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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 22, 1999
----------------
PATRIOT BANK CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 0-26744 23-2820537
---------------------------- ----------- -------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Ident. No.)
High and Hanover Streets, Pottstown Pennsylvania 19464
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 323-1500
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N/A
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(Former name or former address, if changed since last report.)
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<PAGE>
Item 5. Other Events.
- ---------------------
On January 22, 1999 the consolidation of Patriot Bank Corp. ("Patriot")
with First Lehigh Corporation ("First Lehigh") to form a new Pennsylvania
corporation named Patriot Bank Corp. was completed. In connection with the
transaction First Lehigh Bank was merged with and into Patriot Bank.
The acquisition will be treated as a purchase for financial accounting
purposes.
Item 7. Financial Statements and Exhibits.
- ------------------------------------------
(a) Financial Statements of Businesses Acquired.
(i) Audited Balance Sheets of First Lehigh Corporation as of
December 31, 1998 and 1997.
(ii) Audited Statements of Operations of First Lehigh Corporation for
the two years ended December 31, 1998.
(iii) Audited Statement of Changes in Shareholders' Investment for the
two years ended December 31, 1998.
(iv) Audited Statements of Cash Flow of First Lehigh Corporation for
the two years ended December 31, 1998.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PATRIOT BANK CORP.
Dated: April 7, 1999
By /s/ Richard A. Elko
-----------------------------
Richard A. Elko
Executive Vice President and Chief
Financial Officer
<PAGE>
FIRST LEHIGH CORPORATION
AND SUBSIDIARIES
================
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
TABLE OF CONTENTS
=================
Page
----
INDEPENDENT AUDITORS' REPORT 2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet 3
Statement of Operations 4-5
Statement of Changes in Shareholders' Investment 6
Statement of Cash Flows 7-8
Notes to Financial Statements 9-34
----------
-1-
<PAGE>
INDEPENDENT AUDITORS' REPORT
============================
To the Shareholders and
Board of Directors of
First Lehigh Corporation:
We have audited the accompanying consolidated balance sheets of First
Lehigh Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in shareholders'
investment and cash flows for the years then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Lehigh
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Wilkes-Barre, Pennsylvania
January 21, 1999, except for Notes 1 and 21
as to which the date is January 22, 1999
-2-
<PAGE>
<TABLE>
<CAPTION>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
=========================================
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
(In thousands)
- -------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------
ASSETS
======
<S> <C> <C>
CASH AND DUE FROM BANKS $ 6,518 $ 7,470
FEDERAL FUNDS SOLD 1,350 611
TRADING SECURITIES 7,715 7,571
SECURITIES AVAILABLE-FOR-SALE 33,528 17,908
SECURITIES HELD-TO-MATURITY (Fair value of $1,094
and $3,990) 1,070 4,085
LOANS (Net of $1,160 and $1,586 allowance for loan losses) 50,550 62,820
PREMISES AND EQUIPMENT 4,161 4,365
FORECLOSED ASSETS HELD FOR SALE, Net -- 1,597
OTHER ASSETS 1,542 2,292
-------- --------
TOTAL ASSETS $106,434 $108,719
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
========================================
DEPOSITS:
Noninterest-bearing $ 11,386 $ 11,258
Interest-bearing 83,099 80,888
-------- --------
Total deposits 94,485 92,146
LONG-TERM DEBT 2,062 1,214
OTHER LIABILITIES 571 909
-------- --------
Total liabilities 97,118 94,269
SHAREHOLDERS' INVESTMENT 9,316 14,450
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $106,434 $108,719
======== ========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
-3-
<PAGE>
<TABLE>
<CAPTION>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
=========================================
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except per share data)
- ---------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,215 $ 5,824
Interest and dividends on investment securities:
Taxable interest income 1,577 1,660
Dividends 185 154
Interest on overnight funds 363 168
------- -------
Total interest income 7,340 7,806
======= =======
INTEREST EXPENSE:
Interest on deposits 3,526 3,579
Interest on long-term debt 115 108
Interest on other borrowed funds -- 26
------- -------
Total interest expense 3,641 3,713
======= =======
NET INTEREST INCOME 3,699 4,093
PROVISION FOR LOAN LOSSES 140 1,003
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,559 3,090
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OTHER INCOME:
Service charges, fees and other income 544 492
Gain on sale of foreclosed assets, net 15 49
Rental income 183 191
Realized gains on securities available-for-sale 4 22
Gain on sale of deposits -- 478
Gain on sale of real estate -- 183
Litigation settlement -- 184
------- -------
Total other income, net 746 1,599
======= =======
LOSS (INCOME) ON TRADING SECURITIES:
Realized 512 2,528
Unrealized (1,727) 1,163
======= =======
Total (loss) income, net (1,215) 3,691
======= =======
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
=========================================
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except per share data)
- ---------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
OTHER EXPENSES:
Salaries and employee benefits $ 1,707 $ 1,633
Loss on bulk sale of loans and foreclosed assets 2,822 --
Net occupancy expense 406 442
Equipment expense 199 209
FDIC insurance 39 106
Foreclosed asset expenses 249 1,175
Other 1,546 1,812
------- -------
Total other expenses 6,968 5,377
======= =======
NET (LOSS) INCOME $(3,878) $ 3,003
------- -------
EARNINGS (LOSS) PER SHARE - BASIC $ (2.10) $ 1.28
------- -------
EARNINGS (LOSS) PER SHARE - DILUTED $ (2.10) $ 0.86
------- -------
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
=========================================
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except for share information)
- -----------------------------------------------------------------------------------------------------------------------------------
CONTRIBUTED ACCUMULATED
SENIOR SERIES A CAPITAL IN OTHER TOTAL
PREFERRED PREFERRED EXCESS COMPRE- SHARE-
.....STOCK...... ......STOCK..... ..COMMON STOCK.... OF PAR RETAINED HENSIVE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT VALUE EARNINGS INCOME INVESTMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 900,363 $9 682,000 $7 2,000,000 $20 $9,021 $ 3,227 $(274) $ 12,010
--------
Comprehensive income: 3,003 3,003
Net income
Change in net unrealized gains on
securities available-for-sale,
net of reclassification adjustment 249 249
--------
Comprehensive income 3,252
--------
ISSUANCE OF COMMON STOCK
UNDER STOCK BONUS PLAN 50,000 150 150
DIVIDENDS DECLARED ON
SENIOR PREFERRED AND
SERIES A PREFERRED STOCK (962) (962)
------- -- ------- -- --------- --- ------ ------- ---- --------
BALANCE AT DECEMBER 31, 1997 900,363 9 682,000 7 2,050,000 20 9,171 5,268 (25) 14,450
--------
Comprehensive income:
Net income (3,878) (3,878)
Change in net unrealized gains on
securities available-for-sale,
net of reclassification adjustment 133 133
--------
Comprehensive income (3,745)
--------
DIVIDENDS DECLARED ON
SENIOR PREFERRED AND
SERIES A PREFERRED STOCK (1,389) (1,389)
CONVERSION OF SENIOR
PREFERRED STOCK INTO
COMMON STOCK (6,140) 6,140 --
------- -- ------- -- --------- --- ------ ------- ---- --------
BALANCE AT DECEMBER 31, 1998 894,223 $9 682,000 $7 2,056,140 $20 $9,171 $ 1 $108 $9,316
======= == ======= == ========= === ====== ======= ==== ======
</TABLE>
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See Notes to Consolidated Financial Statements
-6-
<PAGE>
<TABLE>
<CAPTION>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
=========================================
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands)
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(3,878) $3,003
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Realized loss (gains) on securities available-for-sale 4 (22)
Loss (gain) on sale of foreclosed assets, net 23 (49)
Gain on sale of deposits -- 478
Provision for loan losses 140 1,003
Provision for foreclosed assets losses 17 655
Depreciation of premises and equipment 290 182
Amortization 46 14
(Gain) loss on disposal of equipment (12) 27
Loss on bulk sale of loans and foreclosed assets 2,822 --
Net increase in trading securities (144) (1,262)
Losses (gains) on sale of other assets 124 (183)
Change in:
Other assets 254 184
Other liabilities (115) (220)
-------- --------
Net cash (used in) provided by
operating activities (429) 3,810
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (28,439) --
Proceeds from the maturity of securities available-for-sale 15,921 2,325
Proceeds from bulk sale of loans and foreclosed assets 6,716 --
Net decrease (increase) in loans 3,023 (1,526)
Proceeds from sales of foreclosed assets 1,120 3,287
Proceeds from surrender of life insurance policies 285 --
Proceeds from sales of other assets 150 484
Proceeds from sales of premises and equipment 37 --
Capital expenditures for premises and equipment (111) (450)
Capital expenditures for foreclosed assets (61) (101)
Proceeds from the sale of securities available-for-sale -- 1,952
-------- --------
Net cash (used in) provided by
investing activities (1,359) 5,971
-------- --------
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
=========================================
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)
- ---------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $2,339 $2,549
Proceeds from long-term debt 1,016 --
Dividend payments (1,612) (740)
Payments on long-term debt (168) (109)
Sale of deposit accounts -- (6,820)
Net decrease in other borrowed funds -- (1,200)
------ ------
Net cash provided by (used in)
financing activities 1,575 (6,320)
------ ------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (213) 3,461
CASH AND CASH EQUIVALENTS, BEGINNING 8,081 4,620
------ ------
CASH AND CASH EQUIVALENTS, ENDING $7,868 $8,081
------ ------
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $3,643 $3,712
------ ------
Cash paid for income taxes $ 22 $ 47
====== ======
</TABLE>
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See Notes to Consolidated Financial Statements
-8-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
=========================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. ADMINISTRATIVE ORDER AND OTHER REGULATORY AGREEMENTS
First Lehigh Corporation (the "Company") and First Lehigh Bank (the "Bank")
were subject to and consented to the following regulatory orders and
agreements: (i) effective February 28, 1996, the Company and the Bank
entered into an Administrative Order (the "Pennsylvania Order") with the
Pennsylvania Department of Banking (the "Department"), which replaced an
earlier order entered into in 1993; (ii) on April 29, 1996, the Bank entered
into a Memorandum of Understanding (the "Memorandum of Understanding") with
the Federal Deposit Insurance Corporation ("FDIC"), which has replaced two
cease and desist orders dating from October 1987 and June 1992; and (iii) in
January 1991, the Company consented to a written agreement (the "Federal
Reserve Agreement") with the Federal Reserve Bank and the Department. Under
the terms of the regulatory orders and agreements, the Company and Bank were
subject to additional performance objectives, restrictions on dividend
payments, and certain operational restrictions and requirements.
All of the above orders were rescinded as of January 22, 1999 upon
completion of the merger with Patriot Bank (see Note 21).
2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
--------------------
First Lehigh Corporation and its subsidiaries, Pond Associates (a
partnership) and First Lehigh Bank, and First Lehigh Bank's subsidiaries
(Allentown Properties, Inc., Quakertown Properties, Inc., Walnutport
Properties, Inc., Walnutport Properties II, Inc., Winchester Property
Management Corporation and Pond Road Properties, Inc.) (collectively the
"Corporation") provide commercial banking services.
The First Lehigh Corporation's primary regulator is the Federal Reserve
Bank of Philadelphia while the primary regulator of its subsidiary, First
Lehigh Bank is the Pennsylvania Department of Banking. First Lehigh Bank
is also regulated and insured by the Federal Deposit Insurance
Corporation.
-9-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Lehigh Bank is a commercial bank which provides a variety of
financial services to individuals and small business customers through its
five branch offices in Walnutport, Cherryville, Bethlehem and Allentown,
Pennsylvania. Its primary deposit products are passbook and statement
savings accounts, certificates of deposit, NOW accounts, money market
accounts, checking accounts and club accounts. Its primary lending
products are secured small business loans and lines of credit, residential
loans, installment loans and secured consumer loans.
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the First
Lehigh Corporation and its direct and indirect subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Estimates that are particularly susceptible to significant change relate
to the determination of the allowances for loan losses and the valuation
of assets acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of allowances for loan losses
and for writedowns of foreclosed assets, management obtains independent
appraisals for significant properties.
A majority of the Corporation's loan portfolio consist of commercial and
residential real estate loans to borrowers within the Lehigh Valley, which
constitutes the primary marketing area of the institution.
While management uses available information to recognize losses on loans
and foreclosed assets, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the allowances for loan losses and for writedowns of foreclosed
assets. Such agencies may require the Corporation to recognize additions
to the allowances based on their judgments about information available to
them at the time of their examination. Because of these factors, it is
reasonably possible that the allowances for loan losses and for writedowns
of foreclosed assets may change materially in the near term.
-10-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
INVESTMENT SECURITIES
---------------------
Securities held-to-maturity are debt securities for which the Bank has the
positive intent and ability to hold to maturity and are reported at
amortized cost.
Trading securities are marketable equity securities held principally for
resale in the near term and recorded at their fair values. Unrealized
appreciation and depreciation on trading securities are included
immediately in income.
Securities available-for-sale consist of securities not classified as
trading securities or securities held-to-maturity. Unrealized appreciation
and depreciation, net of tax, on securities available-for-sale are
reported as a net amount in a separate component of shareholders'
investment until realized.
Gains and losses on the sale of securities are determined using the
specific identification method.
Declines in the fair value of individual securities held-to-maturity and
available-for-sale below their cost that are other than temporary result
in write-downs of the individual securities to their fair value. Any
related write-downs are included in earnings as realized losses.
Premiums and discounts are amortized over the period to maturity using an
interest method.
LOANS
-----
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due generally, when the loan is ninety days past due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are
received. Impaired loans are charged off when collection is considered
remote.
-11-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
LOAN FEES
---------
Fees collected upon loan origination and certain direct costs of
originating loans are deferred and recognized as adjustments to income
over the contractual lives of the related loans as yield adjustments. Upon
prepayment or other dispositions of the underlying loans before their
contractual maturities, any associated unamortized fees or costs are
recognized. Prior to 1988, such fees and costs were included in income
when collected or paid.
ALLOWANCE FOR LOAN LOSSES
-------------------------
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and
other relevant factors.
PREMISES AND EQUIPMENT
----------------------
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is
computed generally using the straight-line method.
FORECLOSED ASSETS HELD FOR SALE
-------------------------------
Foreclosed assets held for sale are carried at the lower of fair value
minus costs to sell or cost. The provision for foreclosed asset losses and
the costs of holding and maintaining the property are included in the
statement of operations caption "Foreclosed asset expenses."
INCOME TAXES
------------
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
-12-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
COMPREHENSIVE INCOME
--------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of January 1, 1998.
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income,
are components of comprehensive income. The adoption of SFAS No. 130 had
no effect on the Company's net (loss) income or shareholders' investment.
The components of other comprehensive income are as follows for the years
ended December 31, 1998 and 1997:
1998 1997
---- ----
(In thousands)
Unrealized holding gains (losses) on available-for-sale $133 $249
securities ==== ====
STATEMENT OF CASH FLOWS
-----------------------
The Corporation considers all cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and federal funds
sold to be cash equivalents for purposes of the statement of cash flows.
The Corporation transferred approximately $936,000 and $539,000 from loans
to foreclosed assets held for sale during the years ended December 31,
1998 and 1997, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair
value information about financial instruments, whether or not recognized
in the statement of financial condition. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be utilized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Corporation.
-13-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Investment securities: Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and
commercial and industrial loans) are estimated using discounted cash
flow analysis, based on interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Loan
fair value estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits.
The carrying amount of accrued interest payable approximates fair
value.
Other borrowed funds and long-term debt: The carrying amounts of other
borrowed funds and long-term debt approximate their fair values.
Other liabilities: Commitments to extend credit were evaluated and fair
value was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparts. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
DERIVATIVE FINANCIAL STATEMENTS
-------------------------------
The Company has no derivative financial instruments requiring
disclosure under SFAS No. 119.
-14-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
3. CASH AND DUE FROM BANKS
Deposits with one financial institution are insured up to $100,000. The Bank
maintains cash balances with certain other financial institutions in excess
of the insured amount.
4. INVESTMENT SECURITIES
Trading securities are comprised of marketable equity securities with a cost
basis of $6,780,000 and $4,908,000 at December 31, 1998 and 1997,
respectively. Unrealized net holding (losses) gains on trading securities of
$(1,727,000) and $1,163,000 were included in earnings in 1998 and 1997,
respectively.
The amortized cost of other securities and their fair value at December 31,
1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
..................1998.................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-
FOR-SALE
Obligations of the U.S.
Treasury and other U.S.
government agencies
and corporations $30,932 $ 148 $ (90) $30,990
Other, primarily corporate
debt securities 2,438 61 (11) 2,488
Equity securities 50 -- -- 50
------- ------- ------- -------
Total securities
available-for-sale $33,420 $ 209 $ (101) $33,528
======= ======= ======= =======
SECURITIES HELD-TO-
MATURITY
Obligations of the U.S.
Treasury and other U.S.
government agencies
and corporations $ 1,020 $ 24 $ -- $ 1,044
Foreign securities 50 -- -- 50
------- ------- ------- -------
Total securities
held-to-maturity $ 1,070 $ 24 $ -- $ 1,094
======= ======= ======= =======
</TABLE>
-15-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
..................1997.................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-
FOR-SALE
Obligations of the U.S.
Treasury and other U.S.
government agencies
and corporations $15,109 $ 84 $ (92) $15,101
Other, primarily corporate
debt securities 2,774 19 (36) 2,757
Equity securities 50 -- -- 50
------- ------- ------- -------
Total securities
available-for-sale $17,933 $ 103 $ (128) $17,908
======= ======= ======= =======
SECURITIES HELD-TO-
MATURITY
Obligations of the U.S.
Treasury and other U.S.
government agencies
and corporations $ 4,035 $ -- $ (95) $ 3,940
Foreign securities 50 -- -- 50
------- ------- ------- -------
Total securities
held-to-maturity $ 4,085 $ -- $ (95) $ 3,990
======= ======= ======= =======
</TABLE>
-16-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The amortized cost and fair value of debt securities held-to-maturity and
securities available-for-sale at December 31, 1998 by contractual maturity,
are shown below (in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Due within one year $ 150 $ 150 $ -- $ --
Due after one year
through five years 3,161 3,256 1,070 1,094
Due after five years
through ten years 13,629 13,669 -- --
Due after ten years 500 500 -- --
------- ------- ------- -------
Total debt securities 17,440 17,575 1,070 1,094
Mortgage-backed securities 15,930 15,903 -- --
------- ------- ------- -------
Total $33,370 $33,478 $ 1,070 $ 1,094
======= ======= ======= =======
</TABLE>
The proceeds, gross gains and gross losses from the sale of
available-for-sale securities during the year ended December 31, 1998 and
1997 were as follows (in thousands):
1998 1997
---- ----
Proceeds $4 $1,952
Gross gains 4 31
Gross losses -- 9
Investment securities with a carrying value of approximately $6,607,000 and
$10,457,000 at December 31, 1998 and 1997, respectively were pledged to
secure certain deposits, repurchase agreements and for other purposes as
required by law.
At December 31, 1998, there is no concentration of investments that exceed
10% of shareholders' equity for any individual issuer excluding those
guaranteed by the U.S. government.
In management's opinion, no permanent impairment of the value of any
held-to-maturity or available-for-sale securities has occurred at
December 31, 1998.
-17-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
5. LOANS
The components of loans in the consolidated balance sheet were as follows at
December 31, 1998 and 1997, (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Commercial $2,865 $3,416
Real estate construction 2,584 4,620
Commercial real estate 12,984 18,485
Residential real estate 24,892 24,381
Consumer 4,805 6,467
Automobile loans 3,688 7,267
------- -------
Subtotal 51,818 64,636
Unearned income 108 230
Allowance for loan losses 1,160 1,586
------- -------
Net loans $50,550 $62,820
======= =======
</TABLE>
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Balance at January 1 $1,586 $1,624
------ ------
Loans charged off (1,119) (1,172)
Recoveries 553 131
------ ------
Net charge offs (566) (1,041)
------ ------
Provision for loan losses 140 1,003
------ ------
Balance at December 31 $1,160 $1,586
====== ======
</TABLE>
As discussed in Note 11, in October 1998, the Company liquidated all of its
impaired loans. At December 31, 1997, the outstanding balance of impaired
loans recognized in conformity with FASB Statement No. 114 as amended by
FASB Statement No. 118 was $3,364,000. The average recorded investment in
impaired loans during 1998 and 1997 was $2,337,000 and $1,969,000,
respectively. At December 31, 1997, the allowance for loan losses related to
the impaired loans was $655,000, while at December 31, 1998, there was no
allowance allocated since there were no impaired loans outstanding. Payments
received on impaired loans and applied to principal, net of the 1998
liquidating sale, were $550,000 and $314,000 in 1998 and 1997, respectively.
The Bank is not committed to lend additional funds to debtors whose loans
are impaired.
-18-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Smaller balance homogeneous loans excluded from the impaired loan
classification include residential real estate and consumer loans.
The Corporation makes loans to its officers and directors and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The following table summarizes loan activity
with officers, directors and their associates during the years ended
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Balance, beginning $2,190 $2,395
Advances 88 40
Payments and other reductions (341) (245)
------ ------
Balance, ending $1,937 $2,190
====== ======
</TABLE>
6. FORECLOSED ASSETS HELD FOR SALE
The following table summarizes the activity in foreclosed assets held for
sale during the years ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Balance, beginning $1,897 $5,200
Transfers from loans 936 539
Additional capitalized costs 55 97
Disposals (2,571) (3,234)
Charge-offs (317) (705)
------ ------
Total -- 1,897
Less allowance for write-downs of foreclosed assets -- 300
------ ------
Balance, ending $ -- $1,597
====== ======
</TABLE>
-19-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following table summarizes the activity in the allowance for write-downs
of foreclosed assets during the years ended December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Balance, beginning $300 $350
Provision for foreclosed asset losses 17 655
Charge-offs (317) (705)
---- ----
Balance, ending $ -- $300
==== ====
</TABLE>
7. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Land and improvements $ 893 $ 893
Buildings and leasehold improvements 3,722 4,323
Equipment and fixtures 1,687 2,018
------ ------
Total 6,302 7,234
Less accumulated depreciation and amortization 2,141 2,869
------ ------
Total $4,161 $4,365
====== ======
</TABLE>
-20-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
8. TIME DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $7,328,000 and $7,293,000 at December 31, 1998 and
1997, respectively. Interest related to time certificates of deposit in
denominations of $100,000 or more was approximately $417,000 and $399,000
for the years ended December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit
under $100,000 are as follows:
1999 $38,287
2000 6,575
2001 2,235
2002 and thereafter 1,495
-------
$48,592
=======
9. LONG-TERM DEBT
The Corporation has a secured promissory note with principal payments of
$9,100, plus interest, due monthly, maturing in 1999. Interest is calculated
by using the lender's commercial rate plus .6%. At December 31, 1998,
$54,000 was outstanding on this debt. The note is secured by less than 10%
of the shares of Bank stock owned by the Corporation.
The Corporation has a mortgage payable with Firstrust Bank of $2,008,000 at
December 31, 1998. The mortgage is due in monthly payments, including
interest at 8.25%, of $22,026 through February 2001 with the outstanding
balance due in a balloon payment of approximately $1,780,000. The mortgage
is secured by real estate with a carrying value of approximately $2,923,000.
Maturities of long-term debt at December 31, 1998 are as follows:
YEARS ENDING DECEMBER 31
------------------------
1999 $ 164,000
2000 110,000
2001 $1,788,000
----------
$2,062,000
==========
-21-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
10. SHAREHOLDERS' INVESTMENT
Shareholders' investment at December 31, 1998 and 1997 consists of the
following (in thousands, except share information):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Senior preferred stock, par value $.01 per share, 1,500,000
shares authorized, 894,223 and 900,363 shares issued and $9 $9
outstanding in 1998 and 1997, respective
Series A preferred stock, par value $.01 per share, 1,000,000
shares authorized; 682,000 shares issued and 7 7
outstanding (liquidation preference of $2,114)
Common stock, par value $.01 per share, 10,000,000 shares
authorized; 2,056,140 and 2,050,000 shares issued and
outstanding in 1998 and 1997, respectively 20 20
Contributed capital in excess of par value 9,171 9,171
Retained earnings, including partner's equity from partnership
included in consolidation 1 5,268
Net unrealized appreciation (depreciation) on securities
available-for-sale 108 (25)
------ -------
Total shareholders' investment $9,316 $14,450
====== =======
</TABLE>
Each share of the Corporation's senior preferred stock is convertible, at
the option of the shareholder, to common stock at the rate of one share of
common stock for each share of senior preferred stock. Conversion rates are
adjusted for common stock dividends and splits. The senior preferred stock
dividend is at an annual rate of $.25 per share. The liquidation price of
the senior preferred stock is $5.00 plus any accrued dividends. Dividends of
$280,025 and $406,359 were paid to senior preferred stockholders in 1998 and
1997, respectively. The 1997 amounts include $237,542 of dividends in
arrears.
-22-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Each share of the Series A preferred stock with a par value of $.01 is
convertible at the option of the holder to common stock at the rate of .8 of
a share of common stock for each share of Series A preferred stock until
March 31, 1999. Conversion rates are adjusted for common stock dividends and
splits. The Series A preferred stock dividend is at an annual rate of $.3255
per share. Dividends of $1,331,946 and $332,986 were paid to the Series A
preferred stockholders in 1998 and 1997, respectively. The amounts paid
included $1,054,457 and $221,990 of dividends in arrears at 1998 and 1997,
respectively. At December 31, 1998, all dividends in arrears were paid to
the stockholders.
11. BULK SALE OF LOANS AND FORECLOSED ASSETS
In October 1998, the Company sold the majority of its foreclosed assets,
impaired loans and certain other loans and assets. The following assets were
included in the bulk sale:
<TABLE>
<CAPTION>
<S> <C>
Performing loans $4,527,000
Impaired loans 2,580,000
Foreclosed assets 1,434,000
Loans - 90 days and over 857,000
Other assets 141,000
----------
$9,539,000
==========
</TABLE>
The Company received cash of approximately $6.716 million for the above
assets, resulting in a loss on the sale of $2.822 million.
-23-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
12. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and
the effects of income and the weighted average number of shares of dilutive
potential common stock for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
---------- ----------- ------
<S> <C> <C> <C>
1998
----
Net loss $(3,877,751)
Less preferred stock dividends:
Series A (221,991)
Senior (223,752)
----------
Basic EPS
---------
Net income available to common
shareholders (4,323,494) 2,054,469 $(2.10)
======
Dilutive effect of potential common stock
-----------------------------------------
Stock options:
Exercise of options outstanding 60,000
Hypothetical share repurchase
at $6.46 (32,493)
Preferred stock:
Common shares issued upon
assumed conversion:
Series A 545,600
Senior 895,894
Preferred dividend that would not
apply upon conversion 445,743
----------- ---------
Diluted EPS $(3,877,751) 3,523,470 $(1.10)
----------- =========== ========= ======
</TABLE>
The Basic EPS value of ($2.10) is used for diluted EPS since inclusion of
the potential common stock equivalents is antidilutive.
-24-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
---------- ----------- ------
<S> <C> <C> <C>
1997
----
Net income $3,002,876
Less preferred stock dividends:
Series A (221,991)
Senior (225,091)
----------
Basic EPS
---------
Net income available to common
shareholders 2,555,794 2,002,877 $1.28
=====
Dilutive effect of potential common stock
-----------------------------------------
Stock options:
Exercise of options
outstanding 60,000
Hypothetical share repurchase
at $7.75 (27,097)
Preferred stock:
Common shares issued upon
assumed conversion:
Series A 545,600
Senior 900,363
Preferred dividend that would not
apply upon conversion 447,082
---------- ---------
Diluted EPS $3,002,876 3,481,743 $.86
----------- ========== ========= ====
</TABLE>
-25-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
13. NONCASH INVESTING AND FINANCING ACTIVITIES
CONSOLIDATION OF PARTNERSHIP INTEREST
-------------------------------------
In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which the Company was a limited partner,
which owned the building which houses a branch and administrative offices
of the Bank. As part of this litigation settlement, the Company received
$184,000 representing a $47,000 general partnership interest and a cash
settlement of $137,000. The entire $184,000 has been included in other
income in 1997. After receipt of this settlement, the Company's ownership
interest as a general partner exceeded 50%, and therefore, the Company has
been required under generally accepted accounting principles to include in
its 1997 financial statements all of the accounts of this previously
unconsolidated subsidiaries. The pro forma balances of this partnership
after elimination of intercompany balances are as follows:
<TABLE>
<CAPTION>
ASSETS
-----------
<S> <C>
Premises and equipment $ 1,051,000
Other assets 252,000
-----------
Total assets $ 1,303,000
===========
LIABILITIES AND EQUITY
-----------------------
Mortgage payable $ 1,051,000
Other liabilities 7,000
Minority interest 191,000
-----------
Total liabilities 1,249,000
Equity 54,000
-----------
Total liabilities and equity $ 1,303,000
===========
INCOME STATEMENT
----------------
Noninterest income $ 188,000
Mortgage interest (88,000)
Occupancy expenses (141,000)
-----------
Net loss $ (41,000)
===========
</TABLE>
DIVIDEND PAYMENTS
-----------------
At December 31, 1997, the Company has accrued $222,000 of dividends
payable to its stockholders in the first quarter of 1998.
ISSUANCE OF COMMON STOCK
------------------------
The Company, under the terms of its nonqualified stock bonus plan, issued
50,000 shares of its common stock in 1997 at the option price of $150,000.
-26-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
14. INCOME TAXES
The reasons for the difference between the provision for income taxes and
the amount computed by applying the statutory federal income tax rate of 34%
to income before provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Expected provision $(1,356) $1,021
Effect of tax-exempt income (9) (9)
Effect of dividends received deduction (44) (37)
Other 2 3
Net operating loss carryforward 1,407 (978)
------- ------
Provision (credit) for income taxes $ -- $ --
======= ======
</TABLE>
At December 31, 1998, the Corporation has a net operating loss carryforward
of approximately $5,251,000 available to offset future taxable income, which
begins to expire in 2007 if not utilized.
The deferred income tax asset and liability components are as follows at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 1,785 $ 543
Write-down of foreclosed assets held for sale -- 492
Accrued expenses -- 17
Net unrealized losses on securities available-for-sale -- 8
------- -------
Total 1,785 1,060
------- -------
Deferred tax liabilities:
Trading securities gains (318) (905)
Net unrealized gains on securities available-for-sale (37) --
Depreciation (18) (86)
Deferred loan costs, net (17) (11)
Loan losses (8) (52)
Accretion (7) (6)
------- -------
Total (405) (1,060)
------- -------
Valuation allowance (1,380) --
------- -------
Net deferred tax asset $ -- $ --
======= =======
</TABLE>
-27-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. REGULATORY MATTERS AND RESTRICTIONS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators, that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is
subject.
To be categorized as well capitalized, a bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. The Bank's actual capital amounts and ratios are also presented
in the table. The Company's consolidated capital ratios are not
significantly different from those of the Bank. No amounts were deducted
from capital for interest-rate risk in either 1998 or 1997.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE ACTION
(Dollars in thousands) .......ACTUAL..... ....PURPOSES..... ....PROVISIONS....
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk
weighted assets) $ 9,409 15.39% $4,892 8.00% $6,115 10.00%
Tier I capital (to
risk weighted assets) $ 8,640 14.13% $2,446 4.00% $3,669 6.00%
Tier I capital (to
average assets) * $ 8,640 8.21% $4,209 4.00% $5,261 5.00%
As of December 31, 1997:
Total capital (to risk
weighted assets) $14,714 19.28% $6,104 8.00% $7,631 10.00%
Tier I capital (to
risk weighted assets) $13,752 18.02% $3,052 4.00% $4,578 6.00%
Tier I capital (to
average assets) * $13,752 12.58% $4,372 4.00% $5,464 5.00%
</TABLE>
* The Department requires a minimum of 6.5% under the terms of the Pennsylvania
Order.
-28-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Certain restrictions exist regarding the ability of the Bank to transfer
funds to First Lehigh Corporation in the form of cash dividends, loans and
advances. As of December 31, 1998, no retained earnings of the Bank
(included in consolidated retained earnings) were available for distribution
to First Lehigh Corporation as dividends, without prior regulatory approval.
In addition, First Lehigh Corporation is unable to pay dividends at December
31, 1998, without the prior approval of the Federal Reserve Bank.
Additionally, the Bank is limited to the amount it may loan or advance to
its affiliates unless such loans or advances are collateralized by specified
obligations. At December 31, 1998, the maximum amount available for
unsecured loans from the Bank to First Lehigh Corporation approximates
$1,400,000.
16. PROFIT-SHARING PLAN
The Corporation has a noncontributory profit-sharing plan covering eligible
employees. Costs of the profit-sharing plan are funded as accrued.
Contributions to the plan are discretionary and are determined annually by
the Bank's board of directors. Profit sharing expense of $25,000 was
recorded for both 1998 and 1997.
17. STOCK OPTIONS
1997 NONQUALIFIED STOCK OPTION PLAN
On November 12, 1997, the Corporation instituted a nonqualified stock
option plan for the purpose of securing and retaining key employees. Under
this plan, 75,000 shares of common stock have been reserved for future
issuance. The option period may vary by agreement, but in no case shall be
exercisable after ten years from the date of grant. On December 11, 1997,
the Corporation issued options to purchase 50,000 shares of the
Corporation's common stock at an option price of $3.00 per share. The
options were all exercised prior to December 31, 1997.
1989 EQUITY INCENTIVE
In 1989, the Corporation formed the "First Lehigh Corporation 1989 Equity
Incentive Plan" for which stock options may be granted to employees for
the purchase of up to 84,000 shares of the Corporation's common stock. On
December 7, 1995, 60,000 options were issued at $3.50 per share. These
options expire December 2005.
-29-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Corporation applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. The
compensation expense attributable to the participants of the 1997
Nonqualified Stock Option Plan was $100,000. If the Company utilized SFAS
No. 123 based on the fair value at the grant date for awards, there would
have been no effect on income or earnings per share.
For purposes of the SFAS No. 123 calculations, the fair value of each option
grant is estimated using the Black-Scholes option - pricing model with the
following weighted-average assumptions for grants issued in 1997:
Dividend yield .00%
Expected volatility .00%
Risk-free interest rate 5.55%
Expected life None
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve to varying degrees
elements of credit, interest rate or liquidity risk in excess of the amount
recognized in the consolidated balance sheet.
The Corporation's exposure to credit loss from nonperformance by the other
party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Corporation generally does not require collateral or other security to
support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as
follows at December 31, 1998:
Commitments to extend credit $3,544
Standby letters of credit $ 831
-30-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Corporation evaluates each customer's credit-worthiness on
a case-by-case basis. The amount of collateral obtained if deemed necessary
by the Corporation on extension of credit is based on management's credit
assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the
Corporation guaranteeing performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1998 and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
........1998....... ........1997.......
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $7,868 $7,868 $8,081 $8,081
Trading account securities 7,715 7,715 7,571 7,571
Securities available-for-sale 33,528 33,528 17,908 17,908
Securities held-to-maturity 1,070 1,094 4,085 3,990
Loans, net of allowance 50,550 51,195 62,769 64,276
Accrued interest receivable 670 670 758 758
Financial liabilities:
Deposits 94,485 96,261 92,146 92,598
Long-term debt 2,062 2,062 1,214 1,214
Accrued interest payable 209 209 211 211
</TABLE>
-31-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
20. FIRST LEHIGH CORPORATION (Parent company only) CONDENSED FINANCIAL
STATEMENTS (In thousands):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
-----------------------
1998 1997
---- ----
Assets:
<S> <C> <C>
Deposits with bank subsidiaries $ 574 $ 754
Accounts receivable -- 52
Investment in subsidiaries 8,748 13,727
Premises and equipment 2,215 2,346
Other assets 51 313
-------- --------
Total assets $ 11,588 $ 17,192
======== ========
Liabilities and shareholders' investment:
Demand notes payable $ 54 $ 163
Other liabilities 209 476
Long-term debt 2,009 2,103
-------- --------
Total liabilities 2,272 2,742
Shareholders' investment 9,316 14,450
-------- --------
Total liabilities and shareholders' investment $ 11,588 $ 17,192
======== ========
CONDENSED STATEMENT OF OPERATIONS
---------------------------------
1998 1997
---- ----
Investment income $ 16 $ 18
Other income 319 449
Other expenses (312) (312)
Interest expense (179) (197)
-------- --------
Loss before equity of subsidiaries (156) (42)
Equity in earnings of subsidiaries (3,722) 3,045
-------- --------
Net (loss) income $ (3,878) $ 3,003
======== ========
</TABLE>
-32-
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(3,878) $ 3,003
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Gain on sale of equipment (12)
Depreciation of premises and equipment 108
Equity in net (loss) income of subsidiaries 3,722 (3,045)
Increase or decrease in:
Accounts receivable 52 (47)
Other assets 253 (72)
Other liabilities (35) 172
------- -------
Net cash provided by operating activities 210 11
------- -------
Cash flows provided by investing activities,
Dividends received from subsidiaries 1,389 962
------- -------
Cash flows from financing activities,
Distributions to shareholders (1,611) (740)
Payments on note payable (109) --
Payments on long-term debt (94) --
Purchases of property, plant and equipment (2) --
Proceeds from sale of property and equipment 37 (109)
------- -------
Net cash used in investing activities (1,779) (849)
------- -------
Net (decrease) increase in deposits with bank subsidiaries (180) 124
Deposits with bank subsidiaries at beginning of year 754 630
------- -------
Deposits with bank subsidiaries at end of year $ 574 $ 754
======= =======
</TABLE>
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<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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21. SUBSEQUENT EVENT
On January 22, 1999, all of the outstanding preferred and common stock of
the Corporation was acquired by Patriot Bank Corp. in a tax-free exchange.
In accordance with the merger agreement, each First Lehigh Corporation
shareholder will receive .482 shares of Patriot Bank Corp. common stock in
exchange for each share of First Lehigh Corporation common and senior
preferred stock and .38562 shares of Patriot Bank Corp. common stock in
exchange for each share of First Lehigh Corporation Series A preferred
stock.
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