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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO.: 0-26744
_____________PATRIOT BANK CORP._____________
(Exact name of Registrant as specified in its charter)
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PENNSYLVANIA 23-2820537
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
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HIGH AND HANOVER STREETS, POTTSTOWN, PENNSYLVANIA 19464
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(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 323-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, no par value
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes __X__ . No _________ .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [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 $58,746,708 and is based upon the last sales price of $10.125 per
share as quoted on The Nasdaq Stock Market for March 9, 1999.
As of March 9, 1999, the Registrant had 6,180,618 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
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INDEX
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Item 4A. Executive Officers of the Registrant........................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 30
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 62
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 62
Item 11. Executive Compensation...................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 62
Item 13. Certain Relationships and Related Transactions.............. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 63
SIGNATURES................................................................ 64
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PART I
ITEM 1. BUSINESS
GENERAL
Patriot Bank Corp. (the "Company") is a Pennsylvania corporation and is the
holding company for Patriot Bank (the "Bank") and Patriot Investment Company
("PIC"). The Company is a bank holding company and is subject to regulation by
the Board of Governors of the Federal Reserve System (the "FRB"), the Federal
Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange
Commission (the "SEC"). Originally organized as a Delaware corporation, the
Company became a Pennsylvania corporation as a result of its consolidation with
First Lehigh Corporation on January 22, 1999. The Company's executive offices
are located at the administrative offices of the Bank at High and Hanover
Streets, Pottstown, Pennsylvania 19464.
The Bank was originally chartered in 1938. In 1991, the Bank's predecessor
converted from a federally-chartered mutual savings bank to a
Pennsylvania-chartered mutual savings bank and changed its name to Patriot
Savings Bank. In August 1995, the Bank converted from a Pennsylvania-chartered
mutual savings bank to a federally-chartered mutual savings bank. On December 1,
1995, the Company acquired the Bank as part of the Bank's conversion from a
mutual to stock form of ownership (the "Conversion"). In connection with the
Conversion, the Bank changed its name to Patriot Bank. On May 23, 1997, the Bank
converted to a Pennsylvania-chartered commercial bank. The Bank conducts
business through its network of 18 community banking offices located in
Montgomery, Berks, Lehigh, Northampton and Chester Counties, Pennsylvania. As a
result of its acquisition of First Lehigh Bank, certain of the Bank's deposits
are insured by the Savings Association Insurance Fund ("SAIF") and certain of
its deposits are insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. At December 31, 1998, the Bank had total assets of $786.4 million,
deposits of $377.8 million and stockholder's equity of $41.8 million.
The Bank is a community-oriented financial services provider whose business
primarily consists of attracting retail deposits from the general public and
small businesses and originating commercial, consumer, and mortgage loans in the
Bank's market area. In addition to its lending activities, the Bank also invests
in investment and mortgage-backed securities. The Bank uses advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB") and repurchase agreements as
sources of funds.
The Bank's revenues are derived principally from interest on loans,
interest on investment and mortgage-backed securities and other fees and service
charges. The Bank's primary sources of funds are deposits, FHLB advances,
repurchase agreements, interest on loans and investment and mortgage-backed
securities and principal repayments.
PIC is a Delaware investment corporation that was incorporated by the
Company on September 10, 1996. Its primary business consists of maintaining an
investment portfolio. At December 31, 1998, PIC had total assets of $199.9
million, liabilities of $176.4 million, and stockholder's equity of $23.5
million.
MARKET AREA AND COMPETITION
The Company is located approximately 45 miles northwest of Philadelphia,
Pennsylvania and its market consists primarily of Montgomery, Berks, Lehigh,
Northampton, Bucks, and Chester counties, Pennsylvania. The segment of the
markets served by the Company is primarily industrially oriented and
demographically is comprised of middle income and upper income households.
The Company faces significant competition both in originating loans and
attracting deposits. The Company's competitors are other financial services
providers operating within its primary market area, some of which are larger and
have greater financial resources than the Company. The Company's competition for
loans and deposits comes principally from commercial banks, savings and loan
associations, savings banks, credit unions, and mortgage banking companies (some
of which are
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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.
SUBSIDIARY ACTIVITIES
The Company has two wholly-owned subsidiaries: The Bank and PIC. The Bank
has three wholly-owned subsidiaries: Marathon Management Company, Inc.
("Marathon"), Patriot Investments and Insurance Company ("PIIC"), and Patriot
Commercial Leasing Co., Inc. ("PCLC"). Marathon provides title insurance
services through a joint venture partnership. At December 31, 1998, Marathon had
total assets of $135,000. PIIC markets certain nondeposit investment products.
At December 31, 1998, PIIC had total assets of $89,000. PCLC is a commercial
leasing company. At December 31, 1998, PCLC had total assets of $46.1 million.
PERSONNEL
As of December 31, 1998, the Bank had 162 full-time and 20 part-time
employees, none of whom was covered by a collective bargaining agreement.
Management believes that the Bank has good relations with its employees and
there are no pending or threatened labor disputes with its employees.
REGULATION AND SUPERVISION
GENERAL. The Company, as a bank holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
FRB under the Bank Holding Company Act, as amended (the "BHCA"). In addition,
the activities of Pennsylvania-chartered commercial banks, such as the Bank, are
governed by the Pennsylvania Banking Code and the Federal Deposit Insurance Act
("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the Pennsylvania Department of Banking ("PDB"), as its primary regulator, and
the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan
Bank ("FHLB") System. Certain of the Bank's deposits are insured by the BIF
while most of its deposit accounts are insured by the SAIF. The Bank must file
reports with the PDB and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other banking
institutions. The PDB and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the FRB, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to banking institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
HOLDING COMPANY REGULATION. The Company is a bank holding company
registered under the BHCA. As a bank holding company, the Company's activities
and those of the Bank are limited to the business of banking and activities
closely related or incidental to banking.
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The BHCA prohibits a bank holding company, directly or indirectly, or
through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another banking institution or holding company thereof, without prior
written approval of the FRB; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the BHCA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary bank and to commit resources to support the
bank, i.e., to downstream funds to the bank. This support may be required at
times when, absent such policy, the bank holding company might not otherwise
provide such support. Any capital loans by a bank holding company to its
subsidiary bank are subordinate in right of payment to deposits and to certain
other indebtedness of the bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of its subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
CAPITAL REQUIREMENTS. The FRB has adopted risk-based capital guidelines
for bank holding companies, such as the Company. The required minimum ratio of
total capital to risk-weighted assets (including off-balance sheet activities,
such as standby letters of credit) is 8.0%. At least half of the total capital
is required to be "Tier 1 capital," consisting principally of common
stockholders' equity, noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less goodwill.
The remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt and intermediate-term preferred stock, certain hybrid capital instruments
and other debt securities, perpetual preferred stock, and a limited amount of
the general loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are required to maintain a
leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is
in compliance with these guidelines. The Bank is subject to similar capital
requirements adopted by the FDIC.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
Under the FRB prompt corrective action regulations, the FRB is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a bank holding company 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 FRB to meet a specific capital level. A bank holding company generally is
considered "adequately capitalized" if its ratio of total capital
to risk-weighted assets is at least 8%, its ratio of Tier I (core) capital to
risk-weighted assets is at least 4%, and its ratio of core capital to total
assets is at least 4% (3% if the institution receives the highest CAMEL rating).
A bank holding company that has lower ratios of capital are categorized as
"undercapitalized," "significantly under capitalized," or "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the FRB within 45 days of the date a bank
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The FRB could also take any one of a number
of discretionary supervisory actions, including the issuance of a
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capital directive and the replacement of senior executive officers and
directors. At December 31, 1998, both the Company and the Bank were "well
capitalized."
INSURANCE OF DEPOSIT ACCOUNTS. Although most of the deposits of the Bank
are presently insured by the SAIF, certain of its deposits are insured by the
BIF (the deposit insurance fund that covers most commercial bank deposits). Both
the BIF and the SAIF are statutorily required to maintain a 1.25% of insured
reserve deposits ratio. Both the BIF and the SAIF currently exceed the 1.25%
ratio. Therefore, most institutions, including the Bank, presently pay no
deposit insurance premiums. The FDIC must assess deposit insurance premiums if
the 1.25% ratio is not met, and may impose premiums on under capitalized or
unsafe institutions.
While most banks do not pay deposit insurance, all institutions are
assessed for payment of the FICO bonds. Through 1999, BIF deposits are assessed
for FICO payments at a rate that is one-fifth of the rate assessed on SAIF
deposits. 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 FDIC resets the FICO assessment rate each calendar quarter.
The current annual rate is 1.22 basis points for BIF deposits, and 6.10 basis
points for SAIF deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
LOANS TO ONE BORROWER. Applicable regulations limit the dollar amount of
loans that the Bank may have outstanding to any one borrower, or group of
affiliated borrowers, to 15% of the capital and surplus of the Bank. As of
December 31, 1998, this limitation was equal to $6.3 million. There are
exceptions from the limitation for certain secured loans, depending upon the
amount and type of collateral.
LIMITATION ON CAPITAL DISTRIBUTIONS. Dividend payments by the Bank to the
Company are subject to the Pennsylvania Banking Code of 1965 and the FDI Act.
Under the Pennsylvania Banking Code, no dividends may be paid except from
"accumulated net earnings" (generally, undivided profits). Under the FDI Act, no
dividends may be paid by an insured bank if the bank is in arrears in the
payment of any insurance assessment due to the FDIC. Under current banking laws,
the Bank would be limited to approximately $22.2 million of dividends in 1999
plus an additional amount equal to the Bank's net profit for 1999, up to the
date of any such dividend declaration.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Bank to pay dividends to the Company.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Law"), amended various federal
banking laws to provide for nationwide interstate banking, interstate bank
mergers and interstate branching. The interstate banking provisions allow for
the acquisition by a bank holding company of a bank located in another state.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its 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 Bank. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the Bank's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally provides
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with
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non-affiliated companies. In addition, banks are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no bank may purchase the securities of any affiliate other
than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. 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 FDIC has primary enforcement
responsibility over state nonmember banks and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order 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. Federal law also establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require
depositary institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). During
fiscal 1998, the Federal Reserve Board regulations generally required that
reserves be maintained against aggregate transaction accounts as follows: for
accounts aggregating $47.8 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts aggregating
greater than $47.8 million, the reserve requirement is $1.434 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $47.8 million. The first
$4.7 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) were exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the FDIC.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and its subsidiaries report their income on a
consolidated basis using the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Company. For its 1998 taxable year, the Company is subject to a maximum
federal income tax rate of 34%.
BAD DEBT RESERVES. As a commercial bank, the Bank is permitted to
recognize bad debt expense based on actual experience. Prior to its conversion
to a commercial bank in May 1997, the Bank was a thrift institution. For fiscal
years beginning prior to December 31, 1995, thrift institutions which qualified
under certain definitional tests and other conditions of the Internal Revenue
Code of 1986 (the "Code") were permitted to use certain favorable provisions to
calculate their deductions from taxable income for annual additions to their bad
debt reserve. A reserve could be established for bad debts on qualifying real
property loans (generally secured by interests in real property improved or to
be improved) under (i) the Percentage of Taxable Income Method (the "PTI
Method") or (ii) the Experience Method. The reserve for nonqualifying loans was
computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), as modified
by the Taxpayer Relief Act of 1997 (the "1997 Act"), requires savings
institutions to recapture (i.e., take into income) certain portions of their
accumulated bad debt reserves. The 1996 Act repeals the reserve method of
accounting for bad debts effective for tax years beginning after 1995. Thrift
institutions that would be treated as small banks are allowed to utilize the
Experience Method applicable to such institutions, while thrift institutions
that are treated as large banks (those generally exceeding $500 million in
assets) are required to use only the specific charge-off method. Thus, the PTI
Method of accounting for bad debts is no longer available for any financial
institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's current taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank is
permitted to make additions to its tax bad debt reserves. In addition, since the
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 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.
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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.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on a corporation's alternative minimum
taxable income ("AMTI") at a rate of 20% if this rate exceeds the corporation's
income tax rate for the taxable year. The excess of the tax bad debt reserve
deduction using the percentage of taxable income method over the deduction that
would have been allowable under the experience method is treated as a preference
item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net
operating loss carryovers. AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). 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.
STATE TAXATION
COMMONWEALTH OF PENNSYLVANIA. The Bank is subject to a "Bank Shares Tax"
which is imposed on every bank having capital stock located within Pennsylvania.
The Bank Shares Tax is based on the value of the bank's shares as of the
preceding January 1st. The taxable amount is computed by adding the book value
of capital stock paid in, the book value of the surplus and the book value of
undivided profits, and then deducting from that total an amount equal to the
percentage that the book value of the bank's federal obligations and state
obligations bears to the book value of the bank's total assets. This value is
calculated on the basis of the current year and the preceding five years, but,
if a bank has not been in existence for six years, the taxable amount is
computed by adding the value for the number of years that the bank has been in
existence and dividing the resulting sum by that number of years. The Bank
Shares Tax rate is 1.25% of the taxable amount. Banks subject to the Bank Shares
Tax are exempt from all other corporate taxes imposed by Pennsylvania.
Corporations doing business in Pennsylvania and not subject to Bank Shares
Tax are subject to Pennsylvania Corporate Net Income Tax ("CNIT"). The CNIT is
an annual excise tax and is measured by the Corporation's taxable income as
determined under the Code. When a domestic or foreign corporation's entire
business is not transacted wholly within Pennsylvania, such taxable income must
allocated and apportioned to determine that portion subject to the CNIT. The
CNIT rate is 9.99%. Pennsylvania also subjects such corporations to the
Pennsylvania Capital Stock and Foreign Franchise Tax.
Prior to January 22, 1999, the Company was subject to the Pennsylvania CNIT
and the Pennsylvania Capital Stock and Foreign Franchise Tax because it was a
foreign corporation doing business in Pennsylvania. The Company's Pennsylvania
CNIT will be calculated on an unconsolidated basis and adjusted to reflect the
appropriate allocation and apportionment requirements. After January 22, 1999,
the Company is subject to the Pennsylvania Capital Stock Tax and CNIT.
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ITEM 2. PROPERTIES
The Bank has 18 banking offices, three (3) of which are located in
Montgomery County, four (4) of which are located in Berks County, five (5) of
which are located in Lehigh County, four (4) of which are located in Northampton
County, and two (2) of which are located in Chester County, Pennsylvania. The
Bank owns 9 and leases 9 of the banking office properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various legal actions arising from normal
business activities. Management believes that those actions are either without
merit or that the ultimate liability, if any, resulting from such actions will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 1998, a special meeting of the shareholders of the Company
was held to adopt and approve an Agreement and Plan of Consolidation (the
"Plan") with First Lehigh Corporation. The shareholders of the Company approved
and adopted the Plan by a vote of 3,460,056 for and 111,153 against. There were
7,548 abstentions and 70,740 broker nonvotes. On January 22, 1999, the
consolidation was completed and the Company and First Lehigh Corporation
consolidated to form a new Pennsylvania corporation under the name "Patriot Bank
Corp."
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information, including principal occupation during the past five
years, relating to the principal executive officers of the Company, as of March
15, 1999, is set forth below:
James B. Elliott -- Age 58. Mr. Elliott was elected Chairman of the
Company in July 1998. Mr. Elliott is the President of Stratecon, Inc.
Joseph W. Major -- Age 43. Mr. Major was elected President and Chief
Executive Officer of the Company and the Bank in July 1998. Prior to that
Mr. Major was President and Chief Operating Officer of the Company and the
Bank since September 1995 and Chief Executive Officer of the Bank since
April 1997. Prior to his appointment at the Company and the Bank, Mr. Major
was a partner in the firm of Mauger & Major.
Richard A. Elko -- Age 37. Mr. Elko was elected Executive Vice
President and Chief Financial Officer of the Company and the Bank in
January 1996. Prior to his appointment at the Company and the Bank, Mr.
Elko was Corporate Controller at Sovereign Bancorp, Inc.
Joni S. Naugle -- Age 40. Ms. Naugle was elected as Chief Operating
Officer of the Company and the Bank in December 1998. Prior to that Ms.
Naugle was a Senior Vice President for Marketing and Retail Sales at
Sovereign Bank from 1979 to April 1998 and a consultant from April 1998 to
December 1998.
Kevin R. Pyle -- Age 32. Mr. Pyle has been Chief Credit Officer of the
Bank since March 1996. Prior thereto he was a commercial lending officer of
Berks County Bank.
James G. Blume -- Age 33. Mr. Blume was elected as Controller of the
Company and Patriot Bank in March 1997. Prior to that Mr. Blume was the
Accounting Manager of the Company and Patriot Bank. Prior to that Mr. Blume
was senior staff accountant at Sovereign Bank until March 1996.
Robert G. Phillips -- Age 47. Mr. Phillips was elected Treasurer of
the Company and the Bank in August 1995. Prior thereto, Mr. Phillips was
Treasurer of the Bank.
Diane M. Davidheiser -- Age 41. Ms. Davidheiser was elected Corporate
Secretary of the Company and the Bank in September 1998. Prior to that Ms.
Davidheiser was an investor relations specialist and corporate
administration assistant at Patriot Bank since 1987.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") National Market System under the symbol "PBIX." At March 9,
1999, the total number of holders of record of the Company's common stock was
899.
The following table sets forth the high and low bid and asked information
of the Company's common stock to the extent available as reported by NASDAQ.
Such prices have been adjusted to reflect all stock dividends paid during 1998
and 1997.
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------ -------------------------------------------------
BID ASKED BID ASKED
---------------- ----------------- ---------------- ------------------
QTR HIGH LOW HIGH LOW QTR HIGH LOW HIGH LOW
- --- ----- ----- ----- ----- --- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st 16 1/2 13 13/32 16 51/64 13 51/64 1st 10 22/32 8 18/32 11 10/32 9
2nd 17 13 13/64 17 1/4 13 19/32 2nd 11 18/32 9 1/2 11 30/32 9 26/32
3rd 16 11 3/4 16 1/4 12 1/8 3rd 14 26/32 11 18/32 15 10/32 11 26/32
4th 12 7/8 9 13 1/16 10 4th 16 20/32 13 6/32 17 13 12/32
</TABLE>
The bid quotations reflect interdealer quotations, do not include retail
mark ups, mark downs or commissions, and may not necessarily represent actual
transactions. The bid information as stated is, to the knowledge of management
of the Company, the best approximate value at the time indicated.
DIVIDEND INFORMATION.
Dividends on the Company's Common Stock are generally payable in February,
May, August, and November.
Set forth below are the cash dividends paid by the Company during 1998 and
1997. Such dividends have been adjusted to reflect all stock dividends paid
during such years.
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
First Quarter....................................... $.066 $.055
Second Quarter...................................... $.068 $.058
Third Quarter....................................... $.070 $.062
Fourth Quarter...................................... $.075 $.064
</TABLE>
For certain limitations on the ability of the Bank to pay dividends to the
Company, See Part I, Item I "Business -- Regulation and Supervision --
Limitation on Capital Distributions" and Note 18 at Item 8 "Financial Statements
and Supplementary Data" hereof.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data and management's
discussion and analysis set forth below is derived in part from, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto, contained elsewhere herein.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets....................................... $980,761 $852,083 $529,165 $268,869 $221,035
Investment and mortgage-backed securities
available for sale............................... 386,380 343,125 159,148 47,646 33,025
Investment and mortgage-backed securities
held to maturity................................. 29,639 62,516 72,710 3,917 8,669
Loans held for sale................................ 5,576 4,095 -- -- --
Loans and leases receivable........................ 509,080 422,209 280,184 194,250 168,974
Allowance for credit losses........................ (4,087) (2,512) (1,830) (1,702) (1,720)
Deposits........................................... 377,796 289,528 239,514 201,618 189,938
Borrowings......................................... 549,321 508,884 231,595 10,000 10,000
Stockholders' equity............................... 42,260 46,533 53,117 54,110 17,868
</TABLE>
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest Income.................................... $ 63,107 $ 50,249 $ 29,594 $ 17,168 $ 15,498
Interest Expense................................... 46,236 35,807 17,502 9,549 8,125
-------- -------- -------- -------- --------
Net interest income before provision for credit
losses........................................... 16,871 14,442 12,092 7,619 7,373
Provision for credit losses........................ 1,200 915 305 60 56
-------- -------- -------- -------- --------
Net interest income after provision for credit
losses........................................... 15,671 13,527 11,787 7,559 7,317
Non-interest income................................ 3,873 2,330 637 518 674
Non-interest expense............................... 14,267 11,158 9,198 6,151 6,090
-------- -------- -------- -------- --------
Income before income taxes......................... 5,277 4,699 3,226 1,926 1,901
Income taxes....................................... 1,222 1,326 1,251 734 717
-------- -------- -------- -------- --------
Net income......................................... $ 4,055 $ 3,373 $ 1,975 $ 1,192 $ 1,184
======== ======== ======== ======== ========
Diluted earnings per share (1)..................... $ 0.78 $ 0.59 $ 0.31
======== ======== ========
Net income before special charge (2)............... $ 2,811
========
Diluted earnings per share before special charge
(1) (2).......................................... $ 0.44
========
</TABLE>
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA--(CONTINUED)
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA, CONTINUED
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS (3):
Return on Average Assets.................................... 0.45% 0.49% 0.48% 0.50% 0.54%
Return on Average Assets before special charge (2).......... -- -- 0.68 -- --
Return on Average Equity.................................... 8.72 7.22 3.71 5.40 6.59
Return on Average Equity before special charge (2).......... -- -- 5.28 -- --
Average interest rate spread (4)............................ 1.98 2.10 2.95 3.29 3.33
Net interest margin (5)..................................... 2.01 2.14 3.01 3.39 3.45
Average interest-earning assets to average interest bearing
liabilities............................................... 103.72 104.85 113.69 109.20 107.16
Total non-interest expense to average assets (9)............ 1.58 1.56 1.93 2.65 2.75
Dividend payout ratio (1)................................... 35.91 40.31 45.91 -- --
REGULATORY CAPITAL RATIOS (6):
Tier 1 capital to average assets (7)........................ 5.37% 7.90% 9.97% 20.14% 8.46%
Tier 1 capital to Risk-adjusted assets (7).................. 10.00 12.92 20.28 34.27 13.98
Total risk adjusted capital to risk-adjusted assets (7)..... 12.46 14.54 20.98 35.35 15.33
ASSET QUALITY RATIOS (8):
Non-performing assets as a percent of total assets.......... 0.11 0.15 0.12 0.29 0.45
Non-performing loans as a percent of loans receivable....... 0.21 0.26 0.20 0.30 0.43
Allowance for credit losses as a percent of loans
receivable................................................ 0.79 0.59 0.65 0.88 1.01
Allowance for credit losses as a percent of non-performing
loans..................................................... 362.63 225.90 321.94 292.94 234.94
</TABLE>
- ------------------
(1) 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.
(2) Special charge representing the special deposit insurance assessment levied
against all SAIF member financial institutions in 1996 by the FDIC to
recapitalize its SAIF fund.
(3) All ratios are based on average monthly balances during the indicated
periods.
(4) The average interest rate spread represents the difference between the
weighted average yield on total assets and the weighted average cost of
total liabilities and equity.
(5) The net interest margin represents tax-equivalent net interest income as a
percent of average interest-earning assets.
(6) For definitions and further information relating to regulatory capital
requirements, see footnote 18 of the consolidated financial statements.
(7) Regulatory capital ratios for 1996 and years prior are calculated under OTS
guidelines, 1998 and 1997 ratios are calculated using FDIC guidelines due to
the conversion to a state chartered commercial bank.
(8) Non-performing assets consist of non-performing loans and real estate owned
(REO). Non-performing loans consist of non-accrual loans, while REO consists
of real estate acquired through foreclosure and real estate acquired by
acceptance of a deed in lieu of foreclosure.
(9) Calculated prior to a special charge, of $836,000 tax effected, representing
the special deposit insurance assessment levied against all SAIF member
financial institutions in 1996 by the FDIC to recapitalize its SAIF fund.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information, this discussion and analysis of
Patriot Bank Corp. and Subsidiaries (Patriot) contains forward-looking
statements. The forward-looking statements contained in this discussion and
analysis are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date of this report. Patriot undertakes no
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this report.
Patriot's financial results include the following significant events:
CAPITAL TRANSACTIONS. Patriot became a publicly owned company on December
1, 1995, when it issued 3,769,125 shares of common stock and raised net proceeds
of $36,652,000. On September 22, 1997, and November 21, 1996, Patriot paid
special 20% stock dividends. On May 14, 1998, Patriot distributed a 25% stock
split. For comparative purposes, per share amounts, as presented herein, have
been adjusted to reflect the stock split/dividends. During 1996, 1997 and 1998
Patriot repurchased 338,000, 1,246,000, and 538,000 shares of its common stock
at a cost of $6,892,000, $13,554,000 and $2,517,000, respectively.
LEASING ACQUISITION. On November 6, 1998, Patriot completed its
acquisition of Keystone Financial Leasing Company (KFL). KFL is a small-ticket
commercial leasing company with total assets of $43,327,000 including lease
receivables of $42,764,000. KFL was purchased for $6,258,000 in cash plus
contingent consideration based upon future revenues of KFL. The acquisition was
accounted for as a purchase. Goodwill arising from the transaction totaled
$2,267,000.
RETIREMENT. Effective June 30, 1998, Patriot's former chairman retired.
Patriot satisfied its contractual obligation related to the former chairman,
which resulted in a special non-recurring charge of $961,000.
DEPOSIT SALE. On November 21, 1997, Patriot completed the sale of
$10,350,000 of deposits and a branch office. Patriot received a 7.5% premium on
the deposits and recognized a net gain of $885,000.
TRUST PREFERRED SECURITIES. On June 5, 1997, Patriot issued $19 million of
10.30% trust preferred securities. The trust preferred securities, subject to
certain limitations, qualify as tier 1 capital for regulatory purposes.
12
<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
SUMMARY. For the year ended December 31, 1998, Patriot reported net income
of $4,055,000 or $.78 diluted earnings per share compared to net income of
$3,373,000 or $.59 diluted earnings per share for the year ended December 31,
1997. This represents an increase in net income of 20% and an increase in
diluted earnings per share of 32%. Return on average equity was 8.72% for 1998
compared to 7.22% for 1997.
NET INTEREST INCOME. Net interest income for 1998 was $16,871,000 compared
to $14,442,000 in 1997. This represents an increase of 17% and is primarily due
to an increase in average balances. Average balances increased throughout 1998
as Patriot grew its assets to more fully utilize the capital raised in the stock
conversion. Much of Patriot's asset growth resulted from the origination of
commercial loans and the acquisition of KFL. Additionally, Patriot maintained a
larger investment and mortgage-backed securities portfolio throughout 1998 than
in prior years Patriot's asset growth was funded through deposit growth and
borrowings.
As a result of the maintenance of a larger investment and mortgage-backed
securities portfolio, the funding of that portfolio with borrowings and jumbo
deposits, stock repurchases and the issuance of the trust preferred securities,
Patriot's net interest margin (net interest income on a fully tax equivalent
basis as a percentage of average interest-earning assets) decreased as
anticipated to 2.01% in 1998 from 2.14% in 1997.
Interest on loans was $35,242,000 for 1998 compared to $27,008,000 for
1997. The average balance of loans was $455,167,000 with an average yield of
7.74% compared to an average balance of $348,186,000 with an average yield of
7.76% in 1997. The increase in average balance was due to increased originations
of commercial loans and the acquisition of KFL. Also, the average balance of
mortgage loans was higher in 1998 than in 1997 because the mortgage loan
portfolio grew from $191,729,000 at December 31, 1996, to $298,755,000 at
December 31, 1997, whereas, in 1998 the mortgage loan portfolio was maintained
at just over $300,000,000 as most mortgage loan originations were sold. The
slight decrease in average yield is primarily a result of generally lower
interest rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $27,521,000 for 1998 compared to $23,048,000 for 1997. The
average balance of the investment portfolio was $417,037,000 with an average
yield of 6.84% for 1998 compared to an average balance of $336,718,000 with an
average yield of 6.96% for 1997. The increase in average balance was due to the
purchase of investment and mortgage-backed securities. The decrease in average
yield is primarily a result of the effect of generally lower interest rates on
adjustable rate securities and new securities purchases.
Interest on total deposits was $17,382,000 for 1998 compared to $13,405,000
for 1997. The average balance of total deposits was $350,262,000 with an average
cost of 4.96% for 1998 compared to an average balance of $275,811,000 with an
average cost of 4.86% for 1997. The increase in average balance was the result
of aggressive marketing of core deposits (money market, checking and savings
accounts) and an increase in Patriot's jumbo deposit program. The increase in
average yield was the result of jumbo deposits comprising a higher percentage of
total deposits. Patriot uses jumbo deposits attracted through individuals and
brokerages as an alternative to borrowings. Total brokered deposits approximated
$103,023,000 and $41,477,000 at December 31, 1998 and 1997, respectively. The
average balance of retail deposits (total deposits less jumbo deposits) was
$247,239,000 with an average cost of 4.47% for 1998 compared to an average
balance of $234,334,000 with an average cost of 4.58% for 1997. The increase in
average balance and the decrease in cost of Patriot's retail deposits was the
result of emphasis placed on core deposits and less emphasis on retail
certificates of deposit.
Interest on borrowings was $28,851,000 in 1998 compared to $22,402,000 in
1997. The average balance of borrowings was $498,124,000 with an average cost of
5.79% for 1998 compared to an average balance of $382,357,000 with an average
cost of 5.86% for 1997. The increase in average balance was due to the use of
borrowings to fund the growth in the balance sheet. The decrease in
13
<PAGE>
average cost was due to generally lower interest rates offsetting the cost of
the trust preferred securities.
SPREAD ANALYSIS. The following table sets forth Patriot's average balances
and the yields on those balances for the years ended December 31, 1998, 1997 and
1996. 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,
------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest earning deposits... $ 11,381 $ 344 3.02% $ 5,522 $ 193 3.49% $ 3,207 $ 116 3.62%
Investment and
mortgage-backed
securities(1)............. 417,037 27,521 6.84% 336,718 23,048 6.96% 165,159 11,049 6.69%
Loans receivable, net(2).... 455,167 35,242 7.74% 348,186 27,008 7.76% 234,726 18,429 7.85%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest-earning
assets.................... 883,585 63,107 7.25% 690,426 50,249 7.34% 403,092 29,594 7.34%
Non-interest-earning
assets.................... 18,236 -- -- 16,635 -- -- 7,018 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total assets............ $901,821 $63,107 7.11% $707,061 $50,249 7.16% $410,110 $29,594 7.22%
======== ======= ==== ======== ======= ==== ======== ======= ====
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Savings deposits............ $116,381 $ 3,488 2.99% $ 93,902 $ 2,632 2.80% $ 82,354 $ 2,120 2.57%
Certificates of deposits.... 233,881 13,894 5.94% 181,909 10,773 5.92% 136,010 7,775 5.72%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits.......... 350,262 17,382 4.96% 275,811 13,405 4.86% 218,364 9,895 4.53%
Borrowings(3)............... 501,605 28,854 5.76% 382,357 22,402 5.86% 136,200 7,607 5.57%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities........... 851,867 46,236 5.43% 658,168 35,807 5.44% 354,564 17,502 4.94%
Non-interest-bearing
liabilities............... 3,436 -- -- 2,188 -- -- 2,300 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities....... 855,303 46,236 5.41% 660,356 35,807 5.42% 356,864 17,502 4.90%
Equity...................... 46,518 -- -- 46,705 -- -- 53,246 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities and
equity................ $901,821 $46,236 5.13% $707,061 $35,807 5.06% $410,110 $17,502 4.27%
======== ======= ==== ======== ======= ==== ======== ======= ====
Net interest rate spread(4)... 1.98% 2.10% 2.95%
==== ==== ====
Net interest margin(5)........ 2.01% 2.14% 3.01%
Ratio of interest-earning
assets to interest-bearing
liabilities................. 103.72% 104.90% 113.69%
</TABLE>
- ------------------
(1) Includes securities available for sale and held to maturity and unamortized
discounts and premiums.
(2) Amount is net of deferred loan and lease fees, loans in process, discounts
and premiums, and allowance for credit losses and includes loans held for
sale and non-performing loans and leases for which the accrual of interest
has been discontinued.
(3) Includes short-term, long-term and trust preferred borrowings.
(4) Net interest rate spread represents the difference between the average yield
on total assets and the average cost of total liabilities and equity.
(5) Net interest margin represents the tax-equivalent net interest income
divided by average interest-earning assets. Net interest margin was
increased by .11% in 1998 and .06% in 1997 and unaffected for 1996 due to
tax equivalent calculations.
14
<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, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
VOLUME RATE NET VOLUME RATE NET
-------- ------ -------- -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits.......... 180 (29) 151 81 (4) 77
Investment and mortgage-backed
securities....................... 5,326 (853) 4,473 11,737 262 11,999
Loans.............................. 8,283 (49) 8,234 8,804 (225) 8,579
------- ----- ------- ------- ----- -------
Total interest-earning assets.... 13,789 (931) 12,858 20,622 33 20,655
------- ----- ------- ------- ----- -------
INTEREST-BEARING LIABILITIES:
Deposits........................... 3,751 226 3,977 3,023 487 3,510
Borrowings......................... 6,867 (415) 6,452 14,404 391 14,795
------- ----- ------- ------- ----- -------
Total interest-bearing
liabilities................... 10,618 (189) 10,429 17,427 878 18,305
------- ----- ------- ------- ----- -------
Net change in net interest
income........................... $ 3,171 $(742) $ 2,429 $ 3,195 $(845) $ 2,350
======= ===== ======= ======= ===== =======
</TABLE>
PROVISION FOR CREDIT LOSSES. The provision for credit losses was
$1,200,000 for 1998 compared to $915,000 for 1997. The increase in the provision
is a reflection of the growth of Patriot's loan portfolio and the higher
percentage of commercial loans and leases as a percentage of total loans. See
"Credit Quality" for a detailed discussion of Patriot's asset quality.
The following table sets forth the activity in the allowance for credit losses
for the years indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance, beginning of year................. $2,512 $1,830 $1,702 $1,720 $1,665
Charge-offs:
Residential............................. 114 17 13 76 --
Commercial.............................. 253 -- 98 -- --
Home equity and consumer................ 145 259 66 5 5
------ ------ ------ ------ ------
Total charge-offs................. 512 276 177 81 5
------ ------ ------ ------ ------
Recoveries:
Residential............................. -- 2 -- -- --
Commercial.............................. -- 31 -- -- --
Home equity and consumer................ 9 10 -- 3 4
------ ------ ------ ------ ------
Total recoveries.................. 9 43 -- 3 4
------ ------ ------ ------ ------
Net charge-offs.............................. 503 233 177 78 1
Acquired allowance........................... 878 -- -- -- --
Provision charged to operations.............. 1,200 915 305 60 56
------ ------ ------ ------ ------
Allowance, end of year....................... $4,087 $2,512 $1,830 $1,702 $1,720
====== ====== ====== ====== ======
Net charge-offs to average loans............. .11% .07% .08% .05% --%
Allowance for credit losses as a percentage
of year-end total loans.................... .79% .59% .65% .88% 1.01%
</TABLE>
NON-INTEREST INCOME. Total non-interest income was $3,873,000 for 1998
compared to $2,330,000 for 1997. The increase was primarily due to an increased
emphasis on recurring non-
15
<PAGE>
interest income including loan and deposit fees, ATM fees and mortgage banking
activities. Non-interest income in 1998 included securities gains of $1,850,000.
Non-interest income in 1997 included a gain of $885,000 recognized from the
deposit sale and securities gains of $438,000.
NON-INTEREST EXPENSE. Total non-interest expense was $14,267,000 for 1998
compared to $11,158,000 for 1997. Non-interest expense in 1998 included an
infrequent charge of $961,000 related to the retirement of Patriot's former
chairman. The increase in recurring non-interest expense was the result of
increased salary and employee benefit costs and occupancy and equipment costs,
both related to Patriot's expanded operations. Patriot's efficiency ratio was
68.77% in 1998 compared to 66.52% in 1997.
INCOME TAX PROVISION. The income tax provision was $1,222,000 for 1998
compared to $1,326,000 for 1997. The effective tax rate was 23.16% for 1998
compared to 28.22% for 1997. The decrease in the effective tax rate is the
result of Patriot's tax planning strategies which include investments in
tax-exempt securities. Also, on May 22, 1997, Patriot's primary operating
subsidiary, Patriot Bank, converted its banking charter from a federally
chartered savings bank to a state chartered commercial bank. Prior to Patriot
Bank's charter conversion, it was subject to state income taxes. Patriot Bank's
state tax expense is currently a franchise tax and, therefore, is no longer
based on income and is considered a non-interest expense.
FINANCIAL CONDITION
LOAN PORTFOLIO. Patriot's primary loan products are commercial loans and
leases, home equity loans on existing owner-occupied residential real estate,
and fixed-rate and adjustable-rate mortgage loans. Patriot also offers
residential construction loans and other consumer loans.
COMMERCIAL. Patriot originates commercial loans with an emphasis on small
businesses, professionals and entrepreneurs within Patriot's local markets. Most
of Patriot's commercial loan relationships have exposure of $500,000 or less.
Commercial loans are generally secured by real estate and personal guarantees.
As a result of the KFL acquisition, Patriot acquired $42,764,000 in small-
ticket commercial leases. The acquired portfolio is representative of Patriot's
ongoing business in which Patriot originates small-ticket commercial leases to
business located in Pennsylvania and other contiguous states. The leases are
considered financing leases for financial accounting purposes.
CONSUMER. Patriot offers variable rate (based upon prime rate) home equity
lines of credit and fixed-rate home equity loans, which are generally secured by
single-family, owner-occupied residential properties. Patriot also offers a
variety of other consumer loans, which primarily consist of installment loans
secured by automobiles, credit cards, unsecured lines of credit and other loans
secured by deposit accounts.
MORTGAGE. Patriot offers both fixed-rate and adjustable-rate mortgage
loans secured by one- to four-family residences, primarily owner-occupied,
located in Patriot's primary market area. Patriot generally underwrites its
first mortgage loans in accordance with underwriting standards set by the
Federal Home Loan Mortgage Corp. (FHLMC) and the Federal National Mortgage
Association (FNMA). Patriot also originates residential construction loans. Most
of the mortgage loans originated by Patriot are sold into the secondary markets.
Patriot generally only retains certain adjustable rate and balloon mortgages in
its portfolio.
At December 31, 1998, Patriot's total loan portfolio was $509,080,000
compared to a total loan portfolio of $422,209,000 at December 31, 1997. The
increase in the loan portfolio was primarily the result of an emphasis placed on
commercial lending relationships and the acquisition of KFL.
16
<PAGE>
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,
---------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Portfolio
Residential mortgages.......... $300,232 58.73% $294,716 69.41% $190,849 67.54%
Construction................... 5,267 1.03 4,039 0.95 3,210 1.14
Consumer Portfolio
Home equity.................... 64,807 12.67 75,439 17.77 72,480 25.65
Other consumer loans........... 4,336 0.85 3,909 0.92 2,546 0.90
Commercial Portfolio
Commercial loans............... 92,367 18.06 46,166 10.87 13,491 4.77
Commercial leases.............. 44,301 8.66 334 0.08 -- --
-------- ------ -------- ------ -------- ------
Total loans, gross............. 511,310 100.00% 424,603 100.00% 282,576 100.00%
Deferred loan fees............. (2,230) (2,394) (2,392)
Allowance for credit losses.... (4,087) (2,512) (1,830)
-------- -------- --------
Total loans, net.......... $504,993 $419,697 $278,354
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1995 1994
------------------- -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage Portfolio
Residential mortgages.......... $131,352 66.86% $108,203 63.41%
Construction................... 1,712 0.87 374 0.22
Consumer Portfolio
Home equity.................... 57,969 29.50 56,914 33.35
Other consumer loans........... 2,159 1.10 1,391 0.82
Commercial Portfolio
Commercial loans............... 3,288 1.67 3,760 2.20
Commercial leases.............. -- -- -- --
-------- ------ -------- ------
Total loans, gross........ 196,480 100.00% 170,642 100.00%
Deferred loan fees............. (2,230) (1,668)
Allowance for credit losses.... (1,702) (1,720)
-------- --------
Total loans, net.......... $192,548 $167,254
======== ========
</TABLE>
The following table details Patriot's loan originations for the years
indicated:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Mortgage.............................................. $ 98,067 $143,864 $ 76,733
Consumer.............................................. 25,428 42,227 39,794
Commercial............................................ 67,204 46,665 14,148
Commercial Leases..................................... 6,202 397 --
-------- -------- --------
Total Originations.................................... $196,901 $233,153 $130,675
======== ======== ========
</TABLE>
17
<PAGE>
LOAN MATURITY. The following table sets forth the maturity schedule for
Patriot's loan portfolio (excluding residential mortgages and consumer loans):
<TABLE>
<CAPTION>
AMOUNTS AT DECEMBER 31, 1998, MATURING
----------------------------------------------------
AFTER ONE YEAR
IN ONE YEAR THROUGH FIVE AFTER
OR LESS YEARS FIVE YEARS TOTAL
----------- -------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Maturity Schedule:
Commercial loans............................. $21,717 $52,923 $13,653 $ 88,293
Commercial leases............................ 14,443 641 29,217 $ 44,301
Residential construction loans............... 84 4,784 399 5,267
Other construction loans..................... 1,772 2,111 191 4,074
------- ------- ------- --------
Total................................... $38,016 $60,459 $43,460 $141,935
======= ======= ======= ========
Fixed rates.................................. $26,026 $56,748 $42,898 $125,672
Adjustable rates............................. 11,990 3,711 562 16,263
------- ------- ------- --------
Total................................... $38,016 $60,459 $43,460 $141,935
======= ======= ======= ========
</TABLE>
CREDIT QUALITY. Patriot's Asset Review and Credit Administration
Committees establish acceptable credit risks to be undertaken, the policies and
procedures to be used to control credit risk and the corrective actions to be
taken when credit challenges are encountered. These committees also review
credit quality on a monthly basis, classify assets in accordance with applicable
management guidelines and regulations, make recommendations to Patriot's Board
of Directors with regard to placing assets on non-accrual status, charge-offs
and write-downs and the appropriate level of credit reserves.
Patriot accrues interest on all loans until management determines that the
collection of interest is doubtful. In no event does Patriot continue accruing
interest on loans contractually past due 90 days or more. Upon discontinuance of
interest accrual, all unpaid accrued interest is reversed.
Patriot generally requires appraisals on an annual basis on foreclosed
properties. Patriot generally conducts inspections on foreclosed properties on
at least a quarterly basis.
At December 31, 1998 non-performing assets were $1,127,000 or 0.11% of
total assets compared to $1,274,000 or .15% of total assets at December 31,
1997. Patriot has controlled its level of non-performing assets by quickly
identifying problem assets and resolving them in an expedient manner. Patriot
had no restructured loans within the meaning of SFAS No. 15 and no potential
problem loans within the meaning of the Securities and Exchange Commission Guide
3 at December 31, 1998.
18
<PAGE>
The following table sets forth information regarding non-performing assets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential mortgages................... $ 494 $ 524 $ 411 $ 494 $ 498
Commercial.............................. 159 128 6 10 16
Commercial leases....................... 75 -- -- -- --
Home equity and consumer................ 212 125 151 77 215
------- ------- ------- ------- -------
Total non-accrual loans greater
than 90 days.................... 940 777 568 581 729
------- ------- ------- ------- -------
Residential mortgages................... 98 328 -- -- --
Home equity and consumer................ 31 7 -- -- --
------- ------- ------- ------- -------
Total non-accrual loans less than
90 days......................... 129 335 -- -- --
------- ------- ------- ------- -------
Total non-performing loans......... 1,069 1,112 568 581 729
REO..................................... 58 162 74 195 265
------- ------- ------- ------- -------
Total non-performing assets........ $ 1,127 $ 1,274 $ 642 $ 776 $ 994
======= ======= ======= ======= =======
Allowance for credit losses as a percent
of loans receivable................... .79% .59% .65% .88% 1.01%
Allowance for credit losses as a percent
of total non-performing loans......... 362.63 225.90 321.94 292.94 235.94
Non-performing loans as a percent of
total loans receivable................ .21 .26 .20 .30 .43
Non-performing assets as a percent of
total assets.......................... .11 .15 .12 .29 .45
</TABLE>
ALLOWANCE FOR CREDIT LOSSES. The adequacy of the allowance for credit
losses is based on management's evaluation of the risks inherent in its loan and
lease portfolio and the general economy. Management makes a quarterly
determination as to an appropriate provision from earnings necessary to maintain
an allowance for credit losses that is adequate to cover estimated losses with
respect to loans and leases receivable which are deemed probable and estimable
based on information currently known to management. The amount charged to
earnings is based upon several factors, including a continuing review of
delinquent, classified and non-accrual loans and leases, large loans and leases,
and overall portfolio quality, regular examination and review of the loan
portfolio by regulatory authorities, analytical review of loan and lease
charge-off experience, delinquency rates, other relevant historical and peer
statistical ratios, and management's judgment with respect to local and general
economic conditions and their impact on the existing loan and lease portfolio.
Although management believes the allowance is adequate to protect against future
losses arising out of its existing loan and lease portfolio, actual losses are
dependent on future events and, as such, further additions to the allowance may
be necessary. Patriot will continue to monitor and modify its allowance for
credit losses as conditions dictate. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review Patriot's
allowance for credit losses. Such agencies may require the company to make
additional provisions for estimated credit losses based upon their judgments
about information available to them at the time of their examination.
During 1998 Patriot's loan and lease portfolio grew from $422,209,000 at
December 31, 1997, to $509,080,000. Almost all of this growth was in Patriot's
commercial loan and lease portfolio. Management deemed it appropriate to add
$1,200,000 to Patriot's allowance to adequately address this growth. Included in
Patriot's loan growth was the lease portfolio acquired in the KFL acquisition
and its related credit reserves of $878,000. Management deemed this acquired
reserve to be adequate and consistent with its reserving methodology and
philosophy.
19
<PAGE>
The following table sets forth management's allocation of the allowance for
credit losses at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $1,273 31.15% 59.76% $1,253 49.88% 72.24% $ 895 48.87% 69.27%
mortgages...........
Commercial loans and
leases.............. 2,131 52.13 26.72 629 25.04 8.70 261 14.28 4.18
Home equity and
consumer............ 683 16.72 13.52 630 25.08 19.06 674 36.85 26.55
------ ------ ------ ------ ------ ------ ------ ------ ------
Total valuation
allowances........ $4,087 100.00% 100.00% $2,512 100.00% 100.00% $1,830 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential
mortgages........... $1,265 74.32% 67.73% $1,212 70.47% 63.63%
Commercial Loans and
leases.............. 33 1.94 1.67 52 3.02 2.20
Home equity and
consumer............ 404 23.74 30.60 456 26.51 34.17
------ ------ ------ ------ ------ ------
Total valuation
allowances........ $1,702 100.00% 100.00% $1,720 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at December 31, 1998,
were $30,487,000 compared to $9,014,000 at December 31, 1997. The increase in
cash and cash equivalents was primarily due to the receipt of principal
repayments on mortgage-backed securities.
SECURITIES. Investment securities consist of US Treasury and government
agency securities, corporate debt and equity securities. Mortgage-backed
securities consist of securities generally insured by either the FHLMC, FNMA or
the Government National Mortgage Association (GNMA). Collateralized mortgage
obligations consist of securities issued by the FHLMC, FNMA or private issuers.
Total investment and mortgage-backed securities at December 31, 1998, were
$416,019,000 compared to $405,641,000 at December 31, 1997. The slight increase
in investment and mortgage-backed securities was part of management's strategy
to maintain the investment portfolio at just over $400,000,000 for most of 1998,
as management chose to grow Patriot's balance sheet with commercial loans and
leases. The composition of investment and mortgage-backed securities changed
during 1998 as adjustable rate collateralized mortgages prepaid and were
replaced primarily with new purchases of fixed rate collateralized
mortgage-backed securities with average lives of less than five years.
20
<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,
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
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:
US Treasury and government agency
securities....................... $ 40,568 $ 40,699 $ 19,884 $ 20,086 $ 5,023 $ 4,990
Corporate securities............... 19,102 20,715 17,493 18,767 -- --
Equity securities.................. 60,823 63,979 48,168 52,553 23,797 24,492
Mortgage-backed securities:
FHLMC.............................. 6,122 6,157 11,287 11,501 14,582 14,709
FNMA............................... 43,554 43,470 20,163 20,254 25,118 25,124
GNMA............................... 7,114 7,206 12,592 12,871 14,498 14,751
Collateralized mortgage obligations:
FHLMC.............................. 104,751 106,256 75,085 75,784 37,928 37,639
FNMA............................... 89,855 89,294 118,778 118,844 31,654 31,502
Other.............................. 8,560 8,604 12,522 12,465 5,976 5,941
-------- -------- -------- -------- -------- --------
Total investment and
mortgage-backed securities
available for sale............ $380,449 $386,380 $335,972 $343,125 $158,576 $159,148
======== ======== ======== ======== ======== ========
HELD TO MATURITY:
Investment securities:
US Treasury and government agency
securities....................... $ 900 $ 908 $ 1,035 $ 1,034 $ 1,911 $ 1,892
Corporate securities............... 1,502 1,560 1,502 1,544 2,506 2,533
Collateralized mortgage obligations:
FHLMC.............................. 1,176 1,190 1,801 1,804 -- --
FNMA............................... 7,509 7,517 9,775 9,887 -- --
Other.............................. 18,552 18,734 48,403 48,548 68,293 68,297
-------- -------- -------- -------- -------- --------
Total investment and
mortgage-backed securities
held to maturity.............. $ 29,639 $ 29,909 $ 62,516 $ 62,817 $ 72,710 $ 72,722
======== ======== ======== ======== ======== ========
</TABLE>
21
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yield and contractual maturities of the Patriot's
investment and mortgage-backed securities as of December 31, 1998.
<TABLE>
<CAPTION>
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Treasury and government securities... $ -- --% $ -- --% $ 54 5.60%
Corporate securities...................... -- -- -- -- -- --
Equity securities......................... -- -- -- -- -- --
Mortgage-backed securities:
FHLMC..................................... 157 6.68 732 6.68 1,113 6.61
FNMA...................................... 2,964 6.45 5,501 6.42 8,438 6.42
GNMA...................................... 138 7.32 548 6.96 913 6.94
Collateralized mortgage obligations:
FHLMC..................................... 1,455 6.64 6,885 6.64 11,571 6.65
FNMA...................................... 1,305 6.48 6,148 6.48 10,150 6.49
Other..................................... 138 6.69 654 6.69 1,105 6.69
-------- ----- ------- ----- -------- -----
Total available for sale................ $ 6,157 6.53% $20,468 6.54% $ 33,344 6.55%
======== ===== ======= ===== ======== =====
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government securities... $ -- --% $ 650 5.60% $ 250 5.30%
Corporate securities...................... -- -- 1,502 6.92 -- --
Collateralized mortgage obligations:
FHLMC..................................... 1 6.70 102 6.70 173 6.70
FNMA...................................... 149 6.80 465 6.80 791 6.80
Other..................................... 250 6.51 1,791 6.88 3,054 6.89
-------- ----- ------- ----- -------- -----
Total held to maturity:................. $ 400 6.62% $ 4,510 6.70% $ 4,268 6.77%
======== ===== ======= ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
MORE THAN TEN YEARS NO STATED MATURITY TOTAL
------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Treasury and government securities... $ 40,645 6.71% $ -- --% $ 40,699 6.71%
Corporate securities...................... 20,715 8.92 -- -- 20,715 8.92
Equity securities......................... 2,620 8.97 61,359 5.52 63,979 5.66
Mortgage-backed securities:
FHLMC..................................... 4,155 6.49 -- -- 6,157 6.54
FNMA...................................... 26,567 6.55 -- -- 43,470 6.50
GNMA...................................... 5,607 6.90 -- -- 7,206 6.92
Collateralized mortgage obligations:
FHLMC..................................... 86,345 6.70 -- -- 106,256 6.69
FNMA...................................... 71,691 6.50 -- -- 89,294 6.49
Other..................................... 6,707 6.69 -- -- 8,604 6.69
-------- ----- ------- ----- -------- -----
Total available for sale................ $265,052 6.83% $61,359 5.52% $386,380 6.58%
======== ===== ======= ===== ======== =====
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government securities... $ -- --% $ -- --% $ 900 5.52%
Corporate securities...................... -- -- -- -- 1,502 6.92
Collateralized mortgage obligations:
FHLMC..................................... 900 6.70 -- -- 1,176 6.70
FNMA...................................... 6,104 6.80 -- -- 7,509 6.80
Other..................................... 13,457 6.91 -- -- 18,552 6.90
-------- ----- ------- ----- -------- -----
Total held to maturity:................. $ 20,461 6.87% $ -- --% $ 29,639 6.82%
======== ===== ======= ===== ======== =====
</TABLE>
22
<PAGE>
Investments in equity securities that have readily determinable fair values
and all investments in debt securities are classified as either held to maturity
and reported at amortized cost, available for sale and reported at fair value
with unrealized gains and losses reported in a separate component of
stockholders' equity, or trading securities and reported at fair value with
unrealized gains and losses included in earnings.
The following table represents the securities of single issuers (other than
obligations of the United States and its political subdivisions, agencies and
corporations) having an aggregate book value in excess of 10% of Patriot's
stockholder's equity which were held at December, 31 1998:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
(IN THOUSANDS)
ISSUER CARRYING VALUE FAIR VALUE
- ------ -------------- ----------
<S> <C> <C>
FHLMC Preferred Stock............................... $34,959 $36,790
FHLB Stock.......................................... $18,607 $18,607
GE Capital Mortgage Services, Inc................... $ 4,939 $ 4,963
</TABLE>
OTHER ASSETS. Premises and equipment at December 31, 1998 were $10,259,000
compared to $8,542,000 at December 31, 1997. The increase was due to the
expansion and relocation of Patriot's mortgage banking operation, the KFL
acquisition and continued investments in technology. Accrued interest receivable
at December 31, 1998 was $4,114,000 compared to $4,119,000 at December 31, 1997.
The decrease is associated with general decreases in interest rates coupled with
the purchase of zero-coupon investment securities. Other assets at December 31,
1998 were $6,988,000 compared to $813,000 at December 31, 1997. The increase is
related to receivables created by timing differences of prepayments on
investment securities and prepaid costs associated with the First Lehigh
acquisition.
DEPOSITS. Deposits are generally attracted from within Patriot's primary
market area through the offering of various deposit instruments, including
checking accounts, money market accounts, savings accounts, certificates of
deposit and retirement savings plans. Patriot also solicits jumbo deposits from
various sources.
Total deposits at December 31, 1998 were $377,796,000 compared to
$289,528,000 at December 31, 1997. $30,160,000 of that increase was the result
of aggressive marketing of money market and other transaction-based deposit
accounts. The remaining $58,108,000 of that increase came from Patriot's jumbo
deposit program. Patriot uses jumbo deposits as an alternative to borrowings.
The following table sets forth the distribution of average deposit accounts
for the periods indicated and the weighted average yield on each category of
deposit presented:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL WEIGHTED TOTAL WEIGHTED TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AVERAGE DEPOSITS YIELD AVERAGE DEPOSITS YIELD AVERAGE DEPOSITS YIELD
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market $ 62,749 17.91% 4.45% $ 42,425 15.38% 4.29% $ 33,829 15.49% 4.02%
deposits...........
Passbook deposits.... 23,772 6.79 2.42 27,149 9.84 2.61 27,444 12.57 2.38
NOW deposits......... 21,452 6.12 0.56 18,399 6.67 0.55 17,502 8.02 0.58
Demand deposits...... 8,408 2.40 0.00 5,929 2.15 0.00 3,579 1.64 0.00
Retail certificates
of deposit......... 130,858 37.37 5.78 140,432 50.92 5.77 133,969 61.35 5.71
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total retail
deposits........... 247,239 70.59 4.47 234,334 84.96 4.58 216,323 99.07 4.51
Jumbo certificates of
deposit............ 103,023 29.41 6.15 41,477 15.04 6.44 2,041 0.93 6.69
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits..... $350,262 100.00% 4.96% $275,811 100.00% 4.86% $218,364 100.00% 4.53%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
23
<PAGE>
At December 31, 1998, the Company had $96,163,000 in certificate of deposit
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<S> <C>
Three months or less....................................... $23,181
Over three through six months.............................. 10,577
Over six through 12 months................................. 14,429
Over 12 months............................................. 47,976
-------
Total.................................................... $96,163
=======
</TABLE>
BORROWINGS. Patriot utilizes borrowings as a source of funds for its
growth strategy and its asset/liability management. Patriot is eligible to
obtain advances from the Federal Home Loan Bank (FHLB) upon the security of the
FHLB common stock it owns and certain of its residential mortgages and
mortgage-backed securities, provided certain standards related to
creditworthiness have been met. FHLB advances are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member institutions
fluctuates from time to time in accordance with the policies of the FHLB.
Patriot also uses repurchase agreements as a funding source. Repurchase
agreements are generally short-term obligations collateralized by government
agency and other securities.
The following table presents certain information regarding borrowed funds:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances................... $360,198 5.25% $275,200 5.78% $210,000 5.64%
Repurchase Agreements........... 170,123 5.43 214,684 5.89 21,595 6.22
Trust Preferred................. 19,000 10.30 19,000 10.80 -- --
-------- ----- -------- ----- -------- ----
Total borrowings outstanding.... $549,321 5.48% $508,884 6.01% $231,595 5.69%
======== ===== ======== ===== ======== ====
Short-term (less than 1 year)... $235,123 5.47% $385,684 5.84% $145,595 5.72%
Long-term (over 1 year)......... 314,198 5.49% 123,200 6.55% 86,000 5.65
-------- ----- -------- ----- -------- ----
Total borrowings
outstanding............. $549,321 5.48% $508,884 6.01% $231,595 5.69%
======== ===== ======== ===== ======== ====
</TABLE>
STOCKHOLDERS' EQUITY. Total stockholders' equity was $42,260,000 at
December 31, 1998 compared to $46,533,000 at December 31, 1997. The decrease was
a result of the repurchase of common stock, cash dividends paid and a decrease
in the net unrealized gain on investment and mortgage-backed securities
available for sale 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 agreements. While
maturities and scheduled amortization of loans and investment and
mortgage-backed securities are predictable sources of funds, deposit inflows and
loan and mortgage-backed security prepayments are greatly influenced by economic
conditions, general interest rates and competition. Therefore, Patriot manages
its balance sheet to provide adequate liquidity based upon various economic,
interest rate and competitive assumptions and in light of profitability
measures.
During 1998, significant liquidity was provided by financing activities,
particularly long-term FHLB advances and deposits. Maturities of investment and
mortgage-backed securities also provided significant liquidity during 1997. The
funds provided by these activities were used to repay previous borrowings as
long-term FHLB advances and deposits were used to extend the maturity of many of
Patriot's borrowings. Funds were also invested into new loans and investment and
mortgage-backed securities, and used to fund the repurchase of Patriot's common
stock.
24
<PAGE>
At December 31, 1998, Patriot had outstanding loan commitments of
$41,674,000. Patriot anticipates that it will have sufficient funds available to
meet its loan origination commitments. Certificates of deposit which are
scheduled to mature in one year or less from December 31, 1998 totaled
$168,451,000. Based upon historical experience, Patriot expects that
substantially all of the maturing certificates of deposit will be retained at
maturity. See "Year 2000 Compliance" for a discussion regarding the possible
impact of Year 2000 issues on Patriot's liquidity.
CAPITAL RESOURCES. FDIC regulations currently require companies to
maintain a minimum leverage capital ratio of not less than 3% of tier 1 capital
to total adjusted assets and not less than 4% of risk-adjusted assets, and a
minimum risk-based capital ratio (based upon credit risk) of not less than 8%.
The FDIC requires a minimum leverage capital requirement of 3% for institutions
rated composite 1 under the CAMEL rating system. For all other institutions, the
minimum leverage capital requirement is 3% plus at least an additional 1% to 2%,
(100 to 200) basis points. At December 31, 1998, Patriot Bank's and Patriot Bank
Corp.'s capital ratios exceeded all requirements to be considered well
capitalized. The following table sets forth the capital ratios of Patriot Bank
Corp., Patriot Bank and the current regulatory requirements at December 31,
1998:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital (to risk weighted
assets)
Patriot Bank Corp.................. $60,050 12.46% $38,551 8% $48,189 10%
Patriot Bank....................... 43,553 10.15% 34,341 8% 42,926 10%
Tier I capital (to risk-weighted
assets)
Patriot Bank Corp.................. 48,184 10.00% 19,275 4% 28,913 6%
Patriot Bank....................... 38,641 9.00% 17,170 4% 25,756 6%
Tier I capital (to average assets)
Patriot Bank Corp.................. 48,184 5.37% 38,448 4% 44,848 5%
Patriot Bank....................... 38,641 5.78% 29,632 4% 33,411 5%
</TABLE>
MANAGEMENT OF INTEREST RATE RISK. The principal objective of Patriot's
interest rate risk management function is to evaluate the interest rate risk
included in certain on and off balance sheet accounts, determine the level of
risk appropriate given Patriot's business focus, operating environment, capital
and liquidity requirements and performance objectives, and manage the risk
consistent with Board approved guidelines. Through such management, Patriot
seeks to reduce the vulnerability of its net interest income to changes in
interest rates. Patriot monitors its interest rate risk as such risk relates to
its operating strategies. Patriot's Board of Directors has established an
Asset/Liability Committee comprised of senior management, which is responsible
for reviewing its asset/liability and interest rate position and making
decisions involving asset/liability considerations. The Asset/Liability
Committee meets regularly and reports trends and Patriot's interest rate risk
position to the Board of Directors.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, therefore, a negative gap theoretically would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap position would theoretically tend to result in an increase in net
interest income while a positive gap would tend to affect net interest income
adversely.
25
<PAGE>
Patriot pursues several actions designed to control its level of interest
rate risk. These actions include increasing the percentage of the loan portfolio
consisting of short-term and adjustable-rate loans through increased
originations of these loans, acquiring short-term and adjustable-rate mortgage-
backed securities, and undertaking to lengthen the maturities of deposits and
borrowings. At December 31, 1998, 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 $65,113,000 representing
a one-year cumulative "gap," as defined above, as a percentage of total assets
of negative 6.64%.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, 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, 1998, 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, 1998
-------------------------------------------------------------------------------
MORE THAN
3 MONTHS MORE THAN MORE THAN MORE THAN
3 MONTHS TO 6 MONTHS 1 YEAR TO 3 YEARS TO MORE THAN
OR LESS 6 MONTHS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
-------- --------- --------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS(1):
Interest earning deposits............ 29,443 -- -- -- -- -- 29,443
Investment and mortgage-backed
securities, net(2)(5).............. 113,703 21,215 36,615 35,326 61,782 147,378 416,019
Loans receivable, net(3)(5).......... 77,365 32,540 67,488 98,984 146,204 87,988 510,569
------- ------- ------- ------- ------- ------- -------
Total interest-earning assets.... 220,511 53,755 104,103 134,310 207,986 235,366 956,031
Non-interest-earning assets.......... 24,730 24,730
------- ------- ------- ------- ------- ------- -------
Total assets..................... 220,511 53,755 104,103 134,310 207,986 260,096 980,761
INTEREST-BEARING LIABILITIES:
Money market and passbook savings
accounts(6)........................ 9,774 9,774 19,548 36,763 3,557 17,613 97,029
Demand and NOW accounts.............. 892 892 1,783 3,566 7,132 23,908 37,363
Certificate accounts................. 58,621 41,883 67,947 41,481 23,857 9,615 243,404
Borrowings........................... 215,368 17,000 -0- 52,000 170,000 94,953 549,321
------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities.................... 284,655 69,549 89,278 133,810 204,546 145,279 927,117
Non-interest-bearing liabilities..... 11,384 11,384
Equity............................... 42,260 42,260
------- ------- ------- ------- ------- ------- -------
Total liabilities and equity..... 284,655 69,549 89,278 133,810 204,546 198,923 980,761
Interest sensitivity gap(4).......... (64,144) (15,794) 14,825 500 3,440 61,173
Cumulative interest sensitivity
gap................................ (64,144) (79,938) (65,113) (64,613) (61,173) --
Cumulative interest sensitivity gap
as a percent of total assets....... -6.54% -8.15% -6.64% -6.59% -6.24% 0.00%
Cumulative interest-earning assets as
a percent of cumulative
interest-bearing liabilities....... 77.47% 77.43% 85.32% 88.81% 92.18% 103.12%
</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 assets available for sale and held to maturity.
(3) For purposes of the gap analysis, loans receivable includes non-performing
loans and is reduced for the allowance for estimated loan losses, and
unamortized discounts and deferred loan fees.
(4) Interest sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
(5) Annual prepayment rates for loans and mortgage-backed securities range from
11% to 38%.
(6) Money market savings accounts, passbook accounts and NOW accounts are
assumed to have decay rates between 5% and 40% annually.
26
<PAGE>
In addition to gap analysis, Patriot utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate sensitivity.
Income simulation considers not only the impact of changing market interest
rates on forecasted net interest income, but also other factors such as yield
curve relationships, the volume and mix of assets and liabilities, customer
preferences and general market conditions.
Through the use of income simulation modeling Patriot has calculated an
estimate of net interest income for the year ending December 31, 1999, based
upon the assets, liabilities and off-balance sheet financial instruments in
existence at December 31, 1998. Patriot has also estimated changes to that
estimated net interest income based upon immediate and sustained changes in
interest rates ("rate shocks"). Rate shocks assume that all interest rates
increase or decrease on the first day of the period modeled and remain at that
level for the entire period. The following table reflects the estimated
percentage change in estimated net interest income for the year ending December
31, 1999.
RATE SHOCK TO INTEREST RATES % CHANGE
---------------------------- --------
+2% (11.8%)
+1% (5.5%)
-1% 2.6%
-2% 3.7%
Patriot's management believes that the assumptions utilized in evaluating
Patriot's estimated net interest income are reasonable; however, the interest
rate sensitivity of Patriot's assets, liabilities and off-balance sheet
financial instruments as well as the estimated effect of changes in interest
rates on estimated net interest income could vary substantially if different
assumptions are used or actual experience differs from the experience on which
the assumptions were based.
YEAR 2000 COMPLIANCE
STATE OF READINESS. Pursuant to its strategic business plan, Patriot has
made significant investments in new technology over the last two years. As a
result of these investments, the primary systems used by Patriot are believed to
be Year 2000 compliant. Management has substantially completed a comprehensive
program to analyze, test and proactively address all of Patriot's systems to
ensure Year 2000 compliance. Management has also substantially completed the
process of evaluating significant customer and vendor relationships as well as
liquidity, given the potential for concern among deposit customers resulting in
decreased deposit balances, to assess risks and make appropriate contingency
plans.
RISKS. Year 2000 issues result from the inability of many computer
programs or computerized equipment to accurately calculate, store or use data as
the year 2000 approaches. Banking, by its nature, is a very data processing
intensive industry. These potential shortcomings could result in a system
failure or miscalculations causing disruptions of operation, including among
other things, a temporary inability to process transactions, track important
customer information, provide convenient access to this information, or engage
in normal business operations.
CONTINGENCY PLANS. Patriot believes that the consequences of incomplete or
untimely resolution of its Year 2000 issues do not represent a known material
event or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition. If
compliance is not achieved in a timely manner by Patriot or any of its
significant related third parties, be it a supplier of services or customer, the
Year 2000 issue could possibly have a material effect on Patriot's operations
and financial position. Contingency plans are also being developed in the event
of any unanticipated interruptions in Patriots' mission critical systems.
Business continuation plans for critical business applications are being
developed. These plans include adequate staffing on site during the Year 2000
date change to quickly repair any errant applications. In addition, in the event
of any problems the Company would follow its current computer outage business
continuation plans until such problems are corrected.
27
<PAGE>
COST. The cost of the project and the date on which Patriot plans to
complete both Year 2000 modifications and system conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties. Management currently estimates the
cost of its Year 2000 plan including performing tests, documenting results and
making modifications where necessary to be approximately $145,000 of which
$46,000 has been expensed prior to December 31, 1998.
QUARTERLY DATA
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,
1998 1998 1998 1998 1997 1997 1997 1997
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income............... $16,697 $15,720 $15,571 $15,119 $14,860 $13,746 $11,323 $10,320
Total interest expense.............. 12,147 11,802 11,364 10,923 11,138 10,143 7,730 6,796
------- ------- ------- ------- ------- ------- ------- -------
Net interest income................. 4,550 3,918 4,207 4,196 3,722 3,603 3,593 3,524
Provision for credit losses......... 325 325 300 250 455 235 120 105
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for credit losses................. 4,225 3,593 3,907 3,946 3,267 3,368 3,473 3,419
Other income........................ 836 841 1,532 664 1,274 575 256 225
Other expenses...................... 3,672 3,111 4,131 3,353 3,405 2,859 2,521 2,373
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes.......... 1,389 1,323 1,308 1,257 1,136 1,084 1,208 1,271
Income tax provision................ 341 283 300 298 242 253 370 461
------- ------- ------- ------- ------- ------- ------- -------
Net income.......................... $ 1,048 $ 1,040 $ 1,008 $ 959 $ 894 $ 831 $ 838 $ 810
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share.......... $ 0.21 $ 0.20 $ 0.19 $ 0.18 $ 0.17 $ 0.15 $ 0.14 $ 0.13
Dividends per share................. $ .075 $ .070 $ .068 $ .066 $ .064 $ .062 $ .058 $ .055
Market Prices -- High............... $ 13.06 $ 16.25 $ 17.25 $ 16.80 $ 17.00 $ 15.30 $ 11.91 $ 11.33
Low................ $ 9.00 $ 11.75 $ 13.20 $ 13.41 $ 13.20 $ 11.59 $ 9.50 $ 8.59
</TABLE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
SUMMARY. For the year ended December 31, 1997, Patriot reported net income
of $3,373,000 or $.59 diluted earnings per share compared to net income of
$1,975,000 or $.31 diluted earnings per share for the year ended December 31,
1996. This represents an increase in net income of 71% and an increase in
earnings per share of 90%. Return on average equity was 7.22% for 1997 compared
to 3.71% for 1996.
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. Excluding the special charge, Patriot reported net income of $2,811,000 or
$.44 diluted earnings per share for 1996.
NET INTEREST INCOME. Net interest income for 1997 was $14,442,000 compared
to $12,092,000 in 1996. This represents an increase of 19% and is primarily due
to an increase in average balances. Average balances increased throughout 1997
as Patriot grew its assets to more fully utilize the capital raised in its stock
conversion. Much of Patriot's asset growth resulted from the origination of
commercial, consumer and mortgage loans. Additionally, Patriot purchased
investment and mortgage-backed securities.
As a result of these growth strategies, stock repurchases and the issuance
of the trust preferred securities. Patriot's net interest margin (net interest
income as a percentage of average interest-earning assets) decreased as
anticipated to 2.14% from 3.01% in 1996.
28
<PAGE>
Interest on loans was $27,008,000 for 1997 compared to $18,429,000 for
1996. The average balance of loans was $348,186,000 with an average yield of
7.76% compared to an average balance of $234,726,000 with an average yield of
7.85% for 1996. The increase in average balance is due to an emphasis placed on
commercial loans, residential mortgage loans and home equity loans during 1997.
The decrease in average yield is primarily a result of an emphasis on short-term
and adjustable-rate loans, many of which are originated with teaser rates.
Interest on Patriot's investment portfolio (investment and mortgage-backed
securities) was $23,048,000 for 1997 compared to $11,409,000 in 1996. The
average balance of the investment portfolio was $336,718,000 with an average
yield of 6.96% for 1997 compared to an average balance of $165,159,000 with an
average yield of 6.69% for 1996. The increase in average balance and the
increase in average yield was due to the purchase of higher yielding investment
and mortgage-backed securities. The majority of securities purchased in 1997
were adjustable rate collateralized mortgage obligations with interest rates
tied to one month LIBOR.
Interest on total deposits was $13,405,000 for 1997 compared to $9,895,000
for 1996. The average balance of total deposits was $275,811,000 with an average
cost of 4.86% for 1997 compared to an average balance of $218,364,000 with an
average cost of 4.53% for 1996. The increase in average balance was the result
of aggressive marketing of money market and other transaction-based deposit
accounts, the opening of two new community banking offices and an increase in
Patriot's jumbo deposit program offset somewhat by the sale of $10,350,000 of
deposits. The increase in average yield was the result of a higher percentage of
jumbo deposits offset by the emphasis on transaction-based deposit accounts.
Interests on borrowings was $22,402,000 in 1997 compared to $7,607,000 in
1996. The average balance of borrowings was $382,357,000 with an average cost of
5.86% for 1997 compared to an average balance of $136,200,000 with an average
cost of 5.57% for 1996. The increase in average balance was due to the use of
borrowings to fund the growth in the balance sheet. The increase in average cost
was due to higher balances of long-term borrowings and due to the issuance of
the trust preferred securities.
PROVISION FOR CREDIT LOSSES. The provision for loan losses was $915,000
for 1997 compared to $305,000 for 1996. The increase in the provision is a
reflection of the growth of Patriot's loan portfolio and the origination of more
commercial and consumer loans.
NON-INTEREST INCOME. Total non-interest income was $2,330,000 for 1997
compared to $637,000 for 1996. The increase was primarily due to an increased
emphasis on recurring non-interest income including loan and deposit fees, ATM
fees and mortgage banking gains. Non-interest income in 1997 also includes a
gain of $885,000 recognized from the deposit sale and net gains of $438,000
associated with the sale of investment securities.
NON-INTEREST EXPENSE. Total non-interest expense was $11,158,000 for 1997
compared to $9,198,000 for 1996. 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 and non-income
based tax expense. 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.
INCOME TAX PROVISION. The income tax provision was $1,326,000 for 1997
compared to $1,251,000 for 1996. The effective tax rate was 28.22% for 1997
compared to 38.78% for 1996. The decrease in the effective tax rate is the
result of Patriot's tax planning strategies, which include investments in
tax-exempt securities. Also, prior to Patriot Bank's charter conversion, it was
subject to state income taxes. Patriot Bank's state tax expense is now
considered a non-interest expense.
29
<PAGE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The discussion concerning the effects of interest rate changes on the
Company's estimated net interest income for the year ending December 31, 1999
set forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Management of Interest Rate Risk" in Item 7 hereof, is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of Patriot Bank Corp. (the Corporation) is responsible for
the preparation, integrity, and fair presentation of its published financial
statements. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts that are based on judgments and estimates of management.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can only provide reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the degree of
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with generally accepted accounting
principles. This assessment was based on criteria for effective internal control
over financial reporting described in "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes the Corporation maintained an
effective internal control structure over financial data, presented in
accordance with generally accepted accounting principles.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation
as safety and soundness laws and regulations.
The Corporation assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that Patriot Bank Corp. complied, in all material respects,
with the designated laws and regulations related to safety and soundness for the
year ended December 31, 1998.
/s/ Joseph W. Major /s/ Richard A. Elko
- ------------------------- --------------------------------
Joseph W. Major Richard A. Elko
Chief Executive Officer Chief Financial Officer
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Patriot Bank Corp.:
We have audited the accompanying consolidated balance sheet of Patriot Bank
Corp. and Subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The accompanying
consolidated balance sheet of the Company as of December 31, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the two year period then ended were audited by other
auditors whose report thereon dated January 21, 1998, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG LLP
January 13, 1999, except as to Note2 which is as of January 22, 1999
31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Patriot Bank Corp.
We have audited the accompanying consolidated balance sheets of Patriot Bank
Corp. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1997. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Patriot
Bank Corp. and Subsidiaries as of December 31, 1997 and the consolidated results
of their operations and their consolidated cash flows for each of the two years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
- ---------------------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
January 21, 1998
32
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 1,044 $ 2,597
Interest-earning deposits in other financial institutions... 29,443 6,417
-------- --------
Total cash and cash equivalents........................ 30,487 9,014
Securities available for sale............................... 386,380 343,125
Securities held to maturity (market value of $29,909 and
$62,817 at December 31, 1998 and 1997, respectively)...... 29,639 62,516
Loans held for sale......................................... 5,576 4,095
Loans and leases receivable, net of allowances for credit
loss of $4,087 and $2,512 at December 31, 1998 and 1997,
respectively.............................................. 504,993 419,697
Premises and equipment, net................................. 10,259 8,542
Accrued interest receivable................................. 4,114 4,119
Real estate owned........................................... 58 162
Goodwill.................................................... 2,267 --
Other assets................................................ 6,988 813
-------- --------
Total assets........................................... $980,761 $852,083
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $377,796 $289,528
FHLB Advances............................................... 360,198 275,200
Securities sold under repurchase agreements................. 170,123 214,684
Trust preferred debt securities............................. 19,000 19,000
Advances from borrowers for taxes and insurance............. 4,747 3,135
Other liabilities........................................... 6,637 4,003
-------- --------
Total liabilities...................................... 938,501 805,550
======== ========
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, none issued at December 31, 1998 and 1997,
respectively.............................................. -- --
Common stock, $0.008 par value, 10,000,000 shares
authorized, 7,034,927 and 7,033,029 shares issued at
December 31, 1998 and 1997, respectively.................. 56 56
Additional paid-in capital.................................. 60,348 59,926
Common stock acquired by ESOP, 411,352 and 437,061 shares at
cost at December 31, 1998 and 1997, respectively.......... (2,285) (2,428)
Common stock acquired by MRP, 154,116 and 200,411 shares at
amortized cost at December 31, 1998 and 1997,
respectively.............................................. (971) (1,285)
Retained earnings........................................... 4,220 1,680
Treasury stock acquired, 2,122,309 and 1,584,944 shares at
cost at December 31, 1998 and 1997, respectively.......... (22,963) (16,071)
Accumulated other comprehensive income...................... 3,855 4,655
-------- --------
Total stockholders' equity............................. 42,260 46,533
-------- --------
Total liabilities and stockholders' equity............. $980,761 $852,083
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Interest-earning deposits.............................. $ 344 $ 193 $ 116
Securities............................................. 27,521 23,048 11,049
Loans and leases....................................... 35,242 27,008 18,429
------- ------- -------
Total interest income............................... 63,107 50,249 29,594
------- ------- -------
INTEREST EXPENSE
Deposits............................................... 17,382 13,405 9,895
Short-term borrowings.................................. 16,379 15,648 5,965
Long-term borrowings................................... 12,475 6,754 1,642
------- ------- -------
Total interest expense................................... 46,236 35,807 17,502
------- ------- -------
Net interest income before provision for credit
losses.............................................. 16,871 14,442 12,092
Provision for credit losses............................ 1,200 915 305
------- ------- -------
Net interest income after provision for credit
losses.............................................. 15,671 13,527 11,787
------- ------- -------
NON-INTEREST INCOME
Service fees, charges and other operating income....... 1,406 830 526
Gain on the sale of branch deposits and facility....... -- 885 --
Gain (loss) on sale of real estate acquired through
foreclosure......................................... 1 (9) 16
Gain (loss) on sale of securities available for sale... 1,850 438 (28)
Mortgage banking activities............................ 616 186 123
------- ------- -------
Total non-interest income........................... 3,873 2,330 637
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits......................... 8,741 6,741 4,115
Occupancy and equipment................................ 2,187 1,952 978
Professional services.................................. 634 258 225
Federal deposit insurance premiums..................... 196 132 1,814
Information Services................................... 146 167 373
Advertising............................................ 552 551 397
Deposit processing..................................... 388 307 253
Other operating expenses............................... 1,423 1,050 1,043
------- ------- -------
Total non-interest expense.......................... 14,267 11,158 9,198
------- ------- -------
Income before income taxes.......................... 5,277 4,699 3,226
Income taxes........................................... 1,222 1,326 1,251
------- ------- -------
Net income.......................................... $ 4,055 $ 3,373 $ 1,975
======= ======= =======
Earning per share -- basic............................. $ 0.83 $ 0.62 $ 0.31
======= ======= =======
Earnings per share -- diluted.......................... $ 0.78 $ 0.59 $ 0.31
======= ======= =======
Dividends per share................................. $ 0.28 $ 0.24 $ 0.14
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
NUMBER OF COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
SHARES(1) STOCK CAPITAL ESOP MRP EARNINGS STOCK INCOME TOTAL
--------- ------ ---------- ------- ------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1996..................... 4,373 38 36,700 (2,714) -- 19,893 -- 193 54,110
Common stock issued....... 168 1 1,731 -- -- -- -- -- 1,732
Common stock acquired by
MRP...................... (168) -- -- -- (1,732) -- -- -- (1,732)
Amortization of MRP....... -- -- -- -- 194 -- -- -- 194
Treasury stock
purchased................ (235) -- -- -- -- -- (2,517) -- (2,517)
Stock dividend 20%........ 826 8 10,530 -- -- (10,538) -- -- --
Release of ESOP shares.... 21 -- 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..................... 4,985 $47 $49,014 $(2,571) $(1,538) $10,357 $(2,517) $ 325 $53,117
------ --- ------- ------- ------- ------- -------- ------ -------
Common stock issued....... 6 -- 102 -- -- -- -- -- 102
Common stock acquired by
MRP...................... (6) -- -- -- (102) -- -- -- (102)
Treasury stock
purchased................ (1,037) -- -- -- -- -- (13,554) -- (13,554)
Stock dividend 20%........ 789 9 10,645 -- -- (10,654) -- -- --
Release and amortization
of MRP................... 48 -- -- -- 355 -- -- -- 355
Release of ESOP shares.... 26 -- 165 143 -- -- -- -- 308
Change in unrealized gains
on securities available
for sale, net of taxes... -- -- -- -- -- -- -- 4,330 4,330
Net income................ -- -- -- -- -- 3,373 -- -- 3,373
Cash dividends paid....... -- -- -- -- -- (1,396) -- -- (1,396)
------ --- ------- ------- ------- ------- -------- ------ -------
BALANCE AT DECEMBER 31,
1997..................... 4,811 $56 $59,926 $(2,428) $(1,285) $ 1,680 $(16,071) $4,655 $46,533
------ --- ------- ------- ------- ------- -------- ------ -------
Common stock issued....... 2 -- 46 -- -- -- -- -- 46
Common stock acquired by
MRP...................... (2) -- -- -- (46) -- -- -- (46)
Treasury stock
purchased................ (538) -- -- -- -- -- (6,892) -- (6,892)
Stock split 25%........... -- -- -- -- -- -- -- -- --
Release and amortization
of MRP................... 48 -- 156 -- 360 -- -- -- 516
Release of ESOP shares.... 26 -- 220 143 -- -- -- -- 363
Change in unrealized gains
on securities available
for sale, net of taxes... -- -- -- -- -- -- -- (800) (800)
Net income................ -- -- -- -- -- 4,055 -- -- 4,055
Cash dividends paid....... -- -- -- -- -- (1,515) -- -- (1,515)
------ --- ------- ------- ------- ------- -------- ------ -------
BALANCE AT DECEMBER 31,
1998..................... 4,347 $56 $60,348 $(2,285) $ (971) $ 4,220 $(22,963) $3,855 $42,260
====== === ======= ======= ======= ======= ======== ====== =======
</TABLE>
- ------------------
(1) All per share data restated to reflect stock split.
The accompanying notes are an integral part of these statements.
35
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income................................................ $ 4,055 $ 3,373 $ 1,975
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization and accretion of
Deferred loan origination fees........................ (126) (145) (464)
Premiums and discounts................................ (1,228) (94) (39)
MRP shares............................................ 360 355 194
Goodwill.............................................. 26 -- --
Provision for credit losses............................. 1,200 915 305
Release of ESOP shares.................................. 363 308 196
(Gain) loss on sale of securities....................... (1,805) (438) 28
(Gain) loss on sale of real estate owned................ (1) 9 (16)
Write down of real estate owned......................... 97 -- --
Gain on sale of deposits................................ -- (885) --
Depreciation of premises and equipment.................. 1,027 762 259
Mortgage loans originated for sale...................... (42,988) (13,753) --
Mortgage loans sold..................................... 41,507 9,658 --
Decrease (increase) in deferred income taxes............ 315 (139) (277)
Decrease (increase) in accrued interest receivable...... 5 (1,470) (1,444)
Increase in other assets................................ (5,742) (1,134) (71)
(Decrease) increase in other liabilities................ (998) 1,563 1,077
-------- -------- --------
Net cash (used by) provided by operating activities... (3,933) (1,115) 1,723
-------- -------- --------
INVESTING ACTIVITIES
Loan originations & principal payments on loans, net.... (45,381) (142,265) (85,643)
Proceeds from the sale of securities -- available for
sale.................................................. 8,475 4,280 3,918
Proceeds from the maturity of securities -- available
for sale.............................................. 167,326 26,740 16,784
Proceeds from the maturity of securities -- held to
maturity.............................................. 32,877 10,194 5,625
Purchase of securities -- available for sale............ (216,846) (208,017) (132,012)
Purchase of securities -- held to maturity.............. -- -- (74,418)
Proceeds from sale of real estate owned................. 83 50 131
Purchase of premises and equipment...................... (2,496) (1,880) (4,533)
Purchase of leasing company............................. (6,585) -- --
Proceeds from sale of premises and equipment............ -- 300 --
-------- -------- --------
Net cash used by investing activities................. (62,547) (310,598) (270,148)
-------- -------- --------
FINANCING ACTIVITIES
Net increase in deposits................................ 87,896 60,361 37,896
Decrease from sale of deposits.......................... -- (9,462) --
(Repayment of) proceeds from short term borrowings...... (169,561) 171,089 135,595
Proceeds from long term borrowings...................... 226,415 87,200 86,000
Repayment of long term borrowings....................... (50,002) -- --
Net proceeds from trust preferred stock................. -- 19,000 --
Increase in advances from borrowers for taxes and
insurance............................................. 1,612 636 721
Cash paid for dividends................................. (1,515) (1,396) (973)
Purchase of treasury stock.............................. (6,892) (13,554) (2,517)
-------- -------- --------
Net cash provided by financing activities............. 87,953 313,874 256,722
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 21,473 2,161 (11,703)
Cash and cash equivalents at beginning of year.............. 9,014 6,853 18,556
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 30,487 $ 9,014 $ 6,853
======== ======== ========
Supplemental disclosures
Cash paid for interest on deposits...................... $ 17,367 $ 13,368 $ 9,888
Cash paid for income taxes.............................. $ 937 $ 1,982 $ 1,161
Transfers from loans to real estate owned............... $ 75 $ 167 $ 31
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net Income................................................ $4,055 $3,373 $1,975
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the
period............................................ 1,050 4,768 160
Less: Reclassification adjustment for gains included
in net income..................................... (1,850) (438) (28)
------ ------ ------
Comprehensive income (loss)............................... $3,255 $7,703 $2,107
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
Patriot Bank Corp. and Subsidiaries (Patriot). Such accounting and reporting
policies conform with generally accounting principles and predominant practices
within the financial institution industry.
Patriot, through its subsidiaries, offers a broad range of lending,
depository and related financial services to small businesses and consumers
primarily through 18 community banking offices located in Berks, Chester,
Montgomery, Northampton and Lehigh counties in Pennsylvania and through direct
mail and various electronic and telephonic means.
Patriot Bank principally competes with other banking and financial
institutions in its primary market communities. Commercial banks, savings banks,
savings and loan associations, credit unions and money market funds actively
compete for deposits and loans. Such institutions, as well as consumer finance
and insurance companies, may be considered competitors of Patriot with respect
to one or more of the services they render.
A. BASIS OF FINANCIAL PRESENTATION
The accompanying financial statements include the accounts of the parent
company, Patriot Bank Corp. and its subsidiaries: Patriot Bank and its
subsidiaries, Marathon Management Company, Patriot Investment & Insurance
Company, Patriot Commercial Leasing Company, Inc., and Patriot Investment
Company. All material intercompany balances and transactions have been
eliminated in consolidation. In preparing the consolidated financial statements,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates. The principal estimates that are particularly susceptible to
significant change in the near term relate to the allowance for possible credit
losses, mortgage servicing rights, and other real estate owned.
The evaluation of the adequacy of the allowance for credit losses includes,
among other factors, an analysis of historical loss rates, by category, applied
to current loan and lease totals. However, actual losses may be higher or lower
than historical trends, which vary. Actual losses on specified problem loans and
leases, which also are provided for in the evaluation, may vary from estimated
loss percentages, which are established based upon a limited number of potential
loss classifications.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting of Comprehensive Income," which is effective for years
beginning after December 15, 1997. This new standard requires entities
presenting a complete set of financial statements to include details of
comprehensive income. Comprehensive income consists of net income or loss for
the current period and income, expenses, gains, and losses that bypass the
income statement and are reported directly in a separate component of equity.
The required disclosure of Comprehensive Income have been presented in these
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for all periods
beginning after December 15, 1997. SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. Patriot's
1998 annual financial statements include the required disclosures for a business
that is managed as one operating segment.
38
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In February 1998, the FASB issued SFAS No. 132 , "Employer's Disclosures
about Pensions and other Postretirement Benefits." This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when FASB Statements No 97, "Employers' Accounting for
Pensions," No. 88, "Employers' Benefits," and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," were issued. This statement
requires changes in disclosures and does not effect the earnings, financial
condition, or equity of the Corporation. This statement is effective for fiscal
years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of certain exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (b) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (c) a hedge of foreign currency exposure. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier adoption is permitted. Patriot has not yet determined the impact, if
any, of this statement, including if applicable, its provisions for the
potential reclassifications of certain investment securities, on earnings,
financial condition or equity.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement
requires that after the securitizaion of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify any retained
mortgage-backed securities based on the ability and intent to sell or hold those
investments, except that a mortgage banking enterprise must classify as trading
any retained mortgage-backed securities that it commits to sell before or during
the securitization process. This statement is effective for the first fiscal
quarter beginning after December 15, 1998, with earlier adoption permitted. This
statement provides a one-time opportunity for an enterprise to reclassify, based
on the ability and intent on the date of adoption of this statement,
mortgage-backed securities and other beneficial interest retained after
securitization of mortgage loans held for sale from the trading category, except
for those with commitments in place. Patriot has not yet determined the impact,
if any, of this statement, including if applicable, its provisions for the
potential reclassifications of certain investment securities, on earnings,
financial condition or equity.
B. CASH AND CASH DUE FROM BANKS
Cash and cash equivalents are defined as cash on hand, cash items in
process of collection and amounts due from banks. Interest-earning deposits
consist of deposit accounts with the Federal Home Loan Bank (FHLB) of Pittsburgh
and deposits with other financial institutions generally having maturities of
three months or less.
39
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
C. SECURITIES
Securities for which Patriot has the intent and ability to hold to maturity
are classified as held to maturity and reported at amortized cost. Securities
expected to be held for an indefinite period of time are classified as available
for sale and are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, net of estimated
income taxes. Securities that are bought and held principally for the purpose of
selling are classified as trading and reported at fair value, with unrealized
gains and losses included in earnings. Patriot has no securities held for
trading. Gains or losses on the sales of securities are recognized at trade date
utilizing the specific identification method.
D. LOANS HELD FOR SALE
Loans held for resale consist of residential mortgage loans originated by
Patriot. They are recorded at the lower of cost or estimated fair value on an
aggregate basis.
E. LOANS AND LEASES AND ALLOWANCE FOR CREDIT LOSSES
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at unpaid principal
balances and net of deferred loan origination fees and discounts. Interest is
accrued and credited to operations based upon the principal amount of loans
outstanding. Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method over the contractual life of the loans,
adjusted for estimated prepayments based on Patriot's historical prepayment
experience.
Direct finance leases have terms ranging from three to five years. Under
direct finance lease accounting, the balance sheet includes the gross minimum
lease payments receivable, unguaranteed estimated residual values of the leased
equipment, and capitalized indirect costs, reduced by unearned lease income. The
capitalized initial direct cost incurred in underwriting and acquiring the
leases.
The lease residual values represent the proceeds from the sale of leased
equipment at the end of the initial term of the lease and are determined on the
basis of analyses prepared by Patriot based upon professional appraisals,
historical experience and industry data. Management reviews the estimated
residual values on a periodic basis, and impairments in value, if any, are
recognized as an immediate charge to income.
An allowance for credit losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks in the loan and lease portfolio. Management's periodic
evaluation of the adequacy of the allowance for credit losses is based upon
evaluation of individual loans and leases, the overall risk characteristics of
the various portfolio segments, past loss experience, current and projected
financial status and creditworthiness of its borrowers, the adequacy of
collateral, the level and nature of non-performing loans, current economic
conditions, the results of the most recent regulatory examination (which was in
September of 1998) and other relevant factors. This evaluation is inherently
subjective. While management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. In
addition, various regulatory agencies as an integral part of their examination
process, periodically review the allowance for credit losses. Such agencies may
require Patriot to recognize additions to the allowance for credit losses based
on their judgments of information which is available to them at the time of
their examinations.
40
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Impairment is based on the fair value of the collateral
when the creditor determines that foreclosure is probable.
Large groups of smaller-balance homogeneous loans are collectively
evaluated for impairment. Those loans include residential mortgage, home equity
and consumer loans. Patriot's impaired loans at and during the years ended
December 31, 1998, 1997 and 1996 were not significant.
Uncollectible interest on loans and leases that are contractually past due
ninety days or greater 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. PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost less accumulated depreciation.
Depreciation is provided for by the straight-line method over the estimated
useful lives of the assets.
G. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
On January 1, 1997 Patriot adopted 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. Adoption of this new statement did not have a material impact on
Patriot's consolidated financial position or results of operations.
H. EMPLOYEE BENEFIT PLANS
Patriot has certain employee benefit plans covering substantially all
employees. Patriot accrues costs as incurred.
I. INCOME TAXES
Deferred income taxes are determined based on the differences between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when the differences reverse. Deferred
tax expense is the result of changes in deferred tax assets and liabilities. The
principal differences between assets and liabilities for financial statement and
tax return purposes is the allowance for credit losses.
J. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common shares by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Prior periods'
earnings per share calculations have been restated to reflect the 1998 25% stock
split and the 1997 and 1996 20% stock dividends.
41
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
K. GOODWILL
Goodwill represents the excess of the purchase price over the estimated
fair value of identifiable net assets acquired through purchase acquisitions and
is included in other assets. The amortization of goodwill is on a straight-line
basis over 15 years, which is the estimated period to be benefited.
L. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on net
income.
NOTE 2 -- BUSINESS COMBINATIONS
On November 6, 1998, Patriot purchased Keystone Financial Leasing ("KFL"),
a small-ticket commercial leasing company with $43,327,000 million in total
assets. Patriot paid $6,585,000 in cash at closing and will pay additional cash
consideration based upon future revenues of KFL. Such future consideration will
not exceed $5,465,000. The acquisition was accounted for as a purchase, and
accordingly, the results of operations for KFL have been included in Patriot's
consolidated statement of income since the date of acquisition. The transaction
added $2,273,000 of tax deductible goodwill to Patriot's balance sheet. The
balance of this goodwill at December 31, 1998 was $2,247,000.
A summary of unaudited pro forma combined financial information for the
year ended December 31, 1998 as if the KFL acquisition occurred at the beginning
of 1998 is as follows:
<TABLE>
<CAPTION>
PATRIOT KFL PROFORMA
----------- ---------- -----------
<S> <C> <C> <C>
Net interest income..................... $16,871,000 $2,130,000 $19,001,000
Non-interest income..................... 3,873,000 257,000 4,130,000
Net income.............................. 4,055,000 68,000 4,123,000
Diluted earnings per share.............. .78 .01 .79
</TABLE>
Proforma information on KFL for 1997 and 1996 was not material.
On January 22, 1999, Patriot completed the acquisition of First Lehigh
Corporation ("First Lehigh"), a commercial banking company with $104,478,000 in
total assets and $93,905,000 in total deposits. Patriot issued 1,640,000 shares
of common stock for all the outstanding common and preferred stock of First
Lehigh. The transaction had a total value of $21,047,000. The acquisition was
accounted for as a purchase, and accordingly, the results of operations of First
Lehigh will be included in Patriot's consolidated statement of income from the
date of acquisition.
NOTE 3 -- RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
Patriot is required to maintain certain average reserve balances as
established by the Federal Reserve Board. The amounts of those reserve balances
for the reserve computation periods, which included December 31, 1998 and 1997,
were $905,000 and $1,583,000, respectively.
42
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 4 -- SECURITIES
The amortized cost and estimated fair value of investment and
mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Treasury and government agency
securities............................ $ 40,568 $ 176 $ 45 $ 40,699
Corporate debt securities................ 19,102 1,705 92 20,715
FHLMC Preferred Stock.................... 34,959 1,831 -- 36,790
FHLB Stock............................... 18,607 -- -- 18,607
Equity securities........................ 7,257 1,528 203 8,582
Mortgage-backed securities:
FHLMC.................................... 6,122 52 17 6,157
FNMA..................................... 43,554 171 255 43,470
GNMA..................................... 7,114 97 5 7,206
Collateralized mortgage obligations:
FHLMC.................................... 104,751 1,505 -- 106,256
FNMA..................................... 89,855 668 1,229 89,294
GE Capital Mortgage Services, Inc........ 4,939 24 -- 4,963
Other.................................... 3,621 20 -- 3,641
-------- ------ ------ --------
Total securities available for sale...... $380,449 $7,777 $1,846 $386,380
======== ====== ====== ========
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government agency
securities............................ $ 900 $ 8 $ -- $ 908
Corporate debt securities................ 1,502 58 -- 1,560
Collateralized mortgage obligations:
FHLMC.................................... 1,176 14 -- 1,190
FNMA..................................... 7,509 8 -- 7,517
Other.................................... 18,552 185 3 18,734
-------- ------ ------ --------
Total securities held to maturity........ $ 29,639 $ 273 $ 3 $ 29,909
======== ====== ====== ========
</TABLE>
43
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 4 -- SECURITIES -- (CONTINUED)
<TABLE>
<CAPTION>
1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Treasury and government agency
securities............................ $ 19,884 $ 202 $ -- $ 20,086
Commerce Bancorp, Inc. debt security..... 5,000 276 -- 5,276
Corporate debt securities................ 12,493 998 -- 13,491
FHLMC Stock.............................. 30,031 1,245 -- 31,276
FHLB Stock............................... 13,760 -- -- 13,760
Equity securities........................ 4,377 3,140 -- 7,517
Mortgage-backed securities:
FHLMC.................................... 11,287 214 -- 11,501
FNMA..................................... 20,163 185 94 20,254
GNMA..................................... 12,592 279 -- 12,871
Collateralized mortgage obligations:
FHLMC.................................... 75,085 806 107 75,784
FNMA..................................... 118,778 503 437 118,844
Securitized Asset Sales, Inc............. 4,934 -- 81 4,853
GE Capital Mortgage Services, Inc........ 7,476 24 -- 7,500
Other.................................... 112 -- -- 112
-------- ------ ---- --------
Total securities available for sale......... $335,972 $7,872 $719 $343,125
======== ====== ==== ========
HELD TO MATURITY:
Investment securities:
U.S. Treasury and government agency
securities............................ $ 1,035 $ 4 $ 5 $ 1,034
Corporate debt securities................ 1,502 42 -- 1,544
Collateralized mortgage obligations:
FHLMC.................................... 1,801 3 -- 1,804
FNMA..................................... 9,775 112 -- 9,887
Capstead Securities Corp. IV............. 6,055 24 -- 6,079
CMC Securities Corporation............... 6,377 64 -- 6,441
Other.................................... 35,971 150 93 36,028
-------- ------ ---- --------
Total securities held to maturity........... $ 62,516 $ 399 $ 98 $ 62,817
======== ====== ==== ========
</TABLE>
44
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 4 -- SECURITIES -- (CONTINUED)
The amortized cost and estimated fair value of investment and
mortgage-backed securities at December 31, 1998, 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>
Securities
Due in one year or less................ $ 400 $ 497 $ 7,414 $ 6,157
Due after one year through five
years................................ 4,510 4,580 20,245 20,468
Due after five years through ten
years................................ 4,268 4,281 32,981 33,344
Due after ten years.................... 20,461 20,551 261,486 265,052
Equity securities...................... -- -- 58,323 61,359
------- ------- -------- --------
Total securities....................... $29,639 $29,909 $380,449 $386,380
======= ======= ======== ========
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the contractual maturities. The mortgage-backed securities may mature
earlier than their contractual maturities because of principal prepayments.
Proceeds from sales of investment and mortgage-backed securities and the
realized gross gains and losses from those sales are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales............................. $8,475 $4,280 $3,918
====== ====== ======
Gross realized gains............................ 1,912 438 75
Gross realized losses........................... (62) -- (103)
------ ------ ------
Net realized gain (loss)........................ $1,850 $ 438 $ (28)
====== ====== ======
</TABLE>
Securities having an aggregate amortized cost of $3,043,388, $335,000, and
$412,000 were pledged to secure public deposits at December 31, 1998, 1997 and
1996, respectively.
45
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 5 -- LOANS AND LEASES RECEIVABLE
Loans and leases receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Mortgage Portfolio
Residential mortgages................................. $300,232 $294,716
Construction.......................................... 5,267 4,039
Consumer Portfolio
Home equity........................................... 64,807 75,439
Other consumer loans.................................. 4,336 3,909
Commercial Portfolio
Commercial loans...................................... 92,367 46,166
Commercial leases..................................... 44,301 334
-------- --------
Total loans, gross.................................... 511,310 424,603
Deferred loan origination fees........................ (2,230) (2,394)
Allowance for credit losses........................... (4,087) (2,512)
-------- --------
Total loans, net...................................... $504,993 $419,697
======== ========
</TABLE>
Patriot services a $43,100,000 portfolio of sold loans with corresponding
originated mortgage servicing rights totaling $413,000.
Patriot's loan portfolio is principally concentrated in the eastern
Pennsylvania and New Jersey geographic areas.
Activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year...................... $2,512 $1,830 $1,702
Provision for possible credit losses.............. 1,200 915 305
Acquired allowance................................ 878 -- --
Loans charged off................................. (512) (276) (177)
Recoveries........................................ 9 43 --
------ ------ ------
Balance at end of year............................ $4,087 $2,512 $1,830
====== ====== ======
</TABLE>
Non-performing loans, consisting of all loans 90 days past due and certain
other loans for which the accrual of interest has been discontinued, were
$1,069,000 and $1,112,000 at December 31, 1998 and 1997, 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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income that would have been recorded......... $152 $71 $53
Interest income recognized............................ (108) (21) (17)
---- --- ---
Interest income foregone.............................. $ 44 $50 $36
==== === ===
</TABLE>
46
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 6 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1998 1997
------------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................ -- $ 1,255 $1,255
Buildings....................................... 30-40 6,927 6,051
Furniture, fixtures and equipment............... 3-7 5,857 4,059
Leasehold improvements.......................... 15 742 655
------- ------
14,781 12,020
Less accumulated depreciation................... (4,522) (3,478)
------- ------
$10,259 $8,542
======= ======
</TABLE>
NOTE 7 -- DEPOSITS
Deposits and their average rates are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Transaction deposits..................... $ 23,961 0.58% $ 16,908 0.61%
Money market deposits.................... 74,613 4.36 51,696 4.44
Savings deposits......................... 22,416 2.39 24,510 2.38
Non-interest-bearings demand deposits.... 13,402 0.00 11,117 0.00
-------- ---- -------- ----
Total transaction, money market, savings
and demand deposits.................... 134,392 2.92 104,231 2.86
Certificates of deposit.................. 243,404 5.67 185,297 5.87
-------- ---- -------- ----
Total.................................... $377,796 4.69% $289,528 4.79%
======== ==== ======== ====
</TABLE>
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more totaled approximately $96,163,000 and $41,788,000 at
December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, Patriot
has one brokerage firm which has placed certificates of deposits at the bank,
totaling approximately $80,831,000 and $30,490,000, respectively.
At December 31, 1998 scheduled maturities of certificates of deposit were
as follows:
1999.............................................. $168,451
2000.............................................. 41,821
2001.............................................. 20,043
2002.............................................. 2,287
2003.............................................. 1,529
Thereafter........................................ 9,273
--------
$243,404
========
47
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 8 -- FHLB ADVANCES
A. SHORT TERM
Short-term advances from the FHLB have maturities of less than one year.
These advances are collateralized by FHLB stock and certain first mortgage loans
and mortgage-backed securities. Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at year-end.............................. $65,000 $171,000
Maximum amount outstanding at any month-end
during the period.............................. $68,000 $213,000
Average amount outstanding during each period.... $63,983 $155,042
Weighted average interest rate on short-term
borrowings..................................... 5.81% 5.76%
</TABLE>
B. LONG TERM
At December 31, 1998 and 1997, long-term advances from the FHLB totaling
$295,198,000 and $104,200,000 have maturities of one to ten years. These
advances are collateralized by FHLB stock and certain first mortgage loans and
mortgage-backed securities.
At December 31, 1997, the outstanding long-term borrowings mature as
follows (in thousands):
2000.............................................. $ 50,000
2001.............................................. 0
2002.............................................. 60,000
2003.............................................. 110,000
Thereafter........................................ 75,198
--------
$295,198
========
48
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 9 -- SECURITIES SOLD UNDER SHORT-TERM REPURCHASE AGREEMENTS
Patriot enters into sales of securities under agreements to repurchase.
These transactions are reflected as a liability on the accompanying Consolidated
Balance Sheets. At December 31, 1998 and 1997, all of the agreements were to
repurchase identical securities.
Short-term repurchase agreements generally have maturities of less than one
year. These repurchase agreements are collateralized by certain mortgage-backed,
agency and corporate securities. Short-term repurchase agreements are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at year-end..................................... $170,123 $214,684
Maximum amount outstanding at any month-end during the
period................................................ $242,131 $221,962
Average amount outstanding during each period........... $221,113 $115,593
Weighted average interest rate on short-term
borrowings............................................ 5.73% 5.77%
Investment and mortgage-backed securities underlying the
agreements at year-end:
Carrying value........................................ $179,534 $227,629
Estimated fair value.................................. $179,534 $227,629
</TABLE>
NOTE 10 -- TRUST PREFERRED SECURITIES
On May 29, 1997, Patriot issued $19,000,000 of 10.30% junior subordinated
debentures to Patriot Capital Trust I, a Delaware Business Trust, in which
Patriot owns all of the common equity. The trust issued $19,000,000 of preferred
securities to investors, secured by the junior subordinated debentures and the
guarantee of Patriot. Although the junior subordinated debentures will be
treated as debt of Patriot, they currently qualify for Tier I capital treatment,
subject to certain limitations, under risk-based capital guidelines of the
Federal Reserve. The Trust Preferred Securities are callable by the Company on
or after July 1, 2007, or earlier in the event the deduction of related interest
for federal income taxes is prohibited, treatment as Tier I capital is no longer
permitted or certain other contingencies arise. The Trust Preferred Securities
must be redeemed upon maturity of the debentures in 2027.
NOTE 11 -- BRANCH SALE
On November 21, 1997 Patriot completed the sale of a community banking
office and $10,350,000 of deposits from that office at a 7.5% premium. Patriot
recognized a gain from the sale of the deposits and the physical facility of
approximately $885,000.
49
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 12 -- INCOME TAXES
Applicable income taxes in the consolidated statements of income are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal....................................... $ 892 $1,301 $1,306
State......................................... 15 109 222
APIC from Stock Compensation.................. -- 55 --
------ ------ ------
Total current................................... 907 1,465 1,528
------ ------ ------
Deferred
Federal....................................... 215 (39) (277)
State......................................... 100 (100) --
------ ------ ------
Total deferred.................................. 315 (139) (277)
------ ------ ------
Applicable income taxes......................... $1,222 $1,326 $1,251
====== ====== ======
Effective tax rate.............................. 23.2% 28.2% 38.8%
====== ====== ======
</TABLE>
The income tax provision reconciled to taxes computed at the statutory
federal rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal tax expense at statutory rate............... 34.0% 34.0% 34.0%
Adjustment resulting from:
State tax, net of federal tax benefit............. -- .8 2.3
Tax-exempt interest and dividend income........... (12.2) (9.0) (1.4)
ESOP expense...................................... 1.4 1.2 0.6
Other............................................. -- (0.8) 1.3
----- ----- -----
Income taxes........................................ 23.2% 28.2% 38.8%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets
Deferred loan fees..................................... $ 92 $ 184
Allowance for credit losses............................ 1,091 854
Uncollectible interest................................. 15 18
Non-qualified pension plan............................. 12 14
MRP expense............................................ 66 66
State NOL carryovers................................... -- 100
Reserves............................................... 6 11
------- -------
Total deferred tax assets........................... $ 1,282 $ 1,247
======= =======
Deferred tax liabilities
Depreciation........................................... $ 523 $ 368
Discount accretion..................................... 217 134
Gain on sale of loans.................................. -- 48
Originated mortgage servicing rights................... 141 --
Bad debt recapture..................................... 19 --
Unrealized gain on securities available for sale....... 2,076 2,498
------- -------
Total deferred tax liabilities...................... 2,976 3,048
------- -------
Net deferred tax (liability) asset.................. $(1,694) ($1,801)
======= =======
</TABLE>
50
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 12 -- INCOME TAXES -- (CONTINUED)
Based on management's evaluation of the likelihood of realization, no
valuation allowance has been provided against deferred tax benefits.
The Small Business Job Protection Act of 1996 ("Act"), enacted on August
20,1996, provides for the repeal of the tax bad debt deduction computed under
the percentage of taxable income method. The repeal of the use of this method is
effective for tax years beginning after December 31, 1995. Prior to the change
in law, the Bank had qualified under the provisions of the Internal Revenue Code
which permitted it to deduct from taxable income an allowance for bad debts
based on 8% of taxable income.
Upon repeal, the Bank is required to recapture into income, over a six-year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The base year
tax reserves, which may be subject to recapture if the Bank ceases to qualify as
a bank for federal income tax purposes are restricted with respect to certain
distributions. The Bank's total tax bad-debt reserves at December 31, 1998, are
approximately $4,103,000, of which $4,046,000 represents the base year amount
and $57,000 is subject to recapture.
NOTE 13 -- EARNINGS PER SHARE
CAPITAL TRANSACTIONS. Patriot became a publicly owned company on December
1, 1995 when it issued 3,769,125 shares of common stock and raised net proceeds
of $36,652,000. On September 22, 1997 and November 21, 1996 Patriot paid special
20% stock dividends. On May 14, 1998 Patriot distributed a 25% stock split. For
comparative purposes, per share amounts, as presented herein, have been adjusted
to reflect the stock split/dividends. During 1996, 1997 and 1998 Patriot
repurchased 282,684, 1,302,260, and 537,365 shares of its common stock at a cost
of $6,892,000, $13,554,000 and $2,517,000, respectively.
Patriot's calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31, 1998
---------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net Income available to common
stockholders.......................... $4,055 4,916 $0.83
EFFECT OF DILUTIVE SECURITIES
Dilutive Options......................... -- 305 (.05)
------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed
conversions........................... $4,055 5,221 $0.78
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net Income available to common
Stockholders.......................... $3,373 5,438 $0.62
EFFECT OF DILUTIVE SECURITIES
Dilutive Options......................... -- 255 (.03)
------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed
conversions........................... $3,373 5,693 $0.59
====== ===== =====
</TABLE>
51
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 13 -- EARNINGS PER SHARE -- (CONTINUED)
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31, 1996
---------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net Income available to common
stockholders.......................... $1,975 6,310 $0.31
EFFECT OF DILUTIVE SECURITIES
Dilutive Options......................... -- 76 --
------ ----- -----
DILUTED EPS
Net income available to common
Stockholders plus assumed
conversions........................... $1,975 6,386 $0.31
====== ===== =====
</TABLE>
NOTE 14 -- EMPLOYEE BENEFIT PLANS
A. 401(K) PLAN
Patriot maintains a 401(k) plan covering all of its employees who have
attained age 21 and have completed at least one year of service. 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 prior
to January 1, 1997. Subsequent to January 1997 Patriot will 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. Prior to 1997, Patriot
contributed 50% of an employee's contribution, up to 6% of salary. Patriot's
contributions were $218,000, $143,000, and $35,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
B. EMPLOYEE STOCK OWNERSHIP PLAN
In 1995, Patriot established an internally leveraged Employee Stock
Ownership Plan (ESOP) for eligible employees who have completed one year of
service with Patriot or its subsidiaries. In December 1995, the ESOP borrowed
$3,015,000 from Patriot to purchase 434,000 (as adjusted for subsequent stock
dividends and stock split) newly issued shares of common stock. Patriot makes
contributions to the ESOP equal to the ESOP's debt service less any dividends
received by the ESOP. Any dividends received by the ESOP are used to pay debt
service. The ESOP shares are pledged as collateral for its debt. As the debt is
repaid, shares are released from collateral and allocated to qualifying
employees based on the proportion of debt service paid in the year. Patriot
accounts for its ESOP in accordance with Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." Accordingly, the debt of the
ESOP is recorded as debt and the shares pledged as collateral are reported as
unearned ESOP shares in the consolidated Balance Sheets. As shares are released
from collateral, Patriot reports compensation expense equal to the current
market price of the shares, and the allocated shares are included in outstanding
shares for earnings per share computations. Dividends on allocated ESOP shares
are recorded as a reduction of retained earnings; dividends on unallocated ESOP
shares are recorded as a reduction of debt and accrued interest. ESOP
compensation expense was $360,000, 308,000 and $194,000 in 1998, 1997 and 1996,
respectively. The ESOP shares as of December 31, 1998 were as follows:
Allocated shares........................ 131,000
Unreleased shares....................... 412,000
----------
Total ESOP shares....................... 543,000
==========
Fair value of unreleased shares......... $4,833,000
==========
52
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 14 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
C. STOCK-BASED COMPENSATION
Patriot maintains a Management Recognition Plan (MRP). The MRP provides
that up to 271,000 shares of common stock may be granted, at the discretion of
the Board, to key directors and officers at no cost to the individuals. Patriot
granted 241,000 shares in 1996 and 10,000 shares in 1998 in the form of
restricted stock payable over five years from the date of grant. The recipients
of the restricted stock are entitled to all voting and other stockholder rights,
except that the shares, while restricted, may not be sold, pledged or otherwise
disposed of and are required to be held in escrow. In the event the recipient
terminates association with Patriot for reasons other than death, disability or
change in control, the recipient forfeits all rights to the allocated shares
under restriction which are canceled and revert to Patriot for reissuance under
the plan. Shares acquired by the MRP were newly issued shares and were recorded
at the date of award based on the market value of shares. Shares acquired by the
MRP, which are shown as a separate component of stockholders' equity, are being
amortized to expense over the five-year vesting period. As shares are vested
during this five-year period, Patriot records compensation expense equal to the
shares being amortized. For the years ended December 31, 1998, 1997 and 1996,
$359,000, $355,000 and $194,000 were amortized to expense. At December 31, 1998,
18,000 shares were reserved for future grants under the plan.
Patriot maintains a stock option plan. Patriot's employee stock option plan
is accounted for under the intrinsic value method of APB Opinion No. 25.
Accordingly, Patriot is required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 "Accounting for Stock-Based Compensation," had been applied. The
plan permits the grant of options to employees and directors for up to 542,000
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 1998, 1997 and 1996 net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income............................. $4,055,000 $3,685,000 $3,373,000 $3,110,000
Earnings per share -- basic............ $ 0.83 $ 0.75 $ 0.62 $ 0.58
Earnings per share -- diluted.......... $ 0.78 $ 0.71 $ 0.59 $ 0.54
</TABLE>
1996
------------------------
AS REPORTED PRO-FORMA
----------- ----------
Net income............................. $1,975,000 $ 1,841000
Earnings per share -- basic............ $ 0.31 $ 0.29
Earnings per share -- diluted.......... $ 0.31 $ 0.29
53
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 14 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
A summary status of Patriot's option plans as of December 31, 1997 and 1996 and
the charges during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... 646,250 $ 7.26 637,500 $ 7.19 -- --
Granted.......................... 31,500 13.66 8,750 13.10 637,500 $ 7.19
Exercised........................ 6,800 7.19 -- -- -- --
Canceled......................... 11,450 11.29 -- -- -- --
------- ------ ------- ------ ------- ------
Outstanding at year-end.......... 659,500 $ 7.49 646,250 $ 7.26 637,500 $ 7.19
======= ====== ======= ====== ======= ======
Options exercisable at
year-end....................... 248,200 127,500 --
======= =======
Weighted average fair value of
options granted during the
year........................... $ 4.40 $ 5.34 $ 2.74
====== ====== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model as follows:
1998 1997 1996
----- ----- -----
Assumptions:
Dividend yield............................ 2.40% 2.40% 2.40%
Expected volatility....................... 34.71% 33.30% 22.90%
Risk-free interest rate................... 6.00% 6.47% 6.50%
The following table summarizes information about non-qualified options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED OUTSTANDING AT WEIGHTED
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$7.19 628,000 7.5 years $ 7.19 248,200 $ 7.19
$12.00-$15.88 31,500 9.5 years $13.66 -- $13.66
</TABLE>
D. EMPLOYEE STOCK PURCHASE PLAN
In 1998, Patriot implemented an Employee Stock Purchase Plan ("ESPP") which
permits eligible employees to purchase Patriot common stock directly from
Patriot through payroll deduction. Purchases of common stock are made at 90% of
the market value of Patriot common stock on the last day of each quarter.
Purchases are limited annually to $25,000 fair market value and shares are
issued from treasury stock. In 1998, Patriot recorded expense of $2,430 related
to the ESPP.
E. PENSION PLAN
Effective December 31, 1996, the Board of Directors approved the
termination of Patriot's non-contributory defined benefit pension plan.
Previously, the plan covered substantially all full time employees meeting
certain eligibility requirements. As a result of this termination, all
participating employees became fully vested under the plan. Distributions of the
participants' vested benefits took place in the fourth quarter of 1997. Such
distributions were in the form of cash payouts and rollovers
54
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 14 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
into Patriot's 401(k) plan. In accordance with SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Pension Plans and for
Terminated Benefits", both a settlement and curtailment had occurred. For the
year ended December 31, 1997, the loss associated with the settlement and
curtailment of this plan was not significant. No gain or loss was recognized for
the year ended December 31, 1996.
NOTE 15 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
Patriot is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers,
including commitments to extend credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated Balance Sheets. The contract or notional amounts
of those instruments reflect the extent of Patriot's involvement in particular
classes of financial instruments.
Patriot's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. Patriot
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. Unless noted otherwise, Patriot
requires collateral to support financial instruments with credit risk.
The contractual or notional amounts of outstanding loan commitments as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
VARIABLE TOTAL
FIXED RATE RATE COMMITMENTS
COMMITMENTS COMMITMENTS OUTSTANDING
----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Mortgage loans............................ $3,074 $ 705 $ 3,779
Consumer and other loans.................. 1,291 22,318 23,609
Commercial lines of credit................ -- 9,381 9,381
Commercial leases......................... 1,200 -- 1,200
Construction loans........................ 3,705 -- 3,705
------ ------- -------
$9,270 $32,404 $41,674
====== ======= =======
Financial instruments whose notional or
contract amounts exceed the amount of the
credit risk
Interest rate cap......................... -- 50,000 50,000
Interest rate floor....................... -- 50,000 50,000
</TABLE>
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.
55
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 15 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK -- (CONTINUED)
Interest rate cap and floor agreements are instruments used by Patriot to
manage its interest rate risk and serve as a cash flow hedge for certain short
term borrowings. An interest rate cap is an agreement whereby the seller of the
cap contractually agrees to pay the buyer the difference between the actual
interest rate and strike rate per the cap contract, if the actual rate is higher
than the strike rate. An interest rate floor is an agreement whereby the seller
of the floor contractually agrees to pay the buyer the difference between the
actual interest rate and the strike rate of the floor contract, if the actual
rate is lower than the strike rate. Patriot's interest rate cap and floor are
due to terminate on December 25, 2001. The index used for agreements is the one
month London Inter Bank Offering Rate (LIBOR).
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
A. LEASE COMMITMENTS
Patriot is committed to various operating leases related to branch
facilities having initial or remaining terms in excess of one year. The minimum
annual rental commitments under these leases outstanding at December 31, 1998
are as follows:
1999..................................... $ 424,589
1999..................................... 466,389
2000..................................... 485,005
2001..................................... 504,589
2002..................................... 425,527
Thereafter............................... 3,460,539
---------
5,771,638
=========
Total rental expense for all leases for the year ended December 31, 1998,
1997 and 1996 totaled $260,038, $184,516 and $54,815, respectively.
B. OTHER
Patriot is a defendant in various legal actions arising from normal
business activities. Management believes that those actions are without merit or
that the ultimate liability, if any, resulting from such actions will not have a
material adverse effect on Patriot's consolidated financial position, results of
operations, or stockholders' equity.
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Patriot is required to disclose the estimated fair value of Patriot's
assets and liabilities considered to be financial instruments. As with most
financial institutions, the majority of Patriot's assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many of
such instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction. Also, it is Patriot's
general practice and intent to hold the preponderance of its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, Patriot has used significant estimates and present value calculations
to prepare this disclosure. Changes in the assumptions or methodologies used to
estimate fair value may affect the estimated amounts.
Estimates of fair value are made at a specific point in time based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any
56
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS -- (CONTINUED)
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. For a
substantial portion of the Company's financial instruments, no quoted market
exists. Therefore, estimates of fair value are necessarily based on a number of
significant assumptions (many of which involve events outside the control of
management). Such assumptions include assessments of current economic
conditions, perceived risks associated with these financial instruments and
their counterparties, future expected loss experience, and other factors. Given
the uncertainties surrounding these assumptions, the reported fair values
represent estimates only, and therefore cannot be compared to the historical
accounting model. Use of different assumptions or methodologies are likely to
result in significantly different fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking, or other business, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill, or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of non-interest bearing demand deposits,
savings, and NOW accounts and money market deposit accounts is equal to the
carrying amount because these deposits have no stated maturity. Obviously, this
approach to estimating fair value excludes the significant benefit that results
from the low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.
Fair values have been estimated using data which management considered the
best available. Fair value of financial instruments actively traded in a
secondary market has been estimated using quoted market prices. The fair value
of loans receivable has been estimated using present value cash flow, discounted
at an interest rate that gives effect to estimated prepayment risk and credit
loss factors. Fair value of financial instrument liabilities with no stated
maturities has been estimated to equal the carrying amount. Fair value of
financial instrument liabilities with stated maturities has been estimated using
present value cash flow, discounted at a rate approximating current market rates
for similar assets and liabilities. The resulting estimated fair values and
carrying amounts at December 31, 1998 and 1997, respectively were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
ESTIMATED ESTIMATED
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents.... $ 30,487 $ 30,487 $ 9,014 $ 9,014
Investment and
mortgage-backed securities
available for sale......... 386,380 386,380 343,125 343,125
Investment and
mortgage-backed securities
held to maturity........... 29,909 29,639 62,817 62,516
Total Loans receivable
(net)................... 516,292 514,656 426,557 426,304
Financial Liabilities:
Deposits with no stated
maturities.............. 134,392 134,392 104,231 104,231
Deposits with stated
maturities.............. 247,079 243,404 185,532 185,297
Borrowings................. 546,779 549,321 516,149 508,301
</TABLE>
57
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
NOTIONAL FAIR CARRYING NOTIONAL FAIR CARRYING
AMOUNT VALUE AMOUNT AMOUNT VALUE AMOUNT
------ -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Off-balance sheet items:
Commitments to extend
credit.................. 49,663 -- -- 49,663 -- --
Caps and floors............ 50,000 (281) 237 50,000 5 317
</TABLE>
NOTE 18 -- REGULATORY MATTERS
Patriot is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on Patriot's
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Patriot must meet specific
capital guidelines that involve quantitative measures of Patriots assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Patriot's capital amounts are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Patriot Bank Corp and Patriot Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and core capital (as defined in
the regulations) to risk-weighted assets, and of core capital to adjusted
assets. Management believes, as of December 31, 1998, that Patriot meets all
capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Department
of Banking of the Commonwealth of Pennsylvania categorized Patriot Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, Patriot Bank must maintain minimum total
risk-based, core risk-based and core leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institutions category.
<TABLE>
<CAPTION>
REQUIRED TO BE
ADEQUATELY REQUIRED TO BE
ACTUAL CAPITALIZED WELL CAPITALIZED
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital (to risk weighted
assets)
Patriot Bank Corp............... $60,050 12.46% $38,551 8% $48,189 10%
Patriot Bank.................... 43,553 10.15% 34,341 8% 42,926 10%
Tier I capital (to risk-weighted
assets)
Patriot Bank Corp............... 48,184 10.00% 19,275 4% 28,913 6%
Patriot Bank.................... 38,641 9.00% 17,170 4% 25,756 6%
Tier I capital (to average assets)
Patriot Bank Corp............... 48,184 5.37% 38,448 4% 44,848 5%
Patriot Bank.................... 38,641 5.78% 29,632 4% 33,411 5%
</TABLE>
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.
58
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 18 -- REGULATORY MATTERS -- (CONTINUED)
The following schedule summarizes the actual capital balances and ratios of
Patriot Bank at December 31, 1997:
<TABLE>
<CAPTION>
REQUIRED TO BE
ADEQUATELY REQUIRED TO BE
ACTUAL CAPITALIZED WELL CAPITALIZED
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital (to risk weighted
assets)
Patriot Bank Corp............... $62,807 14.54% $34,567 8% $43,208 10%
Patriot......................... 44,100 10.77% 32,748 8% 40,936 10%
Tier I capital (to risk-weighted
assets)
Patriot Bank Corp............... 55,837 12.92% 17,283 4% 25,925 6%
Patriot......................... 41,588 10.16% 16,374 4% 24,561 6%
Tier I capital (to average assets)
Patriot Bank Corp............... 55,837 7.90% 28,282 4% 35,353 5%
Patriot......................... 41,588 6.12% 27,204 4% 34,005 5%
</TABLE>
In conformity with Patriot's charter, a "liquidation account" was
established for Patriot Bank at the time of its conversion to the stock form of
ownership. In the unlikely event of a complete liquidation of Patriot Bank,
holders of savings accounts with qualifying deposits, who continue to maintain
their savings accounts, would be entitled to a distribution from the
"liquidation account" in an amount equal to the then current adjusted savings
account balance before any liquidation distribution could be made with respect
to capital stock. The balance in the "liquidation account" was $10,792,000 at
December 31, 1998. This amount may not be utilized for the payment of cash
dividends to the holding company.
LIMITATION ON CAPITAL DISTRIBUTIONS. Dividend payments by the Bank to the
Company are subject to the Pennsylvania Banking Code of 1965 and the FDI Act.
Under the Pennsylvania Banking Code, no dividends may be paid except from
"accumulated net earnings" (generally, undivided profits). Under the FDI Act, no
dividends may be paid by an insured bank if the bank is in arrears in the
payment of any insurance assessment due to the FDIC. Under current banking laws,
the Bank would be limited to approximately $22.2 million of dividends in 1999
plus an additional amount equal to the Bank's net profit for 1999, up to the
date of any such dividend declaration.
59
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Patriot Bank Corp. is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash and cash equivalents..................... $ 16 $ 89
Loans to subsidiaries......................... 49 499
Investment in subsidiaries.................... 62,547 66,517
Other assets.................................. 649 586
------- -------
Total assets............................ $63,261 $67,691
======= =======
Liabilities and stockholders' equity
Other liabilities............................. $ 2,001 $ 2,158
Trust Preferred Securities.................... 19,000 19,000
Stockholders' equity.......................... 42,260 46,533
------- -------
Total liabilities and stockholders'
equity............................... $63,261 $67,691
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income..................................... $ 27 $ 161 $ 824
Other Income........................................ -- 5 --
------ ------ ------
Total Income................................ $ 27 166 824
Interest expense.................................... 2,231 1,187 --
Other Expense....................................... 3,397 875 531
------ ------ ------
Total Expense............................... 5,628 2,062 531
Income (loss) before income taxes and undistribute
earnings of subsidiaries.......................... (5.601) (1,896) 293
Income taxes (benefit) expense...................... (967) (527) 111
------ ------ ------
Income (loss) before undistributed earnings of
subsidiaries...................................... (4,634) (1,369) 182
Earnings of subsidiaries............................ 8,689 4,742 1,793
------ ------ ------
Net income.................................. $4,055 $3,373 $1,975
====== ====== ======
</TABLE>
60
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income..................................... $ 4,055 $ 3,373 $ 1,975
Adjustments to reconcile net income to net cash
provided by operating activities
Earnings from subsidiaries.................. (8,689) (4,742) (1,793)
Dividends from subsidiaries................. 23,600 13,615 5,000
Change in other assets...................... (63) (121) 462
Change in other liabilities................. (157) 1,564 530
MRP/ESOP Plans.............................. 879 663 390
------- ------- -------
Net cash provided by operating
activities............................ 19,625 14,352 5,739
------- ------- -------
Cash flows from investing activities
Investment in subsidiary....................... (11,741) (17,814) (20,581)
Loans to subsidiary............................ 450 (499) 18,214
------- ------- -------
Net cash used in investing activities.... (11,291) (18,313) (2,367)
------- ------- -------
Cash flows from financing activities
Net proceeds from trust preferred securities... -- 19,000 --
Cash dividends paid to stockholders......... (1,515) (1,396) (973)
Purchase of treasury stock.................. (6,892) (13,554) (2,517)
------- ------- -------
Net cash provided by financing
activities............................ (8,407) 4,050 (3,490)
Increase (decrease) in cash and cash
equivalents.................................... (73) 89 (118)
Cash and cash equivalents at beginning of year... 89 -- 118
------- ------- -------
Cash and cash equivalents at end of year......... $ 16 $ 89 $ --
======= ======= =======
</TABLE>
61
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 26, 1998, the Board of Directors of the Company engaged KPMG
LLP as the Company's independent auditors for the fiscal year ending December
31, 1998. The Company interviewed several independent accounting firms before
selecting KPMG LLP. The decision to change the Company's accountants was
recommended by the Audit Committee of the Company's Board of Directors.
The Company did not have any disagreements with the Company's former
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure during the Company's last
two fiscal years or any subsequent interim period. The prior accountant's
reports on the Company's financial statements for the years ended December 31,
1996 and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit scope, or
accounting principles.
The Company did not consult with KPMG LLP on any matter during the two
years prior to the engagement of KPMG LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 22, 1999.
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 22, 1999,
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 22, 1999.
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 22, 1999.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS.
Consolidated financial statements are omitted because the required
information is either not applicable, not required or is shown in the respective
financial statements or in the notes thereto.
2. FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules are omitted because the required information
is either not applicable, not required or is shown in the respective financial
statements or in the notes thereto.
(3) EXHIBITS
(a) The following exhibits are filed as part of this report.
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Patriot Bank Corp.
(Incorporated by reference to Exhibit 3.1 to Patriot Bank
Corp.'s Registration Statement No. 33-96530 on Form S-1.)
3.2 Bylaws of the Patriot Bank Corp. (Incorporated by reference
to Exhibit 3.2 to Patriot Bank Corp.'s Registration
Statement No. 35-96530 on Form S-1.)
10.1 Employment Agreement between Patriot Bank Corp. and Joseph
W. Major dated May 23, 1997. (Incorporated by reference to
Exhibit 10.1 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.2 Amended and Restated Employment Agreement between Patriot
Bank Corp. and Gary N. Gieringer dated June 30, 1998.***
10.3 Employment Agreement between Patriot Bank Corp. and Richard
A. Elko dated May 23, 1997. (Incorporated by reference to
Exhibit 10.3 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.4 Change in Control Agreement between Patriot Bank Corp. and
Paulette A. Strunk dated May 23, 1997. (Incorporated by
reference to Exhibit 10.4 to Patriot Bank Corp.'s Annual
Report on Form 10-K for the year ended December 31,
1997.)***
10.5 Change in Control Agreement between Patriot Bank Corp. and
Robert G. Philips dated May 23, 1997. (Incorporated by
reference to Exhibit 10.5 to Patriot Bank Corp.'s Annual
Report on Form 10-K for the year ended December 31,
1997.)***
10.6 Employment Agreement between Patriot Bank and Joseph W.
Major dated May 23, 1997. (Incorporated by reference to
Exhibit 10.6 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.7 Employment Agreement between Kevin R. Pyle and Patriot Bank
dated March 1, 1998.***
10.8 Employment Agreement between Richard A. Elko and Patriot
Bank dated May 23, 1997. (Incorporated by reference to
Exhibit 10.8 to Patriot Bank Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997.)***
10.9 Change in Control Agreement between Paulette A. Strunk and
Patriot Bank dated May 23, 1997. (Incorporated by reference
to Exhibit 10.9 to Patriot Bank Corp.'s Annual Report on
Form 10-K for the year ended December 31, 1997.)***
10.10 Change in Control Agreement between Robert G. Philips and
Patriot Bank dated May 23, 1997. (Incorporated by reference
to Exhibit 10.10 to Patriot Bank Corp.'s Annual Report on
Form 10-K for the year ended December 31, 1997.)***
10.11 The Patriot Bank Corp. 1996 Stock-Based Incentive Plan.
(Incorporated by reference to Patriot Bank Corp.'s Proxy
Statement for the 1996 Annual Meeting of Stockholders filed
April 26, 1996).***
10.12 Employment Agreement between Joni S. Naugle and Patriot Bank
dated December 1, 1998.***
21.0 Subsidiaries.
23.1 Consent of Grant Thornton LLP
23.2 Consent of KPMG LLP
27.0 Financial Data Schedule
99.0 Proxy Statement for the 1999 Annual Meeting of Stockholders
(filed herewith)
</TABLE>
- ------------------
*** Denotes a management contract or a compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K.
None.
63
<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
Dated: March 19, 1999 By /s/ JOSEPH W. MAJOR
----------------------------------
Joseph W. Major
President and Chief
Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ JAMES B. ELLIOTT Chairman of the Board March 19, 1999
- --------------------------
James B. Elliott
/s/ JOSEPH W. MAJOR President and Chief Executive March 19, 1999
- -------------------------- Officer and Director
Joseph W. Major
/s/ RICHARD A. ELKO Executive Vice President March 19, 1999
- -------------------------- and Chief Financial Officer
Richard A. Elko and Director
/s/ SAMUEL N. LANDIS Director March 19, 1999
- --------------------------
Samuel N. Landis
/s/ LARRY V. THREN Director March 19, 1999
- --------------------------
Larry V. Thren
/s/ JAMES A. BENTLEY, JR. Director March 19, 1999
- --------------------------
James A. Bentley, Jr.
/s/ JAMES G. BLUME Controller, Chief March 19, 1999
- -------------------------- Accounting Officer
James G. Blume
64
PATRIOT BANK CORP.
EMPLOYMENT AGREEMENT
AS AMENDED AND RESTATED
This AGREEMENT ("Agreement") as amended and restated effective June 30,
1998, first made effective as of December 1, 1995 and later amended and restated
as of May 23, 1997, by and between PATRIOT BANK CORP. (the "Holding Company"), a
corporation organized under the laws of Delaware, with its principal
administrative office at High and Hanover Streets, Pottstown, Pennsylvania, and
GARY N. GIERINGER (the "Executive").
WITNESSETH:
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES; RESIGNATION FROM BOARD.
(a) During the period of Executive's employment hereunder, Executive agrees
to serve as Special Senior Advisor to the Holding Company. The Executive shall
render such advisory and related services to the Holding Company as may be
reasonably requested from time to time by the Chairman of the Board or his
designee, which services shall include (i) pursuing business contacts in Berks
County, Pennsylvania, on behalf of the Holding Company and its affiliated
companies, (ii) pursuing business opportunities, generally, on behalf of the
Holding Company and its affiliated companies, and (iii) representing the Holding
Company and its affiliated companies at civic and social events in Berks County.
The parties intend for all purposes that the Executive's relationship to the
Holding Company be characterized as that of an employee, and the supervision of
his performance will be carried out consistently with such characterization.
(b) The Executive hereby resigns as a member of the Board, effective as of
the date first above written.
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2. TERM.
(a) Except as otherwise provided herein, the period of Executive's
employment under this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of sixty (60) full calendar
months thereafter.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence consistent with the policies of the Holding Company
or, where relevant, its affiliated companies, Executive shall be required to
devote not more than twenty (20) hours per week of his business time, attention,
skill, and efforts to the faithful performance of his duties hereunder;
provided, however, that, with the approval of the Board of Directors of the
Holding Company (the "Board"), as evidenced by a resolution of the Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's reasonable judgment, will not present
any conflict of interest with the Holding Company or its subsidiaries, or
materially adversely affect the performance of Executive's duties pursuant to
this Agreement.
(c) Notwithstanding anything herein contained to the contrary: (i)
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement; and (ii) nothing in this Agreement shall mandate
or prohibit a continuation of Employee's employment following the expiration of
the term of the Agreement upon such terms as the Board and the Executive may
mutually agree.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to an annualized salary from the
Holding Company of One Hundred Thousand Dollars ($100,000.00) ("Base Salary").
The Holding Company shall be under no obligation to review or increase such Base
Salary amount during the term of this Agreement. Base Salary shall include any
amounts of compensation deferred by Executive under any qualified or unqualified
plan maintained by the Holding Company. Such Base Salary shall be payable
bi-weekly. In addition to the Base Salary provided in this subsection, the
Holding Company shall
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also provide Executive, at no premium cost to Executive, with all such other
benefits as are generally provided to permanent full-time employees of the
Holding Company.
(b) The Holding Company will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent, singularly and in the
aggregate, to those in which Executive was participating or otherwise deriving
benefit from immediately prior to the beginning of the term of this Agreement;
provided, however, that the Holding Company shall not be required to include the
Executive in any bonus plan or arrangement, stock option plan, management
recognition plan, or any similar plan or arrangement maintained for the benefit
of senior executives of the Holding Company. Nothing in this subsection,
however, shall be construed as adversely affecting any vested and non-vested
rights the Executive may presently have under any plan or arrangement.
(c) In addition to the Base Salary provided for by Subsection (a) and the
benefits provided for in Subsections (a) and (b), the Holding Company shall pay
or reimburse Executive for all reasonable travel and other reasonable expenses
incurred in the performance of Executive's obligations under this Agreement and
may, but shall not be required to, provide such additional compensation in such
form and such amounts as the Board may from time to time determine. In this
regard, Executive shall be provided, upon prior request, with the use of such
Holding Company facilities and equipment as may be required to perform his
duties hereunder. The Executive shall be provided, at his option, with an
automobile expense allowance or the use of a recent model automobile, similar to
that used by the Executive as of the date hereof, which will be owned or leased
by the Holding Company or an affiliate of the Holding Company, as may be
mutually agreed upon by the Executive and the Holding Company. All reasonable
expenses associated therewith shall be borne by the Holding Company.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination during the Executive's
term of employment under this Agreement, the provisions of this section shall
apply. As used in this Agreement, an "Event of Termination" shall mean and
include any one or more of the following: (i) the termination by the Holding
Company of Executive's full-time employment hereunder for any reason (including
Termination for Disability (as defined in
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Section 6(b)), other than a Termination for Cause (as defined in Section 6(a),
(ii) prior to the occurrence of a Change in Control (as defined in Subsection
(f)), Executive's resignation from the Holding Company's employ upon (A) the
failure to continue to retain him as Special Senior Advisor to the Holding
Company, (B) a material change in Executive's function, duties, or
responsibilities with the Holding Company, which change would cause Executive's
position to become one of lesser responsibility, importance, or scope from, or
be more onerous than, the position set forth in Section 1(a), (C) a relocation
of Executive's principal place of employment by more than twenty (20) miles from
its location at the effective date of this Agreement, (D) a liquidation or
dissolution of the Holding Company, or (E) a breach of this Agreement by the
Holding Company, or (iii) concurrent with or following the occurrence of a
Change in Control, the Executive's termination of employment for any reason
other than Cause. Upon the occurrence of any event described in Subclause (A),
(B), (C), (D) or (E), Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than thirty (30)
days' prior written notice given within six (6) full calendar months after the
event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination (as defined in Section 7(b)), the Holding Company shall be obligated
to continue to pay Executive, or, in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, an amount equal
to the sum of: (i) the amount of the remaining payments (or benefits) that the
Executive would have earned if he had continued his employment with the Holding
Company during the remaining unexpired term of this Agreement based on the
Executive's Base Salary at the Date of Termination; and (ii) amounts equal to
the annual contributions that would have been made on Executive's behalf to any
employee pension benefit plans of the Holding Company during the remaining term
of this Agreement based on contributions most recently made (on an annualized
basis) prior to the Date of Termination. The amounts described in Clause (i)
shall be paid on a monthly basis (in arrears), and the amounts described in
Clause (ii) shall be paid on the anniversary dates of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company for
Executive prior to his
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termination at no premium cost to the Executive. Such coverage shall cease upon
the expiration of the otherwise remaining term of this Agreement.
(d) In the event the Executive's employment with the Holding Company
terminates for any reason other than an Event of Termination, he shall not be
entitled to any further payments or benefits hereunder (other than any payments
or benefits which have been appropriately accrued but not yet paid as of the
termination date).
(e) Notwithstanding the provisions of Subsection (b), prior to the
commencement of benefits under such subsection, the Board may, in its
discretion, elect to pay the present value of the aggregate payments required
thereunder in one lump sum. In exercising such discretion, the Board may
consider the circumstances and expressed preference of the Executive, but the
final decision shall be that of the Board. For purposes of determining the lump
sum amount, the required payments shall be discounted in the manner provided in
the Supplemental Retirement and Death Benefit Agreement being executed by the
parties concurrently herewith. In the event of the Executive's death after the
commencement of payments under Subsection (c), then, notwithstanding the
provisions of such subsection, the Board may also elect, in its discretion,
elect to pay the present value of the remaining payments in one lump sum to the
person or persons entitled thereto. The exercise of discretion and calculation
of the lump sum amount shall be effected as provided above with respect to the
Executive.
(f) For purposes of this Agreement, the term "Change in Control" shall have
the meaning ascribed to such term in Section 5 of the employment contract, dated
May 23, 1997, between the Executive and the Holding Company (the "Prior
Agreement"), which agreement is being superseded hereby.
(g) Notwithstanding anything herein to the contrary, in the case of a
Termination for Disability, the Holding Company shall be entitled to offset
against amounts due hereunder the Executive's benefits under any long-term
disability plan of the Holding Company (or an affiliate) in which he is a
participant; provided, however, that no such offset shall be permitted with
respect to any period of time after the expiration of the otherwise scheduled
term hereof, as set forth in Section 2(a).
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5. ADDITIONAL PAYMENTS UPON EXECUTION OF AGREEMENT; POTENTIAL
SUPPLEMENTAL PAYMENTS FOLLOWING A CHANGE IN CONTROL.
Concurrently with the execution and delivery of this Agreement, the Holding
Company shall pay to the Executive, in cash, the following amounts: (i)
$961,000, representing an amount to which he was entitled, immediately prior to
the execution and delivery of this Agreement, under his prior employment
agreement with the Holding Company, and in consideration of his agreeing to the
provisions of Sections 9(a) and 9(b), and (ii) $40,000, representing his bonus
entitlement for the first six months of 1998. In the event the payments made
pursuant to the preceding sentence, when aggregated with all other payments and
benefits made to the Executive (including those under Section 4), become subject
to the excise tax provisions of Section 4999 of the Internal Revenue Code of
1986, as amended, then, notwithstanding the provisions of Section 11 of this
Agreement, he shall be entitled to the benefits set forth in Section 6 of the
Prior Agreement.
6. TERMINATION FOR CAUSE OR DISABILITY.
(a) The term "Termination for Cause" shall mean termination because of (i)
a material loss to the Holding Company or one of its affiliates caused by
Executive's personal dishonesty, willful misconduct, breach of fiduciary duty
involving personal profit, or intentional failure to perform stated duties, (ii)
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), (iii) the issuance of a final cease and desist order, or (iv)
a material breach of any provision of this Agreement. Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for Cause
unless and until (i) there shall have been delivered to him a Notice of
Termination which shall include a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail, and (ii) in the case of conduct that can be
cured, thirty (30) days have elapsed without the Executive effecting such cure
and, if applicable, reimbursing the Holding Company and its affiliates for any
material losses.
(b) The term "Termination for Disability" shall mean
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termination following the occurrence of the Executive's "disability" qualifying
him for benefits under the long-term disability plan of the Holding Company (or
an affiliate) in which he is then a participant.
7. NOTICE, ETC.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, the term "Notice of Termination" shall mean a written notice
which shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) The term "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the case of a Termination for Cause or
Disability, shall not be less than thirty (30) days from the date such Notice of
Termination is given); provided, however, that if a dispute exists regarding the
Executive's termination, the "Date of Termination" shall be determined in
accordance with Subsection (c).
(c) If, within thirty (30) days after any Notice of Termination is given by
the Holding Company, the Executive notifies the Holding Company that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement of
the parties, by a binding arbitration award, or by a final judgment, order or
decree of a court of competent jurisdiction (the time for appeal therefrom
having expired and no appeal having been perfected), provided that the Date of
Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the Executive pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Holding Company will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, Base Salary) and continue him, to the extent permitted by law, as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the dispute is finally
resolved in accordance with this Agreement. In the event the dispute is resolved
adversely to the Executive, he shall be required to reimburse the Holding
Company (with
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interest at the short-term applicable federal rate, as determined under Section
1274 of the Internal Revenue Code of 1986, as amended, in effect on the date of
termination of employment) for the payment of interim Base Salary, benefits and
other amounts paid or provided, as provided in the document or order finally
settling or adjudicating the matter. Amounts paid under this section are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
8. POST-TERMINATION OBLIGATIONS.
(a) To the extent relevant, all payments and benefits to Executive under
this Agreement shall be subject to Executive's compliance with this section and
Section 9 for one (1) full year after the earlier of the expiration of this
Agreement or termination of Executive's employment with the Holding Company.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Holding Company as may reasonably be required by the Holding
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party. Such assistance shall be provided at
no cost to the Holding Company, except for the reimbursement for out-of-pocket
expenses of the Executive.
9. COVENANT NOT TO COMPETE; NONSOLICITATION; NONDISCLOSURE OF
HOLDING COMPANY BUSINESS.
(a) The Executive hereby acknowledges and recognizes the highly competitive
nature of the business of the Holding Company and its subsidiaries and
accordingly agrees that, except in the case of Termination for Cause, during and
for the applicable period described in Section 8(a) the Executive will not:
(i) be engaged, directly or indirectly, either for his own account or
as agent, consultant, employee, partner, officer, director, proprietor,
investor (except as an investor owning less than 5% of the stock of a
publicly owned company) or otherwise of, any person, firm, corporation, or
enterprise engaged, in (A) the banking or financial services industry, or
(B) any other activity in which the Holding Company or any of its
majority-owned subsidiaries is engaged during the term of this Agreement,
in either case in any county in which, at any time during the term of this
Agreement or at the date of termination of
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the Executive's employment, a branch, office or other facility of the
Holding Company or a majority-owned subsidiary is located, or in any county
contiguous to such a county, including contiguous counties located outside
of the Commonwealth of Pennsylvania (the "Non-Competition Area"); and
(ii) provide financial or other assistance to any person, firm,
corporation, or enterprise engaged in (A) the banking or financial services
industry, or (B) any other activity in which the Holding Company or any of
its majority-owned subsidiaries is engaged during the term of this
Agreement, in the Non-Competition Area.
(b) It is expressly understood and agreed that, although the Executive and
the Holding Company consider the restrictions contained in Subsection (a)
reasonable for the purpose of preserving for the Holding Company and its
subsidiaries their goodwill and other proprietary rights, if a final judicial
determination is made by a court having jurisdiction that the time or territory
or any other restriction contained in Subsection (a) is an unreasonable or
otherwise unenforceable restriction against the Executive, the provisions of
Subsection (a) will not be rendered void but will be deemed amended to apply as
to such maximum time and territory and to such other extent as such court may
judicially determine or indicate to be reasonable.
(c) Without the prior consent of the Holding Company, at no time during the
period described in Section 8(a) shall the Executive directly or indirectly
solicit or hire any person who was at any time during the term of this Agreement
an employee of the Holding Company or any of its majority-owned subsidiaries,
nor shall the Executive (if relevant) encourage or induce any such person to
terminate his or her employment relationship with the Holding Company or any
such subsidiary.
(d) Executive recognizes and acknowledges that the business activities,
business plans and other confidential information of the Holding Company and its
subsidiaries as they may exist from time to time, are valuable, special and
unique assets of the business of the Holding Company and its subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities or
plans, or any confidential information, of the Holding Company and its
subsidiaries to any person, firm, corporation, or other entity for any reason or
purpose whatsoever
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unless expressly authorized by the Board or required by law, or unless knowledge
thereof is otherwise in the public domain through no fault of the Executive.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business activities or plans, or confidential
information, of the Holding Company.
(e) In the event of a breach or threatened breach by the Executive of the
provisions of this section, the Holding Company will be entitled to an
injunction restraining Executive from violating or continuing to violate the
provisions of Subsection (a), (c) or (d), as applicable. Nothing herein will be
construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
10. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company.
11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company, or
any predecessor or affiliate of the Holding Company, and Executive, except that
this Agreement shall not affect or operate to reduce any vested benefit or
compensation inuring to the Executive of a kind elsewhere provided. No provision
of this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement. Nothing herein shall be construed as precluding the Executive's
continued right to vest in contingent benefits in existence on the effective
date of this Agreement, provided he otherwise satisfies the vesting requirements
of the relevant plan, contract or arrangement. Concurrently with the execution
of this Agreement, the Holding Company and the Executive are executing a
Supplemental Retirement and Death Benefit Agreement. Executive's entitlement to
the benefits thereunder shall not be affected by this Agreement, and entitlement
to such benefits shall be determined solely by reference to the provisions
contained therein.
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12. NO ATTACHMENT; BINDING EFFECT.
(a) Except as required by law, no right to receive payments or benefits
under this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null and void.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and permitted
assigns.
13. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only
as to the specific term or condition waived and shall not constitute a waiver
of such term or condition for the future as to any act other than that
specifically waived.
14. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall, to the full extent consistent with
law, continue in full force and effect.
15. HEADINGS FOR REFERENCE ONLY.
The headings of the sections herein are included solely for convenience of
reference and shall not control the meaning or interpretation of any of the
provisions of this Agreement.
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16. GOVERNING LAW.
This Agreement shall be governed by the domestic internal laws of the
Commonwealth of Pennsylvania, unless otherwise specified herein.
17. ARBITRATION, ETC.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three (3) arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Holding Company's principal
administrative office in accordance with the rules of the American Arbitration
Association then in effect. Unless otherwise agreed upon by the parties, such
arbitrators shall be chosen as provided by such rules. Judgment may be entered
on the arbitrators' award in any court having jurisdiction; provided, however,
that Executive shall be entitled to seek specific performance of his right to be
paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement. In the event any
dispute or controversy arising under or in connection with Executive's
termination is resolved in favor of the Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled, to the extent not
already paid or provided, to the payment of all back-pay, including Base Salary,
benefits and any other amounts due Executive under this Agreement. Interest
thereon shall be paid as provided in the determination of the arbitrators.
18. PAYMENT OF COSTS AND LEGAL FEES.
In the event a dispute or controversy arising under or in connection with
Executive's termination is submitted to arbitration as provided in Section 17,
Executive shall be entitled to the payment of all reasonable legal fees and
related expenses paid or incurred by him in resolving such dispute or
controversy, unless the arbitrators determine that his claim is completely
without merit.
19. INDEMNIFICATION.
The Holding Company shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities
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reasonably incurred by him in connection with or arising out of any action, suit
or proceeding in which he may be involved by reason of his having been a
director or officer of the Holding Company or an affiliate thereof (whether or
not he continues to be a director or officer at the time of incurring such
expenses or liabilities), such expenses and liabilities to include, but not be
limited to judgments, court costs and attorneys' fees and the cost of reasonable
settlements. In no event shall coverage or indemnification be less than the
rights granted to any director or officer whose status as such has terminated
prior to the date hereof.
20. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Holding Company to expressly and
unconditionally assume and agree to perform the Holding Company's obligations
under this Agreement, in the same manner and to the same extent that the Holding
Company would be required to perform if no such succession or assignment had
taken place.
IN WITNESS WHEREOF, PATRIOT BANK CORP. has caused this Amended and Restated
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer for its directors, and Executive has signed this Agreement,
on the date and year first above written.
PATRIOT BANK CORP.
By____________________________
Joseph W. Major for the
Entire Board of Directors
[CORPORATE SEAL] Attest: __________________________
(Assistant) Secretary
WITNESS:
- ---------------------- ------------------------------
Gary N. Gieringer
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PATRIOT BANK
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of March 1, 1998, by and among Patriot
Bank (the "Bank"), a state chartered bank, with its principal administration
office at High and Hanover Streets, Pottstown, Pennsylvania, and Kevin R. Pyle
("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement;
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
Senior Team Leader of Commercial Relationships of the Bank. Executive shall
render administrative and management services to the Bank such as are
customarily performed by persons situated in a similar executive capacity.
During said period, Executive also agrees to serve, if elected as an officer of
the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter ("term").
Commencing on the first anniversary date of this Agreement and continuing on
each anniversary thereafter, the disinterested members of the board of directors
of the Bank ("Board") may extend the Agreement for an additional year such that
the remaining term of the Agreement shall be three (3) years unless the
Executive elects not to extend the term of this Agreement by giving written
notice in accordance with Section 8 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to renew the Agreement and the rationale and results thereof shall be
included in the minutes of the Board's meeting. The Board shall give notice to
the Executive as soon as possible after such review as to whether the
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Agreement is to be extended; however, if Executive has not received a Notice of
Termination from the Board, pursuant to Section 8 hereof, at least thirty (30)
days prior to the end of the annual anniversary date of the Agreement, this
Agreement is deemed to be extended for an additional twelve (12) months.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Bank in participation in community and civic
organizations; provided, however, that, during his business time and with
approval of the Board, as evidenced by a resolution of such Board, from time to
time, Executive may serve, or continue to serve, on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which
in such Board's judgment, will not present any conflict of interest with the
Bank, or materially affect the performance of Executive's duties pursuant to
this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Bank may be terminated by the Bank or the Executive during the term of
this Agreement, subject to the terms and conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of Seventy-Five
Thousand Dollars ($75,000) per year ("Base Salary"). Base Salary shall include
any amounts of compensation deferred by Executive under any qualified or
unqualified plan maintained by the Bank. Such Base Salary shall be payable
bi-weekly. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Board or by a Committee of the Board, delegated such responsibility by the
Board. The Committee or the Board may increase Executive's Base Salary. Any
increase in Base Salary shall become the "Base Salary" for purposes of this
Agreement. In addition to the Base Salary provided in this Section 3(a), the
Bank shall also provide Executive, at no premium cost to Executive, with all
such other benefits as are provided uniformly to permanent full-time employees
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of the Bank, or provided uniformly to senior executives and key management
employees only.
(b) The Executive shall be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, health and
accident plans, medical coverage or any other employee benefit plan or
arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Bank in which Executive is eligible to participate. Nothing paid
to the Executive under any such plan or arrangement will be deemed to be in lieu
of other compensation to which the Executive is entitled under this Agreement,
nor will it be deemed to be paid in satisfaction of the Base Salary.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Bank shall pay or reimburse Executive for all reasonable travel and other
reasonable expenses incurred by Executive performing his obligations under this
Agreement and may provide such additional compensation in such form and such
amounts as the Board may from time to time determine. The Executive shall be
provided, at his option, with an automobile expense allowance or the use of a
recent model automobile which will be owned or leased by the Bank, as may be
mutually agreed by the Executive and the Bank. All reasonable expenses
associated therewith shall be borne by the Bank.
(d) In addition to the Base salary and other compensation and reimbursement
set forth in paragraphs (a), (b) and (c) of this Section 3, Executive shall be
paid an annual bonus determined by Executive's achievement of specific goals set
forth by the Board of Directors tied to financial production.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
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termination by the Bank or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a) hereof, or Termination for Cause, as defined in Section 7 hereof; (ii)
Executive's resignation from the Bank's employ upon any (A) failure to elect or
reelect or to appoint or reappoint Executive as Vice President and Senior
Commercial Lender, unless consented to by the Executive, (B) a material change
in Executive's function, duties or responsibilities, which change would cause
Executive's position to become one of lesser responsibility, importance or scope
from the position and attributes thereof described in Section 1 above, unless
consented to by Executive, (C) a relocation of Executive's principal place of
employment by more than 20 miles from its location at the effective date of this
Agreement, unless consented to by the Executive, (D) a material reduction in the
benefits and perquisites to the Executive from those being provided as of the
effective date of this Agreement, unless consented to by the Executive, (E) a
liquidation or dissolution of the Bank or Holding Company, (F) breach of this
Agreement by the Bank, or (iii) the failure or refusal of the Bank and/or
Holding Company to extend this Agreement pursuant to Section 2(a) above. Upon
the occurrence of any event described in clauses (A), (B), (C), (D), (E) or (F),
above, Executive shall have the right to elect to terminate his employment under
this Agreement by resignation upon not less than sixty (60) days prior written
notice given within six (6) full months after the event giving rise to said
right to elect.
(b) Upon a Event of Termination, Executive shall be entitled to the
benefits provided in Section 5(c) and (d) below, and such benefits shall not be
reduced in the event that Executive obtains other employment following
termination of his employment hereunder.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Patriot Bank Corp. (the "Holding Company") shall mean an event of a nature that:
(i) would be required to be reported in response to Item 1 of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or (ii)
results in a Change in Control of the Bank or the Holding Company within the
meaning of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit
Insurance Act and the Rules and Regulations promulgated by the Office of Thrift
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Supervision ("OTS") or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Bank or the Holding Company
representing twenty-five percent (25%) or more of the Bank's or Holding
Company's outstanding voting securities or right to acquire such securities
except for any voting securities of the Bank purchased by any employee benefit
plan of the Bank or the Holding Company and any voting securities purchased by
the Holding Company, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, shall be, for purposes of this
clause (B), considered as though he were a member of the Incumbent Board, or (C)
a plan of reorganization, merger, consolidation, sale of all or substantially
all the assets of the Bank or the Holding Company or similar transaction occurs
in which the Bank or Holding Company is not the resulting entity; provided,
however, that such an event listed above will be deemed to have occurred or to
have been effectuated upon the receipt of all required regulatory approvals not
including the lapse of any statutory waiting periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any occurrence, under the control of the Bank's or Holding
Company's successor in control, set forth in Section 4(a)(ii)(A) through (F) and
(iii), unless such termination is because of Executive's Termination for Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
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the greater of: (1) the payments due for the remaining term of the Agreement; or
(3) three times Executive's average annual compensation for the five (5) most
recent taxable years that Executive has been employed by the Bank or such lesser
number of years in the event that Executive shall have been employed by the Bank
for less than five (5) years. Such average annual compensation shall include
Base Salary, commissions, bonuses, contributions on Executive's behalf to any
pension and/or profit sharing plan, severance payments, retirement payments,
directors or committee fees, fringe benefits paid or to be paid to the Executive
in any such year and payment of any expense items without accountability or
business purposes or that do not meet the Internal Revenue Service requirements
for deductibility by the Bank; provided, however, that any payment under this
provision and subsection 5(d) below shall not exceed three (3) times the
Executive's average annual compensation. In the event the Bank is not in
compliance with its minimum capital requirements or if such payments would cause
the Bank's capital to be reduced below its minimum regulatory capital
requirements, such payments shall be deferred until such time as the Bank or
successor thereto is in capital compliance. At the election of the Executive,
which election is to be made prior to a Change in Control, such payments shall
be made in a lump sum as of the Executive's Date of Termination. In the event
that no election is made, payment to the Executive will be made in approximately
equal installments on a monthly basis over a period of thirty-six (36) months
following the Executive's termination. Such payments shall not be reduced in the
event Executive obtains other employment following termination of employment.
(d) Upon the executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his severance at no premium cost to the Executive, except to
the extent that such coverage may be changed in its application for all Bank
employees on a non-discriminatory basis. Such coverage and payments shall cease
upon the expiration of thirty-six (36) months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS.
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
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under Section 28OG of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is One Dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount," as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR CAUSE.
(a) The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of the resolution duly adopted by the affirmative vote of not
less than a majority of the members of the Board at a meeting of the Board
called and held for that purpose (after reasonable notice to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good-faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Except as provided in Section 7(b) hereof, Executive shall not have
the right to receive compensation or other benefits for any period after the
Date of Termination. During the period beginning on the date of the Notice of
Termination for Cause pursuant to Section 8 hereof through the Date of
Termination, any stock options and related limited rights granted to Executive
under any stock option plan shall not be exercisable nor shall any unvested
awards granted to Executive under any stock benefit plan of the Bank, the
Holding Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination, such stock options and related limited rights and any such unvested
awards shall become null and void and shall not be exercisable by or delivered
to Executive at any time subsequent to such Termination for Cause.
(b) If, within thirty (30) days after Notice of Termination for Cause is
received by Executive, the Executive notifies the Bank that a dispute exists
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concerning the termination ("Notice of Dispute"), the Date of Termination shall
be date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a Notice of
Dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence. In the
event the Executive pursues resolution of such dispute through arbitration in
accordance with the rules of the American Arbitration Association then in
effect, the Bank will continue to pay Executive his Base Salary in effect when
the Notice of Dispute notice giving rise to the dispute was given until the
earlier of: (1) the resolution of the dispute pursuant to arbitration in
accordance with this Agreement, or (2) six (6) months from the Date of
Termination as specified in the Notice of Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within the thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
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dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause, which shall be governed
by Section 7 of this Agreement, the Bank will continue to pay Executive his Base
Salary in effect when the notice giving rise to the dispute was given until the
earlier of: (1) the resolution of the dispute in accordance with this Agreement
or (2) the expiration of the remaining term of this Agreement as determined as
of the Date of Termination. Amounts paid under this Section are in addition to
all other amounts due under this Agreement and shall not be offset against or
reduce any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
10. DISCLOSURE OF BANK BUSINESS.
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Bank and affiliates thereof,
as it may exist from time to time, is a valuable, special and unique asset of
the business of the Bank. Executive will not, during or after the term of his
employment, disclose any knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principals, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank
to the OTS and the Federal Deposit Insurance Corporation ("FDIC") pursuant to a
formal regulatory request. In the event of a breach or threatened breach by
Executive of the provisions of this Section, the Bank will be entitled to an
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injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank
for such breach or threatened breach, including the recovery of damages
from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits that
those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
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(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver
of such term or condition for the future as to any act other than that
specifically waived.
15. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove,
except as provided in Section 7.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. ss.
1818(e)(3) or (g)(1); the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i)
pay Executive all or part of the compensation withheld while their contract
obligations were suspended; and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. ss.1813(x)(1) all obligations of the Bank under
this contract shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
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(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the director of the OTS
(or his designee) or the FDIC at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. ss.l 823(c); or
(ii) by the Director of the OTS (or his designee) at the time the Director (or
his designee) approves a supervisory merger to resolve problems related to the
operations of the Bank or when the Bank is determined by the Director to be in
an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
Any payments made to Executive pursuant to this Agreement, or otherwise,
are subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and 12
C.F.R. ss.545.121 and any rules and regulations promulgated thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
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convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of Delaware, but only to the extent
not superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sifting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits pursuant
to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) as permitted under
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federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 C.F.R. ss.545.121 and any rules or
regulations promulgated thereunder.
23. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, Patriot Bank has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officers and
directors, and Executive has signed this Agreement on the ______ day of
____________, 1998.
ATTEST: PATRIOT BANK BOARD OF DIRECTORS
_________________________ By________________________________
Secretary Entire Board of Directors
[SEAL]
WITNESS:
- ------------------------- ----------------------------------
Executive
14
PATRIOT BANK
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of December 1, 1998, by and among
Patriot Bank (the "Bank"), a Pennsylvania chartered commercial bank, with its
principal administration office at High and Hanover Streets, Pottstown,
Pennsylvania, and Joni Naugle ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement;
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of her employment hereunder, Executive agrees to serve as
Chief Operating Officer of the Bank. Executive shall render administrative and
management services to the Bank such as are customarily performed by persons
situated in a similar executive capacity. During said period, Executive also
agrees to serve, if elected as an officer of the Holding Company or any
subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter ("term").
Commencing on the first anniversary date of this Agreement and continuing on
each anniversary thereafter, the disinterested members of the board of directors
of the Bank ("Board") may extend the Agreement for an additional year such that
the remaining term of the Agreement shall be three (3) years unless the
Executive elects not to extend the term of this Agreement by giving written
notice in accordance with Section 8 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to renew the Agreement and the rationale and results thereof shall be
included in the minutes of
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the Board's meeting. The Board shall give notice to the Executive as soon as
possible after such review as to whether the Agreement is to be extended;
however, if Executive has not received a Notice of Termination from the Board,
pursuant to Section 8 hereof, at least thirty (30) days prior to the end of the
annual anniversary date of the Agreement, this Agreement is deemed to be
extended for an additional twenty-four (24) months.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all her
business time, attention, skill, and efforts to the faithful performance of her
duties hereunder including activities and services related to the organization,
operation and management of the Bank in participation in community and civic
organizations; provided, however, that, during her business time and with
approval of the Board, as evidenced by a resolution of such Board, from time to
time, Executive may serve, or continue to serve, on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Bank may be terminated by the Bank or the Executive during the term of
this Agreement, subject to the terms and conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of One Hundred
Thousand Dollars ($100,000.00) per year ("Base Salary"). Base Salary shall
include any amounts of compensation deferred by Executive under any qualified or
unqualified plan maintained by the Bank. Such Base Salary shall be payable
weekly. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Chief Executive Officer of the Bank. The Chief Executive Officer may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Bank shall also provide Executive, at no premium cost
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to Executive, with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank, or provided uniformly to senior
executives and key management employees only.
(b) The Executive shall be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, health and
accident plans, medical coverage or any other employee benefit plan or
arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided
inany plan of the Bank in which Executive is eligible to participate. Nothing
paid to the Executive under any such plan or arrangement will be deemed to be in
lieu of other compensation to which the Executive is entitled under this
Agreement,nor will it be deemed to be paid in satisfaction of the Base Salary.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Bank shall pay or reimburse Executive for all reasonable travel and other
reasonable expenses incurred by Executive performing her obligations under this
Agreement and may provide such additional compensation in such form and such
amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a) hereof, or Termination for Cause, as defined in Section 7 hereof; (ii)
Executive's resignation from the Bank's employ upon any (A) failure to elect or
reelect or to appoint or reappoint Executive as Chief Operating Officer, unless
consented to by the Executive, (B) a material change in Executive's function,
duties or responsibilities, which change would cause Executive's position to
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become one of lesser responsibility, importance or scope from the position and
attributes thereof described in Section 1 above, unless consented to by
Executive, (C) a relocation of Executive's principal place of employment by more
than 20 miles from its location at the effective date of this Agreement, unless
consented to by the Executive, (D) a material reduction in the benefits and
perquisites to the Executive from those being provided as of the effective date
of this Agreement, unless consented to by the Executive, (E) a liquidation or
dissolution of the Bank or Holding Company, or (F) breach of this Agreement by
the Bank, or (iii) the failure or refusal of the Bank and/or Holding Company to
extend this Agreement pursuant to Section 2(a) above. Upon the occurrence of any
event described in clauses (A), (B), (C), (D), (E) or (F), above, Executive
shall have the right to elect to terminate her employment under this Agreement
by resignation upon not less than sixty (60) days prior written notice given
within six (6) full months after the event giving rise to said right to elect.
(b) Upon a Event of Termination, Executive shall be entitled to the
benefits provided in Section 5(c) and (d) below, and such benefits shall not be
reduced in the event that Executive obtains other employment following
termination of her employment hereunder.
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been Change in Control of the Bank or Patriot Bank Corp. (the "Holding
Company"). For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Change in Bank Control Act and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss.303.4(a) with
respect to the Bank and the Board of Governors of the Federal Reserve System
("FRB") at 12 C.F.R. ss.225.41(b) with respect to the Holding Company, as in
effect on the date hereof; or (iii) results in a transaction requiring prior FRB
approval under the Bank Holding Company Act of 1956 and the regulations
promulgated thereunder by the FRB at 12 C.F.R. ss.225.11, as in effect on the
date hereof except for the Holding Company's acquisition of the Bank; or (iv)
4
<PAGE>
without limitation such a Change in Control shall be deemed to have occurred at
such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of voting securities of
the Bank or the Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Bank purchased by the Holding
Company and any voting securities purchased by any employee benefit plan of the
Bank or the Holding Company, or (B) individuals who constitute the Board on the
date hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the same
Nominating Committee serving under an Incumbent Board, shall be, for purposes of
this clause (B), considered as though she were a member of the Incumbent Board,
(C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity; provided, however, that such an event listed above will be deemed to
have occurred or to have been effectuated upon the receipt of all required
regulatory approvals not including the lapse of any statutory waiting periods,
(D) a proxy statement shall be distributed soliciting proxies from shareholders
of the Holding Company, by someone other than the current management of the
Holding Company, seeking stockholder approval of a plan of reorganization,
merger or consolidation of the Holding Company or Bank or similar transaction
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to the plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company, or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or the Holding Company.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d) of this Section 5
upon her subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
5
<PAGE>
resignation following any occurrence, under the control of the Bank's or Holding
Company's successor in control, set forth in Section 4(a)(ii)(A) through (F) or
(iii), unless such termination is because of Executive's Termination for Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank shall pay Executive, or in the event of her subsequent death, her
beneficiary or beneficiaries, or her estate, as the case may be, a sum equal to
the greater of: (1) the payments due for the remaining term of the Agreement; or
(2) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Bank or such
lesser number of years in the event that Executive shall have been employed by
the Bank for less than five (5) years. Such average annual compensation shall
include Base Salary, commissions, bonuses, contributions on Executive's behalf
to any pension and/or profit sharing plan, severance payments, retirement
payments, directors or committee fees, fringe benefits paid or to be paid to the
Executive in any such year and payment of any expense items without
accountability or business purposes or that do not meet the Internal Revenue
Service requirements for deductibility by the Bank. At the election of the
Executive, which election is to be made within thirty (30) days of the Date of
Termination, such payments shall be made in a lump sum or paid in equal monthly
installments during the thirty-six (36) months following the Date of
Termination. In the event that no election is made, payment to the Executive
will be made in approximately equal installments on a monthly basis over a
period of thirty-six (36) months following the Executive's termination. Such
payments shall not be reduced in the event Executive obtains other employment
following termination of employment.
(d) Upon the executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to her severance at no premium cost to the Executive, except to
the extent that such coverage may be changed in its application for all Bank
employees on a non-discriminatory basis. Such coverage and payments shall cease
upon the expiration of thirty-six (36) months following the Date of Termination.
6
<PAGE>
6. CHANGE OF CONTROL RELATED PROVISIONS.
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is One Dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount," as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR CAUSE.
(a) The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of the resolution duly adopted by the affirmative vote of not
less than a majority of the members of the Board at a meeting of the Board
called and held for that purpose (after reasonable notice to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good-faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Except as provided in Section 7(b) hereof, Executive shall not have
the right to receive compensation or other benefits for any period after the
Date of Termination. During the period beginning on the date of the Notice of
Termination for Cause pursuant to Section 8 hereof through the Date of
Termination, any stock options and related limited rights granted to Executive
under any stock option plan shall not be exercisable nor shall any unvested
awards granted to Executive under any stock benefit plan of the Bank, the
Holding Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination, such stock options and related limited rights and any such unvested
7
<PAGE>
awards shall become null and void and shall not be exercisable by or delivered
to Executive at any time subsequent to such Termination for Cause.
(b) If, within thirty (30) days after Notice of Termination for Cause is
received by Executive, the Executive notifies the Bank that a dispute exists
concerning the termination ("Notice of Dispute"), the Date of Termination shall
be date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expire and no appeal having been perfected) and provided
further that the Date of Termination shall be extended by a Notice of Dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence. In the event
the Executive pursues resolution of such dispute through arbitration in
accordance with the rules of the American Arbitration Association then in
effect, the Bank will continue to pay Executive her Base Salary in effect when
the Notice of Dispute notice giving rise to the dispute was given until the
earlier of: (1) the resolution of the dispute pursuant to arbitration in
accordance with this Agreement, or (2) six (6) months from the Date of
Termination as specified in the Notice of Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within the thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
8
<PAGE>
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause, which shall be governed
by Section 7 of this Agreement, the Bank will continue to pay Executive her Base
Salary in effect when the notice giving rise to the dispute was given until the
earlier of: (1) the resolution of the dispute in accordance with this Agreement
or (2) the expiration of the remaining term of this Agreement as determined as
of the Date of Termination. Amounts paid under this Section are in addition to
all other amounts due under this Agreement and shall not be offset against or
reduce any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
10. NONDISCLOSURE OF BANK BUSINESS.
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Bank and affiliates thereof,
as it may exist from time to time, is a valuable, special and unique asset of
the business of the Bank. Executive will not, during or after the term of her
employment, disclose any knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principals, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
9
<PAGE>
Executive may disclose information regarding the business activities of the Bank
to the Federal Deposit Insurance Corporation ("FDIC") pursuant to a formal
regulatory request. In the event of a breach or threatened breach by Executive
of the provisions of this Section, the Bank will be entitled to an injunction
restraining Executive from disclosing, in whole or in part, the knowledge of the
past, present, planned or considered business activities of the Bank or
affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits that
those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
10
<PAGE>
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver
of such term or condition for the future as to any act other than that
specifically waived.
15. LIMITATION ON PAYMENTS.
Any payments made to Executive pursuant to this Agreement, or otherwise,
are subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and 12
C.F.R. Pt. 359 and any rules and regulations promulgated thereunder.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of Pennsylvania, but only to the
extent not superseded by federal law.
11
<PAGE>
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of her right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
20. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits pursuant
to a legal judgment, arbitration or settlement.
21. INDEMNIFICATION.
The Bank shall provide Executive (including her heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its
expense, or in lieu thereof, shall indemnify Executive (and her heirs, executors
and administrators) to the fullest extent permitted under Pennsylvania law
against all expenses and liabilities reasonably incurred by him in connection
with or arising out of any action, suit or proceeding in which she may be
involved by reason of her having been a director or officer of the Bank (whether
or not she continues to be a director or officer at the time of incurring such
expenses or liabilities), such expenses and liabilities to include, but not be
limited to, judgements, court costs and attorneys' fees and the cost of
reasonable settlements.
12
<PAGE>
22. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, Patriot Bank has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officers and
directors, and Executive has signed this Agreement on the _____ day of
________________, 1998.
ATTEST: PATRIOT BANK
_________________________ By________________________________
Secretary Joseph W. Major for the Entire
Board of Directors
[SEAL]
WITNESS:
- ------------------------- ----------------------------------
Joni Naugle
13
EXHIBIT 21
Subsidiaries
Jurisdiction
Subsidiary of Organization
- ---------- ---------------
Patriot Bank Pennsylvania
Patriot Investment Company Delaware
Patriot Commercial Leasing Co., Inc. Pennsylvania
Marathon Management Company, Inc. Pennsylvania
Patriot Investments and Insurance Company Pennsylvania
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 21, 1998 accompanying the
consolidated financial statements incorporated by reference in the Annual Report
Patriot Bank Corp. and Subsidiaries on Form 10-K for the year ended December 31,
1998. 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 19, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to incorporation by reference in the Registration Statements (No.
333-13981 and No. 333-62123) on Form S-8 of Patriot Bank Corp. of our report
dated January 13, 1999, except as to Note 2 which was as of January 22, 1999,
relating to the consolidated balance sheet of Patriot Bank Corp. and
subsidiaries as of December 31, 1998, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the year ended
December 31, 1998, which report appears in the December 31, 1998 annual report
on Form 10-K of Patriot Bank Corp.
Philadelphia, Pennsylvania
March 22, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001000235
<NAME> Patriot Bank Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<EXCHANGE-RATE> 1.000 1.000
<CASH> 1,044 2,597
<INT-BEARING-DEPOSITS> 29,443 6,417
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 386,380 343,125
<INVESTMENTS-CARRYING> 29,639 62,516
<INVESTMENTS-MARKET> 29,909 62,817
<LOANS> 509,080 422,209
<ALLOWANCE> (4,087) (2,512)
<TOTAL-ASSETS> 980,761 852,083
<DEPOSITS> 377,796 289,528
<SHORT-TERM> 235,123 385,684
<LIABILITIES-OTHER> 11,384 7,138
<LONG-TERM> 314,198 123,200
0 0
0 0
<COMMON> 56 56
<OTHER-SE> 42,204 46,477
<TOTAL-LIABILITIES-AND-EQUITY> 980,761 852,083
<INTEREST-LOAN> 35,242 27,008
<INTEREST-INVEST> 27,521 23,048
<INTEREST-OTHER> 344 193
<INTEREST-TOTAL> 63,107 50,249
<INTEREST-DEPOSIT> 17,382 13,405
<INTEREST-EXPENSE> 46,236 35,807
<INTEREST-INCOME-NET> 16,871 14,442
<LOAN-LOSSES> 1,200 915
<SECURITIES-GAINS> 1,850 438
<EXPENSE-OTHER> 14,267 11,158
<INCOME-PRETAX> 5,277 4,699
<INCOME-PRE-EXTRAORDINARY> 4,055 3,373
<EXTRAORDINARY> 0 0
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<NET-INCOME> 4,055 3,373
<EPS-PRIMARY> 0.83 0.62
<EPS-DILUTED> 0.78 0.59
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<CHARGE-OFFS> 512 276
<RECOVERIES> 9 43
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</TABLE>
PATRIOT BANK CORP.
High & Hanover Streets
Pottstown, Pennsylvania 19464
(610) 323-1500
March 19, 1999
Fellow Stockholders:
You are cordially invited to attend the annual meeting of stockholders (the
"Annual Meeting") of Patriot Bank Corp. and subsidiaries (the "Company"), which
will be held on April 22, 1999, at 2:00 p.m., Eastern Standard Time, at
Brookside, Prospect and Adams Streets, Pottstown, Pennsylvania.
The attached notice of the annual meeting and the proxy statement describe the
formal business to be transacted at the annual meeting. Directors and officers
of the Company, as well as a representative of KPMG LLP, the Company's
independent auditors for 1998, will be present at the Annual Meeting to respond
to any questions that our stockholders may have regarding the business to be
transacted.
The Board of Directors of the Company has determined that the matters to be
considered at the Annual Meeting are in the best interests of the Company and
its stockholders. For the reasons set forth in the proxy statement, the Board
unanimously recommends that you vote "FOR" each of the nominees as directors
specified under Proposal 1 and "FOR" Proposal 2.
Please sign and return the enclosed proxy card promptly. Your cooperation is
appreciated because a majority of the common stock must be represented, either
in person or by proxy, to constitute a quorum for the conduct of business.
On behalf of the Board of Directors and all of the employees of the Company, we
thank you for your continued interest and support.
Sincerely yours,
/s/
----------------------------
James B. Elliott
Chairman of the Board
/s/
----------------------------
Joseph W. Major
President and
Chief Executive Officer
<PAGE>
PATRIOT BANK CORP.
High & Hanover Streets
Pottstown, Pennsylvania 19464
(610) 323-1500
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on April 22, 1999
------------------------
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the "Annual
Meeting") of Patriot Bank Corp. (the "Company") will be held on April 22, 1999,
at 2:00 p.m., Eastern Standard Time, at Brookside, Prospect and Adams Streets,
Pottstown, Pennsylvania.
The purpose of the Annual Meeting is to consider and vote upon the
following matters:
1. The election of two directors for terms of three years each or
until their successors are elected and qualified;
2. The ratification of the appointment of KPMG LLP as independent
auditors of the Company for the fiscal year ending December 31, 1999; and
3. Such other matters as may properly come before the meeting and at
any adjournments thereof, including whether or not to adjourn the meeting.
The Board of Directors has established March 9, 1999, as the record date
for the determination of stockholders entitled to receive notice of and to vote
at the Annual Meeting and at any adjournments thereof. Only recordholders of the
common stock of the Company as of the close of business on such record date will
be entitled to vote at the Annual Meeting or any adjournments thereof. In the
event there are not sufficient votes for a quorum or to approve or ratify any of
the foregoing proposals at the time of the Annual Meeting, the Annual Meeting
may be adjourned in order to permit further solicitation of proxies by the
Company. A list of stockholders entitled to vote at the Annual Meeting will be
available at Patriot Bank, High & Hanover Streets, Pottstown, Pennsylvania
19464, for a period of ten days prior to the Annual Meeting and will also be
available at the Annual Meeting itself.
By Order of the Board of Directors
/s/
------------------------------------
DIANE M. DAVIDHEISER
Secretary
Pottstown, Pennsylvania
March 19, 1999
<PAGE>
PATRIOT BANK CORP.
------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 22, 1999
------------------------
SOLICITATION AND VOTING OF PROXIES
This proxy statement is being furnished to stockholders of Patriot Bank
Corp. (the "Company") in connection with the solicitation by the Board of
Directors ("Board of Directors" or "Board") of proxies to be used at the annual
meeting of stockholders (the "Annual Meeting"), to be held on April 22, 1999 at
2:00 p.m. at Brookside, Prospect and Adams Streets, Pottstown, Pennsylvania and
at any adjournments thereof. The 1998 Annual Report to Stockholders, including
consolidated financial statements for the fiscal year ended December 31, 1998,
accompanies this proxy statement, which is first being mailed to recordholders
on or about March 19, 1999.
Regardless of the number of shares of common stock owned, it is important
that recordholders of a majority of the shares be represented by proxy or
present in person at the Annual Meeting. Stockholders are requested to vote by
completing the enclosed proxy card and returning it signed and dated in the
enclosed postage-paid envelope. Stockholders are urged to indicate their vote in
the spaces provided on the proxy card. Proxies solicited by the Board of
Directors of the Company will be voted in accordance with the directions given
therein. Where no instructions are indicated, signed proxy cards will be voted
FOR the election of the nominees for director named in this proxy statement, and
FOR the ratification of KPMG LLP as independent auditors of the Company for the
fiscal year ending December 31, 1999.
Other than the matters set forth on the attached Notice of Annual Meeting
of Stockholders, the Board of Directors knows of no additional matters that will
be presented for consideration at the Annual Meeting. Execution of a proxy,
however, confers on the designated proxy holders discretionary authority to vote
the shares in accordance with their best judgment on such other business, if
any, that may properly come before the Annual Meeting and at any adjournments
thereof, including whether or not to adjourn the Annual Meeting.
A proxy may be revoked at any time prior to its exercise by filing a
written notice of revocation with the Secretary of the Company, by delivering to
the Company a duly executed proxy bearing a later date, or by attending the
Annual Meeting and voting in person. However, if you are a stockholder whose
shares are not registered in your own name, you will need appropriate
documentation from your recordholder to vote personally at the Annual Meeting.
The cost of solicitation of proxies on behalf of management will be borne
by the Company. Proxies may also be solicited personally or by telephone by
directors, officers and other employees of the Company without additional
compensation therefor. The Company will also request persons, firms and
corporations holding shares in their names, or in the name of their nominees,
which are beneficially owned by others, to send proxy material to and obtain
proxies from such beneficial owners, and will reimburse such holders for their
reasonable expenses in doing so.
VOTING SECURITIES
The securities which may be voted at the Annual Meeting consist of shares
of common stock of the Company ("Common Stock"), with each share entitling its
owner to one vote on all matters to be voted on at the Annual Meeting, except as
described below. There is no cumulative voting for the election of directors.
1
<PAGE>
The close of business on March 9, 1999 has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
stockholders of record entitled to notice of and to vote at the Annual Meeting
and at any adjournments thereof. The total number of shares of Common Stock
outstanding on the Record Date was 6,180,618 shares.
As provided in the Company's Articles of Incorporation, recordholders of
Common Stock who beneficially own in excess of 10% of the outstanding shares of
Common Stock (the "Limit") are not entitled to any vote in respect of the shares
held in excess of the Limit. A person or entity is deemed to beneficially own
shares owned by an affiliate of, as well as, by persons acting in concert with,
such person or entity. The Company's Articles of Incorporation authorize the
Board of Directors to make all determinations necessary to implement and apply
the Limit, including determining whether persons or entities are acting in
concert.
The presence, in person or by proxy, of the holders of at least a majority
of the total number of shares of Common Stock entitled to vote (after
subtracting any shares in excess of the Limit pursuant to the Company's Articles
of Incorporation) is necessary to constitute a quorum at the Annual Meeting. In
the event there are not sufficient votes for a quorum or to approve or ratify
any proposal at the time of the Annual Meeting, the Annual Meeting may be
adjourned in order to permit the further solicitation of proxies.
As to the election of directors, the proxy card being provided by the Board
of Directors enables a stockholder to vote "FOR" the election of the nominees
proposed by the Board of Directors, or to "WITHHOLD" authority to vote for one
or more of the nominees being proposed. Under Pennsylvania law and the Company's
bylaws, directors are elected by a plurality of votes cast, without regard to
either (i) broker non-votes, or (ii) proxies as to which authority to vote for
one or more of the nominees being proposed is withheld.
As to the approval of KPMG LLP as independent auditors of the Company and
all other matters that may properly come before the Annual Meeting, by checking
the appropriate box, you may: (i) vote "FOR" the item; (ii) vote "AGAINST" the
item; or (iii) "ABSTAIN" from voting on such item. Under the Company's bylaws,
unless otherwise required by law, all such matters shall be determined by a
majority of the votes cast, without regard to either (a) broker non-votes, or
(b) proxies marked "ABSTAIN" as to that matter.
Proxies solicited hereby will be returned to the Company's transfer agent,
Registrar and Transfer Company, and will be tabulated by inspectors of election
designated by the Board of Directors, who will not be employed by, or a director
of, the Company or any of its affiliates. After the final adjournment of the
Annual Meeting, the proxies will be returned to the Company for safekeeping.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as to those persons believed by
management to be beneficial owners of more than 5% of the Company's outstanding
shares of Common Stock on the Record Date or as disclosed in certain reports
regarding such ownership filed by such persons with the Company and with the
Securities and Exchange Commission ("SEC"), in accordance with Sections 13(d)
and 13(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act").
Other than those persons listed below, the Company is not aware of any person,
as such term is defined in the Exchange Act, that owns more than 5% of the
Company's Common Stock as of the Record Date.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- -------------- ------------------- -------------------- --------
<S> <C> <C> <C>
Common Stock Patriot Bank 542,916(1) 8.8%
Employee Stock Ownership
Plan ("ESOP")
High & Hanover Streets
Pottstown, Pennsylvania 19464
Common Stock Brandes Investment 318,008(2) 5.1%
12750 High Bluff Drive
San Diego, CA 92130
Common Stock James L. Leuthe 584,158(3) 9.5%
3514 Eton Road
Allentown, PA 18104
</TABLE>
- ------------------
(1) Shares of Common Stock were acquired by the ESOP in the conversion. The
Personnel Compensation/Benefits Committee of the Board of Directors
administers the ESOP. Investors Trust Company has been appointed as the
corporate trustee for the ESOP ("ESOP Trustee"). The ESOP Trustee, subject
to its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of the participants. At March 9, 1999,
87,681 shares had been allocated under the ESOP and 455,235 shares remain
unallocated. With respect to unallocated shares, such unallocated shares
will be voted by the ESOP Trustee in a manner calculated to most accurately
reflect the instructions received from participants regarding the allocated
stock so long as such vote is in accordance with the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
(2) Based upon an amendment to Schedule 13G filed on December 31, 1998.
(3) James L. Leuthe has executed an irrevocable proxy granting the Board of
Directors the right to vote all shares of stock of the Company beneficially
owned by him. The Company has agreed with the Federal Deposit Insurance
Corporation that it will vote such shares "for" and "against" each matter in
the same percentage as all other outstanding shares of stock of the Company
are voted.
PROPOSALS TO BE VOTED ON AT THE MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of six (6)
directors and is divided into three classes. Each of the six members of the
Board of Directors of the Company also presently serves as a director of the
Bank. Directors are elected for staggered terms of three years each, with the
term of office of only one of the three classes of directors expiring each year.
Directors serve until their successors are elected and qualified.
The two nominees proposed for election at this Annual Meeting are Richard
A. Elko and James A. Bentley, Jr. No person being nominated as a director is
being proposed for election pursuant to any agreement or understanding between
any such person and the Company.
In the event that any such nominee is unable to serve or declines to serve
for any reason, it is intended that the proxies will be voted for the election
of such other person as may be designated by the present Board of Directors. The
Board of Directors has no reason to believe that any of the persons named will
be unable or unwilling to serve. Unless authority to vote for the nominee is
withheld, it is intended that the shares represented by the enclosed proxy card,
if executed and returned, will be voted FOR the election of the nominees
proposed by the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF THE
NOMINEES NAMED IN THIS PROXY STATEMENT.
3
<PAGE>
INFORMATION WITH RESPECT TO THE NOMINEES AND CONTINUING DIRECTORS
The following table sets forth, as of the Record Date, the names of the
nominees, continuing directors and Named Executive Officers (as defined below)
as well as their ages, a brief description of their recent business experience,
including present occupations and employment, certain directorships held by
each, the year in which each director became a director of the Bank, the year in
which their terms (or in the case of the nominees, their proposed terms) as
director of the Company expire. The table also sets forth the amount of Common
Stock and the percent thereof beneficially owned by each director and Named
Executive Officer and all directors and executive officers as a group as of the
Record Date.
<TABLE>
<CAPTION>
SHARES OF
EXPIRATION COMMON STOCK
NAME AND PRINCIPAL OCCUPATION DIRECTOR OF TERM AS BENEFICIALLY PERCENT
AT PRESENT AND FOR PAST FIVE YEARS AGE SINCE(1) DIRECTOR OWNED(2)(3)(4)(5) OF CLASS
- ---------------------------------- --- -------- ---------- ----------------- --------
<S> <C> <C> <C> <C> <C>
NOMINEES
James A. Bentley, Jr. 40 1998 2002 12,470 *
President and Owner Bentley Graphic
Communications, Inc. since 1989
Richard A. Elko 37 1999 2002 80,829 1.3%
Executive Vice President and Chief
Financial Officer of the Company and the
Bank since January 1996. Prior to his
appointment at the Company and the Bank,
Mr. Elko was Corporate Controller at
Sovereign Bancorp, Inc.
CONTINUING DIRECTORS
Larry V. Thren 56 1992 2001 63,994 1.0%
Vice President of Human Resources and
Support Services, Pottstown Memorial
Medical Center since 1988.
James B. Elliott 58 1990 2001 44,193 *
Chairman of the Board since July 1998.
President of Stratecon, Inc.
Samuel N. Landis 74 1988 2000 90,993 1.5%
Retired general contractor
Joseph W. Major 43 1990 2000 174,919 2.8%
President and Chief Executive Officer of
the Company since July 1998. Prior thereto
he was President and Chief Operating
Officer of the Company and the Bank since
September 1995. Prior to his appointment at
the Company and the Bank, Mr. Major was a
partner in the law firm of Mauger & Major.
NAMED EXECUTIVE OFFICER WHO
IS NOT A DIRECTOR
Kevin R. Pyle 32 -- -- 31,369 *
Chief Credit Officer of the Bank since
March 1996, prior thereto commercial
lending officer for Berks County Bank
Stock Ownership of all Directors and -- -- -- 526,287(6) 8.3%
Executive Officers as a Group (11 persons)
</TABLE>
- ------------------
* Represents less than one percent of the outstanding Common Stock.
4
<PAGE>
(1) Includes years of service as a director of the Company's predecessor, the
Bank.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting or dispositive power as to shares reported
herein (except as noted).
(3) Includes 5,426 vested shares awarded to each outside director and 27,136,
7,200, and 1,296 vested shares awarded to Messrs. Major, Elko, and Pyle,
respectively, under the Patriot Bank Corp. 1996 Stock-Based Incentive Plan
(the "Incentive Plan"). Stock Awards granted under the Incentive Plan vest
in five equal annual installments commencing on June 7, 1997, the first
anniversary of the effective date of the stock award.
(4) Includes 8,568 shares subject to options granted to Mr. Elliott, 13,568
shares subject to options granted to Messrs. Thren and Landis, and 67,844,
40,705, and 1,800 shares subject to options granted to Messrs. Major, Elko,
and Pyle, respectively, under the Incentive Plan that are exercisable within
60 days.
(5) Does not include unvested stock awards granted under the Incentive Plan
which the holder has the right to vote. Under the Incentive Plan, 8,142
shares have been awarded to each outside director which have not yet vested,
and 40,704, 10,800, and 1,944 shares have been awarded to Messrs. Major,
Elko, and Pyle, respectively, which have not yet vested.
(6) Does not include a total of 89,820 unvested shares awarded under the
Incentive Plan as to which voting may be directed.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS.
The Company conducts its business through meetings of the Board of
Directors and through activities of its committees. The Board of Directors of
the Company meets monthly and may have additional meetings as needed. During
fiscal 1998, the Board of Directors of the Company held 12 meetings. All of the
directors of the Company attended at least 75% of the total number of the
Company's Board meetings held and committee meetings on which such directors
served during fiscal 1998. The Board of Directors of the Company maintains
committees, the nature and composition of which are described below:
Audit Committee. The Audit Committee of the Company consists of Messrs.
Elliott, Bentley, Landis, and Thren who are outside directors. The Audit
Committee is responsible for reporting to the Board on the general financial
condition of the Company and the results of the annual audit, and is responsible
for ensuring that the Company's activities are being conducted in accordance
with applicable laws and regulations. The Audit Committee met four times in
fiscal 1998.
Nominating Committee. The Company's Nominating Committee for the 1999
Annual Meeting consists of the entire Board of Directors. The committee
considers and recommends the nominees for director to stand for election at the
Company's annual meeting of shareholders. The Company's Articles of
Incorporation and bylaws provide for stockholder nominations of directors. These
provisions require such nominations to be made pursuant to timely notice in
writing to the Secretary of the Company. The shareholder's notice of nomination
must contain all information relating to the nominee which is required to be
disclosed by the Company's bylaws and by the Exchange Act. The Nominating
Committee met on January 21, 1999.
Compensation Committee. The Personnel Compensation/Benefits Committee of
the Company (the "Compensation Committee") consists of Messrs. Thren, Landis,
Elliott, and Bentley. The Compensation Committee meets to establish compensation
and benefits for the executive officers and to review the incentive compensation
programs when necessary. The Compensation Committee is also responsible for
establishing certain guidelines and limits for compensation for other salaried
officers and employees of the Company. The Compensation Committee met 2 times in
fiscal 1998.
Executive Committee. The Executive Committee of the Company consists of
Messrs. Elliott, Major, Landis, Bentley and Thren. The Executive Committee is
responsible for conducting the business of the Company in the absence of the
entire Board. The Executive Committee met 9 times in 1998.
Investment Committee. The Investment Committee of the Company consists of
Messrs. Elliott, Major, Elko, Bentley, and Pyle and Robert G. Philips and
Deborah L. Gibson, who are employees of the Bank. The Investment Committee is
responsible for oversight and direction of the Company's
5
<PAGE>
purchases of securities and the funding of such purchases. The Investment
Committee met 4 times in 1998.
Mergers and Acquisitions Committee. The Mergers and Acquisitions Committee
consists of the entire Board of Directors. The Mergers and Acquisitions
Committee is responsible for providing guidance and direction for the
consideration of potential merger and acquisition opportunities. The Mergers and
Acquisitions Committee met 2 times in 1998.
Legal Coordinating Committee. The Legal Coordinating Committee consists of
Messrs. Thren, Elliott, Landis, and Bentley. The Legal Coordinating Committee is
responsible for oversight and direction in dealing with actual and potential
legal issues, including pending and threatened claims against the Company or the
Bank. The Legal Coordinating Committee met 2 times in 1998.
DIRECTORS' COMPENSATION
Directors' Fees. Nonemployee directors are currently paid annual retainers
ranging from $13,000 to $16,000, plus an additional fee ranging from $2,000 to
$6,000 to the chairman of certain committees. James B. Elliott receives an
additional fee of $15,000 as Chairman of the Board.
Incentive Plan. On June 7, 1996, stockholders approved the Patriot Bank
Corp 1996 Stock-Based Incentive Plan, under which all directors who are not also
employees of the Company are eligible to receive stock awards and options to
purchase Common Stock. Under the Incentive Plan, each outside director was
granted non-statutory options to purchase 33,921 shares of common stock at an
exercise price of $7.184, which was the fair market value of shares on the
effective date of the grant, as adjusted for subsequent stock splits and stock
dividends. Options become exercisable in five (5) equal annual installments
commencing one year from the effective date of the grant.
EXECUTIVE COMPENSATION
The report of the Compensation Committee and the stock performance graph
shall not be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any filing under the
Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act,
except as to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
Compensation Committee Report on Executive Compensation. Under rules
established by the Securities and Exchange Commission ("SEC"), the Company is
required to provide certain data and information in regard to the compensation
and benefits provided to the Company's Chief Executive Officer and other
executive officers of the Company. The disclosure requirements for the Chief
Executive Officer and other executive officers include the use of tables and a
report explaining the rationale and considerations that led to fundamental
compensation decisions affecting those individuals. In fulfillment of this
requirement, the Compensation Committee (the "Committee"), at the direction of
the Board of Directors, has prepared the following report for inclusion in this
proxy statement.
Compensation Policies. The Compensation Committee of the Board has
established a policy for executive compensation, taking into account both
subjective performance criteria and certain specified objective performance
measures. The purpose of the policy is to: (i) provide compensation
opportunities which are competitive with other financial services companies;
(ii) support the Company's goal setting and strategic planning process; (iii)
motivate the executive management of the Company to achieve profit and other key
goals of the institution, including but not limited to the Company's commitment
to the communities it serves, to its employees, customers and investors; (iv)
motivate the executive management to operate the Company in a safe and sound
manner, and in compliance with all pertinent governmental and regulatory
requirements; and (v) minimize potential overhead by designating a portion of
the annual compensation of executives as variable rather than fixed.
During the course of 1998, the Company took into account a variety of
objective and subjective criteria in evaluating the performance of the executive
management of the Company. The Committee assessed in detail the various
challenges facing the Company, both from a historical capital and operational
standpoint, and the significant competitive pressures within the Company's
trading areas.
6
<PAGE>
In the course of this assessment of competitive salary ranges among other
similarly situated companies, it was noted that competitive executive
compensation packages vary in relationship to these various subjective and
objective factors. A variety of resources were utilized which provided peer data
regarding executive compensation and financial performance of the company, which
included but was not limited to the "SNL Executive Compensation Review 1998" for
both Commercial Banks and Thrifts, assessments which review executive
compensation and company performance for publicly traded banks and thrifts.
Comparisons were made with institutions located within Southeastern
Pennsylvania, the Middle Atlantic trading area, and relative to national
averages. The peer groups considered in these analyses are not necessarily
comprised of the same institutions used in the peer group for the stock
performance graph. Additionally, the Company took into account executive
compensation plans of other local nonbanking companies and institutions.
In establishing an Executive Compensation Plan for 1998, the Executive
Committee of the institution established certain specific objectives for
executive management, which included the creation and execution of a strategic
business plan, identifying and completing acquisition opportunities,
strengthening of senior management, and reaching certain financial goals based
on asset size, earnings per share, net income, return on assets and return on
equity.
Additionally, the Company utilized a number of subjective elements as part
of the decision making process regarding executive compensation. The individual
skills and talents of the executive managers of the Company, including but not
limited to experience, leadership ability, planning and organizational skills,
administrative talent, vision for the future, and work ethic were given
consideration in establishing executive compensation.
As detailed in its Mergers and Acquisitions Plan, the Company recognizes
the importance of identifying, structuring, negotiating, closing and integrating
strategic mergers and acquisitions. The Company's Board of Directors believes it
prudent to award special incentive compensation to individuals who significantly
participate in the mergers and acquisitions process. Incentives will generally
be paid upon completion of a transaction and eligible participants, as
determined by the Board of Directors, will include members of the Board of
Directors, Executive and Senior Management and other team members. All
transactions must adhere to the Company's acquisition philosophy as described in
the Mergers and Acquisitions Plan.
Because of the complexity and varying nature of any particular transaction,
the Company's Board of Directors has elected to use a subjective process for
determining the amount of awards. Upon completion of a transaction, the Chief
Executive Officer will prepare a recommendation that will be submitted to the
Compensation Committee. The recommendation will detail the participating
individuals, the amounts to be awarded and the subjective factors considered.
Compensation of the Chief Executive Officer and President. During the
course of 1998, Mr. Major, as President and Chief Executive Officer,
satisfactorily accomplished all of the objective performance criteria of the
institution, and addressed a number of other challenges facing the Company. In
addition, the Company showed growth in asset size and earnings, continued to
report asset quality superior to the various peer groups considered, and
completed the acquisition of Keystone Financial Leasing Corporation and entered
into an agreement to acquire First Lehigh Corporation. Consistent with these
various objective and subjective measures, the Compensation Committee increased
Mr. Major's salary to $210,000 a year, and awarded a year-end bonus of $153,000.
The Compensation Committee specifically noted that the bonus elements of
compensation were partially subjective in nature, and in-part based upon
satisfactory accomplishment of the objective requirements of the Company in
1998. It furthermore concluded that the payment of this compensation package was
necessary in order to meet the aforestated policies of the Company and to
maintain the continuity and high performance of management. Based on the
aforementioned surveys, total compensation to Mr. Major was in the mid range of
other institutions of similar asset size. Mr. Major has an employment contract
(see "Employment Contracts").
THE COMPENSATION COMMITTEE
Larry V. Thren James A. Bentley, Jr.
Samuel N. Landis James B. Elliott
7
<PAGE>
Stock Performance Graph. The following graph shows a comparison of total
stockholder return on the Company's Common Stock, based on the market price of
the Common Stock, with the cumulative total return of companies on the Nasdaq
Stock Market (U.S.) Index, the Media General Index for Savings Institutions, and
the NASDAQ Banking Index for the period beginning on December 4, 1995, the day
the Company's Common Stock began trading, through December 31, 1998. The graph
was derived from a limited period of time, and, as a result, may not be
indicative of possible future performance of the Company's Common Stock. The
data was supplied by Media General Financial Services.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts the
following plot points:
Comparison of Cumulative Total Returns for Patriot Bank Corp. Common
Stock, the Nasdaq Stock Market Index, the MG Index for Savings Institutions and
the NASDAQ Banking Index.
SUMMARY
<TABLE>
<CAPTION>
COMPANY 12/4/95 12/31/95 12/31/96 12/31/97 12/31/98
- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Patriot Bank Corp............................ 100.00 128.60 165.85 319.96 225.67
Broad Market (NASDAQ Stock Market)........... 100.00 99.63 120.46 147.77 207.72
Industry Index (Media General)............... 100.00 101.94 133.04 223.69 196.10
Industry Index (NASDAQ Banking Index)........ 100.00 148.93 196.62 332.17 326.14
</TABLE>
Notes:
A. The lines represent annual index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighed daily, using the market capitalization on
the previous trading day.
C. If the fiscal year-end is not a trading day, the preceding trading
day is used.
D. The index level for all the series was set to $100.00 on 12/4/95, the
date on which the Company's stock was first publicly traded.
8
<PAGE>
Summary Compensation Table. The following table shows, for the years ended
December 31, 1998, 1997 and 1996, the cash compensation paid by the Company, as
well as certain other compensation paid or accrued for those years, to the
President and Chief Executive Officer and the Executive Vice President and Chief
Financial Officer of the Company, and to the Chief Credit Officer of the Bank
for 1998 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- --------------------- ----------------------
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION(1) YEAR ($)(2) ($) ($)(3) ($)(4) (#)(5) ($)(6) ($)(7)
- ------------------------------ ---- -------- -------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph W. Major 1998 $210,000 $153,090 -- -- -- -- $ 25,190
President, Chief Executive 1997 $147,788 $ 79,047 -- -- -- -- $ 43,014
Officer and Director 1996 $105,385 $ 82,696 -- $487,614 $113,074 -- $ 22,226
Richard A. Elko 1998 $123,375 $ 97,603 -- -- -- -- $ 20,265
Executive Vice President 1997 $110,000 $ 55,649 -- -- -- -- $ 17,472
and Chief Financial Officer 1996 $ 95,457 $ 52,218 -- $129,375 $ 67,843 -- --
Kevin R. Pyle 1998 $ 75,000 $ 27,338 -- -- -- -- $ 19,210
Chief Credit Officer 1997 $ 64,859 $ 11,134 -- -- -- -- $ 17,086
1996 $ 35,783 $ 9,943 -- $ 41,916 $ 3,000 -- --
Gary N. Gieringer 1998 $168,000 $ 40,000 -- -- -- -- $986,053(8)
1997 $208,308 $ 67,298 -- -- -- -- $ 56,876
1996 $165,539 $ 72,436 -- $487,614 $113,074 -- $ 26,554
</TABLE>
- ------------------
(1) Mr. Gieringer served as President, Chief Executive Officer and Director of
the Bank from 1987 until August 1995. In August 1995, Mr. Gieringer was
appointed as Chairman of the Board and Chief Executive Officer. Effective
June 30, 1998, Mr. Gieringer resigned as an officer and director of the
Company and the Bank due to health reasons. Mr. Major was appointed as
President and Chief Operating Officer in August 1995. Upon Mr. Gieringer's
resignation, Mr. Major was appointed as Chief Executive Officer of the
Company. Mr. Elko was appointed as Executive Vice President and Chief
Financial Officer in January 1996. Mr. Pyle was appointed Chief Credit
Officer of Patriot Bank in March 1996.
(2) Includes compensation deferred at the election of Messrs. Gieringer, Major,
Elko, and Pyle through the Company's 401(k) Plan.
(3) There were no (a) perquisites over the lesser of $50,000 or 10% of the
individual's total salary and bonus for the last year, (b) payments of
above-market preferential earnings on deferred compensation, (c) payments of
earnings with respect to long-term incentive plans prior to settlement or
maturation, (d) tax payment reimbursements, or (e) preferential discounts on
stock.
(4) Pursuant to the Incentive Plan, Messrs. Gieringer, Major, Elko, and Pyle
were awarded 67,842, 67,842, 18,000, and 3,240 shares (as adjusted by
subsequent stock dividends and stock splits) of Common Stock, respectively,
in fiscal 1996 which had a market value on June 7, 1996, the date of grant,
of $487,614, $487,614, $129,375, and $41,916. Stock Awards granted under the
Incentive Plan vest in five equal annual installments on each anniversary of
the effective date of the stock award. As of December 31, 1998, the market
value of the 67,842, 67,842, 18,000 and 3,240 shares was $797,144, $797,144,
$211,500, and $38,070, respectively.
(5) Includes shares subject to options granted to Messrs. Gieringer, Major,
Elko, and Pyle under the Stock Option Plan. All options granted under the
Incentive Plan become exercisable in five equal annual installments on each
anniversary of the effective date of the grant.
(6) For 1998, 1997, and 1996, the Company had no long-term incentive plans in
existence. Accordingly, there were no payments or awards under any long-term
incentive plan.
(7) Includes 1,365, 1,365, 896, and 1,365 shares allocated to Messrs. Major,
Elko, Pyle, and Gieringer, respectively, for fiscal 1998 pursuant to the
ESOP with a market value of $13,650, $13,650, $8,960, and $13,650,
respectively. Includes $11,540, $6,615, $11,403 and $5,560 in matching and
discretionary contributions by the Company to the Company's 401(k) plan
during 1998 for Messrs. Major, Elko Gieringer and Pyle, respectively.
Includes 2,560, 1,900, 637, and 751 shares allocated to Messrs. Gieringer,
Major, Elko, and Pyle, respectively, for fiscal 1997 pursuant to the ESOP
with a market value of $45,326, $33,639, $11,284, and $13,317, respectively,
and $11,550, $9,375, $6,188 and $3,769 in matching and discretionary
contributions by the Company to the Company's 401(k) plan during 1997 for
Messrs. Gieringer, Major, Elko, and Pyle, respectively. Includes allocations
of 1,949 shares to Mr. Gieringer ($21,924 market value) and 1,906 shares to
Mr. Major ($21,438 market value) for fiscal 1996 pursuant to the ESOP and
matching and discretionary contributions by the Company to its 401(k) plan
for Messrs. Gieringer and Major of $4,620 and $788, respectively, for 1996.
(8) Mr. Gieringer received a lump sum payment of $961,000 upon his resignation
in satisfaction of the Company's obligations under his employment agreement.
9
<PAGE>
EMPLOYMENT AGREEMENTS
The Bank and the Company have entered into employment agreements with
Messrs. Major and Elko, (individually, the "Executive"). These employment
agreements are intended to ensure that the Bank and the Company will be able to
maintain a stable and competent management base. The continued success of the
Bank and the Company depends to a significant degree on the skills and
competence of Messrs. Major and Elko.
The employment agreements provide for a five-year term for Messrs. Major
and Elko. The Bank employment agreements provide that, commencing on the first
anniversary date and continuing each anniversary date thereafter, the Board of
Directors may extend the agreement for an additional year so that the remaining
term shall be five years, unless written notice of non-renewal is given by the
Board of Directors after conducting a performance evaluation of the Executive.
The terms of the Company employment agreements shall be extended on a daily
basis unless written notice of non-renewal is given by the Board of the Company.
The agreements provide that the Executive's base salary will be reviewed
annually. The current base salaries for Messrs. Major and Elko are $210,000 and
$123,375, respectively. In addition to the base salary, the agreements provide
for, among other things, participation in stock benefits plans and other fringe
benefits applicable to executive personnel. The agreements provide for
termination by the Bank or the Company for cause as defined in the agreements at
any time. In the event the Bank or the Company chooses to terminate the
Executive's employment for reasons other than for cause, or in the event of the
Executive's resignation from the Bank and the Company upon: (i) failure to
re-elect the Executive to his current offices; (ii) a material change in the
Executive's functions, duties or responsibilities; (iii) a relocation of the
Executive's principal place of employment by more than 20 miles; (iv) a material
reduction in the benefits and perquisites provided to the Executive; (v)
liquidation or dissolution of the Bank or the Company; or (vi) a breach of the
agreement by the Bank or the Company, the Executive or, in the event of death,
his beneficiary would be entitled to receive an amount equal to the remaining
base salary payments due to the Executive and the contributions that would have
been made on the Executive's behalf to any employee benefit plans of the Bank or
the Company during the remaining term of the agreement. The Bank and the Company
would also continue and pay for the Executive's life, health and disability
coverage for the remaining term of the Agreement.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company, the Executive or, in the event of
the Executive's death, his beneficiary, would be entitled to a severance payment
equal to the greater of: (i) the payments due for the remaining term of the
agreement; or (ii) five times the average of the five preceding taxable years'
annual compensation. The Bank and the Company would also continue the
Executive's life, health, and disability coverage for thirty-six months.
Notwithstanding that both agreements provide for a severance payment in the
event of a change in control, the Executive would only be entitled to receive a
severance payment under one agreement. Based solely on the Compensation reported
in the Summary Compensation Table for 1998 and excluding any benefits under any
employee plan which may be payable, following a change in control and
termination of employment Messrs. Major and Elko would receive approximately
$1,296,677 and $890,503, respectively, in severance payments in addition to
other non-cash benefits provided for under the agreements.
Payments under the agreements in the event of a change in control may
constitute some portion of an excess parachute payment under Section 280G of the
Internal Revenue Code (the "Code") for executive officers, resulting in the
imposition of an excise tax on the recipient and denial of the deduction for
such excess amounts to the Company and the Bank. Under the agreements the
Company and the Bank have agreed to pay to the Executive such additional amount,
if any, as is necessary, after the deduction of any applicable taxes, to pay any
such excise tax imposed on the Executive.
Payments to the Executive under the Bank's agreement will be guaranteed by
the Company in the event that payments or benefits are not paid by the Bank.
Payment under the Company's agreement would be made by the Company. All
reasonable costs and legal fees paid or incurred by the Executive pursuant to
any dispute or question of interpretation relating to the Agreements shall be
paid by the
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Bank or Company, respectively, if the Executive is successful pursuant to a
legal judgment, arbitration or settlement. The employment agreements also
provide that the Bank and Company shall indemnify the Executive to the fullest
extent allowable under federal and Delaware law, respectively.
The Bank has entered into an employment agreement with Mr. Pyle having a
term of three years (the "Employment Agreement"). The Employment Agreement
provides that, commencing on the first anniversary date and continuing on each
anniversary date thereafter, the disinterested members of the Board of Directors
of the Bank may extend the Employment Agreement for an additional year so that
the remaining term shall be three years, unless written notice of nonrenewal is
given by the Board of Directors after conducting a performance evaluation of Mr.
Pyle. The current base salary for Mr. Pyle is $75,000. In addition to the base
salary, the Employment Agreement provides for, among other things, participation
in stock benefit plans and other fringe benefits applicable to executive
personnel. The Employment Agreement provides for termination by the Bank for
cause as defined in the Employment Agreement at any time. In the event the Bank
chooses to terminate Mr. Pyle's employment for reasons other than for cause, or
in the event of his resignation from the Bank upon: (i) failure to reelect him
to his current offices; (ii) material change in his functions, duties or
responsibilities; (iii) a relocation of his principal place of employment by
more than 20 miles; (iv) a material reduction in the benefits and perquisites
provided to him; (v) liquidation or dissolution of the Bank or the Company; or
(vi) a breach of the Employment Agreement by the Bank or the refusal of the Bank
to extend the term of the Employment Agreement, Mr. Pyle, or his beneficiary in
the event of his death, would be entitled to receive an amount equal to the
greater of (a) the remaining base salary payments due to him or (b) three times
his average annual compensation for the five most recent years that he has been
employed by the Bank. The Bank would also continue to pay for his life, health
and disability coverage for the three years following the date of termination.
Under the Employment Agreement, upon an involuntary or voluntary
termination of Mr. Pyle's employment following a change in control of the Bank
or the Company, Mr. Pyle, or his beneficiary in the event of his death, would be
entitled to a severance payment equal to the greater of (i) the payments due for
the remaining term of the Employment Agreement; or (ii) three times the average
of the five preceding years' annual compensation. The Bank would also continue
his life, health and disability coverage for thirty-six (36) months. Any amounts
payable under the Employment Agreement resulting from termination of employment
following a change in control would be reduced to the extent necessary to avoid
such payments constituting an excess parachute payment under Section 280G of the
Code.
The Company has entered into an employment with Mr. Gieringer having a term
of five years. The employment agreement provides for a base salary of $100,000.
In addition to the base salary, the employment agreement provides for
participation by Mr. Gieringer in employee benefit plans generally provided to
permanent full time employees of the Company, but the Company is not required to
include Mr. Gieringer in any bonus plan, stock option plan or similar plan
maintained for the benefit of senior executives of the Company. Mr. Gieringer is
provided with, at his option, an automobile expense allowance or the use of a
recent model automobile. Mr. Gieringer is to serve as a special senior advisor
to the Company, and render such advisory and related services as may be
reasonably requested from time to time by the Chairman of the Board or its
designee. Mr. Gieringer is not required to devote more than twenty (20) hours
per week to such duties.
The employment agreement provides the Company may terminate Mr. Gieringer's
employment at any time "for cause" as defined in the employment agreement. In
the event the Company chooses to terminate Mr. Gieringer's employment for
reasons other than for cause or in the event of his resignation from the Company
upon: (i) failure to retain him as a special senior advisor to the Company, (ii)
a material change in his functions, duties or responsibilities, (iii) a
relocation of his principal place of employment by more than 20 miles, (iv) a
liquidation or dissolution of the Company, or (v) a breach of the employment
agreement by the Company, or in the event Mr. Gieringer resigns or is terminated
after a change in control of the Company, Mr. Gieringer, or his beneficiary in
the event of his death, would be entitled to continue to receive the remaining
payments during the remaining unexpired term of the employment agreement and an
amount equal to the annual contributions that
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<PAGE>
would have been made on his behalf to any employee pension benefit plans of the
Company during the remaining term of the employment agreement. The Company would
also continue to pay for his life, health and disability coverage for the
remaining term of the employment agreement.
Incentive Plan. On June 7, 1996, the stockholders approved the Patriot
Bank Corp. 1996 Stock-Based Incentive Plan ("Incentive Plan") under which all
employees of the Company are eligible to receive awards. The Company maintains
the Incentive Plan which provides discretionary awards to officers and key
employees as determined by a committee of non-employee directors. No options
were granted under the Incentive Plan to the Named Executive Officers for fiscal
1998.
The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the Named
Executive Officers at December 31, 1998. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such options and the closing sale price of the Common Stock at
December 31, 1998.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTION/SARS
AT FISCAL YEAR END(#) AT FISCAL YEAR END($)
---------------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE(2)
- ---- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Gary N. Gieringer............. 67,844 101,766 $309,766 $464,644
Joseph W. Major............... 67,844 101,766 $309,766 $464,644
Richard A. Elko............... 40,706 61,059 $185,864 $278,795
Kevin R. Pyle................. 1,800 2,700 $ 8,219 $ 12,328
</TABLE>
- ------------------
(1) The options in this table have an exercise price of $7.184 and become
exercisable at an annual rate of 20% beginning June 7, 1997. The options
will expire ten (10) years from the date of grant.
(2) Based on market value of the underlying stock at the fiscal year end, minus
the exercise price. The market price on December 31, 1998 was $11.75.
Supplemental Retirement Plan. The Company maintains a non-qualified
Supplemental Retirement Plan for the benefit of certain executive officers and
directors. The Supplemental Retirement Plan ("SRP") has been adopted by the
Company to provide supplemental retirement benefits to selected executives and
directors of the Company. Benefits under the SRP vest on a seven year schedule
subject to acceleration upon a change in control. The SRP provides a defined
benefit payable in fifteen annual installments of an amount which is determined
at the discretion of the Board. The participants under the SRP as determined by
the Personnel Compensation/Benefits Committee are Messrs. Major, Elliott and
Thren. The SRP provides for an early start to payment of the installments in the
event of disability, death prior to retirement, retirement or a change in
control. The SRP is unfunded for purposes of its tax treatment, however, the
Company has entered into certain life insurance contracts, the proceeds of which
could be used to fund the SRP in the future.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Company's current policy provides that all loans made by the Company to
its directors and officers are made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectibility or present other unfavorable
features.
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<PAGE>
PROPOSAL 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Company's independent auditors for the fiscal year ended December 31,
1998 were KPMG LLP. The Company's Board of Directors has appointed KPMG LLP as
independent auditors for the Company for the year ending December 31, 1999,
subject to ratification of such appointment by the shareholders.
Representatives of KPMG LLP will be present at the Annual Meeting. They
will be given an opportunity to make a statement if they desire to do so and
will be available to respond to appropriate questions from stockholders present
at the Annual Meeting.
KPMG LLP was engaged on February 26, 1998 as the Company's independent
auditors for the year ending December 31, 1998. The Company's Audit Committee
selected KPMG LLP after interviewing several independent certified public
accounting firms. The Company did not consult with KPMG LLP on any matter during
the Company's two most recent fiscal years.
The Company did not have any disagreements with the Company's former
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure during the Company's last
two fiscal years or any subsequent interim period. The prior accountant's
reports on the Company's financial statements for the years ended December 31,
1996 and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit scope, or
accounting principles. The Company's independent auditors for the fiscal year
ended December 31, 1997 were Grant Thornton LLP.
Unless marked to the contrary, the shares represented by the enclosed proxy
card will be voted FOR ratification of the appointment of KPMG LLP as the
independent auditors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY.
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ADDITIONAL INFORMATION
SHAREHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy statement and form of
proxy relating to the 2000 Annual Meeting of Stockholders, a stockholder
proposal must be received by the Secretary of the Company at the address set
forth on the Notice of Annual Meeting of Stockholders not later than November
20, 1999. Any such proposal will be subject to 17 C.F.R. ss.240.14a-8 of the
Rules and Regulations under the Exchange Act. Notice of Business to be Conducted
at an Annual Meeting
The bylaws of the Company provide an advance notice procedure for a
stockholder to properly bring business before an Annual Meeting. The stockholder
must give written advance notice to the Secretary of the Company not less than
ninety (90) days before the date originally fixed for such meeting; provided,
however, that in the event that less than twenty-one (21) days notice of the
date of the meeting is given or made to shareholders, notice by the stockholder
to be timely must be received not later than the close of business on the
seventh day following the date on which the Company's notice to stockholders of
the annual meeting date was mailed. Nominations for directors by shareholders
must be received by the Secretary of the Company not later than the close of
business on the 90th day preceding the date of the annual meeting. In the case
of nominations to the Board of Directors, certain information regarding the
nominee must be provided. Nothing in this paragraph shall be deemed to require
the Company to include in its proxy statement or the proxy relating to an annual
meeting any stockholder proposal which does not meet all of the requirements for
inclusion established by the SEC in effect at the time such proposal is
received.
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING
The Board of Directors knows of no business which will be presented for
consideration at the Meeting other than as stated in the Notice of Annual
Meeting of Stockholders. If, however, other matters are properly brought before
the Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote the shares represented thereby on such matters in accordance with
their best judgment.
Whether or not you intend to be present at the Annual Meeting, you are
urged to return your proxy card promptly. If you are then present at the Annual
Meeting and wish to vote your shares in person, your original proxy may be
revoked by voting at the Annual Meeting.
By Order of the Board of Directors
/s/
-----------------------------------
DIANE M. DAVIDHEISER
Secretary
Pottstown, Pennsylvania
March 19, 1999
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN, DATE AND
PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
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