U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file Number: 33-71712
FIRST LEHIGH CORPORATION
(Exact name of small business issuer as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-2218479
(I.R.S. Employer Identification No.)
1620 Pond Road
Allentown, Pennsylvania 18104
(Address of principal executive offices)
(Zip Code)
(610) 398-6660
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes |X| No __
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the issuer's classes of common equity, as of the latest
practicable date: 2,000,000 shares of common stock, par value $.01 per share, as
of September 30, 1996.
Transitional Small Business Disclosure Format (check one):
Yes __ No |X|
1
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Part I - Financial Information Page Number
- ------------------------------- -----------
Item 1. Financial Statements:
Consolidated Balance Sheet as of
September 30, 1996 and
December 31, 1995......................................... 3
Consolidated Statements of Income for the
nine months ended
September 30, 1996 and 1995............................... 4 - 5
Consolidated Statements of Income for
the three months ended
September 30, 1996 and 1995................................ 6 - 7
Consolidated Statement of Cash Flows
for the nine months ended
September 30, 1996 and 1995................................ 8
Consolidated Statement of Cash Flows for
the three months ended
September 30, 1996 and 1995................................ 9
Notes to Consolidated Financial Statements................... 10 - 16
Item 2. Management's Discussion and Analysis or
Plan of Operations.......................................... 17 - 35
Part II - Other Information
Item 1. Legal Proceedings............................................ 36
Item 6. Exhibits and Reports on Form 8-K............................. 37
Signatures.................................................. 38
2
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(in thousands except share data)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks............................................ $ 2,941 $ 2,578
Federal funds sold................................................. 1,528 2,465
-------- -------
Cash and cash equivalents...................... 4,469 5,043
Securities held-to-maturity (estimated fair
value of $4,152 and $4,328, respectively)......................... 4,437 4,441
Securities available-for-sale...................................... 21,893 21,437
Trading securities................................................. 6,988 6,038
Loans and leases................................................... 65,726 59,387
Less: unearned income.......................................... (471) (514)
allowance for loan losses................................ (1,760) (1,624)
-------- --------
Net loans...................................... 63,495 57,249
Premises and equipment, net........................................ 2,090 2,174
Real estate and other investments.................................. 47 163
Foreclosed assets held for sale.................................... 5,249 4,814
Other assets....................................................... 2,120 2,039
-------- --------
Total Assets................................... $110,788 $103,398
======== ========
LIABILITIES
Deposits:
Noninterest-bearing............................................. $ 10,156 $ 9,689
Interest-bearing................................................ 85,064 82,623
-------- --------
Total Deposits................................. 95,220 92,312
Other liabilities.................................................. 443 472
Other borrowed funds............................................... 2,400 0
Long-term debt..................................................... 299 381
-------- --------
Total Liabilities.............................. 98,362 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.................................................. 4,077 1,340
Unrealized appreciation (depreciation) on securities
available-for-sale................................................ (450) 94
-------- --------
Total Shareholders' Investment................. 12,426 10,233
-------- --------
Total Liabilities and
Shareholders' Investment...................... $110,788 $103,398
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
(in thousands, except share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ............................ $ 4,216 $ 3,825
Interest and dividends on investment securities:
Taxable interest income .............................. 1,204 1,144
Dividends ............................................ 200 157
Interest on federal funds sold ........................ 78 104
------- -------
Total Interest Income ............... 5,698 5,230
------- -------
INTEREST EXPENSE:
Interest on deposits .................................. 2,660 2,574
Interest on other borrowed funds ...................... 41 42
Interest on long-term debt ............................ 23 32
------- -------
Total Interest Expense .............. 2,724 2,648
------- -------
NET INTEREST INCOME ................................... 2,974 2,582
PROVISION (CREDIT) FOR LOAN LOSSES .................... (667) 250
------- -------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR LOAN LOSSES ...................................... 3,641 2,332
------- -------
OTHER INCOME:
Service charges, fees and other income ................ 422 360
Gain on sale of foreclosed assets, net ................ 46 33
Rental income ......................................... 0 11
Realized gains on investment securities, net .......... 0 18
Trading securities gains, net ......................... 842 1,335
Litigation settlement ................................. 1,539 0
------- -------
Total Other Income .................. 2,849 1,757
------- -------
OTHER EXPENSES:
Salaries and employee benefits ........................ 954 996
Net occupancy expense ................................. 398 398
Equipment expense ..................................... 158 184
FDIC insurance ........................................ 116 172
Foreclosed asset expenses ............................. 510 588
Other ................................................. 1,616 1,688
------- -------
Total Other Expenses ................ 3,752 4,026
------- -------
4
<PAGE>
INCOME BEFORE PROVISION FOR INCOME TAXES ...... 2,738 63
PROVISION FOR INCOME TAXES .................... 0 0
----------- -----------
NET INCOME .................................... $ 2,738 $ 63
=========== ===========
PRIMARY EARNINGS PER SHARE .................... $ 0.85 $ (0.09)
=========== ===========
FULLY DILUTED EARNINGS PER SHARE .............. $ 0.71 $ (0.09)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary .................................... 2,848,902 2,848,902
Fully Diluted .............................. 3,414,502 2,848,902
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
---- ----
(in thousands, except share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ........................ $ 1,468 $ 1,335
Interest and dividends on investment securities:
Taxable interest income .......................... 434 387
Dividends ........................................ 59 53
Interest on federal funds sold .................... 20 47
----------- -----------
Total Interest Income ........... 1,981 1,822
----------- -----------
INTEREST EXPENSE:
Interest on deposits .............................. 897 914
Interest on other borrowed funds .................. 24 1
Interest on long-term debt ........................ 7 10
----------- -----------
Total Interest Expense .......... 928 925
----------- -----------
NET INTEREST INCOME ............................... 1,053 897
PROVISION FOR LOAN LOSSES ......................... 0 250
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES .................................. 1,053 647
----------- -----------
OTHER INCOME:
Service charges, fees and other income ............ 121 117
Gain on sale of foreclosed assets, net ............ 28 0
Rental income ..................................... 0 2
Realized gains on investment securities, net ...... 0 18
Trading securities gains, net ..................... 576 654
----------- -----------
Total Other Income .............. 725 791
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits .................... 320 322
Net occupancy expense ............................. 131 134
Equipment expense ................................. 55 57
FDIC insurance .................................... 38 41
Foreclosed asset expenses ......................... 140 195
Other ............................................. 632 900
----------- -----------
Total Other Expenses ............ 1,316 1,649
----------- -----------
6
<PAGE>
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES ................................. 462 (211)
PROVISION FOR INCOME TAXES ........................ 0 0
----------- -----------
NET INCOME (LOSS) ................................. $ 462 $ (211)
=========== ===========
PRIMARY EARNINGS PER SHARE ........................ $ 0.12 $ (0.11)
=========== ===========
FULLY DILUTED EARNINGS PER SHARE .................. $ 0.10 $ (0.11)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary ........................................ 2,848,902 2,848,902
Fully Diluted .................................. 3,414,502 2,848,902
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 2,738 $ 63
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (credit) for loan losses ................... (667) 250
Provision for foreclosed asset losses ................ 160 315
Write-off of capitalized legal expenses .............. 0 400
Depreciation ......................................... 122 128
Amortization and accretion ........................... 69 81
Realized gain on investment securities, net .......... 0 18
Net (increase) decrease in trading securities ........ (950) 401
Gain on sale of foreclosed assets held for sale ..... (46) (33)
Gain on sale of real estate and other investments .... (397) 0
(Gain) loss on sale/disposal of equipment ............ (7) 6
Change in:
Other assets ....................................... (162) (14)
Other liabilities .................................. (29) (38)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 831 1,541
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ............................. 2,224 612
Proceeds from sales .................................. 773 854
Purchases of securities .............................. (3,999) (3,030)
Net increase in loans and leases ....................... (7,318) (2,749)
Proceeds from sales of premises and equipment .......... 7 54
Capital expenditures for premises and equipment ........ (38) (44)
Proceeds from sales of foreclosed assets ............... 1,105 1,689
Capitalized expenditures for foreclosed assets ......... (36) (199)
Proceeds from sales of real estate and other investments 614 0
Proceeds from sales of other assets .................... 37 23
------- -------
NET CASH USED IN INVESTING ACTIVITIES .................. (6,631) (2,790)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................... 2,908 3,346
Net increase (decrease) in other borrowed funds ........ 2,400 (3,811)
Payments on long-term debt ............................. (82) (82)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................................. 5,226 (547)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................... (574) (1,796)
CASH AND CASH EQUIVALENTS, BEGINNING ........................ 5,043 5,660
------- -------
CASH AND CASH EQUIVALENTS, ENDING ........................... $ 4,469 $ 3,864
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ................................. $ 2,726 $ 2,585
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
---- ----
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 462 $ (211)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................ 0 250
Provision for foreclosed asset losses ................ 0 55
Write-off of capitalized legal expenses .............. 0 400
Depreciation ......................................... 41 40
Amortization and accretion ........................... 19 27
Realized gain on investment securities, net ........ 0 (18)
Net decrease in trading securities ................... 212 217
Gain on sale of foreclosed assets held for sale ...... (28) 0
Loss on sale of real estate and other investments .... 3 0
Change in:
Other assets ....................................... (177) 313
Other liabilities .................................. (167) 11
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 365 1,084
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ............................. 69 524
Proceeds from sales .................................. 0 854
Purchases of securities .............................. 0 (1,123)
Net increase in loans and leases ....................... (1,117) (956)
Proceeds from sales of premises and equipment .......... 0 24
Capital expenditures for premises and equipment ........ (2) (11)
Proceeds from sales of foreclosed assets ............... 765 441
Capitalized expenditures for foreclosed assets ......... (36) (108)
Proceeds from sales of real estate and other investments 97 0
Proceeds from sales of other assets .................... 14 5
------- -------
NET CASH USED IN INVESTING ACTIVITIES .................. (210) (350)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits ............................... (810) (48)
Net increase (decrease) in other borrowed funds ........ 550 (400)
Payments on long-term debt ............................. (28) (27)
------- -------
NET CASH USED IN FINANCING ACTIVITIES .................. (288) (475)
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................................... (133) 259
CASH AND CASH EQUIVALENTS, BEGINNING ........................ 4,602 3,605
------- -------
CASH AND CASH EQUIVALENTS, ENDING ........................... $ 4,469 $ 3,864
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ................................. $ 932 $ 909
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
9
<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.
10
<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.
11
<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 September 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 $1,617,000 from loans to
foreclosed assets held for sale during the nine months ended September 30, 1996.
12
<PAGE>
LONG TERM DEBT
The Company has a term note with an outstanding balance of $299,484 at
September 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 September 30, 1996, the Bank's Tier I capital ratio
was 10.88%. 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
13
<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 September 30, 1996, the Bank's level of nonaccrual loans to gross
loans was 4.13%, and the Bank's level of classified assets to Tier I capital and
reserve for loan and lease losses was 68.57%.
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.
14
<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
September 30, 1996, this ratio was 4.13%. 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 September 30, 1996, this
ratio was 68.57%. 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 September 30, 1996 this ratio was 10.88% 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
15
<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.
Status of Compliance with the Memorandum of Understanding
The Bank is currently in compliance with the requirements of the
Memorandum of Understanding. As of September 30, 1996 the Bank's Tier I capital
ratio was 10.88%, 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. See page 31 for discussion of a
proposed offering of shares of Senior Preferred Stock in lieu of such
accumulated dividends.
16
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
Part I - Financial Information (Cont'd)
Item 2. - Management's Discussion and Analysis or Plan of Operations:
The consolidated financial review of the Company is intended to compare
the performance of the Company for the periods ended September 30, 1996 and
1995. The review of the information presented should be read in conjunction with
the consolidated financial statements and the accompanying notes.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
NET INCOME
Net income for the first nine months of 1996 increased $2,675,000,
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:
(in thousands)
Recovery of recorded investment
in impaired loans $ 905
Recovery of other assets 103
Recovery of previous loan charge-off 1,140
1996 interest income 58
Recovery of 1996 expenses 132
Legal fees accrual 105
1996 other income 1,539
------
Total $3,982
======
A final cash payment of $600,000 in connection with the settlement of
this matter was scheduled to be received in the third quarter of 1996. However,
the obligor has delayed payment through further bankruptcy proceedings. The
bankruptcy trustee has tentatively scheduled an auction of the bankrupt's estate
for December 1996. Any future payments will be recorded as other income when
received.
17
<PAGE>
The other significant factors contributing toward the remaining
increase of $1,136,000 in net income during the first nine months of 1996 over
the same period in 1995 were as follows: Net interest income increased $392,000,
or 15.18%, compared to 1995. Credit for loan losses amounted to $667,000 in 1996
as compared to provision for loan losses of $250,000 in 1995, resulting in net
increase in income of $917,000. Other expenses declined $274,000, or 6.81%,
during the first nine months of 1996 compared to the same period in 1995.
However, net gains on trading securities declined $493,000, or 36.93%, in 1996
as compared to the same period in 1995.
The profit performance for financial institutions is measured by the
return on average assets ("ROA") and the return on average equity ("ROE"). On an
annualized basis, the Company's ROA was 3.41% in 1996 compared to 0.08% in 1995.
The ROE was 33.20% for the first nine months of 1996 compared to 0.89% in 1995.
Excluding $1,539,000 income from the Settlement, on an annualized basis, the
Company's ROA and ROE were 1.49% and 14.54%, respectively, for the first nine
months of 1996.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities. The
primary sources used to fund these assets were deposits, borrowed funds, and
capital.
In the first nine months of 1996, as outlined below, net interest
income increased $392,000, or 15.18%, over the same period in 1995.
During the first nine months of 1996, interest and fee income on loans
increased $391,000, or 10.22%, over the same period in 1995, as the result of
increase in the average loan balance of $5.63 million, or 10.64%. The Bank
experienced an increased demand in loan requests during the first three quarters
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 originate their dealer paper. During the first nine months of 1996,
the Bank originated $11.52 million consumer loans, as compared to $4.14 consumer
loans in the same period in 1995. The average yield on loans, however, declined
4 basis points from 9.64% in 1995 to 9.60% in 1996.
Interest and dividend income on investment securities increased from
$1.30 million in 1995 to $1.40 million in 1996, or 7.92%, partially as the
result of receiving a special dividend of $25,000 on an investment. In addition,
the average balance of investment security portfolio increased $889,000, or
2.94%, during the first nine months of 1996 than over the same period in 1995,
mostly as the result of investing the proceeds from the Settlement in
securities. The average yield on securities also increased 27 basis points
during 1996 compared to the same period in 1995.
Interest expense on deposits increased $86,000, or 3.34%, for the nine
months ended September 30, 1996 compared to the same period in 1995, partially
as the result of higher average balance for interest-bearing deposits of $1.94
million, or 2.35% as compared to the first nine months
18
<PAGE>
of 1995. Additionally, the average rate paid by the Bank for the
interest-bearing deposits increased 4 basis points from 4.17% in 1995 to 4.21%
in 1996 as interest on savings deposits decreased and interest on time deposits
increased.
During the first nine months of 1996, the average yield on
interest-earning assets increased 13 basis points and the cost of
interest-bearing liabilities increased 2 basis points, resulting in an increase
in net spread of 11 basis points. The net yield on interest-earning assets
increased 30 basis points during 1996.
19
<PAGE>
Distribution of Interest-Earning Assets and Interest-Bearing
Liabilities:
Interest Rates and Interest Differential
The following tables sets 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 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 Nine Months Ended September 30,
(in thousands)
1996 1995
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(2) $58,550 $ 4,216 9.60% $52,922 $ 3,825 9.64%
Investment securities 31,124 1,404 6.01% 30,235 1,301 5.74%
Federal funds sold 1,955 78 5.32% 2,355 104 5.89%
------- ------- ------ ------- ------- ------
Total interest-earning assets $91,629 $ 5,698 8.29% $85,512 $ 5,230 8.16%
======= ------- ------ ======= ------- ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $36,276 $ 754 2.78% $36,002 $ 820 3.05%
Time deposits 48,037 1,906 5.30% 46,376 1,754 5.06%
Other borrowed funds 926 41 5.82% 840 42 6.59%
Long-term debt 340 23 8.89% 450 32 9.38%
------- ------- ------ ------- ------- ------
Total interest-bearing liabilities $85,579 $ 2,724 4.25% $83,668 $ 2,648 4.23%
======= ------- ------ ======= ------- ------
NET INTEREST INCOME $ 2,974 $ 2,582
======= =======
INTEREST RATE SPREAD 4.04% 3.93%
===== =====
NET YIELD ON INTEREST-
EARNING ASSETS(1) 4.33% 4.03%
===== =====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 107.07% 102.20%
======= =======
</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.
20
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
(in thousands)
1995 1994
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(2) $52,922 $3,825 9.64% $49,390 $3,552 9.59%
Investment securities 30,235 1,301 5.74% 27,278 1,173 5.73%
Federal funds sold 2,355 104 5.89% 2,476 71 3.83%
------- ------ ------ ------- ------ ------
Total interest-earning assets $85,512 $5,230 8.16% $79,144 $4,796 8.08%
======= ------ ------ ======= ------ ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $36,002 $ 820 3.05% $39,553 $ 844 2.85%
Time deposits 46,376 1,754 5.06% 42,321 1,305 4.12%
Other borrowed funds 840 42 6.59% 79 2 3.34%
Long-term debt 450 32 9.38% 545 31 7.50%
------- ------ ------ ------- ------ -----
Total interest-bearing liabilities $83,668 $2,648 4.23% $82,498 $2,182 3.54%
======= ------- ------ ======= ------ -----
NET INTEREST INCOME $2,582 $2,614
====== ======
INTEREST RATE SPREAD 3.93% 4.54%
==== ====
NET YIELD ON INTEREST-
EARNING ASSETS(1) 4.03% 4.40%
==== ====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 102.20% 95.93%
====== =====
</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.
21
<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 Nine Months Ended For the Nine Months Ended
September 30, 1996 vs. September 30, 1995 vs.
1995 Increase (Decrease) 1994 Increase (Decrease)
Due to Due to
---------------------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 415 $ (24) $ 391 $ 256 $ 17 $ 273
Investment securities 37 66 103 124 4 128
Federal funds sold (16) (10) (26) (6) 39 33
----- ----- ----- ----- ----- -----
Total interest-earning assets $ 436 $ 32 $ 468 $ 374 $ 60 $ 434
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits $ 16 $ (82) $ (66) $ (83) $ 59 (24)
Time deposits 31 121 152 91 358 449
Other borrowed funds 6 (7) (1) 36 4 40
Long-term debt (7) (2) (9) (8) 9 1
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ 46 $ 30 $ 76 $ 36 $ 430 $ 466
----- ----- ----- ----- ----- -----
CHANGE IN NET INTEREST INCOME $ 390 $ 2 $ 392 $ 338 $(370) $ (32)
===== ===== ===== ===== ===== =====
</TABLE>
22
<PAGE>
OTHER INCOME
Total other income, excluding securities gains, increased $1,603,000
for the nine months ended September 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 $64,000 in 1996 compared to the same
period in 1995. The increase of $62,000 in service charges, fees and other
income and $13,000 in gain from sale of foreclosed assets were mitigated by a
decrease of $11,000 in rental income due to discontinuing the Company's leasing
operations. For the first nine months of 1996, the net gain on trading and
investment securities portfolios declined $511,000, compared to the same period
in 1995. The Company's trading securities are carried at fair value and are
comprised primarily of the common stock of other banks and bank holding
companies. The strong stock market growth during 1995 and 1996 has resulted in
significant net gains in trading securities. A downturn in the overall market
would most likely result in future trading securities losses.
OTHER EXPENSES
Total other expenses declined $274,000, or 6.81%, for the first nine
months of 1996 compared to the same period in 1996. Salaries and employee
benefits declined $42,000 in 1996 compared to 1995, principally as a result of
$48,000 bonus and relocation expenses incurred during the first nine months of
1995. FDIC insurance premium decreased $56,000, or 32.56%, as the result of
lower rates. Foreclosed asset expenses declined $78,000 as compared to the first
nine months of 1995. In addition, other expenses declined $72,000, or 4.27%
during 1996 as compared to the same period in 1995. Within the other expense
category: 1995 legal costs for the Settlement were approximately $377,000 higher
than the same period in 1996, while 1996 legal costs for the litigation with the
FDIC, involving the Company's chairman and CEO and the Bank's former president,
were approximately $347,000 higher than the same period in 1995. Although the
Company expects to recover some of these legal costs under its directors and
officers liability insurance, such amounts have been expensed pending resolution
of the claim for such refunds.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was $1.76 million at September 30, 1996,
compared to $1.624 million at December 31, 1995. The allowance equaled 2.70% of
loans at September 30, 1996, compared to 2.76% at December 31, 1995.
The adequacy of the allowance for loan losses is measured monthly by an
adequacy test. The adequacy test is an evaluation of all loans which have been
classified (other loans especially mentioned, substandard, doubtful, loss) by
internal loan review, regulatory examination, monitoring of delinquency and
other pertinent factors. Allocations are determined by an in depth review of
each individual credit based on its potential future loss. The value of tangible
collateral and/or guarantees is determined as well as the borrower's ability and
willingness to repay. This value, as measured
23
<PAGE>
against the loan balance, is used in determining the allowance allocation for
collateral-dependent loans. Additionally, the Bank considers the suggested
guidelines of its regulatory agencies when completing the analysis of the
institution's allowance for loan losses. The guidelines suggest the utilization
of minimum percentages of 15%, 50%, and 100% for use in determining general
allowances for loans classified as substandard, doubtful and loss, respectively.
These requirements are a measurement only and do not constitute a specific
allowance placed against any specifically identified loan. Total loans
outstanding, net of substandard, doubtful, and loss are given an estimated
allowance requirement to absorb future losses. These loans are performing loans,
well secured, or loans secured by cash, cash equivalents or marketable
securities. Although it would appear that little or no allowance allocations
would apply to these loans, allowances need to be made for the historical
charge-offs and the human error element in the perfection of the Bank's interest
and other issues unforeseen to management. Additionally, the Bank conducts an
annual review of all credits in excess of $150,000 or more, which demonstrates
any recent delinquency characteristics or other weaknesses, to assure the
adequacy of the allowance and provision for loan losses.
At monthly meetings, the Credit Administration Committee is presented
with the adequacy test of the allowance for loan losses that contains
information relative to both specific credits and the total portfolio in
general. The information is used to determine the adjustment needed for the
allowance to be properly stated. In establishing the adjustment required,
management considers a variety of factors, including, but not limited to,
general economic factors and potential losses from significant borrowers. The
Bank continues to strengthen its underwriting process and internal loan review
process by implementing stringent analytical standards in the loan approval and
review procedures.
In May 1996, management completed a detailed analysis of gross loan
charge-offs for the years 1991 to 1995. This analysis took into consideration
the type of lending done during those years, changes in the concentration of the
loan portfolio and the current composition of the loan portfolio. Based on this
review, management decided to increase the general allowance percentage applied
to nonclassified loans as of May 31, 1996. This increase 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 nine months ended September 30, 1996. During the
first nine months of 1995, $250,000 provision for loan losses was booked.
24
<PAGE>
The following table sets forth a reconciliation of the allowance for
loan losses and illustrates the charge-offs and recoveries by major loan
category for nine months ended September 30, 1996 (in thousands):
Beginning Balance, January 1, 1996 ...... $1,624
------
Charge-offs:
Commercial, financial and agricultural --
Real estate - construction ........... --
Real estate - mortgage ............... 267
Installment loans to individuals ..... 91
Lease financing ...................... 22
------
Total charge-offs ....................... 380
------
Recoveries:
Commercial, financial and agricultural 10
Real estate - construction ........... --
Real estate - mortgage ............... 1,165
Installment loans to individuals ..... 8
Lease financing ...................... --
------
Total recoveries ........................ 1,183
------
Net recoveries .......................... 803
------
Credit for loan losses .................. (667)
------
Ending Balance, September 30, 1996 ...... $1,760
======
Ratio of net recoveries to
average loans outstanding ............ 1.28%
FINANCIAL CONDITION
At September 30, 1996, the Company's total assets were $110.8 million,
representing an increase of $7.39 million from December 31, 1995, principally as
the result of receiving approximately $4.0 million in the Settlement, a $2.91
million increase in deposits and a $2.4 million of borrowed funds.
Loans
Net loans increased $6.25 million from $57.25 million at December 31,
1995 to $63.5 million at September 30, 1996. As mentioned earlier, the Bank
originated indirect paper for several auto dealers. The consumer loan portfolio
has increased approximately $6.98 million, or 161% since December 31, 1995,
mostly as a result of originating more auto loans. The change in the composition
of other loans at September 30, 1996 compared to December 31, 1995 is as
follows: Real estate construction loans increased $192,000, or 4.36%;
Residential real estate loans increased $634,000, or 2.55%; Commercial loans
increased $318,000, or 8.01%, while Real estate commercial loans declined $1.74
million, or 8.16%
25
<PAGE>
The following table sets forth the maturity and repricing schedule of
the loan portfolio at September 30, 1996 (in thousands):
After one After
Within but within five
One year five years years Total
Maturity Schedule:
Commercial ............... $ 1,916 $ 1,618 $ 679 $ 4,213
Real estate-construction.. 2,917 936 324 4,177
Real estate-mortgage ..... 11,295 19,797 11,741 42,833
Consumer, net ............ 624 9,763 933 11,320
Nonaccrual loans ......... -- -- -- 2,712
------- ------- ------- -------
Total .......................... $16,752 $32,114 $13,677 $65,255
======= ======= ======= =======
Repricing Schedule (1):
Fixed rate loans ......... $16,607 $26,008 $ 3,645 $46,260
Floating rate loans ...... 15,696 587 -- 16,283
Nonaccrual loans ......... -- -- -- 2,712
------- ------- ------- -------
Total .......................... $32,303 $26,595 $ 3,645 $65,255
======= ======= ======= =======
- -------------
(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 $22.84 million (amortized
costs), or 71.06%, of total investment securities. Included in the above are
$4.87 million mortgage-backed products, mostly consisting of collateralized
mortgage obligations ("CMO") and real estate mortgage investment conduits
("REMIC"). During the current year, stress tests were conducted twice on these
CMOs and REMICs, all of which were passed.
At the present time, the Company does not engage in the use of
derivatives investment products as a means to hedge the risks in its investment,
loan or deposit portfolios.
Deposits and Repurchase Agreement
Total deposits increased $2.91 million, or 3.15%, from $92.31 million
at December 31, 1995 to $95.22 million at September 30, 1996. During the
second and third quarter of 1996, the Bank experienced deposit growth in all
categories except in money market accounts. Noninterest-bearing
26
<PAGE>
demand deposits increased $467,000; savings, club and interest-bearing demand
deposits increased $1.56 million, partially as a result of $571,000 increase in
Christmas club accounts which will mature in October 1996; and time deposits
increased $881,000 since December 31, 1995. As a percentage of total deposits,
savings, club accounts and interest-bearing demand deposits represented 38.37%
at September 30, 1996, compared to 37.89% at December 31, 1995. There were no
brokered deposits within the Company's deposit base at September 30, 1996.
The balance for a repurchase agreement increased to $2.4 million at
September 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 September 30, 1996 and December 31, 1995.
September 30, December 31,
1996 1995
---- ----
(in thousands)
Three months or less .... $1,860 $2,852
Over three months through
twelve months .... 4,143 2,811
Over one year through
five years ....... 1,427 1,075
Over five years ......... 0 0
------ ------
TOTAL ............ $7,430 $6,738
====== ======
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consist of impaired and other loans where the
principal, interest, or both, 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.
27
<PAGE>
The following table represents nonperforming assets of the Company at
September 30, 1996 and December 31, 1995.
September 30, December 31,
1996 1995
---- ----
(in thousands)
Impaired loans ................................. $ 2,712 $ 5,248
Other loans past due 90 days or more ........... 643 257
------- -------
Total nonperforming loans .................. 3,355 5,505
Foreclosed assets held for sale ................ 5,249 4,814
------- -------
Total nonperforming assets ................. $ 8,604 $10,319
======= =======
Nonperforming loans as a percentage
of loans (net of unearned interest) ........ 5.14% 9.35%
Nonperforming assets as a percentage of assets.. 7.77% 9.98%
Loans past due 90 days or more increased $386,000 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, 44.17% are secured by real estate, 35.30% are loans to consumers and
20.52% are to commercial borrowers.
Impaired loans declined $2,536,000, or 29.50%, at September 30, 1996
compared to December 31, 1995. Loans with carrying values of $1,617,000 were
transferred to foreclosed assets held for sale during 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 $2.636 million of impaired loans and loans to
commercial borrowers represent remaining $76,000. The Bank analyzes its
allowance requirements monthly and makes provisions to address new developments
as they arise in an effort to recognize problems and provide for potential
future losses to earnings or capital.
The majority of nonperforming assets are secured by real estate. The
composition of the nonperforming assets at September 30, 1996 follows:
28
<PAGE>
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 ....... $1,225,633
Foreclosed assets held for sale.. 832,565
----------
Total ........................... $2,058,198
==========
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 ....... $ 901,978
Foreclosed assets held for sale.. 1,563,657
----------
Total ........................... $2,465,635
==========
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 ....... $ 529,844
Foreclosed assets held for sale.. 2,514,506
----------
Total ........................... $3,044,350
==========
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............... $ 672,113
==========
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................ $ 25,261
==========
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
fourth quarter of 1996.
Assets Under Agreement or Payoffs:
Impaired and over 90 days................ $ 0
Foreclosed assets held for sale.......... 338,371
-----------
Total.................................... $ 338,371
===========
29
<PAGE>
At September 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 an
Administrative 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/or classified assets. Through September 30, 1996, the Company eliminated
gross $3.47 million of nonperforming and/or classified assets, including
$290,000 in charge-offs, $1,865,600 in cash payments and $1,315,500 as a result
of declassification or cures. The $3.47 million reduction was slightly lower
than management's targeted reduction of $3.95 million. Pending and potential
reductions for the fourth quarter are expected to approximate $1.759 million,
more than the targeted $1.317 million per quarter. Total reduction for 1996 is
estimated at $5.23 million which is in line with the $5.3 million projection
made in January 1996. The Bank anticipates that it will be in compliance with
the regulatory requirements (See "Regulatory Matters" under the notes to the
consolidated financial statements included in part I of this report) as of
November 24, 1996.
Management believes that the current level of dispositions of
nonperforming assets will allow the Bank to meet all scheduled regulatory
requirements discussed in Regulatory Matters. The Company continues to market
its foreclosed assets held for sale through listing by external agents.
LIQUIDITY AND FUNDS MANAGEMENT
Liquidity management ensures that adequate funds will be available to
meet anticipated and unanticipated deposit withdrawals, debt servicing payments,
investment commitments, commercial 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 September 30, 1996, the Company maintained $4.469 million in cash
and cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, the Company had $21.893 million in securities
available-for-sale representing 19.76% of total assets at September 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 September 30, 1996, approximately 79.24% of the
Company's assets were funded by core deposits acquired within its market area.
An additional 11.22% of the assets were funded by the Company's equity. These
two components provide a substantial and stable source of funds.
30
<PAGE>
The Company's Board of Directors has not declared or paid any dividends
on the outstanding shares of either its Senior Preferred Stock or its Series A
Preferred Stock due to restrictions placed on it by federal and state banking
regulators and other restrictions that do not permit the Bank to pay dividends
to the holding company. The amount of undeclared dividends in arrears on the
Senior and Series A Preferred Stock at September 30, 1996, were $441,939 and
$1,165,453, respectively.
The Company has filed a registration statement with Securities and
Exchange Commission with respect to 57,000 shares of its Senior Preferred Stock.
These shares will be offered to holders of Senior Preferred Stock in exchange
for such holder's agreement to waive such holder's rights to receive dividends
that have accumulated on shares of Senior Preferred Stock through December 31,
1995. Holders accepting this offer will receive one share of Senior Preferred
Stock for each $5 of accumulated dividends that are waived. The total amount of
accumulated dividends on Senior Preferred Stock at December 31, 1995 was
$282,770. Accordingly, a maximum of 56,554 shares can be issued in the offering
under such registration statement.
For the nine months ended September 30, 1996, cash and cash equivalents
decreased $574,000. Changes in cash are measured by changes in three major
classifications of cash flows known as operating, investing and financing
activities.
During the first nine months of 1996, net cash and cash equivalents of
$831,000 were provided by operating activities compared to $1.541 million
provided in the same period in 1995, a decrease of $710,000, principally as the
result of increased activities in trading securities during 1996.
Net increase in cash used in investing activities was $3.84 million
during the first nine 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 $4.57 million for loans, offset in part by net cash provided by
investment securities of $562,000. In addition, net proceeds from sale of
foreclosed assets declined $421,000, while net cash provided from sale of real
estate and other investments increased $614,000 during the first nine months of
1996 as compared to the same period in 1995.
Net cash of $5.23 million was provided by financing activities during
the first nine months of 1996 as compared to $547,000 used in the same period in
1995, representing a net change in financing activities of $5.77 million. Net
increase of $6.21 million cash provided from repurchase agreement, offset in
part by $438,000 decline in cash provided from deposit activities was the
primary reason for the net change for the nine months ended September 30, 1996
as compared to the same period in 1995.
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.
31
<PAGE>
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 September 30, 1996 the Company maintained a one-year cumulative GAP
of negative $6.792 million, or 6.97% 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 $16.04 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.
32
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at September 30, 1996:
<TABLE>
<CAPTION>
September 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>
Interest-Earning assets:
Investment securities (1) $11,306 $ 644 $ 1,288 $ 5,597 $16,010 $34,845
Loans (2) 21,957 10,346 7,940 18,655 3,645 62,543
------- ------- ------- ------- ------- -------
TOTAL $33,263 $10,990 $ 9,228 $24,252 $19,655 $97,388
------- ------- ------- ------- ------- -------
Interest-bearing
liabilities:
Demand-interest bearing $14,554 $ -- $ -- $ -- $ -- $14,554
Savings and Clubs (3) 1,495 743 1,486 4,458 13,797 21,979
Time 21,733 9,821 7,499 9,478 -- 48,531
Other borrowed funds 2,400 -- -- -- -- 2,400
Long-term debt 299 -- -- -- -- 299
------- ------- ------- ------- ------- -------
TOTAL $40,481 $10,564 $ 8,985 $13,936 $13,797 $87,763
------- ------- ------- ------- ------- -------
GAP ($ 7,218) $ 426 $ 243 $10,316 $ 5,858 $ 9,625
------- ------- ------- ------- ------- -------
Cumulative GAP ($ 7,218) ($ 6,792) ($ 6,549) $ 3,767 $ 9,625 $ 9,625
======= ======= ======= ======= ======= =======
</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 $1,528,000
of federal funds sold.
(2) Includes estimated schedule maturities of the fixed rate loans ignoring
any potential rollover at maturity. Excludes nonaccrual loans
of $2,712,000.
(3) Assumes that 7% of the savings deposits are repriceable each year based
on the previous five years' historical activity.
33
<PAGE>
CAPITAL
The adequacy of the Company's capital is reviewed on an ongoing basis
with reference to size, composition and quality of the Company's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
As required by the federal banking regulatory authorities, new
guidelines have been adopted to measure capital adequacy. Under the guidelines,
certain minimum ratios are required for core capital and total capital as a
percentage of risk-weighted assets and other off balance sheet instruments. For
the Company, Tier I capital consists of shareholders' equity less intangible
assets, and Tier II capital includes the allowable portion of the allowance for
loan losses, currently limited to 1.25% of risk-weighted assets.
The following table sets forth the capital ratios of the Bank as of
September 30, 1996 and 1995.
Regulatory September 30,
Requirements 1996 1995
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio.............. 4.0% * 10.88% 8.57%
Risk-based capital ratios:
Tier I capital/risk-weighted............. 4.0% 15.14% 11.91%
Tier I and Tier II capital/
Risk-weighted assets............ 8.0% 16.40% 13.18%
- -------------
* The Pennsylvania Department of banking requires the Bank to maintain a
minimum Tier I leverage capital ratio of at least 6.5% under the terms
of the Administrative Order.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995
ANALYSIS OF OPERATIONS
Net income for three months ended September 30, 1996 was $462,000 as
compared to a loss of $211,000 for the same period in 1995, representing an
increase of $673,000. The increase was primarily attributable to the increased
net interest income of $156,000, decreased other expenses of $333,000 and no
provision for loan losses as compared to $250,000 provision for loan losses
recorded in the third quarter of 1995.
Interest and fees earned on loans increased $133,000, or 9.96% as
compared to the third quarter 1995, mostly the result of an increased average
loan portfolio of $7.98 million, or 14.82%,
34
<PAGE>
mitigated by lower yield as compared to 1995, principally due to approximately
$38,000 additional income recorded for nonperforming loans during the third
quarter 1995. Interest expense was almost the same as 1995.
Other income declined $66,000, or 8.34%, in the third quarter of 1996
as compared to the same period in 1995, primarily as the result of decreased
trading securities gains of $78,000, or 11.93%.
Other expenses also declined $333,000, or 20.19%, during the third
quarter of 1996 as compared to the same period in 1995, principally as a result
of decreased foreclosed asset and other expenses of $55,000 and $268,000,
respectively. The latter declined as the result of decreased legal costs of
$386,000 for the Settlement, offset in part by increased legal costs of $176,000
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 flow provided by operating activities decreased $719,000,
primarily the result of the timing of changes in other assets and liabilities.
Net cash used in investing activities declined $140,000 during the
three months ended September 30, 1996 as compared to the same period in 1995,
principally due to increased cash receipts from sales of foreclosed assets.
Net cash used in financing activities also declined $187,000 during the
third quarter of 1996 compared to the same period in 1996, principally as the
result of $950,000 increase in borrowed funds offset by a $762,000 decrease in
deposits.
DEPOSIT INSURANCE FUNDS ACT OF 1996
The Deposit Insurance Funds Act of 1996 (the "Act") was enacted on
September 29, 1996. The Act changes payment terms for the Bank's payments into
the Bank Insurance Fund ("BIF") of the FDIC.
Beginning in 1997, BIF assessments will be used for the first time to
help pay off the $780 million annual interest payments on $8 billion in "FICO"
bonds issued in the 1980s as part of the governments savings and loan bailout.
The law provides that BIF assessments must be set at a rate equal to one-fifth
of the Savings Institution Insurance Fund ("SAIF") rates for 1997, 1998 and
1999. After 1999, all FDIC-insured institutions will pay the same risk-adjusted
rates.
The Bank estimates that its annual cost for FDIC insurance coverage
will increase less than $15,000 based on September 30, 1996 deposit levels and
based on available rate information. However, the FDIC may increase the
projected rates at anytime.
35
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
Part II - Other Information
Item 1. - Legal Proceedings
On June 23, 1995, the Federal Deposit Insurance Corporation (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 Company's banking subsidiary, First Lehigh
Bank (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 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
Company's understanding that the settlement does not assess any monetary damages
or penalties against Mr. Marvin.
36
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K.
( a) Exhibits.
The following exhibits are filed with this Form 10-QSB:
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Form SB-2 Registration Statement No. 33-71712).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Form SB-2 Registration
Statement No. 33-71712).
11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
37
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST LEHIGH CORPORATION
Date: November 13, 1996 By: /s/ James L. Leuthe
----------------------------
James L. Leuthe, Chairman
of the Board and Chief
Executive Officer
Date: November 13, 1996 By: /s/ Kashmira K. Lodaya
----------------------------
Kashmira K. Lodaya, Treasurer
(principal financial and
accounting officer)
38
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
EXHIBIT INDEX
Exhibit No. Description of Exhibit 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).
11.1 Statement re: Computation of Per Share 40 - 43
Earnings.
27 Financial Data Schedule. 44 - 45
39
FIRST LEHIGH CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 Page 1 of 4
SEPTEMBER SEPTEMBER
PRIMARY EARNINGS PER SHARE: 30, 1996 30, 1995
-------- --------
NET INCOME 2,737,943 63,419
LESS DIVIDENDS IN ARREARS:
SERIES A (166,493) (166,493)
SENIOR PREFERRED (159,169) (159,169)
---------- ----------
ADJUSTED NET INCOME 2,412,281 (262,243)
---------- ----------
COMMON STOCK EQUIVALENT SHARES
OUTSTANDING: 2,848,902 2,848,902
---------- ----------
PRIMARY EARNINGS PER SHARE 0.85 (0.09)
========== ==========
COMPUTATION OF COMMON STOCK
EQUIVALENT SHARES:
COMMON STOCK 2,000,000 2,000,000
SENIOR PREFERRED STOCK 848,902 848,902
---------- ----------
TOTAL 2,848,902 2,848,902
========== ==========
FULLY DILUTED EARNINGS SEPTEMBER SEPTEMBER
PER SHARE: 30, 1996 30, 1995
-------- --------
NET INCOME 2,737,943 63,419
LESS DIVIDENDS IN ARREARS:
SERIES A (166,493) (166,493)
SENIOR PREFERRED (159,169) (159,169)
---------- ----------
ADJUSTED NET INCOME 2,412,281 (262,243)
---------- ----------
FULLY DILUTED COMMON STOCK
EQUIVALENT SHARES OUTSTANDING: 3,414,502 3,396,953
---------- ----------
FULLY DILUTED EARNINGS PER SHARE 0.71 (0.08)
========== ==========
COMPUTATION OF FULLY DILUTED
COMMON STOCK EQUIVALENTS:
SHARES OUTSTANDING 2,000,000 2,000,000
INCLUSION OF SERIES A SHARES
AT CONVERSION RATE (1) 545,600 545,600
INCLUSION OF SENIOR PREFERRED
SHARES (2) 848,902 848,902
INCLUSION OF STOCK OPTIONS (3) 20,000 2,451
---------- ----------
TOTAL 3,414,502 3,396,953
========== ==========
40
<PAGE>
Page 2 of 4
- ------------
(1) ASSUMES 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.
(2) ASSUMES CONVERSION OF SENIOR PREFERRED SHARES INTO COMMON STOCK AT FULL
VALUE SINCE THE BASE VALUE APPROXIMATES MARKET VALUE. 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.
(3) ASSUMES CONVERSION OF THE STOCK OPTIONS INTO COMMON SHARES USING
TREASURY STOCK METHOD OF COMPUTATION.
41
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 Page 3 of 4
SEPTEMBER SEPTEMBER
PRIMARY EARNINGS PER SHARE: 30, 1996 30, 1995
-------- --------
NET INCOME 461,570 (210,743)
LESS DIVIDENDS IN ARREARS:
SERIES A (55,498) (55,498)
SENIOR PREFERRED (53,056) (53,056)
---------- ----------
ADJUSTED NET INCOME 353,016 (319,297)
---------- ----------
COMMON STOCK EQUIVALENT SHARES
OUTSTANDING: 2,848,902 2,848,902
---------- ----------
PRIMARY EARNINGS PER SHARE 0.12 (0.11)
========== ==========
COMPUTATION OF COMMON STOCK
EQUIVALENT SHARES:
COMMON STOCK 2,000,000 2,000,000
SENIOR PREFERRED STOCK 848,902 848,902
---------- ----------
TOTAL 2,848,902 2,848,902
========== ==========
FULLY DILUTED EARNINGS SEPTEMBER SEPTEMBER
PER SHARE: 30, 1996 30, 1995
-------- --------
NET INCOME 461,570 (210,743)
LESS DIVIDENDS IN ARREARS:
SERIES A (55,498) (55,498)
SENIOR PREFERRED (53,056) (53,056)
---------- ----------
ADJUSTED NET INCOME 353,016 (319,297)
---------- ----------
FULLY DILUTED COMMON STOCK
EQUIVALENT SHARES OUTSTANDING: 3,414,502 3,396,953
---------- ----------
FULLY DILUTED EARNINGS PER SHARE 0.10 (0.09)
========== ==========
COMPUTATION OF FULLY DILUTED
COMMON STOCK EQUIVALENTS:
SHARES OUTSTANDING 2,000,000 2,000,000
INCLUSION OF SERIES A SHARES
AT CONVERSION RATE (1) 545,600 545,600
INCLUSION OF SENIOR PREFERRED
SHARES (2) 848,902 848,902
INCLUSION OF STOCK OPTIONS (3) 20,000 2,451
---------- ----------
TOTAL 3,414,502 3,396,953
========== ==========
42
<PAGE>
- ------------
(1) ASSUMES 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.
(2) ASSUMES CONVERSION OF SENIOR PREFERRED SHARES INTO COMMON STOCK AT FULL
VALUE SINCE THE BASE VALUE APPROXIMATES MARKET VALUE. 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.
(3) ASSUMES CONVERSION OF THE STOCK OPTIONS INTO COMMON SHARES USING
TREASURY STOCK METHOD OF COMPUTATION.
43
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,941
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,528
<TRADING-ASSETS> 6,988
<INVESTMENTS-HELD-FOR-SALE> 21,893
<INVESTMENTS-CARRYING> 4,437
<INVESTMENTS-MARKET> 4,152
<LOANS> 65,255
<ALLOWANCE> 1,760
<TOTAL-ASSETS> 110,788
<DEPOSITS> 95,220
<SHORT-TERM> 2,400
<LIABILITIES-OTHER> 443
<LONG-TERM> 299
0
15
<COMMON> 20
<OTHER-SE> 12,391
<TOTAL-LIABILITIES-AND-EQUITY> 110,788
<INTEREST-LOAN> 4,216
<INTEREST-INVEST> 1,404
<INTEREST-OTHER> 78
<INTEREST-TOTAL> 5,698
<INTEREST-DEPOSIT> 2,660
<INTEREST-EXPENSE> 2,724
<INTEREST-INCOME-NET> 2,974
<LOAN-LOSSES> (667)
<SECURITIES-GAINS> 842
<EXPENSE-OTHER> 3,752
<INCOME-PRETAX> 2,738
<INCOME-PRE-EXTRAORDINARY> 2,738
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,738
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 4.33
<LOANS-NON> 2,712
<LOANS-PAST> 643
<LOANS-TROUBLED> 193
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,624
<CHARGE-OFFS> 380
<RECOVERIES> 1,183
<ALLOWANCE-CLOSE> 1,760
<ALLOWANCE-DOMESTIC> 792
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 968
</TABLE>
