SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31,
1997, or
[ ] Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ____________ to ____________.
Commission File Number 0-14555.
FIRST LEESPORT BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Pennsylvania 23-2354007
(State or Other Juris- (I.R.S. Employer
diction of Incorporation) Identification No.)
133 North Centre Avenue,
Leesport, Pennsylvania 19533
(Address of Principal Executive Offices)
Registrant's Telephone Number: (610) 926-2161
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $5.00 Par Value
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained herein, and no disclosure
will 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. [X]
Issuer's revenues for year ended December 31, 1997: $13,769,000.
As of March 23, 1998, the aggregate market value of the Common
Stock (based upon the average sales price on such date) of the
Registrant held by nonaffiliates was $28,962,500.
Number of Shares of Common Stock Outstanding at March 6, 1998:
1,191,171.
Portions of the registrant's definitive Proxy Statement prepared
in connection with its Annual Meeting of Stockholders to be held
on April 14, 1998 are incorporated in Part III hereof.
<PAGE>
PART I
Item 1. Business.
The Company.
First Leesport Bancorp, Inc. (the "Company") is a
Pennsylvania business corporation headquartered at 133 North
Centre Avenue, Leesport, Pennsylvania 19533. The Company was
organized as a bank holding company on January 1, 1986, with The
First National Bank of Leesport (the "Bank") as a wholly-owned
subsidiary of the Company. Presently, the Company functions
primarily as the holder of all the common stock of the Bank.
Although it does not have any present plans to do so, the Company
may acquire other subsidiaries in the future.
The Bank.
The Bank was incorporated under the laws of the United
States of America as a national bank in 1909. Since its
inception, the Bank has operated as a banking institution doing
business in Berks County, Pennsylvania. At December 31, 1997,
the Bank had total assets of $180 million, total stockholders'
equity of $18 million, and total deposits of $148 million. The
Bank currently has the equivalent of 87 full-time employees.
The Bank engages in a full service commercial and consumer
banking business, including such services as accepting deposits
in the form of time, demand and savings accounts. Such time
deposits include certificates of deposit, individual retirement
accounts, and club accounts. The savings accounts include money
market accounts, NOW plus accounts, and the traditional regular
savings accounts. In addition to accepting deposits, the Bank
makes both secured and unsecured commercial and consumer loans,
finances commercial transactions, makes construction and mortgage
loans, including home equity loans, issues credit cards, and
rents safe deposit facilities. The Bank also provides small
business loans and student loans. The Bank purchases certain of
the data processing services that it requires from Bisys, Inc., a
company based in Cherry Hill, New Jersey.
The Bank's main office is located at 133 North Centre
Avenue, Leesport, Pennsylvania. The Bank also provides services
to its customers through four full service offices located in
Blandon, Wyomissing Hills, Wernersville, and Reading,
Pennsylvania. All offices, except the Wernersville office,
provide drive-in facilities and automated teller machines. (See
"Properties.") The Bank also operates a loan production office
in Wyomissing, Pennsylvania. The Bank expects to open a full
service branch in Hamburg, Pennsylvania in May 1998.
Supervision and Regulation.
Securities Regulation
The Company is under the jurisdiction of the Securities and
Exchange Commission and of state securities commissions for
matters relating to the offering and sale of its securities. In
addition, the Company is subject to the Securities and Exchange
Commission's rules and regulations relating to periodic
reporting, proxy solicitation, and insider trading.
General
The Company is registered as a bank holding company and is
subject to supervision and regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") under
the Bank Holding Act of 1956, as amended (the "BHCA"). As a bank
holding company, the Company's activities and those of its bank
subsidiary are limited to the business of banking and activities
closely related or incidental to banking. Bank holding companies
are required to file periodic reports with and are subject to
examination by the Federal Reserve Board. The Federal Reserve
Board has issued regulations under the BHCA that require a bank
holding company to serve as a source of financial and managerial
strength to its subsidiary banks. As a result, the Federal
Reserve Board, pursuant to such regulations, may require the
Company to stand ready to use its resources to provide adequate
capital funds to its bank subsidiary during periods of financial
stress or adversity.
The BHCA prohibits the Company from acquiring direct or
indirect control of more than 5% of the outstanding shares of any
class of voting stock, or substantially all of the assets of, any
bank, or from merging or consolidating with another bank holding
company, without prior approval of the Federal Reserve Board.
Additionally, the BHCA prohibits the Company from engaging in or
from acquiring ownership or control of more than 5% of the
outstanding shares of any class of voting stock of any company
engaged in a non-banking business, unless such business is
determined by the Federal Reserve Board to be so closely related
to banking as to be a proper incident thereto.
As a Pennsylvania bank holding company for purposes of the
Pennsylvania Banking Code, the Company is also subject to
regulation and examination by the Pennsylvania Department of
Banking.
The Bank is a national bank and a member of the Federal
Reserve System and its deposits are insured (up to applicable
limits) by the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank is subject to regulation and examination by
the Office of the Comptroller of the Currency (the "OCC"), and to
a much lesser extent, the Federal Reserve Board and the FDIC.
The Bank is also subject to requirements and restrictions under
federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts
of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be
made and the types of services that may be offered. Various
consumer laws and regulations also affect the operations of the
Bank. In addition to the impact of regulation, commercial banks
are affected significantly by the actions of the Federal Reserve
Board as it attempts to control the money supply and credit
availability in order to influence the economy.
Capital Adequacy Guidelines
Bank holding companies are required to comply with the
Federal Reserve Board's risk-based capital guidelines. The
required minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is
required to be "Tier 1 capital," consisting principally of common
shareholders' equity, less certain intangible assets. The
remainder ("Tier 2 capital") may consist of certain preferred
stock, a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, and a limited
amount of the general loan loss allowance. The risk-based
capital guidelines are required to take adequate account of
interest rate risk, concentration of credit risk, and risks of
nontraditional activities.
In addition to the risk-based capital guidelines, the
Federal Reserve Board requires a bank holding company to maintain
a leverage ratio of a minimum level of Tier 1 capital (as
determined under the risk-based capital guidelines) equal to 3%
of average total consolidated assets for those bank holding
companies which have the highest regulatory examination ratings
and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to
maintain a ratio of at least 1% to 2% above the stated minimum.
The Bank is subject to almost identical capital requirements
adopted by the OCC.
Prompt Corrective Action Rules
The Federal banking agencies have regulations defining the
levels at which an insured institution would be considered "well
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically
undercapitalized." The applicable Federal bank regulator for a
depository institution could, under certain circumstances,
reclassify a "well-capitalized" institution as "adequately
capitalized" or require an "adequately capitalized" or
"undercapitalized" institution to comply with supervisory actions
as if it were in the next lower category. Such a
reclassification could be made if the regulatory agency
determines that the institution is in an unsafe or unsound
condition (which could include unsatisfactory examination
ratings). The Company and the Bank each satisfy the criteria to
be classified as "well capitalized" within the meaning of
applicable regulations.
Regulatory Restrictions on Dividends
The Bank may not, under the National Bank Act, declare a
dividend without approval of the Comptroller of the Currency,
unless the dividend to be declared by the Bank's Board of
Directors does not exceed the total of: (i) the Bank's net
profits for the current year to date, plus (ii) its retained net
profits for the preceding two current years, less any required
transfers to surplus. In addition, the Bank can only pay
dividends to the extent that its retained net profits (including
the portion transferred to surplus) exceed its bad debts. The
Federal Reserve Board, the OCC and the FDIC have formal and
informal policies which provide that insured banks and bank
holding companies should generally pay dividends only out of
current operating earnings, with some exceptions. The Prompt
Corrective Action Rules, described above, further limit the
ability of banks to pay dividends, because banks which are not
classified as well capitalized or adequately capitalized may not
pay dividends.
Under these policies and subject to the restrictions
applicable to the Bank, the Bank could declare, during 1998,
without prior regulatory approval, aggregate dividends of
approximately $1.775 million, plus net profits earned to the date
of such dividend declaration.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for
all insured depository institutions that results in the
assessment of premiums based on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC assigns, on a
semiannual basis, each depository institution to one of three
capital groups (well-capitalized, adequately capitalized or
undercapitalized) and further assigns such institution to one of
three subgroups within a capital group. The institution's
subgroup assignment is based upon the FDIC's judgment of the
institution's strength in light of supervisory evaluations,
including examination reports, statistical analyses and other
information relevant to measuring the risk posed by the
institution. Only institutions with a total capital to
risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to
risk-based assets ratio of 6% or greater, and a Tier 1 leverage
ratio of 5% or greater, are assigned to the well-capitalized
group. As of December 31, 1997, the Bank was well capitalized
for purposes of calculating insurance assessments.
The Bank Insurance Fund ("BIF") is presently fully funded at
more than the minimum amount required by law. Accordingly, the
1998 BIF assessment rates range from zero for those institutions
with the least risk, to $0.27 for every $100 of insured deposits
for institutions deemed to have the highest risk. The Bank is in
the category of institutions that presently pay nothing for
deposit insurance. The FDIC adjusts the rates every six months.
While the Bank presently pays no premiums for deposit
insurance, it is subject to assessments to pay the interest on
Financing Corporation ("FICO") bonds. FICO was created by
Congress to issue bonds to finance the resolution of failed
thrift institutions. Prior to 1997, only thrift institutions
were subject to assessments to raise funds to pay the FICO bonds.
On September 30, 1996, as part of the omnibus budget act,
Congress enacted the Deposit Insurance Funds Act of 1996, which
recapitalized the Savings Association Insurance Fund ("SAIF") and
provided that commercial banks would be subject to 1/5 of the
assessment to which thrifts are subject for FICO bond payments
through 1999. Beginning in 2000, commercial banks and thrifts
will be subject to the same assessment for FICO bonds. The FICO
assessment for the Bank (and all commercial banks) for the first
six months of 1998 is $.0063 for each $100 of deposits.
New Legislation
Proposed legislation is introduced in almost every
legislative session that would dramatically affect the regulation
of the banking industry. Whether or not such legislation will
ever be enacted and what effect it may have on the Company and
the Bank cannot be estimated at this time.
Interstate Banking
Prior to the passage of the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"), the BHCA prohibited a bank holding company located in one
state from acquiring a bank located in another state, unless such
an acquisition by an out-of-state bank holding company was
specifically authorized by the law of the state where the bank to
be acquired was located. Similarly, interstate branching by a
single bank was generally prohibited by the McFadden Act. The
Interstate Banking Act permits an adequately capitalized and
adequately managed bank holding company to acquire a bank in
another state whether or not the law of that other state permits
the acquisition, subject to certain deposit concentration caps
and approval by the Federal Reserve Board. In addition, under
the Interstate Banking Act, a bank can engage in interstate
expansion by merging with a bank in another state, unless the
other state affirmatively opted out of the legislation before
June 1, 1997. The Interstate Banking Act also permits de novo
interstate branching, but only if a state affirmatively opts in
by adopting appropriate legislation. Pennsylvania, Delaware,
Maryland, and New Jersey, as well as other states, have adopted
"opt in" legislation which allows such transactions.
Competition.
The banking industry in the Bank's service area is extremely
competitive. The Bank's market area is the primary trade area of
Berks County, Pennsylvania. The Bank competes not only with
other commercial banks, but also with other financial
institutions such as savings banks, savings and loan
associations, money market funds, mortgage companies, leasing
companies, finance companies, insurance companies, stock
brokerage firms and a variety of financial service companies.
Competition is based on both the price and quality of services
offered by competing financial institutions.
In addition to the Bank, there are 13 other commercial
banks, three savings associations, and several credit unions that
maintain offices in Berks County. Most of the banks and savings
and loans in Berks County are larger than the Bank.
The Company expects the operating environment for financial
institutions to become increasingly competitive. Similarly, the
manner in which banking institutions conduct their operations may
change materially as the activities in which bank holding
companies and their banking and nonbanking subsidiaries are
permitted to engage expands, and funding and investment
alternatives continue to broaden, although the long-range effects
of these changes cannot be predicted with reasonable certainty at
this time. These changes most likely will narrow the differences
and intensify competition between and among commercial banks,
thrift institutions and other financial institutions such as
credit unions, mutual funds, and insurance companies.
<PAGE>
Item 2. Properties.
The only real estate owned by the Company is a single-family
home located adjacent to the Bank's main office. The Company's
principal office is located in the main office of the Bank at
133 North Centre Avenue, Leesport, Pennsylvania. The Company
does not reimburse the Bank for use of the property.
Listed below are the locations of properties owned by the
Bank. Such properties are not subject to any mortgage, lien or
encumbrance.
Property
Location Address
1. Leesport 133-141 North Centre Avenue,
Leesport, Pennsylvania
2. Blandon Route 222, Maidencreek Township,
Blandon, Pennsylvania
3. Wyomissing Hills 2228 State Hill Road,
Wyomissing Hills, Pennsylvania
4. Reading 1210 Rockland Street
Reading, Pennsylvania
5. Hamburg 801 South Fourth Street
Hamburg, Pennsylvania
Each of these Bank offices provides drive-in facilities and
automated teller machines. The Bank leases the premises of its
Wernersville branch, which does not have a drive-up facility or
an automated teller machine. The Bank also leases space occupied
by its loan production office in Wyomissing, Pennsylvania.
Item 3. Legal Proceedings.
A certain amount of litigation arises in the ordinary course
of the business of the Company and the Bank. In the opinion of
the management of the Company, there are no proceedings pending
to which the Company or the Bank is a party or to which its
property is subject, that, if determined adversely to the Company
or the Bank, would be material in relation to the Company's
stockholders' equity or financial condition, nor are there any
proceedings pending other than ordinary routine litigation
incident to the business of the Company and the Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against the Company or the Bank by
governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of the Company's fiscal year ended
December 31, 1997.
<PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder
Matters.
As of December 31, 1997, there were 583 record holders of
the Company's Common Stock. The market price of the Company's
Common Stock for each quarter in 1997 and 1996 and the dividends
declared on the Company's Common Stock for each quarter in 1997
and 1996 are set forth below.
Market Value of Common Stock
The Company's Common Stock is traded in the NASDAQ Small
Capitalization Market under the symbol "FLPB."
The following table sets forth the high and low bid and
asked information of the Company's common stock to the extent
available, as reported by NASDAQ.
1997 1996
Bid Asked Bid Asked
Qtr High Low High Low Qtr High Low High Low
1st 19.25 16.75 21.25 18.50 1st 15.00 14.00 17.25 16.00
2nd 19.25 19.00 21.25 20.75 2nd 14.75 14.75 16.75 16.00
3rd 20.75 19.00 22.25 20.50 3rd 15.00 14.25 16.50 15.75
4th 23.00 20.75 24.75 22.00 4th 16.75 14.50 18.50
15.75
The bid quotations reflect interdealer quotations, do not
include retail mark ups, mark downs or commissions, and may not
necessarily represent actual transactions. The bid information
as stated is, to the knowledge of management of the Company, the
best approximate value at the time indicated.
Dividend Information
Dividends on the Common Stock of First Leesport Bancorp,
Inc. are payable on the 15th of January, April, July, and
October.
Dividends Declared
1997 1996
1st Qtr. $.13 $.12
2nd Qtr. .13 .12
3rd Qtr. .13 .12
4th Qtr. .13 .13
The Company derives substantially all of its income from
dividends paid to it by the Bank.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with the financial statements included in this
report. It is intended to assist the reader in understanding and
evaluating the financial position of the Company.
FINANCIAL CONDITION
The Company's total assets increased to $180,265,000 at
December 31, 1997 representing a growth rate of 11% from
$162,023,000 at December 31, 1996. Management has committed to
accelerated growth and this percentage almost doubles the 6%
growth realized during 1996 to reflect that commitment.
The plan for growth includes three key components, one of
which was completed during 1997. That component, growing the
loan portfolio was achieved by increasing staff throughout the
lending and support areas and aggressively marketing our loan
products. The two other components, accelerated deposit growth
and increased branch outlets, are moving forward.
The original plan called for our fifth full service office
to open in Hamburg, PA during the fourth quarter of 1997. Delays
have pushed that opening date back to early during the second
quarter of 1998. In conjunction with that opening, additional
deposit products and promotions will help to implement the third
of these components. Work will begin around that time on the
sixth full service office to be located in Bern Township on State
Route 183. With the purchase of land, development costs,
construction, and peripherals, these offices are expected to cost
approximately $1,000,000 each.
Cash and balances due from banks showed very little change
throughout the year. When combined with available federal funds
sold, these immediately liquid funds actually decreased by less
than $100,000 between December 31, 1996 and December 31, 1997.
Investment securities decreased by $1,344,000 or 3% from
$39,690,000 at December 31, 1996 to $38,346,000 at December 31,
1997. Repayments on pooled mortgage securities, maturities, and
called securities contributed to this decrease. There were no
securities sold during the year. The level of municipal
securities was maintained at or near the level reported at the
end of 1996. This segment of the portfolio is used to help
manage the Company's tax liability throughout the year. The
Company continues to invest only in bank-qualified securities and
does not own any derivative products at this time.
Net loans increased during 1997 by $18,523,000, or 17%, to
$128,296,000. This figure is net of loans sold which increased
during the year by $6,379,000 after repayments.
The total amount of loans serviced by the Bank increased to
$153,688,000 at December 31, 1997; an increase of 19% from
$128,786,000 at December 31, 1996. Net commercial loans
outstanding at December 31, 1997 amounted to $44,547,000 compared
with $32,915,000 at December 31, 1996. This increase,
$11,632,000, represents an increase of 35%, and is a significant
part of the overall increase of $18,523,000 noted above.
Also contributing to this growth is an increase in consumer
loans, including installment, home equity, and credit card loans.
This group increased by $4,277,000 from December 31, 1996 to
December 31, 1997, an increase of 27%.
The Bank expects loan demand to continue to be strong
throughout 1998 considering the current interest rate
environment. Management will continue to aggressively price its
loan products and sell conforming loans into the secondary market
whenever advantageous for the Bank.
The allowance for loan losses amounted to $1,483,000 at
December 31, 1997, up from $1,105,000 at December 31, 1996. This
amount, representing 1.14% of total loans compares favorably with
last year's 1.00%. Management feels that the level in the
allowance is sufficient to meet any credit risk issues
outstanding at this time based on its continuous review of the
loan portfolio and any potential or actual problem loans. With
the continued rate of growth within the loan portfolio,
management is keenly aware of the need to vigilantly monitor the
adequacy of this allowance.
Bank premises and equipment increased by $516,000 or 16% to
$3,844,000 at December 31, 1997 from $3,328,000 at December 31,
1996. Two major items within this category include the cost of
acquiring land for the Hamburg Office, and the cost of purchasing
additional computer equipment as the Bank has begun installing a
wide area network throughout all of its offices. This investment
in technology is expected to improve communications,
efficiencies, and service within the Company. As enhancements to
internal processes are developed, additional returns on this
investment are expected.
Other assets, which include accrued interest receivable,
increased by $638,000 to $4,223,000 at December 31, 1997. Within
this total, net servicing rights on mortgages increased by
$145,000, and the cash surrender value of life insurance policies
purchased by the Bank during 1996 to fund deferred compensation
arrangements with certain board members and senior officers
increased by $221,000.
Total deposits increased by $10,962,000 or 8% to
$148,499,000 at December 31, 1997 from $137,537,000 at
December 31, 1996. Management is encouraged by this growth, but
recognizes that overall deposits must grow more dramatically in
order to fund the Bank's future growth.
Non-interest bearing deposits, which serve to reduce the
Bank's overall cost of funds, increased by $1,529,000 or 9% to
$18,466,000 from $16,937,000. Total interest bearing deposits,
which include all money market related instruments, savings, and
time deposits, increased by $9,433,000 or 8% to $130,033,000 from
$120,600,000. Time deposits, including certificates with
balances over $100,000 accounted for all of this increase. In
fact, the other types of interest bearing deposits actually
decreased by $358,000. It is not unusual for this shifting of
deposits to time deposit instruments to occur when the interest
rate environment stabilizes.
Federal funds purchased and other borrowed funds increased
by $6,114,000 or 107% between December 31, 1996 and December 31,
1997. These balances grew to $11,814,000 from $5,700,000 to help
fund the loan growth noted above. While the Bank has ample
borrowing capacity, management recognizes the long-term
implications of continuing to fund loan growth with funds
borrowed from correspondents including the Federal Home Loan
Bank. One of the three key components in its overall objective
to grow the Bank is to accelerate the growth of deposits. As
this component is addressed, reliance on these borrowed funds
will decrease.
All of the short-term borrowings outstanding at December 31,
1997 is due to the Federal Home Loan Bank of Pittsburgh.
$5,000,000 of it matures during 1998 with the remaining
$3,000,000 open under a renewable line of credit arrangement
repayable at the Bank's discretion.
Stockholders' Equity increased by $1,042,000 or 6% to
$18,163,000 at December 31, 1997 from $17,121,000 at December 31,
1996. Within this increase, $213,000 can be attributed to an
increase in the net unrealized appreciation on securities
available for sale. Retained earnings increased by $829,000 or
10% to $8,850,000. Net income, net of dividends declared
provides this increase. The Company's book value at December 31,
1997 was $15.25 per share compared with $14.37 per share at
December 31, 1996, an increase of 6%. Book value increased
during 1996 by 5%.
The Bank's capital level remains very strong with the
leverage ratio at December 31, 1997 at 9.7% compared with 10.4%
at December 31, 1996. Management has targeted this ratio for
improvement as a high leverage ratio generally results in lower
returns on total equity. The regulatory minimum is 5%. The
Bank's total risk weighted capital ratio at December 31, 1997 is
15.9% compared with 17.6% at December 31, 1996. The regulatory
minimum is 8.0%.
Results of Operations
Net income for 1997 amounted to $1,448,000 compared with
$1,709,000 for 1996, a decrease of 15%. With management's
commitment to growth and the investments in technology and people
noted above, these results were anticipated and satisfactory.
Net interest income, which represents 90% of the Bank's
total income, decreased by a very modest $38,000, less than 1%,
from 1996 to 1997. Making up this total, however, were two
significant components.
First, total interest income increased from $12,340,000 for
1996 to $13,020,000 for 1997, an increase of $680,000 or 6%.
Interest and fees on loans contributed $522,000 of this total.
Interest on investment securities, both taxable and tax-exempt,
increased by $187,000 or 8%.
Second, interest expense on deposits increased from
$5,232,000 for 1996 to $5,638,000 for 1997, an increase of
$406,000 or 8%. This, combined with an increase of $312,000,
representing 134%, in interest costs on borrowed funds, resulted
in an overall increase in interest expense of $718,000 or 13%
from $5,464,000 in 1996 to $6,182,000 in 1997.
A very competitive marketplace combined with low interest
rates to create a very different yield and interest margin
comparison. The overall yield on earning assets for 1997 was
8.10% compared with 8.26% for 1996, a decrease of 16 basis
points. On the other side, the average cost of deposits
increased from 4.42% in 1996 to 4.61% in 1997, a difference of
19 basis points. These factors combined to reduce the net yield,
or interest margin from 4.60% in 1996 to 4.26% in 1997.
Management expects this highly competitive environment to remain
throughout 1998. Banking mergers within the Bank's marketing
area are continuing to re-shape the local marketplace.
Throughout the year, management reviews the credit quality
of its loan portfolio, examines economic conditions, and assesses
concentrations within the portfolio. These examinations serve to
validate the allowance for possible loan losses. During 1997,
specific credits were identified which required additional
provisions to the allowance, and combined with the increased loan
volumes, required a contribution from 1997's earnings of
$500,000. The provision during 1996 was only $210,000.
Total other income increased by 55% from $484,000 for 1996
to $749,000 for 1997, an increase of $265,000. Mortgage banking
activities generated $216,000 of this increase as the Bank
capitalized on favorable economic conditions to generate and sell
mortgage loans into the secondary market through the Federal
National Mortgage Association.
Total other expenses increased from $4,928,000 for 1996 to
$5,252,000 for 1997, an increase of $324,000 or 7%. Within this
increase, salaries and benefits increased by $178,000 or 7% from
$2,378,000 to $2,556,000. Contributing to this increase were
increased staff, which raised the number of full-time equivalent
employees from 79 at the end of 1996 to 87 at the end of 1997.
The costs associated with foreclosed real estate decreased
from $161,000 in 1996 to $43,000 in 1997. A reduced level of
other real estate properties throughout the year provided this
decrease. Marketing and advertising expenses increased by 20%
growing from $263,000 in 1996 to $315,000 in 1997, a total of
$52,000. Efforts in this area were focused primarily on building
customer awareness about the Bank. Professional services,
including costs associated with management consultants, strategic
planning professionals, and employment search agencies, increased
from $199,000 for 1996 to $232,000 for 1997, an increase of
$33,000 or 17%.
Other expenses, which include all supplies, postage, travel
and entertainment, and other expenses increased by $164,000 or
21% from $772,000 in 1996 to $936,000 in 1997. Income before
income taxes decreased from $2,222,000 in 1996 to $1,835,000 in
1997, a decrease of $387,000 representing 17%. The resulting
decrease in federal income taxes of $126,000 from $513,000 to
$387,000 generated net income of $1,448,000 for 1997 compared
with $1,709,000 for 1996, a decrease of $261,000 or 15%.
Net income expressed on a per share basis, amounted to $1.21
per share in 1997 compared with $1.43 per share in 1996. The
quarterly dividend of $.13 per share was paid throughout the year
to generate annual dividends of $.52 per share in 1997 compared
with $.49 per share in 1996. As a percentage of net income, the
dividend payout ratio for 1997 was 43% compared with 34% for
1996.
Liquidity and Rate Sensitivity
Through the years, the banking industry has adapted to an
environment in which interest rates have fluctuated dramatically
and in which depositors have been provided with liquid, rate
sensitive investment options. The industry utilizes a process
known as asset/liability management as a means of managing this
adaptation.
Asset/liability management is intended to provide for
adequate liquidity and interest rate sensitivity by matching
interest rate sensitive assets and liabilities and coordinating
maturities and repricing characteristics on assets and
liabilities.
Approximately 26% of the total loan portfolio is subject to
rate changes within one year. In addition, approximately 28% of
the securities portfolio is scheduled to reprice within one year.
Offsetting these rate sensitive assets are deposits repricing
within one year. At the present time, the Bank's one-year gap is
negative and signifies a decrease in net interest income in a
rising rate environment. Throughout the year, the Bank attempts
to structure its rate sensitivity position to minimize the risk
to earnings in changing rate environments.
Adequate liquidity means having the ability to obtain
sufficient cash to meet all current and projected needs promptly
and at a reasonable cost. These needs include deposit
withdrawals, liability runoffs, and increased loan demand. The
principal sources of liquidity are cash and due from banks, money
market instruments, and all unpledged securities. Maturing loans
and loan payments are other sources of liquidity as well as sales
of loans into the secondary market.
Other sources of liquidity are the federal funds market and
the discount window of the Federal Reserve Bank. The Bank also
maintains membership in the Federal Home Loan Banking system as
an alternate source of liquidity. In view of all the factors
involved, management believes that liquidity is adequate to meet
all anticipated needs.
Capital Adequacy
Federal bank regulatory agencies have established certain
capital-related criteria that must be met by banks and bank
holding companies. The measurements which incorporate the
varying degrees of risk contained within the Bank's Balance Sheet
and exposure to off-balance sheet commitments were established to
provide a framework for comparing different institutions because
of each institution's concentration of resources. See Note 12 of
the financial statements for a discussion of regulatory capital
requirements.
The Company is not aware of any pending recommendations by
regulatory authorities which would have a material impact on the
Company's capital, resources, or liquidity if they were
implemented, nor is the Company under any agreements with any
regulatory authorities.
Year 2000
The well-publicized "Year 2000 Problem" for computer-based
date information will have an impact on the financial services
industry. The Bank is no exception. A committee has been
established within the Bank to develop a plan to address this
issue. The committee has been charged with assessing the impact,
identifying affected equipment, resolving problems, and testing
the solutions. A regulatory deadline of the end of 1998 has been
established.
The Bank will also be working very closely with its data
processing provider, Bisys, of Cherry Hill, New Jersey, to
integrate and test all critical computer-based applications. The
estimated cost to the Bank for this process is $50,000 which
includes a certification process developed by Bisys in
conjunction with the consulting firm of Arthur Andersen and
Company.
Interest Rate Risk Management
Interest rate risk management involves managing the extent
to which interest-sensitive assets and interest-sensitive
liabilities are matched. Interest rate sensitivity is the
relationship between market interest rates and earnings
volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by
changes in the level of market interest rates. In order to
maintain consistent earnings performance, the Company seeks to
manage, to the extent possible, the repricing characteristics of
its assets and liabilities.
The ratio between assets and liabilities repricing in
specific time intervals is referred to as an interest rate
sensitivity gap. Interest rate sensitivity gaps can be managed
to take advantage of the slope of the yield curve as well as
forecasted changes in the level of interest rate changes.
One major objective of the Company when managing the rate
sensitivity of its assets and liabilities is to stabilize net
interest income. The management of and authority to assume
interest rate risk is the responsibility of the Company's Asset/
Liability Committee ("ALCO"), which is comprised of senior
management and Board members. ALCO meets quarterly to monitor
the ratio of interest sensitive assets to interest sensitive
liabilities. The process to review interest rate risk management
is a regular part of management of the Company. Consistent
policies and practices of measuring and reporting interest rate
risk exposure, particularly regarding the treatment of
noncontractual assets and liabilities, are in effect. In
addition, there is an annual process to review the interest rate
risk policy with the Board of Directors which includes limits on
the impact to earnings from shifts in interest rates.
To manage the interest sensitivity position, an asset/
liability model called "gap analysis" is used to monitor the
difference in the volume of the Company's interest sensitive
assets and liabilities that mature or reprice within given
periods. 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.
At December 31, 1997, the Bank maintained a one year
cumulative gap of negative $28.1 million or 15.6% of total
assets. The effect of this gap position provided a negative
mismatch of assets and liabilities which can expose the Bank to
interest rate risk during a period of rising interest rates.
<TABLE>
<CAPTION>
Interest Sensitivity Gap at December 31, 1997
Three
Within to One to Over
Three Twelve Three Three
(in thousands) Months Months Years Years
<S> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits in other banks $ 100 $ - $ - $ -
Securities(1),(2) 8,149 8,558 9,734 11,247
Loans 29,022 22,231 25,550 52,976
Total interest earning assets 37,271 30,789 35,284 64,223
Interest bearing liabilities:
Interest bearing deposits(3) 5,992 17,768 14,246 13,690
Time deposits 49,642 6,916 7,682 7,383
Time deposits $100,000 and over 2,690 1,412 1,332 1,280
Other borrowed funds 11,814 - - -
Total interest bearing liabilities 70,138 26,096 23,260 22,353
Interest sensitivity gap $(32,867) $ 4,693 $ 12,024 $ 41,870
Cumulative sensitivity gap $(32,867) $(28,174) $(16,150) $ 25,720
_____________________
</TABLE>
(1) Gross of unrealized gains/losses on available for sale
securities.
(2) Investments and loans are included in the earlier of the
period in which interest rates were next scheduled to adjust
or the period in which they are due. In addition, loans
were included in the periods in which they are scheduled to
be repaid based on scheduled amortization. For amortizing
loans and mortgage-backed securities, annual prepayment
rates are assumed reflecting historical experience as well
as management's knowledge and experience of its loan
products.
(3) The Bank's demand and savings accounts were generally
subject to immediate withdrawal. However, management
considers a certain amount of such accounts to be core
accounts having significantly longer effective maturities
based on the retention experiences of such deposits in
changing interest rate environments. The effective
maturities presented are the FDICIA 305 recommended maturity
distribution limits for nonmaturing deposits.
Upon reviewing the current interest sensitivity scenario,
decreasing interest rates could positively effect net income
because the Company is liability sensitive. In a rising interest
rate environment, net income could be negatively affected because
more liabilities than assets will reprice during a given period.
Certain shortcomings are inherent in the method of analysis
presented in the above table. Although certain assets and
liabilities may have similar maturities or period of repricing,
they may react in different degrees to changes in market interest
rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets and
liabilities may lag behind changes in market interest rates.
Certain assets, such as adjustable-rate mortgages, have features
which restrict changes in interest rates on a short-term basis
and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels may
deviate significantly from those assumed in calculating the
table. The ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest
rate increase.
Capital
The adequacy of the Company's capital is reviewed on an
ongoing basis with regard 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.
An important indicator in the banking industry is the
leverage ratio, defined as the ratio of common stockholders'
equity less intangible assets, to average quarterly assets less
intangible assets. The leverage ratio at December 31, 1997 was
9.72% compared to 10.35% at December 31, 1996. This decrease is
the direct result of the increase in average assets in 1997. For
1997 and 1996, the ratios were well above minimum regulatory
guidelines.
As required by the federal banking regulatory authorities,
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 common stockholders' equity less intangible
assets, and Tier II capital includes the allowable portion of the
allowance for possible loan losses, currently limited to 1.25% of
risk-weighted assets. By regulatory guidelines, the separate
component of equity for unrealized appreciation or depreciation
on available for sale securities is excluded from Tier I Capital.
The following table sets forth the Bank's capital and
ratios. The Company's capital amounts and ratios were not
materially different from those of the Bank.
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996
<S> <C> <C>
Tier I
Common stockholders' equity (excluding
unrealized appreciation on securities) $ 17,411 $ 16,776
Tier II
Allowable portion of allowance for loan
losses 1,482 1,105
Risk-based capital $ 18,893 $ 17,881
Risk adjusted assets (including off-
balance sheet exposures) $118,534 $101,660
Tier I risk-based capital ratio 14.69% 16.50%
Total risk-based capital ratio 15.94% 17.59%
Leverage ratio 9.72% 10.35%
</TABLE>
Regulatory guidelines require that Tier I capital and total
risk-based capital to risk-adjusted assets must be at least 4.0%
and 8.0%, respectively.
Liquidity and Funds Management
Liquidity management is 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 investment securities, sales of loans, growth in core
deposits, short- and long-term borrowings and repurchase
agreements. Regular loan payments are a dependable source of
funds, while the sale of loans and investment securities, deposit
flows, and loan prepayments are significantly influenced by
general economic conditions and level of interest rates.
At December 31, 1997, the Company maintained $5.60 million
in cash and cash equivalents primarily consisting of cash and due
from banks. In addition, the Company had $38.3 million in
securities available for sale. The combined total of
$43.9 million represented 24.4% of total assets at December 31,
1997. The Company believes that its liquidity is adequate.
The Company considers its primary source of liquidity to be
its core deposit base, which includes noninterest bearing and
interest-bearing demand deposits, savings, and time deposits
under $100,000. This funding source has grown steadily over the
years and consists of deposits from customers throughout the
branch network. The Company will continue to promote the growth
of deposits through its branch offices. At December 31, 1997,
approximately 78.7% of the Company's assets were funded by core
deposits acquired within its market area. An additional 10.1% of
the assets were funded by the Company's equity. These two
components provide a substantial and stable source of funds.
Recently Issued Accounting Standards
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Statement
No. 130 requires that all items that are required to be
recognized as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements. This Statement does not require a
specific format for that financial statement, but requires that
an enterprise display an amount representing total comprehensive
income for the period in that financial statement. Statement
No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt Statement No. 130 in
its March 31, 1998 Form 10-QSB. Reclassification of financial
statements for earlier periods provided for comparative purposes
will be required. Adoption of Statement No. 130 is not expected
to have a material impact on the Company.
Operating Segment Disclosure
In June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." Statement No. 131 establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. Statement No. 131 is effective for periods
beginning after December 15, 1997. The Company will adopt
Statement No. 131 in its March 31, 1998 Form 10-QSB, and
comparative information for earlier years will be restated.
Adoption of Statement No. 131 is not expected to have a material
impact on the Company.
<PAGE>
Changes in Interest Income and Interest Expense
The following table sets forth certain information regarding
changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on
changes attributable to (1) changes in volume (changes in volume
multiplied by old rate), and (2) changes in rate (changes in rate
multiplied by average volume).
ANALYSIS OF CHANGES IN INTEREST INCOME(1)
<TABLE>
<CAPTION>
1997/1996 Increase (Decrease) 1996/1995 Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in other
banks and federal funds sold (25) (4) (29) (73) (9) (82)
Securities (taxable) 171 70 241 186 104 290
Securities (tax-exempt) (37) (17) (54) 2 (26) (24)
Loans 893 (371) 522 684 (62) 622
----- ---- --- --- --- ---
Total Interest Income 1,002 (322) 680 799 7 806
----- ---- --- --- --- ---
Other borrowed funds 276 36 312 (21) (25) (46)
Interest-bearing demand deposits 8 43 51 27 (26) 1
Savings deposits (4) (13) (17) 13 (84) (71)
Time deposits 317 55 372 366 (38) 328
----- ---- --- --- --- ---
Total Interest Expense 597 121 718 385 (173) 212
----- ---- --- --- --- ---
Increase (Decrease)
in Net Interest Income 405 (443) (38) 414 180 594
===== ==== === === === ===
</TABLE>
_________________
(1) Loan fees have been included in the change in interest
income totals presented. Nonaccrual loans have been
included in average loan balances.
Risk Elements
The following table presents a summary of nonperforming
loans and renegotiated loans for 1997 and 1996.
NONPERFORMING LOANS
(In Thousands)
As of December 31,
1997 1996
Nonaccrual loans
Real Estate $ 881 $253
Consumer 45 4
Commercial 458 517
Total $1,384 $774
Loans past due 90 days or more and still
accruing interest
Real Estate $ 452 $213
Consumer 124 103
Commercial 212 1
Total loans past due 90 days or more $ 788 $317
Troubled debt restructurings
Real Estate $ 0 $ 0
Consumer 0 0
Commercial 1,757 1,246
Total troubled debt restructurings $1,757 $1,246
Amount of interest on loans which would have
been recorded at original rates $ 42 $ 90
Amount of interest which was reflected in
income 0 0
Interest income not recognized on total
nonaccrual loans $ 42 $ 90
The Bank generally places a loan on non-accrual after the
loan is more than 90 days past due.
Allowance for Loan Losses
The following tables set forth an analysis of the Company's
allowance for loan losses for 1997 and 1996 and the allocation of
the allowance.
Analysis of the Allowance for Loan Losses
(In Thousands Except Ratios)
December 31,
1997 1996
Balance, Beginning of Year $ 1,105 $ 1,179
Charge-Offs
Commercial 13 249
Real estate 21 0
Consumer 125 95
Total 159 344
Recoveries
Commercial 1 17
Real estate 0 0
Consumer 36 43
Total 37 60
Net Charge-Offs 122 284
Provision Charged to Operations 500 210
Balance, End of Year $ 1,483 $ 1,105
Average Loans, Net $118,585 $108,796
Ratio of Net Charge-Offs to Average Loans 0.10% 0.26%
Ratio of Allowance Balance to Loans, End
of Year 1.14% 1.00%
The allowance for loan losses is maintained at a level
considered adequate to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to
operating expenses and reduced by net charge-offs. The Bank
performs continuous credit reviews of the loan portfolio and
considers current economic conditions, review of specific problem
loans and other factors in determining the adequacy of the
allowance balance.
The following table details the allocation of the allowance
for loan losses to the various loan categories. The allocation
is made for analytical purposes and is not necessarily indicative
of the categories in which future credit losses may occur. The
total allowance is available to absorb losses from any segment of
loans.
Allocation of Allowance for Loan Losses
(In Thousands)
December 31,
1997 1996
Percent Percent
of Loans in of Loans in
Category to Category to
Amount Total Loans Amount Total Loans
Commercial $ 249 34.3% $ 198 29.7%
Real Estate 476 50.2% 107 56.0%
Consumer 117 15.5% 178 14.3%
Total Allocated 842 100% 483 100%
Unallocated 641 -- 622 --
TOTAL $1,483 100% $1,105 100%
Loan Portfolio
The following table sets forth the Company's loan
distribution at December 31:
1997 1996
Commercial, financial, agricultural $ 44,547 $ 32,915
Real estate construction 1,964 1,439
Real estate mortgage 63,235 60,768
Consumer 20,033 15,756
$129,779 $110,878
Loan Maturities
The rate at which outstanding loans of the Bank at
December 31, 1997 are maturing by major category is indicated by
the table below.
Maturities of Outstanding Loans
(In Thousands)
Within After One After
One But Within Five
Year Five Years Years Total
Real Estate $ 2,255 $ 3,438 $59,506 $ 65,199
Consumer 1,177 10,197 8,659 20,033
Commercial 17,420 20,484 6,643 44,547
Total $20,852 $34,119 $74,808 $129,779
Excluding the loans maturing within one year listed above,
$14,334,000 or 11.0% of the loan portfolio is sensitive to
interest rate changes.
Maturity of Certificates of Deposit of $100,000 or More
The following table sets forth the amounts of the Bank's
certificates of deposit of $100,000 or more by maturity date.
December 31, 1997
(In Thousands)
Three Months or Less $2,102
Over Three Through Six Months 958
Over Six Through Twelve Months 867
Over Twelve Months 2,787
TOTAL $6,714
Securities Portfolio Maturities and Yields
The following table sets forth information about the
maturities and weighted average yield on the Company's securities
portfolio. Floating rate, immediately repriceable items are
included in the first column, and yields are not reported on a
tax equivalent basis.
December 31, 1997
(In Thousands)
Due in After 1 After 5
1 Year Year to Years to After
or Less 5 Years 10 Years 10 Years Total
Obligations of $8,124 $11,086 $1,535 $4,400 $25,145
the U.S. 6.29% 6.74% 7.00% 7.30% 6.71%
Treasury and
other U.S.
Government
Agencies and
Corporations
State and $2,505 $6,747 $ 393 $ 693 $10,338
Municipal 5.11% 5.33% 6.39% 7.07% 5.44%
Obligations
Other Securities $ 0 $1,046 $ 0 $ 24 $ 1,070
0 % 7.23% 0% 7.23% 7.23%
Securities Portfolio
The following table sets forth the carrying value of the
Company's investment securities at its last two fiscal year ends:
As of December 31,
1997 1996
(In Thousands)
U.S. Treasuries $10,292 $10,205
U.S. Government Agencies 15,221 16,584
State and Political Subdivisions 10,589 10,914
Other Securities and Equity Securities 2,244 1,987
$38,346 $39,690
For purposes of the above table, all securities are
classified as available for sale and are reflected at fair value.
Other Borrowed Funds
Short-term borrowings at December 31, 1997 consisted of
borrowings from the Federal Home Loan Bank (FHLB) under a
renewable line of credit arrangement and a repurchase agreement,
both of which mature in 1998 with variable interest rates which
were 6.21% and 5.63% respectively. The borrowings are
collateralized by certain qualifying assets of the Bank.
Short-term borrowings at December 31, 1996, consisted of
borrowings from FHLB under a line of credit arrangement which
matured in 1997, bearing interest at 5.43%. The borrowings were
collateralized by certain qualifying assets of the Bank.
An additional source of funds for the Bank is federal funds
purchased, of which $3,814,000 and $0 were outstanding at
December 31, 1997 and 1996 respectively. The federal funds
purchased typically mature in one day.
Information concerning the short-term borrowings at FHLB is
summarized as follows at December 31:
1997 1996
Line of credit $5,000 $5,700
Repurchase agreement 3,000 -
$8,000 $5,700
Average balance during the year 6,968 3,304
Average interest rate during the year 5.83 5.72
Maximum month-end balance during
the year 9,000 5,700
Average Balances, Rates and Net Yield
The following table sets forth the average daily balances of
major categories of interest earning assets and interest bearing
liabilities, the average rate paid thereon, and the net interest
margin for each of the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
(in thousands, except rates)
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
U.S. Gov't Securities $ 10,327 $ 619 5.99% $ 10,766 $ 623 5.79%
U.S. Gov't Agencies 13,024 945 7.26% 9,006 647 7.19%
Municipal Obligations(1) 10,741 576 5.36% 11,417 630 5.52%
Other Securities 6,295 431 6.85% 7,242 484 6.55%
Investments 40,387 2,571 6.37% 38,431 2,384 6.18%
Interest-bearing deposits
and federal funds sold 370 13 3.51% 939 42 4.47%
Real Estate Loans 63,271 5,373 8.49% 62,425 5,503 8.82%
Consumer Loans 17,765 1,643 9.25% 15,632 1,528 9.77%
Commercial Loans 38,911 3,420 8.79% 31,981 2,883 9.01%
Loans $119,947 $10,436 8.70% $110,038 9,914 8.95%
Earning Assets $160,704 $13,020 8.10% $149,408 $12,340 8.26%
Money Market Accounts $ 28,007 $ 787 2.81% $ 27,709 $ 736 2.66%
Savings Deposit 24,524 509 2.08% 24,719 526 2.13%
Time Deposits 72,317 4,342 6.00% 66,969 3,970 5.93%
Interest-bearing Deposits $124,848 $ 5,638 4.52% $119,397 $ 5,232 4.40%
Other Borrowed Funds 9,343 544 5.82% 4,268 232 5.44%
Interest-bearing
Liabilities $134,191 6,182 4.61% $123,665 5,464 4.42%
Noninterest-bearing
Deposits $ 18,040 $ 16,896
Interest Rate Spread 3.49% 3.84%
NET INTEREST MARGIN $ 6,838 4.26% $ 6,876 4.60%
_______________
</TABLE>
(1) Rates on Municipal Obligations are not reported on a tax-
equivalent basis.
(2) Nonaccrual loans have been included in average loan
balances.
<PAGE>
Dividends and Stockholders' Equity
The Company increased its dividends in 1997 to $0.52 per
share from $0.49 per share in 1996. The Company's dividend
payout ratio increased from 34.2% in 1996 to 42.7% in 1997 due to
the decrease in the Company's net income. The Company's ratio of
average stockholders' equity to average assets for the year ended
December 31, 1997 was 10.31%.
Year ended December 31
1997 1996
Return on assets 0.85% 1.08%
Return on equity 8.21% 10.36%
Dividend payment ratio 42.75% 34.17%
Equity to assets ratio 10.31% 10.42%
<PAGE>
Item 7. Financial Statements.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First Leesport Bancorp, Inc.
Leesport, Pennsylvania
We have audited the accompanying consolidated balance sheets
of First Leesport Bancorp, Inc. and its wholly-owned subsidiary,
The First National Bank of Leesport, as of December 31, 1997 and
1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. These financial
statements are the responsibility of the Company'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 consolidated 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 Leesport Bancorp, Inc. and its
wholly-owned subsidiary, The First National Bank of Leesport, as
of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Reading, Pennsylvania
January 9, 1998
Beard & Company, Inc.
<PAGE>
FIRST LEESPORT BANCORP, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
THE FIRST NATIONAL BANK OF LEESPORT
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
(In Thousands)
ASSETS
Cash and due from banks $ 5,456 $ 5,087
Interest-bearing deposits in other banks 100 112
Total cash and cash equivalents 5,556 5,199
Federal funds sold - 448
Securities available for sale 38,346 39,690
Loans, net of allowance for loan losses
1997 $1,483; 1996 $1,105 128,296 109,773
Bank premises and equipment, net 3,844 3,328
Accrued interest receivable and other
assets 4,223 3,585
Total assets $180,265 $162,023
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 18,466 $ 16,937
Interest-bearing 130,033 120,600
Total deposits 148,499 137,537
Federal funds purchased 3,814 -
Short-term borrowings 8,000 5,700
Accrued interest payable and other
liabilities 1,789 1,665
Total liabilities 162,102 144,902
Stockholders' Equity
Common stock, par value $ 5 per share;
authorized 2,000,000 shares; issued
1,200,000 shares 6,000 6,000
Surplus 3,000 3,000
Retained earnings 8,850 8,021
Net unrealized appreciation on
securities available for sale, net
of taxes 434 221
Treasury stock, at cost 8,829 shares (121) (121)
Total stockholders' equity 18,163 17,121
Total liabilities and stockholders'
equity $180,265 $162,023
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST LEESPORT BANCORP, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
THE FIRST NATIONAL BANK OF LEESPORT
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1997 1996 1995
(In Thousands, Except Per
Share Amounts)
Interest income:
Loans receivable, including fees $10,436 $ 9,914 $ 9,292
Securities:
Taxable 1,995 1,754 1,464
Tax-exempt 576 630 654
Other 13 42 124
Total interest income 13,020 12,340 11,534
Interest expense:
Deposits 5,638 5,232 4,974
Borrowings 544 232 278
Total interest expense 6,182 5,464 5,252
Net interest income 6,838 6,876 6,282
Provision for loan losses 500 210 270
Net interest income after
provision for loan losses 6,338 6,666 6,012
Other income:
Customer service fees 313 311 285
Mortgage banking activities 290 74 73
Other income 146 99 135
Net realized loss on sale of
securities - - (34)
Total other income 749 484 459
Other expenses:
Salaries and employee benefits 2,556 2,378 2,237
Occupancy 416 424 411
Equipment 289 291 266
Computer services 304 289 270
Taxes, other than income 161 151 147
Foreclosed real estate 43 161 39
Marketing and advertising 315 263 180
Professional services 232 199 145
Other expenses 936 772 907
Total other expenses 5,252 4,928 4,602
Income before income taxes 1,835 2,222 1,869
Federal income taxes 387 513 417
Net income $ 1,448 $ 1,709 $ 1,452
Basic earnings per share $ 1.21 $ 1.43 $ 1.22
See Notes to Consolidated Financial Statements.<PAGE>
FIRST LEESPORT BANCORP, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
THE FIRST NATIONAL BANK OF LEESPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
Net Unrealized
Appreciation
(Depreciation)
On Securities
Common Retained Available Treasury
Stock Surplus Earnings For Sale Stock
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $6,000 $3,000 $5,980 $(258) $(121)
Net income - - 1,452 - -
Cash dividends, $.45
per share - - (536) - -
Net change in unrealized
appreciation on
securities available
for sale, net of taxes - - - 760 -
Balance, December 31, 1995 6,000 3,000 6,896 502 (121)
Net income - - 1,709 - -
Cash dividends, $ .49 per
share - - (584) - -
Net change in unrealized
appreciation (depre-
ciation) on securities
available for sale, net
of taxes - - - (281) -
Balance, December 31, 1996 6,000 3,000 8,021 221 (121)
Net income - - 1,448 - -
Cash dividends, $ .52 per
share - - (619) - -
Net change in unrealized
appreciation on
securities available
for sale, net of taxes - - - 213 -
Balance, December 31, 1997 $6,000 $3,000 $8,850 $ 434 $(121)
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST LEESPORT BANCORP, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
THE FIRST NATIONAL BANK OF LEESPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,448 $ 1,709 $ 1,452
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 500 210 270
Provision for depreciation and
amortization 274 295 268
Net amortization (accretion) of invest-
ment securities premiums and discounts (4) (18) 61
Net cash provided by loans held for sale 252 36 53
Gain on sale of securities and loans (252) (36) (19)
Increase in accrued interest receivable
and other assets (748) (151) (149)
Increase (decrease) in accrued interest
payable and other liabilities 124 (34) 315
Net cash provided by operating activities 1,594 2,011 2,251
Cash Flows From Investing Activities
Proceeds from sales of securities
available for sale - - 2,579
Proceeds from principal repayments and
maturities of securities available for
sale 7,943 7,404 1,697
Proceeds from principal repayments and
maturities of securities held to
maturity - - 3,324
Purchase of securities available for sale (6,272) (9,654) (3,173)
Purchase of securities held to maturity - - (6,975)
Purchase of life insurance - (1,785) -
Net (increase) decrease in federal funds
sold 448 153 (601)
Loans made to customers, net of
principal collected (19,023) (5,891) (7,299)
Purchases of bank premises and equipment (790) (309) (105)
Net cash used in investing activities (17,694) (10,082) (10,553)
Cash Flows From Financing Activities
Net increase in deposits 10,962 4,099 16,025
Net increase (decrease) in federal
funds purchased 3,814 - (5,493)
Net proceeds (repayments) of short-term
borrowings 2,300 5,700 (2,000)
Repayment of long-term debt - (1,000) -
Dividends paid (619) (572) (524)
Net cash provided by financing activities 16,457 8,227 8,008
Increase (decrease) in cash and cash
equivalents 357 156 (294)
Cash and cash equivalents:
January 1 5,199 5,043 5,337
December 31 $ 5,556 $ 5,199 $ 5,043
Cash payments for:
Interest $ 6,093 $ 5,423 $ 5,071
Income taxes $ 685 $ 530 $ 415
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST LEESPORT BANCORP, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
THE FIRST NATIONAL BANK OF LEESPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts
of First Leesport Bancorp, Inc. ("the Company"), a bank
holding company, and its wholly-owned subsidiary, The First
National Bank of Leesport ("the Bank"). All significant
intercompany accounts and transactions have been eliminated.
Nature of operations:
The Bank operates under a national bank charter and provides
full banking services. As a national bank, the Bank is
subject to regulation of the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation.
The bank holding company is subject to regulation by the
Federal Reserve Bank. The area served by the Bank is
principally Berks County, Pennsylvania.
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.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks and interest-
bearing demand deposits in other banks.
Securities:
Securities classified as available for sale are those
securities that the Bank intends to hold for an indefinite
period of time but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movement in interest rates, changes in maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory
capital considerations and other similar factors.
Securities available for sale are carried at fair value.
Unrealized appreciation or depreciation is reported as
increases or decreases in stockholders' equity, net of the
related deferred tax effect. Realized gains or losses,
determined on the basis of the cost of the specific
securities sold, are included in earnings. Premiums and
discounts are recognized in interest income using a method
which approximates the interest method over the period to
maturity.
Management determines the appropriate classification of
debt securities at the time of purchase and re-evaluates
such designation as of each balance sheet date.
Loans receivable:
Loans that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off
generally are stated at their outstanding unpaid principal
balances, net of any deferred fees or costs on originated
loans or unamortized premiums or discounts on purchased
loans. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an
adjustment of the yield (interest income) of the related
loans.
A loan is generally considered impaired when it is
probable the Bank will be unable to collect all contractual
principal and interest payments due in accordance with the
terms of the loan agreement. The accrual of interest is
generally discontinued when the contractual payment of
principal or interest has become 90 days past due or
management has serious doubts about further collectibility
of principal or interest, even though the loan is currently
performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well
secured. When a loan is placed on nonaccrual status, unpaid
interest credited to income in the current year is reversed
and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Interest received on
nonaccrual loans generally is either applied against
principal or reported as interest income, according to
management's judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance
with the contractual terms for a reasonable period of time
and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Allowance for loan losses:
The allowance for loan losses is established through
provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance
for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses related to impaired loans
that are identified for evaluation is based on discounted
cash flows using the loan's initial effective interest rate
or the fair value, less selling costs, of the collateral for
certain collateral dependent loans. By the time a loan
becomes probable of foreclosure, it has been charged down to
fair value, less estimated costs to sell.
The allowance for loan losses is maintained at a level
considered adequate to provide for losses that can be
reasonably anticipated. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current
economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows
expected to be received on impaired loans.
Loans held for sale:
Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or
estimated fair value. All sales are made without recourse.
There were no loans held for sale at December 31, 1997 and
1996.
Foreclosed real estate:
Foreclosed assets, which are recorded in other assets,
include properties acquired through foreclosure or in full
or partial satisfaction of the related loan.
Foreclosed assets are initially recorded at fair value,
net of estimated selling costs, at the date of foreclosure.
After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of
carrying amount or fair value, less estimated costs to sell.
Revenue and expenses from operations and changes in the
valuation allowance are included in foreclosed real estate
expenses.
Bank premises and equipment:
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the
straight-line and accelerated depreciation methods over
their estimated useful lives.
Loan servicing:
The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net
servicing revenues. Impairment of mortgage servicing rights
is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring
impairment, the rights are stratified based on loan type,
term and interest rates of the underlying loans. The amount
of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed
their fair value.
Income taxes:
Deferred taxes are provided on the liability method
whereby deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are
recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts
of assets and liabilities in the financial statements and
their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted through the provision
for income taxes for the effects of changes in tax laws and
rates on the date of enactment.
Off-balance sheet financial instruments:
In the ordinary course of business, the Bank has
entered into off-balance sheet financial instruments
consisting of commitments to extend credit, letters of
credit and commitments to sell loans. Such financial
instruments are recorded in the consolidated balance sheets
when they become receivable or payable.
Advertising:
Advertising costs are expensed as incurred.
Earnings per share:
The Company adopted FASB Statement No. 128, "Earnings
Per Share" in 1997. Since the Company has a simple capital
structure, previously reported earnings per share for 1996
and 1995 equal basic earnings per share as reflected in the
consolidated statements of income. The weighted average
number of common shares outstanding was 1,191,171 in 1997,
1996 and 1995 respectively.
Reclassifications:
Certain items in the 1996 and 1995 consolidated
financial statements have been reclassified to conform with
the 1997 consolidated financial statement presentation
format. Such reclassifications had no impact on net income.
2. Restrictions on Cash and Due from Bank Balances
The Bank is required to maintain average reserve balances
with the Federal Reserve Bank. For the years 1997 and 1996,
the average of these reserve balances approximated $705,000
and $650,000 respectively.
3. SECURITIES
The amortized cost of available for sale securities and
their approximate fair values at December 31 were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury securities $10,188 $114 $ (10) $10,292
U.S. Government agencies 10,921 95 (17) 10,999
Mortgage-backed securities 4,036 193 (7) 4,222
Obligations of state and
political subdivisions 10,338 251 - 10,589
Corporate securities 1,070 32 - 1,102
Equity securities 1,135 7 - 1,142
$37,688 $692 $ (34) $38,346
December 31, 1996:
U.S. Treasury securities $10,186 $ 65 $ (46) $10,205
U.S. Government agencies 11,998 58 (95) 11,961
Mortgage-backed securities 4,510 123 (10) 4,623
Obligations of state and
political subdivisions 10,698 223 (7) 10,914
Corporate securities 1,070 24 - 1,094
Equity securities 893 - - 893
$39,355 $493 $(158) $39,690
</TABLE>
Equity securities are comprised primarily of stock in the
Federal Reserve Bank, the Federal Home Loan Bank and
Atlantic Central Bankers' Bank.
The amortized cost and fair value of securities as of
December 31, 1997, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities
because the securities may be called or prepaid without
penalty.
Amortized Cost Fair Value
(In Thousands)
Due in one year or less $10,629 $10,638
Due after one year through
five years 18,879 19,255
Due after five years through
ten years 1,917 1,945
Due after ten years 1,092 1,144
Mortgage-backed securities 4,036 4,222
Equity securities 1,135 1,142
$37,688 $38,346
Securities with an amortized cost of $3,596,000 and
$2,197,000 at December 31, 1997 and 1996 respectively were
pledged to secure public deposits and for other purposes as
required or permitted by law.
There were no sales of securities in 1997 and 1996. Gross
gains of $4,000 and gross losses of $38,000 were realized on
sales of securities available for sale in 1995.
4. LOANS RECEIVABLE
The components of loans receivable at December 31, 1997 and
1996 were as follows:
1997 1996
(In Thousands)
Commercial $ 44,547 $ 32,915
Real estate construction 1,964 1,439
Commercial real estate 10,350 3,075
Residential real estate 52,885 57,693
Credit card 665 667
Consumer 19,368 15,089
129,779 110,878
Allowance for loan losses (1,483) (1,105)
$128,296 $109,773
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
1997 1996 1995
(In Thousands)
Balance, beginning $1,105 $1,179 $1,124
Provision for loan losses 500 210 270
Loans charged off (159) (344) (329)
Recoveries 37 60 114
Balance, ending $1,483 $1,105 $1,179
The recorded investment in impaired loans, not requiring an
allowance for loan losses, was $-0- at December 31, 1997 and
1996. The recorded investment in impaired loans requiring
an allowance for loan losses was $944,000 and $517,000 at
December 31, 1997 and 1996 respectively. At December 31,
1997 and 1996, the related allowance for loan losses
associated with those loans was $195,000 and $171,000
respectively. For the years ended December 31, 1997, 1996
and 1995, the average recorded investment in these impaired
loans was $1,009,000, $726,000 and $888,000 respectively,
and the interest income recognized on impaired loans was
$42,000, $2,000 and $-0- respectively.
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid
principal balance of these loans as of December 31, 1997 and
1996 was $25,392,000 and $19,013,000 respectively. Custodial
escrow balances maintained in connection with the foregoing
loan servicing and included in other liabilities were
approximately $173,000 and $100,000 at December 31, 1997 and
1996 respectively. Mortgage servicing rights of $158,000
were capitalized in 1997. Amortization of mortgage
servicing rights was $13,000 in 1997; and the net carrying
value of $145,000 approximates its fair value at
December 31, 1997. Mortgage servicing rights were not
capitalized in 1996 because they were not material.
6. BANK PREMISES AND EQUIPMENT
Components of bank premises and equipment were as follows:
December 31,
1997 1996
(In Thousands)
Land and land improvements $ 982 $ 706
Bank buildings 3,691 3,590
Bank furniture and equipment 2,408 2,017
7,081 6,313
Less accumulated depreciation 3,237 2,985
$3,844 $3,328
Certain bank facilities and equipment are leased under
various operating leases. Rental expense for these leases
was $72,000, $55,000 and $65,000 respectively for the years
ended December 31, 1997, 1996 and 1995. Future minimum
rental commitments under noncancellable leases are as
follows (in thousands):
1998 $ 62
1999 39
2000 20
2001 20
$141
7. DEPOSITS
The components of deposits at December 31, 1997 and 1996
were as follows:
1997 1996
(In Thousands)
Demand, non-interest bearing $ 18,466 $ 16,937
Demand, interest bearing 28,133 28,004
Savings 23,563 24,050
Time, $ 100,000 and over 6,714 4,562
Time, other 71,623 63,984
$148,499 $137,537
At December 31, 1997, the scheduled maturities of time
deposits are as follows (in thousands):
1998 $43,889
1999 15,043
2000 9,981
2001 1,806
2002 7,618
$78,337
8. BORROWINGS
The Bank has a line of credit commitment from the Federal
Home Loan Bank (FHLB) for borrowings up to $6,000,000, which
expires March 25, 1998. No amounts were outstanding under
this line at December 31, 1997 and 1996.
Short-term borrowings at December 31, 1997 consisted of
borrowings from the FHLB under a line of credit arrangement
and a repurchase agreement, both of which mature in 1998
with variable interest rates which were 6.21% and 5.63%
respectively. The borrowings are collateralized by certain
qualifying assets of the Bank.
Short-term borrowings at December 31, 1996 consisted of
borrowings from the FHLB under a line of credit arrangement
which matured in 1997, bearing interest at 5.43%. The
borrowings were collateralized by certain qualifying assets
of the Bank.
9. EMPLOYEE BENEFITS
The Bank has a noncontributory defined benefit pension plan
covering all employees who meet the eligibility
requirements. To be eligible, an employee must have
completed 1,000 hours of service in their first 12 months of
employment or in any like period thereafter. The Plan
provides benefits based on years of service and the
employee's highest five-year average of compensation.
Benefits are subject to certain reductions if the employee
retires before reaching age 65. The Bank's funding policy
is to make the minimum annual contribution that is required
by applicable regulations, plus such amounts as the Bank may
determine to be appropriate from time to time.
Net pension cost for this plan consisted of the following
components:
Years Ended December 31,
1997 1996 1995
(In Thousands)
Service cost (benefits earned) $ 101 $ 96 $ 101
Interest cost on projected benefit
obligation 100 112 113
Actual return on plan assets (270) (151) (212)
Net amortization and deferral 127 15 104
$ 58 $ 72 $ 106
The following table sets forth the Plan's funded status and
amounts recognized in the accompanying consolidated balance
sheets:
December 31,
1997 1996
(In Thousands)
Actuarial present value of benefit
obligations:
Vested benefits $(1,139) $(1,012)
Accumulated benefits $(1,175) $(1,034)
Projected benefits $(1,704) $(1,440)
Plan assets at fair value, principally
mutual funds 1,711 1,512
Plan assets in excess of projected
benefit obligation 7 72
Unrecognized prior service cost 26 28
Unrecognized net loss 234 159
Unrecognized net transition asset (200) (223)
Prepaid pension cost $ 67 $ 36
Assumptions used by the Bank in the determination of pension
plan information consisted of the following:
December 31,
1997 1996 1995
Discount rate 6.50% 7.00% 7.00%
Rate of increase in compensation
levels 4.00% 4.50% 4.50%
Expected long-term rate of return
on plan assets 8.00% 8.00% 8.00%
The Bank has a 401(k) plan which covers employees who meet
the eligibility requirements of having worked 1,000 hours in
a plan year and have attained the age of 21. Participants
are permitted to contribute from 1% - 10% of compensation.
The Bank matches 50% of the participant's contributions up
to a maximum match of 3-1/2%. The expense related to this
plan was $45,000, $43,000 and $43,000 for the years ended
December 31, 1997, 1996 and 1995 respectively.
The Bank has entered into deferred compensation agreements
with certain directors and a salary continuation plan for
certain key employees. At December 31, 1997 and 1996, the
present value of the future liability was $258,000 and
$153,000 respectively. To fund the benefits under these
agreements, the Bank is the owner and beneficiary of life
insurance policies on the lives of the directors and
employees. These policies had an aggregate cash surrender
value of $2,080,000 and $1,859,000 at December 31, 1997 and
1996 respectively. For the years ended December 31, 1997,
1996 and 1995, $102,000, $65,000 and $2,300 respectively was
charged to expense in connection with these agreements.
10. INCOME TAXES
The components of income tax expense are as follows:
Years Ended December 31,
1997 1996 1995
(In Thousands)
Current $440 $460 $375
Deferred (53) 53 42
$387 $513 $417
The income tax provision includes $(12,000) in 1995 of
income taxes (benefit) related to losses on the sale of
securities of $34,000.
Reconciliation of the statutory income tax expense computed
at 34% to the income tax expense included in the
consolidated statements of income is as follows:
Years Ended December 31,
1997 1996 1995
(In Thousands)
Federal income tax at statutory
rate $ 624 $ 755 $ 636
Tax exempt interest (229) (246) (257)
Interest disallowance 30 29 30
Other (38) (25) 8
$ 387 $ 513 $ 417
Net deferred tax assets consisted of the following
components as of December 31, 1997 and 1996:
1997 1996
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 366 $ 237
Deferred compensation 64 28
Deferred loan fees 42 85
Total deferred tax assets 472 350
Deferred tax liabilities:
Prepaid pension (23) (12)
Bank premises and equipment (78) (66)
Securities - (3)
Mortgage servicing rights (49) -
Net unrealized appreciation on securities
available for sale (224) (114)
Total deferred tax liabilities (374) (195)
Net deferred tax assets $ 98 $ 155
11. TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
The Bank has had banking transactions in the ordinary course
of business with its executive officers and directors and
their related interests on the same terms, including
interest rates and collateral, as those prevailing at the
time for comparable transactions with others. At
December 31, 1997 and 1996, these persons were indebted to
the Bank for loans totaling $3,418,000 and $3,106,000
respectively. During 1997, $1,898,000 of new loans were
made and repayments totaled $1,586,000.
12. REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
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 possibly 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 below) of total and Tier I
capital (as defined in the regulations) to risk-weighted
assets, and of Tier I capital to average assets. Management
believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from
the Office of the Comptroller of the Currency categorized
the Bank as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or
events since that notification that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios are also
presented below. The Company's capital amounts and ratios
were not materially different from those of the Bank.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollar Amounts In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk
weighted assets) $18,893 15.94% $>9,483 >8.00% $>11,853 >10.00%
Tier I capital (to
risk weighted assets) 17,411 14.69 >4,741 >4.00 >7,112 >6.00
Tier I capital (to
average assets) 17,411 9.72 >7,165 >4.00 >8,956 >5.00
As of December 31, 1996:
Total capital (to risk
weighted assets) $17,881 17.59% $>8,133 >8.00% $>10,166 >10.00%
Tier I capital (to
risk weighted
assets) 16,776 16.50 >4,066 >4.00 >6,100 >6.00
Tier I capital (to
average assets) 16,776 10.35 >6,483 >4.00 >8,104 >5.00
</TABLE>
The approval of the Comptroller of the Currency is required
if the total of all dividends declared by a national bank in
any calendar year exceeds the Bank's net profits (as
defined) for that year combined with its retained net
profits for the preceding two calendar years. Under this
formula, the Bank can declare dividends in 1998 without
approval of the Comptroller of the Currency of approximately
$1,775,000 plus an additional amount equal to the Bank's net
profit for 1998, up to the date of any such dividend
declaration. As of December 31, 1997, the Company has
declared a $.13 per share cash dividend for stockholders of
record on January 2, 1998, payable January 15, 1998.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank 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, letters of
credit and commitments to sell loans. Those instruments
involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and letters of
credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does
for on-balance sheet instruments.
A summary of the contractual amount of the Bank's financial
instrument commitments is as follows:
December 31,
1997 1996
(In Thousands)
Commitments to extend credit $17,873 $14,799
Outstanding letters of credit 648 441
Commitments to sell loans - -
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Since many of the commitments
are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Commitments generally have fixed expiration
dates or other termination clauses and may require payment
of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal
or commercial real estate, accounts receivable, inventory
and equipment.
Outstanding letters of credit are conditional commitments
issued by the Bank to guarantee the performance of 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.
Commitments to sell loans are to the Federal National
Mortgage Association. These commitments are generally met
through mortgage originations in the normal course of
business.
14. CONCENTRATIONS OF CREDIT RISK
The Bank grants commercial, residential and consumer loans
to customers primarily located in Berks County,
Pennsylvania. The concentrations of credit by type of loan
are set forth in Note 4. Although the Bank has a
diversified loan portfolio, its debtors' ability to honor
these contracts is influenced by the region's economy.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair
value of the Company's financial instruments; however, there
are inherent weaknesses in any estimation technique.
Therefore, for substantially all financial instruments, the
fair value estimates herein are not necessarily indicative
of the amounts the Company could have realized in a sales
transaction on the dates indicated. The estimated fair
value amounts have been measured as of their respective year
ends and have not been re-evaluated or updated for purposes
of these consolidated financial statements subsequent to
those respective dates. As such, the estimated fair values
of these financial instruments subsequent to the respective
reporting dates may be different than the amounts reported
at each year end.
The following information should not be interpreted as an
estimate of the fair value of the entire Company since a
fair value calculation is only provided for a limited
portion of the Company's assets. Due to a wide range of
valuation techniques and the degree of subjectivity used in
making the estimates, comparisons between the Company's
disclosures and those of other companies may not be
meaningful. The following methods and assumptions were used
to estimate the fair values of the Company's financial
instruments at December 31, 1997 and 1996:
Cash and cash equivalents and federal funds sold:
The carrying amounts reported in the balance sheet for cash
and short-term instruments approximate those assets' fair
values.
Securities:
Fair values for 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 receivable:
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. The fair values for other loans (e.g.,
consumer loans and fixed rate mortgage loans) are estimated
using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to
borrowers of similar credit quality.
Deposit liabilities:
The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings and
certain types of money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate
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
expected monthly maturities on time deposits.
Short-term borrowings and federal funds purchased:
The carrying amounts of short-term borrowings and federal
funds purchased approximate their fair values.
Accrued interest receivable and payable:
The carrying amount of accrued interest receivable and
accrued interest payable approximates its fair value.
Off-balance sheet instruments:
Fair values for the Bank's off-balance sheet instruments are
based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 5,556 $ 5,556 $ 5,199 $ 5,199
Federal funds sold - - 448 448
Securities 38,346 38,346 39,690 39,690
Loans receivable, net 128,296 129,393 109,773 109,666
Accrued interest receivable 1,292 1,292 1,183 1,183
Financial Liabilities:
Deposits 148,499 149,394 137,537 138,098
Federal funds purchased 3,814 3,814 - -
Short-term borrowings 8,000 8,000 5,700 5,700
Accrued interest payable 892 892 803 803
Off-Balance Sheet Financial
Instruments:
Commitments to extend credit - - - -
Standby letters of credit - - - -
Commitments to sell loans - - - -
</TABLE>
16. FIRST LEESPORT BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Balance Sheets
December 31,
1997 1996
(In Thousands)
ASSETS
Cash $ 155 $ 168
Investment in bank subsidiary 17,877 17,029
Securities available for sale 210 -
Premises and equipment and other assets 71 69
$18,313 $17,266
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, other $ 150 $ 145
Stockholders' equity 18,163 17,121
$18,313 $17,266
Statements of Income
Years Ended December 31,
1997 1996 1995
(In Thousands)
Dividends from bank subsidiary $ 858 $ 632 $ 536
Other income 44 35 38
Other expenses (94) (93) (101)
808 574 473
Equity in undistributed net
income of bank subsidiary 640 1,135 979
Net income $1,448 $1,709 $1,452
Statements of Cash Flows
Years Ended December 31,
1997 1996 1995
(In Thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $1,448 $ 1,709 $1,452
Depreciation 4 4 3
Undistributed earnings of
bank subsidiary (640) (1,135) (979)
Increase in other liabilities 2 - 39
Increase in other assets (5) - -
Net cash provided by
operating activities 809 578 515
CASH FLOWS USED IN INVESTING
ACTIVITIES
Purchase of investment
securities (203) - -
CASH FLOWS USED IN FINANCING
ACTIVITIES
Cash dividends paid (619) (572) (524)
Increase (decrease) in cash (13) 6 (9)
Cash:
Beginning 168 162 171
Ending $ 155 $ 168 $ 162
<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.
The name, age, principal occupation, business experience
during the past five years, and other information with respect to
each director and executive officer of the Company is set forth
on pages 3, 4 and 7 of the Company's Proxy Statement dated
March 9, 1998, prepared in connection with the Company's Annual
Meeting of Stockholders to be held on April 14, 1998 (the "Proxy
Statement"), and such information is incorporated herein by
reference thereto.
Item 10. Executive Compensation.
Information with respect to the compensation of executive
officers and directors of the Company is set forth on pages 6, 8
and 9 of the Proxy Statement and is incorporated herein by
reference thereto.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Information relating to those persons who, to the knowledge
of the Company's management, may be deemed to be the beneficial
owners, either directly or indirectly, of 5% or more of the
shares of the outstanding Common Stock of the Company as of
February 28, 1998, is set forth on page 10 of the Proxy Statement
and is incorporated herein by reference thereto.
Information relating to beneficial ownership of shares of
the Company's Common Stock owned by each director, nominee, and
executive officer and by all directors and executive officers, as
a group, as of February 28, 1998, is set forth on pages 3, 4 and
7 of the Proxy Statement and is incorporated herein by reference
thereto.
Item 12. Certain Relationships and Related Transactions.
Information relating to business relationships and
transactions between the Company and members of management or
their affiliates is set forth on page 10 of the Proxy Statement
and is incorporated herein by reference thereto.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The Exhibits required in response to this item are as
follows:
Exhibit No. Description
3.1 Articles of Incorporation of First Leesport
Bancorp, Inc. (Incorporated herein by reference to
Exhibit 3.1 to Registrant's annual report on
Form 10-K for the year ended December 31, 1989.)
3.2 By-laws of First Leesport Bancorp, Inc.
(Incorporated herein by reference to Exhibit 3.2
to Registrant's annual report on Form 10-K for the
year ended December 31, 1989.)
10.1 Contract between the First National Bank of
Leesport and Bisys (formerly Automatic Data
Processing, Inc.) (Incorporated herein by
reference to Exhibit 10.1 to Registration
Statement on Form 10 of Registrant.)
10.2 The First National Bank of Leesport Pension Plan.
(Incorporated herein by reference to Exhibit 10.2
to Registrant's annual report on Form 10-KSB for
the year ended December 31, 1992.)*
10.3 Severance Agreement between the First National
Bank of Leesport and John T. Connelly
(Incorporated herein by reference to Exhibit 10.3
to Registrant's annual report on Form 10-K for the
year ended December 31, 1990.)*
10.4 Employment Agreement between the First National
Bank of Leesport and John T. Connelly*
10.5 The First National Bank of Leesport 401(k)
Retirement Savings Plan (Incorporated herein by
reference to Exhibit 10.4 to Registrant's annual
report on Form 10-K for the year ended
December 31, 1990.)*
10.6 Lease Agreement for Wernersville branch
(Incorporated herein by reference to Exhibit 10.5
to Registrant's annual report on Form 10-KSB for
the year ended December 31, 1995.).
10.7 Lease Agreement for Wyomissing, Pennsylvania loan
production office (Incorporated herein by
reference to Exhibit 10.6 to Registrant's annual
report on Form 10-KSB for the year ended
December 31, 1995.).
10.8 Supplemental Executive Retirement Plan
(Incorporated herein by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).*
10.9 Deferred Compensation Plan for Directors
(Incorporated herein by reference to Exhibit 10.2
to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).*
11 No statement setting forth the computation of per
share earnings is included because, pursuant to
Instruction (b)(11) to Item 601 of Regulation S-B,
such computation is reflected clearly in the
financial statements set forth in response to
Item 7 of this Report.
21 Subsidiaries of First Leesport Bancorp, Inc.
27.1 Financial Data Schedule (included herein)
_____________________
* Denotes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during
the quarter ended December 31, 1997.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
March 9, 1998 FIRST LEESPORT BANCORP, INC.
By /s/ John T. Connelly
John T. Connelly,
President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/ John T. Connelly President and Chief March 9, 1998
John T. Connelly Executive Officer,
Director
/s/ Frederick P. Henrich Treasurer, Chief March 9, 1998
Frederick P. Henrich Financial Officer,
and Chief Accounting
Officer
/s/ Louis D. Bruno Director March 9, 1998
Louis D. Bruno
/s/ Joseph M. Fabrizio Director March 9, 1998
Joseph M. Fabrizio
/s/ Richard L. Henry Director March 9, 1998
Richard L. Henry
/s/ William Keller Director March 9, 1998
William Keller
/s/ Michael D. Mathias Director March 9, 1998
Michael D. Mathias
/s/ Harry J. O'Neill III Director March 9, 1998
Harry J. O'Neill III
Director March 9, 1998
Karen A. Rightmire
/s/ Alfred J. Weber Director March 9, 1998
Alfred J. Weber
/s/ Daniel W. Weist Director March 9, 1998
Daniel W. Weist
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Incorporation of First Leesport
Bancorp, Inc. (Incorporated herein by reference
to Exhibit 3.1 to Registrant's annual report on
Form 10-K for the year ended December 31, 1989.)
3.2 By-laws of First Leesport Bancorp, Inc.
(Incorporated herein by reference to Exhibit 3.2
to Registrant's annual report on Form 10-K for the
year ended December 31, 1989.)
10.1 Contract between the First National Bank of
Leesport and Bisys (formerly Automatic Data
Processing, Inc.). (Incorporated herein by
reference to Exhibit 10.1 to Registration
Statement on Form 10 of Registrant.)
10.2 The First National Bank of Leesport Pension Plan.
(Incorporated herein by reference to Exhibit 10.2
to Registrant's annual report on Form 10-KSB for
the year ended December 31, 1992.)*
10.3 Severance Agreement between the First National
Bank of Leesport and John T. Connelly
(Incorporated herein by reference to Exhibit 10.3
to Registrant's annual report on Form 10-K for the
year ended December 31, 1990.)*
10.4 Employment Agreement between the First National
Bank of Leesport and John T. Connelly*
10.5 The First National Bank of Leesport 401(k)
Retirement Savings Plan. (Incorporated herein by
reference to Exhibit 10.4 to Registrant's annual
report on Form 10-K for the year ended
December 31, 1990.)*
10.6 Lease Agreement for Wernersville branch.
(Incorporated herein by reference to Exhibit 10.5
to Registrant's annual report on Form 10-KSB for
the year ended December 31, 1995.).
10.7 Lease Agreement for Wyomissing, Pennsylvania loan
production office. (Incorporated herein by
reference to Exhibit 10.6 to Registrant's annual
report on Form 10-KSB for the year ended
December 31, 1995.).
10.8 Supplemental Executive Retirement Plan.
(Incorporated herein by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).*
10.9 Deferred Compensation Plan for Directors.
(Incorporated herein by reference to Exhibit 10.2
to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).*
11 No statement setting forth the computation of per
share earnings is included because, pursuant to
Instruction (b)(11) to Item 601 of Regulation S-B,
such computation is reflected clearly in the
financial statements set forth in response to
Item 7 of this Report.
21 Subsidiaries of First Leesport Bancorp, Inc.
27.1 Financial Data Schedule (included herein)
_____________________
* Denotes a management contract or compensatory plan or
arrangement.
Exhibit 10.4
October 15, 1997
Mr. John T. Connelly
34 Buckingham Drive
Wyomissing Hills, PA 19610
Dear John:
We are providing this letter agreement to you to confirm the
matters we have been discussing regarding your successor as
President and Chief Executive Officer of First Leesport Bancorp,
Inc. ("Bancorp") and The First National Bank of Leesport
("Bank"), and to assure that your services and experience will be
available to Bancorp and the Bank until your normal retirement at
age 65.
Accordingly, the Boards of Directors of Bancorp and Bank, on
the one hand, and you, on the other hand, intending to be legally
bound, hereby agree as follows:
1. Successor. You will assist the Boards of Directors of
Bancorp and Bank in the process of locating, interviewing and
selecting a qualified candidate to succeed you as President and
Chief Executive Officer of Bancorp and of Bank. This process
will begin immediately, although no specific date or timetable
has been established for the completion of this process.
2. Title and Responsibilities. Concurrently with the
election of the individual referenced in the preceding paragraph
as President and Chief Executive Officer, you agree to
concurrently submit your resignation for such offices and the
Boards of Directors of each of Bancorp and Bank shall elect you
"Chairman of the Board of Directors" of each of Bancorp and Bank.
At that time you will assume the responsibilities of such office
as set forth in the Bylaws of Bancorp and Bank and shall perform
such other duties as may be assigned to you from time to time by
the respective Boards of Directors of Bancorp and Bank, which
shall include acting as a liaison between management and the
Boards of Directors of Bancorp and Bank, and maintaining and
improving relationships between Bank and its customers and the
communities in which the offices of Bank are located. You agree
to perform such duties on a full-time basis until your retirement
and not to be involved in any other business activities (except
for investment of personal assets) during such time.
3. Base Salary. Your base salary through the date of your
retirement shall be $116,000 per year for services as Chairman of
the Board of Directors of Bancorp and Bank, unless increased in
the discretion of the Board of Directors, payable in accordance
with the normal payroll practices of Bancorp and Bank.
4. Performance Bonus. Although you will be ineligible to
participate in Bancorp's executive incentive plan, you will be
eligible for consideration to receive a cash bonus annually in
such discretionary amount as may be determined by the Boards of
Directors of Bancorp and Bank.
5. Other Benefits. Until your retirement you will
continue to participate in all of the employee benefit plans and
be entitled to receive other fringe benefits to the same extent
and in the same manner as other executive officers of Bancorp and
Bank.
6. Term/Termination. The term of your employment under
this letter agreement shall expire on July 31, 2000, unless
sooner terminated upon thirty (30) days prior written notice for
"Cause" or "Disability." For purposes of this letter agreement,
"Cause" and "Disability" shall have the same meanings as set
forth in that certain Severance Agreement, dated January 1, 1991,
between Bancorp and you (the "Severance Agreement").
In the event of termination for "Cause," all of your
rights to continued employment and any further obligations of
either Bancorp or Bank under this letter agreement (except for
vested benefits payable under any employee benefit plan or
amounts payable in accordance with the specific terms of any
other agreement) shall cease as of the date of termination. In
the event of termination for "Disability," all of your rights to
continued employment shall cease and any further obligations of
either Bancorp or Bank under this letter agreement (except for
vested benefits payable under any employee benefit plan or
amounts payable in accordance with the specific terms of any
other agreement) shall be determined in accordance with the
disability plans of Bancorp or Bank then in effect.
7. Severance. In the event that the Board of Directors of
Bancorp and Bank conclude that it would be in the best interests
of the institutions to terminate your relationship with Bancorp
and Bank prior to July 31, 2000, in the absence of a Change in
Control, your employment relationship with Bancorp and Bank may
be terminated without cause upon thirty (30) days prior written
notice. If your employment is so terminated, you will be
entitled to continued payments of base salary in effect on the
date of termination through July 31, 2000 as severance payments.
You will also receive a nonqualified benefit actuarially
equivalent to the amount of the benefit lost because of reduced
time of service under any qualified or nonqualified employee
benefit plan in which you participated at the date of termination
as a result of your termination of employment prior to normal
retirement age. Finally, you will be entitled to continued
health insurance coverage or, if you are ineligible to
participate in Bancorp's or Bank's health insurance plan, you
will be provided with the cost to obtain such coverage.
8. Status of Severance Agreement. The Severance Agreement
shall remain in full force and effect on the terms and conditions
stated therein. You agree that your sole and exclusive remedy as
a result of your delivery of a Notice of Termination (as defined
in the Severance Agreement), including as a result of your
involuntary termination of employment following a Change in
Control (as defined in the Severance Agreement), shall be the
payment provided in Section 3 of the Severance Agreement
notwithstanding this agreement or anything contained herein.
_________________________
If you are in agreement with the terms of this letter,
please so indicate by signing the enclosed duplicate copy and
returning it to us.
Very truly yours,
FIRST LEESPORT BANCORP, INC.
By_______________________________
Chair, Executive Committee
THE FIRST NATIONAL BANK OF LEESPORT
By________________________________
Chair, Executive Committee
Accepted and agreed to this
_____ day of October 1997
_________________________
John T. Connelly
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
The First National Bank United States of America
of Leesport (national bank)
HayCorp, Inc. Pennsylvania
