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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26744
PATRIOT BANK CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 232820537
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
High and Hanover Streets, Pottstown, Pennsylvania 19464-9963
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(Address of principal executive offices) (Zip Code)
(610) 323-1500
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(Registrant's telephone number, including area code)
Not Applicable
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(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: 6,281,398 shares of common
stock were outstanding as of November 14, 2001.
1
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets at September 30, 2001
and December 31, 2000
Consolidated Statements of Income for the Three-Month and Nine-month
Periods ended September 30, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the
Periods ended September 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows for the Nine-month
Periods ended September 30, 2001 and 2000
Consolidated Statements of Comprehensive Income for the
Three-Month and Nine-month Periods ended September 30, 2001
and 2000
Notes to Consolidated Financial Statements
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
Items 1 through 6
SIGNATURES
2
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
- --------------------------------------------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Cash and due from banks $ 18,053 $ 2,910
Interest-earning deposits in other financial institutions 1,591 24,166
----------- -----------
Total cash and cash equivalents 19,644 27,076
Investment and mortgage-backed securities available for sale 257,663 84,889
Investment and mortgage-backed securities held to maturity
(market value of $54,778 and $299,685 at September 30, 2001
and December 31, 2000, respectively) 54,841 302,489
Loans held for sale 2,111 8,564
Loans and leases receivable, net of allowance for credit loss of $6,082 and $5,839
at September 30, 2001 and December 31, 2000, respectively 649,288 650,640
Premises and equipment, net 6,700 7,574
Accrued interest receivable 4,189 5,125
Real estate and other property owned 292 62
Cash surrender value life insurance 17,070 16,483
Goodwill 8,999 9,426
Core Deposit Intangible 3,484 3,848
Other assets 7,183 8,729
----------- -----------
Total assets $ 1,031,464 $ 1,124,905
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 536,886 $ 651,958
FHLB advances 405,529 317,186
Securities sold under repurchase agreements -- 80,651
Trust preferred debt securities 19,000 19,000
Advances from borrowers for taxes and insurance 2,541 3,893
Other liabilities 5,356 417
----------- -----------
Total liabilities 969,312 1.073,105
----------- -----------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
Issued at September 30, 2001 and December 31, 2000, respectively -- --
Common stock, no par value, 10,000,000 shares authorized, 6,555,436
issued at September 30, 2001 and December 31, 2000 -- --
Paid in capital 58,209 58,174
Common stock acquired by ESOP, 340,652 and 359,934 shares at amortized cost at
September 30, 2001 and December 31, 2000, respectively (1,864) (1,999)
Common stock acquired by MRP, 18,537 and 57,195 shares at amortized
cost at September 30, 2001 and December 31, 2000, respectively (75) (241)
Retained earnings 7,409 4,833
Treasury stock, 276,304 and 353,660 at cost at September 30, 2001
and December 31, 2000, respectively (3,482) (4,043)
Accumulated other comprehensive income (loss) 1,955 (4,924)
----------- -----------
Total stockholders' equity 62,152 51,800
----------- -----------
Total liabilities and stockholders' equity $ 1,031,464 $ 1,124,905
=========== ===========
The accompanying notes are an integral part of these statements.
3
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
Three-Month Period Ended Nine-Month Period Ended
September 30,
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2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
INTEREST INCOME
Interest-earning deposits $ 71 $ 64 $ 489 $ 293
Investment and mortgage-backed securities 4,931 6,992 16,595 21,384
Loans and leases 13,505 14,474 41,230 41,596
-------- -------- -------- --------
Total interest income 18,507 21,530 58,314 63,273
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 6,330 8,578 22,512 22,056
Short-term borrowings 808 4,507 1,531 13,028
Long -term borrowings 5,382 3,077 16,947 10,621
-------- -------- -------- --------
Total interest expense 12,520 16,162 40,990 45,705
-------- -------- -------- --------
Net interest income before provision for
Credit losses 5,987 5,368 17,324 17,568
Provision for credit losses (500) (225) (1,450) (825)
-------- -------- -------- --------
Net in1terest income after provision for
Credit losses 5,487 5,143 15,874 16,473
-------- -------- -------- --------
NON-INTEREST INCOME
Service fees, charges and other operating income 1,502 1,318 4,139 3,737
Gain (loss) on sale of real estate acquired through
Foreclosure 2 (4) (14) (7)
Gain on sale of investment and mortgage-backed
Securities available for sale -- -- 503 1
Mortgage banking gains 487 962 1,313 1,832
-------- -------- -------- --------
Total non-interest income 1,991 2,276 5,941 5,563
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,480 2,803 7,102 8,154
Office occupancy and equipment 1,107 1,246 3,412 3,975
Professional services 260 371 615 851
Advertising 275 158 608 461
Deposit processing 161 174 467 493
Goodwill amortization 183 195 547 502
Core Deposit Intangible 121 121 364 364
Office supplies & postage 159 173 449 579
MAC expense 123 165 349 461
Other operating expense 402 498 1,421 1,370
-------- -------- -------- --------
Total non-interest expense 5,271 5,904 15,334 17,210
-------- -------- -------- --------
Income before taxes and cumulative effect of
Change in accounting principle 2,207 1,515 6,481 5,096
Income taxes 629 287 1,822 1,074
-------- -------- -------- --------
Income before cumulative effect of change
In accounting principle 1,578 1,228 4,659 4,022
Cumulative effect of change in accounting principle, net of
($105,000) in income tax -- -- (204) --
-------- -------- -------- --------
Net income $ 1,578 $ 1,228 $ 4,455 $ 4,022
======== ======== ======== ========
Basic Earnings Per Share:
Income before cumulative effect of change in accounting principle $ 0.27 $ 0.21 $ 0.79 $ 0.69
Cumulative effective of change in accounting principle -- -- (.03) --
-------- -------- -------- --------
Net Income $ 0.27 $ 0.21 $ 0.76 $ 0.69
======== ======== ======== ========
Dilutive Earnings Per Share:
Income before cumulative effect of change in accounting principle $ 0.26 $ 0.21 $ 0.78 $ 0.68
Cumulative effective of change in accounting principle -- -- (.03) --
-------- -------- -------- --------
Net Income $ 0.26 $ 0.21 $ 0.75 $ 0.68
======== ======== ======== ========
Dividends Per Share $ .09 $ .09 $ .28 $ .27
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
4
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, unaudited)
Accumulated
Other
Number of Paid-in Retained Treasury Comprehensive
Shares Capital ESOP MRP Earnings Stock (Loss) Income Total
--------- ------- -------- ----- -------- -------- ------------- --------
BALANCE AT JANUARY 1, 2000 5,691 $58,117 $(2,141) $(638) $ 4,737 $(4,172) $(6,135) $ 49,768
Common stock retired by MRP (20) -- -- (20)
Common stock forfeited by
MRP -- -- -- 20 -- -- -- 20
Release and amortization
Of MRP 52 3 -- 377 -- -- -- 380
Release of ESOP shares 25 74 142 -- -- -- -- 216
Purchase ESPP shares 16 -- -- -- -- 129 -- 129
Change in unrealized losses
On securities available
For sale, net of taxes -- -- -- -- -- -- 1,211 1,211
Net income -- -- -- -- 2,009 -- -- 2,009
Cash dividends paid -- -- -- -- (1,913) -- -- (1,913)
------ ------- ------- ----- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 2000 5,784 $58,174 $(1,999) $(241) $ 4,833 $(4,043) $(4,924) $ 51,800
------ ------- ------- ----- ------- ------- ------- --------
Release and amortization
Of MRP 39 -- -- 166 -- -- -- 166
Release of ESOP shares 19 35 135 -- -- -- -- 170
Purchase ESPP shares 5 -- -- -- -- 36 -- 36
Stock options exercised 73 -- -- -- -- 525 -- 525
Unrealized gains associated
with change in accounting
principle -- -- -- -- -- -- 3,000 3,000
Change in unrealized losses
on securities available
for sale, net of taxes -- -- -- -- -- -- 3,879 3,879
Net income -- -- -- -- 4,455 -- -- 4,455
Cash dividends paid -- -- -- -- (1,879) -- -- (1,879)
------ ------- ------- ----- ------- ------- ------- --------
BALANCE AT SEPTEMBER 30, 2001 5,920 $58,209 $(1,864) $ (75) $ 7,409 $(3,482) $ 1,955 $ 62,152
------ ------- ------- ----- ------- ------- ------- --------
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-Months Period Ended September 30,
--------------------------------------
2001 2000
---- ----
Operating activities
Net Income $ 4,455 $ 4,022
Adjustments to reconcile net income to net cash (used in) provided by
operating activities
Amortization and accretion of
Deferred loan origination fees (45) (353)
Premiums and discounts (1,483) (2,198)
MRP shares 166 279
Goodwill and Core Deposit Intangible 911 866
Provision for credit losses 1,450 825
Release of ESOP shares 170 87
(Gain) on sale of securities available for sale (194) (1)
Loss on sale of real estate owned 14 7
Recoveries on real estate owned 39 16
Depreciation of premises and equipment 1,191 1,343
Mortgage loans originated for sale (53,947) (109,617)
Mortgage loans sold 60,400 145,643
(Increase) decrease in deferred income taxes (2,377) 715
(Increase) in cash surrender value of life insurance (587) (595)
Increase (decrease) in accrued interest receivable 936 (68)
Decrease in other assets 288 3,560
Increase (decrease) in other liabilities 4,819 (2,776)
--------- ---------
Net cash provided by operating activities 16,206 41,755
--------- ---------
Investing activities
Loan originations and principal payments on loans, net (1,590) (66,239)
Proceeds from the sale of securities - available for sale 49,830 --
Proceeds from the maturity of securities - available for sale 39,357 2,619
Proceeds from the maturity of securities - held to maturity 27,178 35,724
Purchase of securities - available for sale (29,149) (1,118)
Proceeds from sale of real estate owned 1,341 291
Purchase of premises and equipment (333) (1,523)
Proceeds from sale of premises and equipment 16 2,431
--------- ---------
Net cash provided by (used in) investing activities 86,650 (27,815)
--------- ---------
Financing activities
Net (decrease) increase in deposits (115,310) 139,312
Repayment of short term borrowings (22,651) (202,234)
Repayment of long term borrowings -- (1,902)
Proceeds from long term borrowings 30,343 70,000
(Decrease) in advances from
Borrowers for taxes and insurance (1,352) (1,709)
Cash paid for dividends (1,879) (1,640)
Purchase of Treasury Stock 561 --
--------- ---------
Net cash (used in) provided by financing activities (110,288) 1,827
--------- ---------
Net (decrease) increase in cash and cash equivalents (7,432) 15,767
Cash and cash equivalents at beginning of year 27,076 8,161
--------- ---------
Cash and cash equivalents at of the nine month period $ 19,644 $ 23,928
========= =========
Supplemental Disclosures
Cash paid for interest on deposits $ 22,275 $ 21,553
========= =========
Cash paid for income taxes $ 1,194 $ 1,254
========= =========
Transfers from loans and leases to real estate owned $ 1,533 $ 191
========= =========
Transfer securities from available for sale to held to maturity $ 220,471 $ --
========= =========
The accompanying notes are an integral part of these statements.
6
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three-Month Period Ended Nine-Month Period Ended
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September 30,
- -------------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Net income $1,578 $1,228 $ 4,455 $4,022
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized gains associated with change in accounting
principle -- -- 3,000 --
Unrealized holding gains arising during the period 3,704 758 4,007 59
Less: Reclassification adjustment for gains included
in net income -- -- (128) --
------ ------ ------- ------
Comprehensive income $5,282 $1,986 $11,334 $4,081
====== ====== ======= ======
7
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2001
Note 1 - General
The accompanying financial statements of Patriot Bank Corp. and Subsidiaries
("Patriot") include the accounts of the parent company, Patriot Bank Corp. and
its wholly-owned subsidiaries, Patriot Bank and Patriot Investment Company. All
material intercompany balances and transactions have been eliminated in
consolidation. These financial statements have been prepared in accordance with
the instructions for Form 10-Q and therefore do not include certain information
or footnotes necessary for the presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. However, in the opinion of management, the consolidated financial
statements reflect all adjustments (which consist of normal recurring accruals)
necessary for a fair presentation of the results for the unaudited periods. The
results of operations for the three-month and nine-month periods ended September
30, 2001 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,
2000.
8
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2001
Note 2 - Investment And Mortgage-Backed Securities
The amortized cost and estimated fair value of investment and
mortgage-backed securities are as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 29,035 $ 25 $ 712 $ 28,348 $ -- $ -- $ -- $ --
Corporate debt securities 16,232 27 1,881 14,378 17,084 15 1,992 15,107
FHLMC Preferred Stock 34,978 2,659 -- 37,637 44,973 1,915 -- 46,888
FHLB Stock 21,084 -- -- 21,084 16,609 -- -- 16,609
Equity securities 5,850 27 340 5,537 6,295 9 639 5,665
Mortgage-backed securities
FHLMC 5,425 92 -- 5,517 613 7 -- 620
FNMA 48,182 501 4 48,679 -- -- -- --
GNMA 122 11 -- 133 -- -- -- --
Collateralized Mortgage Obligations:
FHLMC 48,161 798 82 48,877 -- -- -- --
FNMA 41,913 860 -- 42,773 -- -- -- --
Other 4,625 75 -- 4,700 -- -- -- --
-------- ------ ------ -------- -------- ------ ------- --------
Total securities available for
Sale $255,607 $5,075 $3,019 $257,663 $ 85,574 $1,946 $ 2,631 $ 84,889
======== ====== ====== ======== ======== ====== ======= ========
HELD TO MATURITY:
Investment securities
U.S. Treasury and
Government agency
Securities $ 18,774 $ 644 $ 109 $ 19,309 $ 76,545 $4,144 $ 7,131 $ 73,558
Corporate debt securities 1,000 12 -- 1,012 1,001 -- 1 1,000
Mortgage-backed securities
FHLMC 1,780 27 36 1,771 3,446 27 47 3,426
FNMA 1,773 84 53 1,804 48,462 2,605 1,183 49,884
GNMA 2,512 63 66 2,509 3,573 38 83 3,528
Colateralized mortgage
Obligations
FHLMC 19,141 424 917 18,648 90,920 1,240 2,238 89,922
Fannie Mae 9,861 58 194 9,725 70,043 922 1,198 69,767
Other -- -- -- -- 6,196 14 35 6,175
CMBS -- -- -- -- 2,303 122 -- 2,425
-------- ------ ------ -------- -------- ------ ------- --------
Total securities held to maturity $ 54,841 $1,312 $1,375 $ 54,778 $302,489 $9,112 $11,916 $299,685
======== ====== ====== ======== ======== ====== ======= ========
9
Note 3 - Loans Receivable
Loans receivable are summarized as follows:
September 30, December 31,
- ---------------------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------
(in thousands)
Mortgage loan portfolio
Secured by real estate $ 224,764 $ 253,213
Construction 4,652 10,779
Consumer loan portfolio
Home equity 67,108 64,733
Consumer 8,972 8,553
Comercial loan portfolio
Commercial 275,989 252,837
Commercial leases 73,218 67,094
--------- ---------
Total loans receivable 654,703 657,209
Less deferred loan origination costs (fees) 667 (730)
Allowance for credit losses (6,082) (5,839)
--------- ---------
Total loans receivable, net $ 649,288 $ 650,640
========= =========
Note 4 - Deposits
Deposits are summarized as follows:
September 30, December 31,
- ---------------------------------------------------------------------------------------------
Deposit type 2001 2000
- ---------------------------------------------------------------------------------------------
(in thousands)
NOW $ 31,765 $ 23,163
Money market 136,883 110,092
Savings accounts 36,392 29,051
Non-interest-bearing demand 34,869 41,309
--------- ---------
Total demand, transaction, money
market and savings deposits 239,909 203,615
Certificates of deposits 296,977 448,343
--------- ---------
Total deposits $ 536,886 $ 651,958
========= =========
10
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, 2001 For Nine-Months Ended September 30, 2001
----------------------------------------- ----------------------------------------
Income Avg Shares Per-Share Income Avg Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Net Income available to common
Stockholders $1,578 5,902 $0.27 $4,455 5,867 $0.76
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 180 (.01) -- 112 (.01)
------ ----- ----- ------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed conversions $1,578 6,082 $0.26 $4,455 5,979 $0.75
====== ===== ===== ====== ===== =====
For Three-Months Ended September 30, 2000 For Nine-months Ended September 30, 2000
----------------------------------------- ----------------------------------------
Income Avg Shares Per-Share Income Avg Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Net Income available to common
Stockholders $1,228 5,825 $0.21 $4,022 5,815 $0.69
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 24 -- -- 138 (.01)
------ ----- ----- ------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed conversions $1,228 5,849 $0.21 $4,022 5,953 $0.68
====== ===== ===== ====== ===== =====
11
Note 6 - Segment Reporting
The Company has two reportable segments: Patriot Bank (PB), and Patriot
Commercial Leasing Corporation (PCLC). Patriot Bank operates a community banking
network with eighteen community banking offices providing deposits and loan
services to customers. Patriot Commercial Leasing Corporation is a small ticket
leasing company headquartered in Pottstown, PA.
The following table highlights income statement and balance sheet
information for each of the segments at or for the three-month and nine-month
periods ending September 30, 2001 and 2000 (in thousands).
For the three-month period ended September 30, 2001 For the nine-month period ended September 30, 2001
--------------------------------------------------- --------------------------------------------------
PB PCLC Total PB PCLC Total
-- ---- ----- -- ---- -----
Net interest income $ 5,424 $ 563 $ 5,987 $ 15,584 $ 1,740 $ 17,324
Other income 1,664 327 1,991 4,871 1,070 5,941
Total net income 1,403 175 1,578 3,898 557 4,455
Total assets 957,367 74,097 1,031,464 957,367 74,097 1,031,464
Total loans and leases, 581,486 73,217 654,703 581,486 73,217 654,703
gross
For the three-month period ended September 30, 2000 For the nine-month period ended September 30, 2000
--------------------------------------------------- --------------------------------------------------
PB PCLC Total PB PCLC Total
-- ---- ----- -- ---- -----
Net interest income $ 4,872 $ 496 $ 5,368 $ 16,484 $ 1,084 $ 17,568
Other income 1,981 295 2,276 4,717 846 5,563
Total net income 1,087 141 1,228 3,599 423 4,022
Total assets 1,067,684 65,764 1,133,448 1,067,684 65,764 1,133,448
Total loans and leases, 572,200 67,019 639,219 572,200 67,019 639,219
gross
12
Note 7 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement as amended by SFAS No. 137
in June 1999 and SFAS No. 138 in June 2000 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of certain exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment; (b) a hedge of
the exposure to variable cash flows of a forecasted transaction; or (c) a hedge
of foreign currency exposure. SFAS No. 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier adoption
is permitted. Patriot adopted SFAS 133 on January 1, 2001. At the time of
adoption, Patriot reclassified approximately $220,471,000 of fixed rate mortgage
backed securities, CMO's and agency securities from held to maturity to
available for sale and equity resulting in a net of tax increase of
approximately $3 million in accumulated other comprehensive income. Patriot
typically has not used derivative instruments and currently holds no positions
that had further significant impact upon the adoption of SFAS 133 on earnings,
financial condition or equity.
Note 8 - Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In September 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement supercedes and replaces the guidance in Statement 125. It revises
the standards of accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, although it carries over
most of Statement 125's provisions without reconsideration. The Statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001 and for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is to be applied prospectively with certain exceptions. Other
than those exceptions, earlier or retroactive application of its accounting
provisions is not permitted. There was no impact from the adoption of this
statement on Patriot's earnings, financial condition, or equity.
Note 9 - Business Combinations
In June 2001, the FASB issued Statement No. 141, "Business Combinations." The
Statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No.
38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of the Statement are to be accounted for
using the purchase method, thereby eliminating the use of the pooling of
interest method.
The provisions of the Statement apply to all business combinations initiated
after June 30, 2001. The Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. Historically, Patriot has not used the pooling of
interest method and therefore, expects no impact on earnings, financial
condition, or equity upon adoption of Statement No. 141.
Note 10 - Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets." The Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. The Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements, including requirements for periodic impairment evaluation.
The provisions of the Statement are required to be applied starting with fiscal
years beginning after December 15, 2001, except that goodwill and intangible
assets acquired after June 30, 2001, will be subject immediately to the
non-amortization and amortization provisions of the Statement. Early application
is permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not previously been
issued. The Statement is required to be applied at the beginning of an entity's
fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. Upon adoption of Statement
No. 142 in January 2002, the anticipated effect on Patriot's earnings as a
result of the elimination of goodwill amortization expense is $800,000 after-tax
for fiscal year 2002. As required by SFAS No. 141, Patriot will perform an
impairment test upon adoption. At this time, Patriot doesn't anticipate any
impairment.
13
Note 11 - 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. This Statement amends FASB Statement No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies, and it applies to
all entities. It is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Earlier application is encouraged. The Bank does
not expect the adoption of the Statement to have an impact on it's earnings,
financial condition, or equity.
Note 12 - Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. This Statement supersedes the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, this Statement retains the
requirement of Opinion 30 to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, by abandonment, or in distribution to
owners) or is classified as held for sale. This Statement also amends ARB No.
51, Consolidated Financial Statements, to eliminate the exception to
consolidation for a temporarily controlled subsidiary. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with earlier application encouraged. The provisions of this Statement
generally are to be applied prospectively. The Bank does not expect the adoption
of the Statement to have an impact on it's earnings, financial condition, or
equity.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information, this discussion and analysis of
Patriot Bank Corp. and Subsidiaries (Patriot) contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to those
discussed in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. Patriot undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
GENERAL. Patriot reported diluted earnings per share of $.26 and net income
of $1,578,000 for the three-month period ended September 30, 2001 compared to
diluted earnings per share of $.21 and net income of $1,228,000 for the three
month period ended September 30, 2000. Diluted earnings per share for the
nine-month period ending September 30, 2001 was $.75 and net income of
$4,455,000 compared with $.68 and net income of $4,022,000 for the nine-month
period ended September 30, 2000. Return on average equity was 10.67%, for the
three-month period ended September 30, 2001 compared to 9.48%, for the
three-month period ended September 30, 2000.
NET INTEREST INCOME. Net interest income for the three-month and nine-month
periods ended September 30, 2001 was $5,987,000 and $17,324,000 compared to
$5,368,000 and $17,568,000 for the same periods in 2000. Patriot's net interest
margin (net interest income as a percentage of average interest-earning assets)
was 2.40% for the nine-month period ended September 30, 2001 compared to 2.28%
for the same period in 2000. The improvement of Patriot's interest margin spread
to 2.61% is primarily associated with decreases in the cost of funds associated
with growth of Patriot's core deposit accounts, continuing growth in the higher
yielding commercial loan and lease portfolios, coupled with the reductions in
investments and mortgage loans and associated wholesale funding.
Interest on loans and leases was $13,505,000 and $41,230,000 for the
three-month and nine-month periods ended September 30, 2001 compared to
$14,474,000 and $41,596,000 for the same periods in 2000. The average balance of
loans was $655,172,000 with an average yield of 8.37% for the nine-month period
ended September 30, 2001 compared to an average balance of $669,394,000 with an
average yield of 8.28% for the same period in 2000. The decrease in interest on
loans is the result of Patriot's two year plan to allow mortgages to run-off,
offset by aggressive marketing of commercial loans and leases. The increase in
average yield is primarily a result of a greater volume of higher yielding
commerical loans and leases.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $4,931,000 and $16,595,000 for the three-month and nine-month
periods ended September 30, 2001 compared to $6,992,000 and $21,384,000 for the
same periods in 2000. The average balance of the investment portfolio was
$342,947,000 with an average yield of 6.81% for the nine-month period ended
September 30, 2001 compared to an average balance of $418,547,000 with an
average yield of 7.15% for the same period in 2000. The decrease in average
balance is primarily due to Patriot allowing the investment portfolio to
amortize down so it can be replaced with commercial assets. The decrease in
average yield is related to general decreases in market rates on adjustable
securities.
Interest on total deposits was $6,330,000 and $22,512,000 for the
three-month and nine-month periods ended September 30, 2001 compared to
$8,578,000 and $22,056,000 for the same periods in 2000. The average balance of
total deposits was $587,874,000 with an average cost of 5.12% for the nine-month
period ended September 30, 2001 compared to an average balance $586,112,000 with
an average cost of 5.01% for the same period in 2000. The increase in average
balance is primarily the result of aggressive marketing of certificates of
deposit, money market and other transaction-based deposit accounts, offset by a
decrease in Patriot's jumbo deposit program. The increase in average yield was
the result of general increases in interest rates and growth in the jumbo
deposit program in 2000. Patriot has shifted their focus in 2001 from growing
jumbo deposits by replacing them with lower cost of borrowings as they run-off.
Interest on borrowings was $6,190,000 and $18,478,000 for the three-month
and nine-month periods ended September 30, 2001 compared to $7,584,000 and
$23,649,000 for the same periods in 2000. The average balance of borrowings was
$419,212,000 with an average cost of 5.82% for the nine-month period ended
September 30, 2001 compared to an average balance of $519,541,000 with an
average cost of 5.99% for the same period in 2000. The decrease in average
balance is primarily due to borrowings being replaced by proceeds received on
investment sales, run-off of mortgage loan portfolio and growth in Patriot's
deposit based products offset by growth in Patriot's commercial loan and lease
portfolios. The decrease in the cost of borrowings was the result of a decrease
in interest rates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was $500,000
and $1,450,000 for the three-month and nine-month periods ended September 30,
2001 compared to $225,000 and $825,000 for the same period in 2000. Patriot
analyzes the loan loss reserve on a monthly basis to ensure its adequacy.
Patriot's total loans consist of four distinct portfolios - mortgage, consumer,
commercial loans and commercial leases. The mortgage loan portfolio is mature as
Patriot has been in the mortgage lending business for many years. The consumer
loan portfolio is also mature as Patriot has been in this business for many
years as well. The level of reserves allocated to mortgage and consumer lending
have been consistently based on extensive historical data regarding, among other
things, delinquencies, charge-offs and recoveries. Since entering the commercial
loan and lease businesses, Patriot has maintained reserves for these portfolios
at an acceptable level as determined by management. However, many of the loans,
especially the commercial loans were originated in the last 36 to 48 months, and
therefore management willl continue to analyze recent historical data regarding
commercial loan and lease delinquencies, charge-offs and recoveries to determine
the appropriate level of reserves going forward. Almost all of the growth during
the first nine-months of 2001 in Patriot's
15
loan portfolio has been in commercial lending and leasing. Based on the
aforementioned criteria, the provision was increased in 2001 due to the
additional exposure that has been assumed by Patriot by focusing more on
commercial lending and leasing, which historically has had a higher credit risk
despite the fact that Patriot continues to currently have excellent asset
quality with low levels of non-performing assets. At September 30, 2001
Patriot's non-performing assets were .45% of total assets and all loans 30 days
or more delinquent were 1.17% of total loans.
NON-INTEREST INCOME. Total non-interest income was $1,991,000 and $5,941,000
for the three-month and nine-month periods ended September 30, 2001 compared to
$2,276,000 and $5,563,000 for the same periods in 2000. The three-month decrease
in non-interest income was primarily due to a decrease in mortgage banking gains
related to a one time sale of $50,000,000 of residential mortgage loans in 2000
offset by an increased emphasis on recurring non-interest income such as loan,
deposit and ATM fees. The nine-month increase in non-interest income was
primarliy the result of increased deposit fees coupled with gains recognized on
the sale of investment securities available for sale offset by a decrease in
mortgage banking gains.
NON-INTEREST EXPENSE. Total non-interest expense was $5,271,000 and
$15,334,000 for the three-month and nine-month periods ended September 30, 2001
compared to $5,904,000 and $17,210,000 for the same periods in 2000. The
decrease in non-interest expense was primarly due to Patriot's restructuring of
its mortgage banking operations overhead structure from a fixed to variable cost
model.
INCOME TAX PROVISION. The income tax provision was $629,000 and $1,822,000
for the three-month and nine-month periods ended September 30, 2001 compared to
$287,000 and $1,074,000 for the same periods in 2000. The effective tax rate was
28.50% and 28.11% for three-month and nine-month periods ended September 30,
2001 compared to 18.94% and 21.08% for the same periods in 2000. The increase in
income tax provision is primarily due to income provided by certain tax
preferential securities comprising a smaller percentage of taxable income in
2001 coupled with the sale of some tax preferential securities in 2001.
FINANCIAL CONDITION
LOAN AND LEASE PORTFOLIO. Patriot's primary portfolio loan products are
commercial loans, small ticket commercial leases, fixed-rate and adjustable-rate
mortgage loans and home equity loans and lines of credit. Patriot also offers
residential construction loans and other consumer loans. At September 30, 2001
Patriot's total loan portfolio was $649,288,000, compared to a total loan
portfolio of $650,640,000 at December 31, 2000. The decrease in the loan
portfolio was primarily the result of Patriot's two-year plan to allow
residential mortgages to run-off offset by growth in the commercial loan and
lease portfolios. Commercial loan and lease originations for the nine-month
period ended September 30, 2001 were $117,874,000 compared to $148,390,000 for
the same period in 2000.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at September 30, 2001
were $19,644,000 compared to $27,076,000 at December 31, 2000. The decrease in
cash balances is associated with timing differences in borrowing activity and
investment prepayments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment securities consist
primarily of U.S. agency securities, mortgage-backed securities which are
generally insured or guaranteed by either FHLMC, FNMA or the GNMA and
collateralized mortgage obligations. Total investment and mortgage-backed
securities at September 30, 2001 were $312,504,000 compared to $387,378,000 at
December 31, 2000. The decrease in investment and mortgage-backed securities is
primarily due to $49,830,000 of investments sold during this period along with
higher investment amortization and prepayments. Additionally, Patriot adopted
SFAS 133 on January 1, 2001. At the time of adoption, Patriot reclassified
approximately $220,471,000 of fixed rate mortgage backed securities, CMO's and
agency securities from held to maturity to available for sale and equity
resulting in a net of tax increase of approximately $3,000,000 in accumulated
other comprehensive income. Patriot typically has not used derivative
instruments and currently holds no positions that had further significant impact
upon the adoption of SFAS 133 on earnings, financial condition or equity. During
the first quarter of 2001, Patriot sold $30,333,000 of the securities
reclassified resulting in a cumulative change in accounting principle with a net
after tax impact of a $204,000 loss.
OTHER ASSETS. Other assets at September 30, 2001 were $7,183,000 compared to
$8,729,000 at December 31, 2000. The decrease in other assets was primarily
attributable to adjustments to Patriot's deferred tax position related to
unrealized gains on investments and mortgage backed securities available for
sale and timing issues related to in-process suspense accounts.
DEPOSITS. Deposits are primarily attracted from within Patriot's market area
through the offering of various deposit instruments, including NOW accounts,
money market accounts, savings accounts, certificates of deposit and retirement
savings plans. Patriot also attracts jumbo certificates of deposit. Total
deposits at September 30, 2001 were $536,886,000 compared to $651,958,000 at
December 31, 2000. The decrease in balance is primarily attributed to the
run-off of $145,763,000 of wholesale banking deposits offset by $30,691,000
growth in Patriot's core deposits.
16
BORROWINGS. Patriot utilizes borrowings as a source of funds for its asset
growth and its asset/liability management. Patriot is eligible to obtain
advances from the FHLB upon the security of the FHLB common stock it owns and
certain of its residential mortgages and mortgage-backed securities, provided
certain standards related to creditworthiness have been met. Patriot may also
utilize repurchase agreements to meet its liquidity needs. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions fluctuates from time to time in accordance with
the policies of the FHLB. Total borrowings at September 30, 2001 were
$424,529,000 compared to $416,837,000 at December 31, 2000. The increase is
primarily associated with higher yielding deposits being replaced by lower
yielding borrowings.
OTHER LIABILTIIES. Other Liabilities at September 30, 2001 were $5,356,000
compared to $417,000 at December 31, 2000. The increase in other liabilities is
primarliy related to the position of the federal income tax liability of the
bank associated with the one time charge in the fourth quarter of 2000 and the
accruing of federal taxes on Patriot's earnings throughout 2001.
STOCKHOLDERS' EQUITY. Total stockholders' equity was $62,152,000 at September
30, 2001 compared to $51,800,000 at December 31, 2000. The increase in balance
is primarily due to earnings offset by dividends paid to shareholders' and
increases in accumulated other comprehensive income.
17
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances and repurchase agreements. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
During the nine-month period ended September 30, 2001, significant liquidity
was provided by maturities of investment and mortgage-backed securities. The
funds provided by these activities were invested in new commercial loans and
leases and the repayment of borrowings.
At September 30, 2001, Patriot had outstanding loan commitments of
$66,781,000. Patriot anticipates that it will have sufficient funds available to
meet its loan origination commitments. Certificates of deposit which are
scheduled to mature in one year or less from September 30, 2001 totaled
$234,289,000. Based upon historical experience, Patriot expects that
substantially all of the maturing certificates of deposit will be retained at
maturity.
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 and not less than 4% of risk-adjusted assets, and a
minimum risk-based capital ratio (based upon credit risk) of not less than 8%.
The FDIC requires a minimum leverage capital requirement of 3% for institutions
rated composite 1 under the CAMEL rating system. For all other institutions, the
minimum leverage capital requirement is 3% plus at least an additional 1% to 2%,
(100 to 200) basis points. At September 30, 2001, 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,
2001:
To Be To Be
Actual Adequacy Capitalized Well Capitalized
------ -------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2001
Total capital (to risk weighted assets)
Patriot Bank Corp. $ 73,497 11.44% $51,409 8% $64,261 10%
Patriot 72,358 11.27% 51,342 8% 64,178 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 66,715 10.38% 25,704 4% 38,557 6%
Patriot 65,080 10.14% 25,671 4% 38,507 6%
Tier I capital (to average assets)
Patriot Bank Corp. 66,715 6.53% 40,867 4% 51,084 5%
Patriot 65,080 6.37% 40,867 4% 51,084 5%
18
MANAGEMENT OF INTEREST RATE RISK
The principal objective of Patriot's interest rate risk management function
is to evaluate the interest rate risk included in certain on and off balance
sheet accounts, determine the level of risk appropriate given Patriot's business
focus, operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board approved guidelines.
Through such management, Patriot seeks to reduce the vulnerability of its net
interest income to changes in interest rates. Patriot monitors its interest rate
risk as such risk relates to its operating strategies. Patriot's Board of
Directors has established an Asset/Liability Committee comprised of senior
management, 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 matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap theoretically would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net interest
income. Conversely, during a period of falling interest rates, a negative gap
position would theoretically tend to result in an increase in net interest
income while a positive gap would tend to affect net interest income adversely.
Patriot pursues several actions designed to control its level of interest
rate risk. These actions include increasing the percentage of the loan portfolio
consisting of short-term and adjustable-rate loans through increased
originations of these loans, acquiring short-term and adjustable-rate
mortgage-backed securities, and undertaking to lengthen the maturities of
deposits and borrowings. At September 30, 2001, Patriot's total net
interest-earning assets maturing or repricing within one year exceeded its total
interest-bearing liabilities maturing or repricing in the same time period by
$58,625,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of a positive 5.68%.
19
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 2001, which are
anticipated, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at September
30, 2001, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a Three-Month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be repaid and/or repriced as a result of contractual amortization
and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and
as a result of contractual rate adjustments on adjustable-rate loans.
At September 30, 2001
---------------------
3 Months 3 Months to 6 Months to 1 Year to
or Less 6 Months 1 Year 3 Years
------- -------- ------ -------
(In thousands)
INTEREST EARNING ASSETS(1):
Interest earning deposits $ 1,591 $ -- $ -- $ --
Investment and mortgage-backed securities, net (2)(5) 53,569 9,295 40,793 44,493
Loans receivable, net(3)(5) 142,777 47,682 87,968 210,722
-------- -------- --------- --------
Total interest-earning assets 197,937 56,977 128,761 255,215
Non-interest-earning assets -- -- -- --
-------- -------- --------- --------
Total assets 197,937 56,977 128,761 255,215
-------- -------- --------- --------
INTEREST-BEARING LIABILITIES:
Money market and passbook savings accounts(6) 6,853 6,853 13,706 22,569
Demand and NOW accounts (6) 615 615 1,230 457
Certificates of deposit 76,462 71,050 86,777 52,851
Borrowings 18,635 635 41,619 120,000
-------- -------- --------- --------
Total interest-bearing liabilities 102,565 79,153 143,332 195,877
Non-interest-bearing liabilities
Equity -- -- -- --
-------- -------- --------- --------
Total liabilities and equity 102,565 79,153 143,332 195,877
-------- -------- --------- --------
Interest sensitivity gap(4) $ 95,372 $(22,176) $ (14,571) $ 59,338
======== ======== ========= ========
Cumulative interest sensitivity gap $ 95,372 $ 73,196 $ 58,625 $117,963
======== ======== ========= ========
Cumulative interest sensitivity gap as a percent of 9.25% 7.10% 5.68% 11.44%
total assets
Cumulative interest-earning assets as a percent of 192.99% 140.28% 118.04% 122.64%
cumulative interest-bearing liabilities
At September 30, 2001
---------------------
3 Years to More than
5 Years 5 Years Total
------- ------- -----
(In thousands)
INTEREST EARNING ASSETS(1):
Interest earning deposits $ -- $ -- $ 1,591
Investment and mortgage-backed securities, net (2)(5) 28,042 136,312 312,504
Loans receivable, net(3)(5) 124,870 37,380 651,399
-------- --------- ----------
Total interest-earning assets 152,912 173,692 965,494
Non-interest-earning assets -- 65,970 65,970
-------- --------- ----------
Total assets 152,912 239,662 1,031,464
-------- --------- ----------
INTEREST-BEARING LIABILITIES:
Money market and passbook savings accounts(6) 18,576 104,718 173,275
Demand and NOW accounts (6) 851 62,866 66,634
Certificates of deposit 7,576 2,261 296,977
Borrowings 72,000 174,181 427,070
-------- --------- ----------
Total interest-bearing liabilities 90,003 344,026 963,956
Non-interest-bearing liabilities 5,356 5,356
Equity -- 62,152 62,152
-------- --------- ----------
Total liabilities and equity 99,003 411,534 1,031,464
-------- --------- ----------
Interest sensitivity gap(4) $ 53,909 $(171,872) $ --
-------- ========= ==========
Cumulative interest sensitivity gap $171,872 $ --
======== =========
Cumulative interest sensitivity gap as a percent of 16.66% --%
total assets
Cumulative interest-earning assets as a percent of 127.72% 100.16%
cumulative interest-bearing liabilities
(1) Interest-earning assets are included in the period in which the
balances are expected to be repaid and/or repriced as a result of
anticipated prepayments, scheduled rate adjustments, and contractual
maturities.
(2) Includes investment and mortgage-backed securities available for sale
and held to maturity.
(3) For purposes of the gap analysis, loans receivable includes
non-performing loans and is reduced for the allowance for possible
loan losses, and unamortized discounts and deferred loan fees.
20
(4) Interest sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
(5) Annual prepayment rates for loans and mortgage-backed securities have
been estimated utilizing historical analysis and industry
expectations.
(6) Money market and savings accounts, and NOW account decay rates have
been estimated based upon a historical analysis of core deposit
trends.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As shown above, the Bank has a positive gap (interest-sensitive assets are
greater than interest-sensitive liabilities) within the next year, which
generally indicates that an increase in rates may lead to an increase in net
interest income and a decrease in rates may lead to a decrease in net interest
income.
The disscusion concerning the effects of interest rate changes on the
Company's estimated net interest income for the year ending December 31, 2001
set forth in "Managements Discussion an Analysis of Financial and Results of
Operations -- Management of Interest Rate Risk" in Item 2 herof, is incorporated
herein by reference.
In addition to gap analysis, Patriot utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate sensitivity.
Income simulation considers not only the impact of changing market interest
rates on forecasted net interest income, but also other factors such as yield
curve relationships, the volume and mix of assets and liabilities, customer
preferences and general market conditions.
Through the use of income simulation modeling Patriot has calculated an
estimate of net interest income for the year through September 30, 2002, based
upon the assets, liabilities and off-balance sheet financial instruments in
existence at September 30, 2001. Patriot has also estimated changes to that
estimated net interest income based upon interest rates rising or falling in
monthly increments ("rate ramps"). Rate ramps assume that all interest rates
increase or decrease in monthly increments evenly throughout the period modeled.
The following table reflects the estimated percentage change in estimated net
interest income for the period ending September 30, 2002.
---------------------------------------
Rate ramp
to interest rates % change
---------------------------------------
+2% 2.11%
-2% (3.87%)
Patriot's management believes that the assumptions utilized in evaluating
Patriot's estimated net interest income are reasonable; however, the interest
rate sensitivity of Patriot's assets, liabilities and off-balance sheet
financial instruments as well as the estimated effect of changes in interest
rates on estimated net interest income could vary substantially if different
assumptions are used or actual experience differs from the experience on which
the assumptions were based.
21
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
There are various claims and lawsuits in which Patriot is
periodically involved incidental to the Patriot's business, which in the
aggregate involve amounts which are believed by management to be immaterial to
the financial condition, equity, and results of operations of 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.
none
(b) Reports filed on Form 8K
none
-----------------------
* Incorporated herein by reference into this document from the exhibits to
Form S-1, Registration Statement, filed on September 1, 1995 as amended
Registration No. 33-96530.
22
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 14, 2001
---------------------------- -----------------------------------------
Richard A. Elko
President and Chief Executive Officer
Date November 14, 2001
---------------------------- -----------------------------------------
James G. Blume
Senior Vice President and
Chief Financial Officer
23