As filed with the Securities and Exchange Commission on October 2, 1996
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST LEHIGH CORPORATION
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(Name of small business issuer in its charter)
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<S> <C> <C>
Pennsylvania 6022 23-2218479
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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1620 Pond Road, Allentown, Pennsylvania 18104; (610) 398-6660
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(Address and telephone number of principal executive offices)
1620 Pond Road, Allentown, Pennsylvania 18104-2255
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(Address of principal place of business or
intended principal place of business)
James L. Leuthe, Chairman
First Lehigh Corporation
1620 Pond Road
Allentown, Pennsylvania 18104
(610) 398-6660
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(Name, address and telephone number of agent for service)
Copy to:
John W. Kauffman, Esquire
Duane, Morris & Heckscher
4200 One Liberty Place
Philadelphia, Pennsylvania 19103-7396
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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If this Form is filed to register additional securities for an offering pursuant
to rule 462(b) under the Securities Act of 1933 (the "Securities Act"), please
check the following box and list the Securities Act registration number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities registration
statement number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed
Share maximum Proposed
Title of each class amount offering maximum Amount of
of securities to be price per aggregate registration
to be registered registered share offering price fee
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<S> <C> <C> <C> <C>
Senior Preferred Stock, par value $.01 57,000 shares $5.00** $285,000 $100
Common Stock, par value $.01 * -- -- --
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* Such presently indeterminable number of shares as shall be issuable from
time to time upon conversion of the Senior Preferred Stock.
** The per share offering price is based upon the determination by the Board
of Directors of the Company to offer each current holder the right to
purchase shares of Senior Preferred Stock in exchange for such holder's
agreement to waive such holder's right to receive cash dividends
accumulated though December 31, 1995, when, as and if declared by the
Company's Board of Directors, at the rate of $5.00 of accumulated dividend
per share.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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FIRST LEHIGH CORPORATION
Cross Reference Sheet
Item Number and Caption Heading in Prospectus
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1. Front of the Registration Statement and Outside Facing Page; Cross Reference Sheet; Outside Front
Front Cover Page of Prospectus.................................... Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover
Prospectus........................................................ Page; Additional Information
3. Summary Information and Risk Factors.............................. Prospectus Summary; Risk Factors
4. Use of Proceeds................................................... Use of Proceeds
5. Determination of Offering Price................................... The Offering
6. Dilution.......................................................... *
7. Selling Security Holders.......................................... *
8. Plan of Distribution.............................................. Outside Front Cover Page; Prospectus Summary;
The Offering
9. Legal Proceedings................................................. Risk Factors; Business and Properties
10. Directors, Executive Officers, Promoters and
Control Persons................................................... Management
11. Security Ownership of Certain Beneficial Owners Beneficial Ownership of the Company's Securities
and Management....................................................
12. Description of Securities......................................... Description of the Company's Securities;
Dividends; Prospectus Summary
13. Interest of Named Experts and Counsel............................. Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification Disclosure of Commission Position on Indemnifi-
for Securities Act Liabilities.................................... cation for Securities Act Liabilities
15. Organization Within Last Five Years............................... *
16. Description of Business........................................... Outside Front Cover Page; Prospectus Summary;
Dividends; Business and Properties; Management;
Beneficial Ownership of the Company's Securities
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation......................................................... Condition and Results of Operations
18. Description of Property........................................... Business and Properties
19. Certain Relationships and Related Transactions.................... Certain Transactions
20. Market for Common Equity and Related Prospectus Summary; Dividends; Shares Eligible
Stockholder Matters............................................... for Future Sale; Risk Factors
21. Executive Compensation............................................ Management
22. Financial Statements.............................................. Consolidated Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................ *
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* Omitted from Prospectus because item is inapplicable or answer is negative.
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PROSPECTUS
57,000 Shares
FIRST LEHIGH CORPORATION
Senior Preferred Stock
----------------
This Prospectus relates to the offer and issuance by First Lehigh
Corporation (the "Company") of up to 57,000 shares (the "Shares") of the
Company's Senior Preferred Stock, par value $.01 per share (the "Senior
Preferred Stock"). The Company is the holding company of First Lehigh Bank, a
Pennsylvania banking institution (the "Bank"). There is no minimum number of
Shares that must be issued in this offering in order to consummate this
offering.
The Shares are being offered solely to each holder (a "Holder" or the
"Holders") of currently outstanding shares of Senior Preferred Stock in exchange
for such Holder's agreement to waive such Holder's right to receive dividends
that have accumulated on shares of Senior Preferred Stock from the date of their
issuance through December 31, 1995 pursuant to the terms of the Company's
Articles of Incorporation ("Accumulated Dividends"), but which the Company is
not currently permitted to declare and pay because of restrictions contained in
certain regulatory orders to which the Company and the Bank are subject. A
Holder who accepts the offer being made pursuant to this Prospectus will receive
Shares of Preferred Stock at the rate of one Share for each $5.00 of Accumulated
Dividends that are waived by such Holder. No Holder may purchase more than such
Holder's pro rata portion of such Shares determined by dividing the total amount
of the Accumulated Dividends on the shares of Senior Preferred Stock held by
such Holder through December 31, 1995 by $5.00. Any Holder who accepts the offer
for the Shares offered hereby, however, must accept the offer with respect to
all Accumulated Dividends on all of such Holder's shares of Senior Preferred
Stock through December 31, 1995. No fractional shares of Senior Preferred Stock
will be issued to any Holder accepting the offer made pursuant to this
Prospectus, and any remaining amount of any Accumulated Dividend of less than
$5.00 will be paid to such Holder in cash. The total amount of Accumulated
Dividends on the outstanding shares of Senior Preferred Stock as of December 31,
1995 was $282,770.
Holders who do not accept the offer being made hereby will retain their
rights to be paid their respective Accumulated Dividends in cash if and when
they are declared and paid by the Company.
This offering will terminate at 5 p.m., Philadelphia time, on December 13,
1996, subject to the Company's right to terminate the offering at any time and
to extend the offering for up to 90 days.
The Bank and the Company are currently subject to certain regulatory orders
and agreements. Failure to comply with such orders could result in additional
enforcement actions, restrictions on the operations of the Company and the Bank,
civil monetary penalties and, if wilful noncompliance were to continue, actions
to take possession of the business and property of the Bank by the regulatory
authority. See "Risk Factors -- Regulatory Enforcement Actions to Which the
Company and the Bank Are Subject."
THE SHARES OFFERED HEREBY DO NOT REPRESENT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The Shares offered hereby involve a high degree of risk. See "Risk
Factors."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Selling/Underwriting Proceeds to
Public(1) Commissions the Company(1)(2)
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Per Share................................. $5.00 $ -- See note (2) below
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Total(3) ................................. $ 285,000 -- See note (2) below
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(1) Based upon a Holder's agreement to waive Accumulated Dividends at the rate
of $5.00 of Accumulated Dividend for one Share of Senior Preferred Stock.
(2) No cash will be received by the Company in this offering. The Company will
reduce the amount of Accumulated Dividends of the Senior Preferred Stock by
the amount waived by the Holders accepting the offer hereunder. The
expenses of this offering will be paid by the Company.
(3) There is no minimum number of Shares that must be issued in this offering
in order to consummate this offering.
----------------
The date of this Prospectus is ___________, 1996.
----------------
The Senior Preferred Stock is non-voting, except as otherwise provided by
law. The Senior Preferred Stock ranks senior to the Common Stock in liquidation
and in payment of dividends and senior to the Company's Series A Convertible
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), in
payment of dividends. Each share of Senior Preferred Stock has a $5.00
liquidation preference per share and will rank on parity with respect to rights
in liquidation with the Series A Preferred Stock. Dividends on the Senior
Preferred Stock are cumulative from the date of issuance and, when, as and if
declared by the Company's Board of Directors, are payable quarterly at the
annual rate of $.25 per share. The amount of dividends paid in any calendar year
may not exceed the Company's net income for the preceding calendar year. No
dividends will be paid on the Company's other classes of outstanding capital
stock until all dividends that have accumulated on the Senior Preferred Stock
have been declared and paid or a sum sufficient for the payment thereof is set
apart for such payments. See "Description of the Company's Securities." Under a
written agreement with the Federal Reserve Bank of Philadelphia (the "Federal
Reserve Bank"), the Company is not permitted to declare or pay any dividends
without the prior written approval of the Federal Reserve Bank and the
Pennsylvania Department of Banking (the "Department"). The Federal Reserve Bank
has refused permission for the Company to pay cash dividends that have
accumulated thereon through December 31, 1995. There is no assurance that such
permission will be granted to the Company for the payment of cash dividends in
1996 or 1997. See "Risk Factors -- Regulatory Enforcement Actions to which the
Company and the Bank are Subject."
Prior to this offering, there has been no established public trading market
in the Company's Senior Preferred Stock or the Company's Common Stock, although
there have been limited quotations and sporadic sales of the Common Stock. There
can be no assurance that an active market for the Senior Preferred Stock or the
Common Stock will ever develop or that the Senior Preferred Stock or the Common
Stock will be traded on a recognized exchange or in any other organized market.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information, including the Consolidated
Financial Statements and related Notes, appearing elsewhere in this Prospectus.
The Company
First Lehigh Corporation (the "Company") is a Pennsylvania corporation
organized in 1982 for the purpose of becoming the bank holding company that owns
all of the outstanding capital stock of First Lehigh Bank (the "Bank"). The
Bank, which was organized in 1923, provides a full range of loan, deposit and
other commercial banking services, principally to consumers and small- to
medium-size businesses, from its five branch offices located in the Lehigh
Valley area of Pennsylvania. The Company had consolidated total assets of
approximately $110.6 million, deposits of approximately $96.0 million and
shareholders' equity of approximately $11.8 million at June 30, 1996. The
executive offices of the Company and the Bank are located at 1620 Pond Road,
Allentown, Pennsylvania 18104, and their telephone number is (610) 398-6660.
In past years, the financial condition, results of operations and business
of the Company and the Bank were affected by an adverse market for real estate
and economic conditions in its market areas. As a result, the Company and the
Bank have become subject to or have consented to certain regulatory orders and
agreements that have established certain requirements, including an increased
regulatory capital requirement for the Bank, generally intended to enhance the
financial condition and operations of the Company and the Bank. See "Risk
Factors -- Regulatory Enforcement Actions to Which the Company and the Bank Are
Subject."
The Offering
The Offering The Shares are being offered solely to each Holder
of currently outstanding shares of Senior
Preferred Stock in exchange for such Holder's
agreement to waive such Holder's right to receive
Accumulated Dividends through December 31, 1995,
but which the Company is not currently permitted
to declare and pay because of restrictions
contained in certain regulatory orders to which
the Company and the Bank are subject and
restrictions contained in the Company's Articles
of Incorporation.
A Holder who accepts the offer being made pursuant
to this Prospectus will receive Shares of
Preferred Stock at the rate of one Share for each
$5.00 of Accumulated Dividends that are waived by
such Holder. No Holder may subscribe for more than
his pro rata portion of such Shares determined by
dividing the total amount of the Accumulated
Dividends on the shares of Senior Preferred Stock
held by such Holder through December 31, 1995 by
$5.00. Any Holder who accepts the offer for the
Shares offered hereby, however, must accept the
offer with respect to all Accumulated Dividends on
all of such Holder's shares of Senior Preferred
Stock through December 31, 1995. No fractional
shares of Senior Preferred Stock will be issued to
any Holder accepting the offer made pursuant to
this Prospectus, and any remaining amount of any
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Accumulated Dividend of less than $5.00 will be
paid to such Holder in cash.
Holders who do not accept the offer being made
hereby will retain their rights to be paid their
respective Accumulated Dividends in cash if and
when they are declared and paid by the Company.
Senior Preferred Stock The following is a summary of the terms of the
Senior Preferred Stock. For further information,
see "Description of Securities of the Company --
Senior Preferred Stock."
Dividends. Dividends on the Senior Preferred Stock
are cumulative from the date of issuance of such
shares at the annual rate of $.25 per share. When,
as and if declared by the Company's Board of
Directors out of funds legally available for such
purpose, dividends are payable quarterly, provided
that the aggregate amount of dividends paid in any
calendar year on the Senior Preferred Stock and
the Series A Preferred Stock may not exceed the
Company's net income for the preceding calendar
year. No dividends will be paid on the Company's
other classes of outstanding capital stock until
all dividends that have accumulated on the Senior
Preferred Stock have been declared and paid or
declared and a sum sufficient for the payment
thereof is set apart for such payment.
Furthermore, under a written agreement with the
Federal Reserve Bank, the Company is not permitted
to declare or pay any dividends without the prior
written approval of the Federal Reserve Bank and
the Department. The Federal Reserve Bank has
refused permission for the Company to pay cash
dividends that have accumulated thereon through
December 31, 1995. There is no assurance that such
permission will be granted to the Company in 1996
or 1997. Persons who accept the offer to purchase
Shares of Senior Preferred Stock in this offering
will have waived accumulated dividends on the
shares of Senior Preferred Stock currently held by
them through December 31, 1995, and dividends on
those shares will be cumulative from January 1,
1996. Dividends on Shares of Senior Preferred
Stock issued in this offering will be cumulative
from the date of issuance.
Conversion Rights. Each share of Senior Preferred
Stock is convertible at any time at the option of
the holder into one share of Common Stock (the
"Conversion Rate"), subject to adjustment in
certain events. The Conversion Rate of the Senior
Preferred Stock will be adjusted if the greater of
book value or market value of the Company's Common
Stock is not equal to $5.00 (the "Base Value") or
more per share at the close of business on the
last trading day of the New York Stock Exchange in
October 1998 (the "Adjustment Date"), so that
beginning November 1, 1998, one share of Senior
Preferred Stock will be convertible into that
number of shares of Common Stock equal to the then
existing Conversion Rate multiplied by a fraction,
the numerator of which is the Base Value, and the
denominator of which is the greater of the book
value or market value per share at the close of
business on the Adjustment Date, assuming that
there have been no other adjustments to the
Conversion Rate or the Base Value due to other
events such as stock dividends, split-ups or
combinations. No adjustment of this type will be
made if the greater of market value or book value
is equal to or greater than the Base Value per
share at such time.
4
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Redemption. The Senior Preferred Stock is not
redeemable.
Liquidation Preference. $5.00 per share plus
accrued but unpaid dividends. The Senior
Preferred Stock ranks on parity with the Series A
Preferred Stock with respect to rights upon
liquidation.
Voting. The Senior Preferred Stock is non-voting,
except as otherwise provided by law.
Offering Termination This offering will terminate at 5 p.m.,
Philadelphia time, on December 13, 1996, subject
to the Company's right to terminate the offering
at any time and to extend the offering for up to
90 days.
Use of Proceeds The proceeds of all Shares issued pursuant to the
offering made hereby will be applied to the
cancellation of the Accumulated Dividends on the
shares of Senior Preferred Stock held by the
Holders who subscribe hereunder. No cash will be
received by the Company as a result of this
offering.
Risks of Offering Failure to comply with the respective regulatory
orders, or any other regulatory agreement or
order, as well as future regulatory determina-
tions, could result in additional enforcement
actions, restrictions on the operations of the
Company and the Bank and civil monetary penalties.
For example, if the Company or the Bank does not
comply with any of the terms of any order or
agreement, the respective regulatory authority may
petition the appropriate court for an order to
enforce the terms thereof. If wilful noncompliance
were to continue, the Department could seek to
take possession of the business and property of
the Bank, subject to providing notice and the
holding of a hearing with the concurrence of the
Pennsylvania Attorney General, or the FDIC could
seek to terminate the deposit insurance of the
Bank.
Risk Factors Prospective investors should carefully consider
the factors discussed under the heading "Risk
Factors," including the following: (i) Regu-
latory Enforcement Actions to Which the Company
and the Bank Are Subject; (ii) Financial Condition
and Operations; (iii) Regulatory Capital
Requirements; (iv) Regulation; (v) Economic
Conditions; (vi) Dividends; (vii) Rights in
Liquidation of Senior Preferred Stock; (viii)
Litigation; (ix) Lack of Public Trading Market for
the Company's Common Stock; (x) Competition;
(xi) Anti-Takeover Provisions; (xii) Possible
Limitation of Tax Benefits; (xiii) Control by
Existing Shareholders, Management and
(xiv) Federal Income Tax Consequences. See "Risk
Factors."
Federal Income Tax The issuance of the Shares to the Holders of
Consequences currently outstanding shares of Senior Preferred
Stock who accept the offering being made by this
Prospectus will be treated for federal income tax
purposes as a distribution of property by the
Company to such Holders with respect
5
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to their shares of Senior Preferred Stock.
Accordingly, the distributed Shares will be
treated as a taxable dividend in the amount of
$5.00 per Share for federal income tax purposes.
Address for Receipt First Lehigh Corporation
of Subscriptions 1620 Pond Road
Allentown, PA 18104
Attention: James L. Leuthe, Chairman
6
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Selected Ratios
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For the Years Ended For the Six
December 31, Months Ended
------------------- June 30,
1995 1994 1996
---- ---- ----
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SELECTED OPERATING RATIOS:
Return on average assets:
With securities gains (losses) ........................ 0.08 (0.48) 4.31
Without securities gains (losses) ..................... (1.50) (0.98) 3.80
Return on average shareholders' equity:
With securities gains (losses) .................... 0.87 (6.07) 43.23
Without securities gains (losses) ................. (16.04) (12.36) 38.18
Net interest margin ....................................... 4.06 4.51 4.29
ASSET QUALITY RATIOS:
Allowance for loan losses to period end loans, net of
unearned income ....................................... 2.76 2.86 2.98
Allowance for loan losses to period end nonperforming
loans.................................................. 29.50 18.08 48.50
Net charge-offs to average loans, net of unearned income .. 0.55 0.81 (1.59)
Average total loans as a percentage of average deposits and
borrowed funds ........................................ 64.36 57.48 67.30
Nonperforming loans to loans(1) ........................... 9.35 15.80 6.14
Nonperforming assets to total assets(1) ................... 9.98 13.94 8.38
Average shareholders' equity to average total assets ...... 9.37 7.91 9.96
Tier I leverage capital ................................... 8.82 7.02 10.54
Tier II capital ........................................... 13.75 10.80 15.72
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(1) Nonperforming assets consist of nonperforming loans and foreclosed assets.
Nonperforming loans consist of non-accrual loans that are 90 days or more
past due and accruing loans past due 90 days or more ("Nonperforming
Loans"). Foreclosed assets consist of real estate acquired through
foreclosure and real estate acquired by acceptance of a deed in lieu of
foreclosure ("Foreclosed Assets"). These ratios do not include
consideration of the provision for the allowance for loan and lease losses.
The Company's Nonperforming Loans and Foreclosed Assets, in each case net
of related reserves, was 7.90% of total assets at June 30, 1996.
7
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Summary Consolidated Financial Data
(in thousands, except per share data)
For the Years Ended For the Six Months Ended
December 31, June 30,
------------ --------
1995 1994 1996 1995
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Income Statement Data: (unaudited)
Net interest income ................ $ 3,484 $ 3,569 $ 1,921 $ 1,685
Provision (credit) for loan losses . 250 25 (667) 0
---------- ---------- ---------- ---------
Net interest income after
provision (credit) for loan
losses............................ 3,234 3,544 2,588 1,685
---------- ---------- ---------- ---------
Noninterest income:
Operating ........................ 620 962 319 285
Unrealized gains on trading
securities ...................... 728 398 177 527
Realized gains on investment
securities ...................... 901 95 89 154
Litigation Settlement .............. -- -- 1,539 --
---------- ---------- ---------- ---------
Total ............................ 2,249 1,455 2,124 966
Noninterest expenses and
taxes ............................ 5,399 5,475 2,436 2,377
---------- ---------- ---------- ---------
Net income (loss) ............. 84 (476) 2,276 274
Dividend on Preferred Stock ........ -- -- -- --
Net income (loss) applicable
to Common Stock ............... 84 (476) 2,276 274
Per Common Share:
Net income (loss)-primary .......... $ (0.12) $ (0.34) $ .72 $ .02
Net income (loss)-fully diluted .... (0.12) (0.34) .60 .02
Book value at end of period(1) ..... 2.64 2.27 3.03 2.63
Liquidating book value at the
end of period(2) ................. 1.30 0.67 1.96 1.29
Tangible book value at end
of period(1) ..................... 2.62 2.22 3.02 2.60
Liquidating tangible book
value at end of period(2) ........ 1.26 0.59 1.95 1.23
Weighted average shares of
Common Stock
outstanding-primary .............. 2,848,902 2,283,552 2,848,902 2,848,902
Weighted average shares
of Common Stock
outstanding-fully diluted ........ 2,848,902 2,283,552 3,414,502 3,396,927
<CAPTION>
As of December 31, As of June 30,
------------------ --------------
Balance Sheet Data: 1995 1994 1996
---- ---- ----
Net loans .......................... $ 57,249 $ 57,917 $ 63,070
Total assets ....................... 103,398 102,373 110,592
Deposits ........................... 92,312 89,113 96,030
Shareholders' investment ........... 10,233 8,537 11,775
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</TABLE>
(1) Both the book value and tangible book value assume the Series A Preferred
Stock is converted into Common Stock at the rate of .8 shares of Common
Stock for each share of Series A Preferred Stock and the Senior Preferred
Stock is converted into Common Stock at the rate of one share of Common
Stock for each share of Senior Preferred Stock.
(2) Both the liquidating book value and liquidating tangible book value assume
that the Series A Preferred Stock is redeemed at a per share redemption
price of $3.10 per share and any accrued and unpaid dividends.
8
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RISK FACTORS
The Company has experienced significant financial and operating problems in
recent years and for these and other reasons a purchase of the Shares involves
significant risks. In determining whether or not to acquire the Shares offered
hereby in exchange for an agreement to waive such Holder's respective
Accumulated Dividends, each Holder should carefully consider the following
factors in addition to the other information set forth herein.
Regulatory Enforcement Actions to Which the Company and the Bank Are Subject
The Company and the Bank are subject to and have consented to the following
regulatory orders and agreements: (i) effective February 28, 1996, the Company
and the Bank entered into an Administrative Order (the "Pennsylvania Order")
with the Pennsylvania Department of Banking (the "Department"), which replaced
an earlier order entered into in 1993; (ii) on April 29, 1996, the Bank entered
into a Memorandum of Understanding (the "Memorandum of Understanding") with the
FDIC, which has replaced two cease and desist orders dating from October 1987
and June 1992; and (iii) in January 1991, the Company consented to a written
agreement (the "Federal Reserve Agreement") with the Federal Reserve Bank and
the Department.
The following is a discussion of the material terms and provisions of the
Pennsylvania Order, the Memorandum of Understanding and the Federal Reserve
Agreement.
The Pennsylvania Order
Capital Requirements and Dividend Restrictions
Under the terms of the Pennsylvania Order, the Bank is required to
maintain, at all times, a minimum Tier I capital equal to or greater than 6.5%
of the Bank's adjusted total assets, plus a fully-funded loan loss reserve. The
Bank must provide the Pennsylvania Department of Banking with a quarterly report
detailing the maintenance of a 6.5% Tier I capital ratio and a fully-funded loan
loss reserve. As of June 30, 1996, the Bank's Tier I capital ratio was 10.54%.
The Bank is required to maintain a formal program to review the adequacy of the
Bank's allowance for loan and lease losses. The Bank may not declare or pay any
cash dividend without the prior written approval of the Department and the
Regional Director of the FDIC.
Credit Limitations and Restrictions
The following credit limitations and restrictions were imposed under the
Pennsylvania Order: (i) the Bank may not grant, extend, renew, alter or
restructure any loan or other extension of credit without first obtaining and
analyzing all relevant credit information, as well as taking all necessary steps
to properly value and perfect its interests in collateral, where applicable;
(ii) the Bank may not extend, directly or indirectly, any new or additional
credit (which for the purposes of the Pennsylvania Order, includes the granting
of renewals or extensions, or the capitalizing of accrued interest) to, or for
the benefit of, any borrower who is obligated in any manner to the Bank on any
extension of credit, or portion thereof, which has been charged off the books of
the Bank, in whole or in part, or to any affiliate or related interest of, or
other person or entity associated with, any such borrower, as long as any
portion of such extension of credit, whether or not the portion was charged off,
remains uncollected. The provisions of clause (ii) above do not apply to the
advancement of funds by the Bank for the sole purpose of maintaining or
protecting the Bank's real estate collateral if the failure to extend such
credit would otherwise be substantially
9
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detrimental to the best interests of the Bank; (iii) the Bank may not extend,
directly or indirectly, any new or additional credit to, or for the benefit of,
any borrower who is obligated in any manner to the Bank on any loan or other
extension of credit that has been adversely classified, in whole or in part, by
the Department in the report of examination dated as of June 30, 1995, or as a
result of any subsequent examination of the Bank by the Department or the FDIC,
or to any affiliate or related interest of, or other person or entity associated
with any such borrower ("classified borrower"), as long as such loan or other
extension of credit remains classified or uncollected. This clause (iii) does
not prohibit the Bank from renewing all or any part of an extension of credit to
a classified borrower who is not subject to the prohibitions of clause (ii),
after collection in cash of interest due on the entire extension of credit. The
prohibitions of clause (iii) do not apply to any extension of credit to a
classified borrower who is not subject to the prohibitions of clause (ii) above,
if the Bank's failure to extend further credit to a classified borrower would be
substantially detrimental to the best interests of the Bank, which determination
must be evidenced in writing in the applicable loan files; and (iv) the Bank
must comply fully and at all times with the provisions of section 1415 of the
Banking Code of 1965, as amended, relating to loans to executive officers and
directors.
Performance Objectives
The following performance objectives were also stated in the Pennsylvania
Order: (i) the Bank must reduce the level of nonaccrual loans to total gross
loans noted in the Report of Examination as of June 30, 1995, to no more than 7%
by August 26, 1996, and further reduce such ratio to no more than 4% by November
24, 1996 and 2% by February 22, 1997; and (ii) the Bank must reduce the level of
classified assets as of June 30, 1995, to no more than 100% of Tier I capital
and reserve for loan and lease losses by August 26, 1996, and further reduce
such ratio to 75% by November 24, 1996 and 50% by February 22, 1997. As of June
30, 1996, the Bank's level of non-accrual loans to gross loans was 5.66%, and
the Bank's level of classified assets to Tier I capital and reserve for loan and
lease losses was 75.24%.
Reporting and Other Requirements
Other affirmative measures required to be taken by the Bank under the
Pennsylvania Order are as follows: (i) the Bank is required to submit quarterly
progress reports, no later than 30 days following the last day of each calendar
quarter; (ii) the Bank must comply with all state and federal laws that relate
to the operation of the Bank; (iii) the Bank must have and retain qualified
management, must notify the Secretary of Banking in writing of any resignations
and/or terminations of any members of its Board of Directors and/or any of its
senior executive officers and must obtain prior written approval from the
Department for any new Directors or senior executive officers; (iv) and the Bank
must maintain a written investment policy in a form and manner acceptable to the
Secretary of Banking, as determined at subsequent examinations or visitations.
Status of Compliance with the Pennsylvania Order
The Company believes that it and the Bank are currently in compliance with
the Pennsylvania Order. The Pennsylvania Order requires the Bank to reduce the
level of nonaccrual loans to total gross loans noted in the report of
examination as of June 30, 1995, to no more than 7% by August 26, 1996. As of
June 30, 1996, this ratio was 5.66%. Additionally, the Order requires the Bank
to reduce the level of classified assets as of June 30, 1995, to no more than
100% of Tier I capital and the reserve for loan and lease losses by August 26,
1996, with further reductions thereafter. As of June 30, 1996, this ratio was
75.24%. The Pennsylvania Order also contains a provision requiring the Bank to
maintain, at all times, a minimum Tier
10
<PAGE>
I capital equal to or greater than 6.5% of the Bank's adjusted total assets,
plus a fully-funded loan loss reserve. As of June 30, 1996 this ratio was 10.54%
and the Bank's loan loss reserve was fully funded.
The Memorandum of Understanding
Capital Requirements and Dividend Restrictions
The Memorandum of Understanding requires the Bank to maintain its Tier I
capital at an amount equal to or greater than 6.0% of the Bank's adjusted total
assets. During the term of the Memorandum of Understanding, the Bank may not
declare or pay dividends without the prior written approval of the FDIC, which
declarations and payments must be made in accordance with applicable laws and
regulations, and may be made only if after such payments the ratio of Tier I
capital to adjusted total assets will be not less than 6.0%.
Credit Limitations and Restrictions
Under the terms of the Memorandum of Understanding, the Bank is prohibited
from extending credit, either directly or indirectly to, or for the benefit of
any borrower who is obligated in any manner to the Bank on any extension of
credit, or portion thereof, which has been charged off the books of the Bank.
The Bank is also prohibited from extending credit to, or for the benefit of, any
borrower who is obligated in any manner to the Bank on any extension of credit
that has been classified, in whole or in part, as a result of the examination of
the Bank as of June 30, 1995. These prohibitions will not apply if the Bank
determines that failure to extend further credit would be substantially
detrimental to the institution.
Reporting and Other Requirements
The Bank was required to charge-off assets classified as "Loss" or
"Doubtful" as of June 30, 1995 by May 9, 1996, and, within 30 days of receipt of
future FDIC Reports of Examination, charge-off assets classified "Loss" or
"Doubtful." The Bank was required to submit a Classified Asset Reduction Plan to
the FDIC by May 29, 1996. Also, the Bank was required (i) to adopt a method of
computing the balance of its allowance for loan and lease losses that gives
consideration to the volume and composition of the loan portfolio; (ii) to adopt
and implement a written earnings plan and (iii) to revise, adopt and implement
written lending and investment policies in a form and manner acceptable to the
FDIC as determined at subsequent examinations. The Bank is required to review
the adequacy of the loan loss allowance quarterly and submit progress reports to
the Regional Director of the FDIC detailing the form, content, and manner of any
actions taken to secure compliance with the Memorandum of Understanding on a
quarterly basis. The Bank is in compliance with these requirements of the
Memorandum of Understanding.
Status of Compliance with the Memorandum of Understanding
The Bank is currently in compliance with the requirements of the Memorandum
of Understanding. As of June 30, 1996 the Bank's Tier I capital ratio was
10.54%, which is greater than the 6.0% ratio required by the Memorandum of
Understanding. The Bank has made necessary charge-offs and revised and adopted
its credit and investment policies. The earnings improvement plan required has
been prepared and submitted.
11
<PAGE>
The Federal Reserve Agreement
Requirements and Dividend Restrictions
Under the Federal Reserve Agreement, the Company is subject to the
following requirements: (i) the Board of Directors of the Company was required
to establish a compliance committee consisting of three directors who were not
officers or principal shareholders of the Company, which would be responsible
for monitoring and coordinating the Company's adherence to the Federal Reserve
Agreement and submit quarterly progress reports to the Company's Board of
Directors; (ii) the Company is not permitted to declare or pay any dividends
without the prior written approval of the Federal Reserve Bank and the
Department; (iii) the Board of Directors of the Company was required to conduct
a review of the functions and performance of the officers of the Company and the
Bank and forward its written findings and conclusions along with a written
description of proposed management or operational changes; (iv) the Company was
required to submit a capital plan; (v) the Company is not permitted to redeem or
repurchase its outstanding preferred and common stock without 30 days prior
written notice to the Federal Reserve Bank and the Department; (vi) the Company
may not incur any additional debt without the written approval of the Federal
Reserve Bank and the Department; (vii) the Company was required to develop
written procedures to strengthen and maintain in a satisfactory manner its
records and audit functions; and (viii) the Company and the Bank are required to
submit quarterly reports to the Federal Reserve Bank and the Department.
Status of Compliance with the Federal Reserve Agreement
According to information received from the Federal Reserve Bank, the
Company believes that it is currently in substantial compliance with the Federal
Reserve Agreement. The Company has received permission from the Federal Reserve
Bank to issue the Shares in lieu of Accumulated Dividends for the periods ending
December 31, 1994 and December 31, 1995.
Consequences of Failure to Comply with the Regulatory Orders
Failure to comply with the Pennsylvania Order, the Memorandum of
Understanding, the Federal Reserve Agreement or any other regulatory agreement
or order, as well as future regulatory determinations, could result in
additional enforcement actions, restrictions on the operations of the Company
and the Bank and civil monetary penalties, among other things. For example, if
the Company or the Bank does not comply with any of the terms of any order or
agreement, the respective regulatory authority may petition the appropriate
court for an order to enforce the terms thereof. If wilful noncompliance were to
continue, the Department could seek to take possession of the business and
property of the Bank, subject to providing notice and the holding of a hearing
with the concurrence of the Pennsylvania Attorney General, or the FDIC could
seek to terminate the deposit insurance of the Bank.
Financial Condition and Operations
The Company has experienced significant financial and operational problems
in recent years, which are reflected in part by the following:
o The Company reported net income of $84,000 and a net loss of $476,000
during the years ended December 31, 1995 and 1994, respectively. The
Bank did not have core operating earnings during these years primarily
due to the extraordinary expenses associated with the ongoing carrying
and workout costs involved with the high level of nonearning assets
held
12
<PAGE>
on the Company's books. The Company's focus on the resolution and
workout of the nonperforming and classified assets has been successful
in reducing these problems.
o The Company's Nonperforming Loans and Foreclosed Assets, in each case
net of related reserves, was 7.90% of total assets at June 30, 1996.
In May 1996, the Company and the Bank received cash payments of
approximately $4.0 million relating to a recovery of a substantial
nonperforming loan that had been in protracted litigation. After
accounting for previous write downs and current period related
expenses the Company recorded other income of approximately $1.9
million as a result of the resolution of this matter. The adverse
effects of high levels of nonperforming assets, however, consisting of
substantial provisions for loan losses and net loan charge-offs,
decreased accrual of interest income and increased operating expenses
as a result of the allocation of resources to the collection and
work-out of nonperforming assets, are anticipated to continue to
adversely affect the operations of the Company and the Bank.
o At December 31, 1995, the Company's allowance for loan losses amounted
to approximately $1,624,000, or 2.76% of net loans, as compared to
$1,703,000, or 2.86% of net loans and leases at December 31, 1994. As
of June 30, 1996, the allowance for loan losses amounted to
approximately $1,937,000, or 2.98% of total loans. Future additions to
these allowances or reductions in carrying values of Foreclosed Assets
could become necessary as a result of future changes in the real
estate market and/or the economic conditions in the Company's primary
market area. Future increases in nonperforming assets could adversely
affect the Company's results of operations and potentially lead to
further regulatory enforcement actions. See "Risk Factors --
Regulatory Enforcement Actions to Which the Bank and the Company Are
Subject."
Management of both the Company and the Bank remains committed to devoting
substantial time and resources to the identification, collection and work-out of
nonperforming assets. The real estate markets and the overall economy in the
Company's primary market area, however, will be significant determinants of the
quality of the Company's assets in future periods and, thus, its financial
condition and operations.
Regulatory Capital Requirements
Section 38 of the Federal Deposit Insurance Act ("FDIA"), as amended by the
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), effective
December 1991, and the regulations of the FDIC implementing the prompt
corrective action provision of FDICIA, effective December 1992, require that the
federal banking agencies establish five capital levels for insured depository
institutions - - "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" -- and requires or permits such agencies to take certain
supervisory actions as an insured institution's capital level falls. See
"Business and Properties -- Supervision and Regulation -- Banks." During the
year ended December 31, 1995 the Bank had increased its combined ratio of Tier I
and Tier II capital to risk-weighted assets to 13.75% from 10.80% as of December
31, 1994. As of June 30, 1996, this combined ratio was 15.72%. A combined ratio
of Tier I and Tier II capital of less than 8.0% would result in a designation of
a bank as "undercapitalized." See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." FDICIA and implementing
regulations also provide that only "well capitalized institutions," and
"adequately capitalized institutions" that have obtained a waiver from the FDIC,
may use insured brokered deposits or insure accounts on a pass-through basis
established under certain qualified employee benefit plans. The foregoing powers
13
<PAGE>
and authorities are in addition to the existing powers of the federal banking
agencies to deal with undercapitalized institutions.
Under the Pennsylvania Order, the Bank is required to maintain at all times
a minimum Tier 1 capital ratio equal to or greater than 6.5% of the Bank's
adjusted total assets. See "Risk Factors -- Regulatory Enforcement Actions to
Which the Company and the Bank Are Subject." At December 31, 1995 and June 30,
1996, the Bank's Tier I leverage capital ratio was 8.82% and 10.54%,
respectively. There can be no assurance that the Company and the Bank will not
be subject to additional capital requirements in the future, either as a result
of regulations, guidelines and policies of general applicability or individual
regulatory capital requirements that are applied to the Company or the Bank.
Pursuant to Section 18 of FDIA, federal banking agencies are required to review
their capital standards for insured depository institutions biennially to
determine whether those standards require sufficient capital to facilitate
prompt corrective action to prevent or minimize loss to the deposit insurance
funds. Regulatory authorities could also limit the ability of companies such as
the Company and the Bank to include certain deferred income tax assets permitted
under generally accepted accounting principles for regulatory capital and
regulatory reporting purposes. See "Business and Properties -- Supervision and
Regulation -- Banks."
Regulation
The federal and state laws and regulations that are applicable to bank
holding companies and banks give regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and generally have
been promulgated to protect depositors and deposit insurance funds and not for
the purpose of protecting shareholders. Any change in such regulations, whether
by an applicable federal or state regulatory authority or federal or state
legislative bodies, could have a significant impact on the Company and the Bank.
See "Business -- Supervision and Regulation."
Economic Conditions
Prevailing economic conditions, as well as government policies and
regulations concerning, among other things, monetary and fiscal affairs,
significantly affect the operations of financial institutions such as the Bank.
In particular, because the Bank's lending and deposit-taking activities are
conducted primarily in the Lehigh Valley area of Pennsylvania, economic
conditions and the market for real estate in this area significantly affect the
Bank's financial condition and results of operations. In the late 1980's and
early 1990's, excess residential and commercial office inventory, coupled with a
regional economic decline, adversely affected Pennsylvania's real estate market
in general and the Bank's market area. Recently, the local market has rebounded
and returned to more normal economic conditions. However, if these negative
trends redevelop, such factors could adversely affect the financial condition
and operations of the Company and the Bank in future periods. Adverse trends in
the consumer lending markets will particularly affect the Company's and the
Bank's financial condition and operations as the Bank focuses on consumer loans.
Currently, the Bank is experiencing a stronger demand for consumer loans and
growth in its deposit base, but there can be no assurance that this demand and
growth will continue in future periods.
The Company's net interest income, which is the difference between the
interest income received on its interest-earning assets, including loans and
investment securities, and the interest expense incurred in connection with its
interest-bearing liabilities, including deposits and borrowing, can be
significantly affected by changes in market interest rates. The Company actively
monitors its assets and liabilities in an effort to minimize the effects of
changes in interest rates, primarily by altering the mix and
14
<PAGE>
maturity of the Company's loans, investments and funding sources. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dividends
The Company has not paid any dividends on its outstanding Common Stock
since June 30, 1991, and has accrued and unpaid dividends on its Series A
Preferred Stock of $1,109,956 as of June 30, 1996 and Accumulated Dividends of
$388,883 of its Senior Preferred Stock as of June 30, 1996. Due to its financial
condition, its recent results of operations and regulatory restrictions on the
payment of dividends by the Bank, which is the Company's primary source of funds
for the payment of dividends, management of the Company currently does not
anticipate the resumption of dividend payments on the Common Stock, and its
ability to pay Accumulated Dividends on the Senior Preferred Stock and dividends
on the Series A Preferred Stock has been restricted by federal and state
regulatory authorities.
The payment of dividends is also restricted by certain provisions of the
Company's Articles of Incorporation and the Pennsylvania Business Corporation
Law. See "Dividends." Dividends must be declared and paid, or declared and a sum
sufficient for payment thereof set aside, on the Senior Preferred Stock before
any dividend may be declared or paid on any other capital stock of the Company.
Dividends must be declared and paid, or declared and a sum sufficient for
payment thereof set aside, on the Series A Preferred Stock before any dividend
may be declared or paid on any other capital stock of the Company other than the
Senior Preferred Stock. Under the Company's Articles of Incorporation, the
aggregate amount of dividends paid in any calendar year on the Senior Preferred
Stock and the Series A Preferred Stock may not exceed the amount of the
Company's net income for the preceding calendar year as shown on the Company's
audited statement of income for such preceding calendar year. Under Pennsylvania
law, the Company's Board of Directors may not authorize, and the Company may not
make, distributions (including dividends) if either (i) the Company would be
unable to pay its debts as they become due in the usual course of its business,
or (ii) as determined by the Board of Directors, the total assets of the Company
would be less than the sum total of its liabilities plus the amount that would
be needed, if the Company were to be dissolved at the time as of which the
distribution is measured, to satisfy the preferential rights upon dissolution of
the holders of the Company's outstanding Series A Preferred Stock, Senior
Preferred Stock and any other shares that may have preferential rights upon
dissolution superior to those receiving the distribution. See "Dividends."
Under the Federal Reserve Agreement, the Company is also required to obtain
approval of the Federal Reserve Board and the Department to declare and pay any
dividends on its capital stock. Dividends accruing on the Shares of Senior
Preferred Stock issued in this offering will be subject to these restrictions.
The Federal Reserve Bank has refused permission for the Company to pay cash
dividends that have accumulated thereon through December 31, 1995. There is no
assurance that such permission will be granted to the Company in 1996 or 1997.
The Federal Reserve Board, however, has agreed to permit the Company to offer
additional shares of Senior Preferred Stock to the current holders of Senior
Preferred Stock in exchange for such holders' waiver of Accumulated Dividends on
their respective shares through December 31, 1995. For a description of various
regulatory requirements and/or limitations relating to the Company's ability to
pay dividends to shareholders and the ability of the Bank to pay dividends to
the Company, see "Risk Factors -- Regulatory Enforcement Actions to Which the
Company and the Bank Are Subject," "Dividends" and "Business and Properties --
Supervision and Regulation -- Banks."
15
<PAGE>
Rights in Liquidation of Senior Preferred Stock
The Senior Preferred Stock will rank on a parity with the Series A
Preferred Stock with respect to rights on liquidation. In the event of a
liquidation of the Company or similar event, before any distribution or payment
is made upon any Common Stock, the holders of the Senior Preferred Stock will be
entitled to receive $5.00 per share plus accrued and unpaid dividends thereon,
and the holders of the Series A Preferred Stock will be entitled to receive
$3.10 per share plus accrued and unpaid dividends thereon. In the event that the
Company's assets to be distributed upon any such liquidation are insufficient to
permit payment of the full liquidation value to holders of the Senior Preferred
Stock and the Series A Preferred Stock, the assets will be distributed ratably
among such holders based on the respective liquidation preferences thereof.
Litigation
The Company and the Bank are subject to the regulatory enforcement actions
described under "Risk Factors -- Regulatory Enforcement Actions to Which the
Company and the Bank Are Subject," above. The FDIC has initiated administrative
proceedings against the Company's Chairman of the Board and Chief Executive
Officer and the Bank's former president in which, as a result of transactions
occurring prior to February 1992, the FDIC is seeking to prohibit such persons
from participating in the conduct of the affairs of any bank insured by the FDIC
and civil monetary penalties. Even though neither the Bank nor the Company is a
party to these proceedings, both the Bank's and the Company's Bylaws require
them to indemnify such persons in connection with the administrative
proceedings. Such persons, however, are required to reimburse the Company and/or
the Bank for all expenses incurred or advanced by the Company or the Bank in
connection with such proceedings if a court ultimately determines that the
alleged actions or omissions constituted wilful misconduct or recklessness.
While it is difficult to determine the amount of indemnification in this
proceeding, the Company believes at this time that the amount will not
materially and adversely affect the Company's financial condition. The Company
carries director's and officer's liability insurance coverage and is in the
process of submitting a claim for reimbursement of its expenses in connection
with these proceedings. Management is aware that the FDIC and the Bank's former
president have entered into a tentative settlement in this matter subject to
formal FDIC approval. It is the Bank's understanding that such settlement does
not assess any monetary damages or penalties against such person. See "Business
and Properties -- Legal Proceedings." In the opinion of management, there are no
proceedings pending other than the aforementioned regulatory enforcement actions
that, if determined adversely to the Company or any subsidiary, would be
material in relation to the Company's undivided profits or financial condition,
nor are there any other proceedings pending other than ordinary routine
litigation. See "Business and Properties -- Legal Proceedings."
Lack of Public Trading Market for the Company's Common Stock
Prior to this offering, the Company's Common Stock has traded infrequently
in isolated transactions. Four brokerage institutions currently make a market in
the Company's Common Stock. There is no assurance that an active trading market
for the Company's Common Stock or the Company's Senior Preferred Stock will
develop or be sustained after this offering or that the Company's Common Stock
or Senior Preferred Stock will be traded on a recognized exchange or in any
other organized market.
16
<PAGE>
Competition
Vigorous competition exists in all of the major areas in which the Company
and the Bank currently engage in business. The Company and the Bank face
competition from various financial and non-financial businesses, many of which
have substantially greater resources and capital than do the Company and the
Bank. Particularly intense competition exists for loans and deposits.
Anti-Takeover Provisions
Certain provisions of Pennsylvania corporate law and the Company's Articles
of Incorporation and Bylaws contain significant anti-takeover provisions that
may make it more difficult and time-consuming to acquire the Company and to
change majority control of the Board of Directors. These provisions may reduce
the Company's vulnerability to an unsolicited proposal for the takeover of the
Company. See "Description of the Company's Securities -- Anti-Takeover
Provisions."
Possible Limitation of Tax Benefits
Acquisitions of Common Stock, Series A Preferred Stock and/or Senior
Preferred Stock by persons who are or become "five percent shareholders" (i.e.,
certain persons who own five percent or more of the outstanding equity value of
the Company), including both current holders and those who are not current
holders, which acquisitions would increase their equity ownership in the Company
above five percent, could result in an "ownership change" for federal income tax
purposes. If an "ownership change" occurs, an annual limitation would be imposed
on the Company's ability to utilize its net operating loss carryforwards and
possibly on its ability to deduct, in the future, certain built-in losses that
have not yet been recognized for tax purposes if certain threshold limitations
on the amount of such losses were exceeded. At December 31, 1995, the Company
had a net operating loss carryforward of $4,930,000 available to offset future
taxable income, which will expire in 2007 if not utilized. There can be no
assurance that an "ownership change" will not occur as a result of this offering
or in the future as a result of the cumulative effect of this offering and other
acquisitions and transfers of capital stock of the Company. The Company has the
absolute right to reject, in whole or in part, subscriptions to purchase Shares
in this offering if management believes that such purchases might result in an
"ownership change."
Control by Existing Shareholders, Management
Holders of Senior Preferred Stock do not have the right to vote on any
matter submitted to a vote of the Company's shareholders, except as otherwise
provided by law. Therefore, the Company's existing shareholders will continue to
control all matters submitted to a vote of shareholders, including the election
of directors. Management of the Company controls approximately 70% of the votes
in matters submitted to the vote of shareholders, including the election of
directors. Therefore, after this offering, the existing shareholders, or
management acting alone, will have the ability generally to control the policies
of the Company. See "Beneficial Ownership of the Company's Securities."
Federal Income Tax Consequences
The issuance of the Shares to the Holders of currently outstanding shares
of Senior Preferred Stock who accept the offering being made by this Prospectus
will be treated for federal income tax purposes as a distribution of property by
the Company to such Holders with respect to their shares of Senior Preferred
Stock. Accordingly, the distributed Shares will be treated as a taxable dividend
in the
17
<PAGE>
amount of $5.00 per Share for federal income tax purposes. The Holders of the
distributed Shares will receive a tax basis in the Shares equal to the amount of
the dividend.
THE OFFERING
General
The Shares are being offered solely to each Holder of currently outstanding
shares of Senior Preferred Stock. The Company is offering the Shares to the
Holders in exchange for such Holder's agreement to waive the right to receive
Accumulated Dividends through December 31, 1995, but which the Company is not
currently permitted to declare and pay because of restrictions contained in
certain regulatory orders to which the Company and the Bank are subject and
restrictions contained in the Company's Articles of Incorporation.
A Holder who accepts the offer being made pursuant to this Prospectus will
receive Shares of Preferred Stock at the rate of one Share for each $5.00 of
Accumulated Dividends that are waived by such Holder. No Holder may purchase
more than such Holder's pro rata portion of such Shares determined by dividing
the total amount of the Accumulated Dividends on the shares of Senior Preferred
Stock held by such Holder through December 31, 1995 by $5.00. Any Holder who
accepts the offer for the Shares offered hereby, however, must accept the offer
with respect to all Accumulated Dividends on all of such Holder's shares of
Senior Preferred Stock through December 31, 1995. No minimum number of Shares is
required to be sold in this offering in order to consummate this offering. No
fractional shares of Senior Preferred Stock will be issued to any Holder
accepting the offer made pursuant to this Prospectus, and any remaining amount
of any Accumulated Dividend of less than $5.00 will be paid to such Holder in
cash. The total amount of Accumulated Dividends on the outstanding shares of
Senior Preferred Stock as of December 31, 1995 was $282,770.
Holders who do not accept the offer being made hereby will retain their
rights to be paid their respective Accumulated Dividends in cash if and when
they are declared and paid by the Company.
Expiration of Offering
This offering will terminate at 5 p.m., Philadelphia time, on December 13,
1996, subject to the Company's right to terminate the offering at any time and
to extend the offering for up to 90 days (the "Termination Date").
Subscription Procedure
To subscribe for Shares, a subscriber must complete, sign, date and deliver
the accompanying form of Waiver and Subscription Agreement to the Company or
prior to the Termination Date at the following address:
First Lehigh Corporation
1620 Pond Road
Allentown, PA 18104
Attention: James L. Leuthe, Chairman
All executed Waiver and Subscription Agreements must be in a form
satisfactory to the Company. The Company reserves the right, in its sole
discretion, to require completion or correction of Waiver and Subscription
Agreements submitted or to reject any subscription not complying with the
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<PAGE>
terms of this offering or for any other reason. The Company reserves the right,
in their discretion, to waive any deficiency or irregularity with respect to any
Waiver and Subscription Agreement.
Issuance of the Shares
The Company intends to issue the Shares to those Holders who comply with
the above-described subscription procedure within 30 days after the Termination
Date.
Determination of Offering Price
In determining the purchase price for, and the initial conversion price
into shares of Common Stock of, the Shares, the Board of Directors of the
Company considered such factors as historical bid and ask prices for isolated
trades in the Company's Common Stock that have occurred infrequently from time
to time, internally prepared budgeting assumptions and forecasts, the offering
price of the Company's Senior Preferred Stock in the offering thereof completed
in 1994, the future prospects of the Company, the Bank and the banking industry
in general, the position of the Company and the Bank in the banking industry,
the general condition of the securities markets at the time of the commencement
of this offering and the prices of similar securities of comparable companies.
Federal Income Tax Consequences
The issuance of the Shares to the Holders of currently outstanding shares
of Senior Preferred Stock who accept the offering being made by this Prospectus
will be treated for federal income tax purposes as a distribution of property by
the Company to such Holders with respect to their shares of Senior Preferred
Stock. Accordingly, the distributed Shares will be treated as a taxable dividend
in the amount of $5.00 per Share for federal income tax purposes. The Holders of
the distributed Shares will receive a tax basis in the Shares equal to the
amount of the dividend.
USE OF PROCEEDS
The proceeds of all Shares issued pursuant to the offering made hereby will
be applied to the cancellation of the Accumulated Dividends on the shares of
Senior Preferred Stock held by the Holders who subscribe hereunder. No cash will
be received by the Company in this offering.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1996. The as adjusted column reflects the receipt of the net
proceeds of this offering assuming that all of the Shares offered hereby are
issued.
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<PAGE>
<TABLE>
<CAPTION>
June 30, 1996
June 30, 1996 As Adjusted
------------- -----------
<S> <C> <C>
Shareholders' equity:
Senior Preferred Stock, $.01 par value
1,500,000 shares authorized;
848,902 shares outstanding, 905,426
shares outstanding as adjusted (2) .............. $ 8,489 $ 9,054
Series A Preferred Stock, $.01 par
value, 1,000,000 shares authorized;
682,000 shares outstanding ...................... 6,820 6,820
Common stock, $.01 par value, 10,000,000
shares authorized; 2,000,000 shares
outstanding (1) ................................. 20,000 20,000
Capital in excess of par ............................ 8,764,878 9,046,933
Retained earnings ................................... 3,615,279 3,332,509
Unrealized depreciation on available-for-sale
securities ...................................... (640,236) (640,236)
------------ ------------
Total long-term debt and shareholders' equity ... $ 11,775,230 $ 11,775,080
============ ============
</TABLE>
- ----------------------
(1) Does not include 150,500 shares of Common Stock reserved for issuance under
the Company's stock option plans or the 545,600 shares and the 848,902
shares reserved for issuance upon the conversion of the Series A Preferred
Stock or Senior Preferred Stock, respectively, assuming all of the Shares
offered hereby are sold in this offering. See Notes 11 and 15 of the Notes
to the Consolidated Financial Statements.
(2) Assumes that all of the Shares offered hereby are issued in this offering
and $150 in cash is paid in lieu of fractional shares.
DIVIDENDS
The Company has not paid any dividends on the Common Stock since June 1991.
Due to its financial condition, its recent results of operations and regulatory
restrictions on the payment of dividends by the Bank and the Company, management
of the Company currently does not anticipate the resumption of dividend payments
on the Common Stock. Also, the Company has accrued and unpaid dividends on its
Series A Preferred Stock of $998,960 as of December 31, 1995 and $1,109,956 as
of June 30, 1996 and Accumulated Dividends of $282,770 as of December 31, 1995
and $388,883 on its Senior Preferred Stock as of June 30, 1996. Dividends are
cumulative on the Series A Preferred Stock at the rate of $.3255 per share per
year. Dividends on the Senior Preferred Stock are cumulative from the date of
issuance at the rate of $.25 per share per annum. When, as and if declared by
the Board of Directors of the Company out of funds legally available for that
purpose, dividends are payable to the holders of the Senior Preferred Stock
quarterly. Dividends must be declared and paid, or declared and a sum sufficient
for payment thereof set aside, on the Senior Preferred Stock before any dividend
may be declared or paid on any other capital stock of the Company. Dividends
must be declared and paid, or declared and a sum sufficient for payment thereof
set aside, on the Series A Preferred Stock before any dividend may be declared
or paid on any other capital stock of the Company other than the Senior
Preferred Stock. Under the Company's Articles of Incorporation, the aggregate
amount of
20
<PAGE>
dividends paid in any calendar year on the Senior Preferred Stock and the Series
A Preferred Stock may not exceed the amount of the Company's net income for the
preceding calendar year as shown on the Company's audited statement of income
for such preceding calendar year. The persons who accept the offer to purchase
Shares of Senior Preferred Stock in this offering will have waived accumulated
dividends on the shares of Senior Preferred Stock currently held by them through
December 31, 1995, and dividends on the shares will be cumulative from January
1, 1996. Dividends on Shares of Senior Preferred Stock issued in this offering
will be cumulative from the date of issuance.
Under Pennsylvania law, the Company's Board of Directors may not authorize,
and the Company may not make, distributions (including dividends) if either
(i) the Company would be unable to pay its debts as they become due in the usual
course of its business, or (ii) as determined by the Board of Directors, the
total assets of the Company would be less than the sum total of its liabilities
plus the amount that would be needed, if the Company were to be dissolved at the
time as of which the distribution is measured, to satisfy the preferential
rights upon dissolution of the holders of the Company's outstanding Series A
Preferred Stock, Senior Preferred Stock and any other shares that may have
preferential rights upon dissolution superior to those receiving the
distribution.
Under the Pennsylvania Order, the Bank may not declare or pay any cash
dividends without prior written approval of the Department and the Regional
Director of the FDIC. Certain other provisions under the Pennsylvania Banking
Code restrict the ability of the Bank to transfer funds to the Company in the
form of cash dividends, loans and advances. Under the Federal Reserve Agreement,
the Company may not declare or pay any cash dividends without the prior written
approval of the Federal Reserve Bank and the Department. Pursuant to the Federal
Reserve Agreement, the Federal Reserve Bank refused permission for the Company
to pay cash dividends that have accumulated thereon through December 31, 1995.
There is no assurance that such permission will be granted to the Company in
1996 or 1997. See "Risk Factors -- Regulatory Enforcement Actions to Which the
Company and the Bank Are Subject," "Business and Properties -- Supervision and
Regulation" and "Risk Factors -- Dividends."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated financial review of the Company is intended to compare the
performance of the Company for the years ended December 31, 1995 and 1994 and
for the three-month and six-month periods ended June 30, 1996 and 1995. The
review of the information presented should be read in conjunction with the
consolidated financial statements and the notes thereto included in elsewhere in
this Prospectus.
Overview
During 1995, the Company and the Bank continued their rebuilding program.
The strong emphasis placed on resolving and disposing of the Bank's classified
and nonperforming assets led to a substantial reduction of such assets in 1995
and during the first six months of 1996. In May 1996, the Bank completed the
settlement of a large nonperforming loan that had been the subject of protracted
litigation, which resulted in a recovery of approximately $4.0 million. See
"Comparison of Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
- -- Net Income" below. Management believes that this transaction will provide the
impetus necessary to complete the Bank's restructuring program and a basis for
establishing core operating earnings and future profitability.
The Company recorded net income for 1995 of $84,000. Although the Bank did
not have core operating earnings during 1995, primarily due to the extraordinary
expenses associated with the ongoing carrying and workout costs involved with
the high level of nonearning assets, it did make substantial progress in
resolving these problems. During 1995, the level of classified and/or
nonperforming assets
21
<PAGE>
was reduced by approximately $6.5 million. The Bank continues to pursue
compliance with the requirements of its regulatory orders and anticipates it
will be in full compliance by year end 1996. These efforts will require further
resolution and workout of nonperforming assets, which management believes will
be accompanied by a decrease in workout expenses and carrying costs and possibly
contribute to establishing core operating earnings by the Bank in 1996.
During 1995, the Bank had considered effecting a bulk sale of a portion of
its nonperforming loans to accelerate the disposal of these assets. It was
determined, however, that the progress made during 1995 in resolving various
litigation matters would permit the Bank to resolve these matters on a more
programmatic basis. It is management's belief that this method eliminates the
harsh economic consequences that may result from a bulk sale and will enable the
Bank to continue to enhance its capital and shareholder value.
Based on the most recent regulatory feedback, the condition of the Bank
remains less than satisfactory due to the lack of core earnings and a high level
of nonperforming assets. However, the regulators have recognized the improving
trends in the Bank's performance and its substantial compliance with outstanding
remedial actions, as well as the reductions in problem assets.
Unfortunately, the Bank's lack of core earnings in 1995 prohibited the
Company from paying a cash dividend in 1996 on shares of its Senior Preferred
Stock and Series A Preferred Stock.
Comparison Between 1995 and 1994 Results of Operations
In 1995, the Company recorded a net income of $84,000 as compared to a net
loss of $476,000 in 1994, an increase of $560,000. The loss per share improved
from ($.34) per common share in 1994 to ($.12) for the comparable period in
1995. The improved results in 1995 were due to higher gains on investment
securities, offset in part by a higher provision for loan losses and lower gains
from sale of foreclosed assets.
Net interest income decreased $85,000 to $3.484 million in 1995 from $3.569
million in 1994. The provision for loan losses increased by $225,000 to $250,000
in 1995. Other income increased $794,000 to $2.249 million in 1995 from $1.455
million in 1994, principally as the result of securities gains. Other expenses
decreased $76,000, or 1.39%, in 1995 as compared to the same period in 1994.
The profit performance for financial institutions is measured by the return
on average assets ("ROA") and the return on average equity ("ROE"). The
Company's ROA was 0.08% in 1995 compared to (0.48)% in 1994. The ROE was 0.87%
in 1995 compared to (6.07)% in 1994.
Net Interest Income
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities. The
primary sources used to fund these assets were deposits, borrowed funds and
capital.
In 1995, net interest income declined $85,000, or 2.38%, over the same
period in 1994. Interest income increased $530,000, or 8.14%, while interest
expense increased $615,000, or 20.93%. The majority of the increase in interest
income was attributable to an increase in the average loan balance of $4.255
million, or 8.68%. The Company experienced an increased demand in loan requests
during most of 1995, partially attributable to consumer loan promotion during
the second quarter of 1995,
22
<PAGE>
which resulted in additional loan originations of approximately $750,000. The
average yield on loans in 1995, however, decreased 18 basis points, of which 11
basis points reduction was attributable to recording interest income of $76,000
on nonaccrual loans during 1994 as compared to only $18,000 in 1995.
Interest and dividend income on investment securities increased from $1.62
million in 1994 to $1.75 million in 1995, or 8.11%, as the result of the $1.86
million, or 6.62%, increase in the average balance of the investment security
portfolio.
Interest expense on deposits increased $609,000, or 21.29%, during 1995, as
compared to 1994. The average rate paid by the Company for deposits increased 68
basis points from 3.53% in 1994 to 4.21% in 1995. In addition to the generally
increasing rate environment encountered through the first half of 1995, the
Company experienced a change in the composition of deposits which contributed to
higher interest costs. During spring and summer 1995, the Company believed that
the general public perceived that increases in interest rates may have peaked
and, therefore, customers were more willing to invest in longer-term time
deposits by withdrawing from savings deposits. In addition, during February
1995, the Bank ran a special promotion aimed at increasing the twelve and
twenty-four month categories of the certificates of deposit. Overall,
approximately $2.3 million of new money was deposited. The average balance of
savings deposits decreased $3.2 million, while the average balance of time
deposits increased 11 basis points; however, the average rates paid on time
deposits increased one whole percentage point, which, in conjunction with the
above mentioned change in deposit composition, added significantly to the
increase in interest costs.
Interest expense on borrowed funds amounted to $42,000 in 1995 as compared
to $36,000 in 1994. Since November 1994, the Company has utilized a repurchase
agreement established with a brokerage firm for its borrowed funds.
During 1995, the average yield on interest-earning assets declined 4 basis
points, while the cost of interest-bearing liabilities increased 68 basis
points. The net decrease in the interest rate spread and the net yield on
interest-earning assets was 72 and 45 basis points, respectively.
23
<PAGE>
Interest Rates and Interest Differential
The following tables set forth, for the periods indicated, information
regarding: (a) the average balances of asset and liability categories; (b) the
total dollar amount of interest income from interest-earning assets (including
mortgage loan origination fees representing yield adjustments) and the resulting
average yields; (c) the total dollar amount of interest expense on
interest-bearing liabilities and resulting average costs; (d) net interest
income; (e) interest rate spread; (f) net yield on interest-earning assets; and
(g) the ratio of average interest-earning assets to average interest-bearing
liabilities. Average balances are based on daily balances.
<TABLE>
<CAPTION>
================================================================================================================================
For the Year Ended December 31,
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans(2) $53,276 $5,131 9.63% $49,021 $4,811 9.81%
Investment securities 29,880 1,746 5.84% 28,024 1,615 5.76%
Federal funds sold 2,741 161 5.87% 2,072 82 3.96%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $85,897 $7,038 8.19% $79,117 $6,508 8.23%
======= ------ ------- ======= ------ -------
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
- --------------------------------------------------------------------------------------------------------------------------------
Savings deposits $35,781 $1,068 2.98% $38,983 $1,119 2.87%
Time deposits 46,652 2,402 5.15% 41,971 1,742 4.15%
Repurchase agreement 629 42 6.68% 382 23 6.02%
Other borrowed funds 0 0 0.00% 280 13 4.64%
Long-term debt 436 42 9.63% 534 42 7.87%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $83,498 $3,554 4.26% $82,150 $2,939 3.58%
======= ------ ------- ======= ------ -------
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $3,484 $3,569
====== ======
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SPREAD 3.93% 4.65%
======= =======
- --------------------------------------------------------------------------------------------------------------------------------
NET YIELD ON INTEREST-EARNING ASSETS(1) 4.06% 4.51%
======= =======
- --------------------------------------------------------------------------------------------------------------------------------
RATIO OF AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-
BEARING LIABILITIES 102.87% 96.31%
======= =======
================================================================================================================================
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) For the purposes of computations, nonaccrual loans are not included in the
daily average loan amounts outstanding.
24
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
For the Year Ended December 31,
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans(2) $49,021 $4,811 9.81% $59,420 $5,754 9.68%
Investment securities 28,024 1,615 5.76% 21,466 1,280 5.97%
Federal funds sold 2,072 82 3.96% 3,817 116 3.04%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $79,117 $6,508 8.23% $84,703 $7,150 8.44%
======= ------ ------- ======= ------ -------
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
- --------------------------------------------------------------------------------------------------------------------------------
Savings deposits $38,983 $1,119 2.87% $43,361 $1,384 3.19%
Time deposits 41,971 1,742 4.15% 44,904 2,031 4.52%
Repurchase agreement 382 23 6.02% 0 0 0.00%
Other borrowed funds 280 13 4.64% 0 0 0.00%
Other debts 534 42 7.87% 612 40 6.54%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $82,150 $2,939 3.58% $88,877 $3,455 3.89%
======= ------ ------- ======= ------ -------
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $3,569 $3,695
====== ======
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SPREAD 4.65% 4.55%
======= =======
- --------------------------------------------------------------------------------------------------------------------------------
NET YIELD ON INTEREST-EARNING ASSETS(1) 4.51% 4.36%
======= =======
- --------------------------------------------------------------------------------------------------------------------------------
RATIO OF AVERAGE INTEREST-EARNING
ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES 96.31% 95.30%
======= =======
================================================================================================================================
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) For the purposes of computations, nonaccrual loans are not included in the
daily average loan amounts outstanding.
25
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income and
Interest Expense:
The following table sets forth for the period indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
=======================================================================================================================
For the Year Ended For the Year Ended
December 31, 1995 vs. 1994 December 31, 1994 vs. 1993
Increase (Decrease) Due to Increase (Decrease) Due to
- -----------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $406 $ (86) $320 $(1,024) $ 81 $(943)
Investment Securities 106 25 131 361 (26) 335
Federal funds sold 32 47 79 (63) 29 (34)
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $544 $ (14) $530 $ (726) $ 84 $(642)
---- ----- ---- ------- ----- -----
- -----------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
- -----------------------------------------------------------------------------------------------------------------------
Savings deposits $(87) $ 36 $(51) $ (131) $(134) $(265)
Time deposits 150 510 660 (132) (158) (290)
Repurchase agreement 16 3 19 23 0 23
Other borrowed funds (13) 0 (13) 13 0 13
Long-term debt (8) 8 0 (5) 7 2
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 58 $ 557 $615 $ (232) $(285) $(517)
---- ----- ---- ------- ----- -----
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST
INCOME $486 $(571) $(85) $ (494) $ 369 $(125)
==== ===== ==== ======= ===== =====
=======================================================================================================================
</TABLE>
Other Income
Total other income, excluding securities gains, decreased $342,000, or
35.55%, during 1995 compared to 1994. The majority of decrease for the period
was the result of a decrease of $266,000 in gains recognized from the sale of
foreclosed assets, a decrease of $6,000 in income earned on foreclosed assets
due to sale of several of the revenue producing properties, a net decrease of
$20,000 in the gains recognized on the sale of leasing equipment and a reduction
of $27,000 in service charges on deposits.
During 1995, the net gain on the trading portfolio was $1,493,000, an
increase of $956,000 as compared to 1994. Since the beginning of 1995, the
securities included in the Company's trading portfolio have had significant
appreciation in market value consistent with the overall financial market
indices. Consequently, the Company capitalized on the increase in market value
by selling several trading securities for an aggregate realized gain of $765,000
in 1995 as compared to $139,000 realized gains on the trading portfolio in 1994.
The unrealized holding gains on the trading portfolio were $728,000 and $398,000
in 1995 and 1994, respectively. In addition, during 1995, the net gains on
available-for-sale securities were
26
<PAGE>
$136,000 as compared to net loss of $44,000 in 1994, an increase of $180,000.
Net gains on available-for-sale securities include proceeds of $139,000 from
claim settlements for securities sold in prior years.
Other Expense
Total noninterest expense decreased $76,000, or 1.39%, in 1995 as compared
to 1994. Occupancy expenses declined $121,000, partially as the result of a
reduction of $43,000 in rent expense due to the Company's subleasing a portion
of its office space in 1995 and partially as the result of writing off rent
receivables of $63,000 during 1994. Equipment expense decreased $44,000,
principally due to the discontinuation of the majority of the Company's leasing
operations. Also, FDIC insurance premium declined $33,000 due to lower rates
that became effective in May 1995. Furthermore, expenses on foreclosed assets
declined $328,000, or 30.57%, primarily as the result of a $390,000 decrease in
the provision for foreclosed asset losses. Management continually evaluates the
need for additional writedowns of its foreclosed assets held for sale and the
provision of $350,000 recorded in 1995 was based on the most recent appraisals
and evaluations by management and the Bank's regulators.
Mitigating the above decreases was an increase of $160,000, which was
attributable to legal costs of litigation to close a significant real estate
transaction. On March 15, 1995, the Company was notified that the U.S.
Bankruptcy Court for the Eastern District of Pennsylvania had granted a decision
in the Bank's favor. A subsequent appeal was decided by the District Court on
January 17, 1996 in favor of the Bank. The appellant's motion for the District
Court to stay the closing was denied on February 14, 1996. On May 21, 1996 the
parties stipulated to a settlement in this matter which resulted in a recovery
of approximately $4.0 million. For further information regarding this
settlement, see "Current Events" below. Furthermore, the Company incurred legal
costs of approximately $300,000 in connection with the litigation with the FDIC,
involving the Company's chairman and CEO and the Bank's former president.
Provision for Loan Losses
The allowance for loan losses was $1.624 million at December 31, 1995,
compared to $1.703 million at December 31, 1994. The allowance equaled 2.76% of
loans at December 31, 1995, compared to 2.86% at December 31, 1994. The decline
in this percentage is attributable to growth in the loan portfolio as well as
improvement in the risk and quality of the loan portfolio, and the reduction of
nonperforming loans.
The adequacy of the allowance for loan losses is measured monthly by an
adequacy test. The adequacy test is an evaluation of all loans which have been
classified (other loans especially mentioned, substandard, doubtful, loss) by
internal loan review, regulatory examination, monitoring of delinquency and
other pertinent factors. Allocations are determined by an in depth review of
each individual credit based on its potential future loss. The value of tangible
collateral and/or guarantees is determined as well as the borrower's ability and
willingness to repay. This value, as measured against the loan balance, is used
in determining the reserve allocation for collateral-dependent loans.
Additionally, the Bank considers the suggested guidelines of its regulatory
agencies when completing the analysis of the institution's allowance for loan
losses. The guidelines suggest the utilization of minimum percentages of 15%,
50%, and 100% for use in determining general reserves for loans classified as
substandard, doubtful and loss, respectively. These reserve requirements are a
measurement only and do not constitute a specific reserve placed against any
specifically identified loan. Total loans outstanding, net of substandard,
doubtful and loss, are given an estimated reserve requirement to absorb future
losses. These loans are performing loans, well secured, or loans secured by
cash, cash equivalents or marketable securities. Although it would appear that
little or no reserve allocations would apply to these loans, allowances need to
be made for the historical charge-offs and the human error element in the
perfection of the Bank's interest and other issues unforeseen
27
<PAGE>
to management. Additionally, the Bank conducts a quarterly review of all credits
in excess of $100,000 or more, which demonstrates any recent delinquency
characteristics or other weaknesses, to assure the adequacy of the allowance and
provision for loan losses.
At monthly meetings, the Credit Administration Committee is presented with
the adequacy test of the allowance for loan losses that contains information
relative to both specific credits and the total portfolio in general. The
information is used to determine the adjustment needed for the allowance to be
properly stated. In establishing the adjustment required, management considers a
variety of factors, including, but not limited to, general economic factors and
potential losses from significant borrowers. The Bank continues to strengthen
its underwriting process and internal loan review process by implementing
stringent analytical standards in the loan approval and review procedures.
At December 31, 1995, based on management's evaluation as outlined above,
the amount charged to operating expense for the provision for loan losses was
$250,000 compared to $25,000 at December 31, 1994.
The following table sets forth a reconciliation of the allowance for loan
losses and illustrates the charge-offs and recoveries by major loan category for
year ended December 31, 1995 (in thousands):
Beginning Balance, January 1, 1995 .............. $1,703
------
Charge-offs:
Commercial, financial and agricultural .... 118
Real estate -- construction ............... 114
Real estate -- mortgage ................... 569
Installment loans to individuals .......... 83
Lease financing ........................... 18
------
Total charge-offs ............................... 902
------
Recoveries:
Commercial, financial, and agricultural ... --
Real estate -- construction ............... --
Real estate -- mortgage ................... 537
Installment loans to individuals .......... 24
Lease financing ........................... 12
------
Total Recoveries ................................ 573
------
Net charge-offs ................................. 329
------
Provision for loan losses ....................... 250
------
Ending Balance, December 31, 1995 ............... $1,624
======
Ratio of net charge-offs to
average loans outstanding ................. 0.55%
Financial Condition
At December 31, 1995, the Company's total assets were $103.4 million,
representing an increase of $1.025 million. The increase primarily resulted from
the net change in unrealized appreciation of $1.612 million on available-for-
sale securities.
28
<PAGE>
Loans
Net loans declined $668,000, from $57.9 million at December 31, 1994 to
$57.2 million at December 31, 1995. During the second quarter of 1995, a $1.5
million dollar commercial loan, which was outstanding at December 31, 1994, was
paid off. However, consumer loan demand was good during the current year. Also,
during April and May 1995, the Company had a consumer loan sales promotion,
resulting in new consumer loan originations of approximately $750,000. As part
of the promotion, the Company had offered a reduction of 25 basis points in its
published consumer loan rates. The change in the composition of loans is as
follows: Residential real estate loans increased by $1.04 million, or 4.35%;
Real estate construction loans decreased $605,000, or 12.08%; Real estate
commercial loans increased $620,000, or 2.99%; Consumer loans increased
$824,000, or 23.43%; and Commercial loans declined $2.67 million, or 39.77%.
The following table sets forth the maturity and repricing schedule of the
loan portfolio at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
After one After
Within but within five
one year five years years Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial ............... $ 2,216 $ 817 $ 871 $ 3,904
Real estate--construction. 2,127 837 350 3,314
Reale state--mortgage .... 12,578 19,326 10,162 42,066
Consumer, net ............ 609 3,460 272 4,341
Nonaccrual loans ......... -- -- -- 5,248
---------- ---------- ---------- ----------
Total ....................... $ 17,530 $ 24,440 $ 11,655 $ 58,873
========== ========== ========== ==========
Repricing schedule(1):
Fixed rate loans ......... $ 13,774 $ 19,637 $ 3,031 $ 36,442
Floating rate loans ...... 16,582 601 -- 17,183
Nonaccrual loans ......... -- -- -- 5,248
---------- ---------- ---------- ----------
Total ....................... $ 30,356 $ 20,238 $ 3,031 $ 58,873
========== ========== ========== ==========
</TABLE>
(1) Data for repricing schedule by loan categories is not available.
Investment Securities
The primary objectives of the Company's investment strategy are to maintain
an appropriate level of liquidity and to generate income. During 1995, the
amortized cost of the investment portfolio increased $636,000, or 2.12%;
however, the fair value of the portfolio increased $3.8 million, or 13.56%,
primarily as the result of strong financial markets during 1995.
During December 1995, the Company took advantage of the one-time
reclassification of securities allowed by the Financial Accounting Standards
Board (FASB). The Company reclassified $1.81 million held-to-maturity
securities, consisting of U.S. Treasury and corporate bonds to the
available-for-sale security category.
29
<PAGE>
The largest sector of the investment portfolio remains securities of U.S.
Government agencies and corporations which totals $20.73 million (amortized
cost), or 67.52% of total investment securities. Within this sector of the
portfolio, approximately $1.74 million, or 8.41%, is invested in structured or
"step-up" interest rate securities. The "step-up" rate is a specified rate,
predetermined at origination of the security, and not linked to any index. The
bonds are subject to call provisions at the "step-up" date. The current interest
rates on "step-up" bonds range from 5.50% to 5.65%; however, if held until
maturity in 2001, the rates would range from 8% to 8.15%. In addition,
approximately $5.01 million is invested in mortgage-backed products, including
$4.57 million collateralized mortgage obligations ("CMO") and real estate
mortgage investment conduits ("REMIC"). Twice a year, stress tests are conducted
on these CMOs and REMICs, and, based on stress tests done at year-end 1995, the
estimated average life of these securities is 4.18 years.
At the present time, the Company does not engage in the use of derivative
investment products as a means to hedge the risks in its investment, loan or
deposit portfolios.
Deposits and Repurchase Agreement
Total deposits increased $3.2 million, or 3.59%, from $89.1 million at
December 31, 1994 to $92.3 million at December 31, 1995. Noninterest-bearing
demand deposits declined $461,000, or 4.54%, while interest-bearing deposits
increased $3.66 million, or 4.64%, during 1995. Within interest-bearing
deposits, the composition between types of interest-bearing deposits changed
significantly. Savings, club and interest-bearing demand accounts decreased
$1.79 million; however, the amount of certificates of deposit increased $5.45
million. A significant factor in the increase in certificates of deposit was a
special promotion that was offered by the Bank in February 1995. Management,
believing that the public's overall perception that increases in interest rates
may have temporarily peaked, and after considering competitive trends, offered a
promotion to increase its certificates of deposit within the twelve and
twenty-four month categories. As a result, these categories increased
approximately $3.6 million, and although some depositors withdrew funds and
decreased other deposit classifications, overall, approximately $2.3 million of
new money was deposited. In addition, during the second quarter of 1995, the
depositors were investing in longer term time deposits by withdrawing from other
accounts to take advantages of rates before they started to decline. As a
percentage of total deposits, savings and club accounts and interest-bearing
demand deposits represented 37.89% at December 31, 1995, compared to 41.26% at
December 31, 1994. There were no brokered deposits within the Company's deposit
base at December 31, 1995.
The balance for repurchase agreements declined from $3.811 million at
December 31, 1994 to none at December 31, 1995. The aforementioned increase in
deposits solved the short-term liquidity needs during 1995. The following table
sets forth maturities of time deposits of $100,000 or more for December 31, 1995
and 1994:
December 31,
------------
1995 1994
---- ----
(in thousands)
Three months or less ............... $2,852 $1,264
Over three months through
twelve months ........... 2,811 2,430
Over one year through
five years .............. 1,075 1,038
Over five years .................... 0 0
------ ------
TOTAL ................... $6,738 $4,732
====== ======
30
<PAGE>
Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed assets held
for sale. Nonperforming loans consist of impaired and other loans where the
principal, interest, or both, is 90 or more days past due and loans that have
been placed on nonaccrual. When loans are placed on nonaccrual status, income
from the current period is reversed from current earnings and interest from
prior periods is charged to the allowance for loan losses. Similarly, consumer
loans are considered nonaccrual if the collateral is insufficient to recover the
principal or are charged-off if deemed to be uncollectible. Foreclosed assets
consist of assets acquired through foreclosure or real estate acquired by
acceptance of a deed in lieu of foreclosure.
The following table represents nonperforming assets of the Company at
December 31, 1995 and 1994.
December 31,
------------
1995 1994
---- ----
(in thousands)
Impaired loans ....................................... $ 5,248 $ 7,687
Other loans past due 90 days or more ................. 257 1,731
------- -------
Total nonperforming loans ...................... 5,505 9,418
Foreclosed assets held for sale ...................... 4,814 4,851
------- -------
Total nonperforming assets ..................... $10,319 $14,269
======= =======
Nonperforming loans as a percentage
of loans (net of unearned interest) ............ 9.35% 15.80%
Nonperforming assets as a percentage of assets ....... 9.98% 13.94%
Loans past due 90 days or more decreased $1.474 million, or 70.26%,
from the amount at December 31, 1994. This decrease was due to the following (in
thousands):
Loans brought current ......................... $(1,043)
Loans paid off ................................ (177)
Loans transferred to impaired loan status ..... (493)
Charge-offs ................................... (18)
New delinquent loans .......................... 257
-------
$(1,474)
=======
All delinquent loans are reviewed by management on a weekly basis with
regard to legal proceedings and collection efforts. Management believes that the
above reduction is directly attributable to increased collection procedures and
efforts. Of the delinquent loans, 75.88% are secured by real estate, 18.29% are
loans to commercial borrowers and 5.83% are to consumers.
Impaired loans declined $2.439 million, or 31.73%, at December 31, 1995
compared to December 31, 1994. Loans with carrying values of $2.522 million were
transferred to foreclosed assets held for sale during 1995. Over 90% of the
impaired loans are beyond the point of restructure. These are loans that have
been in litigation and/or foreclosure and can only be resolved through
liquidation. Management believes that the transfer from impaired loans to
foreclosed assets is an improving trend that will continue for
31
<PAGE>
the next two to three quarters as most of the litigation and/or foreclosure
actions are completed. The improving trend and movement of impaired loans to
foreclosed assets enables the Bank to sell the properties. It is anticipated
that the aforementioned trend will continue with a resulting decrease in
nonaccrual and those loans over 90 days delinquent. Although this will increase
the Bank's foreclosed assets portfolio, it will enable the Bank to expedite the
final sale of these assets. Real estate loans represent $5.181 million of
impaired loans, and loans to commercial borrowers represent the remaining
$67,000 balance. The Bank analyzes its reserve requirements monthly and makes
provisions to address new developments as they arise in an effort to recognize
problems and provide for potential future losses to earnings or capital. The
majority of the nonperforming assets are real estate secured.
The following table sets forth the total of commercial and investment
properties, all of which are currently in litigation and/or foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days .................. $1,010,823
Foreclosed assets held for sale ............ 787,027
----------
Total ...................................... $1,797,850
==========
The following table sets forth the total of residential properties to be
foreclosed upon and liquidated including properties currently owned that are
listed for sale. All litigation and foreclosure proceedings in the nonaccrual
and over 90-day category are being actively pursued.
Residential:
Impaired and over 90 days ................. $ 979,186
Foreclosed assets held for sale ........... 1,319,054
----------
Total .................................... $2,298,240
==========
The following table sets forth the total of land developments and building
lots to be foreclosed upon and liquidated, including land developments and
building lots currently owned and listed for sale. All litigation and
foreclosure proceedings in the nonaccrual and over 90-day category are being
actively pursued.
Land Development/Building Lots:
Impaired and over 90 days ................. $1,456,187
Foreclosed assets held for sale ........... 1,059,231
----------
Total ..................................... $2,515,418
==========
The following table sets forth the total of loans in litigation that are
not secured by real estate.
Secured by Other Than Real Estate:
Impaired and over 90 days .................... $ 99,173
==========
The following table sets forth the total of assets that are listed as
nonperforming, but which are under agreements that provide a yield at or in
excess of current market rates.
Performing/Nonperforming Assets:
Impaired and over 90 days .................. $ 0
Foreclosed assets held for sale ............ 1,106,054
----------
Total ...................................... $1,106,054
==========
32
<PAGE>
The following table sets forth the total of assets that are being worked
out or restructured in order to be returned to performing status.
Restructured Loans or Cures:
Impaired and over 90 days ................... $750,743
Foreclosed assets held for sale ............. 0
--------
Total ....................................... $750,743
========
The following table sets forth the total of assets that are under agreement
or being paid off with the settlement dates to take place in the first quarter
of 1996.
Assets Under Agreement or Payoffs:
Impaired and over 90 days .................... $ 0
Foreclosed assets held for sale .............. 542,445
--------
Total ........................................ $542,445
========
The other category represents one credit that is in litigation:
Other:
Impaired and over 90 days ................. $1,209,594
Foreclosed assets held for sale ........... 0
----------
Total ..................................... $1,209,594
==========
On May 21, 1996, the Bank stipulated to the Settlement of a U.S. Bankruptcy
Court proceeding with respect to this other large non-performing credit of
$1,209,594. This settlement resulted in the recovery of approximately $4.0
million by the Bank and the Company.
At December 31, 1995, there were no loans, other than those classified as
nonperforming loans, where known information about borrowers' possible credit
problems causes management to have serious doubts as to their ability to comply
with the current loan repayment terms.
In January 1995, the Company's Board of Directors developed a disposition
plan to reduce approximately $8.0 million of nonperforming and classified
assets. This disposition plan was initiated to comply with the Pennsylvania
Order of the Pennsylvania Department of Banking, a written agreement of the
Federal Reserve Bank and orders issued by the FDIC. As part of this disposition
plan, the Company will aggressively market its nonperforming and classified
assets. Through December 31, 1995, the Company has disposed of approximately
$6.59 million of nonperforming and classified assets. The Company continues to
market its foreclosed assets held for sale through external listing agents.
Allowance for Loan Losses Between Loan Categories
The following table shows the allocation of the allowance for loan losses
as of the dates indicated. The allocation among the different loan categories is
based upon a specific allocation process performed by management. Amounts shown
in the table do not purport to be an indication of future charge-off trends.
33
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Commercial ........................ $ 16 6.75% $ 95 11.10%
Real estate--construction ......... 248 7.32 279 8.4
Real estate--residential .......... 259 42.34 418 39.90
Real estate--commercial ........... 441 36.22 196 34.70
Consumer .......................... 14 7.37 19 5.90
Unallocated ....................... 646 N/A 696 N/A
---------- ---------- ---------- ----------
Total .......................... $ 1,624 100.0% $ 1,703 100.0%
========== ===== ========== =====
</TABLE>
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
investments, sales of assets, growth in core deposits, short and long-term
borrowings and repurchase agreements. Regular loan payments are a dependable
source of funds, while the sale of loans and investment securities, deposit
flows, and loan prepayments are significantly influenced by general economic
conditions and level of interest rates.
At December 31, 1995, the Company maintained $5.043 million in cash and
cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, the Company had $21.437 million in securities
available-for-sale representing 20.73% of total assets at December 31, 1995.
The Company considers its primary source of liquidity to be its core
deposit base. The Company will continue to promote the acquisition of deposits
through its branch offices. At December 31, 1995, approximately 82.76% of the
Company's assets were funded by core deposits acquired within its market area.
An additional 9.90% of the assets were funded by the Company's equity. These two
components provide a substantial and stable source of funds.
The Company's Board of Directors has not declared or paid any dividends on
the outstanding shares of either its Senior or Series A Preferred Stock due to
restrictions placed on it by federal and state banking regulators and other
restrictions that do not permit the Bank to pay dividends to the holding
company. The amount of dividends in arrears on the Senior and Series A Preferred
Stock at December 31, 1995, were $282,770 and $998,960, respectively.
For the year ended December 31, 1995, cash and cash equivalents decreased
$617,000, or 10.90%, as compared to the same period in 1994. Changes in cash are
measured by changes in three major classifications of cash flows known as
operating, investing and financing activities.
In 1995, net cash and cash equivalents of $1.73 million was provided by
operating activities as compared to $2.141 million used in 1994, representing a
net change in operating activities of $3.871 million. During 1994, the Company
increased its trading portfolio by $2.547 million as compared to a decrease of
$476,000 in 1995, representing a net change of $3.023 million. Furthermore, in
1995 other assets decreased $477,000 as compared to an increase of $148,000 in
1994.
34
<PAGE>
Net cash used in investing activities amounted to $1.625 million in 1995 as
compared to $3.679 million in 1994, a decrease of $2.054 million. Net cash
expenditures related to investment securities declined $1.987 million in 1995.
Similarly, net cash expenditures related to foreclosed assets decreased $568,000
in 1995. These two decreases were offset by a net increase in 1995 cash
expenditures for loans to account for most of the decrease in cash used in
investing activities.
Cash flows from financing activities declined $8.453 million in 1995 as
compared to 1994. $3.530 of this decrease is due to proceeds from the 1994
Senior Preferred Stock offering. The balance of the change is primarily due to
the elimination of repurchase agreements during 1995 offset by the increase in
deposits.
Interest Rate Sensitivity
Interest rate sensitivity management involves the matching of maturity and
repricing dates of interest-earning assets and interest-bearing liabilities to
help insure the Company's earnings against extreme fluctuations in interest
rates.
The effect of interest rate changes on the Company's assets and liabilities
may be analyzed by monitoring the Company's interest rate sensitivity gap
("GAP"). An asset or liability is said to be interest-rate sensitive within a
specific time period if it will mature or reprice within a given time period.
The interest rate sensitivity GAP is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A positive GAP (asset sensitive) indicates that more
assets reprice during a given period compared to liabilities, while a negative
GAP (liability sensitive) has the opposite effect.
The Company's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This is accomplished through the measurement of the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. The goal
of maintaining a reasonable balance between interest rate sensitive assets and
interest rate sensitive liabilities is accomplished through the Company's
asset/liability management program.
At December 31, 1995 the Company maintained a one-year cumulative GAP of
negative $2.252 million, or 2.56%, of total interest earning assets which have
been adjusted for the appreciation on those securities available-for-sale. The
effect of this GAP position provided a negative mismatch of assets and
liabilities which exposes the Company to interest rate risk during a period of
rising interest rates. A significant item contributing to the short-term
negative gap is $15.789 million of interest-bearing demand and savings deposits
which do not have contracted maturities and are not as rate sensitive as time
deposits. However, the ability to reprice still exists, and, therefore, they
have been included in the shortest repricing time frame.
35
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at December 31, 1995:
<TABLE>
<CAPTION>
=========================================================================================
December 31, 1995
6
Months
6 Months to 1 1 to 2 2 to 5 Over 5
or Less Year Years Years Years Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning
assets:
- -----------------------------------------------------------------------------------------
Investment securi- $12,078 $ 1,638 $ 1,291 $ 6,646 $12,628 $34,281
ties(1)
- -----------------------------------------------------------------------------------------
Loans (2) 21,095 9,261 7,062 13,176 3,031 53,625
- -----------------------------------------------------------------------------------------
TOTAL $33,173 $10,899 $ 8,353 $19,822 $15,659 $87,906
------- ------- ------- ------- --------- -------
- -----------------------------------------------------------------------------------------
Interest-bearing
liabilities:
- -----------------------------------------------------------------------------------------
Demand-interest $14,164 $ -- $ -- $ -- $ -- $14,164
bearing
- -----------------------------------------------------------------------------------------
Savings and Clubs (3) 722 903 1,444 4,332 13,408 20,809
- -----------------------------------------------------------------------------------------
Time 20,113 10,041 8,809 8,686 1 47,650
- -----------------------------------------------------------------------------------------
Long-term debt 381 -- -- -- -- 381
- -----------------------------------------------------------------------------------------
TOTAL $35,380 $10,944 $10,253 $13,018 $13,409 $83,004
------- ------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------
GAP $(2,207) $ (45) $(1,900) $ 6,804 $ 2,250 $ 4,902
------- ------- ------- ------- ------- ---------
- -----------------------------------------------------------------------------------------
Cumulative GAP $(2,207) $(2,252) $(4,152) $ 2,652 $ 4,802 $ 4,902
======= ======= ======= ======= ======= =======
=========================================================================================
</TABLE>
- ------------------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities. Also, includes equity securities balance in
six months or less category inasmuch as they were categorized as trading
securities effective January 1, 1994. Also includes $2,465,000 of federal
funds sold.
(2) Includes estimated scheduled maturities of the fixed rate loans ignoring
any potential rollover at maturity. Excludes nonaccrual loans of
$5,248,000.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
Capital
The adequacy of the Company's capital is reviewed on an ongoing basis with
reference to size, composition and quality of the Company's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
36
<PAGE>
As required by the federal banking regulatory authorities, new guidelines
have been adopted to measure capital adequacy. Under the guidelines, certain
minimum ratios are required for core capital and total capital as a percentage
of risk-weighted assets and other off balance sheet instruments. For the
Company, Tier I capital consists of shareholders' equity less intangible assets,
and Tier II capital includes the allowable portion of the allowance for possible
loan losses, currently limited to 1.25% of risk-weighted assets.
The following table sets forth the capital ratios of the Bank as of
December 31, 1995 and 1994.
December 31,
Regulatory ----------------
Requirements 1995 1994
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio ......... 4.0%* 8.82% 7.02%
Risk-based capital ratios:
Tier I capital/risk-weighted ........ 4.0% 12.49% 9.54%
Tier I and Tier II capital/
risk-weighted assets ...... 8.0% 13.75% 10.80%
- ------------------
* The Pennsylvania Department of Banking requires the Bank to maintain a
minimum Tier I leverage capital ratio of at least 6.5% under the terms of
the Pennsylvania Order.
Comparison of Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Net Income
Net income for the first six months of 1996 increased $2,002,000, compared
to the same period in 1995. The majority of increase, or $1,539,000, was
attributed to a settlement (the "Settlement") received with respect to a large
impaired loan. On May 21, 1996, the Bank and certain other related parties
entered into the Settlement with respect to a significant real estate
transaction that had been in protracted litigation. The Bank was notified in
January 1996 that it had received a favorable court decision regarding an appeal
of an earlier decision of the U.S. Bankruptcy Court, and the Bank had continued
to pursue resolution of a substantial real estate transaction. On May 22 and May
23, 1996, First Lehigh Corporation and the Bank received cash payments totaling
approximately $4.0 million. The payments were recorded as follows:
Recovery of recorded investment (In thousands)
in impaired loans $ 905
Recovery of other assets 103
Recovery of previous loan charge-off 1,140
1996 interest income 58
Recovery of 1996 expenses 132
Legal fees accrual 105
1996 other income 1,539
------
Total $3,982
======
A final cash payment of $600,000 in connection with the settlement of this
matter is scheduled to be received in the third quarter of 1996, which will be
recorded as other income when it is received.
37
<PAGE>
Other factors contributing toward the increased net income in 1996, over
the same period in 1995 were an increase in net interest income of $236,000, or
14.01%, and credit for loan losses of $667,000, which were mitigated by decline
in gains on trading securities of $415,000, or 60.94%.
On an annualized basis, the Company's ROA was 4.31% in 1996 compared to
0.54% in 1995. The ROE was 43.23% for the first half of 1996 compared to 5.90%
in 1995. Excluding $1,539,000 income from the settlement, on an annualized
basis, the Company's ROA and ROE were 1.3% and 14.0%, respectively, for the
first six months of 1996.
Net Interest Income
In the first six months of 1996, as outlined below, net interest income
increased $236,000, or 14.01%, over the same period in 1995.
During the first half of 1996, interest and fee income on loans increased
$258,000, or 10.36%, over the same period in 1995, primarily as the result of
increase in the average loan balance of $4.61 million, or 8.80%. The Bank
experienced an increased demand in loan requests during the first six months of
1996. In addition, since January 1996, the Bank has instituted a new consumer
loan program pursuant to which the Bank signed agreements with several auto
dealers to provide loans to their credit-worthy customers. During the first six
months of 1996, the Bank originated $7.37 million consumer loans, as compared to
$2.79 million consumer loans in the same period in 1995. Consequently, the
average yield on loans increased 14 basis points from 9.50% in 1995 to 9.64% in
1996.
Interest and dividend income on investment securities increased from
$861,000 in 1995 to $911,000 in 1996, or 5.81%, partially as the result of
receiving a special dividend of $25,000 on an investment. The average balance of
investment security portfolio declined, however, by $57,000, or 0.19%, during
the first half of 1996 than over the same period in 1995.
Interest expense on deposits increased $103,000, or 6.20%, for the six
months ended June 30, 1996, compared to the same period in 1995, partially as
the result of higher average balance for interest-bearing deposits of $2.43
million, or 2.99%, mostly in time deposits, as compared to the first six months
of 1995. In addition, the average rate paid by the Bank for interest-bearing
deposits increased 11 basis points from 4.12% in 1995 to 4.23% in 1996. During
1996, the lower rates on savings deposits were mitigated by higher rates on time
deposits as they lag behind the changes occurring in the national prime rate.
Thus, the Bank's interest cost on time deposits has increased 41 basis points
during the first half of 1996, despite the fact that since July 6, 1995, the
national prime rate has declined 75 basis points. The cost of savings declined,
however, by 32 basis points.
Interest expense on borrowed funds declined by $24,000, or 58.54%, as
average balance declined from $1.26 million in 1995 to $608,000 in 1996. The
cost also declined by 1.05%. Since November 1994, the Company has utilized a
repurchase agreement established with a brokerage firm for its borrowed funds.
During the first half of 1996, the average yield on interest-earning assets
increased 26 basis points and the cost of interest-bearing liabilities increased
8 basis points, resulting in an increase in net spread of 18 basis points. The
net yield on interest-earning assets increased 31 basis points during 1996.
Interest Rates and Interest Differential
The following tables set forth, for the periods indicated, information
regarding: (a) the average balances of asset and liability categories; (b) the
total dollar amount of interest income from interest from
38
<PAGE>
interest-earning assets (including mortgage loan origination fees representing
yield adjustments) and the resulting average yields; (c) the total dollar amount
of interest expense on interest-bearing liabilities and resulting average costs;
(d) net interest income; (e) interest rate spread; (f) net yield on
interest-earning assets; and (g) the ratio of average interest-earning assets to
average interest-bearing liabilities. Average balances are based on daily
balances.
<TABLE>
<CAPTION>
=================================================================================================================
For the Six Months Ended June 30,
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
- -----------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans(2) $57,029 $ 2,748 9.64% $52,415 $ 2,490 9.50%
Investment securities 30,330 911 6.01% 30,387 861 5.67%
Federal funds sold 2,156 58 5.38% 1,923 57 5.93%
------- ------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets $89,515 $ 3,717 8.31% $84,725 $ 3,408 8.05%
======= ------- ------- ======= ------- -------
- -----------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
- -----------------------------------------------------------------------------------------------------------------
Saving deposits $35,854 $ 496 2.78% $35,714 $ 549 3.10%
Time deposits 47,917 1,267 5.32% 45,626 1,111 4.91%
Other borrowed funds 608 17 5.53% 1,257 41 6.58%
Long-term debt 354 16 8.94% 463 22 9.45%
------- ------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $84,733 $ 1,796 4.26% $83,060 $ 1,723 4.18%
======= ------- ------- ======= ------- -------
- -----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 1,921 $ 1,685
======= =======
- -----------------------------------------------------------------------------------------------------------------
INTEREST RATE SPREAD 4.05% 3.87%
======= =======
- -----------------------------------------------------------------------------------------------------------------
NET YIELD ON INTEREST-
EARNING ASSETS(1) 4.29% 3.98%
======= =======
- -----------------------------------------------------------------------------------------------------------------
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO AVERAGE
INTEREST-BEARING LIABILITIES 105.64% 102.00%
======= =======
=================================================================================================================
</TABLE>
- ------------------------
(1) Net interest income divided by average interest-earning assets.
(2) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
39
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
For the Six Months Ended June 30,
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
- -----------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans(2) $52,415 $ 2,490 9.50% $50,066 $ 2,439 9.74%
Investment securities 30,387 861 5.67% 25,574 730 5.71%
Federal funds sold 1,923 57 5.93% 2,571 44 3.42%
------- ------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets $84,725 $ 3,408 8.05% $78,211 $ 3,213 8.22%
======= ------- ------- ======= ------- -------
- -----------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
- -----------------------------------------------------------------------------------------------------------------
Saving deposits $35,714 $ 549 3.10% $39,400 $ 549 2.81%
Time deposits 45,626 1,111 4.91% 42,608 876 4.15%
Other borrowed funds 1,257 41 6.58% 10 0 0.00%
Long-term debt 463 22 9.45% 558 20 7.13%
------- ------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $83,060 $ 1,723 4.18% $82,576 $ 1,445 3.53%
======= ------- ------- ======= ------- -------
- -----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 1,685 $ 1,768
======= =======
- -----------------------------------------------------------------------------------------------------------------
INTEREST RATE SPREAD 3.87% 4.69%
======= =======
- -----------------------------------------------------------------------------------------------------------------
NET YIELD ON INTEREST-
EARNING ASSETS(1) 3.98% 4.52%
======= =======
- -----------------------------------------------------------------------------------------------------------------
RATIO OF AVERAGE INTER-
EST-EARNING ASSETS TO
AVERAGE INTEREST-BEAR-
ING LIABILITIES 102.00% 94.71%
======= =======
=================================================================================================================
</TABLE>
- -----------------------
(1) Net interest income divided by average interest-earning assets.
(2) For the purpose of these computations, nonaccruing loans are not included
in the daily average loan amounts outstanding.
40
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income and
Interest Expense:
The following table sets forth for the period indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
========================================================================================================================
For the Six Months Ended For the Six Months Ended
June 30, 1996 vs. 1995 June 30, 1995 vs. 1994
Increase (Decrease) Due to Increase (Decrease) Due to
- ------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $241 $ 17 $258 $123 $ (72) $ 51
Investment Securities (8) 58 50 139 (8) 131
Federal funds sold 13 (12) 1 (30) 43 13
---- ---- ---- ---- ----- ----
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $246 $ 63 $309 $232 $ (37) $195
---- ---- ---- ---- ----- ----
- ------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
- ------------------------------------------------------------------------------------------------------------------------
Savings deposits $ 29 $(82) $(53) $(75) $ 75 $ 0
Time deposits 34 122 156 37 198 235
Other borrowed funds (19) (5) (24) 41 0 41
Long-term debt (5) (1) (6) (8) 10 2
---- ---- ---- ---- ----- ----
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 39 $ 34 $ 73 $( 5) $ 283 $278
---- ---- ---- ---- ----- ----
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST
INCOME $207 $ 29 $236 $237 $(320) $(83)
==== ==== ==== ==== ===== ====
========================================================================================================================
</TABLE>
Other Income
Total other income, excluding securities gains, increased $1,573,000 for
the six months ended June 30, 1996 compared to the same period in 1995,
principally as the result of recording $1,539,000 for the Settlement of an
impaired loan. The amount $1,539,000 represents prior years' interest, late
charges, and recovery of legal and other costs associated with the loan. If
$1,539,000 were excluded from the other income, other income (excluding
securities gains) would have increased $34,000 in 1996 compared to the same
period in 1995. The increase of $58,000 in service charges and other fees was
mitigated by a decrease of $15,000 in gains from the sale of foreclosed assets
and a decrease of $9,000 in rental income due to discontinuing the Company's
leasing operations. For the first half of 1996, the net gain on trading
portfolio declined $415,000, compared to the same period in 1995.
Other Expenses
Total other expenses increased $59,000, or 2.48%, for the first six months
of 1996 compared to the same period in 1996. Salaries and employee benefits
declined $40,000 in 1996 compared to 1995, principally as a result of $48,000
bonus and relocation expenses incurred during the first half of 1995.
41
<PAGE>
FDIC insurance premium decreased $53,000, or 40.46%, as the result of lower
rates. Foreclosed asset expenses declined $23,000 as compared to the first half
of 1995. The above decreases in expenses were mitigated by increased legal costs
of approximately $172,000 in connection with the litigation with the FDIC,
involving the Company's chairman and CEO and the Bank's former president.
Provision for Loan Losses
The allowance for loan losses was $1.937 million at June 30, 1996, compared
to $1.624 million at December 31, 1995. The allowance equaled 2.98% of loans at
June 30, 1996, compared to 2.76% at December 31, 1995.
In May 1996, management completed a detailed analysis of gross loan
charge-offs for the years 1991 to 1995. This analysis took into consideration
the type of lending done during those years, changes in the concentration of the
loan portfolio and the current composition of the loan portfolio. Based on this
review, management decided to increase the general allowance percentage applied
to nonclassified loans as of May 31, 1996. This increase resulted in an
additional provision for loan losses of approximately $300,000 during the
quarter ended June 30, 1996. However, due primarily to the large recovery
recorded during the second quarter, an overall credit for loan losses of
$667,000 was recorded for the six months ended June 30, 1996.
The following table sets forth a reconciliation of the allowance for loan
losses and illustrates the charge-offs and recoveries by major loan category for
six months ended June 30, 1996 (in thousands):
Beginning Balance, January 1, 1996 ...................... $ 1,624
Charge-offs:
Commercial, financial and agricultural .... --
Real estate -- construction ............... --
Real estate -- mortgage ................... 192
Installment loans to individuals .......... 9
Lease financing ........................... --
-------
Total charge-offs ............................ 201
-------
Recoveries:
Commercial, financial and agricultural .... 9
Real estate - construction ................ --
Real estate - mortgage .................... 1,165
Installment loans to individuals .......... 7
Lease financing ........................... --
-------
Total recoveries ............................. 1,181
-------
Net recoveries ............................... (980)
-------
Credit for loan losses ....................... (667)
-------
Ending Balance, June 30, 1996 ................ $ 1,937
=======
Ratio of net recoveries to
average loans outstanding ................. 1.59%
Financial Condition
At June 30, 1996, the Company's total assets were $110.6 million,
representing an increase of $7.19 million from December 31, 1995, principally as
the result of receiving approximately $4.0 million in the Settlement with
respect to a large impaired loan and higher demand in loan originations.
42
<PAGE>
Loans
Net loans increased $5.82 million from $57.25 million at December 31, 1995
to $63.07 million at June 30, 1996. As mentioned earlier, the Bank has
agreements with several auto dealers to provide loans to their credit-worthy
customers. The consumer loan portfolio has increased approximately $4.7 million,
or 108%, since December 31, 1995, mostly as a result of originating more auto
loans. The change in the composition of other loans at June 30, 1996 compared to
December 31, 1995 is as follows: Real estate construction loans declined
$161,000, or 3.66%; while Residential real estate loans increased $977,000, or
3.93%; Real estate commercial loans increased $265,000, or 1.24%; and Commercial
loans increased $350,000, or 8.81%.
The following table sets forth the maturity and repricing schedule of the
loan portfolio at June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
After one After
Within but within five
One year five years years Total
-------- ---------- ----- -----
<S> <C> <C> <C> <C>
Maturity Schedule:
Commercial ..................... $ 2,421 $ 1,061 $ 772 $ 4,254
Real estate--construction ...... 3,140 301 345 3,786
Real estate--mortgage .......... 13,905 19,239 11,107 44,251
Consumer, net .................. 824 7,743 449 9,016
Nonaccrual loans ............... -- -- -- 3,700
---------- ---------- ---------- ----------
Total ............................... $ 20,290 $ 28,344 $ 12,673 $ 65,007
========== ========== ========== ==========
Repricing Schedule (1):
Fixed rate loans .................... $ 16,076 $ 23,643 $ 3,343 $ 43,062
Floating rate loans ................. 17,653 592 -- 18,245
Nonaccrual loans .................... -- -- -- 3,700
---------- ---------- ---------- ----------
Total .................................. $ 33,729 $ 24,235 $ 3,343 $ 65,007
========== ========== ========== ==========
</TABLE>
- ------------------------------
(1) Data for repricing schedule by loan categories is not available.
Investment Securities
The primary objectives of the Company's investment strategy are to maintain
an appropriate level of liquidity and to generate income.
The largest sector of the investment portfolio remains securities of U.S.
Government agencies and corporations which totals $22.88 million (amortized
costs), or 69.88%, of total investment securities. Included in the above are
$4.91 million mortgage-backed products, mostly consisting of collateralized
mortgage obligations ("CMO") and real estate mortgage investment conduits
("REMIC"). Twice a year, stress tests are conducted on these CMOs and REMICs,
all of which were passed during the recent tests done.
At the present time, the Company does not engage in the use of derivatives
investment products as a means to hedge the risks in its investment, loan or
deposit portfolios.
43
<PAGE>
Deposits and Repurchase Agreement
Total deposits increased $3.72 million, or 4.03%, from $92.31 million at
December 31, 1995 to $96.03 million at June 30, 1996. During the second quarter
of 1996, the Bank experienced deposit growth in all categories except in money
market accounts. Noninterest-bearing demand deposits increased $895,000;
savings, club and interest-bearing demand deposits increased $2.05 million,
partially as a result of $399,000 increase in Christmas club accounts which will
mature in October 1996; and time deposits increased $772,000 since December 31,
1995. As a percentage of total deposits, savings, club accounts and
interest-bearing demand deposits represented 38.55% at June 30, 1996, compared
to 37.89% at December 31, 1995. There were no brokered deposits within the
Company's deposit base at June 30, 1996.
The balance for a repurchase agreement increased to $1.85 million at June
30, 1996. There were no such borrowings at December 31, 1995. As mentioned
earlier, the brisk demand in loans necessitated the borrowing of funds against
the repurchase agreement for the short term.
The following table sets forth maturities of time deposits of $100,000 or
more at June 30, 1996 and December 31, 1995.
June 30, December 31,
1996 1995
---- ----
(in thousands)
Three months or less....................... $1,814 $2,852
Over three months through twelve months.... 4,180 2,811
Over one year through five years........... 1,309 1,075
Over five years............................ 0 0
------ ------
Total...................................... $7,303 $6,738
====== ======
Nonperforming Assets
The following table represents nonperforming assets of the Company at June
30, 1996 and December 31, 1995.
June 30, December 31,
1996 1995
---- ----
(in thousands)
Impaired loans................................. $ 3,700 $ 5,248
Other loans past due 90 days or more........... 294 257
------- -------
Total nonperforming loans.................. 3,994 5,505
Foreclosed assets held for sale................ 5,272 4,814
------- -------
Total nonperforming assets................. $ 9,266 $ 10,319
======= ========
Nonperforming loans as a percentage
of loans (net of unearned interest)........ 6.14% 9.35%
Nonperforming assets as a percentage of assets. 8.38% 9.98%
Loans past due 90 days or more increased $37,000 from the amount at
December 31, 1995. All delinquent loans are reviewed by management on a weekly
basis with regard to legal proceedings and collection efforts. Of the delinquent
loans, 39.12% are secured by real estate, 37.75% are loans to consumers and
23.13% are to commercial borrowers.
44
<PAGE>
Impaired loans declined $1,548,000, or 29.50%, at June 30, 1996 compared to
December 31, 1995. Loans with carrying values of $938,000 were transferred to
foreclosed assets held for sale during the first quarter of 1996. In addition,
on May 21, 1996, the Bank stipulated to the Settlement of a U.S. Bankruptcy
Court proceeding with respect to a large impaired loan, resulting in a reduction
of loan balance of $905,000, as discussed previously. Over 90% of the impaired
loans are beyond the point of restructure. These are loans that have been in
litigation and/or foreclosure and can only be resolved through liquidation.
Management believes that the transfer from impaired loans to foreclosed assets
is an improving trend that will continue for the next two to three quarters as
most of the litigation and/or foreclosure actions are completed. The improving
trend and movement of impaired loans to foreclosed assets enables the Bank to
sell the properties. It is anticipated that the aforementioned trend will
continue with a resulting decrease in impaired loans and those loans over 90
days delinquent. Although this will increase the Bank's foreclosed assets
portfolio, it will enable the Bank to expedite the final sale of these assets.
Real estate loans represent $3.605 million of impaired loans, loans to
commercial borrowers represent $67,000, and loans to consumer borrowers
represent the remaining $28,000 balance. The Bank analyzes its allowance
requirements monthly and makes provisions to address new developments as they
arise in an effort to recognize problems and provide for potential future losses
to earnings or capital.
The majority of nonperforming assets are secured by real estate. The
composition of the nonperforming assets at June 30, 1996 follows:
The following table sets forth the total of commercial and investment
properties, all of which are currently in litigation and/or foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days................. $1,868,615
Foreclosed assets held for sale........... 832,565
----------
Total..................................... $2,701,180
==========
The following table sets forth the total of residential properties to be
foreclosed upon and liquidated, including properties currently owned that are
listed for sale. All litigation and foreclosure proceedings in the nonaccrual
and over 90-day category are being actively pursued.
Residential:
Impaired and over 90 days................. $1,405,470
Foreclosed assets held for sale........... 1,074,911
----------
Total..................................... $2,480,381
==========
The following table sets forth the total of land developments and building
lots to be foreclosed upon and liquidated, including land developments and
building lots currently owned and listed for sale. All litigation and
foreclosure proceedings in the nonaccrual and over 90-day category are being
actively pursued.
Land Development/Building Lots:
Impaired and over 90 days................ $ 546,513
Foreclosed assets held for sale.......... 2,631,661
----------
Total.................................... $3,178,174
==========
The following table sets forth the total of loans in litigation that are
not secured by real estate.
45
<PAGE>
Secured by Other Than Real Estate:
Impaired and over 90 days................. $ 147,301
==========
The following table sets forth the total of assets that are listed as
nonperforming, but which are under agreements that provide a yield at or in
excess of current market rates.
Performing/Nonperforming Assets:
Impaired and over 90 days.................. $ 25,611
==========
The following table sets forth the total of assets that are under agreement
or are being paid off with the settlement dates to take place in the third
quarter of 1996.
Assets Under Agreement or Payoffs:
Impaired and over 90 days.................. $ 0
Foreclosed assets held for sale............ 732,459
----------
Total...................................... $ 732,459
==========
At June 30, 1996, there were no loans, other than those classified as
nonperforming loans, where known information about borrowers' possible credit
problems causes management to have serious doubts as to their ability to comply
with the current loan repayment terms.
In January 1996, the Company's Board of Directors developed a disposition
plan to reduce approximately $5.3 million of nonperforming and/or classified
assets. This disposition plan was initiated to comply with the Administrative
Order, the Federal Reserve Agreement and orders issued by the FDIC. As part of
this disposition plan, the Company will aggressively market its nonperforming
and/or classified assets. Through June 30, 1996, the Company eliminated gross
$2.89 million of nonperforming and/or classified assets, including $161,600 in
charge-offs, $1,557,000 in cash payments and $1,171,100 as a result of
declassification or cures. The $2.89 million reduction was slightly higher than
management's targeted reduction of $2.63 million for the same period. Pending
and potential reductions for the third quarter are expected to approximate $.8
million, less than the targeted $1.317 million per quarter. The Bank anticipates
that it will be in compliance with the regulatory requirements as of August 26,
1996.
Management believes that the current level of dispositions of nonperforming
assets will allow the Bank to meet all scheduled regulatory requirements. The
Company continues to market its foreclosed assets held for sale through listing
by external agents.
Liquidity and Funds Management
At June 30, 1996, the Company maintained $4.602 million in cash and cash
equivalents in the form of cash and due from banks (after reserve requirements).
In addition, the Company had $21.775 million in securities available-for-sale
representing 19.69% of total assets at June 30, 1996.
The Company considers its primary source of liquidity to be its core
deposit base. The Company will continue to promote the acquisition of deposits
through its branch offices. At June 30, 1996, approximately 80.23% of the
Company's assets were funded by core deposits acquired within its market area.
An additional 10.65% of the assets were funded by the Company's equity. These
two components provide a substantial and stable source of funds.
The Company's Board of Directors has not declared or paid any dividends on
the outstanding shares of either its Senior or Series A Preferred Stock due to
restrictions placed on it by federal and state banking
46
<PAGE>
regulators and other restrictions that do not permit the Bank to pay dividends
to the holding company. The amount of undeclared dividends in arrears on the
Senior and Series A Preferred Stock at June 30, 1996, were $388,883 and
$1,109,956, respectively.
For the six months ended June 30, 1996 cash and cash equivalents decreased
$441,000. Changes in cash are measured by changes in three major classifications
of cash flows known as operating, investing and financing activities.
During the first six months of 1996, net cash and cash equivalents of
$466,000 were provided by operating activities compared to $457,000 provided in
the same period 1995, an increase of $9,000.
Net increase in cash used in investing activities was $3.98 million during
the first six months of 1996 as compared to the same period in 1995. The primary
reason for the increase was attributed to net increase in cash expenditures of
$4.41 million for loans, offset in part by net cash provided by investment
securities of $748,000. In addition, net proceeds from sale of foreclosed assets
declined $819,000, while net cash provided from sale of real estate and other
investments increased $517,000 during the first half of 1996 as compared to the
same period in 1995.
Net cash of $5.51 million was provided by financing activities during the
first six months of 1996 as compared to $72,000 used in the same period in 1995,
representing a net change in financing activities of $5.58 million. The net
increase of $324,000 and $5.26 million cash provided from deposits and
repurchase agreements, respectively, was the primary reason for the net change
for the six months ended June 30, 1996 as compared to the same period in 1995.
Interest Rate Sensitivity
At June 30, 1996 the Company maintained a one-year cumulative GAP of
negative $5.417 million, or 5.63% of total interest-earning assets which have
been adjusted for the depreciation on securities available-for-sale. The effect
of this GAP position provides a negative mismatch of assets and liabilities
which exposes the Company to interest rate risk during a period of rising
interest rates. A significant item contributing to the short-term negative gap
is $17.344 million of interest-bearing demand and savings deposits which do not
have contractual maturities and are not as rate sensitive as time deposits.
However, the ability to reprice still exists, and, therefore, they have been
included in the shortest repricing time frame.
47
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at June 30, 1996:
<TABLE>
<CAPTION>
===================================================================================================================================
June 30,
1996
- -----------------------------------------------------------------------------------------------------------------------------------
6 Months
6 Months to 1 1 to 2 2 to 5 Over 5
or less Year Years Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities (1) $10,790 $ 1,352 $ 1,221 $ 5,390 $16,229 $34,982
- ------------------------------------------------------------------------------------------------------------------------------------
Loans (2) 24,244 9,485 6,044 18,191 3,343 61,307
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $35,034 $10,837 $ 7,265 $23,581 $19,572 $96,289
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Demand-interest bearing $15,283 $ -- $ -- $ -- $ -- $15,283
- ------------------------------------------------------------------------------------------------------------------------------------
Savings and Clubs (3) 1,320 741 1,481 4,444 13,755 21,741
- ------------------------------------------------------------------------------------------------------------------------------------
Time 17,857 13,910 7,653 9,002 0 48,422
- ------------------------------------------------------------------------------------------------------------------------------------
Other borrowed funds 1,850 -- -- -- -- 1,850
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt 327 -- -- -- -- 327
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $36,637 $14,651 $ 9,134 $13,446 $13,755 $87,623
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
GAP ($1,603) ($3,814) ($1,869) $10,135 $ 5,817 $ 8,666
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP ($1,603) ($5,417) ($7,286) $ 2,849 $ 8,666 $ 8,666
======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities. Also, includes equity securities balance in
six months or less category as they were categorized as trading securities
effective January 1, 1994. Also includes $1,569,000 of federal funds sold.
(2) Includes estimated schedule maturities of the fixed rate loans ignoring any
potential rollover at maturity. Excludes nonaccrual loans of $3,700,000.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
48
<PAGE>
Capital
The following table sets forth the capital ratios of the Bank as of
June 30, 1996 and 1995.
Regulatory June 30,
Requirements 1996 1995
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio.............. 4.0%* 10.54% 8.75%
Risk-based capital ratios:
Tier I capital/risk-weighted............. 4.0% 14.46% 11.88%
Tier I and Tier II capital/
Risk-weighted assets............ 8.0% 15.72% 13.13%
- ----------------------
* The Pennsylvania Department of Banking requires the Bank to maintain a
minimum Tier I leverage capital ratio of at least 6.5% under the terms of
the Pennsylvania Order.
Comparison of Three Months Ended June 30, 1996 to Three Months Ended June 30,
1995
Analysis of Operations
Net income for three months ended June 30, 1996 was $2,145,000, an increase
of $1,984,000 as compared to the same period in 1995. During the second quarter
of 1996, the Bank received the Settlement, as previously discussed, for a large
impaired loan, resulting in recording $1,539,000 in other income category. In
addition, as the result of fully funded allowance for loan losses, the Bank
recorded a credit for loan losses of $719,000 which was mitigated by lower
securities gains of $361,000.
Net interest income increased $207,000 for the second quarter of 1996 as
compared to 1995. Interest and fees earned on loans increased $196,000, or
15.53%, mostly the result of an increased average loan portfolio of $1.695
million, as well as increased yield of 19 basis points as compared to the second
quarter 1995. Interest expense was almost the same as 1995.
Other income increased $1,213,000 in the second quarter of 1996 as compared
to the second quarter of 1995. The majority of increase, or $1,539,000, was for
the Settlement amount as mentioned earlier mitigated by lower securities gains
of $361,000.
Total other expenses increased $155,000, or 13.48%, for three months ended
June 30, 1996 as compared to the same period in 1995. FDIC insurance premium
declined $27,000. However, foreclosed asset expenses increased $69,000. In
addition, legal fees increased approximately $105,000 as a result of expenses
incurred in connection with litigation with the FDIC involving the Company's
chairman and the Bank's former president, as compared to the same period in
1995.
Net cash flows from operating activities increased $1.1 million,
principally as the result of changes in the trading securities portfolio.
Net increase in cash used in investing activities was $2.14 million during
the three months ended June 30, 1996, as compared to the same period in 1995.
The increase was primarily attributed to net increase in investment securities
of $1.3 million and in loan originations of $0.7 million.
49
<PAGE>
Cash flows from financing activities increased $2.8 million, primarily as
the result of increase in deposits of $2.6 million.
BUSINESS AND PROPERTIES
General
First Lehigh Corporation (the "Company") was incorporated under
Pennsylvania law in 1982 and is registered as a bank holding company under the
Bank Holding Company Act of 1956 (the "Holding Company Act"). The Company
provides financial and managerial resources and services to, and coordinates and
evaluates the activities of, First Lehigh Bank (the "Bank") and the Bank's
subsidiaries. Through the Bank, the Company provides a wide range of financial
services, principally to consumers and small- to medium-size businesses in the
Lehigh Valley area of Pennsylvania.
As of June 30, 1996, the Company had total assets of $110.6 million and
total deposits of $96.0 million.
In recent years, the financial condition, results of operations and
business of the Company and the Bank have been adversely affected by the adverse
markets for real estate and economic conditions in its market areas. The Company
and the Bank have also consented to certain regulatory orders that have
established certain requirements, including an increased regulatory capital
requirement for the Bank, generally intended to enhance the financial condition
and operations of the Company and the Bank. See "Risk Factors -- Regulatory
Enforcement Actions to Which the Company and the Bank Are Subject."
The Bank experienced financial difficulties in the early 1990's that
resulted from problems in loan administration and controls and inadequacies in
the Bank's internal loan review functions. In order to take steps to correct
such problems, the Bank has initiated numerous actions.
The Bank has improved its loan files by updating old loan files with
current cash flow analyses and by obtaining new appraisals on older credits.
Management of the Bank reviews all loans having a principal balance in excess of
$50,000 on a quarterly basis to determine whether the allowance for loan losses
is adequate. The Bank has also allocated additional staff to conduct such loan
reviews. The Bank strengthened underwriting policies by reducing collateral
emphasis by setting new minimums for cash flow coverage of debt service and by
increasing loan to value ratios. The Bank has significantly reduced the Bank's
exposure to certain types of lending, primarily loans to builder/developers, by
curtailing lending to new customers in the real estate development business and
by reducing exposure to existing customers in the real estate business.
It is the Bank's policy for appraisals of properties held as Foreclosed
Assets to be periodically updated. The Bank has improved the appraisal process
by pre-qualifying all appraisers from prepared lists of those appraisers who are
acceptable to the Bank, with respect to which the Bank has been assisted by new
certification requirements for appraisers under state law.
The Bank has improved its record keeping functions by adding better
controls, formalizing written policies and internal loan grading by grading all
loans over $100,000, assigning a risk rating to each loan and adjusting loan
loss reserves to match the internal loan grading. The Bank has worked closely
with state regulators to increase the depth of all management and board reports,
including the monthly budget reporting to the Department.
50
<PAGE>
Business of the Company
First Lehigh Bank
The Bank, which was established in 1923, engages in a full-service
commercial banking business, including accepting time and demand deposits,
making secured and unsecured commercial and consumer loans, financing commercial
transactions, and making construction and mortgage loans. Its deposits are
insured by the FDIC to the extent provided by law.
The Bank maintains its principal executive offices in Allentown, Lehigh
County, Pennsylvania, with five banking offices located in Pennsylvania. The
Bank's five branches are located in Walnutport and Cherryville, Northampton
County, Allentown and Bethlehem, Lehigh County, and Quakertown, Bucks County.
The Bank is a Pennsylvania banking institution under the supervision of the
Department and the FDIC.
Lending Activity of the Bank
The Bank offers consumer and commercial loans to customers and prospective
customers. Commercial loans are for working capital lines of credit, term loans
to purchase equipment, fixtures or furniture, commercial mortgages to finance
investment properties, and commercial mortgages to acquire business-owner
occupied properties. The Bank writes loans at variable interest rates or at
fixed interest rates with balloon maturities. Commercial lines of credit are
usually reviewed on an annual basis while term loans and mortgages usually
mature within a five-to-seven-year period. The Bank makes commercial loans to a
wide variety of service, retail, distribution and manufacturing companies. In
the past the Bank has had a concentration of loans to real estate
developers/speculators. The Bank has significantly reduced this concentration.
In general, the Bank requires collateral on all commercial loans.
Collateral is in the form of real estate, either residential or commercial,
cash, marketable securities, accounts receivable, inventory, equipment and other
fixed assets. The Bank generally does not make loans based primarily on the
accounts receivable or inventory of a business. In general, the Bank maintains a
loan-to-value ratio of not greater than 75% (except higher amounts would be
available for the most creditworthy customers) on real estate taken as
collateral. The Bank will accept a second or third lien position on real estate
assuming that the overall loan-to-value ratio is not greater than 75% and that
prior liens are not excessive in relation to the Bank's loan.
Commercial mortgages that have an adjustable rate feature are based upon
the base interest rate of the Bank and, in general, do not have interest rate
caps or floors. The Bank does not offer negative amortization loans. As
structured, adjustable rate commercial mortgages of the Bank are not anticipated
to present increased prepayment risks, increased default risks or, in periods of
rising interest rates, increased risks that loan rates may lag behind the Bank's
funding costs to a material extent.
In addition to commercial loans, the Bank makes personal loans to consumers
and individuals. These loans include "bridge loans" to acquire a residential
property when the existing home remains unsold and installment loans for the
purchase of automobiles, debt consolidation or other personal purposes. The Bank
makes residential first mortgage loans for the acquisition of homes and
refinancings of mortgages in the Bank's primary market area. The Bank offers
adjustable rate residential mortgages. In general, the Bank will lend up to 80%
of the value of a borrower's home, less any prior liens. The borrower must
demonstrate the financial ability to service the loan and must have an
acceptable credit repayment history.
51
<PAGE>
Management of the Bank believes that these types of loans present no undue risks
or lending concentrations.
Secured loans up to $50,000 may be approved by the individual loan officer.
Loans in excess of $50,000 must be approved by the full Board of Directors of
the Bank. All loans approved by the officer's loan committee are reported to the
full Board of Directors of the Bank on a monthly basis.
Non-Banking Subsidiaries
The Company's other indirect subsidiaries are six corporations wholly owned
by the Bank, a limited partnership of which the Bank holds a 49% equity interest
and a corporation of which the Bank has a 50% ownership interest that is a
general partner of the aforementioned limited partnership. These subsidiaries
primarily own real estate that is leased to the Bank.
Competition
The Bank competes actively with other Lehigh Valley area commercial banks,
many of which have assets substantially greater than those of the Bank, as well
as with major banking and financial institutions headquartered elsewhere. The
Bank is generally competitive with other financial institutions in the service
area with respect to interest rates paid on time and savings deposits, service
charges on deposit accounts and interest rates charged on loans.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The following discussion encompasses the material
statutory and regulatory provisions that affect the Company and the Bank. To the
extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions.
Bank Holding Companies. The Company is registered as a "bank holding
company" under the Holding Company Act. As a bank holding company, the Company
is subject to regulation by the Federal Reserve Board and is required to file
with the Federal Reserve Board an annual report and such additional information
as the Federal Reserve Board may require pursuant to the Holding Company Act.
The Federal Reserve Board will also make examinations of the Company and its
subsidiaries. The Federal Reserve Board has the authority to issue
cease-and-desist orders against a bank holding company and its non-bank
subsidiaries if the Board determines that their actions constitute a serious
risk to the financial safety, soundness or stability of the bank holding
company's subsidiary bank or a violation of law. The order may require the bank
holding company and its non-bank subsidiaries to cease the activity or may
require the bank holding company to divest itself of the non-bank subsidiary or
subsidiaries.
A bank holding company is prohibited under the Holding Company Act from,
among other things, engaging in or acquiring direct or indirect control of more
than 5% of the voting shares of any company engaged in non-banking activities
unless the Federal Reserve Board, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. In making determinations, the Federal
Reserve Board considers whether the performance of these activities by a bank
holding company would offer benefits to the public that outweigh possible
adverse effects. Activities found permissible as activities properly incident to
banking include, among others: operating a mortgage, finance, credit card or
factoring company; performing certain data processing operations; providing
limited securities brokerage services; providing investment and financial
advice; acting as insurance agent or underwriter for certain types of
credit-related insurance; leasing personal property
52
<PAGE>
on a full-payout, nonoperating basis; providing tax planning and preparation
services; operating a collection agency; providing certain courier services and,
subject to certain limitations, providing certain discount brokerage services
for customers.
Federal Reserve Board approval may be required before the Company or its
non-bank subsidiaries, if any, may begin to engage in any such activities and
before any such businesses may be acquired. The Federal Reserve Board is
empowered to differentiate between activities that are initiated by a bank
holding company or a subsidiary and activities commenced by acquisition of a
going concern. Further, under the Holding Company Act and the Federal Reserve
Board's regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit or provision of credit or provision of any property or services. The
so-called anti-tie-in provisions state generally that a bank may not extend
credit, lease or sell property or furnish any service to a customer on the
condition that the customer obtain or provide additional credit or service from
or to the bank, its bank holding company or any other subsidiary of its bank
holding company, or on the condition that the customer not obtain other credit
or service from a competitor of the bank, its bank holding company or any
subsidiary of its bank holding company.
The Holding Company Act requires the prior approval of the Federal Reserve
Board in any case where a bank holding company proposes to acquire direct or
indirect ownership or control of more than 5% of any class of voting securities
of any bank (unless it owns a majority of such bank's voting shares) or to merge
or consolidate with any other bank holding company. The Holding Company Act
further provides that the Federal Reserve Board shall not approve any such
acquisition, merger or consolidation that would have anticompetitive effects.
The Holding Company Act prohibits a bank holding company from acquiring a bank
located in another state unless such acquisition is specifically authorized by
the statutory laws of the state in which such bank is located. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 enacted in September
1994 (the "Interstate Banking Act") provides that, among other things,
substantially all state barriers to the acquisition of out-of-state bank holding
companies will be eliminated. See "--Interstate Banking Legislation."
Source of Strength Policy. Under the Federal Reserve Board's "source of
strength" policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances in which it might not do so absent such policy. The legality and
scope of this policy of the Federal Reserve Board is unclear in light of recent
judicial precedent. Nevertheless, the Company has sought to act as a source of
strength to the Bank in recent periods and will continue to seek to act as a
source of strength to the Bank.
Banks. The Bank is a Pennsylvania-chartered bank subject to the supervision
of, and is regularly examined by, the FDIC and the Department.
As a state-chartered commercial bank, the Bank is subject to the applicable
provisions of the Pennsylvania Banking Code of 1965, as amended (the "Banking
Code"), and the regulations of the Department adopted thereunder. The Bank
derives its lending and investment powers from these laws, and is subject to
examination from time to time by the Department.
The Banking Code provides for extensive regulation of the Bank's business,
including limitations on the amount of interest it may charge on various loans,
limitations on the amount of credit it may extend to any one customer and
limitations on its ownership of shares of stock in certain entities, including
banks and trust companies. The Banking Code prohibits any person from acquiring
more than 10% of any class of outstanding stock of any bank (5% of any such
class if the bank had net operating loss carryforwards, as defined in the
Internal Revenue Code of 1986, in excess of 20% of the bank's total
stockholders' equity),
53
<PAGE>
without the prior approval by the Department. Exempted from prior approval by
the Department are acquisitions of shares of stock of a bank by such bank or a
person who controls the bank and acquisitions of shares of stock of a bank
through a merger or consolidation approved by the Department or the United
States Comptroller of the Currency. Approval of the Department is required for
amendments to the Articles of Incorporation of the Bank. The Banking Code
regulates the establishment of branch offices and sets minimum capital stock and
surplus requirements. Under the Banking Code, banks are permitted to operate
branch offices statewide.
The Bank is subject to certain restrictions under Pennsylvania law relating
to the declaration and payment of dividends. Dividends may be declared and paid
only out of accumulated net earnings (undivided profits). Where surplus is less
than 50% of the amount of the Bank's capital (defined as par value multiplied by
the number of shares outstanding), no dividend may be paid or declared without
the prior approval of the Department until surplus is equal to 50% of the total
amount of capital. Where surplus is equal to or greater than 50% but less than
100% of capital, until such time as surplus equals capital, the Bank must
transfer at least 10% of its net earnings to surplus prior to the declaration of
a dividend. The Department has the power to issue orders prohibiting the payment
of dividends where such payment is deemed to be an unsafe or unsound banking
practice.
The Bank is a member of the FDIC and, therefore, is subject to additional
regulation by that agency. The FDIC must approve the establishment of new branch
offices. Any insured bank that does not operate in accordance with, or conform
to, FDIC regulations, policies and directives may be sanctioned for
noncompliance. Dividend payments by a bank are generally prohibited where the
bank is in default of its FDIC assessments. Moreover, the FDIC has the power to
issue orders prohibiting the payment of dividends where such payment is deemed
to be an unsafe or unsound banking practice. The Bank is subject to examinations
from time to time by the FDIC. The Bank is not a member of the Federal Reserve
System.
The Federal Reserve Board has adopted a regulation pursuant to the Change
in Bank Control Act of 1978, which, subject to certain exceptions, requires
persons who intend to acquire control of a bank or bank holding company to give
at least 60 days' prior written notice to the Federal Reserve Board. Control for
the purpose of this regulation exists when the acquiring party obtains voting
control of at least 25% of any class of a bank's voting securities. Subject to
rebuttal, control is presumed to exist when the acquiring party obtains voting
control of at least 10% of any class of a bank's voting securities if
(i) securities issued by the bank are registered pursuant to Section 12 of the
Exchange Act, or (ii) following the acquisition, there would be no holder of
that class of the bank's voting securities with holdings larger than that of the
acquiring party. The Change in Bank Control Act of 1978 and the regulations
promulgated thereunder authorize the Federal Reserve Board to disapprove any
such acquisition on certain specified grounds.
Although the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA") pertains primarily to thrift depository institutions (such as
savings and loan associations), certain of FIRREA's provisions may now or in the
future affect the Bank. In particular, were the Bank in the future to seek to
acquire and own a single thrift institution (although the Bank does not
currently plan to do so), FIRREA would permit such acquisition free from
interstate banking laws. In addition, FIRREA imposes certain "cross-guarantee"
provisions which are applicable to the Bank. Under FIRREA, all commonly
controlled insured depository institutions are liable to the FDIC for any loss
the FDIC incurs in connection with defaults of or assistance granted to their
affiliated depository institutions. Under such "cross-guarantee" arrangements,
each depository institution subsidiary could be subject to claims for amounts
the FDIC actually loses in connection with the operation of or assistance
granted to an affiliated depository institution in the event it were ultimately
to be taken over by the FDIC.
54
<PAGE>
In December 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") became law. Under FDICIA, financial institutions are subject
to increased regulatory scrutiny and must comply with certain operational,
managerial and compensation standards. Under FDICIA, institutions must be
classified in one of five defined categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized). In the event an institution's capital deteriorates to the
"undercapitalized" category or below, FDICIA prescribes an increasing amount of
regulatory intervention, including the institution by a bank of a capital
restoration plan, a performance guarantee of the plan by a parent institution
and the placement of a hold on increases in assets, number of branches or lines
of business. If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be imposed, including
restrictions on interest payable on accounts, dismissal of management and (in
critically undercapitalized situations) appointment of a receiver. Critically
undercapitalized institutions may not, beginning 60 days after becoming
critically undercapitalized, make any payment of principal or interest on their
subordinated debt. A well capitalized institution may be reclassified as
adequately capitalized, and an adequately capitalized institution or an
undercapitalized institution may be forced to comply with certain supervisory
actions as if it were in the next lower capital category (except that a
significantly undercapitalized institution may not be reclassified as critically
undercapitalized where the institution is deemed to be engaging in unsafe or
unsound practices or has received and not corrected a less than satisfactory
examination report rating for asset quality, management, earnings or liquidity).
All but well capitalized institutions are prohibited from accepting brokered
deposits without prior regulatory approval.
FDICIA also requires the regulators to prescribe certain non-capital
standards for safety and soundness relating generally to operations and
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not satisfy such standards.
Furthermore, FDICIA and its implementing regulations require all insured
depository institutions, except those with total assets of less than $500
million, to conduct periodic audits and to establish audit committees of their
boards of directors. FDICIA also requires all depository institutions to undergo
an annual regulatory examination.
Restrictions on Transactions with Affiliates and Insiders. The Bank, as an
FDIC-insured, state-chartered, nonmember bank, is also subject to the
restrictions of Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act
and Regulation O adopted by the Federal Reserve Board. Section 23A requires that
loans or extensions of credit to an affiliate, purchases of securities issued by
an affiliate, purchases of assets from an affiliate (except as may be exempted
by order or regulation), the acceptance of securities issued by an affiliate as
collateral and the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate (collectively, "covered transactions") be on terms and
conditions consistent with safe and sound banking practices, and imposes
quantitative restrictions on the amount of and collateralization requirements on
such transactions. Section 23B requires that all covered transactions and
certain other transactions, including the sale of securities or other assets to
an affiliate and the payment of money or the furnishing of services to an
affiliate, be on terms comparable to those prevailing for similar transactions
with nonaffiliates.
Sections 22(g) and 22(h) of the Federal Reserve Act impose similar
limitations on loans and extensions of credit from the Bank to its and the
Company's executive officers, directors and principal shareholders and any of
their related interests. The limitations restrict the terms and aggregate amount
of such transactions. Regulation O implements the provisions of Sections 22(g)
and 22(h) and requires maintenance of records of such transactions by the Bank
and regular reporting of such transactions by insiders. The FDIC also requires
the Bank, upon request, to disclose publicly loans and extensions of credit to
insiders in excess of certain amounts.
55
<PAGE>
Limitation on Activities of FDIC-Insured, State-Chartered Banks. The
Federal Deposit Insurance Act (the "FDIA"), as amended by FDICIA, generally
limits the activities and equity investments of an FDIC-insured, state-chartered
bank, such as the Bank, to those that are permissible for national banks, unless
the FDIC has determined that an activity would not pose a significant risk to
the deposit insurance fund and the bank is, and continues to be, in compliance
with applicable capital standards.
FDIC Insurance. The Bank formerly paid deposit insurance premiums to the
FDIC based on a single, uniform assessment rate established by the FDIC for all
institutions insured by the Bank Insurance Fund ("BIF"). Recent legislation
eliminated limitations on increases in federal deposit insurance premiums and
authorized the FDIC to increase assessment rates to the extent necessary to
protect the BIF. The FDIA, as amended by FDICIA, required the FDIC to promulgate
regulations establishing a risk-based assessment system and gave the FDIC
authority to promulgate regulations governing the transition from the fixed-rate
to a risk-based assessment system. The risk-based assessment system calculates
assessments based on (i) the probability that the deposit insurance fund will
incur a loss with respect to an institution, taking into consideration the risks
attributable to different categories and concentrations of assets and
liabilities and any other factors the FDIC determines relevant, (ii) the likely
amount of any such loss and (iii) the revenue needs of the deposit insurance
fund. In 1992, the FDIC adopted a transitional risk-based deposit insurance
system that resulted in an increase in the federal deposit insurance premiums
paid by all but the strongest financial institutions. The permanent system
replacing the transitional system is nearly identical to the transitional system
and will not result in a decrease in premiums. Under FDIC regulations,
institutions are assigned to one of three capital groups -- "well capitalized,"
"adequately capitalized" and "undercapitalized" -- based on their total
risk-based capital, Tier I risk-based capital and Tier I leverage capital
ratios. These three groups are then each subdivided into three subgroups based
on supervisory evaluations by the institution's primary federal regulator (the
FDIC in the case of the Bank), resulting in a total of nine assessment
classifications. The assessment rate schedule for BIF assessment ratios ranges
from 0% to .27% depending upon the institution's assessment risk classification.
Modification to the premium structure has resulted in a reduction of the premium
for the Bank to .17% as of January 1, 1996 with a corresponding decrease in
deposit insurance premiums paid by the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution or its Board of Directors has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation or order of or any condition
imposed by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance if the
institution has no tangible capital under applicable regulations or capital
guidelines.
Governmental Monetary Policy. Bank profitability is principally dependent
upon interest rate differentials. In general, the difference between the
interest paid by a bank on its deposits and other borrowings and the interest
received by a bank on loans and securities held in its investment portfolio
comprise the major portion of a bank's earnings. Thus, the earnings and growth
of the Bank will be subject to the influence of general economic conditions and
the monetary and fiscal policies of the United States Government and its
agencies, including the Comptroller of the Currency, the Federal Reserve Board
and the FDIC. An important function of the Federal Reserve Board is to regulate
the money supply, credit conditions and interest rates in order to mitigate
recessionary and inflationary pressures. Among the instruments of monetary
policy used to implement these objectives are open market transactions in United
States Government securities and changes in reserve requirements against bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of credit, bank loans, investment and deposits.
Their use may also affect interest rates charged on loans or paid on deposits.
56
<PAGE>
The Federal Reserve Board requires all depository institutions, such as the
Bank, to maintain reserves against their net transaction accounts (primarily
NOW, Super NOW and checking accounts) and non-personal time deposits. As of
January 1995, reserves of 3% must be maintained against net transaction accounts
of $54.0 million or less, except that no reserves are required against the first
$4.3 million of net transaction accounts, and reserves of 10% must be maintained
against net transaction accounts in excess of $54.0 million. No reserves are
currently required against non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy applicable liquidity requirements. Because required reserves
must be maintained in the form of vault cash or a noninterest-bearing account at
a Federal Reserve Bank, however, the effect of the reserve requirements is to
reduce an institution's interest-earning assets.
The monetary policies and regulations of the United States Government and
its agencies have had a significant effect on the operations of commercial banks
in the past and are expected to continue to do so in the future. The effects of
such policies upon the future business, earnings and growth of the Bank cannot
be predicted.
Interstate Banking Legislation. The Interstate Banking Act will allow
federal regulators, beginning in June 1997, to approve mergers between
adequately capitalized banks from different states regardless of whether the
transaction is prohibited under any state law, unless one of the banks' home
states has enacted a law expressly prohibiting out-of-state mergers before June
1997. This act will also allow a state to permit out-of-state banks to establish
and operate new branches in this state. The Commonwealth of Pennsylvania, has
"opted in" to this interstate merger provision. Therefore, the prior requirement
that interstate acquisitions would only be permitted when another state had
"reciprocal" legislation that allowed acquisitions by Pennsylvania based bank
holding companies has been eliminated. The new Pennsylvania legislation,
however, retained the requirement that an acquisition of a Pennsylvania
institution by a Pennsylvania or a non-Pennsylvania based holding company must
be approved by the Pennsylvania Department of Banking.
Employees
As of June 30, 1996, the Company and its subsidiaries had 54 employees,
including 44 full-time employees. The Company provides a variety of employment
benefits and considers its relationships with its employees to be satisfactory.
Properties
The principal executive offices of the Company and the Bank consist of
7,190 square feet of space in an office building located in Allentown,
Pennsylvania. The Bank leases this office space from an affiliate of the Company
under a lease expiring in October 2010 providing for monthly rental payments of
$29,518 until November 1, 1996. The rent for the remaining years of the lease
will be adjusted based on the increase in the Consumer Price Index. The Bank
subleases a portion of the building to a third party under a lease expiring in
December 1997 providing for monthly rental payments of $9,784. The sublessee has
the right to extend the lease for two successive three- and five-year periods at
monthly rental payments of $8,633 and $10,359, respectively. The Bank has
subleased another portion of the building to two parties and has achieved
substantial occupancy, which reduces its carrying costs. The Bank is a
participant in the mortgage on this property, the only outstanding encumbrance
upon the property, as one of the lenders, to the extent of $2,270,000.
The Bank leases the Walnutport and Quakertown branch buildings from
subsidiaries pursuant to open-ended oral leases, which provide for monthly
rental payments of $2,000 each. The Cherryville branch
57
<PAGE>
building is owned directly by the Bank. There are no mortgages or other
encumbrances on these properties. The Bank leases the Allentown and Bethlehem
branch buildings from third parties. The Bethlehem lease will expire in August
1996 and provides for monthly rental payments of $2,479. The Allentown lease
will expire in February 1997 and provides for monthly rental payments of $4,665.
The branches range in size from approximately 2,500 to 4,000 square feet with
the average size being approximately 3,300 square feet. The Bank intends to seek
regulatory approval to establish a branch of the Bank in the building in which
its principal executive offices are located. There is no assurance, however,
that such approval will be obtained or that a branch of the Bank will be
established at this location.
The Company considers its and the Bank's offices, branches and equipment to
be well-maintained and adequate for their operations.
Legal Proceedings
The Company and the Bank are subject to and have consented to the following
regulatory orders and agreements: (i) effective February 28, 1996, the Company
and the Bank entered into the Pennsylvania Order with the Department, which
replaced an earlier order entered into in 1993; (ii) on April 29, 1996 the Bank
entered into the Memorandum of Understanding with the FDIC, which has replaced
two cease and desist orders dating from October 1987 and June 1992; and (iii) in
January 1991, the Company consented to Federal Reserve Agreement with the
Federal Reserve Bank and the Department. The Pennsylvania Order, the Memorandum
of Understanding and the Federal Reserve Agreement are more fully described
under "Risk Factors -- Regulatory Enforcement Actions to Which the Company and
the Bank are Subject."
On June 23, 1995, the FDIC issued a Notice of Intention to Prohibit from
Further Participation and a Notice of Assessment of Civil Money Penalties,
Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing
(collectively, the "Notices") against James L. Leuthe, Chairman of the Board and
Chief Executive Officer of the Company, and against Harold R. Marvin, Jr.,
formerly the President of the Company and of the Bank. Mr. Marvin resigned as
President and as director of both the Company and the Bank in 1993.
The Notices initiate administrative proceedings in which the FDIC, as a
result of transactions occurring prior to February 1992, is seeking to prohibit
Messrs. Leuthe and Marvin from further participation in the conduct of the
affairs of any bank insured by the FDIC or any other federally insured
depository institution, without the prior approval of the FDIC and the
appropriate federal financial institution regulatory agency. The allegations of
the FDIC are substantially the same as those which formed the basis of the
Stipulation of Settlement with and Administrative Order of the Pennsylvania
Department of Banking. The Company and the Bank entered into the Stipulation of
Settlement and consented to the Administrative Order in March 1993. The Notices
also seek to impose civil monetary penalties of $500,000 against Mr. Leuthe and
$300,000 against Mr. Marvin. Neither the Company nor the Bank is a party to
these proceedings. Both Mr. Leuthe and Mr. Marvin deny wrongdoing and are
defending these actions. Hearings before a Federal Administrative Law Judge,
concerning this matter commenced on July 9, 1996 and have been recessed until
January 22, 1997, at which time the hearings are expected to last an additional
one to two months.
Under both the Company's and the Bank's Bylaws, the Company and the Bank
are required to indemnify Messrs. Leuthe and Marvin in connection with the
administrative proceedings brought against them by reason of fact that they are
or were Officers and Directors of the Bank. However, Mr. Leuthe and/or
Mr. Marvin are required to reimburse the Company and/or the Bank for all
expenses incurred or advanced by the Company or the Bank in connection with such
events if a court ultimately determines
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<PAGE>
that the alleged actions or omissions of Mr. Leuthe and/or Mr. Marvin constitute
willful misconduct or recklessness. While it is difficult to determine the
amount of indemnification in this case, the Company believes at this time that
the amount will not materially and adversely affect the Company's financial
condition.
The Company carries director's and officer's liability insurance coverage
and is in the process of submitting a claim for reimbursement of its expenses in
connection with these proceedings.
Management is aware that the FDIC and Mr. Marvin have reached a tentative
settlement in this matter subject to formal FDIC approval. It is the Bank's
understanding that the settlement does not assess any monetary damages or
penalties against Mr. Marvin.
The Company, the Bank and two of the Company's other subsidiaries are also
defendants in an action commenced on March 13, 1992 in the Court of Common Pleas
of Lehigh County, Pennsylvania, and brought by persons who were limited partners
in the limited partnership that owns the building in which the Company's and the
Bank's executive offices are located. The plaintiffs in this lawsuit also
operated a restaurant on the first floor of that building. The plaintiffs allege
claims for damages in excess of $50,000 against the Bank relating to alleged
bidding process irregularities, faulty building construction and wrongful
exclusion from partnership affairs. The Bank has filed a counterclaim for lost
rents. Pleadings in the case are closed. The Company believes that it has
meritorious defenses to these claims and that the ultimate resolution of the
pending proceedings will not have a material adverse effect on the Company's or
the Bank's results of operations, financial condition or liquidity. In the
opinion of management, there are no other proceedings pending that, if
determined adversely against the Company or any subsidiary, would be material in
relation to the Company's financial condition, nor are there any proceedings
pending other than ordinary routine litigation, except for the litigation and
regulatory enforcement actions described above.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the executive
officers and directors of the Company and the Bank.
Name Age Position
---- --- --------
James L. Leuthe 54 Chairman of the Board, Acting
President, Chief Executive Officer and
Director of the Company
Wilbur R. Roat 49 President, Chief Executive Officer and
Director of the Bank and Director of
the Company
George M. Baltozer 62 Executive Vice President and Chief
Operating Officer of the Bank
Kashmira K. Lodaya 48 Treasurer of the Company and
Controller of the Bank
Stephen M. Alinikoff 51 Director of the Company and the Bank
Peter Barter 80 Director of the Company and the Bank
Robert B. Colfer 54 Director of the Company and the Bank
Vincent Dieter 62 Director of the Company and the Bank
Charles D. Flack, Jr. 41 Director of the Company and the Bank
Harry J. Lentz 86 Director of the Company and the Bank
John H. McKeever 71 Secretary and Director of the Company
and Chairman of the Board, Secretary
and Director of the Bank
James L. Leuthe has served as Chairman and a director of the Company since
its formation in 1982 and is currently serving as the Company's Acting
President. Mr. Leuthe has also served from time to time as the Company's
President, most recently from October 1992 to October 1993, and as Chairman and
a director of the Bank from 1971 to May 1993. Mr. Leuthe is also the President
of Midland Farms, Inc., a real estate holding and development company and active
farm operation, and the Chairman of the Board of The Bethlehem Corporation, an
industrial equipment and machinery manufacturer.
Wilbur R. Roat has served as President, Chief Executive Officer and a
director of the Bank and as a director of the Company since September 1994.
Prior to joining the Bank, Mr. Roat served as President and Chief Executive
Officer of St. Edmond's Savings and Loan Association ("St. Edmond's") in
Philadelphia, Pennsylvania from March 1992 to August 1994. During his tenure at
St. Edmond's, St. Edmond's was a $70 million thrift institution for which
Mr. Roat was responsible for recruiting and developing the management team and
the development of the institution's initial five-year business plan. Prior
thereto, Mr. Roat served in various positions with PSFS/Meritor Financial Group,
the most recent of which were as Senior Vice President of Retail Banking for the
Philadelphia Savings Fund Society from March 1990 to March 1992 and as Senior
Vice President and Chief Administrative Officer of Meritor Financial Group from
November 1986 to February 1990.
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<PAGE>
George M. Baltozer has served as Executive Vice President and Chief
Operating Officer of the Bank since January 1991. Mr. Baltozer previously served
as President of Dauphin National Bank from October 1985 to December 1990.
Mr. Baltozer served as the Acting President of the Bank from March 1994 until
September 1994.
Kashmira K. Lodaya has served as Treasurer of the Company since January
1993 and as Controller of the Bank since February 1992. Ms. Lodaya previously
served as Assistant Controller of the Bank from 1988 to February 1992.
Stephen M. Alinikoff has served as a director of the Company and the Bank
since June 1993. During the past five years, Mr. Alinikoff has served as the
President and Chief Executive Officer of Security First Group, an independent
financial services organization, and as managing principal of First Security
Investments, Inc., a registered broker-dealer.
Peter Barter was elected as director of the Company and the Bank on October
24, 1994. Mr. Barter has been the owner of Fernbrook & Co., a sportswear
business, for more than 30 years.
Robert B. Colfer has served as a director of the Company and the Bank since
1985. Mr. Colfer has been the President of Keypunch, Inc., a data entry service
provider, since 1973.
Vincent Dieter has served as a director of the Company and the Bank since
1972. Mr. Dieter has been the owner of Kern's Machine Shop, Inc., a manufacturer
of small machine parts, for over 10 years.
Charles D. Flack, Jr. was elected as a director of the Company and the Bank
in August 1993. During the past five years, he has served as Chief Executive
Officer of Diamond Manufacturing Co., a perforated metal manufacturer.
Harry J. Lentz has served as a director of the Company and the Bank since
1975. Mr. Lentz is retired and formerly served as the assistant cashier of the
Bank for over 20 years. He also is retired from service as the Deputy Recorder
of Deeds for the Northampton County, Pennsylvania courthouse.
John H. McKeever has served as a director of the Company and the Bank since
1972 and as Secretary of the Company and the Bank for more than five years. He
has served as Chairman of the Board of the Bank since May 1993. Mr. McKeever is
an attorney at law in private practice.
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<PAGE>
Compensation of Directors and Executive Officers
Executive Compensation.
The following tables contain compensation data with respect to the
Company's Chief Executive Officer and the Bank's President and Chief Executive
Officer. No other executive officer received in excess of $100,000 in salary and
bonus in 1995, 1994 or 1993.
Summary Compensation Table
--------------------------
Annual Compensation
--------------------------------
Other
Name and Annual All
Principal Compensa- Other
Position Year Salary($) Bonus($) tion($) Compensation
-------- ---- --------- -------- ------- ------------
James L. Leuthe 1995 $ 30,000(1) -- $ 15,203(2) --
Chairman of the 1994 $ 30,000(1) -- $ 10,823(2) --
Board, Acting Pre- 1993 $ 97,500(1) -- $ 10,001(2) $ 6,300
sident, Chief Exec-
utive Officer and
director of the Com-
pany
Wilbur R. Roat 1995 $107,500 $ 12,500 $ 3,675(3) $ 35,503(4)
President, Chief Ex-
ecutive Officer and
Director of the Bank
and director of the
Company
- ------------------
(1) Inasmuch as Mr. Leuthe was not deemed an employee of the Company, these
amounts were paid to Mr. Leuthe as consulting fees. Since October 1992,
Mr. Leuthe has committed a majority of his time to the restructuring and
raising of capital necessary to assure compliance with the regulatory
orders and agreements.
(2) Represents the depreciation expense of $9,423 in 1995, $9,423 in 1994,
$8,889 in 1993 with respect to the use by Mr. Leuthe of a vehicle owned by
the Bank and $890, $1,400 and $1,112 paid in insurance premiums with
respect to such vehicle in 1995, 1994 and 1993, respectively. For 1995, the
total also includes the depreciation expense of $4,061 and insurance
premiums of $829 with respect to the use by Mr. Leuthe of a vehicle owned
by the Company.
(3) Represents the depreciation expense of $2,824 and insurance premiums of
$851 with respect to the use by Mr. Roat of a vehicle owned by the Bank.
(4) Represents relocation expense paid to Mr. Roat in 1995.
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<PAGE>
Option Grants in Last Fiscal Year
---------------------------------
<TABLE>
<CAPTION>
Individual Grants
Number of Secu- Percent of Total
rities Options Granted
Underlying to Employees Exercise Grant Date Expiration
Name Options Granted in Fiscal Year Price Market Price Date
- ---- --------------- -------------- ----- ------------ ----
<S> <C> <C> <C> <C> <C>
Wilbur R. Roat 60,000(1) 100% $3.50 $4.50(1) 12/05
</TABLE>
- ------------------
(1) The options became exercisable on the grant date.
Fiscal Year-End Option Values
-----------------------------
Value of
Unexercised
Number of In-the-Money
Unexercised Options Options at
at FY-End (#) FY-End ($)
------------- ----------
Name Exercisable Exercisable
---- ----------- -----------
James L. Leuthe 20,000(1) $ 7,500(2)
Wilbur R. Roat 60,000(3) $60,000(2)
- ------------------
(1) Of these option shares, options to purchase 20,000 shares are exercisable
at an exercise price of $4.125 per share. No options were exercised by
Mr. Leuthe during the year ended December 31, 1995.
(2) Value based upon the per share bid price of $4.50 at December 31, 1995.
(3) Options to purchase 60,000 shares are exercisable at an exercise price of
$3.50 per share.
The Bank has entered into a Severance Compensation Agreement with Mr. Roat
that commenced September 1, 1995 and is effective through August 31, 2000. Under
this agreement, in the event of a discharge within two years of a change of
control of the Bank or the Company, the Bank will be obligated (i) to pay to
Mr. Roat an amount equal to two times his salary plus bonus for the immediately
preceding calendar year prior to such change of control, (ii) to provide life,
disability and health insurance coverage for 24 months and (iii) to pay to
Mr. Roat an additional amount based upon his benefits under the Bank's employee
profit sharing plan. Also, at Mr. Roat's request made within six months of such
discharge, the Bank is obligated to purchase Mr. Roat's principal residence in
the Lehigh Valley at its original purchase price.
Director Compensation
The non-employee directors of the Bank receive fees of $350 for each
meeting they attend. No fees are paid to directors of the Company. During 1995,
John H. McKeever, a director of the Company
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and the Bank, was paid $15,750 for legal services performed for the Company and
the Bank. Harry J. Lentz was paid $100 per month for services as an assistant
secretary of the Company and the Bank in 1995.
CERTAIN TRANSACTIONS
The Bank has had and expects to continue to have banking and financial
transactions in the ordinary course of business with directors and executive
officers of the Company and its subsidiaries, and members of such persons'
immediate families and companies in which they have an ownership interest of 10%
or more, on comparable terms, including interest rates, collateral and repayment
terms on extensions of credit, as those prevailing from time to time for other
customers. In the opinion of management, such loans and commitments to loan did
not involve more than a normal risk of collectibility or present other
unfavorable features. As of December 31, 1995, the directors and officers of the
Company and their respective affiliates have loans outstanding in the following
principal amounts: Mr. Leuthe, $1,147,223; Mr. Alinikoff, $399,405; John D.
McKeever, the son of Mr. McKeever, $147,740; and Mr. Barter, $484,286.
The Bank leases certain office space from a partnership in which the Bank
owns 49% of the limited partnership interests. The Bank in turn subleases a
portion of this space. Net rent expense related to this lease was $195,486 in
1995, $300,942 in 1994 and $246,723 in 1993.
Mr. McKeever provided legal services to the Bank during 1995. A. John May
is a principal beneficial owner of the Company's Series A Preferred Stock.
Mr. May is a member of Duane, Morris & Heckscher, which provided legal services
for the Company and the Bank in 1994 and 1995.
In connection with its offering of up to 1,500,000 shares of Senior
Preferred Stock that commenced on May 12, 1994, the Company and First Security
Investments, Inc. entered into a Selling Agent Agreement. Pursuant to this
agreement, First Security Investments, Inc. agreed to use its best efforts to
offer and sell the shares of Senior Preferred Stock in such offering for which
it was paid a commission of 8% of the aggregate offering price of the shares
sold and a non-accountable expense allowance of $25,000. An aggregate of 848,902
shares of Senior Preferred Stock were sold in the offering for which First
Security Investments, Inc. received approximately $340,000 in selling
commissions and the $25,000 expense allowance. Mr. Alinikoff is the President
and controlling shareholder of First Security Investments, Inc.
BENEFICIAL OWNERSHIP OF THE COMPANY'S SECURITIES
The following sets forth, as of June 30, 1996, the name and address of each
person who is known by the Company to be the beneficial owner of more than 5% of
the Company's outstanding Common Stock or of more than 5% of the Company's
outstanding Series A Preferred Stock, the number of shares of each class
beneficially owned and the percentages of the Company's outstanding Common Stock
and Series A Preferred Stock so owned. No person holds more than 5% of the
Company's outstanding Senior Preferred Stock. The Series A Preferred Stock is
convertible at the option of each holder into Common Stock at any time on the
following basis: (i) on or before March 31, 1996, each share of Series A
Preferred Stock is convertible at the rate of .8 of a share of Common Stock for
each share of Series A Preferred Stock and (ii) after March 31, 1996, each share
of Series A Preferred Stock is convertible at the rate of .72 of a share of
Common Stock for each share of Series A Preferred Stock. However, the Board of
Directors of the Company has approved an amendment to the Company's Articles of
Incorporation that would retain the .8 conversion rate until March 1999, subject
to shareholder approval, and the share amounts and percentages included in the
following tables are based upon the .8 per share conversion rate. The Senior
Preferred Stock is currently convertible at the option of each
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<PAGE>
holder into Common Stock at any time at the rate of one share of Common Stock
for each share of Senior Preferred Stock. Holders of Common Stock are entitled
to one vote per share and holders of Senior Preferred Stock are entitled to four
votes per share (assuming a conversion rate of .8 of a share of Common Stock for
each share of Series A Preferred Stock) on each matter presented for a vote to
the Company's shareholders.
<TABLE>
<CAPTION>
Percent of
Percent of Series A Outstanding
Outstanding Preferred Series A
Common Stock Common Stock Stock Preferred Stock
Beneficially Beneficially Beneficially Beneficially
Name and Address Owned(1) Owned(1) Owned Owned
- ---------------- -------- -------- ----- -----
<S> <C> <C> <C> <C>
James L. Leuthe 1,278,780(2) 54.7% 420,000(3) 61.6%
1620 Pond Road
Allentown, PA 18104
Frank Henry 125,000 6.3 -- --
P.O. Box 1007
Wilkes-Barre, PA 18773
John H. McKeever 132,200 6.5 50,000 7.3
1112 Walnut Drive
Danielsville, PA 18038
Robert B. Colfer 100,000 4.9 50,000 7.3
845 W. Wyoming Street
Allentown, PA 18015
A. John May 42,560 2.1 51,500(4) 7.6
4200 One Liberty Place
Philadelphia, PA 19103
Financial East, L.P. 40,000 2.0 50,000 7.3
4200 One Liberty Place
Philadelphia, PA 19103
Harold R. Marvin, Jr 40,070 2.0 50,000 7.3
924 Hyacinth Drive
Delray Beach, FL 33483
</TABLE>
- ----------
(1) Includes the number of shares of Common Stock that such persons have the
right to acquire upon conversion of the Series A Preferred Stock and the
Senior Preferred Stock. The number of shares of Common Stock that
Mr. Leuthe, Mr. McKeever, Mr. Colfer, Mr. May, Financial East, L.P. and
Mr. Marvin have the right to acquire upon conversion of the Series A
Preferred Stock is 336,000 shares, 40,000 shares, 40,000 shares, 41,200
shares, 40,000 and 40,000 shares, respectively.
(2) Includes 221,640 shares owned by Mr. Leuthe's children, 18,000 shares owned
by corporations of which Mr. Leuthe is the controlling shareholder.
Mr. Leuthe disclaims beneficial ownership of 12,400 shares of Common Stock
held in certain trusts for the benefit of his children that are included
in this total.
(3) Includes 20,000 shares owned by Mr. Leuthe's children.
(4) These shares consist of 50,000 shares owned by Financial East, L.P., a
limited partnership of which Mr. May is the general partner, and 1,500
shares owned by Mash & Co., a general partnership of
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<PAGE>
which Mr. May is a general partner. Mr. May disclaims beneficial ownership
of 36,471 shares owned by Financial East, L.P. and 900 shares owned by Mash
& Co.
The following table sets forth, as of June 30, 1996, the amount and
percentage of the Company's outstanding Common Stock and Series A Preferred
Stock beneficially owned by each director of the Company and by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percent of
Percent of Series A Outstanding
Outstanding Preferred Series A
Name Common Stock Common Stock Stock Preferred Stock
of Individual Beneficially Beneficially Beneficially Beneficially
or Identity of Group Owned(1)(2) Owned(2) Owned(1) Owned
-------------------- ----------- -------- -------- -----
<S> <C> <C> <C> <C>
James L. Leuthe(3) 1,278,780 54.7% 420,000 61.6%
Stephen M. Alinikoff(4) 51,000 2.5 -- --
Peter Barter 50,000 2.5 -- --
Robert B. Colfer(3) 100,000 4.9 50,000 7.3
Vincent Dieter(5) 13,960 * -- --
Charles D. Flack, Jr.(6) 84,000 4.1 -- --
Harry J. Lentz 9,100 * -- --
John H. McKeever(3) 132,200 6.5 50,000 7.3
Wilbur R. Roat(7) 62,000 3.0 -- --
All directors and executive 1,781,040 71.2% 520,000 76.2%
officers as a group (11 per-
sons)
</TABLE>
- ------------------
* Less than 1%.
(1) Information furnished by the directors.
(2) Assumes the number of shares of Common Stock that such persons have the
right to acquire upon the conversion of the Series A Preferred Stock.
Reference is made to "Principal Beneficial Owners" above.
(3) Reference is made to "Principal Beneficial Owners" above.
(4) Includes 1,000 shares of Common Stock that Mr. Alinikoff has the right to
acquire upon the conversion of 1,000 shares of Senior Preferred Stock.
(5) These shares are owned jointly with Mr. Dieter's wife.
(6) Of these shares, 50,000 shares are held by Diamond Manufacturing Co., a
company of which Mr. Flack is a director, the President and a controlling
shareholder. This total also includes 25,000 shares of Common Stock that
Diamond Manufacturing Co. has the right to acquire upon conversion of
25,000 shares of Senior Preferred Stock.
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<PAGE>
(7) These shares include 2,000 shares owned jointly with Mr. Roat's wife and
60,000 shares that Mr. Roat has the right to acquire under currently
exercisable stock options.
DESCRIPTION OF THE COMPANY'S SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $.01 par value, 1,000,000 shares of Series Preferred Stock,
$.01 par value (the "Series Preferred Stock"), and 1,500,000 shares of Senior
Preferred Stock, $.01 par value. As of the date of this Prospectus, 2,000,000
shares of Common Stock held by 130 holders of record, 682,000 shares of Series A
Preferred Stock held by 20 holders of record and 848,902 shares of Senior
Preferred Stock held by 63 holders of record were issued and outstanding. The
following statements are brief summaries of certain provisions with respect to
the Common Stock, the Series A Preferred Stock and the Senior Preferred Stock
contained in the Company's Articles of Incorporation, a copy of which has been
filed with the Commission. The following summary is qualified in its entirety by
reference thereto.
The transfer agent and registrar for the Company's Common Stock, the Series
A Preferred Stock and the Senior Preferred Stock is First Lehigh Bank, 500 Main
Street, Walnutport, Pennsylvania 18088.
Common Stock
Each outstanding share of Common Stock is entitled to one vote on all
matters submitted to a vote of shareholders, including the election of
directors. In general, the holders of the Common Stock and the holders of the
Series A Preferred Stock vote together as a single class on all matters
presented to the Company's shareholders for a vote, including the election of
directors. The holders of the Series A Preferred Stock currently are entitled to
four votes (assuming a conversion rate of .8 of a share of Common Stock for each
share of Series A Preferred Stock) for each share held (subject to adjustment in
certain instances). See "Series A Preferred Stock" for a discussion of the
voting rights of the holders of the Company's outstanding Series A Preferred
Stock. The holders of Common Stock do not have cumulative voting rights or
preemptive rights. Dividends may be paid to the holders of Common Stock when and
if declared by the Board of Directors from funds legally available for
dividends. For a summary of the restrictions and limitations with respect to the
declaration and payment of dividends by the Company, see "Dividends." All
outstanding shares of Common Stock are fully paid and non-assessable. In the
event of any liquidation, dissolution or winding-up of the affairs of the
Company, the holders of Common Stock will be entitled to share ratably in its
assets remaining after provision for payment of creditors and for the payment of
the liquidation preference to the holders of any outstanding Series A Preferred
Stock, Senior Preferred Stock and any other series of Series Preferred Stock
that the Company may issue from time to time.
Series A Preferred Stock
The Company's Board of Directors has designated an aggregate of 750,000
shares of the Series A Preferred Stock, of which 682,000 are currently
outstanding. The Board of Directors of the Company has the authority to issue an
additional 250,000 shares of the Company's Series Preferred Stock in one or more
series and to determine the designations, relative rights, preferences and
limitations of each series, without obtaining the approval of the Company's
shareholders, except in certain circumstances. The issuance of the Series
Preferred Stock, while providing flexibility in connection with possible
financings, acquisitions and other corporate purposes, could, among other
things, adversely affect the voting power of the holders of the Common Stock and
the Series A Preferred Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, deny shareholders
the receipt of a premium on their shares of capital stock and have a depressive
effect on the market price
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<PAGE>
thereof. Management of the Company is not aware of any such threatened
transactions to obtain control of the Company. The Company has no present plan
to issue any new series of Series Preferred Stock or additional shares of Series
A Preferred Stock.
Voting Rights. In general, the holders of the Series A Preferred Stock and
the holders of the Common Stock vote together as a single class on all matters
presented to the Company's shareholders for a vote, including the election of
directors. The holders of the Common Stock are entitled to one vote for each
share held, and the holders of the Series A Preferred Stock currently are
entitled to four votes (assuming a conversion rate of .8 of a share of Common
Stock for each share of Series A Preferred Stock) for each share held (subject
to adjustment in certain instances). No cumulative voting rights exist with
respect to the election of directors. Under the Company's Articles of
Incorporation, the approval of the holders of at least a majority of the shares
of Series A Preferred Stock then outstanding is required to approve any
amendment, modification or waiver of the terms of the Series A Preferred Stock,
except that the approval of the holders of at least 80% of the shares of Series
A Preferred Stock then outstanding is required to approve any change relating to
(i) the terms of the Series A Preferred Stock relating to dividends payable on
the Series A Preferred Stock, (ii) amounts payable on redemption or the time at
which redemption of the Series A Preferred Stock is to occur or (iii) the
conversion rate of the Series A Preferred Stock. The voting rights of the
holders of each share of the Series A Preferred Stock is determined by
multiplying the number of shares of Common Stock into which the Series A
Preferred Stock is convertible times five. Therefore, after March 31, 1996 the
holders of Series A Preferred Stock are entitled to 3.6 votes for each share
held. The Board of Directors have prepared an amendment to the Company's
Articles of Incorporation that would retain the pre-March 31, 1991 voting rate
of four votes per share until March 31, 1999. See "Conversion Rights" below.
Conversion Rights. Until March 31, 1996, the Series A Preferred Stock was
convertible into Common Stock at the option of each holder at any time at the
rate of .8 of a share of Common Stock for each share of Series A Preferred
Stock. After March 31, 1996, each share of Series A Preferred Stock is
convertible into .72 of a share of Common Stock, subject to adjustment in
certain circumstances. However, the Board of Directors of the Company has
approved an amendment to the Company's Articles of Incorporation that would
retain the .8 conversion rate until March 31, 1999, subject to stockholder
approval.
Dividends. The holders of shares of Series A Preferred Stock are entitled
to receive cash dividends at the rate of $.3255 per share per year before any
dividends are declared or paid on the Common Stock; however, the aggregate
dividends paid on the Series A Preferred Stock and the Senior Preferred Stock in
any calendar year may not exceed the Company's net income for the preceding
calendar year as shown on the Company's audited statement of income for the
preceding calendar year. For a summary of the restrictions and limitations with
respect to the declaration and payment of dividends by the Company, see
"Dividends." Holders of shares of Series A Preferred Stock will not be entitled
to any dividends, whether payable in cash, property or stock, in excess of the
cumulative dividends described above. Payment of dividends on the Series A
Preferred Stock is subordinate to the payment of all accrued but unpaid
dividends on the Senior Preferred Stock. See "Senior Preferred Stock."
Liquidation Preference and Redemption Provisions. In the event of the
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred Stock then outstanding will be entitled to be paid out of the assets
of the Company available for distribution to its shareholders the amount of
$3.10 per share plus accrued but unpaid dividends before any payment may be made
to the holders of the Company's Common Stock. The Series A Preferred Stock ranks
on parity with the Senior Preferred Stock in the event of a liquidation,
dissolution or winding up of the Company. The Company has the option to redeem
for cash all or any part of the then outstanding shares of the Series A
Preferred
68
<PAGE>
Stock at any time after March 31, 1996 at a per share redemption price of $3.50
plus any accrued but unpaid dividends provided that the Company has funds
legally available to be used by it to redeem its Series A Preferred Stock. No
sinking fund for the redemption of the Series A Preferred Stock has been
established. The Series A Preferred Stock is fully paid and non-assessable.
There are no preemptive rights applicable to the Series A Preferred Stock.
Senior Preferred Stock
The Company is authorized to issue up to 1,500,000 shares of Senior
Preferred Stock of which 848,902 shares are currently outstanding, the relative
rights, powers and preferences of which are summarized as follows:
Dividends. The holders of Senior Preferred Stock will be entitled to be
paid, before any dividends are declared or paid upon or set aside for any Junior
Securities, as described below, when, as and if declared by the Board of
Directors out of funds legally available for that purpose, dividends in cash at
the rate of $.25 per share per annum. "Junior Securities" are defined as any
equity securities of the Company other than the Senior Preferred Stock.
Therefore, no dividends will be paid on the Company's Common Stock or Series A
Preferred Stock until all dividends that have accumulated on the Senior
Preferred Stock have been declared and paid, or declared and a sum sufficient
for payment thereof is set apart for such payment.
Dividends on shares of Senior Preferred Stock are cumulative from the date
of issuance of such shares. When, as and if declared by the Board of Directors
of the Company out of funds legally available for such purpose, dividends on the
Senior Preferred Stock are payable quarterly. The aggregate amount of dividends
paid on the Senior Preferred Stock and the Series A Preferred Stock in any
calendar year may not exceed the Company's net income for the preceding calendar
year as shown on the Company's audited statement of income for such preceding
calendar year. If the full amount of dividends on the Senior Preferred Stock is
not declared and paid or declared and a sum sufficient for the payment thereof
set apart, the amount of the deficiency in such dividends must be fully paid, or
dividends in such amount must be declared on the shares of the Senior Preferred
Stock and a sum sufficient for the payment thereof must be set apart for such
payment, before any dividend may be declared or paid or any other distribution
ordered or made upon any Junior Securities, including the Common Stock and the
Series A Preferred Stock. For a summary of the restrictions and limitations with
respect to the declaration and payment of dividends by the Company, see
"Dividends." Holders of shares of Senior Preferred Stock will not be entitled to
any dividends, whether payable in cash, profits or stock, in excess of the
cumulative dividends described above. The Company is subject to certain
regulatory restrictions with respect to the declaration and payment of
dividends. See "Risk Factors -- Regulatory Enforcement Actions." Furthermore,
persons who accept the offer to purchase Shares of Senior Preferred Stock in
this offering will have waived accumulated dividends on the shares of Senior
Preferred Stock currently held by them through December 31, 1995, and dividends
on those shares will be cumulative from January 1, 1996. Dividends on Shares of
Senior Preferred Stock issued in this offering will be cumulative from the date
of issuance.
Conversion Rights. Each share of Senior Preferred Stock is convertible at
any time at the option of the holder thereof into one share of Common Stock,
subject to adjustment to protect against dilution in the event of a payment of a
stock dividend on the Common Stock, a stock split-up or combination or similar
event. The conversion rate of the Senior Preferred Stock will be adjusted if the
greater of book value or market value of the Company's Common Stock is not equal
to $5.00 (the "Base Value") or more per share at the close of business on the
last trading day of the New York Stock Exchange in October 1998 (the "Adjustment
Date"), so that beginning November 1, 1998, one share of Senior
69
<PAGE>
Preferred Stock will be convertible into that number of shares of Common Stock
equal to the then existing conversion rate multiplied by a fraction, the
numerator of which is the Base Value, and the denominator of which is the
greater of the book value or market value per share at the close of business on
the Adjustment Date, assuming that there have been no other adjustments to the
conversion rate or the Base Value due to other events such as stock dividends,
split-ups or combinations.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, the holders of Senior Preferred Stock will be
entitled to be paid the liquidation value of $5.00 per share plus accrued but
unpaid dividends before any distribution or payment is made upon any Common
Stock. The Senior Preferred Stock will rank on a parity with respect to rights
on liquidation with the Series A Preferred Stock. In the event that the
Company's assets to be distributed upon any such liquidation are insufficient to
permit payment of the full liquidation value to holders of the Senior Preferred
Stock and the Series A Preferred Stock, the assets will be distributed ratably
among such holders based on the respective liquidation preferences thereof.
Voting Rights. Except as otherwise provided by law, the holders of Senior
Preferred Stock will have no voting rights. Under the Company's Articles of
Incorporation, the approval of the holders of at least a majority of the shares
of Senior Preferred Stock outstanding is required to approve any amendment,
modification or waiver of the terms of the Senior Preferred Stock, except that
the approval of the holders of at least 66-2/3% of the shares of Senior
Preferred Stock outstanding is required to approve any change relating to
(i) the dividends payable on the Senior Preferred Stock, (ii) the conversion
rate of the Senior Preferred Stock or (iii) the preference on liquidation of
the Senior Preferred Stock.
Anti-Takeover Provisions
The Company's Articles of Incorporation contain certain provisions that
affect shareholder voting and other requirements. Those provisions include:
(i) a provision that requires the affirmative vote of the holders of at least
80% of the outstanding shares of Common Stock before the Company can enter into
any merger, consolidation, liquidation, dissolution or sale of all or
substantially all of the assets of the Company and (ii) a provision that gives
the Company's Board of Directors authority to take any lawful action to oppose a
tender offer or similar transaction if the Board of Directors determines that
the offer should be rejected and that permits the Board of Directors to consider
any pertinent issue in determining whether to oppose any such offer. A vote of
80% of the outstanding shares of Common Stock is required to amend the provision
that requires an 80% vote for mergers and other fundamental corporate changes.
The Company's Articles of Incorporation also contains a provision that
shareholders do not have cumulative voting rights with respect to election of
directors.
Also, the Company's Bylaws provide for the division of the Company's Board
of Directors into four classes. Only one class is elected each year, and the
regular term of each class is four years. See "Management -- Directors." The
Company's Bylaws also require any shareholder who desires to nominate a
candidate for election as a director to provide certain information concerning
such person that is equivalent to that contained in the Company's proxy
materials for those candidates nominated by the Company's Board of Directors not
later than 120 days before the first anniversary of the date of the preceding
annual meeting of shareholders.
Pennsylvania has also adopted certain laws that may be deemed to be
"anti-takeover" in effect. One provision permits directors, in considering the
best interests of the Company, to consider the effects of any action upon its
employees, suppliers, customers, shareholders and creditors and the communities
in which the Company maintains facilities. The effect of this provision is to
put the considerations of
70
<PAGE>
these constituencies on parity with one another, with the result that no one
group, including shareholders, is required to be the dominant or controlling
concern of directors in determining what is in the best interests of the
Company. This provision applies to all Pennsylvania corporations.
If any class of the Company's securities is registered under the Securities
Exchange Act of 1934, which is unlikely to occur until 120 days after the last
day of its fiscal year on which the Company has 500 or more shareholders of any
class, the Company will become subject to certain additional anti-takeover
provisions under Pennsylvania law. A summary of these anti-takeover provisions
is as follows:
Control Transactions. This provision requires any person or group that
acquires 20% of the voting power over shares entitled to cast votes in an
election of directors to offer to purchase all outstanding shares for cash at a
fair value.
Business Combinations. This provision prohibits any person or group that
acquires at least 20% of the voting power of a corporation from effecting a
business combination with the corporation, such as a merger, an asset sale and
certain recapitalizations, for a period of up to five years from the date such
control was acquired. A corporation may opt out of this provision on a
case-by-case basis by approving a particular business combination prior to the
date such person or group acquires 20% of the voting power.
Control-Share Acquisitions. This provision prevents a person or group that
crosses certain stock ownership thresholds of 20%, 33-1/3% or 50% for the first
time from voting certain shares beneficially owned by the person unless voting
power is restored to such shares by a vote of all shareholders and a vote of
disinterested shareholders at a shareholders meeting. Also, any business
combinations occurring after the restoration of voting power will require the
acquiring person to pay severance compensation to Pennsylvania employees of the
corporation whose employment is terminated, other than for wilful misconduct
connected with the work of the employee, within 90 days before or 24 months
after the restoration of voting power.
Disgorgement. This provision requires any person or group that acquires 20%
or more of the voting power of a corporation to disgorge to the corporation all
profits realized from the sale of equity securities of the corporation within 18
months after acquiring this control status if the person or group purchased
equity securities of the corporation within 24 months prior to, or 18 months
after, the acquisition of control status.
Each of these provisions would make it difficult and time-consuming for any
person or group to acquire the Company, if the Company were to become subject to
these provisions as a result of a registration of any class of its securities
under the Securities Exchange Act of 1934. If the Company becomes subject to
these provisions, it would be able to opt out of one or more of these provisions
only by an amendment to the Company's Articles of Incorporation approved by both
the Board of Directors and the shareholders. With respect to the control-share
acquisition and disgorgement provisions, such amendment would be required to be
adopted within 90 days after the date any class of the Company's securities
first becomes registered under the Securities Exchange Act of 1934. The Company
will not make a determination as to whether to opt out of any of these
provisions until such time, if any, it becomes subject to them.
Also, the Company's executive officers and directors currently hold, and
will continue to hold upon completion of this offering, 69.8% of the total
voting power of the Company's outstanding voting securities. Therefore, no
change in control of the Company can be effected without the approval of the
Company's current Board of Directors and management.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Assuming the maximum amount of Shares are issued in this offering, the
Company will have outstanding approximately 2,000,000 shares of Common Stock,
682,000 shares of Series A Preferred Stock and 905,426 shares of Senior
Preferred Stock (convertible into 905,426 shares of Common Stock at the initial
conversion rate) upon completion of this offering. All of the shares of Senior
Preferred Stock outstanding after this offering will be freely tradeable without
restriction or further registration under the Securities Act, except that any
shares purchased or held by "affiliates" of the Company, as that term is defined
in Rule 144 under the Securities Act, may generally only be sold in compliance
with Rule 144 as described below.
"Restricted securities" within the meaning of Rule 144 may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, including an exemption contained in Rule 144. Sales
of restricted securities in the public market, or the availability of such
shares for sale, could adversely affect the market price of the Common Stock and
the Senior Preferred Stock. In general, under Rule 144 as currently in effect,
any person (or persons whose shares are aggregated for purposes of Rule 144) who
has beneficially owned "restricted securities," as that term is defined in Rule
144, for at least two years (including, in the case of a non-affiliate holder,
any period of ownership of preceding non-affiliate holders) is entitled to sell,
within any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the class or (ii) the
average weekly trading volume in such securities during the four calendar weeks
preceding such sale, provided that certain public information about the Company,
as required by Rule 144, is then available and the seller complies with the
manner of sale and notification requirements of the Rule. A person who is not an
affiliate, has not been an affiliate within three months prior to the sale and
has, together with any previous owners who were not affiliates, beneficially
owned restricted securities for at least three years is entitled to sell such
shares under Rule 144(k) without regard to any of the volume limitations
described above.
Of the shares of Common Stock and Series A Preferred Stock outstanding,
1,269,000 shares of Common Stock and 520,000 shares of Series A Preferred Stock
held by affiliates are eligible for sale pursuant to Rule 144. The remaining
730,960 shares of Common Stock and 162,000 shares of Series A Preferred Stock
held by non-affiliates are freely tradeable.
The Company is unable to estimate the amount, timing or nature of future
sales of outstanding shares of Common Stock, Series A Preferred Stock or Senior
Preferred Stock. Prior to this offering, there has been no market for any class
of the Company's capital stock and no prediction can be made of the effect, if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the securities in the public market may have an adverse
effect on the market price thereof.
Notwithstanding the foregoing, there can be no assurance that a trading
market will develop for any class of capital stock of the Company.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
As permitted by the provisions for indemnification of directors and
officers in the Pennsylvania Business Corporation Law, which applies to the
Company and the Bank, both the Company's and the
72
<PAGE>
Bank's Bylaws provide for indemnification of directors and officers for
reasonable expenses, judgments, fines and amounts paid in settlement of actions
unless the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted wilful misconduct or recklessness. The
Bylaws for both the Company and the Bank also avail directors of the
Pennsylvania law limiting directors' liability for money damages except in those
cases where they have breached their fiduciary duty and such breach constitutes
self-dealing, willful misconduct or recklessness. Such provisions are subject to
applicable federal and state regulatory restrictions.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the above-described provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
LEGAL MATTERS
The validity of the issuance of the Senior Preferred Stock offered hereby
will be passed upon for the Company by Duane, Morris & Heckscher, Philadelphia,
Pennsylvania. Members of Duane, Morris & Heckscher and their affiliates own
1,440 shares of the Company's Common Stock and 55,000 shares of the Company's
Series A Preferred Stock. See "Beneficial Ownership of the Company's Securities
- -- Principal Shareholders" and "Certain Transactions."
EXPERTS
The consolidated financial statements of the Company and its subsidiaries
at December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 appearing in this Prospectus and Registration Statement
have been examined by Parente, Randolph, Orlando, Carey & Associates, certified
public accountants, as set forth in their report appearing elsewhere herein, and
are included in reliance upon such report and upon the authority of such firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), as amended, under Section
15(d) thereof, and, in accordance therewith files reports and other information
with the Securities and Exchange Commission (the "Commission"). The Company has
filed with the Commission a Registration Statement on Form SB-2 (herein,
together with all amendments thereto, called the "Registration Statement") under
the Securities Act of 1933 (the "Securities Act") with respect to the Shares
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the Shares offered hereby.
Statements contained herein concerning the provisions of such documents are not
necessarily complete, and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. The Registration Statement,
including exhibits and schedules filed therewith, and such reports and other
information may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Thirteenth Floor, New York,
73
<PAGE>
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, such material may also
be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. The Company will provide without charge to each
person who receives this Prospectus, upon written or oral request of such
person, a copy of any of the information incorporated by reference in this
Prospectus (not including exhibits to the information that is incorporated by
reference unless the exhibits are themselves specifically incorporated by
reference). Such requests may be directed to the Company, 1620 Pond Road,
Allentown, Pennsylvania 18104, Attention: James L. Leuthe, Chairman; telephone:
(610) 398-6660.
74
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Nos.
---------
Audited Consolidated Financial Statements:
Independent Auditors' Report ................................ F-2 to F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994. F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 ............................. F-5 to F-6
Consolidated Statements of Changes in Mandatory Redeemable
Preferred Stock and Shareholders' Investment for the
Years Ended December 31, 1995 and 1994 ................. F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 ............................. F-8 to F-9
Notes to the Consolidated Financial Statements .............. F-10 to F-28
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1996 and
December 31, 1995 ...................................... F-29
Consolidated Statements of Income for the six months ended
June 30, 1996 and 1995 ................................. F-30 to F-31
Consolidated Statements of Income for the three months ended
June 30, 1996 and 1995 ................................. F-32 to F-33
Consolidated Statement of Cash Flows for the six months ended
June 30, 1996 and 1995 ................................. F-34
Consolidated Statement of Cash Flows for the three months
ended June 30, 1996 and 1995 ........................... F-35
Notes to Unaudited Consolidated Financial Statements ........ F-36 to F-44
75
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Nos.
---------
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report.......................................................... F-2 to F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 ................................................ F-5 to F-6
Consolidated Statements of Changes in Mandatory Redeemable Preferred
Stock and Shareholders' Investment for the Years Ended
December 31, 1995 and 1994 ................................................ F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 ................................................ F-8 to F-9
Notes to the Consolidated Financial Statements........................................ F-10 to F-28
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1996 and December 31, 1995................. F-29
Consolidated Statements of Income for the six months ended
June 30, 1996 and 1995..................................................... F-30 to F-31
Consolidated Statements of Income for the three months ended
June 30, 1996 and 1995..................................................... F-32 to F-33
Consolidated Statement of Cash Flows for the six months ended
June 30, 1996 and 1995..................................................... F-34
Consolidated Statement of Cash Flows for the three months ended
June 30, 1996 and 1995..................................................... F-35
Notes to Unaudited Consolidated Financial Statements ................................. F-36 to F-44
</TABLE>
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of
First Lehigh Corporation:
We have audited the accompanying consolidated balance sheets of
First Lehigh Corporation and subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of operations, changes in shareholders'
investment and cash flows for the years then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
First Lehigh Corporation and subsidiary at December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 13 to the consolidated financial
statements, First Lehigh Corporation and its subsidiary, First Lehigh Bank (the
"Bank"), are operating under written agreements with their regulators, the
Federal Reserve Bank and the Federal Deposit Insurance Corporation ("FDIC") and
the Commonwealth of Pennsylvania Department of Banking (the "Department"),
respectively, which, among other things, require certain minimum capital
requirements to be met and maintained. These minimum capital requirements exceed
the minimum leverage and Tier I risk-based capital ratios required by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). On
March 30, 1993, the Department issued an administrative order to the Bank which
establishes certain goals and restrictions related to such areas as loan
administration, credit policies, dividend payments and assessment of the
adequacy of the allowance for loan losses. In addition, the Bank has filed a
capital plan with the Department outlining its plans for attaining certain
required levels of regulatory capital and the Department has stated its
nonobjection to the plan and the FDIC has approved the plan.
F-2
<PAGE>
At December 31, 1995, the Bank met all regulatory capital
requirements. However, other requirements of the various regulatory agreements
related to nonperforming asset levels have not been met by the dates called for
in the agreements and the financial impact, if any, on the Corporation and the
Bank of regulatory actions that may result from the failure of the Bank to
comply with the regulatory agreements cannot be determined. Accordingly, the
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In 1994, the Corporation changed its method of accounting for
impaired loans and investment securities by adopting Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement of Financial Accounting Standards No. 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures", and Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
/s/ PARENTE, RANDOLPH, ORLANDO, CAREY
& ASSOCIATES
-------------------------------------
Parente, Randolph, Orlando, Carey
& Associates
Allentown, Pennsylvania
February 2, 1996
F-3
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
---------------------------------------
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 AND 1994
(In Thousands)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS.......................................................... $ 2,578 $ 2,645
FEDERAL FUNDS SOLD............................................................... 2,465 3,015
TRADING SECURITIES............................................................... 6,038 6,514
SECURITIES AVAILABLE-FOR-SALE.................................................... 21,437 16,162
SECURITIES HELD-TO-MATURITY (Fair value of $4,328 and $5,330).................... 4,441 6,263
LOANS:
Commercial, financial and agricultural....................................... 3,901 6,335
Real estate - construction................................................... 4,403 5,008
Real estate - mortgage....................................................... 46,158 44,502
Installment.................................................................. 4,855 4,198
Direct lease financing....................................................... 70 258
-------- --------
Total loans........................................................... 59,387 60,301
Less: Unearned income....................................................... 514 681
Allowance for loan losses............................................. 1,624 1,703
-------- --------
Net loans...................................................... 57,249 57,917
-------- --------
PREMISES AND EQUIPMENT........................................................... 2,174 2,349
FORECLOSED ASSETS HELD FOR SALE, NET............................................. 4,814 4,851
OTHER ASSETS..................................................................... 2,202 2,657
-------- --------
TOTAL ASSETS............................................... $103,398 $102,373
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
DEPOSITS:
Noninterest-bearing.......................................................... $ 9,689 $ 10,150
Interest-bearing............................................................. 82,623 78,963
-------- --------
Total deposits........................................................ 92,312 89,113
OTHER BORROWED FUNDS............................................................. - 3,811
LONG-TERM DEBT................................................................... 381 491
OTHER LIABILITIES................................................................ 472 421
-------- --------
Total liabilities..................................................... 93,165 93,836
SHAREHOLDERS' INVESTMENT......................................................... 10,233 8,537
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT............. $103,398 $102,373
======== ========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
F-4
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands, except per share data and
shares outstanding)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................................ $ 5,131 $ 4,811
Interest and dividends on investment securities:
Taxable interest income............................................... 1,514 1,376
Dividends............................................................. 232 239
Interest on federal funds sold............................................ 161 82
------- -------
Total interest income.......................................... 7,038 6,508
------- -------
INTEREST EXPENSE:
Interest on deposits...................................................... 3,470 2,861
Interest on other borrowed funds.......................................... 42 36
Interest on long-term debt................................................ 42 42
------- -------
Total interest expense......................................... 3,554 2,939
------- -------
NET INTEREST INCOME........................................................... 3,484 3,569
PROVISION FOR LOAN LOSSES..................................................... 250 25
------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................................................... 3,234 3,544
------- -------
OTHER INCOME:
Service charges and other income.......................................... 499 555
Gain on sale of foreclosed assets, net.................................... 109 375
Rental income............................................................. 12 32
Unrealized holding gains on trading securities............................ 728 398
Realized gains (losses) on:
Trading securities.................................................... 765 139
Securities available-for-sale......................................... 136 (44)
------- -------
Total other income............................................. 2,249 1,455
------- -------
OTHER EXPENSES:
Salaries and employee benefits............................................ 1,324 1,291
Net occupancy expense..................................................... 532 653
Equipment expense......................................................... 237 281
FDIC insurance............................................................ 220 253
Foreclosed asset expenses................................................. 745 1,073
Other..................................................................... 2,341 1,924
------- -------
Total other expenses........................................... 5,399 5,475
------- -------
</TABLE>
(Continued)
F-5
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands, except per share data and shares outstanding)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME (LOSS)............................................................. $ 84 $ (476)
DIVIDENDS ON PREFERRED STOCK.................................................. -- --
--------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK.................................. $ 84 $ (476)
========= =========
PRIMARY LOSS PER SHARE........................................................ $ (0.12) $ (0.34)
========= =========
FULLY DILUTED LOSS PER SHARE.................................................. $ (0.12) $ (0.34)
========= =========
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING:
Primary............................................................... 2,848,902 2,283,552
Fully diluted......................................................... 2,848,902 2,283,552
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
(Concluded)
F-6
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands, except for share information)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTRIBUTED
CAPITAL
SENIOR SERIES A IN EXCESS
PREFERRED STOCK PREFERRED STOCK COMMON STOCK OF PAR
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993........... -- $ -- 682,000 $ 7 2,000,000 $ 20 $ 5,242
NET LOSS...............................
IMPLEMENTATION OF SFAS NO. 115........
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION).......
SALE OF 848,902 SHARES OF
SENIOR PREFERRED STOCK........... 848,902 8 3,522
------- ----- ------- ------ --------- ----- --------
BALANCE AT DECEMBER 31, 1994......... 848,902 8 682,000 7 2,000,000 20 8,764
NET INCOME...........................
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)......
------- ----- ------- ------ --------- ----- --------
BALANCE AT DECEMBER 31, 1995......... 848,902 $ 8 682,000 $ 7 2,000,000 $ 20 $ 8,764
======= ===== ======= ====== ========= ===== ========
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION)
ON
SECURITIES TOTAL
RETAINED AVAILABLE- SHAREHOLDER
EARNINGS FOR-SALE INVESTMENT
-------------------------------------
BALANCE AT DECEMBER 31, 1993.......... $ 1,732 $ -- $ 7,001
NET LOSS.............................. (476) (476)
IMPLEMENTATION OF SFAS NO. 115........ 11 11
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)....... (1,529) (1,529)
SALE OF 848,902 SHARES OF
SENIOR PREFERRED STOCK........... 3,530
------- ------ -------
BALANCE AT DECEMBER 31, 1994......... 1,256 (1,518) 8,537
NET INCOME........................... 84 84
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)...... 1,612 1,612
------- ------ -------
BALANCE AT DECEMBER 31, 1995......... $ 1,340 $ 94 $10,233
======= ====== =======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
F-7
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................ $ 84 $ (476)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Realized (gains) losses on securities available-for-sale.................. (136) 44
Gain on sale of foreclosed assets, net.................................... (109) (375)
Gain on sale/disposal of equipment........................................ -- (14)
Gain on sale of loans..................................................... -- (34)
Provision for loan losses................................................. 250 25
Provision for foreclosed assets losses.................................... 350 740
Depreciation of premises and equipment.................................... 168 199
Amortization.............................................................. 113 124
Net decrease (increase) in trading securities............................. 476 (2,547)
Losses on other assets.................................................... 6 --
Change in:
Other assets.......................................................... 477 (148)
Other liabilities..................................................... 51 53
Refundable income taxes............................................... -- 268
------- -------
Net cash provided by (used in) operating activities............ 1,730 (2,141)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available-for-sale.......................... 951 2,253
Proceeds from the maturity of securities available-for-sale...................... 4,430 3,343
Purchases of securities available-for-sale....................................... (7,104) (9,306)
Proceeds from sale of loans...................................................... -- 1,405
Net increase in loans............................................................ (2,251) (3,362)
Decrease in mortgage loans held for sale......................................... -- 410
Proceeds from sales of premises and equipment.................................... 61 94
Capital expenditures for premises and equipment.................................. (54) (267)
Capital expenditures for foreclosed assets....................................... (136) (569)
Proceeds from sales of foreclosed assets......................................... 2,455 2,320
Proceeds from sales of other assets.............................................. 23 --
------- -------
Net cash used in investing activities.......................... (1,625) (3,679)
------- -------
</TABLE>
(Continued)
F-8
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits......................................... $ 3,199 $ 475
Proceeds from long-term debt................................................ -- 545
Payments on long-term debt.................................................. (110) (54)
Net increase (decrease) in other borrowed funds............................. (3,811) 3,235
Sale of senior preferred stock.............................................. -- 3,530
------ -------
Net cash (used in) provided by financing activities....... (722) 7,731
------ -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................ (617) 1,911
CASH AND CASH EQUIVALENTS, BEGINNING............................................ 5,660 3,749
------- -------
CASH AND CASH EQUIVALENTS, ENDING............................................... $ 5,043 $ 5,660
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest...................................................... $ 3,493 $ 2,959
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
(Concluded)
F-9
<PAGE>
- -------------------------------------------------------------------------------
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ADMINISTRATIVE ORDER:
REGULATORY AGREEMENTS:
On March 30, 1993, the Pennsylvania Department of Banking (the
"Department") issued an administrative order to the Corporation's primary
subsidiary, First Lehigh Bank, (the "Bank"). Under the terms of the
Department's administrative order, the Bank, among other things:
o Must not declare or pay any cash dividend, without the prior
written approval of the Department and the Regional Director of the
Federal Deposit Insurance Corporation ("FDIC");
o Must maintain a minimum liquidity ratio of 26% at all times;
o Must maintain, at all times, a minimum Tier 1 capital of 6.5% and a
"fully funded loan loss reserve";
o Must maintain a formal program to review the adequacy of the Bank's
allowance for loan losses;
o May not increase the outstanding amount of loans to any of the
concentrations of credit noted in the May 31, 1992 joint report of
examination of the Department and the FDIC (the "Examination") (the
Bank must also take all necessary steps to protect its interests in
the credits comprising the concentrations and to reduce the
concentrations to a safe and prudent level);
o May not grant, extend, renew, alter or restructure any loan or
other extension of credit without first obtaining and analyzing all
relevant credit information, as well as taking all necessary steps
to properly value and perfect its interests in collateral, where
applicable;
o May not extend directly or indirectly, any new or additional credit
to, or for the benefit of, any borrower who is associated with a
previously charged-off loan or a credit that has been adversely
classified in the Examination;
o Must adopt and implement a plan to diversify its asset portfolio;
o Must correct all violations of law noted in the Examination;
o Must reduce the level of nonperforming loans noted in the
Examination by at least half by March 30, 1994;
o Must reduce the classified assets noted in the Examination to not
more than 100% of Tier 1 leverage capital by September 1994 and to
not more than 50% of Tier 1 leverage capital by September 1995;
o Must implement a plan to manage its foreclosed asset properties
(including loans previously accounted for as in-substance
foreclosures) and to use best efforts to reduce the number of such
properties owned/held by the Bank;
o Must increase the membership on its board of directors to a minimum
of six directors and must retain qualified management (with prior
written approval of the Department required for any new directors
or senior executive officers).
(Continued)
F-10
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In addition, the Bank must comply with all terms of the Capital Plan it
submitted to the Department and the FDIC in February 1993 as amended in
March 1993. The Capital Plan called for the infusion of $2,000,000 by the
Corporation into the Bank and the sale of two branches to The National
Bank of Boyertown which would result in a gain of approximately
$2,100,000. In addition, the Capital Plan projected profitability for the
Bank in 1993 through 1997 and a Tier 1 leverage capital ratio in excess of
6.75% and a liquidity ratio in excess of 33% for each year end in the
period 1993 through 1997. The Capital Plan was approved by the FDIC on
June 1, 1993.
The Corporation continues to operate under a regulatory agreement issued
by the Federal Reserve Bank and the Bank continues to operate under a
cease and desist order issued by the FDIC, both of which were based on
examinations completed before 1992 and also place certain requirements
related to capital, adversely classified assets and management policies.
Such requirements are no more restrictive than those included in the
administrative order issued by the Department.
The Corporation's and the Bank's continued existence is dependent upon its
ability to achieve its 1993 Capital Plan and compliance with the terms of
the administrative and cease and desist orders. The Corporation's
management believes that the successful implementation of its Capital Plan
will provide sufficient capital, liquidity and earnings for it to continue
as a going concern in its present form.
As of December 31, 1995, the Bank has not fully complied with the
Department's administrative order since it has not reduced the level of
classified assets noted in the Examination to the specified level. A
comparison of the specified level and the actual level attained at
December 31, 1995 follows (in thousands):
Actual
Specified Level
Level Attained
----- --------
Classified assets............................. $ 4,538 $ 8,530
The Bank is currently in discussion with representatives of the
Pennsylvania Department of Banking and Federal Deposit Insurance
Corporation concerning the possible replacement of the existing orders and
agreements with updated language and requirements more appropriate to the
Bank's current condition.
2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
First Lehigh Corporation and its subsidiary First Lehigh Bank and the
Bank's subsidiaries (Allentown Properties, Inc., Quakertown Properties,
Inc., Walnutport Properties, Inc., Walnutport Properties II, Inc.,
Winchester Property Management Corporation and Pond Road Properties, Inc.)
(collectively the "Corporation") provide commercial banking services.
The First Lehigh Corporations's primary regulator is the Federal Reserve
Bank while the primary regulator of its subsidiary, First Lehigh Bank is
the Pennsylvania Department of Banking. First Lehigh Bank is also
regulated and insured by the Federal Deposit Insurance Corporation.
First Lehigh Bank is a commercial bank which provides a variety of
financial services to individuals and small business customers through its
five branch offices in Walnutport, Cherryville, Bethlehem, Allentown and
Quakertown, Pennsylvania. Its primary deposit products are passbook and
statement savings accounts, certificates of deposit, NOW accounts, money
market accounts, checking accounts and club accounts. Its primary lending
products are secured small business loans and lines of credit, residential
loans, installment loans and secured consumer loans.
(Continued)
F-11
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the First
Lehigh Corporation and its direct and indirect subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Estimates that are particularly susceptible to significant change relate
to the determination of the allowances for loan losses and the valuation
of assets acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of allowances for loan losses
and for writedowns of foreclosed assets, management obtains independent
appraisals for significant properties.
A majority of the Corporation's loan portfolio consist of commercial and
residential real estate loans to borrowers within the Lehigh Valley, which
constitutes the primary marketing area of the institution. During the past
decade the economy has begun to diversify and as a result is seeing
moderate growth. The Lehigh Valley is home to thousands of small and
medium-sized companies and has become a prime location for back-office
operations and a growing number of distribution centers. The economic base
is consciously making the transition from heavy industry to a service
economy and is poised for better-than-average growth during the next few
years.
While management uses available information to recognize losses on loans
and foreclosed assets, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the allowances for loan losses and for writedowns of foreclosed
assets. Such agencies may require the Corporation to recognize additions
to the allowances based on their judgments about information available to
them at the time of their examination. Because of these factors, it is
reasonably possible that the allowances for loan losses and for writedowns
of foreclosed assets may change materially in the near term.
INVESTMENT SECURITIES
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994. SFAS No. 115 requires that
investments in debt and equity securities be classified in three
categories, held-to maturity securities, trading securities, and
available-for-sale securities. Classification in these categories
require, respectively, accounting for securities at amortized cost,
accounting for securities at fair value with unrealized gains and losses
included in earnings, and accounting for securities at fair value with
unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' investment. The cumulative effect of
the adoption of SFAS No. 115 as of January 1, 1994 resulted in an increase
in shareholders' investment of $10,518.
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.
(Continued)
F-12
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are reported at amortized cost.
TRADING SECURITIES
Marketable equity securities held principally for resale in the near
term are classified as trading securities and recorded at their fair
values. Unrealized holding gains and losses on trading securities are
included immediately in other income.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist of debt securities not classified
as trading securities or securities held-to-maturity.
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate component
of shareholder's investment until realized.
LOANS
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due generally, when the loan is ninety days past due. When
interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent
cash payments are received. Impaired loans are charged off when
collection is considered remote.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost
or market. Net unrealized losses are recognized through a valuation
allowance by charges to income.
LOAN FEES
Fees collected upon loan origination and certain direct costs of
originating loans are deferred and recognized as adjustments to income
over the contractual lives of the related loans as yield adjustments.
Upon prepayment or other dispositions of the underlying loans before
their contractual maturities, any associated unamortized fees or costs
are recognized. Prior to 1988, such fees and costs were included in
income when collected or paid.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance
is based on an evaluation of the portfolio, past loan loss experience,
current economic conditions, volume, growth and composition of the loan
portfolio, and other relevant factors.
(Continued)
F-13
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
LOSS AND CASH DIVIDENDS PER SHARE
Primary loss per common share is based on the weighted average common
shares and common share equivalents outstanding during the period. Net
income (loss) applicable to common stock is reduced by current year
dividends in arrears on the Series A and Senior preferred stock. The
assumed conversion of the Series A preferred stock into common stock
has an anti-dilutive impact on earnings per share at December 31, 1995
and 1994.
STATEMENT OF CASH FLOWS
The Corporation considers all cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and federal
funds sold to be cash equivalents for purposes of the statement of cash
flows.
The Corporation transferred approximately $2,522,000 and $2,609,000
from loans to foreclosed assets held for sale during the years ended
December 31, 1995 and 1994, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in
the statement of financial condition. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be utilized in
immediate settlement of the instruments. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
(Continued)
F-14
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying amounts. The fair values for other loans (for example,
fixed rate commercial real estate and rental property mortgage
loans and commercial and industrial loans) are estimated using
discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgements
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.
Short-term borrowings and notes payable: The carrying amounts of
short-term borrowings and notes payable 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.
RECLASSIFICATIONS
Certain 1994 amounts have been reclassified to conform with 1995
reporting format.
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.
(Continued)
F-15
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENT SECURITIES:
The amortized cost of securities and their fair value at December 31, 1995
were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
TRADING SECURITIES
Marketable equity securities .................................. $ 4,911 $ 1,222 $ (95) $ 6,038
======= ======= ======= =======
SECURITIES AVAILABLE-FOR-SALE
Obligations of the U.S. Treasury and other
U.S. government agencies and corporation ................... 16,680 154 (112) 16,722
Other, primarily corporate debt securities .................... 4,663 105 (53) 4,715
------- ------- ------- -------
Total securities available-for-sale ........................... $21,343 $ 259 $ (165) $21,437
======= ======= ======= =======
SECURITIES HELD-TO-MATURITY
Obligations of the U. S. Treasury and other
U.S. government agencies and corporation ................... $ 4,046 $ -- $ (101) $ 3,945
Foreign securities ............................................ 50 -- -- 50
Other, primarily corporate debt securities .................... 345 -- (12) 333
------- ------- ------- -------
Total securities held-to-maturity ............................. $ 4,441 $ -- $ (113) $ 4,328
======= ======= ======= =======
</TABLE>
The amortized cost and fair value of investment securities as of December
31, 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
TRADING SECURITIES
Marketable equity securities ................................... $ 6,116 $ 970 $ (572) $ 6,514
======= ====== ======= =======
SECURITIES AVAILABLE-FOR-SALE
Obligations of the U.S. Treasury and other
U.S. government agencies and corporation .................... $14,367 $ -- (1,204) $13,163
Other, primarily corporate debt securities ..................... 3,313 -- (314) 2,999
------- ------ ------- -------
Total securities available-for-sale ............................ $17,680 $ -- $(1,518) $16,162
======= ====== ======= =======
SECURITIES HELD-TO-MATURITY
Obligations of the U. S. Treasury and other
U.S. government agencies and corporation .................... $ 5,210 $ -- $ (786) $ 4,424
Foreign securities ............................................. 50 -- 50
Other, primarily corporate debt securities ..................... 1,003 -- (147) 856
------- ------ ------- -------
Total securities held-to-maturity .............................. $ 6,263 $ -- $ (933) $ 5,330
======= ====== ======= =======
</TABLE>
(Continued)
F-16
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The amortized cost and fair value of debt securities held-to-maturity and
securities available-for-sale at December 31, 1995 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 .................................... $ 1,822 $ 1,816 $ -- $ --
Due after one year through five years .................. 3,708 3,731 50 50
Due after five years through ten years ................. 8,781 8,756 4,391 4,278
Due after ten years .................................... 2,026 2,075 -- --
------- ------- ------- -------
16,337 16,378 4,441 4,328
Mortgage-backed securities ............................. 5,006 5,059 -- --
------- ------- ------- -------
Total .................................................. $21,343 $21,437 $ 4,441 $ 4,328
======= ======= ======= =======
</TABLE>
The proceeds, gross gains and gross losses from the sale of
available-for-sale securities during the year ended December 31, 1995 and
1994 were as follows:
1995 1994
---- ----
Proceeds.......................................... $ 951 $ 2,253
Gross gains....................................... 149 --
Gross losses...................................... 13 44
There were no sales of securities classified as held-to-maturity in 1995
or 1994.
In December 1995, securities held-to-maturity with an amortized cost of
$1,805,515 and fair value of $1,826,479 were transferred to the
available-for-sale classification.
Investment securities with a carrying value of approximately $8,241,000
and $8,281,000 at December 31, 1995 and 1994, respectively were pledged to
secure certain deposits, repurchase agreements and for other purposes as
required by law.
At December 31, 1994, 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
held-to-maturity securities has occurred at December 31, 1995.
(Continued)
F-17
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. LOANS:
The components of loans in the consolidated statements of financial
condition were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Commercial ................................................. $ 3,971 $ 6,593
Real estate construction ................................... 4,403 5,008
Commercial real estate ..................................... 21,325 20,705
Residential real estate .................................... 24,833 23,797
Consumer ................................................... 4,855 4,198
-------- --------
Subtotal ................................................... 59,387 60,301
Unearned income ............................................ 514 681
Allowance for loan losses .................................. 1,624 1,703
-------- --------
$ 57,249 $ 57,917
======== ========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Balance at January 1 ....................................... $ 1,703 $ 2,155
Loans charged off .......................................... (902) (831)
Recoveries ................................................. 573 354
-------- --------
Net loans charged off ...................................... (329) (477)
Provision for loan losses .................................. 250 25
-------- --------
Balance at December 31 ..................................... $ 1,624 $ 1,703
======== ========
</TABLE>
Impairment of loans having recorded investments of $5,248,000 at December
31, 1995 and $7,687,000 at December 31, 1994 has been recognized in
conformity with FASB Statement No. 114 as amended by FASB Statement No.
118. The average recorded investment in impaired loans during 1995 and
1994 was $6,582,000 and $9,444,000, respectively. The total allowance for
loan losses related to these loans was $726,000 and $334,000 at December
31, 1995 and 1994, respectively. Interest income on impaired loans of
$30,000 and $93,000 was recognized for cash payments received in 1995 and
1994, respectively. The Bank is not committed to lend additional funds to
debtors whose loans are impaired.
Smaller balance homogeneous loans excluded from the impaired loan
classification include residential real estate and consumer loans. Loans
to the real estate development industry were approximately $6,000,000 at
December 31, 1995.
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, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance, beginning.................................. $ 4,163 $ 2,033
Advances............................................ 211 6,207
Payments and other reductions....................... (1,836) (4,077)
-------- --------
Balance, ending..................................... $ 2,538 $ 4,163
======== ========
</TABLE>
(Continued)
F-18
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. FORECLOSED ASSETS HELD FOR SALE:
The following table summarizes the activity in foreclosed assets held for
sale during the years ended December 31, 1995 and 1994 (in thousands):
1995 1994
------- -------
Balance, beginning ..................... $ 4,851 $ 4,435
Transfers from loans ................... 2,522 2,609
Additional capitalized costs ........... 136 577
Disposals .............................. (1,844) 1,996)
Charge-offs ............................ (790) (273)
------- -------
4,875 5,352
Less allowance for write downs
of foreclosed assets ................... 61 501
------- -------
Balance ending ......................... $ 4,814 $ 4,851
======= =======
The following table summarizes the activity in the allowance for
write-downs of foreclosed assets during the years ended December 31, 1995
and 1994 (in thousands):
1995 1994
----- -----
Balance, beginning ................... $ 501 34
Provision ............................ 350 740
Charge-offs .......................... (790) (273)
----- -----
Balance, ending ...................... $ 61 $ 501
===== =====
7. PREMISES AND EQUIPMENT:
The following is a summary of premises and equipment at December 31, 1995
and 1994 (in thousands):
1995 1994
---- ----
Land and improvements ........................ $ 243 $ 243
Buildings and leasehold improvements ......... 2,041 2,079
Equipment and fixtures ....................... 1,919 1,897
Equipment held for lease ..................... 43 129
------ ------
4,246 4,348
Less accumulated depreciation and
amortization ................................. 2,072 1,999
------ ------
$2,174 $2,349
====== ======
(Continued)
F-19
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Equipment held for lease includes vehicles and other equipment leased to
customers under operating leases that provide for the customer to cancel
the lease upon notice as provided for in the lease agreement. The
following schedule provides an analysis of equipment held for lease by
major classes as of December 31, 1995 and 1994 (in thousands):
1995 1994
---- ----
Cars ............................................. $ 30 $ 81
Trucks and heavy vehicles ........................ 13 13
Equipment ........................................ -- 35
---- ----
43 129
Accumulated depreciation ......................... 43 109
---- ----
$ -- $ 20
===== =====
8. TIME DEPOSITS:
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $6,738,000 and $4,732,000 at December 31, 1995 and
1994, respectively. Interest related to time certificates of deposit in
denominations of $100,000 or more was approximately $324,000 and $166,000
for the years ended December 31, 1995 and 1994, respectively.
9. OTHER BORROWED FUNDS:
Information concerning securities sold under agreements to repurchase and
other borrowings is summarized as follows (dollars in thousands):
1995 1994
------ ------
Year end balance ................................ $ -- $3,811
Average interest rate during the year ........... 6.66% 5.60%
Average balance during the year ................. $ 629 $ 662
Maximum month-end balance
during the year ................................. $3,079 $3,811
Securities underlying the agreements at year end:
Amortized cost .................................. $4,648 $4,653
Fair value ...................................... $4,552 $4,094
(Continued)
F-20
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
10. LONG-TERM DEBT:
In June 1994, the Corporation obtained a secured promissory note for
$545,184 with principal payments of $9,100, plus interest, due monthly.
Interest is calculated by using the lender's commercial rate plus .6%. The
proceeds of this note were used to payoff the two demand notes. The
maturity date of the loan is June 25, 1999. $381,382 was outstanding on
this debt at December 31, 1995. The note is secured by less that 10% of
the shares of Bank stock owned by the Corporation.
Maturities of long-term debt at December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31,
1996........................................ $ 109,200
1997........................................ 109,200
1998........................................ 109,200
1999........................................ 53,782
----------
$ 381,382
==========
11. SHAREHOLDERS' INVESTMENT:
Shareholders' investment at December 31, 1995 and 1994 consists of the
following (in thousands, except share information):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Senior preferred stock, par value $.01 per share,
1,500,000 shares authorized, 848,902 shares
issued and outstanding in both years....................................... $ 8 $ 8
Series A preferred stock, par value $.01 per share,
1,000,000 shares authorized; 682,000 shares
issued and outstanding (liquidation
preference of $2,114) in both years........................................ 7 7
Common stock, par value $.01 per share,
10,000,000 shares authorized;
2,000,000 shares issued and
outstanding in both years.................................................. 20 20
Contributed capital in excess of par value.................................... 8,764 8,764
Retained earnings............................................................. 1,340 1,256
Net unrealized appreciation (depreciation) on securities
available-for-sale........................................................ 94 (1,518)
-------- --------
Total shareholders' investment............................................ $ 10,233 $ 8,537
======== ========
</TABLE>
(Continued)
F-21
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Each share of the Series A preferred stock with a par value of $.01 is
convertible at the option of the holder, prior to March 31, 1996, to
common stock at the rate of .8 of a share of common stock for each share
of Series A preferred stock and after March 31, 1996, each share is
convertible into common stock at the rate of .72. Conversion rates are
adjusted for common stock dividends and splits. The Series A preferred
stock dividend is at an annual rate of $.3255 per share. Prior to the
Capital Plan resolution, the Series A preferred stock was redeemable at
the option of the Corporation after March 31, 1996 at the redemption price
of $3.50 (liquidation price $3.10) plus any accrued dividends. Cumulative
dividends in arrears are $998,960 and $776,969 as of December 31, 1995 and
1994, respectively.
During 1994, the Corporation sold 848,902 shares of senior preferred stock
with a par value of $.01 for $5.00 per share. Each share of senior
preferred stock is convertible at the option of the shareholder, prior to
October 31, 1998, to common stock at the rate of one share of common stock
for each share of senior preferred stock. The conversion rate will be
adjusted on November 1, 1998 if the greater of book value or market value
of the Corporation's common stock is not equal to $5.00 or more per share
at the close of business on the last trading day of the New York Stock
Exchange in October 1998. No adjustment will be made if the greater of the
market value or book value is equal to or greater than $5.00 per share at
such time. Conversion rates are adjusted for common stock dividends and
splits. The preferred stock dividend is at an annual rate of $.25 per
share. The liquidation price of the senior preferred stock is $5.00 plus
any accrued dividends. Cumulative dividends in arrears at December 31,
1995 and 1994 are $282,770 and $70,544, respectively.
Primary and fully diluted loss per share is computed based on the
following data for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net income (loss) applicable to common shares........... $ 84,181 $ (476,596)
Less current dividends in arrears:
Senior preferred stock.............................. (212,226) (70,544)
Series A preferred stock............................ (221,991) (221,991)
--------- ----------
Adjusted loss applicable to common shares............... $(350,036) $ (769,131)
========= ==========
</TABLE>
Weighted average common shares and common share equivalents outstanding
for the years ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Common shares........................................... 2,000,000 2,000,000
Senior preferred shares................................. 848,902 283,552
---------- ----------
Total....................................... 2,848,902 2,283,552
========== ==========
</TABLE>
(Continued)
F-22
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Series A preferred shares are not common stock equivalents since the
stated cash yield was more than 66 2/3% of the average Aa bond yield at
date of issuance. Accordingly, they are excluded from the computation of
weighted average common share and common share equivalents outstanding.
Series A preferred shares and options are also excluded in the computation
of fully diluted earnings per share since they have an anti-dilutive
effect.
12. INCOME TAXES:
The reasons for the difference between the provision (credit) for income
taxes and the amount computed by applying the statutory federal income tax
rate of 34% to income (loss) before provision (credit) for income taxes
are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Expected provision (credit) ......................... $ 29 $(162)
Effect of tax-exempt interest income ................ (12) (11)
Effect of dividends received deduction .............. (57) (57)
Other, net .......................................... -- 1
Net operating loss carryforward ..................... 40 229
----- -----
Provision (credit) for income taxes ........... $ -- $ --
===== =====
</TABLE>
At December 31, 1995, the Corporation has a net operating loss
carryforward of approximately $4,930,000 available to offset future
taxable income, which begins to expire in 2007 if not utilized.
(Continued)
F-23
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The deferred income tax asset and liability components are as follows at
December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
Deferred tax assets:
<S> <C> <C>
Net operating loss ................................................ $ 1,676 $ 1,187
Provision for loan losses ......................................... 90 128
Write-down of investment securities and
foreclosed assets held for sale ................................ 419 529
Unrealized losses on securities available
for sale ....................................................... -- 516
------- -------
Total ................................................................ 2,185 2,360
------- -------
Deferred tax liabilities:
Deferred loan costs, net .......................................... (21) (17)
Depreciation ...................................................... (105) (102)
Accretion ......................................................... (7) (5)
Trading securities gains .......................................... (266) (136)
Unrealized gains on securities available
for sale ....................................................... (32) --
------- -------
Total ................................................................ (431) (260)
------- -------
Valuation allowance .................................................. (1,754) (2,100)
------- -------
Net deferred tax asset ............................................... $ -- $ --
======= =======
</TABLE>
13. REGULATORY RESTRICTIONS:
Various regulatory agencies require banks and bank holding companies to
maintain a leverage ratio of core capital to total assets at a prescribed
level, currently 3%. In addition, bank regulators have issued risk-based
capital guidelines. Under such guidelines, minimum ratios of core capital
and total qualifying capital as a percentage of risk-weighted assets and
certain off-balance sheet items of 4% and 8%, respectively, are required
at December 31, 1993.
At December 31, 1995, the Bank met all of these capital requirements. Core
capital was $9,075,000 or 8.82% of total assets and 12.49% of total
risk-weighted assets, while total qualifying capital was $9,992,000 or
13.75% of total risk-weighted assets.
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, 1995, 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, 1995, without the prior approval of the
Federal Reserve Bank and the Department.
(Continued)
F-24
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Additionally, the Bank is limited to the amount it may loan or advance to
its affiliates unless such loans or advances are collateralized by
specified obligations. At December 31, 1995, the maximum amount available
for unsecured loans from the Bank to First Lehigh Corporation approximates
$500,000.
14. PROFIT-SHARING PLAN:
The Corporation has a noncontributory profit-sharing plan covering
eligible employees. Costs of the profit-sharing plan are funded as
accrued. The Corporation did not make a contribution to the plan in 1995
or 1994. Contributions to the plan are discretionary and are determined
annually by the Bank's board of directors.
15. STOCK OPTIONS:
The Corporation has a key employee Incentive Stock Option Plan. Options
are granted to purchase common stock at prices not less than the fair
market value of the common stock on the date of grant. The price of
options granted to any person possessing more than 10% of the total
combined voting power of all classes of stock of the Corporation must be
at least 110% of the fair market value of the common stock on the date of
grant. An officer of the Corporation resigned in 1994 and, in accordance
with the terms of the Plan, his 40,000 options expired. The 6,500 option,
which were granted to an officer of the Corporation on July 31, 1985,
expired during 1995 according to the term of the plan. Activity under the
Plan for the years ended December 31, 1995 and 1994 is as follows (in
thousands):
<TABLE>
<CAPTION>
AVAILABLE UNDER OPTION PRICE
FOR OPTION OPTION PER SHARE
---------- ------ ---------
<S> <C> <C> <C>
Balance, December 31, 1993 ............ -- 66,500 $3.00 - $4.12
Expired ............................... 40,000 (40,000) $3.00
Granted ............................... -- --
------- ------
Balance, December 31, 1994 ............ 40,000 26,500 $3.99 - $4.12
Expired ............................... 6,500 (6,500) $3.99
Granted ............................... -- --
------- ------- -----
Balance, December 31, 1995 ............ 46,500 20,000 $4.12
======= ======= =====
</TABLE>
In 1989, the Corporation formed the "First Lehigh Corporation 1989 Equity
Incentive Plan" for which stock options may be granted to employees for
the purchase of up to 84,000 shares of the Corporation's common stock.
During 1995, 60,000 options were issued at $3.50 per share.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve to varying
degrees elements of credit, interest rate or liquidity risk in excess of
the amount recognized in the consolidated balance sheet.
(Continued)
F-25
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Commitments to extend credit.......................... $3,417,517 $1,747,877
Standby letters of credit............................. 486,751 100,000
</TABLE>
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Corporation evaluates each customer's credit-worthiness
on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Corporation on extension of credit is based on
management's credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the
Corporation guaranteeing performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
17. RELATED PARTY TRANSACTIONS:
The Bank leases certain office space from an affiliate. The Bank in turn,
subleases a portion of this space as allowed for under this agreement. Net
rent expense related to this lease was $195,486 and $300,942, for the
years ended December 31, 1995, and 1994, respectively.
The following summarizes the future annual minimum lease payments due to
the affiliate, net of sublease income, under the terms of the lease as of
December 31, 1995:
YEARS ENDING DECEMBER 31 (Thousands of Dollars)
------------------------
1996.................................... 186
1997.................................... 192
1998.................................... 298
1999.................................... 296
2000.................................... 311
Thereafter.............................. 3,483
------
Total......................... $4,766
======
(Continued)
F-26
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
18. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Corporations' financial instruments at
December 31, 1995 are as follows (in thousands):
1995
----
Carrying Fair
Amount Value
------ -----
Financial assets:
Cash and cash equivalents............... $ 5,043 $ 5,043
Trading account securities.............. 6,038 6,038
Securities available for sale........... 21,437 21,437
Securities held-to-maturity............. 4,441 4,328
Loans, net of allowance................. 57,249 57,393
Accrued interest receivable............. 799 799
Financial liabilities:
Deposits................................ 92,312 93,374
Long-term debt.......................... 381 381
Accrued interest payable................ 217 217
19. FIRST LEHIGH CORPORATION (Parent company only)
CONDENSED FINANCIAL STATEMENTS (In thousands):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Assets:
Deposits with bank subsidiary ............................................. $ 813 $ 3,482
Accounts receivable ....................................................... 6 171
Investment in bank subsidiary, at equity in net assets .................... 8,777 5,341
Loans ..................................................................... 94 --
Other assets .............................................................. 925 656
------- -------
Total assets ........................................................... $ 10,615 $ 9,650
======== ========
Liabilities and shareholders' investment:
Demand notes payable ...................................................... $ 381 $ 491
Due to subsidiary ......................................................... -- 58
Other liabilities ......................................................... 1 564
------- -------
Total liabilities ...................................................... 382 1,113
Shareholders' investment .................................................. 10,233 8,537
------- -------
Total liabilities and shareholders' investment ......................... $ 10,615 $ 9,650
======== =======
</TABLE>
(Continued)
F-27
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Investment income....................................................... 63 37
Other income............................................................ 18 --
Other expenses.......................................................... (321) (136)
------ -----
Loss before equity in income (loss) of subsidiary....................... (240) (99)
Equity in net income (loss) of subsidiary............................... 324 (377)
----- -----
Net income (loss)....................................................... 84 (476)
===== =====
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................ $ 84 $ (476)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Equity in net (income) loss of subsidiary ............................ (324) 377
Increase or decrease in:
Accounts receivable ......................................... 165 (171)
Other assets ................................................ (269) (533)
Due to subsidiary ........................................... (58) --
Other liabilities ........................................... (563) 561
Loans ....................................................... (94) --
------- -------
Net cash used in operating
activities ............................................. (1,059) (242)
------- -------
Cash flows from investing activities:
Additional capital contribution to subsidiary .............................. (1,500) --
------- -------
Cash flows from financing activities:
Issuance of senior preferred stock ......................................... -- 3530
Payments on demand notes ................................................... -- (576)
Proceeds from long-term debt ............................................... -- 545
Payments on long-term debt ................................................. (110) (54)
------- -------
Net cash used in financing
activities ............................................. (110) 3,445
------- -------
Net (decrease) increase deposits with
bank subsidiary ............................................................ (2,669) 3,203
Deposits with bank subsidiary at beginning of year ........................... 3,482 279
------- -------
Deposits with bank subsidiary at end of year ................................. $ 813 $ 3,482
======= =======
</TABLE>
- -------------------------------------------------------------------------------
(Concluded)
F-28
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ---------
(in thousands except share data)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks........................................... $ 3,033 $ 2,578
Federal funds sold ............................................... 1,569 2,465
--------- ---------
Cash and cash equivalents................................ 4,602 5,043
Securities held-to-maturity
(estimated market value of $4,100 and
$4,328, respectively) ........................................... 4,438 4,441
Securities available-for-sale..................................... 21,775 21,437
Trading securities................................................ 7,200 6,038
Loans and leases.................................................. 65,457 59,387
Less: unearned income ......................................... (450) (514)
allowance for loan losses ............................... (1,937) (1,624)
--------- ---------
Net loans............................................. 63,070 57,249
Premises and equipment, net ...................................... 2,129 2,174
Real estate and other investments ................................ 147 163
Foreclosed assets held for sale................................... 5,272 4,814
Other assets ..................................................... 1,959 2,039
--------- ---------
Total Assets.......................................... $110,592 $ 103,398
========= =========
LIABILITIES
Deposits:
Noninterest-bearing............................................ $ 10,584 $ 9,689
Interest-bearing .............................................. 85,446 82,623
--------- ---------
Total Deposits......................................... 96,030 92,312
Other liabilities................................................. 610 472
Other borrowed funds.............................................. 1,850 0
Long-term debt ................................................... 327 381
--------- ---------
Total Liabilities ..................................... 98,817 93,165
--------- ---------
SHAREHOLDERS' INVESTMENT
Senior preferred stock, par value of $.01 per share,
1,500,000 shares authorized, 848,902 shares
issued and outstanding........................................... 8 8
Series A preferred stock, par value $.01 per share,
1,000,000 shares authorized; 682,000 shares issued and
outstanding (liquidation preference of $2,114) .................. 7 7
Common stock, par value $.01 per share, 10,000,000
authorized; 2,000,000 shares issued and outstanding ............. 20 20
Contributed capital in excess of par value ....................... 8,764 8,764
Retained earnings................................................. 3,616 1,340
Unrealized appreciation (depreciation) on securities
available-for-sale .............................................. (640) 94
--------- ---------
Total Shareholders' Investment ......................... 11,775 10,233
--------- ---------
Total Liabilities and Shareholders' Investment ......... $ 110,592 $ 103,398
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-29
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
(In thousands,
except share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ............................... $2,748 $2,490
Interest and dividends on investment securities:
Taxable interest income ................................. 770 757
Dividends ............................................... 141 104
Interest on federal funds sold ........................... 58 57
--------- ---------
Total Interest Income .................. 3,717 3,408
--------- ---------
INTEREST EXPENSE:
Interest on deposits ..................................... 1,763 1,660
Interest on other borrowed funds ......................... 17 41
Interest on long-term debt ............................... 16 22
--------- ---------
Total Interest Expense ................. 1,796 1,723
--------- ---------
NET INTEREST INCOME ...................................... 1,921 1,685
CREDIT FOR LOAN LOSSES ................................... 667 0
--------- ---------
NET INTEREST INCOME AFTER CREDIT
FOR LOAN LOSSES ......................................... 2,588 1,685
--------- ---------
OTHER INCOME:
Service charges and other fees ........................... 301 243
Gain on sale of foreclosed assets, net ................... 18 33
Rental income ............................................ 0 9
Trading securities gains, net ............................ 266 681
Litigation settlement .................................... 1,539 0
--------- ---------
Total Other Income ..................... 2,124 966
--------- ---------
OTHER EXPENSES:
Salaries and employee benefits ........................... 634 674
Net occupancy expense .................................... 267 264
Equipment expense ........................................ 103 127
FDIC insurance ........................................... 78 131
Foreclosed asset expenses ................................ 370 393
Other .................................................... 984 788
--------- ---------
Total Other Expenses ................... 2,436 2,377
--------- ---------
</TABLE>
F-30
<PAGE>
<TABLE>
<S> <C> <C>
INCOME BEFORE PROVISION FOR INCOME TAXES ............... 2,276 274
PROVISION FOR INCOME TAXES ............................. 0 0
--------- ---------
NET INCOME.............................................. $ 2,276 $ 274
========= =========
PRIMARY EARNINGS PER SHARE ............................. $ 0.72 $ 0.02
========= =========
FULLY DILUTED EARNINGS PER SHARE ....................... $ 0.60 $ 0.02
========= =========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary ............................................. 2,848,902 2,848,902
Fully Diluted ....................................... 3,414,502 3,396,927
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-31
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
-----------------
1996 1995
---- ----
(In thousands,
except share data)
<S> <C> <C>
(Unaudited)
INTEREST INCOME:
Interest and fees on loans ............................ $ 1,458 $ 1,262
Interest and dividends on investment securities:
Taxable interest income .............................. 378 382
Dividends ............................................ 65 43
Interest on federal funds sold ........................ 32 37
------- -------
Total Interest Income ............... 1,933 1,724
------- -------
INTEREST EXPENSE:
Interest on deposits .................................. 883 881
Interest on other borrowed funds ...................... 7 4
Interest on long-term debt ............................ 8 11
------- -------
Total Interest Expense .............. 898 896
------- -------
NET INTEREST INCOME ................................... 1,035 828
CREDIT FOR LOAN LOSSES ................................ 719 0
------- -------
NET INTEREST INCOME AFTER CREDIT
FOR LOAN LOSSES ...................................... 1,754 828
------- -------
OTHER INCOME:
Service charges and other fees ........................ 173 135
Gain on sale of foreclosed assets, net ................ 14 13
Rental income ......................................... 0 4
Trading securities gains, net ......................... (30) 331
Litigation settlement ................................. 1,539 0
------- -------
Total Other Income .................. 1,696 483
------- -------
OTHER EXPENSES:
Salaries and employee benefits ........................ 304 307
Net occupancy expense ................................. 136 135
Equipment expense ..................................... 52 60
FDIC insurance ........................................ 39 66
Foreclosed asset expenses ............................. 254 185
Other ................................................. 520 397
------- -------
Total Other Expenses ................ 1,305 1,150
------- -------
</TABLE>
F-32
<PAGE>
<TABLE>
<S> <C> <C>
INCOME BEFORE PROVISION FOR INCOME TAXES.. 2,145 161
PROVISION FOR INCOME TAXES ............... 0 0
---------- ----------
NET INCOME ............................... $ 2,145 $ 161
========== ==========
PRIMARY EARNINGS PER SHARE ............... $ 0.71 $ 0.02
========== ==========
FULLY DILUTED EARNINGS PER SHARE ......... $ 0.60 $ 0.02
========== ==========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary ............................... 2,848,902 2,848,902
Fully Diluted ......................... 3,414,502 3,396,927
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-33
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
--------- -------
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 2,276 $ 274
Adjustments to reconcile net income to net cash
used in operating activities:
Credit for loan losses ................................. (667) 0
Provision for foreclosed asset losses .................. 160 260
Depreciation ........................................... 81 88
Amortization and accretion ............................. 50 54
Realized gain on investment securities, net ............ 0 (154)
Net (increase) decrease in trading securities .......... (1,162) 338
Gain on sale of foreclosed assets held for sale ........ (18) (33)
Gain on sale of real estate and other investments ...... (400) 0
(Gain) loss on sale/disposal of equipment .............. (7) 6
Change in:
Other assets ....................................... 15 (327)
Other liabilities .................................. 138 (49)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 466 457
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ............................. 2,155 88
Proceeds from sales .................................. 773 0
Purchases of securities .............................. (3,999) (1,907)
Net increase in loans and leases ....................... (6,199) (1,793)
Proceeds from sales of premises and equipment .......... 7 30
Capital expenditures for premises and equipment ........ (36) (33)
Proceeds from sales of foreclosed assets ............... 338 1,248
Capitalized expenditures for foreclosed assets ......... 0 (91)
Proceeds from sales of real estate and other
investments........................................... 517 0
Proceeds from sales of other assets .................... 23 18
------- -------
NET CASH USED IN INVESTING ACTIVITIES .................. (6,421) (2,440)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................... 3,718 3,394
Net increase (decrease) in other borrowed funds ........ 1,850 (3,411)
Payments on long-term debt ............................. (54) (55)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................................. 5,514 (72)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................... (441) (2,055)
CASH AND CASH EQUIVALENTS, BEGINNING ........................ 5,043 5,660
------- -------
CASH AND CASH EQUIVALENTS, ENDING ........................... $ 4,602 $ 3,605
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ................................. $ 1,794 $ 1,676
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-34
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
------- -------
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 2,145 $ 161
Adjustments to reconcile net income to net cash
used in operating activities:
Credit for loan losses ............................... (719) 0
Provision for foreclosed asset losses ................ 115 130
Depreciation ......................................... 41 44
Amortization and accretion ........................... 29 26
Realized gain on investment securities, net .......... 0 (154)
Net decrease in trading securities ................... 108 440
Gain on sale of foreclosed assets held for sale ...... (14) (13)
Gain on sale of real estate and other investments .... (400) 0
Change in:
Other assets ....................................... 58 (175)
Other liabilities .................................. 227 42
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 1,590 501
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ............................. 329 34
Purchases of securities .............................. (3,499) (1,907)
Net increase in loans and leases ....................... (1,823) (1,051)
Decrease in loans held for resale ...................... 0 102
Proceeds from sales of premises and equipment .......... 0 28
Capital expenditures for premises and equipment ........ (16) (22)
Proceeds from sales of foreclosed assets ............... 218 772
Capitalized expenditures for foreclosed assets ......... 0 (78)
Proceeds from sales of real estate and other
investments........................................... 517 0
Proceeds from sales of other assets .................... 23 11
------- -------
NET CASH USED IN INVESTING ACTIVITIES .................. (4,251) (2,111)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................... 3,645 1,017
Net increase in other borrowed funds ................... 350 150
Payments on long-term debt ............................. (27) (27)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............. 3,968 1,140
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................................... 1,307 (470)
CASH AND CASH EQUIVALENTS, BEGINNING ........................ 3,295 4,075
------- -------
CASH AND CASH EQUIVALENTS, ENDING ........................... $ 4,602 $ 3,605
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ................................. $ 890 $ 878
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-35
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
Part I - Financial Information (Cont'd)
Part 1. - Financial Statements (Cont'd)
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES:
FINANCIAL STATEMENT PRESENTATION:
The consolidated interim financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission with respect to Form 10-QSB. The
financial information included herein reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made herein are adequate to make the
information not misleading. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's Form 10-KSB for year-end December 31, 1995.
Interim statements are subject to possible adjustments in connection
with the annual audit of the Company's accounts for the full fiscal year 1996.
In the Company's opinion, all adjustments necessary in order to make the interim
financial statements not misleading have been included.
The results of operations for the interim periods presented are not
necessarily indicative of the results expected for the year ending December 31,
1996.
PRINCIPLES OF CONSOLIDATION
First Lehigh Corporation and its subsidiary First Lehigh Bank (the
"Bank") and the Bank's subsidiaries (Allentown Properties, Inc., Quakertown
Properties, Inc., Walnutport Properties, Inc., Walnutport Properties II, Inc.,
Pond Road Properties, Inc. and Winchester Property Management Co.) (Collectively
the "Company") provide commercial banking services. The consolidated financial
statements include the accounts of the First Lehigh Corporation and its direct
and indirect subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
F-36
<PAGE>
INVESTMENT SECURITIES
Investments in debt and equity securities are classified in three
categories, held-to-maturity securities, trading securities, and
available-for-sale securities. Classification in these categories requires,
respectively, accounting for securities at amortized cost, accounting for
securities at fair value with unrealized gains and losses included in earnings,
and accounting for securities at fair value with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
investment.
LOANS
Interest on loans is accrued and credited to income based upon the
principal amount outstanding and using the interest method for amortizing
unearned income on certain installment loans.
The accrual of interest income is generally discounted on loans past
due 90 days or more or when there is a reasonable doubt as to the collection of
interest. The Company continues the accrual of interest on loans past due 90
days or more when they are well secured and in the process of collection. When
interest accruals are discontinued, uncollected interest credited to income is
reversed if the collectibility is not certain.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or fair
value.
LOAN FEES
Fees collected upon loan origination and certain direct costs of
originating loans are deferred and recognized as adjustments to income over the
contractual lives of the related loans as yield adjustments. Upon prepayment or
other disposition of the underlying loans before their contractual maturities,
any associated unamortized fees or costs are recognized. Prior to 1988, such
fees and costs were included in income when collected or paid.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors.
F-37
<PAGE>
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation and amortization
is computed generally using the straight-line method.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of fair value
minus costs to sell or cost. The provision for foreclosed asset losses and the
costs of holding and maintaining the property are included in the statement of
income caption "Foreclosed asset expenses."
INCOME TAXES
At June 30, 1996 the Company has available approximately $4.93 million
of net operating losses based on its filed tax returns through December 31,
1995, which begin to expire 2007 if not utilized. No tax benefit related to the
unused net operating loss carry forward has been recognized in these financial
statements except for the reduction of the provision for income taxes due to the
availability of the net operating losses.
EARNINGS AND CASH DIVIDENDS PER SHARE
Primary earnings per common share is based on the weighted average
common shares and common share equivalents outstanding during the period. Net
income applicable to common stock is reduced by current year dividends in
arrears on both the Senior and Series A preferred stock. The calculation of
fully diluted earnings per common share is based on the conversion of the Series
A preferred stock into common shares at the rate of .8 shares of common stock
for each share of Series A preferred stock. The conversion rate of Series A
preferred stock changed from .8 to .72 in March 1996. However, the Board of
Directors has approved an amendment that would retain the .8 conversion rate
until March 1999, subject to shareholder approval. For purposes of this
calculation the conversion rate of .8 was used. The Senior preferred shares are
common stock equivalents since its effective yield was less than 66.6% of an
average Aa corporate bond yield at the time of issuance.
STATEMENT OF CASH FLOWS
The Company transferred approximately $938,000 from loans to foreclosed
assets held for sale during the six months ended June 30, 1996.
F-38
<PAGE>
LONG TERM DEBT
The Company has a term note with an outstanding balance of $326,784 at
June 30, 1996. Principal payments of $9,100 plus interest, at the lenders
commercial rate plus 0.6%, are due monthly. The note is secured by less than 10%
of the shares of the Bank which are owned by the Company.
REGULATORY MATTERS
Regulatory Enforcement Actions to Which the Company and the Bank Are
Subject
The Company and the Bank are subject to and have consented to the
following regulatory orders and agreements: (i) effective February 28, 1996, the
Company and the Bank entered into an Administrative Order (the "Pennsylvania
Order") with the Pennsylvania Department of Banking (the "Department"), which
replaced an earlier order entered into in 1993; (ii) on April 29, 1996 the Bank
entered into a Memorandum of Understanding (the "Memorandum of Understanding")
with the FDIC, which has replaced two cease and desist orders dating from
October 1987 and June 1992; and (iii) in January 1991, the Company consented to
a written agreement (the "Federal Reserve Agreement") with the Federal Reserve
Bank and the Department.
The following is a discussion of the material terms and provisions of
the Pennsylvania Order, the Memorandum of Understanding and the Federal Reserve
Agreement.
The Pennsylvania Order
Capital Requirements and Dividend Restrictions
Under the terms of the Pennsylvania Order, the Bank is required to
maintain, at all times, a minimum Tier I capital equal to or greater than 6.5%
of the Bank's adjusted total assets, plus a fully-funded loan loss reserve. The
Bank must provide the Pennsylvania Department of Banking with a quarterly report
detailing the maintenance of a 6.5% Tier I capital ratio and a fully-funded loan
loss reserve. As of June 30, 1996, the Bank's Tier I capital ratio was 10.54%.
The Bank is required to maintain a formal program to review the adequacy of the
Bank's allowance for loan and lease losses. The Bank may not declare or pay any
cash dividend without the prior written approval of the Department and the
Regional Director of the FDIC.
Credit Limitations and Restrictions
The following credit limitations and restrictions were imposed under
the Pennsylvania Order: (i) the Bank may not grant, extend, renew, alter or
restructure any loan or other extension of credit without first obtaining and
analyzing all relevant credit information, as well as taking all necessary steps
to properly value and perfect its interests in collateral, where applicable;
(ii) the Bank may not extend, directly or, indirectly, any new or additional
credit (which for the purposes of the Pennsylvania Order, includes the granting
of renewals or extensions, or the capitalizing of accrued interest) to, or for
the benefit of, any borrower who is obligated in any manner to the Bank on any
F-39
<PAGE>
extension of credit, or portion thereof, which has been charged off the books of
the Bank, in whole or in part, or to any affiliate or related interest of, or
other person or entity associated with, any such borrower, as long as any
portion of such extension of credit, whether or not the portion was charged off,
remains uncollected. The provisions of clause (ii) above do not apply to the
advancement of funds by the Bank for the sole purpose of maintaining or
protecting the Bank's real estate collateral if the failure to extend such
credit would otherwise be substantially detrimental to the best interests of the
Bank; (iii) the Bank may not extend, directly or indirectly, any new or
additional credit to, or for the benefit of, any borrower who is obligated in
any manner to the Bank on any loan or other extension of credit that has been
adversely classified, in whole or in part, by the Department in the report of
examination dated as of June 30, 1995, or as a result of any subsequent
examination of the Bank by the Department or the FDIC, or to any affiliate or
related interest of, or other person or entity associated with any such borrower
("classified borrower"), as long as such loan or other extension of credit
remains classified or uncollected. This clause (iii) does not prohibit the Bank
from renewing all or any part of an extension of credit to a classified borrower
who is not subject to the prohibitions of clause (ii), after collection in cash
of interest due on the entire extension of credit. The prohibitions of clause
(iii) do not apply to any extension of credit to a classified borrower who is
not subject to the prohibitions of clause (ii) above, if the Bank's failure to
extend further credit to a classified borrower would be substantially
detrimental to the best interests of the Bank, which determination must be
evidenced in writing in the applicable loan files; and (iv) the Bank must comply
fully and at all times with the provisions of section 1415 of the Banking Code
of 1965, as amended, relating to loans to executive officers and directors.
Performance Objectives
The following performance objectives were also stated in the
Pennsylvania Order: (i) the Bank must reduce the level of nonaccrual loans to
total gross loans noted in the Report of Examination as of June 30, 1995, to no
more than 7% by August 26, 1996, and further reduce such ratio to no more than
4% by November 24, 1996 and 2% by February 22, 1997; and (ii) the Bank must
reduce the level of classified assets as of June 30, 1995, to no more than 100%
of Tier I capital and reserve for loan and lease losses by August 26, 1996, and
further reduce such ratio to 75% by November 24, 1996 and 50% by February 22,
1997. As of June 30, 1996, the Bank's level of non-accrual loans to gross loans
was 5.66%, and the Bank's level of classified assets to Tier I capital and
reserve for loan and lease losses was 75.24%.
Reporting and Other Requirements
Other affirmative measures required to be taken by the Bank under the
Pennsylvania Order are as follows: (i) the Bank is required to submit quarterly
progress reports, no later than 30 days following the last day of each calendar
quarter; (ii) the Bank must comply with all state and federal laws that relate
to the operation of the Bank; (iii) the Bank must have and retain qualified
management, must notify the Secretary of Banking in writing of any resignations
and/or terminations of any members of its Board of Directors and/or any of its
senior executive officers and must obtain prior written approval from the
Department for any new Directors or senior executive officers; (iv) and the Bank
must maintain a written investment policy in a form and manner acceptable to the
Secretary of Banking, as determined at subsequent examinations or visitations.
F-40
<PAGE>
Status of Compliance with the Pennsylvania Order
The Company believes that it and the Bank are currently in compliance
with the Pennsylvania Order. The Pennsylvania Order requires the Bank to reduce
the level of nonaccrual loans to total gross loans noted in the report of
examination as of June 30, 1995, to no more than 7% by August 26, 1996. As of
June 30, 1996, this ratio was 5.66%. Additionally, the Order requires the Bank
to reduce the level of classified assets as of June 30, 1995, to no more than
100% of Tier I capital and the reserve for loan and lease losses by August 26,
1996, with further reductions thereafter. As of June 30, 1996, this ratio was
75.24%. The Pennsylvania Order also contains a provision requiring the Bank to
maintain, at all times, a minimum Tier I capital equal to or greater than 6.5%
of the Bank's adjusted total assets, plus a fully-funded loan loss reserve. As
of June 30, 1996 this ratio was 10.54% and the Bank's loan loss reserve was
fully funded.
The Memorandum of Understanding
Capital Requirements and Dividend Restrictions
The Memorandum of Understanding requires the Bank maintain its Tier I
capital at an amount equal to or greater than 6.0% of the Bank's adjusted total
assets. During the term of the Memorandum of Understanding, the Bank may not
declare or pay dividends without the prior written approval of the FDIC, which
declarations and payments must be made in accordance with applicable laws and
regulations, and may be made only if after such payments the ratio of Tier I
capital to adjusted total assets will be not less than 6.0%.
Credit Limitations and Restrictions
Under the terms of the Memorandum of Understanding, the Bank is
prohibited from extending credit, either directly or indirectly to, or for the
benefit of any borrower who is obligated in any manner to the Bank on any
extension of credit, or portion thereof, which has been charged off the books of
the Bank. The Bank is also prohibited from extending credit to, or for the
benefit of any borrower who is obligated in any manner to the Bank on any
extension of credit that has been classified, in whole or in part, as a result
of the examination of the Bank as of June 30, 1995. These prohibitions will not
apply if the Bank determines that failure to extend further credit would be
substantially detrimental to the institution.
Reporting and Other Requirements
The Bank was required to charge-off assets classified as "Loss" or
"Doubtful" as of June 30, 1995 by May 9, 1996, and, within 30 days of receipt of
future FDIC Reports of Examination, charge-off assets classified "Loss" or
"Doubtful." The Bank was required to submit a Classified Asset Reduction Plan to
the FDIC by May 29, 1996. Also, the Bank was required (i) to adopt a method of
computing the balance of its allowance for loan and lease losses that gives
consideration to the volume and composition of the loan portfolio; (ii) to adopt
and implement a written earnings plan and (iii) revise, adopt and implement
written lending and investment policies in a form and manner acceptable to the
FDIC as determined at subsequent examinations. The Bank is required to review
the adequacy of the loan loss allowance quarterly and submit progress reports to
the Regional
F-41
<PAGE>
Director of the FDIC detailing the form, content, and manner of any actions
taken to secure compliance with the Memorandum of Understanding on a quarterly
basis. The Bank is in compliance with these requirements of the Memorandum of
Understanding.
Status of Compliance with the Memorandum of Understanding
The Bank is currently in compliance with the requirements of the
Memorandum of Understanding. As of June 30, 1996 the Bank's Tier I capital ratio
was 10.54%, which is greater than the 6.0% ratio required by the Memorandum of
Understanding. The Bank has made necessary charge-offs and revised and adopted
its credit and investment policies. The earnings improvement plan required has
been prepared and submitted.
The Federal Reserve Agreement
Requirements and Dividend Restrictions
Under the Federal Reserve Agreement, the Company is subject to the
following requirements: (i) the Board of Directors of the Company was required
to establish a compliance committee consisting of three directors who were not
officers or principal shareholders of the Company, which would be responsible
for monitoring and coordinating the Company's adherence to the Federal Reserve
Agreement and submit quarterly progress reports to the Company's Board of
Directors; (ii) the Company is not permitted to declare or pay any dividends
without the prior written approval of the Federal Reserve Bank and the
Department; (iii) the Board of Directors of the Company was required to conduct
a review of the functions and performance of the officers of the Company and the
Bank and forward its written findings and conclusions along with a written
description of proposed management or operational changes; (iv) the Company was
required to submit a capital plan; (v) the Company is not permitted to redeem or
repurchase its outstanding preferred and common stock without 30 days prior
written notice to the Federal Reserve Bank and the Department; (vi) the Company
may not incur any additional debt without the written approval of the Federal
Reserve Bank and the Department; (vii) the Company was required to develop
written procedures to strengthen and maintain in a satisfactory manner its
records and audit functions; and (viii) the Company and the Bank are required to
submit quarterly reports to the Federal Reserve Bank and the Department.
Status of Compliance with the Federal Reserve Agreement
According to information received from the Federal Reserve Bank, the
Company believes that it is currently in substantial compliance with the Federal
Reserve Agreement. The Company has received permission from the Federal Reserve
Bank to issue the Shares in lieu of Accumulated Dividends for the periods ending
December 31, 1994 and December 31, 1995.
F-42
<PAGE>
No person is authorized in connection with any offering made hereby to give any
information or to make any representation not contained in this Prospectus, and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company, the Selling Agent or any subagent. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered hereby, nor does it
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstance create any
implication that the information contained herein is correct as of any date
subsequent to the date hereof.
TABLE OF CONTENTS
Page
----
Prospectus Summary...........................................................3
Risk Factors.................................................................9
The Offering................................................................18
Use of Proceeds.............................................................19
Capitalization..............................................................19
Dividends...................................................................20
Management's Discussion
and Analysis of Financial
Condition and Results of Operations.......................................21
Business and Properties.....................................................50
Management..................................................................60
Certain Transactions........................................................64
Beneficial Ownership of the Company's Securities............................64
Description of the Company's Securities.....................................67
Shares Eligible for Future Sale.............................................72
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities............................72
Legal Matters...............................................................73
Experts.....................................................................73
Additional Information......................................................73
Index to Consolidated Financial Statements.................................F-1
57,000 Shares
FIRST LEHIGH CORPORATION
Senior Preferred Stock
PROSPECTUS
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
As permitted by the provisions for indemnification of directors and
officers under the Pennsylvania Business Corporation Law, which applies to the
Company and the Bank, both the Company's and the Bank's Bylaws provide for
indemnification of directors and officers for reasonable expenses, judgments,
fines and amounts paid in settlement of actions unless the act or failure to act
giving rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness. The Bylaws for both the Company
and the Bank also avail directors of the Pennsylvania law that provides that a
director shall not be liable for monetary damages for any action taken unless
the director has breached his fiduciary duty and such breach constitutes
self-dealing, willful misconduct or recklessness and except in cases involving
the responsibility or liability of a director pursuant to any criminal statute
or the liability of a director for the payment of taxes pursuant to federal,
state or local law. Such provisions are subject to applicable federal and state
regulatory restrictions.
Item 25. Other Expenses of Issuance and Distribution.
Registration fee ................................................... $ 100
Printing and engraving expenses .................................... 3,000*
Legal fees and expenses ............................................ 30,000*
Accountants' fees and expenses ..................................... 5,000*
Blue sky fees and expenses ......................................... 1,000*
Miscellaneous ...................................................... 900*
-------
Total $40,000*
=======
- --------------
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
The Company has not sold any securities within the past three years without
registering the securities under the Securities Act.
Item 27. Exhibits.
Exhibits Description
- -------- -----------
3.1 Articles of Incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Form SB-2 Registration
Statement No. 33-71712).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Form SB-2 Registration Statement No. 33-71712).
4.1 Specimen Certificate of Senior Preferred Stock of the Company
(incorporated by reference to Exhibit 4.1 to the Company's Form SB-2
Registration Statement No. 33-71712).
5.1 Opinion of Duane, Morris & Heckscher.**
7.1 Opinion on Liquidation Preference. **
II-1
<PAGE>
10.1 Severance Compensation Agreement between the Bank and Wilbur R. Roat
dated December 7, 1995 (incorporated by reference to Exhibit 10.1 the
Company's Form 10-KSB report for the fiscal year ended December 31,
1995).*
10.2 Government Securities Clearing Agreement dated as of July 12, 1993
between the Bank and Custodial Trust Company (incorporated by
reference to Exhibit 10.2 to the Company's Form SB-2 Registration
Statement No. 33-71712).
10.3 Promissory Note from the Company to Meridian Bank in the principal
amount of $545,183.92 dated June 24, 1994. (Incorporated by reference
to Exhibit 10.3 of the Company's Form 10-KSB report, as amended, for
fiscal year ended December 31, 1994).
10.4 Office Lease dated June 3, 1994 between the Bank and Neely, Scharadin
& Silbert, Inc. (Incorporated by reference to Exhibit 10.4 of the
Company's Form 10-KSB report, as amended, for fiscal year ended
December 31, 1994).
10.5 Data Processing Services Agreement between the Bank and Bisys, Inc.
dated as of February 19, 1991 (incorporated by reference to Exhibit
10.5 to the Company's Form SB-2 Registration Statement No.
33-71712).
10.6 Office Lease between Pond Associates and First Lehigh Bank dated
November 1, 1990 (incorporated by reference to Exhibit 10.6 to the
Company's Form SB-2 Registration Statement No. 33-71712).
10.7 Lease Agreement between 740 Hamilton Street, Inc. and the Germantown
Savings Bank dated as of February 1, 1971; Lease Assignment and
Assumption between the Bank and Savings Fund Society of Germantown,
d/b/a Germantown Savings Bank dated September 19, 1986; and letter
dated August 4, 1993 acknowledging exercise of option term and
confirmed by 740 Hamilton Street, Inc. and the Bank (each incorporated
by reference to Exhibit 10.7 to the Company's Form SB-2 Registration
Statement No. 33-71712).
10.8 Lease Agreement between Janice H. Levin and the Estate of Philip J.
Levin and The Savings Fund Society of Germantown and its Vicinity
dated July 31, 1974, First Amendment dated January 20, 1975, Second
Amendment dated June 22, 1984, Assignment and Assumption between the
Bank and the Savings Fund Society of Germantown and its Vicinity dated
as of September 30, 1986, including Consent to Assignment of Net
Realty Holding Trust, Third Amendment dated July 11, 1989, Fourth
Amendment dated August 6, 1991, Fifth Amendment dated August 26, 1991
and Sixth Amendment dated August 16, 1993 (each incorporated by
reference to Exhibit 10.8 to the Company's Form SB-2 Registration
Statement No. 33-71712).
10.9 The Company's 1984 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.9 to the Company's Form SB-2 Registration
Statement No. 33-71712).*
10.10 The Company's 1989 Equity Incentive Plan (incorporated by reference to
Exhibit 10.10 to the Company's Form SB-2 Registration Statement No.
33-71712).*
10.11 Agreement of Limited Partnership of Pond Associates dated March 2,
1990 among Pond Eight, Inc. and the limited partners set forth
therein; and First Amendment of Limited Partnership Agreement of Pond
Associates dated January 15, 1991 (each incorporated by reference to
Exhibit 10.12 to the Company's Form SB-2 Registration Statement No.
33-71712).
10.12 Office Lease dated December 30, 1994 between the Bank and Kevin T.
Fogerty (incorporated by reference to Exhibit 10.13 of the Company's
Form 10-KSB report, as amended, for fiscal year ended December 31,
1994).
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
to the Company's Form 10-KSB report for the fiscal year ended December
31, 1995).
23.1 Consent of Duane, Morris & Heckscher (to be included in their opinion
filed as Exhibit 5.1).
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates.
24.1 Power of Attorney (included on page II-4 of this registration
statement).
II-2
<PAGE>
99.1 Form of Waiver and Subscription Agreement.**
- ------------------
* This exhibit is a management contract or compensatory plan or arrangement.
** To be filed by amendment.
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes as follows:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and
(iii) include any additional or changed material information on the plan of
distribution.
2. For determining any liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial bona
fide offering thereof.
3. To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Allentown, the Commonwealth of Pennsylvania on September 30, 1996.
FIRST LEHIGH CORPORATION
By:/s/ James L. Leuthe
---------------------------------------------
James L. Leuthe, Chairman of
the Board and Chief Executive Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints James L. Leuthe and Wilbur R. Roat, and each or
either of them, as such person's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him, and in his name,
place and stead, in any and all capacities, to sign any or all amendments or
post-effective amendments to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them or their substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/James L. Leuthe Chairman of the Board, September 30, 1996
- ------------------------ Chief Executive Officer
James L. Leuthe and Director (principal
executive officer)
/s/Kashmira K. Lodaya Treasurer (principal September 30, 1996
- ------------------------ financial and accounting
Kashmira K. Lodaya officer)
II-4
<PAGE>
Signature Title Date
- --------- ----- ----
/s/Stephen M. Alinikoff Director September 30, 1996
- ------------------------
Stephen M. Alinikoff
/s/Peter Barter Director September 30, 1996
- ------------------------
Peter Barter
/s/Robert B. Colfer Director September 30, 1996
- ------------------------
Robert B. Colfer
/s/Vincent Dieter Director September 30, 1996
- ------------------------
Vincent Dieter
/s/Charles D. Flack, Jr. Director September 30, 1996
- ------------------------
Charles D. Flack, Jr.
/s/Harry J. Lentz Director September 30, 1996
- ------------------------
Harry J. Lentz
/s/John H. McKeever Director September 30, 1996
- ------------------------
John H. McKeever
/s/Wilbur R. Roat Director September 30, 1996
- ------------------------
Wilbur R. Roat
II-5
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-B)
Exhibit No. Description Page No.
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Form SB-2 Registration Statement No. 33-71712).
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Form SB-2 Registration Statement No.
33-71712).
4.1 Specimen Certificate of Senior Preferred Stock of the
Company (incorporated by reference to Exhibit 4.1 to the
Company's Form SB-2 Registration Statement No. 33-71712).
5.1 Opinion of Duane, Morris & Heckscher.**
7.1 Opinion on Liquidation Preference.**
10.1 Severance Compensation Agreement between the Bank and Wilbur
R. Roat dated December 7, 1995 (incorporated by reference
to Exhibit 10.1 to the Company's Form 10-KSB report for the
fiscal year ended December 31, 1995).*
10.2 Government Securities Clearing Agreement dated as of July
12, 1993 between the Bank and Custodial Trust Company
(incorporated by reference to Exhibit 10.2 to the
Company's Form SB-2 Registration Statement No. 33-71712).
10.3 Promissory Note from the Company to Meridian Bank in the
principal amount of $545,183.92 dated June 24, 1994.
(Incorporated by reference to Exhibit 10.3 of the
Company's Form 10-KSB report, as amended, for fiscal year
ended December 31, 1994).
10.4 Office Lease dated June 3, 1994 between the Bank and Neely,
Scharadin & Silbert, Inc. (Incorporated by reference to
Exhibit 10.4 of the Company's Form 10-KSB report, as
amended, for fiscal year ended December 31, 1994).
10.5 Data Processing Services Agreement between the Bank and
Bisys, Inc. dated as of February 19, 1991 (incorporated by
reference to Exhibit 10.5 to the Company's Form SB-2
Registration Statement No. 33-71712).
10.6 Office Lease between Pond Associates and First Lehigh Bank
dated November 1, 1990 (incorporated by reference to Exhibit
10.6 to the Company's Form SB-2 Registration Statement No.
33-71712).
10.7 Lease Agreement between 740 Hamilton Street, Inc. and the
Germantown Savings Bank dated as of February 1, 1971;
Lease Assignment and Assumption between the Bank and
Savings Fund Society of Germantown, d/b/a Germantown Savings
Bank dated September 19, 1986; and letter dated August 4,
1993 acknowledging exercise of option term and confirmed
by 740 Hamilton Street, Inc. and the Bank (each incorporated
by reference to Exhibit 10.7 to the Company's Form SB-2
Registration Statement No. 33-71712).
10.8 Lease Agreement between Janice H. Levin and the Estate of
Philip J. Levin and The Savings Fund Society of Germantown
and
<PAGE>
its Vicinity dated July 31, 1974, First Amendment dated
January 20, 1975, Second Amendment dated June 22, 1984,
Assignment and Assumption between the Bank and the Savings
Fund Society of Germantown and its Vicinity dated as of
September 30, 1986, including Consent to Assignment of Net
Realty Holding Trust, Third Amendment dated July 11, 1989,
Fourth Amendment dated August 6, 1991, Fifth Amendment dated
August 26, 1991 and Sixth Amendment dated August 16, 1993
(each incorporated by reference to Exhibit 10.8 to the
Company's Form SB-2 Registration Statement No. 33-71712).
10.9 The Company's 1984 Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.9 to the Company's Form SB-2
Registration Statement No. 33-71712).*
10.10 The Company's 1989 Equity Incentive Plan (incorporated by
reference to Exhibit 10.10 to the Company's Form SB-2
Registration Statement No. 33-71712).*
10.11 Agreement of Limited Partnership of Pond Associates dated
March 2, 1990 among Pond Eight, Inc. and the limited
partners set forth therein; and First Amendment of Limited
Partnership Agreement of Pond Associates dated January 15,
1991 (each incorporated by reference to Exhibit 10.12 to the
Company's Form SB-2 Registration Statement No. 33-71712).
10.12 Office Lease dated December 30, 1994 between the Bank and
Kevin T. Fogerty (incorporated by reference to Exhibit 10.13
of the Company's Form 10-KSB report, as amended, for fiscal
year ended December 31, 1994).
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Form 10-KSB report for the
fiscal year ended December 31, 1995).
23.1 Consent of Duane, Morris & Heckscher (to be included in
their opinion filed as Exhibit 5.1).
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates.
24.1 Power of Attorney (included on page II-4 of this
registration statement).
99.1 Form of Waiver and Subscription Agreement.**
- ------------------
* This exhibit is a management contract or compensatory plan or arrangement.
** To be filed by amendment.
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2
of our report dated February 2, 1996, relating to the 1995 and 1994 consolidated
financial statements of First Lehigh Corporation and subsidiaries, and to the
reference to our Firm under the caption "Experts."
PARENTE, RANDOLPH, ORLANDO, CAREY
& ASSOCIATES
Allentown, Pennsylvania
September 30, 1996