U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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
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(Address of principal executive offices)
(Zip Code)
(610) 398-6660
---------------------------------------------------------------
(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) 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: 2,056,140 shares of common stock, par value $.01 per share, as
of June 30, 1998.
Transitional Small Business Disclosure Format (check one):
Yes ___ No |X|
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Part I - Financial Information Page Number
- ------------------------------ -----------
Item 1. Financial Statements:
Consolidated Balance Sheet as of September 30, 1998
and December 31, 1997................................... 3
Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997................ 4 - 5
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997................ 6 - 7
Consolidated Statement of Cash Flows for the nine
months ended September 30, 1998 and 1997................ 8 - 9
Consolidated Statement of Cash Flows for the three
months ended September 30, 1998 and 1997................ 10 - 11
Notes to Consolidated Financial Statements................ 12 - 15
Item 2. Management's Discussion and Analysis or Plan
of Operations........................................... 16 - 35
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings......................................... 36 - 37
Item 6. Exhibits and Reports on Form 8-K.......................... 38
Signatures................................................ 39
2
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(in thousands)
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash and due from banks ............................................. $ 8,940 $ 7,470
Federal funds sold .................................................. 1,691 611
--------- ---------
Cash and cash equivalents ................................. 10,631 8,081
Securities held-to-maturity (estimated fair
value of $4,111 and $3,990, respectively) .......................... 4,077 4,085
Securities available-for-sale ....................................... 20,826 17,908
Trading securities .................................................. 7,877 7,571
Loans ............................................................... 60,132 64,636
Less: unearned income ........................................... (139) (230)
allowance for loan losses ................................. (1,861) (1,586)
--------- ---------
Net loans ............................................. 58,132 62,820
Premises and equipment, net ......................................... 4,209 4,365
Foreclosed assets held for sale, net ................................ 1,994 1,597
Other assets ........................................................ 2,259 2,292
--------- ---------
Total Assets .............................................. $ 110,005 $ 108,719
========= =========
LIABILITIES
- -----------
Deposits:
Noninterest-bearing .............................................. $ 10,683 $ 11,258
Interest-bearing ................................................. 84,731 80,888
--------- ---------
Total Deposits ............................................ 95,414 92,146
Long-term debt ...................................................... 1,098 1,214
Other liabilities ................................................... 1,460 909
--------- ---------
Total Liabilities ......................................... 97,972 94,269
--------- ---------
SHAREHOLDERS' INVESTMENT
- ------------------------
Senior preferred stock, par value of $.01 per share,
1,500,000 shares authorized, 894,223 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; 2,056,140 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, including partners' equity from partnership
included in consolidation ......................................... 2,494 5,268
Net unrealized appreciation (depreciation) on securities
available-for-sale ................................................ 332 (25)
--------- ---------
Total Shareholders' Investment ............................ 12,033 14,450
--------- ---------
Total Liabilities and Shareholders' Investment ............ $ 110,005 $ 108,719
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
----------- -----------
(in thousands, except per share data)
(Unaudited)
INTEREST INCOME:
<S> <C> <C>
Interest and fees on loans .................................. $ 4,104 $ 4,442
Interest and dividends on investment securities:
Taxable interest income .................................... 1,131 1,281
Dividends .................................................. 129 120
Interest on time deposits ................................... 1 0
Interest on overnight funds ................................. 263 108
----------- -----------
Total Interest Income ............................. 5,628 5,951
----------- -----------
INTEREST EXPENSE:
Interest on deposits ........................................ 2,662 2,701
Interest on other borrowed funds ............................ 0 15
Interest on long-term debt .................................. 72 16
----------- -----------
Total Interest Expense ............................ 2,734 2,732
----------- -----------
NET INTEREST INCOME ......................................... 2,894 3,219
PROVISION FOR LOAN LOSSES ................................... 225 603
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................................ 2,669 2,616
----------- -----------
OTHER INCOME:
Service charges, fees and other income ...................... 412 367
Gain on sale of foreclosed assets, net ...................... 7 75
Gain on sale of real estate investment ...................... 0 183
Rental income ............................................... 137 0
Realized gains on investment securities, net ................ 0 17
Trading securities (losses) gains, net ...................... (1,610) 2,990
----------- -----------
Total Other Income ................................ (1,054) 3,632
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits .............................. 1,246 1,142
Net occupancy expense ....................................... 303 321
Equipment expense ........................................... 155 158
FDIC insurance .............................................. 30 96
Foreclosed asset expenses ................................... 157 482
Other ....................................................... 1,219 1,364
----------- -----------
Total Other Expenses .............................. 3,110 3,563
----------- -----------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES ........................................ (1,495) 2,685
PROVISION FOR INCOME TAXES .................................. 0 0
----------- -----------
NET (LOSS) INCOME ........................................... $ (1,495) $ 2,685
=========== ===========
EARNINGS PER SHARE - BASIC .................................. $ (0.89) $ 1.17
=========== ===========
EARNINGS PER SHARE - DILUTED ................................ $ (0.89) $ 0.77
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Common ................................................... 2,053,907 2,000,000
Common Share Equivalents ................................. 3,523,217 3,466,893
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
----------- -----------
(in thousands, except per share data)
(Unaudited)
INTEREST INCOME:
<S> <C> <C>
Interest and fees on loans ..................... $ 1,341 $ 1,482
Interest and dividends on investment securities:
Taxable interest income ....................... 398 406
Dividends ..................................... 52 35
Interest on overnight funds .................... 86 62
----------- -----------
Total Interest Income ................ 1,877 1,985
----------- -----------
INTEREST EXPENSE:
Interest on deposits ........................... 911 934
Interest on other borrowed funds ............... 0 0
Interest on long-term debt ..................... 23 5
----------- -----------
Total Interest Expense ............... 934 939
----------- -----------
NET INTEREST INCOME ............................ 943 1,046
PROVISION FOR LOAN LOSSES ...................... 75 513
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................... 868 533
----------- -----------
OTHER INCOME:
Service charges, fees and other income ......... 131 123
Gain on sale of foreclosed assets, net ......... 7 49
Rental income .................................. 45 0
Trading securities (losses) gains, net ......... (1,780) 1,478
----------- -----------
Total Other Income ................... (1,597) 1,650
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits ................. 416 423
Net occupancy expense .......................... 102 108
Equipment expense .............................. 50 51
FDIC insurance ................................. 10 10
Foreclosed asset expenses ...................... 53 320
Other .......................................... 429 542
----------- -----------
Total Other Expenses ................. 1,060 1,454
----------- -----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES ............................ (1,789) 729
PROVISION FOR INCOME TAXES ..................... 0 0
----------- -----------
NET (LOSS) INCOME .............................. $ (1,789) $ 729
=========== ===========
EARNINGS PER SHARE - BASIC ..................... $ (0.92) $ 0.31
=========== ===========
EARNINGS PER SHARE - DILUTED ................... $ (0.92) $ 0.21
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Common ...................................... 2,056,140 2,000,000
Common Share Equivalents .................... 3,519,737 3,466,893
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
7
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ...................................... $ (1,495) $ 2,685
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for loan losses .............................. 225 603
Provision for foreclosed asset losses .................. 17 222
Depreciation ........................................... 219 131
Amortization and accretion ............................. 41 11
Realized gain on investment securities, net ............ 0 (17)
Net increase in trading securities ..................... (306) (378)
Gain on sale of premises and equipment ................. (12) 0
Loss (gain) on sale of foreclosed assets held for sale 21 (75)
Gain on sale of real estate and other investments ...... 0 (183)
Change in:
Other assets ........................................ 113 (364)
Other liabilities ................................... (60) (165)
-------- --------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES ............................... (1,237) 2,470
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ............................. 6,653 1,710
Purchase of securities ............................... (9,247) 0
Net decrease (increase) in loans ....................... 3,350 (3,476)
Proceeds from sale of premises and equipment ......... 37 27
Capital expenditures for premises and equipment ........ (88) (369)
Proceeds from sales of foreclosed assets ............... 558 2,120
Capitalized expenditures for foreclosed assets ......... (57) (81)
Proceeds from sales of real estate and other investments 0 174
Proceeds from sales of other assets .................... 97 192
-------- --------
NET CASH PROVIDED BY
INVESTING ACTIVITIES ................................ 1,303 297
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................... 3,268 2,365
Net decrease in other borrowed funds ................... 0 (1,200)
Payment on long-term debt ............................ (116) (82)
Dividend payments ...................................... (668) (516)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .................................. 2,484 567
-------- --------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NET INCREASE
IN CASH AND CASH EQUIVALENTS ............................. 2,550 3,334
CASH AND CASH EQUIVALENTS, BEGINNING ......................... 8,081 4,620
-------- --------
CASH AND CASH EQUIVALENTS, ENDING ............................ $ 10,631 $ 7,954
======== ========
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ................................. $ 2,739 $ 2,729
Cash paid for income taxes ............................. $ 22 $ 47
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On September 16, 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 September 16, 1998. The Senior Preferred Stock third
quarter 1998 dividend of $55,889 and Series A Preferred Stock third quarter 1998
dividend of $55,498, as well as all previously accumulated dividends on the
Series A Preferred Stock of $721,471, have been included in other liabilities.
</TABLE>
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 SEPTEMBER 30,
1998 1997
-------- --------
(in thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ...................................... $ (1,789) $ 729
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for loan losses ............................. 75 513
Provision for foreclosed asset losses ................. 17 222
Depreciation .......................................... 73 51
Amortization and accretion ............................ 17 4
Net decrease in trading securities .................. 1,948 46
Gain on sale of premises and equipment ................ (18) 0
Loss (gain) on sale of foreclosed assets held for sale 21 (56)
Change in:
Other assets ........................................ 48 180
Other liabilities ................................... (39) 14
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................... 353 1,703
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ............................. 2,887 84
Purchase of securities ............................... (3,248) 0
Net decrease (increase) in loans ....................... 2,111 (194)
Net decrease in loans held for sale .................... 210 0
Proceeds from sale of premises and equipment ........... 24 0
Capital expenditures for premises and equipment ........ (9) (1)
Proceeds from sales of foreclosed assets ............... 180 965
Capitalized expenditures for foreclosed assets ......... (19) (2)
Proceeds from sales of other assets .................... 32 109
-------- --------
NET CASH PROVIDED BY
INVESTING ACTIVITIES ................................ 2,168 961
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................... 350 345
Net decrease in borrowed funds ......................... 0 (50)
Payment on long-term debt .............................. (39) (28)
Dividend payments ...................................... (223) (222)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .................................. 88 45
-------- --------
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
NET INCREASE
IN CASH AND CASH EQUIVALENTS ............................. 2,609 2,709
CASH AND CASH EQUIVALENTS, BEGINNING ......................... 8,022 5,245
-------- --------
CASH AND CASH EQUIVALENTS, ENDING ............................ $ 10,631 $ 7,954
======== ========
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ................................. $ 926 $ 936
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On September 16, 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 September 16, 1998. The Senior Preferred Stock third
quarter 1998 dividend of $55,889 and Series A Preferred Stock third quarter 1998
dividend of $55,498, as well as all previously accumulated dividends on the
Series A Preferred Stock of $721,471, have been included in other liabilities.
</TABLE>
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, 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.
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.
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.
13
<PAGE>
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of fair value
minus costs to sell or cost. The provision for foreclosed asset losses and the
costs of holding and maintaining the property are included in the statement of
income caption "Foreclosed asset expenses."
INCOME TAXES
At September 30, 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.
STATEMENT OF CASH FLOWS
The Company transferred approximately $936,000 from loans to foreclosed
assets held for sale during the nine months ended September 30, 1998.
LONG-TERM DEBT
The Company has a term note due June 1999 with an outstanding balance of
$82,000 at September 30, 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 $1,016,000 at
September 30, 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 $2,947,000.
14
<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 September 30, 1998 and 1997 is as
follows:
September 30,
-------------
1998 1997
-------- -------
Net (loss) income.......................... $(1,495) $2,685
Unrealized available-for-sale
securities appreciation................... 357 193
-------- -------
Comprehensive (loss) income................ $(1,138) $2,878
======== =======
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 in compliance with each of
the above orders and agreements. The ratios and percentages required by the
order and agreements at September 30, 1998 are as follows: Actual at Required by
the Order September 30, 1998 And Agreements
Actual at Required by the Order
September 30, 1998 And Agreements
------------------ --------------
Tier I Capital ............ 10.15% 6.5%
Non accrual to gross loans
as noted in June 30, 1995
examination report ...... 0.92% 2.0%
Classified assets at
June 30, 1995 to 50% of
Tier I capital and
loan loss reserve ....... 20.59% 50.0%
Fully funded loan
loss reserve ............. Yes Yes
Dividend approvals
obtained ................ Yes Yes
15
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
Part I - Financial Information (Cont'd)
Item 2. - Management's Discussion and Analysis or Plan of Operations:
The consolidated financial review of the Company is intended to compare the
performance of the Company for the periods ended September 30, 1998 and 1997.
The review of the information presented should be read in conjunction with the
consolidated financial statements and the accompanying notes.
CURRENT EVENTS
On July 28, 1998, the Company agreed to be acquired by Patriot Bank of
Pottstown, PA. (The "Consolidation Agreement"). Management believes that this
transaction will enable the Company, under the banner of Patriot Bank, to expand
its sales and marketing efforts, allowing the Company to offer a broader area of
products and services while maintaining the philosophy of a community bank.
Also, the transactions will allow the Company to take advantage of Patriot's
computer systems, marketing programs and product lines to better serve the
existing customers of the Company but also attract new customers. The agreement
is incorporated by reference to the Company's Form 8-K filed with the Securities
and Exchange Commission on August 6, 1998.
In conjunction with the Consolidation Agreement, as well as management's
overall plans, the Company has entered into an agreement during October 1998 to
sell a significant portion of its nonperforming assets. Management has set a
goal for 1998 to dispose of at least $4.0 million of nonperforming assets. The
bulk sale included both nonperforming assets and performing loans consisting of
the following:
Performing loans........................ $4,527,000
Impaired loans.......................... 2,580,000
Foreclosed assets....................... 1,434,000
Loans - 90 days and over................ 857,000
Other assets............................ 141,000
----------
$9,539,000
==========
The Company will receive cash of approximately $6.30 million for the above
assets resulting in an estimated loss of $2.805 million on this bulk sale after
charging $440,000 to the allowance for loan losses. Management believes that
this transition will improve the overall financial position of the Company since
it eliminates the majority of its nonperforming assets.
16
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
NET INCOME
The Company incurred a net loss of $1.495 million for the first three
quarters of 1998 as compared to $2.685 million of net income for the same period
in 1997, a decrease of $4.18 million in net income. Almost the entire change was
attributable to losses on its trading securities portfolio which consisted of
equity securities of financial institutions. Management believes that during the
third quarter of 1998, a significant downturn in the share prices of the
financial services sector occurred primarily as a result of investors' worries
about global economic crisis and U.S. Corporate earnings. Without the losses
attributable to unrealized losses in its trading securities portfolio, the
Company would have reflected net income of $115,000 for 1998 as compared to a
net loss of $305,000 for 1997. The other significant changes in net income were
as follows: a decrease of $325,000 in net interest income primarily as a result
of lower interest and fees due to a decrease in the average loan balances;
$325,000 in reduction in foreclosed assets expense due to lower operating costs
and value write downs and a reduction of $378,000 in the provision for loan
losses based on management's evaluation of the loan portfolio.
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 nine months ended September 30, 1998, interest and fee income on
loans declined $338,000, or 7.61%, compared to the nine month period ended
September 30, 1997, mostly attributable to decrease in the average loan balance
of $5.137 million, or 7.98%. During the first nine months of 1998, approximately
$4 million in larger loans were repaid, a significant portion of which were
previously troubled credits. Also, the Bank had approximately $3.0 million of
originations which were in process; $1.35 million in loans were approved but not
funded while $1.65 million loans were pending approval. The yield on loans
increased 3 basis points to 9.23% during the first nine months of 1998 as
compared to the same period in 1997.
Interest and dividend income on investment securities decreased $141,000,
or 10.06%, in the for the nine months ended September 30, 1998, compared to the
same period in 1997. The average yield on the investment portfolio decreased 54
basis points from 6.12% in 1997 to 5.58% in 1998. In the first nine months of
1998 the Company had $6.653 million of higher yield debt securities prematurely
called by its issuers. The Company replaced these debt securities with similar
instruments, however, with annual yields at lower market rates. Also, the
Company wrote off $32,000 of premium on these called debt securities, further
adjusting downward its annual yield. Mitigating the above decrease was an
increase in interest income of $155,000 on overnight funds attributable to
increase in average balance of $3.835 million in 1998 as compared to the same
period in 1997.
17
<PAGE>
Interest expense on deposits declined $39,000, or 1.44%, in the first nine
months of 1998 compared to the same period in 1997. The average balance for
deposits declined $2.726 million during the nine months ended September 30, 1998
as compared to the same period in 1997, primarily attributable to $6.82 million
sale of deposits of the Bank's Quakertown branch to the Quakertown National Bank
on October 30, 1997. This decrease was mitigated in part by a new super now
deposit account of a regional nonprofit organization which maintained an average
balance of $1.84 million for the first nine months of 1998. The average balance
on savings deposits remained almost the same; however, average interest cost
increased 7 basis points partly attributable to special rates extended to the
aforementioned deposit account. The average balance on time deposits decreased
$2.705 million; however, average interest cost increased 14 basis points which
was in line with the regional trends on time deposits.
For the first nine months of 1998, as compared to the same period in 1997,
the average yield on interest-earning assets declined 31 basis points, while the
cost of interest-bearing liabilities increased 11 basis points, resulting in a
net decrease in the interest rate spread of 42 basis points. The net yield on
earning assets declined 37 basis points during the first nine months of 1998
compared to the same period in 1997. In evaluating the $325,000 decrease in net
interest income from $3.219 million in 1997 to $2.894 million in 1998, $213,000
resulted from a decrease in volume while the balance, $112,000, was due to
interest rate changes.
18
<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 Nine Months ended September 30,
(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) $59,272 $ 4,104 9.23% $64,409 $ 4,442 9.20%
Investment securities 30,122 1,260 5.58 30,504 1,401 6.12
Bank time deposits 23 1 5.80 0 0 0.00
Overnight funds 6,433 263 5.45 2,598 108 5.54
------- ------- ---- ------- ------- ----
Total interest-earning assets $95,850 $ 5,628 7.83% $97,511 $ 5,951 8.14%
======= ------- ---- ======= ------- ----
INTEREST-BEARING
LIABILITIES:
Saving deposits $36,041 $ 741 2.75% $36,062 $ 724 2.68%
Time deposits 47,679 1,921 5.39 50,384 1,977 5.25
Other borrowed funds 0 0 0.00 338 15 5.85
Long-term debt 1,156 72 8.21 231 16 9.13
------- ------- ---- ------- ------- ----
Total interest-bearing liabilities $84,876 $ 2,734 4.31% $87,015 $ 2,732 4.20%
======= ------- ---- ======= ------- ----
NET INTEREST INCOME $ 2,894 $ 3,219
======= ======
INTEREST RATE SPREAD 3.52% 3.94%
==== ====
NET INTEREST MARGIN
ON INTEREST- EARNING
ASSETS (2) 4.03% 4.40%
==== ====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 112.93% 112.06%
====== ======
</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.
19
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
For the Nine Months ended September 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) $64,409 $4,442 9.20% $58,550 $4,216 9.60%
Investment securities 30,504 1,401 6.12 31,124 1,404 6.01
Overnight funds 2,598 108 5.54 1,955 78 5.33
------- ------- ---- ------- ------- ----
Total interest-earning assets $97,511 $5,951 8.14% $91,629 $5,698 8.29%
======= ------- ---- ======= ------- ----
INTEREST-BEARING
LIABILITIES:
Saving deposits $36,062 $724 2.68% $36,276 $ 754 2.78%
Time deposits 50,384 1,977 5.25 48,037 1,906 5.30
Other borrowed funds 338 15 5.85 926 41 5.82
Long-term debt 231 16 9.13 340 23 8.89
------- ------- ---- ------- ------- ----
Total interest-bearing liabilities $87,015 $2,732 4.20% $85,579 $2,724 4.25%
======= ------- ---- ======= ------- ----
NET INTEREST INCOME $3,219 $2,974
======= =======
INTEREST RATE SPREAD 3.94% 4.04%
==== ====
NET INTEREST MARGIN
ON INTEREST-EARNING
ASSETS (2) 4.40% 4.33%
==== ====
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO AVERAGE
INTEREST-BEARING LIABILITIES 112.06% 107.07%
====== ======
</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.
20
<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 Nine Months Ended For the Nine Months Ended
September 30, 1998 vs. September 30, 1997 vs.
1997 Increase (Decrease) 1996 Increase (Decrease)
Due to Due to
-----------------------------------------------------------------
Volume Rate Total Volume Rate Total
-----------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $(401) $ 63 $(338) $ 423 $(197) $ 226
Investment securities (52) (89) (141) (14) 11 (3)
Bank time deposits 1 0 1 0 0 0
Overnight funds 158 (3) 155 27 3 30
----- ----- ----- ----- ----- -----
Total interest-earning assets $(294) $ (29) $(323) $ 436 $(183) $ 253
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits $ (6) $ 23 $ 17 $ (6) $ (24) (30)
Time deposits (126) 70 (56) 96 (25) 71
Other borrowed funds (8) (7) (15) (26) 0 (26)
Long-term debt 59 (3) 56 (8) 1 (7)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ (81) $ 83 $ 2 $ 56 $ (48) $ 8
----- ----- ----- ----- ----- -----
CHANGE IN NET
INTEREST INCOME $(213) $(112) $(325) $ 380 $(135) $ 245
===== ===== ===== ===== ===== =====
</TABLE>
21
<PAGE>
OTHER INCOME
Total other income declined $4.686 million during the nine months ended
September 30, 1998 compared to the same period in 1997, attributable to $1.61
million losses incurred on the trading securities portfolio during the first
nine months of 1998 as compared to $2.99 million gain recognized on the
securities trading portfolio during the same period in 1997. The trading
securities are carried at fair value and include the unrealized gains or losses
in the determination of income/(loss) from operations. Management believes that
during the third quarter of 1998, a significant downturn in the share prices of
the financial services sector occurred primarily as a result of investors'
worries about global economic crisis and U.S. corporate earnings. During the
first nine months of 1998, the Company recognized $368,000 in realized gains and
$1.978 million in unrealized losses on its trading portfolio. Management will
continue to closely monitor its investment portfolio to position the portfolio
against future downturns or fluctuations in the stock market.
In December 1997, the Company received the controlling interest of a real
estate partnership and was required under generally accepted accounting
principles to include all of the accounts within its consolidated totals as
compared to the previously utilized equity method. Rental income received from
this real estate partnership amounted to $137,000 for nine months ended
September 30, 1998. Mitigating the increase was a decrease in nonrecurring gains
in the same period of 1997 on the sale of real estate investments of $183,000
and a reduction of $68,000 in gains on the sales of foreclosed assets.
OTHER EXPENSES
Other expenses decreased $453,000, or 12.71%, during the first nine months
of 1998 as compared to the same period in 1997. Salaries and benefits increased
$104,000, or 9.11%, for the nine months ended September 30, 1998 as a result of
the new branch opening during the second quarter 1997 and additional staffing in
branch administration and the credit and collection departments. The Bank's FDIC
insurance premiums declined $66,000, or 68.75%, the result of an improvement in
the Bank's risk classification effective July 1, 1997. In addition, foreclosed
asset expenses declined $325,000, or 67.43% for the nine months ended September
30, 1998 as compared to the same period in 1997 due to lower operating costs and
fewer required write downs of property values. However mitigating these
decreases, the Company incurred acquisition costs of $71,000 during the first
nine months of 1998 attributable to the Consolidation Agreement as compared to
none during the same period in 1997.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was $1.861 million at September 30, 1998,
compared to $1.586 million at December 31, 1997. The allowance equaled 3.10% of
loans at September 30, 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
22
<PAGE>
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 $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.
For the nine months ended September 30, 1998, based on management's
evaluation as outlined above, the amount charged to operating expense for the
provision for loan losses was $225,000 compared to $603,000 at September 30,
1997.
23
<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 September 30, 1998 (in thousands):
Beginning Balance, January 1, 1998 ........ $ 1,586
-------
Charge-offs:
Commercial, financial and agricultural.. --
Real estate - construction ............. 27
Real estate - mortgage ................. 134
Installment loans to individuals ....... 257
-------
Total charge-offs ......................... 418
-------
Recoveries:
Commercial, financial and agricultural.. 23
Real estate - construction ............. 99
Real estate - mortgage ................. 289
Installment loans to individuals ....... 57
-------
Total recoveries .......................... 468
-------
Net charge-offs ........................... (50)
-------
Provision for loan losses ................. 225
-------
Ending Balance, September 30, 1998 ........ $ 1,861
=======
Ratio of net recoveries to
average loans outstanding .............. 0.08%
FINANCIAL CONDITION
At September 30, 1998, the Company's total assets were $110.0 million as
compared to $108.72 million at December 31, 1997, representing an increase of
$1.286 million, or 1.18%, which is mostly attributable to $3.268 million growth
in its deposits, offset in part by $1.806 million decline in shareholders
investment resulting from trading losses recognized primarily during the third
quarter of 1998 from recent stock market declines in the financial securities
sector of the stock market.
Loans
Net loans decreased $4.688 million, or 7.46%, from $62.820 million at
December 31, 1997 to $58.132 million at September 30, 1998. During the first
half of 1998, the Bank experienced payoffs of several large commercial loans
including $4 million of previously identified problem loans.
Most categories of loans, as outlined below, declined at September 30, 1998
as compared to December 31, 1997, except for residential real estate loans which
increased $2.924 million during the first nine months of 1998, mostly
attributable to the purchase of $2 million of residential real estate loans in
February 1998 and $2.1 million of home equity loan originations the result of a
special promotion by the Bank in the second quarter of 1998. The change in the
composition of loans at September 30, 1998 as compared to December 31, 1997 is
as follows: Real estate construction loans declined $1.36 million, or 29.44%;
Commercial real estate decreased $2.384
24
<PAGE>
million, or 12.90%; Consumer loans declined $3.594 million or 26.48%; while
Commercial loans increased $1,000, or 0.03%; and Residential real estate loans
increased $2.924 million, or
12.03%.
The following table sets forth the maturity and repricing schedule of the
loan portfolio at September 30, 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 ............. $ 1,581 $ 796 $ 716 $ 3,093
Real estate-construction 1,830 605 825 3,260
Real estate-mortgage ... 6,353 19,142 15,677 41,172
Consumer, net .......... 1,328 8,051 509 9,888
Nonaccrual loans ....... -- -- -- 2,580
------- ------- ------- -------
Total ........................ $11,092 $28,594 $17,727 $59,993
======= ======= ======= =======
Repricing Schedule (1):
Fixed rate loans ....... $11,388 $26,878 $ 6,627 $44,893
Floating rate loans .... 12,435 85 -- 12,520
Nonaccrual loans ....... -- -- -- 2,580
------- ------- ------- -------
Total ........................ $23,823 $26,963 $ 6,627 $59,993
======= ======= ======= =======
</TABLE>
- ----------------
(1) Data for repricing schedule by loan categories is not available.
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 $19.80 million (amortized
costs) at September 30, 1998, or 80.60% of total investment securities. Included
in the above are $1.946 million mortgage-backed products, mostly consisting of
collateralized mortgage obligations ("CMO") and real estate mortgage investment
conduits ("REMIC").
The available-for-sale securities increased $2.918 million, or 16.29%, from
$17.908 million at December 31, 1997 to $20.826 million at September 30, 1998.
The Company continually evaluates its cash position throughout the year and
based on its cash requirements invests excess funds into investments which meets
these requirements and its investment policies. During 1998, the Company had
bonds of $6.653 million prematurely called by its issuers resulting in excess
cash on hand for the Company. Also, excess cash was generated by an increase in
deposits of $3.268 million during the first nine months of 1998. Based on the
above increase in cash flows, the Company purchased $9.247 million of debt
securities during the three quarters ending September
25
<PAGE>
30, 1998.
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 $3.268 million from $92.146 million at December
31, 1997 to $95.414 million at September 30, 1998, primarily the result of a new
super now account received from a regional nonprofit organization. During the
third quarter of 1998, the average balance maintained by this depositor amounted
to $2.168 million. At September 30, 1998, noninterest-bearing deposits
decreased $575,000, while interest-bearing deposits increased $3.843 million as
compared to December 31, 1997. As a percentage of total deposits, savings, club
accounts and interest-bearing demand deposits represented 38.55% at September
30, 1998 as compared to 36.43% at December 31, 1997.
The following table sets forth maturities of time deposits of $100,000 or
more at September 30, 1998 and December 31, 1997.
September 30, December 31,
1998 1997
------ ------
(in thousands)
Three months or less .... $1,863 $2,124
Over three months through
twelve months ........ 4,439 2,641
Over one year through
five years ........... 1,310 2,528
Over five years ......... 0 0
------ ------
TOTAL ............ $7,612 $7,293
====== ======
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and foreclosed assets held
for sale. Nonperforming loans consist of impaired and other loans, with respect
to which 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.
26
<PAGE>
The following table represents nonperforming assets of the Company at
September 30, 1998 and December 31, 1997.
September 30, December 31,
1998 1997
------ ------
(in thousands)
Impaired loans ............................... $2,580 $3,364
Other loans past due 90 days or more ......... 1,415 421
------ ------
Total nonperforming loans ................ 3,995 3,785
Foreclosed assets held for sale .............. 1,994 1,597
------ ------
Total nonperforming assets ............... $5,989 $5,382
====== ======
Nonperforming loans as a percentage
of loans (net of unearned interest) ...... 6.66% 5.88%
Nonperforming assets as a percentage of assets 5.44% 4.95%
Impaired loans declined $784,000 at September 30, 1998 as compared to
December 31, 1997. The activity within the impaired loan category for the first
three quarters of 1998 was $2.281 million of additional nonaccrual loans were
added to impaired loans reduced by a return to accrual status of $1.444 million,
transfer to foreclosed assets of $936,000, payoffs and pay downs of $550,000 and
$136,000 was charged off against the allowance for loan losses. Real estate
loans represent $2.166 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 increased $994,000 from $421,000 at December
31, 1997 to $1.415 million at September 30, 1998. A portion of the increase in
1998, $439,000 was attributable to two matured loans which through September 30,
1998 have not been renewed. Three other loans amounting to $268,000 were
identified as potential problems since the borrowers are experiencing financial
difficulties. All delinquent loans are reviewed by management on a weekly basis
with regard to legal proceedings and collection efforts. Of the delinquent
loans, 93.99% are secured by real estate, 3.32% are loans to commercial
borrowers and 2.69% are loans to consumers.
Foreclosed assets held for sale increased $397,000 from $1.597 million at
December 31, 1997 to $1.994 million at September 30, 1998, partially the result
of the transfer of $936,000 from impaired loans, net of assets disposed of
during the period.
The following table sets forth the total of commercial and investment
properties at September 30, 1998, all of which are currently in litigation
and/or foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days ......... $1,234,987
Foreclosed assets held for sale ... 652,252
----------
Total ............................. $1,887,239
==========
27
<PAGE>
The following table sets forth the total of residential properties to be
foreclosed upon and liquidated at September 30, 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.......... $1,706,727
Foreclosed assets held for sale.... 1,060,989
-----------
Total.............................. $2,767,716
==========
The following table sets forth the total of land developments and building
lots to be foreclosed upon and liquidated at September 30, 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.......... $322,955
Foreclosed assets held for sale.... 208,061
--------
Total.............................. $531,016
========
The following table sets forth the total of loans in litigation that are
not secured by real estate at September 30, 1998.
Secured by Other Than Real Estate:
Impaired and over 90 days.......... $453,644
========
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 September 30, 1998.
Performing/Nonperforming Assets:
Impaired and over 90 days.......... $216,269
========
The following table sets forth the total of assets that are under agreement
or are being paid off with the settlement dates to take place in the fourth
quarter of 1998.
Assets Under Agreement or Payoffs:
Impaired & over 90 days............ $ 60,000
Foreclosed assets held for sale.... 72,778
--------
Total.............................. $132,778
========
At September 30, 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.
28
<PAGE>
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 September 30, 1998, the Company maintained $10.631 million in cash and
cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, the Company had $20.826 million in securities
available-for-sale representing 18.93% of total assets at September 30, 1998.
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 September 30, 1998, approximately 79.82% of the Company's
assets were funded by core deposits acquired within its market area. An
additional 11.49% of the assets were funded by the Company's equity. These two
components provide a substantial and stable source of funds.
The Company paid the following cash dividends to the holders of the Senior
Preferred Stock and Series A Preferred Stock during the first three quarters of
1998 and 1997.
<TABLE>
<CAPTION>
Date
Class of Stock Paid Current Arrears Total
- -------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1998
- ------------------
Senior Preferred February 4, 1998 $56,272 -- $56,272
Senior Preferred May 5, 1998 $56,085 -- $56,085
Senior Preferred August 12, 1998 $55,889 -- $55,889
Series A Preferred February 4, 1998 $55,498 $110,995 $166,493
Series A Preferred May 5, 1998 $55,498 $110,995 $166,493
Series A Preferred August 12, 1998 $55,498 $110,995 $166,493
September 30, 1997
- ------------------
Senior Preferred May 12, 1997 $56,273 $237,542 $293,815
Senior Preferred August 12, 1997 $56,272 -- $56,272
Series A Preferred -- -- -- None
Series A Preferred August 12, 1997 $55,498 $110,995 $166,493
</TABLE>
29
<PAGE>
In addition, on September 16, 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 September 16, 1998. This declaration included an
aggregate of $55,889 on its Senior Preferred Stock for the third quarter of 1998
and an aggregate of $166,493 on its Series A Preferred Stock, which represented
the third quarter 1998 dividend of $55,498 and $721,471 for dividend in arrears.
After payment of the $721,471, there remains no arrearges of dividends on the
Series A Preferred Stock as of September 30, 1998.
There were no dividends paid to its common stockholders for the period in
1998 or 1997.
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.
For the nine months ended September 30, 1998, cash and cash equivalents
increased $2.550 million as compared to $3.334 million increase for the same
period in 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 $3.707 million during the
nine months ended September 30, 1998, attributable to a decrease in net income
of $4.180 million as compared to the same period in 1997.
Cash flows from investing activities increased $1.006 million during the
nine months ended September 30, 1998 as compared to the same period in 1997.
During the first nine months of 1998, loans decreased $3.35 million as compared
to an increase of $3.476 million during the same period in 1997, resulting a net
decrease of $6.826 million. Approximately $4.0 million of large loans were
repaid in 1998 and not replaced. The excess cash, along with $6.653 million of
debt securities which were prematurely called by its issuers were reinvested
into similar investment instruments at market rates.
Cash flows from financing activities increased $1.917 million during the
first nine months of 1998, due to an increase in deposits of $903,000 primarily
the result of a new account for a not-for-profit organization which has
maintained an average balance of $1.837 million in 1998. Also in 1997, the
Company repaid a repurchase agreement which was outstanding at December 31, 1996
in the amount of $1.20 million.
30
<PAGE>
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 September 30, 1998 the Company has a negative interest sensitive GAP of
$9.146 million, or 9.34% 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 $16.948
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.
31
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at September 30, 1998:
<TABLE>
<CAPTION>
September 30, 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) $ 19,226 $ 616 $ 1,170 $ 3,545 $ 15,985 $ 40,542
Loans (2) 16,689 7,134 7,077 19,886 6,627 57,413
-------- -------- -------- -------- -------- --------
TOTAL $ 35,915 $ 7,750 $ 8,247 $ 23,431 $ 22,612 $ 97,955
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand-interest bearing $ 15,555 $ -- $ -- $ -- $ -- $ 15,555
Savings and clubs (3) 1,393 719 1,439 4,316 13,361 21,228
Time 21,373 13,641 9,201 3,734 -- 47,949
Long-term debt 105 25 53 914 -- 1,097
-------- -------- -------- -------- -------- --------
TOTAL $ 38,426 $ 14,385 $ 10,693 $ 8,964 $ 13,361 $ 85,829
-------- -------- -------- -------- -------- --------
GAP ($ 2,511) ($ 6,635) ($ 2,446) $ 14,467 $ 9,251 $ 12,126
-------- -------- -------- -------- -------- --------
Cumulative GAP ($ 2,511) ($ 9,146) ($11,592) $ 2,875 $ 12,126 $ 12,126
======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $7.779 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 $2.58
million.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
32
<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, 1998 and 1997.
Regulatory September 30,
Requirements 1998 1997
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio 4.0%* 10.15% 12.05%
Risk-based capital ratios:
Tier I capital/risk-weighted 4.0% 15.55% 16.99%
Tier I and Tier II capital/
Risk-weighted assets 8.0% 16.82% 18.25%
- -------------
* 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 were 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 September 30, 1998 deposit levels and based on available
rate information. However, the FDIC may increase the projected rates at anytime.
33
<PAGE>
"YEAR 2000" ISSUES
During 1997, the Bank formed a Technology Task Team who will be primarily
responsible for Year 2000 compliance for the Company. The team members completed
the assessment phase and contacted all vendors which they believe would be
affected by the millennium change with updates on a regular basis. The team
members developed a Year 2000 plan which includes awareness, assessment,
monitoring, testing and reporting. The plan included identifying critical and
non-critical systems and follow-up procedures to insure all external and
internal systems and vendors will be Year 2000 compliant. The Board of Directors
have received a quarterly update on the progress of the Task Team. The Bank's
computer application servicer has been dealing with the Year 2000 issue since
May 1997 and is expecting to complete the host phase by November 1998. During
the period of November 1998 to March 1999, the servicer will coordinate an
end-to-end test which will allow the Bank to simulate daily processing on
sensitive century dates such as Day 1, first Month-end, first Leap Day, etc. At
a minimum, testing will involve bank/branch input to host, production cycles and
feedback to the general ledger system, and other key interfaces to facilitate
completion of the end-to-end test. Most of other computer related vendors are
anticipating to be Year 2000 compliant during 1998. The Technology Task Team has
inventoried all operating systems, hardware and software and concluded that the
majority of personal computers are Year 2000 compatible. The Bank will replace
those computers which are not Year 2000 compliant. Management has estimated an
overall cost of $50,000 to $75,000 will be incurred for issues pertaining to the
Year 2000.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
ANALYSIS OF OPERATIONS
For the third quarter of 1998, the Company recorded a net loss of $1.789
million as compared to $729,000 net income for the same period in 1997,
primarily as the result of trading securities losses of $1.78 million.
Management believes that during the third quarter of 1998, a significant
downturn in the share prices of the financial services sector occurred primarily
as a result of investors' worries about global economic crisis and U.S.
corporate earnings. The majority of the Company's equity security portfolio is
within the financial services sector.
Net interest income decreased $103,000, or 9.85%, during the third quarter
of 1998 as compared to the third quarter of 1997. The majority of the decrease
was due to lower interest and fees on loans due to a decrease in the average
loan balances. The average yield remained static at approximately 9.23%. The
provision for loan losses decreased $438,000 for the third quarter of 1998 as
compared to 1997 since management provided additional allowance in 1997 for the
indirect dealer portion of the installment loan portfolio. Other income declined
$3.247 million in the third quarter of 1998 as compared to the third quarter of
1997, mostly the result of aforementioned securities losses which declined
$3.258 million during the third quarter of 1998 when compared to the third
quarter of 1997. Other expenses decreased $394,000 during the third quarter of
1998 as compared to the same period in 1997, mostly due to reduced foreclosed
assets expenses of $267,000 due to lower operating costs and fewer writedowns of
property values.
34
<PAGE>
For the third quarter of 1998, net cash decreased $100,000 as compared to
the third quarter of 1997. During the third quarter of 1998, cash flows from
operating activities declined $1.35 million as compared to the same period in
1997 attributable to decreased net income of $2.518 million. Cash flows provided
by investing activities increased $1.207 million, mostly the result of a
decrease in loans of $2.305 million, offset in part by decrease in proceeds from
sale of foreclosed assets of $785,000.
35
<PAGE>
FIRST LEHIGH CORPORATION
FORM 10-QSB
Part II - Other Information
Item 1. - Legal Proceedings
On June 23, 1995, the Federal Deposit Insurance Corporation (the "FDIC")
issued a Notice of Intention to Prohibit from Further Participation and a Notice
of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law,
Order to Pay and Notice of Hearing (collectively, the "Notices") against James
L. Leuthe, the former 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. On June 26, 1998, the FDIC
Board of Directors issued an Order and Decision prohibiting Mr. Leuthe from
future participation in the affairs of any federally-insured financial
institution, and assessing a civil monetary penalty in the amount of $250,000.
That Order and Decision was served on Mr. Leuthe and his counsel on July 1,
1998. The provisions of the Order became effective July 26, 1998. Mr. Leuthe has
timely filed an appeal to the District of Columbia Circuit Court of Appeals. Mr.
Leuthe resigned as Chairman of the Board, Chief Executive Officer, Acting
President and a director of the Company on July 27, 1998. That appeal is
presently pending, with the parties awaiting the issuance of a briefing schedule
from the court.
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
36
<PAGE>
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 that the amount will not materially 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's position, and in early 1998 instituted suit against the carrier in the
Court of Common Pleas of Lehigh County, Pennsylvania, to litigate the coverage
issue. The pleadings in that case are closed, and discovery is proceeding. It is
expected the case will come to trial sometime in spring or summer of 1999.
37
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed with or incorporated by reference to
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 Agreement and Plan of Consolidation dated as of July 28,
1998 between First Lehigh Corporation and Patriot Bank
Corp. (Incorporated by reference to Exhibit 99.1 of the
Company's Form 8-K Current Report filed on August 6,
1998).
10.2 Bank Plan of Merger dated as of July 28, 1998 between First
Lehigh Bank and Patriot Bank Corp. (Incorporated by
reference to Exhibit 99.2 of the Company's Form 8-K
Current Report filed on August 6, 1998).
10.3 Stock Option Agreement dated as of July 28, 1998 between
First Lehigh Corporation and Patriot Bank Corp.
(Incorporated by reference to Exhibit 99.3 to the Company's
Form 8-K Current Report filed on August 6, 1998).
10.4 Standstill Agreement dated as of July 27, 1998 between
James L. Leuthe and Patriot Bank Corp. (Incorporated by
reference to Exhibit 99.4 to the Company's Form 8-K Current
Report filed on August 6, 1998).
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 August 6, 1998 to
report under Item 5, (i) the resignation of James L. Leuthe
as Chairman of the Board, Acting President and a director of
the Company and (ii) the execution of the Consolidation
Agreement with Patriot Bank Corporation.
38
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST LEHIGH CORPORATION
Date: November 13, 1998 By: /s/ Wilbur R. Roat
------------------------------
Wilbur R. Roat
President and Chief Executive Officer
Date: November 13, 1998 By: /s/ Kashmira K. Lodaya
------------------------------
Kashmira K. Lodaya, Treasurer
(principal financial and
accounting officer)
39
<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 Agreement and Plan of Consolidation dated
as of July 28, 1998 between First Lehigh
Corporation and Patriot Bank Corp.
(Incorporated by reference to Exhibit 99.2
of the Company's form 8-K Current Report
filed on August 6, 1998).
10.2 Bank Plan of Merger dated as of July 28,
1998 between First Lehigh Bank and Patriot
Bank Corp. (Incorporated by reference to
Exhibit 99.2 of the Company's Form 8-K
Current Report filed on
August 6, 1998).
10.3 Stock Option Agreement dated as of July 28,
1998 between First Lehigh Corporation and
Patriot Bank Corp. (Incorporated by
reference to Exhibit 99.3 to the Company's
Form 8-K Current Report filed on August 6,
1998).
10.4 Standstill Agreement dated as of July 27,
1998 between James L. Leuthe and Patriot
Bank Corp. (Incorporated by reference to
Exhibit 99.4 to the Company's Form 8-K
Current Report filed on August 6, 1998).
11.1 Statement re: Computation of Per Share 41 - 42
Earnings.
27 Financial Data Schedule. 43 - 44
40
FIRST LEHIGH CORPORATION
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
SEPTEMBER SEPTEMBER
BASIC EPS: 30, 1998 30, 1997
---------- -------- --------
NET INCOME (LOSS) (1,495,335) 2,685,277
LESS PREFERRED STOCK DIVIDENDS:
SERIES A (166,493) (166,493)
SENIOR (167,863) (168,818)
---------- ----------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS (1,829,691) 2,349,966
---------- ----------
COMMON STOCK OUTSTANDING: 2,053,907 2,000,000
---------- ----------
EARNINGS PER SHARE - BASIC (0.89) 1.17
========== ==========
SEPTEMBER SEPTEMBER
DILUTED EPS: 30, 1998 30, 1997
------------ -------- --------
NET INCOME (LOSS) (1,495,335) 2,685,277
---------- ---------
DILUTED EFFECT OF POTENTIAL
COMMON STOCK:
COMMON STOCK 2,053,907 2,000,000
STOCK OPTIONS 60,000 60,000
HYPOTHETICAL SHARE REPURCHASE (1) (32,746) (39,070)
COMMON SHARES ISSUED UPON
ASSUMED CONVERSION:
SERIES A (2) 545,600 545,600
SENIOR (3) 896,456 900,363
---------- ----------
DILUTIVE COMMON STOCK
OUTSTANDING: 3,523,217 3,466,893
---------- ----------
EARNINGS PER SHARE - DILUTED (4) (0.42) 0.77
========== ==========
- ----------
(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.
(4) ANTIDILUTIVE; IN 1998, BASIC EARNINGS PER SHARE WILL BE UTILIZED.
41
<PAGE>
FIRST LEHIGH CORPORATION
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
SEPTEMBER SEPTEMBER
BASIC EPS: 30, 1998 30, 1997
---------- ----------
NET INCOME (LOSS) (1,789,244) 729,147
LESS PREFERRED STOCK DIVIDENDS:
SERIES A (55,498) (55,498)
SENIOR (55,889) (56,273)
---------- ----------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS (1,900,631) 617,376
---------- ----------
COMMON STOCK OUTSTANDING: 2,056,140 2,000,000
---------- ----------
EARNINGS PER SHARE - BASIC (0.92) 0.31
========== ==========
SEPTEMBER SEPTEMBER
DILUTED EPS: 30, 1998 30, 1997
---------- ----------
NET INCOME (LOSS) (1,789,244) 729,147
---------- ----------
DILUTED EFFECT OF POTENTIAL
COMMON STOCK:
COMMON STOCK 2,056,140 2,000,000
STOCK OPTIONS 60,000 60,000
HYPOTHETICAL SHARE REPURCHASE (1) (36,226) (39,070)
COMMON SHARES ISSUED UPON
ASSUMED CONVERSION:
SERIES A (2) 545,600 545,600
SENIOR (3) 894,223 900,363
---------- ----------
DILUTIVE COMMON STOCK
OUTSTANDING: 3,519,737 3,466,893
---------- ----------
EARNINGS PER SHARE - DILUTED (4) (0.51) 0.21
========== ==========
- ----------
(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.
(4) ANTIDILUTIVE; IN 1998, BASIC EARNINGS PER SHARE WILL BE UTILIZED.
42
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,852
<INT-BEARING-DEPOSITS> 6,088
<FED-FUNDS-SOLD> 1,691
<TRADING-ASSETS> 7,877
<INVESTMENTS-HELD-FOR-SALE> 20,826
<INVESTMENTS-CARRYING> 4,077
<INVESTMENTS-MARKET> 4,111
<LOANS> 59,993
<ALLOWANCE> 1,861
<TOTAL-ASSETS> 110,005
<DEPOSITS> 95,414
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,460
<LONG-TERM> 1,098
0
16
<COMMON> 20
<OTHER-SE> 11,997
<TOTAL-LIABILITIES-AND-EQUITY> 110,005
<INTEREST-LOAN> 4,104
<INTEREST-INVEST> 1,260
<INTEREST-OTHER> 264
<INTEREST-TOTAL> 5,628
<INTEREST-DEPOSIT> 2,662
<INTEREST-EXPENSE> 2,734
<INTEREST-INCOME-NET> 2,894
<LOAN-LOSSES> 225
<SECURITIES-GAINS> (1,610)
<EXPENSE-OTHER> 3,110
<INCOME-PRETAX> (1,495)
<INCOME-PRE-EXTRAORDINARY> (1,495)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,495)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
<YIELD-ACTUAL> 4.03
<LOANS-NON> 2,580
<LOANS-PAST> 1,415
<LOANS-TROUBLED> 137
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,586
<CHARGE-OFFS> 418
<RECOVERIES> 468
<ALLOWANCE-CLOSE> 1,861
<ALLOWANCE-DOMESTIC> 824
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,037
</TABLE>
