<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-26744
PATRIOT BANK CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 232820537
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(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:
1
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 5,628,626 shares of common
stock were outstanding as of May 14, 1999.
2
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PATRIOT BANK CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998
Consolidated Statements of Income for the Three-Month
Periods ended March 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the
Periods ended March 31, 1999 and December 31, 1998
Consolidated Statements of Cash Flows for the Three-Month Periods
ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income for the Three-Month Periods
ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
</TABLE>
PART II OTHER INFORMATION
Items 1 through 6
SIGNATURES
3
<PAGE> 4
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION> March 31, December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,063 $ 1,044
Interest-earning deposits in other financial institutions 18,227 29,443
----------- ---------
Total cash and cash equivalents 22,290 30,487
Investment and mortgage-backed securities available for sale 436,490 386,380
Investment and mortgage-backed securities held to maturity (market value of
$21,434 and $29,909 at March 31, 1999
and December 31, 1998, respectively) 21,276 29,639
Loans held for sale 933 5,576
Loans and leases receivable, net of provision for credit loss of $6,164 and $4,087
at March 31, 1999 and December 31, 1998, respectively 555,276 504,993
Premises and equipment, net 14,810 10,259
Accrued interest receivable 4,595 4,114
Real estate and other property owned 63 58
Cash surrender value life insurance 15,068 --
Goodwill 13,808 2,267
Other assets 7,000 6,988
----------- ---------
Total assets $ 1,091,609 $ 980,761
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $473,237 $377,796
FHLB advances 370,197 360,198
Securities sold under repurchase agreements 160,031 170,123
Trust preferred debt securities 19,000 19,000
Advances from borrowers for taxes and insurance 5,055 4,747
Other liabilities 5,965 6,637
--------- ---------
Total liabilities 1,033,485 938,501
--------- ---------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
Issued at March 31, 1999 and December 31, 1998, respectively -- --
Common stock, no par value, 10,000,000 shares authorized, 6,557,618
and 7,034,927 issued at March 31, 1999 and December 31, 1998, respectively -- --
Paid in capital 58,015 60,404
Common stock acquired by ESOP, 411,352 and 404,925 shares at amortized cost at
March 31, 1999 and December 31, 1998, respectively (2,249) (2,285)
Common stock acquired by MRP, 147,067 and 154,116 shares at amortized
cost at March 31, 1999 and December 31, 1998, respectively (941) (971)
Retained earnings 5,132 4,220
Treasury stock, 377,000 and 2,122,309 at cost at March 31, 1999
and December 31, 1998, respectively (4,240) (22,963)
Accumulated other comprehensive income 2,407 3,855
----------- ---------
Total stockholders' equity 58,124 42,260
----------- ---------
Total liabilities and stockholders' equity $ 1,091,609 $ 980,761
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
<TABLE>
<CAPTION>
Three-Month Period Ended
March 31,
- ------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INTEREST INCOME
Interest-earning deposits $ 103 $ 50
Investment and mortgage-backed securities 7,185 6,849
Loans 10,673 8,220
-------- --------
Total interest income 17,961 15,119
-------- --------
INTEREST EXPENSE
Deposits 4,921 3,961
Short-term borrowings 3,012 4,520
Long -term borrowings 4,341 2,442
----- -----
Total interest expense 12,274 10,923
------ ------
Net interest income before provision for
credit losses 5,687 4,196
Provision for credit losses 300 250
-------- --------
Net interest income after provision for
credit losses 5,387 3,946
-------- --------
NON-INTEREST INCOME
Service fees, charges and other operating income 721 296
Gain on sale of real estate acquired through
foreclosure 1 --
Gain on sale of investment and mortgage-backed
securities available for sale 284 304
Mortgage banking gains 128 64
-------- --------
Total non-interest income 1,134 664
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,556 1,906
Office occupancy and equipment 1,110 491
Professional services 130 170
Federal deposit insurance premiums 55 46
Data processing 37 31
Advertising 165 211
Deposit processing 122 99
Goodwill amortization 196 --
Other operating expense 358 399
-------- --------
Total non-interest expense 4,729 3,353
-------- --------
Income before income taxes 1,792 1,257
Income taxes 488 298
-------- --------
Net income $ 1,304 $ 959
======== ========
Earnings per share - basic $ 0.23 $ 0.19
======== ========
Earnings per share - diluted $ 0.22 $ 0.18
======== ========
Dividends per share $ 0.08 $ 0.07
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Number of Paid-in Retained Treasury Comprehensive
Shares Capital ESOP MRP Earnings Stock Income Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 4,811 $ 59,982 $(2,428) $(1,285) $ 1,680 $(16,071) $ 4,655 $46,533
Common stock issued 2 46 -- -- 46
Common stock acquired by
MRP (2) -- -- (46) -- -- -- (46)
Treasury stock purchased (538) -- -- -- -- (6,892) -- (6.892)
Stock split 25% -- -- -- -- -- -- -- --
Release and amortization
of MRP 48 156 -- 360 -- -- -- 516
Release of ESOP shares 26 220 143 -- -- -- -- 363
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- (800) (800)
Net income -- -- -- -- 4,055 -- -- 4.055
Cash dividends paid -- -- -- -- (1,515) -- -- (1,515)
----- -------- ------- ------- ------- -------- ------- -------
BALANCE AT DECEMBER 31, 1998 4,347 $ 60,404 $(2,285) $ (971) $ 4,220 $(22,963) $ 3,855 $42,260
----- -------- ------- ------- ------- -------- ------- -------
Common stock issued 5 60 -- -- 60
Common stock acquired by
MRP (5) -- -- (60) -- -- -- (60)
Treasury stock purchased (377) -- -- -- -- (4,808) -- (4.808)
Treasury stock retired -- (23,531) -- -- -- 23,531 -- --
Common stock issued for
business combination 1,640 21,047 -- -- -- -- -- 21,047
Amortization of MRP shares 12 -- -- 90 -- -- -- 90
Amortization of ESOP shares 7 35 36 -- -- -- -- 71
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- (1,448) (1,448)
Net income -- -- -- -- 1,304 -- -- 1.304
Cash dividends paid -- -- -- -- (392) -- -- (392)
----- -------- ------- ------- ------- -------- ------- -------
BALANCE AT MARCH 31, 1999 5,629 $ 58,015 $(2,249) $ (941) $ 5,132 $ (4,240) $ 2,407 $58,124
===== ======== ======= ======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
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Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three-Months Period Ended March 31,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net Income $1,304 $959
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and accretion of
Deferred loan origination fees 2 (6)
Premiums and discounts (581) (88)
MRP shares 90 90
Goodwill 196 --
Provision for credit losses 300 250
Release of ESOP shares 71 95
Gain on sale of securities available for sale (284) (304)
Loss on sale of real estate owned (1) --
Charge-off real estate owned 59 --
Depreciation of premises and equipment 522 201
Mortgage loans originated for sale (7,161) (9,267)
Mortgage loans sold 11,804 5,153
Decrease in deferred income taxes (2,062) (683)
Increase (decrease) in accrued interest receivable 254 (15)
Increase (decrease) in other assets 4,863 (6,322)
(Decrease) increase in other liabilities (948) 3,013
----- -----
Net Cash provided (used) by operating activities 8,428 (6,924)
----- -------
Investing activities
Loan originations and principal payments on loans, net (1,488) (17,065)
Proceeds from the sale of securities - available for sale 4,121 5,834
Proceeds from the maturity of securities - available for sale 25,633 12,199
Proceeds from the maturity of securities - held to maturity 8,363 5,626
Purchase of securities - available for sale (41,576) (19,933)
Purchase of bank owned life insurance (14,905) --
Proceeds from sale of real estate owned 5 --
Purchase of premises and equipment (809) (238)
Cash received in business combination 10,077 -------
------ -------
Net cash used in by investing activities (10,579) (13,577)
-------- --------
Financing activities
Net increase in deposits 941 54,934
Repayment of short term borrowings (2,068) (105,395)
Repayment of (proceeds) from long term borrowings (25) 71,000
Increase (decrease) in advances from
Borrowers for taxes and insurance 306 728
Cash paid for dividends (392) (355)
Purchase of Treasury Stock (4,808) --
------- --------
Net cash (used) provided by financing activities (6,046) 20,912
--------- -------
Net (decrease) increase in cash and cash equivalents (8,197) 411
Cash and cash equivalents at beginning of year 30,487 9,014
------ -----
Cash and cash equivalents at end of year 22,290 $9,425
====== ======
Supplemental Disclosures
Cash paid for interest on deposits $4,681 $3,954
====== ======
Cash paid for income taxes $618 $12
==== ===
Transfers from loans to real estate owned $60 $17
=== ===
</TABLE>
The accompanying notes are an integral part of these statements.
7
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Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three-Month Period Ended
- -------------------------------------------------------------------------------------------------------------------------
March 31,
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 1,304 $ 959
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized holding (losses) gains arising during the period (1,261) 3,826
Less: Reclassification adjustment for gains included
in net income (187) (201)
----- -----
Comprehensive (loss) income $ (144) $ 4,584
========= =======
</TABLE>
8
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PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 1999
Note 1 - General
The accompanying financial statements of Patriot Bank Corp. and
Subsidiaries ("Patriot") include the accounts of the parent company, Patriot
Bank Corp. and its wholly-owned subsidiaries, Patriot Bank and Patriot
Investment Company. All material intercompany balances and transactions have
been eliminated in consolidation. These financial statements have been prepared
in accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, the
consolidated financial statements reflect all adjustments (which consist of
normal recurring accruals) necessary for a fair presentation of the results for
the unaudited periods. The results of operations for the three-month period
ended March 31, 1999 are not necessarily indicative of the results which may be
expected for the entire year. The consolidated financial statements should be
read in conjunction with the annual report on Form 10-K for the year ended
December 31, 1998.
9
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PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 1999
Note 2 - Investment And Mortgage-Backed Securities
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
cost gain loss value cost gain loss value
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities
U.S. Treasury and
government agency
securities $ 67,388 $ 187 $ 149 $ 67,426 $ 40,568 $ 176 $ 45 $ 40,699
Corporate debt securities 19,694 1,088 100 20,682 19,102 1,705 92 20,715
FHLMC Preferred Stock 34,961 1,778 -- 36,739 34,959 1,831 -- 36,790
FHLB Stock 19,460 -- -- 19,460 18,607 -- -- 18,607
Equity securities 13,456 1,361 1,038 13,779 7,257 1,528 203 8,582
Mortgage-backed
securities
FHLMC 5,537 52 11 5,578 6,122 52 17 6,157
Fannie Mae 53,102 106 623 52,585 43,554 171 255 43,470
GNMA 6,186 119 -- 6,305 7,114 97 5 7,206
Colateralized mortgage
Obligations
FHLMC 118,309 1,577 345 119,541 104,751 1,505 -- 106,256
Fannie Mae 87,361 464 949 86,876 89,855 668 1,229 89,294
Other 7,462 65 8 7,519 8,560 44 -- 8,604
--------- -------- -------- -------- --------- --------- --------- ---------
Total securities available for
sale $ 432,916 $ 6,797 $ 3,223 $ 436,490 $ 380,449 $ 7,777 $ 1,846 $ 386,380
========= ======== ======== ========= ========= ========= ========= =========
HELD TO MATURITY:
Investment securities
U.S. Treasury and
government agency
Securities $ 900 $ 4 $ -- $ 904 $ 900 $ 8 $ -- $ 908
Corporate debt securities 1,502 42 -- 1,544 1,502 58 -- 1,560
Colateralized mortgage
Obligations
FHLMC 1,041 8 -- 1,049 1,176 14 -- 1,190
Fannie Mae 6,251 -- 2 6,249 7,509 8 -- 7,517
Other 11,582 107 1 11,688 18,552 185 3 18,734
-------- ------- -------- --------- -------- --------- --------- ---------
Total securities held to maturity $ 21,276 $ 161 $ 3 $ 21,434 $ 29,639 $ 273 $ 3 $ 29,909
======== ========= ======== ========= ======== ========= ========= =========
</TABLE>
10
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Note 3 - Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Mortgage loan portfolio
Secured by real estate $301,721 $300,232
Construction 3,716 5,267
Consumer loan portfolio
Home equity 72,871 64,807
Consumer 10,695 4,336
Comercial loan portfolio
Commercial 129,454 92,367
Commercial leases 45,106 44,301
--------- ---------
Total loans receivable 563,563 511,310
Less deferred loan origination fees (2,123) (2,230)
Allowance for credit losses (6,164) (4,087)
--------- ---------
Total loans receivable, net $555,276 $504,993
========= =========
Note 4 - Deposits
Deposits are summarized as follows:
March 31, December 31,
- ------------------------------------------------------------------------------------------------------------------------------
Deposit type 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
NOW $ 37,197 $ 23,961
Money market 85,350 74,613
Savings accounts 43,775 22,416
Non-interest-bearing demand 23,320 13,402
-------- --------
Total demand, transaction, money
market and savings deposits 189,642 134,392
Certificates of deposits 283,595 243,404
-------- --------
Total deposits $ 473,237 $ 377,796
========= =========
</TABLE>
11
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Note 5 - Year 2000 Compliance.
STATE OF READINESS. Pursuant to its strategic business plan, Patriot has
made significant investments in new technology over the last two years. As a
result of these investments, the primary systems used by Patriot are believed to
be Year 2000 compliant. Management has substantially completed a comprehensive
program to analyze, test and proactively address all of Patriot's systems to
ensure Year 2000 compliance. Management has also substantially completed the
process of evaluating significant customer and vendor relationships as well as
liquidity, given the potential for concern among deposit customers resulting in
decreased deposit balances, to assess risks and make appropriate contingency
plans.
RISKS. Year 2000 issues result from the inability of many computer
programs or computerized equipment to accurately calculate, store or use data as
the year 2000 approaches. Banking, by its nature, is a very data processing
intensive industry. These potential shortcomings could result in a system
failure or miscalculations causing disruptions of operation, including among
other things, a temporary inability to process transactions, track important
customer information, provide convenient access to this information, or engage
in normal business operations.
CONTINGENCY PLANS. Patriot believes that the consequences of incomplete
or untimely resolution of its Year 2000 issues do not represent a known material
event or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition. If
compliance is not achieved in a timely manner by Patriot or any of its
significant related third parties, be it a supplier of services or customer, the
Year 2000 issue could possibly have a material effect on Patriot's operations
and financial position. Contingency plans are also being developed in the event
of any unanticipated interruptions in Patriots' mission critical systems.
Business continuation plans for critical business applications are being
developed. These plans include adequate staffing on site during the Year 2000
date change to quickly repair any errant applications. In addition, in the event
of any problems the Company would follow its current computer outage business
continuation plans until such problems are corrected.
COST. The cost of the project and the date on which Patriot plans to
complete both Year 2000 modifications and system conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties. Management currently estimates the
cost of its Year 2000 plan including performing tests, documenting results and
making modifications where necessary to be approximately $145,000 of which
$82,000 has been expensed prior to March 31, 1999.
Pursuant to its strategic business plan, Patriot has made significant
investments in new technology over the last two years. As a result of these
investments, the primary systems used by Patriot are currently Year 2000
compliant. Management has initiated a comprehensive program to analyze and
proactively plan for ensuring all of Patriot's systems are year 2000 compliant.
It is currently anticipated that certain secondary systems will require
modification. The cost of these modifications is expected to be minimal.
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." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of certain exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (b) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (c) a hedge of foreign currency exposure. This statement is
effective for all fiscal quarters of fiscal years beginning after December 15,
1999. Earlier adoption is permitted. Patriot has not yet determined the impact,
if any, of this statement, including if applicable, its provisions for the
potential reclassifications of certain investment securities, on earnings,
financial condition or equity.
Note 7 - Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Mortgage Loans Held
12
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for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement requires that
after the securitizaion of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This statement is effective for the first fiscal quarter
beginning after December 15, 1999, with earlier adoption permitted. This
statement provides a one-time opportunity for an enterprise to reclassify, based
on the ability and intent on the date of adoption of this statement,
mortgage-backed securities and other beneficial interest retained after
securitization of mortgage loans held for sale from the trading category, except
for those with commitments in place. Patriot has not yet determined the impact,
if any, of this statement, including if applicable, its provisions for the
potential reclassifications of certain investment securities, on earnings,
financial condition or equity.
Note 9 - Business Combinations
On January 22, 1999, the Company consummated its acquisition of First
Lehigh Corporation (First Lehigh), the holding company of First Lehigh Bank. At
the time of the merger First Lehigh Bank was a commercial bank with $104,475,000
in total assets, $93,905,000 in total deposits, and five branches in Lehigh and
Carbon counties of Pennsylvania. Patriot issued 1,640,000 shares of common stock
for all of the outstanding common and preferred stock of First Lehigh. The
transaction had a total value of $21,047,000. The acquisition was accounted for
as a purchase, and accordingly the results of operations of First Lehigh will be
included in Patriot;s consolidated statement of income from the date of
acquisition. The transaction added $6,712,000 of goodwill and $4,508,000 of core
deposit intangibles to Patriot's balance sheet which will be amortized on an
accelerated basis over a period of 15-20 years.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information, this discussion and analysis of
Patriot Bank Corp. and Subsidiaries (Patriot) contains forward-looking
statements. The forward-looking statements contained 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 diluted earnings per share of $.22 and net
income of $1,304,000 for the three-month period ended March 31, 1999. This
represents an increase of 22% over diluted earnings per share of $.18 and net
income of $959,000 for the three month period ended March 31, 1998. Return on
average equity was 9.44%, for the three-month period ended March 31, 1999
compared to 8.29%, for the three-month period ended March 31, 1998.
NET INTEREST INCOME. Net interest income for the three-month period ended
March 31, 1999 was $5,687,000 compared to $4,196,000 for the same period in
1998. This increase is primarily due to an increase in average balances
associated with the acquisitions of Keystone Financial Leasing Company
(Keystone) and First Lehigh Corporation (First Lehigh) and as Patriot has
continued to grow its assets to more fully utilize its capital. Patriot's net
interest margin (net interest income as a percentage of average interest-earning
assets) was 2.32% for the three-month period ended March 31, 1999 compared to
2.02% for the same period in 1998. The increase in margin is primarily due to
the acquisitions and the growth of Patriot's commercial loan portfolio.
Interest on loans and leases was $10,673,000 for the three-month period
ended March 31, 1999 compared to $8,220,000 for the same period in 1998. The
average balance of loans was $541,505,000 with an average yield of 7.93% for the
three-month period ended March 31, 1999 compared to an average balance of
$430,235,000 with an average yield of 7.67% for the same period in 1998. The
increase in average balance is due to the acquisitions of Keystone and First
Lehigh and as Patriot continues to have strong originations of commercial loans.
The increase in average yield is primarily a result of a greater volume of
higher yielding commerical loans and leases from both acquisitions coupled with
Patriot's increased originations of its own commercial loan.
Interest on Patriot's investment portfolio (investment and
mortgage-backed securities) was $7,185,000 for the three-month period ended
March 31, 1999 compared to $6,849,000 for the same period in 1998. The average
balance of the investment portfolio was $453,395,000 with an average yield of
6.60% for the three-month period ended March 31, 1999 compared to an average
balance of $399,140,000 with an average yield of 7.01% for the same period in
1998. The increase in average balance was primarily due to investments acquired
from First Lehigh. The decrease in average yield is related to decreases in
yields in the market.
Interest on total deposits was $4,921,000 for the three-month period
ended March 31, 1999 compared to $3,961,000 for the same period in 1998. The
average balance of total deposits was $442,156,000 with an average cost of 4.51%
for the three-month period ended March 31, 1999 compared to an average balance
of $320,326,000 with an average cost of 5.01% for the same period in 1998. The
increase in average balance is primarily the result of $93,905,000 of new
deposits from the acquisition of First Lehigh coupled with aggressive marketing
of money market and other transaction-based deposit accounts, and an increase in
Patriot's jumbo deposit program. The decrease in average yield was the result of
a higher percentage of lower costing core deposits due to the addition of
approximately $50,000,000 in core deposits from the First Lehigh acquistion
coupled with general decreases in interest rates.
Interest on borrowings was $7,353,000 for the three-month period ended
March 31, 1999 compared to $6,962,000 for the same period in 1998. The average
balance of borrowings was $549,858,000 with an average cost of 5.42% for the
three-month period ended March 31, 1999 compared to an average balance of
$476,282,000 with a cost of 5.92% for the same period in 1998. The increase in
average balance was due to the use of borrowings to fund the growth in the
balance sheet particularly for the funding of the purchase Keystone Leasing
Company. The decrease in the cost of borrowings was the result of a general
decrease in interest rates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was $300,000
for the three-month period ended March 31, 1999 compared to $250,000 for the
same period in 1998. The increase in the provision is a reflection of the growth
of Patriot's loan portfolio and the origination of more commercial loans and
leases offset somewhat by Patriot's asset quality and low level of delinquencies
and low level of non-performing assets. At March 31, 1999 Patriot's
non-performing assets were .16% of total assets and all loans 30 days or more
delinquent were .69% of total loans.
14
<PAGE> 15
NON-INTEREST INCOME. Total non-interest income was $1,134,000 for the
three-month period ended March 31,1999 compared to $664,000 for the same period
in 1998. The increase in other non-interest incomewas primarily due to an
increased emphasis on recurring non-interest income including loan and deposit
fees, ATM fees, mortgage banking gains, and income from bank owned life
insurance.
NON-INTEREST EXPENSE. Total non-interest expense was $4,729,000 for the
three-month period ended March 31, 1999 compared to $3,353,000 for the same
period in 1998. The increase in non-interest expense was the result of increased
salary and employee benefit costs and occupancy and equipment costs, both
related to the acquisition of Keystone and First Lehigh and Patriot's expanded
operations.
INCOME TAX PROVISION. The income tax provision was $488,000 for the
three-month period ended March 31, 1999 compared to $298,000 for the same period
in 1998. The effective tax rate was 27.23% for 1999 compared to 23.71% for 1998.
The increase is a result of the amortization of non-deductable goodwill offset
somewhat by the purchase of certain tax exempt investments.
FINANCIAL CONDITION
LOAN AND LEASE PORTFOLIO. Patriot's primary portfolio loan products are
commercial loans, small ticket commercial leases, fixed-rate and adjustable-rate
mortgage loans and home equity loans and lines of credit. Patriot also offers
residential construction loans and other consumer loans. At March 31, 1999
Patriot's total loan portfolio was $555,276,000, compared to a total loan
portfolio of $504,993,000 at December 31, 1998. The increase in the loan
portfolio was primarily result of the loan portfolio acquired from First Lehigh
coupled with aggressive marketing of commercial loans. During the three-month
period ended March 31, 1999, Patriot originated total loans and leases of
$53,663,000, compared to total loans and leases originated of $46,370,000 for
the same period in 1998. Commercial loan and lease originations for the
three-month period ended March 31, 1999 were $27,073,000 compared to $11,442,000
for the same period in 1998.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at March 31, 1999
were $22,290,000 compared to $30,487,000 at December 31, 1998. The decrease in
cash balances is associated with timing differences in borrowing activity and
investment prepayments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment securities consist
primarily of U.S. agency securities, mortgage-backed securities which are
generally insured or guaranteed by either FHLMC, FNMA or the GNMA and
collateralized mortgage obligations.
Total investment and mortgage-backed securities at March 31, 1999 were
$457,766,000 compared to $416,019,000 at December 31, 1998. The increase in
investment and mortgage-backed securities was primarily due to investvents
acquired from First Lehigh Corp..
OTHER ASSETS. Premises and equipment at March 31, 1999 was $14,810,000
compared to $10,259,000 at December 31, 1998. The increase in premises and
equipment is primarily associated with the First Lehigh acquisition. Accrued
interest receivable at March 31, 1999 was $4,595,000 compared to $4,114,000 at
December 31, 1998. The increase is consistent with the growth in the loan and
investment portfolios. Real estate owned at March 31, 1999 was $63,000 compared
to $58,000 at December 31, 1998. During the three-month period ended March 31,
1999 Patriot purchased a bank owned life insurance policy with a cash surrender
value at March 31, 1999 of $15,068,000. Goodwill at March 31, 1999 was
$13,808,000 compared to $2,267,000 at December 31, 1998. The increase in
goodwill is associated with the First Lehigh acquisition. Other assets at March
31, 1999 were $7,000,000 compared to $6,988,000 at December 31, 1998.
DEPOSITS. Deposits are primarily attracted from within Patriot's market
area through the offering of various deposit instruments, including NOW
accounts, money market accounts, savings accounts, certificates of deposit and
retirement savings plans. Patriot also attracts jumbo certificates of deposit.
Total deposits at March 31, 1999 were $473,237,000 compared to
$377,796,000 at December 31, 1998. The increase in balance is primarily
attributed to the acquisition of First Lehigh which added $93,905,000 of
deposits
BORROWINGS. Patriot utilizes borrowings as a source of funds for its
asset growth and its asset/liability management. Patriot is eligible to obtain
advances from the FHLB upon the security of the FHLB common stock it owns and
certain of its residential mortgages and mortgage-backed securities, provided
certain standards related to creditworthiness have been met. Patriot may also
utilize repurchase agreements to meet its liquidity needs. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions fluctuates from time to time in accordance with
the policies of the FHLB. Total borrowings at March 31, 1999 were $549,228,000
compared to $549,321,000 at December 31, 1998.
STOCKHOLDERS' EQUITY. Total stockholders' equity was $58,124,000 at March
31, 1999 compared to $42,260,000 at
15
<PAGE> 16
December 31, 1998. The increase in balance is primarily due to stock issued in
the acquisition of First Lehigh Corp. offset by the purchase of treasury stock.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances and repurchase agreements. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
During the three-month period ended March 31, 1999, significant liquidity
was provided by maturities and sales of investment and mortgage-backed
securities and the acquisition of First Lehigh. The funds provided by these
activities were invested in new loans, investment and mortgage-backed
securities, the repayment of borrowings and the purchase of trasury stock.
At March 31, 1999, Patriot had outstanding loan commitments of
$41,674,000. Patriot anticipates that it will have sufficient funds available to
meet its loan origination commitments. Certificates of deposit which are
scheduled to mature in one year or less from March 31, 1999 totaled
$200,822,000. Based upon historical experience, Patriot expects that
substantially all of the maturing certificates of deposit will be retained at
maturity. See "Year 2000 Compliance" for a discussion regarding the possible
impact of Year 2000 issues on Patriot's liquidity.
Capital Resources. FDIC regulations currently require companies to
maintain a minimum leverage capital ratio of not less than 3% of tier 1 capital
to total adjusted assets and not less than 4% of risk-adjusted assets, and a
minimum risk-based capital ratio (based upon credit risk) of not less than 8%.
The FDIC requires a minimum leverage capital requirement of 3% for institutions
rated composite 1 under the CAMEL rating system. For all other institutions, the
minimum leverage capital requirement is 3% plus at least an additional 1% to 2%,
(100 to 200) basis points. At December 31, 1998, Patriot Bank's and Patriot Bank
Corp.'s capital ratios exceeded all requirements to be considered well
capitalized. The following table sets forth the capital ratios of Patriot Bank
Corp., Patriot Bank and the current regulatory requirements at March 31, 1999:
<TABLE>
<CAPTION>
To Be To Be
Actual Adequacy Capitalized Well Capitalized
-------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Patriot Bank Corp. $ 67,785 12.07% $44,946 8% $56,183 10%
Patriot 55,734 10.91% 30,006 8% 37,508 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 56,021 9.97% 22,473 4% 33,710 6%
Patriot 48,964 9.58% 20,442 4% 30,663 6%
Tier I capital (to average assets)
Patriot Bank Corp. 56,021 5.37% 41,753 4% 52,189 5%
Patriot 48,964 5.67% 34,521 4% 43,152 5%
</TABLE>
17
<PAGE> 18
MANAGEMENT OF INTEREST RATE RISK
The principal objective of Patriot's interest rate risk management
function is to evaluate the interest rate risk included in certain on and off
balance sheet accounts, determine the level of risk appropriate given Patriot's
business focus, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board approved
guidelines. Through such management, Patriot seeks to reduce the vulnerability
of its net interest income to changes in interest rates. Patriot monitors its
interest rate risk as such risk relates to its operating strategies. Patriot's
Board of Directors has established an Asset/Liability Committee comprised of
senior management, which is responsible for reviewing its asset/liability and
interest rate position and making decisions involving asset/liability
considerations. The Asset/Liability Committee meets regularly and reports trends
and Patriot's interest rate risk position to the Board of Directors.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, therefore, a negative gap theoretically would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap position would theoretically tend to result in an increase in net
interest income while a positive gap would tend to affect net interest income
adversely.
Patriot pursues several actions designed to control its level of interest
rate risk. These actions include increasing the percentage of the loan portfolio
consisting of short-term and adjustable-rate loans through increased
originations of these loans, acquiring short-term and adjustable-rate
mortgage-backed securities, and undertaking to lengthen the maturities of
deposits and borrowings. At March 31, 1999, Patriot's total interest-bearing
liabilities maturing or repricing within one year exceeded its total net
interest-earning assets maturing or repricing in the same time period by
$82,415,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 7.55%.
18
<PAGE> 19
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1999, which are
anticipated, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at March 31,
1999, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a Nine-Month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be repaid and/or repriced as a result of contractual amortization
and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and
as a result of contractual rate adjustments on adjustable-rate loans.
<TABLE>
<CAPTION>
At March 31, 1999
-----------------
3 Months 3 Months to 6 Months to 1 Year to 3 Years to More than
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
------- -------- ------ -------- -------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS(1):
Interest earning deposits $ 18,227 $ -- $ -- $ -- $ -- $ -- $ 18,227
Investment and mortgage-backed securities, 106,140 34,392 45,489 80,452 70,983 120,310 457,766
net (2)(5)
Loans receivable, net(3)(5) 80,524 40,745 77,209 100,397 155,378 101,956 556,209
------ ------ -------- ------- ------- ------- -------
Total interest-earning assets 204,891 75,137 122,698 180,849 226,361 222,266 1.032,202
Non-interest-earning assets -- -- -- -- -- 59,407 59,407
------- ------ -------- ------- ------- ------- ---------
Total assets 204,891 75,137 122,698 180,849 226,361 281,673 1,091,609
------- ------ -------- ------- ------- ------- ---------
INTEREST-BEARING LIABILITIES:
Money market and passbook savings accounts(6) 11,309 11,309 22,619 42,734 6,134 35,019 129,124
Demand and NOW accounts (6) 1,513 1,513 3,026 6,052 12,103 36,310 60,517
Certificates of deposit 48,091 42,788 109,943 55,328 20,719 6,727 283,596
Borrowings 233,030 -- -- 52,000 173,760 90,438 549,228
------- ------ -------- -------- ------- -------- ---------
Total interest-bearing liabilities 293,943 55,610 135,588 156,114 212,716 168,494 1,022,465
Non-interest-bearing liabilities 11,020 11,020
Equity -- -- -- -- -- 58,124 58,124
-------- ------- --------- -------- ------- ------ ------
Total liabilities and equity 293,943 55,610 135,588 156,114 212,716 237,638 1,091,609
------- ------ --------- ------- ------- ------- ---------
Interest sensitivity gap(4) $(89,052) $19,527 $(12,890) $ 24,735 $ 13,645 $44,035 $ --
========= ======= ========= ========= ========= ======= =========
Cumulative interest sensitivity gap $(89,052) $(69,525) $(82,415) $(57,680) $(44,035) $--
========= ========= ========= ========= ========= ===
Cumulative interest sensitivity gap as a
percent of total assets (8.16)% (6.37)% (7.55)% (5.28)% (4.03)% --%
Cumulative interest-earning assets as a percent
of cumulative interest-bearing liabilities 69.70% 80.11% 83.01% 91.01% 94.84% 100.95%
</TABLE>
19
<PAGE> 20
(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 40% 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.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disscusion 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.
21
<PAGE> 22
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
There are various claims and lawsuits in which Patriot
is periodically involved incidental to the Patriot's
business, which in the aggregate involve amounts which
are believed by management to be immaterial to the
financial condition, equity, and results of operations
of the Company.
Item 2 CHANGES IN SECURITIES
Not applicable.
Item 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 8K
Report on Form 8-K dated January 22, 1998
contained financial statements related to the
acquistion of 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.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATRIOT BANK CORP.
------------------
(Registrant)
Date May 14, 1999
------------------
Joseph W. Major
President and Chief Executive Officer
Date May 14, 1999
------------------
Richard A. Elko
Executive Vice President and
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001000235
<NAME> PATRIOT BANK CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,063
<INT-BEARING-DEPOSITS> 18,227
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 436,490
<INVESTMENTS-CARRYING> 21,276
<INVESTMENTS-MARKET> 21,434
<LOANS> 563,563
<ALLOWANCE> (6,164)
<TOTAL-ASSETS> 1,091,609
<DEPOSITS> 473,237
<SHORT-TERM> 233,055
<LIABILITIES-OTHER> 5,965
<LONG-TERM> 295,196
0
0
<COMMON> 0
<OTHER-SE> 58,124
<TOTAL-LIABILITIES-AND-EQUITY> 1,091,609
<INTEREST-LOAN> 10,673
<INTEREST-INVEST> 7,185
<INTEREST-OTHER> 103
<INTEREST-TOTAL> 17,961
<INTEREST-DEPOSIT> 4,921
<INTEREST-EXPENSE> 12,274
<INTEREST-INCOME-NET> 5,687
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 284
<EXPENSE-OTHER> 4,729
<INCOME-PRETAX> 1,792
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,304
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
<YIELD-ACTUAL> 2.32
<LOANS-NON> 1,679
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,087
<CHARGE-OFFS> 44
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 6,164
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,164
</TABLE>
