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 March 31, 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 March 31, 1996.
Transitional Small Business Disclosure Format (check one):
Yes No X
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FIRST LEHIGH CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
Part I - Financial Information
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheet as of March 31, 1996 and December 31, 1995.......................................... 3
Consolidated Statements of Income for the three months ended
March 31, 1996 and 1995...................................................................................... 4 - 5
Consolidated Statement of Cash Flows for the three months ended
March 31, 1996 and 1995..................................................................................... 6
Notes to Consolidated Financial Statements.................................................................... 7 - 14
Item 2. Management's Discussion and Analysis or Plan of Operations..................................................... 15 - 32
Part II - Other Information
Item 1. Legal Proceedings.............................................................................................. 33
Item 6. Exhibits and Reports on Form 8-K............................................................................... 34
Signatures.................................................................................................... 35
</TABLE>
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FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(in thousands)
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................. $ 2,277 $ 2,578
Federal funds sold .................................................. 1,018 2,465
--------- ---------
Cash and cash equivalents ....................... 3,295 5,043
Securities held-to-maturity (estimated market
value of $4,160 and $4,328, respectively) .......................... 4,440 4,441
Securities available-for-sale ....................................... 18,853 21,437
Trading securities .................................................. 7,308 6,038
Loans and leases .................................................... 62,724 59,387
Less: unearned income ........................................... (543) (514)
Less: allowance for loan losses ................................. (1,571) (1,624)
--------- ---------
Net loans ....................................... 60,610 57,249
Premises and equipment, net ......................................... 2,154 2,174
Real estate and other investments ................................... 263 163
Foreclosed assets held for sale ..................................... 5,591 4,814
Other assets ........................................................ 1,983 2,039
--------- ---------
Total Assets .................................... $ 104,497 $ 103,398
========= =========
LIABILITIES
Deposits:
Noninterest-bearing .............................................. $ 9,386 $ 9,689
Interest-bearing ................................................. 82,999 82,623
--------- ---------
Total Deposits .................................. 92,385 92,312
Other liabilities ................................................... 383 472
Other borrowed funds ................................................ 1,500 0
Long-term debt ...................................................... 354 381
--------- ---------
Total Liabilities ............................... 94,622 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 ................................................... 1,471 1,340
Unrealized appreciation (depreciation) on securities available-
for-sale ........................................................... (395) 94
--------- ---------
Total Shareholders' Investment .................. 9,875 10,233
--------- ---------
Total Liabilities and Shareholders' Investment .. $ 104,497 $ 103,398
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
(In thousands, except share data)
(unaudited)
INTEREST INCOME:
Interest and fees on loans ..................... $1,290 $1,228
Interest and dividends on investment securities:
Taxable interest income ....................... 392 375
Dividends ..................................... 76 61
Interest on federal funds sold ................. 26 20
------ ------
Total Interest Income ........ 1,784 1,684
------ ------
INTEREST EXPENSE:
Interest on deposits ........................... 880 779
Interest on other borrowed funds ............... 10 37
Interest on long-term debt ..................... 8 11
------ ------
Total Interest Expense ....... 898 827
------ ------
NET INTEREST INCOME ............................ 886 857
PROVISION FOR LOAN LOSSES ...................... 52 0
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................... 834 857
------ ------
OTHER INCOME:
Service charges and other fees ................. 128 108
Gain on sale of foreclosed assets, net ......... 4 20
Rental income .................................. 0 5
Trading securities gains, net .................. 296 350
------ ------
Total Other Income ........... 428 483
------ ------
OTHER EXPENSES:
Salaries and employee benefits ................. 330 367
Net occupancy expense .......................... 131 129
Equipment expense .............................. 51 67
FDIC insurance ................................. 39 65
Foreclosed asset expenses ...................... 116 208
Other .......................................... 464 391
------ ------
Total Other Expenses ......... 1,131 1,227
------ ------
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INCOME BEFORE PROVISION FOR INCOME TAXES 131 113
PROVISION FOR INCOME TAXES ............. 0 0
---------- ----------
NET INCOME ............................. $ 131 $ 113
========== ==========
PRIMARY EARNINGS PER SHARE ............. $ 0.01 $ 0.00
========== ==========
FULLY DILUTED EARNINGS PER SHARE ....... $ 0.01 $ 0.00
========== ==========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary ............................. 2,848,902 2,848,902
Fully Diluted ....................... 3,416,320 2,848,902
The accompanying notes are an integral part of the consolidated financial
statements.
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FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 131 $ 113
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for loan losses ..................... 52 0
Provision for foreclosed asset losses ......... 45 130
Depreciation .................................. 40 44
Amortization and accretion .................... 21 28
Net increase in trading securities ............ (1,270) (102)
Gain on sale of foreclosed assets held for sale (4) (20)
(Gain) loss on sale/disposal of equipment ..... (7) 6
Change in:
Other assets ................................ (43) (152)
Other liabilities ........................... (89) (91)
------- -------
NET CASH USED IN OPERATING ACTIVITIES ........... (1,124) (44)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ...................... 1,826 54
Proceeds from sales ........................... 773 0
Purchases of securities ....................... (500) 0
Net increase in loans and leases ................ (4,376) (742)
Decrease in loans held for resale ............... 0 (102)
Proceeds from sales of premises and equipment ... 7 2
Capital expenditures for premises and equipment . (20) (11)
Proceeds from sales of foreclosed assets ........ 120 476
Capitalized expenditures for foreclosed assets .. 0 (13)
Proceeds from sales of other assets ............. 0 7
------- -------
NET CASH USED IN INVESTING ACTIVITIES ........... (2,170) (329)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ........................ 73 2,377
Net increase (decrease) in other borrowed funds . 1,500 (3,561)
Payments on long-term debt ...................... (27) (28)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .......................... 1,546 (1,212)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............ (1,748) (1,585)
CASH AND CASH EQUIVALENTS, BEGINNING ................. 5,043 5,660
------- -------
CASH AND CASH EQUIVALENTS, ENDING .................... $ 3,295 $ 4,075
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest .......................... $ 904 $ 798
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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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.
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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 ninety 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.
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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 March 31, 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 carryforward has been recognized in these financial
statements.
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.
STATEMENT OF CASH FLOWS
The Company transferred approximately $938,000 from loans to foreclosed
assets held for sale during the three months ended March 31, 1996.
LONG TERM DEBT
The Company has a term note with an outstanding balance of $354,084 at
March 31, 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.
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REGULATORY MATTERS
The Company and the Bank remain subject to Regulatory Agreements
previously described in the Form 10-KSB, with the exception of the March 1993
Stipulation of Settlement to an Administrative Order with the Pennsylvania
Department of Banking. Effective February 28, 1996, the March 1993 Order was
superseded with a new Administrative Order, the requirements of which are
outlined below.
On April 29, 1996 the Bank entered into a Memorandum Of Understanding
(MOU) with the FDIC. It is anticipated that the "MOU" will replace the Cease and
Desist Orders of June 10, 1992 and October 29, 1987.
The following is a discussion of the material terms and provisions of
the February 28, 1996 Administrative Order between the Pennsylvania Department
of Banking and First Lehigh Bank and the April 29, 1996 "MOU" between the Bank
and the FDIC.
The Pennsylvania Order
Capital Requirements and Dividend Restrictions
Under the terms of the Pennsylvania Order dated as of February 28, 1996
(the "Administrative 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 Part
325 total assets, plus a fully-funded loan loss reserve. The Bank shall 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 March 31, 1996, the Bank's Tier I capital ratio was 9.04%. 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 shall not extend, directly or indirectly, any new or additional
credit (which for the purposes of the Administrative Order, shall include 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, so 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 shall 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 shall not extend, directly or indirectly, any new or
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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 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"), so long as such loan or other extension of credit remains classified
or uncollected. This clause (iii) shall 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 this subparagraph
shall 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 shall be
evidenced in writing in the applicable loan files; and (iv) the Bank shall
comply fully and at all times with the provisions of section 1415 of the Banking
Code of 1965, as amended, 7 P.S. Section 1415.
Performance Objectives
The following performance objectives were also stated in the
Pennsylvania Administrative Order: (i) the Bank shall 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 shall 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.
Reporting and Other Requirements
Other affirmative measures required to be taken by the Bank under the
Pennsylvania Administrative 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 calender quarter; (ii) the Bank must comply with all state and federal
laws that relate to the operation of the Bank; (iii) the Bank shall have and
retain qualified management, and during the pendency of the Order shall 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. The Department shall be required to give prior written approval for
any new Directors or Senior Executive Officers during the pendency of the
Administrative Order; (iv) and the Bank shall, within sixty days of the
effective date of the Order, revise, adopt and implement a written investment
policy in a form and manner acceptable to the Secretary of Banking, as
determined at subsequent examinations or visitations.
The FDIC Memorandum of Understanding
Capital Requirements and Dividend Restrictions
The Memorandum Of Understanding (MOU) requires the Bank maintain its
Tier I capital at an amount equal to or greater than 6.0% of the Bank's Part 325
total assets. During the term of the "MOU" the Bank may not declare or pay
dividends without the prior written approval of the FDIC,
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and unless such declarations and payments are made in accordance with applicable
laws and regulations and only if after such payments the ratio of Tier I capital
to Part 325 assets will be not less than 6.0%.
Credit Limitations and Restrictions
Under the terms of the "MOU" 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 "MOU" further provides that the Bank must, by May 9, 1996,
charge-off assets classified as "Loss" or "Doubtful" as of June 30, 1995, and
the Bank during the term of the "MOU" must, within 30 days of receipt of future
Reports of Examination charge-off assets classified "Loss" or "Doubtful." The
Bank must submit its Classified Asset Reduction Plan to the FDIC by May 29,
1996.
Also, by May 29, 1996 the Bank must 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. The Bank is required to review
the adequacy of the loan loss allowance on a quarterly basis.
Additionally, by June 29, 1996 the Bank must adopt and implement a
written earnings plan and submit it to the FDIC. Also, by June 29, 1996 the Bank
must 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 submit quarterly progress reports to the
Regional Director of the FDIC detailing the form, content, and manner of any
actions taken to secure compliance with the "MOU."
STATUS OF COMPLIANCE WITH CERTAIN PROVISIONS OF THE ORDERS
AND AGREEMENTS
The Pennsylvania Order
The Company believes that it and the Bank are currently in substantial
compliance with the Pennsylvania Order. The Order requires that the Bank shall
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
March 31, 1996, this ratio was 7.16%. The Bank anticipates it will meet this
requirement. Additionally, the Order requires the Bank to reduce the level of
classified assets as of
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June 30, 1995, to no more than 100% of Tier I capital and reserve for loan and
lease losses by August 26, 1996, with further reductions thereafter. As of March
31, 1996, this ratio was 91.47%.
The 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 Part 325 total assets, plus a fully-funded loan loss reserve. As of
March 31, 1996 this ratio was 9.04% and the Bank's loan loss reserve was fully
funded.
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 FDIC Order
June 10, 1992 Order
The Bank was required to lower the amounts of certain loans classified
as doubtful and substandard as of the effective date of the Order so as not to
exceed 50% of Tier I capital on or before December 1, 1993 and 25% of Tier I
capital on or before June 30, 1994. As of December 31, 1995, this ratio was
60.16%. As of March 31, 1996, this ratio was 52.96%. The ratio of loans and
leases that were 30 days or more past due was to be reduced to 5% of total gross
loans and leases on or before December 1, 1993. As of December 31, 1995, this
ratio was 11.65%. As of March 31, 1996, this ratio was 11.04%. The ratio of
nonaccrual loans was to be reduced to 5% of gross loans on or before December 1,
1993 and to 1% of gross loans on or before June 30, 1994. In addition, the Bank
was required to take steps to ensure future compliance with all applicable laws
and regulations.
October 29, 1987 Order
The Bank is required to take steps to ensure future compliance with all
applicable laws and regulations. In addition, two-thirds of the members of the
Board of Directors of the Bank are required to be qualified as independent
outside directors under the FDIC's definition. The FDIC contends that Messrs.
Alinikoff and Flack, two of the Bank's directors, do not satisfy the definition.
The FDIC has agreed not to pursue any enforcement action and allow the current
board composition of five outside and three inside directors. The Order also
required the Bank to provide a Bank-wide training program to ensure that all
officers and employees were fully trained to comply with applicable laws and
regulations.
The Bank remains subject to the FDIC Orders and is continuing its
efforts to correct those areas in which it is currently not in compliance.
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April 29, 1996 Memorandum of Understanding
The Bank is currently working to complete actions to comply with the
MOU. As of March 31, 1996 the Bank's Tier I capital ratio was 9.04%, which is
greater than the 6.0% MOU requirement. The Bank has made necessary charge-offs
and revised and adopted its credit and investment policies. The earnings
improvement plan required by the MOU is being prepared and will be submitted on
or before the June 29, 1996 deadline.
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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 March 31, 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 THREE MONTHS ENDED MARCH 31, 1996 TO
THREE MONTHS ENDED MARCH 31, 1995
NET INCOME
Net income for the first three months of 1996 increased $18,000, or
15.93%, compared to the same period in 1995. The increase in net income was
attributed primarily to higher net interest income of $29,000 and lower other
expenses of $96,000, offset in part by higher provision for loan losses of
$52,000 and lower gains on trading securities of $54,000.
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 0.51% in 1996 compared to 0.45% in 1995.
The ROE was 5.20% for the first quarter of 1996 compared to 5.08% in 1995.
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 three months of 1996, as outlined below, net interest
income increased $29,000, or 3.38%, over the same period in 1995.
During the first quarter of 1996, interest and fee income on loans
increased $62,000, or 5.05%, over the same period in 1995, as the result of
increase in the average loan balance of $2.92 million or 5.58%. The Bank
experienced an increased demand in loan requests during the first three months
of 1996. Furthermore, since January 1996, the Bank has instituted a new consumer
loan program pursuant to which the Bank has signed agreements with several auto
dealers to provide loans to their credit-worthy customers. During the first
quarter of 1996, the Bank originated $2.42 million
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consumer loans, as compared to $902,000 consumer loans in the same period in
1995. The average yield on loans, however, declined 5 basis points from 9.40% in
1995 to 9.35% in 1996.
Interest and dividend income on investment securities increased from
$436,000 in 1995 to $468,000 in 1996, or 7.34%, partially as the result of
receiving a special dividend of $25,000 on an investment. The average balance of
the investment security portfolio increased $524,000, or 1.75% during the first
quarter of 1996 than over the same period in 1995.
Interest expense on deposits increased $101,000, or 12.97%, for the
quarter ended March 31, 1996, compared to the same period in 1995. The average
rate paid by the Bank for interest-bearing deposits increased 37 basis points
from 3.87% in 1995 to 4.24% in 1996. The Bank's average rate on time deposits
lags behind the changes occurring in the national prime rate. The Bank's
interest cost on time deposits has increased 69 basis points during the first
quarter of 1996 as compared to the same period in 1995, despite the fact that
since July 6, 1995, the national prime rate has declined 75 basis points. The
cost of saving deposits declined, however, by 0.23%. The Bank also experienced a
change in the composition of deposits which contributed to higher interest
costs. During spring and summer 1995, the Bank believed that the general public
perceived that increases in interest rates may have peaked and, therefore,
customers were 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. The average balance of savings deposits decreased $1.05
million, while the average balance of time deposits increased $3.54 million.
Interest expense on borrowed funds decreased from $37,000 for the three
months ended March 31, 1995 to $10,000 for the same period in 1996 as average
balance declined from $2.3 million in 1995 to $701,000 in 1996. The cost also
declined 70 basis points. Since November 1994, the Company has utilized a
repurchase agreement established with a brokerage firm for its borrowed funds.
During the first quarter of 1996, the average yield on interest-earning
assets increased 8 basis points and the cost of interest-bearing liabilities
increased 27 basis points when compared to the first quarter of 1995. The net
decrease in the interest rate spread and the net yield on interest-earning
assets was 19 and 5 basis points, respectively.
16
<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 Quarter Ended March 31,
(in thousands)
1996 1995
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(2) $55,199 $1,290 9.35% $52,280 $1,228 9.40%
Investment securities 30,491 468 6.14% 29,967 436 5.81%
Federal funds sold 1,928 26 5.39% 1,370 20 5.84%
------- ------ ---- ------- ------ ----
Total interest-earning assets $87,618 $1,784 8.14% $83,617 $1,684 8.06%
======= ------- ---- ======= ------- ----
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,304 245 2.79% $36,351 $ 271 3.02%
Time deposits 47,689 635 5.36% 44,154 508 4.67%
Other borrowed funds 701 10 5.64% 2,333 37 6.34%
Long-term debt 368 8 8.60% 477 11 9.22%
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities $84,062 $ 898 4.30% $83,315 $ 827 4.03%
======= ------- ---- ======= ------- ----
NET INTEREST INCOME $ 886 $ 857
====== ======
INTEREST RATE SPREAD 3.84% 4.03%
==== ====
NET YIELD ON INTEREST-
EARNING ASSETS(1) 4.05% 4.10%
==== ====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 104.23% 100.36%
====== ======
</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.
17
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
(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) ......................... $52,280 $ 1,228 9.40% $51,067 $ 1,266 9.91%
Investment securities ............ 29,967 436 5.81% 22,857 325 5.68%
Federal funds sold ............... 1,370 20 5.84% 2,745 21 3.06%
------- ------- ---- ------ ------- ----
Total interest-earning assets .... $83,617 $ 1,684 8.06% $76,669 $ 1,612 8.40%
======= ------- ---- ====== ------- ----
INTEREST-BEARING
LIABILITIES:
Saving deposits .................. $36,351 $ 271 3.02% $38,290 $ 263 2.79%
Time deposits .................... 44,154 508 4.67% 42,744 445 4.22%
Other borrowed funds ............. 2,333 37 6.43% 0 0 0.00%
Long-term debt ................... 477 11 9.22% 566 9 6.36%
------- ------- ---- ------ ------- ----
Total interest-bearing liabilities $83,315 $ 827 4.03% $81,600 $ 717 3.56%
======= ------- ---- ====== ------- ----
NET INTEREST INCOME .............. $ 857 $ 895
======= =======
INTEREST RATE SPREAD ............. 4.03% 4.84%
==== ====
NET YIELD ON INTEREST-
EARNING ASSETS(1) ............... 4.10% 4.66%
==== ====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES ...................... 100.36% 93.96%
====== =====
</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.
18
<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 Quarter Ended
March 31, 1996 vs. 1995
Increase (Decrease) Due to
Volume Rate Total
------ ---- -----
(in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 99 ($ 37) $ 62
Investment securities (12) 44 32
Federal funds sold 17 (11) 6
------ ---- ----
Total interest-earning assets $ 104 ($4) $100
------ ---- ----
INTEREST-BEARING LIABILITIES:
Savings deposits $ 0 ($ 26) ($ 26)
Time deposits 30 97 127
Other borrowed funds (23) (4) (27)
Long-term debt (2) (1) (3)
------ ---- ----
Total interest-bearing liabilities $ 5 $ 66 $ 71
------ ---- ----
CHANGE IN NET INTEREST
INCOME $ 99 ($ 70) $ 29
====== ===== ====
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended
March 31, 1995 vs. 1994
Increase (Decrease) Due to
Volume Rate Total
------ ---- -----
(in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans ....................................... $ 160 ($198) ($ 38)
Investment securities ....................... 77 34 111
Federal funds sold .......................... (55) 54 (1)
----- ----- -----
Total interest-earning assets ............... $ 182 ($110) $ 72
----- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits ............................ ($ 24) $ 32 $ 8
Time deposits ............................... (11) 74 63
Other borrowed funds ........................ 37 0 37
Long-term debt .............................. (8) 10 2
----- ----- -----
Total interest-bearing liabilities .......... ($ 6) $ 116 $ 110
----- ----- -----
CHANGE IN NET INTEREST
INCOME .................................... $ 188 ($226) ($ 38)
===== ===== =====
</TABLE>
20
<PAGE>
OTHER INCOME
Total other income, excluding securities gains, was almost flat for the
three months ended March 31, 1996, as compared to the same period in 1995. The
increase of $20,000 in service charges and other fees was mitigated by a
decrease of $16,000 in gains from sale of foreclosed assets and a decrease of
$5,000 in rental income due to discontinuing the Company's leasing operations.
For the first quarter of 1996, the net gain on trading portfolio declined
$54,000, compared to the same period in 1995.
OTHER EXPENSES
Total other expenses declined $96,000, or 7.82% for the first quarter
ended March 31, 1996, compared to the same period in 1995. Salaries and employee
benefits decreased $37,000 in the first quarter of 1996 compared to the first
quarter of 1995, primarily as a result of $48,000 bonus and relocation expenses
incurred during the first quarter of 1995. FDIC insurance premium decreased
$26,000 as the result of lower rates. In addition, expenses on foreclosed assets
declined $92,000, or 44.23%, primarily as the result of a $85,000 decrease in
the provision for foreclosed asset losses. The above decreases in expenses were
mitigated by increased legal costs of approximately $75,000 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 $1.571 million at March 31, 1996,
compared to $1.624 million at December 31, 1995. The allowance equaled 2.53% of
loans at March 31, 1996, compared to 2.76% at December 31, 1995. 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
21
<PAGE>
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 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 amount to be charged to the
provision. In establishing the amount of provision 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 March 31, 1996, based on management's evaluation as outlined above,
the amount charged to operating expense for the provision for loan losses was
$52,000 compared to no provision in 1995.
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 quarter ended March 31, 1996 (in thousands):
Beginning Balance, January 1, 1996 ................................... $1,624
------
Charge-offs:
Commercial, financial and agricultural ............................ --
Real estate - construction ........................................ --
Real estate - mortgage............................................. 133
Installment loans to individuals .................................. 7
Lease financing ................................................... --
------
Total charge-offs .................................................... 140
------
Recoveries:
Commercial, financial and agricultural ............................ 7
Real estate - construction ........................................ --
Real estate - mortgage ............................................ 21
Installment loans to individuals .................................. 7
Lease financing ................................................... --
------
Total recoveries ..................................................... 35
------
Net charge-offs ...................................................... 105
------
Provision for loan losses ............................................ 52
------
Ending Balance, March 31, 1996 ....................................... $1,571
======
Ratio of net charge-offs to
average loans outstanding.......................................... 0.17%
22
<PAGE>
FINANCIAL CONDITION
At March 31, 1996, the Company's total assets were $104.5 million,
representing an increase of $1.1 million from December 31, 1995, principally as
the result of higher demand in loan originations.
Loans
Net loans increased $3.36 million from $57.25 million at December 31,
1995 to $60.6 million at March 31, 1996. During the first quarter of 1996, the
Company experienced a brisk demand for loan originations. In addition, as
mentioned earlier, the Bank has agreements with several auto dealers to provide
loans to their credit-worthy customers. During the first three months of 1996,
the Bank originated approximately $2.4 million consumer loans, resulting in a
net increase of $1.4 million consumer loans since December 31, 1995. The change
in the composition of loans at March 31, 1996 compared to December 31, 1995 is
as follows: Residential real estate loans increased by $512,000, or 2.06%; Real
estate construction loans decreased $260,000, or 5.91%; Real estate commercial
loans increased $588,000, or 2.76%; Consumer loans increased $1.401 million, or
32.27%; and Commercial loans increased $1.067 million, or 26.87%.
The following table sets forth the maturity and repricing schedule of
the loan portfolio at March 31, 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....................... $ 2,626 $ 1,567 $ 778 $ 4,971
Real estate-construction......... 2,797 570 320 3,687
Real estate-mortgage............. 13,580 18,905 10,794 43,279
Consumer, net.................... 770 4,683 289 5,742
Nonaccrual loans................. -- -- -- 4,502
-------- ------- ------- -------
Total................................ $19,773 $25,725 $12,181 $62,181
======== ======= ======= =======
Repricing Schedule (1):
Fixed rate loans............... $15,034 $21,236 $ 2,964 $39,234
Floating rate loans............ 17,848 597 -- 18,445
Nonaccrual loans............... -- -- -- 4,502
------- ------- ------- -------
Total................................ $32,882 $21,833 $ 2,964 $62,181
======= ======= ======= =======
</TABLE>
(1) Data for repricing schedule by loan categories is not available.
23
<PAGE>
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 $19.44 million, or
65.62%, of total investment securities. Included in the above are $4.96 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 last two tests.
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 $73,000, or 0.08%, from $92.31 million at
December 31, 1995 to $92.39 million at March 31, 1996. Noninterest-bearing
demand deposits decreased $303,000, or 3.13%, while interest-bearing deposits
increased $376,000, or 0.46%, during the first quarter of 1996, mostly in
savings, club and interest-bearing demand accounts. As a percentage of total
deposits, savings, club accounts and interest-bearing demand deposits
represented 38.34% at March 31, 1996, compared to 37.89% at December 31, 1995.
There were no brokered deposits within the Company's deposit base at March 31,
1996.
The balance for a repurchase agreement increased to $1.5 million at
March 31, 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 March 31, 1996 and December 31, 1995.
March 31, December 31,
1996 1995
--------- ------------
(in thousands)
Three months or less......................... $2,867 $2,852
Over three months through
twelve months......................... 3,181 2,811
Over one year through
five years............................ 874 1,075
Over five years.............................. 0 0
------ ------
TOTAL................................... $6,922 $6,738
====== ======
24
<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
March 31, 1996 and December 31, 1995.
March 31, December 31,
1996 1995
------- -------
(in thousands)
Impaired loans ............................... $ 4,502 $ 5,248
Other loans past due 90 days or more ......... 430 257
------- -------
Total nonperforming loans ................ 4,932 5,505
Foreclosed assets held for sale .............. 5,591 4,814
------- -------
Total nonperforming assets ............... $10,523 $10,319
======= =======
Nonperforming loans as a percentage
of loans (net of unearned interest) ...... 7.93% 9.35%
Nonperforming assets as a percentage of assets 10.07% 9.98%
Loans past due 90 days or more increased $173,000 from the amount at
December 31, 1995, primarily as the result of three loans which were matured but
not renewed as of March 31, 1996. These loans are current in monthly interest
and principal payments and are in the process of renewing. All delinquent loans
are reviewed by management on a weekly basis with regard to legal proceedings
and collection efforts. Of the delinquent loans, 33.02% are secured by real
estate, 53.02% are loans to consumers and 13.95% are to commercial borrowers.
Impaired loans declined $746,000, or 14.21%, at March 31, 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. Over 90% of
the nonaccrual 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 nonaccrual 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 nonaccrual 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.
25
<PAGE>
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 $4.44 million of nonaccrual 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 secured by real estate.
The composition of the nonperforming assets are as 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............................ $ 1,781,044
Foreclosed assets held for sale...................... 767,256
-------------
Total................................................ $ 2,548,300
=============
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............................. $ 1,144,331
Foreclosed assets held for sale....................... 1,021,244
-------------
Total................................................. $ 2,165,575
=============
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....................... 1,968,990
------------
Total................................................. $ 2,515,503
============
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.............................. $ 250,565
==========
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.
26
<PAGE>
Performing/Nonperforming Assets:
Impaired and over 90 days.............................. $ 0
Foreclosed assets held for sale........................ 870,613
--------
Total.................................................. $870,613
========
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
second quarter of 1996.
Assets Under Agreement or Payoffs:
Impaired and over 90 days............................... $ 0
Foreclosed assets held for sale......................... 962,991
--------
Total................................................... $962,991
========
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
==========
The initial phases of the litigation process has resulted in two
decisions in the Company's favor. The Company anticipates it will prevail in the
appellate process. If the ultimate decision in this matter is favorable, the
Company expects to receive approximately $5.1 million of funds currently held in
escrow. If these funds are received, the accounting records would be adjusted in
the following approximate amounts (in millions).
Recovery of recorded investment in impaired loan....... $1.2
Recovery of previous loan charge-offs................... 1.1
Gain (including recovery of approximately $630,000
in professional fees incurred through December
31, 1995 and prior years' interest)............. 2.8
----
Total................................................... $5.1
====
At March 31, 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 to $8 million of nonperforming and
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 classified assets. Through March 31, 1996, the Company eliminated
approximately $1.77 million of nonperforming and classified assets, including
$112,000 in charge-offs, $415,000 in cash payments and $1,239,000 as a result of
declassification or cures. The Company continues to market its foreclosed assets
held for sale through external listing of agents.
27
<PAGE>
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 March 31, 1996, the Company maintained $3.295 million in cash and
cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, the Company had $18.853 million in securities
available-for-sale representing 18.04% of total assets at March 31, 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 March 31, 1996, approximately 81.79% of the
Company's assets were funded by core deposits acquired within its market area.
An additional 9.45% 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 March 31, 1996, were $335,826 and $1,054,458, respectively.
For the quarter ended March 31, 1996 cash and cash equivalents
decreased $1,748,000. Changes in cash are measured by changes in three major
classifications of cash flows known as operating, investing and financing
activities.
During the first three months of 1996, net cash and cash equivalents of
$1.124 million were used in operating activities, compared to $44,000 used in
the same period in 1995. The net increase of $1.168 million used for trading
securities was the primary reason for additional cash used in operating
activities during the first quarter of 1996.
Net cash used in investing activities amounted to $2.170 million during
the first quarter of 1996 as compared to $329,000 in the same period in 1995, an
increase of $1.841 million. The net increase in cash expenditures of $3.634
million for loans was partially offset by the net increase in cash provided of
$2.045 million from securities. Also, the net cash provided from sale of
foreclosed assets declined $356,000 during the first three months of 1996 as
compared to the same period in 1995.
Net cash of $1.546 million was provided by financing activities during
the first quarter of 1996 as compared to $1.212 million used in the same period
in 1995, representing a net change in financing activities of $2.758 million.
The net decline of $2.304 million in cash provided from deposits was
28
<PAGE>
mitigated by the net increase of $5.061 million in repurchase agreement balance
for the first quarter of 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.
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 March 31, 1996 the Company maintained a one-year cumulative GAP of
negative $5.252 million, or 5.88% of total interest-earning assets which have
been adjusted for the depreciation on 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 $16.054 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.
29
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at March 31, 1996:
<TABLE>
<CAPTION>
March 31,
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) ........... $ 9,398 $ 2,433 $ 1,380 $ 6,134 $ 12,274 $ 31,619
Loans (2) ........................... 22,334 10,548 5,841 15,992 2,964 57,679
-------- -------- -------- -------- -------- --------
TOTAL ............................... $ 31,732 $ 12,981 $ 7,221 $ 22,126 $ 15,238 $ 89,298
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand-interest bearing .............. $ 14,204 $ -- $ -- $ -- $ -- $ 14,204
Savings and Clubs (3) ................ 729 1,121 1,457 4,372 13,533 21,212
Time ................................. 18,152 13,905 7,014 8,512 0 47,583
Other borrowed funds ................. 1,500 -- -- -- -- 1,500
Long-term debt ....................... 354 -- -- -- -- 354
-------- -------- -------- -------- -------- --------
TOTAL ............................... $ 34,939 $ 15,026 $ 8,471 $ 12,884 $ 13,533 $ 84,853
-------- -------- -------- -------- -------- --------
GAP ................................... ($ 3,207) ($ 2,045) ($ 1,250) $ 9,242 $ 1,705 $ 4,445
-------- -------- -------- -------- -------- --------
Cumulative GAP ........................ ($ 3,207) ($ 5,252) ($ 6,502) $ 2,740 $ 4,445 $ 4,445
======== ======== ======== ======== ======== ========
</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 $1,018,000
of federal funds sold.
(2) Includes estimated schedule maturities of the fixed rate loans ignoring
any potential rollover at maturity. Excludes nonaccrual loans of
$4,502,000.
(3) Assumes that 7% of the savings deposits are repriceable each year based
on the previous five years' historical activity.
30
<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
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
March 31, 1996 and 1995.
Regulatory March 31,
Requirements 1996 1995
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio.......... 4.0%* 9.04% 8.59%
Risk-based capital ratios:
Tier I capital/risk-weighted......... 4.0% 12.28% 11.78%
Tier I and Tier II capital/
Risk-weighted assets........ 8.0% 13.54% 13.04%
- - -----------------------------------------
* 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.
CURRENT EVENTS AND FUTURE PROSPECTS
During the first quarter of 1996, the Bank has experienced good loan
demand, partially attributable to momentum created from promotions and sales
efforts that commenced in the late third quarter and fourth quarter of 1995.
Activity in the consumer/installment loan category has been strong and the Bank
has also experienced growth in its commercial loan portfolio. Net loans
outstanding increased approximately $3.36 million from December 31, 1995 to
March 31, 1996.
The Bank's deposit balances have remained approximately the same as
year-end 1995; however, new account volume and activity has increased.
The Bank continues to pursue its plans to reduce classified assets as
part of its overall goals for 1996. The plan calls for a reduction of
approximately $5 to $8 million of nonperforming assets by December 31, 1996. As
of March 31, 1996 the Bank eliminated approximately $1.77 million of
31
<PAGE>
nonperforming and classified assets. In conjunction with this effort the Bank
continues to pursue the resolution of a significant real estate transaction
which, when completed, will result in a substantial recovery. This matter has
been in protracted litigation, but the Bank was notified in January 1996 that it
had prevailed in an appellate action in the U.S. Bankruptcy Court. Management
believes that this recent decision will lead to the ultimate resolution of this
case in 1996.
Management of the Company and the Bank believes that the impact of
these developments will have a positive effect on operating performance in 1996.
32
<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 intend to
defend this action.
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 the 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, it does
not appear at this time that it will be an amount that is material to the
Company's financial condition.
Effective February 26, 1996, the March 1993 Administrative Order
between the Pennsylvania Department of Banking and First Lehigh Bank was
superseded with a new Administrative Order. On April 29, 1996 the Bank entered
into a Memorandum Of Understanding with the FDIC which it anticipates will
replace the FDIC Cease and Desist Orders of October 1987 and June 1992. The
content of these agreements has been described earlier in Note 1 to the notes to
Consolidated Financial Statements included in Part I of this Form 10-QSB.
33
<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
34
<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: May 14, 1996 By: /s/James L. Leuthe
-------------------
James L. Leuthe, Chairman
of the Board and Chief
Executive Officer
Date: May 14, 1996 By: /s/Kashmira K. Lodaya
----------------------
Kashmira K. Lodaya, Treasurer
(principal financial and
accounting officer)
35
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No.
- - ----------- ---------------------- --------
<S> <C> <C>
3.1 Articles of Incorporation of the Company,
as amended (incorporated by reference to
Exhibit 3.1 to the Company's Form SB-2
Registration 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. 33-714712).
11.1 Statement re: Computation of Per Share 37 - 38
Earnings.
27 Financial Data Schedule. 39 - 40
</TABLE>
36
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Page 1 of 2
MARCH 31, MARCH 31,
1996 1995
-------- --------
PRIMARY EARNINGS PER SHARE:
NET INCOME 131,727 113,229
LESS DIVIDENDS IN ARREARS:
SERIES A (55,498) (55,498)
SENIOR PREFERRED (53,056) (53,056)
---------- ----------
ADJUSTED NET INCOME 23,173 4,675
---------- ----------
COMMON STOCK EQUIVALENT SHARES 2,848,902 2,848,902
---------- ----------
OUTSTANDING:
PRIMARY EARNINGS PER SHARE 0.01 0.00
========== ==========
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
========== ==========
MARCH 31, MARCH 31,
1996 1995
-------- --------
FULLY DILUTED EARNINGS
PER SHARE:
NET INCOME 131,727 113,229
LESS DIVIDENDS IN ARREARS:
SERIES A (55,498) (55,498)
SENIOR PREFERRED (53,056) (53,056)
---------- ----------
ADJUSTED NET INCOME 23,173 4,675
FULLY DILUTED COMMON STOCK
EQUIVALENT SHARES OUTSTANDING: 3,416,320 3,396,927
---------- ----------
FULLY DILUTED EARNINGS PER SHARE 0.01 0.00
========== ==========
37
<PAGE>
Page 2 of 2
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) (3) 848,902 848,902
INCLUSION OF STOCK OPTIONS (4) 21,818 2,425
--------- ---------
TOTAL 3,416,320 3,396,927
========= =========
- - ---------------------------------------------------------------------
(1) ASSUMES CONVERSION OF THE SERIES A PREFERRED STOCK INTO COMMON SHARES
AT THE RATE OF .8 SHARES OF PREFERRED TO COMMON.
(2) ASSUMES CONVERSION OF SENIOR PREFERRED SHARES INTO COMMON STOCK AT
FULL VALUE SINCE THE BASE VALUE APPROXIMATES MARKET VALUE.
(3) 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 TIME OF ISSUANCE
(4) ASSUMES CONVERSION OF THE STOCK OPTIONS INTO COMMON SHARES USING
TREASURY STOCK METHOD OF COMPUTATION.
38
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,277
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,018
<TRADING-ASSETS> 7,308
<INVESTMENTS-HELD-FOR-SALE> 18,853
<INVESTMENTS-CARRYING> 4,440
<INVESTMENTS-MARKET> 4,160
<LOANS> 62,181
<ALLOWANCE> 1,571
<TOTAL-ASSETS> 104,497
<DEPOSITS> 92,385
<SHORT-TERM> 1,500
<LIABILITIES-OTHER> 383
<LONG-TERM> 354
0
15
<COMMON> 20
<OTHER-SE> 9,840
[TOTAL-LIABILITY-AND-EQUITY] 104,497
<INTEREST-LOAN> 1,290
<INTEREST-INVEST> 468
<INTEREST-OTHER> 26
<INTEREST-TOTAL> 1,784
<INTEREST-DEPOSIT> 880
<INTEREST-EXPENSE> 898
<INTEREST-INCOME-NET> 886
<LOAN-LOSSES> 52
<SECURITIES-GAINS> 296
<EXPENSE-OTHER> 1,131
<INCOME-PRETAX> 131
<INCOME-PRE-EXTRAORDINARY> 131
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 4.05
<LOANS-NON> 4,502
<LOANS-PAST> 430
<LOANS-TROUBLED> 172
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,624
<CHARGE-OFFS> 140
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 1,571
<ALLOWANCE-DOMESTIC> 811
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 760
</TABLE>
