1
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, 1999
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
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(Address of principal executive offices) (Zip Code)
(610) 323-1500
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes | | No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 6,185,707 shares of
common stock were outstanding as of August 12, 1999.
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PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1999
and December 31, 1998
Consolidated Statements of Income for the Three-Month and Six-Month
Periods ended June 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the
Periods ended June 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows for the Three-Month and
Six-Month Periods ended June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income for the
Three-Month and Six-Month Periods ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
Items 1 through 6
SIGNATURES
2
3
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30, December 31,
-------- ------------
1999 1998
---- ----
(unaudited)
ASSETS
Cash and due from banks $ 5,194 $ 1,044
Interest-earning deposits in other financial institutions 12,307 29,443
----------- ---------
Total cash and cash equivalents 17,501 30,487
Investment and mortgage-backed securities available for sale 185,034 386,380
Investment and mortgage-backed securities held to maturity (market value of
$272,438 and $29,909 at June 30, 1999 and December 31, 1998, respectively) 274,169 29,639
Loans held for sale 3,685 5,576
Loans and leases receivable, net of provision for credit loss of $5,860 and
$4,087 at June 30, 1999 and December 31, 1998, respectively 565,426 504,993
Premises and equipment, net 15,093 10,259
Accrued interest receivable 4,697 4,114
Real estate and other property owned 88 58
Cash surrender value life insurance 15,264 --
Goodwill and other intangible assets 14,174 2,267
Other assets 6,974 6,988
----------- ---------
Total assets $ 1,102,105 $ 980,761
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $482,006 $377,796
FHLB advances 381,997 360,198
Securities sold under repurchase agreements 153,852 170,123
Trust preferred debt securities 19,000 19,000
Advances from borrowers for taxes and insurance 6,323 4,747
Other liabilities 4,233 6,637
----------- ---------
Total liabilities 1,047,411 938,501
----------- ---------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
Issued at June 30, 1999 and December 31, 1998, respectively -- --
Common stock, no par value, 10,000,000 shares authorized, 6,556,786
and 7,034,927 issued at June 30, 1999 and December 31, 1998, respectively -- --
Paid in capital 58,050 60,404
Common stock acquired by ESOP, 398,497 and 404,925 shares at amortized cost
at June 30, 1999 and December 31, 1998, respectively (2,213) (2,285)
Common stock acquired by MRP, 134,187 and 154,116 shares at amortized
cost at June 30, 1999 and December 31, 1998, respectively (827) (971)
Retained earnings 6,002 4,220
Treasury stock, 375,137 and 2,122,309 at cost at June 30, 1999
and December 31, 1998, respectively (4,222) (22,963)
Accumulated other comprehensive income (2,096) 3,855
----------- ---------
Total stockholders' equity 54,694 42,260
----------- ---------
Total liabilities and stockholders' equity $ 1,102,105 $ 980,761
=========== =========
The accompanying notes are an integral part of these statements.
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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,
-------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------
INTEREST INCOME
Interest-earning deposits $ 53 $ 127 $ 156 $ 179
Investment and mortgage-backed securities 7,499 6,687 14,684 13,534
Loans 11,004 8,757 21,677 16,978
------- ------- ------- -------
Total interest income 18,556 15,571 36,517 30,691
------- ------- ------- -------
INTEREST EXPENSE
Deposits 5,093 4,368 10,014 8,329
Short-term borrowings 3,090 4,183 6,102 8,703
Long-term borrowings 4,369 2,813 8,710 5,255
------- ------- ------- -------
Total interest expense 12,552 11,364 24,826 22,287
------- ------- ------- -------
Net interest income before provision for
credit losses 6,004 4,207 11,691 8,404
Provision for credit losses 300 300 600 550
------- ------- ------- -------
Net interest income after provision for
credit losses 5,704 3,907 11,091 7,854
------- ------- ------- -------
NON-INTEREST INCOME
Service fees, charges and other operating income 991 276 1,712 572
Gain on sale of real estate acquired through
foreclosure 1 -- 1 --
Gain on sale of investment and mortgage-backed
securities available for sale 72 1,115 357 1,419
Mortgage banking gains 138 141 266 205
------- ------- ------- -------
Total non-interest income 1,202 1,532 2,336 2,196
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,537 2,825 4,927 4,731
Office occupancy and equipment 946 510 2,056 1,001
Professional services 117 159 247 328
Federal deposit insurance premiums 55 45 110 91
Data processing 26 20 65 53
Advertising 135 174 300 385
Deposit processing 161 98 283 197
Goodwill amortization 252 -- 449 --
Office supplies and postage 147 80 305 168
MAC expense 123 20 194 72
Other operating expense 593 200 885 458
------- ------- ------- -------
Total non-interest expense 5,092 4,131 9,821 7,484
------- ------- ------- -------
Income before income taxes 1,814 1,308 3,606 2,566
Income taxes 443 300 931 598
------- ------- ------- -------
Net income $ 1,371 $ 1,008 $ 2,675 $ 1,968
======= ======= ======= =======
Earnings per share - basic $ 0.24 $ 0.20 $ 0.47 $ 0.39
======= ======= ======= =======
Earnings per share - diluted $ 0.23 $ 0.19 $ 0.45 $ 0.37
======= ======= ======= =======
Dividends per share $ 0.08 $ 0.07 $ 0.15 $ 0.13
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
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Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, unaudited)
Accumulated
Other
Number of Paid-in Retained Treasury Comprehensive
Shares Capital ESOP MRP Earnings Stock Income Total
------ ------- ---- --- -------- ----- ------ -----
BALANCE AT JANUARY 1, 1998 4,811 $ 59,982 $ (2,428) $ (1,285) $ 1,680 $(16,071) $ 4,655 $ 46,533
Common stock issued 2 46 -- -- 46
Common stock acquired by
MRP (2) -- -- (46) -- -- -- (46)
Treasury stock purchased (538) -- -- -- -- (6,892) -- (6.892)
Stock split 25% -- -- -- -- -- -- -- --
Release and amortization
of MRP 48 156 -- 360 -- -- -- 516
Release of ESOP shares 26 220 143 -- -- -- -- 363
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- (800) (800)
Net income -- -- -- -- 4,055 -- -- 4.055
Cash dividends paid -- -- -- -- (1,515) -- -- (1,515)
------- -------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998 4,347 $ 60,404 $ (2,285) $ (971) $ 4,220 $(22,963) $ 3,855 $ 42,260
------- -------- -------- -------- -------- -------- -------- --------
Common stock issued 4 36 -- -- 36
Common stock acquired by
MRP (4) -- -- (36) -- -- -- (36)
Treasury stock purchased (377) -- -- -- -- (4,808) -- (4.808)
Treasury stock retired (23,531) -- -- -- 23,531 -- --
Common stock issued for
business combination 1,640 21,047 -- -- -- -- -- 21,047
Amortization of MRP shares 24 32 -- 180 -- -- -- 212
Amortization of ESOP shares 13 62 72 -- -- -- -- 134
Purchase of ESPP shares 2 -- -- -- -- 18 -- 18
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- (5,951) (5,951)
Net income -- -- -- -- 2,675 -- -- 2,675
Cash dividends paid -- -- -- -- (893) -- -- (893)
------- -------- -------- -------- -------- -------- -------- --------
BALANCE AT JUNE 30, 1999 5,649 $ 58,050 $ (2,213) $ (827) $ 6,002 $ (4,222) $ (2,096) $ 54,694
======= ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six-Months Period Ended
-----------------------
June 30,
--------
1999 1998
---- ----
Operating activities
Net Income $ 2,675 $ 1,968
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and accretion of
Deferred loan origination fees 89 (47)
Premiums and discounts (1,288) (387)
MRP shares 213 181
Goodwill 449 --
Provision for credit losses 600 550
Release of ESOP shares 134 184
Gain on sale of securities available for sale (357) (1,419)
Loss on sale of real estate owned (1) --
Charge-off real estate owned 113 --
Depreciation of premises and equipment 1,023 413
Mortgage loans originated for sale (24,810) (13,511)
Mortgage loans sold 26,701 14,804
Increase in deferred income taxes (1,996) (668)
Increase in cash surrender value of life insurance (264) --
Decrease (increase) in accrued interest receivable 152 (393)
Decrease (increase) in other assets 7,074 (1,331)
(Decrease) increase in other liabilities (2,912) 646
--------- ---------
Net Cash provided by operating activities 7,595 990
--------- ---------
Investing activities
Loan originations and principal payments on loans, net (12,102) (41,420)
Proceeds from the sale of securities - available for sale 6,182 5,186
Proceeds from the maturity of securities - available for sale 41,346 57,307
Proceeds from the maturity of securities - held to maturity 22,772 14,062
Purchase of securities - available for sale (80,995) (56,407)
Purchase of bank owned life insurance (15,000) --
Proceeds from sale of real estate owned 5 --
Purchase of premises and equipment (1,618) (518)
Proceeds from sale of premises and equipment 25 --
Cash received in business combination 9,769 --
--------- ---------
Net cash used in by investing activities (29,609) (21,790)
--------- ---------
Financing activities
Net increase in deposits 9,627 75,891
Proceeds from (Repayment of) short term borrowings 3,581
Proceeds from long term borrowings -- 105,000
Repayment of long term borrowings (53) (25,000)
Increase in advances from
Borrowers for taxes and insurance 1,574 1,469
Cash paid for dividends (893) (727)
Purchase of Treasury Stock (4,808) --
--------- ---------
Net cash provided by financing activities 9,028 22,477
--------- ---------
Net (decrease) increase in cash and cash equivalents (12,986) 1,677
Cash and cash equivalents at beginning of year 30,487 9,014
--------- ---------
Cash and cash equivalents at end of year $ 17,501 $ 10,691
========= =========
Supplemental Disclosures
Cash paid for interest on deposits $ 9,762 $ 8,321
========= =========
Cash paid for income taxes $ 1,068 $ 387
========= =========
Transfer of securities from available for sale to held to maturity $ 267,676 --
========= =========
Non-cash assets received in business combinations $ 108,162 --
========= =========
Transfers from loans to real estate owned $ 142 $ 17
========= =========
The accompanying notes are an integral part of these statements.
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Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three-Month Period Ended Six-Month Period Ended
------------------------ ----------------------
June 30,
--------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 1,371 $1,008 $2,675 $1,968
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized holding (losses) gains arising during the period (4,347) (758) (5,715) 68
Less: Reclassification adjustment for gains included
in net income (48) (736) (236) (937)
------- ------ -------- -------
Comprehensive (loss) income $(3,024) $ (486) $ (3,276) $ 1,099
======= ====== ======== =======
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PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1999
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 periods ended June 30,
1999 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, 1998.
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PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1999
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, 1999 December 31, 1998
-------------------------------------------- -------------------------------------------
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 $ 52,737 $ -- $ 3,249 $ 49,488 $ 40,568 $ 176 $ 45 $ 40,699
Corporate debt securities 19,362 726 209 19,879 19,102 1,705 92 20,715
FHLMC Preferred Stock 34,962 1,176 -- 36,138 34,959 1,831 -- 36,790
FHLB Stock 19,635 -- -- 19,635 18,607 -- -- 18,607
Equity securities 10,332 1,060 369 11,023 7,257 1,528 203 8,582
Mortgage-backed
securities
FHLMC -- -- -- -- 6,122 52 17 6,157
Fannie Mae 50,518 4 1,757 48,765 43,554 171 255 43,470
GNMA 97 9 -- 106 7,114 97 5 7,206
Colateralized mortgage
Obligations
FHLMC -- -- -- -- 104,751 1,505 -- 106,256
Fannie Mae -- -- -- -- 89,855 668 1,229 89,294
Other -- -- -- -- 8,560 44 -- 8,604
--------- ------ ------ -------- --------- ------- ------- ---------
Total securities available
for Sale $ 187,643 $2,975 $ 5,584 $185,034 $ 380,449 $ 7,777 $ 1,846 $ 386,380
========= ====== ======= ======== ========= ======= ======= =========
HELD TO MATURITY:
Investment securities
U.S. Treasury and
government agency Securities $ 24,024 $ 7 $ 605 $ 23,426 $ 900 $ 8 $ -- $ 908
Corporate debt securities 1,501 21 -- 1,522 1,502 58 -- 1,560
Mortgage-backed
Securities
FHLMC 5,102 49 9 5,142 -- -- -- --
Fannie Mae 10,501 51 127 10,425 -- -- -- --
GNMA 5,295 62 3 5,354 -- -- -- --
Colateralized mortgage
Obligations
FHLMC 125,860 1,030 1,514 125,376 1,176 14 -- 1,190
Fannie Mae 87,656 276 1,025 86,907 7,509 8 -- 7,517
Other 14,230 73 17 14,286 18,552 185 3 18,734
--------- ------ ------ -------- --------- ------- ------- ---------
Total securities held to maturity $ 274,169 $1,569 $ 3,300 $272,438 $ 29,639 $ 273 $ 3 $ 29,909
========= ====== ======= ======== ========= ======= ======= =========
During the second quarter Patriot transferred $268,242,000 in investment
securities, principally consisting of agency mortgage-backed and CMO securities.
from an available for sale classification to held to maturity to reflect
Patriot's intentions to hold the securities to maturity.
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Note 3 - Loans Receivable
Loans receivable are summarized as follows:
June 30, December 31,
-------- ------------
1999 1998
---- ----
(in thousands)
Mortgage loan portfolio
Secured by real estate $287,671 $300,232
Construction 4,572 5,267
Consumer loan portfolio
Home equity 70,276 64,807
Consumer 9,888 4,336
Commercial loan portfolio
Commercial 152,078 92,367
Commercial leases 49,127 44,301
-------- --------
Total loans receivable 573,612 511,310
Less deferred loan origination fees (2,326) (2,230)
Allowance for credit losses (5,860) (4,087)
-------- --------
Total loans receivable, net $565,426 $504,993
======== ========
Note 4 - Deposits
Deposits are summarized as follows:
June 30, December 31,
-------- ------------
Deposit type 1999 1998
- ------------ ---- ----
(in thousands)
NOW $ 24,588 $ 23,961
Money market 88,065 74,613
Savings accounts 42,940 22,416
Non-interest-bearing demand 33,414 13,402
--------- ---------
Total demand, transaction, money
market and savings deposits 189,007 134,392
Certificates of deposits 292,999 243,404
--------- ---------
Total deposits $ 482,006 $ 377,796
========= =========
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Note 5 - 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 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 December 15, 2000. Earlier adoption is
permitted. Patriot has not yet determined the impact, if any, of this statement,
including if applicable, its provisions for the potential reclassifications of
certain investment securities, on earnings, financial condition or equity.
Note 6 - Business Combinations
On January 22, 1999, the Company consummated its acquisition of First
Lehigh Corporation (First Lehigh), the holding company of First Lehigh Bank. At
the time of the merger First Lehigh Bank was a commercial bank with $104,475,000
in total assets, $93,905,000 in total deposits, and five branches in Lehigh and
Carbon counties of Pennsylvania. Patriot issued 1,640,000 shares of common stock
for all of the outstanding common and preferred stock of First Lehigh. The
transaction had a total value of $21,047,000. The acquisition was accounted for
as a purchase, and accordingly the results of operations of First Lehigh will be
included in Patriot;s consolidated statement of income from the date of
acquisition. The transaction added $6,712,000 of goodwill which will be
amortized over 15 years and $4,508,000 of core deposit intangibles to Patriot's
balance sheet which will be amortized on an accelerated basis over a period of
5-20 years.
On June 28, 1999. The company acquired three offices of Ark Mortgage
Inc. The offices acquired are located in Fort Washington, Lancaster, and
Bethlehem. The purchase price was equal to $250,000 in cash less certain profits
on the acquired mortgage pipeline. The acquisition will be accounted for as a
purchase and will add approximately $170,000 of goodwill to Patriot's balance
sheet which will be amortized over a period of 15 years.
Note 7 - Subsequent Events
On August 16, 1999, the company announced the acquisition of Municipal
Capital Corporation, a brokerage for small ticket municipal leases. Municipal
Capital's principal product line is tax-exempt and taxable lease/purchase
obligations.
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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 $.23 and net income
of $1,371,000 for the three-month period ended June 30, 1999. This represents an
increase of 21% over diluted earnings per share of $.19 and net income of
$1,008,000 for the three month period ended June 30, 1998. Diluted earnings per
share for the six-month period ending June 30, 1999 was $.45 and net income of
$2,675,000 compared with $.37 and net income of $1,968,000 for the six-month
period ended June 30, 1998. Return on average equity was 9.49%, for the
three-month period ended June 30, 1999 compared to 8.43%, for the three-month
period ended June 30, 1998.
NET INTEREST INCOME. Net interest income for the three-month and six-month
periods ended June 30, 1999 was $6,004,000 and $11,691,000 compared to
$4,207,000 and $8,404,000 for the same periods in 1998. This increase is
primarily due to an increase in average balances associated with the
acquisitions of Keystone Financial Leasing Company (Keystone) and First Lehigh
Corporation (First Lehigh) and as Patriot has continued to grow its assets to
more fully utilize its capital. Patriot's net interest margin (net interest
income as a percentage of average interest-earning assets) was 2.38% for the
six-month period ended June 30, 1999 compared to 2.01% for the same period in
1998. The increase in margin is primarily due to the acquisitions and the growth
of Patriot's commercial loan portfolio.
Interest on loans and leases was $11,004,000 and $21,677,000 for the
three-month and six-month periods ended June 30, 1999 compared to $8,757,000 and
16,978,000 for the same periods in 1998. The average balance of loans was
$551,682,000 with an average yield of 7.89% for the six-month period ended June
30, 1999 compared to an average balance of $441,511,000 with an average yield of
7.71% for the same period in 1998. The increase in average balance is due to the
acquisitions of Keystone and First Lehigh and the continued origination of
commercial loans. The increase in average yield is primarily a result of a
greater volume of higher yielding commercial loans and leases from both
acquisitions coupled with Patriot's increased originations of its own commercial
loans.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $7,499,000 and $14,684,000 for the three-month and six-month
periods ended June 30, 1999 compared to $6,687,000 and $13,534,000 for the same
periods in 1998. The average balance of the investment portfolio was
$462,284,000 with an average yield of 6.62% for the six-month period ended June
30, 1999 compared to an average balance of $401,337,000 with an average yield of
6.90% for the same period in 1998. The increase in average balance was primarily
due to investments acquired from First Lehigh. The decrease in average yield is
related to decreases in yields in the market.
Interest on total deposits was $5,093,000 and $10,014,000 for the three-month
and six-month periods ended June 30, 1999 compared to $4,368,000 and $8,329,000
for the same periods in 1998. The average balance of total deposits was
$458,103,000 with an average cost of 4.40% for the six-month period ended June
30, 1999 compared to an average balance of $338,672,000 with an average cost of
5.01% for the same period in 1998. The increase in average balance is primarily
the result of $93,905,000 of new deposits from the acquisition of First Lehigh
coupled with aggressive marketing of money market and other transaction-based
deposit accounts, and an increase in Patriot's jumbo deposit program. The
decrease in average yield was the result of a higher percentage of lower costing
core deposits due to the addition of approximately $50,000,000 in core deposits
from the First Lehigh acquisition coupled with general decreases in interest
rates.
Interest on borrowings was $7,459,000 and $14,812,000 for the three-month
and six-month periods ended June 30, 1999 compared to $6,996,000 and $13,958,000
for the same periods in 1998. The average balance of borrowings was $553,558,000
with an average cost of 5.37% for the six-month period ended June 30, 1999
compared to an average balance of $477,355,000 with a cost of 5.89% for the same
period in 1998. The increase in average balance was due to the use of borrowings
to fund the growth in the balance sheet particularly for the funding of the
purchase Keystone Leasing Company. The decrease in the cost of borrowings was
the result of a general decrease in interest rates.
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PROVISION FOR CREDIT LOSSES. The provision for credit losses was $300,000 and
$600,000 for the three-month and six-month periods ended June 30, 1999 compared
to $300,000 and $550,000 for the same periods in 1998. The increase in the
provision is a reflection of the growth of Patriot's loan portfolio and the
origination of more commercial loans and leases offset somewhat by Patriot's
asset quality and low level of delinquencies and low level of non-performing
assets. At June 30, 1999 Patriot's non-performing assets were .07% of total
assets and all loans 30 days or more delinquent were .68% of total loans.
NON-INTEREST INCOME. Total non-interest income was $1,202,000 and $2,336,000
for the three-month and six-month periods ended June 30,1999 compared to
$1,532,000 and $2,196,000 for the same periods in 1998. Non-interest income also
includes gains recognized on the sale of investment securities available for
sale. The increase in recurring other non-interest income was primarily due to
an increased emphasis on recurring non-interest income including loan and
deposit fees, ATM fees, mortgage banking gains, and income from bank owned life
insurance.
NON-INTEREST EXPENSE. Total non-interest expense was $5,092,000 and
$9,821,000 for the three-month and six-month periods ended June 30, 1999
compared to $4,131,000 and $7,464,000 for the same periods in 1998. The increase
in non-interest expense was the result of increased salary and employee benefit
costs and occupancy and equipment costs, both related to the acquisition of
Keystone and First Lehigh and Patriot's expanded operations. Non-interest
expense in the three-month period ended June 30, 1998 also included a special
non-recurring pre-tax charge of $961,000 related to the retirement of Patriot's
former Chairman.
INCOME TAX PROVISION. The income tax provision was $443,000 and $931,000 for
the three-month and six-month periods ended June 30, 1999 compared to $300,000
and $598,000 for the same periods in 1998. The effective tax rate was 24.42% and
25.81% for three-month and six-month periods ended June 30, 1999 compared to
22.92% and 23.20% for the same periods in 1998. The increase is a result of the
amortization of non-deductible goodwill offset somewhat by the purchase of
certain tax exempt investments.
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, 1999
Patriot's total loan portfolio was $565,426,000, compared to a total loan
portfolio of $504,993,000 at December 31, 1998. The increase in the loan
portfolio was primarily the result of the loan portfolio acquired from First
Lehigh coupled with aggressive marketing of commercial loans. During the
three-month period ended June 30, 1999, Patriot originated total loans and
leases of $126,774,000, compared to total loans and leases originated of
$93,528,000 for the same period in 1998. Commercial loan and lease originations
for the three-month period ended June 30, 1999 were $70,429,000 compared to
$28,522,000 for the same period in 1998.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at June 30, 1999 were
$17,501,000 compared to $30,487,000 at December 31, 1998. The decrease in cash
balances is associated with timing differences in borrowing activity and
investment prepayments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment securities consist
primarily of U.S. agency securities, mortgage-backed securities which are
generally insured or guaranteed by either FHLMC, FNMA or the GNMA and
collateralized mortgage obligations.
Total investment and mortgage-backed securities at June 30, 1999 were
$459,203,000 compared to $416,019,000 at December 31, 1998. The increase in
investment and mortgage-backed securities was primarily due to investments
acquired from First Lehigh Corp.. During the second quarter Patriot transferred
$268,242,000 in investment securities, principally consisting of agency
mortgage-backed and CMO securities. from an available for sale classification to
held to maturity to reflect Patriot's intentions to hold the securities to
maturity. The transaction recorded a markdown on the transferred securities of
$561,000 into the accumulated other comprehensive income.
OTHER ASSETS. Premises and equipment at June 30, 1999 was $15,093,000
compared to $10,259,000 at December 31, 1998. The increase in premises and
equipment is primarily associated with the First Lehigh acquisition. Accrued
interest receivable at June 30, 1999 was $4,697,000 compared to $4,114,000 at
December 31, 1998. The increase is consistent with the growth in the loan and
investment portfolios. Real estate owned at June 30, 1999 was $88,000 compared
to $58,000 at December 31, 1998. During the six-month period ended June 30, 1999
Patriot purchased a bank owned life insurance policy with a cash surrender value
at June 30, 1999 of $15,264,000. Goodwill at June 30, 1999 was $14,174,000
compared to $2,267,000 at December 31, 1998. The increase in goodwill and other
intangibles is associated with the First Lehigh acquisition. Other assets at
June 30, 1999 were $6,974,000 compared to $6,988,000 at December 31, 1998.
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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, 1999 were $482,006,000 compared to $377,796,000 at
December 31, 1998. The increase in balance is primarily attributed to the
acquisition of First Lehigh which added $93,905,000 of deposits
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, 1999 were $554,849,000
compared to $549,321,000 at December 31, 1998.
STOCKHOLDERS' EQUITY. Total stockholders' equity was $54,694,000 at June 30,
1999 compared to $42,260,000 at December 31, 1998. The increase in balance is
primarily due to stock issued in the acquisition of First Lehigh Corp. and net
income in excess of dividends paid offset by the purchase of treasury stock and
decreases in the market values of investment and mortgage-backed securities
available for sale.
YEAR 2000 COMPLIANCE.
STATE OF READINESS. Pursuant to its strategic business plan, Patriot
has made significant investments in new technology over the last two years. As a
result of these investments, the primary systems used by Patriot are believed to
be Year 2000 compliant. Management has substantially completed a comprehensive
program to analyze, test and proactively address all of Patriot's systems to
ensure Year 2000 compliance. Management has also substantially completed the
process of evaluating significant customer and vendor relationships as well as
liquidity, given the potential for concern among deposit customers resulting in
decreased deposit balances, to assess risks and make appropriate contingency
plans.
RISKS. Year 2000 issues result from the inability of many computer
programs or computerized equipment to accurately calculate, store or use data as
the year 2000 approaches. Banking, by its nature, is a very data processing
intensive industry. These potential shortcomings could result in a system
failure or miscalculations causing disruptions of operation, including among
other things, a temporary inability to process transactions, track important
customer information, provide convenient access to this information, or engage
in normal business operations.
CONTINGENCY PLANS. Patriot believes that the consequences of incomplete
or untimely resolution of its Year 2000 issues do not represent a known material
event or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition. If
compliance is not achieved in a timely manner by Patriot or any of its
significant related third parties, be it a supplier of services or customer, the
Year 2000 issue could possibly have a material effect on Patriot's operations
and financial position. Contingency plans are also being developed in the event
of any unanticipated interruptions in Patriots' mission critical systems.
Business continuation plans for critical business applications are being
developed. These plans include adequate staffing on site during the Year 2000
date change to quickly repair any errant applications. In addition, in the event
of any problems the Company would follow its current computer outage business
continuation plans until such problems are corrected.
COST. The cost of the project and the date on which Patriot plans to
complete both Year 2000 modifications and system conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties. Management currently estimates the
cost of its Year 2000 plan including performing tests, documenting results and
making modifications where necessary to be approximately $145,000 of which
$83,000 has been expensed prior to June 30, 1999.
Pursuant to its strategic business plan, Patriot has made significant
investments in new technology over the last two years. As a result of these
investments, the primary systems used by Patriot are currently Year 2000
compliant. Management has initiated a comprehensive program to analyze and
proactively plan for ensuring all of Patriot's systems are year 2000 compliant.
It is currently anticipated that certain secondary systems will require
modification. The cost of these modifications is expected to be minimal.
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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 six-month period ended June 30, 1999, significant liquidity was
provided by maturities and sales of investment and mortgage-backed securities,
the acquisition of First Lehigh, and growth in deposits. The funds provided by
these activities were invested in new loans, investment and mortgage-backed
securities, and the purchase of treasury stock.
At June 30, 1999, Patriot had outstanding loan commitments of
$46,507,000. 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 30,1999 totaled $175,056,000.
Based upon historical experience, Patriot expects that it will have the ability
to retain substantially all of the maturing certificates of deposit at maturity.
See "Year 2000 Compliance" for a discussion regarding the possible impact of
Year 2000 issues on Patriot's liquidity.
Capital Resources. FDIC regulations currently require companies to
maintain a minimum leverage capital ratio of not less than 3% of tier 1 capital
to total adjusted assets and not less than 4% of risk-adjusted assets, and a
minimum risk-based capital ratio (based upon credit risk) of not less than 8%.
The FDIC requires a minimum leverage capital requirement of 3% for institutions
rated composite 1 under the CAMEL rating system. For all other institutions, the
minimum leverage capital requirement is 3% plus at least an additional 1% to 2%,
(100 to 200) basis points. At December 31, 1998, 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, 1999:
To Be To Be
Actual Adequacy Capitalized Well Capitalized
------ -------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1999
Total capital (to risk weighted assets)
Patriot Bank Corp. $68,315 11.86% $46,073 8% $57,592 10%
Patriot 56,104 10.61% 42,294 8% 52,868 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 61,544 10.69% 23,037 4% 34,555 6%
Patriot 49,714 9.40% 21,147 4% 31,721 6%
Tier I capital (to average assets)
Patriot Bank Corp. 61,544 5.67% 43,430 4% 54,287 5%
Patriot 49,714 5.42% 36,712 4% 45,890 5%
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MANAGEMENT OF INTEREST RATE RISK
The principal objective of Patriot's interest rate risk management function
is to evaluate the interest rate risk included in certain on and off balance
sheet accounts, determine the level of risk appropriate given Patriot's business
focus, operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board approved guidelines.
Through such management, Patriot seeks to reduce the vulnerability of its net
interest income to changes in interest rates. Patriot monitors its interest rate
risk as such risk relates to its operating strategies. Patriot's Board of
Directors has established an Asset/Liability Committee comprised of senior
management, which is responsible for reviewing its asset/liability and interest
rate position and making decisions involving asset/liability considerations. The
Asset/Liability Committee meets regularly and reports trends and Patriot's
interest rate risk position to the Board of Directors.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, therefore, a negative gap theoretically would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap position would theoretically tend to result in an increase in net
interest income while a positive gap would tend to affect net interest income
adversely.
Patriot pursues several actions designed to control its level of interest
rate risk. These actions include increasing the percentage of the loan portfolio
consisting of short-term and adjustable-rate loans through increased
originations of these loans, acquiring short-term and adjustable-rate
mortgage-backed securities, and undertaking to lengthen the maturities of
deposits and borrowings. At June 30, 1999, Patriot's total interest-bearing
liabilities maturing or repricing within one year exceeded its total net
interest-earning assets maturing or repricing in the same time period by
$104,618,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 9.49%.
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The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999, which are
anticipated, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at June 30,
1999, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a Nine-Month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be repaid and/or repriced as a result of contractual amortization
and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and
as a result of contractual rate adjustments on adjustable-rate loans.
At June 30, 1999
3 Months 3 Months to 6 Months to 1 Year to 3 Years to More than
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
------- -------- ------ ------- ------- ------- -----
(In thousands)
INTEREST EARNING ASSETS(1):
Interest earning deposits $ 12,307 $ -- $ -- $ -- $ -- $ -- $ 12,307
Investment and mortgage-backed
securities, net (2)(5) 86,487 14,362 26,604 48,027 143,770 139,953 459,203
Loans receivable, net(3)(5) 110,700 40,913 70,156 98,418 165,021 89,763 574,971
--------- --------- --------- --------- -------- --------- ----------
Total interest-earning assets 209,494 55,275 96,760 146,445 308,791 229,716 1,046,481
Non-interest-earning assets -- -- -- -- -- 55,624 55,624
--------- --------- --------- --------- -------- --------- ----------
Total assets 209,494 55,275 96,760 146,445 308,791 285,340 1,102,105
--------- --------- --------- --------- -------- --------- ----------
INTEREST-BEARING LIABILITIES:
Money market and passbook savings
accounts(6) 11,647 11,647 23,293 43,992 6,075 34,351 131,005
Demand and NOW accounts (6) 1,450 1,450 2,900 5,800 11,600 34,802 58,002
Certificates of deposit 44,214 50,257 80,585 96,294 11,112 10,537 292,999
Borrowings 236,704 2,000 -- 50,000 170,000 96,145 554,849
--------- --------- --------- --------- -------- --------- ----------
Total interest-bearing liabilities 294,015 65,354 106,778 196,086 198,787 175,835 1,036,855
Non-interest-bearing liabilities 10,556 10,556
Equity -- -- -- -- -- 54,694 54,694
--------- --------- --------- --------- -------- --------- ----------
Total liabilities and equity 294,015 65,354 106,778 196,086 198,787 241,085 1,102,105
--------- --------- --------- --------- -------- --------- ----------
Interest sensitivity gap(4) $ (84,521) $ (10,079) $(10,018) $ (49,641) $ 110,004 $ 44,255 $ --
========= ========= ======== ========= ========= ========= ==========
Cumulative interest sensitivity gap $ (84,521) $ (94,600) $(104,618) $(154,259) $(44,255) $ --
========= ========= ======== ========= ========= =========
Cumulative interest sensitivity gap as a
percent of total assets (7.67)% (8.58)% (9.49)% (14.00)% (4.02)% --%
Cumulative interest-earning assets as a
percent of cumulative interest-bearing
liabilities 71.25% 73.68% 77.56% 76.71% 94.86% 100.93%
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(1) Interest-earning assets are included in the period in which the
balances are expected to be repaid and/or repriced as a result of
anticipated prepayments, scheduled rate adjustments, and contractual
maturities.
(2) Includes investment and mortgage-backed securities available for sale
and held to maturity.
(3) For purposes of the gap analysis, loans receivable includes
non-performing loans and is reduced for the allowance for possible
loan losses, and unamortized discounts and deferred loan fees.
(4) Interest sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
(5) Annual prepayment rates for loans and mortgage-backed securities range
from 9% to 24%.
(6) Money market and savings accounts, and NOW accounts are assumed to
have decay rates between 5% and 135% annually and have been estimated
based upon a historic analysis of core deposit trends.
In addition to gap analysis, Patriot utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate sensitivity.
Income simulation considers not only the impact of changing market interest
rates on forecasted net interest income, but also other factors such as yield
curve relationships, the volume and mix of assets and liabilities, customer
preferences and general market conditions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion concerning the effects of interest rate changes on the
Company's estimated net interest income for the year ending December 31, 1998
set forth in "Managements Discussion and Analysis of Financial and Results of
Operations -- Management of Interest Rate Risk" in Item 2 hereof, is
incorporated herein by reference.
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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 27, 1999.
At the said meeting 6,180,618 shares of Common Stock were eligible to vote, of
which 3,479,045 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 James A. Bentley and Richard A. Elko.
For % Withheld %
James A. Bentley 3,461,021 99.50 17,844 0.50
Richard A. Elko 3,460,841 99.50 18,204 0.50
The names of each of the directors whose term of office continued after the
Annual Meeting and their respective term expirations are as follows:
Samuel N. Landis 2000
Joseph W. Major 2000
Larry V. Thren 2001
James B. Elliot 2001
2. The ratification of the appointment of KPMG Peat Marwick LLP as independent
auditors of Patriot Bank Corp. for fiscal year ending December 31, 1999.
For % Against % Abstain %
3,312,928 95.20% 124,285 3.60% 41,832 1.20%
Not applicable.
Item 5 OTHER INFORMATION
Not applicable.
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Item 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Following exhibits are filed as part of this report.
Exhibit 27 Financial Data Schedule
(filed herewith)
(b) Reports filed on Form 8K
Report on Form 8-K dated April 7, 1999 contained
financial statements related to the acquisition of
First Lehigh Corporation.
- ----------
* 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.
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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 12, 1999
_______________________ _______________________________________
Joseph W. Major
President and Chief Executive Officer
Date August 12, 1999
_______________________ _______________________________________
Richard A. Elko
Executive Vice President and
Chief Financial Officer
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