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, 1997
[ ] 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, 1997.
Transitional Small Business Disclosure Format (check one):
Yes | | No |X|
1
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
Part I - Financial Information Number
- ------------------------------- ------
Item 1. Financial Statements:
Consolidated Balance Sheet as of
March 31, 1997 and December 31, 1996....................... 3
Consolidated Statements of Income
for the three months ended
March 31, 1997 and 1996.................................... 4 - 5
Consolidated Statement of Cash Flows
for the three months ended
March 31, 1997 and 1996................................... 6 - 7
Notes to Consolidated Financial Statements.................. 8 - 14
Item 2. Management's Discussion and
Analysis or Plan of Operations.............................15 - 30
Part II - Other Information
Item 1. Legal Proceedings............................................31 - 32
Item 6. Exhibits and Reports on Form 8-K............................. 33
Signatures.................................................. 34
2
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ---------
(in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................. $ 2,735 $ 2,861
Federal funds sold .................................................. 2,253 1,759
--------- ---------
Cash and cash equivalents ............................... 4,988 4,620
Securities held-to-maturity (estimated fair
value of $3,819 and $3,899, respectively) .......................... 4,089 4,091
Securities available-for-sale ....................................... 21,543 21,922
Trading securities .................................................. 6,662 6,309
Loans and leases .................................................... 65,189 66,434
Less: unearned income ........................................... (410) (436)
allowance for loan losses ................................. (1,474) (1,624)
--------- ---------
Net loans ............................................... 63,305 64,374
Premises and equipment, net ......................................... 2,086 2,022
Real estate and other investments ................................... 0 47
Foreclosed assets held for sale ..................................... 5,540 4,850
Other assets ........................................................ 2,429 2,045
--------- ---------
Total Assets ............................................ $ 110,642 $ 110,280
========= =========
LIABILITIES
Deposits:
Noninterest-bearing .............................................. $ 10,896 $ 10,086
Interest-bearing ................................................. 86,023 85,853
--------- ---------
Total Deposits .......................................... 96,919 95,939
Other liabilities ................................................... 980 859
Other borrowed funds ................................................ 50 1,200
Long-term debt ...................................................... 245 272
--------- ---------
Total Liabilities ....................................... 98,194 98,270
--------- ---------
SHAREHOLDERS' INVESTMENT
Senior preferred stock, par value of $.01 per share, 1,500,000 shares
authorized, 900,363 shares issued and
outstanding ........................................................ 9 9
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 .......................... 9,021 9,021
Retained earnings ................................................... 3,985 3,227
Unrealized depreciation on securities available-for-sale ............ (594) (274)
--------- ---------
Total Shareholders' Investment ........................... 12,448 12,010
--------- ---------
Total Liabilities and Shareholders' Investment ........... $ 110,642 $ 110,280
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---- ----
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ..................... $ 1,437 $ 1,290
Interest and dividends on investment securities:
Taxable interest income ....................... 439 392
Dividends ..................................... 48 76
Interest on federal funds sold ................. 22 26
--------- ---------
Total Interest Income .............. 1,946 1,784
--------- ---------
INTEREST EXPENSE:
Interest on deposits ........................... 881 880
Interest on other borrowed funds ............... 6 10
Interest on long-term debt ..................... 6 8
--------- ---------
Total Interest Expense ............. 893 898
--------- ---------
NET INTEREST INCOME ............................ 1,053 886
PROVISION FOR LOAN LOSSES ...................... 45 52
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................... 1,008 834
--------- ---------
OTHER INCOME:
Service charges, fees and other income ......... 120 128
Gain on sale of foreclosed assets, net ......... 12 4
Gain on sale of real estate investment ......... 183 0
Realized gains on investment securities, net ... 17 0
Trading securities gains, net .................. 703 296
--------- ---------
Total Other Income ................. 1,035 428
--------- ---------
OTHER EXPENSES:
Salaries and employee benefits ................. 343 330
Net occupancy expense .......................... 107 131
Equipment expense .............................. 54 51
FDIC insurance ................................. 43 39
Foreclosed asset expenses ...................... 70 116
Other .......................................... 374 464
--------- ---------
Total Other Expenses ............... 991 1,131
--------- ---------
4
<PAGE>
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 1,052 131
PROVISION FOR INCOME TAXES ..................... 0 0
--------- ---------
NET INCOME ..................................... $ 1,052 $ 131
========= =========
PRIMARY EARNINGS PER SHARE...................... $ 0.32 $ 0.01
========= =========
FULLY DILUTED EARNINGS PER SHARE................ $ 0.27 $ 0.01
========= =========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary...................................... 2,900,363 2,848,902
Fully Diluted................................ 3,469,441 3,416,320
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---- ----
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 1,052 $ 131
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses .............................. 45 52
Provision for foreclosed asset losses .................. 0 45
Depreciation ........................................... 40 40
Amortization and accretion ............................. 5 21
Realized gain on investment securities, net ............ (17) 0
Net increase in trading securities ..................... (353) (1,270)
Gain on sale of foreclosed assets held for sale ....... (12) (4)
Gain on sale of real estate and other investments ...... (183) 0
Gain on sale/disposal of equipment .................... 0 (7)
Change in:
Other assets ........................................ (239) (43)
Other liabilities ................................... (173) (89)
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ..................... 165 (1,124)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ............................. 73 1,826
Proceeds from sales .................................. 0 773
Purchases of securities .............................. 0 (500)
Net (increase) decrease in loans and leases ............ 57 (4,376)
Proceeds from sales of premises and equipment .......... 0 7
Capital expenditures for premises and equipment ........ (104) (20)
Proceeds from sales of foreclosed assets ............... 209 120
Capitalized expenditures for foreclosed assets ......... (24) 0
Proceeds from sales of real estate and other investments 174 0
Proceeds from sales of other assets .................... 15 0
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ...................... 400 (2,170)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................... 980 73
Net increase (decrease) in other borrowed funds ........ (1,150) 1,500
Payments on long-term debt ............................. (27) (27)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................................ (197) 1,546
------- -------
6
<PAGE>
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS ......................... 368 (1,748)
CASH AND CASH EQUIVALENTS, BEGINNING ..................... 4,620 5,043
------- -------
CASH AND CASH EQUIVALENTS, ENDING ........................ $ 4,988 $ 3,295
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ............................. $ 894 $ 904
Cash paid for income taxes ......................... $ 35 $ 0
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On March 25, 1997, the Company's Board of Directors declared a dividend on
the outstanding shares of its Senior Preferred Stock for the stockholders
of record at March 25, 1997. The accumulated dividends as of December 31,
1996 of $237,542 and the first quarter 1997 dividend of $56,273 have been
included in other liabilities.
The accompanying notes are an integral part of the consolidated financial
statements.
7
<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, 1996.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full fiscal year 1997. 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,
1997.
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.
8
<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 discontinued 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 aggregate cost or
market.
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.
9
<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 March 31, 1997 the Company has available approximately $3.350 million of
net operating losses based on its filed tax returns through December 31, 1996,
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 declared and
unpaid or 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 their 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 $863,000 from loans to foreclosed
assets held for sale during the three months ended March 31, 1997.
10
<PAGE>
LONG TERM DEBT
The Company has a term note with an outstanding balance of $245,000 at
March 31, 1997. 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 March 31, 1997, the Bank's Tier I capital ratio was
11.31%. 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
11
<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 March
31, 1997, the Bank's level of nonaccrual loans to gross loans was 0.55%, and the
Bank's level of classified assets to Tier I capital and reserve for loan and
lease losses was 45.07%.
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.
12
<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 2% by February 22, 1997. As of
March 31, 1997, this ratio was 0.55%. Additionally, the Order requires the Bank
to reduce the level of classified assets as of June 30, 1995, to no more than
50% of Tier I capital and the reserve for loan and lease losses by February 22,
1997, with further reductions thereafter. As of March 31, 1997, this ratio was
45.07%. 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 March 31, 1997 this ratio was 11.31% 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
13
<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 March 31, 1997 the Bank's Tier I capital ratio was
11.31%, 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 received permission from the Federal Reserve Bank
to issue the shares of Senior Preferred Stock in lieu of accumulated dividends
on its outstanding shares of Senior Preferred Stock for the periods ending
December 31, 1994 and December 31, 1995. In addition, recently the Company has
received permission from the Federal Reserve Bank to pay cash dividends
accumulated through March 31, 1997 to Senior Preferred Stockholders with the
record date of March 25, 1997.
14
<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 March 31, 1997 and 1996. 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, 1997 TO THREE MONTHS ENDED
MARCH 31, 1996
NET INCOME
Net income for the first quarter of 1997 increased $921,000 as compared to
the same quarter in 1996. Net interest income increased $167,000 mostly due to
an increase in interest and fees earned on loans while interest expense remained
static. Other income increased $607,000 mostly due to continued gains and
appreciation in the Company's trading security portfolio and a gain of $183,000
realized on the sale of a real estate investment. Finally, other expenses
decreased $140,000 mostly due to decreased legal and other costs pertaining to
impaired loans and FDIC litigation involving the Company's Chairman and CEO and
the Bank's former president as well as a decrease in amortization expense due to
assets acquired in an earlier branch office purchase being fully amortized.
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 3.84% in 1997 as compared to 0.51% in
1996. The ROE was 33.60% for the first quarter of 1997 as compared to 5.20% in
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 three months of 1997, as outlined below, net interest income
increased $167,000, or 18.85%, over the same period in 1996.
During the first quarter of 1997, interest and fees on loans increased
$147,000 or 11.40% as
15
<PAGE>
compared to the same period in 1996. The average loan balances for 1997
increased $7.369 million due to an increased demand for consumer credit. In
early 1996, the Bank began a new consumer loan program in conjunction with local
auto dealers. The Bank has signed agreements to provide auto loans to these
dealers' credit-worthy customers. Approximately $2.40 million dollars was
originated in the first quarter of 1996 and continued throughout the remainder
of the year, resulting in the increased average loan balance. The overall
interest yield decreased 16 basis points from 9.35% in 1996 to 9.19% in 1997.
Interest expense for 1997 and 1996 remained static at approximately
$900,000 for each quarter. Deposits for the first quarter of 1997 increased
$980,000 of which the majority were noninterest-bearing deposits. The average
balance of time deposits increased $2.076 million; however, the average cost
decreased 12 basis points. The overall increase in average time deposits balance
was the investment by consumers into higher yielding twenty-four month
certificates of deposits during 1995 which was the result of a special promotion
by the Bank during the first quarter of 1995. As these become due in the first
and second quarter of 1997, the Bank will continue to remain competitive in
retaining these deposits as they reprice in a very competitive local deposit
environment.
The interest yield on interest-earning assets remained fixed at
approximately 8.15% while overall interest cost decreased 7 basis points from
4.30% in 1996 to 4.23% in 1997. The overall interest rate spread increased 8
basis points while the net interest margin on interest-earning assets increased
36 basis points to 4.41%.
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 interest margin 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)
1997 1996
---- ----
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $62,568 $1,437 9.19% $55,199 $1,290 9.35%
Investment securities 31,220 487 6.24% 30,491 468 6.14%
Federal funds sold 1,699 22 5.18% 1,928 26 5.39%
------- ------ ------- ------- ------ -----
Total interest-earning assets $95,487 $1,946 8.15% $87,618 $1,784 8.14%
======= ------ ------- ======= ------ -----
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,280 $ 238 2.74% $35,304 $ 245 2.79%
Time deposits 49,765 643 5.24% 47,689 635 5.36%
Other borrowed funds 398 6 6.03% 701 10 5.64%
Long-term debt 259 6 9.27% 368 8 8.60%
------- ------- ------- ------- ------ -----
Total interest-bearing liabilities $85,702 $ 893 4.23% $84,062 $ 898 4.30%
======= ------- ------- ======= ------ -----
NET INTEREST INCOME $ 1,053 $ 886
======= ======
INTEREST RATE SPREAD 3.92% 3.84%
====== ======
NET INTEREST MARGIN
ON INTEREST-EARNING 4.41% 4.05%
ASSETS (2) ====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 111.42% 104.23%
====== ======
</TABLE>
- ------------------------
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
17
<PAGE>
<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 (1) $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 INTEREST MARGIN
ON INTEREST- EARNING 4.05% 4.10%
ASSETS (2) ======= =======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 104.23% 100.36%
======= =======
</TABLE>
- ----------------
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
18
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income and
Interest Expense:
The following table presents the extent to which net interest income
changed due to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities during the periods
indicated. Information provided in each category with respect to changes
attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rate multiplied by prior
volume) and the net change. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
March 31, 1997 vs. 1996 March 31, 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 224 $ (77) $ 147 $ 99 $ (37) $ 62
Investment securities 14 5 19 (12) 44 32
Federal funds sold (3) (1) (4) 17 (11) 6
----- ----- ----- ----- ----- -----
Total interest-earning assets $ 235 $ (73) $ 162 $ 104 $ (4) $ 100
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits $ (2) $ (5) $ (7) $ 0 $ (26) (26)
Time deposits 66 (58) 8 30 97 127
Other borrowed funds (8) 4 (4) (23) (4) (27)
Long-term debt (5) 3 (2) (2) (1) (3)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ 51 $ (56) $ (5) $ 5 $ 66 $ 71
----- ----- ----- ----- ----- -----
CHANGE IN NET INTEREST INCOME $ 184 $ (17) $ 167 $ 99 $ (70) $ 29
===== ===== ===== ===== ===== =====
</TABLE>
19
<PAGE>
OTHER INCOME
After excluding security gains, as well as the gain realized on the sale of
real estate investments, other income remained approximately the same for the
first quarter of 1997 and 1996. The gains from security sales increased
significantly from $296,000 in 1996 to $720,000 in 1997. For 1997 and 1996, the
realized portion of the security gains represented $562,000 and $45,000,
respectively, while the unrealized portion represented the balance of $158,000
and $251,000, respectively. During the first quarter of 1997, management decided
to take advantage of a significant appreciation in its trading portfolio by
selling certain securities which resulted in the above mentioned realized gains.
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, 1996 and first two months of 1997 has
resulted in significant net gains in trading securities. A downturn in the
overall market could result in future trading securities losses. Management
continues to closely monitor its security portfolio in order to make those
decisions which will enable the Company to maximize its return on it's
investment assets.
Also included in other income was the gain of $183,000 which resulted from
the sale of certain real estate parcels the Company acquired for investment
purposes during 1994.
OTHER EXPENSES
Other expenses decreased $140,000, or 12.38%, during the first quarter of
1997 as compared to 1996. Occupancy expenses decreased $24,000, or 18.32%, as
the result of rent reduction for the administrative offices of the Company and
the Bank because of the decreased cost of debt service, foreclosed assets
decreased $46,000, or 39.66%, mostly due to a decrease in the provision for
additional foreclosed asset losses. Management continues to aggressively market
its foreclosed asset portfolio in an attempt to continue to reduce these
nonperforming assets. Other expenses declined $90,000, or 19.40%, mostly due to
decreased legal and professional fees associated with the FDIC litigation
involving the Company's Chairman and CEO and the Bank's former president as well
as its impaired loan portfolio. Also, amortization expense decreased $25,000 due
to assets acquired in an earlier branch office purchase becoming fully
amortized.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was $1.474 million at March 31, 1997,
compared to $1.624 million at December 31, 1996. The allowance equaled 2.28% of
loans at March 31, 1997, compared to 2.46% at December 31, 1996. The decline in
this percentage is attributable to recent 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
20
<PAGE>
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 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.
At March 31, 1997, based on management's evaluation as outlined above, the
amount charged to operating expense for the provision for loan losses was
$45,000 compared to $52,000 in 1996.
21
<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
the quarter ended March 31, 1997 (in thousands):
Beginning Balance, January 1, 1997 ...................... $1,624
------
Charge-offs:
Commercial, financial and agricultural ............... --
Real estate - construction ........................... 5
Real estate - mortgage................................ 142
Installment loans to individuals ..................... 93
Lease financing ...................................... --
------
Total charge-offs ....................................... 240
------
Recoveries:
Commercial, financial and agricultural ............... 6
Real estate - construction ........................... --
Real estate - mortgage ............................... 6
Installment loans to individuals ..................... 5
Lease financing ...................................... 28
------
Total recoveries ........................................ 45
------
Net charge-offs ......................................... 195
------
Provision for loan losses ............................... 45
------
Ending Balance, March 31, 1997 .......................... $1,474
======
Ratio of net charge-offs to
average loans outstanding ............................ 0.30%
FINANCIAL CONDITION
At March 31, 1997, the Company's total assets were $110.6 million,
approximately the same, as compared to the December 31, 1996 amount of $110.3
million.
Loans
Net loans decreased $1.069 million from $64.374 million at December 31,
1996 to $63.305 million at March 31, 1997. The majority of the decrease was
attributable to the commercial business portfolio. The Bank experienced minimal
commercial originations in January and February 1997 which in addition to
commercial repayments during the same period resulted in the overall decrease of
the loan portfolio. The Bank has continued to experience an increase in its
installment loan business. The majority of this increase remains within the
automobile category which increased approximately 48 originations or $560,000
over the same period in 1996. The change in the composition of other loans at
March 31, 1997 as compared to December 31, 1996 is as follows: Real estate
construction decreased $636,000 or 12.93%; Residential real estate loans
decreased $882,000 or 3.41%; Commercial real estate loans decreased $667,000 or
3.36%; while consumer loans increased $959,000 or 8.15% and commercial loans
increased $7,000.
22
<PAGE>
The following table sets forth the maturity and repricing schedule of the
loan portfolio at March 31, 1997 (in thousands):
After one After
Within but within five
One year five years years Total
-------- ---------- ----- -----
Maturity Schedule:
Commercial ............. $ 1,412 $ 1,565 $ 677 $ 3,654
Real estate-construction 2,830 942 226 3,998
Real estate-mortgage ... 8,222 23,814 10,676 42,712
Consumer, net .......... 662 11,118 945 12,725
Nonaccrual loans ....... -- -- -- 1,690
------- ------- ------- -------
Total ...................... $13,126 $37,439 $12,524 $64,779
======= ======= ======= =======
Repricing Schedule (1):
Fixed rate loans ........ $12,495 $31,554 $ 3,073 $47,122
Floating rate loans ..... 15,391 576 -- 15,967
Nonaccrual loans ........ -- -- -- 1,690
------- ------- ------- -------
Total ...................... $27,886 $32,130 $ 3,073 $64,779
======= ======= ======= =======
(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 $23.28 million (amortized
costs), or 74.56%, of total investment securities. Included in the above are
$2.96 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 as of March 31, 1997.
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 at March 31, 1997 increased $980,000 from $95.939 million at
December 31, 1996 to $96.919 million. Noninterest-bearing deposits increased
$810,000 primarily the result of increased activity in certain escrow and
business accounts. The certificates of deposit decreased approximately $1.096
million mostly due to certificates which became due for repricing and were not
renewed due to the very competitive rates in the local environment. As a
percentage of total
23
<PAGE>
deposits, savings, club accounts and interest-bearing demand accounts deposits
represented 37.78% at March 31, 1997 as compared to 36.85% at December 31, 1996.
There were no brokered deposits within the Company's deposit base at March 31,
1997.
Borrowed funds represented $50,000 at March 31, 1997 as compared to $1.200
million at December 31, 1996. At December 31, 1996, the Company utilized
borrowings in the form of repurchase agreements to fund a portion of the Banks
asset growth, in particular its installment loan portfolio. As a result of
several commercial loan repayments, the Company was able to repay this
short-term borrowing.
The following table sets forth maturities of time deposits of $100,000 or
more at March 31, 1997 and December 31, 1996.
March 31, December 31,
1997 1996
---- ----
(in thousands)
Three months or less...................... $3,071 $2,800
Over three months through
twelve months.......................... 2,648 3,412
Over one year through
five years............................. 1,430 1,640
Over five years........................... 0 0
------ ------
TOTAL............................. $7,149 $7,852
====== ======
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.
24
<PAGE>
The following table represents nonperforming assets of the Company at March
31, 1997 and December 31, 1996.
March 31, December 31,
1997 1996
---- ----
(in thousands)
Impaired loans ..................................... $1,690 $2,052
Other loans past due 90 days or more ............... 837 609
------ ------
Total nonperforming loans ...................... 2,527 2,661
Foreclosed assets held for sale .................... 5,540 4,850
------ ------
Total nonperforming assets ..................... $8,067 $7,511
====== ======
Nonperforming loans as a percentage
of loans (net of unearned interest) ............ 3.90% 4.03%
Nonperforming assets as a percentage of assets ..... 7.29% 6.81%
Loans past due 90 days or more increased $228,000 from $609,000 at December
31, 1996 to $837,000 at March 31, 1997. The increase is mostly attributable to
the consumer loan portfolio. Over the past year, the Bank has significantly
increased the automobile segment of this portfolio. The overall increase has
created additional workloads for existing loan personnel in originating and
servicing the increased volume. As a result of this volume increase, management
has hired additional personnel to ensure that the entire loan portfolio is
adequately serviced from originations through payment collections. All
delinquent loans are reviewed by management on a weekly basis with regard to
legal proceedings and collection efforts. Of the delinquent loans, 68.34% are
secured by real estate, 17.32% are loans to consumers and 14.34% are to
commercial borrowers.
Impaired loans declined $362,000, or 17.64%, at March 31, 1997 compared to
December 31, 1996. Loans with carrying values of $863,000 were transferred to
foreclosed assets held for sale during the first quarter of 1997. The majority
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 several quarters as
the litigation and/or foreclosure actions are more toward completion. 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 an expected decrease in nonaccrual and those loans over 90
days delinquent.
Although this will increase the Bank's foreclosed assets portfolio, it will
enable the Bank to expedite the final sale of these assets. Real estate loans
represent $1.678 million of nonaccrual loans, and loans to commercial borrowers
represent the remaining $12,000 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.
25
<PAGE>
The following table sets forth the total of commercial and investment
properties at March 31, 1997, all of which are currently in litigation and/or
foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days.................. $1,068,357
Foreclosed assets held for sale............ 1,249,634
-----------
Total...................................... $2,317,991
==========
The following table sets forth the total of residential properties to
be foreclosed upon and liquidated at March 31, 1997, 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.................. $1,097,575
Foreclosed assets held for sale............ 1,198,818
----------
Total...................................... $2,296,393
==========
The following table sets forth the total of land developments and
building lots to be foreclosed upon and liquidated at March 31, 1997, 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.................. $ 66,568
Foreclosed assets held for sale............ 2,746,045
----------
Total...................................... $2,812,613
==========
The following table sets forth the total of loans in litigation that
are not secured by real estate at March 31, 1997.
Secured by Other Than Real Estate:
Impaired and over 90 days.................. $ 294,298
==========
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 1997.
Assets Under Agreement or Payoffs:
Foreclosed assets held for sale............ $ 345,824
===========
At March 31, 1997, 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.
For 1997, management has set a goal to dispose of $4.50 million in
classified and/or nonperforming assets. The disposition plan as originally
drafted in 1996 and as adjusted for 1997
26
<PAGE>
was initiated to comply with the Administrative Order of the Department, the
Written Agreement of the Federal Reserve Bank and several previous orders which
have been replaced by the Memorandum of Understanding. Management continues to
market these classified assets. As of March 31, 1997, the classified assets were
reduced by $866,000 through collections of $55,000, sales agreements of
$233,000, declassifications and/or cures of $364,000 and $214,000 of
charge-offs. The above reduction allowed the Bank to substantially meet its
internal goal as of March 31, 1997. The Bank was substantially in compliance
with the regulatory requirements (see "Legal Proceedings" in Part I of this
report) as of February 22, 1997.
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. While regular loan payments are a
predictable source of funds, the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates and competition. The Company
manages its balance sheet to prove adequate liquidity based on various economic,
interest rate and competitive assumptions and in light of profitability
measures.
At March 31, 1997, the Company maintained $4.988 million in cash and cash
equivalents in the form of cash and due from banks (after reserve requirements).
In addition, the Company had $21.543 million in securities available-for-sale
representing 19.47% of total assets at March 31, 1997.
The Company considers its primary source of liquidity to be its core
deposit base and continues to promote the acquisition of deposits through its
branch offices. At March 31, 1997, approximately 81.23% of the Company's assets
were funded by core deposits acquired within its market area. An additional
11.52% 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 declared a dividend on the outstanding
shares of its Senior Preferred Stock for the shareholders of record at March 25,
1997. During May 1997, the accumulated dividend as of December 31, 1996, or
$237,542, and the first quarter 1997 dividend of $56,273, or 6.25 cents per
share, will be paid to Senior Preferred Stockholders. There were no dividends
declared or paid on the Series A Preferred Stock. The amount of undeclared
dividends in arrears on the Series A Preferred Stock at March 31, 1997 was
$1,276,449.
Cash flows for the quarter ended March 31, 1997 provided $368,000, while
$1.748 million was used in the same quarter for 1996. Changes in cash are
measured by changes in three major classifications of cash flows known as
operating, investing and financing activities.
Cash flows from operating activities increased $1.289 million in 1997,
mostly due to increased net income of $900,000 and less funds being expended for
trading securities. Cash flows
27
<PAGE>
from investing activities increased $2.57 million for March 31, 1997 as compared
to 1996. In 1996 there was a significant increase in demand for consumer loans
which continued through 1997; however, there were several large commercial
repayments in 1997 which were not replaced with new originations resulting in a
net decrease in loans. In addition, the cash flows from financing activities
decreased $1.743 million since the Company repaid the repurchase agreement it
used to fund a portion of the loan growth.
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, 1997 the Company maintained a one-year cumulative GAP of
negative $9.46 million, or 9.69% 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 $16.43 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.
28
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at March 31, 1997:
<TABLE>
<CAPTION>
March 31,
1997
---------
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) $ 9,783 $ 490 $ 1,130 $ 4,236 $ 18,909 $ 34,548
Loans (2) 19,580 8,306 10,043 22,087 3,073 63,089
-------- -------- -------- -------- -------- --------
TOTAL $ 29,363 $ 8,796 $ 11,173 $ 26,323 $ 21,982 $ 97,637
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand-interest bearing $ 15,709 $ -- $ -- $ -- $ -- $ 15,709
Savings and clubs (3) 718 1,089 1,438 4,313 13,350 20,908
Time 17,367 12,441 10,774 8,824 -- 49,406
Other borrowed funds 50 -- -- -- -- 50
Long-term debt 245 -- -- -- -- 245
-------- -------- -------- -------- -------- --------
TOTAL $ 34,089 $ 13,530 $ 12,212 $ 13,137 $ 13,350 $ 86,318
-------- -------- -------- -------- -------- --------
GAP ($ 4,726) ($ 4,734) ($ 1,039) $ 13,186 $ 8,632 $ 11,319
-------- -------- -------- -------- -------- --------
Cumulative GAP ($ 4,726) ($ 9,460) ($10,499) $ 2,687 $ 11,319 $ 11,319
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $2.253 million of Federal funds sold.
(2) Includes estimated schedule maturities of the fixed rate loans ignoring any
potential rollover at maturity. Excludes nonaccrual loans of $1.69 million.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
29
<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
March 31, 1997 and 1996.
<TABLE>
<CAPTION>
March 31,
Regulatory ---------
Requirements 1997 1996
------------ ---- ----
<S> <C> <C> <C>
Leverage ratio:
Tier I (core capital) ratio .............. 4.0%* 11.31% 9.04%
Risk-based capital ratios:
Tier I capital/risk-weighted ............. 4.0% 15.81% 12.28%
Tier I and Tier II capital/
Risk-weighted assets ............ 8.0% 17.07% 13.54%
</TABLE>
- ----------
* 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.
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 March 31, 1997 deposit levels and based
on available rate information. However, the FDIC may increase the projected
rates at anytime.
30
<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 FDIC and Mr. Marvin have reached a settlement
in this matter. The settlement does not assess any monetary damages or penalties
against Mr. Marvin and prohibits Mr. Marvin from participating in any manner in
the conduct of the affairs of any financial institution or organization.
The Notices initiate administrative proceedings in which the FDIC, as a
result of transactions occurring prior to February 1992, is seeking to prohibit
Mr. Leuthe 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. Neither the Company nor the
Bank is a party to these proceedings. Mr. Leuthe has denied wrongdoing and
intends to defend this action.
From a procedural standpoint, the hearings in this matter are closed.
Counsel for the parties are presently on a timetable whereby principal memoranda
of law was submitted by April 14, 1997 and reply memoranda will be submitted by
May 14, 1997. The administrative law judge is expected to issue a recommended
decision within 45 days thereafter. Either party which disputes the recommended
decision of the administrative law judge then has 30 days to file exceptions to
take an appeal to the full FDIC Board of Directors. The FDIC Board will likely
not render a decision for at least 60 to 90 days following any such appeal.
Also, either party which disputes the decision of the FDIC Board will have the
right to appeal such decision to the Third Circuit Court of Appeals.
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.
31
<PAGE>
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. The Company's insurance carrier
has indicated that it may dispute coverage relating to this matter on the basis
that the insurance carrier did not receive timely notice of the proceedings.
The Company disputes the insurance carrier's position.
32
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed with this Form 10-QSB:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<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. 33-71712).
11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
</TABLE>
33
<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 13, 1997 By:/s/ James L. Leuthe
---------------------------------
James L. Leuthe, Chairman
of the Board and Chief
Executive Officer
Date: May 13, 1997 By:/s/ Kashmira K. Lodaya
---------------------------------
Kashmira K. Lodaya, Treasurer
(principal financial and
accounting officer)
34
<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 36 - 37
Earnings.
27 Financial Data Schedule. 38 - 39
35
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 Page 1 of 2
MARCH MARCH
PRIMARY EARNINGS PER SHARE: 31, 1997 31, 1996
---------- ----------
NET INCOME 1,051,650 131,727
LESS DIVIDENDS IN ARREARS:
SERIES A (55,498) (55,498)
SENIOR PREFERRED (56,273) (53,056)
---------- ----------
ADJUSTED NET INCOME 939,879 23,173
---------- ----------
COMMON STOCK EQUIVALENT SHARES
OUTSTANDING: 2,900,363 2,848,902
---------- ----------
PRIMARY EARNINGS PER SHARE 0.32 0.01
==== ====
COMPUTATION OF COMMON STOCK
EQUIVALENT SHARES:
COMMON STOCK 2,000,000 2,000,000
SENIOR PREFERRED STOCK 900,363 848,902
---------- ----------
TOTAL 2,900,363 2,848,902
========== ==========
FULLY DILUTED EARNINGS MARCH MARCH
PER SHARE: 31, 1997 31, 1996
---------- ----------
NET INCOME 1,051,650 131,727
LESS DIVIDENDS IN ARREARS:
SERIES A (55,498) (55,498)
SENIOR PREFERRED (56,273) (53,056)
---------- ----------
ADJUSTED NET INCOME 939,879 23,173
---------- ----------
FULLY DILUTED COMMON STOCK
EQUIVALENT SHARES OUTSTANDING: 3,469,441 3,416,320
---------- ----------
FULLY DILUTED EARNINGS PER SHARE 0.27 0.01
==== ====
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) 900,363 848,902
INCLUSION OF STOCK OPTIONS (3) 23,478 21,818
---------- ----------
TOTAL 3,469,441 3,416,320
========== ==========
36
<PAGE>
Page 2 of 2
- ----------
(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.
37
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FIRST LEHIGH CORPORATION, AND SUBSIDIARY EXHIBIT 27
FINANCIAL DATA SCHEDULE Page 1 of 2
THREE MONTHS ENDED MARCH 31, 1997
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 2,735
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,253
<TRADING-ASSETS> 6,662
<INVESTMENTS-HELD-FOR-SALE> 21,543
<INVESTMENTS-CARRYING> 4,089
<INVESTMENTS-MARKET> 3,819
<LOANS> 64,779
<ALLOWANCE> 1,474
<TOTAL-ASSETS> 110,642
<DEPOSITS> 96,919
<SHORT-TERM> 50
<LIABILITIES-OTHER> 980
<LONG-TERM> 245
0
16
<COMMON> 20
<OTHER-SE> 12,412
<TOTAL-LIABILITIES-AND-EQUITY> 110,642
<INTEREST-LOAN> 1,437
<INTEREST-INVEST> 487
<INTEREST-OTHER> 22
<INTEREST-TOTAL> 1,946
<INTEREST-DEPOSIT> 881
<INTEREST-EXPENSE> 893
<INTEREST-INCOME-NET> 1,053
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 720
<EXPENSE-OTHER> 991
<INCOME-PRETAX> 1,052
<INCOME-PRE-EXTRAORDINARY> 1,052
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,052
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 4.41
<LOANS-NON> 1,690
<LOANS-PAST> 837
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,624
<CHARGE-OFFS> 240
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 1,474
<ALLOWANCE-DOMESTIC> 43
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,035
</TABLE>
