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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO.: 0-26744
PATRIOT BANK CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2820537
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
HIGH AND HANOVER STREETS, POTTSTOWN, 19464
PENNSYLVANIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 323-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant is $76,614,538 and is based upon the last sales price of $14 per
share as quoted on The Nasdaq Stock Market for March 8, 2000.
As of March 8, 2000, the Registrant had 6,187,879 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
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INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Item 4A. Executive Officers of the Registrant........................ 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 32
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 63
Item 11. Executive Compensation...................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 63
Item 13. Certain Relationships and Related Transactions.............. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 63
SIGNATURES............................................................ 65
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PART I
ITEM 1. BUSINESS
GENERAL
Patriot Bank Corp. (the "Company") is a Pennsylvania corporation and is the
holding company for Patriot Bank (the "Bank") and Patriot Investment Company
("PIC"). The Company is a bank holding company and is subject to regulation by
the Board of Governors of the Federal Reserve System (the "FRB"). Originally
organized as a Delaware corporation, the Company became a Pennsylvania
corporation as a result of its consolidation with First Lehigh Corporation on
January 22, 1999. The Company's executive offices are located at the
administrative offices of the Bank at High and Hanover Streets, Pottstown,
Pennsylvania 19464.
The Bank was originally chartered in 1938. In 1991, the Bank's predecessor
converted from a federally-chartered mutual savings bank to a
Pennsylvania-chartered mutual savings bank and changed its name to Patriot
Savings Bank. In August 1995, the Bank converted from a Pennsylvania-chartered
mutual savings bank to a federally-chartered mutual savings bank. On December 1,
1995, the Company acquired the Bank as part of the Bank's conversion from a
mutual to stock form of ownership (the "Conversion"). In connection with the
Conversion, the Bank changed its name to Patriot Bank. On May 23, 1997, the Bank
converted to a Pennsylvania-chartered commercial bank. The Bank conducts
business through its network of 18 community banking offices located in
Montgomery, Berks, Lehigh, Northampton and Chester Counties, Pennsylvania. As a
result of its acquisition of First Lehigh Bank, certain of the Bank's deposits
are insured by the Savings Association Insurance Fund ("SAIF") and certain of
its deposits are insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. At December 31, 1999, the Bank had total assets of $1,133 million,
deposits of $502 million and stockholder's equity of $72 million.
The Bank is a community-oriented financial services provider whose business
primarily consists of attracting retail deposits from the general public and
small businesses and originating commercial, consumer, and mortgage loans in the
Bank's market area. In addition to its lending activities, the Bank also invests
in investment and mortgage-backed securities. The Bank uses advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB") and repurchase agreements as
sources of funds.
The Bank's revenues are derived principally from interest on loans,
interest on investment and mortgage-backed securities and other fees and service
charges. The Bank's primary sources of funds are deposits, FHLB advances,
repurchase agreements, interest on loans and investment and mortgage-backed
securities and principal repayments.
PIC is a Delaware investment corporation that was incorporated by the
Company on September 10, 1996. Its primary business consists of maintaining an
investment portfolio. At December 31, 1999, PIC had total assets of $1.1 million
and stockholder's equity of $1.1 million.
MARKET AREA AND COMPETITION
The Company is located approximately 45 miles northwest of Philadelphia,
Pennsylvania and its market consists primarily of Montgomery, Berks, Lehigh,
Northampton, Bucks, and Chester counties, Pennsylvania. The segment of the
markets served by the Company is primarily industrially oriented and
demographically is comprised of middle income and upper income households.
The Company faces significant competition both in originating loans and
attracting deposits. The Company's competitors are other financial services
providers operating within its primary market area, some of which are larger and
have greater financial resources than the Company. The Company's competition for
loans and deposits comes principally from commercial banks, savings and loan
associations, savings banks, credit unions, and mortgage banking companies (some
of which are subsidiaries of major financial institutions). In addition, the
Company faces increasing competition for deposits from non-bank institutions
such as brokerage firms and insurance firms with products such as money market
funds, mutual funds and annuities. Competition may increase as a result of the
continuing reduction in the effective restrictions on interstate operations of
financial institutions.
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Management considers the Company's reputation for financial strength,
superior customer service, convenience and product offerings as a competitive
advantage in attracting and retaining customers.
SUBSIDIARY ACTIVITIES
The Company has two wholly-owned subsidiaries: The Bank and PIC. The Bank
has three wholly-owned subsidiaries: Marathon Management Company, Inc.
("Marathon"), Patriot Investments and Insurance Company ("PIIC"), and Patriot
Commercial Leasing Co., Inc. ("PCLC"). Marathon provides title insurance
services through a joint venture partnership. At December 31, 1999, Marathon had
total assets of $205,000. PIIC markets certain nondeposit investment products.
At December 31, 1999 PIIC had total assets of $198,000. PCLC is a commercial
leasing company. At December 31, 1999, PCLC had total assets of $59.5 million.
PERSONNEL
As of December 31, 1999, the Bank had 272 full-time and 23 part-time
employees, none of whom was covered by a collective bargaining agreement.
Management believes that the Bank has good relations with its employees and
there are no pending or threatened labor disputes with its employees.
REGULATION AND SUPERVISION
GENERAL. The Company, as a bank holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of,
the FRB under the Bank Holding Company Act, as amended (the "BHCA"). In
addition, the activities of Pennsylvania-chartered commercial banks, such as the
Bank, are governed by the Pennsylvania Banking Code and the Federal Deposit
Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the Federal Deposit Insurance Corporation (the "FDIC"), and the Pennsylvania
Department of Banking ("PDB"). The Bank is a member of the Federal Home Loan
Bank ("FHLB") System. Certain of the Bank's deposits are insured by the BIF
while most of its deposit accounts are insured by the SAIF. The Bank must file
reports with the PDB and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other banking
institutions. The PDB and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the FRB, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to banking institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
HOLDING COMPANY REGULATION. The Company is a bank holding company
registered under the BHCA. As a bank holding company, the Company's activities
and those of the Bank are limited to the business of banking and activities
closely related or incidental to banking.
The BHCA prohibits a bank holding company, directly or indirectly, or
through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another banking institution or holding company thereof, without prior
written approval of the FRB; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the BHCA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC.
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Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary bank and to commit resources to support the
bank, i.e., to downstream funds to the bank. This support may be required at
times when, absent such policy, the bank holding company might not otherwise
provide such support. Any capital loans by a bank holding company to its
subsidiary bank are subordinate in right of payment to deposits and to certain
other indebtedness of the bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of its subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
NEW LEGISLATION. Landmark legislation in the financial services area was
signed into law by the President on November 12, 1999. The Gramm-Leach-Bliley
Act dramatically changes certain banking laws that have been in effect since the
early part of the 20th century. The most radical changes are that the separation
between banking and the securities businesses mandated by the Glass-Steagall Act
has now been removed, and the provisions of any state law that prohibits
affiliation between banking and insurance entities have been preempted.
Accordingly, the new legislation now permits firms engaged in underwriting and
dealing in securities, and insurance companies, to own banking entities, and
permits bank holding companies (and in some cases, banks) to own securities
firms and insurance companies. The provisions of federal law that preclude
banking entities from engaging in non-financially related activities, such as
manufacturing, have not been changed. For example, a manufacturing company
cannot own a bank and become a bank holding company, and a bank holding company
cannot own a subsidiary that is not engaged in financial activities, as defined
by the regulators.
The new legislation creates a new category of bank holding company called a
"financial holding company." In order to avail itself of the expanded financial
activities permitted under the new law, a bank holding company must notify the
Federal Reserve that it elects to be a financial holding company. A bank holding
can make this election if it, and all its bank subsidiaries, are well
capitalized, well managed, and have at least a satisfactory Community
Reinvestment Act rating, each in accordance with the definitions prescribed by
the Federal Reserve and the regulators of the subsidiary banks. Once a bank
holding company makes such an election, and provided that the Federal Reserve
does not object to such election, the financial holding company may engage in
financial activities (i.e., securities underwriting, insurance underwriting, and
certain other activities that are financial in nature as to be determined by the
Federal Reserve) by simply giving a notice to the Federal Reserve within thirty
days after beginning such business or acquiring a company engaged in such
business. This makes the regulatory approval process to engage in financial
activities much more streamlined than it was under prior law.
The Company believes it qualifies to become a financial holding company,
but has not yet determined whether or not it will file to become treated as one.
The Federal Reserve has only recently promulgated rules implementing these
provisions of the new legislation, and the Company may wait to see what the
experience of other companies is under the new rules before it makes an
election.
The new law also permits certain financial activities to be undertaken by a
subsidiary of a national bank. As the Bank is not a national bank, these
provisions do not apply directly to the Bank. Generally, for financial
activities that are conducted as a principal, such as an underwriter or dealer
holding an inventory, a national bank must be one of the 100 largest national
banks in the United States and have debt that is rated investment grade.
However, smaller national banks may own a securities broker or an insurance
agency, or certain other financial agency entities under the new law. Under
prior law, national banks could only own an insurance agency if it was located
in a town of fewer than 5,000 residents, or under certain other conditions.
Under the new law, there is no longer any restriction on where the insurance
agency subsidiary of a national bank is located or does business. As a
Pennsylvania bank, the Bank is permitted under Pennsylvania law to own and
operate an insurance agency without restriction, and could also own and operate
a securities brokerage.
In addition to the foregoing provisions of the new law that make major
changes to the federal banking laws, the new legislation also makes a number of
additions and revisions to numerous federal laws that affect the business of
banking. For example, there is now a federal law on privacy with respect to
customer information held by banks. The federal banking regulators are
authorized to adopt rules regarding privacy for
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customer information. Banks must establish a disclosure policy for non-public
customer information, disclose the policy to their customers, and give their
customers the opportunity to object to non-public information being disclosed to
a third party. Also, the Community Reinvestment Act has been amended by the new
law to provide that small banks (those under $250 million in assets) that
previously received an "outstanding" on their last CRA exam will not have to
undergo another CRA exam for five years, or for four years if their last exam
was "satisfactory." In addition, any CRA agreement entered into between a bank
and a community group must be disclosed, with both the bank and the group
receiving any grants from the bank detailing the amount of funding provided and
what it was used for. The new law also requires a bank's policy on fees for
transactions at ATM machines by non-customers to be conspicuously posted on the
ATM. A number of other provisions affecting other general regulatory
requirements for banking institutions were also adopted.
It is too early to tell what effect the Gramm-Leach-Bliley Act may have on
the Company and the Bank. The intent and scope of the act is positive for the
financial industry, and is an attempt to modernize federal banking laws and make
U.S. institutions competitive with those from other countries. While the
legislation makes significant changes in U.S. banking law, such changes may not
directly affect the Company's business unless it decides to avail itself of new
opportunities available under the new law. The Company does not expect any of
the provisions of the new Act to have a material adverse effect on its existing
operations, or to significantly increase its costs.
Separately from the Gramm-Leach-Bliley Act, Congress is often considering
financial industry legislation. The Company cannot predict how any new
legislation, or new rules adopted by the federal banking agencies, may affect
its business in the future.
CAPITAL REQUIREMENTS. The FRB has adopted risk-based capital guidelines
for bank holding companies, such as the Company. The required minimum ratio of
total capital to risk-weighted assets (including off-balance sheet activities,
such as standby letters of credit) is 8.0%. At least half of the total capital
is required to be "Tier 1 capital," consisting principally of common
stockholders' equity, noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less goodwill.
The remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt and intermediate-term preferred stock, certain hybrid capital instruments
and other debt securities, perpetual preferred stock, and a limited amount of
the general loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are required to maintain a
leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is
in compliance with these guidelines. The Bank is subject to similar capital
requirements adopted by the FDIC.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
Under the FDIC prompt corrective action regulations, the FDIC is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a bank is considered "well capitalized" if its ratio of total capital
to risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to
risk-weighted assets is at least 6%, its ratio of core capital to total assets
is at least 5%, and it is not subject to any order or directive by the FDIC to
meet a specific capital level. A bank generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A bank that has lower ratios of
capital is categorized as "undercapitalized," "significantly under capitalized,"
or "critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the FDIC within 45 days of the date
a bank receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the
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plan must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The FDIC could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. At December 31, 1999,
both the Company and the Bank were "well capitalized."
INSURANCE OF DEPOSIT ACCOUNTS. Although most of the deposits of the Bank
are presently insured by the SAIF, certain of its deposits are insured by the
BIF (the deposit insurance fund that covers most commercial bank deposits). Both
the BIF and the SAIF are statutorily required to maintain a 1.25% of insured
reserve deposits ratio. Both the BIF and the SAIF currently exceed the 1.25%
ratio. Therefore, most institutions, including the Bank, presently pay no
deposit insurance premiums. The FDIC must assess deposit insurance premiums if
the 1.25% ratio is not met, and may impose premiums on under capitalized or
unsafe institutions.
While most banks do not pay deposit insurance, all institutions are
assessed for payment of the FICO bonds. Full pro rata sharing of the FICO
payments between BIF and SAIF members began on January 1, 2000. The FDIC resets
the FICO assessment rate each calendar quarter. The current annual rate is
$0.212 per each $1,000 of deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
LOANS TO ONE BORROWER. Applicable regulations limit the dollar amount of
loans that the Bank may have outstanding to any one borrower, or group of
affiliated borrowers, to 15% of the capital and surplus of the Bank. As of
December 31, 1999, this limitation was equal to $10.8 million. There are
exceptions from the limitation for certain secured loans, depending upon the
amount and type of collateral.
LIMITATION ON CAPITAL DISTRIBUTIONS. Dividend payments by the Bank to the
Company are subject to the Pennsylvania Banking Code of 1965 and the FDI Act.
Under the Pennsylvania Banking Code, no dividends may be paid except from
"accumulated net earnings" (generally, undivided profits). Under the FDI Act, no
dividends may be paid by an insured bank if the bank is in arrears in the
payment of any insurance assessment due to the FDIC. Under current banking laws,
the Bank would be limited to approximately $27.4 million of dividends in 2000
plus an additional amount equal to the Bank's net profit for 2000, up to the
date of any such dividend declaration.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Bank to pay dividends to the Company.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Law"), amended various federal
banking laws to provide for nationwide interstate banking, interstate bank
mergers and interstate branching. The interstate banking provisions allow for
the acquisition by a bank holding company of a bank located in another state.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its nonbanking subsidiaries) is limited by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered
transactions with any individual affiliate to 10% of the capital and surplus of
the Bank. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the Bank's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from affiliates
is generally prohibited. Section 23B generally provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for
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comparable transactions with non-affiliated companies. In addition, banks are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies and no bank may purchase the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. There is an exception for loans made pursuant
to a benefit or compensation program that is widely available to all employees
of the institution and does not give preference to insiders over other
employees. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to insiders based, in part, on the Bank's
capital position and requires certain board approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the FDIC has primary enforcement
responsibility over state nonmember banks and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order, removal of officers and/or
directors, to institution of receivership or conservatorship, or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Federal law also establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require
depositary institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). During
fiscal 1999, the Federal Reserve Board regulations generally required that
reserves be maintained against aggregate transaction accounts as follows: for
accounts aggregating $47.8 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts aggregating
greater than $47.8 million, the reserve requirement is $1.434 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $47.8 million. The first
$4.7 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) were exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the FDIC.
FEDERAL AND STATE TAXATION
Federal Taxation
GENERAL. The Company and its subsidiaries report their income on a
consolidated basis using the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Company. For its 1999 taxable year, the Company is subject to a maximum
federal income tax rate of 34%.
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BAD DEBT RESERVES. As a commercial bank, the Bank is permitted to
recognize bad debt expense based on actual experience. Prior to its conversion
to a commercial bank in May 1997, the Bank was a thrift institution. For fiscal
years beginning prior to December 31, 1995, thrift institutions which qualified
under certain definitional tests and other conditions of the Internal Revenue
Code of 1986 (the "Code") were permitted to use certain favorable provisions to
calculate their deductions from taxable income for annual additions to their bad
debt reserve. A reserve could be established for bad debts on qualifying real
property loans (generally secured by interests in real property improved or to
be improved) under (i) the Percentage of Taxable Income Method (the "PTI
Method") or (ii) the Experience Method. The reserve for nonqualifying loans was
computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), as modified
by the Taxpayer Relief Act of 1997 (the "1997 Act"), requires savings
institutions to recapture (i.e., take into income) certain portions of their
accumulated bad debt reserves. The 1996 Act repeals the reserve method of
accounting for bad debts effective for tax years beginning after 1995. Thrift
institutions that would be treated as small banks are allowed to utilize the
Experience Method applicable to such institutions, while thrift institutions
that are treated as large banks (those generally exceeding $500 million in
assets) are required to use only the specific charge-off method. Thus, the PTI
Method of accounting for bad debts is no longer available for any financial
institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's current taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank is
permitted to make additions to its tax bad debt reserves. In addition, since the
Bank's tax bad debt reserves as of December 31, 1987 exceeded its tax bad debt
reserves as of December 31, 1995 it is not required to recapture any income.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. The Banks does not intend to
pay dividends that would result in a recapture of any portion of its bad debt
reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on a corporation's alternative minimum
taxable income ("AMTI") at a rate of 20% if such alternative minimum tax ("AMT")
exceeds the income tax the corporation would otherwise pay for the taxable year.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference
7
10
item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net
operating loss carryovers. AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). The Bank does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company owns more than 20% of the stock of a corporation
distributing a dividend, 80% of any dividends received may be deducted.
State Taxation
COMMONWEALTH OF PENNSYLVANIA. The Bank is subject to a "Bank Shares Tax"
which is imposed on every bank having capital stock located within Pennsylvania.
The Bank Shares Tax is based on the value of the bank's shares as of the
preceding January 1st. The taxable amount is computed by adding the book value
of capital stock paid in, the book value of the surplus and the book value of
undivided profits, and then deducting from that total an amount equal to the
percentage that the book value of the bank's federal obligations and state
obligations bears to the book value of the bank's total assets. This value is
calculated on the basis of the current year and the preceding five years, but,
if a bank has not been in existence for six years, the taxable amount is
computed by adding the value for the number of years that the bank has been in
existence and dividing the resulting sum by that number of years. The Bank
Shares Tax rate is 1.25% of the taxable amount. Banks subject to the Bank Shares
Tax are exempt from all other corporate taxes imposed by Pennsylvania.
Corporations doing business in Pennsylvania and not subject to Bank Shares
Tax are subject to Pennsylvania Corporate Net Income Tax ("CNIT"). The CNIT is
an annual excise tax and is measured by the Corporation's taxable income as
determined under the Code. When a domestic or foreign corporation's entire
business is not transacted wholly within Pennsylvania, such taxable income must
allocated and apportioned to determine that portion subject to the CNIT. The
CNIT rate is 9.99%. Pennsylvania also subjects such corporations to the
Pennsylvania Capital Stock and Foreign Franchise Tax.
Prior to January 22, 1999, the Company was subject to the Pennsylvania CNIT
and the Pennsylvania Capital Stock and Foreign Franchise Tax because it was a
foreign corporation doing business in Pennsylvania. The Company's Pennsylvania
CNIT will be calculated on an unconsolidated basis and adjusted to reflect the
appropriate allocation and apportionment requirements. The Company is currently
subject to the Pennsylvania Capital Stock Tax and CNIT.
ITEM 2. PROPERTIES
The Bank has 18 banking offices, three (3) of which are located in
Montgomery County, four (4) of which are located in Berks County, five (5) of
which are located in Lehigh County, four (4) of which are located in Northampton
County, and two (2) of which are located in Chester County, Pennsylvania. The
Bank owns 9 and leases 9 of the banking office properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various legal actions arising from normal
business activities. Management believes that those actions are either without
merit or that the ultimate liability, if any, resulting from such actions will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
11
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information, including principal occupation during the past five
years, relating to the principal executive officers of the Company, as of March
15, 2000, is set forth below:
James B. Elliott -- Age 59. Mr. Elliott was elected Chairman of the
Company in July 1998. Mr. Elliott is the President of Stratecon, Inc.
Joseph W. Major -- Age 44. Mr. Major was elected President and Chief
Executive Officer of the Company and the Bank in July 1998. Prior to that Mr.
Major was President and Chief Operating Officer of the Company and the Bank
since September 1995 and Chief Executive Officer of the Bank since April 1997.
Prior to his appointment at the Company and the Bank, Mr. Major was a partner in
the firm of Mauger & Major.
Richard A. Elko -- Age 38. Mr. Elko is President of ZipFinancial.com and
Executive Vice President of the Company and the Bank. Mr. Elko was elected
Executive Vice President and Chief Financial Officer of the Company and the Bank
in January 1996. Prior to his appointment at the Company and the Bank, Mr. Elko
was Corporate Controller at Sovereign Bancorp, Inc.
Joni S. Naugle -- Age 41. Ms. Naugle was elected as Chief Operating
Officer of the Company and the Bank in December 1998. Prior to that Ms. Naugle
was a Senior Vice President for Marketing and Retail Sales at Sovereign Bank
from 1979 to April 1998 and a consultant from April 1998 to December 1998.
Kevin R. Pyle -- Age 33. Mr. Pyle has been Chief Credit Officer of the
Bank since March 1996. Prior thereto he was a Vice President of Berks County
Bank.
James G. Blume -- Age 34. Mr. Blume was elected as Chief Financial Officer
of the Company in December 1999. Prior to that, Mr. Blume served as Controller
of the Company and Patriot Bank since March 1997. Prior to that Mr. Blume was
the Accounting Manager of the Company and Patriot Bank. Prior to that Mr. Blume
was senior staff accountant at Sovereign Bank until March 1996.
Robert G. Phillips -- Age 48. Mr. Phillips was elected Treasurer of the
Company and the Bank in August 1995. Prior thereto, Mr. Phillips was Treasurer
of the Bank.
Diane M. Davidheiser -- Age 42. Ms. Davidheiser was elected Corporate
Secretary of the Company and the Bank in September 1998. Prior to that Ms.
Davidheiser was an investor relations specialist and corporate administration
assistant at Patriot Bank since 1987.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") National Market System under the symbol "PBIX". At March 8,
2000, the total number of holders of record of the Company's common stock was
864.
The following table sets forth the high and low bid and asked information
of the Company's common stock to the extent available as reported by NASDAQ.
Such prices have been adjusted to reflect all stock dividends paid during 1998.
1999 1998
---------------------------- ---------------------------------
BID ASKED BID ASKED
----------- ------------ ----------- --------------
QTR HIGH LOW HIGH LOW QTR HIGH LOW HIGH LOW
- --- ---- --- ---- --- --- ---- --- ---- ---
1st 13 9 3/8 13 1/8 9 1/2 1st 16 1/2 13 13/32 16 51/64 13 51/64
2nd 15 3/8 9 1/4 9 1/2 9 3/8 2nd 17 13 13/64 17 1/4 13 19/32
3rd 10 5/8 9 1/8 9 7/8 9 3/8 3rd 16 11 3/4 16 1/4 12 1/8
4th 10 7/8 8 1/8 11 8 3/16 4th 12 7/8 9 13 1/16 10
9
12
The bid quotations reflect interdealer quotations, do not include retail
mark ups, mark downs or commissions and may not necessarily represent actual
transactions. The bid information as stated is, to the knowledge of management
of the Company, the best approximate value at the time indicated.
DIVIDEND INFORMATION.
Dividends on the Company's Common Stock are generally payable in February,
May, August and November.
Set forth below are the cash dividends paid by the Company during 1999 and
1998. Such dividends have been adjusted to reflect all stock dividends paid
during such years.
1999 1998
----- -----
First Quarter............................................... $.078 $.066
Second Quarter.............................................. $.080 $.068
Third Quarter............................................... $.083 $.070
Fourth Quarter.............................................. $.085 $.075
For certain limitations on the ability of the Bank to pay dividends to the
Company, see Part I, Item I "Business -- Regulation and
Supervision -- Limitation on Capital Distributions".
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data and management's
discussion and analysis set forth below is derived in part from, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto, contained elsewhere herein.
AT DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets....................... $1,129,443 $980,761 $852,083 $529,165 $268,869
Investment and mortgage-backed
securities available for sale.... 87,334 386,380 343,125 159,148 47,646
Investment and mortgage-backed
securities held to maturity...... 348,047 29,639 62,516 72,710 3,917
Loans held for sale................ 4,972 5,576 4,095 -- --
Loans and leases receivable........ 628,060 509,080 422,209 280,184 194,250
Allowance for credit losses........ (6,082) (4,087) (2,512) (1,830) (1,702)
Deposits........................... 502,002 377,796 289,528 239,514 201,618
Borrowings......................... 568,795 549,321 508,884 231,595 10,000
Stockholders' equity............... 49,768 42,260 46,533 53,117 54,110
10
13
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Interest income.................... $75,544 $63,107 $50,249 $29,594 $17,168
Interest expense................... 51,510 46,236 35,807 17,502 9,549
------- ------- ------- ------- -------
Net interest income before
provision for credit losses...... 24,034 16,871 14,442 12,092 7,619
Provision for credit losses........ 1,200 1,200 915 305 60
------- ------- ------- ------- -------
Net interest income after provision
for credit losses................ 22,834 15,671 13,527 11,787 7,559
Non-interest income................ 5,945 3,873 2,330 637 518
Non-interest expense(3)............ 26,402 14,267 11,158 9,198 6,151
------- ------- ------- ------- -------
Income before income taxes......... 2,377 5,277 4,699 3,226 1,926
Income taxes....................... 177 1,222 1,326 1,251 734
------- ------- ------- ------- -------
Net income......................... $ 2,200 $ 4,055 $ 3,373 $ 1,975 $ 1,192
======= ======= ======= ======= =======
Diluted earnings per share(2)...... $ 0.37 $ 0.78 $ 0.59 $ 0.31
======= ======= ======= =======
Net income before non-recurring
charge(3)........................ $ 5,549 $ 2,811
======= =======
Diluted earnings per share before
non-recurring charge(2)(3)....... $ 0.94 $ 0.44
======= =======
Cash earnings per share before non-
recurring charge(2)(3)(10)....... $ 1.20 $ 0.92 $ 0.71 $ 0.50
======= ======= ======= =======
AT DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
PERFORMANCE RATIOS(4):
Return on average assets........... 0.20% 0.45% 0.49% 0.48% 0.50%
Return on average assets before
non-recurring charge(3).......... 0.51 -- -- 0.68 --
Return on average equity........... 4.00 8.72 7.22 3.71 5.40
Return on average equity before
non-recurring charge(3).......... 10.10 -- -- 5.28 --
Cash return on average equity(3)... 12.95% 10.27% 8.63% 6.02% 7.15%
Average interest rate spread(5).... 2.32 1.98 2.10 2.95 3.29
Net interest margin(6)............. 2.44 2.01 2.14 3.01 3.39
Average interest-earning assets to
average interest bearing
liabilities...................... 100.39 103.72 104.85 113.69 109.20
Total non-interest expense to
average assets before
non-recurring charge(3).......... 2.41 1.58 1.56 1.93 2.65
Dividend payout ratio(2)........... 86.02 35.91 40.31 45.91 --
REGULATORY CAPITAL RATIOS(7):
Tier 1 capital to average
assets(8)........................ 5.45% 5.37% 7.90% 9.97% 20.14%
Tier 1 capital to risk-adjusted
assets(8)........................ 9.39 10.00 12.92 20.28 34.27
Total capital to risk-adjusted
assets(8)........................ 10.46 12.46 14.54 20.98 35.35
11
14
AT DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
ASSET QUALITY RATIOS(9):
Non-performing assets as a percent
of total assets.................. 0.15 0.11 0.15 0.12 0.29
Non-performing loans as a percent
of loans receivable.............. 0.24 0.21 0.26 0.20 0.30
Allowance for credit losses as a
percent of loans receivable...... 0.96 0.79 0.59 0.65 0.88
Allowance for credit losses as a
percent of non-performing
loans............................ 354.04 362.63 225.90 321.94 292.94
- ---------------
(1) Patriot has classified its investment and mortgage-backed securities as
"held to maturity" or "available for sale" since fiscal 1994 when it
adopted Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
(2) Patriot completed its initial public offering on December 1, 1995.
Therefore, earnings per share and dividend payout ratio are not applicable
for years prior to 1996.
(3) In 1996, a non-recurring charge of $836,000 tax effected was recorded,
representing the special deposit insurance assessment levied against all
SAIF member financial institutions by the FDIC to recapitalize its SAIF
fund. In 1999, a non-recurring charge of $ 5,067,000 was recorded in
connection with Patriot's internet initiative -- BankZip.com.
(4) All ratios are based on average monthly balances during the indicated
periods. Return on average assets and return on average equity are
calculated before the cumulative effect of change in method of accounting
for income taxes.
(5) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities and equity.
(6) The net interest margin represents tax-equivalent net interest income as a
percent of average interest-earning assets.
(7) For definitions and further information relating to regulatory capital
requirements, see footnote 19 of the consolidated financial statements.
(8) Regulatory capital ratios for 1996 and years prior are calculated under OTS
guidelines. The ratios for 1999, 1998 and 1997 are calculated using Federal
Reserve guidelines due to the conversion of Patriot Bank to a state
chartered commercial bank in May 1997.
(9) Non-performing assets consist of non-performing loans and real estate owned
(REO). Non-performing loans consist of non-accrual loans, while REO
consists of real estate acquired through foreclosure and real estate
acquired by acceptance of a deed in lieu of foreclosure.
(10) Cash earnings per share is calculated by the elimination of non-cash
expenses such as goodwill amortization, ESOP expense, and MRP expense
12
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 in this discussion and
analysis 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 of this report. Patriot undertakes no
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this report.
Patriot's financial results include the following significant events:
CAPITAL TRANSACTIONS. Patriot became a publicly owned company on
December 1, 1995, when it issued 3,769,125 shares of common stock and
raised net proceeds of $36,652,000. On September 22, 1997, and November 21,
1996, Patriot paid special 20% stock dividends. On May 14, 1998, Patriot
distributed a 25% stock split. For comparative purposes, per share amounts,
as presented herein, have been adjusted to reflect the stock
split/dividends. During 1996, 1997, 1998 and 1999 Patriot repurchased
338,000, 1,246,000, 538,000 and 377,000 shares of its common stock at a
cost of $6,892,000, $13,554,000, $2,517,000 and $4,808,000, respectively.
MORTGAGE COMPANY ACQUISITION. On June 28, 1999, Patriot acquired
three offices of Ark Mortgage Inc. The offices acquired are located in Fort
Washington, Lancaster, and Bethlehem. The purchase price was equal to
$250,000 in cash less certain profits on the acquired mortgage pipeline.
The acquisition was accounted for as a purchase and added approximately
$240,000 of goodwill to Patriot's balance sheet which is being amortized
over a period of 4 years.
BANK ACQUISITION. On January 22, 1999, Patriot completed the
acquisition of First Lehigh Corporation ("First Lehigh"), a commercial
banking company with $104,478,000 in total assets and $93,905,000 in total
deposits. Patriot issued 1,640,000 shares of common stock for all 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 are
included in Patriot's consolidated statement of income from the date of
acquisition. Goodwill and core deposit intangibles arising from the
transaction totaled $12,439,000 which are being amortized over 15 years.
LEASING ACQUISITION. On November 6, 1998, Patriot completed its
acquisition of Keystone Financial Leasing Company (KFL). KFL is a
small-ticket commercial leasing company which had total assets of
$43,327,000 including lease receivables of $42,764,000 at the date of
acquisition. KFL was purchased for $6,258,000 in cash plus contingent
consideration based upon future revenues of KFL. The acquisition was
accounted for as a purchase. Goodwill arising from the transaction totaled
$2,267,000 and is being amortized over 15 years.
RETIREMENT. Effective June 30, 1998, Patriot's former chairman
retired. Patriot satisfied its contractual obligation related to the former
chairman, which resulted in a special non-recurring charge of $961,000.
DEPOSIT SALE. On November 21, 1997, Patriot completed the sale of
$10,350,000 of deposits and a branch office. Patriot received a 7.5%
premium on the deposits and recognized a net gain of $885,000.
TRUST PREFERRED SECURITIES. On June 5, 1997, Patriot issued $19
million of 10.30% trust preferred securities. The trust preferred
securities, subject to certain limitations, qualify as tier 1 capital for
regulatory purposes.
13
16
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SUMMARY. For the year ended December 31, 1999, Patriot reported net income
of $2,200,000 or $.37 diluted earnings per share including costs related to the
launch of BankZip.com of $3,349,000 ($5,067,000 before tax). Patriot's core
banking operations exclusive of BankZip.com for the year ended December 31, 1999
generated $5,549,000 or $.94 diluted earnings per share compared to net income
of $4,055,000 or $.78 diluted earnings per share for the year ended December 31,
1998. This represents an increase in net income of 37% and an increase in
diluted earnings per share of 21% from core operations. Excluding the
non-recurring charge related to BankZip.com, return on average equity was 10.10%
for 1999 compared to 8.72% for 1998.
NET INTEREST INCOME. Net interest income for 1999 was $24,034,000 compared
to $16,871,000 in 1998. This represents an increase of 43% and is primarily due
to an increase in average balances and interest spreads related to the
acquisitions of First Lehigh and KFL. Much of Patriot's asset growth resulted
from the origination of commercial loans and leases. Additionally, Patriot
maintained a slightly larger investment and mortgage-backed securities portfolio
throughout 1999 than in prior years. Patriot's asset growth was funded through
deposit growth and borrowings.
As a result of the acquisitions of First Lehigh and KFL which added higher
yielding loans and leases coupled with a lower costing deposit base, Patriot's
net interest margin (net interest income on a fully tax equivalent basis as a
percentage of average interest-earning assets) increased as anticipated to 2.44%
in 1999 from 2.01% in 1998.
Interest on loans was $45,590,000 for 1999 compared to $35,242,000 for
1998. The average balance of loans was $571,966,000 with an average yield of
7.97% compared to an average balance of $455,167,000 with an average yield of
7.74% in 1998. The increase in average balance was due to increased originations
of commercial loans and leases as well as the acquisitions of First Lehigh and
KFL. Also, the average balance of mortgage loans was maintained at a consistent
level during 1999 as most mortgage loan originations were sold. The increase in
average yield is primarily a result of commercial loans and leases representing
a larger percentage of the loan portfolio.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $29,656,000 for 1999 compared to $27,521,000 for 1998. The
average balance of the investment portfolio was $457,093,000 with an average
yield of 6.78% for 1999 compared to an average balance of $417,037,000 with an
average yield of 6.84% for 1998. The increase in average balance was primarily
due to investment and mortgage-backed securities acquired in the First Lehigh
acquisition. The slight decrease in average yield is primarily a result of
prepayments on higher yielding securities at the end of 1998 offset with
increased yields on adjustable rate securities in 1999.
Interest on total deposits was $20,565,000 for 1999 compared to $17,382,000
for 1998. The average balance of total deposits was $468,814,000 with an average
cost of 4.38% for 1999 compared to an average balance of $350,262,000 with an
average cost of 4.96% for 1998. The increase in average balance was primarily
the result of the acquisition of First Lehigh, which added $89,000,000 in
deposits, $50,000,000 of which were core deposits, coupled with aggressive
marketing of core deposits (money market, checking and savings accounts) and an
increase in Patriot's jumbo deposit program. The decrease in average cost was
the result of the increase in core deposits from the First Lehigh acquisition
offset by an increase in jumbo deposits. Patriot uses jumbo deposits attracted
through individuals and brokerages as an alternative to borrowings. Total
brokered deposits approximated $136,113,000 and $96,163,000 at December 31, 1999
and 1998, respectively. The average balance of retail deposits (total deposits
less jumbo deposits) was $359,317,000 with an average cost of 3.96% for 1999
compared to an average balance of $247,239,000 with an average cost of 4.47% for
1998. The increase in average balance and the decrease in cost of Patriot's
retail deposits was the result of the First Lehigh acquisition and an increased
emphasis placed on attracting core deposits and less emphasis on originating
retail certificates of deposit.
Interest on borrowings was $30,945,000 in 1999 compared to $28,854,000 in
1998. The average balance of borrowings was $568,922,000 with an average cost of
5.43% for 1999 compared to an average balance of $501,605,000 with an average
cost of 5.76% for 1998. The increase in average balance was due to the use of
14
17
borrowings to fund the growth in the balance sheet. The decrease in average cost
was due to generally lower interest rates.
SPREAD ANALYSIS. The following table sets forth Patriot's average balances
and the yields on those balances for the years ended December 31, 1999, 1998 and
1997. The yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown,
except where noted otherwise. The yields and costs include fees, which are
considered adjustments to yields.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ -------- -------- ------ -------- -------- ------
(IN THOUSANDS)
ASSETS:
Interest-earning
assets:
Interest earning
deposits............. $ 12,729 $ 298 2.34% $ 11,381 $ 344 3.02% $ 5,522 $ 193 3.49%
Investment and
mortgage-backed
securities(1)........ 457,093 29,656 6.78 417,037 27,521 6.84 336,718 23,048 6.96
Loans receivable,
net(2)............... 571,966 45,590 7.97 455,167 35,242 7.74 348,186 27,008 7.76
---------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest-earning
assets............... 1,041,788 75,544 7.35 883,585 63,107 7.25 690,426 50,249 7.34
Non-interest-earning
assets............... 55,753 -- -- 18,236 -- -- 16,635 -- --
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total assets........... $1,097,541 $75,544 7.00% $901,821 $63,107 7.11% $707,061 $50,249 7.16%
========== ======= ==== ======== ======= ==== ======== ======= ====
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
Savings deposits....... $ 179,774 $ 4,767 2.65% $116,381 $ 3,488 2.99% $ 93,902 $ 2,632 2.80%
Certificates of
deposits............. 289,040 15,798 5.47 233,881 13,894 5.94 181,909 10,773 5.92
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits......... 468,814 20,565 4.39 350,262 17,382 4.96 275,811 13,405 4.86
Borrowings(3).......... 568,922 30,945 5.44 501,605 28,854 5.76 382,357 22,402 5.86
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities.......... 1,037,736 51,510 4.96% 851,867 46,236 5.43% 658,168 35,807 5.44%
Non-interest-bearing
liabilities.......... 4,847 -- -- 3,436 -- -- 2,188 -- --
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities...... 1,042,583 51,510 4.94 855,303 46,236 5.41 660,356 35,807 5.42
Equity................. 54,958 -- -- 46,518 -- -- 46,705 -- --
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities and
equity............... $1,097,541 $51,510 4.69% $901,821 $46,236 5.13% $707,061 $35,807 5.06%
========== ======= ==== ======== ======= ==== ======== ======= ====
Net interest rate
spread(4)............ 2.31% 1.98% 2.10%
==== ==== ====
Net interest
margin(5)............ 2.44% 2.01% 2.14%
Ratio of
interest-earning
assets to
interest-bearing
liabilities.......... 100.39% 103.72% 104.90%
- ---------------
(1) Includes securities available for sale and held to maturity and unamortized
discounts and premiums.
(2) Amount is net of deferred loan and lease fees, loans in process, discounts
and premiums, and allowance for possible loan and lease losses and includes
loans held for sale and non-performing loans and leases for which the
accrual of interest has been discontinued.
(3) Includes short-term, long-term and trust preferred borrowings.
(4) Net interest rate spread represents the difference between the average yield
on total assets and the average cost of total liabilities and equity.
(5) Net interest margin represents the tax-equivalent net interest income
divided by average interest-earning assets. Net interest margin was
increased by .12% in 1999, .11% in 1998, and .06% in 1997 due to tax
equivalent calculations.
15
18
RATE/VOLUME ANALYSIS. The following table presents the extent to which net
interest income changed due to changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities during the
periods indicated. Information is provided in each category with respect to
changes attributable to changes in volumes (changes in volume multiplied by
prior rate), changes attributable to changes in rate (changes in rate multiplied
by prior volume), and the net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionally to the changes due
to volume and the changes due to rate.
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------ ----------------------------
VOLUME RATE NET VOLUME RATE NET
-------- -------- -------- -------- ------ --------
(IN THOUSANDS)
Interest-earning assets:
Interest-earning deposits............ $ 38 $ (84) $ (46) $ 180 $ (29) $ 151
Investment and mortgage-backed
securities......................... 2,606 (472) 2,134 5,326 (853) 4,473
Loans................................ 9,283 1,065 10,348 8,283 (49) 8,234
------- ------- ------- ------- ----- -------
Total interest-earning assets........ 11,927 509 12,436 13,789 (931) 12,858
------- ------- ------- ------- ----- -------
Interest-bearing liabilities:
Deposits............................. 4,796 (1,634) 3,162 3,751 226 3,977
Borrowings........................... 3,724 (1,612) 2,112 6,867 (415) 6,452
------- ------- ------- ------- ----- -------
Total interest-bearing liabilities... 8,520 (3,246) 5,274 10,618 (189) 10,429
------- ------- ------- ------- ----- -------
Net change in net interest income.... $ 3,407 $ 3,755 $ 7,162 $ 3,171 $(742) $ 2,429
======= ======= ======= ======= ===== =======
16
19
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1999 and
1998 was $1,200,000 . See "Credit Quality" for a detailed discussion of
Patriot's asset quality.
The following table sets forth the activity in the allowance for credit
losses for the years indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(IN THOUSANDS)
Allowance, beginning of year.......... $4,087 $2,512 $1,830 $1,702 $1,720
Charge-offs:
Residential......................... 249 114 17 13 76
Commercial.......................... 573 253 -- 98 --
Home equity and consumer............ 243 145 259 66 5
------ ------ ------ ------ ------
Total charge-offs........... 1,065 512 276 177 81
------ ------ ------ ------ ------
Recoveries:
Residential......................... 0 -- 2 -- --
Commercial.......................... 66 -- 31 -- --
Home equity and consumer............ 38 9 10 -- 3
------ ------ ------ ------ ------
Total recoveries............ 104 9 43 -- 3
------ ------ ------ ------ ------
Net charge-offs....................... 961 503 233 177 78
Acquired allowance.................... 1,756 878 -- -- --
Provision charged to operations....... 1,200 1,200 915 305 60
------ ------ ------ ------ ------
Allowance, end of year................ $6,082 $4,087 $2,512 $1,830 $1,702
====== ====== ====== ====== ======
Net charge-offs to average loans...... .17% .11% .07% .08% .05%
Allowance for credit losses as a
percentage of year-end total
loans............................... .96% .79% .59% .65% 88%
NON-INTEREST INCOME. Total non-interest income was $5,945,000 for 1999
compared to $3,873,000 for 1998. The increase was primarily due to an increased
emphasis on recurring non-interest income including loan and deposit fees, ATM
fees and mortgage banking activities. Non-interest income in 1999 included
securities gains of $507,000 compared to $1,850,000 in 1998.
NON-INTEREST EXPENSE. Total non-interest expense was $26,402,000 for 1999
compared to $14,267,000 for 1998. Non-interest expense in 1999 included
$5,067,000 in costs incurred related to the launch of BankZip.com. Non-interest
expense in 1998 included an infrequent charge of $961,000 related to the
retirement of Patriot's former chairman. The increase in recurring non-interest
expense reflects the acquisitions of First Lehigh and KFL plus growth in
Patriot's operations. Patriot's efficiency ratio was 88.07% in 1999 compared to
68.77% in 1998 inclusive of the non-recurring charges in each year, exclusive of
these charges the efficiency ratio was 71.17% in 1999 compared to 64.14% in 1998
which increased due to the costs incurred with the integration of the
acquisitions of KFL and First Lehigh.
INCOME TAX PROVISION. The income tax provision was $177,000 for 1999
compared to $1,222,000 for 1998. The effective tax rate was 7.44% for 1999
compared to 23.16% for 1998. The decrease in the effective tax rate is the
result of the tax impact of the costs incurred amounting to $5,067,000 related
to the launch of BankZip.com, substantially magnifying Patriot's proportion of
tax exempt income to net income by Patriot's tax planning strategies, which
include investments in tax-exempt securities. Excluding the costs and related
tax benefits related to the launch of BankZip.com, Patriot's effective tax rate
was 25.53% for 1999.
17
20
FINANCIAL CONDITION
LOAN PORTFOLIO. Patriot's primary loan products are commercial loans and
leases, home equity loans on existing owner-occupied residential real estate,
and fixed-rate and adjustable-rate mortgage loans. Patriot also offers
residential construction loans and other consumer loans.
COMMERCIAL. Patriot originates commercial loans with an emphasis on small
businesses, professionals and entrepreneurs within Patriot's local markets. Most
of Patriot's commercial loan relationships have exposure of $500,000 or less.
Commercial loans are generally secured by real estate and personal guarantees.
As a result of the KFL acquisition in November 1998, Patriot acquired
$42,764,000 in small-ticket commercial leases. The acquired portfolio is
representative of Patriot's ongoing business in which Patriot originates
small-ticket commercial leases to businesses located in Pennsylvania and other
contiguous states. The leases are considered financing leases for financial
accounting purposes.
CONSUMER. Patriot offers variable rate (based upon prime rate) home equity
lines of credit and fixed-rate home equity loans, which are generally secured by
single-family, owner-occupied residential properties. Patriot also offers a
variety of other consumer loans, which primarily consist of installment loans
secured by automobiles, credit cards, unsecured lines of credit and other loans
secured by deposit accounts.
MORTGAGE. Patriot offers both fixed-rate and adjustable-rate mortgage
loans secured by one- to four-family residences, primarily owner-occupied,
located in Patriot's primary market area. Patriot generally underwrites its
first mortgage loans in accordance with underwriting standards set by the
Federal Home Loan Mortgage Corp. (FHLMC) and the Federal National Mortgage
Association (FNMA). Patriot also originates residential construction loans. Most
of the residential mortgage loans originated by Patriot are sold into the
secondary markets. Patriot generally only retains certain adjustable rate and
balloon residential mortgages in its portfolio.
At December 31, 1999, Patriot's total loan portfolio was $628,060,000
compared to a total loan portfolio of $509,080,000 at December 31, 1998. The
increase in the loan portfolio was primarily the result of an emphasis placed on
commercial lending and leasing relationships and the acquisition of First
Lehigh.
The following table sets forth the composition of Patriot's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated:
AT DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Mortgage Portfolio:
Residential mortgages............... $293,852 47.25% $300,232 58.73% $294,716 69.41%
Construction........................ 10,481 1.69 5,267 1.03 4,039 0.95
Consumer Portfolio:
Home equity......................... 69,785 11.22 64,807 12.67 75,439 17.77
Other consumer loans................ 9,081 1.46 4,336 0.85 3,909 0.92
Commercial Portfolio:
Commercial loans.................... 189,189 30.41 92,367 18.06 46,166 10.87
Commercial leases................... 57,808 9.29 44,301 8.66 334 0.08
-------- ------ -------- ------ -------- ------
Total loans, gross.................... 630,196 100.00% 511,310 100.00% 424,603 100.00%
Deferred loan fees.................. (2,136) (2,230) (2,394)
Allowance for credit losses......... (6,082) (4,087) (2,512)
-------- -------- --------
Total loans, net............ $621,978 $504,993 $419,697
======== ======== ========
18
21
AT DECEMBER 31,
-----------------------------------------
1996 1995
------------------- -------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
Mortgage Portfolio:
Residential mortgages.................................. $190,849 67.54% $131,352 66.86%
Construction........................................... 3,210 1.14 1,712 0.87
Consumer Portfolio:
Home equity............................................ 72,480 25.65 57,969 29.50
Other consumer loans................................... 2,546 0.90 2,159 1.10
Commercial Portfolio:
Commercial loans....................................... 13,491 4.77 3,288 1.67
Commercial leases...................................... -- -- -- --
-------- ------ -------- ------
Total loans, gross....................................... 282,576 100.00% 196,480 100.00%
Deferred loan fees..................................... (2,392) (2,230)
Allowance for credit losses............................ (1,830) (1,702)
-------- --------
Total loans, net............................... $278,354 $192,548
======== ========
19
22
The following table details Patriot's loan originations for the years
indicated:
FOR THE PERIOD ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Mortgage........................................... $113,928 $ 98,067 $143,864
Consumer........................................... 30,149 25,428 42,227
Commercial......................................... 132,364 67,204 46,665
Commercial Leases.................................. 40,147 6,202 397
-------- -------- --------
Total Originations................................. $316,588 $196,901 $233,153
======== ======== ========
LOAN MATURITY. The following table sets forth the maturity schedule for
Patriot's loan portfolio (excluding residential mortgages and consumer loans):
AMOUNTS AT DECEMBER 31, 1999, MATURING
---------------------------------------------------
AFTER ONE
YEAR
IN ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
----------- ---------- ---------- --------
(IN THOUSANDS)
Loan Maturity Schedule:
Commercial loans......................... $38,151 $111,907 $30,209 $180,267
Commercial leases........................ 19,547 37,791 470 57,808
Residential construction loans........... 10,228 -- 253 10,481
Other construction loans................. 6,528 1,987 407 8,922
------- -------- ------- --------
Total.......................... $74,454 $151,685 $31,339 $257,478
======= ======== ======= ========
Fixed rates.............................. $30,117 $105,030 $25,243 $160,390
Adjustable rates......................... 44,337 46,655 6,096 97,088
------- -------- ------- --------
Total.......................... $74,454 $151,685 $31,339 $257,478
======= ======== ======= ========
CREDIT QUALITY. Patriot's Asset Review and Credit Administration
Committees establish acceptable credit risks to be undertaken, the policies and
procedures to be used to control credit risk and the corrective actions to be
taken when credit challenges are encountered. These committees also review
credit quality on a monthly basis, classify assets in accordance with applicable
management guidelines and regulations, make recommendations to Patriot's Board
of Directors with regard to placing assets on non-accrual status, charge-offs
and write-downs and the appropriate level of credit reserves.
Patriot accrues interest on all loans until management determines that the
collection of interest is doubtful. In no event does Patriot continue accruing
interest on loans contractually past due 90 days or more. Upon discontinuance of
interest accrual, all unpaid accrued interest is reversed.
Patriot generally requires appraisals on an annual basis on foreclosed
properties. Patriot generally conducts inspections on foreclosed properties on
at least a quarterly basis.
At December 31, 1999 non-performing assets were $1,718,000 or 0.15% of
total assets compared to $1,127,000 or .11% of total assets at December 31,
1998. Patriot has controlled its level of non-performing assets by quickly
identifying problem assets and resolving them in an expedient manner. Patriot
had no restructured loans within the meaning of SFAS No. 15 and no potential
problem loans within the meaning of the Securities and Exchange Commission Guide
3 at December 31, 1999.
20
23
The following table sets forth information regarding non-performing assets:
AT DECEMBER 31,
--------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------- -------
(IN THOUSANDS)
Non-accrual loans:
Residential mortgages................... $ 591 $ 494 $ 524 $ 411 $ 494
Commercial.............................. 189 159 128 6 10
Commercial leases....................... 56 75 -- -- --
Home equity and consumer................ 373 212 125 151 77
------ ------ ------ ------- -------
Total non-accrual loans greater than 90
days.................................. 1,209 940 777 568 581
------ ------ ------ ------- -------
Residential mortgages................... 242 98 328 -- --
Home equity and consumer................ 74 31 7 -- --
------ ------ ------ ------- -------
Total non-accrual loans less than 90
days.................................. 316 129 335 -- --
------ ------ ------ ------- -------
Total non-performing loans.............. 1,525 1,069 1,112 568 581
REO..................................... 193 58 162 74 195
------ ------ ------ ------- -------
Total non-performing assets............. $1,718 $1,127 $1,274 $ 642 $ 776
====== ====== ====== ======= =======
Allowance for credit losses as a percent
of loans receivable................... .96% .79% .59% .65% .88%
Allowance for credit losses as a percent
of total non-performing loans......... 354.02 362.63 225.90 321.94 292.94
Non-performing loans as a percent of
total loans receivable................ .24 .21 .26 .20 .30
Non-performing assets as a percent of
total assets.......................... .15 .11 .15 .12 .29
ALLOWANCE FOR CREDIT LOSSES. The adequacy of the allowance for credit
losses is based on management's evaluation of the risks inherent in its loan and
lease portfolio and the general economy. Management makes a quarterly
determination as to an appropriate provision from earnings necessary to maintain
an allowance for credit losses that is adequate to cover estimated losses with
respect to loans and leases receivable which are deemed probable and estimable
based on information currently known to management. The amount charged to
earnings is based upon several factors, including a continuing review of
delinquent, classified and non-accrual loans and leases, large loans and leases,
and overall portfolio quality, regular examination and review of the loan
portfolio by regulatory authorities, analytical review of loan and lease
charge-off experience, delinquency rates, other relevant historical and peer
statistical ratios, and management's judgment with respect to local and general
economic conditions and their impact on the existing loan and lease portfolio.
Although management believes the allowance is adequate to protect against future
losses arising out of its existing loan and lease portfolio, actual losses are
dependent on future events and, as such, further additions to the allowance may
be necessary. Patriot will continue to monitor and modify its allowance for
credit losses as conditions dictate. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review Patriot's
allowance for credit losses. Such agencies may require the company to make
additional provisions for estimated credit losses based upon their judgments
about information available to them at the time of their examination.
During 1999 Patriot's loan and lease portfolio grew from $509,080,000 at
December 31, 1998, to $628,060,000. Almost all of this growth was in Patriot's
commercial loan and lease portfolio. Management deemed it appropriate to add
$1,200,000 to Patriot's allowance to adequately address the risk inherent in
Patriot's portfolio. Included in Patriot's loan growth was the loan portfolio
acquired in the First Lehigh acquisition and its related credit reserves of
$1,756,000. Management deemed this acquired reserve to be adequate and
consistent with its reserving methodology and philosophy.
21
24
The following table sets forth management's allocation of the allowance for
credit losses at the dates indicated:
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- --------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
Residential mortgages...... $1,509 24.81% 48.52% $1,273 31.15% 59.76% $1,253 49.88% 72.24%
Commercial loans and
leases................... 3,605 59.27 39.02 2,131 52.13 26.72 629 25.04 8.70
Home equity and consumer... 968 15.92 12.46 683 16.72 13.52 630 25.08 19.06
------ ------ ------ ------ ------ ------ ------ ------ ------
Total valuation
allowances............... $6,082 100.00% 100.00% $4,087 100.00% 100.00% $2,512 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
AT DECEMBER 31,
-------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
Residential mortgages.................................... $ 895 48.87% 69.27% $1,265 74.32% 67.73%
Commercial loans and leases.............................. 261 14.28 4.18 33 1.94 1.67
Home equity and consumer................................. 674 36.85 26.55 404 23.74 30.60
------ ------ ------ ------ ------ ------
Total valuation allowances............................... $1,830 100.00% 100.00% $1,702 100.00% 100.00%
====== ====== ====== ====== ====== ======
22
25
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at December 31, 1999,
were $8,161,000 compared to $30,487,000 at December 31, 1998. The decrease in
cash and cash equivalents was primarily due to a lower level of receipts of
principal repayments on mortgage-backed securities.
SECURITIES. Investment securities consist of US Treasury and government
agency securities, corporate debt and equity securities. Mortgage-backed
securities consist of securities generally insured by either the FHLMC, FNMA or
the Government National Mortgage Association (GNMA). Collateralized mortgage
obligations consist of securities issued by the FHLMC, FNMA or private issuers.
Total investment and mortgage-backed securities at December 31, 1999, were
$435,381,000 compared to $416,019,000 at December 31, 1998. The increase in
investment and mortgage-backed securities was primarily due to investments
acquired from First Lehigh. During 1999 Patriot transferred $366,628,000 in
investment securities, principally consisting of agency, mortgage-backed and CMO
securities, from an available for sale classification to held to maturity to
reflect Patriot's intentions to hold the securities to maturity. The transaction
recorded an unrealized loss on the transferred securities of $4,758,000 net of
tax, which continues to be reported as a component of accumulated other
comprehensive income (loss) and is being amortized over the remaining lives of
those securities.
The following table sets forth certain information regarding the amortized
cost and market value of investment and mortgage-backed securities at the dates
indicated:
AT DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
US Treasury and
government agency
securities.......... $ -- $ -- $ 40,568 $ 40,699 $ 19,884 $ 20,086
Corporate
securities.......... 17,361 16,663 19,102 20,715 17,493 18,767
Equity securities..... 72,106 70,671 60,823 63,979 48,168 52,553
Mortgage-backed
securities:
FHLMC................. -- -- 6,122 6,157 11,287 11,501
FNMA.................. -- -- 43,554 43,470 20,163 20,254
GNMA.................. -- -- 7,114 7,206 12,592 12,871
Collateralized mortgage
obligations:
FHLMC................. -- -- 104,751 106,256 75,085 75,784
FNMA.................. -- -- 89,855 89,294 118,778 118,844
Other................. -- -- 8,560 8,604 12,522 12,465
-------- -------- -------- -------- -------- --------
Total investment
and
mortgage-backed
securities
available for
sale........... $ 89,467 $ 87,334 $380,449 $386,380 $335,972 $343,125
======== ======== ======== ======== ======== ========
HELD TO MATURITY:
Investment securities:
US Treasury and
government agency
securities.......... $ 74,246 $ 66,791 $ 900 $ 908 $ 1,035 $ 1,034
Corporate
securities.......... 1,501 1,500 1,502 1,560 1,502 1,544
23
26
AT DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
Mortgage-backed
securities:
FHLMC................. 4,272 4,292 -- -- -- --
FNMA.................. 54,809 51,673 -- -- -- --
GNMA.................. 4,528 4,569 -- -- -- --
Collateralized mortgage
obligations:
FHLMC................. 114,178 110,809 1,176 1,190 1,801 1,804
FNMA.................. 82,489 79,215 7,509 7,517 9,775 9,887
Other................. 9,732 9,700 18,552 18,734 48,403 48,548
CMBS.................. 2,292 2,205 -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment
and
mortgage-backed
securities held
to maturity.... $348,047 $330,754 $ 29,639 $ 29,909 $ 62,516 $ 62,817
======== ======== ======== ======== ======== ========
The following table sets forth certain information regarding the carrying
value, weighted average yield and contractual maturities of Patriot's investment
and mortgage-backed securities as of December 31, 1999.
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- --------- ---------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
Corporate securities................. $ 300 6.09% $ 884 6.69% $ 274 6.11%
Equity securities.................... -- -- -- -- -- --
------ ---- ------- ---- ------- ----
Total available for sale..... $ 300 6.09% $ 884 6.69% $ 274 6.11%
====== ==== ======= ==== ======= ====
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government
securities........................ $ 650 5.60% $ 3,023 5.62% $11,932 6.43%
Corporate securities................. 500 6.64 1,001 7.06 -- --
Mortgage-backed securities:
FHLMC................................ 195 6.31 1,667 6.56 534 6.06
FNMA................................. 2,345 5.70 6,268 6.31 8,818 6.32
GNMA................................. 179 6.38 393 6.36 657 6.40
Collateralized mortgage obligations:
FHLMC................................ 1,786 6.57 8,519 6.56 13,252 6.57
FNMA................................. 1,112 6.50 5,790 6.50 9,919 6.48
Other................................ 188 6.89 1,005 6.91 1,716 6.91
CMBS................................. 105 7.14 1,021 7.14 1,166 7.14
------ ---- ------- ---- ------- ----
Total held to maturity....... $7,060 6.19% $28,687 6.44% $47,994 6.49%
====== ==== ======= ==== ======= ====
24
27
MORE THAN TEN YEARS NO STATED MATURITY TOTAL
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
Corporate securities............... $ 15,205 8.92% $ -- --% $ 16,663 8.70%
Equity securities.................. -- -- 70,671 6.15 70,671 6.15
-------- ---- ------- ---- -------- ----
Total available for sale... $ 15,205 8.92% $70,671 6.15% $ 87,334 6.63%
======== ==== ======= ==== ======== ====
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government
securities...................... $ 58,641 6.73% $ -- --% $ 74,246 6.63%
Corporate securities............... -- -- -- -- 1,501 6.92
Mortgage-backed securities:
FHLMC.............................. 1,876 5.96 4,272 6.22
FNMA............................... 37,378 6.48 54,809 6.40
GNMA............................... 3,299 6.37 4,528 6.37
Collateralized mortgage obligations:
FHLMC.............................. 90,621 6.62 -- -- 114,178 6.61
FNMA............................... 65,668 6.48 -- -- 82,489 6.48
Other.............................. 6,823 6.88 -- -- 9,732 6.89
CMBS............................... -- -- -- -- 2,292 7.14
-------- ---- ------- ---- -------- ----
Total held to maturity..... $264,306 6.59% $ -- --% $348,047 6.55%
======== ==== ======= ==== ======== ====
Investments in equity securities that have readily determinable fair values
and all investments in debt securities are classified as either held to maturity
and reported at amortized cost or available for sale and reported at fair value
with unrealized gains and losses reported in a separate component of
stockholders' equity, or trading securities and reported at fair value with
unrealized gains and losses included in earnings.
The following table represents the securities of single issuers (other than
obligations of the United States and its political subdivisions, agencies and
corporations) having an aggregate book value in excess of 10% of Patriot's
stockholder's equity which were held at December 31, 1999:
AT DECEMBER 31, 1999
----------------------------
ISSUER CARRYING VALUE FAIR VALUE
- ------ -------------- ----------
(IN THOUSANDS)
FHLMC Preferred Stock............................... $44,966 $44,612
FHLB Stock.......................................... $20,835 $20,835
OTHER ASSETS. Premises and equipment at December 31, 1999 were $11,376,000
compared to $10,259,000 at December 31, 1998. The increase was due to the First
Lehigh acquisition and continued investments in technology offset by the sale of
office sites amounting to $5,137,000 in a sale leaseback transaction. Accrued
interest receivable at December 31, 1999 was $4,845,000 compared to $4,114,000
at December 31, 1998. The increase is associated with growth in the balance
sheet from the First Lehigh acquisition and continued commercial loan and lease
growth. Cash surrender value life insurance was $15,700,000 at December 31,
1999, this reflects Patriot's purchase of a BOLI (Bank owned life insurance)
during 1999. Goodwill and other intangibles were $14,189,000 at December 31,
1999 compared to $2,267,000 at December 31, 1998, this increase resulted from
the goodwill recognized in connection with the acquisition of First Lehigh.
Other assets at December 31, 1999 were $12,648,000 compared to $6,988,000 at
December 31, 1998. The increase is to changes in the deferred tax accounts
related to the balance of the accumulated other comprehensive income (loss) at
December 31, 1999.
25
28
DEPOSITS. Deposits are generally attracted from within Patriot's primary
market area through the offering of various deposit instruments, including
checking accounts, money market accounts, savings accounts, certificates of
deposit and retirement savings plans. Patriot also solicits jumbo deposits from
various sources.
Total deposits at December 31, 1999 were $502,002,000 compared to
$377,796,000 at December 31, 1998. Of that increase, $89,000,000 was the result
of the First Lehigh acquisition and $17,000,000 came from aggressive marketing
of money market and other transaction-based deposit accounts. The remaining
$18,000,000 of that increase came from Patriot's jumbo deposit program. Patriot
uses jumbo deposits as an alternative to borrowings.
The following table sets forth the distribution of average deposit accounts
for the periods indicated and the weighted average yield on each category of
deposit presented:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Money market deposits.... $ 86,152 18.37% 4.07% $ 62,749 17.91% 4.45% $ 42,425 15.38% 4.29%
Passbook deposits........ 39,654 8.46% 2.47 23,772 6.79 2.42 27,149 9.84 2.61
NOW deposits............. 34,294 7.31% 0.76 21,452 6.12 0.56 18,399 6.67 0.55
Demand deposits.......... 19,675 4.20% 0.00 8,408 2.40 0.00 5,929 2.15 0.00
Retail certificates of
deposit................ 179,542 38.30% 5.27 130,858 37.37 5.78 140,432 50.92 5.77
-------- ------ ----- -------- ------ ---- -------- ------ ----
Total retail deposits.... 359,317 76.64 3.95 247,239 70.59 4.47 234,334 84.96 4.58
Jumbo certificates of
deposit................ 109,497 23.36 5.78 103,023 29.41 6.15 41,477 15.04 6.44
-------- ------ ----- -------- ------ ---- -------- ------ ----
Total
deposits...... $468,814 100.00% 4.38% $350,262 100.00% 4.96% $275,811 100.00% 4.86%
======== ====== ===== ======== ====== ==== ======== ====== ====
At December 31, 1999, the Company had $136,113,000 in certificate of
deposit accounts in amounts of $100,000 or more maturing as follows:
Three months or less........................................ $ 60,362
Over three through six months............................... 39,231
Over six through 12 months.................................. 6,183
Over 12 months.............................................. 30,337
--------
Total............................................. $136,113
========
BORROWINGS. Patriot utilizes borrowings as a source of funds for its
growth strategy and its asset/liability management. Patriot is eligible to
obtain advances from the Federal Home Loan Bank (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. 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.
Patriot also uses repurchase agreements as a funding source. Repurchase
agreements are generally short-term obligations collateralized by government
agency and other securities.
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The following table presents certain information regarding borrowed funds:
AT DECEMBER 31,
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
FHLB advances.................. $412,692 5.28% $360,198 5.25% $275,200 5.78%
Repurchase Agreements.......... 137,103 5.36 170,123 5.43 214,684 5.89
Trust Preferred................ 19,000 10.30 19,000 10.30 19,000 10.80
-------- ----- -------- ----- -------- -----
Total borrowings
outstanding........ $568,795 5.47% $549,321 5.48% $508,884 6.01%
======== ===== ======== ===== ======== =====
Short-term (less than 1
year)........................ $236,206 5.50% $235,123 5.47% $385,684 5.84%
Long-term (over 1 year)........ 332,589 5.44 314,198 5.49 123,200 6.55
-------- ----- -------- ----- -------- -----
Total borrowings
outstanding........ $568,795 5.46% $549,321 5.48% $508,884 6.01%
======== ===== ======== ===== ======== =====
STOCKHOLDERS' EQUITY. Total stockholders' equity was $49,768,000 at
December 31, 1999 compared to $42,260,000 at December 31, 1998. The increase was
a result of the issuance of stock related to the First Lehigh acquisition and
net income, offset by repurchases of common stock, cash dividends paid and a
decrease in the net unrealized gain on investment and mortgage-backed securities
available for sale.
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 1999, significant liquidity was provided by financing activities,
particularly short-term FHLB advances and deposits. Maturities of investment and
mortgage-backed securities also provided significant liquidity during 1999. The
funds provided by these activities were invested in new loans and used to fund
the repurchase of Patriot common stock.
At December 31, 1999, Patriot had outstanding loan commitments of
$76,346,000. Patriot anticipates that it will have sufficient funds available to
meet its loan commitments. Certificates of deposit which are scheduled to mature
in one year or less from December 31, 1999 totaled $222,399,000. Based upon
historical experience, Patriot expects that substantially all of the maturing
certificates of deposit will be retained at maturity.
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, a Tier 1 capital ratio of not less than 4% of
risk-adjusted assets, and a minimum risk-based total 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, 1999, Patriot Bank's and Patriot Bank Corp.'s capital ratios exceeded all
requirements to be considered well capitalized. The following
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30
table sets forth the capital ratios of Patriot Bank Corp., Patriot Bank and the
current regulatory requirements at December 31, 1999:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION
---------------- ------------------ ------------------
AS OF DECEMBER 31, 1999 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------- ------- ----- -------- ------ -------- ------
Total capital (to
risk-weighted assets)
Patriot Bank Corp. ........... $65,849 10.46% $50,346 8% $62,932 10%
Patriot Bank.................. 69,299 10.95% 50,621 8% 63,277 10%
Tier I capital (to
risk-weighted assets)
Patriot Bank Corp. ........... 59,085 9.39% 25,173 4% 37,759 6%
Patriot Bank.................. 63,217 9.99% 25,310 4% 37,965 6%
Tier I capital (to average
assets)
Patriot Bank Corp. ........... 59,085 5.45% 43,334 4% 54,168 5%
Patriot Bank.................. 63,217 6.55% 38,601 4% 48,251 5%
MANAGEMENT OF INTEREST RATE RISK. The principal objective of Patriot's
interest rate risk management function is to evaluate the interest rate risk
included in certain on and off balance sheet accounts, determine the level of
risk appropriate given Patriot's business focus, operating environment, capital
and liquidity requirements and performance objectives, and manage the risk
consistent with Board approved guidelines. Through such management, Patriot
seeks to reduce the vulnerability of its net interest income to changes in
interest rates. Patriot monitors its interest rate risk as such risk relates to
its operating strategies. Patriot's Board of Directors has established an
Asset/Liability Committee comprised of senior management, which is responsible
for reviewing its asset/liability and interest rate position and making
decisions involving asset/liability considerations. The Asset/Liability
Committee meets regularly and reports trends and Patriot's interest rate risk
position to the Board of Directors.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, therefore, a negative gap theoretically would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap position would theoretically tend to result in an increase in net
interest income while a positive gap would tend to affect net interest income
adversely.
Patriot pursues several actions designed to control its level of interest
rate risk. These actions include increasing the percentage of the loan 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 December 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
$220,460,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 19.52%.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 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
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31
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 December 31, 1999, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three-month
period and subsequent selected time intervals. The loan amounts in the table
reflect principal balances expected to be repaid and/or repriced as a result of
contractual amortization and anticipated prepayments of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans.
AT DECEMBER 31, 1999
-----------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
3 MONTHS OR 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO MORE THAN
INTEREST-EARNING ASSETS(1): LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
- --------------------------- ----------- ----------- ----------- --------- ---------- --------- ----------
(IN THOUSANDS)
Interest earning deposits.... $ 3,242 $ -- $ -- $ -- $ -- $ -- $ 3,242
Investment and mortgage-
backed securities,
net(2)(5)................ 82,372 8,742 28,986 28,829 90,065 196,387 435,381
Loans receivable,
net(3)(5)................ 104,906 53,859 79,629 99,477 191,508 97,571 626,950
--------- --------- --------- --------- --------- -------- ----------
Total interest-earning
assets................. 190,520 62,601 108,615 128,306 281,573 293,958 1,065,573
Non-interest-earning
assets................... 63,870 63,870
--------- --------- --------- --------- --------- -------- ----------
Total assets............. 190,520 62,601 108,615 128,306 281,573 357,828 1,129,443
INTEREST-BEARING LIABILITIES:
Money market and passbook
savings accounts(6)...... 11,388 11,388 22,776 43,030 5,561 29,754 123,897
Demand and NOW accounts.... 1,635 1,635 3,270 6,540 13,079 39,237 65,396
Certificate accounts....... 89,512 51,517 81,370 71,271 15,221 3,818 312,709
Borrowings................. 257,705 -- 50,000 -- 216,897 44,193 568,795
--------- --------- --------- --------- --------- -------- ----------
Total interest-bearing
liabilities............ 360,350 64,540 157,416 120,841 250,758 117,002 1,070,797
Non-interest-bearing
liabilities.............. 8,878 8,878
Equity..................... 49,768 49,768
--------- --------- --------- --------- --------- -------- ----------
Total liabilities and
equity................. $ 360,240 $ 64,540 $ 157,416 $ 120,841 $ 250,758 $175,648 $1,129,443
--------- --------- --------- --------- --------- -------- ----------
Interest sensitivity
gap(4)................... (169,720) (1,939) (48,801) 7,465 30,815 182,180
Cumulative interest
sensitivity gap.......... (169,720) (171,659) (220,460) (212,994) (182,180) --
Cumulative interest
sensitivity gap as a
percent of total
assets................... -15.03% -15.20% -19.52% -18.86% -16.13% 0.00%
Cumulative interest-earning
assets as a percent of
cumulative
interest-bearing
liabilities.............. 52.89% 59.59% 62.13% 69.70% 80.90% 99.51%
- ---------------
(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 assets 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 estimated 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
6% to 22%.
(6) Money market savings accounts, passbook accounts and NOW accounts are
assumed to have decay rates between 5% and 40% annually.
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.
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32
Through the use of income simulation modeling Patriot has calculated an
estimate of net interest income for the year ending December 31, 2000, based
upon the assets, liabilities and off-balance sheet financial instruments in
existence at December 31, 1999. Patriot has also estimated changes to that
estimated net interest income based upon immediate and sustained changes in
interest rates ("rate shocks"). Rate shocks assume that all interest rates
increase or decrease on the first day of the period modeled and remain at that
level for the entire period. The following table reflects the estimated
percentage change in estimated net interest income for the year ending December
31, 2000.
RATE SHOCK TO
INTEREST RATES % CHANGE
- -------------- --------
+2% (12.4)%
+1% (5.8)%
-1% 6.5%
-2% 14.0%
Patriot's management believes that the assumptions utilized in evaluating
Patriot's estimated net interest income are reasonable; however, the interest
rate sensitivity of Patriot's assets, liabilities and off-balance sheet
financial instruments as well as the estimated effect of changes in interest
rates on estimated net interest income could vary substantially if different
assumptions are used or actual experience differs from the experience on which
the assumptions were based.
YEAR 2000 ISSUES
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use data for the year
2000 or later. These potential shortcomings could result in a system failure or
miscalculations causing disruptions of operations, 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. While lingering concern exists about certain dates during
the Year 2000, the most significant date, January 1, 2000, has passed without
incident. As of the date of this filing Patriot has not experienced any
significant Year 2000 problems relating to its internal or third party computer
systems. Nor has Patriot experienced any issues regarding ability of commercial
customers to meet debt service as a result of Year 2000 issues. Patriot incurred
costs related to year 2000 compliance and testing amounting to $144,000 and will
continue to monitor systems for problems in the future, however the costs
related to that process are not expected to be significant.
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33
QUARTERLY DATA
The following table presents selected quarterly consolidated financial
data:
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total interest income.......... $19,923 $19,104 $18,556 $17,961 $16,697 $15,720 $15,571 $15,119
Total interest expense......... 13,684 13,000 12,552 12,274 12,147 11,802 11,364 10,923
------- ------- ------- ------- ------- ------- ------- -------
Net interest income............ 6,239 6,104 6,004 5,687 4,550 3,918 4,207 4,196
Provision for credit losses.... 300 300 300 300 325 325 300 250
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after pro
vision for credit losses..... 5,939 5,804 5,704 5,387 4,225 3,593 3,907 3,946
Other income................... 1,836 1,774 1,202 1,134 836 841 1,532 664
Other expenses................. 10,820 5,761 5,092 4,729 3,672 3,111 4,131 3,353
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before income
taxes........................ (3,045) 1,817 1,814 1,792 1,389 1,323 1,308 1,257
Income tax provision........... (1,165) 410 443 488 341 283 300 298
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income.............. $(1,880) $ 1,407 $ 1,371 $ 1,304 $ 1,048 $ 1,040 $ 1,008 $ 959
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share..... $ (0.32) $ 0.24 $ 0.23 $ 0.22 $ 0.21 $ 0.20 $ 0.19 $ 0.18
Dividends per share............ $ .085 $ .083 $ .080 $ .078 $ .075 $ .070 $ .068 $ .066
Market Prices -- High.......... $ 11.00 $ 9.88 $ 9.50 $ 13.13 $ 13.06 $ 16.25 $ 17.25 $ 16.80
Low............ $ 8.19 $ 9.37 $ 9.38 $ 9.50 $ 9.00 $ 11.75 $ 13.20 $ 13.41
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
SUMMARY. For the year ended December 31, 1998, Patriot reported net income
of $4,055,000 or $.78 diluted earnings per share compared to net income of
$3,373,000 or $.59 diluted earnings per share for the tear ended December 31,
1997. This represents an increase in net income of 20% and an increase in
earnings per share of 32%. Return on average equity was 8.72% for 1997 compared
to 7.22% for 1997.
NET INTEREST INCOME. Net interest income for 1998 was $16,871,000 compared
to $14,442,000 in 1997. This represents an increase of 17% and is primarily due
to an increase in average balances. Average balances increased throughout 1998
as Patriot grew its assets to more fully utilize the capital raised in its stock
conversion. Much of Patriot's asset growth resulted from the origination of
commercial loans and the acquisition of KFL. Additionally, Patriot maintained a
larger investment and mortgage backed securities portfolio throughout 1998 than
in prior years. Patriots asset growth was funded through deposit growth and
borrowings.
As a result of the maintenance of a larger investment and mortgage-backed
securities portfolio, the funding of that portfolio with borrowings and jumbo
deposits, stock repurchases and the issuance of the trust preferred securities,
Patriot's net interest margin (net interest income on a fully tax equivalent
basis as a percentage of average interest-earning assets) decreased as
anticipated to 2.01% in 1998 from 2.14% in 1997.
Interest on loans was $35,242,000 for 1998 compared to $27,008,000 for
1997. The average balance of loans was $455,167,000 with an average yield of
7.74% compared to an average balance of $348,186,000 with an average yield of
7.76% in 1997. The increase in average balance was due to increased originations
of commercial loans and the acquisition of KFL. Also, the average balance of
mortgage loans was higher in 1998 than in 1997 because the mortgage loan
portfolio grew from $191,729,000 at December 31, 1996, to $298,755,000 at
December 31, 1997, whereas, in 1998 the mortgage loan portfolio was maintained
at just over $300,000,000 as most mortgage loan originations were sold. The
slight decrease in average yield is primarily a result of generally lower
interest rates.
31
34
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $27,521,000 for 1998 compared to $23,048,000 for 1997. The
average balance of the investment portfolio was $417,037,000 with an average
yield of 6.84% for 1998 compared to an average balance of $336,718,000 with an
average yield of 6.96% for 1997. The increase in average balance was due to the
purchase of investment and mortgage-backed securities. The decrease in average
yield is primarily a result of the effect of generally lower interest rates on
adjustable rate securities and new securities purchased.
Interest on total deposits was $17,382,000 for 1998 compared to $13,405,000
for 1997. The average balance of total deposits was $350,262,000 with an average
cost of 4.96% for 1998 compared to an average balance of $275,811,000 with an
average cost of 4.86% for 1997. The increase in average balance was the result
of aggressive marketing of core deposits (money market, checking and savings
accounts) and an increase in Patriot's jumbo deposit program. The increase in
average yield was the result of jumbo deposits comprising a higher percentage of
total deposits. Patriot uses jumbo deposits attracted through individuals and
brokerages as an alternative to borrowings. Total brokered deposits approximated
$103,023,000 and $41,477,000 at December 31, 1998 and 1997, respectively. The
average balance of retail deposits (total deposits less jumbo deposits) was
$247,239,000 with an average cost of 4.47% for 1998 compared to an average
balance of $234,334,000 with an average cost of 4.58% for 1997. The increase in
average balance and the decrease in cost of Patriot's retail deposits was the
result of emphasis placed on core deposits and less emphasis on retail
certificates of deposit.
Interest on borrowings was $28,851,000 in 1998 compared to $22,402,000 in
1997. The average balance of borrowings was $498,124,000 with an average cost of
5.79% for 1998 compared to an average balance of $382,357,000 with an average
cost of 5.86% for 1997. The increase in average balance was due to the use of
borrowings to fund the growth in the balance sheet. The decrease in average cost
was due to generally lower interest rates offsetting the cost of the trust
preferred securities.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was
$1,200,000 for 1998 compared to $915,000 for 1997. The increase in the provision
was a reflection of the growth of Patriot's loan portfolio and the higher
percentage of commercial loans and leases as a percentage of total loans.
NON-INTEREST INCOME. Total non-interest income was $3,873,000 for 1998
compared to $2,330,000 for 1997. The increase was primarily due to an increased
emphasis on recurring non-interest income including loan and deposit fees, ATM
fees and mortgage banking activities. Non-interest income in 1998 included
securities gains of $1,850,000. Non-interest income in 1997 included a gain of
$885,000 recognized from the deposit sale and securities gains of $438,000.
NON-INTEREST EXPENSE. Total non-interest expense was $14,267,000 for 1998
compared to $11,158,000 for 1997. Non-interest expense in 1998 included an
infrequent charge of $961,000 related to the retirement of Patriot's former
chairman. The increase in recurring 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. Patriot's efficiency ratio was
68.77% in 1998 compared to 66.52% in 1997.
INCOME TAX PROVISION. The income tax provision was $1,222,000 for 1998
compared to $1,326,000 for 1997. The effective tax rate was 23.16% for 1998
compared to 28.22% for 1997. The decrease in the effective tax rate is the
result of Patriot's tax planning strategies which include investments in
tax-exempt securities. Also, on May 22,1997, Patriot's primary operating
subsidiary, Patriot Bank, converted its banking charter from a federally
chartered savings bank to a state chartered commercial bank. Prior to Patriot
Bank's charter conversion, it was subject to state income taxes. Patriot Bank's
state tax expense is currently a franchise tax and is no longer based on income
and is considered a non-interest expense.
ITEM 7A 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, 2000
set forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Management of Interest Rate Risk" in Item 7 hereof, is
incorporated herein by reference.
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35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of Patriot Bank Corp. (the Corporation) is responsible for
the preparation, integrity, and fair presentation of its published financial
statements. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts that are based on judgments and estimates of management.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can only provide reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the degree of
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with generally accepted accounting
principles. This assessment was based on criteria for effective internal control
over financial reporting described in "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes the Corporation maintained an
effective internal control structure over financial data, presented in
accordance with generally accepted accounting principles.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Federal Deposit Insurance Corporation as safety and soundness laws and
regulations.
The Corporation assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that Patriot Bank Corp. complied, in all material respects,
with the designated laws and regulations related to safety and soundness as of
December 31, 1999.
/s/ Joseph W. Major /s/ James G. Blume
Joseph W. Major James G. Blume
Chief Executive Officer Chief Financial
Officer
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Patriot Bank Corp.:
We have audited the accompanying consolidated balance sheets of Patriot
Bank Corp. and Subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for the years 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. The accompanying consolidated financial statements of Patriot Bank
Corp. for the period ended December 31, 1997 were audited by other auditors
whose report thereon, dated January 21, 1998, expressed an unqualified opinion
on those statements.
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 1999 and 1998 financial statements referred to above
present fairly, in all material respects, the financial position of Patriot Bank
Corp. and subsidiaries as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP SIG
KPMG LLP
January 20, 2000
34
37
INDEPENDENT AUDITORS' REPORT
Board of Directors
Patriot Bank Corp.
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Patriot Bank Corp. and Subsidiaries for
the year ended December 31, 1997. These consolidated 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 consolidated results of its
operations and its cash flows of the Patriot Bank Corp. and Subsidiaries for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
- ----------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
January 21, 1998
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38
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1999 1998
---------- --------
ASSETS
Cash and due from banks..................................... $ 4,919 $ 1,044
Interest-earning deposits in other financial institutions... 3,242 29,443
---------- --------
Total cash and cash equivalents................... 8,161 30,487
Securities available for sale............................... 87,334 386,380
Securities held to maturity (market value of $330,754 and
$29,909 at December 31, 1999 and 1998, respectively)...... 348,047 29,639
Loans held for sale......................................... 4,972 5,576
Loans and leases receivable, net of allowances for credit
loss of $6,082 and $4,087 at December 31, 1999 and 1998,
respectively.............................................. 621,978 504,993
Premises and equipment, net................................. 11,376 10,259
Accrued interest receivable................................. 4,845 4,114
Real estate owned........................................... 193 58
Cash surrender value life insurance......................... 15,700 --
Goodwill and other intangible assets........................ 14,189 2,267
Other assets................................................ 12,648 6,988
---------- --------
Total assets...................................... $1,129,443 $980,761
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $ 502,002 $377,796
FHLB Advances............................................... 412,692 360,198
Securities sold under repurchase agreements................. 137,103 170,123
Advances from borrowers for taxes and insurance............. 4,761 4,747
Trust Preferred............................................. 19,000 19,000
Other liabilities........................................... 4,117 6,637
---------- --------
Total liabilities................................. 1,079,675 938,501
---------- --------
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, none issued at December 31, 1999 and 1998,
respectively.............................................. -- --
Common stock, no par value, 10,000,000 shares authorized,
6,555,490 and 7,034,927 shares issued at December 31, 1999
and 1998, respectively....................................
Additional paid-in capital.................................. 58,117 60,404
Common stock acquired by ESOP, 385,643 and 411,352 shares at
cost at December 31, 1999 and 1998, respectively.......... (2,141) (2,285)
Common stock acquired by MRP, 108,794 and 154,116 shares at
amortized cost at December 31, 1999 and 1998,
respectively.............................................. (638) (971)
Retained earnings........................................... 4,737 4,220
Treasury stock acquired, 369,991 and 2,122,309 shares at
cost at December 31, 1999 and 1998, respectively.......... (4,172) (22,963)
Accumulated other comprehensive (loss) income............... (6,135) 3,855
---------- --------
Total stockholders' equity........................ 49,768 42,260
---------- --------
Total liabilities and stockholders' equity........ $1,129,443 $980,761
========== ========
The accompanying notes are an integral part of these statements.
36
39
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
INTEREST INCOME
Interest-earning deposits................................. $ 298 $ 344 $ 193
Securities................................................ 29,656 27,521 23,048
Loans and leases.......................................... 45,590 35,242 27,008
------- ------- -------
Total interest income............................. 75,544 63,107 50,249
------- ------- -------
INTEREST EXPENSE
Deposits.................................................. 20,565 17,382 13,405
Short-term borrowings..................................... 13,343 16,379 15,648
Long-term borrowings...................................... 17,602 12,475 6,754
------- ------- -------
Total interest expense............................ 51,510 46,236 35,807
------- ------- -------
Net interest income before provision for credit losses.... 24,034 16,871 14,442
Provision for credit losses............................... 1,200 1,200 915
------- ------- -------
Net interest income after provision for credit losses..... 22,834 15,671 13,527
------- ------- -------
NON-INTEREST INCOME
Service fees, charges and other operating income.......... 4,443 1,406 830
Gain on the sale of branch deposits and facility.......... -- -- 885
(Loss) gain on sale of real estate owned.................. (3) 1 (9)
Gain on sale of securities available for sale............. 507 1,850 438
Mortgage banking activities............................... 998 616 186
------- ------- -------
Total non-interest income......................... 5,945 3,873 2,330
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits............................ 10,606 8,741 6,741
Occupancy and equipment................................... 4,108 2,187 1,952
Professional services..................................... 787 634 258
Federal deposit insurance premiums........................ 225 196 132
Information Services...................................... 179 146 167
Advertising............................................... 817 552 551
Deposit processing........................................ 605 388 307
Goodwill amortization..................................... 992 7 --
Office supplies & postage................................. 641 367 306
MAC expense............................................... 377 226 141
Internet initiatives (BankZip.com)........................ 5,067 -- --
Other operating expenses.................................. 1,998 823 603
------- ------- -------
Total non-interest expense........................ 26,402 14,267 11,158
------- ------- -------
Income before income taxes............................. 2,377 5,277 4,699
Income taxes.............................................. 177 1,222 1,326
------- ------- -------
Net income............................................. $ 2,200 $ 4,055 $ 3,373
======= ======= =======
Earning per share -- basic................................ $ 0.38 $ 0.83 $ 0.62
======= ======= =======
Earnings per share -- diluted............................. $ 0.37 $ 0.78 $ 0.59
======= ======= =======
Dividends per share....................................... $ 0.32 $ 0.28 $ 0.24
======= ======= =======
- ---------------
(1) All per share data restated to reflect stock splits and dividends.
The accompanying notes are an integral part of these statements.
37
40
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
NUMBER OF PAID-IN RETAINED TREASURY COMPREHENSIVE
SHARES(1) CAPITAL ESOP MRP EARNINGS STOCK INCOME TOTAL
--------- ---------- ------- -------- -------- -------- ------------- --------
BALANCE AT JANUARY 1, 1997...... 4,985 $49,061 $(2,571) $ (1,538) $ 10,357 $ (2,517) $ 325 $ 53,117
------ ------- ------- -------- -------- -------- ------- --------
Common stock issued............. 6 102 -- -- -- -- -- 102
Common stock acquired by MRP.... (6) -- -- (102) -- -- -- (102)
Treasury stock purchased........ (1,037) -- -- -- -- (13,554) -- (13,554)
Stock dividend 20%.............. 789 10,654 -- -- (10,654) -- -- --
Release and amortization of
MRP........................... 48 -- -- 355 -- -- -- 355
Release of ESOP shares.......... 26 165 143 -- -- -- -- 308
Change in unrealized gains on
securities available for sale,
net of taxes.................. -- -- -- -- -- -- 4,330 4,330
Net income...................... -- -- -- -- 3,373 -- -- 3,373
Cash dividends paid............. -- -- -- -- (1,396) -- -- (1,396)
------ ------- ------- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1997.... 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............. 3 26 -- -- -- -- -- 26
Common stock acquired by MRP.... (3) -- -- (26) -- -- -- (26)
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
Release and amortization of
MRP........................... 48 53 -- 359 -- -- -- 412
Release of ESOP shares.......... 26 118 144 -- -- -- -- 262
Purchase ESPP shares............ 7 68 68
Change in unrealized gains on
securities available for sale,
net of taxes.................. -- -- -- -- -- -- (9,990) (9,990)
Net income...................... -- -- -- -- 2,200 -- -- 2,200
Cash dividends paid............. -- -- -- -- (1,683) -- -- (1,683)
------ ------- ------- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1999.... 5,691 $58,117 $(2,141) $ (638) $ 4,737 $ (4,172) $(6,135) $ 49,768
====== ======= ======= ======== ======== ======== ======= ========
- ---------------
(1) All per share data restated to reflect stock split.
The accompanying notes are an integral part of these statements.
38
41
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net Income................................................ $ 2,200 $ 4,055 $ 3,373
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization and accretion of Deferred loan origination
fees.................................................. 70 (126) (145)
Premiums and discounts................................ (2,836) (1,228) (94)
MRP shares............................................ 412 516 355
Goodwill.............................................. 992 7
Provision for possible loan losses...................... 1,200 1,200 915
Release of ESOP shares.................................. 262 363 308
Gain on sale of investment securities................... (507) (1,850) (438)
Loss (gain) on sale of real estate owned................ 3 (1) 9
Write down of real estate owned......................... -- 97 --
Gain on sale of deposits................................ -- -- (885)
Depreciation of premises and equipment.................. 1,751 1,027 762
Mortgage loans originated for sale...................... (63,796) (42,988) (13,753)
Mortgage loans sold..................................... 64,400 41,507 9,658
(Increase) decrease in deferred income taxes............ (1,390) 315 (139)
Increase in cash surrender value of life insurance...... (653)
Decrease (increase) in accrued interest receivable...... 4 5 (1,470)
Decrease (increase) in other assets..................... 543 (5,723) (1,134)
(Decrease) increase in other liabilities................ (3,548) (1,154) 1,563
--------- --------- ---------
Net cash used by operating activities................. (893) (3,978) (1,115)
--------- --------- ---------
INVESTING ACTIVITIES
Loan originations & principal payments on loans, net...... (69,698) (45,381) (142,265)
Proceeds from the sale of securities -- available for
sale.................................................... 27,478 8,475 4,280
Proceeds from the maturity of securities -- available for
sale.................................................... 43,030 167,371 26,740
Proceeds from the maturity of securities -- held to
maturity................................................ 61,276 32,877 10,194
Purchase of securities -- available for sale.............. (107,502) (216,846) (208,017)
Purchase of securities -- held to maturity................ (13,056) -- --
Purchase of cash surrender value of life insurance........ (15,047) -- --
Proceeds from sale of real estate owned................... 476 83 50
Cash received in (paid for) business combinations......... 9,769 (6,585)
Purchase of premises and equipment........................ (4,235) (2,496) (1,880)
Proceeds from sale of premises and equipment.............. 5,644 -- 300
--------- --------- ---------
Net cash used by investing activities................. (61,865) (62,502) (310,598)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase in deposits.................................. 29,437 87,896 60,361
Decrease from sale of deposits............................ -- -- (9,462)
Proceeds from (repayment of) short term borrowings........ 22,582 (169,561) 171,089
Proceeds from long term borrowings........................ 95,000 226,415 87,200
Repayment of long term borrowings......................... (100,108) (50,002) --
Net proceeds from trust preferred stock................... -- -- 19,000
Increase in advances from borrowers for taxes and
insurance............................................... 12 1,612 636
Cash paid for dividends................................... (1,683) (1,515) (1,396)
Purchase of treasury stock................................ (4,808) (6,892) (13,554)
--------- --------- ---------
Net cash provided by financing activities............. 40,432 87,953 313,874
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents......................................... (22,326) 21,473 2,161
Cash and cash equivalents at beginning of year.............. 30,487 9,014 6,853
Cash and cash equivalents at end of year.................... $ 8,161 $ 30,487 $ 9,014
========= ========= =========
Supplemental disclosures
Cash paid for interest on deposits........................ $ 20,233 $ 17,367 $ 13,368
Cash paid for income taxes................................ $ 1,193 $ 937 $ 1,982
Transfers from loans to real estate owned................. $ 603 $ 75 $ 167
Transfer securities from available for sale to held to
maturity................................................ $ 366,628 -- --
Non-cash assets received in business combinations......... $ 94,302 -- --
The accompanying notes are an integral part of these statements.
39
42
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
Net Income.................................................. $ 2,200 $4,055 $3,373
Other comprehensive income, net of tax......................
Unrealized gains (losses) on securities...................
Unrealized holding gains (losses) arising during the
period............................................... (9,655) 421 4,619
Less: Reclassification adjustment for gains included in
net income........................................... (335) (1,221) (289)
------- ------ ------
Comprehensive income (loss)................................. $(7,790) $3,255 $7,703
======= ====== ======
The accompanying notes are an integral part of these statements.
40
43
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
Patriot Bank Corp. and Subsidiaries (Patriot). Such accounting and reporting
policies conform with generally accounting principles and predominant practices
within the financial institution industry.
Patriot, through its subsidiaries, offers a broad range of lending,
depository and related financial services to small businesses and consumers
primarily through 18 community banking offices located in Berks, Chester,
Montgomery, Northampton and Lehigh counties in Pennsylvania and through direct
mail and various electronic and telephonic means.
Patriot Bank principally competes with other banking and financial
institutions in its primary market communities. Commercial banks, savings banks,
savings and loan associations, credit unions, brokerage firms and money market
funds actively compete for deposits and loans. Such institutions, as well as
consumer finance and insurance companies, may be considered competitors of
Patriot with respect to one or more of the services they render.
a. BASIS OF FINANCIAL PRESENTATION
The accompanying financial statements include the accounts of the parent
company, Patriot Bank Corp. and its subsidiaries: Patriot Bank and its
subsidiaries, Marathon Management Company, Patriot Investment & Insurance
Company, Patriot Commercial Leasing Company, Inc., and Patriot Investment
Company. All material intercompany balances and transactions have been
eliminated in consolidation. In preparing the consolidated financial statements,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates. The principal estimates that are particularly susceptible to
significant change in the near term relate to the allowance for credit losses,
mortgage servicing rights, investment securities available for sale, and other
real estate owned.
The evaluation of the adequacy of the allowance for credit losses includes,
among other factors, an analysis of historical loss rates, by category, applied
to current loan and lease totals. However, actual losses may be higher or lower
than historical trends, which vary. Actual losses on specified problem loans and
leases, which also are provided for in the evaluation, may vary from estimated
loss percentages, which are established based upon a limited number of potential
loss classifications.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement as amended by SFAS No. 137
in June 1999 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. SFAS No. 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. 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.
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 securitization of a mortgage loan held for sale, an entity engaged in
mortgage
41
44
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
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.
b. CASH AND CASH DUE FROM BANKS
Cash and cash equivalents are defined as cash on hand, cash items in
process of collection and amounts due from banks. Interest-earning deposits
consist of deposit accounts with the Federal Home Loan Bank (FHLB) of Pittsburgh
and deposits with other financial institutions generally having maturities of
three months or less.
c. SECURITIES
Securities for which Patriot has the intent and ability to hold to maturity
are classified as held to maturity and reported at amortized cost. Securities
expected to be held for an indefinite period of time are classified as available
for sale and are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, net of estimated
income taxes. Securities that are bought and held principally for the purpose of
selling are classified as trading and reported at fair value, with unrealized
gains and losses included in earnings. Patriot has no securities held for
trading. Gains or losses on the sales of securities are recognized at trade date
utilizing the specific identification method. As mentioned in Note 4, Patriot
transferred certain securities available for sale to securities held to
maturity.
d. LOANS HELD FOR SALE
Loans held for resale consist of residential mortgage loans originated by
Patriot. They are recorded at the lower of cost or estimated fair value on an
aggregate basis.
e. LOANS AND LEASES AND ALLOWANCE FOR CREDIT LOSSES
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at unpaid principal
balances and net of deferred loan origination fees and discounts. Interest is
accrued and credited to operations based upon the principal amount of loans
outstanding. Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method over the contractual life of the loans,
adjusted for estimated prepayments based on Patriot's historical prepayment
experience.
Direct finance leases have terms 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 indirect costs, reduced by unearned lease income.
The lease residual values represent the 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 Patriot 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.
42
45
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
An allowance for credit losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks in the loan and lease portfolio. Management's periodic
evaluation of the adequacy of the allowance for credit losses is based upon
evaluation of individual loans and leases, the overall risk characteristics of
the various portfolio segments, past loss experience, current and projected
financial status and creditworthiness of its borrowers, the adequacy of
collateral, the level and nature of non-performing loans, current economic
conditions, the results of the most recent regulatory examination and other
relevant factors. This evaluation is inherently subjective. While management
uses the best information available to make such evaluations, future adjustments
to the allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In addition, various regulatory
agencies as an integral part of their examination process, periodically review
the allowance for credit losses. Such agencies may require Patriot to recognize
additions to the allowance for credit losses based on their judgments of
information which is available to them at the time of their examinations.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Impairment is based on the fair value of the collateral
when the creditor determines that foreclosure is probable.
Large groups of smaller-balance homogeneous loans are collectively
evaluated for impairment. Those loans include residential mortgage, home equity
and consumer loans. Patriot's impaired loans at and during the years ended
December 31, 1999, 1998 and 1997 were not significant.
Uncollectible interest on loans and leases that are contractually past due
ninety days or greater is charged off. Loans are returned to an accrual status
when payments become current and other factors indicating doubtful
collectibility cease to exist.
f. PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost less accumulated depreciation.
Depreciation is provided for by the straight-line method over the estimated
useful lives of the assets.
g. EMPLOYEE BENEFIT PLANS
Patriot has certain employee benefit plans covering substantially all
employees. Patriot accrues costs as incurred.
h. INCOME TAXES
Deferred income taxes are determined based on the differences between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when the differences reverse. Deferred
tax expense is the result of changes in deferred tax assets and liabilities.
i. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common shares by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Prior periods'
earnings per share calculations have been restated to reflect stock splits and
stock dividends.
43
46
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
j. GOODWILL
Goodwill represents the excess of the purchase price over the estimated
fair value of identifiable net assets acquired through purchase acquisitions and
is included in other assets. The amortization of goodwill is on a straight-line
basis over 15 years, which is the estimated period to be benefited.
k. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on net
income.
NOTE 2 -- BUSINESS COMBINATIONS
On January 22, 1999, Patriot completed the acquisition of First Lehigh
Corporation ("First Lehigh"), a commercial banking company with $104,478,000 in
total assets and $93,905,000 in total deposits. Patriot issued 1,640,000 shares
of common stock for all 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 are included in Patriot's consolidated statement of income from the date
of acquisition.
On June 28, 1999, the corporation acquired three offices of Ark Mortgage
Inc. The offices acquired were located in Fort Washington, Lancaster, and
Bethlehem, Pennsylvania. The purchase price was equal to $250,000 in cash less
certain profits on the acquired mortgage pipeline. The acquisition was accounted
for as a purchase and added approximately $240,000 of goodwill to Patriot's
balance sheet which will be amortized over a period of 4 years.
On November 6, 1998, Patriot completed its acquisition of Keystone
Financial Leasing Company (KFL). KFL is a small-ticket commercial leasing
company which had total assets of $43,327,000 including lease receivables of
$42,764,000 at the date of acquisition. KFL was purchased for $6,258,000 in cash
plus contingent consideration based upon future revenues of KFL. The acquisition
was accounted for as a purchase. Goodwill arising from the transaction totaled
$2,267,000.
NOTE 3 -- RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
Patriot is required to maintain certain average reserve balances as
established by the Federal Reserve Board. The amounts of those reserve balances
for the reserve computation periods which included December 31, 1999 and 1998,
were $1,556,000 and $905,000, respectively.
44
47
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
NOTE 4 -- SECURITIES
The amortized cost and estimated fair value of investment and
mortgage-backed securities are as follows:
1999
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
Corporate debt securities.......... $ 17,361 $ 73 $ 771 $ 16,663
FHLMC Preferred Stock.............. 44,966 797 1,151 44,612
FHLB Stock......................... 20,835 -- -- 20,835
Equity securities.................. 6,305 -- 1,081 5,224
-------- ------ ------- --------
Total securities available for
sale........................ $ 89,467 $ 870 $ 3,003 $ 87,334
======== ====== ======= ========
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government agency
securities....................... $ -- $ -- $ -- $ --
Corporate securities............... 1,501 -- 1 1,500
Mortgage-backed securities:
FHLMC.............................. 4,272 32 12 4,292
FNMA............................... 54,809 26 3,162 51,673
GNMA............................... 4,528 44 3 4,569
Collateralized mortgage obligations:
FHLMC.............................. 114,178 690 4,059 110,809
FNMA............................... 82,489 227 3,501 79,215
Other.............................. 9,732 -- 32 9,700
CMBS............................... 2,292 -- 87 2,205
-------- ------ ------- --------
Total securities held to
maturity.................... $348,047 $1,019 $18,312 $330,754
======== ====== ======= ========
During 1999 Patriot transferred $366,628,000 in investment securities,
principally consisting of agency, mortgage-backed and CMO securities, from an
available for sale classification to held to maturity to reflect Patriot's
intentions to hold the securities to maturity. Patriot recorded an unrealized
loss on the transferred securities of $4,758,000 net of tax, which continues to
be reported as a component of accumulated other comprehensive income and is
being amortized over the remaining lives of those securities.
1998
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
U.S. Treasury and government agency
securities....................... $ 40,568 $ 176 $ 45 $ 40,699
Corporate debt securities.......... 19,102 1,705 92 20,715
FHLMC Preferred Stock.............. 34,959 1,831 -- 36,790
45
48
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
1998
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
FHLB Stock......................... 18,607 -- -- 18,607
Equity securities.................. 7,257 1,528 203 8,582
Mortgage-backed securities:
FHLMC.............................. 6,122 52 17 6,157
FNMA............................... 43,554 171 255 43,470
GNMA............................... 7,114 97 5 7,206
Collateralized mortgage obligations:
FHLMC.............................. 104,751 1,505 -- 106,256
FNMA............................... 89,855 668 1,229 89,294
GE Capital Mortgage Services,
Inc.............................. 4,939 24 -- 4,963
Other.............................. 3,621 20 -- 3,641
-------- ------ ------ --------
Total securities available for
sale........................ $380,449 $7,777 $1,846 $386,380
======== ====== ====== ========
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government agency
securities....................... $ 900 $ 8 $ -- $ 908
Corporate debt securities.......... 1,502 58 -- 1,560
Collateralized mortgage obligations:
FHLMC.............................. 1,176 14 -- 1,190
FNMA............................... 7,509 8 -- 7,517
Other.............................. 18,552 185 3 18,734
-------- ------ ------ --------
Total securities held to
maturity.................... $ 29,639 $ 273 $ 3 $ 29,909
======== ====== ====== ========
The amortized cost and estimated fair value of investment and
mortgage-backed securities at December 31, 1999, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties:
HELD TO MATURITY AVAILABLE FOR SALE
--------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- -------
(IN THOUSANDS)
Securities
Due in one year or less.................. $ 7,060 $ 6,903 $ 301 $ 300
Due after one year through five years.... 28,687 27,977 898 884
Due after five years through ten years... 47,994 46,332 298 274
Due after ten years...................... 264,306 249,542 15,864 15,205
Equity securities........................ -- -- 72,106 70,671
-------- -------- ------- -------
Total securities............... $348,047 $330,754 $89,467 $87,334
======== ======== ======= =======
46
49
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
For purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the contractual maturities. The mortgage-backed securities may mature
earlier than their contractual maturities because of principal prepayments.
Proceeds from sales of investment and mortgage-backed securities and the
realized gross gains and losses from those sales are as follows:
AVAILABLE FOR SALE
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
Proceeds from sales..................................... $27,478 $8,475 $4,280
======= ====== ======
Gross realized gains.................................... 1,265 1,912 438
Gross realized losses................................... (758) (62) --
------- ------ ------
Net realized gain (loss)................................ $ 507 $1,850 $ 438
======= ====== ======
Securities having an aggregate amortized cost of $ 2,839,601, $3,043,388,
and $335,000 were pledged to secure public deposits at December 31, 1999, 1998
and 1997, respectively.
NOTE 5 -- LOANS AND LEASES RECEIVABLE
Loans and leases receivable are summarized as follows:
DECEMBER 31,
--------------------
1999 1998
-------- --------
Mortgage Portfolio
Residential mortgages....................................... $293,852 $300,232
Construction................................................ 10,481 5,267
Consumer Portfolio
Home equity................................................. 69,785 64,807
Other consumer loans........................................ 9,081 4,336
Commercial Portfolio
Commercial loans............................................ 189,189 92,367
Commercial leases........................................... 57,808 44,301
-------- --------
Total loans, gross.......................................... 630,196 511,310
Deferred loan origination fees.............................. (2,136) (2,230)
Allowance for credit losses................................. (6,082) (4,087)
-------- --------
Total loans, net.................................. $621,978 $504,993
======== ========
Patriot services a $37,823,000 portfolio of sold loans with corresponding
originated mortgage servicing rights totaling $369,000.
Patriot's loan portfolio is principally concentrated in the eastern
Pennsylvania and New Jersey geographic areas.
47
50
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
Activity in the allowance for credit losses is summarized as follows:
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
Balance at beginning of year............................ $ 4,087 $2,512 $1,830
Provision for credit losses............................. 1,200 1,200 915
Acquired allowance...................................... 1,756 878 --
Loans charged off....................................... (1,065) (512) (276)
Recoveries.............................................. 104 9 43
------- ------ ------
Balance at end of year.................................. $ 6,082 $4,087 $2,512
======= ====== ======
Patriot had impaired loans at December 31, 1999 of $262,000 compared to
$50,000 at December 31, 1998. The average recorded investment in impaired loans
was $159,000, $45,000, and $0 during 1999, 1998 and 1997, respectively. The
allowance for loan losses on impaired loans was $47,000 at December 31, 1999
compared to $9,000 at December 31, 1998. Patriot recognizes interest income on a
cash basis method on impaired loans. Total interest income recognized on
impaired loans totaled $12,000 and $5,000 for the years ended December 31, 1999
and 1998, respectively.
Non-performing loans, consisting of all loans 90 days past due and certain
other loans for which the accrual of interest has been discontinued, were
$1,525,000 and $1,069,000 at December 31, 1999 and 1998, respectively. Interest
income that would have been recorded under the original terms of such loans and
the interest income actually recognized are summarized as follows:
1999 1998 1997
---- ----- ----
(IN THOUSANDS)
Interest income that would have been recorded............... $155 $ 152 $ 71
Interest income recognized.................................. (95) (108) (21)
---- ----- ----
Interest income foregone.................................... $ 60 $ 44 $ 50
==== ===== ====
NOTE 6 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
ESTIMATED
USEFUL LIVES 1999 1998
------------ ------- -------
(IN THOUSANDS)
Land................................................. -- $ 890 $ 1,255
Buildings............................................ 30-40 4,255 6,927
Furniture, fixtures and equipment.................... 3-7 9,371 5,857
Leasehold improvements............................... 15 899 742
------- -------
15,415 14,781
Less accumulated depreciation........................ (4,039) (4,522)
------- -------
$11,376 $10,259
======= =======
48
51
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
NOTE 7 -- DEPOSITS
Deposits and their average rates are summarized as follows:
1999 1998
------------------- -------------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
-------- ------- -------- -------
(IN THOUSANDS)
Transaction deposits......................... $ 34,635 1.54% $ 23,961 0.58%
Money market deposits........................ 86,705 4.25% 74,613 4.36%
Savings deposits............................. 37,193 2.42% 22,416 2.39%
Non-interest-bearings demand deposits........ 30,760 0.00% 13,402 0.00%
-------- ----- -------- -----
Total transaction, money market, savings and
demand deposits............................ 189,293 2.70% 134,392 2.92%
Certificates of deposit...................... 312,709 5.37% 243,404 5.67%
-------- ----- -------- -----
Total.............................. $502,002 4.36% $377,796 4.69%
======== ===== ======== =====
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more totaled approximately $136,113,000 and $96,163,000 at
December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, Patriot
had one brokerage firm whose certificates of deposits totaled approximately
$120,159,000 and $80,831,000, respectively.
At December 31, 1999 scheduled maturities of certificates of deposit were
as follows:
2000.............................................. $222,399
2001.............................................. 71,271
2002.............................................. 4,001
2003.............................................. 2,629
2004.............................................. 8,591
Thereafter........................................ 3,818
--------
$312,709
========
NOTE 8 -- FHLB ADVANCES
A. SHORT TERM
Short-term advances from the FHLB have maturities of less than one year.
These advances are collateralized by FHLB stock and certain first mortgage loans
and mortgage-backed securities. Short-term borrowings are summarized as follows:
1999 1998 1997
-------- ------- --------
(IN THOUSANDS)
Balance at year-end................................. $172,500 $65,000 $171,000
Maximum amount outstanding at any month-end during
the period........................................ $172,500 $68,000 $213,000
Average amount outstanding during each period....... $ 93,825 $63,983 $155,042
Weighted average interest rate on short-term
borrowings........................................ 5.66% 5.81% 5.76%
49
52
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
b. LONG TERM
At December 31, 1999 and 1998, long-term advances from the FHLB totaling
$240,192,000 and $295,198,000 have maturities of one to eight years. These
advances are collateralized by FHLB stock and certain first mortgage loans and
mortgage-backed securities.
At December 31, 1999, the outstanding long-term borrowings mature as
follows (in thousands):
2001............................................... 0
2002............................................... 25,000
2003............................................... 95,000
2004............................................... 95,000
Thereafter......................................... 25,192
-------
240,192
=======
NOTE 9 -- SECURITIES SOLD UNDER SHORT-TERM REPURCHASE AGREEMENTS
Patriot enters into sales of securities under agreements to repurchase.
These transactions are reflected as a liability on the accompanying Consolidated
Balance Sheets. At December 31, 1999 and 1998, all of the agreements were to
repurchase identical securities.
Short-term repurchase agreements generally have maturities of less than one
year. These repurchase agreements are collateralized by certain mortgage-backed,
agency and corporate securities. Short-term repurchase agreements are summarized
as follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Balance at year-end................................ $137,103 $170,123 $214,684
Maximum amount outstanding at any month-end during
the period....................................... $170,124 $242,131 $221,962
Average amount outstanding during each period...... $151,092 $221,113 $115,593
Weighted average interest rate on short-term
borrowings....................................... 5.31% 5.73% 5.77%
Investment and mortgage-backed securities
underlying the agreements at year-end:
Carrying value................................... $146,646 $179,534 $227,629
Estimated fair value............................. $140,561 $179,534 $227,629
NOTE 10 -- TRUST PREFERRED SECURITIES
On May 29, 1997, Patriot issued $19,000,000 of 10.30% junior subordinated
debentures to Patriot Capital Trust I, a Delaware Business Trust, in which
Patriot owns all of the common equity. The trust issued $19,000,000 of preferred
securities to investors, secured by the junior subordinated debentures and the
guarantee of Patriot. Although the junior subordinated debentures will be
treated as debt of Patriot, they currently qualify for Tier I capital treatment,
subject to certain limitations, under risk-based capital guidelines of the
Federal Reserve. The Trust Preferred Securities are callable by the Company on
or after July 1, 2007, or earlier in the event the deduction of related interest
for federal income taxes is prohibited, treatment as Tier I capital is no longer
permitted or certain other contingencies arise. The Trust Preferred Securities
must be redeemed upon maturity of the debentures in 2027.
50
53
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
NOTE 11 -- BRANCH SALE
On November 21, 1997 Patriot completed the sale of a community banking
office and $10,350,000 of deposits from that office at a 7.5% premium. Patriot
recognized a gain in 1997 from the sale of the deposits and the physical
facility of approximately $885,000.
NOTE 12 -- INCOME TAXES
Applicable income taxes in the consolidated statements of income are as
follows:
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
Current
Federal............................................... $ 1,459 $ 892 $1,301
State................................................. 108 15 109
APIC from Stock Compensation.......................... -- -- 55
------- ------ ------
Total current........................................... 1,567 907 1,465
------- ------ ------
Deferred
Federal............................................... (1,336) 215 (39)
State................................................. (54) 100 (100)
------- ------ ------
Total deferred.......................................... (1,390) 315 (139)
------- ------ ------
Applicable income taxes................................. $ 177 $1,222 $1,326
======= ====== ======
Effective tax rate...................................... 7.4% 23.2% 28.2%
======= ====== ======
The income tax provision reconciled to taxes computed at the statutory
federal rate is as follows:
1999 1998 1997
----- ----- ----
Federal tax expense at statutory rate....................... 34.0% 34.0% 34.0%
Adjustment resulting from:
State tax, net of federal tax benefit..................... .7 -- .8
Bank owned life insurance................................. (9.7) -- --
Tax-exempt interest and dividend income................... (32.1) (12.2) (9.0)
ESOP expense.............................................. 1.4 1.4 1.2
Goodwill.................................................. 11.4 -- --
Other..................................................... 1.7 -- 1.2
----- ----- ----
Income taxes................................................ 7.4% 23.2% 28.2%
===== ===== ====
51
54
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
1999 1998
------ -------
(IN THOUSANDS)
Deferred tax assets
Deferred loan fees........................................ $ -- $ 92
Allowance for credit losses............................... 1,845 1,091
Uncollectible interest.................................... 25 15
Non-qualified pension plan................................ 8 12
MRP expense............................................... 70 66
Book loss on BankZip.com.................................. 1,725 --
Acquired NOL's............................................ 1,382 --
Reserves other............................................ 3 6
Intangibles amortization.................................. 183 --
Alternative minimum tax credits........................... 87 --
Unrealized loss on securities available for sale.......... 3,160 --
------ -------
Total deferred tax assets.............................. $8,488 $ 1,282
====== =======
Deferred tax liabilities
Depreciation.............................................. $ 616 $ 523
Discount accretion........................................ 286 217
Gain on sale of loans..................................... -- --
Originated mortgage servicing rights...................... 125 141
Bad debt recapture........................................ 377 19
Purchase accounting....................................... 232 --
Deferred loan costs....................................... 69 --
Unrealized gain on securities available for sale.......... -- 2,076
------ -------
Total deferred tax liabilities......................... 1,705 2,976
------ -------
Net deferred tax asset (liability)..................... $6,783 $(1,694)
====== =======
Based on management's evaluation of the likelihood of realization, no
valuation allowance has been provided against deferred tax benefits.
On January 22, 1999, Patriot acquired First Lehigh Corp. ("First Lehigh")
in a tax-free acquisition. As a result of this acquisition, Patriot was able to
record a net deferred tax asset of approximately $1,851,000, primarily due to
unrecorded net operating loss benefits of First Lehigh. For federal income tax
purposes, Patriot has approximately $4,063,000 of net operating loss
carryforwards resulting in a $1,382,000 deferred tax asset as of December 31,
1999. The net operating loss will begin to expire after the year ended December
31, 2010 if not utilized.
The Small Business Job Protection Act of 1996 ("Act"), enacted on August
20,1996, provides for the repeal of the tax bad debt deduction computed under
the percentage of taxable income method. The repeal of the use of this method is
effective for tax years beginning after December 31, 1995. Prior to the change
in law, the Bank had qualified under the provisions of the Internal Revenue Code
which permitted it to deduct from taxable income an allowance for bad debts
based on 8% of taxable income.
Upon repeal, the Bank is required to recapture into income, over a six-year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The base year
tax reserves, which may be subject to recapture if the Bank ceases to qualify as
a bank for federal income tax purposes are restricted with respect to certain
distributions. The Bank's total tax bad-debt
52
55
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
reserves at December 31, 1999, are approximately $4,089,000, of which $4,046,000
represents the base year amount and $43,000 is subject to recapture.
NOTE 13 -- EARNINGS PER SHARE
CAPITAL TRANSACTIONS. Patriot became a publicly owned company on December
1, 1995, when it issued 3,769,125 shares of common stock and raised net proceeds
of $36,652,000. On September 22, 1997, and November 21, 1996, Patriot paid
special 20% stock dividends. On May 14, 1998, Patriot distributed a 25% stock
split. For comparative purposes, per share amounts, as presented herein, have
been adjusted to reflect the stock split/dividends. During 1996, 1997, 1998 and
1999 Patriot repurchased 338,000, 1,246,000, 538,000 and 377,000 shares of its
common stock at a cost of $6,892,000, $13,554,000, $2,517,000 and $4,088,000,
respectively.
Patriot's calculation of earnings per share is as follows:
FOR YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Net Income available to common stockholders.... $2,200 5,731 $0.38
EFFECT OF DILUTIVE SECURITIES
Dilutive Options............................... -- 186 (.01)
------ ----- -----
DILUTED EPS
Net income available to common Stockholders
plus assumed conversions..................... $2,200 5,917 $0.37
====== ===== =====
FOR YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Net Income available to common Stockholders.... $4,055 4,916 $0.83
EFFECT OF DILUTIVE SECURITIES
Dilutive Options............................... -- 305 (.05)
------ ----- -----
DILUTED EPS
Net income available to common Stockholders
plus assumed conversions..................... $4,055 5,221 $0.78
====== ===== =====
FOR YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Net Income available to common stockholders.... $3,373 5,438 $0.62
EFFECT OF DILUTIVE SECURITIES
Dilutive Options............................... -- 255 (.03)
------ ----- -----
DILUTED EPS
Net income available to common Stockholders
plus assumed conversions..................... $3,373 5,693 $0.59
====== ===== =====
53
56
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
NOTE 14 -- SEGMENT REPORTING
The Company has three reportable segments: Patriot Bank, Patriot Commercial
Leasing Corporation and BankZip.Com. Patriot Bank operates a community banking
network with twenty-one community banking offices providing deposits and loan
services to customers. Patriot Commercial Leasing Corporation is a small ticket
leasing company headquartered in Exton PA. BankZip.com is a new internet
initiative launched in the third quarter of 1999.
BankZip.com will provide community banks with access to a quick,
cost-effective and proactive Internet strategy. The Company incurred costs of
$5,067,000 related to the BankZip.com initiative during 1999. On December 14,
1999 Patriot divested control of BankZip.com with a private placement to
individual investors. Patriot's ongoing relationship with BankZip.com consists
principally of convertible debentures, which entitle Patriot to acquire 5
million shares of BankZip.com at no further cost. At December 31, 1999, Patriot
Commercial Leasing Corporation had commitments to fund leases of $467,000 to
BankZip.com. In addition, Patriot Bank provided Accounting and Human Resource
functions on a outsourcing basis to BankZip.com for an immaterial fee.
AT OR FOR THE YEAR-ENDED DECEMBER 31, 1999
----------------------------------------------------
PATRIOT
COMMERCIAL
PATRIOT BANK LEASING BANKZIP.COM TOTAL
------------ ---------- ----------- ----------
Net interest income............................. $ 22,291 $ 1,743 $ -- $ 24,034
Other income.................................... 5,016 929 -- 5,945
Total net income................................ 7,100 167 (5,067) 2,200
Total assets.................................... 1,069,993 59,450 -- 1,129,443
Total loans and leases, gross................... 572,388 57,808 -- 630,196
AT OR FOR THE YEAR-ENDED DECEMBER 31, 1998
----------------------------------------------------
PATRIOT
COMMERCIAL
PATRIOT BANK LEASING BANKZIP.COM TOTAL
------------ ---------- ----------- ----------
Net interest income............................. $ 16,409 $ 462 $ -- $ 16,871
Other income.................................... 3,840 33 -- 3,873
Total net income................................ 4,005 50 -- 4,055
Total assets.................................... 934,624 46,137 -- 980,761
Total loans and leases, gross................... 467,009 44,301 -- 511,310
AT OR FOR THE YEAR-ENDED DECEMBER 31, 1997
----------------------------------------------------
PATRIOT
COMMERCIAL
PATRIOT BANK LEASING BANKZIP.COM TOTAL
------------ ---------- ----------- ----------
Net interest income............................. $ 14,436 $ 6 $ -- $ 14,442
Other income.................................... 2,320 10 -- 2,330
Total net income................................ 3,391 (18) -- 3,373
Total assets.................................... 849,773 2,310 -- 852,083
Total loans and leases, gross................... 424,269 334 -- 424,603
NOTE 15 -- EMPLOYEE BENEFIT PLANS
a. 401(k) PLAN
Patriot maintains a 401(k) plan covering all of its employees who have
attained age 21 and have completed at least one year of service. Patriot will
contribute 100% of an employee's contribution up to 3% of
54
57
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
base salary and 50% of an employee's contribution between 3% and 6% of base
salary. Patriot's contributions were $277,000, $218,000, and $143,000, for the
years ended December 31, 1999, 1998 and 1997, respectively.
b. EMPLOYEE STOCK OWNERSHIP PLAN
In 1995, Patriot established an internally leveraged Employee Stock
Ownership Plan (ESOP) for eligible employees who have completed one year of
service with Patriot or its subsidiaries. In December 1995, the ESOP borrowed
$3,015,000 from Patriot to purchase 543,000 (as adjusted for subsequent stock
dividends and stock split) newly issued shares of common stock. Patriot makes
contributions to the ESOP equal to the ESOP's debt service less any dividends
received by the ESOP. Any dividends received by the ESOP are used to pay debt
service. The ESOP shares are pledged as collateral for its debt. As the debt is
repaid, shares are released from collateral and allocated to qualifying
employees based on the proportion of debt service paid in the year. Patriot
accounts for its ESOP in accordance with Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." Accordingly, the debt of the
ESOP is recorded as debt and the shares pledged as collateral are reported as
unearned ESOP shares in the consolidated Balance Sheets. As shares are released
from collateral, Patriot reports compensation expense equal to the current
market price of the shares, and the allocated shares are included in outstanding
shares for earnings per share computations. Dividends on allocated ESOP shares
are recorded as a reduction of retained earnings; dividends on unallocated ESOP
shares are recorded as a reduction of debt and accrued interest. ESOP
compensation expense was $262,000, 363,000 and $308,000 in 1999, 1998 and 1997,
respectively. The ESOP shares as of December 31, 1999 were as follows:
Allocated shares................................. 157,000
Unreleased shares................................ 386,000
----------
Total ESOP shares................................ 543,000
==========
Fair value of unreleased shares.................. $4,150,000
==========
c. STOCK-BASED COMPENSATION
Patriot maintains a Management Recognition Plan (MRP). The MRP provides
that up to 271,000 shares of common stock may be granted, at the discretion of
the Board, to key directors and officers at no cost to the individuals. Patriot
granted 241,000, 10,000 and 3,000 shares 1996, 1998 and 1999, respectively in
the form of restricted stock payable over five years from the date of grant. The
recipients of the restricted stock are entitled to all voting and other
stockholder rights, except that the shares, while restricted, may not be sold,
pledged or otherwise disposed of and are required to be held in escrow. In the
event the recipient terminates association with Patriot for reasons other than
death, disability or change in control, the recipient forfeits all rights to the
allocated shares under restriction which are canceled and revert to Patriot for
reissuance under the plan. Shares acquired by the MRP were newly issued shares
and were recorded at the date of award based on the market value of shares.
Shares acquired by the MRP, which are shown as a separate component of
stockholders' equity, are being amortized to expense over the five-year vesting
period. As shares are vested during this five-year period, Patriot records
compensation expense equal to the shares being amortized. For the years ended
December 31, 1999, 1998 and 1997, $359,000, $359,000, and $355,000 were
amortized to expense. At December 31, 1999, 15,000 shares were reserved for
future grants under the plan.
Patriot maintains a stock option plan. Patriot's employee stock option plan
is accounted for under the intrinsic value method of APB Opinion No. 25.
Accordingly, Patriot is required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 "Accounting for Stock-Based Compensation," had been applied. The
plan permits the grant of options to employees and directors for up to 700,000
shares of common stock. The options have a term of
55
58
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
10 years and vest over a five-year period. The exercise price of each option
equals the market price of Patriot's stock on the date of grant. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the plan been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS No. 123, Patriot's 1999, 1998 and 1997
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1999 1998 1997
------------------------ ------------------------ ------------------------
AS REPORTED PRO-FORMA AS REPORTED PRO FORMA AS REPORTED PRO-FORMA
----------- ---------- ----------- ---------- ----------- ----------
Net income..................... $2,200,000 $1,389,000 $4,055,000 $3,685,000 $3,373,000 $3,110,000
Earnings per share -- basic.... $ 0.38 $ 0.24 $ 0.83 $ 0.75 $ 0.62 $ 0.58
Earnings per
share -- diluted............. $ 0.37 $ 0.23 $ 0.78 $ 0.71 $ 0.59 $ 0.54
A summary status of Patriot's option plans as of December 31, 1999, 1998
and 1997 and the charges during the years ending on those dates is presented
below:
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Outstanding, beginning of year... 659,500 $ 7.49 646,250 $ 7.26 637,500 $ 7.19
Granted.......................... 49,800 8.71 31,500 13.66 8,750 13.10
Exercised........................ 2,700 7.19 6,800 7.19 -- --
Canceled......................... 8,800 12.75 11,450 11.29 -- --
------- ------ ------- ------ ------- ------
Outstanding at year-end.......... 697,800 $ 7.49 659,500 $ 7.49 646,250 $ 7.26
======= ====== ======= ====== ======= ======
Options exercisable at
year-end....................... 379,000 248,200 127,500
======= ======= =======
Weighted average fair value of
options granted during the
year........................... $ 4.95 $ 4.40 $ 5.34
====== ====== ======
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model as follows:
Assumptions:
Dividend yield............................................ 2.40% 2.40% 2.40%
Expected volatility....................................... 33.91% 34.71% 33.30%
Risk-free interest rate................................... 6.44% 6.00% 6.47%
The following table summarizes information about non-qualified options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXCERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED OUTSTANDING AT WEIGHTED
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
$7.19 623,500 6.5 years $ 7.19 374,100 $ 7.19
$12.00 - $15.88 24,500 8.5 years $13.52 4,900 $13.52
$ 7.26 - $11.75 49,800 9.5 years $ 8.71 -- $ 8.71
56
59
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
d. EMPLOYEE STOCK PURCHASE PLAN
In 1998, Patriot implemented an Employee Stock Purchase Plan ("ESPP") which
permits eligible employees to purchase Patriot common stock directly from
Patriot through payroll deduction. Purchases of common stock are made at 90% of
the market value of Patriot common stock on the last day of each quarter.
Purchases are limited annually to $25,000 fair market value and shares are
issued from treasury stock. In 1999 and 1998, Patriot recorded expense of $9,318
and $2,228, respectively related to the ESPP.
NOTE 16 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
Patriot is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers,
including commitments to extend credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated Balance Sheets. The contract or notional amounts
of those instruments reflect the extent of Patriot's involvement in particular
classes of financial instruments.
Patriot's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. Patriot
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. Unless noted otherwise, Patriot
requires collateral to support financial instruments with credit risk.
The contractual or notional amounts of outstanding loan commitments as of
December 31, 1999 are as follows:
TOTAL
FIXED RATE VARIABLE RATE COMMITMENTS
COMMITMENTS COMMITMENTS OUTSTANDING
----------- ------------- -----------
(IN THOUSANDS)
Financial instruments whose contract amounts
represent credit risk
Mortgage loans.............................. $ 6,572 $ 3,643 $10,215
Consumer and other loans.................... 443 23,205 23,648
Commercial lines of credit.................. -- 20,952 20,952
Commercial leases........................... 13,000 -- 13,000
Construction loans.......................... 8,531 -- 8,531
------- ------- -------
Total............................... $28,546 $47,800 $76,346
======= ======= =======
Fees received in connection with these commitments are recognized as income
over the life of the commitment or the life of the loan.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Patriot evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by Patriot upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral for commitments generally includes
residential or other real estate.
57
60
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
a. LEASE COMMITMENTS
Patriot is committed to various operating leases related to branch
facilities having initial or remaining terms in excess of one year. The minimum
annual rental commitments under these leases outstanding at December 31, 1999
are as follows:
2000............................................. 1,218,866
2001............................................. 1,134,745
2002............................................. 1,072,602
2003............................................. 950,516
2004............................................. 779,007
Thereafter....................................... 10,445,414
----------
15,601,150
==========
Total rental expense for all leases for the year ended December 31, 1999,
1998 and 1997 totaled $680,613, $260,038, and $184,516, respectively.
b. OTHER
Patriot is a defendant in various legal actions arising from normal
business activities. Management believes that those actions are without merit or
that the ultimate liability, if any, resulting from such actions will not have a
material adverse effect on Patriot's consolidated financial position, results of
operations, or stockholders' equity.
NOTE 18 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Patriot is required to disclose the estimated fair value of Patriot's
assets and liabilities considered to be financial instruments. As with most
financial institutions, the majority of Patriot's assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many of
such instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction. Also, it is Patriot's
general practice and intent to hold the preponderance of its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, Patriot has used significant estimates and present value calculations
to prepare this disclosure. Changes in the assumptions or methodologies used to
estimate fair value may affect the estimated amounts.
Estimates of fair value are made at a specific point in time based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking, or other business, existing
customer relationships, extensive branch banking network,
58
61
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
property, equipment, goodwill, or certain tax implications related to the
realization of unrealized gains or losses. Also, the fair value of non-interest
bearing demand deposits, savings, and NOW accounts and money market deposit
accounts is equal to the carrying amount because these deposits have no stated
maturity. Obviously, this approach to estimating fair value excludes the
significant benefit that results from the low-cost funding provided by such
deposit liabilities, as compared to alternative sources of funding. As a
consequence, the fair value of individual assets and liabilities may not be
reflective of the fair value of a banking organization that is a going concern.
Fair values have been estimated using data which management considered the
best available. Fair value of financial instruments actively traded in a
secondary market has been estimated using quoted market prices. The fair value
of loans receivable has been estimated using present value cash flow, discounted
at an interest rate that gives effect to estimated prepayment risk and credit
loss factors. Fair value of financial instrument liabilities with no stated
maturities has been estimated to equal the carrying amount. Fair value of
financial instrument liabilities with stated maturities has been estimated using
present value cash flow, discounted at a rate approximating current market rates
for similar assets and liabilities. The resulting estimated fair values and
carrying amounts at December 31, 1999 and 1998, respectively were as follows:
1999 1998
--------------------- ---------------------
ESTIMATED ESTIMATED
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
--------- -------- --------- --------
(IN THOUSANDS)
Financial Assets:
Cash and cash equivalents............... $ 8,161 $ 8,161 $ 30,487 $ 30,487
Investment and mortgage-backed
securities Available for sale......... 87,334 87,334 386,380 386,380
Investment and mortgage-backed
securities Held to maturity........... 330,754 348,047 29,909 29,639
Total Loans receivable (net)............ 625,435 626,950 516,292 514,656
Investment in BankZip.com............... 10,218 -- -- --
Financial Liabilities:
Deposits with no stated maturities...... 189,293 189,293 134,392 134,392
Deposits with stated maturities......... 310,371 312,709 247,079 243,404
Borrowings.............................. 557,404 568,795 546,779 549,321
ESTIMATED ESTIMATED
NOTIONAL FAIR CARRYING NOTIONAL FAIR CARRYING
AMOUNT VALUE AMOUNT AMOUNT VALUE AMOUNT
-------- --------- -------- -------- --------- --------
Off-balance sheet items:
Commitments to extend
credit................ 76,346 -- -- 41,674 -- --
Caps and floors......... -- -- -- 50,000 (281) 237
59
62
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
NOTE 19 -- REGULATORY MATTERS
Patriot is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on
Patriot's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Patriot must meet
specific capital guidelines that involve quantitative measures of Patriots
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Patriot's capital amounts are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Patriot Bank Corp. and Patriot Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and core capital (as defined in
the regulations) to risk-weighted assets, and of core capital to average assets.
Management believes, as of December 31, 1999, that Patriot meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Department
of Banking of the Commonwealth of Pennsylvania categorized Patriot Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, Patriot Bank must maintain minimum total
risk-based, core risk-based and core leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
TO BE WELL
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
As of December 31, 1999
Total capital (to risk weighted assets)
Patriot Bank Corp...................... $65,849 10.46% $50,346 8% $62,932 10%
Patriot Bank........................... 69,299 10.95% 50,621 8% 63,277 10%
Tier I capital (to risk-weighted
assets)
Patriot Bank Corp...................... 59,085 9.39% 25,173 4% 37,759 6%
Patriot Bank........................... 63,217 9.99% 25,310 4% 37,965 6%
Tier I capital (to average assets)
Patriot Bank Corp...................... 59,085 5.45% 43,334 4% 54,168 5%
Patriot Bank........................... 63,217 6.55% 38,601 4% 48,251 5%
Patriot Bank is subject to regulations of certain regulatory agencies and,
accordingly, is periodically examined by such regulatory authorities. As a
consequence of the regulation of banking activities, Patriot Bank's operations
are susceptible to changes in legislation and regulations.
60
63
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
The following schedule summarizes the actual capital balances and ratios of
Patriot Bank at December 31, 1998:
TO BE WELL
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(IN THOUSANDS)
As of December 31, 1998
Total capital (to risk weighted assets)
Patriot Bank Corp...................... $60,050 12.46% $38,551 8% $48,189 10%
Patriot Bank........................... 43,553 10.15% 34,341 8% 42,926 10%
Tier I capital (to risk-weighted
assets)
Patriot Bank Corp...................... 48,184 10.00% 19,275 4% 28,913 6%
Patriot Bank........................... 38,641 9.00% 17,170 4% 25,756 6%
Tier I capital (to average assets)
Patriot Bank Corp...................... 48,184 5.37% 38,448 4% 44,848 5%
Patriot Bank........................... 38,641 5.78% 29,632 4% 33,411 5%
In conformity with Patriot's charter, a "liquidation account" was
established for Patriot Bank at the time of its conversion to the stock form of
ownership. In the unlikely event of a complete liquidation of Patriot Bank,
holders of savings accounts with qualifying deposits, who continue to maintain
their savings accounts, would be entitled to a distribution from the
"liquidation account" in an amount equal to the then current adjusted savings
account balance before any liquidation distribution could be made with respect
to capital stock. The balance in the "liquidation account" was $8,710,000 at
December 31, 1999. This amount may not be utilized for the payment of cash
dividends to the holding company.
NOTE 20 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Patriot Bank Corp. is as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 15 $ 16
Loans to subsidiaries....................................... 135 49
Investment in subsidiaries.................................. 68,443 62,547
Other assets................................................ 465 649
------- -------
Total assets...................................... $69,058 $63,261
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................... $ 290 $ 2,001
Trust Preferred Securities.................................. 19,000 19,000
Stockholders' equity........................................ 49,768 42,260
------- -------
Total liabilities and stockholders' equity........ $69,058 $63,261
======= =======
61
64
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Interest income....................................... $ 85 $ 27 $ 161
Other................................................. -- -- 5
------- ------- -------
Total Income........................................ 85 27 166
Interest expense...................................... 2,218 2,231 1,187
Other................................................. 504 3,397 875
------- ------- -------
Total Expense......................................... 2,722 5,628 2,062
Income (loss) before income taxes and undistributed
earnings of subsidiaries............................ (2.637) (5,601) (1,896)
Income taxes (benefit) expense........................ (2,606) (967) (527)
------- ------- -------
Income (loss) before undistributed earnings of
subsidiaries........................................ (31) (4,634) (1,369)
Earnings of subsidiaries.............................. 2,231 8,689 4,742
------- ------- -------
Net income.......................................... $ 2,200 $ 4,055 $ 3,373
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities
Net income....................................... $ 2,200 $ 4,055 $ 3,373
Adjustments to reconcile net income to net cash
provided by operating activities
Earnings from subsidiaries.................... (2,231) (8,689) (4,742)
Dividends from subsidiaries................... 21,093 23,600 13,615
Change in other assets........................ 184 (63) (121)
Change in other liabilities................... (1,711) (157) 1,564
MRP/ESOP Plans................................ 674 879 663
-------- -------- --------
Net cash provided by operating activities... 20,209 19,625 14,352
-------- -------- --------
Cash flows from investing activities
Investment in subsidiary......................... (13,701) (11,741) (17,814)
Loans to subsidiary.............................. (86) 450 (499)
-------- -------- --------
Net cash used in investing activities....... (13,787) (11,291) (18,313)
-------- -------- --------
Cash flows from financing activities
Net proceeds from trust preferred securities..... -- -- 19,000
Cash dividends paid to stockholders.............. (1,683) (1,515) (1,396)
Purchase of ESPP shares from treasury............ 68 -- --
Purchase of treasury stock....................... (4,808) (6,892) (13,554)
-------- -------- --------
Net cash provided by financing activities... (6,423) (8,407) (4,050)
Increase (decrease) in cash and cash equivalents... (1) (73) 89
Cash and cash equivalents at beginning of year..... 16 89 --
-------- -------- --------
Cash and cash equivalents at end of year........... $ 15 $ 16 $ 89
======== ======== ========
62
65
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 26, 1998, the Board of Directors of the Company engaged KPMG
LLP as the Company's independent auditors for the fiscal year ending December
31, 1998. The Company interviewed several independent accounting firms before
selecting KPMG LLP. The decision to change the Company's accountants was
recommended by the Audit Committee of the Company's Board of Directors.
The Company did not have any disagreements with the Company's former
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure during the Company's last
two fiscal years or any subsequent interim period. The prior accountant's report
on the Company's financial statements for the year ended December 31, 1997 did
not contain an adverse opinion or a disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
The Company did not consult with KPMG LLP on any matter during the two
years prior to the engagement of KPMG LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation and directors'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 2000,
excluding the Stock Performance Graph and Compensation Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 27, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS.
Consolidated financial statements are omitted because the required
information is either not applicable, not required or is shown in the respective
financial statements or in the notes thereto.
2. FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules are omitted because the required information
is either not applicable, not required or is shown in the respective financial
statements or in the notes thereto.
63
66
(3) EXHIBITS
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of the Patriot Bank Corp.
(Incorporated by reference to Exhibit 3.1 to Patriot Bank
Corp.'s Registration Statement No. 33-96530 on Form S-1.)
3.2 Bylaws of the Patriot Bank Corp. (Incorporated by reference
to Exhibit to Patriot Bank Corp.'s Registration Statement
No. 35-96530 on Form S-1.)
10.1 Employment Agreement between Patriot Bank Corp. and Joseph
W. Major dated May 23, 1997. (Incorporated by reference to
Exhibit 10.1 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.2 Amended and Restated Employment Agreement between Patriot
Bank Corp. and Gary N. Gieringer dated June 30, 1998.
(Incorporated by reference to Exhibit 10.2 to Patriot Bank
Corp.'s Annual Report on Form 10-K for the year ended
December 31, 1998.)***
10.3 Employment Agreement between Patriot Bank Corp. and Richard
A. Elko dated May 23, 1997. (Incorporated by reference to
Exhibit 10.3 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.4 Change in Control Agreement between Patriot Bank Corp. and
Paulette A. Strunk dated May 23, 1997. (Incorporated by
reference to Exhibit 10.4 to Patriot Bank Corp.'s Annual
Report on Form 10-K for the year ended December 31,
1997.)***
10.5 Change in Control Agreement between Patriot Bank Corp. and
Robert G. Philips dated May 23, 1997. (Incorporated by
reference to Exhibit 10.5 to Patriot Bank Corp.'s Annual
Report on Form 10-K for the year ended December 31,
1997.)***
10.6 Employment Agreement between Patriot Bank and Joseph W.
Major dated May 23, 1997. (Incorporated by reference to
Exhibit 10.6 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.7 Employment Agreement between Kevin R. Pyle and Patriot Bank
dated March 1, 1998. (Incorporated by reference to Exhibit
10.7 to Patriot Bank Corp.'s Annual Report on Form 10-K for
the year ended December 31, 1998).***
10.8 Employment Agreement between Richard A. Elko and Patriot
Bank dated May 23, 1997. (Incorporated by reference to
Exhibit 10.8 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.9 Change in Control Agreement between Paulette A. Strunk and
Patriot Bank dated May 23, 1997. (Incorporated by reference
to Exhibit 10.9 to Patriot Bank Corp.'s Annual Report on
Form 10-K for the year ended December 31, 1997.)***
10.10 Change in Control Agreement between Robert G. Philips and
Patriot Bank dated May 23, 1997. (Incorporated by reference
to Exhibit 10.10 to Patriot Bank Corp.'s Annual Report on
Form 10-K for the year ended December 31, 1997.)***
10.11 The Patriot Bank Corp. 1996 Stock-Based Incentive Plan.
(Incorporated by reference to Patriot Bank Corp.'s Proxy
Statement for the 1996 Annual Meeting of Stockholders filed
April 26, 1996).***
10.12 Employment Agreement between Joni S. Naugle and Patriot Bank
dated December 1, 1998. (Incorporated by reference to
Exhibit 10.12 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1998).***
10.13 Employment Agreement between Patriot Bank and James G. Blume
dated December 6, 1999.***
21.0 Subsidiaries.
23.1 Consent of Grant Thornton LLP
23.2 Consent of KPMG LLP
27.0 Financial Data Schedule
99.0 Proxy Statement for the 2000 Annual Meeting of Stockholders
(filed herewith)
- ---------------
*** Denotes a management contract or a compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K.
None.
64
67
SIGNATURES
Pursuant to the requirements of Section 13 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
By /s/ JOSEPH W. MAJOR
------------------------------------
Joseph W. Major
President and Chief
Executive Officer
Dated: March 27, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ JAMES B. ELLIOTT Chairman of the Board March 27, 2000
- ---------------------------------------------------
James B. Elliott
/s/ JOSEPH W. MAJOR President and Chief Executive March 27, 2000
- --------------------------------------------------- Officer and Director
Joseph W. Major
/s/ RICHARD A. ELKO Executive Vice President and March 27, 2000
- --------------------------------------------------- Director
Richard A. Elko
/s/ SAMUEL N. LANDIS Director March 27, 2000
- ---------------------------------------------------
Samuel N. Landis
/s/ LARRY V. THREN Director March 27, 2000
- ---------------------------------------------------
Larry V. Thren
/s/ JAMES A. BENTLEY, JR. Director March 27, 2000
- ---------------------------------------------------
James A. Bentley, Jr.
/s/ JAMES G. BLUME Chief Financial Officer March 27, 2000
- ---------------------------------------------------
James G. Blume
65