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, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 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: 5,444,983 shares of common
stock, par value $.01 per share, were outstanding as of August 14, 1998.
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997
Consolidated Statements of Income for the Three-Month and
Six-Month Periods ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Three-Month and
Six-Month Periods ended June 30, 1998 and 1997
Consolidated Statements of Comprehensive Income for the
Three-Month and Six-Month Periods ended June 30, 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)
June 30, December 31,
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1998 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited) (note)
Assets
Cash and due from banks $ 10,574 $ 2,597
Interest-earning deposits in other financial institutions 117 6,417
-------- --------
Total cash and cash equivalents 10,691 9,014
Investment and mortgage-backed securities available for sale 337,989 343,125
Investment and mortgage-backed securities held to maturity (market value of
$48,881 and $62,817 at June 30, 1998 and December 31, 1997, respectively) 48,454 62,516
Loans held for sale 2,802 4,095
Loans and leases receivable, net of allowances for possible
loss, $2,817 and $2,512 at June 30, 1998
and December 31, 1997, respectively 460,617 419,697
Premises and equipment, net 8,647 8,542
Accrued interest receivable 4,512 4,119
Real estate owned 179 162
Other assets 2,412 230
-------- --------
Total assets $876,303 $851,500
======== ========
Liabilities and stockholders' equity
Deposits $365,604 $289,528
Borrowings 220,391 275,200
Securities sold under repurchase agreements 215,337 214,684
Advances from borrowers for taxes and insurance 4,604 3,135
Trust preferred securities 18,448 18,417
Other liabilities 4,649 4,003
-------- --------
Total liabilities 829,033 804,967
-------- --------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
issued at June 30, 1998 and December 31, 1997, respectively -- --
Common stock, $.01 par value, 10,000,000 shares authorized, 7,028,631
and 7,033,029 issued at June 30, 1998 and December 31, 1997, respectively 56 56
Additional paid-in capital 60,039 59,926
Common stock acquired by ESOP, 437,061 shares at amortized cost at
June 30, 1998 and December 31, 1997, respectively (2,356) (2,428)
Common stock acquired by MRP, 196,013 and 248,604 shares at amortized
cost at June 30, 1998 and December 31, 1997, respectively (1,105) (1,285)
Retained earnings 2,921 1,680
Treasury stock acquired, 1,584,944 at cost at June 30, 1998 and
December 31, 1997, respectively (16,071) (16,071)
Accumulated other comprehensive income 3,786 4,655
-------- --------
Total stockholders' equity 47,270 46,533
-------- --------
Total liabilities and stockholders' equity $876,303 $851,500
======== ========
The accompanying notes are an integral part of these statements.
Note: The balance sheet at December 31, 1997 is taken from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
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1998 1997 1998 1997
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(unaudited)
Interest income
Interest-earning deposits $ 127 $ 30 $ 179 $ 116
Investment and mortgage-backed securities 6,687 4,986 13,534 9,680
Loans 8,757 6,307 16,978 11,848
------- -------- -------- -------
Total interest income 15,571 11,323 30,691 21,644
------- -------- -------- -------
Interest expense
Deposits 4,368 3,272 8,329 6,366
Short-term borrowings 4,183 1,394 8,703 2,605
Long-term borrowings 2,813 3,064 5,255 5,556
------- -------- -------- -------
Total interest expense 11,364 7,730 22,287 14,527
------- -------- -------- -------
Net interest income before provision for
possible loan losses 4,207 3,593 8,404 7,117
Provision for possible loan losses 300 120 550 225
------- -------- -------- -------
Net interest income after provision for
possible loan losses 3,907 3,473 7,854 6,892
------- -------- -------- -------
Non-interest income
Service fees, charges and other operating income 276 161 572 300
Loss on sale of real estate acquired through
foreclosure -- (9) -- (9)
Gain on sale of investment and mortgage-backed
securities available for sale 1,115 104 1,419 190
Mortgage banking gains 141 -- 205 --
------- -------- -------- -------
Total non-interest income 1,532 256 2,196 481
------- -------- -------- -------
Non-interest expense
Salaries and employee benefits 2,969 1,667 4,962 3,100
Office occupancy and equipment 510 450 1,001 878
Professional services 159 25 328 80
Federal deposit insurance premiums 45 39 91 47
Information Services 20 42 53 90
Advertising 174 125 385 249
Deposit processing 98 76 197 137
Other operating expense 156 97 467 313
------- -------- -------- --------
Total non-interest expense 4,131 2,521 7,484 4,894
------- -------- -------- -------
Income before income taxes 1,308 1,208 2,566 2,479
Income taxes 300 370 598 832
------- -------- -------- --------
Net income $ 1,008 $ 838 $ 1,968 $ 1,647
======= ======== ======= =======
Earnings per share -- basic $ 0.20 $ 0.14 $ 0.39 $ 0.28
======== ======== ======== ========
Earnings per share -- diluted $ 0.19 $ 0.14 $ 0.37 $ 0.27
======== ======== ======== ========
Dividends per share $ 0.07 $ 0.06 $ 0.13 $ 0.11
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six-Month Period Ended June 30,
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1998 1997
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(unaudited)
Operating activities
Net income $ 1,968 $ 1,647
Adjustments to reconcile net income to net cash used by operating
activities
Amortization and accretion of
Deferred loan origination fees (47) (154)
Premiums and discounts (387) 120
Management recognition plan 180 174
Provision for possible loan losses 550 225
Release of ESOP shares 184 131
Gain on sale of securities available for sale (1,419) (190)
Loss on sale of real estate owned -- 9
Depreciation of premises and equipment 413 357
Mortgage loans originated for sale (13,511) --
Mortgage loans sold 14,804 --
Increase in deferred income taxes (668) (22)
Increase in accrued interest receivable (393) (1,344)
Increase in other assets (1,332) (9,333)
Increase (decrease) in other liabilities 646 (1,062)
--------- --------
Net cash used by operating activities 990 (9,442)
--------- --------
Investing activities
Loan originations & principal payments on loans, net (41,420) (65,092)
Proceeds from sale of securities -- available for sale 5,186 719
Proceeds from maturity of securities -- available for sale 47,307 4,566
Proceeds from maturity of securities -- held to maturity 14,062 3,576
Purchases of securities -- available for sale (56,407) (104,151)
Proceeds from sale of real estate owned -- 30
Purchase of premises and equipment (518) (1,372)
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Net cash used by investing activities (21,790) (161,724)
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Financing activities
Net increase in deposits 75,891 43,817
Net (repayments) proceeds from short term borrowings (134,156) 85,821
Proceeds from long term borrowings 105,000 25,000
Repayments of long term borrowings (25,000) --
Proceeds from trust preferred stock -- 18,525
Increase in advances from borrowers
for taxes and insurance 1,469 1,234
Cash paid for dividends (727) (741)
Purchase of treasury stock -- (5,462)
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Net cash provided by financing activities 22,477 168,194
--------- --------
Net increase (decrease) in cash and cash equivalents 1,677 (2,972)
Cash and cash equivalents at beginning of year 9,014 6,853
--------- --------
Cash and cash equivalents at end of year $ 10,691 $ 3,881
========= ========
Supplemental disclosures
Cash paid for interest on deposits was $8,321 and $6,335 for the six-month
periods ended June 30, 1998 and 1997, respectively. Cash paid for income taxes
was $387 and $1,060 for the six-month periods ended June 30, 1998 and 1997,
respectively. Transfers from loans to real estate owned were $17 and $139 for
the six-month periods ended June 30, 1998 and 1997, respectively.
The accompanying notes are an integral part of these statements.
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three-Month Six-Month
Period Ended Period Ended
June 30, June 30,
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1998 1997 1998 1997
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Net income $ 1,008 $ 838 $ 1,968 $1,647
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the
period (379) (447) 550 956
Less: Reclassification adjustment for gains included
in net income (1,115) (104) (1,419) (190)
------- ----- ------- -------
Comprehensive income (loss) $ (486) $ 287 $ 1,099 $ 2,413
======= ====== ======= =======
The accompanying notes are an integral part of these statements.
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 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 June 30, 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.
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1998
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, 1998 December 31, 1997
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Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
cost gain loss value cost appreciation depreciation value
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Investment and Mortgage-Backed Securities Available for Sale
Investment securities
U.S. Treasury and
government agency
securities $ 30,067 $ 100 $ 72 $ 30,095 $ 19,884 $ 202 $ -- $ 20,086
Corporate securities 21,600 813 27 22,386 17,493 1,274 -- 18,767
Equity securitites 54,570 4,003 -- 58,573 48,168 4,385 -- 52,553
Mortgage-backed
securities
FHLMC 8,582 162 -- 8,744 11,287 214 -- 11,501
Fannie Mae 16,616 168 101 16,683 20,163 185 94 20,254
GNMA 10,050 218 -- 10,268 12,592 279 -- 12,871
Colateralized mortgage
obligations
FHLMC 66,076 757 84 66,749 75,085 806 107 75,784
Fannie Mae 113,717 364 568 113,513 118,778 503 437 118,844
Other 10,895 83 -- 10,978 12,522 24 81 12,465
-------- -------- -------- -------- --------- --------- -------- --------
Total investment and
mortgage-backed securities
available for sale $332,173 $ 6,668 $ 852 $337,989 $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 $ 5 $ 3 $ 1,037 $ 1,035 $ 4 $ 5 $ 1,034
Corporate securities 1,502 40 -- 1,542 1,502 42 -- 1,544
Colateralized mortgage
obligations
FHLMC 1,470 11 -- 1,481 1,801 3 -- 1,804
Fannie Mae 8,600 114 -- 8,714 9,775 112 -- 9,887
Other 35,847 269 9 36,107 48,403 238 93 48,548
-------- -------- -------- -------- --------- --------- -------- --------
Total investment and
mortgage-backed securities
available for sale $ 48,454 $ 439 $ 12 $ 48,881 $ 62,516 $ 399 $ 98 $ 62,817
======== ======== ======== ======== ========= ========= ======== ========
Note 3 - Loans and Leases Receivable
Loans and leases receivable are summarized as follows:
June 30, December 31,
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1998 1997
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(in thousands)
Residential mortgage portfolio
Residential mortgages $325,508 $294,716
Construction 3,012 4,039
Consumer portfolio
Home equity 67,584 75,439
Consumer 4,172 3,909
Commercial portfolio
Commercial 64,743 46,166
Commercial leases 963 334
-------- --------
Total loans and leases receivable 465,982 424,603
Less deferred origination fees (2,548) (2,394)
Less allowance for possible losses (2,817) (2,512)
-------- --------
Total loans and leases receivable, net $460,617 $419,697
======== ========
Note 4 - Deposits
Deposits are summarized as follows:
June 30, December 31,
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Deposit type 1998 1997
- ---------------------------------------------------------------------------------------
(in thousands)
NOW $ 16,794 $ 16,908
Money market 62,370 51,696
Savings accounts 24,617 24,510
Non-interest-bearing demand 15,447 11,117
-------- --------
Total demand, transaction, money
market and savings deposits 119,228 104,231
Certificates of deposits 246,376 185,297
-------- --------
Total deposits $365,604 $289,528
======== ========
Note 5 - 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 6 - 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.
Note 7 - Accounting for Derivative Instruments and Hedging Activities
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal quarters of
fiscal years beginning after June 15, 1999 with early adoption permitted. SFAS
133 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. Entities
are required to recognize all derivatives as either assets or liabilities on the
balance sheet 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 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 exposures. Patriot
has not yet determined the impact, if any, of this Statement, including its
provisions for the potential reclassifications of investment securities, on
earnings, financial condition or equity.
Note 8 - Subsequent Events
On July 28, 1998 Patriot Bank Corp. announced the execution of a Definitive
Agreement to acquire First Lehigh Corporation, ("First Lehigh") parent company
of First Lehigh Bank. At June 30, 1998 First Lehigh was a $111 million bank
holding company with five community banking offices located in Pennsylvania's
Lehigh Valley. The terms of the agreement call for Patriot to exchange (I) .428
shares of Patriot common stock for each share of First Lehigh common stock and
senior preferred stock and (ii) .342 shares of Patriot common stock for each
share of Series A preferred stock. The transaction will be accounted for as a
purchase for a total consideration of approximately $24.7 million. Subject to
regulatory approval Patriot anticipates the transaction to close at the end of
1998 or early 1999.
PATRIOT BANK CORP. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 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 $.19 and net income of
$1,008,000 for the three-month period ended June 30, 1998. This represents an
increase of over 35% over earnings per share of $.14 and net income of $838,000
for the three month period ended June 30, 1997. Earnings per share for the
six-month period ending June 30, 1998 was $.37 and net income of $1,968,000
compared with $.27 and net income of $1,647,000 for the six-month period ended
June 30, 1997. Return on average equity was 8.43%, for the three-month period
ended June 30, 1998 compared to 6.94%, for the three-month period ended June 30,
1997.
Net Interest Income. Net interest income for the three-month and six-month
periods ended June 30, 1998 was $4,207,000 and $8,404,000 compared to $3,593,000
and $7,117,000 for the same periods 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 2.01% for the six-month
period ended June 30, 1998 compared to 2.39% for the same period in 1997. The
decrease in margin is primarily due to an increase in the percentage of
investment and mortgage-backed securities to total assets.
Interest on loans was $8,757,000 and $16,978,000 for the three-month and
six-month periods ended June 30, 1998 compared to $6,307,000 and $11,848,000 for
the same periods in 1997. The average balance of loans was $441,511,000 with an
average yield of 7.71% for the six-month period ended June 30, 1998 compared to
an average balance of $302,311,000 with an average yield of 7.85% for the same
period in 1997. The increase in average balance is due to increased origination
of commercial loans and residential mortgage loans. The decrease in average
yield is primarily a result of an emphasis placed on shorter term and
adjustable-rate mortgage loans many of which are originated with teaser rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $6,687,000 and $13,534,000 for the three-month and six-month
periods ended June 30, 1998 compared to $4,986,000 and $9,680,000 for the same
periods in 1997. The average balance of the investment portfolio was
$401,337,000 with an average yield of 6.90% for the six-month period ended June
30, 1998 compared to an average balance of $284,989,000 with an average yield of
6.89% 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 $4,368,000 and $8,329,000 for the three-month
and six-month periods ended June 30, 1998 compared to $3,272,000 and $6,366,000
for the same periods in 1997. The average balance of total deposits was
$338,672,000 with an average cost of 5.01% for the six-month period ended June
30, 1998 compared to an average balance of $265,333,000 with an average cost of
4.84% 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 somewhat by the
emphasis on transaction-based deposit accounts.
Interest on borrowings was $6,996,000 and $13,958,000 for the three-month and
six-month periods ended June 30, 1998 compared to $4,458,000 and $8,161,000 for
the same periods in 1997. The average balance of borrowings was $477,355,000
with an average cost of 5.89% for the six-month period ended June 30, 1998
compared to an average balance of $286,846,000 with a cost of 5.74% 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 Losses. The provision for possible losses was
$300,000 and $550,000 for the three-month and six-month periods ended June 30,
1998 compared to $120,000 and $225,000 for the same periods in 1997. The
increase in the provision is a reflection of the growth of Patriot's loan
portfolio and the origination of more commercial loans offset somewhat by
Patriot's asset quality and low level of delinquencies and low level of
non-performing assets. At June 30, 1998 Patriot's non-performing assets were
.13% of total assets and all loans 30 days or more delinquent were .67% of total
loans.
Non-Interest Income. Total non-interest income was $1,532,000 and $2,196,000
for the three-month and six-month periods ended June 30,1998 compared to
$256,000 and $481,000 for the same periods in 1997. Non-interest income
includes gains recognized on the sale of investment securities available for
sale. The increase in other non-interest income 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 Expense. Total non-interest expense was $4,131,000 and
$7,484,000 for the three-month and six-month periods ended June 30, 1998
compared to $2,521,000 and $4,894,000 for the same periods 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. 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. The ratio of recurring non-interest
expense to average assets improved to 1.43% for the three-month period ended
June 30 1998 compared to 1.60% for the same period in 1997. The improvement in
the overhead ratio reflects an emphasis on managing costs.
Income Tax Provision. The income tax provision was $300,000 and $598,000 for
the three-month and six-month periods ended June 30, 1998 compared to $370,000
and $832,000 for the same periods in 1997. The effective tax rate was 23.30% for
1998 compared to 33.56% 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 and Lease Portfolio. Patriot's primary portfolio products are
commercial loans, commercial leases, 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 June 30, 1998 Patriot's total loan portfolio was
$463,434,000, 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 and residential mortgage loans. During the six-month period ended
June 30, 1998, Patriot originated total loans of $93,528,000, compared to total
loans originated of $102,151,000 for the same period in 1997.
Cash and Cash Equivalents. Cash and cash equivalents at June 30, 1998 were
$10,691,000 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 June 30, 1998 were
$386,443,000 compared to $405,641,000 at December 31, 1997. The decrease in
investment and mortgage-backed securities was primarily due to maturities and
principal repayments.
Other Assets. Premises and equipment at June 30, 1998 was $8,647,000 compared
to $8,542,000 at December 31, 1997. Accrued interest receivable at June 30, 1998
was $4,512,000 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 June 30, 1998 was $179,000 compared to $162,000 at December 31, 1997.
Other assets at June 30, 1998 were $2,412,000 compared to $230,000 at December
31, 1997. The increase is primarily due to timing of cash receipts associated
with investment and lending activity.
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, 1998 were $365,604,000 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 Federal Home Loan Bank of Pittsburgh ("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, 1998 were $456,176,000 compared to $508,301,000
at December 31, 1997. The decrease in borrowings was due to funding provided by
the increase in deposit balances.
Stockholders' Equity. Total stockholders' equity was $47,270,000 at June
30, 1998 compared to $46,533,000 at December 31, 1997. The increase in balance
is primarily due to income earned offset by dividends paid to stockholders.
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, 1998, significant liquidity was
provided by operations, deposit growth and long-term borrowings. Maturities and
sales of investment and mortgage-backed securities also provided significant
liquidity during the six-month period ended June 30, 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 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 June 30, 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 June 30, 1998:
To Be To Be
Actual Adequately Capitalized Well Capitalized
---------------- ---------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1998
Total capital (to risk weighted assets)
Patriot Bank Corp. $ 64,749 15.29% $33,882 8% $43,352 10%
Patriot 37,526 10.38% 28,918 8% 36,148 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 57,979 13.69% 16,940 4% 25,411 6%
Patriot 34,710 9.60% 14,459 4% 21,689 6%
Tier I capital (to average assets)
Patriot Bank Corp. 57,979 6.54% 35,472 4% 44,340 5%
Patriot 34,710 5.82% 23,843 4% 29,803 5%
Management of Interest Rate Risk
The principal objective of Patriot's interest rate risk management function
is to evaluate the interest rate risk included in certain on and off balance
sheet accounts, determine the level of risk appropriate given Patriot's business
focus, operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board approved guidelines.
Through such management, Patriot seeks to reduce the vulnerability of its net
interest income to changes in interest rates. Patriot monitors its interest rate
risk as such risk relates to its operating strategies. Patriot's Board of
Directors has established an Asset/Liability Committee comprised of senior
management, 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 and lease
portfolio consisting of short-term and adjustable-rate loans and leases through
increased originations of these products for Patriot's portfolio, the sale of
longer-term residential mortgage loans, acquiring short-term and adjustable-rate
mortgage-backed securities, and undertaking to lengthen the maturities of
deposits and borrowings and undertaking to lessen the sensitivity of deposits to
interest rate changes. At June 30, 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
$84,340,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 9.62%.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 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 June 30,
1998, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a six-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, 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 $ 117 $ -- $ -- $ -- $ -- $ -- $ 117
Investment and mortgage-backed
securities, net (2)(5) 168,198 13,052 29,528 46,964 21,691 107,010 386,443
Loans and leases receivable, net(3)(5) 75,054 37,117 53,472 138,793 70,183 88,801 463,420
-------- -------- -------- -------- ------- -------- -------
Total interest-earning assets 243,369 50,169 83,000 185,757 91,874 195,811 849,980
Non-interest-earning assets -- -- -- -- -- 26,323 26,323
-------- -------- -------- -------- ------- -------- -------
Total assets 243,369 50,169 83,000 185,757 91,874 222,134 876,303
-------- -------- -------- -------- ------- -------- -------
Interest-bearing liabilities:
Money market and passbook savings
accounts(6) 10,825 10,825 21,651 17,845 4,890 22,765 88,802
Demand and NOW accounts (6) 317 317 634 2,536 2,536 24,088 30,427
Certificates of deposit 35,100 25,074 87,606 85,743 3,322 9,530 246,375
Borrowings 253,528 10,000 5,000 2,000 0 183,648 454,176
-------- -------- -------- -------- ------- -------- -------
Total interest-bearing liabilities 299,770 46,216 114,891 108,124 10,748 240,031 819,780
Non-interest-bearing liabilities -- -- -- -- -- 9,253 9,253
Equity -- -- -- -- -- 47,270 47,270
-------- -------- -------- -------- ------- -------- -------
Total liabilities and equity 299,770 46,216 114,891 108,124 10,748 296,554 876,303
-------- -------- -------- -------- ------- -------- -------
Interest sensitivity gap(4) $(56,401) $ 3,953 $(31,891) $77,633 $81,127 $(74,420) $ --
======== ======== ======== ======== ======= ======== =======
Cumulative interest sensitivity gap $(56,401) $(52,449) $(84,340) $(6,707) $74,420 $ --
======== ======== ======== ======== ======= ========
Cumulative interest sensitivity gap as a
percent of total assets (6.44)% (5.99)% (9.62)% (0.77)% 8.49% --%
Cumulative interest-earning assets as a
percent of cumulative interest-bearing
liabilities 81.19% 84.84% 81.70% 98.82% 112.84% 103.68%
(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 and leases receivable includes
non-performing loans and is reduced for the allowance for possible
losses, and unamortized discounts and deferred 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 leases receivable and mortgage-backed
securities range from 12% to 39%.
(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.
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
The company held its Annual Meeting of Shareholders on April 23, 1998.
At the said meeting 5,620,259 shares of Common Stock were eligible to vote, of
which 3,433,183 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 Larry V. Thren and James B. Elliott.
For % Withheld %
--------- ----- -------- ----
Larry V. Thren 3,390,662 98.76 42,521 1.24
James B. Elliott 3,390,906 98.77 42,277 1.23
The names of each of the directors whose term of office continued after the
Annual Meeting and thier respective term expirations were as follows:
Gary N. Gieringer 1999
Leonard A. Huff 1999
John H. Diehl 2000
Samuel N. Landis 2000
Joseph W. Major 2000
2. The approval of the 1998 Employee Stock Purchase Plan.
For % Against % Abstain %
--------- ----- ------- ---- ------- ---
2,536,781 73.89% 66,778 1.95% 8,985 .26%
3. The ratification of the appointment of KPMG Peat Marwick LLP as independent
auditors of Patriot Bank Corp. for fiscal year ending December 31, 1998.
For % Against % Abstain %
--------- ----- ------- --- ------- ---
3,392,629 98.82% 33,368 .97% 7,186 .21%
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 June 4, 1998 contained
notification of appointment of James B. Elliott as
Chairman and Joseph W. Major as CEO and the resignation
of Chairman Gary N. Gieringer
- ---------------
* Incorporated herein by reference into this document from the exhibits to Form
S-1, Registration Statement, filed on September 1, 1995 as amended
Registration No. 33-96530.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATRIOT BANK CORP.
----------------------------------------
(Registrant)
Date August 14, 1998 ----------------------------------------
--------------- Joseph W. Major
President and Chief Operating Officer
Date August 14, 1998 ----------------------------------------
--------------- Richard A. Elko
Executive Vice President
Chief Financial Officer