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 June 30, 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
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(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 June 30, 1997.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
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<TABLE>
<CAPTION>
Part I - Financial Information Page Number
- ------------------------------- -----------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheet as of June 30, 1997 and December 31, 1996..... 3
Consolidated Statements of Income for the six months ended
June 30, 1997 and 1996................................................ 4 - 5
Consolidated Statements of Income for the three months ended
June 30, 1997 and 1996................................................ 6 - 7
Consolidated Statement of Cash Flows for the six months ended
June 30, 1997 and 1996................................................ 8 - 9
Consolidated Statement of Cash Flows for the three months ended
June 30, 1997 and 1996................................................ 10-11
Notes to Consolidated Financial Statements.............................. 12-18
Item 2. Management's Discussion and Analysis or Plan of Operations............... 19-37
Part II - Other Information
Item 1. Legal Proceedings........................................................ 38-39
Item 6. Exhibits and Reports on Form 8-K......................................... 40
Signatures.............................................................. 41
</TABLE>
2
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks ............................................. $ 5,077 $ 2,861
Federal funds sold .................................................. 168 1,759
--------- ---------
Cash and cash equivalents ....................... 5,245 4,620
Securities held-to-maturity (estimated fair
value of $3,880 and $3,899, respectively) .......................... 4,088 4,091
Securities available-for-sale ....................................... 20,219 21,922
Trading securities .................................................. 6,733 6,309
Loans and leases .................................................... 68,103 66,434
Less: unearned income ............................................ (366) (436)
allowance for loan losses .................................. (1,436) (1,624)
--------- ---------
Net loans and leases ............................ 66,301 64,374
Premises and equipment, net ......................................... 2,283 2,022
Real estate and other investments ................................... 0 47
Foreclosed assets held for sale ..................................... 4,862 4,850
Other assets ........................................................ 2,758 2,045
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Total Assets .................................... $ 112,489 $ 110,280
========= =========
LIABILITIES
- -----------
Deposits:
Noninterest-bearing .............................................. $ 11,074 $ 10,086
Interest-bearing ................................................. 86,885 85,853
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Total Deposits .................................. 97,959 95,939
Other liabilities ................................................... 903 859
Other borrowed funds ................................................ 50 1,200
Long-term debt ...................................................... 218 272
--------- ---------
Total Liabilities ............................... 99,130 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 ................................................... 4,666 3,227
Unrealized depreciation on securities available-for-sale ........... (364) (274)
--------- ---------
Total Shareholders' Investment .................. 13,359 12,010
--------- ---------
Total Liabilities and Shareholders' Investment .. $ 112,489 $ 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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
----------- -----------
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ........................ $ 2,960 $ 2,748
Interest and dividends on investment securities:
Taxable interest income .......................... 875 770
Dividends ........................................ 85 141
Interest on federal funds sold .................... 46 58
----------- -----------
Total Interest Income ........... 3,966 3,717
----------- -----------
INTEREST EXPENSE:
Interest on deposits .............................. 1,767 1,763
Interest on other borrowed funds .................. 15 17
Interest on long-term debt ........................ 11 16
----------- -----------
Total Interest Expense .......... 1,793 1,796
----------- -----------
NET INTEREST INCOME ............................... 2,173 1,921
PROVISION (CREDIT) FOR LOAN LOSSES ................ 90 (667)
----------- -----------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR LOAN LOSSES .................................. 2,083 2,588
----------- -----------
OTHER INCOME:
Service charges, fees and other income ............ 244 272
Gain on sale of foreclosed assets, net ............ 26 18
Gain on sale of real estate investment ............ 183 29
Realized gains on investment securities, net ...... 17 0
Trading securities gains, net ..................... 1,512 266
Litigation Settlement ............................. 0 1,539
----------- -----------
Total Other Income .............. 1,982 2,124
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits .................... 719 634
Net occupancy expense ............................. 213 267
Equipment expense ................................. 107 103
FDIC insurance .................................... 86 78
Foreclosed asset expenses ......................... 162 370
Other ............................................. 822 984
----------- -----------
Total Other Expenses ............ 2,109 2,436
----------- -----------
4
<PAGE>
INCOME BEFORE PROVISION FOR INCOME TAXES .......... 1,956 2,276
PROVISION FOR INCOME TAXES ........................ 0 0
----------- -----------
NET INCOME ........................................ $ 1,956 $ 2,276
=========== ===========
PRIMARY EARNINGS PER SHARE ........................ $ 0.60 $ 0.72
=========== ===========
FULLY DILUTED EARNINGS PER SHARE .................. $ 0.50 $ 0.60
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary ........................................ 2,900,363 2,848,902
Fully Diluted .................................. 3,466,526 3,414,502
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
----------- -----------
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ........................ $ 1,523 $ 1,458
Interest and dividends on investment securities:
Taxable interest income .......................... 436 378
Dividends ........................................ 37 65
Interest on federal funds sold .................... 24 32
----------- -----------
Total Interest Income ........... 2,020 1,933
----------- -----------
INTEREST EXPENSE:
Interest on deposits .............................. 886 883
Interest on other borrowed funds .................. 9 7
Interest on long-term debt ........................ 5 8
----------- -----------
Total Interest Expense .......... 900 898
----------- -----------
NET INTEREST INCOME ............................... 1,120 1,035
PROVISION (CREDIT) FOR LOAN LOSSES ................ 45 (719)
----------- -----------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR LOAN LOSSES .................................. 1,075 1,754
----------- -----------
OTHER INCOME:
Service charges, fees and other income ............ 124 173
Gain on sale of foreclosed assets, net ............ 14 14
Trading securities gains, net ..................... 809 (30)
Litigation Settlement ............................. 0 1,539
----------- -----------
Total Other Income .............. 947 1,696
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits .................... 376 304
Net occupancy expense ............................. 106 136
Equipment expense ................................. 53 52
FDIC insurance .................................... 43 39
Foreclosed asset expenses ......................... 92 254
Other ............................................. 448 520
----------- -----------
Total Other Expenses ............ 1,118 1,305
----------- -----------
6
<PAGE>
INCOME BEFORE PROVISION FOR INCOME TAXES .......... 904 2,145
PROVISION FOR INCOME TAXES ........................ 0 0
----------- -----------
NET INCOME ........................................ $ 904 $ 2,145
=========== ===========
PRIMARY EARNINGS PER SHARE ........................ $ 0.27 $ 0.71
=========== ===========
FULLY DILUTED EARNINGS PER SHARE .................. $ 0.23 $ 0.60
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Primary ........................................ 2,900,363 2,848,902
Fully Diluted .................................. 3,466,893 3,414,502
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
------- -------
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 1,956 $ 2,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (credit) for loan losses .................................. 90 (667)
Provision for foreclosed asset losses ............................... 0 160
Depreciation ........................................................ 80 81
Amortization and accretion .......................................... 7 50
Realized gain on investment securities, net ......................... (17) 0
Net increase in trading securities .................................. (424) (1,162)
Gain on sale of foreclosed assets held for sale .................... (19) (18)
Gain on sale of real estate and other investments ................... (183) (400)
Gain on sale/disposal of equipment .................................. 0 (7)
Change in:
Other assets ..................................................... (544) 15
Other liabilities ................................................ (179) 138
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................................ 767 466
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities .......................................... 1,626 2,155
Proceeds from sales ............................................... 0 773
Purchases of securities ........................................... 0 (3,999)
Net increase in loans and leases .................................... (3,282) (6,199)
Proceeds from sales of premises and equipment ....................... 27 7
Capital expenditures for premises and equipment ..................... (368) (36)
Proceeds from sales of foreclosed assets ............................ 1,155 338
Capitalized expenditures for foreclosed assets ...................... (79) 0
Proceeds from sales of real estate and other investments ............ 174 517
Proceeds from sales of other assets ................................. 83 23
------- -------
NET CASH USED IN INVESTING ACTIVITIES ................................ (664) (6,421)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................................ 2,020 3,718
Net increase (decrease) in other borrowed funds ..................... (1,150) 1,850
Payments on long-term debt .......................................... (54) (54)
Dividend payments ................................................... (294) 0
------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ............................................... 522 5,514
------- -------
8
<PAGE>
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS .......................................... 625 (441)
CASH AND CASH EQUIVALENTS, BEGINNING ...................................... 4,620 5,043
------- -------
CASH AND CASH EQUIVALENTS, ENDING ......................................... $ 5,245 $ 4,602
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest .............................................. $ 1,793 $ 1,794
Cash paid for income taxes .......................................... $ 47 $ 0
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On June 25, 1997, the Company's Board of Directors declared a dividend on
the outstanding shares of its Senior and Series A Preferred stock for the
stockholders of record at June 25, 1997. The Senior Preferred second quarter
1997 dividend of $56,273 and Series A Preferred second quarter 1997 dividend of
$55,498, as well as two quarters of Series A accumulated dividends of $110,995,
have been included in other liabilities.
The accompanying notes are an integral part of the consolidated financial
statements.
9
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1997 1996
------- -------
(in thousands)
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 904 $ 2,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (credit) for loan losses .................................. 45 (719)
Provision for foreclosed asset losses ............................... 0 115
Depreciation ........................................................ 40 41
Amortization and accretion .......................................... 2 29
Realized gain on investment securities, net ......................... 0 0
Net (increase) decrease in trading securities ....................... (71) 108
Gain on sale of foreclosed assets held for sale .................... (7) (14)
Gain on sale of real estate and other investments ................... 0 (400)
Change in:
Other assets ..................................................... (305) 58
Other liabilities ................................................ (6) 227
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................................ 602 1,590
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities .......................................... 1,553 329
Purchases of securities ........................................... 0 (3,499)
Net increase in loans and leases .................................... (3,339) (1,823)
Proceeds from sales of premises and equipment ....................... 27 0
Capital expenditures for premises and equipment ..................... (264) (16)
Proceeds from sales of foreclosed assets ............................ 946 218
Capitalized expenditures for foreclosed assets ...................... (55) 0
Proceeds from sales of real estate and other investments ............ 0 517
Proceeds from sales of other assets ................................. 68 23
------- -------
NET CASH USED IN INVESTING ACTIVITIES ................................ (1,064) (4,251)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................................ 1,040 3,645
Net increase in other borrowed funds ................................ 0 350
Payments on long-term debt .......................................... (27) (27)
Dividend Payments ................................................... (294) 0
------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ............................................... 719 3,968
------- -------
10
<PAGE>
NET INCREASE IN CASH
AND CASH EQUIVALENTS .................................................. 257 1,307
CASH AND CASH EQUIVALENTS, BEGINNING ...................................... 4,988 3,295
------- -------
CASH AND CASH EQUIVALENTS, ENDING ......................................... $ 5,245 $ 4,602
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest .............................................. $ 899 $ 890
Cash paid for income taxes .......................................... $ 12 $ 0
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On June 25, 1997, the Company's Board of Directors declared a dividend on
the outstanding shares of its Senior and Series A Preferred stock for the
stockholders of record at June 25, 1997. The Senior Preferred second quarter
1997 dividend of $56,273 and Series A Preferred second quarter 1997 dividend of
$55,498, as well as two quarters of Series A accumulated dividends of $110,995,
have been included in other liabilities.
The accompanying notes are an integral part of the consolidated financial
statements.
11
<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.
12
<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.
13
<PAGE>
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is computed
generally using the straight-line method.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of fair value
minus costs to sell or cost. The provision for foreclosed asset losses and the
costs of holding and maintaining the property are included in the statement of
income caption "Foreclosed asset expenses."
INCOME TAXES
At June 30, 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 $1.069 million from loans to
foreclosed assets held for sale during the six months ended June 30, 1997.
14
<PAGE>
LONG TERM DEBT
The Company has a term note with an outstanding balance of $217,584 at June
30, 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 June 30, 1997, the Bank's Tier I capital ratio was
11.73%. 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
15
<PAGE>
extension of credit, or portion thereof, which has been charged off the books of
the Bank, in whole or in part, or to any affiliate or related interest of, or
other person or entity associated with, any such borrower, as long as any
portion of such extension of credit, whether or not the portion was charged off,
remains uncollected. The provisions of clause (ii) above do not apply to the
advancement of funds by the Bank for the sole purpose of maintaining or
protecting the Bank's real estate collateral if the failure to extend such
credit would otherwise be substantially detrimental to the best interests of the
Bank; (iii) the Bank may not extend, directly or indirectly, any new or
additional credit to, or for the benefit of, any borrower who is obligated in
any manner to the Bank on any loan or other extension of credit that has been
adversely classified, in whole or in part, by the Department in the report of
examination dated as of June 30, 1995, or as a result of any subsequent
examination of the Bank by the Department or the FDIC, or to any affiliate or
related interest of, or other person or entity associated with any such borrower
("classified borrower"), as long as such loan or other extension of credit
remains classified or uncollected. This clause (iii) does not prohibit the Bank
from renewing all or any part of an extension of credit to a classified borrower
who is not subject to the prohibitions of clause (ii), after collection in cash
of interest due on the entire extension of credit. The prohibitions of clause
(iii) do not apply to any extension of credit to a classified borrower who is
not subject to the prohibitions of clause (ii) above, if the Bank's failure to
extend further credit to a classified borrower would be substantially
detrimental to the best interests of the Bank, which determination must be
evidenced in writing in the applicable loan files; and (iv) the Bank must comply
fully and at all times with the provisions of section 1415 of the Banking Code
of 1965, as amended, relating to loans to executive officers and directors.
Performance Objectives
The following performance objectives were also stated in the Pennsylvania
Order: (i) the Bank must reduce the level of nonaccrual loans to total gross
loans noted in the Report of Examination as of June 30, 1995, to no more than 7%
by August 26, 1996, and further reduce such ratio to no more than 4% by November
24, 1996 and 2% by February 22, 1997; and (ii) the Bank must reduce the level of
classified assets as of June 30, 1995, to no more than 100% of Tier I capital
and reserve for loan and lease losses by August 26, 1996, and further reduce
such ratio to 75% by November 24, 1996 and 50% by February 22, 1997. As of June
30, 1997, the Bank's level of nonaccrual loans to gross loans was 0.53%, and the
Bank's level of classified assets to Tier I capital and reserve for loan and
lease losses was 35.58%.
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.
16
<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 required 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
June 30, 1997, this ratio was 0.53%. 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 June 30, 1997, this ratio was
35.58%. The Pennsylvania Order also contains a provision requiring the Bank to
maintain, at all times, a minimum Tier I capital equal to or greater than 6.5%
of the Bank's adjusted total assets, plus a fully-funded loan loss reserve. As
of June 30, 1997 this ratio was 11.73% 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
17
<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 June 30, 1997 the Bank's Tier I capital ratio was
11.73%, 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. Also, the Company received permission
from the Federal Reserve Bank to pay cash dividends accumulated through March
31, 1997 to its Senior Preferred Stockholders with the record date of March 25,
1997. In addition, the Company has received permission from the Federal Reserve
Bank to pay the second quarter 1997 cash dividend to its Senior Preferred
Stockholders, and the second quarter 1997 as well as two quarters of cash
dividends in arrears to its Series A Preferred Stockholders.
18
<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 June 30, 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 SIX MONTHS ENDED JUNE 30, 1997 TO
SIX MONTHS ENDED JUNE 30, 1996
NET INCOME
Net income for the first half of 1997 declined $320,000, or 14.06%, as
compared to the same period in 1996. Net interest income increased $252,000, the
majority of which was attributable to higher interest income and fees earned on
loans while interest costs remained static between periods. Other expenses
declined $327,000 mostly due to a decrease in the write down of foreclosed asset
portfolio, decreased legal expenses pertaining to 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. However, other income declined $142,000 during
the six months ended June 30, 1997, as compared to the same period in 1996 due
to two significant items. During May 1996, the Company recorded $1,539,000 as
other income resulting from a litigation settlement (the "Settlement") with
respect to a large impaired loan. This nonrecurring Settlement amount was
mitigated in the first six months of 1997 by an increase in the gains recognized
on the trading securities of $1,263,000 as compared to the same period in 1996.
For the first half of 1997, a provision for loan losses of $90,000 was recorded
as compared to $667,000 credit recorded for the six months ended June 30, 1996
primarily as the result of a large recovery recorded during the second quarter
1996.
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 3.53% in 1997 as compared to 4.31% in
1996. The ROE was 30.62% for the first half of 1997 compared to 43.23% 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,
19
<PAGE>
borrowed funds, and capital.
In the first six months of 1997, net interest income increased
$252,000, or 13.12%, over the same period in 1996, the majority of which was
attributable to increased loan interest and fee income.
During the first half of 1997, interest and fee income on loans
increased $212,000, or 7.71%, over the same period in 1996, primarily the result
of an increase in the average loan balance of $6.69 million, or 11.73%. The
majority of the increase in the average loan balance was directly related to a
new consumer loan program instituted by the Bank during 1996. The consumer loan
program initiative was directed to the local auto dealers and their
credit-worthy customers. The majority of new originations continues to be in the
auto loan market, although during the second quarter of 1997, the Company
experienced an increase in originations in both the commercial and real estate
portfolios as compared to the first quarter of 1997. Mitigating the large
increase in the average loan portfolio was a decrease in the average loan yield
of 35 basis points, from 9.64% during the first six months of 1996 to 9.29%
during the first six months of 1997, primarily attributable to the competiveness
of interest rates in the local economy.
Interest expense on deposits continued to remain static at
approximately $1.8 million for the first six months in 1997 and 1996. The
average balance of interest-bearing liabilities increased $1.513 million in the
first six months of 1997 over the same period in 1996. The majority of this
increase was attributable to time deposits which increased $1.74 million in the
first six months of 1997. The increase in the average balance of time deposits
was mitigated by decreases in the average costs in both the savings and time
deposits of 9 basis points for each category. This decrease was attributable to
two-year certificates of deposit issued in 1995 which were repricing at the 1997
market rates.
For the first half of 1997, the average yield on interest-earning
assets decreased 9 basis points, while the cost of interest-bearing liabilities
declined 7 basis points, resulting in a net decrease in the interest rate spread
of 2 basis points. In addition, the net yield on interest-earning assets
increased 21 basis points during the first half of 1997 mostly due to increased
net interest income as outlined above.
20
<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 Six Months ended June 30,
(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) $63,719 $ 2,960 9.29% $57,029 $ 2,748 9.64%
Investment securities 31,109 960 6.17% 30,330 911 6.01%
Overnight funds 1,690 46 5.44% 2,156 58 5.38%
------- ------- ----- ------- ------- ------
Total interest-earning assets $96,518 $ 3,966 8.22% $89,515 $ 3,717 8.31%
======= ------- ----- ======= ------- ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,838 $ 478 2.69% $35,854 $ 496 2.78%
Time deposits 49,657 1,289 5.23% 47,917 1,267 5.32%
Other borrowed funds 506 15 5.90% 608 17 5.53%
Long-term debt 245 11 8.93% 354 16 8.94%
------- ------- ------ ------- ------- ------
Total interest-bearing liabilities $86,246 $ 1,793 4.19% $84,733 $ 1,796 4.26%
======= ------- ------ ======= ------- ------
NET INTEREST INCOME $ 2,173 $ 1,921
======= =======
INTEREST RATE SPREAD 4.03% 4.05%
====== ======
NET INTEREST MARGIN
ON INTEREST-EARNING 4.50% 4.29%
ASSETS (2) ====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 111.91% 105.64%
====== ======
</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.
21
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
(in thousands)
1996 1995
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $57,029 $ 2,748 9.64% $52,415 $ 2,490 9.50%
Investment securities 30,330 911 6.01% 30,387 861 5.67%
Overnight funds 2,156 58 5.38% 1,923 57 5.93%
------- ------- ------ ------- ------- ------
Total interest-earning assets $89,515 $ 3,717 8.31% $84,725 $ 3,408 8.05%
======= ------- ------ ======= ------- ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,854 $ 496 2.78% $35,714 $ 549 3.10%
Time deposits 47,917 1,267 5.32% 45,626 1,111 4.91%
Other borrowed funds 608 17 5.53% 1,257 41 6.58%
Long-term debt 354 16 8.94% 463 22 9.45%
------- ------- ------ ------- ------- ------
Total interest-bearing liabilities $84,733 $ 1,796 4.26% $83,060 $ 1,723 4.18%
======= ------- ------ ======= ------- ------
NET INTEREST INCOME $ 1,921 $ 1,685
======= =======
INTEREST RATE SPREAD 4.05% 3.87%
====== ======
NET INTEREST MARGIN
ON INTEREST-EARNING 4.29% 3.98%
ASSETS (2) ====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 105.64% 102.00%
====== ======
</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.
22
<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 Six Months Ended For the Six Months Ended
June 30, 1997 vs. 1996 June 30, 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 $ 322 $(110) $ 212 $ 241 $ 17 $ 258
Investment securities 34 15 49 (8) 58 50
Overnight funds (13) 1 (12) 13 (12) 1
----- ----- ----- ----- ----- -----
Total interest-earning assets $ 343 $ (94) $ 249 $ 246 $ 63 $ 309
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits $ 2 $ (20) $ (18) $ 29 $ (82) (53)
Time deposits 63 (41) 22 34 122 156
Other borrowed funds (5) 3 (2) (19) (5) (24)
Long-term debt (5) 0 (5) (5) (1) (6)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ 55 $ (58) $ (3) $ 39 $ 34 $ 73
----- ----- ----- ----- ----- -----
CHANGE IN NET INTEREST INCOME $ 288 $ (36) $ 252 $ 207 $ 29 $ 236
===== ===== ===== ===== ===== =====
</TABLE>
23
<PAGE>
OTHER INCOME
Total other income, excluding securities gains and the Settlement amount,
increased $134,000 for the six-month period ended June 30, 1997 compared to the
same period in 1996, principally as the result of $154,000 increased gains on
the sale of certain real estate parcels previously acquired by the Company.
During the first half of 1997, the gains on investment securities increased
$1,263,000 as compared to the same period in 1996, of which the realized portion
of the security gains represented $1,052,000 and $89,000, respectively, and the
unrealized portion represented $477,000 and $177,000, respectively. During the
first half of 1997, management decided to take advantage of 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 bank holding companies. The strong stock market growth during 1995, 1996
and first half 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 enable the Company to maximize its return on its
investment assets.
During the first half of 1996, the Company recorded $1,539,000 from the
Settlement of an impaired loan which had been in protracted litigation.
OTHER EXPENSES
Other expenses declined $327,000, or 13.42%, during the first half of 1997
as compared to the same period in 1996. Occupancy expenses decreased $54,000, or
20.22%, the result of a reduction in rent expense for the administrative offices
of the Company and the Bank. The foreclosed assets expenses decreased $208,000
or 56.22% mostly due to a decrease in the provision for the write down of its
foreclosed asset portfolio. Management continues to evaluate the carrying cost
of this portfolio to ensure that this carrying cost approximates the liquidation
values of the underlying assets. In addition, management continues to
aggressively market its foreclosed asset portfolio in an attempt to continue to
reduce these nonperforming assets. Other expenses declined $162,000, or 16.46%,
during the first half of 1997 as compared to the same period in 1996, 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. Also,
amortization expenses, included in other expenses, decreased $48,000 due to
assets acquired in an earlier branch office purchase becoming fully amortized.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was $1.436 million at June 30, 1997, compared
to $1.624 million at December 31, 1996. The allowance equaled 2.12% of loans at
June 30, 1997, as 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.
24
<PAGE>
The adequacy of the allowance for loan losses is measured monthly by an
adequacy test. The adequacy test includes 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 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 June 30, 1997, based on management's evaluation as outlined above, the
amount charged to operating expense for the provision for loan losses was
$90,000 compared to credit for loan losses of $667,000 in 1996.
25
<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 period ended June 30, 1997 (in thousands):
Beginning Balance, January 1, 1997 .................... $1,624
------
Charge-offs:
Commercial, financial and agricultural ............. --
Real estate - construction ......................... 5
Real estate - mortgage.............................. 151
Installment loans to individuals ................... 192
Lease financing .................................... --
------
Total charge-offs ..................................... 348
------
Recoveries:
Commercial, financial and agricultural ............. 12
Real estate - construction ......................... --
Real estate - mortgage ............................. 9
Installment loans to individuals ................... 16
Lease financing .................................... 33
------
Total recoveries ...................................... 70
------
Net charge-offs ....................................... 278
------
Provision for loan losses ............................. 90
------
Ending Balance, June 30, 1997 ......................... $1,436
======
Ratio of net charge-offs to
average loans outstanding .......................... 0.43%
FINANCIAL CONDITION
At June 30, 1997, the Company's total assets were $112.5 million,
representing an increase of $2.2 million from December 31, 1996, principally as
the result of higher demand in loan originations.
Loans
Net loans increased $1.93 million from $64.374 million at December 31, 1996
to $66.301 million at June 30, 1997.
The majority of the increase in loans remains within the consumer loan
portfolio in particular auto loans. The Bank has continued to market its auto
loans to a group of local auto dealerships and its credit-worthy customers. In
addition, the Bank has continued to increase its commercial loan originations
which were flat during January and February of 1997. The change in the
composition of loans at June 30, 1997 as compared to December 31, 1996 is as
follows: Real estate construction loans increased $896,000 or 18.21%;
Residential real estate loans decreased $1.364 million or 5.28%; Commercial real
estate loans decreased $638,000 or 3.22%; Commercial loans decreased $267,000 or
7.30%; while consumer loans increased $3.112 million or 26.45%.
26
<PAGE>
The following table sets forth the maturity and repricing schedule of the
loan portfolio at June 30, 1997 (in thousands):
After one After
Within but within five
One year five years years Total
-------- ---------- ----- -----
Maturity Schedule:
Commercial ................. $ 1,453 $ 1,527 $ 400 $ 3,380
Real estate-construction ... 4,201 999 330 5,530
Real estate-mortgage ....... 7,798 23,841 11,087 42,726
Consumer, net .............. 647 13,097 1,134 14,878
Nonaccrual loans ........... -- -- -- 1,223
------- ------- ------- -------
Total ............................ $14,099 $39,464 $12,951 $67,737
======= ======= ======= =======
Repricing Schedule (1):
Fixed rate loans ........... $14,035 $33,350 $ 3,263 $50,648
Floating rate loans ........ 15,296 570 -- 15,866
Nonaccrual loans ........... -- -- -- 1,223
------- ------- ------- -------
Total ............................ $29,331 $33,920 $ 3,263 $67,737
======= ======= ======= =======
(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 total $21.75 million (amortized
costs) at June 30, 1997, or 73.90% of total investment securities. Included in
the above are $2.93 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 most recent test.
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 Other Borrowed Funds
Total deposits at June 30, 1997 increased $2.02 million from $95.939
million at December 31, 1996 to $97.959 million. Noninterest-bearing deposits
increased $988,000, primarily as the result of increased activity in certain
escrow and business accounts. Interest bearing deposits increased $1.032 million
for the first half of 1997 due to a combination of increases in both savings and
time deposits. Savings, club and interest-bearing deposits increased $477,000,
of which
27
<PAGE>
$373,000 consisted of increases in Christmas club accounts which will mature in
October 1997. Time deposits increased $555,000 mostly due to a special promotion
offered during the second quarter of 1997 when the Bank opened its new Pond Road
branch. As a percentage of total deposits, savings, club accounts and
interest-bearing demand deposits represented 36.57% at June 30, 1997 as compared
to 36.85% at December 31, 1996. There were no brokered deposits within the
Company's deposit base at June 30, 1997.
Borrowed funds represented $50,000 at June 30, 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 $1.5
million securities which were called by their issuers during 1997, 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 June 30, 1997 and December 31, 1996.
June 30, December 31,
1997 1996
---- ----
(in thousands)
Three months or less .... $1,161 $2,800
Over three months through
twelve months .... 4,621 3,412
Over one year through
five years ....... 1,715 1,640
Over five years ......... 0 0
------ ------
TOTAL ............ $7,497 $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.
28
<PAGE>
The following table represents nonperforming assets of the Company at June
30, 1997 and December 31, 1996.
June 30, December 31,
1997 1996
---- ----
(in thousands)
Impaired loans ................................... $1,223 $2,052
Other loans past due 90 days or more ............. 947 609
------ ------
Total nonperforming loans .................... 2,170 2,661
Foreclosed assets held for sale .................. 4,862 4,850
------ ------
Total nonperforming assets ................... $7,032 $7,511
====== ======
Nonperforming loans as a percentage
of loans (net of unearned interest) .......... 3.20% 4.03%
Nonperforming assets as a percentage of assets ... 6.25% 6.81%
Loans past due 90 days or more increased $338,000 from $609,000 at December
31, 1996 to $947,000 at June 30, 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 and will
continue to monitor the loan department's needs and performance in the future.
All delinquent loans are reviewed by management on a weekly basis with regard to
legal proceedings and collection efforts. Of the delinquent loans, 66.32% are
secured by real estate, 15.95% are loans to consumers and 17.74% are to
commercial borrowers.
Impaired loans declined $829,000, or 40.40%, at June 30, 1997 compared to
December 31, 1996. Loans with carrying values of $1,069,000 were transferred to
foreclosed assets held for sale during the first half of 1997. The majority of
the impaired loans are beyond the point of restructure. These are loans that
have been in litigation and/or foreclosure and can only be resolved through
liquidation. Management believes that the transfer from impaired loans to
foreclosed assets is an improving trend that will continue for the next several
quarters as the litigation and/or foreclosure actions are more toward
completion. The improving trend and movement of impaired loans to foreclosed
assets enables the Bank to sell the properties. It is anticipated that the
aforementioned trend will continue with an expected decrease in impaired loans.
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 $1.211 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.
29
<PAGE>
The following table sets forth the total of commercial and investment
properties at June 30, 1997, all of which are currently in litigation and/or
foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days ......... $1,139,163
Foreclosed assets held for sale ... 851,514
----------
Total ............................. $1,990,677
==========
The following table sets forth the total of residential properties to be
foreclosed upon and liquidated at June 30, 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 ....... $ 673,287
Foreclosed assets held for sale.. 1,050,937
----------
Total ........................... $1,724,224
==========
The following table sets forth the total of land developments and building
lots to be foreclosed upon and liquidated at June 30, 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 ....... $ 26,333
Foreclosed assets held for sale.. 2,488,920
----------
Total ........................... $2,515,253
==========
The following table sets forth the total of loans in litigation that are
not secured by real estate at June 30, 1997.
Secured by Other Than Real Estate:
Impaired and over 90 days ........ $287,541
========
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 at June 30, 1997.
Performing/Nonperforming Assets:
Impaired and over 90 days ...... $43,197
=======
The following table sets forth the total of assets that are under agreement
or are being paid off with the settlement dates to take place in the third
quarter of 1997.
Assets Under Agreement or Payoffs:
Foreclosed assets held for sale .... $470,283
========
30
<PAGE>
At June 30, 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 assets. The disposition plan as originally drafted in 1996 and as
adjusted for 1997 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 June 30, 1997, the
gross reduction in classified assets was approximately $1.96 and the net
reduction was $1.62 million. The above reductions allowed the Bank to
substantially meet its internal goal as of June 30, 1997. The Bank was
substantially in compliance with the regulatory requirements (see "Regulatory
Matters" under the notes to the consolidated financial statements included in
part I of this Form 10-QSB report) as of February 22, 1997.
LIQUIDITY AND FUNDS MANAGEMENT
Liquidity management is intended 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 June 30, 1997, the Company maintained $5.245 million in cash and cash
equivalents in the form of cash and due from banks (after reserve requirements).
In addition, the Company had $20.219 million in securities available-for-sale
representing 17.97% of total assets at June 30, 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 June 30, 1997, approximately 80.42% of the Company's assets
were funded by core deposits acquired within its market area. An additional
12.07% of the assets were funded by the Company's equity. These two components
provide a substantial and stable source of funds.
On May 12, 1997, the Company paid $293,815 of cash dividends to its Senior
Preferred stockholders. Included in this balance were the dividends in arrears
as of December 31, 1996 of $237,542 as well as the first quarter 1997 dividend
of $56,273. For the second quarter 1997, on June 25, 1997, the Company's Board
of Directors declared a dividend on both the Senior and Series A Preferred
stockholders of record as of June 25, 1997. This declaration included $56,272
due to its Senior Preferred stockholders for the second quarter of 1997 and
$166,493 due to the Series A Preferred stockholders, which represented a portion
of the undeclared dividend in arrears. After payment of the $166,493, $1,165,454
remains in arrears on the Series A Preferred stock through June
31
<PAGE>
30, 1997.
For the six months ended June 30, 1997, cash and cash equivalents increased
$625,000 as compared to a $441,000 decrease for the same period in 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 $301,000 for the six months
ended June 30, 1997, principally as the result of net income from operations
adjusted for noncash items.
Cash flows from investing activities declined $5.757 million for the six
months ended June 30, 1997 as compared to the same period in 1996. During May
1996, approximately $4 million of proceeds from the Settlement were utilized to
purchase investment securities. Another significant portion of investing
activity was an increase in loans particularly in 1996 with a continued increase
in the first six months of 1997. The increase in the loan portfolio during the
first six months of 1997 was mitigated by several large commercial repayments
which took place in the first quarter of 1997, resulting in the net decrease for
the six months ended June 30, 1997 compared to 1996. In addition, proceeds from
sale of foreclosed assets and real estate and other investments increased
$474,000 for the six-month period ended June 30, 1997 as compared to the same
period in 1996, a further indication of management's intention to continue to
liquidate the Company's nonperforming assets.
Cash flows provided by financing activities decreased $4.992 million for
the six months ended June 30, 1997 mostly due to repayment of the repurchase
agreement and reduction in deposits as compared to the same period in 1996. In
1996, the Company utilized both an increase in deposits and a repurchase
agreement to fund its loan growth. However, a major portion of the loan growth
for the six months ended June 30, 1997 was funded by deposits only. In addition,
since several large agency bonds included in the investment portfolio were
prematurely called, management used these funds to repay the outstanding
repurchase agreement.
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
32
<PAGE>
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 June 30, 1997 the Company maintained a one-year cumulative GAP of
negative $7.54 million, or 7.63% of total interest-earning assets which have
been adjusted for the depreciation on securities available-for-sale. The effect
of this GAP position provides a negative mismatch of assets and liabilities
which exposes the Company to interest rate risk during a period of rising
interest rates. A significant item contributing to the short-term negative gap
is $16.655 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.
33
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at June 30, 1997:
<TABLE>
<CAPTION>
June 30,
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) $ 9,038 $ 575 $ 1,301 $ 4,757 $ 16,727 $ 32,398
Loans (2) ............... 20,640 8,691 10,905 23,015 3,263 66,514
-------- -------- -------- -------- -------- --------
TOTAL .................. $ 29,678 $ 9,266 $ 12,206 $ 27,772 $ 19,990 $ 98,912
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand-interest bearing . $ 14,662 $ -- $ -- $ -- $ -- $ 14,662
Savings and clubs (3) ... 1,271 722 1,443 4,329 13,400 21,165
Time .................... 16,264 13,300 14,758 6,736 -- 51,058
Other borrowed funds .... 50 -- -- -- -- 50
Long-term debt .......... 218 -- -- -- -- 218
-------- -------- -------- -------- -------- --------
TOTAL .................. $ 32,465 $ 14,022 $ 16,201 $ 11,065 $ 13,400 $ 87,153
-------- -------- -------- -------- -------- --------
GAP ...................... ($ 2,787) ($ 4,756) ($ 3,995) $ 16,707 $ 6,590 $ 11,759
-------- -------- -------- -------- -------- --------
Cumulative GAP ........... ($ 2,787) ($ 7,543) ($11,538) $ 5,169 $ 11,759 $ 11,759
======== ======== ======== ======== ======== ========
</TABLE>
- -----------------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as
trading securities and $1.358 million investment in overnight funds.
(2) Includes estimated scheduled maturities of the fixed rate loans
ignoring any potential rollover at maturity. Excludes nonaccrual loans
of $1.223 million.
(3) Assumes that 7% of the savings deposits are repriceable each year based
on the previous five years' historical activity.
34
<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 June
30, 1997 and 1996.
Regulatory June 30,
Requirements 1997 1996
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio.............. 4.0%* 11.73% 10.54%
Risk-based capital ratios:
Tier I capital/risk-weighted.......... 4.0% 16.06% 14.46%
Tier I and Tier II capital/
Risk-weighted assets........... 8.0% 17.32% 15.72%
- ------------------
* 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 federal government's 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 June 30, 1997 deposit levels and based on
available rate information. However, the FDIC may increase the projected rates
at anytime.
35
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997
TO THE THREE MONTHS ENDED JUNE 30, 1996
ANALYSIS OF OPERATIONS
Overall net income decreased $1.241 million dollars for the quarter ended
June 30, 1997 as compared to the same period in 1996. Net interest income before
the provision for loan losses increased $85,000 or 8.21%. The majority of this
increase, $65,000, was attributable to an increase in interest and fees earned
on the loan portfolio due to continued growth in the average loan balances, in
particular, the auto loan portion of the consumer loan portfolio. Overall
interest expense was approximately $900,000 for both quarters. As previously
discussed, the provision and overall allowance is constantly monitored by
management. The provision for loan losses increased $764,000 in the three months
ended June 30, 1997 compared to the same period in 1996. For the three months
ended June 30, 1996, as a result of a fully funded loan loss reserve, the
Company recorded a $719,000 credit to the allowance for loan losses as compared
to a $45,000 provision for the three months ended June 30, 1997. There were two
significant components of other income, gains on trading securities and the
Settlement. During the second quarter of 1996, the Company recorded $1.539
million as other income from the Settlement which was in protracted litigation.
In the second quarter of 1997, the Company, recognizing a significant
appreciation in its trading security portfolio, sold certain securities which
resulted in a significant gain of $490,000 on these transactions. In addition,
$319,000 of unrealized gains were recognized in the three months ended June 30,
1997. Other expenses decreased $187,000 during the three months ended June 30,
1997 as compared to the three months ended June 30, 1996, due to decreased
occupancy expenses, foreclosed asset expenses and other expenses in aggregate of
$264,000. Occupancy expenses were down due to a decrease in rent expense
attributable to a decrease in the operating expenses of the building. Foreclosed
assets expenses decreased due to a decrease in the write down of the carrying
value of the assets within the portfolio based on managements evaluation of the
underlying assets. Lastly, legal expenses declined due to the ongoing litigation
with the FDIC involving the Company's chairman and the Bank's former president
and the reduced level of activity of the proceedings during the second quarter
of 1997 and compared to the second quarter of 1996.
Overall, there was a decrease of $1.05 million in net cash for the second
quarter of 1997 as compared to the second quarter of 1996. Net cash provided by
operating activities decreased $988,000 for the three months ended June 30, 1997
compared to the same period in 1996, mostly due to the cash provided by
operations as adjusted for noncash items. A significant portion of the second
quarter of 1996 income was the Settlement of $1.539 million. Net cash used in
investing activities decreased $3.187 million during the three months ended June
30, 1997. In 1996, approximately $4 million of the Settlement proceeds were used
to purchase investment securities. The increase in the second quarter of 1997
proceeds from investment maturities of $1.224 million were used to fund a
portion of the loan growth. As explained earlier, the Bank continued to
experience a growth in its installment loan portfolio in both the second
quarters of 1997 and 1996; however, during the three months ended June 30, 1997,
there was also an increased demand for additional commercial originations. The
net cash provided by financing activities decreased $3.249 million in the second
quarter of 1997 as compared to the same period in 1996. The majority of the
decrease was attributable to a decrease in 1997 deposits of $2.605 million as
compared to the same
36
<PAGE>
period in 1996. In 1996, the Bank had a time deposit promotion which accounted
for a significant portion of the increase in deposits which did not reoccur in
the second quarter of 1997.
CURRENT EVENTS
On May 29, 1997, the Bank opened its sixth branch at Pond Road in
Allentown, Pennsylvania, the same location where the administrative offices are
located. As of June 30, 1997, deposits for the new branch were approximately
$983,000.
On June 10, 1997, the Bank entered into a Branch Purchase Agreement (the
"Agreement") with The Quakertown National Bank ("QNB"), the sole subsidiary of
QNB Corp., pursuant to which QNB agreed to purchase from the Bank the deposits
of the Quakertown Branch of the Bank. The acquisition agreement is subject to
regulatory approval and is expected to be consummated by the fourth quarter of
1997. The Bank estimates that the amount of the deposits to be transferred to
QNB represents approximately 8.6% of the Bank's total deposit liabilities.
Effective July 1, 1997, the FDIC has assigned the Bank 1B assessment risk
classification, up from a 1C classification, for purposes of the Federal Deposit
Insurance Act, as amended by Section 302 of the Federal Deposit Insurance
Corporation Improvement Act of 1991. The FDIC insurance premium rate for 1B
classification is $.03 per $100 deposits as compared to $.17 per $100 deposits
for 1C classification. The Bank anticipates cost savings for the remainder of
1997 of approximately $66,000.
37
<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 and consummated 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 initiated 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, which the
Company and the Bank entered into 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
is defending these actions.
From a procedural standpoint, the hearings in this matter are closed.
Counsel for the parties have submitted memoranda of law and proposed findings of
fact/conclusions of law. The administrative law judge is expected to issue a
recommended decision by on or before September 8, 1997. Either party which
disputes that recommended decision has 30 days to file exceptions which are
heard by the full FDIC Board of Directors. The FDIC Board will likely not render
a decision for at least 60 to 90 days following the filing of any such
exceptions. Either party which disputes the eventual decision of the FDIC Board
has 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 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 constituted 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
38
<PAGE>
and adversely affect the Company's financial condition.
The Company carries Director's and Officer's Liability Insurance coverage
and is in the process of submitting a claim for reimbursement of its expenses in
connection with these proceedings. 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.
39
<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).
10.1 Branch Purchase Agreement between First Lehigh Bank and the
Quakertown National Bank dated as of June 20, 1997
(incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K report dated June 20, 1997 and filed with the
Commission on July 3, 1997).
11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on July 3, 1997 to report under Item
5 that the Bank had entered into a Branch Purchase Agreement with Quakertown
National Bank ("QNB"), pursuant to which QNB has agreed to purchase from the
Bank the deposits of the Bank's Quakertown Branch located in Quakertown,
Pennsylvania.
40
<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: August 13, 1997 By:/s/James L. Leuthe
-------------------------
James L. Leuthe, Chairman
of the Board and Chief
Executive Officer
Date: August 13, 1997 By:/s/Kashmira K. Lodaya
-------------------------
Kashmira K. Lodaya, Treasurer
(principal financial and
accounting officer)
41
<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).
10.1 Branch Purchase Agreement between
First Lehigh Bank and the Quakertown
National Bank dated as of June 20, 1997
(incorporated by reference to Exhibit 2.1
to the Company's Form 8-K report dated
June 20, 1997 and filed with the Commission
on July 3, 1997).
11.1 Statement re: Computation of Per Share 43 - 46
Earnings.
27 Financial Data Schedule. 47 - 48
42
FIRST LEHIGH CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 Page 1 of 2
JUNE JUNE
PRIMARY EARNINGS PER SHARE: 30, 1997 30, 1996
- --------------------------- -------- --------
NET INCOME 1,956,130 2,276,373
LESS DIVIDENDS PAID OR IN ARREARS(4):
SERIES A (110,996) (110,996)
SENIOR PREFERRED (112,545) (106,113)
---------- ----------
ADJUSTED NET INCOME 1,732,589 2,059,265
---------- ----------
COMMON STOCK EQUIVALENT SHARES
OUTSTANDING: 2,900,363 2,848,902
---------- ----------
PRIMARY EARNINGS PER SHARE 0.60 0.72
========== ==========
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 JUNE JUNE
PER SHARE: 30, 1997 30, 1996
- --------------------------- -------- --------
NET INCOME 1,956,130 2,276,373
LESS DIVIDENDS PAID OR IN ARREARS(4):
SERIES A (110,996) (110,996)
SENIOR PREFERRED (112,545) (106,113)
---------- ----------
ADJUSTED NET INCOME 1,732,589 2,059,265
---------- ----------
FULLY DILUTED COMMON STOCK
EQUIVALENT SHARES OUTSTANDING: 3,466,526 3,414,502
---------- ----------
FULLY DILUTED EARNINGS PER SHARE 0.50 0.60
========== ==========
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) 20,563 20,000
--------- ---------
TOTAL 3,466,526 3,414,502
========= =========
- --------------------------
43
<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.
(4) OF THE $110,996 OF SERIES A PREFERRED STOCK DIVIDENDS INCLUDED IN THE
CALCULATION, $55,498 WILL BE PAID IN AUGUST 1997 WITH THE BALANCE OF
$55,498 REMAINING IN ARREARS.
OF THE $112,545 OF SENIOR PREFERRED STOCK DIVIDENDS INCLUDED IN THE
CALCULATION, $56,273 WAS PAID IN MAY 1997, WHILE THE SECOND QUARTER AMOUNT
OF $56,272 WILL BE PAID IN AUGUST 1997.
44
<PAGE>
FIRST LEHIGH CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 Page 1 of 2
JUNE JUNE
PRIMARY EARNINGS PER SHARE: 30, 1997 30, 1996
- --------------------------- ---------- ----------
NET INCOME 904,480 2,144,646
LESS DIVIDENDS PAID OR IN ARREARS (4):
SERIES A (55,498) (55,498)
SENIOR PREFERRED (56,273) (53,056)
---------- ----------
ADJUSTED NET INCOME 792,710 2,036,092
---------- ----------
COMMON STOCK EQUIVALENT SHARES
OUTSTANDING: 2,900,363 2,848,902
---------- ----------
PRIMARY EARNINGS PER SHARE 0.27 0.71
========== ==========
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 JUNE JUNE
PER SHARE: 30, 1997 30, 1996
- --------------------------- ---------- ----------
NET INCOME 904,480 2,144,646
LESS DIVIDENDS PAID OR IN ARREARS (4):
SERIES A (55,498) (55,498)
SENIOR PREFERRED (56,273) (53,056)
---------- ----------
ADJUSTED NET INCOME 792,710 2,036,092
---------- ----------
FULLY DILUTED COMMON STOCK
EQUIVALENT SHARES OUTSTANDING: 3,466,893 3,414,502
---------- ----------
FULLY DILUTED EARNINGS PER SHARE 0.23 0.60
========== ==========
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) 20,930 20,000
--------- ---------
TOTAL 3,466,893 3,414,502
========= =========
- --------------------
45
<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.
(4) BOTH DIVIDENDS ON THE SERIES A AND SENIOR PREFERRED STOCK HAVE BEEN
DECLARED AND WILL BE PAID IN AUGUST 1997 TO THE STOCKHOLDERS OF RECORD ON
JUNE 25, 1997.
46
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,887
<INT-BEARING-DEPOSITS> 1,190
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<TRADING-ASSETS> 6,733
<INVESTMENTS-HELD-FOR-SALE> 20,219
<INVESTMENTS-CARRYING> 4,088
<INVESTMENTS-MARKET> 3,880
<LOANS> 67,737
<ALLOWANCE> 1,436
<TOTAL-ASSETS> 112,489
<DEPOSITS> 97,959
<SHORT-TERM> 50
<LIABILITIES-OTHER> 903
<LONG-TERM> 218
0
16
<COMMON> 20
<OTHER-SE> 13,323
<TOTAL-LIABILITIES-AND-EQUITY> 112,489
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<INCOME-PRETAX> 1,956
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,956
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 4.50
<LOANS-NON> 1,223
<LOANS-PAST> 947
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,624
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<RECOVERIES> 70
<ALLOWANCE-CLOSE> 1,436
<ALLOWANCE-DOMESTIC> 416
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,020
</TABLE>
