UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-26744
PATRIOT BANK CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 232820537
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
High and Hanover Streets, Pottstown, Pennsylvania 19464-9963
(Address of principal executive offices) (Zip Code)
(610) 323-1500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,329,423 shares of common
stock were outstanding as of May 8, 2002.
1
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION 3
Item 1 FINANCIAL STATEMENTS (Unaudited) 3
Consolidated Balance Sheets at March 31, 2002
and December 31, 2001 3
Consolidated Statements of Income for the Three-Month Periods
ended March 31, 2002 and 2001 4
Consolidated Statements of Stockholders' Equity for the
Periods ended March 31, 2002 and December 31, 2001 5
Consolidated Statements of Cash Flows for the Three-Month
Period ended March 31, 2002 and 2001 6
Consolidated Statements of Comprehensive (Loss) Income for the
Three-Month Period ended March 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 15
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
PART II OTHER INFORMATION
Items 1 through 6 22
SIGNATURES 23
2
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31, December 31,
----------- -----------
2002 2001
----------- -----------
(unaudited)
Assets
Cash and due from banks $ 12,462 14,218
Interest-earning deposits in other financial institutions 8,260 7,248
----------- -----------
Total cash and cash equivalents 20,722 21,466
Investment and mortgage-backed securities available for sale 255,803 247,612
Investment and mortgage-backed securities held to maturity
(market value of $36,048 and $43,078 at March 31, 2002
and December 31, 2001, respectively) 36,581 43,637
Loans held for sale 6,682 6,652
Loans and leases receivable, net of allowance for credit loss of $6,294 and
$6,199 at March 31, 2002 and December 31, 2001, respectively 636,568 642,940
Premises and equipment, net 6,639 6,758
Accrued interest receivable 3,802 3,988
Real estate and other property owned 115 349
Cash surrender value life insurance 17,537 17,305
Goodwill 8,718 8,688
Core deposit intangible 3,241 3,362
Other assets 8,746 7,313
----------- -----------
Total assets $ 1,005,154 $ 1,010,070
=========== ===========
Liabilities and stockholders' equity
Deposits $ 529,941 $ 533,863
FHLB advances 387,178 387,179
Trust preferred debt securities 18,000 18,000
Advances from borrowers for taxes and insurance 3,939 3,329
Other liabilities 5,616 5,993
----------- -----------
Total liabilities 944,674 948,364
----------- -----------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
issued at March 31, 2002 and December 31, 2001, respectively -- --
Common stock, no par value, 10,000,000 shares authorized, 6,555,436
issued at March 31, 2002 and December 31, 2001 -- --
Additional Paid in capital 57,841 57,867
Common stock acquired by ESOP, 327,798 and 334,225 shares at amortized cost
at March 31, 2002 and December 31, 2001, respectively (1,774) (1,819)
Common stock acquired by MRP, 5,240 and 5,650 shares at amortized
cost at March 31, 2002 and December 31, 2001, respectively (59) (68)
Retained earnings 9,821 8,598
Treasury stock, 226,013 and 235,833 at cost at March 31, 2002
and December 31, 2001, respectively (2,955) (3,051)
Accumulated other comprehensive (loss) income (2,394) 179
----------- -----------
Total stockholders' equity 60,480 61,706
----------- -----------
Total liabilities and stockholders' equity $ 1,005,154 $ 1,010,070
=========== ===========
The accompanying notes are an integral part of these statements.
3
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
Three-Month Period Ended
March 31,
---------
2002 2001
-------- --------
(unaudited)
Interest income
Interest-earning deposits $ 48 $ 312
Investment and mortgage-backed securities 4,411 6,276
Loans and leases 12,498 14,031
-------- --------
Total interest income 16,957 20,619
-------- --------
Interest expense
Deposits 4,283 8,760
Short-term borrowings 1,127 469
Long-term borrowings 4,771 5,648
-------- --------
Total interest expense 10,181 14,877
-------- --------
Net interest income before provision for
Credit losses 6,776 5,742
Provision for credit losses 675 450
-------- --------
Net interest income after provision for
Credit losses 6,101 5,292
-------- --------
Non-interest income
Service fees, charges and other operating income 1,357 1,233
(Loss) gain on sale of real estate acquired through
Foreclosure (7) 15
Gain on sale of investment and mortgage-backed
Securities available for sale -- 402
Mortgage banking gains 311 354
-------- --------
Total non-interest income 1,661 2,004
-------- --------
Non-interest expense
Salaries and employee benefits 2,977 2,103
Office occupancy and equipment 1,041 1,174
Professional services 217 170
Data processing 51 59
Advertising 127 138
Deposit processing 141 155
Amortization of intangibles 121 303
Office supplies & postage 170 143
ATM expense 105 107
Other operating expense 383 757
-------- --------
Total non-interest expense 5,333 5,109
-------- --------
Income before taxes and cumulative effect of change in
accounting principle 2,429 2,187
Income tax expense 589 597
-------- --------
Income before cumulative effect of change in accounting principle 1,840 1,590
-------- --------
Cumulative effect of change in accounting principle, net of ($105,000)
in income tax benefit -- (204)
-------- --------
Net Income $ 1,840 $ 1,386
======== ========
Basic earnings per share:
Income before cumulative effect of change in accounting principle $ 0.31 $ 0.27
Cumulative effective of change in accounting principle -- (0.03)
-------- --------
Net Income $ 0.31 $ 0.24
======== ========
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.30 $ 0.27
Cumulative effective of change in accounting principle -- (0.03)
-------- --------
Net Income $ 0.30 $ 0.24
======== ========
The accompanying notes are an integral part of these statements.
4
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, unaudited)
Accumulated
Additional Other
Number of Paid-in Retained Treasury Comprehensive
Shares Capital ESOP MRP Earnings Stock Income (Loss) Total
------ ------- ---- --- -------- ----- ------------- -----
Balance at January 1, 2001 5,784 $ 58,174 $ (1,999) $ (241) $ 4,833 $ (4,043) $ (4,924) $ 51,800
Release and amortization
of MRP 52 42 -- 173 -- -- -- 215
Release of ESOP shares 26 58 180 -- -- -- -- 238
Sale of stock associated with
Employee Stock Purchase Plan 7 -- -- -- -- 59 -- 59
Change in unrealized losses
on securities available
for sale, net of taxes -- -- -- -- -- -- 5,103 5,103
Exercise of stock options 111 (407) -- -- -- 933 526
Net income -- -- -- -- 6,099 -- -- 6,099
Cash dividends paid -- -- -- -- (2,334) -- -- (2,334)
----- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2001 5,980 $ 57,867 $ (1,819) $ (68) $ 8,598 $ (3,051) $ 179 $ 61,706
----- -------- -------- -------- -------- -------- -------- --------
Release and amortization
of MRP -- -- -- 9 -- -- -- 9
Release of ESOP shares 6 33 45 -- -- -- -- 78
Sale of stock associated with
Employee Stock Purchase Plan 2 -- -- -- -- 24 -- 24
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- (2,573) (2,573)
Exercise of stock options 8 (58) -- -- -- 71 -- 13
Stock awards -- (1) -- -- -- 1 -- --
Net income -- -- -- -- 1,840 -- -- 1,840
Cash dividends paid -- -- -- -- (617) -- -- (617)
----- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2002 5,996 $ 57,841 $ (1,774) $ (59) $ 9,821 $ (2,955) $ (2,394) $ 60,480
----- -------- -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these statements.
5
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Three-months Period Ended March 31,
-----------------------------------
2002 2001
--------- ---------
Operating activities
Net Income $ 1,840 $ 1,386
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and accretion of
Deferred loan origination fees (234) (51)
Premiums and discounts (365) (654)
MRP shares 9 91
Goodwill -- 182
Core deposit intangible 121 121
Provision for credit losses 675 450
Release of ESOP shares 78 49
Gain on sale of securities available for sale -- (93)
Loss (gain) on sale of real estate owned 7 (15)
Charge-off real estate owned and other repossessed assets 158 2
Depreciation of premises and equipment 343 405
Mortgage loans originated for sale (18,598) (19,228)
Mortgage loans sold 18,568 19,551
Increase in deferred income taxes (142) (2,372)
Increase in cash surrender value of life insurance (232) (183)
Decrease in accrued interest receivable 186 393
Increase in other assets (83) (2,431)
(Decrease) increase in other liabilities (407) 4,328
--------- ---------
Net cash provided by operating activities 1,924 1,931
--------- ---------
Investing activities
Loan originations and principal payments on loans, net 5,719 3,855
Proceeds from the sale of securities - available for sale -- 44,615
Proceeds from the maturity of securities - available for sale 27,749 7,630
Proceeds from the maturity of securities - held to maturity 6,932 1,040
Purchase of securities - available for sale (39,231) (4,098)
Proceeds from sale of real estate owned 280 312
Purchase of premises and equipment (224) (122)
Proceeds from sale of premises and equipment -- 16
--------- ---------
Net cash provided by investing activities 1,225 53,248
--------- ---------
Financing activities
Net decrease in deposits (3,922) (2,507)
Proceeds from short term borrowings -- 71,000
Repayment of short term repurchase agreements -- (80,126)
Repayment of long term borrowings (1) (1)
Increase in advances from
Borrowers for taxes and insurance 610 881
Cash paid for dividends (617) (716)
Proceeds from the sale of stock associated with Employee Stock
Purchase Plan 24 18
Proceeds from the exercise of stock options 13 --
--------- ---------
Net cash used in financing activities (3,893) (11,451)
--------- ---------
Net (decrease) increase in cash and cash equivalents (744) 43,728
Cash and cash equivalents at beginning of year 21,466 27,076
--------- ---------
Cash and cash equivalents as of the three month period $ 20,722 $ 70,804
========= =========
Supplemental Disclosures
Cash paid for interest on deposits $ 4,254 $ 8,729
========= =========
Cash paid for income taxes $ -- $ 784
========= =========
Transfer securities from held to maturity to available for sale $ -- $ 220,471
========= =========
Transfers from loans to real estate owned $ 211 $ 943
========= =========
The accompanying notes are an integral part of these statements.
6
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, unaudited)
Three-Month Period Ended
------------------------
March 31,
---------
2002 2001
---- ----
Net income $ 1,840 $ 1,386
Other comprehensive income, net of tax
Unrealized (losses) gains on securities
Unrealized holding (losses) gains arising during the period (2,573) 4,571
Reclassification adjustment for gains included
in net income -- (61)
------- -------
Comprehensive (loss) income $ (733) $ 5,896
======= =======
7
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2002
Note 1 - General
The accompanying financial statements of Patriot Bank Corp. and Subsidiaries
("Patriot") include the accounts of the parent company, Patriot Bank Corp. and
its wholly-owned subsidiaries, Patriot Bank and Patriot Investment Company. All
material intercompany balances and transactions have been eliminated in
consolidation. These financial statements have been prepared in accordance with
the instructions for Form 10-Q and therefore do not include certain information
or footnotes necessary for the presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. However, in the opinion of management, the consolidated financial
statements reflect all adjustments (which consist of normal recurring accruals)
necessary for a fair presentation of the results for the unaudited periods. The
results of operations for the three-month period ended March 31, 2002 are not
necessarily indicative of the results which may be expected for the entire year.
The consolidated financial statements should be read in conjunction with the
annual report on Form 10-K for the year ended December 31, 2001.
8
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2002
Note 2 - Investment And Mortgage-Backed Securities
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
March 31, 2002 December 31, 2001
------------------------------------------ ----------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
cost gain loss value cost gain loss value
---- ---- ---- ----- ---- ---- ---- -----
(in thousands)
Available for Sale:
Investment securities
U.S. Treasury and
Government agency
securities $ 39,177 $-- $ 2,425 $ 36,752 $ 31,475 $ 2 $ 1,640 $ 29,837
Corporate debt securities 17,655 30 1,806 15,879 16,582 27 1,656 14,953
FHLMC preferred Stock 45,412 608 347 45,673 42,762 2,184 53 44,893
FHLB stock 19,559 -- -- 19,559 19,359 -- -- 19,359
Equity securities 11,496 26 255 11,267 5,845 31 433 5,443
Mortgage-backed securities
FHLMC 9,867 14 122 9,759 5,194 13 10 5,197
FNMA 49,888 126 243 49,771 45,466 124 144 45,446
GNMA 116 14 -- 130 120 12 -- 132
Collateralized mortgage obligations:
FHLMC 37,756 29 414 37,371 44,879 566 193 45,252
FNMA 27,483 328 -- 27,811 33,632 582 70 34,144
Other 1,816 15 -- 1,831 2,938 18 -- 2,956
-------- -------- -------- -------- -------- -------- -------- --------
Total securities available for
Sale $260,225 $ 1,190 $ 5,612 $255,803 $248,252 $ 3,559 $ 4,199 $247,612
======== ======== ======== ======== ======== ======== ======== ========
Held to Maturity:
Investment securities
U.S. Treasury and
Government agency
Securities $ 14,391 $ 333 $ 279 $ 14,445 $ 14,388 $ 342 $ 226 $ 14,504
Corporate debt securities -- -- -- -- 1,000 1 -- 1,001
Mortgage-backed securities
FHLMC 1,493 29 35 1,487 1,661 27 36 1,652
FNMA 1,526 81 36 1,571 1,680 80 51 1,709
GNMA 2,002 43 65 1,980 2,245 57 65 2,237
Collateralized mortgage
obligations
FHLMC 11,980 195 737 11,438 16,187 264 834 15,617
FNMA 5,189 88 150 5,127 6,476 53 171 6,358
-------- -------- -------- -------- -------- -------- -------- --------
Total securities held to maturity $ 36,581 $ 769 $ 1,302 $ 36,048 $ 43,637 $ 824 $ 1,383 $ 43,078
======== ======== ======== ======== ======== ======== ======== ========
9
Note 3 - Loans Receivable
Loans receivable are summarized as follows:
March 31, December 31,
--------- ------------
2002 2001
---- ----
(in thousands)
Commercial loan portfolio
Commercial $ 291,611 $ 283,848
Commercial leases 79,249 77,838
Consumer loan portfolio
Home equity 66,089 66,834
Consumer 7,906 8,614
Mortgage loan portfolio
Secured by real estate $ 191,322 $ 206,467
Construction 5,636 4,605
--------- ---------
Total loans receivable 641,813 648,206
Less deferred loan origination costs 1,049 933
Allowance for credit losses (6,294) (6,199)
--------- ---------
Total loans receivable, net $ 636,568 $ 642,940
========= =========
Note 4 - Deposits
Deposits are summarized as follows:
March 31, December 31,
--------- ------------
Deposit type 2002 2001
- ------------ ---- ----
(in thousands)
NOW $ 35,052 $ 30,951
Money market 139,063 135,214
Savings accounts 52,819 45,534
Non-interest-bearing demand 41,712 38,235
-------- --------
Total demand, transaction, money
market and savings deposits 268,646 249,934
Certificates of deposits 261,295 283,929
-------- --------
Total deposits $529,941 $533,863
======== ========
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.
Anti-dilutive options. Patriot had 10,000 and 44,500 anti-dilutive options at
March 31, 2002 and 2001, respectively.
For Three-Months Ended March 31, 2002
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
BASIC EPS
Net Income available to common
stockholders $1,840 5,997 $0.31
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 188 (.01)
------ ------ -----
DILUTED EPS
Net income available to common
stockholders $1,840 6,185 $0.30
====== ====== =====
For Three-Months Ended March 31, 2001
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- -------
BASIC EPS
Net Income available to common
stockholders $1,386 5,845 $0.24
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 40 --
------ ------ -----
DILUTED EPS
Net income available to common
stockholders $1,386 5,885 $0.24
====== ====== =====
11
Note 6 - Segment Reporting
The Company has three reportable segments: Patriot Bank, Patriot
Mortgage and Patriot Commercial Leasing Corporation. Patriot Bank operates a
community banking network with sixteen community banking offices providing
deposits and loan services to customers. Patriot Mortgage is a mortgage
origination unit which sells residential mortgages into the secondary market to
generate fee income. Patriot Commercial Leasing Corporation is a small ticket
leasing company.
The following table highlights income statement and balance sheet
information for each of the segments at or for the three-month period ending
March 31, 2002 and 2001 (in thousands).
For the three-month period ended March 31, 2002
-----------------------------------------------
Patriot
-------
Bank Mortgage Leasing Total
---- -------- ------- -----
Net interest income $ 5,954 $ 135 $ 687 $ 6,776
Other income 1,108 261 292 1,661
Total net income 1,572 146 122 1,840
Total assets 918,675 6,716 79,763 1,005,154
Total loans and leases, gross 563,613 6,682 79,249 649,544
---------- ---------- ---------- ----------
For the three-month period ended March 31, 2001
-----------------------------------------------
Patriot
-------
Bank Mortgage Leasing Total
---- -------- ------- -----
Net interest income $ 5,085 $ 58 $ 599 $ 5,742
Other income 1,365 289 350 2,004
Total net income 1,103 90 193 1,386
Total assets 1,045,083 8,248 70,662 1,123,993
Total loans and leases, gross 573,892 8,240 69,711 651,843
---------- ---------- ---------- ----------
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. 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 impact on earnings, financial condition or equity. During 2001,
Patriot sold $30,333,000 of the securities reclassified resulting in a
cumulative change in accounting principle with a net after tax impact of a
$204,000 loss.
Note 8 - Accounting for Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. The Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements, including requirements for periodic impairment evaluation.
The provisions of the Statement are required to be applied starting with fiscal
years beginning after December 15, 2001, except that goodwill and intangible
assets acquired after June 30, 2001, will be subject immediately to the
non-amortization and amortization provisions of the Statement. The Statement is
required to be applied at the beginning of an entity's fiscal year and to be
applied to all goodwill and other intangible assets recognized in its financial
statements at that date. Patriot adopted Statement No. 142 in January 2002. As a
result, Patriot anticipates a $728,000 reduction in the amortization of goodwill
expense for the fiscal year 2002. As required by SFAS No. 142, Patriot will
perform an impairment test within six months of adoption. At this time, Patriot
does not anticipate any impairment.
Note 9 - Accounting for Asset Retirement Obligations
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. It is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Earlier application is encouraged. The Bank
does not expect the adoption of the Statement to have an impact on it's
earnings, financial condition, or equity.
13
Note 10 - Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. This Statement supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. However, this
Statement retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in distribution to owners) or is classified as held for sale.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with earlier application encouraged. The provisions of this
Statement generally are to be applied prospectively. The adoption of the
Statement did not have any impact on the Bank'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 $.30 and net income
of $1,840,000 for the three-month period ended March 31, 2002 compared to
diluted earnings per share of $.24 and net income of $1,386,000 for the three
month period ended March 31, 2001. Return on average equity was 12.05%, for the
three-month period ended March 31, 2002 compared to 10.49%, for the three-month
period ended March 31, 2001.
Net Interest Income. Net interest income for the three-month period ended
March 31, 2002 was $6,776,000 compared to $5,742,000 for the same period in
2001. Patriot's net interest margin (net interest income as a percentage of
average interest-earning assets) was 3.06% for the three-month period ended
March 31, 2002 compared to 2.28% for he same period in 2001. The increase in net
interest income during the first quarter of 2002 is primarily due to the impact
of decreases in market rates on Patriot's funding sources and Patriot's strategy
to reduce investments, mortgage-backed securities and mortgage loans and the
level of wholesale funding. The decreases in market rates on Patriot's funding
sources outpaced the rates on assets and, as a result, expanded Patriot's net
interest margin.
Interest on loans and leases was $12,498,000 for the three-month period
ended March 31, 2002 compared to $14,031,000 for the same period in 2001. The
average balance of loans was $641,840,000 with an average yield of 7.83% for the
three-month period ended March 31, 2002 compared to an average balance of
$657,442,000 with an average yield of 8.62% for the same period in 2001. The
decrease in average balance is primarily due to Patriot allowing mortgages to
run-off, offset by aggressive marketing of commercial loans and leases. The
decrease in average yield is primarily a result of a decrease in interest rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $4,411,000 for the three-month period ended March 31, 2002
compared to $6,276,000 for the same period in 2001. The average balance of the
investment portfolio was $290,201,000 with an average yield of 6.61% for the
three-month period ended March 31, 2002 compared to an average balance of
$375,724,000 with an average yield of 7.04% for the same period in 2001. The
decrease in average balance is primarily due to Patriot allowing the investment
portfolio to amortize down so they can be replaced with generally
higher-yielding commercial loans and leases, as well as Patriot sold $50,920,000
in securities throughout 2001. The decrease in average yield is related to
general decreases in market rates on adjustable rate securities.
Interest on total deposits was $4,283,000 for the three-month period ended
March 31, 2002 compared to $8,760,000 for the same period in 2001. The average
balance of total deposits was $528,303,000 with an average cost of 3.26% for the
three-month period ended March 31, 2002 compared to an average balance of
$643,198,000 with an average cost of 5.52% for the same period in 2001. The
decrease in average balance is primarily the result of an decrease in Patriot's
jumbo certificates of deposit, offset by aggressive marketing of money market
accounts, transaction-based deposit accounts and other certificates of deposit.
The overall decrease in the average cost on deposits was primarily the result of
a decrease in interest rates and emphasis placed on lower cost money market and
transaction based deposit accounts.
Interest on borrowings was $5,898,000 for the three-month period ended
March 31, 2002 compared to $6,117,000 for the same periods in 2001. The average
balance of borrowings was $405,826,000 with an average cost of 5.81% for the
three-month period ended March 31, 2002 compared to an average balance of
$413,227,000 with a cost of 5.92% for the same period in 2001. The decrease in
average balance was primarily due to borrowings being repaid by proceeds
received on the run-off of the mortgage loan portfolio and growth in Patriot's
branch deposits, offset by growth in Patriot's commercial loan and leases
portfolios. The decrease in the yield on borrowings was the result of a decrease
in interest rates.
Provision for Credit Losses. The provision for credit losses was $675,000
for the three-month period ended March 31, 2002 compared to $450,000 for the
same period in 2001. An allowance for credit losses is maintained at a level
that represents management's best estimate of known and inherent losses in the
loan and lease portfolio. Management's periodic evaluation of the allowance for
credit losses is based upon evaluation of individual loans and leases, the
overall risk characteristics of the various portfolio segments, regression
analyseses using past loss experience, current and projected financial status
and creditworthiness of its
15
borrowers, the adequacy of collateral, the level and nature of non-performing
loans, current economic conditions, the results of the most recent regulatory
examination and other relevant factors. This evaluation is inherently
subjective. While management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for credit losses. Such agencies may
require Patriot to recognize additions to the allowance for credit losses based
on their judgments of information which is available to them at the time of
their examinations.
Patriot's total loans consist of four distinct portfolios. Each of
which is monitored and analyzed separately.
The mortgage loan portfolio is seasoned as Patriot has been in the
mortgage lending business for many years and has sold substantially all new
mortgage originations in the past two years. The level of non-performing assets
in the mortgage portfolio has increased during the past two years. Management
believes this increase can be attributed to the current recessionary phase of
the credit cycle and a relatively low reference point in previous years
balances. Patriot's mortgage loans are generally well collateralized and
historically Patriot has experienced minimal losses on these loans. Because of
Patriot's consistent history in mortgage lending and the long-term nature of
this portfolio, Patriot predominately relies upon an internal regression
analysis which uses historical data to estimate losses that are inherent in the
portfolio.
The consumer loan portfolio consists of mostly of home equity loans
and home equity lines of credit. The consumer loan portfolio is also mature as
Patriot has been in consumer lending business for many years. As with mortgage
lending Patriot predominantly uses an internal regression analysis, which uses
historical data to estimate losses that are inherent in the portfolio.
Patriot entered the commercial lending business in 1996 and has
grown the portfolio into a substantial portion of total loans. Patriot uses
historical data to prepare regression models to monitor trends of charge-offs
and recoveries and establish appropriate allowance levels. Patriot also closely
monitors local economic and business trends relative to its commercial lending
portfolio to estimate the effect those trends may have on potential losses.
Patriot's commercial loan portfolio contains some loans that are substantially
larger than the loans within other portfolios. The potential loss associated
with an individual loan could have a significant impact on the allowance and
charge-off levels at Patriot. Therefore Patriot closely monitors these loans and
will specifically reserve for individual loans which exhibit weakness.
Patriot entered the commercial leasing business in 1998 principally
through the acquisition of Keystone Leasing. Patriot's leasing portfolio has a
short, approximately 3-year life. Patriot performs an internal regression
analysis on this portfolio using historical data (including Keystone Leasing
data). Patriot also closely monitors regional and national economic business
trends relative to its commercial leasing portfolio to estimate the effects
those trends may have on potential losses.
Patriot continues to have asset quality with low levels of
delinquencies and non-performing assets. At March 31, 2002 Patriot's
non-performing assets were .57% of total assets. Additionally, Patriot had
$6,989,000 in loans and leases which were 30 days or more delinquent which
represented only 1.08% of Patriot's total loan and lease portfolios.
16
Non-Interest Income. Total non-interest income was $1,661,000 for the
three-month period ended March 31, 2002 compared to $2,004,000 for the same
period in 2001. The decrease in non-interest income was primarily due to
$402,000 in gains recognized on the sale of investment securities available for
sale during the first quarter of 2001 versus no security gains during the first
quarter of 2002 . Non-interest income also includes recurring non-interest
income such as loan and deposit fees, ATM fees, and income from bank owned life
insurance, where amounts are consistent with the prior period.
Non-Interest Expense. Total non-interest expense was $5,333,000 for the
three-month period ended March 31, 2002 compared to $5,109,000 for the same
period in 2001. The increase in non-interest expense was primarily due to higher
compensation costs associated with salaries, payroll taxes and employee benefits
due to increases in staffing associated with branch deposit growth and
commercial lending.
Income Tax Provision. The income tax provision for the first quarter of 2002
was $589,000. The income tax provision for the three-month period ended March
31, 2001 was $597,000 along with a benefit of $105,000 relating to a change in
accounting principle. The effective tax rate was 24.25% for three-month period
ended March 31, 2002 compared to 26.20% for the same period in 2001. The
decrease in the effective tax rate was primarily due to the elimination of
goodwill amortization expense in 2002. The goodwill booked with Patriot's
acquisition of First Lehigh Bank was a non-deductible expense for taxes which
increased Patriot's taxable income prior to 2002. Additionally, Patriot
purchased some tax beneficial securities during the fourth quarter of 2001 which
also was part of the decrease in the effective tax rate.
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 March 31, 2002
Patriot's total loan portfolio was $636,568,000, compared to a total loan
portfolio of $642,940,000 at December 31, 2001. The decrease in the loan
portfolio is primarily the result of Patriot allowing mortgages to run-off,
offset by an emphasis placed on increasing commercial lending and leasing
relationships.
Cash and Cash Equivalents. Cash and cash equivalents at March 31, 2002 were
$20,722,000 compared to $21,466,000 at December 31, 2001. The decrease in cash
balances was temporary and primarily due to timing differences related to the
repayment of borrowed funds.
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 March 31, 2002 were
$292,384,000 compared to $291,249,000 at December 31, 2001. The increase in
investment and mortgage-backed securities was primarily due to the purchase of
$39,231,000 of available for sale securities offset by normal investment
amortization and maturities.
Other Assets. Other assets at March 31, 2002 $8,746,000 compared to
$7,313,000 at December 31, 2001. The increase in other assets was primarily
attributable to adjustments to Patriot's deferred tax position related the
increase of unrealized losses on investments.
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 solicits brokered deposits from various
sources. Total deposits at March 31, 2002 were $529,941,000 compared to
$533,863,000 at December 31, 2001. Of that decrease, $8,321,000 was related to
brokered deposits and $14,313,000 was related to retail certificates of deposit,
offset by a $18,712,000 increase of core deposits. The reduction in brokered
deposits was part of Patriot's strategy to deleverage the balance sheet and
reduce the dependence on wholesale funding.
17
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 March 31, 2002 were $405,178,000
compared to $405,179,000 at December 31, 2001. The decrease in borrowings is
associated with the repayment of an amortizing FHLB advance.
Other Liabilities. Other Liabilities at March 31, 2002 were $5,616,000 compared
to $5,993,000 at December 31, 2001. The decrease in balance was primarily
related to timing differences on the accrual of certain compensation expenses.
Stockholders' Equity. Total stockholders' equity was $60,480,000 at March 31,
2002 compared to $61,706,000 at December 31, 2001. The decrease is primarily due
the change in accumulated other comprehensive losses which was a result of a
decrease in the market value on available for sale securities and dividends paid
to shareholders offset by earnings.
18
Liquidity and Capital Resources
Liquidity. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances and repurchase agreements. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
During the three-month period ended March 31, 2002, significant liquidity
was provided by growth in deposits and maturities of investment and
mortgage-backed securities. The funds provided by these activities were invested
in new loans and the repayment of borrowings.
At March 31, 2002, Patriot had outstanding loan commitments of
$63,035,000. 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 March 31, 2002 totaled
$168,577,000. 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, a tier 1 capital ratio of not less than 4% of risk-adjusted
assets, and a minimum risk-based total capital ratio (based upon credit risk) of
not less than 8%. The FDIC requires a minimum leverage capital requirement of 3%
for institutions rated composite 1 under the CAMEL rating system. For all other
institutions, the minimum leverage capital requirement is 3% plus at least an
additional 1% to 2% (100 to 200 basis points). A bank is considered "well
capitalized" if it maintains a minimum leverage capital ratio of not less than
5% of tier 1 capital to total adjusted assets, a tier 1 capital ratio of not
less than 6% of risk adjusted assets, and a minimum risk-based total capital
ratio (based upon credit risk) of not less than 10%. At March 31, 2002, Patriot
Bank's and Patriot Bank Corp.'s capital ratios exceeded all requirements to be
considered well capitalized. The following table sets forth the capital ratios
of Patriot Bank Corp., Patriot Bank and the current regulatory requirements at
December 31, 2001:
To Be To Be
Actual Adequacy Capitalized Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 2002
Total capital (to risk weighted assets)
Patriot Bank Corp. $75,219 11.63% $51,735 8% $64,670 10%
Patriot 74,727 11.57% 51,647 8% 64,559 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 68,915 10.66% 25,868 4% 38,802 6%
Patriot 68,315 10.58% 25,824 4% 38,735 6%
Tier I capital (to average assets)
Patriot Bank Corp. 68,915 6.95% 39,684 4% 49,605 5%
Patriot 68,315 6.89% 39,684 4% 49,605 5%
19
Management of Interest Rate Risk. The principal objective of
Patriot's interest rate risk management function is to evaluate the interest
rate risk included in certain on and off balance sheet accounts, determine the
level of risk appropriate given Patriot's business focus, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with Board approved guidelines. Through such management, Patriot
seeks to reduce the vulnerability of its net interest income to changes in
interest rates. Patriot monitors its interest rate risk as such risk relates to
its operating strategies. Patriot's Board of Directors has established an
Asset/Liability Committee comprised of senior management and directors, which is
responsible for reviewing its asset/liability and interest rate position and
making decisions involving asset/liability considerations. The Asset/Liability
Committee meets regularly and reports trends and Patriot's interest rate risk
position to the Board of Directors.
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 levels of interest rate risk of the
Company when exposed to time factors and changes in interest rate environments.
Income simulation modeling is utilized in measuring Patriot's
interest rate risk and managing its interest rate sensitivity. Income simulation
considers not only the impact of changing market interest rates on forecasted
net interest income, but also other factors such as yield curve relationships,
the volume and mix of assets and liabilities, customer preferences and general
market conditions.
Through the use of income simulation modeling the company has
calculated an estimate of net interest income for the year ending March 31,
2003, based upon the assets, liabilities and off-balance sheet financial
instruments in existence at March 31, 2002. Patriot has also estimated changes
to that estimated net interest income based upon interest rates rising or
falling in monthly increments ("rate ramps"). Rate ramps assume that all
interest rates increase or decrease in monthly increments evenly throughout the
period modeled. The following table reflects the estimated percentage change in
estimated net interest income for the year ending March 31, 2003 resulting from
changes in interest rates.
Rate ramp to interest rates % change
--------------------------- --------
+2% 1.26%
-2% (2.29%)
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 such interest rate movements in relation to an
unchanged environment. This method of measurement primarily evaluates the longer
term repricing risks and options in the Company's balance sheet. The Company has
established policy limits for upward and downward rate shocks of 20% of economic
value of equity at risk for every 100 basis points of interest rate shock.
Additionally the Company has a policy limit that the ratio of EVE adjusted
equity to EVE adjusted assets will be maintained above a 5% ratio. The following
table reflects the estimated economic value of equity at risk and the ratio of
EVE adjusted equity to EVE adjusted assets at March 31, 2002, resulting from
shocks to interest rates.
Percent change EVE Equity/
Rate shock from base EVE Assets
----------- --------- ----------
+2% -20.56% 10.59%
+1% -9.37% 11.73%
Base 12.57%
-1% -1.34% 12.18%
-2% -10.28% 10.93%
20
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.
The following table summarizes the amount of interest-earning assets
and interest-bearing liabilities outstanding at March 31, 2002, which are
anticipated, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Loan amounts reflect principal balances expected to
be repaid and/or repriced as a result of contractual amortization and
anticipated prepayments of adjustable-rate loans and fixed-rate loans and as a
result of contractual rate adjustments on adjustable-rate loans. Estimated
prepayment rates were applied to mortgage loans and mortgage-backed securities
based upon industry expectations. Core deposit decay rates have been estimated
based upon a historical analysis of core deposit trends. With the exceptions
noted above, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth the gap and cumulative gap as a percentage of total assets at
March 31, 2002:
0-90 91-180 181-365
Days Days Days
---- ---- ----
GAP to Total Assets 9.41% .98% -2.80%
Cumulative GAP to Total Assets 9.41% 10.39% 7.59%
As shown above, the company has a positive gap (interest sensitive
assets are greater than interest sensitive liabilities) within the next year,
which generally indicates that an increase in rates may lead to an increase in
net interest income and a decrease in rates may lead to a decrease in net
interest income. Interest sensitivity gap analysis measures whether assets or
liabilities may reprice but does not capture the ability to reprice or the range
of potential repricing on assets or liabilities. Thus indications based on a
positive or negative gap position need to be analyzed in conjunction with other
interest rate risk management tools.
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.
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.
(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 May 8, 2002
----------------- ----------------------------------------
Richard A. Elko
President and Chief Executive Officer
Date May 8, 2002
----------------- ----------------------------------------
James G. Blume
Senior Vice President and
Chief Financial Officer
23