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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 33-71712
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FIRST LEHIGH CORPORATION
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(Exact name of small business issuer in its charter)
Pennsylvania 2318479
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1620 Pond Road, Allentown, Pennsylvania 18104
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (610) 398-6660
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Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act: None.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes X . No .
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [N/A]
State issuer's revenues for its most recent fiscal year: $7,679,000
The aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant as of March 21, 1997 is $3,551,800 based upon a
per share average bid and actual prices of $5.00 on such date.
State the number of shares outstanding of each of the Registrant's classes
of common stock as of the latest practicable date: 2,000,000 shares of Common
Stock, par value $.01 per share, as of March 21, 1997.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one): Yes . No X .
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Part I
Item 1. Description of Business.
(a) Business Development.
First Lehigh Corporation (the "Company") was incorporated under
Pennsylvania law in 1982 and is registered as a bank holding company under the
Bank Holding Company Act of 1956 (the "Holding Company Act"). The Company
provides financial and managerial resources and services to, and coordinates and
evaluates the activities of, First Lehigh Bank (the "Bank") and the Bank's
subsidiaries. Through the Bank, the Company 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 December 31, 1996, the Company had total assets of $110.3 million
and total deposits of $95.9 million.
In recent years, the financial condition, results of operations and
business of the Company and the Bank have been adversely affected by the adverse
markets for real estate and economic conditions in its market areas. The Company
and the Bank have also consented to certain regulatory agreements that have
established certain requirements, including an increased regulatory capital
requirement for the Bank, generally intended to enhance the financial condition
and operations of the Company and the Bank.
The Bank experienced financial difficulties in the early 1990's that
resulted from problems in loan administration and controls and inadequacies in
the Bank's internal loan review functions. In order to take steps to correct
such problems, the Bank has initiated numerous actions.
The 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 the Bank reviews all loans having a principal balance in excess of
$50,000 on a quarterly basis to determine whether the allowance for loan losses
is adequate. The Bank has also allocated additional staff to conduct such loan
reviews. The 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. The Bank has significantly reduced the Bank's
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 the Bank's policy for appraisals of properties held as Foreclosed
Assets to be periodically updated. The Bank has improved the appraisal process
by pre-qualifying all appraisers from prepared lists of those appraisers who are
acceptable to the Bank, with respect to which the Bank has been assisted by new
certification requirements for appraisers under state law.
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The 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.
(b) Business of the Company.
First Lehigh Bank
The 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 Federal Deposit Insurance Corporation (the "FDIC")
to the extent provided by law. The Bank is a Pennsylvania banking institution
under the supervision of the Pennsylvania Department of Banking (the
"Department") and the FDIC.
The Bank maintains its principal executive offices in Allentown, Lehigh
County, Pennsylvania, with five banking offices located in Pennsylvania. The
Bank's five branches are located in Walnutport and Cherryville, Northampton
County, Allentown and Bethlehem, Lehigh County, and Quakertown, Bucks County. In
January 1997, the Bank received permission from the Department to open a branch
in Allentown, Lehigh County.
Lending Activity of the Bank
The 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. The 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. The Bank makes commercial
loans to a wide variety of service, retail, distribution and manufacturing
companies. In the past the Bank has had a concentration of loans to real estate
developers/speculators. The Bank has significantly reduced this concentration.
In general, the Bank requires collateral on all commercial loans.
Collateral is in the form of real estate, either residential or commercial,
cash, marketable securities, accounts receivable, inventory, equipment and other
fixed assets. The Bank generally does not make loans based primarily on the
accounts receivable or inventory of a business. In general, the 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. The 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 the Bank's loan.
Commercial mortgages that have an adjustable rate feature are based
upon the base interest rate of the Bank and, in general, do not have interest
rate caps or floors. The Bank does not offer negative amortization loans. As
structured, adjustable rate commercial mortgages of
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the 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 the Bank's funding costs to a material extent.
In addition to commercial loans, the 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.
The Bank makes residential first mortgage loans for the acquisition of homes and
refinancings of mortgages in the Bank's primary market area. The Bank offers
adjustable rate residential mortgages. In general, the 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 the 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 the Bank. Loans between $50,000 and $150,000 are approved by the
officers' loan committee and reported to the full Board of Directors of the
Bank. All loans approved by the officers' loan committee are reported to the
full Board of Directors of the Bank on a monthly basis.
Non-Banking Subsidiaries
The Company's other indirect subsidiaries are six corporations wholly
owned by the Bank, a limited partnership of which the Bank holds a 49% equity
interest and a corporation of which the Bank has a 50% ownership interest that
is a general partner of the aforementioned limited partnership. These
subsidiaries primarily own real estate that is leased to the Bank.
Competition
The Bank competes actively with other Lehigh Valley area commercial
banks, many of which have assets substantially greater than those of the Bank,
as well as with major banking and financial institutions headquartered
elsewhere. The 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 the Company and the 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.
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Bank Holding Companies. The Company is registered as a "bank holding
company" under the Holding Company Act. As a bank holding company, the Company
is subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") and is required to file with the Federal Reserve
Board an annual report and such additional information as the Federal Reserve
Board may require pursuant to the Holding Company Act. The Federal Reserve Board
will also make examinations of the Company and its subsidiaries. The Federal
Reserve Board has the authority to issue cease-and-desist orders against a bank
holding company and its non-bank subsidiaries if the Board 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 Holding Company Act
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 Federal Reserve Board, 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 Federal
Reserve Board 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.
Federal Reserve Board approval may be required before the Company or
its non-bank subsidiaries, if any, may begin to engage in any such activities
and before any such businesses may be acquired. The Federal Reserve Board 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 Holding Company Act and the Federal Reserve
Board'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 Holding Company Act requires the prior approval of the Federal
Reserve Board 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.
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The Holding Company Act further provides that the Federal Reserve Board shall
not approve any such acquisition, merger or consolidation that would have
anticompetitive effects. The Holding Company Act 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 will be eliminated.
Source of Strength Policy. Under the Federal Reserve Board's "source of
strength" policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances in which it might not do so absent such policy. The legality and
scope of this policy of the Federal Reserve Board is unclear in light of recent
judicial precedent. Nevertheless, the Company has sought to act as a source of
strength to the Bank in recent periods and will continue to seek to act as a
source of strength to the Bank.
Banks. The Bank is a Pennsylvania-chartered bank subject to the
supervision of, and is regularly examined by, the FDIC and the Department.
As a state-chartered commercial bank, the Bank is subject to the
applicable provisions of the Pennsylvania Banking Code of 1965, as amended (the
"Banking Code"), and the regulations of the Department adopted thereunder. The
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 the 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 Internal Revenue Code of 1986, 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 the 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.
The 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,
the Bank must transfer at least 10% of its net
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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.
The 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 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. The Bank is subject to examinations
from time to time by the FDIC. The Bank is not a member of the Federal Reserve
System.
The Federal Reserve Board 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 Federal Reserve Board.
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 Federal Reserve Board 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 the Bank. In particular, were the Bank in the future to
seek to acquire and own a single thrift institution (although the 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 the 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, undercapitalized, significantly
undercapitalized and critically undercapitalized). In the event an institution's
capital deteriorates to the "undercapitalized" category or below, FDICIA
prescribes an increasing
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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. The 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 Federal Reserve Board. 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 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 the Bank to its and the
Company'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 the Bank
and regular
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reporting of such transactions by insiders. The FDIC also requires the 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
Federal Deposit Insurance Act (the "FDIA"), as amended by FDICIA, generally
limits the activities and equity investments of an FDIC-insured, state-chartered
bank, such as the 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 the Bank's payments into the Bank Insurance Fund ("BIF") of the FDIC.
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 1980's as part of the government's savings and loan bailout.
The law provides that BIF assessments must be set at a rate equal to one-fifth
of the Savings Institution Insurance Fund ("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 the 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 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 the 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 Federal Reserve
Board and the FDIC. An important function of the Federal Reserve Board 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 Federal Reserve Board requires all depository institutions, such as
the Bank, to maintain reserves against their net transaction accounts (primarily
NOW, Super NOW and
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checking accounts) and non-personal time deposits. As of January 1996, reserves
of 3% must be maintained against net transaction accounts of $47.7 million or
less, except that no reserves are required against the first $4.3 million of net
transaction accounts, and reserves of 10% must be maintained against net
transaction accounts in excess of $47.7 million. No reserves are currently
required against non-personal time deposits. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board 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 the
Bank cannot be predicted.
Interstate Banking Legislation. The Interstate Banking Act will allow
federal regulators, beginning in June 1997, 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 will also allow 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.
Employees
As of December 31, 1996, the Company and its subsidiaries had 54
employees, including 43 full-time employees. The Company provides a variety of
employment benefits and considers its relationships with its employees to be
satisfactory.
Item 2. Properties.
The principal executive offices of the Company and the Bank consist of
7,190 square feet of space in an office building located in Allentown,
Pennsylvania. The Bank leases this office space from an affiliate of the Company
under a lease expiring in October 2010 providing for an average monthly rental
payment of $23,657 and $22,837 for 1996 and 1997, 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 the Bank as master lessee.
The Bank subleases a portion of the building to a third party under a lease
expiring in December 1997 providing for monthly rental payments of $9,784. The
sublessee has the right to extend the lease for two successive three- and
five-year periods at monthly rental payments of $8,633 and $10,359,
respectively. The Bank has subleased another portion of the building to two
parties and
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has achieved substantial occupancy, which reduces its carrying costs. The
property is encumbered by a mortgage with an outstanding balance of $2,190,000.
The Bank is a participant in this mortgage to the extent of $1,095,000.
The Bank leases the Walnutport and Quakertown branch buildings from
subsidiaries pursuant to open-ended oral leases, which provide for monthly
rental payments of $2,000 each. The Cherryville branch building is owned
directly by the Bank. There are no mortgages or other encumbrances on these
properties. The Bank leases the Allentown and Bethlehem branch buildings from
third parties. The Bethlehem lease will expire in August 1997 and provides for
monthly rental payments of $2,479. The Allentown lease will expire in February
1997 and provides for monthly rental payments of $4,665; the Bank is currently
in discussions with the landlord's representative regarding future lease terms.
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 Company considers its and the Bank's offices, branches and
equipment to be modern, well-maintained and adequate for their operations.
Item 3. Legal Proceedings.
(a) Summary of 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 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 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, the Bank is required 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. The
Bank must provide the Department, with a quarterly report detailing the
maintenance of a 6.5% Tier I capital ratio and a fully-funded loan loss reserve.
As of December 31, 1996, the Bank's Tier I capital ratio was 10.70%. The Bank is
required to maintain a formal program to review the adequacy of the Bank's
allowance for loan and lease
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losses. The 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) the 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) the 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 the Bank on any
extension of credit, or portion thereof, which has been charged off the books of
the 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
advancement of funds by the Bank for the sole purpose of maintaining or
protecting the Bank's real estate collateral if the failure to extend such
credit would otherwise be substantially detrimental to the best interests of the
Bank; (iii) the 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 the 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 the 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 the 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 the Bank's failure to
extend further credit to a classified borrower would be substantially
detrimental to the best interests of the Bank, which determination must be
evidenced in writing in the applicable loan files; and (iv) the 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) the 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) the 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.
-11-
<PAGE>
Reporting and Other Requirements
Other affirmative measures required to be taken by the Bank under the
Pennsylvania Order are as follows: (i) the Bank is required to submit quarterly
progress reports, no later than 30 days following the last day of each calendar
quarter; (ii) the Bank must comply with all state and federal laws that relate
to the operation of the Bank; (iii) the 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 the 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
The Company believes that it and the Bank are currently in compliance
with the Pennsylvania Order. 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 2% by February 22, 1997. As of
December 31, 1996, this ratio was 1.97%, and as of February 22, 1997, this ratio
was 0.56%. Additionally, the Order requires the 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 loan and lease losses by February 22, 1997, with further
reductions thereafter. As of December 31, 1996, this ratio was 49.65%, and as of
February 22, 1997, this ratio was 43.36%. 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, 1996 this ratio was 10.70%
and the Bank's loan loss reserve was fully funded.
The Memorandum of Understanding
Capital Requirements and Dividend Restrictions
The Memorandum of Understanding requires the Bank to maintain its Tier
I capital at an amount equal to or greater than 6.0% of the Bank's adjusted
total assets. During the term of the Memorandum of Understanding, the 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%.
-12-
<PAGE>
Credit Limitations and Restrictions
Under the terms of the Memorandum of Understanding, the 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 the Bank on any
extension of credit, or portion thereof, which has been charged off the books of
the Bank. The Bank is also prohibited from extending credit to, or for the
benefit of, any borrower who is obligated in any manner to the Bank on any
extension of credit that has been classified, in whole or in part, as a result
of the examination of the Bank as of June 30, 1995. These prohibitions will not
apply if the Bank determines that failure to extend further credit would be
substantially detrimental to the institution.
Reporting and Other Requirements
The 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." The Bank was required to submit a Classified Asset Reduction Plan to
the FDIC by May 29, 1996. Also, the Bank was 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. The 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. The Bank is in compliance with these
requirements of the Memorandum of Understanding.
Status of Compliance with the Memorandum of Understanding
The Bank is currently in compliance with the requirements of the
Memorandum of Understanding. As of December 31, 1996 the Bank's Tier I capital
ratio was 10.70%, which is greater than the 6.0% ratio required by the
Memorandum of Understanding. The 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, the Company is subject to the
following requirements: (i) the Board of Directors of the Company was required
to establish a compliance committee consisting of three directors who were not
officers or principal shareholders of the Company, which would be responsible
for monitoring and coordinating the Company's adherence to the Federal Reserve
Agreement and submit quarterly progress reports to the Company's Board of
Directors; (ii) the Company 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
-13-
<PAGE>
of the Company was required to conduct a review of the functions and performance
of the officers of the Company and the Bank and forward its written findings and
conclusions along with a written description of proposed management or
operational changes; (iv) the Company was required to submit a capital plan; (v)
the Company 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) the Company may not incur any additional debt
without the written approval of the Federal Reserve Bank and the Department;
(vii) the Company was required to develop written procedures to strengthen and
maintain in a satisfactory manner its records and audit functions; and (viii)
the Company and the 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, the
Company believes that it is currently in substantial compliance with the Federal
Reserve Agreement. The Company received permission from the Federal Reserve Bank
to issue the shares of Senior Preferred Stock in lieu of accumulated dividends
on its outstanding shares of Senior Preferred Stock for the periods ending
December 31, 1994 and December 31, 1995.
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 the Company
and the Bank and civil monetary penalties, among other things. For example, if
the Company or the 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 the 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 the Bank.
(b) Other Legal Proceedings
The Company, the Bank and two of the Company's other subsidiaries are
also defendants in an action commenced on March 13, 1992 in the Court of Common
Pleas of Lehigh County, Pennsylvania, and brought by persons who were limited
partners in the limited partnership that owns the building in which the
Company's and the Bank's executive offices are located. The plaintiffs in this
lawsuit also operated a restaurant on the first floor of that building. The
plaintiffs allege claims for damages in excess of $50,000 against the Bank
relating to alleged bidding process irregularities, faulty building construction
and wrongful exclusion from partnership affairs. The Bank has filed a
counterclaim for lost rents. Pleadings in the case are closed. The Company
believes that it has meritorious defenses to these claims and that the ultimate
resolution of the pending proceedings will not have a material adverse effect on
the Company's or the Bank's results of operations, financial condition or
liquidity. In the opinion of management, there
-14-
<PAGE>
are no other proceedings pending that, if determined adversely against the
Company or any subsidiary, would be material in relation to the Company's
financial condition, nor are there any proceedings pending other than ordinary
routine litigation, except for the litigation and regulatory enforcement actions
described above.
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 "Notices") against James L. Leuthe, Chairman of the Board and
Chief Executive Officer of the Company, and against Harold R. Marvin, Jr.,
formerly the President of the Company and the Bank. Mr. Marvin resigned as
President and as director of both the Company and the Bank in 1993.
The Notices initiated administrative proceedings in which the FDIC, as
a result of transactions occurring prior to February 1992, has sought to
prohibit Messrs. Leuthe and Marvin 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 a
stipulation of settlement with and administrative order of the Department
entered into in 1993, which has been replaced by the Pennsylvania Order. The
Notices also sought to impose civil monetary penalties of $500,000 against Mr.
Leuthe and $300,000 against Mr. Marvin. Neither the Company nor the Bank is a
party to these proceedings. Mr. Leuthe has denied wrongdoing and intends to
defend this action. The FDIC and Mr. Marvin have reached 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.
From a procedural standpoint, the hearings in this matter are closed.
Counsel for the parties are presently on a timetable whereby principal memoranda
of law will be submitted by April 14, 1997 and reply memoranda by May 14, 1997.
The administrative law judge is expected to issue a recommended decision within
45 days thereafter. Either party which disputes the recommended decision of the
administrative law judge then has 30 days to file exceptions to take an appeal
to the full FDIC Board of Directors. The FDIC Board will likely not render a
decision for at least 60 to 90 days following any such appeal. Also, either
party which disputes the decision of the FDIC Board will have the right to
appeal such decision to the Third Circuit Court of Appeals.
Under both the Company's and the Bank's Bylaws, the Company and the
Bank are required to indemnify Messrs. Leuthe and Marvin in connection with the
administrative proceedings brought against them by reason of the fact that they
are or were officers and directors of the Bank. However, Mr. Leuthe and/or Mr.
Marvin are required to reimburse the Company and/or the Bank for all expenses
incurred or advanced by the Company or the Bank in connection with such events
if a court ultimately determines that the alleged actions or omissions of Mr.
Leuthe and/or Mr. Marvin constitute willful misconduct or recklessness. While it
is difficult to determine the amount of indemnification in this case, it does
not appear at this time that it will be an amount that is material to the
Company's financial condition.
-15-
<PAGE>
The Company carries director's and officer's liability coverage and is
in the process of submitting a claim for reimbursement of its expenses in
connection with these proceedings. The Company's insurance carrier has indicated
that it may dispute coverage relating to this matter on the basis that the
insurance carrier did not receive timely notice of the proceedings. The Company
disputes the insurance carrier's position.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-16-
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock, $.01 par value, is the only class of common
stock of the Company that is authorized, issued and outstanding. As of February
28, 1997, there were 2,000,000 shares issued and outstanding, held by
approximately 130 stockholders of record. The market makers in the Company's
Common Stock are Security First Group, F.J. Morrisey & Co., Ryan Beck & Co. and
Legg Mason Wood Walker Incorporated. The Company's Common Stock is quoted on the
OTC electronic bulletin board. According to information received by the Company
from F.J. Morrisey & Co., certain information regarding bid quotations for the
Company's Common Stock is as follows: (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. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
The Company has not paid any dividends on the Common Stock since June
1991. Due to its financial condition, its recent results of operations and
regulatory restrictions on the payment of dividends by the Bank and the Company,
management of the Company currently does not anticipate the resumption of
dividend payments on the Common Stock. Also, the Company has accrued and unpaid
dividends on its Series A Preferred Stock of $1,220,951 and on its Senior
Preferred Stock of $237,542 as of December 31, 1996. 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 the Company 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 the
Company. 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 the Company other
than the Senior Preferred Stock. Under the Company'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
the Company's net income for the preceding calendar year as shown on the
Company's audited statement of income for such preceding calendar year.
Under Pennsylvania law, the Company's Board of Directors may not
authorize, and the Company may not make, distributions (including dividends) if
either (i) the Company 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 the Company would be less than the sum total of
its liabilities plus the amount that would be needed, if the Company 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 the Company'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.
-17-
<PAGE>
Under the Pennsylvania Order, the 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 Pennsylvania Banking
Code restrict the ability of the Bank to transfer funds to the Company in the
form of cash dividends, loans and advances. Under the Federal Reserve Agreement,
the Company may not declare or pay any cash dividends without the prior written
approval of the Federal Reserve Bank and the Department.
The Company received regulatory approval from the Federal Reserve to
issue stock in lieu of cash dividends for 1994 and 1995, at the shareholder's
option. In December 1996, the Company issued 51,461 shares of Senior Preferred
Stock to holders of Senior Preferred Stock who accepted the Company's offer to
be issued such shares in lieu of cash dividends that had accumulated through
December 31, 1995, but which the Company was not permitted to declare and pay.
Therefore, the amount of accumulative dividends on the Company's Senior
Preferred Stock was reduced by $257,769. The Company has requested approval from
the Federal Reserve Bank to pay all accumulated but not waived dividends on the
Senior Preferred Stock through the first quarter of 1997.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The consolidated financial review of the Company is intended to compare
the performance of the Company for the years ended December 31, 1996 and 1995.
The review of the information presented should be read in conjunction with the
consolidated financial statements and the notes thereto included in Item 7 of
this report.
Overview
The Company's total assets were $110.3 million at December 31, 1996, an
increase of $6.88 million from December 31, 1995. The Company's net income was
$2,145,000, comprised primarily of a $1,539,000 litigation settlement involving
a large impaired loan, with the remainder in securities gains from the
subsidiary Bank's equities portfolio. These earnings had a positive effect on
the subsidiary Bank's capital position which was $11.5 million as of December
31, 1996, and management believes that such earnings have positioned the Bank
for a return to core earnings.
During 1996, the Bank continued its program to dispose of foreclosed
real estate and reduce its nonperforming loans. Transactions within these
portfolios resulted in a $2.81 million net reduction in nonperforming assets.
The proceeds from these activities were invested in performing assets
contributing to an increase in the Bank's net interest income.
The Bank experienced good loan demand during 1996, originating
approximately $14.4 million consumer loans, an increase of $8.3 million compared
to the $6.1 million of consumer loans booked in 1995. This increase was
partially attributable to the establishment of several indirect automobile loan
dealership relationships that are expected to continue in 1997. During the year,
deposits increased by $3.63 million, with total deposits of $95.94 million at
December 31, 1996.
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<PAGE>
This increase resulted in additional interest expense during the year. However,
the Bank's cost of interest-bearing deposits remained basically the same at
4.22% in 1996 compared with 4.21% in 1995.
In February 1996, the Bank entered into an Administrative Order with
the Department which replaced an earlier order entered into in 1993. Also in
April 1996, the Bank entered into a Memorandum of Understanding with the FDIC
which replaced two cease and desist orders from October 1987 and June 1992. The
Company continues to be subject to its 1991 written agreement with the Federal
Reserve Bank. The Company and the Bank are in substantial compliance with all
provisions of the aforementioned agreements.
Results of recent examinations by the Department and the FDIC indicate
that the Bank continues to show positive trends in improving the overall
performance of the institution, but still has a high level of nonperforming
assets that have an adverse effect on its operations. In January 1997, the Bank
received regulatory approvals to open a new branch in its Administrative Offices
in South Whitehall Township, PA. This branch will be the institution's sixth
retail location, and is expected to open in the Spring of 1997.
Although the Company did not pay any dividends in 1996, it issued
51,461 shares of Senior Preferred stock, at $5 per share, to existing Senior
Preferred shareholders who waived their rights to receive dividends that were
accumulated on shares of Senior Preferred Stock through December 31, 1995. The
total reduction in accumulated dividends was $257,769. Effective December 23,
1996, these newly issued shares started to accumulate an annual dividend of 5%.
Comparison Between 1996 and 1995 Net Income
In 1996, the Company recorded net income of $2,145,000 as compared to
$84,000 in 1995, an increase of $2,061,000. The majority of this increase, or
$1,539,000, was attributed to a settlement (the "Settlement") received with
respect to a large impaired loan. On May 21, 1996, the Bank and certain other
related parties entered into the Settlement with respect to a significant real
estate transaction that had been in protracted litigation. The Bank was notified
in January 1996 that it had received a favorable court decision regarding an
appeal of an earlier decision of the U.S. Bankruptcy Court, and the Bank had
continued to pursue resolution of a substantial real estate transaction. On May
22 and May 23, 1996, the Company and the Bank received cash payments totaling
approximately $4.0 million. The payments were recorded as follows:
(in thousands)
Recovery of recorded investment
in impaired loans $ 905
Recovery of other assets 103
Recovery of previous loan charge-off 1,140
1996 interest income 58
Recovery of 1996 expenses 132
Legal fees accrual 105
1996 other income 1,539
------
Total $3,982
======
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<PAGE>
A final cash payment of $600,000 in connection with the Settlement of
this matter was scheduled to be received in the third quarter of 1996. However,
the obligor has delayed payment through further bankruptcy proceedings. All
future payments, if any, will be recorded as other income when received.
Other significant factors contributing toward the remaining increase of
$522,000 in net income during 1996 over the same period in 1995 were as follows:
Net interest income increased $544,000, or 15.61%, due mostly to an increase in
the average loan balance of $6.3 million, an increase in interest and dividend
income on investment securities of $155,000, offset in part by an increase in
interest paid on deposits of $101,000.
The Company recorded a credit for loan losses of $367,000 in 1996 as
compared to a provision of $250,000 in 1995, primarily due to a recovery of
$1,140,000 as part of the Settlement outlined above.
Other expenses increased $404,000 in 1996 as compared to 1995, mostly
attributable to an increased provision of $252,000 for possible losses
attributable to its foreclosed assets held for sale.
The profit performance for financial institutions is measured by the
return on average assets ("ROA") and the return on average equity ("ROE"). The
Company's ROA was 1.99% in 1996 compared to 0.08% in 1995. The ROE was 18.89% in
1996 compared to 0.87% in 1995. Excluding $1,539,000 income from the Settlement,
the Company's ROA and ROE were 0.57% and 5.80%, respectively, for 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. The
primary sources used to fund these assets were deposits, borrowed funds and
capital.
Net interest income for 1996 was $4.028 million compared to $3.484
million in 1995. The net increase of $544,000, or 15.61%, is primarily due to an
increase in the average loan balance. In addition, the interest rate spread
increased 10 basis points from 3.93% in 1995 to 4.03% in 1996. Finally, the net
interest margin on interest earning assets increased 28 basis points to 4.34%
from 4.06%.
In 1996, interest and fee income on loans increased $542,000, or
10.56%, compared to 1995, as the result of an increase in the average loan
balance of $6.3 million, or 11.84%. In January 1996, the Bank instituted a new
consumer loan program, pursuant to which it signed agreements with several auto
dealers to originate their dealer paper. As a result, the Bank originated $14.4
million consumer loans in 1996 as compared to $6.1 million consumer loans in
1995. At December 31, 1996, auto loans amounted to $7.619 million, or 11.47%, of
the total loan portfolio as compared to $426,000, or 0.72%, for the same period
in 1995. The average yield on loans declined slightly by 11 basis points from
9.63% in 1995 to 9.52% in 1996.
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<PAGE>
Interest and dividend income on investment securities increased from
$1.75 million in 1995 to $1.90 million in 1996, or 8.88%, primarily the result
of an increase in the average investment portfolio of $1.28 million, or 4.29%.
The increase in average balances was primarily the result of the investment of a
significant portion of the proceeds from the Settlement. The average yield on
securities increased 26 basis points during 1996 compared to 1995 as the result
of higher overall interest rates.
Interest expense on deposits increased $101,000, or 2.91%, in 1996
compared to 1995, as the result of higher average balance for interest-bearing
deposits of $2.2 million, or 2.67% in 1996. The increase in average
interest-bearing deposits was primarily attributable to an increase in the
average balance of certificates of deposit to $48.542 million in 1996 as
compared to $46.652 million in 1995. Certificates of deposit increased during
this period due to a higher interest rate environment, resulting in a continued
shift of deposits out of savings accounts and into higher-costing certificate of
deposit accounts. However, the average rate paid by the Bank for the
interest-bearing deposits remained almost the same, 4.22% in 1996 as compared to
4.21% in 1995. Interest expense decreased approximately $67,000 on savings
accounts, attributable to both a decline in average balances as well as the
average rates. Mitigating this decrease is the increase in the average balance
of certificates of deposit which resulted in approximately $168,000 of
additional interest expense.
-21-
<PAGE>
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 derived from average daily
balances.
<TABLE>
<CAPTION>
For the Year Ended December 31,
(in thousands)
----------------------------------------------------------------------------
1996 1995
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
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%
Federal funds sold 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:
Savings 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 liabilities $85,806 $ 3,651 4.25% $83,498 $3,554 4.26%
======= -------- ---- ======= ------ ----
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 LIABILI-
TIES 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.
-22-
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
(in thousands)
------------------------------------------------------------------------------
1995 1994
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1) $53,276 $5,131 9.63% $49,021 $4,811 9.81%
Investment securities 29,880 1,746 5.84% 28,024 1,615 5.76%
Federal funds sold 2,741 161 5.87% 2,072 82 3.96%
------- ------ ----- ------- ------ ----
Total interest-earning assets $85,897 $7,038 8.19% $79,117 $6,508 8.23%
======= ------ ---- ======= ------ ----
INTEREST-BEARING
LIABILITIES:
Savings deposits $35,781 $1,068 2.98% $38,983 $1,119 2.87%
Time deposits 46,652 2,402 5.15% 41,971 1,742 4.15%
Repurchase agreement 629 42 6.68% 382 23 6.02%
Other borrowed funds 0 0 0.00% 280 13 4.64%
Long-term debt 436 42 9.63% 534 42 7.87%
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities $83,498 $3,554 4.26% $82,150 $2,939 3.58%
======= ------ ---- ======= ------ ----
NET INTEREST INCOME $3,484 $3,569
====== ======
INTEREST RATE SPREAD 3.93% 4.65%
==== ====
NET INTEREST MARGIN ON
INTEREST-EARNING ASSETS(2) 4.06% 4.51%
==== ====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO AVER
AGE INTEREST-BEARING LIA-
BILITIES 102.87% 96.31%
====== =====
</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.
-23-
<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 De- For the Year Ended De-
cember 31, 1996 vs. 1995 cember 31, 1995 vs. 1994
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 $ 598 $ (56) $ 542 $ 406 $ (86) $ 320
Investment securities 77 78 155 106 25 131
Federal funds sold (42) (14) (56) 32 47 79
----- ----- ----- ----- ----- -----
Total interest-earning assets $ 633 $ 8 $ 641 $ 544 $ (14) $ 530
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits $ 5 $ (72) $ (67) $ (87) $ 36 (51)
Time deposits 65 103 168 150 510 660
Other borrowed funds 13 (5) 8 3 3 6
Long-term debt (11) (1) (12) (8) 8 0
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ 72 $ 25 $ 97 $ 58 $ 557 $ 615
----- ----- ----- ----- ----- -----
CHANGE IN NET INTEREST INCOME $ 561 $ (17) $ 544 $ 486 $(571) $ (85)
===== ===== ===== ===== ===== =====
</TABLE>
Other Income
Total other income, excluding securities gains, increased $1,494,000
during 1996 compared to 1995, principally the result of the gain of $1,539,000
for the Settlement of an impaired loan. Included in the $1,539,000, were prior
years' interest, late charges and recovery of legal and other costs associated
with the loan. If $1,539,000 were excluded from the other income, other income
(excluding securities gains) would have decreased $45,000 in 1996 compared to
1995, primarily the result of a decline in gain from sale of foreclosed assets
of $47,000. During 1996, the net gains from the investment securities portfolios
declined $190,000, or 11.66%, as compared to 1995. The Company's trading
securities are carried at fair value and are comprised primarily of the common
-24-
<PAGE>
stock of other banks and bank holding companies. The strong stock market growth
during 1995 and 1996 has resulted in significant net gains in trading
securities. The significant portion of the overall gain was generated from the
trading securities. In the aggregate, the overall gain (realized and unrealized)
within the trading security portfolio amounted to $1.378 million in 1996, a
decrease of $115,000 as compared to $1.493 million in 1995. During 1996,
management elected to liquidate certain securities to capitalize market gains,
resulting in the fluctuation between the realized and unrealized gains from
trading securities.
Other Expenses
Total other expenses increased $404,000, or 7.48%, during 1996 compared
to 1995. Salaries and employee benefits increased $161,000, or 12.16%, primarily
due to a $150,000 accrual for bonuses. Foreclosed asset expenses increased
$430,000, or 57.72%, in 1996 as compared to 1995, mostly as the result of an
increased provision for possible losses of $252,000. The increased provision
will allow management to aggressively market and dispose of its foreclosed asset
holdings throughout 1997. Mitigating the above increases were decreases of
occupancy expenses of $70,000, or 13.16%, principally as the result of reduced
rent expense and the FDIC insurance premium of $64,000, or 29.09%, as the result
of lower rates. In addition, in the aggregate other expenses declined $23,000,
or 0.98% in 1996 as compared to 1995. However, within this category, the 1995
legal costs incurred for the Settlement were approximately $383,000 higher than
in 1996, while 1996 legal costs for the litigation with the FDIC, involving the
Company's Chairman and CEO and the Bank's former President, were approximately
$617,000 in 1996, or $309,000 higher than in 1995.
Provision For Loan Losses
The allowance for loan losses was $1.624 million at December 31, 1996
and 1995. The allowance equaled 2.46% of loans at December 31, 1996, as compared
to 2.76% at December 31, 1995.
The adequacy of the allowance for loan losses is measured monthly by an
adequacy test. The adequacy test is 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, the 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
-25-
<PAGE>
for the historical charge-offs and the human error element in the perfection of
the Bank's interest and other issues unforeseen to management. Additionally, the
Bank conducts an annual review of all credits in excess of $150,000 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. The
Bank continues to strengthen its underwriting process and internal loan review
process by implementing stringent analytical standards in the loan approval and
review procedures.
In May 1996, management completed a detailed analysis of gross loan
charge-offs for the years 1991 to 1995. This analysis took into consideration
the type of lending done during those years, changes in the concentration of the
loan portfolio and the current composition of the loan portfolio. Based on this
review, management decided to increase the general allowance percentage applied
to nonclassified loans as of May 31, 1996. This increase of percentage resulted
in management providing an additional provision for loan losses of
approximately $300,000 during the quarter ended June 30, 1996. Also during the
second quarter, the Bank received a large recovery of approximately $1.140
million as the result of the Settlement. In the aggregate for 1996, the amount
of loans charged off decreased $53,000 from $902,000 in 1995 to $849,000 in
1996. In addition, the amount of recoveries in 1996 increased to $1.216 million,
up from $573,000 primarily attributable to the Settlement. Finally, during the
fourth quarter of 1996, a provision of $300,000 was made at the banking
regulators' request to cover the charge off of two nonperforming loans with an
aggregate balance of $293,000.
-26-
<PAGE>
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 year ended December 31, 1996 (in thousands):
Beginning Balance, January 1, 1996 ........ $1,624
------
Charge-offs:
Commercial, financial and agricultural . 67
Real estate - construction ............. --
Real estate - mortgage ................. 589
Installment loans to individuals ....... 171
Lease financing ........................ 22
------
Total charge-offs ......................... 849
------
Recoveries:
Commercial, financial and agricultural . 26
Real estate - construction ............. --
Real estate - mortgage ................. 1,173
Installment loans to individuals ....... 10
Lease financing ........................ 7
------
Total recoveries .......................... 1,216
Net recoveries ............................ 367
Credit for loan losses .................... (367)
------
Ending Balance, December 31, 1996 ......... $1,624
=======
Ratio of net recoveries to
average loans outstanding .............. 0.58%
Financial Condition
At December 31, 1996, the Company's total assets were $110.3 million,
representing an increase of $6.88 million from December 31, 1995, primarily the
result of an increase in net loans of $7.125 million. The asset growth was
primarily funded through the funds recovered as part of the Settlement, deposit
inflows and borrowed funds.
Loans
Net loans increased $7.13 million from $57.25 million at December 31,
1995 to $64.37 million at December 31, 1996.
As mentioned earlier, the Bank initiated an indirect lending program
for several auto dealers. The consumer loan portfolio has increased
approximately $7.43 million, or 171% since December 31, 1995, of which increase
in auto loans amounted to $7.19 million. The change in the composition of other
loans at December 31, 1996 compared to December 31, 1995 is as follows: Real
estate construction loans increased $517,000, or 11.74%; Residential real estate
loans increased $978,000, or 3.94%; while Commercial real estate loans declined
$1.48 million, or 6.95%; and Commercial loans decreased $312,000, or 7.86%.
-27-
<PAGE>
The following table sets forth the maturity and repricing schedule of
the loan portfolio at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
After one After
Within but within five
one year five years years Total
-------- ---------- ----- -----
<S> <C> <C> <C> <C>
Maturity Schedule:
Commercial....................... $ 1,301 $ 1,740 $ 598 $ 3,639
Real estate-construction......... 3,352 908 242 4,502
Real estate-mortgage............. 11,499 21,382 11,165 44,046
Consumer, net.................... 651 10,188 920 11,759
Nonaccrual loans................. -- -- -- 2,052
------- ------- ------- -------
Total.................................. $16,803 $34,218 $12,925 $65,998
======= ======= ======= =======
Repricing Schedule (1):
Fixed rate loans................ $15,766 $28,661 $ 3,231 $47,658
Floating rate loans............. 15,707 581 -- 16,288
Nonaccrual loans................ -- -- -- 2,052
------- ------- ------- -------
Total................................. $31,473 $29,242 $ 3,231 $65,998
======= ======= ======= =======
</TABLE>
(1) Data for repricing schedule by loan categories is not available.
Investment Securities
The primary objectives of the Company's investment strategy are to
maintain an appropriate level of liquidity and to generate income.
The largest sector of the investment portfolio remains securities of
U.S. Government agencies and corporations which totals $23.32 million (amortized
cost), or 75.0%, of total investment securities. Included in the above are $3
million mortgage-backed products, mostly consisting of collateralized mortgage
obligations ("CMO") and real estate mortgage investment conduits ("REMIC").
During 1996, stress tests were conducted twice on these CMOs and REMICs, all of
which were passed.
At the present time, the Company does not engage in the use of
derivative investment products as a means to hedge the risks in its investment,
loan or deposit portfolios.
Deposits and Repurchase Agreement
Total deposits increased $3.63 million, or 3.93%, from $92.31 million
at December 31, 1995 to $95.94 million at December 31, 1996. Noninterest-bearing
demand deposits increased $397,000; savings, club and interest-bearing demand
deposits increased $377,000; and time deposits increased $2.85 million since
December 31, 1995. During the fourth quarter of 1996, the Bank offered a
promotion to increase its certificates of deposit within the 15 and 30-month
categories. This
-28-
<PAGE>
promotion was primarily attributable to the Bank's strategy of offering
competitive rates on its certificates of deposit products in order to fund its
asset growth and increase net interest income. As a percentage of total
deposits, savings, club accounts and interest-bearing demand deposits
represented 36.85% at December 31, 1996, as compared to 37.89% at December 31,
1995. There were no brokered deposits within the Company's deposit base at
December 31, 1996.
Borrowed funds were $1.2 million at December 31, 1996, while there were
no such borrowings at December 31, 1995. As discussed earlier, management
determined for the short term to utilize borrowings in the form of repurchase
agreements to fund a portion of the Bank's asset growth due, in part, to a brisk
demand in loans.
The following table sets forth maturities of time deposits of $100,000
or more at December 31, 1996 and 1995.
December 31,
------------
1996 1995
------ ------
(in thousands)
Three months or less .... $2,800 $2,852
Over three months through
twelve months .... 3,412 2,811
Over one year through
five years ....... 1,640 1,075
Over five years ......... 0 0
------ ------
TOTAL ............ $7,852 $6,738
====== ======
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, are 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.
-29-
<PAGE>
The following table represents nonperforming assets of the Company at
December 31, 1996 and 1995.
December 31,
1996 1995
---- ----
(in thousands)
Impaired loans ............................... $2,052 $ 5,248
Other loans past due 90 days or more ......... 609 257
------ -------
Total nonperforming loans ................ 2,661 5,505
Foreclosed assets held for sale .............. 4,850 4,814
------ -------
Total nonperforming assets ............... $7,511 $10,319
====== =======
Nonperforming loans as a percentage
of loans (net of unearned interest) ...... 4.03% 9.35%
Nonperforming assets as a percentage of assets 6.81% 9.98%
All delinquent loans are reviewed by management on a weekly basis with
regard to legal proceedings and collection efforts. Of the delinquent loans,
34.48% are secured by real estate, 45.81% are loans to consumers and 19.70% are
to commercial borrowers.
Impaired loans declined $3,196,000, or 60.90%, at December 31, 1996 as
compared to December 31, 1995. The decline was primarily the result of loans
with carrying values of $2,015,000 being transferred to foreclosed assets held
for sale during 1996 and, on May 21, 1996, the Bank stipulated to the Settlement
of a U.S. Bankruptcy Court proceeding with respect to a large impaired loan,
resulting in a reduction of the loan balance of $905,000. Over 90% of the
impaired loans are beyond the point of restructure. These are loans that have
been in litigation and/or foreclosure and can only be resolved through
liquidation. Management believes that the transfer from impaired loans to
foreclosed assets is an improving trend that will continue for the next two to
three quarters as most of the litigation and/or foreclosure actions continue
toward completion. The improving trend and movement of impaired loans to
foreclosed assets enables the Bank to sell the properties. It is anticipated
that the aforementioned trend will continue with a resulting decrease in
impaired loans and loans over 90 days or more. Although this will increase the
Bank's foreclosed assets portfolio, it will enable the Bank to expedite the
final disposition of these assets. Real estate loans represent $2.025 million of
impaired loans, loans to commercial borrowers represent $20,000 and loans to
consumers represent the remaining $7,000. The Bank analyzes its allowance
requirements monthly and makes provisions to address new developments as they
arise in an effort to recognize problems and provide for potential future losses
to earnings or capital.
The majority of nonperforming assets are secured by real estate. The
composition of the nonperforming assets at December 31, 1996 follows:
The following table sets forth the total of commercial and investment
properties, all of which are currently in litigation and/or foreclosure.
-30-
<PAGE>
Commercial/Investment Properties:
Impaired and over 90 days ....................... $ 877,995
Foreclosed assets held for sale ................. 1,050,951
----------
Total............................................ $1,928,946
==========
The following table sets forth the total of residential properties to
be foreclosed upon and liquidated, 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........................ 779,916
Foreclosed assets held for sale ................. 1,223,729
----------
Total............................................ $2,003,645
==========
The following table sets forth the total of land developments and
building lots to be foreclosed upon and liquidated, 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 ....................... $ 453,012
Foreclosed assets held for sale ................. 2,259,154
---------
Total............................................ $2,712,166
==========
The following table sets forth the total of loans in litigation that
are not secured by real estate.
Secured by Other Than Real Estate:
Impaired and over 90 days ....................... $525,548
========
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.
Performing/Nonperforming Assets:
Impaired and over 90 days........................ $24,911
=======
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 during
the first quarter of 1997.
Assets Under Agreement or Payoffs:
Foreclosed assets held for sale .................. $316,304
--------
At December 31, 1996, 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.
-31-
<PAGE>
In January 1996, the Company's Board of Directors developed a
disposition plan to reduce approximately $5.3 million of nonperforming and/or
classified assets outstanding as of January 1, 1996. This disposition plan was
initiated to comply with the Administrative Order of the Department, the
Written Agreement of the Federal Reserve Bank and previous orders issued by the
FDIC, which have been replaced by the Memorandum of Understanding. As part of
this disposition plan, the Company has aggressively marketed its nonperforming
and/or classified assets. Through December 31, 1996, the Company eliminated
gross $5.4 million of nonperforming and/or classified assets, including $719,000
in charge-offs, $3,007,000 in cash payments and $1,657,000 as a result of
declassification or cures. The Bank achieved its goal to reduce nonperforming
and/or classified assets successfully during 1996. The Bank was substantially in
compliance with the regulatory requirements (See "Legal Proceedings" in Part I
of this report) as of February 22, 1997.
Management believes that the current level of dispositions of
nonperforming assets will allow the Bank to meet all scheduled regulatory
requirements discussed under "Legal Proceedings". The Company continues to
market its foreclosed assets held for sale through listing by external agents.
Allowance for Loan Losses Between Loan Categories
The following table shows the allocation of the allowance for loan
losses as of the dates indicated. The allocation among the different loan
categories is based upon a specific allocation process performed by management.
Amounts shown in the table do not purport to be an indication of future
charge-off trends.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial.......................... $ 20 5.54% $ 16 6.75%
Real estate-construction............ 93 7.45 248 7.32
Real estate-residential............. 114 39.11 259 42.34
Real estate-commercial.............. 292 30.07 441 36.22
Consumer............................ 26 17.83 14 7.37
Unallocated......................... $1,079 N/A 646 N/A
----- ------ ------ ------
Total............................ $1,624 100.00% $1,624 100.00%
====== ====== ====== ======
</TABLE>
Liquidity and Funds Management
Liquidity management ensures that adequate funds will be available to
meet anticipated and unanticipated deposit withdrawals, debt servicing payments,
investment commitments, commercial
-32-
<PAGE>
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. Regular loan
payments are a dependable source of funds, while the sale of loans and
investment securities, deposit flows, and loan prepayments are significantly
influenced by general economic conditions and level of interest rates.
At December 31, 1996, the Company maintained $4.62 million in cash and
cash equivalents in the form of cash and due from banks including Federal Funds
sold (after reserve requirements). In addition, the Company had $21.92 million
in securities available-for-sale representing 19.88% of total assets at December
31, 1996 as compared to $21.44 million, or 20.73%, at December 31, 1995.
Management believes that its liquidity is adequate.
The Company considers its primary source of liquidity to be its core
deposit base. This source has grown steadily over the years and consists of
customers' deposits obtained through its branch offices. At December 31, 1996,
approximately 79.88% of the Company's assets were funded by core deposits
acquired within its market area. An additional 10.89% of the assets were funded
by the Company's equity. These two components provide a substantial and stable
source of funds.
The Company's Board of Directors has not declared or paid any dividends
on the outstanding shares of either its Senior Preferred Stock or its Series A
Preferred Stock due to restrictions placed on it by federal and state banking
regulators and other restrictions that do not permit the Bank to pay dividends
to the holding company. The amount of undeclared dividends in arrears on the
Senior and Series A Preferred Stock at December 31, 1996, were $237,542 and
$1,220,951, respectively.
During the fourth quarter of 1996, the Company issued 51,461 shares of
Senior Preferred Stock to shareholders after receiving agreements from such
holders to waive such holder's rights to receive dividends that were accumulated
on shares of Senior Preferred Stock through December 31, 1995. Holders who
accepted the offer to exchange have received one share of Senior Preferred Stock
for each $5 of accumulated dividends that were waived. The total reduction in
accumulated dividends was $257,769. Effective December 23, 1996, these newly
issued 51,461 shares of Senior Preferred Stock have started to accumulate an
annual 5% dividend.
For year ended December 31, 1996, cash and cash equivalents decreased
$423,000. Changes in cash are measured by changes in three major classifications
of cash flows: operating, investing and financing activities.
During 1996, net cash and cash equivalents of $2.124 million were
provided by operating activities compared to $1.73 million provided in 1995, an
increase of $394,000. The increase was the result of net income of the Company
adjusted for noncash items.
The net increase in cash used for investing activities was $5.64
million in 1996 compared to 1995. The primary increase in investing activity for
1996 of $6.693 million was the origination of new installment loans. As
explained earlier, the Bank initiated an indirect lending program for several
auto dealers, increasing its portfolio of auto loans at December 31, 1996 to
$7.619 million, up from $426,000 in 1995. The above increase was mitigated by a
decrease in the amount used to
-33-
<PAGE>
purchase securities. Net securities purchased were $450,000 in 1996 as compared
to $1.723 million in 1995. The decrease in the funds was used for the Bank's new
auto installment loan program.
Net cash of $4.718 million was provided by financing activities in 1996
compared to $722,000 used in 1995, representing a net change in financing
activities of $5.44 million. The primary component of this change, $5.011
million, was the use of borrowed funds. During 1995, the Company repaid a $3.811
million repurchase agreement obligation outstanding at December 31, 1994. Also
in 1996, the Company borrowed an additional $1.200 million to fund its growth on
a short-term basis. Historically, the Bank has entered into repurchase
agreements as a method of providing the Bank with the cost effective funding in
periods where its needs for funds exceeded the amount of funds provided by its
depositing gathering activities.
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 the Company's earnings against extreme fluctuations in interest
rates.
The effect of interest rate changes on the Company's assets and
liabilities may be analyzed by monitoring the Company'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
sensitive) indicates that more assets reprice during a given period compared to
liabilities, while a negative GAP (liability sensitive) has the opposite effect.
The Company'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 the Company's
asset/liability management program.
At December 31, 1996 the Company maintained a one-year cumulative GAP
of negative $7.324 million, or 7.47% 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 the Company to interest rate risk during a period of rising
interest rates. A significant item contributing to the short-term negative gap
is $15.16 million of interest-bearing demand and savings 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.
-34-
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at December 31, 1996:
<TABLE>
<CAPTION>
December 31,
1996
-------------------------------------------------------------------------------------------
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) $ 8,915 $ 458 $ 917 $ 4,212 $ 19,579 $ 34,081
Loans (2) 21,765 9,708 9,154 20,088 3,231 63,946
-------- -------- -------- -------- -------- --------
TOTAL $ 30,680 $ 10,166 $ 10,071 $ 24,300 $ 22,810 $ 98,027
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand-interest bearing $ 14,434 $ -- $ -- $ -- $ -- $ 14,434
Savings and Clubs (3) 726 902 1,452 4,356 13,481 20,917
Time 21,762 8,874 9,514 10,353 -- 50,503
Other borrowed funds 1,200 -- -- -- -- 1,200
Long-term debt 272 -- -- -- -- 272
-------- -------- -------- -------- -------- --------
TOTAL $ 38,394 $ 9,776 $ 10,966 $ 14,709 $ 13,481 $ 87,326
-------- -------- -------- -------- -------- --------
GAP ($ 7,714) $ 390 $ (895) $ 9,591 $ 9,329 $ 10,701
-------- -------- -------- -------- -------- --------
Cumulative GAP ($ 7,714) ($ 7,324) ($ 8,219) $ 1,372 $ 10,701 $ 10,701
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $1.759 million of Federal funds sold.
(2) Includes estimated schedule maturities of the fixed rate loans ignoring any
potential rollover at maturity. Excludes nonaccrual loans of $2,052,000.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
Capital
The adequacy of the Company's capital is reviewed on an ongoing basis
with reference to size, composition and quality of the Company's resources. An
adequate capital base is important
-35-
<PAGE>
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
the Company, 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 the Bank as of
December 31, 1996 and 1995.
Regulatory December 31,
Requirements 1996 1995
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio . 4.0%* 10.70% 8.82%
Risk-based capital ratios:
Tier I capital/risk-weighted 4.0% 15.19% 12.49%
Tier I and Tier II capital/
Risk-weighted assets 8.0% 16.45% 13.75%
* The Pennsylvania Department of banking requires the Bank to maintain a minimum
Tier I leverage capital ratio of at least 6.5% under the terms of the
Administrative Order.
Deposit Insurance Funds Act of 1996
The Deposit Insurance Funds Act of 1996 (the "Deposit Act") was enacted
on September 29, 1996. The Deposit Act changes payment terms for the Bank's
payments into the Bank Insurance Fund ("BIF") of the FDIC.
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 1980's as part of the governments savings and loan bailout.
The law provides that BIF assessments must be set at a rate equal to one-fifth
of the Savings Institution Insurance Fund ("SAIF") rates for 1997, 1998 and
1999. After 1999, all FDIC-insured institutions will pay the same risk-adjusted
rates.
The Bank estimates that its annual cost for FDIC insurance coverage
will increase less than $15,000 based on December 31, 1996 deposit levels and
based on available rate information. However, the FDIC may increase the
projected rates at anytime.
-36-
<PAGE>
Item 7. Financial Statements.
The following consolidated audited financial statements are included in
this Item:
Index to Financial Statements
<TABLE>
<CAPTION>
Page Nos.
<S> <C>
Independent Auditors' Report........................................................ F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995........................ F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 .................................................. F-3 to F-4
Consolidated Statements of Changes in Shareholders' Investment
for the Years Ended December 31, 1996 and 1995 .............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 .................................................. F-6 to F-7
Notes to the Consolidated Financial Statements...................................... F-8 to F-32
</TABLE>
-37-
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
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, 1996 and 1995, and the
related consolidated statements of operations, 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, 1996 and 1995, 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 Notes 1 and 13 to the consolidated financial
statements, First Lehigh Corporation and its subsidiary, First Lehigh Bank (the
"Bank"), are operating under written agreements with their regulators, the
Federal Reserve Bank and the Federal Deposit Insurance Corporation ("FDIC") and
the Commonwealth of Pennsylvania Department of Banking (the "Department"),
respectively, which, among other things, require certain levels of nonperforming
assets and certain minimum capital requirements to be met and maintained. The
minimum capital requirements exceed the minimum leverage and Tier I risk-based
capital ratios required by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA").
PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
Allentown, Pennsylvania
February 14, 1997
F-1
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
CASH AND DUE FROM BANKS $ 2,861 $ 2,578
FEDERAL FUNDS SOLD 1,759 2,465
TRADING SECURITIES 6,309 6,038
SECURITIES AVAILABLE-FOR-SALE 21,922 21,437
SECURITIES HELD-TO-MATURITY (Fair value of $3,899 4,091 4,441
and $4,328)
LOANS (Net of $1,624 allowance for loan losses in both years) 64,374 57,249
PREMISES AND EQUIPMENT 2,022 2,174
FORECLOSED ASSETS HELD FOR SALE, Net 4,850 4,814
OTHER ASSETS 2,092 2,202
--------- ---------
TOTAL ASSETS $ 110,280 $ 103,398
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ----------------------------------------
DEPOSITS:
Noninterest-bearing $ 10,086 $ 9,689
Interest-bearing 85,853 82,623
--------- ---------
Total deposits 95,939 92,312
OTHER BORROWED FUNDS 1,200 --
LONG-TERM DEBT 272 381
OTHER LIABILITIES 859 472
--------- ---------
Total liabilities 98,270 93,165
SHAREHOLDERS' INVESTMENT 12,010 10,233
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $ 110,280 $ 103,398
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(In thousands, except per share data and shares outstanding)
1996 1995
---- ----
INTEREST INCOME:
Interest and fees on loans $ 5,673 $ 5,131
Interest and dividends on investment securities:
Taxable interest income 1,637 1,514
Dividends 264 232
Interest on federal funds sold 105 161
------- -------
Total interest income 7,679 7,038
------- -------
INTEREST EXPENSE:
Interest on deposits 3,571 3,470
Interest on other borrowed funds 50 42
Interest on long-term debt 30 42
------- -------
Total interest expense 3,651 3,554
------- -------
NET INTEREST INCOME 4,028 3,484
CREDIT (PROVISION) FOR LOAN LOSSES 367 (250)
------- -------
NET INTEREST INCOME AFTER CREDIT (PROVISION)
FOR LOAN LOSSES 4,395 3,234
------- -------
OTHER INCOME:
Service charges, fees and other income 512 499
Gain on sale of foreclosed assets, net 62 109
Rental income 1 12
Unrealized holding gains on trading securities 372 728
Realized gains (losses) on:
Trading securities 1,006 765
Securities available-for-sale 79 136
Securities held-to-maturity (18)
Litigation settlement 1,539
------- -------
Total other income 3,553 2,249
------- -------
F-3
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(In thousands, except per share data and shares outstanding)
1996 1995
---- ----
OTHER EXPENSES:
Salaries and employee benefits $ 1,485 $ 1,324
Net occupancy expense 462 532
Equipment expense 207 237
FDIC insurance 156 220
Foreclosed asset expenses 1,175 745
Other 2,318 2,341
---------- ----------
Total other expenses 5,803 5,399
---------- ----------
NET INCOME $ 2,145 $ 84
========== ==========
PRIMARY INCOME (LOSS) PER SHARE $ 0.60 $ (0.12)
========== ==========
FULLY DILUTED INCOME (LOSS) PER SHARE $ 0.50 $ (0.12)
========== ==========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary 2,850,167 2,848,902
Fully diluted 3,415,767 2,848,902
See Notes to Consolidated Financial Statements
F-4
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(In thousands, except for share information)
<TABLE>
<CAPTION>
SENIOR SERIES A CONTRIBUTED
PREFERRED PREFERRED CAPITAL IN
STOCK STOCK COMMON STOCK EXCESS OF PAR
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 848,902 $ 8 682,000 $ 7 2,000,000 $ 20 $ 8,764
NET INCOME
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
------- --- ------- --- --------- ---- -------
BALANCE AT DECEMBER 31, 1995 848,902 8 682,000 7 2,000,000 20 8,764
ISSUANCE OF SENIOR PREFERRED STOCK
IN LIEU OF CASH DIVIDEND 51,461 1 257
NET INCOME
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
------- --- ------- --- --------- ---- -------
BALANCE AT DECEMBER 31, 1996 900,363 $ 9 682,000 $ 7 2,000,000 $ 20 $ 9,021
======= === ======= === ========= ==== =======
NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON SECURITIES TOTAL
RETAINED AVAILABLE SHAREHOLDERS'
EARNINGS FOR SALE INVESTMENT
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $1,256 $ (1,518) $8,537
NET INCOME 84 84
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 1,612 1,612
------ -------- -------
BALANCE AT DECEMBER 31, 1995 1,340 94 10,233
ISSUANCE OF SENIOR PREFERRED STOCK
IN LIEU OF CASH DIVIDEND (258)
NET INCOME 2,145 2,145
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (368) (368)
------ -------- -------
BALANCE AT DECEMBER 31, 1996 $3,227 $ (274) $12,010
====== ========= =======
</TABLE>
F-5
See Notes to Consolidated Financial Statements
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,145 $ 84
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized gains on securities available-for-sale (79) (136)
Gain on sale of foreclosed assets, net (62) (109)
Gain on sale/disposal of equipment (7) --
Realized losses on securities held-to-maturity 18 --
(Credit) provision for loan losses (367) 250
Provision for foreclosed assets losses 602 350
Depreciation of premises and equipment 161 168
Amortization 73 113
Net (increase) decrease in trading securities (271) 476
(Gains) losses on other assets (397) 6
Change in:
Other assets (79) 477
Other liabilities 387 51
------- -------
Net cash provided by operating activities 2,124 1,730
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available-for-sale 4,038 951
Proceeds from the maturity of securities available-for-sale 3,789 4,430
Purchases of securities available-for-sale (8,604) (7,104)
Proceeds from sale of securities held-to-maturity 327 --
Net increase in loans (8,944) (2,251)
Proceeds from sales of premises and equipment 54 61
Capital expenditures for premises and equipment (56) (54)
Capital expenditures for foreclosed assets (43) (136)
Proceeds from sales of foreclosed assets 1,483 2,455
Proceeds from sales of other assets 691 23
------- -------
Net cash used in investing activities (7,265) (1,625)
------- -------
</TABLE>
F-6
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(In Thousands)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 3,627 $ 3,199
Payments on long-term debt (109) (110)
Net increase (decrease) in other borrowed funds 1,200 (3,811)
------- -------
Net cash provided by (used in) financing activities 4,718 (722)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (423) (617)
CASH AND CASH EQUIVALENTS, BEGINNING 5,043 5,660
------- -------
CASH AND CASH EQUIVALENTS, ENDING $ 4,620 $ 5,043
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 3,657 $ 3,493
======= =======
Cash paid for income taxes $ 22 $--
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<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:
o Must not declare or pay any cash dividend, without the prior written
approval of the Department and the Regional Director of the FDIC;
o 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";
o 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;
o 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
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.
F-8
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company believes that it and the Bank are in compliance with the
Pennsylvania Order as of December 31, 1996. 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. As of December 31, 1996, this ratio was
1.97%. 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,
with further reductions thereafter. As of December 31, 1996, this ratio
was 49.65%. 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, 1996, this ratio was
10.70% 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, 1996.
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 subsidiary First Lehigh Bank and the
Bank's 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.
F-9
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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,
Allentown and Quakertown, 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 within the Lehigh
Valley, which constitutes the primary marketing area of the
institution. During the past decade the economy has begun to diversify
and as a result is seeing moderate growth.
The Lehigh Valley is home to thousands of small and medium-sized
companies and has become a prime location for back-office operations
and a growing number of distribution centers. The economic base is
consciously making the transition from heavy industry to a service
economy and is poised for better-than-average growth during the next
few years.
F-10
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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.
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.
F-11
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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."
F-12
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
INCOME (LOSS) AND CASH DIVIDENDS PER SHARE
Primary income (loss) per common share is based on the weighted average
common shares and common share equivalents outstanding during the
period. Net income (loss) applicable to common stock is reduced by
current year dividends in arrears on the Series A and Senior preferred
stock. The assumed conversion of the Series A preferred stock into
common stock had an anti-dilutive impact on earnings per share for the
year ended December 31, 1995.
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 $2,015,000 and $2,522,000
from loans to foreclosed assets held for sale during the years ended
December 31, 1996 and 1995, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 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.
F-13
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
F-14
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $4,810,000 and $4,911,000 at December 31, 1996 and 1995,
respectively. Unrealized net holding gains on trading securities of
$372,000 and $728,000 were included in earnings in 1996 and 1995,
respectively.
The amortized cost of other securities and their fair value at
December 31, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ----- ------- -------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-
FOR-SALE
Obligations of the U.S.
Treasury and other U.S.
government agencies and
corporations $19,279 $ 83 $ (287) $19,075
Other, primarily corporate
debt securities 2,917 3 (73) 2,847
------- ----- ------- -------
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
======= ===== ======= =======
</TABLE>
F-15
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-
FOR-SALE
Obligations of the U.S.
Treasury and other U.S.
government agencies and
corporations $16,680 $ 154 $ (112) $16,722
Other, primarily corporate
debt securities 4,663 105 (53) 4,715
------- ------- ------- -------
Total securities
available-for-sale $21,343 $ 259 $ (165) $21,437
======= ======= ======= =======
SECURITIES HELD-TO-
MATURITY
Obligations of the U.S.
Treasury and other U.S.
government agencies and
corporations $ 4,046 $ -- $ (101) $ 3,945
Foreign securities 50 -- -- 50
Other, primarily corporate
debt securities 345 -- (12) 333
------- ------- ------- -------
Total securities
held-to-maturity $ 4,441 $ -- $ (113) $ 4,328
======= ======= ======= =======
</TABLE>
F-16
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities held-to-maturity and
securities available-for-sale at December 31, 1996 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.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------- ------- ------ ------
<S> <C> <C> <C> <C>
Due within one year $ -- $ -- $ -- $ --
Due after one year 1,410 1,411 50 50
through five years
Due after five years 15,031 14,875 4,041 3,849
through ten years
Due after ten years 1,886 1,852 -- --
------- ------- ------ ------
Total debt securities 18,327 18,138 4,091 3,899
Mortgage-backed
securities 3,819 3,734 -- --
------- ------- ------ ------
Total $22,146 $21,872 $4,091 $3,899
======= ======= ====== ======
</TABLE>
The proceeds, gross gains and gross losses from the sale of available-for-sale
securities during the year ended December 31, 1996 and 1995 were as follows (in
thousands):
1996 1995
---- ----
Proceeds $4,038 $951
Gross gains 131 149
Gross losses 52 13
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 $8,459,000 and
$8,241,000 at December 31, 1996 and 1995, respectively were pledged to secure
certain deposits, repurchase agreements and for other purposes as required by
law.
F-17
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1996, 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, 1996.
In December 1995, securities held-to-maturity with an amortized cost of
$1,805,515 and a fair value of $1,826,479 were transferred to the
available-for-sale classification.
5. LOANS
The components of loans in the consolidated statements of financial
condition were as follows at December 31, 1996 and 1995, (in thousands):
1996 1995
---- ----
Commercial $ 3,659 $ 3,971
Real estate construction 4,920 4,403
Commercial real estate 19,842 21,325
Residential real estate 25,941 24,833
Consumer 4,453 4,429
Automobile loans 7,619 426
------- -------
Subtotal 66,434 59,387
Unearned income 436 514
Allowance for loan losses 1,624 1,624
------- -----
Net Loans $64,374 $57,249
======= =======
F-18
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
An analysis of the changes in the allowance for loan losses follows:
1996 1995
---- ----
Balance at January 1 $ 1,624 $ 1,703
------- -------
Loans charged off (849) (902)
Recoveries 1,216 573
------- -------
Net recoveries (charge offs) 367 (329)
------- -------
(Credit) provision for loan losses (367) 250
------- -------
Balance at December 31 $ 1,624 $ 1,624
======= =======
Impairment of loans having recorded investments of $2,052,000 at December
31, 1996, and $5,248,000 at December 31, 1995, 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 1996 and
1995 was $3,718,000 and $6,582,000, respectively. The total allowance for
loan losses related to these loans was $258,000 and $726,000 at December
31, 1996 and 1995, respectively. Interest income on impaired loans of
$30,000 was recognized for cash payments received in 1995. Payments
received on impaired loans in 1996 of approximately $1,180,000 were
applied to principal. 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 $3,400,000 at
December 31, 1996.
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, 1996 and 1995 (in thousands):
1996 1995
---- ----
Balance, beginning $2,538 $4,163
Advances 1,275 211
Payments and other reductions (1,418) (1,836)
------ ------
Balance, ending 2,395 $2,538
====== ======
F-19
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. FORECLOSED ASSETS HELD FOR SALE
The following table summarizes the activity in foreclosed assets held for
sale during the years ended December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning $4,814 $4,851
Transfers from loans 2,015 2,522
Additional capitalized costs 117 136
Disposals (1,433) (1,844)
Charge-offs (313) (790)
------ ------
Total 5,200 4,875
Less allowance for write-downs of foreclosed assets 350 61
------ ------
Balance, ending $4,850 $4,814
====== ======
</TABLE>
The following table summarizes the activity in the allowance for
write-downs of foreclosed assets during the years ended December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning $ 61 $501
Provision for foreclosed asset losses 602 350
Charge-offs (313) (790)
---- ----
Balance, ending $350 $ 61
==== ====
</TABLE>
Net income of $1,539,000 from a litigation settlement related to
foreclosed assets held for sale was recognized in 1996.
F-20
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and improvements $ 243 $ 243
Buildings and leasehold improvements 2,003 2,041
Equipment and fixtures 1,936 1,919
Equipment held for lease - 43
----- ------
Total 4,182 4,246
Less accumulated depreciation and amortization 2,160 2,072
----- -----
Total $2,022 $2,174
====== ======
</TABLE>
8. TIME DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $7,752,000 and $6,738,000 at December 31, 1996 and
1995, respectively. Interest related to time certificates of deposit in
denominations of $100,000 or more was approximately $388,000 and $324,000
for the years ended December 31, 1996 and 1995, respectively.
9. OTHER BORROWED FUNDS
Information concerning securities sold under agreements to repurchase and
other borrowings is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Year end balance $1,200 $ -
Average interest rate during the year 5.94% 6.66%
Average balance during the year $ 849 $ 629
Maximum month-end balance during the year $2,400 $3,079
Securities underlying the agreements at year end:
Amortized cost $4,643 $4,649
Fair value $4,431 $4,552
</TABLE>
F-21
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. LONG-TERM DEBT
In June 1994, the Corporation obtained a secured promissory note for
$545,184 with principal payments of $9,100, plus interest, due monthly.
Interest is calculated by using the lender's commercial rate plus .6%. The
proceeds of this note were used to payoff the two demand notes. The
maturity date of the loan is June 25, 1999. $272,182 was outstanding on
this debt at December 31, 1996. The note is secured by less that 10% of
the shares of Bank stock owned by the Corporation.
Maturities of long-term debt at December 31, 1996 are as follows:
YEARS ENDING DECEMBER 31
------------------------
1997 $109,200
1998 109,200
1999 53,782
--------
$272,182
========
11. SHAREHOLDERS' INVESTMENT
Shareholders' investment at December 31, 1996 and 1995 consists of the
following (in thousands, except share information):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Senior preferred stock, par value $.01 per share, 1,500,000
shares authorized, 900,363 and 848,902 shares issued and outstanding in 1996
and 1995, respectively. $ 9 $ 8
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) in both years 7 7
Common stock, par value $.01 per share, 10,000,000 shares authorized;
2,000,000 shares issued and outstanding in both years
20 20
</TABLE>
F-22
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Contributed capital in excess of par value $ 9,021 $ 8,764
Retained earnings 3,227 1,340
Net unrealized (depreciation) appreciation on securities
available for sale (274) 94
---- ----
Total shareholders' investment $12,010 $10,233
======= =======
</TABLE>
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 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. Cumulative dividends in arrears at December 31, 1996 and 1995 are
$237,542 and $282,770, respectively.
Each share of the Series A preferred stock with a par value of $.01 was
convertible at the option of the holder, prior to March 31, 1996, to common
stock at the rate of .8 of a share of common stock for each share of Series
A preferred stock and after March 31, 1996, each share is convertible into
common stock at the rate of .72. 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. Cumulative dividends in arrears are
$1,220,951 and $998,960 as of December 31, 1996 and 1995, respectively.
Primary and fully diluted income (loss) per share is computed based on the
following data for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income $2,145,312 $ 84,181
Less dividends applicable to current year:
Senior preferred stock (212,542) (212,226)
Series A preferred stock (221,991) (221,991)
-------- ---------
Net income (loss) applicable to common shares $1,710,779 $(350,036)
========== =========
</TABLE>
F-23
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Weighted average common shares and common share equivalents outstanding
for the years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Common shares 2,000,000 2,000,000
Senior preferred shares 850,167 848,902
--------- ---------
Total 2,850,167 2,848,902
========= =========
</TABLE>
Series A preferred shares are not common stock equivalents since the
stated cash yield was more than 66-2/3% of the average Aa bond yield at
date of issuance. Accordingly, they are excluded from the computation of
weighted average common share and common share equivalents outstanding.
However, the assumed conversion into 545,600 common shares is included in
the determination of fully diluted earnings per share.
Series A preferred shares and options are also excluded in the computation
of the 1996 fully diluted earnings per share because the dilution is less
than 3% and in the 1995 fully diluted earnings per share since they have
an anti-dilutive effect.
12. 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):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected provision $ 729 $ 29
Effect of tax-exempt income (9) (12)
Effect of dividends received deduction (63) (57)
Other 1 -
Net operating loss carryforward (658) 40
----- ----
Provision for income taxes $ - $ -
====== ====
</TABLE>
At December 31, 1996, the Corporation has a net operating loss
carryforward of approximately $3,350,000 available to offset future
taxable income, which begins to expire in 2007 if not utilized.
F-24
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The deferred income tax asset and liability components are as follows at
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss $1,139 $1,676
Loan losses - 90
Write-down of investment securities and foreclosed assets
held for sale 498 419
Accrued expenses 51
Net unrealized losses on securities available-for-sale 93 -
------ ------
Total 1,781 2,185
------ ------
Deferred tax liabilities:
Loan losses (35) -
Deferred loan costs, net (32) (21)
Depreciation (107) (107)
Accretion (5) (7)
Trading securities gains (528) (402)
Net unrealized gains on securities available-for-sale - (32)
------ ------
Total (707) (569)
------ ------
Valuation allowance (1,074) (1,616)
------ ------
Net deferred tax asset $ - $ -
====== ======
</TABLE>
13. 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.
F-25
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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,
1996, 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 1996 or 1995.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE ACTION
(Dollars in thousands) ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk
weighted assets) $12,775 16.45% $6,212** 8.00%** $7,765** 10.00%**
Tier I capital (to risk
weighted assets) $11,796 15.19% $3,106** 4.00%** $4,659** 6.00%**
Tier I capital (to
average assets) * $11,796 10.70% $4,410** 4.00%** $5,513** 5.00%**
As of December 31, 1995:
Total capital (to risk
weighted assets) $ 9,992 13.75% $5,812** 8.00%** $7,765** 10.00%**
Tier I capital (to risk
weighted assets) $ 9,075 12.49% $2,906** 4.00%** $4,359** 6.00%**
Tier I capital (to
average assets) * $ 9,075 8.82% $4,117** 4.00%** $5,147** 5.00%**
</TABLE>
*The Department requires a minimum of 6.5% under the terms of the
Administrative Order.
**In the printed version, denotes "greater than or equal to."
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, 1996, 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, 1996, without the prior approval of the
Federal Reserve Bank.
F-26
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1996, the maximum amount available
for unsecured loans from the Bank to First Lehigh Corporation approximates
$1,750,000.
14. 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 of directors. Profit sharing expense of
$25,000 was recorded for the year ended December 31, 1996. The Corporation
did not make a contribution to the plan in 1995.
15. STOCK OPTIONS
The Corporation has 66,500 shares of common stock reserved for issuance
under a key employee Incentive Stock Option Plan. Options are granted to
purchase common stock at prices not less than the fair market value of the
common stock on the date of grant. The price of options granted to any
person possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation must be at least 110% of the fair
market value of the common stock on the date of grant. A total of 26,500
options, which were granted to an officer of the Corporation in, 1985 and
1986, expired during 1995 and 1996 according to the terms of the plan.
Activity under the Incentive Stock Option Plan for the years ended
December 31, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
SHARES WEIGHTED-
UNDER AVERAGE
OPTION EXERCISE PRICE
------ --------------
<S> <C> <C>
Balance, December 31, 1994 26,500 $4.09
Expired (6,500) $3.99
Granted -
-------
Balance, December 31, 1995 20,000 $4.12
Expired (20,000) $4.12
Granted -
-------
Balance, December 31, 1996 -
=======
</TABLE>
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. The Corporation applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation expense has been
recognized for either plan. Had compensation cost for the plans been
determined based on the fair values at the grant dates for awards
consistent with the method of SFAS No. 12, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts
indicated below for the year ended December 31, 1995:
REPORTED PRO FORMA
-------- ---------
Net income (loss) (in thousands) $84 $(30)
Primary earnings (loss) per share $(.12) $(.16)
For purposes of the pro forma 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 1995:
Dividend yield .00%
Expected volatility .00%
Risk-free interest rate 5.45%
Expected life 3 Years
16. 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.
F-27
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk are as
follows at December 31, 1996 and 1995:
1996 1995
---- ----
Commitments to extend credit $2,910,210 $3,417,517
Standby letters of credit 755,513 486,751
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.
17. RELATED PARTY TRANSACTIONS
The Bank leases certain office space from an affiliate. The Bank in turn,
subleases a portion of this space as allowed for under this agreement. Net
rent expense related to this lease was $112,442 and $195,486, for the
years ended December 31, 1996, and 1995, respectively.
The following summarizes the future annual minimum lease payments due to
the affiliate, net of sublease income, under the terms of the lease as of
December 31, 1996:
YEAR ENDING DECEMBER 31 (Thousands of dollars)
-----------------------
1997 $ 92
1998 197
1999 194
2000 223
2001 267
Thereafter 2,421
------
Total $3,394
======
F-28
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporations' financial instruments at
December 31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,620 4,620 $ 5,043 5,043
Trading account securities 6,309 6,309 6,038 6,038
Securities available-for-sale 21,922 21,922 21,437 21,437
Securities held-to-maturity 4,091 3,899 4,441 4,328
Loans, net of allowance 64,374 63,658 57,249 57,393
Accrued interest receivable 855 855 799 799
Financial liabilities:
Deposits 95,939 95,772 92,312 93,974
Other borrowed funds 1,200 1,200 - -
Long-term debt 272 272 381 381
Accrued interest payable 211 211 217 217
</TABLE>
F-30
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
19. FIRST LEHIGH CORPORATION (Parent company only)
CONDENSED FINANCIAL STATEMENTS (In thousands):
CONDENSED BALANCE SHEET
-----------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Assets:
Deposits with bank subsidiary $ 630 $ 813
Accounts receivable 5 6
Investment in bank subsidiary 11,522 8,777
Loans - 94
Other assets 356 925
------- -------
Total assets $12,513 $10,615
======= =======
Liabilities and shareholders' investment:
Demand notes payable 272 381
Other liabilities 231 1
------- -------
Total liabilities 503 382
Shareholders' investment 12,010 10,233
------- -------
Total liabilities and shareholders' investment $12,513 $10,615
======= =======
CONDENSED STATEMENT OF OPERATIONS
---------------------------------
1996 1995
Investment income $ 24 $ 63
Other income 42 18
Other expenses (949) (321)
---- ----
Loss before equity in income of subsidiary (883) (240)
Equity in net income of subsidiary 3028 324
---- ---
Net income $2,145 $ 84
====== =====
</TABLE>
F-31
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
---------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $2,145 $ 84
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of subsidiary (3,028) (324)
Increase or decrease in:
Accounts receivable 1 165
Loans 94 (94)
Other assets 484 (269)
Due to subsidiary - (58)
Other liabilities 230 (563)
------- -------
Net cash used in operating activities (74) (1,059)
------- -------
Cash flows used in investing activities,
Additional capital contribution to subsidiary - (1,500)
------- -------
Cash flows used in financing activities,
Payments on note payable (109) (110)
------- -------
Net decrease in deposits with bank subsidiary (183) (2,669)
Deposits with bank subsidiary at beginning of year 813 3,482
------- -------
Deposits with bank subsidiary at end of year 630 813
======= =======
</TABLE>
F-32
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
(a) Directors and Executive Officers.
The following table sets forth certain information regarding the
executive officers and directors of the Company and the Bank.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James L. Leuthe 55 Chairman of the Board, Acting President, Chief
Executive Officer and Director of the Company
Wilbur R. Roat 49 President, Chief Executive Officer and Director
of the Bank and Director of the Company
George M. Baltozer 62 Executive Vice President and Chief Operating Officer of the Bank
Kashmira K. Lodaya 48 Treasurer of the Company and Vice President and Controller of the Bank
Stephen M. Alinikoff 52 Director of the Company and the Bank
Peter Barter 81 Director of the Company and the Bank
Robert B. Colfer 54 Director of the Company and the Bank
Vincent Dieter 62 Director of the Company and the Bank
Charles D. Flack, Jr. 42 Director of the Company and the Bank
Harry J. Lentz 87 Director of the Company and the Bank
John H. McKeever 71 Secretary and Director of the Company and
Chairman of the Board, Secretary and Director
of the Bank
</TABLE>
James L. Leuthe has served as Chairman and a director of the Company
since its formation in 1982 and is currently serving as the Company's Acting
President. Mr. Leuthe has also served from time to time as the Company's
President, most recently from October 1992 to October 1993, and as Chairman and
a director of the Bank from 1971 to May 1993. Mr. Leuthe is also the President
of Midland Farms, Inc., a real estate holding and development company and active
farm operation, and a director of The Bethlehem Corporation, an industrial
equipment and machinery manufacturer. Mr. Leuthe was subject to a 1993 order of
the Department and two
-38-
<PAGE>
former orders of the FDIC of 1987 and 1992, under which he resigned as an
officer of the Bank. See also "Legal Proceedings" in Part I above.
Wilbur R. Roat has served as President, Chief Executive Officer and a
director of the Bank and as director of the Company since September 1994. Prior
to joining the 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 the 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 the Bank from March 1994 until
September 1994.
Kashmira K. Lodaya has served as Treasurer of the Company since January
1993 and as Vice President and Controller of the Bank since February 1996. Ms.
Lodaya previously served as Controller of the Bank from 1992 to February 1996.
Stephen M. Alinikoff has served as a director of the Company and the
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.
Peter Barter was elected as director of the Company and the 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 the Company and the 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 the Company and the 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 the Company and the
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 the Company and the Bank
since 1975. Mr. Lentz is retired and formerly served as the assistant cashier of
the Bank for over 20 years. He
-39-
<PAGE>
also is retired from service as the Deputy Recorder of Deeds for the Northampton
County, Pennsylvania courthouse.
John H. McKeever has served as a director of the Company and the Bank
since 1972 and as Secretary of the Company and the Bank for more than five
years. He has served as Chairman of the Board of the Bank since May 1993. Mr.
McKeever is an attorney at law in private practice.
(b) Compliance with Section 16(a) of the Exchange Act.
The Company does not have a class of securities registered under the
Securities Exchange Act of 1934, and, therefore, its officers, directors and
holders of more than 10% of the outstanding shares of the Company are not
subject to the provisions of Section 16(a).
Item 10. Executive Compensation.
(a) Executive Compensation.
The following tables contain compensation data with respect to the
Company's Chief Executive Officer, each executive officer whose total salary and
bonus for 1996 exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation
-------------------------------------------
Other
Name and Annual All
Principal Compensa- Other
Position Year Salary($) Bonus($) tion($) Compensation
-------- ---- --------- -------- ------- ------------
<S> <C> <C> <C>
James L. Leuthe 1996 $190,000(1) -- $15,921(2) --
Chairman of the Board, 1995 30,000(1) -- $15,203(2) --
Acting President, Chief 1994 30,000(1) -- $10,823(2) --
Executive Officer and
director of the Company
Wilbur Roat 1996 $107,500 $ -- $6,257(3) --
President, Chief Execu- 1995 107,500 12,500 3,675(3) $35,503(4)
tive Officer and Director
of the Bank and director
of the Company
</TABLE>
- ----------
(1) Inasmuch as Mr. Leuthe was not deemed an employee of the Company, 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.
-40-
<PAGE>
(2) Represents the depreciation expense of $9,423 in 1996, $9,423 in 1995 and
$9,423 in 1994 with respect to the use by Mr. Leuthe of a vehicle owned by
the Bank and $890 and $1,400 paid in insurance premiums with respect to such
vehicle in 1996, 1995 and 1994, respectively. The total also includes the
depreciation expense of $4,061 in 1996 and $4,061 in 1995 and insurance
premiums of $707 in 1996 and $829 in 1995 with respect to the use by Mr.
Leuthe of a vehicle owned by the Company. For 1996, the total includes
$1,096 of a non-cash taxable fringe benefit.
(3) Represents the depreciation expense of $2,824 and insurance premiums of $851
in 1995 and $676 in 1996 with respect to the use by Mr. Roat of a vehicle
owned by the Bank. For 1996 the total includes $2,757 of a non-cash taxable
fringe benefit.
(4) Represents relocation expense paid to Mr. Roat in 1995.
The Company did not grant stock options to any person in 1996.
Fiscal Year-End (December 31, 1996) Option Values
-------------------------------------------------
Value of
Unexercised
Number of In-the-Money
Unexercised Options Options at
at FY-End (#) FY-End ($)
------------- ----------
Name Exercisable Exercisable
- ---- ----------- -----------
James L. Leuthe -- $ --
Wilbur R. Roat 60,000(1) $ 60,000(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 $4.50 at December 31, 1996.
The Bank 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 the Company, the 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 the Bank's employee
profit sharing plan. Also, at Mr. Roat's request made within six months of such
discharge, the Bank is obligated to purchase Mr. Roat's principal residence in
the Lehigh Valley at its original purchase price.
-41-
<PAGE>
Director Compensation
The non-employee directors of the Bank receive fees of $350 for each
meeting they at tend. No fees are paid to directors of the Company. During 1996,
John H. McKeever, a director of the Company and the Bank, was paid $15,750 for
legal services performed for the Company and the Bank. Harry J. Lentz was paid
$100 per month for services as an assistant secretary of the Company and the
Bank in 1996.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 14, 1997, the name and
address of each person who is known by the Company to be the beneficial owner of
more than 5% of the Company's outstanding Common Stock or of more than 5% of the
Company's outstanding Series A Preferred Stock, the number of shares of each
class beneficially owned and the percentages of the Company's outstanding
Common Stock and Series A Preferred Stock so owned. No person holds more than 5%
of the Company's outstanding Senior Preferred Stock. The Series A Preferred
Stock is convertible at the option of each holder into 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 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
Common Stock for each share of Series A Preferred Stock. However, the Board of
Directors of the Company has approved an amendment to the Company'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
following tables are based upon the .8 per share conversion rate. The Senior
Preferred Stock is currently convertible at the option of each holder into
Common Stock at any time at the rate of one share of Common Stock for each share
of Senior Preferred Stock.
-42-
<PAGE>
<TABLE>
<CAPTION>
Percent of
Percent of Series A Outstanding
Outstanding Preferred Series A
Common Stock Common Stock Stock Preferred Stock
Beneficially Beneficially Beneficially Beneficially
Name and Address Owned(1) Owned(1) Owned Owned
---------------- -------- -------- ----- -----
<S> <C> <C> <C> <C>
James L. Leuthe(3) 1,278,780(2) 54.7% 420,000(3) 61.6%
1620 Pond Road
Allentown, PA 18104
Frank Henry 125,000 6.3 -- --
P.O. Box 1007
Wilkes-Barre, PA 18773
John H. McKeever 132,800(4) 6.5 50,000 7.3
1112 Walnut Drive
Danielsville, PA 18038
Robert B. Colfer 100,000 4.9 50,000 7.3
845 W. Wyoming Street
Allentown, PA 18015
A. John May 42,560 2.1 51,500(5) 7.6
4200 One Liberty Place
Philadelphia, PA 19103
Financial East, L.P. 40,000 2.0 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.
(2) Includes 221,640 shares owned by Mr. Leuthe's children, 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.
-43-
<PAGE>
(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.
The following table sets forth, as of March 14, 1997, the amount and
percentage of the Company's outstanding Common Stock and Series A Preferred
Stock beneficially owned by each director of the Company and by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percent of
Percent of Series A Outstanding
Outstanding Preferred Series A
Name and Address Common Stock Common Stock Stock Preferred Stock
of Individual Beneficially Beneficially Beneficially Beneficially
or Identity of Group Owned(1)(2) Owned(2) Owned(1) Owned
-------------------- ----------- -------- -------- -----
<S> <C> <C> <C> <C>
James L. Leuthe(3) 1,278,780 54.7% 420,000 61.6%
Stephen M. Alinikoff(4) 60,000 2.5 -- --
Peter Barter 50,000 2.5 -- --
Robert B. Colfer(3) 100,000 4.9 50,000 7.3
Vincent Dieter(5) 13,960 -- -- --
Charles D. Flack, Jr.(6) 84,250 4.1 -- --
Harry J. Lentz 9,100 -- -- --
John H. McKeever(3) 132,800 6.5 50,000 7.3
Wilbur R. Roat(7) 62,000 3.0 -- --
All directors and execu- 1,781,040 71.2% 520,000 76.2%
tive officers as a group
(11 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.
-44-
<PAGE>
(4) Of these shares, 10,000 shares are held in a partnership of which Mr.
Alinikoff is the general partner. This total also includes 6,900 shares of
Common Stock that such partnership has the right to acquire upon a
conversion of 6,900 shares of Senior Preferred Stock. This total also
includes 300 shares of Common Stock that Mr. Alinikoff has the right to
acquire upon the conversion of 300 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. This total also includes 25,000 shares of Common Stock that
Diamond Manufacturing Co. has the right to acquire upon conversion of 25,000
shares of Senior Preferred Stock and 250 shares of Common Stock that Mr.
Flack has the right to acquire upon conversion of 250 shares of Senior
Preferred Stock.
(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.
Item 12. Certain Relationships and Related Transactions.
The Bank has had and expects to continue to have banking and financial
transactions in the ordinary course of business with directors and executive
officers of the Company and its subsidiaries, and members of such persons'
immediate families and companies in which they have an ownership interest of 10%
or more, on comparable terms, including interest rates, collateral and repayment
terms on extensions of credit, as those prevailing from time to time for other
customers. In the opinion of management, such loans and commitments to loan did
not involve more than a normal risk of collectibility or present other
unfavorable features. As of December 31, 1996, the directors and officers of the
Company and their respective affiliates have loans outstanding in the following
principal amounts: Mr. Leuthe, $1,357,011; Mr. Alinikoff, $393,405; John D.
McKeever, the son of Mr. McKeever, $ 36,073; and Mr. Barter, $259,659.
The Company has provided advancement of legal expenses on behalf of Mr.
Leuthe in connection with the FDIC proceedings described under "Legal
Proceedings" in part I of this report.
The Bank leases certain office space from a partnership in which the
Bank owns 49% of the limited partnership interests. The Bank in turn subleases a
portion of this space. Net rent expense related to this lease was $112,442,
$195,486 and $300,942 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Mr. McKeever provided legal services to the Bank during 1996. A. John
May is a principal beneficial owner of the Company's Series A Preferred Stock.
Mr. May is a member of Duane, Morris & Heckscher, which provided legal services
for the Company and the Bank in 1995 and 1996.
-45-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Articles of Incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Form SB-2 Registration State
ment No. 33-71712).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Form SB-2 Registration Statement No. 33-71712).
4.1 Specimen Certificate of Senior Preferred Stock of the Company (incorpo-
rated by reference to Exhibit 4.1 to the Company's Form SB-2 Registration
Statement No. 33-71712).
10.1 Severance Compensation Agreement between the Bank and Wilbur R. Roat
dated December 7, 1995 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-KSB Annual Report for the year ended December 31,
1995).*
10.2 Government Securities Clearing Agreement dated as of
July 12, 1993 between the Bank and Custodial Trust
Company (incorporated by reference to Exhibit 10.2 to
the Company's Form SB-2 Registration Statement No.
33-71712).
10.3 Promissory Note from the Company to Meridian Bank in
the principal amount of $545,183.92 dated June 24,
1994. (Incorporated by reference to Exhibit 10.3 of
the Company's Form 10-KSB report, as amended, for
fiscal year ended December 31, 1994).
10.4 Office Lease dated June 3, 1994 between the Bank and Neely, Scharadin
& Silbert, Inc. (Incorporated by reference to Exhibit 10.4 of the Com-
pany's Form 10-KSB report, as amended, for fiscal year ended December
31, 1994).
10.5 Data Processing Services Agreement between the Bank and Bisys, Inc.
dated as of February 19, 1991 (incorporated by reference to Exhibit 10.5
to the Company's Form SB-2 Registration Statement No. 33-71712).
10.6 Office Lease between Pond Associates and First Lehigh Bank dated No-
vember 1, 1990 (incorporated by reference to Exhibit 10.6 to the Com-
pany's Form SB-2 Registration Statement No. 33-71712).
10.7 Lease Agreement between 740 Hamilton Street, Inc. and
the Germantown Savings Bank dated as of February 1,
1971; Lease Assignment and Assumption between the
Bank and Savings Fund Society of Germantown, d/b/a
Germantown Savings Bank dated September 19, 1986; and
letter dated August 4, 1993 acknowledging exercise of
option term and confirmed by 740 Hamilton Street,
Inc. and the Bank (each incorporated by reference to
Exhibit 10.7 to the Company's Form SB-2 Registration
Statement No. 33-71712).
10.8 Lease Agreement between Janice H. Levin and the Estate of Philip J.
Levin and The Savings Fund Society of Germantown and its Vicinity dated
-46-
<PAGE>
July 31, 1974, First Amendment dated January 20,
1975, Second Amendment dated June 22, 1984,
Assignment and Assumption between the Bank and the
Savings Fund Society of Germantown and its Vicinity
dated as of September 30, 1986, including Consent to
Assignment of Net Realty Holding Trust, Third
Amendment dated July 11, 1989, Fourth Amendment dated
August 6, 1991, Fifth Amendment dated August 26, 1991
and Sixth Amendment dated August 16, 1993 (each
incorporated by reference to Exhibit 10.8 to the
Company's Form SB-2 Registration Statement
No. 33- 71712).
10.9 The Company's 1984 Incentive Stock Option Plan (incorporated by refer-
ence to Exhibit 10.9 to the Company's Form SB-2 Registration Statement
No. 33-71712).*
10.10 The Company's 1989 Equity Incentive Plan (incorporated by reference to
Exhibit 10.10 to the Company's Form SB-2 Registration Statement
No. 33-71712).*
10.11 Agreement of Limited Partnership of Pond Associates
dated March 2, 1990 among Pond Eight, Inc. and the
limited partners set forth therein; and First
Amendment of Limited Partnership Agreement of Pond
Associates dated January 15, 1991 (each incorporated
by reference to Exhibit 10.12 to the Company's Form
SB-2 Registration Statement No. 33-71712).
10.12 Office Lease dated April 30, 1996 between the Bank and Kevin T.
Fogerty.
10.13 Office Lease dated September 1, 1996 between the Bank and ERA Part-
ners Group, Inc.
21.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1
of the Company's Form 10-KSB report for the fiscal year ended December
31, 1995).
27.1 Financial Data Schedule
</TABLE>
- ------------
* This exhibit is a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
-47-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST LEHIGH CORPORATION
Date: March 27, 1997 By:/s/James L. Leuthe
-----------------------------
James L. Leuthe, Chairman of the Board,
Acting President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/James L. Leuthe Chief Executive Officer and March 27, 1997
- ---------------------------------------- Director (principal executive officer)
James L. Leuthe
/s/Kashmira K. Lodaya Treasurer (principal financial March 27, 1997
- ---------------------------------------- and accounting officer)
Kashmira K. Lodaya
/s/Stephen M. Alinikoff Director March 27, 1997
- ----------------------------------------
Stephen M. Alinikoff
/s/Peter Barter Director March 27, 1997
- ----------------------------------------
Peter Barter
/s/Robert B. Colfer Director March 27, 1997
- ----------------------------------------
Robert B. Colfer
/s/Vincent Dieter Director March 27, 1996
- ----------------------------------------
Vincent Dieter
<PAGE>
/s/Charles D. Flack, Jr. Director March 27, 1997
- ----------------------------------------
Charles D. Flack, Jr.
/s/Harry J. Lentz Director March 27, 1997
- ----------------------------------------
Harry J. Lentz
/s/John H. McKeever Director March 27, 1997
- ----------------------------------------
John H. McKeever
/s/Wilbur R. Roat Director March 27, 1997
- ----------------------------------------
Wilbur R. Roat
</TABLE>
<PAGE>
Supplemental Information to Be Furnished with Reports Filed Pursuant to Section
15(d) of the Exchange Act by Non-Reporting Issuers.
No annual report to security holders covering the fiscal year ended
December 31, 1996 has been sent to the Company's security holders. In accordance
with the instructions included under this caption of Form 10-KSB, the Company
intends to furnish copies of any such material to the Commission at such time
that it is sent to security holders.
The Company did not hold an annual meeting in 1996, and will forward
copies of its proxy statement for its 1997 annual meeting to the Commission at
the time of their distributions to shareholders.
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Form SB-2 Registration Statement No. 33-71712).
3.2 Bylaws of the Company (incorporated by reference to Ex-
hibit 3.2 to the Company's Form SB-2 Registration State-
ment No. 33-71712).
4.1 Specimen Certificate of Senior Preferred Stock of the Com-
pany (incorporated by reference to Exhibit 4.1 to the Com-
pany's Form SB-2 Registration Statement No. 33-71712).
10.1 Severance Compensation Agreement between the Bank and
Wilbur R. Roat dated December 7, 1995. (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-KSB
Annual Report for the year ended December 31, 1995).*
10.2 Government Securities Clearing Agreement dated as of July
12, 1993 between the Bank and Custodial Trust Company
(incorporated by reference to Exhibit 10.2 to the Company's
Form SB-2 Registration Statement No. 33-71712).
10.3 Promissory Note from the Company to Meridian Bank in
the principal amount of $545,183.92 dated June 24, 1994.
(Incorporated by reference to Exhibit 10.3 of the Company's
Form 10-KSB report, as amended, for fiscal year ended
December 31, 1994).
10.4 Office Lease dated June 3, 1994 between the Bank and
Neely, Scharadin & Silbert, Inc. (Incorporated by reference
to Exhibit 10.4 of the Company's Form 10-KSB report, as
amended, for fiscal year ended December 31, 1994).
10.5 Data Processing Services Agreement between the Bank and
Bisys, Inc. dated as of February 19, 1991 (incorporated by
reference to Exhibit 10.5 to the Company's Form SB-2
Registration Statement No. 33-71712).
10.6 Office Lease between Pond Associates and First Lehigh
Bank dated November 1, 1990 (incorporated by reference
to Exhibit 10.6 to the Company's Form SB-2 Registration
Statement No. 33-71712).
10.7 Lease Agreement between 740 Hamilton Street, Inc. and the
Germantown Savings Bank dated as of February 1, 1971;
Lease Assignment and Assumption between the Bank and
Savings Fund Society of Germantown, d/b/a Germantown
Savings Bank dated September 19, 1986; and letter dated
August 4, 1993 acknowledging exercise of option term and
confirmed by 740 Hamilton Street, Inc. and the Bank (each
incorporated by reference to Exhibit 10.7 to the Company's
Form SB-2 Registration Statement No. 33-71712).
<PAGE>
10.8 Lease Agreement between Janice H. Levin and the Estate
of Philip J. Levin and The Savings Fund Society of Ger-
mantown and its Vicinity dated July 31, 1974, First Amend-
ment dated January 20, 1975, Second Amendment dated
June 22, 1984, Assignment and Assumption between the
Bank and the Savings Fund Society of Germantown and its
Vicinity dated as of September 30, 1986, including Consent
to Assignment of Net Realty Holding Trust, Third Amend-
ment dated July 11, 1989, Fourth Amendment dated August
6, 1991, Fifth Amendment dated August 26, 1991 and Sixth
Amendment dated August 16, 1993 (each incorporated by
reference to Exhibit 10.8 to the Company's Form SB-2
Registration Statement No. 33-71712).
10.9 The Company's 1984 Incentive Stock Option Plan (incorpo-
rated by reference to Exhibit 10.9 to the Company's Form
SB-2 Registration Statement No. 33-71712).*
10.10 The Company's 1989 Equity Incentive Plan (incorporated
by reference to Exhibit 10.10 to the Company's Form SB-2
Registration Statement No. 33-71712).*
10.11 Agreement of Limited Partnership of Pond Associates dated
March 2, 1990 among Pond Eight, Inc. and the limited
partners set forth therein; and First Amendment of Limited
Partnership Agreement of Pond Associates dated January
15, 1991 (each incorporated by reference to Exhibit 10.12
to the Company's Form SB-2 Registration Statement No.
33-71712).
10.12 Office Lease dated April 30, 1996 between the Bank and
Kevin T. Fogerty.
10.13 Office Lease dated September 1, 1996 between the Bank
and ERA Partners Group, Inc.
21.1 Subsidiaries of the Company. (Incorporated by reference to
Exhibit 21.1 of the Company's Form 10-KSB report for the
fiscal year ended December 31, 1995).
27.1 Financial Data Schedule.
</TABLE>
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* This exhibit is a management contract or compensatory plan or arrangement.
EXHIBIT 10.12
OFFICE LEASE
THIS LEASE is made and entered into this 30th day of
April, 1996 by and between FIRST LEHIGH BANK, a Pennsylvania
banking corporation, hereinafter referred to as "Lessor", and KEVIN
T. FOGERTY, ATTORNEY, hereinafter referred to as "Lessee".
W I T N E S S E T H:
WHEREAS, Pond Associates, a Pennsylvania limited partnership,
hereinafter referred to as "Owner", is the owner of the real estate
and office building know as Lot #9, Winchester Plaza, South
Whitehall Township, Lehigh County, Pennsylvania. The aforesaid
real estate and office building erected thereon is hereinafter
referred to as the "Premises";
WHEREAS, the Lessor herein has leased the Premises from Owner
pursuant to a lease bearing even date herewith; and
WHEREAS, Lessor desires to sublease a portion of the Premises
to Lessee and Lessee desires to lease a portion of the Premises
from Lessor.
NOW THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Lease, and other good and valuable
consideration, Lessor leases to Lessee, and Lessee leases from
Lessor, the Premises according to the following terms and
conditions:
<PAGE>
ARTICLE 1 - DESCRIPTION OF RENTAL SPACE
The premises subject to this lease shall consist of those areas described
in Exhibit "A" attached hereto. The aforesaid portion of the Premises shall be
hereinafter referred to as the "Rental Space".
ARTICLE 2 - TERM
2.1 Lease Term. The term of this lease shall be five(5) years commencing on
April 30, 1996, and ending on April 30, 2001, unless sooner terminated or
extended as provided in this Lease.
2.2 Holdover. If Lessee holds over and continues in possession of the
Rental Space after expiration of the term of this Lease or any extension of that
term, other than as provided in herein, Lessee will be deemed to be occupying
the Rental Space on the basis of a month-to-month tenancy, subject to all of the
terms and conditions of this Lease.
ARTICLE 3. RENT
3.1 Basic Rent. Lessee will pay to Lessor the sum of Eighteen Thousand
Eight Hundred Thirty and 00/100 Dollars ($18,830.00) per annum for the first
year of the initial term. Lessee will pay to Lessor the sum of Nineteen Thousand
Five Hundred Two Dollars and Fifty Cents ($19,502.50) for the second year of the
initial term. Lessee will pay to Lessor the sum of Twenty Thousand One Hundred
Seventy Five Dollars ($20,175.00) per year for the 3rd, 4th, and 5th years of
the initial term.
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All rents shall be paid in twelve (12) equal monthly installments, in advance,
on the first day of each month. This will be known as the "basic rent." Rent for
any fractional month at the beginning or end of the Lease term shall be pro
rated on a per diem basis.
ARTICLE 4. USE OF RENTAL SPACE
4.1 Permitted Use. Lessee will use the Rental Space only for proper
purposes, which uses shall be limited to use as a Law Office or other office
uses.
4.2 Insurance Hazards. Lessee shall not use the Rental Space nor permit it
to be used in any manner that will cause a cancellation of, or an increase in
the existing rates for, fire, liability, or other insurance policies insuring
the Lessor for any liability in connection with ownership of the Premises.
4.3 Waste, Nuisance, or Illegal Uses. Lessee shall not use the Rental Space
or permit it to be used in any manner that results in waste of the Rental Space
or Premises or constitutes nuisance. Lessee shall not use the Rental Space or
permit it to be used for any illegal purpose. Lessee at its own expense will
comply, and will cause its officers, employees, agents, and invitees to comply,
with all applicable laws and ordinances, and with all applicable rules and
regulation of governmental agencies concerning the use of the Premises.
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ARTICLE 5. SERVICES, MAINTENANCE, AND SURRENDER
5.1 Use of Common Areas. Elevators, stairs, hallways, lobbies, parking
lots, walkways and all other common areas of the Premises are for the joint use
of all Tenants of the Premises. Lessee and its officers, employees, agents, and
invitees will use such common areas in a reasonable, orderly, and sanitary
manner in cooperation with all other Tenants and their officers, employees,
agents, and invitees.
5.2 Services and Maintenance by Lessor. So long as Lessee is not in default
under the terms of this Lease, Lessor shall furnish the Premises with the
following services and maintenance at Lessor's sole expense and shall pay all
expenses incurred in the operation and maintenance of the building when due:
(a) Heat and Air Conditioning. Heat and air conditioning from every
day during the customary periods of the year when such are necessary.
Lessee shall be responsible to pay their pro-rata share (18.70%) expense of
the monthly heating and air conditioning costs incurred for the third
floor.
(b) Elevators. Elevator service for the use of Lessee and the invitees
of Lessees and occupants.
(c) Electricity. Electric service for lighting and ordinary business
appliances. Lessee shall be responsible to pay their pro-rata
share(18.70%)expense of the monthly electrical costs incurred for the third
floor.
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(d) Fire Sprinkling System. A fire sprinkling system.
(e) Janitorial Service. Usual janitorial and maintenance service,
including sweeping and waxing of floors, removal of trash and garbage and
cleaning of windows, for and in the Rental Space at Lessee's expense.
(f) Water. Hot and cold water for lavatory and drinking purposes.
Lessee shall be responsible to pay a proportionate share of the monthly
water and sewer charges based on an equitable percentage (18.70%)to be
subsequently agreed upon by Lessor and Lessee.
(g) Insurance. Lessor will maintain fire and casualty insurance on the
Premises.
5.3 Curtailment or Interruption of Service. Lessor reserves the right to
interrupt, curtail, or suspend the provision of any utility service to which
Lessee may be entitled when necessary by reason of accident or emergency or for
repairs, alterations, or improvements that Lessor deems desirable or necessary,
or due to difficulty in obtaining supplies or labor or for any other cause
beyond the reasonable control of Lessor. The work of such repairs, alterations,
or improvements shall be made with reasonable diligence. Lessor shall in no
respect be liable for any failure of the utility companies or governmental
authorities to supply utility services to Lessee or for any limitation of supply
resulting from governmental order or directives. Lessee shall claim no
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<PAGE>
diminution or abatement of rent, nor damages, by reason of such interruption,
curtailment, or suspension, nor shall this Lease or any of Lessee's obligations
by reduced or affected.
5.4 Maintenance and Surrender by Lessee. Lessee shall maintain the Rental
Space throughout the Lease term, and keep them free from waste or nuisance. Upon
termination of the Lease, Lessee shall deliver the Rental Space in as good a
condition and state of repair as it was at the time Lessor delivered possession
to Lessee, except for reasonable wear and tear and damage by fire, flood or
other casualty. In the event Lessee should neglect to reasonably maintain the
Rental Space, Lessor shall have the right, but not the obligation, to cause
repairs or corrections to be made, and any reasonable costs incurred for such
repairs or corrections for which Lessee is responsible under this Paragraph
shall be payable by Lessee to Lessor as additional rent on the next rent
installment date.
5.5 Consideration for Other Tenants. Lessee will conduct itself, and will
cause its officers, employees, agents, and invitees to conduct themselves, with
full regard for the rights, convenience, and welfare of all other Tenants in the
Premises.
ARTICLE 6. TAXES
6.1 Personal Property Taxes. Lessee shall be liable for all taxes levied or
assessed against personal property, furniture or fixtures placed by Lessee in or
on the Rental Space. If any such
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<PAGE>
taxes for which Lessee is liable are levied or assessed against Lessor or
Lessor's property, and if Lessor elects to pay them, or if the assessed value of
Lessor's property is increased by inclusion of personal property, furniture, or
fixtures placed by Lessee in the Rental Space, and Lessor elects to pay the
taxes based on such increase, Lessee shall pay to Lessor on demand that part of
the taxes for which Lessee is primarily liable under this Article.
ARTICLE 7. ALTERATIONS, ADDITIONS,
IMPROVEMENTS, AND FIXTURES
7.1. Consent of Lessor. Lessee shall not make any alterations, additions,
or improvements to the Rental Space without the prior written consent of Lessor.
Consent for nonstructural alterations, additions, or improvements shall not be
unreasonable withheld by Lessor. Lessor agrees that it is responsible to provide
the building shell; heating, ventilation and air conditioning system throughout
the Rental Space; plumbing connections to main bathrooms and basic bathroom
fixtures and construction of main bathrooms similar to those on the third floor
of the Building; and construction and finishing of all common areas.
7.2 Property of Lessor. All alterations, additions, or improvements made by
Lessee shall become the property of Lessor at the termination of this lease.
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7.3 Trade Fixtures. Lessee has the right at all times to erect or install
furniture and fixtures, provided that Lessee complies with all applicable
governmental laws, ordinances, and regulations. Lessee shall have the right to
remove such items at the termination of this Lease, provided Lessee is not in
default at that time and the fixtures can be removed without structural damage
to the Rental Space. Prior to the termination of this Lease, Lessee must repair
any damage to the Rental Space. Prior to the termination of this Lease, Lessee
must repair any damage caused by removal of any fixtures. Any furniture or
fixtures that have not been removed by Lessee at the termination of this Lease
shall be deemed abandoned by Lessee and shall automatically become the property
of Lessor.
ARTICLE 8. DAMAGE OR DESTRUCTION
8.1 Notice to Lessor. If the Rental Space or any structures or improvements
on the Premises should be damaged or destroyed by fire, flood, or other
casualty, Lessee shall give immediate written notice of the damage or
destruction to Lessor, including a description of the damage and, as far as
known to Lessee, the cause of the damage.
8.2 Total Destruction. If the Rental Space are totally destroyed by fire,
flood, or other casualty, or if the Premises should be so damaged by such a
cause that rebuilding or repairs cannot be completed within sixty (60) working
days, this Lease
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<PAGE>
shall at the option of either Lessee or Lessor terminate, and rent shall be
abated for the unexpired portion of this Lease, effective as of the date of
written notification.
8.3 Partial Destruction. If the Rental Space or Premises are damaged by
fire, flood, or other casualty but not to such an extend that rebuilding or
repairs cannot reasonably be completed within sixty 60) working days, this Lease
shall not be terminated except as provided in Sub-paragraphs (a) and (b).
(a) If the partial destruction of the Rental Space occurs prior to the
final twelve months of the Lease term (which shall include any exercised
option to extend). Lessor shall, at its sole cost and risk, proceed
immediately to rebuild or repair the damaged buildings and improvements to
substantially the condition in which they existed prior to such damage. If
the Rental Space is untenantable in whole or in part following such damage,
the rent payable during the period in which it is untenantable shall be
adjusted equitably.In the event that Lessor should fail to complete such
rebuilding or repairs within sixty (60) working days from the date of
written notification by Lessee to Lessor of the occurrence of the damage,
Lessee may terminate this Lease by written notification to Lessor. On such
notification, all rights and obligations under this Lease shall cease.
(b) If partial destruction of the Rental space occurs in the
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<PAGE>
final twelve (12) months of the Lease term (which shall include any
exercised options to extend), Lessor need not rebuild or repair the Rental
Space. If Lessor elects not to rebuild or repair the Rental Space and the
Rental Space is untenantable in whole or in part following such damage,
Lessee may elect to terminate the Lease or to continue the Lease with the
rent for the remainder of the Lease period adjusted equitably.
ARTICLE 9. CONDEMNATION
9.1 Total Condemnation. If the whole of the Premises shall be taken by any
public or quasi public authority under the power of eminent domain,
condemnation, or expropriation or in the event of a conveyance in lieu thereof,
then this Lease shall terminate on that date and Lessee shall have no claim
against Lessor or the condemning authority for the value of the unexpired term
of this Lease.
9.2 Partial Condemnation. If any part of the Premises shall be so taken or
conveyed and if such partial taking or conveyance shall render the Rental Space
unsuitable for the business of the Lessee, then the term of this Lease shall
cease and terminate as of the date on which possession of the Rental Space is
required to be surrendered to the condemning authority. Lessee shall have no
claim against Lessor or the condemning authority for the value of any unexpired
portion of this Lease. In the event
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<PAGE>
such partial taking or conveyance is not extensive enough to render the Rental
Space unsuitable for the business of Lessee, this Lease shall continue in full
force and effect except that the rent shall be adjusted equitably during the
unexpired portion of the Lease.
9.3 Lessor's Damages. In the event of any condemnation or taking, whether
whole or partial, the Lessee shall not be entitled to any part of the award.
Lessee hereby expressly waives any right or claim to any part of such amount and
assigns to Lessor any such right or claim to which Lessee might become entitled.
9.4 Lessee's Damages. Although all damages in the event of any condemnation
are to belong to the Lessor, Lessee shall have the right, to the extent that it
shall not diminish the Lessor's award, to claim and recover from the condemning
authority, such compensation as may be separately awarded or recoverable by
Lessee under the Eminent Domain Code in Lessee's own right for or on account of,
and limited solely to, any cost to which Lessee might be put in removing
Lessee's merchandise, furniture, fixtures, leasehold improvements, and
equipment.
ARTICLE 10. RULES AND REGULATIONS
10.1 Lessee and Lessee's officers, employees, agents, and invitees will
comply fully with all of the rules and regulations of the Premises and related
facilities as published by the Lessor and Owner from time to time. Lessor shall
at all times have the right
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<PAGE>
to make reasonable changes, additions or deletions to these rules and
regulations for the purpose of ensuring or enhancing the safety, care,
cleanliness, maintenance, or preservation of the Premises and related facilities
and Premises, as well as for the purpose of preserving good order in and at
Premises. Lessee and its officers, employees, agents, and invitees will be bound
by any such changes, additions, or deletions to the rules and regulations on
receipt by Lessee of written notice from Lessor setting forth the changes,
additions, or deletions. Lessee shall be responsible for the compliance of its
officers, employees, and invitees with all such rules and regulations.
ARTICLE 11. INSPECTION BY LESSOR
11.1 Lessor and its agents, employees, and representatives shall have the
right to enter the Rental Space at all reasonable hours, whether or not during
normal business hours, for purposes of inspection, cleaning, maintenance,
repairs, alterations, or additions as Lessor may deem necessary (but Lessor
assumes no obligation to make repairs in the Rental Space except as
expressly provided in this Lease), or to show the Rental Space to prospective
Lessees, purchasers, or lenders. Lessee shall not be entitled to any abatement
or reduction of rent by reason of the entry of Lessor or any of its officers,
agents, representatives, or employees pursuant to this article, nor shall such
entry be deemed an actual or constructive eviction.
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<PAGE>
ARTICLE 12. MECHANICS' LIENS
12.1 The Lessee shall not cause or permit any mechanics liens to be filed
at any time against the Premises or any part of the Premises in connection with
any work done by it or caused to be done by it. If any such lien should be
filed, the Lessee shall promptly cause it to be discharged of record by payment,
deposit, bond, order of court, or otherwise.
ARTICLE 13. INDEMNITY
13.1 Lessee agrees to indemnify and hold Lessor and Owner harmless against
any and all claims, demands, damages, costs, and expenses, including reasonable
attorneys' fees for the defense of such claims and demands arising from the
conduct or management of Lessee's business on the Premises or its use of the
Rental Space, or from any breach on the part of Lessee of any conditions of this
Lease, or from any act or negligence of Lessee, its officers, agents,
contractors, employees, sublessees, or invitees in or about the Premises. In
case of any action or proceeding brought against Lessor by reason of any such
claim, Lessee, on notice from Lessor, agrees to defend the action or proceeding.
ARTICLE 14. ASSIGNMENT AND SUBLEASE
14.1 Assignment and Subletting by Lessee. Lessee shall not have the right
to further assign this Lease or further sublet the Rental Space without the
prior written approval of Lessor. Any further assignment or subleasing shall not
relieve Lessee from its
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<PAGE>
liability under the terms and conditions of this Lease, and any assignee of
Lessee shall be bound unconditionally by and perform all of the obligations of
Lessee under this Lease.
14.2 Assignment of Lessor. Lessor is expressly given the right to assign
any or all of its interest under the terms of this Lease.
ARTICLE 15. DEFAULT
15.1 Lessee's Default. Each of the following events shall be deemed to be
events of default by Lessee under this Lease:
(a) Lessee fails to pay any installment of rent due under this Lease
and the failure continues for a period of fifteen (15) days.
Notwithstanding the fact that Lessee cures arrearages in rent, if such
default and curing occur three (3) times within a one (1) year period, such
defaults will be deemed deliberate and not curable on the last occasion
thereof.
(b) Lessee fails to comply with any term, provision, or covenant of
this Lease, other than the payment of rent, and does not cure the failure
within thirty (30) days after written notice of the failure to Lessee.
(c) Lessee makes an assignment for the benefit of creditors. (d)
Lessee deserts or vacates any substantial portion of the Rental space for a
period of thirty (30) or more days.
15.2 Remedies for Default. On the occurrence of any event
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of default specified herein, Lessor shall have the option to pursue any one
or more of the following remedies:
(a) Lessor may terminate this Lease after at least fifteen (15) days'
written notice, in which event Lessee shall immediately surrender the
Rental Space to Lessor. Lessor may, without prejudice to any other remedy
that it may have for possession or arrearages in rent, enter on and take
possession of the Rental Space and remove all persons and property without
being deemed guilty of any manner of trespass, and may relet the Rental
Space, or any part of the Rental Space, for all or any part of the
remainder of the Lease term to a party satisfactory to Lessor at such
monthly rental as Lessor, with reasonable diligence, is able to secure.
Lessee agrees to pay Lessor on demand the amount of all loss and damage
that lessor suffers by reason of such termination, whether through
inability to relet the Rental Space on satisfactory terms or otherwise.
(b) Lessor may enter on and take possession of the Rental Space, after
at least fifteen (15) days' written notice, and relet the Rental Space for
the benefit of Lessee on such terms as Lessor deems advisable, and receive
the rent for the reletting. Lessee agrees to pay Lessor on demand any
deficiency that may arise by reason of such reletting.
(c) Lessor may enter on the Rental Space, without being
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liable for prosecution or any claim for damages for such entry, and do
whatever Lessee is obligated to do under the terms of this Lese to correct
the default. Lessee agrees to reimburse Lessor on demand for any expenses
that Lessor may incur in effecting compliance with Lessee's obligations
under this Lease in this manner, and Lessee further agrees that Lessor
shall not be liable for any damages resulting to Lessee from such action.
No re-entry or taking possession of the Rental Space by Lessor shall be
construed as an election on its part to terminate this Lease, unless
written notice of such intention be given to Lessee. Notwithstanding any
such reletting or reentry or taking possession, Lessor may at any time
thereafter elect to terminate this Lease for a previous default. The loss
or damage that Lessor may suffer by reason of termination of this Lease,
or the deficiency from any reletting as provided for above, shall include
the expense of repossession.
15.3 Lessor's Default. If Lessor defaults in the performance of any term,
covenant, or condition required to be performed by it under this agreement,
Lessee may elect to do either one of the following:
(a) After not less than fifteen (15) days' notice to Lessor, Lessee
may remedy such default by any necessary action and, in connection with
such remedy, may pay expenses and employ
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counsel. All sums expended of obligations incurred by Lessee in
connection with remedying Lessor's default shall be paid by Lessor to
Lessee on demand and, on failure of such reimbursement, Lessee may, in
addition to any other right or remedy that Lessee may have, deduct these
costs and expenses from rent subsequently becoming due under this Lease.
(b) Lessee may terminate this Lease by giving at least fifteen (15)
days' notice to Lessor of such intention. In the event Lessee elects this
option, the Lease will be terminated on the date designated in Lessee's
notice, unless Lessor has cured the default prior to expiration of the
fifteen (15) day period.
15.4 Cumulative Remedies. Pursuit of any of the remedies provided in this
Lease by either Lessor or Lessee shall not preclude pursuit of any of the other
remedies provided in this Lease or by law. Pursuit of any remedy provided in
this Lease or by law by either party shall not constitute a forfeiture or waiver
of any damages accruing to either party by reason of the violation of any of the
terms, provisions, and covenants contained in this Lease. Nor shall pursuit of
any remedies provided in this Lease by Lessor constitute a waiver or forfeiture
of any rent due to Lessor under this Lease.
15.5 Waiver of Default. No waiver by either party of any default or
violation or breach of any of the terms, provisions, or
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covenants contained in this Lease shall be deemed or construed to constitute a
waiver of any other violation or breach of any of the terms, provisions, and
covenants of the Lease. Forbearance by either party to enforce one or more of
the remedies provided in this Lease or by law on an event of default shall not
be deemed or construed to constitute a waiver of such default. Lessor's
acceptance of rent following an event of default under this Lease shall not be
construed as Lessor's waiver of the default.
15.6 Surrender of Rental Space. Nothing done by Lessor or its agents during
the Lease term shall be deemed an acceptance of a surrender of the Rental Space,
and no agreement to accept a surrender the Rental Space shall be valid unless in
writing and subscribed by Lessor.
ARTICLE 16. SIGNS
Lessor shall provide an appropriate sign outside and shall list Lessee as a
tenant on that sign. Lessee shall be permitted to install suitable signs in the
Building lobby, elevator, and other appropriate places within the Building
provided said signs comply with all applicable zoning and municipal
requirements.
ARTICLE 17. MISCELLANEOUS
17.1 Mortgages. Lessee accepts this Lease subject to any deeds of trust,
security interests, or mortgages that might now or later constitute a lien on
the Premises. Lessee must, on demand, execute any instruments, releases, or
other documents that are
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required by any mortgagee for the purpose of subjection and subordinating
this Lease to the lien of any such deed of trust, security interest, or mortgage
constitute a lien on the Building or improvements in the Building or the
Premises, Lessor has the right to waive the applicability of this Paragraph so
that this Lease will not be subject and subordinate to any such deed of trust,
security interest, or mortgage. Lessor agrees that it shall require that any
mortgagee execute a non-disturbance and attornment agreement with respect to
the Rental Space.
17.2 Notices of Addresses. All notices to be given under this agreement
shall be given by certified mail or registered mail, addressed to the property
party, at the following addresses:
LESSOR: FIRST LEHIGH BANK
1620 POND ROAD SUITE 300
ALLENTOWN, PA 18104-2255
ATTN: GEORGE M. BALTOZER
LESSEE: KEVIN T. FOGERTY, ATTORNEY
1620 POND ROAD SUITE 301
ALLENTOWN, PA 18104-2255
Either party may change the address to which notices are to be sent by
giving the other party notice of the new address in the manner provided in this
Paragraph.
17.3 Binding Successors and Assigns. All rights and liability given to, or
imposed on, the respective parties to this Lease shall extend to and bind the
several respective successors and assigns of the parties when otherwise
permitted by this Lease.
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17.4 Reasonableness. In all instances where Lessor's or Lessee's consent,
permission, or approval is required, the same shall not be unreasonably refused,
withheld, or delayed.
17.5 Pennsylvania Law to Apply. This Lease shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania. All
obligations of the parties created by this agreement are performable in Lehigh
County, Pennsylvania, which county shall be the proper forum in which to
litigate any issues arising under this lease.
17.6 Legal Construction. In the event any one or more of the provisions
contained in this agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provisions of the agreement, and
this agreement shall be construed as if such invalid, illegal, or unenforceable
provision had never been included in the agreement.
17.7 Prior Agreements Superseded. This Lease constitutes the only agreement
between Lessor and Lessee and supersedes any prior understandings or written or
oral agreements between the parties respecting the subject matter of this Lease.
17.8 Amendment. No amendment, modification, or alteration of the terms of
this Lease shall be binding unless in writing, dated subsequent to the date of
this Lease, and duly executed by the Lessor and Lessee.
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17.9 Attorney's Fees and Costs. If at any time during the term of this
Lease either Lessor or Lessee shall institute any action or proceeding against
the other relating to the provisions of this Lease, or any default of this
Lease, then the unsuccessful party shall reimburse the successful party for
reasonable attorney's fees and expenses incurred to enforce the Lease.
17.10 Unavoidable Delay. Neither Lessor nor Lessee shall be required to
perform any term, condition, or covenant in this Lease so long as such
performance is hindered or prevented by unavoidable delays. For purposes of this
Paragraph, unavoidable delays shall be defined as natural disasters; strikes,
lockouts or labor disputes; government regulations, restrictions, or controls;
enemy or hostile government action; civil riot; fire, floods, or nuclear
accident; or any other cause not reasonably within the control of Lessor or
Lessee and that by the exercise of due diligence Lessor or a Lessee is unable,
wholly or in part, to prevent or overcome.
17.11 The undersigned Lessor and Lessee execute this agreement on
April 30, 1996, at Allentown, Lehigh County, Pennsylvania.
17.12 Attached Lease Addendum and Exhibit "A" shall become a part of this
lease.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this lease on the date first
written.
LESSOR
FIRST LEHIGH BANK
BY: /s/ GEORGE M. BALTOZER
_______________________________
GEORGE M. BALTOZER
EXECUTIVE VICE PRESIDENT
LESSEE
KEVIN T. FOGERTY, ATTORNEY
/s/ G.M. BALTOZER BY: /s/ KEVIN T. FOGERTY
___________________________ _______________________________
Attest
CONSENT
The Owner of the Premises, Pond Associates, hereby consents to this
Sub-Lease between FIRST LEHIGH BANK and KEVIN T. FOGERTY, ATTORNEY.
POND ASSOCIATES
AUGUST 30, 1996 BY: /s/ Wilbur R. Roat
___________________________ _______________________________
Date
-22-
<PAGE>
EXHIBIT "A"
Description of Rental Space:
1,345 square feet of space on the third floor of the building as
specifically designated by Lessor consisting as of the date of this Lease of
1,345 improved space.
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<PAGE>
LEASE ADDENDUM FOR: 1620 POND ROAD, ALLENTOWN, PA 18104
FROM: KEVIN T. FOGERTY, ATTORNEY
A. Gross Leasable space as per attached plan is 1,345 sq. ft.
B. Year 1 of lease; the base rental shall be $14 per square
foot for a total of $18,830 per annum, payable monthly at
$1,569.17.
C. Year 2 of lease; the base rental shall be $14.50 per square
foot for a total of $19,502.50 per annum, payable monthly at
$1,625.20.
D. Year 3,4, & 5 of lease; the base rental shall be $15.00 per
square foot for a total of $20,175.00 per annum, payable
monthly at $1,681.25.
E. Lessee shall be responsible for pro-rata share (18.70%) of
heat, lights, and electric for leased space on third floor.
F. Lessee shall be responsible for insurance and janitorial for
leased space.
G. Lessor shall be responsible for building outside grass and
snow removal, taxes, repairs, insurance of outside of
building.
Total Monthly Lease: Year 1 = $1,569.17
Year 2 = $1,625.20
Year 3 = $1,681.25
Year 4 = $1,681.25
Year 5 = $1,681.25
-24-
<PAGE>
ADDENDUM TO LEASE AGREEMENT BETWEEN
FIRST LEHIGH BANK AND KEVIN T. FOGERTY
THIS ADDENDUM TO LEASE AGREEMENT, made this 30th day of April, 1996, is
intended to supplement and modify the written Lease Agreement to and of which it
is a part, it being the intention of the parties hereto that to the extent any
provisions of this Addendum conflict with or differ from any terms and
provisions of the Lease Agreement, the terms of this Addendum shall control.
AND NOW, the parties, for the good and valuable consideration stated in the
Lease Agreement being executed contemporaneously herewith, and intending to be
legally bound hereby, the parties agree as follows:
1. Term - The parties acknowledge and agree that the term of this Lease may
at Lessee's option and election be terminated by Lessee on thirty (30) days
written notice to Lessor if for any reason whatsoever Lessee does not continue
to serve as primary outside counsel for Lessor, handling foreclosures,
collections, preparation of loan documentation and defense of lender liability
cases, and similar routine day-to-day matters.
2. The bookshelves installed by Lessee shall remain his property and may be
removed by him at the termination of this Lease.
IN WITNESS WHEREOF, the parties have executed this Addendum on the date and
year above written.
Witness: FIRST LEHIGH BANK:
/s/ BY: /s/ GEORGE M. BALTOZER
________________________________ _____________________________
George M. Baltozer
Witness:
/s/ G.M. BALTOZER /s/ KEVIN T. FOGERTY
________________________________ __________________________________
Kevin T. Fogerty, Esquire
EXHIBIT 10.13
OFFICE LEASE
THIS LEASE is made and entered into this 1 st day of September, 1996 by
and between FIRST LEHIGH BANK, a Pennsylvania banking corporation, hereinafter
referred to as "Lessor", and ERA PARTNERS GROUP, INC., A Pennsylvania
professional corporation, hereinafter referred to as "Lessee".
W I T N E S S E T H:
WHEREAS, Pond Associates, a Pennsylvania limited partnership,
hereinafter referred to as "Owner", is the owner of the real estate and office
building know as Lot #9, Winchester Plaza, South Whitehall Township, Lehigh
County, Pennsylvania. The aforesaid real estate and office building erected
thereon is hereinafter referred to as the "Premises";
WHEREAS, the Lessor herein has leased the Premises from Owner pursuant
to a lease bearing even date herewith; and
WHEREAS, Lessor desires to sublease a portion of the Premises to Lessee
and Lessee desires to lease a portion of the Premises from Lessor.
NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Lease, and other good and valuable
<PAGE>
consideration, Lessor leases to Lessee, and Lessee leases from Lessor, the
Premises according to the following terms and conditions:
ARTICLE 1 - DESCRIPTION OF RENTAL SPACE
The premises subject to this lease shall consist of those areas described
in Exhibit "A" attached hereto. The aforesaid portion of the Premises shall be
hereinafter referred to as the "Rental Space".
ARTICLE 2 - TERM
2.1 Lease Term. The term of this lease shall be four (4) years commencing
on September 1, 1996, and ending on July 1, 2000, unless sooner terminated or
extended as provided in this Lease.
2.2 Holdover. If Lessee holds over and continues in possession of the
Rental Space after expiration of the term of this Lease or any extension of that
term, other than as provided in herein, Lessee will be deemed to be occupying
the Rental Space on the basis of a month-to-month tenancy, subject to all of the
terms and conditions of this Lease.
ARTICLE 3. RENT
3.1 Basic Rent. Lessee will pay to Lessor the sum of Sixteen Thousand Nine
Hundred Thirty One and 00/100 Dollars
<PAGE>
($16,931.00) per year for the first(1) year of the initial term. Lessee
will pay to Lessor the sum of Seventeen Thousand Nine Hundred Fifty-two Dollars
($17,952.00) for the second year of the initial term. Lessee will pay to Lessor
the sum of Eighteen Thousand Nine Hundred Seventy-three and 00/100 Dollars
($18,973.00) per year for the 3rd year of the initial term. Lessee will pay to
Lessor the sum of Nineteen Thousand Nine Hundred Ninety Four Dollars
($19,994.00) for the 4th year of the initial term. It is acknowledged that
included in the Rental Space is 600 sq. feet. All rents shall be paid in twelve
(12) equal monthly installments, in advance, on the first day of each month.
This will be known as the "basic rent." Rent for any fractional month at the
beginning or end of the Lease term shall be pro rated on a per diem basis.
ARTICLE 4. USE OF RENTAL SPACE
4.1 Permitted Use. Lessee will use the Rental Space only for proper
purposes, which uses shall be limited to use as a Real Estate Office or other
office uses.
4.2 Insurance Hazards. Lessee shall not use the Rental Space nor permit it
to be used in any manner that will cause a cancellation of, or an increase in
the existing rates for, fire,
<PAGE>
liability, or other insurance policies insuring the Lessor for any liability in
connection with ownership of the Premises.
4.3 Waste, Nuisance, or Illegal Uses. Lessee shall not use the Rental Space
or permit it to be used in any manner that results in waste of the Rental Space
or Premises or constitutes nuisance. Lessee shall not use the Rental Space or
permit it to be used for any illegal purpose. Lessee at its own expense will
comply, and will cause its officers, employees, agents, and invitees to comply,
with all applicable laws and ordinances, and with all applicable rules and
regulation of governmental agencies concerning the use of the Premises.
ARTICLE 5. SERVICES, MAINTENANCE, AND SURRENDER
5.1 Use of Common Areas. Elevators, stairs, hallways, lobbies, parking
lots, walkways and all other common areas of the Premises are for the joint use
of all Tenants of the Premises. Lessee and its officers, employees, agents, and
invitees will use such common areas in a reasonable, orderly, and sanitary
manner in cooperation with all other Tenants and their officers, employees,
agents, and invitees.
5.2 Services and Maintenance by Lessor. So long as Lessee is not in default
under the terms of this Lease, Lessor shall furnish
<PAGE>
the Premises with the following services and maintenance at Lessor's sole
expense and shall pay all expenses incurred in the operation and maintenance of
the building when due:
(a) Heat and Air Conditioning. Heat and air conditioning from every
day during the customary periods of the year when such are necessary.
Lessee shall be responsible to pay their expense of the monthly heating and
air conditioning costs.
(b) Elevators. Elevator service for the use of Lessee and the invitees
of Lessees and occupants.
(c) Electricity. Electric service for lighting and ordinary business
appliances. Lessee shall be responsible to pay their expense of the monthly
electrical costs.
(d) Fire Sprinkling System. A fire sprinkling system.
(e) Janitorial Service. Usual janitorial and maintenance service,
including sweeping and waxing of floors, removal of trash and garbage and
cleaning of windows, for and in the Rental Space at Lessee's expense.
(f) Water. Hot and cold water for lavatory and drinking purposes.
Lessee shall be responsible to pay a proportionate share of the monthly
water and sewer charges based on an equitable percentage to be subsequently
agreed upon by Lessor and Lessee.
<PAGE>
(g) Insurance. Lessor will maintain fire and casualty insurance on the
Premises.
5.3 Curtailment or Interruption of Service. Lessor reserves the right to
interrupt, curtail, or suspend the provision of any utility service to which
Lessee may be entitled when necessary by reason of accident or emergency or for
repairs, alterations, or improvements that Lessor deems desirable or necessary,
or due to difficulty in obtaining supplies or labor or for any other cause
beyond the reasonable control of Lessor. The work of such repairs, alterations,
or improvements shall be made with reasonable diligence. Lessor shall in no
respect be liable for any failure of the utility companies or governmental
authorities to supply utility services to Lessee or for any limitation of supply
resulting from governmental order or directives. Lessee shall claim no
diminution or abatement of rent, nor damages, by reason of such interruption,
curtailment, or suspension, nor shall this Lease or any of Lessee's obligations
by reduced or affected.
5.4 Maintenance and Surrender by Lessee. Lessee shall maintain the Rental
Space throughout the Lease term, and keep them free from waste or nuisance. Upon
termination of the Lease, Lessee shall deliver the Rental Space in as good a
condition and state of repair as it was at the time Lessor delivered possession
to Lessee,
<PAGE>
except for reasonable wear and tear and damage by fire, flood or other casualty.
In the event Lessee should neglect to reasonably maintain the Rental Space,
Lessor shall have the right, but not the obligation, to cause repairs or
corrections to be made, and any reasonable costs incurred for such repairs or
corrections for which Lessee is responsible under this Paragraph shall be
payable by Lessee to Lessor as additional rent on the next rent installment
date.
5.5 Consideration for Other Tenants. Lessee will conduct itself, and will
cause its officers, employees, agents, and invitees to conduct themselves, with
full regard for the rights, convenience, and welfare of all other Tenants in the
Premises.
ARTICLE 6. TAXES
6.1 Personal Property Taxes. Lessee shall be liable for all taxes levied or
assessed against personal property, furniture or fixtures placed by Lessee in or
on the Rental Space. If any such taxes for which Lessee is liable are levied or
assessed against Lessor or Lessor's property, and if Lessor elects to pay them,
or if the assessed value of Lessor's property is increased by inclusion of
personal property, furniture, or fixtures placed by Lessee in the Rental Space,
and Lessor elects to pay the taxes
<PAGE>
based on such increase, Lessee shall pay to Lessor on demand that part of the
taxes for which Lessee is primarily liable under this Article.
ARTICLE 7. ALTERATIONS, ADDITIONS,
IMPROVEMENTS, AND FIXTURES
7.1. Consent of Lessor. Lessee shall not make any alterations, additions,
or improvements to the Rental Space without the prior written consent of Lessor.
Consent for nonstructural alterations, additions, or improvements shall not be
unreasonable withheld by Lessor. Lessor agrees that it is responsible to provide
the building shell; heating, ventilation and air conditioning system throughout
the Rental Space; plumbing connections to main bathrooms and basic bathroom
fixtures and construction of main bathrooms similar to those on the third floor
of the Building; and construction and finishing of all common areas.
7.2 Property of Lessor. All alterations, additions, or improvements made by
Lessee shall become the property of Lessor at the termination of this lease.
7.3 Trade Fixtures. Lessee has the right at all times to erect or install
furniture and fixtures, provided that Lessee complies with all applicable
governmental laws, ordinances, and
<PAGE>
regulations. Lessee shall have the right to remove such items at the termination
of this Lease, provided Lessee is not in default at that time and the fixtures
can be removed without structural damage to the Rental Space. Prior to the
termination of this Lease, Lessee must repair any damage to the Rental Space.
Prior to the termination of this Lease, Lessee must repair any damage caused by
removal of any fixtures. Any furniture or fixtures that have not been removed by
Lessee at the termination of this Lease shall be deemed abandoned by Lessee and
shall automatically become the property of Lessor.
ARTICLE 8. DAMAGE OR DESTRUCTION
8.1 Notice to Lessor. If the Rental Space or any structures or improvements
on the Premises should be damaged or destroyed by fire, flood, or other
casualty, Lessee shall give immediate written notice of the damage or
destruction to Lessor, including a description of the damage and, as far as
known to Lessee, the cause of the damage.
8.2 Total Destruction. If the Rental Space are totally destroyed by fire,
flood, or other casualty, or if the Premises should be so damaged by such a
cause that rebuilding or repairs cannot be completed within sixty (60) working
days, this Lease shall at the option of either Lessee or Lessor terminate, and
rent
<PAGE>
shall be abated for the unexpired portion of this Lease, effective as of the
date of written notification.
8.3 Partial Destruction. If the Rental Space or Premises are damaged by
fire, flood, or other casualty but not to such an extend that rebuilding or
repairs cannot reasonably be completed within sixty (60) working days, this
Lease shall not be terminated except as provided in Sub-paragraphs (a) and (b).
(a) If the partial destruction of the Rental Space occurs prior to the
final twelve months of the Lease term (which shall include any exercised
option to extend). Lessor shall, at its sole cost and risk, proceed
immediately to rebuild or repair the damaged buildings and improvements to
substantially the condition in which they existed prior to such damage. If
the Rental Space is untenantable in whole or in part following such damage,
the rent payable during the period in which it is untenantable shall be
adjusted equitably. In the event that Lessor should fail to complete such
rebuilding or repairs within sixty (60) working days from the date of
written notification by Lessee to Lessor of the occurrence of the damage,
Lessee may terminate this Lease by written notification to Lessor. On such
notification, all rights and obligations under this Lease shall cease.
<PAGE>
(b) If partial destruction of the Rental Space occurs in the final
twelve (12) months of the Lease term (which shall include any exercised
options to extend), Lessor need not rebuild or repair the Rental Space. If
Lessor elects not to rebuild or repair the Rental Space and the Rental
Space is untenantable in whole or in part following such damage, Lessee may
elect to terminate the Lease or to continue the Lease with the rent for the
remainder of the Lease period adjusted equitably.
ARTICLE 9. CONDEMNATION
9.1 Total Condemnation. If the whole of the Premises shall be taken by any
public or quasi public authority under the power of eminent domain,
condemnation, or expropriation or in the event of a conveyance in lieu thereof,
then this Lease shall terminate on that date and Lessee shall have no claim
against Lessor or the condemning authority for the value of the unexpired term
of this Lease.
9.2 Partial Condemnation. If any part of the Premises shall be so taken or
conveyed and if such partial taking or conveyance shall render the Rental Space
unsuitable for the business of the Lessee, then the term of this Lease shall
cease and terminate as of the date on which possession of the Rental Space is
<PAGE>
required to be surrendered to the condemning authority. Lessee shall have no
claim against Lessor or the condemning authority for the value of any unexpired
portion of this Lease. In the event such partial taking or conveyance is not
extensive enough to render the Rental Space unsuitable for the business of
Lessee, this Lease shall continue in full force and effect except that the rent
shall be adjusted equitably during the unexpired portion of the Lease.
9.3 Lessor's Damages. In the event of any condemnation or taking, whether
whole or partial, the Lessee shall not be entitled to any part of the award.
Lessee hereby expressly waives any right or claim to any part of such amount and
assigns to Lessor any such right or claim to which Lessee might become entitled.
9.4 Lessee's Damages. Although all damages in the event of any condemnation
are to belong to the Lessor, Lessee shall have the right, to the extent that it
shall not diminish the Lessor's award, to claim and recover from the condemning
authority, such compensation as may be separately awarded or recoverable by
Lessee under the Eminent Domain Code in Lessee's own right for or on account of,
and limited solely to, any cost to which Lessee might be put in removing
Lessee's merchandise, furniture, fixtures, leasehold improvements, and
equipment.
<PAGE>
ARTICLE 10. RULES AND REGULATIONS
10.1 Lessee and Lessee's officers, employees, agents, and invitees will
comply fully with all of the rules and regulations of the Premises and related
facilities as published by the Lessor and Owner from time to time. Lessor shall
at all times have the right to make reasonable changes, additions or deletions
to these rules and regulations for the purpose of ensuring or enhancing the
safety, care, cleanliness, maintenance, or preservation of the Premises and
related facilities and Premises, as well as for the purpose of preserving good
order in and at Premises. Lessee and its officers, employees, agents, and
invitees will be bound by any such changes, additions, or deletions to the rules
and regulations on receipt by Lessee of written notice from Lessor setting forth
the changes, additions, or deletions. Lessee shall be responsible for the
compliance of its officers, employees, and invitees with all such rules and
regulations.
ARTICLE 11. INSPECTION BY LESSOR
11.1 Lessor and its agents, employees, and representatives shall have the
right to enter the Rental Space at all reasonable hours, whether or not during
normal business hours, for purposes of inspection, cleaning, maintenance,
repairs, alterations, or
<PAGE>
additions as Lessor may deem necessary (but Lessor assumes no obligation to make
repairs in the Rental Space except as expressly provided in this Lease), or to
show the Rental Space to prospective Lessees, purchasers, or lenders. Lessee
shall not be entitled to any abatement or reduction of rent by reason of the
entry of Lessor or any of its officers, agents, representatives, or employees
pursuant to this article, nor shall such entry be deemed an actual or
constructive eviction.
ARTICLE 12. MECHANICS' LIENS
12.1 The Lessee shall not cause or permit any mechanics liens to be filed
at any time against the Premises or any part of the Premises in connection with
any work done by it or caused to be done by it. If any such lien should be
filed, the Lessee shall promptly cause it to be discharged of record by payment,
deposit, bond, order of court, or otherwise.
ARTICLE 13. INDEMNITY
13.1 Lessee agrees to indemnify and hold Lessor and Owner harmless against
any and all claims, demands, damages, costs, and expenses, including reasonable
attorneys' fees for the defense of such claims and demands arising from the
conduct or management of Lessee's business on the Premises or its use of the
Rental Space, or from any breach on the part of Lessee of any conditions of this
<PAGE>
Lease, or from any act or negligence of Lessee, its officers, agents,
contractors, employees, sublessees, or invitees in or about the Premises. In
case of any action or proceeding brought against Lessor by reason of any such
claim, Lessee, on notice from Lessor, agrees to defend the action or proceeding.
ARTICLE 14. ASSIGNMENT AND SUBLEASE
14.1 Assignment and Subletting by Lessee. Lessee shall not have the right
to further assign this Lease or further sublet the Rental Space without the
prior written approval of Lessor. Any further assignment or subleasing shall not
relieve Lessee from its liability under the terms and conditions of this Lease,
and any assignee of Lessee shall be bound unconditionally by and perform all of
the obligations of Lessee under this Lease.
14.2 Assignment of Lessor. Lessor is expressly given the right to assign
any or all of its interest under the terms of this Lease.
ARTICLE 15. DEFAULT
15.1 Lessee's Default. Each of the following events shall be deemed to be
events of default by Lessee under this Lease:
(a) Lessee fails to pay any installment of rent due under this Lease
and the failure continues for a period of fifteen
<PAGE>
(15) days. Notwithstanding the fact that Lessee cures arrearages in
rent, if such default and curing occur three (3) times within a one (1)
year period, such defaults will be deemed deliberate and not curable on the
last occasion thereof.
(b) Lessee fails to comply with any term, provision, or covenant of
this Lease, other than the payment of rent, and does not cure the failure
within thirty (30) days after written notice of the failure to Lessee.
(c) Lessee makes an assignment for the benefit of creditors.
(d) Lessee deserts or vacates any substantial portion of the Rental
space for a period of thirty (30) or more days.
15.2 Remedies for Default. On the occurrence of any event of default
specified herein, Lessor shall have the option to pursue any one or more of the
following remedies:
(a) Lessor may terminate this Lease after at least fifteen (15) days'
written notice, in which event Lessee shall immediately surrender the
Rental Space to Lessor. Lessor may, without prejudice to any other remedy
that it may have for possession or arrearages in rent, enter on and take
possession of the Rental Space and remove all persons and property without
being deemed guilty of any manner of trespass, and may
<PAGE>
relet the Rental Space, or any part of the Rental Space, for all or
any part of the remainder of the Lease term to a party satisfactory to
Lessor at such monthly rental as Lessor, with reasonable diligence, is able
to secure. Lessee agrees to pay Lessor on demand the amount of all loss and
damage that lessor suffers by reason of such termination, whether through
inability to relet the Rental Space on satisfactory terms or otherwise.
(b) Lessor may enter on and take possession of the Rental Space, after
at least fifteen (15) days' written notice, and relet the Rental Space for
the benefit of Lessee on such terms as Lessor deems advisable, and receive
the rent for the reletting. Lessee agrees to pay Lessor on demand any
deficiency that may arise by reason of such reletting. (c) Lessor may enter
on the Rental Space, without being liable for prosecution or any claim for
damages for such entry, and do whatever Lessee is obligated to do under the
terms of this Lese to correct the default. Lessee agrees to reimburse
Lessor on demand for any expenses that Lessor may incur in effecting
compliance with Lessee's obligations under this Lease in this manner, and
Lessee further agrees that Lessor shall not be liable for any damages
resulting to Lessee
<PAGE>
from such action. No re-entry or taking possession of the Rental Space
by Lessor shall be construed as an election on its part to terminate this
Lease, unless written notice of such intention be given to Lessee.
Notwithstanding any such reletting or reentry or taking possession, Lessor
may at any time thereafter elect to terminate this Lease for a previous
default. The loss or damage that Lessor may suffer by reason of termination
of this Lease, or the deficiency from any reletting as provided for above,
shall include the expense of repossession. 15.3 Lessor's Default. If Lessor
defaults in the performance of any term, covenant, or condition required to
be performed by it under this agreement, Lessee may elect to do either one
of the following:
(a) After not less than fifteen (15) days' notice to Lessor, Lessee
may remedy such default by any necessary action and, in connection with
such remedy, may pay expenses and employ counsel. All sums expended of
obligations incurred by Lessee in connection with remedying Lessor's
default shall be paid by Lessor to Lessee on demand and, on failure of such
reimbursement, Lessee may, in addition to any other right or remedy that
Lessee may have, deduct these costs and expenses
<PAGE>
from rent subsequently becoming due under this Lease.
(b) Lessee may terminate this Lease by giving at least fifteen (15)
days' notice to Lessor of such intention. In the event Lessee elects this
option, the Lease will be terminated on the date designated in Lessee's
notice, unless Lessor has cured the default prior to expiration of the
fifteen (15) day period.
15.4 Cumulative Remedies. Pursuit of any of the remedies provided in this
Lease by either Lessor or Lessee shall not preclude pursuit of any of the other
remedies provided in this Lease or by law. Pursuit of any remedy provided in
this Lease or by law by either party shall not constitute a forfeiture or waiver
of any damages accruing to either party by reason of the violation of any of the
terms, provisions, and covenants contained in this Lease. Nor shall pursuit of
any remedies provided in this Lease by Lessor constitute a waiver or forfeiture
of any rent due to Lessor under this Lease.
15.5 Waiver of Default. No waiver by either party of any default or
violation or breach of any of the terms, provisions, or covenants contained in
this Lease shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions, and covenants of the Lease.
Forbearance by
<PAGE>
either party to enforce one or more of the remedies provided in this Lease or by
law on an event of default shall not be deemed or construed to constitute a
waiver of such default. Lessor's acceptance of rent following an event of
default under this Lease shall not be construed as Lessor's waiver of the
default.
15.6 Surrender of Rental Space. Nothing done by Lessor or its agents during
the Lease term shall be deemed an acceptance of a surrender of the Rental Space,
and no agreement to accept a surrender the Rental Space shall be valid unless in
writing and subscribed by Lessor.
ARTICLE 16. MISCELLANEOUS
16.1 Mortgages. Lessee accepts this Lease subject to any deeds of trust,
security interests, or mortgages that might now or later constitute a lien on
the Premises. Lessee must, on demand, execute any instruments, releases, or
other documents that are required by any mortgagee for the purpose of subjection
and subordinating this Lease to the lien of any such deed of trust, security
interest, or mortgage constitute a lien on the Building or improvements in the
Building or the Premises, Lessor has the right to waive the applicability of
this Paragraph so that this Lease will not be subject and subordinate to any
such deed of trust,
<PAGE>
security interest, or mortgage. Lessor agrees that it shall require that any
mortgagee execute a non-disturbance and attornment agreement with respect to the
Rental Space.
16.2 Notices of Addresses. All notices to be given under this agreement
shall be given by certified mail or registered mail, addressed to the property
party, at the following addresses:
LESSOR: FIRST LEHIGH BANK
1620 POND ROAD SUITE 300
ALLENTOWN, PA 18104-2255
ATTN: GEORGE M. BALTOZER, EVP
LESSEE: ERA PARTNERS GROUP, INC.
1620 POND ROAD SUITE 101
ALLENTOWN, PA 18104-2255
Either party may change the address to which notices are to be sent by
giving the other party notice of the new address in the manner provided in this
Paragraph.
16.3 Binding Successors and Assigns. All rights and liability given to, or
imposed on, the respective parties to this Lease shall extend to and bind the
several respective successors and assigns of the parties when otherwise
permitted by this Lease.
16.4 Reasonableness. In all instances where Lessor's or Lessee's consent,
permission, or approval is required, the same shall not be unreasonably refused,
withheld, or delayed.
16.5 Pennsylvania Law to Apply. This Lease shall be governed
<PAGE>
by and construed in accordance with the laws of the Commonwealth of
Pennsylvania. All obligations of the parties created by this
agreement are performable in Lehigh County, Pennsylvania, which
county shall be the proper forum in which to litigate any issues
arising under this lease.
16.6 Legal Construction. In the event any one or more of the provisions
contained in this agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provisions of the agreement, and
this agreement shall be construed as if such invalid, illegal, or unenforceable
provision had never been included in the agreement.
16.7 Amendment. No amendment, modification, or alteration of the terms of
this Lease shall be binding unless in writing, dated subsequent to the date of
this Lease, and duly executed by the Lessor and Lessee.
16.8 Attorney's Fees and Costs. If at any time during the term of this
Lease either Lessor or Lessee shall institute any action or proceeding against
the other relating to the provisions of this Lease, or any default of this
Lease, then the unsuccessful party shall reimburse the successful party for
reasonable attorney's fees and expenses incurred to enforce the Lease.
<PAGE>
16.9 Unavoidable Delay. Neither Lessor nor Lessee shall be required to
perform any term, condition, or covenant in this Lease so long as such
performance is hindered or prevented by unavoidable delays. For purposes of this
Paragraph, unavoidable delays shall be defined as natural disasters; strikes,
lockouts or labor disputes; government regulations, restrictions, or controls;
enemy or hostile government action; civil riot; fire, floods, or nuclear
accident; or any other cause not reasonably within the control of Lessor or
Lessee and that by the exercise of due diligence Lessor or a Lessee is unable,
wholly or in part, to prevent or overcome.
16.10 The undersigned Lessor and Lessee execute this agreement on September
1,1996, at Allentown, Lehigh County, Pennsylvania.
<PAGE>
EXHIBIT "A"
Description of Rental Space:
1621 square feet of space on the first floor of the building as specifically
designated by Lessor consisting as of the date of this Lease of 1621 square feet
of improved space.
<PAGE>
EXHIBIT "B"
A. Gross leasable space as per agreement is 1621 square feet, which includes
600 square feet previously known as "Common Area".
B. Year one (1) of Lease
(1) 1021 sq. ft. @ 11.00 per sq. ft. = $11,231.00 per year or $935.92
per month.
(2) 600 sq. ft. @ $9.50 per sq. ft. = $5,700.00 per year or $475.00
per month.
C. Year two (2) of Lease
(1) 1021 sq. ft. @ $12.00 per sq. ft. = $12,252.00 per year or $1,021.00
per month.
(2) 600 sq. ft. @ $9.50 per sq. ft. = $5,700.00 per year or $475.00
per month.
D. Year three (3) of Lease
(1) 1021 sq. ft. @ $13.00 per sq. ft. = $13,273.00 per year or $1,106.09
per month.
(2) 600 sq. ft. @ $9.50 per sq. ft. = $5,700.00 per year or $475.00
per month.
E. Year four (4) of Lease
(1) 1021 sq. ft. @ $14.00 per sq. ft. = $14,294.00 per year or $1,191.17
per month.
(2) 600 sq. ft. @ $9.50 per sq. ft. = $5,700.00 per year or $475.00
per month.
<PAGE>
SUMMARY
A. Year One (1)
Total yearly = $16,931.00 - Monthly $1,410.92
B. Year Two (2)
Total yearly = $17,952.00 - Monthly $1,496.00
C. Year Three (3)
Total yearly = $18,973.08 - Monthly $1,581.09
D. Year Four (4)
Total yearly = $19,994.00 - Monthly $1,666.17
EXHIBIT "C"
RENOVATIONS
A. Lessor agrees to pay a maximum of $8,500.00 for renovations to the
rental space contained in this lease.
B. Lessor shall approve all plans and specifications prior to commencing
renovations.
C. All permits, inspections, insurance and workmanship shall be the sole
responsibility of the lessee.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this lease on the date first
written. ** (Addendum to Lease)
LESSOR
FIRST LEHIGH BANK
By:/s/ George M. Baltozer
__________________________________
GEORGE M. BALTOZER
EXECUTIVE VICE PRESIDENT
LESSEE
ERA PARTNERS GROUP, INC.
________________________________ BY: /s/__________________________________
/s/ PRESIDENT
Attest
BY: /s/__________________________________
/s/ SECRETARY
BY: /s/__________________________________
/s/ TREASURER
** Addendum to Lease
This Lease term begins as of the date that all work is completely finished and
all Township approvals have been met and an occupancy permit has been signed by
South Whitehall Township. This addendum overrides any other start dates that may
be contained in this agreement.
** Addendum to Lease
This lease term will commence as of the date all approvals have been received
and work completed, or any space that is occupied within the lease agreement
area; however, no later than October 15, 1996. This addendum overrides the above
addendum that is contained in this agreement.
<PAGE>
CONSENT
The Owner of the Premises, Pond Associates, hereby consents to this
Sub-Lease between FIRST LEHIGH BANK and ERA PARTNERS GROUP, INC.
POND ASSOCIATES
August 22, 1996 By: /s/ Wilbur R. Roat
- ---------------------------------------- ------------------
Date
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