UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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
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PATRIOT BANK CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2820537
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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: 5,448,085 shares of common
stock, par value $.01 per share, were outstanding as of May 14, 1998.
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997
Consolidated Statements of Income for the Three-Month Periods
ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Three-Month
Periods ended March 31, 1998 and 1997
Consolidated Statements of Comprehensive Income for the
Three-Month Periods ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
Items 1 through 6
SIGNATURES
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
Assets
Cash and due from banks $ 3,174 $ 2,597
Interest-earning deposits in other financial institutions 6,251 6,417
--------- ---------
Total cash and cash equivalents 9,425 9,014
Investment and mortgage-backed securities available for sale 351,374 343,125
Investment and mortgage-backed securities held to maturity
(market value of $59,926 and $62,817 at March 31, 1998
and December 31, 1997, respectively) 56,890 62,516
Loans held for sale 8,209 4,095
Loans receivable 439,324 422,209
Allowance for possible loan losses (2,813) (2,512)
--------- ---------
Loans receivable, net 436,511 419,697
Premises and equipment, net 8,579 8,542
Accrued interest receivable 4,134 4,119
Real estate owned 179 162
Other assets 4,997 230
--------- ---------
Total assets $ 880,298 $ 851,500
========= =========
Liabilities and stockholders' equity
Deposits $ 344,550 $ 289,528
FHLB Advances 222,200 275,200
Securities sold under repurchase agreements 233,289 214,684
Advances from borrowers for taxes and insurance 3,863 3,135
Guaranteed Preferred Beneficial Interest in the Company's
subordinated debt 18,433 18,417
Other liabilities 7,016 4,003
--------- ---------
Total liabilities 829,351 804,967
--------- ---------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
issued at March 31, 1998 and December 31, 1997, respectively -- --
Common stock, $.01 par value, 10,000,000 shares authorized, 7,033,029
issued at March 31, 1998 and December 31, 1997, respectively 56 56
Additional paid-in capital 59,985 59,926
Common stock acquired by ESOP, 437,061 shares at cost at
March 31, 1998 and December 31, 1997, respectively (2,392) (2,428)
Common stock acquired by MRP, 208,443 shares at amortized cost
at March 31, 1998 and December 31, 1997, respectively (1,195) (1,285)
Retained earnings 2,284 1,680
Treasury stock acquired, 1,584,944 at cost at March 31, 1998 and
December 31, 1997, respectively (16,071) (16,071)
Net unrealized gain on investment and mortgage-backed
securities available for sale, net of taxes 8,280 4,655
--------- ---------
Total stockholders' equity 50,947 46,533
--------- ---------
Total liabilities and stockholders' equity $ 880,298 $ 851,500
========= =========
The accompanying notes are an integral part of these statements.
2
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
Three-Month Period Ended
March 31,
------------------------
1998 1997
------- -------
(unaudited)
Interest income
Interest-earning deposits $ 50 $ 29
Investment and mortgage-backed securities 6,849 4,751
Loans 8,220 5,540
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Total interest income 15,119 10,320
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Interest expense
Deposits 3,961 3,094
Short-term borrowings 4,520 2,491
Long-term borrowings 2,442 1,211
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Total interest expense 10,923 6,796
------- -------
Net interest income before provision for
possible loan losses 4,196 3,524
Provision for possible loan losses 250 105
------- -------
Net interest income after provision for
possible loan losses 3,946 3,419
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Non-interest income
Service fees, charges and other operating income 296 139
Gain on sale of investment and mortgage-backed
securities available for sale 304 86
Mortgage banking gains 64 --
------- -------
Total non-interest income 664 225
------- -------
Non-interest expense
Salaries and employee benefits 1,994 1,433
Office occupancy and equipment 491 429
Professional services 170 54
Federal deposit insurance premiums 46 8
Data processing 31 48
Advertising 211 125
Deposit processing 99 61
Other operating expense 311 215
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Total non-interest expense 3,353 2,373
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Income before income taxes 1,257 1,271
Income taxes 298 461
------- -------
Net income $ 959 $ 810
======= =======
Earnings per share -- basic $ 0.19 $ 0.14
======= =======
Earnings per share -- diluted $ 0.18 $ 0.13
======= =======
Dividends per share $ 0.07 $ 0.06
======= =======
The accompanying notes are an integral part of these statements.
3
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three-Month Period
Ended March 31,
-------------------------
1998 1997
-------- --------
(unaudited)
Operating activities
Net income $ 959 $ 810
Adjustments to reconcile net income to net cash
used by operating activities
Amortization and accretion of
Deferred loan origination fees (6) (85)
Premiums and discounts (88) 40
Management recognition plan 90 87
Provision for possible loan losses 250 105
Release of ESOP shares 95 --
Gain on sale of securities available for sale (304) (87)
Depreciation of premises and equipment 201 132
Mortgage loans originated for sale (9,267) --
Mortgage loans sold 5,153 --
(Decrease) increase in deferred income taxes (683) 284
Increase in accrued interest receivable (15) (600)
Increase in other assets (6,322) (2,221)
Increase (decrease) in other liabilities 3,013 (1,066)
-------- --------
Net cash used by operating activities (6,924) (2,601)
-------- --------
Investing activities
Loan originations & principal payments on loans, net (17,065) (14,531)
Proceeds from sale of securities -- available for sale 5,834 442
Proceeds from maturity of securities -- available for sale 12,199 1,869
Proceeds from maturity of securities -- held to maturity 5,626 1,701
Purchases of securities -- available for sale (19,933) (55,844)
Purchase of premises and equipment (238) (700)
-------- --------
Net cash used by investing activities (13,577) (67,063)
-------- --------
Financing activities
Net increase in deposits 54,934 26,766
(Repayments) proceeds from short term borrowings (84,395) 45,649
Proceeds (repayments) from long term borrowings 50,000 (2,000)
Increase in advances from borrowers
for taxes and insurance 728 563
Cash paid for dividends (355) (363)
Purchase of treasury stock -- (5,005)
-------- --------
Net cash provided by financing activities 20,912 65,610
-------- --------
Net increase (decrease) in cash and cash equivalents 411 (4,054)
Cash and cash equivalents at beginning of year 9,014 6,853
-------- --------
Cash and cash equivalents at end of year $ 9,425 $ 2,799
======== ========
Supplemental disclosures
Cash paid for interest on deposits was $3,954 and $3,085 for the three-month
periods ended March 31, 1998 and 1997, respectively. Cash paid for income taxes
was $12 and $0 for the three-month periods ended March 31, 1998 and 1997,
respectively. Transfers from loans to real estate owned were $17 and $0 for the
three-month periods ended March 31, 1998 and 1997, respectively.
The accompanying notes are an integral part of these statements.
4
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three-Month Period
Ended March 31,
---------------------------
1998 1997
------ -----
Net income $ 959 $ 810
Other comprehensive income, net of tax(1)
Unrealized gains on securities
Unrealized holding gains arising during the period 3,823 (548)
Less: Reclassification adjustment for gains included (198) (56)
in net income ----- -----
3,625 (604)
------ -----
Comprehensive income $4,584 $ 206
====== =====
(1) Components of other comprehensive income are shown net of tax.
Alternatively, other comprehensive income could be displayed before tax with
one amount shown for the aggregate income tax expense or benefit.
5
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 1998
Note 1 - General
The accompanying financial statements of Patriot Bank Corp. and
Subsidiaries ("Patriot") include the accounts of the parent company, Patriot
Bank Corp. and its wholly-owned subsidiaries, Patriot Bank and Patriot
Investment Company. All material intercompany balances and transactions have
been eliminated in consolidation. These financial statements have been prepared
in accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, the
consolidated financial statements reflect all adjustments (which consist of
normal recurring accruals) necessary for a fair presentation of the results for
the unaudited periods. The results of operations for the three-month period
ended March 31, 1998 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, 1997.
Note 2 - Earnings Per Share
On April 16, 1998 Patriot announced a 25% stock split. New shares resulting
from the stock split will distributed on May 14, 1998 to stockholders of record
on May 1, 1998. For comparative purposes, per share amounts, as presented herin,
have been adjusted to reflect this stock split.
6
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 1998
Note 3 - Investment And Mortgage-Backed Securities
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
March 31, 1998
----------------------------------------------------
Amortized Unrealized Unrealized Fair
cost gain loss value
--------- ---------- ---------- -----
(in thousands)
Investment and Mortgage-Backed
Securities Available for Sale
Investment securities
U.S. Treasury and government
agency securities $ 27,591 $ 309 $ 57 $ 27,843
Corporate securities 20,245 1,169 -- 21,414
Equity securitites 47,268 4,451 278 51,441
Mortgage-backed securities
FHLMC 10,223 430 -- 10,653
Fannie Mae 18,708 271 56 18,923
GNMA 11,485 234 -- 11,719
Colateralized mortgage obligations
FHLMC 63,340 3,922 107 67,155
Fannie Mae 127,775 2,683 516 129,942
Other 12,008 276 -- 12,284
-------- ------- ------ --------
Total investment and
mortgage-backed securities
available for sale $338,643 $13,745 $1,014 $351,374
======== ======= ====== ========
Investment and Mortgage-Backed
Securities Held to Maturity
Investment securities
U.S. Treasury and government
agency securities $ 1,035 $ 5 $ 3 $ 1,037
Corporate securities 1,502 35 -- 1,537
Colateralized mortgage obligations
FHLMC 1,705 -- 9 1,696
Fannie Mae 9,180 310 -- 9,490
Other 43,468 2,698 -- 46,166
-------- ------- ------ --------
Total investment and
mortgage-backed securities
available for sale $ 56,890 $ 3,048 $ 12 $ 59,926
======== ======= ====== ========
December 31, 1997
----------------------------------------------------
Amortized Unrealized Unrealized Fair
cost appreciation depreciation Value
--------- ------------ ------------ ---------
(in thousands)
Investment and Mortgage-Backed
Securities Available for Sale
Investment securities
U.S. Treasury and government
agency securities $ 19,984 $ 202 $ -- $ 20,086
Corporate securities 17,493 1,274 -- 18,767
Equity securitites 48,168 4,385 -- 52,553
Mortgage-backed securities
FHLMC 11,287 214 -- 11,501
Fannie Mae 20,163 185 94 20,254
GNMA 12,592 279 -- 12,871
Colateralized mortgage obligations
FHLMC 75,085 806 107 75,784
Fannie Mae 118,778 503 437 118,844
Other 12,522 24 81 12,465
-------- ------- ---- --------
Total investment and
mortgage-backed securities
available for sale $335,972 $7,872 $719 $343,125
======== ====== ==== ========
Investment and Mortgage-Backed
Securities Held to Maturity
Investment securities
U.S. Treasury and government
agency securities $ 1,035 $ 4 $ 5 $ 1,034
Corporate securities 1,502 42 -- 1,544
Colateralized mortgage obligations
FHLMC 1,801 3 -- 1,804
Fannie Mae 9,775 112 -- 9,887
Other 48,403 238 93 48,548
-------- ------- ---- --------
Total investment and
mortgage-backed securities
available for sale $ 62,516 $ 399 $ 98 $ 62,817
======== ======= ==== ========
7
Note 4 - Loans Receivable
Loans receivable are summarized as follows:
March 31, December 31,
1998 1997
--------- ------------
(in thousands)
Mortgage loan portfolio
Secured by real estate $ 305,013 $ 294,716
Construction 5,253 4,039
Consumer loan portfolio
Home equity 72,176 75,439
Installment 4,161 3,909
Comercial loan portfolio
Commercial 54,336 46,166
Commercial leases 1,017 334
--------- ---------
Total loans receivable 441,956 424,603
Less deferred loan origination fees (2,632) (2,394)
--------- ---------
Total loans receivable, net $ 439,324 $ 422,209
========= =========
Note 5 - Deposits
Deposits are summarized as follows:
March 31, December 31,
--------- ------------
Deposit type 1998 1997
(in thousands)
NOW $ 18,652 $ 16,908
Money market 59,056 51,696
Savings accounts 24,849 24,510
Non-interest-bearing demand 13,831 11,117
-------- --------
Total demand, transaction, money
market and savings deposits 116,388 104,231
Certificates of deposits 228,162 185,297
-------- --------
Total deposits $344,550 $289,528
======== ========
8
Note 6 - Year 2000 Compliance.
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.
Note 7 - Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) has issued
SFAS No. 130, "Reporting of Comprehensive Income", which is effective for years
beginning after Decembet 15, 1997. This new standard requires entitles
presenting a complete set of financial statements to include details of
comprehensive income. Comprehensive income consists of net income or loss for
the current period and income, expenses, gains, and losses that bypass the
income statement and are reported directly in a separate component of equity.
Patriot has evalusated SFAS No. 130 and has prepared these financial statements
in accordance with SFAS No. 130 and the instructions for Form 10-Q.
Note 8 - Disclosures about Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is effective for all periods
beginning after December 15, 1997. SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. Patriot has
evaluated SFAS No. 131 and has prepared these financial statements in accordance
with SFAS No. 131 and the instructions for Form 10-Q.
9
PATRIOT BANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
March 31, 1998
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 earnings per share of $.18 ($.22 prior to
adjustment for the 25% stock split) and net income of $959,000 for the
three-month period ended March 31, 1998. This represents an increase of over 29%
over earnings per share of $.13 ($.17 prior to adjustment for the 25% stock
split) and net income of $810,000 for the three month period ended March 31,
1997. Return on average equity was 8.29%, for the three-month period ended March
31, 1998 compared to 6.60%, for the three-month period ended March 31,1997. When
Patriot's initial public offering was completed in December 1995 the company
initiated an aggressive growth strategy to more fully utilize the capital
raised. The growth strategy encompasses leveraging the balance sheet by
acquiring investment securities through the use of borrowings.
Net Interest Income. Net interest income for the three-month period ended
March 31, 1998 was $4,196,000 compared to $3,524,000 for the same period in
1997. This increase is primarily due to an increase in average balances as
Patriot has grown 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 2.02% for the three-month period ended March 31, 1998 compared to
2.43% for the same period in 1997. The decrease in margin is primarily due to an
increase in investment and mortgage-backed securities pursuant to Patriot's
growth strategy.
Interest on loans was $8,220,000 for the three-month period ended March 31,
1998 compared to $5,540,000 for the same period in 1997. The average balance of
loans was $430,235,000 with an average yield of 7.67% for the three-month period
ended March 31, 1998 compared to an average balance of $286,940,000 with an
average yield of 7.76% for the same period in 1997. The increase in average
balance is due to an emphasis placed on commercial, residential mortgage loans
and home equity loans. The decrease in average yield is primarily a result of an
emphasis placed on shorter term and adjustable-rate loans many of which are
originated with teaser rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $6,849,000 for the three-month period ended March 31, 1998
compared to $4,751,000 for the same period in 1997. The average balance of the
investment portfolio was $399,140,000 with an average yield of 7.01% for the
three-month period ended March 31, 1998 compared to an average balance of
$277,409,000 with an average yield of 6.85% for the same period in 1997. The
increase in average balance and the increase in yield was due to the purchase of
higher yielding investments to more fully leverage Patriot's capital.
Interest on total deposits was $3,961,000 for the three-month period ended
March 31, 1998 compared to $3,094,000 for the same period in 1997. The average
balance of total deposits was $320,326,000 with an average cost of 5.01% for the
three-month period ended March 31, 1998 compared to an average balance of
$259,727,000 with an average cost of 4.83% for the same period in 1997. The
increase in average balance was the result of aggressive marketing of money
market and other transaction-based deposit accounts, the opening of two new
community banking offices and an increase in Patriot's jumbo deposit program.
The increase in average yield was the result of a higher percentage of jumbo
deposits offset by the emphasis on transaction-based deposit accounts.
Interest on borrowings was $6,962,000 for the three-month period ended
March 31, 1998 compared to $3,702,000 for the same periods in 1997. The average
balance of borrowings was $476,282,000 with an average cost of 5.92% for the
three-month period ended March 31, 1998 compared to an average balance of
$265,978,000 with a cost of 5.64% for the same period in 1997. The increase in
average balance was due to the use of borrowings to fund the growth in the
balance sheet. The increase in the cost of borrowings was the result of
extending the maturity of borrowings, an increase in interest rates and the
issuance of trust preferred securities.
Provision for Possible Loan Losses. The provision for possible loan losses
was $250,000 for the three-month period ended March 31, 1998 compared to
$105,000 for the same period in 1997. The increase in the provision is a
reflection of the growth of Patriot's loan portfolio and the origination of more
commercial and consumer loans offset by Patriot's high asset quality and low
level of delinquencies and low level of non-performing assets. At March 31, 1998
Patriot's non-performing assets were .13% of total assets and all loans 30 days
or more delinquent were .67% of total loans.
10
Non-Interest Income. Total non-interest income was $664,000 for the
three-month period ended March 31,1998 compared to $225,000 for the same period
in 1997. The increase was primarily due to an increased emphasis on recurring
non-interest income including loan and deposit fees, ATM fees, and mortgage
banking gains. Non-interest income also includes gains recognized on the sale of
investment securities available for sale.
Non-Interest Expense. Total non-interest expense was $3,353,000 for the
three-month period ended March 31, 1998 compared to $2,373,000 for the same
period in 1997. The increase in non-interest expense was the result of increased
salary and employee benefit costs and occupancy and equipment costs, both
related to Patriot's expanded operations. The ratio of non-interest expense to
average assets improved to 1.60% for the three-month period ended March 31 1998
compared to 1.65% for the same period in 1997. The improvement in the overhead
ratio reflects the growth of Patriot while maintaining an emphasis on managing
costs.
Income Tax Provision. The income tax provision was $298,000 for the
three-month period ended March 31, 1998 compared to $461,000 for the same period
in 1997. The effective tax rate was 23.71% for 1998 compared to 36.27% for 1997.
The decrease is a result of the purchase of certain tax exempt investments and a
reduction in state income tax due to the conversion of Patriot Bank's charter.
Financial Condition
Loan Portfolio. Patriot's primary loan products are commercial, home equity
loans on existing owner-occupied residential real estate and fixed-rate and
adjustable-rate mortgage loans. Patriot also offers residential construction
loans and other consumer loans. At March 31, 1998 Patriot's total loan portfolio
was $439,324,000, compared to a total loan portfolio of $422,209,000 at December
31, 1997. The increase in the loan portfolio was the result of aggressive
marketing of commercial, consumer and residential mortgage loans. During the
three-month period ended March 31, 1998, Patriot originated total loans of
$46,370,000, compared to total loans originated of $31,826,000 for the same
period in 1997.
Cash and Cash Equivalents. Cash and cash equivalents at March 31, 1998 were
$9,425,000 compared to $9,014,000 at December 31, 1997.
Investment and Mortgage-Backed Securities. Investment securities consist
primarily of U.S. agency securities, mortgage-backed securities which are
generally insured or guaranteed by either FHLMC, FNMA or the GNMA and
collateralized mortgage obligations.
Total investment and mortgage-backed securities at March 31, 1998 were
$408,264,000 compared to $405,641,000 at December 31, 1997. The increase in
investment and mortgage-backed securities was due to the purchase of securities
pursuant to Patriot's growth strategy.
Other Assets. Premises and equipment at March 31, 1998 was $8,579,000
compared to $8,542,000 at December 31, 1997. The increase was associated with
Patriot's ongoing investment in technology related equipment. Accrued interest
receivable at March 31, 1998 was $4,134,000 compared to $4,119,000 at December
31, 1997. The increase is consistent with the growth in the loan and investment
portfolios. Real estate owned at March 31, 1998 was $179,000 compared to
$162,000 at December 31, 1997. Other assets at March 31, 1998 were $4,997,000
compared to $230,000 at December 31, 1997. The increase is primarily due to a
receivable in transit on a matured security.
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 March 31, 1998 were $344,550,000 compared to $289,528,000
at December 31, 1997. The increase in balance was the result of aggressive
marketing of money market accounts and other transaction-based deposit accounts
as well as an increase in Patriot's jumbo deposit program.
Borrowings. Patriot utilizes borrowings as a source of funds for its asset
growth and its asset/liability management. Patriot is eligible to obtain
advances from the FHLB upon the security of the FHLB common stock it owns and
certain of its residential mortgages and mortgage-backed securities, provided
certain standards related to creditworthiness have been met. Patriot may also
utilize repurchase agreements to meet its liquidity needs. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions fluctuates from time to time in accordance with
the policies of the FHLB.
Total borrowings at March 31, 1998 were $473,922,000 compared to
$508,301,000 at December 31, 1997. The decrease in borrowings was due to the
increase in deposit balances offset by the leveraging of Patriot's capital and
growth of Patriot's loan portfolio.
Other Liabilities at March 31, 1998 were $7,016,000 compared to $ 4,003,000
at December 31, 1997. The increase is primarily due to the increase in the
deferred tax liability associated with the appreciation in the market value of
securities available for sale.
Stockholders' Equity. Total stockholders' equity was $50,947,000 at March
31, 1998 compared to $46,533,000 at December 31, 1997. The increase was
primarily a result of the appreciation in the market value of securities
available for sale.
11
Liquidity and Capital Resources
Liquidity. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances and repurchase agreements. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
During the three-month period ended March 31, 1998, significant liquidity
was provided by deposit growth and long-term borrowings. Maturities and sales of
investment and mortgage-backed securities also provided significant liquidity
during the three-month period ended March 31, 1998. The funds provided by these
activities were invested in new loans, investment and mortgage-backed
securities, and the repayment of short-term borrowings.
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 100 to
200 basis points.
At March 31, 1998, Patriot Bank's and 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 March 31, 1998:
To Be To Be
Actual Adequately Capitalized Well Capitalized
--------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 1998
Total capital (to risk weighted assets)
Patriot Bank Corp. $63,911 15.41% $33,172 8% $41,465 10%
Patriot 44,100 10.78% 27,837 8% 34,796 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 56,888 13.72% 16,856 4% 24,879 6%
Patriot 34,682 9.97% 13,918 4% 20,879 6%
Tier I capital (to average assets)
Patriot Bank Corp. 56,888 6.68% 34,075 4% 42,594 5%
Patriot 34,682 5.82% 23,843 4% 29,803 5%
12
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 March 31, 1998, 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
$82,462,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 9.37%.
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.
13
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1998, 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 March 31,
1998, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be repaid and/or repriced as a result of contractual amortization
and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and
as a result of contractual rate adjustments on adjustable-rate loans.
At March 31, 1998
------------------------------------------------------------------------------------
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 $ 6,251 $ -- $ -- $ -- $ -- $ -- $ 6,251
Investment and mortgage-backed
securities, net(2)(5) 198,079 14,068 24,056 41,914 25,543 104,603 408,263
Loans receivable, net(3)(5) 60,923 35,363 55,461 127,743 64,342 100,889 444,721
-------- ------- -------- -------- -------- -------- --------
Total interest-earning assets 265,253 49,431 79,517 169,657 89,885 205,492 859,235
Non-interest-earning assets -- -- -- -- -- 21,062 21,062
-------- ------- -------- -------- -------- -------- --------
Total assets 265,253 49,431 79,517 169,657 89,885 226,554 880,297
-------- ------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Money market and passbook savings
accounts(6) 9,666 9,666 19,332 16,609 5,167 23,465 83,906
Demand and NOW accounts(6) 338 338 677 2,707 2,707 25,715 32,482
Certificates of deposit 27,675 33,233 74,448 79,833 3,434 9,539 228,162
Borrowings 291,289 -- 10,000 19,000 85,000 68,633 473,922
-------- ------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 328,968 43,237 104,457 118,149 96,308 127,352 818,472
Non-interest-bearing liabilities -- -- -- -- -- 10,878 10,878
Equity -- -- -- -- -- 50,947 50,947
-------- ------- -------- -------- -------- -------- --------
Total liabilities and equity 328,968 43,237 104,457 118,149 96,308 189,177 880,297
-------- ------- ------- -------- -------- -------- --------
Interest sensitivity gap(4) $(63,715) $ 6,194 $(24,940) $ 51,508 $ (6,423) $ 37,377 $ --
======== ======= ======== ======== ======== ======== ========
Cumulative interest sensitivity gap $(63,715) ($57,522) $(82,462) $(30,953) $(37,377) $ --
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap
as a percent of total assets (7.24)% (6.53)% (9.37)% (3.52)% (4.25)% --%
Cumulative interest-earning assets as a
percent of cumulative interest-
bearing liabilities 80.63% 84.55% 82.70% 94.80% 94.59% 104.98%
(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
12% to 30%.
(6) Money market and savings accounts, and NOW accounts are assumed to have
decay rates between 4% and 76% 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.
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 an Analysis of Financial and Results of
Operations--Management of Interest Rate Risk" in Item 2 hereof, is incorporated
herein by reference.
Page
----
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 and results of
operations of the Company.
Item 2 CHANGES IN SECURITIES
Not applicable.
Item 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5 OTHER INFORMATION
Not applicable.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Following exhibits are filed as part of this report.
Exhibit 27 Financial Data Schedule
(filed herewith)
(b) Reports filed on Form 8-K
Report on Form 8-K dated March 4, 1998 contained notification
of change in independent auditors from Grant Thornton LLP to
KPMG Peat Marwick LLP
- -----------------------
* 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.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATRIOT BANK CORP.
-------------------------------------
(Registrant)
Date May 14, 1998
------------
-------------------------------------
Joseph W. Major
President and Chief Operating Officer
Date May 14, 1998
------------
-------------------------------------
Richard A. Elko
Executive Vice President and
Chief Financial Officer
15