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, 1997
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 23-2218479
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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 |_|
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]
Issuer's revenues for its most recent fiscal year: $7,806,000.
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The aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant as of March 20, 1997 is $5,477,700 based upon a
per share average bid and actual prices of $7.50 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: 2,050,000 shares of Common
Stock, par value $.01 per share, as of March 20, 1998.
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, 1997, the Company had total assets of $108.7 million
and total deposits of $92.1 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 during the
early 1990's. 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
$100,000 on an annual 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. In January 1997, the Bank
received permission from the Department to open a branch in Allentown, Lehigh
County. In October 1997, the Bank sold $6.82 million of deposits of the Bank's
Quakertown Branch to Quakertown National Bank and closed its Quakertown Branch.
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; however, the Bank continues to significantly reduce this
concentration.
In general, the Bank requires collateral on all commercial loans in the
form of real estate, either residential or commercial, cash, marketable
securities, accounts receivable, inventory, equipment or other fixed assets. 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
credit worthy 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.
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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 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 has a 90% ownership interest in a corporation which is a
general partner of a limited partnership. This partnership owns real estate that
is leased to the Bank. Also, the Company has six other indirect subsidiaries
that are wholly owned by the Bank. 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
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statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions.
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.
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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. 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
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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 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
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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
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.
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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 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.
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
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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 checking accounts) and non-personal time deposits. As of
January 1997, reserves of 3% must be maintained against net transaction accounts
of $44.9 million or less, except that no reserves are required against the first
$4.4 million of net transaction accounts, and reserves of 10% must be maintained
against net transaction accounts in excess of $44.9 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 allows
federal regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate
merger provision. Therefore, the prior requirement that interstate acquisitions
would only be permitted when another state had "reciprocal" legislation that
allowed acquisitions by Pennsylvania-based bank holding companies has been
eliminated. The new Pennsylvania legislation, however, retained the requirement
that an acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Department.
Employees
As of December 31, 1997, the Company and its subsidiaries had 60
employees, including 50 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 building from a non-banking subsidiary
of the Company under a lease expiring in October 2010 providing for an average
monthly rental payment of $22,920 and $23,339 for 1997 and 1998, respectively.
The rent for the remaining years of the lease may be adjusted based on increases
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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 2000 providing for monthly rental payments of
$8,633. The sublessee has the right to extend the lease for a five-year period
at monthly rental payment of $10,359. The Bank has subleased another portion of
the building to two parties and has achieved substantial occupancy, which
reduces its carrying costs. The property is encumbered by a mortgage with an
outstanding balance of $2,103,000. The Bank is a participant in this mortgage to
the extent of $1,051,000.
The Bank leases the Walnutport branch building from a subsidiary
pursuant to an open-ended oral lease, which provide for monthly rental payment
of $2,000. The Cherryville branch building is owned directly by 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 1999 and provides for monthly rental payments of $2,479.
The Allentown lease will expire in April 2000 and provides for monthly rental
payments of $3,440. The branches range in size from approximately 2,500 to 4,000
square feet with the average size being approximately 3,300 square feet. The
Quakertown property owned by a subsidiary of the Bank is listed for sale with a
real estate agent.
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
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detailing the maintenance of a 6.5% Tier I capital ratio and a fully-funded loan
loss reserve. As of December 31, 1997, the Bank's Tier I capital ratio was
12.58%. The Bank is required to maintain a formal program to review the adequacy
of the Bank's allowance for loan and lease 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
-11-
<PAGE>
than 100% of Tier I capital and reserve for loan and lease losses by August 26,
1996, and further reduce such ratio to 75% by November 24, 1996 and 50% by
February 22, 1997.
Reporting and Other Requirements
Other affirmative measures required to be taken by 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 substantially 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, 1997, this ratio was 2.12%, and as of February 28, 1998, this
ratio was 2.07%. 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, 1997, this ratio was 23.68%, and as of
February 28, 1998, this ratio was 21.21%. The Pennsylvania Order also contains a
provision requiring the Bank to maintain, at all times, a minimum Tier I capital
equal to or greater than 6.5% of the Bank's adjusted total assets, plus a
fully-funded loan loss reserve. As of December 31, 1997 this ratio was 12.58%
and the Bank's loan loss reserve was fully funded.
The 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
consider ation 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, 1997 the Bank's Tier I capital
ratio was 12.58%, 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.
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
In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which the Company was a limited partner. This
litigation was commenced in March 1992 in the court of Common Pleas of Lehigh
County, Pennsylvania. The partnership owned the Pond Road building which housed
the administrative offices of the Bank as well as a branch office. As part of
this litigation settlement, the Company received $184,000 representing a
$47,000 general partnership interest and a cash settlement of $137,000. The
entire $184,000 has been included in other income. The general partnership
interest received as part of the settlement, combined with the Company's
interest already owned, aggregated more than a 50% ownership interest as a
general partner. Since the Company has a majority of the general partnership
interest, it is required under generally accepted accounting principles to
include in its 1997 financial statements all of the accounts of this previously
unconsolidated subsidiary.
-14-
<PAGE>
On June 23, 1995, the FDIC issued a Notice of Intention to Prohibit
from Further Participation and a Notice of Assessment of Civil Money Penalties,
Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing
(collectively, the "Notice") against James L. Leuthe, Chairman of the Board and
Chief Executive Officer of the Company, and against Harold R. Marvin, Jr.,
formerly the President of the Company and of the Bank. Mr. Marvin resigned as
President and as director of both the Company and the Bank in 1993. The FDIC and
Mr. Marvin have reached and consummated a settlement in this matter. The
settlement does not assess any monetary damages or penalties against Mr. Marvin
and prohibits Mr. Marvin from participating in any manner in the conduct of the
affairs of any financial institution or organization without the approval of the
FDIC and the appropriate federal financial institution regulatory agency.
The Notice initiated administrative proceedings in which the FDIC, as a
result of transactions occurring prior to 1993, is seeking to prohibit Mr.
Leuthe from further participation in the conduct of the affairs of any bank
insured by the FDIC or any other federally insured depository institution,
without the prior approval of the FDIC and the appropriate federal financial
institution regulatory agency. The allegations of the FDIC are substantially the
same as those which formed the basis of the Stipulation of Settlement with and
Administrative Order of the Pennsylvania Department of Banking, which the
Company and the Bank entered into in March 1993. The FDIC also sought to impose
civil monetary penalties of $500,000 against Mr. Leuthe. Mr. Leuthe has denied
wrongdoing and is defending these actions.
Neither the Company nor the Bank is a party to these proceedings.
On February 13, 1998, the administrative law judge of the FDIC issued a
decision recommending the prohibition of Mr. Leuthe from future participation in
the affairs of any federally insured financial institution and the assessment of
a civil monetary penalty in the sum of $250,000 against Mr. Leuthe. On March 13,
1998, Mr. Leuthe filed exceptions to the recommended decision with a supporting
Memorandum of Law and Request for Oral Argument. Those exceptions will be heard
by the full FDIC Board of Directors. The Company believes that the FDIC Board of
Directors will likely not render a decision for at least 45 to 60 days following
any such appeal. Also, either party will have the right to appeal any decision
of the FDIC Board of Directors to the United States District of Columbia Circuit
Court of Appeals or the United States Court of Appeals for the Third Circuit
within 30 days after the date of the decision.
Under both the Company's and the Bank's Bylaws, the Company and the
Bank are required to indemnify Mr. Leuthe in connection with the administrative
proceedings brought against him by reason of the fact that he is or was an
officer and director of the Bank. However, Mr. Leuthe is 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 constituted willful misconduct or
recklessness. While it is difficult to determine the amount of indemnification
in this case, the Company believes at this time that the amount will not
materially and adversely affect the Company's financial condition.
-15-
<PAGE>
The Company carries Director's and Officer's Liability Insurance
coverage, and it initially submitted a claim for reimbursement of its expenses
in connection with these proceedings. The Company's insurance carrier responded
by disputing coverage, raising, among other things, the position that the
insurance carrier did not receive timely notice of the proceedings. The Company
disputes the insurance carrier's position, and has recently instituted a suit
against the carrier in the Court of Common Pleas for Lehigh County to litigate
this coverage issue.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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, 1998, there were 2,050,000 shares issued and outstanding, held by
approximately 137 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. Morrissey & Co., certain information regarding bid quotations for the
Company's Common Stock is as follows: for 1996, (i) at March 31, 1996, bid price
$4.75; (ii) at June 30, 1996, bid price $4.50; (iii) at September 30, 1996, bid
price $4.50; and (iv) at December 31, 1996, bid price $4.50; and for 1997, (i)
at March 31, 1997, bid price $5.00; (ii) at June 30, 1997, bid price $4.875;
(iii) at September 30, 1997, bid price $5.00; and (iv) at December 31, 1997, bid
price $7.00. 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 $943,464 as of December 31, 1997.
Dividends accrue on the Series A Preferred Stock at the rate of $.3255 per share
per year. Dividends on the Senior Preferred Stock accrue at the rate of $.25 per
share per year. When, as and if declared by the Board of Directors of 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
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<PAGE>
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.
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.
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, 1997 and 1996.
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 $108.72 million at December 31, 1997, a
decrease of $1.56 million from December 31, 1996. The decrease in assets
resulted from the liquidation of a portion of available-for-sale securities to
fund the sale of $6.82 million of deposits of the Quakertown branch to the
Quakertown National Bank on October 30, 1997, an overall decline in nonconsumer
loan originations along with several large commercial loan repayments during the
fourth quarter of 1997.
The Company reported net income of $3.003 million, or $0.86 per share,
diluted, for 1997 as compared to $2.145 million, or $0.63 per share, diluted,
for 1996. The majority of the net income was attributable to trading securities
gains in 1997, while the litigation Settlement was the primary source in 1996.
Without the income from security gains and litigation settlements, the Company
would have incurred a loss from operations of $894,000 in 1997, as compared to a
loss of $833,000 for 1996.
-17-
<PAGE>
During 1997, the Bank continued its program to dispose of foreclosed
assets by aggressively marketing its foreclosed asset portfolio and reinvesting
the proceeds from these sales into performing assets. The foreclosed assets held
for sale decreased $3.253 million from $4.850 million in 1996 to $1.597 million
in 1997.
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. The Bank incurred unanticipated losses during the second
half of 1997, when the Bank, based on its internal investigation, charged off
$484,000 of installment loans. The Bank provided an additional provision of
$440,000 to its allowance for loan loss reserve to facilitate this charge off.
Furthermore, the Bank's management concluded after conducting a detailed
analysis of the indirect paper portfolio that its net yield before these losses
was comparable to other consumer loan portfolios with lesser degree of risk.
Therefore, effective August 1997, the Bank discontinued this auto dealer
program. The Bank has added two additional employees within its credit and
collection department to continually monitor and work this segment of this loan
portfolio to provide against future losses.
In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which the Company was a limited partner. The
partnership owned the Pond Road building which housed the administrative offices
of the Bank as well as a branch office. As part of this litigation settlement,
the Company received $184,000 representing a $47,000 general partnership
interest and a cash settlement of $137,000. The entire $184,000 has been
included in other income. The general partnership interest received as part of
the settlement, combined with the Company's interest already owned, aggregated
more than a 50% ownership interest as a general partner. Since the Company has a
majority of the general partnership interest, it is required under generally
accepted accounting principles to include in its 1997 financial statements all
of the accounts of this previously unconsolidated subsidiary.
COMPARISON BETWEEN 1997 AND 1996 NET INCOME
NET INCOME
In 1997, the Company recorded net income of $3,003,000 as compared to
$2,145,000 in 1996, an increase of $858,000, or 40%. Net interest income
increased $65,000 in 1997 mostly due to an increase in the average balance of
the loan portfolio mitigated by an increase in interest paid on long-term debt.
The 1997 provision for loan losses amounted to $1,003,000 as compared to a
$367,000 credit recorded for 1996, primarily the result of a large recovery
recorded during the second quarter of 1996. Other income increased $1,737,000
during 1997 as compared to 1996 due to several significant items: gains
recognized on investment securities increased $2.274 million consistent with the
performance of the stock market; a gain of $478,000 was recognized on the sale
of deposits of its Quakertown branch on October 30, 1997; an increase in rental
income of $190,000 due to inclusion of a previously unconsolidated subsidiary
and the above mitigated by a decrease in settlements from litigations of
$1,355,000 as compared to 1996, when the Company recorded $1,539,000 as other
income resulting from a litigation settlement (the "Settlement") with respect to
a large impaired loan. Other expenses declined $426,000, or 7.34%
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<PAGE>
in 1997 as compared to 1996, mostly as the result of decreased legal expenses
pertaining to FDIC litigation involving the Company's Chairman and CEO and the
Bank's former president.
The profit performance for financial institutions is measured by the
Return on Average Assets ("ROA") and the Return on Average Equity ("ROE"). On an
annualized basis the Company's ROA was 2.70% in 1997 as compared to 1.99% in
1996. The ROE was 22.32% in 1997 compared to 18.89% in 1996.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities,
while the primary sources used to fund these assets were deposits, borrowed
funds and capital.
During 1997, interest and fee income on loans increased $151,000, or
2.66%, compared to 1996, mostly due to increased average loan balance of $3.54
million, or 5.91%. The average loan balance has continually grown since the
first quarter of 1996 when the Bank instituted a consumer loan program
initiative which was directed to the local auto dealers and their creditworthy
customers. Also, the yield on the loan portfolio decreased 29 basis points to
9.23% during 1997 as compared to 9.52% in 1996. The decrease in the interest
yield was partly attributable to the reversal of $135,000 as compared to $76,000
being recovered in 1996, of accrued interest income on problem loans. The
Company's policy is to discontinue accruing interest when it appears that the
borrower may be unable to meet payments as they become due.
Interest expense on deposits remained static at approximately $3.57
million for 1997 and 1996. The average balance of deposits decreased $809,000 in
1997 as compared to 1996. The average balance of time deposits increased $1.40
million in 1997 while the average cost fluctuated slightly downward from 5.29%
to 5.26%, while the average balance of savings deposits decreased $593,000 with
a 1997 average cost down 9 basis points from 2.77% to 2.68%. The overall
decrease in deposits were the result of the sale of the deposits of the
Quakertown Branch on October 30, 1997 offset by several deposit promotions
throughout the year aimed at increasing the Bank's market share, in particular
its time deposits.
Interest expense on long-term debt increased $78,000 in 1997 as
compared to 1996, directly attributable to inclusion in the 1997 consolidated
financial statements of a mortgage and related interest expense of a previously
unconsolidated subsidiary.
For 1997, the average yield on interest-earning assets decreased 15
basis points, while the cost of interest-bearing liabilities increased 1 basis
point, resulting in a net decrease in the interest rate spread of 16 basis
points. The net yield on interest-earning assets also decreased 8 basis points.
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<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 based on daily balances.
<TABLE>
<CAPTION>
For the Year ended December 31,
(in thousands)
1997 1996
-------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1) $63,109 $5,824 9.23% $59,585 $5,673 9.52%
Investment securities 29,867 168 6.07% 31,162 1,901 6.10%
Overnight funds 3,044 1,814 5.52% 1,969 105 5.33%
------- ------ ------ ------- ------ -------
Total interest-earning assets $96,020 $7,806 8.13% $92,716 $7,679 8.28%
======= ====== ====== ======= ====== -------
INTEREST-BEARING
LIABILITIES:
Saving deposits 35,495 $ 950 2.68% $36,088 $1,001 2.77%
Time deposits 49,944 2,629 5.26% 48,542 2,570 5.29%
Other borrowed funds 404 26 6.44% 849 50 5.89%
Long-term debt 1,291 108 8.37% 327 30 9.17%
------- ------ ------ ------- ------ -------
Total interest-bearing liabilities $87,134 $3,713 4.26% $85,806 $3,651 4.25%
======= ====== ====== ======= ====== =======
NET INTEREST INCOME $4,093 $4,028
====== ======
INTEREST RATE SPREAD 3.87% 4.03%
====== ======
NET INTEREST MARGIN ON
INTEREST-EARNING ASSETS(2) 4.26% 4.34%
====== ======
RATIO OF AVERAGE
INTEREST-EARNING ASSETS
TO AVERAGE INTEREST-
BEARING LIABILITIES 110.20% 108.05%
====== ======
</TABLE>
- ----------------
(1) For the purpose of these computations, nonaccrual loans are not included
in the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
-20-
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
(in thousands)
1996 1995
-------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- -------- ---------- -------- -------- ----------
<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%
Overnight funds 1,969 105 5.33% 2,741 161 5.87%
------- ------ ------ ------- ------ ------
Total interest-earning assets $92,716 $7,679 8.28% $85,897 $7,038 8.19%
======= ------ ------ ======= ------ ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $36,088 $1,001 2.77% $35,781 $1,068 2.98%
Time deposits 48,542 2,570 5.29% 46,652 2,402 5.15%
Other borrowed funds 849 50 5.89% 629 42 6.68%
Long-term debt 327 30 9.17% 436 42 9.63%
------- ------ ------ ------- ------ ------
Total interest-bearing 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 LIABILITIES 108.05% 102.87%
====== ======
</TABLE>
- ----------------
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
-21-
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income
and Interest Expense:
The following table presents the extent to which net interest income
changed due to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities during the periods
indicated. Information provided in each category with respect to changes
attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rate multiplied by prior
volume) and the net change. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1997 vs. 1996 December 31, 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ -------------------------------
Volume Rate Total Volume Rate Total
------ ----- ----- ------ ---- -----
INTEREST-EARNING ASSETS: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans $337 $(186) $151 $598 $(56) $542
Investment securities (69) (18) (87) 77 78 155
Overnight funds 59 4 63 (42) (14) (56)
---- ----- ---- ---- ---- ----
Total interest-earning assets $327 $(200) $127 $633 $ 8 $641
---- ----- ---- ---- ---- ----
INTEREST-BEARING LIABILITIES:
Savings deposits $(22) (29) $(51) 5 $(72) $(67)
Time deposits 71 (12) 59 65 103 168
Other borrowed funds (28) 4 (24) 13 (5) 8
Long-term debt 81 (3) 78 (11) (1) (12)
---- ----- ---- ---- ---- ----
Total interest-bearing liabilities $102 $ (40) $ 62 $ 72 $ 25 $ 97
---- ----- ---- ---- ---- ----
CHANGE IN NET INTEREST INCOME $225 $(160) $ 65 $561 $(17) $544
==== ===== ==== ==== ==== ====
</TABLE>
OTHER INCOME
Total other income increased $1.737 million, or 48.89%, during 1997 as
compared to 1996. There were several major factors which contributed to changes
in the composition of other income between 1997 and 1996. First, the most
significant part of other income were gains recognized by the Company on its
security portfolio represented $3.713 million and $1.439 million in 1997 and
1996, respectively. Of the $2.274 million increase in investment securities
gains, $1.483 million represented realized gains on equity securities.
Throughout 1997, manage ment has evaluated its trading securities portfolio and
has sold those securities which represented significant appreciation. The
Company's trading securities are carried at fair value and consist principally
of common stock of bank holding companies. Management continues to closely
-22-
<PAGE>
monitor its investment portfolio to position the portfolio against future
fluctuations in the stock market. A downturn in the overall market could result
in future trading securities losses.
In 1997, the Company recorded a gain of $478,000 representing the
premium on the deposits of its Quakertown Branch which were sold on October 30,
1997 to Quakertown National Bank. Also, on December 19, 1997, the Company
acquired, through a litigation settlement, the controlling interest of a real
estate partnership. Prior to this settlement, the Company was allowed to record
the yearly activity under the equity method. However once the controlling
interest was acquired late in 1997, the Company was required to include all of
the activity of the partnership in its consolidated financial statements. As
such the $190,000 increase in rental income was the result of inclusion of this
previously unconsolidated partnership as required for 1997. In 1997, the Company
also sold certain parcels of real estate it previously acquired at a gain of
$183,000, an increase, as compared to 1996, of $130,000. Mitigating all of the
above increases was a decrease in litigation settlements of $1.355 million. In
1996, the company received $1.539 million from the settlement of an impaired
loan which had been in protracted litigation while in 1997 it received $184,000
attributable to settlement of litigation pertaining to a real estate investment
partnership as mentioned above.
OTHER EXPENSES
Overall, other expenses declined $426,000, or 7.34%, during 1997 as
compared to 1996. The most significant change was attributable to a $506,000, or
21.83%, decrease in expenses classified as other. Within this category, legal
and professional fees, mostly attributable to litigation by the FDIC against the
Company's Chairman and Chief Executive Officer and the Bank's former president,
decreased $612,000. Since a significant portion of the casework and expenses for
this litigation was performed in 1996, minimal expenses were incurred in 1997.
As explained in the legal proceedings section, the administrative law judge
assigned to this case has recommended a decision against the Company's Chairman.
The Company is now awaiting a final ruling from the FDIC's board pertaining to
this matter. Other decreases included a rate reduction of $50,000, or 32.05%, of
the FDIC insurance premium due to an improvement in the Bank's risk
classification from a 1C to a 1B and the decrease in amortization expense of
$64,000 due to certain assets which were previously acquired in a branch
purchase were fully amortized in 1996. The above decreases were mitigated by
increases in 1997 of $148,000, or 9.97%, in salaries and employees benefits due
to additional employees being hired for the new Pond Road branch and two
employees added to the credit and collection department, computer service fee of
$80,000 due to outsourcing the Bank's check processing and data entry operations
and increased advertising and promotional expenses of $63,000 incurred for an
advertising campaign aimed at promoting the Bank within the local community.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was $1.586 million at December 31, 1997,
compared to $1.624 million at December 31, 1996. The allowance equaled 2.51% of
loans at December 31, 1997, as compared to 2.46% at December 31, 1996.
-23-
<PAGE>
The adequacy of the allowance for loan losses is measured monthly by an
adequacy test. The adequacy test includes an evaluation of all loans which have
been classified (other loans especially mentioned, substandard, doubtful, loss)
by internal loan review, regulatory examination, monitoring of delinquency and
other pertinent factors. Allocations are determined by an in-depth review of
each individual credit based on its potential future loss. The value of tangible
collateral and/or guarantees is determined as well as the borrower's ability and
willingness to repay. This value, as measured against the loan balance, is used
in determining the allowance allocation for collateral-dependent loans.
Additionally, 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 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
$100,000 or more, which demonstrates any recent delinquency characteristics or
other weaknesses, to assure the adequacy of the allowance and provision for
loan losses.
At monthly meetings, the Credit Administration Committee is presented
with the adequacy test of the allowance for loan losses that contains
information relative to both specific credits and the total portfolio in
general. The information is used to determine the adjustment needed for the
allowance to be properly stated. In establishing the adjustment required,
management considers a variety of factors, including, but not limited to,
general economic factors and potential losses from significant borrowers. 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.
At December 31, 1997, the amount charged to operating expense for the
provision for loan losses was $1,003,000 as compared to a credit provision for
loan losses of $367,000 in 1996. The increase in the 1997 provision was based on
management's evaluation of the loan portfolio as outlined above and also above
average losses incurred within the auto segment of the installment loan
portfolio. In August 1997, management discontinued the loan program to local
auto dealers to reduce the Bank's exposure for additional losses. The credit
provision in 1996 was mostly due to a significant recovery as part of litigation
settlement on an impaired loan which occurred in the second quarter of 1996.
The following table sets forth a reconciliation of the allowance for
loan losses and illustrates the charge-offs and recoveries by major loan
category for the period ended December 31, 1997 (in thousands):
-24-
<PAGE>
Beginning Balance, January 1, 1997....................... $1,624
------
Charge-offs:
Commercial, financial and agricultural................ 105
Real estate - construction............................ 37
Real estate - mortgage................................ 327
Installment loans to individuals...................... 703
Lease financing....................................... --
------
Total charge-offs........................................ 1,172
------
Recoveries:
Commercial, financial and agricultural................ 24
Real estate - construction............................ --
Real estate - mortgage................................ 31
Installment loans to individuals...................... 43
Lease financing....................................... 33
------
Total recoveries......................................... 131
------
Net charge-offs.......................................... 1,041
------
Provision for loan losses................................ 1,003
------
Ending Balance, December 31, 1997........................ $1,586
======
Ratio of net charge-offs to
average loans outstanding............................. 1.55%
FINANCIAL CONDITION
At December 31, 1997, the Company's total assets were $108.72 million,
a decrease of $1.56 million from December 31, 1996. This decrease is mostly
attributable to $6.82 million sale of deposits of the Quakertown branch to The
Quakertown National Bank on October 30, 1997. The above decrease was mitigated
by several promotions the bank had aimed at increasing its market share of time
deposits and also the opening of its new Pond Road Branch office which accounted
for $1.934 million of deposits as of December 31, 1997.
Loans
Net loans decreased $1.554 million, from $64.374 million at December
31, 1996 to $62.82 million at December 31, 1997. A portion of the decrease was
partly attributable to a $1.051 million loan which was eliminated in
consolidation and represented the Bank's portion of a loan to a partnership
which was previously not required to be included in the consolidated financial
statements.
All categories of loans, as outlined below, declined at December 31,
1997 as compared to December 31, 1996 with the exception of consumer loans which
increased 15.35%. The
-25-
<PAGE>
nonconsumer loan portfolio experienced flat originations throughout 1997. Also,
in the fourth quarter of 1997, the Bank experienced an increase in principal
paydowns of $2.864 million as compared to the same period in 1996. Management
believes that the decrease in originations and an increase in commercial
principal paydowns is a regional trend and is evaluating ways to increase
consumer interest. The average balance of the consumer loan portfolio increased
$5.856 million from $11.645 million in 1996 to $17.501 million in 1997. As
mentioned previously, the Bank began an affiliation with several local auto
dealers in January 1996 aimed at increasing its installment loan portfolio. In
August 1997, management evaluated the performance of this segment of the
installment loan portfolio and decided that the overall rate of return on this
segment can be achieved in other areas with less risk and therefore terminated
this arrangement effective August 1997. The change in the composition of loans
at December 31, 1997 as compared to December 31, 1996 is as follows: Real estate
construction loans declined $300,000, or 6.10%; Residential real estate loans
decreased $1.498 million, or 5.80%; Commercial real estate loans decreased
$1.357 million, or 6.84%; Commercial loans declined $243,000, or 6.64%; and
Consumer loans increased $1.806 million, or 15.35%.
The following table sets forth the maturity and repricing schedule of
the loan portfolio at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
After one After
Within but within five
One year five years years Total
-------- ---------- ------- -------
<S> <C> <C> <C> <C>
Maturity Schedule:
Commercial..................... $ 1,570 $ 1,110 $ 614 $ 3,294
Real estate-construction........ 3,223 669 183 4,075
Real estate-mortgage............ 8,658 20,322 11,211 40,191
Consumer, net................... 1,092 11,269 1,121 13,482
Nonaccrual loans................ -- -- -- 3,364
------- ------- ------- -------
Total................................. $14,543 $33,370 $13,129 $64,406
======= ====== ======= =======
Repricing Schedule (1):
Fixed rate loans................ $14,446 $28,834 $ 3,724 $47,004
Floating rate loans............. 12,972 695 371 14,038
Nonaccrual loans................ -- -- -- 3,364
------- ------- ------- -------
Total................................. $27,418 $29,529 $ 4,095 $64,406
======= ======= ======= =======
</TABLE>
- --------------
(1) Data for repricing schedule by loan categories is not available.
-26-
<PAGE>
Investment Securities
The primary objectives of the Company's investment strategy are to
provide and maintain a level of liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk and to promote
the Company's lending activities.
The largest sector of the investment portfolio remains securities of
U.S. Government agencies and corporations which total $19.14 million (amortized
cost) at December 31, 1997, or 71.07% of total investment securities. Included
in the above are $2.331 million mortgage-backed products, mostly consisting of
collateralized mortgage obligations ("CMO") and real estate mortgage investment
conduits ("REMIC"). Twice a year, stress tests are conducted on these CMOs and
REMICs, all of which were passed recently.
The available-for-sale securities decreased $4.014 million, or 18.31%,
from $21.922 million in 1996 to $17.908 million in 1997. Approximately $2.0
million of this decrease was the result of securities sold to fund the sale of
the Quakertown Deposits. Also, in 1997 the Company had other sales and
maturities of $2.0 million of debt equities which it currently has maintained in
a cash position as it evaluates future loan and investment opportunities.
At the present time, the Company does not engage in the use of
derivatives investment products as a means to hedge the risks in its investment,
loan or deposit portfolios.
Deposits and Other Borrowed Funds
The Company continues to offer a variety of deposit accounts with a
range of interest rates and term options. The deposits consist primarily of
checking, savings, super now, money market and certificates of deposit.
Fluctuations within its deposit base are influenced by competition, economic
conditions and changes in current rates. Total deposits at December 31, 1997
declined $3.793 million from $95.939 million at December 31, 1996 to $92.146
million at December 31, 1997, attributable mostly to $6.82 million sale of
deposits of the Quakertown branch to the Quakertown National Bank on October 30,
1997. Throughout 1997, the Company offered several promotions aimed at
increasing its deposits. In addition to the Pond Road Branch increase, the Bank
had significant increases in its time deposits at both its Walnutport and
Bethlehem branches of $1.131 million and $541,000, respectively. The Bank opened
its new Pond Road branch on May 23, 1997, and through several promotions had
approximately $1.93 million of deposits at December 31, 1997. Overall, the
change in the composition of the deposits was an increase in noninterest-bearing
deposits of $1.172 million, while interest-bearing deposits declined $4.965
million consisting of savings, club accounts and interest-bearing demand
deposits declining $1.779 and time deposits declining $3.186 million. As a
percentage of total deposits, savings, club accounts and interest-bearing demand
deposits represented 36.43% at December 31, 1997 as compared to 36.85% at
December 31, 1996. There were no brokered deposits within the Company's deposit
base at December 31, 1997.
-27-
<PAGE>
Other borrowed funds, at December 31, 1996 consisted of a $1.20 million
repurchase agreement with a brokerage company which was utilized to fund the
Company's asset growth, in particular, its installment loan portfolio. During
1997, the outstanding amount was repaid in its entirety.
The following table sets forth maturities of time deposits of $100,000
or more at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------ ------
(in thousands)
<S> <C> <C>
Three months or less....................... $2,124 $2,800
Over three months through twelve months.... 2,641 3,312
Over one year through five years........... 2,528 1,640
Over five years............................ 0 0
------ ------
TOTAL............................... $7,293 $7,752
====== ======
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consist of impaired and other loans where the
principal, interest, or both, is 90 or more days past due and loans that have
been placed on nonaccrual. When loans are placed on nonaccrual status, income
from the current period is reversed from current earnings and interest from
prior periods is charged to the allowance for loan losses. Similarly, consumer
loans are considered nonaccrual if the collateral is insufficient to recover the
principal or are charged-off if deemed to be uncollectible. Foreclosed assets
consist of assets acquired through foreclosure or real estate acquired by
acceptance of a deed in lieu of foreclosure.
The following table represents nonperforming assets of the Company at
December 31, 1997 and 1996.
December 31,
---------------------------
1997 1996
------- -------
(in thousands)
Impaired loans.................................. $ 3,364 $ 2,052
Other loans past due 90 days or more............ 421 609
------- -------
Total nonperforming loans................... 3,785 2,661
Foreclosed assets held for sale................. 1,597 4,850
------- -------
Total nonperforming assets.................. $ 5,382 $ 7,511
======= =======
-28-
<PAGE>
Nonperforming loans as a percentage
of loans (net of unearned interest)......... 5.88% 4.03%
Nonperforming assets as a percentage of assets.. 4.95% 6.81%
Impaired loans increased $1.312 million at December 31, 1997 as
compared to December 31, 1996. Throughout the year, as problems are identified
within the loan portfolio, those credits which are considered beyond the point
of restructure are immediately transferred to the impaired loan category for
further evaluation. The loans within this category are normally involved in
litigation and/or foreclosure. Once a credit is considered impaired, management
will try as quickly as possible to remove it from the impaired classification
through liquidation, by transferring it to foreclosed assets. During 1997,
$2.832 million of loans were transferred to impaired loans as part of
managements internal evaluation. Of that amount, $539,000 was transferred to
foreclosed assets, $239,000 was charged off to the allowance for loan losses,
$181,000 was paid off and $559,000 was returned to accrual status, while the
balance of $1.312 million represented the overall increase. Real estate loans
represent $3.152 million of impaired loans and loans to consumer and commercial
borrowers represent $90,000 and $122,000, respectively.
Loans past due 90 days or more decreased $188,000 from $609,000 at
December 31, 1996 to $421,000 at December 31, 1997. All delinquent loans are
reviewed by management on a weekly basis with regard to legal proceedings and
collection efforts. Of the delinquent loans, 80.29% are secured by real estate,
11.40% are loans to consumers and 8.31% are to commercial borrowers.
Foreclosed assets held for sale declined $3.253 million, or 67.07%, at
December 31, 1997 compared to December 31, 1996. In 1996, as part of its
operating plan, and in order to comply with the Administrative Order of the
Department, the Written Agreement of the Federal Reserve Bank and several
previous orders which have been replaced by the Memorandum of Understanding,
the Company set aggressive goals to begin to liquidate its nonperforming assets.
As part of this plan, management set a goal to dispose of $4.50 million of
classified assets. At December 31, 1997, the gross reduction in classified
assets was $4.622 million, however, after inclusion of the activity for 1997,
the overall net reduction was $2.998 million. Although management did not meet
its overall goal for 1997, the Company remains in substantial compliance with
the regulatory requirements as they pertain to classified assets as discussed in
the "Legal Proceedings" in Part I of this report.
The following table sets forth the total of commercial and investment
properties at December 31, 1997, all of which are currently in litigation and/or
foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days........................ $ 1,857,967
Foreclosed assets held for sale.................. 301,908
-------------
Total............................................ $ 2,159,875
=============
-29-
<PAGE>
The following table sets forth the total of residential properties to
be foreclosed upon and liquidated at December 31, 1997, including properties
currently owned that are listed for sale. All litigation and foreclosure
proceedings in the nonaccrual and over 90-day category are being actively
pursued.
Residential:
Impaired and over 90 days......................... $ 683,270
Foreclosed assets held for sale................... 345,779
-------------
Total............................................. $ 1,029,049
=============
The following table sets forth the total of land developments and
building lots to be foreclosed upon and liquidated at December 31, 1997,
including land developments and building lots currently owned and listed for
sale. All litigation and foreclosure proceedings in the nonaccrual and over
90-day category are being actively pursued.
Land Development/Building Lots:
Impaired and over 90 days....................... $ 416,661
Foreclosed assets held for sale................. 491,573
-------------
Total........................................... $ 908,234
=============
The following table sets forth the total of loans in litigation that
are not secured by real estate at December 31, 1997.
Secured by Other Than Real Estate:
Impaired and over 90 days....................... $ 547,728
============
The following table sets forth the total of assets that are listed as
nonperforming, but which are under agreements that provide a yield at or in
excess of current market rates at December 31, 1997.
Performing/Nonperforming Assets:
Impaired and over 90 days....................... $ 279,085
=============
The following table sets forth the total of assets that are under
agreement or are being paid off with the settlement dates to take place in the
first quarter of 1998.
Assets Under Agreement:
Foreclosed assets held for sale................. $ 457,686
============
At December 31, 1997, there were no loans, other than those classified
as nonperforming loans, where known information about borrowers' possible credit
problems causes management to have serious doubts as to their ability to comply
with the current loan repayment terms.
-30-
<PAGE>
LIQUIDITY AND FUNDS MANAGEMENT
Liquidity management is intended to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
servicing payments, investment commitments, commercial and consumer loan demand
and ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short and
long-term borrowings and repurchase agreements. While regular loan payments are
a predictable source of funds, the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates and competition. The Company
manages its balance sheet to prove adequate liquidity based on various economic,
interest rate and competitive assumptions and in light of profitability
measures.
At December 31, 1997, the Company maintained $7.47 million in cash and
cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, the Company had $17.908 million in securities
available-for-sale representing 16.47% of total assets at December 31, 1997.
The Company considers its primary source of liquidity to be its core
deposit base and continues to promote the acquisition of deposits through its
branch offices. At December 31, 1997, approximately 78.14% of the Company's
assets were funded by core deposits acquired within its market area. An
additional 13.29% of the assets were funded by the Company's equity. These two
components provide a substantial and stable source of funds.
The Company paid the following cash dividends to its Preferred
stockholders during 1997. There were no dividends paid to its common
stockholders in 1997.
<TABLE>
<CAPTION>
Class of Stock Date Paid Current Arrears Total
-------------- ---------- ------- ------- -----
<S> <C> <C> <C> <C>
Senior Preferred May 12, 1997 $56,273 $237,542 $293,815
August 12, 1997 56,272 --- 56,272
November 1997 56,272 --- 56,272
Series A Preferred August 12, 1997 $55,498 $110,995 $166,493
November 1997 55,498 110,995 166,493
</TABLE>
In addition, on December 17, 1997, the Company's Board of Directors
declared a dividend on both the Senior and Series A Preferred to stockholders of
record as of December 17, 1997. This declaration included $56,272 due to its
Senior Preferred stockholders for the fourth quarter of 1997 and $166,493 due to
the Series A Preferred stockholders, which represented the fourth quarter 1997
of $55,498 and $110,995 dividend in arrears. After payment of the $166,493,
$943,464 remains in arrears on the Series A Preferred stock through December 31,
1997.
-31-
<PAGE>
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 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 Company's ability to pay dividends is
also impacted by regulatory orders and agreements.
At December 31, 1997, cash and cash equivalents increased $3.461 million
from $4.62 million in 1996 to $8.081 million. Contributing to this increase was
$3.810 million provided by operating activities as compared to $2.124 million in
1996 and cash utilized in investing and financing activities of $349,000 in 1997
as compared to $2.547 million in 1996. The significant changes in investing cash
activity were net proceeds of securities transactions in 1997 of $4.277 million
as compared to net purchases of $450,000 in 1996. The Company sold $1.93 million
of securities to fund the sale of its Quakertown deposits on October 30, 1997
and also had debt equities of $500,000 prematurely called in December 1997. The
Company has decided to maintain a higher than average cash position as it
evaluates several loan and other options. Loans decreased $7.418 million,
primarily as the result of the discontinuing of the auto segment of the
installment loan portfolio in August 1997 and several commercial prepayments in
December 1997. Also, as mentioned earlier, the Company continues to
aggressively market its foreclosed assets portfolio, increasing proceeds $1.804
million in 1997 as compared to 1996.
Deposits decreased $7.42 million mostly attributable to the sale of the
Quakertown deposits of $6.82 million on October 30, 1997 and related runoff.
Other borrowed funds decreased $1.200 million, as the Company repaid its
outstanding repurchase agreement at December 31, 1996 which was used in 1996 to
fund the Company's installment loan growth. Long-term debt increased $1.051
million, the result of inclusion of a previously unconsolidated subsidiary.
Also, in 1997, the Company resumed paying dividends and during the year made
dividend payments of $740,000 to its stockholders, consisting of $280,000 of the
1997 amount currently due as well as $460,000 of amounts previously in arrears.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management involves the matching of maturity
and repricing dates of interest-earning assets and interest-bearing liabilities
to help insure 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
-32-
<PAGE>
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, 1997 the Company has a positive interest sensitive GAP
of $1.36 million, or 1.42% of total interest-earning assets which have been
adjusted for the depreciation on securities available-for-sale. Under a general
assumption, that the general market interest rate changes affect the repricing
of assets and liabilities equally, this gap indicates that the effect of an
increase in overall market interest rates would result in an increase in the net
interest margin, while falling interest rates would cause a decrease in the
margin.
-33-
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at December 31, 1997:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------
6 Months 6 Months 1 to 2 2 to 5 Over 5
or less to 1 Year Years Years Years Total
-------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (in thousands)
Investment securities (1) $13,756 $ 533 $ 1,218 $ 3,756 $15,606 $34,869
Loans (2) 20,774 6,644 9,844 19,685 4,095 61,042
------ ------ ------- ------- ------- -------
TOTAL $34,530 $7,177 $11,062 $23,441 $19,701 $95,911
------- ------ ------- ------- ------- -------
Interest-bearing
liabilities:
Demand-interest bearing $14,120 $ -- $ -- $ -- $ -- $14,120
Savings and clubs (3) 675 839 1,350 4,050 12,537 19,451
Time 18,158 6,344 17,115 5,700 -- 47,317
Long-term debt (4) 186 24 51 953 -- 1,214
------- ------ ------- ------- ------- -------
TOTAL $33,139 $7,207 $18,516 $10,703 $12,537 $82,102
------- ------ ------- ------- ------- -------
GAP $ 1,391 ($30) $(7,454) $12,738 $ 7,164 $13,809
------- ----- ------- ------- ------- -------
Cumulative GAP $ 1,391 $1,361 $(6,093) $ 6,645 $13,809 $13,809
======= ====== ======= ======= ======= =======
</TABLE>
- ------------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $5.306 million investment in overnight funds.
(2) Includes estimated scheduled maturities of the fixed rate loans ignoring
any potential rollover at maturity. Excludes nonaccrual loans of $3.364
million.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
(4) Includes estimated scheduled payments for mortgage note.
MARKET RISK DISCLOSURE
The Company has evaluated the impact of changes in interest rates on
the net interest margin. The assumptions used in the evaluation include all
aspects of interest earning assets and interest bearing liabilities. The overall
impact in future interest rates changes on these assumptions may vary since a
shift in interest rates may provide consumers with an option, for example, a
switch from variable to fixed rate products.
Sensitivity analysis was used to apply +200 and -200 basis point
interest rate shocks to the Bank's balance sheet and income statement at
December 31, 1997. Market Risks for interest
-34-
<PAGE>
rate declines were measured in terms of percent and dollars of forecast net
income at risk, while the Market Risk for initial rate increases are measured in
terms of percent and dollars of equity value at risk. Equity value at risk
determined by comparing the before and after shock market value of portfolio
equity. Market value of portfolio equity is the present value of total assets,
less the present value of total liabilities.
Total net income at risk for the period January 1, 1998 to December 31,
1998, given a negative 200 basis point decline in interest rates was 9.51%, or a
projected $225,000 decrease in net income. The majority of the decrease was the
trading portfolio earnings at risk estimated to be $133,000, while all other
earnings as risk were $92,000.
Equity value risk as of December 31, 1997 was 5.46%, or a $961,000
decrease in the present value of equity, given a 200 basis point increase in
interest rates. The present value of the trading portfolio would decrease
$19,000, while the combined present value of all other assets and liabilities
would decline $942,000.
CAPITAL
The adequacy of 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 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, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
Regulatory ---------------------
Requirements 1997 1996
------------ ------ -----
<S> <C> <C> <C>
Leverage ratio:
Tier I (core capital) ratio.............. 4.0%* 12.58% 10.70%
Risk-based capital ratios:
Tier I capital/risk-weighted............. 4.0% 18.02% 15.19%
Tier I and Tier II capital/
Risk-weighted assets............ 8.0% 19.28% 16.45%
</TABLE>
- ------------
* 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.
-35-
<PAGE>
DEPOSIT INSURANCE FUNDS ACT OF 1996
The Deposit Insurance Funds Act of 1996 (the "Act") was enacted on
September 29, 1996. The 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 1980s as part of the federal government's savings and loan
bailout. The law provides that BIF assessments must be set at a rate equal to
one-fifth of the Savings Institution Insurance Fund ("SAIF") rates for 1997,
1998 and 1999. After 1999, all FDIC-insured institutions will pay the same risk-
adjusted rates.
During 1997, the Bank incurred $12,100 expense for the Bank Insurance
Fund of the FDIC.
"YEAR 2000" ISSUES
During 1997, the Bank formed a Technology Task Team who will be
responsible for year 2000 compliance for the Bank. The team members contacted
all vendors which they believe would be affected by the millennium change. The
Bank's computer application servicer has been dealing with the year 2000 issue
since May 1997 and is expecting to complete the host phase by September 1998.
During the period of October 1998 to March 1999, the servicer will coordinate an
end-to-end test which will allow the Bank to simulate daily processing on
sensitive century dates such as Day 1, first Month-end, first Leap Day, etc. At
a minimum, testing will involve bank/branch input to host, production cycles and
feedback to the general ledger system, and other key interfaces to facilitate
completion of the end-to-end test. Most of other computer related vendors are
anticipating to be year 2000 compliance during 1998. The Bank's Technology Task
Team has inventoried all operating systems, hardware and software and concluded
that the majority of personal computers are year 2000 compatible. The Bank will
replace those computers which are not compliant as necessary. An estimated cost
of $50,000 to $75,000 will be incurred by the Bank for the year 2000 issue.
-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, 1997 and 1996........................ F-2
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1996 .................................................. F-3 to F-4
Consolidated Statements of Changes in Shareholders' Investment
for the Years Ended December 31, 1997 and 1996 .............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 .................................................. F-6 to F-7
Notes to the Consolidated Financial Statements...................................... F-8 to F-34
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
First Lehigh Corporation:
We have audited the accompanying consolidated balance sheets of First
Lehigh Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' investment
and cash flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Lehigh
Corporation and subsidiary at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, in
1997 the Corporation changed its method of computing earnings per share by
adopting Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
/s/ Parente, Randolph, Orlando, Carey & Associates
Allentown, Pennsylvania
February 3, 1998
F-1
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 7,470 $ 2,861
FEDERAL FUNDS SOLD 611 1,759
TRADING SECURITIES 7,571 6,309
SECURITIES AVAILABLE-FOR-SALE 17,908 21,922
SECURITIES HELD-TO-MATURITY (Fair value of $3,990
and $3,899) 4,085 4,091
LOANS (Net of $1,586 and $1,624 allowance for loan losses) 62,820 64,374
PREMISES AND EQUIPMENT 4,365 2,022
FORECLOSED ASSETS HELD FOR SALE, Net 1,597 4,850
OTHER ASSETS 2,292 2,092
-------- --------
TOTAL ASSETS $108,719 $110,280
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
DEPOSITS:
Noninterest-bearing $ 11,258 $ 10,086
Interest-bearing 80,888 85,853
-------- --------
Total deposits 92,146 95,939
OTHER BORROWED FUNDS -- 1,200
LONG-TERM DEBT 1,214 272
OTHER LIABILITIES 909 859
-------- --------
Total liabilities 94,269 98,270
SHAREHOLDERS' INVESTMENT 14,450 12,010
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $108,719 $110,280
======== ========
- -----------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands, except per share data and shares outstanding)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,824 $ 5,673
Interest and dividends on investment securities:
Taxable interest income 1,660 1,637
Dividends 154 264
Interest on overnight funds 168 105
------- -------
Total interest income 7,806 7,679
------- -------
INTEREST EXPENSE:
Interest on deposits 3,579 3,571
Interest on other borrowed funds 26 50
Interest on long-term debt 108 30
------- -------
Total interest expense 3,713 3,651
------- -------
NET INTEREST INCOME 4,093 4,028
PROVISION (CREDIT) FOR LOAN LOSSES 1,003 (367)
------- -------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR LOAN LOSSES 3,090 4,395
------- -------
OTHER INCOME:
Service charges, fees and other income 492 459
Gain on sale of foreclosed assets, net 49 62
Gain on sale of real estate 183 53
Rental income 191 1
Gain on sale of deposits 478
Unrealized holding gains on trading securities 1,163 372
Realized gains (losses) on:
Trading securities 2,528 1,006
Securities available-for-sale 22 79
Securities held-to-maturity (18)
Litigation settlement 184 1,539
------- -------
Total other income 5,290 3,553
------- -------
</TABLE>
F-3
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands, except per share data and shares outstanding)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OTHER EXPENSES:
Salaries and employee benefits $ 1,633 $ 1,485
Net occupancy expense 442 462
Equipment expense 209 207
FDIC insurance 106 156
Foreclosed asset expenses 1,175 1,175
Other 1,812 2,318
------- -------
Total other expenses 5,377 5,803
------- -------
NET INCOME $ 3,003 $ 2,145
======= =======
EARNINGS PER SHARE - BASIC $ 1.28 $ 0.86
======= =======
EARNINGS PER SHARE - DILUTED $ 0.86 $ 0.63
======= =======
- ---------------------------------------------------------------------------------------
</TABLE>
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, 1997 AND 1996
(In thousands, except for share information)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SENIOR SERIES A
PREFERRED PREFERRED CONTRIBUTED
STOCK STOCK COMMON STOCK CAPITAL IN
--------------------- ----------------- ------------------ EXCESS OF PAR
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
ISSUANCE OF COMMON STOCK
UNDER STOCK BONUS PLAN 50,000 150
DIVIDENDS DECLARED ON
SENIOR PREFERRED AND
SERIES A PREFERRED STOCK
NET INCOME
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
------- -- ------- -- --------- --- ------
BALANCE AT DECEMBER 31, 1997 900,363 $9 682,000 $7 2,050,000 $20 $9,171
======= == ======= == ========= === ======
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON SECURITIES TOTAL
RETAINED AVAILABLE SHAREHOLDERS'
EARNINGS FOR SALE INVESTMENT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
ISSUANCE OF COMMON STOCK
UNDER STOCK BONUS PLAN 150
DIVIDENDS DECLARED ON
SENIOR PREFERRED AND
SERIES A PREFERRED STOCK (962) (962)
NET INCOME 3,003 3,003
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 249 249
------- ----- --------
BALANCE AT DECEMBER 31, 1997 $ 5,268 $ (25) $ 14,450
======= ===== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
F-5
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,003 $ 2,145
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized gains on securities available-for-sale (22) (79)
Gain on sale of foreclosed assets, net (49) (62)
Gain on sale of deposits 478
Provision (credit) for loan losses 1,003 (367)
Provision for foreclosed assets losses 655 602
Depreciation of premises and equipment 182 161
Amortization 14 73
Gain on sale/disposal of equipment 27 (7)
Realized losses on securities held-to-maturity 18
Net increase in trading securities (1,262) (271)
Gains on other assets (183) (397)
Change in:
Other assets 184 (79)
Other liabilities (220) 387
------- -------
Net cash provided by operating activities 3,810 2,124
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available-for-sale 1,952 4,038
Proceeds from the maturity of securities available-for-sale 2,325 3,789
Purchases of securities available-for-sale (8,604)
Proceeds from sale of securities held-to-maturity 327
Net increase in loans (1,526) (8,944)
Proceeds from sales of premises and equipment 54
Capital expenditures for premises and equipment (450) (56)
Capital expenditures for foreclosed assets (101) (43)
Proceeds from sales of foreclosed assets 3,287 1,483
Proceeds from sales of other assets 484 691
------- -------
Net cash provided by (used in)
investing activities 5,971 (7,265)
------- -------
</TABLE>
F-6
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of deposit accounts $(6,820)
Net (decrease) increase in other borrowed funds (1,200) $ 1,200
Dividend payments (740)
Payments on long-term debt (109) (109)
Net increase in deposits 2,549 3,627
------- -------
Net cash (used in) provided by
financing activities (6,320) 4,718
------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 3,461 (423)
CASH AND CASH EQUIVALENTS, BEGINNING 4,620 5,043
------- -------
CASH AND CASH EQUIVALENTS, ENDING $ 8,081 $ 4,620
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 3,712 $ 3,657
======= =======
Cash paid for income taxes $ 47 $ 22
======= =======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
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 substantially in compliance
with the Pennsylvania Order as of December 31, 1997. The Pennsylvania
Order requires the Bank to reduce the level of nonaccrual loans to total
gross loans noted in the Report of Examination as of June 30, 1995, to no
more than 4% by November 24, 1996 and to 2% by February 22, 1997. As of
December 31, 1997, this ratio was 2.1% which was higher than the 2%
required by the Pennsylvania Order. Additionally, the Pennsylvania Order
requires the Bank to reduce the level of classified assets as of June 30,
1995, to no more than 75% of Tier I capital and the allowance for loan
losses by November 24, 1996 and to 50% by February 22, 1997. As of
December 31, 1997, this ratio was 23.68%. The Pennsylvania Order also
contains a provision requiring the Bank to maintain, at all times, a
minimum Tier I capital equal to or greater than 6.5% of the Bank's
adjusted total assets, plus a "fully-funded loan loss reserve." As of
December 31, 1997, this ratio was 12.58% and the Bank's loan loss reserve
was fully funded.
The Federal Reserve Agreement requires the Company to obtain the approval
of the Federal Reserve Bank and the Department in order to declare or pay
any dividends to its shareholders.
The Memorandum of Understanding and Federal Reserve Agreement also place
certain requirements related to capital, adversely classified assets and
management policies. Such requirements are no more restrictive than those
included in the Pennsylvania Order issued by the Department. Management
believes the Corporation is in compliance with the Memorandum of
Understanding and the Federal Reserve Agreement as of December 31, 1997.
The Company's and the Bank's continued existence is dependent upon its
ability to achieve compliance with the terms of the administrative order
and other regulatory agreements. The Corporation's management believes
that compliance will be achieved allowing the Corporation to continue as a
going concern in its present form.
2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Lehigh Corporation and its subsidiaries, Pond Associates (a
partnership) and First Lehigh Bank, and First Lehigh Bank's
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 and
Allentown, Pennsylvania. Its primary deposit products are passbook and
statement savings accounts, certificates of deposit, NOW accounts,
money market accounts, checking accounts and club accounts. Its primary
lending products are secured small business loans and lines of credit,
residential loans, installment loans and secured consumer loans.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the First
Lehigh Corporation and its direct and indirect subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Estimates that are particularly susceptible to significant change
relate to the determination of the allowances for loan losses and the
valuation of assets acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of
allowances for loan losses and for writedowns of foreclosed assets,
management obtains independent appraisals for significant properties.
A majority of the Corporation's loan portfolio consist of commercial
and residential real estate loans to borrowers within the Lehigh
Valley, which constitutes the primary marketing area of the
institution.
While management uses available information to recognize losses on
loans and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the allowances for loan losses and for writedowns
of foreclosed assets. Such agencies may require the Corporation to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Because
of these factors, it is reasonably possible that the allowances for
loan losses and for writedowns of foreclosed assets may change
materially in the near term.
F-10
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
Securities held-to-maturity are debt securities for which the Bank has
the positive intent and ability to hold to maturity and are reported at
amortized cost.
Trading securities are marketable equity securities held principally
for resale in the near term and recorded at their fair values.
Unrealized appreciation and depreciation on trading securities are
included immediately in other income.
Securities available-for-sale consist of securities not classified as
trading securities or securities held-to-maturity. Unrealized
appreciation and depreciation, net of tax, on securities
available-for-sale are reported as a net amount in a separate component
of shareholders' investment until realized.
Gains and losses on the sale of securities are determined using the
specific identification method.
Declines in the fair value of individual securities held-to-maturity
and available-for-sale below their cost that are other than temporary
result in write-downs of the individual securities to their fair value.
Any related write-downs are included in earnings as realized losses.
Premiums and discounts are amortized over the period to maturity using
an interest method.
LOANS
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due generally, when the loan is ninety days past due. When
interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent
cash payments are received. Impaired loans are charged off when
collection is considered remote.
F-11
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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."
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.
F-12
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
The Corporation considers all cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and federal
funds sold to be cash equivalents for purposes of the statement of cash
flows.
The Corporation transferred approximately $539,000 and $2,015,000 from
loans to foreclosed assets held for sale during the years ended
December 31, 1997 and 1996, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
utilized in immediate settlement of the instruments. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Corporation.
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.
F-13
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deposits: The fair values disclosed for demand deposits (for
example, interest-bearing checking accounts and passbook accounts)
are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The fair values
for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual
maturities on such time deposits. The carrying amount of accrued
interest payable approximates fair value.
Other borrowed funds and long-term debt: The carrying amounts of
other borrowed funds and long-term debt approximate their fair
values.
Other liabilities: Commitments to extend credit were evaluated and
fair value was estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the
counterparts. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates.
DERIVATIVE FINANCIAL STATEMENTS
The Company has no derivative financial instruments requiring
disclosure under SFAS No. 119.
3. CASH AND DUE FROM BANKS
Deposits with one financial institution are insured up to $100,000. The
Bank maintains cash balances with certain other financial institutions in
excess of the insured amount.
F-14
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES
Trading securities are comprised of marketable equity securities with a
cost basis of $4,908,000 and $4,810,000 at December 31, 1997 and 1996,
respectively. Unrealized net holding gains on trading securities of
$1,163,000 and $372,000 were included in earnings in 1997 and 1996,
respectively.
The amortized cost of other securities and their fair value at December
31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
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 $15,109 $ 84 $ (92) $15,101
Other, primarily corporate
debt securities 2,774 19 (36) 2,757
Equity securities 50 - - 50
------- ----- ------ -------
Total securities
available-for-sale $17,933 $ 103 $ (128) $17,908
======== ===== ======= =======
SECURITIES HELD-TO-
MATURITY
Obligations of the U.S.
Treasury and other U.S.
government agencies and
corporations $ 4,035 $ - $ (95) $ 3,940
Foreign securities 50 50
------- ----- ------ -------
Total securities
held-to-maturity $ 4,085 $ - $ (95) $ 3,990
======== ===== ======= =======
</TABLE>
F-15
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<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 2,867 3 (73) 2,797
Equity securities 50 - - 50
------- ----- ----- -------
Total securities
available-for-sale $22,196 $ 86 $(360) $21,922
======= ===== ===== =======
SECURITIES HELD-TO-
MATURITY
Obligations of the U.S.
Treasury and other U.S.
government agencies and
corporations $ 4,041 $ - $(192) $ 3,849
Foreign securities 50 50
------- ----- ----- -------
Total securities
held-to-maturity $ 4,091 $ - $(192) $ 3,899
======= ===== ===== =======
</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, 1997 by contractual
maturity, are shown below (in thousands). Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<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
through five years 661 657 50 50
Due after five years
through ten years 13,402 13,421 4,035 3,940
Due after ten years 756 769 - -
------- ------- ----- ------
Total debt securities 14,819 14,847 4,085 3,990
Mortgage-backed securities 3,064 3,011 - -
------- ------- ----- ------
Total $17,883 $17,858 $4,085 $3,990
======= ======= ====== ======
</TABLE>
The proceeds, gross gains and gross losses from the sale of
available-for-sale securities during the year ended December 31, 1997 and
1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Proceeds $1,952 $4,038
Gross gains 31 131
Gross losses 9 52
</TABLE>
On October 22, 1996, the Company sold debt securities classified as
held-to-maturity with an amortized cost of $345,000 for $327,000 resulting
in a realized loss of $18,000. The Bank's regulators classified this
security due to a negative change in the issuer's credit worthiness
resulting in management's decision to liquidate the security.
Investment securities with a carrying value of approximately $10,457,000
and $8,459,000 at December 31, 1997 and 1996, respectively were pledged to
secure certain deposits, repurchase agreements and for other purposes as
required by law.
F-17
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1997, there is no concentration of investments that exceed
10% of shareholders' equity for any individual issuer excluding those
guaranteed by the U.S. government.
In management's opinion, no permanent impairment of the value of any
held-to-maturity or available-for-sale securities has occurred at December
31, 1997.
5. LOANS
The components of loans in the consolidated statements of financial
condition were as follows at December 31, 1997 and 1996, (in thousands):
1997 1996
-------- --------
Commercial $ 3,416 $ 3,659
Real estate construction 4,620 4,920
Commercial real estate 18,485 19,842
Residential real estate 24,381 25,941
Consumer 6,467 4,453
Automobile loans 7,267 7,619
-------- --------
Subtotal 64,636 66,434
Unearned income 230 436
Allowance for loan losses 1,586 1,624
-------- --------
Net loans $62,820 $ 64,374
======= ========
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:
1997 1996
------- ------
Balance at January 1 $ 1,624 $1,624
------ ------
Loans charged off (1,172) (849)
Recoveries 131 1,216
------- ------
Net (charge offs) recoveries (1,041) 367
------- ------
Provision (credit) for loan losses 1,003 (367)
------- ------
Balance at December 31 $ 1,586 $1,624
======= ======
Impairment of loans having recorded investments of $3,364,000 at December
31, 1997, and $2,052,000 at December 31, 1996, has been recognized in
conformity with FASB Statement No. 114 as amended by FASB Statement No.
118. The average recorded investment in impaired loans during 1997 and
1996 was $1,969,000 and $3,718,000, respectively. The total allowance for
loan losses related to these loans was $655,000 and $258,000 at December
31, 1997 and 1996, respectively. Payments received on impaired loans and
applied to principal were $314,000 and $1,180,000 in 1997 and 1996,
respectively. The Bank is not committed to lend additional funds to
debtors whose loans are impaired.
Smaller balance homogeneous loans excluded from the impaired loan
classification include residential real estate and consumer loans. Loans
to the real estate development industry were approximately $1,157,000 and
$3,400,000 at December 31, 1997 and 1996, respectively.
The Corporation makes loans to its officers and directors and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more
than normal risk of collectibility. The following table summarizes loan
activity with officers, directors and their associates during the years
ended December 31, 1997 and 1996 (in thousands):
1997 1996
------ ------
Balance, beginning $2,395 $2,538
Advances 40 1,275
Payments and other reductions (245) (1,418)
------ ------
Balance, ending $2,190 $2,395
====== ======
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, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Balance, beginning $5,200 $4,875
Transfers from loans 539 2,015
Additional capitalized costs 97 56
Disposals (3,234) (1,433)
Charge-offs (705) (313)
------ ------
Total 1,897 5,200
Less allowance for write-downs of foreclosed assets 300 350
------ ------
Balance, ending $1,597 $4,850
====== ======
</TABLE>
The following table summarizes the activity in the allowance for
write-downs of foreclosed assets during the years ended December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Balance, beginning $ 350 $ 61
Provision for foreclosed asset losses 655 602
Charge-offs (705) (313)
------- ------
Balance, ending $ 300 $ 350
======= ======
</TABLE>
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, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land and improvements $ 893 $ 243
Buildings and leasehold improvements 4,323 2,003
Equipment and fixtures 2,018 1,936
------- -------
Total 7,234 4,182
Less accumulated depreciation and amortization 2,869 2,160
------ -------
Total $4,365 $ 2,022
====== =======
</TABLE>
8. TIME DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $7,293,000 and $7,752,000 at December 31, 1997 and
1996, respectively. Interest related to time certificates of deposit in
denominations of $100,000 or more was approximately $399,000 and $388,000
for the years ended December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
under $100,000 are as follows:
1998 $19,902
1999 15,330
2000 3,086
2001 1,433
2002 and thereafter 437
-------
$40,188
=======
F-21
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. OTHER BORROWED FUNDS
Information concerning securities sold under agreements to repurchase and
other borrowings is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Year end balance $ - $1,200
Average interest rate during the year 6.28% 5.94%
Average balance during the year $ 404 $ 849
Maximum month-end balance during the year $3,000 $2,400
Securities underlying the agreements (actual
ownership not transferred) at year end:
Amortized cost $6,637 $4,643
Fair value $6,581 $4,431
</TABLE>
10. LONG-TERM DEBT
The Corporation has a secured promissory note with principal payments of
$9,100, plus interest, due monthly, maturing in 1999. Interest is
calculated by using the lender's commercial rate plus .6%. At December 31,
1997 $163,000 was outstanding on this debt. The note is secured by less
than 10% of the shares of Bank stock owned by the Corporation.
The Corporation has a mortgage payable with Firstrust Bank of $1,051,000
at December 31, 1997. The mortgage is due in monthly payments, including
interest at 8.25%, of $11,013 through February 2001 with the outstanding
balance due in a balloon payment of approximately $890,000. The mortgage
is secured by real estate with a carrying value of approximately
$3,002,000.
Maturities of long-term debt at December 31, 1997 are as follows:
YEARS ENDING DECEMBER 31
------------------------
1998 $ 156,000
1999 105,000
2000 55,000
2001 898,000
----------
$1,214,000
==========
F-22
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. SHAREHOLDERS' INVESTMENT
Shareholders' investment at December 31, 1997 and 1996 consists of the
following (in thousands, except share information):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Senior preferred stock, par value $.01 per share, 1,500,000
shares authorized, 900,363 shares issued and outstanding $ 9 $ 9
Series A preferred stock, par value $.01 per share, 1,000,000 shares
authorized; 682,000 shares issued and outstanding (liquidation
preference of $2,114) 7 7
Common stock, par value $.01 per share, 10,000,000 shares
authorized; 2,050,000 and 2,000,000 shares issued and outstanding
in 1997 and 1996, respectively 20 20
Contributed capital in excess of par value 9,171 9,021
Retained earnings, including partners' equity from partnership
included in consolidation 5,268 3,227
Net unrealized depreciation on securities available-for-sale (25) (274)
------- -------
Total shareholders' investment $14,450 $12,010
======= =======
</TABLE>
Each share of the Corporation's senior preferred stock is convertible at
the option of the shareholder, prior to October 31, 1998, to common stock
at the rate of one share of common stock for each share of senior
preferred stock. The conversion rate will be adjusted on November 1, 1998
if the greater of book value or market value of the Corporation's common
stock is not equal to $5.00 or more per share at the close of business on
the last trading day of the New York Stock Exchange in October 1998. No
adjustment will be made if the greater of the market value or book value
is equal to or greater than $5.00 per share at such time. Conversion rates
are adjusted for common stock dividends and splits. The senior preferred
stock dividend is at an annual rate of $.25 per share. The liquidation
price of the senior preferred stock is $5.00 plus any accrued dividends.
During 1996, 51,461 shares of senior preferred stock and $465 in cash were
issued in payment of $257,770 dividends in arrears. During 1997, dividends
of $406,359, including $237,542 dividends in arrears, were paid to senior
preferred stockholders.
F-23
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Each share of the Series A preferred stock with a par value of $.01 is
convertible at the option of the holder to common stock at the rate of .8
of a share of common stock for each share of Series A preferred stock
until March 31, 1999. Conversion rates are adjusted for common stock
dividends and splits. The Series A preferred stock dividend is at an
annual rate of $.3255 per share. During 1997, $332,986 dividends,
including $221,990 dividends in arrears, were paid to Series A preferred
stockholders. Cumulative dividends in arrears are $943,464 and $1,220,951
as of December 31, 1997 and 1996, respectively.
In addition, the Board of Directors declared a fourth quarter 1997
dividend, payable to recordholders of December 17, 1997, to its senior
preferred stockholders of $56,272 and $166,493 to its Series A preferred
stockholders.
12. EARNINGS PER SHARE
In 1997, the Corporation adopted SFAS No. 128, "Earnings Per Share," which
changed the computation of earnings per share ("EPS") and requires
presentation of two new amounts, basic and diluted EPS, and additional
informational disclosures. The adoption of SFAS No. 128 is required for
all reporting periods after December 15, 1997 and requires restatement for
all prior periods. The adoption of SFAS No. 128 resulted in the
restatement of the Corporation's 1996 EPS, as follows:
Previously reported:
Basic EPS $.60
Diluted EPS $.50
Restated amounts:
Basic EPS $.86
Diluted EPS $.63
F-24
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following data show the amounts used in computing earnings per share
and the effects of income and the weighted average number of shares of
dilutive potential common stock for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
--------- ------------- -----
<S> <C> <C> <C>
1997
Net income $3,002,876
Less preferred stock dividends:
Series A (221,991)
Senior (225,091)
---------
Basic EPS
Net income available to common
shareholders 2,555,794 2,002,877 $1.28
=====
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 60,000
Hypothetical share repurchase
at $7.75 (27,097)
Preferred stock:
Common shares issued upon
assumed conversion:
Series A 545,600
Senior 900,363
Preferred dividend that would not
apply upon conversion 447,082
---------- ---------
Diluted EPS $3,002,876 3,481,743 $ .86
========== ========= =====
</TABLE>
F-25
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
--------- ------------- -----
<S> <C> <C> <C>
1996
Net income $2,145,312
Less preferred stock dividends:
Series A (221,991)
Senior (212,542)
---------
Basic EPS
Net income available to common
shareholders 1,710,779 2,000,000 $.86
====
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 60,000
Hypothetical share repurchase
at $5.25 (40,000)
Preferred stock:
Common shares issued upon
assumed conversion:
Series A 545,600
Senior 850,167
Preferred dividend that would not
apply upon conversion 434,533
---------- ---------
Diluted EPS $2,145,312 3,415,767 $.63
========== ========= ====
</TABLE>
F-26
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. NONCASH INVESTING AND FINANCING ACTIVITIES
CONSOLIDATION OF PARTNERSHIP INTEREST
In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which the Company was a limited partner,
which owned the building which houses a branch and administrative
offices of the Bank. As part of this litigation settlement, the Company
received $184,000 representing a $47,000 general partnership interest
and a cash settlement of $137,000. The entire $184,000 has been
included in other income. After receipt of this settlement, the
Company's ownership interest as a general partner exceeded 50%, and
therefore, the Company has been required under generally accepted
accounting principles to include in its 1997 financial statements all
of the accounts of this previously unconsolidated subsidiary. The pro
forma balances of this partnership after elimination of intercompany
balances are as follows:
ASSETS
Premises and equipment $1,051,000
Other assets 252,000
----------
Total assets $1,303,000
==========
LIABILITIES AND EQUITY
Mortgage payable $1,051,000
Other liabilities 7,000
Minority interest 191,000
----------
Total liabilities 1,249,000
Equity 54,000
----------
Total liabilities and equity $1,303,000
==========
INCOME STATEMENT
Noninterest income $ 188,000
Mortgage interest (88,000)
Occupancy expenses (141,000)
----------
Net loss $ (41,000)
==========
DIVIDEND PAYMENTS
At December 31, 1997, the Company has accrued $222,000 of dividends
payable to its stockholders in the first quarter of 1998.
ISSUANCE OF COMMON STOCK
The Company, under the terms of its nonqualified stock bonus plan,
issued 50,000 shares of its common stock in 1997 at the option price of
$150,000.
F-27
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. INCOME TAXES
The reasons for the difference between the provision for income taxes and
the amount computed by applying the statutory federal income tax rate of
34% to income before provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Expected provision $1,021 $ 729
Effect of tax-exempt income (9) (9)
Effect of dividends received deduction (37) (63)
Other 3 1
Net operating loss carryforward (978) (658)
------ -----
Provision for income taxes $ - $ -
====== =====
</TABLE>
At December 31, 1997, the Corporation has a net operating loss
carryforward of approximately $1,594,000 available to offset future
taxable income, which begins to expire in 2007 if not utilized.
The deferred income tax asset and liability components are as follows
at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 543 $1,139
Write-down of foreclosed assets held for sale 492 498
Accrued expenses 17 51
Net unrealized losses on securities available-for-sale 8 93
------- ------
Total 1,060 1,781
------- ------
Deferred tax liabilities:
Loan losses (52) (35)
Deferred loan costs, net (11) (32)
Depreciation (86) (107)
Accretion (6) (5)
Trading securities gains (905) (528)
------ ------
Total (1,060) (707)
------ ------
Valuation allowance - (1,074)
------ ------
Net deferred tax asset $ - $ -
====== =======
</TABLE>
F-28
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. REGULATORY MATTERS AND RESTRICTIONS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators, that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31,
1997, that the Bank meets all capital adequacy requirements to which it is
subject.
To be categorized as well capitalized, a bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. The Bank's actual capital amounts and ratios are also presented
in the table. The Company's consolidated capital ratios are not
significantly different from those of the Bank. No amounts were deducted
from capital for interest-rate risk in either 1997 or 1996.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
(Dollars in thousands) ------------------- ------------------ -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk
weighted assets) $14,714 19.28% $6,104 8.00% $7,631 10.00%
Tier I capital (to risk
weighted assets) $13,752 18.02% $3,052 4.00% $4,578 6.00%
Tier I capital (to
average assets) * $13,752 12.58% $4,372 4.00% $5,464 5.00%
As of December 31, 1996:
Total capital (to risk
weighted assets) $12,775 16.45% $6,212 8.00% $7,765 10.00%
Tier 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%
</TABLE>
* The Department requires a minimum of 6.5% under the terms of the
Administrative Order.
F-29
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Certain restrictions exist regarding the ability of the Bank to transfer
funds to First Lehigh Corporation in the form of cash dividends, loans and
advances. As of December 31, 1997, no retained earnings of the Bank
(included in consolidated retained earnings) were available for
distribution to First Lehigh Corporation as dividends, without prior
regulatory approval. In addition, First Lehigh Corporation is unable to
pay dividends at December 31, 1997, without the prior approval of the
Federal Reserve Bank.
Additionally, the Bank is limited to the amount it may loan or advance to
its affiliates unless such loans or advances are collateralized by
specified obligations. At December 31, 1997, the maximum amount available
for unsecured loans from the Bank to First Lehigh Corporation approximates
$1,750,000.
16. PROFIT-SHARING PLAN
The Corporation has a noncontributory profit-sharing plan covering
eligible employees. Costs of the profit-sharing plan are funded as
accrued. Contributions to the plan are discretionary and are determined
annually by the Bank's board of directors. Profit sharing expense of
$25,000 was recorded for both 1997 and 1996.
17. STOCK OPTIONS
1997 NONQUALIFIED STOCK OPTION PLAN
On November 12, 1997, the Corporation instituted a nonqualified stock
option plan for the purpose of securing and retaining key employees.
Under this plan, 75,000 shares of common stock have been reserved for
future issuance. The option period may vary by agreement, but in no
case shall be exercisable after ten years from the date of grant. On
December 11, 1997, the Corporation issued options to purchase 50,000
shares of the Corporation's common stock at an option price of $3.00
per share. The options were all exercised prior to December 31, 1997.
1989 EQUITY INCENTIVE
In 1989, the Corporation formed the "First Lehigh Corporation 1989
Equity Incentive Plan" for which stock options may be granted to
employees for the purchase of up to 84,000 shares of the Corporation's
common stock. On December 7, 1995, 60,000 options were issued at $3.50
per share. These options expire December 2005.
F-30
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCENTIVE STOCK OPTION PLAN
Previously, the Corporation had reserved 66,500 shares of common stock
for issuance under a key employee Incentive Stock Option Plan. At
January 1, 1996, there were 20,000 remaining options under this plan
which expired during 1996. At December 31, 1997, this plan was
terminated.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. The
compensation expense attributable to the participants of the 1997
Nonqualified Stock Option Plan was $100,000. If the Company utilized SFAS
No. 123 based on the fair value at the grant date for awards, there would
have been no effect on income or earnings per share.
For purposes of the SFAS No. 123 calculations, the fair value of each
option grant is estimated using the Black-Scholes option - pricing model
with the following weighted-average assumptions for grants issued in 1997:
Dividend yield .00%
Expected volatility .00%
Risk-free interest rate 5.55%
Expected life None
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve to varying
degrees elements of credit, interest rate or liquidity risk in excess of
the amount recognized in the consolidated balance sheet.
The Corporation's exposure to credit loss from nonperformance by the other
party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Corporation generally does not require collateral or other security to
support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as
follows at December 31, 1997:
Commitments to extend credit $3,176,632
Standby letters of credit 1,293,265
F-31
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporations' financial instruments at
December 31, 1997 and 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,081 $ 8,081 $ 4,620 $ 4,620
Trading account securities 7,571 7,571 6,309 6,309
Securities available-for-sale 17,908 17,908 21,922 21,922
Securities held-to-maturity 4,085 3,990 4,091 3,899
Loans, net of allowance 62,769 64,276 64,374 63,658
Accrued interest receivable 758 758 855 855
Financial liabilities:
Deposits 92,904 92,598 95,939 95,772
Other borrowed funds - - 1,200 1,200
Long-term debt 1,214 1,214 272 272
Accrued interest payable 211 211 211 211
</TABLE>
F-32
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
19. FIRST LEHIGH CORPORATION (Parent company only)
CONDENSED FINANCIAL STATEMENTS (In thousands):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
1997 1996
------- --------
<S> <C> <C>
Assets:
Deposits with bank subsidiary $ 754 $ 630
Accounts receivable 52 5
Investment in subsidiary 13,727 11,522
Premises and equipment 2,346 -
Other assets 313 356
------- -------
Total assets $17,192 $12,513
======= =======
Liabilities and shareholders' investment:
Demand notes payable $ 163 $ 272
Other liabilities 476 231
Long-term debt 2,103 -
------- -------
Total liabilities 2,742 503
Shareholders' investment 14,450 12,010
------- -------
Total liabilities and shareholders' investment $17,192 $12,513
======= =======
CONDENSED STATEMENT OF OPERATIONS
1997 1996
------- ------
Investment income $ 18 $ 24
Other income 449 42
Other expenses (312) (919)
Interest expense (197) (30)
------- ------
Loss before equity in income of subsidiary (42) (883)
Equity in net income of subsidiary 3,045 3,028
------- ------
Net income $ 3,003 $ 2,145
======= =======
</TABLE>
F-33
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,003 $2,145
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of subsidiary (3,045) (3,028)
Increase or decrease in:
Accounts receivable (47) 1
Loans 94
Other assets (72) 484
Other liabilities 172 230
------ -------
Net cash used in operating activities 11 (74)
------ -------
Cash flows provided by investing activities,
Dividends received from subsidiary 962 --
------ -------
Cash flows from financing activities,
Distributions to shareholders (740)
Payments on note payable (109) (109)
------ -------
Net cash used in investing activities (849) (109)
------ -------
Net decrease in deposits with bank subsidiary 124 (183)
Deposits with bank subsidiary at beginning of year 630 813
------ -------
Deposits with bank subsidiary at end of year $ 754 $ 630
====== =======
</TABLE>
F-34
<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 56 Chairman of the Board, Acting President, Chief
Executive Officer and Director of the Company
Wilbur R. Roat 50 President, Chief Executive Officer and Director
of the Bank and Director of the Company
George M. Baltozer 63 Executive Vice President and Chief Operating
Officer of the Bank
Kashmira K. Lodaya 49 Treasurer of the Company and Vice President
and Controller of the Bank
Stephen M. Alinikoff 53 Director of the Company and the Bank
Peter Barter 82 Director of the Company and the Bank
Robert B. Colfer 55 Director of the Company and the Bank
Vincent Dieter 63 Director of the Company and the Bank
Charles D. Flack, Jr. 43 Director of the Company and the Bank
Harry J. Lentz 88 Director of the Company and the Bank
John H. McKeever 72 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
-37-
<PAGE>
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 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 for a description of the current FDIC
administrative proceedings against Mr. Leuthe.
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.
-38-
<PAGE>
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 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 1997 exceeded $100,000.
-39-
<PAGE>
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Other Securities All
Name and Annual Underlying Other
Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- ------------------ ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James L. Leuthe 1997 $90,000(1) $100,000 $27,706(2) -- --
Chairman of the 1996 190,000(1) -- 15,921(2) -- --
Board, Acting President, 1995 30,000(1) -- 15,203(2) -- --
Chief Executive Officer
and director of the
Company
Wilbur Roat 1997 $111,635 $ 5,000 $7,053(3) -- --
President, Chief 1996 107,500 -- 6,257(3) -- --
Executive Officer 1995 107,500 12,500 3,675(3) 60,000 $35,503(4)
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.
(2) Represents the depreciation expense of $9,422 in 1997, $9,423 in 1996 and
$9,423 in 1995 with respect to the use by Mr. Leuthe of a vehicle owned by
the Bank and $607, $664 and $890 paid in insurance premiums with respect
to such vehicle in 1997, 1996 and 1995, respectively. The total also
includes the depreciation expense of $4,061 in 1997, $4,061 in 1996 and
$4,061 in 1995 and insurance premiums of $1,437 in 1997, $707 in 1996 and
$829 in 1995 with respect to the use by Mr. Leuthe of a vehicle owned by
the Company. For 1997 and 1996, the totals include $2,134 and $1,096,
respectively, of a non-cash taxable fringe benefit. The total in 1997
includes an auto lease paid by the Company of $10,045.
(3) Represents the depreciation expense of $3,341 in 1997, $2,824 in 1996
and $2,824 in 1995 and insurance premiums of $706 in 1997, $676 in 1996
and $851 in 1995 with respect to the use by Mr. Roat of a vehicle owned
by the Bank. For 1997 and 1996 the total includes $3,006 and $2,757,
respectively, of a non-cash taxable fringe benefit.
(4) Represents relocation expense paid to Mr. Roat in 1995.
-40-
<PAGE>
The Company did not grant stock options to any executive officers in
1997.
Fiscal Year-End (December 31, 1997) Option Values
Value of
Unexercised
Number of In-the-Money
Unexercised Options Options at
at FY-End (#) FY-End ($)
------------------- ------------
Name Exercisable Exercisable
- ---- ----------- ------------
James L. Leuthe -- $ --
Wilbur R. Roat 60,000(1) $ 210,000(2)
- ---------------
(1) Options to purchase 60,000 shares are exercisable at an exercise price of
$3.50 per share.
(2) Value based upon the per share bid price of $7.00 at December 31, 1997.
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.
Director Compensation
The non-employee directors of the Bank received fees of $350 for each
meeting they at tended through May 28, 1997. As of June 1, 1997, all
non-employee directors of the Bank received fees of $450 for each meeting
attended. All directors of the Company received a fee of $450 for 1997. During
1997, 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 1997.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of February 28, 1998, 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
-41-
<PAGE>
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.
<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>
-42-
<PAGE>
- -------------------
(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 and 18,000
shares owned by corporations of which Mr. Leuthe is the controlling
shareholder. Mr. Leuthe disclaims beneficial ownership of 12,400 shares
of Common Stock held in certain trusts for the benefit of his children
that are included in this total.
(3) Includes 20,000 shares owned by Mr. Leuthe's children.
(4) Of these shares, 600 shares are owned by Mr. McKeever's wife.
(5) These shares consist of 50,000 shares owned by Financial East, L.P., a
limited partnership of which Mr. May is the general partner, and 1,500
shares owned by Mash & Co., a general partnership of which Mr. May is a
general partner. Mr. May disclaims beneficial ownership of 36,471
shares owned by Financial East, L.P. and 900 shares owned by Mash & Co.
The following table sets forth, as of February 28, 1998, 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) 45,846 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) 86,756 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
executive officers as a
group (11 persons) 1,789,242 71.2% 520,000 76.2%
</TABLE>
-43-
<PAGE>
- ------------------
(1) Information furnished by the directors.
(2) Assumes the number of shares of Common Stock that such persons have the
right to acquire upon the conversion of the Series A Preferred Stock.
Reference is made to "Principal Beneficial Owners" above.
(3) Reference is made to "Principal Beneficial Owners" above.
(4) This total includes 4,250 shares of Common Stock that Mr. Alinikoff's
sister has the right to acquire upon the conversion of 4,250 shares of
Senior Preferred Stock; 1,591 shares of Common Stock that Mr.
Alinikoff's daughter has the right to acquire upon the conversion of
1,591 shares of Senior Preferred Stock; and 1,005 shares of Common
Stock that Mr. Alinikoff has the right to acquire upon the conversion
of 1,005 shares of Senior Preferred Stock.
(5) These shares are owned jointly with Mr. Dieter's wife.
(6) Of these shares, 50,000 shares are held by Diamond Manufacturing Co., a
company of which Mr. Flack is a director, the President and a
controlling shareholder, 700 shares are owned by Mr. Flack's wife and
9,300 shares are owned by Mr. Flack's three children. This total also
includes an aggregate 26,756 shares of Common Stock that two pension
funds of Diamond Manufacturing Co. have the right to acquire upon
conversion of 26,756 shares of Senior Preferred Stock.
(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, 1997, the directors and officers of the
Company and their respective affiliates have loans outstanding in the following
principal amounts: Mr. Leuthe, $1,349,204; Mr. Alinikoff, $386,405; and Mr.
Barter, $76,245.
-44-
<PAGE>
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 and
$195,486 for the years ended December 31, 1996 and 1995, respectively. During
1997, this limited partnership was included in the consolidation.
Therefore, this expense was eliminated in consolidation.
Mr. McKeever provided legal services to the Bank during 1997. 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 1996 and 1997.
-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 (incorporated
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
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 January 1, 1997 and Addendum to Services Agreement dated
as of October 2, 1997.
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).
</TABLE>
-46-
<PAGE>
<TABLE>
<S> <C>
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
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
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. (Incorporated by reference to the Company's Form 10-KSB annual
report for the year ended December 31, 1996).
10.13 Office Lease dated September 1, 1996 between the Bank and ERA Partners
Group, Inc. (Incorporated by reference to the Company's Form 10-KSB
annual report for the year ended December 31, 1996).
10.14 Letter amending Lease dated April 28, 1997 between 740 Hamilton
Street Inc. and the Bank.
10.15 Seventh Amendment of Lease dated September 15, 1995 between Net
Realty Holding Trust and the Bank.
10.16 Eighth Amendment of Lease dated September 3, 1997 between Net
Realty Holding Trust and the Bank.
10.17 First Lehigh Corporation Nonqualified Stock Option Plan.*
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).
23.1 Consent of Parente, Randolph, Orlando, Carey & Associates
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 30, 1998 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 30, 1998
- ----------------------------------- Director (principal executive officer)
James L. Leuthe
/s/ Kashmira K. Lodaya Treasurer (principal financial March 30, 1998
- ---------------------------------- and accounting officer)
Kashmira K. Lodaya
/s/ Stephen M. Alinikoff Director March 30, 1998
- -----------------------------------
Stephen M. Alinikoff
/s/ Peter Barter Director March 30, 1998
- -----------------------------------
Peter Barter
/s/ Robert B. Colfer Director March 30, 1998
- -----------------------------------
Robert B. Colfer
/s/ Vincent Dieter Director March 30, 1998
- -----------------------------------
Vincent Dieter
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Charles D. Flack, Jr. Director March 30, 1998
- -----------------------------------
Charles D. Flack, Jr.
/s/ Harry J. Lentz Director March 30, 1998
- -----------------------------------
Harry J. Lentz
/s/ John H. McKeever Director March 30, 1998
- -----------------------------------
John H. McKeever
/s/ Wilbur R. Roat Director March 30, 1998
- -----------------------------------
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, 1997 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 1997, and will forward
copies of its proxy statement for its 1998 annual meeting to the Commission at
the time of their distributions to shareholders.
<PAGE>
Exhibit Index
Exhibit No. Description
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
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 (incorporated 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 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 January 1, 1997 and Addendum
to Services Agreement dated as of October 2, 1997.
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
<PAGE>
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 July 31, 1974, First
Amendment dated January 20, 1975, Second Amendment
dated June 22, 1984, Assignment and Assumption be
tween 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 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. (Incorporated by reference to the
Company's Form 10-KSB annual report for the year ended
December 31, 1996).
10.13 Office Lease dated September 1, 1996 between the Bank
and ERA Partners Group, Inc. (Incorporated by reference
to the Company's Form 10-KSB annual report for the
year ended December 31, 1996).
10.14 Letter amending Lease dated April 28, 1997 between 740
Hamilton Street Inc. and the Bank.
10.15 Seventh Amendment of Lease dated September 15, 1995
between Net Realty Holding Trust and the Bank.
<PAGE>
10.16 Eighth Amendment of Lease dated September 3, 1997
between Net Realty Holding Trust and the Bank.
10.17 First Lehigh Corporation Nonqualified Stock Option
Plan.*
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).
23.1 Consent of Parente, Randolph, Orlando, Carey & Associates
27.1 Financial Data Schedule
- ------------------
* This exhibit is a management contract or compensatory plan or arrangement.
SERVICES AGREEMENT
BISYS, INC. Contract No. CH-2081-07-96
11 Greenway Plaza -------------
Houston, Texas 77046-1102 Price List No. 07-96
-----------
Client First Lehigh Bank
---------------------------------------------------------------
Address 1620 Pond Road
--------------------------------------------------------------
City Allentown State Pennsylvania Zip Code 18104
--------------------- --------------------- -----------
1. SCOPE OF AGREEMENT
BISYS. Inc. ("BISYS") shall provide Client, in accordance with this Agreement,
the services selected by Client from BISYS' then applicable Standard Services
Price List and/or Special Services Price List (collectively, the "Price Lists")
(collectively, the "Services"). BISYS shall provide the reports listed on the
Standard Reports List and Special Reports List as applicable to the Services
selected by Client. The current Price Lists are attached hereto and made a part
hereof.
2. TERM OF AGREEMENT
A. The initial term of this Agreement shall commence January 1, 1997 (the
"Initiation Date") and end 60 full calendar months thereafter (the "Initial
Period").
B. The Agreement shall automatically continue after the Initial Period for
subsequent consecutive terms of three years each unless and until it is
terminated by either party upon written notice to the other given at least
180 days prior to the end of the Initial Period or any additional three year
period.
C. If Client has given BISYS notice pursuant to Paragraph 2(B) and Client
intends to deconvert from the BISYS data processing system ("BISYS System").
Client may, upon written notice to BISYS given at any time during the final
120 days of this Agreement (as determined in accordance with 2(B) above) or
any extension hereof pursuant to this Paragraph 2(C), extend the termination
date to the date indicated in such notice, which date shall not be, in any
event, less than 120 days after the date of such notice. Commencing at the
end of the Initial Period or any renewal period (as applicable), Client
shall pay for Services at the prices set forth in the then current BISYS
Price Lists notwithstanding the giving or extension notice.
D. Continuing obligations under this Agreement including, without limitation,
those relating co "BISYS Products" (defined in Paragraph 9(A));
"Confidential Information" (defined in Paragraph 9(F)) and "Client Files"
(defined in Paragraph 7(A)), shall survive any termination.
3. CHARGES
A. Each month commencing Initiation Date, whether or not Client actually uses
any Services during such month, Client shall pay a minimum monthly charge
equal to the greater of (i) $9,400; (ii) BISYS' charges for the Services
actually used by Client during such month; (iii) 80% of the charges invoiced
to Client during the immediately preceding month; or (iv) 80% of the charges
invoiced to Client for the month immediately preceding any deconversion by
Client if Client deconverts from the BISYS System.
B. The initial charges for the Services are specified in the Price Lists, and
shall be recorded by the BISYS System or by any other means used by BISYS of
determining Client's usage. The charges for the Services listed on the
Standard Services Price List as of the date hereof will not be changed by
BISYS until the expiration of the first year following Initiation Date.
Thereafter, during the remaining term of the Initial Period, the charges for
the Services listed on the Standard Services Price List may be changed by
BISYS at any time and from time to time upon at least 90 days prior written
notice to Client. During the Initial Period, the charges for the Services
listed on the Special Services Price List as of the date hereof may be
changed by BISYS at any time after the date hereof upon at least 90 days
prior written notice to Client. After the Initial Period, the charges for
the Services listed on the Price Lists shall automatically, and without
notice, be changed to BISYS' standard (nondiscounted) list prices then in
effect for the respective Services: such prices may, thereafter, be changed
by BISYS, at any time and from time to time, upon at least 90 days prior
written notice to Client.
C. There shall be added to all charges for the Services furnished Client
hereunder amounts equal to any applicable taxes levied or based on such
Services, exclusive of taxes based on BISYS' income.
D. No later than the 5th day of each calendar month, BISYS shall invoice (the
"Monthly Invoice") Client: (i) for all Services projected to be used by
Client during that month (the "Billing Month") which charge will be based
upon either actual usage and number of accounts during the month prior to
the Billing Month or the minimum charge pursuant to Paragraph 3(A); (ii) an
amount equal to 100% of the recurring pass through charges (e.g.
communication charges) actually utilized by Client during the prior month as
the estimated pass through charges for the Billing Month; (iii) adjustments
(debits/credits) to the prior month's estimated charges set forth in (i) and
(ii) above and; (iv) all other charges incurred by Client during the prior
month. Client agrees co pay all amounts set forth in the Monthly Invoice by
automatic debit by BISYS on the last business day of the Billing Month from
a Client bank account established for this purpose (the "Payment Account").
Client agrees to execute any and all required documentation to enable BISYS
to perform such automatic debiting of the Payment Account. If Client fails
to pay any amounts due under this Agreement, Client shall, upon demand, pay
interest at the rate of 1-1/2% per month, but in no event more than the
highest interest rate allowable, on such delinquent amounts from their due
date until the date of payment. Client agrees to reimburse BISYS for any and
all expenses BISYS may incur, including reasonable attorney fees, in taking
action to collect any amounts due BISYS hereunder. All amounts due must be
paid prior to Client's deconversion from the BISYS System.
4. AVAILABILITY OF THE SERVICES
A. Hours for accessing Services on an on-line basis ("On-Line Hours") at the
BISYS data center providing Services to Client ("Data Center") are 7:00 A.M.
to 9:00 P.M. Monday through Friday and 7:00 A.M. to 5:00 P.M. Saturday (Data
Center time) exclusive of BISYS holidays (New Years Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day). A
particular Service may also be available at other than On-Line Hours; in
which event Client may, at its option and subject to any additional charges
therefor, use that Service at such other times.
B. BISYS will make every reasonable effort to have the Services available
during the On-Line Hours. However, BISYS cannot and does not guarantee such
availability. Accordingly, Client's remedy and BISYS' sole liability to
Client or any third party for claims, notwithstanding the form of such
claims (e.g., contract, negligence or otherwise), arising out of (i) the
unavailability of the BISYS System or (ii) the interruption in or delay of
the Services provided or to be provided by BISYS hereunder, shall be for
BISYS to use all reasonable efforts to make the BISYS System available
and/or to resume the Services as promptly as reasonably practicable.
C. Client shall, at it's expense, be responsible for delivering and
transmitting to and from Client's offices, the offices of the applicable
regulatory authorities and any other location authorized by Client, and the
Data Center all data and information necessary for BISYS to furnish the
Services to Client.
<PAGE>
5. USE Of THE SERVICES
A. Client is exclusively responsible for the consequences of its own actions;
for any instructions it gives BISYS; for its failure to access the Services
in the manner prescribed by BISYS. and for its failure to supply accurate
input information. Client is responsible for auditing, balancing, verifying
the correctness of calculation routines (such as interest and service
charges) and reconciling any out-of-balance condition, and for notifying
BISYS of any errors in the foregoing within three business days after
receipt of the incorrect information. Client's remedy and BISYS' sole
liability to Client or any third party for any claims, notwithstanding the
form of such claims (e.g., contract, negligence or otherwise), arising out
of errors of omissions in the Services provided or to be provided by BISYS
hereunder and caused by BISYS shall be for BISYS to furnish the correct
report and/or to correct the applicable Client Files, provided that Client
promptly advises BISYS thereof.
B. Client shall use the Services in accordance with such reasonable
instructions as may be established by BISYS from time to rime as set forth
in any written materials furnished by BISYS to Client.
C. Except as otherwise permitted by BISYS, Client will use the Services only
for its own internal and proper business purposes and will not sell or
otherwise provide, directly or indirectly, any of the Services or any
portion thereof to any third party.
D. Client shall not make any alteration, change or modification to any of the
computer programs, data bases and/or BISYS supported files used by BISYS in
connection with providing the Services to Client hereunder, without BISYS'
prior written consent in each instance.
E. BISYS shall give Client written notice of any BISYS system change which
materially affects Client. Nothing herein shall preclude or limit BISYS'
ability to make changes to its data processing system.
6. COMMUNICATION LINES AND EQUIPMENT.
A. BISYS shall order, on Client's behalf and with Client's approval, the
installation of appropriate telephone lines and communications equipment to
enable Client to access the Services. Client shall pay all charges relating
to the installation and use of such telephone lines and communications
equipment.
B. BISYS shall not be responsible for the reliability, or continued
availability, of telephone lines and communications equipment used by Client
in accessing the Services.
7. FILE SECURITY AND RETENTION.
A. Any Client data bases and files or other information provided by Client to
BISYS for use with the Services (the "Client Files") shall remain the
confidential property of Client. BISYS will provide reasonable security
provisions to insure that third parties do not have access to the Client
Files. BISYS reserves the right to issue and change regulations and
procedures from time to time to improve file security. BISYS will instruct
its employees having access to the Client files to keep the same
confidential by using the same care and discretion that BISYS uses with
respect to its own confidential property.
B. BISYS will take reasonable precautions to prevent the loss of, or alteration
to, Client Files, but BISYS cannot guarantee against any such loss or
alteration. Accordingly, Client will, to the extent deemed necessary by
Client, keep copies of all source documents of information delivered to
BISYS and will maintain a procedure external to the BISYS System for the
reconstruction of lost or altered Client Files. In connection with the
foregoing, it is understood that Client shall assume and be responsible for
risk of loss and/or damage to documents and records while they are in
transit to and from the Data Center.
C. During the term of this Agreement, BISYS will retain the Client Files in
accordance with, and to the extent provided by BISYS' then prevailing
records retention policies for the Services, which policies will be
consistent with guidelines covering the Services established by appropriate
regulatory authorities. BISYS will, upon the expiration of any retention
period for Client Files, dispose of Client Files in any manner deemed
appropriate by BISYS unless Client, prior to such disposal, furnishes to
BISYS written instructions for the disposition of such Client Files at
Client's expense. Client shall pay for the provision of Client Files to
Client at BISYS' standard rates for such services and BISYS shall provide
such Client Files provided that BISYS has been paid for all Services
provided hereunder through the date such requested Client Files are returned
to Client.
D. BISYS has a written Disaster Recovery Plan establishing emergency
procedures, including off-premises back-up facility. In connection
therewith, BISYS has prepared a Disaster Recovery Manual. The Disaster
Recovery Plan and Disaster Recovery Manual are available at the Data Center
for examination by bank auditors and examiners and, as they may be modified
from time to time, will remain in existence during the term of this
Agreement. BISYS shall provide Client, upon written request, with
information necessary for Client to develop a disaster contingency plan
which will work in concert with BISYS' Disaster Recovery Plan.
8. DUTIES UPON TERMINATION; RETURN OF RECORDS.
A. Upon the termination of this Agreement for any reason, BISYS will dispose of
all Client Files still in the BISYS System in any manner deemed appropriate
by BISYS unless Client, not later than 30 days after such termination,
furnishes to BISYS written instructions for the disposition of such Client
Files at Client's expense as set forth in Paragraph 8(B).
B. At Client's request as set forth in Paragraph 8(A), BISYS shall deliver to
Client all of the Client Files then retained by BISYS including file layouts
and their descriptions in BISYS format and shall provide in accordance with
BISYS deconversion policies, reasonable and necessary assistance with the
deconversion from the BISYS System to a non-BISYS system ("Deconversion").
Client shall pay BISYS for Deconversion assistance in accordance with BISYS'
then current Deconversion rate schedule. Payment for Deconversion together
with all other payments which are due, and which will become due pursuant to
the provisions of this Agreement shall be paid to BISYS prior to delivery of
such Client Files.
C. Client Files returned to Client shall be in a standard BISYS machine
readable format.
9. OWNERSHIP, USE AND CONFIDENTIALITY; BISYS PRODUCTS AND CONFIDENTIAL
INFORMATION.
A. All computer programs and related documentation made available, directly or
indirectly, by BISYS to Client as part of the Services (the "BISYS
Products") are the exclusive and confidential property of BISYS or the third
parties from whom BISYS has secured the right to use such computer programs
and documentation.
B. A personal, non-exclusive, non-transferable right and license is being
granted to Client to use, during the term of this Agreement, any
applications software programs included in the BISYS Products (the
"Application Programs") which are delivered to Client as part of the
Services solely for Client's own business usage. Client shall not have any
interest in the Applications Programs except for this limited license.
C. Client shall receive all improvements, enhancements, modifications and
updates to any Applications Programs which are delivered to Client as part
of the Services if, and as, made available by BISYS to its clients
generally. All such improvements, enhancements, modifications and updates
shall be delivered to Client in the form of a computer media, which media
shall be provided to Client by BISYS and shall be installed by Client. If
Client fails to install any such media within 45 days of its receipt from
BISYS, BISYS shall have no further obligation to provide Client with
improvements, enhancements, modifications or updates to such Application
Programs.
D. Client acknowledges that it shall be deemed a sublicensee of BISYS for any
systems software programs included in the BISYS Products (the "Systems
Programs") which are delivered to Client as part of the Services. Client
accepts a sublicense from BISYS of the Systems Programs on a personal,
non-exclusive, non-transferable basis with the right to use, during the term
of this Agreement, such Systems Programs solely in connection with the
Services.
2
<PAGE>
E. Client shall not copy, in whole or in part, any BISYS Products or related
documentation, whether in the form of computer media, printed or in any
other form. Client shall not make any alteration, change or modification to
any BISYS Products.
F. Client shall treat as confidential and will not disclose or otherwise make
available any of the BISYS Products or any trade secrets, processes,
proprietary data, information or documentation related thereto including,
without limitation, any flow charts. logic diagram or source code
(collectively the "Confidential Information"), in any form, to any person
other than employees of Client. Client will instruct its employees who have
access to the BISYS Products and the Confidential Information to keep the
same confidential by using the same care and discretion that Client uses
with respect to its own confidential property and trade secrets. Upon the
termination of this Agreement for any reason. Client shall return to BISYS
any and all copies of the BISYS Products and the Confidential Information
which are in its possession.
10. GOVERNMENTAL AGENCIES.
A. Client shall provide all required notices to the appropriate regulatory
authorities concerning the initiation or termination of this Agreement, or
of any substantial changes in the Services being provided to Client. BISYS
agrees that any and all Client Files maintained by it for the Client
pursuant to this Agreement shall be available for inspection by the
appropriate regulatory authorities and Client's internal auditors and
independent public accountants, upon prior written notice to BISYS. All
costs incurred by BISYS in the preparation of data for inspection,
examination or audit will be charged to Client at BISYS' then standard rates
for such services.
B. BISYS shall provide annually to the appropriate regulatory authorities any
Third Party Review Reports prepared by independent public accountants with
respect to the Services performed by BISYS at the Data Center and copies of
BISYS' audited financial statements. By entering into this Agreement, BISYS
agrees that it extends to the Office of Thrift Supervision ("OTS") the same
authority and responsibility (as applicable to Client) provided to the other
regulatory agencies pursuant to the Bank Service Corporation Act. 12 U.S.C.
1867(C) relating to services performed by contract or otherwise.
C. If after the date hereof any modifications to the Services shall be required
by law or by any governmental regulatory authority. BISYS shall, except to
the extent such changes may be beyond the capability of the BISYS System to
implement, conform the Services to be in compliance with such modified laws
or governmental regulations. BISYS may, at its discretion, pass on, in whole
or in part, an equitable basis to all users of the Services (including
Client) affected by any such modification the actual costs incurred by BISYS
in making any such modification to the Services.
11. WARRANTY.
A. BISYS represents and warrants that the Services will conform materially to
their design specifications and user documentation which may be changed from
time to time. This warranty shall not extend to any of the computer
programs, data bases and/or BISYS supported files used by BISYS in
connection with providing the Services to Client hereunder which have been
altered, changed or modified in any way. without BISYS' prior written
consent in each instance.
B. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THERE ARE NO WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OR
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
12. LIMITATION OF LIABILITY.
A. The remedies specified in this Agreement constitute Client's sole and
exclusive remedies in the event of any alleged defaults by BISYS under this
Agreement. BISYS' sole liability, if any, for damages (monetary or
otherwise) resulting from claims made by Client or any third party arising
from or related to any and all causes not covered by the foregoing remedies
shall be limited to the lesser of (i) the amount of actual damages incurred
by Client or (ii) an amount which shall not exceed the charges paid by
Client during the six (6) month period immediately preceding the event from
which such liability arose for the Services performed which gave rise to the
claim.
B. IN NO EVENT WILL BISYS BE RESPONSIBLE FOR SPECIAL, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES WHICH CLIENT MAY INCUR OR EXPERIENCE ON ACCOUNT OF
ENTERING INTO OR RELYING ON THIS AGREEMENT, EVEN IF BISYS HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
13. PATENT AND COPYRIGHT INDEMNIFICATION.
BISYS will hold Client harmless and, at its own expense, will defend any action
brought against Client based on a claim that the Services used within the scope
of this Agreement infringe a United States patent or copyright provided Client
notifies BISYS promptly in writing of the claim. BISYS has sole control of the
defense of the action and all negotiations for its settlement or compromise, and
Client cooperates with BISYS in the defense of the action. In the event any of
the Service(s) becomes, or in BISYS' opinion is likely to become, the subject of
a claim of infringement of parent or copyright, BISYS, at its option. may (i)
secure for Client the right to continue using such Service(s), (ii) replace or
modify such Services to make it or them non-infringing, (iii) cease providing
the affected Service(s) or (iv) if none of the foregoing options is commercially
reasonable, in BISYS' opinion, terminate this Agreement. If BISYS exercises its
option hereunder to terminate this Agreement, such termination shall be at no
penalty to BISYS except that BISYS shall provide the Deconversion assistance
described in Paragraph 8(B) at no charge to Client.
14. INSURANCE.
BISYS shall maintain, during the term of this Agreement, $10,000,000 of coverage
under a Blanket Crime Policy covering fraudulent and dishonest acts committed by
its employees for which it is legally responsible. BISYS shall maintain, on its
own behalf, insurance coverage for loss from fire, disaster, or other causes
contributing to interruption of normal services. Client, at its own expense,
will maintain all insurance and fidelity bonds required by the applicable
regulatory authorities.
15. DEFAULT; REMEDIES UPON DEFAULT.
A. Any of the following events will constitute an "Event of Default" under the
Agreement: (i) non-payment of any amounts due hereunder to BISYS by Client:
(ii) nonperformance of any of Client's or BISYS' other material obligations
hereunder; (iii) if any representation or warranty of Client or BISYS is
materially breached; (iv) if Client or BISYS files a petition for bankruptcy
or becomes the subject of an involuntary bankruptcy petition which is not
vacated within 60 days of filing, or becomes insolvent: or (v) if any
substantial part of Client's or BISYS' property becomes subject to any levy.
seizure, assignment, application or sale for or by any creditor or
governmental agency.
B. Upon occurrence of an Event of Default under the Agreement, the
non-defaulting party may, at its option, terminate this Agreement provided
at least 30 days (or longer period as may be required by the applicable
regulatory authorities) prior written notice has been given to the other and
such default has not been cured within such period. Upon such termination by
BISYS, BISYS may declare all amounts due and to become due hereunder
immediately due and payable. The remedies contained in this Paragraph 15 are
cumulative and in addition to all other rights and remedies available to the
parties under this Agreement or by operation of law or otherwise.
16. FORCE MAJEURE
BISYS shall not be liable or deemed to be in default for any delay or failure to
perform under this Agreement or for interruption of the Services resulting,
directly or indirectly, from any cause beyond BISYS' reasonable control.
3
<PAGE>
17. GENERAL
A. BISYS shall provide Client upon written request, copies of The BISYS Group,
Inc.'s (BISYS' parent corporation) current audited financial statements.
B. Client acknowledges that it has not been induced to enter into this
Agreement by any representation or warranty not set forth in this Agreement.
This Agreement contains the entire agreement of the parties with respect to
its subject matter and supersedes all existing agreements and all other
oral, written or other communications between them concerning its subject
matter. This Agreement shall not be modified in any way except by a writing
signed by both parties.
C. The failure by either party hereto to insist upon strict performance of any
of the provisions contained herein shall in no way constitute a waiver of
its rights as set forth herein, at law or equity, or a waiver by either
party of any other provisions or subsequent default by the other party in
the performance of or compliance with any of the terms and conditions set
forth herein.
D. This Agreement may not be assigned by either party, in whole or in part,
without the prior written consent of the other which consent shall not be
unreasonably withheld. It shall not be deemed an assignment requiring
consent if the stock of either is sold, or all, or substantially all, of the
assets are sold so long as such sale does not materially negatively affect
the basis of the financial bargain upon which this Agreement is based as of
the date hereof and such sale does not materially negatively affect the
provision of the Services hereunder. If there is such a negative impact,
then the sale shall be deemed an assignment requiring consent as set forth
above. This Agreement shall be binding upon and shall inure to the benefit
of BISYS and Client and their respective successors and permitted assigns.
E. If any provision of this Agreement (or any portion thereof) shall be held to
be invalid, illegal or unenforceable, the validity, legality or
enforceability of the remainder of this Agreement shall not in any way be
affected or impaired thereby.
F. The headings in this Agreement are intended for convenience of reference and
shall not affect its interpretation.
G. The individuals executing this Agreement on behalf of BISYS and Client do
each hereby represent and warrant that they are duly authorized by all
necessary action to execute this Agreement on behalf of their respective
principals.
H. Client acknowledges that a breach of any of its obligations under this
Agreement relating to the BISYS Products and/or the Confidential Information
will cause BISYS irreparable injury and damage and therefore may be enjoined
through injunctive proceedings in addition to any other rights or remedies
which may be available to BISYS, at law or in equity and BISYS grants Client
the same rights with respect to a breach of BISYS' obligations relating to
the confidentiality of Client Files.
I. During the term of this Agreement, neither party hereto shall, directly or
indirectly, solicit or encourage to leave, any employee of the other without
prior written consent, which consent shall not be unreasonably withheld.
J. By executing this Agreement, the parties agree to extend the term of any
existing written Additional Services Agreements or authorizations for
specific Services to be coterminous with the term of this Agreement and to
have such agreements be covered by the terms and provisions hereof.
BISYS, INC. FIRST LEHIGH BANK
Agreed to: /s/ W.W. Neville Agreed to: /s/ George M. Baltozer
------------------- -------------------------
(signature-Authorized Officer) (signature-Authorized Representative)
Name: W.W. Neville Name: George M. Baltozer
------------------------- ------------------------------
(print or type) (print or type)
Title: President Date: 10/02/97 Title: E.V.P Date: 9/29/97
-------------- -------- ----- -------
(print or type) (print or type)
- --------------------------------------------------------------------------------
THIS AGREEMENT SHALL BECOME EFFECTIVE UPON BEING SIGNED BY AUTHORIZED OFFICERS
OF BISYS AND CLIENT. BISYS' MARKETING REPRESENTATIVES DO NOT HAVE THE
AUTHORITY TO BIND BISYS.
- --------------------------------------------------------------------------------
4
<PAGE>
ADDENDUM TO SERVICES AGREEMENT NO. CH-2081-07-96
SERVICES AGREEMENT DATED AS OF JANUARY 1, 1997
Reference is made to the above Services Agreement between the undersigned (the
"Agreement") to which this Addendum is attached and made a part thereof.
The Agreement is hereby amended and supplemented as follows:
1. Except as expressly amended and supplemented hereby, all terms defined in
the Agreement shall have the same meanings when used herein.
2. Term of Agreement.
2.1 Notwithstanding anything to the contrary contained in Paragraph 2 of
the Agreement, if at any time during the Initial Period, Client is
acquired by or merged into (and is not the surviving entity), a
financial organization which does not have a valid Services Agreement
with BISYS, Client shall have the option to terminate this Agreement
prior to the end of the Initial Period, upon 180 days prior written
notice to BISYS by Client, and such termination shall be effective
provided that:
(a) Client provides written notice of its intention to terminate this
Agreement pursuant to this Paragraph not later than 90 days after
the date following final regulatory approval of the acquisition
or merger by the appropriate regulatory bodies;
(b) The effective date of termination in Client's written notice
shall not be less than 180 days after the date of Client's
notice;
(c) Client shall pay BISYS for all Services provided by BISYS through
the effective termination, including all pass-through charges;
(d) Based on the month during which the effective date of termination
occurs, Client shall pay BISYS the amount set forth on Exhibit B;
(e) Client pays BISYS for all Deconversion assistance in accordance
with Paragraph 8(B) of the Agreement; and
(f) all payments must be made prior to delivery of Client Files.
3. Charges.
3.1 Section 3 of the Agreement is amended by inserting the following new
paragraphs after Paragraph 3(D):
"E. For purposes of this Agreement the following definitions shall
apply:
(1) For purposes of this Agreement, the term "Client Accounts", shall
include, but not be limited to, deposit and loan accounts on the
BISYS System, including, but not limited to Savings
Accounts-Account Base, Time Deposits/Certificates of Deposits
Accounts-Account Base, Transaction Accounts-Account Base
(including DDA, MMDA, NOW, SUPER NOW, Money Market), Line of
Credit
<PAGE>
Accounts-Account Base, Mortgage Loans-Account Base, Construction
Loans-On Line History, Commercial Loans-Account Base, Installment
Loans-Account Base, Adjustable Installment Loans, Commercial Loan
Processing, Construction/Commercial Loan Control
Accounts-Construction Loans, Construction/Commercial Loan Control
Accounts-Commercial Loans.
(2) "One Year Period" shall mean each twelve (12) calendar month
period commencing the first day of the first full calendar month
following January 1, 1997 and the indication as to which twelve
(12) month period is indicated will be with the addition of an
ordinal number preceding the term One Year Period, e.g., First
One Year Period, Second One Year Period, etc.
(3) "Exhibit A Services" shall mean the Services identified on
attached Exhibit A (both the Standard Services and Special
Services listed on Exhibit A). The parties agree that included in
the definition of Exhibit A Services are Client usage of any
features associated with the Services listed on the Standard
Services portion of Exhibit A which features are in existence and
available to Client as of the date of this Addendum. Neither
features, nor Services, listed on the Price Lists as of the date
hereof, but not set forth on Exhibit A shall be deemed to be part
of the Exhibit A Services and such other Services and/or features
shall be billed to Client in accordance with the provisions of
Paragraph 3(G) below. The parties also agree that Exhibit A
Services are recurring Services and do not include any
installation charges, training charges, one-time license fees or
any other one-time charges.
F. For all Client usage of Exhibit A Services, Client will pay BISYS
a fixed monthly charge (the "Fixed Monthly Charge"), in accordance
with the following:
(1) During the First One Year Period, the Fixed Monthly Charge will
be $9,400.00.
(2) At the end of each One Year Period, BISYS will determine the
average number of Client Accounts based on the immediately
preceding twelve month period (the "Year End Accounts"). The
Fixed Monthly Charge for the next One Year Period will be
calculated as (x) the number of Year End Accounts, times (y)
$0.50 (the "Per Account Fee"). During the Initial Period, in no
event will the Fixed Monthly Charge be less than $9,400.00.
(3) The Fixed Monthly Charge may be adjusted during a One Year
Period, if Client converts Acquired Accounts (defined below) to
the BISYS System. Commencing on the first day of the third month
following the conversion of the Acquired Accounts, BISYS will add
the number of Acquired Accounts to the most recent number of Year
End Accounts, and the Fixed Monthly Charge will be adjusted as
follows: (x) the then current Fixed Monthly Charge, plus (y) (the
number of Acquired Accounts times the then current Per Account
Fee).
(4) BISYS agrees that the Per Account Fee will not be increased
during the first two One Year Periods, thereafter, the Per
Account Fee may be increased by an amount equal to the lower of
(i) five percent (5%) each year; or (ii) the percentage increase
in the United States Consumer Price index as published by the
Bureau of Labor Statistics, United States Department of Labor
("CPI"), during the twelve month period immediately preceding the
date of increase.
2
<PAGE>
(5) During the Initial Period, Client shall receive a ten percent
(10%) discount against the Fixed Monthly Charge set forth on each
Monthly Invoice.
G. In addition to the Fixed Monthly Charge, Client will pay BISYS each
month for:
(1) All Client usage of Services not specifically set forth on
Exhibit A; and
(2) For all pass-through charges.
H. During the Initial Period, Client will be entitled to receive the
following non-cumulative credits in the amounts set forth below to be
applied against the charges for the Services described opposite such
amount:
Service Amount of Credit
------- ----------------
TargetPlus $400.00/per month
BISYS University $1,000.00/per year
3.2 (a) During the Initial Period, BISYS' Conversion Services shall be
provided to Client at no charge for the conversion of any future
financial organization assets acquired by Client ("Acquired
Assets"), provided that the data and files from such future
merged organizations are in machine readable form, readable by
BISYS' computers at the BISYS Center. Client does, however, agree
to pay in full all out-of-pocket conversion related expenses not
included in BISYS' provided standard conversion services,
including but not limited to, data communications, terminal
equipment charges and reasonable travel, lodging and meals
expense.
4. New Products.
4.1 During the Initial Period, Client will be entitled to receive a
fifteen percent (15%) discount on the one-time implementation/
installation charges set forth in the Price Lists for any new Service
selected by Client after June 1, 1997, provided, however, that the
discount is not applicable against the charges associated with any
BISYS electronic banking Service, including, but not limited to, ATM
Debit Card, Home Banking, Total Treasury Manager and Total Access
Banking Services.
4.2 During the Initial Period, if Client elects to utilize any of the
following Services, the monthly recurring charge associated with such
Service will be included in the Fixed monthly charge: Total Financial
Manager Core Package for a Single Station (including Financial System
Manager Accounts), Exception Item Pull, Daily Activity File and
Statement Rendering.
5. Neither BISYS nor Client shall (except to persons acting on behalf of such
party) disclose, and neither party shall permit any of its employees or
other persons who act or acted in its behalf to disclose, any of the terms
and conditions of the Agreement, including without limitation any Addendum
or pricing terms, except as may be required by law.
Except as expressly amended and supplemented hereby, the Agreement shall remain
unchanged and continue to be in full force and effect.
3
<PAGE>
This Addendum supersedes and replaces any prior agreement (written or oral) as
to its subject matter. If there is any conflict between the terms and conditions
of this Addendum and the terms and conditions of the Agreement or any prior
addendum to this Agreement, the Terms and Conditions of this Addendum shall
prevail.
BISYS, INC. FIRST LEHIGH BANK
By: /s/ W.W. Neville By: /s/ George M. Baltozer
------------------------- ---------------------------------
Name: W.W. Neville Name: George M. Baltozer
----------------------- -------------------------------
Title: President Title: Executive V.P.
---------------------- ------------------------------
Date: October 2, 1997 Date: September 22, 1997
----------------------- -------------------------------
- -------------------------------------------------------------------------------
THIS ADDENDUM SHALL BECOME EFFECTIVE UPON BEING SIGNED BY AN AUTHORIZED OFFICER
OF BISYS. BISYS' MARKETING REPRESENTATIVES DO NOT HAVE THE AUTHORITY TO BIND
BISYS.
- -------------------------------------------------------------------------------
4
<PAGE>
FIRST LEHIGH BANK
Exhibit A
<TABLE>
<S> <C>
SAVINGS AND CERTIFICATES
Savings and CD's Interest Check Processing
Club Processing and Check Production Anniversary Processing
Online Savings Histories TotalPlus Currency Reporting
Online File Maintenance CD Renewal Notices
CD Term History and Penalty Accounts Service Charge Processing
Retirement Accounts Accounts Assessed a Service Charge
Retirement Account Statement Processing Landlord Tenant Account Processing
Variable Interest Accounts Surrogate Account Processing
Detail Statement Production IOLTA Processing
DDA ACCOUNTS
DDA Accounts Extra DDA Statement Cycles
Posting of All Item Transmitted Combined Statements
DDA Statement Check Register Transactions Overdraft Reminder Notices
DDA Transaction Processing IEH Processing
Line of Credit Processing Total Plus Currency Reporting
Automatic LOC Disbursements Online File Maintenance Histories (all
DDA Variable Interest Rate Accounts applications)
Account Analysis
Sweep Processing
COMMERCIAL LOANS
Commercial Notes Processing Commercial Loan Deferred Fee
Online Commercial Loan Histories Accounts
MORTGAGE LOANS
Mortgage Loan Accounts ML History Cards
Construction Loan Accounts Adjustable Rate Mortgage Loans
Investor Reporting AML Rate Change Notices
Online Mortgage Loan Histories ML Deferred Fee/Cost Accounting
ML Accounts with MICR/OCR Coupons Online Construction Loan Histories
ML Accounts with Escrow Credit Bureau Reporting
ML Accounts with Tax and Insurance Records Automated Letters
FASB 91 Accounts Reported Loans to One Borrower Report (all
Loan Commitments applications)
Extra ML Trial Balance Runs
GENERAL LEDGER
TFM Core Package GL Integration
INSTALLMENT LOANS
Consumer/Savings Account Loans IL Accounts with MICR/OCR Coupons
Commercial Loans IL Notices/Billing Runs
Online Installment Loan Histories IL Notices Billing Generated
IL Investor Accounts IL Deferred Fee/Cost Accounting
Dealer Reporting/Floor Planning Adjustable Rate Installment Loans
IL Classification Reports Credit Bureau Reporting
IL Classification Accounts Reported Share Loan Trial Balance Runs
IL History Cards
</TABLE>
4
<PAGE>
FIRST LEHIGH BANK
Exhibit A (Cont'd)
<TABLE>
<S> <C>
ATM SUPPORT
Other Source ATM Tapes Other Servicer Balance File Update
Other Source ATM Transactions
MISCELLANEOUS PROCESSING
ACH Transactions Total Remote Print
TotalMatic Internal/External Drafts Automatic Withholding Accounts
TotalMatic Accounts Tax Compliance Processing
Customer Information File Quarterly OTC Records on File
Online CIF Memos. Microfiche Originals
Transactions Processing Notices Microfiche Copies
Disaster Recovery Assessment Pages Microfiched
Remote Print Software Support
</TABLE>
First T-Pooled Terminal at Each Location
Additional T-Pooled Terminals (not to exceed 20% growth in the aggregate
over the number of terminals on Initiation Date)
<PAGE>
FIRST LEHIGH BANK
Exhibit B
Early Termination Fee Per Paragraph 2.1(d)
Month During Which Effective
Termination Date Occurs Early Termination Fee
---------------------------- ---------------------
July 1997 $159,800
August 1997 150,400
September 1997 141,000
October 1997 131,600
November 1997 122,200
December 1997 112,800
January 1998 103,400
February 1998 - January 1999 100,000
February 1999 94,000
March 1999 84,600
April 1999 75,200
May 1999 65,800
June 1999 - June 2001 50,000
July 2001 47,000
August 2001 37,600
September 2001 28,200
October 2001 18,800
November 2001 9,400
December 2001 0
April 28, 1997
Mr. George M. Baltozer
Executive Vice President
First Lehigh Bank
1620 Pond Road
Allentown, PA 18104
Re: 740 Hamilton Mall Office
Dear George:
This letter will confirm that the existing lease between 740 Hamilton
Street Inc. and First Lehigh Bank for 3,400 sq. ft. at 740 Hamilton Mall (branch
bank) will be extended for a five year period commencing May 1, 1997 through
April 30, 2002 with the present rent to be adjusted as follows:
During the five year term through April 30, 2002, the rent shall be
$12 per sq. ft. x 3,400 sq. ft. = $40,800 per year to be paid monthly
in the sum of $3,400 per month on the first day of each month, in
advance. In addition, First Lehigh Bank will continue to pay an
additional amount as its pro rata share of taxes, utilities, etc. in
the same manner and using the same formula that the parties have used
over the last ten years of the lease. This calculation will be made
as of February 28th of each year for the prior twelve months and
billed to First Lehigh in early March just as it has been over the
last ten years.
The other terms and conditions set forth in the original lease and
addendum thereto shall remain in full force and effect.
I have enclosed two (2) copies of this letter signed by 740 Hamilton
Street Inc. Please have one copy signed by the
<PAGE>
Mr. George M. Baltozer
Executive Vice President
April 28, 1997
Page -2-
appropriate bank officer and return to me for my file.
Cordially yours,
/s/ Robert J. Johnson
-----------------------
ROBERT J. JOHNSON
RJJ/aek
Enclosures
The undersigned parties hereby confirm that the lease between them for
the 3,400 sq. ft. at 740 Hamilton Mall has been extended to April 30, 2002 on
the rental terms stated above.
740 HAMILTON STREET INC. FIRST LEHIGH BANK
By: [ILLEGIBLE] By: /s/George M Baltozer
------------------------ -------------------------
President Executive Vice President
SEVENTH AMENDMENT OF LEASE
Seventh Amendment of Lease dated September 15, 1995 by and between Net
Realty Holding Trust, c/o Net Properties Inc., 535 Boylston Street, Boston,
Massachusetts 02116 (hereinafter "Landlord") and First Lehigh Bank, 500 Main
Street, Walnutport, Pennsylvania 18088 (hereinafter "Tenant").
WHEREAS, Janice H. Levin and the Estate of Philip J. Levin, Landlord's
predecessor in interest, and The Savings Fund Society of Germantown and its
Vicinity entered into a lease dated July 31, 1974 (hereinafter the "Lease") with
respect to the premises occupied by Tenant and located at Lehigh Shopping
Center, Union Boulevard and Pennsylvania Avenue, Bethlehem, Pennsylvania 18018;
and
WHEREAS, The Savings Fund Society of Germantown and its Vicinity
assigned its interest in the Lease to Tenant by Assignment dated September 30,
1986; and
WHEREAS, the Lease was amended by a First Amendment of Lease dated
January 20, 1975, and a Second Amendment of Lease dated June 22, 1984, and a
Third Amendment of Lease dated July 11, 1989, and a Fourth Amendment of Lease
dated August 6, 1991, and a Fifth Amendment of Lease dated August 26, 1991, and
a Sixth Amendment of Lease dated August 18, 1993; and
WHEREAS, the parties desire to revive and amend the terms of said
Lease;
NOW THEREFORE, in consideration of the mutual covenants set forth
herein, the Lease is hereby amended as follows:
1. The term of the Lease is hereby extended for a two (2) year period
commencing September 1, 1995 and terminating August 31, 1997.
2. The Lease is hereby amended to provide that Tenant's minimum rent
shall be as follows for the period indicated:
Period Monthly Annual
------ --------- ----------
September 1, 1995 - August 31, 1997 $2,479.17 $29,750.00
3. Paragraph 3rd (Compliance with Laws, etc.) of the Lease is hereby
deleted and replaced with the following:
3rd: A. The Tenant shall, at its own cost and expense comply with all
governmental laws, ordinances, orders and regulations relating to the
use, condition, and occupancy of the premises now or hereafter in
force, including, but not limited to zoning, building, health and
safety codes; and comply with, execute, and perform any required
repairs or improvements with respect to all rules, requirements and
regulations of the Board of Fire Underwriters, the Landlord's
insurance companies and other organizations establishing insurance
rates. The Tenant shall not suffer, permit or commit any waste or
nuisance, or conduct any auction, distress, fire or bankruptcy sale.
B. The Tenant shall not use the premises for the generation, storage,
treatment or disposal of Hazardous Waste, and hereby certifies that
its operations on or other use of the premises will not involve
same. For purposes of this lease, the term "Hazardous Waste" is
defined by cumulative reference to the following sources as amended
from time to time: (a) the Resource Conservation and Recovery Act of
1976, 42 USC 901 et seq. (RCRA); (b) the Comprehensive Environmental
Resource, Compensation and Liability Act of 1980, Public Law 96-610;
and (c) any federal, state or municipal regulations, rules or orders
issued or promulgated under or pursuant to any of the foregoing by
any agency, department or other administrative, regulatory or
judicial body. The Tenant shall indemnify Landlord for any liability
imposed should the provisions of this article be or become untrue.
The warranty of this article shall survive the expiration or
termination of this lease.
<PAGE>
4. Tenant acknowledges that Landlord has relied on the representations
set forth in the ERISA Certificate, signed by Tenant simultaneously
herewith and, in the event Tenant fails to sign the ERISA
Certificate or any of the representations set forth by Tenant in the
ERISA Certificate are found to be untrue, Landlord shall have the
right to terminate the Lease by giving Tenant thirty (30) days
written notice and, upon such termination, the Lease shall
terminate and come to an end without any further liability between
Landlord and Tenant except Tenant shall be responsible for any
penalties or damages incurred by Landlord as a result of Tenant's
failure to comply with its obligations under this paragraph.
5. Except as otherwise provided herein, all other terms and conditions
of the Lease shall be deemed to be incorporated herein and made part
of this agreement and shall continue in full force and effect.
Net Realty Holding Trust
Witnesses for Landlord:
/s/ Linda S. Messer By: /s/ Thomas C. Prendergast
- --------------------------- -----------------------------
Thomas C. Prendergast
/s/ Tania Weng Authorized Representative
- ---------------------------
First Lehigh Bank
Witnesses for Tenant:
[ILLEGIBLE] /s/ George M. Baltozer
- --------------------------- By: ----------------------------
Asst. Secy. GEORGE M. BALTOZER
- --------------------------- Name: ----------------------------
Executive Vice President
Its: ----------------------------
EIGHTH AMENDMENT OF LEASE
Eighth Amendment of Lease dated September 3, 1997 by and between Net Realty
Holding Trust, c/o Net Properties Management, Inc., 535 Boylston Street, Boston,
Massachusetts 02116 (hereinafter "Landlord") and First Lehigh Bank, 500 Main
Street, Walnutport, Pennsylvania 18088 (hereinafter "Tenant").
WHEREAS, Janice H. Levin and the Estate of Philip J. Levin, Landlord's
predecessor in interest, and The Savings Fund Society of Germantown and its
Vicinity entered into a lease dated July 31, 1974 (hereinafter the "Lease") with
respect to the premises occupied by Tenant and located at Lehigh Shopping
Center, Union Boulevard and Pennsylvania Avenue, Bethlehem, Pennsylvania 18018;
and
WHEREAS, The Savings Fund Society of Germantown and its Vicinity assigned
its interest in the Lease to Tenant by Assignment dated September 30, 1986; and
WHEREAS, the Lease was amended by a First Amendment of Lease dated January
20, 1975, and a Second Amendment of Lease dated June 22, 1984, and a Third
Amendment of Lease dated July 11, 1989, and a Fourth Amendment of Lease dated
August 6, 1991, and a Fifth Amendment of Lease dated August 26, 1991, and a
Sixth Amendment of Lease dated August 18, 1993, and a Seventh Amendment of Lease
dated September 15, 1995; and
WHEREAS, the parties desire to revive and amend the terms of said Lease;
NOW THEREFORE, in consideration of the mutual covenants set forth herein,
the Lease is hereby amended as follows:
1. The term of the Lease is hereby extended for a two (2) year period
commencing September 1, 1997 and terminating August 31, 1999.
2. The Lease is hereby amended to provide that Tenant's minimum rent
shall be as follows for the period indicated:
- --------------------------------------------------------------------------------
Period Monthly Annual
- --------------------------------------------------------------------------------
September 1, 1997 - August 31, 1999 $2,479.17 $29,750.00
- --------------------------------------------------------------------------------
Notwithstanding the foregoing, Tenant shall have a concession for the
payment of minimum rent for the period beginning September 1, 1997 and
ending October 31, 1997, provided that Tenant fully and faithfully
complies with all of its obligations as set forth in the Lease. In the
event that Tenant fails to so comply, the rent concession shall
terminate and come to an end, and Tenant shall immediately become
responsible for the payment of minimum rent without any concession or
deduction whatsoever.
3. Tenant acknowledges that Landlord has relied on the representations
set forth in the ERISA Certificate, signed by Tenant simultaneously
herewith and, in the event Tenant fails to sign the ERISA Certificate
or any of the representations set forth by Tenant in the ERISA
Certificate are found to be untrue, Landlord shall have the right to
terminate the Lease by giving Tenant thirty (30) days written notice
and, upon such termination, the Lease shall terminate and come to an
end without any further liability between Landlord and Tenant except
Tenant shall be responsible for any penalties or damages incurred by
Landlord as a result of Tenant's failure to comply with its
obligations under this paragraph.
4. Except as otherwise provided herein, all other terms and conditions of
the Lease shall be deemed to be incorporated herein and made part of
this agreement and shall continue in full force and effect.
First Lehigh Bank
8-22-97
<PAGE>
5. The submission of this Amendment for examination does not constitute
an offer to lease the Premises and shall vest no right in either
party. This Amendment shall become effective only upon execution and
legal delivery thereof by Landlord and Tenant. This Amendment may be
executed in more than one counterpart, and each such counterpart shall
be deemed to be an original document.
Net Realty Holding Trust
Witnesses for Landlord:
/s/ [CLIENT SUPPLY] By: /s/ Thomas C. Prendergast
- ---------------------------------- -------------------------------
Thomas C. Prendergast
/s/ [CLIENT SUPPLY] Authorized Representative
- ----------------------------------
First Lehigh Bank
Witnesses for Tenant:
/s/ [CLIENT SUPPLY] By: /s/ George M. Baltozer
- ---------------------------------- -------------------------------
Name: /s/ George M. Baltozer
-----------------------------
/s/ [CLIENT SUPPLY] Its: Executive Vice President
- ---------------------------------- -----------------------------
2
<PAGE>
Exhibit 10.17
FIRST LEHIGH CORPORATION
1997 NONQUALIFIED STOCK OPTION PLAN
1. Purpose. The purpose of the First Lehigh Corporation 1997 Nonqualified
Stock Option Plan (the "Plan") is to further the growth, development and
financial success of First Lehigh Corporation (the "Company") and the
subsidiaries of the Company by providing additional incentives to those officers
who are responsible for the management of the business affairs of the Company
and/or subsidiaries of the Company, which will enable them to participate
directly in the growth of the capital stock of the Company. The Company intends
that the Plan will facilitate securing, retaining and motivating management
employees of high caliber and potential. To accomplish these purposes, the Plan
provides a means whereby employees may receive stock options ("Options") to
purchase the Company's Common Stock, $.01 par value (the "Common Stock").
2. Administration.
(a) Administration by the Board. The Plan shall be administered by the
Company's Board of Directors (the "Board").
(b) Authority of the Board. The Board shall have full and final authority,
in its sole discretion, to interpret the provisions of the Plan and to decide
all questions of fact arising in its application; to determine the employees to
whom Options shall be granted and the type, amount, size and terms of each such
grant; to determine the time when Options shall be granted; and to make all
other determinations necessary or advisable for the administration of the Plan.
All decisions, determinations and interpretations of the Board shall be final
and binding on all optionees and all other holders of Options granted under the
Plan.
3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares that
may be issued under the Plan shall not exceed in the aggregate 75,000 shares of
Common Stock. Such shares may be authorized and unissued shares or shares issued
and subsequently reacquired by the Company. Except as otherwise provided herein,
any shares subject to an Option that for any reason expires or is terminated
unexercised as to such shares shall again be available under the Plan.
4. Eligibility To Receive Options. Persons eligible to receive Options
under the Plan shall be limited to those officers and key employees of the
Company and any subsidiary of the Company (as defined in Section 425 of the Code
or any amendment or substitute thereto) who are in positions in which their
decisions, actions and counsel significantly impact upon the profitability and
success of the Company or any subsidiary of the Company. Directors of the
Company who are not also officers or employees of the Company or any subsidiary
of the Company shall not be eligible to participate in the Plan. Notwithstanding
anything to the contrary set forth in the Plan, the maximum number of shares of
Common Stock for which Options may be granted to any employee in any calendar
year shall be 50,000 shares.
<PAGE>
5. Type of Options. Grants may be made at any time and from time to time by
the Board in the form of stock options to purchase shares of Common Stock.
Options granted hereunder shall be Options that are not intended to qualify as
incentive stock options within the meaning of Section 422 of the Code or any
amendment or substitute thereto ("Nonqualified Stock Options").
6. Option Agreements. Options for the purchase of Common Stock shall be
evidenced by written agreements in such form not inconsistent with the Plan as
the Board shall approve from time to time. The Options granted hereunder may be
evidenced by a single agreement or by multiple agreements, as determined by the
Board in its sole discretion. Each option agreement shall contain in substance
the following terms and conditions:
(a) Type of Option. Each option agreement shall identify the Options
represented thereby either as Nonqualified Stock Options.
(b) Option Price. Each option agreement shall set forth the purchase price
of the Common Stock purchasable upon the exercise of the Option evidenced
thereby. Subject to the limitation set forth in Section 6(d)(ii) of the Plan,
the purchase price of the Common Stock subject to an Option shall be not less
than 50% of the fair market value of such stock on the date the Option is
granted, as determined by the Board, but in no event less than the par value of
such stock. For this purpose, fair market value on any date shall mean the
closing price of the Common Stock, as reported by the OTC Bulletin Board the
National Association of Securities Dealers, or if the Common Stock is not
reported by the OTC Bulletin Board, the fair market value shall be as determined
by the Board.
(c) Exercise Term. Each option agreement shall state the period or periods
of time within which the Option may be exercised, in whole or in part, as
determined by the Board, provided that no Option shall be exercisable after ten
years from the date of grant thereof. The Board shall have the power to permit
an acceleration of previously established exercise terms, subject to the
requirements set forth herein, upon such circumstances and subject to such terms
and conditions as the Board deems appropriate.
(d) Substitution of Options. Options may be granted under the Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become, and who do concurrently with the grant of
such options become, employees of the Company or a subsidiary of the Company as
a result of a merger or consolidation of the employing corporation with the
Company or a subsidiary of the Company, or the acquisition by the Company or a
subsidiary of the Company of the assets or capital stock of the employing
corporation. The terms and conditions of the substitute options so granted may
vary from the terms and conditions set forth in this Section 6 to such extent as
the Board at the time of grant may deem appropriate to conform, in whole or in
part, to the provisions of the stock options in substitution for which they are
granted.
7. Date of Grant. The date on which an Option shall be deemed to have been
granted under the Plan shall be the date of the Board's authorization of the
Option or such later date as may be determined by the Board at the time the
Option is authorized.
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<PAGE>
Notice of the determination shall be given to each individual to whom an
Option is so granted within a reasonable time after the date of such grant.
8. Exercise and Payment for Shares. Options may be exercised in whole or in
part, from time to time, by giving written notice of exercise to the Secretary
of the Company, specifying the number of shares to be purchased. The purchase
price of the shares with respect to which an Option is exercised shall be
payable in full with the notice of exercise in cash, Common Stock at fair market
value, or a combination thereof, as the Board may determine from time to time
and subject to such terms and conditions as may be prescribed by the Board for
such purpose. The Board may also, in its discretion and subject to prior
notification to the Company by an optionee, permit an optionee to enter into an
agreement with the Company=s transfer agent or a brokerage firm of national
standing whereby the optionee will simultaneously exercise the Option and sell
the shares acquired thereby through the Company=s transfer agent or such a
brokerage firm and either the Company=s transfer agent or the brokerage firm
executing the sale will remit to the Company from the proceeds of sale the
exercise price of the shares as to which the Option has been exercised.
9. Rights upon Termination of Employment. In the event that an optionee
ceases to be an employee of the Company or any subsidiary of the Company for any
reason other than death or disability (within the meaning of Section 22 of the
Code or any substitute therefor), the optionee shall have the right to exercise
the Option during its term within a period of three months after such
termination to the extent that the Option was exercisable at the time of
termination, or within such other period, and subject to such terms and
conditions, as may be specified by the Board. In the event that an optionee dies
or becomes disabled prior to the expiration of his Option and without having
fully exercised his Option, the optionee or his successor shall have the right
to exercise the Option during its term within a period of one year after
termination of employment due to death or disability to the extent that the
Option was exercisable at the time of termination, or within such other period,
and subject to such terms and conditions, as may be specified by the Board.
10. General Restrictions. Each Option granted under the Plan shall be
subject to the requirement that, if at any time the Board shall determine that
(i) the listing, registration or qualification of the shares of Common Stock
subject or related thereto upon any securities exchange or under any state or
federal law, or (ii) the consent or approval of any government regulatory body,
or (iii) the satisfaction of any tax payment or withholding obligation, or (iv)
an agreement by the recipient of an Option with respect to the disposition of
shares of Common Stock, is necessary or desirable as a condition of or in
connection with the granting of such Option or the issuance or purchase of
shares of Common Stock thereunder, such Option shall not be consummated in whole
or in part unless such listing, registration, qualification, consent, approval
or agreement shall have been effected or obtained free of any conditions not
acceptable to the Board.
11. Rights of a Shareholder. The recipient of any Option under the Plan,
unless otherwise provided by the Plan, shall have no rights as a shareholder
unless and until certificates for shares of Common Stock are issued and
delivered to him.
12. Right to Terminate Employment. Nothing contained in the Plan or in any
option agreement entered into pursuant to the Plan shall confer upon any
optionee the right to continue in
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<PAGE>
the employment of the Company or any subsidiary of the Company or affect
any right that the Company or any subsidiary of the Company may have to
terminate the employment of such optionee.
13. Withholding. Whenever the Company proposes or is required to issue or
transfer shares of Common Stock under the Plan, the Company shall have the right
to require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state or local withholding tax requirements prior to the delivery
of any certificate or certificates for such shares. If and to the extent
authorized by the Board, in its sole discretion, an optionee may make an
election, by means of a form of election to be prescribed by the Board, to have
shares of Common Stock that are acquired upon exercise of an Option withheld by
the Company or to tender other shares of Common Stock or other securities of the
Company owned by the optionee to the Company at the time of exercise of an
Option to pay the amount of tax that would otherwise be required by law to be
withheld by the Company as a result of any exercise of an Option. Any such
election shall be irrevocable and shall be subject to termination by the Board,
in its sole discretion, at any time. Any securities so withheld or tendered will
be valued by the Board as of the date of exercise.
14. Non-Assignability. No Option under the Plan shall be assignable or
transferable by the recipient thereof except by will or by the laws of descent
and distribution or by such other means as the Baord may approve. During the
life of the recipient, such Option shall be exercisable only by such person or
by such person's guardian or legal representative.
15. Non-Uniform Determinations. The Board's determinations under the Plan
(including without limitation determinations of the persons to receive Options,
the form, amount and timing of such grants, the terms and provisions of Options,
and the agreements evidencing same) need not be uniform and may be made
selectively among persons who receive, or are eligible to receive, grants of
Options under the Plan whether or not such persons are similarly situated.
16. Adjustments.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
-4-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, all outstanding Options will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Board. The Board may, in the exercise of its discretion in such instances,
declare that any Option shall terminate as of a date fixed by the Board and give
each Option holder the right to exercise his Option as to all or any part of the
shares of Common Stock covered by the Option, including shares as to which the
Option would not otherwise be exercisable.
(c) Sale or Merger. In the event of a proposed sale of all or substantially
all of the assets of the Company, or the merger of the Company with or into
another corporation, the Board, in the exercise of its sole discretion, may take
such action as it deems desirable, including, but not limited to: (i) causing an
Option to be assumed or an equivalent option to be substituted by the successor
corporation or a parent or subsidiary of such successor corporation, (ii)
providing that each Option holder shall have the right to exercise his Option as
to all of the shares of Common Stock covered by the Option, including shares as
to which the Option would not otherwise be exercisable, or (iii) declaring that
an Option shall terminate at a date fixed by the Board provided that the Option
holder is given notice and opportunity to exercise the then exercisable portion
of his Option prior to such date.
17. Amendment. The Board may terminate or amend the Plan at any time, with
respect to shares as to which Options have not been granted, subject to any
required shareholder approval or any shareholder approval that the Board may
deem to be advisable for any reason, such as for the purpose of obtaining or
retaining any statutory or regulatory benefits under tax, securities or other
laws or satisfying any applicable stock exchange listing requirements. The Board
may not, without the consent of the holder of an Option, alter or impair any
Option previously granted under the Plan, except as specifically authorized
herein.
18. Reservation of Shares. The Company, during the term of the Plan, will
at all times reserve and keep available such number of shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any shares hereunder, shall relieve the Company of any liability for the
failure to issue or sell such shares as to which such requisite authority shall
not have been obtained.
19. Effect on Other Plans. Participation in the Plan shall not affect an
employee's eligibility to participate in any other benefit or incentive plan of
the Company or any subsidiary of the Company. Any Options granted pursuant to
the Plan shall not be used in determining the benefits provided under any other
plan of the Company or any subsidiary of the Company unless specifically
provided.
20. Duration of the Plan. The Plan shall remain in effect until all Options
granted under the Plan have been satisfied by the issuance of shares, but no
Option shall be granted more than ten years after the earlier of the date the
Plan is adopted by the Company or is approved by the Company's shareholders.
-5-
<PAGE>
21. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in
the Plan, if the Board finds, by a majority vote, after full consideration of
the facts presented on behalf of both the Company and any optionee, that the
optionee has been engaged in fraud, embezzlement, theft, commission of a felony
or dishonest conduct in the course of his employment or retention by the Company
or any subsidiary of the Company that damaged the Company or any subsidiary of
the Company or that the optionee has disclosed confidential information of the
Company or any subsidiary of the Company, the optionee shall forfeit all
unexercised Options and all exercised Options under which the Company has not
yet delivered the certificates. The decision of the Board in interpreting and
applying the provisions of this Section 21 shall be final. No decision of the
Board, however, shall affect the finality of the discharge or termination of
such optionee by the Company or any subsidiary of the Company in any manner.
22. No Prohibition on Corporate Action. No provision of the Plan shall be
construed to prevent the Company or any officer or director thereof from taking
any action deemed by the Company or such officer or director to be appropriate
or in the Company's best interest, whether or not such action could have an
adverse effect on the Plan or any Options granted hereunder, and no optionee or
optionee's estate, personal representative or beneficiary shall have any claim
against the Company or any officer or director thereof as a result of the taking
of such action.
23. Indemnification. With respect to the administration of the Plan, the
Company shall indemnify each present and future member of the Board against, and
each member of the Board shall be entitled without further action on his part to
indemnity from the Company for, all expenses (including the amount of judgments
and the amount of approved settlements made with a view to the curtailment of
costs of litigation, other than amounts paid to the Company itself) reasonably
incurred by him in connection with or arising out of, any action, suit or
proceeding in which he may be involved by reason of his being or having been a
member of the Board, whether or not he continues to be such member at the time
of incurring such expenses; provided, however, that such indemnity shall not
include any expenses incurred by any such member of the Board (i) in respect of
matters as to which he shall be finally adjudged in any such action, suit or
proceeding to have been guilty of gross negligence or willful misconduct in the
performance of his duty as such member of the Board; or (ii) in respect of any
matter in which any settlement is effected for an amount in excess of the amount
approved by the Company on the advice of its legal counsel; and provided further
that no right of indemnification under the provisions set forth herein shall be
available to or enforceable by any such member of the Board unless, within 60
days after institution of any such action, suit or proceeding, he shall have
offered the Company in writing the opportunity to handle and defend same at its
own expense. The foregoing right of indemnification shall inure to the benefit
of the heirs, executors or administrators of each such member of the Board and
shall be in addition to all other rights to which such member may be entitled as
a matter of law, contract or otherwise.
24. Miscellaneous Provisions.
(a) Compliance with Plan Provisions. No optionee or other person shall have
any right with respect to the Plan, the Common Stock reserved for issuance under
the Plan or in any Option until a written option agreement shall have been
executed by the Company and the optionee and all
-6-
<PAGE>
the terms, conditions and provisions of the Plan and the Option applicable
to such optionee (and each person claiming under or through him) have been met.
(b) Approval of Counsel. In the discretion of the Board, no shares of
Common Stock, other securities or property of the Company or other forms of
payment shall be issued hereunder with respect to any Option unless counsel for
the Company shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign legal, securities exchange and
other applicable requirements.
(c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the
Exchange Act applies to the Plan or to Options granted under the Plan, it is the
intention of the Company that the Plan comply in all respects with the
requirements of Rule 16b-3, that any ambiguities or inconsistencies in
construction of the Plan be interpreted to give effect to such intention and
that, if the Plan shall not so comply, whether on the date of adoption or by
reason of any later amendment to or interpretation of Rule 16b-3, the provisions
of the Plan shall be deemed to be automatically amended so as to bring them into
full compliance with such rule.
(d) Effects of Acceptance of Option. By accepting any Option or other
benefit under the Plan, each optionee and each person claiming under or through
him shall be conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the Plan by the Company
and/or the Board or its delegates.
(e) Construction. The masculine pronoun shall include the feminine and
neuter, and the singular shall include the plural, where the context so
indicates.
Exhibit 23.1
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in Registration Statement
(No. 333-41911) dated December 10, 1997 of First Lehigh Corporation on Form S-8
of our report dated February 3, 1998, appearing in this annual report on Form
10-KSB of First Lehigh Corporation for the year ended December 31, 1997.
/s/ Parente, Randolph, Orlando, Carey & Associates
Wilkes-Barre, Pennsylvania
March 25, 1998
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