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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, 2000
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant is $49,614,210 and is based upon the last sales price of $8 per share
as quoted on The Nasdaq Stock Market for March 12, 2001.
As of March 12, 2001, the Registrant had 6,201,776 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
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INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Item 4A. Executive Officers of the Registrant........................ 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 33
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 63
Item 11. Executive Compensation...................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 63
Item 13. Certain Relationships and Related Transactions.............. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 63
SIGNATURES............................................................ 63
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PART I
ITEM 1. BUSINESS
GENERAL
Patriot Bank Corp. (the "Company") is a Pennsylvania corporation and is the
holding company for Patriot Bank (the "Bank") and Patriot Investment Company
("PIC"). The Company is a bank holding company and is subject to regulation by
the Board of Governors of the Federal Reserve System (the "FRB"). Originally
organized as a Delaware corporation, the Company became a Pennsylvania
corporation as a result of its consolidation with First Lehigh Corporation on
January 22, 1999. The Company's executive offices are located at the
administrative offices of the Bank at High and Hanover Streets, Pottstown,
Pennsylvania 19464.
The Bank was originally chartered in 1938. In 1991, the Bank's predecessor
converted from a federally-chartered mutual savings bank to a
Pennsylvania-chartered mutual savings bank and changed its name to Patriot
Savings Bank. In August 1995, the Bank converted from a Pennsylvania-chartered
mutual savings bank to a federally-chartered mutual savings bank. On December 1,
1995, the Company acquired the Bank as part of the Bank's conversion from a
mutual to stock form of ownership (the "Conversion"). In connection with the
Conversion, the Bank changed its name to Patriot Bank. On May 23, 1997, the Bank
converted to a Pennsylvania-chartered commercial bank. The Bank conducts
business through its network of 18 community banking offices located in
Montgomery, Berks, Lehigh, Northampton and Chester Counties, Pennsylvania. As a
result of its acquisition of First Lehigh Bank, certain of the Bank's deposits
are insured by the Savings Association Insurance Fund ("SAIF") and certain of
its deposits are insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. At December 31, 2000, the Bank had total assets of $1,123 million,
deposits of $653 million and stockholder's equity of $70 million.
The Bank is a community-oriented financial services provider whose business
primarily consists of attracting deposits from the general public and small
businesses and originating commercial loans and leases, consumer loans, and
mortgage loans in the Bank's market area. In addition to its lending activities,
the Bank also invests in investment and mortgage-backed securities. The Bank
uses advances from the Federal Home Loan Bank of Pittsburgh ("FHLB") and
repurchase agreements as sources of funds.
The Bank's revenues are derived principally from interest on loans and
leases, interest on investment and mortgage-backed securities and other fees and
service charges. The Bank's primary sources of funds are deposits, FHLB
advances, repurchase agreements, interest on loans and investment and
mortgage-backed securities and principal repayments 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, 2000, PIC had total assets of $1.1 million
and stockholder's equity of $1.1 million.
MARKET AREA AND COMPETITION
The Company is located approximately 45 miles northwest of Philadelphia,
Pennsylvania and its market consists primarily of Montgomery, Berks, Lehigh,
Northampton, and Chester counties, Pennsylvania. The segment of the markets
served by the Company is primarily industrially oriented and demographically is
comprised of middle income and upper income households.
The Company faces significant competition both in originating loans and
attracting deposits. The Company's competitors are other financial services
providers operating within its primary market area, some of which are larger and
have greater financial resources than the Company. The Company's competition for
loans and deposits comes principally from commercial banks, savings and loan
associations, savings banks, credit unions, and mortgage banking companies (some
of which are subsidiaries of major financial institutions). In addition, the
Company faces increasing competition for deposits from non-bank institutions
such as brokerage firms and insurance firms with products such as money market
funds, mutual funds and annuities. Management considers the Company's reputation
for financial strength, superior customer service, convenience and product
offerings as a competitive advantage in attracting and retaining customers.
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SUBSIDIARY ACTIVITIES
The Company has two wholly-owned subsidiaries: The Bank and PIC. The Bank
has three wholly-owned subsidiaries: Marathon Management Company, Inc.
("Marathon"), Patriot Investments and Insurance Company ("PIIC"), and Patriot
Commercial Leasing Co., Inc. ("PCLC"). Marathon provides title insurance
services through a joint venture partnership. At December 31, 2000, Marathon had
total assets of $228,000. PIIC markets certain nondeposit investment products.
At December 31, 2000, PIIC had total assets of $407,000. PCLC is a commercial
leasing company. At December 31, 2000, PCLC had total assets of $68.0 million.
PERSONNEL
As of December 31, 2000, the Bank had 211 full-time and 16 part-time
employees, none of whom was covered by a collective bargaining agreement.
Management believes that the Bank has good relations with its employees and
there are no pending or threatened labor disputes with its employees.
REGULATION AND SUPERVISION
GENERAL. The Company, as a bank holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of,
the FRB under the Bank Holding Company Act, as amended (the "BHCA"). In
addition, the activities of Pennsylvania-chartered commercial banks, such as the
Bank, are governed by the Pennsylvania Banking Code and the Federal Deposit
Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the Federal Deposit Insurance Corporation (the "FDIC"), and the Pennsylvania
Department of Banking ("PDB"). The Bank is a member of the Federal Home Loan
Bank ("FHLB") System. Certain of the Bank's deposits are insured by the BIF
while most of its deposit accounts are insured by the SAIF. The Bank must file
reports with the PDB and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other banking
institutions. The PDB and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the FRB, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to banking institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
HOLDING COMPANY REGULATION. The Company is a bank holding company
registered under the BHCA. As a bank holding company, the Company's activities
and those of the Bank are limited to the business of banking and activities
closely related or incidental to banking.
The BHCA prohibits a bank holding company, directly or indirectly, or
through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another banking institution or holding company thereof, without prior
written approval of the FRB; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the BHCA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary bank and to commit resources to support the
bank, i.e., to downstream funds to the bank. This support may be required at
times when, absent such policy, the bank holding company might not otherwise
provide such support. Any capital loans by a bank holding company to its
subsidiary bank are subordinate in
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right of payment to deposits and to certain other indebtedness of the bank. In
the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of
its subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
NEW LEGISLATION. Landmark legislation in the financial services area was
signed into law by the President on November 12, 1999. The Gramm-Leach-Bliley
Act dramatically changes certain banking laws that have been in effect since the
early part of the 20th century. The most radical changes are that the separation
between banking and the securities businesses mandated by the Glass-Steagall Act
has now been removed, and the provisions of any state law that prohibits
affiliation between banking and insurance entities have been preempted.
Accordingly, the new legislation now permits firms engaged in underwriting and
dealing in securities, and insurance companies, to own banking entities, and
permits bank holding companies (and in some cases, banks) to own securities
firms and insurance companies. The provisions of federal law that preclude
banking entities from engaging in non-financially related activities, such as
manufacturing, have not been changed. For example, a manufacturing company
cannot own a bank and become a bank holding company, and a bank holding company
cannot own a subsidiary that is not engaged in financial activities, as defined
by the regulators.
The new legislation creates a new category of bank holding company called a
"financial holding company." In order to avail itself of the expanded financial
activities permitted under the new law, a bank holding company must notify the
Federal Reserve that it elects to be a financial holding company. A bank holding
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 rating, each in accordance with the definitions prescribed by
the Federal Reserve and the regulators of the subsidiary banks. Once a bank
holding company makes such an election, and provided that the Federal Reserve
does not object to such election, the financial holding company may engage in
financial activities (i.e., securities underwriting, insurance underwriting, and
certain other activities that are financial in nature as determined by the
Federal Reserve) by simply giving a notice to the Federal Reserve within thirty
days after beginning such business or acquiring a company engaged in such
business. This makes the regulatory approval process to engage in financial
activities much more streamlined than it was under prior law.
The Company believes it qualifies to become a financial holding company,
but has not yet determined whether or not it will file to become treated as one.
The Federal Reserve has only recently promulgated rules implementing these
provisions of the new legislation, and the Company may wait to see what the
experience of other companies is under the new rules before it makes an
election.
The new law also permits certain financial activities to be undertaken by a
subsidiary of a national bank. As the Bank is not a national bank, these
provisions do not apply directly to the Bank. Generally, for financial
activities that are conducted as a principal, such as an underwriter or dealer
holding an inventory, a national bank must be one of the 100 largest national
banks in the United States and have debt that is rated investment grade.
However, smaller national banks may own a securities broker or an insurance
agency, or certain other financial agency entities under the new law. Under
prior law, national banks could only own an insurance agency if it was located
in a town of fewer than 5,000 residents, or under certain other conditions.
Under the new law, there is no longer any restriction on where the insurance
agency subsidiary of a national bank is located or does business. As a
Pennsylvania bank, the Bank is permitted under Pennsylvania law to own and
operate an insurance agency without restriction, and could also own and operate
a securities brokerage.
In addition to the foregoing provisions of the new law that make major
changes to the federal banking laws, the new legislation also makes a number of
additions and revisions to numerous federal laws that affect the business of
banking. For example, there is now a federal law on privacy with respect to
customer information held by banks. The federal banking regulators are
authorized to adopt rules regarding privacy for customer information. Banks must
establish a disclosure policy for non-public customer information, disclose the
policy to their customers, and give their customers the opportunity to object to
non-public information being disclosed to a third party. Also, the Community
Reinvestment Act has been amended by the new law to provide that small banks
(those under $250 million in assets) that previously received an "outstanding"
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their last CRA exam will not have to undergo another CRA exam for five years, or
for four years if their last exam was "satisfactory." In addition, any CRA
agreement entered into between a bank and a community group must be disclosed,
with both the bank and the group receiving any grants from the bank detailing
the amount of funding provided and what it was used for. The new law also
requires a bank's policy on fees for transactions at ATM machines by
non-customers to be conspicuously posted on the ATM. A number of other
provisions affecting other general regulatory requirements for banking
institutions were also adopted.
It is too early to tell what effect the Gramm-Leach-Bliley Act may have on
the Company and the Bank. The intent and scope of the act is positive for the
financial industry, and is an attempt to modernize federal banking laws and make
U. S. institutions competitive with those from other countries. While the
legislation makes significant changes in U. S. banking law, such changes may not
directly affect the Company's business unless it decides to avail itself of new
opportunities available under the new law. The Company does not expect any of
the provisions of the new Act to have a material adverse effect on its existing
operations, or to significantly increase its costs.
Separately from the Gramm-Leach-Bliley Act, Congress is often considering
financial industry legislation. The Company cannot predict how any new
legislation, or new rules adopted by the federal banking agencies, may affect
its business in the future.
CAPITAL REQUIREMENTS. The FRB has adopted risk-based capital guidelines
for bank holding companies, such as the Company. The required minimum ratio of
total capital to risk-weighted assets (including off-balance sheet activities,
such as standby letters of credit) is 8.0%. At least half of the total capital
is required to be "Tier 1 capital," consisting principally of common
stockholders' equity, noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less goodwill.
The remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt and intermediate-term preferred stock, certain hybrid capital instruments
and other debt securities, perpetual preferred stock, and a limited amount of
the general loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are required to maintain a
leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is
in compliance with these guidelines. The Bank is subject to similar capital
requirements adopted by the FDIC.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
Under the FDIC prompt corrective action regulations, the FDIC is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a bank is considered "well capitalized" if its ratio of total capital
to risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to
risk-weighted assets is at least 6%, its ratio of core capital to total assets
is at least 5%, and it is not subject to any order or directive by the FDIC to
meet a specific capital level. A bank generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A bank that has lower ratios of
capital is categorized as "undercapitalized," "significantly under capitalized,"
or "critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the FDIC within 45 days of the date
a bank receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the 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
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directive and the replacement of senior executive officers and directors. At
December 31, 2000, both the Company and the Bank were "well capitalized."
INSURANCE OF DEPOSIT ACCOUNTS. Although most of the deposits of the Bank
are presently insured by the SAIF, certain of its deposits are insured by the
BIF (the deposit insurance fund that covers most commercial bank deposits). Both
the BIF and the SAIF are statutorily required to maintain a 1.25% of insured
reserve deposits ratio. Both the BIF and the SAIF currently exceed the 1.25%
ratio. Therefore, most institutions, including the Bank, presently pay no
deposit insurance premiums. The FDIC must assess deposit insurance premiums if
the 1.25% ratio is not met, and may impose premiums on under capitalized or
unsafe institutions.
While most banks do not pay deposit insurance, all institutions are
assessed for payment of the FICO bonds. Full pro rata sharing of the FICO
payments between BIF and SAIF members began on January 1, 2000. The FDIC resets
the FICO assessment rate each calendar quarter. The current annual rate is
$0.196 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, 2000, this limitation was equal to $10.4 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 $23.6 million of dividends in 2001
plus an additional amount equal to the Bank's net profit for 2001, up to the
date of any such dividend declaration.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Bank to pay dividends to the Company.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Law"), amended various federal
banking laws to provide for nationwide interstate banking, interstate bank
mergers and interstate branching. The interstate banking provisions allow for
the acquisition by a bank holding company of a bank located in another state.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its nonbanking subsidiaries) is limited by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered
transactions with any individual affiliate to 10% of the capital and surplus of
the Bank. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the Bank's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from affiliates
is generally prohibited. Section 23B generally provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for 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
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Regulation O thereunder. Among other things, such loans are required to be made
on terms substantially the same as those offered to unaffiliated individuals and
to not involve more than the normal risk of repayment. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
ENFORCEMENT. Under the FDI Act, the FDIC has primary enforcement
responsibility over state nonmember banks and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order, removal of officers and/or
directors, to institution of receivership or conservatorship, or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Federal law also establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require
depositary institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). During
fiscal 2000, the Federal Reserve Board regulations generally required that
reserves be maintained against aggregate transaction accounts as follows: for
accounts aggregating $37.3 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts aggregating
greater than $37.3 million, the reserve requirement is $1.119 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $37.3 million. The first
$5.5 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) were exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the FDIC.
FEDERAL AND STATE TAXATION
Federal Taxation
GENERAL. The Company and its subsidiaries report their income on a
consolidated basis using the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Company. For its 2000 taxable year, the Company is subject to a maximum
federal income tax rate of 34%.
BAD DEBT RESERVES. As a large commercial bank, the Bank is permitted to
recognize bad debt expense based on actual chargeoffs. Prior to its conversion
to a commercial bank in May 1997, the Bank was a thrift institution. For fiscal
years beginning prior to December 31, 1995, thrift institutions which qualified
under certain definitional tests and other conditions of the Internal Revenue
Code of 1986 (the "Code") were permitted to use certain favorable provisions to
calculate their deductions from taxable income for annual
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additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the Percentage of Taxable Income
Method (the "PTI Method") or (ii) the Experience Method. The reserve for
nonqualifying loans was computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), as modified
by the Taxpayer Relief Act of 1997 (the "1997 Act"), requires savings
institutions to recapture (i.e., take into income) certain portions of their
accumulated bad debt reserves. The 1996 Act repeals the reserve method of
accounting for bad debts effective for tax years beginning after 1995. Thrift
institutions that would be treated as small banks are allowed to utilize the
Experience Method applicable to such institutions, while thrift institutions
that are treated as large banks (those generally exceeding $500 million in
assets) are required to use only the specific charge-off method. Thus, the PTI
Method of accounting for bad debts is no longer available for any financial
institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's current taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank is
permitted to make additions to its tax bad debt reserves. In addition, since the
Bank's tax bad debt reserves as of December 31, 1987 exceeded its tax bad debt
reserves as of December 31, 1995 it is not required to recapture any income.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on a corporation's alternative minimum
taxable income ("AMTI") at a rate of 20% if such alternative minimum tax ("AMT")
exceeds the income tax the corporation would otherwise pay for the taxable year.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference item for purposes of computing the
AMTI. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). The Bank does not typically
expect to be subject to the AMT.
7
10
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company owns more than 20% of the stock of a corporation
distributing a dividend, 80% of any dividends received may be deducted.
State Taxation
COMMONWEALTH OF PENNSYLVANIA. The Bank is subject to a "Bank Shares Tax"
which is imposed on every bank having capital stock located within Pennsylvania.
The Bank Shares Tax is based on the value of the bank's shares as of the
preceding January 1st. The taxable amount is computed by adding the book value
of capital stock paid in, the book value of the surplus and the book value of
undivided profits, and then deducting from that total an amount equal to the
percentage that the book value of the bank's federal obligations and state
obligations bears to the book value of the bank's total assets. This value is
calculated on the basis of the current year and the preceding five years, but,
if a bank has not been in existence for six years, the taxable amount is
computed by adding the value for the number of years that the bank has been in
existence and dividing the resulting sum by that number of years. The Bank
Shares Tax rate is 1.25% of the taxable amount. Banks subject to the Bank Shares
Tax are exempt from all other corporate taxes imposed by Pennsylvania.
Corporations doing business in Pennsylvania and not subject to Bank Shares
Tax are subject to Pennsylvania Corporate Net Income Tax ("CNIT"). The CNIT is
an annual excise tax and is measured by the Corporation's taxable income as
determined under the Code. When a domestic or foreign corporation's entire
business is not transacted wholly within Pennsylvania, such taxable income must
allocated and apportioned to determine that portion subject to the CNIT. The
CNIT rate is 9.99%. Pennsylvania also subjects corporations to the Pennsylvania
Capital Stock and Foreign Franchise Tax.
Prior to January 22, 1999, the Company was subject to the Pennsylvania CNIT
and the Pennsylvania Capital Stock and Foreign Franchise Tax because it was a
foreign corporation doing business in Pennsylvania. The Company's Pennsylvania
CNIT was calculated on an unconsolidated basis and adjusted to reflect the
appropriate allocation and apportionment requirements. After January 22, 1999,
the Company became subject to the Pennsylvania Capital Stock Tax and CNIT.
ITEM 2. PROPERTIES
The Bank has 18 banking offices, three (3) of which are located in
Montgomery County, four (4) of which are located in Berks County, five (5) of
which are located in Lehigh County, four (4) of which are located in Northampton
County, and two (2) of which are located in Chester County, Pennsylvania. The
Bank owns 3 and leases 15 of the banking office properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various legal actions arising from normal
business activities. Management believes that those actions are either without
merit or that the ultimate liability, if any, resulting from such actions will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
11
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information, including principal occupation during the past five
years, relating to the principal executive officers of the Company, as of March
12, 2001, is set forth below:
Richard A. Elko -- Age 40. Mr. Elko was elected President/CEO of the
Company and the Bank in November 2000. Prior to that Mr. Elko served as
Executive Vice President and Chief Financial Officer of the Company and the Bank
since January 1996. Prior to his appointment at the Company and the Bank, Mr.
Elko was Corporate Controller at Sovereign Bancorp, Inc.
Joni S. Naugle -- Age 42. Ms. Naugle was elected as Executive Vice
President/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 Sovereign Bank from 1979 to April
1998 and a consultant from April 1998 to December 1998.
Kevin R. Pyle -- Age 34. Mr. Pyle was elected as Executive Vice
President/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. Prior thereto he was a commercial lending officer of Berks County Bank.
James G. Blume -- Age 35. Mr. Blume was elected as Senior Vice
President/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. Prior to that Mr. Blume was the Accounting
Manager of the Company and Patriot Bank. Prior to that Mr. Blume was senior
staff accountant at Sovereign Bank until March 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") National Market System under the symbol "PBIX". At March 12,
2001, the total number of holders of record of the Company's common stock was
844.
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.
2000 1999
----------------------------------- -----------------------------------
BID ASKED BID ASKED
-------------- -------------- -------------- --------------
QTR HIGH LOW HIGH LOW QTR HIGH LOW HIGH LOW
- --- ---- --- ---- --- --- ---- --- ---- ---
1st 15 1/16 8 3/8 15 3/16 8 11/16 1st 13 9 3/8 13 1/8 9 1/2
2nd 13 1/4 6 5/8 13 3/8 6 15/16 2nd 15 3/8 9 1/4 9 1/2 9 3/8
3rd 7 1/4 6 1/2 7 5/8 6 5/8 3rd 10 5/8 9 1/8 9 7/8 9 3/8
4th 6 7/8 5 13/16 7 5 15/16 4th 10 7/8 8 1/8 11 8 3/16
The bid quotations reflect interdealer quotations, do not include retail
mark ups, mark downs or commissions and may not necessarily represent actual
transactions. The bid information as stated is, to the knowledge of management
of the Company, the best approximate value at the time indicated.
DIVIDEND INFORMATION.
Dividends on the Company's Common Stock are generally payable in February,
May, August and November.
Set forth below are the cash dividends paid by the Company during 2000 and
1999. Such dividends have been adjusted to reflect all stock dividends paid
during such years.
9
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2000 1999
------ ------
First Quarter............................................... $.0875 $.0775
Second Quarter.............................................. $.0900 $.0800
Third Quarter............................................... $.0925 $.0825
Fourth Quarter.............................................. $.0925 $.0850
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" hereof.
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,
------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- -------- -------- --------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION
DATA:
Total assets..................... $1,124,905 $1,129,443 $980,761 $852,083 $529,165
Investment and mortgage-backed
securities available for
sale........................... 84,889 87,334 386,380 343,125 159,148
Investment and mortgage-backed
securities held to maturity.... 302,489 348,047 29,639 62,516 72,710
Loans held for sale.............. 8,564 4,972 5,576 4,095 --
Loans and leases receivable...... 656,479 628,060 509,080 422,209 280,184
Allowance for credit losses...... (5,839) (6,082) (4,087) (2,512) (1,830)
Deposits......................... 651,958 502,002 377,796 289,528 239,514
Borrowings....................... 416,837 568,795 549,321 508,884 231,595
Stockholders' equity............. 51,800 49,768 42,260 46,533 53,117
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Interest income...................... $84,143 $75,544 $63,107 $50,249 $29,594
Interest expense..................... 61,471 51,510 46,236 35,807 17,502
------- ------- ------- ------- -------
Net interest income before provision
for credit losses.................. 22,672 24,034 16,871 14,442 12,092
Provision for credit losses.......... 1,125 1,200 1,200 915 305
------- ------- ------- ------- -------
Net interest income after provision
for credit losses.................. 21,547 22,834 15,671 13,527 11,787
Non-interest income.................. 7,124 5,945 3,873 2,330 637
Non-interest expense................. 26,844 26,402 14,267 11,158 9,198
------- ------- ------- ------- -------
Income before income taxes........... 1,827 2,377 5,277 4,699 3,226
Income taxes......................... (182) 177 1,222 1,326 1,251
------- ------- ------- ------- -------
Net income........................... $ 2,009 $ 2,200 $ 4,055 $ 3,373 $ 1,975
======= ======= ======= ======= =======
Diluted earnings per share........... $ 0.34 $ 0.37 $ 0.78 $ 0.59 $ 0.31
======= ======= ======= ======= =======
10
13
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income before non-recurring
charges(1)......................... $ 5,233 $ 5,549 $ 2,811
======= ======= =======
Diluted earnings per share before
non-recurring charges(1)........... $ 0.89 $ 0.94 $ 0.44
======= ======= =======
Cash earnings per share before non-
recurring charges(1)(8)............ $ 1.17 $ 1.20 $ 0.92 $ 0.71 $ 0.50
======= ======= ======= ======= =======
AT DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
PERFORMANCE RATIOS(2):
Return on average assets............. 0.17% 0.20% 0.45% 0.49% 0.48%
Return on average assets before non-
recurring charge(1)................ 0.45 0.51 -- -- 0.68
Return on average equity............. 3.94 4.00 8.72 7.22 3.71
Return on average equity before non-
recurring charge(1)................ 10.30 10.10 -- -- 5.28
Cash return on average equity(1)..... 18.66 12.95 10.27 8.63 6.02
Average interest rate spread(3)...... 2.13 2.32 1.98 2.10 2.95
Net interest margin(4)............... 2.25 2.44 2.01 2.14 3.01
Average interest-earning assets to
average interest bearing
liabilities........................ 99.09 100.39 103.72 104.85 113.69
Total non-interest expense to average
assets before non-recurring
charge(2).......................... 2.32 2.41 1.58 1.56 1.93
Dividend payout ratio................ 105.70 86.02 35.91 40.31 45.91
REGULATORY CAPITAL RATIOS(5):
Tier 1 capital to average
assets(7).......................... 5.48% 5.45% 5.37% 7.90% 9.97%
Tier 1 capital to risk-adjusted
assets(6).......................... 9.45 9.39 10.00 12.92 20.28
Total risk adjusted capital to
risk-adjusted assets(6)............ 10.41 10.46 12.46 14.54 20.98
ASSET QUALITY RATIOS(7):
Non-performing assets as a percent of
total assets....................... 0.35% 0.15% 0.11% 0.15% 0.12%
Non-performing loans as a percent of
loans receivable................... 0.59 0.24 0.21 0.26 0.20
Allowance for credit losses as a
percent of loans receivable........ 0.88 0.96 0.79 0.59 0.65
Allowance for credit losses as a
percent of non-performing assets... 147.82 354.04 362.63 225.90 321.94
- ---------------
(1) In 1996, a non-recurring after-tax charge of $836,000 was recorded,
representing the special deposit insurance assessment levied against all
SAIF member financial institutions by the FDIC to recapitalize its SAIF
fund. In 1999, a non-recurring after-tax charge of $ 3,349,000 was recorded
in connection with an internet initiative. 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.
11
14
(2) All ratios are based on average monthly balances during the indicated
periods. Return on average assets and return on average equity are
calculated before the cumulative effect of change in method of accounting
for income taxes.
(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.
(5) For definitions and further information relating to regulatory capital
requirements, see footnote 18 of the consolidated financial statements.
(6) Regulatory capital ratios for 1996 are calculated under OTS guidelines. The
ratios for 1997 through 2000 are calculated using Federal Reserve
guidelines due to the conversion of Patriot Bank to a state chartered
commercial bank in May 1997.
(7) Non-performing assets consist of non-performing loans and real estate owned
(REO). Non-performing loans consist of non-accrual loans, while REO
consists of real estate acquired through foreclosure and real estate
acquired by acceptance of a deed in lieu of foreclosure.
(8) Cash earnings per share is calculated by the elimination of non-cash
expenses such as goodwill amortization, ESOP expense, and MRP expense
12
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information, this discussion and analysis of
Patriot Bank Corp. and Subsidiaries (Patriot) contains forward-looking
statements. The forward-looking statements contained in this discussion and
analysis are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date of this report. Patriot undertakes no
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this report.
Patriot's financial results include the following significant events:
CAPITAL TRANSACTIONS. Patriot became a publicly owned company on
December 1, 1995, when it issued 3,769,125 shares of common stock and
raised net proceeds of $36,652,000. On September 22, 1997, and November 21,
1996, Patriot paid special 20% stock dividends. On May 14, 1998, Patriot
distributed a 25% stock split. For comparative purposes, per share amounts,
as presented herein, have been adjusted to reflect the stock
split/dividends. During 1996, 1997, 1998 and 1999 Patriot repurchased
338,000, 1,246,000, 538,000 and 377,000 shares of its common stock at a
cost of $6,892,000, $13,554,000, $2,517,000 and $4,808,000, respectively.
Patriot did not repurchase any shares of its common stock in 2000.
RESIGNATION. On November 3, 2000, Patriot's former CEO resigned.
Patriot satisfied a contractual obligation related to the former CEO, which
resulted in a non-recurring, after-tax charge of $785,000.
BANK ACQUISITION. On January 22, 1999, Patriot completed the
acquisition of First Lehigh Corporation ("First Lehigh"), a commercial
banking company with $104,478,000 in total assets and $93,905,000 in total
deposits. Patriot issued 1,640,000 shares of common stock for all the
outstanding common and preferred stock of First Lehigh. The transaction had
a total value of $21,047,000. The acquisition was accounted for as a
purchase, and accordingly, the results of operations of First Lehigh are
included in Patriot's consolidated statement of income from the date of
acquisition. Goodwill and core deposit intangibles arising from the
transaction totaled $12,439,000 which are being amortized over 15 years.
LEASING ACQUISITION. On November 6, 1998, Patriot completed its
acquisition of Keystone Financial Leasing Company (KFL). KFL 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 and is being amortized over 15 years.
RETIREMENT. Effective June 30, 1998, Patriot's former chairman
retired. Patriot satisfied its contractual obligation related to the former
chairman, which resulted in a non-recurring, after-tax charge of $634,000.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
SUMMARY. 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 ($785,000
related to the resignation of Patriot's CEO, a one time restructuring charge of
$1,453,000 and non-recurring expenses of $986,000). Core earnings excluding
these non-recurring charges were $5,233,000 or $.89 diluted earnings per share.
For the year ended December 31, 1999, Patriot reported
13
16
net income of $2,200,000 or $.37 diluted earnings per share including costs
related to the launch of an internet initiative of $3,349,000 ($5,067,000 before
tax). Patriot's core banking operations exclusive of that internet initiative
for the year ended December 31, 1999 generated $5,549,000 or $.94 diluted
earnings per share. Excluding the non-recurring charges, return on average
equity was 10.30% for 2000 compared to 10.10% for 1999.
NET INTEREST INCOME. Net interest income for 2000 was $22,672,000 compared
to $24,034,000 in 1999. The yield on Patriot's interest earning assets continued
it's favorable trend and increased to 7.82% for the year 2000 compared to 7.35%
for 1999 in response to growth in higher yielding commercial loan and lease
portfolios. The cost of Patriot's interest bearing liabilities was 5.58% for
2000 compared to 4.96% for 1999. The increase in funding costs resulted from
generally higher interest rates, especially with regard to short-term funding.
Much of Patriot's asset growth resulted from the origination of commercial loans
and leases. Patriot's asset growth was funded through deposit growth and
borrowings.
Interest on loans was $55,531,000 for 2000 compared to $45,590,000 for
1999. The average balance of loans in 2000 was $666,171,000 with an average
yield of 8.33% compared to an average balance of $571,966,000 with an average
yield of 7.97% in 1999. The increase in average balance was due to increased
originations of commercial loans and leases. Also, the average balance of
mortgage loans was maintained at a consistent level during 2000 as most mortgage
loan originations were sold; additionally, pursuant to an interest rate risk
strategy Patriot sold approximately $50,000,000 in residential mortgage loans
from the portfolio during the third quarter of 2000. The increase in average
yield is primarily a result of commercial loans and leases representing a larger
percentage of the loan portfolio.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $28,190,000 for 2000 compared to $29,656,000 for 1999. The
average balance of the investment portfolio was $412,712,000 with an average
yield of 7.17% for 2000 compared to an average balance of $457,093,000 with an
average yield of 6.78% for 1999. The decrease in average balance was primarily
due to normal amortization as Patriot has allowed investment and mortgage-backed
securities to runoff. The increase in average yield is primarily a result of
repricings of adjustable rate securities.
Interest on total deposits was $30,709,000 for 2000 compared to $20,565,000
for 1999. The average balance of total deposits was $596,618,000 with an average
cost of 5.15% for 2000 compared to an average balance of $468,814,000 with an
average cost of 4.38% for 1999. The increase in average balance was primarily
the result of an increase in Patriot's brokered jumbo deposit program, coupled
with aggressive marketing of core deposits (money market, checking and savings
accounts). The increase in average cost was the result of the increase in jumbo
deposits and market pricing on retail deposits. Total brokered jumbo deposits
approximated $204,917,000 and $136,113,000 at December 31, 2000 and 1999,
respectively. The average balance of retail deposits (total deposits less
brokered jumbo deposits) was $401,441,000 with an average cost of 4.36% for 2000
compared to an average balance of $359,317,000 with an average cost of 3.96% for
1999. The increase in average balance and yield was primarily the result of
Patriot's brokered jumbo deposit program, offset by growth of core deposits.
Interest on borrowings was $30,762,000 in 2000 compared to $30,945,000 in
1999. The average balance of borrowings was $504,666,000 with an average cost of
6.01% for 2000 compared to an average balance of $568,922,000 with an average
cost of 5.43% for 1999. The decrease in average balance was due to less use of
borrowings to fund the growth in the balance sheet. The increase in average cost
was due to generally higher interest rates.
SPREAD ANALYSIS. The following table sets forth Patriot's average balances
and the yields on those balances for the years ended December 31, 2000, 1999 and
1998. The yields and costs are derived by dividing
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17
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,
----------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ -------- -------- ------
(IN THOUSANDS)
ASSETS:
Interest-earning
assets:
Interest earning
deposits............. $ 12,330 $ 422 3.42% $ 12,729 $ 298 2.34% $ 11,381 $ 344 3.02%
Investment and
mortgage-backed
securities(1)........ 412,712 28,190 7.17 457,093 29,656 6.78 417,037 27,521 6.84
Loans receivable,
net(2)............... 666,171 55,531 8.33 571,966 45,590 7.97 455,167 35,242 7.74
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Net interest-earning
assets............... 1,091,213 84,143 7.82 1,041,788 75,544 7.35 883,585 $63,107 7.25
Non-interest-earning
assets............... 62,104 -- -- 55,753 -- -- 18,236 -- --
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Total assets........... $1,153,317 $84,143 7.42% $1,097,541 $75,544 7.00% $901,821 $63,107 7.11%
========== ======= ==== ========== ======= ==== ======== ======= =====
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
Savings deposits....... $ 199,543 $ 6,016 3.01% $ 179,774 $ 4,767 2.65% $116,381 $ 3,488 2.99%
Certificates of
deposits............. 397,075 24,698 6.22 289,040 15,798 5.47 233,881 13,894 5.94
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Total deposits......... 596,618 30,714 5.15 468,814 20,565 4.38 350,262 17,382 4.96
Borrowings(3).......... 504,666 30,757 6.01 568,922 30,945 5.43 501,605 28,854 5.76
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Total interest-bearing
liabilities.......... 1,101,284 61,471 5.58% 1,037,736 51,510 4.96% 851,867 46,236 5.43%
Non-interest-bearing
liabilities.......... 1,213 -- -- 4,847 -- -- 3,436 -- --
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Total liabilities...... 1,102,497 61,471 5.58 1,042,583 51,510 4.94 855,303 46,236 5.41
Equity................. 50,820 -- -- 54,958 -- -- 46,518 -- --
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Total liabilities and
equity............... $1,153,317 $61,471 5.34% $1,097,541 $51,510 4.69% $901,821 $46,236 5.13%
========== ======= ==== ========== ======= ==== ======== ======= =====
Net interest rate
spread(4)............ 2.08% 2.31% 1.98%
==== ==== =====
Net interest
margin(5)............ 2.25 2.44 2.01
Ratio of
interest-earning
assets to interest
bearing
liabilities.......... 99.09% 100.39% 103.72%
- ---------------
(1) Includes securities available for sale and held to maturity and unamortized
discounts and premiums.
(2) Amount is net of deferred loan and lease fees, loans in process, discounts
and premiums, and allowance for loan and lease losses and includes loans
held for sale and non-performing loans and leases for which the accrual of
interest has been discontinued.
(3) Includes short-term, long-term and trust preferred borrowings.
(4) Net interest rate spread represents the difference between the average yield
on total assets and the average cost of total liabilities and equity.
(5) Net interest margin represents the tax-equivalent net interest income
divided by average interest-earning assets. The impact of the tax-equivalent
calculation increased the net interest margin by .13% in 2000, .12% in 1999
and .11% in 1998 due to tax equivalent calculations.
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
15
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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, 2000 YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------ ------------------------------
VOLUME RATE NET VOLUME RATE NET
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Interest-earning assets:
Interest-earning deposits........... $ (9) $ 133 $ 124 $ 38 $ (84) $ (46)
Investment and mortgage-backed
securities........................ (3,160) 1,694 (1,466) 2,606 (472) 2,134
Loans............................... 7,802 2,139 9,941 9,283 1,065 10,348
------- ------- ------- ------- ------- -------
Total interest-earning assets....... 4,633 3,966 8,599 11,927 509 12,436
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits............................ 7,115 3,029 10,144 4,796 (1,634) 3,162
Borrowings.......................... (3,429) 3,246 (183) 3,724 (1,612) 2,112
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities....................... 3,686 6,275 9,961 8,520 (3,246) 5,274
------- ------- ------- ------- ------- -------
Net change in net interest income... $ 947 $(2,309) $(1,362) $ 3,407 $ 3,755 $ 7,162
======= ======= ======= ======= ======= =======
PROVISION FOR CREDIT LOSSES. The provision for credit losses was
$1,125,000 for 2000 compared to $1,200,000 for 1999. See "Credit Quality" for a
detailed discussion of Patriot's asset quality.
The following table sets forth the activity in the allowance for credit
losses for the years indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Allowance, beginning of year........... $6,082 $4,087 $2,512 $1,830 $1,702
Charge-offs:
Residential.......................... 102 249 114 17 13
Commercial........................... 1,111 573 253 -- 98
Home equity and consumer............. 268 243 145 259 66
------ ------ ------ ------ ------
Total charge-offs............ 1,481 1,065 512 276 177
------ ------ ------ ------ ------
Recoveries:
Residential.......................... -- -- -- 2 --
Commercial........................... 98 66 -- 31 --
Home equity and consumer............. 15 38 9 10 --
------ ------ ------ ------ ------
Total recoveries............. 113 104 9 43 --
------ ------ ------ ------ ------
Net charge-offs........................ 1,368 961 503 233 177
Acquired allowance..................... -- 1,756 878 -- --
Provision charged to operations........ 1,125 1,200 1,200 915 305
------ ------ ------ ------ ------
Allowance, end of year................. $5,839 $6,082 $4,087 $2,512 $1,830
====== ====== ====== ====== ======
Net charge-offs to average loans....... .21% .17% .11% .07% .08%
Allowance for credit losses as a
percentage of year-end total loans... .88% .96% .79% .59% .65%
16
19
NON-INTEREST INCOME. Total non-interest income was $7,124,000 for 2000
compared to $5,945,000 for 1999. The increase was primarily due to an increased
emphasis on recurring non-interest income including loan and deposit fees, ATM
fees and mortgage banking activities.
NON-INTEREST EXPENSE. Total non-interest expense was $26,844,000 for 2000
compared to $26,402,000 for 1999. Non-interest expense in 2000 included $785,000
related to the resignation of Patriot's CEO 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. Non-interest expense in 1999
included $5,067,000 in costs incurred related to the launch of an internet
initiative. The increase in recurring non-interest expense reflects growth in
Patriot's operations. Patriot's efficiency ratio was 73.70% in 2000 compared to
71.17% in 1999 exclusive of the non-recurring charges in each year.
INCOME TAX PROVISION. The income tax provision was $(182,000) for 2000
compared to $177,000 for 1999. The effective tax rate was (9.96)% for 2000
compared to 7.44% for 1999. The decrease in the effective tax rate is the result
of the tax impact of the non-recurring costs in 2000 resulting in an increase in
Patriot's proportion of tax exempt income to net income. Patriot's tax exempt
income results from tax planning strategies, which include investments in
tax-exempt securities. Excluding the non-recurring costs in 2000 and 1999,
Patriot's effective tax rate was 22.03% and 25.53% for 2000 and 1999,
respectively.
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20
FINANCIAL CONDITION
LOAN PORTFOLIO. Patriot's primary loan products are commercial loans and
leases, home equity loans on existing owner-occupied residential real estate,
and fixed-rate and adjustable-rate mortgage loans. Patriot also offers
residential construction loans and other consumer loans.
COMMERCIAL. Patriot originates commercial loans with an emphasis on small
businesses, professionals and entrepreneurs within Patriot's local markets. Most
of Patriot's commercial loan relationships have exposure of $500,000 or less.
Commercial loans are generally secured by real estate and personal guarantees.
Patriot also originates small-ticket commercial leases to businesses located in
Pennsylvania and other contiguous states. The leases are considered financing
leases for financial accounting purposes.
CONSUMER. Patriot offers variable rate (based upon prime rate) home equity
lines of credit and fixed-rate home equity loans, which are generally secured by
single-family, owner-occupied residential properties. Patriot also offers a
variety of other consumer loans, which primarily consist of installment loans
secured by automobiles, credit cards, unsecured lines of credit and other loans
secured by deposit accounts.
MORTGAGE. Patriot offers both fixed-rate and adjustable-rate mortgage
loans secured by one- to four-family residences, primarily owner-occupied,
located in Patriot's primary market area. Patriot generally underwrites its
first mortgage loans in accordance with underwriting standards set by the
Federal Home Loan Mortgage Corp. (FHLMC) and the Federal National Mortgage
Association (FNMA). Patriot also originates residential construction loans. Most
of the residential mortgage loans originated by Patriot are sold into the
secondary markets. Patriot generally only retains certain adjustable rate and
balloon residential mortgages in its portfolio.
At December 31, 2000, Patriot's total loan portfolio was $656,479,000
compared to a total loan portfolio of $628,060,000 at December 31, 1999. The
increase in the loan portfolio was primarily the result of an emphasis placed on
commercial lending and leasing relationships. Pursuant to an interest rate risk
strategy, Patriot sold approximately $50,000,000 in residential mortgage loans
from the portfolio during the third quarter of 2000.
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,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Mortgage Portfolio:
Residential mortgages............... $253,213 38.53% $293,852 47.25% $300,232 58.73%
Construction........................ 10,779 1.64 10,481 1.69 5,267 1.03
Consumer Portfolio:
Home equity......................... 64,733 9.85 69,785 11.22 64,807 12.67
Other consumer loans................ 8,553 1.30 9,081 1.46 4,336 0.85
Commercial Portfolio:
Commercial loans.................... 252,837 38.47 189,189 30.41 92,367 18.06
Commercial leases................... 67,094 10.21 57,808 9.29 44,301 8.66
-------- ------ -------- ------ -------- ------
Total loans, gross.................... 657,209 100.00% 630,196 100.00% 511,310 100.00%
Deferred loan fees.................. (730) (2,136) (2,230)
Allowance for credit losses......... (5,839) (6,082) (4,087)
-------- -------- --------
Total loans, net............ $650,640 $621,978 $504,993
======== ======== ========
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21
AT DECEMBER 31,
-----------------------------------------
1997 1996
------------------- -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
Mortgage Portfolio:
Residential mortgages................................. $294,716 69.41% $190,849 67.54%
Construction.......................................... 4,039 0.95 3,210 1.14
Consumer Portfolio:
Home equity........................................... 75,439 17.77 72,480 25.65
Other consumer loans.................................. 3,909 0.92 2,546 0.90
Commercial Portfolio:
Commercial loans...................................... 46,166 10.87 13,491 4.77
Commercial leases..................................... 334 0.08 -- --
-------- ------ -------- ------
Total loans, gross...................................... 424,603 100.00% 282,576 100.00%
Deferred loan fees.................................... (2,394) (2,392)
Allowance for credit losses (2,512) (1,830)
-------- --------
Total loans, net.............................. $419,697 $278,354
======== ========
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22
The following table details Patriot's loan originations for the years
indicated:
FOR THE PERIOD ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Mortgage........................................... $188,391 $113,928 $ 98,067
Consumer........................................... 24,925 30,149 25,428
Commercial......................................... 140,095 132,364 67,204
Commercial Leases.................................. 55,147 40,147 6,202
-------- -------- --------
Total Originations....................... $408,558 $316,588 $196,901
======== ======== ========
LOAN MATURITY. The following table sets forth the maturity schedule for
Patriot's loan portfolio (excluding residential mortgages and consumer loans):
AMOUNTS AT DECEMBER 31, 2000, MATURING
---------------------------------------------------
AFTER ONE
IN ONE YEAR
YEAR OR THROUGH AFTER FIVE
LESS FIVE YEARS YEARS TOTAL
----------- ---------- ---------- --------
(IN THOUSANDS)
Loan Maturity Schedule:
Commercial loans......................... $ 68,301 $157,867 $13,052 $239,220
Commercial leases........................ 22,801 43,608 685 67,094
Residential construction loans........... 10,779 -- -- 10,779
Other construction loans................. 10,050 2,446 1,121 13,617
-------- -------- ------- --------
Total.......................... $111,931 $203,921 $14,858 $330,710
======== ======== ======= ========
Fixed rates.............................. $ 75,783 $190,927 $13,656 $280,366
Adjustable rates......................... 36,148 12,994 1,202 50,344
-------- -------- ------- --------
Total.......................... $111,931 $203,921 $14,858 $330,710
======== ======== ======= ========
CREDIT QUALITY. Patriot's Asset Review and Credit Administration
Committees establish acceptable credit risks to be undertaken, the policies and
procedures to be used to control credit risk and the corrective actions to be
taken when credit challenges are encountered. These committees also review
credit quality on a monthly basis, classify assets in accordance with applicable
management guidelines and regulations, make recommendations to Patriot's Board
of Directors with regard to placing assets on non-accrual status, charge-offs
and write-downs and the appropriate level of credit reserves.
Patriot accrues interest on all loans until management determines that the
collection of interest is doubtful. In no event does Patriot continue accruing
interest on loans contractually past due 90 days or more. Upon discontinuance of
interest accrual, all unpaid accrued interest is reversed.
Patriot generally requires appraisals on an annual basis on foreclosed
properties. Patriot generally conducts inspections on foreclosed properties on
at least a quarterly basis.
At December 31, 2000, non-performing assets were $3,950,000 or 0.35% of
total assets compared to $1,718,000 or .15% of total assets at December 31,
1999. Although the ratio of non-performing assets to total assets has grown
during the past year, Patriot continues to perform favorably at levels well
below national peer group statistics. Patriot controls its level of
non-performing assets by quickly identifying problem assets and resolving them
in an expedient manner. At December 31, 2000, 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.
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23
The following table sets forth information regarding non-performing assets:
AT DECEMBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ -------
(IN THOUSANDS)
Non-accrual loans:
Residential mortgages................ $1,142 $ 591 $ 494 $ 524 $ 411
Commercial........................... 1,593 189 159 128 6
Commercial leases.................... 502 56 75 -- --
Home equity and consumer............. 255 373 212 125 151
------ ------ ------ ------ -------
Total non-accrual loans greater than
90 days............................ 3,492 1,209 940 777 568
------ ------ ------ ------ -------
Commercial........................... 208 -- -- -- --
Residential mortgages................ 166 242 98 328 --
Home equity and consumer............. 22 74 31 7 --
------ ------ ------ ------ -------
Total non-accrual loans less than 90
days............................... 396 316 129 335 --
------ ------ ------ ------ -------
Total non-performing loans........... 3,888 1,525 1,069 1,112 568
REO.................................. 62 193 58 162 74
------ ------ ------ ------ -------
Total non-performing assets.......... $3,950 $1,718 $1,127 $1,274 $ 642
====== ====== ====== ====== =======
Allowance for credit losses as a
percent of loans receivable........ .88% .96% .79% .59% .65%
Allowance for credit losses as a
percent of total non-performing
assets............................. 147.82 354.02 362.63 225.90 321.94
Non-performing loans as a percent of
total loans receivable............. .59 .24 .21 .26 .20
Non-performing assets as a percent of
total assets....................... .35 .15 .11 .15 .12
ALLOWANCE FOR CREDIT LOSSES. Patriot's total loans consist of four
distinct portfolios. Mortgage loans comprise 40.39% of total loans. The mortgage
loan portfolio is mature as Patriot has been in the mortgage lending business
for many years. Consumer loans comprise 11.15% of total loans and consists
mostly of home equity loans and home equity lines of credit. The consumer loan
portfolio is also mature as Patriot has been in this business for many years as
well. The level of reserves allocated to mortgage and consumer lending have been
consistently based on extensive historical data regarding, among other things,
delinquencies, charge-offs and recoveries. Commercial loans comprise 38.25% of
total loans. Patriot entered the commercial lending business in 1996. Commercial
leases comprise 10.21% of total loans. Patriot entered the commercial leasing
business in 1998. Since entering the commercial loan and lease businesses,
Patriot has maintained reserves for these portfolios at the high end of the
acceptable range as determined by management due in part to limited historical
data regarding delinquencies, charge-offs and recoveries. As the commercial loan
and lease portfolios have matured, Patriot has analyzed recent historical data
regarding delinquencies, charge-offs and recoveries to determine the appropriate
level of reserves. In 2000, Patriot determined that its asset quality statistics
were better than originally anticipated and better than most peer institutions.
This determination allowed Patriot to maintain its reserves for commercial loans
and leases at levels closer to the midpoint of the acceptable range. In 1999,
Patriot acquired First Lehigh Corp which resulted in an increase in the overall
allowance as a percentage of total loans as necessitated by First Lehigh's
historical asset quality statistics and underwriting standards. Also the First
Lehigh acquisition inflated the reserve as a percentage of total loans. As the
First Lehigh loan portfolio has matured the reserve as a percentage of total
loans has returned to historical levels, Patriot's percentage of loan loss
reserves to total loans decreased from .96% in 1999 to .88% in 2000.
During 2000 Patriot's loan and lease portfolio grew from $628,060,000 at
December 31, 1999, to $656,479,000. Almost all of this growth was in Patriot's
commercial loan and lease portfolio. Based on the aforementioned criteria,
management deemed it appropriate to add $1,125,000 to Patriot's allowance to
21
24
adequately address the risk inherent in Patriot's portfolio. Patriot believes
that although non-performing asset ratios have trended upward during 2000, the
allowance provided appropriate coverage of credit losses at December 31, 2000.
The following table sets forth management's allocation of the allowance for
credit losses at the dates indicated:
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- -------------------------------- --------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
Residential mortgages...... $ 903 15.47% 40.39% $1,509 24.81% 48.52% $1,273 31.15% 59.76%
Commercial loans and
leases................... 4,312 73.84 48.46 3,605 59.27 39.02 2,131 52.13 26.72
Home equity and consumer... 624 10.69 11.15 968 15.92 12.46 683 16.72 13.52
------ ------ ------ ------ ------ ------ ------ ------ ------
Total valuation
allowances............... $5,839 100.00% 100.00% $6,082 100.00% 100.00% $4,087 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
AT DECEMBER 31,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
Residential mortgages.................................... $1,253 49.88% 72.24% $ 895 48.87% 69.27%
Commercial loans and leases.............................. 629 25.04 8.70 261 14.28 4.18
Home equity and consumer................................. 630 25.08 19.06 674 36.85 26.55
------ ------ ------ ------ ------ ------
Total valuation allowances............................... $2,512 100.00% 100.00% $1,830 100.00% 100.00%
====== ====== ====== ====== ====== ======
22
25
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at December 31, 2000,
were $27,076,000 compared to $8,161,000 at December 31, 1999. The increase in
cash and cash equivalents was temporary and primarily due to timing differences
related to the repayment of borrowed funds.
SECURITIES. Investment securities consist of US Treasury and government
agency securities, corporate debt and equity securities. Mortgage-backed
securities consist of securities generally insured by either the FHLMC, FNMA or
the Government National Mortgage Association (GNMA). Collateralized mortgage
obligations consist of securities issued by the FHLMC, FNMA or private issuers.
Total investment and mortgage-backed securities at December 31, 2000, were
$387,378,000 compared to $435,381,000 at December 31, 1999. The decrease in
investment and mortgage-backed securities was primarily due to normal
amortization. During 1999 Patriot transferred $366,628,000 in investment
securities, principally consisting of agency, mortgage-backed and CMO
securities, from an available for sale classification to held to maturity to
reflect Patriot's intentions to hold the securities to maturity. The transaction
recorded an unrealized loss on the transferred securities of $4,758,000 net of
tax, which continues to be reported as a component of accumulated other
comprehensive income (loss) and is being amortized over the remaining lives of
those securities.
23
26
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,
------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
US Treasury and
government agency
securities.......... $ -- $ -- $ -- $ -- $ 40,568 $ 40,699
Corporate
securities.......... 17,084 15,107 17,361 16,663 19,102 20,715
Equity securities..... 67,877 69,162 72,106 70,671 60,823 63,979
Mortgage-backed
securities:
FHLMC................. 613 620 -- -- 6,122 6,157
FNMA.................. -- -- -- -- 43,554 43,470
GNMA.................. -- -- -- -- 7,114 7,206
Collateralized mortgage
obligations:
FHLMC................. -- -- -- -- 104,751 106,256
FNMA.................. -- -- -- -- 89,855 89,294
Other................. -- -- -- -- 8,560 8,604
-------- -------- -------- -------- -------- --------
Total investment
and
mortgage-backed
securities
available
for sale....... $ 85,574 $ 84,889 $ 89,467 $ 87,334 $380,449 $386,380
======== ======== ======== ======== ======== ========
HELD TO MATURITY:
Investment securities:
US Treasury and
government agency
securities.......... $ 76,545 $ 73,558 $ 74,246 $ 66,791 $ 900 $ 908
Corporate
securities.......... 1,001 1,000 1,501 1,500 1,502 1,560
Mortgage-backed
securities:
FHLMC................. 3,446 3,426 4,272 4,292 -- --
FNMA.................. 48,462 49,884 54,809 51,673 -- --
GNMA.................. 3,573 3,528 4,528 4,569 -- --
Collateralized mortgage
obligations:
FHLMC................. 90,920 89,922 114,178 110,809 1,176 1,190
FNMA.................. 70,043 69,767 82,489 79,215 7,509 7,517
Other................. 6,196 6,175 9,732 9,700 18,552 18,734
CMBS.................. 2,303 2,425 2,292 2,205 -- --
-------- -------- -------- -------- -------- --------
Total investment
and
mortgage-backed
securities held
to
maturity....... $302,489 $299,685 $348,047 $330,754 $ 29,639 $ 29,909
======== ======== ======== ======== ======== ========
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27
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, 2000.
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- --------- ---------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
Corporate securities................... $ -- --% $ 926 6.60% $ 287 6.11%
Equity securities...................... -- -- -- -- -- --
------ ---- ------- ---- ------- ----
Mortgage-backed securities:
FHLMC.................................. 9 7.87 25 7.77 45 7.77
FNMA................................... -- -- -- -- -- --
GNMA................................... -- -- -- -- -- --
------ ---- ------- ---- ------- ----
Total available for sale....... $ 9 7.87% $ 951 6.63% $ 332 6.33%
====== ==== ======= ==== ======= ====
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government
securities.......................... $ -- --% $ 2,998 5.62% $10,746 6.34%
Corporate securities................... -- -- 1,001 7.06 -- --
Mortgage-backed securities:
FHLMC.................................. 142 7.24 1,192 6.48 418 7.45
FNMA................................... 450 6.89 4,589 6.37 8,461 6.41
GNMA................................... 141 7.52 282 7.38 492 7.40
Collateralized mortgage obligations:
FHLMC.................................. 1,827 6.83 6,435 6.60 10,599 6.60
FNMA................................... 915 6.63 5,082 6.48 8,590 6.48
Other.................................. 130 6.87 644 6.91 1,099 6.91
CMBS................................... 116 7.14 1,021 7.14 1,166 7.14
------ ---- ------- ---- ------- ----
Total held to maturity:........ $3,721 6.84% $23,244 6.46% $41,571 6.51%
====== ==== ======= ==== ======= ====
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28
MORE THAN TEN YEARS NO STATED MATURITY TOTAL
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
AVAILABLE FOR SALE:
Investment securities:
Corporate securities................. $ 13,894 9.04% $ -- --% $ 15,107 8.83%
Equity securities.................... -- -- 69,162 6.14 69,162 6.14
-------- ---- ------- ---- -------- ----
Mortgage-backed securities:
FHLMC................................ 541 7.78 -- -- 620 7.78
FNMA................................. -- -- -- -- -- --
GNMA................................. -- -- -- -- -- --
-------- ---- ------- ---- -------- ----
Total available for sale..... $ 14,435 8.99% $69,162 6.14% $ 84,889 6.63%
======== ==== ======= ==== ======== ====
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government
securities........................ $ 62,801 6.77% $ -- --% $ 76,545 6.67%
Corporate securities................. -- -- -- 1,001 7.06
Mortgage-backed securities:
FHLMC................................ 1,694 7.53 -- -- 3,446 7.15
FNMA................................. 34,962 6.52 -- -- 48,462 6.49
GNMA................................. 2,658 7.38 -- -- 3,573 7.39
Collateralized mortgage obligations:
FHLMC................................ 72,059 6.65 -- -- 90,920 6.65
FNMA................................. 55,456 6.48 -- -- 70,043 6.48
Other................................ 4,323 6.87 -- -- 6,196 6.88
CMB.................................. -- -- -- -- 2,303 7.14
-------- ---- ------- ---- -------- ----
Total held to maturity:...... $233,954 6.64% $ -- --% $302,489 6.61%
======== ==== ======= ==== ======== ====
Investments in equity securities that have readily determinable fair values
and all investments in debt securities are classified as either held to maturity
and reported at amortized cost or available for sale and reported at fair value
with unrealized gains and losses reported in a separate component of
stockholders' equity, or trading securities and reported at fair value with
unrealized gains and losses included in earnings.
The following table represents the securities of single issuers (other than
obligations of the United States and its political subdivisions, agencies and
corporations) having an aggregate book value in excess of 10% of Patriot's
stockholder's equity which were held at December, 31 2000:
AT DECEMBER 31, 2000
----------------------------
ISSUER CARRYING VALUE FAIR VALUE
- ------ -------------- ----------
(IN THOUSANDS)
FHLMC Preferred Stock............................... $44,973 $46,888
FHLB Stock.......................................... $16,609 $16,609
OTHER ASSETS. Premises and equipment at December 31, 2000 were $7,574,000
compared to $11,376,000 at December 31, 1999. The decrease is primarily due to
the sale of First Lehigh's corporate headquarters. Accrued interest receivable
at December 31, 2000 was $5,125,000 compared to $4,845,000 at December 31, 1999.
The increase is associated with an overall increase in the yield of
interest-earning assets. Cash surrender value life insurance at December 31,
2000 was $16,483,000 compared to $15,700,000 at December 31, 1999, this reflects
normal accretion. Goodwill and other intangibles were $13,274,000 at December
31, 2000 compared to $14,189,000 at December 31, 1999, this decrease is
associated with normal
26
29
amortization. Other assets at December 31, 2000 were $8,729,000 compared to
$12,648,000 at December 31, 1999. The decrease is primarily due to the timing of
various receivables.
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 jumbo
deposits from various sources.
Total deposits at December 31, 2000 were $651,958,000 compared to
$502,002,000 at December 31, 1999. Of that increase, $60,000,000 came from
certificate of deposits, $14,000,000 came from transaction-based deposit
accounts. The remaining $85,000,000 of that increase came from Patriot's
brokered jumbo deposit program. Patriot uses brokered jumbo deposits as an
alternative to borrowings.
The following table sets forth the distribution of average deposit accounts
for the periods indicated and the weighted average yield on each category of
deposit presented:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
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.... $103,493 17.35% 4.84% $ 86,152 18.37% 4.07% $ 62,749 17.91% 4.45%
Passbook deposits........ 32,907 5.52 2.45 39,654 8.46 2.47 23,772 6.79 2.42
NOW deposits............. 42,116 7.06 0.43 34,294 7.31 0.76 21,452 6.12 0.56
Demand deposits.......... 21,027 3.52 0.00 19,675 4.20 0.00 8,408 2.40 0.00
Retail certificates of
deposit................ 201,899 33.84 5.71 179,542 38.30 5.27 130,858 37.37 5.78
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total retail deposits.... 401,442 67.29 4.37 359,317 76.64 3.95 247,239 70.59 4.47
Jumbo certificates of
deposit................ 195,176 32.71 6.71 109,497 23.36 5.78 103,023 29.41 6.15
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Total
deposits...... $596,618 100.00% 5.13% $468,814 100.00% 4.38% $350,262 100.00% 4.96%
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At December 31, 2000, the Company had $233,888,000 in certificate of
deposit accounts in amounts of $100,000 or more maturing as follows:
Three months or less........................................ $ 22,898
Over three through six months............................... 111,888
Over six through 12 months.................................. 65,252
Over 12 months.............................................. 33,850
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Total..