U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 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
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(Exact name of small business issuer as specified in its charter)
Pennsylvania
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(State or other jurisdiction of incorporation or organization)
23-2218479
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(I.R.S. Employer Identification No.)
1620 Pond Road
Allentown, Pennsylvania 18104
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(Address of principal executive offices)
(Zip Code)
(610) 398-6660
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(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 JUNE 30, 1998
INDEX
Part I - Financial Information Page Number
- ------------------------------ -----------
Item 1. Financial Statements:
Consolidated Balance Sheet as of June 30, 1998
and December 31, 1997........................................ 3
Consolidated Statements of Operations for the six months
ended June 30, 1998 and 1997................................. 4 - 5
Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997................................. 6 - 7
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997................................. 8 - 9
Consolidated Statement of Cash Flows for the three months
ended June 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 - 33
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings.............................................. 34 - 35
Item 5. Other Information.............................................. 36
Item 6. Exhibits and Reports on Form 8-K............................... 36 - 37
Signatures..................................................... 38
2
<PAGE>
<TABLE>
<CAPTION>
FIRST LEHIGH CORPORATION
CONSOLIDATED BALANCE SHEET June 30, December 31,
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS (Unaudited)
- --------
Cash and due from banks ............................................. $ 6,768 $ 7,470
Federal funds sold .................................................. 1,254 611
--------- ---------
Cash and cash equivalents ................................. 8,022 8,081
Securities held-to-maturity (estimated fair
value of $4,019 and $3,990, respectively) .......................... 4,083 4,085
Securities available-for-sale ....................................... 20,227 17,908
Trading securities .................................................. 9,825 7,571
Loans ............................................................... 62,347 64,636
Less: unearned income ........................................... (166) (230)
allowance for loan losses ................................. (1,819) (1,586)
--------- ---------
Net loans ............................................. 60,362 62,820
Loans held for sale ................................................. 210 0
Premises and equipment, net ......................................... 4,279 4,365
Foreclosed assets held for sale, net ................................ 2,193 1,597
Other assets ........................................................ 2,295 2,292
--------- ---------
Total Assets .......................................... $ 111,496 $ 108,719
========= =========
LIABILITIES
- -------------
Deposits:
Noninterest-bearing .............................................. $ 10,543 $ 11,258
Interest-bearing ................................................. 84,521 80,888
--------- ---------
Total Deposits ....................................... 95,064 92,146
Other liabilities ................................................... 888 909
Long-term debt ...................................................... 1,137 1,214
--------- ---------
Total Liabilities ..................................... 97,089 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 ......................................... 5,117 5,268
Net unrealized appreciation/depreciation on securities
available-for-sale ................................................ 83 (25)
--------- ---------
Total Shareholders' Investment ........................ 14,407 14,450
--------- ---------
Total Liabilities and Shareholders' Investment ........ $ 111,496 $ 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>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
---------- ----------
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ..................... $ 2,763 $ 2,960
Interest and dividends on investment securities:
Taxable interest income ....................... 733 875
Dividends ..................................... 77 85
Interest on time deposits ...................... 1 0
Interest on overnight funds .................... 177 46
---------- ----------
Total Interest Income ............... 3,751 3,966
---------- ----------
INTEREST EXPENSE:
Interest on deposits ........................... 1,751 1,767
Interest on other borrowed funds ............... 0 15
Interest on long-term debt ..................... 49 11
---------- ----------
Total Interest Expense .............. 1,800 1,793
---------- ----------
NET INTEREST INCOME ............................ 1,951 2,173
PROVISION FOR LOAN LOSSES ...................... 150 90
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................... 1,801 2,083
---------- ----------
OTHER INCOME:
Service charges, fees and other income ......... 281 244
Gain on sale of foreclosed assets, net ......... 0 26
Gain on sale of real estate investment ......... 0 183
Rental income .................................. 92 0
Realized gains on investment securities, net ... 0 17
Trading securities gains, net .................. 170 1,512
---------- ----------
Total Other Income .................. 543 1,982
---------- ----------
OTHER EXPENSES:
Salaries and employee benefits ................. 830 719
Net occupancy expense .......................... 201 213
Equipment expense .............................. 105 107
FDIC insurance ................................. 20 86
Foreclosed asset expenses ...................... 104 162
Other .......................................... 790 822
---------- ----------
Total Other Expenses ................ 2,050 2,109
---------- ----------
4
<PAGE>
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 294 1,956
PROVISION FOR INCOME TAXES ..................... 0 0
---------- ----------
NET INCOME ..................................... $ 294 $ 1,956
========== ==========
EARNINGS PER SHARE - BASIC ..................... $ 0.03 $ 0.87
========== ==========
EARNINGS PER SHARE - DILUTED ................... $ 0.03 $ 0.56
========== ==========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Common ...................................... 2,052,737 2,000,000
Common Share Equivalents .................... 2,052,737 3,466,534
</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 JUNE 30,
-----------------------------
1998 1997
----------- -----------
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ..................... $ 1,373 $ 1,523
Interest and dividends on investment securities:
Taxable interest income ....................... 377 436
Dividends ..................................... 46 37
Interest on overnight funds .................... 88 24
----------- -----------
Total Interest Income ................... 1,884 2,020
----------- -----------
INTEREST EXPENSE:
Interest on deposits ........................... 893 886
Interest on other borrowed funds ............... 0 9
Interest on long-term debt ..................... 24 5
----------- -----------
Total Interest Expense .................. 917 900
----------- -----------
NET INTEREST INCOME ............................ 967 1,120
PROVISION FOR LOAN LOSSES ...................... 75 45
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................... 892 1,075
----------- -----------
OTHER INCOME:
Service charges, fees and other income ......... 151 124
Gain on sale of foreclosed assets, net ......... 0 14
Rental income .................................. 47 0
Trading securities (losses) gains, net ......... (69) 809
----------- -----------
Total Other Income ...................... 129 947
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits ................. 408 376
Net occupancy expense .......................... 105 106
Equipment expense .............................. 55 53
FDIC insurance ................................. 10 43
Foreclosed asset expenses ...................... 44 92
Other .......................................... 400 448
----------- -----------
Total Other Expenses .................... 1,022 1,118
----------- -----------
6
<PAGE>
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES ............................ (1) 904
PROVISION FOR INCOME TAXES ..................... 0 0
----------- -----------
NET (LOSS) INCOME .............................. $ (1) $ 904
=========== ===========
EARNINGS PER SHARE - BASIC ..................... $ (0.05) $ 0.40
=========== ===========
EARNINGS PER SHARE - DILUTED ................... $ (0.05) $ 0.26
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Common ...................................... 2,052,737 2,000,000
Common Share Equivalents .................... 2,052,737 3,466,900
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
Net income .............................................. $ 294 $ 1,956
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses ............................... 150 90
Depreciation ............................................ 146 80
Amortization and accretion .............................. 24 7
Realized gain on investment securities, net ............. 0 (17)
Net increase in trading securities ...................... (2,254) (424)
Loss on sale of premises and equipment .................. 6 0
Gain on sale of foreclosed assets held for sale ........ 0 (19)
Gain on sale of real estate and other investments ....... 0 (183)
Change in:
Other assets .......................................... 65 (544)
Other liabilities ..................................... (21) (179)
------- -------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES ................................ (1,590) 767
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities .............................. 3,766 1,626
Purchase of securities ................................ (5,999) 0
Net (increase) decrease in loans ........................ 1,239 (3,282)
Net increase in loans held for sale ..................... (210) 0
Proceeds from sale of premises and equipment ............ 13 27
Capital expenditures for premises and equipment ......... (79) (368)
Proceeds from sales of foreclosed assets ................ 378 1,155
Capitalized expenditures for foreclosed assets .......... (38) (79)
Proceeds from sales of real estate and other investments 0 174
Proceeds from sales of other assets ..................... 65 83
------- -------
NET CASH USED IN
INVESTING ACTIVITIES ................................. (865) (664)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................ 2,918 2,020
Net decrease in other borrowed funds .................... 0 (1,150)
Payment on long-term debt ............................... (77) (54)
Dividend payments ....................................... (445) (294)
------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ................................... 2,396 522
------- -------
8
<PAGE>
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS .............................. (59) 625
CASH AND CASH EQUIVALENTS, BEGINNING .......................... 8,081 4,620
------- -------
CASH AND CASH EQUIVALENTS, ENDING ............................. $ 8,022 $ 5,245
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest .................................. $ 1,813 $ 1,793
Cash paid for income taxes .............................. $ 22 $ 47
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On June 23, 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 June 23, 1998. The Senior Preferred Stock second
quarter 1998 dividend of $55,889 and Series A Preferred Stock second 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.
9
<PAGE>
FIRST LEHIGH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
<S> <C> <C>
Net (loss) income .................................... $ (1) $ 904
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for loan losses ........................... 75 45
Depreciation ........................................ 73 40
Amortization and accretion .......................... 15 2
Loss on sale of premises and equipment .............. 6 0
Net increase in trading securities ................ (1,546) (71)
Gain on sale of foreclosed assets held for sale .... 0 (7)
Change in:
Other assets ...................................... 12 (305)
Other liabilities ................................. 38 (6)
------- -------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES ............................. (1,328) 602
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Proceeds from maturities ........................... 885 1,553
Purchase of securities ............................. (1,500) 0
Net increase in loans ................................ (406) (3,339)
Net increase in loans held for sale .................. (210) 0
Proceeds from sale of premises and equipment ......... 13 27
Capital expenditures for premises and equipment ...... (20) (264)
Proceeds from sales of foreclosed assets ............. 123 946
Capitalized expenditures for foreclosed assets ....... (7) (55)
Proceeds from sales of other assets .................. 10 68
------- -------
NET CASH USED IN
INVESTING ACTIVITIES .............................. (1,112) (1,064)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................. 983 1,040
Payment on long-term debt ............................ (39) (27)
Dividend payments .................................... (222) (294)
------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ................................ 722 719
------- -------
11
<PAGE>
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS ........................... (1,718) 257
CASH AND CASH EQUIVALENTS, BEGINNING ....................... 9,740 4,988
------- -------
CASH AND CASH EQUIVALENTS, ENDING .......................... $ 8,022 $ 5,245
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest ............................... $ 931 $ 899
Cash paid for income taxes ........................... $ 8 $ 12
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On June 23, 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 June 23, 1998. The Senior Preferred Stock second
quarter 1998 dividend of $55,889 and Series A Preferred Stock second 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.
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 June 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 six months ended June 30, 1998.
LONG-TERM DEBT
The Company has a term note due June 1999 with an outstanding balance of
$108,000 at June 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 $1,028,000 at
June 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 $2,971,000.
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 June 30, 1998 and 1997 is as
follows:
June 30,
--------
1998 1997
------- -------
Net income ...................................... $ 294 $ 1,956
Unrealized available-for-sale
securities appreciation (depreciation) ......... 108 (90)
------- -------
Comprehensive income ............................ $ 402 $ 1,866
======= =======
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 June 30, 1998 are as follows:
Actual at Required by the Order
June 30, 1998 And Agreements
------------- ----------------------
Tier I Capital ......................... 12.39% 6.5%
Non accrual to gross loans
as noted in June 30, 1995
examination report ................... 1.03% 2.0%
Classified assets at
June 30, 1995 to 50% of
Tier I capital and
loan loss reserve .................... 18.59% 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 June 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, First Lehigh Corporation had agreed to be acquired by
Patriot Bank Corp. of Pottstown, PA. pursuant to the Consolidation Agreement
between the two parties (the "Consolidation Agreement"). The management of the
Company views this transaction as an excellent way of providing additional
locations for the delivery of a broader array of products and services to the
Bank's customers.
Under the terms of the agreement to purchase the Company, Patriot will
exchange 0.428 shares of its common stock for each outstanding share of the
Company's common stock and senior preferred stock. The Company's Series A
preferred stock will receive 0.342 of Patriot stock for each share held. The
exchange ratio is expected to remain fixed of Patriot's stock price remains
between $14.71 and $17.97 during 20-day pricing period described in the
Consolidation Agreement. References made to Item 5 of this form 10-QSB report.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED
JUNE 30, 1997
NET INCOME
Net Income for the first six months of 1998 was $294,000 as compared to
$1.956 million for the same period in 1997. Net interest income after the
provision for loan losses declined $282,000, of which $197,000 was for interest
and fees on loans resulting from a decrease in the average loan balance of
$4.158 million during the period of 1998 as compared to 1997. The provision for
loan losses increased $60,000 from $90,000 in 1997 to $150,000 in 1998 based on
management's continued evaluation of the loan portfolio. Other income decreased
$1.439 million in 1998 as compared to 1997 primarily due to lower trading
securities gains of $1.342 million, lower gains from the sale of foreclosed
assets of $26,000 during the six months ended June 30, 1998 and a nonrecurring
sale of a real estate investment during the corresponding period of 1997 of
$183,000.
The profit performance for financial institutions is generally measured by
the Return on Average Assets ("ROA") and the Return on Average Equity ("ROE").
On an annualized basis the Company's ROA was 0.53% in 1998 as compared to 3.53%
in 1997. The ROE was 4.04% for the first half of 1998 as compared to 30.62% in
1997.
16
<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 half of 1998, interest and fee income on loans declined
$197,000, or 6.66%, mostly attributable to decrease in the average loan balance
of $4.158 million, or 6.53%. During the first six 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 $5.0 million of
originations which were in process; $1 million in loans were settled but not
funded while $4 million in loans were pending approval. The yield on loans
decreased one basis point to 9.28% during the first half of 1998 as compared to
the same period in 1997.
Interest and dividend income on investment securities decreased $150,000,
or 15.63%, in the first half of 1998 compared to the same period in 1997, mostly
due to $2.207 million reduction in average balance of investment securities. The
majority of this reduction in 1998 was an increase of $2.140 million of debt
securities which were prematurely called by the issuers and the sale of $2.0
million of investment securities sold in order to fund the deposit sale of the
Bank's Quakertown branch in October 1997. The Company continues to reinvest its
available cash in accordance with its investment policies and purchased $5.999
million of debt securities in the first half of 1998 as compared to no activity
for the same period in 1997. Mitigating the above decrease was an increase in
the average balance of overnight funds of $4.886 million in 1998 resulting in an
increase of interest earned of $131,000 as compared to the same period in 1997.
Interest expense of deposits declined $16,000, or 0.91%, in the first six
months of 1998 compared to the first six months of 1997. The average balance for
deposits declined $2.291 million during the first half of 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, and mitigated in part by a new super now deposit account of a
regional nonprofit organization which maintained an average balance of $1.67
million for the first six months of 1998. The average balance on savings
deposits declined $222,000; however, average cost increased 4 basis points
attributable to special rates extended to the aforementioned deposit account.
The average balance on time deposits decreased $2.069 million; however, there
was an increase of 14 basis points which was consistent with regional trends on
time deposits.
For the first six months of 1998, as compared to the same period in 1997,
the average yield on interest-earning assets declined 33 basis points, while the
cost of interest-bearing liabilities increased 11 basis points, resulting in a
net decrease in the interest rate spread of 44 basis points. The net yield on
earning assets declined 39 basis points during the first half of 1998 compared
to the first half of 1997. Of the $222,000 decline in net interest income in the
first six months of 1998 as compared to the first half of 1997, a decline of
$106,000 was attributable to reduced volume in average balances and a decline of
$116,000 was due to interest rate changes.
17
<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 Six Months ended June 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) $59,561 $2,763 9.28% $63,719 $2,960 9.29%
Investment securities 28,902 810 5.61 31,109 960 6.17
Bank time deposits 34 1 5.88 0 0 0.00
Overnight funds 6,576 177 5.39 1,690 46 5.44
------- ------ ------ ------- ------ ------
Total interest-earning assets $95,073 $3,751 7.89% $96,518 $3,966 8.22%
======= ------ ------ ======= ------ ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,616 $ 483 2.73% $35,838 $ 478 2.69%
Time deposits 47,588 1,268 5.37 49,657 1,289 5.23
Other borrowed funds 0 0 0.00 506 15 5.90
Long-term debt 1,176 49 8.29 245 11 8.93
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities $84,380 $1,800 4.30% $86,246 $1,793 4.19%
======= ------ ------ ======= ------ ------
NET INTEREST INCOME $1,951 $2,173
====== ======
INTEREST RATE SPREAD 3.59% 4.03%
====== ======
NET INTEREST MARGIN
ON INTEREST- EARNING
ASSETS (2) 4.11% 4.50%
====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 112.67% 111.91%
====== ======
</TABLE>
- -------------------------
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
18
<PAGE>
<TABLE>
<CAPTION>
For the Six Months ended June 30,
(in thousands)
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $63,719 $2,960 9.29% $57,029 $2,748 9.64%
Investment securities 31,109 960 6.17 30,330 911 6.01
Overnight funds 1,690 46 5.44 2,156 58 5.38
------- ------ ------ ------- ------ ------
Total interest-earning assets $96,518 $3,966 8.22% $89,515 $3,717 8.31%
======= ------ ------ ======= ------ ------
INTEREST-BEARING
LIABILITIES:
Saving deposits $35,838 $ 478 2.69% $35,854 $ 496 2.78%
Time deposits 49,657 1,289 5.23 47,917 1,267 5.32
Other borrowed funds 506 15 5.90 608 17 5.53
Long-term debt 245 11 8.93 354 16 8.94
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities $86,246 $1,793 4.19% $84,733 $1,796 4.26%
======= ------ ------ ======= ------ ------
NET INTEREST INCOME $2,173 $1,921
====== ======
INTEREST RATE SPREAD 4.03% 4.05%
====== ======
NET INTEREST MARGIN
ON INTEREST- EARNING
ASSETS (2) 4.50% 4.29%
====== ======
RATIO OF AVERAGE INTEREST-
EARNING ASSETS TO
AVERAGE INTEREST-BEARING
LIABILITIES 111.91% 105.64%
====== ======
</TABLE>
- ------------------------
(1) For the purpose of these computations, nonaccrual loans are not included in
the daily average loan amounts outstanding.
(2) Net interest income divided by average interest-earning assets.
19
<PAGE>
Analysis of the Effect of Volume and Rate Changes in Interest Income and
Interest Expense:
The following table presents the extent to which net interest income
changed due to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities during the periods
indicated. Information provided in each category with respect to changes
attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rate multiplied by prior
volume) and the net change. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 1998 vs. 1997 June 30, 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 $ (237) $ 40 $(197) $ 322 $ (110) $ 212
Investment securities (71) (79) (150) 34 15 49
Bank time deposits 1 0 1 0 0 0
Overnight funds 134 (3) 131 (13) 1 (12)
------- -------- ----- ----- ------ -----
Total interest-earning assets $ (173) $ (42) $(215) $ 343 $ (94) $ 249
------- ------ ----- ----- ------ -----
INTEREST-BEARING LIABILITIES:
Savings deposits $ (7) $ 12 $ 5 $ 2 $ (20) (18)
Time deposits (92) 71 (21) 63 (41) 22
Other borrowed funds (8) (7) (15) (5) 3 (2)
Long-term debt 40 (2) 38 (5) 0 (5)
------- -------- ----- ----- ------ -----
Total interest-bearing liabilities $ (67) $ 74 $ 7 $ 55 $ (58) $ (3)
------- ------ ----- ----- ------ -----
CHANGE IN NET INTEREST INCOME $ (106) $ (116) $(222) $ 288 $ (36) $ 252
====== ====== ===== ===== ====== =====
</TABLE>
20
<PAGE>
OTHER INCOME
Total other income declined $1.439 million during the first half of 1998 as
compared to the same period in 1997, mostly attributable to lower gains of
$1.342 million recognized on its trading securities portfolio. The Company's
trading security portfolio, consisting mainly of bank holding company equities,
was $9.825 million at June 30, 1998. These trading securities are carried at
fair value and include the unrealized gains on losses in the statement of
operations. During the first half of 1998, the financial services sector has not
continued the significant increases in its share prices as it had throughout
1997. Management will continue to closely monitor its investment portfolio to
position the portfolio against future fluctuations in the stock market. A
downturn in the overall market or financial services sector could result in
future trading securities losses.
Also contributing to the decrease were nonrecurring gains in 1997 on the
sale of real estate investments of $183,000. 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
$92,000 during the first half of 1998.
OTHER EXPENSES
Other expenses decreased $59,000, or 2.80%, during the first half of 1998
as compared to the same period in 1997. Salaries and benefits increased
$111,000, or 15.44%, in the first six months of 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 76.74%, the result of an improvement in
the Bank's risk classification effective July 1, 1997. In addition, foreclosed
asset expenses decreased $58,000, or 35.80% during the first six months of 1998
as compared to the same period in 1997 due to lower operating costs.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was $1.819 million at June 30, 1998, compared
to $1.586 million at December 31, 1997. The allowance equaled 2.93% of loans at
June 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 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
21
<PAGE>
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.
At June 30, 1998, based on management's evaluation as outlined above, the
amount charged to operating expense for the provision for loan losses was
$150,000 compared to $90,000 charged at June 30, 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 June 30, 1998 (in thousands):
Beginning Balance, January 1, 1998 ............... $ 1,586
-------
Charge-offs:
Commercial, financial and agricultural ........ --
Real estate - construction .................... 27
Real estate - mortgage......................... 130
Installment loans to individuals .............. 216
-------
Total charge-offs ................................ 373
-------
Recoveries:
Commercial, financial and agricultural ........ 23
Real estate - construction .................... 99
Real estate - mortgage ........................ 289
Installment loans to individuals .............. 45
-------
Total recoveries ................................. 456
-------
Net charge-offs .................................. (83)
-------
Provision for loan losses ........................ 150
-------
Ending Balance, June 30, 1998 .................... $ 1,819
=======
Ratio of net recoveries to
average loans outstanding ..................... 0.13%
22
<PAGE>
FINANCIAL CONDITION
At June 30, 1998, the Company's total assets were $111.50 million as
compared to $108.72 million at December 31, 1997, representing an increase of
$2.78 million, or 2.55%, which is mostly attributable to $2.92 million growth in
its deposits since December 31, 1997.
Loans
Net loans decreased $2.458 million, or 3.91%, from $62.820 million at
December 31, 1997 to $60.362 million at June 30, 1998. There were two key items
which attributed to the change in the loan portfolio for the first six months of
1998. First, the Bank experienced payoffs of several large commercial loans in
the first half of 1998 including approximately $4 million of previously
identified problem loans. Second, mitigating the above decrease, at June 30,
1998, approximately $5 million of new loan originations were pending; $1 million
were approved waiting for settlements, while $4 million were pending final
review and approvals.
Most categories of loans, as outlined below, declined at June 30, 1998 as
compared to December 31, 1997, except for residential real estate loans which
increased $2.724 million during the first half 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 June 30, 1998 as compared to December 31, 1997 is as follows: Real
estate construction loans declined $1.624 million, or 35.15%; Commercial real
estate decreased $976,000, or 5.28%; Consumer loans declined $2.205 million or
16.25%; Commercial loans declined $144,000, or 4.22%; while Residential real
estate loans increased $2.724 million, or 11.20%.
23
<PAGE>
The following table sets forth the maturity and repricing schedule of the
loan portfolio at June 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 ...................... $ 1,342 $ 998 $ 608 $ 2,948
Real estate-construction ........ 1,536 687 773 2,996
Real estate-mortgage ............ 5,666 19,059 17,536 42,261
Consumer, net ................... 1,283 8,660 1,334 11,277
Nonaccrual loans ................ -- -- -- 2,699
------- ------- ------- -------
Total ................................. $ 9,827 $29,404 $20,251 $62,181
======= ======= ======= =======
Repricing Schedule (1):
Fixed rate loans ................ $11,418 $27,556 $ 6,871 $45,845
Floating rate loans ............. 13,607 30 -- 13,637
Nonaccrual loans ................ -- -- -- 2,699
------- ------- ------- -------
Total ................................. $25,025 $27,586 $ 6,871 $62,181
======= ======= ======= =======
</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 $19.45 million (amortized
costs) at June 30, 1998, or 80.30% of total investment securities. Included in
the above are $2.078 million mortgage-backed products, mostly consisting of
collateralized mortgage obligations ("CMO") and real estate mortgage investment
conduits ("REMIC").
The available-for-sale securities increased $2.32 million, or 12.94%, from
$17.91 million at December 31, 1997 to $20.23 million at June 30, 1998. The
Company, after evaluating its cash position, purchased $6.0 million of bonds
throughout the first six months of 1998. The increase in the cash position was
generated by operations, in particular an increase in deposits, as well as $3.48
million of bonds which were prematurely 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.
24
<PAGE>
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 $2.918 million from $92.146 million at
December 31, 1997 to $95.064 million at June 30, 1998, primarily the result of a
new super now account received from a regional nonprofit organization. During
the second quarter of 1998, the average balance maintained by this depositor
amounted to $2.110 million. Management believes that this depositor will
maintain an average balance of at least $1.5 million throughout the second half
of 1998. At June 30, 1998, noninterest-bearing deposits decreased $715,000,
while interest-bearing deposits increased $3.633 million as compared to December
31, 1997. As a percentage of total deposits, savings, club accounts and
interest-bearing demand deposits represented 38.72% at June 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 June 30, 1998 and December 31, 1997.
June 30, December 31,
1998 1997
------ ------
(in thousands)
Three months or less ....... $1,471 $2,124
Over three months through
twelve months .......... 4,386 2,641
Over one year through
five years ............. 1,801 2,528
Over five years ............ 0 0
------ ------
TOTAL ............... $7,658 $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.
25
<PAGE>
The following table represents nonperforming assets of the Company at June
30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Impaired loans ..................................... $2,699 $3,364
Other loans past due 90 days or more ............... 870 421
------ ------
Total nonperforming loans ...................... 3,569 3,785
Foreclosed assets held for sale .................... 2,193 1,597
------ ------
Total nonperforming assets ..................... $5,762 $5,382
====== ======
Nonperforming loans as a percentage
of loans (net of unearned interest) ............ 5.74% 5.88%
Nonperforming assets as a percentage of assets ..... 5.17% 4.95%
</TABLE>
Impaired loans declined $665,000 at June 30, 1998 as compared to December
31, 1997. There were several key factors which impacted the impaired loan
balance throughout the first six months of 1998. First, $1.264 million of loans
were transferred to nonaccrual status. Second, $936,000, was transferred from
impaired loans to foreclosed assets. Lastly, $519,000 was repaid by the
borrowers, $342,000 has returned to accrual status and $132,000 was charged off
to the provision. The transfer of impaired loans to foreclosed assets is
expected to continue for several quarters as management actively pursues the
litigation/foreclosure actions towards completion in anticipation of the
ultimate disposal of these nonperforming assets. Real estate loans represent
$2.285 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 $449,000 from $421,000 at December
31, 1997 to $870,000 at June 30, 1998. All delinquent loans are reviewed by
management on a weekly basis with regard to legal proceedings and collection
efforts. Of the delinquent loans, 92.41% are secured by real estate, 5.40% are
loans to commercial borrowers and a small fraction are loans to consumers.
Foreclosed assets held for sale increased $596,000 from $1.597 million at
December 31, 1997 to $2.193 million at June 30, 1998 primarily the result of the
transfer of $936,000 from impaired loans.
26
<PAGE>
The following table sets forth the total of commercial and investment
properties at June 30, 1998, all of which are currently in litigation and/or
foreclosure.
Commercial/Investment Properties:
Impaired and over 90 days ............ $1,322,236
Foreclosed assets held for sale ...... 684,799
----------
Total ................................ $2,007,035
==========
The following table sets forth the total of residential properties to be
foreclosed upon and liquidated at June 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 ............ $1,138,251
Foreclosed assets held for sale ...... 1,164,553
----------
Total ................................ $2,302,804
==========
The following table sets forth the total of land developments and building
lots to be foreclosed upon and liquidated at June 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............. $344,779
Foreclosed assets held for sale....... 273,323
--------
Total................................. $618,102
========
The following table sets forth the total of loans in litigation that are
not secured by real estate at June 30, 1998.
Secured by Other Than Real Estate:
Impaired and over 90 days............. $485,468
========
The following table sets forth the total of assets that are listed as
nonperforming, but which are under agreements that provide a yield at or in
excess of current market rates at June 30, 1998.
Performing/Nonperforming Assets:
Impaired and over 90 days............. $218,350
========
The following table sets forth the total of assets that are under agreement
or are being paid off with the settlement dates to take place in the third
quarter of 1998.
Assets Under Agreement or Payoffs:
Impaired & over 90 days............... $60,000
Foreclosed assets held for sale....... 70,525
--------
Total................................. $130,525
========
27
<PAGE>
At June 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.
For 1998, management has established a goal to dispose of $4.0 million of
gross classified and/or nonperforming assets. As of June 30, 1998, the gross
reduction in classified and/or nonperforming assets was $583,000; however,
during the first half ended June 30, 1998, $768,000 was added to classified
and/or nonperforming assets, resulting in a net increase in classified and/or
nonperforming assets of $185,000. Management continues to evaluate all available
options to liquidate these assets and remains committed to moving toward its
1998 goal. Although, the net change during the first half of 1998 adversely
affected management's goals for 1998, the Bank remains in compliance at June 30,
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 June 30, 1998, the Company maintained $8.022 million in cash and cash
equivalents in the form of cash and due from banks (after reserve requirements).
In addition, the Company had $20.227 million in securities available-for-sale
representing 18.14% of total assets at June 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 June 30, 1998, approximately 78.39% of the Company's assets
were funded by core deposits acquired within its market area. An additional
12.92% of the assets were funded by the Company's equity. These two components
provide a substantial and stable source of funds.
28
<PAGE>
The Company paid cash dividends to the holders of the Senior Preferred
Stock and Series A Preferred Stock during the first half of 1998 and 1997. There
were no dividends paid to its common stockholders for the period in 1998 or
1997.
<TABLE>
<CAPTION>
Date
Class of Stock Paid Current Arrears Total
- -------------- ---- ------- ------- -----
<S> <C> <C> <C> <C>
June 30, 1998
- -------------
Senior Preferred February 4, 1998 $56,272 -- $ 56,272
Senior Preferred May 5, 1998 $56,085 -- $ 56,085
Series A Preferred February 4, 1998 $55,498 $110,995 $166,493
Series A Preferred May 5, 1998 $55,498 $110,995 $166,493
June 30, 1997
- -------------
Senior Preferred May 12, 1997 $56,273 $237,542 $293,815
Series A Preferred -- -- -- None
</TABLE>
In addition, on June 23, 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 June 23, 1998. This declaration included an
aggregate of $55,889 on its Senior Preferred Stock for the second quarter of
1998 and an aggregate of $166,493 on its Series A Preferred Stock, which
represented the second quarter 1998 dividend of $55,498 and $110,995 for
dividend in arrears. After payment of the $166,493, $721,471 remains in arrears
on the Series A Preferred Stock as of June 30, 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.
For the six months ended June 30, 1998, cash and cash equivalents decreased
$59,000 as compared to $625,000 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 $2.357 million during the
six months ended June 30, 1998, mostly attributable to a decrease in net income
of $1.662 million and increased net activity in trading securities of $1.830
million.
29
<PAGE>
Cash flows from investing activities declined $201,000 during the six
months ended June 30, 1998 as compared to the same period in 1997. During the
first six months of 1998, $5.999 million of securities were purchased to replace
$3.766 million of debt instruments that were prematurely called by the issuers,
an increase of $2.140 million over the same period in 1997. Also, net proceeds
from sale of foreclosed assets decreased $784,000 during the first half of 1998
as compared to the same period in 1997 as management continues to evaluate all
possibilities in liquidating the foreclosed asset portfolio. Finally, mitigating
these decreases was an increase in proceeds received from loans as the Bank
experienced several large loan repayments in the first half of 1998.
Cash flows from financing activities increased $1.874 million during the
first half of 1998, due to an increase in deposits of $898,000 primarily the
result of a new account for a not-for-profit organization which has maintained
an average balance of $1.666 million 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 June 30, 1998 the Company has a negative interest sensitive GAP of
$7.478 million, or 7.52% 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 $17.07
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.
30
<PAGE>
The following table sets forth the Company's interest sensitivity GAP
position at June 30, 1998:
<TABLE>
<CAPTION>
June 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) ..... $ 16,553 $ 688 $ 1,124 $ 1,756 $ 19,880 $ 40,001
Loans (2) ..................... 17,667 7,358 7,619 19,967 6,871 59,482
-------- -------- -------- -------- -------- --------
TOTAL ........................ $ 34,220 $ 8,046 $ 8,743 $ 21,723 $ 26,751 $ 99,483
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand-interest bearing ....... $ 15,838 $ -- $ -- $ -- $ -- $ 15,838
Savings and clubs (3) ......... 1,228 716 1,432 4,296 13,295 20,967
Time .......................... 12,369 19,436 11,537 4,374 -- 47,716
Long-term debt ................ 132 25 53 927 -- 1,137
-------- -------- -------- -------- -------- --------
TOTAL ........................ $ 29,567 $ 20,177 $ 13,022 $ 9,597 $ 13,295 $ 85,658
-------- -------- -------- -------- -------- --------
GAP ............................ $ 4,653 ($12,131) ($ 4,279) $ 12,126 $ 13,456 $ 13,825
-------- -------- -------- -------- -------- --------
Cumulative GAP ................. $ 4,653 ($ 7,478) ($11,757) $ 369 $ 13,825 $ 13,825
======== ======== ======== ======== ======== ========
</TABLE>
- -------------
(1) Includes average pay downs based on the stress test for collateralized
mortgage obligation securities, equity securities categorized as trading
securities and $5.866 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 $2.699
million.
(3) Assumes that 7% of the savings deposits are repriceable each year based on
the previous five years' historical activity.
31
<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 June 30,
Requirements 1998 1997
------------ ---- ----
Leverage ratio:
Tier I (core capital) ratio............. 4.0% * 12.39% 11.73%
Risk-based capital ratios:
Tier I capital/risk-weighted............ 4.0% 18.14% 16.06%
Tier I and Tier II capital/
Risk-weighted assets........... 8.0% 19.40% 17.32%
- --------------------
* 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 June 30, 1998 deposit levels and based on available rate
information. However, the FDIC may increase the projected rates at anytime.
32
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998
TO THE THREE MONTHS ENDED JUNE 30, 1997
ANALYSIS OF OPERATIONS
For the second quarter of 1998, the Company recorded a net loss of $1,000
as compared to $904,000 net income for the same period in 1997, mostly as the
result of decreased trading securities gains of $878,000. Interest and fee
income earned on loans decreased $150,000 to $1.373 million in 1998 mostly due
to a decrease in the average loan balance for 1998. The decrease of
approximately $4 million was attributable to several large repayments of
previously troubled credits. In addition, at June 30, 1998 there were $5.0
million of new loans which were pending approval and settlement. Other income
declined $818,000 during the second quarter of 1998 as compared to the same
period in 1997 as the result of aforementioned lower gains of $878,000 on its
trading portfolio, offset in part by increased rental income of $47,000 and
service charges and other income of $27,000. The trading securities gains
decreased due to a slower advance of the stock market, in particular, the stocks
of the financial institutions sector. Other expenses declined $96,000 during the
second quarter of 1998 as compared to the second quarter of 1997, the result of
decreased FDIC insurance premiums of $33,000, foreclosed asset expenses of
$48,000 and other expenses of $48,000 mitigated by increased salaries and
benefits of $32,000.
For the second quarter 1998, net cash decreased $1.975 million as compared
to the second quarter of 1997. During the second quarter of 1998, cash flows
from operating activities decreased $1.930 million, attributable to increased
trading securities activities of $1.475 million and decreased net income of
$905,000 as compared to the same period in 1997. Cash flows from investing and
financing activities were approximately the same for the second quarters of 1998
and 1997. In 1998, the Company purchased additional debt securities of $1.5
million to replace those prematurely called by the issuers. Also as explained
above, loans decreased $2.933 million in 1998 as compared to 1997. The proceeds
from the sale of foreclosed assets decreased $823,000 in 1998 as management
continues to evaluate its options in disposing the nonperforming assets.
33
<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.
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
34
<PAGE>
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 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's position, and in early 1998 instituted suit against the carrier in the
Court of Common Pleas of Lehigh County, PA, 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.
35
<PAGE>
Item 5. Other Information.
On July 27, 1998, James L. Leuthe resigned as Chairman of the Board of
Directors, Acting President and director of the Company. John H. McKeever
was appointed as Chairman of the Board of Directors and Acting President of
the Company. On August 5, 1998, the Board of Directors appointed Wilbur R.
Roat as President and Chief Executive Officer of the Company and George M.
Baltozer as Vice President of the Company.
On July 28, 1998, the Company entered into an Agreement and Plan of
Consolidation (the "Consolidation Agreement") with Patriot Bank Corp.
("Patriot") pursuant to which the Company and Patriot will consolidate (the
"Consolidation") into a newly formed Pennsylvania business corporation to
be named Patriot Bank Corp. In connection with the Consolidation agreement,
the Bank and Patriot Bank entered into a Bank Plan of Merger, pursuant to
which, upon consummation of the consolidation, the Bank will merge with and
into Patriot Bank.
For more complete information regarding the Consolidation Agreement and the
transactions contemplated thereunder, reference is made to the Company's
Form 8-K Current Report filed with the Securities and Exchange Commission
on August 6, 1998, which is incorporated herein by reference.
Item 6. - Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed with this Form 10-QSB:
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to
the Company's Form SB-2 Registration Statement No.
33-71712).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Form SB-2 Registration
Statement No. 33-71712).
10.1 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).
36
<PAGE>
Exhibit No. Description
----------- -----------
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.
No reports on Form 8-K were filed during the quarter ended
June 30, 1998. 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 Corp.
37
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST LEHIGH CORPORATION
Date: August 13, 1998 By: /s/Wilbur R. Roat
----------------------------------
Wilbur R. Roat
President and Chief Executive Officer
Date: August 13, 1998 By: /s/Kashmira K. Lodaya
----------------------------------
Kashmira K. Lodaya, Treasurer
(principal financial and
accounting officer)
38
<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 40 - 41
Earnings.
27 Financial Data Schedule. 42 - 43
39
FIRST LEHIGH CORPORATION
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
JUNE 30, JUNE 30,
BASIC EPS: 1998 1997
- -------------------------------------------------------------------------------
NET INCOME 293,909 1,956,130
LESS PREFERRED STOCK DIVIDENDS:
SERIES A (110,996) (110,996)
SENIOR (111,974) (112,546)
---------- ----------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS 70,939 1,732,588
---------- ----------
COMMON STOCK OUTSTANDING: 2,052,737 2,000,000
---------- ----------
EARNINGS PER SHARE - BASIC 0.03 0.87
========== ==========
JUNE 30, JUNE 30,
DILUTED EPS: 1998 1997
- -------------------------------------------------------------------------------
NET INCOME 293,909 1,956,130
---------- ----------
DILUTED EFFECT OF POTENTIAL
COMMON STOCK:
COMMON STOCK 2,052,737 2,000,000
STOCK OPTIONS 60,000 60,000
HYPOTHETICAL SHARE REPURCHASE (1) (31,111) (39,429)
COMMON SHARES ISSUED UPON
ASSUMED CONVERSION:
SERIES A (2) 545,600 545,600
SENIOR (3) 897,626 900,363
---------- ----------
DILUTIVE COMMON STOCK
OUTSTANDING: 3,524,852 3,466,534
---------- ----------
EARNINGS PER SHARE - DILUTED (4) 0.08 0.56
========== ==========
- -------------
(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, .03 EARNINGS PER SHARE DILUTIVE WILL BE UTILIZED.
40
<PAGE>
FIRST LEHIGH CORPORATION
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
JUNE 30, JUNE 30,
BASIC EPS: 1998 1997
- -------------------------------------------------------------------------------
NET INCOME (LOSS) (852) 904,480
LESS PREFERRED STOCK DIVIDENDS:
SERIES A (55,498) (55,498)
SENIOR (55,889) (56,273)
--------- ---------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS (112,239) 792,709
--------- ---------
COMMON STOCK OUTSTANDING: 2,052,737 2,000,000
--------- ---------
EARNINGS PER SHARE - BASIC (0.05) 0.40
========= =========
JUNE 30, JUNE 30,
DILUTED EPS: 1998 1997
- -------------------------------------------------------------------------------
NET INCOME (LOSS) (852) 904,480
--------- ---------
DILUTED EFFECT OF POTENTIAL
COMMON STOCK:
COMMON STOCK 2,052,737 2,000,000
STOCK OPTIONS 60,000 60,000
HYPOTHETICAL SHARE REPURCHASE (1) (29,281) (39,063)
COMMON SHARES ISSUED UPON
ASSUMED CONVERSION:
SERIES A (2) 545,600 545,600
SENIOR (3) 897,626 900,363
--------- ---------
DILUTIVE COMMON STOCK
OUTSTANDING: 3,526,682 3,466,900
--------- ---------
EARNINGS PER SHARE - DILUTED (4) (0.00) 0.26
========= =========
- ---------------
(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, (.05) EARNINGS PER SHARE DILUTIVE WILL BE UTILIZED.
41
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FIRST LEHIGH CORPORATION, AND SUBSIDIARY EXHIBIT 27
FINANCIAL DATA SCHEDULE
SIX MONTHS ENDED JUNE 30, 1998
</LEGEND>
<CIK> 707357
<NAME> FIRST LEHIGH CORPORATION, AND SUBSIDIARY
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,156
<INT-BEARING-DEPOSITS> 4,612
<FED-FUNDS-SOLD> 1,254
<TRADING-ASSETS> 9,825
<INVESTMENTS-HELD-FOR-SALE> 20,227
<INVESTMENTS-CARRYING> 4,083
<INVESTMENTS-MARKET> 4,019
<LOANS> 62,181
<ALLOWANCE> 1,819
<TOTAL-ASSETS> 111,496
<DEPOSITS> 95,064
<SHORT-TERM> 0
<LIABILITIES-OTHER> 888
<LONG-TERM> 1,137
0
16
<COMMON> 20
<OTHER-SE> 14,371
<TOTAL-LIABILITIES-AND-EQUITY> 111,496
<INTEREST-LOAN> 2,763
<INTEREST-INVEST> 810
<INTEREST-OTHER> 178
<INTEREST-TOTAL> 3,751
<INTEREST-DEPOSIT> 1,751
<INTEREST-EXPENSE> 1,800
<INTEREST-INCOME-NET> 1,951
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 170
<EXPENSE-OTHER> 2,050
<INCOME-PRETAX> 294
<INCOME-PRE-EXTRAORDINARY> 294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<YIELD-ACTUAL> 4.11
<LOANS-NON> 2,699
<LOANS-PAST> 870
<LOANS-TROUBLED> 138
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,586
<CHARGE-OFFS> 373
<RECOVERIES> 456
<ALLOWANCE-CLOSE> 1,819
<ALLOWANCE-DOMESTIC> 732
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,087
</TABLE>
