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 June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-26744
PATRIOT BANK CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 232820537
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
High and Hanover Streets, Pottstown, Pennsylvania 19464-9963
(Address of principal executive offices) (Zip Code)
(610) 323-1500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,343,864 shares of common
stock were outstanding as of August 9, 2002.
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets at June 30, 2002
and December 31, 2001
Consolidated Statements of Income for the Three-Month and Six-Month
Periods ended June 30, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the
Periods ended June 30, 2002 and December 31, 2001
Consolidated Statements of Cash Flows for the Six-Month
Periods ended June 30, 2002 and 2001
Consolidated Statements of Comprehensive Income for the
Three-Month and Six-Month Periods ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
Items 1 through 6
SIGNATURES
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
June 30, December 31,
-------- ------------
2002 2001
---------- ----------
(unaudited)
ASSETS
Cash and due from banks $ 17,392 $ 14,218
Interest-earning deposits in other financial institutions 5,557 7,248
---------- ----------
Total cash and cash equivalents 22,949 21,466
Investment and mortgage-backed securities available for sale 264,462 247,612
Investment and mortgage-backed securities held to maturity
(market value of $32,714 and $43,078 at June 30, 2002
and December 31, 2001, respectively) 32,896 43,637
Loans held for sale 7,341 6,652
Loans and leases receivable, net of allowance for credit loss of $6,478 and
$6,199 at June 30, 2002 and December 31, 2001, respectively 633,245 642,940
Premises and equipment, net 6,599 6,758
Accrued interest receivable 3,951 3,988
Real estate and other property owned 606 349
Cash surrender value life insurance 17,760 17,305
Goodwill 8,743 8,688
Core deposit intangible 3,119 3,362
Other assets 8,237 7,313
---------- ----------
Total assets $ 1,009,908 $ 1,010,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 505,764 $ 533,863
FHLB advances 398,376 387,179
Other short term borrowings & repurchase agreements 7,890 --
Trust preferred debt securities 23,000 18,000
Advances from borrowers for taxes and insurance 3,899 3,329
Other liabilities 6,402 5,993
---------- ----------
Total liabilities 945,331 948,364
---------- ----------
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued at June 30, 2002 and December 31, 2001, respectively -- --
Common stock, no par value, 20,000,000 shares authorized, 6,560,436 and
6,555,436 issued at June 30, 2002 and December 31, 2001, respectively -- --
Additional Paid in capital 57,956 57,867
Common stock acquired by ESOP, 321,371 and 334,225 shares at amortized cost at
June 30, 2002 and December 31, 2001, respectively (1,728) (1,819)
Common stock acquired by MRP, 10,158 and 5,650 shares at amortized
cost at June 30, 2002 and December 31, 2001, respectively (120) (68)
Retained earnings 11,168 8,598
Treasury stock, 223,717 and 235,833 at cost at June 30, 2002
and December 31, 2001, respectively (2,923) (3,051)
Accumulated other comprehensive income 224 179
---------- ----------
Total stockholders' equity 64,577 61,706
---------- ----------
Total liabilities and stockholders' equity $1,009,908 $1,010,070
========== ==========
The accompanying notes are an integral part of these statements.
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
Three-Month Period Ended Six-Month Period Ended
June 30,
-----------------------------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(unaudited)
INTEREST INCOME
Interest-earning deposits $ 12 $ 105 $ 60 $ 417
Investment and mortgage-backed securities 4,370 5,388 8,781 11,665
Loans and leases 12,433 13,694 24,931 27,725
-------- -------- -------- --------
Total interest income 16,815 19,187 33,772 39,807
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 3,615 7,424 7,898 16,182
Short-term borrowings 1,128 258 2,255 721
Long-term borrowings 4,806 5,910 9,577 11,565
-------- -------- -------- --------
Total interest expense 9,549 13,592 19,730 28,468
-------- -------- -------- --------
Net interest income before provision for
credit losses 7,266 5,595 14,042 11,339
Provision for credit losses (1,000) (500) (1,675) (950)
-------- -------- -------- --------
Net interest income after provision for
Credit losses 6,266 5,095 12,367 10,389
-------- -------- -------- --------
NON-INTEREST INCOME
Service fees, charges and other operating income 1,211 1,404 2,555 2,637
Loss on sale of real estate acquired through
Foreclosure (28) (30) (22) (16)
Gain on sale of investment and mortgage-backed
Securities available for sale 134 101 134 503
Mortgage banking gains 486 472 797 826
-------- -------- -------- --------
Total non-interest income 1,803 1,947 3,464 3,950
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,985 2,518 5,962 4,946
Office occupancy and equipment 956 1,132 1,997 2,305
Professional services 414 186 631 355
Advertising 205 194 332 332
Deposit processing 162 151 303 306
Goodwill amortization -- 183 -- 364
Core Deposit Intangible 121 121 243 243
Office supplies & postage 189 147 359 290
ATM expense 126 119 231 226
Other operating expense 329 204 762 697
-------- -------- -------- --------
Total non-interest expense 5,487 4,955 10,820 10,064
-------- -------- -------- --------
Income before taxes and cumulative effect of
change in accounting principle 2,582 2,087 5,011 4,275
Income taxes 602 596 1,191 1,193
-------- -------- -------- --------
Income before cumulative effect of change In accounting principle 1,980 1,491 3,820 3,082
Cumulative effect of change in accounting principle, net of
($105,000) in income tax -- -- -- (204)
-------- -------- -------- --------
Net income $ 1,980 $ 1,491 $ 3,820 $ 2,878
======== ======== ======== ========
Basic Earnings Per Share:
Income before cumulative effect of change in accounting principle $ 0.33 $ 0.26 $ 0.64 $ 0.52
Cumulative effective of change in accounting principle -- -- -- (.03)
-------- -------- -------- --------
Net Income $ 0.33 $ 0.26 $ 0.64 $ 0.49
======== ======== ======== ========
Dilutive Earnings Per Share:
Income before cumulative effect of change in accounting principle $ 0.31 $ 0.25 $ 0.61 $ 0.52
Cumulative effective of change in accounting principle -- -- -- (.03)
-------- -------- -------- --------
Net Income $ 0.31 $ 0.25 $ 0.61 $ 0.49
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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
------ -------- ------- ----- -------- ------- ------- --------
Common stock issued 5 70 70
Common stock acquired by (5) (52) (52)
MRP
Release of ESOP shares 13 78 91 -- -- -- -- 169
Sale of stock associated with
Employee Stock Purchase Plan 5 -- -- -- -- 56 -- 56
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- 45 45
Exercise of stock options 7 (58) -- -- -- 71 -- 13
Stock awards -- (1) -- -- -- 1 -- --
Net income -- -- -- -- 3,820 -- -- 3,820
Cash dividends paid -- -- -- -- (1,250) -- -- (1,250)
------ -------- ------- ----- -------- ------- ------- --------
BALANCE AT JUNE 30, 2002 6,005 $ 57,956 $(1,728) $(120) $ 11,168 $(2,923) $ 224 $ 64,577
------ -------- ------- ----- -------- ------- ------- --------
The accompanying notes are an integral part of these statements.
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six-Months Period Ended June 30,
--------------------------------
2002 2001
-------- ---------
OPERATING ACTIVITIES
Net Income $ 3,820 $ 2,878
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization and accretion of
Deferred loan origination fees (424) (43)
Premiums and discounts (553) (1,067)
MRP shares 18 158
Goodwill -- 364
Core deposit intangible 243 243
Provision for credit losses 1,675 950
Release of ESOP shares 169 104
Gain on sale of securities available for sale (134) (194)
Loss (gain) on sale of real estate owned 22 (16)
Charge-off real estate owned and other repossessed assets 158 39
Depreciation of premises and equipment 648 809
Loss on disposition of equipment 57 --
Mortgage loans originated for sale (38,474) (36,350)
Mortgage loans sold 37,785 41,089
Increase in deferred income taxes (481) (2,374)
Increase in cash surrender value of life insurance (455) (366)
Increase in accrued interest receivable 37 654
Decrease in other assets (898) (2,086)
Increase in other liabilities 354 4,060
-------- ---------
Net cash provided by operating activities 3,567 8,884
-------- ---------
INVESTING ACTIVITIES
Loan originations and principal payments on loans, net 7,524 (2,261)
Proceeds from the sale of securities - available for sale 5,738 49,755
Proceeds from the maturity of securities - available for sale 43,314 25,433
Proceeds from the maturity of securities - held to maturity 10,301 7,233
Purchase of securities - available for sale (64,273) (6,461)
Proceeds from sale of real estate owned 481 988
Purchase of premises and equipment (581) (313)
Proceeds from sale of premises and equipment 35 16
-------- ---------
Net cash provided by investing activities 2,539 74,390
-------- ---------
FINANCING ACTIVITIES
Net decrease in deposits (28,099) (97,263)
Proceeds from short term borrowings 19,090 8,733
Funding of trust preferred securities 5,000 --
Repayment of long term borrowings (3) --
Increase in advances from borrowers for taxes and insurance 570 1,298
Cash paid for dividends (1,250) (1,299)
Proceeds from the sale of stock associated with Employee Stock
Purchase Plan 56 19
Proceeds from the exercise of stock options 13 --
-------- ---------
Net cash used in financing activities (4,623) (88,512)
-------- ---------
Net (decrease) increase in cash and cash equivalents 1,483 (5,238)
Cash and cash equivalents at beginning of year 21,466 27,076
-------- ---------
Cash and cash equivalents as of the three month period $ 22,949 $ 21,838
======== =========
Supplemental Disclosures
Cash paid for interest on deposits $ 7,857 $ 15,987
======== =========
Cash paid for income taxes $ 1,000 $ 788
======== =========
Transfers from loans and leases to real estate owned $ 918 $ 1,089
======== =========
Transfer securities from held to maturity to available for sale $ -- $ 220,471
======== =========
The accompanying notes are an integral part of these statements.
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three-Month Period Ended Six-Month Period Ended
June 30,
----------------------------------------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $ 1,980 $ 1,491 $ 3,820 $ 2,878
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the period 2,706 (1,396) 134 3,236
Less: Reclassification adjustment for gains included
in net income (88) (61) (88) (61)
------- ------- ------- -------
Comprehensive income $ 4,598 $ 156 $ 3,865 $ 6,053
======= ======= ======= =======
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2002
Note 1 - General
The accompanying financial statements of Patriot Bank Corp. and
Subsidiaries ("Patriot") include the accounts of the parent company, Patriot
Bank Corp. and its wholly-owned subsidiaries, Patriot Bank and Patriot
Investment Company. All material intercompany balances and transactions have
been eliminated in consolidation. These financial statements have been prepared
in accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, the
consolidated financial statements reflect all adjustments (which consist of
normal recurring accruals) necessary for a fair presentation of the results for
the unaudited periods. The results of operations for the three-month and
six-month period ended June 30, 2002 are not necessarily indicative of the
results which may be expected for the entire year. The consolidated financial
statements should be read in conjunction with the annual report on Form 10-K for
the year ended December 31, 2001.
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2002
Note 2 - Investment And Mortgage-Backed Securities
The amortized cost and estimated fair value of investment and
mortgage-backed securities are as follows:
--------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
-------------------------------------------- --------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
cost gain loss value cost gain loss value
-------- ------ ------ -------- -------- ------ ------ --------
(in thousands)
AVAILABLE FOR SALE:
Investment securities
U.S. Treasury and
Government agency
Securities $ 44,386 $ 36 $1,964 $ 42,458 $ 31,475 $ 2 $1,640 $ 29,837
Corporate debt securities 17,629 39 1,725 15,943 16,582 27 1,656 14,953
FHLMC preferred Stock 55,329 1,680 2 57,007 42,762 2,184 53 44,893
FHLB stock 20,009 -- -- 20,009 19,359 -- -- 19,359
Equity securities 11,483 297 198 11,582 5,845 31 433 5,443
Mortgage-backed securities
FHLMC 19,291 208 -- 19,499 5,194 13 10 5,197
FNMA 42,296 817 -- 43,113 45,466 124 144 45,446
GNMA 108 14 -- 122 120 12 -- 132
Collateralized mortgage
obligations:
FHLMC 30,905 267 13 31,159 44,879 566 193 45,252
FNMA 21,607 375 -- 21,982 33,632 582 70 34,144
Other 1,560 28 -- 1,588 2,938 18 -- 2,956
-------- ------ ------ -------- -------- ------ ------ --------
Total securities available
for Sale $264,603 $3,761 $3,902 $264,462 $248,252 $3,559 $4,199 $247,612
======== ====== ====== ======== ======== ====== ====== ========
HELD TO MATURITY:
Investment securities
U.S. Treasury and
Government agency
Securities $ 14,392 $ 367 $ 127 $ 14,632 $ 14,388 $ 342 $ 226 $ 14,504
Corporate debt securities -- -- -- -- 1,000 1 -- 1,001
Mortgage-backed securities
FHLMC 1,451 38 31 1,458 1,661 27 36 1,652
FNMA 1,473 85 35 1,523 1,680 80 51 1,709
GNMA 1,800 37 64 1,773 2,245 57 65 2,237
Collateralized mortgage
obligations
FHLMC 9,596 85 447 9,234 16,187 264 834 15,617
FNMA 4,184 36 126 4,094 6,476 53 171 6,358
-------- ------ ------ -------- -------- ------ ------ --------
Total securities held to maturity $ 32,896 $ 648 $ 830 $ 32,714 $ 43,637 $ 824 $1,383 $ 43,078
======== ====== ====== ======== ======== ====== ====== ========
Note 3 - Loans Receivable
Loans receivable are summarized as follows:
June 30, December 31,
-------- ------------
2002 2001
--------- ---------
(in thousands)
Commercial loan portfolio
Commercial $ 298,881 $ 283,848
Commercial leases 81,055 77,838
Consumer loan portfolio
Home equity 67,381 66,834
Consumer 7,801 8,614
Mortgage loan portfolio
Secured by real estate $ 176,276 $ 206,467
Construction 6,993 4,605
--------- ---------
Total loans receivable 638,387 648,206
Less deferred loan origination costs 1,336 933
Allowance for credit losses (6,478) (6,199)
--------- ---------
Total loans receivable, net $ 633,245 $ 642,940
========= =========
Note 4 - Deposits
Deposits are summarized as follows:
June 30, December 31,
-------- ------------
Deposit type 2002 2001
- ------------ -------- ------------
(in thousands)
NOW $ 38,254 $ 30,951
Money market 138,719 135,214
Savings accounts 54,039 45,534
Non-interest-bearing demand 41,839 38,235
-------- --------
Total demand, transaction, money
market and savings deposits 272,851 249,934
Certificates of deposits 232,913 283,929
-------- --------
Total deposits $505,764 $533,863
======== ========
NOTE 5 - EARNINGS PER SHARE
For Three-Months Ended June 30, 2002 For Six-Months Ended June 30, 2002
-------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Net Income available to common
Stockholders $1,980 6,009 $0.33 $3,820 6,003 $0.64
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 340 (.02) -- 264 (.03)
------ ----- ----- ------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed conversions $1,980 6,349 $0.31 $3,820 6,267 $0.61
====== ===== ===== ====== ===== =====
For Three-Months Ended June 30, 2001 For Six-Months Ended June 30, 2001
-------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Net Income available to common
Stockholders $1,491 5,854 $0.25 $2,878 5,850 $0.49
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 114 -- -- 77 --
------ ----- ----- ------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed conversions $1,491 5,968 $0.25 $2,878 5,927 $0.49
====== ===== ===== ====== ===== =====
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 and six-month
periods ending June 30, 2002 and 2001 (in thousands).
For the three-month period ended June 30, 2002 For the six-month period ended June 30, 2002
---------------------------------------------------- ---------------------------------------------------
PATRIOT PATRIOT PATRIOT CONSOLIDATED PATRIOT PATRIOT PATRIOT CONSOLIDATED
BANK MORTGAGE LEASING PATRIOT BANK BANK MORTGAGE LEASING PATRIOT BANK
Net interest income $ 6,433 $ 144 $ 689 $ 7,266 $ 12,387 $ 279 $ 1,376 $ 14,042
Other income 1,196 344 263 1,803 2,307 602 555 3,464
Total net income 1,644 196 144 1,980 3,229 290 301 3,820
Total assets 912,761 14,661 82,486 1,009,908 912,761 14,661 72,168 1,009,908
Total loans and
leases, gross 551,498 14,511 81,055 647,064 551,498 14,511 71,406 647,064
For the three-month period ended June 30, 2001 For the six-month period ended June 30, 2001
---------------------------------------------------- ---------------------------------------------------
PATRIOT PATRIOT PATRIOT CONSOLIDATED PATRIOT PATRIOT PATRIOT CONSOLIDATED
BANK MORTGAGE LEASING PATRIOT BANK BANK MORTGAGE LEASING PATRIOT BANK
Net interest income $ 4,959 $ 58 $ 578 $ 5,595 $ 10,046 $ 116 $ 1,177 $ 11,339
Other income 1,149 405 393 1,947 2,496 712 742 3,950
Total net income 1,273 28 190 1,491 2,510 (14) 382 2,878
Total assets 974,876 5,743 72,168 1,047,044 969,133 5,743 72,168 1,047,044
Total loans and
leases, gross 579,830 5,723 71,406 656,959 579,830 5,723 71,406 656,959
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. The
Company has completed its evaluation and, based on this evaluation of the Bank's
operations there was no indication of transitional impairment losses as of the
date of adoption.
As of the date of adoption, the company had unamortized goodwill in the
amount of $8.7 million, which will be subject to the transition provisions of
SFAS No. 141 and No. 142. Amortization expenses related to goodwill was $0 and
$181,000 for the three months ended June 30, 2002 and 2001, and $0 and $364,000
for the six months ended June 30, 2002 and 2001, respectively.
A summary of goodwill and other intangible assets at June 30, 2002 is as
follows:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Goodwill (non-amortizing) $ 10,941 $ 2,198 $ 8,743
Amortization expense of other intangible assets for the six months ended June
30, 2002 is as follows (in thousands):
For the six
months ended
June 30, 2002
-------------
Other amortizing intangibles:
Core Deposit Intangible $ 4,606 $ 1,487 $ 3,119
-------- -------- ---------
Total other amortizing
intangibles $ 4,606 $ 1,487 $ 3,119
======== ======== =========
The estimated amortization expense of intangible assets for each of the five
succeeding fiscal years is as follows:
Estimated annual amortization expense (in thousands)
For the year ended December 31, 2002 486
For the year ended December 31, 2003 465
For the year ended December 31, 2004 433
For the year ended December 31, 2005 433
For the year ended December 31, 2006 433
Note 9 - Accounting for Asset Retirement Obligations
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. It is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Earlier application is encouraged. The Bank
does not expect the adoption of the Statement to have an impact on it's
earnings, financial condition, or equity.
Note 10 - Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. This Statement supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. However, this
Statement retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in distribution to owners) or is classified as held for sale.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with earlier application encouraged. The provisions of this
Statement generally are to be applied prospectively. The adoption of the
Statement did not have any impact on the Bank's earnings, financial condition,
or equity.
Note 11 - Reporting Gains and Losses from Extinguishment of Debt
In April 2002, the FASB issued Statement No. 145, "Reporting Gains and Losses
from Extinguishment of Debt". This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications. It is effective for financial statements issued for
fiscal years beginning after May 15, 2002, and interim periods within those
fiscal years. Patriot doesn't expect the adoption of the Statement to have a
significant impact on the Bank's earnings, financial condition, or equity.
Note 12 - Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Patriot doesn't expect the adoption of the
Statement to have a significant impact on the Bank's earnings, financial
condition, or equity.
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 $.31 and net
income of $1,980,000 for the three-month period ended June 30, 2002 compared to
diluted earnings per share of $.25 and net income of $1,491,000 for the three
month period ended June 30, 2001. Diluted earnings per share for the six-month
period ending June 30, 2002 was $.61 and net income of $3,820,000 compared with
$.49 and net income of $2,878,000 for the six-month period ended June 30, 2001.
Return on average equity was 12.82%, for the three-month period ended June 30,
2002 compared to 10.57%, for the three-month period ended June 30, 2001.
NET INTEREST INCOME. Net interest income for the three-month and six-month
periods ended June 30, 2002 was $7,266,000 and $14,042,000 compared to
$5,595,000 and $11,339,000 for the same periods in 2001. The increase in net
interest income is primarily due to the impact of decreases in market rates on
Patriot's funding sources and Patriot's strategy to reduce investments,
mortgage-backed securities and mortgage loans and the level of wholesale
funding. The decreases in market rates on Patriot's funding sources outpaced the
rates on assets and, as a result, expanded Patriot's net interest margin.
Patriot's net interest margin (net interest income as a percentage of average
interest-earning assets) for the three-month and six-month periods ended June
30, 2002 was 3.32% and 3.18% compared to 2.40% and 2.31% for the same period in
2001.
Interest on loans and leases was $12,433,000 and $24,931,000 for the
three-month and six-month periods ended June 30, 2002 compared to $13,694,000
and $27,725,000 for the same periods in 2001. The average balance of loans was
$640,718,000 with an average yield of 7.80% for the six-month period ended June
30, 2002 compared to an average balance of $656,661,000 with an average yield of
8.45% 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 $4,370,000 and $8,781,000 for the three-month and six-month
periods ended June 30, 2002 compared to $5,388,000 and $11,665,000 for the same
periods in 2001. The average balance of the investment portfolio was
$292,286,000 with an average yield of 6.58% for the six-month period ended June
30, 2002 compared to an average balance of $356,087,000 with an average yield of
6.91% for the same period in 2001. The decrease in average balance is primarily
due to Patriot allowing the investment portfolio to amortize down so it can be
replaced with generally higher-yielding commercial loans and leases. The
decrease in average yield is related to general decreases in market rates on
adjustable rate securities.
Interest on total deposits was $3,615,000 and $7,898,000 for the
three-month and six-month periods ended June 30, 2002 compared to $7,424,000 and
$16,182,000 for the same periods in 2001. The average balance of total deposits
was $523,608,000 with an average cost of 3.02% for the six-month period ended
June 30, 2002 compared to an average balance of $608,763,000 with an average
cost of 5.36% 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 $5,934,000 and $11,832,000 for the three-month
and six-month periods ended June 30, 2002 compared to $6,168,000 and $12,286,000
for the same periods in 2001. The average balance of borrowings was $410,395,000
with an average cost of 5.74% for the six-month period ended June 30, 2002
compared to an average balance of $417,959,000 with a cost of 5.85% 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
$1,000,000 and $1,675,000 for the three-month and six-month periods ended June
30, 2002 compared to $500,000 and $950,000 for the same period in 2001. The
increased provision was the result of increased commercial loan and lease
outstandings, higher charge-offs as well as some deterioration in asset quality.
An allowance for credit losses is maintained at a level that represents
management's best estimate of known and inherent losses in the loan and lease
portfolio. Management's periodic evaluation of the allowance for credit losses
is based upon evaluation of individual loans and leases, the overall risk
characteristics of the various portfolio segments, regression analyses using
past loss experience, current and projected financial status and
creditworthiness of its borrowers, the adequacy of collateral, the level and
nature of non-performing loans, current economic conditions, the results of the
most recent regulatory examination and other relevant factors. This evaluation
is inherently subjective. While management uses the best information available
to make such evaluations, future adjustments to the allowance may be necessary
if conditions differ substantially from the assumptions used in making the
evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for credit losses. Such
agencies may require Patriot to recognize additions to the allowance for credit
losses based on their judgments of information, which is available to them at
the time of their examinations.
Patriot's total loans consist of four distinct portfolios. Each of which is
monitored and analyzed seperately.
The mortgage loan portfolio is seasoned as Patriot has been in the
mortgage lending business for many years and has sold substantially all new
mortgage originations in the past two years. The level of non-performing assets
in the mortgage portfolio has increased during the past two years from $565,810
at June 30,2000 to $1,010,044 at June 30, 2002. Management believes this
increase can be attributed to the current recessionary phase of the credit cycle
and a relatively low reference point in previous year's 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 home equity loans and home
equity lines of credit. The consumer loan portfolio is also mature as Patriot
has been in consumer lending business for many years. As with mortgage lending,
Patriot predominantly uses an internal regression analysis, which uses
historical data to estimate losses that are inherent in the portfolio.
Patriot entered the commercial lending business in 1996 and has grown the
portfolio into a substantial portion of total loans. Patriot uses historical
data to prepare regression models to monitor trends of charge-offs and
recoveries and establish appropriate allowance levels. Patriot also closely
monitors local economic and business trends relative to its commercial lending
portfolio to estimate the effect those trends may have on potential losses.
Patriot's commercial loan portfolio contains some loans that are substantially
larger than the loans within other portfolios. The potential loss associated
with an individual loan could have a significant impact on the allowance and
charge-off levels at Patriot. Therefore, Patriot closely monitors these loans
and will specifically reserve for individual loans which exhibit weakness.
Patriot entered the commercial leasing business in 1998 principally
through the acquisition of Keystone Leasing. Patriot's leasing portfolio has a
short, approximately 3 to 4 year life. Patriot performs an internal regression
analysis on this portfolio using historical data (including Keystone Leasing
data). Patriot also closely monitors regional and national economic business
trends relative to its commercial leasing portfolio to estimate the effects
those trends may have on potential losses.
Patriot's levels of delinquencies and non-performing assets have increased
somewhat but compare favorably with industry averages. At June 30, 2002
Patriot's non-performing assets were .58% of total assets compared to .39% at
the end of the same period in 2001. Additionally, Patriot had $8,278,000 in
loans and leases, which were 30 days or more delinquent representing 1.28% of
Patriot's total loan and lease portfolios compared to $7,172,175 and 1.09%,
respectively, at the end of the same period in 2001.
NON-INTEREST INCOME. Total non-interest income was $1,803,000 and
$3,464,000 for the three-month and six-month periods ended June 30, 2002
compared to $1,947,000 and $3,950,000 for the same periods in 2001. The decrease
in non-interest income was primarily due to $134,000 in gains recognized on the
sale of investment securities available for sale during 2002 versus $503,000 in
gains recognized on the sale of investment securities available for sale during
2001. Non-interest income also includes recurring non-interest income such as
loan and deposit fees, mortgage banking gains, ATM fees, and income from bank
owned life insurance, that are consistent with the prior period.
NON-INTEREST EXPENSE. Total non-interest expense was $5,487,000 and
$10,820,000 for the three-month and six-month periods ended June 30, 2002
compared to $4,955,000 and $10,064,000 for the same periods in 2001. The
increase in non-interest expense was primarily due to higher compensation costs
due to increases in staffing associated with branch deposit growth and
commercial lending offset by the elimination of $364,000 of goodwill
amortization.
INCOME TAX PROVISION. The income tax provision was $602,000 and $1,191,000
for the three-month and six-month periods ended June 30, 2002 compared to
$596,000 and $1,193,000 for the same periods in 2001. The effective tax rate was
23.32% and 23.77% for the three-month and six-month periods ended June 30, 2002
compared to 28.56% and 27.91% for the same periods in 2001. The decrease in the
effective tax rate was primarily due to the elimination of non-deductible
goodwill amortization expense in 2002. Additionally, Patriot purchased certain
tax beneficial securities during the fourth quarter of 2001.
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 June 30, 2002
Patriot's total loan portfolio was $633,245,000, 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 June 30, 2002 were
$22,949,000 compared to $21,466,000 at December 31, 2001. The increase in cash
balances is associated with timing differences in borrowing activity and
investment prepayments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment securities consist
primarily of U.S. agency securities, mortgage-backed securities which are
generally insured or guaranteed by either FHLMC, FNMA or the GNMA and
collateralized mortgage obligations. Total investment and mortgage-backed
securities at June 30, 2002 were $297,358,000 compared to $291,249,000 at
December 31, 2001. The increase in investment and mortgage-backed securities was
primarily due to the purchase of $64,273,000 of available for sale securities
offset by $59,353,000 of normal investment amortization, sales and maturities.
OTHER ASSETS. Other assets at June 30, 2002 were $8,237,000 compared to
$7,313,000 at December 31, 2001. The increase in other assets was primarily
attributable to a new insurance program for Patriot's equipment leasing
customers.
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 June 30, 2002 were $505,764,000 compared to $533,863,000 at
December 31, 2001. Of that decrease, $24,109,000 was related to brokered
deposits and $26,907,000 was related to retail certificates of deposit, offset
by a $22,917,000 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.
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 June 30, 2002 were $429,266,000
compared to $405,179,000 at December 31, 2001. The increase is primarily
associated with higher yielding deposits being replaced by lower yielding
borrowings.
OTHER LIABILTIIES. Other Liabilities at June 30, 2002 were $6,402,000
compared to $5,993,000 at December 31, 2001. The increase in balance is
primarily the result of the accrual of Patriot's corporate income taxes as a
result from Patriot's net operating income offset by timing differences in
payable accounts.
STOCKHOLDERS' EQUITY. Total stockholders' equity was $64,577,000 at June
30, 2002 compared to $61,706,000 at December 31, 2001. The increase in balance
is due to earnings offset by dividends paid to shareholders' and increases in
accumulated other comprehensive income.
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is based on management's ongoing evaluation of
the loan portfolio and reflects an amount considered by management to be its
best estimate of known and inherent losses in the portfolio. Management
considers a variety of factors when establishing the allowance, such as the
impact of current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of loan review and related classifications, and
historic loss rates. In addition, certain individual loans which management has
identified as problematic are specifically provided for, based upon an
evaluation of the borrower's perceived ability to pay, the estimated adequacy of
the underlying collateral and other relevant factors. Consideration is also
given to examinations performed by regulatory agencies. Although provisions have
been established and segmented by type of loan, based upon management's
assessment of their differing inherent loss characteristics, the entire
allowance for losses on loans is available to absorb further loan losses in any
category.
Management uses significant estimates to determine the allowance for loan
losses. Since the allowance for loan losses is dependent, to a great extent, on
conditions that may be beyond Patriot's control, it is at least reasonably
possible that management's estimate of the allowance for loan losses and actual
results could differ in the near term.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for loan losses. They may require additions to
the allowance based upon their judgements about information available to them at
the time of examination.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established against deferred tax assets
when in the judgement of management, it is more likely than not that such
deferred tax assets will not become available. Based on management's evaluation
of the likelihood of realization, no valuation allowance has been established.
Because the judgement about the level of future taxable income is dependent to a
great extent on matters that may, at least in part be beyond Patriot's control,
it is at least reasonably possible that management's judgement about the need
for a valuation allowance for deferred taxes could change in the near term.
REAL ESTATE OWNED (REO) AND OTHER REPOSSESSED PROPERTY
Real estate owned is defined to include real estate Patriot acquires
through foreclosure. REO is recorded on Patriot's books at the lower of
Patriot's carrying value in the loan or the fair value of the property as of the
date of transfer to REO. Any excess of the recorded investment in the loan over
the fair market value is charged against Patriot's loan loss reserve.
Other repossessed property consists of mostly leased equipment returned to
Patriot at the end of the lease. The off-lease equipment is recorded on
Patriot's books at the lower of Patriot's carrying value in the lease or the
fair value of the equipment as of the date of transfer to other repossessed
property. Any excess of the recorded investment in the lease over the fair
market value is taken as a loss on Patriot's books. Additionally, valuation of
REO and other repossessed property is dependent to a great extent on current
economic, market and geographic conditions, and that may, at least in part be
beyond Patriot's control. It is at least reasonably possible that management's
estimates included in the valuation of REO and other repossessed property could
change in the near term. Patriot's current judgement is that the valuation of
REO and other repossessed property remains appropriate at June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances and repurchase agreements. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
During the three-month and six-month period ended June 30, 2002,
significant liquidity was provided by the maturity and principal repayment on
investment and mortgage-backed securities. These funds were invested in new
securities. Additional liquidity was provided by new borrowings which were used
to cover a reduction in deposits.
At June 30, 2002, Patriot had outstanding loan commitments of $70,159,000.
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 June 30, 2002 totaled $126,043,000. 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 June 30, 2002, Patriot
Bank's and Patriot Bank Corp.'s capital ratios exceeded all requirements to be
considered well capitalized. The following table sets forth the capital ratios
of Patriot Bank Corp., Patriot Bank and the current regulatory requirements at
June 30, 2002:
To Be To Be
Actual Adequacy Capitalized Well Capitalized
------ -------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 2002
Total capital (to risk weighted assets)
Patriot Bank Corp. $82,421 12.76% $51,679 8% $64,599 10%
Patriot Bank 75,802 11.76% 51,578 8% 64,472 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 73,942 11.45% 25,840 4% 38,760 6%
Patriot Bank 68,569 10.64% 25,789 4% 38,683 6%
Tier I capital (to average assets)
Patriot Bank Corp. 73,942 7.45% 39,677 4% 49,596 5%
Patriot Bank 68,569 6.91% 39,677 4% 49,596 5%
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 June 30, 2003, based upon
the assets, liabilities and off-balance sheet financial instruments in existence
at June 30, 2002. Patriot has also estimated changes to that estimated net
interest income based upon interest rates rising or falling in monthly
increments ("rate ramps"). Rate ramps assume that all interest rates increase or
decrease in monthly increments evenly throughout the period modeled. The
following table reflects the estimated percentage change in estimated net
interest income for the year ending June 30, 2003 resulting from changes in
interest rates.
Rate ramp to interest rates % change
--------------------------- --------
+2% .26%
-2% (2.48%)
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 June 30, 2002, resulting from
shocks to interest rates.
Percent change EVE Equity/
Rate shock from base EVE Assets
---------- --------- ----------
+2% -14.68% 11.27%
+1% -6.31% 12.05%
Base 12.52%
-1% -4.95% 11.72%
-2% -15.24% 10.31%
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 June 30, 2002, which are
anticipated, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Loan amounts reflect principal balances expected to
be repaid and/or repriced as a result of contractual amortization and
anticipated prepayments of adjustable-rate loans and fixed-rate loans and as a
result of contractual rate adjustments on adjustable-rate loans. Estimated
prepayment rates were applied to mortgage loans and mortgage-backed securities
based upon industry expectations. Core deposit decay rates have been estimated
based upon a historical analysis of core deposit trends. With the exceptions
noted above, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth the gap and cumulative gap as a percentage of total assets at
June 30, 2002:
0-90 91-180 181-365
Days Days Days
---- ---- ----
GAP to Total Assets 8.98% -4.57% 6.61%
Cumulative GAP to Total Assets 8.98% 4.41% 11.02%
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.
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
The company held its Annual Meeting of Shareholders on April 23, 2002. At
the said meeting 6,317,582 shares of Common Stock were entitled to vote, of
which 5,633,946 shares were present in person or by proxy. The following matters
were voted upon at the Annual Meeting and the number of affirmative votes,
negative votes and abstentions with respect to the matters are as follows:
1. At the Annual Meeting, two directors were elected for three-year terms.
The nominees were Richard Elko and James A. Bentley, Jr.
For % Withheld %
Richard Elko 5,472,093 97.10 161,853 2.90
James A. Bentley, Jr 5,474,943 97.20 159,003 2.80
The names of each of the directors whose term of office continued after
the Annual Meeting and their respective term expirations are as follows:
Russell J. Kunkel 2003
Thomas D. Paulus 2003
James B. Elliott 2004
Larry V. Thren 2004
2. The ratification of the appointment of KPMG LLP as independent auditors
of Patriot Bank Corp. for fiscal year ending December 31, 2002.
For % Against % Abstain %
5,550,266 98.50% 57,345 1.5% 0 0.0%
3. The approval of the Patriot Bank Corp. 2002 Stock Option Plan.
For % Against % Abstain %
4,898,821 87.7% 694,086 12.3% 0 0.00%
Item 5 OTHER INFORMATION
Not applicable.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Following exhibits are filed as part of this
report.
-- Exhibit 99.1 Certification of Chief Executive Office
-- Exhibit 99.2 Certification of Chief Financial Officer
(b) Reports filed on Form 8K
none
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* 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.
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 August 9, 2002 /s/ RICHARD A. ELKO
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Richard A. Elko
President and Chief Executive Officer
Date August 9, 2002 /s/ JAMES G. BLUME
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James G. Blume
Senior Vice President and
Chief Financial Officer