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 September 30, 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
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
- ------------------------------------------------- ----------
(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: 5,108,612 shares of common
stock, par value $.01 per share, were outstanding as of November 13, 1998.
PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997
Consolidated Statements of Income for the Three-Month
and nine-month Periods ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Three-Month and
nine-month Periods ended September 30, 1998 and 1997
Consolidated Statements of Comprehensive Income for the
Three-Month and nine-month Periods ended September 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)
September 30, December 31,
- --------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
(unaudited)
Assets
Cash and due from banks $ 4,708 $ 2,597
Interest-earning deposits in other financial institutions 12,733 6,417
--------- ---------
Total cash and cash equivalents 17,441 9,014
Investment and mortgage-backed securities available for sale 393,865 343,125
Investment and mortgage-backed securities held to maturity
(market value of $39,264 and $62,817 at September 30, 1998
and December 31, 1997, respectively) 38,569 62,516
Loans held for sale 6,927 4,095
Loans and leases receivable 450,027 422,209
Allowance for possible loan and lease losses (3,108) (2,512)
Premises and equipment, net 9,504 8,542
Accrued interest receivable 4,004 4,119
Real estate owned 89 162
Other assets 3,411 230
--------- ---------
Total assets $ 920,729 $ 851,500
========= =========
Liabilities and stockholders' equity
Deposits $ 360,025 $ 289,528
FHLB advances 260,200 275,200
Securities sold under repurchase agreements 228,095 214,684
Advances from borrowers for taxes and insurance 2,071 3,135
Trust preferred securities 18,463 18,417
Other liabilities 5,311 4,003
--------- ---------
Total liabilities 874,165 804,967
--------- ---------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
issued at September 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 September 30, 1998 and December 31, 1997,
respectively 56 56
Additional paid-in capital 60,097 59,926
Common stock acquired by ESOP, 437,061 and 417,779 shares at amortized
cost at September 30, 1998 and December 31, 1997, respectively (2,321) (2,428)
Common stock acquired by MRP, 196,013 and 248,604 shares at amortized
cost at September 30, 1998 and December 31, 1997, respectively (1,015) (1,285)
Retained earnings 3,580 1,680
Treasury stock acquired, 1,852,595 and 1,584,944 at cost at
September 30, 1998 and December 31, 1997, respectively (19,460) (16,071)
Accumulated other comprehensive income 5,627 4,655
--------- ---------
Total stockholders' equity 46,564 46,533
--------- ---------
Total liabilities and stockholders' equity $ 920,729 $ 851,500
========= =========
The accompanying notes are an integral part of these statements.
1
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
Three-Month Period Ended nine-month Period Ended
September 30,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
Interest income
Interest-earning deposits $ 54 $ 47 $ 232 $ 136
Investment and mortgage-backed securities 6,990 6,395 20,525 16,102
Loans 8,676 7,304 25,654 19,152
-------- -------- -------- --------
Total interest income 15,720 13,746 46,411 35,390
-------- -------- -------- --------
Interest expense
Deposits 4,543 3,457 12,872 9,822
Short-term borrowings 4,217 4,633 12,921 10,238
Long-term borrowings 3,042 2,053 8,296 4,610
-------- -------- -------- --------
Total interest expense 11,802 10,143 34,089 24,670
-------- -------- -------- --------
Net interest income before provision for
possible loan losses 3,918 3,603 12,322 10,720
Provision for possible loan losses 325 235 875 460
-------- -------- -------- --------
Net interest income after provision for
possible loan losses 3,593 3,368 11,447 10,260
-------- -------- -------- --------
Non-interest income
Service fees, charges and other operating income 405 246 978 546
Loss on sale of real estate acquired through
foreclosure -- -- -- (9)
Gain on sale of investment and mortgage-backed
securities available for sale 186 242 1,604 432
Mortgage banking gains 250 88 455 88
-------- -------- -------- --------
Total non-interest income 841 576 3,037 1,057
-------- -------- -------- --------
Non-interest expense
Salaries and employee benefits 2,062 1,795 7,023 4,896
Office occupancy and equipment 549 472 1,550 1,351
Professional services 135 92 464 172
Federal deposit insurance premiums 45 39 91 89
Data processing 39 41 93 130
Advertising 96 97 481 347
Deposit processing 102 83 299 220
Other operating expense 83 241 594 549
-------- -------- -------- --------
Total non-interest expense 3,111 2,860 10,595 7,754
-------- -------- -------- --------
Income before income taxes 1,323 1,084 3,889 3,563
Income taxes 283 252 881 1,084
-------- -------- -------- --------
Net income $ 1,040 $ 832 $ 3,008 $ 2,479
======== ======== ======== ========
Earnings per share -- basic $ 0.21 $ 0.16 $ 0.60 $ 0.44
======== ======== ======== ========
Earnings per share -- diluted $ 0.20 $ 0.15 $ 0.57 $ 0.42
======== ======== ======== ========
Dividends per share $ 0.07 $ 0.06 $ 0.20 $ 0.18
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
2
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
nine-month Period Ended
September 30,
- -----------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------
(unaudited)
Operating activities
Net income $ 3,008 $ 2,479
Adjustments to reconcile net income to net cash used by operating activities
Amortization and accretion of
Deferred loan origination fees (96) (145)
Premiums and discounts (769) 70
Management recognition plan 270 262
Provision for possible loan losses 875 460
Release of ESOP shares 278 213
Gain on sale of securities available for sale (1,604) (432)
Loss on real estate owned 90 9
Depreciation of premises and equipment 626 746
Mortgage loans originated for sale (34,999) (4,875)
Mortgage loans sold 32,167 4,875
Increase (decrease) in deferred income taxes (588) 458
Decrease (increase) in accrued interest receivable 115 (2,370)
Increase in other assets (3,321) (1,807)
Increase in other liabilities 1,308 559
--------- ---------
Net cash (used) provided by operating activities (2,640) 502
--------- ---------
Investing activities
Loan originations & principal payments on loans, net (27,987) (118,625)
Proceeds from sale of securities -- available for sale 5,652 1,327
Proceeds from maturity of securities -- available for sale 107,488 13,179
Proceeds from maturity of securities -- held to maturity 23,947 6,386
Purchases of securities - available for sale (159,508) (187,036)
Proceeds from sale of real estate owned -- 35
Purchase of premises and equipment (1,588) (1,768)
--------- ---------
Net cash used by investing activities (51,996) (286,502)
--------- ---------
Financing activities
Net increase in deposits 70,212 53,897
Net (Repayments) proceeds from short term borrowings (161,589) 195,059
Proceeds from long term borrowings 160,000 40,200
Proceeds from trust preferred stock -- 18,406
Decrease in advances from borrowers
for taxes and insurance (1,064) (382)
Cash paid for dividends (1,107) (1,046)
Purchase of treasury stock (3,389) (13,554)
--------- ---------
Net cash provided by financing activities 63,063 292,580
--------- ---------
Net increase in cash and cash equivalents 8,427 6,580
Cash and cash equivalents at beginning of year 9,014 6,853
--------- ---------
Cash and cash equivalents at end of year $ 17,441 $ 13,433
========= =========
Supplemental disclosures
Cash paid for interest on deposits was $12,862 and $10,203 for the nine-month
periods ended September 30, 1998 and 1997, respectively. Cash paid for income
taxes was $537 and $1,460 for the nine-month periods ended September 30, 1998
and 1997, respectively. Transfers from loans to real estate owned were $17 and
$139 for the nine-month periods ended September 30, 1998 and 1997, respectively.
The accompanying notes are an integral part of these statements.
3
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three-Month Period Ended nine-month Period Ended
September 30,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 1,040 $ 832 $ 3,008 $ 2,479
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized holding gains arising during the period 2,027 1,705 2,575 2,660
Less: Reclassification adjustment for gains included
in net income (186) (242) (1,604) (432)
Comprehensive income $ 2,881 $ 2,295 $ 3,979 $ 4,707
======= ======= ======= =======
4
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 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 September 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.
5
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 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:
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized Unrealized Unrealized Fair Amortized appre- depre- Fair
cost gain loss value cost ciation ciation value
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Investment and Mortgage-Backed
Securities Available for Sale
Investment securities
U.S. Treasury and
government agency
securities $ 38,539 $ 548 $ -- $ 39,087 $ 19,884 $ 202 $ -- $ 20,086
Corporate securities 19,101 1,739 102 20,738 17,493 1,274 -- 18,767
Equity securities 57,280 2,850 533 59,597 48,168 4,385 -- 52,553
Mortgage-backed
securities
FHLMC 7,158 81 8 7,231 11,287 214 -- 11,501
Fannie Mae 35,385 209 96 35,498 20,163 185 94 20,254
GNMA 8,527 150 1 8,676 12,592 279 -- 12,871
Colateralized mortgage
obligations
FHLMC 99,869 2,184 -- 102,053 75,085 806 107 75,784
Fannie Mae 109,573 1,486 -- 111,059 118,778 503 437 118,844
Other 9,785 141 -- 9,926 12,522 24 81 12,465
-------- ------- ------ -------- -------- ------ ---- --------
Total investment and
mortgage-backed securities
available for sale $385,217 $ 9,388 $ 740 $393,865 $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 $ 11 $ 1 $ 1,045 $ 1,035 $ 4 $ 5 $ 1,034
Corporate securities 1,502 67 -- 1,569 1,502 42 -- 1,544
Colateralized mortgage
Obligations
FHLMC 1,319 22 -- 1,341 1,801 3 -- 1,804
Fannie Mae 8,044 131 -- 8,175 9,775 112 -- 9,887
Other 26,669 469 4 27,134 48,403 238 93 48,548
------- ------- ---- ------- ------- ---- ------- --------
Total investment and
Mortgage-backed securities
Available for sale $38,569 $ 700 $ 5 $39,264 $62,516 $399 $ 98 $62,817
======= ======= ==== ======= ======= ==== ======= =======
6
Note 3 - Loans Receivable
Loans receivable are summarized as follows:
September 30, December 31,
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Mortgage loan portfolio
Secured by real estate $ 303,706 $ 294,716
Construction 4,197 4,039
Consumer loan portfolio
Home equity 64,369 75,439
Consumer 4,220 3,909
Comercial loan portfolio
Commercial 74,485 46,166
Commercial leases 1,437 334
--------- ---------
Total loans receivable 452,414 424,603
Less deferred loan origination fees (2,387) (2,394)
--------- ---------
Total loans receivable, net $ 450,027 $ 422,209
========= =========
Note 4 - Deposits
Deposits are summarized as follows:
September 30, December 31,
- --------------------------------------------------------------------------------
Deposit type 1998 1997
- --------------------------------------------------------------------------------
(in thousands)
NOW $ 14,230 $ 16,908
Money market 66,124 51,696
Savings accounts 23,177 24,510
Non-interest-bearing demand 17,156 11,117
-------- --------
Total demand, transaction, money
market and savings deposits 120,687 104,231
Certificates of deposits 239,338 185,297
-------- --------
Total deposits $360,025 $289,528
======== ========
7
Note 5 - 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. The
disclosure requirements of this statement will have no impact on the financial
condition, net income or shareholder's equity of the company.
Note 6 - 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 7 - Recent Events
On July 28, 1998 Patriot Bank Corp. announced the execution of a Definitive
Agreement o acquire First Lehigh Corporation, ("First Lehigh") parent company of
First Lehigh Bank. At September 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 between
(i) .428 and .482 shares of Patriot common stock for each share of First Lehigh
common stock and senior preferred stock and between (ii) .342 and .38562 shares
of Patriot common stock for each share of Series A preferred stock. The
transaction will be accounted for as a purchase, subject to shareholder and
regulatory approval Patriot anticipates the transaction to close in early 1999.
On November 6, 1998 Patriot completed the acquisition of Keystone Financial
Leasing, a $40 million small ticket commercial leasing company. Patriot paid $6
million in cash at closing and will pay future cash considerations based on
future revenues of the leasing company. Keystone Financial Leasing will be
accounted for as a purchase and merged into Patriot Commercial Leasing Company,
a wholly-owned subsidiary of Patriot Bank and operate out of Exton PA.
8
PATRIOT BANK CORP. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
September 30, 1998
Forward Looking Statements. 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
herin 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 $.20 and net income of
$1,040,000 for the three-month period ended September 30, 1998. This represents
an increase of over 33% over earnings per share of $.15 and net income of
$832,000 for the three month period ended September 30, 1997. Earnings per share
for the nine-month period ending September 30, 1998 was $.57 and net income of
$3,008,000 compared with $.42 and net income of $2,479,000 for the nine-month
period ended September 30, 1997. Return on average equity was 9.13%, for the
three-month period ended September 30, 1998 compared to 7.38%, for the
three-month period ended September 30, 1997.
Net Interest Income. Net interest income for the three-month and nine-month
periods ended September 30, 1998 was $3,918,000 and $12,322,000 compared to
$3,603,000 and $10,720,000 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% tax
effected for the nine-month period ended September 30, 1998 compared to 2.26%
tax effected 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 $8,676,000 and $25,654,000 for the three-month and
nine-month periods ended September 30, 1998 compared to $7,304,000 and
$19,152,000 for the same periods in 1997. The average balance of loans was
$448,254,000 with an average yield of 7.73% for the nine-month period ended
September 30, 1998 compared to an average balance of $376,758,000 with an
average yield of 7.74% for the same period in 1997. The increase in average
balance is due to increased origination of commercial and residential mortgage
loans offset by a decrease in consumer 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 $6,990,000 and $20,525,000 for the three-month and nine-month
periods ended September 30, 1998 compared to $6,395,000 and $16,102,000 for the
same periods in 1997. The average balance of the investment portfolio was
$423,136,000 with an average yield of 6.78% for the nine-month period ended
September 30, 1998 compared to an average balance of $372,385,000 with an
average yield of 7.00% for the same period in 1997. The increase in average
balance was due to the purchase of investments to more fully leverage Patriot's
capital. The decrease in average yield is a result of generally lower interest
rates.
Interest on total deposits was $4,543,000 and $12,872,000 for the
three-month and nine-month periods ended September 30, 1998 compared to
$3,457,000 and $9,822,000 for the same periods in 1997. The average balance of
total deposits was $361,903,000 with an average cost of 4.98% for the nine-month
period ended September 30, 1998 compared to an average balance of $281,577,000
with an average cost of 4.87% 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 $7,259,000 and $21,217,000 for the three-month
and nine-month periods ended September 30, 1998 compared to $6,686,000 and
$14,848,000 for the same periods in 1997. The average balance of borrowings was
$489,904,000 with an average cost of 5.88% for the nine-month period ended
September 30, 1998 compared to an average balance of $443,510,000 with a cost of
5.98% 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 decrease in
the cost of borrowings was a result of generally lower interest rates.
Provision for Loan Losses. The provision for loan losses was $325,000 and
$875,000 for the three-month and nine-month periods ended September 30, 1998
compared to $235,000 and $460,000 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 and consumer loans offset somewhat by Patriot's
asset quality and low level of delinquencies and low level of non-performing
assets. At September 30, 1998 Patriot's non-performing assets were .11% of total
assets and all loans 30 days or more delinquent were .58% of total loans.
9
Non-Interest Income. Total non-interest income was $841,000 and $3,037,000
for the three-month and nine-month periods ended September 30, 1998 compared to
$576,000 and $1,057,000 for the same periods in 1997. Non-interest income also
includes gains recognized on the sale of investment securities available for
sale. The increase in other non-interest income was primarily due to security
gains and 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 $3,111,000 and
$10,595,000 for the three-month and nine-month periods ended September 30, 1998
compared to $2,860,000 and $7,754,000 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 nine-month period ended September 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 1.36% for the three-month period ended
September 30, 1998 compared to 1.44% 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 $283,000 and $881,000
for the three-month and nine-month periods ended September 30, 1998 compared to
$252,000 and $1,084,000 for the same periods in 1997. The effective tax rate was
21.39% for 1998 compared to 23.25% for 1997. The decrease is a result of the
purchase of certain tax exempt investments.
Financial Condition
Loan Portfolio. Patriot's primary portfolio loan products are commercial
loans, 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 September 30, 1998 Patriot's
total loan portfolio was $450,027,000, 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 nine-month period ended September 30, 1998, Patriot originated total
loans of $132,957,000, compared to total loans originated of $177,185,000 for
the same period in 1997.
Cash and Cash Equivalents. Cash and cash equivalents at September 30, 1998
were $17,441,000 compared to $9,014,000 at December 31, 1997. The increase in
cash balances is associated with a timing difference in borrowing activity.
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 September 30, 1998 were
$432,434,000 compared to $405,641,000 at December 31, 1997. The increase in
investment and mortgage-backed securities was primarily due to purchases offset
by maturities and principal repayments.
Other Assets. Premises and equipment at September 30, 1998 was $9,504,000
compared to $8,542,000 at December 31, 1997. Accrued interest receivable at
September 30, 1998 was $4,004,000 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 September 30, 1998 was $89,000 compared to
$162,000 at December 31, 1997. Other assets at September 30, 1998 were
$3,411,000 compared to $230,000 at December 31, 1997. The increase is primarily
due to timing of cash receipts associated with investment and mortgage loan
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 September 30, 1998 were $360,025,000 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 September 30, 1998 were $506,758,000 compared to
$508,301,000 at December 31, 1997. The decrease in borrowings was primarily due
to funding provided by the increase in deposit balances.
Stockholders' Equity. Total stockholders' equity was $46,564,000 at
September 30, 1998 compared to $46,533,000 at December 31, 1997. The slight
increase in balance is primarily due to income earned and increases in market
value of securities available for sale offset by dividends paid to stockholders'
and the purchase of treasury stock.
Year 2000 Compliance. Year 2000 issues result from the inability of many
computer programs or computerized equipment to accurately calculate, store or
use a date after December 31, 1999. Banking, by its nature, is a vary date
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. 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 believed to be Year 2000 compliant. With the assistance of a
nationally recognized accounting firm, Management has initiated a comprehensive
program to analyze, test, and proactively plan for ensuring all of Patriot's
systems year 2000 compliant. It is currently anticipated that certain secondary
systems will require modification. Management is also in the process of
evaluating significant customer and vendor relationships to assess risks and
make appropriate contingency plans.
Management currently estimates the cost of executing its Year 2000 plan,
performing tests, documenting results and making modifications where necessary
to be less than $100,000.
10
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 nine-month period ended September 30, 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 nine-month period ended September 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 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 September 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 September 30, 1998:
To Be To Be
Actual Adequately Capitalized Well Capitalized
---------------- ---------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1998
Total capital (to risk weighted assets)
Patriot Bank Corp. $62,508 14.29% $35,001 8% $43,752 10%
Patriot 38,543 10.28% 30,006 8% 37,508 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 54,583 12.48% 17,501 4% 26,251 6%
Patriot 35,435 9.45% 15,003 4% 22,505 6%
Tier I capital (to average assets)
Patriot Bank Corp. 54,583 6.18% 35,315 4% 44,144 5%
Patriot 35,435 5.24% 27,058 4% 33,823 5%
11
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 September 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
$74,892,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 8.13%.
12
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 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 September
30, 1998, 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 September 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 $ 12,733 $ -- $ -- $ -- $ -- $ -- $ 12,733
Investment and mortgage-backed
securities, net (2)(5) 149,502 30,556 46,746 34,150 30,810 140,670 432,434
Loans receivable, net(3)(5) 78,670 31,554 51,010 88,538 120,432 83,642 453,846
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets 240,905 62,110 97,756 122,688 9,280 529,586 899,014
Non-interest-earning assets -- -- -- -- -- 21,715 21,715
-------- -------- -------- -------- -------- -------- --------
Total assets 240,905 62,110 97,756 122,688 151,242 246,028 920,729
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Money market and passbook savings
accounts(6) 8,848 8,848 17,697 33,287 3,224 17,397 89,301
Demand and NOW accounts (6) 785 785 1,569 3,139 6,277 18,831 31,385
Certificates of deposit 25,531 55,983 64,522 59,159 24,678 9,465 239,338
Borrowings 291,095 -- -- 2,000 120,000 93,663 506,758
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 326,259 65,616 83,788 97,585 154,179 139,356 866,783
Non-interest-bearing liabilities -- -- -- -- -- 7,382 7,382
Equity -- -- -- -- -- 46,564 46,564
-------- -------- -------- -------- -------- -------- --------
Total liabilities and equity 326,259 65,616 83,788 97,585 154,179 193,302 920,729
-------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap(4) $(85,354) $(3,506) $ 13,968 $ 25,103 $ (2,937) $ 52,726 $ --
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap $(85,354) $(88,860) $(74,892) $(49,789) $(52,726) $ --
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap as a
percent of total assets (9.27)% (9.65)% (8.13)% (5.41)% (5.73)% --%
Cumulative interest-earning assets as a
percent of cumulative interest-bearing
liabilities 73.84% 77.32% 84.26% 91.31% 92.75% 103.72%
13
(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 36%.
(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.
14
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 herof, is incorporated
herein by reference.
15
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 August 13, 1998 contained
notification of definitive agreement to acquire First Lehigh
Corporation.
Report on Form 8-K dated September 28, 1998 contained
notification of definitive agreement to acquire Keystone
Financial Leasing Company.
- ----------
* 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.
16
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 November 14, 1998
----------------- -------------------------------------
Joseph W. Major
President and Chief Operating Officer
Date November 14, 1998
----------------- -------------------------------------
Richard A. Elko
Executive Vice President and
Chief Financial Officer
17