As filed with the Securities and Exchange Commission on September 30, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
Patriot Bank Corp.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 6712 23-2820537
- ------------------------- ----------------- ----------------
(State or other jurisdic- (Primary Standard (I.R.S. Employer
tion of incorporation or Industrial Class- Identification
organization) ification Code No.)
Number)
High and Hanover Streets
Pottstown, Pennsylvania 19464
(610) 323-1500
---------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Joseph W. Major
President and Chief Executive Officer
Patriot Bank Corp.
High and Hanover Streets
Pottstown, Pennsylvania 19464
(610) 323-1500
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------------------
First Lehigh Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 6712 23-2218479
- ------------------------- ----------------- -----------------
(State or other jurisdic- (Primary Standard (I.R.S. Employer
tion of incorporation or Industrial Class- Identification
organization) ification Code No.)
Number)
1620 Pond Road
Allentown, Pennsylvania 18104
(610) 398-6660
---------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Wilbur R. Roat
President and Chief Executive Officer
First Lehigh Corporation
1620 Pond Road
Allentown, Pennsylvania 18104
(610) 398-6660
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
<PAGE>
including area code, of agent for service)
------------------------------------------
To be consolidated into a new Pennsylvania corporation known
as Patriot Bank Corp.
with a copy to: with a copy to:
Jeffrey P. Waldron, Esquire Kathleen M. Shay, Esquire
Stevens & Lee Duane, Morris & Heckscher LLP
111 North Sixth Street 4200 One Liberty Place
P.O. Box 679 Philadelphia, PA 19103-7396
Reading, PA 19603
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Title of Amount to be Proposed Proposed Amount of
each class registered (1) maximum maximum registra-
of secur- offering aggregate tion fee (2)
ities to be price per offering
registered unit price
- --------------------------------------------------------------------------------
Common Stock, 7,691,771 Not Not
no par value shares applicable applicable $26,422
- --------------------------------------------------------------------------------
(1) Based on the maximum number of shares of common stock of Patriot Bank
Corp., a new Pennsylvania corporation to be formed upon the filing of
the articles of consolidation (the "Holding Company"), that may be
issued in connection with the proposed consolidation (the
"Consolidation") of Patriot Bank Corp. ("Patriot") and First Lehigh
Corporation ("First Lehigh"), and the conversion of all outstanding
shares of common stock and preferred stock of Patriot and First Lehigh
(other than dissenting shares under Pennsylvania law and shares
directly or indirectly owned by Patriot or First Lehigh) into shares
of common stock of the Holding Company. In accordance with Rule 416,
this Registration Statement shall also register any additional shares
of the Registrant's common stock that may become issuable to prevent
dilution resulting from stock splits, stock dividends or similar
transactions as provided by the agreement relating to the
Consolidation.
(2) Estimated solely for purposes of calculating the registration fee.
Computed in accordance with Rule 457(f)(1), on the basis of (i) the
closing sale price of the common stock of Patriot on September 24,
1998 of $12.50 with respect to 5,333,336 shares of Patriot common
stock to be exchanged in the Consolidation and unexercised options to
purchase 644,391 shares of Patriot common stock, and (ii) the average
of the bid and asked prices of the common stock of First Lehigh on
September 24, 1998 of $4.6875 with respect to 3,495,963 shares of
First Lehigh common stock and shares of First Lehigh preferred stock
to be exchanged in the Consolidation and unexercised options to
purchase 60,000 shares of First Lehigh common stock.
<PAGE>
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
[Letterhead of Patriot Bank Corp.]
PATRIOT BANK CORP.
High and Hanover Streets
Pottstown, Pennsylvania 19464
November __, 1998
Dear Shareholder:
You are cordially invited to attend a special meeting of the
shareholders (the "Patriot Special Meeting") of Patriot Bank Corp. ("Patriot")
which will be held at __________________________________________________,
Pottstown, Pennsylvania, at 3:00 p.m., local time, on December __, 1998.
At the Patriot Special Meeting, shareholders will be asked to approve
and adopt the Agreement and Plan of Consolidation (the "Agreement") dated as of
July 28, 1998, by and between First Lehigh Corporation ("First Lehigh")
providing for the consolidation (the "Consolidation") of Patriot and First
Lehigh into Patriot Bank Corp., a Pennsylvania corporation to be formed upon
completion of the Consolidation (the "Holding Company") and the conversion of
each outstanding share of common stock of Patriot (other than any shares
directly or indirectly owned by Patriot or First Lehigh) into 1.0 share of
common stock of the Holding Company, all as more fully described in the
accompanying Proxy Statement/Prospectus. Completion of the Consolidation is
subject to certain conditions, including the approval of the Agreement by the
shareholders of Patriot and First Lehigh and the approval of the Consolidation
by various regulatory agencies.
The accompanying Proxy Statement/Prospectus and its Annexes contain
important information concerning the Consolidation. Please read all of these
materials carefully.
The Board of Directors of Patriot has carefully considered and
unanimously approved the Agreement and believes that the Consolidation is in
<PAGE>
the best interests of Patriot and its Shareholders. ACCORDINGLY, THE BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT.
Your vote is important regardless of the number of shares you own.
Whether or not you plan to attend the Patriot Special Meeting, the Board of
Directors of Patriot urges you to complete, sign, date and return the enclosed
Proxy Card promptly in the enclosed postage-paid envelope. This will not prevent
you from voting in person at the Patriot Special Meeting but will ensure that
your vote is counted if you are unable to attend.
Thank you very much for your continued interest and support. We look
forward to seeing you at the Patriot Special Meeting.
Sincerely,
Joseph W. Major
President and Chief Executive Officer
<PAGE>
PATRIOT BANK CORP.
High and Hanover Streets
Pottstown, Pennsylvania 19464
(610) 323-1500
--------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on December __, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders
(including any adjournment or postponement, the "Patriot Special Meeting") of
PATRIOT BANK CORP. ("Patriot") will be held at
__________________________________, Pottstown, Pennsylvania, at 3:00 p.m., local
time, on December __, 1998, to consider the following matters, all as more fully
described in the accompanying Joint Proxy Statement/Prospectus:
1. To consider and vote upon the Agreement and Plan of Consolidation
(the "Agreement") dated as of July 28, 1998, by and between Patriot and
First Lehigh Corporation ("First Lehigh"), pursuant to which Patriot and
First Lehigh will be consolidated (the "Consolidation") into Patriot Bank
Corp., a Pennsylvania corporation to be formed upon completion of the
Consolidation (the "Holding Company"). The Agreement provides that (a) each
Patriot shareholder will receive, for each outstanding share of the common
stock of Patriot held by such person, 1.0 share of the common stock of the
Holding Company, and (b) if the average value of a share of Patriot common
stock, determined in accordance with the Agreement over a twenty trading
day period immediately preceding the effective date of the Consolidation
(the "Patriot Market Value"), is between $14.71 and $17.97, then each First
Lehigh shareholder will receive, for each outstanding share of the common
stock of First Lehigh and each share of Senior Preferred Stock of First
Lehigh held by such person, .428 shares of the common stock of the Holding
Company, and each First Lehigh shareholder will receive, for each
outstanding share of Series A Preferred Stock held by such person, .342
shares of the common stock of the Holding Company. If the Patriot Market
Value is less than $14.71, then each share of First Lehigh common stock and
Senior Preferred Stock will be converted into such number of shares as is
equal to $6.30 divided by the Patriot Market Value and each share of Series
A Preferred Stock will be converted into such number of shares as is equal
to $5.04 divided by the Patriot Market Value; provided that if the Patriot
Market Value is less than $13.07, then Patriot can elect to have each share
of First Lehigh common stock and Senior Preferred Stock converted into .482
shares of Holding Company
<PAGE>
common stock and each share of Series A Preferred Stock will be converted
into .38562 shares of Holding Company common stock. If the Patriot Market
Value is greater than $17.97, then each share of First Lehigh common stock
and Senior Preferred Stock will be converted into such number of shares as
is equal to $7.69 divided by the Patriot Market Value and each share of
Series A Preferred Stock will be converted into such number of shares as is
equal to $6.15 divided by the Patriot Market Value. First Lehigh has the
right to terminate the Agreement if the Patriot Market Value is less than
$12.26.
2. To vote on adjournment of the Patriot Special Meeting, if
necessary, to permit further solicitation of proxies in the event there are
not sufficient votes at the time of the Patriot Special Meeting to approve
the Agreement.
3. To consider such other matters as may properly be brought before
the Patriot Special Meeting.
The Board of Directors of Patriot has fixed the close of business on
____________, 1998, as the record date for determining shareholders entitled to
notice of, and to vote at, the Patriot Special Meeting.
The Board of Directors of Patriot believes that the Consolidation is
fair to and in the best interests of Patriot and its shareholders and recommends
that shareholders vote "FOR" approval of the Agreement.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
WHETHER OR NOT YOU PLAN TO ATTEND THE PATRIOT SPECIAL MEETING, THE BOARD OF
DIRECTORS OF PATRIOT URGES YOU TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL
NOT PREVENT YOU FROM VOTING IN PERSON AT THE PATRIOT SPECIAL MEETING BUT WILL
ENSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
By order of the Board of Directors
Paulette A. Strunk
Secretary
Pottstown, Pennsylvania
November __, 1998
<PAGE>
[LETTERHEAD OF FIRST LEHIGH]
November __, 1998
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders
(the "First Lehigh Special Meeting") of First Lehigh Corporation ("First
Lehigh") to be held on _________________, December __, 1998, at 11:00 a.m.,
local time, at ______________________________, Allentown, Pennsylvania.
At the First Lehigh Special Meeting, shareholders will be asked to
consider and vote upon the adoption and approval Agreement and Plan of
Consolidation dated as of July 28, 1998 (the "Agreement"), by and between First
Lehigh and Patriot Bank Corp. ("Patriot"), providing for (a) the consolidation
(the "Consolidation") of Patriot and First Lehigh into Patriot Bank Corp., a
Pennsylvania corporation to be formed upon completion of the Consolidation (the
"Holding Company"), (b) the conversion of each outstanding share of common
stock, Senior Preferred Stock, and Series A Preferred Stock of First Lehigh
(other than any dissenting shares under Pennsylvania law and shares directly or
indirectly owned by Patriot or First Lehigh) into shares of common stock of the
Holding Company, all as more fully described in the accompanying Proxy
Statement/Prospectus. The Holding Company will pay cash to First Lehigh
shareholders in lieu of issuing fractional shares of common stock of the Holding
Company. Completion of the Consolidation is subject to certain conditions,
including the approval of the Agreement by the shareholders of First Lehigh and
Patriot and the approval of the Consolidation by various regulatory agencies.
The accompanying Proxy Statement/Prospectus and its Annexes contain
important information concerning the Consolidation. Please read all of these
materials carefully.
The Board of Directors of First Lehigh has carefully considered and
unanimously approved the Agreement after considering various factors, including
the fairness opinion of Danielson Associates Inc., First Lehigh's financial
advisor, and believes that the Consolidation is fair to and in the best
interests of First Lehigh and its shareholders. ACCORDINGLY, YOUR BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL
AND ADOPTION OF THE AGREEMENT.
Your vote is important regardless of the number of shares you own.
Whether or not you plan to attend the First Lehigh Special Meeting, the Board
<PAGE>
of Directors of First Lehigh urges you to complete, sign, date and return the
enclosed Proxy Card promptly in the enclosed postage-paid envelope. This will
not prevent you from voting in person at the First Lehigh Special Meeting but
will ensure that your vote is counted if you are unable to attend.
Thank you very much for your continued interest and support. We look
forward to seeing you at the First Lehigh Special Meeting.
Sincerely yours,
Wilbur R. Roat,
President and Chief Executive Officer
<PAGE>
FIRST LEHIGH CORPORATION
1620 Pond Road
Allentown, Pennsylvania 18104
--------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on December __, 1998
--------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders
(including any adjournment or postponement, the "First Lehigh Special Meeting")
of First Lehigh Corporation ("First Lehigh"), a Pennsylvania corporation, will
be held on _______________, December __, 1998, at 11:00 a.m., local time, at
_____________________, Allentown, Pennsylvania, to consider and vote upon the
following matters, all as more fully described in the accompanying Joint Proxy
Statement/Prospectus:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Consolidation (the "Agreement") dated as of June 28, 1998,
by and between Patriot Bank Corp. ("Patriot"), and First Lehigh, a copy of which
is attached as Annex A to the Joint Proxy Statement/Prospectus accompanying this
Notice, which contemplates that, among other things, (a) Patriot and First
Lehigh will be consolidated (the "Consolidation") into Patriot Bank Corp., a
Pennsylvania corporation to be formed upon completion of the Consolidation (the
"Holding Company"), (b) if the average value of a share of Patriot common stock,
determined in accordance with the Agreement, over a twenty trading day period
immediately preceding the effective date of the Consolidation (the "Patriot
Market Value") is greater than or equal to $14.71 and less than or equal to
$17.97, then each First Lehigh shareholder will receive for each outstanding
share of the common stock and Senior Preferred Stock of First Lehigh held by
such person .428 shares of the common stock of the Holding Company, and each
First Lehigh shareholder will receive for each outstanding share of Series A
Preferred Stock of First Lehigh held by such person .342 shares of the common
stock of the Holding Company and (c) each Patriot shareholder will receive for
each outstanding share of the common stock of Patriot held by such person 1.0
shares of the common stock of the Holding Company. If the Patriot Market Value
is less than $14.71, then each share of First Lehigh common stock and Senior
Preferred Stock will be converted into such number of shares as is equal to
$6.30 divided by the Patriot Market Value and each share of Series A Preferred
Stock will be converted into such number of shares as is equal to $5.04 divided
by the Patriot Market Value; provided that if the Patriot Market Value is less
than $13.07, then Patriot can elect to have each share of First Lehigh common
stock and Senior Preferred Stock converted into .482 shares of Holding Company
common stock and each share of
<PAGE>
Series A Preferred Stock converted into .38562 shares of Holding Company stock;
provided further, however, that if the Patriot Market Value is less than $12.26,
First Lehigh has the right to terminate the Agreement prior to the effective
date of the Consolidation. If the Patriot Market Value is greater than $17.97,
then each share of First Lehigh common stock and Senior Preferred Stock will be
converted into such number of shares as is equal to $7.69 divided by the Patriot
Market Value and each share of Series A Preferred Stock will be converted into
such number of shares as is equal to $6.15 divided by the Patriot Market Value.
2. The adjournment of the First Lehigh Special Meeting, if necessary,
to permit further solicitation of proxies in the event there are not sufficient
votes at the time of the First Lehigh Special Meeting to approve and adopt the
Agreement.
3. The transaction of such other business as may properly be brought
before the First Lehigh Special Meeting.
The Board of Directors of First Lehigh has fixed the close of business
on __________, 1998 as the record date for determining shareholders entitled to
notice of, and to vote at, the First Lehigh Special Meeting. Approval of the
Agreement will require (i) the affirmative vote of the holders of at least 80%
of the outstanding shares of First Lehigh Common Stock, (ii) the affirmative
vote of the holders of at least 80% of the outstanding shares of the Series A
Preferred Stock and (iii) the affirmative vote of the holders of at least 66
2/3% of the outstanding shares of the Senior Preferred Stock.
The Board of Directors of First Lehigh has carefully considered the
terms of the Agreement and has unanimously concluded that such terms are fair
and believes that the Consolidation is fair to and in the best interests of
First Lehigh and its shareholders and recommends that shareholders vote "FOR"
approval and adoption of the Agreement.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
WHETHER OR NOT YOU PLAN TO ATTEND THE FIRST LEHIGH SPECIAL MEETING, THE BOARD OF
DIRECTORS OF FIRST LEHIGH URGES YOU TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON AT THE FIRST LEHIGH SPECIAL
MEETING BUT WILL ENSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE>
BY ORDER OF THE BOARD OF DIRECTORS
------------------------------,
Secretary
Allentown, Pennsylvania
November __, 1998
<PAGE>
- --------------------------------------------------------------------------------
PATRIOT BANK CORP. and FIRST LEHIGH CORPORATION
JOINT PROXY STATEMENT
--------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
This Joint Proxy Statement/Prospectus is being furnished to
shareholders of Patriot Bank Corp., a Delaware corporation ("Patriot"), and to
shareholders of First Lehigh Corporation, a Pennsylvania corporation ("First
Lehigh"), in connection with the solicitation of proxies by the respective
Boards of Directors of Patriot and First Lehigh for use at the Special Meeting
of Shareholders of Patriot (including any adjournments or postponements thereof,
the "Patriot Special Meeting") and the Special Meeting of Shareholders of First
Lehigh (including any adjournments or postponements thereof, the "First Lehigh
Special Meeting" and, together with the Patriot Special Meeting, the "Meetings")
to be held on December __, 1998.
This Proxy Statement/Prospectus relates to an Agreement and Plan of
Consolidation (the "Agreement") dated as of July 28, 1998, by and between
Patriot and First Lehigh, pursuant to which Patriot and First Lehigh will be
consolidated (the "Consolidation") into Patriot Bank Corp., a Pennsylvania
corporation to be formed upon completion of the Consolidation (the "Holding
Company"). In the Consolidation, (a) each share of common stock, par value $0.01
per share, of Patriot (the "Patriot Common Stock"), other than any shares
directly or indirectly owned by Patriot or First Lehigh other than in a
fiduciary capacity that are beneficially owned by third parties or as a result
of debts previously contracted ("Excluded Shares"), will be converted into and
become the right to receive 1.0 shares of the common stock of the Holding
Company, (b) each share of common stock, par value $0.01 per share, of First
Lehigh (the "First Lehigh Common Stock") and each share of Senior Preferred
Stock, par value $0.01 per share, of First Lehigh (the "Senior Preferred
Stock"), other than (i) any dissenting shares under Pennsylvania law
("Dissenting Shares"), and (ii) Excluded Shares, will be converted into and
become the right to receive .428 shares of the common stock of the Holding
Company, and (d) each share of Series A Preferred Stock, par value $0.01 per
share, of First Lehigh (the "Series A Preferred Stock"), other than Dissenting
Shares and Excluded Shares, will be converted into and become the right to
receive .342 shares of the Common Stock of the Holding Company; provided that
the average value of a share of Patriot Common Stock, determined in accordance
with the Agreement, over a twenty trading day period immediately preceding the
effective date (the "Closing Date") of the Consolidation (the "Patriot Market
<PAGE>
Value") is greater than or equal to $14.71 and less than or equal to $17.97. If
the Patriot Market Value is less than $14.71, then each share of First Lehigh
Common Stock and Senior Preferred Stock will be converted into such number of
shares as is equal to $6.30 divided by the Patriot Market Value and each share
of Series A Preferred Stock will be converted into such number of shares as is
equal to $5.04 divided by the Patriot Market Value; provided that if the Patriot
Market Value is less than $13.07, then Patriot can elect to have each share of
First Lehigh Common Stock and Senior Preferred Stock converted into .482 shares
of Holding Company Common Stock and each share of Series A Preferred Stock
converted into .38562 shares of Holding Company Common Stock. If the Patriot
Market Value is greater than $17.97, then each share of First Lehigh Common
Stock and Senior Preferred Stock will be converted into such number of shares as
is equal to $7.69 divided by the Patriot Market Value and each share of Series A
Preferred Stock converted into such number of shares as is equal to $6.15
divided by the Patriot Market Value. First Lehigh has the right to terminate the
Agreement if the Patriot Market Value is less than $12.26.
Upon completion of the Consolidation, the former holders of First
Lehigh Common Stock, Senior Preferred Stock, and Series A Preferred Stock will
hold approximately 22% of the issued and outstanding Holding Company Common
Stock (as defined below) and the former holders of Patriot Common Stock will
hold approximately 78% of the issued and outstanding Holding Company Common
Stock. The Senior Preferred Stock and the Series A Preferred Stock are
collectively referred to herein as the "First Lehigh Preferred Stock."
The Patriot Common Stock is traded on the NASDAQ National Market under
the symbol "PBIX." The First Lehigh Common Stock is quoted on the NASD OTC
Bulletin Board under the symbol "FLHI." On July 28, 1998, the last business day
prior to the public announcement of the Agreement, the last reported sales
prices for Patriot Common Stock and First Lehigh Common Stock were $15.50 and
$7.25 per share, respectively. On September 25, 1998, such prices were $12.25
and $4.875 per share, respectively.
This Proxy Statement/Prospectus constitutes both the proxy statement of
each of Patriot and First Lehigh relating to (i) the solicitation of proxies by
their respective Boards of Directors for use at the Meetings to be held for the
purpose of considering and voting upon a proposal to approve and adopt the
Agreement and (ii) the prospectus of the Holding Company with respect to up to a
maximum of 7,691,771 shares of common stock, no par value, of the Holding
Company (the "Holding Company Common Stock") to be issued to shareholders of
Patriot and First Lehigh in the Consolidation. The number of shares of Holding
Company Common Stock into which shares (other than any Dissenting Shares and
Excluded Shares) of Patriot Common Stock, First Lehigh Common Stock, and First
Lehigh Preferred Stock will be converted in the Consolidation will be further
adjusted to prevent dilution in the event of stock splits, reclassifications or
other similar events. The Holding Company will pay cash to Patriot and First
Lehigh shareholders in lieu of issuing fractional shares of Holding Company
Common Stock.
<PAGE>
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the respective shareholders of Patriot and First Lehigh on
or about November __, 1998.
THE SHARES OF HOLDING COMPANY COMMON STOCK OFFERED HEREBY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF HOLDING COMPANY COMMON STOCK OFFERED HEREBY ARE NOT
SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
----------------
The date of this Proxy Statement/Prospectus is November __, 1998.
<PAGE>
Table of Contents
-----------------
<TABLE>
<S> <C>
AVAILABLE INFORMATION........................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................. 2
SUMMARY ....................................................................... 5
The Companies.......................................................... 5
The Meetings........................................................... 8
The Consolidation...................................................... 13
Management and Operations of the Holding Company After the
Consolidation................................................. 19
Exchange of Certificates............................................... 20
Standstill Agreement with James L. Leuthe.............................. 20
Certain Related Transactions........................................... 21
Interests of Certain Persons in the Consolidation...................... 22
Comparative Per Common Share Data...................................... 22
SELECTED FINANCIAL DATA......................................................... 26
PRO FORMA COMBINED FINANCIAL INFORMATION........................................ 30
Pro Forma Unaudited Combined Condensed Balance Sheet as of
June 30, 1998................................................. 31
Pro Forma Unaudited Combined Condensed Statements of Income for
the Six Months Ended June 30, 1998 and
the Year Ended December 31, 1997.............................. 34
THE MEETINGS.................................................................... 36
Date, Time and Place................................................... 36
Matters To Be Considered at the Special Meetings....................... 36
Votes Required......................................................... 36
Voting of Proxies...................................................... 40
Revocability of Proxies................................................ 42
Record Date; Stock Entitled to Vote; Quorum............................ 42
Solicitation of Proxies................................................ 43
THE CONSOLIDATION............................................................... 44
Background of and Reasons for the Consolidation; Recommendations
of the Boards of Directors.................................... 44
Terms of the Consolidation............................................. 48
Opinions of Financial Advisors ........................................ 50
Effective Date of the Consolidation.................................... 59
Exchange of Stock Certificates......................................... 60
Conditions to the Consolidation........................................ 61
Regulatory Approvals................................................... 63
Representations and Warranties......................................... 65
Business Pending the Consolidation..................................... 66
Dividends.............................................................. 69
No Solicitation of Transactions........................................ 70
Amendment; Extension and Waivers....................................... 70
Termination; Effect of Termination..................................... 71
Management and Operations of the Holding Company after the
Consolidation................................................. 72
Employee Benefits...................................................... 73
Accounting Treatment................................................... 73
Certain Federal Income Tax Consequences................................ 74
Expenses .............................................................. 75
Resale of Holding Company Common Stock................................. 75
Dissenters' Rights..................................................... 76
INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION............................... 80
Stock Options.......................................................... 80
Standstill Agreement Between Patriot and James L. Leuthe............... 81
(i)
<PAGE>
<S> <C>
Indemnification; Directors and Officers Insurance...................... 82
Continued Employment................................................... 83
Employment Agreements.................................................. 83
Change in Control Agreements........................................... 85
Pension Plans.......................................................... 85
CERTAIN RELATED TRANSACTIONS.................................................... 85
Stock Option Agreement................................................. 85
DESCRIPTION OF THE HOLDING COMPANY.............................................. 89
General .............................................................. 89
Board and Management................................................... 89
Remuneration of Directors and Officers................................. 91
Directors and Management of Subsidiaries............................... 91
Authorized Capital Stock............................................... 91
Market for Holding Company Common Stock and Dividends.................. 93
Pennsylvania Anti-Takeover Provisions.................................. 94
COMPARISON OF RIGHTS OF SHAREHOLDERS OF PATRIOT, FIRST LEHIGH, AND THE
HOLDING COMPANY........................................................ 95
Directors.............................................................. 96
Shareholder Meetings................................................... 99
Action by Shareholders Without a Meeting............................... 100
Antitakeover Provisions................................................ 101
Required Shareholder Vote.............................................. 103
DESCRIPTION OF PATRIOT.......................................................... 110
Recent Developments.................................................... 110
Business .............................................................. 110
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 122
Management............................................................. 166
Security Ownership of Certain Beneficial Owners and Management......... 166
Executive Compensation................................................. 169
Incentive Plan......................................................... 170
Supplemental Retirement Plan........................................... 171
Transactions With Certain Related Persons.............................. 171
Directors' Fees........................................................ 172
Incentive Plan......................................................... 172
Market Price of and Dividends on Patriot Common Stock and Related
Shareholder Matters........................................... 172
DESCRIPTION OF FIRST LEHIGH..................................................... 174
Business .............................................................. 174
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 193
Management............................................................. 232
Security Ownership of Certain Beneficial Owners and Management......... 236
Market Price of and Dividends on First Lehigh Stock and Related
Matters....................................................... 238
ADJOURNMENT..................................................................... 240
INDEMNIFICATION................................................................. 241
EXPERTS ....................................................................... 241
LEGAL MATTERS................................................................... 242
OTHER MATTERS................................................................... 242
FINANCIAL STATEMENTS OF PATRIOT................................................. S-1
FINANCIAL STATEMENTS OF FIRST LEHIGH............................................ T-1
<PAGE>
<S> <C>
ANNEXES
A. Agreement and Plan of Consolidation between
Patriot and First Lehigh, dated as of July 28, 1998....................... A-1
B. Stock Option Agreement between Patriot and First Lehigh,
dated July 28, 1998....................................................... B-1
C. Standstill Agreement between Patriot and James L. Leuthe,
dated July 28, 1998 ...................................................... C-1
D. Opinion of Janney Montgomery Scott Inc.................................... D-1
E. Opinion of Danielson Associates Inc....................................... E-1
F. Sections 1930 and 1571-1580 of the Pennsylvania
Business Corporation Law of 1988, as amended.............................. F-1
</TABLE>
(iii)
<PAGE>
No persons have been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus,
or incorporated by reference herein, in connection with the solicitation of
proxies or the offering of securities made hereby and, if given or made, such
information or representation must not be relied upon as having been authorized
by Patriot or First Lehigh. This Proxy Statement/Prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom it is
not lawful to make any such offer or solicitation in such jurisdiction. Neither
the delivery of this Proxy Statement/Prospectus nor any distribution of
securities made hereunder shall, under any circumstances, create an implication
that there has been no change in the affairs of Patriot or First Lehigh since
the date hereof or that the information herein is correct as of any time
subsequent to its date.
All information concerning Patriot and its subsidiaries contained
herein, incorporated herein by reference or supplied herewith, has been
furnished by Patriot, and all information concerning First Lehigh and its
subsidiaries contained herein, incorporated herein by reference or supplied
herewith, has been furnished by First Lehigh.
AVAILABLE INFORMATION
Patriot is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). First Lehigh is subject
to the information requirements of Section 15(d) of the Exchange Act and, in
accordance therewith, files certain reports with the Commission. The reports,
proxy statements and other information filed by Patriot and First Lehigh with
the Commission can be inspected and copied at the offices of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, New York, New
York 10048, and Citicorp Center, 500 West Madison Avenue, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material also can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, and from the web site that the
Commission maintains at http://www.sec.gov
Patriot and First Lehigh have filed with the Commission a Registration
Statement on Form S-4 (together with any amendments thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Holding Company Common Stock to be
<PAGE>
issued pursuant to the Agreement. This Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits thereto. Such additional information may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Proxy Statement/Prospectus or in any document incorporated in this Proxy
Statement/Prospectus by reference or supplied herewith as to the contents of any
contract or other document referred to herein or therein are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement or such
other document, each such statement being qualified in all respects by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Patriot (File No.
0-26744) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. Patriot's Annual Report on Form 10-K for the year
ended December 31, 1997.
2. Patriot's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
3. Patriot's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1998.
4. Patriot's Current Report on Form 8-K filed March 4,
1998, as amended by Form 8-KA filed March 24, 1998.
5. Patriot's Current Report on Form 8-K filed June 4, 1998.
6. Patriot's Current Report on Form 8-K filed August 13, 1998.
The following documents filed with the Commission by First Lehigh (File
No. 33-71712) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. First Lehigh's Annual Report on Form 10-KSB for the
year ended December 31, 1997.
2. First Lehigh's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1998.
2
<PAGE>
3. First Lehigh's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1998.
4. First Lehigh's Current Report on Form 8-K filed
August 6, 1998.
In addition, all documents filed by Patriot and First Lehigh pursuant
to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Proxy Statement/Prospectus and prior to the date of the Meetings shall
be deemed to be incorporated by reference in this Proxy Statement/Prospectus and
to be a part hereof from the dates of filing of such documents or reports. Any
statement contained herein or in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON
WRITTEN OR ORAL REQUEST. DOCUMENTS RELATING TO PATRIOT MAY BE REQUESTED FROM
PATRIOT BANK CORP., HIGH AND HANOVER STREETS, POTTSTOWN, PENNSYLVANIA 19464
(TELEPHONE NUMBER (610) 323-1500), ATTENTION: DIANE DAVIDHEISER. DOCUMENTS
RELATING TO FIRST LEHIGH MAY BE REQUESTED FROM FIRST LEHIGH CORPORATION, 1620
POND ROAD, ALLENTOWN, PENNSYLVANIA 18104 (TELEPHONE NUMBER (610) 398-6660),
ATTENTION: ___________________. IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS
PRIOR TO THE APPLICABLE MEETING, REQUESTS SHOULD BE RECEIVED BY _______ __,
1998.
This Joint Proxy Statement/Prospectus (including the information
incorporated herein by reference) contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of the Holding Company,
Patriot, and First Lehigh, including: (i) statements relating to the cost
savings estimated to result from the Consolidation, (ii) statements relating to
revenues estimated to result from the Consolidation, and (iii) statements
preceded by, followed by, or that include the words "believes," "expects,"
3
<PAGE>
anticipates," "estimates," or similar expressions. See "Summary," "Pro Forma
Combined Financial Information," "The Consolidation--Background of and Reasons
for the Consolidation; Recommendations of the Boards of Directors--and Opinions
of Financial Advisors." These forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, the following possibilities: (a) expected cost savings from the
Consolidation may not be fully realized or realized within the expected time
frame; (b) revenues following the Consolidation may be lower than expected, or
deposit attrition, operating costs or customer loss and business disruption
following the Consolidation may be greater than expected; (c) competitive
pressures among depository and other financial institutions may increase
significantly; (d) costs or difficulties related to the integration of the
businesses of Patriot and First Lehigh may be greater than expected; (e) changes
in the interest rate environment may reduce margins; (f) general economic or
business conditions, either nationally or in Pennsylvania, may be less favorable
than expected, resulting in, among other things, a deterioration in credit
quality or a reduced demand for credit; (g) legislative or regulatory changes
may adversely affect the business in which the Holding Company will be engaged,
and (h) changes may occur in the securities markets.
4
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus and in the documents incorporated herein by
reference. Reference is made to, and this summary is qualified in its entirety
by, the more detailed information contained or incorporated by reference in this
Proxy Statement/Prospectus and the Annexes hereto. A copy of the Agreement
(including exhibits thereto) is set forth in Annex A to this Proxy
Statement/Prospectus and reference is made thereto for a complete description of
the terms of the Consolidation. Shareholders of Patriot and First Lehigh are
urged to read carefully this entire Proxy Statement/Prospectus, including the
Annexes hereto.
The Companies
Patriot
Patriot Bank Corp. ("Patriot") is a Delaware corporation and is the
holding company for Patriot Bank ("Patriot Bank") and Patriot Investment Company
("PIC"). Patriot 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 "Commission").
Patriot Bank was originally chartered in 1938. In 1991, Patriot 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, Patriot Bank converted from a
Pennsylvania-chartered mutual savings bank to a federally-chartered mutual
savings bank. On December 1, 1995, Patriot acquired Patriot Bank as part of
Patriot 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, Patriot Bank converted to a
Pennsylvania-chartered commercial bank. Patriot Bank conducts business through
its network of 13 community banking offices located in Montgomery, Berks,
Lehigh, Northampton and Chester Counties, Pennsylvania. The Bank's deposits are
insured up to the maximum allowable by the Savings Association Insurance Fund
("SAIF") administered by the FDIC. At June 30, 1998, Patriot Bank had total
assets of $640.3 million, deposits of $365.6 million and stockholders' equity of
$35.7 million.
5
<PAGE>
Patriot 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 its market area. In addition to its lending activities. Patriot Bank
also invests in investment and mortgage-backed securities. Patriot Bank uses
advances from the Federal Home Loan Bank of Pittsburgh ("FHLB") and repurchase
agreements as sources of funds.
Patriot Bank's revenues are derived principally from interest on loans,
interest on investment and mortgage-backed securities and other fees and service
charges. Patriot Bank's primary sources of funds are deposits, FHLB advances,
repurchase agreements, interest on loans, investment and mortgage-backed
securities and principal repayments.
PIC is a Delaware investment corporation that was incorporated by
Patriot on September 10, 1996. Its primary business consists of maintaining an
investment portfolio. At June 30, 1998, PIC had total assets of $245.4 million,
liabilities of $210.6 million, and stockholder's equity of $34.8 million.
On September 16, 1998 Patriot entered into an agreement to purchase all
of the outstanding capital stock of Keystone Financial Leasing, Inc. ("KFL"), a
small ticket leasing company having approximately $40 million in assets as of
June 30, 1998. KFL is a wholly owned subsidiary of Keystone Bank, N.A. The
agreement provides that Patriot is to pay $6,585,000 in cash at closing and
further cash consideration based on future revenues of KFL. Patriot intends to
merge KFL into Patriot Commercial Leasing Company, a wholly owned subsidiary of
Patriot Bank. The acquisition is subject to approval of various regulatory
agencies and will be treated as a purchase for financial accounting purposes.
Patriot expects the transaction to close near the end of 1998.
The principal executive offices of Patriot are located at High and
Hanover Streets, Pottstown, Pennsylvania 19464, and its telephone number is
(610) 323-1500. For further information concerning Patriot and its subsidiaries,
see "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"PATRIOT SELECTED FINANCIAL DATA" and "DESCRIPTION OF PATRIOT."
6
<PAGE>
First Lehigh
First Lehigh Corporation (the "First Lehigh") was incorporated under
Pennsylvania law in 1982 and is registered as a bank holding company. First
Lehigh provides financial and managerial resources and services to, and
coordinates and evaluates the activities of, First Lehigh Bank ("First Lehigh
Bank") and its subsidiaries. First Lehigh Bank provides a wide range of
financial services, principally to consumers and small- to medium-size
businesses in the Lehigh Valley area of Pennsylvania.
As of June 30, 1998, the Company had total assets of $111.4 million,
total deposits of $95.1 million, and total stockholders' equity of $14.4
million.
In recent years, the financial condition, results of operations and
business of First Lehigh and First Lehigh Bank have been adversely affected by
certain adverse markets for real estate and economic conditions during the early
1990's. First Lehigh and First Lehigh Bank have also consented to certain
regulatory agreements that have established certain requirements, including an
increased regulatory capital requirement for First Lehigh Bank, generally
intended to enhance the financial condition and operations of First Lehigh and
First Lehigh Bank.
First Lehigh Bank, which was established in 1923, engages in a
full-service commercial banking business, including accepting time and demand
deposits, making secured and unsecured commercial and consumer loans, financing
commercial transactions, and making construction and mortgage loans. Its
deposits are insured by the FDIC to the extent provided by law. First Lehigh
Bank is a Pennsylvania banking institution under the supervision of the
Pennsylvania Department of Banking (the "Department") and the FDIC.
First Lehigh Bank maintains its principal executive offices in
Allentown, Lehigh County, Pennsylvania, with five banking offices located in
Pennsylvania. First Lehigh Bank's five branches are located in Walnutport and
Cherryville, Northampton County, Allentown and Bethlehem, Lehigh County.
The principal executive offices of First Lehigh are located at 1620
Pond Road, Allentown, Pennsylvania 18104 and its telephone number is
(610) 398-6660. For additional information concerning First Lehigh, see
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"FIRST LEHIGH SELECTED FINANCIAL DATA" and "DESCRIPTION OF FIRST LEHIGH."
7
<PAGE>
The Meetings
General
The Patriot Special Meeting will be held at _________________,
Pottstown, Pennsylvania, at 3:00 p.m., local time, on December __, 1998.
The First Lehigh Special Meeting will be held at ______________________
_________________________________, Allentown, Pennsylvania, at 11:00 a.m., local
time, on ________________, December __, 1998.
Record Dates
The record date for the Patriot Special Meeting is ______________, 1998
(the "Patriot Record Date"). The record date for the First Lehigh Special
Meeting is ________________, 1998 (the "First Lehigh Record Date"). Only
shareholders of record at the close of business on the Patriot Record Date or
the First Lehigh Record Date, as applicable, will be entitled to receive notice
of, and to vote at, the Meetings.
Matters to be Considered at the Meetings
Patriot. At the Patriot Special Meeting, holders of Patriot Common
Stock will consider and vote upon a proposal to approve and adopt the Agreement,
which is attached as Annex A to this Proxy Statement/Prospectus and incorporated
herein by reference. In addition, shareholders of Patriot are being asked to
approve a proposal to adjourn the Patriot Special Meeting, if necessary, to
permit further solicitation of proxies in the event there are not sufficient
votes at the Patriot Special Meeting to approve the Agreement (the "Patriot
Adjournment Proposal"). Shareholders will also consider and vote upon any other
matter that may properly come before the Patriot Special Meeting.
First Lehigh. At the First Lehigh Special Meeting, holders of First
Lehigh Common Stock, Senior Preferred Stock, and Series A Preferred Stock will
consider and vote upon a proposal to approve and adopt the Agreement attached as
Annex A to this Proxy Statement/Prospectus and incorporated herein by reference.
In addition, shareholders of First Lehigh are being asked to approve a proposal
to adjourn the First Lehigh Special Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient votes at the First
Lehigh Special Meeting to approve the Agreement (the "First Lehigh Adjournment
Proposal"). Shareholders will
8
<PAGE>
also consider and vote upon any other matter that may properly come before the
First Lehigh Special Meeting.
See "THE MEETINGS -- Matters to be Considered at the Meetings."
Votes Required
Patriot. Shareholders entitled to cast at least a majority of the votes
which all shareholders are entitled to cast on the Patriot Record Date must be
represented in person or by proxy at the Patriot Special Meeting for a quorum to
be present for purposes of voting on the Agreement, the Patriot Adjournment
Proposal and any other matter to be considered at the Patriot Special Meeting.
The approval and adoption of the Agreement will require the affirmative vote, in
person or by proxy, of the holders of at least a majority of the outstanding
shares of Patriot Common Stock. The approval of the Patriot Adjournment Proposal
will require the affirmative vote, in person or by proxy, of a majority of votes
which all shareholders are entitled to cast at the Patriot Special Meeting. Each
holder of shares of Patriot Common Stock outstanding on the Patriot Record Date
will be entitled to one vote for each share held of record at the Patriot
Special Meeting. On the Patriot Record Date, directors and executive officers of
Patriot owned approximately ____________ shares of Patriot Common Stock, or
approximately _____% of the then outstanding shares of Patriot Common Stock.
Management of Patriot is not aware of any person or entity owning 5% or more of
Patriot Common Stock, except the following persons:
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- ---------------- -------------------- --------
Common Stock Patriot Bank 551,767(1) 10.1%
Employee Stock Ownership
Plan ("ESOP")
High and Hanover Streets
Pottstown, PA 19464
Common Stock Peter B. Cannell & Co., Inc. 430,985(2) 7.9%
645 Madison Avenue
New York, NY 10022
Common Stock Brandes Investment 374,725(3) 6.9%
12750 High Bluff Drive
San Diego, CA 92130
9
<PAGE>
- --------------
(1) Shares of Common Stock were acquired by the ESOP in the conversion.
The ESOP Committee of the Board of Directors administers the ESOP.
CoreStates Financial Corp., as successor to Meridian 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 June 30, 1998, 114,706 shares had
been allocated under the ESOP and 437,061 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 January 28, 1998.
(3) Based upon an amendment to Schedule 13G filed on February 10, 1998.
First Lehigh. Shareholders entitled to cast at least a majority of the
votes which all shareholders are entitled to cast on the First Lehigh Record
Date must be represented in person or by proxy at the First Lehigh Special
Meeting for a quorum to be present for purposes of voting on the Agreement, the
First Lehigh Adjournment Proposal and any other matter to be considered at the
First Lehigh Special Meeting. The approval and adoption of the Agreement will
require the affirmative vote of the holders of at least 80% of the outstanding
shares of First Lehigh Common Stock, the affirmative vote of 80% of the
outstanding shares of the Series A Preferred Stock, and the affirmative vote of
the holders of 66 2/3% of the outstanding shares of Senior Preferred Stock.
Holders of a majority of the outstanding shares of the First Lehigh Common
Stock, a majority of the outstanding shares of the Senior Preferred Stock and a
majority of the outstanding shares of Series A Preferred Stock must be present,
in person or by proxy, at the First Lehigh Special Meeting for a quorum to be
present. The approval of the First Lehigh Adjournment Proposal will require the
affirmative vote of a majority of votes cast, in person or by proxy, at the
First Lehigh Special Meeting by holders of First Lehigh Common Stock and First
Lehigh Preferred Stock voting together as one class.
Each holder of shares of First Lehigh Common Stock and Senior Preferred
Stock outstanding on the First Lehigh Record Date will be entitled to one vote
for each share held of record at the First Lehigh Special Meeting. Each holder
of shares of Series A Preferred Stock outstanding on the First Lehigh Record
Date will be entitled to 3.6 votes for each share held of record
10
<PAGE>
on the First Lehigh Record Date. Each of the directors and each of the executive
officers of First Lehigh have agreed to vote all shares of First Lehigh Common
Stock and Preferred Stock that they own on the First Lehigh Record Date in favor
of the approval and adoption of the Agreement. See "THE CONSOLIDATION --
Background of and Reasons for the Consolidation; Recommendations of the Boards
of Directors -- Background of the Consolidation," for information concerning the
approval of the Agreement and recommendation by the First Lehigh Board of
Directors. On the First Lehigh Record Date, such directors and executive
officers of First Lehigh owned approximately __________ shares of First Lehigh
Common Stock, or approximately ____% of the then outstanding shares of First
Lehigh Common Stock, __________ shares of Series A Preferred Stock, or
approximately ____% of the then outstanding shares of Series A Preferred Stock,
and _________ shares of Senior Preferred Stock, or approximately ____% of the
then outstanding shares of Senior Preferred Stock.
Management of First Lehigh is not aware of any person or entity owning
5% or more of the outstanding shares of First Lehigh Common Stock, Series A
Preferred Stock, or Senior Preferred Stock, except for the following persons:
<TABLE>
<CAPTION>
Senior Percent of Percent of
Preferred Percent of Series A Outstanding Senior Outstanding
Stock Outstanding Preferred Series A Preferred Senior Preferred
Beneficially Common Stock Common Stock Stock Preferred Stock Stock Stock
Name and Address Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Owned Owned(1) Owned(1) Owned Owned Owned Owned
- ---------------- ------------ ------------ ------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
James L. Leuthe(3) 1,223,780(2) 51.2% 420,000(3) 61.6% -- --
1620 Pond Road
Allentown, PA 18104
Frank Henry 125,000 6.1 -- -- -- --
P.O. Box 1007
Wilkes-Barre, PA 18773
John H. McKeever 132,800(4) 6.3 50,000 7.3 -- --
1112 Walnut Drive
Danielsville, PA 18038
Robert B. Colfer 100,000 4.8 50,000 7.3 -- --
845 W. Wyoming Street
Allentown, PA 18015
A. John May 42,560 2.0 51,500(5) 7.6 -- --
4200 One Liberty Place
Philadelphia, PA 19103
11
<PAGE>
<S> <C> <C> <C> <C>
Financial East, L.P. 40,000 1.9 50,000 7.3 -- --
4200 One Liberty Place
Philadelphia, PA 19103
</TABLE>
- ------------------
(1) Includes the number of shares of Common Stock that such persons have the
right to acquire upon conversion of the Series A Preferred Stock and the
Senior Preferred Stock. The number of shares of Common Stock that
Mr. Leuthe, Mr. McKeever, Mr. Colfer, Mr. May and Financial East, L.P.
have the right to acquire upon conversion of the Series A Preferred
Stock is 336,000 shares, 40,000 shares, 40,000 shares, 41,200 shares and
40,000 shares, respectively. The Series A Preferred Stock is
convertible at the option of each holder into First Lehigh Common Stock
at any time on the following basis: (i) on or before March 31, 1996,
each share of Series A Preferred Stock is convertible at the rate of .8
of a share of First Lehigh Common Stock for each share of Series A
Preferred Stock and (ii) after March 31, 1996, each share of Series A
Preferred Stock is convertible at the rate of .72 of a share of First
Lehigh Common Stock for each share of Series A Preferred Stock.
However, the Board of Directors of First Lehigh has approved an
amendment to First Lehigh's Articles of Incorporation that would retain
the .8 conversion rate until March 1999 subject to shareholder
approval, and the share amounts and percentages included in the above
table are based upon the .8 per share conversion rate. The Senior
Preferred Stock is currently convertible at the option of each holder
into First Lehigh Common Stock at any time at the rate of one share of
First Lehigh Common Stock for each share of Senior Preferred Stock.
(2) Includes 10,000 shares owned by Mr. Leuthe's wife and 145,640 shares
owned by Mr. Leuthe's children and 18,000 shares owned by corporations
of which Mr. Leuthe is the controlling shareholder. Mr. Leuthe
disclaims beneficial ownership of 12,400 shares of Common Stock held in
certain trusts for the benefit of his children that are included in
this total.
(3) Includes 20,000 shares owned by Mr. Leuthe's children.
(4) Of these shares, 600 shares are owned by Mr. McKeever's wife.
(5) These shares consist of 50,000 shares owned by Financial East, L.P., a
limited partnership of which Mr. May is the general partner, and 1,500
shares owned by Mash & Co., a general partnership of which Mr. May is a
general partner. Mr. May disclaims beneficial ownership of 36,471
shares owned by Financial East, L.P. and 900 shares owned by Mash & Co.
12
<PAGE>
Mr. Leuthe has agreed to vote, or cause to be voted, all shares of
First Lehigh capital stock owned by him in favor of the Agreement and has
granted an irrevocable proxy to vote such shares to Patriot's Board of
Directors. See "INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION."
See "THE MEETINGS -- Votes Required."
Voting and Revocation of Proxies
Shares represented by all properly executed proxies received in time
for the Meetings will be voted at such Meetings in the manner specified therein
by the holders thereof. In the case of Patriot, properly executed proxies that
do not contain voting instructions will be voted in favor of the Agreement and
in favor of the Patriot Adjournment Proposal. In the case of First Lehigh,
properly executed proxies that do not contain voting instructions will be voted
in favor of the Agreement and in favor of the First Lehigh Adjournment Proposal.
The grant of a proxy on the enclosed Patriot or First Lehigh form does
not preclude a Patriot shareholder or a First Lehigh shareholder from voting in
person. A Patriot shareholder or a First Lehigh shareholder may revoke a proxy
at any time prior to its exercise by filing with the Secretary of Patriot (in
the case of a Patriot shareholder) or the Secretary of First Lehigh (in the case
of a First Lehigh shareholder) a duly executed revocation of proxy, by
submitting a duly executed proxy bearing a later date or by appearing at the
applicable Meeting and voting in person at such Meeting. Attendance at the
applicable Meeting will not, in and of itself, constitute revocation of a proxy.
See "THE MEETINGS -- Voting of Proxies" and "Revocability of Proxies."
The Consolidation
Terms of the Consolidation
On the date the Articles of Consolidation are filed with the
Pennsylvania Department of State and the Delaware Department of State, which
will be the Closing Date (the "Effective Date"), (a) each outstanding share of
Patriot Common Stock (other than any Excluded Shares) will be automatically
converted into, and become a right to receive, 1.0 shares of Holding Company
Common Stock (the "Patriot Exchange Ratio"), and (b) each outstanding share of
First Lehigh Common Stock and Senior Preferred Stock (other than any
13
<PAGE>
Dissenting Shares and Excluded Shares) will be automatically converted into, and
become a right to receive, .428 shares of Holding Company Common Stock, and each
outstanding share of Series A Preferred Stock (other than any Dissenting Shares
and Excluded Shares) will be automatically converted into, and become a right to
receive, .342 shares of Holding Company Common Stock; provided that the average
value of a share of Patriot Common Stock, determined in accordance with the
Agreement, over a twenty trading day period immediately preceding the Effective
Date (the "Patriot Market Value") is between $14.71 and $17.97. If the Patriot
Market Value is less than $14.71, then each share of First Lehigh Common Stock
and Senior Preferred Stock will be converted into such number of shares as is
equal to $6.30 divided by the Patriot Market Value and each share of Series A
Preferred Stock will be converted into such number of shares as is equal to
$5.04 divided by the Patriot Market Value; provided that if the Patriot Market
Value is less than $13.07, then Patriot can elect to have each share of First
Lehigh Common Stock and Senior Preferred Stock converted into .482 shares of
Holding Company Common Stock and each share of Series A Preferred Stock
converted into .38562 shares of Holding Company Common Stock. If the Patriot
Market Value is greater than $17.97, then each share of First Lehigh Common
Stock and Senior Preferred Stock will be converted into such number of shares as
is equal to $7.69 divided by the Patriot Market Value and each share of Series A
Preferred Stock will be converted into such number of shares as is equal to
$6.15 divided by the Patriot Market Value. The ratios at which shares of First
Lehigh Common Stock, Senior Preferred Stock, and Series A Preferred Stock are
converted into shares of Holding Company Common Stock are referred to herein as
the "First Lehigh Common Exchange Ratio" and the "Series A Preferred Exchange
Ratio." First Lehigh has the right to terminate the Agreement if the Patriot
Market Value is less than $12.26.
The Patriot Exchange Ratio, the First Lehigh Common Exchange Ratio, and
the Series A Preferred Exchange Ratio will be subject to adjustment to prevent
dilution in the event of additional stock splits, reclassifications or other
similar events.
The Holding Company will in all events pay cash to First Lehigh
shareholders in lieu of issuing fractional shares of Holding Company Common
Stock.
In connection with the Consolidation, all outstanding options to
purchase shares of Patriot Common Stock and First Lehigh Common Stock issued
under Patriot's and First Lehigh's preexisting stock option plans, whether or
not exercisable, generally will be converted on the Effective Date into options
to acquire that number of shares of Holding Company Common Stock equal
14
<PAGE>
to the number of shares covered by the option multiplied by the Patriot Exchange
Ratio or the First Lehigh Common Exchange Ratio, as the case may be, and the
exercise price for a whole share of Holding Company Common Stock shall be the
stated exercise price for such option divided by the Patriot Exchange Ratio or
the First Lehigh Common Exchange Ratio, as the case may be, such shares to be
issuable upon exercise in accordance with the terms of the respective plans and
grant agreements of Patriot and First Lehigh under which they were issued. See
"THE CONSOLIDATION -- Terms of the Consolidation."
The Effective Date will be the fifth business day following
satisfaction or waiver, to the extent permitted under the Agreement, of the
conditions to the consummation of the Consolidation as specified in the
Agreement or such other date as Patriot and First Lehigh may mutually agree. See
"THE CONSOLIDATION -- Effective Date."
Dividends
The Agreement permits First Lehigh to pay required dividends on its
outstanding Senior Preferred Stock and Series A Preferred Stock and requires
First Lehigh to pay all dividends in arrears on its Series A Preferred Stock
prior to the Effective Date. Under the terms of the Agreement, First Lehigh is
prohibited from paying dividends on its Common Stock. The Agreement contains no
restrictions on Patriot's right to pay cash dividends. See "THE CONSOLIDATION --
Dividends."
Dissenters' Rights
Under Section 1930 and Chapter 15, Subchapter D, of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), holders of First
Lehigh Common Stock or First Lehigh Preferred Stock who properly file with First
Lehigh a written notice of intention to dissent will have the right to obtain a
cash payment for the "fair value" of their shares (excluding any element of
value arising in anticipation of the Consolidation). In order to exercise such
rights, First Lehigh shareholders must comply with the procedural requirements
of Chapter 15, Subchapter D, of the BCL, a description of which is provided in
"THE CONSOLIDATION -- Dissenters' Rights" and the full text of which is attached
to this Proxy Statement/Prospectus as Annex F. Such "fair value" would be
determined in judicial proceedings, the result of which cannot be predicted.
Failure to take any of the steps required under Chapter 15, Subchapter D, of the
BCL on a timely basis may result in the loss of dissenters' rights.
15
<PAGE>
Patriot shareholders do not have dissenters' rights under the Delaware
General Corporation Law (the "DGCL").
See "THE CONSOLIDATION -- Dissenters' Rights" and "COMPARISON OF RIGHTS
OF SHAREHOLDERS OF PATRIOT, FIRST LEHIGH, AND THE HOLDING COMPANY -- Dissenters'
Rights."
Accounting Treatment and Certain Federal Income Tax Consequences
The Consolidation will be treated as a purchase for financial
accounting purposes and is expected to constitute a tax-free reorganization for
federal income tax purposes. It is a condition to completion of the
Consolidation that Patriot and First Lehigh each receive an opinion from
Patriot's counsel that the Consolidation will constitute a tax-free
reorganization for federal income tax purposes. If, for any reason, Patriot and
First Lehigh cannot obtain an opinion that the consolidation will constitute a
tax-free reorganization for federal income tax purposes, then either Patriot or
First Lehigh could terminate this Agreement or both Patriot and First Lehigh
could elect to waive this condition. If the parties elected to waive this
condition, any vote of the shareholders of Patriot and First Lehigh approving
the Consolidation would be resolicited. As of the date of the Proxy
Statement/Prospectus, Patriot and First Lehigh each has no reason to believe
that Patriot's counsel will be unable to deliver such opinion.
See "THE CONSOLIDATION -- Certain Federal Income Tax Consequences," "--
Accounting Treatment" and "-- Conditions to the Merger."
Recommendations of Boards of Directors
Patriot. The Board of Directors of Patriot believes that the terms of
the Consolidation are fair and in the best interests of Patriot and its
shareholders and has approved the Agreement. The Board of Directors of Patriot
unanimously recommends that the shareholders of Patriot approve the Agreement.
First Lehigh. The Board of Directors of First Lehigh believes that the
terms of the Consolidation are fair and in the best interests of First Lehigh
and its shareholders and has approved the Agreement. The Board of Directors of
First Lehigh unanimously recommends that the shareholders of First Lehigh
approve and adopt the Agreement.
See "THE CONSOLIDATION -- Background of and Reasons for the
Consolidation; Recommendations of the Boards of Directors."
16
<PAGE>
Opinions of Financial Advisor
Janney Montgomery Scott Inc. ("JMS") has delivered its oral opinion as
of July 28, 1998, and its written opinion as of the date of this Proxy
Statement/Prospectus, to the Board of Directors of Patriot that, as of the
respective dates of such opinions, and subject to the assumptions and
considerations set forth therein, the Patriot Exchange Ratio is fair from a
financial point of view to the holders of Patriot Common Stock. A copy of the
opinion of JMS, dated the date of this Proxy Statement/Prospectus, is attached
hereto as Annex D.
Danielson Associates Inc. ("Danielson Associates") has delivered its
written opinion dated July 27, 1998, to the Board of Directors of First Lehigh
that subject to the assumptions and considerations set forth therein, the
financial terms of the Patriot offer were fair from a financial point of view to
First Lehigh and the holders of First Lehigh Common Stock and First Lehigh
Preferred Stock. A copy of the opinion of Danielson Associates is attached
hereto as Annex E.
For information on the assumptions made, matters considered and limits
of the reviews by JMS and Danielson, see "THE CONSOLIDATION -- Opinions of the
Financial Advisors."
Conditions to the Consolidation; Regulatory Approvals
The obligations of Patriot and First Lehigh to complete the
Consolidation are subject to various conditions usual and customary in
transactions similar to the Consolidation, including, without limitation, that
(i) the Consolidation qualify as a tax-free reorganization for federal income
tax purposes, (ii) the approval of the Board of Governors of the Federal Reserve
System under the Bank Holding Company Act (the "BHCA"), which is anticipated to
be received in ________________ 1998, (iii) the approval of the Department under
the Pennsylvania Banking Code of 1965 (the "Banking Code") which is anticipated
to be received in _________ 1998, and (iv) approvals of the shareholders of both
Patriot and First Lehigh are obtained. In addition, it is a condition to closing
that the FDIC consent in writing to the Standstill Agreement between James L.
Leuthe and Patriot. No assurance can be given that all such conditions will be
met, including receipt of all required approvals or the timing or conditions of
such approvals. See "THE CONSOLIDATION -- Conditions to the Consolidation."
Application has been made to obtain required regulatory approvals. See "THE
CONSOLIDATION -- Regulatory Approvals."
17
<PAGE>
Termination; Effect of Termination
The Agreement may be terminated at any time prior to the Effective Date
by mutual written consent of Patriot and First Lehigh or by either party if (i)
the other party, in any material respect, breaches any representation, warranty,
covenant or understanding contained in the Agreement which would have a Material
Adverse Effect (as defined in the Agreement) on the breaching party, and such
breach has not been cured by the earlier of thirty days from the date written
notice of such breach was given to such party committing the breach or the
Effective Date, unless on the Effective Date such breach no longer causes a
Material Adverse Effect, (ii) the Effective Date of the Consolidation shall not
have occurred on or before March 31, 1999, unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate the Agreement to
perform or observe in any material respect its agreements required to be
performed or observed by such party on or before the Effective Date or (iii)
either party has received a final unappealable administrative order from a
regulatory authority whose approval or consent has been requested that such
approval or consent will not be granted or will not be granted absent the
imposition of terms and conditions which would have a Material Adverse Effect on
the Holding Company, unless such occurrence shall be due to the failure of the
party seeking to terminate the Agreement or perform or observe in any material
respect its agreements set forth therein required to be performed or observed by
such party on or before the Effective Date.
First Lehigh may terminate the Agreement in the event that the Patriot
Market Value is less than $12.26.
The Agreement may be terminated by either the Board of Directors of
Patriot or the Board of Directors of First Lehigh if their respective
shareholders shall have not approved this Agreement by the requisite vote;
provided, however, that neither Patriot nor First Lehigh will have the right to
terminate the Agreement if prior to such shareholder vote the Board of Directors
of the party whose shareholders failed to approve the Agreement shall have
otherwise withdrawn, modified or changed in a manner adverse to the other party
its approval or recommendation of the Agreement and the transactions
contemplated thereby.
See "THE CONSOLIDATION -- Termination; Effect of Termination."
18
<PAGE>
Comparison of Shareholder Rights
Patriot is a Delaware corporation subject to the provisions of the
DGCL, and First Lehigh is a Pennsylvania corporation subject to the provisions
of the BCL. Upon completion of the Consolidation, shareholders of Patriot and
First Lehigh will become shareholders of the Holding Company, and their rights
as such will be governed by the BCL and also by the Holding Company's Articles
of Incorporation and Bylaws. The rights of shareholders of the Holding Company
are different in certain respects from the rights of shareholders of Patriot and
First Lehigh. The most significant of these differences include certain
provisions of the Holding Company's Articles of Incorporation designed to deter
a nonnegotiated attempt to obtain control of the Holding Company. See
"DESCRIPTION OF THE HOLDING COMPANY" and "COMPARISON OF THE RIGHTS OF
SHAREHOLDERS OF PATRIOT, FIRST LEHIGH, AND THE HOLDING COMPANY."
Management and Operations of the Holding Company After the Consolidation
The initial Board of Directors of the Holding Company will consist of
seven members, all of whom will be the present Directors of Patriot. For
information concerning the persons who have been designated to be members of the
Board of Directors of the Holding Company, See "DESCRIPTION OF THE HOLDING
COMPANY -- Board and Management." James B. Elliot, the Chairman of the Board,
and Joseph W. Major, the President and Chief Executive Officer of Patriot, will
be the Chairman of the Board of Directors and President and Chief Executive
Officer of the Holding Company, respectively.
On the Effective Date, the executive officers of the Holding Company
will be as follows:
James B. Elliot - Chairman
Joseph W. Major - President and Chief Executive Officer
Richard A. Elko - Executive Vice President and Chief
Financial Officer
The Board of Directors and executive officers of Patriot Bank in office
immediately prior to completion of the Consolidation will remain as Patriot
Bank's Board of Directors and executive officers.
See "THE CONSOLIDATION -- Management and Operations after the
Consolidation" and "-- Employee Benefits."
19
<PAGE>
Exchange of Certificates
After the Effective Date, the Holding Company will send to Patriot and
First Lehigh shareholders transmittal materials for use in effecting the
exchange of their certificates representing whole shares of Patriot Common
Stock, First Lehigh Common Stock, and First Lehigh Preferred Stock for
certificates representing shares of Holding Company Common Stock. The Holding
Company will pay holders of Patriot Common Stock, First Lehigh Common Stock, and
First Lehigh Preferred Stock cash in lieu of issuing fractional shares of
Holding Company Common Stock. See "THE CONSOLIDATION -- Exchange of Patriot and
First Lehigh Stock Certificates."
Standstill Agreement with James L. Leuthe
Patriot and James L. Leuthe entered into a standstill agreement dated
July 28, 1998 (the "Standstill Agreement") pursuant to which Mr. Leuthe has
granted to the Board of Directors of Patriot an irrevocable proxy to vote all
shares of First Lehigh capital stock owned by him. Following completion of the
Consolidation, Mr. Leuthe has agreed to grant to the Board of Directors of the
Holding Company an irrevocable proxy to vote all shares of Holding Company
Common Stock owned by him. In addition, Mr. Leuthe has agreed not to sell any
capital stock of First Lehigh owned by him prior to completion of the
Consolidation and to vote, or cause to be voted, all First Lehigh capital stock
owned by him in favor of the Consolidation.
Mr. Leuthe has agreed to place in escrow certain of the shares of the
Holding Company Common Stock into which his First Lehigh capital stock will be
converted, cash, or other securities as security for the performance of Mr.
Leuthe's obligations under the Standstill Agreement. In addition, Mr. Leuthe has
agreed to place additional shares of Holding Company Common Stock, cash, or
other securities in escrow to secure any obligation which may be determined by
the FDIC or any other state or federal regulatory authority to be owed to First
Lehigh, First Lehigh Bank, or their successors as a result of a determination
that Mr. Leuthe was not entitled to indemnification or advancement of expenses
in connection with proceedings relating to his duties as an officer or director
of First Lehigh.
Certain provisions of the Standstill Agreement expire June 30, 2013. A
copy of the Standstill Agreement is attached as Annex C to this Proxy
Statement/Prospectus and incorporated herein by reference. This summary of the
Standstill Agreement is qualified in its entirety by reference thereto.
20
<PAGE>
Certain Related Transactions
As a condition to Patriot entering into the Agreement, First Lehigh
granted Patriot an option (the "Patriot Option") under certain circumstances to
purchase up to 410,000 shares of First Lehigh Common Stock (or such greater
number of shares of First Lehigh Common Stock as shall represent 19.9% of the
then outstanding First Lehigh Common Stock without giving effect to the shares
issuable under the Patriot Option) at a purchase price of $7.00 per share
pursuant to a Stock Option Agreement dated July 28, 1998 (the "Patriot Option
Agreement"), a copy of which is included as Annex B to this Proxy
Statement/Prospectus. The Patriot Option may be exercised by Patriot only upon
the occurrence of specified events that have the potential for a third party to
effect an acquisition of control of First Lehigh prior to the termination of the
Agreement. None of such triggering events has occurred as of the date hereof.
Acquisitions of shares of First Lehigh Common Stock pursuant to an exercise of
the Patriot Option would be subject to prior regulatory approval under certain
circumstances.
The Patriot Option Agreement provides that Patriot may require, under
certain circumstances, First Lehigh to repurchase the Patriot Option and all
shares of First Lehigh Common Stock purchased by Patriot pursuant to the Patriot
Option on the terms and conditions set forth in the Patriot Option Agreement.
First Lehigh's repurchase of the Patriot Option or First Lehigh's repurchase of
any of the shares of First Lehigh Common Stock purchased by Patriot pursuant to
the Patriot Option may have the effect of precluding a potential acquiror of
First Lehigh from accounting for the acquisition of First Lehigh as a pooling of
interests for financial accounting purposes for a certain period of time. See
"CERTAIN RELATED TRANSACTIONS -- Stock Option Agreement."
The directors and executive officers of First Lehigh have agreed to
vote their respective shares of Patriot Common Stock and First Lehigh Common
Stock in favor of the Agreement. All the directors and executive officers of
First Lehigh have agreed to certain restrictions with respect to their First
Lehigh shares which are intended to ensure compliance with applicable securities
laws. See "THE CONSOLIDATION -- Matters to be Considered at the Meetings." A
copy of the form of letter agreement executed by the directors and executive
officers of First Lehigh is included as Exhibit 1-A to the Agreement attached
hereto as Annex A.
The Patriot Stock Option Agreement, the Standstill Agreement between
Patriot and James L. Leuthe and the agreement of First Lehigh's directors and
executive officers to vote in favor of the
21
<PAGE>
Consolidation are intended to increase the likelihood that the Consolidation
will be consummated in accordance with the terms of the Agreement and may have
the effect of discouraging competing offers to the Consolidation. See "CERTAIN
RELATED TRANSACTIONS -- Stock Option Agreement" and "INTERESTS OF CERTAIN
PERSONS IN THE CONSOLIDATION -- Standstill Agreement between Patriot and James
L. Leuthe."
Interests of Certain Persons in the Consolidation
Certain directors and executive officers of Patriot are the holders of
stock options to acquire Patriot Common Stock, which will be converted into
options to acquire Holding Company Common Stock. Wilbur R. Roat, the President
and Chief Executive Officer of First Lehigh, is the holder of stock options to
acquire First Lehigh Common Stock, which will be converted into options to
acquire Holding Company Common Stock. The value of Holding Company options, if
any, will be dependent on the value of Holding Company Common Stock which cannot
be predicted at this time. The directors and executive officers of Patriot will
become the directors and executive officers of the Holding Company on the
Effective Date.
The Agreement provides that, except for James L. Leuthe as provided in
the Standstill Agreement, the Holding Company will indemnify and insure after
the Effective Date persons who served as directors and officers of Patriot and
First Lehigh or their respective subsidiaries. See "THE CONSOLIDATION --
Management and Operations of the Holding Company" and "INTERESTS OF CERTAIN
PERSONS IN THE CONSOLIDATION."
Comparative Per Common Share Data
The following table sets forth certain unaudited comparative per share
data relating to book value per common share, cash dividends declared per common
share and earnings per share (i) on an historical basis for Patriot and First
Lehigh, (ii) on a pro forma basis per share of Patriot Common Stock to reflect
completion of the Consolidation, assuming the Consolidation was effective for
the periods presented, and (iii) on a pro forma basis per share of First Lehigh
Common Stock to reflect completion of the Consolidation, assuming the
Consolidation was effective for the periods presented. The pro forma information
has been prepared giving effect to the Consolidation using the purchase
accounting method assuming the Consolidation was effective for the periods
presented. For a description of the effect of purchase accounting, see "THE
CONSOLIDATION -- Accounting Treatment." The following pro forma per share data
assume a Patriot Exchange Ratio of 1.0 share of Holding Company Common Stock for
each share of Patriot Common Stock and a
22
<PAGE>
First Lehigh Common Exchange Ratio of .428 shares of Holding Company Common
Stock for each share of First Lehigh Common Stock and Senior Preferred Stock,
and a Series A Preferred Exchange Ratio of .342 shares of Holding Company Common
Stock for each share of Series A Preferred Stock. This information should be
read in conjunction with the consolidated financial statements of Patriot and
First Lehigh, including the notes thereto, appearing elsewhere in this Proxy
Statement/Prospectus or incorporated by reference herein, and the other
financial data appearing elsewhere in this Proxy Statement/Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "FINANCIAL STATEMENTS OF
PATRIOT," "FINANCIAL STATEMENTS OF FIRST LEHIGH," "SELECTED FINANCIAL DATA" and
"PRO FORMA COMBINED FINANCIAL DATA."
The following information is not necessarily indicative of the results
of operations of future periods or future combined financial position of the
Holding Company.
23
<PAGE>
At or for
the six months At or for the year
Book Value Per Common Share: ended June 30, 1998 ended December 31, 1997
- --------------------------- ------------------- -----------------------
Historical:
Patriot . . . . . . . . . . . . . $9.83 $9.77
First Lehigh. . . . . . . . . . . 4.19 4.19
Pro Forma:
Patriot and First Lehigh Combined.
Patriot(1). . . . . . . . . . . . 11.42 11.39
First Lehigh(2) . . . . . . . . . 4.89 4.88
Cash Dividends Declared Per Common Share:
Historical:
Patriot . . . . . . . . . . . . . 0.13 0.24
First Lehigh. . . . . . . . . . . . 0.00 0.00
Pro Forma:
Patriot(3). . . . . . . . . . . . . 0.13 0.24
First Lehigh(4) . . . . . . . . . . 0.06 0.10
Earnings Per Share(7):
Historical:
Patriot
Basic . . . . . . . . . . . . . . 0.39 0.62
Diluted . . . . . . . . . . . . . 0.37 0.59
First Lehigh
Basic . . . . . . . . . . . . . . 0.03 1.28
Diluted . . . . . . . . . . . . . 0.03 0.86
Pro Forma:
Patriot(5)
Basic . . . . . . . . . . . . . 0.25 0.62
Diluted . . . . . . . . . . . . 0.23 0.59
First Lehigh(6)
Basic . . . . . . . . . . . . . 0.11 0.27
Diluted . . . . . . . . . . . . 0.10 0.25
- ------------------
(1) Pro forma book value per share of Patriot Common Stock was calculated
by dividing total pro forma combined shareholders' equity amounts by
6,307,000 shares at June 30, 1998 and 6,258,000 shares at December 31,
1997, multiplied by the Patriot Exchange Ratio of 1.0 share of Holding
Company Common Stock for each share of Patriot Common Stock.
(2) Pro forma book value per share of First Lehigh Common Stock was
calculated by dividing total pro forma book value per share by the
First Lehigh Common Exchange Ratio of .428.
(3) Patriot pro forma dividends per share represent historical dividends
paid by Patriot multiplied by the Patriot Exchange Ratio of 1.0.
24
<PAGE>
(4) First Lehigh pro forma dividends per share represent historical
dividends paid by Patriot multiplied by the First Lehigh Common
Exchange Ratio of .428.
(5) Patriot pro forma earnings per share represents historical net income
for Patriot and First Lehigh combined on the assumption that Patriot and
First Lehigh had been combined for the periods presented on a purchase
accounting basis, divided by the pro forma weighted average number of
shares of Holding Company Common Stock which would have been outstanding
following completion of the Consolidation multiplied by the Patriot
Exchange Ratio of 1.0.
(6) First Lehigh pro forma earnings per share represents historical net
income for Patriot and First Lehigh combined on the assumption that
Patriot and First Lehigh had been combined for the periods presented on
a purchase accounting basis, divided by the pro forma weighted average
number of shares of Holding Company Common Stock which would have been
outstanding following completion of the Consolidation multiplied by the
First Lehigh Common Exchange Ratio of .428.
(7) Earnings per share amounts have been computed in accordance with the
provisions of FASB Statement No. 128, Earnings Per Share.
25
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth (i) certain historical consolidated
summary financial data for Patriot, and (ii) certain historical consolidated
summary financial data for First Lehigh. These data are derived from, and should
be read in conjunction with, among other things, the consolidated financial
statements of Patriot and the consolidated financial statements of First Lehigh,
including the notes thereto, appearing elsewhere in this Proxy
Statement/Prospectus or incorporated by reference herein, and the pro forma
combined financial information, including the notes thereto, appearing elsewhere
in this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE," "FINANCIAL STATEMENTS OF PATRIOT," "FINANCIAL STATEMENTS OF FIRST
LEHIGH," "PRO FORMA COMBINED FINANCIAL INFORMATION" and "SUMMARY - Comparative
per Common Share Data."
26
<PAGE>
<TABLE>
<CAPTION>
PATRIOT SELECTED FINANCIAL DATA
At or for
the Six
Months Ended At or for the
June 30, Year Ended December 31,
------------------ --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income .................. $ 30,691 $ 21,644 $ 50,249 $ 29,594 $ 17,168 $ 15,498 $ 17,361
Interest expense ................. 22,287 14,527 35,807 17,502 9,549 8,125 9,628
-------- -------- -------- -------- -------- -------- --------
Net interest income before provision
for possible loan losses ....... 8,404 7,117 14,442 12,092 7,619 7,373 7,733
Provision for possible loan losses 550 225 915 305 60 56 1
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for possible loan losses ....... 7,854 6,892 13,527 11,787 7,559 7,317 7,732
Non-interest income .............. 2,196 481 2,330 637 518 674 1,496
Non-interest expense ............. 7,484 4,894 11,158 9,198 6,151 6,090 5,451
-------- -------- -------- -------- -------- -------- --------
Income before income taxes ....... 2,566 2,479 4,699 3,226 1,926 1,901 3,777
Income taxes ..................... 598 832 1,326 1,251 734 717 1,460
-------- -------- -------- -------- -------- -------- --------
Net income ....................... $ 1,968 $ 1,647 $ 3,373 $ 1,975 $ 1,192 $ 1,184 $ 2,317
======== ======== ======== ======== ======== ======== ========
Per Share Data:(11)
Earnings per share(2)
Basic .......................... $ 0.39 $ 0.28 $ 0.62 $ 0.31
Diluted ........................ 0.37 0.27 0.59 0.31
Cash dividends declared
per share(2) ................... 0.13 0.11 $ 0.24 $ 0.14
Book value per share(2)(3) ....... 9.93 9.15 9.57 8.92 8.59
Selected Financial Condition Data:
Total assets ..................... $876,303 $699,015 $851,500 $529,165 $268,869 $221,035 $221,895
Investment and mortgage-backed
securities available for
sale(1) ........................ 337,989 259,056 343,125 159,148 47,646 33,025 --
Investment and mortgage-backed
securities held to maturity (1). 48,454 69,134 62,516 72,710 3,917 8,669 34,436
Loans receivable ................. 463,434 345,286 422,209 280,184 194,250 168,974 161,529
Allowance for possible loan
losses ......................... (2,817) (2,041) (2,512) (1,830) (1,702) (1,720) (1,665)
Deposits ......................... 365,604 283,331 289,528 239,514 201,618 189,938 198,876
Borrowings ....................... 454,176 342,415 508,301 231,595 10,000 10,000 2,000
Stockholders' equity ............. 47,270 49,501 46,533 53,117 54,110 17,868 17,517
Performance Ratios(4):
Return on average assets ......... 0.46% 0.55% 0.49% 0.48% 0.50% 0.54% 0.99%
Return on average equity ......... 8.35 6.77 7.22 3.71 5.40 6.59 13.61
Average interest rate spread(5) .. 1.96 2.36 2.10 2.95 3.29 3.33 3.31
Net interest margin(6) ........... 2.01 2.39 2.14 3.01 3.39 3.45 3.43
Average interest-earning assets to
average interest-bearing
liabilities .................... 104.42 106.67 104.90 113.69 109.20 107.16 106.9
Total non-interest expense to
average assets(10).............. 1.73% 1.63% 1.56% 1.93% 2.65% 2.75% 2.34%
Dividend payout ratio(2) ......... 36.31 41.52 40.31 45.91 -- -- --
Asset Quality Ratios(9):
Allowance for possible loan losses
as a percentage of loans
receivable ..................... 0.60% 0.59% 0.59% 0.65% 0.88% 1.01% 1.02%
Allowance for possible loan losses
as a percentage of non-performing
loans(5) ....................... 444.32 223.38 225.90 321.94 292.94 234.94 190.94
Non-performing loans as a
percentage of loans receivable.. 0.14 0.21 0.26 0.20 0.30 0.43 .53
Non-performing assets as a per-
centage of total assets(5) ..... 0.09% 0.13% 0.15% 0.12% 0.29% 0.45% 0.64%
Net charge-offs as a percentage
of average loans, net .......... 0.06% 0.01% 0.07% 0.08% 0.05% --% (0.12)%
Regulatory Capital Ratios(7):
Tier 1 capital to average
assets(8) ..................... 6.54% 9.59% 7.90% -- -- -- --
Tier 1 capital to tangible
assets(8) ..................... -- -- -- 9.92% 20.14% 8.46% 7.89%
Total risk adjusted capital to
risk adjusted assets(8) ...... 15.29 16.66 12.92 20.28 34.27 13.98 13.61
Tier 1 capital to risk-adjusted
assets(8) ...................... 13.69 17.93 14.54 20.98 35.35 15.33 14.90
Leverage ratio(7)(8) .............
Total capital to risk-weighted
assets(7) ...................... 15.29 16.66 12.92 20.28 34.27 13.98 13.61
</TABLE>
27
<PAGE>
- ----------------
(1) Patriot has classified its investment and mortgage-backed securities as
held to maturity or "available for sale" since fiscal 1994 when it adopted
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
(2) Patriot completed its initial public offering on December 1, 1995.
Therefore, earnings per share and dividend payout ratio are not applicable
for years prior to 1996.
(3) Special charge representing the special deposit insurance assessment levied
against all SAIF member financial institutions by the FDIC to recapitalize
its SAIF fund.
(4) All ratios are based on average monthly balances, annualized for interim
periods, during the indicated periods. Return on average assets and return
on average equity are calculated before the cumulative effect of change in
method of accounting for income taxes.
(5) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing assets.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) For definitions and further information relating to regulatory capital
requirements, see footnote 10 of the consolidated financial statements.
(8) Regulatory capital ratios for 1996 and years prior are calculated under OTS
guidelines, 1998 and 1997 ratios are calculated using FDIC guidelines due
to Patriot's conversion to a state chartered commercial bank.
(9) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of non-accrual and accruing loans 90
days or more overdue, while REO consists of real estate acquired through
foreclosure and real estate acquired by acceptance of a deed in lieu of
foreclosure.
(10) Calculated prior to special charge.
(11) Earnings per share for prior periods have been restated to reflect the
effect of May 14, 1998 5 for 4 stock split.
28
<PAGE>
FIRST LEHIGH SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At or for the
Six Months
Ended June 30, At or for the Year Ended December 31,
------------------- ---------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ...................... $ 3,751 $ 3,966 $ 7,806 $ 7,679 $ 7,038 $ 6,508 $ 7,150
Interest expense ..................... 1,800 1,793 3,713 3,651 3,554 2,939 3,455
-------- -------- -------- -------- -------- -------- -------
Net interest income .................. 1,951 2,173 4,093 4,028 3,484 3,569 3,695
Provision for loan losses ............ 150 90 1,003 (367) 250 25 1,106
Other income ......................... 543 1,982 5,290 3,553 2,249 1,455 4,107
Other expenses ....................... 2,050 2,109 5,377 5,803 5,399 5,475 6,577
-------- -------- -------- -------- -------- -------- -------
Income before income taxes ......... 294 1,956 3,003 2,145 84 (476) 119
Income taxes ......................... 0 0 0 0 0 0 (30)
-------- -------- -------- -------- -------- -------- -------
Net income ......................... $ 294 $ 1,956 $ 3,003 $ 2,145 $ 84 $ (476) $ 149
======== ======== ======== ======== ======== ======== =======
Per Share Data(1):
Net income (basic)(2)............... 0.03 0.87 1.28 0.86 (0.18) (0.38) (0.05)
Net income (diluted)(2)............. 0.03 0.56 0.86 0.63 (0.18) (0.38) (0.05)
Cash dividends ..................... -- -- -- -- -- -- --
Book value ......................... 3.92 3.54 3.86 3.06 2.64 2.27 2.53
Market price ....................... 6.625 4.875 7.00 4.50 4.50 4.25 3.00
Cash dividends ....................... -- -- -- -- -- -- --
Total assets ......................... 111,496 112,489 108,719 110,280 103,398 102,373 96,583
Total deposits ....................... 95,064 97,959 92,146 95,939 92,312 89,113 88,638
Total equity ......................... 14,407 13,359 14,450 12,010 10,233 8,537 7,001
Key ratios:
Return on average assets (ROA)...... 0.53 3.53 2.70 1.99 0.08 (0.48) 0.14
Return on average stockholders'
equity (ROE) ..................... 4.04 30.62 22.32 18.89 0.87 (6.07) 2.21
Dividend payout .................... -- -- -- -- -- -- --
Average equity to average assets ... 13.19 11.54 12.12 10.53 9.37 7.91 6.33
</TABLE>
- ----------
(1) Per share information has been restated to reflect stock splits and stock
dividends issued through December 31, 1997.
(2) Earnings per share amounts have been computed in accordance with the
provisions of FASB Statement No. 128, Earnings Per Share.
29
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth selected unaudited pro forma financial data
reflecting the Consolidation.
The pro forma information has been prepared assuming that shareholders of
Patriot will receive in the Consolidation 1.0 share of Holding Company Common
Stock for each share of Patriot Common Stock they own, and shareholders of First
Lehigh will receive .428 shares of Holding Company Common Stock for each share
of First Lehigh Common Stock and Senior Preferred Stock they own, and .342
shares of Holding Company Common Stock for each share of Series A Preferred
Stock they own. See "THE CONSOLIDATION -- Terms of the Consolidation."
The pro forma financial information included in this Proxy
Statement/Prospectus is presented for illustrative purposes only. Such pro forma
financial information does not necessarily reflect what the actual results of
the Holding Company would be following completion of the Consolidation.
The following pro forma information does not give effect to any potential
cost savings or potential revenue enhancements that may be realized or incurred
as a result of the Consolidation. See "THE CONSOLIDATION -- Management and
Operations of the Holding Company After the Consolidation."
Pro Forma Unaudited Combined Condensed Balance Sheet as of June 30, 1998
The following unaudited pro forma combined condensed balance sheet
information reflects (i) the historical consolidated balance sheets of Patriot
and First Lehigh as of June 30, 1998 and (ii) the pro forma combined condensed
balance sheet of the Holding Company as of such date, after giving effect to the
Consolidation. The Consolidation has been reflected as a purchase effective as
of June 30, 1998. The unaudited information should be read in conjunction with
the historical consolidated financial statements of Patriot and First Lehigh,
including the notes thereto, appearing elsewhere in, or incorporated by
reference into, this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE," "FINANCIAL STATEMENTS OF FIRST LEHIGH," and "FINANCIAL
STATEMENTS OF PATRIOT."
30
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Holding
First Forma Company Pro Forma
Patriot Lehigh Adjustments Combined KFL Adjustments Combined
-------- ------- ----------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 10,691 $ 8,022 $ (832)(1) $ 17,881 $ (376) $(6,585)(10) $ 10,920
Investments and mortgage-
backed securities 386,443 34,135 9,230 (2) 429,808 429,808
Loans held for sale 2,802 210 3,012 3,012
Loans 463,434 62,181 (11,374)(3) 514,241 40,940 1,576(11) 556,757
Allowance for loan losses (2,817) (1,819) (4,636) (849) (5,485)
Goodwill and other
tangible assets 14,505 (4) 14,505 462(12) 14,967
Foreclosed assets 179 2,193 (2,193)(5) 179 179
Other assets 15,571 6,574 1,709 (6) 23,854 542 24,396
-------- -------- ------- -------- ------- ------- ----------
Total assets $876,303 $111,496 $11,045 $998,844 $40,257 $(4,547) $1,034,554
======== ======== ======= ======== ======= ======= ==========
Deposits $365,604 $ 95,064 $ (311)(7) $460,357 $ 460,357
Borrowings 435,728 1,137 0 436,865 31,875 468,740
Trust Preferred Securities 18,448 0 0 18,448 18,448
Other liabilities 9,253 888 1,000(8) 11,141 3,735 100(13) 14,976
-------- -------- ------- -------- ------- ------- ----------
Total liabilities $829,033 $ 97,089 $ 689 $926,811 $35,610 100 962,521
Total stockholders'
equity 47,270 14,407 10,356(9) 72,033 4,647 (4,647)(14) 72,033
Total liabilities and
stockholders' equity $876,303 $111,496 $11,045 $998,844 $40,257 $(4,547) $1,034,554
======== ======== ======= ======== ======= ======= ==========
</TABLE>
- ----------------------------
(1) Payment of First Lehigh dividends in arrears.
(2) Investment of proceeds from disposition of certain First Lehigh loans and
foreclosed assets.
(3) Sale of $12,017,000 of First Lehigh's performing and non-performing loans
pursuant to an accelerated disposition plan and valuation adjustment of
$643,000 on First Lehigh's loans based upon yield and maturity as compared
to similar loans.
(4) New goodwill of $9,865,000 and core deposit intangible of $4,640,000
resulting from First Lehigh acquisition.
(5) Sale of First Lehigh's foreclosed assets.
31
<PAGE>
(6) Deferred tax assets resulting from loss on sale of loans and foreclosed
assets, valuation adjustment on loans and deposits and certain transaction
costs.
(7) Valuation adjustment on First Lehigh's time deposits based upon yield and
maturity as compared to similar deposits.
(8) Liability for estimated transaction costs.
(9) Elimination of First Lehigh's existing capitalization and issuance of
1,496,000 shares of Patriot common stock.
(10) Cash purchase price for KFL.
(11) Valuation adjustment on KFL's leases based upon yield and maturity as
compared to similar leases.
(12) New goodwill resulting from KFL acquisition.
(13) Liability for estimated transaction costs.
(14) Elimination of KFL's existing capitalization.
32
<PAGE>
Pro Forma Unaudited Combined Condensed Statements of Income for the Year Ended
December 31, 1997 and the Six Months Ended June 30, 1998
The following unaudited pro forma combined condensed statements of income
reflect the historical consolidated statements of income of Patriot and First
Lehigh, as indicated below, for each period presented and the pro forma combined
condensed statements of income of the Holding Company, after giving effect to
the Consolidation. The Consolidation has been reflected as a purchase. See "THE
CONSOLIDATION -- Accounting Treatment." The pro forma combined condensed
statements of income do not give effect to any potential cost savings, revenue
enhancements. The pro forma combined condensed statements of income for the year
ended December 31, 1997 and for the six months ended June 30, 1998 were prepared
on the assumption that the consolidation had been completed as of the beginning
of the applicable period. The unaudited information should be read in
conjunction with the historical consolidated financial statements of Patriot and
First Lehigh, including the notes thereto, appearing elsewhere in, or
incorporated by reference into, this Proxy Statement/Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "FINANCIAL STATEMENTS OF
FIRST LEHIGH," and "FINANCIAL STATEMENTS OF PATRIOT."
33
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Pro Forma Pro Forma Pro Forma
Patriot Lehigh Adjustments Combined KFL Adjustments Combined
------- ------- ----------- -------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ........ $30,691 $ 3,751 $(192)(a) $34,250 $2,364 $ (498)(e) $36,116
Interest expense ....... 22,287 1,800 (81)(b) 24,006 791 24,797
------- ------- ----- ------- ------ ------
Net interest income .... 8,404 1,951 (111) 10,244 1,573 (498) 11,319
Provision for loan 550 150 700 150 850
losses.................
Other income ........... 2,196 543 2,739 67 2,806
Other expenses ......... 7,484 2,050 470(c) 10,004 687 15(f) 10,706
------ ------- ----- ------- ----- ------ ------
Income before income 2,566 294 (581) 2,279 803 (513) 2,569
taxes..................
Income taxes ........... 598 0 67 665 282 (175)(g) 772
------- ------- ----- ------- ----- ----- ------
Net income ............. $ 1,968 $ 294 $(648)(d) $ 1,614 $ 521 $ (338) $1,797
======= ======= ===== ======= ====== ====== ======
Basic earnings per share $ 0.39 $ 0.25 $0.28
Diluted earnings per share $ 0.37 $ 0.23 $0.26
</TABLE>
- ---------------------
(a) Adjustment to interest income for sale of performing loans, investment of
proceeds from sale of loans and foreclosed assets, amortization of valuation
adjustment on loans and payment of dividends in arrears.
(b) Amortization of valuation adjustment on deposit.
(c) Amortization of core deposit intangible over its estimated life in
accordance with core deposit analysis and amortization of goodwill on a
straight line basis over 20 years.
(d) Tax expense on First Lehigh's actual pretax income and taxable pro forma
adjustments at 34%.
(e) Amortization of valuation adjustment on leases and reduction of interest
income resulting from payment of cash purchase price.
(f) Amortization of goodwill on a straight line basis over 15 years.
(g) Tax benefit on all adjustments at 34%.
34
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Pro Forma Pro Forma Pro Forma
Patriot Lehigh Adjustments Combined KFL Adjustments Combined
------- ------- ----------- --------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ......... $50,249 $ 7,806 $ (384)(a) $57,671 $4,119 $ (996)(e) $60,794
Interest expense ........ 35,807 3,713 (161)(b) 39,359 1,366 40,725
------- ------- ------- ------- ------ -------
Net interest income ..... 14,442 4,093 (223) 18,312 2,753 (996) 20,069
Provision for loan 915 1,003 1,918 300 2,218
losses..................
Other income ............ 2,330 5,290 7,620 210 7,830
Other expenses .......... 11,158 5,377 940 (c) 17,475 1,253 31 (f) 18,759
------- ------ ------- ------- ------ ------ -------
Income before income 4,699 3,003 (1,163) 6,539 1,410 (1,027) 6,922
taxes..................
Income taxes ........... 1,326 - 945 (d) 2,271 496 (349)(g) 2,418
------- ------ ------- ------- ------ ------ -------
Net income ............. $ 3,373 $ 3,003 (2,108) $ 4,268 $ 914 $ (678) $ 4,504
====== ====== ====== ====== ===== ===== =======
Basic earnings per share(h) $ 0.62 $ 0.62 $0.65
Diluted earnings per share(h) $ 0.59 $ 0.59 $0.62
</TABLE>
- ---------------------
(a) Adjustment to interest income for sale of performing loans, investment of
proceeds from sale of loans and foreclosed assets, amortization of valuation
adjustment on loans and payment of dividends in arrears.
(b) Amortization of valuation adjustment on deposit.
(c) Amortization of core deposit intangible over its estimated life in
accordance with core deposit analysis and amortization of goodwill on a
straight line basis over 20 years.
(d) Tax expense on First Lehigh's actual pretax income and taxable pro forma
adjustments at 34%.
(e) Amortization of valuation adjustment on leases and reduction of interest
income resulting from payment of cash purchase price.
(f) Amortization of goodwill on a straight line basis over 15 years.
(g) Tax benefit on all adjustments at 34%.
(h) Earnings per share for prior periods have been restated to reflect the
effect of the May 14, 1998 5 for 4 stock split.
35
<PAGE>
THE MEETINGS
Date, Time and Place
Patriot. The Patriot Special Meeting will be held at
___________________________________, Pottstown, Pennsylvania, at 3:00 p.m.,
local time on ________________, December __, 1998.
First Lehigh. The First Lehigh Special Meeting will be held at
________________________________, Allentown, Pennsylvania, at 11:00 a.m. local
time, on __________, December __, 1998.
Matters To Be Considered at the Special Meetings
Patriot. At the Patriot Special Meeting, holders of Patriot Common
Stock will be asked to consider and vote upon the approval and adoption of the
Agreement and the approval of the Patriot Adjournment Proposal. Shareholders may
also consider and vote upon such other matters as may properly be brought before
the Patriot Special Meeting.
The Board of Directors of Patriot has approved the Agreement and
recommends a vote FOR approval and adoption of the Agreement. The Board of
Directors has also approved, and recommends a vote FOR approval of, the Patriot
Adjournment Proposal.
First Lehigh. At the First Lehigh Special Meeting, holders of First
Lehigh Common Stock, Senior Preferred Stock, and Series A Preferred Stock will
be asked to consider and vote upon the approval and adoption of the Agreement
and the approval of the First Lehigh Adjournment Proposal. Shareholders may also
consider such other matters as may properly be brought before the First Lehigh
Special Meeting.
The Board of Directors of First Lehigh has approved the Agreement and
recommends a vote FOR approval and adoption of the Agreement. The Board of
Directors has also approved, and recommends a vote FOR approval of, the First
Lehigh Adjournment Proposal.
Votes Required
Patriot. Shareholders entitled to cast at least a majority of the votes
which all shareholders are entitled to cast on the Patriot Record Date must be
represented in person or by proxy at the Patriot Special Meeting for a quorum to
be present for purposes of voting on the Agreement, the Patriot
36
<PAGE>
Adjournment Proposal and any other matter to be considered at the Patriot
Special Meeting. The approval and adoption of the Agreement will require the
affirmative vote, in person or by proxy, of the holders of at least a majority
of the outstanding shares of Patriot Common Stock. The approval of the Patriot
Adjournment Proposal will require the affirmative vote, in person or by proxy,
of a majority of votes cast at the Patriot Special Meeting. Each holder of
shares of Patriot Common Stock outstanding on the Patriot Record Date will be
entitled to one vote for each share held of record at the Patriot Special
Meeting. On the Patriot Record Date, directors and executive officers of Patriot
owned approximately _______ shares of Patriot Common Stock, or approximately
_______% of the then outstanding shares of Patriot Common Stock. Management of
Patriot is not aware of any person or entity owning 5% or more of Patriot Common
Stock, except the following persons:
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- ---------------- -------------------- --------
Common Stock Patriot Bank 551,767(1) 10.1%
Employee Stock Ownership
Plan ("ESOP")
High and Hanover Streets
Pottstown, PA 19464
Common Stock Peter B. Cannell & Co., Inc. 430,985(2) 7.9%
645 Madison Avenue
New York, NY 10022
Common Stock Brandes Investment 374,725(3) 6.9%
12750 High Bluff Drive
San Diego, CA 92130
- ----------------------
(1) Shares of Common Stock were acquired by the ESOP in the conversion. The
ESOP Committee of the Board of Directors administers the ESOP.
CoreStates Financial Corp., as successor to Meridian 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 September 15, 1998, 114,706 shares had been allocated
under the ESOP and 437,061 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").
37
<PAGE>
(2) Based upon an amendment to Schedule 13G filed on January 28, 1998.
(3) Based upon an amendment to Schedule 13G filed on February 10, 1998.
First Lehigh. Shareholders entitled to cast at least a majority of the
votes which all shareholders are entitled to cast on the First Lehigh Record
Date must be represented in person or by proxy at the First Lehigh Special
Meeting for a quorum to be present for purposes of voting on the Agreement, the
First Lehigh Adjournment Proposal and any other matter to be considered at the
First Lehigh Special Meeting. In addition, holders of a majority of the
outstanding shares of the Senior Preferred Stock and a majority of the
outstanding shares of Series A Preferred Stock must be present, in person or by
proxy, at the First Lehigh Special Meeting for a quorum to be present. The
approval and adoption of the Agreement will require the affirmative vote of the
holders of at least 80% of the outstanding shares of First Lehigh Common Stock,
the affirmative vote of the holders of at least 80% of the outstanding shares of
the Series A Preferred Stock and the affirmative vote of the holders of at least
66 2/3% of the outstanding shares of Senior Preferred Stock. The approval of the
First Lehigh Adjournment Proposal will require the affirmative vote of a
majority of votes cast, in person or by proxy, at the First Lehigh Special
Meeting by holders of First Lehigh Common Stock and Series A Preferred Stock
voting together as a class.
Each holder of shares of First Lehigh Common Stock and Senior Preferred
Stock outstanding on the First Lehigh Record Date will be entitled to one vote
for each share held of record at the First Lehigh Special Meeting. Each holder
of Series A Preferred Stock outstanding on the First Lehigh Record Date will be
entitled to 3.6 votes for each share held of record on the First Lehigh Record
Date. All of the directors and each of the executive officers of First Lehigh
have agreed to vote all shares of First Lehigh capital stock that they own on
the First Lehigh Record Date in favor of the approval and adoption of the
Agreement. On the First Lehigh Record Date, directors and executive officers of
First Lehigh owned approximately _______ shares of First Lehigh Common Stock, or
approximately _____% of the then outstanding shares of First Lehigh Common
Stock, approximately _____ shares of Series A Preferred Stock, or approximately
____% of the then outstanding shares of Series A Preferred Stock, and
approximately _____ shares of Senior Preferred Stock, or approximately _____% of
the then outstanding shares of Senior Preferred Stock.
38
<PAGE>
Management of First Lehigh is not aware of any person or entity owning
5% or more of the outstanding shares of First Lehigh Common Stock, except for
the following persons:
<TABLE>
<CAPTION>
Senior Percent of Percent of
Preferred Percent of Series A Outstanding Senior Outstanding
Stock Outstanding Preferred Series A Preferred Senior Preferred
Beneficially Common Stock Common Stock Stock Preferred Stock Stock Stock
Owned Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Name and Address Owned(1) Owned(1) Owned Owned Owned Owned
- ---------------- ------------ ------------ ------------ --------------- ------------ ----------------
Owned <C> <C>
<S> <C> <C> <C> <C>
James L. Leuthe(3) 1,223,780(2) 51.2% 420,000(3) 61.6% -- --
1620 Pond Road
Allentown, PA 18104
Frank Henry 125,000 6.1 -- -- -- --
P.O. Box 1007
Wilkes-Barre, PA 18773
John H. McKeever 132,800(4) 6.3 50,000 7.3 -- --
1112 Walnut Drive
Danielsville, PA 18038
Robert B. Colfer 100,000 4.8 50,000 7.3 -- --
845 W. Wyoming Street
Allentown, PA 18015
A. John May 42,560 2.0 51,500(5) 7.6 -- --
4200 One Liberty Place
Philadelphia, PA 19103
Financial East, L.P. 40,000 1.9 50,000 7.3 -- --
4200 One Liberty Place
Philadelphia, PA 19103
</TABLE>
- ------------------
(1) Includes the number of shares of Common Stock that such persons have the
right to acquire upon conversion of the Series A Preferred Stock and the
Senior Preferred Stock. The number of shares of Common Stock that
Mr. Leuthe, Mr. McKeever, Mr. Colfer, Mr. May and Financial East, L.P.
have the right to acquire upon conversion of the Series A Preferred
Stock is 336,000 shares, 40,000 shares, 40,000 shares, 41,200 shares and
40,000 shares, respectively. The Series A Preferred Stock is
convertible at the option of each holder into First Lehigh Common Stock
at any time on the following basis: (i) on or before March 31, 1996,
each share of Series A Preferred Stock is convertible at the rate of .8
of a share of First Lehigh Common Stock for each share of Series A
Preferred Stock and (ii) after March 31, 1996, each share of Series A
Preferred Stock is convertible at the rate of .72 of a share of First
39
<PAGE>
Lehigh Common Stock for each share of Series A Preferred Stock.
However, the Board of Directors of First Lehigh has approved an
amendment to First Lehigh's Articles of Incorporation that would retain
the .8 conversion rate until March 1999 subject to shareholder approval,
and the share amounts and percentages included in the above table are
based upon the .8 per share conversion rate. The Senior Preferred Stock
is currently convertible at the option of each holder into First Lehigh
Common Stock at any time at the rate of one share of First Lehigh Common
Stock for each share of Senior Preferred Stock.
(2) Includes 10,000 shares owned by Mr. Leuthe's wife and 145,640 shares
owned by Mr. Leuthe's children and 18,000 shares owned by corporations
of which Mr. Leuthe is the controlling shareholder. Mr. Leuthe
disclaims beneficial ownership of 12,400 shares of Common Stock held in
certain trusts for the benefit of his children that are included in
this total.
(3) Includes 20,000 shares owned by Mr. Leuthe's children.
(4) Of these shares, 600 shares are owned by Mr. McKeever's wife.
(5) These shares consist of 50,000 shares owned by Financial East, L.P., a
limited partnership of which Mr. May is the general partner, and 1,500
shares owned by Mash & Co., a general partnership of which Mr. May is a
general partner. Mr. May disclaims beneficial ownership of 36,471
shares owned by Financial East, L.P. and 900 shares owned by Mash & Co.
Mr. Leuthe has agreed to vote, or cause to be voted, all shares of
First Lehigh capital stock owned by him for the Agreement and has granted an
irrevocable proxy to vote such shares to Patriot's Board of Directors. See
"INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION."
Voting of Proxies
Shares represented by all properly executed proxies received in time
for the Meetings will be voted at such Meetings in the manner specified therein
by the holders thereof. In the case of Patriot, properly executed proxies that
do not contain voting instructions will be voted in favor of the Agreement and
in favor of the Patriot Adjournment Proposal. In the case of First Lehigh,
properly executed proxies that do not contain voting instructions will be voted
in favor of the Agreement and in favor of the First Lehigh Adjournment Proposal.
40
<PAGE>
Patriot and First Lehigh each intend to count shares of Patriot Common
Stock, First Lehigh Common Stock, Senior Preferred Stock, or Series A Preferred
Stock, as the case may be, present in person at the Meetings but not voting, and
shares of Patriot Common Stock, First Lehigh Common Stock, Senior Preferred
Stock, or Series A Preferred Stock, as the case may be, for which they have
received proxies but with respect to which holders of shares have abstained on
any matter, as present at the Meetings for purposes of determining the presence
or absence of a quorum for the transaction of business.
The abstention from voting with respect to any proposal by any
shareholder who is present in person or by proxy at the Patriot Special Meeting
or the First Lehigh Special Meeting will not constitute or be counted as a
"vote" cast for purposes of the Patriot Special Meeting or the First Lehigh
Special Meeting, respectively. Because the approval of the Agreement at the
Patriot Special Meeting will require the affirmative vote, in person or by
proxy, of the holders of at least a majority of the outstanding shares of
Patriot Common Stock, an abstention with respect to the Agreement will have the
same effect as a vote against the Agreement. Because the approval of the
Agreement at the First Lehigh Special Meeting will require the affirmative vote
of at least 80% of the outstanding shares of First Lehigh Common Stock, at least
80% of the outstanding shares of the Series A Preferred Stock, and at least
66 2/3% of the outstanding shares of Senior Preferred Stock at the First Lehigh
Special Meeting, an abstention by a holder of First Lehigh Common Stock or a
holder of First Lehigh Preferred Stock with respect to the Agreement will have
the same effect (except for dissenters' rights) as a vote against the Agreement.
Because approval of the First Lehigh Adjournment Proposal at the First Lehigh
Special Meeting requires the affirmative vote of a majority of all votes cast by
the shareholders of First Lehigh entitled to vote thereon, an abstention by
holders of First Lehigh Preferred Stock will have no effect on the voting on
such proposal by such holders at the Meeting.
Under the applicable rules of the New York Stock Exchange and the
National Association of Securities Dealers, Inc. ("NASD"), brokers and/or
members, as the case may be, who hold shares in street name for customers who
are the beneficial owners of such shares are prohibited from giving a proxy to
vote such customers' shares with respect to the approval and adoption of the
Agreement or the respective Adjournment Proposals in the absence of specific
instructions from such customers ("broker non-votes"). Broker non-votes also
will not constitute or be counted as "votes" cast for purposes of the Patriot
Special Meeting or the First Lehigh Special Meeting. Therefore, a broker
non-vote will have the same effect as a vote against the Agreement at the
41
<PAGE>
Patriot Special Meeting. Similarly, a broker non-vote with respect to shares of
First Lehigh Common Stock or First Lehigh Preferred Stock will have the same
effect as a vote against the Agreement.
It is not expected that any matter other than those referred to herein
will be brought before either of the Meetings. If, however, other matters are
properly presented for a vote, the persons named as proxies will vote in
accordance with their judgment with respect to such matters.
Revocability of Proxies
The grant of a proxy on the enclosed Patriot or First Lehigh form does
not preclude a Patriot shareholder or a First Lehigh shareholder from voting in
person. A Patriot shareholder or a First Lehigh shareholder may revoke a proxy
at any time prior to its exercise by filing with the Secretary of Patriot (in
the case of a Patriot shareholder) or the Secretary of First Lehigh (in the case
of a First Lehigh shareholder) a duly executed revocation of proxy, by
submitting a duly executed proxy bearing a later date or by appearing at the
applicable Meeting and voting in person at such Meeting. Attendance at the
applicable Meeting will not, in and of itself, constitute revocation of a proxy.
Record Date; Stock Entitled to Vote; Quorum
Patriot. Only holders of record of Patriot Common Stock on the Patriot
Record Date will be entitled to notice of, and to vote at, the Patriot Special
Meeting. On the Patriot Record Date, _______ shares of Patriot Common Stock were
issued and outstanding and held by approximately _______ holders of record.
Shareholders entitled to cast at least a majority of the votes which
all shareholders are entitled to cast on the Patriot Record Date must be
represented in person or by proxy at the Patriot Special Meeting in order for a
quorum to be present for purposes of voting on approval of the Agreement and the
Patriot Adjournment Proposal.
First Lehigh. Only holders of record of First Lehigh Common Stock,
Senior Preferred Stock, or Series A Preferred Stock on the First Lehigh Record
Date will be entitled to notice of, and to vote at, the First Lehigh Special
Meeting. On the First Lehigh Record Date, _______ shares of First Lehigh Common
Stock were issued and outstanding and held by approximately _______ holders of
record, ______ shares of Senior Preferred Stock were issued and outstanding and
held by approximately ______ holders of record, and ______
42
<PAGE>
shares of Series A Preferred Stock were issued and outstanding and held by
approximately ______ holders of record.
Shareholders entitled to cast at least a majority of the votes which
all shareholders are entitled to cast on the First Lehigh Record Date must be
represented in person or by proxy at the First Lehigh Special Meeting in order
for a quorum to be present for purposes of voting on approval and adoption of
the Agreement and approval of the First Lehigh Adjournment Proposal.
Solicitation of Proxies
Each of Patriot and First Lehigh will bear the cost of the solicitation
of proxies from its own shareholders, except that Patriot and First Lehigh will
share equally the cost of printing and mailing this Proxy Statement/Prospectus.
In addition to solicitation by mail, the directors, officers and employees of
each of Patriot and First Lehigh and their subsidiaries may solicit proxies from
shareholders of such company by telephone or telegram or in person without
compensation other than reimbursement for their actual expenses. Arrangements
will also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial owners
of stock held of record by such persons, and Patriot and First Lehigh will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
PATRIOT AND FIRST LEHIGH SHAREHOLDERS SHOULD NOT SEND STOCK
CERTIFICATES WITH THEIR PROXY CARDS. AS DESCRIBED BELOW UNDER THE CAPTION "THE
CONSOLIDATION -- EXCHANGE OF PATRIOT COMMON STOCK AND FIRST LEHIGH COMMON STOCK
CERTIFICATES," EACH PATRIOT AND FIRST LEHIGH SHAREHOLDER WILL BE PROVIDED WITH
MATERIALS FOR EXCHANGING SHARES OF PATRIOT COMMON STOCK, FIRST LEHIGH COMMON
STOCK, SENIOR PREFERRED STOCK, AND SERIES A PREFERRED STOCK AS PROMPTLY AS
PRACTICABLE AFTER THE EFFECTIVE DATE.
43
<PAGE>
THE CONSOLIDATION
Background of and Reasons for the Consolidation; Recommendations of the Boards
of Directors
Background of the Consolidation
Since 1987, First Lehigh and First Lehigh Bank have been subject to
several regulatory orders and agreements of the FDIC, the Department and the
FRB. In addition, in 1995, the FDIC sought and obtained the removal of the
former president of First Lehigh and First Lehigh Bank and, since 1995, the FDIC
sought the removal of Mr. Leuthe as chairman of First Lehigh, which culminated
in a final decision of the FDIC Board dated June 26, 1998 to prohibit Mr. Leuthe
from future participation in the affairs of any federally-insured financial
institution, including his removal as an officer and director of First Lehigh.
Because of the existence of enforcement proceedings, the Board of
Directors of First Lehigh periodically evaluated the sale of the Company. To
that end, the Presidents of First Lehigh Bank and Patriot, Messrs. Roat and
Major, met on September 26, 1997 to discuss an acquisition by Patriot of First
Lehigh. Subsequent to that initial meeting, a number of discussions ensued
between Messrs. Roat and Major about a possible combination. As a result of
these discussions, on November 11, 1997, Patriot made a preliminary nonbinding
offer to First Lehigh that was subject to further due diligence. On November 19,
1997, Messrs. Roat and Major met to discuss Patriot's preliminary offer.
Subsequent to this meeting, Patriot submitted to First Lehigh a due diligence
information request list. However, based on ongoing discussions among the
members of the Board of Directors of First Lehigh, First Lehigh elected not to
proceed with further discussions and negotiations terminated.
On January 12, 1998, Mr. Roat again met with Mr. Major and delivered to
Mr. Major an investment summary prepared by Keefe, Bruyette & Woods
Incorporated. Over the next three months, numerous discussions regarding a
possible combination occurred. During this period Messrs. Roat and Major
regularly updated their respective Boards of Directors as to the status of
negotiations. On April 2, 1998, Patriot submitted a written nonbinding offer to
the First Lehigh Board of Directors. At the invitation of the First Lehigh Board
of Directors, Mr. Major met with the First Lehigh Board to discuss Patriot's
proposal. On May 4, 1998, the First Lehigh Board of Directors voted to table
consideration of the Patriot offer because of Patriot's requirements regarding
the execution by Mr. Leuthe of a standstill
44
<PAGE>
agreement, including escrow provisions. On May 7, 1998, Patriot formally
rescinded its offer.
On May 13, 1998, the First Lehigh Board of Directors authorized Mr.
Roat to contact Mr. Major to reopen discussions. Over the next month additional
discussions occurred that resulted in Patriot submitting another written,
nonbinding offer to First Lehigh on July 7, 1998. This offer was amended on July
8, 1998 and was contingent upon completion of additional due diligence. On July
8, 1998, the First Lehigh Board of Directors unanimously accepted Patriot's
nonbinding offer and authorized negotiation of the terms of a definitive
agreement. Counsel for the parties thereafter began negotiation of a definitive
agreement. On July 15, 1998, the Patriot Mergers and Acquisitions Committee
approved the acquisition subject to completion of due diligence. Patriot
performed due diligence from July 20 through July 25, 1998. On July 23, 1998,
the First Lehigh Board of Directors approved the Consolidation subject to
negotiation of the terms of a final definitive agreement. Negotiations with
respect to the Agreement were completed over the next five days and, on July 28,
1998, the Patriot Board of Directors met and approved the transaction after
which the parties executed the Agreement and related documents.
Reasons for the Consolidation
Patriot's Reasons for the Consolidation
In determining whether to enter into the Agreement, Patriot's Board of
Directors considered a number of factors, including the following: (i) the
financial condition, operating results and future prospects of Patriot and First
Lehigh, (ii) historical pro forma financial information on the Consolidation,
including among other things, pro forma book value and earnings per share
information, dilution analysis and a capital ratio impact information, (iii) a
comparison of the Consolidation to other comparable financial institution
mergers, based on, among other things, multiples of book value and earnings,
(iv) the opinion of JMS as to the fairness of the Patriot Exchange Ratio to
Patriot from a financial point of view, and (v) the natural geographic market
extension represented by the First Lehigh franchise.
In approving the Consolidation, the Patriot Board did not specifically
identify any one factor or group of factors being more significant than any
other factor in the decision making process, although individual directors may
have given one or more factors more weight than other factors. The emphasis of
the Patriot Board's discussion in considering the transaction, however, was on
the financial aspects of the transaction,
45
<PAGE>
particularly (i) the immediate pro forma earnings per share and return on equity
accretion to Patriot shareholders and the further potential accretion in light
of potential revenue enhancements and cost savings resulting from the
Consolidation, (ii) the ability to further expand Patriot's market penetration
into the Lehigh Valley, (iii) the fact that the addition of First Lehigh's
assets will help accelerate Patriot's conversion to a commercial bank with an
increased commercial loan portfolio and increased deposit base, (iv) the ability
to increase Patriot's capital base, thereby reducing Patriot's balance sheet
leverage and increasing its operating flexibility, (v) perceived opportunities
to enhance Holding Company revenues and reduce Holding Company operating
expenses following the consolidation, and (vi) the increase in number of
outstanding shares of capital stock of the Holding Company and the resulting
increased market capitalization and liquidity for the Holding Company's stock.
First Lehigh's Reasons for the Consolidation
In determining whether to enter into the Agreement, First Lehigh's
Board of Directors considered a number of factors, including the following: (i)
the financial condition, operating results and future prospects of First Lehigh
and Patriot; (ii) historical and pro forma financial information on the
Consolidation, (iii) a comparison of the Consolidation to other comparable
financial institution mergers, based on, among other things, multiples of book
value and earnings, (iv) the opinion of Danielson Associates Inc. as to the
fairness of the exchange ratio to First Lehigh Shareholders from a financial
point of view, (v) a review of Patriot's asset/liability structure, (vi) the
operating and marketing philosophy of Patriot compared to First Lehigh and (vii)
the future operating prospects of Patriot as an active competitive financial
institution in the Lehigh Valley market.
Approval of the Consolidation by the First Lehigh Board was not based
on any single factor but rather a series of benefits to be derived by
shareholders, customers and employees. The Board considered Patriot's ability to
profitably service the First Lehigh customer base with an expanded product line
in comparison to current First Lehigh products and recognized an immediate
advantage, upon consolidation and data processing systems conversion, that would
accrue to customers. Also, Patriot has made significant investment in data
processing systems and organizational infrastructure which First Lehigh's
management had identified as areas in which it would be required to invest
substantial financial resources in the immediate future to remain competitive
and profitable. Third, Patriot is in a growth mode which First Lehigh's
management believes may provide opportunities for First Lehigh's employees.
First Lehigh's management also believes that
46
<PAGE>
the Consolidation will result in a larger company with an increased number of
outstanding shares of capital stock of the Holding Company with increased market
capitalization and liquidity to shareholders for the Holding Company's stock.
The foregoing discussion of the information and factors considered by
the First Lehigh Board of Directors is not intended to be exhaustive but is
believed to include all material factors considered by the First Lehigh Board of
Directors. In reaching its determination to approve and recommend the
Consolidation, the First Lehigh Board did not assign any relative or specific
weights to the foregoing factors, and individual directors may have given
differing weights to different factors. After deliberating with respect to the
Consolidation and the other transactions contemplated by the Agreement,
considering, among other things, the matters discussed above and the opinions of
Danielson referred to above, the First Lehigh Board of Directors (with all
directors present and no directors absent) approved and adopted the Agreement
and the transactions contemplated thereby, including First Lehigh Stock Option
Agreement, by a unanimous vote, as being in the best interests of First Lehigh
and its shareholders.
Recommendation of the Patriot Board of Directors
The Board of Directors of Patriot believes that the terms of the
Consolidation are fair to, and in the best interests of, Patriot and its
shareholders and has approved the Agreement. The Board of Directors of Patriot
unanimously recommends that the shareholders of Patriot approve the Agreement.
Recommendation of the First Lehigh Board of Directors
The Board of Directors of First Lehigh believes that the terms of the
Consolidation are fair to, and in the best interests of, First Lehigh and its
shareholders and has approved the Agreement. The Board of Directors of First
Lehigh unanimously recommends that the shareholders of First Lehigh approve and
adopt the Agreement. See "-- Background of and reasons for the Consolidation;
Recommendations of the Board of Directors -- Background of the Consolidation"
for information concerning the approval of the Agreement and recommendation by
the First Lehigh Board of Directors.
47
<PAGE>
Terms of the Consolidation
Upon completion of the Consolidation, the separate legal existence of
each of Patriot and First Lehigh will cease. All property, rights, powers,
duties, obligations, debts and liabilities of Patriot and First Lehigh will
automatically be taken and deemed to be transferred to and vested in the Holding
Company, in accordance with Pennsylvania law. The Holding Company, as the
surviving corporation, will be governed by the Articles of Incorporation and
Bylaws of the Holding Company. The Articles of Incorporation and Bylaws of the
Holding Company are set forth as Exhibits A and B, respectively, to the Articles
of Consolidation which will be filed with the Pennsylvania Department of State
and the Delaware Secretary of State on the Effective Date and which are set
forth as Exhibit 4 to the Agreement attached as Annex A to this Proxy
Statement/Prospectus. For a description of the differences between Patriot's
Articles of Incorporation and Bylaws and the Holding Company's Articles of
Incorporation and Bylaws, and between First Lehigh's Articles of Incorporation
and Bylaws and the Holding Company's Articles of Incorporation and Bylaws, see
"COMPARISON OF SHAREHOLDER RIGHTS."
At the Effective Date of the Consolidation, each outstanding share of
Patriot Common Stock (other than any Excluded Shares) will be automatically
converted into, and become a right to receive, 1.0 shares of Holding Company
Common Stock (the "Patriot Exchange Ratio"), and (b) each outstanding share of
First Lehigh Common Stock and Senior Preferred Stock (other than any Dissenting
Shares and Excluded Shares) will be automatically converted into, and become a
right to receive, .428 shares of Holding Company Common Stock, and each
outstanding share of Series A Preferred Stock (other than any Dissenting Shares
and Excluded Shares) will be automatically converted into, and become a right to
receive, .342 shares of Holding Company Common Stock; provided that the average
value of a share of Patriot Common Stock, determined in accordance with the
Agreement, over a twenty trading day period immediately preceding the Effective
Date (the "Patriot Market Value") is between $14.71 and $17.97. If the Patriot
Market Value is less than $14.71, then each share of First Lehigh Common Stock
and Senior Preferred Stock will be converted into such number of shares as is
equal to $6.30 divided by the Patriot Market Value and each share of Series A
Preferred Stock will be converted into such number of shares as is equal to
$5.04 divided by the Patriot Market Value; provided that if the Patriot Market
Value is less than $13.07, then Patriot can elect to have each share of First
Lehigh Common Stock and Senior Preferred Stock converted into .482 shares of
Holding Company Common Stock and each share of Series A Preferred Stock
converted into .38562 shares of Holding Company Common Stock. If the Patriot
Market Value is greater than $17.97, then each share of First Lehigh Common
Stock and Senior Preferred Stock will be converted into such number of shares as
is equal to $7.69 divided by the
48
<PAGE>
Patriot Market Value and each share of Series A Preferred Stock will be
converted into such number of shares as is equal to $6.15 divided by the Patriot
Market Value. The ratios at which shares of First Lehigh Common Stock, Senior
Preferred Stock, and Series A Preferred Stock are converted into shares of
Holding Company Common Stock are referred to herein as the "First Lehigh Common
Exchange Ratio" and the "Series A Preferred Exchange Ratio." First Lehigh has
the right to terminate the Agreement if the Patriot Market Value is less than
$12.26.
The Patriot Exchange Ratio, the First Lehigh Exchange Ratio, and the
Series A Preferred Exchange Ratio will be subject to adjustment to prevent
dilution in the event of additional stock splits, reclassifications or other
similar events.
The Holding Company will in all events pay cash to Patriot and First
Lehigh shareholders in lieu of issuing fractional shares of Holding Company
Common Stock.
As of the Patriot Record Date, directors and executive officers of
Patriot and/or Patriot Bank held options to purchase an aggregate of _______
shares of Patriot Common Stock which had been granted pursuant to Patriot's
stock option plans (the "Patriot Options"). As of the First Lehigh Record Date,
Wilbur R. Roat, President and Chief Executive Officer of First Lehigh and First
Lehigh Bank, held options to purchase an aggregate of 60,000 shares of First
Lehigh Common Stock which had been granted pursuant to First Lehigh's stock
option plans (the "First Lehigh Options"). On the Effective Date, each Patriot
Option and First Lehigh Option which is then outstanding, whether or not
exercisable, shall cease to represent a right to acquire shares of Patriot
Common Stock or First Lehigh Common Stock, as the case may be, and shall be
converted automatically into an option to purchase shares of Holding Company
Common Stock, and the Holding Company shall assume each Patriot Option and First
Lehigh Option, in accordance with the terms of the applicable Patriot and First
Lehigh stock option plan and stock option agreement by which it is evidenced,
except that from and after the Effective Date, (i) the Holding Company and its
Board of Directors or a duly authorized committee thereof shall be substituted
for Patriot, First Lehigh and their respective Boards of Directors or duly
authorized committees thereof administering such Patriot or First Lehigh stock
option plan, as the case may be, (ii) each Patriot Option and First Lehigh
Option assumed by the Holding Company may be exercised solely for shares of
Holding Company Common Stock, (iii) the number of shares of Holding Company
Common Stock subject to any Patriot Option or First Lehigh Option shall be equal
to the number of shares of Patriot Common Stock or First Lehigh Common Stock
subject to such Patriot Option or First Lehigh Option, as the case may be,
immediately prior to the Effective Date multiplied by the Patriot Exchange Ratio
or the First Lehigh Common Exchange Ratio, as the case may be, provided that any
fractional shares of Holding Company Common Stock resulting from such
multiplication shall be rounded down to the nearest share, and (iv) the per
share exercise price under each such Patriot Option or First Lehigh Option, as
49
<PAGE>
the case may be, shall be adjusted by dividing the per share exercise price
under each such Option by the Patriot Exchange Ratio or the First Lehigh Common
Exchange Ratio, as the case may be, provided that such exercise price shall be
rounded up to the nearest cent. Notwithstanding clauses (iii) and (iv) of the
preceding sentence, each Patriot Option and First Lehigh Option which is an
"incentive stock option" shall be adjusted as required by Section 424 of the
Internal Revenue Code of 1986, as amended (the "Code").
The Holding Company Common Stock and cash to be received by the holders
of Patriot Common Stock, First Lehigh Common Stock, and First Lehigh Preferred
Stock in lieu of fractional interests in Holding Company Common Stock (including
the holders of Patriot Options and First Lehigh Options to acquire Patriot
Common Stock and First Lehigh Common Stock, respectively) in exchange for each
share (other than any Dissenting Shares and Excluded Shares) of Patriot Common
Stock, First Lehigh Common Stock, and First Lehigh Preferred Stock (including
shares subject to options) are referred to herein as the "Consideration."
Opinions of Financial Advisors
Opinion of Patriot's Financial Advisor
Patriot has retained Janney Montgomery Scott ("JMS") to render a
fairness opinion in connection with the Consolidation. JMS has rendered opinions
that, based upon and subject to the various considerations set forth therein, as
of July 28, 1998, and as of the date of this Proxy Statement/ Prospectus, that
the First Lehigh Exchange Ratios are fair, from a financial point of view, to
the holders of Patriot Common Stock.
The full text of JMS' opinion as of the date thereof, which sets forth
the assumptions made, matters considered and limitations of the review
undertaken, is attached as Annex D to this Proxy Statement/Prospectus, is
incorporated herein by reference, and should be read in its entirety in
connection with this Proxy Statement/Prospectus. The summary of the opinion of
JMS set forth herein is qualified in its entirety by reference to the full text
of such opinion attached as Annex D to this Proxy Statement/Prospectus (the
"Proxy Opinion"). The Proxy Opinion of JMS is directed only to the First
50
<PAGE>
Lehigh Exchange Ratios and does not constitute a recommendation to any holder of
Patriot Common Stock as to how such shareholder should vote at the Patriot
Special Meeting.
JMS was selected to render its opinions based upon its qualifications,
expertise and experience. JMS has knowledge of, and experience with,
Pennsylvania banking markets and banking organizations operating in those
markets and was selected by Patriot because of its knowledge of, experience
with, and reputation in the financial services industry. In addition, JMS
co-managed a private offering of trust preferred securities for Patriot in June
1997.
On July 28, 1998, the Patriot Board of Directors approved the Agreement
and JMS delivered an oral opinion (the "Preliminary Opinion") to the Patriot
Board of Directors stating that, as of such date, the First Lehigh Exchange
Ratios (which were determined by the Board of Directors at arm's- length
negotiations with First Lehigh) were fair to the holders of Patriot Common Stock
from a financial point of view. JMS reached the same opinion as of the date of
this Proxy Statement/Prospectus.
In connection with rendering its Proxy Opinion, JMS, among other
things: (i) reviewed the historical financial performances, current financial
positions and general prospects of Patriot and First Lehigh, (ii) reviewed the
Agreement, (iii) reviewed the Registration Statement on Form S-4, (iv) reviewed
and analyzed historical market prices and trading activity of Patriot and First
Lehigh, (v) reviewed publicly-available information such as annual reports, SEC
filings and research reports; (vi) considered the terms and conditions of the
proposed Consolidation between Patriot and First Lehigh as compared with the
terms and conditions of comparable bank mergers and acquisitions, (vii)
discussed with certain members of Patriot's and First Lehigh's senior management
the strategic aspects of the Consolidation, including estimated potential cost
savings and revenue enhancements; (viii) compared the respective results of
operations for Patriot and First Lehigh with those of certain publicly-traded
companies which were deemed relevant to Patriot and First Lehigh; (ix)
considered the pro forma effects of the Consolidation on Patriot's earnings per
share, book value per share, tangible book value per share, and cash dividends
per share of Patriot; and (x) conducted such other financial analyses, studies
and investigations as JMS deemed appropriate.
JMS relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinions. With respect to Patriot's and
51
<PAGE>
First Lehigh's financial forecasts reviewed by JMS in rendering its opinion, JMS
assumed that such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Patriot and First Lehigh as to the future financial performance
of Patriot and First Lehigh. JMS did not make an independent evaluation or
appraisal of the assets (including loans) or liabilities of Patriot or First
Lehigh nor was it furnished with any such appraisal. JMS also did not
independently verify and has relied on and assumed that all allowances for loan
and lease losses set forth in the balance sheets of Patriot and First Lehigh
were adequate and complied fully with applicable law, regulatory policy and
sound banking practice as of the date of such financial statements.
The following is a summary of selected analyses prepared and analyzed
by JMS in connection with its Preliminary and Proxy Opinions but does not
purport to be a complete description of the analyses undertaken by JMS. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to a partial analysis or summary
description. JMS believes that its analyses must be considered as a whole and
that selecting portions of such analyses and the factors considered therein,
without considering all factors and analyses, could create an incomplete view of
the analyses and processes underlying the Preliminary and Proxy Opinions. In
performing its analyses, JMS made numerous assumptions with respect to industry
performance, business and economic conditions and various other matters, many of
which cannot be predicted and are beyond the control of Patriot, First Lehigh
and JMS. Any estimates contained in JMS' analyses are not necessarily indicative
of future results or values, which may be significantly more or less favorable
than such estimates. Estimates of the values of companies do not purport to be
appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. Because such estimates are inherently subject
to uncertainty, neither Patriot or JMS assumes responsibility if future results
or actual values are materially different from these estimates.
Comparison of Stock Price Performance. JMS compared the relative stock
price performance of Patriot, First Lehigh and the NASD Bank Stock Index from
January 1, 1997 through July 24, 1998. Patriot's stock price for that period
exceeded the performance of the NASD Bank Stock Index. In comparison, First
Lehigh's stock price for that period lagged the NASD Bank Stock Index.
Analysis of County Deposit Market Share. JMS examined the deposit
market shares for the periods ended June 30, 1997, June 30, 1996 and June 30,
1995 for both Patriot and First Lehigh in the counties where First Lehigh
52
<PAGE>
maintains deposit-taking facilities. JMS reviewed total county market share and
compared them to other insured deposit-taking institutions in such counties. JMS
also reviewed deposit growth rates over that period for both Patriot and First
Lehigh and compared them to other insured deposit-taking institutions in such
counties.
Comparable Company Analysis. JMS compared selected financial and
operating data for First Lehigh with those of a peer group of selected banks and
bank holding companies located in Pennsylvania and New Jersey with assets less
than $250 million (the "First Lehigh Peer Group"). The analysis compared price
per share as a multiple of latest twelve month earnings per share, price per
share as a percentage of estimated 1998 earnings per share, price per share as a
percentage of tangible book value per share, dividend yield, equity as a
percentage of assets, nonperforming assets plus loans 90 days past due as a
percentage of assets, loan loss reserves as a percentage of nonperforming assets
plus loans 90 days past due, return on average assets, return on average equity
and efficiency ratios.
In addition, JMS also compared selected financial and operating data
for Patriot with those of a peer group of selected bank and bank holding
companies located in Pennsylvania and New Jersey with assets between $500
million and $1.0 billion (the "Patriot Peer Group"). The analysis compared price
per share as a multiple of latest twelve month earnings per share, price per
share as a percentage of estimated 1998 earnings per share, price per share as a
percentage of tangible book value per share, dividend yield, equity as a
percentage of assets, nonperforming assets plus loans 90 days past due as a
percentage of assets, loan loss reserves as a percentage of nonperforming assets
plus loans 90 days past due, return on average assets, return on average equity
and efficiency ratios.
Pro Forma Merger Analysis. JMS analyzed, using projections provided by
Patriot and First Lehigh, certain pro forma effects resulting from the
Consolidation based on the First Lehigh Exchange Ratios. JMS examined the
Consolidation as if the transaction closed on December 31, 1998 (including
assumptions regarding estimated potential revenue enhancements and estimated
potential cost savings). The principal conclusions were that the Consolidation
would have a significantly positive impact on the earnings per share, return on
assets and return on equity of Patriot and negative impact on the tangible book
value per share.
Analysis of Selected Merger and Acquisition Transactions. JMS analyzed
certain financial aspects of selected mergers and acquisitions of banks and bank
holding companies with assets between $50 million and $200
53
<PAGE>
million announced since January 1, 1998. The analysis compared equity as a
percentage of assets, return on average assets, return on average equity, and
nonperforming assets as a percentage of assets. The analysis also compared the
imputed transaction value per share as a percentage of book value per share, the
imputed transaction value per share per share as a percentage of tangible book
value per share, the imputed transaction value per share as a multiple of the
latest twelve months of earnings per share, the imputed transaction value as a
percentage of deposits, the imputed transaction value as a percentage of assets
and the tangible book premium as a percentage of core deposits. In summary, the
analysis indicated that the value to be offered by Patriot to the shareholders
of First Lehigh compared favorably to the value offered in the transactions
described herein.
Discounted Dividend Analyses. Using discounted dividend analyses, JMS
estimated the present value of the future dividend streams that First Lehigh
could produce on a stand-alone basis over a five-year period under different
assumptions, if First Lehigh performed in accordance with various earnings
growth forecasts. JMS also estimated the terminal value for First Lehigh's
Common Stock after the five year period by applying a range of earnings
multiples from 15 to 19 times First Lehigh's terminal year earnings. The range
of multiples used reflected a variety of scenarios regarding the growth and
profitability prospects of First Lehigh. The dividend streams and terminal
values were then discounted to present value using discount rates ranging from
10% to 15%, reflecting different assumptions regarding the rates of return
required by holders or prospective buyers of First Lehigh's Common Stock.
In reaching its opinion as to fairness, none of the analyses performed
by JMS was assigned a greater significance by JMS than any other. As a result of
its consideration of the aggregate of all factors present and analyses
performed, JMS reached the conclusion, and opined, that the First Lehigh
Exchange Ratios, as set forth in the Agreement, are fair from a financial point
of view to holders of Patriot Common Stock.
In connection with delivering its Proxy Opinion, JMS updated certain
analyses described above to reflect current market conditions and events
occurring since the date of the Agreement. Such reviews and updates led JMS to
conclude that it was not necessary to change the conclusions it had reached in
connection with rendering the Preliminary Opinion.
JMS, as part of its investment banking business, is regularly engaged
in the valuation of assets, securities and companies in connection with various
types of asset and security transactions, including mergers,
54
<PAGE>
acquisitions, private placements, and valuation for various other purposes and
in the determination of adequate consideration in such transactions.
The Proxy Opinion of JMS was based solely upon the information
available to it and the economic, market and other circumstances as they existed
as of the date hereof; events occurring after the date hereof could materially
affect the assumptions used in preparing its Proxy Opinion. JMS has not
undertaken to reaffirm and revise its Proxy Opinion or otherwise comment upon
any events occurring after the date hereof.
In delivering its Preliminary Opinion and Proxy Opinion, JMS assumed
that in the course of obtaining the necessary regulatory and governmental
approvals for the Consolidation, no restrictions will be imposed on the Holding
Company that would have a material adverse effect on the contemplated benefits
of the Consolidation. JMS also assumed that there would not occur any change in
applicable law or regulation that would cause a material adverse change in the
prospects or operations of Patriot and First Lehigh after the Consolidation.
Pursuant to the terms of the engagement letter dated July 28, 1998,
Patriot paid JMS $25,000 upon the issuance of the Preliminary Opinion. In
addition, Patriot has also agreed to pay JMS $50,000 upon the issuance of the
Proxy Opinion to reimburse JMS for its reasonable out-of-pocket expenses.
Whether or not the Consolidation is completed, Patriot has agreed to indemnify
JMS and certain related persons against certain liabilities relating to or
arising out of its engagement.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION OF JMS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION,
WHICH IS SET FORTH AS ANNEX D TO THIS PROXY STATEMENT/PROSPECTUS.
Opinion of First Lehigh's Financial Advisor
First Lehigh retained Danielson Associates Inc. ("Danielson
Associates") to advise the First Lehigh Board of Directors as to its "fair" sale
value and the fairness to its shareholders of the financial terms of the offer
to acquire First Lehigh. Danielson Associates is regularly engaged in the
valuation of banks, bank holding companies, and thrifts in the connection with
mergers, acquisitions, and other securities transactions; and has knowledge of,
and experience with, the Pennsylvania banking markets and banking organizations
operating in those markets. Danielson Associates was selected by First Lehigh
because of its knowledge of, expertise with, and reputation in the financial
services industry.
55
<PAGE>
In such capacity, Danielson Associates reviewed the Agreement with
respect to the pricing and other terms and conditions of the Consolidation, but
the decision as to accepting the offer was ultimately made by the Board of
Directors of First Lehigh. Danielson Associates rendered its oral opinion to the
First Lehigh Board of Directors, which it subsequently confirmed in writing,
that as of the date of such opinion, the financial terms of the Patriot offer
were "fair" to First Lehigh and its shareholders. No limitations were imposed by
the First Lehigh Board of Directors upon Danielson Associates with respect to
the investigation made or procedures followed by it in arriving at its opinion.
In arriving at its opinion, Danielson Associates (a) reviewed certain
business and financial information relating to First Lehigh and Patriot,
including annual reports for the fiscal year ended December 31, 1997 and call
report data from 1989 to 1997 including quarterly reports for 1998; (b)
discussed the past and current operations, financial condition and prospects of
First Lehigh with its senior executives; (c) analyzed the pro forma impact of
the merger on Patriot's earnings per share, capitalization, and financial
ratios; (d) reviewed the reported prices and trading activity for the First
Lehigh and the Patriot Common Stock and compared them to similar bank holding
companies; (e) reviewed and compared the financial terms, to the extent publicly
available, with comparable transactions; (f) reviewed the Agreement and certain
related documents; and (g) considered such other factors as were deemed
appropriate.
Danielson Associates did not obtain any independent appraisal of assets
or liabilities of First Lehigh or Patriot or their respective subsidiaries.
Further, Danielson Associates did not independently verify the information
provided by First Lehigh and assumed the accuracy and completeness of all such
information.
In arriving at its opinion, Danielson Associates performed a variety of
financial analyses. Danielson Associates believes that its analyses must be
considered as a whole and that consideration of portions of such analyses and
the factors considered therein, without considering all the factors and
analyses, could create an incomplete view of the analyses and the process
underlying Danielson Associates' opinion. The preparation of a fairness opinion
is a complex process involving subjective judgments and is not necessarily
susceptible to partial analysis and summary description.
In its analyses, Danielson Associates made certain assumptions with
respect to industry performance, business and economic conditions, and other
matters, many of which were beyond First Lehigh's or Patriot's control.
56
<PAGE>
Any estimates contained in Danielson Associates analyses are not necessarily
indicative of the future results of value, which may be significantly more or
less favorable than such estimates. Estimates of values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies or
their securities may actually be sold.
The following is a summary of selected analyses considered by Danielson
Associates in connection with its opinion letter.
Pro Forma Merger Analyses
Danielson Associates analyzed the changes in the amount of earnings and
book value represented by the receipt of about $23.4 million at the time of the
Agreement for all of the outstanding shares of First Lehigh Common Stock, which
will be paid in Patriot common stock. The analysis evaluated, among other
things, possible dilution in earnings and capital per share for Patriot Common
Stock.
Comparable Companies
Danielson Associates compared First Lehigh's (a) tangible capital of
13.13% of assets as of March 31, 1998, (b) 4.68% of assets nonperforming as of
March 31, 1998, and (c) net operating income of .11% of average assets for the
trailing twelve month period ending March 31, 1998, with the medians for
selected Pennsylvania banks, which Danielson Associates deemed comparable. These
banks included Neffs Bank, New Tripoli Bank, Citizens National Bank of
Slatington and Merchants Bank of Bangor. Their medians were (a) tangible capital
of 15.36% of assets, (b) 1.05% of assets nonperforming, and (c) net operating
income of 2.39% of average assets.
Danielson Associates also compared Patriot's (a) stock price of July
24, 1998 of 22.7 times adjusted earnings and 155% of book, (b) dividend yield
based on trailing four quarters as of June 30, 1998 and stock price as of July
24, 1998 of 1.81%, (b) tangible capital as of June 30, 1998 of 5.39% of assets,
(d) nonperforming assets as of June 30, 1998 equal to .09% of total assets, (e)
return on average assets during the trailing four quarters ended June 30, 1998
of .44% and (f) return on average equity during the same period of 8.04%, with
the medians for selected banks and bank holding companies that Danielson
Associates deemed to be comparable to Patriot. The selected institutions
included ESB Financial Corp., Fidelity Bancorp, Inc., First Keystone Financial,
Inc., Parkvale Financial Corporation, Progress Financial Corporation, TF
Financial Corp. and York Financial Corp. in Pennsylvania; and FMS Financial
Corporation, Lakeview Financial Corp., Raritan Bancorp, Inc. and
57
<PAGE>
Statewide Financial Corp. in New Jersey. The comparable medians were (a) stock
price of 18.6 times earnings and 170% of book, (b) dividend yield of 1.71%, (c)
tangible capital of 6.84% of assets, (d) .47% of assets nonperforming, (e)
return on average assets of 1.84% and (f) return on average equity of 11.07%.
Danielson Associates also compared other income, expense, and balance sheet
information of such companies with similar information about Patriot.
Furthermore, Danielson Associates compared Patriot to similar
performing publicly-traded thrifts and banks in the United States. The
comparable thrifts included Commonwealth Bancorp, Inc. of Pennsylvania, Elmira
Savings Bank and Haven Bancorp, Inc. of New York, First Federal Savings-East
Hartford of Connecticut and Firstfed America Bancorp of Massachusetts. The
comparable medians were (a) stock price as of July 24, 1998 equal to 20.8 times
adjusted earnings and 140% of book, (b) dividend yield based on trailing four
quarters as of June 30, 1998 and stock price as of July 24, 1998 of 1.51%, (c)
tangible capital as of June 30, 1998 of 6.77% of assets, (d) nonperforming
assets during the trailing four quarters ended June 30, 1998 equal to .36% of
total assets, (e) return on average assets during the trailing four quarters
ended June 30, 1998 of .58% and (f) return on average equity during the same
period of 7.43%.
The comparable underperforming banks included CB Bancshares, Inc. of
Hawaii, CoVest Bancshares, Inc. and Wintrust Financial of Illinois, Fidelity
National Corp. of Georgia and Republic Security Financial of Florida. The
comparable medians were (a) stock price equal to 33.0 times adjusted earnings
and 199% of book, (b) dividend yield of .66%, (c) tangible capital of 8.00% of
assets, (d) .83% of assets nonperforming, (3) return on average assets of .54%
and (f) return on average equity of 5.92%. Other income, expense, and balance
sheet information of such companies was compared with similar information about
Patriot by Danielson Associates.
Comparable Transaction Analysis
Danielson Associates compared the consideration to be paid in the
merger to the equity capital of First Lehigh with capital multiples paid in
acquisition of banks in Kentucky, Maryland, Ohio, Pennsylvania and West Virginia
through the opinion date. Of these, the most applicable recent transactions
included Jeff Banks/Regent, HUBCO/Community, ML/Penncore and HUBCO/Security
National. At the time Danielson Associates made its analysis, the consideration
to be paid in the merger was 158% of First Lehigh's March 31, 1998 book value.
This compares to the median multiple of 190% of book value for the comparable
acquisitions.
58
<PAGE>
Other Analysis
In addition to performing the analyses summarized below, Danielson
Associates also considered the general market for bank and thrift mergers, the
historical financial performance of First Lehigh and Patriot, the deposit market
shares of both banks, and the general economic conditions and prospects of those
banks.
No company or transaction used in this composite analysis is identical
to First Lehigh or Patriot. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather it involves complex consideration and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading values of
the company or companies to which they are being compared.
The summary set forth above does not purport to be a complete
description of the analyses and procedures performed by Danielson Associates in
the course of arriving at its opinions. In payment for its services as the
financial advisor to First Lehigh, Danielson Associates has been paid a fee of
$15,000.
The full text of the opinion of Danielson Associates dated as of July
27, 1998, which sets forth assumptions made and matters considered, is attached
hereto as Annex E to this Proxy Statement/Prospectus. First Lehigh shareholders
are urged to read this opinion in its entirety. Danielson Associates' opinion is
directed only to the consideration to be received by First Lehigh shareholders
in the Consolidation and does not constitute a recommendation to any First
Lehigh shareholder as to how such shareholder should vote at the First Lehigh
Meeting.
Effective Date of the Consolidation
Under the Agreement, the Effective Date will be the date on which
Articles of Consolidation are filed with the Pennsylvania Department of State
and the Delaware Department of State which will be the same date as the Closing
Date. The Closing Date will be the fifth business day following satisfaction or
waiver of the conditions to the consummation of the Consolidation as specified
in the Agreement or such other date as Patriot and First Lehigh may mutually
agree. The parties presently expect that the Effective Date will occur in the
first quarter 1999. See " -- Conditions to the Consolidation" herein.
59
<PAGE>
The Agreement may be terminated by either party if, among other
reasons, the Effective Date does not occur on or before March 31, 1999, unless
the failure of such occurrence shall be due to the failure of the party seeking
to terminate the Agreement to perform or observe in any material respect its
agreements required to be performed or observed by such party on or before the
Effective Date. See " -- Termination; Effect of Termination."
Exchange of Stock Certificates
The conversion of Patriot Common Stock and First Lehigh Common Stock
and First Lehigh Preferred Stock into Holding Company Common Stock will occur
automatically at the Effective Date. As soon as practicable after the Effective
Date, the Holding Company, or a transfer agent designated by the Holding
Company, in the capacity of exchange agent (the "Exchange Agent"), will send a
transmittal form to each Patriot and First Lehigh shareholder of record. The
transmittal form will contain instructions with respect to the surrender of
certificates representing Patriot Common Stock, First Lehigh Common Stock, and
First Lehigh Preferred Stock to be exchanged for Holding Company Common Stock.
Under the Agreement, certificates representing shares of Holding Company Common
Stock and checks for cash in lieu of fractional interests in shares of Holding
Company Common Stock must be mailed to former shareholders of Patriot and First
Lehigh as soon as reasonably possible but in no event later than 20 business
days following the receipt of certificates representing former shares of Patriot
Common Stock, First Lehigh Common Stock, and First Lehigh Preferred Stock duly
endorsed.
PATRIOT AND FIRST LEHIGH SHAREHOLDERS SHOULD NOT FORWARD PATRIOT OR
FIRST LEHIGH STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED
TRANSMITTAL FORMS. PATRIOT AND FIRST LEHIGH SHAREHOLDERS SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Until the certificates representing Patriot Common Stock, First Lehigh
Common Stock, and First Lehigh Preferred Stock are surrendered for exchange
after completion of the Consolidation, holders of such certificates will not
receive, and will not be paid dividends on, the Holding Company Common Stock
into which such shares have been converted. When such certificates are
surrendered, any unpaid dividends will be paid without interest. For all other
purposes, however, each certificate which represents shares of Patriot Common
Stock, First Lehigh Common Stock, or First Lehigh Preferred Stock outstanding at
the Effective Date (other than any Dissenting Shares and Excluded Shares) will
be deemed to evidence ownership of and the right to receive the shares of
Holding Company Common Stock (and cash in lieu of fractional shares) into which
those shares have been converted by virtue of
60
<PAGE>
the Consolidation. Neither Patriot, First Lehigh nor the Holding Company will be
liable to any holder of shares of Patriot Common Stock, First Lehigh Common
Stock, or First Lehigh Preferred Stock for any amount paid in good faith to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
All shares of Holding Company Common Stock issued upon conversion of
shares of Patriot Common Stock, First Lehigh Common Stock, and First Lehigh
Preferred Stock shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Patriot Common Stock, First Lehigh Common
Stock, and First Lehigh Preferred Stock, subject, however, to the Holding
Company's obligation to pay any dividends or make any other distributions with a
record date on or prior to the Effective Date, which may have been declared or
made by Patriot or First Lehigh on such shares of Patriot Common Stock or First
Lehigh Preferred Stock in accordance with the Agreement and which remain unpaid
at the Effective Date.
No fractional shares of Holding Company Common Stock will be issued to
any shareholder of First Lehigh upon completion of the Consolidation. For each
fractional share that would otherwise be issued in connection with the
conversion of the First Lehigh Common Stock and Senior Preferred Stock, the
Holding Company will pay by check an amount equal to the product obtained by
multiplying the fractional share interest to which such holder would otherwise
be entitled by the closing price of a share of Holding Company Common Stock on
the Nasdaq National Market System (the "Holding Company Market Price") on the
first day Holding Company Common Stock is traded after the Effective Date. For
each fractional share that would otherwise be issued in connection with the
conversion of the Series A Preferred Stock, the Holding Company will pay by
check an amount equal to the product obtained by multiplying the fractional
interest to which such holder would otherwise be entitled by 80% of the Holding
Company Market Price on the first day Holding Company Common Stock is traded
after the Effective Date.
Conditions to the Consolidation
The obligations of Patriot and First Lehigh to effect the Consolidation
are subject to various conditions, which include the following:
(a) all action required to be taken by, or on the part of, Patriot and
First Lehigh to authorize the execution, delivery and performance of the
Agreement and the consummation of the transactions contemplated by the
Agreement, shall have been duly and validly taken and Patriot and First Lehigh
61
<PAGE>
shall have received certified copies of the resolutions of the other party
evidencing such authorizations;
(b) the obligations and covenants of Patriot and First Lehigh required
by the Agreement to be performed by Patriot and First Lehigh at or prior to the
Effective Date shall have been duly performed and complied with in all material
respects;
(c) the representations and warranties of Patriot and First Lehigh set
forth in the Agreement shall be true and correct, as of the date of the
Agreement, and as of the Effective Date as though made on and as of the
Effective Date, except as to any representation or warranty (i) which
specifically relates to an earlier date or (ii) where the breach of the
representation or warranty would not, either individually or in the aggregate,
constitute a Material Adverse Effect (see "-- Representations and Warranties");
(d) Patriot and First Lehigh shall have received all required approvals
("Regulatory Approvals") of regulatory authorities of the Consolidation, without
the imposition of any term or condition that would have a Material Adverse
Effect on the Holding Company upon completion of the Consolidation and all
notice and waiting periods required thereunder shall have expired or been
terminated (see "-- Regulatory Approvals");
(e) there shall not be in effect any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits
consummation of the transactions contemplated by the Agreement;
(f) Patriot and First Lehigh shall each have received an opinion of
Stevens & Lee that, among other things, the Consolidation will be treated for
federal income tax purposes as a "reorganization" within the meaning of Section
368(a) of the Code (see "-- Certain Federal Income Tax Consequences");
(g) All accrued but unpaid dividends in arrears with respect to the
First Lehigh Series A Preferred Stock shall have been paid;
(h) the Agreement shall have been approved by the shareholders of First
Lehigh and Patriot by such vote as is required under the BCL, the DGCL, their
respective Articles of Incorporation, Bylaws and applicable Nasdaq requirements;
and
62
<PAGE>
(i) the Holding Company Common Stock shall be approved for quotation on
the Nasdaq Stock Market National Market System.
In addition to the foregoing conditions, the obligation of Patriot to
effect the consolidation are subject to satisfaction of each of the following
conditions:
(a) No adjustment shall have occurred with respect to the conversion
rights of any holder of the Senior Preferred Stock or the Series A Preferred
Stock;
(b) Each regulatory agreement to which First Lehigh is a party shall
have been terminated by the applicable regulatory authority;
(c) The FDIC shall have consented in writing to the terms of the
Standstill Agreement between Patriot and James L. Leuthe; and
(d) Mr. Leuthe shall have complied with all terms of the Standstill
Agreement to be complied with prior to or concurrently with completion of the
Consolidation and all outstanding indebtedness of Mr. Leuthe to First Lehigh
Bank shall have been repaid in full.
In addition to the foregoing, the obligations of each party to the
Agreement are conditioned on other conditions which are customary for
transactions of the type contemplated by the Agreement.
Except for the requirements of shareholder approval, Regulatory
Approvals and the absence of any order, decree, or injunction preventing the
transactions contemplated by the Agreement, each of the conditions described
above may be waived in the manner and to the extent described in " -- Amendment;
Waivers" herein. Neither Patriot nor First Lehigh, however, anticipates waiving
the conditions that it receive an opinion of counsel that provides, among other
things, that the Consolidation will be treated as a "reorganization" within the
meaning of Section 368(a) of the Code. If for any reason, Patriot and First
Lehigh cannot obtain an opinion of counsel that the consolidation will be
treated as a "reorganization" within the meaning of Section 368(a) of the Code
and Patriot and First Lehigh waive receipt of such an opinion as a condition of
closing, then any vote of the shareholders of Patriot and First Lehigh approving
the Consolidation would be resolicited.
Regulatory Approvals
The Consolidation is subject to prior approval of the FRB under Section
3 of the BHCA and regulations of the FRB thereunder. An application for approval
of the Consolidation was filed with the FRB on or about _________________, 1998.
In evaluating an application under the BHCA, the FRB shall take into
63
<PAGE>
consideration the financial and managerial resources and future prospects of the
parties involved, and the resulting company and the convenience and needs of the
community to be served. Consideration of the managerial resources of a company
shall include consideration of the competence, experience and integrity of the
directors, officers and principal shareholders of the company. Before approving
an application, the FRB shall request from the U.S. Department of Justice and
consider any report rendered within 30 days on the competitive factors involved.
The FRB may not approve any proposed transaction (i) which would result in a
monopoly or which would be in furtherance of any combination or conspiracy to
monopolize the banking business in any part of the United States, (ii) which in
any section of the country may have the effect of substantially lessening
competition or tending to create a monopoly or which in any other manner would
be in restraint of trade, unless the FRB finds that the anticompetitive effects
of the proposed transaction are clearly outweighed in the public interest by the
probable effect of the proposed transaction in meeting the convenience and needs
of the community to be served.
In addition, the FRB has the responsibility by statute and regulation
to review the performance of all involved institutions in meeting their
responsibilities under the Community Reinvestment Act ("CRA"), which includes
the record of performance of the existing institutions in meeting the credit
needs of the entire community including low- and moderate-income neighborhoods.
Patriot Bank and First Lehigh Bank received ratings of "satisfactory" in their
last CRA examinations.
Patriot and First Lehigh anticipate receipt of the FRB approval in
_________________. However, there can be no assurance that the FRB will approve
the Consolidation, and, if approved, there can be no assurance as to the date of
such approval or conditions of such approval. The Consolidation may not be
consummated until 30 days (15 days if the Attorney General does not object)
after the date of the FRB approval, during which time the U.S. Department of
Justice has the opportunity to challenge the Consolidation on antitrust grounds.
The commencement of an antitrust action by the U.S. Department of Justice would
stay the effectiveness of FRB approval unless a court specifically orders
otherwise. In reviewing the Consolidation, the U.S. Department of Justice could
analyze the Consolidation's effect on competition differently than the FRB, and
thus it is possible that the U.S. Department of Justice could reach a different
conclusion than the FRB regarding the Consolidation's competitive effects.
The Consolidation also is subject to prior approval of the Department
under the Banking Code.
64
<PAGE>
An application for approval of the Consolidation was filed with the Department
on ______________, 1998. In evaluating an application under the Banking Code,
the Department applies criteria similar to the criteria utilized by the FRB
under the BHC. Patriot and First Lehigh anticipate receipt of Department
approval in _________________. However, there can be no assurance that the
Department will approve the Consolidation, and, if approved there can be no
assurance as to the date of such approval or conditions of such approval.
Representations and Warranties
The Agreement contains customary representations and warranties
relating to, among other things, (a) the corporate organization of Patriot and
its subsidiaries and First Lehigh and its subsidiaries; (b) the capital
structures of Patriot and First Lehigh; (c) the due authorization, execution,
delivery, performance and enforceability of the Agreement; (d) consents or
approvals of Regulatory Authorities or third parties necessary to complete the
Consolidation; (e) the consistency of financial statements with generally
accepted accounting principles and, where appropriate, applicable regulatory
accounting principles; (f) the absence of material adverse changes, since March
31, 1998, in the consolidated assets, business, financial condition or results
of operations of Patriot or First Lehigh; (g) the filing of tax returns and
payment of taxes; (h) the absence of undisclosed material pending or threatened
litigation; (i) compliance with applicable laws and regulations; (j) retirement
and other employee plans and matters relating to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"); (k) the quality of title to assets
and properties; (l) the maintenance of adequate insurance; (m) the absence of
undisclosed brokers' or finders' fees; (n) the absence of material environmental
violations, actions or liabilities; (o) the consistency of the allowance for
loan losses with generally accepted accounting principles and all applicable
regulatory criteria; (p) the accuracy of information supplied by Patriot and
First Lehigh in connection with the Registration Statement on Form S-4 filed
with the Commission in connection with the issuance of Holding Company Common
Stock in the Consolidation, this Proxy Statement/Prospectus and all applications
filed with regulatory authorities for approval of the Consolidation; (q)
documents filed with the Commission and the accuracy of information contained
therein; (r) the validity and binding nature of loans reflected as assets in the
financial statements of First Lehigh and Patriot; (s) transactions with
affiliates; (t) the absence of any undisclosed contract, agreement, plan or
arrangement; and (u) the accuracy of representations set forth in the Agreement.
65
<PAGE>
Business Pending the Consolidation
Pursuant to the Agreement, Patriot and First Lehigh have each agreed to
use their reasonable good faith efforts to preserve their business organizations
intact, to maintain good relationships with employees and to preserve the
goodwill of customers and others with whom business relationships exist. In
addition, Patriot and First Lehigh have each agreed in the Agreement to conduct
its business and to engage in transactions, including extensions of credit, only
in the ordinary course of business, consistent with past practice, except as
otherwise required by the Agreement or with the written consent of the other
party.
In addition, First Lehigh has agreed in the Agreement that prior to the
Effective Date, except as otherwise consented to or approved by Patriot or as
otherwise permitted or required by the Agreement, it will not, and will not
permit any of its subsidiaries to, without the written consent of the other
party, among other things:
(a) amend or change any provision of its Articles of Incorporation,
Charter or Bylaws;
(b) change the number of authorized or issued shares of its capital
stock or issue any shares or issue or grant any option or similar rights with
respect to its authorized or issued capital stock or any securities convertible
into shares of such stock, or split, combine or reclassify any shares of capital
stock, or declare, set aside or pay any dividend or other distribution in
respect of capital stock, or redeem or otherwise acquire any shares of capital
stock, except that (A) First Lehigh may issue up to an aggregate of 60,000
shares of First Lehigh Common Stock upon the valid exercise of First Lehigh
Options, (B) First Lehigh may issue shares of First Lehigh Common Stock upon the
conversion of any outstanding shares of Senior Preferred Stock or Series A
Preferred Stock, (C) First Lehigh may issue shares of First Lehigh Common Stock
pursuant to the Patriot Stock Option Agreement, (D) First Lehigh may pay
required dividends on the outstanding Senior Preferred Stock and Series A
Preferred Stock, and (E) First Lehigh may pay the cumulative dividends in
arrears on the Series A Preferred Stock.
(c) grant any severance or termination pay to, or, enter into any new
or amend any existing employment agreement with, or increase the compensation
of, any employee, officer or director;
66
<PAGE>
(d) merge or consolidate any subsidiary with any other corporation;
sell or lease all or any substantial portion of the assets or business; make any
acquisition of all or any substantial portion of the business or assets of any
other person, firm, association, corporation or business organization other than
in connection with the collection of any loan or credit arrangement; enter into
a purchase and assumption transaction with respect to deposits and liabilities;
permit the revocation or surrender by any subsidiary of its certificate of
authority to maintain, or file an application for the relocation of, any
existing branch office;
(e) sell or otherwise dispose of the capital stock or sell or otherwise
dispose of any of its assets or the assets of any subsidiary other than in the
ordinary course of business consistent with past practice; subject any of its
assets to a lien, pledge, security interest or other encumbrance (other than in
connection with government deposits, repurchase agreements, bankers acceptances,
"treasury tax and loan" accounts established in the ordinary course of business
and transactions in FHLB advances and "federal funds" and the satisfaction of
legal requirements in the exercise of trust powers) other than in the ordinary
course of business consistent with past practice; incur any indebtedness for
borrowed money (or guarantee any indebtedness for borrowed money), except in the
ordinary course of business consistent with past practice;
(f) take any action which would result in any of its representations
and warranties set forth in the Agreement becoming untrue as of any date after
the date hereof except as otherwise contemplated or permitted by the Agreement,
or in any of the conditions set forth in the Agreement not being satisfied,
except in each case as may be required by applicable law;
(g) change any method, practice or principle of accounting, except as
may be required from time to time by generally accepted accounting principles
(without regard to any optional early adoption date) or any regulatory
authority;
(h) waive, release, grant or transfer any rights of value or modify or
change in any material respect any existing material agreement to which it or
any subsidiary is a party, other than in the ordinary course of business
consistent with past practice;
(i) implement any pension, retirement, profit sharing, bonus, welfare
benefit or similar plan or arrangement that was not in effect on the date of the
Agreement, or, except as required by law and except as
67
<PAGE>
otherwise set forth in the Agreement, materially amend any existing plan or
arrangement;
(j) purchase any security for its investment portfolio;
(k) amend or otherwise modify the underwriting and other lending
guidelines and policies in effect as of the date of the Agreement or otherwise
fail to conduct its lending activities in the ordinary course of business
consistent with past practice;
(l) enter into, renew, extend or modify any other transaction with any
affiliate, other than deposit and loan transactions in the ordinary course of
business and which are in compliance with the requirements of applicable laws
and regulations;
(m) change any deposit or loan rates or enter into any interest rate
swap, floor or cap or similar commitment, agreement or arrangement;
(n) take any action that would give rise to a right of payment to any
individual under any employment agreement;
(o) take any action that would preclude the Consolidation from
qualifying as a reorganization within the meaning of Section 368 of the Code; or
(p) agree to do any of the foregoing.
First Lehigh has agreed in the Agreement, among other things, (i) to
permit Patriot, if Patriot elects to do so, at Patriot's own expense, to cause a
"phase I environmental audit" to be performed at any physical site owned or
occupied by it or any of its subsidiaries; (ii) if requested by Patriot and at
Patriot's expense, to cause its independent certified public accountants to
perform a review of its unaudited consolidated financial statements as of the
end of any calendar quarter, in accordance with Statement of Auditing Standards
No. 71, and to issue their report on such financial statements; (iii) if
requested by Patriot, to use its reasonable best efforts to obtain an extension
of any contract with an outside service bureau or other vendor of services to it
or any subsidiary of First Lehigh on terms and conditions mutually acceptable to
each party; (iv) to provide to Patriot, on a monthly basis, a written list of
nonperforming assets; (v) to submit the Agreement to its shareholders for
approval at a special meeting to be held as soon as practicable; (vi) to confer,
at the request of the other party, on a
68
<PAGE>
monthly basis prior to the Effective Date regarding each party's financial
condition, operations and business matters relating to the completion of the
Consolidation; (vii) to provide to Patriot copies of the minutes of any meeting
of the Board of Directors of First Lehigh and its subsidiaries, and of any of
its committees or of any senior management committee; (viii) to prepare all
applications for, and use their reasonable best efforts to obtain, all required
Regulatory Approvals; (ix) subject to the terms of the Agreement, to take all
actions necessary to complete the transactions contemplated by the Agreement;
(x) to maintain, and cause their respective subsidiaries to maintain, adequate
insurance; (xi) to maintain accurate books and records; (xii) to file all tax
returns and pay all taxes when due; (xiii) to agree upon the form and substance
of any press release or public disclosure related to the Agreement and the
Consolidation; and (xiv) to deliver to the other copies of all securities
documents when filed.
In addition to the foregoing provisions, First Lehigh has agreed to
list its headquarters located at 1620 Pond Road, Allentown, Pennsylvania for
sale.
Dividends
The Agreement permits First Lehigh to pay required dividends on the
outstanding shares of Senior Preferred Stock and Series A Preferred Stock. The
Agreement contains no restrictions on Patriot's right to pay cash dividends.
The Holding Company presently intends to pay an annual dividend of $.28
per share of Holding Company Common Stock. However, the timing and amount of
future dividends, if any, will depend upon earnings, capital levels, cash
requirements, the financial condition of the Holding Company and Patriot Bank,
applicable government regulations and policies and other factors deemed relevant
by the Holding Company's Board of Directors, including the amount of dividends
payable to the Holding Company by Patriot Bank.
The principal source of income and cash flow of the Holding Company,
including cash flow to pay dividends on the Holding Company Common Stock, is
dividends from Patriot Bank. Various federal and state laws, regulations and
policies limit the ability of the Patriot Bank to pay dividends to the Holding
Company. For certain limitations on Patriot Bank's ability to pay dividends to
the Holding Company, see "DESCRIPTION OF Patriot - Business-Supervision and
Regulation."
69
<PAGE>
No Solicitation of Transactions
The Agreement provides that First Lehigh shall not, and shall not
authorize or permit any of its directors, officers, employees or agents, to
directly or indirectly (i) respond to, solicit, initiate or encourage any
inquiries relating to, or the making of any proposal which relates to, an
Acquisition Transaction (as defined below), (ii) recommend or endorse an
Acquisition Transaction, (iii) participate in any discussions or negotiations
regarding an Acquisition Transaction, (iv) provide any third party (other than
the other party to the Agreement or an affiliate of such party) with any
nonpublic information in connection with any inquiry or proposal relating to an
Acquisition Transaction or (v) enter into an agreement with any other party with
respect to an Acquisition Transaction. First Lehigh has agreed to notify Patriot
orally (within one day) and in writing (as promptly as practicable) if any
inquiries or proposals relating to an Acquisition Transaction are received or
any such negotiations or discussions are sought to be initiated or continued.
"Acquisition Transaction" means one of the following transactions with a party
other than Patriot: (i) a merger or consolidation, or any similar transaction,
(ii) a purchase, lease or other acquisition of all or a substantial portion of
the assets or liabilities of First Lehigh or (iii) a purchase or other
acquisition (including by way of share exchange, tender offer, exchange offer or
otherwise) of a substantial interest in any class or series of First Lehigh's
equity securities (other than as permitted under the Agreement) or their
subsidiaries.
Amendment; Extension and Waivers
Subject to applicable law, at any time prior to the consummation of the
transactions contemplated by the Agreement, Patriot and First Lehigh may (a)
amend the Agreement, (b) extend the time for the performance of any of the
obligations or other acts of Patriot and First Lehigh required in the Agreement,
(c) waive any inaccuracies in the representations and warranties contained in
the Agreement or in any document delivered pursuant to the Agreement, or (d)
waive compliance with any of the agreements or conditions contained in the
Agreement, except for the requirements of shareholder approval, Regulatory
Approvals and the absence of any order, decree, or injunction preventing the
transactions contemplated by the Agreement; provided, however, that any
amendment, extension or waiver granted or executed after shareholders of First
Lehigh and Patriot have approved the Agreement shall not modify either the
amount or the form of consideration to be provided to holders of Patriot Common
Stock, First Lehigh Common Stock, or First Lehigh Preferred Stock upon
consummation of the Consolidation, change any terms of the Articles of
Incorporation of the Holding Company, or otherwise materially
70
<PAGE>
adversely affect the shareholders of Patriot or First Lehigh without the
approval of such shareholders. In particular, if for any reason, Patriot and
First Lehigh cannot obtain an opinion of counsel that the consolidation will be
treated as a "reorganization" within the meaning of Section 368(a) of the Code
and Patriot and First Lehigh waive receipt of such an opinion as a condition of
closing, then any vote of the shareholders of Patriot and First Lehigh approving
the Consolidation would be resolicited.
Termination; Effect of Termination
The Agreement may be terminated at any time prior to the Effective Date
by mutual written consent of Patriot and First Lehigh or by either party if (i)
the other party, in any material respect, breaches any representation, warranty,
covenant or understanding contained in the Agreement which would have a Material
Adverse Effect (as defined in the Agreement) on the breaching party, and such
breach has not been cured by the earlier of thirty days from the date written
notice of such breach was given to such party committing the breach or the
Effective Date unless on the Effective Date such breach no longer causes a
Material Adverse Effect, (ii) the Effective Date of the Consolidation shall not
have occurred by on or before March 31, 1999, unless the failure of such
occurrence shall be due to the failure of the party seeking to terminate the
Agreement to perform or observe in any material respect its agreements required
to be performed or observed by such party on or before the Effective Date or
(iii) either party has received a final unappealable administrative order from a
regulatory authority whose approval or consent has been requested that such
approval or consent will not be granted or will not be granted absent the
imposition of terms and conditions which would have a Material Adverse Effect on
the Holding Company, unless such occurrence shall be due to the failure of the
party seeking to terminate the Agreement or perform or observe in any material
respect its agreements set forth therein required to be performed or observed by
such party on or before the Effective Date.
First Lehigh may terminate the Agreement in the event that the Patriot
Market Value is less than $12.26.
The Agreement may be terminated by either the Board of Directors of
Patriot or the Board of Directors of First Lehigh if their shareholders shall
have not approved this Agreement by the requisite vote; provided, however, that
neither Patriot nor First Lehigh will have a right to terminate the Agreement if
prior to such shareholder vote the Board of Directors of the party whose
shareholders failed to approve the Agreement shall have withdrawn,
71
<PAGE>
modified or changed in a manner adverse to the other party its approval or
recommendation of the Agreement and the transactions contemplated thereby.
In the event of termination of the Agreement by either Patriot or First
Lehigh, the Agreement will be void, except as otherwise provided in the
Agreement and there will be no liability on the part of Patriot or First Lehigh
other than (i) the liability arising out of any uncured willful breach of any
covenant or other agreement contained in the Agreement, any fraudulent breach of
a representation or warranty contained in the Agreement, or (ii) any obligation
or liability arising under the Patriot Stock Option Agreement.
Management and Operations of the Holding Company after the Consolidation
Directors and Executive Officers
The initial Board of Directors of the Holding Company will consist of 7
members, all of whom will be designated by the Board of Directors of Patriot.
For information concerning the persons who have been designated to be members of
the Board of Directors of the Holding Company, see "DESCRIPTION OF THE HOLDING
COMPANY -- Board and Management." James B. Elliot will be the Chairman of the
Board of Directors of the Holding Company and Joseph W. Major will be the
President and Chief Executive Officer of the Holding Company.
On the Effective Date, the executive officers of the Holding Company
will be as follows:
James B. Elliot - Chairman
Joseph W. Major - President and Chief Executive Officer
Richard A. Elko - Executive Vice President and Chief
Financial Officer
The Board of Directors and executive officers of Patriot Bank
in office immediately prior to completion of the Consolidation will remain as
Patriot Bank's Board of Directors and executive officers.
Holding Company
Patriot and First Lehigh expect the Holding Company to achieve certain
cost savings and operating synergies as a result of the Consolidation. These
costs savings and operating synergies are anticipated to aggregate approximately
8% to 11% of Patriot's and First Lehigh's aggregate recurring
72
<PAGE>
operating expenses, and are expected to be substantially realized within 18
months following the Effective Date. Patriot and First Lehigh expect the cost
savings and operating synergies will be realized primarily as the result of the
elimination of duplicative administrative and back office functions. Because of
the uncertainties inherent in consolidating two financial institutions, changes
in the regulatory environment and changes in economic conditions, no assurances
can be given that any particular level of cost savings will be realized, that
any such cost savings will be realized over the time period currently
anticipated or that such cost savings will not be offset to some degree by
increases in other expenses, including expenses relating to consolidating the
two companies.
The Banks
Following the Effective Date, First Lehigh Bank will be merged with
and into Patriot Bank, with Patriot Bank as the surviving institution. The
executive officers and directors of Patriot Bank immediately prior to such
merger will remain as the executive officers and directors of Patriot Bank after
such merger. Patriot Bank intends to convert all of First Lehigh's branches to
Patriot Bank's operating systems.
Employee Benefits
On the Effective Date, the fringe benefit, employee pension and welfare
benefit plans of Patriot will become the fringe benefit, employee pension and
welfare benefit plans of the Holding Company. The employee pension and welfare
benefit plans of First Lehigh (as well as any other plan of First Lehigh
providing for benefits not subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")), may, at the Holding Company's election and
subject to the requirements of the Code and other applicable laws, continue to
be maintained separately or consolidated, frozen, or terminated. Through the
Effective Date, First Lehigh may not grant further benefits or awards under any
First Lehigh plan to employees or directors, including, without limitation, the
granting of stock options, stock appreciation rights, restricted stock, and
performance shares.
Accounting Treatment
The Consolidation will be accounted for using the purchase method of
accounting. In general, the purchase method accounts for a business combination
as the acquisition of one company by another. Purchase accounting requires that
the purchase price and costs of the acquisition be allocated to all of the
assets acquired and liabilities assumed, based on their fair value. If the
purchase price exceeds the fair value of the purchased company's net assets the
excess is recorded as goodwill, and the goodwill will be amortized over its
estimated life. Earnings or losses of the purchased company are included in the
buyer's financial statements prospectively from the consummation date of the
acquisition. See "UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION."
73
<PAGE>
Certain Federal Income Tax Consequences
Completion of the Consolidation is conditioned upon there being
delivered to Patriot and First Lehigh an opinion of Stevens & Lee, P.C., counsel
to Patriot, that for federal income tax purposes, under current law, assuming
that the Consolidation and related transactions will take place as described in
the Agreement, among other things, the Consolidation will constitute a
reorganization within the meaning of Section 368(a) of the Code, and Patriot and
First Lehigh will each be a party to the reorganization within the meaning of
Section 368(b) of the Code.
In that case, in the opinion of Stevens & Lee, P.C., the following
would be the material federal income tax consequences of the Merger:
(i) no gain or loss will be recognized by Patriot or First Lehigh in
the Consolidation;
(ii) no gain or loss will be recognized by holders of shares of
Patriot Common Stock, First Lehigh Common Stock, or First Lehigh Preferred Stock
upon their receipt of Holding Company Common Stock in exchange for their Patriot
Common Stock, First Lehigh Common Stock, and First Lehigh Preferred Stock except
that shareholders who receive cash proceeds for fractional interests in Holding
Company Common Stock will recognize gain or loss equal to the difference between
such proceeds and the tax basis allocated to their fractional share interests,
and such gain or loss will constitute capital gain or loss if their Patriot
Common Stock, First Lehigh Common Stock, or First Lehigh Preferred Stock is held
as a capital asset at the Effective Date;
(iii) the tax basis of the shares of Holding Company Common Stock
(including fractional share interests) received by the shareholders of Patriot
and First Lehigh will be the same as the tax basis of their respective shares of
Patriot Common Stock, First Lehigh Common Stock, and First Lehigh Preferred
Stock exchanged therefor; and
(iv) the holding period of the Holding Company Common Stock in the
hands of the Patriot and First Lehigh shareholders will include the holding
period of their Patriot Common Stock, First Lehigh Common Stock, and First
Lehigh Preferred Stock exchanged therefor, provided such Patriot Common Stock,
First Lehigh Common Stock, and First Lehigh Preferred Stock is held as a capital
asset at the Effective Date.
74
<PAGE>
Under the Agreement, the condition that Stevens & Lee, P.C. deliver the
opinions described above can be waived by Patriot and First Lehigh,
respectively. However, in the event that the delivery of such opinion of counsel
is waived, or such opinion would otherwise set forth tax consequences materially
different to a shareholder than those described above, Patriot and First Lehigh
intend to resolicit proxies.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY
AND IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED
TREASURY REGULATIONS THEREUNDER, AND CURRENT ADMINISTRATIVE RULINGS AND COURT
DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD
AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE DISCUSSION IS NOT A
COMPLETE DESCRIPTION OF ALL THE FEDERAL INCOME TAX CONSEQUENCES OF THE
CONSOLIDATION AND, IN PARTICULAR, DOES NOT ADDRESS TAX CONSIDERATIONS THAT May
AFFECT THE TREATMENT OF SHAREHOLDERS WHO ACQUIRED THEIR PATRIOT COMMON STOCK OR
FIRST LEHIGH COMMON STOCK PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR
OTHERWISE AS COMPENSATION, OR SHAREHOLDERS WHICH ARE EXEMPT ORGANIZATIONS OR WHO
ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. EACH SHAREHOLDER'S
INDIVIDUAL CIRCUMSTANCES May AFFECT THE TAX CONSEQUENCES OF THE CONSOLIDATION TO
SUCH SHAREHOLDER. IN ADDITION, NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO
THE TAX CONSEQUENCES OF THE CONSOLIDATION UNDER APPLICABLE STATE, LOCAL, OR
FOREIGN LAWS. ACCORDINGLY, EACH PATRIOT AND FIRST LEHIGH SHAREHOLDER IS ADVISED
TO CONSULT A TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
CONSOLIDATION TO SUCH SHAREHOLDER.
Expenses
Patriot and First Lehigh will each pay all costs and expenses incurred
by it in connection with the transactions contemplated by the Agreement,
including fees and expenses of financial consultants, accountants and legal
counsel, except that the cost of printing and mailing this Proxy
Statement/Prospectus will be shared equally by Patriot and First Lehigh.
Resale of Holding Company Common Stock
The Holding Company Common Stock issued pursuant to the Consolidation
will be freely transferable under the Securities Act except for shares issued to
any shareholder of Patriot or First Lehigh who may be deemed to be an
"affiliate" of Patriot or First Lehigh for purposes of Rule 145 under the
Securities Act or an affiliate of the Holding Company for purposes of Rule 144
promulgated under the Securities Act (each an "Affiliate"). Affiliates will
include persons (generally executive officers, directors and 10% shareholders)
who control, are controlled by or are under common control
75
<PAGE>
with (i) Patriot or First Lehigh at the time of the Meetings or (ii) the Holding
Company at or after the Effective Date.
Rules 144 and 145 will restrict the sale of Holding Company Common
Stock received in the Consolidation by Affiliates and certain of their family
members and related interests. Generally, during the year following the
Effective Date, those persons who are Affiliates of Patriot or First Lehigh at
the time of the Meetings, provided they are not Affiliates of the Holding
Company at or following the Effective Date, may publicly resell any Holding
Company Common Stock received by them in the Consolidation, subject to certain
limitations as to, among other things, the amount of the Holding Company Common
Stock sold by them in any three-month period and as to the manner of sale. After
the one year period, such Affiliates may resell their shares without such
restriction so long as there is adequate current public information with respect
to the Holding Company as required by Rule 144. Persons who are Affiliates of
the Holding Company after the Effective Date may publicly resell the Holding
Company Common Stock received by them in the Consolidation subject to similar
limitations and subject to certain filing requirements specified in Rule 144.
The ability of Affiliates to resell shares of Holding Company Common
Stock received in the Consolidation under Rule 144 or Rule 145 as summarized
herein generally will be subject to the Holding Company's having satisfied its
Exchange Act reporting requirements for specified periods prior to the time of
sale. Affiliates also would be permitted to resell Holding Company Common Stock
received in the Consolidation pursuant to an effective registration statement
under the Securities Act or another available exemption from the Securities Act
regulations requirements. This Proxy Statement/Prospectus does not cover any
resales of Holding Company Common Stock received by persons who may be deemed to
be Affiliates.
Each director and executive officer of Patriot and First Lehigh has
entered into an agreement with First Lehigh and Patriot, respectively, providing
that, as an affiliate, he or she will not transfer any Holding Company Common
Stock received in the Consolidation except in compliance with the Securities
Act.
Dissenters' Rights
Pursuant to the BCL, shareholders of First Lehigh have the right to
dissent from the Consolidation, and to obtain payment of the "fair value" (as
defined therein) of their First Lehigh Preferred Stock or First Lehigh Common
Stock, as the case may be, if the Consolidation is consummated. The
76
<PAGE>
term "fair value" means the value of First Lehigh Preferred Stock or First
Lehigh Common Stock immediately before completion of the Consolidation, taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the Consolidation.
The following summary of the steps to be taken if the right to dissent
is to be exercised is qualified in its entirety by the full text of Section 1930
and Subchapter D of Chapter 15 of the BCL, which are attached as Annex F to this
Proxy Statement/Prospectus. Each step must be taken in the indicated order and
in strict compliance with the applicable provisions of the statute in order to
perfect dissenters' rights. The failure of any shareholder to comply with the
aforesaid steps will result in the shareholder receiving the consideration
contemplated by the Agreement. See "THE CONSOLIDATION -- Terms of the
Consolidation." Any shareholder of First Lehigh who contemplates exercising the
right to dissent is urged to read carefully the provisions of Section 1930 and
Subchapter D of Chapter 15 of the BCL.
Any written notice or demand which is required in connection with the
exercise of dissenters' rights, whether before or after the Effective Date, must
be sent to 1620 Pond Road, Allentown, Pennsylvania 18104 (Attention: John H.
McKeever, Secretary).
A shareholder who wishes to dissent must file with First Lehigh prior
to the vote of shareholders on the Consolidation at the First Lehigh Special
Meeting a written notice of intention to demand that he be paid the fair value
for his shares of First Lehigh Preferred Stock or First Lehigh Common Stock, as
the case may be, if the Consolidation is effected, must effect no change in the
beneficial ownership of his First Lehigh Preferred Stock or First Lehigh Common
Stock, as the case may be, from the date of such filing through the Effective
Date, and must refrain from voting his First Lehigh Preferred Stock or First
Lehigh Common Stock, as the case may be, to approve the Consolidation. Neither a
proxy nor a vote against approval of the Consolidation will constitute the
necessary written notice of intention to dissent. A beneficial owner of First
Lehigh Preferred Stock or First Lehigh Common Stock whose shares are held of
record in "street name" by a brokerage firm or other nominee must obtain the
written consent of such record holder to such beneficial owner's exercise of
dissenters' rights and must submit such consent to First Lehigh no later than
the time of the filing of his notice of intention to dissent.
If the Consolidation is approved by the required vote of Patriot's and
First Lehigh's shareholders at the Meetings, First Lehigh will mail a notice to
all dissenters who gave due notice of intention to demand payment
77
<PAGE>
and who refrained from voting in favor of the Consolidation. The notice will
state where and when a demand for payment must be sent and certificates for
First Lehigh Preferred Stock and First Lehigh Common Stock must be deposited in
order to obtain payment, and will include a form for demanding payment and a
copy of Subchapter D of Chapter 15 of the BCL. The time set for receipt of the
demand for payment and deposit of stock certificates will not be less than 30
days from the date of mailing of the notice.
A shareholder who fails to timely demand payment or fails to timely
deposit stock certificates, as required by First Lehigh's notice will not have
any right to receive payment of the fair value of his First Lehigh Preferred
Stock or First Lehigh Common Stock, as the case may be.
Promptly after completion of the Consolidation, or upon timely receipt
of demand for payment if the Consolidation already has been completed, the
Holding Company will either remit to dissenters who have made demand and have
deposited their stock certificates the amount that the Holding Company, as
successor to Patriot and First Lehigh, estimates to be the fair value of the
First Lehigh Preferred Stock and First Lehigh Common Stock or give written
notice that no such remittance is being made. The remittance or notice will be
accompanied by (i) a closing balance sheet and an income statement of First
Lehigh for a fiscal year ending not more than 16 months before the date of
remittance, together with the latest available interim financial statements,
(ii) a statement of the Holding Company's estimate of the fair value of the
First Lehigh Preferred Stock or First Lehigh Common Stock, as the case may be,
and (iii) notice of the right of the dissenter to demand payment or supplemental
payment under the BCL, as the case may be, accompanied by a copy of Subchapter D
of Chapter 15 of the BCL. If the Holding Company does not remit the estimated
fair value for shares with respect to which demand for payment has been made and
stock certificates have been deposited, then the Holding Company will return any
certificates that have been deposited. Returned certificates, and any
certificates subsequently issued in exchange therefor, will be marked to record
the fact that demand for payment has been made. Transferees of shares so marked
shall not acquire any rights in First Lehigh or the Holding Company other than
those rights held by the original dissenter after such dissenter demanded
payment of fair value.
If a dissenter believes that the amount stated or remitted by the
Holding Company is less than the fair value of the First Lehigh Preferred Stock
or First Lehigh Common Stock, he may send the Holding Company his own estimate
of the fair value of the First Lehigh Preferred Stock or First Lehigh Common
Stock, as the case may be, which shall be deemed to be a demand for payment of
the amount of the deficiency. If the Holding Company remits
78
<PAGE>
payment of its estimated value of a dissenter's First Lehigh Preferred Stock or
First Lehigh Common Stock, as the case may be, and the dissenter does not file
his own estimate within 30 days after the mailing by the Holding Company of its
remittance, the dissenter will be entitled to no more than the amount remitted
to him by the Holding Company.
Within 60 days after the latest to occur of completion of the
Consolidation, timely receipt by First Lehigh or the Holding Company, as the
case may be, of any demands for payment, or timely receipt by First Lehigh or
the Holding Company, as the case may be, of any estimates by dissenters of fair
value, if any demands for payment remain unsettled, First Lehigh or the Holding
Company, as the case may be, may file, in the case of the Holding Company, in
the Court of Common Pleas of Montgomery County or, in the case of First Lehigh,
in the Court of Common Pleas of Lehigh County, an application requesting that
the fair value of the First Lehigh Preferred Stock or First Lehigh Common Stock
be determined by the Court. In such case, all dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares, and a copy of the application shall be served
on each such dissenter.
If First Lehigh or the Holding Company, as the case may be, were to
fail to file such an application, then any dissenter, on behalf of all
dissenters who have made a demand and who have not settled their claim against
First Lehigh or the Holding Company, as successor, may file an application in
the name of First Lehigh or the Holding Company, as successor, at any time
within the 30-day period after the expiration of the 60-day period and request
that the fair value be determined by the Court. The fair value determined by the
Court may, but need not, equal the dissenters' estimates of fair value. If no
dissenter files such an application, then each dissenter entitled to do so shall
be paid First Lehigh's or the Holding Company's, as the case may be, estimate of
the fair value of the First Lehigh Preferred Stock or First Lehigh Common Stock,
as the case may be, and no more, and may bring an action to recover any amount
not previously remitted, plus interest at a rate the Court finds fair and
equitable.
First Lehigh and/or the Holding Company, as the case may be, intend to
negotiate in good faith with any dissenting shareholder. If after negotiation, a
claim cannot be settled, then First Lehigh and/or the Holding Company, as
successor, intends to file an application requesting that the fair value of the
First Lehigh Preferred Stock or First Lehigh Common Stock, as the case may be,
be determined by the Court.
79
<PAGE>
Holders of Patriot Common Stock do not have dissenters' rights with
respect to the proposals to be voted on at the Patriot Special Meeting.
INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION
Certain members of the management and Boards of Directors of Patriot,
First Lehigh and their respective subsidiaries may be deemed to have interests
in the Consolidation in addition to their interests, if any, in Patriot Common
Stock, First Lehigh Common Stock, or First Lehigh Preferred Stock. The Patriot
and First Lehigh Boards of Directors were aware of these factors and considered
them, among other matters, in approving the Agreement and the transactions
contemplated thereby.
Stock Options
As of the Patriot Record Date, the directors and executive officers of
Patriot beneficially own approximately _______ shares of Patriot Common Stock
and Patriot Options to purchase _______ shares of Patriot Common Stock. On the
Effective Date, each Patriot Option, whether or not such Patriot Option is
exercisable on the Effective Date, shall be converted on the Effective Date into
and become an option to acquire that number of shares of Holding Company Common
Stock equal to the number of shares of Patriot Common Stock covered by the
Patriot Option multiplied by the Patriot Exchange Ratio, at an exercise price
equal to the present stated exercise price of such option divided by the Patriot
Exchange Ratio. Shares issuable upon the exercise of such options to acquire
Holding Company Common Stock shall be issuable in accordance with the terms of
the respective plans and grant agreements of Patriot under which they were
issued.
As of the First Lehigh Record Date, the directors and executive
officers of First Lehigh beneficially own approximately _______ shares of First
Lehigh Common Stock, ______ shares of Senior Preferred Stock, ______ shares of
Series A Preferred Stock, and First Lehigh Options to purchase _______ shares of
First Lehigh Common Stock. On the Effective Date, each First Lehigh Option,
whether or not such First Lehigh Option is exercisable on the Effective Date,
shall be converted on the Effective Date into and become an option to acquire
that number of shares of Holding Company Common Stock equal to the number of
shares of First Lehigh Common Stock covered by the First Lehigh Option
multiplied by the First Lehigh Common Exchange Ratio, at an exercise price equal
to the present stated exercise price of such option divided by the First Lehigh
Common Exchange Ratio. Shares issuable upon the exercise of such options to
acquire Holding Company Common Stock shall be
80
<PAGE>
issuable in accordance with the terms of the respective plans and grant
agreements of First Lehigh under which they were issued.
The value of the Holding Company options, if any, will be dependent on
the value of Holding Company Common Stock which cannot be predicted at this
time.
Standstill Agreement Between Patriot and James L. Leuthe
Patriot and James L. Leuthe entered into a standstill agreement dated
July 28, 1998 (the "Standstill Agreement") pursuant to which Mr. Leuthe has
granted to the Board of Directors of Patriot an irrevocable proxy to vote all
shares of First Lehigh Common Stock and First Lehigh Preferred Stock owned by
him. Following completion of the Consolidation, Mr. Leuthe has agreed to grant
to the Board of Directors of the Holding Company an irrevocable proxy to vote
all shares of Holding Company Common Stock owned by him. In addition, Mr. Leuthe
has agreed not to sell any capital stock of First Lehigh owned by him prior to
completion of the Consolidation and to vote, or cause to be voted, all First
Lehigh Common Stock and First Lehigh Preferred Stock owned by him in favor of
the Consolidation.
Mr. Leuthe has agreed to place in escrow certain of the shares of the
Holding Company Common Stock into which his First Lehigh capital stock will be
converted, cash, or other securities with a value of $700,000 as security for
the performance of Mr. Leuthe's obligations under the Standstill Agreement. In
addition, Mr. Leuthe has agreed to place additional shares of Holding Company
Common Stock, cash, or other securities with a value of $430,000 in escrow to
secure any obligation which may be determined by the FDIC or any other state or
federal regulatory authority to be owed to First Lehigh, First Lehigh Bank, or
their successors as a result of a determination that Mr. Leuthe was not entitled
to indemnification or advancement of expenses in connection with proceedings
relating to his duties as an officer or director of First Lehigh.
Mr. Leuthe has granted Patriot a first option to purchase any shares of
Holding Company Common Stock that he may wish to sell, except for open market
sales through a broker designated by the Holding Company. The aggregate amount
of any such open market sales may not exceed 20,000 shares in any calendar
quarter. Mr. Leuthe has also waived any right to indemnification he may have
under the articles of incorporation or bylaws of First Lehigh or the laws of the
Commonwealth of Pennsylvania except for claims or liability relating solely to
the Agreement and the transactions contemplated by the Agreement.
81
<PAGE>
Certain provisions of the Standstill Agreement expire June 30, 2013. A
copy of the Standstill Agreement is attached as Annex C to this Proxy
Statement/Prospectus and incorporated herein by reference. This summary of the
Standstill Agreement is qualified in its entirety by reference thereto.
Indemnification; Directors and Officers Insurance
Patriot and First Lehigh have agreed in the Agreement that, except as
provided in the Standstill Agreement, on or after the Effective Date, the
Holding Company shall indemnify, defend and hold harmless all prior and
then-existing directors, officers and employees of Patriot, First Lehigh and
their respective subsidiaries against (i) all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in settlement (with
the approval of the Holding Company) of or in connection with any claim, action,
suit, proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director, officer
or employee of Patriot, First Lehigh or their respective subsidiaries, whether
pertaining to any matter existing or occurring at or prior to the Effective Date
and whether asserted or claimed prior to, or at or after, the Effective Date
("Indemnified Liabilities") and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or pertaining to the
Agreement or the transactions contemplated by the Agreement, to the same extent
as such officer, director or employee would be indemnified by Patriot, First
Lehigh or their respective subsidiaries as of July 28, 1998, including the right
to advancement of expenses, provided, however, that any such officer, director
or employee may not be indemnified by the Holding Company if such
indemnification is prohibited by applicable law.
Patriot and First Lehigh have agreed in the Agreement that the Holding
Company will maintain a directors' and officers' liability insurance policy
providing coverage amounts not less than the greater of coverage amounts
provided under the Patriot or First Lehigh directors' and officers' liability
insurance policy and on terms generally no less favorable, including Patriot's
or First Lehigh's existing policy if it meets the foregoing standard. The
Holding Company's directors' and officers' insurance policy will cover for a
period of at least six years after the Effective Date persons who are currently
covered by the Patriot and First Lehigh insurance policies, except that the
Holding Company shall have no obligation to provide insurance coverage for Mr.
Leuthe with respect to certain matters.
82
<PAGE>
Continued Employment
The initial Board of Directors of the Holding Company will consist of 7
members, all of whom will be designated by the Board of Directors of Patriot.
For information concerning the persons who have been designated to be members of
the Board of Directors of the Holding Company, see "DESCRIPTION OF THE HOLDING
COMPANY -- Board and Management." James B. Elliot will be the Chairman of the
Board of Directors of the Holding Company and Joseph W. Major will be the
President and Chief Executive Officer of the Holding Company.
On the Effective Date, the executive officers of the Holding Company
will be as follows:
James B. Elliot - Chairman
Joseph W. Major - President and Chief Executive Officer
Richard A. Elko - Executive Vice President and Chief
Financial Officer
The Board of Directors and executive officers of Patriot Bank in office
immediately prior to completion of the Consolidation will remain as Patriot
Bank's Board of Directors and executive officers.
Employment Agreements
Patriot and Patriot Bank have entered into employment agreements with
Messrs. Major and Elko, (individually, the "Executive"). These employment
agreements are intended to ensure that Patriot will be able to maintain a stable
and competent management base. The continued success of Patriot 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 Patriot 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 Patriot employment agreements shall be extended on a
daily basis unless written notice of non-renewal is given by the Board of
Patriot. The agreements provide that the Executive's base salary will be
reviewed annually. The current base salaries for
83
<PAGE>
Messrs. Major and Elko are $200,000 and $117,500, respectively. In addition to
the base salary, the agreements provide for, among other things, participation
in stock benefit plans and other fringe benefits applicable to executive
personnel. The agreements provide for termination by Patriot Bank or Patriot for
cause as defined in the agreements at any time. In the event Patriot Bank or
Patriot chooses to terminate the Executive's employment for reasons other than
for cause, or in the event of the Executive's resignation from Patriot Bank and
Patriot 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 Patriot Bank or Patriot; or
(vi) a breach of the agreement by Patriot Bank or Patriot, 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 Patriot Bank or Patriot during the remaining term of the agreement.
Patriot Bank and Patriot 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 Patriot Bank or Patriot, 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. Patriot Bank and Patriot 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 1997 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
$1,134,177, and $828,245, 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
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 Patriot and Patriot Bank have
84
<PAGE>
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 Patriot Bank's agreement will be
guaranteed by Patriot in the event that payments or benefits are not paid by
Patriot Bank. Payment under Patriot's agreement would be made by Patriot. 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 Patriot Bank or Patriot, respectively, if the Executive is successful
pursuant to a legal judgment, arbitration or settlement. The employment
agreements also provide that Patriot Bank and Patriot shall indemnify the
Executive to the fullest extent allowable under federal and Delaware law,
respectively.
Change in Control Agreements
For a description of the rights of Messrs. Major and Elko in connection
with a change in control of Patriot or Patriot Bank, see "INTERESTS OF CERTAIN
PERSONS IN THE CONSOLIDATION -- Employment Agreements."
Pension Plans
Following the Consolidation, the employee benefit plans of Patriot will
become the plans of the Holding Company. Those employees of First Lehigh and
First Lehigh Bank who become employees of Patriot or any of its subsidiaries
will be eligible to become participants in the Holding Company's employee
benefit and pension plans. Patriot intends to grant such employees credit for
past service with First Lehigh and its subsidiaries for purposes of vesting and
participation in such employee benefit and pension plans. Patriot will study
whether to freeze, terminate, merge or otherwise consolidate First Lehigh's
plans with the Patriot plans.
CERTAIN RELATED TRANSACTIONS
Stock Option Agreement
Concurrently with the execution and delivery of the Agreement, and as a
condition and inducement thereto, Patriot and First Lehigh entered into the
Patriot Stock Option Agreement pursuant to which First Lehigh granted Patriot an
option to purchase up to 410,000 shares of First Lehigh Common Stock (or such
greater number of shares of First Lehigh Common Stock as shall
85
<PAGE>
represent 19.9% of the then outstanding First Lehigh Common Stock) at a price
per share of $7.00.
The following is a summary of the material provisions of the Patriot
Stock Option Agreement, which is attached as Annex B to this Proxy
Statement/Prospectus and is incorporated herein by reference. The following
summary is qualified in its entirety by reference to the Stock Option Agreement.
The option is exercisable, in whole or in part, at any time or one or
more times, or from time to time upon the occurrence of a Triggering Event (as
defined below), provided that (i) Patriot is not, on the date of exercise, in
material breach of the agreements or covenants contained in the Agreement or the
Stock Option Agreement, and (ii) no preliminary or permanent injunction or other
order against the delivery of shares covered by the option issued by any court
of competent jurisdiction in the United States shall be in effect on the date of
exercise, upon or after the occurrence of a Triggering Event.
The term "Triggering Event" means the occurrence of any of the
following events:
(i) a person or group (as such terms are defined in the Exchange Act
and the rules and regulations thereunder), other than Patriot or an
affiliate of Patriot, acquires beneficial ownership (within the meaning of
Rule 13d-3 under the Exchange Act) of 25% or more of the then outstanding
shares of the common stock of First Lehigh (excluding any shares eligible
to be reported on Schedule 13G of the Commission); or
(ii) a person or group, other than Patriot or an affiliate of
Patriot, enters into an agreement or letter of intent or memorandum of
understanding with First Lehigh or First Lehigh shall have authorized,
recommended or publicly proposed, or publicly announced an intention to
authorize, recommend or propose, such an agreement or letter of intent or
memorandum of understanding, pursuant to which such person or group or any
affiliate of such person or group would (i) merge or consolidate, or enter
into any similar transaction, with First Lehigh, (ii) acquire all or
substantially all of the assets or liabilities of First Lehigh or all or
substantially all of the assets or liabilities of First Lehigh Bank (or
any successor subsidiary), or (iii) acquire beneficial ownership of
securities representing, or the right to acquire beneficial ownership or
to vote securities representing, 25% or more of the then outstanding
shares of
86
<PAGE>
First Lehigh's common stock (excluding any shares eligible to be reported
on Schedule 13G of the Commission) or the then outstanding shares of
common stock of First Lehigh Bank.
The option shall terminate and be of no further force and effect upon
the earliest to occur of (A) the Effective Date, (B) termination of the
Agreement in accordance with the terms thereof prior to the occurrence of a
Triggering Event or a Preliminary Triggering Event (as such term is hereinafter
defined), other than a termination of the Agreement due to an uncured material
breach of any material covenant, undertaking or representation of warranty,
contained in the Agreement which would have a Material Adverse Effect, unless in
the case of termination by First Lehigh due to such breach, the termination is
as a result of a willful breach of the Agreement by Patriot (a termination due
to an uncured material breach of any material covenant, undertaking or
representation of warranty, contained in the Agreement which would have a
Material Adverse Effect, except a termination by First Lehigh as a result of a
willful breach by Patriot, being referred to herein as a "Default Termination"),
(C) 18 months after the termination of the Agreement by First Lehigh pursuant to
a Default Termination, or (D) 18 months after termination of the Agreement
(other than pursuant to a Default Termination) following the occurrence of a
Triggering Event or a Preliminary Triggering Event; and provided, further, that
any purchase of shares upon exercise of the option shall be subject to
compliance with applicable securities and banking laws.
The term "Preliminary Triggering Event" means the occurrence of any of
the following events:
(i) a person or group (as such terms are defined in the Exchange Act
and the rules and regulations thereunder), other than Patriot or an
affiliate of Patriot, acquires beneficial ownership (within the meaning of
Rule 13d-3 under the Exchange Act) of 10% or more of the then outstanding
shares of common stock of First Lehigh (excluding any shares eligible to
be reported on Schedule 13G of the Commission);
(ii) a person or group, other than Patriot or an affiliate of
Patriot, publicly announces a bona fide proposal (including a written
communication that is or becomes the subject of public disclosure) for (i)
any merger, consolidation or acquisition of all or substantially all the
assets or liabilities of First Lehigh or all or substantially all the
assets or liabilities of First Lehigh Bank or any other business
combination involving First Lehigh or First Lehigh Bank,
87
<PAGE>
or (ii) a transaction involving the transfer of beneficial ownership of
securities representing, or the right to acquire beneficial ownership or
to vote securities representing, 10% or more of the then outstanding
shares of common stock of First Lehigh or the then outstanding shares of
common stock of First Lehigh Bank (collectively, a "Proposal"), and
thereafter, if such Proposal has not been Publicly Withdrawn (as such term
is hereinafter defined) at least 30 days prior to the meeting of
shareholders of First Lehigh called to vote on the Consolidation, First
Lehigh's shareholders fail to approve the Consolidation by the vote
required by applicable law at the meeting of shareholders called for such
purpose or such meeting has been cancelled; or
(iii) the Board of Directors of First Lehigh (A) fails to recommend
the Consolidation, (B) recommends an Acquisition Transaction, or (C) has
withdrawn or modified in a manner adverse to Patriot the recommendation of
the Board of Directors of First Lehigh with respect to the Agreement and
thereafter First Lehigh's shareholders fail to approve the Consolidation
by the vote required by law at the meeting of shareholders called for such
purpose or such meeting is not scheduled or is cancelled without the
written consent of Patriot; or
(iv) a person or group, other than Patriot or an affiliate of
Patriot, makes a bona fide Proposal and thereafter, but before such
Proposal has been Publicly Withdrawn, First Lehigh shall have breached any
representation, warranty, covenant or obligation contained in the
Agreement and such breach would entitle Patriot to terminate the Agreement
as a Default Termination (without regard to the cure period provided for
therein unless such cure is promptly effected without jeopardizing
consummation of the Consolidation pursuant to the Agreement).
The term "Publicly Withdrawn" means an unconditional bona fide
withdrawal of the Proposal coupled with a public announcement of no further
interest in pursuing such Proposal or in acquiring any controlling influence
over First Lehigh or in soliciting or inducing any other person (other than
Patriot or an affiliate of Patriot) to do so.
The Stock Option Agreement provides that Patriot may require, under
certain circumstances, First Lehigh to repurchase the option and all shares of
Common Stock of First Lehigh purchased by Patriot pursuant to the option on the
terms and conditions set forth in the Stock Option Agreement. First Lehigh's
repurchase of the option or First Lehigh's repurchase of any of the shares of
Common Stock of First Lehigh purchased by Patriot pursuant to
88
<PAGE>
the option could have the effect of precluding a potential acquiror of First
Lehigh from accounting for the acquisition of First Lehigh as a pooling of
interests for financial accounting purposes.
In the event of any change in common stock of First Lehigh by reason of
stock dividends, split-ups, recapitalizations, combinations, conversions,
divisions, exchanges of shares or the like, the number and kind of shares
issuable pursuant to the option will be adjusted appropriately.
The Stock Option Agreement provides for certain registration rights
with respect to shares of common stock issuable upon exercise of the option.
The Stock Option Agreement, together with (i) First Lehigh's agreement
to not solicit other transactions relating to the acquisition of First Lehigh by
a third party (see "THE CONSOLIDATION -- No Solicitation of Transactions"), and
(ii) the agreement of each of the directors and executive officers of First
Lehigh to vote their shares of First Lehigh Common Stock and Preferred Stock in
favor of the Agreement, are intended to increase the likelihood that the
Consolidation will be completed in accordance with the terms of the Agreement
and may have the effect of discouraging competing offers to the Consolidation.
DESCRIPTION OF THE HOLDING COMPANY
General
Upon the Effective Date of the Consolidation, the Holding Company will
succeed to all the business, properties and assets, and become subject to all of
the debts, obligations and liabilities, of both Patriot and First Lehigh. The
Holding Company's sole business will be to act as a holding company for the
present subsidiaries of Patriot and First Lehigh, the principal subsidiary being
Patriot Bank.
Board and Management
The business and affairs of the Holding Company will be managed by a
Board of Directors which will initially consist of 7 members, all of whom are
the present directors of Patriot. The Board is divided into three classes. The
term of office of each director will be three years, except that (i) the term of
office of the initial Class I directors will expire at the first annual meeting
of shareholders after the Effective Date, (ii) the term of office of the initial
Class II directors will expire at the second annual meeting of shareholders
after the Effective Date, and (iii) the term of office
89
<PAGE>
of the initial Class III directors will expire at the third annual meeting of
shareholders after the Effective Date.
The 7 persons to serve as the initial directors of the Holding Company,
each of whom is presently a director of Patriot, are listed below. Each such
individual has indicated a willingness to serve as a director of the Holding
Company if the Consolidation is effected. If, prior to the Effective Date, any
such individual is unable or unwilling to serve as a director of the Holding
Company, the Board of Directors of Patriot shall designate another person to
serve in such person's stead.
Year First Elected
a Director of
Class and Name Patriot
-------------- ------------------
Class I Leonard A. Huff 1951
James A. Bentley, Jr. 1998
Class II John H. Diehl 1981
Samuel N. Landis 1988
Joseph W. Major 1990
Class III James B. Elliott 1992
Larry V. Thren 1990
The initial officers of the Holding Company have been designated, and
will serve at the pleasure of the Board of Directors of the Holding Company.
These persons, together with their current positions and positions in the
Holding Company, are listed below. If, prior to the Effective Date of the
Consolidation, any such designated individual is unable or unwilling to serve in
such capacity, the Board of Directors of Patriot shall designate another person
to serve in such person's stead.
Position with
Name and Present Position The Holding Company
------------------------- -------------------
James B. Elliot Chairman
Chairman of Patriot
Joseph W. Major, President and Chief
President and Chief Executive Executive Officer
Officer of Patriot
Richard A. Elko, Executive Vice
Executive Vice President and President and Chief
Chief Financial Officer Financial Officer
of Patriot
For additional information regarding the executive officers of Patriot
and First Lehigh, see "DESCRIPTION OF PATRIOT - Management" and "DESCRIPTION OF
First Lehigh - Management."
90
<PAGE>
Remuneration of Directors and Officers
The total aggregate remuneration of the directors and officers of the
Holding Company in such capacities will be approximately equivalent to the
remuneration paid to directors and executive officers at companies that will be
peer companies to the Holding Company. Patriot and First Lehigh anticipate that
Holding Company directors will receive an annual retainer of $16,000, and an
additional fee ranging from $2,000 to $6,000 for the chairman of certain
committees. For information as to the remuneration of the directors and officers
of Patriot and First Lehigh, see "DESCRIPTION OF PATRIOT - Executive
Compensation" and "DESCRIPTION OF FIRST LEHIGH - Executive Compensation."
Directors and Management of Subsidiaries
Patriot Bank and First Lehigh Bank, the existing banking subsidiaries
of Patriot and First Lehigh, respectively, will merge on the Effective Date with
Patriot Bank as the survivor. Patriot Bank will operate substantially as it is
presently operated, with substantially the same management, except that the
Consolidation will permit management to seek ways in which it can realize cost
savings by consolidating functions.
Authorized Capital Stock
The authorized capital stock of the Holding Company will consist of
20,000,000 shares of common stock, no par value, and 5,000,000 shares of
preferred stock. Set forth below is a brief outline of certain material
information concerning such authorized stock. This summary outline is qualified
by reference to the express terms of the Articles of Incorporation of the
Holding Company which are attached hereto as Exhibit A to the Articles of
Consolidation attached as Exhibit 4 to the Agreement which is attached as
Annex A.
Preferred Stock
The preferred stock of the Holding Company may, in the discretion of
the Holding Company Board of Directors, be issued, from time to time, as a class
without series or, if so determined by the Board of Directors, either in whole
or in part, in one or more series. The Board of Directors will have the power to
determine the par value, voting rights, designations, preferences and other
rights, and the qualifications, limitations and restrictions thereof, of the
preferred stock.
91
<PAGE>
Common Stock
Each share of the Holding Company Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Holding Company Common Stock. The holders of the Holding Company will
possess exclusive voting rights in the Holding Company, except to the extent
that shares of preferred stock issued in the future may have voting rights, if
any. Each holder of shares of the Holding Company Common Stock will be entitled
to one vote for each share held of record on all matters submitted to a vote of
holders of shares of Holding Company Common Stock. Holders of Holding Company
Common Stock will not be entitled to cumulate their votes for election of
directors.
Dividends
The Holding Company may, from time to time, declare dividends to the
holders of Holding Company Common Stock, who will be entitled to share equally
in any such dividends.
Liquidation
In the event of a liquidation, dissolution or winding up of the Holding
Company, each holder of shares of Holding Company Common Stock would be entitled
to receive, after payment of all debts and liabilities of the Holding Company, a
pro rata portion of all assets of the Holding Company available for distribution
to holders of Holding Company Common Stock. If any preferred stock is issued,
the holders thereof may have a priority in liquidation or dissolution over the
holders of the Holding Company Common Stock.
Other Characteristics
Holders of the Holding Company Common Stock will not have preemptive
rights with respect to any additional shares of Holding Company Common Stock
that may be issued. The Holding Company Common Stock is not subject to call for
redemption, and the outstanding shares of Holding Company stock, when issued and
upon receipt by the Holding Company of the full purchase price therefor, will be
fully paid and nonassessable.
For a description of a comparison of the rights of shareholders of
Patriot and the Holding Company and of First Lehigh and the Holding Company, see
"- Comparison of Shareholder Rights of Patriot, First Lehigh, and the Holding
Company."
92
<PAGE>
Market for Holding Company Common Stock and Dividends
The Holding Company will not have issued any capital stock prior to the
Effective Date of the Consolidation. Consequently, there is no established
market for the Holding Company Common Stock. The Holding Company Common Stock
has been approved for quotation on the Nasdaq Stock Market National Market
System under the symbol "PBIX" upon completion of the Consolidation.
Managements of both Patriot and First Lehigh believe that those firms
which presently make and maintain a market in Patriot Common Stock and First
Lehigh Common Stock will make and maintain a market in Holding Company Common
Stock after the Effective Date. Because the Holding Company will be larger and
have a greater number of shares of common stock outstanding than either Patriot
or First Lehigh on an individual basis, the managements of Patriot and First
Lehigh believe that it is reasonable to expect that an active and liquid market
for Holding Company Common Stock will develop and continue. The development of a
public market having the desirable characteristics of depth, liquidity and
orderliness, however, depends upon the presence in the marketplace of a
sufficient number of willing buyers and sellers at any given time, over which
neither the Holding Company nor any market maker has any control. Accordingly,
there can be no assurance that an established and liquid market for Holding
Company Common Stock will develop, or if one develops, that it will continue.
The Holding Company presently intends to pay an annual dividend of $.28
per share of Holding Company Common Stock. However, the timing and amount of
future dividends, if any, will depend upon earnings, capital levels, cash
requirements, the financial condition of the Holding Company and Patriot Bank,
applicable government regulations and policies and other factors deemed relevant
by the Holding Company's Board of Directors, including the amount of dividends
payable to the Holding Company by Patriot Bank.
The principal source of income and cash flow of the Holding Company,
including cash flow to pay dividends on the Holding Company Common Stock, is
dividends from Patriot Bank. Various federal and state laws, regulations and
policies limit the ability of Patriot Bank to pay dividends to the Holding
Company. For certain limitations on Patriot Bank's ability to pay dividends to
the Holding Company, see "DESCRIPTION OF PATRIOT - Business-Supervision and
Regulation" and Note 18 to the Financial Statements of Patriot.
93
<PAGE>
Pennsylvania Anti-Takeover Provisions
The Holding Company will be subject to various provisions of the BCL
which are triggered, in general, if any person or group acquires, or discloses
an intent to acquire, 20% or more of the voting power of a covered corporation,
other than pursuant to a registered firm commitment underwriting or, in certain
cases, pursuant to the approving vote of the Holding Company's Board of
Directors. The relevant provisions are contained in Subchapters 25E-H of the
BCL.
Subchapter 25E of the BCL (relating to control transactions) provides
that if any person or group acquires 20% or more of the voting power of a
covered corporation, the remaining shareholders may demand from such person or
group the fair value of their shares, including a proportionate amount of any
control premium. Subchapter 25F of the BCL (relating to business combinations)
delays for five years and imposes conditions upon "business combinations"
between an "interested shareholder" and the corporation. The term "business
combination" is defined broadly to include various transactions utilizing a
corporation's assets for purchase price amortization or refinancing purposes.
For this purpose, an "interested shareholder" is defined generally as the
beneficial owner of at least 20% of a corporation's voting shares.
Subchapter 25G of the BCL (relating to control share acquisitions)
prevents a person who has acquired 20% or more of the voting power of a covered
corporation from voting such shares unless the "disinterested" shareholders
approve such voting rights. Failure to obtain such approval exposes the owner to
the risk of a forced sale of the shares to the issuer. Even if shareholder
approval is obtained, the corporation is also subject to Subchapters 25I and J
of the BCL. Subchapter 25I provides for a minimum severance payment to certain
employees terminated within two years of the approval. Subchapter 25J prohibits
the abrogation of certain labor contracts prior to their stated date of
expiration.
Subchapter 25H of the BCL (relating to disgorgement) applies in the
event that (i) any person or group publicly discloses that the person or group
may acquire control of the corporation or (ii) a person or group acquires (or
publicly discloses an offer or intent to acquire) 20% or more of the voting
power of the corporation and, in either case, sells shares within 18 months
thereafter. Any profits from sales of equity securities of the corporation by
the person or group during the 18-month period belong to the
94
<PAGE>
corporation if the securities that were sold were acquired during the 18-month
period or within 24 months prior thereto.
Subchapters 25E-H of the BCL contain a wide variety of transactional
and status exemptions, exclusions and safe harbors. Upon completion of the
Consolidation, the Holding Company will be subject to the provisions of
Subchapters 25E through J. Such action can be reversed under certain
circumstances.
In addition, the fiduciary duty standards applicable to the Board of
Directors of the Holding Company under the BCL and certain provisions of the
Holding Company's Articles of Incorporation and Bylaws may have the effect of
deterring or discouraging, among other things, a nonnegotiated tender or
exchange offer for the Holding Company Common Stock, a proxy contest for control
of the Holding Company, the assumption of control of the Holding Company by a
holder of a large block of the Holding Company's Common Stock and the removal of
the Holding Company's management. For a description of a comparison of the
rights of shareholder of Patriot and the Holding Company and of First Lehigh and
the Holding Company, see "- Comparison of Shareholder rights of Patriot, First
Lehigh and the Holding Company."
COMPARISON OF RIGHTS OF SHAREHOLDERS OF PATRIOT, FIRST LEHIGH, AND THE HOLDING
COMPANY
At the Effective Date, shareholders of Patriot and First Lehigh
automatically will become shareholders of the Holding Company, and their rights
as shareholders will be determined by the BCL and by the Holding Company's
Articles of Incorporation and Bylaws. The following is a summary of material
differences between the rights of holders of Holding Company Common Stock and
the rights of holders of Patriot Common Stock and First Lehigh Common Stock.
These differences arise from various provisions of the Articles of Incorporation
and Bylaws of the Holding Company and the Articles of Incorporation and Bylaws
of Patriot and First Lehigh, respectively, and differences between the BCL and
DGCL.
This summary does not purport to be a complete statement of the
respective rights of Patriot shareholders and First Lehigh shareholders under
the applicable Pennsylvania law, their respective Articles of Incorporation or
Bylaws or a comprehensive comparison with the rights of the Holding Company's
shareholders under the applicable Pennsylvania law, the Holding Company's
Articles of Incorporation and the Holding Company's Bylaws, or a complete
description of the specific provisions referred to herein. This summary is not
meant to be relied upon as an exhaustive list or a detailed description of
95
<PAGE>
the provisions discussed and is qualified in its entirety by reference to the
BCL, the DGCL, and the governing corporate instruments of Patriot, First Lehigh
and the Holding Company. Copies of such governing corporate instruments of
Patriot, First Lehigh and the Holding Company are available, without charge, to
any person, including any beneficial owner to whom this Proxy
Statement/Prospectus is delivered, by following the instructions listed under
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
Directors
Removal
Pursuant to the Holding Company's Articles of Incorporation, the
Holding Company's directors may be removed from office by a vote of shareholders
if the votes of shareholders cast in favor of the resolution for the removal of
such director constitute at least a majority of the votes which all shareholders
would be entitled to cast at an annual election of directors.
Under Patriot's Articles of Incorporation, directors may be removed
from office only for cause and only by the affirmative vote of the holders of
not less than eighty percent (80%) of the total votes of all shares of Patriot
eligible to be cast by shareholders.
First Lehigh's Bylaws provide that any director, the Board of
Directors, or a class of the board may be removed at any time with or without
cause by the vote of a majority of the votes cast by shareholders present at the
meeting, in person or by proxy.
Nomination
Shareholders of the Holding Company, First Lehigh, and Patriot,
pursuant to their respective Bylaws, are required to submit to their respective
companies, in writing and in advance, any nomination of a candidate for election
as a director. Additionally, each requires the notification to include certain
background information regarding the proposed nominee.
The Holding Company's Bylaws provide that such nominations generally
must be submitted to the secretary of the Holding Company in writing not later
than the close of business on the ninetieth (90th) day immediately preceding the
date of the annual meeting of shareholders.
96
<PAGE>
Patriot's Bylaws provide that its shareholders must submit written
nominations to the Secretary of Patriot not less than ninety (90) days prior to
the date of any meeting of shareholders called for the election of directors. If
less than one hundred (100) days prior disclosure of the date of the meeting is
given, then the nomination must be received by the close of business on the
tenth day following the date on which such disclosure was made.
First Lehigh's Bylaws provide that its shareholders must submit to the
Secretary of First Lehigh certain specified information about any nominee for
the Board of Directors not later than 120 days prior to the first anniversary of
the preceding annual meeting of shareholders.
Election of Directors
The Holding Company's Articles of Incorporation and Bylaws provide that
its Board of Directors shall be composed of not less than five (5) nor more than
twenty-five (25) directors, the number of which may be determined by the Board
of Directors. The Holding Company Board of Directors is divided into three
classes, each serving three-year terms, so that approximately one-third of the
directors are elected at each annual meeting of shareholders; however, the
initial term of each class is less than three years to provide staggered years
for the election of each class of directors. Unless waived by the Board of
Directors, a person must have been a shareholder of record of the Holding
Company for a period of time equal to the lesser of three (3) years or, the time
elapsed since the consolidation of Patriot and First Lehigh into the Holding
Company in order to qualify for election as a director of the Holding Company.
Patriot's Bylaws provide that the Board of Directors of Patriot shall
be fixed by a resolution of the Board of Directors. The number of Directors may
be increased or decreased by resolution of the Board of Directors. Presently,
the Board of Directors is composed of seven (7) members. The Board of Directors
of Patriot is divided into three (3) staggered classes, each serving three
(3)-year terms, so that approximately one-third (1/3) of the directors are
elected at each annual meeting of shareholders.
First Lehigh's Bylaws provide that the Board of Directors of First
Lehigh shall be determined by the Board of Directors from time to time.
Presently, the Board of Directors is composed of eight (8) members. The Board of
Directors of First Lehigh is divided into four (4) staggered classes, each
serving three-year terms, so that approximately one-third (1/3) of the
97
<PAGE>
directors are elected at each annual meeting of shareholders. The directors need
not be residents of the Commonwealth of Pennsylvania or stockholders of First
Lehigh. A majority of all directors at a regular meeting of the board of
directors may increase the total number of directors, and may designate the
class of any new director.
Cumulative Voting
Neither the Holding Company's, Patriot's nor First Lehigh's
shareholders are permitted to cumulate votes in the election of directors.
Limited Liability
As permitted by the BCL, First Lehigh's and the Holding Company's
Bylaws provide that directors are not personally liable for any action taken or
any failure to take any action unless the director breached or failed to perform
the duties of his or her office as set forth under Pennsylvania law and such
breach or failure constitutes self-dealing, willful misconduct or recklessness;
provided, however, that there is no such elimination of liability arising under
any criminal statute or with respect to the payment of taxes pursuant to local,
state or federal law.
As permitted under the DGCL, Patriot's Articles of Incorporation
provide that directors are not personally liable for monetary damages for breach
of fiduciary duty as a director; provided, however, there is no such elimination
of liability for (i) any breach of a director's duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) any
transaction from which the director derived an improper personal benefit, or
(iv) any payment of a dividend or purchase or redemption of stock by the
corporation that was impermissible under the DGCL.
Indemnification
The Bylaws of the Holding Company and First Lehigh each provide for
indemnification of current and former directors, officers and agents for certain
litigation-related liabilities and expenses to the maximum extent provided by
Pennsylvania law.
As provided in the BCL, current and former directors, officers,
employees and agents of the Holding Company and First Lehigh are entitled to
indemnification (i) in third party actions if such person acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
98
<PAGE>
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful, (ii) in derivative
actions if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation; provided, however,
that no indemnification shall be made in any case where the act or failure to
act giving rise to the claim for indemnification is determined by a court to
have constituted willful misconduct or recklessness.
The DGCL provides that each director and officer of Patriot may be
indemnified by Patriot against expenses (including attorney's fees, judgments,
fines and amounts paid in settlement) actually and reasonably incurred in
connection with the defense or settlement of any threatened, pending or
completed legal proceedings in which he is involved by reason of the fact that
he is or was a director or officer of Patriot if he acted in good faith and in a
manner that he reasonably believed to be in or not opposed to the best interests
of Patriot and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of Patriot, the director or officer
may not be indemnified in respect of any claim, issue or matter as to which he
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to Patriot unless a court determines otherwise.
Patriot's Articles of Incorporation provide that each officer and
director of Patriot who is made a party to or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding by reason of the
fact that he is or was a director or officer of Patriot shall be indemnified and
held harmless by Patriot to the fullest extent authorized by the DGCL.
Shareholder Meetings
Special meetings of the Holding Company's shareholders may be called at
any time by the Board of Directors. The Holding Company's shareholders are not
entitled to call a special meeting, except as specifically provided by law.
The Holding Company's bylaws require a shareholder entitled to vote for
the election of directors to submit written notice of any matter desired to be
placed on the agenda of an annual meeting of shareholders not less than ninety
(90) days prior to any annual meeting of shareholders. If shareholders receive
less than twenty-one (21) days' notice of the meeting, then such notice must be
sent to the Secretary of the Holding Company not later than the close of the
seventh day following the day on which notice of
99
<PAGE>
the meeting was mailed to shareholders. Each notice must provide a brief
description of the business desired to be brought before the annual meeting.
Special meetings of Patriot shareholders may be called at any time by a
majority of the Board of Directors. Written notice of the meeting stating the
place, date, hour and purpose must be mailed at least ten days before the
meeting to each shareholder entitled to vote at the meeting.
The annual meeting of the shareholders of Patriot for the election of
Directors must be held no later than thirteen (13) months after the date of the
last annual meeting of shareholders. Written notice of the meeting stating the
place, date and hour must be mailed at least ten days before the meeting to each
shareholder entitled to vote at the meeting.
Special meetings of First Lehigh shareholders may be called by the
Chairman, the President, the Board of Directors, or shareholders entitled to
cast at least one-fifth (1/5) of the votes which all shareholders are entitled
to cast at the particular meeting. It is the duty of the Secretary of First
Lehigh to fix the date of the special meeting, which must be less than sixty
(60) days after receipt of the request for a special meeting. If the secretary
refuses to set a date, the person calling the meeting may do so. Business
transacted at all special meetings is confined to that stated in the call and
matters germane thereto, unless all shareholders entitled to vote are present
and consent. Written notice of special meetings must be given to each
shareholder entitled to vote at the meeting at least ten (10) days before such
meeting to consider a fundamental change (such as merger, amendment to the
articles of incorporation, or voluntary dissolution) and at least five (5) days
for any other purpose.
Action by Shareholders Without a Meeting
The Holding Company's Articles of Incorporation provide that no action
required or permitted to be taken at any annual or special meeting of the
Holding Company's shareholders may be taken without a meeting, and the power of
the Holding Company's shareholders to consent in writing to action without a
meeting is expressly denied.
Patriot's Articles of Incorporation provide that no action required or
permitted to be taken at any annual or special meeting of Patriot's shareholders
may be taken without a meeting, and the power of Patriot's shareholders to
consent in writing to action without a meeting is expressly denied.
100
<PAGE>
First Lehigh's Bylaws allow shareholders of First Lehigh to act without
a meeting if a consent in writing setting forth the action so taken shall be
signed by shareholders who would be entitled to cast the minimum number of votes
necessary to authorize the action at a meeting at which all shares entitled to
vote were present and voting. Such written consent must be filed with the
Secretary of First Lehigh.
Antitakeover Provisions
The Holding Company is subject to the provisions of Subchapters 25E
through 25J of the BCL. For a description of Subchapters 25E through 25J, see
"DESCRIPTION OF THE HOLDING COMPANY - Pennsylvania Antitakeover Provisions."
First Lehigh is not subject to the provisions of Subchapters 25E through 25J of
the BCL. The provisions of First Lehigh's articles of incorporation and bylaws
creating a classified board of directors and requiring the affirmative vote of
holders of 80% of the outstanding shares of First Lehigh Common Stock to approve
any merger have "antitakeover" effects. See "COMPARISON OF RIGHTS OF
SHAREHOLDERS OF PATRIOT, FIRST LEHIGH, AND THE HOLDING COMPANY."
Restrictions in Patriot's Certificate of Incorporation and Bylaws
A number of provisions of Patriot's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws relating to
stock ownership and transfers, the Board of Directors and business combinations,
which might be deemed to have a potential "anti-takeover" effect.
Limitation on Voting Rights
The Certificate of Incorporation of Patriot provides that in no event
shall any record owner of any outstanding Patriot Common Stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of the then outstanding shares of Patriot Common Stock (the
"Limit") be entitled or permitted to any vote in respect of the shares held in
excess of the Limit. Beneficial ownership is determined pursuant to Rule 13d-3
of the General Rules and Regulations promulgated pursuant to the Securities
Exchange Act of 1934, and includes shares beneficially owned by such person or
any of his affiliates (as defined in the Certificate of Incorporation), shares
which such person or his affiliates have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person
101
<PAGE>
and his affiliates have or share investment or voting power, but shall not
include shares beneficially owned by the ESOP or directors, officers and
employees of Patriot Bank or Patriot or shares that are subject revocable proxy
and that are not otherwise beneficially owned, or deemed by Patriot to be
beneficially owned, by such person and his affiliates. The Certificate of
Incorporation of Patriot further provides that this provision limiting voting
rights may only be amended upon the vote of 80% of the outstanding shares of
voting stock (after giving effect to the limitation on voting rights).
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders
The Certificate of Incorporation requires the approval of the holders
of at least 80% of Patriot's outstanding shares of voting stock to approve
certain "Business Combinations," as defined therein, and related transactions.
Under Delaware law, absent this provision, Business Combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of Common Stock of Patriot
and any other affected class of stock. Under the Certificate of Incorporation,
at least 80% approval of stockholders is required in connection with any
transaction involving an Interested Stockholder (as defined below) except (i) in
cases where the proposed transaction has been approved in advance by a majority
of those members of Patriot's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the Interested
Stockholder became an Interested Stockholder or (ii) if the proposed transaction
meets certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares, in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, corporation, partnership or other entity
(other than Patriot or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
Patriot. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of Patriot or any of its subsidiaries with or into any Interested
Stockholder or Affiliate (as defined in the Certificate of Incorporation) of an
Interested Stockholder, (ii) any sale, lease, exchange, mortgage, transfer or
other disposition to or with any Interested Stockholder or Affiliate of 25% or
more of the assets of Patriot or combined assets of Patriot and its subsidiary;
(iii) the issuance or transfer to any Interested Stockholder or its Affiliate by
Patriot (or any
102
<PAGE>
subsidiary) of any securities of Patriot in exchange for any assets, cash or
securities the value of which equals or exceeds 25% of the fair market value of
the Patriot Common Stock; (iv) the adoption of any plan for the liquidation or
dissolution of Patriot proposed by or on behalf of any Interested Stockholder or
Affiliate thereof; and (v) any reclassification of securities, recapitalization,
merger or consolidation of Patriot which has the effect of increasing the
proportionate share of Patriot Common Stock or any class of equity or
convertible securities of Patriot owned directly or indirectly by an Interested
Stockholder or Affiliate thereof.
Section 203 of the Delaware Corporation Law
Section 203 of the DGCL prevents an "interested stockholder" (defined
in Section 203 of the DGCL, generally, as a person owning 15% or more of a
corporation's outstanding voting stock), from engaging in a "business
combination" (as defined in Section 203 of the DGCL) with a publicly held
Delaware corporation for three years following the date such person became an
interested stockholder, unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the transaction
in which the interested stockholder became an interested stockholder or approved
the business combination; (ii) upon consummation of the transaction that
resulted in the interested stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and shares owned by certain
employee stock plans); or (iii) following the transaction in which such person
became an interested stockholder, the business combination is approved by the
board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
Required Shareholder Vote
General
The Holding Company's Articles of Incorporation and First Lehigh's
Bylaws both provide that holders of common stock entitled to vote at a meeting
of shareholders are entitled to one vote for each share of common stock owned of
record. First Lehigh's Articles of Incorporation provide that holders of Series
A Preferred Stock are entitled to such number of votes for each share of Series
A Preferred Stock held as is equal to five (5) times the number of shares of
First Lehigh Common Stock into which each share of Series A
103
<PAGE>
Preferred may be converted. Except as otherwise provided under the BCL or First
Lehigh's Articles of Incorporation, holders of Senior Preferred Stock have no
voting rights. Pursuant to the provisions of the DGCL, holders of Patriot Common
Stock are entitled to one vote for each share of common stock owned of record.
Fundamental Changes
The Holding Company's Articles of Incorporation require that a plan of
merger, consolidation, share exchange, division, conversion, asset transfer (in
respect of a sale, lease, exchange or other disposition of all, or substantially
all, the assets of the Holding Company) or any transaction similar to the
foregoing must be approved by the affirmative vote of at least 80 percent (80%)
of votes cast by shareholders entitled to vote, and if any class of shares is
entitled to vote as a separate class, the affirmative vote of shareholders
entitled to cast at least a majority of the votes cast by the outstanding shares
of any such class. The Holding Company may voluntarily completely liquidate
and/or dissolve only in accordance with all applicable laws and only if the
proposed liquidation and/or dissolution is approved by the affirmative vote of
shareholders entitled to cast at least 80 percent (80%) of the votes which all
shareholders are entitled to cast. The above provisions do not apply to any
transaction which is approved in advance by seventy-five percent (75%) of the
members of the board of directors of the Holding Company, at a meeting duly
called and held.
Patriot's Articles of Incorporation require that a merger,
consolidation, liquidation or dissolution of Patriot or any action that would
result in the sale or other disposition of all, or substantially all, of the
assets of Patriot with any person who beneficially owns 10% or more of the votes
entitled to be cast, must be approved by the affirmative vote of the holders of
at least eighty percent (80%) of the outstanding shares of Patriot Common Stock.
First Lehigh's Articles of Incorporation require that a plan of merger,
consolidation, share exchange, liquidation or dissolution of First Lehigh, or
any action that would result in the sale or other disposition of all, or
substantially all, of the assets of First Lehigh, be approved by the affirmative
vote of holders of at least eighty percent (80%) of the outstanding shares of
First Lehigh Common Stock.
In addition, if the rights of the Series A Preferred Stock or the
Senior Preferred Stock will be affected by such transaction, then such
transaction must be approved by the affirmative vote of a majority, and in
104
<PAGE>
some cases a super majority, of the shares voted by such class, voting
separately as a class.
Amendment of Articles of Incorporation
The Holding Company's Articles of Incorporation provide the Holding
Company with the right to amend, alter, change or repeal any provision in its
Articles of Incorporation now or hereafter prescribed by statute, however, the
Holding Company's Articles of Incorporation also contain various provisions that
require a super majority vote of shareholders to amend or repeal particular
sections of such Articles. Amendment or repeal of the provisions of the Holding
Company's Articles of Incorporation relating to noncumulative voting, the
classification of directors, the acquisition of voting control, the requirement
of holding meetings for shareholder action, tender offer, merger, consolidation
or similar transaction all require (i) the affirmative vote of eighty percent
(80%) of the shares entitled to vote or (ii) the affirmative vote of eighty
percent (80%) of the members of the Holding Company's Board of Directors and the
affirmative vote of shareholders entitled to cast at least a majority of votes
which all shareholders are entitled to cast.
Patriot's Articles of Incorporation require the affirmative vote of
eighty percent (80%) of the outstanding shares of Patriot Common Stock to amend
provisions relating to (i) the limits on voting rights of stockholders owning
10% or more of Patriot's Common Stock, (ii) powers of the Board of Directors,
(iii) the power of shareholders and the Board of Directors to amend bylaws, and
(iv) business combinations with interested shareholders.
Except for amendments to First Lehigh's Articles relating to rights of
holders of First Lehigh Preferred Stock, amendments to First Lehigh's Articles
of Incorporation must be approved by the holders of at least a majority of the
votes cast by all shareholders entitled to vote thereon.
Amendment of Bylaws
The authority to amend or repeal the Holding Company's Bylaws is vested
in the Holding Company's Board of Directors, subject always to the power of the
shareholders of the Holding Company to change such action by the affirmative
vote of shareholders entitled to cast at least sixty-six and two-thirds percent
(66-2/3%) of the Holding Company's total voting power, except that any amendment
to decrease director indemnification or increase the exposure to liability for
directors shall require the affirmative vote of sixty-six and two-thirds percent
(66-2/3%) of the entire Board of Directors or
105
<PAGE>
shareholders entitled to cast at least seventy-five percent (75%) of the votes
that all shareholders are entitled to cast.
Patriot's Bylaws may be altered, amended or repealed by the affirmative
vote of the holders of eighty percent (80%) of the outstanding shares of Patriot
Common Stock at any regular or special meeting duly convened after notice to the
shareholders of that purpose, or by a majority vote of the members of the Board
of Directors at any regular or special meeting thereof duly convened after
notice to the directors of that purpose, subject always to the power of the
shareholders to change such action of the Board of Directors by the affirmative
vote of the holders of eighty percent (80%) of the outstanding shares of Patriot
Common Stock.
Except for amendments to the sections providing limited liability of
and indemnification of directors and officers and as provided in the BCL, First
Lehigh's Bylaws may be altered, amended or repealed by a vote of the majority of
the Board of Directors of First Lehigh present at any regular or special meeting
regularly called. However, the power of the Board of Directors is subject to the
power of the shareholders to change or repeal such Bylaws.
Mandatory Tender Offer Provision
The Holding Company's Articles of Incorporation provide that if any
corporation, person, entity or group becomes the beneficial owner of capital
stock having the right to cast in the aggregate twenty-five percent (25%) or
more of all votes entitled to be cast by all issued and outstanding shares of
capital stock entitled to vote, such corporation, person, entity or group shall,
within thirty (30) days thereafter offer to purchase all shares of capital stock
of the Holding Company issued, outstanding and entitled to vote, at a price per
share equal to the highest price paid for each respective class or series of
capital stock of the Holding Company purchased by such corporation, person,
entity or group within the preceding twelve months. If such person, entity,
corporation or group did not purchase any shares of a particular class or series
of capital stock of the Holding Company within the preceding twelve (12) months,
such offer to purchase shall be at a price per share equal to the fair market
value of such class or series of capital stock on the date on which such
corporation, person, entity or group becomes the beneficial owner, directly or
indirectly, of shares of capital stock of the Holding Company having the right
to cast in the aggregate twenty-five percent (25%) or more of all votes entitled
to be cast by all issued and outstanding capital stock of the Holding Company.
Such offer shall provide that the purchase price for such shares shall be
payable in cash. These provisions are
106
<PAGE>
inapplicable if eighty percent (80%) or more of the Holding Company's Board of
Directors approves in advance the acquisition of beneficial ownership by such
corporation, person, entity or group, of shares of capital stock of the Holding
Company having the right to cast in the aggregate twenty-five percent (25%) or
more of all votes entitled to be cast by all issued and outstanding shares of
capital stock of the Holding Company. The provisions provided in the Holding
Company's Articles of Incorporation are to be in addition to and not in lieu of
any rights granted under Subchapter 25E of the BCL. However, if the provisions
of the Holding Company's Articles of Incorporation addressing mandatory tender
offers and Subchapter E of the BCL are both applicable, the price per share to
be paid for shares of capital stock of the Holding Company issued, outstanding
and entitled to vote shall be the higher of the price per share determined in
accordance with the Holding Company's Articles of Incorporation addressing
mandatory tender offers or the price per share determined in accordance with the
provisions of Subchapter 25E of the BCL.
Subchapter 25E of the BCL also provides that following any acquisition
by a person or group of more than twenty percent (20%) of a publicly-held
corporation's voting stock, the remaining shareholders have the right to receive
payment, in cash, for their shares from such person or group of an amount equal
to the "fair value" of their shares, including a proportionate amount for any
control premium. The Holding Company is subject to Subchapter 25E of the BCL.
See "DESCRIPTION OF THE HOLDING COMPANY -- Antitakeover Provisions."
Dissenters' Rights
Under the BCL, a shareholder of a corporation is generally entitled to
receive payment of the fair value of such shareholder's shares if such
shareholder duly exercises its dissenters' rights with respect to a plan of
merger or consolidation, share exchange, asset transfer, division or conversion
to which such corporation is a party, unless the shares are (i) listed on a
national securities exchange or (ii) held of record by more than 2,000
shareholders. The foregoing market exceptions do not apply, and dissenters'
rights generally are available in respect of, (i) shares that are not converted
solely into shares of the acquiring, surviving, new or other corporation or
solely into such shares and money in lieu of fractional shares, (ii) shares of
any preferred or special class unless the shareholders of the class are entitled
to vote on the plan and such class vote is required for the adoption of the plan
or to effectuate the transaction and (iii) shares which under the plan are
treated differently from shares of the same class or series and which are not
entitled to vote as a special class under
107
<PAGE>
BCL Section 1906(c). The BCL allows a corporation to provide dissenters' rights
notwithstanding the statutory exceptions, but neither the Holding Company's, nor
First Lehigh's Articles of Incorporation or Bylaws require such optional
dissenters' rights. Under the BCL, if a plan of merger or consolidation, share
exchange, asset transfer, division or conversion is adopted by the directors
only, without any shareholder approvals required, the shareholders have no
statutory dissenters' rights in respect of the plan other than optional
dissenters' rights, if any.
Holders of Patriot Common Stock do not have dissenters' rights under
the DGCL.
Dividends
Under the BCL, a corporation may pay dividends unless, after giving
effect thereto, (i) the corporation would be unable to pay its debts as they
become due in the usual course of its business or (ii) the total assets of the
corporation would be less than the sum of its total liabilities plus the amount
that would be needed, if the corporation were to be dissolved at the time as of
which the distribution is measured, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
Under the DGCL, a corporation may only pay dividends out of its
surplus.
Voluntary Dissolution
The Holding Company's Articles of Incorporation and Bylaws are silent
regarding voluntary dissolution. Under the BCL, if the Board of Directors of a
Pennsylvania corporation recommends that the corporation be dissolved and
directs that the question be submitted to a vote at a meeting of shareholders,
the corporation may be dissolved upon the affirmative vote of a majority of the
votes cast by all shareholders entitled to vote thereon and, if any class of
shares is entitled to vote thereon as a class, the affirmative vote of a
majority of the votes cast in each class vote.
First Lehigh's Articles of Incorporation require that any dissolution
of the corporation be approved by the holders of 80% of the outstanding shares
of First Lehigh Common Stock.
Patriot's Articles of Incorporation and Bylaws are silent regarding
voluntary dissolution, except where such dissolution would result in
108
<PAGE>
a sale of assets to a person beneficially owning 10% or more of the outstanding
voting power of Patriot. Under the DGCL, no dissolution of Patriot is valid
unless first approved by the Board of Directors and by the holders of a majority
of the outstanding shares of Patriot Common Stock.
Preemptive Rights
Holders of Holding Company Common Stock, Patriot Common Stock, First
Lehigh Common Stock, and First Lehigh Preferred Stock are not entitled to
preemptive rights.
109
<PAGE>
DESCRIPTION OF PATRIOT
Recent Developments
On September 16, 1998 Patriot entered into an agreement to purchase
all of the outstanding capital stock of Keystone Financial Leasing, Inc.
("KFL"), a small ticket leasing company with approximately $40 million in assets
at June 30, 1998. KFL is a wholly owned subsidiary of Keystone Bank, N.A. The
agreement provides that Patriot is to pay $6,585,000 in cash at closing and
further cash consideration based on future revenues of KFL. Patriot intends to
merge KFL into Patriot Commercial Leasing Company, a wholly owned subsidiary of
Patriot Bank. The acquisition is subject to approval of various regulatory
agencies and will be treated as a purchase for financial accounting purposes.
Patriot expects the transaction to close near the end of 1998.
Business
General
Patriot is a Delaware corporation and is the holding company for
Patriot Bank and Patriot Investment Company ("PIC"). Patriot is a bank holding
company and is subject to regulation by the FRB, the FDIC and the Commission.
The Company's executive offices are located at the administrative offices of the
Bank at High and Hanover Streets, Pottstown, Pennsylvania 19464.
Patriot Bank was originally chartered in 1938. In 1991, Patriot 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, Patriot Bank converted from a
Pennsylvania-chartered mutual savings bank to a federally-chartered mutual
savings bank. On December 1, 1995, Patriot acquired Patriot Bank as part of
Patriot Bank's conversion from a mutual to stock form of ownership (the
"Conversion"). In connection with the Conversion, the bank's name was changed to
Patriot Bank. On May 23, 1997, Patriot Bank converted to a Pennsylvania-
chartered commercial bank. Patriot Bank conducts business through its network of
13 community banking offices located in Montgomery, Berks, Lehigh, Northampton
and Chester Counties, Pennsylvania. Patriot Bank's deposits are insured up to
the maximum allowable by the SAIF administered by the FDIC. At June 30, 1998,
Patriot Bank had total assets of
110
<PAGE>
$640.3 million, deposits of $365.6 million and stockholders' equity of $35.7
million.
Patriot 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 its market area. In addition to its lending activities, Patriot Bank
also invests in investment and mortgage-backed securities. Patriot Bank uses
advances from the FHLB and repurchase agreements as sources of funds.
Patriot Bank's revenues are derived principally from interest on
loans, interest on investment and mortgage-backed securities and other fees and
service charges. Patriot 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
Patriot on September 10, 1996. Its primary business consists of maintaining an
investment portfolio. At June 30, 1998, PIC had total assets of $245.4 million,
liabilities of $210.6 million, and stockholder's equity of $34.8 million.
Market Area and Competition
Patriot 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 Patriot is primarily industrially oriented and demographically
is comprised of middle income and upper income households.
Patriot faces significant competition both in originating loans and
attracting deposits. Patriot's competitors are other financial services
providers operating within its primary market area, some of which are larger and
have greater financial resources than Patriot. Patriot's competition for loans
and deposits comes principally from commercial banks, savings and loan
associations, savings banks, credit unions, and mortgage banking companies (some
of which are subsidiaries of major financial institutions). In addition, Patriot
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.
111
<PAGE>
Management considers Patriot's reputation for financial strength,
superior customer service, convenience and product offerings as a competitive
advantage in attracting and retaining customers.
Subsidiary Activities
Patriot has two wholly-owned subsidiaries: The Bank and PIC. The Bank
has three wholly-owned subsidiaries: Marathon Management Company, Inc.
("Marathon"), Patriot Financial Center, Inc. ("PBFC"), and Patriot Commercial
Leasing Co., Inc. ("PCLC"). Marathon provides title insurance services through a
joint venture partnership. At June 30, 1998, Marathon had total assets of
$165,000. PBFC markets certain nondeposit investment products. At June 30, 1998,
PBFC had total assets of $40,000. PCLC is a commercial leasing company. At June
30, 1998, PCLC had total assets of $2.0 million.
Personnel
As of June 30, 1998, the Bank had 127 full-time and 25 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. Patriot, 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 BHCA. In addition, the activities of Pennsylvania-chartered
commercial banks, such as Patriot Bank, are governed by the Banking Code and the
Federal Deposit Insurance Act ("FDI Act").
Patriot Bank is subject to extensive regulation, examination and
supervision by the Department, as its primary regulator, and the FDIC, as the
deposit insurer. Patriot Bank is a member of the FHLB System and its deposit
accounts are insured up to applicable limits by the SAIF managed by the FDIC.
Patriot Bank must file reports with the Department 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 Department and/or the FDIC
conduct periodic examinations to test Patriot 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.
112
<PAGE>
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
Patriot, Patriot Bank and their operations. Certain of the regulatory
requirements applicable to Patriot Bank and to Patriot 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
Proxy Statement/Prospectus does not purport to be a complete description of such
statutes and regulations and their effects on Patriot Bank and Patriot.
Holding Company Regulation. Patriot is a bank holding company
registered under the BHCA. As a bank holding company, Patriot's activities and
those of Patriot Bank are limited to the business of banking and activities
closely related or incidental to banking.
The BHCA prohibits a bank holding company, directly or indirectly, or
through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another banking institution or holding company thereof, without prior
written approval of the FRB; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the BHCA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC.
Under FRB policy, a bank holding company is expected to act as a
source of financial strength to its subsidiary bank and to commit resources to
support the bank, i.e., to downstream funds to the bank. This support may be
required at times when, absent such policy, the bank holding company might not
otherwise provide such support. Any capital loans by a bank holding company to
its subsidiary bank are subordinate in 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 adopted risk-based capital guidelines
for bank holding companies, such as Patriot. 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
113
<PAGE>
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. Patriot is in
compliance with these guidelines. Patriot Bank is subject to similar capital
requirements also adopted by the FRB.
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
114
<PAGE>
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 capital
directive and the replacement of senior executive officers and directors. At
June 30, 1998, Patriot was "well capitalized."
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to 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 Patriot 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 undercapitalized 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 every six months. The
current annual rate is 1.26 basis points for BIF deposits, and 6.3 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 Patriot 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 Patriot Bank. As of
June 30, 1998, this limitation was equal to $5.4 million. There are exceptions
from the limitation for certain secured loans, depending upon the amount and
type of collateral. At June 30, 1998, the aggregate outstanding loans and
commitments to Patriot Bank's largest borrower was $1.6 million.
115
<PAGE>
Limitation on Capital Distributions. Dividend payments by Patriot Bank
to the Company are subject to the Banking Code, the Federal Reserve Act, and the
FDI Act. Under the 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,
Patriot Bank would be limited to approximately $20.8 million of dividends in
1998 plus an additional amount equal to Patriot Bank's net profit from June 30,
1998, 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 Patriot Bank to pay dividends to
Patriot.
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.
Interstate bank mergers and branch purchase and assumption
transactions were allowed effective June 1, 1997; however, states were permitted
to "opt-out" of the merger and purchase and assumption provisions by enacting a
law which specifically prohibited such interstate transactions. States could
have, in the alternative, enacted legislation to allow interstate merger and
purchase and assumption transactions prior to June 1, 1997. States could also
enact legislation to allow for de novo interstate branching by out of state
banks. In July 1995, Pennsylvania adopted "opt-in" legislation which allows such
transactions.
Transactions with Related Parties. Patriot 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. Section 23A limits the aggregate amount of covered
transactions with any individual affiliate to 10% of the capital and surplus of
Patriot Bank. The aggregate amount of covered transactions with all affiliates
is limited to 20% of Patriot 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
116
<PAGE>
purchase of low quality assets from affiliates is generally prohibited. Section
23B generally provides that certain transactions with affiliates, including
loans and asset purchases, must be on terms and under circumstances, including
credit standards, that are substantially the same or at least as favorable to
the institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, banks are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no bank may purchase the securities of any affiliate other
than a subsidiary.
Patriot 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 Federal Reserve Act 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 Patriot Bank may make to
insiders based, in part, on Patriot 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
117
<PAGE>
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. FRB regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 1998, the FRB
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $47.8 million or less
(subject to adjustment by the FRB) 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 FRB 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 FRB) were exempted from the reserve requirements. Patriot Bank is in
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the FDIC.
Federal and State Taxation
Federal Taxation
General. Patriot 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 Patriot 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 Patriot. Patriot is currently subject to a maximum federal income
tax rate of 35%.
Bad Debt Reserves. As a commercial bank, Patriot Bank is permitted to
recognize bad debt expense based on actual experience. Prior to its conversion
to a commercial bank in May 1997, Patriot Bank was a thrift institution. For
fiscal years beginning prior to December 31, 1995, thrift institutions which
118
<PAGE>
qualified under certain definitional tests and other conditions of 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")
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 Patriot Bank's current taxable year, in which Patriot Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by Patriot Bank during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, Patriot
Bank is permitted to make additions to its tax bad debt reserves. Since Patriot
Bank's tax bad debt reserves as of December 31, 1995 did not exceed its tax bad
debt reserves as of December 31, 1987, it is not required to recapture any
income.
Distributions. Under the 1996 Act, if Patriot Bank makes "non-dividend
distributions" to Patriot, such distributions will be considered to have been
119
<PAGE>
made from Patriot 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 Patriot Bank's income. Non-dividend
distributions include distributions in excess of Patriot 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 Patriot Bank's current or accumulated
earnings and profits will not be so included in Patriot Bank's income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if Patriot Bank makes a non-dividend
distribution to Patriot, 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. Patriot Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which Patriot 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 Patriot Bank, whether or not an
Alternative Minimum Tax ("AMT") is paid. Patriot Bank does not expect to be
subject to the AMT, and is not currently subject to the environmental tax
liability.
Dividends Received Deduction and Other Matters. Patriot may exclude
from its income 100% of dividends received from Patriot 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 Patriot Bank will not file a
120
<PAGE>
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. Prior to Patriot Bank's conversion to a
Pennsylvania chartered commercial bank, Patriot Bank was subject to the Mutual
Thrift Institutions Tax ("MTIT"), an excise tax imposed on certain financial
institutions (including savings institutions having capital stock) for the
privilege of doing business in Pennsylvania. The MTIT equals 11.5% of an
institution's "annual taxable net income" determined in accordance with
generally accepted accounting principles with certain modifications. Financial
institutions subject to the MTIT are exempt from all other corporate taxes
imposed by Pennsylvania.
Patriot Bank is now 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 the
MTIT or 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 Franchise Tax.
At the start of 1997, Patriot Bank was subject to the MTIT. After
Patriot Bank's conversion to a Pennsylvania-chartered commercial bank, Patriot
121
<PAGE>
Bank ceased to be subject to the MTIT and Patriot Bank will file its final MTIT
return. Patriot Bank is now subject to the Bank Shares Tax. The January 1st
share value of Patriot Bank may be averaged to include preceding years if
Pennsylvania treats the conversion consistent with a foreign corporation
commencing business in Pennsylvania.
Patriot is subject to the Pennsylvania CNIT and the Pennsylvania
Capital Stock and Franchise Tax because it is a foreign corporation doing
business in Pennsylvania. Patriot's Pennsylvania CNIT is calculated on an
unconsolidated basis and adjusted to reflect the appropriate allocation and
apportionment requirements. Patriot is not subject to the MTIT or Bank Shares
Tax.
State of Delaware Taxation. The Delaware Tax Code excludes from
Delaware corporate income taxation any corporation which limits its activities
to the maintenance and management of intangible investments within the State of
Delaware. This exception for Delaware "holding companies" applies to the Company
as long as its sole activity in the State of Delaware is the maintenance and
management of its subsidiary investments including Patriot Bank and PIC. Patriot
is, however, required to file annual reports and pay fees to the State of
Delaware. PIC is not subject to Delaware corporate income tax as an investment
company.
Patriot Bank has 13 banking offices, three (3) of which are located in
Montgomery County, four (4) of which are located in Berks County, three (3) of
which are located in Lehigh County, one (1) of which is located in Northampton
County, one (1) which is located in Chester County, and one (1) of which is
located in Bucks County, Pennsylvania. Patriot Bank owns 6 and leases 7 of the
banking office properties.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
In addition to historical information, this discussion and analysis of
Patriot contains forward-looking statements. The forward-looking statements
contained herein 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 hereof. Patriot undertakes no
122
<PAGE>
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
Stock Conversion. Patriot became a publicly owned company on December
1, 1995 when it issued 3,769,125 shares of common stock to the public and raised
net proceeds of $36,652,000.
Stock Dividends. On September 22, 1997 and November 21, 1996 Patriot
paid special 20% stock dividends to its shareholders. For comparative purposes,
per share amounts, as presented herein, have been adjusted to reflect these
stock dividends.
Stock Split. On April 16, 1998, Patriot announced a 25% stock split.
New shares resulting from the stock split were distributed on May 14, 1998 to
stockholders of record on May 1, 1998. For comparative purposes, per share
amounts as presented herein have been adjusted to reflect this stock split.
Year 2000 Compliance. Year 2000 issues result from the inability of
many computer programs or computerized equipment to accurately calculate, store
or use a date after December 31, 1999. 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. 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 currently believed to be Year 2000 compliant. With the assistance of a
nationally recognized accounting firm, Management has initiated a comprehensive
program to analyze, test, and proactively plan for ensuring all of Patriot's
systems are year 2000 compliant. It is currently anticipated that certain
secondary systems will require modification. Management is also in the process
of evaluating significant customer and vendor relationships to assess risks and
make appropriate contingency plans.
Management currently estimates the cost of executing its Year 2000
plan, performing tests, documenting results and making modifications where
necessary to be less than $100,000.
123
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
General. Patriot reported earnings per share for the six-month period
ending June 30, 1998 of $.37 and net income of $1,968,000. This represents an
increase of over 32% over earnings per share of $.27 and net income of
$1,647,000 for the six-month period ended June 30, 1997. Return on average
equity was 8.35%, for the three-month period ended June 30, 1998 compared to
6.77%, for the six-month period ended June 30, 1997.
Net Interest Income. Net interest income for the six-month period
ended June 30, 1998 was $8,404,000 compared to $7,117,000 for the same period in
1997. This increase is primarily due to an increase in average balances as
Patriot has grown its assets to more fully utilize its capital. Patriot's net
interest margin (net interest income as a percentage of average interest-
earning assets) was 2.01% for the six-month period ended June 30, 1998 compared
to 2.39% for the same period in 1997. The decrease in margin is primarily due to
an increase in the percentage of investment and mortgage-backed securities to
total assets.
Interest on loans was $16,978,000 for the six-month period ended June
30, 1998 compared to $11,848,000 for the same period in 1997. The average
balance of loans was $441,511,000 with an average yield of 7.71% for the
six-month period ended June 30, 1998 compared to an average balance of
$302,311,000 with an average yield of 7.85% for the same period in 1997. The
increase in average balance is due to increased origination of commercial and
residential mortgage loans. The decrease in average yield is primarily a result
of an emphasis placed on shorter term and adjustable-rate mortgage loans many of
which are originated with teaser rates.
Interest on Patriot's investment portfolio (investment and
mortgage-backed securities) was $13,534,000 for the six-month period ended June
30, 1998 compared to $9,680,000 for the same period in 1997. The average balance
of the investment portfolio was $401,337,000 with an average yield of 6.90% for
the six-month period ended June 30, 1998 compared to an average balance of
$284,989,000 with an average yield of 6.89% for the same period in 1997. The
increase in average balance and the increase in yield was due to the purchase of
higher yielding investments to more fully leverage Patriot's capital.
Interest on total deposits was $8,329,000 for the six-month period
ended June 30, 1998 compared to $6,366,000 for the same period in 1997. The
average balance of total deposits was $338,672,000 with an average cost of 5.01%
for the six-month period ended June 30, 1998 compared to an average balance of
124
<PAGE>
$268,273,000 with an average cost of 4.84% for the same period in 1997. 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.
The increase in average yield was the result of a higher percentage of jumbo
deposits offset somewhat by the emphasis on transaction-based deposit accounts.
Interest on borrowings was $13,958,000 for the six-month period ended
June 30, 1998 compared to $8,161,000 for the same period in 1997. The average
balance of borrowings was $477,355,000 with an average cost of 5.89% for the
six-month period ended June 30, 1998 compared to an average balance of
$286,846,000 with a cost of 5.74% for the same period in 1997. The increase in
average balance was due to the use of borrowings to fund the growth in the
balance sheet. The increase in the cost of borrowings was the result of
extending the maturity of borrowings, an increase in interest rates and the
issuance of trust preferred securities.
Spread Analysis. The following table sets forth Patriot's average
balances and the yields on those balances for the six-month periods ended June
30, 1998 and 1997. The yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods shown, except where noted otherwise. The yields and costs include fees
which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Six Month Period Ended June 30,
----------------------------------------------------------
1998 1997
----------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits $ 9,208 $ 179 3.92% $ 4,867 $ 116 3.67%
Investment and mortgage-
backed securities(1) 401,337 13,534 6.90 284,989 9,680 6.89
Loans receivable, net(2) 441,511 16,978 7.71 302,311 11,848 7.85
Net interest-earning assets 852,056 30,691 7.29 592,167 21,644 7.35
Non-interest-earning assets 17,418 -- -- 13,720 -- --
-------- ------- ---- -------- ------- ----
Total assets $869,474 $30,691 7.14 $605,887 $21,644 7.19
======== ======= ==== ======== ======= ====
Liabilities and Equity:
Interest-bearing liabilities:
Savings deposits $113,286 $ 1,620 2.88 $ 88,366 $ 1,198 2.73
Certificates 225,386 6,709 6.00 176,967 5,168 5.89
-------- ------- ---- -------- ------- ----
Total deposits 338,672 8,329 5.01 268,273 6,366 4.84
Borrowings 477,355 13,958 5.89 286,846 8,161 5.74
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 816,027 22,287 5.51 555,119 14,527 5.28
Non-interest-bearing liabilities 5,935 -- -- 1,675 -- --
-------- ------- ---- -------- ------- ----
Total liabilities 821,962 22,287 5.47 556,794 14,527 5.26
Equity 47,512 -- -- 49,093 -- --
-------- ------- ---- -------- ------- ----
Total liabilities and equity $869,474 $22,287 5.17% $605,887 $14,527 4.83%
======== ======= ==== ======== ======= ====
Net interest rate spread(3) 1.96% 2.36%
==== ====
Net interest margin(4) 2.01% 2.39%
Ratio of interest-earning assets
to interest-bearing liabilities 104.42% 106.67%
</TABLE>
125
<PAGE>
- --------------
(1) Includes securities available for sale and held to maturity and unamortized
discounts and premiums.
(2) Amount is net of deferred loan fees, loans in process, discounts and
premiums, and allowance for possible loan losses and includes non-performing
loans for which the accrual of interest has been discontinued.
(3) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities and equity.
(4) Net interest margin represents tax-equivalent net interest income divided by
average interest-earning assets.
126
<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 volume (changes in volume multiplied by prior
rate), 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.
127
<PAGE>
<TABLE>
<CAPTION>
Six Month Period Ended June 30, 1998 Year Ended December 31, 1997
Compared to Six Month Period Compared to Year Ended
June 30, 1997 December 31, 1996
------------------------------------ ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------ ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits................. $ 88 $ (25) $ 63 $ 81 $ (4) $ 77
Investment and mortgage-backed securities. 3,924 (70) 3,854 11,737 262 11,999
Loans(1).................................. 5,357 (227) 5,130 8,804 (225) 8,579
------ ----- ------ ------- ----- -------
Total interest-earning assets........... 9,369 (322) 9,047 20,622 33 20,655
------ ----- ------ ------- ----- -------
Interest-bearing liabilities:
Deposits.................................. 1,792 171 1,963 3,023 487 3,510
Borrowings................................ 5,474 323 5,797 14,404 391 14,795
------ ----- ------ ------- ----- -------
Total interest-bearing liabilities...... 7,266 494 7,760 17,427 878 18,305
------ ----- ------ ------- ----- -------
Net change in net interest income......... $2,103 $(816) $1,287 $ 3,195 $(845) $ 2,350
====== ===== ====== ======= ===== =======
- ---------------
(1) Includes non-accrual loans.
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Year Ended Compared to Year Ended
December 31, 1995 December 31, 1994
--------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits................. $ (58) $ (27) $ (85) $ (52) $ 79 $ 27
Investment and mortgage-backed securities. 7,894 290 8,184 170 450 620
Loans(1).................................. 4,862 (535) 4,327 754 269 1,023
------- ----- ------- ----- ------ ------
Total interest-earning assets........... 12,698 (272) 12,426 872 798 1,670
------- ----- ------- ----- ------ ------
Interest-bearing liabilities:
Deposits.................................. 1,117 (202) 915 300 918 1,218
Borrowings................................ 7,103 (65) 7,038 124 82 206
------- ----- ------- ----- ------ ------
Total interest-bearing liabilities...... 8,220 (267) 7,953 424 1,000 1,424
------- ----- ------- ----- ------ ------
Net change in net interest income......... $ 4,478 $ (5) $ 4,473 $ 448 $ (202) $ 246
======= ===== ======= ===== ====== ======
- ---------------
(1) Includes non-accrual loans.
</TABLE>
128
<PAGE>
Provision for Possible Loan Losses. The provision for possible loan
losses was $550,000 for the six-month period ended June 30, 1998 compared to
$225,000 for the same period in 1997. 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 offset somewhat by Patriot's asset quality and low
level of delinquencies and low level of non-performing assets. At June 30, 1998
Patriot's non-performing assets were .13% of total assets and all loans 30 days
or more delinquent were .67% of total loans.
The following table sets forth the activity in the allowance for
possible loan losses for the periods indicated:
For the Six-Month Period
Ended June 30,
------------------------
1998 1997
---- ----
(In thousands)
Allowance, beginning of period $2,512 $1,830
Charge-offs:
Residential 50 1
Commercial 183 0
Home equity and consumer 91 45
------ ------
Total charge-offs 324 46
------ ------
Recoveries:
Residential 1 2
Commercial 0 30
Home equity and consumer 78 0
------ ------
Total recoveries 79 32
------ ------
Net charge-offs (recoveries) 245 14
Provision charged to operations 550 225
------ ------
Allowance, end of period $2,817 $2,041
====== ======
Net charge-offs (recoveries) to average loans 0.06% 0.01%
Allowance for loan losses as a percentage of
period-end total loans 0.60% 0.59%
Non-Interest Income. Total non-interest income was $2,196,000 for the
six-month period ended June 30,1998 compared to $481,000 for the same period in
1997. Non-interest income also includes gains recognized on the sale of
investment securities available for sale. The increase in other non-interest
income 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 Expense. Total non-interest expense was $7,484,000 for
the six-month period ended June 30, 1998 compared to $4,894,000 for the same
period in 1997. The increase in non-interest expense was the result of increased
salary
129
<PAGE>
and employee benefit costs and occupancy and equipment costs, both related to
Patriot's expanded operations. Non-interest expense in the six-month period
ended June 30, 1998 also included a special non-recurring pre-tax charge of
$961,000 related to the retirement of Patriot's former Chairman. The ratio of
recurring non-interest expense to average assets improved to 1.51% for the
six-month period ended June 30 1998 compared to 1.63% for the same period in
1997. The improvement in the overhead ratio reflects an emphasis on managing
costs.
Income Tax Provision. The income tax provision was $598,000 for the
six-month period ended June 30, 1998 compared to $832,000 for the same period in
1997. The effective tax rate was 23.30% for 1998 compared to 33.56% for 1997.
The decrease is a result of the purchase of certain tax exempt investments and a
reduction in state income tax due to the conversion of Patriot Bank's charter.
Financial Condition
Loan Portfolio. Patriot's primary portfolio loan products are
commercial loans, 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. At June 30, 1998
Patriot's total loan portfolio was $463,434,000, compared to a total loan
portfolio of $422,209,000 at December 31, 1997. The increase in the loan
portfolio was the result of aggressive marketing of commercial, consumer and
residential mortgage loans. During the six-month period ended June 30, 1998,
Patriot originated total loans of $93,528,000, compared to total loans
originated of $102,151,000 for the same period in 1997.
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:
130
<PAGE>
<TABLE>
<CAPTION>
At June 30, 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 $325,508 69.85% $294,716 69.41% $190,849 67.54%
Construction 3,012 0.65 4,039 0.95 3,210 1.14
Consumer Portfolio
Home equity 67,584 14.50 75,439 17.77 72,480 25.65
Other consumer loans 4,172 0.90 3,909 0.92 2,546 0.90
Commercial Portfolio
Commercial 64,743 13.89 46,166 10.87 13,491 4.77
Commercial Leases 963 0.21 334 0.08 -- --
-------- ------ -------- ------ -------- ------
Total loans, gross 465,982 100.00% 424,603 100.00% 282,576 100.00%
Deferred loan fees (2,548) (2,394) (2,392)
Allowance for
loan losses (2,817) (2,512) (1,830)
-------- -------- --------
Total loans, net $460,617 $419,697 $278,354
======== ======== ========
<CAPTION>
At December 31,
---------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Portfolio
Residential mortgages $131,352 66.86% $108,203 63.41% $108,116 66.13%
Construction 1,712 0.87 374 0.22 44 0.03
Consumer Portfolio
Home equity 57,969 29.50 56,914 33.35 50,611 30.96
Other consumer loans 2,159 1.10 1,391 0.82 276 0.17
Commercial Portfolio
Commercial 3,288 1.67 3,760 2.20 4,431 2.71
Commercial Leases -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total loans, gross 196,480 100.00% 170,642 100.00% 163,478 100.00%
Deferred loan fees (2,230) (1,668) (1,949)
Allowance for
loan losses (1,702) (1,720) (1,665)
-------- -------- --------
Total loans, net $192,548 $167,254 $159,864
======== ======== ========
</TABLE>
Note: Certain prior year figures have been reclassified to conform with the
current year presentation.
131
<PAGE>
Loan Maturity. The following table sets forth the maturity schedule
for the Company's loan portfolio (excluding residential real estate and consumer
loans):
Amounts at June 30, 1998, Maturing
-------------------------------------------
after one
in one year
year or through after five
less five years years Total
------- ---------- ---------- -----
(in thousands)
Loan Maturity Schedule
Commercial loans................ $14,401 $14,370 $32,744 $61,515
Residential construction loans.. 46 218 2,748 3,012
Other construction loans ....... 3,228 0 0 3,228
------- ------- ------- -------
Total......................... $17,675 $14,588 $35,492 $67,755
======= ======= ======= =======
Fixed rates..................... $ 8,913 $14,442 $35,192 $58,547
Adjustable rates................ 8,762 146 300 9,208
------- ------- ------- -------
Total......................... $17,675 $14,588 $35,492 $67,755
======= ======= ======= =======
Credit Quality. Management and the Board of Directors perform a
monthly review of all delinquent loans. The procedures taken by Patriot with
respect to delinquencies vary depending on the nature of the loan and period of
delinquency. When a borrower fails to make a required payment on a loan, Patriot
takes a number of steps to have the borrower cure the delinquency and restore
the loan to current status.
Patriot's Asset/Loan Review Committee reviews and classifies Patriot's
assets periodically and at least quarterly and reports the results of its review
to the Board of Directors. Patriot classifies assets in accordance with
applicable regulations and management guidelines.
Patriot generally requires appraisals on an annual basis on foreclosed
properties and, to the extent necessary, properties deemed to be in-substance
foreclosures. Patriot generally conducts external inspections on foreclosed
properties and properties deemed in-substance foreclosures on at least a
quarterly basis.
Non-Accrual and Past-Due Loans. Patriot accrues interest on all loans
until management determines 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 had no restructured loans within the meaning of the Commission
Guide 3 at June 30, 1998.
132
<PAGE>
The following table sets forth information regarding non-performing
assets:
<TABLE>
<CAPTION>
At June 30, At December 31,
----------- -----------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential mortgages $ 450 $ 524 $ 411 $ 494 $ 498 $ 715
Commercial -- 128 6 10 16 65
Home equity and consumer 139 125 151 77 215 92
------ ------ ------ ------ ------ ------
Total non-accrual loans
greater than 90 days 589 777 568 581 729 872
Residential mortgages 45 328 -- -- -- --
Commercial -- -- -- -- -- --
Home equity and consumer -- 7 -- -- -- --
------ ------ ------ ------ ------ ------
Total non-accrual loans
less than 90 days 45 335 0 0 0 0
Total non-performing loans 634 1,112 568 581 729 872
REO 179 162 74 195 265 548
------ ------ ------ ------ ------ ------
Total non-performing assets $ 813 $1,274 $ 642 $ 776 $ 994 $1,420
====== ====== ====== ====== ====== ======
Allowance for possible loan
losses as a percent of
loans receivable 0.60% 0.59% 0.65% 0.88% 1.01% 1.02%
Allowance for possible loan
losses as a percent of
total non-performing
loans 444.32 225.90 321.94 292.94 235.94 190.94
Non-performing loans as a
percent of total loans
receivable .14 .26 .20 .30 .43 .53
Non-performing assets as a
percent of total assets .09 .15 .12 .29 .45 .64
</TABLE>
Allowance for Possible Loan Losses. The adequacy of the allowance for
possible loan losses is based on management's evaluation of the risks inherent
in its loan portfolio and the general economy. Management makes a quarterly
determination as to an appropriate provision from earnings necessary to maintain
an allowance for loan losses that is adequate to cover estimated losses with
respect to loans receivable which are deemed probable and estimable based on
information currently known to management. The amount charged to earnings is
based on several factors, including a continuing review of delinquent,
classified and non-accrual loans, large loans, and overall portfolio quality,
regular examination and review of the loan portfolio by regulatory authorities,
analytical review of loan charge-off experience, delinquency rates, other
relevant historical and peer statistical ratios, and management's judgment with
respect to local and general economic conditions and their impact on the
existing loan portfolio. Although management believes the allowance is adequate
to protect against future losses arising out of its existing loan portfolio,
actual losses are dependent on future events and, as such, further additions to
133
<PAGE>
the allowance may be necessary. Patriot will continue to monitor and modify its
allowance for loan losses as conditions dictate.
The following table sets forth management's allocation of the
allowance for possible loan losses at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
At June 30, --------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
Percent of Percent of Percent of
Percent of Loans in Percent of Loans in Percent of Loans in
Allowance Each Allowance Each Allowance Each
to Category to Category to Category
Total to Total Total to Total Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ---------- ------ ---------- ---------- ------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages $1,328 47.14% 70.50% $1,253 49.88% 72.24% $ 895 48.87% 69.27%
Commercial 856 30.39 14.10 629 25.04 8.70 261 14.28 4.18
Home equity and consumer 633 22.47 15.40 630 25.08 19.06 674 36.85 26.55
Total valuation allowances 2,817 100.00% 100.00% 2,512 100.00% 100.00% $1,830 100.00% 100.00%
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- ------------------------------- -----------------------------------
Percent of Percent of Percent of
Percent of Loans in Percent of Loans in Percent of Loans in
Allowance Each Allowance Each Allowance Each
to Category to Category to Category
Total to Total Total to Total Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ---------- ------ ---------- ---------- ------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages $1,265 74.32% 67.73% $1,212 70.47% 63.63% $1,193 71.65% 66.16%
Commercial 33 1.94 1.67 52 3.02 2.2 59 3.54 2.71
Home equity and consumer 404 23.74 30.6 456 26.51 34.17 413 24.81 31.13
Total valuation allowances $1,702 100.00% 100.00% $1,720 100.00% 100.00% $1,665 100.00% 100.00%
</TABLE>
134
<PAGE>
Cash and Cash Equivalents. Cash and cash equivalents at June 30, 1998
were $10,691,000 compared to $9,014,000 at December 31, 1997.
Investment and Mortgage-Backed Securities. Investment securities
consist primarily of U.S. agency securities, mortgage-backed securities which
are generally insured or guaranteed by either FHLMC, FNMA or the GNMA and
collateralized mortgage obligations.
Total investment and mortgage-backed securities at June 30, 1998 were
$386,443,000 compared to $405,641,000 at December 31, 1997. The decrease in
investment and mortgage-backed securities was primarily due to maturities and
principal repayments.
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 June 30, At December 31,
-------------------- ---------------------------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- ------------------- ------------------
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
Investment securities:
U.S. Treasury and
government agency
securities $ 30,067 $ 30,095 $ 19,884 $ 20,086 $ 5,023 $ 4,990 $ 7,105 $ 7,175
Corporate securities 21,600 22,386 17,493 18,767 -- -- 1,019 1,046
Equity securities 54,570 58,573 48,168 52,553 23,797 24,492 1,914 1,914
Mortgage-backed securities:
FHLMC 8,582 8,744 11,287 11,501 14,582 14,709 12,179 12,258
FNMA 16,616 16,683 20,163 20,254 25,118 25,124 17,709 17,755
GNMA 10,050 10,268 12,592 12,871 14,498 14,751 5,463 5,539
Collateralized mortgage
obligations:
FHLMC 66,076 66,749 75,085 75,784 37,928 37,639 1,964 1,959
FNMA 113,717 113,513 118,778 118,844 31,654 31,502 -- --
Other 10,895 10,978 12,522 12,465 5,976 5,941 -- --
-------- -------- -------- -------- -------- -------- ------- -------
Total investment and
mortgage-backed
securities available for
sale $332,173 $337,989 $335,972 $343,125 $158,576 $159,148 $47,353 $47,646
======== ======== ======== ======== ======== ======== ======= =======
Held to Maturity:
Investment securities:
U.S. Treasury and
government agency
securities (MUNIs) $ 1,035 $ 1,037 $ 1,035 $ 1,034 $ 1,911 $ 1,892 $ 2,414 $ 2,397
Corporate securities 1,502 1,542 1,502 1,544 2,506 2,533 1,503 1,566
Collateralized mortgage
obligations:
FHLMC 1,470 1,481 1,801 1,804 -- -- -- --
FNMA 8,600 8,714 9,775 9,887 -- -- -- --
Other 35,847 36,107 48,403 48,548 68,293 68,297 -- --
-------- -------- -------- -------- -------- -------- ------- ------
Total investment and
mortgage-backed
securities held to
maturity $ 48,454 $ 48,881 $ 62,516 $ 62,817 $ 72,710 $ 72,722 $ 3,917 $ 3,963
======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
135
<PAGE>
The following table sets forth certain information regarding the
carrying value, weighted average yield and contractual maturities of the
Company's investment and mortgage-backed securities as of June 30, 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>
Available for Sale:
Investment securities:
U.S. Treasury and government securities. $ -- --% $ -- --% $ 1,695 6.54%
Corporate securities.................... -- -- -- --% -- --%
Equity securities....................... -- --% -- --% -- --%
Mortgage-backed securities:
FHLMC................................... 1,317 6.66% 2,971 6.63% 738 6.15%
FNMA.................................... 2,601 6.45% 4,334 6.45% 3,772 6.56%
GNMA.................................... 179 7.07% 748 6.85% 1,220 6.78%
Collateralized mortgage obligations:
FHLMC................................... 1,518 6.49% 20,228 6.79% 14,110 6.77%
FNMA.................................... 5,485 6.79% 38,050 6.81% 58,233 6.84%
Other................................... 1,907 6.64% 8,961 6.68% 110 6.79%
Total available for sale.............. $13,007 6.66% $ 75,292 6.76% $79,878 6.80%
Held to Maturity:
Investment securities:
U.S. Treasury and government securities. 135 5.90% 650 5.60% 250 5.30%
Corporate securities.................... -- --% 1,502 6.92% -- --%
Collateralized mortgage obligations:
FHLMC................................... 1,470 6.71% -- --% -- --%
FNMA.................................... 866 6.71% 5,259 6.71% 2,475 6.71%
Other................................... 14,802 6.52% 20,252 6.98% 793 7.66%
Total held to maturity................ $17,273 6.54% $ 27,663 6.89% $3,518 6.82%
Total investment securities........... $30,280 6.59% $102,954 6.80% $83,396 6.80%
<CAPTION>
More than ten years No stated maturity Total
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C>
Available for Sale:
Investment securities:
U.S. Treasury and government securities. $ 28,400 7.12% -- -- $ 30,095 7.09%
Corporate securities.................... 22,386 8.60% -- -- 22,386 8.60%
Equity securities....................... -- --% $58,573 6.25% 58,573 6.25%
Mortgage-backed securities:
FHLMC................................... 3,718 5.91% -- -- 8,744 6.29%
FNMA.................................... 5,976 6.45% -- -- 16,683 6.47%
GNMA.................................... 8,121 6.76% -- -- 10,268 6.77%
Collateralized mortgage obligations:
FHLMC................................... 30,893 6.79% -- -- 66,749 6.78%
FNMA.................................... 11,745 6.76% -- -- 113,513 6.82%
Other................................... -- --% -- -- 10,978 6.67%
Total available for sale.............. $111,239 7.19% $58,573 6.25% $337,989 6.82%
Held to Maturity:
Investment securities:
U.S. Treasury and government securities. -- --% -- -- 1,035 5.57%
Corporate securities.................... -- --% -- -- 1,502 6.92%
Collateralized mortgage obligations:
FHLMC................................... -- --% -- -- 1,470 6.71%
FNMA.................................... -- --% -- -- 8,600 6.71%
Other................................... -- --% -- -- 35,847 6.81%
Total held to maturity................ $ -- --% $ -- --% $ 48,454 6.76%
Total investment securities........... $111,240 7.19% $58,573 6.25% $386,443 6.81%
</TABLE>
136
<PAGE>
Patriot accounts for its investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires management to classify investments in equity securities that have
readily determinable fair values and all investments in debt securities as
either held to maturity and reported at amortized cost, available for sale and
reported at fair value with unrealized gains and losses reported in a separate
component of stockholders' equity, or trading securities and reported at fair
value with unrealized gains and losses included in earnings.
On November 15, 1995, the Financial Accounting Standards Board issued
a special report entitled "A Guide to Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities." This guide
allows enterprises to reassess the appropriateness of the classification of all
securities held. Based on this special report, Patriot reclassified $6,000,000
of securities from held to maturity to available for sale. The transfer was made
at fair value and resulted in an estimated unrealized loss of $59,000 and a
decrease in stockholders' equity of $39,000 based on current market values.
The following table represents the securities of single issuers (other
than the obligation 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 6-30-98:
At June 30, 1998
---------------------------
(In thousands)
Issuer Carrying Value Fair Value
------ -------------- ----------
Capstead Securities Corp. IV $ 5,691 $ 5,749
GE Capital MTG Services, Inc. $ 6,587 $ 6,649
5.00% FHLMC Preferred Stock $ 4,929 $ 5,000
6.125% FHLMC Preferred Stock $10,027 $10,430
6.14% FHLMC Preferred Stock $20,000 $21,200
FHLB Stock $13,760 $13,760
Other Assets. Premises and equipment at June 30, 1998 was $8,647,000
compared to $8,542,000 at December 31, 1997. Accrued interest receivable at June
30, 1998 was $4,512,000 compared to $4,119,000 at December 31, 1997. The
increase is consistent with the growth in the loan and investment portfolios.
Real estate owned at June 30, 1998 was $179,000 compared to $162,000 at December
31, 1997. Other assets at June 30, 1998 were $2,412,000 compared to $230,000 at
December 31, 1997. The increase is primarily due to timing of cash receipts
associated with investment and mortgage loan activity.
137
<PAGE>
Deposits. Deposits are primarily attracted from within Patriot's
market area through the offering of various deposit instruments, including NOW
accounts, money market accounts, savings accounts, certificates of deposit and
retirement savings plans. Patriot also attracts jumbo certificates of deposit.
Total deposits at June 30, 1998 were $365,604,000 compared to
$289,528,000 at December 31, 1997. The increase in balance was the result of
aggressive marketing of money market accounts and other transaction-based
deposit accounts as well as an increase in Patriot's jumbo deposit program.
The following table sets forth the distribution of average deposit
accounts for the periods indicated and the weighted average yield on each
category of deposit presented:
<TABLE>
<CAPTION>
For the Six Month Period
Ended June 30, For the Year Ended December 31,
------------------------------- ---------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ ------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Yield Balance Deposits Yield Balance Deposits Yield
------- -------- -------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposits... $ 57,560 17.19% 4.45% $ 42,425 15.38% 4.29% $ 33,829 15.49% 4.02%
Passbook deposits....... 24,379 7.28 2.40 27,149 9.84 2.61 27,444 12.57 2.38
Now deposits............ 16,986 5.07 0.69 18,399 6.67 0.55 17,502 8.02 0.58
Demand deposits......... 10,576 3.16 -- 5,929 2.15 -- 3,579 1.64 --
Certificates of Deposit. 225,385 67.30 6.00 181,909 65.96 5.92 136,010 62.28 5.72
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total................. $334,886 100.00% 5.01% $275,811 100.00% 4.86% $218,364 100.00% 4.53%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
At June 30, 1998, the Company had $99,731,000 in certificate of
deposit accounts in amounts of $100,000 or more maturing as follows:
Maturity Period Amount
--------------- ------
Three months or less............... $ 4,840
Over three through six months...... 5,844
Over six through 12 months......... 29,933
Over 12 months..................... 59,114
-------
Total............................ $99,731
=======
138
<PAGE>
Borrowings. Patriot utilizes borrowings as a source of funds for its
asset growth and its asset/liability management. Patriot is eligible to obtain
advances from the 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. Patriot may also
utilize repurchase agreements to meet its liquidity needs. 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.
Total borrowings at June 30, 1998 were $456,176,000 compared to
$508,301,000 at December 31, 1997. The decrease in borrowings was due to funding
provided by the increase in deposit balances.
The following table presents certain information regarding borrowed
funds:
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------ -----------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ -----------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowings $220,391 5.56% $275,200 5.78% $210,000 5.64% $10,000 5.82%
Repurchase Agreements 215,337 5.68 214,684 5.89 21,595 6.22 -- --
Trust Preferred 18,448 10.80 18,417 10.80 -- --
-------- ----- -------- ----- -------- ----
Total borrowings outstanding $454,176 5.83% $508,301 6.01% $231,595 5.69% $10,000 5.82%
======== ===== ======== ===== ======== ===== ======= ====
Short-term $268,528 5.75% $385,684 5.84% $145,595 5.73% $10,000 5.82%
Long-term 185,648 5.95 122,617 6.55 86,000 5.65 -- --
-------- ----- -------- ----- -------- ----- ------- ----
Total borrowings outstanding $454,176 5.83% $508,301 6.01% $231,595 5.69% $10,000 5.82%
======== ===== ======== ===== ======== ===== ======= ====
</TABLE>
Stockholders' Equity. Total stockholders' equity was $47,270,000 at
June 30, 1998 compared to $46,533,000 at December 31, 1997. The increase in
balance is primarily due to income earned offset by dividends paid to
stockholders'.
139
<PAGE>
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 the six-month period ended June 30, 1998, significant liquidity
was provided by operations, deposit growth and long-term borrowings. Maturities
and sales of investment and mortgage-backed securities also provided significant
liquidity during the six-month period ended June 30, 1998. The funds provided by
these activities were invested in new loans, investment and mortgage-backed
securities, and the repayment of short-term borrowings.
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 100 to
200 basis points.
At June 30, 1998, Patriot Bank's and 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 June 30, 1998:
140
<PAGE>
<TABLE>
<CAPTION>
To Be To Be
Actual Adequacy Capitalized Well Capitalized
---------------- -------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Patriot Bank Corp. $ 64,749 15.29% $33,882 8% $43,352 10%
Patriot 37,526 10.38% 28,918 8% 36,148 10%
Tier I capital (to risk-weighted assets)
Patriot Bank Corp. 57,979 13.69% 16,940 4% 25,411 6%
Patriot 34,710 9.60% 14,459 4% 21,689 6%
Tier I capital (to average assets)
Patriot Bank Corp. 57,979 6.54% 35,472 4% 44,340 5%
Patriot 34,710 5.82% 23,843 4% 29,803 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
141
<PAGE>
theoretically would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income.
Conversely, during a period of falling interest rates, a negative gap position
would theoretically tend to result in an increase in net interest income while a
positive gap would tend to affect net interest income adversely.
Patriot pursues several actions designed to control its level of
interest rate risk. These actions include increasing the percentage of the loan
portfolio consisting of short-term and adjustable-rate loans through increased
originations of these loans, acquiring short-term and adjustable-rate
mortgage-backed securities, and undertaking to lengthen the maturities of
deposits and borrowings. At June 30, 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
$84,340,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 9.62%.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 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 June 30,
1998, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a six-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.
142
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1998
------------------------------------------------------------------------------------
3 Months 3 Months to 6 Months to 1 Year to 3 Years to More than
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
--------- ----------- ----------- --------- ---------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets(1):
Interest earning deposits $ 117 $ -- $ -- $ -- $ -- $ -- $ 117
Investment and mortgage-
backed securities, net(2)(5) 168,198 13,052 29,528 46,964 21,691 107,010 386,443
Loans receivable, net(3)(5) 75,054 37,117 53,472 138,793 70,183 88,801 463,420
-------- -------- -------- -------- ------- -------- --------
Total interest-earning assets 243,369 50,169 83,000 185,757 91,874 195,811 849,980
Non-interest-earning assets -- -- -- -- -- 26,323 26,323
-------- -------- -------- -------- ------- -------- --------
Total assets 243,369 50,169 83,000 185,757 91,874 222,134 876,303
-------- -------- -------- -------- ------- -------- --------
Interest-bearing liabilities:
Money market and passbook
savings accounts(6) 10,825 10,825 21,651 17,845 4,890 22,765 88,802
Demand and NOW accounts(6) 317 317 634 2,536 2,536 24,088 30,427
Certificates of deposit 35,100 25,074 87,606 85,743 3,322 9,530 246,375
Borrowings 253,528 10,000 5,000 2,000 0 183,648 454,176
-------- -------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities 299,770 46,216 114,891 108,124 10,748 240,031 819,780
Non-interest-bearing
liabilities 9,253 9,253
Equity -- -- -- -- -- 47,270 47,270
-------- -------- -------- -------- ------- -------- --------
Total liabilities and equity 299,770 46,216 114,891 108,124 10,748 296,554 876,303
-------- -------- -------- -------- ------- -------- --------
Interest sensitivity gap(4) $(56,401) $ 3,953 $(31,891) $ 77,633 $81,127 $(74,420) $ --
======== ======== ======== ======== ======= ======== ========
Cumulative interest
sensitivity gap $(56,401) $(52,449) $(84,340) $(6,707) $74,420 $ --
======== ======== ======== ======= ======= ========
Cumulative interest sensitivity
gap as a percent of total
assets (6.44)% (5.99)% (9.62)% (0.77)% 8.49% --%
Cumulative interest-earning
assets as a percent of
cumulative interest-bearing
liabilities 81.19% 84.84% 81.70% 98.82% 112.84% 103.68%
</TABLE>
143
<PAGE>
- ----------
(1) Interest-earning assets are included in the period in which the
balances are expected to be repaid and/or repriced as a result of
anticipated prepayments, scheduled rate adjustments, and contractual
maturities.
(2) Includes investment and mortgage-backed securities available for sale
and held to maturity.
(3) For purposes of the gap analysis, loans receivable includes
non-performing loans and is reduced for the allowance for possible loan
losses, and unamortized discounts and deferred loan fees.
(4) Interest sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
(5) Annual prepayment rates for loans and mortgage-backed securities range
from 12% to 39%.
(6) Money market and savings accounts, and NOW accounts are assumed to have
decay rates between 4% and 76% annually and have been estimated based
upon a historic analysis of core deposit trends.
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 twelve month period ending June 30, 1998
based upon the assets, liabilities and off-balance sheet financial instruments
in existence at June 10, 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 twelve month period
ending June 31, 1999.
Rate shock to interest rates % change
---------------------------- --------
2.0% (17.2)%
1.0% (7.8)%
(1.0)% 2.6%
(2.0)% 5.3%
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.
144
<PAGE>
The following table presents selected quarterly consolidated financial
data:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1997 1997 1997 1997
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total interest income $15,571 $15,119 $14,860 $13,746 $11,323 $10,320
Total interest expense 11,364 10,923 11,138 10,143 7,730 6,796
------- ------- ------- ------- ------- -------
Net interest income 4,207 4,196 3,722 3,603 3,593 3,524
Provision for possible loan loss 300 250 455 235 120 105
------- ------- ------- ------- ------- -------
Net interest income after
provision for possible
loan losses 3,907 3,946 3,267 3,368 3,473 3,419
Other income 1,532 664 1,274 575 256 225
Other expenses 4,131 3,353 3,405 2,859 2,521 2,373
------- ------- ------- ------- ------- -------
Income before income taxes 1,308 1,257 1,136 1,084 1,208 1,271
Income tax provision 300 298 242 253 370 461
------- ------- ------- ------- ------- -------
Net income $ 1,008 $ 959 $ 894 $ 831 $ 838 $ 810
======= ======= ======= ======= ======= =======
Earnings per share 0.189 0.180 0.173 0.146 0.140 0.134
Dividends per share 0.068 0.060 0.063 0.062 0.058 0.055
Note: Earnings per share for prior periods have been restated to reflect the
effect of the May 14, 1998 5 for 4 stock split.
145
<PAGE>
<CAPTION>
Three Months Ended
--------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Total interest income $9,102 $ 8,424 $6,862 $5,206
Total interest expense 5,855 5,194 3,867 2,586
------ ------- ------ ------
Net interest income 3,247 3,230 2,995 2,620
Provision for possible loan loss 100 90 80 35
------ ------- ------ ------
Net interest income after
provision for possible
loan losses 3,147 3,140 2,915 2,585
Other income 257 128 131 121
Other expenses 2,145 3,381 1,928 1,744
------ ------- ------ ------
Income before income taxes 1,259 (113) 1,118 962
Income tax provision 452 (20) 440 379
------ ------- ------ ------
Net income $ 807 $ (93) $ 678 $ 583
====== ======= ====== ======
Earnings per share 0.126 (0.017) 0.106 0.094
Dividends per share 0.054 0.045 0.034 0.010
</TABLE>
Note: Earnings per share for prior periods have been restated to reflect the
effect of the May 14, 1998 5 for 4 stock split.
146
<PAGE>
1997 Compared to 1996
Summary. For the year ended December 31, 1997, Patriot reported net
income of $3,373,000 or $.74 per share compared to net income of $1,975,000 or
$.39 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 $.55 per share for 1996.
Charter Conversion. On May 22, 1997, Patriot Bank completed its
conversion from a federally chartered savings bank to a state chartered
commercial bank. The charter conversion had no significant impact on the
financial condition or results of operation of Patriot.
Capital Transactions. 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. During
1997 Patriot repurchased a total of 1,042,000 shares of its common stock at a
total cost of $13,554,000.
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.
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 the 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. Most of the investment and
mortgage-backed securities purchased either have short average lives (five years
or less) or have adjustable rates. Patriot's asset growth was funded through
deposit growth and borrowings.
As a result of these growth strategies the stock repurchases and the
issuance of the trust preferred securities. Patriot's net interest margin
147
<PAGE>
(net interest income as a percentage of average interest-earning assets)
decreased as anticipated to 2.14% from 3.01% in 1996. 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 deposit sale.
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.
Spread Analysis. The following table sets forth Patriot's average
balances and the yields on those balances for the years ended December 31, 1997,
1996 and 1995. 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.
148
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------------- ------------------------------
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 ... $ 5,522 $ 193 3.49% $ 3,207 $ 116 3.62% $ 4,719 $ 201 4.26%
Investment and mortgage-
backed securities(1) ...... 336,718 23,048 6.96 165,159 11,049 6.69 46,802 2,865 6.12
Loans receivable, net(2) .... 348,186 27,008 7.76 234,726 18,429 7.85 173,020 14,102 8.15
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest-earning assets . 690,426 50,249 7.34 403,092 29,594 7.34 224,541 17,168 7.65
Non-interest-earning assets . 16,635 -- -- 7,018 -- -- 7,248 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total assets ................ $707,061 $50,249 7.16 $410,110 $29,594 7.22 $231,789 $17,168 7.41
======== ======= ==== ======== ======= ==== ======== ======= ====
Liabilities and Equity:
Interest-bearing liabilities:
Savings deposits ............ $ 93,902 $ 2,632 2.80 $ 82,354 $ 2,120 2.57 $ 78,004 $ 2,083 0.03
Certificates Of Deposits .... 181,909 10,773 5.92 136,010 7,775 5.72 118,494 6,897 5.82
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits .............. 275,811 13,405 4.86 218,364 9,895 4.53 196,498 8,980 4.57
Borrowings(3) ............... 382,357 22,402 5.86 136,200 7,607 5.57 9,126 569 6.23
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities ............... 658,168 35,807 5.44 354,564 17,502 4.94 205,624 9,549 4.64
Non-interest-bearing
liabilities ............... 2,188 -- -- 2,300 -- -- 4,069 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities ........... 660,356 35,807 5.42 356,864 17,502 4.90 209,693 9,549 4.55
Equity ...................... 46,705 -- -- 53,246 -- -- 22,096 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total liabilities and
equity .................... $707,061 35,807 5.06 $410,110 $17,502 4.27 $231,789 $ 9,549 4.12
======== ======= ==== ======== ======= ==== ======== ======= ====
Net interest rate spread(4) 2.10% 2.95% 3.29%
==== ==== ====
Net interest margin(5) 2.14% 3.01% 3.39%
Ratio of interest-earning
assets to interest-bearing
liabilities 104.90% 113.69% 109.20%
</TABLE>
149
<PAGE>
- ----------
(1) Includes securities available for sale and held to maturity and
unamortized discounts and premiums.
(2) Amount is net of deferred loan fees, loans in process, discounts and
premiums, and allowance for possible loan losses and includes loans
held for sale and non-performing loans for which the accrual of
interest has been discontinued.
(3) Includes short-term, long-term, and trust preferred securities.
(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 tax-equivalent net interest income
divided by average interest-earning assets.
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, 1997 Year Ended December 31, 1996
Compared to Year Ended Compared to Year Ended
December 31, 1996 December 31, 1995
------------------------------ -------------------------------
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 $ 81 $ (4) $ 77 $ (58) $ (27) $ (85)
Investment and mortgage-backed securities 11,737 262 11,999 7,894 290 8,184
Loans(1) 8,804 (225) 8,579 4,862 (535) 4,327
------- ----- ------- ------- ----- -------
Total interest-earning assets 20,622 33 20,655 12,698 (272) 12,426
------- ----- ------- ------- ----- -------
Interest-bearing liabilities:
Deposits 3,023 487 3,510 1,117 (202) 915
Borrowings 14,404 391 14,795 7,103 (65) 7,038
------- ----- ------- ------- ----- -------
Total interest-bearing liabilities 17,427 878 18,305 8,220 (267) 7,953
------- ----- ------- ------- ----- -------
Net change in net interest income $ 3,195 $(845) $ 2,350 $ 4,478 $ (5) $ 4,473
======= ===== ======= ====== ===== =======
</TABLE>
- ----------
(1) Includes non-accrual loans.
150
<PAGE>
Provision for Possible Loan Losses. The provision for possible 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. See "Credit Quality" for a
detailed discussion of Patriot's asset quality.
The following table sets forth the activity in the allowance for
possible loan losses for the years indicated:
At or for the Year Ended December 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
Allowance, beginning of year $1,830 $1,702 $1,720 $1,665 $1,450
Charge-offs:
Residential 17 13 76 -- 3
Commercial -- 98 -- -- --
Home equity and consumer 259 66 5 5 --
------ ------ ------ ------ ------
Total charge-offs 276 177 81 5 3
------ ------ ------ ------ ------
Recoveries:
Residential 2 -- -- -- --
Commercial 31 -- -- -- 217
Home equity and consumer 10 -- 3 4 --
------ ------ ------ ------ ------
Total recoveries 43 -- 3 4 217
------ ------ ------ ------ ------
Net charge-offs (recoveries) 233 177 78 1 (214)
Provision charged to operations 915 305 60 56 1
------ ------ ------ ------ ------
Allowance, end of year $2,512 $1,830 $1,702 $1,720 $1,665
====== ====== ====== ====== ======
Net charge-offs (recoveries)
to average loans .07% .08% .05% --% (.12)%
Allowance for possible loan losses
as a percentage of
year-end total loans .59% .65% .88% 1.01% 1.02%
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. Non-interest
expense in 1996 also includes the special charge of $1,338,000 for the special
deposit insurance assessment levied against all SAIF member financial
institutions by the FDIC to recapitalize its SAIF fund. The ratio
151
<PAGE>
of non-interest expense to average assets improved to 1.56% for 1997 compared to
1.93% for 1996 (excluding the special charge). The improvement in the overhead
ratio reflects the growth of Patriot while maintaining an emphasis on managing
costs.
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 no longer
based on income and is now considered a non-interest expense.
FINANCIAL CONDITION
Loan Portfolio. Patriot's primary loan products are commercial, 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 Lending. Patriot originates commercial loans with an
emphasis on small businesses, professionals and entrepreneurs within Patriot's
local markets. Most of Patriot's commercial loan relationships have exposure of
$500,000 or less. Commercial loans are generally secured by real estate and
personal guarantees.
Consumer Lending. Patriot offers variable rate (based upon prime rate)
home equity lines of credit which extend credit lines based on an applicant's
income and equity in their home. These lines are generally secured by
single-family, owner-occupied residential properties. Patriot also offers
fixed-rate home equity loans which are generally secured by single-family,
owner-occupied residential properties. These loans are generally originated with
terms from 1 to 15 years. Patriot also offers a variety of other consumer loans,
which primarily consist of installment loans secured by automobiles, student
loans, credit cards and other loans secured by deposit accounts.
Mortgage Lending. Patriot offers both fixed-rate and adjustable-rate
mortgage loans secured by one- to four-family residences, primarily
owner-occupied, located in Patriot's primary market area. Patriot generally
underwrites its first mortgage loans in accordance with underwriting standards
set by the Federal Home Loan Mortgage Corp. (FHLMC) and the Federal National
Mortgage Association (FNMA). Patriot also offers construction loans
152
<PAGE>
to qualified borrowers for the construction of one- to four-family residences in
Patriot's market area. These loans are underwritten in accordance with the same
standards as Patriot's mortgages on existing properties, except the loans
generally provide for disbursement in stages during a construction period of up
to 12 months, during which period the borrower is required to make monthly
payments of accrued interest on the outstanding loan balance.
At December 31, 1997, Patriot's total loan portfolio was $422,209,000
compared to a total loan portfolio of $280,184,000 at December 31, 1996. The
increase in the loan portfolio was the result of aggressive marketing of
commercial loans, home equity loans and residential mortgage loans. During 1997,
Patriot originated total loans of $279,422,000 compared to total loans
originated in 1996 of $130,674,000.
The following table sets forth the maturity schedule for Patriot's loan
portfolio (excluding residential real estate and consumer loans):
Amounts at December 31, 1997, Maturing
--------------------------------------------
after
in one year
one year through after
or less five years five years Total
-------- ---------- ---------- -------
(in thousands)
Loan Maturity Schedule:
Commercial loans $13,974 $18,941 $4,042 $36,957
Residential construction loans 37 158 2,254 2,449
Other construction loans 1,446 144 -- 1,590
------- ------- ------ -------
Total $15,457 $19,243 $6,296 $40,996
======= ======= ====== =======
Fixed rates $ 7,483 $18,691 $6,296 $32,470
Adjustable rates 7,974 552 -- 8,526
------- ------- ------ -------
Total $15,457 $19,243 $6,296 $40,996
======= ======= ====== =======
Credit Quality. Management and the Board of Directors perform a monthly
review of all delinquent loans. The procedures taken by Patriot with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency. When a borrower fails to make a required payment on a loan, Patriot
takes a number of steps to have the borrower cure the delinquency and restore
the loan to current status.
Patriot's Asset/Loan Review Committee reviews and classifies Patriot's
assets monthly and reports the results of its review to the Board of Directors.
Patriot classifies assets in accordance with applicable regulations and
management guidelines.
153
<PAGE>
Patriot generally requires appraisals on an annual basis on foreclosed
properties and, to the extent necessary, properties deemed to be in-substance
foreclosures. Patriot generally conducts inspections on foreclosed properties
and properties deemed in-substance foreclosures on at least a quarterly basis.
Non-Accrual and Past-Due Loans. Patriot accrues interest on all loans
until management determines that the collection of interest is doubtful. In no
event does Patriot continue accruing interest on loans contractually past due 90
days or more. Upon discontinuance of interest accrual, all unpaid accrued
interest is reversed. Patriot had no restructured loans within the meaning of
SFAS No. 15 and no potential problem loans within the meaning of the Commission
Guide 3 at December 31, 1997.
Allowance for Possible Loan Losses. The adequacy of the allowance for
possible loan losses is based on management's evaluation of the risks inherent
in its loan portfolio and the general economy. Management makes a quarterly
determination as to an appropriate provision from earnings necessary to maintain
an allowance for loan losses that is adequate to cover estimated losses with
respect to loans receivable which are deemed probable and estimable based on
information currently known to management. The amount charged to earnings is
based upon several factors, including a continuing review of delinquent,
classified and non-accrual loans, large loans, and overall portfolio quality,
regular examination and review of the loan portfolio by regulatory authorities,
analytical review of loan charge-off experience, delinquency rates, other
relevant historical and peer statistical ratios, and management's judgment with
respect to local and general economic conditions and their impact on the
existing loan portfolio. Although management believes the allowance is adequate
to protect against future losses arising out of its existing loan portfolio,
actual losses are dependent on future events and, as such, further additions to
the allowance may be necessary. Patriot will continue to monitor and modify its
allowance for loan losses as conditions dictate.
Cash and Cash Equivalents. Cash and cash equivalents at December 31,
1997 were $9,014,000 compared to $6,853,000 at December 31, 1996. The increase
in cash and cash equivalents was primarily due to cash needed to support two
additional community banking offices opened in 1997 and the increased activity
associated with servicing commercial customers.
Investment and Mortgage-Backed Securities. Investment securities
consist of US Treasury and government agency securities, corporate debt and
equity securities. Mortgage-backed securities consist of securities generally
154
<PAGE>
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, 1997
were $405,641,000 compared to $231,858,000 at December 31, 1996. The increase in
investment and mortgage-backed securities was due to the purchase of investment
and mortgage-backed securities pursuant to Patriot's growth strategy. The
majority of securities purchased in 1997 were adjustable rate collateralized
mortgage obligations with interest rates tied to one month LIBOR.
The following table sets forth certain information regarding the
carrying value, weighted average yield and contractual maturities of Patriot's
investment and mortgage-backed securities as of December 31, 1997.
<TABLE>
<CAPTION>
More than More than
one year five years More than
One year or less to five years to ten years ten years
------------------- --------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury and
government securities $ -- --% $ 2,753 2.83% $ 1,858 2.83% $15,475 2.83%
Corporate securities -- -- -- -- -- -- 18,767 9.36
Equity securities -- -- -- -- -- -- -- --
Mortgage-backed securities:
FHLMC 1,460 7.42 4,240 7.42 876 7.42 4,925 7.42
FNMA 2,516 7.41 5,769 7.41 4,172 7.41 7,797 7.41
GNMA 207 6.72 905 6.72 1,452 6.72 10,307 6.72
Collateralized mortgage obligations:
FHLMC 8,581 7.08 17,057 7.08 13,123 7.08 37,023 7.08
FNMA 1,596 7.20 56,219 7.20 56,474 7.20 4,555 7.20
Other 1,679 6.40 7,896 6.40 2,890 6.40 -- --
------- ---- ------- ---- ------- ---- ------- ----
Total available for sale $16,039 7.10% $94,839 7.01% $80,845 7.06% $98,849 6.86%
======= ==== ======= ==== ======= ==== ======= ====
Held to maturity:
Investment securities:
U.S Treasury and
government securities $ 135 5.57% $ 650 5.57% $ 250 5.57% $ -- --%
Corporate securities -- -- 1,502 6.96 -- -- -- --
Equity securities -- -- -- -- -- -- -- --
Collateralized mortgage obligations:
FHLMC 392 6.00 1,409 6.00 -- -- -- --
FNMA 1,013 7.00 4,838 7.00 3,924 7.00 -- --
Other 11,188 7.07 32,009 7.07 5,206 7.07 -- --
------- ---- ------- ---- ------- ---- ------- ----
Total available for sale $12,728 7.02% $40,408 7.00% $ 9,380 7.00% $ -- --%
======= ==== ======= ==== ======= ==== ======= ====
155
<PAGE>
<CAPTION>
No stated
maturity Total
------------------- --------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury and
government securities $ -- --% $ 20,086 2.83%
Corporate securities -- -- 18,767 9.36
Equity securities 52,553 6.20 52,553 6.20
Mortgage-backed securities:
FHLMC -- -- 11,501 7.42
FNMA -- -- 20,254 7.41
GNMA -- -- 12,871 6,72
Collateralized mortgage obligations:
FHLMC -- -- 75,784 7.08
FNMA -- -- 118,844 7.20
Other -- -- 12,465 6.40
------- ---- -------- ----
Total available for sale $52,553 6.20% $343,125 6.86%
======= ==== ======== ====
Held to maturity:
Investment securities:
U.S Treasury and
government securities $ -- --% $ 1,035 5.57%
Corporate securities -- -- 1,502 6.96
Equity securities -- -- -- --
Collateralized mortgage obligations:
FHLMC -- -- 1,801 6.00
FNMA -- -- 9,775 7.00
Other -- -- 48,403 7.07
------- ---- -------- ----
Total available for sale $ -- --% $ 62,516 7.00%
======= ==== ======== ====
</TABLE>
156
<PAGE>
Patriot accounts for its investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires management to classify investments in equity securities that have
readily determinable fair values and all investments in debt securities as
either held to maturity and reported at amortized cost, available for sale and
reported at fair value with unrealized gains and losses reported in a separate
component of stockholders' equity, or trading securities and reported at fair
value with unrealized gains and losses included in earnings.
In November 1995, the Financial Accounting Standards Board issued a
special report entitled "A Guide to Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities." This guide
allows enterprises to reassess the appropriateness of the classification of all
securities held. Based on this special report, Patriot reclassified $6,000,000
of securities from held to maturity to available for sale. The transfer was made
at fair value and resulted in an estimated unrealized loss of $59,000 and a
decrease in stockholders' equity of $39,000 based on current market values.
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 12-31-97:
At December 31, 1997
----------------------------------
Issuer Carrying Value Fair Value
- ------ -------------- ----------
(in thousands)
FHLMC Preferred Stock $31,299 $31,299
FHLB Stock 13,760 13,760
Capstead Securities Corp. IV 6,055 6,079
CMC Securities Corporation II 6,377 6,441
GE Capital MTG. Services, Inc. 7,500 7,500
Commerce Capital Trust 5,276 5,276
Securitized Asset Sales, Inc. $ 4,853 $ 4,853
Other Assets. Premises and equipment at December 31, 1997 were
$8,542,000 compared to $7,724,000 at December 31, 1996. The increase was due to
the opening of two new banking offices, and investments in technology. Accrued
interest receivable at December 31, 1997 was $4,119,000 compared to $2,649,000
at December 31, 1996. The increase is consistent with the growth in the loan and
157
<PAGE>
investment portfolios. Real estate owned at December 31, 1997 was $162,000
compared to $74,000 at December 31, 1996.
Deposits. Deposits are generally attracted from within Patriot's
primary market area through the offering of various deposit instruments,
including NOW accounts, money market accounts, savings accounts, certificates of
deposit and retirement savings plans. Patriot also solicits jumbo deposits from
various sources.
Total deposits at December 31, 1997 were $289,528,000 compared to
$239,514,000 at December 31, 1996. The increase in 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.
At December 31, 1997, Patriot had $41,788,000 in certificate of deposit
accounts in amounts of $100,000 or more maturing as follows:
Maturity Period Amount
--------------- ------
Three months or less....................................... $ 942
Over three through six months.............................. 1,806
Over six through 12 months................................. 4,712
Over 12 months............................................. 34,328
-------
Total............................................... 41,788
=======
Borrowings. Patriot utilizes borrowings as a source of funds for its
growth strategy and its asset/liability management. Patriot is eligible to
obtain advances from the FHLB upon the security of 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 securities.
Stockholders' Equity. Total stockholders' equity was $46,533,000 at
December 31, 1997 compared to $53,117,000 at December 31, 1996. The decrease was
a result of the repurchase of common stock and cash dividends paid offset
somewhat by the retention of earnings and an increase in the net unrealized gain
on investment and mortgage-backed securities available for sale.
158
<PAGE>
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 1997, significant liquidity was provided by financing
activities, particularly FHLB advances, repurchase agreements and the trust
preferred securities, as well as by deposit growth. Maturities of investment and
mortgage-backed securities also provided significant liquidity during 1997. The
funds provided by these activities were invested in new loans and investment and
mortgage-backed securities, and funded the sale of deposits and the repurchase
of Patriot's common stock.
At December 31, 1997, Patriot had outstanding loan commitments of
$49,663,000. 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, 1997 totaled
$91,399,000. Based upon historical experience, Patriot expects that
substantially all of the maturing certificates of deposit will be retained at
maturity.
Capital Resources. FDIC regulations currently require companies to
maintain a minimum leverage capital ratio of not less than 3% of tier 1 capital
to total adjusted assets 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 100 to
200 basis points.
At December 31, 1997, Patriot Bank's and Patriot's capital ratios
exceeded all well capitalized required ratios. The following table sets forth
the capital ratios of Patriot, Patriot Bank and the current regulatory
requirements at December 31, 1997:
159
<PAGE>
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes Prompt Corrective Action
----------------- ----------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital (to risk weighted assets)
Patriot $62,807 14.54% $34,567 8% $43,208 10%
Patriot Bank 44,100 10.77% 32,748 8% 40,936 10%
Tier I capital (to risk-weighted assets)
Patriot 55,837 12.92% 17,283 4% 25,925 6%
Patriot Bank 41,588 10.16% 16,374 4% 24,561 6%
Tier I capital (to average assets)
Patriot 55,837 7.90% 28,282 4% 35,353 5%
Patriot Bank 41,588 6.12% 27,204 4% 34,005 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
160
<PAGE>
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, therefore, a negative gap
theoretically would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income.
Conversely, during a period of falling interest rates, a negative gap position
would theoretically tend to result in an increase in net interest income while a
positive gap would tend to affect net interest income adversely.
Patriot pursues several actions designed to control its level of
interest rate risk. These actions include increasing the percentage of the loan
portfolio consisting of short-term and adjustable-rate loans through increased
originations of these loans, acquiring short-term and adjustable-rate
mortgage-backed securities, and undertaking to lengthen the maturities of
deposits and borrowings. At December 31, 1997, 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
$111,213,000 representing a one-year cumulative "gap," as defined above, as a
percentage of total assets of negative 13.06%.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1997, 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, 1997, 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.
161
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------
3 Months 3 Months to 6 Months to 1 Year to 3 Years to More than
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
-------- ----------- ----------- --------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest earning assets(1):
Interest earning deposits $ 6,417 $ -- $ -- $ -- $ -- $ -- $ 6,417
Investment and mortgage-backed
securities, net(2)(5) 203,471 12,472 17,242 35,116 33,820 103,520 405,641
Loans receivable, net(3)(5) 54,791 29,865 71,878 97,005 57,143 113,110 423,792
--------- --------- ---------- --------- --------- --------- --------
Total interest-earning assets 264,679 42,337 89,120 132,121 90,963 216,630 835,850
Non-interest-earning assets -- -- -- -- -- 15,650 15,650
--------- --------- ---------- --------- --------- --------- --------
Total assets 264,679 42,337 89,120 132,121 90,963 232,280 851,500
--------- --------- ---------- --------- --------- --------- --------
Interest-bearing liabilities:
Money market and passbook savings
accounts(6) 8,407 8,407 16,813 14,810 4,928 22,841 76,206
Demand and NOW accounts(6) 292 292 584 2,335 2,335 22,187 28,025
Certificate of deposit 17,538 25,317 44,015 87,006 3,540 7,881 185,297
Borrowings 375,684 -- 10,000 19,000 85,000 18,617 508,301
--------- --------- --------- --------- --------- -------- --------
Total interest-bearing
liabilities 401,921 34,016 71,412 123,151 95,803 71,526 797,829
Non-interest-bearing liabilities 7,138 7,138
Equity -- -- -- -- -- 46,533 46,533
--------- --------- --------- --------- --------- -------- --------
Total liabilities and equity 401,921 34,016 71,412 123,151 95,803 125,197 851,500
--------- --------- --------- --------- --------- -------- --------
Interest sensitivity gap(4) $(137,242) $ 8,321 $ 17,708 $ 8,970 $ (4,840) $107,083 $ --
========= ========= ========= ========= ========= ======== ========
Cumulative interest sensitivity
gap $(137,242) $(128,921) $(111,213) $ (102,243) $(107,083) $ --
========= ========= ========= ========== ========= ========
Cumulative interest sensitivity
gap as a percent of total
assets (16.12)% (15.14)% (13.06)% (12.01)% (12.58)% --%
Cumulative interest-earning assets
as a percent of cumulative
interest-bearing liabilities 65.85 % 70.43 % 78.08 % 83.78 % 85.26 % 104.77%
</TABLE>
162
<PAGE>
- -----------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be repaid and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Includes investment and mortgage-backed securities available for sale and
held to maturity.
(3) For purposes of the gap analysis, loans receivable includes non-performing
loans and is reduced for the allowance for possible loan losses, and
unamortized discounts and deferred loan fees.
(4) Interest sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
(5) Annual prepayment rates for loans and mortgage-backed securities range from
12% to 30%.
(6) Money market and savings accounts, and NOW accounts are assumed to have
decay rates between 4% and 76% annually and have been estimated based upon
a historic analysis of core deposit trends.
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, 1998 based upon
the assets, liabilities and off-balance sheet financial instruments in existence
at December 31, 1997. 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, 1998.
Rate shock to interest rates % change
---------------------------- --------
+2% (12.1%)
+1% (5.5%)
-1% 5.3%
-2% 11.5%
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
163
<PAGE>
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
General. Patriot reported net income of $1,975,000 or $.39 per share
for the year ended December 31, 1996. This represents an increase of 66% over
net income of $1,192,000 in 1995. Return on average equity was 3.71%, for 1996
compared to 5.40%, for 1995.
Net Interest Income. Net interest income for 1996 was $12,092,000
compared to $7,619,000 in 1995. This represents an increase of 58% and is
primarily due to an increase in average balances. Patriot's average interest
rate spread (the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities) was 2.44% in 1996 compared to 3.01% in 1995.
Interest on loans was $18,429,000 for 1996 compared to $14,102,000 for
1995. The average balance of loans was $234,726,000 with an average yield of
7.85% compared to an average balance of $173,020,000 with an average yield of
8.15% for 1995. The increase in average balance is due to the origination of
residential mortgage loans and home equity loans and to a lesser extent,
commercial loans. The decrease in average yield is primarily a result of an
emphasis on short-term and adjustable-rate loans.
Interest on investment and mortgage-backed securities was $11,049,000
for 1996 compared to $2,865,000 in 1995. The average balance of the investment
portfolio was $165,159,000 with an average yield of 6.69% for 1996 compared to
an average balance of $46,802,000 with an average yield of 6.12% for 1995. The
increase in average balance and the increase in average yield was due to the
purchase of investment and mortgage-backed securities.
Interest on total deposits was $9,895,000 for 1996 compared to
$8,980,000 for 1995. The average balance of total deposits was $218,364,000 with
an average cost of 4.53% for 1996 compared to an average balance of $196,498,000
with an average cost of 4.57% for 1995. The increase in average balance was the
result of aggressive marketing of time and transaction-based deposit accounts.
The opening of three new community banking offices and the introduction of a
jumbo deposit program late in 1996. The decrease in average yield was the result
of an emphasis placed on transaction-based deposit accounts and lower rates
offered on time deposits.
164
<PAGE>
Interest on borrowings was $7,607,000 in 1996 compared to $569,000 in
1995. The average balance of borrowings was $136,200,000 with an average cost of
5.57% for 1996 compared to an average balance of $9,126,000 with an average cost
of 6.23% for 1995. The increase in average balance was due to the use of
borrowings to fund the growth in the balance sheet. The decrease in average cost
was due to higher balances of short-term borrowings.
Provision for Possible Loan Losses. The provision for possible loan
losses was $305,000 for 1996 compared to $60,000 for 1995. The increase in the
provision is a reflection of the growth of Patriot's loan portfolio and the
origination of commercial and consumer loans.
Non-interest Income. Total non-interest income was $637,000 for 1995
compared to $518,000 for 1995. The increase was primarily due to mortgage
banking gains recognized in 1996 and less of a net loss on the sale of
investment and mortgage-backed securities in 1996 than in 1995, offset somewhat
by less of a net gain on the disposition of real estate acquired through
foreclosure.
Non-interest Expense. Total non-interest expense was $9,198,000 for
1996 compared to $6,151,000 for 1995. The increase in non-interest expense was
the result of increased salary and employee benefit costs and occupancy and
equipment costs, both related to Patriot's expanded operations. Non-interest
expense in 1996 also includes the special charge of $1,338,000 for the special
deposit insurance assessment levied against all SAIF member financial
institutions by the FDIC to recapitalize its SAIF fund.
Income Tax Provision. The income tax provision was $1,251,000 for 1996
compared to $734,000 for 1995. The effective tax rate was 38.78% for 1996
compared to 38.11% for 1995.
165
<PAGE>
Management
The following sets forth information concerning Patriot's executive
officers.
Name Age Title
- ---- --- -----
James B. Elliott ............. 57 Chairman of the Board
Joseph W. Major .............. 42 President and Chief Executive
Officer of Patriot and Patriot Bank
Richard A. Elko .............. 37 Executive Vice President and Chief
Financial Officer of Patriot and
Patriot Bank
James B. Elliott. Mr. Elliott has been Chairman of the Board of Patriot
since July 1998.
Joseph W. Major. Mr. Major has been President and Chief Executive
Officer of Patriot and Patriot Bank since July 1998. Prior thereto, Mr. Major
was President and Chief Operating Officer of Patriot Bank since September 1995
and Chief Executive Officer of Patriot Bank since April 1997. Prior to his
appointment at Patriot and Patriot Bank, Mr. Major was a partner in the law firm
of Mauger and Major.
Richard A. Elko. Mr. Elko has been Executive Vice President and Chief
Financial Officer of Patriot and Patriot Bank since January 1996. Prior to his
appointment at Patriot and Patriot Bank, Mr. Elko was Corporate Controller at
Sovereign Bancorp, Inc.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the Record Date, the names of the
directors and Named Executive Officers (as defined below) of Patriot 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 Patriot Bank, and the year in which
their terms as director of Patriot expire. The table also sets forth the amount
of Patriot 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.
166
<PAGE>
<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>
Larry V. Thren 55 1992 2001
Vice President of Human Resources and Support
Services, Pottstown Memorial Medical Center
since 1988
James B. Elliot 57 1990 2001 *
Principal, Stratecon, Inc.
James A. Bentley, Jr. 39 1997 1999
Principal, Bentley Graphic Communications, Inc.
Leonard A. Huff 87 1951 1999 *
Retired industrial superintendent
John H. Diehl 80 1981 2000
Retired insurance broker
Samuel N. Landis 73 1988 2000
Retired general contractor
Joseph W. Major 42 1990 2000
President and Chief Operating Officer of Patriot
since September 1995, President and
Chief Executive Officer of Patriot Bank since
April 1997 and prior thereto President and Chief
Operating Officer of Patriot 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
Richard A. Elko 37 -- -- *
Executive Vice President and Chief Financial Officer
of Patriot and Patriot Bank since January 1966.
Prior to his appointment at Patriot and Patriot
Bank, Mr. Elko was Corporate Controller at
Sovereign Bancorp, Inc.
Stock Ownership of all Directors and -- -- --
Executive Officers as a Group (10 persons)
</TABLE>
167
<PAGE>
- -------------------
*Represents less than one percent of the outstanding Common Stock.
(1) Includes years of service as a director of Patriot's predecessor, Patriot
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 1,809 vested shares awarded to each outside director and 9,045 and
2,400 vested shares awarded to Messrs. Major and Elko, 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) Does not include 21,710 shares subject to options granted to each outside
director and 108,551 and 65,130 shares subject to options granted to
Messrs. Major and Elko, respectively, under the Incentive Plan. All options
granted under the Incentive Plan become exercisable in five equal annual
installments commencing on June 7, 1997, the first anniversary of the
effective date of the grant.
(5) Does not include unvested stock awards granted under the Incentive Plan
which the holder has the right to vote. Under the Incentive Plan, 8,683
shares have been awarded to each outside director which have not yet
vested, and 43,419 and 11,520 shares have been awarded to Messrs. Major and
Elko, respectively, which have not yet vested.
(6) Does not include a total of 145,926 unvested shares awarded under the
Incentive Plan as to which voting may be directed.
168
<PAGE>
Executive Compensation
The following table shows, for the years ended December 31, 1997, 1996
and 1995, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for those years, to the Chairman of the Board and
Chief Executive Officer, President and Chief Operating Officer, and Executive
Vice President and Chief Financial Officer of the Company ("Named Executive
Officers").
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------------
Other Restricted All
Annual Stock LTIP Other
Name and Principal Salary Bonus Compensation Awards Options Payouts Compensation
Position (1) Year ($)(2) ($) ($)(3) ($)(4) (#)(5) ($)(6) ($)(7)
- ------------------ ---- -------- ------- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary N. Gieringer, 1997 $208,308 $67,298 -- -- -- -- $56,876
Chairman of the Board, 1996 $165,539 $72,436 -- $487,614 $113,074 -- $26,554
Chief Executive Officer 1997 $158,650 $30,000 -- -- -- -- $ 4,620
and Director
Joseph W. Major 1997 $147,788 $79,047 -- -- -- -- $43,014
President, Chief 1996 $105,385 $82,696 -- $487,614 $113,074 -- $22,226
Operating Officer 1995 $ 32,256 $12,500 -- -- -- -- --
and Director
Richard A. Elko 1997 $110,000 $55,649 -- -- -- -- $17,472
Executive Vice 1996 $ 95,457 $52,218 -- $129,375 $ 67,843 -- --
President and Chief 1995 -- -- -- -- -- -- --
Financial Officer
</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. Mr. Major
was appointed as President and Chief Operating Officer in August 1995. Mr.
Elko was appointed as Executive Vice President and Chief Financial Officer
in January 1996.
(2) Includes compensation deferred at the election of Messrs. Gieringer, Major,
and Elko 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 and Elko were
awarded 54,274, 54,274 and 14,400 shares (as adjusted by subsequent stock
dividends) 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 and
$129,375. 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, 1997, the market value of the
169
<PAGE>
54,274, 54,274 and 14,400 shares was $1,153,323, $1,153,323 and $306,000,
respectively.
(5) Includes shares subject to options granted to Messrs. Gieringer, Major and
Elko 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 1997, 1996, and 1995, 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 2,133, 1,583, and 531 shares allocated to Messrs. Gieringer,
Major, and Elko, respectively, for fiscal 1997 pursuant to the ESOP with a
market value of $45,326, $33,639 and $11,284, respectively, and allocations
of 1,624 shares to Mr. Gieringer ($21,924 market value) and 1,588 shares to
Mr. Major ($21,438 market value) for fiscal 1996 pursuant to the ESOP.
Includes $11,550, $9,375 and $6,188 in matching and discretionary
contributions by the Company to the Company's 401(k) plan during 1997 for
Messrs. Gieringer, Major, and Elko, respectively. Such contributions for
Messrs. Gieringer and Major were $4,620 and $788, respectively, for 1996.
Incentive Plan
On June 7, 1996, the stockholders approved the Patriot Bank Corp. 1996
Stock-Based Incentive Plan ("Incentive Plan") under which all employees of the
Company are eligible to receive awards. The Company maintains the Incentive Plan
which provides discretionary awards to officers and key employees as determined
by a committee of non-employee directors. No options were granted under the
Incentive Plan to the Named Executive Officers for fiscal 1997.
The following table provides certain information with respect to the
number of shares of Common Stock represented by outstanding options held by the
Named Executive Officers at December 31, 1997. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such options and the closing sale price of the Common Stock at
December 31, 1997.
170
<PAGE>
Fiscal Year-End Option/SAR Values
Value of
Number of Securities Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Option/SARs at
Fiscal Year End(#) Fiscal Year End($)
---------------------- ------------------
Name Exercisable Unexercisable(1) Exercisable Unexercisable(2)
---- --------------------------- ----------- ----------------
Gary N. Gieringer 27,137 108,551 $332,971 $1,331,921
Joseph W. Major 27,137 108,551 $332,971 $1,331,921
Richard A. Elko 16,282 65,130 $199,780 $ 799,145
(1) The options in this table have an exercise price of $8.98 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, 1997 was
$21.25.
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. Gieringer, 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.
171
<PAGE>
Directors' Fees
Non-employee directors are currently paid an annual retainer of
$16,000, plus an additional fee ranging from $2,000 to $6,000 to the chairman of
certain committees.
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 27,137 shares of common stock at an exercise
price of $8.98, which was the fair market value of shares on the effective date
of the grant, as adjusted for subsequent stock splits. Options become
exercisable in five (5) equal annual installments commencing one year from the
effective date of the grant.
Market Price of and Dividends on Patriot Common Stock and Related Shareholder
Matters
Patriot'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 October __,
1998, the total number of holders of record of Patriot's common stock was
approximately ____.
The following table sets forth the high and low bid and asked
information of Patriot's common stock to the extent available as reported by
NASDAQ. Such prices have been adjusted to reflect all stock dividends paid
during 1996 and 1997 and the first three quarters of 1998.
172
<PAGE>
<TABLE>
<CAPTION>
1996 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 7 5/64 6 13/16 7 7/32 7 5/64 1st 10 43/64 8 37/64 11 1/4 9
2nd 7 5/32 6 15/16 7 19/64 7 5/64 2nd 11 37/64 9 1/2 11 59/64 9 53/64
3rd 8 17/64 7 5/64 8 13/32 7 5/32 3rd 14 51/64 11 37/64 15 19/64 11 53/64
4th 9 3/32 8 1/16 9 15/64 8 17/64 4th 16 19/32 13 13/64 17 13 13/32
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------
Bid Asked
-------------- --------------
Qtr High Low High Low
- --- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st 16 1/2 13 13/32 16 51/64 13 51/64
2nd 17 13 13/64 17 1/4 13 19/32
3rd 16 11 3/4 16 1/4 12 1/8
</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 Patriot, the best approximate value at the time indicated.
Dividends on Patriot's common stock are generally payable in February,
May, August, and November.
Set forth below are the cash dividends paid by Patriot during 1996 and
1997 and the first three quarters of 1998. Such dividends have been adjusted to
reflect all stock dividends paid during such years.
173
<PAGE>
1998 1997 1996
---------------------------------------------
First Quarter $.060 $.055 $.010
Second Quarter $.068 $.058 $.034
Third Quarter $.070 $.062 $.045
Fourth Quarter $.063 $.054
For information on the ability of Patriot to pay dividends on the
Patriot Common Stock following execution of the Agreement, see "THE
CONSOLIDATION - Dividends." For certain limitations on the ability of Patriot
Bank to pay dividends to Patriot, see "DESCRIPTION OF Patriot - Business
Supervision and Regulation."
The Holding Company presently intends to pay an annual dividend of $.28
per share of Holding Company Common Stock. However, the timing and amount of
future dividends, if any, will depend upon earnings, capital levels, cash
requirements, the financial condition of the Holding Company and Patriot Bank,
applicable government regulations and policies and other factors deemed relevant
by the Holding Company's Board of Directors, including the amount of dividends
payable to the Holding Company by Patriot Bank.
The principal source of income and cash flow of the Holding Company,
including cash flow to pay dividends on the Holding Company Common Stock, is
dividends from Patriot Bank. Various federal and state laws, regulations and
policies limit the ability of Patriot Bank to pay dividends to the Holding
Company. For certain limitations on Patriot Bank's ability to pay dividends to
the Holding Company, see "DESCRIPTION OF Patriot - Business-Supervision and
Regulation" and Note 18 to the Financial Statements of Patriot.
DESCRIPTION OF FIRST LEHIGH
Business
First Lehigh was incorporated under Pennsylvania law in 1982 and is
registered as a bank holding company under the BHCA. First Lehigh provides
financial and managerial resources and services to, and coordinates and
evaluates the activities of, First Lehigh Bank and its subsidiaries. Through
First Lehigh Bank, First Lehigh provides a wide range of financial services,
principally to consumers and small- to medium-size businesses in the Lehigh
Valley area of Pennsylvania.
174
<PAGE>
As of June 30, 1998, First Lehigh had total assets of $111.5 million,
stockholders' equity of $14.4 million and total deposits of $95.1 million.
In recent years, the financial condition, results of operations and
business of First Lehigh and First Lehigh Bank have been adversely affected by
the adverse markets for real estate and economic conditions in its market areas
during the early 1990's. First Lehigh and First Lehigh Bank have also consented
to certain regulatory agreements that have established certain requirements,
including an increased regulatory capital requirement for First Lehigh Bank,
generally intended to enhance the financial condition and operations of First
Lehigh and First Lehigh Bank.
First Lehigh Bank experienced financial difficulties in the early
1990's that resulted from problems in loan administration and controls and
inadequacies in First Lehigh Bank's internal loan review functions. In order to
take steps to correct such problems, First Lehigh Bank has initiated numerous
actions.
First Lehigh Bank has improved its loan files by updating old loan
files with current cash flow analyses and by obtaining new appraisals on older
credits. Management of First Lehigh Bank reviews all loans having a principal
balance in excess of $100,000 on an annual basis to determine whether the
allowance for loan losses is adequate. First Lehigh Bank has also allocated
additional staff to conduct such loan reviews. First Lehigh Bank strengthened
underwriting policies by reducing collateral emphasis, by setting new minimums
for cash flow coverage of debt service and by increasing loan to value ratios.
First Lehigh Bank has significantly reduced its exposure to certain types of
lending, primarily loans to builder/developers, by curtailing lending to new
customers in the real estate development business and by reducing exposure to
existing customers in the real estate business.
It is First Lehigh Bank's policy for appraisals of properties held as
Foreclosed Assets to be periodically updated. First Lehigh Bank has improved the
appraisal process by pre-qualifying all appraisers from prepared lists of those
appraisers who are acceptable to First Lehigh Bank, with respect to which First
Lehigh Bank has been assisted by new certification requirements for appraisers
under state law.
First Lehigh Bank has improved its record keeping functions by adding
better controls, formalizing written policies and internal loan grading by
grading all loans over $100,000, assigning a risk rating to each loan and
adjusting loan loss reserves to match the internal loan grading.
175
<PAGE>
First Lehigh Bank, which was established in 1923, engages in a
full-service commercial banking business, including accepting time and demand
deposits, making secured and unsecured commercial and consumer loans, financing
commercial transactions and making construction and mortgage loans. Its deposits
are insured by the FDIC to the extent provided by law. First Lehigh Bank is a
Pennsylvania banking institution under the supervision of the Department and the
FDIC.
First Lehigh Bank maintains its principal executive offices in
Allentown, Lehigh County, Pennsylvania, with five banking offices located in
Pennsylvania. First Lehigh Bank's five branches are located in Walnutport and
Cherryville, Northampton County, Allentown and Bethlehem, Lehigh County. In
January 1997, First Lehigh Bank received permission from the Department to open
a branch in Allentown, Lehigh County. In October 1997, First Lehigh Bank sold
$6.82 million of deposits of its Quakertown Branch to Quakertown National Bank
and closed its Quakertown Branch.
Lending Activity
First Lehigh Bank offers consumer and commercial loans to customers and
prospective customers. Commercial loans are for working capital lines of credit,
term loans to purchase equipment, fixtures or furniture, commercial mortgages to
finance investment properties and commercial mortgages to acquire business-owner
occupied properties. First Lehigh Bank writes loans at variable interest rates
or at fixed interest rates with balloon maturities. Commercial lines of credit
are usually reviewed on an annual basis while term loans and mortgages usually
mature within a five-to-seven-year period. First Lehigh Bank makes commercial
loans to a wide variety of service, retail, distribution and manufacturing
companies. In the past First Lehigh Bank has had a concentration of loans to
real estate developers/speculators; however, First Lehigh Bank continues to
significantly reduce this concentration.
In general, First Lehigh Bank requires collateral on all commercial
loans in the form of real estate, either residential or commercial, cash,
marketable securities, accounts receivable, inventory, equipment or other fixed
assets. First Lehigh Bank generally does not make loans based primarily on the
accounts receivable or inventory of a business. In general, First Lehigh Bank
maintains a loan-to-value ratio of not greater than 75% (except higher amounts
would be available for the most creditworthy customers) on real estate taken as
collateral. First Lehigh Bank will accept a second or third lien position on
real estate assuming that the overall loan-to-value ratio is not greater than
75% and that prior liens are not excessive in relation to First Lehigh Bank's
loan.
176
<PAGE>
Commercial mortgages that have an adjustable rate feature are based
upon the base interest rate of First Lehigh Bank and, in general, do not have
interest rate caps or floors. First Lehigh Bank does not offer negative
amortization loans. As structured, adjustable rate commercial mortgages of First
Lehigh Bank are not anticipated to present increased prepayment risks, increased
default risks or, in periods of rising interest rates, increased risks that loan
rates may lag behind First Lehigh Bank's funding costs to a material extent.
In addition to commercial loans, First Lehigh Bank makes personal loans
to consumers and individuals. These loans include "bridge loans" to acquire a
residential property when the existing home remains unsold and installment loans
for the purchase of automobiles, debt consolidation or other personal purposes.
First Lehigh Bank makes residential first mortgage loans for the acquisition of
homes and refinancings of mortgages in First Lehigh Bank's primary market area.
First Lehigh Bank offers adjustable rate residential mortgages. In general,
First Lehigh Bank will lend up to 80% of the value of a borrower's home, less
any prior liens. The borrower must demonstrate the financial ability to service
the loan and must have an acceptable credit repayment history. Management of
First Lehigh Bank believes that these types of loans present no undue risks or
lending concentrations.
Secured loans up to $50,000 may be approved by the individual loan
officer. Loans in excess of $150,000 must be approved by the full Board of
Directors of First Lehigh Bank. Loans between $50,000 and $150,000 are approved
by the officers' loan committee and reported to the full Board of Directors of
First Lehigh Bank. All loans approved by the officers' loan committee are
reported to the full Board of Directors of First Lehigh Bank on a monthly basis.
Non-Banking Subsidiaries
First Lehigh has a 90% ownership interest in a corporation which is a
general partner of a limited partnership. This partnership owns real estate that
is leased to First Lehigh Bank. Also, First Lehigh has six other indirect
subsidiaries that are wholly owned by First Lehigh Bank. These subsidiaries
primarily own real estate that is leased to First Lehigh Bank.
Competition
First Lehigh Bank competes actively with other Lehigh Valley area
commercial banks, many of which have assets substantially greater than those of
First Lehigh Bank, as well as with major banking and financial institutions
177
<PAGE>
headquartered elsewhere. First Lehigh Bank is generally competitive with other
financial institutions in the service area with respect to interest rates paid
on time and savings deposits, service charges on deposit accounts and interest
rates charged on loans.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The following discussion encompasses the material
statutory and regulatory provisions that affect First Lehigh and First Lehigh
Bank. To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions.
Bank Holding Companies. First Lehigh is registered as a "bank holding
company" under the BHCA. As a bank holding company, First Lehigh is subject to
regulation by the FRB and is required to file with the FRB an annual report and
such additional information as the BHCA may require pursuant to the BHCA. The
FRB will also make examinations of First Lehigh and its subsidiaries. The FRB
has the authority to issue cease-and-desist orders against a bank holding
company and its non-bank subsidiaries if the FRB determines that their actions
constitute a serious risk to the financial safety, soundness or stability of the
bank holding company's subsidiary bank or a violation of law. The order may
require the bank holding company and its non-bank subsidiaries to cease the
activity or may require the bank holding company to divest itself of the
non-bank subsidiary or subsidiaries.
A bank holding company is prohibited under the BHCA from, among other
things, engaging in or acquiring direct or indirect control of more than 5% of
the voting shares of any company engaged in non-banking activities unless the
FRB, by order or regulation, has found such activities to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
In making determinations, the FRB considers whether the performance of these
activities by a bank holding company would offer benefits to the public that
outweigh possible adverse effects. Activities found permissible as activities
properly incident to banking include, among others: operating a mortgage,
finance, credit card or factoring company; performing certain data processing
operations; providing investment and financial advice; acting as insurance agent
or underwriter for certain types of credit-related insurance; leasing personal
property on a full-payout, nonoperating basis; and, subject to certain
limitations, providing certain discount brokerage services for customers.
178
<PAGE>
FRB approval may be required before First Lehigh or its non-bank
subsidiaries, if any, may begin to engage in any such activities and before any
such businesses may be acquired. The FRB is empowered to differentiate between
activities that are initiated by a bank holding company or a subsidiary and
activities commenced by acquisition of a going concern. Further, under the BHCA
and the FRB's regulations, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or provision of credit or provision of any property or
services. The so-called anti-tie-in provisions state generally that a bank may
not extend credit, lease or sell property or furnish any service to a customer
on the condition that the customer obtain or provide additional credit or
service from or to the bank, its bank holding company or any other subsidiary of
its bank holding company, or on the condition that the customer not obtain other
credit or service from a competitor of the bank, its bank holding company or any
subsidiary of its bank holding company.
The BHCA requires the prior approval of the FRB in any case where a
bank holding company proposes to acquire direct or indirect ownership or control
of more than 5% of any class of voting securities of any bank (unless it owns a
majority of such bank's voting shares) or to merge or consolidate with any other
bank holding company. The BHCA further provides that the FRB shall not approve
any such acquisition, merger or consolidation that would have anticompetitive
effects. The BHCA prohibits a bank holding company from acquiring a bank located
in another state unless such acquisition is specifically authorized by the
statutory laws of the state in which such bank is located. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act") provides that, among other things, substantially all state barriers to the
acquisition of out-of-state bank holding companies are eliminated.
Source of Strength Policy. Under the FRB's "source of strength" policy,
First Lehigh is expected to act as a source of financial strength to the Bank
and to commit resources to support First Lehigh Bank in circumstances in which
it might not do so absent such policy. The legality and scope of this policy of
the FRB is unclear in light of recent judicial precedent. Nevertheless, First
Lehigh has sought to act as a source of strength to First Lehigh Bank in recent
periods and will continue to seek to act as a source of strength to First Lehigh
Bank.
Banks. First Lehigh Bank is a Pennsylvania-chartered bank subject to
the supervision of, and is regularly examined by, the FDIC and the Department.
179
<PAGE>
As a state-chartered commercial bank, First Lehigh Bank is subject to
the applicable provisions of the Pennsylvania Banking Code and the regulations
of the Department adopted thereunder. First Lehigh Bank derives its lending and
investment powers from these laws, and is subject to examination from time to
time by the Department.
The Banking Code provides for extensive regulation of First Lehigh
Bank's business, including limitations on the amount of interest it may charge
on various loans, limitations on the amount of credit it may extend to any one
customer and limitations on its ownership of shares of stock in certain
entities, including banks and trust companies. The Banking Code prohibits any
person from acquiring more than 10% of any class of outstanding stock of any
bank (5% of any such class if the bank had net operating loss carryforwards, as
defined in the Code, in excess of 20% of the bank's total stockholders' equity),
without the prior approval by the Department. Exempted from prior approval by
the Department are acquisitions of shares of stock of a bank by such bank or a
person who controls the bank and acquisitions of shares of stock of a bank
through a merger or consolidation approved by the Department or the U.S.
Comptroller of the Currency. Approval of the Department is required for
amendments to the Articles of Incorporation of First Lehigh Bank. The Banking
Code regulates the establishment of branch offices and sets minimum capital
stock and surplus requirements. Under the Banking Code, banks are permitted to
operate branch offices statewide.
First Lehigh Bank is subject to certain restrictions under Pennsylvania
law relating to the declaration and payment of dividends. Dividends may be
declared and paid only out of accumulated net earnings (undivided profits).
Where surplus is less than 50% of the amount of First Lehigh Bank's capital
(defined as par value multiplied by the number of shares outstanding), no
dividend may be paid or declared without the prior approval of the Department
until surplus is equal to 50% of the total amount of capital. Where surplus is
equal to or greater than 50% but less than 100% of capital, until such time as
surplus equals capital, First Lehigh Bank must transfer at least 10% of its net
earnings to surplus prior to the declaration of a dividend. The Department has
the power to issue orders prohibiting the payment of dividends where such
payment is deemed to be an unsafe or unsound banking practice.
First Lehigh Bank is a member of the FDIC and, therefore, is subject to
additional regulation by that agency. The FDIC must approve the establishment of
new branch offices. Any insured bank that does not operate in accordance with,
or conform to, FDIC regulations, policies and directives may be sanctioned for
noncompliance. Dividend payments by a bank are
180
<PAGE>
generally prohibited where the bank is in default of its FDIC assessments.
Moreover, the FDIC has the power to issue orders prohibiting the payment of
dividends where such payment is deemed to be an unsafe or unsound banking
practice. First Lehigh Bank is subject to examinations from time to time by the
FDIC. First Lehigh Bank is not a member of the Federal Reserve System.
The FRB has adopted a regulation pursuant to the Change in Bank Control
Act of 1978, which, subject to certain exceptions, requires persons who intend
to acquire control of a bank or bank holding company to give at least 60 days'
prior written notice to the FRB. Control for the purpose of this regulation
exists when the acquiring party obtains voting control of at least 25% of any
class of a bank's voting securities. Subject to rebuttal, control is presumed to
exist when the acquiring party obtains voting control of at least 10% of any
class of a bank's voting securities if (i) securities issued by the bank are
registered pursuant to Section 12 of the Exchange Act, or (ii) following the
acquisition, there would be no holder of that class of the bank's voting
securities with holdings larger than that of the acquiring party. The Change in
Bank Control Act of 1978 and the regulations promulgated thereunder authorize
the FRB to disapprove any such acquisition on certain specified grounds.
Although the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") pertains primarily to thrift depository institutions
(such as savings and loan associations), certain of FIRREA's provisions may now
or in the future affect First Lehigh Bank. In particular, were First Lehigh Bank
in the future to seek to acquire and own a single thrift institution (although
First Lehigh Bank does not currently plan to do so), FIRREA would permit such
acquisition free from interstate banking laws. In addition, FIRREA imposes
certain "cross-guarantee" provisions which are applicable to First Lehigh Bank.
Under FIRREA, all commonly controlled insured depository institutions are liable
to the FDIC for any loss the FDIC incurs in connection with defaults of or
assistance granted to their affiliated depository institutions. Under such
"cross-guarantee" arrangements, each depository institution subsidiary could be
subject to claims for amounts the FDIC actually loses in connection with the
operation of or assistance granted to an affiliated depository institution in
the event it were ultimately to be taken over by the FDIC.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), financial institutions are subject to increased regulatory scrutiny
and must comply with certain operational, managerial and compensation standards.
Under FDICIA, institutions must be classified in one of five defined categories
(well capitalized, adequately capitalized,
181
<PAGE>
undercapitalized, significantly undercapitalized and critically
undercapitalized). In the event an institution's capital deteriorates to the
"undercapitalized" category or below, FDICIA prescribes an increasing amount of
regulatory intervention, including the institution by a bank of a capital
restoration plan, a performance guarantee of the plan by a parent institution
and the placement of a hold on increases in assets, number of branches or lines
of business. If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be imposed, including
restrictions on interest payable on accounts, dismissal of management and (in
critically undercapitalized situations) appointment of a receiver. Critically
undercapitalized institutions may not, beginning 60 days after becoming
critically undercapitalized, make any payment of principal or interest on their
subordinated debt. A well capitalized institution may be reclassified as
adequately capitalized, and an adequately capitalized institution or an
undercapitalized institution may be forced to comply with certain supervisory
actions as if it were in the next lower capital category (except that a
significantly undercapitalized institution may not be reclassified as critically
undercapitalized where the institution is deemed to be engaging in unsafe or
unsound practices or has received and not corrected a less than satisfactory
examination report rating for asset quality, management, earnings or liquidity).
All but well capitalized institutions are prohibited from accepting brokered
deposits without prior regulatory approval.
FDICIA also requires the regulators to prescribe certain non-capital
standards for safety and soundness relating generally to operations and
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not satisfy such standards.
Furthermore, FDICIA and its implementing regulations require all
insured depository institutions, except those with total assets of less than
$500 million, to conduct periodic audits and to establish audit committees of
their boards of directors. FDICIA also requires all depository institutions to
undergo an annual regulatory examination.
Restrictions on Transactions with Affiliates and Insiders. First Lehigh
Bank, as an FDIC-insured, state-chartered, nonmember bank, is also subject to
the restrictions of Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve
Act and Regulation O adopted by the FRB. Section 23A requires that loans or
extensions of credit to an affiliate, purchases of securities issued by an
affiliate, purchases of assets from an affiliate (except as may be exempted by
order or regulation), the acceptance of securities issued by an affiliate as
collateral and the issuance of a guarantee, acceptance or letter
182
<PAGE>
of credit on behalf of an affiliate (collectively, "covered transactions") be on
terms and conditions consistent with safe and sound banking practices, and
imposes quantitative restrictions on the amount of and collateralization
requirements on such transactions. Section 23B requires that all covered
transactions and certain other transactions, including the sale of securities or
other assets to an affiliate and the payment of money or the furnishing of
services to an affiliate, be on terms comparable to those prevailing for similar
transactions with nonaffiliates.
Sections 22(g) and 22(h) of the Federal Reserve Act impose similar
limitations on loans and extensions of credit from First Lehigh Bank to its and
First Lehigh's executive officers, directors and principal shareholders and any
of their related interests. The limitations restrict the terms and aggregate
amount of such transactions. Regulation O implements the provisions of Sections
22(g) and 22(h) and requires maintenance of records of such transactions by
First Lehigh Bank and regular reporting of such transactions by insiders. The
FDIC also requires First Lehigh Bank, upon request, to disclose publicly loans
and extensions of credit to insiders in excess of certain amounts.
Limitation on Activities of FDIC-Insured, State-Chartered Banks. The
FDI Act as amended by FDICIA, generally limits the activities and equity
investments of an FDIC-insured, state-chartered bank, such as First Lehigh Bank,
to those that are permissible for national banks, unless the FDIC has determined
that an activity would not pose a significant risk to the deposit insurance fund
and the bank is, and continues to be, in compliance with applicable capital
standards.
FDIC Insurance. The Deposit Insurance Funds Act of 1996 (the "Deposit
Act") was enacted on September 29, 1996. The Deposit Act changes payment terms
for First Lehigh Bank's payments into the BIF of the FDIC.
The law provides that BIF assessments must be set at a rate equal to
one-fifth of the SAIF rates for 1997, 1998 and 1999. After 1999, all
FDIC-insured institutions will pay the same risk-adjusted rates.
The FDIC may terminate the deposit insurance of any insured depository
institution, including First Lehigh Bank, if it determines after a hearing that
the institution or its Board of Directors has engaged or is engaging in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation or order of or any
condition imposed by the FDIC. It also may suspend deposit
183
<PAGE>
insurance temporarily during the hearing process for the permanent termination
of insurance if the institution has no tangible capital under applicable
regulations or capital guidelines.
Governmental Monetary Policy. Bank profitability is principally
dependent upon interest rate differentials. In general, the difference between
the interest paid by a bank on its deposits and other borrowings and the
interest received by a bank on loans and securities held in its investment
portfolio comprise the major portion of a bank's earnings. Thus, the earnings
and growth of First Lehigh Bank will be subject to the influence of general
economic conditions and the monetary and fiscal policies of the United States
Government and its agencies, including the Comptroller of the Currency, the FRB
and the FDIC. An important function of the FRB is to regulate the money supply,
credit conditions and interest rates in order to mitigate recessionary and
inflationary pressures. Among the instruments of monetary policy used to
implement these objectives are open market transactions in United States
Government securities and changes in reserve requirements against bank deposits.
These instruments are used in varying combinations to influence overall growth
and distribution of credit, bank loans, investment and deposits. Their use may
also affect interest rates charged on loans or paid on deposits.
The FRB requires all depository institutions, such as First Lehigh
Bank, to maintain reserves against their net transaction accounts (primarily
NOW, Super NOW and checking accounts) and non-personal time deposits. For 1998,
reserves of 3% must be maintained against net transaction accounts of $47.8
million or less, and reserves of 10% must be maintained against net transaction
accounts in excess of $47.8 million. No reserves are currently required against
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy applicable liquidity
requirements. Because required reserves must be maintained in the form of vault
cash or a noninterest-bearing account at a Federal Reserve Bank, however, the
effect of the reserve requirements is to reduce an institution's
interest-earning assets.
The monetary policies and regulations of the United States Government
and its agencies have had a significant effect on the operations of commercial
banks in the past and are expected to continue to do so in the future. The
effects of such policies upon the future business, earnings and growth of First
Lehigh Bank cannot be predicted.
184
<PAGE>
Interstate Banking Legislation. The Interstate Banking Act allows
federal regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger
provision. Therefore, the prior requirement that interstate acquisitions would
only be permitted when another state had "reciprocal" legislation that allowed
acquisitions by Pennsylvania-based bank holding companies has been eliminated.
The new Pennsylvania legislation, however, retained the requirement that an
acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Department.
As of June 30, 1998, First Lehigh and its subsidiaries had 56
employees, including 49 full-time employees. First Lehigh provides a variety of
employment benefits and considers its relationships with its employees to be
satisfactory.
Properties
The principal executive offices of First Lehigh and First Lehigh Bank
consist of 7,190 square feet of space in an office building located in
Allentown, Pennsylvania. First Lehigh Bank leases this office building from a
non-banking subsidiary of First Lehigh under a lease expiring in October 2010
providing for an average monthly rental payment of $22,920 and $23,339 for 1997
and 1998, respectively. The rent for the remaining years of the lease may be
adjusted based on increases in the Consumer Price Index or changes in the cost
of debt service to First Lehigh Bank as master lessee. First Lehigh Bank
subleases a portion of the building to a third party under a lease expiring in
December 2000 providing for monthly rental payments of $8,633. The sublessee has
the right to extend the lease for a five-year period at monthly rental payment
of $10,359. First Lehigh Bank has subleased another portion of the building to
two parties and has achieved substantial occupancy, which reduces its carrying
costs. The property is encumbered by a mortgage with an outstanding balance of
$2,103,000. First Lehigh Bank is a participant in this mortgage to the extent of
$1,051,000. Pursuant to the Agreement, First Lehigh has listed this property
for sale.
First Lehigh Bank leases the Walnutport branch building from a
subsidiary pursuant to an open-ended oral lease, which provide for monthly
rental payment of $2,000. The Cherryville branch building is owned directly by
First Lehigh Bank. There are no mortgages or other encumbrances on these
185
<PAGE>
properties. First Lehigh Bank leases the Allentown and Bethlehem branch
buildings from third parties. The Bethlehem lease will expire in August 1999 and
provides for monthly rental payments of $2,479. The Allentown lease will expire
in April 2000 and provides for monthly rental payments of $3,440. The branches
range in size from approximately 2,500 to 4,000 square feet with the average
size being approximately 3,300 square feet. The Quakertown property owned by a
subsidiary of First Lehigh Bank is listed for sale with a real estate agent.
First Lehigh considers its and First Lehigh Bank's offices, branches
and equipment to be modern, well-maintained and adequate for their operations.
Legal Proceedings
Summary of Regulatory Enforcement Actions to Which First Lehigh and
First Lehigh Bank are Subject
First Lehigh and First Lehigh Bank are subject to and have consented to
the following regulatory orders and agreements: (i) effective February 28, 1996,
First Lehigh and First Lehigh Bank entered into an Administrative Order (the
"Pennsylvania Order") with the Department, which replaced an earlier order
entered into in 1993; (ii) on April 29, 1996, First Lehigh Bank entered into a
Memorandum of Understanding (the "Memorandum of Understanding") with the FDIC,
which has replaced two cease and desist orders dating from October 1987 and June
1992; and (iii) in January 1991, First Lehigh consented to a written agreement
(the "Federal Reserve Agreement") with the Federal Reserve Bank of Philadelphia
(the "Federal Reserve Bank") and the Department.
The following is a discussion of the material terms and provisions of
the Pennsylvania Order, the Memorandum of Understanding and the Federal Reserve
Agreement.
The Pennsylvania Order
Capital Requirements and Dividend Restrictions
Under the terms of the Pennsylvania Order, First Lehigh Bank is
required to maintain, at all times, a minimum Tier I capital equal to or greater
than 6.5% of First Lehigh Bank's adjusted total assets, plus a fully-funded
loan loss reserve. First Lehigh Bank must provide the Department, with a
quarterly report detailing the maintenance of a 6.5% Tier I capital ratio
186
<PAGE>
and a fully-funded loan loss reserve. As of December 31, 1997, First Lehigh
Bank's Tier I capital ratio was 12.58%. First Lehigh Bank is required to
maintain a formal program to review the adequacy of First Lehigh Bank's
allowance for loan and lease losses. First Lehigh Bank may not declare or pay
any cash dividend without the prior written approval of the Department and the
Regional Director of the FDIC.
Credit Limitations and Restrictions
The following credit limitations and restrictions were imposed under
the Pennsylvania Order: (i) First Lehigh Bank may not grant, extend, renew,
alter or restructure any loan or other extension of credit without first
obtaining and analyzing all relevant credit information, as well as taking all
necessary steps to properly value and perfect its interests in collateral, where
applicable; (ii) First Lehigh Bank may not extend, directly or indirectly, any
new or additional credit (which for the purposes of the Pennsylvania Order,
includes the granting of renewals or extensions, or the capitalizing of accrued
interest) to, or for the benefit of, any borrower who is obligated in any manner
to First Lehigh Bank on any extension of credit, or portion thereof, which has
been charged off the books of First Lehigh Bank, in whole or in part, or to any
affiliate or related interest of, or other person or entity associated with, any
such borrower, as long as any portion of such extension of credit, whether or
not the portion was charged off, remains uncollected. The provisions of clause
(ii) above do not apply to the advance ment of funds by First Lehigh Bank for
the sole purpose of maintaining or protecting First Lehigh Bank's real estate
collateral if the failure to extend such credit would otherwise be substantially
detrimental to the best interests of First Lehigh Bank; (iii) First Lehigh Bank
may not extend, directly or indirectly, any new or additional credit to, or for
the benefit of, any borrower who is obligated in any manner to First Lehigh Bank
on any loan or other extension of credit that has been adversely classified, in
whole or in part, by the Department in the report of examination dated as of
June 30, 1995, or as a result of any subsequent examination of First Lehigh Bank
by the Department or the FDIC, or to any affiliate or related interest of, or
other person or entity associated with any such borrower ("classified
borrower"), as long as such loan or other extension of credit remains classified
or uncollected. This clause (iii) does not prohibit First Lehigh Bank from
renewing all or any part of an extension of credit to a classified borrower who
is not subject to the prohibitions of clause (ii), after collection in cash of
interest due on the entire extension of credit. The prohibitions of clause (iii)
do not apply to any extension of credit to a classified borrower who is not
subject to the prohibitions of clause (ii) above, if First Lehigh Bank's failure
to extend further credit to a classified borrower would be
187
<PAGE>
substantially detrimental to the best interests of the Bank, which determination
must be evidenced in writing in the applicable loan files; and (iv) First Lehigh
Bank must comply fully and at all times with the provisions of section 1415 of
the Banking Code of 1965, as amended, relating to loans to executive officers
and directors.
Performance Objectives
The following performance objectives were also stated in the
Pennsylvania Order: (i) First Lehigh Bank was required to reduce the level of
nonaccrual loans to total gross loans noted in the Report of Examination as of
June 30, 1995, to no more than 7% by August 26, 1996, and further reduce such
ratio to no more than 4% by November 24, 1996 and 2% by February 22, 1997; and
(ii) First Lehigh Bank was required to reduce the level of classified assets as
of June 30, 1995, to no more than 100% of Tier I capital and reserve for loan
and lease losses by August 26, 1996, and further reduce such ratio to 75% by
November 24, 1996 and 50% by February 22, 1997.
Reporting and Other Requirements
Other affirmative measures required to be taken by First Lehigh Bank
under the Pennsylvania Order are as follows: (i) First Lehigh Bank is required
to submit quarterly progress reports, no later than 30 days following the last
day of each calendar quarter; (ii) First Lehigh Bank must comply with all state
and federal laws that relate to the operation of First Lehigh Bank; (iii) First
Lehigh Bank must have and retain qualified management, must notify the Secretary
of Banking in writing of any resignations and/or terminations of any members of
its Board of Directors and/or any of its senior executive officers and must
obtain prior written approval from the Department for any new Directors or
senior executive officers; (iv) and First Lehigh Bank must maintain a written
investment policy in a form and manner acceptable to the Secretary of Banking,
as determined at subsequent examinations or visitations.
Status of Compliance with the Pennsylvania Order
First Lehigh believes that it and First Lehigh Bank are substantially
in compliance with the Pennsylvania Order. The Pennsylvania Order requires First
Lehigh Bank to reduce the level of nonaccrual loans to total gross loans noted
in the report of examination as of June 30, 1995, to no more than 2% by February
22, 1997. As of December 31, 1997, this ratio was 2.12%, and as of February 28,
1998, this ratio was 2.07%. Additionally, the Order requires First Lehigh Bank
to reduce the level of classified assets as of June 30, 1995, to no more than
50% of Tier I capital and the reserve for
188
<PAGE>
loan and lease losses by February 22, 1997, with further reductions thereafter.
As of December 31, 1997, this ratio was 23.68%, and as of February 28, 1998,
this ratio was 21.21%. The Pennsylvania Order also contains a provision
requiring First Lehigh Bank to maintain, at all times, a minimum Tier I capital
equal to or greater than 6.5% of First Lehigh Bank's adjusted total assets, plus
a fully-funded loan loss reserve. As of December 31, 1997 this ratio was 12.58%
and First Lehigh Bank's loan loss reserve was fully funded.
The Memorandum of Understanding
Capital Requirements and Dividend Restrictions
The Memorandum of Understanding requires First Lehigh Bank to maintain
its Tier I capital at an amount equal to or greater than 6.0% of First Lehigh
Bank's adjusted total assets. During the term of the Memorandum of
Understanding, First Lehigh Bank may not declare or pay dividends without the
prior written approval of the FDIC, which declarations and payments must be made
in accordance with applicable laws and regulations, and may be made only if
after such payments the ratio of Tier I capital to adjusted total assets will be
not less than 6.0%.
Credit Limitations and Restrictions
Under the terms of the Memorandum of Understanding, First Lehigh Bank
is prohibited from extending credit, either directly or indirectly, to or for
the benefit of any borrower who is obligated in any manner to First Lehigh Bank
on any extension of credit, or portion thereof, which has been charged off the
books of First Lehigh Bank. First Lehigh Bank is also prohibited from extending
credit to, or for the benefit of, any borrower who is obligated in any manner to
First Lehigh Bank on any extension of credit that has been classified, in whole
or in part, as a result of the examination of First Lehigh Bank as of June 30,
1995. These prohibitions will not apply if First Lehigh Bank determines that
failure to extend further credit would be substantially detrimental to the
institution.
Reporting and Other Requirements
First Lehigh Bank was required to charge-off assets classified as
"Loss" or "Doubtful" as of June 30, 1995 by May 9, 1996, and, within 30 days of
receipt of future FDIC Reports of Examination, charge-off assets classified
"Loss" or "Doubtful." First Lehigh Bank was required to submit a Classified
Asset Reduction Plan to the FDIC by May 29, 1996. Also, First Lehigh Bank was
189
<PAGE>
required (i) to adopt a method of computing the balance of its allowance for
loan and lease losses that gives consideration to the volume and composition of
the loan portfolio; (ii) to adopt and implement a written earnings plan and
(iii) to revise, adopt and implement written lending and investment policies in
a form and manner acceptable to the FDIC as determined at subsequent
examinations. First Lehigh Bank is required to review the adequacy of the loan
loss allowance quarterly and submit progress reports to the Regional Director of
the FDIC detailing the form, content and manner of any actions taken to secure
compliance with the Memorandum of Understanding on a quarterly basis. First
Lehigh Bank is in compliance with these requirements of the Memorandum of
Understanding.
Status of Compliance with the Memorandum of Understanding
First Lehigh Bank is currently in compliance with the requirements of
the Memorandum of Understanding. As of December 31, 1997 First Lehigh Bank's
Tier I capital ratio was 12.58%, which is greater than the 6.0% ratio required
by the Memorandum of Understanding. First Lehigh Bank has made necessary
charge-offs and revised and adopted its credit and investment policies. The
earnings improvement plan required has been prepared and submitted.
The Federal Reserve Agreement
Requirements and Dividend Restrictions
Under the Federal Reserve Agreement, First Lehigh is subject to the
following requirements: (i) the Board of Directors of First Lehigh was required
to establish a compliance committee consisting of three directors who were not
officers or principal shareholders of First Lehigh, which would be responsible
for monitoring and coordinating First Lehigh's adherence to the Federal Reserve
Agreement and submit quarterly progress reports to First Lehigh's Board of
Directors; (ii) First Lehigh is not permitted to declare or pay any dividends
without the prior written approval of the Federal Reserve Bank and the
Department; (iii) the Board of Directors of First Lehigh was required to conduct
a review of the functions and performance of the officers of First Lehigh and
First Lehigh Bank and forward its written findings and conclusions along with a
written description of proposed management or operational changes; (iv) First
Lehigh was required to submit a capital plan; (v) First Lehigh is not permitted
to redeem or repurchase its outstanding preferred and common stock without 30
days prior written notice to the Federal Reserve Bank and the Department; (vi)
First Lehigh may not incur any additional debt without the written approval of
the Federal Reserve Bank and
190
<PAGE>
the Department; (vii) First Lehigh was required to develop written procedures to
strengthen and maintain in a satisfactory manner its records and audit
functions; and (viii) First Lehigh and First Lehigh Bank are required to submit
quarterly reports to the Federal Reserve Bank and the Department.
Status of Compliance with the Federal Reserve Agreement
According to information received from the Federal Reserve Bank, First
Lehigh believes that it is currently in substantial compliance with the Federal
Reserve Agreement.
Consequences of Failure to Comply with the Regulatory Orders
Failure to comply with the Pennsylvania Order, the Memorandum of
Understanding, the Federal Reserve Agreement or any other regulatory agreement
or order, as well as future regulatory determinations, could result in
additional enforcement actions, restrictions on the operations of First Lehigh
and First Lehigh Bank and civil monetary penalties, among other things. For
example, if First Lehigh or First Lehigh Bank does not comply with any of the
terms of any order or agreement, the respective regulatory authority may
petition the appropriate court for an order to enforce the terms thereof. If
willful noncompliance were to continue, the Department could seek to take
possession of the business and property of First Lehigh Bank, subject to
providing notice and the holding of a hearing with the concurrence of the
Pennsylvania Attorney General, or the FDIC could seek to terminate the deposit
insurance of First Lehigh Bank.
Other Legal Proceedings
In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which First Lehigh was a limited partner. This
litigation was commenced in March 1992 in the court of Common Pleas of Lehigh
County, Pennsylvania. The partnership owned the Pond Road building which housed
the administrative offices of the Bank as well as a branch office. As part of
this litigation settlement, First Lehigh received $184,000 representing a
$47,000 general partnership interest and a cash settlement of $137,000. The
entire $184,000 has been included in other income. The general partnership
interest received as part of the settlement, combined with First Lehigh's
interest already owned, aggregated more than a 50% ownership interest as a
general partner. Since First Lehigh has a majority of the general partnership
interest, it is required under generally accepted accounting principles to
include in its 1997 financial statements all of the accounts of this previously
unconsolidated subsidiary.
191
<PAGE>
On June 23, 1995, the FDIC issued a Notice of Intention to Prohibit
from Further Participation and a Notice of Assessment of Civil Money Penalties,
Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing
(collectively, the "Notice") against James L. Leuthe, Chairman of the Board and
Chief Executive Officer of First Lehigh, and against Harold R. Marvin, Jr.,
formerly the President of First Lehigh and of First Lehigh Bank. Mr. Marvin
resigned as President and as director of both First Lehigh and First Lehigh Bank
in 1993. The FDIC and Mr. Marvin have reached and consummated a settlement in
this matter. The settlement does not assess any monetary damages or penalties
against Mr. Marvin and prohibits Mr. Marvin from participating in any manner in
the conduct of the affairs of any financial institution or organization without
the approval of the FDIC and the appropriate federal financial institution
regulatory agency.
The Notice directed to Mr. Leuthe initiated administrative proceedings
in which the FDIC, as a result of transactions occurring prior to 1993, is
seeking to prohibit Mr. Leuthe from further participation in the conduct of the
affairs of any bank insured by the FDIC or any other federally insured
depository institution, without the prior approval of the FDIC and the
appropriate federal financial institution regulatory agency. The allegations of
the FDIC are substantially the same as those which formed the basis of the
Stipulation of Settlement with and Administrative Order of the Department, which
First Lehigh and First Lehigh Bank entered into in March 1993. The FDIC also
sought to impose civil monetary penalties of $500,000 against Mr. Leuthe. Mr.
Leuthe has denied wrongdoing and is defending these actions.
Neither First Lehigh nor First Lehigh Bank is a party to these
proceedings.
On February 13, 1998, the administrative law judge of the FDIC issued a
decision recommending the prohibition of Mr. Leuthe from future participation in
the affairs of any federally insured financial institution and the assessment of
a civil monetary penalty in the sum of $250,000 against Mr. Leuthe. On March 13,
1998, Mr. Leuthe filed exceptions to the recommended decision with a supporting
Memorandum of Law and Request for Oral Argument. Those exceptions were heard by
the full FDIC Board of Directors. On June 26, 1998, the FDIC Board of Directors
affirmed the decision of the administrative law judge. Mr. Leuthe has appealed
the decision of the FDIC Board of Directors.
Under both First Lehigh's and First Lehigh Bank's Bylaws, First Lehigh
and First Lehigh Bank are required to indemnify Mr. Leuthe in connection with
the administrative proceedings brought against him by reason
192
<PAGE>
of the fact that he is or was an officer and director of First Lehigh Bank.
However, Mr. Leuthe is required to reimburse First Lehigh and/or First Lehigh
Bank for all expenses incurred or advanced by First Lehigh or First Lehigh Bank
in connection with such events if a court ultimately determines that the alleged
actions or omissions of Mr. Leuthe constituted willful misconduct or
recklessness. While it is difficult to determine the amount of indemnification
in this case, First Lehigh believes at this time that the amount will not
materially and adversely affect First Lehigh's financial condition. See
"Interests of Certain Persons in the Consolidation -- Standstill Agreement
Between Patriot and James L. Leuthe."
First Lehigh carries Director's and Officer's Liability Insurance
coverage, and it initially submitted a claim for reimbursement of its expenses
in connection with these proceedings. First Lehigh's insurance carrier responded
by disputing coverage, raising, among other things, the position that the
insurance carrier did not receive timely notice of the proceedings. First Lehigh
disputes the insurance carrier's position, and has recently instituted a suit
against the carrier in the Court of Common Pleas for Lehigh County to litigate
this coverage issue.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of Six Months Ended June 30, 1998 to Six Months Ended
June 30, 1997
Net Income
Net Income for the first six months of 1998 was $294,000 as compared to
$1.956 million for the same period in 1997. Net interest income after the
provision for loan losses declined $282,000, of which $197,000 was for interest
and fees on loans resulting from a decrease in the average loan balance of
$4.158 million during the first six months of 1998 as compared to the same
period 1997. The provision for loan losses increased $60,000 from $90,000 for
1997 to $150,000 for the first six months of 1998 based on management's
continued evaluation of the loan portfolio. Other income decreased $1.439
million for the first six months in 1998 as compared to the first six months of
1997 primarily due to lower trading securities gains of $1.342 million, lower
gains from the sale of foreclosed assets of $26,000 during the six months ended
June 30, 1998 and a nonrecurring sale of a real estate investment during the
corresponding period of 1997 of $183,000.
The profit performance for financial institutions is generally measured
by the Return on Average Assets ("ROA") and the Return on Average
193
<PAGE>
Equity ("ROE"). On an annualized basis First Lehigh Bank's ROA was 0.53% for the
first six months of 1998 as compared to 3.53% for the first six months of 1997.
The ROE was 4.04% for the first half of 1998 as compared to 30.62% in 1997.
Net Interest Income
Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities. The
primary sources used to fund these assets were deposits, borrowed funds and
capital.
During the first half of 1998, interest and fee income on loans
declined $197,000, or 6.66%, mostly attributable to decrease in the average loan
balance of $4.158 million, or 6.53%. During the first six months of 1998,
approximately $4.0 million in larger loans were repaid, a significant portion of
which were previously troubled credits. Also, First Lehigh Bank had
approximately $5.0 million of originations which were in process; $1.0 million
in loans were settled but not funded while $4.0 million in loans were pending
approval. The yield on loans decreased one basis point to 9.28% during the first
half of 1998 as compared to the same period in 1997.
Interest and dividend income on investment securities decreased
$150,000, or 15.63%, in the first half of 1998 compared to the same period in
1997, mostly due to $2.207 million reduction in average balance of investment
securities. The majority of this reduction in the 1998 period was an increase of
$2.140 million of debt securities which were prematurely called by the issuers
and the sale of $2.0 million of investment securities sold in order to fund the
deposit sale of the Quakertown branch in October 1997. First Lehigh continues to
reinvest its available cash in accordance with its investment policies and
purchased $5.999 million of debt securities in the first half of 1998 as
compared to no activity for the same period in 1997. Mitigating the above
decrease was an increase in the average balance of overnight funds of $4.886
million during the first six months of 1998 resulting in an increase of interest
earned of $131,000 as compared to the same period in 1997.
Interest expense of deposits declined $16,000, or 0.91%, in the first
six months of 1998 compared to the first six months of 1997. The average balance
for deposits declined $2.291 million during the first half of 1998 as compared
to the same period in 1997, primarily attributable to $6.82 million sale of
deposits of the Quakertown branch to the Quakertown National Bank on October 30,
1997, and mitigated in part by a new super NOW
194
<PAGE>
deposit account of a regional nonprofit organization which maintained an average
balance of $1.67 million for the first six months of 1998. The average balance
on savings deposits declined $222,000; however, average cost increased 4 basis
points attributable to special rates extended to the aforementioned deposit
account. The average balance on time deposits decreased $2.069 million; however,
there was an increase of 14 basis points which was consistent with regional
trends on time deposits.
For the first six months of 1998, as compared to the same period in
1997, the average yield on interest-earning assets declined 33 basis points,
while the cost of interest-bearing liabilities increased 11 basis points,
resulting in a net decrease in the interest rate spread of 44 basis points. The
net yield on earning assets declined 39 basis points during the first half of
1998 compared to the first half of 1997. Of the $222,000 decline in net interest
income in the first six months of 1998 as compared to the first half of 1997, a
decline of $106,000 was attributable to reduced volume in average balances and a
decline of $116,000 was due to interest rate changes.
Distribution of Interest-Earning Assets and Interest-Bearing
Liabilities:
Interest Rates and Interest Differential
The following tables set forth, for the periods indicated, information
regarding: (a) the average balances of asset and liability categories; (b) the
total dollar amount of interest income from interest from interest-earning
assets (including mortgage loan origination fees representing yield adjustments)
and the resulting average yields; (c) the total dollar amount of interest
expense on interest-bearing liabilities and resulting average costs; (d) net
interest income; (e) interest rate spread; (f) net interest margin on
interest-earning assets; and (g) the ratio of average interest-earning assets to
average interest-bearing liabilities. Average balances are based on daily
balances.
195
<PAGE>
<TABLE>
<CAPTION>
For the Six Months ended June 30,
----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
INTEREST-EARNING ASSETS:
Loans (1) $59,561 $2,763 9.28% $63,719 $2,960 9.29%
Investment securities 28,902 810 5.61 31,109 960 6.17
Bank time deposits 34 1 5.88 0 0 0.00
Overnight funds 6,576 177 5.39 1,690 46 5.44
------- ------ ------ ------- ------ ------
Total interest-earning assets $95,073 $3,751 7.89% $96,518 $3,966 8.22%
======= ------ ------ ======= ------ ------
INTEREST-BEARING LIABILITIES:
Saving deposits $35,616 $ 483 2.73% $35,838 $ 478 2.69%
Time deposits 47,588 1,268 5.37 49,657 1,289 5.23
Other borrowed funds 0 0 0.00 506 15 5.90
Long-term debt 1,176 49 8.29 245 11 8.93
------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities $84,380 $1,800 4.30% $86,246 $1,793 4.19%
======= ------ ------ ======= ------ ------
NET INTEREST INCOME $1,951 $2,173
====== ======
INTEREST RATE SPREAD 3.59% 4.03%
====== ======
NET INTEREST MARGIN ON
INTEREST-EARNING ASSETS(2) 4.11% 4.50%
====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO AVERAGE
INTEREST-BEARING
LIABILITIES 112.67% 111.91%
====== ======
</TABLE>
- ------------------
(1) For the purpose of these computations, nonaccrual loans are not
included in the daily average loan amounts outstanding.
(2) Annualized net interest income divided by average interest-earning
assets.
196
<PAGE>
<TABLE>
<CAPTION>
For the Six Months ended June 30,
-----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
INTEREST-EARNING ASSETS:
Loans (1) $63,719 $2,960 9.29% $57,029 $2,748 9.64%
Investment securities 31,109 960 6.17 30,330 911 6.01
Overnight funds 1,690 46 5.44 2,156 58 5.38
------- ------ ------ ------- ------ ------
Total interest-earning assets $96,518 $3,966 8.22% $89,515 $3,717 8.31%
======= ------ ------ ======= ------ ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,838 $ 478 2.69% $35,854 $ 496 2.78%
Time deposits 49,657 1,289 5.23 47,917 1,267 5.32
Other borrowed funds 506 15 5.90 608 17 5.53
Long-term debt 245 11 8.93 354 16 8.94
------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities $86,246 $1,793 4.19% $84,733 $1,796 4.26%
======= ------ ------ ======= ------ ------
NET INTEREST INCOME $2,173 $1,921
====== ======
INTEREST RATE SPREAD 4.03% 4.05%
====== ======
NET INTEREST MARGIN ON
INTEREST-EARNING ASSETS(2) 4.50% 4.29%
====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO AVERAGE
INTEREST-BEARING
LIABILITIES 111.91% 105.64%
====== ======
</TABLE>
- ------------------
(1) For the purpose of these computations, nonaccrual loans are not
included in the daily average loan amounts outstanding.
(2) Annualized net interest income divided by average interest-earning
assets.
197
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income
and Interest Expense:
The following table presents the extent to which net interest income
changed due to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities during the periods
indicated. Information provided in each category with respect to changes
attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rate multiplied by prior
volume) and the net change. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 1998 vs. 1997 June 30, 1997 vs. 1996
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $(237) $ 40 $(197) $322 $(110) $212
Investment securities (71) (79) (150) 34 15 49
Bank time deposits 1 0 1 0 0 0
Overnight funds 134 (3) 131 (13) 1 (12)
----- ----- ----- ---- ----- ----
Total interest-earning
assets $(173) $ (42) $(215) $343 $ (94) $249
----- ----- ----- ---- ----- ----
INTEREST-BEARING
LIABILITIES:
Savings deposits $ (7) $ 12 $ 5 $ 2 $ (20) $(18)
Time deposits (92) 71 (21) 63 (41) 22
Other borrowed funds (8) (7) (15) (5) 3 (2)
Long-term debt 40 (2) 38 (5) 0 (5)
----- ----- ----- ---- ----- ----
Total interest-bearing
liabilities $ (67) $ 74 $ 7 $ 55 $ (58) $ (3)
----- ----- ----- ---- ----- ----
CHANGE IN NET INTEREST
INCOME $(106) $(116) $(222) $288 $ (36) $252
===== ===== ===== ==== ===== ====
</TABLE>
Other Income
Total other income declined $1.439 million during the first half of
1998 as compared to the same period in 1997, mostly attributable to lower gains
of $1.342 million recognized on its trading securities portfolio. First Lehigh's
trading security portfolio, consisting mainly of bank holding company equities,
was $9.825 million at June 30, 1998. These trading securities are carried at
fair value and include the unrealized gains on losses in the statement of
operations. During the first half of 1998, the financial services sector has not
198
<PAGE>
continued the significant increases in its share prices as it had throughout
1997. Management will continue to closely monitor its investment portfolio to
position the portfolio against future fluctuations in the stock market. A
downturn in the overall market or financial services sector could result in
future trading securities losses.
Also contributing to the decrease were nonrecurring gains in 1997 on
the sale of real estate investments of $183,000. In December 1997, First Lehigh
received the controlling interest of a real estate partnership and was required
under generally accepted accounting principles to include all of the accounts
within its consolidated totals as compared to the previously utilized equity
method. Rental income received from this real estate partnership amounted to
$92,000 during the first half of 1998.
Other Expenses
Other expenses decreased $59,000, or 2.80%, during the first half of
1998 as compared to the same period in 1997. Salaries and benefits increased
$111,000, or 15.44%, in the first six months of 1998 as a result of the new
branch opening during the second quarter 1997 and additional staffing in branch
administration and the credit and collection departments. First Lehigh Bank's
FDIC insurance premiums declined $66,000, or 76.74%, the result of an
improvement in First Lehigh Bank's risk classification effective July 1, 1997.
In addition, foreclosed asset expenses decreased $58,000, or 35.80% during the
first six months of 1998 as compared to the same period in 1997 due to lower
operating costs.
Provision for Loan Losses
The allowance for loan losses was $1.819 million at June 30, 1998,
compared to $1.586 million at December 31, 1997. The allowance equaled 2.92% of
loans at June 30, 1998, as compared to 2.45% at December 31, 1997.
The adequacy of the allowance for loan losses is measured monthly by
an adequacy test. The adequacy test includes an evaluation of all loans which
have been classified (other loans especially mentioned, substandard, doubtful,
loss) by internal loan review, regulatory examination, monitoring of delinquency
and other pertinent factors. Allocations are determined by an in depth review of
each individual credit based on its potential future loss. The value of tangible
collateral and/or guarantees is determined as well as the borrower's ability and
willingness to repay. This value, as measured against the loan balance, is used
in determining the allowance allocation for collateral-dependent loans.
Additionally, First Lehigh Bank considers the suggested guidelines of its
199
<PAGE>
regulatory agencies when completing the analysis of the institution's allowance
for loan losses. The guidelines suggest the utilization of minimum percentages
of 15%, 50%, and 100% for use in determining general allowances for loans
classified as substandard, doubtful and loss, respectively. These requirements
are a measurement only and do not constitute a specific allowance placed against
any specifically identified loan. Total loans outstanding, net of substandard,
doubtful and loss are given an estimated allowance requirement to absorb future
losses. These loans are performing loans, well secured, or loans secured by
cash, cash equivalents or marketable securities. Although it would appear that
little or no allowance allocations would apply to these loans, allowances need
to be made based on historical charge-offs and possibility of error regarding
the perfection of First Lehigh Bank's interest and other issues unforeseen to
management. Additionally, First Lehigh Bank conducts an annual review of all
credits in excess of $100,000 or more, which demonstrates any recent delinquency
characteristics or other weaknesses, to assure the adequacy of the allowance and
provision for loan losses.
At monthly meetings, the Credit Administration Committee is presented
with the adequacy test of the allowance for loan losses that contains
information relative to both specific credits and the total portfolio in
general. The information is used to determine the adjustment needed for the
allowance to be properly stated. In establishing the adjustment required,
management considers a variety of factors, including, but not limited to,
general economic factors and potential losses from significant borrowers. First
Lehigh Bank continues to strengthen its underwriting process and internal loan
review process by implementing stringent analytical standards in the loan
approval and review procedures.
At June 30, 1998, based on management's evaluation as outlined above,
the amount charged to operating expense for the provision for loan losses was
$150,000 compared to $90,000 charged at June 30, 1997.
The following table sets forth a reconciliation of the allowance for
loan losses and illustrates the charge-offs and recoveries by major loan
category for the period ended June 30, 1998 (in thousands):
Beginning Balance, January 1, 1998..................... $1,586
------
Charge-offs:
Commercial, financial and agricultural............... --
Real estate - construction........................... 27
Real estate - mortgage............................... 130
Installment loans to individuals..................... 216
------
Total charge-offs...................................... 373
------
Recoveries:
Commercial, financial and agricultural............... 23
Real estate - construction........................... 99
Real estate - mortgage............................... 289
Installment loans to individuals..................... 45
------
Total recoveries....................................... 456
------
Net charge-offs........................................ (83)
------
Provision for loan losses.............................. 150
------
Ending Balance, June 30, 1998.......................... $1,819
======
Ratio of net recoveries to average loans outstanding... 0.14%
200
<PAGE>
Financial Condition
At June 30, 1998, First Lehigh's total assets were $111.50 million as
compared to $108.72 million at December 31, 1997, representing an increase of
$2.78 million, or 2.55%, which is mostly attributable to $2.92 million growth in
its deposits since December 31, 1997.
Loans
Net loans decreased $2.458 million, or 3.91%, from $62.820 million at
December 31, 1997 to $60.362 million at June 30, 1998. There were two key items
which attributed to the change in the loan portfolio for the first six months of
1998. First, First Lehigh Bank experienced payoffs of several large commercial
loans in the first half of 1998 including approximately $4.0 million of
previously identified problem loans. Second, mitigating the above decrease, at
June 30, 1998, approximately $5.0 million of new loan originations were pending;
$1.0 million were approved waiting for settlements, while $4.0 million were
pending final review and approvals.
Most categories of loans, as outlined below, declined at June 30, 1998
as compared to December 31, 1997, except for residential real estate loans which
increased $2.724 million during the first half of 1998, mostly attributable to
the purchase of $2.0 million of residential real estate loans in February 1998
and $2.1 million of home equity loan originations the result of a special
promotion by First Lehigh Bank in the second quarter of 1998. The change in the
composition of loans at June 30, 1998 as compared to December 31, 1997 is as
follows: Real estate construction loans declined $1.624 million, or 35.15%;
Commercial real estate decreased $976,000, or 5.28%; Consumer loans declined
$2.205 million or 16.25%; Commercial loans declined $144,000, or 4.22%; while
Residential real estate loans increased $2.724 million, or 11.20%.
201
<PAGE>
The following table sets forth the maturity and repricing schedule of
the loan portfolio at June 30, 1998 (in thousands):
After one After
Within but within five Non-
One year five years years Accrual Total
-------- ---------- ------ ------- -----
Maturity Schedule:
Commercial.............. $ 1,342 $ 998 $ 608 $ -- $ 2,948
Real estate-
construction.......... 1,536 687 773 -- 2,996
Real estate-mortgage.... 5,666 19,059 17,536 -- 42,261
Consumer, net........... 1,283 8,660 1,334 -- 11,277
Nonaccrual loans........ -- -- -- 2,699 2,699
------- ------- ------- ------ -------
Total..................... $ 9,827 $29,404 $20,251 $2,699 $62,181
======= ======= ======= ====== =======
Repricing Schedule(1):
Fixed rate loans........ $11,418 $27,556 $ 6,871 $ -- $45,845
Floating rate loans..... 13,607 30 -- -- 13,637
Nonaccrual loans........ -- -- -- 2,699 2,699
------- ------- ------- ------ -------
Total..................... $25,025 $27,586 $ 6,871 $2,699 $62,181
======= ======= ======= ====== =======
- ------------------
(1) Data for repricing schedule by loan categories is not available.
Investment Securities
The primary objectives of First Lehigh Bank's investment strategy are
to provide and maintain a level of liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk and to promote
the First Lehigh Bank's lending activities.
The largest sector of the investment portfolio remains securities of
U.S. Government agencies and corporations, which totaled $19.45 million
(amortized costs) at June 30, 1998, or 80.30% of total investment securities.
Included in the above are $2.078 million mortgage-backed products, mostly
consisting of collateralized mortgage obligations ("CMO") and real estate
mortgage investment conduits ("REMIC").
The available-for-sale securities increased $2.32 million, or 12.95%,
from $17.91 million at December 31, 1997 to $20.23 million at June 30, 1998.
First Lehigh, after evaluating its cash position, purchased $6.0 million of
bonds throughout the first six months of 1998. The increase in the cash position
was generated by operations, in particular an increase in deposits, as well as
$3.48 million of bonds which were prematurely called by their issuers.
At the present time, First Lehigh does not engage in the use of
derivative investment products as a mean to hedge the risks in its investment,
loan or deposit portfolio.
202
<PAGE>
Deposits
First Lehigh Bank continues to offer a variety of deposit accounts
with a range of interest rates and term options. The deposits consist primarily
of checking, savings, super now, money market and certificates of deposit.
Fluctuation within its deposit base are influenced by competition, economic
conditions and changes in current rates.
Total deposits increased $2.918 million from $92.146 million at
December 31, 1997 to $95.064 million at June 30, 1998, primarily the result of a
new super now account received from a regional nonprofit organization. During
the second quarter of 1998, the average balance maintained by this depositor
amounted to $2.110 million. Management believes that this depositor will
maintain an average balance of at least $1.5 million throughout the second half
of 1998. At June 30, 1998, noninterest-bearing deposits decreased $715,000,
while interest-bearing deposits increased $3.633 million as compared to December
31, 1997. As a percentage of total deposits, savings, club accounts and
interest-bearing demand deposits represented 38.72% at June 30, 1998 as compared
to 36.43% at December 31, 1997.
The following table sets forth maturities of time deposits of $100,000
or more at June 30, 1998 and December 31, 1997.
June 30, December 31,
1998 1997
-------- ------------
(in thousands)
Three months or less.................... $1,471 $2,124
Over three months through twelve months. 4,386 2,641
Over one year through five years........ 1,801 2,528
Over five years......................... 0 0
------ ------
TOTAL................................. $7,658 $7,293
====== ======
Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consist of impaired and other loans, with
respect to which the principal, interest, or both, is 90 or more days past due,
and loans that have been placed on nonaccrual. When loans are placed on
nonaccrual status, income from the current period is reversed from current
earnings and interest from prior periods is charged to the allowance for loan
losses. Similarly, consumer loans are considered nonaccrual if the collateral is
insufficient to recover the principal or are charged-off if deemed to be
uncollectible. Foreclosed assets consist of assets acquired through foreclosure
or real estate acquired by acceptance of a deed in lieu of foreclosure.
203
<PAGE>
The following table represents nonperforming assets of First Lehigh
Bank at June 30, 1998 and December 31, 1997.
June 30, December 31,
1998 1997
-------- ------------
(in thousands)
Impaired loans......................... $2,699 $3,364
Other loans past due 90 days or more... 870 421
------ ------
Total nonperforming loans............ 3,569 3,785
Foreclosed assets held for sale........ 2,193 1,597
------ ------
Total nonperforming assets........... $5,762 $5,382
====== ======
Nonperforming loans as a percentage of
loans (net of unearned interest)..... 5.74% 5.88%
Nonperforming assets as a percentage
of assets............................ 5.17% 4.95%
Impaired loans declined $665,000 at June 30, 1998 as compared to
December 31, 1997. The net decrease resulted in reductions as follows: $936,000,
was transferred from impaired loans to foreclosed assets, $519,000 was repaid by
the borrowers, $342,000 has returned to accrual status and $132,000 was charged
off to the provision. Impaired loans were increased by $1.264 million of loans
that were transferred to nonaccrual status. The transfer of impaired loans to
foreclosed assets is expected to continue for several quarters as management
actively pursues the litigation/foreclosure actions towards completion in
anticipation of the ultimate disposal of these nonperforming assets. Real estate
loans represent $2.285 million of the impaired loan total, while loans to
consumer and commercial borrowers represent the balance of $90,000 and $324,000,
respectively.
Loans past due 90 days or more increased $449,000 from $421,000 at
December 31, 1997 to $870,000 at June 30, 1998. All delinquent loans are
reviewed by management on a weekly basis with regard to legal proceedings and
collection efforts. Of the delinquent loans, 92.41% are secured by real estate,
5.40% are loans to commercial borrowers and a small fraction are loans to
consumers.
Foreclosed assets held for sale increased $596,000 from $1.597 million
at December 31, 1997 to $2.193 million at June 30, 1998 primarily the result of
the transfer of $936,000 from impaired loans.
The following table sets forth the total of commercial and investment
properties at June 30, 1998, all of which are currently in litigation and/or
foreclosure.
204
<PAGE>
Commercial/Investment Properties:
Impaired and over 90 days......................... $1,322,236
Foreclosed assets held for sale................... 684,799
----------
Total........................................... $2,007,035
==========
The following table sets forth the total of residential properties to
be foreclosed upon and liquidated at June 30, 1998, including properties
currently owned that are listed for sale. All litigation and foreclosure
proceedings in the nonaccrual and over 90-day category are being actively
pursued.
Residential:
Impaired and over 90 days......................... $1,138,251
Foreclosed assets held for sale................... 1,164,553
----------
Total........................................... $2,302,804
==========
The following table sets forth the total of land developments and
building lots to be foreclosed upon and liquidated at June 30, 1998, including
land developments and building lots currently owned and listed for sale. All
litigation and foreclosure proceedings in the nonaccrual and over 90-day
category are being actively pursued.
Land Development/Building Lots:
Impaired and over 90 days......................... $ 344,779
Foreclosed assets held for sale................... 273,323
----------
Total........................................... $ 618,102
==========
The following table sets forth the total of loans in litigation that
are not secured by real estate at June 30, 1998.
Secured by Other Than Real Estate:
Impaired and over 90 days......................... $ 485,468
==========
The following table sets forth the total of assets that are listed as
nonperforming, but which are under agreements that provide a yield at or in
excess of current market rates at June 30, 1998.
Performing/Nonperforming Assets:
Impaired and over 90 days......................... $ 218,350
==========
The following table sets forth the total of assets that are under
agreement or are being paid off with the settlement dates to take place in the
third quarter of 1998.
Assets Under Agreement or Payoffs:
Impaired & over 90 days........................... $ 60,000
Foreclosed assets held for sale................... 70,525
----------
Total........................................... $ 130,525
==========
205
<PAGE>
At June 30, 1998, there were no loans, other than those classified as
nonperforming loans, where known information about borrowers' possible credit
problems causes management to have serious doubts as to the borrowers' ability
to comply with the current loan repayment terms.
For 1998, management has established a goal to dispose of $4.0 million
of gross classified and/or nonperforming assets. As of June 30, 1998, the gross
reduction in classified and/or nonperforming assets was $583,000; however,
during the first half ended June 30, 1998, $768,000 was added to classified
and/or nonperforming assets, resulting in a net increase in classified and/or
nonperforming assets of $185,000. Management continues to evaluate all available
options to liquidate these assets and remains committed to moving toward its
1998 goal. Although, the net change during the first half of 1998 adversely
affected management's goals for 1998, First Lehigh Bank remains in compliance at
June 30, 1998 with the regulatory requirements pertaining to classified assets
as discussed in "DESCRIPTION OF FIRST LEHIGH -- Business," and committed to
reach its goal for the balance of 1998.
Liquidity and Funds Management
Liquidity management is intended to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
servicing payments, investment commitments, commercial and consumer loan demand
and ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short and
long-term borrowings and repurchase agreements. While regular loan payments are
a predictable source of funds, the sale of loans and investment securities,
deposit flows and loan prepayments are significantly influenced by general
economic conditions, the level of interest rates and competition. First Lehigh
manages its balance sheet to provide adequate liquidity based on various
economic, interest rate and competitive assumptions and in light of
profitability measures.
At June 30, 1998, First Lehigh maintained $8.022 million in cash and
cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, First Lehigh had $20.227 million in securities
available-for-sale representing 18.14% of total assets at June 30, 1998.
First Lehigh considers its primary source of liquidity to be its core
deposit base and continues to promote the acquisition of deposits through its
branch offices. At June 30, 1998, approximately 78.39% of First Lehigh's assets
were funded by core deposits acquired within its market area. An additional
206
<PAGE>
12.92% of the assets were funded by First Lehigh's equity. These two components
provide a substantial and stable source of funds.
First Lehigh paid cash dividends to the holders of the Senior
Preferred Stock and Series A Preferred Stock during the first half of 1998 and
1997. There were no dividends paid to its common stockholders for the period in
1998 or 1997.
Date
Class of Stock Paid Current Arrears Total
-------------- ---- ------- ------- -----
June 30, 1998
- -------------
Senior Preferred February 4, 1998 $56,272 --- $ 56,272
Senior Preferred May 5, 1998 $56,085 --- $ 56,085
Series A Preferred February 4, 1998 $55,498 $110,995 $166,493
Series A Preferred May 5, 1998 $55,498 $110,995 $166,493
June 30, 1997
- -------------
Senior Preferred May 12, 1997 $56,273 $237,542 $293,815
Series A Preferred --- --- --- None
In addition, on June 23, 1998, First Lehigh's Board of Directors
declared a dividend on both the Senior Preferred Stock and Series A Preferred
Stock to holders of record on June 23, 1998. This declaration included an
aggregate of $55,889 on its Senior Preferred Stock for the second quarter of
1998 and an aggregate of $166,493 on its Series A Preferred Stock, which
represented the second quarter 1998 dividend of $55,498 and $110,995 for
dividend in arrears. After payment of the $166,493, $721,471 remains in arrears
on the Series A Preferred Stock as of June 30, 1998.
First Lehigh Bank is subject to certain restrictions under
Pennsylvania law relating to the declaration and payment of dividends. Dividends
may be declared and paid only out of accumulated net earnings (undivided
profits). Where surplus is less than 50% of the amount of First Lehigh Bank's
capital (defined as par value multiplied by the number of shares outstanding),
no dividend may be paid or declared without the prior approval of the Department
until surplus is equal to 50% of the total amount of capital. Where surplus is
equal to or greater than 50% but less than 100% of capital, until such time as
surplus equals capital, First Lehigh Bank must transfer at least 10% of its net
earnings to surplus prior to the declaration of a dividend. The Department has
the power to issue orders prohibiting the payment of dividends where such
payment is deemed to be an unsafe or unsound banking practice. First Lehigh's
ability to pay dividends is also impacted by the regulatory orders and
agreements to which it and First Lehigh Bank are subject.
207
<PAGE>
For the six months ended June 30, 1998, cash and cash equivalents
decreased $59,000 as compared to $625,000 increase for the same period in 1997.
Changes in cash are measured by changes in three major classifications of cash
flows known as operating, investing and financing activities.
Cash flows from operating activities decreased $1.590 million during
the six months ended June 30, 1998, mostly attributable to a decrease in net
income of $1.662 million and increased net activity in trading securities of
$2.254 million.
Cash flows from investing activities declined $865,000 during the six
months ended June 30, 1998 as compared to the same period in 1997. During the
first six months of 1998, $5.999 million of securities were purchased to replace
$3.766 million of debt instruments that were prematurely called by the issuers,
an increase of $2.140 million over the same period in 1997. Also, net proceeds
from sale of foreclosed assets decreased $777,000 during the first half of 1998
as compared to the same period in 1997 as management continues to evaluate all
possibilities in liquidating the foreclosed asset portfolio. Finally, mitigating
these decreases was an increase in proceeds received from loans as First Lehigh
Bank experienced several large loan repayments in the first half of 1998.
Cash flows from financing activities increased $2.396 million during
the first half of 1998, due to an increase in deposits of $2.918 million
primarily the result of a new account for a not-for-profit organization which
has maintained an average balance of $1.666 million in 1998. Also in 1997, First
Lehigh repaid a repurchase agreement which was outstanding at December 31, 1996
in the amount of $1.150 million.
Interest Rate Sensitivity
Interest rate sensitivity management involves the matching of maturity
and repricing dates of interest-earning assets and interest-bearing liabilities
to help insure First Lehigh's earnings against extreme fluctuations in interest
rates.
The effect of interest rate changes on First Lehigh's assets and
liabilities may be analyzed by monitoring First Lehigh's interest rate
sensitivity gap ("GAP"). An asset or liability is said to be interest-rate
sensitive within a specific time period if it will mature or reprice within a
given time period. The interest rate sensitivity GAP is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A positive GAP (asset
208
<PAGE>
sensitive) indicates that more assets reprice during a given period compared to
liabilities, while a negative GAP (liability sensitive) has the opposite effect.
First Lehigh's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This is accomplished through the measurement of the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. The goal
of maintaining a reasonable balance between interest rate sensitive assets and
interest rate sensitive liabilities is accomplished through First Lehigh's
asset/liability management program.
At June 30, 1998 First Lehigh Bank has a negative interest sensitive
GAP of $7.478 million, or 7.52% of total interest-earning assets which have been
adjusted for the depreciation on securities available-for-sale. The effect of
this GAP position provides a negative mismatch of assets and liabilities which
exposes First Lehigh Bank to interest rate risk during a period of rising
interest rates. A significant item contributing to the short-term negative gap
is $17.07 million of interest-bearing demand and saving deposits which do not
have contractual maturities and are not as rate sensitive as time deposits.
However, the ability to reprice still exists, and, therefore, they have been
included in the shortest repricing time frame.
The following table sets forth First Lehigh's interest sensitivity GAP
position at June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------------------------------
6 Months
6 Months to 1 1 to 2 2 to 5 Over 5
or less Year Years Years Years Total
-------- ------- ------ ------ ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1) $16,553 $ 688 $ 1,124 $ 1,756 $19,880 $40,001
Loans (2) 17,667 7,358 7,619 19,967 6,871 59,482
------- -------- -------- ------- ------- -------
TOTAL $34,220 $ 8,046 $ 8,743 $21,723 $26,751 $99,483
------- -------- -------- ------- ------- -------
Interest-bearing liabilities:
Demand-interest bearing $15,838 $ -- $ -- $ -- $ -- $15,838
Savings and clubs(3) 1,228 716 1,432 4,296 13,295 20,967
Time 12,369 19,436 11,537 4,374 -- 47,716
Long-term debt 132 25 53 927 -- 1,137
------- -------- -------- ------- ------- -------
TOTAL $29,567 $ 20,177 $ 13,022 $ 9,597 $13,295 $85,658
------- -------- -------- ------- ------- -------
GAP $ 4,653 $(12,131) $ (4,279) $12,126 $13,456 $13,825
------- -------- -------- ------- ------- -------
Cumulative GAP $ 4,653 $ (7,478) $(11,757) $ 369 $13,825 $13,825
======= ======== ======== ======= ======= =======
</TABLE>
209
<PAGE>
- ------------------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $5.866 million investment in overnight funds.
(2) Includes estimated scheduled maturities of the fixed rate loans ignoring any
potential rollover at maturity. Excludes nonaccrual loans of $2.699 million.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
Capital
The adequacy of First Lehigh's capital is reviewed on an ongoing basis
with reference to size, composition and quality of First Lehigh's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
As required by the federal banking regulatory authorities, new
guidelines have been adopted to measure capital adequacy. Under the guidelines,
certain minimum ratios are required for core capital and total capital as a
percentage of risk-weighted assets and other off balance sheet instruments. For
First Lehigh Bank, Tier I capital consists of shareholders' equity less
intangible assets, and Tier II capital includes the allowable portion of the
allowance for loan losses, currently limited to 1.25% of risk-weighted assets.
The following table sets forth the capital ratios of First Lehigh Bank
as of June 30, 1998 and 1997.
June 30,
Regulatory ---------------
Requirements 1998 1997
------------ ------ ------
Leverage ratio:
Tier I (core capital) ratio... 4.0%* 12.39% 11.73%
Risk-based capital ratios:
Tier I capital/risk-weighted.. 4.0% 18.14% 16.06%
Tier I and Tier II capital/
Risk-weighted assets........ 8.0% 19.40% 17.32%
- ------------------
* The Department requires First Lehigh Bank to maintain a minimum Tier I
leverage capital ratio of at least 6.5% under the terms of the Administrative
Order.
210
<PAGE>
The Deposit Act
The Deposit Act was enacted on September 29, 1996. The Deposit Act
changes payment terms for First Lehigh Bank's payments into the BIF.
Beginning in 1997, BIF assessments were used for the first time to
help pay off the $780 million annual interest payments on $8 billion in "FICO"
bonds issued in the 1980s as part of the federal government's savings and loan
bailout. The law provides that BIF assessments must be set at a rate equal to
one-fifth of the SAIF rates for 1997, 1998 and 1999. After 1999, all
FDIC-insured institutions will pay the same risk-adjusted rates.
First Lehigh Bank estimates that its annual cost for BIF assessment
will be less than $13,000 based on June 30, 1998 deposit levels and based on
available rate information. However, the FDIC may increase the projected rates
at any time.
1997 Compared to 1996
Overview
First Lehigh's total assets were $108.72 million at December 31, 1997,
a decrease of $1.56 million from December 31, 1996. The decrease in assets
resulted from the liquidation of a portion of available-for-sale securities to
fund the sale of $6.82 million of deposits of the Quakertown branch to the
Quakertown National Bank on October 30, 1997, an overall decline in nonconsumer
loan originations along with several large commercial loan repayments during the
fourth quarter of 1997.
First Lehigh reported net income of $3.003 million, or $0.86 per
share, diluted, for 1997 as compared to $2.145 million, or $0.63 per share,
diluted, for 1996. The majority of the net income was attributable to trading
securities gains in 1997, while the litigation Settlement, as defined below, was
the primary source in 1996. Without the income from security gains and
litigation settlements, First Lehigh would have incurred a loss from operations
of $894,000 in 1997, as compared to a loss of $833,000 for 1996.
During 1997, First Lehigh Bank continued its program to dispose of
foreclosed assets by aggressively marketing its foreclosed asset portfolio and
reinvesting the proceeds from these sales into performing assets. The foreclosed
assets held for sale decreased $3.253 million from $4.850 million in 1996 to
$1.597 million in 1997.
211
<PAGE>
In January 1996, First Lehigh Bank instituted a new consumer loan
program, pursuant to which it signed agreements with several auto dealers to
originate their dealer paper. First Lehigh Bank incurred unanticipated losses
during the second half of 1997, when First Lehigh Bank, based on its internal
investigation, charged off $484,000 of installment loans. First Lehigh Bank
provided an additional provision of $440,000 to its allowance for loan loss
reserve to facilitate this charge off. Furthermore, First Lehigh Bank's
management concluded after conducting a detailed analysis of the indirect paper
portfolio that its net yield before these losses was comparable to other
consumer loan portfolios with lesser degree of risk. Therefore, effective August
1997, First Lehigh Bank discontinued this auto dealer program. First Lehigh Bank
has added two additional employees within its credit and collection department
to continually monitor and work this segment of this loan portfolio to provide
against future losses.
In December 1997, a settlement was reached involving ongoing
litigation centered on a partnership, in which First Lehigh was a limited
partner. The partnership owned the Pond Road building which housed the
administrative offices of First Lehigh Bank as well as a branch office. As part
of this litigation settlement, First Lehigh received $184,000 representing a
$47,000 general partnership interest and a cash settlement of $137,000. The
entire $184,000 has been included in other income. The general partnership
interest received as part of the settlement, combined with First Lehigh's
interest already owned, aggregated more than a 50% ownership interest as a
general partner. Since First Lehigh Bank has a majority of the general
partnership interests, it is required under generally accepted accounting
principles to include in its 1997 financial statements all of the accounts of
this previously unconsolidated subsidiary.
Comparison Between 1997 and 1996 Net Income
Net Income
In 1997, First Lehigh recorded net income of $3,003,000 as compared to
$2,145,000 in 1996, an increase of $858,000, or 40%. Net interest income
increased $65,000 in 1997 mostly due to an increase in the average balance of
the loan portfolio mitigated by an increase in interest paid on long-term debt.
The 1997 provision for loan losses amounted to $1,003,000 as compared to a
$367,000 credit recorded for 1996, primarily the result of a large recovery
recorded during the second quarter of 1996. Other income increased $1,737,000
during 1997 as compared to 1996 due to several significant items: gains
recognized on investment securities increased $2.274 million consistent with the
performance of the stock market; a gain of $478,000 was recognized on the sale
212
<PAGE>
of deposits of its Quakertown branch on October 30, 1997; an increase in rental
income of $190,000 due to inclusion of a previously unconsolidated subsidiary
and the above mitigated by a decrease in settlements from litigations of
$1,355,000 as compared to 1996, when First Lehigh recorded $1,539,000 as other
income resulting from a litigation settlement (the "Settlement") with respect to
a large impaired loan. Other expenses declined $426,000, or 7.34% in 1997 as
compared to 1996, mostly as the result of decreased legal expenses pertaining to
FDIC litigation involving First Lehigh's Chairman and CEO and First Lehigh
Bank's former president.
On an annualized basis First Lehigh Bank's ROA was 2.70% in 1997 as
compared to 1.99% in 1996. The ROE was 22.32% in 1997 compared to 18.89% in
1996.
Net Interest Income
Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities,
while the primary sources used to fund these assets were deposits, borrowed
funds and capital.
During 1997, interest and fee income on loans increased $151,000, or
2.66%, compared to 1996, mostly due to increased average loan balance of $3.52
million, or 5.91%. The average loan balance has continually grown since the
first quarter of 1996 when First Lehigh Bank instituted a consumer loan program
initiative which was directed to the local auto dealers and their credit-worthy
customers. Also, the yield on the loan portfolio decreased 29 basis points to
9.23% during 1997 as compared to 9.52% in 1996. The decrease in the interest
yield was partly attributable to the reversal of $135,000 as compared to $76,000
being recovered in 1996, of accrued interest income on problem loans. First
Lehigh's policy is to discontinue accruing interest when it appears that the
borrower may be unable to meet payments as they become due.
Interest expense on deposits remained static at approximately $3.58
million for 1997 and 1996. The average balance of deposits decreased $809,000 in
1997 as compared to 1996. The average balance of time deposits increased $1.40
million in 1997 while the average cost fluctuated slightly downward from 5.29%
to 5.26%, while the average balance of savings deposits decreased $593,000 with
a 1997 average cost down 9 basis points from 2.77% to 2.68%. The overall
decrease in deposits was the result of the sale of the deposits of the
Quakertown Branch on October 30, 1997 offset by several deposit promotions
213
<PAGE>
throughout the year aimed at increasing First Lehigh Bank's market share, in
particular its time deposits.
Interest expense on long-term debt increased $78,000 in 1997 as
compared to 1996, directly attributable to inclusion in the 1997 consolidated
financial statements of a mortgage and related interest expense of a previously
unconsolidated subsidiary.
For 1997, the average yield on interest-earning assets decreased 15
basis points, while the cost of interest-bearing liabilities increased 1 basis
point, resulting in a net decrease in the interest rate spread of 16 basis
points. The net yield on interest-earning assets also decreased 8 basis points.
Distribution of Interest-Earning Assets and Interest-Bearing Liabilities:
Interest Rates and Interest Differential
The following tables set forth, for the periods indicated, information
regarding: (a) the average balances of asset and liability categories; (b) the
total dollar amount of interest income from interest-earning assets (including
mortgage loan origination fees representing yield adjustments) and the resulting
average yields; (c) the total dollar amount of interest expense on
interest-bearing liabilities and resulting average costs; (d) net interest
income; (e) interest rate spread; (f) net interest margin on interest-earning
assets; and (g) the ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances are based on daily balances.
214
<PAGE>
<TABLE>
<CAPTION>
For the Year ended December 31,
(in thousands)
-------------------------------------------------------------------
1997 1996
--------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans(1) $63,109 $5,824 9.23% $59,585 $5,673 9.52%
Investment securities 29,867 1,814 6.07% 31,162 1,901 6.10%
Overnight funds 3,044 168 5.52% 1,969 105 5.33%
------- ------ ---- ------- ------ ----
Total interest-earning assets $96,020 $7,806 8.13% $92,716 $7,679 8.28%
======= ====== ==== ======= ====== ====
INTEREST-BEARING
LIABILITIES:
Saving deposits 35,495 $ 950 2.68% $36,088 $1,001 2.77%
Time deposits 49,944 2,629 5.26% 48,542 2,570 5.29%
Other borrowed funds 404 26 6.44% 849 50 5.89%
Long-term debt 1,291 108 8.37% 327 30 9.17%
------ ------ ---- ------- ------ ----
Total interest-bearing $87,134 $3,713 4.26% $85,806 $3,651 4.25%
liabilities ======= ------ ---- ======= ------ ----
NET INTEREST INCOME $4,093 $4,028
====== ======
INTEREST RATE SPREAD 3.87% 4.03%
==== ====
NET INTEREST MARGIN ON
INTEREST-EARNING ASSETS(2) 4.26% 4.34%
==== ====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO AVERAGE
INTEREST-BEARING LIABILITIES 110.20% 108.05%
====== ======
</TABLE>
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
215
<PAGE>
<TABLE>
<CAPTION>
For the Year ended December 31,
(in thousands)
-------------------------------------------------------------------
1996 1995
--------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans(1) $59,585 $5,673 9.52% $53,276 $5,131 9.63%
Investment securities 31,162 1,901 6.10% 29,880 1,746 5.84%
Overnight funds 1,969 105 5.33% 2,741 161 5.87%
------- ------ ---- ------- ------ ----
Total interest-earning assets $92,716 $7,679 8.28% $85,897 $7,038 8.19%
======= ====== ==== ======= ====== ====
INTEREST-BEARING
LIABILITIES:
Saving deposits $36,088 $1,001 2.77% $35,781 $1,068 2.98%
Time deposits 48,542 2,570 5.29% 46,652 2,402 5.15%
Other borrowed funds 849 50 5.89% 629 42 6.68%
Long-term debt 327 30 9.17% 436 42 9.63%
------- ------ ---- ------- ------ ----
Total interest-bearing $85,806 $3,651 4.25% $83,498 $3,554 4.26%
liabilities ======= ------ ---- ======= ------ ----
NET INTEREST INCOME $4,028 $3,484
====== ======
INTEREST RATE SPREAD 4.03% 3.93%
==== ====
NET INTEREST MARGIN ON
INTEREST-EARNING ASSETS(2) 4.34% 4.06%
==== ====
RATIO OF AVERAGE INTEREST-EARNING
ASSETS TO AVERAGE INTEREST-BEARING
LIABILITIES 108.05% 102.87%
====== ======
</TABLE>
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
216
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income and
Interest Expense:
The following table presents the extent to which net interest income
changed due to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities during the periods
indicated. Information provided in each category with respect to changes
attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rate multiplied by prior
volume) and the net change. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
vs. 1996 Increase vs. 1995 Increase
(Decrease) Due to (Decrease) Due to
-----------------------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
INTEREST-EARNING ASSETS: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans $337 $(186) $151 $598 $(56) $542
Investment securities (69) (18) (87) 77 78 155
Overnight funds 59 4 63 (42) (14) (56)
---- ----- ---- ---- ---- ----
Total interest-earning assets $327 $(200) $127 $633 $ 8 $641
---- ----- ---- ---- ---- ----
INTEREST-BEARING LIABILITIES:
Savings deposits $(22) $ (29) $(51) $ 5 $(72) $(67)
Time deposits 71 (12) 59 65 103 168
Other borrowed funds (28) 4 (24) 13 (5) 8
Long-term debt 81 (3) 78 (11) (1) (12)
---- ----- ---- ---- ---- ----
Total interest-bearing liabilities $102 $ (40) $ 62 $ 72 $ 25 $ 97
---- ----- ---- ---- ---- ----
CHANGE IN NET INTEREST INCOME $225 $(160) $ 65 $561 $(17) $544
==== ===== ==== ==== ==== ====
</TABLE>
Other Income
Total other income increased $1.737 million, or 48.89%, during 1997 as
compared to 1996. There were several major factors which contributed to changes
in the composition of other income between 1997 and 1996. First, the most
significant part of other income were gains recognized by First Lehigh on its
security portfolio represented $3.713 million and $1.439 million in 1997 and
1996, respectively. Of the $2.274 million increase in investment securities
gains, $1.483 million represented realized gains on equity securities.
Throughout 1997, management has evaluated its trading securities portfolio and
has sold those securities which represented significant appreciation. First
Lehigh's trading securities are carried at fair value and consist principally of
common stock of bank holding companies. Management continues to closely monitor
its investment portfolio to position the portfolio against future fluctuations
in the stock market. A downturn in the overall market could result in future
trading securities losses.
In 1997, First Lehigh recorded a gain of $478,000 representing the
premium on the deposits of its Quakertown Branch which were sold on October 30,
1997 to Quakertown National Bank. Also, on December 19, 1997, First Lehigh
acquired, through a litigation settlement, the controlling interest of a real
estate partnership. Prior to this settlement, First Lehigh was allowed to record
the yearly activity under the equity method. However once the controlling
interest was acquired late in 1997, First Lehigh was required to include all of
the activity of the partnership in its consolidated financial statements. As
such the $190,000 increase in rental income was the result of inclusion of this
previously unconsolidated partnership as required for 1997. In 1997, First
Lehigh also sold certain parcels of real estate it previously acquired at a gain
of $183,000, an increase, as compared to 1996, of $130,000. Mitigating all of
217
<PAGE>
the above increases was a decrease in litigation settlements of $1.355 million.
In 1996, First Lehigh received $1.539 million from the Settlement of an impaired
loan which had been in protracted litigation, while in 1997 it received $184,000
attributable to settlement of litigation, pertaining to a real estate investment
partnership as mentioned above.
Other Expenses
Overall, other expenses declined $426,000, or 7.34%, during 1997 as
compared to 1996. The most significant change was attributable to a $506,000, or
21.83%, decrease in expenses classified as other. Within this category, legal
and professional fees, mostly attributable to litigation by the FDIC against
First Lehigh's former Chairman and Chief Executive Officer and First Lehigh
Bank's former president, decreased $612,000. Since a significant portion of the
casework and expenses for this litigation was performed in 1996, minimal
expenses were incurred in 1997. First Lehigh's former Chairman is now appealing
the FDIC's ruling in this matter. Other decreases included a rate reduction of
$50,000, or 32.05%, of the FDIC insurance premium due to an improvement in First
Lehigh Bank's risk classification from a 1C to a 1B and the decrease in
amortization expense of $64,000 due to certain assets which were previously
acquired in a branch purchase were fully amortized in 1996. The above decreases
were mitigated by increases in 1997 of $148,000, or 9.97%, in salaries and
employees benefits due to additional employees being hired for the new Pond Road
branch and two employees added to the credit and collection department, computer
service fee of $80,000 due to outsourcing First Lehigh Bank's check processing
and data entry operations and increased advertising and promotional expenses of
$63,000 incurred for an advertising campaign aimed at promoting First Lehigh
Bank within the local community.
Provision for Loan Losses
The allowance for loan losses was $1.586 million at December 31, 1997,
compared to $1.624 million at December 31, 1996. The allowance equaled 2.51% of
loans at December 31, 1997, as compared to 2.46% at December 31, 1996.
The adequacy of the allowance for loan losses is measured monthly by
an adequacy test. The adequacy test includes an evaluation of all loans which
have been classified (other loans especially mentioned, substandard, doubtful,
loss) by internal loan review, regulatory examination, monitoring of delinquency
and other pertinent factors. Allocations are determined by an in-depth review of
218
<PAGE>
each individual credit based on its potential future loss. The value of tangible
collateral and/or guarantees is determined as well as the borrower's ability and
willingness to repay. This value, as measured against the loan balance, is used
in determining the allowance allocation for collateral-dependent loans.
Additionally, First Lehigh Bank considers the suggested guidelines of its
regulatory agencies when completing the analysis of the institution's allowance
for loan losses. The guidelines suggest the utilization of minimum percentages
of 15%, 50%, and 100% for use in determining general allowances for loans
classified as substandard, doubtful and loss, respectively. These requirements
are a measurement only and do not constitute a specific allowance placed against
any specifically identified loan. Total loans outstanding, net of substandard,
doubtful, and loss are given an estimated allowance requirement to absorb future
losses. These loans are performing loans, well secured, or loans secured by
cash, cash equivalents or marketable securities. Although it would appear that
little or no allowance allocations would apply to these loans, allowances need
to be made based on historical charge-offs and possibility of human error
regarding the perfection of First Lehigh Bank's interest and other issues
unforeseen to management. Additionally, First Lehigh Bank conducts an annual
review of all credits in excess of $100,000 or more, which demonstrates any
recent delinquency characteristics or other weaknesses, to assure the adequacy
of the allowance and provision for loan losses.
At monthly meetings, the Credit Administration Committee is presented
with the adequacy test of the allowance for loan losses that contains
information relative to both specific credits and the total portfolio in
general. The information is used to determine the adjustment needed for the
allowance to be properly stated. In establishing the adjustment required,
management considers a variety of factors, including, but not limited to,
general economic factors and potential losses from significant borrowers. First
Lehigh Bank continues to strengthen its underwriting process and internal loan
review process by implementing stringent analytical standards in the loan
approval and review procedures.
At December 31, 1997, the amount charged to operating expense for the
provision for loan losses was $1,003,000 as compared to a credit provision for
loan losses of $367,000 in 1996. The increase in the 1997 provision was based on
management's evaluation of the loan portfolio as outlined above and also above
average losses incurred within the auto segment of the installment loan
portfolio. In August 1997, management discontinued the loan program to local
auto dealers to reduce First Lehigh Bank's exposure for additional losses. The
credit provision in 1996 was mostly due to a significant recovery as part of the
219
<PAGE>
litigation Settlement on an impaired loan which occurred in the second quarter
of 1996.
The following table sets forth a reconciliation of the
allowance for loan losses and illustrates the charge-offs and recoveries by
major loan category for the period ended December 31, 1997 (in thousands):
Beginning Balance, January 1, 1997....................... $1,624
------
Charge-offs:
Commercial, financial and agricultural................ 105
Real estate - construction............................ 37
Real estate - mortgage................................ 327
Installment loans to individuals...................... 703
Lease financing....................................... --
------
Total charge-offs........................................ 1,172
------
Recoveries:
Commercial, financial and agricultural.............. 24
Real estate - construction............................ --
Real estate - mortgage................................ 31
Installment loans to individuals...................... 43
Lease financing....................................... 33
------
Total recoveries......................................... 131
------
Net charge-offs.......................................... 1,041
------
Provision for loan losses................................ 1,003
------
Ending Balance, December 31, 1997........................ $1,586
======
Ratio of net charge-offs to
average loans outstanding............................. 1.65%
Financial Condition
At December 31, 1997, First Lehigh's total assets were $108.72
million, a decrease of $1.56 million from December 31, 1996. This decrease is
mostly attributable to $6.82 million sale of deposits of the Quakertown branch
to The Quakertown National Bank on October 30, 1997. The above decrease was
mitigated by several promotions First Lehigh Bank had aimed at increasing its
market share of time deposits and also the opening of its new Pond Road Branch
office which accounted for $1.934 million of deposits as of December 31, 1997.
Loans
Net loans decreased $1.554 million, from $64.374 million at December
31, 1996 to $62.82 million at December 31, 1997. A portion of the decrease was
partly attributable to a $1.051 million loan which was eliminated in
consolidation and represented First Lehigh Bank's portion of a loan to a
partnership which was previously not required to be included in the consolidated
financial statements.
220
<PAGE>
All categories of loans, as outlined below, declined at December 31,
1997 as compared to December 31, 1996 with the exception of consumer loans which
increased 15.35%. The nonconsumer loan portfolio experienced flat originations
throughout 1997. Also, in the fourth quarter of 1997, First Lehigh Bank
experienced an increase in principal paydowns of $2.864 million as compared to
the same period in 1996. Management believes that the decrease in originations
and an increase in commercial principal paydowns is a regional trend and is
evaluating ways to increase consumer interest. The average balance of the
consumer loan portfolio increased $5.856 million from $11.645 million in 1996 to
$17.501 million in 1997. As mentioned previously, First Lehigh Bank began an
affiliation with several local auto dealers in January 1996 aimed at increasing
its installment loan portfolio. In August 1997, management evaluated the
performance of this segment of the installment loan portfolio and decided that
the overall rate of return on this segment can be achieved in other areas with
less risk and therefore terminated this arrangement effective August 1997. The
change in the composition of loans at December 31, 1997 as compared to December
31, 1996 is as follows: Real estate construction loans declined $300,000, or
6.10%; Residential real estate loans decreased $1.498 million, or 5.80%;
Commercial real estate loans decreased $1.357 million, or 6.84%; Commercial
loans declined $243,000, or 6.64%; and Consumer loans increased $1.806 million,
or 15.35%.
The following table sets forth the maturity and repricing schedule of
the loan portfolio at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
After one After
Within but within five Non-
One year five years years Accrual Total
-------- ---------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Maturity Schedule:
Commercial $ 1,570 $ 1,110 $ 614 $ -- $ 3,294
Real estate-
construction 3,223 669 183 -- 4,075
Real estate-mortgage 8,658 20,322 11,211 -- 40,191
Consumer, net 1,092 11,269 1,121 -- 13,482
Nonaccrual loans -- -- -- 3,364 3,364
------- -------- ------- ------ -------
Total $14,543 $ 33,370 $13,129 $3,364 $64,406
======= ======== ======= ====== =======
Repricing Schedule (1):
Fixed rate loans $14,446 $ 28,834 $ 3,724 $ -- $47,004
Floating rate loans 12,972 695 371 -- 14,038
Nonaccrual loans -- -- -- 3,364 3,364
------- -------- ------- ------ -------
Total $27,418 $ 29,529 $ 4,095 $3,364 $64,406
------- -------- ------- ------ -------
</TABLE>
(1) Data for repricing schedule by loan categories is not available.
221
<PAGE>
Investment Securities
The primary objectives of First Lehigh's investment strategy are to
provide and maintain a level of liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk and to promote
First Lehigh Bank's lending activities.
The largest sector of the investment portfolio remains securities of
U.S. Government agencies and corporations which total $19.14 million (amortized
cost) at December 31, 1997, or 71.07% of total investment securities. Included
in the above are $2.331 million mortgage-backed products, mostly consisting of
collateralized mortgage obligations ("CMO") and real estate mortgage investment
conduits ("REMIC"). Twice a year, stress tests are conducted on these CMOs and
REMICs, all of which were passed recently.
The available-for-sale securities decreased $4.014 million, or 18.31%,
from $21.922 million in 1996 to $17.908 million in 1997. Approximately $2.0
million of this decrease was the result of securities sold to fund the sale of
the Quakertown Deposits. Also, in 1997 First Lehigh had other sales and
maturities of $2.0 million of debt equities which it currently has maintained in
a cash position as it evaluates future loan and investment opportunities.
At the present time, First Lehigh does not engage in the use of
derivatives investment products as a means to hedge the risks in its investment,
loan or deposit portfolios.
Deposits and Other Borrowed Funds
First Lehigh Bank continues to offer a variety of deposit accounts
with a range of interest rates and term options. The deposits consist primarily
of checking, savings, super now, money market and certificates of deposit.
Fluctuations within its deposit base are influenced by competition, economic
conditions and changes in current rates. Total deposits at December 31, 1997
declined $3.793 million from $95.939 million at December 31, 1996 to $92.146
222
<PAGE>
million at December 31, 1997, attributable mostly to $6.82 million sale of
deposits of the Quakertown branch to the Quakertown National Bank on October 30,
1997. Throughout 1997, First Lehigh Bank offered several promotions aimed at
increasing its deposits. In addition to the Pond Road Branch increase, First
Lehigh Bank had significant increases in its time deposits at both its
Walnutport and Bethlehem branches of $1.131 million and $541,000, respectively.
First Lehigh Bank opened its new Pond Road branch on May 23, 1997, and through
several promotions had approximately $1.93 million of deposits at December 31,
1997. Overall, the change in the composition of the deposits was an increase in
noninterest-bearing deposits of $1.172 million, while interest-bearing deposits
declined $4.965 million consisting of savings, club accounts and
interest-bearing demand deposits declining $1.779 and time deposits declining
$3.186 million. As a percentage of total deposits, savings, club accounts and
interest-bearing demand deposits represented 36.43% at December 31, 1997 as
compared to 36.85% at December 31, 1996. There were no brokered deposits within
First Lehigh's deposit base at December 31, 1997.
Other borrowed funds, at December 31, 1996 consisted of a $1.20
million repurchase agreement with a brokerage company which was utilized to fund
First Lehigh's asset growth, in particular, its installment loan portfolio.
During 1997, the outstanding amount was repaid in its entirety.
The following table sets forth maturities of time deposits of $100,000
or more at December 31, 1997 and 1996.
December 31,
------------
1997 1996
---- ----
(in thousands)
Three months or less....................... $2,124 $2,800
Over three months through
twelve months....................... 2,641 3,312
Over one year through
five years.......................... 2,528 1,640
Over five years............................ 0 0
------ ------
TOTAL..................................... $7,293 $7,752
====== =======
Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consist of impaired and other loans where the
principal, interest, or both, is 90 or more days past due and loans that have
been placed on nonaccrual. When loans are placed on nonaccrual status, income
from the current period is reversed from current earnings and interest from
prior periods is charged to the allowance for loan losses. Similarly, consumer
loans are considered nonaccrual if the collateral is insufficient to recover the
principal or are charged-off if deemed to be uncollectible. Foreclosed assets
consist of assets acquired through foreclosure or real estate acquired by
acceptance of a deed in lieu of foreclosure.
223
<PAGE>
The following table represents nonperforming assets of First Lehigh at
December 31, 1997 and 1996.
December 31,
------------
1997 1996
---- ----
(in thousands)
Impaired loans................................ $ 3,364 $ 2,052
Other loans past due 90 days or more.......... 421 609
------- -------
Total nonperforming loans................. 3,785 2,661
Foreclosed assets held for sale............... 1,597 4,850
------- -------
Total nonperforming assets................ $ 5,382 $ 7,511
======= =======
Nonperforming loans as a percentage
of loans (net of unearned interest)....... 5.88% 4.03%
Nonperforming assets as a percentage of
assets..................................... 4.95% 6.81%
Impaired loans increased $1.312 million at December 31, 1997 as
compared to December 31, 1996. Throughout the year, as problems are identified
within the loan portfolio, those credits which are considered beyond the point
of restructure are immediately transferred to the impaired loan category for
further evaluation. The loans within this category are normally involved in
litigation and/or foreclosure. Once a credit is considered impaired, management
will try as quickly as possible to remove it from the impaired classification
through liquidation, by transferring it to foreclosed assets. During 1997,
$2.832 million of loans were transferred to impaired loans as part of
managements internal evaluation. Of that amount, $539,000 was transferred to
foreclosed assets, $239,000 was charged off to the allowance for loan losses,
$181,000 was paid off and $559,000 was returned to accrual status, while the
balance of $1.312 million represented the overall increase. Real estate loans
represent $3.152 million of impaired loans and loans to consumer and commercial
borrowers represent $90,000 and $122,000, respectively.
Loans past due 90 days or more decreased $188,000 from $609,000 at
December 31, 1996 to $421,000 at December 31, 1997. All delinquent loans are
reviewed by management on a weekly basis with regard to legal proceedings and
collection efforts. Of the delinquent loans, 80.29% are secured by real estate,
11.40% are loans to consumers and 8.31% are to commercial borrowers.
224
<PAGE>
Foreclosed assets held for sale declined $3.253 million, or 67.07%, at
December 31, 1997 compared to December 31, 1996. In 1996, as part of its
operating plan, and in order to comply with the Administrative Order of the
Department, the Written Agreement of the Federal Reserve Bank and several
previous orders which have been replaced by the Memorandum of Understanding,
First Lehigh set aggressive goals to begin to liquidate its nonperforming
assets. As part of this plan, management set a goal to dispose of $4.50 million
of classified assets. At December 31, 1997, the gross reduction in classified
assets was $4.622 million, however, after inclusion of the activity for 1997,
the overall net reduction was $2.998 million. Although management did not meet
its overall goal for 1997, First Lehigh remains in substantial compliance with
the regulatory requirements as they pertain to classified assets.
The following table sets forth the total of commercial and investment
properties at December 31, 1997, all of which are currently in litigation and/or
foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days $1,857,967
Foreclosed assets held for sale 301,908
----------
Total $2,159,875
==========
The following table sets forth the total of residential properties to
be foreclosed upon and liquidated at December 31, 1997, including properties
currently owned that are listed for sale. All litigation and foreclosure
proceedings in the nonaccrual and over 90-day category are being actively
pursued.
Residential:
Impaired and over 90 days $ 683,270
Foreclosed assets held for sale 345,779
----------
Total $1,029,049
==========
The following table sets forth the total of land developments and
building lots to be foreclosed upon and liquidated at December 31, 1997,
including land developments and building lots currently owned and listed for
sale. All litigation and foreclosure proceedings in the nonaccrual and over
90-day category are being actively pursued.
Land Development/Building Lots:
Impaired and over 90 days $ 416,661
Foreclosed assets held for sale 491,573
----------
Total $ 908,234
==========
The following table sets forth the total of loans in litigation that
are not secured by real estate at December 31, 1997.
225
<PAGE>
Secured by Other Than Real Estate:
Impaired and over 90 days $ 547,728
==========
The following table sets forth the total of assets that are listed as
nonperforming, but which are under agreements that provide a yield at or in
excess of current market rates at December 31, 1997.
Performing/Nonperforming Assets:
Impaired and over 90 days $ 279,085
==========
The following table sets forth the total of assets that are under
agreement or are being paid off with the settlement dates to take place in the
first quarter of 1998.
Assets Under Agreement:
Foreclosed assets held for sale $ 457,686
==========
At December 31, 1997, there were no loans, other than those classified
as nonperforming loans, where known information about borrowers' possible credit
problems causes management to have serious doubts as to their ability to comply
with the current loan repayment terms.
Liquidity and Funds Management
Liquidity management is intended to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
servicing payments, investment commitments, commercial and consumer loan demand
and ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short and
long-term borrowings and repurchase agreements. While regular loan payments are
a predictable source of funds, the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates and competition. First Lehigh
manages its balance sheet to prove adequate liquidity based on various economic,
interest rate and competitive assumptions and in light of profitability
measures.
At December 31, 1997, First Lehigh maintained $7.47 million in cash
and cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, First Lehigh had $17.908 million in securities
available-for-sale representing 16.47% of total assets at December 31, 1997.
First Lehigh considers its primary source of liquidity to be its core
deposit base and continues to promote the acquisition of deposits through its
branch offices. At December 31, 1997, approximately 78.14% of First Lehigh's
226
<PAGE>
assets were funded by core deposits acquired within its market area. An
additional 13.29% of the assets were funded by First Lehigh's equity. These two
components provide a substantial and stable source of funds.
First Lehigh paid the following cash dividends to its Preferred
stockholders during 1997. There were no dividends paid to its common
stockholders in 1997.
<TABLE>
<CAPTION>
Date
Class of Stock Paid Current Arrears Total
- -------------- ---- ------- ------- -----
<S> <C> <C> <C> <C>
Senior Preferred May 12, 1997 $56,273 $237,542 $293,815
August 12, 1997 56,272 --- 56,272
November 1997 56,272 --- 56,272
Series A Preferred August 12, 1997 $55,498 $110,995 $166,493
November 1997 55,498 110,995 166,493
</TABLE>
In addition, on December 17, 1997, First Lehigh's Board of Directors
declared a dividend on both the Senior and Series A Preferred to stockholders of
record as of December 17, 1997. This declaration included $56,272 due to its
Senior Preferred stockholders for the fourth quarter of 1997 and $166,493 due to
the Series A Preferred stockholders, which represented the fourth quarter 1997
of $55,498 and $110,995 dividend in arrears. After payment of the $166,493,
$943,464 remains in arrears on the Series A Preferred stock through December 31,
1997.
First Lehigh Bank is subject to certain restrictions under
Pennsylvania law relating to the declaration and payment of dividends. Dividends
may be declared and paid only out of accumulated net earnings (undivided
profits). Where surplus is less than 50% of the amount of the Bank's capital
(defined as par value multiplied by the number of shares outstanding), no
dividend may be paid or declared without the prior approval of the Department
until surplus is equal to 50% of the total amount of capital. Where surplus is
equal to or greater than 50% but less than 100% of capital, until such time as
surplus equals capital, First Lehigh Bank must transfer at least 10% of its net
earnings to surplus prior to the declaration of a dividend. The Department has
the power to issue orders prohibiting the payment of dividends where such
payment is deemed to be an unsafe or unsound banking practice. First Lehigh's
ability to pay dividends is also impacted by regulatory orders and agreements.
At December 31, 1997, cash and cash equivalents increased $3.461
million from $4.62 million in 1996 to $8.081 million. Contributing to this
increase was $3.810 million provided by operating activities as compared to
$2.124 million in 1996 and cash utilized in investing and financing activities
of $349,000 in 1997 as compared to $2.547 million in 1996. The significant
227
<PAGE>
changes in investing cash activity were net proceeds of securities transactions
in 1997 of $4.277 million as compared to net purchases of $450,000 in 1996.
First Lehigh sold $1.95 million of securities to fund the sale of its Quakertown
deposits on October 30, 1997 and also had debt equities of $500,000 prematurely
called in December 1997. First Lehigh has decided to maintain a higher than
average cash position as it evaluates several loan and other options. Loans
decreased $1.526 million, primarily as the result of the discontinuing of the
auto segment of the installment loan portfolio in August 1997 and several
commercial prepayments in December 1997. Also, as mentioned earlier, First
Lehigh continues to aggressively market its foreclosed assets portfolio,
increasing proceeds $1.804 million in 1997 as compared to 1996.
Deposits decreased $7.42 million mostly attributable to the sale of
the Quakertown deposits of $6.82 million on October 30, 1997 and related runoff.
Other borrowed funds decreased $1.200 million, as First Lehigh repaid its
outstanding repurchase agreement at December 31, 1996 which was used in 1996 to
fund First Lehigh's installment loan growth. Long-term debt increased $1.051
million, the result of inclusion of a previously unconsolidated subsidiary.
Also, in 1997, First Lehigh resumed paying dividends and during the year made
dividend payments of $740,000 to its stockholders, consisting of $280,000 of the
1997 amount currently due as well as $460,000 of amounts previously in arrears.
Interest Rate Sensitivity
Interest rate sensitivity management involves the matching of maturity
and repricing dates of interest-earning assets and interest-bearing liabilities
to help insure First Lehigh's earnings against extreme fluctuations in interest
rates.
The effect of interest rate changes on First Lehigh's assets and
liabilities may be analyzed by monitoring First Lehigh'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 a given time
period. The interest rate sensitivity GAP is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A positive GAP (asset sensitive) indicates that more
assets reprice during a given period compared to liabilities, while a negative
GAP (liability sensitive) has the opposite effect.
228
<PAGE>
First Lehigh's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This is accomplished through the measurement of the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. The goal
of maintaining a reasonable balance between interest rate sensitive assets and
interest rate sensitive liabilities is accomplished through First Lehigh's
asset/liability management program.
At December 31, 1997 First Lehigh has a positive interest sensitive
GAP of $1.36 million, or 1.42% of total interest-earning assets which have been
adjusted for the depreciation on securities available-for-sale. Under a general
assumption, that the general market interest rate changes affect the repricing
of assets and liabilities equally, this gap indicates that the effect of an
increase in overall market interest rates would result in an increase in the net
interest margin, while falling interest rates would cause a decrease in the
margin.
The following table sets forth First Lehigh's interest sensitivity GAP
position at December 31, 1997:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------
6 Months 6 Months 1 to 2 2 to 5 Over 5
or less to 1 Year Years Years Years Total
-------- --------- ------ ------ ----- -----
Interest-earning assets: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities (1) $13,756 $ 533 $ 1,218 $ 3,756 $15,606 $34,869
Loans (2) 20,774 6,644 9,844 19,685 4,095 61,042
------- ------ ------- ------- ------- -------
TOTAL $34,530 $7,177 $11,062 $23,441 $19,701 $95,911
------- ------ ------- ------- ------- -------
Interest-bearing liabilities:
Demand-interest bearing $14,120 $ -- $ -- $ -- $ -- $14,120
Savings and clubs (3) 675 839 1,350 4,050 12,537 19,451
Time 18,158 6,344 17,115 5,700 -- 47,317
Long-term debt (4) 186 24 51 953 -- 1,214
------- ------ ------- ------- ------- -------
TOTAL $33,139 $7,207 $18,516 $10,703 $12,537 $82,102
------- ------ ------- ------- ------- -------
GAP $ 1,391 $ (30) $(7,454) $12,738 $ 7,164 $13,809
------- ------ ------- ------- ------- -------
Cumulative GAP $ 1,391 $1,361 $(6,093) $ 6,645 $13,809 $13,809
======= ====== ======= ======= ======= =======
</TABLE>
229
<PAGE>
- ---------------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $5.305 million investment in overnight funds.
(2) Includes estimated scheduled maturities of the fixed rate loans ignoring any
potential rollover at maturity. Excludes nonaccrual loans of $3.364 million.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
(4) Includes estimated scheduled payments for mortgage note.
Market Risk Disclosure
First Lehigh has evaluated the impact of changes in interest rates on
the net interest margin. The assumptions used in the evaluation include all
aspects of interest earning assets and interest bearing liabilities. The overall
impact in future interest rates changes on these assumptions may vary since a
shift in interest rates may provide consumers with an option, for example, a
switch from variable to fixed rate products.
Sensitivity analysis was used to apply +200 and -200 basis point
interest rate shocks to First Lehigh Bank's balance sheet and income statement
at December 31, 1997. Market Risks for interest rate declines were measured in
terms of percent and dollars of forecast net income at risk, while the Market
Risk for initial rate increases are measured in terms of percent and dollars of
equity value at risk. Equity value at risk determined by comparing the before
and after shock market value of portfolio equity. Market value of portfolio
equity is the present value of total assets, less the present value of total
liabilities.
Total net income at risk for the period January 1, 1998 to December
31, 1998, given a negative 200 basis point decline in interest rates was 9.51%,
or a projected $225,000 decrease in net income. The majority of the decrease was
the trading portfolio earnings at risk estimated to be $133,000, while all other
earnings at risk were $92,000.
230
<PAGE>
Equity value risk as of December 31, 1997 was 5.46%, or a $961,000
decrease in the present value of equity, given a 200 basis point increase in
interest rates. The present value of the trading portfolio would decrease
$19,000, while the combined present value of all other assets and liabilities
would decline $942,000.
Capital
The adequacy of First Lehigh's capital is reviewed on an ongoing basis
with reference to size, composition and quality of First Lehigh's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
As required by the federal banking regulatory authorities, new
guidelines have been adopted to measure capital adequacy. Under the guidelines,
certain minimum ratios are required for core capital and total capital as a
percentage of risk-weighted assets and other off balance sheet instruments. For
First Lehigh Bank, Tier I capital consists of shareholders' equity less
intangible assets, and Tier II capital includes the allowable portion of the
allowance for loan losses, currently limited to 1.25% of risk- weighted assets.
The following table sets forth the capital ratios of First Lehigh Bank
as of December 31, 1997 and 1996.
Regulatory December 31,
Requirements 1997 1996
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio 4.0% * 12.58% 10.70%
Risk-based capital ratios:
Tier I capital/risk-weighted 4.0% 18.02% 15.19%
Tier I and Tier II capital/
Risk-weighted assets 8.0% 19.28% 16.45%
- ---------------
* The Department requires First Lehigh Bank to maintain a minimum Tier I
leverage capital ratio of at least 6.5% under the terms of the Administrative
Order.
The Deposit Act
The Deposit Act was enacted on September 29, 1996. The Deposit Act
changes payment terms for First Lehigh Bank's payments into the BIF of the FDIC.
231
<PAGE>
Beginning in 1997, BIF assessments will be used for the first time to
help pay off the $780 million annual interest payments on $8 billion in "FICO"
bonds issued in the 1980s as part of the federal government's savings and loan
bailout. The law provides that BIF assessments must be set at a rate equal to
one-fifth of the SAIF rates for 1997, 1998 and 1999. After 1999, all
FDIC-insured institutions will pay the same risk-adjusted rates.
During 1997, First Lehigh Bank incurred $12,100 expense for the BIF of
the FDIC.
"Year 2000" Issues
During 1997, First Lehigh Bank formed a Technology Task Team which is
responsible for year 2000 compliance for First Lehigh Bank. The team members
contacted all vendors which they believe would be affected by the millennium
change. First Lehigh Bank's computer application servicer has been dealing with
the year 2000 issue since May 1997 and is expecting to complete the host phase
by September 1998. During the period of October 1998 to March 1999, the servicer
will coordinate an end-to-end test which will allow First Lehigh Bank to
simulate daily processing on sensitive century dates such as Day 1, first
Month-end, first Leap Day, etc. At a minimum, testing will involve bank/branch
input to host, production cycles and feedback to the general ledger system, and
other key interfaces to facilitate completion of the end-to-end test. Most of
other computer related vendors are anticipating to be year 2000 compliant during
1998. First Lehigh Bank's Technology Task Team has inventoried all operating
systems, hardware and software and concluded that the majority of personal
computers are year 2000 compatible. First Lehigh Bank will replace those
computers which are not compliant as necessary. An estimated cost of $50,000 to
$75,000 will be incurred by First Lehigh Bank for the year 2000 issue.
Management
The following table sets forth certain information regarding the
executive officers and directors of First Lehigh.
Name Age Position
- ---- --- --------
Wilbur R. Roat 50 President, Chief Executive Officer and
Director
George M. Baltozer 63 Executive Vice President and Chief
Operating Office of First Lehigh Bank
Kashmira K. Lodaya 49 Treasurer of First Lehigh and Vice
President and Controller of First Lehigh
Bank
Stephen M. Alinikoff 53 Director
Peter Barter 82 Director
Robert B. Colfer 55 Director
Vincent Dieter 63 Director
Charles D. Flack, Jr. 43 Director
Harry J. Lentz 88 Director
John H. McKeever 72 Chairman of the Board, Secretary and
Director
232
<PAGE>
Wilbur R. Roat has served as President, Chief Executive Officer and a
director of First Lehigh Bank and as director of First Lehigh since September
1994. In August 1998, Mr. Roat was elected President and Chief Executive Officer
of First Lehigh. Prior to joining First Lehigh Bank, Mr. Roat served as
President and Chief Executive Officer of St. Edmond's Savings and Loan
Association ("St. Edmond's") in Philadelphia, Pennsylvania from March 1992 to
August 1994. During his tenure at St. Edmond's, St. Edmond's was a $70 million
thrift institution for which Mr. Roat was responsible for recruiting and
developing the management team and the development of the institution's initial
five-year business plan. Prior thereto, Mr. Roat served in various positions
with PSFS/Meritor Financial Group, the most recent of which were as Senior Vice
President of Retail Banking for the Philadelphia Savings Fund Society from March
1990 to March 1992 and as Senior Vice President and Chief Administrative Officer
of Meritor Financial Group from November 1986 to February 1990.
George M. Baltozer has served as Executive Vice President and Chief
Operating Officer of First Lehigh Bank since January 1991. Mr. Baltozer
previously served as President of Dauphin National Bank from October 1985 to
December 1990. Mr. Baltozer served as the Acting President of First Lehigh Bank
from March 1994 until September 1994.
Kashmira K. Lodaya has served as Treasurer of First Lehigh since
January 1993 and as Vice President and Controller of First Lehigh Bank since
February 1996. Ms. Lodaya previously served as Controller of First Lehigh Bank
from 1992 to February 1996.
Stephen M. Alinikoff has served as a director of First Lehigh and
First Lehigh Bank since June 1993. During the past five years, Mr. Alinikoff has
served as the President and Chief Executive Officer of Security First Group, an
independent financial services organization, and as managing principal of First
Security Investments, Inc., a registered broker-dealer.
233
<PAGE>
Peter Barter was elected as director of First Lehigh and First Lehigh
Bank on October 24, 1994. Mr. Barter has been the owner of Fernbrook & Co., a
sportswear business, for more than 30 years.
Robert B. Colfer has served as a director of First Lehigh and First
Lehigh Bank since 1985. Mr. Colfer has been the President of Keypunch, Inc., a
data entry service provider, since 1973.
Vincent Dieter has served as a director of First Lehigh and First
Lehigh Bank since 1972. Mr. Dieter has been the owner of Kern's Machine Shop,
Inc., a manufacturer of small machine parts, for over 10 years.
Charles D. Flack, Jr. was elected as a director of First Lehigh and
First Lehigh Bank in August 1993. During the past five years, he has served as
Chief Executive Officer of Diamond Manufacturing Co., a perforated metal
manufacturer.
Harry J. Lentz has served as a director of First Lehigh and First
Lehigh Bank since 1975. Mr. Lentz is retired and formerly served as the
assistant cashier of First Lehigh Bank for over 20 years. He also is retired
from service as the Deputy Recorder of Deeds for the Northampton County,
Pennsylvania courthouse.
John H. McKeever was elected Chairman of First Lehigh on July 27,
1998. Mr. McKeever has served as a director of First Lehigh and First Lehigh
Bank since 1972 and as Secretary of First Lehigh and First Lehigh Bank for more
than five years. He has served as Chairman of the Board of First Lehigh Bank
since May 1993. Mr. McKeever is an attorney at law in private practice.
Executive Compensation
The following tables contain compensation data with respect to First
Lehigh's Chief Executive Officer and each executive officer whose total salary
and bonus for 1997 exceeded $100,000.
234
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term
Compensation
------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary ($) Bonus($) Compensation($) Options(#) Compensation($)
- ------------------ ---- ---------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James L. Leuthe 1997 $ 90,000(1) $100,000 $27,706(2) -- --
Chairman of the Board, 1996 190,000(1) -- 15,921(2) -- --
Acting President, 1995 30,000(1) -- 15,203(2) -- --
Chief Executive Officer
and Director of the
Company
Wilbur Roat 1997 $111,635 $ 5,000 $ 7,053(3) -- --
President, Chief 1996 107,500 -- 6,257(3) -- --
Executive Officer and 1995 107,500 12,500 3,675(3) 60,000 $35,503(4)
Director of the Bank
and Director of the
Company
</TABLE>
- ---------------
(1) Inasmuch as Mr. Leuthe was not deemed an employee of First Lehigh, these
amounts were paid to Mr. Leuthe as consulting and management fees. Since
October 1992, Mr. Leuthe has committed a majority of his time to the
restructuring and raising of capital necessary to assure compliance with the
regulatory orders and agreements.
(2) Represents the depreciation expense of $9,422 in 1997, $9,423 in 1996 and
$9,423 in 1995 with respect to the use by Mr. Leuthe of a vehicle owned by
First Lehigh Bank and $607, $664 and $890 paid in insurance premiums with
respect to such vehicle in 1997, 1996 and 1995, respectively. The total also
includes the depreciation expense of $4,061 in 1997, $4,061 in 1996 and
$4,061 in 1995 and insurance premiums of $1,437 in 1997, $707 in 1996 and
$829 in 1995 with respect to the use by Mr. Leuthe of a vehicle owned by
First Lehigh. For 1997 and 1996, the totals include $2,134 and $1,096,
respectively, of a non-cash taxable fringe benefit. The total in 1997
includes an auto lease paid by First Lehigh of $10,045.
(3) Represents the depreciation expense of $3,341 in 1997, $2,824 in 1996 and
$2,824 in 1995 and insurance premiums of $706 in 1997, $676 in 1996 and $851
in 1995 with respect to the use by Mr. Roat of a vehicle owned by First
Lehigh. For 1997 and 1996 the total includes $3,006 and $2,757,
respectively, of a non-cash taxable fringe benefit.
(4) Represents relocation expense paid to Mr. Roat in 1995.
First Lehigh did not grant stock options to any executive officers in
1997.
235
<PAGE>
Fiscal Year-End (December 31, 1997) Option Values
-------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
----------- -----------
Name Exercisable Exercisable
---- ----------- -----------
James L. Leuthe -- $ --
Wilbur R. Roat 60,000(1) $210,000(2)
- ---------------
(1) Options to purchase 60,000 shares are exercisable at an exercise price
of $3.50 per share.
(2) Value based upon the per share bid price of $7.00 at December 31, 1997.
First Lehigh has entered into a Severance Compensation Agreement with
Mr. Roat that commenced September 1, 1995 and is effective through August 31,
2000. Under this agreement, in the event of a discharge within two years of a
change of control of the Bank or First Lehigh, First Lehigh Bank will be
obligated (i) to pay to Mr. Roat an amount equal to two times his salary plus
bonus for the immediately preceding calendar year prior to such change of
control, (ii) to provide life, disability and health insurance coverage for 24
months and (iii) to pay to Mr. Roat an additional amount based upon his benefits
under First Lehigh Bank's employee profit sharing plan. Also, at Mr. Roat's
request made within six months of such discharge, First Lehigh Bank is obligated
to purchase Mr. Roat's principal residence in the Lehigh Valley at its original
purchase price.
Director Compensation
The nonemployee directors of First Lehigh Bank received fees of $350
for each meeting they attended through May 28, 1997. As of June 1, 1997, all
nonemployee directors of First Lehigh Bank received fees of $450 for each
meeting attended. All directors of First Lehigh received a fee of $450 for 1997.
During 1997, John H. McKeever, a director of First Lehigh and First Lehigh Bank,
was paid $15,750 for legal services performed for First Lehigh and First Lehigh
Bank. Harry J. Lentz was paid $100 per month for services as an assistant
secretary of First Lehigh and First Lehigh Bank in 1997.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 31, 1998, the amount and
percentage of First Lehigh'S outstanding Common Stock and Series A Preferred
Stock beneficially owned by each director of First Lehigh and by all directors
and executive officers of First Lehigh as a group.
236
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding Percent of
Percent of Series A Series A Senior Outstanding
Outstanding Preferred Preferred Preferred Senior
Name and Address Common Stock Common Stock Stock Stock Stock Preferred
of Individual or Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Identity of Group Owned(1)(2) Owned(2) Owned(1) Owned Owned Owned
- ----------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C>
Stephen M. Alinikoff(4) 45,846 2.2% -- -- 6,846 0.76%
Peter Barter 50,000 2.4 -- -- -- --
Robert B. Colfer(3) 100,000 4.8 50,000 7.3% -- --
Vincent Dieter(5) 13,960 -- -- -- -- --
Charles D. Flack, Jr.(6) 86,756 4.2 -- -- 26,756 2.97
Harry J. Lentz 9,100 -- -- -- -- --
John H. McKeever(3) 132,800 6.3 50,000 7.3 -- --
Wilbur R. Roat(7) 62,000 2.9 -- -- -- --
All directors and 454,662 12.8% 100,000 14.6% 33,602 3.73%
executive officers as a
group (10 persons)
</TABLE>
- --------------
(1) Information furnished by the directors.
(2) Assumes the number of shares of Common Stock that such persons have the
right to acquire upon the conversion of the Series A Preferred Stock.
Reference is made to "Principal Beneficial Owners" above.
(3) Reference is made to "Principal Beneficial Owners" above.
(4) This total includes 4,250 shares of Common Stock that Mr. Alinikoff's sister
has the right to acquire upon the conversion of 4,250 shares of Senior
Preferred Stock; 1,591 shares of Common Stock that Mr. Alinikoff's daughter
has the right to acquire upon the conversion of 1,591 shares of Senior
Preferred Stock; and 1,005 shares of Common Stock that Mr. Alinikoff has the
right to acquire upon the conversion of 1,005 shares of Senior Preferred
Stock.
(5) These shares are owned jointly with Mr. Dieter's wife.
(6) Of these shares, 50,000 shares are held by Diamond Manufacturing Co., a
company of which Mr. Flack is a director, the President and a controlling
shareholder, 700 shares are owned by Mr. Flack's wife and 9,300 shares are
owned by Mr. Flack's three children. This total also includes an aggregate
26,756 shares of Common Stock that two pension funds of Diamond
Manufacturing Co. have the right to acquire upon conversion of 26,756 shares
of Senior Preferred Stock.
237
<PAGE>
(7) These shares include 2,000 shares owned jointly with Mr. Roat's wife and
60,000 shares that Mr. Roat has the right to acquire under currently
exercisable stock options.
Market Price of and Dividends on First Lehigh Stock and Related Matters
The First Lehigh Common Stock is the only class of common stock of
First Lehigh that is authorized, issued and outstanding. As of August 31, 1998,
there were 2,056,140 shares issued and outstanding, held by approximately 128
stockholders of record. The market makers in First Lehigh's Common Stock are
Security First Group, F.J. Morrisey & Co., Ryan Beck & Co. and Legg Mason Wood
Walker Incorporated. First Lehigh's Common Stock is quoted on the OTC electronic
bulletin board. According to information received by First Lehigh from F.J.
Morrissey & Co., certain information regarding bid quotations for First Lehigh's
Common Stock is as follows: for 1996, (i) at March 31, 1996, bid price $4.75;
(ii) at June 30, 1996, bid price $4.50; (iii) at September 30, 1996, bid price
$4.50; and (iv) at December 31, 1996, bid price $4.50; and for 1997, (i) at
March 31, 1997, bid price $5.00; (ii) at June 30, 1997, bid price $4.875; (iii)
at September 30, 1997, bid price $5.00; and (iv) at December 31, 1997, bid price
$7.00; and for 1998, (i) at March 31, 1998, bid price $6.75; (ii) at June 30,
1998, bid price $6.625; and (iii) at September 30, 1998, bid price $_____. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
First Lehigh has not paid any dividends on the First Lehigh Common
Stock since June 1991. Due to its financial condition, its recent results of
operations and regulatory restrictions on the payment of dividends by First
Lehigh Bank and First Lehigh, management of First Lehigh currently does not
anticipate the resumption of dividend payments on the First Lehigh Common Stock.
Also, First Lehigh has accrued and unpaid dividends on its Series A Preferred
Stock of $943,464 as of December 31, 1997. Dividends accrue on the Series A
Preferred Stock at the rate of $.3255 per share per year. Dividends on the
Senior Preferred Stock accrue at the rate of $.25 per share per year. When, as
and if declared by the Board of Directors of First Lehigh out of funds legally
available for that purpose, dividends are payable to the holders of the Senior
Preferred Stock quarterly. Dividends must be declared and paid, or declared and
a sum sufficient for payment thereof set aside, on the Senior Preferred Stock
before any dividend may be declared or paid on any other capital stock of First
238
<PAGE>
Lehigh. Dividends must be declared and paid, or declared and a sum sufficient
for payment thereof set aside, on the Series A Preferred Stock before any
dividend may be declared or paid on any other capital stock of First Lehigh
other than the Senior Preferred Stock. Under First Lehigh's Articles of
Incorporation, the aggregate amount of dividends paid in any calendar year on
the Senior Preferred Stock and the Series A Preferred Stock may not exceed the
amount of First Lehigh's net income for the preceding calendar year as shown on
First Lehigh's audited statement of income for such preceding calendar year.
Under Pennsylvania law, First Lehigh's Board of Directors may not
authorize, and First Lehigh may not make, distributions (including dividends) if
either (i) First Lehigh would be unable to pay its debts as they become due in
the usual course of its business, or (ii) as determined by the Board of
Directors, the total assets of First Lehigh would be less than the sum total of
its liabilities plus the amount that would be needed, if First Lehigh were to be
dissolved at the time as of which the distribution is measured, to satisfy the
preferential rights upon dissolution of the holders of First Lehigh's
outstanding Series A Preferred Stock, Senior Preferred Stock and any other
shares that may have preferential rights upon dissolution superior to those
receiving the distribution.
Under the Pennsylvania Order, First Lehigh Bank may not declare or pay
any cash dividends without prior written approval of the Department and the
Regional Director of the FDIC. Certain other provisions under the Banking
Code restrict the ability of First Lehigh Bank to transfer funds to First Lehigh
in the form of cash dividends, loans and advances. Under the Federal Reserve
Agreement, First Lehigh may not declare or pay any cash dividends without the
prior written approval of the Federal Reserve Bank and the Department.
239
<PAGE>
ADJOURNMENT
In the event that there are not sufficient votes to constitute a
quorum or approve the adoption of the Agreement at the time of one or both of
the Meetings, such proposal could not be approved unless the Meetings were
adjourned in order to permit further solicitation of proxies. In order to allow
proxies which have been received by Patriot or First Lehigh, as the case may be,
at the time of the applicable Meeting to be voted for such adjournment, if
necessary, each of Patriot and First Lehigh has submitted the question of
adjournment under such circumstances to its shareholders as a separate matter
for their consideration.
The Boards of Directors of each of Patriot and First Lehigh recommend
that shareholders vote their proxies in favor of the Patriot Adjournment
Proposal or the First Lehigh Adjournment Proposal, as the case may be, so that
their proxies may be used for such purposes in the event it becomes necessary.
Properly executed proxies will be voted in favor of the Patriot Adjournment
Proposal or the First Lehigh Adjournment Proposal, as the case may be, unless
otherwise indicated thereon. If it is necessary to adjourn one or both of the
Meetings, no notice of the time and place of the adjourned meeting is required
to be given to shareholders other than an announcement of such time and place at
the Special Meeting.
240
<PAGE>
INDEMNIFICATION
Pennsylvania law provides that a Pennsylvania corporation may
indemnify directors, officers, employees and agents of the corporation against
liabilities they may incur in such capacities for any action taken or any
failure to act, whether or not the corporation would have the power to indemnify
the person under any provision of law, unless such action or failure to act is
determined by a court to have constituted recklessness or willful misconduct.
Pennsylvania law also permits the adoption of a Bylaw amendment, approved by
shareholders, providing for the elimination of a director's liability for
monetary damages for any action taken or any failure to take any action unless
(1) the director has breached or failed to perform the duties of his office and
(2) the breach or failure to perform constitutes self-dealing willful misconduct
or recklessness.
The Bylaws of the Holding Company provide for (1) indemnification of
directors, officers, employees and agents of the Holding Company and its
subsidiaries and (2) the elimination of a director's liability for monetary
damages, to the fullest extent permitted by Pennsylvania law.
Directors and officers also are insured against certain liabilities
for their actions, as such, by an insurance policy obtained by the Holding
Company.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to the directors, officers and controlling
persons of the Holding Company pursuant to the foregoing provisions, or
otherwise, the Holding Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
EXPERTS
The consolidated financial statements of Patriot Bank Corp. as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 included or incorporated by reference in this Proxy
Statement/Prospectus or in the Registration Statement of which this Proxy
Statement/Prospectus forms a part have been audited by Grant Thornton LLP,
independent certified public accountants, whose report thereon appears herein
and elsewhere in the Registration Statement. Such financial statements are
included in reliance upon the report of Grant Thornton LLP, given upon the
authority of such firm as experts in accounting and auditing.
241
<PAGE>
The consolidated financial statements of First Lehigh appearing in
this Proxy Statement/Prospectus have been audited by Parente, Randolph, Orlando,
Carey & Associates, independent accountants, to the extent and for the periods
indicated in their report appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the Holding Company Common Stock to be issued in the
Consolidation, certain federal income tax consequences of the Consolidation, and
certain other legal matters relating to the Consolidation are being passed upon
by the law firm of Stevens & Lee, P.C., counsel to Patriot.
Legal matters in connection with the Consolidation will be passed upon
for First Lehigh by Duane, Morris & Heckscher, LLP, Philadelphia, Pennsylvania.
Members of Duane, Morris & Heckscher, LLP and their affiliates own 1,400 shares
of First Lehigh Common Stock and 51,500 shares of Series A Preferred Stock.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Boards of
Directors of Patriot and First Lehigh know of no matters which will be presented
for consideration at the Meetings other than as set forth in this Proxy
Statement/Prospectus. However, if any other matters shall properly come before
either of the Meetings or any adjournments thereof and be voted upon, the forms
of proxy shall be deemed to confer discretionary authority to the individuals
named as proxies therein to vote the shares represented by such proxy as to any
such matters.
242
<PAGE>
FINANCIAL STATEMENTS OF PATRIOT
INDEX
Patriot Bank Corp. and Patriot Bank:
Financial Statements (Audited)
Independent Auditor's Report ........................... S-2
Consolidated Balance Sheets - As of December 31, 1997
and 1996 ............................................. S-3
Consolidated Statements of Income - For the years ended
December 31, 1997, 1996 and 1995 ..................... S-4
Consolidated Statements of Changes in Stockholders'
Equity - For the years ended
December 31, 1997, 1996 and 1995 ..................... S-5
Consolidated Statements of Cash Flows - For the years
ended December 31, 1997, 1996 and 1995 ............. S-6
Notes to Consolidated Financial Statements ............. S-7
Financial Statements (Unaudited)
Consolidated Balance Sheets - As of June 30, 1998
and December 31, 1997 ................................ S-32
Consolidated Statements of Income - For the
six months ended June 30, 1998 and 1997 .............. S-33
Consolidated Statements of Changes In Stockholders'
Equity - For the six months ended June 30, 1998 ...... S-34
Consolidated Statements of Cash Flows - For the six
months ended June 30, 1998 and 1997 ................ S-35
Consolidated Statements of Comprehensive Income - For
the six months ended June 30, 1998 and 1997 ........ S-36
Notes to Consolidated Financial Statements ............. S-37
S-1
<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 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Patriot Bank Corp.
and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
January 21, 1998
S-2
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Assets
Cash and due from banks $ 2,597 $ 1,997
Interest-earning deposits in other financial institutions 6,417 4,856
--------- ---------
Total cash and cash equivalents 9,014 6,853
Investment and mortgage-backed securities available for sale 343,125 159,148
Investment and mortgage-backed securities held to maturity
(market value of $62,817 and $72,722 at December 31,
1997 and 1996, respectively) 62,516 72,710
Loans held for sale 4,095 --
Loans receivable 422,209 280,184
Allowance for possible loan losses (2,512) (1,830)
Premises and equipment, net 8,542 7,724
Accrued interest receivable 4,119 2,649
Real estate owned 162 74
Other assets 230 1,653
--------- ---------
Total assets $ 851,500 $ 529,165
========= =========
Liabilities and stockholders' equity
Deposits $ 289,528 $ 239,514
FHLB Advances 275,200 210,000
Securities sold under repurchase agreements 214,684 21,595
Advances from borrowers for taxes and insurance 3,135 2,499
Guaranteed Preferred Beneficial Interest in the
Company's subordinated debt 18,417 --
Other liabilities 4,003 2,440
--------- ---------
Total liabilities 804,967 476,048
--------- ---------
Preferred stock, $0.01 par value, 2,000,000 shares authorized,
none issued at December 31, 1997 and 1996, respectively -- --
Common stock, $0.01 par value, 10,000,000 shares authorized,
5,626,423 and 4,683,594 shares issued at December 31,
1997 and 1996, respectively 56 47
Additional paid-in capital 59,926 49,014
Common stock acquired by ESOP, 349,649 and 308,513
shares at cost at December 31, 1997 and 1996, respectively (2,428) (2,571)
Common stock acquired by MRP, 166,754 and 160,644 shares at
amortized cost at December 31, 1997 and 1996, respectively (1,285) (1,538)
Retained earnings 1,680 10,357
Treasury stock acquired, 1,267,955 and 226,147 shares
at cost at December 31, 1997 and 1996, respectively (16,071) (2,517)
Accumulated Other Comprehensive Income 4,655 325
--------- ---------
Total stockholders' equity 46,533 53,117
--------- ---------
Total liabilities and stockholders' equity $ 851,500 $ 529,165
========= =========
</TABLE>
The accompanying notes are an integral part of these statements
S-3
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest-earning deposits $ 193 $ 116 $ 201
Investment and mortgage-backed securities 23,048 11,049 2,865
Loans 27,008 18,429 14,102
------- ------- -------
Total interest income 50,249 29,594 17,168
------- ------- -------
Interest expense
Deposits 13,405 9,895 8,980
Short-term Borrowings 15,648 5,965 569
Long-term Borrowings 6,754 1,642 --
------- ------- -------
Total interest expense 35,807 17,502 9,549
------- ------- -------
Net interest income before provision for
possible loan losses 14,442 12,092 7,619
Provision for possible loan losses 915 305 60
------- ------- -------
Net interest income after
provision for loan losses 13,527 11,787 7,559
------- ------- -------
Non-interest income
Service fees, charges and other operating income 830 526 519
Gain on the sale of branch deposits and facility 885
(Loss) Gain on sale of real estate acquired through
foreclosure (9) 16 96
Gain (loss) on sale of investment and mortgage-backed
securities available for sale 438 (28) (97)
Mortgage banking gains 186 123 --
------- ------- -------
Total non-interest income 2,330 637 518
------- ------- -------
Non-interest expense
Salaries and employee benefits 7,048 4,324 3,048
Occupancy and equipment 1,952 978 658
Federal deposit insurance premiums 132 1,814 439
Data processing 167 373 258
Advertising 551 397 226
Deposit processing 307 253 236
Other operating expenses 1,001 1,059 1,286
------- ------- -------
Total non-interest expense 11,158 9,198 6,151
------- ------- -------
Income before income taxes 4,699 3,226 1,926
Income taxes 1,326 1,251 734
------- ------- -------
Net income $3,373 $1,975 $1,192
======= ======= =======
Earning per share - basic $0.62 $0.31
===== =====
Earnings per share - diluted $0.59 $0.31
===== =====
Dividends per share $0.24 $0.14
===== =====
</TABLE>
S-4
The accompanying notes are an integral part of these statements.
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Number of Common paid-in Retained Treasury Comprehensive
shares stock capital ESOP MRP earnings stock Income Total
--------- ------ ---------- ---- --- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 -- -- -- -- -- 18,701 -- (833) 17,868
Shares issued upon
conversion 3,769 38 36,614 -- -- -- -- -- 36,652
Common stock acquired
by ESOP (301) -- -- (3,015) -- -- -- -- (3,015)
Release of ESOP shares 30 -- 86 301 -- -- -- -- 387
Net income -- -- -- -- -- 1,192 -- -- 1,192
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- 1,026 1,026
Comprehensive Income
December 31, 1995 -- -- -- -- -- -- -- -- --
----- --- ------- ------- ------- ------- -------- ------ -------
Balance at December 31, 1995 3,498 38 36,700 (2,714) -- 19,893 -- 193 54,110
----- --- ------- ------- ------- ------- -------- ------ -------
Common stock issued 134 1 1,731 -- -- -- -- -- 1,732
Common stock acquired
by MRP (134) -- -- -- (1,732) -- -- -- (1,732)
Amortization of MRP -- -- -- -- 194 -- -- -- 194
Treasury stock purchased (188) -- -- -- -- -- (2,517) -- (2,517)
Stock dividend 661 8 10,530 -- -- (10,538) -- -- --
Release of ESOP shares 17 -- 53 143 -- -- -- -- 196
Net income -- -- -- -- -- 1,975 -- -- 1,975
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- 132 132
Comprehensive Income
December 31, 1996 -- -- -- -- -- -- -- -- --
Cash dividends paid -- -- -- -- -- (973) -- -- (973)
----- --- ------- ------- ------- ------- -------- ------ -------
Balance at December 31, 1996 3,988 $47 $49,014 $(2,571) $(1,538) $10,357 $ (2,517) $ 325 $53,117
----- --- ------- ------- ------- ------- -------- ------ -------
Common stock issued 5 -- 102 -- -- -- -- -- 102
Common stock acquired
by MRP (5) -- -- -- (102) -- -- -- --
Treasury stock purchased (830) -- -- -- -- -- (13,554) -- (13,554)
Stock dividend 631 9 10,654 -- -- (10,654) -- -- --
Release of MRP 32 -- -- -- 355 -- -- -- 355
Release of ESOP shares 21 -- 165 143 -- -- -- -- 308
Net income -- -- -- -- -- 3,373 -- -- 3,373
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- 4,330 4,330
Comprehensive Income
December 31, 1997 -- -- -- -- -- -- -- -- --
Cash dividends paid -- -- -- -- -- (1,396) -- -- (1,396)
----- --- ------- ------- ------- ------- -------- ------ -------
Balance at December 31, 1997 3,842 $56 $59,926 $(2,428) $(1,285) $ 1,680 $(16,071) $4,655 $46,533
===== === ======= ======= ======== ======= ======== ====== =======
<CAPTION>
Other
Comprehensive
Income
-------------
<S> <C>
Balance at January 1, 1995 --
Shares issued upon
conversion --
Common stock acquired
by ESOP --
Release of ESOP shares --
Net income 1,192
Change in unrealized gains
on securities available
for sale, net of taxes 1,026
Comprehensive Income
December 31, 1995 2,218
-----
Balance at December 31, 1995 --
-----
Common stock issued --
Common stock acquired
by MRP --
Amortization of MRP --
Treasury stock purchased --
Stock dividend --
Release of ESOP shares --
Net income 1,975
Change in unrealized gains
on securities available
for sale, net of taxes 132
Comprehensive Income
December 31, 1996 2,107
Cash dividends paid --
-----
Balance at December 31, 1996 $ --
-----
Common stock issued --
Common stock acquired
by MRP --
Treasury stock purchased --
Stock dividend --
Release of MRP --
Release of ESOP shares --
Net income 3,373
Change in unrealized gains
on securities available
for sale, net of taxes 4,330
Comprehensive Income
December 31, 1997 7,703
Cash dividends paid --
-----
Balance at December 31, 1997 $ --
=====
</TABLE>
The accompanying notes are an integral part of these statements.
S-5
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net Income 3,373 1,975 1,192
Adjustments to reconcile net income to net cash provided by
operating activities
Amortization and accretion of
Deferred loan origination fees (145) (464) (460)
Premiums and discounts (94) (39) (71)
MRP share 355 194
Provision for possible loan losses 915 305 60
Release of ESOP shares 308 196 387
(Gain) loss on sale of securities available for sale (438) 28 97
Loss (gain) on sale of real estate owned 9 (16) (96)
Gain on sale of deposits and facility (885) -- --
Depreciation of premises and equipment 762 259 187
Mortgage loans originated for sale (13,753) -- --
Mortgage loans sold 9,658 -- --
Decrease (increase) decrease in deferred income taxes 459 (277) 96
Increase in accrued interest receivable (1,470) (1,444) (29)
Increase in other assets (1,149) (71) (315)
Increase (decrease) in other liabilities 1,563 1,077 (39)
-------- -------- --------
Net Cash used by operating activities (532) 1,723 1,009
-------- -------- --------
Investing activities
Loan originations & principal payments on loans, net (142,265) (85,643) (25,309)
-------- -------- --------
Proceeds from the sale of securities - available for sale 4,280 3,918 10,249
Proceeds from the maturity of securities - available for sale 26,740 16,784 5,289
Proceeds from the maturity of securities - held to maturity 10,194 5,625 --
Purchase of securities - available for sale (208,017) (132,012) (22,450)
Purchase of securities - held to maturity -- (74,418) (1,251)
Proceeds from sale of real estate owned 50 131 398
Purchase of premises and equipment (1,880) (4,533) (95)
Proceeds from sale of premises and equipment 300 -- --
-------- -------- --------
Net cash (used in by investing activities) (310,598) (270,148) (33,169)
-------- -------- --------
Financing activities
Net increase in deposits 60,361 37,896 11,680
Decrease from sale of deposits (9,462) -- --
Proceeds from short term borrowings 171,089 135,595 --
Proceeds from long term borrowings 87,200 86,000 --
Proceeds from trust preferred securities 18,417 -- --
Increase (decrease) in advances from borrowers for
taxes and insurance 636 721 (49)
Net proceeds from stock conversion -- -- 33,637
Cash paid for dividends (1,396) (973) --
Purchase of Treasury Stock (13,554) (2,517) --
-------- -------- --------
Net cash provided by financing activities 313,291 256,722 45,268
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 2,161 (11,703) 13,108
Cash and cash equivalents at beginning of year 6,853 18,556 5,448
-------- -------- --------
Cash and cash equivalents at end of year 9,014 6,853 18,556
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
S-6
<PAGE>
Patriot Bank Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
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 13 community banking offices located in Berks, Bucks, 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 Financial Center, Inc.,
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 loan losses, mortgage
servicing rights, and other real estate owned.
The evaluation of the adequacy of the allowance for possible
loan losses includes, among other factors, an analysis of historical loss rates,
by category, applied to current loan totals. However, actual losses may be
higher or lower than historical trends, which vary. Actual losses on specified
problem loans, 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) has 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.
These financial statements have been reclassified to reflect the provisions of
SFAS No. 130.
Additional Footnote disclosure would have been added to reflect the related
tax effects allocated to each component of Other Comprehensive Income as
follows (In thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
-------------------------- -------------------------- ----------------------------
Tax Tax Tax
Before (Expense) Net of Before (Expense) Net of Before (Expense) Net of
Tax or Tax Tax or Tax Tax or Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gains on Securities:
Unrealized holding gains
arising during period 7,224 2,456 4,768 121 (41) 80 1,408 (479) 929
Less: reclassification
adjustment for gains
realized in net income (664) 226 (438) 79 (27) 52 147 (50) 97
---------------------------------------------------------------------------------------
Net Unrealized gains 6,560 2,682 4,330 200 (68) 138 1,555 (529) 1,026
</TABLE>
S-7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
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 has
evaluated SFAS No. 131 and does not foresee a material effect on the
presentation of it's financial position or results of operation.
b. Investment and Mortgage-Backed Securities
Patriot classifies its investment and mortgage-backed securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115, debt
securities that Patriot has the intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost. Securities
expected to be held for an indefinite period of time are classified as available
for sale and are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, net of estimated
income taxes. Securities that are bought and held principally for the purpose of
selling are classified as trading and reported at fair value, with unrealized
gains and losses included in earnings. Patriot has no securities held for
trading. Gains or losses on the sales of securities are recognized at trade date
utilizing the specific identification method.
c. Loans held for resale
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.
d. Loans and Allowance for Possible Loan 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 fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the interest
method over the contractual life of the loans, adjusted for estimated
prepayments based on Patriot's historical prepayment experience.
Management's periodic evaluation of the adequacy of the allowance for possible
loan losses is based on Patriot's past loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. Such estimates are susceptible to change, and actual losses on
specific loans may vary from estimated losses. The allowance for possible loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries).
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is reestablished, in
which case the loan is returned to accrual status.
S-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
On January 1, 1995, Patriot adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan: Income Recognition and Disclosures." SFAS No. 114 requires
that a creditor measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
SFAS No. 114, as amended, applies to all loans that are identified for
evaluation, uncollateralized as well as collateralized, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. Those loans include residential mortgage, home equity and consumer
loans. Patriot's loan portfolio is substantially comprised of residential
mortgage, home equity and consumer loans; therefore, the adoption of SFAS No.
114 had no material effect on Patriot's consolidated financial position or
results of operations. Patriot's impaired loans at December 31, 1997 and 1996
were not significant.
e. 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.
On January 1, 1996, Patriot adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The adoption of SFAS No. 121 had no
material effect on the consolidated financial position or results of operations.
f. 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.
g. Employee Benefit Plans
Patriot has certain employee benefit plans covering substantially all employees.
Patriot accrues costs as incurred.
On January 1, 1996, Patriot adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock options and
similar instruments under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. Patriot's employee stock option plan is accounted
for under APB Opinion No. 25.
S-9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
h. Advertising Cost
Patriot expenses advertising costs as incurred.
i. Income Taxes
Deferred income taxes are provided on temporary differences between amounts
reported for financial statement and tax purposes in accordance with SFAS No.
109, "Accounting for Income Taxes."
j. Earnings per Shares
In 1997, Patriot adopted the provisions of SFAS No. 128, "Earnings per Share."
SFAS 128 eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such 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 adoption of SFAS No. 128.
k. Statement of Cash Flows
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. Cash paid for interest on deposits was $13,368,000, $9,888,000
and $8,988,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Cash paid for income taxes was $1,982,000, $1,161,000 and
$6,701,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Transfers from loans to real estate owned were $167,000, $31,000, and $218,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Transfers of
investment securities from held to maturity to available for sale were $-0-,
$-0- and $6,000,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
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 - 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, 1997 and 1996, were
$1,583,000 and $456,000, respectively.
S-10
<PAGE>
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
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. 5,000 276 -- 5,276
Other Corporate 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 Mtg. Services, Inc. 7,476 24 -- 7,500
Other 112 -- -- 112
-------- ------ ---- --------
Total investment
and mortgage-backed
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 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 investment
and mortgage-backed
securities held to maturity $ 62,516 $ 399 $ 98 $ 62,817
======== ====== ==== ========
</TABLE>
S-11
<PAGE>
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES--(Continued)
<TABLE>
<CAPTION>
1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
Investment securities:
U.S. Treasury and
government agency
securities $ 5,023 $-- $ 33 $ 4,990
Equity securities 23,797 695 -- 24,492
Mortgage-backed securities:
FHLMC 14,582 149 22 14,709
FNMA 25,118 150 144 25,124
GNMA 14,498 253 -- 14,751
Collateralized mortgage
obligations:
FHLMC 37,928 7 296 37,639
FNMA 31,654 13 165 31,502
Other 5,976 -- 35 5,941
-------- ------ ---- --------
Total investment
and mortgage-backed
securities available for sale $158,576 $1,267 $695 $159,148
======== ====== ==== ========
Held to Maturity:
Investment securities:
U.S. Treasury and
government agency
securities $ 1,911 $-- $ 19 $ 1,892
Corporate securities 2,506 27 -- 2,533
Collateralized mortgage
obligations:
Other 68,293 281 277 68,297
-------- ------ ---- --------
Total investment
and mortgage-backed
securities held to maturity $ 72,710 $ 308 $296 $ 72,722
======== ====== ==== ========
</TABLE>
S-12
<PAGE>
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES--(Continued)
The amortized cost and estimated fair value of investment and mortgage-backed
securities at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties:
<TABLE>
<CAPTION>
Held to maturity Available for sale
----------------------- ------------------------
Amortized Fair Amortized Fair
cost value cost value
--------- ----- --------- -----
(in thousands)
<S> <C> <C> <C> <C>
Investment and mortgage-backed securities
Due in one year or less $12,728 $12,764 $ 16,018 $ 16,039
Due after one year through five years 40,408 40,603 94,564 94,839
Due after five years through ten years 9,380 9,450 80,569 80,845
Due after ten years -- -- 96,653 98,849
Equity Securities -- -- 48,168 52,553
------- ------- -------- --------
Total investment and mortgage-backed securities $62,516 $62,817 $335,972 $343,125
======= ======= ======== ========
</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 Held to maturity
----------------------- -----------------------
Year ended December 31, Year ended
1997 1996 December 31, 1995
------ ------ -----------------------
(in thousands)
<S> <C> <C> <C>
Proceeds from sales $4,280 $3,918 $10,249
====== ====== =======
Gross realized gains 438 $ 75 $ --
Gross realized losses -- (103) (97)
------ ------ -------
Net realized gain (loss) $ 438 $ (28) $ (97)
====== ====== =======
</TABLE>
On November 15, 1995, the FASB issued a special report entitled "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." This guide allowed enterprises to reassess the
appropriateness of the classification of all securities held. Based on this
special report, Patriot reclassified $6,000,000 of securities from held to
maturity to available for sale. The transfer was made at fair value and resulted
in an estimated unrealized loss of $59,000 and a decrease in stockholders'
equity of $39,000 based on current market values.
Securities having an aggregate amortized cost of $335,000, $412,000 and $445,000
were pledged to secure public deposits at December 31, 1997, 1996 and 1995,
respectively.
S-13
<PAGE>
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
------------------------
1997 1996
-------- --------
(in thousands)
Real estate loans
First mortgages secured by one- to four-family
residences $302,684 $192,518
Home equity and second mortgage 77,070 72,480
Construction 4,039 3,210
Multi-family and commercial 36,957 11,822
-------- --------
420,750 280,030
Consumer loans 3,853 2,546
-------- --------
Total loans receivable 424,603 282,576
Less deferred loan origination fees (2,394) (2,392)
-------- --------
Total loans receivable, net $422,209 $280,184
======== ========
Activity in the allowance for possible loan losses is summarized as follows:
1997 1996 1995
------ ------ ------
(in thousands)
Balance at beginning of year $1,830 $1,702 $1,720
Provision for possible loan losses 915 305 60
Loans charged off (276) (177) (81)
Recoveries 43 -- 3
------ ------ ------
Balance at end of year $2,512 $1,830 $1,702
====== ====== ======
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 $1,112,000
and $568,000 at December 31, 1997 and 1996, 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:
1997 1996 1995
---- ---- ----
(in thousands)
Interest income that would have
been recorded $71 $53 $53
Interest income recognized (21) (17) (14)
--- --- ---
Interest income foregone $50 $36 $39
=== === ===
S-14
<PAGE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Estimated
useful lives 1997 1996
------------ ------- -------
(in thousands)
Land -- $ 1,255 $ 1,220
Buildings 30-40 6,051 5,966
Furniture, fixtures and equipment 3-7 4,059 2,969
Leasehold improvements 15 655 506
-- ------- -------
12,020 10,661
Less accumulated depreciation (3,478) (2,937)
------- -------
$ 8,542 $ 7,724
======= =======
NOTE 6 - DEPOSITS
Deposits and their average rates are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Average Average
Balance rate Balance rate
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
NOW deposits $ 16,908 0.61% $ 17,842 0.49%
Money market 51,696 4.44 33,411 4.57
Savings accounts 24,510 2.38 27,712 2.38
Non-interest-bearing demand 11,117 -- 3,433 --
-------- ---- -------- ----
Total demand, transaction, money market and
savings deposits 104,231 2.86 82,398 2.76
Certificates of deposit 185,297 5.87 157,116 5.76
-------- ----- -------- ----
Total $289,528 4.79% $239,514 4.73%
======== ===== ======== ====
</TABLE>
The aggregate amount of certificates of deposit with minimum denominations of
$100,000 or more totaled approximately $41,788,000 and $19,357,000 at December
31, 1997 and 1996, respectively. At December 31, 1997, Patriot has one company
who's certificates of deposits totaled approximately $30,490,000.
At December 31, 1997, scheduled maturities of certificates of deposit were as
follows:
1998 $ 91,399
1999 70,384
2000 10,985
2001 1,586
2002 2,048
Thereafter 8,895
--------
$185,297
========
S-15
<PAGE>
NOTE 7 - 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>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Balance at year-end $171,000 $134,000
Maximum amount outstanding at any month-end during the period $213,000 $183,500
Average amount outstanding during each period $155,042 $106,855
Weighted average interest rate on short-term borrowings 5.76% 5.50%
</TABLE>
b. LONG TERM At December 31, 1997 and 1996, long-term advances from the FHLB
totaling $104,200 and $76,000 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):
1998 0
1999 19,000
2000 0
2001 0
2002 85,000
Thereafter 200
-------
104,200
=======
NOTE 8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
a. SHORT TERM Patriot enters into sales of securities under agreements to
repurchase. These transactions are reflected as a liability on the accompanying
Consolidated Balance Sheets. The dollar amount of securities underlying the
agreements remains in the asset account, although the securities underlying the
agreements are delivered to primary dealers who manage the transactions. At
December 31, 1997 and 1996, 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>
1997 1996
-------- -------
(In thousands)
<S> <C> <C>
Balance at year-end $214,684 $11,595
Maximum amount outstanding at any month-end during the period $221,962 $11,595
Average amount outstanding during each period $115,593 $ 254
Weighted average interest rate on short-term borrowings 5.77% 6.40%
Mortgage-backed securities underlying the agreements at year-end:
Carrying value $227,629 $23,287
Estimated fair value $227,629 $23,287
</TABLE>
S-16
<PAGE>
NOTE 8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS--(Continued)
b. LONG TERM At December 31, 1997 and 1996 long-term repurchase agreements
totalling $0 and $10,000 generally have maturities of one to two years. These
repurchase agreements are collateralized by certain mortgage-backed securities.
NOTE 9 - 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 10 - EQUITY TRANSACTIONS
On July 28, 1997 Patriot completed a tender offer to purchase 449,537 (539,444
after 20% stock dividend) shares at $18.00 per share.
On August 25, 1997, Patriot announced a 20% stock dividend. The stock
distribution was made on September 22, 1997 to stockholders of record on
September 8, 1997.
On October 25, 1996, Patriot announced a 20% stock dividend. The stock
distribution was made on November 21, 1996 to stockholders of record on November
7, 1996. At December 31, 1997 and 1996 shares outstanding were 4,358,000 and
4,457,000 respectively. All share amounts have been retroactively adjusted for
stock dividends.
In July 1995, the Board of Directors of Patriot Bank adopted an overall Plan of
Conversion (the Conversion), as amended on August 30, 1995, pursuant to which
Patriot Bank converted from a federally chartered mutual savings bank to a
federally chartered capital stock savings bank. All of Patriot Bank's
outstanding capital stock was acquired by Patriot, a newly organized Delaware
corporation which became the holding company for Patriot Bank. The conversion
was completed on December 1, 1995 when Patriot issued 3,769,125 (not effected
for stock dividends) shares of common stock to the public. The provisions of
SFAS No. 128, "Earnings Per Share," are not applicable for the year ended
December 31, 1995.
S-17
<PAGE>
NOTE 11 - BRANCH SALE
On November 21, 1997 Patriot completed the sale of a community banking office
and $10,350,000 of deposits form 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
NOTE 12 - INCOME TAXES
Applicable income taxes in the consolidated statements of income are as follows:
1997 1996 1995
------- ------- ----
(in thousands)
Current
Federal $ 1,301 $ 1,306 $525
State 109 222 113
APIC from Stock Compensation 55 -- --
------- ------- ----
Total current 1,465 1,528 638
======= ======= ====
Deferred
Federal (39) (277) 96
State (100) -- --
------- ------- ----
Total deferred (139) (277) 96
------- ------- ----
Applicable income taxes $ 1,326 $ 1,251 $734
======= ======= ====
Effective tax rate 28.2% 38.8% 38.1%
======= ======= ====
S-18
<PAGE>
NOTE 12 - INCOME TAXES - (Continued)
The income tax provision reconciled to taxes computed at the statutory federal
rate is as follows:
1997 1996 1995
---- ---- ----
Federal tax expense at statutory rate 35.0% 35.0% 35.0%
Adjustment resulting from:
State tax, net of federal tax benefit .8 2.3 3.7
Tax-exempt interest and dividend income (9.0) (1.4) (0.1)
ESOP expense 1.2 0.6 1.6
MRP expense (1.2) 1.5 --
Other 1.4 0.8 (2.1)
---- ---- ----
Income taxes 28.2% 38.8% 38.1%
==== ==== ====
1997 1996
---- ----
(in thousands)
Deferred tax assets
Deferred loan fees $ 184 $288
Allowance for possible loan losses 854 579
Uncollectible interest 18 23
Non-qualified pension plan 14 14
MRP expense 66 68
State NOL carryovers 100 --
Reserves 11 --
------- ----
Total deferred tax assets $ 1,247 $972
======= ====
Deferred tax liabilities
Depreciation $368 $211
Discount accretion 134 87
Pension plan -- 15
Gain on sale of loans 48 100
Excess loan servicing fees -- --
Unrealized gain on securities
available for sale 2,498 228
------- ----
Total deferred tax liabilities 3,048 641
------- ----
Net deferred tax (liability) asset $(1,801) $331
======= ====
Based on management's evaluation of the likelihood of realization, no valuation
allowance has been provided against deferred tax benefits.
S-19
<PAGE>
NOTE 12 - INCOME TAXES - (Continued)
Prior to 1996, the Bank was permitted to deduct a percentage of its taxable
income as an addition to a bad debt reserve for tax purposes regardless of the
Bank's charge-off experience. This special deduction was repealed for taxable
years following 1995. The Bank is now required to compute its bad debt
deductions for tax purposes using the specific charge-off method. At December
31, 1997, 1996, and 1995 the Bank's tax bad debt reserve was approximately $ 4.0
million.
The Bank is not required to recapture its tax bad debt reserve into taxable
income as long as the Bank continues to operate as a bank under federal tax law
and does not use the reserve to fund dividends or redeem its stock. In
accordance with SFAS No. 109, the Bank has not recorded any deferred tax
liability on of its tax bad debt reserve. The tax that would be paid were the
Bank ultimately required to recapture of the reserve would amount to
approximately $1.4 million.
S-20
<PAGE>
NOTE 13 - EARNINGS PER SHARE
Patriot's calculation of earnings per share in accordance with SFAS No. 128,
"Earnings Per Share" is as follows:
<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 4,350 $0.78
Effect of Dilutive Securities Options -- 204 (.04)
------ ----- -----
Diluted EPS
Net income available to common
stockholders plus assumed conversions $3,373 4,554 $0.74
====== ===== =====
</TABLE>
Options to purchase 3,600 shares of common stock at $18.02 were outstanding
during the year. They were not included in the computation of diluted EPS
because the option exercise price was greater than the average market price.
<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 5,048 $0.39
Effect of Dilutive Securities Options -- 61 --
------ ----- -----
Diluted EPS
Net income available to common
stockholders plus assumed conversions $1,975 5,109 $0.39
====== ===== =====
</TABLE>
All options at December 31, 1996 had exercise prices less than the average
market price, accordingly they have all been included in the above calculation.
As a result of the conversion completed in December 1995, EPS for the year ended
December 31, 1995 was not applicable.
S-21
<PAGE>
NOTE 14 - EMPLOYEE BENEFIT PLANS
a. 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 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.
b. 401(k) Plan
Patriot maintains a 401(k) plan covering all of its employees who have attained
age 21 and have completed at least one year of service. 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 $143,000, $35,000 and $32,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
c. Employee Stock Ownership Plan
In 1995, Patriot established an internally leveraged Employee Stock Ownership
Plan (ESOP) for eligible employees who have completed one year of service with
Patriot or its subsidiaries. In December 1995, the ESOP borrowed $3,015,000 from
Patriot to purchase 434,000 (as adjusted for subsequent stock dividends) 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 $308,000,
$194,000 and $387,000 in 1997, 1996 and 1995, respectively. The ESOP shares as
of December 31, 1997 were as follows:
Allocated shares 85,000
Unreleased shares 349,000
----------
Total ESOP shares 434,000
==========
Fair value of unreleased shares $7,395,000
==========
S-22
<PAGE>
NOTE 14 - EMPLOYEE BENEFIT PLANS - (Continued)
d. Stock-Based Compensation
Patriot maintains a Management Recognition Plan (MRP). The MRP provides that up
to 217,000 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 193,000 shares in 1996 and 6,000 (as adjusted for subsequent stock
dividends) shares in 1997 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, 1997 and 1996, $355,000 and $194,000
was amortized to expense. At December 31, 1997, 18,000 shares were reserved for
future grants under the plan.
Patriot maintains stock option plan. The stock option plan is accounted for
under APB Opinion No. 25 and related interpretations. The plan permits the grant
of options to employees and directors for up to 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 1997 and 1996 net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------------------------ --------------------------------
As reported Pro forma As reported Pro forma
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income $3,373,000 $3,110,000 $1,975,000 $1,841,000
Earnings per share - basic $ 0.78 $ 0.72 $ 0.39 $ 0.36
Earnings per share - diluted $ 0.74 $ 0.68 $ 0.39 $ 0.36
</TABLE>
S-23
<PAGE>
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>
1997 1996
----------------------- -------------------------
Weighted Weighted
Average Average
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year 510,000 $8.98 -- --
Granted 7,000 16.38 510,000 $8.98
------- ----- ------- -----
Outstanding at year-end 517,000 $9.08 510,000 $8.98
======= ===== ======= =====
Options exercisable at year-end 102,000 --
======= =======
Weighted average fair value of
options granted during the year $6.68 $3.42
===== =====
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model as follows:
Assumptions:
Dividend yield 2.40% 2.40%
Expected volatility 33.30% 22.90%
Risk-free interest rate 6.47% 6.50%
The following table summarizes information about non-qualified options
outstanding at December 31, 1997:
<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 1997 Contractual Life Exercise Price 1997 Exercise Price
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 8.98 510,000 8.5 years $ 8.98 102,000 $ 8.98
$14.74 - $18.02 7,200 9.5 years $16.38 -- $16.38
</TABLE>
S-24
<PAGE>
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, 1997 are as follows:
<TABLE>
<CAPTION>
Total
Fixed rate Variable rate commitments
commitments commitments outstanding
----------- ------------- -----------
(in thousands)
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Mortgage loans $3,059 $ 1,093 $ 4,152
Consumer and other loans 388 21,387 21,775
Commercial lines of credit -- 20,074 20,074
Construction loans 3,662 -- 3,662
------ ------- -------
$7,109 $42,554 $49,663
====== ======= =======
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.
S-25
<PAGE>
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. 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.
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, 1997 are as
follows:
1998 $ 206,552
1999 180,000
2000 180,000
2001 196,817
2002 219,600
Thereafter 2,042,758
----------
3,025,727
==========
Total rental expense for all leases for the year ended December 31, 1997 and
1996 totaled $184,516 and $54,815, respectively. There were no leases in 1995.
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 or results of
operations.
S-26
<PAGE>
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of the estimated fair value of Patriot's assets and liabilities
considered to be financial instruments. As with most financial institutions, the
majority of Patriot's assets and liabilities are considered financial
instruments as defined in SFAS No. 107. However, many of such instruments lack
an available trading market, as characterized by a willing buyer and seller
engaging in an exchange transaction. Also, it is Patriot's general practice and
intent to hold the preponderance of its financial instruments to maturity and
not to engage in trading or sales activities. Therefore, Patriot has used
significant estimates and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair value may
affect the estimated amounts.
Fair values have been estimated using data which management considered the best
available. Fair value of financial instruments actively traded in a secondary
market has been estimated using quoted market prices. The fair value of loans
receivable has been estimated using present value cash flow, discounted at an
interest rate that gives effect to estimated prepayment risk and credit loss
factors. Fair value of financial instrument liabilities with no stated
maturities has been estimated to equal the carrying amount. Fair value of
financial instrument liabilities with stated maturities has been estimated using
present value cash flow, discounted at a rate approximating current market rates
for similar assets and liabilities. The resulting estimated fair values and
carrying amounts at December 31, 1997 and 1996, respectively were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
--------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 9,014 $ 9,014 $ 6,853 $ 6,853
Investment and mortgage-backed
securities available for sale 343,125 343,125 159,148 159,148
Investment and mortgage-backed
securities held to maturity 62,817 62,516 72,722 72,710
Total Loans receivable (net) 426,557 423,792 280,468 278,354
Financial Liabilities:
Deposits with no stated maturities 104,231 104,231 82,398 82,398
Deposits with stated maturities 185,532 185,297 158,888 157,116
Borrowings 516,149 508,301 229,947 231,595
Off-balance sheet items
Commitments to extend credit 49,663 49,663 18,996 18,996
Caps and floors 5 317 -- --
</TABLE>
S-27
<PAGE>
NOTE 18 - REGULATORY MATTERS
On May 22, 1997, Patriot Bank completed its conversion from a federally
chartered savings bank to a state chartered commercial bank. Effective with the
charter conversion Patriot Bank's regulators changed from the OTS to the State
of Pennsylvania and the FDIC. Patriot Bank Corp. is regulated by the Federal
Reserve.
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 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, 1997, that Patriot meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Department of
Banking of the Commonwealth of Pennsylvania categorized Patriot as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, Patriot 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 Required to be
Adequately Well
Actual Capitalized 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 capita
(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>
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.
S-28
<PAGE>
NOTE 18 - REGULATORY MATTERS - (Continued)
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Funds Act)
was signed into law which, among other things, imposed a special one-time
assessment on Savings Association Insurance Fund (SAIF) member institutions,
including Patriot Bank, to recapitalize the SAIF. As required by the Funds Act,
the Federal Deposit Insurance Corporation (FDIC) imposed a special assessment of
65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996. The special assessment was recognized as a tax-deductible
expense in 1996. Patriot recorded a special after-tax charge of $836,000
($1,338,000 before-tax) as a result of the FDIC special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation (FICO) bonds across all Bank Insurance Fund (BIF) and SAIF members.
Beginning on January 1, 1997, BIF deposits will be assessed for FICO payments at
a rate of 20% of the rate assessed on SAIF deposits. Based on current estimates
by the FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points,
while SAIF deposits will pay an estimated 6.5 basis points on the FICO bonds.
Full pro rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged.
The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999,
provided the savings associations remain as of that time.
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 $11,487,000 at December 31, 1997.
This amount may not be utilized for the payment of cash dividends to the holding
company.
For the period ended December 31, 1996 Patriot was regulated by the (OTS) Office
of Thrift thus 1996 capital ratios are calculated under OTS guidelines.
The following schedule summarizes the actual capital balances and ratios of
Patriot Bank at December 31, 1996:
<TABLE>
<CAPTION>
Tangible Leverage Leverage Risk-based
capital (core) capital (core) capital capital to
to tangible to tangible to risk-adjusted risk-adjusted
assets assets assets assets
----------- -------------- ---------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Regulatory capital $32,049 $32,049 $32,049 $33,879
Minimum capital requirement 7,490 14,980 9,944 19,889
------- ------- ------- -------
Excess $24,559 $17,069 $22,105 $13,990
======= ======= ======= =======
Capital ratio 6.47% 6.47% 12.89% 13.63%
======= ====== ======= =======
</TABLE>
S-29
<PAGE>
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Patriot Bank Corp. is as follows:
Condensed Balance Sheets
December 31,
---------------------
1997 1996
------- -------
(in thousands)
Assets
Cash and cash equivalents $ 89 $--
Loans to subsidiaries 499 --
Investment in subsidiaries 66,517 53,246
Other assets 3 465
------- -------
Total assets $67,108 $53,711
======= =======
Liabilities and stockholders' equity
Other liabilities $ 2,158 $ 594
Trust Preferred Securities 18,417 --
Stockholders' equity 46,533 53,117
------- -------
Total liabilities and stockholders' equity $67,108 $53,711
======= =======
Condensed Statements of Income
Year ended December 31,
-----------------------
1997 1996
------- ------
(in thousands)
Interest income $ 161 $ 824
Other Income 5 --
------- ------
Total Income 166 824
Interest expense 1,187 --
Other Expense 875 531
------- ------
Total Expense 2,062 531
Income (loss) before income taxes and undistributed
earnings of subsidiaries (1,896) 293
Income taxes (benefit) expense (527) 111
------- ------
Income (loss) before undistributed earnings
of subsidiaries (1,396) 182
Earnings of subsidiaries 4,742 1,793
------- ------
Net income $ 3,373 $1,975
======= ======
S-30
<PAGE>
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION, -- (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,373 $ 1,975
Adjustments to reconcile net income to net cash
provided by operating activities
Earnings from subsidiaries (4,742) (1,793)
Dividends from subsidiaries 13,615 5,000
Change in other assets 462 (363)
Change in other liabilities 1,564 530
MRP/ESOP Plans 663 390
-------- --------
Net cash provided by operating activities 14,935 5,739
-------- --------
Cash flows from investing activities
Investment in subsidiary (17,814) (20,581)
Loans to subsidiary (499) 18,214
-------- --------
Net cash used in investing activities (18,313) (2,367)
-------- --------
Cash flows from financing activities
Net proceeds from trust preferred securities 18,417 --
Cash dividends paid to stockholders (1,396) (973)
Purchase of treasury stock (13,554) (2,517)
-------- --------
Net cash provided by financing activities 3,467 (3,490)
-------- --------
Increase (decrease) in cash and cash equivalents 89 (118)
Cash and cash equivalents at beginning of year -- 118
-------- --------
Cash and cash equivalents at end of year $ 89 $ --
======== ========
</TABLE>
S-31
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
(unaudited) (note)
<S> <C> <C>
Assets
Cash and due from banks $ 10,574 $ 2,597
Interest-earning deposits in other financial institutions 117 6,417
--------- ---------
Total cash and cash equivalents 10,691 9,014
Investment and mortgage-backed securities available for sale 337,989 343,125
Investment and mortgage-backed securities held to maturity (market value of
$48,881 and $62,817 at June 30, 1998 and December 31, 1997, respectively) 48,454 62,516
Loans held for sale 2,802 4,095
Loans and leases receivable, net of allowances for possible
loss, $2,817 and $2,512 at June 30, 1998
and December 31, 1997, respectively 460,617 419,697
Premises and equipment, net 8,647 8,542
Accrued interest receivable 4,512 4,119
Real estate owned 179 162
Other assets 2,412 230
--------- ---------
Total assets $ 876,303 $ 851,500
========= =========
Liabilities and stockholders' equity
Deposits $ 365,604 $ 289,528
Borrowings 220,391 275,200
Securities sold under repurchase agreements 215,337 214,684
Advances from borrowers for taxes and insurance 4,604 3,135
Trust preferred securities 18,448 18,417
Other liabilities 4,649 4,003
--------- ---------
Total liabilities 829,033 804,967
--------- ---------
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
issued at June 30, 1998 and December 31, 1997, respectively -- --
Common stock, $.01 par value, 10,000,000 shares authorized, 7,028,631
and 7,033,029 issued at June 30, 1998 and December 31, 1997, respectively 56 56
Additional paid-in capital 60,039 59,926
Common stock acquired by ESOP, 437,061 shares at amortized cost at
June 30, 1998 and December 31, 1997, respectively (2,356) (2,428)
Common stock acquired by MRP, 196,013 and 248,604 shares at amortized
cost at June 30, 1998 and December 31, 1997, respectively (1,105) (1,285)
Retained earnings 2,921 1,680
Treasury stock acquired, 1,584,944 at cost at June 30, 1998 and
December 31, 1997, respectively (16,071) (16,071)
Accumulated other comprehensive income 3,786 4,655
--------- ---------
Total stockholders' equity 47,270 46,533
--------- ---------
Total liabilities and stockholders' equity $ 876,303 $ 851,500
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
Note: The balance sheet at December 31, 1997 is taken from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
S-32
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
<TABLE>
<CAPTION>
Six-Month Period Ended
June 30,
------------------------
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Interest income
Interest-earning deposits $ 179 $ 116
Investment and mortgage-backed securities 13,534 9,680
Loans 16,978 11,848
-------- --------
Total interest income 30,691 21,644
-------- --------
Interest expense
Deposits 8,329 6,366
Short-term borrowings 8,703 2,605
Long-term borrowings 5,255 5,556
-------- --------
Total interest expense 22,287 14,527
-------- --------
Net interest income before provision for
possible loan losses 8,404 7,117
Provision for possible loan losses 550 225
-------- --------
Net interest income after provision for
possible loan losses 7,854 6,892
-------- --------
Non-interest income
Service fees, charges and other operating income 572 300
Loss on sale of real estate acquired through
foreclosure -- (9)
Gain on sale of investment and mortgage-backed
securities available for sale 1,419 190
Mortgage banking gains 205 --
-------- --------
Total non-interest income 2,196 481
-------- --------
Non-interest expense
Salaries and employee benefits 4,962 3,100
Office occupancy and equipment 1,001 878
Professional services 328 80
Federal deposit insurance premiums 91 47
Information Services 53 90
Advertising 385 249
Deposit processing 197 137
Other operating expense 467 313
-------- --------
Total non-interest expense 7,484 4,894
-------- --------
Income before income taxes 2,566 2,479
Income taxes 598 832
-------- --------
Net income $ 1,968 $ 1,647
======== ========
Earnings per share -- basic $ 0.39 $ 0.28
======== ========
Earnings per share -- diluted $ 0.37 $ 0.27
======== ========
Dividends per share $ 0.13 $ 0.11
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
S-33
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six-Month Period Ended June 30, 1998 and
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Unrealized
gains
(losses) on
Additional securities
Number of Common paid-in Retained Treasury available
shares stock capital ESOP MRP earnings stock for sale Total
--------- ------ ---------- ---- --- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 -- -- -- -- -- 18,701 -- (833) 17,868
Shares issued upon
conversion 3,769 38 36,614 -- -- -- -- -- 36,652
Common stock acquired
by ESOP (301) -- -- (3,015) -- -- -- -- (3,015)
Release of ESOP shares 30 -- 86 301 -- -- -- -- 387
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- 1,026 1,026
Net income -- -- -- -- -- 1,192 -- -- 1,192
----- --- ------- ------- ------- ------ -------- ------ -------
Balance at December 31, 1995 3,498 38 36,700 (2,714) -- 19,893 -- 193 54,110
Common stock issued 134 1 1,731 -- -- -- -- -- 1,732
Common stock acquired
by MRP (134) -- -- -- (1,732) -- -- -- (1,732)
Amortization of MRP -- -- -- -- 194 -- -- -- 194
Treasury stock purchased (188) -- -- -- -- -- (2,517) -- (2,517)
Stock dividend 661 8 10,530 -- -- (10,538) -- -- --
Release of ESOP shares 17 -- 53 143 -- -- -- -- 196
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- 132 132
Net income -- -- -- -- -- 1,975 -- -- 1,975
Cash dividends paid -- -- -- -- -- (973) -- -- (973)
----- --- ------- ------- ------- ------- --------- ------- --------
Balance at December 31, 1996 3,988 $47 $49,014 $(2,571) $(1,538) $10,357 $(2,517) $325 $53,117
Common stock issued 5 -- 102 -- -- -- -- -- 102
Common stock acquired
by MRP (5) -- -- -- (102) -- -- -- --
Treasury stock purchased (830) -- -- -- -- -- (13,554) -- (13,554)
Stock dividend 631 9 10,654 -- -- (10,654) -- -- --
Release of MRP 32 -- -- -- 355 -- -- -- 355
Release of ESOP shares 21 -- 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 3,842 $56 $59,926 $(2,428) $(1,285) $1,680 $(16,071) $4,655 $46,533
Stock Split 961
Release of MRP 49 -- -- -- 181 -- -- -- 181
Release of ESOP shares -- -- 114 71 -- -- -- -- 185
Change in unrealized gains
on securities available
for sale, net of taxes -- -- -- -- -- -- -- (869) (869)
Net income -- -- -- -- -- 1,968 -- -- 1,968
Cash dividends paid -- -- -- -- -- (727) -- -- (727)
----- --- ------- ------- ------- ------ -------- ------ -------
Balance at June 30, 1998 4,852 $56 $60,040 $(2,357) $(1,105) $2,921 $(16,071) $3,786 $47,270
===== === ======= ======= ======= ====== ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
S-34
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six-Month Period Ended June 30,
-------------------------------
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
Operating activities
Net income $ 1,968 $ 1,647
Adjustments to reconcile net income to net cash used by operating
activities
Amortization and accretion of
Deferred loan origination fees (47) (154)
Premiums and discounts (387) 120
Management recognition plan 180 174
Provision for possible loan losses 550 225
Release of ESOP shares 184 131
Gain on sale of securities available for sale (1,419) (190)
Loss on sale of real estate owned -- 9
Depreciation of premises and equipment 413 357
Mortgage loans originated for sale (13,511) --
Mortgage loans sold 14,804 --
Increase in deferred income taxes (668) (22)
Increase in accrued interest receivable (393) (1,344)
Increase in other assets (1,332) (9,333)
Increase (decrease) in other liabilities 646 (1,062)
--------- ---------
Net cash used by operating activities 990 (9,442)
--------- ---------
Investing activities
Loan originations & principal payments on loans, net (41,420) (65,092)
Proceeds from sale of securities -- available for sale 5,186 719
Proceeds from maturity of securities -- available for sale 47,307 4,566
Proceeds from maturity of securities -- held to maturity 14,062 3,576
Purchases of securities -- available for sale (56,407) (104,151)
Proceeds from sale of real estate owned -- 30
Purchase of premises and equipment (518) (1,372)
--------- ---------
Net cash used by investing activities (21,790) (161,724)
--------- ---------
Financing activities
Net increase in deposits 75,891 43,817
Net (repayments) proceeds from short term borrowings (134,156) 85,821
Proceeds from long term borrowings 105,000 25,000
Repayments of long term borrowings (25,000) --
Proceeds from trust preferred stock -- 18,525
Increase in advances from borrowers
for taxes and insurance 1,469 1,234
Cash paid for dividends (727) (741)
Purchase of treasury stock -- (5,462)
--------- ---------
Net cash provided by financing activities 22,477 168,194
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,677 (2,972)
Cash and cash equivalents at beginning of year 9,014 6,853
--------- ---------
Cash and cash equivalents at end of year $ 10,691 $ 3,881
========= =========
</TABLE>
Supplemental disclosures
Cash paid for interest on deposits was $8,321 and $6,335 for the six-month
periods ended June 30, 1998 and 1997, respectively. Cash paid for income taxes
was $387 and $1,060 for the six-month periods ended June 30, 1998 and 1997,
respectively. Transfers from loans to real estate owned were $17 and $139 for
the six-month periods ended June 30, 1998 and 1997, respectively.
The accompanying notes are an integral part of these statements.
S-35
<PAGE>
Patriot Bank Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
--------------------
1998 1997
------ ------
<S> <C> <C>
Net income $1,968 $1,647
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the
period 550 956
Less: Reclassification adjustment for gains included
in net income (1,419) (190)
------ ------
Comprehensive income (loss) $1,099 $2,413
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
S-36
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1998
NOTE 1 - General
The accompanying financial statements of Patriot Bank Corp. and Subsidiaries
("Patriot") include the accounts of the parent company, Patriot Bank Corp. and
its wholly-owned subsidiaries, Patriot Bank and Patriot Investment Company. All
material intercompany balances and transactions have been eliminated in
consolidation. These financial statements have been prepared in accordance with
the instructions for Form 10-Q and therefore do not include certain information
or footnotes necessary for the presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. However, in the opinion of management, the consolidated financial
statements reflect all adjustments (which consist of normal recurring accruals)
necessary for a fair presentation of the results for the unaudited periods. The
results of operations for the three-month period ended June 30, 1998 are not
necessarily indicative of the results which may be expected for the entire year.
The consolidated financial statements should be read in conjunction with the
annual report on Form 10-K for the year ended December 31, 1997.
S-37
<PAGE>
PATRIOT BANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1998
NOTE 2 - Investment And Mortgage-Backed Securities
The amortized cost and estimated fair value of investment and mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------
Amortized Unrealized Unrealized Fair
cost gain loss value
--------- ---------- ---------- ------
(in thousands)
<S> <C> <C> <C> <C>
Investment and Mortgage-Backed
Securities Available for Sale
Investment securities
U.S. Treasury and
government agency securities $ 30,067 $ 100 $ 72 $ 30,095
Corporate securities 21,600 813 27 22,386
Equity securities 54,570 4,003 -- 58,573
Mortgage-backed securities
FHLMC 8,582 162 -- 8,744
Fannie Mae 16,616 168 101 16,683
GNMA 10,050 218 -- 10,268
Collateralized mortgage
obligations
FHLMC 66,076 757 84 66,749
Fannie Mae 113,717 364 568 113,513
Other 10,895 83 -- 10,978
-------- ------ ---- --------
Total investment and
mortgage-backed securities
available for sale $332,173 $6,668 $852 $337,989
======== ====== ==== ========
Investment and Mortgage-Backed
Securities Held to Maturity
Investment securities
U.S. Treasury and
government agency
securities $ 1,035 $ 5 $ 3 $ 1,037
Corporate securities 1,502 40 -- 1,542
Collateralized mortgage
obligations
FHLMC 1,470 11 -- 1,481
Fannie Mae 8,600 114 -- 8,714
Other 35,847 269 9 36,107
-------- ------ ---- --------
Total investment and
mortgage-backed securities
available for sale $ 48,454 $ 439 $ 12 $ 48,881
======== ====== ==== ========
S-38
<PAGE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Amortized Unrealized Unrealized Fair
cost appreciation depreciation value
--------- ------------ ------------ -----
(in thousands)
<S> <C> <C> <C> <C>
Investment and Mortgage-Backed
Securities Available for Sale
Investment securities
U.S. Treasury and
government agency securities $ 19,884 $ 202 $-- $ 20,086
Corporate securities 17,493 1,274 -- 18,767
Equity securities 48,168 4,385 -- 52,553
Mortgage-backed securities
FHLMC 11,287 214 -- 11,501
Fannie Mae 20,163 185 94 20,254
GNMA 12,592 279 -- 12,871
Collateralized mortgage
obligations
FHLMC 75,085 806 107 75,784
Fannie Mae 118,778 503 437 118,844
Other 12,522 24 81 12,465
-------- ------ ---- --------
Total investment and
mortgage-backed securities
available for sale $335,972 $7,872 $719 $343,125
======== ====== ==== ========
Investment and Mortgage-Backed
Securities Held to Maturity
Investment securities
U.S. Treasury and
government agency
securities $ 1,035 $ 4 $ 5 $ 1,034
Corporate securities 1,502 42 -- 1,544
Collateralized mortgage
obligations
FHLMC 1,801 3 -- 1,804
Fannie Mae 9,775 112 -- 9,887
Other 48,403 238 93 48,548
-------- ------ ---- --------
Total investment and
mortgage-backed securities
available for sale $ 62,516 $ 399 $ 98 $ 62,817
======== ====== ==== ========
</TABLE>
S-39
<PAGE>
NOTE 3 - Loans and Leases Receivable
Loans and leases receivable are summarized as follows:
June 30, December 31,
1998 1997
--------- ------------
(in thousands)
Residential mortgage portfolio
Residential mortgages $ 325,508 $ 294,716
Construction 3,012 4,039
Consumer portfolio
Home equity 67,584 75,439
Consumer 4,172 3,909
Commercial portfolio
Commercial 64,743 46,166
Commercial leases 963 334
--------- ---------
Total loans and leases receivable 465,982 424,603
Less deferred origination fees (2,548) (2,394)
Less allowance for possible losses (2,817) (2,512)
--------- ---------
Total loans and leases receivable, net $ 460,617 $ 419,697
========= =========
Note 4 - Deposits
Deposits are summarized as follows:
June 30, December 31,
Deposit Type 1998 1997
- ------------ --------- ------------
(in thousands)
NOW $ 16,794 $ 16,908
Money market 62,370 51,696
Savings accounts 24,617 24,510
Non-interest-bearing demand 15,447 11,117
--------- --------
Total demand, transaction, money
market and savings deposits 119,228 104,231
Certificates of deposits 246,376 185,297
--------- ---------
Total deposits $ 365,604 $ 289,528
========= =========
S-40
<PAGE>
NOTE 5 - Year 2000 Compliance.
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 currently Year 2000
compliant. Management has initiated a comprehensive program to analyze and
proactively plan for ensuring all of Patriot's systems are year 2000 compliant.
It is currently anticipated that certain secondary systems will require
modification. The cost of these modifications is expected to be minimal.
NOTE 6 - Disclosures about Segments of an Enterprise and Related Information
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 has
evaluated SFAS No. 131 and has prepared these financial statements in accordance
with SFAS No. 131 and the instructions for Form 10-Q.
NOTE 7 - Accounting for Derivative Instruments and Hedging Activities
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal quarters of
fiscal years beginning after June 15, 1999 with early adoption permitted. SFAS
133 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. Entities
are required to recognize all derivatives as either assets or liabilities on the
balance sheet 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 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 exposures. Patriot
has not yet determined the impact, if any, of this Statement, including its
provisions for the potential reclassifications of investment securities, on
earnings, financial condition or equity.
NOTE 8 - Subsequent Events
On July 28, 1998 Patriot Bank Corp. announced the execution of a Definitive
Agreement to acquire First Lehigh Corporation, ("First Lehigh") parent company
of First Lehigh Bank. At June 30, 1998 First Lehigh was a $111 million bank
holding company with five community banking offices located in Pennsylvania's
Lehigh Valley. The terms of the agreement call for Patriot to exchange (I) .428
shares of Patriot common stock for each share of First Lehigh common stock and
senior preferred stock and (ii) .342 shares of Patriot common stock for each
share of Series A preferred stock. The transaction will be accounted for as a
purchase for a total consideration of approximately $24.7 million. Subject to
regulatory approval Patriot anticipates the transaction to close at the end of
1998 or early 1999.
S-41
<PAGE>
FINANCIAL STATEMENTS OF FIRST LEHIGH
INDEX
First Lehigh Corporation and First Lehigh Bank:
Financial Statements (Audited)
Independent Auditor's Report .......................... T-2
Consolidated Balance Sheets - As of December 31, 1997
and 1996 ............................................ T-3
Consolidated Statement of Income - For the years ended
December 31, 1997 and 1996 ........................... T-4
Consolidated Statement of Changes In
Shareholders' Investment -
For the years ended December 31, 1997 and 1996 ....... T-5
Consolidated Statement of Cash Flows - For the years
ended December 31, 1997 and 1996 ................... T-6
Notes to Consolidated Financial Statements ............. T-7
Financial Statements (Unaudited)
Consolidated Balance Sheets - As of December 31, 1997
and June 30, 1998 .................................... T-32
Consolidated Statements of Operations - For the six months
ended June 30, 1998 and 1997 ......................... T-33
Consolidated Statements of Cash Flows - For the six
months ended June 30, 1998 and 1997 ................ T-34
Notes to Consolidated Financial Statements ............. T-35
T-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
First Lehigh Corporation:
We have audited the accompanying consolidated balance sheets of First
Lehigh Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' investment
and cash flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Lehigh
Corporation and subsidiary at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, in
1997 the Corporation changed its method of computing earnings per share by
adopting Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
Parente, Randolph, Orlando, Carey & Associates.
Allentown, Pennsylvania
February 3, 1998
T-2
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(In thousands)
1997 1996
---- ----
ASSETS
CASH AND DUE FROM BANKS $7,470 $2,861
FEDERAL FUNDS SOLD 611 1,759
TRADING SECURITIES 7,571 6,309
SECURITIES AVAILABLE-FOR-SALE 17,908 21,922
SECURITIES HELD-TO-MATURITY (Fair value of $3,990
and $3,899) 4,085 4,091
LOANS (Net of $1,586 and $1,624 allowance for
loan losses) 62,820 64,374
PREMISES AND EQUIPMENT 4,365 2,022
FORECLOSED ASSETS HELD FOR SALE, Net 1,597 4,850
OTHER ASSETS 2,292 2,092
-------- ---------
TOTAL ASSETS $108,719 $110,280
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
DEPOSITS:
Noninterest-bearing $11,258 $10,086
Interest-bearing 80,888 85,853
------- -------
Total deposits 92,146 95,939
OTHER BORROWED FUNDS 0 1,200
LONG-TERM DEBT 1,214 272
OTHER LIABILITIES 909 859
------- -------
Total liabilities 94,269 98,270
SHAREHOLDERS' INVESTMENT 14,450 12,010
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $108,719 $110,280
======== ========
See Notes to Consolidated Financial Statements
T-3
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands, except per share data and shares outstanding)
1997 1996
---- ----
INTEREST INCOME:
Interest and fees on loans $5,824 $5,673
Interest and dividends on investment securities:
Taxable interest income 1,660 1,637
Dividends 154 264
Interest on overnight funds 168 105
------ ------
Total interest income 7,806 7,679
------ ------
INTEREST EXPENSE:
Interest on deposits 3,579 3,571
Interest on other borrowed funds 26 50
Interest on long-term debt 108 30
------ ------
Total interest expense 3,713 3,651
------ ------
NET INTEREST INCOME 4,093 4,028
PROVISION (CREDIT) FOR LOAN LOSSES 1,003 (367)
------ ------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR LOAN LOSSES 3,090 4,395
------ ------
OTHER INCOME:
Service charges, fees and other income 492 459
Gain on sale of foreclosed assets, net 49 62
Gain on sale of real estate 183 53
Rental income 191 1
Gain on sale of deposits 478
Unrealized holding gains on trading securities 1,163 372
Realized gains (losses) on:
Trading securities 2,528 1,006
Securities available-for-sale 22 79
Securities held-to-maturity (18)
Litigation settlement 184 1,539
------ ------
Total other income 5,290 3,553
------ ------
OTHER EXPENSES:
Salaries and employee benefits $1,633 $1,485
Net occupancy expense 442 462
Equipment expense 209 207
FDIC insurance 106 156
Foreclosed asset expenses 1,175 1,175
Other 1,812 2,318
------ ------
Total other expenses 5,377 5,803
------ ------
NET INCOME $3,003 $2,145
====== ======
EARNINGS PER SHARE - BASIC $1.28 $0.86
====== ======
EARNINGS PER SHARE - DILUTED $0.86 $0.63
====== ======
See Notes to Consolidated Financial Statements
T-4
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands, except for share information)
<TABLE>
<CAPTION>
SENIOR SERIES A NET
PREFERRED PREFERRED TOTAL UNREALIZED
STOCK STOCK COMMON STOCK CONTRIBUTED (DEPRECIATION) APPRECIATION
------------- ------------- ------------- CAPITAL IN ON SECURITIES ON AVAILABLE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EXCESS OF PAR RETAINED VALUE EARNINGS
------ ------ ------ ------ ------ ------ ------------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1995 848,902 $8 682,000 $7 2,000,000 $20 $8,764 $1,340 $94 $10,233
ISSUANCE OF SENIOR
PREFERRED STOCK
IN LIEU OF CASH
DIVIDEND 51,461 1 257 (258)
NET INCOME 2,145 2,145
NET CHANGE IN
UNREALIZED APPRE-
CIATION
(DEPRECIATION) (368) (368)
------- -- -------- -- --------- --- ------ ------ ---- -------
BALANCE AT
DECEMBER 31, 1996 900,363 9 682,000 7 2,000,000 20 9,021 3,227 (274) 12,010
ISSUANCE OF COMMON
STOCK UNDER STOCK
BONUS PLAN 50,000 150 150
DIVIDENDS DECLARED
ON SENIOR PREFERRED
AND SERIES A
PREFERRED STOCK (962) (962)
NET INCOME 3,003 3,003
NET CHANGE IN
UNREALIZED APPRE-
CIATION
(DEPRECIATION) 249 249
------- -- -------- -- --------- --- ------ ------ ---- -------
BALANCE AT
DECEMBER 31, 1997 900,363 $9 682,000 $7 2,050,000 $20 $9,171 $5,268 ($25) $14,450
======= == ======== == ========= === ====== ====== ==== =======
</TABLE>
See Notes to Consolidated Financial Statements
T-5
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,003 $ 2,145
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized gains on securities available-for-sale (22) (79)
Gain on sale of foreclosed assets, net (49) (62)
Gain on sale of deposits 478
Provision (credit) for loan losses 1,003 (367)
Provision for foreclosed assets losses 655 602
Depreciation of premises and equipment 182 161
Amortization 14 73
Gain on sale/disposal of equipment 27 (7)
Realized losses on securities held-to-maturity 18
Net increase in trading securities (1,262) (271)
Gains on other assets (183) (397)
Change in:
Other assets 184 (79)
Other liabilities (220) 387
------- -------
Net cash provided by operating activities 3,810 2,124
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available-for-sale 1,952 4,038
Proceeds from the maturity of securities
available-for-sale 2,325 3,789
Purchases of securities available-for-sale (8,604)
Proceeds from sale of securities held-to-maturity 327
Net increase in loans (1,526) (8,944)
Proceeds from sales of premises and equipment 54
Capital expenditures for premises and equipment (450) (56)
Capital expenditures for foreclosed assets (101) (43)
Proceeds from sales of foreclosed assets 3,287 1,483
Proceeds from sales of other assets 484 691
------- -------
Net cash provided by (used in)
investing activities 5,971 (7,265)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of deposit accounts ($6,820)
Net (decrease) increase in other borrowed funds (1,200) $ 1,200
Dividend payments (740)
Payments on long-term debt (109) (109)
Net increase in deposits 2,549 3,627
------- -------
Net cash (used in) provided by
financing activities (6,320) 4,718
------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 3,461 (423)
CASH AND CASH EQUIVALENTS, BEGINNING 4,620 5,043
------- -------
CASH AND CASH EQUIVALENTS, ENDING $ 8,081 $ 4,620
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 3,712 $ 3,657
======= =======
Cash paid for income taxes $ 47 $ 22
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
T-6
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ADMINISTRATIVE ORDER AND OTHER REGULATORY AGREEMENTS
First Lehigh Corporation (the "Company") and First Lehigh Bank (the
"Bank") are subject to and have consented to the following regulatory
orders and agreements: (i) effective February 28, 1996, the Company and
the Bank entered into an Administrative Order (the "Pennsylvania
Order") with the Pennsylvania Department of Banking (the "Department"),
which replaced an earlier order entered into in 1993; (ii) on April 29,
1996, the Bank entered into a Memorandum of Understanding (the
"Memorandum of Understanding") with the Federal Deposit Insurance
Corporation ("FDIC"), which has replaced two cease and desist orders
dating from October 1987 and June 1992; and (iii) in January 1991, the
Company consented to a written agreement (the "Federal Reserve
Agreement") with the Federal Reserve Bank and the Department.
Under the terms of the Pennsylvania Order, the Bank, among other
things:
- Must not declare or pay any cash dividend, without the
prior written approval of the Department and the Regional
Director of the FDIC;
- Must maintain, at all times, a minimum Tier 1 capital equal to
or greater than 6.5% of the Bank's adjusted total assets and a
"fully funded loan loss reserve";
- May not grant, extend, renew, alter or restructure any loan or
other extension of credit without first obtaining and
analyzing all relevant credit information, as well as taking
all necessary steps to properly value and perfect its
interests in collateral, where applicable;
- May not extend directly or indirectly, any new or additional
credit to, or for the benefit of, any borrower who is
associated with a previously charged-off loan or a credit that
has been adversely classified in the June 30, 1995 Report of
Examination or as a result of any subsequent regulatory
examination.
The following performance objectives were also stated in the
Pennsylvania Order: (i) the Bank must reduce the level of nonaccrual
loans to total gross loans noted in the Report of Examination as of
June 30, 1995, to no more than 7% by August 26, 1996, and further
reduce such ratio to no more than 4% by November 24, 1996 and 2% by
February 22, 1997; and (ii) the
T-7
<PAGE>
Bank must reduce the level of classified assets as of June 30,
1995, to no more than 100% of Tier I capital and the allowance for
loan losses by August 26, 1996, and further reduce such ratio to 75%
by November 24, 1996 and 50% by February 22, 1997.
The Company believes that it and the Bank are substantially in
compliance with the Pennsylvania Order as of December 31, 1997. The
Pennsylvania Order requires the Bank to reduce the level of nonaccrual
loans to total gross loans noted in the Report of Examination as of
June 30, 1995, to no more than 4% by November 24, 1996 and to 2% by
February 22, 1997. As of December 31, 1997, this ratio was 2.1% which
was higher than the 2% required by the Pennsylvania Order.
Additionally, the Pennsylvania Order requires the Bank to reduce the
level of classified assets as of June 30, 1995, to no more than 75% of
Tier I capital and the allowance for loan losses by November 24, 1996
and to 50% by February 22, 1997. As of December 31, 1997, this ratio
was 23.68%. The Pennsylvania Order also contains a provision requiring
the Bank to maintain, at all times, a minimum Tier I capital equal to
or greater than 6.5% of the Bank's adjusted total assets, plus a
"fully-funded loan loss reserve." As of December 31, 1997, this ratio
was 12.58% and the Bank's loan loss reserve was fully funded.
The Federal Reserve Agreement requires the Company to obtain the
approval of the Federal Reserve Bank and the Department in order to
declare or pay any dividends to its shareholders.
The Memorandum of Understanding and Federal Reserve Agreement also
place certain requirements related to capital, adversely classified
assets and management policies. Such requirements are no more
restrictive than those included in the Pennsylvania Order issued by the
Department. Management believes the Corporation is in compliance with
the Memorandum of Understanding and the Federal Reserve Agreement as of
December 31, 1997.
The Company's and the Bank's continued existence is dependent upon its
ability to achieve compliance with the terms of the administrative
order and other regulatory agreements. The Corporation's management
believes that compliance will be achieved allowing the Corporation to
continue as a going concern in its present form.
2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Lehigh Corporation and its subsidiaries, Pond Associates (a
partnership) and First Lehigh Bank, and First Lehigh Bank's
T-8
<PAGE>
subsidiaries (Allentown Properties, Inc., Quakertown Properties, Inc.,
Walnutport Properties, Inc., Walnutport Properties II, Inc., Winchester
Property Management Corporation and Pond Road Properties, Inc.)
(collectively the "Corporation") provide commercial banking services.
The First Lehigh Corporations' primary regulator is the Federal Reserve
Bank while the primary regulator of its subsidiary, First Lehigh Bank
is the Pennsylvania Department of Banking. First Lehigh Bank is also
regulated and insured by the Federal Deposit Insurance Corporation.
First Lehigh Bank is a commercial bank which provides a variety of
financial services to individuals and small business customers through
its five branch offices in Walnutport, Cherryville, Bethlehem and
Allentown, Pennsylvania. Its primary deposit products are passbook and
statement savings accounts, certificates of deposit, NOW accounts,
money market accounts, checking accounts and club accounts. Its primary
lending products are secured small business loans and lines of credit,
residential loans, installment loans and secured consumer loans.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the First
Lehigh Corporation and its direct and indirect subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Estimates that are particularly susceptible to significant change
relate to the determination of the allowances for loan losses and the
valuation of assets acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of
allowances for loan losses and for writedowns of foreclosed assets,
management obtains independent appraisals for significant properties.
A majority of the Corporation's loan portfolio consist of commercial
and residential real estate loans to borrowers
T-9
<PAGE>
within the Lehigh Valley, which constitutes the primary marketing area
of the institution.
While management uses available information to recognize losses on
loans and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the allowances for loan losses and for writedowns
of foreclosed assets. Such agencies may require the Corporation to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the
allowances for loan losses and for writedowns of foreclosed assets may
change materially in the near term.
INVESTMENT SECURITIES
Securities held-to-maturity are debt securities for which the Bank has
the positive intent and ability to hold to maturity and are reported at
amortized cost.
Trading securities are marketable equity securities held principally
for resale in the near term and recorded at their fair values.
Unrealized appreciation and depreciation on trading securities are
included immediately in other income.
Securities available-for-sale consist of securities not classified as
trading securities or securities held-to-maturity. Unrealized
appreciation and depreciation, net of tax, on securities
available-for-sale are reported as a net amount in a separate component
of shareholders' investment until realized.
Gains and losses on the sale of securities are determined using the
specific identification method.
Declines in the fair value of individual securities held-to-maturity
and available-for-sale below their cost that are other than temporary
result in write-downs of the individual securities to their fair value.
Any related write-downs are included in earnings as realized losses.
Premiums and discounts are amortized over the period to maturity using
an interest method.
T-10
<PAGE>
LOANS
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due generally, when the loan is ninety days past due. When
interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent
cash payments are received. Impaired loans are charged off when
collection is considered remote.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost
or market. Net unrealized losses are recognized through a valuation
allowance by charges to income.
LOAN FEES
Fees collected upon loan origination and certain direct costs of
originating loans are deferred and recognized as adjustments to income
over the contractual lives of the related loans as yield adjustments.
Upon prepayment or other dispositions of the underlying loans before
their contractual maturities, any associated unamortized fees or costs
are recognized. Prior to 1988, such fees and costs were included in
income when collected or paid.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance
is based on an evaluation of the portfolio, past loan loss experience,
current economic conditions, volume, growth and composition of the loan
portfolio, and other relevant factors.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation and
amortization is computed generally using the straight-line method.
T-11
<PAGE>
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of fair value
minus costs to sell or cost. The provision for foreclosed asset losses
and the costs of holding and maintaining the property are included in
the statement of operations caption "Foreclosed asset expenses."
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
STATEMENT OF CASH FLOWS
The Corporation considers all cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and federal
funds sold to be cash equivalents for purposes of the statement of cash
flows.
The Corporation transferred approximately $539,000 and $2,015,000 from
loans to foreclosed assets held for sale during the years ended
December 31, 1997 and 1996, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
utilized in immediate settlement of the instruments. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Corporation.
T-12
<PAGE>
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in
the statement of financial condition for cash and cash
equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities
are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are
based on carrying amounts. The fair values for other loans
(for example, fixed rate commercial real estate and rental
property mortgage loans and commercial and industrial loans)
are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value
estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of
accrued interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for
example, interest-bearing checking accounts and passbook
accounts) are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are
estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates
to a schedule of aggregated contractual maturities on such
time deposits. The carrying amount of accrued interest payable
approximates fair value.
Other borrowed funds and long-term debt: The carrying amounts
of other borrowed funds and long-term debt approximate their
fair values.
Other liabilities: Commitments to extend credit were evaluated
and fair value was estimated using the fees currently charged
to enter into similar agreements, taking into account the
remaining terms of the agreements and the present
creditworthiness of the counterparts. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates.
DERIVATIVE FINANCIAL STATEMENTS
The Company has no derivative financial instruments requiring
disclosure under SFAS No. 119.
3. CASH AND DUE FROM BANKS
Deposits with one financial institution are insured up to $100,000. The
Bank maintains cash balances with certain other financial institutions
in excess of the insured amount.
4. INVESTMENT SECURITIES
Trading securities are comprised of marketable equity securities with a
cost basis of $4,908,000 and $4,810,000 at December 31, 1997 and 1996,
respectively. Unrealized net holding gains on trading securities of
$1,163,000 and $372,000 were included in earnings in 1997 and 1996,
respectively.
The amortized cost of other securities and their fair value at December
31, 1997 and 1996 were as follows (in thousands):
T-13
<PAGE>
1997
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
SECURITIES AVAILABLE-
FOR-SALE
Obligations of the U.S.
Treasury and other
U.S. government
agencies and
corporations $15,109 $ 84 $ (92) $15,101
Other, primarily
corporate debt
securities 2,774 19 (36) 2,757
Equity securities 50 - - 50
------- ---- ------ -------
Total securities
available-for-sale $17,933 $103 $(128) $17,908
======= ==== ===== =======
SECURITIES HELD-TO
MATURITY
Obligations of the U.S.
Treasury and other
U.S. government
agencies and
corporations $ 4,035 $ - $ (95) $ 3,940
Foreign securities 50 50
------- ---- ------ -------
Total securities
held-to-maturity $ 4,085 $ - $ (95) $ 3,990
======= ==== ===== =======
1996
------------------------------------------
SECURITIES AVAILABLE-
FOR-SALE
Obligations of the U.S.
Treasury and other
U.S. government
agencies and
corporations $19,179 $ 83 $ (287) $19,075
Other, primarily
corporate debt
securities 2,867 3 (73) 2,797
Equity securities 50 - - 50
------- ---- ------ -------
Total securities
available-for-sale $22,196 $ 86 $(360) $21,922
======= ==== ===== =======
SECURITIES HELD-TO
MATURITY
Obligations of the U.S.
Treasury and other
U.S. government
agencies and
corporations $ 4,041 $ - $(192) $ 3,849
Foreign securities 50 50
------- ---- ------ -------
Total securities
held-to-maturity $ 4,091 $ - $(192) $ 3,899
======= ==== ===== =======
T-14
<PAGE>
The amortized cost and fair value of debt securities held-to-maturity
and securities available-for-sale at December 31, 1997 by contractual
maturity, are shown below (in thousands). 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.
SECURITIES SECURITIES
AVAILABLE-FOR-SALE HELD-TO-MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- -------- -----
Due within one year $ - $ - $ - $ -
Due after one year
through five years 661 657 50 50
Due after five years
through ten years 13,402 13,421 4,035 3,940
Due after ten years 756 769 - -
-------- ------- ------- -------
Total debt securities 14,819 14,847 4,085 3,990
Mortgage-backed securities 3,064 3,011 - -
-------- ------- ------- -------
Total $ 17,883 $17,858 $ 4,085 $ 3,990
======== ======= ======= =======
The proceeds, gross gains and gross losses from the sale of
available-for-sale securities during the year ended December 31, 1997
and 1996 were as follows (in thousands):
T-15
<PAGE>
1997 1996
---- ----
Proceeds $1,952 $4,038
Gross gains 31 131
Gross losses 9 52
On October 22, 1996, the Company sold debt securities classified as
held-to-maturity with an amortized cost of $345,000 for $327,000
resulting in a realized loss of $18,000. The Bank's regulators
classified this security due to a negative change in the issuer's
credit worthiness resulting in management's decision to liquidate the
security.
Investment securities with a carrying value of approximately
$10,457,000 and $8,459,000 at December 31, 1997 and 1996, respectively
were pledged to secure certain deposits, repurchase agreements and for
other purposes as required by law.
At December 31, 1997, there is no concentration of investments that
exceed 10% of shareholders' equity for any individual issuer excluding
those guaranteed by the U.S. government.
In management's opinion, no permanent impairment of the value of any
held-to-maturity or available-for-sale securities has occurred at
December 31, 1997.
5. LOANS
The components of loans in the consolidated statements of financial
condition were as follows at December 31, 1997 and 1996, (in
thousands):
1997 1996
---- ----
Commercial $ 3,416 $ 3,659
Real estate construction 4,620 4,920
Commercial real estate 18,485 19,842
Residential real estate 24,381 25,941
Consumer 6,467 4,453
Automobile loans 7,267 7,619
------- -------
Subtotal 64,636 66,434
Unearned income 230 436
Allowance for loan losses 1,586 1,624
------- -------
Net loans $62,820 $64,374
======= =======
T-16
<PAGE>
An analysis of the changes in the allowance for loan losses follows:
1997 1996
---- ----
Balance at January 1 $1,624 $1,624
------ ------
Loans charged off (1,172) (849)
Recoveries 131 1,216
------ ------
Net (charge offs) recoveries (1,041) 367
------ ------
Provision (credit) for loan losses 1,003 (367)
------ ------
Balance at December 31 $1,586 $1,624
====== ======
Impairment of loans having recorded investments of $3,364,000 at
December 31, 1997, and $2,052,000 at December 31, 1996, has been
recognized in conformity with FASB Statement No. 114 as amended by FASB
Statement No. 118. The average recorded investment in impaired loans
during 1997 and 1996 was $1,969,000 and $3,718,000, respectively. The
total allowance for loan losses related to these loans was $655,000 and
$258,000 at December 31, 1997 and 1996, respectively. Payments received
on impaired loans and applied to principal were $314,000 and $1,180,000
in 1997 and 1996, respectively. The Bank is not committed to lend
additional funds to debtors whose loans are impaired.
Smaller balance homogeneous loans excluded from the impaired loan
classification include residential real estate and consumer loans.
Loans to the real estate development industry were approximately
$1,157,000 and $3,400,000 at December 31, 1997 and 1996, respectively.
The Corporation makes loans to its officers and directors and to their
associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons and do not
involve more than normal risk of collectibility. The following table
summarizes loan activity with officers, directors and their associates
during the years ended December 31, 1997 and 1996 (in thousands):
1997 1996
Balance, beginning $ 2,395 $ 2,538
Advances 40 1,275
Payments and other reductions (245) (1,418)
------- -------
Balance, ending $ 2,190 $ 2,395
======= =======
T-17
<PAGE>
6. FORECLOSED ASSETS HELD FOR SALE
The following table summarizes the activity in foreclosed assets held
for sale during the years ended December 31, 1997 and 1996 (in
thousands):
1997 1996
---- --
Balance, beginning $ 5,200 $ 4,875
Transfers from loans 539 2,015
Additional capitalized costs 97 56
Disposals (3,234) (1,433)
Charge-offs (705) (313)
------- -------
Total 1,897 5,200
Less allowance for write-downs
of foreclosed assets 300 350
------- -------
Balance, ending $ 1,597 $ 4,850
======= =======
The following table summarizes the activity in the allowance for
write-downs of foreclosed assets during the years ended December 31,
1997 and 1996 (in thousands):
1997 1996
---- ----
Balance, beginning $ 350 $ 61
Provision for foreclosed asset losses 655 602
Charge-offs (705) (313)
----- -----
Balance, ending $ 300 $ 350
===== =====
Income of $1,539,000 from a litigation settlement related to foreclosed
assets held for sale was recognized in 1996.
7. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31,
1997 and 1996 (in thousands):
1997 1996
---- ----
Land and improvements $ 893 $ 243
Buildings and leasehold improvements 4,323 2,003
Equipment and fixtures 2,018 1,936
------ ------
Total 7,234 4,182
Less accumulated depreciation and
amortization 2,869 2,160
------ ------
Total $4,365 $2,022
====== =====
T-18
<PAGE>
8. TIME DEPOSITS
The aggregate amount of time certificates of deposit in denominations
of $100,000 or more was $7,293,000 and $7,752,000 at December 31, 1997
and 1996, respectively. Interest related to time certificates of
deposit in denominations of $100,000 or more was approximately $399,000
and $388,000 for the years ended December 31, 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of certificates of
deposit under $100,000 are as follows:
1998 $19,902
1999 15,330
2000 3,086
2001 1,433
2002 and thereafter 437
-------
$40,188
=======
9. OTHER BORROWED FUNDS
Information concerning securities sold under agreements to repurchase
and other borrowings is summarized as follows (dollars in thousands):
1997 1996
---- ----
Year end balance $ - $ 1,200
Average interest rate during the year 6.28% 5.94%
Average balance during the year $ 404 $ 849
Maximum month-end balance during the
year $3,000 $ 2,400
Securities underlying the agreements
(actual ownership not transferred)
at year end:
Amortized cost $6,637 $ 4,643
Fair value $6,581 $ 4,431
T-19
<PAGE>
10. LONG-TERM DEBT
The Corporation has a secured promissory note with principal payments
of $9,100, plus interest, due monthly, maturing in 1999. Interest is
calculated by using the lender's commercial rate plus .6%. At December
31, 1997 $163,000 was outstanding on this debt. The note is secured by
less that 10% of the shares of Bank stock owned by the Corporation.
The Corporation has a mortgage payable with Firstrust Bank of
$1,051,000 at December 31, 1997. The mortgage is due in monthly
payments, including interest at 8.25%, of $11,013 through February 2001
with the outstanding balance due in a balloon payment of approximately
$890,000. The mortgage is secured by real estate with a carrying value
of approximately $3,002,000.
Maturities of long-term debt at December 31, 1997 are as follows:
YEARS ENDING DECEMBER 31
------------------------
1998 $ 156,000
1999 105,000
2000 55,000
2001 898,000
----------
$1,214,000
==========
11. SHAREHOLDERS' INVESTMENT
Shareholders' investment at December 31, 1997 and 1996 consists of the
following (in thousands, except share information):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Senior preferred stock, par value $.01 per share, 1,500,000 shares
authorized, 900,363 shares issued and outstanding $ 9 $ 9
Series A preferred stock, par value $.01 per share, 1,000,000 shares
authorized, 682,000 shares issued and outstanding (liquidation
preference of $2,114) 7 7
Common stock, par value $.01 per share, 10,000,000 shares authorized;
2,050,000 and 2,000,000 shares issued and outstanding in 1997
and 1996, respectively 20 20
Contributed capital in excess of par value 9,171 9,021
Retained earnings, including partners' equity from partnership
included in consolidation 5,268 3,227
Net unrealized depreciation on securities available-for-sale (25) (274)
-------- --------
Total shareholders' investment $ 14,450 $ 12,010
======== ========
</TABLE>
T-20
<PAGE>
Each share of the Corporation's senior preferred stock is convertible at the
option of the shareholder, prior to October 31, 1998, to common stock at the
rate of one share of common stock for each share of senior preferred stock. The
conversion rate will be adjusted on November 1, 1998 if the greater of book
value or market value of the Corporation's common stock is not equal to $5.00 or
more per share at the close of business on the last trading day of the New York
Stock Exchange in October 1998. No adjustment will be made if the greater of the
market value or book value is equal to or greater than $5.00 per share at such
time. Conversion rates are adjusted for common stock dividends and splits. The
senior preferred stock dividend is at an annual rate of $.25 per share. The
liquidation price of the senior preferred stock is $5.00 plus any accrued
dividends. During 1996, 51,461 shares of senior preferred stock and $465 in cash
were issued in payment of $257,770 dividends in arrears. During 1997, dividends
of $406,359, including $237,542 dividends in arrears, were paid to senior
preferred stockholders.
Each share of the Series A preferred stock with a par value of $.01 is
convertible at the option of the holder to common stock at the rate of .8 of a
share of common stock for each share of Series A preferred stock until March 31,
1999. Conversion rates are adjusted for common stock dividends and splits. The
Series A preferred stock dividend is at an annual rate of $.3255 per share.
During 1997, $332,986 dividends, including $221,990 dividends in arrears, were
paid to Series A preferred stockholders. Cumulative dividends in arrears are
$943,464 and $1,220,951 as of December 31, 1997 and 1996, respectively.
In addition, the Board of Directors declared a fourth quarter 1997 dividend,
payable to recordholders of December 17, 1997, to its senior preferred
stockholders of $56,272 and $166,493 to its Series A preferred stockholders.
12. EARNINGS PER SHARE
In 1997, the Corporation adopted SFAS No. 128, "Earnings Per Share,"
which changed the computation of earnings per share ("EPS") and
requires presentation of two new amounts, basic and diluted EPS, and
additional informational disclosures. The adoption of SFAS No. 128 is
required for all reporting periods after December 15, 1997 and requires
restatement for all prior periods. The adoption of SFAS No. 128
resulted in the restatement of the Corporation's 1996 EPS, as follows:
Previously reported:
Basic EPS $.60
Diluted EPS $.50
Restated amounts:
Basic EPS $.86
Diluted EPS $.63
The following data show the amounts used in computing earnings per
share and the effects of income and the weighted average number of
shares of dilutive potential common stock for the years ended December
31, 1997 and 1996:
T-21
<PAGE>
<TABLE>
<CAPTION>
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
--------- ------------- ---
<S> <C> <C> <C>
1997
Net income $3,002,876
Less preferred stock dividends:
Series A (221,991)
Senior (225,091)
-----------
Basic EPS
Net income available to
common shareholders 2,555,794 2,002,877 $1.28
=====
Dilutive effect of potential common stock Stock options:
Exercise of options outstanding 60,000
Hypothetical share repurchase
at $7.75 (27,097)
Preferred stock: Common shares issued upon assumed conversion:
Series A 545,600
Senior 900,363
Preferred dividend that
would not apply upon conversion 447,082
---------- ---------- ----
Diluted EPS $3,002,876 3,481,743 $ .86
========== ========== ====
1996
Net income $2,145,312
Less preferred stock dividends:
Series A (221,991)
Senior (212,542)
Basic EPS
Net income available to
common shareholders 1,710,779 2,000,000 $ .86
=====
Dilutive effect of potential common stock Stock options:
Exercise of options outstanding 60,000
Hypothetical share repurchase
at $5.25 (40,000)
Preferred stock: Common shares issued upon assumed conversion:
Series A 545,600
Senior 850,167
Preferred dividend that
would not apply upon conversion 434,533
----------- ----------- -----
Diluted EPS $ 2,145,312 3,415,767 $ .63
=========== =========== =====
</TABLE>
T-22
<PAGE>
13. NONCASH INVESTING AND FINANCING ACTIVITIES
CONSOLIDATION OF PARTNERSHIP INTEREST
In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which the Company was a limited partner,
which owned the building which houses a branch and administrative
offices of the Bank. As part of this litigation settlement, the Company
received $184,000 representing a $47,000 general partnership interest
and a cash settlement of $137,000. The entire $184,000 has been
included in other income. After receipt of this settlement, the
Company's ownership interest as a general partner exceeded 50%, and
therefore, the Company has been required under generally accepted
accounting principles to include in its 1997 financial statements all
of the accounts of this previously unconsolidated subsidiary. The pro
forma balances of this partnership after elimination of intercompany
balances are as follows:
ASSETS
Premises and equipment $1,051,000
Other assets 252,000
----------
Total assets $1,303,000
==========
LIABILITIES AND EQUITY
Mortgage payable $1,051,000
Other liabilities 7,000
Minority interest 191,000
----------
Total liabilities 1,249,000
Equity 54,000
----------
Total liabilities and equity $1,303,000
==========
INCOME STATEMENT
Noninterest income $ 188,000
Mortgage interest (88,000)
Occupancy expenses (141,000)
----------
Net loss $ (41,000)
==========
DIVIDEND PAYMENTS
T-23
<PAGE>
At December 31, 1997, the Company has accrued $222,000 of dividends
payable to its stockholders in the first quarter of 1998.
ISSUANCE OF COMMON STOCK
The Company, under the terms of its nonqualified stock bonus plan,
issued 50,000 shares of its common stock in 1997 at the option price of
$150,000.
14. INCOME TAXES
The reasons for the difference between the provision for income taxes
and the amount computed by applying the statutory federal income tax
rate of 34% to income before provision for income taxes are as follows
(in thousands):
1997 1996
---- ----
Expected provision $ 1,021 $ 729
Effect of tax-exempt income (9) (9)
Effect of dividends received deduction (37) (63)
Other 3 1
Net operating loss carryforward (978) (658)
------- ------
Provision for income taxes $ - $ -
======= =======
At December 31, 1997, the Corporation has a net operating loss
carryforward of approximately $1,594,000 available to offset future
taxable income, which begins to expire in 2007 if not utilized.
The deferred income tax asset and liability components are as follows
at December 31, 1997 and 1996 (in thousands):
1997 1996
---- ----
Deferred tax assets:
Net operating loss $ 543 $ 1,139
Write-down of foreclosed assets
held for sale 492 498
Accrued expenses 17 51
Net unrealized losses on securities
available-for-sale 8 93
------ ------
Total 1,060 1,781
------ ------
Deferred tax liabilities:
Loan losses $ (52) (35)
Deferred loan costs, net (11) (32)
Depreciation (86) (107)
Accretion (6) (5)
Trading securities gains (905) (528)
------ ------
Total (1,060) (707)
------ ------
Valuation allowance - (1,074)
------ ------
Net deferred tax asset $ - $ -
====== ======
T-24
<PAGE>
15. REGULATORY MATTERS AND RESTRICTIONS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators, that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification 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 the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
To be categorized as well capitalized, a bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. The Bank's actual capital amounts and ratios are
also presented in the table. The Company's consolidated capital ratios
are not significantly different from those of the Bank. No amounts were
deducted from capital for interest-rate risk in either 1997 or 1996.
T-25
<PAGE>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------- ------------- -----------------
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Total capital (to risk
weighted assets) $14,714 19.28% $6,104 8.00% $7,631 10.00%
Tier 1 capital (to risk
weighted assets) $13,752 18.02% $3,052 4.00% $4,578 6.00%
Tier 1 capital (to risk
average assets)* $13,752 12.58% $4,372 4.00% $5,464 5.00%
As of December 31, 1996:
Total capital (to risk
weighted assets) $12,775 16.45% $6,212 8.00% $7,765 10.00%
Tier 1 capital (to risk
weighted assets) $11,796 15.19% $3,106 4.00% $4,659 6.00%
Tier 1 capital (to risk
average assets)* $11,796 10.70% $4,410 4.00% $5,513 5.00%
* The Department requires a minimum of 6.5% under the terms of
the Administrative Order.
Certain restrictions exist regarding the ability of the Bank to
transfer funds to First Lehigh Corporation in the form of cash
dividends, loans and advances. As of December 31, 1997, no retained
earnings of the Bank (included in consolidated retained earnings) were
available for distribution to First Lehigh Corporation as dividends,
without prior regulatory approval. In addition, First Lehigh
Corporation is unable to pay dividends at December 31, 1997, without
the prior approval of the Federal Reserve Bank.
Additionally, the Bank is limited to the amount it may loan or advance
to its affiliates unless such loans or advances are collateralized by
specified obligations. At December 31, 1997, the maximum amount
available for unsecured loans from the Bank to First Lehigh Corporation
approximates $1,750,000.
16. PROFIT-SHARING PLAN
The Corporation has a noncontributory profit-sharing plan covering
eligible employees. Costs of the profit-sharing plan are funded as
accrued. Contributions to the plan are discretionary and are determined
annually by the Bank's board
T-26
<PAGE>
of directors. Profit sharing expense of $25,000 was recorded for both
1997 and 1996.
17. STOCK OPTIONS
1997 NONQUALIFIED STOCK OPTION PLAN
On November 12, 1997, the Corporation instituted a nonqualified stock
option plan for the purpose of securing and retaining key employees.
Under this plan, 75,000 shares of common stock have been reserved for
future issuance. The option period may vary by agreement, but in no
case shall be exercisable after ten years from the date of grant. On
December 11, 1997, the Corporation issued options to purchase 50,000
shares of the Corporation's common stock at an option price of $3.00
per share. The options were all exercised prior to December 31, 1997.
1989 EQUITY INCENTIVE
In 1989, the Corporation formed the "First Lehigh Corporation 1989
Equity Incentive Plan" for which stock options may be granted to
employees for the purchase of up to 84,000 shares of the Corporation's
common stock. On December 7, 1995, 60,000 options were issued at $3.50
per share. These options expire December 2005.
INCENTIVE STOCK OPTION PLAN
Previously, the Corporation had reserved 66,500 shares of common stock
for issuance under a key employee Incentive Stock Option Plan. At
January 1, 1996, there were 20,000 remaining options under this plan
which expired during 1996. At December 31, 1997, this plan was
terminated.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. The
compensation expense attributable to the participants of the 1997
Nonqualified Stock Option Plan was $100,000. If the Company utilized
SFAS No. 123 based on the fair value at the grant date for awards,
there would have been no effect on income or earnings per share.
For purposes of the SFAS No. 123 calculations, the fair value of each
option grant is estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants issued
in 1997:
Divided yield .00%
Expected volatility .00%
Risk-free interest rate 5.55%
Expected life None
T-27
<PAGE>
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation 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. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve
to varying degrees elements of credit, interest rate or liquidity risk
in excess of the amount recognized in the consolidated balance sheet.
The Corporation's exposure to credit loss from nonperformance by the
other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance sheet instruments.
The Corporation generally does not require collateral or other security
to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are
as follows at December 31, 1997:
Commitments to extend credit $3,176,632
Standby letters of credit 1,293,265
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Corporation evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Corporation on extension of credit
is based on management's credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the
Corporation guaranteeing performance by a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
T-28
<PAGE>
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporations' financial instruments at
December 31, 1997 and 1996, are as follows (in thousands):
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -----
Financial assets:
Cash and cash equivalents $ 8,081 $ 8,081 $ 4,620 $ 4,620
Trading account securities 7,571 7,571 6,309 6,309
Securities available-for-
sale 17,908 17,908 21,922 21,922
Securities held-to-
maturity 4,085 3,990 4,091 3,899
Loans, net of allowance 62,769 64,276 64,374 63,658
Accrued interest receivable 758 758 855 855
Financial liabilities:
Deposits 92,904 92,598 95,939 95,772
Other borrowed funds - - 1,200 1,200
Long-term debt 1,214 1,214 272 272
Accrued interest payable 211 211 211 211
T-29
<PAGE>
20. FIRST LEHIGH CORPORATION (Parent company only)
CONDENSED FINANCIAL STATEMENTS (In thousands):
CONDENSED BALANCE SHEET
1997 1996
---- ----
Assets:
Deposits with bank subsidiary $ 754 $ 630
Accounts receivable 52 5
Investment in subsidiary 13,727 11,522
Premises and equipment 2,346
Other assets 313 356
------- -------
Total assets $17,192 $12,513
======= =======
Liabilities and shareholders' investment:
Demand notes payable $ 163 $ 272
Other liabilities 476 231
Long-term debt 2,103
------- -------
Total liabilities 2,742 503
Shareholders' investment 14,450 12,010
------- -------
Total liabilities and shareholders'
investment $17,192 $12,513
======= =======
CONDENSED STATEMENT OF OPERATIONS
1997 1996
---- ----
Investment income $ 18 $ 24
Other income 449 42
Other expenses (312) (919)
Interest expense (197) (30)
------- -------
Loss before equity in income of subsidiary (42) (883)
Equity in net income of subsidiary 3,045 3,028
------- ------
Net income $ 3,003 $2,145
======= ======
T-30
<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
1997 1996
---- ----
Cash flows from operating activities:
Net income $3,003 $2,145
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of subsidiary (3,045) (3,028)
Increase or decrease in:
Accounts receivable (47) 1
Loans 94
Other assets (72) 484
Other liabilities 172 220
------ ------
Net cash used in operating
activities 11 (74)
------ ------
Cash flows provided by investing
activities, Dividends received
from subsidiary 962 -
------ ------
Cash flows from financing activities,
Distributions to shareholders (740)
Payments on note payable (109) (109)
------ ------
Net cash used in investing activities (849) (109)
------ ------
Net decrease in deposits with bank
subsidiary 124 (183)
Deposits with bank subsidiary at
beginning of year 630 813
------ ------
Deposits with bank subsidiary at end
of year $ 754 $ 630
====== ======
T-31
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(in thousands)
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash and due from banks ............................................. $ 6,768 $ 7,470
Federal funds sold .................................................. 1,254 611
--------- ---------
Cash and cash equivalents ................................... 8,022 8,081
Securities held-to-maturity (estimated fair
value of $4,019 and $3,990, respectively) ....................... 4,083 4,085
Securities available-for-sale ....................................... 20,227 17,908
Trading securities .................................................. 9,825 7,571
Loans ............................................................... 62,347 64,636
Less: unearned income .......................................... (166) (230)
allowance for loan losses ................................... (1,819) (1,586)
--------- ---------
Net loans ................................................... 60,362 62,820
Loans held for sale ................................................. 210 0
Premises and equipment, net ......................................... 4,279 4,365
Foreclosed assets held for sale, net ................................ 2,193 1,597
Other assets ........................................................ 2,295 2,292
--------- ---------
Total Assets ............................................ $ 111,496 $ 108,719
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ............................................. $ 10,543 $ 11,258
Interest-bearing ................................................ 84,521 80,888
--------- ---------
Total Deposits .............................................. 95,064 92,146
Other liabilities ................................................... 888 909
Long-term debt ...................................................... 1,137 1,214
--------- ---------
Total Liabilities ....................................... 97,089 94,269
--------- ---------
SHAREHOLDERS' INVESTMENT
Senior preferred stock, par value of $.01 per share, 1,500,000 shares
authorized, 894,223 and 900,363 shares
Issued and outstanding in 1998 and 1997, respectively ........... 9 9
Series A preferred stock, par value $.01 per share,
1,000,000 shares authorized; 682,000 shares issued and
outstanding (liquidation preference of $2,114) .................. 7 7
Common stock, par value $.01 per share, 10,000,000
authorized; 2,056,140 and 2,000,000 shares issued
and outstanding in 1998 and 1997, respectively .................. 20 20
Contributed capital in excess of par value .......................... 9,171 9,171
Retained earnings, including partners' equity from partnership
included in consolidation ....................................... 5,117 5,268
Net unrealized appreciation/depreciation on securities
available- for-sale ............................................. 83 (25)
---------
Total Shareholders' Investment .............................. 14,407 14,450
--------- ---------
Total Liabilities and Shareholders' Investment .............. $ 111,496 $ 108,719
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
T-32
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
------- ------
(in thousands, except
per share data)
(Unaudited)
INTEREST INCOME:
Interest and fees on loans ..................... $ 2,763 $ 2,960
Interest and dividends on investment securities:
Taxable interest income .................... 733 875
Dividends .................................. 77 85
Interest on time deposits ...................... 1 0
Interest on overnight funds .................... 177 46
---------- ----------
Total Interest Income ................. 3,751 3,966
---------- ----------
INTEREST EXPENSE:
Interest on deposits ........................... 1,751 1,767
Interest on other borrowed funds ............... 0 15
Interest on long-term debt ..................... 49 11
---------- ----------
Total Interest Expense ................ 1,800 1,793
---------- ----------
NET INTEREST INCOME ............................ 1,951 2,173
PROVISION FOR LOAN LOSSES ...................... 150 90
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................ 1,801 2,083
---------- ----------
OTHER INCOME:
Service charges, fees and other income ......... 281 244
Gain on sale of foreclosed assets, net ......... 0 26
Gain on sale of real estate investment ......... 0 183
Rental income .................................. 92 0
Realized gains on investment securities, net ... 0 17
Trading securities gains, net .................. 170 1,512
---------- ----------
Total Other Income .................... 543 1,982
---------- ----------
OTHER EXPENSES:
Salaries and employee benefits ................. 830 719
Net occupancy expense .......................... 201 213
Equipment expense .............................. 105 107
FDIC insurance ................................. 20 86
Foreclosed asset expenses ...................... 104 162
Other .......................................... 790 822
---------- ----------
Total Other Expenses .................. 2,050 2,109
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 294 1,956
PROVISION FOR INCOME TAXES ..................... 0 0
---------- ----------
NET INCOME ..................................... $ 294 $ 1,956
========== ==========
EARNINGS PER SHARE - BASIC ..................... $ 0.03 $ 0.87
========== ==========
EARNINGS PER SHARE - DILUTED ................... $ 0.03 $ 0.56
========== ==========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Common .........-............................ 2,052,737 2,000,000
Common Share Equivalents .................... 2,052,737 3,466,534
The accompanying notes are an integral part of the consolidated financial
statements.
T-33
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
------- ------
(in thousands, except
per share data)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................. $ 294 $ 1,956
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Provision for loan losses ............. 150 90
Depreciation .......................... 146 80
Amortization and accretion ............ 24 7
Realized gain on investment
securities, net ..................... 0 (17)
Net increase in trading securities .... (2,254) (424)
Loss on sale of premises and equipment 6 0
Gain on sale of foreclosed assets held
for sale ............................ 0 (19)
Gain on sale of real estate and other
investments ......................... 0 (183)
Change in:
Other assets ........................ 65 (544)
Other liabilities ................... (21) (179)
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES .............................. (1,590) 767
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities .............. 3,766 1,626
Purchase of securities ................ (5,999) 0
Net (increase) decrease in loans ........ 1,239 (3,282)
Net increase in loans held for sale ..... (210) 0
Proceeds from sale of premises and
equipment ............................. 13 27
Capital expenditures for premises and
equipment ............................. (79) (368)
Proceeds from sales of foreclosed assets 378 1,155
Capitalized expenditures for foreclosed
assets ................................ (38) (79)
Proceeds from sales of real estate and
other investments ..................... 0 174
Proceeds from sales of other assets ..... 65 83
------- -------
NET CASH USED IN INVESTING ACTIVITIES ..... (865) (664)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................ 2,918 2,020
Net decrease in other borrowed funds .... 0 (1,150)
Payment on long-term debt ............... (77) (54)
Dividend payments ....................... (445) (294)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES . 2,396 522
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................. (59) 625
CASH AND CASH EQUIVALENTS, BEGINNING ...... 8,081 4,620
------- -------
CASH AND CASH EQUIVALENTS, ENDING ......... $ 8,022 $ 5,245
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest .................. $ 1,813 $ 1,793
Cash paid for income taxes .............. $ 22 $ 47
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On June 23, 1998, the Company's Board of Directors declared a dividend on
the outstanding shares of its Senior and Series A Preferred Stock for the
stockholders of record at June 23, 1998. The Senior Preferred Stock second
quarter 1998 dividend of $55,889 and Series A Preferred Stock second quarter
1998 dividend of $55,498, as well as two quarters of Series A Preferred Stock
accumulated dividends of $110,995, have been included in other liabilities.
The accompanying notes are an integral part of the consolidated financial
statements.
T-34
<PAGE>
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES:
FINANCIAL STATEMENT PRESENTATION:
The consolidated interim financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission with respect to Form 10-QSB. The
financial information included herein reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made herein are adequate to make the
information not misleading. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's Form 10-KSB for year-end December 31, 1997.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full fiscal year 1998. In the
Company's opinion, all adjustments necessary in order to make the interim
financial statements not misleading have been included.
The results of operations for the interim periods presented are not
necessarily indicative of the results expected for the year ending December 31,
1998.
PRINCIPLES OF CONSOLIDATION
First Lehigh Corporation and its subsidiaries, Pond Associates (a
partnership) and First Lehigh Bank (the "Bank") and the Bank's subsidiaries
(Allentown Properties, Inc., Quakertown Properties, Inc., Walnutport Properties,
Inc., Walnutport Properties II, Inc., Pond Road Properties, Inc. and Winchester
Property Management Co.) (collectively, the "Company") provide commercial
banking services. The consolidated financial statements include the accounts of
the First Lehigh Corporation and its direct and indirect subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
T-35
<PAGE>
INVESTMENT SECURITIES
Investments in debt and equity securities are classified in three
categories, held-to-maturity securities, trading securities and
available-for-sale securities. Classification in these categories requires,
respectively, accounting for securities at amortized cost, accounting for
securities at fair value with unrealized gains and losses included in earnings
and accounting for securities at fair value with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
investment.
LOANS
Interest on loans is accrued and credited to income based upon the
principal amount outstanding and using the interest method for amortizing
unearned income on certain installment loans.
The accrual of interest income is generally discontinued on loans past due
90 days or more or when there is a reasonable doubt as to the collection of
interest. The Company continues the accrual of interest on loans past due 90
days or more when they are well secured and in the process of collection. When
interest accruals are discontinued, uncollected interest credited to income is
reversed if the collectibility is not certain.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market.
LOAN FEES
Fees collected upon loan origination and certain direct costs of
originating loans are deferred and recognized as adjustments to income over the
contractual lives of the related loans as yield adjustments. Upon prepayment or
other disposition of the underlying loans before their contractual maturities,
any associated unamortized fees or costs are recognized. Prior to 1988, such
fees and costs were included in income when collected or paid.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio and other relevant factors.
T-36
<PAGE>
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is computed
generally using the straight-line method.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of fair value
minus costs to sell or cost. The provision for foreclosed asset losses and the
costs of holding and maintaining the property are included in the statement of
income caption "Foreclosed asset expenses."
INCOME TAXES
At June 30, 1998 the Company has available approximately $1.594 million of
net operating losses based on its filed tax returns through December 31, 1997,
which begin to expire 2007 if not utilized. No tax benefit related to the unused
net operating loss carry forward has been recognized in these financial
statements except for the reduction of the provision for income taxes due to the
availability of the net operating losses.
EARNINGS PER SHARE ("EPS")
Basic EPS excludes dilution from common stock equivalents and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from common stock equivalents, similar to the previously
utilized fully-diluted EPS, but uses only the average stock price during the
period as part of the computation.
STATEMENT OF CASH FLOWS
The Company transferred approximately $936,000 from loans to foreclosed
assets held for sale during the six months ended June 30, 1998.
LONG-TERM DEBT
The Company has a term note due June 1999 with an outstanding balance of
$108,000 at June 30, 1998. Principal payments of $9,100 plus interest, at the
lenders commercial rate plus 0.6%, are due monthly. The note is secured by less
than 10% of the shares of the Bank which are owned by the Company.
The Company has a mortgage payable with Firstrust Bank of $1,028,000 at
June 30, 1998. The mortgage is due in monthly payments, including interest at
8.25%, of $11,000 through February
T-37
<PAGE>
2001 with the outstanding balance due in a balloon payment of approximately
$890,000. The mortgage is secured by real estate with a carrying value of
approximately $2,971,000.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" effective for the first quarter of 1998.
Comprehensive Income is defined as the change in an entity's equity during the
period arising from transactions and other events from non-owner sources.
Comprehensive Income for the quarter ending June 30, 1998 and 1997 is as
follows:
June 30,
------------
1998 1997
---- ----
Net income...................................... $294 $1,956
Unrealized available-for-sale securities
appreciation (depreciation)................... 108 (90)
---- ------
Comprehensive income............................ $402 $1,866
==== ======
REGULATORY MATTERS
Regulatory Enforcement Actions to Which the Company and the Bank Are
Subject
The Company and the Bank are subject to and have consented to the following
regulatory orders and agreements: (i) effective February 28, 1996, the Company
and the Bank entered into an Administrative Order (the "Pennsylvania Order")
with the Pennsylvania Department of Banking (the "Department"), which replaced
an earlier order entered into in 1993; (ii) on April 29, 1996 the Bank entered
into a Memorandum of Understanding (the "Memorandum of Understanding") with the
FDIC, which has replaced two cease and desist orders dating from October 1987
and June 1992; and (iii) in January 1991, the Company consented to a written
agreement (the "Federal Reserve Agreement") with the Federal Reserve Bank and
the Department. Each of the above orders and agreements have been discussed in
detail in its most recently filed Form 10-KSB for the year ended December 31,
1997. The Company believes that it and the Bank are in compliance with each of
the above orders and agreements. The ratios and percentages required by the
order and agreements at June 30, 1998 are as follows:
Actual at Required by the Order
June 30, 1998 And Agreements
------------- ---------------------
Tier I Capital ..................... 12.39% 6.5%
Non accrual to gross loans as noted
in June 30, 1995 examination
report ........................... 1.03% 2.0%
Classified assets at June 30, 1995
to 50% of Tier I capital and loan
loss reserve ..................... 18.59% 50.0%
Fully funded loan loss reserve ..... Yes Yes
Dividend approvals obtained ........ Yes Yes
T-38
<PAGE>
APPENDIX A
AGREEMENT AND PLAN
OF CONSOLIDATION
between
PATRIOT BANK CORP.
and
FIRST LEHIGH CORPORATION
July 28, 1998
<PAGE>
AGREEMENT
---------
TABLE OF CONTENTS
-----------------
BACKGROUND................................................................ A-1
AGREEMENT ................................................................ A-2
ARTICLE I
THE CONSOLIDATION
-----------------
Section 1.01 Definitions................................................. A-3
-----------
Section 1.02 The Consolidation........................................... A-9
-----------------
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FLC
-------------------------------------
Section 2.01 Organization................................................ A-19
------------
Section 2.02 Capitalization.............................................. A-20
--------------
Section 2.03 Authority; No Violation..................................... A-22
-----------------------
Section 2.04 Consents.................................................... A-23
--------
Section 2.05 Financial Statements........................................ A-24
--------------------
Section 2.06 Taxes....................................................... A-24
-----
Section 2.07 No Material Adverse Effect.................................. A-24
--------------------------
Section 2.08 Contracts................................................... A-24
---------
Section 2.09 Ownership of Property; Insurance Coverage................... A-26
-----------------------------------------
Section 2.10 Legal Proceedings........................................... A-27
-----------------
Section 2.11 Compliance With Applicable Law.............................. A-28
------------------------------
Section 2.12 ERISA....................................................... A-28
-----
Section 2.13 Brokers, Finders and Financial Advisors..................... A-30
---------------------------------------
<PAGE>
Section 2.14 Environmental Matters....................................... A-30
---------------------
Section 2.15 Allowance for Loan Losses................................... A-30
-------------------------
Section 2.16 Information to be Supplied.................................. A-31
--------------------------
Section 2.17 Securities Documents........................................ A-31
--------------------
Section 2.18 Related Party Transactions.................................. A-32
--------------------------
Section 2.19 Loans....................................................... A-32
-----
Section 2.20 Fairness Opinion............................................ A-33
----------------
Section 2.21 Quality of Representations.................................. A-33
--------------------------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PATRIOT
-----------------------------------------
Section 3.01 Organization................................................ A-33
------------
Section 3.02 Capitalization.............................................. A-34
--------------
Section 3.03 Authority; No Violation..................................... A-34
-----------------------
Section 3.04 Consents.................................................... A-36
--------
Section 3.05 Financial Statements........................................ A-36
--------------------
Section 3.06 Taxes....................................................... A-37
-----
Section 3.07 No Material Adverse Effect.................................. A-38
--------------------------
Section 3.08 Legal Proceedings........................................... A-38
-----------------
Section 3.09 Compliance With Applicable Law.............................. A-38
------------------------------
Section 3.10 Information to be Supplied.................................. A-39
--------------------------
Section 3.11 ERISA....................................................... A-39
-----
Section 3.12 Brokers, Finders and Financial Advisors..................... A-41
---------------------------------------
Section 3.13 Securities Documents........................................ A-41
--------------------
Section 3.14 Fairness Opinion............................................ A-41
----------------
<PAGE>
Section 3.15 Quality of Representations.................................. A-41
--------------------------
ARTICLE IV
COVENANTS OF THE PARTIES
------------------------
Section 4.01 Conduct of FLC's Business................................... A-42
-------------------------
Section 4.02 Access; Confidentiality..................................... A-45
-----------------------
Section 4.03 Regulatory Matters and Consents............................. A-46
-------------------------------
Section 4.04 Taking of Necessary Action.................................. A-47
--------------------------
Section 4.05 Indemnification; Insurance.................................. A-48
--------------------------
Section 4.06 No Other Bids and Related Matters........................... A-49
---------------------------------
Section 4.07 Duty to Advise; Duty to Update Disclosure
Schedule........................................................ A-50
Section 4.08 Current Information......................................... A-50
-------------------
Section 4.09 Undertakings by FLC......................................... A-51
-------------------
Section 4.10 Employee Benefits........................................... A-53
-----------------
Section 4.11 Nasdaq Listing.............................................. A-53
--------------
Section 4.12 Affiliate Letters........................................... A-53
-----------------
Section 4.13 Severance Pay............................................... A-53
-------------
Section 4.14 Disposition of FLC Equity Portfolio......................... A-53
-----------------------------------
Section 4.15 Sale of FLC Headquarters.................................... A-53
------------------------
Section 4.16 Conduct of Patriot.......................................... A-54
------------------
Section 4.17 Closing Date................................................ A-54
------------
ARTICLE V
CONDITIONS
----------
Section 5.01 Mutual Conditions to the Obligations of FLC
-------------------------------------------
and Patriot under this Agreement................................ A-54
--------------------------------
<PAGE>
Section 5.02 Additional Conditions to the Obligations of
-------------------------------------------
Patriot......................................................... A-57
-------
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
---------------------------------
Section 6.01 Termination................................................. A-57
-----------
Section 6.02 Effect of Termination....................................... A-59
---------------------
ARTICLE VII
MISCELLANEOUS
-------------
Section 7.01 Expenses.................................................... A-59
--------
Section 7.02 Non-Survival of Representations and Warranties.............. A-59
----------------------------------------------
Section 7.03 Amendment, Extension and Waiver............................. A-59
-------------------------------
Section 7.04 Entire Agreement............................................ A-60
----------------
Section 7.05 No Assignment............................................... A-60
-------------
Section 7.06 Notices..................................................... A-60
-------
Section 7.07 Captions.................................................... A-62
--------
Section 7.08 Counterparts................................................ A-62
------------
Section 7.09 Severability................................................ A-62
------------
Section 7.10 Governing Law............................................... A-62
-------------
Exhibit 1 FLC's Affiliate Agreement................................... A-64
Exhibit 2 Patriot Stock Option Agreement.............................. A-67
Exhibit 3 Standstill Agreement........................................ A-82
Exhibit 4 Bank Plan of Merger......................................... A-95
Exhibit 5 Articles and Certificate of Consolidation................... A-102
Exhibit 6 Form of Opinion of Patriot's Counsel........................ A-133
Exhibit 7 Form of Opinion of FLC's Counsel............................ A-136
Exhibit 8 Matters to be Covered in Tax Opinion of
Counsel to Patriot.......................................... A-138
<PAGE>
AGREEMENT
---------
THIS AGREEMENT AND PLAN OF CONSOLIDATION, dated as of July 28, 1998, is
made by and between PATRIOT BANK CORP., a Delaware corporation, having its
principal place of business in Pottstown, Pennsylvania, and FIRST LEHIGH
CORPORATION ("FLC"), a Pennsylvania corporation, having its principal place of
business in Allentown, Pennsylvania.
BACKGROUND
----------
1. Patriot and FLC desire to consolidate into a new Pennsylvania
business corporation to be named Patriot Bank Corp. (the "Holding Company"), in
accordance with the applicable laws of the Commonwealth of Pennsylvania and the
State of Delaware, and in accordance with the plan of consolidation set forth
herein.
2. Patriot and FLC desire that the consolidation of Patriot and FLC
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended.
3. As an inducement to Patriot's willingness to enter into this
Agreement, (a) certain directors and certain officers of FLC are executing a
Letter Agreement in the form attached hereto as Exhibit 1, (b) FLC is
concurrently granting to Patriot an option to acquire, under certain
circumstances, FLC's common stock (the "Patriot Lock-Up Option") pursuant to a
Stock Option Agreement between Patriot and FLC in the form attached hereto as
Exhibit 2, and (c) James L. Leuthe, Chairman of FLC, is concurrently executing
the Standstill Agreement in the form attached hereto as Exhibit 3.
4. Patriot desires to merge First Lehigh Bank, a bank chartered under
the laws of the Commonwealth of Pennsylvania and wholly-owned subsidiary of FLC
("First Lehigh Bank"), into and with Patriot Bank, a bank chartered under the
laws of the Commonwealth of Pennsylvania, and a wholly-owned subsidiary of
Patriot ("Patriot Bank"), with Patriot Bank surviving such merger in accordance
with the Bank Plan of Merger in the form attached hereto as Exhibit 4.
5. Patriot and FLC desire to provide the terms and conditions governing
the transactions contemplated herein.
A-1
<PAGE>
AGREEMENT
---------
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants, agreements, representations and warranties herein contained, the
parties hereto, intending to be legally bound, do hereby agree as follows:
A-2
<PAGE>
ARTICLE I
THE CONSOLIDATION
-----------------
Section 1.01 Definitions. As used in this Agreement, the following
terms shall have the indicated meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
Affiliate means, with respect to any Person, any Person who
directly, or indirectly, through one or more intermediaries, controls,
or is controlled by, or is under common control with, such Person and,
without limiting the generality of the foregoing, includes any
executive officer or director of such Person and any Affiliate of such
executive officer or director.
Agreement means this agreement, and any amendment or
supplement hereto, which constitutes a "plan of consolidation" between
Patriot and FLC.
Applications means the applications for regulatory approval
which are required by the transactions contemplated hereby.
Articles and Certificate of Consolidation means the articles
and certificate of consolidation in the form attached hereto as Exhibit
5 to be executed by Patriot and FLC and to be filed in the PDS, in
accordance with the applicable laws of the Commonwealth of Pennsylvania
and to be filed in the DOSS, in accordance with the applicable laws of
the State of Delaware.
Bank Merger means the merger of First Lehigh Bank with and
into Patriot Bank, with Patriot Bank surviving such merger,
contemplated by Section 1.03 of this Agreement.
BCL means the Pennsylvania Business Corporation Law of 1988,
as amended.
BHCA means the Bank Holding Company Act of 1956, as amended.
A-3
<PAGE>
Closing Date means the fifth business day following the
satisfaction or waiver, to the extent permitted hereunder, of the
conditions to the consummation of the Consolidation specified in
Article V of this Agreement (other than the delivery of certificates,
opinions and other instruments and documents to be delivered at the
Closing), or such other date as Patriot and FLC may mutually agree.
Consolidation means the consolidation of Patriot and FLC into
the Holding Company, contemplated by this Agreement.
DGCL means the Delaware General Corporation Law.
DOJ means the United States Department of Justice.
DOSS means the Delaware Office of the Secretary State.
Dissenting Shares shall have the meaning set forth in Section
1.02(e)(ii)(F) hereof.
Effective Date means the date upon which the Articles of
Consolidation shall be filed in the PDS, and shall be the same as the
Closing Date.
Environmental Law means any federal, state, local or foreign
law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction
or agreement with any Regulatory Authority relating to (i) the
protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and animal
life or any other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of any substance presently
listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, whether by type or by
quantity, including any material containing any such substance as a
component.
ERISA means the Employee Retirement Income Security Act of
1974, as amended.
A-4
<PAGE>
Exchange Act means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated from time to time
thereunder.
FDIA means the Federal Deposit Insurance Act, as amended.
FDIC means the Federal Deposit Insurance Corporation.
FRB means the Board of Governors of the Federal Reserve
System.
FLC Common Stock means the common stock of FLC described in
Section 2.02(a).
FLC Capital Stock means collectively FLC Common Stock, FLC
Senior Preferred Stock and FLC Series A Preferred Stock.
FLC Disclosure Schedule means a disclosure schedule delivered
by FLC to Patriot pursuant to Article II of this Agreement.
FLC Exchange Ratios shall have the meaning given to such term
in Section 1.02(e)(ii)(A) and (B).
FLC Financials means (i) the audited consolidated financial
statements of FLC as of December 31, 1997 and for the three years ended
December 31, 1997, including the notes thereto, and (ii) the unaudited
interim consolidated financial statements of FLC as of each calendar
quarter thereafter included in Securities Documents filed by FLC.
FLC Options means options to purchase shares of FLC Common
Stock granted pursuant to the FLC Stock Option Plans.
FLC Regulatory Reports means the annual and quarterly reports
of FLC filed with the FRB since December 31, 1996 through the Closing
Date, and the financial reports of First Lehigh Bank and accompanying
schedules for each calendar quarter filed with the FDIC, beginning with
the quarter ended December 31, 1996, through the Closing Date.
A-5
<PAGE>
FLC Senior Preferred Stock means the senior preferred stock
described in Section 2.02(a).
FLC Series A Preferred Stock means the series A preferred
stock described in Section 2.02(a).
FLC Stock Option Plans means the 1997 Stock Option Plan and
the First Lehigh Corporation 1989 Equity Incentive Plan.
FLC Subsidiaries means any corporation, 50% or more of the
capital stock of which is owned, either directly or indirectly, by FLC,
except any corporation the stock of which is held in the ordinary
course of the lending activities of First Lehigh Bank.
GAAP means generally accepted accounting principles as in
effect at the relevant date.
Holding Company Common Stock means the common stock, par
value, of the Holding Company.
IRC means the Internal Revenue Code of 1986, as amended.
IRS means the Internal Revenue Service.
Material Adverse Effect shall mean, with respect to Patriot or
FLC, respectively, any effect that is material and adverse to its
assets, financial condition or results of operations on a consolidated
basis, provided, however, that Material Adverse Effect shall not be
deemed to include (a) any change in the value of the respective
investment and loan portfolios of Patriot or FLC resulting from a
change in interest rates generally, (b) any change occurring after the
date hereof in any federal or state law, rule or regulation or in GAAP,
which change affects banking institutions generally, including any
changes affecting the Bank Insurance Fund and (c) actions or omissions
of a party (or any of its Subsidiaries) taken with the prior informed
written consent of the other party in contemplation of the transactions
contemplated hereby.
NASD means the National Association of Securities Dealers,
Inc.
A-6
<PAGE>
Patriot Common Stock has the meaning given to that term in
Section 3.02(a) of this Agreement.
Patriot Disclosure Schedule means a disclosure schedule
delivered by Patriot to FLC pursuant to Article III of this Agreement.
Patriot Exchange Ratio shall have the meaning given to such
term in Section 1.02(e)(i)(A).
Patriot Financials means (i) the audited consolidated
financial statements of Patriot as of December 31, 1997 and for the
three years ended December 31, 1997, including the notes thereto, and
(ii) the unaudited interim consolidated financial statements of Patriot
as of each calendar quarter thereafter included in Securities Documents
filed by Patriot.
Patriot Lock-Up Option means the option granted to Patriot to
acquire shares of FLC Common Stock referenced in the recitals to this
Agreement.
Patriot Market Price means, as of any date, the average
between the closing high bid and low asked prices of a share of Patriot
Common Stock on the Nasdaq National Market System (as reported in The
Wall Street Journal, or if not reported therein, in another
authoritative source).
Patriot Market Value means the average of the Patriot Market
Prices for the twenty (20) consecutive trading days ending on the
trading day immediately preceding the Closing Date.
Patriot Options means options to purchase shares of Patriot
Common Stock granted pursuant to the Patriot Stock Option Plan.
Patriot Regulatory Reports means the annual and quarterly
reports of Patriot filed with the FRB since December 31, 1997 through
the Closing Date, and the financial reports of Patriot Bank and
accompanying schedules for each calendar quarter, beginning with the
quarter ended December 31, 1998, through the Closing Date.
Patriot Stock Option Plan means the Patriot 1996 Stock-Based
Incentive Plan, as amended.
A-7
<PAGE>
Patriot Subsidiaries means any corporation, 50% or more of the
capital stock of which is owned, either directly or indirectly, by
Patriot, except any corporation the stock of which is held in the
ordinary course of the lending activities of a bank.
PDB means the Pennsylvania Department of Banking.
PDS means the Department of State of the Commonwealth of
Pennsylvania.
Person means any individual, corporation, partnership, joint
venture, association, trust or "group" (as that term is defined in
Section 13(d)(3) of the Exchange Act).
Prospectus/Proxy Statement means the prospectus/proxy
statement, together with any amendments and supplements thereto, to be
transmitted to holders of FLC Capital Stock and Patriot Common Stock in
connection with the transactions contemplated by this Agreement.
Registration Statement means the registration statement on
Form S-4, including any pre-effective or post-effective amendments or
supplements thereto, as filed with the SEC under the Securities Act
with respect to the Holding Company Common Stock to be issued in
connection with the transactions contemplated by this Agreement.
Regulatory Agreement has the meanings given to that term in
Sections 2.11 and 3.09 of this Agreement.
Regulatory Authority means any banking agency or department of
any federal or state government, including without limitation the FRB,
the FDIC, the PDB, or the respective staffs thereof.
Rights means warrants, options, rights, convertible securities
and other capital stock equivalents which obligate an entity to issue
its securities.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933, as amended,
and the rules and regulations promulgated from time to time thereunder.
A-8
<PAGE>
Securities Documents means all registration statements,
schedules, statements, forms, reports, proxy material, and other
documents required to be filed under the Securities Laws.
Securities Laws means the Securities Act, the Exchange Act,
the Investment Company Act of 1940, as amended, the Investment Advisers
Act of 1940, as amended, the Trust Indenture Act of 1939, as amended,
and in each case the rules and regulations promulgated from time to
time thereunder.
Standstill Agreement means the Standstill Agreement between
James L. Leuthe and Patriot, the form of which is attached hereto as
Exhibit 3.
Subsidiary means any corporation or partnership, 50% or more
of the capital stock or partnership interests of which is owned, either
directly or indirectly, by another entity, except any corporation or
partnership the stock or partnership interests of which is held in the
ordinary course of the lending activities of a bank.
Section 1.02 The Consolidation.
(a) Closing. The closing will take place at 10:00 a.m. on the
Closing Date at the offices of Stevens & Lee, One Glenhardie Corporate Center,
Suite 202, 1275 Drummers Lane, P.O. Box 236, Wayne, Pennsylvania, unless another
time and place are agreed to by the parties hereto; provided, in any case, that
all conditions to closing set forth in Article V (other than the delivery of
certificates, opinions and other instruments and documents to be delivered at
the Closing) have been satisfied or waived at or prior to the Closing Date. On
the Closing Date, FLC and Patriot shall cause the Articles of Consolidation to
be duly executed and to be filed in the PDS and the Certificate of Consolidation
to be duly executed and filed in the DOSS.
(b) The Consolidation. Subject to the terms and conditions of
this Agreement, on the Effective Date, FLC and Patriot shall consolidate into
the Holding Company in accordance with the provisions of the BCL and the DGCL.
The Holding Company shall be the corporation formed as a result of the
Consolidation under the laws of the Commonwealth of Pennsylvania and shall have
its headquarters at High and Hanover Streets, Pottstown, Pennsylvania. From and
after the Effective Date, the Consolidation shall have the effects set forth in
Section 1929 of the BCL.
A-9
<PAGE>
(c) Holding Company's Articles of Incorporation and Bylaws.
On and after the Effective Date, the articles of incorporation and bylaws of the
Holding Company shall be as set forth in the Articles and Certificate of
Consolidation and the Bylaws of the Holding Company shall be adopted on the
Effective Date by the Holding Company's Board of Directors.
(d) Board of Directors and Officers of the Holding Company
and Patriot Bank Board of Directors and Officers.
(i) On the Effective Date, the Board of Directors of the
Holding Company, as the continuing corporation as a result of the Consolidation,
shall consist of the directors identified in the Articles and Certificate of
Consolidation, all of whom shall be the existing members of the Patriot Board of
Directors.
(ii) On the Effective Date, the executive officers of the
Holding Company shall be the existing executive officers of Patriot.
(iii) The Board of Directors and officers of Patriot Bank
shall remain unchanged.
(e) Conversion of Shares.
(i) Patriot Common Stock.
(A) Subject to the provisions of subparagraphs (B),
(C) and (D) of this Section 1.02(e)(i), each share of Patriot Common Stock
issued and outstanding immediately prior to the Effective Date (other than
shares of Patriot Common Stock, if any, then owned by Patriot or FLC or any
Patriot Subsidiary) shall, on the Effective Date, by reason of the
Consolidation and without any action on the part of the holder thereof, be
converted into and become a right to receive 1.0 shares of fully paid and
nonassessable shares of Holding Company Common Stock. The exchange ratio
set forth in this Section 1.02(e)(i)(A) is hereinafter referred to as the
"Patriot Exchange Ratio".
(B) Each share of Patriot Common Stock (other than
trust account shares or shares acquired in connection with debts previously
A-10
<PAGE>
contracted ("DPC shares")) owned by FLC or a FLC Subsidiary on the
Effective Date, if any, shall be cancelled.
(C) Each share of Patriot Common Stock issued and
held in the treasury of Patriot or owned by any Patriot Subsidiary (other
than trust account shares or DPC shares) as of the Effective Date, if any,
shall be cancelled, and no cash, stock or other property shall be delivered
in exchange therefor.
(D) No fraction of a whole share of Holding Company
Common Stock and no scrip or certificates therefor shall be issued in
connection with the Consolidation. Any former holder of Patriot Common
Stock who would otherwise be entitled to receive a fraction of a share of
Holding Company Common Stock shall receive, in lieu thereof, cash in an
amount equal to such fraction of a share multiplied by the closing price of
the Holding Company Common Stock on the Nasdaq National Market System on
the first day Holding Company Common Stock is traded after the Effective
Date.
(ii) FLC Capital Stock.
(A) Subject to the provisions of subparagraphs (C),
(D), (E) and (F) of this Section 1.02(e)(ii), each share of FLC Common
Stock and each share of FLC Senior Preferred Stock issued and outstanding
immediately prior to the Effective Date (other than shares of FLC Common
Stock or FLC Senior Preferred stock, if any, then owned by Patriot or FLC
or any FLC Subsidiary) shall, on the Effective Date, by reason of the
Consolidation and without any action on the part of the holder thereof, be
converted into and become a right to receive:
(i) if the Patriot Market Value is greater than
or equal to $14.71 and less than or equal to $17.97, then .428
shares of fully paid and nonassessable shares of Holding Company
Common Stock.
(ii) if the Patriot Market Value is less than
$14.71, then that number (rounded to the nearest thousandth) of
shares of fully paid and nonassessable shares of Holding Company
Common Stock, equal to $6.30 divided by the Patriot Market Value,
A-11
<PAGE>
provided that if the Patriot Market Value is less than $13.07,
Patriot shall have the option to elect, by written notice to FLC,
and subject to FLC's rights under Section 6.01(c) hereof, to have
the FLC Exchange Ratio with respect to FLC Common Stock and FLC
Senior Preferred Stock be equal to that number (rounded to the
nearest thousandth) of shares of fully paid and nonassessable
shares of Holding Company Common Stock, equal to $6.30 divided by
$13.07; or
(iii) if the Patriot Market Value is greater
than $17.97, then that number (rounded to the nearest thousandth)
of shares of fully paid and nonassessable shares of Holding
Company Common Stock equal to $7.69 divided by the Patriot Market
Value; provided that if on or prior to the Effective Date there
has been any public announcement of a proposed acquisition or
sale of all or substantially all of Patriot's assets or a merger,
consolidation or similar transaction involving Patriot in which
Patriot is not the surviving entity or in which shareholders of
Patriot before such transaction will not hold in the aggregate
shares of the surviving or new corporation to be outstanding
immediately after the consummation thereof entitled to cast at
least a majority of the votes entitled to be cast generally for
the election of directors, the Exchange Ratio shall be .428.
The FLC Exchange Ratio, as determined pursuant to any of Sections
1.02(e)(ii)(A)(i), 1.02(e)(ii)(A)(ii) or 1.02(e)(ii)(A)(iii), is sometimes
hereinafter referred to as the "Applicable Common and Senior Preferred
Exchange Ratio".
(B) Subject to the provisions of subparagraphs (C),
(D), (E) and (F) of this Section 1.02(e)(ii), each share of FLC Series A
Preferred Stock issued and outstanding immediately prior to the Effective
Date (other than shares of FLC Series A Preferred Stock, if any, then owned
by Patriot or FLC or any FLC Subsidiary) shall, on the Effective Date, by
reason of the Consolidation and without any action on the part of the
holder thereof, be converted into and become a right to receive:
(i) if the Patriot Market Value is greater than
or equal to $14.71 and less than or equal to $17.97, then .342
A-12
<PAGE>
shares of fully paid and nonassessable shares of Holding Company
Common Stock.
(ii) if the Patriot Market Value is less than
$14.71, then that number (rounded to the nearest thousandth) of
shares of fully paid and nonassessable shares of Holding Company
Common Stock, equal to $5.04 divided by the Patriot Market Value,
provided that if the Patriot Market Value is less than $13.07,
Patriot shall have the option to elect, by written notice to FLC,
and subject to FLC's rights under Section 6.01(c) hereof, to have
the FLC Exchange Ratio with respect to the FLC Series A Preferred
Stock be equal to that number (rounded to the nearest thousandth)
of shares of fully paid and nonassessable shares of Holding
Company Common Stock, equal to 5.04 divided by $13.07; or
(iii) if the Patriot Market Value is greater
than $17.97, then that number (rounded to the nearest thousandth)
of shares of fully paid and nonassessable shares of Holding
Company Common Stock equal to $6.15 divided by the Patriot Market
Value; provided that if on or prior to the Effective Date there
has been any public announcement of a proposed acquisition or
sale of all or substantially all of Patriot's assets or a merger,
consolidation or similar transaction involving Patriot in which
Patriot is not the surviving entity or in which shareholders of
Patriot before such transaction will not hold in the aggregate
shares of the surviving or new corporation to be outstanding
immediately after the consummation thereof entitled to cast at
least a majority of the votes entitled to be cast generally for
the election of directors, the Exchange Ratio shall be .342.
The FLC Exchange Ratio, as determined pursuant to any of Sections
1.02(e)(ii)(B)(i), 1.02(e)(ii)(B)(ii) or 1.02(e)(ii)(B)(iii), is sometimes
hereinafter referred to as the "Applicable Series A Preferred Exchange
Ratio".
(C) Each share of FLC Capital Stock (other than trust
account shares or DPC shares) owned by Patriot or a Patriot Subsidiary on
the Effective Date, if any, shall be cancelled.
A-13
<PAGE>
(D) Each share of FLC Capital Stock issued and held
in the treasury of FLC or owned by any FLC Subsidiary (other than trust
account shares or DPC shares) as of the Effective Date, if any, shall be
cancelled, and no cash, stock or other property shall be delivered in
exchange therefor.
(E) No fraction of a whole share of Holding Company
Common Stock and no scrip or certificates therefor shall be issued in
connection with the Consolidation. Any former holder of FLC Capital Stock
who would otherwise be entitled to receive a fraction of a share of Holding
Company Common Stock shall receive, in lieu thereof, cash in an amount
equal to such fraction of a share multiplied by the closing price of the
Holding Company Common Stock on the Nasdaq National Market System on the
first day Holding Company Common Stock is traded after the Effective Date,
and, in the case of FLC Series A Preferred Stock, further multiplied by
0.8.
(F) Each outstanding share of FLC Capital Stock the
holder of which has perfected his dissenters rights under the BCL and has
not effectively withdrawn or lost such right as of the Effective Date shall
not be converted into or represent a right to receive shares of Holding
Company Stock hereunder, and the holder thereof shall be entitled only to
such rights as are granted by the BCL. FLC shall give Patriot prompt notice
upon receipt by FLC of any such written demands for payment of the fair
value of such shares of FLC Common Stock ("Dissenting Shares") and of
withdrawals of such demands and any other instruments provided pursuant to
the BCL (any shareholder duly making such demand being hereinafter called a
"FLC Dissenting Shareholder"). If any FLC Dissenting Shareholder shall
effectively withdraw or lose (through failure to perfect or otherwise) his
right to such payment at any time, such holder's shares of FLC Capital
Stock shall be converted into the right to receive Holding Company Common
Stock in accordance with Section 1.02(e)(ii) of this Agreement. Any
payments made in respect of Dissenting Shares shall be made by the Holding
Company, as the continuing corporation after the Consolidation.
A-14
<PAGE>
(f) Stock Options.
(i) On the Effective Date, each FLC Option and each
Patriot Option which is then outstanding, whether or not exercisable, shall
cease to represent a right to acquire shares of FLC Common Stock or Patriot
Common Stock, as the case may be, and shall be converted automatically into
an option to purchase shares of Holding Company Common Stock, and the
Holding Company shall assume each FLC Option and Patriot Option, in
accordance with the terms of the applicable FLC Stock Option Plan or
Patriot Stock Option Plan, as the case may be, and the stock option
agreement by which it is evidenced, except that from and after the
Effective Date, (i) the Holding Company and its Board of Directors or a
duly authorized committee thereof shall be substituted for FLC, Patriot or
their respective Boards of Directors or duly authorized committee thereof
administering such FLC Stock Option Plan or Patriot Stock Option Plan, as
the case may be, (ii) each FLC Option and Patriot Option assumed by the
Holding Company may be exercised solely for shares of the Holding Company
Common Stock, (iii) the number of shares of Holding Company Common Stock
subject to each Patriot Option shall be equal to the number of shares of
Patriot Common Stock subject to such Patriot Option immediately prior to
the Effective Date multiplied by the Patriot Exchange Ratio, provided that
any fractional shares of Holding Company Common Stock resulting from such
multiplication shall be rounded down to the nearest share, and (iv) the per
share exercise price under each such Patriot Option shall be adjusted by
dividing the per share exercise price under each such Patriot Option by the
Patriot Exchange Ratio, provided that such exercise price shall be rounded
up to the nearest cent, (v) the number of shares of Holding Company Common
Stock subject to each FLC Option shall be equal to the number of shares of
FLC Common Stock subject to such FLC Option immediately prior to the
Effective Date multiplied by the Applicable FLC Common and Senior Preferred
Exchange Ratio, provided that any fractional shares of Holding Company
Common Stock resulting from such multiplication shall be rounded down to
the nearest share, and (vi) the per share exercise price under each such
FLC Option shall be adjusted by dividing the per share exercise price under
each such FLC Option by the FLC Common and Senior Preferred Exchange Ratio,
provided that such exercise price shall be rounded up to the nearest cent.
Notwithstanding clauses (iii), (iv), (v) and (vi) of the
A-15
<PAGE>
preceding sentence, each Patriot Option or FLC Option which is an
"incentive stock option" shall be adjusted as required by Section 424 of
the IRC, and the regulations promulgated thereunder, so as not to
constitute a modification, extension or renewal of the option within the
meaning of Section 424(h) of the IRC. Patriot and FLC agree to take all
necessary steps to effect the foregoing provisions of this Section 1.02(f).
(ii) As soon as practicable after the Effective Date,
the Holding Company shall deliver to each participant in each FLC Stock
Option Plan and the Patriot Stock Option Plan an appropriate notice setting
forth such participant's rights pursuant thereto and the grants subject to
such FLC Stock Option Plan or Patriot Stock Option Plan shall continue in
effect on the same terms and conditions, including without limitation the
duration thereof, subject to the adjustments required by Section 1.02(f)(i)
hereof after giving effect to the Consolidation. Within 30 days after the
Effective Date, the Holding Company shall file a registration statement on
Form S-3 or Form S-8, as the case may be (or any successor or other
appropriate forms), with respect to the shares of Holding Company Common
Stock subject to such options and shall use its reasonable best efforts to
maintain the current status of the prospectus or prospectuses contained
therein for so long as such options remain outstanding.
(g) Surrender and Exchange of FLC and Patriot Stock
Certificates.
(i) Exchange of Certificates. Each holder of shares of
FLC Capital Stock or Patriot Common Stock who surrenders to the Holding
Company (or its agent) the certificate or certificates representing such
shares will be entitled to receive, as soon as practicable after the
Effective Date, in exchange therefor a certificate or certificates for the
number of whole shares of Holding Company Common Stock into which such
holder's shares of FLC Capital Stock or Patriot Common Stock have been
converted pursuant to the Consolidation, together with a check for cash in
lieu of any fractional share in accordance with Section 1.02(e)(i)(D) or
Section 1.02(e)(ii)(E) hereof, as the case may be.
A-16
<PAGE>
(ii) Rights Evidenced by Certificates. Each certificate
for shares of Holding Company Common Stock issued in exchange for
certificates for FLC Capital Stock or Patriot Common Stock pursuant to
Section 1.02(g)(i) hereof will be dated the Effective Date and be entitled
to dividends and all other rights and privileges pertaining to Holding
Company Common Stock from and after the Effective Date. Until surrendered,
each certificate theretofore evidencing shares of FLC Capital Stock or
Patriot Common Stock, from and after the Effective Date, will evidence
solely the right to receive certificates for shares of Holding Company
Common Stock pursuant to Section 1.02(g)(i) hereof and a check for cash in
lieu of any fractional share in accordance with Section 1.02(e)(i)(D) or
Section 1.02(e)(ii)(E), as the case may be. If certificates for shares of
FLC Capital Stock or Patriot Common Stock are exchanged for Holding Company
Common Stock at a date following one or more record dates for the payment
of dividends or of any other distribution on the shares of Holding Company
Common Stock, the Holding Company will pay cash in an amount equal to
dividends theretofore payable on such Holding Company Common Stock and pay
or deliver any other distribution to which holders of shares of Holding
Company Common Stock have theretofore become entitled. Upon surrender of
certificates for shares of FLC Capital Stock or Patriot Common Stock in
exchange for certificates for Holding Company Common Stock, the Holding
Company also shall pay any dividends to which such holder of FLC Capital
Stock, in the case of a holder of Patriot Common Stock, may be entitled as
a result of the declaration of a dividend on the FLC Capital Stock or
Patriot Common Stock by FLC or Patriot in accordance with the terms of this
Agreement with a record date prior to the Effective Date and a payment date
after the Effective Date. No interest will accrue or be payable in respect
of dividends or cash otherwise payable under this Section 1.02(g) upon
surrender of certificates for shares of FLC Capital Stock or Patriot Common
Stock. Notwithstanding the foregoing, no party hereto will be liable to any
holder of FLC Capital Stock or any holder of Patriot Common Stock, for any
amount paid in good faith to a public official or agency pursuant to any
applicable abandoned property, escheat or similar law. Until such time as
certificates for shares of FLC Capital Stock or Patriot Common Stock are
surrendered by a Patriot or FLC shareholder to the Holding Company for
exchange, the Holding Company shall have the right to withhold dividends or
A-17
<PAGE>
any other distributions on the shares of Holding Company Common Stock
issuable to such shareholder.
(iii) Exchange Procedures. Each certificate for shares
of FLC Capital Stock or Patriot Common Stock delivered for exchange under
this Section 1.02(g) must be endorsed in blank by the registered holder
thereof or be accompanied by a power of attorney to transfer such shares
endorsed in blank by such holder. If more than one certificate is
surrendered at one time and in one transmittal package for the same
shareholder account, the number of whole shares of Holding Company Common
Stock for which certificates will be issued pursuant to this Section
1.02(g) will be computed on the basis of the aggregate number of shares
represented by the certificates so surrendered. If shares of Holding
Company Common Stock or payments of cash are to be issued or made to a
person other than the one in whose name the surrendered certificate is
registered, the certificate so surrendered must be properly endorsed in
blank, with signature(s) guaranteed, or otherwise in proper form for
transfer, and the person to whom certificates for shares of Holding Company
Common Stock is to be issued or to whom cash is to be paid shall pay any
transfer or other taxes required by reason of such issuance or payment to a
person other than the registered holder of the certificate for shares of
FLC Capital Stock or Patriot Common Stock which are surrendered. As
promptly as practicable after the Effective Date, the Holding Company shall
send or cause to be sent to each shareholder of record of FLC Capital Stock
or Patriot Common Stock transmittal materials for use in exchanging
certificates representing FLC Capital Stock for certificates representing
Holding Company Common Stock into which the FLC Capital Stock or Patriot
Common Stock have been converted in the Consolidation. Certificates
representing shares of Holding Company Common Stock and checks for cash in
lieu of fractional shares shall be mailed to former shareholders of FLC and
Patriot as soon as reasonably possible but in no event later than twenty
(20) business days following the receipt of certificates representing
former shares of FLC Capital Stock or Patriot Common Stock duly endorsed or
accompanied by the materials referenced herein and delivered by certified
mail, return receipt requested (but in no event earlier than the second
business day following the Effective Date).
A-18
<PAGE>
(iv) Closing of Stock Transfer Books; Cancellation of
FLC and Patriot Certificates. Upon the Effective Date, the stock transfer
books for FLC Capital Stock and Patriot Common Stock will be closed and no
further transfers of shares of FLC Capital Stock or Patriot Common Stock
will thereafter be made or recognized. All certificates for shares of FLC
Capital Stock and Patriot Common Stock surrendered pursuant to this Section
1.02(g) will be cancelled by the Holding Company.
(h) Anti-Dilution Provisions. If, FLC or Patriot has, at any
time after the date hereof and before the Effective Date, (A) issued a dividend
in shares of FLC Common Stock or Patriot Common Stock, (B) combined the
outstanding shares of FLC Common Stock or Patriot Common Stock into a smaller
number of shares, (C) subdivided the outstanding shares of FLC Common Stock or
Patriot Common Stock, or (D) reclassified the shares of FLC Common Stock or
Patriot Common Stock, then the number of shares of Holding Company Common Stock
to be delivered to FLC or Patriot shareholders who are entitled to receive
shares of Holding Company Common Stock in exchange for shares of FLC Capital
Stock or Patriot Common Stock shall be adjusted so that each FLC or Patriot
shareholder shall be entitled to receive such number of shares of Holding
Company Common Stock as such shareholder would have been entitled to receive if
the Effective Date had occurred prior to the happening of such event. (By way of
illustration, if Patriot or FLC shall declare a stock dividend of 7% payable
with respect to a record date on or prior to the Effective Date and the
conditions set forth above are satisfied, the Patriot Exchange Ratio or the FLC
Exchange Ratio, as the case may be, shall be adjusted downward by 7%).
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FLC
-------------------------------------
FLC hereby represents and warrants to Patriot that, except as
specifically set forth in the FLC Disclosure Schedule delivered to Patriot by
FLC on the date hereof:
Section 2.01 Organization.
(a) FLC is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania. FLC is
a bank holding company duly registered under the BHCA. FLC has the corporate
power and authority to carry on its business and operations as now being
conducted and to own and operate the properties and assets now owned and being
A-19
<PAGE>
operated by it. FLC is not qualified or licensed to do business as a foreign
corporation in any other jurisdiction and is not required to be so qualified or
licensed as the result of the ownership or leasing of property or the conduct of
its business except where the failure to be so qualified or licensed would not
have a Material Adverse Effect on FLC.
(b) First Lehigh Bank is a state bank duly organized and
validly existing under the laws of the Commonwealth of Pennsylvania. First
Lehigh Bank has the corporate power and authority to carry on its business and
operations as now being conducted and to own and operate the properties and
assets now owned and being operated by it. Neither First Lehigh Bank nor any
other FLC Subsidiary is qualified or licensed to do business as a foreign
corporation in any other jurisdiction and neither is required to be so qualified
or licensed as the result of the ownership or leasing of property or the conduct
of its business, except where the failure to be so qualified or licensed would
not have a Material Adverse Effect on FLC.
(c) There are no FLC Subsidiaries other than First Lehigh
Bank and those identified in the FLC Disclosure Schedule.
(d) The deposits of First Lehigh Bank are insured by the
FDIC to the extent provided in the FDIA.
(e) The respective minute books of FLC and First Lehigh Bank
and each other FLC Subsidiary accurately record, in all material respects, all
material corporate actions of their respective shareholders and boards of
directors (including committees).
(f) Prior to the date of this Agreement, FLC has delivered
to Patriot true and correct copies of the articles of incorporation and bylaws
of FLC and the articles of incorporation and bylaws of First Lehigh Bank as in
effect on the date hereof.
Section 2.02 Capitalization.
(a) The authorized capital stock of FLC consists of (a)
10,000,000 shares of common stock, $0.01 par value ("FLC Common Stock"), of
which 2,056,140 shares are outstanding, validly issued, fully paid and
nonassessable and free of preemptive rights, (b) 1,500,000 shares of senior
A-20
<PAGE>
preferred stock, $.01 par value ("FLC Senior Preferred Stock"), of which 894,223
shares are issued or outstanding and (c) 1,000,000 shares of series A preferred
stock, $.01 par value ("FLC Series A Preferred Stock"), of which 682,000 shares
are issued and outstanding. Neither FLC nor First Lehigh Bank nor any other FLC
Subsidiary has or is bound by any subscription, option, warrant, call,
commitment, agreement, plan or other Right of any character relating to the
purchase, sale or issuance or voting of, or right to receive dividends or other
distributions on any shares of FLC Capital Stock or any other security of FLC or
any securities representing the right to vote, purchase or otherwise receive any
shares of FLC Capital Stock, or any other security of FLC, other than (i) shares
issuable under the Patriot Option, (ii) 60,000 shares of FLC Common Stock
issuable under the FLC Stock Option Plans upon the exercise of presently
outstanding options, (iii) with respect to the FLC Senior Preferred Stock, the
right to receive cumulative dividends at the annual rate of $.25 per share and
(iv) with respect to the FLC Series A Preferred Stock the right to receive
cumulative dividends at the annual rate of $.3255 per share and the right to
receive cumulative dividends in arrears of $832,467 as of June 30, 1998, all as
set forth in detail in the FLC Disclosure Schedule.
(b) The authorized capital stock of First Lehigh Bank
consists of 10,500 shares of common stock, par value $20 per share ("First
Lehigh Bank Common Stock"), of which 10,500 shares are outstanding, validly
issued, fully paid, nonassessable, free of preemptive rights and owned by FLC.
Neither FLC nor any FLC Subsidiary has or is bound by any subscription, option,
warrant, call, commitment, agreement or other Right of any character relating to
the purchase, sale or issuance or voting of, or right to receive dividends or
other distributions on any shares of the capital stock of any FLC Subsidiary or
any other security of any FLC Subsidiary or any securities representing the
right to vote, purchase or otherwise receive any shares of the capital stock or
any other security of any FLC Subsidiary. Except as set forth in the FLC
Disclosure Schedule, either FLC or First Lehigh Bank owns all of the outstanding
shares of capital stock of each FLC Subsidiary free and clear of all liens,
security interests, pledges, charges, encumbrances, agreements and restrictions
of any kind or nature.
(c) Except as set forth in the FLC Disclosure Schedule,
neither (i) FLC, (ii) First Lehigh Bank nor (iii) any other FLC Subsidiary, owns
any equity interest, directly or indirectly, other than treasury stock, in any
A-21
<PAGE>
other company or controls any other company, except for equity interests held in
the investment portfolios of FLC and FLC Subsidiaries, equity interests held by
FLC Subsidiaries in a fiduciary capacity, and equity interests held in
connection with the commercial loan activities of FLC Subsidiaries. There are no
subscriptions, options, warrants, calls, commitments, agreements or other Rights
outstanding and held by FLC or First Lehigh Bank with respect to any other
company's capital stock or the equity of any other person.
(d) To the best of FLC's knowledge, except as disclosed in
FLC's Annual Report on Form 10-KSB for the year ended December 31, 1997, no
person or "group" (as that term is used in Section 13(d)(3) of the Exchange
Act), is the beneficial owner (as defined in Section 13(d) of the Exchange Act)
of 5% or more of the outstanding shares of any class of FLC Capital Stock.
Section 2.03 Authority; No Violation.
(a) FLC has full corporate power and authority to execute
and deliver this Agreement and to complete the transactions contemplated hereby.
First Lehigh Bank has full corporate power and authority to execute and deliver
the Bank Plan of Merger and to consummate the Bank Merger. The execution and
delivery of this Agreement by FLC and the completion by FLC of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of FLC and, except for approval by the shareholders of FLC as required
under the BCL, FLC's articles of incorporation and bylaws, no other corporate
proceedings on the part of FLC are necessary to complete the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by FLC and, subject to approval of the shareholders of FLC as required
under the BCL, FLC's articles of incorporation and bylaws and receipt of the
required approvals from Regulatory Authorities described in Section 3.04 hereof,
constitutes the valid and binding obligation of FLC, enforceable against FLC in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity. The Bank Plan of Merger, upon
its execution and delivery by First Lehigh Bank concurrently with the execution
and delivery of this Agreement, will constitute the valid and binding obligation
of First Lehigh Bank, enforceable against First Lehigh Bank in accordance with
its terms, subject to required approvals of Regulatory Authorities, and subject
to applicable conservatorship or receivership provisions of the FDIA, or
A-22
<PAGE>
insolvency and similar laws affecting creditors' rights generally and subject,
as to enforceability, to general principles of equity.
(b) (A) The execution and delivery of this Agreement by FLC,
(B) the execution and delivery of the Bank Plan of Merger by First Lehigh Bank,
(C) subject to receipt of approvals from the Regulatory Authorities referred to
in Section 3.04 hereof and FLC's and Patriot's compliance with any conditions
contained therein, the completion of the transactions contemplated hereby, and
(D) compliance by FLC or First Lehigh Bank with any of the terms or provisions
hereof or of the Bank Plan of Merger, will not (i) conflict with or result in a
breach of any provision of the articles of incorporation or other organizational
document or bylaws of FLC or any FLC Subsidiary; (ii) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to FLC or any FLC Subsidiary or any of their respective properties or
assets; or (iii) except as set forth in the FLC Disclosure Schedule, violate,
conflict with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in a right of termination or acceleration or the creation
of any lien, security interest, charge or other encumbrance upon any of the
properties or assets of FLC or any FLC Subsidiary under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement, commitment or other instrument or obligation to which
FLC or any FLC Subsidiary is a party, or by which they or any of their
respective properties or assets may be bound or affected, except for such
violations, conflicts, breaches or defaults under clause (ii) or (iii) hereof
which, either individually or in the aggregate, will not have a Material Adverse
Effect on FLC.
Section 2.04 Consents. Except for the consents, approvals, filings and
registrations from or with the Regulatory Authorities referred to in Section
3.04 hereof and compliance with any conditions contained therein, and the
approval of this Agreement by the shareholders of FLC under the BCL, FLC's
articles of incorporation and bylaws, and the approval of the Bank Plan of
Merger by FLC as sole shareholder of First Lehigh Bank under the Pennsylvania
Banking Code of 1965, as amended, and by the First Lehigh Bank Board of
Directors, and except as disclosed in the FLC Disclosure Schedule, no consents
A-23
<PAGE>
or approvals of, or filings or registrations with, any public body or authority
are necessary, and no consents or approvals of any third parties are necessary,
or will be, in connection with (a) the execution and delivery of this Agreement
by FLC or the Bank Plan of Merger by First Lehigh Bank, and (b) the completion
by FLC of the transactions contemplated hereby or by First Lehigh Bank of the
Bank Merger. As of the date hereof, FLC has no reason to believe that (i) any
required consents or approvals will not be received or will be received with
conditions, limitations or restrictions unacceptable to it or which would
adversely impact FLC's or First Lehigh Bank's ability to complete the
transactions contemplated by this Agreement or that (ii) any public body or
authority, the consent or approval of which is not required or any filing with
which is not required, will object to the completion of the transactions
contemplated by this Agreement.
Section 2.05 Financial Statements.
(a) FLC has previously delivered, or will deliver, to
Patriot the FLC Regulatory Reports. The FLC Regulatory Reports have been, or
will be, prepared in all material respects in accordance with applicable
regulatory accounting principles and practices throughout the periods covered by
such statements, and fairly present, or will fairly present in all material
respects, the financial position, results of operations and changes in
shareholders' equity of FLC as of and for the periods ended on the dates
thereof, in accordance with applicable regulatory accounting principles applied
on a consistent basis.
(b) FLC has previously delivered to Patriot the FLC
Financials. The FLC Financials have been, or will be, prepared in accordance
with GAAP applied on a consistent basis throughout the periods covered by such
statements, except as noted therein, and fairly present, or will fairly present,
the consolidated financial position, results of operations and cash flows of FLC
as of and for the periods ending on the dates thereof, in accordance with GAAP
applied on a consistent basis, except as noted therein and in the FLC Disclosure
Schedule.
(c) At the date of each balance sheet included in the FLC
Financials or the FLC Regulatory Reports, neither FLC nor First Lehigh Bank (as
the case may be) had, or will have any liabilities, obligations or loss
contingencies of any nature (whether absolute, accrued, contingent or otherwise)
of a type required to be reflected in such FLC Financials or FLC Regulatory
Reports or in the footnotes thereto which are not fully reflected or reserved
against therein or fully disclosed in a footnote thereto, except for
liabilities, obligations and loss contingencies which are not material in the
aggregate to FLC and which are incurred in the ordinary course of business,
consistent with past practice and except for liabilities, obligations and loss
contingencies which are within the subject matter of a specific representation
and warranty herein and subject, in the case of any unaudited statements, to
normal, recurring audit adjustments and the absence of footnotes.
Section 2.06 Taxes.
(a) FLC and the FLC Subsidiaries are members of the same
affiliated group within the meaning of IRC Section 1504(a). FLC has duly filed,
and will file, all federal, state and local tax returns required to be filed by
or with respect to FLC and all FLC Subsidiaries on or prior to the Closing Date
(all such returns being accurate and correct in all material respects) and has
duly paid or will pay, or made or will make, provisions for the payment of all
federal, state and local taxes which have been incurred by or are due or claimed
to be due from FLC and any FLC Subsidiary by any taxing authority or pursuant to
any tax sharing agreement or arrangement (written or oral) on or prior to the
Closing Date other than taxes which (i) are not delinquent or (ii) are being
contested in good faith.
(b) No consent pursuant to IRC Section 341(f) has been filed
(or will be filed prior to the Closing Date) by or with respect to FLC or any
FLC Subsidiary.
Section 2.07 No Material Adverse Effect. FLC has not suffered any
Material Adverse Effect since March 31, 1998.
Section 2.08 Contracts.
(a) Except as described in FLC's Annual Reports on Form
10-KSB for the years ended December 31, 1995, 1996 and 1997, previously
delivered to Patriot, in the footnotes to the audited consolidated financial
statements of FLC as of December 31, 1997, and for the three years ended
December 31, 1997, or in the FLC Disclosure Schedule, neither FLC nor any FLC
Subsidiary is a party to or subject to: (i) any employment, consulting or
severance contract or arrangement with any past or present officer, director or
employee of FLC or any FLC Subsidiary, except for "at will" arrangements; (ii)
A-24
<PAGE>
any plan, arrangement or contract providing for bonuses, pensions, options,
deferred compensation, retirement payments, profit sharing or similar
arrangements for or with any past or present officers, directors or employees of
FLC or any FLC Subsidiary; (iii) any collective bargaining agreement with any
labor union relating to employees of FLC or any FLC Subsidiary; (iv) any
agreement which by its terms limits the payment of dividends by any FLC
Subsidiary; (v) any instrument evidencing or related to indebtedness for
borrowed money whether directly or indirectly, by way of purchase money
obligation, conditional sale, lease purchase, guaranty or otherwise, in respect
of which FLC or any FLC Subsidiary is an obligor to any person, which instrument
evidences or relates to indebtedness other than deposits, repurchase agreements,
Federal Home Loan Bank advances, bankers acceptances and "treasury tax and loan"
accounts established in the ordinary course of business and transactions in
"federal funds" or which contains financial covenants or other restrictions
(other than those relating to the payment of principal and interest when due)
which would be applicable on or after the Closing Date to Patriot or any Patriot
Subsidiary; or (vi) any contract (other than this Agreement) limiting the
freedom of any FLC Subsidiary to engage in any type of banking or bank-related
business permissible under law.
(b) True and correct copies of agreements, plans,
arrangements and instruments referred to in Section 2.08(a) or described in the
FLC Annual Report on Form 10-KSB for the year ended December 31, 1997 or in a
footnote to the FLC Financials, have been provided to Patriot on or before the
date hereof, are listed on the FLC Disclosure Schedule and are in full force and
effect on the date hereof and neither FLC nor any FLC Subsidiary (nor, to the
knowledge of FLC, any other party to any such contract, plan, arrangement or
instrument) has breached any provision of, or is in default in any respect under
any term of, any such contract, plan, arrangement or instrument which breach or
default has resulted in or will result in a Material Adverse Effect with respect
to FLC. Except as set forth in the FLC Disclosure Schedule, no party to any
A-25
<PAGE>
material contract, plan, arrangement or instrument will have the right to
terminate any or all of the provisions of any such contract, plan, arrangement
or instrument as a result of the transactions contemplated by this Agreement.
Except as set forth in the FLC Disclosure Schedule, none of the employees
(including officers) of FLC or any FLC Subsidiary possess the right to terminate
their employment as a result of the execution of this Agreement. Except as set
forth in the FLC Disclosure Schedule, no plan, employment agreement, termination
agreement, or similar agreement or arrangement to which FLC or any FLC
Subsidiary is a party or under which FLC or any FLC Subsidiary may be liable
contains provisions which permit an employee or independent contractor to
terminate it without cause and continue to accrue future benefits thereunder.
Except as set forth in the FLC Disclosure Schedule, no such agreement, plan or
arrangement (x) provides for acceleration in the vesting of benefits or payments
due thereunder upon the occurrence of a change in ownership or control of FLC or
any FLC Subsidiary absent the occurrence of a subsequent event; (y) provides for
benefits which may cause the disallowance of a federal income tax deduction
under IRC Section 280G; or (z) requires FLC or any FLC Subsidiary to provide a
benefit in the form of FLC Common Stock or determined by reference to the value
of FLC Common Stock.
Section 2.09 Ownership of Property; Insurance Coverage.
(a) FLC and the FLC Subsidiaries have, or will have as to
property acquired after the date hereof, good and, as to real property,
marketable title to all assets and properties owned by FLC or any FLC Subsidiary
in the conduct of their businesses, whether such assets and properties are real
or personal, tangible or intangible, including assets and property reflected in
the balance sheets contained in the FLC Regulatory Reports and in the FLC
Financials or acquired subsequent thereto (except to the extent that such assets
and properties have been disposed of for fair value, in the ordinary course of
business, since the date of such balance sheets), subject to no encumbrances,
liens, mortgages, security interests or pledges, except (i) those items which
secure repurchase agreements and liabilities for borrowed money from a Federal
Home Loan Bank, (ii) statutory liens for amounts not yet delinquent or which are
being contested in good faith, (iii) items permitted under Article IV, and (iv)
the items disclosed in the FLC Disclosure Schedule. FLC and the FLC
Subsidiaries, as lessee, have the right under valid and subsisting leases of
real and personal properties used by FLC and its Subsidiaries in the conduct of
their businesses to occupy or use all such properties as presently occupied and
used by each of them. Except as disclosed in the FLC Disclosure Schedule, such
existing leases and commitments to lease constitute or will constitute operating
leases for both tax and financial accounting purposes and the lease expense and
A-26
<PAGE>
minimum rental commitments with respect to such leases and lease commitments are
as disclosed in the notes to the FLC Financials.
(b) With respect to all agreements pursuant to which FLC or
any FLC Subsidiary has purchased securities subject to an agreement to resell,
if any, FLC or such FLC Subsidiary, as the case may be, has a valid, perfected
first lien or security interest in the securities or other collateral securing
the repurchase agreement, and the value of such collateral equals or exceeds the
amount of the debt secured thereby.
(c) FLC and the FLC Subsidiaries currently maintain
insurance considered by FLC to be reasonable for their respective operations and
similar in scope and coverage to that maintained by other businesses similarly
engaged. Neither FLC nor any FLC Subsidiary has received notice from any
insurance carrier that (i) such insurance will be cancelled or that coverage
thereunder will be reduced or eliminated, or (ii) premium costs with respect to
such policies of insurance will be substantially increased. Except as set forth
on the FLC Disclosure Schedule, there are presently no material claims pending
under such policies of insurance and no notices have been given by FLC or First
Lehigh Bank under such policies. All such insurance is valid and enforceable and
in full force and effect, and within the last ten years FLC has received each
type of insurance coverage for which it has applied and during such periods has
not been denied indemnification for any material claims submitted under any of
its insurance policies.
Section 2.10 Legal Proceedings. Except as set forth in the FLC
Disclosure Schedule, neither FLC nor any FLC Subsidiary is a party to any, and
there are no pending or, to the best of FLC's knowledge, threatened legal,
administrative, arbitration or other proceedings, claims (whether asserted or
unasserted), actions or governmental investigations or inquiries of any nature
(i) against FLC or any FLC Subsidiary, (ii) to which FLC or any FLC Subsidiary's
assets are or may be subject, (iii) challenging the validity or propriety of any
of the transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of FLC to perform under this Agreement, except for
any proceedings, claims, actions, investigations or inquiries referred to in
clauses (i) or (ii) which, if adversely determined, individually or in the
aggregate, could not be reasonably expected to have a Material Adverse Effect on
FLC.
A-27
<PAGE>
Section 2.11 Compliance With Applicable Law.
(a) Except as set forth in the FLC Disclosure Schedule, FLC
and FLC Subsidiaries hold all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their businesses under, and have complied in
all material respects with, applicable laws, statutes, orders, rules or
regulations of any federal, state or local governmental authority relating to
them, other than where such failure to hold or such noncompliance will neither
result in a limitation in any material respect on the conduct of their
businesses nor otherwise have a Material Adverse Effect on FLC.
(b) Except as set forth on the FLC Disclosure Schedule,
neither FLC nor any FLC Subsidiary has received any notification or
communication from any Regulatory Authority (i) asserting that FLC or any FLC
Subsidiary is not in compliance with any of the statutes, regulations or
ordinances which such Regulatory Authority enforces; (ii) threatening to revoke
any license, franchise, permit or governmental authorization which is material
to FLC or any FLC Subsidiary; (iii) requiring or threatening to require FLC or
any FLC Subsidiary, or indicating that FLC or any FLC Subsidiary may be
required, to enter into a cease and desist order, agreement or memorandum of
understanding or any other agreement restricting or limiting, or purporting to
restrict or limit, in any manner the operations of FLC or any FLC Subsidiary,
including without limitation any restriction on the payment of dividends; or
(iv) directing, restricting or limiting, or purporting to direct, restrict or
limit, in any manner the operations of FLC or any FLC Subsidiary, including
without limitation any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this sentence is
hereinafter referred to as a "Regulatory Agreement"). Neither FLC nor any FLC
Subsidiary has consented to or entered into any Regulatory Agreement, except as
heretofore disclosed in the FLC Financials or in the FLC Disclosure Schedule.
Section 2.12 ERISA. FLC has previously delivered to Patriot true and
complete copies of all employee pension benefit plans within the meaning of
ERISA Section 3(2), profit sharing plans, stock purchase plans, deferred
compensation and supplemental income plans, supplemental executive retirement
plans, employment agreements, annual or long term incentive plans, severance
plans, policies and agreements, group insurance plans, and all other employee
welfare benefit plans within the meaning of ERISA Section 3(1) (including
A-28
<PAGE>
vacation pay, sick leave, short-term disability, long-term disability, and
medical plans) and all other employee benefit plans, policies, agreements and
arrangements, all of which are set forth in the FLC Disclosure Schedule,
maintained or contributed to for the benefit of the employees or former
employees (including retired employees) and any beneficiaries thereof or
directors or former directors of FLC or any FLC Subsidiary, together with (i)
the most recent actuarial (if any) and financial reports relating to those plans
which constitute "qualified plans" under IRC Section 401(a), (ii) the most
recent annual reports relating to such plans filed by them, respectively, with
any government agency, and (iii) all rulings and determination letters which
pertain to any such plans. Neither FLC, any FLC Subsidiary nor any pension plan
maintained by FLC or any FLC Subsidiary, has incurred, directly or indirectly,
within the past six (6) years any liability under Title IV of ERISA (including
to the Pension Benefit Guaranty Corporation) or to the IRS with respect to any
pension plan qualified under IRC Section 401(a) which liability has resulted in
or will result in a Material Adverse Effect with respect to FLC, except
liabilities to the Pension Benefit Guaranty Corporation pursuant to ERISA
Section 4007, all of which have been fully paid, nor has any reportable event
under ERISA Section 4043 occurred with respect to any such pension plan. With
respect to each of such plans that is subject to Title IV of ERISA, the present
value of the accrued benefits under such plan, based upon the actuarial
assumptions used for funding purposes in the plan's most recent actuarial report
did not, as of its latest valuation date, exceed the then current value of the
assets of such plan allocable to such accrued benefits. Neither FLC nor any FLC
Subsidiary has incurred or is subject to any liability under ERISA Section 4201
for a complete or partial withdrawal from a multi-employer plan. All "employee
benefit plans," as defined in ERISA Section 3(3), comply and within the past six
(6) years have complied in all material respects with (i) relevant provisions of
ERISA and (ii) in the case of plans intended to qualify for favorable income tax
treatment, provisions of the IRC relevant to such treatment. No prohibited
transaction (which shall mean any transaction prohibited by ERISA Section 406
and not exempt under ERISA Section 408 or any transaction prohibited under IRC
Section 4975) has occurred within the past six (6) years with respect to any
employee benefit plan maintained by FLC or any FLC Subsidiary which would result
in the imposition, directly or indirectly, of an excise tax under IRC Section
4975 or other penalty under ERISA or the IRC, which, individually or in the
aggregate, has resulted in or will result in a Material Adverse Effect with
respect to FLC.
A-29
<PAGE>
FLC and the FLC Subsidiaries provide continuation coverage under group health
plans for separating employees and "qualified beneficiaries" in accordance with
the provisions of IRC Section 4980B(f). Such group health plans are in
compliance with Section 1862(b)(1) of the Social Security Act. Neither FLC nor
any FLC Subsidiary is aware of any existing or contemplated audit of any of its
employee benefit plans by the Internal Revenue Service or U.S. Department of
Labor.
Section 2.13 Brokers, Finders and Financial Advisors. Except for FLC's
engagement of McGuire Performance Solutions LLC and Danielson Associates Inc. in
connection with the transactions contemplated by this Agreement, neither FLC nor
any FLC Subsidiary, nor any of their respective officers, directors, employees
or agents, has employed any broker, finder or financial advisor in connection
with the transactions contemplated by this Agreement or in connection with any
transaction other than the Consolidation, or, except for its commitments
disclosed in the FLC Disclosure Schedule, incurred any liability or commitment
for any fees or commissions to any such person in connection with the
transactions contemplated by this Agreement or in connection with any
transaction other than the Consolidation, which has not been reflected in the
FLC Financials. The FLC Disclosure Schedule shall contain as an exhibit the
engagement letter between FLC and Danielson Associates Inc.
Section 2.14 Environmental Matters. Except as set forth in the FLC
Disclosure Schedule, to the knowledge of FLC, neither FLC nor any FLC
Subsidiary, nor any properties owned or occupied by FLC or any FLC Subsidiary
has been or is in violation of or liable under any Environmental Law which
violation or liability, individually or in the aggregate, resulted in, or will
result, in a Material Adverse Effect with respect to FLC. There are no actions,
suits or proceedings, or demands, claims, notices or investigations (including
without limitation notices, demand letters or requests for information from any
environmental agency) instituted or pending, or to the knowledge of FLC,
threatened, relating to the liability of any property owned or occupied by FLC
or any FLC Subsidiary under any Environmental Law.
Section 2.15 Allowance for Loan Losses. The allowance for loan losses
reflected, and to be reflected, in the FLC Regulatory Reports, and shown, and to
be shown, on the balance sheets contained in the FLC Financials have been, and
A-30
<PAGE>
will be, established in accordance with the requirements of GAAP and all
applicable regulatory criteria.
Section 2.16 Information to be Supplied. The information to be supplied
by FLC and First Lehigh Bank for inclusion in the Registration Statement
(including the Prospectus/Proxy Statement) will not, at the time the
Registration Statement is declared effective pursuant to the Securities Act and
as of the date the Prospectus/Proxy Statement is mailed to shareholders of
Patriot and FLC and up to and including the date(s) of the meetings of
shareholders of Patriot and FLC to which such Prospectus/Proxy Statement
relates, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein not misleading.
The information supplied, or to be supplied, by FLC for inclusion in the
Applications will, at the time such documents are filed with any Regulatory
Authority and up to and including the date(s) of the obtainment of any required
regulatory approvals or consents, be accurate in all material aspects.
Section 2.17 Securities Documents. FLC has delivered to Patriot copies
of its (i) annual reports on SEC Form 10-KSB for the years ended December 31,
1997, 1996 and 1995 and (ii) a quarterly report on SEC Form 10-Q for the quarter
ended March 31, 1998. Such reports complied, at the time filed with the SEC, in
all material respects, with the Exchange Act and all applicable rules and
regulations of the SEC.
A-31
<PAGE>
Section 2.18 Related Party Transactions. Except as disclosed (i) in the
FLC Disclosure Schedule (which shall include disclosure of all transactions
between FLC or First Lehigh Bank, on the one hand, and James L. Leuthe and any
Affiliate of Mr. Leuthe, on the other hand), (ii) the FLC Annual Report on Form
10-KSB for the year ended December 31, 1997, or (iii) in the footnotes to the
FLC Financials, FLC is not a party to any transaction (including any loan or
other credit accommodation but excluding deposits in the ordinary course of
business) with any Affiliate of FLC (except an FLC Subsidiary); and all such
transactions (a) were made in the ordinary course of business, (b) were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other Persons, and (c)
did not involve more than the normal risk of collectability or present other
unfavorable features. Except as set forth on the FLC Disclosure Schedule, no
loan or credit accommodation to any Affiliate of FLC is presently in default or,
during the three year period prior to the date of this Agreement, has been in
default or has been restructured, modified or extended. Neither FLC nor First
Lehigh Bank has been notified that principal and interest with respect to any
such loan or other credit accommodation will not be paid when due or that the
loan grade classification accorded such loan or credit accommodation by First
Lehigh Bank is inappropriate.
Section 2.19 Loans. Each loan reflected as an asset in the FLC
Financial Statements (i) is evidenced by notes, agreements or other evidences of
indebtedness which are true, genuine and correct (ii) to the extent secured, has
been secured by valid liens and security interests which have been perfected,
and (ii) is the legal, valid and binding obligation of the obligor named
therein, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles, in
each case other than loans as to which the failure to satisfy the foregoing
standards would not have a Material Adverse Effect on FLC.
A-32
<PAGE>
Section 2.20 Fairness Opinion. FLC has received a written opinion from
Danielson Associates Inc. to the effect that, as of the date hereof, the
consideration to be received by shareholders of FLC pursuant to this Agreement
is fair, from a financial point of view, to such shareholders.
Section 2.21 Quality of Representations. The representations made by
FLC in this Agreement are true, correct and complete in all material respects,
and do not omit statements necessary to make them not misleading under all facts
and circumstances.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PATRIOT
-----------------------------------------
Patriot hereby represents and warrants to FLC that, except as
set forth in the Patriot Disclosure Schedule delivered by Patriot to FLC on or
prior to the date hereof:
Section 3.01 Organization.
(a) Patriot is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Patriot
is a bank holding company duly registered under the BHCA. Patriot has the
corporate power and authority to carry on its business and operations as now
being conducted and to own and operate the properties and assets now owned and
being operated by it. Each Patriot Subsidiary is duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation and each possesses full corporate power and authority to carry on
its respective business and to own, lease and operate its properties as
presently conducted. Neither Patriot nor any Patriot Subsidiary is required by
the conduct of its business or the ownership or leasing of its assets to qualify
to do business as a foreign corporation in any jurisdiction other than the
Commonwealth of Pennsylvania or the State of Delaware, except where the failure
to be so qualified would not have a Material Adverse Effect on Patriot.
(b) Patriot Bank is a state-chartered bank, duly organized
and validly existing under the laws of the Commonwealth of Pennsylvania. Patriot
Bank has the corporate power and authority to carry on its business and
operations as now being conducted and to own and operate the properties and
assets now owned and being operated by it.
A-33
<PAGE>
(c) The deposits of Patriot Bank are insured by the FDIC to
the extent provided in the FDIA.
Section 3.02 Capitalization.
(a) The authorized capital stock of Patriot consists of
12,000,000 shares of capital stock divided into (a) 10,000,000 shares of common
stock, $.01 par value ("Patriot Common Stock"), of which, at the date of this
Agreement, 1,579,944 shares were issued and held by Patriot as treasury stock
and 5,448,687 shares are outstanding, validly issued, fully paid and
nonassessable and free of preemptive rights and (b) 2,000,000 shares of
preferred $.01 par value, of which, at the date of this Agreement, none were
issued and outstanding. Neither Patriot nor Patriot Bank nor any other Patriot
Subsidiary has or is bound by any subscription, option, warrant, call,
commitment, agreement, plan or other Right of any character relating to the
purchase, sale or issuance or voting of, or right to receive dividends or other
distributions on any shares of Patriot Common Stock or any other security of
Patriot or any securities representing the right to vote, purchase or otherwise
receive any shares of Patriot Common Stock or any other security of Patriot,
other than (i) options to acquire 652,841 shares of Patriot Common Stock under
Patriot Stock Option Plan and (ii) the employee stock purchase plan.
(b) The authorized capital stock of Patriot Bank consists of
10,000,000 shares of common stock, par value $1.00 per share ("Patriot Bank
Common Stock"), of which 1,000 shares are outstanding, validly issued, fully
paid, nonassessable, free of preemptive rights and owned by Patriot, and
2,000,000 shares of preferred stock, none of which is outstanding. Either
Patriot or Patriot Bank owns all of the outstanding shares of capital stock of
each Patriot Subsidiary free and clear of all liens, security interests,
pledges, charges, encumbrances, agreements and restrictions of any kind or
nature.
(c) To the best of Patriot's knowledge, except as disclosed
in Patriot's proxy statement dated March 20, 1998, no person or "group" (as that
term is used in Section 13(d)(3) of the Exchange Act) is the beneficial owner
(as defined in Section 13(d) of the Exchange Act) of 5% or more of the
outstanding shares of Patriot Common Stock.
Section 3.03 Authority; No Violation.
A-34
<PAGE>
(a) Patriot has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. Patriot Bank has full corporate power and authority to
execute and deliver the Bank Plan of Merger and to consummate the Bank Merger.
The execution and delivery of this Agreement by Patriot and the completion by
Patriot of the transactions contemplated hereby have been duly and validly
approved by the Board of Directors of Patriot and, except for approval of the
shareholders of Patriot as required by the DGCL, Patriot's articles of
incorporation and bylaws and Nasdaq requirements applicable to it, no other
corporate proceedings on the part of Patriot are necessary to complete the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Patriot and, subject to approval by the shareholders
of Patriot and receipt of the required approvals of Regulatory Authorities
described in Section 3.04 hereof, constitutes the valid and binding obligation
of Patriot, enforceable against Patriot in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general principles of equity.
The Bank Plan of Merger, upon its execution and delivery by Patriot Bank
concurrently with the execution and delivery of this Agreement, will constitute
the valid and binding obligation of Patriot Bank, enforceable against Patriot
Bank in accordance with its terms, subject to applicable conservatorship and
receivership provisions of the FDIA, or insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity.
(b) (A) The execution and delivery of this Agreement by
Patriot, (B) subject to receipt of approvals from the Regulatory Authorities
referred to in Section 3.04 hereof and FLC's and Patriot's compliance with any
conditions contained therein, the completion of the transactions contemplated
hereby, and (C) compliance by Patriot with any of the terms or provisions
hereof, will not (i) conflict with or result in a breach of any provision of the
certificate of incorporation or other organizational document or bylaws of
Patriot or any Patriot Subsidiary; (ii) violate any statute, code, ordinance,
rule, regulation, judgment, order, writ, decree or injunction applicable to
Patriot or any Patriot Subsidiary or any of their respective properties or
assets; or (iii) violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default), under, result in the termination of,
A-35
<PAGE>
accelerate the performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest, charge or other
encumbrance upon any of the properties or assets of Patriot or any Patriot
Subsidiary under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
investment or obligation to which Patriot or any Patriot Subsidiary is a party,
or by which they or any of their respective properties or assets may be bound or
affected, except for such violations, conflicts, breaches or defaults under
clause (ii) or (iii) hereof which, either individually or in the aggregate, will
not have a Material Adverse Effect on Patriot.
Section 3.04 Consents. Except for consents, approvals, filings and
registrations from or with the FRB, the FDIC, the PDB, the DOJ, the SEC, the
PDS, the NASD and state "blue sky" authorities, and compliance with any
conditions contained therein, and the approval of this Agreement by the
shareholders of Patriot, and except as disclosed in the Patriot Disclosure
Schedule, no consents or approvals of, or filings or registrations with, any
public body or authority are necessary, and no consents or approvals of any
third parties are necessary, or will be, in connection with (a) the execution
and delivery of this Agreement by Patriot, and (b) the completion by Patriot of
the transactions contemplated hereby. As of the date hereof, Patriot has no
reason to believe that (i) any required consents or approvals will not be
received or will be received with conditions, limitations or restrictions
unacceptable to it or which would adversely impact Patriot's ability to complete
the transactions contemplated by this Agreement or that (ii) any public body or
authority, the consent or approval of which is not required or any filing with
which is not required, will object to the completion of the transactions
contemplated by this Agreement.
Section 3.05 Financial Statements.
(a) Patriot has made the Patriot Regulatory Reports
available to FLC for inspection. The Patriot Regulatory Reports have been, or
will be, prepared in all material respects in accordance with applicable
regulatory accounting principles and practices throughout the periods covered by
such statements, and fairly present, or will fairly present in all material
respects, the financial position, results of operations, and changes in
A-36
<PAGE>
shareholders' equity of Patriot as of and for the periods ended on the dates
thereof, in accordance with applicable regulatory accounting principles applied
on a consistent basis.
(b) Patriot has previously delivered, or will deliver, to
FLC the Patriot Financials. The Patriot Financials have been, or will be,
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered by such statements, except as noted therein, and fairly present,
or will fairly present, the consolidated financial position, results of
operations and cash flows of Patriot as of and for the periods ending on the
dates thereof, in accordance with GAAP applied on a consistent basis, except as
noted therein.
(c) At the date of each balance sheet included in the
Patriot Financials or Patriot Regulatory Reports, neither Patriot nor Patriot
Bank (as the case may be) had, or will have, any liabilities, obligations or
loss contingencies of any nature (whether absolute, accrued, contingent or
otherwise) of a type required to be reflected in such Patriot Financials or
Patriot Regulatory Reports or in the footnotes thereto which are not fully
reflected or reserved against therein or disclosed in a footnote thereto, except
for liabilities, obligations or loss contingencies which are not material in the
aggregate to Patriot and which are incurred in the ordinary course of business,
consistent with past practice, and except for liabilities, obligations or loss
contingencies which are within the subject matter of a specific representation
and warranty herein and subject, in the case of any unaudited statements, to
normal recurring audit adjustments and the absence of footnotes.
Section 3.06 Taxes.
(a) Patriot and the Patriot Subsidiaries are members of the
same affiliated group within the meaning of IRC Section 1504(a). Patriot has
duly filed, and will file, all federal, state and local tax returns required to
be filed by or with respect to Patriot and all Patriot Subsidiaries on or prior
to the Closing Date (all such returns being accurate and correct in all material
respects) and has duly paid or will pay, or made or will make, provisions for
the payment of all federal, state and local taxes which have been incurred by or
are due or claimed to be due from Patriot and any Patriot Subsidiary by any
taxing authority or pursuant to any tax sharing agreement or arrangement
(written or oral) on or prior to the Closing Date other than taxes which (i) are
not delinquent or (ii) are being contested in good faith.
A-37
<PAGE>
(b) No consent pursuant to IRC Section 341(f) has been filed
(or will be filed prior to the Closing Date) by or with respect to Patriot or
any Patriot Subsidiary.
Section 3.07 No Material Adverse Effect. Patriot has not suffered any
Material Adverse Effect since March 31, 1998.
Section 3.08 Legal Proceedings. Except as set forth in the Patriot
Disclosure Schedule, neither Patriot nor any Patriot Subsidiary is a party to
any, and there are no pending or, to the best of Patriot's knowledge, threatened
legal, administrative, arbitration or other proceedings, claims, actions or
governmental investigations or inquiries of any nature (i) against Patriot or
any Patriot Subsidiary, (ii) to which Patriot's or any Patriot Subsidiary's
assets are or may be subject, (iii) challenging the validity or propriety of any
of the transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of Patriot to perform under this Agreement, except
for any proceedings, claims, actions, investigations or inquiries referred to in
clauses (i) or (ii) which, individually or in the aggregate, could not be
reasonably expected to have a Material Adverse Effect on Patriot.
Section 3.09 Compliance With Applicable Law.
(a) Patriot and the Patriot Subsidiaries hold all licenses,
franchises, permits and authorizations necessary for the lawful conduct of their
businesses under, and have complied in all material respects with, applicable
laws, statutes, orders, rules or regulations of any federal, state or local
governmental authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any material
respect on the conduct of their businesses nor otherwise have a Material Adverse
Effect on Patriot.
(b) Neither Patriot nor any Patriot Subsidiary has received
any notification or communication from any Regulatory Authority (i) asserting
that Patriot or any Patriot Subsidiary is not in compliance with any of the
statutes, regulations or ordinances which such Regulatory Authority enforces;
(ii) threatening to revoke any license, franchise, permit or governmental
authorization which is material to Patriot or any Patriot Subsidiary; (iii)
requiring or threatening to require Patriot or any Patriot Subsidiary, or
indicating that Patriot or any Patriot Subsidiary may be required, to enter into
a cease and desist order, agreement or memorandum of understanding or any other
A-38
<PAGE>
agreement restricting or limiting, or purporting to restrict or limit, in any
manner the operations of Patriot or any Patriot Subsidiary, including without
limitation any restriction on the payment of dividends; or (iv) directing,
restricting or limiting, or purporting to direct, restrict or limit, in any
manner the operations of Patriot or any Patriot Subsidiary, including without
limitation any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this sentence is
hereinafter referred to as a "Regulatory Agreement"). Neither Patriot nor any
Patriot Subsidiary has consented to or entered into any Regulatory Agreement.
Section 3.10 Information to be Supplied. The information to be supplied
by Patriot for inclusion in the Registration Statement (including the
Prospectus/Proxy Statement) will not, at the time the Registration Statement is
declared effective pursuant to the Securities Act and as of the date the
Prospectus/Proxy Statement is mailed to shareholders of Patriot and FLC and up
to and including the date(s) of the meetings of shareholders of Patriot and FLC
to which such Prospectus/Proxy Statement relates, contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein not misleading. The information supplied, or to be
supplied, by Patriot for inclusion in the Applications will, at the time such
documents are filed with any Regulatory Authority and up to and including the
date(s) of the obtainment of any required regulatory approvals or consents, be
accurate in all material aspects.
Section 3.11 ERISA. Patriot has previously delivered or made available
to FLC true and complete copies of the employee pension benefit plans which it
currently maintains within the meaning of ERISA Section 3(2), including profit
sharing plans, stock purchase plans, deferred compensation and severance plans,
policies and agreements, group insurance plans, and all other employee welfare
benefit plans within the meaning of ERISA Section 3(1) (including, if
applicable, vacation pay, sick leave, short-term disability, long-term
disability, and medical plans), and all other employee benefit plans, policies,
agreements and arrangements, all of which are set forth on the Patriot
Disclosure Schedule, maintained or contributed to for the benefit of the
employees or former employees (including retired employees) and any
beneficiaries thereof or directors or former directors of Patriot or any Patriot
Subsidiary, together with (i) the most recent actuarial (if any) and financial
reports relating to those plans which constitute "qualified plans" under IRC
A-39
<PAGE>
Section 401(a), (ii) the most recent annual reports relating to such plans filed
by them, respectively, with any government agency, and (iii) all rulings and
determination letters which pertain to any such plans. To the best of Patriot's
knowledge, neither Patriot, any Patriot Subsidiary, nor any pension plan
maintained by Patriot or any Patriot Subsidiary, has incurred, directly or
indirectly, within the past six (6) years any liability under Title IV of ERISA
(including to the Pension Benefit Guaranty Corporation) or to the IRS with
respect to any pension plan qualified under IRC Section 401(a) which liability
has resulted in or will result in a Material Adverse Effect with respect to
Patriot, except liabilities to the Pension Benefit Guaranty Corporation pursuant
to ERISA Section 4007, all of which have been fully paid, nor has any reportable
event under ERISA Section 4043 occurred with respect to any such pension plan.
With respect to each of such plans that is subject to Title IV of ERISA, the
fair market value of the assets under such plan exceeds the present value of the
accrued benefits liability as of the end of the most recent plan year with
respect to such plan calculated on the basis of the actual assumptions used in
the most recent actuarial valuation for such plan. Neither Patriot nor any
Patriot Subsidiary has incurred or is subject to any liability under ERISA
Section 4201 for a complete or partial withdrawal from a multi-employer plan. To
the best of Patriot's knowledge, all "employee benefit plans," as defined in
ERISA Section 3(3), comply and within the past six (6) years have complied in
all material respects with (i) relevant provisions of ERISA, and (ii) in the
case of plans intended to qualify for favorable income tax treatment, provisions
of the IRC relevant to such treatment. To the best of Patriot's knowledge, no
prohibited transaction (which shall mean any transaction prohibited by ERISA
Section 406 and not exempt under ERISA Section 408 or any transaction prohibited
under IRC Section 4975) has occurred within the past six (6) years with respect
to any employee benefit plan maintained by Patriot or any Patriot Subsidiary
that would result in the imposition, directly or indirectly, of an excise tax
under IRC Section 4975 or other penalty under ERISA or the IRC, which
individually or in the aggregate, has resulted in or will result in a Material
Adverse Effect with respect to Patriot. Patriot and the Patriot Subsidiaries
comply with the continuation coverage rules applicable to its group health
plan(s) for covered employees and "qualified beneficiaries" of covered employees
(as defined in IRC Section 4980B(g)), in accordance with the provisions of IRC
Section 4980B(f). Such group health plans are in compliance with Section
A-40
<PAGE>
1862(b)(1) of the Social Security Act. Neither Patriot nor any Patriot
Subsidiary is aware of any existing or contemplated audit of any of its employee
benefit plans by the Internal Revenue Service or U.S. Department of Labor.
Section 3.12 Brokers, Finders and Financial Advisors. Except for
Patriot's engagement of Janney Montgomery Scott Inc. ("JMS") in connection with
the transactions contemplated by this Agreement, neither Patriot nor any Patriot
Subsidiary, nor any of their respective officers, directors, employees or
agents, has employed any broker, finder or financial advisor in connection with
the transactions contemplated by this Agreement or in connection with any
transaction other than the Consolidation, or, except for its commitments
disclosed in the Patriot Disclosure Schedule, incurred any liability or
commitment for any fees or commissions to any such person in connection with the
transactions contemplated by this Agreement or in connection with any
transaction other than the Consolidation, which has not been reflected in the
Patriot Financials.
Section 3.13 Securities Documents. Patriot has delivered to FLC copies
of its (i) annual reports on SEC Form 10-K for the years ended December 31, 1997
and 1996, (ii) quarterly reports on SEC Form 10-Q for the quarter ended March
31, 1998, and (iii) proxy materials used in connection with its annual meetings
of shareholders held in 1998, 1997 and 1996. Such reports and such proxy
materials complied, at the time filed with the SEC, in all material respects,
with the Exchange Act and the applicable rules and regulations of the SEC.
Section 3.14 Fairness Opinion. Patriot has received a written opinion
from JMS to the effect that, as of the date hereof, the consideration to be
received by shareholders of Patriot pursuant to this Agreement is fair, from a
financial point of view, to such shareholders.
Section 3.15 Quality of Representations. The representations made by
Patriot in this Agreement are true, correct and complete in all material
respects and do not omit statements necessary to make the representations not
misleading under the circumstances.
A-41
<PAGE>
ARTICLE IV
COVENANTS OF THE PARTIES
------------------------
Section 4.01 Conduct of FLC's Business.
(a) From the date of this Agreement to the Closing Date, FLC
and its Subsidiaries will conduct its business and engage in transactions,
including extensions of credit, only in the ordinary course and consistent with
past practice and policies, except as otherwise required or contemplated by this
Agreement or with the written consent of Patriot. FLC will use its best efforts,
and will cause each of the Subsidiaries to use its best efforts, to (i) preserve
its business organizations intact, (ii) maintain good relationships with
employees, and (iii) preserve for itself the goodwill of its customers and
others with whom business relationships exist. From the date hereof to the
Closing Date, except as otherwise consented to or approved by Patriot in writing
or as permitted or required by this Agreement, FLC will, or will not permit any
Subsidiary to:
(i) amend or change any provision of its articles of
incorporation or bylaws;
(ii) change the number of authorized or issued shares of
its capital stock or issue any shares or issue or grant any option,
warrant, call, commitment, subscription, Right or agreement of any
character relating to its authorized or issued capital stock or any
securities convertible into shares of such stock, or split, combine or
reclassify any shares of capital stock, or declare, set aside or pay any
dividend or other distribution in respect of capital stock, or redeem or
otherwise acquire any shares of capital stock, except that (A) FLC may
issue up to an aggregate of 60,000 shares of FLC Common Stock upon the
valid exercise of presently outstanding FLC Options, (B) FLC may pay
required dividends on the FLC Senior Preferred Stock and the FLC Series A
Preferred Stock, (C) FLC may pay the cumulative dividends in arrears on the
FLC Series A Preferred Stock, (D) FLC may issue shares of FLC Common Stock
pursuant to the Patriot Lock-Up Option, and (E) FLC may issue shares of FLC
Common Stock upon the conversion of any outstanding shares of FLC Senior
Preferred Stock or FLC Series A Preferred Stock;
(iii) grant any severance or termination pay to, or,
enter into any new or amend any existing employment agreement with, or
A-42
<PAGE>
increase the compensation of, any employee, officer or director;
(iv) merge or consolidate any Subsidiary with any other
corporation; sell or lease all or any substantial portion of the assets or
business; make any acquisition of all or any substantial portion of the
business or assets of any other person, firm, association, corporation or
business organization other than in connection with the collection of any
loan or credit arrangement; enter into a purchase and assumption
transaction with respect to deposits and liabilities; permit the revocation
or surrender by any Subsidiary of its certificate of authority to maintain,
or file an application for the relocation of, any existing branch office;
(v) sell or otherwise dispose of the capital stock or
sell or otherwise dispose of any of its assets or the assets of any
Subsidiary other than in the ordinary course of business consistent with
past practice; subject any of its assets to a lien, pledge, security
interest or other encumbrance (other than in connection with government
deposits, repurchase agreements, bankers acceptances, "treasury tax and
loan" accounts established in the ordinary course of business and
transactions in Federal Home Loan Bank advances and "federal funds" and the
satisfaction of legal requirements in the exercise of trust powers) other
than in the ordinary course of business consistent with past practice;
incur any indebtedness for borrowed money (or guarantee any indebtedness
for borrowed money), except in the ordinary course of business consistent
with past practice;
(vi) take any action which would result in any of its
representations and warranties set forth in this Agreement becoming untrue
as of any date after the date hereof except as otherwise contemplated or
permitted by this Agreement, or in any of the conditions set forth in
Article V hereof not being satisfied, except in each case as may be
required by applicable law;
(vii) change any method, practice or principle of
accounting, except as may be required from time to time by GAAP (without
regard to any optional early adoption date) or any Regulatory Authority;
A-43
<PAGE>
(viii) waive, release, grant or transfer any rights of
value or modify or change in any material respect any existing material
agreement to which it or any Subsidiary is a party, other than in the
ordinary course of business consistent with past practice;
(ix) implement any pension, retirement, profit sharing,
bonus, welfare benefit or similar plan or arrangement that was not in
effect on the date of this Agreement, or, except as required by law and
except as set forth in Section 4.10, materially amend any existing plan or
arrangement;
(x) purchase any security for its investment portfolio;
(xi) amend or otherwise modify the underwriting and
other lending guidelines and policies in effect as of the date hereof or
otherwise fail to conduct its lending activities in the ordinary course of
business;
(xii) enter into, renew, extend or modify any other
transaction with any Affiliate, other than deposit and loan transactions in
the ordinary course of business and which are in compliance with the
requirements of applicable laws and regulations;
(xiii) change deposit or loan rates;
(xiv) enter into any interest rate swap, floor or cap or
similar commitment, agreement or arrangement;
(xv) except for the execution of this Agreement, take
any action that would give rise to a right of payment to any individual
under any employment agreement;
(xvi) take any action that would preclude the
Consolidation from qualifying as a reorganization within the meaning of
Section 368 of the IRC; or
(xvii) agree to do any of the foregoing.
A-44
<PAGE>
For purposes of this Section 4.01, it shall not be considered in the
ordinary course of business for FLC to do any of the following: (i) make any
capital expenditure without the prior written consent of Patriot other than
payments under a contract to purchase furniture at the Walnutport branch in the
amount of $11,000 and a contract to purchase an ATM machine in the amount of
$23,900; (ii) make any sale, assignment, transfer, pledge, hypothecation or
other disposition of any assets having a book or market value, whichever is
greater, in the aggregate in excess of $10,000, other than pledges of assets to
secure Federal Home Loan Bank advances or government deposits, to exercise trust
powers, sales of assets received in satisfaction of debts previously contracted
in the normal course of business, in each case, in the ordinary course of
business; or (iii) undertake or enter any lease, contract or other commitment
for its account, involving a loan or payment of more than $10,000, or containing
a material financial commitment and extending beyond 12 months from the date
hereof.
Section 4.02 Access; Confidentiality.
(a) From the date of this Agreement through the Closing
Date, FLC or Patriot, as the case may be, shall afford to, and shall cause each
FLC Subsidiary or Patriot Subsidiary to afford to, the other party and its
authorized agents and representatives, complete access to their respective
properties, assets, books and records and personnel, at reasonable hours and
after reasonable notice; and the officers of FLC and Patriot will furnish any
person making such investigation on behalf of the other party with such
financial and operating data and other information with respect to the
businesses, properties, assets, books and records and personnel as the person
making such investigation shall from time to time reasonably request.
(b) FLC and Patriot each agree to conduct such investigation
and discussions hereunder in a manner so as not to interfere unreasonably with
normal operations and customer and employee relationships of the other party.
(c) All information furnished to Patriot by FLC or by FLC to
Patriot previously in connection with the transactions contemplated by this
Agreement or pursuant hereto shall be held in confidence.
A-45
<PAGE>
(d) A representative of Patriot shall be invited to attend
all meetings of the FLC Board of Directors and any committee thereof and all
management committee meetings, including without limitation, loan,
asset/liability and investment committee meetings (or the functional
equivalent).
Section 4.03 Regulatory Matters and Consents.
(a) FLC and Patriot shall promptly prepare a
Prospectus/Proxy Statement to be mailed to their respective shareholders in
connection with the meetings of their respective shareholders and transactions
contemplated hereby, and to be filed with the SEC by Patriot and FLC on behalf
of the Holding Company. The Registration Statement shall conform to all
applicable legal requirements. Patriot shall, as promptly as practicable
following the preparation thereof, file the Registration Statement with the SEC
and FLC and Patriot shall use all reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as practicable
after such filing. Patriot will advise FLC, promptly after Patriot receives
notice thereof, of the time when the Registration Statement has become effective
or any supplement or amendment has been filed, of the issuance of any stop order
or the suspension of the qualification of the shares of capital stock issuable
pursuant to the Registration Statement, or the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the amendment
or supplement of the Registration Statement or for additional information.
Patriot shall use its reasonable best efforts to obtain, prior to the effective
date of the Registration Statement, all necessary state securities laws or "Blue
Sky" permits and approvals required to carry out the transactions contemplated
by this Agreement. Patriot will provide FLC with as many copies of such
Registration Statement and all amendments thereto promptly upon the filing
thereof as FLC may reasonably request.
(b) Patriot and FLC will prepare all Applications to
Regulatory Authorities and make all filings for, and use their reasonable best
efforts to obtain as promptly as practicable after the date hereof, all
necessary permits, consents, approvals, waivers and authorizations of all
Regulatory Authorities necessary or advisable to consummate the transactions
contemplated by this Agreement.
(c) Each party will furnish the other with all information
concerning itself and its Subsidiaries as may be reasonably necessary or
A-46
<PAGE>
advisable in connection with the Registration Statement and any Application or
filing made to any Regulatory Authority in connection with the transactions
contemplated by this Agreement.
(d) Patriot and FLC shall have the right to review in
advance, and each will consult with the other on, all information which appears
in any filing made with or written materials submitted to the SEC, any
Regulatory Authority or any third party in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable. The parties
hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of the SEC,
Regulatory Authorities and third parties necessary or advisable to consummate
the transactions contemplated by this Agreement and each party will keep the
other apprised of the status of matters relating to completion of the
transactions contemplated hereby and thereby.
(e) Each party will promptly furnish the other with copies
of all Applications and other written communications to, or received from, any
Regulatory Authority in respect of the transactions contemplated hereby.
Section 4.04 Taking of Necessary Action. Patriot and FLC shall each use
its reasonable best efforts in good faith, and each of them shall cause its
Subsidiaries to use their reasonable best efforts in good faith, to take or
cause to be taken all action necessary or desirable on its part so as to permit
completion of the Consolidation as soon as practicable after the date hereof,
including, without limitation, (A) obtaining the consent or approval of each
individual, partnership, corporation, association or other business or
professional entity whose consent or approval is required or desirable for
consummation of the transactions contemplated hereby (including assignment of
leases without any change in terms), provided that neither party or its
Subsidiaries shall agree to make any payments or modifications to agreements in
connection therewith without the prior written consent of the other party, and
(B) requesting the delivery of appropriate opinions, consents and letters from
its counsel and independent auditors. No party hereto shall take, or cause, or
to the best of its ability permit to be taken, any action that would
substantially impair the prospects of completing the Consolidation pursuant to
A-47
<PAGE>
this Agreement; provided that nothing herein contained shall preclude Patriot
from exercising its rights under this Agreement or the Patriot Lock-Up Option.
Section 4.05 Indemnification; Insurance.
(a) Indemnification. Except as specified in the Standstill
Agreement, in the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative, in which
any person who is now, or has been at any time prior to the date of this
Agreement, or who becomes prior to the Effective Date, a director or officer or
employee of either party or any of their respective Subsidiaries (the
"Indemnified Parties") is, or is threatened to be, made a party to a suit based
in whole or in part on, or arising in whole or in part out of, or pertaining to
(i) the fact that he is or was a director, officer or employee of either party,
any of their respective Subsidiaries or any of their respective predecessors or
(ii) this Agreement or any of the transactions contemplated hereby, whether in
any case asserted or arising before or after the Effective Date, the parties
hereto agree to cooperate and use their best efforts to defend against and
respond thereto to the extent permitted by the BCL and the Articles of
Incorporation and Bylaws of such party. On or after the Effective Date, the
Holding Company shall indemnify, defend and hold harmless all prior and
then-existing directors and officers of FLC, Patriot or their respective
Subsidiaries, against (i) all losses, claims, damages, costs, expenses,
liabilities or judgments or amounts that are paid in settlement (with the prior
approval of the Holding Company) of or in connection with any claim, action,
suit, proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director, officer
or employee of FLC, Patriot or their respective Subsidiaries, whether pertaining
to any matter existing or occurring at or prior to the Effective Date and
whether asserted or claimed prior to, or at or after, the Effective Date
("Indemnified Liabilities") and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, to the same extent as such
officer, director or employee may be indemnified by FLC, Patriot or their
respective Subsidiaries, as the case may be, as of the date hereof including the
right to advancement of expenses, provided, however, that any such officer,
director or employee may not be indemnified by the Holding Company if such
indemnification is prohibited by applicable law.
A-48
<PAGE>
(b) Insurance. The Holding Company shall maintain a
directors' and officers' liability insurance policy providing coverage amounts
not less than the greater of coverage amounts provided under the FLC or Patriot
directors and officers' liability insurance policy and on terms generally no
less favorable, including Patriot's existing policy if it meets the foregoing
standard. Such policy shall cover persons who are currently covered by the FLC
and Patriot insurance policies for a period of six years after the Effective
Date, except that the Holding Company shall have no obligation to provide
insurance coverage for Mr. Leuthe with respect to any matter described in
Section 7(a)(i) of the Standstill Agreement.
(c) Assumption. In the event that the Holding Company or any
of its respective successors or assigns (i) consolidates with or merges into any
other person and shall not be the continuing or surviving corporation or entity
of such consolidation or consolidation or (ii) transfers all or substantially
all of its properties and assets to any Person, then, and in each such case the
successors and assigns of such entity shall assume the obligations set forth in
this Section 4.05.
Section 4.06 No Other Bids and Related Matters. So long as this
Agreement remains in effect, FLC shall and shall not authorize or permit any of
its directors, officers, employees or agents, to directly or indirectly (i)
respond to, solicit, initiate or encourage any inquiries relating to, or the
making of any proposal which relates to, an Acquisition Transaction (as defined
below), (ii) recommend or endorse an Acquisition Transaction, (iii) participate
in any discussions or negotiations regarding an Acquisition Transaction, (iv)
provide any third party (other than the other party to this Agreement or an
affiliate of such party) with any nonpublic information in connection with any
inquiry or proposal relating to an Acquisition Transaction or (v) enter into an
agreement with any other party with respect to an Acquisition Transaction. FLC
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations previously conducted with any parties other than
Patriot hereto with respect to any of the foregoing, and will take all actions
necessary or advisable to inform the appropriate individuals or entities
referred to in this sentence of the obligations undertaken in this Section 4.06.
FLC will notify Patriot orally (within one day) and in writing (as promptly as
practicable) if any inquiries or proposals relating to an Acquisition
Transaction are received or any such negotiations or discussions are sought to
A-49
<PAGE>
be initiated or continued. As used in this Agreement, "Acquisition Transaction"
shall mean one of the following transactions with a party other than Patriot
hereto (i) a merger or consolidation, or any similar transaction, (ii) a
purchase, lease or other acquisition of all or a substantial portion of the
assets or liabilities of FLC or (iii) a purchase or other acquisition (including
by way of share exchange, tender offer, exchange offer or otherwise) of a
substantial interest in any class or series of FLC's equity securities.
Section 4.07 Duty to Advise; Duty to Update Disclosure Schedule. FLC
shall promptly advise Patriot of any change or event having a Material Adverse
Effect on it or which it believes would or would be reasonably likely to cause
or constitute a material breach of any of its representations, warranties or
covenants set forth herein. FLC shall update its Disclosure Schedule as promptly
as practicable after the occurrence of an event or fact which, if such event or
fact had occurred prior to the date of this Agreement, would have been disclosed
in such Disclosure Schedule. The delivery of such updated Disclosure Schedule
shall not relieve FLC from any breach or violation of this Agreement and shall
not have any effect for the purposes of determining the satisfaction of the
condition set forth in Section 5.01(c).
Section 4.08 Current Information.
(a) Ongoing Communications. During the period from the date
of this Agreement to the Effective Date, FLC shall, cause one or more of its
designated representatives to confer on a weekly or more frequent basis with
representatives of Patriot regarding its financial condition, operations and
business and matters relating to the completion of the transactions contemplated
hereby. As soon as reasonably available, but in no event more than 45 days after
the end of each calendar quarter ending after the date of this Agreement (other
than the last quarter of each fiscal year ending December 31) FLC and Patriot
will deliver to the other party its quarterly report on Form 10-Q under the
Exchange Act, and, as soon as reasonably available, but in no event more than 90
days after the end of each fiscal year ended December 31, FLC and Patriot will
deliver to the other party its Annual Report on Form 10-K. In addition, within
fifteen (15) days after the end of each month that is not a quarter end, FLC
A-50
<PAGE>
shall deliver to Patriot an interim consolidated balance sheet as of such month
end and an income statement for the month and year-to-date then ended.
(b) Board Minutes. FLC shall provide to Patriot a copy of
the minutes of any meeting of the Board of Directors of FLC or any Subsidiary,
or any committee thereof, or any senior management committee, but in any event
within 10 days of the meeting of such board or committee to which such minutes
relate, except that with respect to any meeting held within 10 days of the
Closing Date, such minutes shall be provided prior to the Closing Date.
Section 4.09 Undertakings by FLC. From and after the date of this
Agreement, FLC shall:
(a) Phase I Environmental Audit. Permit Patriot, if Patriot
elects to do so, at its own expense, to cause a "phase I environmental audit" to
be performed at any physical location owned or occupied by FLC or any of its
Subsidiaries on the date hereof;
(b) Timely Review. If requested by Patriot and at Patriot's
expense, cause its independent certified public accountants to perform a review
of its unaudited consolidated financial statements as of the end of any calendar
quarter, in accordance with Statement of Auditing Standards No. 71, and to issue
its report on such financial statements as soon as is practicable thereafter;
(c) Outside Service Bureau Contracts. If requested to do so
by Patriot, use its best efforts to obtain an extension of any contract with an
outside service bureau or other vendor of services or any Subsidiary, on terms
and conditions mutually acceptable to each party;
(d) List of Nonperforming Assets. Provide Patriot, within
fifteen (15) days after the monthly meeting of its Loan Review Committee, a
written list of nonperforming assets, classified assets and problem loans as of
the end of such month; and
(e) Shareholders Meetings. Take all action necessary to
properly call and convene a special meeting of its shareholders as soon as
practicable after the date hereof to consider and vote upon this Agreement and
the transactions contemplated hereby. The Board of Directors of FLC and the
A-51
<PAGE>
Board of Directors of Patriot will recommend that the shareholders of FLC and
Patriot, respectively, approve this Agreement and the transactions contemplated
hereby. If required by Patriot, FLC, shall retain a proxy solicitor in
connection with the solicitation of the approval of its shareholders of this
Agreement and the transactions contemplated hereby.
(f) Public Announcements. Cooperate and cause its respective
officers, directors, employees and agents to cooperate in good faith, consistent
with their respective legal obligations, in the preparation and distribution of,
and agree upon the form, substance and timing of, any press release related to
this Agreement and the transactions contemplated hereby, and any other public
disclosures related thereto, including without limitation, communications to
shareholders and internal announcements and customer disclosures, but nothing
contained herein shall prohibit either party from making any disclosure which
its counsel deems necessary under applicable law;
(g) Maintenance of Insurance. Maintain, and cause their
respective Subsidiaries to maintain, insurance in such amounts as are reasonable
to cover such risks as are customary in relation to the character and location
of its properties and the nature of its business;
(h) Maintenance of Books and Records. Maintain, and cause
their respective Subsidiaries to maintain, books of account and records in
accordance with GAAP applied on a basis consistent with those principles used in
preparing the financial statements heretofore delivered;
(i) Delivery of Securities Documents. Deliver to the other,
copies of all Securities Documents simultaneously with the filing thereof; and
(j) Taxes. File all federal, state, and local tax returns
required to be filed by them or their respective Subsidiaries on or before the
date such returns are due (including any extensions) and pay all taxes shown to
be due on such returns on or before the date such payment is due.
A-52
<PAGE>
Section 4.10 Employee Benefits. On and after the Effective Date, the
fringe benefits (including miscellaneous benefits) welfare benefit plans and
pension benefit (retirement) plans of Patriot shall become the fringe benefits,
welfare benefit plans and pension benefit (retirement) plans of the Holding
Company. After Closing, the Holding Company will initially maintain the FLC
employee benefit plans and will study whether to freeze, terminate, merge or
otherwise consolidate such FLC plans with the Holding Company employee benefit
plans.
Section 4.11 Nasdaq Listing. Patriot shall use all reasonable efforts
to cause the shares of the Holding Company Common Stock to be issued in
connection with the Consolidation to be approved for quotation on the Nasdaq
Stock Market's National Market, subject to official notice of issuance, as of or
prior to the Effective Date.
Section 4.12 Affiliate Letters. FLC shall use its best efforts to cause
each person who may be deemed to be an Affiliate of FLC, to execute and deliver
to Patriot as soon as practicable after the date of this Agreement, and in any
event prior to the date of the meetings of shareholders of FLC and Patriot to be
called pursuant to Section 4.09(f) hereof, a written agreement in the form of
Exhibit 1.
Section 4.13 Severance Pay. After the Effective Date, employees of FLC
or any of their respective Subsidiaries who are involuntarily terminated, shall
receive the severance pay specified in Patriot's severance plan.
Section 4.14 Disposition of FLC Equity Portfolio. Within thirty (30)
days of the date of this Agreement and subject to the exercise by the FLC Board
of Directors of their fiduciary duty, FLC and Patriot shall jointly develop a
plan to sell all of FLC's equity portfolio other than Patriot Common Stock in an
orderly fashion provided, however, that FLC shall consult with the Chief
Financial Officer of Patriot prior to the execution of each sale and with
respect to the reinvestment of the proceeds of such sales.
Section 4.15 Sale of FLC Headquarters. Within thirty (30) days of the
date of this Agreement, FLC shall list for sale with a broker acceptable to
Patriot the property owned by FLC and located at 1620 Pond Road, Allentown,
Pennsylvania.
A-53
<PAGE>
Section 4.16 Conduct of Patriot. From the date hereof to the Closing
Date, except as otherwise consented to or approved by FLC in writing or as
permitted or required by this Agreement, Patriot will not take any action that
would preclude the Consolidation from qualifying as a reorganization within the
meaning of Section 368 of the IRC.
Section 4.17 Closing Date. The parties desire the Closing Date to be on
or before November 1, 1998, and shall observe their covenants in Sections 4.03
and 4.04 and elsewhere in this Agreement in an attempt to achieve such date. If
such date is not practicably attainable, the parties acknowledge that the
Closing Date may not be able to occur until after January 4, 1999, due to the
inability of certain third party processors to accommodate (during the period
November 1, 1998 through December 31, 1998) the systems conversions of Patriot
Bank and First Lehigh Bank that are to occur concurrently with the Closing Date.
ARTICLE V
CONDITIONS
----------
Section 5.01 Mutual Conditions to the Obligations of FLC and Patriot
under this Agreement. The obligations of FLC and Patriot hereunder shall be
A-54
<PAGE>
subject to satisfaction at or prior to the Closing Date of each of the following
conditions, unless waived by both parties pursuant to Section 7.03 hereof:
(a) Corporate Proceedings. All action required to be taken
by, or on the part of, each party to authorize the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement, shall have been duly and validly taken and each
party shall have received certified copies of the resolutions of the other party
evidencing such authorizations;
(b) Covenants. The obligations and covenants of each party
required by this Agreement to be performed by each party at or prior to the
Closing Date shall have been duly performed and complied with in all material
respects;
(c) Representations and Warranties. The representations and
warranties of each party set forth in this Agreement shall be true and correct,
as of the date of this Agreement, and as of the Closing Date as though made on
and as of the Closing Date, except as to any representation or warranty (i)
which specifically relates to an earlier date or (ii) where the breach of the
representation or warranty would not, either individually or in the aggregate,
constitute a Material Adverse Effect;
(d) Approvals of Regulatory Authorities. The parties shall
have received all required approvals of Regulatory Authorities of the
Consolidation, without the imposition of any term or condition that would have a
Material Adverse Effect on the Holding Company upon completion of the
Consolidation and all notice and waiting periods required thereunder shall have
expired or been terminated;
(e) No Injunction. There shall not be in effect any order,
decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits consummation of the transactions contemplated hereby;
(f) Officer's Certificate. Each party shall have delivered
to the other party a certificate, dated the Closing Date and signed, without
personal liability, by its chairman or president, to the effect that the
conditions set forth in subsections (a) through (e) of this Section 5.01 have
been satisfied, to the best knowledge of the officer executing the same;
A-55
<PAGE>
(g) Opinions of Counsel. FLC shall have received an opinion
of Stevens & Lee, counsel to Patriot, dated the Closing Date, in form and
substance reasonably satisfactory to FLC and its counsel to the effect set forth
on Exhibit 6 attached hereto and Patriot shall have received an opinion of
counsel of Duane, Morris & Heckscher LLP, counsel to FLC, dated the Closing
Date, in form and substance reasonably satisfactory to Patriot and its counsel
to the effect set forth in Exhibit 7 attached hereto;
(h) Registration Statement. The Registration Statement shall
be effective under the Securities Act and no proceedings shall be pending or
threatened by the SEC to suspend the effectiveness of the Registration
Statement; all required approvals by state securities or "blue sky" authorities
with respect to the transactions contemplated by this Agreement, shall have been
obtained; and neither the Registration Statement nor any such approval by state
securities or "blue sky" authorities shall be subject to a stop order or
threatened stop order by the SEC or any such authority;
(i) Tax Opinion. Each party shall have received an opinion
of Stevens & Lee substantially to the effect set forth on Exhibit 8 attached
hereto;
(j) Approval of Shareholders. This Agreement shall have been
approved by the shareholders of FLC and Patriot by such vote as is required
under BCL, the DGCL, their respective articles or certificates of incorporation
and bylaws or under Nasdaq requirements applicable to it;
(k) Nasdaq Listing. The Holding Company Common Stock shall
be approved for quotation on the Nasdaq National Market System;
(l) Dividends on FLC Preferred Stock. The accrued but unpaid
dividends in arrears on the FLC Series A Preferred Stock shall be paid on or
before the Closing Date;
(m) Other. Each party shall have furnished the other party
with such certificates of its respective officers or others and such documents
to evidence fulfillment of the conditions set forth in this Section 5.01 as each
party may reasonable request.
A-56
<PAGE>
Section 5.02 Additional Conditions to the Obligations of Patriot. The
obligation of Patriot hereunder shall be subject to satisfaction at or prior to
the Closing of each of the following conditions unless waived by Patriot
pursuant to Section 7.03.
(a) Conversion Rights. No adjustment shall have occurred
with respect to the conversion rights of any holder of FLC Senior Preferred
Stock or FLC Series A Preferred Stock.
(b) Termination of Regulatory Agreements. On or prior to the
Closing Date each Regulatory Agreement to which FLC or First Lehigh Bank is a
party shall have been terminated by the applicable Regulatory Authority.
(c) FDIC Consent to Standstill Agreement. The FDIC, pursuant
to the provisions of the FDIC order dated June 26, 1998 with respect to Mr.
Leuthe, shall have consented in writing to the terms and conditions of the
Standstill Agreement.
(d) Funding of Escrow. Mr. Leuthe shall have executed the
escrow agreement and funded the escrow required by Section 7 of the Standstill
Agreement.
(e) Compliance with Standstill Agreement. Mr. Leuthe shall
have complied with all provisions of the Standstill Agreement required to be
complied with prior to or concurrently with the completion of the Consolidation,
including without limitation, the execution of a proxy in favor of the Board of
Directors of the Holding Company.
(f) Repayment of Indebtedness. Mr. Leuthe shall have repaid
in full all outstanding indebtedness of Mr. Leuthe to First Lehigh Bank.
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
---------------------------------
Section 6.01 Termination. This Agreement may be terminated
on or at any time prior to the Closing Date:
(a) By the mutual written consent of the parties hereto;
A-57
<PAGE>
(b) By Patriot or FLC:
(i) if the Closing Date shall not have occurred on or
before March 31, 1999, unless the failure of such occurrence shall be
due to the failure of the party seeking to terminate this Agreement to
perform or observe in any material respect its agreements set forth in
this Agreement required to be performed or observed by such party on
or before the Closing Date; or
(ii) if either party has received a final unappealable
administrative order from a Regulatory Authority whose approval or
consent has been requested that such approval or consent will not be
granted, or will not be granted absent the imposition of terms and
conditions which would not permit satisfaction of the condition set
forth at Section 5.01(d) hereof, unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe in any material respect its agreements
set forth herein required to be performed or observed by such party on
or before the Closing Date; or
(c) By FLC, if the Patriot Market Value is less than $12.26;
(d) at any time on or prior to the Effective Date, by FLC in
writing if Patriot has, or by Patriot in writing if FLC has, in any material
respect, breached (i) any material covenant or undertaking contained herein or
(ii) any representation or warranty contained herein, which in the case of a
breach by Patriot would have a Material Adverse Effect on Patriot or in the case
of a breach by FLC would have a Material Adverse Effect on FLC, in any case, if
such breach has not been substantially cured by the earlier of 30 days after the
date on which written notice of such breach is given to the party committing
such breach or the Effective Date unless on such date such breach no longer
causes a Material Adverse Effect;
(e) by either the Board of Directors of Patriot or the Board
of Directors of FLC if their shareholders shall have not approved this Agreement
by the requisite vote; provided, however, that no termination right shall exist
hereunder if prior to such shareholder vote the Board of Directors of the party
whose shareholders failed to approve this Agreement shall have otherwise
A-58
<PAGE>
withdrawn, modified or changed in a manner adverse to the other party its
approval or recommendation of this Agreement and the transactions contemplated
thereby.
Section 6.02 Effect of Termination. If this Agreement is terminated
pursuant to Section 6.01 hereof, this Agreement shall forthwith become void
(other than Section 4.02(c) and Section 7.01 hereof, which shall remain in full
force and effect), and there shall be no further liability on the part of
Patriot or FLC to the other, except for any liability arising out of any uncured
willful breach of any covenant or other agreement contained in this Agreement,
any fraudulent breach of a representation or warranty, in this Agreement and any
obligation or liability arising under the Patriot Option. Nothing contained in
this Section 6.02 shall be deemed to prohibit Patriot or FLC from maintaining an
action against a third party for tortious interference or otherwise.
ARTICLE VII
MISCELLANEOUS
-------------
Section 7.01 Expenses. Except for the cost of printing and mailing the
Proxy Statement/Prospectus which shall be shared equally, each party hereto
shall bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated hereby, including fees and expenses of its own
financial consultants, accountants and counsel.
Section 7.02 Non-Survival of Representations and Warranties. All
representations, warranties and, except to the extent specifically provided
otherwise herein, agreements and covenants, other than those covenants that by
their terms are to be performed after the Effective Date, including without
limitation the covenants set forth in Sections 1.02(f) and (g), and 4.05,
hereof, which will survive the Consolidation, shall terminate on the Closing
Date.
Section 7.03 Amendment, Extension and Waiver. Subject to applicable
law, at any time prior to the consummation of the transactions contemplated by
this Agreement, the parties may (a) amend this Agreement, (b) extend the time
for the performance of any of the obligations or other acts of either party
hereto, (c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or (d) waive
compliance with any of the agreements or conditions contained in Articles IV and
V hereof or otherwise, provided that any amendment, extension or waiver granted
or executed after shareholders of FLC or Patriot have approved this Agreement
A-59
<PAGE>
shall not modify either the amount or the form of the consideration to be
provided hereby to holders of FLC Common Stock or Patriot Common Stock upon
consummation of the Consolidation, change any terms of the articles of Holding
Company or otherwise materially adversely affect the shareholders of FLC or
Patriot without the approval of the shareholders who would be so affected. This
Agreement may not be amended except by an instrument in writing authorized by
the respective Boards of Directors and signed, by duly authorized officers, on
behalf of the parties hereto. Any agreement on the part of a party hereto to any
extension or waiver shall be valid only if set forth in an instrument in writing
signed by a duly authorized officer on behalf of such party, but such waiver or
failure to insist on strict compliance with such obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
Section 7.04 Entire Agreement. This Agreement, including the documents
and other writings referred to herein or delivered pursuant hereto, contains the
entire agreement and understanding of the parties with respect to its subject
matter. This Agreement supersedes all prior arrangements and understandings
between the parties, both written or oral with respect to its subject matter.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto and their respective successors, any rights, remedies,
obligations or liabilities.
Section 7.05 No Assignment. Neither party hereto may assign any of its
rights or obligations hereunder to any other person, without the prior written
consent of the other party hereto.
Section 7.06 Notices. All notices or other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
A-60
<PAGE>
prepaid registered or certified mail (return receipt requested), or sent by
telecopy, addressed as follows:
(a) If to Patriot, to:
Patriot Bank Corp.
High and Hanover Streets
Pottstown, Pennsylvania 19464
Attention: Joseph W. Major,
President and Chief Executive
Officer
Telecopy No.: (610) 323-0914
with a copy to:
Stevens & Lee
One Glenhardie Corporate Center
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087-0236
Attention: Jeffrey P. Waldron, Esquire
Telecopy No.: (610) 687-1384
(b) If to FLC, to:
First Lehigh Corporation
1620 Pond Road
Allentown, Pennsylvania 18104
Attention: Wilbur R. Roat,
Director
Telecopy No.: (610) 398-6693
A-61
<PAGE>
with copies to:
Duane, Morris & Heckscher LLP
4200 One Liberty Place
Philadelphia, Pennsylvania 19103-7396
Attention: Kathleen M. Shay, Esquire
Telecopy No.: (215) 970-1020
Section 7.07 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
Section 7.08 Counterparts. This Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
Section 7.09 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
Section 7.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic internal law (including the law of
conflicts of law) of the Commonwealth of Pennsylvania.
A-62
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
PATRIOT BANK CORP.
By________________________________
Joseph W. Major,
President and
Chief Executive Officer
FIRST LEHIGH CORPORATION
By________________________________
John H. McKeever,
Chairman of the Board and
Acting President
A-63
<PAGE>
Exhibit 1
---------
July 28, 1998
Patriot Bank Corp.
High and Hanover Streets
Pottstown, Pennsylvania 19464
Ladies and Gentlemen:
Patriot Bank Corp. ("Patriot") and First Lehigh Corporation ("FLC") desire
to enter into an agreement dated July 28, 1998 ("Agreement"), pursuant to which,
subject to the terms and conditions set forth therein, (a) a new Pennsylvania
corporation to be named Patriot Bank Corp. will be formed by Patriot and FLC
(the "Holding Company"), (b) shareholders of Patriot shall receive shares of
Holding Company common stock for shares of common stock of Patriot outstanding
on the closing date, and (c) shareholders of FLC shall receive shares of Holding
Company common stock for shares of capital stock of FLC outstanding on the
closing date (the foregoing, collectively, referred to herein as the
"Consolidation").
Patriot has requested, as an inducement to its execution and delivery to
FLC of the Agreement, that the undersigned execute and deliver to Patriot this
Letter Agreement.
In consideration of the foregoing, each of the undersigned hereby
irrevocably:
(a) Agrees (i) to be present (in person or by proxy) at all meetings of
shareholders of FLC called to vote for approval of the Agreement and the
Consolidation so that all shares of capital stock of FLC then owned by the
undersigned will be counted for the purpose of determining the presence of a
quorum at such meetings, and (ii) to vote or cause to be voted all shares owned
by the undersigned on any record date for any meeting of shareholders of FLC
called to vote on the Consolidation in favor of approval and adoption of the
A-64
<PAGE>
Patriot Bank Corp.
July 28, 1998
Page 2
Agreement and the transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the Board of Directors of FLC).
(b) Agrees not to offer, sell, transfer or otherwise dispose of any
shares of common stock of the Holding Company received in the Consolidation,
except (i) at such time as a registration statement under the Securities Act of
1933, as amended ("Securities Act") covering sales of such Holding Company
common stock is effective and a prospectus is made available under the
Securities Act, (ii) within the limits, and in accordance with the applicable
provisions of, Rule 145(d) under the Securities Act, or (iii) in a transaction
which, in the opinion of counsel satisfactory to the Holding Company or as
described in a "no-action" or interpretive letter from the staff of the
Securities and Exchange Commission ("SEC"), is not required to be registered
under the Securities Act; and acknowledges and agrees that the Holding Company
is under no obligation to register the sale, transfer or other disposition of
the Holding Company common stock by the undersigned or on behalf of the
undersigned, or to take any other action necessary to make an exemption from
registration available;
(c) Agrees that neither FLC nor the Holding Company shall be bound by
any attempted sale of any shares of FLC capital stock or Holding Company common
stock, respectively, in violation of this Agreement and FLC's and the Holding
Company's transfer agents shall be given appropriate stop transfer orders and
shall not be required to register any such attempted sale, unless the sale has
been effected in compliance with the terms of this Letter Agreement; and further
agrees that the certificate representing shares of Holding Company common stock
owned by the undersigned may be endorsed with a restrictive legend consistent
with the terms of this Letter Agreement;
(d) Agrees to use reasonable efforts to cause the provisions of
subparagraph (b) hereof to be observed with respect to shares of Holding Company
common stock and FLC common stock owned by (i) his or her spouse, (ii) any of
A-65
<PAGE>
Patriot Bank Corp.
July 28, 1998
Page 3
his or her relatives or relatives of his or her spouse occupying his or her
home, (iii) any trust or estate in which he or she, his or her spouse, or any
such relative owns at least a 10% beneficial interest or of which any of them
serves as trustee, executor or in any similar capacity, and (iv) any corporation
or other organization in which the undersigned, any affiliate of the
undersigned, his or her spouse, or any such relative owns at least 10% of any
class of equity securities or of the equity interest;
(e) Represents that the undersigned has the capacity to enter into this
Letter Agreement and that it is a valid and binding obligation enforceable
against the undersigned in accordance with its terms, subject to bankruptcy,
insolvency and other laws affecting creditors' rights and general equitable
principles.
-------------------------
This Letter Agreement may be executed in two or more counterparts, each of
which shall be deemed to constitute an original, but all of which together shall
constitute one and the same Letter Agreement.
-------------------------
This Letter Agreement shall terminate concurrently with any termination of
the Agreement in accordance with its terms.
-------------------------
The undersigned intend to be legally bound hereby.
Sincerely,
A-66
<PAGE>
EXHIBIT 2
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Stock Option Agreement") dated July 28,
1998, is by and between FIRST LEHIGH CORPORATION, a Pennsylvania corporation
("FLC") and PATRIOT BANK CORP., a Delaware corporation ("Patriot").
BACKGROUND
1. Patriot and FLC desire to enter into an Agreement and Plan of
Consolidation, dated July 28, 1998 (the "Agreement"), providing, among other
things, for the creation by Patriot and FLC of a bank holding company which will
issue shares of its common stock to the shareholders of Patriot and FLC (the
"Consolidation").
2. As a condition to Patriot to enter into the Agreement, FLC is
granting to Patriot an option to purchase up to that number of shares of common
stock, par value $.01 per share (the "Common Stock") of FLC as shall equal 19.9%
of shares of Common Stock of FLC issued and outstanding as of the date hereof,
on the terms and conditions hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual covenants and
agreements set forth herein, Patriot and FLC, intending to be legally bound
hereby, agree:
1. Grant of Option. FLC hereby grants to Patriot, on the terms and
conditions set forth herein, the option to purchase (the "Option") up to 410,000
shares of Common Stock of FLC (as adjusted as set forth herein, the "Option
Shares") at a price per share (as adjusted as set forth herein, the "Option
Price") equal to $[7.00], provided, however, that in no event shall the number
of Option Shares for which the Option is exercisable exceed 19.9% of the issued
and outstanding shares of FLC Common Stock without giving effect to any shares
subject to or issued pursuant to the Option.
A-67
<PAGE>
2. Exercise of Option.
(a) Provided that (i) Patriot shall not be, on the date of exercise, in
material breach of the agreements or covenants contained in the Agreement or
this Stock Option Agreement, and (ii) no preliminary or permanent injunction or
other order against the delivery of shares covered by the Option issued by any
court of competent jurisdiction in the United States shall be in effect on the
date of exercise, upon or after the occurrence of a Triggering Event (as such
term is hereinafter defined) Patriot may exercise the Option, in whole or in
part, at any time or one or more times, from time to time; provided that the
Option shall terminate and be of no further force and effect upon the earliest
to occur of (A) the Effective Date of the Consolidation, as provided in the
Agreement, (B) termination of the Agreement in accordance with the terms thereof
prior to the occurrence of a Triggering Event or a Preliminary Triggering Event,
other than a termination of the Agreement pursuant to Section 6.01(d), unless in
the case of termination by FLC pursuant to Section 6.01(d), such termination is
as a result of a willful breach of the Agreement by Patriot (a termination
pursuant to Section 6.01(d), except a termination by FLC as a result of a
willful breach by Patriot, being referred to herein as a "Default Termination"),
(C) 18 months after the termination of the Agreement by Patriot or FLC pursuant
to a Default Termination, and (D) 18 months after termination of the Agreement
(other than pursuant to a Default Termination) following the occurrence of a
Triggering Event or a Preliminary Triggering Event; and provided, further, that
any purchase of shares upon exercise of the Option shall be subject to
compliance with applicable securities and banking laws. The rights set forth in
Section 3 hereof shall terminate when the right to exercise the Option
terminates (other than as a result of a complete exercise of the Option) as set
forth above.
(b) As used herein, the term "Triggering Event" means the occurrence of
any of the following events:
(i) a person or group (as such terms are defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations thereunder), other than Patriot or an
affiliate of Patriot, acquires beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 25% or more of the
then outstanding shares of Common Stock (excluding any
A-68
<PAGE>
shares eligible to be reported on Schedule 13G of the Securities and
Exchange Commission); or
(ii) a person or group, other than Patriot or an affiliate of
Patriot, enters into an agreement or letter of intent or memorandum of
understanding with FLC or FLC shall have authorized, recommended or
publicly proposed, or publicly announced an intention to authorize,
recommend or propose, such an agreement or letter of intent or
memorandum of understanding, pursuant to which such person or group or
any affiliate of such person or group would (i) merge or consolidate,
or enter into any similar transaction, with FLC, (ii) acquire all or
substantially all of the assets or liabilities of FLC or all or
substantially all of the assets or liabilities of First Lehigh Bank
(or any successor subsidiary), the wholly-owned subsidiary of FLC
("First Lehigh Bank"), or (iii) acquire beneficial ownership of
securities representing, or the right to acquire beneficial ownership
or to vote securities representing, 25% or more of the then
outstanding shares of Common Stock (excluding any shares eligible to
be reported on Schedule 13G of the Securities and Exchange Commission)
or the then outstanding shares of common stock of First Lehigh Bank.
(c) As used herein, the term "Preliminary Triggering Event" means the
occurrence of any of the following events:
(i) a person or group (as such terms are defined in the Exchange
Act and the rules and regulations thereunder), other than Patriot or
an affiliate of Patriot, acquires beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 10% or more of the
then outstanding shares of Common Stock (excluding any shares eligible
to be reported on Schedule 13G of the Securities and Exchange
Commission);
(ii) a person or group, other than Patriot or an affiliate of
Patriot, publicly announces a bona fide proposal (including a written
communication that is or becomes the subject of public disclosure) for
(i) any merger, consolidation or acquisition of all or substantially
all the assets or liabilities of FLC or all or substantially all the
assets or liabilities of First Lehigh Bank, or any other business
combination involving FLC or First Lehigh
A-69
<PAGE>
Bank, or (ii) a transaction involving the transfer of beneficial
ownership of securities representing, or the right to acquire
beneficial ownership or to vote securities representing, 10% or more
of the then outstanding shares of Common Stock or the then outstanding
shares of Common Stock of First Lehigh Bank (collectively, a
"Proposal"), and thereafter, if such Proposal has not been Publicly
Withdrawn (as such term is hereinafter defined) at least 30 days prior
to the meeting of shareholders of FLC called to vote on the
Consolidation, FLC's shareholders fail to approve the Consolidation by
the vote required by applicable law at the meeting of shareholders
called for such purpose or such meeting has been cancelled; or
(iii) the Board of Directors of FLC shall (A) fail to recommend
the Consolidation, (B) recommend an Acquisition Transaction or (C)
have withdrawn or modified in a manner adverse to Patriot the
recommendation of the Board of Directors of FLC with respect to the
Agreement and thereafter FLC's shareholders fail to approve the
Consolidation by the vote required by law at the meeting of
shareholders called for such purpose or such meeting is not scheduled
or is cancelled without the written consent of Patriot; or
(iv) a person or group, other than Patriot or an affiliate of
Patriot, makes a bona fide Proposal and thereafter, but before such
Proposal has been Publicly Withdrawn, FLC shall have breached any
representation, warranty, covenant or obligation contained in the
Agreement and such breach would entitle Patriot to terminate the
Agreement under Section 6.01(d) thereof (without regard to the cure
period provided for therein unless such cure is promptly effected
without jeopardizing consummation of the Consolidation pursuant to the
Agreement).
If more than one of the transactions giving rise to a Triggering Event or a
Preliminary Triggering Event under this Section 2 is undertaken or effected,
then all such transactions shall give rise only to one Triggering Event or
Preliminary Triggering Event, as applicable, which Triggering Event or
Preliminary Triggering Event shall be deemed continuing for all purposes
hereunder until all such transactions are abandoned.
"Publicly Withdrawn" for purposes of this Section 2 shall mean an
unconditional bona fide withdrawal of the Proposal
A-70
<PAGE>
coupled with a public announcement of no further interest in pursuing such
Proposal or in acquiring any controlling influence over FLC or in soliciting or
inducing any other person (other than Patriot or an affiliate of Patriot) to do
so.
Notwithstanding the foregoing, the obligation of FLC to issue Option
Shares upon exercise of the Option shall be deferred (but shall not terminate):
(i) until the receipt of all required governmental or regulatory approvals or
consents necessary for FLC to issue the Option Shares or Patriot to exercise the
Option, or until the expiration or termination of any waiting period required by
law, or (ii) so long as any injunction or other order, decree or ruling issued
by any federal or state court of competent jurisdiction is in effect which
prohibits the sale or delivery of the Option Shares, and, in each case,
notwithstanding any provision to the contrary set forth herein, the Option shall
not expire or otherwise terminate with respect to the Option Shares subject to
any prior exercise.
FLC shall notify Patriot promptly in writing of the occurrence of any
Triggering Event known to it, it being understood that the giving of such notice
by FLC shall not be a condition to the right of Patriot to exercise the Option.
FLC will not take any action which would have the effect of preventing or
disabling FLC from delivering the Option Shares to Patriot upon exercise of the
Option or otherwise performing its obligations under this Stock Option
Agreement, except to the extent required by applicable securities and banking
laws and regulations. In the event Patriot wishes to exercise the Option,
Patriot shall send a written notice to FLC (the date of which is hereinafter
referred to as the "Notice Date") specifying the total number of Option Shares
it wishes to purchase and a place and date between two and ten business days
inclusive from the Notice Date for the closing of such a purchase (a "Closing");
provided, however, that a Closing shall not occur prior to two days after the
later of receipt of any necessary regulatory approvals or the expiration of any
legally required notice or waiting period, if any.
A-71
<PAGE>
3. Repurchase of Option by FLC.
(a) Subject to the last sentence of Section 2(a), at the request of
Patriot at any time commencing upon the first occurrence of a Repurchase Event
(as defined in Section 3(d)) and ending 18 months immediately thereafter, FLC
shall repurchase from Patriot (x) the Option and (y) all shares of Common Stock
purchased by Patriot pursuant hereto with respect to which Patriot then has
beneficial ownership. The date on which Patriot exercises its rights under this
Section 3 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Section 3 Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Patriot for any shares
of Common Stock acquired pursuant to the Option with respect to which
Patriot then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined
below) for each share of Common Stock over (y) the Option Price
(subject to adjustment pursuant to Section 6), multiplied by the
number of shares of Common Stock with respect to which the Option has
not been exercised; and
(iii) the excess, if any, of the Applicable Price over the Option
Price (subject to adjustment pursuant to Section 6) paid (or, in the
case of Option Shares with respect to which the Option has been
exercised, but the Closing has not occurred, payable) by Patriot for
each share of Common Stock with respect to which the Option has been
exercised and with respect to which Patriot then has beneficial
ownership, multiplied by the number of such shares.
(b) If Patriot exercises it rights under this Section 3, FLC shall,
within ten (10) business days after the Request Date, pay the Section 3
Repurchase Consideration to Patriot in immediately available funds, and
contemporaneously with such payment, Patriot shall surrender to FLC the Option
and the certificate evidencing the shares of Common Stock purchased thereunder
with respect to which Patriot then has beneficial ownership, and Patriot shall
warrant that it has sole record and beneficial ownership of such shares, and
that the same are then free and clear of all liens, claims, charges and
encumbrances of any kind whatsoever. Notwithstanding the foregoing, to the
A-72
<PAGE>
extent that prior notification to or approval of any banking agency or
department of any federal or state government, including without limitation the
FRB, the PDB, the FDIC, or the respective staffs thereof (the "Regulatory
Authority"), is required in connection with the payment of all or any portion of
the Section 3 Repurchase Consideration, Patriot shall have the ongoing option to
revoke its request for repurchase pursuant to Section 3, in whole or in part, or
to require that FLC deliver from time to time that portion of the Section 3
Repurchase Consideration that it is not then so prohibited from paying and
promptly file the required notice or application for approval and expeditiously
process the same (and each party shall cooperate with the other in the filing of
any such notice or application and the obtaining of any such approval), in which
case the ten (10) business day period of time that would otherwise run pursuant
to the preceding sentence for the payment of the portion of the Section 3
Repurchase Consideration shall run instead from the date on which, as the case
may be, any required notification period has expired or been terminated or such
approval has been obtained and, in either event, any requisite waiting period
shall have passed. If any Regulatory Authority disapproves of any part of FLC's
proposed repurchase pursuant to this Section 3, FLC shall promptly give notice
of such fact to FLC. If any Regulatory Authority prohibits the repurchase
pursuant to this Section 3, FLC shall promptly give notice of such fact to
Patriot. If any Regulatory Authority prohibits the repurchase in part but not in
whole, then Patriot shall have the right (i) to revoke the repurchase request or
(ii) to the extent permitted by such Regulatory Authority, determine whether the
repurchase should apply to the Option and/or Option Shares and to what extent to
each, and Patriot shall thereupon have the right to exercise the Option as to
the number of Option Shares for which the Option was exercisable at the Request
Date less the sum of the number of shares covered by the Option in respect of
which payment has been made pursuant to Section 3(a)(ii) and the number of
shares covered by the portion of the Option (if any) that has been repurchased.
Patriot shall notify FLC of its determination under the preceding sentence
within five (5) business days of receipt of notice of disapproval of the
repurchase.
(c) For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Common Stock paid for any such
share by the person or groups described in Section 3(d)(i), (ii) the price per
share of Common Stock received by a holder of Common Stock in connection with
any merger or other business combination transaction
A-73
<PAGE>
described in Section 3(d)(ii), (iii) or (iv), or (iii) the highest closing sales
price per share of Common Stock quoted on the Nasdaq Stock Market or OTC
Bulletin Board during the 40 business days preceding the Request Date; provided,
however, that in the event of a sale of less than all of FLC's assets, the
Applicable Price shall be the sum of the price paid in such sale for such assets
and the current market value of the remaining assets of FLC as determined by a
nationally-recognized investment banking firm selected by Patriot, divided by
the number of shares of Common Stock outstanding at the time of such sale. If
the consideration to be offered, paid or received pursuant to either of the
foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent
nationally-recognized investment banking firm selected by Patriot and reasonably
acceptable to FLC, which determination shall be conclusive for all purposes of
this Agreement.
(d) As used herein, a Repurchase Event shall occur if (i) any person or
group (as such terms are defined in the Exchange Act and the rules and
regulations thereunder), other than Patriot or an affiliate of FLC, acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of, or the right to acquire beneficial ownership of, 25% or more of the
then-outstanding shares of Common Stock, (ii) FLC shall have merged or
consolidated with any person, other than Patriot or an affiliate of Patriot, and
shall not be the surviving or continuing corporation of such merger or
consolidation, (iii) any person, other than Patriot or an affiliate of Patriot,
shall have merged into FLC and FLC shall be the surviving corporation, but, in
connection with such merger, the then-outstanding shares of Common Stock have
been changed into or exchanged for stock or other securities of FLC or any other
person or cash or any other property or the outstanding shares of Common Stock
immediately prior to such merger shall after such merger represent less than 50%
of the outstanding shares and share equivalents of the surviving corporation or
(iv) FLC shall have sold or otherwise transferred more than 25% of its
consolidated assets to any person, other than Patriot or an affiliate of
Patriot.
4. Payment and Delivery of Certificates. At any Closing hereunder, (a)
Patriot will make payment to FLC of the aggregate price for the Option Shares so
purchased by wire transfer of immediately available funds to an account
designated by FLC, (b) FLC will deliver to Patriot a stock certificate or
A-74
<PAGE>
certificates representing the number of Option Shares so purchased, registered
in the name of Patriot or its designee, in such denominations as were specified
by Patriot in its notice of exercise, and (c) Patriot will pay any transfer or
other taxes required by reason of the issuance of the Option Shares so
purchased.
A legend will be placed on each stock certificate evidencing Option
Shares issued pursuant to this Stock Option Agreement, which legend will read
substantially as follows:
"The shares of stock evidenced by this certificate have not been
the subject of a registration statement filed under the Securities Act
of 1933, as amended (the "Act"), and declared effective by the
Securities and Exchange Commission. These shares may not be sold,
transferred or otherwise disposed of prior to such time unless First
Lehigh Corporation receives an opinion of counsel acceptable to it
stating that an exemption from the registration provisions of the Act
is available for such transfer."
5. Registration Rights. Upon or after the occurrence of a Triggering
Event and upon receipt of a written request from Patriot, FLC shall prepare and
file as soon as practicable a registration statement under the Securities Act of
1933 (the "Securities Act") with the Securities and Exchange Commission covering
the Option and such number of Option Shares as Patriot shall specify in its
request, and FLC shall use its best efforts to cause such registration statement
to be declared effective in order to permit the sale or other disposition of the
Option and the Option Shares, provided that Patriot shall in no event have the
right to have more than one such registration statement become effective, and
provided further that FLC shall not be required to prepare and file any such
registration statement in connection with any proposed sale with respect to
which counsel to FLC delivers to FLC and to Patriot its opinion to the effect
that no such filing is required under applicable laws and regulations with
respect to such sale or disposition; provided further, however, that FLC may
delay any registration of Option Shares above for a period not exceeding 90 days
in the event that FLC shall in good faith determine that any such registration
would adversely affect an offering or contemplated offering of securities by
FLC. Patriot shall provide all information reasonably requested by FLC for
inclusion in any registration statement to be filed hereunder. In connection
with such filing,
A-75
<PAGE>
FLC shall use its reasonable best efforts to cause to be delivered to Patriot
such certificates, opinions, accountant's letters and other documents as Patriot
shall reasonably request and as are customarily provided in connection with
registration of securities under the Securities Act. FLC shall provide to
Patriot such number of copies of the preliminary prospectus and final prospectus
and any amendments and supplements thereto as Patriot may reasonably request.
All reasonable expenses incurred by FLC in complying with the
provisions of this Section 5, including, without limitation, all registration
and filing fees, reasonable printing expenses, reasonable fees and disbursements
of counsel for FLC and blue sky fees and expenses, shall be paid by FLC.
Underwriting discounts and commissions to brokers and dealers relating to the
Option Shares, fees and disbursements of counsel to Patriot and any other
expenses incurred by Patriot in connection with such filing shall be borne by
FLC. In connection with such filing, FLC shall indemnify and hold harmless
Patriot against any losses, claims, damages or liabilities, joint or several, to
which Patriot may become subject, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any preliminary or final registration statement or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and FLC will reimburse Patriot for any
legal or other expense reasonably incurred by Patriot in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that FLC will not be liable in any case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such preliminary or final registration statement or such amendment or
supplement thereto in reliance upon and in conformity with written information
furnished by or on behalf of Patriot specifically for use in the preparation
thereof. Patriot will indemnify and hold harmless FLC to the same extent as set
forth in the immediately preceding sentence but only with reference to written
information furnished by or on behalf of Patriot for use in the preparation of
such preliminary or final registration statement or such amendment or supplement
thereto; and Patriot will reimburse FLC for any legal or other expense
reasonably incurred by FLC in connection with investigating or
A-76
<PAGE>
defending any such loss, claim, damage, liability or action. Notwithstanding
anything to the contrary contained herein, no indemnifying party shall be liable
for any settlement effected without its prior written consent.
6. Adjustment Upon Changes in Capitalization. In the event of any
change in the Common Stock by reason of stock dividends, split-ups,
recapitalizations, combinations, conversions, divisions, exchanges of shares or
the like, then the number and kind of Option Shares and the Option Price shall
be appropriately adjusted.
7. Filings and Consents. Each of Patriot and FLC will use its
reasonable best efforts to make all filings with, and to obtain consents of, all
third parties and governmental authorities necessary to the consummation of the
transactions contemplated by this Stock Option Agreement. Within 10 days from
the date hereof, Patriot shall file a report of beneficial ownership on Form 13D
with the Securities and Exchange Commission under the Exchange Act which
discloses the rights of Patriot hereunder.
8. Representations and Warranties of FLC. FLC hereby represents and
warrants to Patriot as follows:
(a) Due Authorization. FLC has full corporate power and authority to
execute, deliver and perform this Stock Option Agreement and all corporate
action necessary for execution, delivery and performance of this Stock Option
Agreement has been duly taken by FLC. This Stock Option Agreement constitutes a
legal, valid and binding obligation of FLC, enforceable against FLC in
accordance with its terms (except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar laws of
general applicability relating to or affecting creditors' rights or by general
equity principles).
(b) Authorized Shares. FLC has taken all necessary corporate action to
authorize and reserve for issuance all shares of Common Stock that may be issued
pursuant to any exercise of the Option.
9. Representations and Warranties of Patriot. Patriot hereby represents
and warrants to FLC that Patriot has full corporate power and authority to
execute, deliver and perform this Stock Option Agreement and all corporate
action
A-77
<PAGE>
necessary for execution, delivery and performance of this Stock Option Agreement
has been duly taken by Patriot. This Stock Option Agreement constitutes a legal,
valid and binding obligation of Patriot, enforceable against Patriot in
accordance with its terms (except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar laws of
general applicability relating to or affecting creditors' rights or by general
equity principles).
10. Specific Performance. The parties hereto acknowledge that damages
would be an inadequate remedy for a breach of this Stock Option Agreement and
that the obligations of the parties hereto shall be specifically enforceable.
11. Entire Agreement. This Stock Option Agreement and the Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof.
12. Assignment or Transfer. Patriot may not sell, assign or otherwise
transfer its rights and obligations hereunder, in whole or in part, to any
person or group of persons other than to a wholly-owned subsidiary of Patriot.
Patriot represents that it is acquiring the Option for Patriot's own account and
not with a view to, or for sale in connection with, any distribution of the
Option or the Option Shares. Patriot is aware that neither the Option nor the
Option Shares is the subject of a registration statement filed with, and
declared effective by, the Securities and Exchange Commission pursuant to
Section 5 of the Securities Act, but instead each is being offered in reliance
upon the exemption from the registration requirement provided by Section 4(2)
thereof and the representations and warranties made by Patriot in connection
therewith.
13. Amendment of Stock Option Agreement. By mutual consent of the
parties hereto, this Stock Option Agreement may be amended in writing at any
time, for the purpose of facilitating performance hereunder or to comply with
any applicable regulation of any governmental authority or any applicable order
of any court or for any other purpose.
14. Validity. The invalidity or unenforceability of any provision of
this Stock Option Agreement shall not affect the
A-78
<PAGE>
validity or enforceability of any other provisions of this Stock Option
Agreement, which shall remain in full force and effect.
15. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered personally, by telegram or telecopy, or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
(i) If to FLC, to:
First Lehigh Corporation
1620 Pond Road
Allentown, PA 18104
Attention: Wilbur R. Roat, Director
Telecopy No.: (610) 398-6693
with a copy to:
Duane, Morris & Heckscher, LLP
4200 One Liberty Place
Philadelphia, Pennsylvania 19103-9396
Attention: Kathleen M. Shay, Esquire
Telecopy No.: (215) 979-1020
(ii) If to Patriot, to:
Patriot Bank Corp.
High and Hanover Street
Pottstown, Pennsylvania 19464
Attention: Joseph W. Major, President
and Chief Executive Officer
Telecopy No.: (610) 323-0914
A-79
<PAGE>
with copies to:
Stevens & Lee
One Glenhardie Corporate Center
Suite 202
1275 Drummers Lane
P.O. Box 236
Wayne, PA 19087
Attention: Jeffrey P. Waldron, Esquire
Telecopy No.: (610) 687-1384
or to such other address as the person to whom notice is to be given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
16. Governing Law. This Stock Option Agreement shall be governed by and
construed in accordance with the domestic internal law (but not the law of
conflicts of law) of the Commonwealth of Pennsylvania.
17. Captions. The captions in this Stock Option Agreement are inserted
for convenience and reference purposes, and shall not limit or otherwise affect
any of the terms or provisions hereof.
18. Waivers and Extensions. The parties hereto may, by mutual written
consent, extend the time for performance of any of the obligations or acts of
either party hereto. Each party may waive in writing (i) compliance with any of
the covenants of the other party contained in this Stock Option Agreement and/or
(ii) the other party's performance of any of its obligations set forth in this
Stock Option Agreement.
19. Parties in Interest. This Stock Option Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and, nothing in this
Stock Option Agreement, express or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Stock Option Agreement.
20. Counterparts. This Stock Option Agreement may be executed in two or
more counterparts, each of which shall be
A-80
<PAGE>
deemed to be an original, but all of which shall constitute one and the same
agreement.
21. Expenses. Except as otherwise provided herein, all costs and
expenses incurred by the parties hereto in connection with the transactions
contemplated by this Stock Option Agreement or the Option shall be paid by the
party incurring such cost or expense.
22. Defined Terms. Capitalized terms which are used but not defined
herein shall have the meanings ascribed to such terms in the Agreement.
IN WITNESS WHEREOF, each of the parties hereto, pursuant to resolutions
adopted by its Board of Directors, has caused this Stock Option Agreement to be
executed by its duly authorized officer as of the day and year first above
written.
FIRST LEHIGH CORPORATION
By
------------------------------------
John H. McKeever, Chairman
of the Board and Acting President
PATRIOT BANK CORP.
By
------------------------------------
Joseph W. Major,
President and Chief
Executive Officer
A-81
<PAGE>
EXHIBIT 3
STANDSTILL AGREEMENT
Agreement made this 28th day of July, 1998 by and between Patriot Bank
Corp., a Delaware corporation and registered bank holding company ("Patriot"),
having its principal place of business at High and Hanover Streets, Pottstown,
Pennsylvania 19464 and James L. Leuthe, an individual residing at 3514 Eton
Road, Allentown, Pennsylvania 18104.
Background
Patriot and First Lehigh Corporation, a Pennsylvania corporation and
registered bank holding company ("FLC") have entered into an Agreement and Plan
of Consolidation (the "Agreement") pursuant to which (i) FLC and Patriot will
consolidate into a new Pennsylvania corporation (the "Holding Company"), to be
named Patriot Bank Corp. (the "Consolidation") and, (ii) shareholders of FLC
would receive (A) shares of Holding Company common stock, no par value per share
("Holding Company Common Stock") in exchange for each share of issued and
outstanding FLC common stock, par value $.01 per share ("FLC Common Stock"), (B)
shares of Holding Company Common Stock in exchange for each issued and
outstanding share of FLC Senior Preferred Stock (the "FLC Senior Preferred
Stock") and (C) shares of Holding Company Common Stock in exchange for each
issued and outstanding share of FLC Series A Preferred Stock (the "FLC Series A
Preferred Stock" and together with the FLC Common Stock and the FLC Senior
Preferred Stock, the "FLC Capital Stock") all as more particularly set forth in
the Agreement.
Mr. Leuthe is the Chairman of FLC and the owner of a substantial equity
interest in FLC.
As a condition of Patriot's willingness to execute the Agreement,
Patriot has required Mr. Leuthe to enter into this Standstill Agreement pursuant
to which Mr. Leuthe will agree to certain restrictions on the voting and
disposition of his (i) FLC Capital Stock prior to the Consolidation and (ii)
Holding Company
A-82
<PAGE>
Common Stock after the Consolidation, and certain other conditions and
restrictions, and Mr. Leuthe has agreed to accept such conditions and
restrictions.
Agreement
The parties hereto, intending to be legally bound, hereby agree as
follows:
1. Representations, Warranties and Covenants of Mr. Leuthe.
Mr. Leuthe represents, warrants and covenants as follows:
(a) Mr. Leuthe has full power, right and authority to enter into this
Agreement and to perform all transactions provided for in this Agreement.
(b) Except for shares of FLC Capital Stock pledged to Citizens National
Bank of Slatington to secure a loan in the approximate principal amount of
$600,000 and shares of FLC Capital Stock pledged to Royal Bank of Pennsylvania
to secure a loan in the approximate principal amount of $350,000, Mr. Leuthe
owns free and clear of all liens and restrictions (except such restrictions upon
transfer as may arise under federal or state securities laws as a result of Mr.
Leuthe's status as an "affiliate" of FLC and restrictions imposed by the Federal
Deposit Insurance Corporation ("FDIC"), the Board of Governors of the Federal
Reserve System (the "FRB") or the Pennsylvania Department of Banking ("PDB"))
including without limitation any restrictions set forth in any agreement to
which he may be a party, the following shares of FLC Capital Stock:
(i) seven hundred thousand (700,000) shares of FLC Common Stock;
(ii) no shares of FLC Senior Preferred Stock;
(iii) four hundred thousand (400,000) shares of FLC Series A
Preferred Stock.; and
(iv) no shares of Patriot common stock, no par value per share
("Patriot Common Stock").
A-83
<PAGE>
In addition, Mr. Leuthe represents that he holds no options to acquire shares of
FLC Common Stock and holds no other options to acquire FLC Capital Stock.
(c) Subject to the terms of the FDIC Order (as hereinafter defined),
Mr. Leuthe, in his capacity as Chairman of FLC and in his capacity as a
shareholder of FLC Capital Stock shall use his best efforts to cause the
transactions provided for in the Agreement to be completed. Mr. Leuthe, as a
shareholder, shall be present (in person or by proxy) at all shareholder
meetings FLC holds and his FLC Capital Stock may be counted for the purposes of
determining the presence of a quorum at such meetings. Moreover, subject to the
terms of the FDIC Order, Mr. Leuthe, as a shareholder, shall vote, or cause to
be voted, all FLC Capital Stock beneficially owned by him and having the right
to vote thereon to approve the Agreement at the special meeting of shareholders
of FLC to be held to consider such approval and shall not vote any FLC Capital
Stock in favor of any transaction with any person other than Patriot or aid,
abet or otherwise lend his support to any other person in connection with any
transaction or in connection with a tender offer or exchange offer. In addition,
Mr. Leuthe shall disclose, or permit Patriot and FLC to disclose that he has
entered into this Standstill Agreement and that he supports the Consolidation
and recommends a vote in favor of the Consolidation.
(d) Prior to the completion of the Consolidation, Mr. Leuthe shall not
sell, transfer or otherwise dispose of, or permit the sale, transfer or other
disposition of any FLC Capital Stock. During such period, Mr. Leuthe shall not
engage in any negotiations or initiate discussions with any other party with
respect to any sale, transfer or other disposition of any FLC Capital Stock, and
shall not vote, or permit to be voted, any FLC Capital Stock in favor of any
merger, consolidation, sale of assets, stock or similar transactions involving
FLC or its subsidiary with any party other than Patriot or a subsidiary of
Patriot.
(e) Mr. Leuthe shall file on a timely basis an amendment to his report
on Form 13-D with the Securities and Exchange Commission pursuant to Section
13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), with respect
to the transactions provided for herein and shall provide Patriot with a copy
thereof prior to its filing.
A-84
<PAGE>
2. Representation and Warranties of Patriot.
Patriot represents and warrants that it is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has full power, right and authority to enter into this Standstill
Agreement and to perform all transactions provided for in this Standstill
Agreement. The execution, delivery and performance of this Standstill Agreement
has been duly authorized by all necessary corporate or other action of Patriot.
3. Covenants of Mr. Leuthe.
Prior to June 30, 2013, and subject to the further provisions hereof:
(a) Except as provided pursuant to the Agreement, neither Mr. Leuthe
nor any corporation, entity or other affiliate controlled by Mr. Leuthe
(collectively, the "Leuthe Group"), will, directly or indirectly, acquire any
FLC Capital Stock, Patriot Common Stock or Holding Company Common Stock (except
by way of stock dividends or other distributions or offerings made available to
holders of FLC Capital Stock, Patriot Common Stock or Holding Company Common
Stock generally).
(b) Mr. Leuthe shall take such actions as may be required so that all
Holding Company Common Stock owned by a member of the Leuthe Group are voted for
nominees to the Board of Directors of the Holding Company and, unless the
Holding Company otherwise consents in writing, on all other matters to be voted
on by the holders of Holding Company Common Stock in the manner directed by the
Holding Company. The members of the Leuthe Group, as holders of Holding Company
Common Stock, shall be present, in person or by proxy at all meetings of
shareholders of the Holding Company so that all Holding Company Common Stock
beneficially owned by them may be counted for the purpose of determining the
presence of a quorum at such meetings.
(c) No member of the Leuthe Group shall deposit any Holding Company
Common Stock in a voting trust or subject any Holding Company Common Stock to
any arrangement or agreement with respect to the voting of such Holding Company
Common Stock, except as may otherwise be required by the Federal Deposit
Insurance Corporation ("FDIC") or the terms of this Standstill Agreement.
A-85
<PAGE>
(d) No member of the Leuthe Group shall solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation 14A
under the Exchange Act) in opposition to the recommendation of the majority of
the directors of the Holding Company with respect to any matter.
(e) No member of the Leuthe Group shall join a partnership, limited
partnership, syndicate or other group, or otherwise act in concert with any
other person, for the purpose of acquiring, holding, voting or disposing of
Holding Company Common Stock, or otherwise become a "person" within the meaning
of Section 13(d)(3) of the Exchange Act (in each case other than solely with
members of the Leuthe Group).
(f) Subject to paragraph 4(e), no member of the Leuthe Group shall,
directly or indirectly, offer, sell or transfer any Holding Company Common Stock
without first offering Patriot a right of first refusal in the manner provided
in paragraph 4, except (i) pursuant to a bona fide public offering registered
under the Securities Act of 1933, as amended (the "Act") (provided that no sales
of Holding Company Common Stock are made to any person or related group of
persons who would immediately thereafter, to the knowledge of any member of the
Leuthe Group, own or have the right to acquire Holding Company Common Stock
representing more than 1% of the total combined voting power of all Holding
Company Common Stock then outstanding), and (ii) as the result of any pledge or
hypothecation to a bona fide broker or financial institution to secure a bona
fide loan, or the foreclosure of any lien or encumbrance which may be placed
upon any Holding Company Common Stock (whether voluntarily or involuntarily).
(g) Notwithstanding anything contained herein to the contrary, for the
entire term of this Standstill Agreement, Mr. Leuthe (i) hereby grants, and
directs any party who acts as a record holder of FLC Capital Stock for Mr.
Leuthe to grant, to the Board of Directors of Patriot an irrevocable proxy in
the form attached hereto as Exhibit A to vote all shares of FLC Capital Stock at
any special or regular meeting of shareholders of FLC and (ii) upon completion
of the Consolidation, will grant, and will direct any party who acts as a record
holder for Mr. Leuthe to grant, to the Board of Directors of the Holding Company
an irrevocable proxy in the form attached hereto as Exhibit B to vote all shares
of Holding Company Common Stock at any special or regular meeting of
shareholders of the Holding Company. Each such proxy, in consideration of the
Agreement and
A-86
<PAGE>
the benefit conferred upon Mr. Leuthe thereby, shall be deemed coupled with an
interest. In the event that the terms and provisions of this paragraph 3(g) are
not complied with by any member of the Leuthe Group or any party who acts as a
record holder of FLC Capital Stock on behalf of any member of the Leuthe Group,
then, in addition to any remedy, the Holding Company may have under section 7,
Mr. Leuthe, upon written demand by the Holding Company, shall immediately
contribute or cause to be contributed all Holding Company Common Stock
beneficially owned by Mr. Leuthe to a voting trust, the trustee of which will be
designated by the Holding Company.
(h) Mr. Leuthe shall transfer no shares of FLC Capital Stock to a
broker to be held in street name unless the proposed broker shall be approved by
Patriot or the Holding Company, as the case may be, and such broker, prior to
any transfer shall (A) execute a proxy in favor of the Board of Directors of
Patriot or the Holding Company, as the case may be, and (B) agree in writing to
provide to Patriot or the Holding Company, as the case may be, copies of all
statements delivered to Mr. Leuthe and all trade confirmations delivered to Mr.
Leuthe relating to FLC Capital Stock or Holding Company Common Stock.
4. Right of First Refusal.
To the extent required by paragraph 3(f), any member of the Leuthe
Group, prior to making any offer to sell or transfer Holding Company Common
Stock, shall give the Holding Company the opportunity to purchase such Holding
Company Common Stock in the following manner:
(a) Any member of the Leuthe Group intending to make such an offer,
sale or transfer shall give notice (the "Transfer Notice") to the Holding
Company in writing of such intention, specifying the number of shares of Holding
Company Common Stock proposed to be disposed of and certifying in writing that
such transfer will be an open market sale through a broker acceptable to the
Holding Company.
(b) The Holding Company shall have the right, exercisable by written
notice given by the Holding Company to the party which gave the Transfer Notice
within fifteen (15) business days after receipt of such Transfer Notice to
purchase (or to cause a corporation, entity, person or group designated by the
Holding Company to purchase) all, but not a part of, the Holding Company Common
Stock specified in such Transfer Notice for cash
A-87
<PAGE>
at the mean between the high bid and low asked price for the Holding Company
Common Stock on the Nasdaq Stock Market as of the date of the Transfer Notice.
(c) If the Holding Company exercises its right of first refusal
hereunder, the closing of the purchase of the Holding Company Common Stock with
respect to which such right has been exercised shall take place within thirty
(30) calendar days (or if approval of such purchase is required by the Holding
Company shareholders or any regulatory authority as required by law or pursuant
to any stock exchange rule or policy, within ninety (90) calendar days) after
the Holding Company gives notice of such exercise. Upon exercise of its right of
first refusal, the Holding Company shall be legally obligated to consummate the
purchase contemplated thereby and shall use its best efforts to secure all
approvals required in connection therewith.
(d) If the Holding Company does not exercise its right of first refusal
hereunder within the time specified for such exercise, the party giving the
Transfer Notice shall be free during the period of ninety (90) calendar days
following the expiration of such time for exercise to sell the Holding Company
Common Stock specified in such Transfer Notice in an open market sale through a
broker acceptable to the Holding Company and not knowingly to an affiliate
provided the party giving such Transfer Notice gives written direction to the
broker completing the sale to provide the Holding Company with a copy of any
trade confirmation.
(e) Notwithstanding the foregoing, this Section 4 shall not be
applicable to any sale of shares of Holding Company Common Stock by the Leuthe
Group in an amount not to exceed 20,000 shares per calendar quarter if each sale
or sales are made in open market transactions through a broker designated by the
Holding Company and such broker agrees to give to the Holding Company notice of
any such sale.
5. FDIC Agreement.
The parties acknowledge that Mr. Leuthe is the subject of an order of
the FDIC dated June 26, 1998 (the "FDIC Order") that affects the voting and
disposition of FLC Capital Stock and Holding Company Common Stock. Mr. Leuthe
acknowledges and agrees that the provisions of this Agreement are in addition
to, and not in lieu of the provisions of the FDIC order and Mr. Leuthe shall
A-88
<PAGE>
use his best efforts to obtain the consent of the FDIC to the terms of this
Standstill Agreement.
6. Waiver of Indemnification.
Mr. Leuthe hereby waives any rights he may have under the articles of
incorporation or bylaws of FLC, the certificate of incorporation or bylaws of
Patriot, the articles of incorporation or bylaws of the Holding Company, the
Agreement, the laws of the State of Delaware, the laws of the Commonwealth of
Pennsylvania or any federal law to any indemnification against any action, claim
or liability arising out of, or as a result of his position as an officer or
director of FLC other than indemnification against any action, claim or
liability arising solely out of the approval of the Agreement and the completion
of the transactions contemplated thereby with respect to which Mr. Leuthe shall
be entitled to indemnification as, and to the same extent as, set forth in the
Agreement. Mr. Leuthe also hereby waives any right to advancement of expenses or
any right to common law contribution with respect to any action, claim or
liability as to which he has waived indemnification.
7. Escrow.
(a) Notwithstanding anything contained herein to the contrary or in the
Agreement, upon completion of the Consolidation, Mr. Leuthe shall deposit into
escrow pursuant to a separate escrow agreement to be executed on or before the
closing of the Consolidation (the "Escrow Agreement") by and among Patriot, Mr.
Leuthe and an independent escrow agent determined by Patriot (the "Escrow
Agent"), an amount of Holding Company Common Stock, cash or other securities
equal to (i) $430,000 to secure any obligation now owed or hereafter determined
by the FDIC or any other state or federal regulatory authority to be owed by Mr.
Leuthe to FLC, its subsidiary, or their successors and assigns as a result of a
determination that Mr. Leuthe was not entitled to indemnification or advancement
of expenses in connection with proceedings related to the FDIC Order or any
action or proceeding brought against Mr. Leuthe as a result of any breach of
fiduciary or other duty, or any other tort or breach of contract committed by
Mr. Leuthe (the "Restitution Fund") and (ii) $700,000 of Holding Company Common
Stock, cash or other securities to secure and Mr. Leuthe's obligation under this
Standstill Agreement (the "Collateral Fund"). Except as set
A-89
<PAGE>
forth in paragraphs (b) and (c) below, Mr. Leuthe shall at all times maintain
the balance held in escrow for these purposes at $1,130,000 million or more.
(b) Funds shall be released from the Restitution Fund in accordance
with this Standstill Agreement and the Escrow Agreement upon the later of (i)
five (5) years from the date hereof, in which case the entire amount of the
Restitution Fund shall be returned to Mr. Leuthe, or (ii) the issuance of a
final, binding, unappealable order by the FDIC or a court of competent
jurisdiction either (A) that no amount is due and owing by Mr. Leuthe to FLC,
its subsidiary or its successors and assign, or (B) of the amount due and owing
by Mr. Leuthe to FLC, its subsidiary or their successors and assigns. If an
amount is determined to be due and owing by Mr. Leuthe and such amount equals or
exceeds the Restitution Fund, the Escrow Agent shall pay or deliver the entire
Restitution Fund to the Holding Company. If the amount determined to be due and
owing by Mr. Leuthe is less than the amount escrowed therefor, the Escrow Agent
shall pay or deliver from the Restitution Fund the amount due and owing to the
Holding Company and the difference of the Restitution Fund shall be paid or
delivered to Mr. Leuthe. Notwithstanding the foregoing, in the event FLC (or the
Holding Company as successor to FLC) receives any insurance or other proceeds
from whatever source (including any claim for malpractice against FLC's counsel)
as a result of its claim that payments made to Mr. Leuthe by FLC are covered
under FLC's directors and officers liability policy, the Restitution Fund shall
be reduced, and the Escrow Agent shall pay from the Restitution Fund to Mr.
Leuthe, an amount equal to such insurance proceeds.
(c) Upon receipt of a certificate from Mr. Leuthe accompanied by any
relevant trade confirmation, funds shall be released from the Collateral Fund as
follows:
Number of Holding
Company Shares
Beneficially Owned by Required Amount of
the Leuthe Group Collateral Fund
--------------------- -------------------
400,000 or more $700,000
300,000 - 399,000 600,000
200,000 - 299,000 500,000
A-90
<PAGE>
100,000 - 199,000 400,000
25,000 - 99,000 350,000
Less than 25,000 0
8. Miscellaneous.
(a) Mr. Leuthe on the one hand, and Patriot, on the other, acknowledge
and agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
holding Company, shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Standstill Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state thereof having jurisdiction, in addition to any other remedy to
which Patriot or the Holding Company may be entitled at law or equity.
(b) As used herein, the term "affiliate" includes parent, spouse,
sibling, any child, grandchild, mother-in-law, father-in-law or any spouse of
any of the foregoing and otherwise shall have the meaning set forth in Rule
12b-2 under the Exchange Act and the term "person" shall mean any individual,
partnership, corporation, limited liability company, trust or other entity.
(c) This Standstill Agreement contains the entire understanding of the
parties with respect to the transactions contemplated hereby and this Standstill
Agreement may be amended only by an agreement in writing executed by the parties
hereto.
(d) Descriptive headings are for convenience only and shall not control
or affect the meaning or construction of any provision of this Standstill
Agreement.
(e) For the convenience of the parties, any number of counterparts of
this Standstill Agreement may be executed by the parties hereto and each such
executed counterpart shall be, and shall be deemed to be, an original
instrument.
(f) All notices, consents, requests, instructions, approvals and other
communications provided for herein shall be validly given or made, if in writing
delivered personally or registered mail, postage prepaid, if to:
A-91
<PAGE>
Patriot or the Holding Company:
Patriot Bank Corp.
High and Hanover Streets
Pottstown, PA 19464
Attention: Joseph W. Major, President
Copy To:
Jeffrey P. Waldron, Esquire
Stevens & Lee
1275 Drummers Lane
P.O. Box 236
Wayne, PA 19087-0236
Mr. Leuthe:
James L. Leuthe
3514 Eton Road
Allentown, Pennsylvania 18104
Copy To:
Duane, Morris & Heckscher
4200 Liberty Place
Philadelphia, Pennsylvania 19103
Attention: A. John May, Esquire
(g) This Standstill Agreement shall be binding upon the parties hereto
and their respective heirs, executors, personal representatives, successors and
assigns.
IN WITNESS WHEREOF, the parties have executed this Standstill Agreement
this 28th day of July, 1998.
----------------------------
James L. Leuthe,
individually
PATRIOT BANK CORP.
By___________________________
Joseph W. Major,
President
A-92
<PAGE>
Exhibit A
FIRST LEHIGH CORPORATION
IRREVOCABLE PROXY
Pursuant to the terms of a Standstill Agreement dated July 27, 1998
between James L. Leuthe and Patriot Bank Corp., the undersigned hereby
irrevocably appoints the full Board of Directors of Patriot Bank Corp., with
full powers of substitution, to act as attorneys and proxies for the undersigned
to vote all shares of First Lehigh Corporation Common Stock, Senior Preferred
Stock and Series A Preferred Stock which the undersigned is entitled to vote at
any meeting of shareholders of First Lehigh Corporation. The undersigned
acknowledges that this proxy is coupled with an interest and is therefore
irrevocable until June 30, 2013 as provided in the Standstill Agreement.
----------------------------
James L. Leuthe
July 27, 1998
A-93
<PAGE>
Exhibit B
PATRIOT BANK CORP.
IRREVOCABLE PROXY
Pursuant to the terms of a Standstill Agreement dated July 27, 1998
between James L. Leuthe and Patriot Bank Corp., a Delaware corporation, as
predecessor of Patriot Bank Corp., a Pennsylvania corporation, the undersigned
hereby irrevocably appoints the full Board of Directors of Patriot Bank Corp., a
Pennsylvania corporation, with full powers of substitution, to act as attorneys
and proxies for the undersigned to vote all shares of Patriot Bank Corp. Common
Stock, which the undersigned is entitled to vote at any meeting of shareholders
of Patriot Bank Corp. The undersigned acknowledges that this proxy is coupled
with an interest and is therefore irrevocable until June 30, 2013 as provided in
the Standstill Agreement.
----------------------------
James L. Leuthe
Date:________________
A-94
<PAGE>
EXHIBIT 4
BANK PLAN OF MERGER
THIS BANK PLAN OF MERGER ("Plan of Merger") dated July 28, 1998, is by and
between PATRIOT BANK, a Pennsylvania- chartered bank ("Patriot Bank"), and FIRST
LEHIGH BANK, a Pennsylvania-chartered bank ("FL Bank").
BACKGROUND
1. Patriot Bank is a Pennsylvania bank and a wholly-owned subsidiary of
Patriot Bank Corp., a Delaware corporation ("Patriot"). The authorized capital
stock of Patriot Bank consists of 10,000,000 shares of common stock, par value
$1.00 per share ("Patriot Bank Common Stock"), of which at the date hereof 1,000
shares are issued and outstanding, and 2,000,000 shares of preferred stock, none
of which are outstanding.
2. FL Bank is a Pennsylvania bank and a wholly-owned subsidiary of First
Lehigh Corporation, a Pennsylvania corporation ("FL"). The authorized capital
stock of FL Bank consists of 10,500 shares of common stock, par value $20.00 per
share ("FL Bank Common Stock"), of which at the date hereof 10,500 shares are
issued and outstanding.
3. The respective Boards of Directors of Patriot Bank and FL Bank deem the
merger of FL Bank with and into Patriot Bank, pursuant to the terms and
conditions set forth or referred to herein, to be desirable and in the best
interests of the respective corporations and their respective shareholders.
4. The respective Boards of Directors of Patriot Bank and FL Bank have
adopted resolutions approving this Plan of Merger. The respective Boards of
Directors of Patriot and FL have adopted resolutions approving an Agreement
dated July __, 1998 (the "Agreement") between Patriot and FL, pursuant to which
this Plan of Merger is being executed by Patriot Bank and FL Bank.
A-95
<PAGE>
AGREEMENT
In consideration of the premises and of the mutual covenants and agreements
herein contained, and in accordance with
A-96
<PAGE>
the applicable laws and regulations of the Commonwealth of Pennsylvania, Patriot
Bank and FL Bank, intending to be legally bound hereby, agree:
ARTICLE I
MERGER
Subject to the terms and conditions of this Plan of Merger and in
accordance with the applicable laws and regulations of the Commonwealth of
Pennsylvania, on the Effective Date (as that term is defined in Article V
hereof): FL Bank shall merge with and into Patriot Bank; the separate existence
of FL Bank shall cease; and Patriot Bank shall be the surviving corporation
(such transaction referred to herein as the "Merger" and Patriot Bank, as the
surviving corporation in the Merger, referred to herein as the "Surviving
Bank"). The name of the Surviving Bank shall be "Patriot Bank" and it shall have
its home office at High and Hanover Streets, Pottstown, Pennsylvania 19464.
ARTICLE II
ARTICLES OF INCORPORATION AND BYLAWS
On and after the Effective Date, the Articles of Incorporation and Bylaws
of Patriot Bank, as in effect immediately prior to the Effective Date, shall
automatically be and remain the Articles of Incorporation and Bylaws of the
Surviving Bank, until altered, amended or repealed.
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS
3.1 Board of Directors. On and after the Effective Date, the directors of
the Surviving Bank shall consist of the directors of Patriot Bank duly elected
and holding office immediately prior to the Effective Date. Directors shall be
elected annually and shall hold office until their successors are elected and
qualified. The names and residence addresses of the directors are:
Name Residence Address
---- -----------------
Larry V. Thren 41 Gladwynn Drive
Reading, PA 19606
James B. Elliott 684 Old Swede Road
Douglasville, PA 19518
A-97
<PAGE>
Leonard A. Huff 1219 Sheep Hill Road
Pottstown, PA 19464
John H. Diehl 180 Diehl Lane
Alburtis, PA 18011
Samuel N. Landis 669 Furnace Street
Emmaus, PA 18049
Joseph W. Major 2960 Raspberry Lane
Gilbertsville, PA 19525
James A. Bentley, Jr. 2537 Flowing Springs Road
Birchrunville, PA 19421
3.2 Officers. On and after the Effective Date, the officers of the
Surviving Bank shall consist of the officers of Patriot Bank duly elected and
holding office immediately prior to the Effective Date.
ARTICLE IV
CONVERSION OF SHARES
4.1 Stock of Patriot Bank. Each share of Patriot Bank Common Stock issued
and outstanding immediately prior to the Effective Date shall, on and after the
Effective Date, continue to be issued and outstanding as a share of common stock
of the Surviving Bank.
4.2 Stock of FL Bank. Each share of FL Bank Common Stock issued and
outstanding immediately prior to the Effective Date, and each share of FL Bank
Common Stock issued and held in the treasury of FL as of the Effective Date, if
any, shall, on the Effective Date, be cancelled, and no cash, stock or other
property shall be delivered in exchange therefor.
ARTICLE V
EFFECTIVE DATE OF THE MERGER
The Merger shall be effective on the date on which articles of
merger executed by Patriot Bank and FL Bank are filed with the Secretary of
State of the Commonwealth of Pennsylvania, unless a later date is specified in
such articles (the "Effective Date").
A-98
<PAGE>
ARTICLE VI
EFFECT OF THE MERGER
6.1 Separate Existence. On the Effective Date: the separate existence of FL
Bank shall cease; and all of the property (real, personal and mixed), rights,
powers, duties and obligations of FL Bank shall be taken and deemed to be
transferred to and vested in the Surviving Bank, without further act or deed, as
provided by applicable laws and regulations.
ARTICLE VII
CONDITIONS PRECEDENT
The obligations of Patriot Bank and FL Bank to effect the Merger shall be
subject to (i) the approval of this Plan of Merger by Patriot and FL in their
capacities as the sole shareholder of Patriot Bank and FL Bank, respectively,
(ii) receipt of approval of the Merger from the Federal Deposit Insurance
Corporation, the Pennsylvania Department of Banking and any other applicable
regulatory authority, (iii) receipt of any necessary approval to operate the
main office of FL Bank and the branch offices of FL Bank as offices of the
Surviving Bank and (iv) the consummation of the merger of FL into Patriot
pursuant to the Agreement on or before the Effective Date.
ARTICLE VIII
TERMINATION
This Plan of Merger shall terminate upon any termination of the Agreement
in accordance with its terms.
ARTICLE IX
AMENDMENT
Subject to applicable law, this Plan of Merger may be amended, by action of
the respective Boards of Directors of the parties hereto, at any time prior to
consummation of the Merger, but only by an instrument in writing signed by duly
authorized officers on behalf of the parties hereto.
A-99
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1 Extensions; Waivers. Any of the terms and conditions of this Plan of
Merger may be waived at any time by whichever of the parties hereto is, or the
sole shareholder of which is, entitled to the benefit thereof by a written
instrument signed by a duly authorized officer of such party.
10.2 Notices. Any notice or other communication required or permitted under
this Plan of Merger shall be given, and shall be effective, in accordance with
the provisions of Section 7.06 of the Agreement.
10.3 Captions. The headings of the several Articles and Sections herein are
inserted for convenience of reference only and are not intended to be part of,
or to affect the meaning or interpretation of, this Plan of Merger.
10.4 Counterparts. For the convenience of the parties hereto, this Plan of
Merger may be executed in several counterparts, each of which shall be deemed
the original, but all of which together shall constitute one and the same
instrument.
A-100
<PAGE>
10.5 Governing Law. This Plan of Merger shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, Patriot Bank and FL Bank have caused this Bank Plan of
Merger to be executed by their duly authorized officers and their corporate
seals to be hereunto affixed on the date first written above.
PATRIOT BANK CORP.
By
---------------------------------
Joseph W. Major,
President and Chief Executive
Officer
FIRST LEHIGH BANK
By
---------------------------------
John H. McKeever,
Chairman of the Board
and Acting President
A-101
<PAGE>
EXHIBIT 5
ARTICLES AND CERTIFICATE OF CONSOLIDATION OF
PATRIOT BANK CORP.
AND
FIRST LEHIGH CORPORATION
ARTICLES AND CERTIFICATE OF CONSOLIDATION (the "Articles of Consolidation")
dated _________________, 1999 between PATRIOT BANK CORP., a Delaware corporation
("Patriot") with a principal place of business and registered office at High and
Hanover Streets, Pottstown, Pennsylvania, and FIRST LEHIGH CORPORATION, a
Pennsylvania corporation ("FLC") with a principal place of business and
registered office at 1620 Pond Road, in Allentown, Pennsylvania.
WHEREAS, Patriot is a corporation organized and existing under the laws of
the State of Delaware that is registered as a bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "Act"), the authorized
capital stock of which consists of 12,000,000 shares of capital stock divided
into (a) 10,000,000 shares of common stock, $.01 par value ("Patriot Common
Stock"), of which, at the date of this Agreement, 1,579,944 shares were issued
and held by Patriot as treasury stock and 5,448,687 shares are outstanding,
validly issued, fully paid and nonassessable and free of preemptive rights and
(b) 2,000,000 shares of preferred stock, $.01 par value, of which, at the date
of this Agreement, none were issued and outstanding; and
WHEREAS, FLC is a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania that is registered as a bank holding company
pursuant to the Act, the authorized capital stock of which consists of (a)
10,000,000 shares of common stock, $0.01 par value ("FLC Common Stock"), of
which 2,056,140 shares are outstanding, validly issued, fully paid and
nonassessable and free of preemptive rights, (b) 1,500,000 shares of senior
preferred stock, $.01 par value ("FLC Senior Preferred Stock"), of which 894,223
shares are issued or outstanding and (c) 1,000,000 shares of series A preferred
stock, $.01 par value ("FLC Series A Stock" and
A-102
<PAGE>
together with the FLC Common Stock and FLC Senior Preferred Stock, the "FLC
Capital Stock"), of which 682,000 shares are issued and outstanding.
WHEREAS, the respective Boards of Directors of Patriot and FLC deem the
formation of a new Pennsylvania corporation by Patriot and FLC to be named
Patriot Bank Corp. ("PBC") which will then issue shares of common stock of the
PBC to FLC and Patriot shareholders, respectively, for each share of each of FLC
Capital Stock and Patriot Common Stock outstanding as of the closing date,
pursuant to the terms and conditions herein set forth or referred to, is
desirable and in the best interests of the respective corporations and their
respective shareholders, and the respective Boards of Directors and shareholders
of Patriot and FLC have adopted resolutions approving the Agreement and Plan of
Consolidation (the "Agreement and Plan") pursuant to the following vote results:
(i) On July 28, 1998 the Patriot Board of Directors approved the
Agreement and the Plan by a vote of seven votes for the Agreement
and the Plan and zero votes against the Agreement and the Plan;
(ii) On ________ __, 1998 the Patriot shareholders approved the Agreement
and the Plan by a vote of _________ votes for the Agreement and the
Plan and ______ votes against the Agreement and the Plan;
(iii) On July 23, 1998 the FLC Board of Directors approved the Agreement
and the Plan by a vote of ____ votes for the Agreement and the Plan
and zero votes against the Agreement and the Plan; and
(iv) On ______ __, 1998 the FLC shareholders approved the Agreement and
the Plan by a vote of _________ votes for the Agreement and the Plan
and _______ votes against the Agreement and the Plan.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, and in accordance with applicable provisions of the
Pennsylvania Business Corporation Law of 1988, as amended, (the "BCL"), and the
Delaware General Corporation Law (the "DGCL")the parties hereto do hereby agree
as follows:
A-103
<PAGE>
ARTICLE I
CONSOLIDATION
Subject to the terms and conditions of the Agreement and Plan on the
Effective Date, the shareholders of Patriot and FLC shall consolidate into PBC
in accordance with the BCL and DGCL. As a result of the foregoing, the separate
corporate existence of Patriot and FLC shall cease and such transaction shall
hereinafter be referred to as the "Consolidation." The capital stock of PBC
shall consist of 20,000,000 shares of common stock, no par value per share (the
"PBC Common Stock") and 5,000,000 shares of preferred stock, having such par
value as the board of directors of PBC shall fix from time to time, issuable in
series.
ARTICLE II
ARTICLE OF INCORPORATION AND BY-LAWS
The Articles of Incorporation of PBC shall be as set forth in Exhibit A
hereto and the By-Laws of PBC shall be as set forth in Exhibit B hereto, in each
case until altered, amended or repealed.
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS
From and after the Effective Date, the directors and officers of PBC, who
shall hold office until their successors are elected and qualified according to
the By-Laws of PBC, shall be those persons listed on Exhibit C hereto.
ARTICLE IV
CONVERSION AND EXCHANGE OF SHARES
1. The shares of the parties hereto outstanding immediately prior to the
Effective Date, shall, by virtue of the Consolidation and without any action by
the holders thereof, be converted as follows:
(a) Each share of Patriot Common Stock shall be converted into 1.0
shares of PBC Common Stock.
(b) Each share of FLC Common Stock and FLC Senior Preferred Stock shall
be converted into share's of PBC Common Stock to be determined at closing
pursuant to the terms of the Agreement.
A-104
<PAGE>
(c) Each share of FLC Series A Preferred Stock shall be converted into
shares of PBC Common Stock to be determined at Closing pursuant to the terms of
the Agreement.
(d) No fractional shares of PBC Common Stock and no scrip or
certificates therefor will be issued in connection with the Consolidation. Any
former holder of Patriot or FLC Common Stock who would otherwise be entitled to
receive a fraction of a share of PBC Common Stock shall receive, in lieu
thereof, a check for cash in an amount equal to such fraction of a share
multiplied by the closing price of PBC Common Stock on the Nasdaq National
Market System on the first day PBC Common Stock is traded after the Effective
Date.
2. All shares of Patriot Common Stock held in the treasury of Patriot or
any Patriot Subsidiary or owned by FLC or any FLC Subsidiary and all shares of
FLC Common Stock held in the treasury of FLC or any FLC Subsidiary or owned by
Patriot or any Patriot Subsidiary shall be cancelled, and no cash, stock or
other property shall be delivered in exchange therefor.
3. On and after the Effective Date, each holder of a certificate or
certificates theretofore representing outstanding shares of Patriot Common Stock
or outstanding shares of FLC Capital Stock may surrender same to PBC or the
Exchange Agent for cancellation and each such holder shall be entitled upon such
surrender to receive in exchange therefor certificate(s) representing the number
of shares of PBC Common Stock and a check for cash representing the value of
fractional shares to which the holder is entitled as provided above. Until
surrendered, each certificate theretofore representing outstanding shares of
Patriot Common Stock or outstanding shares of FLC Capital Stock, from and after
the Effective Date, will evidence solely the right to receive certificates for
shares of PBC Common stock and a check for cash in lieu of any fractional shares
as described above.
ARTICLE V
EFFECTIVE DATE OF THE CONSOLIDATION
The Consolidation shall be effective at 12:01 a.m. January __, 1999 (such
date being herein referred to as the "Effective Date").
A-105
<PAGE>
ARTICLE VI
EFFECT OF THE CONSOLIDATION
On the Effective Date, the separate existence of Patriot and FLC shall
cease and all of the property, real, personal, and mixed, and franchises of each
of Patriot and FLC, and all debts due on whatever account to each of them,
including subscriptions to shares and other choses in action, shall be taken and
deemed to be transferred to and vested in PBC, without further act or deed. PBC
shall thenceforth be responsible for all the liabilities and obligations of each
of Patriot and FLC provided in the BCL and the DGCL.
ARTICLE VII
CONDITIONS PRECEDENT
The obligations of Patriot and FLC to effect the Consolidation shall be
subject to satisfaction, unless duly waived, of the conditions set forth in the
Agreement and Plan.
ARTICLE VIII
TERMINATION
Anything contained in these Articles of Consolidation to the contrary
notwithstanding, and notwithstanding adoption hereof by the shareholders of
Patriot or FLC, the Agreement and Plan may be terminated and the Consolidation
abandoned as provided in Section 6 of the Agreement and Plan.
ARTICLE IX
MISCELLANEOUS
1. Each party, by written instrument signed by a duly authorized officer,
may extend the time for the performance of any of the obligations or other acts
of the other party and may waive compliance with any of the covenants or
performance of any of the obligations of the other party contained in the
Agreement and Plan of Consolidation.
2. Any notice or other communication required or permitted under the
Agreement and Plan of Consolidation shall be given, and shall be effective, in
accordance with the provisions of Section 7 of the Agreement and Plan.
3. The headings of the several Articles herein are inserted for convenience
of reference only and are not intended
A-106
<PAGE>
to be part of or to affect the meaning or interpretation of these Articles
of Consolidation.
4. For the convenience of the parties hereto and to facilitate the filing
and recording of these Articles of Consolidation, it may be executed in several
counterparts, each of which shall be deemed the original, but all of which
together shall constitute one and the same instrument.
5. This Plan of Consolidation shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
6. The full text of the Agreement and Plan is on file at the offices of
Patriot located at High and Hanover Streets, Pottstown, Pennsylvania 19464,
which shall also be the offices of PBC, and is available for review by Patriot
shareholders, FLC shareholders, & PBC shareholders during reasonable business
hours. Upon request and without cost, a copy of the Agreement and Plan will be
sent to any shareholder of FLC or Patriot.
7. In accordance with the provisions of Section 252(d) of the DGCL, PBC
hereby consents to service of process in the State of Delaware in any proceeding
for enforcement of any obligation of FLC or Patriot arising from the
Consolidation. PBC irrevocably appoints the Secretary of State of Delaware as
its agent to accept service of process in any such suit or other proceedings. A
copy of any process served upon the Secretary of State shall be forwarded to the
address of PBC specified in Article IX, Section 6.
A-107
<PAGE>
IN WITNESS WHEREOF, Patriot and FLC have caused this Plan of
Consolidation to be executed in counterparts by their duly authorized officers
and their corporate seals to be hereunto affixed on the date first written
above.
ATTEST PATRIOT BANK CORP.
- ------------------------- -----------------------------------
Secretary Joseph W. Major
President and Chief Executive Officer
ATTEST FIRST LEHIGH CORPORATION
- ------------------------- -----------------------------------
Secretary President
A-108
<PAGE>
EXHIBIT A
ARTICLES OF INCORPORATION
OF
PATRIOT BANCORP, INC.
FIRST. The name of the Corporation is Patriot Bancorp, Inc.
SECOND. The location and post office address of the Corporation's
registered office in this Commonwealth is High and Hanover Streets, Pottstown,
Pennsylvania 19464.
THIRD. The purpose of the Corporation is and it shall have unlimited power
to engage in and to do any lawful act concerning any or all lawful business for
which corporations may be incorporated under provisions of the Business
Corporation Law of 1988, the Act approved December, 1988, P.L. 1444, as amended
(the "Pennsylvania Business Corporation Law").
FOURTH. The term of the Corporation's existence is perpetual.
FIFTH. The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is 25,000,000 shares, divided into two
classes consisting of 20,000,000 shares of common stock, no par value per share
(the "Common Stock") and 5,000,000 shares of preferred stock, having such par
value as the board of directors shall fix and determine, as provided in Article
SIXTH below (the "Preferred Stock").
SIXTH. The Preferred Stock may be issued from time to time as a class
without series or, if so determined by the board of directors of the
Corporation, either in whole or in part, in one or more series. There is hereby
expressly granted to and vested in the board of directors of the Corporation
authority to fix and determine (except as fixed and determined herein), by
resolution, the par value, voting powers, full or limited, or no voting powers,
and such designations, preferences and relative, participating, optional or
other special rights, if any, and the qualifications, limitations or
restrictions thereof, if any, including specifically, but not limited to, the
dividend rights, conversion rights, redemption rights and liquidation
preferences, if any, of any wholly unissued series of Preferred Stock (or the
entire class of Preferred Stock if none of such shares have been
A-109
<PAGE>
issued), the number of shares constituting any such series and the terms
and conditions of the issue thereof. Prior to the issuance of any shares of
Preferred Stock, a statement setting forth a copy of each such resolution or
resolutions and the number of shares of Preferred Stock of each such class or
series shall be executed and filed in accordance with the Pennsylvania Business
Corporation Law. Unless otherwise provided in any such resolution or
resolutions, the number of shares of capital stock of any such class or series
so set forth in such resolution or resolutions may thereafter be increased or
decreased (but not below the number of shares then outstanding), by a statement
likewise executed and filed setting forth a statement that a specified increase
or decrease therein had been authorized and directed by a resolution or
resolutions likewise adopted by the board of directors of the Corporation. In
case the number of such shares shall be decreased, the number of shares so
specified in the statement shall resume the status they had prior to the
adoption of the first resolution or resolutions.
SEVENTH. Each holder of record of Common Stock shall have the right to one
vote for each share of Common Stock standing in such holder's name on the books
of the Corporation. No shareholder shall be entitled to cumulate any votes for
the election of directors.
EIGHTH. The management, control and government of the Corporation shall be
vested in a board of directors consisting of not less than five (5) nor more
than twenty-five (25) members in number, as fixed by the board of directors of
the Corporation from time to time. The directors of the Corporation shall be
divided into three classes: Class I, Class II and Class III. Each Class shall be
as nearly equal in number as possible. If the number of Class I, Class II or
Class III directors is fixed for any term of office, it shall not be increased
during that term, except by a majority vote of the board of directors. The term
of office of the initial Class I directors shall expire at the annual election
of directors by the shareholders of the Corporation in 2000; the term of office
of the initial Class II directors shall expire at the annual election of
directors by the shareholders of the Corporation in 2001; and the term of office
of the initial Class III directors shall expire at the annual election of
directors by the shareholders of the Corporation in 2002. After the initial term
of each Class, the term of office of each Class shall be three (3) years, so
that the term of office of one class of directors shall expire each year when
their respective successors have been duly elected by the
A-110
<PAGE>
shareholders and qualified. At each annual election by the shareholders of
the Corporation, the directors chosen to succeed those whose terms then expire
shall be identified as being of the same class as the directors they succeed.
Unless waived by the board of directors of the Corporation, in order to qualify
for election as a director of the Corporation, a person must have been a
shareholder of record of the Corporation for a period of time equal to three (3)
years. Unless waived by the Board of Directors, shareholders of another
corporation that merges with the Corporation, is acquired by, or acquires the
Corporation, or enters into any similar transaction with the Corporation shall
qualify for election as a director of the Corporation if such shareholder was a
shareholder of record of the other corporation for a period of time equal to
three (3) years. If, for any reason, a vacancy occurs on the board of directors
of the Corporation, a majority of the remaining directors shall have the
exclusive power to fill the vacancy by electing a director to hold office for
the unexpired term in respect of which the vacancy occurred. No director of the
Corporation shall be removed from office, as a director, by the vote of
shareholders, unless the votes of shareholders cast in favor of the resolution
for the removal of such director constitute at least a majority of the votes
which all shareholders would be entitled to cast at an annual election of
directors.
NINTH. No holder of any class of capital stock of the Corporation shall
have preemptive rights, and the Corporation shall have the right to issue and to
sell to any person or persons any shares of its capital stock or any option,
warrant or right to acquire capital stock, or any securities having conversion
or option rights without first offering such shares, rights or securities to any
holder of any class of capital stock of the Corporation.
TENTH. Except as set forth below, the affirmative vote of at least 80
percent (80%) of votes cast by shareholders entitled to vote, and if any class
of shares is entitled to vote as a separate class, the affirmative vote of
shareholders entitled to cast at least a majority of the votes cast by the
outstanding shares of such class (or such greater amount as required by the
provisions of these Articles of Incorporation establishing such class) shall be
required to approve any of the following:
(a) any merger or consolidation of the Corporation with or into any
other corporation;
A-111
<PAGE>
(b) any share exchange in which a corporation, person or entity
acquires the issued or outstanding shares of capital stock of the
Corporation pursuant to a vote of shareholders;
(c) any sale, lease, exchange or other transfer of all, or
substantially all, of the assets of the Corporation to any other
corporation, person or entity; or
(d) any transaction similar to, or having similar effect as, any of
the foregoing transactions.
The board of directors of the Corporation shall have the power and duty to
determine, for purposes of this Article TENTH, on the basis of information known
to the board, if any transaction is similar to, or has an effect similar to, any
of the transactions identified above in this Article TENTH. Any such
determination shall be conclusive and binding for all purposes of this Article
TENTH. The Corporation may voluntarily completely liquidate and/or dissolve only
in accordance with all applicable laws and only if the proposed liquidation
and/or dissolution is approved by the affirmative vote of shareholders entitled
to cast at least 80 percent (80%) of the votes which all shareholders are
entitled to cast. The provisions of this Article TENTH shall not apply to any
transaction which is approved in advance by 75 percent (75%) of the members of
the board of directors of the Corporation, at a meeting duly called and held.
ELEVENTH. Subsection 1. No Person or Group Acting in Concert shall Acquire
Voting Control of the Corporation, at any time, except in accordance with the
provisions of Article TENTH. The terms "Acquire," "Voting Control," "Group
Acting in Concert," and "Person" as used in this Article ELEVENTH are defined in
subsection 4 hereof.
Subsection 2. If Voting Control of the Corporation is acquired, in
violation of this Article ELEVENTH, all shares with respect to which any Person
or Group Acting in Concert has acquired Voting Control in excess of the number
of shares the beneficial ownership of which is deemed under subsection 4 hereof
to confer Voting Control of the Corporation (as determined without regard to
this Subsection 2) shall be considered from and after the date of acquisition by
such Person or Group Acting in Concert to be "excess shares" for purposes of
this Article ELEVENTH. All shares deemed to be excess shares shall thereafter
A-112
<PAGE>
no longer be entitled to vote on any matter or to take other shareholder
action. If, after giving effect to the first two sentences of this Subsection 2,
any Person or Group Acting in Concert still shall be deemed to be in Voting
Control of the Corporation based on the number of votes then entitled to be cast
(rather than the number of issued and outstanding shares of common stock of the
Corporation), then shares held in excess of the number of shares deemed to
confer Voting Control upon such Person or Group Acting in Concert also shall not
be entitled to vote on any matter or take any other shareholder action, but this
subsequent reduction in voting rights shall be effected only once. The
provisions of this Subsection 2 deeming shares to be excess shares shall only
apply for so long as such shares shall be beneficially owned by such Person or
Group Acting in Concert who has acquired Voting Control. Notwithstanding the
foregoing, shares held in excess of the number of shares the beneficial
ownership of which would otherwise be deemed under Subsection 4 to confer Voting
Control of the Corporation shall not be deemed to be excess shares if such
shares are held by a Tax-Qualified Employee Stock Benefit Plan.
Subsection 3. The provisions of this Article ELEVENTH shall be of no
further force and effect after the consummation of a transaction in which
another Person Acquires shares of capital stock of the Corporation entitled to
cast 80% or more of the votes which all shareholders are entitled to cast (as
determined without regard to the application of this Article ELEVENTH) and such
transaction was approved in advance by the board of directors of the
Corporation.
Subsection 4. For purposes of this Article ELEVENTH:
A. The term "Acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
B. "Voting Control" means the sole or shared power to vote or to
direct the voting of, or to dispose or to direct the disposition of, more
than ten percent (10%) of the issued and outstanding common stock of the
Corporation; provided that (i) the solicitation, holding and voting of
proxies obtained by the board of directors of the Corporation pursuant to a
solicitation under Regulation 14A of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
shall not constitute Voting Control, (ii) a Tax-Qualified Employee
A-113
<PAGE>
Stock Benefit Plan which holds more than 10 percent of the voting shares of
the Corporation shall not be deemed to have Voting Control of the
Corporation, (iii) any trustee, member of any administrative committee or
employee beneficiary of a Tax-Qualified Employee Stock Benefit Plan shall
not be deemed to have Voting Control of the Corporation either (A) as a
result of their control of a Tax-Qualified Employee Stock Benefit Plan,
and/or their beneficial interest in voting shares held by a Tax-Qualified
Employee Stock Benefit Plan, or (B) as a result of the aggregation of both
their beneficial interest in voting shares held by a Tax-Qualified Employee
Stock Benefit Plan and voting shares held by such trustee, administrative
committee member or employee beneficiary independent of a Tax-Qualified
Employee Stock Benefit Plan, and (iv) any trustee which is a direct or
indirect subsidiary of the Corporation shall not be deemed to have Voting
Control of the Corporation as a result of having the right to vote more
than ten percent (10%) of the issued and outstanding common stock of the
Corporation.
C. "Group Acting in Concert" includes Persons seeking to combine or
pool their voting or other interests in the voting shares for a common
purpose, pursuant to any contract, understanding, relationship, agreement
or other arrangement, whether written or otherwise, provided, that a "Group
Acting in Concert" shall not include (i) the members of the board of
directors of the Corporation solely as a result of their board membership,
(ii) the members of the board of directors of the Corporation as a result
of their solicitation, holding and voting of proxies obtained by them
pursuant to a solicitation subject to rules and regulations promulgated
under the Exchange Act or any successor statute or (iii) any member or all
the members of the board of directors of the Corporation, and any
Tax-Qualified Employee Stock Benefit Plan and the trustees, administrative
committee members and employee beneficiaries thereof.
D. The term "Person" includes an individual, a Group Acting in
Concert, a corporation, a partnership, an association, a joint stock
company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding
or disposing of the equity securities of the Corporation.
A-114
<PAGE>
E. The term "Tax-Qualified Employee Stock Benefit Plan" means any
defined benefit plan or defined contribution plan of the Corporation or any
subsidiary, such as an employee stock ownership plan, stock bonus plan,
profit sharing plan or other plan, that, with its related trust, meets the
requirements to be "qualified" under Section 401 of the Internal Revenue
Code of 1986, as amended.
Subsection 5. This Article ELEVENTH shall not apply to the purchase of
securities of the Corporation by underwriters in connection with a public
offering of such securities by the Corporation or by a holder of shares of
capital stock of the Corporation with written consent of the board of directors
of the Corporation; provided, however, that purchasers of securities of the
Corporation from any underwriter shall be subject to the provisions of this
Article ELEVENTH.
The board of directors of the Corporation shall have the power and duty to
determine, for purposes of this Article ELEVENTH, on the basis of information
known to the Board, if and when such other Person has acquired Voting Control of
the Corporation, and/or if any transaction is similar to, or has a similar
effect as, any of the transactions identified in this Article ELEVENTH. Any such
determination shall be conclusive and binding for all purposes of this Article
ELEVENTH.
TWELFTH. No action required to be taken or which may be taken at any annual
or special meeting of shareholders of the Corporation may be taken without a
meeting, and the power of the shareholders of the Corporation to consent in
writing to action without a meeting is specifically denied. The presence, in
person or by proxy, of shareholders entitled to cast at least a majority of the
votes which all shareholders are entitled to cast shall constitute a quorum of
shareholders at any annual or special meeting of shareholders of the
Corporation.
THIRTEENTH. The authority to make, amend, alter, change or repeal the
By-Laws of the Corporation is hereby expressly and solely granted to and vested
in the board of directors of the Corporation, subject always to the power of the
shareholders to change such action by the affirmative vote of shareholders of
the Corporation entitled to cast at least 66-2/3 percent (66-2/3%) of the votes
which all shareholders are entitled to cast, except that provisions of the
By-Laws of the Corporation relating to limitations on directors' liabilities and
indemnification of
A-115
<PAGE>
directors, officers and others may not be amended to increase the exposure
to liability for directors or to decrease the indemnification of directors,
officers and others except by the affirmative vote of 66-2/3 percent (66-2/3%)
of the entire board of directors or by the affirmative vote of shareholders of
the Corporation entitled to cast at least 75 percent (75%) of the votes which
all shareholders are entitled to cast.
FOURTEENTH. The board of directors of the Corporation, when evaluating any
offer of another party to (a) make a tender or exchange offer for any equity
security of the Corporation, (b) merge or consolidate the Corporation with
another corporation, (c) purchase or otherwise acquire all or substantially all
of the properties and assets of the Corporation, or (d) engage in any
transaction similar to, or having similar effects as, any of the foregoing
transactions, shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Corporation and its
shareholders, give due consideration to all relevant factors, including without
limitation the social and economic effects of the proposed transaction on the
employees, suppliers, customers and other constituents of the Corporation and
its subsidiaries and on the communities in which the Corporation and its
subsidiaries operate or are located, the business reputation of the other party,
and the board of directors' evaluation of the then value of the Corporation in a
freely negotiated sale and of the future prospects of the Corporation as an
independent entity.
FIFTEENTH. If any corporation, person, entity, or group becomes the
beneficial owner, directly or indirectly, of shares of capital stock of the
Corporation having the right to cast in the aggregate 25 percent (25%) or more
of all votes entitled to be cast by all issued and outstanding shares of capital
stock of the Corporation entitled to vote, such corporation, person, entity or
group shall within thirty (30) days thereafter offer to purchase all shares of
capital stock of the Corporation issued, outstanding and entitled to vote. Such
offer to purchase shall be at a price per share equal to the highest price paid
for shares of the respective class or series of capital stock of the Corporation
purchased by such corporation, person, entity or group within the preceding
twelve months. If such corporation, person, entity or group did not purchase any
shares of a particular class or series of capital stock of the Corporation
within the preceding twelve months, such offer to purchase shall be at a price
per share equal to the fair market value of such class or series of capital
stock on the date on which such
A-116
<PAGE>
corporation, person, entity or group becomes the beneficial owner, directly
or indirectly, of shares of capital stock of the Corporation having the right to
cast in the aggregate 25 percent (25%) or more of all votes entitled to be cast
by all issued and outstanding capital stock of the Corporation. Such offer shall
provide that the purchase price for such shares shall be payable in cash. The
provisions of this Article FIFTEENTH shall not apply if 80 percent (80%) or more
of the members of the board of directors of the Corporation approve in advance
the acquisition of beneficial ownership by such corporation, person, entity or
group, of shares of capital stock of the Corporation having the right to cast in
the aggregate 25 percent (25%) or more of all votes entitled to be cast by all
issued and outstanding shares of capital stock of the Corporation. The
provisions of this Article FIFTEENTH shall be in addition to and not in lieu of
any rights granted under Subchapter E of Chapter 25 of the Pennsylvania Business
Corporation Law and any amendment or restatement of such section ("Subchapter
E"); provided, however, that if the provisions of this Article FIFTEENTH and
Subchapter E are both applicable in any given instance, the price per share to
be paid for shares of capital stock of the Corporation issued, outstanding and
entitled to vote shall be the higher of the price per share determined in
accordance with this Article FIFTEENTH or the price per share determined in
accordance with the provisions of Subchapter E.
SIXTEENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in its Articles of Incorporation in the manner
now or hereafter prescribed by statute and all rights conferred upon
shareholders and directors herein are hereby granted subject to this
reservation; provided, however, that the provisions set forth in Articles
SEVENTH, EIGHTH and TENTH through FOURTEENTH, inclusive, of these Articles of
Incorporation may not be repealed, altered or amended, in any respect
whatsoever, unless such repeal, alteration or amendment is approved by either
(a) the affirmative vote of at least 80 percent (80%) of votes cast by
shareholders entitled to vote or (b) the affirmative vote of 75 percent (75%) of
the members of the board of directors of the Corporation and the affirmative
vote of a majority of the votes cast by all shareholders of the Corporation then
entitled to vote.
A-117
<PAGE>
EXHIBIT B
BYLAWS
OF
PATRIOT BANK CORP.
ARTICLE I. MEETINGS OF SHAREHOLDERS.
Section 101. Place of Meetings. All meetings of the shareholders shall be
held at such place or places, within or without the Commonwealth of
Pennsylvania, as shall be determined by the Board of Directors from time to
time.
Section 102. Annual Meetings.
(a) Time and Date. The annual meeting of the shareholders for the
election of Directors and the transaction of such other business as may properly
come before the meeting shall be held at such date or hour as may be fixed by
the Board of Directors. At each annual meeting of shareholders, directors shall
be elected, reports of the affairs of the Corporation shall be considered, and
any other business may be transacted which is within the power of the
shareholders.
(b) Agenda for Annual Meeting. Matters to be placed on the agenda for
consideration at annual meetings of shareholders may be determined by the Board
of Directors or by any shareholder entitled to vote for the election of
directors. Matters proposed for the agenda by shareholders entitled to vote for
the election of directors shall be made by notice in writing, delivered or
mailed by first-class United States mail, postage prepaid, to the Secretary of
the Corporation not less than ninety (90) days prior to any annual meeting of
shareholders; provided, however, that if less than twenty-one (21) days' notice
of the meeting is given to shareholders, such written notice shall be delivered
or mailed, as prescribed, to the Secretary of the Corporation not later than the
close of the seventh day following the day on which notice of the meeting was
mailed to shareholders. Notice of matters which are proposed by the Board of
Directors shall be given at any time by the Chairman of the Board or any other
appropriate officer. Each notice made by shareholders shall set forth a brief
description of the business
A-118
<PAGE>
desired to be brought before the annual meeting. The chairman of the meeting
may determine and declare to the meeting that a matter proposed for the
agenda was not made in accordance with the foregoing procedure, and if the
chairman should so determine, the chairman shall so declare to the meeting and
the matter shall be disregarded.
Section 103. Special Meetings. Special meetings of the shareholders may be
called at any time by the Board of Directors in the manner provided herein.
Shareholders shall not have the right to call special meetings of shareholders,
except as specifically provided by law.
Section 104. Conduct of Shareholders' Meetings. At every meeting of the
shareholders, the Chairman of the Board or, in the Chairman's absence, the
President or, in the President's absence, a chairman (who shall be one of the
officers, if any is present) chosen by a majority of the members of the Board of
Directors shall act as chairman of the meeting. The chairman of the meeting
shall have any and all powers and authority necessary in the chairman's sole
discretion to conduct an orderly meeting and preserve order and to determine any
and all procedural matters, including imposing reasonable limits on the amount
of time at the meeting taken up in remarks by any one shareholder or group of
shareholders. In addition, until the business to be completed at a meeting of
the shareholders is completed, the chairman of a meeting of the shareholders is
expressly authorized to temporarily adjourn and postpone the meeting from time
to time. The Secretary of the Corporation or in the Secretary's absence, an
assistant secretary, shall act as secretary of all meetings of the shareholders.
In the absence at such meeting of the Secretary or assistant secretary, the
chairman of the meeting may appoint another person to act as secretary of the
meeting.
Section 105. Determination of Record Date. The Board of Directors may fix a
time prior to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Corporation after any record date
fixed as provided in this section. The Board of Directors may similarly fix a
record date for the determination of shareholders of record for any other
purpose. When a determination of shareholders of
A-119
<PAGE>
record has been made as provided in this section for purposes of a meeting,
the determination shall apply to any adjournment thereof unless the Board of
Directors fixes a new record date for the adjourned meeting.
Section 106. Voting List. The officer or agent having charge of the
transfer books for shares of the Corporation shall make a complete list of the
shareholders entitled to vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof.
Failure to comply with the requirements of this section shall not affect
the validity of any action taken at a meeting prior to a demand at the meeting
by any shareholder entitled to vote thereat to examine the list. The original
share register or transfer book, or a duplicate thereof kept in Pennsylvania,
shall be prima facie evidence as to who are the shareholders entitled to examine
the list or share register or transfer book or to vote at any meeting of
shareholders.
Section 107. Judges of Election. In advance of any meeting of shareholders
of the Corporation, the Board of Directors may appoint judges of election, who
need not be shareholders, to act at the meeting or any adjournment thereof. If
judges of election are not so appointed, the presiding officer of the meeting
may, and on the request of any shareholder shall, appoint judges of election at
the meeting. The number of judges shall be one (1) or three (3). No person who
is a candidate for office to be filled at the meeting shall act as a judge of
election.
In the event any person appointed as a judge fails to appear or fails or
refuses to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of convening the meeting or at the meeting by the presiding
officer thereof.
The judges of election shall determine the number of shares outstanding and
the voting power of each, the shares represented at the meeting, the existence
of a quorum, the authenticity, validity and effect of proxies, receive votes or
ballots, hear and determine all challenges and questions in any way arising in
connection with the right to vote, count and tabulate all votes,
A-120
<PAGE>
determine the result and do such acts as may be proper to conduct the
election or vote with fairness to all shareholders. The judge or judges of
election shall perform their duties impartially, in good faith, to the best of
their ability and as expeditiously as is practical. If there are three judges of
election, the decision, act or certificate of a majority shall be effective in
all respects as the decision, act or certificate of all.
On request of the presiding officer of the meeting, or of any shareholder,
the judge or judges shall make a report in writing of any challenge or question
or matter determined by them, and execute a certificate of any fact found by
them. Any report or certificate made by them shall be prima facie evidence of
the facts stated therein.
Section 108. No Consent of Shareholders in Lieu of Meeting. No action
required to be taken or which may be taken at any annual or special meeting of
shareholders of the Corporation may be taken without a meeting, and the power of
the shareholders to consent in writing to action without a meeting is
specifically denied.
ARTICLE II. DIRECTORS AND BOARD MEETINGS.
Section 201. Management by Board of Directors. The business and affairs of
the Corporation shall be managed by a Board of Directors consisting of not less
than five (5) nor more than twenty-five (25) members, as fixed by the Board of
Directors from time to time. The Board of Directors may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute,
regulation, the Articles of Incorporation or these Bylaws directed or required
to be exercised or done by the shareholders. The Board of Directors shall
appoint one of its members to be the Chairman ("Chairman") to serve at the
pleasure of the Board. He shall be a voting member of the Board of Directors and
shall preside at all meetings of the Board of Directors and Shareholders. The
Board of Directors shall also appoint a President of the Corporation. The
President shall preside at any meeting of the Board in the absence of the
Chairman.
Section 202. Nominations for Directors. Nominations by shareholders for
directors to be elected at an annual meeting of shareholders must be submitted
to the Secretary of the Corporation in writing not later than the close of
business on
A-121
<PAGE>
the ninetieth (90th) day immediately preceding the date of the
meeting. Such notification shall contain the following information: (a) name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the total number of shares of capital stock of the Corporation that
will be voted for each proposed nominee; (d) the name and residence address of
the notifying shareholder; and (e) the number of shares of capital stock of the
Corporation owned by the notifying shareholder. Nominations not made in
accordance herewith may, in the discretion of the chairman of the meeting, be
disregarded and, upon instruction, the judges of election may disregard all
votes cast for any such proposed nominee.
Section 203. Qualifications of Directors.
(a) Share Ownership. Every Director must be a shareholder of the
Corporation and shall own in his/her own right the number of shares (if any)
required by law in order to qualify as such Director. Any Director shall
forthwith cease to be a Director when he/she no longer holds such shares, which
fact shall be reported to the Board of Directors by the Secretary, whereupon the
Board of Directors shall declare the seat of such Director vacated.
(b) Other Qualifications. It shall be a qualification for election and
continued service as a Director of the Corporation for each Director of the
Corporation to observe the following agreements and covenants:
(i) Except for the Chairman and the President, Directors of the
Corporation shall not, either in their capacities as Directors,
shareholders, or otherwise, directly or indirectly, encourage, solicit,
initiate, or respond to any indications of interest, proposals or offers
for any acquisition of, or change of control involving, the Corporation,
whether by merger, sale of assets, or otherwise, or assist, aid or abet any
person or persons with respect to such conduct. In the event that any
director is approached as described herein, any such contact shall be
immediately referred in writing to the Chairman and the President of
Directors.
(ii) Directors of the Corporation shall not, either in their
capacities as Directors, shareholders or otherwise, provide any third
person with non-public information concerning the Corporation; and
A-122
<PAGE>
(iii) Directors of the Corporation shall not (in any capacity)
publicly comment on the Corporation's strategic alternatives (including
sale or possible sale of the Corporation) or on differences of view among
members of the Board relating to the Corporation's strategic alternatives
or on specific merger proposals or opportunities;
absent in any case either a direction from the entire Board of Directors by the
affirmative vote of 75% of the total number of directors then in office
(rounding up to the nearest whole number) or a written opinion of counsel to the
Corporation that such Director's fiduciary duty requires any such conduct.
It is adopted as the corporate policy of this Corporation that the failure
by a Director to observe and comply with the foregoing covenants and agreements
shall subject the Director to removal by a vote of a majority of the Board of
Directors then in office or otherwise in accordance with law, unless such
Director has received a written opinion of the Corporation's counsel that such
Director's fiduciary duty requires such conduct.
Section 2024. Classification of Directors. The Board of Directors of the
Corporation shall be divided into three (3) classes, as nearly equal in number
as possible, as provided in the Corporation's Articles of Incorporation.
Section 2025. Compensation of Directors. No Director shall be entitled to
any salary as such; but the Board of Directors may fix, from time to time,
reasonable fees or other compensation, payable in cash, stock or other property,
for acting as a Director and reasonable fees to be paid each Director for
his/her services in attending meetings of the Board and meetings of committees
appointed by the Board. The Corporation may reimburse Directors for expenses
related to their duties as members of the Board of Directors.
Section 2026. Regular Meetings. Regular meetings of the Board of Directors
shall be held on such day, at such hour, and at such place, consistent with
applicable law, as the Board of Directors shall from time to time designate or
as may be designated in any notice from the Secretary calling the meeting. The
Board of Directors shall meet for reorganizational purposes at the first regular
meeting following the annual meeting of shareholders at which the Directors are
elected. Notice need not be given of regular meetings of the Board of Directors
which are
A-123
<PAGE>
held at the time and place designated by the Board of Directors. If a regular
meeting is not to be held at the time and place designated by the Board of
Directors, notice of such meeting, which need not specify the business to be
transacted thereat and which may be either verbal or in writing, shall be given
by the President to each member of the Board of Directors at least twenty-four
(24) hours before the time of the meeting.
A majority of the members of the Board of Directors shall constitute a
quorum for the transaction of business. If at the time fixed for the meeting,
including the meeting to organize the new Board following the annual meeting of
shareholders, a quorum is not present, the directors in attendance may adjourn
the meeting from time to time until a quorum is present.
Except as otherwise provided herein, a majority of Directors present and
voting at any meeting of the Board of Directors at which a quorum is present,
shall decide each matter considered. A Director cannot vote by proxy, or
otherwise act by proxy at a meeting of the Board of Directors.
Section 2027. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President or at the request of a
majority of Directors then in office. A special meeting of the Board of
Directors shall be deemed to be any meeting other than a regular meeting of the
Board of Directors. Notice of the time and place of every special meeting, which
need not specify the business to be transacted thereat, shall be given by the
Chairman or the President to each member of the Board at least twenty-four (24)
hours before the time of such meeting.
Section 2028. Reports and Records. The reports of officers and Committees
and the records of the proceedings of all Committees shall be filed with the
Secretary of the Corporation and presented to the Board of Directors, if
practicable, at its next regular meeting. The Board of Directors shall keep
complete records of its proceedings in a minute book kept for that purpose. When
a Director shall request it, the vote of each Director upon a particular
question shall be recorded in the minutes.
A-124
<PAGE>
ARTICLE III. COMMITTEES.
Section 3031. Committees. The following two (2) Committees of the Board of
Directors shall be established by the Board of Directors in addition to any
other Committee the Board of Directors may in its discretion establish:
Executive and Audit Committees.
Section 3032. Executive Committee. The Executive Committee shall consist of
not more than five (5) Directors, including the President who shall serve as
Chairman of the Committee and who shall designate the remaining members. A
majority of the members of the Executive Committee shall constitute a quorum,
and actions of a majority of those present at a meeting at which a quorum is
present shall be the actions of the Committee. Meetings of the Committee may be
called at any time by the Chairman of the Committee or his designee. The
Executive Committee shall have and exercise the authority of the Board of
Directors in the management of the business of the Corporation between the dates
of regular meetings of the Board of Directors.
Section 3033. Audit Committee. The Audit Committee shall consist of at
least three (3) Directors, none of whom shall be officers of the Corporation.
Meetings of the Committee may be called at any time by the Chairman of the Board
or the Chairman of the Committee or his designee. A majority of the members of
the Committee shall constitute a quorum for the transaction of business, and the
actions of a majority of those present at a meeting at which a quorum is present
shall be the actions of the Committee. The Committee shall, among other things,
supervise the audit of the books of the Corporation and recommend for approval
by the Board the services of a reputable Certified Public Accounting firm to
perform such audit.
Section 3034. Appointment of Committee Members. The President shall appoint
the members of the Committees and the Chairman of each such Committee to serve
until the next annual meeting of shareholders. The President shall appoint the
members of any other Committees established by the Board of Directors, and the
Chairman of such Committee, to serve until the next annual meeting of
shareholders. The Board of Directors may appoint, from time to time, other
committees, for such purposes and with such powers as the Board may determine.
Section 3035. Organization and Proceedings. Each Committee of the Board of
Directors shall effect its own organization by
A-125
<PAGE>
the appointment of a Secretary and such other officers, except the
Chairman, as it may deem necessary. A record of proceedings of all Committees
shall be kept by the Secretary of such Committee and filed and presented as
provided in Section 208 of these Bylaws.
ARTICLE IV. OFFICERS.
Section 4041. Chairman. The Board of Directors shall appoint one of its
members to be the Chairman to serve at the pleasure of the Board. He shall be a
voting member of the Board of Directors and shall preside at all meetings of the
Board of Directors, and shareholders.
Section 4042. President. The Board of Directors shall appoint a President
of the Corporation who shall be a member of the Board of Directors. In the
absence of the Chairman of the Board, the President shall preside at any meeting
of the Board. The President shall supervise the carrying out of the policies
adopted or approved by the Board. He shall have general executive powers, as
well as the specific powers conferred by these Bylaws. He shall also have and
may exercise such further powers and duties as from time to time may be
conferred upon,or assigned to him by the Board of Directors.
Section 4043. Vice Presidents. The Board of Directors may appoint one or
more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and
Assistant Vice Presidents (collectively referred to herein as the "Vice
Presidents"). The Vice Presidents shall have such powers and duties as may be
assigned to them by the Board of Directors. The Executive Vice Presidents shall,
in the absence of the President, perform all the duties of the President.
Section 4044. Secretary. The Board of Directors shall appoint a Secretary,
who shall be Secretary of the Board and of the Corporation, and shall keep
accurate minutes of all meetings. He shall attend to the giving of all notices
required by these Bylaws to be given. He shall be custodian of the corporate
seal, records, documents and papers of the Corporation. He shall provide for the
keeping of proper records of all transactions of the Corporation. He shall have
and may exercise any and all other powers and duties pertaining by law,
regulation or practice, to the office of Secretary, or imposed by these Bylaws.
He shall also perform such other duties as may be assigned to him, from time to
time, by the Board of Directors.
A-126
<PAGE>
Section 4045. Chief Financial Officer ("CFO"). The CFO shall act under the
supervision of the President or such other officer as the President may
designate. The CFO shall have custody of the Corporation's funds and such other
duties as may be prescribed by the Board of Directors, President or such other
Supervising Officer as the president may designate.
Section 4046. Assistant Officers. Unless otherwise provided by the Board of
Directors, each Assistant Officer shall perform such duties as shall be
prescribed by the Board of Directors, the Chairman of the Board, the President
or the Officer to whom he/she is an Assistant. In the event of the absence or
disability of an Officer or his/her refusal to act, his/her Assistant Officer
shall, in the order of their rank, and within the same rank in the order of
their seniority, have the powers and authorities of such Officer.
Section 4047. Compensation. Unless otherwise provided by the Board of
Directors, the salaries and compensation of all Officers and Assistant Officers,
except the President shall be fixed by the President in accordance with the
general salary administration programs and guidelines established by the Board.
Section 4048. General Powers. The Officers are authorized to do and perform
such corporate acts as are necessary in the carrying on of the business of the
Corporation, subject always to the direction of the Board of Directors.
ARTICLE V. SHARES OF CAPITAL STOCK.
Section 5051. Authority to Sign Share Certificates. Every share certificate
of the Corporation shall be signed by the Chairman of the Board, the President
or by an Executive Vice President or one of the Vice Presidents. Certificates
may be signed by facsimile signature.
Section 5052. Lost or Destroyed Certificates. Any person claiming a share
certificate to be lost, destroyed or wrongfully taken shall receive a
replacement certificate if such person shall have: (a) requested such
replacement certificate before the Corporation has notice that the shares have
been acquired by a bona fide purchaser; (b) provided the Corporation with an
indemnity agreement satisfactory in form and substance to the Chairman of the
Board, the President or the Executive Vice President; and (c) satisfied any
other reasonable requirements
A-127
<PAGE>
(including providing an affidavit and a surety bond) fixed by the Vice
Chairman and President or the Executive Vice President.
ARTICLE VI. GENERAL.
Section 6061. Fiscal Year. The fiscal year of the Corporation shall begin
on the first (1st) day of January in each year and end on the thirty-first
(31st) day of December in each year.
Section 6062. Absentee Participation in Meetings. Participation in meetings
of the Board of Directors, or of Committees of the Board, by means of a
conference telephone or similar communications equipment, by means of which all
persons participating in the meeting can hear each other shall be permitted.
Section 6063. Emergency Bylaws. In the event of any emergency resulting
from a nuclear attack or similar disaster, and during the continuance of such
emergency, the following Bylaw provisions shall be in effect, notwithstanding
any other provisions of the Bylaws:
(a) A meeting of the Board of Directors or of any Committee thereof may
be called by any Officer or Director upon one (1) hour's notice to all persons
entitled to notice whom, in the sole judgment of the notifier, it is feasible to
notify;
(b) The Director or Directors in attendance at the meeting of the Board
of Directors or of any Committee thereof shall constitute a quorum; and
(c) These Bylaws may be amended or repealed, in whole or in part, by a
majority vote of the Directors attending any meeting of the board of Directors,
provided such amendment or repeal shall only be effective for the duration of
such emergency.
Section 6064. Severability. If any provision of these Bylaws is illegal or
unenforceable as such, such illegality or unenforceability shall not affect any
other provision of these Bylaws and such other provisions shall continue in full
force and effect.
ARTICLE VII. LIABILITY OF DIRECTORS: INDEMNIFICATION.
A-128
<PAGE>
Section 7071. Elimination of Liability. To the fullest extent permitted by
the laws of the Commonwealth of Pennsylvania, a Director of the Corporation
shall not be personally liable for monetary damages for any action taken or any
failure to take any action unless the Director has breached or failed to perform
the duties of his or her office under the Pennsylvania Business Corporation Law
of 1988, as amended, or any successor statute, and such breach or failure
constitutes self-dealing, willful misconduct or recklessness. The provisions of
this Section 701 shall not apply with respect to the responsibility or liability
of a Director under any criminal statute or the liability of a director for the
payment of taxes pursuant to local, state or federal law.
Section 7072. Indemnification. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative by reason of the fact that such person is or
was a Director, officer, employee, or agent of the Corporation, or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), amounts paid in
settlement, judgments, and fines actually and reasonably incurred by such person
in connection with such action, suit, or proceeding; provided, however, that no
indemnification shall be made in any case where the act or failure to act giving
rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness.
Section 7073. Expenses. Expenses (including attorneys' fees) incurred in
defending a civil or criminal action, suit, or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the Director,
officer, employee, or agent to repay such amount if it shall be ultimately
determined that he/she is not entitled to be indemnified by the Corporation as
authorized in this Article VII.
Section 7074. Non-Exclusive. The indemnification and advancement of
expenses provided by this Article VII shall not be deemed exclusive of any other
right to which persons seeking indemnification and advancement of expenses may
be entitled under any agreement, vote of shareholders or disinterested
directors, or otherwise, both as to actions in such persons' official
A-129
<PAGE>
capacity and as to their actions in another capacity while holding office,
and shall continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors, and
administrator of such person.
Section 7075. Insurance, Etc. The Corporation may purchase and maintain
insurance on behalf of any person, may enter into contracts of indemnification
with any person, may create a fund of any nature (which may, but need not be,
under the control of a trustee) for the benefit of any person, and may otherwise
secure in any manner its obligations with respect to indemnification and
advancement of expenses, whether arising under this Article IX or otherwise, to
or for the benefit of any person, whether or not the Corporation would have the
power to indemnify such person against such liability under the provisions of
this Article VII.
Section 7076. Amendment. Notwithstanding anything herein contained or
contained in the Articles of Incorporation to the contrary, this Article VII may
not be amended or repealed, and a provision inconsistent herewith may not be
adopted, except by the affirmative vote of 66-2/3% of the members of the entire
Board of Directors or by the affirmative vote of shareholders of the corporation
entitled to cast at least 75% of all votes which shareholders of the corporation
are then entitled to cast, except that, if the laws of the Commonwealth of
Pennsylvania are amended or any other statute is enacted so as to decrease the
exposure of directors to liability or to increase the indemnification rights
available, this Article VII and any other provision of these Bylaws inconsistent
with such decreased exposure or increased indemnification rights shall be
amended, automatically and without any further action on the part of
shareholders or directors, to reflect such decreased exposure or to include such
increased indemnification rights, unless such legislation expressly otherwise
requires. Any repeal or modification of this Article VII by the directors or
shareholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation or any right to indemnification for any action taken or any failure
to take any action occurring prior to the time of such repeal or modification.
Section 7077. Severability. If, for any reason, any provision of this
Article VII shall be held invalid, such invalidity shall not affect any other
provision not held so invalid, and each such other provision shall, to the full
extent
A-130
<PAGE>
consistent with law, continue in full force and effect. If any provision
of this Article VII shall be held invalid in part, such invalidity shall in no
way affect the remainder of such provision, and the remainder of such provision,
together with all other provisions of this Article VII shall, to the full extent
consistent with law, continue in full force and effect.
ARTICLE VIII. AMENDMENT OR REPEAL.
Section 8081. Amendment or Repeal by the Board of Directors. These Bylaws
may be amended or repealed, in whole or in part, in the manner set forth in the
Articles of Incorporation.
A-131
<PAGE>
EXHIBIT C
DIRECTORS
CLASS I
CLASS II
CLASS III
OFFICERS
Joseph W. Major -- President and Chief Executive
Officer
Richard A. Elko -- Executive Vice President and
Chief Financial Officer
A-132
<PAGE>
EXHIBIT 6
FORM OF OPINION OF COUNSEL TO PATRIOT BANK CORP
FLC shall have received from counsel to Patriot, an opinion, dated as
of the Closing Date, substantially to the effect that, subject to normal
exceptions and qualifications:
(a) Patriot has full corporate power to carry out the transactions
contemplated in the Agreement. The execution and delivery of the Agreement and
the consummation of the transactions contemplated thereunder have been duly and
validly authorized by all necessary corporate action on the part of Patriot, and
the Agreement constitutes a valid and legally binding obligation of Patriot,
except as may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship, and other laws now or hereafter in
effect relating to or affecting the enforcement of creditors' rights generally
or the rights of creditors of banking institutions or their holding companies,
and (ii) general equitable principles, except that no opinion need be rendered
as to the effect or availability of equitable remedies or injunctive relief
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
(b) Subject to satisfaction of the conditions set forth in the
Agreement, neither the transactions contemplated in the Agreement, nor
compliance by Patriot with any of the provisions thereof, will (i) conflict with
or result in a breach or default under (A) the certificate of incorporation or
bylaws of Patriot or the articles of incorporation or bylaws of Patriot Bank,
or, (B) to the knowledge of such counsel, any note, bond, mortgage, indenture,
license, agreement or other material instrument or obligation to which Patriot
or Patriot Bank is a party; or (ii) based on certificates of officers and
without independent verification, to the knowledge of such counsel, result in
the creation or imposition of any material lien or encumbrance upon the property
of Patriot or Patriot Bank, except such material lien, instrument or obligation
that has been disclosed pursuant to the Agreement or the Plan; or (iii) violate
in any material respect any order, writ, injunction or decree known to such
counsel, or any federal or Pennsylvania statute, rule or regulation applicable
to Patriot or Patriot Bank.
A-133
<PAGE>
(c) Patriot Bank is a validly existing Pennsylvania-chartered
commercial bank organized under the laws of the Commonwealth of Pennsylvania and
the United States of America. The deposits of Patriot Bank are insured to the
maximum extent provided by law by the Federal Deposit Insurance Corporation.
Patriot Bank has full corporate power to carry out the transactions contemplated
in the Bank Plan of Merger. The execution and delivery of the Bank Plan of
Merger and the consummation of the transactions contemplated thereunder have
been duly and validly authorized by all necessary corporate action on the part
of Patriot Bank, and the Bank Plan of Merger constitutes a valid and legally
binding obligation of Patriot Bank, except as may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, receivership, conservatorship, and other
laws now or hereafter in effect relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of banking institutions
or their holding companies, and (ii) general equitable principles, except that
no opinion need be rendered as to the effect or availability of equitable
remedies or injunctive relief (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(d) There is, to the knowledge of such counsel, no legal,
administrative, arbitration or governmental proceeding or investigation pending
or threatened to which Patriot or Patriot Bank is a party which would, if
determined adversely to Patriot or Patriot Bank, have a material adverse effect
on the financial condition or results of operation of Patriot and Patriot Bank
taken as a whole, or which presents a claim to restrain or prohibit the
transactions contemplated by the Agreement and the Plan, respectively.
(e) No consent, approval, authorization or order of any federal or
state court or federal or state governmental agency or body, or to such
counsel's knowledge, of any third party, is required for the consummation by
Patriot of the transactions contemplated by the Agreement, except for such
consents, approvals, authorizations or orders as have been obtained or which
would not have a Material Adverse Effect upon Patriot or the Holding Company
upon consummation of the Consolidation.
(f) Upon the filing and effectiveness of the Articles and Certificate
of Consolidation with the PDS and DGCL, the Consolidation will have been
effected in compliance with all
A-134
<PAGE>
applicable Pennsylvania and Delaware laws and regulations in all material
respects.
(g) The shares of Holding Company Common Stock to be issued in
connection with the Consolidation have been duly authorized and will, when
issued in accordance with the terms of the Agreement, be validly issued, fully
paid and nonassessable, free and clear of any mortgage, pledge, lien,
encumbrance or claim (legal or equitable).
Such counsel's opinion shall be limited to matters governed by federal
banking and securities laws, the BCL and the DGCL.
A-135
<PAGE>
EXHIBIT 7
FORM OF OPINION OF COUNSEL TO FLC
Patriot shall have received from counsel to FLC, an opinion, dated as
of the Closing Date, substantially to the effect that, subject to normal
exceptions and qualifications:
(a) FLC has full corporate power to carry out the transactions
contemplated in the Agreement. The execution and delivery of the Agreement and
the consummation of the transactions contemplated thereunder have been duly and
validly authorized by all necessary corporate action on the part of FLC and the
Agreement constitutes a valid and legally binding obligation of FLC except as
may be limited by (i) bankruptcy, insolvency, reorganization, moratorium,
receivership, conservatorship, and other laws now or hereafter in effect
relating to or affecting the enforcement of creditors' rights generally or the
rights of creditors of banking institutions or their holding companies, and (ii)
general equitable principles, except that no opinion need be rendered as to the
effect or availability of equitable remedies or injunctive relief (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
(b) Subject to satisfaction of the conditions set forth in the
Agreement, neither the transactions contemplated in the Agreement nor compliance
by FLC with any of the provisions thereof, will (i) conflict with or result in a
breach or default under (A) the articles of incorporation or bylaws of FLC or
the articles of incorporation or bylaws of First Lehigh Bank, or (B) based on
certificates of officers and without independent verification, to the knowledge
of such counsel, any note, bond, mortgage, indenture, license, agreement or
other instrument or obligation to which FLC or First Lehigh Bank is a party; or
(ii) to the knowledge of such counsel, result in the creation or imposition of
any material lien, instrument or encumbrance upon the property of FLC or First
Lehigh Bank, except such material lien, instrument or obligation that has been
disclosed to Patriot pursuant to the Agreement and the Plan, or (iii) violate in
any material respect any order, writ, injunction, or decree known to such
counsel, or any statute, rule or regulation applicable to FLC or First Lehigh
Bank.
A-136
<PAGE>
(c) First Lehigh Bank is a validly existing bank organized under the
laws of the Commonwealth of Pennsylvania. The deposits of First Lehigh Bank are
insured to the maximum extent provided by law by the Federal Deposit Insurance
Corporation. First Lehigh Bank has full corporate power to carry out the
transactions contemplated in the Bank Plan of Merger. The execution and delivery
of the Bank Plan of Merger and the consummation of the transactions contemplated
thereunder have been duly and validly authorized by all necessary corporate
action on the part of First Lehigh Bank and the Bank Plan of Merger constitutes
a valid and legally binding obligation of First Lehigh Bank except as may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium, receivership,
conservatorship, and other laws now or hereafter in effect relating to or
affecting the enforcement of creditors' rights generally or the rights of
creditors of banking institutions or their holding companies, and (ii) general
equitable principles, except that no opinion need be rendered as to the effect
or availability of equitable remedies or injunctive relief (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
(d) There is, to the knowledge of such counsel, no legal,
administrative, arbitration or governmental proceeding or investigation pending
or threatened to which FLC or First Lehigh Bank is a party which would, if
determined adversely to FLC or First Lehigh Bank, have a material adverse effect
on the business, properties, results of operations, or condition, financial or
otherwise, of FLC or First Lehigh Bank taken as a whole or which presents a
claim to restrain or prohibit the transactions contemplated by the Agreement and
the Plan, respectively.
(e) No consent, approval, authorization, or order of any federal or
state court or federal or state governmental agency or body, or to such
counsel's knowledge, of any third party of any third party, is required for the
consummation by FLC of the transactions contemplated by the Agreement, except
for such consents, approvals, authorizations or orders as have been obtained or
which would not have a Material Adverse Effect upon FLC or the Holding Company
upon consummation of the Consolidation.
Such counsel's opinion shall be limited to matters governed by federal
banking and securities laws and by the BCL.
A-137
<PAGE>
EXHIBIT 8
FORM OF TAX OPINION OF STEVENS & LEE
FLC and Patriot shall have received an opinion of Stevens & Lee
substantially to the effect that, under the provisions of the IRC:
1. The Consolidation will constitute a reorganization within the
meaning of IRC Section 368(a)(1)(A).
2. FLC, Patriot and the Holding Company will each be "a party to a
reorganization" within the meaning of IRC Section 368(b).
3. Neither FLC, nor Patriot, nor the Holding Company will recognize any
gain or loss upon the respective transfers of FLC's and Patriot's assets to the
Holding Company in exchange solely for Holding Company Common Stock (including
any fractional share interests) and the assumption by the Holding Company of the
respective liabilities of FLC and Patriot.
4. The basis of the respective FLC and Patriot assets in the hands of
the Holding Company will be the same as the basis of such assets in the hands of
FLC and Patriot immediately prior to the Consolidation.
5. The holding period of the respective assets of FLC and Patriot to be
received by the Holding Company will include the period during which the assets
were held by FLC and Patriot.
6. No gain or loss will be recognized by the shareholders of FLC or
Patriot on the receipt of Holding Company Common Stock (including any fractional
share interests) solely in exchange for their shares of FLC or Patriot Common
Stock, as the case may be.
7. The basis of the Holding Company Common Stock (including any
fractional share interests) to be received by the FLC and Patriot shareholders
in the Consolidation will be the same as the basis of the FLC or Patriot Common
Stock, as the case may be, surrendered in exchange therefor.
8. The holding period of the Holding Company Common Stock (including
any fractional share interests) to be received by the
A-138
<PAGE>
FLC and Patriot shareholders in the Consolidation will include the period during
which the FLC and Patriot shareholders held their respective FLC and Patriot
Common Stock, provided the shares of such FLC or Patriot Common Stock, as the
case may be, are held as a capital asset on the Effective Date of the
Consolidation.
9. The payment of cash in lieu of fractional share interests of Holding
Company Common Stock will be treated as if the fractional share interests were
distributed as part of the Consolidation and then redeemed by the Holding
Company. Such cash payments will be treated as having been received as
distributions in full payment in exchange for the fractional share interests
redeemed, as provided in IRC Section 302(a). Any gain or loss recognized by an
FLC or Patriot shareholder will be a capital gain or loss, provided the shares
of FLC or Patriot Common Stock, as the case may be, are held as a capital asset
on the Effective Date of the Consolidation.
10. As provided in IRC Section 381(c)(2) and related Treasury
regulations, the Holding Company will succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of FLC and Patriot as
of the Effective Date of the Consolidation. Any deficit in the earnings and
profits of the parties will be used only to offset the earnings and profits
accumulated after the Consolidation.
11. Pursuant to IRC Section 381(a) and related Treasury regulations,
the Holding Company will succeed to and take into account the respective items
of FLC and Patriot described in IRC Section 381(c). Such items will be taken
into account by Holding Company subject to the conditions and limitations of IRC
Sections 381, 382, 383, and 384 and the Treasury regulations thereunder.
12. The Bank Merger will constitute a reorganization within the meaning
of IRC Section 368(a)(1).
13. First Lehigh Bank and Patriot Bank will each be "a party to a
reorganization" within the meaning of IRC Section 368(b).
14. Neither First Lehigh Bank nor Patriot Bank will recognize any gain
or loss upon the transfer of First Lehigh Bank's assets to Patriot Bank in
constructive exchange solely for Patriot Bank Common Stock and the assumption by
Patriot Bank of the liabilities of First Lehigh Bank.
A-139
<PAGE>
15. The basis of the First Lehigh Bank assets in the hands of Patriot
Bank will be the same as the basis of such assets in the hands of First Lehigh
Bank immediately prior to the Bank Merger.
16. The holding period of the First Lehigh Bank assets in the hands of
Patriot Bank will include the period during which such assets were held by First
Lehigh Bank.
17. No gain or loss will be recognized by the Holding Company, as the
shareholder of First Lehigh Bank, upon the constructive receipt of shares of
Patriot Bank Common Stock in exchange for the First Lehigh Bank Common Stock
surrendered in exchange therefor in the Bank Merger.
18. The basis of the Patriot Bank Common Stock to be held by the
Holding Company after the Bank Merger will equal the basis of such stock
immediately before the Bank Merger, increased by the basis of the First Lehigh
Bank Common Stock surrendered in the constructive exchange.
19. As provided in IRC Section 381(c)(2) and related Treasury
regulations, Patriot Bank will succeed to and take into account the earnings and
profits, or deficit in earnings and profits, of First Lehigh Bank as of the
effective date of the Bank Merger. Any deficit in the earnings and profits of
Patriot Bank or First Lehigh Bank will be used only to offset the earnings and
profits accumulated after the Bank Merger.
20. Pursuant to IRC Section 381(a) and related Treasury regulations,
Patriot Bank will succeed to and take into account the items of First Lehigh
Bank described in IRC Section 381(c). Such items will be taken into account by
Patriot Bank subject to the conditions and limitations of IRC Sections 381, 382,
383, and 384 and the Treasury regulations thereunder.
A-140
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Stock Option Agreement") dated July 28,
1998, is by and between FIRST LEHIGH CORPORATION, a Pennsylvania corporation
("FLC") and PATRIOT BANK CORP., a Delaware corporation ("Patriot").
BACKGROUND
1. Patriot and FLC desire to enter into an Agreement and Plan of
Consolidation, dated July 28, 1998 (the "Agreement"), providing, among other
things, for the creation by Patriot and FLC of a bank holding company which will
issue shares of its common stock to the shareholders of Patriot and FLC (the
"Consolidation").
2. As a condition to Patriot to enter into the Agreement, FLC is
granting to Patriot an option to purchase up to that number of shares of common
stock, par value $.01 per share (the "Common Stock") of FLC as shall equal 19.9%
of shares of Common Stock of FLC issued and outstanding as of the date hereof,
on the terms and conditions hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual covenants and
agreements set forth herein, Patriot and FLC, intending to be legally bound
hereby, agree:
1. Grant of Option. FLC hereby grants to Patriot, on the terms and
conditions set forth herein, the option to purchase (the "Option") up to 410,000
shares of Common Stock of FLC (as adjusted as set forth herein, the "Option
Shares") at a price per share (as adjusted as set forth herein, the "Option
Price") equal to $[7.00], provided, however, that in no event shall the number
of Option Shares for which the Option is exercisable exceed 19.9% of the issued
and outstanding shares of FLC Common Stock without giving effect to any shares
subject to or issued pursuant to the Option.
B-1
<PAGE>
2. Exercise of Option.
(a) Provided that (i) Patriot shall not be, on the date of exercise, in
material breach of the agreements or covenants contained in the Agreement or
this Stock Option Agreement, and (ii) no preliminary or permanent injunction or
other order against the delivery of shares covered by the Option issued by any
court of competent jurisdiction in the United States shall be in effect on the
date of exercise, upon or after the occurrence of a Triggering Event (as such
term is hereinafter defined) Patriot may exercise the Option, in whole or in
part, at any time or one or more times, from time to time; provided that the
Option shall terminate and be of no further force and effect upon the earliest
to occur of (A) the Effective Date of the Consolidation, as provided in the
Agreement, (B) termination of the Agreement in accordance with the terms thereof
prior to the occurrence of a Triggering Event or a Preliminary Triggering Event,
other than a termination of the Agreement pursuant to Section 6.01(d), unless in
the case of termination by FLC pursuant to Section 6.01(d), such termination is
as a result of a willful breach of the Agreement by Patriot (a termination
pursuant to Section 6.01(d), except a termination by FLC as a result of a
willful breach by Patriot, being referred to herein as a "Default Termination"),
(C) 18 months after the termination of the Agreement by Patriot or FLC pursuant
to a Default Termination, and (D) 18 months after termination of the Agreement
(other than pursuant to a Default Termination) following the occurrence of a
Triggering Event or a Preliminary Triggering Event; and provided, further, that
any purchase of shares upon exercise of the Option shall be subject to
compliance with applicable securities and banking laws. The rights set forth in
Section 3 hereof shall terminate when the right to exercise the Option
terminates (other than as a result of a complete exercise of the Option) as set
forth above.
(b) As used herein, the term "Triggering Event" means the occurrence of
any of the following events:
(i) a person or group (as such terms are defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations thereunder), other than Patriot or an
affiliate of Patriot, acquires beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 25% or more of the
then outstanding shares of Common Stock (excluding any
B-2
<PAGE>
shares eligible to be reported on Schedule 13G of the Securities and
Exchange Commission); or
(ii) a person or group, other than Patriot or an affiliate of
Patriot, enters into an agreement or letter of intent or memorandum of
understanding with FLC or FLC shall have authorized, recommended or
publicly proposed, or publicly announced an intention to authorize,
recommend or propose, such an agreement or letter of intent or
memorandum of understanding, pursuant to which such person or group or
any affiliate of such person or group would (i) merge or consolidate,
or enter into any similar transaction, with FLC, (ii) acquire all or
substantially all of the assets or liabilities of FLC or all or
substantially all of the assets or liabilities of First Lehigh Bank
(or any successor subsidiary), the wholly-owned subsidiary of FLC
("First Lehigh Bank"), or (iii) acquire beneficial ownership of
securities representing, or the right to acquire beneficial ownership
or to vote securities representing, 25% or more of the then
outstanding shares of Common Stock (excluding any shares eligible to
be reported on Schedule 13G of the Securities and Exchange Commission)
or the then outstanding shares of common stock of First Lehigh Bank.
(c) As used herein, the term "Preliminary Triggering Event" means the
occurrence of any of the following events:
(i) a person or group (as such terms are defined in the Exchange
Act and the rules and regulations thereunder), other than Patriot or
an affiliate of Patriot, acquires beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 10% or more of the
then outstanding shares of Common Stock (excluding any shares eligible
to be reported on Schedule 13G of the Securities and Exchange
Commission);
(ii) a person or group, other than Patriot or an affiliate of
Patriot, publicly announces a bona fide proposal (including a written
communication that is or becomes the subject of public disclosure) for
(i) any merger, consolidation or acquisition of all or substantially
all the assets or liabilities of FLC or all or substantially all the
assets or liabilities of First Lehigh Bank, or any other business
combination involving FLC or First Lehigh
B-3
<PAGE>
Bank, or (ii) a transaction involving the transfer of beneficial
ownership of securities representing, or the right to acquire
beneficial ownership or to vote securities representing, 10% or more
of the then outstanding shares of Common Stock or the then outstanding
shares of Common Stock of First Lehigh Bank (collectively, a
"Proposal"), and thereafter, if such Proposal has not been Publicly
Withdrawn (as such term is hereinafter defined) at least 30 days prior
to the meeting of shareholders of FLC called to vote on the
Consolidation, FLC's shareholders fail to approve the Consolidation by
the vote required by applicable law at the meeting of shareholders
called for such purpose or such meeting has been cancelled; or
(iii) the Board of Directors of FLC shall (A) fail to recommend
the Consolidation, (B) recommend an Acquisition Transaction or (C)
have withdrawn or modified in a manner adverse to Patriot the
recommendation of the Board of Directors of FLC with respect to the
Agreement and thereafter FLC's shareholders fail to approve the
Consolidation by the vote required by law at the meeting of
shareholders called for such purpose or such meeting is not scheduled
or is cancelled without the written consent of Patriot; or
(iv) a person or group, other than Patriot or an affiliate of
Patriot, makes a bona fide Proposal and thereafter, but before such
Proposal has been Publicly Withdrawn, FLC shall have breached any
representation, warranty, covenant or obligation contained in the
Agreement and such breach would entitle Patriot to terminate the
Agreement under Section 6.01(d) thereof (without regard to the cure
period provided for therein unless such cure is promptly effected
without jeopardizing consummation of the Consolidation pursuant to the
Agreement).
If more than one of the transactions giving rise to a Triggering Event or a
Preliminary Triggering Event under this Section 2 is undertaken or effected,
then all such transactions shall give rise only to one Triggering Event or
Preliminary Triggering Event, as applicable, which Triggering Event or
Preliminary Triggering Event shall be deemed continuing for all purposes
hereunder until all such transactions are abandoned.
"Publicly Withdrawn" for purposes of this Section 2 shall mean an
unconditional bona fide withdrawal of the Proposal
B-4
<PAGE>
coupled with a public announcement of no further interest in pursuing such
Proposal or in acquiring any controlling influence over FLC or in soliciting or
inducing any other person (other than Patriot or an affiliate of Patriot) to do
so.
Notwithstanding the foregoing, the obligation of FLC to issue Option
Shares upon exercise of the Option shall be deferred (but shall not terminate):
(i) until the receipt of all required governmental or regulatory approvals or
consents necessary for FLC to issue the Option Shares or Patriot to exercise the
Option, or until the expiration or termination of any waiting period required by
law, or (ii) so long as any injunction or other order, decree or ruling issued
by any federal or state court of competent jurisdiction is in effect which
prohibits the sale or delivery of the Option Shares, and, in each case,
notwithstanding any provision to the contrary set forth herein, the Option shall
not expire or otherwise terminate with respect to the Option Shares subject to
any prior exercise.
FLC shall notify Patriot promptly in writing of the occurrence of any
Triggering Event known to it, it being understood that the giving of such notice
by FLC shall not be a condition to the right of Patriot to exercise the Option.
FLC will not take any action which would have the effect of preventing or
disabling FLC from delivering the Option Shares to Patriot upon exercise of the
Option or otherwise performing its obligations under this Stock Option
Agreement, except to the extent required by applicable securities and banking
laws and regulations. In the event Patriot wishes to exercise the Option,
Patriot shall send a written notice to FLC (the date of which is hereinafter
referred to as the "Notice Date") specifying the total number of Option Shares
it wishes to purchase and a place and date between two and ten business days
inclusive from the Notice Date for the closing of such a purchase (a "Closing");
provided, however, that a Closing shall not occur prior to two days after the
later of receipt of any necessary regulatory approvals or the expiration of any
legally required notice or waiting period, if any.
B-5
<PAGE>
3. Repurchase of Option by FLC.
(a) Subject to the last sentence of Section 2(a), at the request of
Patriot at any time commencing upon the first occurrence of a Repurchase Event
(as defined in Section 3(d)) and ending 18 months immediately thereafter, FLC
shall repurchase from Patriot (x) the Option and (y) all shares of Common Stock
purchased by Patriot pursuant hereto with respect to which Patriot then has
beneficial ownership. The date on which Patriot exercises its rights under this
Section 3 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Section 3 Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Patriot for any shares
of Common Stock acquired pursuant to the Option with respect to which
Patriot then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined
below) for each share of Common Stock over (y) the Option Price
(subject to adjustment pursuant to Section 6), multiplied by the
number of shares of Common Stock with respect to which the Option has
not been exercised; and
(iii) the excess, if any, of the Applicable Price over the Option
Price (subject to adjustment pursuant to Section 6) paid (or, in the
case of Option Shares with respect to which the Option has been
exercised, but the Closing has not occurred, payable) by Patriot for
each share of Common Stock with respect to which the Option has been
exercised and with respect to which Patriot then has beneficial
ownership, multiplied by the number of such shares.
(b) If Patriot exercises it rights under this Section 3, FLC shall,
within ten (10) business days after the Request Date, pay the Section 3
Repurchase Consideration to Patriot in immediately available funds, and
contemporaneously with such payment, Patriot shall surrender to FLC the Option
and the certificate evidencing the shares of Common Stock purchased thereunder
with respect to which Patriot then has beneficial ownership, and Patriot shall
warrant that it has sole record and beneficial ownership of such shares, and
that the same are then free and clear of all liens, claims, charges and
encumbrances of any kind whatsoever. Notwithstanding the foregoing, to the
B-6
<PAGE>
extent that prior notification to or approval of any banking agency or
department of any federal or state government, including without limitation the
FRB, the PDB, the FDIC, or the respective staffs thereof (the "Regulatory
Authority"), is required in connection with the payment of all or any portion of
the Section 3 Repurchase Consideration, Patriot shall have the ongoing option to
revoke its request for repurchase pursuant to Section 3, in whole or in part, or
to require that FLC deliver from time to time that portion of the Section 3
Repurchase Consideration that it is not then so prohibited from paying and
promptly file the required notice or application for approval and expeditiously
process the same (and each party shall cooperate with the other in the filing of
any such notice or application and the obtaining of any such approval), in which
case the ten (10) business day period of time that would otherwise run pursuant
to the preceding sentence for the payment of the portion of the Section 3
Repurchase Consideration shall run instead from the date on which, as the case
may be, any required notification period has expired or been terminated or such
approval has been obtained and, in either event, any requisite waiting period
shall have passed. If any Regulatory Authority disapproves of any part of FLC's
proposed repurchase pursuant to this Section 3, FLC shall promptly give notice
of such fact to FLC. If any Regulatory Authority prohibits the repurchase
pursuant to this Section 3, FLC shall promptly give notice of such fact to
Patriot. If any Regulatory Authority prohibits the repurchase in part but not in
whole, then Patriot shall have the right (i) to revoke the repurchase request or
(ii) to the extent permitted by such Regulatory Authority, determine whether the
repurchase should apply to the Option and/or Option Shares and to what extent to
each, and Patriot shall thereupon have the right to exercise the Option as to
the number of Option Shares for which the Option was exercisable at the Request
Date less the sum of the number of shares covered by the Option in respect of
which payment has been made pursuant to Section 3(a)(ii) and the number of
shares covered by the portion of the Option (if any) that has been repurchased.
Patriot shall notify FLC of its determination under the preceding sentence
within five (5) business days of receipt of notice of disapproval of the
repurchase.
(c) For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Common Stock paid for any such
share by the person or groups described in Section 3(d)(i), (ii) the price per
share of Common Stock received by a holder of Common Stock in connection with
any merger or other business combination transaction
B-7
<PAGE>
described in Section 3(d)(ii), (iii) or (iv), or (iii) the highest closing sales
price per share of Common Stock quoted on the Nasdaq Stock Market or OTC
Bulletin Board during the 40 business days preceding the Request Date; provided,
however, that in the event of a sale of less than all of FLC's assets, the
Applicable Price shall be the sum of the price paid in such sale for such assets
and the current market value of the remaining assets of FLC as determined by a
nationally-recognized investment banking firm selected by Patriot, divided by
the number of shares of Common Stock outstanding at the time of such sale. If
the consideration to be offered, paid or received pursuant to either of the
foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent
nationally-recognized investment banking firm selected by Patriot and reasonably
acceptable to FLC, which determination shall be conclusive for all purposes of
this Agreement.
(d) As used herein, a Repurchase Event shall occur if (i) any person or
group (as such terms are defined in the Exchange Act and the rules and
regulations thereunder), other than Patriot or an affiliate of FLC, acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of, or the right to acquire beneficial ownership of, 25% or more of the
then-outstanding shares of Common Stock, (ii) FLC shall have merged or
consolidated with any person, other than Patriot or an affiliate of Patriot, and
shall not be the surviving or continuing corporation of such merger or
consolidation, (iii) any person, other than Patriot or an affiliate of Patriot,
shall have merged into FLC and FLC shall be the surviving corporation, but, in
connection with such merger, the then-outstanding shares of Common Stock have
been changed into or exchanged for stock or other securities of FLC or any other
person or cash or any other property or the outstanding shares of Common Stock
immediately prior to such merger shall after such merger represent less than 50%
of the outstanding shares and share equivalents of the surviving corporation or
(iv) FLC shall have sold or otherwise transferred more than 25% of its
consolidated assets to any person, other than Patriot or an affiliate of
Patriot.
4. Payment and Delivery of Certificates. At any Closing hereunder, (a)
Patriot will make payment to FLC of the aggregate price for the Option Shares so
purchased by wire transfer of immediately available funds to an account
designated by FLC, (b) FLC will deliver to Patriot a stock certificate or
B-8
<PAGE>
certificates representing the number of Option Shares so purchased, registered
in the name of Patriot or its designee, in such denominations as were specified
by Patriot in its notice of exercise, and (c) Patriot will pay any transfer or
other taxes required by reason of the issuance of the Option Shares so
purchased.
A legend will be placed on each stock certificate evidencing Option
Shares issued pursuant to this Stock Option Agreement, which legend will read
substantially as follows:
"The shares of stock evidenced by this certificate have not been
the subject of a registration statement filed under the Securities Act
of 1933, as amended (the "Act"), and declared effective by the
Securities and Exchange Commission. These shares may not be sold,
transferred or otherwise disposed of prior to such time unless First
Lehigh Corporation receives an opinion of counsel acceptable to it
stating that an exemption from the registration provisions of the Act
is available for such transfer."
5. Registration Rights. Upon or after the occurrence of a Triggering
Event and upon receipt of a written request from Patriot, FLC shall prepare and
file as soon as practicable a registration statement under the Securities Act of
1933 (the "Securities Act") with the Securities and Exchange Commission covering
the Option and such number of Option Shares as Patriot shall specify in its
request, and FLC shall use its best efforts to cause such registration statement
to be declared effective in order to permit the sale or other disposition of the
Option and the Option Shares, provided that Patriot shall in no event have the
right to have more than one such registration statement become effective, and
provided further that FLC shall not be required to prepare and file any such
registration statement in connection with any proposed sale with respect to
which counsel to FLC delivers to FLC and to Patriot its opinion to the effect
that no such filing is required under applicable laws and regulations with
respect to such sale or disposition; provided further, however, that FLC may
delay any registration of Option Shares above for a period not exceeding 90 days
in the event that FLC shall in good faith determine that any such registration
would adversely affect an offering or contemplated offering of securities by
FLC. Patriot shall provide all information reasonably requested by FLC for
inclusion in any registration statement to be filed hereunder. In connection
with such filing,
B-9
<PAGE>
FLC shall use its reasonable best efforts to cause to be delivered to Patriot
such certificates, opinions, accountant's letters and other documents as Patriot
shall reasonably request and as are customarily provided in connection with
registration of securities under the Securities Act. FLC shall provide to
Patriot such number of copies of the preliminary prospectus and final prospectus
and any amendments and supplements thereto as Patriot may reasonably request.
All reasonable expenses incurred by FLC in complying with the
provisions of this Section 5, including, without limitation, all registration
and filing fees, reasonable printing expenses, reasonable fees and disbursements
of counsel for FLC and blue sky fees and expenses, shall be paid by FLC.
Underwriting discounts and commissions to brokers and dealers relating to the
Option Shares, fees and disbursements of counsel to Patriot and any other
expenses incurred by Patriot in connection with such filing shall be borne by
FLC. In connection with such filing, FLC shall indemnify and hold harmless
Patriot against any losses, claims, damages or liabilities, joint or several, to
which Patriot may become subject, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any preliminary or final registration statement or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and FLC will reimburse Patriot for any
legal or other expense reasonably incurred by Patriot in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that FLC will not be liable in any case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such preliminary or final registration statement or such amendment or
supplement thereto in reliance upon and in conformity with written information
furnished by or on behalf of Patriot specifically for use in the preparation
thereof. Patriot will indemnify and hold harmless FLC to the same extent as set
forth in the immediately preceding sentence but only with reference to written
information furnished by or on behalf of Patriot for use in the preparation of
such preliminary or final registration statement or such amendment or supplement
thereto; and Patriot will reimburse FLC for any legal or other expense
reasonably incurred by FLC in connection with investigating or
B-10
<PAGE>
defending any such loss, claim, damage, liability or action. Notwithstanding
anything to the contrary contained herein, no indemnifying party shall be liable
for any settlement effected without its prior written consent.
6. Adjustment Upon Changes in Capitalization. In the event of any
change in the Common Stock by reason of stock dividends, split-ups,
recapitalizations, combinations, conversions, divisions, exchanges of shares or
the like, then the number and kind of Option Shares and the Option Price shall
be appropriately adjusted.
7. Filings and Consents. Each of Patriot and FLC will use its
reasonable best efforts to make all filings with, and to obtain consents of, all
third parties and governmental authorities necessary to the consummation of the
transactions contemplated by this Stock Option Agreement. Within 10 days from
the date hereof, Patriot shall file a report of beneficial ownership on Form 13D
with the Securities and Exchange Commission under the Exchange Act which
discloses the rights of Patriot hereunder.
8. Representations and Warranties of FLC. FLC hereby represents and
warrants to Patriot as follows:
(a) Due Authorization. FLC has full corporate power and authority to
execute, deliver and perform this Stock Option Agreement and all corporate
action necessary for execution, delivery and performance of this Stock Option
Agreement has been duly taken by FLC. This Stock Option Agreement constitutes a
legal, valid and binding obligation of FLC, enforceable against FLC in
accordance with its terms (except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar laws of
general applicability relating to or affecting creditors' rights or by general
equity principles).
(b) Authorized Shares. FLC has taken all necessary corporate action to
authorize and reserve for issuance all shares of Common Stock that may be issued
pursuant to any exercise of the Option.
9. Representations and Warranties of Patriot. Patriot hereby represents
and warrants to FLC that Patriot has full corporate power and authority to
execute, deliver and perform this Stock Option Agreement and all corporate
action
B-11
<PAGE>
necessary for execution, delivery and performance of this Stock Option Agreement
has been duly taken by Patriot. This Stock Option Agreement constitutes a legal,
valid and binding obligation of Patriot, enforceable against Patriot in
accordance with its terms (except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar laws of
general applicability relating to or affecting creditors' rights or by general
equity principles).
10. Specific Performance. The parties hereto acknowledge that damages
would be an inadequate remedy for a breach of this Stock Option Agreement and
that the obligations of the parties hereto shall be specifically enforceable.
11. Entire Agreement. This Stock Option Agreement and the Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof.
12. Assignment or Transfer. Patriot may not sell, assign or otherwise
transfer its rights and obligations hereunder, in whole or in part, to any
person or group of persons other than to a wholly-owned subsidiary of Patriot.
Patriot represents that it is acquiring the Option for Patriot's own account and
not with a view to, or for sale in connection with, any distribution of the
Option or the Option Shares. Patriot is aware that neither the Option nor the
Option Shares is the subject of a registration statement filed with, and
declared effective by, the Securities and Exchange Commission pursuant to
Section 5 of the Securities Act, but instead each is being offered in reliance
upon the exemption from the registration requirement provided by Section 4(2)
thereof and the representations and warranties made by Patriot in connection
therewith.
13. Amendment of Stock Option Agreement. By mutual consent of the
parties hereto, this Stock Option Agreement may be amended in writing at any
time, for the purpose of facilitating performance hereunder or to comply with
any applicable regulation of any governmental authority or any applicable order
of any court or for any other purpose.
14. Validity. The invalidity or unenforceability of any provision of
this Stock Option Agreement shall not affect the
B-12
<PAGE>
validity or enforceability of any other provisions of this Stock Option
Agreement, which shall remain in full force and effect.
15. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered personally, by telegram or telecopy, or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
(i) If to FLC, to:
First Lehigh Corporation
1620 Pond Road
Allentown, PA 18104
Attention: Wilbur R. Roat, Director
Telecopy No.: (610) 398-6693
with a copy to:
Duane, Morris & Heckscher, LLP
4200 One Liberty Place
Philadelphia, Pennsylvania 19103-9396
Attention: Kathleen M. Shay, Esquire
Telecopy No.: (215) 979-1020
(ii) If to Patriot, to:
Patriot Bank Corp.
High and Hanover Street
Pottstown, Pennsylvania 19464
Attention: Joseph W. Major, President
and Chief Executive Officer
Telecopy No.: (610) 323-0914
B-13
<PAGE>
with copies to:
Stevens & Lee
One Glenhardie Corporate Center
Suite 202
1275 Drummers Lane
P.O. Box 236
Wayne, PA 19087
Attention: Jeffrey P. Waldron, Esquire
Telecopy No.: (610) 687-1384
or to such other address as the person to whom notice is to be given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
16. Governing Law. This Stock Option Agreement shall be governed by and
construed in accordance with the domestic internal law (but not the law of
conflicts of law) of the Commonwealth of Pennsylvania.
17. Captions. The captions in this Stock Option Agreement are inserted
for convenience and reference purposes, and shall not limit or otherwise affect
any of the terms or provisions hereof.
18. Waivers and Extensions. The parties hereto may, by mutual written
consent, extend the time for performance of any of the obligations or acts of
either party hereto. Each party may waive in writing (i) compliance with any of
the covenants of the other party contained in this Stock Option Agreement and/or
(ii) the other party's performance of any of its obligations set forth in this
Stock Option Agreement.
19. Parties in Interest. This Stock Option Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and, nothing in this
Stock Option Agreement, express or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Stock Option Agreement.
20. Counterparts. This Stock Option Agreement may be executed in two or
more counterparts, each of which shall be
B-14
<PAGE>
deemed to be an original, but all of which shall constitute one and the same
agreement.
21. Expenses. Except as otherwise provided herein, all costs and
expenses incurred by the parties hereto in connection with the transactions
contemplated by this Stock Option Agreement or the Option shall be paid by the
party incurring such cost or expense.
22. Defined Terms. Capitalized terms which are used but not defined
herein shall have the meanings ascribed to such terms in the Agreement.
IN WITNESS WHEREOF, each of the parties hereto, pursuant to resolutions
adopted by its Board of Directors, has caused this Stock Option Agreement to be
executed by its duly authorized officer as of the day and year first above
written.
FIRST LEHIGH CORPORATION
By
------------------------------------
John H. McKeever, Chairman
of the Board and Acting President
PATRIOT BANK CORP.
By
------------------------------------
Joseph W. Major,
President and Chief
Executive Officer
B-15
<PAGE>
ANNEX C
STANDSTILL AGREEMENT
Agreement made this 28th day of July, 1998 by and between Patriot Bank
Corp., a Delaware corporation and registered bank holding company ("Patriot"),
having its principal place of business at High and Hanover Streets, Pottstown,
Pennsylvania 19464 and James L. Leuthe, an individual residing at 3514 Eton
Road, Allentown, Pennsylvania 18104.
Background
Patriot and First Lehigh Corporation, a Pennsylvania corporation and
registered bank holding company ("FLC") have entered into an Agreement and Plan
of Consolidation (the "Agreement") pursuant to which (i) FLC and Patriot will
consolidate into a new Pennsylvania corporation (the "Holding Company"), to be
named Patriot Bank Corp. (the "Consolidation") and, (ii) shareholders of FLC
would receive (A) shares of Holding Company common stock, no par value per share
("Holding Company Common Stock") in exchange for each share of issued and
outstanding FLC common stock, par value $.01 per share ("FLC Common Stock"), (B)
shares of Holding Company Common Stock in exchange for each issued and
outstanding share of FLC Senior Preferred Stock (the "FLC Senior Preferred
Stock") and (C) shares of Holding Company Common Stock in exchange for each
issued and outstanding share of FLC Series A Preferred Stock (the "FLC Series A
Preferred Stock" and together with the FLC Common Stock and the FLC Senior
Preferred Stock, the "FLC Capital Stock") all as more particularly set forth in
the Agreement.
Mr. Leuthe is the Chairman of FLC and the owner of a substantial equity
interest in FLC.
As a condition of Patriot's willingness to execute the Agreement,
Patriot has required Mr. Leuthe to enter into this Standstill Agreement pursuant
to which Mr. Leuthe will agree to certain restrictions on the voting and
disposition of his (i) FLC Capital Stock prior to the Consolidation and (ii)
Holding Company
C-1
<PAGE>
Common Stock after the Consolidation, and certain other conditions and
restrictions, and Mr. Leuthe has agreed to accept such conditions and
restrictions.
Agreement
The parties hereto, intending to be legally bound, hereby agree as
follows:
1. Representations, Warranties and Covenants of Mr. Leuthe.
Mr. Leuthe represents, warrants and covenants as follows:
(a) Mr. Leuthe has full power, right and authority to enter into this
Agreement and to perform all transactions provided for in this Agreement.
(b) Except for shares of FLC Capital Stock pledged to Citizens National
Bank of Slatington to secure a loan in the approximate principal amount of
$600,000 and shares of FLC Capital Stock pledged to Royal Bank of Pennsylvania
to secure a loan in the approximate principal amount of $350,000, Mr. Leuthe
owns free and clear of all liens and restrictions (except such restrictions upon
transfer as may arise under federal or state securities laws as a result of Mr.
Leuthe's status as an "affiliate" of FLC and restrictions imposed by the Federal
Deposit Insurance Corporation ("FDIC"), the Board of Governors of the Federal
Reserve System (the "FRB") or the Pennsylvania Department of Banking ("PDB"))
including without limitation any restrictions set forth in any agreement to
which he may be a party, the following shares of FLC Capital Stock:
(i) seven hundred thousand (700,000) shares of FLC Common Stock;
(ii) no shares of FLC Senior Preferred Stock;
(iii) four hundred thousand (400,000) shares of FLC Series A
Preferred Stock.; and
(iv) no shares of Patriot common stock, no par value per share
("Patriot Common Stock").
C-2
<PAGE>
In addition, Mr. Leuthe represents that he holds no options to acquire shares of
FLC Common Stock and holds no other options to acquire FLC Capital Stock.
(c) Subject to the terms of the FDIC Order (as hereinafter defined),
Mr. Leuthe, in his capacity as Chairman of FLC and in his capacity as a
shareholder of FLC Capital Stock shall use his best efforts to cause the
transactions provided for in the Agreement to be completed. Mr. Leuthe, as a
shareholder, shall be present (in person or by proxy) at all shareholder
meetings FLC holds and his FLC Capital Stock may be counted for the purposes of
determining the presence of a quorum at such meetings. Moreover, subject to the
terms of the FDIC Order, Mr. Leuthe, as a shareholder, shall vote, or cause to
be voted, all FLC Capital Stock beneficially owned by him and having the right
to vote thereon to approve the Agreement at the special meeting of shareholders
of FLC to be held to consider such approval and shall not vote any FLC Capital
Stock in favor of any transaction with any person other than Patriot or aid,
abet or otherwise lend his support to any other person in connection with any
transaction or in connection with a tender offer or exchange offer. In addition,
Mr. Leuthe shall disclose, or permit Patriot and FLC to disclose that he has
entered into this Standstill Agreement and that he supports the Consolidation
and recommends a vote in favor of the Consolidation.
(d) Prior to the completion of the Consolidation, Mr. Leuthe shall not
sell, transfer or otherwise dispose of, or permit the sale, transfer or other
disposition of any FLC Capital Stock. During such period, Mr. Leuthe shall not
engage in any negotiations or initiate discussions with any other party with
respect to any sale, transfer or other disposition of any FLC Capital Stock, and
shall not vote, or permit to be voted, any FLC Capital Stock in favor of any
merger, consolidation, sale of assets, stock or similar transactions involving
FLC or its subsidiary with any party other than Patriot or a subsidiary of
Patriot.
(e) Mr. Leuthe shall file on a timely basis an amendment to his report
on Form 13-D with the Securities and Exchange Commission pursuant to Section
13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), with respect
to the transactions provided for herein and shall provide Patriot with a copy
thereof prior to its filing.
C-3
<PAGE>
2. Representation and Warranties of Patriot.
Patriot represents and warrants that it is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has full power, right and authority to enter into this Standstill
Agreement and to perform all transactions provided for in this Standstill
Agreement. The execution, delivery and performance of this Standstill Agreement
has been duly authorized by all necessary corporate or other action of Patriot.
3. Covenants of Mr. Leuthe.
Prior to June 30, 2013, and subject to the further provisions hereof:
(a) Except as provided pursuant to the Agreement, neither Mr. Leuthe
nor any corporation, entity or other affiliate controlled by Mr. Leuthe
(collectively, the "Leuthe Group"), will, directly or indirectly, acquire any
FLC Capital Stock, Patriot Common Stock or Holding Company Common Stock (except
by way of stock dividends or other distributions or offerings made available to
holders of FLC Capital Stock, Patriot Common Stock or Holding Company Common
Stock generally).
(b) Mr. Leuthe shall take such actions as may be required so that all
Holding Company Common Stock owned by a member of the Leuthe Group are voted for
nominees to the Board of Directors of the Holding Company and, unless the
Holding Company otherwise consents in writing, on all other matters to be voted
on by the holders of Holding Company Common Stock in the manner directed by the
Holding Company. The members of the Leuthe Group, as holders of Holding Company
Common Stock, shall be present, in person or by proxy at all meetings of
shareholders of the Holding Company so that all Holding Company Common Stock
beneficially owned by them may be counted for the purpose of determining the
presence of a quorum at such meetings.
(c) No member of the Leuthe Group shall deposit any Holding Company
Common Stock in a voting trust or subject any Holding Company Common Stock to
any arrangement or agreement with respect to the voting of such Holding Company
Common Stock, except as may otherwise be required by the Federal Deposit
Insurance Corporation ("FDIC") or the terms of this Standstill Agreement.
C-4
<PAGE>
(d) No member of the Leuthe Group shall solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation 14A
under the Exchange Act) in opposition to the recommendation of the majority of
the directors of the Holding Company with respect to any matter.
(e) No member of the Leuthe Group shall join a partnership, limited
partnership, syndicate or other group, or otherwise act in concert with any
other person, for the purpose of acquiring, holding, voting or disposing of
Holding Company Common Stock, or otherwise become a "person" within the meaning
of Section 13(d)(3) of the Exchange Act (in each case other than solely with
members of the Leuthe Group).
(f) Subject to paragraph 4(e), no member of the Leuthe Group shall,
directly or indirectly, offer, sell or transfer any Holding Company Common Stock
without first offering Patriot a right of first refusal in the manner provided
in paragraph 4, except (i) pursuant to a bona fide public offering registered
under the Securities Act of 1933, as amended (the "Act") (provided that no sales
of Holding Company Common Stock are made to any person or related group of
persons who would immediately thereafter, to the knowledge of any member of the
Leuthe Group, own or have the right to acquire Holding Company Common Stock
representing more than 1% of the total combined voting power of all Holding
Company Common Stock then outstanding), and (ii) as the result of any pledge or
hypothecation to a bona fide broker or financial institution to secure a bona
fide loan, or the foreclosure of any lien or encumbrance which may be placed
upon any Holding Company Common Stock (whether voluntarily or involuntarily).
(g) Notwithstanding anything contained herein to the contrary, for the
entire term of this Standstill Agreement, Mr. Leuthe (i) hereby grants, and
directs any party who acts as a record holder of FLC Capital Stock for Mr.
Leuthe to grant, to the Board of Directors of Patriot an irrevocable proxy in
the form attached hereto as Exhibit A to vote all shares of FLC Capital Stock at
any special or regular meeting of shareholders of FLC and (ii) upon completion
of the Consolidation, will grant, and will direct any party who acts as a record
holder for Mr. Leuthe to grant, to the Board of Directors of the Holding Company
an irrevocable proxy in the form attached hereto as Exhibit B to vote all shares
of Holding Company Common Stock at any special or regular meeting of
shareholders of the Holding Company. Each such proxy, in consideration of the
Agreement and
C-5
<PAGE>
the benefit conferred upon Mr. Leuthe thereby, shall be deemed coupled with an
interest. In the event that the terms and provisions of this paragraph 3(g) are
not complied with by any member of the Leuthe Group or any party who acts as a
record holder of FLC Capital Stock on behalf of any member of the Leuthe Group,
then, in addition to any remedy, the Holding Company may have under section 7,
Mr. Leuthe, upon written demand by the Holding Company, shall immediately
contribute or cause to be contributed all Holding Company Common Stock
beneficially owned by Mr. Leuthe to a voting trust, the trustee of which will be
designated by the Holding Company.
(h) Mr. Leuthe shall transfer no shares of FLC Capital Stock to a
broker to be held in street name unless the proposed broker shall be approved by
Patriot or the Holding Company, as the case may be, and such broker, prior to
any transfer shall (A) execute a proxy in favor of the Board of Directors of
Patriot or the Holding Company, as the case may be, and (B) agree in writing to
provide to Patriot or the Holding Company, as the case may be, copies of all
statements delivered to Mr. Leuthe and all trade confirmations delivered to Mr.
Leuthe relating to FLC Capital Stock or Holding Company Common Stock.
4. Right of First Refusal.
To the extent required by paragraph 3(f), any member of the Leuthe
Group, prior to making any offer to sell or transfer Holding Company Common
Stock, shall give the Holding Company the opportunity to purchase such Holding
Company Common Stock in the following manner:
(a) Any member of the Leuthe Group intending to make such an offer,
sale or transfer shall give notice (the "Transfer Notice") to the Holding
Company in writing of such intention, specifying the number of shares of Holding
Company Common Stock proposed to be disposed of and certifying in writing that
such transfer will be an open market sale through a broker acceptable to the
Holding Company.
(b) The Holding Company shall have the right, exercisable by written
notice given by the Holding Company to the party which gave the Transfer Notice
within fifteen (15) business days after receipt of such Transfer Notice to
purchase (or to cause a corporation, entity, person or group designated by the
Holding Company to purchase) all, but not a part of, the Holding Company Common
Stock specified in such Transfer Notice for cash
C-6
<PAGE>
at the mean between the high bid and low asked price for the Holding Company
Common Stock on the Nasdaq Stock Market as of the date of the Transfer Notice.
(c) If the Holding Company exercises its right of first refusal
hereunder, the closing of the purchase of the Holding Company Common Stock with
respect to which such right has been exercised shall take place within thirty
(30) calendar days (or if approval of such purchase is required by the Holding
Company shareholders or any regulatory authority as required by law or pursuant
to any stock exchange rule or policy, within ninety (90) calendar days) after
the Holding Company gives notice of such exercise. Upon exercise of its right of
first refusal, the Holding Company shall be legally obligated to consummate the
purchase contemplated thereby and shall use its best efforts to secure all
approvals required in connection therewith.
(d) If the Holding Company does not exercise its right of first refusal
hereunder within the time specified for such exercise, the party giving the
Transfer Notice shall be free during the period of ninety (90) calendar days
following the expiration of such time for exercise to sell the Holding Company
Common Stock specified in such Transfer Notice in an open market sale through a
broker acceptable to the Holding Company and not knowingly to an affiliate
provided the party giving such Transfer Notice gives written direction to the
broker completing the sale to provide the Holding Company with a copy of any
trade confirmation.
(e) Notwithstanding the foregoing, this Section 4 shall not be
applicable to any sale of shares of Holding Company Common Stock by the Leuthe
Group in an amount not to exceed 20,000 shares per calendar quarter if each sale
or sales are made in open market transactions through a broker designated by the
Holding Company and such broker agrees to give to the Holding Company notice of
any such sale.
5. FDIC Agreement.
The parties acknowledge that Mr. Leuthe is the subject of an order of
the FDIC dated June 26, 1998 (the "FDIC Order") that affects the voting and
disposition of FLC Capital Stock and Holding Company Common Stock. Mr. Leuthe
acknowledges and agrees that the provisions of this Agreement are in addition
to, and not in lieu of the provisions of the FDIC order and Mr. Leuthe shall
C-7
<PAGE>
use his best efforts to obtain the consent of the FDIC to the terms of this
Standstill Agreement.
6. Waiver of Indemnification.
Mr. Leuthe hereby waives any rights he may have under the articles of
incorporation or bylaws of FLC, the certificate of incorporation or bylaws of
Patriot, the articles of incorporation or bylaws of the Holding Company, the
Agreement, the laws of the State of Delaware, the laws of the Commonwealth of
Pennsylvania or any federal law to any indemnification against any action, claim
or liability arising out of, or as a result of his position as an officer or
director of FLC other than indemnification against any action, claim or
liability arising solely out of the approval of the Agreement and the completion
of the transactions contemplated thereby with respect to which Mr. Leuthe shall
be entitled to indemnification as, and to the same extent as, set forth in the
Agreement. Mr. Leuthe also hereby waives any right to advancement of expenses or
any right to common law contribution with respect to any action, claim or
liability as to which he has waived indemnification.
7. Escrow.
(a) Notwithstanding anything contained herein to the contrary or in the
Agreement, upon completion of the Consolidation, Mr. Leuthe shall deposit into
escrow pursuant to a separate escrow agreement to be executed on or before the
closing of the Consolidation (the "Escrow Agreement") by and among Patriot, Mr.
Leuthe and an independent escrow agent determined by Patriot (the "Escrow
Agent"), an amount of Holding Company Common Stock, cash or other securities
equal to (i) $430,000 to secure any obligation now owed or hereafter determined
by the FDIC or any other state or federal regulatory authority to be owed by Mr.
Leuthe to FLC, its subsidiary, or their successors and assigns as a result of a
determination that Mr. Leuthe was not entitled to indemnification or advancement
of expenses in connection with proceedings related to the FDIC Order or any
action or proceeding brought against Mr. Leuthe as a result of any breach of
fiduciary or other duty, or any other tort or breach of contract committed by
Mr. Leuthe (the "Restitution Fund") and (ii) $700,000 of Holding Company Common
Stock, cash or other securities to secure and Mr. Leuthe's obligation under this
Standstill Agreement (the "Collateral Fund"). Except as set
C-8
<PAGE>
forth in paragraphs (b) and (c) below, Mr. Leuthe shall at all times maintain
the balance held in escrow for these purposes at $1,130,000 million or more.
(b) Funds shall be released from the Restitution Fund in accordance
with this Standstill Agreement and the Escrow Agreement upon the later of (i)
five (5) years from the date hereof, in which case the entire amount of the
Restitution Fund shall be returned to Mr. Leuthe, or (ii) the issuance of a
final, binding, unappealable order by the FDIC or a court of competent
jurisdiction either (A) that no amount is due and owing by Mr. Leuthe to FLC,
its subsidiary or its successors and assign, or (B) of the amount due and owing
by Mr. Leuthe to FLC, its subsidiary or their successors and assigns. If an
amount is determined to be due and owing by Mr. Leuthe and such amount equals or
exceeds the Restitution Fund, the Escrow Agent shall pay or deliver the entire
Restitution Fund to the Holding Company. If the amount determined to be due and
owing by Mr. Leuthe is less than the amount escrowed therefor, the Escrow Agent
shall pay or deliver from the Restitution Fund the amount due and owing to the
Holding Company and the difference of the Restitution Fund shall be paid or
delivered to Mr. Leuthe. Notwithstanding the foregoing, in the event FLC (or the
Holding Company as successor to FLC) receives any insurance or other proceeds
from whatever source (including any claim for malpractice against FLC's counsel)
as a result of its claim that payments made to Mr. Leuthe by FLC are covered
under FLC's directors and officers liability policy, the Restitution Fund shall
be reduced, and the Escrow Agent shall pay from the Restitution Fund to Mr.
Leuthe, an amount equal to such insurance proceeds.
(c) Upon receipt of a certificate from Mr. Leuthe accompanied by any
relevant trade confirmation, funds shall be released from the Collateral Fund as
follows:
Number of Holding
Company Shares
Beneficially Owned by Required Amount of
the Leuthe Group Collateral Fund
--------------------- -------------------
400,000 or more $700,000
300,000 - 399,000 600,000
200,000 - 299,000 500,000
C-9
<PAGE>
100,000 - 199,000 400,000
25,000 - 99,000 350,000
Less than 25,000 0
8. Miscellaneous.
(a) Mr. Leuthe on the one hand, and Patriot, on the other, acknowledge
and agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
holding Company, shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Standstill Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state thereof having jurisdiction, in addition to any other remedy to
which Patriot or the Holding Company may be entitled at law or equity.
(b) As used herein, the term "affiliate" includes parent, spouse,
sibling, any child, grandchild, mother-in-law, father-in-law or any spouse of
any of the foregoing and otherwise shall have the meaning set forth in Rule
12b-2 under the Exchange Act and the term "person" shall mean any individual,
partnership, corporation, limited liability company, trust or other entity.
(c) This Standstill Agreement contains the entire understanding of the
parties with respect to the transactions contemplated hereby and this Standstill
Agreement may be amended only by an agreement in writing executed by the parties
hereto.
(d) Descriptive headings are for convenience only and shall not control
or affect the meaning or construction of any provision of this Standstill
Agreement.
(e) For the convenience of the parties, any number of counterparts of
this Standstill Agreement may be executed by the parties hereto and each such
executed counterpart shall be, and shall be deemed to be, an original
instrument.
(f) All notices, consents, requests, instructions, approvals and other
communications provided for herein shall be validly given or made, if in writing
delivered personally or registered mail, postage prepaid, if to:
C-10
<PAGE>
Patriot or the Holding Company:
Patriot Bank Corp.
High and Hanover Streets
Pottstown, PA 19464
Attention: Joseph W. Major, President
Copy To:
Jeffrey P. Waldron, Esquire
Stevens & Lee
1275 Drummers Lane
P.O. Box 236
Wayne, PA 19087-0236
Mr. Leuthe:
James L. Leuthe
3514 Eton Road
Allentown, Pennsylvania 18104
Copy To:
Duane, Morris & Heckscher
4200 Liberty Place
Philadelphia, Pennsylvania 19103
Attention: A. John May, Esquire
(g) This Standstill Agreement shall be binding upon the parties hereto
and their respective heirs, executors, personal representatives, successors and
assigns.
IN WITNESS WHEREOF, the parties have executed this Standstill Agreement
this 28th day of July, 1998.
----------------------------
James L. Leuthe,
individually
PATRIOT BANK CORP.
By___________________________
Joseph W. Major,
President
C-11
<PAGE>
Exhibit A
FIRST LEHIGH CORPORATION
IRREVOCABLE PROXY
Pursuant to the terms of a Standstill Agreement dated July 27, 1998
between James L. Leuthe and Patriot Bank Corp., the undersigned hereby
irrevocably appoints the full Board of Directors of Patriot Bank Corp., with
full powers of substitution, to act as attorneys and proxies for the undersigned
to vote all shares of First Lehigh Corporation Common Stock, Senior Preferred
Stock and Series A Preferred Stock which the undersigned is entitled to vote at
any meeting of shareholders of First Lehigh Corporation. The undersigned
acknowledges that this proxy is coupled with an interest and is therefore
irrevocable until June 30, 2013 as provided in the Standstill Agreement.
----------------------------
James L. Leuthe
July 27, 1998
C-12
<PAGE>
Exhibit B
PATRIOT BANK CORP.
IRREVOCABLE PROXY
Pursuant to the terms of a Standstill Agreement dated July 27, 1998
between James L. Leuthe and Patriot Bank Corp., a Delaware corporation, as
predecessor of Patriot Bank Corp., a Pennsylvania corporation, the undersigned
hereby irrevocably appoints the full Board of Directors of Patriot Bank Corp., a
Pennsylvania corporation, with full powers of substitution, to act as attorneys
and proxies for the undersigned to vote all shares of Patriot Bank Corp. Common
Stock, which the undersigned is entitled to vote at any meeting of shareholders
of Patriot Bank Corp. The undersigned acknowledges that this proxy is coupled
with an interest and is therefore irrevocable until June 30, 2013 as provided in
the Standstill Agreement.
----------------------------
James L. Leuthe
Date:________________
C-13
<PAGE>
ANNEX D
[Form of Fairness Opinion]
July , 1998
Board of Directors
Patriot Bank Corp.
High and Hanover Streets
Pottstown, PA 19464
Members of the Board:
Patriot Bank Corp. ("Patriot") and First Lehigh Corporation ("First
Lehigh") have entered into an Agreement providing for the proposed consolidation
(the "Consolidation") of Patriot and First Lehigh into Patriot Bank Corp., a new
Pennsylvania corporation to be formed upon completion of the Consolidation. The
terms of the Consolidation are set forth in the Agreement and Plan of
Consolidation (the "Agreement") dated July 28, 1998, and provide that the
holders of First Lehigh Common Stock, Senior Preferred Stock and Series A
Preferred Stock receive the exchange ratios (the "First Lehigh Exchange Ratios")
as set forth in Section 1.02 (e)(ii)(A) and (B) of the Agreement. You have
requested our opinion, from a financial point of view, as to the fairness to the
holders of Patriot common stock of the First Lehigh Exchange Ratios to be
offered in the Consolidation.
Janney Montgomery Scott Inc., as part of its investment banking business,
is engaged regularly in the valuation of financial institutions and their
securities in connection with mergers and acquisitions. In addition, in the
ordinary course of our business as a broker-dealer, we may, from time to time,
have a long or short position in, and buy or sell, debt or equity securities of
Patriot or First Lehigh for our own account or for the accounts of our
customers. We are familiar with Patriot, having co-managed Patriot's trust
preferred offering in June 1997, and are acting as financial advisor to Patriot
in rendering this opinion. We will receive a fee from Patriot for rendering this
opinion.
In arriving at our opinion, we have, among other things:
(a) reviewed the historical financial performances, current financial
positions and general prospects of Patriot and First Lehigh;
(b) reviewed the Agreement;
D-1
<PAGE>
(c) reviewed and analyzed historical market prices and trading
activity performance of Patriot and First Lehigh;
(d) reviewed publicly-available information such as annual reports,
SEC filings and research reports;
(e) considered the terms and conditions of the Consolidation between
Patriot and First Lehigh as compared with the terms and
conditions of comparable bank mergers and acquisitions;
(f) discussed with certain members of Patriot's and First Lehigh's
senior management the strategic aspects of the Consolidation,
including estimated potential cost savings and revenue
enhancements;
(g) compared the respective results of operations for Patriot and
First Lehigh with those of certain publicly traded companies
which were deemed relevant to Patriot and First Lehigh;
(h) considered the pro forma effects of the Consolidation on
Patriot's earnings, book value, tangible book value, cash
dividends per share and certain other balance sheet and
profitability ratios of Patriot; and
(i) conducted such other financial analyses, studies and
investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations made or
given by Patriot and First Lehigh, and their respective officers, directors,
auditors, counsel and other agents, and on filings, releases and other
information issued by Patriot and First Lehigh including financial statements,
financial projections, and stock price data as well as certain information from
recognized independent sources. We have not independently verified the
information concerning Patriot and First Lehigh nor other data which we have
considered in our review and, for purposes of the opinion set forth below, we
have assumed and relied upon the accuracy and completeness of all such
information and data, particularly the information relating to asset quality and
the allowance for loan losses. Additionally, we assume that the Consolidation
is, in all respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospects of Patriot and First Lehigh, including the anticipated sale of
performing and nonperforming loans and real estate owned and assumptions
regarding expense savings and revenue enhancements, we have assumed that such
information has been
D-2
<PAGE>
reasonably prepared and reflects the best currently available estimates and
judgments of the managements of Patriot and First Lehigh as to Patriot's and
First Lehigh's most likely future performance. In rendering our opinion, we have
assumed that in the course of obtaining the necessary regulatory approvals for
the Consolidation, and in preparation of the final proxy statement, no
conditions will be imposed that will have a material adverse effect on the
contemplated benefits of the Consolidation to Patriot.
Our opinion is based upon information provided to us by the managements of
Patriot and First Lehigh, as well as market, economic, financial, and other
conditions as they exist and can be evaluated only as of the date hereof and
speaks to no other period. Our opinion pertains only to the financial
consideration of the Consolidation and does not constitute a recommendation to
the Board of Directors of Patriot and does not constitute a recommendation to
Patriot's shareholders as to how such shareholders should vote on the
Consolidation.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the First Lehigh Exchange Ratios are fair to the holders of Patriot
common stock from a financial point of view.
Sincerely,
JANNEY MONTGOMERY SCOTT INC.
D-3
<PAGE>
ANNEX E
July 27, 1998
Board of Directors
First Lehigh Corporation
1620 Pond Road, Suite 300
Allentown, Pennsylvania 18104-2255
Dear Members of the Board:
Set forth herein is Danielson Associates Inc.'s ("Danielson Associates")
independent opinion as to the "fairness" of the offer by the Patriot Bank
Corporation ("Patriot") of Pottstown, Pennsylvania to acquire all of the
outstanding common and senior preferred stock of First Lehigh Corporation
("First Lehigh") of Allentown, Pennsylvania through an exchange of stock with a
value at the time of the offer of about $23.4 million. The "fair" sale value is
defined as the price at which all of the shares of First Lehigh's common and
preferred stock would change hands between a willing seller and a willing buyer,
each having reasonable knowledge of the relevant facts. In opining to the
"fairness" of the offer, it also had to be determined if the Patriot common
stock to be exchanged for First Lehigh's common and preferred stock was "fairly"
valued.
In preparing the opinion, the markets served by First Lehigh have been
analyzed; its business and future prospects have been reviewed; its financial
performance has been compared with banks in the region; and the acquisition
prices of comparable banks have been analyzed. In addition, any unique
characteristics have been considered.
This opinion is based on data supplied by First Lehigh, and relies on some
public information, all of which is believed to be reliable, but the accuracy or
the completeness of such information cannot be guaranteed. The opinion assumes
that there are no significant loan problems beyond what was stated in recent
reports to regulatory agencies.
In determining the "fair" sale value of First Lehigh, the emphasis has been
on prices paid for banks and bank holding companies with similar financial,
structural and market characteristics. These sale prices were then related to
equity capital, also referred to as "book."
In determining the "fairness" of the offer, we compared the Patriot common
stock to be exchanged for First Lehigh's common and preferred stock with the
common stock of other, similar
E-1
<PAGE>
Board of Directors
July 27, 1998
Page 2
bank and thrift holding companies. In so doing, we also compared Patriot's
recent financial performance with these comparable financial institutions.
Based on the foregoing, we are of the opinion on the date hereof that the
offer made by Patriot to acquire all of the common and preferred stock of First
Lehigh pursuant to the merger agreement is "fair" from a financial point of view
to First Lehigh and its shareholders.
Respectfully submitted,
Arnold G. Danielson
Chairman
Danielson Associates Inc.
AGD:msf
E-2
<PAGE>
ANNEX F
SECTION 1930 OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988
Section 1930. Dissenters rights.
(a) General rule.--If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan of merger
or consolidation objects to the plan of merger or consolidation and complies
with the provisions of Subchapter D of Chapter 15 [FN 1] (relating to dissenters
rights), the shareholder shall be entitled to the rights and remedies of
dissenting shareholders therein provided, if any. See also section 1906(c)
(relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only.--Except as otherwise provided pursuant
to section 1571(c) (relating to grant of optional dissenters rights), Subchapter
D of Chapter 15 shall not apply to any of the shares of a corporation that is a
party to a merger or consolidation pursuant to section 1924(b)(1)(i) (relating
to adoption by board of directors).
(c) Cross references.--See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
- --------------------
1 15 Pa. C.S.A. Section 1571 et seq.
F-1
<PAGE>
SUBCHAPTER D OF CHAPTER 15 OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988
Subchapter D.-Dissenters Rights
Section 1571. Application and effect of subchapter.
(a) General rule.--Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special
treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
F-2
<PAGE>
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting at
which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to
be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the case
of:
(i) Shares converted by a plan if the shares are not converted
solely into shares of the acquiring, surviving, new or other
corporation or solely into such shares and money in lieu of fractional
shares.
(ii) Shares of any preferred or special class unless the
articles, the plan or the terms of the transaction entitle all
shareholders of the class to vote thereon and require for the adoption
of the plan or the effectuation of the transaction the affirmative
vote of a majority of the votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares, property
or assets of another corporation by the issuance of shares, obligations or
otherwise, with or without assuming the liabilities of the other corporation and
with or without the intervention of another corporation or other person, shall
not be entitled to the rights and remedies of dissenting shareholders provided
in this subchapter regardless of the fact, if it be the case, that the
acquisition was accomplished by the issuance of voting shares of the corporation
to be outstanding immediately after the acquisition sufficient to elect a
majority or more of the directors of the corporation.
F-3
<PAGE>
(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.
(d) Notice of dissenters rights.--Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) a copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
Section 1572. Definitions.
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation
for the purposes of this subchapter. The successor corporation in a
division shall have sole responsibility for payments to dissenters and
other liabilities under this subchapter except as otherwise provided in the
plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this
F-4
<PAGE>
subchapter and who has performed every act required up to the time involved
for the assertion of those rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all
of the circumstances, taking into account all relevant factors including
the average rate currently paid by the corporation on its principal bank
loans.
Section 1573. Record and beneficial holders and owners.
(a) Record holders of shares.--A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares
beneficially owned by any one person and discloses the name and address of the
person or persons on whose behalf he dissents. In that event, his rights shall
be determined as if the shares as to which he has dissented and his other shares
were registered in the names of different shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
Section 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value of his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any
F-5
<PAGE>
right to payment of the fair value of his shares under this subchapter.
Neither a proxy nor a vote against the proposed corporate action shall
constitute the written notice required by this section.
Section 1575. Notice to demand payment.
(a) General rule.--If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
beneficial shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
Section 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act.--A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not
represented by certificates, the business corporation may
F-6
<PAGE>
restrict their transfer from the time of receipt of demand for payment
until effectuation of the proposed corporate action or the release of
restrictions under the terms of section 1577(a) (relating to failure to
effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
Section 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action.--Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment.--When uncertified shares have been
released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
F-7
<PAGE>
(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those which the original dissenter had
after making demand for payment of their fair value.
Section 1578. Estimate by dissenter of fair value of shares.
(a) General rule.--If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) (relating to payment of fair value of shares) and the
dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
Section 1579. Valuation proceedings generally.
(a) General rule.--Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares);
F-8
<PAGE>
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
Section 1580. Costs and expenses of valuation proceedings.
(a) General rule.--The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally) including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are parties
and whose action in demanding supplemental payment under section 1578 (relating
to estimate by dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.
F-9
<PAGE>
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses arc assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefitted.
F-10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Pennsylvania law provides that a Pennsylvania corporation may indemnify
directors, officers, employees and agents of the corporation against liabilities
they may incur in such capacities for any action taken or any failure to act,
whether or not the corporation would have the power to indemnify the person
under any provision of law, unless such action or failure to act is determined
by a court to have constituted recklessness or willful misconduct. Pennsylvania
law also permits the adoption of a bylaw amendment, approved by shareholders,
providing for the elimination of a director's liability for monetary damages for
any action taken or any failure to take any action unless (1) the director has
breached or failed to perform the duties of his office and (2) the breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
The bylaws of First Lehigh provide for (1) indemnification of directors,
officers, employees and agents of the registrant and its subsidiaries and (2)
the elimination of a director's liability for monetary damages, to the fullest
extent permitted by Pennsylvania law.
As authorized by Section 145 of the General Corporation Law of the State of
Delaware, each director and officer of Patriot may be indemnified by Patriot
against expenses (including attorney's fees, judgments, fines and amounts paid
in settlement) actually and reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceedings in which
he is involved by reason of the fact that he is or was a director or officer of
Patriot if he acted in good faith and in a manner that he reasonably believed to
be in or not opposed to the best interests of Patriot and, with respect to any
criminal action or proceeding, if he had no reasonable cause to believe that his
conduct was unlawful. If the legal proceeding, however, is by or in the right of
Patriot, the director or officer may not be indemnified in respect of any claim,
issue or matter as to which he shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to Patriot unless a
court determines otherwise.
Article Eleventh of the Certificate of Incorporation of Patriot provides
that, to the fullest extent permitted by law, directors of Patriot will not be
liable for monetary damages to Patriot or its stockholders for breaches of their
fiduciary duties.
II-1
<PAGE>
Directors and officers of each of Patriot and First Lehigh are also insured
against certain liabilities for their actions, as such, by insurance policies
obtained by Patriot and First Lehigh.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
2.1 Agreement and Plan of Consolidation dated as of July 28, 1998,
between Patriot and First Lehigh (included as Annex A to the
Proxy Statement/Prospectus). Schedules are omitted; Patriot and
First Lehigh agree to furnish copies of such schedules to the
Commission upon request.
2.2 Stock Option Agreement dated July 28, 1998, between Patriot and
First Lehigh (included as Annex B to the Proxy Statement/
Prospectus).
2.3 Standstill Agreement dated July 28, 1998, between Patriot and
James L. Leuthe (included as Annex C to the Proxy Statement/
Prospectus).
3.1 Form of Articles of Incorporation of the Holding Company
(included as Exhibit A to Exhibit 5 to Annex A to the Proxy
Statement/Prospectus).
3.2 Form of Bylaws of the Holding Company (included as Exhibit B to
Exhibit 5 to Annex A to the Proxy Statement/Prospectus).
5. Opinion of Stevens & Lee re: Validity.*
8. Form of opinion of Stevens & Lee re: tax matters.*
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Stevens & Lee (contained in Exhibit 5).*
23.3 Consent of Stevens & Lee.*
II-2
<PAGE>
23.4 Consent of Janney Montgomery Scott Incorporated.*
23.5 Consent of Danielson Associates Inc.*
23.6 Consent of Parente, Randolph, Orlando, Carey & Associates.
24.1 Powers of Attorney of Directors and Officers (included on
signature page hereof).
99.1 Form of Opinion of Janney Montgomery Scott Incorporated (included
as Annex D to Proxy Statement/Prospectus).
99.2 Form Opinion of Danielson Associates Inc. (included as Annex E to
Proxy Statement/Prospectus).
99.3 Form of Proxy for the Special Meeting of Shareholders of Patriot.
99.4 Form of Proxy for the Special Meeting of Shareholders of First
Lehigh.
99.5 Question and Answer Brochure.*
- -------------
* To be filed by Amendment
(b) Financial Statement Schedules.
None required.
Item 22. Undertakings.
(a) Each undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-3
<PAGE>
(ii) To reflect in the prospectus any fact or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Each undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) (1) Each undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
II-4
<PAGE>
(2) Each registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the bylaws of the registrant, or otherwise, each
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(e) Each undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) Each undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pottstown, Commonwealth
of Pennsylvania, on September 15, 1998.
Patriot Bank Corp
----------------------------------
(Registrant)
By /s/ Joseph W. Major
-------------------------------
Joseph W. Major,
President and Chief Executive Officer
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph W. Major, Richard A. Elko and Jeffrey P.
Waldron, Esquire, and each of them, his true and lawful attorney-in-fact, as
agent with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacity, to sign any or all amendments to
this Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as they might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Joseph W. Major President, September 15, 1998
- -------------------------- Chief Executive
Joseph W. Major Officer, Director
/s/ James B. Elliot Chairman, September 15,1998
- -------------------------- Director
James B. Elliot
/s/ James A. Bentley, Jr. Director September 15, 1998
- --------------------------
James A. Bentley, Jr.
/s/ John H. Diehl Director September 15, 1998
- --------------------------
John H. Diehl
II-6
<PAGE>
/s/ Samuel N. Landis Director September 15, 1998
- --------------------------
Samuel N. Landis
/s/ Leonard A. Huff Director September 15, 1998
- --------------------------
Leonard A. Huff
/s/ Larry V. Thren Director September 15, 1998
- --------------------------
Larry V. Thren
/s/ Richard A. Elko Chief Financial September 15, 1998
- -------------------------- Officer (Chief
Richard A. Elko Accounting
Officer)
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Allentown, Commonwealth
of Pennsylvania, on September 16, 1998.
First Lehigh Corporation
------------------------------
(Registrant)
By: Wilbur R. Roat
--------------------------
Wilbur R. Roat
President and Chief
Executive Officer
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wilbur R. Roat, Kashmira Lodaya and Kathleen M.
Shay, Esquire, and each of them, his true and lawful attorney-in-fact, as agent
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacity, to sign any or all amendments to this
Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as they might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact AND AGENTS, OR THEIR SUBSTITUTE OR SUBSTITUTES, May
LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
Signature Title Date
- --------- ----- ----
/s/ Wilbur R. Roat President, September 16, 1998
- -------------------------- Chief Executive
Wilbur R. Roat Officer and
Director
- -------------------------- Director September __, 1998
Stephen M. Alinikoff
/s/ Peter Barter Director September 16, 1998
- --------------------------
Peter Barter
/s/ Robert B. Colfer Director September 16, 1998
- -------------------------
Robert B. Colfer
II-8
<PAGE>
/s/ Vincent Dieter Director September 16, 1998
- --------------------------
Vincent Dieter
/s/ Charles D. Flack, Jr. Director September 16, 1998
- --------------------------
Charles D. Flack, Jr.
/s/ Harry J. Lentz Director September 16, 1998
- --------------------------
Harry J. Lentz
/s/ John H. McKeever Chairman, September 16, 1998
- -------------------------- Director
John H. McKeever
/s/ Kashmira Lodaya Chief Financial September 16, 1998
- -------------------------- Officer (Principal
Kashmira Lodaya Accounting Officer)
II-9
<PAGE>
EXHIBIT INDEX
Number Description
2.1 Agreement and Plan of Consolidation dated as of June 28, 1998,
between Patriot and First Lehigh (included as Annex A to the Proxy
Statement/Prospectus). Schedules are omitted; Patriot and First
Lehigh agree to furnish copies of such schedules to the Commission
upon request.
2.2 Stock Option Agreement dated June 28, 1998, between Patriot and
First Lehigh (included as Annex B to the Proxy Statement/
Prospectus).
2.3 Standstill Agreement dated July 28, 1998, between Patriot and
James L. Leuthe (included as Annex C to the Proxy Statement/
Prospectus).
3.1 Form of Articles of Incorporation of the Holding Company (included
as Exhibit A to Exhibit 5 to Annex A to the Proxy
Statement/Prospectus).
3.2 Form of Bylaws of the Holding Company (included as Exhibit B to
Exhibit 5 to Annex A to the Proxy Statement/Prospectus).
5. Opinion of Stevens & Lee re: Validity.*
8. Form of opinion of Stevens & Lee re: tax matters.*
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Stevens & Lee (contained in Exhibit 5).*
23.3 Consent of Stevens & Lee.*
23.4 Consent of Janney Montgomery Scott Incorporated.*
23.5 Consent of Danielson Associates Inc.*
II-10
<PAGE>
23.6 Consent of Parente, Randolph, Orlando, Carey & Associates.
24.1 Powers of Attorney of Directors and Officers (included on
signature page hereof).
99.1 Form of Opinion of Janney Montgomery Scott Incorporated (included
as Annex D to Proxy Statement/Prospectus).
99.2 Form of Opinion of Danielson Associates Inc., (included as Annex E
to Proxy Statement/Prospectus).
99.3 Form of Proxy for the Special Meeting of Shareholders of
Patriot.
99.4 Form of Proxy for the Special Meeting of Shareholders of
First Lehigh.
99.5 Question and Answer Brochure.*
- ------------
* To be filed by Amendment
II-11
Exhibit 23.1
The Board of Directors
of Patriot Bank Corp.
We have issued our report dated January 21, 1998 accompanying the
consolidated financial statements of Patriot Bank Corp. and Subsidiaries
appearing in the 1997 Annual Report of the company to its stockholders included
in The Annual Report on Form 10-K for the year ended December 31, 1997 which are
included or incorporated by reference in the Joint Proxy Statement/Prospectus.
We consent to the inclusion or incorporation by reference in this Joint
Proxy Statement/Prospectus of the aforementioned report and to the use of our
name as it appears under the caption "Experts".
/s/ Grant Thornton LLP
- --------------------------
Philadelphia, Pennsylvania
September 25, 1998
EXHIBIT 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
of First Lehigh Corporation:
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of our report dated February 3, 1998, relating to the consolidated
balance sheet of First Lehigh Corporation and Subsidiary as of December 31, 1997
and 1996 and the related consolidated statements of income, changes in
shareholder's investment and cash flows for each of the years ended December 31,
1997 and 1996. In addition, we consent to the reference to our Firm under the
caption "Experts" in the aforementioned registration statement.
/s/ Parente, Randolph, Orlando, Carey & Associates
- --------------------------------------------------
Allentown, Pennsylvania
September 28, 1998
Exhibit 99.3
PATRIOT BANK CORP.
Special Meeting of Shareholders -
______________________, 1998 at ______ __.m., Local Time
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned shareholder of Patriot Bank Corp. ("Patriot") hereby
appoints [_______________________________ and _____________________________] the
proxies of the undersigned (each with power of substitution and with all powers
the undersigned would possess if personally present) to vote at the Special
Meeting of Shareholders of Patriot to be held on _________________, 1998, and at
any adjournment or postponement thereof (the "Meeting"), all the shares of
Common Stock of Patriot which the undersigned would be entitled to vote on the
following proposals more fully described in the Joint Proxy Statement/Prospectus
dated _________________, 1998 for the Meeting in the manner specified and in the
discretion of the named proxies on any other business that may properly come
before the Meeting.
-----------------------
Please indicate on the reverse side of this card how your stock is to
be voted. Unless you specifically direct otherwise, the shares represented by
this proxy will be voted "FOR" the following proposals.
(continued and to be signed on reverse side)
The DIRECTORS recommend a vote FOR
Approval and adoption of the Agreement and Plan of Consolidation, dated
as of July 28, 1998 (the "Agreement"), relating to the consolidation of
Patriot and First Lehigh Corporation.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Approval of the proposal to adjourn the Meeting, if necessary, in the
event there are not sufficient votes at the time of the Meeting to
approve the Agreement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
<PAGE>
NOTE: Your signature should
appear as your name appears
hereon. When shares are
held by joint tenants, both
should sign. When signing
as attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by the
President or other
authorized officer. If a
partnership, please sign in
partnership name by
authorized person.
Dated:_______________________, 1998
-----------------------------------
(Signature)
-----------------------------------
(Signature if held jointly)
Exhibit 99.4
FIRST LEHIGH CORPORATION
Special Meeting of Shareholders -
______________________, 1998 at 11:00 a.m., Local Time
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned shareholder of First Lehigh Corporation
("First Lehigh") hereby appoints Wilbur R. Roat and John H. McKever, and each or
either of them, the proxies of the undersigned (each with power of substitution
and with all powers the undersigned would possess if personally present) to vote
at the Special Meeting of Shareholders of First Lehigh to be held on
_________________, 1998, and at any adjournment or postponement thereof (the
"Meeting"), all the shares of Common Stock, Series A Preferred Stock and Senior
Preferred Stock of First Lehigh which the undersigned would be entitled to vote
on the following proposals more fully described in the Joint Proxy Statement/
Prospectus dated _________________, 1998 for the Meeting in the manner
specified.
-----------------------
Please indicate on the reverse side of this card how your
stock is to be voted. Unless you specifically direct otherwise, the shares
represented by this proxy will be voted "FOR" the following proposals.
(continued and to be signed on reverse side)
The DIRECTORS recommend a vote FOR
Approval and adoption of the Agreement and Plan of Consolidation, dated
as of July 28, 1998 (the "Agreement"), relating to the consolidation of
First Lehigh and Patriot Bank Corp.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Approval of the proposal to adjourn the Meeting, if necessary, in the
event there are not sufficient votes at the time of the Meeting to
approve the Agreement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
<PAGE>
In their discretion, the
proxies are authorized to
vote on any other business
that may properly come
before the Meeting.
NOTE: Your signature should
appear as your name appears
hereon. When shares are
held by joint tenants, both
should sign. When signing
as attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by the
President or other
authorized officer. If a
partnership, please sign in
partnership name by
authorized person.
Dated:_______________________, 1998
-----------------------------------
(Signature)
-----------------------------------
(Signature if held jointly)
