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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 6, 1998
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PATRIOT BANK CORP.
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(Exact name of registrant as specified in its charter)
Delaware 0-26744 23-2820537
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Ident. No.)
High and Hanover Streets, Pottstown Pennsylvania 19464
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 323-1500
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N/A
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(Former name or former address, if changed since last report.)
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Item 5. Other Events.
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On November 6, 1998, Patriot Bank Corp. ("Patriot") completed the
acquisition of all of the outstanding capital stock of Keystone Financial
Leasing, Inc. ("Keystone Leasing") from Keystone Bank, N.A. Keystone Leasing is
a small ticket equipment leasing company with approximately $40 million in
assets at June 30, 1998.
Patriot has merged Keystone Leasing into Patriot Commercial Leasing
Company, a wholly owned subsidiary of Patriot Bank. The acquisition will be
treated as a purchase for financial accounting purposes.
Item 7. Financial Statements and Exhibits.
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(a) Financial Statements of Businesses Acquired.
(i) Audited Balance Sheet of Keystone Financial Leasing, Inc. as of
December 31, 1998.
(ii) Audited Income Statement of Keystone Financial Leasing, Inc. for
the year ended December 31, 1998.
(iii) Audited Statement of Cash Flow of Keystone Financial Leasing,
Inc. for the year ended December 31, 1998.
KEYSTONE FINANCIAL LEASING COMPANY
Financial Statements
December 31, 1998
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
Keystone Financial Leasing:
We have audited the accompanying balance sheet of Keystone Financial Leasing
(the Company) as of December 31, 1998 and the related statements of income,
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keystone Financial
Leasing as of December 31, 1998 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG LLP
January 15, 1999
KEYSTONE FINANCIAL LEASING
Balance Sheet
December 31, 1998
Assets 1998
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Finance receivables $ 44,334,737
Allowance for uncollectibles (928,266)
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Net assets under leases 43,406,471
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Cash and cash equivalents 45,786
Fixed assets, net 304,274
Goodwill 2,247,313
Other assets 146,908
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Total assets $ 46,150,752
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Liabilities and Stockholder's Equity
Notes payable $ 41,960,097
Accounts payable 2,111,729
Accrued expenses 69,458
Lease deposits collected in advance 1,895,545
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Total liabilities 46,036,829
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Commitments and contingencies
Stockholder's equity:
Common stock - $1 par value; authorized 50,000
shares; issued and outstanding 1,000 shares 1,000
Additional paid-in capital --
Retained earnings 112,923
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Total stockholder's equity 113,923
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$ 46,150,752
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See accompanying notes to financial statements.
2
KEYSTONE FINANCIAL LEASING
Statement of Income
Year ended December 31, 1998
1998
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Revenues:
Finance receivable income $4,452,261
Fee income 117,448
Gain on residuals 163,624
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Total revenues 4,733,333
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Expenses:
Interest 1,692,311
Goodwill Amortization 25,251
Selling and administrative 1,208,944
Amortization of initial direct costs 1,768
Provision for uncollectibles 925,000
Depreciation of fixed assets 60,010
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Total expenses 3,913,284
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Income before income taxes 820,049
Income tax expense 336,564
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Net income $ 483,485
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See accompanying notes to financial statements.
3
KEYSTONE FINANCIAL LEASING
Statement of Equity
Year ended December 31, 1998
Common stock
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Retained Total
Amount earnings Capital
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Balance at January 1, 1998 $ 1,950,000 2,175,736 4,125,736
Net income (prior to acquisition on November 6, 1998) -- 178,103 178,103
Reorganization and dividend to parent company - Keystone Bank $(1,949,000) (2,546,298) (4,495,298)
Net income (November 6 - December 31, 1998) -- 305,382 305,382
Balance at December 31, 1998 $ 1,000 112,923 113,923
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See accompanying notes to financial statements.
4
KEYSTONE FINANCIAL LEASING
Statements of Cash Flows
Year ended December 31, 1998
1998
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Cash flows from operating activities:
Net income $ 483,485
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Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of initial direct costs $ 1,768
Amortization of goodwill 25,251
Depreciation 60,010
Provision for uncollectibles 925,000
Increase in lease deposits 48,161
Decrease in accounts payable
and accrued expenses (95,423)
Decrease in other assets 262,298
Net Change in Lease Receivable (7,713,795)
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Total adjustments $ (6,486,730)
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Net cash used in operating activities $ (6,003,245)
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Cash flows from investing activities:
Purchases of fixed assets $ (163,198)
Initial direct costs capitalized (41,195)
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Net cash used in investing activities $ (204,393)
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Cash flows from financing activities:
Proceeds from notes $ 45,956,011
Payments on notes (32,366,912)
Payment to former stockholders (7,335,675)
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Net cash provided by financing activities $ 6,253,424
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Net increase in cash and cash equivalents $ 45,786
Cash and cash equivalents at beginning of year --
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Cash and cash equivalents at end of year $ 45,786
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Supplemental disclosures of cash flow information - cash
paid during the year for:
Interest $ 452,729
Income taxes 498,093
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See accompanying notes to financial statements.
5
KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(1) Description of Business and Summary of Significant Accounting Policies
Keystone Financial Leasing ("KFL", the "Company") was acquired by Patriot
Bank from Keystone Bank, N.A. on November 6, 1998. As a result of this
transaction the Company became a wholly owned subsidiary of Patriot Bank
(the "parent"). The purchase price was $6,585,000 in cash at closing and
further cash consideration based on future revenues of KFL. Such future
consideration will not exceed $5,465,000. The acquisition will be treated
as a purchase for financial accounting purposes by Patriot Bank and push
down accounting rules have been applied to KFL. Accordingly, the assets
and liabilities of KFL were reflected at their fair value as of the
acquisition date. The excess of the purchase price over the fair value of
net assets acquired is reflected as goodwill in the accompanying balance
sheet and is being amortized over 15 years. The income statement of KFL
reflects the activity for the 12 months ended December 31, 1998 including
the amortization of goodwill of $25,251.
KFL is a small ticket equipment finance company engaged in leasing
agreements and other financing agreements with customers. Generally, the
Company enters into program agreements with national and local equipment
vendors to provide financing for these vendors' equipment sales. The
Company also provides leasing products to customers of its parent and
former parent, Keystone Bank, N.A. The company finances items such as
copiers, telecommunications equipment, data processing equipment, and
medical equipment.
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(1) Continued
The Company's credit risk of finance receivables and assets is
geographically concentrated as of December 31, 1998 as follows:
Pennsylvania 88.4%
New Jersey 3.5%
Maryland 3.3%
New York 1.5%
Delaware 1.0%
Other 2.3%
There is also leased equipment concentration as of December 31, 1998 in
the following areas:
Copiers 30.3%
Computers 28.2%
Other 19.9%
Other Office 6.3%
Telephones 5.4%
Material Handling 3.9%
Restaurants 2.2%
Medical - Dental 1.4%
Manufacturing 1.2%
Graphics 1.2%
The Company retains title to the equipment in the case of leases with
residual values, while the lessee is responsible for maintaining and
insuring the asset.
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(1) Continued
Finance Receivables
The Company's direct finance leases have terms generally ranging from
three to five years. Under direct finance lease accounting, the balance
sheet includes the gross minimum lease payments receivable, unguaranteed
estimated residual values of the leased equipment, and capitalized initial
direct costs, reduced by unearned lease income. The capitalized initial
direct costs represent certain costs incurred in underwriting and
acquiring the leases.
The residual values represent the estimated proceeds from the sale of
leased equipment at the end of the initial term of the lease and are
determined on the basis of analyses prepared by the Company based upon
professional appraisals, historical experience, and industry data.
Management reviews the estimated residual values on a periodic basis and
impairments in value, if any, are recognized as an immediate charge to
income.
Unearned lease income is recorded as revenue over the term of the lease
using the interest method, commencing in the first month of the lease.
Lease income is recognized unless the lease is ninety days or more
delinquent. As of December 31, 1998, $74,579 of lease receivables were
ninety days or more delinquent. The initial direct costs incurred in
consummating the leases are recognized over the life of the related leases
as a reduction of yield.
Allowance for Uncollectibles
The Company records an allowance for uncollectibles to provide for
estimated losses in the financing lease portfolio. Management evaluates
the adequacy of the allowance for uncollectibles on a periodic basis. This
evaluation includes, but is not limited to, an examination of (1)
delinquency levels, (2) historical and projected loss experience, (3) the
nature and value of the underlying collateral, and (4) current economic
and industry trends. Management establishes provisions for uncollectibles
based on probability and estimability of losses. Accounts are generally
written-off when delinquency reaches 120 days or earlier if the evaluation
indicates the account is uncollectible. Recoveries are recognized as
adjustments to the allowance for uncollectibles account when received.
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(1) Continued
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less
to be cash equivalents.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method. Depreciable lives are five to ten years on furniture
and equipment, ten years for leasehold improvements, and twenty-seven
years for buildings.
Fee Income
Fee income consists primarily of late charges, servicing fees, insurance
fees, cost per copy fees, assignment fees, and property tax administration
fees.
Comprehensive Income
There were no components of comprehensive income, therefore comprehensive
income equaled net income for the year ended December 31, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(1) Continued
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates. Material estimates which are particularly susceptible to
significant change in the near term include the determination of the
allowance for uncollectibles and the valuation of unguaranteed estimated
residual values.
(2) Finance Receivables
Finance receivables consist of the following at December 31,
1998
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Minimum lease payments receivable $ 47,010,828
Unguaranteed estimated residual values
of leased equipment 4,102,382
Capitalized initial direct costs 578,958
Less: Unearned income (7,357,431)
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$ 44,334,737
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As of December 31, 1998, minimum lease payments due under finance
receivables are as follows:
Finance
Year ended December 31, receivables
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1999 $16,448,895
2000 12,579,948
2001 7,883,152
2002 4,216,009
2003 and Thereafter 3,206,733
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$44,334,737
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(3) Allowance for Uncollectibles
The following is a summary of the Company's allowance for uncollectibles
for the years ended December 31:
Balance at Balance at
beginning end
of year Provision Charge-offs Recoveries of year
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1998 $ 768,545 925,000 (783,340) 18,061 $928,266
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The provision includes $625,000 related to lease receivables deemed
uncollectible at the date of acquisition, November 6, 1998.
(4) Fixed Assets
Fixed assets as of December 31, 1998 consisted of the following:
1998
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Computer Equipment $ 189,371
Furniture and fixtures 97,565
Leasehold improvements 36,576
Computer software 158,975
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Total 482,487
Less accumulated depreciation (178,213)
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Fixed assets, net $ 304,274
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(5) Notes Payable
The balance of notes payable at December 31, 1998 is $41,960,097. The note
is payable to the Parent Company, Patriot Bank and carries a variable
interest rate based on the Bank's jumbo CD program. At December 31, 1998
the interest rate was 6.1% and for the period ended December 31, 1998, the
note had a balance high of $41,960,097 and an average balance of
$35,165,548. During the year ended December 31, 1998, the Company incurred
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(5) Continued
$324,030 and $1,368,281, in interest cost, to Patriot Bank and Keystone
Bank, N.A., respectively. There is no stated maturity on the note.
(6) Income Taxes
An analysis of the provision for income taxes is as follows:
1998
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Current:
Federal $ 269,704
State 87,160
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Total current 356,864
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Deferred:
Federal (17,000)
State (3,300)
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Total deferred (20,300)
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Total $ 336,564
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Income tax expense was different from the amount computed using the
federal statutory income tax rate for the following reasons:
1998
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Percentage
of pre-tax
Amount income
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Expected tax at the statutory
income tax rate $278,817 34.0%
Increases in income tax resulting from:
State, net of federal
benefit 54,225 6.6
Other 3,522 0.4
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Total $336,564 41.0%
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(6) Continued
The tax effect of the temporary differences which give rise to a deferred
tax asset of $20,300 as of December 31, 1998 consist of differences
related to the financial and tax treatment of leasing activities.
No valuation allowance has been established for the deferred tax asset
because management believes that the results of future operations will
generate sufficient taxable income to realize the deferred tax asset.
(7) Servicing Agreement
The Company services leases for Keystone Bank, N.A. and receives a fee
equal to .25% annually of the outstanding balance of the portfolios.
The balance of leases serviced for Keystone Bank, N.A. was $1,411,109
at December 31, 1998. Income recognized during 1998 for servicing was
not significant.
(8) Commitments and Contingencies
As part of the purchase price of Keystone Financial Leasing (KFL), The
Company entered into an agreement with Keystone Bank, N.A. to share future
KFL revenues, to the extent they are derived from KFL business, for each
year in the seven-year period commencing on November 6, 1998. The maximum
the Company will be required to pay is $5,465,000.
The Company also entered into a private label agreement with Keystone
Bank, N.A., cancellable by either party, to provide leasing products to
customers of KFL up to a maximum of seven years based upon the terms and
conditions outlined in the agreement. In addition, during the first three
years of the term, the Company will pay a referral fee of 0.5% of the
principal balance of the lease receivable to the originating Keystone
entity and a referral fee of 1.0% of the principal balance of the lease
receivable for the remaining four years.
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KEYSTONE FINANCIAL LEASING
Notes to Financial Statements
December 31, 1998
(8) Continued
The Company entered into an agreement to lease office space for a period
of four years. The monthly rent payment is $3,967. The following is a
schedule by year of future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 1998:
1999 $ 47,604
2000 47,604
2001 47,604
2002 47,604
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Total minimum rental payments $ 190,416
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During the year ended December 31, 1998, rental expense was $47,604.
(9) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires that the Company disclose
the estimated fair value of its financial instruments. The carrying
amounts of cash equivalents, other assets, accounts payable, accrued
expenses, lease deposits collected in advance approximate fair value
because of the short maturity of these instruments. The carrying amount of
the notes payable approximates fair value as these notes reprice every
three months. The fair value of lease contracts has not been estimated
since they are specifically excluded under this statement. The Company has
historically experienced net gains on the remarketing of lease residuals.
The Company, as a matter of policy, attempts to align the duration of
finance lease receivables and related debt in order to economically hedge
against interest rate risk. The Company believes that any increases or
decreases in the fair value of debt have been offset by a comparable
increase or decrease in the fair value of the finance receivable
portfolio.
(10) Related Party Transactions
Prior to its acquisition by Patriot Bank, KFL obtained various
administrative services from its parent at no cost. If KFL were to obtain
such services from third parties the costs associated with such services
could be significant. In addition, Keystone also gets favorable funding
rates from its parent which also would likely be higher if obtained from
third parties.
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SIGNATURES
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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 hereunto duly authorized.
PATRIOT BANK CORP.
Dated: January 20, 1999
By /s/ Richard A. Elko
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Richard A. Elko
Executive Vice President
and Chief Financial
Officer