SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No.: 0-26744
PATRIOT BANK CORP.
(exact name of registrant as specified in its charter)
DELAWARE 23-2820537
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
High and Hanover Streets, Pottstown, Pennsylvania 19464
(Address of principal executive offices)
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, par value $0.01 per share
(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. |X|
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 $61,825,892 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 10, 1997.
As of March 10, 1997, the Registrant had 4,105,502 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1996 are incorporated by reference into Parts I and II of this Form 10-K.
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
PART I PAGE
----
Item 1. Business .................................................. 1
Additional Item. Executive Officers of the Registrant................... 15
Item 2. Properties................................................. 15
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 16
Item 6. Selected Financial Data.................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 16
Item 8. Financial Statements and Supplementary Data................ 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant......... 16
Item 11. Executive Compensation..................................... 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 17
Item 13. Certain Relationships and Related Transactions............. 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 17
SIGNATURES.............................................................. 19
<PAGE>
Item 1. Business
General
Patriot Bank Corp. (the "Company") is a Delaware corporation and is the
holding company for Patriot Bank (the "Bank") and Patriot Investment Company
("PIC"). The Company is a thrift holding company and is subject to regulation by
the Office of Thrift Supervision (the "OTS"), the Federal Deposit Insurance
Corporation (the "FDIC") and the Securities and Exchange Commission (the "SEC").
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
in, the Bank changed its name to Patriot Bank. The Bank conducts business
through its network of eleven community banking offices located in Montgomery,
Berks, Lehigh, Northampton and Chester Counties, Pennsylvania. The Bank's
deposits are insured up to the maximum allowable by the Savings Insurance Fund
("SAIF") administered by the FDIC. At December 31, 1996, the Bank had total
assets of $499.4 million, deposits of $239.5 million and stockholder's equity of
$32.1 million.
The Bank is a community-oriented financial services provider whose business
primarily consists of attracting retail deposits from the general public and
small businesses and originating mortgage, consumer and commercial loans in the
Bank's market area. In addition to its lending activities, the Bank also invests
in investment and mortgage-backed securities. The Bank uses advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB") and repurchase agreements as
sources of funds.
The Bank's revenues are derived principally from interest on loans,
interest on investment and mortgage-backed securities and other fees and service
charges. The Bank's primary sources of funds are deposits, FHLB advances,
repurchase agreements, interest on loans and investment and mortgage-backed
securities and principal repayments.
On December 31, 1996, the Bank filed applications with the Pennsylvania
Department of Banking and the FDIC to convert to a state chartered commercial
bank. Additionally, the Company filed an application with the Federal Reserve
Board of Governors ("FRB") to become a bank holding company. The charter
conversion is subject to the approval of the Pennsylvania Department of Banking,
the FDIC and the FRB.
PIC is a Delaware investment corporation that was incorporated by the
Company on December 10, 1996. Its primary business consists of maintaining an
investment portfolio. At December 31, 1996 PIC had total assets of $33.3
million, liabilities of $12.2 million, and stockholder's equity of $21.1
million.
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<PAGE>
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. Competition may increase as a result of the
continuing reduction in the effective restrictions on interstate operations of
financial institutions.
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.
Certain information with respect to the Company's business activities is
set forth on pages 6 to 20 of the Company's 1996 Annual Report to Shareholders
and is incorporated herein by reference.
Lending Activities
Loan Maturity. The following table sets forth the maturity schedule for the
Company's loan portfolio (excluding residential real estate and consumer loans):
<TABLE>
<CAPTION>
Amounts at December 31, 1996, Maturing
--------------------------------------------------------------------------
In One Year or After One Year After Five
Less - Five Years Years Total
----------------- ----------------- ----------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
LOAN MATURITY SCHEDULE
(IN THOUSANDS):
Commercial loans....................... $ 925 $ 8,995 $1,238 $11,158
Residential construction loans......... 29 131 2,862 3,022
Other construction loans............... 179 9 -- 188
------ ------- ------ -------
Total................................ $1,133 $ 9,135 $4,100 $14,368
====== ======= ====== =======
Loans with:
Fixed rates......................... $1,027 $ 5,952 $4,052 $11,031
Adjustable rates.................... 106 3,183 48 3,337
------ ------- ------ -------
Total................................ $1,133 $ 9,135 $4,100 $14,368
====== ======= ====== =======
</TABLE>
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<PAGE>
Investment Activities. The following table sets forth certain information
regarding the carrying value, weighted average and contractual maturities of the
Company's investment and mortgage-backed securities as of December 31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years More than 10 Years No Stated Maturity
------------------ ------------------ ------------------- ------------------ --------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------- --------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury and
government securities... $2,741 6.81% $0 0.00% $2,249 6.56% $0 0.00% $0 0.00%
Equity securities........ -- -- -- -- -- -- -- -- 24,492 5.96
Mortgage-backed
securities:
FHLMC................... 2,537 6.43 10,538 6.83 1,634 7.13 -- -- -- --
FNMA.................... 3,957 6.64 13,080 6.66 8,087 6.53 -- -- -- --
GNMA.................... 2,329 6.01 7,698 6.03 4,724 5.91 -- -- -- --
Collateralized mortgage
obligations:
FHLMC.................... 954 6.17 3,816 6.17 1,475 6.88 31,394 6.94 -- --
FNMA..................... 657 6.64 3,027 6.68 3,483 6.67 24,335 6.84 -- --
OTHER.................... 755 6.27 2,999 6.27 2,187 6.27 -- -- -- --
------ ----- ------- ---- ------- ----- ------- -----
Total available for sale.. $13,930 6.48% $41,158 6.51% $23,839 6.55% $55,729 6.90% $24,492 5.96%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Held to maturity:
Investment securities
U.S. Treasury &
government securities $ 130 5.60% $1,285 5.40% $ 250 5.30% $ 246 4.58% -- --
Corporate securities...... 1,002 6.46 500 6.64 1,004 6.94 -- -- -- --
Collateralized mortgage
obligations:
OTHER.................. 8,503 6.87 34,711 6.95 21,819 7.08 3,260 7.13 -- --
------- ---- ------- ----- ------- ----- ------- ---- ------- ----
Total held to maturity.... $9,635 6.81% $36,496 7.03% $23,073 7.06% $ 3,506 6.95% -- --
====== ===== ======= ===== ======= ===== ======= ===== ======= ====
</TABLE>
<TABLE>
<CAPTION>
------------------
Total
------------------
Weighted
Carrying Average
Value Yield
-------- --------
(In thousands)
<S> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury and
government securities... $ 4,990 6.70%
Equity securities........ 24,492 5.96%
Mortgage-backed
securities:
FHLMC................... 14,709 6.80
FNMA.................... 25,124 6.62
GNMA.................... 14,751 5.99
Collateralized mortgage
obligations:
FHLMC.................... 37,639 6.84
FNMA..................... 31,502 6.80
OTHER.................... 5,941 6.27
-------- -----
Total available for sale.. $159,148 6.55%
======== =====
Held to maturity:
Investment securities
U.S. Treasury &
government securities $1,911 5.29%
Corporate securities...... 2,506 6.69
Collateralized mortgage
obligations:
OTHER.................. 68,293 6.99
------- -----
Total held to maturity.... $ 72,710 6.94%
======== =====
</TABLE>
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<PAGE>
At December 31, 1996, the Company had $19.4 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
Maturity Period Amount
--------------------------------------- -------------------------
(In thousands)
Three months or less................... $ 406
Over three through six months.......... 1,794
Over six through 12 months............. 2,181
Over 12 months......................... 14,976
-------
Total............................... $19,357
=======
Subsidiary Activities
The Company has two wholly-owned subsidiaries: The Bank and PIC. The Bank
has two wholly-owned subsidiaries: Marathon Management Company ("Marathon") and
Real Estate Settlements Incorporated ("RESI"). Marathon is a real estate
management company that currently holds as its only asset title to three parcels
of land in Fleetwood, Pennsylvania. Marathon had $281,000 in total assets as of
December 31, 1996, and had a net loss for the year ended December 31, 1996 of
$3,000. RESI is an inactive service corporation that, prior to May 1994,
conducted a real estate settlement business.
Personnel
As of December 31, 1996, the Bank had 98 full-time and 17 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 savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI
Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the
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<PAGE>
Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") managed
by the FDIC. The Bank must file reports with the OTS 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 savings institutions. The OTS 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 OTS, 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 savings 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 nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the
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<PAGE>
acquisition on the risk to the insurance funds, the convenience and needs
of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the tangible, leverage (core) and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
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<PAGE>
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1996, the
Bank met each of its capital requirements, in each case on a fully phased-in
basis and it is anticipated that the Bank will not be subject to the interest
rate risk component.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution 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 OTS to meet a specific
capital level. A savings institution 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 savings institution that has a
ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier I
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"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 OTS within 45 days of the date a
savings institution 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 OTS could also take any one of a
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<PAGE>
number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the deposit
insurance fund that covers most commercial bank deposits), are statutorily
required to be recapitalized to a 1.25% of insured reserve deposits ratio. Until
recently, members of the SAIF and BIF were paying average deposit insurance
premiums of between 24 and 25 basis points. The BIF met the required reserve in
1995, whereas the SAIF was not expected to meet or exceed the required level
until 2002 at the earliest. This situation was primarily due to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank were placed at a substantial competitive disadvantage
to BIF members with respect to pricing of products and the ability to achieve
lower operating costs.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Funds
Act") was signed into law which, among other things, imposed a special one-time
assessment on SAIF member institutions, including the Bank, to recapitalize the
SAIF. As required by the Funds Act, the FDIC imposed a special assessment of
65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment
was recognized by the Bank as an expense in the quarter ended September 30, 1996
and is generally tax deductible. The SAIF Special Assessment recorded by the
Bank amounted to $1.3 million on a pre-tax basis and $836,000 on an after-tax
basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will
be assessed for FICO payment of 1.3 basis points, while SAIF deposits will pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
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The Bank's assessment rate for fiscal 1996 was 23 basis points and the
premium paid for this period was $476,000. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank.
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 or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge. However, on December 31, 1996, the Bank filed applications with the
Pennsylvania Department of Banking and the FDIC to convert to a state chartered
commercial bank. Additionally, the Company filed an application with the Federal
Reserve Board of Governors ("FRB") to become a bank holding company. The charter
conversion is subject to the approval of the Pennsylvania Department of Banking,
the FDIC and the FRB.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Bank's limit on loans to one borrower was $4.8 million. At December
31, 1996, the Bank's largest aggregate outstanding balance of loans to one
borrower was $1.1 million.
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QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is required to maintain at least
65% of its "portfolio assets" (total assets less: (i) specified liquid assets up
to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the
value of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed securities) in at least 9 months out of each 12 month
period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Bank maintained 98.8% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided that the payment does not cause the
institution to be undercapitalized within the meaning of the prompt corrective
action regulation. However, institutions in a holding company structure would
still have a prior notice requirement. At December 31, 1996, the Bank was a Tier
1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity and short-term liquidity ratios for December
31, 1996 were 5.02% and 2.99% respectively, which exceeded
-10-
<PAGE>
the applicable requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended December 31, 1996 totalled $74,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution 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 savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution'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, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created 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 OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants
-11-
<PAGE>
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 to removal of
officers and/or directors to institution of receivership, 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. Under the FDI Act, the FDIC has the authority to
recommend to the Director of the OTS enforcement action to be taken with respect
to a particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. 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 savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 1996, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $52.0 million, the
reserve requirement is $1.6 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 $52.0 million. The first $4.3 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 OTS.
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
-12-
<PAGE>
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 1996 taxable
year, the Company is subject to a maximum federal income tax rate of 35%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, 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
Banks 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
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<PAGE>
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 Banks does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. 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). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of .12% of the excess of AMTI (with certain
modifications) over $2.0 million is imposed on corporations, including the Bank,
whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does not
expect to be subject to the AMT, but may be subject to the environmental tax
liability.
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.
-14-
<PAGE>
State Taxation
Commonwealth of Pennsylvania. The Bank is subject to the Mutual Thrift
Institutions Tax of the Commonwealth of Pennsylvania based on the Bank's net
income determined in accordance with generally accepted accounting principles
with certain adjustments. The tax rate under the Mutual Thrift Institutions Tax
is 11.5%. Interest on state and federal obligations is excluded from net income.
An allocable portion of interest expense incurred to carry the obligations is
disallowed as a deduction. Three year carryforwards of losses are allowed.
The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
PIC is a Delaware investment company and as such is not subject to state
income tax.
Additional Item. Executive Officers of the Registrant.
The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.
Age at Position with the Company and Bank
Name 12/31/96 and Past Five Years Experience
- ---- -------- ------------------------------
Robert G. Philips 45 Treasurer
Paulette A. Strunk 46 Corporate Secretary
Item 2. Properties
The Bank has eleven banking offices, three (3) of which are located in
Montgomery County, four (4) of which are located in Berks County, two (2) of
which are located in Lehigh County, one (1) of which is located in Northampton
County and one (1) which is located in Chester County, Pennsylvania. The Bank
owns seven and leases four of the banking office properties.
Item 3. Legal Proceedings
The Company is a defendant in various other 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.
-15-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Corporate Information" on the back
inside cover of Registrant's 1996 Annual Report to Stockholders and is
incorporated herein by reference.
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Financial Data" in
the Registrant's 1996 Annual Report to Stockholders on pages 4 and 5 and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 6 through 20 and is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Patriot Bank Corp. and
Subsidiaries, together with the report thereon by Grant Thornton LLP appears in
the Registrant's 1996 Annual Report to Stockholders on pages 20 through 39 and
are incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 1997.
-16-
<PAGE>
Item 11. Executive Compensation
The information relating to executive compensation and directors'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 1997,
excluding the Stock Performance Graph and Compensation Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 1997.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 24, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
PAGE
----
Report of Independent Certified Public Accountants.............. 20
Consolidated Statements of Financial Position,
December 31, 1996 and 1995................................. 21
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995 and 1994................. 22
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994......... 23
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994................. 24
Notes to Consolidated Financial Statements...................... 25
-17-
<PAGE>
The remaining information appearing in the 1996 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of the Patriot Bank Corp.*
3.2 Bylaws of the Patriot Bank Corp.*
4.0 Stock Certificate of the Patriot Bank Corp.*
10.1 Form of Employment Agreement between Patriot Bank and certain
executive officers.*
10.2 The Patriot Bank Corp. 1996 Stock-Based Incentive Plan**
13.0 1996 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I -- Subsidiaries"
27.0 Financial Data Schedule
99.0 Proxy Statement for the 1997 Annual Meeting of Stockholders
(filed herewith)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 22, 1996
regarding its earnings.
---------------
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on September 1,
1995 and any amendments thereto, Registration No. 33-96530.
** Incorporated herein by reference into this document from the Proxy
Statement for the 1996 Annual Meeting of Stockholders filed with
the Securities and Exchange Commission on April 26, 1996.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PATRIOT BANK CORP.
By:
-------------------------------------
Joseph W. Major
President and Chief Operating Officer
DATED: ____________________
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
- ---------------------------- Chairman of the Board and _______________
Gary N. Gieringer Chief Executive Officer
- ---------------------------- President and Chief Operating
Joseph W. Major Officer _______________
- ---------------------------- Executive Vice President and _______________
Richard A. Elko Chief Financial Officer
- ---------------------------- Vice President and Treasurer _______________
Robert G. Philips
- ---------------------------- Director _______________
John H. Diehl
- ---------------------------- Director _______________
James B. Elliott
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
- ---------------------------- Director _______________
Leonard A. Huff
- ---------------------------- Director _______________
Samuel N. Landis
- ---------------------------- Director _______________
Larry V. Thren
</TABLE>
-20-
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PATRIOT BANK CORP.
By: /s/ Joseph W. Major
------------------------------
Joseph W. Major
President and Chief Operating Officer
DATED: ____________________
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Gary N. Gieringer Chairman of the Board and _______________
- ------------------------- Chief Executive Officer
Gary N. Gieringer
/s/ Joseph W. Major President and Chief Operating
- ------------------------- Officer _______________
Joseph W. Major
/s/ Richard A. Elko Executive Vice President and _______________
- ------------------------- Chief Financial Officer
Richard A. Elko
/s/ Robert G. Philips Vice President and Treasurer _______________
- -------------------------
Robert G. Philips
/s/ John H. Diehl Director _______________
- -------------------------
John H. Diehl
/s/ James B. Elliott Director _______________
- -------------------------
James B. Elliott
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Leonard A. Huff Director _______________
- -------------------------
Leonard A. Huff
/s/ Samuel N. Landis Director _______________
- -------------------------
Samuel N. Landis
/s/ Larry V. Thren Director _______________
- -------------------------
Larry V. Thren
</TABLE>
-22-
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $ 529,165 $ 268,869 $ 221,035 $ 221,895 $ 244,171
Investment and mortgage-backed securities
available for sale (1) 159,148 47,646 33,025 -- --
Investment and mortgage-backed securities
held to maturity (1) 72,710 3,917 8,669 34,436 38,148
Loans receivable 280,184 194,250 168,974 161,529 195,837
Allowance for possible loan losses (1,830) (1,702) (1,720) (1,665) (1,450)
Deposits 239,514 201,618 189,938 198,876 207,944
Borrowings 231,595 10,000 10,000 2,000 16,100
Stockholders' equity 53,117 54,110 17,868 17,517 15,200
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income $29,594 $17,168 $15,498 $17,361 $20,298
Interest expense 17,502 9,549 8,125 9,628 12,141
------- ------- ------- ------- -------
Net interest income before provision
for possible loan losses 12,092 7,619 7,373 7,733 8,157
Provision for possible loan losses 305 60 56 1 1,115
------- ------- ------- ------- -------
Net interest income after provision
for possible loan losses 11,787 7,559 7,317 7,732 7,042
Non-interest income 637 518 674 1,496 641
Non-interest expense 9,198 6,151 6,090 5,451 5,132
------- ------- ------- ------- -------
Income before income taxes and cumulative
effect of change in method of
accounting for income taxes 3,226 1,926 1,901 3,777 2,551
Income taxes 1,251 734 717 1,460 593
------- ------- ------- ------- -------
Income before cumulative effect of
change in method of accounting
for income taxes 1,975 1,192 1,184 2,317 1,958
Cumulative effect of change in method
of accounting for income taxes -- -- -- -- 586
------- ------- ------- ------- -------
Net income $ 1,975 $ 1,192 $ 1,184 $ 2,317 $ 2,544
======= ======= ======= ======= =======
Earnings per share (2) $ .464
=======
Net income before special charge (3) $ 2,811
=======
Earnings per share before
special charge (2) (3) $ .661
=======
</TABLE>
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA, CONTINUED
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Performance Ratios (4):
Return on average assets .48% .50% .54% .99% .81%
Return on average assets
before special charge (3) .68 -- -- -- --
Return on average equity 3.71 5.40 6.59 13.61 13.90
Return on average equity
before special charge (3) 5.28 -- -- -- --
Average interest rate spread (5) 2.95 3.29 3.33 3.31 3.38
Net interest margin (6) 3.01 3.39 3.45 3.43 3.50
Average interest-earning
assets to average
interest-bearing liabilities 113.69 109.20 107.16 106.90 105.84
Total non-interest expense to
average assets (9) 1.93 2.65 2.75 2.34 2.13
Dividend payout ratio (2) 45.91 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Regulatory Capital Ratios (7):
Tangible capital to tangible assets 9.97% 20.14% 8.46% 7.89% 6.23%
Leverage (core) capital to
tangible assets 9.97 20.14 8.46 7.89 6.23
Leverage (core) capital to
risk-adjusted assets 20.28 34.27 13.98 13.61 10.61
Risk-based capital to
risk-adjusted assets 20.98 35.35 15.33 14.90 11.62
Asset Quality Ratios(8):
Non-performing assets as a percent of
total assets .12 .29 .45 .64 .86
Non-performing loans as a percent of
loans receivable .20 .30 .43 .53 .72
Allowance for possible loan
losses as a percent of
loans receivable .65 .88 1.01 1.02 .73
Allowance for possible loan
losses as a percent of
non-performing loans 321.94 292.94 235.94 190.94 102.04
Number of community banking offices 11 7 7 7 7
</TABLE>
(1) Patriot has classified its investment and mortgage-backed securities as
"held to maturity" or "available for sale" since fiscal 1994 when it
adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(2) Patriot completed its initial public offering on December 1, 1995.
Therefore, earnings per share and dividend payout ratio are not applicable
for years prior to 1996.
(3) Special charge representing the special deposit insurance assessment levied
against all SAIF member financial institutions by the FDIC to recapitalize
its SAIF fund.
(4) All ratios are based on average monthly balances during the indicated
periods. Return on average assets and return on average equity are
calculated before the cumulative effect of change in method of accounting
for income taxes.
(5) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities and equity.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) For definitions and further information relating to regulatory capital
requirements, see footnote 10 of the consolidated financial statements.
(8) Non-performing assets consist of non-performing loans and real estate owned
(REO). Non-performing loans consist of non-accrual and accruing loans 90
days or more overdue, while REO consists of real estate acquired through
foreclosure and real estate acquired by acceptance of a deed in lieu of
foreclosure.
(9) Calculated prior to special charge.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General. Patriot Bank Corp. and Subsidiaries (Patriot) reported net income
of $1,975,000 or $.46 per share for the year ended December 31, 1996. This
represents an increase of .66% over net income of $1,192,000 in 1995. Return on
average equity and return on average assets were 3.71% and .48%, respectively,
for 1996 compared to 5.40% and .50%, respectively, for 1995.
The 1996 results include a special after-tax charge of $836,000 ($1,338,000
before-tax) representing the special deposit insurance assessment levied against
all SAIF member financial institutions by the FDIC to recapitalize its SAIF fund
(see note 10 to the consolidated financial statements).
Excluding the special charge, Patriot reported core income of $2,811,000 or
$.66 per share for the year ended December 31, 1996. This represents an increase
of 136% over 1995. Return on average assets and return on average equity (both
based upon core earnings) were .68% and 5.28%, respectively, for 1996 compared
to .50% and 5.40%, respectively, for 1995.
Stock Conversion. On July 13, 1995, Patriot Bank's Board of Directors adopted an
overall Plan of Conversion (the Conversion) as amended on August 30, 1995,
pursuant to which Patriot Bank converted from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank. All of Patriot
Bank's outstanding capital stock was acquired by Patriot Bank Corp., a newly
organized Delaware corporation which became the holding company for Patriot
Bank. The Conversion was completed on December 1, 1995 when Patriot issued
3,769,125 shares of common stock to the public and raised net proceeds of
$36,652,000.
Stock Dividend. On November 21, 1996, Patriot paid a special 20% stock dividend.
For comparative purposes, per share amounts, as presented herein, have been
adjusted to reflect the special 20% stock dividend.
Net Interest Income. Net interest income for 1996 was $12,092,000 compared to
$7,619,000 in 1995. This represents an increase of 58% and is primarily due to
an increase in average balances. Patriot's net interest margin (net interest
income as a percentage of average interest-earning assets) was 3.01% in 1996
compared to 3.39% in 1995. Average balances increased throughout 1996 as Patriot
leveraged the capital raised in the stock conversion. In addition to aggressive
marketing of loan and deposit products, Patriot adopted a growth strategy
pursuant to which it purchased investment and mortgage-backed securities and
funded these purchases with borrowings. Most of the investment and
mortgage-backed securities purchased either have short average lives (five years
or less) or have adjustable rates.
Interest on loans was $18,429,000 for 1996 compared to $14,102,000 for
1995. The average balance of loans was $234,726,000 with an average yield of
7.85% compared to an average balance of $173,020,000 with an average yield of
8.15% for 1995. The increase in average balance is due to the aggressive
marketing of residential mortgage loans and home equity loans during 1996. The
decrease in average yield is primarily a result of an emphasis on short-term and
adjustable-rate loans.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $11,049,000 for 1996 compared to $2,865,000 in 1995. The average
balance of the investment portfolio was $165,159,000 with an average yield of
6.69% for 1996 compared to an average balance of $46,802,000 with an average
yield of 6.12% for 1995. The increase in average balance and the increase in
average yield was due to the purchase of investment and mortgage-backed
securities to more fully leverage Patriot's capital.
6
<PAGE>
Interest on total deposits was $9,895,000 for 1996 compared to $8,980,000 for
1995. The average balance of total deposits was $218,364,000 with an average
cost of 4.53% for 1996 compared to an average balance of $196,498,000 with an
average cost of 4.57% for 1995. The increase in average balance was the result
of aggressive marketing of time and transaction-based deposit accounts, the
opening of three new community banking offices and introduction of a jumbo
deposit program late in 1996. The decrease in average yield was the result of an
emphasis placed on transaction-based deposit accounts and lower rates offered
on time deposits.
Interests on borrowings was $7,607,000 in 1996 compared to $569,000 in 1995. The
average balance of borrowings was $136,200,000 with an average cost of 5.57% for
1996 compared to an average balance of $9,126,000 with an average cost of 6.23%
for 1995. The increase in average balance was due to the use of borrowings to
fund the growth in the balance sheet. The decrease in average cost was due to
higher balances of short-term borrowings.
Spread Analysis. The following table sets forth Patriot's average balances and
the yields on those balances for the years ended December 31, 1996, 1995 and
1994. The yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown,
except where noted otherwise. The yields and costs include fees which are
considered adjustments to yields.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits $ 3,207 $ 116 3.62% $ 4,719 $ 201 4.26% $ 6,327 $ 174 2.75%
Investment and mortgage-
backed securities (1) 165,159 11,049 6.69 46,802 2,865 6.12 43,733 2,245 5.13
Loans receivable, net (2) 234,726 18,429 7.85 173,020 14,102 8.15 163,715 13,079 7.99
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest-earning assets 403,092 29,594 7.34 224,541 17,168 7.65 213,775 15,498 7.25
Non-interest-earning assets 7,018 -- -- 7,248 -- -- 7,499 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total assets $410,110 $29,594 7.22 $231,789 $17,168 7.41 $221,274 $15,498 7.00
======== ======= ---- ======== ======= ---- ======== ======= ----
Liabilities and Equity:
Interest-bearing liabilities:
Savings deposits $ 82,354 $ 2,120 2.57 $ 78,004 $ 2,083 2.67% $ 80,512 $ 1,799 2.23%
Certificates 136,010 7,775 5.72 118,494 6,897 5.82 111,996 5,963 5.32
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits 218,364 9,895 4.53 196,498 8,980 4.57 192,508 7,762 4.03
Borrowings 136,200 7,607 5.57 9,126 569 6.23 6,991 363 5.19
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 354,564 17,502 4.94 205,624 9,549 4.64 199,499 8,125 4.07
Non-interest-bearing liabilities 2,300 -- -- 4,069 -- -- 3,816 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities 356,864 17,502 4.90 209,693 9,549 4.55 203,315 8,125 4.00
Equity 53,246 -- -- 22,096 -- -- 17,959 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities and equity $410,110 $17,502 4.27 $231,789 $ 9,549 4.12 $221,274 $ 8,125 3.67
======== ======= ---- ======== ======= ---- ======== ======= ----
Net interest rate spread (3) 2.95% 3.29% 3.33%
==== ==== ====
Net interest margin (4) 3.01% 3.39% 3.45%
Ratio of interest-earning assets
to interest-bearing liabilities 113.69% 109.20% 107.16%
</TABLE>
(1) Includes securities available for sale and held to maturity and unamortized
discounts and premiums.
(2) Amount is net of deferred loan fees, loans in process, discounts and
premiums, and allowance for possible loan losses and includes
non-performing loans for which the accrual of interest has been
discontinued.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities and equity.
(4) Net interest margin represents tax-equivalent net interest income divided
by average interest-earning assets.
7
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which net
interest income changed due to changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities during the
periods indicated. Information is provided in each category with respect to
changes attributable to changes in rate (changes in rate multiplied by prior
volume), and the net change. The changes attributable to the combined impact of
volume and rate have been allocated proportionally to the changes due to volume
and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Year Ended Compared to Year Ended
December 31, 1995 December 31, 1994
----------------------------------------------------------------------
(In thousands) (In thousands)
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------------------------------------
Volume Rate Net Volume Rate Net
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ (58) $ (27) $ (85) $ (52) $ 79 $ 27
Investment and mortgage-backed securities 7,894 290 8,184 170 450 620
Loans (1) 4,862 (535) 4,327 754 269 1,023
-------- -------- -------- -------- -------- --------
Total interest-earning assets 12,698 (272) 12,426 872 798 1,670
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits 1,117 (202) 915 300 918 1,218
Borrowings 7,103 (65) 7,038 124 82 206
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 8,220 (267) 7,953 424 1,000 1,424
-------- -------- -------- -------- -------- --------
Net change in net interest income $ 4,478 $ (5) $ 4,473 $ (448) $ (202) $ 246
======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes non-accrual loans.
Provision for Possible Loan Losses. The provision for possible loan losses
was $305,000 for 1996 compared to $60,000 for 1995. The increase in the
provision is a reflection of the growth of Patriot's loan portfolio and the
origination of commercial loans. See "Credit Quality" for a detailed discussion
of Patriot's asset quality.
8
<PAGE>
The following table sets forth the activity in the allowance for possible loan
losses for the years indicated:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance, beginning of year $ 1,702 $ 1,720 $ 1,665 $ 1,450 $ 749
Charge-offs:
Residential 13 76 -- 3 --
Commercial 98 -- -- -- 404
Home equity and consumer 66 5 5 -- 17
------- ------- ------- ------- -------
Total charge-offs 177 81 5 3 421
------- ------- ------- ------- -------
Recoveries:
Commercial -- -- -- 217 --
Home equity and consumer -- 3 4 -- 7
------- ------- ------- ------- -------
Total recoveries -- 3 4 217 7
------- ------- ------- ------- -------
Net charge-offs (recoveries) 177 78 1 (214) 414
Provision charged to operations 305 60 56 1 1,115
------- ------- ------- ------- -------
Allowance, end of year $ 1,830 $ 1,702 $ 1,720 $ 1,665 $ 1,450
======= ======= ======= ======= =======
Net charge-offs (recoveries)
to average loans .08% .05% --% (.12)% .22%
Allowance for loan losses
as a percentage of
year-end total loans .65% .88% 1.01% 1.02 % .73%
</TABLE>
Non-Interest Income. Total non-interest income was $637,000 for 1996 compared to
$518,000 for 1995. The increase was primarily due to mortgage banking gains
recognized in 1996 and less of a net loss on the sale of investment and
mortgage-backed securities in 1996 than in 1995, offset somewhat by less of a
net gain on the disposition of real estate acquired through foreclosure.
Non-Interest Expense. Total non-interest expense was $9,198,000 for 1996
compared to $6,151,000 for 1995. The increase in non-interest expense was the
result of increased salary and employee benefit costs and occupancy and
equipment costs, both related to Patriot's expanded operations. Non-interest
expense in 1996 also includes the special charge of $1,338,000 for the special
deposit insurance assessment levied against all SAIF member financial
institutions by the FDIC to recapitalize its SAIF fund. The ratio of
non-interest expense (excluding the special charge) to average assets improved
to 1.93% for 1996 compared to 2.65% for 1995. The improvement in the overhead
ratio reflects Patriot's emphasis on managing costs while making long-term
investments in staff, facilities, equipment and technology.
Income Tax Provision. The income tax provision was $1,251,000 for 1996
compared to $734,000 for 1995. The effective tax rate was 38.78% for 1996
compared to 38.11% for 1995.
9
<PAGE>
FINANCIAL CONDITION
Loan Portfolio. Patriot's primary loan products are fixed-rate and
adjustable-rate mortgage loans and home equity loans on existing owner-occupied
residential real estate. Patriot also offers residential construction loans and
other consumer loans. In 1996, Patriot began offering commercial loans
concentrating on small businesses within Patriot's local markets. At December
31, 1996, Patriot's total loan portfolio was $280,184,000, substantially all of
which was secured by real estate (primarily residential real estate), compared
to a total loan portfolio of $194,250,000 at December 31, 1995. The increase in
the loan portfolio was the result of aggressive marketing of residential
mortgage loans and home equity loans during 1996 and the offering of commercial
loans. During 1996, Patriot originated total loans of $130,674,000 compared to
total loans originated in 1995 of $60,966,000.
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:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages $192,518 68.13% $131,352 66.86% $108,203 63.41% $ 108,116 66.13% $133,216 67.22%
Home equity 72,480 25.65 57,969 29.50 56,914 33.35 50,611 30.96 56,687 28.60
Construction 3,210 1.14 1,712 .87 374 .22 44 .03 691 .35
Commercial 11,822 4.18 3,288 1.67 3,760 2.20 4,431 2.71 7,137 3.60
Other consumer loans 2,546 .90 2,159 1.10 1,391 .82 276 .17 452 .23
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total loans, gross 282,576 100.00% 196,480 100.00% 170,642 100.00% 163,478 100.00% 198,183 100.00%
Deferred loan fees (2,392) (2,230) (1,668) (1,949) (2,346)
-------- -------- -------- ------- --------
Total loans, net $280,184 $194,250 $168,974 $ 161,529 $195,837
======== ======== ======== ======= ========
</TABLE>
Mortgage Lending. Patriot offers both fixed-rate and adjustable-rate mortgage
loans secured by one- to four-family residences, primarily owner-occupied,
located in Patriot's primary market area.
Patriot generally underwrites its first mortgage loans in accordance with
underwriting standards set by the Federal Home Loan Mortgage Corp. (FHLMC) and
the Federal National Mortgage Association (FNMA). Patriot also offers
construction loans to qualified borrowers for the construction of one- to
four-family residences in Patriot's market area. These loans are underwritten in
accordance with the same standards as Patriot's mortgages on existing
properties, except the loans generally provide for disbursement in stages during
a construction period of up to 12 months, during which period the borrower is
required to make monthly payments of accrued interest on the outstanding loan
balance.
Consumer Lending. Patriot offers variable rate (based upon prime rate) home
equity lines of credit which extend credit lines based on an applicant's income
and equity in the home. These lines are generally secured by single-family,
owner-occupied residential properties. Patriot also offers fixed-rate home
equity loans which are generally secured by single-family, owner-occupied
residential properties. These loans are generally originated with terms from 1
to 15 years.
Patriot also offers a variety of consumer loans, which primarily consist of
installment loans secured by automobiles, student loans, credit cards and other
loans secured by deposit accounts. Patriot's consumer loans tend to have higher
interest rates and shorter maturities than one- to four-family residential
mortgage loans, but are considered to entail a greater risk of default than such
loans.
10
<PAGE>
Commercial Lending. In 1996, Patriot began offering commercial and commercial
real estate loans. Patriot focuses on loans of $500,000 or less to small
businesses operating within its local markets. Commercial loans are generally
secured by real estate and personal guarantees. Prior to 1996, Patriot
originated a limited number of commercial real estate and multi-family loans.
Credit Quality. Management and the Board of Directors perform a monthly review
of all delinquent loans. The procedures taken by Patriot with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency. When a borrower fails to make a required payment on a loan, Patriot
takes a number of steps to have the borrower cure the delinquency and restore
the loan to current status.
Patriot's Asset/Loan Review Committee reviews and classifies Patriot's assets
periodically and at least quarterly and reports the results of its review to the
Board of Directors. Patriot classifies assets in accordance with applicable
regulations and management guidelines.
Patriot generally requires appraisals on an annual basis on foreclosed
properties and, to the extent necessary, properties deemed to be in-substance
foreclosures. Patriot generally conducts external inspections on foreclosed
properties and properties deemed in-substance foreclosures on at least a
quarterly basis.
Non-Accrual and Past-Due Loans. Patriot accrues interest on all loans until
management determines that the collection of interest is doubtful. In no event
does Patriot continue interest on loans contractually past due 90 days or more.
Upon discontinuance of interest accrual, all unpaid accrued interest is
reversed. Patriot had no restructured loans within the meaning of SFAS No. 15
and no potential problem loans within the meaning of the Securities and Exchange
Commission Guide 3 at December 31, 1996. The following table sets forth
information regarding non-performing assets:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------
(In thousands)
Non-accrual loans:
<S> <C> <C> <C> <C> <C>
Residential mortgages $ 411 $ 494 $ 498 $ 715 $ 564
Commercial 6 10 16 65 788
Home equity and consumer 151 77 215 92 69
----- ----- ----- ------- -------
Total 568 581 729 872 1,421
REO 74 195 265 548 673
----- ----- ----- ------- -------
Total non-performing assets $ 642 $ 776 $ 994 $ 1,420 $ 2,094
===== ===== ===== ======= =======
Allowance for possible loan losses as a percent
of loans receivable .65% .88% 1.01% 1.02% .73%
Allowance for possible loan losses as a percent
of total non-performing loans 321.94 292.94 235.94 190.94 102.04
Non-performing loans as a percent of total
loans receivable .20 .30 .43 .53 .72
Non-performing assets as a percent of total assets .12 .29 .45 .64 .86
</TABLE>
11
<PAGE>
Allowance for Possible Loan Losses. The adequacy of the allowance for possible
loan losses is based on management's evaluation of the risks inherent in its
loan portfolio and the general economy. Management makes a quarterly
determination as to an appropriate provision from earnings necessary to maintain
an allowance for loan losses that is adequate to cover estimated losses with
respect to loans receivable which are deemed probable and estimable based on
information currently known to management. The amount charged to earnings is
based upon several factors, including a continuing review of delinquent,
classified and non-accrual loans, large loans, and overall portfolio quality,
regular examination and review of the loan portfolio by regulatory authorities,
analytical review of loan charge-off experience, delinquency rates, other
relevant historical and peer statistical ratios, and management's judgment with
respect to local and general economic conditions and their impact on the
existing loan portfolio. Although management believes the allowance is adequate
to protect against future losses arising out of its existing loan portfolio,
actual losses are dependent on future events and, as such, further additions to
the allowance may be necessary. Patriot will continue to monitor and modify its
allowance for loan losses as conditions dictate.
The following table sets forth management's allocation of the allowance for
possible loan losses at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
--------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Percent of Loans in Percent of Loans in Percent of Loans in
Allowance Each Allowance Each Allowance Each
to Category to Category to Category
Total to Total Total to Total Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
--------------------------------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
mortgages $ 895 48.87% 69.27% $1,265 74.32% 67.73% $1,212 70.47% 63.63%
Commercial 261 14.28 4.18 33 1.94 1.67 52 3.02 2.20
Home equity
and consumer 674 36.85 26.55 404 23.74 30.60 456 26.51 34.17
------ ------ ------ ------ ------ ------ ------ ------ ------
Total valuation
allowances $1,830 100.00% 100.00% $1,702 100.00% 100.00% $1,720 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
1993 1992
--------------------------------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
to Category to Category
Total to Total Total to Total
Amount Allowance Loans Amount Allowance Loans
--------------------------------------------------------------
--------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Residential
mortgages $1,193 71.65% 66.16% $ 640 44.13% 67.57%
Commercial 59 3.54 2.71 313 21.59 3.60
Home equity
and consumer 413 24.81 31.13 497 34.28 28.83
------ ------ ------ ------ ------ ------
Total valuation
allowances $1,665 100.00% 100.00% $1,450 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Cash and Cash Equivalents. Cash and cash equivalents at December 31, 1996 were
$6,853,000 compared to $18,556,000 at December 31, 1995. The decrease in cash
and cash equivalents was primarily due to a portion of the proceeds from the
stock conversion deposited temporarily in an interest-earning account at
December 31, 1995.
Investment and Mortgage-Backed Securities. Investment securities consist of U.S.
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, 1996 were
$231,858,000 compared to $51,563,000 at December 31, 1995. The increase in
investment and mortgage-backed securities was due to the purchase of investment
and mortgage-backed securities pursuant to Patriot's leveraging strategy.
12
<PAGE>
The following table sets forth certain information regarding the amortized cost
and market value of investment and mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1996 1995 1994
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury and government
agency securities $ 5,023 $ 4,990 $ 7,105 $ 7,175 $ 3,734 $ 3,648
Corporate securities -- -- 1,019 1,046 -- --
Equity securities 23,797 24,492 1,914 1,914 1,845 1,845
Mortgage-backed securities:
FHLMC 14,582 14,709 12,179 12,258 16,037 15,427
FNMA 25,118 25,124 17,709 17,755 6,202 5,894
GNMA 14,498 14,751 5,463 5,539 3,937 3,811
Collateralized mortgage obligations:
FHLMC 37,928 37,639 1,964 1,959 2,522 2,400
FNMA 31,654 31,502 -- -- -- --
Other 5,976 5,941 -- -- -- --
-------- -------- ------- ------- ------- -------
Total investment and mortgage-backed
securities available for sale $158,576 $159,148 $47,353 $47,646 $34,277 $33,025
======== ======== ======= ======= ======= =======
Held to maturity:
Investment securities:
U.S. Treasury and government
agency securities $ 1,911 $ 1,892 $ 2,414 $ 2,397 $ 7,665 $ 7,183
Corporate securities 2,506 2,533 1,503 1,566 1,004 933
Collateralized mortgage obligations:
Other 68,293 68,297 -- -- -- --
-------- -------- ------- ------- ------- -------
Total investment and mortgage-backed
securities held to maturity $ 72,710 $ 72,722 $ 3,917 $ 3,963 $ 8,669 $ 8,116
======== ======== ======= ======= ======= =======
</TABLE>
Effective January 1, 1994, Patriot adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires management to
classify investments in equity securities that have readily determinable fair
values and all investments in debt securities as either held to maturity and
reported at amortized cost, 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. Effective January 1, 1994, Patriot adopted SFAS
No. 115 and classified $3,341,000 of investment and mortgage-backed securities
as held to maturity, $31,095,000 of investment and mortgage-backed securities as
available for sale and no securities as trading securities. The adoption of SFAS
No. 115 resulted in a $92,000 increase to stockholders' equity.
13
<PAGE>
On November 15, 1995, the Financial Accounting Standards Board issued a special
report entitled "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities." This guide allows
enterprises to reassess the appropriateness of the classification of all
securities held. A one-time reassessment can be made on one day between November
15, 1995 and December 31, 1995. Reclassifications from the held to maturity
category that result from this one-time reassessment will not call into question
the intent of an enterprise to hold other debt and equity securities to maturity
in the future. Based on this special report, Patriot reclassified $6,000,000 of
securities from held to maturity to available for sale. The transfer was made at
fair value and resulted in an estimated unrealized loss of $59,000 and a
decrease in stockholders' equity of $39,000 based on current market values.
Other Assets. Premises and equipment at December 31, 1996 were $7,724,000
compared to $3,540,000 at December 31, 1995. The increase was due to the opening
of four new banking offices, investments in technology and renovations to
Patriot's headquarters. Accrued interest receivable at December 31, 1996 was
$2,649,000 compared to $1,205,000 at December 31, 1995. The increase is
consistent with the growth in the loan and investment portfolios. Real estate
owned at December 31, 1996 was $74,000 compared to $195,000 at December 31,
1995. The decrease in real estate owned was due to the disposition of foreclosed
assets.
Deposits. Deposits are generally attracted from within Patriot's primary market
area through the offering of various deposit instruments, including NOW
accounts, money market accounts, savings accounts, certificates of deposit and
retirement savings plans. Patriot also began soliciting jumbo deposits from
various sources in late 1996.
Total deposits at December 31, 1996 were $239,514,000 compared to $201,618,000
at December 31, 1995. The increase was primarily the result of aggressive
marketing of time and transaction-based deposit accounts and the introduction of
a jumbo deposit program.
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:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposits $ 33,829 15.49% 4.02% $ 27,512 14.00% 3.95% $ 24,268 12.61% 2.58%
Passbook deposits 27,444 12.57 2.38 32,059 16.32 2.19 37,182 19.31 2.35
NOW deposits 17,502 8.02 .58 16,685 8.49 1.65 16,848 8.75 1.72
Demand deposits 3,579 1.64 -- 1,748 .89 -- 2,212 1.15 --
Certificates of deposit 136,010 62.28 5.72 118,494 60.30 5.82 111,998 58.18 5.32
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total $218,364 100.00% 4.53% $196,498 100.00% 4.57% $192,508 100.00% 4.03%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
14
<PAGE>
Borrowings. Patriot utilizes borrowings as a source of funds for its growth
strategy and its asset/liability management. Patriot is eligible to obtain
advances from the Federal Home Loan Bank (FHLB) upon the security of the FHLB
common stock it owns and certain of its residential mortgages and
mortgage-backed securities, provided certain standards related to
creditworthiness have been met. FHLB advances are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member institutions
fluctuates from time to time in accordance with the policies of the FHLB.
Patriot also uses repurchase agreements to supplement its borrowings from the
FHLB.
The following table presents certain information regarding borrowed funds:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------
(In thousands)
Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $210,000 5.64% $10,000 5.82% $10,000 6.61%
Repurchase agreements 21,595 6.22 -- -- -- --
-------- ---- ------- ---- ------- ----
Total borrowings outstanding $231,595 5.70% $10,000 5.82% $10,000 6.61%
======== ==== ======= ==== ======= ====
Short-term $145,595 5.73% $10,000 5.82% $10,000 6.61%
Long-term 86,000 5.65 -- -- -- --
-------- ---- ------- ---- ------- ----
Total borrowings outstanding $231,595 5.70% $10,000 5.82% $10,000 6.61%
======== ==== ======= ==== ======= ====
</TABLE>
Stockholders' Equity. Total stockholders' equity was $53,117,000 at December 31,
1996 compared to $54,110,000 at December 31, 1995. The decrease was a result of
the repurchase of common stock offset somewhat by the retention of earnings.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Patriot's primary sources of funds are deposits, principal and
interest payments on loans, principal and interest payments on investment and
mortgage-backed securities, FHLB advances and repurchase represents. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
Patriot Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in cash and U.S. Treasury and other
qualifying investments. Regulations currently in effect require Patriot Bank to
maintain liquid assets of not less than 5% of its net withdrawable accounts plus
short-term borrowings, of which short-term liquid assets must consist of not
less than 1%. These levels are changed from time to time by the Office of Thrift
Supervision (OTS) to reflect economic conditions. Patriot Bank's liquidity ratio
at December 31, 1996 was 5.02%.
During 1996, significant liquidity was provided by financing activities,
particularly borrowings and deposit growth. Maturities and the sale of
investment and mortgage-backed securities also provided significant liquidity
during 1996. The funds provided by these activities were reinvested in new loans
and investment and mortgage-backed securities to maintain an appropriate
liquidity position.
15
<PAGE>
At December 31, 1996, Patriot had outstanding loan commitments of $18,996,000.
Patriot anticipates that it will have sufficient funds to meet its current loan
origination commitments. Certificates of deposit which are scheduled to mature
in one year or less from December 31, 1996 totalled $81,397,000. Based upon
historical experience, Patriot expects that substantially all of the maturing
certificates of deposit will be retained at maturity.
Capital Resources. OTS regulations currently require savings institutions to
maintain a minimum tangible capital ratio of not less than 1.5%, a minimum
leverage capital ratio of not less than 3% of tangible assets and not less than
4% of risk-adjusted assets, and a minimum risk-based capital ratio (based upon
credit risk) of not less than 8%. The OTS requires a minimum leverage capital
requirement of 3% for associations rated composite 1 under the CAMEL rating
system. For all other savings associations, the minimum leverage capital
requirement is 3% plus at least an additional 100 to 200 basis points.
The OTS has incorporated an interest rate risk component into its risk-based
capital requirements. Under the regulation, savings associations which are
deemed to have an "above normal" level of interest rate risk must deduct a
portion of that risk from total capital for regulatory capital purposes. The
final regulation became effective January 1, 1994; however, implementation has
been delayed. It is currently anticipated that Patriot Bank will not have an
"above normal" level of interest rate risk.
Under the OTS prompt corrective action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends on the institution's degree of undercapitalization. A
depository institution's capital tier depends upon its capital levels in
relation to various relevant capital measures, which include leverage and
risk-based capital measures and certain other factors. Under the OTS
regulations, a savings institution that has a leverage capital ratio of less
than 4% (3% for institutions receiving the highest CAMEL rating) will be deemed
to be undercapitalized for purposes of the regulation. Depository institutions
that are not classified as well capitalized or adequately capitalized are
subject to various restrictions regarding capital distributions, payment of
management fees, acceptance of brokered deposits and other operating activities.
At December 31, 1996, Patriot Bank was classified as well capitalized and was in
compliance with all capital requirements. The following table sets forth the
capital ratios of Patriot Bank Corp., Patriot Bank and the current regulatory
requirements at December 31, 1996:
<TABLE>
<CAPTION>
Patriot Bank Corp. Patriot Bank Requirement
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tangible capital to tangible assets 9.97% 6.42% 1.50%
Leverage (core) capital to tangible assets 9.97 6.42 3.00
Leverage (core) capital to risk-adjusted assets 20.28 12.89 4.00
Risk-based capital to risk-adjusted assets 20.98 13.63 8.00
</TABLE>
16
<PAGE>
MANAGEMENT OF INTEREST RATE RISK
The principal objective of Patriot's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the appropriate level of risk given Patriot's business focus,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board-approved guidelines.
Through such management, Patriot seeks to reduce the vulnerability of its net
interest income to changes in interest rates. Patriot monitors its interest rate
risk as such risk relates to its operating strategies. Patriot's Board of
Directors has established an Asset/Liability Committee comprised of senior
management, which is responsible for reviewing its asset/liability and interest
rate position and making decisions involving asset/liability considerations. The
Asset/Liability Committee meets regularly and reports trends and Patriot's
interest rate risk position to the Board of Directors.
Patriot utilizes income simulation modeling in measuring its interest rate risk
and managing its interest rate sensitivity. Income simulation considers not only
the impact of changing market interest rates on forecasted net interest income,
but also other factors such as yield curve relationships, the volume and mix of
assets and liabilities, customer preferences and general market conditions.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap theoretically would tend to adversely affect net interest
income while a positive gap would tend to result in an increase in net interest
income. Conversely, during a period of falling interest rates, a negative gap
position would theoretically tend to result in an increase in net interest
income while a positive gap would tend to affect net interest income adversely.
Patriot has a significant amount of its earning assets invested in fixed-rate
mortgage loans and fixed-rate mortgage-backed securities with contractual
maturities greater than one year. Patriot has initiated several actions designed
to control its level of interest rate risk. These actions include increasing the
percentage of the loan portfolio consisting of short-term and adjustable-rate
mortgage loans through increased originations of these loans, acquiring
short-term and adjustable-rate mortgage-backed securities, and undertaking to
lengthen the maturities of deposits and borrowings. Based upon the assumptions
used in the following table, at December 31, 1996, Patriot's total
interest-bearing liabilities maturing or repricing within one year exceeded its
total net interest-earning assets maturing or repricing in the same time period
by $41,935,000, representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 7.92%.
17
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
anticipated, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at December
31, 1996, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be repaid and/or repriced as a result of contractual amortization
and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and
as a result of contractual rate adjustments on adjustable-rate loans.
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------------------------------------------------
3 Months 3 Months to 6 Months to 1 Year to 3 Years to More than
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
---------------------------------------------------------------------------------------
(In thousands)
Interest-earning assets (1):
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 4,856 $ -- $ -- $ -- $ -- $ -- $ 4,856
Investment and mortgage-
backed securities, net (2) (5) 75,320 14,322 19,741 30,540 16,824 75,111 231,858
Loans receivable, net (3) (5) 33,728 14,738 47,353 51,296 39,813 91,426 278,354
--------- -------- -------- --------- -------- -------- --------
Total interest-earning assets 113,904 29,060 67,094 81,836 56,637 166,537 515,068
Non-interest-earning assets -- -- -- -- -- 14,097 14,097
Total assets 113,904 29,060 67,094 81,836 56,637 180,634 529,165
--------- -------- -------- --------- -------- -------- --------
Interest-bearing liabilities:
Money market and
savings accounts (6) 22,661 780 1,560 12,861 14,439 8,823 61,124
Demand and NOW accounts (6) -- -- -- 3,966 2,854 14,454 21,274
Certificates of deposit 21,382 28,444 31,571 58,966 6,215 10,538 157,116
Borrowings 130,595 10,000 5,000 61,000 25,000 -- 231,595
--------- -------- -------- --------- -------- -------- --------
Total interest-bearing liabilities 174,638 39,224 38,131 136,793 48,508 33,815 471,109
Non-interest-bearing liabilities -- -- -- -- -- 4,939 4,939
Equity -- -- -- -- -- 53,117 53,117
--------- -------- -------- --------- -------- -------- --------
Total liabilities and equity 174,638 39,224 38,131 136,793 48,508 91,871 529,165
--------- -------- -------- --------- -------- -------- --------
Interest sensitivity gap (4) $ (60,734) $(10,164) $ 28,963 $ (54,957) $ 8,129 $ 88,763 $ --
========= ======== ======== ========= ======== ======== ========
Cumulative interest
sensitivity gap $ (60,734) $(70,898) $(41,935) $ (96,892) $(88,763) $ --
========= ======== ======== ========= ======== ========
Cumulative interest
sensitivity gap as a
percent of total assets (11.48)% (13.40)% (7.92)% (18.31)% (16.77)% --%
Cumulative net interest-earning
assets as a percent of
cumulative interest-bearing
liabilities 65.22 % 66.85 % 83.36 % 75.08 % 79.70% 109.33%
</TABLE>
(1) Interest-earning assets are included in the period in which the balances
are expected to be repaid and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Includes investment and mortgage-backed securities available for sale and
held to maturity.
(3) For purposes of the gap analysis, loans receivable includes non-performing
loans and is reduced for the allowance for possible loan losses, and
unamortized discounts and deferred loan fees.
(4) Interest sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
(5) Annual prepayment rates for loans and mortgage-backed securities range from
8% to 30%.
(6) Money market and savings accounts, and NOW accounts are assumed to have
decay rates between 9% and 46% annually and have been estimated based upon
a historic analysis of core deposit trends.
18
<PAGE>
The following table presents selected quarterly consolidated financial data:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996 1995 1995 1995 1995
---------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $9,102 $8,424 $6,862 $5,206 $4,812 $4,308 $4,079 $3,969
Total interest expense 5,855 5,194 3,867 2,586 2,662 2,475 2,280 2,132
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 3,247 3,230 2,995 2,620 2,150 1,833 1,799 1,837
Provision for possible loan losses 100 90 80 35 15 15 15 15
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after pro-
vision for possible loan losses 3,147 3,140 2,915 2,585 2,135 1,818 1,784 1,822
Other income 257 128 131 121 134 144 153 87
Other expenses 2,145 3,381 1,928 1,744 1,922 1,397 1,454 1,378
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 1,259 (113) 1,118 962 347 565 483 531
Income tax provision 452 (20) 440 379 131 222 180 201
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 807 $ (93) $ 678 $ 583 $ 216 $ 343 $ 303 $ 330
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share .189 (.025) .158 .142
Dividends per share .080 .067 .050 .016
Market Prices - High $13.86 $12.70 $10.94 $10.83 $10.94
Low $12.08 $10.52 $10.42 $10.20 $ 8.33
</TABLE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
General. Patriot reported net income of $1,192,000 for the year ended December
31, 1995. This represents an increase of .70% over net income of $1,184,000 in
1994. Return on average equity and return on average assets were 5.40% and .50%,
respectively, for 1995 compared to 6.59% and .54%, respectively, for 1994.
Net Interest Income. Net interest income for 1995 was $7,619,000 compared to
$7,373,000 in 1994. This represents an increase of 3.34% and is primarily due to
an increase in average balances. Patriot's average interest rate spread (the
difference between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities) was 3.01% in 1995
compared to 3.18% in 1994.
Interest on loans was $14,102,000 for 1995 compared to $13,079,000 for 1994. The
average balance of loans was $173,020,000 with an average yield of 8.15%
compared to an average balance of $163,715,000 with an average yield of 7.99%
for 1994. The increase in average balance is due to the aggressive marketing of
residential mortgage loans and home equity loans during 1995. The increase in
average yield is primarily a result of higher overall interest rates offset
somewhat by more competitive pricing.
Interest on investment and mortgage-backed securities was $2,865,000 for 1995
compared to $2,245,000 in 1994. The average balance of the investment portfolio
was $46,802,000 with an average yield of 6.12% for 1995 compared to an average
balance of $43,733,000 with an average yield of 5.13% for 1994. The increase in
average balance was primarily the result of the investment of net proceeds from
the stock conversion which was completed on December 1, 1995. The increase in
average yield was due to higher overall interest rates.
Interest on total deposits was $8,980,000 for 1995 compared to $7,762,000 for
1994. The average balance of total deposits was $196,498,000 with an average
cost of 4.57% for 1995 compared to an average balance of $192,508,000 with an
average cost of 4.03% for 1994. Only moderate deposit growth was pursued in 1995
in anticipation of the funding provided by the conversion. The increase in
average yield on total deposits was primarily the result of higher overall
interest rates and a small change in deposit composition toward higher yielding
products.
19
<PAGE>
Interest on borrowings was $569,000 in 1995 compared to $363,000 in 1994. The
average balance of borrowings was $9,126,000 with an average cost of 6.23% for
1995 compared to an average balance of $6,991,000 with an average cost of 5.19%
for 1994. The increase in average balance was due to the use of borrowings to
fund the growth in the balance sheet. The increase in the cost of borrowings was
the result of higher overall interest rates.
Provision for Possible Loan Losses. The provision for possible loan losses was
$60,000 for 1995 compared to $56,000 for 1994. The amount of the provision
reflected Patriot's high asset quality, low level of delinquencies and low level
of nonperforming assets.
Non-lnterest Income. Total non-interest income was $518,000 for 1995 compared to
$674,000 for 1994. The decrease was due to a gain in 1994 of $183,000 on the
disposition of real estate acquired through foreclosure compared to a gain of
$96,000 in 1995, and a non-recurring loss of $97,000 on the sale of certain
investment and mortgage-backed securities in 1995.
Non-lnterest Expense. Total non-interest expense was $6,151,000 for 1995
compared to $6,090,000 for 1994. The increase in non-interest expense was the
result of the recognition of $387,000 of expenses related to Patriot's Employee
Stock Ownership Plan offset somewhat by other operating efficiencies and
cost-saving efforts. The ratio of non-interest expense to average assets was
2.65% for 1995 compared to 2.75% for 1994. The improvement in the overhead ratio
reflects Patriot's emphasis on managing costs.
Income Tax Provision. The income tax provision was $734,000 for 1995 compared to
$717,000 for 1994. The effective tax rate was 38.11% for 1995 compared to 37.72%
for 1994.
Report of Independent Certified Public Accountants
Board of Directors
Patriot Bank Corp.
We have audited the accompanying consolidated statements of financial position
of Patriot Bank Corp. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of Patriot Bank Corp.'s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Patriot Bank Corp.
and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in the notes to the consolidated financial statements, Patriot Bank
Corp. changed its method of accounting for certain investments in debt and
equity securities in 1994.
Grant Thornton, LLP
Philadelphia, Pennsylvania
January 23, 1997
20
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
-----------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 1,997 $ 2,878
Interest-earning deposits in other financial institutions 4,856 15,678
-------- --------
Total cash and cash equivalents 6,853 18,556
Investment and mortgage-backed securities available for sale --
at market value 159,148 47,646
Investment and mortgage-backed securities held to maturity
(market value of $72,722 and $3,963 at December 31,
1996 and 1995, respectively) 72,710 3,917
Loans receivable 280,184 194,250
Allowance for possible loan losses (1,830) (1,702)
Premises and equipment, net 7,724 3,450
Accrued interest receivable 2,649 1,205
Real estate owned 74 195
Other assets 1,653 1,352
-------- --------
Total assets $529,165 $268,869
======== ========
Liabilities and stockholders' equity
Deposits $239,514 $201,618
Borrowings 231,595 10,000
Advances from borrowers for taxes and insurance 2,499 1,778
Other liabilities 2,440 1,363
-------- --------
Total liabilities 476,048 214,759
-------- --------
Preferred stock, $0.01 par value, 2,000,000 shares authorized,
none issued at December 31, 1995 and 1996, respectively -- --
Common stock, $0.01 par value, 10,000,000 shares authorized,
4,683,594 and 3,769,125 shares issued at December 31,
1996 and 1995, respectively 47 38
Additional paid-in capital 49,014 36,700
Common stock acquired by ESOP, 308,513 and 271,377
shares at cost at December 31, 1996 and 1995, respectively (2,571) (2,714)
Common stock acquired by MRP, 160,644 shares at amortized
cost at December 31, 1996 (1,538) --
Retained earnings 10,357 19,893
Treasury stock, 226,147 shares at cost at December 31, 1996 (2,517) --
Net unrealized gain on investment and mortgage-backed
securities available for sale, net of taxes 325 193
-------- --------
Total stockholders' equity 53,117 54,110
-------- --------
Total liabilities and stockholders' equity $529,165 $268,869
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Interest income
Interest-earning deposits $ 116 $ 201 $ 174
Investment and mortgage-backed securities 11,049 2,865 2,245
Loans 18,429 14,102 13,079
------- ------- -------
Total interest income 29,594 17,168 15,498
------- ------- -------
Interest expense
Deposits 9,895 8,980 7,762
Borrowings 7,607 569 363
------- ------- -------
Total interest expense 17,502 9,549 8,125
------- ------- -------
Net interest income before provision for
possible loan losses 12,092 7,619 7,373
Provision for possible loan losses 305 60 56
------- ------- -------
Net interest income after
provision for loan losses 11,787 7,559 7,317
------- ------- -------
Non-interest income
Service fees, charges and other operating income 526 519 491
Gains on sale of real estate acquired through
foreclosure 16 96 183
Loss on sale of investment and mortgage-backed
securities (28) (97) --
Mortgage banking gains 123 -- --
------- ------- -------
Total non-interest income 637 518 674
------- ------- -------
Non-interest expense
Salaries and employee benefits 4,324 3,048 2,913
Occupancy and equipment 978 658 704
Federal deposit insurance premiums 1,814 439 455
Data processing 373 258 261
Advertising 397 226 173
Deposit processing 253 236 234
Other operating expenses 1,059 1,286 1,350
------- ------- -------
Total non-interest expense 9,198 6,151 6,090
------- ------- -------
Income before income taxes 3,226 1,926 1,901
Income taxes 1,251 734 717
------- ------- -------
Net income $ 1,975 $ 1,192 $ 1,184
======= ======= =======
Earnings per share $ 0.464
=======
Dividends per share $ 0.213
=======
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Unrealized
gains
(losses) on
Additional securities
Number of Common paid-in Retained Treasury available
shares stock capital ESOP MRP earnings stock for sale Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 -- $ -- $ -- $ -- $ -- $17,517 $ -- $ -- $17,517
Cumulative effect of
change in accounting
for investment
securities at
January 1, 1994,
net of taxes -- -- -- -- -- -- -- (92) (92)
Change in unrealized
losses on securities
available for sale,
net of taxes -- -- -- -- -- -- -- (741) (741)
Net income -- -- -- -- -- 1,184 -- -- 1,184
------- ------- ------- -------- -------- ------- -------- ------- -------
Balance at December 31, 1994 -- -- -- -- -- 18,701 -- (833) 17,868
Shares issued upon
conversion 3,769 38 36,614 -- -- -- -- -- 36,652
Common stock acquired
by ESOP (301) -- -- (3,015) -- -- -- -- (3,015)
Release of ESOP shares 30 -- 86 301 -- -- -- -- 387
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- 1,026 1,026
Net income -- -- -- -- -- 1,192 -- -- 1,192
------- ------- ------- -------- -------- ------- -------- ------- -------
Balance at December 31, 1995 3,498 38 36,700 (2,714) -- 19,893 -- 193 54,110
Common stock issued 134 1 1,731 -- -- -- -- -- 1,732
Common stock acquired
by MRP (134) -- -- -- (1,732) -- -- -- (1,732)
Amortization of MRP -- -- -- -- 194 -- -- -- 194
Treasury stock purchased (188) -- -- -- -- -- (2,517) -- (2,517)
Stock dividend 661 8 10,530 -- -- (10,538) -- -- --
Release of ESOP shares 17 -- 53 143 -- -- -- -- 196
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- 132 132
Net income -- -- -- -- -- 1,975 -- -- 1,975
Cash dividends paid -- -- -- -- -- (973) -- -- (973)
------- ------- ------- -------- -------- ------- -------- ------- -------
Balance at December 31, 1996 3,988 $ 47 $49,014 $ (2,571) $ (1,538) $ 10,357 $ (2,517) $ 325 $53,117
======= ======= ======= ======== ======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,975 $ 1,192 $ 1,184
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization and accretion of:
Deferred loan origination fees (464) (460) (605)
Premiums and discounts (39) (71) (88)
MRP shares 194 -- --
Provision for possible loan losses 305 60 56
Release of ESOP shares 196 387 --
Loss on sale of investment and mortgage-backed securities 28 97 --
Gain on sale of real estate owned (16) (96) (183)
Depreciation of premises and equipment 259 187 242
Deferred income tax (benefit) expense (277) 96 159
Increase in accrued interest receivable (1,444) (29) (186)
Increase in other assets (71) (315) 235
Increase (decrease) in other liabilities 1,077 (39) (360)
--------- --------- ---------
Net cash provided by operating activities 1,723 1,009 454
--------- --------- ---------
Investing activities
Loan originations and principal payments on loans, net (85,643) (25,309) (6,900)
Proceeds from the sale of investment and mortgage-
backed securities -- available for sale 3,918 10,249 --
Proceeds from the maturity of investment and
mortgage-backed securities-- available for sale 16,784 5,289 344
Proceeds from the maturity of investment and
mortgage-backed securities-- held to maturity 5,625 -- 6,819
Purchase of investment and mortgage-backed securities-- available for sale (132,012) (22,450) (9,079)
Purchase of investment and mortgage-backed securities-- held to maturity (74,418) (1,251) (6,515)
Proceeds from sale of loans -- -- 57
Proceeds from sale of real estate owned 131 398 466
Purchase of premises and equipment (4,533) (95) (184)
--------- --------- ---------
Net cash used in investing activities (270,148) (33,169) (14,992)
--------- --------- ---------
Financing activities
Net increase (decrease) in deposits 37,896 11,680 (8,938)
Net proceeds from short-term borrowings 135,595 -- 8,000
Net proceeds from long-term borrowings 86,000 -- --
Increase (decrease) in advances from borrowers for taxes and insurance 721 (49) 87
Net proceeds from stock conversion -- 33,637 --
Cash paid for dividends (973) -- --
Purchase of treasury stock (2,517) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities 256,722 45,268 (851)
Net (decrease) increase in cash and cash equivalents (11,703) 13,108 (15,389)
Cash and cash equivalents at beginning of year 18,556 5,448 20,837
--------- --------- ---------
Cash and cash equivalents at end of year $ 6,853 $ 18,556 $ 5,448
========= ========= =========
</TABLE>
Supplemental disclosures
Cash paid for interest was $9,888,000, $8,988,000 and $8,123,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Cash paid for income taxes
was $1,161,000, $670,000 and $315,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Transfers from loans to real estate owned were
$31,000, $218,000 and $-0- for the years ended December 31, 1996, 1995 and 1994,
respectively. Transfers of investment securities from held to maturity to
available for sale were $6,000,000 for the year ended December 31, 1995.
The accompanying notes are an integral part of these statements.
24
<PAGE>
Patriot Bank Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of Patriot
Bank Corp. and Subsidiaries (Patriot). Such accounting and reporting policies
conform with generally accounting principles and predominant practices within
the financial institution industry and have been followed on a consistent basis,
except for the accounting for long-lived assets, mortgage servicing rights and
impaired loans (see notes 1(h), 1(i) and 4, respectively). In preparing the
consolidated financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.
Patriot, through its subsidiaries, offers a broad range of lending, depository
and related financial services to individual consumers and small businesses
primarily through 11 community banking offices located in Berks, Chester,
Montgomery, Northampton and Lehigh counties.
Patriot Bank competes with other banking and financial institutions in its
primary market communities. Commercial banks, savings banks, savings and loan
associations, credit unions and money market funds actively compete for deposits
and for types of loans. Such institutions, as well as consumer finance and
insurance companies, may be considered competitors of Patriot with respect to
one or more of the services they render.
a. Conversion to Stock Form of Ownership and Earnings Per Share
On July 13, 1995, the Board of Directors of Patriot Bank adopted an overall Plan
of Conversion (the Conversion), as amended on August 30, 1995, pursuant to which
Patriot Bank converted from a federally chartered mutual savings bank to a
federally chartered capital stock savings bank. All of Patriot Bank's
outstanding capital stock was acquired by Patriot, a newly organized Delaware
corporation which became the holding company for Patriot Bank.
The conversion was completed on December 1, 1995 when Patriot issued 3,769,125
shares of common stock to the public. The provisions of Accounting Principles
Board (APB) Opinion No. 15, "Earnings Per Share," are not applicable for the
years ended December 31, 1995 and 1994.
On October 25, 1996, Patriot announced a special 20% stock dividend. The stock
distribution was made on November 21, 1996 to stockholders of record on November
7, 1996. At December 31, 1996 and 1995 shares outstanding were 4,149,000 and
4,198,000 respectively. Earnings per share have been calculated on a fully
diluted basis and have been adjusted for the special 20% stock dividend.
Weighted average shares outstanding during the year ended December 31, 1996 were
4,255,000.
b. Principles of Consolidation
The accompanying financial statements include the accounts of the parent
company, Patriot Bank Corp. and its subsidiaries: Patriot Bank and its
subsidiaries, Marathon Management Company and Real Estate Settlements
Incorporated; and Patriot Investment Company. All material intercompany balances
and transactions have been eliminated in consolidation.
c. Interest-Earning Deposits
Interest-earning deposits consist of deposit accounts with the Federal Home Loan
Bank (FHLB) of Pittsburgh and deposits with other financial institutions
generally having maturities of three months or less.
25
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
d. Investment and Mortgage-Backed Securities
Patriot classifies its investment and mortgage-backed securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115, debt
securities that Patriot has the intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost. Securities
expected to be held for an indefinite period of time are classified as available
for sale and are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, net of estimated
income taxes. Securities that are bought and held principally for the purpose of
selling are classified as trading and reported at fair value, with unrealized
gains and losses included in earnings. Patriot has no securities held for
trading. Gains or losses on the sales of securities are recognized at trade date
utilizing the specific identification method.
e. Loans and Allowance for Possible Loan Losses
Loans are stated at unpaid principal balances and net of deferred loan
origination fees and discounts. Interest is accrued and credited to operations
based upon the principal amount of loans outstanding. Loan fees and certain
direct loan origination costs are deferred, and the net fee or cost is
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans, adjusted for estimated prepayments based on
Patriot's historical prepayment experience.
Management's periodic evaluation of the adequacy of the allowance for possible
loan losses is based on Patriot's past loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. Such estimates are susceptible to change, and actual losses on
specific loans may vary from estimated losses. The allowance for possible loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries).
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is reestablished, in
which case the loan is returned to accrual status.
f. Real Estate Owned
Real estate owned is initially recorded at the lower of the loan's unpaid
principal balance (cost) or estimated fair value at the date of foreclosure less
estimated selling expenses. When a loan is initially transferred to real estate
owned, the excess, if any, of the loan balance over fair value is charged to the
allowance for possible loan losses. Periodically thereafter, the asset is
reviewed by management for subsequent declines in the estimated fair value.
Subsequent declines, if any, and holding costs, as well as gains and losses on
subsequent sale, are included in the consolidated statements of income.
Significant property improvements are capitalized to the extent that carrying
value does not exceed estimated fair value less estimated selling expenses.
g. Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost less accumulated depreciation.
Depreciation is provided for by the straight-line method over the estimated
useful lives of the assets.
26
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
h. Long-Lived Assets
On January 1, 1996, Patriot adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The adoption of SFAS No. 121 had no
material effect on the consolidated financial position or results of operations.
i. Servicing Rights
On January 1, 1996, Patriot adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which requires that a mortgage banking enterprise recognize
as a separate asset rights to service mortgage loans for others, however those
servicing rights are acquired. In circumstances where mortgage loans are
originated, separate asset rights to service mortgage loans are only recorded
when the enterprise intends to sell such loans. The adoption of SFAS No. 122 did
not have a material impact on the consolidated financial position or results of
operations.
The Financial Accounting Standards Board (FASB) issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as amended by SFAS No. 127, which provides accounting guidance on
transfers of financial assets, servicing of financial assets and extinguishments
of liabilities. This statement is effective for transfers of financial assets,
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. Adoption of this new statement is not expected to have a
material impact on Patriot's consolidated financial position or results of
operations.
j. Stock-Based Compensation
On January 1, 1996, Patriot adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock options and
similar instruments under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. Patriot's employee stock option plan is accounted
for under APB Opinion No. 25.
k. Income Taxes
Deferred income taxes are provided on temporary differences between amounts
reported for financial statement and tax purposes in accordance with SFAS No.
109, "Accounting for Income Taxes."
l. Advertising Cost
Patriot expenses advertising costs as incurred.
m. Reclassifications
Certain prior period amounts have been reclassified to conform with the current
year's presentation. These reclassifications had no effect on net income.
27
<PAGE>
NOTE 2 - RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
Patriot is required to maintain certain average reserve balances as established
by the Federal Reserve Board. The amounts of those reserve balances for the
reserve computation periods, which included December 31, 1996 and 1995, were
$456,000 and $955,000, respectively.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------
Amortized Unrealized Unrealized Fair
cost appreciation depreciation value
--------- ------------ ------------ -----
(in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
Investment securities:
U.S. Treasury and
government agency
securities $ 5,023 $ -- $ 33 $ 4,990
Corporate securities -- -- -- --
Equity securities 23,797 695 -- 24,492
Mortgage-backed securities:
FHLMC 14,582 149 22 14,709
FNMA 25,118 150 144 25,124
GNMA 14,498 253 -- 14,751
Collateralized mortgage
obligations:
FHLMC 37,928 7 296 37,639
FNMA 31,654 13 165 31,502
Other 5,976 -- 35 5,941
-------- ------- -------- --------
Total investment
and mortgage-backed
securities available for sale $158,576 $ 1,267 $ 695 $159,148
======== ======== ======== ========
Held to Maturity:
Investment securities:
U.S. Treasury and
government agency
securities $ 1,911 $ -- $ 19 $ 1,892
Corporate securities 2,506 27 -- 2,533
Collateralized mortgage
obligations:
Other 68,293 281 277 68,297
-------- ------- -------- --------
Total investment
and mortgage-backed
securities held to maturity $ 72,710 $ 308 $ 296 $ 72,722
======== ======== ======== ========
1995
------------------------------------------------------
Amortized Unrealized Unrealized Fair
cost appreciation depreciation value
--------- ------------ ------------ -----
(in thousands)
Available for Sale:
Investment securities:
U.S. Treasury and
government agency
securities $ 6,105 $ 49 $-- $ 6,154
Corporate securities 1,019 27 -- 1,046
Equity securities 2,914 21 -- 2,935
Mortgage-backed securities:
FHLMC 12,179 95 16 12,258
FNMA 17,709 161 115 17,755
GNMA 5,463 79 3 5,539
Collateralized mortgage
obligations:
FHLMC -- -- -- --
FNMA 1,964 -- 5 1,959
Other -- -- -- --
-------- ------- -------- --------
Total investment
and mortgage-backed
securities available for sale $ 47,353 $ 432 $ 139 $ 47,646
======== ======== ======== ========
Held to Maturity:
Investment securities:
U.S. Treasury and
government agency
securities $ 2,414 $ 4 $ 21 $ 2,397
Corporate securities 1,503 63 -- 1,566
Collateralized mortgage
obligations:
Other -- -- -- --
-------- -------- -------- --------
Total investment
and mortgage-backed
securities held to maturity $ 3,917 $ 67 $ 21 $ 3,963
======== ======== ======== ========
</TABLE>
28
<PAGE>
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES, CONTINUED
The amortized cost and estimated fair value of investment and mortgage-backed
securities at December 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties:
<TABLE>
<CAPTION>
Held to maturity Available for sale
---------------------- ---------------------
Amortized Fair Amortized Fair
cost value cost value
--------- ------- --------- -----
(in thousands)
<S> <C> <C> <C> <C>
Investment and mortgage-backed securities
Due in one year or less $ 9,635 $ 9,637 $ 13,880 $ 13,930
Due after one year through five years 36,496 36,502 41,213 41,158
Due after five years through ten years 23,073 23,077 23,853 23,839
Due after ten years 3,506 3,506 55,833 55,729
No stated maturity -- -- 23,797 24,492
-------- -------- -------- --------
Total investment and mortgage-backed securities $ 72,710 $ 72,722 $158,576 $159,148
======== ======== ======== ========
</TABLE>
Proceeds from sales of investment and mortgage-backed securities and the
realized gross gains and losses from those sales are as follows:
Available for sale Held to maturity
----------------------- -----------------------
Year ended December 31, Year ended December 31,
1996 1995 1994
---- ---- ----
(in thousands)
Proceeds from sales $ 3,918 $ 10,249 $ --
========== ======== ========
Gross realized gains $ 75 $ -- $ --
Gross realized losses (103) (97) --
---------- -------- --------
Net realized loss $ (28) $ (97) $ --
========== ======== ========
On November 15, 1995, the FASB issued a special report entitled "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." This guide allowed enterprises to reassess the
appropriateness of the classification of all securities held. A one-time
reassessment could be made on one day between November 15, 1995 and December 31,
1995. Reclassifications from the held to maturity category that result from this
one-time reassessment will not call into question the intent of an enterprise to
hold other debt and equity securities to maturity in the future.
Based on this special report, Patriot reclassified $6,000,000 of securities from
held to maturity to available for sale. The transfer was made at fair value and
resulted in an estimated unrealized loss of $59,000 and a decrease in
stockholders' equity of $39,000 based on current market values.
Securities having an aggregate amortized cost of $412,000, $445,000 and $189,000
were pledged to secure public deposits at December 31, 1996, 1995 and 1994,
respectively.
29
<PAGE>
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
-------------------------
1996 1995
---- ----
(in thousands)
Real estate loans
First mortgages secured by one- to four-family
residences $ 192,518 $ 131,352
Home equity and second mortgage 72,480 57,969
Construction 3,210 1,712
Multi-family and commercial 11,822 3,288
--------- ---------
280,030 194,321
Consumer loans 2,546 2,159
--------- ---------
Total loans receivable 282,576 196,480
Less deferred loan origination fees (2,392) (2,230)
--------- ---------
Total loans receivable, net $ 280,184 $ 194,250
========= =========
Activity in the allowance for possible loan losses is summarized as follows:
1996 1995 1994
---- ---- ----
(in thousands)
Balance at beginning of year $ 1,702 $ 1,720 $ 1,665
Provision for possible loan losses 305 60 56
Loans charged off (177) (81) (5)
Recoveries -- 3 4
------- ------- -------
Balance at end of year $ 1,830 $ 1,702 $ 1,720
======= ======= =======
Non-performing loans, consisting of all loans 90 days past due and certain other
loans for which the accrual of interest has been discontinued, were $569,000 and
$581,000 at December 31, 1996 and 1995, respectively. Interest income that would
have been recorded under the original terms of such loans and the interest
income actually recognized are summarized as follows:
1996 1995 1994
---- ---- ----
(in thousands)
Interest income that would have been recorded $ 53 $ 53 $ 74
Interest income recognized (17) (14) (40)
----- ----- ----
Interest income foregone $ 36 $ 39 $ 34
===== ===== ====
On January 1, 1995, Patriot adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan: Income Recognition and Disclosures." SFAS No. 114 requires
that a creditor measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
SFAS No. 114, as amended, applies to all loans that are identified for
evaluation, uncollateralized as well as collateralized, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. Those loans include residential mortgage, home equity and consumer
loans. Patriot's loan portfolio is substantially comprised of residential
mortgage, home equity and consumer loans; therefore, the adoption of SFAS No.
114 had no effect on Patriot's consolidated financial position or results of
operations.
30
<PAGE>
NOTE 5 - DEPOSITS
Deposits and their average rates are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
Average Average
Deposit type Balance rate Balance rate
- ------------ ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
NOW $ 17,842 0.49% $ 16,857 0.53%
Money market 33,411 4.57 34,162 4.49
Savings accounts 27,712 2.38 27,511 2.38
Non-interest-bearing demand 3,433 -- 2,519 --
-------- --------
Total demand, transaction, money
market and savings deposits 82,398 2.76 81,049 2.81
Certificates of deposits 157,116 5.76 120,569 5.85
-------- --------
Total deposits $239,514 4.73 $201,618 4.63
======== ========
</TABLE>
The aggregate amount of certificates of deposit with minimum denominations of
$100,000 or more totalled approximately $19,357,000 and $5,250,000 at December
31, 1996 and 1995, respectively. Deposit accounts in excess of $100,000 are not
federally insured.
At December 31, 1996, scheduled maturities of certificates of deposit were as
follows:
1997 $ 81,397
1998 24,844
1999 34,122
2000 4,851
2001 1,364
Thereafter 10,538
--------
Total $157,116
========
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Estimated
useful lives 1996 1995
------------ ---- ----
(in thousands)
Land -- $ 1,220 $ 1,220
Buildings 30-40 5,966 3,590
Furniture, fixtures and equipment 3-7 2,969 1,318
Leasehold improvements 15 506 --
------- -------
10,661 6,128
Less accumulated depreciation (2,937) (2,678)
------- -------
$ 7,724 $ 3,450
======= =======
In 1996, Patriot substantially completed renovations to its existing premises
for approximately $2.4 million, $2 million of which was completed by an entity
related to a director of Patriot.
Patriot is committed to various operating leases related to branch facilities
having initial or remaining terms in excess of one year. The minimum annual
rental commitments under these leases outstanding at December 31, 1996 are as
follows:
1997 $ 154,620
1998 147,500
1999 147,500
2000 147,500
2001 134,405
Thereafter 1,788,775
Total rental expense for all leases for the year ended December 31, 1996
totalled $54,815. There were no leases in prior years.
31
<PAGE>
NOTE 7 - BORROWINGS
a. Short-Term Borrowings
Short-term borrowings consist of advances from the FHLB and repurchase
agreements which generally have maturities of less than one year. Short-term
borrowings are summarized as follows:
1996 1995
---- ----
(in thousands)
Balance at year-end $145,595 $ 10,000
Maximum amount outstanding at any month-end
during the period $183,500 $ 21,000
Average amount outstanding during each period $107,108 $ 9,126
Weighted average interest rate on short-term borrowings 5.57% 6.23%
b. Long-Term Borrowings
At December 31, 1996, long-term borrowings totalling $86 million will mature
within one to five years and are reported as long-term borrowings. The advances
are collateralized by FHLB stock and certain first mortgage loans and
mortgage-backed securities. These advances had a weighted average interest rate
of 5.65%.
Outstanding long-term borrowings mature as follows (in thousands):
1998 $ 34,000
1999 27,000
2000 --
2001 25,000
2002 --
---------
$ 86,000
=========
NOTE 8 - EMPLOYEE BENEFIT PLANS
a. Pension Plan
Patriot has amended its non-contributory defined benefit pension plan to
terminate effective December 31, 1996. The plan covered substantially all
full-time employees meeting certain eligibility requirements. The benefits were
based on each employee's years of service and the average of the highest five
annual salaries of the ten years prior to retirement. An employee became fully
vested upon completion of seven years of qualifying service.
It is anticipated that the termination will be settled in 1997. The actuarial
assumptions have been selected to coincide with the termination and non-vested
benefits have been assumed to be vested.
The following table sets forth the plan's funded status and amounts recognized
in Patriot's consolidated statements of financial position.
1996 1995
---- ----
(in thousands)
Actuarial present value of benefit obligations
Vested $ 1,257 $ 796
Non-vested -- 24
--------- ----------
Accumulated benefit obligation $ 1,257 $ 820
========= ==========
Projected benefit obligation for
service rendered to date $ 1,257 $ 1,536
Plan assets at fair value 1,680 1,685
--------- ----------
Plan assets in excess of projected
benefit obligation 423 149
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of changes in assumptions (93) 25
Unrecognized net obligation being
recognized over 24 years -- 112
---------- ----------
Prepaid pension cost $ 330 $ 286
========== ==========
32
<PAGE>
NOTE 8 - EMPLOYEE BENEFIT PLANS, CONTINUED
The net pension cost included the following components:
1996 1995 1994
---- ---- ----
(in thousands)
Service cost - benefit earned during the period $ 117 $ 99 $ 155
Interest cost on projected benefit obligation 113 107 115
Actual return on plan assets (160) (264) (110)
Net amortization and deferral 29 146 17
----- ----- -----
Net pension cost $ 99 $ 88 $ 177
===== ===== =====
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 4.75% (4% deferred rate), 7.25%
and 8.00% for 1996, 1995 and 1994, respectively. The rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 0%, 5% and 5% for 1996, 1995 and 1994,
respectively. The expected long-term rate of return was 8% for 1996, 1995 and
1994. Contributions to the plan were $-0-, $156,000 and $167,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
b. 401(k) Plan
Patriot maintains a 401(k) plan covering all of its employees who have attained
age 21 and have completed at least one year of service. Patriot contributed 50%
of an employee's contribution, up to 6% of salary. Patriot's contributions were
$35,000, $32,000 and $33,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Effective January 1, 1997, the 401(k) plan has been amended
whereby all eligible employees will receive a contribution to the plan equal to
3% of their base salary. Patriot will also contribute 100% of an employee's
contribution up to 3% of base salary and 50% of an employee's contribution
between 3% and 6% of base salary.
c. Employee Stock Ownership Plan
In 1995, Patriot established an internally leveraged Employee Stock Ownership
Plan (ESOP) for eligible employees who have completed one year of service with
Patriot or its subsidiaries. In December 1995, the ESOP borrowed $3,015,000 from
Patriot to purchase 362,000 newly issued shares of common stock. Patriot makes
contributions to the ESOP equal to the ESOP's debt service less any dividends
received by the ESOP. Any dividends received by the ESOP will be used to pay
debt service. The ESOP shares initially were pledged as collateral for its debt.
As the debt is repaid, shares are released from collateral and allocated to
qualifying employees based on the proportion of debt service paid in the year.
Patriot accounts for its ESOP in accordance with Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." Accordingly, the
debt of the ESOP is recorded as debt and the shares pledged as collateral are
reported as unearned ESOP shares in the consolidated statements of financial
position. As shares are released from collateral, Patriot reports compensation
expense equal to the current market price of the shares, and the allocated
shares are included in outstanding shares for earnings per share computations.
Dividends on allocated ESOP shares will be recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares will be recorded as a reduction
of debt and accrued interest. ESOP compensation expense was $196,000 and
$388,000 in 1996 and 1995, respectively. The ESOP shares as of December 31, 1996
were as follows:
Allocated shares 53,000
Unreleased shares 309,000
----------
Total ESOP shares 362,000
==========
Fair value of unreleased shares $4,165,000
==========
d. Stock-Based Compensation
On June 7, 1996, Patriot's stockholders approved a Management Recognition Plan
(MRP). The MRP provides that up to 181,000 shares of common stock may be
granted, at the discretion of the Board, to key directors and officers at no
cost to the individuals. Patriot granted 161,000 shares
33
<PAGE>
NOTE 8 - EMPLOYEE BENEFIT PLANS, CONTINUED
on June 7, 1996 in the form of restricted stock payable over five years from the
date of grant. The recipients of the restricted stock are entitled to all voting
and other stockholder rights, except that the shares, while restricted, may not
be sold, pledged or otherwise disposed of and are required to be held in escrow.
In the event the recipient terminates association with Patriot for reasons other
than death, disability or change in control, the recipient forfeits all rights
to the allocated shares under restriction which are cancelled and revert to
Patriot for reissuance under the plan. Shares acquired by the MRP were newly
issued shares and were recorded at the date of award based on the market value
of shares on June 7, 1996. Shares acquired by the MRP, which are shown as a
separate component of stockholders' equity, are being amortized to expense over
the five-year vesting period. As shares are vested during this five-year period,
Patriot records compensation expense equal to the shares being amortized. For
the year ended December 31, 1996, $195,000 was amortized to expense. At December
31, 1996, 20,000 shares were reserved for future grants under the plan.
On June 7, 1996, Patriot's stockholders approved a stock option plan. The stock
option plan is accounted for under APB Opinion No. 25 and related
interpretations. The plan permits the grant of options to employees and
directors for up to 452,000 shares of common stock. The options have a term of
10 years and vest over a five-year period. The exercise price of each option
equals the market price of Patriot's stock on the date of grant. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the plan been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS No. 123, Patriot's 1996 net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
As reported Pro forma
----------- ---------
Net income $ 1,975,000 $ 1,841,000
Earnings per share $0.46 $0.43
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of 2.4%; expected volatility
of 22.9%; risk-free interest rates of 6.5%; and expected lives of eight years.
During 1996, 425,000 options were granted, all with an exercise price of $10.78,
and no options were exercised or forfeited. The weighted average fair value of
options granted during 1996 was $4.11 per share and the weighted average
remaining contractual life was 9.5 years at December 31, 1996.
NOTE 9 - INCOME TAXES
Applicable income taxes in the consolidated statements of income are as follows:
1996 1995 1994
---- ---- ----
(in thousands)
Current
Federal $1,306 $ 525 $ 446
State 222 113 112
------ ------ ------
Total current 1,528 638 558
------ ------ ------
Deferred
Federal (277) 96 159
------ ------ ------
Total deferred (277) 96 159
------ ------ ------
Applicable income taxes $1,251 $ 734 $ 717
====== ====== ======
Effective tax rate 38.8% 38.1% 37.7%
====== ====== ======
34
<PAGE>
NOTE 9 - INCOME TAXES, CONTINUED
The income tax provision reconciled to taxes computed at the statutory federal
rate is as follows:
1996 1995 1994
---- ---- ----
Federal tax expense at statutory rate 35.0% 35.0% 35.0%
Adjustment resulting from:
State tax, net of federal tax benefit 2.3 3.7 3.9
Tax-exempt interest income (1.4) (0.1) (0.3)
ESOP expense 0.6 1.6 --
Meals and entertainment 0.6 0.1 0.1
Other 1.7 (2.2) (1.0)
---- ---- ----
Income taxes 38.8% 38.1% 37.7%
==== ==== ====
1996 1995
---- ----
(in thousands)
Deferred tax assets
Deferred loan fees $ 288 $ 376
Loan loss allowance 579 306
Uncollectible interest 23 19
Non-qualified pension plan 14 12
MRP expense 68 --
Unrealized loss on securities
designated as available for sale 19 --
------ --------
Total deferred tax assets $ 991 $ 713
====== ========
1996 1995
---- ----
(in thousands)
Deferred tax liabilities
Depreciation $ 211 $ 214
Discount accretion 87 35
Pension plan 15 13
Gain on sale of loans 100 145
Excess loan servicing fees -- 5
Unrealized gain on securities
designated as available for sale 247 100
------ -----
Total deferred tax liabilities 660 512
------ -----
Net deferred tax asset $ 331 $ 201
====== =====
Based on management's evaluation of the likelihood of realization, no valuation
allowance has been provided against deferred tax benefits.
NOTE 10 - REGULATORY MATTERS
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Funds Act)
was signed into law which, among other things, imposed a special one-time
assessment on Savings Association Insurance Fund (SAIF) member institutions,
including Patriot Bank, to recapitalize the SAIF. As required by the Funds Act,
the Federal Deposit Insurance Corporation (FDIC) imposed a special assessment of
65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996. The special assessment was recognized as a tax-deductible
expense in 1996. Patriot recorded a special after-tax charge of $836,000
($1,338,000 before-tax) as a result of the FDIC special assessment.
35
<PAGE>
NOTE 10 - REGULATORY MATTERS, CONTINUED
The Funds Act also spreads the obligations for payment of the Financing
Corporation (FICO) bonds across all Bank Insurance Fund (BIF) and SAIF members.
Beginning on January 1, 1997, BIF deposits will be assessed for FICO payments at
a rate of 20% of the rate assessed on SAIF deposits. Based on current estimates
by the FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points,
while SAIF deposits will pay an estimated 6.5 basis points on the FICO bonds.
Full pro rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged.
The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999,
provided the savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level of
FDIC insurance assessments on an ongoing basis, whether the savings association
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
In conformity with Office of Thrift Supervision (OTS) regulations, a
"liquidation account" was established for Patriot Bank at the time of its
conversion to the stock form of ownership. In the unlikely event of a complete
liquidation of Patriot Bank, holders of savings accounts with qualifying
deposits, who continue to maintain their savings accounts, would be entitled to
a distribution from the "liquidation account" in an amount equal to the then
current adjusted savings account balance before any liquidation distribution
could be made with respect to capital stock. The balance in the "liquidation
account" was $15,550,000 at December 31, 1996. This amount may not be utilized
for the payment of cash dividends to the holding company.
OTS regulations require institutions regulated by the OTS to have minimum
regulatory tangible capital equal to 1.5% of total tangible assets, a minimum
leverage capital ratio equal to 3% of tangible assets and 4% of risk-adjusted
assets, and a risk-based capital ratio equal to 8%. Patriot Bank was in
compliance with all of these capital requirements as of December 31, 1996. The
following schedule summarizes the actual capital balances of Patriot Bank at
December 31, 1996:
<TABLE>
<CAPTION>
Tangible Leverage Leverage Risk-based
capital (core) capital (core) capital capital to
to tangible to tangible to risk-adjusted risk-adjusted
assets assets assets assets
----------- -------------- ---------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Regulatory capital $32,049 $32,049 $32,049 $33,879
Minimum capital requirement 7,490 14,980 9,944 19,889
------- ------- ------- -------
Excess $24,559 $17,069 $22,105 $13,990
======= ======= ======= =======
Capital ratio 6.47% 6.47% 12.89% 13.63%
======= ======= ======= =======
</TABLE>
The following schedule summarizes capital balances of Patriot Bank Corp. as if
those regulations were applicable:
<TABLE>
<CAPTION>
Tangible Leverage Leverage Risk-based
capital (core) capital (core) capital capital to
to tangible to tangible to risk-adjusted risk-adjusted
assets assets assets assets
----------- -------------- ---------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Regulatory capital $52,738 $52,738 $52,738 $54,569
Minimum capital requirement 7,932 15,864 10,406 20,812
------- ------- ------- -------
Excess $44,806 $36,874 $42,332 $33,757
======= ======= ======= =======
Capital ratio 9.97% 9.97% 20.28% 20.98%
======= ======= ======= =======
</TABLE>
36
<PAGE>
NOTE 10 - REGULATORY MATTERS, CONTINUED
The Federal Deposit Insurance Corporation Improvement Act established five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. A depository
institution's capital tier depends upon its capital levels in relation to
various relevant capital measures, which include leverage and risk-based capital
measures and certain other factors. Depository institutions that are not
classified as well capitalized or adequately capitalized are subject to various
restrictions regarding capital distributions, payment of management fees,
acceptance of brokered deposits and other operating activities. At December 31,
1996, Patriot Bank was classified as well capitalized.
Patriot Bank is subject to regulations of certain regulatory agencies and,
accordingly, is periodically examined by such regulatory authorities. As a
consequence of the regulation of banking activities, Patriot Bank's operations
are susceptible to changes in legislation and regulations.
On October 28, 1996, Patriot announced its intention to convert the charter of
Patriot Bank from a federally chartered savings bank to a state chartered
commercial bank. This change will have no significant effect on the financial
position or results of operations of Patriot.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
Patriot is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers,
including commitments to extend credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial position. The contract or
notional amounts of those instruments reflect the extent of Patriot's
involvement in particular classes of financial instruments.
Patriot's exposure to credit loss in the event of non-performance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. Patriot
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. Unless noted otherwise, Patriot
requires collateral to support financial instruments with credit risk.
The contractual or notional amounts of outstanding loan commitments as of
December 31, 1996 are as follows:
Total
Fixed rate Variable rate commitments
commitments commitments outstanding
----------- ------------- -----------
(in thousands)
Financial instruments whose contract
amounts represent credit risk
Mortgage loans $ 3,300 $ 965 $ 4,265
Consumer and other loans 493 12,978 13,471
Commercial lines of credit -- 888 888
Construction loans 372 -- 372
---------- --------- ---------
$ 4,165 $ 14,831 $ 18,996
========== ========= =========
Fees received in connection with these commitments are recognized as income over
the life of the commitment or the life of the loan.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Patriot evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
Patriot upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral for commitments generally includes residential or other
real estate.
37
<PAGE>
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK, CONTINUED
Patriot is principally engaged in originating one- to four-family residential
real estate loans in southeastern Pennsylvania. Patriot offers both fixed and
adjustable rates of interest on those loans which have amortization terms up to
30 years. The loans are generally originated on the basis of not more than an
80% loan-to-value ratio, which has historically provided Patriot with more than
adequate collateral coverage in the event of default. Nevertheless, Patriot, as
with any lending institution, is subject to the risk that residential real
estate values in the primary lending area may deteriorate, thereby potentially
impairing collateral values in the primary lending area. However, management
believes that residential real estate values are presently stable in its primary
lending area and that the allowance for possible loan losses has been provided
for in amounts commensurate with its current perception of the foregoing risks
in the portfolio.
NOTE 12 - CONTINGENCIES
Patriot is a defendant in various legal actions arising from normal business
activities. Management believes that those actions are without merit or that the
ultimate liability, if any, resulting from such actions will not have a material
adverse effect on Patriot's consolidated financial position or results of
operations.
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of the estimated fair value of Patriot's assets and liabilities
considered to be financial instruments. As with most financial institutions, the
majority of Patriot's assets and liabilities are considered financial
instruments as defined in SFAS No. 107. However, many of such instruments lack
an available trading market, as characterized by a willing buyer and seller
engaging in an exchange transaction. Also, it is Patriot's general practice and
intent to hold the preponderance of its financial instruments to maturity and
not to engage in trading or sales activities. Therefore, Patriot has used
significant estimates and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair value may
affect the estimated amounts.
Fair values have been estimated using data which management considered the best
available. Fair value of financial instruments actively traded in a secondary
market has been estimated using quoted market prices. The fair value of loans
receivable has been estimated using present value cash flow, discounted at an
interest rate that gives effect to estimated prepayment risk and credit loss
factors. Fair value of financial instrument liabilities with no stated
maturities has been estimated to equal the carrying amount. Fair value of
financial instrument liabilities with stated maturities has been estimated using
present value cash flow, discounted at a rate approximating current market rates
for similar assets and liabilities. The resulting fair values and carrying
amounts at December 31, 1996 and 1995, respectively were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- --------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
--------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,853 $ 6,853 $ 18,566 $ 18,556
Investment and mortgage-backed
securities available for sale 159,148 159,148 47,646 47,646
Investment and mortgage-backed
securities held to maturity 72,722 72,710 3,963 3,917
Deposits with no stated maturities 82,398 82,398 81,049 81,049
Deposits with stated maturities 158,888 157,116 121,732 120,569
Borrowings 229,947 231,595 10,000 10,000
Loans receivable (net) 280,468 278,354 194,629 192,548
</TABLE>
There is no material difference between the carrying amount and estimated fair
value of off-balance-sheet items totalling $18,996,000 and $10,733,000 at
December 31, 1996 and 1995, respectively. Such off-balance-sheet items are
primarily comprised of unfunded loan commitments which are generally priced at
market at the time of the commitment.
38
<PAGE>
NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Patriot Bank Corp. is as follows
(in thousands):
Balance sheets
--------------
December 31,
1996 1995
---- ----
Assets
Cash and cash equivalents $ -- $ 118
Loans to subsidiaries -- 18,214
Investment in subsidiaries 53,246 35,740
Other assets 465 102
------- -------
Total assets $53,711 $54,174
======= =======
Liabilities and stockholders' equity
Other liabilities $ 594 $ 64
Stockholders' equity 53,117 54,110
------- -------
Total liabilities and stockholders' equity $53,711 $54,174
======= =======
Statements of operations
------------------------
Year ended December 31,
1996 1995
---- ----
Interest income $ 824 $ 96
Other expense 531 21
------- -------
Income before income taxes and undistributed
earnings of subsidiaries 293 75
Income taxes 111 31
------- -------
Income before undistributed earnings
of subsidiaries 182 44
Earnings of subsidiaries 1,793 1,148
------- -------
Net income $ 1,975 $ 1,192
======= =======
Statements of cash flows
------------------------
Year ended December 31,
1996 1995
---- ----
Cash flows from operating activities
Net income $ 1,975 $ 1,192
Adjustments to reconcile net income to net cash
provided by operating activities
Earnings from subsidiaries (1,793) (1,148)
Dividends from subsidiaries 5,000 --
Change in other assets (363) (102)
Change in other liabilities 530 64
------- -------
Net cash provided by operating activities 5,349 6
------- -------
Cash flows from investing activities
Investment in subsidiary (20,191) (15,311)
Loans to subsidiary 18,214 (18,214)
------- -------
Net cash used in investing activities (1,977) (33,525)
------- -------
Cash flows from financing activities
Net proceeds from stock conversion -- 33,637
Cash dividends paid to stockholders (973) --
Purchase of treasury stock (2,517) --
------- -------
Net cash provided by financing activities (3,490) 33,637
------- -------
Increase (decrease) in cash and cash equivalents (118) 118
Cash and cash equivalents at beginning of year 118 --
------- -------
Cash and cash equivalents at end of year $ -- $ 118
======= =======
39
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 23, 1997 accompanying the
consolidated financial statements incorporated by reference or included in the
Annual Report of Patriot Bank Corp. and Subsidiaries on Form 10-K for the year
ended December 31, 1996. We hereby consent to the incorporation by reference of
said report in the Registration Statement of Patriot Bank Corp. and Subsidiaries
on Form S-8 (File No. 333-13981, effective October 11, 1996).
Philadelphia, Pennsylvania
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001000235
<NAME> Patriot Bank Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 1,997
<INT-BEARING-DEPOSITS> 4,856
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 159,148
<INVESTMENTS-CARRYING> 72,710
<INVESTMENTS-MARKET> 72,722
<LOANS> 280,184
<ALLOWANCE> (1,830)
<TOTAL-ASSETS> 529,165
<DEPOSITS> 239,514
<SHORT-TERM> 145,595
<LIABILITIES-OTHER> 4,939
<LONG-TERM> 86,000
0
0
<COMMON> 47
<OTHER-SE> 53,070
<TOTAL-LIABILITIES-AND-EQUITY> 529,165
<INTEREST-LOAN> 18,429
<INTEREST-INVEST> 11,049
<INTEREST-OTHER> 116
<INTEREST-TOTAL> 29,594
<INTEREST-DEPOSIT> 9,895
<INTEREST-EXPENSE> 17,502
<INTEREST-INCOME-NET> 12,092
<LOAN-LOSSES> 305
<SECURITIES-GAINS> (28)
<EXPENSE-OTHER> 9,198
<INCOME-PRETAX> 3,226
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,975
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<YIELD-ACTUAL> 3.01
<LOANS-NON> 568,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,702
<CHARGE-OFFS> 177
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,830
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,855
</TABLE>
