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, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________to_______________________
Commission File Number 0-26744
PATRIOT BANK CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 232820537
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
High and Hanover Streets, Pottstown, Pennsylvania 19464-9963
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 323-1500
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(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: 6,599,214 shares of
common stock were outstanding as of August 11, 2003.
1
PATRIOT BANK CORP AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION 3
Item 1 FINANCIAL STATEMENTS (Unaudited) 3
Consolidated Balance Sheets at June 30, 2003
and December 31, 2002 3
Consolidated Statements of Income for the Three and Six-Month Periods
ended June 30, 2003 and 2002 4
Consolidated Statements of Shareholders' Equity for the
Periods ended June 30, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows for the Three and Six-Month
Periods ended June 30, 2003 and 2002 6
Consolidated Statements of Comprehensive Income for the
Three and Six-Month Periods ended June 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 9
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 17
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
Item 4 CONTROLS AND PROCEDURES 25
PART II OTHER INFORMATION
Items 1 through 6 26
SIGNATURES 28
EXHIBITS 29
2
ITEM 1 FINANCIAL STATEMENTS
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, 2003 DECEMBER 31, 2002
------------------ -------------------
(unaudited)
ASSETS
Cash and cash due from banks $ 19,801 $ 15,741
Interest earning deposits in other financial institutions 1,082 1,098
---------- -----------
Total cash and cash equivalents 20,883 16,839
Securities available for sale 342,243 315,868
Loans held for sale 5,311 4,314
Loans and leases receivable, net of allowance for credit loss of $7,341
and $6,922 at June 30, 2003 and December 31, 2002, respectively 585,386 611,295
Premises and equipment, net 9,468 7,612
Accrued interest receivable 3,686 3,946
Real estate owned and other repossessed property 474 404
Cash surrender value life insurance 18,615 18,208
Goodwill 11,442 8,777
Amortizing intangible assets 3,638 3,137
Other assets 4,735 4,743
---------- -----------
TOTAL ASSETS $1,005,881 $ 995,143
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 605,738 $ 519,120
FHLB advances and federal funds 257,828 368,173
Repurchase agreements 42,931 14,210
Advances from borrowers for taxes and insurance 2,489 2,208
Trust preferred debt securities 20,500 20,500
Other liabilities 6,877 4,987
---------- -----------
Total liabilities 936,363 929,198
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized,
None issued at June 30, 2003 and December 31, 2002, respectively - -
Common stock, No par value, 20,000,000 shares authorized, 7,216,480 and
7,216,480 shares issued at June 30, 2003 and December 31, 2002, respectively - -
Additional paid-in capital 68,430 57,611
Common stock acquired by ESOP, 325,224 and 339,364 shares at cost at June 30,
2003 and December 31, 2002, respectively (1,604) (1,638)
Common stock acquired by MRP, 6,929 and 9,051 shares at amortized
Cost at June 30, 2003 and December 31, 2002, respectively (76) (98)
Retained earnings 5,934 13,855
Treasury stock acquired, 544,171 and 516,174 shares at cost at
June 30, 2003 and December 31, 2002, respectively (7,102) (6,441)
Accumulated other comprehensive income 3,936 2,656
---------- -----------
Total shareholders' equity 69,518 65,945
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,005,881 $ 995,143
========== ===========
The accompanying notes are an integral part of these statements.
3
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
(unaudited)
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Interest-earning deposits $ 4 $ 12 $ 10 $ 60
Investment securities 4,053 4,370 8,249 8,781
Loans and leases 10,643 12,433 21,773 24,931
----------- --------- --------- ---------
Total interest income 14,700 16,815 30,032 33,772
----------- --------- --------- ---------
INTEREST EXPENSE
Deposits 3,238 3,615 6,378 7,898
Short-term borrowings 478 1,128 1,278 2,255
Long-term borrowings 3,557 4,806 7,173 9,577
----------- --------- --------- ---------
Total interest expense 7,273 9,549 14,829 19,730
----------- --------- --------- ---------
Net interest income before provision for credit losses 7,427 7,266 15,203 14,042
Provision for credit losses 900 1,000 2,000 1,675
----------- --------- --------- ---------
Net interest income after provision for credit losses 6,527 6,266 13,203 12,367
----------- --------- --------- ---------
NON-INTEREST INCOME
Service fees on deposits 918 648 1,780 1,249
Fees on loans and leases 441 241 867 594
Investment gains / (losses) 376 134 932 134
Gain on the sale of loans and leases 746 486 1,449 797
BOLI 202 225 413 459
Patriot Advisors' commissions 502 88 980 211
Loss on the disposition of borrowings (136) -- (725) -
Other non-interest income 39 (19) 38 20
----------- --------- --------- ---------
Total non-interest income 3,088 1,803 5,734 3,464
----------- --------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,064 2,985 7,967 5,962
Occupancy and equipment 1,074 956 2,164 1,997
Professional services 278 414 603 631
Advertising 173 205 337 332
Deposit processing 294 288 583 534
Amortization of intangible assets 149 121 270 243
Office supplies & postage 226 189 435 359
Other operating expense 722 329 1,302 762
----------- --------- --------- ---------
Total non-interest expense 6,980 5,487 13,661 10,820
----------- --------- --------- ---------
Income before taxes 2,635 2,582 5,276 5,011
Income tax expense 484 602 1,025 1,191
----------- --------- --------- ---------
NET INCOME $ 2,151 $ 1,980 $ 4,251 $ 3,820
=========== ========= ========= =========
Earnings per share - basic $ 0.34 $ 0.30 $ 0.67 $ 0.58
=========== ========= ========= =========
Earnings per share - diluted $ 0.32 $ 0.28 $ 0.63 $ 0.55
=========== ========= ========= =========
Dividends per share $ 0.1200 $ 0.0909 $ 0.2291 $ 0.1795
=========== ========= ========= =========
The accompanying notes are an integral part of these statements.
4
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, unaudited)
ACCUMULATED
ADDITIONAL OTHER
NUMBER PAID-IN RETAINED TREASURY COMPREHENSIVE
OF SHARES CAPITAL ESOP MRP EARNINGS STOCK INCOME TOTAL
------ ------- ---- --- --------- ------ ------- -----
BALANCE AT JANUARY 1, 2002 5,980 $ 57,867 $ (1,819) $ (68) $ 8,598 $ (3,051) $ 179 $ 61,706
========= ========== ======== ======== ========= ======== ============= =========
Common stock issued.................. 5 70 -- -- -- -- -- 70
Common stock acquired by MRP......... (5) -- -- (70) -- -- -- (70)
Release and amortization of MRP...... 2 -- -- 40 -- -- -- 40
Purchase of treasury stock........... (293) -- -- -- -- (4,189) -- (4,189)
Release of ESOP shares............... 26 172 181 -- -- -- -- 353
Sale of stock associated with
ESPP................................. 9 -- -- -- -- 118 -- 118
Change in unrealized gains
on securities available
for sale, net of taxes.......... -- -- -- -- -- 2,477 2,477
Exercise of stock options............ 50 (498) -- -- -- 680 -- 182
Stock awards......................... -- -- -- -- -- 1 -- 1
Net income........................... -- -- -- -- 7,698 -- -- 7,698
Cash dividends paid.................. -- -- -- -- (2,441) -- -- (2,441)
--------- ---------- -------- -------- --------- -------- ------------- ---------
BALANCE AT DECEMBER 31, 2002 5,774 $ 57,611 $ (1,638) $ (98) $ 13,855 $ (6,441) $ 2,656 $ 65,945
========= ========== ======== ======== ========= ======== ============= =========
Release and amortization of MRP...... 2 -- -- 22 -- -- -- 22
Purchase of treasury stock........... (89) -- -- -- -- (1,497) -- (1,497)
Release of ESOP shares............... 14 191 34 -- -- -- -- 225
Sale of stock associated with
ESPP................................. 4 -- -- -- -- 65 -- 65
Change in unrealized gains
on securities available
for sale, net of taxes.......... -- -- -- -- -- -- 1,280 1,280
Exercise of stock options............ 2 -- -- -- -- 13 -- 13
Issuance of stock for acquisitions... 50 -- -- -- -- 758 -- 758
Stock dividend 10% 583 10,628 -- -- (10,628) -- -- --
Net income........................... -- -- -- -- 4,251 -- -- 4,251
Cash dividends paid.................. -- -- -- -- (1,544) -- -- (1,544)
--------- ---------- -------- -------- --------- -------- ------------- ---------
BALANCE AT JUNE 30, 2003 6,340 $ 68,430 $ (1,604) $ (76) $ 5,934 $ (7,102) $ 3,936 $ 69,518
========= ========== ======== ======== ========= ======== ============= =========
The accompanying notes are an integral part of these statements.
5
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
SIX-MONTH PERIOD ENDED JUNE 30,
-------------------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net Income $ 4,251 $ 3,820
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and accretion of:
Deferred loan origination costs (fees) 74 (424)
Premiums and discounts 277 (553)
MRP shares 22 18
Intangible assets 270 243
Provision for credit losses 2,000 1,675
Release of ESOP shares 225 169
Gain on sale of investment securities (932) (134)
Loss on disposition of borrowings 725 --
Loss on sale and write down of real estate owned and other repossessed assets 45 180
Depreciation of premises and equipment 698 648
Loss on disposition of equipment -- 57
Mortgage loans originated for sale (66,874) (38,474)
Mortgage loans sold 65,877 37,785
Deferred income tax expense (benefit) 107 (481)
Increase in cash surrender value of life insurance (407) (455)
Decrease in accrued interest receivable 260 37
Decrease (increase) in other assets 75 (898)
(Decrease) increase in other liabilities (621) 354
--------- ---------
Net cash provided by operating activities 6,072 3,567
--------- ---------
INVESTING ACTIVITIES
Loan originations & principal payments on loans, net 22,911 7,524
Proceeds from the sale of securities - available for sale 31,791 5,738
Proceeds from the maturity of securities - available for sale 59,089 43,314
Proceeds from the maturity of securities - held to maturity -- 10,301
Purchase of securities - available for sale (114,661) (64,273)
Proceeds from sale of real estate owned 809 481
Cash paid in business combinations (387) --
Purchase of premises and equipment, net of sales (2,508) (546)
--------- ---------
Net cash (used in) provided by investing activities (2,956) 2,539
--------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 86,618 (28,099)
(Repayment of) proceeds from short term borrowings (111,725) 19,090
Funding of trust preferred securities -- 5,000
Proceeds from short term repurchase agreements 28,721 --
Repayment of long term borrowings (4) (3)
Increase in advances from borrowers for taxes and insurance 281 570
Cash paid for dividends (1,544) (1,250)
Proceeds from the sale of stock associated with ESPP 65 56
Proceeds from the exercise of stock options 13 13
Purchase of treasury stock (1,497) --
--------- ---------
Net cash provided by (used in) financing activities 928 (4,623)
--------- ---------
Increase in cash and cash equivalents 4,044 1,483
Cash and cash equivalents at beginning of the period 16,839 21,466
--------- ---------
Cash and cash equivalents at end of the period $ 20,883 $ 22,949
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest on deposits $ 6,839 $ 7,857
Cash paid for income taxes 927 1,000
Transfers from loans and leases to real estate owned and other repossessed property $ 924 $ 918
6
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands, unaudited)
SUPPLEMENTAL DISCLOSURES (CONTINUED)
On January 3, 2003, Patriot purchased the stock of Bonds & Paulus Associates,
Inc. for $458,000 plus contingent consideration to be paid in shares of Patriot
Bank Corp. common stock based upon future revenues of Bonds & Paulus. Of the
$458,000, $115,000 was paid in cash and 22,810 shares of Patriot Bank Corp.
common stock having a value of $343,000 were issued at closing. In conjunction
with the acquisition of Bonds & Paulus Associates, Inc., liabilities were
assumed as follows:
Fair value of assets acquired $ 1,671.0
Cash paid (115.0)
Stock issued (343.0)
----------
Liabilities assumed $ 1,213.0
On January 17, 2003, Patriot purchased the stock of Pension Benefits Inc. for
$829,000 plus contingent consideration to be paid in shares of Patriot Bank
Corp. common stock based upon future revenues of Pension Benefits, Inc. Of the
$829,000, $414,500 was paid in cash and 27,338 shares of Patriot Bank Corp.
common stock were issued at closing. In conjunction with the acquisition of
Pension Benefits Inc., liabilities were assumed as follows:
Fair value of assets acquired $ 2,114.0
Cash paid (414.5)
Stock issued (414.5)
----------
Liabilities assumed $ 1,285.0
The accompanying notes are an integral part of these statements.
7
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE-MONTH PERIOD SIX-MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
------------------ ----------------
2003 2002 2003 2002
------ ------ ------ ------
(IN THOUSANDS)
Net Income............................................................. $ 2,151 $1,980 $4,251 $3,820
Other comprehensive income.............................................
Unrealized gains on securities........................................
Unrealized holding gains arising during the period................... 46 2,706 1,280 45
Less: Reclassification adjustment for gains included in net income
Net gains on the sale of investment securities....................... (376) (134) (932) (134)
Income tax expense associated with net gains on the sale of
investment securities................................................ 128 46 317 46
------- ------ ------ ------
Comprehensive income................................................... $ 1,949 $4,598 $4,916 $3,777
======= ====== ====== ======
8
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 1 - GENERAL
The accompanying financial statements of Patriot Bank Corp. and Subsidiaries
("Patriot") include the accounts of the parent company, Patriot Bank Corp. and
its wholly-owned subsidiaries, Patriot Bank 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 and six-month periods ended June 30, 2003
are not necessarily indicative of the results which may be expected for the
entire year. The consolidated financial statements should be read in conjunction
with the annual report on Form 10-K for the year ended December 31, 2002. All
share amounts, including earnings per share, have been restated to reflect the
effect of the 10% stock dividend paid in April 2003.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The requirements of Statement No. 148 are effective
for fiscal years ending after December 15, 2002, except for financial reports
containing condensed financial statements for interim periods. Patriot continues
to account for stock based compensation under APB No. 25. If Statement No. 123
would have been applied it would have had the following impact:
THREE-MONTH PERIOD ENDED,
JUNE 30
-------------------------
2003 2002
------ ------
(IN THOUSANDS)
Net income, as reported $2,151 $1,980
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (45) (30)
------ ------
Pro forma net income $2,106 $1,950
====== ======
Earnings per share:
Basic - as reported $ .34 $ .30
====== ======
Basic - pro forma $ .33 $ .30
====== ======
Diluted - as reported $ .32 $ .28
====== ======
Diluted - pro forma $ .31 $ .28
====== ======
SIX-MONTH PERIOD ENDED,
JUNE 30
-----------------------
2003 2002
------ ------
(IN THOUSANDS)
Net income, as reported $4,251 $3,820
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (91) (47)
------ ------
Pro forma net income $4,160 $3,773
====== ======
Earnings per share:
Basic - as reported $ .67 $ .58
====== ======
Basic - pro forma $ .65 $ .57
====== ======
Diluted - as reported $ .63 $ .55
====== ======
Diluted - pro forma $ .61 $ .55
====== ======
9
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 2003 December 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
cost gain loss value cost gain loss value
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
AVAILABLE FOR SALE:
Investment securities
U.S. Treasury and
Government agency
securities $ 36,078 $ 947 $ 18 $ 37,007 $ 66,304 $ 599 $ 652 $ 66,251
Corporate debt securities 22,575 868 1,130 22,313 22,724 131 1,467 21,388
FHLMC preferred stock 84,709 3,431 -- 88,140 67,626 3,715 -- 71,341
FHLB and FRB stock 15,874 -- -- 15,874 17,949 -- -- 17,949
Equity securities 17,100 623 178 17,545 6,647 799 164 7,282
Mortgage-backed securities
FHLMC 56,579 503 116 56,966 67,523 700 81 68,142
FNMA 101,677 1,068 60 102,685 55,821 373 67 56,127
GNMA 65 9 -- 74 96 13 -- 109
Collateralized mortgage
obligations:
FHLMC 58 1 -- 59 2,960 18 -- 2,978
FNMA 1,564 16 -- 1,580 3,689 105 -- 3,794
Other -- -- -- -- 505 2 -- 507
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Total securities available for
Sale $ 336,279 $ 7,466 $ 1,502 $342,243 $ 311,844 $ 6,455 $ 2,431 $315,868
========= ========== ========== ======== ========= ========== ========== ========
10
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
- -------------------------------------------------------------------------------
Composition of loan portfolio June 30, 2003 December 31, 2002
- -------------------------------------------------------------------------------
(in thousands)
Comercial Portfolio:
Commercial loans $ 321,140 $ 315,537
Commercial leases 77,418 77,138
Consumer Portfolio:
Home equity 75,618 72,400
Consumer 7,870 7,724
Mortgage Portfolio:
Residential mortgages $ 97,318 $ 135,632
Construction 11,902 8,220
--------- ----------
Total loans and leases, gross 591,266 616,651
Deferred loan costs 1,461 1,566
Allowance for credit losses (7,341) (6,922)
--------- ----------
Total loans and leases, net $ 585,386 $ 611,295
========= ==========
NOTE 4 - DEPOSITS
Deposits are summarized as follows:
- ------------------------------------------------------------------------
Deposit type June 30, 2003 December 31, 2002
- ------------------------------------------------------------------------
(in thousands)
NOW $ 35,975 $ 31,505
Money market 167,032 143,565
Savings accounts 75,552 59,029
Non-interest-bearing demand 60,032 53,471
--------- ---------
Total demand, transaction, money
market and savings deposits 338,591 287,570
Certificates of deposits 267,147 231,550
--------- ---------
Total deposits $ 605,738 $ 519,120
========= =========
11
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 5 - EARNINGS PER SHARE
The dilutive effect of stock options is excluded from basic earnings
per share but included in the computation of diluted earnings per share.
For Three-Months Ended June 30, 2003 For Six-Months Ended June 30, 2003
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ------
(in thousands) (in thousands)
BASIC EPS
Net Income available to common
Shareholders $2,151 6,367 $0.34 $ 4,251 6,390 $0.67
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 434 (.02) -- 385 (.04)
------ ----- ----- ------- ----- -----
DILUTED EPS
Net income available to common
shareholders $2,151 6,801 $0.32 $ 4,251 6,775 $0.63
====== ===== ===== ======= ===== =====
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
----------- ------------- --------- ----------- ------------- ------
(in thousands) (in thousands)
BASIC EPS
Net Income available to common
Shareholders $1,980 6,611 $0.30 $ 3,820 6,604 $0.58
EFFECT OF DILUTIVE SECURITIES
Dilutive Options -- 373 (.02) -- 290 (.03)
------ ----- ----- ------- ----- -----
DILUTED EPS
Net income available to common
shareholders $1,980 6,984 $0.28 $ 3,820 6,894 $0.55
====== ===== ===== ======= ===== =====
NON-DILUTIVE OPTIONS. Patriot had 0 and 235,000 non-dilutive options at June 30,
2003 and 2002, respectively.
12
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 6 - SEGMENT REPORTING
The Company has four reportable segments: Banking, Mortgage Banking,
Financial Advisors and Commercial Leasing. Banking operates a network of 16
community banking offices providing deposit and loan services to customers.
Mortgage Banking originates and sells residential mortgages into the secondary
market to generate fee income. Financial Advisors results for the three and six
month periods ended June 30, 2002, reflect only brokerage services. In January
2003, Patriot completed its acquisition of two companies, which is disclosed in
Note 13 - Business Combinations. As a result of these business combinations,
Financial Advisors' now offers wealth and investment management, pension
benefits, and insurance services in addition to brokerage services. The impact
of these two acquisitions was $4,498,000 to total assets as well as $453,000 and
$865,000 to other income for the three-month and six-months periods ended 2003.
Commercial Leasing originates small ticket leases.
The following table highlights income statement and balance sheet
information for each of the segments at or for the three and six-month periods
ended June 30, 2003 and 2002.
AT OR FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2003
----------------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- -------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 6,334 $ 75 $ 6 $ 1,012 $ 7,427
Other income 1,703 533 502 350 3,088
Total net income 1,602 210 (67) 406 2,151
Total assets 916,662 5,349 5,359 78,511 1,005,881
Total loans and leases, net 507,968 5,311 - 77,418 590,697
Intersegment interest income / (expense) (890) 75 6 809 -
----------------------------------------------------------------
AT OR FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003
----------------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- -------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 13,045 $ 154 $ 16 $ 1,988 $ 15,203
Other income 3,002 1,038 980 714 5,734
Total net income 3,076 394 (45) 826 4,251
Total assets 916,662 5,349 5,359 78,511 1,005,881
Total loans and leases, net 507,968 5,311 - 77,418 590,697
Intersegment interest income / (expense) (1,868) 154 16 1,698 -
----------------------------------------------------------------
AT OR FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2002
----------------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- -------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 6,337 $ 52 $ 2 $ 875 $ 7,266
Other income 1,108 344 88 263 1,803
Total net income 1,572 135 (15) 288 1,980
Total assets 919,262 7,491 669 82,486 1,009,908
Total loans and leases, net 552,190 7,341 - 81,055 640,586
Intersegment interest income / (expense) (1,095) 52 2 1,041 -
----------------------------------------------------------------
AT OR FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2002
----------------------------------------------------------------
MORTGAGE FINANCIAL COMMERCIAL
BANKING BANKING ADVISORS LEASING TOTAL
------- -------- -------- ------- -----
(IN THOUSANDS)
Net interest income $ 12,206 $ 104 $ 4 $ 1,728 $ 14,042
Other income 2,096 602 211 555 3,464
Total net income 3,058 175 31 556 3,820
Total assets 919,262 7,491 669 82,486 1,009,908
Total loans and leases, net 552,190 7,341 - 81,055 640,586
Intersegment interest income / (expense) (2,184) 104 4 2,076 -
13
PATRIOT BANK CORP, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 7 - ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of non-amortizing and amortizing intangible assets is as follows:
JUNE 30, 2003 DECEMBER 31, 2002
----------------------------------------- ------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED NET CARRYING CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
----------------------------------------- ------------------------------------------
(IN THOUSANDS)
Non-amortizing intangible assets:
Goodwill $ 13,640 $ 2,198 $ 11,442 $ 10,975 $ 2,198 $ 8,777
Amortizing intangible assets:
Core deposit intangible 4,606 1,972 2,634 4,606 1,729 2,877
Customer lists 826 27 799 - - -
Originated mortgage servicing
rights 664 459 205 664 404 260
----------------------------------------- ------------------------------------------
Total amortizing intangible
assets 6,096 2,458 3,638 5,270 2,133 3,137
----------------------------------------- ------------------------------------------
Total intangible assets $ 19,736 $ 4,656 $ 15,080 $ 16,245 $ 4,331 $ 11,914
========================================= ==========================================
Aggregate amortization expense for the three and six-month period ended June 30
is as follows:
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
JUNE 30 JUNE 30
------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Amortization expense ............. $ 170 $ 206 $ 325 $ 350
The estimated amortization expense of intangible assets for each of the five
succeeding fiscal years is as follows:
FOR THE YEAR ENDED ESTIMATED EXPENSE
(IN THOUSANDS)
December 31, 2003 .................... $ 681
December 31, 2004 .................... 579
December 31, 2005 .................... 518
December 31, 2006 .................... 503
December 31, 2007 .................... 495
The changes in the carrying amount of goodwill are as follows:
JUNE 30, 2003 DECEMBER 31, 2002
(IN THOUSANDS)
Balance at the beginning of period ... $ 8,777 $ 8,688
Goodwill acquired .................... 2,665 89
Amortization expense ................. - -
-------- --------
Balance at the end of period ......... $ 11,442 $ 8,777
======== ========
14
PATRIOT BANK CORP, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 8 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. As used in this Statement, a legal
obligation is an obligation that a party is required to settle as a result of an
existing or enacted law, statute, ordinance, or written or oral contract or by
legal construction of a contract under the doctrine of promissory estoppel. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. It is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Earlier application is encouraged. The adoption of this statement did
not have an impact on Patriot's earnings, financial condition, or equity.
NOTE 9 - REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT
In April 2002, the FASB issued Statement No. 145, Reporting Gains and Losses
from Extinguishment of Debt. This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications. It is effective for financial statements issued for
fiscal years beginning after May 15, 2002, and interim periods within those
fiscal years. The adoption of this statement did not have an impact on Patriot's
earnings, financial condition, or equity.
NOTE 10 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This Statement 146
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of this Statement did not have an impact on
Patriot's earnings, financial condition, or equity.
NOTE 11 - AMENDMENTS OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including derivatives embedded
in other contracts and hedging activities. This Statement amends Statement No.
133 for decisions made by the FASB as part of its Derivatives Implementation
Group process. This Statement also amends Statement No. 133 to incorporate
clarifications of the definition of a derivative. This Statement is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003. The provisions of this Statement are not expected to have a
material impact on Patriot's consolidated earnings, financial condition, or
equity.
NOTE 12 - ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Some of the provisions of
this Statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, "Elements of Financial Statements". The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. Effective for
financial instruments entered into or modified after May 31, 2003 and otherwise,
is effective at the beginning of the first interim period after June 15, 2003.
Patriot does not expect the adoption of this Statement to have an impact on its
consolidated earnings, financial condition, or equity.
15
PATRIOT BANK CORP, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2003
NOTE 13 - BUSINESS COMBINATIONS
WEALTH MANAGEMENT FIRM ACQUISITION. On January 3, 2003, Patriot completed the
acquisition of Bonds & Paulus Associates, Inc. (Bonds & Paulus), a wealth
management firm headquartered in Chester County, Pennsylvania. Founded in 1993,
Bonds & Paulus is a registered investment advisory firm, providing investment
advisory and financial planning services to high net-worth individuals and
families. Bonds & Paulus was merged into Patriot Advisors, a division of Patriot
Bank Corp. that provides a full range of wealth and investment management
services. The acquisition was accounted for as a purchase. Bonds & Paulus was
purchased for $458,000 plus contingent consideration to be paid in shares of
Patriot Bank Corp. common stock based upon future revenues of Bonds & Paulus. Of
the $458,000, $115,000 was paid in cash and 22,810 shares of Patriot Bank Corp.
common stock having a value of $343,000 were issued at closing. Based upon
current revenue, the total purchase price will approximate $1,300,000. Goodwill
arising from the transaction totaled $1,209,000.
PENSION BENEFITS SERVICE PROVIDER ACQUISITION. On January 17, 2003, Patriot
completed the acquisition of Pension Benefits, Inc., a pension benefits service
provider headquartered in West Chester, Pennsylvania. Founded in 1986, Pension
Benefits Inc. is a third party administrator and a registered investment
advisory firm, providing comprehensive retirement plan solutions to businesses.
Pension Benefits, Inc. was merged into Patriot Advisors, a division of Patriot
Bank Corp. The acquisition was accounted for as a purchase. Pension Benefits,
Inc. was purchased for $829,000 plus contingent consideration to be paid in
shares of Patriot Bank Corp. common stock based upon future revenues of Pension
Benefits, Inc. Of the $829,000, $414,500 was paid in cash and 27,338 shares of
Patriot Bank Corp. common stock were issued at closing. Based upon current
revenue, the total purchase price will approximate $1,600,000. Goodwill arising
from the transaction totaled $1,431,000.
Supplemental pro forma information that discloses the results of operations for
Patriot Bank Corp. and its subsidiaries for the three and six-month period ended
June 30, 2003 to the same period in 2002 is provided below. The pro forma
information assumes the business combinations of Bonds & Paulus Associates, Inc.
and Pension Benefits, Inc. had been completed as of the beginning of each period
and illustrates the impact on Patriot's non-interest income, net income and EPS
for each period.
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
JUNE 30 JUNE 30
2003 2002 2003 2002
-------------------------------------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 17,788 $ 19,007 $ 35,868 $ 38,013
Net Income $ 2,151 $ 1,983 $ 4,287 $ 3,826
========== ============ ========= =========
Earnings per share - basic $ 0.34 $ 0.30 $ 0.67 $ 0.58
========== ============ ========= =========
Earnings per share - diluted $ 0.32 $ 0.28 $ 0.63 $ 0.56
========== ============ ========= =========
16
PATRIOT BANK CORP, AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this discussion and analysis of
Patriot Bank Corp. and Subsidiaries (Patriot) contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to those
discussed in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. Patriot undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
SUMMARY. Patriot reported diluted earnings per share of $.32 and net income
of $2,151,000 for the three-month period ended June 30, 2003 compared to diluted
earnings per share of $.28 and net income of $1,980,000 for the three month
period ended June 30, 2002. Diluted earnings per share for the six-month period
ending June 30, 2003 was $.63 and net income of $4,251,000 compared with $.55
and net income of $3,820,000 for the six-month period ended June 30, 2002. 2002
earnings per share has been restated to reflect the effect of the 10% stock
dividend paid in April 2003. Return on average equity was 12.43%, for the
three-month period ended June 30, 2003 compared to 12.82%, for the three-month
period ended June 30, 2002.
NET INTEREST INCOME. Net interest income for the three and six-month
periods ended June 30, 2003 was $7,427,000 and $15,203,000 compared to
$7,266,000 and $14,042,000 for the same periods in 2002. The increase in net
interest income is primarily due to the decreases in market rates paid on
Patriot's funding sources outpacing decreases in the rates earned on interest
earning assets. As a result, Patriot's net interest margin was expanded.
Patriot's net interest margin (net interest income as a percentage of average
interest-earning assets) for the three and six-month periods ended June 30, 2003
was 3.50% and 3.59% compared to 3.32% and 3.18% for the same periods in 2002.
Interest on loans and leases was $10,643,000 and $21,773,000 for the three
and six-month periods ended June 30, 2003 compared to $12,433,000 and
$24,931,000 for the same periods in 2002. The average balance of loans was
$597,415,000 with an average yield of 7.31% for the six-month period ended June
30, 2003 compared to an average balance of $640,718,000 with an average yield of
7.80% for the same period in 2002. The decrease in average balance is primarily
due to Patriot allowing residential mortgages to run-off, offset by aggressive
marketing of consumer and commercial loans. In just the six-month period from
June 30, 2003, the residential mortgage loan balance has decreased $38,300,000
while the commercial loan and lease balance has increased $5,900,000. The
decrease in average yield is primarily a result of a decrease in market rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $4,053,000 and $8,249,000 for the three and six-month periods
ended June 30, 2003 compared to $4,370,000 and $8,781,000 for the same periods
in 2002. The average balance of the investment portfolio was $331,197,000 with
an average yield of 5.82% for the six-month period ended June 30, 2003 compared
to an average balance of $292,286,000 with an average yield of 6.58% for the
same period in 2002. The increase in average balance is primarily due to Patriot
investing funds from the repayment of residential mortgage loans. The decrease
in average yield is related to general decreases in market rates on adjustable
rate securities as well as new security purchases at lower yields. Some of these
security purchases have been tax beneficial securities so even though Patriot's
yield may be lower, Patriot's tax expense is lower as well.
Interest on total deposits was $3,238,000 and $6,378,000 for the three and
six-month periods ended June 30, 2003 compared to $3,615,000 and $7,898,000 for
the same periods in 2002. The average balance of total deposits was $563,482,000
with an average cost of 2.25% for the six-month period ended June 30, 2003
compared to an average balance of $523,608,000 with an average cost of 3.02% for
the same period in 2002. The increase in average balance is primarily the result
of aggressive marketing of money market and transaction-based deposit accounts
through new and existing branches offset by a decrease in the average balance of
Patriot's certificate of deposit accounts. The overall decrease in the average
cost on deposits was primarily the result of a decrease in market rates, a
reduction in higher costing certificate of deposit accounts and emphasis placed
on lower cost core deposit accounts.
Interest on borrowings was $4,035,000 and $8,451,000 for the three-month
and six-month periods ended June 30, 2003 compared to $5,934,000 and $11,832,000
for the same periods in 2002. The average balance of borrowings was $354,921,000
with an average cost of 4.74% for the six-month period ended June 30, 2003
compared to an average balance of $410,395,000 with a cost of 5.74% for the same
period in 2002. The decrease in average balance was primarily due to borrowings
being replaced with branch deposit growth. The decrease in the yield on
borrowings was the result of a decrease in interest rates and the result of
restructured borrowed funds with a higher cost of funds. During the six-month
period of 2003, Patriot prepaid $55,000,0000 in FHLB borrowings and restructured
$72,000,000 in FHLB borrowings.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was $900,000 and
$2,000,000 for the three-month and six-month periods ended June 30, 2003
compared to $1,000,000 and $1,675,000 for the same period in 2002. Net
charge-offs for the three and six-month periods-ended June 30, 2003, were
$764,000 and $1,580,000. The combination of these items represented an addition
of $83,000 and $419,000 to the allowance for credit losses, which totaled
$7,258,000 at June 30, 2003. Patriot's total loans consist of four distinct
portfolios, each of which is monitored and analyzed separately. The allowance
for credit losses is based on management's
17
PATRIOT BANK CORP, AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ongoing evaluation of the loan portfolios and reflects an amount considered by
management to be its best estimate of the amount necessary to absorb known and
inherent losses in the portfolios. Management considers a variety of factors
when establishing the allowance, such as the impact of current economic
conditions, diversification of the portfolios, delinquency statistics, results
of loan review and related classifications, and historic loss rates. In
addition, certain individual loans which management has identified as
problematic are specifically provided for, based upon an evaluation of the
borrower's perceived ability to pay, the estimated adequacy of the underlying
collateral and other relevant factors. In addition, regulatory authorities, as
an integral part of their examinations, periodically review the allowance for
credit losses. They may require additions to the allowance based upon their
judgements about information available to them at the time of examination.
Although provisions have been established and segmented by type of loan, based
upon management's assessment of their differing inherent loss characteristics,
the entire allowance for losses on loans is available to absorb further loan
losses in any category. Management uses significant estimates to determine the
allowance for credit losses. Since the allowance for credit losses is dependent,
to a great extent, on conditions that may be beyond Patriot's control,
management's estimate of the allowance necessary to absorb credit losses and
actual credit losses could differ.
RESIDENTIAL MORTGAGE LOANS. The residential mortgage loan portfolio is seasoned
as Patriot has been in the mortgage lending business for many years and has sold
substantially all new mortgage originations in the past three years. Patriot's
mortgage loans are generally well collateralized and historically Patriot has
experienced minimal losses on these loans. Because of Patriot's consistent
history in mortgage lending and the long-term nature of this portfolio, Patriot
predominately relies upon an internal regression analysis that uses historical
data to estimate losses inherent in the portfolio.
CONSUMER LOANS. Consumer loans consist mostly of home equity loans and home
equity lines of credit. The consumer loan portfolio also is mature as Patriot
has been in the consumer lending business for many years. As with mortgage
lending, Patriot predominantly uses an internal regression analysis that uses
historical data to estimate losses inherent in the portfolio.
COMMERCIAL LOANS. Patriot entered the commercial lending business in 1996 and
has grown the portfolio into a substantial portion of total loans. Patriot uses
historical data to prepare regression models to monitor trends of charge-offs
and recoveries and establish appropriate allowance levels. Compared to December
31, 2002, the level of non-performing assets in the commercial lending portfolio
decreased from $3,893,000 to $3,108,000 at June 30, 2003. Patriot closely
monitors local economic and business trends relative to its commercial lending
portfolio to estimate the effect those trends may have on losses. Patriot's
commercial loan portfolio contains some loans that are substantially larger than
the loans within its other portfolios. The loss associated with an individual
loan could have a significant impact on the allowance and charge-off levels at
Patriot. Therefore, Patriot closely monitors these loans and specifically
reserves for individual loans, which exhibit weakness.
COMMERCIAL LEASES. Patriot entered the commercial leasing business in 1998
principally through the acquisition of Keystone Financial Leasing (KFL).
Patriot's leasing portfolio has approximately a 3-year life. Patriot performs an
internal regression analysis on this portfolio using historical data (including
KFL data). Patriot also closely monitors regional and national economic business
trends relative to its commercial leasing portfolio to estimate the effect those
trends may have on losses. During 2002, Patriot experienced an increase in the
level of charge-offs in the commercial leasing portfolio. Patriot attributes the
increase to a general weakness in the overall economy, relatively low previous
year charge-offs and higher delinquency trends in certain sectors of the
portfolio. In response to the elevated charge-offs, Patriot enhanced it's
policies, procedures and resources related to the credit administration of the
leasing portfolio. The result of these enhancements has been a steady
improvement in delinquencies, and non-performing and charged-off leases in the
latter part of 2002 and the first quarter of 2003. Compared to December 31,
2002, the level of non-performing assets in the commercial leasing portfolio
decreased from $1,012,000 to $782,000 at June 30, 2003.
Patriot's percentage of loan loss reserves to total loans increased from 1.11%
at December 31, 2002, to 1.23% at June 30, 2003, which correlates to Patriot's
growth in its higher risk commercial loan portfolio. During the first six months
of 2003, Patriot's overall loan and lease portfolios decreased from $611,295,000
at December 31, 2002, to $585,386,000. The decrease in the loan portfolios was
attributed to the run-off of residential mortgage loans, which was offset by
growth in the commercial loan portfolio. At June 30, 2003, Patriot had
$8,605,000 in loans and leases which were 30 days or more delinquent which
represented 1.44% of Patriot's total loan and lease portfolio compared to
$9,845,000 or 1.58% at June 30, 2002. Based on the growth in the commercial loan
portfolio and the increased level of delinquent loans and leases, management
determined a provision of $2,000,000 was necessary to adequately
18
PATRIOT BANK CORP, AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
address the losses inherent in Patriot's loan and lease portfolios. Patriot
believes that the allowance provides for known and inherent credit losses at
June 30, 2003.
NON-INTEREST INCOME. Total non-interest income was $3,088,000 and
$5,734,000 for the three-month and six-month periods ended June 30, 2003
compared to $1,803,000 and $3,464,000 for the same periods in 2002. The increase
in non-interest income was derived from three sources:
Non-Interest income from the gains on the sale of loans and leases was $746,000
and $1,449,000 for the three and six-month periods ended June 30, 2003 compared
to $486,000 and $797,000 for the same period in 2002. This increase was
primarily due to mortgage banking gains associated with higher volumes. Gains
recognized on the sale of the guaranteed portion of Small Business
Administration loans contributed to this increase as well.
Patriot Advisors, a division of Patriot Bank Corp., provided $502,000 and
$980,000 in non-interest income during the three and six-month periods ended
June 30, 2003 compared to $88,000 and $211,000 for the same period in 2002. This
increase in Patriot Advisors' non-interest income can be attributed to the
acquisitions of Bonds & Paulus Associates, Inc. and Pension Benefits, Inc.,
which occurred during the first quarter of 2003.
Non-Interest income from serivce fees on deposits was $918,000 and $1,780,000
for the three and six-month periods ended June 30, 2003 compared to $648,000 and
$1,249,000 for the same period in 2002. The increase in service fees on deposits
was a result of the implementation of an overdraft privilege product which was
implemented during the third quarter of 2002.
During the six-month period of 2003, Patriot prepaid $55,000,0000 in FHLB
borrowings. During the first and second quarters in 2003, Patriot recorded a
$588,000 and $136,000 loss, respectively, the prepayment penalties for repaying
these advances early. In conjunction with these transactions, Patriot sold
$30,859,000 of securities and recognized $556,000 and $376,000 of investment
gains during the first and second quarters in 2003, respectively. Overall, the
combination of these transactions allowed Patriot to improve its interest rate
risk profile.
NON-INTEREST EXPENSE. Total non-interest expense was $6,980,000 and
$13,661,000 for the three and six-month periods ended June 30, 2003 compared to
$5,487,000 and $10,820,000 for the same periods in 2002. Of this increase in
non-interest expense, $1,079,000 and $2,005,000 for the three and six-month
periods in 2003, was primarily due to higher compensation costs associated with
increases in staffing. Patriot's two acquisitons during the first quarter of
2003 as well as service requirements associated with branch deposit and
commercial lending growth caused the increases in staffing. Other non-interest
expenses such as occupancy and equipment, advertising, deposit processing and
office supplies and postage were also higher during the three and six-month
periods in 2003 as compared to the same periods in 2002, which can be attributed
to normal recurring expenses associated with Patriot's two acquisitions during
the first quarter of 2003 and the addition of 2 new branches in 2003.
INCOME TAX PROVISION. The income tax provision was $484,000 and
$1,025,000 for the three-month and six-month periods ended June 30, 2003
compared to $602,000 and $1,191,000 for the same periods in 2002. The effective
tax rate was 18.37% and 19.43% for the three-month and six-month periods ended
June 30, 2003 compared to 23.32% and 23.77% for the same periods in 2002. The
decrease in the effective tax rate was due to greater tax exempt interest from
tax-beneficial securities.
FINANCIAL CONDITION
LOAN AND LEASE PORTFOLIO. Patriot's primary portfolio loan products are
commercial loans, small-ticket commercial leases, fixed-rate and adjustable-rate
residential mortgage loans and home equity loans and lines of credit. Patriot
also offers residential construction loans and other consumer loans. Patriot has
sold substantially all new residential mortgage (fixed and adjustable rate)
originations since 2000. At June 30, 2003, Patriot's total loan portfolio was
$585,386,000, compared to $611,295,000 at December 31, 2002. The decrease in the
loan portfolio was primarily the result of Patriot allowing residential
mortgages to run-off, offset by an emphasis placed on increasing commercial and
consumer lending relationships.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at June 30, 2003
were $20,883,000 compared to $16,839,000 at December 31, 2002. The increase in
cash balances was primarily due to timing differences.
19
PATRIOT BANK CORP, AND SUBSIDIARIES3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SECURITIES. Investment securities consist of US Treasury and government
agency securities, and corporate debt and equity securities. Mortgage-backed
securities consist of securities generally issued by either the FHLMC, FNMA or
the Government National Mortgage Association ("GNMA"). Collateralized Mortgage
Obligations ("CMOs") consist of securities issued by the FHLMC, FNMA or private
issuers. Total investment and mortgage-backed securities at June 30, 2003 were
$342,243,000 compared to $315,868,000 at December 31, 2002. The increase in
investment and mortgage-backed securities was primarily due to the purchase of
$114,661,000 of available for sale securities offset by investment amortization
and maturities. The funding source for these purchases was principally
residential mortgage loan prepayments.
DEPOSITS. Deposits are primarily attracted from within Patriot's market
area through the offering of various deposit instruments, including checking
accounts, money market accounts, savings accounts, certificates of deposit and
retirement savings plans. Patriot also solicits brokered deposits from various
sources. Total deposits at June 30, 2003 were $605,738,000 compared to
$519,120,000 at December 31, 2002. Of this increase, $35,597,000 was related to
growth in certificates of deposits and $51,022,000 was related to an increase in
core deposits.
FHLB ADVANCES AND FEDERAL FUNDS. Patriot utilizes borrowings as a
source of funds for its growth strategy and its asset/liability management.
Patriot is eligible to obtain advances from the FHLB upon the security of
certain loan portfolios, mortgage-backed securities, and investment securities,
provided certain standards related to creditworthiness have been met. FHLB
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB will advance to member institutions fluctuates from time to time in
accordance with the policies of the FHLB. Patriot also uses Federal Funds as a
funding source. Federal Funds are transactions that are typically between
financial institutions and are short-term unsecured borrowings. Total FHLB
advances and federal funds borrowed at June 30, 2003 were $257,828,000 compared
to $368,173,000 at December 31, 2002. The decrease in FHLB advances and federal
funds was associated with the repayment of short-term FHLB advances. During this
six-month period in 2003, Patriot prepaid $55,000,0000 in FHLB borrowings and
restructured $72,000,000 in FHLB borrowings, which allowed Patriot to improve
its interest rate risk profile.
On June 20, 2003, the Company entered into three pay variable receive
fixed interest rate swaps to hedge changes in the fair value of designated fixed
rate FHLB advances. The notional amount of these contracts totals $72 million
and mature on May 29, 2008. The company has agreed to pay 3 month LIBOR plus a
spread, with quarterly reset, and to receive a fixed rate equal to the rate paid
on the individual FHLB advances.
Since the terms of interest rate swaps mirror those of the hedged
items, FHLB advances, the company has adopted the short cut method, as
prescribed in SFAS No. 133, to account for these transactions. Therefore, no
hedge ineffectiveness was recognized in earnings related to these fair value
hedges.
REPURCHASE AGREEMENTS. Patriot uses repurchase agreements as a funding
source. Repurchase agreements are generally short-term obligations
collateralized by government agency and other securities. Total repurchase
agreements at June 30, 2003 were $42,931,000 compared to $14,210,000 at December
31, 2002. The increase in repurchase agreements was primarily due to the
addition of $31,934,000 of brokered repurchase agreements offset by a decrease
in customer repurchase agreements. The increase in repurchase agreements
replaced FHLB advances that were repaid during the first six months of 2003.
OTHER LIABILTIIES. Other Liabilities at June 30, 2003 were $6,877,000
compared to $4,987,000 at December 31, 2002. The increase in other liabilities
was primarily attributable to the accrual of contingent consideration associated
with the purchase of Bonds and Paulus Associates, Inc. and Pension Benefits Inc.
SHAREHOLDERS' EQUITY. Total shareholders' equity was $69,518,000 at
June 30, 2003 compared to $65,945,000 at December 31, 2002. The increase was
primarily a result of net income and an increase in accumulated other
comprehensive income offset by cash dividends paid and the repurchase of shares
of Patriot Bank Corp. common stock.
20
PATRIOT BANK CORP, AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
The allowance for credit losses on loans and leases is based on management's
ongoing evaluation of the loan portfolio and reflects an amount considered by
management to be its best estimate of the amount necessary to absorb known and
inherent losses in the portfolio. Management considers a variety of factors when
establishing the allowance, such as the impact of current economic conditions,
diversification of the portfolio, delinquency statistics, results of loan review
and related classifications, and historic loss rates. In addition, certain
individual loans which management has identified as problematic are specifically
provided for, based upon an evaluation of the borrower's perceived ability to
pay, the estimated adequacy of the underlying collateral and other relevant
factors. In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for credit losses. They may
require additions to the allowance based upon their judgements about information
available to them at the time of examination. Although provisions have been
established and segmented by type of loan, based upon management's assessment of
their differing inherent loss characteristics, the entire allowance for credit
losses on loans and leases is available to absorb further loan losses in any
category.
Management uses significant estimates to determine the allowance for credit
losses. Because the allowance for credit losses is dependent, to a great extent,
on conditions that may be beyond Patriot's control, management's estimate of the
amount necessary to absorb allowance for credit losses and actual credit losses
could differ. Patriot's current judgement is that the allowance for credit
losses on loans and leases is appropriate at June 30, 2003.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis, as well as operating loss carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance would be established against deferred tax
assets when in the judgement of management, it is more likely than not that such
deferred tax assets will not become available. At June 30, 2003, based on
management's evaluation of the likelihood of realization, no valuation allowance
has been established. Because the judgement about the level of future taxable
income is dependent to a great extent on matters that may, at least in part, be
beyond Patriot's control, it is possible that management's judgement about the
need for a valuation allowance for deferred taxes could change in the future.
REAL ESTATE OWNED (REO) AND OTHER REPOSSESSED PROPERTY
Real estate owned is defined to include real estate Patriot acquires through
foreclosure. REO is recorded on Patriot's books at the lower of Patriot's
carrying value in the loan or the fair value of the property as of the date of
transfer to REO less estimated disposal costs. Any excess at the date of
transfer of the recorded investment in the loan over the fair market value less
estimated disposal costs is charged against Patriot's 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 less estimated disposal costs. Any excess at the date of transfer of
the recorded investment in the lease over the fair market value less estimated
disposal costs is taken as a loss on Patriot's books. Additionally, valuation of
REO and other repossessed property is dependent to a great extent on current
economic, market and geographic conditions that are beyond Patriot's control. It
is possible that management's estimates included in the valuation of REO and
other repossessed property could change in the future. Patriot's current
judgement is that the valuation of REO and other repossessed property is
appropriate at June 30, 2003.
21
PATRIOT BANK CORP, AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances, Federal Funds and repurchase
agreements. While maturities and scheduled amortization of loans and investment
and mortgage-backed securities are predictable sources of funds, deposit inflows
and loan and mortgage-backed security prepayments are greatly influenced by
economic conditions, general interest rates and competition. Therefore, Patriot
manages its balance sheet to provide adequate liquidity based upon various
economic, interest rate and competitive assumptions and in light of
profitability measures.
During the first six months of 2003, $90,880,000 of liquidity was provided from
the repayment and sale of securities. Additional liquidity of $86,618,000 was
provided by deposit growth, $28,721,000 by short-term repurchase agreements and
$22,911,000 from the repayment of loans. These funds were used to purchase
$114,661,000 of investment securities, repay $111,729,000 of borrowings and fund
$5,313,000 and $3,394,000 of commercial and consumer loans, net of prepayments,
respectively.
At June 30, 2003, Patriot had outstanding loan commitments of $62,925,000.
Patriot anticipates that it will have sufficient funds available to meet its
loan commitments. Certificates of deposit that are scheduled to mature in one
year or less from June 30, 2003, totaled $155,282,000. Based upon historical
experience, Patriot expects that substantially all of the maturing certificates
of deposit will be retained at maturity, excluding brokered certificates in the
amount of $16,918,000.
CAPITAL RESOURCES. FDIC regulations currently require companies to maintain a
minimum leverage capital ratio of not less than 3% of tier 1 capital to total
adjusted assets, a tier 1 capital ratio of not less than 4% of risk-adjusted
assets, and a minimum risk-based total capital ratio (based upon credit risk) of
not less than 8%. The FDIC requires a minimum leverage capital requirement of 3%
for institutions rated composite 1 under the CAMELS rating system. For all other
institutions, the minimum leverage capital requirement is 3% plus at least an
additional 1% to 2% (100 to 200 basis points). A bank is considered "well
capitalized" if it maintains a minimum leverage capital ratio of not less than
5% of tier 1 capital to total adjusted assets, a tier 1 capital ratio of not
less than 6% of risk adjusted assets, and a minimum risk-based total capital
ratio (based upon credit risk) of not less than 10%. At June 30, 2003, Patriot
Bank's and Patriot Bank Corp.'s capital ratios exceeded all requirements to be
considered well capitalized. The following table sets forth the capital ratios
of Patriot Bank Corp., Patriot Bank and the current regulatory requirements at
June 30, 2003:
To Be To Be
Actual Adequately Capitalized Well Capitalized
------ ---------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 2003
(dollars in thousands)
Total capital (to risk weighted assets)
Patriot Bank Corp. $ 81,091 12.57% $ 51,617 8% 64,521 10%
Patriot Bank 80,394 12.47% 51,560 8% 64,450 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 72,006 11.16% 25,808 4% 38,713 6%
Patriot Bank 71,228 11.05% 25,780 4% 38,670 6%
Tier I capital (to average assets)
Patriot Bank Corp. 72,006 7.32% 39,362 4% 49,202 5%
Patriot Bank 71,228 7.22% 39,467 4% 49,334 5%
22
PATRIOT BANK CORP, AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OF INTEREST RATE RISK. The principal objective of Patriot's interest
rate risk management function is to evaluate the interest rate risk included in
certain on and off balance sheet accounts, determine the level of risk
appropriate given Patriot's business focus, operating environment, capital and
liquidity requirements and performance objectives, and manage the risk
consistent with Board approved guidelines. Through such management, Patriot
seeks to reduce the vulnerability of its net interest income to changes in
interest rates. Patriot's Board of Directors has established an Asset/Liability
Committee, which is responsible for reviewing its asset/liability and interest
rate position and making decisions involving asset/liability considerations. The
Asset/Liability Committee meets regularly and reports trends and Patriot's
interest rate risk position to the Board of Directors.
The Company uses three complementary methods to analyze and measure interest
rate risk as part of the overall management of interest rate risk. They are
income simulation modeling, estimates of economic value of equity, and static
gap analysis. The combination of these three methods provides a reasonably
comprehensive summary of the level of interest rate risk of the Company when
exposed to time factors and changes in interest rate environments.
Income simulation modeling is utilized in measuring Patriot's interest rate risk
and managing its interest rate sensitivity. Income simulation considers not only
the impact of changing market interest rates on forecasted net interest income,
but also other factors such as yield curve relationships, the volume and mix of
assets and liabilities, customer preferences and general market conditions.
Through the use of income simulation modeling the company has calculated an
estimate of net interest income for the year ending June 30, 2004, based upon
the assets, liabilities and off-balance sheet financial instruments in existence
at June 30, 2003. Patriot has also estimated changes to that estimated net
interest income based upon interest rates rising or falling in monthly
increments ("rate ramps"). Rate ramps assume that all interest rates increase or
decrease in monthly increments evenly throughout the period modeled, with a
floor of 25bp. The following table reflects the estimated percentage change in
estimated net interest income for the year ending June 30, 2004 resulting from
changes in interest rates.
Rate ramp to interest rates % change
- ---------------------------------- -----------
+2% (1.22%)
-2% (.50%)
Economic value of equity ("EVE") estimates the discounted present value of asset
and liability cash flows. Discount rates are based upon market prices for
comparable assets and liabilities. As part of this evaluation the company has
contracted with an independent consultant to perform an extensive core deposit
analysis to appropriately estimate the discounted present value of the retail
deposit franchise. Upward and downward rate shocks are used to measure
volatility in relation to an unchanged interest rate environment. This method of
measurement primarily evaluates the longer term repricing risks and options in
the Company's balance sheet. The Company has established policy limits for
upward and downward rate shocks of 20% of economic value of equity at risk for
every 100 basis points of interest rate shock. Additionally the Company has a
policy limit that the ratio of EVE adjusted equity to EVE adjusted assets will
be maintained above a 5% ratio. The following table reflects the estimated
economic value of equity at risk and the ratio of EVE adjusted equity to EVE
adjusted assets at June 30, 2003, resulting from shocks to interest rates.
Percent change EVE Equity/
Rate shock from base EVE Assets
- ---------- --------- ----------
+2% 4.97% 13.60%
+1% 4.50% 13.25%
Base 12.43%
-1% -10.97% 10.89%
-2% -27.70% 8.72%
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or re-price within that time period. The interest rate
sensitivity gap is defined as the difference
23
PATRIOT BANK CORP, AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
between the amount of interest-earning assets maturing or re-pricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that time period, as well as the impact of off balance sheet
instruments maturing or repricing within that time period.
The following table summarizes the amount of interest-earning assets,
interest-bearing liabilities, and off-balance sheet instruments outstanding at
June 30, 2003, which are anticipated, based upon certain assumptions, to
re-price or mature in each of the future time periods shown. Loan amounts
reflect principal balances expected to be repaid and/or re-priced as a result of
contractual amortization and anticipated prepayments of adjustable-rate loans
and fixed-rate loans and as a result of contractual rate adjustments on
adjustable-rate loans. Estimated prepayment rates were applied to mortgage loans
and mortgage-backed securities based upon industry expectations. Core deposit
decay rates have been estimated based upon a historical analysis of core deposit
trends. With the exceptions noted above, the amount of assets and liabilities
shown which re-price or mature during a particular period were determined in
accordance with the earlier of term to re-pricing or the contractual maturity of
the asset or liability. The table sets forth the gap and cumulative gap as a
percentage of total assets at June 30, 2003:
0-90 91-180 181-365
Days Days Days
---------- ----------- -----------
GAP to Total Assets 2.90% 2.10% 5.40%
Cumulative GAP to Total Assets 2.90% 5.00% 10.40%
As shown above, the company has a positive cumulative gap (interest sensitive
assets are greater than interest sensitive liabilities) within the next year,
which generally indicates that an increase in rates may lead to an increase in
net interest income and a decrease in rates may lead to a decrease in net
interest income. Interest sensitivity gap analysis measures whether assets or
liabilities may reprice but does not capture the ability to reprice based on
market conditions or the magnitude of the change in the repricing on assets or
liabilities. Thus indications based on a positive or negative gap position need
to be analyzed in conjunction with other interest rate risk management tools.
The Company's management believes that the assumptions and combination of
methods utilized in evaluating estimated net interest income are reasonable;
however, the interest rate sensitivity of the Company's assets, liabilities and
off-balance sheet financial instruments as well as the estimated effect of
changes in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from the experience on which the assumptions were based.
24
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Patriot's principal
executive officer and principal financial officer have concluded that
Patriot's disclosure controls and procedures (as defined in Rule 13a-14
under the Securities Exchange Act of 1934, as amended), based on their
evaluation of these controls and procedures as of a date within (90)
days prior to the filing date of this form 10-Q, are effective.
(b) Changes in Internal Controls. There have been no significant changes in
Patriot's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation thereof, including any corrective actions with regard to
significant deficiencies and material weaknesses.
25
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
There are various claims and lawsuits in which Patriot is
periodically involved incidental to Patriot's business, which
in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition,
equity, and results of operations of the Company.
Item 2 CHANGES IN SECURITIES
Not applicable.
Item 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its Annual Meeting of Shareholders on April
24, 2003. At the said meeting 6,141,562 shares of Common Stock were entitled to
vote, of which 5,205,499 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, one director was elected for three-year
terms. The nominee was Russell J. Kunkel.
For % Withheld %
Russell J. Kunkel 5,114,663 98.30 90,836 1.70
The names of each of the directors whose term of office continued after
the Annual Meeting and their respective term expirations are as follows:
James B. Elliott 2004
Larry V. Thren 2004
Richard Elko 2005
James A. Bentley, Jr 2005
2. The ratification of the appointment of KPMG LLP as independent
auditors of Patriot Bank Corp. for fiscal year ending December 31, 2003.
For % Against % Abstain %
5,176,263 99.40 14,961 0.3 14,275 0.3
Item 5 OTHER INFORMATION
Not applicable.
26
Item 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of
this report.
- Exhibit 31.1 Section 302 CEO Certification
- Exhibit 31.2 Section 302 CFO Certification
- Exhibit 32.1 Section 906 CEO Certification
- Exhibit 32.2 Section 906 CFO Certification
(b) Reports filed on Form 8K
-- On April 1, 2003, the registrant filed a Form
8-K reporting the declaration of a 10% stock
dividend.
-- On April 16, 2003, the registrant filed a Form
8-K announcing earnings for the first quarter
of 2003.
-- On April 24, 2003, the registrant filed a Form
8-K reporting the declaration of a cash
dividend of 12 cents per share.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATRIOT BANK CORP.
-------------------------------------
(Registrant)
Date August 11, 2003
_____________________________________
Richard A. Elko
President and Chief Executive Officer
Date August 11, 2003
_____________________________________
James G. Blume
Senior Vice President and
Chief Financial Officer
28