entered the commercial leasing business in 1998
principally through the acquisition of Keystone Financial Leasing (KFL).
Patriot's leasing portfolio has approximately a 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 its
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. Compared to December 31,
2002, the level of non-performing assets in the commercial leasing portfolio
decreased from $1,012,000 to $572,000 at September 30, 2003.
Patriot's percentage of loan loss reserves to total loans increased from 1.11%
at December 31, 2002, to 1.13% at September 30, 2003, which correlates to
Patriot's growth in its higher risk commercial loan portfolio. During the first
nine months of 2003, Patriot's overall loan and lease portfolios decreased from
$611,295,000 at December 31, 2002, to $593,955,000. The decrease in the loan
portfolios was attributed to the run-off of residential mortgage loans, which
was offset by growth in Patriot's other loan and lease portfolios. At September
30, 2003, Patriot had $9,639,000 in loans and leases, which were 30 days or more
delinquent and represented 1.59% of Patriot's total loan and lease portfolio
compared to $9,845,000 or 1.58% at December 31, 2002. Based on the growth in the
commercial loan portfolio and offset by credit quality improvement in the
leasing portfolio, management determined a provision of $2,900,000 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 September 30, 2003.
NON-INTEREST INCOME. Total non-interest income was $3,095,000 and
$8,828,000 for the three-month and nine-month periods ended September 30, 2003
compared to $1,985,000 and $5,449,000 for the same periods 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 $469,000
and $1,918,000 for the three and nine-month periods ended September 30, 2003
compared to $425,000 and $1,221,000 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 $552,000 and
$1,532,000 in non-interest income during the three and nine-month periods ended
September 30, 2003 compared to $53,000 and $265,000 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 as well as the acquistion of Tyler
Wealth Counselors, which occurred during the third quarter of 2003.
Non-Interest income from service fees on deposits was $898,000 and $2,678,000
for the three and nine-month periods ended September 30, 2003 compared to
$709,000 and $1,957,000 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 nine-month period of 2003, Patriot prepaid $55,000,0000 in FHLB
borrowings. During the first and second quarters in 2003, Patriot recorded a
$588,000 and $136,000 loss, respectively, representing the prepayment penalties
for repaying these advances early. In conjunction with these transactions,
Patriot sold $30,859,000 of securities and recognized $556,000 and $376,000 of
investment gains during the first and second quarters in 2003, respectively.
Overall, the combination of these transactions allowed Patriot to improve its
interest rate risk profile.
NON-INTEREST EXPENSE. Total non-interest expense was $7,289,000 and
$20,949,000 for the three and nine-month periods ended September 30, 2003
compared to $5,901,000 and $16,721,000 for the same periods in 2002. Of this
increase in non-interest expense, $1,036,000 and $3,041,000 for the three and
nine-month periods in 2003, was primarily due to higher compensation costs
associated with increases in staffing. Patriot's three acquisitions during the
first nine months of 2003 as well as service requirements associated with branch
deposit and commercial lending growth caused the increases in staffing. Other
non-interest expenses such as occupancy and equipment, advertising, deposit
processing and office supplies and postage were also higher during the three and
nine-month
19
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
periods in 2003 as compared to the same periods in 2002, which can be attributed
to normal recurring expenses associated with Patriot's three acquisitions during
2003 and the addition of 2 new branches in 2003.
INCOME TAX PROVISION. The income tax provision was $484,000 and
$1,509,000 for the three-month and nine-month periods ended September 30, 2003
compared to $493,000 and $1,684,000 for the same periods in 2002. The effective
tax rate was 18.45% and 19.11% for the three-month and nine-month periods ended
September 30, 2003 compared to 19.68% and 22.41% for the same periods in 2002.
The decrease in the effective tax rate was due to greater tax exempt income 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 September 30, 2003, Patriot's total loan portfolio
was $593,955,000, 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 and
consumer lending relationships.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at September 30,
2003 were $19,132,000 compared to $16,839,000 at December 31, 2002. The increase
in cash balances was primarily due to 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 September 30, 2003
were $334,627,000 compared to $315,868,000 at December 31, 2002. The increase in
investment and mortgage-backed securities was primarily due to the purchase of
$154,361,000 of available for sale securities offset by investment amortization
and maturities. The funding source for these purchases was principally
residential mortgage loan prepayments.
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 September 30, 2003 were $623,988,000 compared to
$519,120,000 at December 31, 2002. Of this increase, $99,846,000 was related to
an increase in core deposits and $5,022,000 was related to growth in
certificates of 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 September 30, 2003 were $249,455,000
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 nine-month period in 2003, Patriot prepaid $55,000,0000 in FHLB
borrowings and restructured $72,000,000 in FHLB borrowings, which allowed
Patriot to improve its interest rate risk profile.
On June 20, 2003, the Company entered into three pay variable receive
fixed interest rate swaps to hedge changes in the fair value of designated fixed
rate FHLB advances. The notional amount of these contracts totals $72 million
and mature on May 29, 2008. The company has agreed to pay 3 month LIBOR plus a
spread, with quarterly reset, and to receive a fixed rate equal to the rate paid
on the individual FHLB advances.
Since the terms of interest rate swaps mirror those of the hedged
items, FHLB advances, the Company has adopted the short cut method, as
prescribed in SFAS No. 133, to account for these transactions. Therefore, no
hedge ineffectiveness was recognized in earnings related to these fair value
hedges.
20
PATRIOT BANK CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 September 30, 2003 were $46,270,000 compared to $14,210,000 at
December 31, 2002. The increase in repurchase agreements was primarily due to
the addition of $32,896,000 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 nine months
of 2003.
OTHER LIABILITIES. Other Liabilities at September 30, 2003 were
$6,220,000 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 $63,471,000 at
September 30, 2003 compared to $65,945,000 at December 31, 2002. The decrease
was primarily the result of a decrease in accumulated other comprehensive
income, cash dividends paid to shareholders, and the repurchase of shares of
Patriot Bank Corp. common stock offset by net income.
21
PATRIOT BANK CORP. AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
The allowance for credit losses on loans and leases 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 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. 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 credit
losses on loans and leases 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 credit losses and actual credit losses could differ.
Patriot's current judgement is that the allowance for credit losses on loans and
leases is appropriate at September 30, 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 September 30, 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 less estimated disposal costs. Any excess at the date of
transfer of the recorded investment in the loan over the fair market value less
estimated disposal costs is charged against Patriot's allowance for credit
losses on loans and leases.
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 less estimated disposal costs. Any excess at the date of transfer of
the recorded investment in the lease over the fair market value less estimated
disposal costs 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 is
appropriate at September 30, 2003.
22
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 nine months of 2003, $130,526,000 of liquidity was provided
from the repayment and sale of securities. Additional liquidity of $104,868,000
was provided by deposit growth, $32,060,000 by short-term repurchase agreements
and $12,562,000 from the repayment of loans. These funds were used to purchase
$154,361,000 of investment securities, repay $117,731,000 of borrowings and fund
$11,007,000 and $16,721,000 of commercial and consumer loans, net of
prepayments, respectively.
At September 30, 2003, Patriot had outstanding loan commitments of $68,246,000.
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 September 30, 2003, totaled $140,151,000. 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 $25,841,000.
CAPITAL RESOURCES. Federal Reserve 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 Federal Reserve 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 September 30, 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 September 30, 2003:
To Be To Be
Actual Adequately Capitalized Well Capitalized
------ ---------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2003
(dollars in thousands)
Total capital (to risk weighted assets)
Patriot Bank Corp. $ 77,251 11.74% $ 52,645 8% $ 65,806 10%
Patriot Bank 76,441 11.63% 52,591 8% 65,739 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 70,442 10.70% 26,322 4% 39,483 6%
Patriot Bank 69,632 10.59% 26,296 4% 39,444 6%
Tier I capital (to average assets)
Patriot Bank Corp. 70,442 7.18% 39,362 4% 49,202 5%
Patriot Bank 69,632 7.08% 39,360 4% 49,200 5%
23
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 September 30, 2004, based
upon the assets, liabilities and off-balance sheet financial instruments in
existence at September 30, 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 September 30, 2004
resulting from changes in interest rates.
Rate ramp to interest rates % change
- --------------------------- --------
+2% (2.00%)
-2% (1.49%)
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 September 30, 2003, resulting from shocks to interest rates.
Percent change EVE Equity/
Rate shock from base EVE Assets
- ---------- --------- ----------
+2% 1.14% 13.71%
+1% 1.62% 13.47%
Base 12.95%
-1% -10.55% 11.40%
-2% -30.30% 8.75%
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
24
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, as well as the impact of off balance sheet
instruments maturing or repricing within that time period .
The following table summarizes the amount of interest-earning assets,
interest-bearing liabilities, and off-balance sheet instruments outstanding at
September 30, 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 September 30, 2003:
0-90 91-180 181-365
Days Days Days
------ ------ -------
GAP to Total Assets -1.11% 2.62% 5.33%
Cumulative GAP to Total Assets -1.11% 1.51% 6.83%
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.
25
PATRIOT BANK CORP. AND SUBSIDIARIES
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 September 30, 2003,
are effective.
(b) Changes in Internal Controls. During the third quarter of 2003,
Patriot's internal control process uncovered what is believed to be a
defalcation perpetrated by a mid-level supervisory employee within
Patriot's credit card operation. The defalcation includes an alleged
theft and the alleged falsification and destruction of accounting
records as well as the concealment of credit card delinquencies and
bankruptcies. The total amount of the alleged theft is approximately
$982,000. The company maintains an insurance policy which management
believes covers the majority of the alleged theft, and as a result,
Patriot has recorded an after-tax charge of $367,000 related to the
deductible on that insurance policy and losses and operating expenses
associated with the falsification and destruction of accounting
records. The alleged defalcation included the concealment of
approximately $475,000 of unsecured customer bankruptcies, which, since
they were not material to any prior period, were charged off during the
third quarter through Patriot's loan loss reserve. The alleged
defalcation also included the concealment of approximately $350,000 of
delinquent credit card receivables, which are now being subjected to
normal collection procedures. Additional charge-offs may result from
these delinquent accounts.
Subsequent to the discovery of the alleged defalcation, Management has
implemented staffing changes designed to improve the training of the
individuals involved in the daily operations. Procedural changes were
also implemented to enhance the segregation of duties, which strengthen
the review, authorization and reconciliation process so that the
probability of employee defalcations occurring in the future is
reduced. The Chief Executive Officer and Chief Financial Officer
believes that the corrective actions taken should be adequate to remedy
the aforementioned control inadequacies.
Except as discussed above, 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 of those controls.
26
PATRIOT BANK CORP. AND SUBSIDIARIES
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 31.1 Section 302 CEO Certification
- Exhibit 31.2 Section 302 CFO Certification
- Exhibit 32.1 Section 906 CEO Certification
- Exhibit 32.2 Section 906 CFO Certification
(b) Reports filed on Form 8K
-- On July 22, 2003, the registrant filed a Form 8-K
announcing earnings for the second quarter of 2003.
-- On July 25, 2003, the registrant filed a Form 8-K reporting
the declaration of a cash dividend of 13 cents per share.
-- On September 5, 2003, the registrant filed a Form 8-K
reporting the acquisition of Tyler Wealth Counselors, Inc.
27
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 12, 2003 /s/ Richard A. Elko
-------------------------------------
Richard A. Elko
President and Chief Executive Officer
Date November 12, 2003 /s/ James G. Blume
-------------------------------------
James G. Blume
Senior Vice President and
Chief Financial Officer
28