================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------- -----------------
Commission file Number: 33-71712
FIRST LEHIGH CORPORATION
------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania
------------
(State or other jurisdiction of incorporation or organization)
23-2218479
----------
(I.R.S. Employer Identification No.)
1620 Pond Road
Allentown, Pennsylvania 18104
-----------------------------
(Address of principal executive offices)
(Zip Code)
(610) 398-6660
--------------
(Issuer's telephone number)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the issuer's classes of common equity, as of the latest
practicable date: 2,053,000 shares of common stock, par value $.01 per share, as
of March 31, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
================================================================================
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
INDEX
-----
Part I - Financial Information Page Number
- ------------------------------- -----------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheet as of March 31, 1998
and December 31, 1997..................................................... 3
Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997................................................... 4 - 5
Consolidated Statement of Cash Flows for the three months ended
March 31, 1998 and 1997................................................... 6 - 7
Notes to Consolidated Financial Statements................................ 8 - 11
Item 2. Management's Discussion and Analysis or Plan of Operations................ 12 - 27
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings......................................................... 28 - 29
Item 6. Exhibits and Reports on Form 8-K.......................................... 30
Signatures................................................................ 31
</TABLE>
2
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
(in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................. 9,337 $ 7,470
Federal funds sold .................................................. 403 611
--------- ---------
Cash and cash equivalents ....................... 9,740 8,081
Securities held-to-maturity (estimated fair
value of $3,996 and $3,990, respectively) .......................... 4,084 4,085
Securities available-for-sale ....................................... 19,517 17,908
Trading securities .................................................. 8,279 7,571
Loans ............................................................... 63,006 64,636
Less: unearned income ........................................... (192) (230)
allowance for loan losses .............................. (1,815) (1,586)
--------- ---------
Net loans ....................................... 60,999 62,820
Premises and equipment, net ......................................... 4,351 4,365
Foreclosed assets held for sale, net ................................ 1,373 1,597
Other assets ........................................................ 2,285 2,292
--------- ---------
Total Assets .................................... $ 110,628 $ 108,719
========= =========
LIABILITIES
Deposits:
Noninterest-bearing .............................................. $ 9,984 $ 11,258
Interest-bearing ................................................. 84,097 80,888
--------- ---------
Total Deposits .................................. 94,081 92,146
Other liabilities ................................................... 850 909
Long-term debt ...................................................... 1,176 1,214
--------- ---------
Total Liabilities ............................... 96,107 94,269
--------- ---------
SHAREHOLDERS' INVESTMENT
Senior preferred stock, par value of $.01 per share, 1,500,000 shares
authorized, 897,363 and 900,363 shares
issued and outstanding in 1998 and 1997, respectively .............. 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; 2,053,000 and 2,000,000 shares issued
and outstanding in 1998 and 1997, respectively ..................... 20 20
Contributed capital in excess of par value .......................... 9,171 9,171
Retained earnings ................................................... 5,340 5,268
Net Unrealized depreciation on securities available-for-sale ........ (26) (25)
--------- ---------
Total Shareholders' Investment .................. 14,521 14,450
--------- ---------
Total Liabilities and Shareholders' Investment .. $ 110,628 $ 108,719
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---------- ----------
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ..................... $ 1,390 $ 1,437
Interest and dividends on investment securities:
Taxable interest income ....................... 356 439
Dividends ..................................... 31 48
Interest on time deposits ...................... 1 0
Interest on overnight funds .................... 89 22
---------- ----------
Total Interest Income ........ 1,867 1,946
---------- ----------
INTEREST EXPENSE:
Interest on deposits ........................... 858 881
Interest on other borrowed funds ............... 0 6
Interest on long-term debt ..................... 25 6
---------- ----------
Total Interest Expense ....... 883 893
---------- ----------
NET INTEREST INCOME ............................ 984 1,053
PROVISION FOR LOAN LOSSES ...................... 75 45
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................... 909 1,008
---------- ----------
OTHER INCOME:
Service charges, fees and other income ......... 130 120
Gain on sale of foreclosed assets, net ......... 0 12
Gain on sale of real estate investment ......... 0 183
Rental income .................................. 45 0
Realized gains on investment securities, net ... 0 17
Trading securities gains, net .................. 239 703
---------- ----------
Total Other Income ........... 414 1,035
---------- ----------
OTHER EXPENSES:
Salaries and employee benefits ................. 422 343
Net occupancy expense .......................... 88 107
Equipment expense .............................. 50 54
FDIC insurance ................................. 10 43
Foreclosed asset expenses ...................... 60 70
Other .......................................... 398 374
---------- ----------
Total Other Expenses ......... 1,028 991
---------- ----------
4
<PAGE>
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 295 1,052
PROVISION FOR INCOME TAXES ..................... 0 0
---------- ----------
NET INCOME ..................................... $ 295 $ 1,052
========== ==========
EARNINGS PER SHARE - BASIC ..................... $ 0.09 $ 0.47
========== ==========
EARNINGS PER SHARE - DILUTED ................... $ 0.08 $ 0.30
========== ==========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Common ...................................... 2,050,900 2,000,000
Common Share Equivalents .................... 3,527,963 3,469,441
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------- -------
(in thousands)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income .............................................. $ 295 $ 1,052
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses ............................... 75 45
Depreciation ............................................ 73 40
Amortization and accretion ......................... 9 5
Realized gain on investment securities, net ............. 0 (17)
Net increase in trading securities .................... (708) (353)
Gain on sale of foreclosed assets held for sale ........ 0 (12)
Gain on sale of real estate and other investments ....... 0 (183)
Change in:
Other assets ......................................... 53 (239)
Other liabilities .................................... (59) (173)
------- -------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES ................................ (262) 165
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities .............................. 2,881 73
Purchase of securities ................................ (4,499) 0
Net decrease in loans ................................... 1,645 57
Capital expenditures for premises and equipment ......... (59) (104)
Proceeds from sales of foreclosed assets ................ 258 209
Capitalized expenditures for foreclosed assets .......... (34) (24)
Proceeds from sales of real estate and other investments 0 174
Proceeds from sales of other assets ..................... 55 15
------- -------
NET CASH PROVIDED BY
INVESTING ACTIVITIES ................................. 247 400
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................ 1,935 980
Net decrease in other borrowed funds .................... 0 (1,150)
Payment on long-term debt ............................... (38) (27)
Dividend payments ....................................... (223) 0
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................................... 1,674 (197)
------- -------
6
<PAGE>
NET INCREASE
IN CASH AND CASH EQUIVALENTS .............................. 1,659 368
CASH AND CASH EQUIVALENTS, BEGINNING .......................... 8,081 4,620
------- -------
CASH AND CASH EQUIVALENTS, ENDING ............................. $ 9,740 $ 4,988
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest .................................. $ 882 $ 894
Cash paid for income taxes .............................. $ 14 $ 35
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On March 25, 1998, 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 March 25, 1998. The Senior Preferred Stock first
quarter 1998 dividend of $56,085 and Series A Preferred Stock first quarter 1998
dividend of $55,498, as well as two quarters of Series A Preferred Stock
accumulated dividends of $110,995, have been included in other liabilities.
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
Part I - Financial Information (Cont'd)
Part 1. - Financial Statements (Cont'd)
Notes to Consolidated Financial Statements
- ------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
FINANCIAL STATEMENT PRESENTATION:
---------------------------------
The consolidated interim financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission with respect to Form 10-QSB. The
financial information included herein reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made herein are adequate to make the
information not misleading. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's Form 10-KSB for year-end December 31, 1997.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full fiscal year 1998. 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,
1998.
PRINCIPLES OF CONSOLIDATION
---------------------------
First Lehigh Corporation and its subsidiaries, Pond Associates (a
partnership) and First Lehigh Bank (the "Bank") and the Bank's subsidiaries
(Allentown Properties, Inc., Quakertown Properties, Inc., Walnutport Properties,
Inc., Walnutport Properties II, Inc., Pond Road Properties, Inc. and Winchester
Property Management Co.) (collectively, the "Company") provide commercial
banking services. The consolidated financial statements include the accounts of
the First Lehigh Corporation and its direct and indirect subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
8
<PAGE>
INVESTMENT SECURITIES
---------------------
Investments in debt and equity securities are classified in three
categories, held-to-maturity securities, trading securities, and
available-for-sale securities. Classification in these categories requires,
respectively, accounting for securities at amortized cost, accounting for
securities at fair value with unrealized gains and losses included in earnings,
and accounting for securities at fair value with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
investment.
LOANS
-----
Interest on loans is accrued and credited to income based upon the
principal amount outstanding and using the interest method for amortizing
unearned income on certain installment loans.
The accrual of interest income is generally discontinued on loans past due
90 days or more or when there is a reasonable doubt as to the collection of
interest. The Company continues the accrual of interest on loans past due 90
days or more when they are well secured and in the process of collection. When
interest accruals are discontinued, uncollected interest credited to income is
reversed if the collectibility is not certain.
MORTGAGE LOANS HELD FOR SALE
----------------------------
Mortgage loans held for sale are carried at the lower of aggregate cost or
market.
LOAN FEES
---------
Fees collected upon loan origination and certain direct costs of
originating loans are deferred and recognized as adjustments to income over the
contractual lives of the related loans as yield adjustments. Upon prepayment or
other disposition of the underlying loans before their contractual maturities,
any associated unamortized fees or costs are recognized. Prior to 1998, such
fees and costs were included in income when collected or paid.
ALLOWANCE FOR LOAN LOSSES
-------------------------
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.
9
<PAGE>
PREMISES AND EQUIPMENT
----------------------
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is computed
generally using the straight-line method.
FORECLOSED ASSETS HELD FOR SALE
-------------------------------
Foreclosed assets held for sale are carried at the lower of fair value
minus costs to sell or cost. The provision for foreclosed asset losses and the
costs of holding and maintaining the property are included in the statement of
income caption "Foreclosed asset expenses."
INCOME TAXES
------------
At March 31, 1998 the Company has available approximately $1.594 million of
net operating losses based on its filed tax returns through December 31, 1997,
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 PER SHARE ("EPS")
--------------------------
Basic EPS excludes dilution from common stock equivalents and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from common stock equivalents, similar to the previously
utilized fully-diluted EPS, but uses only the average stock price during the
period as part of the computation.
LONG-TERM DEBT
--------------
The Company has a term note due June 1999 with an outstanding balance of
$136,000 at March 31, 1998. 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.
The Company has a mortgage payable with Firstrust Bank of $1,044,000 at
March 31, 1998. The mortgage is due in monthly payments, including interest at
8.25%, of $11,000 through February 2001 with the outstanding balance due in a
balloon payment of approximately $890,000. The mortgage is secured by real
estate with a carrying value of approximately $2,987,000.
10
<PAGE>
COMPREHENSIVE INCOME
--------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" effective for the first quarter of 1998.
Comprehensive Income is defined as the change in an entity's equity during the
period arising from transactions and other events from non-owner sources.
Comprehensive Income for the quarter ending March 31, 1998 and 1997 is as
follows:
March 31,
---------
1998 1997
------- -------
Net income ................................... $ 295 $ 1,052
Unrealized available-for-sale
security depreciation ....................... (1) (320)
------- -------
Comprehensive income ......................... $ 294 $ 732
======= =======
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. Each of the above orders and agreements have been discussed in
detail in its most recently filed Form 10-KSB for the year ended December 31,
1997. The Company believes that it and the Bank are substantially in compliance
with each of the above orders and agreements. The ratios and percentages
required by the order and agreements at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Actual at Required by the Order
March 31, 1998 And Agreements
-------------- --------------
<S> <C> <C>
Tier I Capital ................................ 12.90% 6.5%
Non Accrual to gross loans
as noted in June 30, 1995
examination report .......................... 2.05% 2.0%
Classified assets at
June 30, 1995 to 50% of
Tier I capital &
loan loss reserve ........................... 21.20% 50.0%
Fully funded loan
loss reserve ................................ Yes Yes
Dividend approvals
obtained .................................... Yes Yes
</TABLE>
11
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
Part I - Financial Information (Cont'd)
Item 2. - Management's Discussion and Analysis or Plan of Operations:
The consolidated financial review of the Company is intended to compare the
performance of the Company for the periods ended March 31, 1998 and 1997. The
review of the information presented should be read in conjunction with the
consolidated financial statements and the accompanying notes.
OVERVIEW
--------
The Company's total assets were $110.63 million at March 31, 1998, an
increase of $1.91 million from December 31, 1997. Net income for the first
quarter of 1998 was $295,000, or $0.08 per share, diluted, as compared to $1.052
million, or $0.30 per share, diluted, for the same period in 1997. This decrease
primarily resulted from lower gains on real estate investment and trading
portfolio.
On May 16, 1998, the Bank will observe its seventy-fifth anniversary and
has set several promotions and recognitions of this occasion throughout the
year. As a part of this program, the Bank has initiated a special promotion on
home-equity loans, for which it has received an excellent response. In addition,
the commercial loan demand has been very brisk since February 1998. At March 31,
1998, approximately $4.5 million of loan originations were pending final
settlement and/or approvals. Once approved, management believes these loans
should close during the second quarter of 1998.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO
--------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------
NET INCOME
----------
Net income for the first quarter of 1998 was $295,000 as compared to $1.052
million for the same period in 1997, a decline of $757,000. Net interest income
declined $69,000, mostly attributable to a temporary shift in earning assets due
to the payoff of several large loans and debt securities prematurely called from
the issuers during the first quarter of 1998. Other income decreased $621,000
during the first quarter of 1998 attributable to decline in trading securities
and real estate investment gains of $464,000 and $183,000, respectively, as
compared to the same period in 1997.
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 1.08% in 1998 as compared to 3.84% in
1997. The ROE was 8.14% for the first quarter of 1998 as compared to 33.60% in
1997.
12
<PAGE>
NET INTEREST INCOME
-------------------
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities. The
primary sources used to fund these assets were deposits, borrowed funds and
capital.
During the first quarter of 1998, interest and fee income on loans declined
$47,000, or 3.27%, mostly due to a decreased average loan balance of $2.332
million, or 3.73%, primarily as a result of a decrease in the commercial loan
portfolio from $34.273 million in the first quarter of 1997 to $31.295 million
in the first quarter of 1998. During the first quarter of 1998, commercial
repayments amounted to $5.025 million, while new originations amounted to $2.042
million. Included in the repayment total was approximately $2.90 million, which
represented loans which were originated as part of workout of previously
troubled loans. In addition, at March 31, 1998, approximately $2.90 million of
new originations were approved but not settled, while an additional $1.61
million were pending completion of review and evaluation of approval. The yield
on loans increased 4 basis points, from 9.19% at March 31, 1997 to 9.23% at
March 31, 1998.
Interest and dividend income on investment securities declined $100,000, or
20.53%, in the first quarter of 1998 compared to the first quarter of 1997,
primarily as a result of a $3.72 million reduction in the average balance of
investment securities. The primary reason for the reduction was several debt
securities which were called prior to maturity by the issuers. However, during
the first quarter of 1998, the Company purchased $4.499 million of securities,
which included several new debt securities with an interest rate higher than the
previously called securities. Mitigating the above decreases was an increase in
interest income earned on overnight funds of $67,000 for the first quarter of
1998 as compared to the same period in 1997.
Interest expense on deposits declined $23,000, or 2.61%, in the first
quarter of 1998 compared to the first quarter of 1997; however, interest expense
on other borrowed funds and long-term debt increased $13,000 during the first
quarter 1998 as compared to the same period in 1997. The average balance of
deposits declined $3.039 million during the first quarter of 1998 as compared to
the first quarter of 1997, primarily attributable to $6.82 million deposit sale
of the Bank's Quakertown Branch to the Quakertown National Bank on October 30,
1997, and mitigated in part by a new super now deposit account of a regional
nonprofit organization which maintained an average balance of $1 million for the
first three months of 1998. The average balance on savings deposits declined
$654,000 and also included a 3 basis point cost reduction, while the average
balance of time deposits decreased $2.385 million with a 13 basis point cost
increase, which was consistent with regional trends on time deposits.
For the first three months of 1998, as compared to the same period in 1997,
the average yield on interest-earning assets declined 25 basis points, while the
cost of interest-bearing liabilities increased 7 basis points, resulting in a
net decrease in the interest rate spread of 32 basis points. The net yield on
earning assets also declined 25 basis points during the first quarter of 1998
compared to the first quarter of 1997. Of the $69,000 decline in net interest
income in the first quarter of 1998 as compared to the first quarter of 1997, a
decline of $91,000 was attributable to reduced volume in average balances, while
an increase of $22,000 was directly impacted by interest rate changes.
13
<PAGE>
Distribution of Interest-Earning Assets and Interest-Bearing Liabilities:
Interest Rates and Interest Differential
The following tables set forth, for the periods indicated, information
regarding: ( a ) the average balances of asset and liability categories; ( b )
the total dollar amount of interest income from interest from interest-earning
assets (including mortgage loan origination fees representing yield adjustments)
and the resulting average yields; ( c ) the total dollar amount of interest
expense on interest-bearing liabilities and resulting average costs; ( d ) net
interest income; ( e ) interest rate spread; ( f ) net interest margin on
interest-earning assets; and ( g ) the ratio of average interest- earning assets
to average interest-bearing liabilities. Average balances are based on daily
balances.
<TABLE>
<CAPTION>
For the Quarter ended March 31,
(in thousands)
1998 1997
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $60,236 $ 1,390 9.23% $62,568 $ 1,437 9.19%
Investment securities 27,496 387 5.63 31,220 487 6.24
Bank time deposits 67 1 5.97 0 0 0.00
Overnight funds 6,754 89 5.27 1,699 22 5.18
------- ------- ------ ------- ------- ------
Total interest-earning assets $94,553 $ 1,867 7.90% $95,487 $ 1,946 8.15%
======= ------- ------ ======= ------- ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $34,626 $ 231 2.71% $35,280 $ 238 2.74%
Time deposits 47,380 627 5.37 49,765 643 5.24
Other borrowed funds 0 0 0.00 398 6 6.03
Long-term debt 1,195 25 8.37 259 6 9.27
------- ------- ------ ------- ------- ------
Total interest-bearing liabilities $83,201 $ 883 4.30% $85,702 $ 893 4.23%
======= ------- ------ ======= ------- ------
NET INTEREST INCOME $ 984 $ 1,053
======= =======
INTEREST RATE SPREAD 3.60% 3.92%
====== ======
NET INTEREST MARGIN
ON INTEREST- EARNING
ASSETS (2) 4.16% 4.41%
====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 113.64% 111.42%
====== ======
</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.
14
<TABLE>
<CAPTION>
For the Quarter ended March 31,
(in thousands)
1997 1996
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $62,568 $ 1,437 9.19% $55,199 $ 1,290 9.35%
Investment securities 31,220 487 6.24 30,491 468 6.14
Overnight funds 1,699 22 5.18 1,928 26 5.39
------- ------- ------ ------- ------- ------
Total interest-earning assets $95,487 $ 1,946 8.15% $87,618 $ 1,784 8.14%
======= ------- ------ ======= ------- ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,280 $ 238 2.74% $35,304 $ 245 2.79%
Time deposits 49,765 643 5.24 47,689 635 5.36
Other borrowed funds 398 6 6.03 701 10 6.64
Long-term debt 259 6 9.27 368 8 8.60
------- ------- ------ ------- ------- ------
Total interest-bearing liabilities $85,702 $ 893 4.23% $84,062 $ 898 4.30%
======= ------- ------ ======= ------- ------
NET INTEREST INCOME $ 1,053 $ 886
======= ======
INTEREST RATE SPREAD 3.92% 3.84%
====== ======
NET INTEREST MARGIN
ON INTEREST-EARNING
ASSETS (2) 4.41% 4.05%
====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 111.42% 104.23%
====== ======
</TABLE>
- ----------
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
15
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income and
Interest Expense:
The following table presents the extent to which net interest income
changed due to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities during the periods
indicated. Information provided in each category with respect to changes
attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rate multiplied by prior
volume) and the net change. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
March 31, 1998 vs. 1997 March 31, 1997 vs. 1996
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 $(186) $ 139 $ (47) $ 224 $ (77) $ 147
Investment securities (43) (57) (100) 14 5 19
Bank time deposits 1 0 1 0 0 0
Overnight funds 67 0 67 (3) (1) (4)
----- ----- ----- ----- ----- -----
Total interest-earning assets $(161) $ 82 $ (79) $ 235 $ (73) $ 162
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits $ (6) $ (1) $ (7) $ (2) $ (5) (7)
Time deposits (84) 68 (16) 66 (58) 8
Other borrowed funds (3) (3) (6) (8) 4 (4)
Long-term debt 23 (4) 19 (5) 3 (2)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ (70) $ 60 $ (10) $ 51 $ (56) $ (5)
----- ----- ----- ----- ----- -----
CHANGE IN NET INTEREST INCOME $ (91) $ 22 $ (69) $ 184 $ (17) $ 167
===== ===== ===== ===== ===== =====
</TABLE>
16
<PAGE>
OTHER INCOME
------------
Total other income declined $621,000 during the first quarter of 1998 as
compared to the same period in 1997, mostly attributable to lower gains of
$183,000 and $464,000 recognized on its real estate investment and trading
securities portfolios, respectively. The Company's trading securities are
carried at fair value and consist principally of common stock of bank holding
companies. Through March 31,1998, the financial services sector did not continue
to appreciate consistently with the overall market gains, after being one of the
leading performers during the past several quarters. Management continues to
closely monitor its investment portfolio to position the portfolio against
future fluctuations in the stock market. A downturn in the overall market could
result in future trading securities losses. Rental income increased $45,000 in
the first quarter of 1998 as a result of the Company receiving the controlling
interest of real estate partnership in December of 1997. After receipt of this
interest, the Company was required under generally accepted accounting
principles to include all of the accounts in its consolidated totals.
Previously, the Company recorded its investment under the equity method.
OTHER EXPENSES
--------------
Other expenses increased $37,000, or 3.73%, during the first three months
of 1998 as compared to the same period in 1997. Salaries and employee benefits
increased $79,000, or 23.03%, in the first quarter of 1998 as a result of the
new branch opening during the second quarter 1997 and additional staffing in the
credit and collection department. However, the Bank's FDIC insurance premium
declined $33,000, or 76.74%, as the result of an improvement in the Bank's risk
classification effective July 1, 1997.
PROVISION FOR LOAN LOSSES
-------------------------
The allowance for loan losses was $1.815 million at March 31, 1998,
compared to $1.586 million at December 31, 1997. The allowance equaled 2.89% of
loans at March 31, 1998, as compared to 2.46% at December 31, 1997.
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
17
<PAGE>
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 $100,000 or more, which demonstrates any recent delinquency
characteristics or other weaknesses, to assure the adequacy of the allowance and
provision for loan losses.
At monthly meetings, the Credit Administration Committee is presented with
the adequacy test of the allowance for loan losses that contains information
relative to both specific credits and the total portfolio in general. The
information is used to determine the adjustment needed for the allowance to be
properly stated. In establishing the adjustment required, management considers a
variety of factors, including, but not limited to, general economic factors and
potential losses from significant borrowers. The Bank continues to strengthen
its underwriting process and internal loan review process by implementing
stringent analytical standards in the loan approval and review procedures.
At March 31, 1998, based on management's evaluation as outlined above, the
amount charged to operating expense for the provision for loan losses was
$75,000 compared to $45,000 charged at March 31, 1997.
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 March 31, 1998 (in thousands):
Beginning Balance, January 1, 1998 ........................... $ 1,586
-------
Charge-offs:
Commercial, financial and agricultural .................... --
Real estate - construction ................................ 26
Real estate - mortgage .................................... 37
Installment loans to individuals .......................... 157
-------
Total charge-offs ............................................ 220
-------
Recoveries:
Commercial, financial and agricultural .................... 6
Real estate - construction ................................ 99
Real estate - mortgage .................................... 244
Installment loans to individuals .......................... 25
-------
Total recoveries ............................................. 374
-------
Net charge-offs .............................................. (154)
-------
Provision for loan losses .................................... 75
-------
Ending Balance, March 31, 1998 ............................... $ 1,815
=======
Ratio of net recoveries to
average loans outstanding ................................. 0.24%
18
<PAGE>
FINANCIAL CONDITION
-------------------
At March 31, 1998, the Company's total assets were $110.63 million as
compared to $108.72 million at December 31, 1997, representing an increase of
$1.91 million which is mostly attributable to $1.94 million growth in its
deposits since December 31, 1997.
Loans
Net loans decreased $1.82 million from $62.82 million at December 31, 1997
to $61.0 million at March 31, 1998. As mentioned earlier, the Bank experienced
several large commercial repayments in January 1998, including approximately
$2.9 million of loans from a workout of existing problem loans. However, at
March 31, 1998, $4.51 million of new originations were pending; $2.9 million
were approved waiting for settlements, while the balance, $1.61 million, was
pending final review and approvals.
All categories of loans, as outlined below, declined at March 31, 1998 as
compared to December 31, 1997, except for residential real estate loans which
increased $1.04 million during the first quarter of 1998, as a result of a
purchase of $2 million of residential real estate loans in February 1998. The
change in the composition of loans at March 31, 1998 as compared to December 31,
1997 is as follows: Real estate construction loans declined $1.023 million, or
22.14%; Commercial real estate declined $223,000, or 1.21%; Consumer loans
declined $1.29 million, or 9.51%, Commercial loans decreased $93,000, or 2.72%;
while Residential real estate loans increased $1.04 million, or 4.27%.
The following table sets forth the maturity and repricing schedule of the
loan portfolio at March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
After one After
Within but within five
One year five years years Total
-------- ---------- ----- -----
<S> <C> <C> <C> <C>
Maturity Schedule:
Commercial .................... $ 1,331 $ 1,065 $ 603 $ 2,999
Real estate-construction ...... 1,924 639 527 3,090
Real estate-mortgage .......... 8,923 18,742 13,352 41,017
Consumer, net ................. 1,251 9,887 1,053 12,191
Nonaccrual loans .............. -- -- -- 3,517
------- ------- ------- -------
Total .............................. $13,429 $30,333 $15,535 $62,814
======= ======= ======= =======
Repricing Schedule (1):
Fixed rate loans .............. $13,516 $26,901 $ 5,634 $46,051
Floating rate loans ........... 12,223 718 305 13,246
Nonaccrual loans .............. -- -- -- 3,517
------- ------- ------- -------
Total .............................. $25,739 $27,619 $ 5,939 $62,814
======= ======= ======= =======
</TABLE>
- ----------
(1) Data for repricing schedule by loan categories is not available.
19
<PAGE>
Investment Securities
The primary objectives of the Company's investment strategy are to provide
and maintain a level of liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk and to promote the
Company's lending activities.
The largest sector of the investment portfolio remains securities of U.S.
Government agencies and corporations, which totaled $21.68 million (amortized
costs) at March 31, 1998, or 71.18% of total investment securities. Included in
the above are $2.865 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 at March 31, 1998.
The available-for-sale securities increased $1.61 million, or 8.98%, from
$17.91 million at December 31, 1997 to $19.52 million at March 31, 1998. During
the first quarter 1998, $4.5 million in bonds were purchased to replace $2.75
million in bonds which were called by their issuers.
At the present time, the Company does not engage in the use of derivative
investment products as a mean to hedge the risks in its investment, loan or
deposit portfolio.
Deposits
The Company continues to offer a variety of deposit accounts with a range
of interest rates and term options. The deposits consist primarily of checking,
savings, super now, money market and certificates of deposit. Fluctuation within
its deposit base are influenced by competition, economic conditions and changes
in current rates.
Total deposits increased $1.94 million from $92.146 million at December 31,
1997 to $94.081 million at March 31, 1998, primarily the result of a new super
now account of $2 million received from a regional nonprofit organization.
Management believes that this depositor will maintain at least $1.5 million
average deposit throughout 1998. At March 31, 1998, noninterest-bearing deposits
declined $1.27 million, while interest-bearing deposits increased $3.21 million
as compared to December 31, 1997. As a percentage of total deposits, savings,
club accounts and interest-bearing demand deposits represented 38.80% at March
31, 1998 as compared to 36.43% at December 31, 1997. There were no brokered
deposits within the Company's deposit base at March 31, 1998.
20
<PAGE>
The following table sets forth maturities of time deposits of $100,000
or more at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Three months or less ....................... $2,316 $2,124
Over three months through
twelve months ....................... 3,163 2,641
Over one year through
five years .......................... 1,935 2,528
Over five years ............................ 0 0
------ ------
TOTAL ............................... $7,414 $7,293
====== ======
</TABLE>
NONPERFORMING ASSETS
--------------------
Nonperforming assets include nonperforming loans and foreclosed assets held
for sale. Nonperforming loans consist of impaired and other loans where the
principal, interest, or both, is 90 or more days past due and loans that have
been placed on nonaccrual. When loans are placed on nonaccrual status, income
from the current period is reversed from current earnings and interest from
prior periods is charged to the allowance for loan losses. Similarly, consumer
loans are considered nonaccrual if the collateral is insufficient to recover the
principal or are charged-off if deemed to be uncollectible. Foreclosed assets
consist of assets acquired through foreclosure or real estate acquired by
acceptance of a deed in lieu of foreclosure.
The following table represents nonperforming assets of the Company at
March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Impaired loans ......................................... $ 3,517 $ 3,364
Other loans past due 90 days or more ................... 285 421
------- -------
Total nonperforming loans .......................... 3,802 3,785
Foreclosed assets held for sale ........................ 1,373 1,597
------- -------
Total nonperforming assets ......................... $ 5,175 $ 5,382
======= =======
Nonperforming loans as a percentage
of loans (net of unearned interest) ................ 6.05% 5.88%
Nonperforming assets as a percentage of assets ......... 4.68% 4.95%
</TABLE>
21
<PAGE>
Impaired loans increased $153,000 at March 31, 1998 as compared to December
31, 1997. Real estate loans represent $3.103 million of the impaired loan total,
while loans to consumer and commercial borrowers represent the balance of
$90,000 and $324,000, respectively.
Loans past due 90 days or more decreased $136,000 from $421,000 at December
31, 1997 to $285,000 at March 31, 1998. All delinquent loans are reviewed by
management on a weekly basis with regard to legal proceedings and collection
efforts. Of the delinquent loans, 94.39% are secured by real estate, 4.91% are
loans to consumers and a small fraction to commercial borrowers.
Foreclosed assets held for sale decreased $224,000 from $1.597 million at
December 31, 1997 to $1.373 million at March 31, 1998.
The following table sets forth the total of commercial and investment
properties at March 31, 1998, all of which are currently in litigation and/or
foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days ........................ $1,505,655
Foreclosed assets held for sale .................. 495,806
----------
Total ............................................ $2,001,461
==========
The following table sets forth the total of residential properties to be
foreclosed upon and liquidated at March 31, 1998, 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 ........................ $ 850,229
Foreclosed assets held for sale .................. 498,265
----------
Total ............................................ $1,348,494
==========
The following table sets forth the total of land developments and building
lots to be foreclosed upon and liquidated at March 31, 1998, 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 ........................ $ 758,982
Foreclosed assets held for sale .................. 209,963
---------
Total ............................................ $ 968,945
=========
The following table sets forth the total of loans in litigation that are
not secured by real estate at March 31, 1998.
Secured by Other Than Real Estate:
Impaired and over 90 days......................... $ 406,871
=========
22
<PAGE>
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 March 31, 1998.
Performing/Nonperforming Assets:
Impaired and over 90 days......................... $ 220,871
==========
The following table sets forth the total of assets that are under agreement
or are being paid off with the settlement dates to take place in the second
quarter of 1998.
Assets Under Agreement or Payoffs:
Impaired & over 90 days........................... $ 60,000
Foreclosed assets held for sale .................. 168,831
---------
Total............................................. $ 228,831
=========
At March 31, 1998, 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 the borrowers' ability
to comply with the current loan repayment terms.
For 1998, management has established a goal to dispose of $4.0 million of
gross classified and/or nonperforming assets. As of March 31, 1998, the gross
reduction in classified and/or nonperforming assets was $1.037 million; however,
during the quarter ended March 31, 1998, $1.818 million was added to classified
and/or nonperforming assets, resulting in a net increase in classified and/or
nonperforming assets of $780,000. Although, the net change during the first
quarter of 1998 adversely affected management's goals for 1998, the Bank remains
substantially in compliance at March 31, 1998 with the regulatory requirements
pertaining to classified assets as discussed in the "Regulatory Matters" in part
I of this form 10-QSB, and committed to reach its goal for the balance of 1998.
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, the level of interest rates and competition. The Company
manages its balance sheet to provide adequate liquidity based on various
economic, interest rate and competitive assumptions and in light of
profitability measures.
At March 31, 1998, the Company maintained $9.74 million in cash and cash
equivalents in the form of cash and due from banks (after reserve requirements).
In addition, the Company had $19.517 million in securities available-for-sale
representing 17.64% of total assets at March 31, 1998.
The Company considers its primary source of liquidity to be its core
deposit base and
23
<PAGE>
continues to promote the acquisition of deposits through its branch offices. At
March 31, 1998, approximately 78.34% of the Company's assets were funded by core
deposits acquired within its market area. An additional 13.13% of the assets
were funded by the Company's equity. These two components provide a substantial
and stable source of funds.
The Company paid cash dividends to the holders of the Senior Preferred
Stock and Series A Preferred Stock during the first quarter of 1998. There were
no dividends paid to its preferred or common stockholders for the same period in
1997.
<TABLE>
<CAPTION>
Date
Class of Stock Paid Current Arrears Total
- -------------- ---- ------- ------- -----
<S> <C> <C> <C> <C>
Senior Preferred February 4, 1998 $56,272 --- $ 56,272
Series A Preferred February 4, 1998 $55,498 $110,945 $166,493
</TABLE>
In addition, on March 25, 1998, the Company's Board of Directors declared a
dividend on both the Senior Preferred Stock and Series A Preferred Stock to
holders of record on March 25, 1998. This declaration included an aggregate of
$56,085 on its Senior Preferred Stock for the first quarter of 1998 and an
aggregate of $166,493 on its Series A Preferred Stock, which represented the
first quarter 1998 dividend of $55,498 and $110,995 for dividend in arrears.
After payment of the $166,493, $832,467 remains in arrears on the Series A
Preferred Stock as of March 31, 1998.
The Bank is subject to certain restrictions under Pennsylvania law relating
to the declaration and payment of dividends. Dividends may be declared and paid
only out of accumulated net earnings (undivided profits). Where surplus is less
than 50% of the amount of the Bank's capital (defined as par value multiplied by
the number of shares outstanding), no dividend may be paid or declared without
the prior approval of the Department until surplus is equal to 50% of the total
amount of capital. Where surplus is equal to or greater than 50% but less than
100% of capital, until such time as surplus equals capital, the Bank must
transfer at least 10% of its net earnings to surplus prior to the declaration of
a dividend. The Department has the power to issue orders prohibiting the payment
of dividends where such payment is deemed to be an unsafe or unsound banking
practice. The Company's ability to pay dividends is also impacted by the
regulatory orders and agreements to which it and the Bank are subject.
Cash flows for the quarter ended March 31, 1998 provided $1.659 million as
compared to $368,000 provided during the quarter ended March 31, 1997. 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 decreased $427,000 during the quarter
ended March 31, 1998, mostly attributable to decreased net income of $757,000.
Cash flows generated from investing activities decreased $153,000 during the
quarter ended March 31, 1998, as compared to the same period in 1997. Loans
decreased $1.588 million during the quarter ended March 31, 1998, due to
24
<PAGE>
several large commercial repayments; however, management believes that the level
of loans should improve as approximately $4.5 million of new loan originations
were in process at March 31, 1998. Also, $2.881 million of debt securities were
prematurely called by the issuers, while these and additional proceeds in
aggregate of $4.499 million were reinvested in debt securities with more
attractive interest rates. Cash flows from financing activities increased $1.871
million during the first quarter of 1998, due to an increase in deposits of
$955,000, most of which was attributable to one large not-for-profit depositor
in 1998. Also in 1997, the Company repaid a repurchase agreement which was
outstanding at December 31, 1996 in the amount of $1.150 million.
INTEREST RATE SENSITIVITY
-------------------------
Interest rate sensitivity management involves the matching of maturity and
repricing dates of interest-earning assets and interest-bearing liabilities to
help insure the Company's earnings against extreme fluctuations in interest
rates.
The effect of interest rate changes on the Company's assets and liabilities
may be analyzed by monitoring the Company's interest rate sensitivity gap
("GAP"). An asset or liability is said to be interest-rate sensitive within a
specific time period if it will mature or reprice within a given time period.
The interest rate sensitivity GAP is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A positive GAP (asset sensitive) indicates that more
assets reprice during a given period compared to liabilities, while a negative
GAP (liability sensitive) has the opposite effect.
The Company's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This is accomplished through the measurement of the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. The goal
of maintaining a reasonable balance between interest rate sensitive assets and
interest rate sensitive liabilities is accomplished through the Company's
asset/liability management program.
At March 31, 1998 the Company has a negative interest sensitive GAP of
$5.045 million, or 5.12% of total interest-earning assets which have been
adjusted for the depreciation on securities available-for-sale. The effect of
this GAP position provides a negative mismatch of assets and liabilities which
exposes the Company to interest rate risk during a period of rising interest
rates. A significant item contributing to the short-term negative gap is $17.06
million of interest-bearing demand and saving 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.
25
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at March 31, 1998:
<TABLE>
<CAPTION>
March 31,
1998
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) $ 16,515 $ 697 $ 1,091 $ 1,485 $ 19,444 $ 39,232
Loans (2) 19,227 6,512 8,231 19,388 5,939 59,297
-------- -------- -------- -------- -------- --------
TOTAL $ 35,742 $ 7,209 $ 9,322 $ 20,873 $ 25,383 $ 98,529
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand-interest bearing $ 16,364 $ -- $ -- $ -- $ -- $ 16,364
Savings and clubs (3) 692 1,039 1,386 4,157 12,868 20,142
Time 13,930 15,787 12,896 4,978 -- 47,591
Long-term debt 160 24 52 940 -- 1,176
-------- -------- -------- -------- -------- --------
TOTAL $ 31,146 $ 16,850 $ 14,334 $ 10,075 $ 12,868 $ 85,273
-------- -------- -------- -------- -------- --------
GAP $ 4,596 ($ 9,641) ($ 5,012) $ 10,798 $ 12,515 $ 13,256
-------- -------- -------- -------- -------- --------
Cumulative GAP $ 4,596 ($ 5,045) ($10,057) $ 741 $ 13,256 $ 13,256
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $7.352 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 $3.517
million.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
26
<PAGE>
CAPITAL
-------
The adequacy of the Company's capital is reviewed on an ongoing basis with
reference to size, composition and quality of the Company's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
As required by the federal banking regulatory authorities, new guidelines
have been adopted to measure capital adequacy. Under the guidelines, certain
minimum ratios are required for core capital and total capital as a percentage
of risk-weighted assets and other off balance sheet instruments. For the
Company, Tier I capital consists of shareholders' equity less intangible assets,
and Tier II capital includes the allowable portion of the allowance for loan
losses, currently limited to 1.25% of risk-weighted assets.
The following table sets forth the capital ratios of the Bank as of March
31, 1998 and 1997.
March 31,
Regulatory ---------
Requirements 1998 1997
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio 4.0%* 12.90% 11.31%
Risk-based capital ratios:
Tier I capital/risk-weighted 4.0% 18.64% 15.81%
Tier I and Tier II capital/
Risk-weighted assets 8.0% 19.90% 17.07%
* 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 BIF assessment will be less
than $13,000 based on March 31, 1998 deposit levels and based on available rate
information. However, the FDIC may increase the projected rates at anytime.
27
<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 directed to Mr. Leuthe initiated administrative proceedings in
which the FDIC, as a result of transactions occurring prior to 1993, 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. Mr.
Leuthe has denied wrongdoing and is defending these actions.
Neither the Company nor the Bank is a party to these proceedings.
On February 13, 1998, the administrative law judge of the FDIC issued a
decision recommending the prohibition of Mr. Leuthe from future participation in
the affairs of any federally insured financial institution and the assessment of
a civil monetary penalty in the sum of $250,000 against Mr. Leuthe. On March 13,
1998, Mr. Leuthe filed exceptions to the recommended decision with a supporting
Memorandum of Law and Request for Oral Argument. Those exceptions will be heard
by the full FDIC Board of Directors. The FDIC Board of Directors will likely
render their decision by mid-June 1998. After that decision is issued, either
party will have the right to take an appeal to the United States Court of
Appeals for the District of Columbia or to the United States Court of Appeals
for the Third Circuit within 30 days of the date of the decision.
Under both the Company's and the Bank's Bylaws, the Company and the Bank
are required to indemnify Mr. Leuthe in connection with the administrative
proceedings brought against him by reason of the fact that he is or was an
officer and director of the Bank. However, Mr. Leuthe is 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 constituted willful misconduct or
recklessness. While it is difficult to determine the amount of indemnification
in this case, the Company believes at this time
28
<PAGE>
that the amount will not materially and adversely affect the Company's financial
condition.
The Company carries Director's and Officer's Liability Insurance coverage,
and it initially submitted a claim for reimbursement of its expenses in
connection with these proceedings. The Company's insurance carrier responded by
disputing coverage, raising, among other things, the position that the insurance
carrier did not receive timely notice of the proceedings. The Company disputes
the insurance carrier's position, and has recently instituted a suit against the
carrier in the Court of Common Pleas for Lehigh County to litigate this coverage
issue.
29
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed with this Form 10-QSB:
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of the
Company, as amended (incorporated by
reference to Exhibit 3.1 to the
Company's Form SB-2 Registration
Statement No. 33-71712).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Form SB-2 Registration
Statement No. 33-71712).
11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On March 13, 1998, the Company filed a Current Report on
Form 8-K to report under Item 5 the decision of the
administrative law judge of the FDIC regarding the
proceedings against the Company's Chairman and Chief
Executive Officer.
30
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST LEHIGH CORPORATION
Date: May 7, 1998 By: /s/ James L. Leuthe
-------------------------------------
James L. Leuthe, Chairman
of the Board and Chief
Executive Officer
Date: May 7, 1998 By: /s/ Kashmira K. Lodaya
-------------------------------------
Kashmira K. Lodaya, Treasurer
(principal financial and
accounting officer)
31
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
3.1 Articles of Incorporation of the Company,
as amended (incorporated by reference to
Exhibit 3.1 to the Company's Form SB-2
Registration Statement No. 33-71712).
3.2 Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's
Form SB-2 Registration Statement
No. 33-71712).
11.1 Statement re: Computation of Per Share 33
Earnings.
27 Financial Data Schedule. 34 - 35
32
<PAGE>
FIRST LEHIGH CORPORATION
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
MARCH MARCH
BASIC EPS: 31 1998 31 1997
--------- ---------
NET INCOME 294,761 1,051,650
LESS PREFERRED STOCK DIVIDENDS:
SERIES A (55,498) (55,498)
SENIOR (56,085) (56,273)
--------- ---------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS 183,178 939,879
--------- ---------
COMMON STOCK OUTSTANDING: 2,050,900 2,000,000
--------- ---------
EARNINGS PER SHARE - BASIC 0.09 0.47
========= =========
MARCH MARCH
DILUTED EPS: 31, 1998 31, 1997
--------- ---------
NET INCOME 294,761 1,051,650
--------- ---------
DILUTED EFFECT OF POTENTIAL
COMMON STOCK:
COMMON STOCK 2,050,900 2,000,000
STOCK OPTIONS 60,000 60,000
HYPOTHETICAL SHARE REPURCHASE (1) (28,000) (36,522)
COMMON SHARES ISSUED UPON
ASSUMED CONVERSION:
SERIES A (2) 545,600 545,600
SENIOR (3) 899,463 900,363
--------- ---------
DILUTIVE COMMON STOCK
OUTSTANDING: 3,527,963 3,469,441
--------- ---------
EARNINGS PER SHARE - DILUTED 0.08 0.30
========= =========
- ----------
(1) ASSUMES CONVERSION OF THE STOCK OPTIONS INTO COMMON SHARES USING TREASURY
STOCK METHOD OF COMPUTATION.
(2) 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.
(3) ASSUMES CONVERSION OF SENIOR PREFERRED SHARES INTO COMMON STOCK AT FULL
VALUE SINCE THE BASE VALUE APPROXIMATES MARKET VALUE.
33
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0
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