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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, 2002
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, PENNSYLVANIA 19464
(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 H. No h.
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. h
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes h. No H.
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 $91,862,851 and is based upon the last sales price of $16.35
per share as quoted on The Nasdaq Stock Market for March 3, 2003.
As of March 3, 2003, the Registrant had 6,136,577 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2003
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-K.
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INDEX
PAGE
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 Shareholder Matters........................ 9
Item 6. Selected Financial Data...................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 35
Item 8. Financial Statements and Supplementary Data ................................................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................................................... 74
PART III
Item 10. Directors and Executive Officers of the Registrant .......................................... 74
Item 11. Executive Compensation....................................................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 74
Item 13. Certain Relationships and Related Transactions............................................... 74
Item 14. Controls and Procedures...................................................................... 74
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................ 75
SIGNATURES ..................................................................................................... 76
CERTIFICATIONS.................................................................................................. 77
PART I
ITEM 1. BUSINESS
GENERAL
Patriot Bank Corp. (the "Company") is a Pennsylvania corporation and a
financial holding company for Patriot Bank (the "Bank") and Patriot Investment
Company ("PIC"). The Company 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 corporate offices of the Bank at High and
Hanover Streets, Pottstown, Pennsylvania 19464.
The Bank was founded in 1905. 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. In 2003 the bank became a member of the
Federal Reserve. The Bank conducts business through its network of 17 community
banking offices located in Berks, Chester, Lehigh, Montgomery and Northampton
counties, Pennsylvania. The majority of the Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") and administered by the Federal
Deposit Insurance Corp. ("FDIC"). As a result of its acquisition of First Lehigh
Bank, the acquired deposits are insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. At December 31, 2002, the Bank had total assets of
$996 million, deposits of $519 million and shareholder's equity of $85 million.
The Bank is a community-oriented financial services provider whose
business primarily consists of attracting deposits from the general public,
small businesses and other enterprises and originating commercial loans and
leases, consumer loans, and mortgage loans in the Bank's market area. The bank
also sells non-deposit investment products to consumers and invests in
investment and mortgage-backed securities. In addition to deposits, 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 and fees on
loans and leases, interest on investment and mortgage-backed securities and
other fees and service charges. Additional revenues are derived from the sale of
certain leases, mortgage loans and investments as well as the sale of
non-deposit investment products to consumers. 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 on loans and
leases, and investment and mortgage-backed securities.
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, 2002, PIC had total assets of $960,000 and
shareholder's equity of $960,000.
In January 2003 the company acquired Bonds and Paulus Inc. a registered
investment advisor and Pension Benefits Inc. a third party administrator and
registered investment advisor and merged those companies into Patriot Advisors,
a wealth management division of the company. Patriot Advisors has approximately
$250 million of assets under management.
MARKET AREA AND COMPETITION
The Company is headquartered approximately 45 miles northwest of
Philadelphia, Pennsylvania and its market consists primarily of Berks, Chester,
Lehigh, Montgomery and Northampton counties in Pennsylvania. The segment of the
markets served by the Company are primarily service and trade oriented and
demographically are comprised of middle income and upper income households.
The Company faces significant competition both in originating loans,
attracting deposits and managed assets. The Company's competitors are other
financial service 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
1
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 managed assets from non-bank institutions such as
brokerage firms and insurance firms with investment and other products such as
money market funds, mutual funds and annuities. Management considers the
Company's community-oriented reputation, superior customer service and personal
relationships, 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: Patriot Commercial Leasing Co., Inc.
("PCLC"), Patriot Advisors and Marathon Management Company, Inc. ("Marathon").
PCLC is a small-ticket commercial leasing company. At December 31, 2002, PCLC
had total assets of $77,931,000 and generated total revenues of $8,700,000 for
the year ended December 31, 2002. Patriot Advisors markets certain non-deposit
investment products. At December 31, 2002, Patriot Advisors had total assets of
$747,000 and generated fee income of $294,000 for the year ended December 31,
2002. Marathon provides title insurance services through a joint venture
partnership. At December 31, 2002, Marathon had total assets of $295,000 and
generated fee income of $43,000 for the year ended December 31, 2002.
PERSONNEL
As of December 31, 2002, the Company had 242 employees (including 13
part-time employees, adjusted to include the employees from the January 2003
acquisitions of Bonds and Paulus Inc. and Pension Benefits Inc., 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 registered financial 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").
In the first quarter of 2003 the Bank was approved and became a member
of the FRB. Becoming a member of the FRB changed the Bank's primary federal
regulator from the FDIC to the FRB.
The Bank is subject to extensive regulation and supervision by the
Federal Reserve System (the "FRB"), 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 FRB 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 the
FRB 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.
2
HOLDING COMPANY REGULATION. The Company is a financial holding company
registered under the BHCA. As a financial services 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 financial 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.
Under FRB policy, a financial holding company is expected to act as a
source of financial strength to its subsidiary bank and to commit resources to
support its subsidiary bank, i.e., to downstream funds to its subsidiary bank.
This support may be required at times when, absent such policy, the financial
holding company might not otherwise provide such support. Any capital loans by a
financial holding company to its subsidiary bank are subordinate in right of
payment to deposits and to certain other indebtedness of its subsidiary bank. In
the event of a financial services holding company's bankruptcy, any commitment
by the financial services 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.
The Gramm-Leach-Bliley Act was enacted in 1999. The Gramm-Leach-Bliley
Act amended the BHCA and created a new category of bank holding company called a
"financial holding company." In order to become a financial holding company a
bank holding company must notify the FRB that it elects to be a financial
holding company. A bank holding company 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 ("CRA") rating, each in accordance with
the definitions prescribed by the FRB and the regulators of the subsidiary
banks. The Gramm-Leach-Bliley Act provides a list of activities that are defined
as being financial in nature:
- Lending and deposit activities
- Issuance and sale of money orders, travelers' checks and U.S. savings
bonds
- Financial advisory services
- Consumer financial counseling services
- Tax planning and preparation advice
- Insurance activities, including underwriting
- Insurance company portfolio investment
- Merchant banking
- Investments of equity or debt in corporations or projects for the
promotion of community welfare
Once a bank holding company becomes a financial holding company, the
holding company or its affiliates may engage in any financial activities that
are financial in nature as determined by the FRB by simply giving notice to the
FRB 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.
In addition to the foregoing provisions of this law, this legislation
also made a number of additions and revisions to numerous federal laws that
affect the business of banking. There is now a federal law on privacy with
respect to customer information held by banks. Federal banking regulators are
authorized to adopt rules regarding privacy for 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 CRA has been
amended by this 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 community group detailing the amount of funding provided and its purpose.
This law also requires a bank's policy on fees for transactions at Automated
Teller Machines ("ATM") for 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.
3
The Sarbanes-Oxley Act of 2002 ("SOA") was signed into law on July 30,
2002. The stated goals of the SOA are to increase corporate responsibility, to
provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws.
The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934, (the
"Exchange Act"). Given the extensive SEC role in implementing rules relating to
many of the SOA's new requirements, the final scope of these requirements
remains to be determined.
The SOA includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of specified issues by the SEC and the
Comptroller General. The SOA allows federal oversight in matters traditionally
left to state regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, the relationships between the board of
directors and management and between the board of directors and its committees.
The SOA addresses, among other matters:
- The role and responsibilities of audit committees
- Certification of financial statements by the chief executive officer
and the chief financial officer
- The forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement
- Prohibitions on insider trading during employee benefit plan black
out periods
- Disclosure of off-balance sheet transactions
- Prohibitions on personal loans to directors and officers, except in
the case of financial institutions to the extent any loans comply
with federal banking regulations
- Expedited filing requirements for Forms 4s, Statement of Changes in
Beneficial Ownership
- Disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code
- "Real time" filing of periodic reports
- The formation of a public accounting oversight board
- Auditor independence
- Various increased criminal penalties for violations of securities
laws
The SOA contains provisions that became effective upon enactment on
July 30, 2002, and provisions that will become effective from within 30 days to
one year from enactment. The SEC has been delegated the task of enacting rules
to implement various provisions with respect to, among other matters, disclosure
in periodic filings pursuant to the Exchange Act.
CAPITAL REQUIREMENTS. The FRB has adopted risk-based capital guidelines
for financial 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 shareholders' equity, noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, less
certain intangible assets. 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 allowance for credit losses.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
financial holding companies. These guidelines provide for a minimum leverage
ratio of 3% for those financial holding companies which have the highest
regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other financial 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.
4
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 (tier 1 leverage ratio) 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 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, 2002, 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. Both the BIF and the SAIF are statutorily required to maintain a ratio
of reserves to insured deposits of 1.25%. Both the BIF and the SAIF currently
exceed the 1.25% ratio. Currently, the Bank does not pay any deposit insurance
premiums; however, this could change. In 2002, the FDIC disclosed that it
anticipated the BIF fund would decline below a 1.25% ratio triggering an
increase in deposit insurance premiums or a one time assessment. As of December
31, 2002 the fund had not declined below the 1.25% ratio. If the 1.25% ratio is
not met, the FDIC must assess deposit insurance premiums and also may impose
premiums on under-capitalized or unsafe institutions.
All institutions are assessed for payment of the FICO bonds, which were
issued to finance regulatory resolution of insolvency that occurred in the late
1980s and early 1990s. 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 $0.168 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, 2002, this limitation was equal to $12.7 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 $31.4 million of dividends in 2003
plus an additional amount equal to the Bank's net profit for 2003, 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 law allows for the
acquisition by a bank holding company of a bank located in another state.
5
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 non-banking 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 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 FRB has primary enforcement
responsibility over state member banks and has the authority to bring actions
against the institution and all institution-affiliated parties, including
shareholders, 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 and 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
("Interagency Guidelines") and a final rule to implement safety and soundness
standards required under the FDI Act. The Interagency 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 Interagency 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 Interagency 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. FRB regulations require depositary institutions
to maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 2002, FRB
regulations generally required that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $41.3 million or less
(subject to adjustment by the FRB) the reserve requirement is 3%; and for
accounts aggregating greater than $41.3 million, the reserve requirement is
$1.068 million plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $41.3 million.
The first $5.7 million of otherwise reservable balances (subject to adjustments
by the FRB) 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 FRB may be used to satisfy liquidity
requirements imposed by the FDIC.
6
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. As a large
commercial bank, the Bank is permitted to recognize bad debt expense based on
actual charge-offs. For its 2002 taxable year, the Company is subject to a
maximum federal income tax rate of 34%.
DISTRIBUTIONS. Under the Small Business Job Protection Act of 1996, 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 included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend 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
included in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
CORPORATE ALERNATIVE 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.
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 typically
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,
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" that 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.
PIC, PCLC, Patriot Advisors, and Marathon are subject to Pennsylvania
Corporate Net Income Tax ("CNIT") and to the Pennsylvania Capital Stock and
Foreign Franchise Tax. Corporations doing business in Pennsylvania and not
subject to Bank Shares Tax are subject to CNIT. The CNIT is an annual excise tax
and is measured by a corporation's taxable income as determined under the
Pennsylvania Tax Code. When a domestic or foreign corporation's entire business
is not transacted wholly within Pennsylvania, such taxable income must be
allocated and apportioned to determine that portion subject to the CNIT. The
CNIT rate is 9.99%.
7
ITEM 2. PROPERTIES
The Company has 20 properties consisting of 16 community banking
offices and 4 sales and operational offices.
BANKING OFFICES
BERKS COUNTY
Boyertown E. Philadelphia Ave & Chestnut Street Leased
Exeter 4915 Perkiomen Ave Owned
Fleetwood 46 West Main Street Leased
Muhlenberg 4930 5th Street Highway Owned
Wyomissing 2228 State Hill Road Leased
CHESTER COUNTY
Phoenixville 119 Nutt Road Leased
LEHIGH COUNTY
Allentown 3920 Tilghman Street Owned
Allentown 740 Hamilton Mall Leased
Emmaus 1130 Chestnut Street Leased
Whitehall 2541 Mickley Ave Leased
MONTGOMERY COUNTY
Limerick 536 Lewis Road Leased
Pottstown High and Hanover Streets Leased
NORTHHAMPTON COUNTY
Bethlehem 3650 Nazareth Pike Leased
Bethlehem 2126 W. Union Blvd. Leased
Cherryville 765 Blue Mountain Drive Owned
Walnutport 500 Main Street Leased
SALES AND OPERATIONAL OFFICES
CHESTER COUNTY
Patriot Advisors 707 Eagleview Blvd. Suite 104 Leased
Exton, PA 19341
Patriot Advisors Two West Market Street Leased
West Chester, PA 19382
MONTGOMERY COUNTY
Patriot Commercial Leasing 1566 Medical Drive Leased
Pottstown, PA 19464
Patriot Mortgage 300 Old Reading Pike Leased
Stowe, PA 19464
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits wherein various amounts
are claimed. In the opinion of the Company's management, these suits should not
result in judgements that, in the aggregate, would have a material adverse
effect on the Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
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 3, 2003, is set forth below:
Richard A. Elko -- Age 41. Mr. Elko was elected President and Chief
Executive Officer of the Company and the Bank in November 2000. Prior to that
Mr. Elko served as Executive Vice President since 1999 and Chief Financial
Officer of the Company and the Bank from January 1996 to December 1999.
Joni S. Naugle -- Age 44. Ms. Naugle was elected as Executive Vice
President and Chief Operating Officer of the Company and the Bank in February
2001. Prior to that, Ms. Naugle served as Chief Operating Officer of the Company
and the Bank since December 1998. Prior to that, Ms. Naugle was a Senior Vice
President for Marketing and Retail Sales at another financial institution from
1979 to April 1998 and a consultant from April 1998 to December 1998.
Kevin R. Pyle -- Age 36. Mr. Pyle was elected as Executive Vice
President and Chief Lending Officer of the Company and the Bank in February
2001. Prior to that, Mr. Pyle served as Chief Credit Officer of the Bank since
March 1996.
James G. Blume -- Age 37. Mr. Blume was elected as Senior Vice
President and Chief Financial Officer of the Company and the Bank in February
2001. Prior to that, Mr. Blume served as Chief Financial Officer of the Company
since December 1999. Prior to that, Mr. Blume served as Controller of the
Company and Patriot Bank since March 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 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 3,
2003, the total number of holders of record of the Company's common stock was
701.
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.
2002 2001
------------------------------------------- ---------------------------------------------
BID ASKED BID ASKED
-------------------- -------------------- -------- -------- -------------------
QTR HIGH LOW HIGH LOW QTR HIGH LOW HIGH LOW
- --- -------- -------- -------- -------- --- -------- -------- -------- --------
1st $13.7700 $10.4500 $13.7800 $10.5500 1st $ 8.0000 $ 6.7500 $ 8.1875 $ 7.0000
2nd 14.8500 13.3000 15.0000 13.4000 2nd 10.2600 7.5313 10.3200 7.6250
3rd 14.1800 12.9200 14.2400 13.0000 3rd 11.7100 8.9500 11.9000 9.1500
4th 15.3600 13.4600 15.4700 13.6500 4th 10.7500 10.0000 10.8900 10.1900
The bid quotations reflect inter-dealer quotations, do not include
retail markups, markdowns 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.
9
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 2002 and 2001. Such dividends have been
adjusted to reflect all stock dividends paid during such years.
2002 2001
---- ----
First Quarter....................................... $ .0975 $ .0925
Second Quarter...................................... $ .1000 $ .0925
Third Quarter....................................... $ .1025 $ .0925
Fourth Quarter...................................... $ .1100 $ .0925
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" and Note 18 at Item 8 "Financial Statements
and Supplementary Data" herein.
EQUITY COMPENSATION PLANS
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF OUTSTANDING EXERCISE PRICE OF FOR FUTURE ISSUANCE
OPTIONS, WARRANTS OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
- ---------------------------------------------------- ----------------------- -------------------- --------------------
Equity compensation plans
approved by security holders:
1996 Stock-Based Option Plan ....................... 400,425 $ 7.81 --
1996 Stock-Based Incentive Plan..................... 258,000 N/A 13,000
2002 Stock-Based Option Plan........................ 205,805 $14.10 94,195
Equity compensation plans not
approved by security holders:................... N/A N/A N/A
----------------------- -------------------- --------------------
Total...................................... 864,230 N/A 107,195
10
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,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets......................................... $ 995,143 $ 1,010,070 $ 1,124,905 $ 1,129,443 $ 980,761
Investment and mortgage-backed
securities available for sale .................... 315,868 247,612 84,889 87,334 386,380
Investment and mortgage-backed
securities held to maturity ...................... -- 43,637 302,489 348,047 29,639
Loans held for sale ................................. 4,314 6,652 8,564 4,972 5,576
Loans and leases receivable ......................... 618,217 649,139 656,479 628,060 509,080
Allowance for credit losses ......................... (6,922) (6,199) (5,839) (6,082) (4,087)
Deposits ............................................ 519,120 533,863 649,958 502,002 377,796
Customer repurchase agreements ...................... 14,210 -- -- -- --
Borrowings........................................... 388,673 405,179 416,837 568,795 549,321
Shareholders'equity.................................. 65,945 61,706 51,800 49,768 42,260
AT DECEMBER 31,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Interest income ......................................... $ 66,114 $ 75,850 $ 84,143 $ 75,544 $ 63,107
Interest expense ........................................ 36,858 52,209 61,471 51,510 46,236
-------- -------- -------- -------- --------
Net interest income before
provision for credit losses .......................... 29,256 23,641 22,672 24,034 16,871
Provision for credit losses ............................. 4,075 2,000 1,125 1,200 1,200
-------- -------- -------- -------- --------
Net interest income after provision
for credit losses .................................... 25,181 21,641 21,547 22,834 15,671
Non-interest income...................................... 7,241 7,892 7,124 5,945 3,873
Non-interest expense .................................... 22,664 20,768 26,844 26,402 14,267
-------- -------- -------- -------- --------
Income before taxes and cumulative
effect of change in accounting principle ............. 9,758 8,765 1,827 2,377 5,277
Income taxes expense (benefit) ......................... 2,060 2,462 (182) 177 1,222
-------- -------- -------- -------- --------
Income before cumulative effect of
change in accounting principle ....................... $ 7,698 $ 6,303 $ 2,009 $ 2,200 $ 4,055
Cumulative effect of change in
accounting principle, net of ($105)
in income tax ... .................................... -- (204) -- -- --
======== ======== ======== ======== ========
Net income .............................................. $ 7,698 $ 6,099 $ 2,009 $ 2,200 $ 4,055
======== ======== ======== ======== ========
Diluted earnings per share .............................. $ 1.26 $ 1.02 $ 0.34 $ 0.37 $ 0.78
======== ======== ======== ======== ========
Net income before non-recurring
charges (2)(8) ....................................... $ 5,233 $ 5,549
======== ========
Diluted earnings per share before
non-recurring charges (2) ............................ $ 0.89 $ 0.94
======== ========
Cash earnings per share before
non-recurring charges (2)(7)(8)....................... $ 1.41 $ 1.30 $ 1.17 $ 1.20 $ 0.92
======== ======== ======== ======== ========
11
AT DECEMBER 31,
-------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------
PERFORMANCE RATIOS(1):
Return on average equity ....................... 12.05% 10.52% 3.94% 4.00% 8.72%
Return on average equity before
non-recurring charge(2) .................... -- -- 10.30 10.10 --
Cash return on average equity(7)............... 16.49 16.91 18.66 12.95 10.27
Return on average assets........................ 0.77 0.58 0.17 0.20 0.45
Return on average assets before
non-recurring charge(2)..................... -- -- 0.45 0.51 --
Average interest rate spread(3)................ 3.15 2.36 2.13 2.32 1.98
Net interest margin(4)......................... 3.35 2.50 2.25 2.44 2.01
Average interest-earning assets to
average interest bearing liabilities......... 101.14 100.47 99.09 100.39 103.72
Total non-interest expense to average
assets before non-recurring charge(2)....... 2.28 1.96 2.32 2.41 1.58
Dividend pay-out ratio.......................... 32.14 36.27 105.70 86.02 35.91
REGULATORY CAPITAL RATIOS(5):
Tier 1 capital to average assets................ 7.33% 6.45% 5.48% 5.45% 5.37%
Tier 1 capital to risk-adjusted assets.......... 11.23 10.49 9.45 9.39 10.00
Total risk adjusted capital to
risk-adjusted assets......................... 12.61 11.54 10.41 10.46 12.46
ASSET QUALITY RATIOS(6):
Non-performing assets as a
percent of total assets...................... 0.67% 0.53% 0.35% 0.15% 0.11%
Non-performing loans as a
percent of loans receivable.................. 1.01 0.76 0.59 0.24 0.21
Allowance for credit losses as a
percent of loans receivable.................. 1.11 0.95 0.88 0.96 0.79
Allowance for credit losses as a
percent of non-performing loans.............. 103.74 116.20 147.82 354.04 362.63
- ----------------
(1) All ratios are based on average balances during the indicated periods.
(2) In 2000, non-recurring after-tax charges of $3,224,000 were recorded
including $1,453,000 in connection with restructuring of operations,
$986,000 of expenses incurred by the restructured operations and $785,000 in
connection with the resignation of Patriot's former President and CEO. In
1999, a non-recurring after-tax charge of $3,349,000 was recorded in
connection with an internet initiative.
(3) 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.
(4) The net interest margin represents tax-equivalent net interest income as a
percent of average interest-earning assets. The amount of tax beneficial
income for 2002, 2001, 2000, and 1999 was $2,088,000, $1,365,000, $1,401,000
and $1,335,000, respectively.
(5) For definitions and further information relating to regulatory capital
requirements, see footnote 18 of the consolidated financial statements.
(6) Non-performing assets consist of non-performing loans, real estate owned
(REO) and other repossessed property. 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. Other repossessed property consists of commercial equipment
acquired at the termination of loans and leases.
(7) Cash earnings per share is calculated by the elimination of non-cash
expenses such as goodwill amortization, core deposit intangible
amortization, ESOP and MRP expense, as shown below.
12
Reconciliation of cash earnings.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income before non-recurring charges .............. $7,698 $6,099 $5,233 $5,549 $4,055
Goodwill amortization ................................ -- 730 1,036 656 7
Core deposit intangible amortization ................. 486 486 422 336 --
ESOP expense .......................................... 353 238 216 262 363
MRP expense ........................................... 40 173 377 359 360
------ ------ ------ ------ ------
Cash earnings......................................... $8,577 $7,726 $7,284 $7,162 $4,785
====== ====== ====== ====== ======
Cash earnings per share before
non-recurring charges ............................ $ 1.41 $ 1.30 $ 1.17 $ 1.20 $ 0.92
====== ====== ====== ====== ======
(8) Reconciliation of net income before non-recurring charges to net income.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999
------- -------
(IN THOUSANDS)
Net income before non-recurring charges.................... $ 5,233 $ 5,549
Non-recurring charge....................................... 4,885 5,074
Income tax benefit associated with non-recurring charge.... (1,661) (1,725)
------- -------
Net income................................................. $ 2,009 $ 2,200
======= =======
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 November 21, 1996 and September 22, 1997, 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. Patriot repurchased
shares as adjusted for stock split/dividends of its common stock in the
following years:
SHARES COST OF
YEAR REPURCHASED REPURCHASE
- ---- ----------- -----------
1996 338,000 $ 2,517,000
1997 1,246,000 13,554,000
1998 538,000 6,892,000
1999 377,000 4,808,000
2000 -- --
2001 -- --
2002 293,516 4,189,000
13
LEASING ACQUISITION. On November 6, 1998, Patriot completed the
acquisition of Keystone Financial Leasing Company (KFL). KFL was 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. In accordance with the Statement of
Financial Accounting Standards (SFAS) No. 142, goodwill is subject to periodic
impairment testing.
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. At December 31, 2002, goodwill
and core deposit intangibles arising from the transaction totaled $6,909,281 and
$2,876,611, respectively. During 2001, the Financial Accounting Standards Board
(FASB) issued Statement No. 142. In accordance with Statement No. 142, Patriot
continues to amortize the core deposit intangible, while goodwill is no longer
amortized but is subject to periodic impairment testing.
WEALTH MANAGEMENT FIRM ACQUISITION. On January 3, 2003, Patriot
completed the acquisition of Bonds & Paulus Associates, Inc. (Bonds & Paulus), a
wealth management firm headquartered in Chester County, Pennsylvania. Founded in
1993, Bonds & Paulus is a registered investment advisory firm, providing
investment advisory and financial planning services to high net-worth
individuals and families. Bonds & Paulus was merged into Patriot Advisors, a
division of Patriot Bank Corp. that provides a full range of wealth and
investment management services. The acquisition was accounted for as a purchase
in 2003. Bonds & Paulus was purchased for $458,000 plus contingent consideration
to be paid in shares of Patriot Bank Corp. common stock and will be based upon
future revenues of Bonds & Paulus. Of the $458,000, $115,000 was paid in cash
and 22,810 shares of Patriot Bank Corp. common stock having a value of $343,000
was issued at closing. Based upon current revenue levels, the total purchase
price will approximate $1,300,000.
PENSION BENEFITS SERVICE PROVIDER ACQUISITION. On January 17, 2003,
Patriot completed the acquisition of Pension Benefits, Inc., a pension benefits
service provider headquartered in West Chester, Pennsylvania. Founded in 1986,
Pension Benefits Inc. is a third party administrator and a registered investment
advisory firm, providing comprehensive retirement plan solutions to businesses.
Pension Benefits, Inc. was merged into Patriot Advisors as well. The acquisition
was accounted for as a purchase in 2003. Pension Benefits, Inc. was purchased
for $829,000 plus contingent consideration to be paid in shares of Patriot Bank
Corp. common stock and will be based upon future revenues of Pension Benefits,
Inc. Of the $829,000, $414,500 was paid in cash and 27,338 shares of Patriot
Bank Corp. common stock was issued at closing. Based upon current revenue
levels, the total purchase price will approximate $1,600,000.
14
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
SUMMARY. For the year ended December 31, 2002, Patriot reported net
income of $7,698,000 or $1.26 diluted earnings per share. For the year ended
December 31, 2001, Patriot reported net income of $6,099,000 or $1.02 diluted
earnings per share. Return on average equity was 12.05% for 2002 and 10.52% for
2001.
NET INTEREST INCOME. Net interest income for 2002 was $29,256,000
compared to $23,641,000 in 2001. The yield on Patriot's interest-earning assets
decreased to 7.28% for the year 2002 compared to 7.71% for 2001. The decrease in
yield on Patriot's interest-earning assets is a result of a decrease in interest
rates. The cost of Patriot's interest-bearing liabilities was 3.98% for 2002
compared to 5.24% for 2001. The decrease in funding costs resulted from
generally lower interest rates coupled with reductions in higher cost
borrowings. Overall, Patriot's net interest margin increased to 3.35% for 2002
compared to 2.50% in 2001.
Interest on loans was $49,020,000 for 2002 compared to $54,122,000 for
2001. The average balance of loans in 2002 was $635,788,000 with an average
yield of 7.73% compared to an average balance of $653,460,000 with an average
yield of 8.30% in 2001. The decrease in the average balance of loans is a result
of Patriot allowing residential mortgages to run-off, offset by increases in
commercial loans and leases. The decrease in average yield is primarily a result
of a decrease in interest rates.
Interest on Patriot's investment portfolio (investment and
mortgage-backed securities) was $17,021,000 for 2002 compared to $21,220,000 for
2001. The average balance of the investment portfolio was $296,079,000 with an
average yield of 6.41% for 2002 compared to an average balance of $333,872,000
with an average yield of 6.73% for 2001. The decrease in average balance is
primarily due to Patriot allowing the investment portfolio to amortize so that
it can be replaced with generally higher-yielding commercial loans and leases.
The decrease in average yield is related to general decreases in market rates on
securities.
Interest on total deposits was $14,479,000 for 2002 compared to
$27,690,000 for 2001. The average balance of total deposits was $518,051,000
with an average cost of 2.79% for 2002 compared to an average balance of
$575,235,000 with an average cost of 4.81% for 2001. The decrease in the average
balance of deposits is primarily the result of a decrease in Patriot's jumbo
certificate of deposits, offset by increases in branch deposits which consists
of money market accounts, transaction based deposit accounts and other
certificates of deposits. The average balance on jumbo certificates of deposit
decreased to $32,529,000 in 2002 compared to $105,530,000 in 2001. The average
balance of retail deposits (total deposits less jumbo certificate of deposits)
was $485,522,000 with an average cost of 2.68% for 2002 compared to an average
balance of $469,705,000 with an average cost of 4.34% for 2001. The increase in
average balance on retail deposits is the result of growth in savings, checking
and money market accounts offset by a decrease in branch certificates of
deposit. The overall decrease in the average cost on deposits is primarily the
result of a decrease in interest rates and emphasis placed on lower cost
transaction based deposit accounts.
Interest on borrowings was $22,379,000 in 2002 compared to $24,519,000
in 2001. The average balance of borrowings was $407,687,000 with an average cost
of 5.49% for 2002 compared to an average balance of $421,084,000 with an average
cost of 5.82% for 2001. The decrease in the average balance of borrowings is
primarily due to the use of funds provided by the run-off of the mortgage loan
portfolio and growth in Patriot's branch deposits to repay borrowings, offset by
growth in Patriot's commercial loan portfolio. The decrease in average cost is
due to lower interest rates.
15
SPREAD ANALYSIS. The following table sets forth Patriot's average
balances and the yields on those balances for the years ended December 31, 2002,
2001 and 2000. 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,
----------------------------------------------
2002
---------------------------- -------------
AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE
-------- -------- ------ -------
ASSETS:
Interest-earning assets:
Interest-earning deposits..... $ 4,457 $ 73 1.64% $ 13,682
Investment and mortgage-
backed securities(1) ...... 296,079 17,021 6.41 333,872
Loans and leases
receivable, net(2)......... 635,788 49,020 7.73 653,460
-------- ------- ---- ----------
Net interest-earning assets... 936,324 66,114 7.28 1,001,014
Non-interest-earning assets... 59,783 -- -- 56,549
-------- ------- ---- ----------
Total assets ................. $996,107 $66,114 6.85% $1,057,563
======== ======= ==== ==========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Core deposits.................. $270,801 $ 4,178 1.54% $ 225,845
Retail Certificates of deposit. 214,721 8,815 4.11 243,860
Brokered Certificates
of deposit.................. 32,529 1,486 4.57 105,530
-------- ------- ---- ----------
Total deposits................. 518,051 14,479 2.79 575,235
Borrowings(3).................. 407,687 22,379 5.49 421,084
-------- ------- ---- ----------
Total interest-bearing
liabilities................. 925,738 36,858 3.98 996,319
Non-interest-bearing
liabilities ................ 6,475 - - 3,266
-------- ------- ---- ----------
Total liabilities.............. 932,213 36,858 3.95 999,585
Equity......................... 63,894 - - 57,978
-------- ------- ---- ----------
Total liabilities and equity... $996,107 $36,858 3.70% $1,057,563
======== ======= ==== ==========
Net interest income............ $29,256
=======
Net interest rate spread(4).... 3.15%
====
Net interest margin(5)......... 3.35
Ratio of interest-earning......
assets to interest
bearing liabilities......... 101.14% 100.47%
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000
--------------------------------------------------
YIELD/ AVERAGE YIELD/
INTEREST RATE BALANCE INTEREST RATE
-------- ------ ------- -------- ------
(IN THOUSANDS)
ASSETS:
Interest-earning assets:
Interest-earning deposits..... $ 508 3.71% $ 12,330 $ 422 3.42%
Investment and mortgage-
backed securities(1) ...... 21,220 6.73 412,712 28,190 7.17
Loans and leases
receivable, net(2)......... 54,122 8.30 666,171 55,531 8.33
-------- ---- ---------- ---------- ----
Net interest-earning assets... 75,850 7.71 1,091,213 84,143 7.82
Non-interest-earning assets... -- -- 62,104 -- --
-------- ---- ---------- ---------- ----
Total assets ................. $ 75,850 7.30% $1,153,317 $ 84,143 7.42%
======== ==== ========== ========== ====
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Core deposits.................. $ 5,763 2.55% $ 199,543 $ 6,016 3.01%
Retail Certificates of deposit 14,618 5.99 201,899 11,558 5.72
Brokered Certificates
of deposit.................. 7,309 6.93 195,176 13,140 6.73
-------- ---- ---------- ---------- ----
Total deposits................. 27,690 4.81 596,618 30,714 5.15
Borrowings(3).................. 24,519 5.82 504,666 30,757 6.01
-------- ---- ---------- ---------- ----
Total interest-bearing
liabilities................. 52,209 5.24 1,101,284 61,471 5.58
Non-interest-bearing
liabilities ................ -- -- 1,213 -- --
-------- ---- ---------- ---------- ----
Total liabilities.............. 52,209 5.22 1,102,497 61,471 5.58
Equity......................... -- -- 50,820 -- --
-------- ---- ---------- ---------- ----
Total liabilities and equity... $ 52,209 4.94% $1,153,317 $ 61,471 5.34%
======== ==== ========== ========== ====
Net interest income............ $ 23,641 $ 22,672
======== ==========
Net interest rate spread(4).... 2.36% 2.08%
==== ====
Net interest margin(5)......... 2.50 2.25
Ratio of interest-earning
assets to interest
bearing liabilities......... 99.09%
----------------
(1) Includes securities available for sale and held to maturity and unamortized
discounts and premiums. The yield is presented on a tax equivalent basis for
tax beneficial investments. The amount of tax beneficial interest associated
with securities for 2002, 2001, and 2000 was $1,956,000, $1,250,000 and
$1,401,000, respectively.
(2) Amount is net of deferred loan and lease fees, loans in process, discounts
and premiums, and allowance for 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. The yield is presented on a tax equivalent
basis for tax beneficial loans. The amount of tax beneficial interest
associated with loans and leases for 2002, 2001, and 2000 was $131,000,
$115,000, and $118,000 respectively.
(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. The impact of the tax-equivalent
calculation increased the net interest margin by .23% in 2002, .14% in 2001
and .13% in 2000 due to tax equivalent calculations.
16
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 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, 2002 YEAR ENDED DECEMBER 31, 2001
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31 2001 DECEMBER 31, 2000
INCREASE (DECREASE) INCREASE(DECREASE)
DUE TO DUE TO
------------------------------------ ----------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- --------- -------- -------- -------- -------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning deposits............... $ (342) $ (93) $ (435) $ 46 $ 40 $ 86
Investment and mortgage-
backed securities.................... (2,543) (1,656) (4,199) (5,653) (1,317) (6,970)
Loans receivable........................ (1,467) (3,635) (5,102) (1,058) (351) (1,409)
---------- --------- -------- -------- -------- -------
Total interest-earning assets........... (4,352) (5,384) (9,736) (6,665) (1,628) (8,293)
---------- --------- -------- -------- -------- -------
INTEREST-BEARING LIABILITIES:
Deposits................................ (2,748) (10,463) (13,211) (1,100) (1,924) (3,024)
Borrowings.............................. (780) (1,360) (2,140) (5,024) (1,214) (6,238)
---------- --------- -------- -------- -------- -------
Total interest-bearing liabilities...... (3,528) (11,823) (15,351) (6,124) (3,138) (9,262)
---------- --------- -------- -------- -------- -------
Net change in net interest income....... $ (824) $ 6,439 $ 5,615 $ (541) $ 1,510 $ 969
========== ========= ======== ======== ======== =======
17
PROVISION FOR CREDIT LOSSES. The provision for credit losses was
$4,075,000 for 2002 compared to $2,000,000 for 2001. See "Credit Quality" for a
detailed discussion of Patriot's asset quality and reserving methodology.
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,
---------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(IN THOUSANDS)
Allowance, beginning of year ............................... $6,199 $5,839 $6,082 $4,087 $2,512
Charge-offs:
Commercial loans......................................... 1,280 640 675 443 253
Commercial leases ....................................... 1,858 798 436 130 --
Residential loans........................................ 158 79 102 249 114
Home equity and consumer loans .......................... 347 355 268 243 145
------ ------ ------ ------ ------
Total charge-offs ................................... 3,643 1,872 1,481 1,065 512
------ ------ ------ ------ ------
Recoveries:
Commercial loans......................................... 95 39 16 27 --
Commercial leases........................................ 121 134 82 39 --
Residential loans........................................ 71 29 -- -- --
Home equity and consumer loans .......................... 4 30 15 38 9
------ ------ ------ ------ ------
Total recoveries .................................... 291 232 113 104 9
------ ------ ------ ------ ------
Net charge-offs............................................. 3,352 1,640 1,368 961 503
Acquired allowance.......................................... -- -- -- 1,756 878
Provision charged to operations ............................ 4,075 2,000 1,125 1,200 1,200
------ ------ ------ ------ ------
Allowance, end of year...................................... $6,922 $6,199 $5,839 $6,082 $4,087
====== ====== ====== ====== ======
Net charge-offs to average loans
and leases............................................... .53% .25% .21% .17% .11%
Allowance for credit losses as a
percentage of year-end total loans ...................... 1.11% .95% .88% .96% .79%
NON-INTEREST INCOME. Total non-interest income was $7,241,000 for 2002
compared to $7,892,000 for 2001. The decrease in non-interest income was
primarily due to $137,000 in losses recognized on the sale of investments
securities in 2002 compared to $558,000 in gains in 2001. Patriot adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as of
January 1, 2001. The cumulative effect of the adoption was a $204,000 decrease
to consolidated income, net of $105,000 of tax benefit, resulting from the sale
of securities transferred into "Available for Sale" during the first quarter in
2001. Other recurring non-interest income including loan and deposit fees and
mortgage banking gains remained consistent in 2002 compared to 2001.
NON-INTEREST EXPENSE. Total non-interest expense was $22,664,000 for
2002 compared to $20,768,000 for 2001. The increase in non-interest expense was
primarily due to higher compensation costs due to increases in staffing
associated with branch deposit and commercial lending growth offset by lower
amortization costs. Patriot's tax effected efficiency ratio, was 58.94% in 2002
compared to 63.94% in 2001. The tax equivalent efficiency ratio is calculated by
taking non-interest expense divided by non-interest income and net interest
income before provision for credit losses. Net interest income before provision
is adjusted to take into consideration tax beneficial investments and loans.
INCOME TAX PROVISION. The income tax provision was $2,060,000 for 2002
compared to $2,462,000 for 2001. The effective tax rate for 2002 was 21.11%
compared to 28.09% for 2001. The decrease in the effective tax rate is due to
greater tax exempt interest from tax-exempt securities offset by the elimination
of non-deductible goodwill.
18
FINANCIAL CONDITION
LOAN PORTFOLIO. Patriot's primary portfolio loan products are
commercial loans and leases and home equity loans on existing owner-occupied
residential real estate. Patriot also offers residential construction loans and
other consumer loans. Patriot has sold substantially all new residential
mortgage (fixed and adjustable rate) originations since 2000.
COMMERCIAL LENDING. 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.
COMMERCIAL LEASING. Patriot's subsidiary, Patriot Commercial Leasing
Company (PCLC), is a small-ticket commercial leasing company. PCLC originates
leases to businesses predominantly located on the East Coast. Transaction sizes
generally range from $5,000 to $500,000 with the average transaction being less
than $50,000. PCLC is owned 100% by Patriot Bank. PCLC's leases are considered
financing leases for accounting purposes.
CONSUMER LENDING. 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 LENDING. 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. Substantially all of the residential mortgage loans originated by Patriot
are sold into the secondary markets; therefore, Patriot's mortgage loan
portfolio consists mainly of seasoned mortgage loans originated prior to 2000.
At December 31, 2002, Patriot's total loan portfolio was $618,217,000
compared to a total loan portfolio of $649,139,000 at December 31, 2001. The
decrease in the loan portfolio is primarily the result of Patriot allowing
residential mortgages to runoff, offset by an increase in commercial lending
relationships.
19
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,
-------------------------------------------------------------------
2002 2001 2000
--------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(IN THOUSANDS)
Commercial Portfolio:
Commercial loans............................... $315,537 51.17% $283,848 43.79% $252,837 38.47%
Commercial leases ............................. 77,138 12.51 77,838 12.01 67,094 10.21
Consumer Portfolio:
Home equity.................................... 72,400 11.74 66,834 10.31 64,733 9.85
Other consumer loans........................... 7,724 1.25 8,614 1.33 8,553 1.30
Mortgage Portfolio:
Residential mortgages ......................... 135,632 22.00 206,467 31.85 253,213 38.53
Construction................................... 8,220 1.33 4,605 .71 10,779 1.64
-------- ------- -------- ------- -------- -------
Total loans and leases, gross.................... 616,651 100.00% 648,206 100.00% 657,209 100.00%
Deferred loan costs (fees)(1).................. 1,566 933 (730)
Allowance for credit losses.................... (6,922) (6,199) (5,839)
-------- -------- --------
Total loans and leases, net.................. $611,295 $642,940 $650,640
======== ======== ========
AT DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(IN THOUSANDS)
Commercial Portfolio:
Commercial loans........................................................ $189,189 30.02% $ 92,367 18.06%
Commercial leases....................................................... 57,808 9.17 44,301 8.66
Consumer Portfolio:
Home equity ............................................................ 69,785 11.07 64,807 12.67
Other consumer loans.................................................... 9,081 1.44 4,336 0.85
Mortgage Portfolio:
Residential mortgages .................................................. 293,852 46.64 300,232 58.73
Construction............................................................ 10,481 1.66 5,267 1.03
-------- ------- -------- -------
Total loans and leases, gross............................................. 630,196 100.00% 511,310 100.00%
Deferred loan fees(1)................................................... (2,136) (2,230)
Allowance for credit losses ............................................ (6,082) (4,087)
Total loans and leases, net .......................................... $621,978 $504,993
======== ========
- ------------
(1) Patriot's focus is on growing its commercial loan, lease and consumer
portfolios while allowing mortgage loans to run-off. There tends to be more
deferred costs associated with originating commercial loans and leases as
compared to originating mortgage loans, which have more deferred fees. As a
result, Patriot's position transitioned from $(2,230,000), $(2,136,000) and
$(730,000), in net deferred fees in 1998, 1999 and 2000, respectively, to
$933,000 and $1,566,000, in net deferred costs in 2001 and 2002,
respectively.
20
LOAN MATURITY. The following table sets forth the maturity schedule for
Patriot's loan portfolio (excluding residential mortgages and consumer loans):
AMOUNTS MATURING AT DECEMBER 31, 2002
--------------------------------------------
IN ONE AFTER AFTER
YEAR ONE TO FIVE
OR LESS FIVE YEARS YEARS TOTAL
-------- ---------- ----- -----
(IN THOUSANDS)
Loan Maturity Schedule:
Commercial loans................................. $ 75,053 $198,144 $ 21,137 $294,334
Commercial construction loans.................... 13,236 7,235 732 21,203
Commercial leases................................ 28,523 48,178 437 77,138
Residential construction loans................... 8,220 -- -- 8,220
-------- -------- -------- --------
Total....................................... $125,032 $253,557 $ 22,306 $400,895
======== ======== ======== ========
Fixed rates...................................... $ 69,100 $235,606 $ 13,836 $318,542
Adjustable rates................................. 55,932 17,951 8,470 82,353
-------- -------- -------- --------
Total....................................... $125,032 $253,557 $ 22,306 $400,895
======== ======== ======== ========
CREDIT QUALITY. Patriot's Asset Review and Credit Administration
Committee establishes 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. This committee also reviews credit
quality on a monthly basis, classifies assets in accordance with applicable
management guidelines and regulations and makes 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 and leases until management
determines that the collection of interest is doubtful (generally when a loan or
lease is 90 days or more delinquent). 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, 2002, non-performing assets ("NPAs") were $6,672,000 or
0.67% of total assets compared to $5,335,000 or .53% of total assets at December
31, 2001. The ratio of non-performing assets to total assets has grown during
the past year. The increase is predominantly associated with generally weaker
economic conditions in Patriot's lending markets. Patriot controls its level of
non-performing assets by quickly identifying problem assets and resolving them
in an expedient manner. At December 31, 2002, 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.
21
The following table sets forth information regarding non-performing
assets:
AT DECEMBER 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
Non-accrual loans and leases
greater than 90 days past due:
Commercial loans............................... $ 3,601 $ 2,047 $ 1,593 $ 189 $ 159
Commercial leases.............................. 657 686 502 56 75
Home equity and consumer....................... 58 184 255 373 212
Residential mortgages.......................... 1,031 1,636 1,142 591 494
-------- -------- -------- -------- --------
Total non-accrual loans and leases
greater than 90 days past due................ 5,347 4,553 3,492 1,209 940
-------- -------- -------- -------- --------
Non-accrual loans and leases less
than 90 days past due:
Commercial loans............................... 292 30 208 -- --
Commercial leases.............................. 355 116 -- -- --
Home equity and consumer....................... 38 133 22 74 31
Residential mortgages.......................... 236 154 166 242 98
-------- -------- -------- -------- --------
Total non-accrual loans and
leases less than 90 days past due.............. 921 433 396 316 129
-------- -------- -------- -------- --------
Total non-performing loans....................... 6,268 4,986 3,888 1,525 1,069
Real Estate Owned (REO).......................... 404 349 62 193 58
-------- -------- -------- -------- --------
Total non-performing assets...................... $ 6,672 $ 5,335 $ 3,950 $ 1,718 $ 1,127
======== ======== ======== ======== ========
Allowance for credit losses as a
percent of loans receivable.................... 1.11% .95% .88% .96% .79%
Non-performing loans as a percent
of total Loans receivable...................... 1.01 .76 .59 .24 .21
Non-performing assets as a percent
of total assets................................ .67 .53 .35 .15 .11
ALLOWANCE FOR CREDIT LOSSES. The allowance for losses on loans is based
on management's ongoing evaluation of the loan portfolio and reflects an amount
considered by management to be its best estimate of known and inherent losses in
the portfolio. Management considers a variety of factors when establishing the
allowance, such as the impact of current economic conditions, diversification of
the portfolios, delinquency statistics, results of loan review and related
classifications, and historic loss rates. In addition, certain individual loans
which management has identified as problematic are specifically provided for,
based upon an evaluation of the borrower's perceived ability to pay, the
estimated adequacy of the underlying collateral and other relevant factors. In
addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for credit losses. They may require additions
to the allowance based upon their judgements about information available to them
at the time of examination. Although provisions have been established and
segmented by type of loan, based upon management's assessment of their differing
inherent loss characteristics, the entire allowance for losses on loans is
available to absorb further loan losses in any category.
Management uses significant estimates to determine the allowance for
credit losses. Since the allowance for credit losses is dependent, to a great
extent, on conditions that may be beyond Patriot's control, it is at least
reasonably possible that management's estimate of the allowance for credit
losses and actual results could differ in the near term.
22
Patriot's total loans consist of four distinct portfolios. Each of
which is monitored and analyzed seperately.
Residential mortgage loans comprise 23.33% of total loans. The mortgage
loan portfolio is seasoned as Patriot has been in the mortgage lending business
for many years and has sold substantially all new mortgage originations in the
past three years. The level of non-performing assets in the mortgage portfolio
decreased during 2002 in correlation to the overall mortgage portfolio. The
ratio of non-performing assets to the total mortgage portfolio remained
relatively stable from 2001 to 2002. Management believes current levels can be
attributed to the current recessionary phase of the credit cycle and a
relatively low reference point in previous years' balances. Patriot's mortgage
loans are generally well collateralized and historically Patriot has experienced
minimal losses on these loans. Because of Patriot's consistent history in
mortgage lending and the long-term nature of this portfolio, Patriot
predominately relies upon an internal regression analysis that uses historical
data to estimate losses inherent in the portfolio.
Consumer loans comprise 12.99% of total loans and consist mostly of
home equity loans and home equity lines of credit. The consumer loan portfolio
also is mature as Patriot has been in the consumer lending business for many
years. As with mortgage lending Patriot predominantly uses an internal
regression analysis that uses historical data to estimate losses inherent in the
portfolio.
Commercial loans comprise 51.17% of total loans. Patriot entered the
commercial lending business in 1996 and has grown the portfolio into a
substantial portion of total loans. Patriot uses historical data to prepare
regression models to monitor trends of charge-offs and recoveries and establish
appropriate allowance levels. The level of non-performing assets in the
commercial lending portfolio increased during 2002. Patriot attributes recent
recessionary conditions to the increase in non-performing commercial assets.
Patriot also closely monitors local economic and business trends relative to its
commercial lending portfolio to estimate the effect those trends may have on
potential losses. Patriot's commercial loan portfolio contains some loans that
are substantially larger than the loans within other portfolios. The potential
loss associated with an individual loan could have a significant impact on the
allowance and charge-off levels at Patriot. Therefore Patriot closely monitors
these loans and will specifically reserve for individual loans which exhibit
weakness.
Commercial leases comprise 12.51% of total loans. Patriot entered the
commercial leasing business in 1998 principally through the acquisition of KFL.
Patriot's leasing portfolio has a short, approximately 3-year life. Patriot
performs an internal regression analysis on this portfolio using historical data
(including KFL data). Patriot also closely monitors regional and national
economic business trends relative to its commercial leasing portfolio to
estimate the effects those trend may have on potential losses.
During 2002 Patriot experienced an increase in the level of chargeoffs
in the commercial leasing portfolio. Patriot attributes the increase to a
general weakness in the overall economy, relatively low previous year levels and
higher delinquency trends in certain sectors of the portfolio. In response to
the elevated levels Patriot enhanced it's policies, procedures and resources
related to the credit administration for the leasing portfolio. The result of
these enhancements has been a steady improvement in charge-offs, delinquencies
and nonperforming leases in the latter part of 2002.
Patriot's percentage of loan loss reserves to total loans increased
from .95% in 2001 to 1.11% in 2002, which correlates to Patriot's growth in its
higher risk commercial loan and lease portfolios. During 2002, Patriot's loan
and lease portfolios decreased from $649,139,000 at December 31, 2001, to
$618,217,000. The decrease in the loan portfolios is attributed to the run-off
of mortgage loans offset by growth in the commercial loan portfolio. Based on
the growth in the commercial loan portfolio and the increased level of
non-performing loans and leases, management determined a provision of $4,075,000
was necessary to adequately address the losses inherent in Patriot's loan and
lease portfolios. Patriot believes that the allowance provides for known and
inherent credit losses at December 31, 2002.
23
The following table sets forth management's allocation of the allowance
for credit losses at the dates indicated:
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ -------------------------------- ---------------------------------
PERCENT OF PERCENT OF PERCENT OF
PERCENT LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
TO CATEGORY TO CATEGORY TO CATEGORY
TOTAL TO TOTAL TOTAL TO TOTAL TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ---------- ------ ---------- ---------- ------ --------- ----------
(IN THOUSANDS)
Commercial loans
and leases................. $5,703 82.39% 63.68% $4,767 76.90% 55.80% $4,312 73.84% 48.46%
Home equity and consumer 734 10.60 12.99 654 10.55 11.64 624 10.69 11.15
Residential mortgages....... 485 7.01 23.33 778 12.55 32.56 903 15.47 40.39
------ ------ ------ ------ ------ ------ ------ ------ ------
Total valuation allowances $6,922 100.00% 100.00% $6,199 100.00% 100.00% $5,839 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
AT DECEMBER 31,
--------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO CATEGORY TO CATEGORY
TOTAL TO TOTAL TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
Commercial loans and leases................................... $3,605 59.27% 39.02% $2,131 52.13% 26.72%
Home equity and consumer...................................... 968 15.92 12.46 683 16.72 13.52
Residential mortgages......................................... 1,509 24.81 48.52 1,273 31.15 59.76
------ ------ ------ ------ ------ ------
Total valuation allowances.................................. $6,082 100.00% 100.00% $4,087 100.00% 100.00%
====== ====== ====== ====== ====== ======
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at December 31,
2002, were $16,839,000 compared to $21,466,000 at December 31, 2001. The
decrease in cash and cash equivalents was primarily due to temporary timing
differences.
SECURITIES. Investment securities consist of US Treasury and government
agency securities, corporate debt and equity securities. Mortgage-backed
securities consist of securities generally issued by either the FHLMC, FNMA or
the Government National Mortgage Association ("GNMA"). Collateralized Mortgage
Obligations ("CMOs") consist of securities issued by the FHLMC, FNMA or private
issuers.
Total investment and mortgage-backed securities at December 31, 2002,
were $315,868,000 compared to $291,249,000 at December 31, 2001. The increase in
investment and mortgage-backed securities is primarily due to $199,135,000 of
investment purchases offset by $180,193,000 of principal repayments, sales,
calls and maturities.
24
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,
----------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- -----
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
US Treasury and government
agency securities .......................... $ 66,304 $ 66,251 $ 31,475 $ 29,837 $ -- $ --
Corporate securities.......................... 22,724 21,388 16,582 14,953 17,084 15,107
Equity securities ............................ 92,222 96,572 67,966 69,695 67,877 69,162
Mortgage-backed securities:
FHLMC......................................... 67,523 68,142 5,194 5,197 613 620
FNMA.......................................... 55,821 56,127 45,466 45,446 -- --
GNMA ......................................... 96 109 120 132 -- --
Collateralized mortgage obligations:
FHLMC......................................... 2,960 2,978 44,879 45,252 -- --
FNMA.......................................... 3,689 3,794 33,632 34,144 -- --
Other......................................... 505 507 2,938 2,956 -- --
--------- --------- --------- -------- --------- --------
Total investment and mortgage-
backed securities available
for sale................................ $ 311,844 $ 315,868 $248,252 $247,612 $ 85,574 $ 84,889
========= ========= ========= ======== ========= ========
HELD TO MATURITY:
Investment securities:
US Treasury and government
agency securities .......................... $ -- $ -- $ 14,388 $ 14,504 $ 76,545 $ 73,558
Corporate securities.......................... -- -- 1,000 1,001 1,001 1,000
Mortgage-backed securities:
FHLMC ........................................ -- -- 1,662 1,652 3,446 3,426
FNMA ......................................... -- -- 1,680 1,709 48,462 49,884
GNMA ......................................... -- -- 2,245 2,237 3,573 3,528
Collateralized mortgage obligations:
FHLMC ........................................ -- -- 16,186 15,617 90,920 89,922
FNMA.......................................... -- -- 6,476 6,358 70,043 69,767
Other ........................................ -- -- -- -- 6,196 6,175
CMBS ......................................... -- -- -- -- 2,303 2,425
--------- --------- --------- -------- --------- --------
Total investment and mortgage-
backed securities held
to maturity ............................ $ -- $ -- $ 43,637 $ 43,078 $ 302,489 $299,685
========= ========= ========= ======== ========= ========
Pursuant to an interest rate risk strategy to reduce the asset
sensitivity of the bank, certain adjustable rate held to maturity securities
were sold during 2002. Consequently, the remaining held to maturity portfolio of
$31,537,000 has been reclassified to available for sale.
25
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, 2002.
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:
U.S. Treasury and
government securities....................... $ 2,560 5.43% $ -- --% $ -- --%
Corporate securities.......................... -- -- 100 2.00 -- --
State and municipal securities ............... -- -- -- -- 224 6.21
Equity securities ............................ -- -- -- -- -- --
Mortgage-backed securities:
FHLMC......................................... 5,990 4.93 11,804 4.94 19,174 4.94
FNMA.......................................... 4,355 4.77 9,964 4.74 15,755 4.70
GNMA ......................................... 40 8.78 15 8.55 29 8.55
Collateralized Mortgage Obligations:
FHLMC......................................... 2,948 6.33 25 8.08 1 5.86
FNMA.......................................... 948 6.00 339 5.79 546 5.78
Other......................................... 16 6.50 54 6.50 77 6.50
--------- ---- --------- ---- --------- ----
Total available for sale................. $ 16,857 5.28% $ 22,301 4.86% $ 35,806 6.45%
========= ==== ========= ==== ========= ====
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:
U.S. Treasury and
government securities....................... $ 31,654 7.07% $ -- --% $ 34,214 6.95%
Corporate securities.......................... 21,288 8.22 -- -- 21,388 8.19
State and municipal securities ............... 31,813 7.23 -- -- 32,037 7.23
Equity securities ............................ -- -- 96,572 6.68 96,572 6.68
Mortgage-backed securities:
FHLMC......................................... 31,174 4.98 -- -- 68,142 4.96
FNMA.......................................... 26,053 5.12 -- -- 56,127 4.91
GNMA ......................................... 25 8.52 -- -- 109 8.63
Collateralized Mortgage Obligations:
FHLMC......................................... 4 5.86 -- -- 2,978 6.34
FNMA.......................................... 1,961 5.78 -- -- 3,794 5.84
Other......................................... 360 6.50 -- -- 507 6.50
--------- ---- --------- ---- --------- ----
Total available for sale................. $ 144,332 6.45% $ 96,572 6.68% $ 315,868 6.17%
========= ==== ========= ==== ========= ====
26
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
shareholders' equity that were held at December 31, 2002:
AT DECEMBER 31, 2002
---------------------------------
EQUITY SECURITY: CARRYING VALUE FAIR VALUE
-------------- ----------
(IN THOUSANDS)
FHLMC preferred stock ............................................................... $ 67,626 $ 71,341
FHLB stock .......................................................................... $ 17,949 $ 17,949
OTHER ASSETS. Other Assets at December 31, 2002, were $4,743,000
compared to $6,732,000 at December 31, 2001. The decrease in other assets was
primarily attributable to adjustments to Patriot's deferred tax position related
to unrealized gains on investments and mortgage backed securities available for
sale.
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
brokered deposits from various sources.
Total deposits at December 31, 2002, were $519,120,000 compared to
$533,863,000 at December 31, 2001. Of that decrease, $17,548,000 was related to
brokered deposits and $34,831,000 was related to higher costing retail
certificates of deposits, replaced by a $37,636,000 increase in lower costing
core deposits. The reduction in brokered deposits was part of Patriot's strategy
to deleverage the balance sheet and reduce the dependence on brokered funding.
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,
-------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ---------------------------- ------------------------------
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............. $140,575 27.14% 2.13% $130,667 22.72% 3.80% $103,493 17.35% 4.84%
Savings deposits.................. 55,726 10.76 1.87 32,351 5.62 1.92 32,907 5.52 2.45
Transaction deposits.............. 74,500 14.38 0.19 62,827 10.92 0.28 63,143 10.58 0.29
Branch certificates
of deposit ..................... 214,721 41.44 4.11 243,860 42.39 5.99 201,899 33.84 5.71
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total branch deposits............. 485,522 93.72 2.68 469,705 81.65 4.34 401,442 67.29 4.37
Jumbo certificates
of deposit...................... 32,529 6.28 4.57 105,530 18.35 6.93 195,176 32.71 6.71
Total deposits.................... $518,051 100.00% 2.79% $575,235 100.00% 4.81% $596,618 100.00% 5.13%
======== ====== ==== ======== ====== ==== ======== ====== ====
At December 31, 2002, the Company had $51,719,000 in brokered and
branch certificate of deposit accounts in amounts of $100,000 or more maturing
as follows.
(IN THOUSANDS)
Three months or less ................................................................. $ 6,925
Over three through six months......................................................... 1,112
Over six through 12 months............................................................ 21,823
Over 12 months ....................................................................... 21,859
--------
Total............................................................................... $ 51,719
========
27
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 FHLB upon the security of certain loan portfolios,
mortgage-backed securities, and investment 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 and Federal
Funds as a funding source. Repurchase agreements are generally short-term
obligations collateralized by government agency and other securities. Federal
Funds are transactions that are typically between financial institutions and are
short-term unsecured borrowings.
During 2002, FHLB (short-term and long-term) advances decreased
$39,006,000. These borrowings were replaced with less expensive Federal Funds
and customer repurchase agreements, $20,000,000 and $14,210,000 respectively.
Patriot also issued $5,000,000 of adjustable rate trust preferred securities and
repurchased $2,500,000 of its fixed rate trust preferred issue. There was a
shift in the maturity of the borrowing portfolio. Short-term borrowings
increased $85,210,000, which was accomplished through the prepayment and
maturity of FHLB advances. This increase in short-term borrowings better
compliments certain adjustable rate loan and investment portfolios.
The following table presents certain information regarding borrowed
funds:
AT DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- -------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
Federal Funds purchased...................... $ 20,000 1.22% $ -- --% $ -- --
FHLB advances ............................... 348,173 4.59 387,179 5.57 317,186 5.67
Repurchase agreements ....................... 14,210 1.79 -- -- 80,651 6.48
Trust preferred ............................. 20,500 9.27 18,000 10.59 19,000 10.62
-------- ---- -------- ----- -------- -----
Total borrowings outstanding .............. $402,883 4.56% $405,179 5.79% $416,837 6.06%
======== ==== ======== ==== ======== ====
Short-term (less than 1 year)................ $155,210 2.56% $ 70,000 6.31% $ 80,651 6.13%
Long-term (over 1 year) ..................... 247,673 5.82 335,179 5.68 336,186 5.97
-------- ---- -------- ----- -------- -----
Total borrowings outstanding .............. $402,883 4.56% $405,179 5.79% $416,837 6.06%
======== ==== ======== ==== ======== ====
SHAREHOLDERS' EQUITY. Total shareholders' equity was $65,945,000 at
December 31, 2002 compared to $61,706,000 at December 31, 2001. The increase was
primarily a result of net income offset by the repurchase of shares of Patriot
Bank Corp. common stock, cash dividends paid and an increase in accumulated
other comprehensive income.
28
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR CREDIT LOSSES
The allowance for losses on loans is based on management's ongoing
evaluation of the loan portfolio and reflects an amount considered by management
to be its best estimate of known and inherent losses in the portfolio.
Management considers a variety of factors when establishing the allowance, such
as the impact of current economic conditions, diversification of the portfolios,
delinquency statistics, results of loan review and related classifications, and
historic loss rates. In addition, certain individual loans which management has
identified as problematic are specifically provided for, based upon an
evaluation of the borrower's perceived ability to pay, the estimated adequacy of
the underlying collateral and other relevant factors. In addition, regulatory
authorities, as an integral part of their examinations, periodically review the
allowance for credit losses. They may require additions to the allowance based
upon their judgements about information available to them at the time of
examination. Although provisions have been established and segmented by type of
loan, based upon management's assessment of their differing inherent loss
characteristics, the entire allowance for losses on loans is available to absorb
further loan losses in any category.
Management uses significant estimates to determine the allowance for
credit losses. Since the allowance for credit losses is dependent, to a great
extent, on conditions that may be beyond Patriot's control, it is at least
reasonably possible that management's estimate of the allowance for credit
losses and actual results could differ in the near term.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established against deferred tax assets
when in the judgement of management, it is more likely than not that such
deferred tax assets will not become available. Based on management's evaluation
of the likelihood of realization, no valuation allowance has been established.
Because the judgement about the level of future taxable income is dependent to a
great extent on matters that may, at least in part be beyond Patriot's control,
it is at least reasonably possible that management's judgement about the need
for a valuation allowance for deferred taxes could change in the near term.
REO AND OTHER REPOSSESSED PROPERTY
Real estate owned is defined to include real estate Patriot acquires
through foreclosure. REO is recorded on Patriot's books at the lower of
Patriot's carrying value in the loan or the fair value of the property as of the
date of transfer to REO. Any excess of the recorded investment in the loan over
the fair market value is charged against Patriot's loan loss reserve.
Other repossessed property consists mostly of leased equipment returned
to Patriot at the end of the lease. The off-lease equipment is recorded on
Patriot's books at the lower of Patriot's carrying value in the lease or the
fair value of the equipment as of the date of transfer to other repossessed
property. Any excess of the recorded investment in the lease over the fair
market value is recorded as a loss. Additionally, valuation of REO and other
repossessed property is dependent to a great extent on current economic, market
and geographic conditions, and that may, at least in part be beyond Patriot's
control. It is at least reasonably possible that management's estimates included
in the valuation of REO and other repossessed property could change in the near
term. Patriot's current judgement is that the valuation of REO and other
repossessed property remains appropriate at December 31, 2002.
29
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, Federal Funds 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 2002, $181,545,000 of liquidity was provided from the repayment
and sale of mortgage-backed securities. Additional liquidity of $60,412,000 was
provided by the repayment of loans and $37,635,000 by core deposit growth. These
funds were invested in $199,135,000 of investment securities and $33,644,000 in
commercial loans. Excess funds were used to repay $34,831,000 and $17,548,000 of
branch certificates of deposit and brokered certificates of deposit,
respectively.
At December 31, 2002, Patriot had outstanding loan commitments of
$90,337,000. Patriot anticipates that it will have sufficient funds available to
meet its loan commitments. Certificates of deposit that are scheduled to mature
in one year or less from December 31, 2002, totaled $131,299,000. Based upon
historical experience, Patriot expects that substantially all of the maturing
certificates of deposit will be retained at maturity, excluding wholesale
certificates in the amount of $29,532,000.
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 CAMELS 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). A bank is
considered "well capitalized" if it maintains a minimum leverage capital ratio
of not less than 5% of tier 1 capital to total adjusted assets, a tier 1 capital
ratio of not less than 6% of risk adjusted assets, and a minimum risk-based
total capital ratio (based upon credit risk) of not less than 10%. At December
31, 2002, Patriot Bank's and Patriot Bank Corp.'s capital ratios exceeded all
requirements to be considered well capitalized. The following table sets forth
the capital ratios of Patriot Bank Corp., Patriot Bank and the current
regulatory requirements at December 31, 2002:
AS OF DECEMBER 31, 2002
-----------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION
------------------- ------------------ -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(IN THOUSANDS)
Total capital (to risk weighted assets)
Patriot Bank Corp.............................. $81,013 12.61% $51,376 8% $64,220 10%
Patriot Bank................................... 79,350 12.35% 51,400 8% 64,250 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp.............................. 72,134 11.23% 25,688 4% 38,532 6%
Patriot Bank................................... 70,398 10.96% 25,700 4% 38,550 6%
Tier I capital (to average assets)
Patriot Bank Corp.............................. 72,134 7.33% 39,378 4% 49,223 5%
Patriot Bank .................................. 70,398 7.15% 39,378 4% 49,223 5%
30
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's Board of Directors has established an Asset/Liability
Committee, 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 Company uses three complementary methods to analyze and measure
interest rate risk as part of the overall management of interest rate risk. They
are income simulation modeling, estimates of economic value of equity, and
static gap analysis. The combination of these three methods provides a
reasonably comprehensive summary of the level of interest rate risk of the
Company when exposed to time factors and changes in interest rate environments.
Income simulation modeling is utilized in measuring Patriot's 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.
Through the use of income simulation modeling the company has
calculated an estimate of net interest income for the year ending December 31,
2003, based upon the assets, liabilities and off-balance sheet financial
instruments in existence at December 31, 2002. Patriot has also estimated
changes to that estimated net interest income based upon interest rates rising
or falling in monthly increments ("rate ramps"). Rate ramps assume that all
interest rates increase or decrease in monthly increments evenly throughout the
period modeled, with a floor of 25bp. The following table reflects the estimated
percentage change in estimated net interest income for the year ending December
31, 2003 resulting from changes in interest rates.
RATE RAMP
TO INTEREST RATES % CHANGE
- ----------------- --------
+2% (1.59%)
-2% (.02%)
Economic value of equity ("EVE") estimates the discounted present value
of asset and liability cash flows. Discount rates are based upon market prices
for comparable assets and liabilities. As part of this evaluation the company
has contracted with an independent consultant to perform an extensive core
deposit analysis to appropriately estimate the discounted present value of the
retail deposit franchise. Upward and downward rate shocks are used to measure
volatility in relation to such interest rate movements in relation to an
unchanged environment. This method of measurement primarily evaluates the longer
term repricing risks and options in the Company's balance sheet. The Company has
established policy limits for upward and downward rate shocks of 20% of economic
value of equity at risk for every 100 basis points of interest rate shock.
Additionally the Company has a policy limit that the ratio of EVE adjusted
equity to EVE adjusted assets will be maintained above a 5% ratio. The following
table reflects the estimated economic value of equity at risk and the ratio of
EVE adjusted equity to EVE adjusted assets at December 31, 2002, resulting from
shocks to interest rates.
PRECENT CHAANGE EVE EQUITY/
RATE SHOCK FROM BASE EVE ASSETS
- ---------- --------------- -----------
+2% -12.55% 11.39%
+1% -5.14% 12.01%
Base 12.32%
-1% -5.70% 11.42%
-2% -15.94% 10.03%
31
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 re-price within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or re-pricing within a specific time period and
the amount of interest-bearing liabilities maturing or re-pricing within that
time period.
The following table summarizes the amount of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 2002, which are
anticipated, based upon certain assumptions, to re-price or mature in each of
the future time periods shown. Loan amounts reflect principal balances expected
to be repaid and/or re-priced 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. Estimated
prepayment rates were applied to mortgage loans and mortgage-backed securities
based upon industry expectations. Core deposit decay rates have been estimated
based upon a historical analysis of core deposit trends. With the exceptions
noted above, the amount of assets and liabilities shown which re-price or mature
during a particular period were determined in accordance with the earlier of
term to re-pricing or the contractual maturity of the asset or liability. The
table sets forth the gap and cumulative gap as a percentage of total assets at
December 31, 2002:
0-90 91-180 181-365
DAYS DAYS DAYS
---- ------ -------
GAP to Total Assets............................................ 8.55% 4.88% -1.84%
Cumulative GAP to Total Assets ................................ 8.55% 13.43% 11.59%
As shown above, the company has a positive cumulative gap (interest
sensitive assets are greater than interest sensitive liabilities) within the
next year, which generally indicates that an increase in rates may lead to an
increase in net interest income and a decrease in rates may lead to a decrease
in net interest income. Interest sensitivity gap analysis measures whether
assets or liabilities may reprice but does not capture the ability to reprice
based on market conditions or the magnitude of the change in the repricing on
assets or liabilities. Thus indications based on a positive or negative gap
position need to be analyzed in conjunction with other interest rate risk
management tools.
The Company's management believes that the assumptions and combination
of methods utilized in evaluating estimated net interest income are reasonable;
however, the interest rate sensitivity of the Company'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.
32
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,
2002 2002 2002 2002 2001 2001 2001 2001
-------- -------- --------- --------- ------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total interest income ................. $ 15,759 $ 16,583 $ 16,815 $ 16,957 $17,537 $ 18,507 $ 19,187 $ 20,619
Total interest expense................. 8,166 8,962 9,549 10,181 11,220 12,520 13,592 14,877
-------- -------- --------- --------- ------- -------- -------- ---------
Net interest income ................... 7,593 7,621 7,266 6,776 6,317 5,987 5,595 5,742
Provision for credit losses ........... 1,200 1,200 1,000 675 550 500 500 450
-------- -------- --------- --------- ------- -------- -------- ---------
Net interest income after
provision for credit losses ......... 6,393 6,421 6,266 6,101 5,767 5,487 5,095 5,292
Other income........................... 1,793 1,985 1,803 1,661 1,951 1,991 1,947 2,003
Other expenses......................... 5,943 5,901 5,487 5,333 5,434 5,271 4,955 5,108
-------- -------- --------- --------- ------- -------- -------- ---------
Income (loss) before taxes and
cumulative effect of change
in accounting principle.............. 2,243 2,505 2,582 2,429 2,284 2,207 2,087 2,187
Income tax............................. 377 493 602 589 640 629 596 597
-------- -------- --------- --------- ------- -------- -------- ---------
Income before cumulative
effect of change in
accounting principle................. $ 1,866 $ 2,012 $ 1,980 $ 1,840 $ 1,644 $ 1,578 $ 1,491 $ 1,590
Cumulative effect of change
in accounting principle,
net of ($105) in
income tax .......................... -- -- -- -- -- -- -- (204)
======== ======== ========= ========= ======= ======== ======== =========
Net income ............................ $ 1,866 $ 2,012 $ 1,980 $ 1,840 $ 1,644 $ 1,578 $ 1,491 $ 1,386
======== ======== ========= ========= ======= ======== ======== =========
DILUTED EARNINGS PERSHARE:
Income before cumulative
effect of change in
accounting principle................. $ 0.33 $ 0.32 $ 0.31 $ 0.30 $ 0.27 $ 0.26 $ 0.25 $ 0.27
Cumulative effect of change
in accounting principle.............. -- -- -- -- -- -- -- (.03)
-------- -------- --------- --------- ------- -------- -------- ---------
Net Income ............................ $ 0.33 $ 0.32 $ 0.31 $ 0.30 $ 0.27 $ 0.26 $ 0.25 $ 0.24
======== ======== ========= ========= ======= ======== ======== =========
Dividends per share.................... $ .110 $ .103 $ .100 $ .0975 $ .093 $ .093 $ .093 $ .093
Market Prices - High................... $ 15.47 $ 14.24 $ 15.00 $ 13.78 $ 10.90 $ 11.95 $ 10.30 $ 8.19
Low ................... $ 13.46 $ 12.96 $ 13.38 $ 10.50 $ 10.00 $ 9.15 $ 7.53 $ 6.81
33
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
SUMMARY. For the year ended December 31, 2001, Patriot reported net
income of $6,099,000 or $1.02 diluted earnings per share. For the year ended
December 31, 2000, Patriot reported net income of $2,009,000 or $.34 diluted
earnings per share. Included in the year 2000 earnings are non-recurring,
after-tax charges totaling $3,224,000 which includes a one time restructuring
charge of $1,453,000, non-recurring expenses of $986,000, both related to the
restructuring of Patriot's mortgage banking operation, and $785,000 related to
the resignation of Patriot's former President and Chief Executive Officer. 2000
core earnings excluding non-recurring charges were $5,233,000 or $.89 diluted
earnings per share. Patriot adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as of January 1, 2001. The cumulative
effect of the adoption was a $204,000 decrease to consolidated income, net of
$105,000 of tax benefit. Return on average equity was 10.52% for 2001 and 3.94%
for 2000. Excluding the non-recurring charges in 2000, return on average equity
was 10.30%.
NET INTEREST INCOME. Net interest income for 2001 was $23,641,000
compared to $22,672,000 in 2000. The yield on Patriot's interest-earning assets
decreased to 7.71% for the year 2001 compared to 7.82% for 2000. The decrease in
yield on Patriot's interest-earning assets is a result of a decrease in interest
rates. The cost of Patriot's interest-bearing liabilities was 5.22% for 2001
compared to 5.58% for 2000. The decrease in funding costs resulted from
generally lower interest rates coupled with reductions in higher costing
wholesale funding. Overall, Patriot's net interest margin increased to 2.50% for
2001 compared to 2.24% in 2000.
Interest on loans was $54,122,000 for 2001 compared to $55,531,000 for
2000. The average balance of loans in 2001 was $653,460,000 with an average
yield of 8.30% compared to an average balance of $666,171,000 with an average
yield of 8.33% in 2000. The decrease in average balance is a result of Patriot
allowing mortgages to run-off, offset by increases in commercial loans. The
decrease in average yield is primarily a result of a decrease in interest rates.
Interest on Patriot's investment portfolio (investment and
mortgage-backed securities) was $21,220,000 for 2001 compared to $28,190,000 for
2000. The average balance of the investment portfolio was $333,872,000 with an
average yield of 6.73% for 2001 compared to an average balance of $412,712,000
with an average yield of 7.17% for 2000. The decrease in average balance of the
investment portfolio is primarily due to Patriot allowing the investment
portfolio to amortize so that it can be replaced with generally higher-yielding
commercial loans and leases. The decrease in average yield is related to general
decreases in market rates on adjustable rate securities.
Interest on total deposits was $27,690,000 for 2001 compared to
$30,714,000 for 2000. The average balance of total deposits was $575,235,000
with an average cost of 4.81% for 2001 compared to an average balance of
596,618,000 with an average cost of 5.15% for 2000. The decrease in average
balance of deposits is primarily the result of a decrease in Patriot's jumbo
certificate of deposits, offset by increases in money market accounts,
transaction based deposit accounts and other certificates of deposits. The
average balance on jumbo certificates of deposit decreased to $105,530,000 in
2001 compared to $195,176,000 in 2000. The average balance of retail deposits
(total deposits less jumbo certificate of deposits) was $469,705,000 with an
average cost of 4.34% for 2001 compared to an average balance of $401,441,000
with an average cost of 4.36% for 2000. The increase in average balance on
retail deposits is the result of growth in certificates of deposit and money
market accounts. The overall decrease in the average cost on deposits is
primarily the result of a decrease in interest rates and emphasis placed on
lower cost money market and transaction based deposit accounts.
Interest on borrowings was $24,519,000 in 2001 compared to $30,757,000
in 2000. The average balance of borrowings was $421,084,000 with an average cost
of 5.82% for 2001 compared to an average balance of $504,666,000 with an average
cost of 6.01% for 2000. The decrease in average balance is primarily due to
borrowings being repaid by proceeds received on investment sales, run-off of the
mortgage loan portfolio and growth in Patriot's retail deposits, offset by
growth in Patriot's commercial loan and lease portfolios. The decrease in
average cost is due to lower interest rates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was
$2,000,000 for 2001 compared to $1,125,000 for 2000. See "Credit Quality" for a
detailed discussion of Patriot's asset quality and reserving methodology.
NON-INTEREST INCOME. Total non-interest income was $7,892,000 for 2001
compared to $7,124,000 for 2000. The increase was primarily due to an increased
emphasis on recurring non-interest income including loan and deposit fees offset
by a decrease in ATM fees that was primarily the result of discontinuing the
operations of several ATM machines at the end of 2000.
34
NON-INTEREST EXPENSE. Total non-interest expense was $20,768,000 for
2001 compared to $26,844,000 for 2000. Non-interest expense in 2000 included
$785,000 related to the resignation of Patriot's former President and Chief
Executive Officer, a one time restructuring charge of $1,453,000 and
non-recurring expenses of $ 986,000 related to the restructuring of Patriot's
mortgage company and call center. The decrease in non-interest expense was
primarily due to Patriot's restructuring of its mortgage banking operations
overhead structure from a fixed to variable cost model. Patriot's tax equivalent
efficiency ratio was 63.94% in 2001 compared to 70.38% in 2000, exclusive of the
non-recurring charges in 2000. The tax equivalent efficiency ratio is calculated
by taking non-interest expense divided by non-interest income and net interest
income before provision. Net interest income before provision is adjusted to
take into consideration tax beneficial investments and loans.
INCOME TAX PROVISION. The income tax provision was $2,462,000 compared
to $(182,000) for 2000. The effective tax rate for 2001 was 28.09% compared to
(9.96)% for 2000. In 2000, the (9.96)% effective tax rate was the result of the
tax impact of the non-recurring costs. Excluding the non-recurring costs in
2000, Patriot's effective tax rate was 22.03%. The increase in the effective tax
rate is primarily due to income provided by certain tax preferential securities
comprising a smaller percentage of taxable income in 2001.
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, 2002,
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.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT
Patriot Bank Corp. (the "Company") is responsible for the preparation,
integrity and fair presentation of its published financial statements as of
December 31, 2002, and the year then ended. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America, and as such, include amounts, some of which are based
on judgments and estimates of management.
Management of the Company is responsible for establishing and
maintaining effective internal control over financial reporting presented in
conformity with accounting principles generally accepted in the United States of
America.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal controls can
provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
Management assessed the Company's internal control over financial
reporting presented in conformity with accounting principles generally accepted
in the United States of America as of December 31, 2002. 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 that, as of December 31, 2002, the Company maintained
effective internal control over financial reporting presented in conformity with
accounting principles generally accepted in the United States of America and
call report instructions.
Management is also responsible for compliance with the federal and
state laws and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the Federal Deposit
Insurance Corporation as safety and soundness laws and regulations.
Management assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that the Company complied, in all significant respects, with
the designated laws and regulations relating to safety and soundness for the
year ended December 31, 2002.
/s/ Richard A. Elko /s/ James G. Blume
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
36
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, 2002 and 2001,
and the related consolidated statements of income, shareholder's equity, cash
flows and comprehensive income for each of the years in the three year period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2002 and 2001, and the results of their operations and their
cash flows for each of the years in the three year period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets in 2002 and SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities in 2001.
/s/ KPMG LLP
Philadelphia, Pennsylvania
January 20, 2003
37
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------------
2002 2001
----------- ----------
ASSETS
Cash and due from banks......................................................... $ 15,741 $ 14,218
Interest-earning deposits in other financial institutions....................... 1,098 7,248
----------- ----------
Total cash and cash equivalents............................................. 16,839 21,466
Securities available for sale .................................................. 315,868 247,612
Securities held to maturity (market value of $0 and $43,078
at December 31, 2002 and 2001, respectively) ................................. -- 43,637
Loans held for sale............................................................. 4,314 6,652
Loans and leases receivable, net of allowances for credit losses of $6,922
and $6,199 at December 31, 2002 and 2001, respectively........................ 611,295 642,940
Premises and equipment, net .................................................... 7,612 6,758
Accrued interest receivable .................................................... 3,946 3,988
Real estate owned and other repossessed property ............................... 404 349
Cash surrender value life insurance ............................................ 18,208 17,305
Goodwill ....................................................................... 8,777 8,688
Amortizing intangible assets ................................................... 3,137 3,943
Other assets.................................................................... 4,743 6,732
----------- ----------
Total assets ............................................................... $ 995,143 $1,010,070
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits........................................................................ $ 519,120 $ 533,863
FHLB advances and federal funds ................................................ 368,173 387,179
Customer repurchase agreements.................................................. 14,210 --
Advances from borrowers for taxes and insurance................................. 2,208 3,329
Trust preferred securities ..................................................... 20,500 18,000
Other liabilities .............................................................. 4,987 5,993
----------- ----------
Total liabilities........................................................... 929,198 948,364
=========== ==========
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued
at December 31, 2002 and 2001, respectively................................... -- --
Common stock, no par value, 20,000,000 shares authorized, 6,560,436 and
6,555,436 shares issued at December 31, 2002 and 2001, respectively .......... -- --
Additional paid-in capital...................................................... 57,611 57,867
Common stock acquired by ESOP, 308,513 and 334,225
shares at cost at December 31, 2002 and 2001, respectively.................... (1,638) (1,819)
Common stock acquired by MRP, 8,228 and 5,650 shares
at amortized cost at December 31, 2002 and 2001, respectively ................ (98) (68)
Retained earnings .............................................................. 13,855 8,598
Treasury stock acquired, 469,249 and 235,833 shares at cost at
December 31, 2002 and 2001, respectively ..................................... (6,441) (3,051)
Accumulated other comprehensive income ......................................... 2,656 179
----------- ----------
Total shareholders' equity .................................................. 65,945 61,706
----------- ----------
Total liabilities and shareholders' equity .................................. $ 995,143 $1,010,070
=========== ==========
The accompanying notes are an integral part of these statements.
38
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
---- ---- ----
INTEREST INCOME
Interest-earning deposits .......................................................... $ 73 $ 508 $ 422
Investment securities .............................................................. 17,021 21,220 28,190
Loans and leases ................................................................... 49,020 54,122 55,531
-------- -------- --------
Total interest income ........................................................ 66,114 75,850 84,143
-------- -------- --------
INTEREST EXPENSE
Deposits ........................................................................... 14,479 27,690 30,714
Short-term borrowings .............................................................. 4,232 2,387 16,464
Long-term borrowings ............................................................... 18,147 22,132 14,293
-------- -------- --------
Total interest expense ....................................................... 36,858 52,209 61,471
-------- -------- --------
Net interest income before provision for credit losses ............................. 29,256 23,641 22,672
Provision for credit losses ........................................................ 4,075 2,000 1,125
-------- -------- --------
Net interest income after provision for credit losses .............................. 25,181 21,641 21,547
-------- -------- --------
NON-INTEREST INCOME
Service fees, charges and other operating income ................................... 5,465 5,563 4,934
Mortgage banking income ............................................................ 1,928 1,791 2,196
Loss on sale of real estate acquired through foreclosure ........................... (15) (20) (7)
Gain on sale of investment and mortgage-backed securities .......................... 1,351 558 1
Loss on the disposition of borrowings .............................................. (1,488) -- --
-------- -------- --------
Total non-interest income .................................................... 7,241 7,892 7,124
-------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits ..................................................... 12,757 9,748 12,580
Occupancy and equipment ............................................................ 4,065 4,538 6,663
Professional services .............................................................. 1,281 960 1,221
Advertising ........................................................................ 745 822 652
Deposit processing ................................................................. 1,117 1,096 1,262
Amortization of intangible assets .................................................. 486 1,216 1,458
Office supplies and postage ........................................................ 739 819 735
Other operating expenses ........................................................... 1,474 1,569 2,273
-------- -------- --------
Total non-interest expense ................................................... 22,664 20,768 26,844
-------- -------- --------
Income before taxes and cumulative effect of change in accounting principle ........ 9,758 8,765 1,827
Income tax expense (benefit) ...................................................... 2,060 2,462 (182)
-------- -------- --------
Income before cumulative effect of change in accounting principle .................. 7,698 6,303 2,009
Cumulative effect of change in accounting principle,
net of ($105) in income taxes ..................................................... -- (204) --
-------- -------- --------
Net Income ......................................................................... $ 7,698 $ 6,099 $ 2,009
======== ======== ========
BASIC EARNINGS PER SHARE:
Income before cumulative effect of change in accounting principle .................. $ 1.29 $ 1.07 $ .35
Cumulative effect of change in accounting principle ................................ -- (.03) --
-------- -------- --------
Net Income ......................................................................... $ 1.29 $ 1.04 $ .35
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of change in accounting principle .................. $ 1.26 $ 1.05 $ .34
Cumulative effect of change in accounting principle ................................ -- (.03) --
-------- -------- --------
Net Income ......................................................................... $ 1.26 $ 1.02 $ .34
======== ======== ========
Dividends Per Share ................................................................ $ 0.41 $ 0.37 $ 0.36
======== ======== ========
The accompanying notes are an integral part of these statements.
39
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000, IN THOUSANDS)
ACCUMULATED
NUMBER ADDITIONAL OTHER
OF PAID-IN RETAINED TREASURY COMPREHENSIVE
SHARES CAPITAL ESOP MRP EARNINGS STOCK INCOME TOTAL
------ ---------- ---- --- -------- -------- ------------- -----
BALANCE AT JANUARY 1, 2000 5,691 $ 58,117 $ (2,141) $(638) $ 4,737 $ (4,172) $ (6,135) $ 49,768
----- -------- -------- ----- -------- -------- -------- --------
Common stock retired by MRP ............... -- (20) -- -- -- -- -- (20)
Common stock forfeited by MRP ............. -- -- -- 20 -- -- -- 20
Release and amortization of MRP ........... 52 3 -- 377 -- -- -- 380
Release of ESOP shares .................... 25 74 142 -- -- -- -- 216
Sale of stock associated with ESPP ........ 16 -- -- -- -- 129 -- 129
Change in unrealized gains on
securities available for sale,
net of taxes ............................ -- -- -- -- -- -- 1,211 1,211
Net income ................................ -- -- -- -- 2,009 -- -- 2,009
Cash dividends paid ....................... -- -- -- -- (1,913) -- -- (1,913)
----- -------- -------- ----- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000 5,784 $ 58,174 $ (1,999) $(241) $ 4,833 $ (4,043) $ (4,924) $ 51,800
===== ======== ======== ===== ======== ======== ======== ========
Release and amortization of MRP ........... 52 42 -- 173 -- -- -- 215
Release of ESOP shares .................... 26 58 180 -- -- -- -- 238
Sale of stock associated with ESPP ........ 7 -- -- -- -- 59 -- 59
Change in unrealized gains on
securities available for sale,
net of taxes ............................ -- -- -- -- -- -- 5,103 5,103
Exercise of stock options ................. 111 (407) -- -- -- 933 -- 526
Net income ................................ -- -- -- -- 6,099 -- -- 6,099
Cash dividends paid ....................... -- -- -- -- (2,334) -- -- (2,334)
----- -------- -------- ----- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2001 5,980 $ 57,867 $ (1,819) $ (68) $ 8,598 $ (3,051) $ 179 $ 61,706
===== ======== ======== ===== ======== ======== ======== ========
Common stock issued ....................... 5 70 -- -- -- -- -- 70
Common stock acquired by MRP .............. (5) -- -- (70) -- -- -- (70)
Release and amortization of MRP ........... 2 -- -- 40 -- -- -- 40
Purchase of treasury stock ................ (293) -- -- -- -- (4,189) -- (4,189)
Release of ESOP shares .................... 26 172 181 -- -- -- -- 353
Sale of stock associated with ESPP ........ 9 -- -- -- -- 118 -- 118
Change in unrealized gains on
securities available for sale,
net of taxes ............................ -- -- -- -- -- -- 2,477 2,477
Exercise of stock options ................. 50 (498) -- -- -- 680 -- 182
Stock awards .............................. -- -- -- -- -- 1 -- 1
Net income ................................ -- -- -- -- 7,698 -- -- 7,698
Cash dividends paid ....................... -- -- -- -- (2,441) -- -- (2,441)
----- -------- -------- ----- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2002 5,774 $ 57,611 $ (1,638) $ (98) $ 13,855 $ (6,441) $ 2,656 $ 65,945
===== ======== ======== ===== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
40
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES
Net Income ...................................................................... $ 7,698 $ 6,099 $ 2,009
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and accretion of:
Deferred loan origination fees .............................................. (717) (310) (529)
Premiums and discounts ...................................................... (1,010) (1,914) (3,128)
MRP shares .................................................................. 40 215 380
Goodwill and other intangible assets .......................................... 486 1,216 1,458
Provision for credit losses ................................................... 4,075 2,000 1,125
Release of ESOP shares ........................................................ 353 238 216
Gain on sale of investment securities ......................................... (1,351) (249) (1)
Loss on sale and write down of real estate owned and other repossessed assets . 194 63 23
Depreciation of premises and equipment ........................................ 1,278 1,546 2,686
Loss on disposition of equipment .............................................. 57 -- --
Mortgage loans originated for sale ............................................ (90,436) (81,371) (125,273)
Mortgage loans sold ........................................................... 92,774 83,283 170,025
Deferred income tax benefit (expense) ........................................ 155 (1,358) 121
Increase in cash surrender value of life insurance ............................ (903) (822) (783)
Decrease (increase) in accrued interest receivable ............................ 42 1,137 (280)
(Increase) decrease in other assets ........................................... (33) 54 3,583
(Decrease) increase in other liabilities ...................................... (1,097) 3,584 (3,835)
--------- --------- ---------
Net cash provided by operating activities ................................. 11,605 13,411 47,797
--------- --------- ---------
INVESTING ACTIVITIES
Loan originations and principal payments on loans, net .......................... 26,768 4,109 (77,849)
Proceeds from the sale of securities -- available for sale .................... 65,701 50,920 4,625
Proceeds from the maturity of securities -- available for sale ................ 104,206 57,733 4,079
Proceeds from the maturity of securities -- held to maturity .................. 11,638 38,382 45,558
Purchase of securities -- available for sale .................................. (199,135) (41,010) (1,118)
Proceeds from sale of real estate owned ....................................... 1,268 1,641 366
Purchase of premises and equipment ............................................ (2,224) (746) (1,665)
Proceeds from sale of premises and equipment .................................. 35 16 2,431
--------- --------- ---------
Net cash provided by (used in) investing activities ....................... 8,257 111,045 (23,573)
--------- --------- ---------
FINANCING ACTIVITIES
Net (decrease) increase in deposits ........................................... (14,743) (116,095) 149,301
(Repayment of) proceeds from short term borrowings ............................ 45,210 (10,651) (367,054)
Funding (repurchase) of trust preferred securities ............................ 2,500 (1,000) --
Proceeds from long term borrowings ............................................ -- -- 217,000
Repayment of long term borrowings ............................................. (50,006) (7) (1,904)
Decrease in advances from borrowers for taxes and insurance ................... (1,121) (564) (868)
Cash paid for dividends ....................................................... (2,441) (2,334) (1,913)
Proceeds from the sale of stock associated with ESPP .......................... 118 59 129
Proceeds from the exercise of stock options ................................... 182 526 --
Purchase of treasury stock, net of stock awards ............................... (4,188) -- --
--------- --------- ---------
Net cash used in financing activities ..................................... (24,489) (130,066) (5,309)
--------- --------- ---------
Decrease (increase) in cash and cash equivalents .............................. (4,627) (5,610) 18,915
Cash and cash equivalents at beginning of year .................................. 21,466 27,076 8,161
--------- --------- ---------
Cash and cash equivalents at end of year ........................................ $ 16,839 $ 21,466 $ 27,076
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest .......................................................... $ 14,261 $ 27,433 $ 30,084
Cash paid (received) for income taxes ........................................... $ 1,575 $ (172) $ 1,254
Transfers from loans and leases to real estate owned and other repossessed
property .................................................................... $ 1,517 $ 1,900 $ 258
Transfer of securities to available for sale from held to maturity .............. $ (31,357) $(220,471) $ --
Reclassification of long-term borrowings to short-term borrowings ............... $ 40,000 $ -- $ --
The accompanying notes are an integral part of these statements.
41
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
---- ---- ----
Net income .................................................................... $ 7,698 $ 6,099 $ 2,009
Other comprehensive income
Unrealized gains on securities
Unrealized gains associated with change in accounting principle ........... -- 3,000 --
Unrealized holding gains (losses) arising during the period ............... 3,368 2,267 1,212
Less: Reclassification adjustment for gains included in net income
Net gains on the sale of investment securities ............................ (1,351) (249) (1)
Income tax expense associated with net gains on the sale of
investment securities .................................................... 459 85 --
-------- -------- --------
Comprehensive income ........................................................ $ 10,174 $ 11,202 $ 3,220
======== ======== ========
The accompanying notes are an integral part of these statements.
42
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
of Patriot Bank Corp. and Subsidiaries ("Patriot" or the "Bank"). Such
accounting and reporting policies conform with generally accepted 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 financial services offices located in Berks, Chester,
Lehigh, Montgomery and Northampton 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, asset management
companies, mutual funds 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.
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 inter-company 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,
valuation of deferred tax assets, and other real estate owned.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement as amended by
SFAS No. 137 in June 1999 and SFAS No. 138 in June 2000 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. Patriot adopted SFAS No. 133 on January 1, 2001. At the time of
adoption, Patriot reclassified approximately $220,471,000 of fixed rate mortgage
backed securities, Collateralized Mortgage Obligation's ("CMOs") and agency
securities from held to maturity to available for sale and equity resulting in a
net of tax increase of approximately $3,000,000 in accumulated other
comprehensive income. Patriot typically has not used derivative instruments and
currently holds no positions that had further impact on earnings, financial
condition or equity. During 2001, Patriot sold $30,333,000 of the securities
reclassified resulting in a cumulative change in accounting principle with a net
after tax impact of a $204,000 loss.
43
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. The Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements, including requirements for periodic impairment evaluation.
The provisions of the Statement are required to be applied starting with fiscal
years beginning after December 15, 2001, except that goodwill and intangible
assets acquired after June 30, 2001, are subject immediately to the
non-amortization and amortization provisions of the Statement. The Statement is
required to be applied at the beginning of an entity's fiscal year and to be
applied to all goodwill and other intangible assets recognized in its financial
statements at that date. Patriot adopted this Statement on January 1, 2002 and
has completed its impairment evaluation. Based on this evaluation, there was no
indication of impairment. See footnote 2 for further information on Patriot's
intangible assets.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. It is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Earlier application is encouraged. This
statement does not apply to Patriot and therefore, did not have an impact on
it's earnings, financial condition, or equity.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. However, the Statement retains the
fundamental provisions of SFAS No. 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. This Statement supersedes the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, this Statement retains the
requirement of APB Opinion No. 30 to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, by abandonment, or in
distribution to owners) or is classified as held for sale. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with earlier application encouraged. The provisions of this Statement
generally are to be applied prospectively. The adoption of the Statement did not
have an impact on it's earnings, financial condition, or equity.
44
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In April 2002, the FASB issued Statement No. 145, Reporting Gains and
Losses from Extinguishment of Debt. This Statement rescinds FASB Statement No.
4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications. It is effective for financial statements issued for
fiscal years beginning after May 15, 2002, and interim periods within those
fiscal years. This Statement does not apply to Patriot and therefore, did not
have an impact on Patriot's earnings, financial condition, or equity.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this Statement did not have
an impact on Patriot's earnings, financial condition, or equity.
In October 2002, the FASB issued Statement No. 147, Acquisitions of
Certain Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
of businesses within the scope of this Statement. In addition, this Statement
amends Statement No. 144 to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement No. 144 requires for other long-lived assets that are
held and used. With some exceptions, the requirements of Statement No. 147 are
effective October 1, 2002. The adoption of this Statement did not have an impact
on Patriot's earnings, financial condition, or equity.
45
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure. This statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The requirements of Statement No. 148 are
effective for fiscal years ending after December 15, 2002, except for financial
reports containing condensed financial statements for interim periods. Patriot
continues to account for stock based compensation under APB No. 25. If Statement
No. 123 would have been applied it would have had the following impact:
YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
--------- --------- --------
(IN THOUSANDS)
Net income, as reported ...................................................... $ 7,698 $ 6,099 $ 2,009
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ................................................. (131) (198) (310)
--------- --------- ---------
Pro forma net income ......................................................... $ 7,567 $ 5,901 $ 1,699
========= ========= =========
Earnings per share:
Basic -- as reported ....................................................... $ 1.29 $ 1.04 $ .35
========= ========= =========
Basic -- pro forma ......................................................... $ 1.27 $ 1.00 $ .29
========= ========= =========
Diluted -- as reported ..................................................... $ 1.26 $ 1.02 $ .34
========= ========= =========
Diluted -- pro forma ....................................................... $ 1.24 $ .98 $ .29
========= ========= =========
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand, cash items in
process of collection, amounts due from banks, and interest earning deposits in
other financial institutions. 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.
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 Shareholders' 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.
LOANS HELD FOR SALE
Loans held for sale consist of residential mortgage loans originated by
Patriot. They are recorded at the lower of cost or estimated fair value on an
aggregate basis.
46
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS, 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 expected 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.
Management's evaluation 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 valuation, may vary from estimated
loss percentages, which are established based upon a limited number of potential
loss classifications.
An allowance for credit losses is maintained at a level that represents
management's best estimate of known and inherent losses in the loan and lease
portfolios. Management's periodic evaluation of the allowance for credit losses
is based upon evaluation of individual loans and leases, the overall risk
characteristics of the various portfolio segments, regression analyses using
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, as defined by SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, are measured based on the present value of expected future
cash flows discounted at a loan's effective interest rate, or at a loan's
observable market price or fair value of the collateral if the loan is
collateral dependent. A loan is considered to be impaired if upon management's
assessment of the relevant facts and circumstances, it is probable that Patriot
will be unable to collect all proceeds due according to the contractual terms of
the loan agreement.
Uncollectible interest on loans and leases that are generally 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.
47
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
GOODWILL
Goodwill represents the excess of the purchase price over the estimated
fair value of identifiable net assets acquired through purchase acquisitions.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on net
income.
48
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 2 -- INTANGIBLE ASSETS
A summary of non-amortizing and amortizing intangible assets at
December 31 is as follows:
2002 2001
---------------------------------- ----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ -------
(IN THOUSANDS)
NON-AMORTIZING INTANGIBLE ASSETS:
Goodwill ........................... $10,975 $ 2,198 $ 8,777 $10,886 $ 2,198 $ 8,688
AMORTIZING INTANGIBLE ASSETS:
Core deposit intangible ............ 4,606 1,729 2,877 4,606 1,244 3,362
Originated mortgage servicing rights 664 404 260 664 83 581
------- ------- ------- ------- ------- -------
Total amortizing intangible assets . 5,270 2,133 3,137 5,270 1,327 3,943
------- ------- ------- ------- ------- -------
Total intangible assets ...... $16,245 $ 4,331 $11,914 $16,156 $ 3,525 $12,631
======= ======= ======= ======= ======= =======
Amortization expense of goodwill and core deposit intangible for the years ended
December 31 is as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Amortization expense ............. $ 486 $ 1,216 $ 1,458
The estimated amortization expense of intangible assets for each of the five
succeeding fiscal years is as follows:
FOR THE YEAR ENDED ESTIMATED EXPENSE
-----------------
(IN THOUSANDS)
December 31, 2003 ............................. $ 465
December 31, 2004 ............................. 433
December 31, 2005 ............................. 433
December 31, 2006 ............................. 433
December 31, 2007 ............................. 288
The changes in the carrying amount of goodwill for the years ended December 31
are as follows:
2002 2001
---- ----
(IN THOUSANDS)
Balance at the beginning of year ............... $ 8,688 $ 9,426
Goodwill acquired .............................. 89 (8)
Amortization expense ........................... -- (730)
------- -------
Balance at the end of year ..................... $ 8,777 $ 8,688
======= =======
49
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
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 include December 31, 2002 and 2001,
were $218,000 and $3,061,000, respectively.
NOTE 4 -- SECURITIES
The amortized cost and estimated fair value of investment and
mortgage-backed securities are as follows:
2002
---------------------------------------------------
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 ............... $ 66,304 $ 599 $ 652 $ 66,251
Corporate debt securities .................................... 22,724 131 1,467 21,388
FHLMC preferred stock ........................................ 67,626 3,715 -- 71,341
FHLB stock ................................................... 17,949 -- -- 17,949
Equity securities ............................................ 6,647 799 164 7,282
Mortgage-backed securities:
FHLMC ........................................................ 67,523 700 81 68,142
FNMA ......................................................... 55,821 373 67 56,127
GNMA ......................................................... 96 13 -- 109
Collateralized mortgage obligations:
FHLMC ........................................................ 2,960 18 -- 2,978
FNMA ......................................................... 3,689 105 -- 3,794
Other ........................................................ 505 2 -- 507
-------- -------- -------- --------
Total securities available for sale ...................... $311,844 $ 6,455 $ 2,431 $315,868
======== ======== ======== ========
50
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 4 -- SECURITIES (CONTINUED)
2001
---------------------------------------------------
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 ............... $ 31,475 $ 2 $ 1,640 $ 29,837
Corporate debt securities .................................... 16,582 27 1,656 14,953
FHLMC preferred stock ........................................ 42,762 2,184 53 44,893
FHLB stock ................................................... 19,359 -- -- 19,359
Equity securities ............................................ 5,845 31 433 5,443
Mortgage-backed securities:
FHLMC ........................................................ 5,194 13 10 5,197
FNMA ......................................................... 45,466 124 144 45,446
GNMA ......................................................... 120 12 -- 132
Collateralized mortgage obligations:
FHLMC ........................................................ 44,879 566 193 45,252
FNMA ......................................................... 33,632 582 70 34,144
Other ........................................................ 2,938 18 -- 2,956
-------- -------- -------- --------
Total securities available for sale ...................... $248,252 $ 3,559 $ 4,199 $247,612
======== ======== ======== ========
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government agency securities ............... $ 14,388 $ 342 $ 226 $ 14,504
Corporate debt securities .................................... 1,000 1 -- 1,001
Mortgage-backed securities:
FHLMC ........................................................ 1,661 27 36 1,652
FNMA ......................................................... 1,680 80 51 1,709
GNMA ......................................................... 2,245 57 65 2,237
Collateralized mortgage obligations:
FHLMC ........................................................ 16,187 264 834 15,617
FNMA ......................................................... 6,476 53 171 6,358
-------- -------- -------- --------
Total securities held to maturity ........................ $ 43,637 $ 824 $ 1,383 $ 43,078
======== ======== ======== ========
51
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 4 -- SECURITIES (CONTINUED)
The amortized cost and estimated fair value of investment and
mortgage-backed securities at December 31, 2002, 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:
AVAILABLE FOR SALE
----------------------
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
Due in one year or less .......................... $ 15,737 $ 16,857
Due after one year through five years ............ 22,301 22,301
Due after five years through ten years ........... 35,796 35,806
Due after ten years .............................. 145,788 144,332
FHLMC Preferred Stocks ........................... 67,626 71,341
FHLB Stock ....................................... 17,949 17,949
Equity securities ................................ 6,647 7,282
-------- --------
Total securities .......................... $311,844 $315,868
======== ========
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 available for sale investment and
mortgage-backed securities and the realized gross gains and losses from those
sales are as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Proceeds from sales ............................. $ 65,701 $ 50,920 $ 4,625
======== ======== ========
Gross realized gains ............................ 1,362 653 1
Gross realized losses ........................... (11) (95) --
-------- -------- --------
Net realized gain ......................... $ 1,351 $ 558 $ 1
======== ======== ========
Patriot adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as of January 1, 2001. The cumulative effect of the
adoption was a $204,000 decrease to consolidated income, net of $105,000 of tax
benefit.
Securities having an aggregate amortized cost of $7,664,400,
$9,510,058, and $9,308,807 were pledged to secure public deposits at December
31, 2002, 2001 and 2000, respectively.
52
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 4 -- SECURITIES (CONTINUED)
During 2002, Patriot sold certain securities classified as held to
maturity as part of an interest rate risk strategy, consequently in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, Patriot reclassified the remaining portfolio of held to maturity
securities to available for sale are are carried at fair value, with unrealized
gains and losses reported as a separate component of shareholder's equity, net
of estimated taxes. Securities that are bought and held principally for the
purpose of selling are classified as trading and reported at fair market 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.
At December 31, 2002, investments with a fair market value totaling
$47,938,000 were pledged as collateral for retail customer repurchase
agreements, securities sold under agreements to repurchase and FHLB advances.
(See footnote 8 for further clarification of collateral securing FHLB advances.)
NOTE 5 -- LOANS AND LEASES RECEIVABLE
Loans and leases receivable are summarized as follows:
DECEMBER 31,
-------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Commercial Portfolio:
Commercial loans .............................. $ 315,537 $ 283,848
Commercial leases ............................. 77,138 77,838
Consumer Portfolio:
Home equity ................................... 72,400 66,834
Other consumer loans .......................... 7,724 8,614
Mortgage Portfolio:
Residential mortgages ......................... 135,632 206,467
Construction .................................. 8,220 4,605
--------- ---------
Total loans and leases, gross ................... 616,651 648,206
Deferred loan origination costs, net .......... 1,566 933
Allowance for credit losses ................... (6,922) (6,199)
--------- ---------
Total loans and leases, net ............... $ 611,295 $ 642,940
========= =========
Patriot services a $22,892,000 portfolio of sold mortgage loans with
corresponding originated mortgage servicing rights totaling $260,000. During
2002, Patriot amortized $321,000 of originated mortgage servicing rights.
Patriot's loan portfolio is principally concentrated in eastern Pennsylvania.
Activity in the allowance for credit losses is summarized as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Balance at beginning of year ................... $ 6,199 $ 5,839 $ 6,082
Provision for credit losses .................... 4,075 2,000 1,125
Loans charged off .............................. (3,643) (1,872) (1,481)
Recoveries ..................................... 291 232 113
------- ------- -------
Balance at end of year ......................... $ 6,922 $ 6,199 $ 5,839
======= ======= =======
53
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 5 -- LOANS AND LEASES RECEIVABLE (CONTINUED)
Impaired loans are measured based on the present value of expected
future cash flows discounted at a loan's effective interest rate or at a loan's
observable market price or fair value of the collateral if the loan is
collateral dependent. A loans is considered to be impaired if upon management's
assessment of the relevant facts and circumstances, it is probable that Patriot
will be unable to collect all proceeds due according to the contractual terms of
the loan agreement. Patriot had impaired loans at December 31, 2002, of $48,000
compared to $127,000 at December 31, 2001. The average recorded investment in
impaired loans was $160,000, $156,000, and $127,000 during 2002, 2001, and 2000,
respectively. The allowance for loan losses on impaired loans was $9,000 at
December 31, 2002, compared to $23,000 at December 31, 2001. Patriot recognizes
interest income on a cash basis method on impaired loans. Total interest income
recognized on impaired loans totaled $6,000, $11,000, and $2,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. All of Patriot's impaired
loans were included as non-performing loans at December 31, 2002, 2001 and 2000
as well.
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 $6,268,000 and $3,888,000 at December 31, 2002 and 2001, 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:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Interest income that would have been recorded .... $ 578 $ 411 $ 390
Interest income recognized ....................... (259) (204) (244)
----- ----- -----
Interest income foregone ......................... $ 319 $ 207 $ 146
===== ===== =====
At December 31, 2002, residential mortgages with a book value totaling
$1,394,000 were pledged as collateral for FHLB advances. (See footnote 8 for
further clarification of collateral securing FHLB advances.)
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
ESTIMATED ---------------------
USEFUL LIVES 2002 2001
------------ ---- ----
(IN THOUSANDS)
Land ............................................. -- $ 1,222 $ 640
Buildings ........................................ 30-40 3,502 2,788
Furniture, fixtures and equipment ................ 3-7 9,588 8,910
Leasehold improvements ........................... 15 1,425 1,278
----- -------- --------
15,737 13,616
Less accumulated depreciation .................... (8,125) (6,858)
----- -------- --------
Premises and equipment, net ...................... $ 7,612 $ 6,758
======== ========
54
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 7 - DEPOSITS
Deposits and average rates are summarized as follows:
2002 2001
----------------------- -----------------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
-------- ------- -------- -------
(IN THOUSANDS)
Transaction deposits ............................ $ 84,976 0.17% $ 69,186 0.28%
Money market deposits ........................... 143,565 2.00 135,214 2.34
Savings deposits ................................ 59,029 1.87 45,534 1.99
-------- ---- -------- ----
Total Core Deposits ............................. 287,570 1.46 249,934 1.71
Certificates of deposit ......................... 231,550 3.48 283,929 5.23
-------- ---- -------- ----
Total ...................................... $519,120 2.35% $533,863 3.59%
======== ==== ======== ====
The aggregate amount of certificates of deposit with minimum
denominations of $100,000 or more totaled approximately $51,719,000 and
$78,485,000 at December 31, 2002 and 2001, respectively. At December 31, 2002,
Patriot had brokered certificates of deposits in the amount of $29,532,000, as
compared to $47,080,000 at December 31, 2001.
At December 31, 2002, scheduled maturities of certificates of deposit
were as follows:
SCHEDULED MATURITIES
--------------------
(IN THOUSANDS)
2003 ................. $131,299
2004 ................. 45,546
2005 ................. 41,743
2006 ................. 2,613
2007 ................. 8,670
Thereafter ............ 1,679
--------
$231,550
========
55
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 8 -- FHLB ADVANCES AND FEDERAL FUNDS PURCHASED
Pursuant to its collateral agreement with the Federal Home Loan Bank of
Pittsburgh ("FHLB"), advances are secured by qualifying loan portfolios,
mortgage-backed securities, FHLB stock, and other investment securities. The
Bank is required to maintain unencumbered qualifying collateral with a haircut
market value at least equal to the amount of its advances from the FHLB. In
addition, as of December 31, 2002, the Bank has delivered residential mortgage
loans with a book value of $1,394,000 and investment securities with a fair
market value of $27,869,000 to the FHLB, as per the terms of the collateral
agreement.
SHORT TERM FHLB ADVANCES
Short-term FHLB advances have maturities of less than one year.
Short-term FHLB advances are summarized as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Balance at year-end .................................................. $121,000 $ 70,000 $ --
Maximum amount outstanding at any month-end during the period ........ 121,000 70,000 206,000
Average amount outstanding during each period ........................ 76,497 33,648 144,758
Weighted average interest rate on short-term borrowings .............. 5.19% 5.81% 5.91%
SHORT TERM FEDERAL FUNDS PURCHASED
Patriot began purchasing overnight Federal Funds as a low cost funding
source during the second quarter of 2002. These transactions are typically
between financial institutions and are short term unsecured borrowings.
Short-term Federal Funds Purchases are summarized as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Balance at year-end ................................................. $20,000 $ -- $ --
Maximum amount outstanding at any month-end during the period ....... 20,000 -- --
Average amount outstanding during each period ....................... 10,892 -- --
Weighted average interest rate on short-term borrowings ............. 1.72% --% --%
LONG TERM FHLB ADVANCES
At December 31, 2002 and 2001, long-term advances from the FHLB totaled
$227,173,000 and $317,179,000, respectively. At December 31, 2002, outstanding
long-term borrowings mature as follows:
WEIGHTED
AMOUNT AVERAGE RATE
------ ------------
(IN THOUSANDS)
2004 .................. $ -- --%
2005 .................. 37,000 6.10
2006 .................. 35,000 5.40
2007 .................. 173 6.20
Thereafter ............ 155,000 5.39
-------- ----
$227,173 5.51%
======== ====
56
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
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, 2002, all of the agreements were to repurchase
identical securities. Short-term repurchase agreements generally have maturities
of less than one year
WHOLESALE
Patriot enters into sales of securities under agreements to repurchase
with other financial institutions and broker dealers. Wholesale repurchase
agreements are summarized as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Balance at year-end ............................................... $ -- $ -- $ 80,651
Maximum amount outstanding at any month-end during the period ..... -- -- 150,639
Average amount outstanding during each period ..................... -- 6,051 119,523
Weighted average interest rate on short-term borrowings ........... --% 6.62% 6.39%
Investment and mortgage-backed securities
underlying the agreements at year-end:
Carrying value .................................................. $ -- $ -- $125,763
Estimated fair value ............................................ -- -- 120,438
CUSTOMER
Patriot enters into sales of securities under agreements to repurchase
with its commercial customers. Customer repurchase agreements are summarized as
follows:
2002 2001 2000
---- ---- -----
(IN THOUSANDS)
Balance at year-end ............................................... $14,210 $ -- $ --
Maximum amount outstanding at any month-end during the period ..... 14,210 -- --
Average amount outstanding during each period ..................... 3,944 -- --
Weighted average interest rate on short-term borrowings ........... 1.90% --% --%
Investment and mortgage-backed securities
underlying the agreements at year-end:
Carrying value .................................................. $20,069 $ -- $ --
Estimated fair value ............................................ 20,069 -- --
57
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 10 -- TRUST PREFERRED SECURITIES
On April 10, 2002, Patriot issued $5,000,000 of floating rate junior
subordinated debt securities to Patriot Capital Trust II, a Delaware Business
Trust, in which Patriot owns all of the common equity. The Trust issued
$5,000,000 of preferred securities to investors, secured by the junior
subordinated debentures and the guarantee of Patriot. The current rate is
5.319%. 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 any April 22 or
October 22 after April 22, 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 2032.
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.
Patriot Bank repurchased $1,000,000 and $2,500,000 of these trust preferred
securities in the open market in 2001 and 2002, respectively.
58
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 11 -- INCOME TAXES
Applicable income taxes in the consolidated statements of income are as follows:
2002 2001 2000
--------- --------- --------
(IN THOUSANDS)
CURRENT
Federal............................................................... $ 2,186 $ 938 $ (76)
State................................................................. 29 166 15
--------- --------- --------
Total current..................................................... 2,215 1,104 (61)
--------- --------- --------
DEFERRED
Federal............................................................... (131) 1,394 (184)
State................................................................. (24) (36) 63
--------- --------- --------
Total deferred ................................................... (155) 1,358 (121)
--------- --------- --------
Applicable income taxes ................................................ $ 2,060 $ 2,462 $ (182)
========= ========= ========
Effective tax rate ..................................................... 21.11% 28.09% (9.96)%
========= ========= ========
Patriot adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as of January 1, 2001. The cumulative effect of the
adoption was a $204,000 decrease to consolidated income, net of $105,000 of tax
benefit for the year ended December 31, 2001.
The income tax provision reconciled to taxes computed at the statutory
federal rate is as follows:
2002 2001 2000
-------- --------- --------
Federal tax expense at statutory rate.................................... 34.00% 34.00% 34.00%
Adjustment resulting from:
State tax, net of federal tax benefit................................ 0.05 0.85 2.77
Bank owned life insurance ........................................... (3.18) (3.36) (15.93)
Tax-exempt interest and dividend income.............................. (12.85) (8.71) (50.97)
ESO Pexpense ........................................................ 0.73 0.37 0.82
Intangible Amortization / Goodwill................................... 1.69 4.10 18.43
Other................................................................ 0.67 0.84 0.92
------- ------- -----
Income taxes ............................................................ 21.11% 28.09% (9.96)%
======= ======= ======
59
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 11 -- INCOME TAXES (CONTINUED)
2002 2001
------- ---------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Allowance for credit losses.................................................... $ 2,464 $ 2,118
Uncollectible interest......................................................... 125 87
MRP expense.................................................................... 8 --
Deferred compensation.......................................................... 197 266
Acquired NOL's................................................................. 359 695
Reserves other................................................................. 13 2
Intangibles amortization....................................................... 383 418
Alternative minimum tax credit................................................. 771 904
------- ---------
Total deferred tax asset........................................................ $ 4,320 $ 4,490
======= =========
DEFERRED TAX LIABILITIES
Depreciation................................................................... $ 441 $ 433
Discount accretion............................................................. 224 258
Originated mortgage servicing right............................................ 88 197
Bad debt recapture............................................................. -- 166
Purchase accounting............................................................ 111 134
Deferred loan cost............................................................ 812 916
Other.......................................................................... 103 --
Unrealized gain on securities available for sale............................... 1,369 92
------- ---------
Total deferred tax liabilities................................................ 3,146 2,196
------- ---------
Net deferred tax asset ....................................................... $ 1,172 $ 2,294
======= =========
Based on management's evaluation of the likelihood of realization, no
valuation allowance has been provided against deferred tax benefits.
For federal income tax purposes, Patriot has approximately $1,056,000
of acquired net operating loss carryforwards, resulting in a $359,000 deferred
tax asset as of December 31, 2002. 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, enacted on August
20,1996, provides for the repeal of the tax bad debt deduction computed under
the percentage of taxable income method. 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 reserves at December 31, 2002, are approximately $4,046,000, all of
which represents the base year amount.
60
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 12 -- EARNINGS PER SHARE
Patriot's calculation of earnings per share is as follows:
FOR YEAR ENDED DECEMBER 31, 2002
-------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
BASIC EPS
Net income available to common shareholders .................................. $ 7,698 5,947 $ 1.29
EFFECT OF DILUTIVE SECURITIES
Dilutive options ............................................................. -- 173 (.03)
----------- --------- ---------
DILUTED EPS
Net income available to common shareholders
plus assumed conversions ................................................. $ 7,698 6,120 $ 1.26
=========== ========= =========
FOR YEAR ENDED DECEMBER 31, 2001
-------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
BASIC EPS
Net income available to common shareholders .................................... $ 6,099 5,892 $ 1.04
EFFECT OF DILUTIVE SECURITIES
Dilutive options ............................................................... -- 106 (.02)
----------- --------- ---------
DILUTED EPS
Net income available to common shareholders
plus assumed conversions.................................................... $ 6,099 5,998 $ 1.02
=========== ========= =========
FOR YEAR ENDED DECEMBER 31, 2000
-------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
BASIC EPS
Net income available to common shareholders..................................... $ 2,009 5,814 $ 0.35
EFFECT OF DILUTIVE SECURITIES
Dilutive options ............................................................... -- 86 (.01)
----------- --------- ---------
DILUTED EPS
Net income available to common shareholders
plus assumed conversions .................................................. $ 2,009 5,900 $ 0.34
=========== ========= =========
NON-DILUTIVE OPTIONS. Patriot had 226,555, 40,000, and 40,000
non-dilutive options at December 31, 2002, 2001 and 2000, respectively.
61
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 13 -- SEGMENT REPORTING
Patriot has three reportable segments: Banking, Mortgage Banking and
Commercial Leasing. Banking operates a network of 16 community banking offices
providing deposits and loan services to customers. Mortgage Banking originates
and sells residential mortgages into the secondary market to generate fee
income. Commercial Leasing originates small ticket commercial leases to
customers.
The following table highlights income statement and balance sheet
information for each of the segments at or for the year ended December 31, 2002,
2001 and 2000:
AT OR FOR THE YEAR-ENDED DECEMBER 31, 2002
---------------------------------------------------
MORTGAGE COMMERCIAL
BANKING BANKING LEASING TOTAL
----------- --------- ---------- -----------
(IN THOUSANDS)
Net interest income........................................... $ 25,959 $ 609 $ 2,688 $ 29,256
Non interest income .......................................... 4,464 1,660 1,117 7,241
Total net income.............................................. 7,244 359 95 7,698
Total assets.................................................. 904,460 12,752 77,931 995,143
Total loans and leases, gross................................. 526,800 12,713 77,138 616,651
Intersegment interest income / (expense) ..................... 5,087 (191) (4,896) --
Intersegment other income / (expense) ........................ 902 (662) (240) --
AT OR FOR THE YEAR-ENDED DECEMBER 31, 2001
---------------------------------------------------
MORTGAGE COMMERCIAL
BANKING BANKING LEASING TOTAL
----------- --------- ---------- -----------
Net interest income........................................... $ 20,957 $ 303 $ 2,381 $ 23,641
Non interest income........................................... 4,972 1,563 1,357 7,892
Total net income.............................................. 5,218 123 758 6,099
Total assets.................................................. 919,900 11,264 78,906 1,010,070
Total loans and leases, gross................................. 559,112 11,256 77,838 648,206
Intersegment interest income / (expense) ..................... 4,661 (245) (4,416) -
Intersegment other income / (expense)......................... 850 (610) (240) -
AT OR FOR THE YEAR-ENDED DECEMBER 31, 2000
---------------------------------------------------
MORTGAGE COMMERCIAL
BANKING BANKING LEASING TOTAL
----------- --------- ---------- -----------
Net interest income........................................... $ 20,342 $ 220 $ 2,110 $ 22,672
Non interest income........................................... 3,824 2,132 1,168 7,124
Total net income............................................. 2,238 (781) 552 2,009
Total assets................................................. 1,037,591 19,349 67,965 1,124,905
Total loans and leases, gross................................ 570,772 19,343 67,094 657,209
Intersegment interest income / (expense)..................... 4,665 (656) (4,009) -
Intersegment other income / (expense) ....................... 1,159 (919) (240) -
62
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 14 -- EMPLOYEE BENEFIT PLANS
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. Under the plan,
Patriot contributes 100% of an employee's contribution up to 6% of base salary.
Patriot's contributions were $301,000, $273,000 and $363,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
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. Accordingly,
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 $353,000, $238,000 and $216,000 in 2002, 2001 and 2000, respectively. The
ESOP shares as of December 31, 2002, were as follows:
SHARES
------
(IN THOUSANDS)
Allocated .................................... 234
Unreleased ................................... 309
---------
Total ESOP ................................... 543
=========
Fair value of unreleased shares .............. $ 4,749
STOCK-BASED COMPENSATION
Patriot maintains a Management Recognition Plan (MRP). The MRP provides
that up to 271,000 (as adjusted for subsequent stock dividends and stock split)
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 5,000, 0
and 2,000 shares during 2002, 2001 and 2000, 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 shareholder 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 re-issuance 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 shareholders' 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, 2002, 2001 and 2000,
$40,000, $173,000 and $377,000 were amortized to expense, respectively. At
December 31, 2002, 13,000 shares were reserved for future grants under the plan.
63
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 14 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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 1,000,000
(as adjusted for subsequent stock dividends and stock split) shares of common
stock. The options have a term of 10 years and vest over a five-year period. The
exercise price of each option equals the market price of Patriot Bank Corp's
common stock on the date of grant. Accordingly, no compensation cost has been
recognized for the plan.
A summary status of Patriot's option plans as of December 31, 2002,
2001 and 2000 and the charges during the years ending on those dates is
presented below:
2002 2001 2000
------------------ -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
(IN THOUSANDS)
Outstanding at beginning of year ................ 498 $ 7.36 667 $ 7.32 698 $ 7.42
Granted.......................................... 226 14.10 21 7.22 43 6.51
Exercised ....................................... 108 7.19 190 7.19 -- --
Canceled......................................... 10 11.75 -- -- 74 7.74
--- -------- --- ------- --------
Outstanding at year-end ......................... 606 $ 9.84 498 $ 7.36 667 $ 7.32
=== ======== === ======= === ========
Options exercisable at year-end ................. 333 406 461
=== === ===
Weighted average fair value of
options granted during the year.................. $ 3.67 $ 4.19 $ 2.02
======== ======= ========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model as follows:
2002 2001 2000
------ ------ ------
Assumptions:
Dividend yield ........................... 2.98% 3.94% 4.40%
Expected volatility....................... 20.75% 37.53% 36.33%
Estimated Life............................ 10 yrs 10 yrs 10 yrs
Risk-free interest rate................... 3.81% 5.05% 5.11%
64
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 14 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 2002:
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 2002 CONTRACTUAL LIFE EXERCISE PRICE 2002 EXERCISE PRICE
- ---------------- -------------- ---------------- -------------- -------------- --------------
(IN THOUSANDS)
$ 6.00 - $ 8.50 350 4.52 years $ 7.12 298 $ 7.16
8.51 - 11.00 10 6.50 years 9.77 6 9.77
11.01 - 13.50 10 5.50 years 12.00 8 12.00
13.51 - 16.00 236 9.33 years 14.09 21 14.05
EMPLOYEE STOCK PURCHASE PLAN
Patriot maintains 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 2002, 2001 and 2000, Patriot recorded expense of
$12,000, $5,000 and $12,000, respectively, related to the ESPP.
NOTE 15 -- 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, 2002, are as follows:
TOTAL
FIXED RATE VARIABLE RATE COMMITMENTS
COMMITMENTS COMMITMENTS OUTSTANDING
----------- ------------- -----------
(IN THOUSANDS)
Financial instruments whose contract amounts represent credit risk
Mortgage loans........................................................ $ 8,973 $ -- $ 8,973
Consumer and other loans.............................................. 124 28,490 28,614
Commercial lines of credit............................................ -- 37,768 37,768
Commercial leases .................................................... 4,056 -- 4,056
Construction loans.................................................... 10,926 -- 10,926
--------- --------- ---------
Total.............................................................. $ 24,079 $ 66,258 $ 90,337
========= ========= =========
65
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 15 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK (CONTINUED)
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 real estate, commercial real estate, or business equipment related
to the lease.
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
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, 2002
are as follows:
COMMITMENTS
--------------
(IN THOUSANDS)
2003........................................ $ 1,115
2004........................................ 1,048
2005........................................ 964
2006........................................ 851
2007........................................ 862
Thereafter.................................. 7,771
---------
$ 12,611
=========
Total rental expense for all leases for the year ended December 31,
2002, 2001, and 2000 totaled $1,120,000, $1,098,000, and $1,901,000,
respectively.
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 shareholders' equity.
NOTE 17 -- 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. However, many of such instruments lack an
available trading market, as characterized by a willing buyer and seller
engaging in an exchange transaction. 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.
66
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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, property, equipment,
goodwill, or certain tax implications related to the realization of unrealized
gains or losses. Excluding securities available for sale, 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. The
fair value of demand deposits, savings, 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. The carrying amount of accrued interest receivable and accrued
interest payable approximate its fair market value. 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
fair value of letters of credit and outstanding commitments approximate the fees
charged for providing such services. The resulting estimated fair values and
carrying amounts at December 31, 2002 and 2001, respectively were as follows:
67
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
2002 2001
----------------------- --------------------------
ESTIMATED ESTIMATED
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
--------- ---------- ----------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents .............. $ 16,839 $ 16,839 $ 21,466 $ 21,466
Securities available for sale .......... 315,868 315,868 247,612 247,612
Securities held to maturity............. -- -- 43,078 43,637
Loans held for sale and loans
and leases receivable, net of
allowances for credit losses......... 629,355 611,295 661,170 642,940
Accrued interest receivable............. 3,946 3,946 3,988 3,988
FINANCIAL LIABILITIES:
Deposits with no stated maturities...... 287,570 287,570 249,934 249,934
Deposits with stated maturities......... 233,619 231,550 287,102 283,929
Borrowings.............................. 429,016 402,883 416,352 405,666
Accrued interest payable................ 2,028 2,028 2,552 2,552
2002 2001
--------------------------------- --------------------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR CARRYING NOTIONAL FAIR CARRYING
AMOUNT VALUE AMOUNT AMOUNT VALUE AMOUNT
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
OFF-BALANCE SHEET ITEMS:
Commitments to extend credit........ 90,337 471 -- 79,507 23 --
68
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 18 -- REGULATORY MATTERS
Patriot and Patriot Bank 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 and Patriot Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Patriot and
Patriot Bank'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, 2002, that Patriot and Patriot
Bank meet all capital adequacy requirements to which it is subject.
As of December 31, 2002, 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 and Patriot Bank must
maintain minimum total risk-based, core risk-based and core leverage ratios as
set forth in the table. At December 31, 2002, Patriot and Patriot Bank met these
ratio requirements. 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
-------- ------- -------- ----- -------- -----
(IN THOUSANDS)
AS OF DECEMBER 31, 2002
Total capital (to risk weighted assets)
Patriot Bank Corp............................. $ 81,013 12.61% $ 51,376 8% $ 64,220 10%
Patriot Bank ................................. 79,350 12.35% 51,400 8% 64,250 10%
Tier I capital (to risk-weighted assets)......
Patriot Bank Corp............................. 72,134 11.23% 25,688 4% 38,532 6%
Patriot Bank.................................. 70,398 10.96% 25,700 4% 38,550 6%
Tier I capital (to average assets)
Patriot Bank Corp............................. 72,134 7.33% 39,378 4% 49,223 5%
Patriot Bank.................................. 70,398 7.15% 39,378 4% 49,223 5%
Patriot and 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 and Patriot Bank's operations are susceptible to changes in
legislation and regulations.
69
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 18 -- REGULATORY MATTERS (CONTINUED)
The following schedule summarizes the actual capital balances and
ratios of Patriot Bank at December 31, 2001:
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, 2001
Total capital (to risk weighted assets)
Patriot Bank Corp............................. $ 74,178 11.54% $ 51,442 8% $ 64,302 10%
Patriot Bank.................................. 73,134 11.39% 51,355 8% 64,194 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp............................. 67,436 10.49% 25,721 4% 38,581 6%
Patriot Bank.................................. 65,976 10.28% 25,678 4% 38,517 6%
Tier I capital (to average assets)
Patriot Bank Corp............................. 67,436 6.45% 41,821 4% 52,276 5%
Patriot Bank.................................. 65,976 6.31% 41,821 4% 52,276 5%
At the time of Patriot's initial public offering, a "liquidation
account" was established for Patriot Bank at 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 $5,174,000 at
December 31, 2002. This amount may not be utilized for the payment of cash
dividends to the holding company.
LIMITATION ON CAPITAL DISTRIBUTIONS. Dividend payments by the Bank to
the Company are subject to the Pennsylvania Banking Code of 1965 and the Federal
Deposit Insurance ("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 Federal
Deposit Insurance Corp. ("FDIC"). Under current banking laws, the Bank would be
limited to approximately $31.4 million of dividends in 2003 plus an additional
amount equal to the Bank's net profit for 2003, up to the date of any such
dividend declaration.
70
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Patriot Bank Corp. is as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31,
------------------------
2002 2001
---------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents....................................................... $ 342 $ 541
Loans to subsidiaries........................................................... 1,703 685
Investment in subsidiaries...................................................... 85,776 79,329
Other assets.................................................................... 396 2,050
---------- --------
Total assets.............................................................. $ 88,217 $ 82,605
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities............................................................... $ 1,772 $ 2,899
Trust preferred securities...................................................... 20,500 18,000
Shareholders' equity............................................................ 65,945 61,706
---------- --------
Total liabilities and shareholders' equity................................ $ 88,217 $ 82,605
========== ========
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Interest income................................................................. $ 87 $ 24 $ 11
Earnings of subsidiaries ....................................................... 9,388 7,733 4,280
Other .......................................................................... -- 9 --
---------- ---------- ----------
Total Income.............................................................. 9,475 7,766 4,291
Interest expense................................................................ 2,220 2,185 2,210
Other........................................................................... 429 321 1,235
---------- ---------- ----------
Total Expense............................................................. 2,649 2,506 3,445
Income before income taxes...................................................... 6,826 5,260 846
Income tax benefit.............................................................. (872) (839) (1,163)
---------- ---------- ----------
Net income................................................................ $ 7,698 $ 6,099 $ 2,009
========== ========== ==========
71
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Cash flows from operating activities
Net income.................................................................... $ 7,698 $ 6,099 $ 2,009
Adjustments to reconcile net income to net cash
provided by operating activities
Earnings from subsidiaries ................................................... (9,388) (7,733) (4,280)
Dividends from subsidiaries................................................... 5,418 4,450 8,066
Change in other assets........................................................ 1,654 (1,490) (95)
Change in other liabilities................................................... (1,127) 2,142 467
Release of MRP/ESOPS hares.................................................... 393 453 596
---------- ---------- ----------
Net cash provided by operating activities................................. 4,648 3,921 6,763
---------- ---------- ----------
Cash flows from investing activities
Investment in subsidiary...................................................... 1,482 (1,646) (5,074)
Loans to subsidiary........................................................... -- -- 95
---------- ---------- ----------
Net cash provided by (used in) investing activities....................... 1,482 (1,646) (4,979)
---------- ---------- ----------
Cash flows from financing activities
Cash dividends paid to Shareholders........................................... (2,441) (2,334) (1,913)
Proceeds from the exercise of stock options..................................... 182 526 -
Proceeds from the sale of stock associated with ESPP............................ 118 59 129
Purchase of treasury stock, net of stock award.................................. (4,188) -- --
---------- ---------- ----------
Net cash used in financing activities......................................... (6,329) (1,749) (1,784)
(Decrease) increase in cash and cash equivalents................................ (199) 526 -
Cash and cash equivalents at beginning of year.................................. 541 15 15
---------- ---------- ----------
Cash and cash equivalents at end of year........................................ $ 342 $ 541 $ 15
========== ========== ==========
72
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
NOTE 20 -- SUBSEQUENT EVENTS
WEALTH MANAGEMENT FIRM ACQUISITION. On January 3, 2003, Patriot
completed the acquisition of Bonds & Paulus Associates, Inc. (Bonds & Paulus), a
wealth management firm headquartered in Chester County, Pennsylvania. Founded in
1993, Bonds & Paulus is a registered investment advisory firm, providing
investment advisory and financial planning services to high net-worth
individuals and families. Bonds & Paulus was merged into Patriot Advisors, a
division of Patriot Bank Corp. that provides a full range of wealth and
investment management services. The acquisition was accounted for as a purchase
in 2003. Bonds & Paulus was purchased for $458,000 plus contingent consideration
to be paid in shares of Patriot Bank Corp. common stock and will be based upon
future revenues of Bonds & Paulus. Of the $458,000, $115,000 was paid in cash
and 22,810 shares of Patriot Bank Corp. common stock having a value of $343,000
was issued at closing. Based upon current revenue levels, the total purchase
price will approximate $1,300,000.
PENSION BENEFITS SERVICE PROVIDER ACQUISITION. On January 17, 2003,
Patriot completed the acquisition of Pension Benefits, Inc., a pension benefits
service provider headquartered in West Chester, Pennsylvania. Founded in 1986,
Pension Benefits Inc. is a third party administrator and a registered investment
advisory firm, providing comprehensive retirement plan solutions to businesses.
Pension Benefits, Inc. was merged into Patriot Advisors as well. The acquisition
was accounted for as a purchase in 2003. Pension Benefits, Inc. was purchased
for $829,000 plus contingent consideration to be paid in shares of Patriot Bank
Corp. common stock and will be based upon future revenues of Pension Benefits,
Inc. Of the $829,000, $414,500 was paid in cash and 27,338 shares of Patriot
Bank Corp. common stock was issued at closing. Based upon current revenue
levels, the total purchase price will approximate $1,600,000.
73
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
N/A
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 Shareholders to be held on April 24, 2003.
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 Shareholders to be held on April 24, 2003,
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 Shareholders to be held on April 24,
2003.
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 Shareholders to be held on April 24, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Patriot's principal executive officer and principal financial officer
have concluded that Patriot's disclosure controls and procedures (as defined in
Rule 13a-14(C) under the Securities Exchange Act of 1934, as amended), based on
their evaluation of these controls and procedures as of a date within (90) days
prior to the filing date of this form 10-K, are effective.
(b) CHANGES IN INTERNAL CONTROLS.
There have been no significant changes in Patriot's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation thereof, including any corrective actions with regard
to significant deficiencies and material weaknesses.
74
PART IV
ITEM 15. 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.
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. 333-650-45 on Form S-4.)
3.2 Bylaws of the Patriot Bank Corp. (Incorporated by reference to
Exhibit 3.2 to Patriot Bank Corp.'s Registration Statement No.
333-650-45 on Form S-4.)
10.1 Employment Agreement between Patriot Bank Corp. and Richard A.
Elko dated February 22, 2001, (Incorporated by reference to
Patriot Bank Corp.'s 2000 10K filed March 29, 2001.) ***
10.2 Employment Agreement between Kevin R. Pyle and Patriot Bank
dated February 22, 2001, (Incorporated by reference to Patriot
Bank Corp.'s 2000 10K filed March 29, 2001.) ***
10.3 Employment Agreement between Richard A. Elko and Patriot Bank
dated February 22, 2001, (Incorporated by reference to Patriot
Bank Corp.'s 2000 10K filed March 29, 2001.) ***
10.4 Employment Agreement between Joni S. Naugle and Patriot Bank
dated February 22, 2001, (Incorporated by reference to Patriot
Bank Corp.'s 2000 10K filed March 29, 2001.) ***
10.5 Employment Agreement between James G. Blume and Patriot Bank
dated February 22, 2001, (Incorporated by reference to Patriot
Bank Corp.'s 2000 10K filed March 29, 2001.) ***
10.6 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 Shareholders filed
April 26, 1996).***
10.7 The Patriot Bank Corp. 2002 Stock-Based Option Plan.
(Incorporated by reference to Patriot Bank Corp.'s Proxy
Statement for the 2002 Annual Meeting of Shareholders filed
April 26, 2002).***
21.0 Subsidiaries.
23.1 Consent of KPMG LLP
99.1 Section 906 Certifications
-----------------
*** Denotes a management contract or a compensatory plan or
arrangement.
(b) REPORTS ON FORM 8-K.
None.
75
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
Dated: March 17, 2003 By /s/ RICHARD A. ELKO
-----------------------------
Richard A. Elko
President and Chief Executive Officer
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 17, 2003
- --------------------------
James B. Elliott
/s/ RICHARD A. ELKO President and Chief March 17, 2003
- -------------------------- Executive Officer and Director
Richard A. Elko
/s/ LARRY V. THREN Director March 17, 2003
- --------------------------
Larry V. Thren
/s/ JAMES A. BENTLEY, JR. Director March 17, 2003
- --------------------------
James A. Bentley, Jr.
/s/ RUSSELL J. KUNKEL Director March 17, 2003
- --------------------------
Russell J. Kunkel
/s/ JAMES G. BLUME Chief Financial Officer March 17, 2003
- --------------------------
James G. Blume
76
SECTION 302 -- CERTIFICATIONS
I, Richard A. Elko, Chief Executive Officer of Patriot Bank Corp, certify that:
1. I have reviewed this yearly report on Form 10-K of Patriot Bank Corp;
2. Based on my knowledge, this yearly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this yearly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this yearly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this yearly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this yearly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this yearly report (the "Evaluation Date");
and
(c) presented in this yearly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
yearly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Richard A. Elko
------------------------
Chief Executive Officer
77
SECTION 302 -- CERTIFICATIONS (CONTINUED)
I, James G. Blume, Chief Financial Officer of Patriot Bank Corp., certify that:
1. I have reviewed this yearly report on Form 10-K of Patriot Bank Corp.;
2. Based on my knowledge, this yearly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this yearly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this yearly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this yearly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this yearly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this yearly report (the "Evaluation Date");
and
(c) presented in this yearly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
yearly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003
/s/ James G. Blume
---------------------------
Chief Financial Officer
78