<PAGE>
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, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------------------- ---------------------
Commission file Number: 2-85306
Lake Ariel Bancorp, Inc.
------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania
------------
(State or other jurisdiction of incorporation or organization)
23-2244948
----------
(I.R.S. Employer Identification No.)
Post Office Box 67
Lake Ariel, Pennsylvania 18436
------------------------------
(Address of principal executive offices)
(Zip Code)
(717) 698-5695
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2)has been subject to such filing requirements for the past 90 days.
Yes X No
------ ------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,649,302 shares of common
stock, par value $.42 per share, as of June 30, 1995.
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-QSB
FOR THE SIX MONTHS ENDED JUNE 30, 1995
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1995
and December 31, 1994.................................................... 3
Consolidated Statement of Income for the three and
six months ended June 30, 1995 and 1994.................................. 4
Earnings Per Share for the three and six month
periods ended June 30, 1995 and 1994..................................... 4
Consolidated Statement of Cash Flows for the six
months ended June 30, 1995 and 1994...................................... 5
Notes to Consolidated Financial Statements................................... 6-7
Item 2. Management's Discussion and Analysis or
Plan of Operations....................................................... 8-20
Part II - Other Information
Item 1. Legal Proceedings............................................................ N/A
Item 2. Changes in Securities........................................................ N/A
Item 3. Defaults Upon Senior Securities.............................................. N/A
Item 4. Submission of Matters to a Vote of Security
Holders.................................................................. N/A
Item 5. Other Information............................................................ N/A
Item 6. Exhibits and Reports on Form 8-K............................................. 21
Signatures................................................................... 22
</TABLE>
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------------- --------------
(in thousands) (in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................................ $ 13,061 $ 10,719
Held-to-maturity securities (estimated fair market
value of $42,978 and $40,674, respectively) ................................... 42,852 42,535
Available-for-sale securities .................................................... 45,313 34,142
Mortgage loans held for resale ................................................... 3,044 119
Loans and leases ................................................................. 148,854 144,372
Less unearned income and loan fees ............................................ (8,814) (7,977)
Less allowance for possible credit losses ..................................... (1,646) (1,496)
--------- ---------
Net Loans ............................................................... 141,438 135,018
Premises and equipment, net ...................................................... 8,152 7,015
Accrued interest receivable ...................................................... 2,907 2,066
Foreclosed assets held for sale .................................................. 320 191
Other assets ..................................................................... 4,085 4,439
--------- ---------
TOTAL ASSETS ..................................................................... $ 258,128 $ 236,125
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ........................................................... $ 24,897 $ 24,880
Interest-bearing:
Demand .................................................................. 27,229 26,099
Savings ................................................................. 43,449 40,888
Time .................................................................... 88,445 75,657
Time $100,000 and over .................................................. 25,887 24,663
--------- ---------
Total Deposits .......................................................... 209,907 192,187
Accrued interest payable ......................................................... 1,901 1,672
Federal Funds Purchased .......................................................... 3,900 --
Securities sold under agreements to repurchase ................................... 500 1,000
Short-term borrowings ............................................................ 2,500 9,750
Long-term debt ................................................................... 20,187 15,219
Other liabilities ................................................................ 1,261 498
--------- ---------
Total Liabilities ....................................................... 240,156 220,326
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of
$1.25 par value each; no outstanding shares .................................... -- --
Common stock: Authorized, 5,000,000 shares of
$.42 par value each; issued and outstanding
1,645,684 shares ............................................................... 693 688
Capital surplus .................................................................. 9,298 9,139
Retained earnings ................................................................ 8,262 7,783
Net unrealized losses on available-for-sale
securities ..................................................................... (281) (1,811)
--------- ---------
Total Stockholders' Equity .............................................. 17,972 15,799
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................................... $ 258,128 $ 236,125
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
----------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases ................................................. $ 6,313 $ 4,732 $ 3,250 $ 2,428
Investment Securities
Taxable ...................................................... 2,186 836 1,136 486
Exempt from federal income taxes ............................. 482 546 226 286
Dividends .................................................... 62 19 31 7
------- ------- ------- -------
Total Investment Securities Income ........................ 2,730 1,401 1,393 779
------- ------- ------- -------
Deposits in banks ................................................ 18 33 13 20
Federal funds sold ............................................... 110 1 85 1
------- ------- ------- -------
TOTAL INTEREST INCOME ..................................... 9,171 6,167 4,741 3,228
------- ------- ------- -------
INTEREST EXPENSE:
Deposits ......................................................... 3,967 2,215 2,112 1,161
Long-term debt ................................................... 743 188 437 151
Federal funds purchased .......................................... 7 -- 2 --
Short-term borrowings ............................................ 45 44 1 31
Securities sold under agreements to repurchase ................... 13 -- 9 --
------- ------- ------- -------
TOTAL INTEREST EXPENSE ..................................... 4,775 2,447 2,561 1,343
------- ------- ------- -------
NET INTEREST INCOME .............................................. 4,396 3,720 2,180 1,885
PROVISION FOR POSSIBLE
CREDIT LOSSES .................................................. 360 200 225 100
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES ..................................... 4,036 3,520 1,955 1,785
------- ------- ------- -------
OTHER OPERATING INCOME:
Loan origination fees ............................................ 14 352 -- 70
Customer service charges and fees ................................ 476 319 256 173
Mortgage servicing fees .......................................... 148 192 73 91
Gain on available-for-sale securities ............................ 227 85 192 63
Trading account security gains (losses), net ..................... -- (7) -- --
Gain (loss) on sale of mortgage loans, net ....................... 40 (75) 16 (47)
Other income ..................................................... 230 136 124 55
------- ------- ------- -------
TOTAL OTHER OPERATING INCOME .............................. 1,135 1,002 661 405
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Salaries and benefits ............................................ 1,794 1,421 895 652
Occupancy expense ................................................ 520 451 248 222
Equipment expense ................................................ 359 295 195 157
FDIC assessment .................................................. 210 161 89 81
Advertising ...................................................... 152 116 60 71
Other expenses ................................................... 990 809 535 377
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES ............................ 4,025 3,253 2,022 1,560
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES ......................... 1,146 1,269 594 630
PROVISION FOR INCOME TAXES ....................................... 240 250 135 127
------- ------- ------- -------
NET INCOME ....................................................... $ 906 $ 1,019 $ 459 $ 503
======= ======= ======= =======
Earnings per share: .............................................. $ 0.55 $ 0.63 $ 0.28 $ 0.31
======= ======= ======= =======
Dividends per share: ............................................. $ 0.26 $ 0.24 $ 0.13 $ 0.12
======= ======= ======= =======
Weighted average no. of shares outstanding: ...................... 1,644 1,630 1,644 1,630
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1995 1994
------- ------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................................... $ 906 $ 1,019
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible credit losses .............................................. 360 200
Depreciation, amortization and accretion .......................................... 363 348
(Increase) decrease in mortgage loans held for resale ............................. (2,925) 11,742
Investment security gains (losses), net ........................................... (227) (70)
Loss on sale of foreclosed assets ................................................. -- 23
(Gain) loss on sale of equipment .................................................. 8 9
(Increase) decrease in accrued interest receivable ................................ (841) (241)
Increase (decrease) in accrued interest payable ................................... 229 103
(Increase) decrease in other assets ............................................... (435) (1,129)
Increase (decrease) in other liabilities .......................................... 802 173
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................................... (1,760) 12,177
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities of investment securities .................................. 3,679 772
Purchases of securities ............................................................ (3,996) (10,239)
Available-for-sale securities:
Proceeds from maturities of securities ............................................. 1,774 3,212
Proceeds from sales of securities .................................................. 6,477 10,739
Purchases of securities ............................................................ (16,869) (14,184)
Net (increase) decrease in loans and leases .......................................... (4,157) (34,678)
Purchases of premises and equipment .................................................. (1,511) (754)
Proceeds from sale of equipment ...................................................... 2 15
Proceeds from sale of foreclosed assets .............................................. 167 189
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .................................. (14,434) (44,928)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ............................................................. 17,720 27,651
Increase (decrease) in federal funds purchased ....................................... 3,900
Increase (decrease) in short-term borrowings ......................................... (7,250) (5,625)
Increase (decrease) in securities sold under
agreements to repurchase ........................................................... (500) 1,000
Proceeds from long-term debt ......................................................... 15,000 15,000
Principal payments on long-term debt ................................................. (10,071) (31)
Proceeds from issuance of common stock ............................................... 164 --
Cash dividends paid .................................................................. (427) (391)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .................................... 18,536 37,604
-------- --------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ......................................... 2,342 4,853
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................................... 10,719 9,800
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD .............................................. $ 13,061 $ 14,653
======== ========
CASH PAID DURING THE YEAR FOR:
Interest ............................................................................ $ 4,546 $ 2,550
======== ========
Income taxes ........................................................................ $ 216 $ 280
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
LAKE ARIEL BANCORP,INC.
FORM 10-QSB
Part I - Financial Information (Cont'd)
Item 1. Financial Statements (Cont'd)
Notes to Consolidated Financial Statements
1. REPORTING AND ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accounting and financial reporting policies of Lake Ariel Bancorp,
Inc. and its subsidiary conform to generally accepted accounting principles and
to general practice within the banking industry. The consolidated statements
include the accounts of Lake Ariel Bancorp, Inc. and its wholly owned
subsidiary, LA Bank, N.A. (Bank) including its subsidiary, LA Lease, Inc.
(collectively, Company). All material intercompany accounts and transactions
have been eliminated in consolidation. The accompanying interim financial
statements are unaudited. In management's opinion, the consolidated financial
statements reflect a fair presentation of the consolidated financial position of
Lake Ariel Bancorp, Inc. and subsidiary, and the results of its operations and
its cash flows for the interim periods presented, in conformity with generally
accepted accounting principles.
2. CASH FLOWS
The Company considers amounts due from banks and federal funds sold as
cash equivalents. Generally, federal funds are sold for one-day periods.
From time to time, the Company swaps its residential mortgage
loans for participation certificates of a similar amount issued by the Federal
Home Loan Mortgage Corporation. These certificates do not involve the transfer
of cash for cash flow purposes. No mortgage loans were swapped for participation
certificates during the first six months of 1995. Approximately $18.4 million in
mortgage loans were swapped for participation certificates during the first six
months of 1994.
3. INVESTMENT SECURITIES
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," on January 1, 1994. SFAS No. 115 requires the
classification of securities as held-to-maturity, available-for-sale or trading.
Securities, other than securities classified as available-for-sale, are carried
at amortized cost if management has the ability and intent to hold these
securities to maturity. Securities expected to be held for an indefinite period
of time and not held until maturity are classified as available-for-sale and are
carried at estimated fair value. Decisions to sell these securities are
determined by the Company's financial position, including but not limited to,
liquidity, interest rate risk, asset liability management strategies, regulatory
requirements, tax considerations or capital adequacy. Gains or losses on
investment securities are computed using the specific identification method.
<PAGE>
The Company has no derivative financial instruments requiring disclosure under
SFAS No. 119.
4. RECLASSIFICATIONS
Certain prior years amounts have been reclassified to conform to the
1995 reporting format.
5. The financial information as of December 31, 1994 and for the interim periods
ended June 30, 1995 and 1994 included herein is unaudited; however, such
information reflects all adjustments consisting of only normal recurring
adjustments, which are, in the opinion of management, necessary to a fair
presentation of the results for the interim periods.
6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings at June 30, 1995 consisted of the following:
Borrowings with the Federal Home Loan Bank ................. $ 2,500,000
===========
Long-term debt at June 30, 1995 consisted of the following:
Unsecured notes, payable in the amount
of $31,200 semiannually, maturing
April 22, 1998............................................... $ 187,000
Borrowings with The Federal Home Loan Bank .................. 20,000,000
===========
Total............................................................ $20,187,000
===========
Annual maturities of the long term debt are as follows:
$31,200 in 1995; $10,062,400 in 1996; $62,400 in 1997; $5,031,000 in 1998;
and $5,000,000 in 2000.
The borrowings with the Federal Home Loan Bank of Pittsburgh require
the Company to maintain collateral with a fair value in an amount which
approximates the total outstanding debt. In addition, the Company must maintain
its membership with the Federal Home Loan Bank of Pittsburgh.
<PAGE>
LAKE ARIEL BANCORP, INC.
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, 1995 and 1994. The
review of the information presented should be read in conjunction with the
consolidated financial statements and the accompanying notes.
NET INCOME
Net income for the first six months of 1995 decreased 11% compared to
the same period in 1994. Net income was positively influenced by a 18% growth in
net interest income. Offsetting this positive factor was a 24% increase in other
operating expenses, which was primarily attributable to the expenses associated
with the Company's newest branch offices. Also, the decline in earnings was a
result of the reduction in mortgage loan activity. Loan origination fees
decreased from $352,000 in the second quarter 1994 to $14,000 in the same period
for 1995.
Profit performance for financial institutions is measured by the return
on average assets (ROA) and the return on average equity (ROE). On an annualized
basis, the ROA was .73% in 1995 compared to 1.12% in 1994. The ROE was 11.05%
for the first six months of 1995 compared to 12.28% in 1994.
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. For purposes of this review, income that is exempt from federal income
taxes has been adjusted to a tax equivalent basis using the statutory rate of
34% for each period presented.
In the first six months of 1995 net interest income increased 18% over
the same period in 1994 primarily due to the positive improvement in the net
income variances of earning assets over interest-bearing liabilities. Total
average earning assets were $66 million greater at June 30, 1995 compared to the
same period in 1994. Average loans grew by 24% or $27 million in the first six
months of 1995. Average commercial loans increased by 8%, real estate mortgage
loans by 25% and consumer loans and lease financing by 49%. The increase in
volume of loans resulted in a 33% growth in loan interest income. Commercial
loan income increased by 31%, mortgage loan income grew by 32% and consumer loan
income increased by 39%. Due to the higher interest rate environment which
continued into the first six months of 1995 the average yield on loans and
leases increased by 72 basis points to 9.04% in 1995 from 8.32% in 1994.
<PAGE>
Investment securities income increased 77% and is directly attributable
to higher volume levels during the period. Tax exempt state and municipal
securities income decreased 12% or $97 thousand due to maturities of tax exempt
securities without similar reinvestments. U.S. government agencies income grew
by 161%, or $1.35 million, again because of volume. Other securities income more
than tripled due to volume. Included in other securities are dividends on both
Federal Reserve Bank and Federal Home Loan Bank stock. Gross unrealized gains on
held to maturity securities were approximately $423 thousand while gross
unrealized losses amounted to $389 thousand.
Total interest expense increased 95% or $2.3 million in the first six
months of 1995 due to both the higher levels of average interest-bearing deposit
accounts and borrowed funds. Average time (certificates of deposit) deposits and
borrowings from the Federal Home Loan Bank contributed heavily to the growth. In
aggregate, average savings and interest-bearing deposits currently represent 37%
of interest-bearing deposits compared to 53% in June, 1994. Total interest
expense associated with these types of deposits decreased 10% or $91 thousand
during the second quarter of 1995. Total average certificates of deposit
increased 80%, but due to the repricing frequency of these deposits and higher
rates, interest expense increased by 140%. The effect of the higher average
rates resulted in a 113 basis point increase in the cost of interest-bearing
deposits, from 3.33% at June 1994 to 4.46% at June, 1995.
Average total borrowings were $28 million in the second quarter of 1995
compared to $10 million in the second quarter of 1994. At June 30, 1995, both
short-term and long-term borrowings were used to fund earning asset growth.
During the first six months of 1995, the average yield on earning
assets increased by 38 basis points and cost of interest-bearing liabilities
increased by 119 basis points. The net effect was a 81 basis point decrease in
the net interest margin from 4.90% in 1994 to 4.08% percent in 1995.
The following table provides an analysis of changes in net interest
income with regard to volume, rate and yields of interest-bearing assets and
liabilities based on month-end average balances for each period. Components of
interest income and expense are presented on a tax equivalent basis using the
federal income tax rate of 34% for each period.
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
For six months ended June 30, 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Annual Income/ Annual Income/
Balance (1) Rate Expense Balance Rate Expense
Assets
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold .................................. $ 3,565 6.19% $ 110 $ 1,171 5.65% $ 33
Deposits in Federal Home Loan Bank .................. 437 8.26% 18 75 1
Investment Securities:
U.S. government agencies .......................... 65,426 6.70% 2,186 29,128 5.76% 836
State and municipal (2) ........................... 16,845 8.69% 730 18,462 8.98% 827
Other securities .................................. 2,207 5.63% 62 863 4.42% 19
-------- ------ ----- ------- ----- -----
Total Securities ................................ $ 84,478 7.07% 2,978 48,453 6.96% 1,682
Loans and Leases:
Commercial, financial and industrial .............. 43,068 10.13% 2,176 40,842 8.17% 1,663
Real estate-construction and mortgage ............. 61,821 8.25% 2,542 49,343 7.82% 1,923
Installment loans to individuals (3) .............. 33,969 9.09% 1,539 22,770 9.55% 1,084
Lease financing (3) ............................... 1,168 9.62% 56 1,142 10.89% 62
-------- ------ ----- ------- ----- -----
Total Loans and Leases .......................... $140,026 9.04% 6,313 114,097 8.32% 4,732
Total earning assets ................................ 228,506 8.27% 9,419 163,796 7.89% 6,448
Cash and due from banks ............................. 8,752 -- -- 10,493 -- --
Premises and equipment .............................. 7,567 -- -- 6,343 -- --
Other, less allowance for credit losses
and loan fees ..................................... 6,019 -- -- 1,842 -- --
-------- ------ ----- ------- ----- -----
Total Assets $250,846 7.53% $ 9,419 $182,474 7.09% $ 6,448
======== ====== ===== ======== ===== ======
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand ............................................ $ 24,590 2.41% $ 296 $ 24,249 2.24% $ 271
Savings ........................................... 41,812 2.44% 508 46,906 2.67% 624
Time .............................................. 85,925 6.02% 2,581 49,761 4.37% 1,085
Time over $100,000 ................................ 25,916 4.05% 582 12,455 3.78% 235
-------- ------ ----- ------- ----- -----
Total Interest-Bearing Deposits ................. $178,243 4.46% 3,967 133,371 3.33% 2,215
Federal Funds Purchased ............................. 223 6.30% 7 0 -- 0
Short-term borrowings ............................... 3,558 2.54% 45 3,268 2.70% 44
Long-term debt ...................................... 23,070 6.45% 743 6,697 5.63% 188
Securities sold under agreements to repurchase ...... 657 3.97% 13 0 -- 0
-------- ------ ----- ------- ----- -----
Total Interest-Bearing Liabilities .............. 205,751 4.67% 4,775 143,336 3.43% 2.447
Demand - noninterest - bearing ...................... 24,941 -- -- 21,316 -- --
Other liabilities ................................... 3,581 -- -- 1,227 -- --
-------- ------ ----- ------- ----- -----
Total Liabilities ................................... 234,273 4.10% 4,775 165,879 2.97% 2,447
Stockholders' equity ................................ 16,573 -- -- 16,595 -- --
-------- ------ ----- ------- ----- -----
Total Liabilities and Stockholders' Equity .......... $250,846 3.83% 4,775 $182,474 2.70% $ 2,447
======== ====== ===== ======== ===== ======
Margin Analysis
Interest income/earning assets ................... 8.27% $ 9,419 7.89% $ 6,448
Interest expense/earning assets .................. 4.19% 4,775 3.00% 2,447
----- -------- ----- --------
Net interest income/earning assets ............... 4.08% $ 4,644 4.90% $ 4,001
===== ======= ===== =======
</TABLE>
(Percentages may not add due to rounding.)
(1) Average balances have been computed using month-end balances. Nonaccrual
loans are included in loan balances.
(2) Interest and yield are presented on a tax equivalent basis using 34% for
each period.
(3) Installment loans and leases are presented net of unearned interest.
<PAGE>
Rate/Volume Variance Analysis Calculation
for six months ended June 30, 1995
1995 Compared to 1994
----------------------------
Total Caused by
Variance Rate Volume
----------------------------
Interest Income:
Federal funds sold ............................ 77 3 74
Deposits in Federal Home Loan Bank ............ 17 5 12
Investment Securities:
U.S. government agencies .................... 1,350 158 1,192
State and municipal ......................... (97) (26) (71)
Other securities ............................ 43 6 37
-----------------------------
Total Investment Securities ............... 1,296 138 1,158
Loans and Leases:
Commercial, financial and industrial ........ 513 418 95
Real estate-construction and mortgage ....... 619 110 509
Installment loans to individuals ............ 455 (56) 511
Lease financing ............................. (6) (7) 1
-----------------------------
Total Loans and Leases .................... 1,581 465 1,116
Total Earning Assets .......................... 2,971 611 2,360
-----------------------------
Interest Expense:
Interest-bearing deposits:
Demand ...................................... 25 21 4
Savings ..................................... (116) (51) (65)
Time ........................................ 1,496 512 984
Time over $100,000 .......................... 347 52 295
-----------------------------
Total Interest-Bearing Deposits ........... 1,752 534 1,218
Federal Funds Purchased ....................... 7 0 7
Short-term borrowings ......................... 1 (3) 4
Long-term debt ................................ 555 32 523
Securities sold under agreements to repurchase 13 0 13
-----------------------------
Total Interest-Bearing Liabilities ............ 2,328 563 1,765
-----------------------------
Net Interest Income Variances ................. $ 643 $ 48 $ 595
=============================
(4) The proportion of the total change attributable to volume and rate changes
during the period has been allocated to the volume and rate components based
upon the absolute dollar amount of the change in each component prior to the
allocation.
<PAGE>
OTHER OPERATING INCOME
Other operating income, during the first six months of 1995, increased
14% from the same period in 1994. Loan origination fees decreased by 96%, or
$338 thousand, because of the decline in residential mortgage loans sold for
cash. Mortgage servicing fee income decreased by 23% or $44,000 when compared to
the first six months of 1994. These fees are directly influenced by the volume
of loans that are sold in the secondary market. Gains or losses on sales of
mortgage loans occur when the coupon rates on mortgage loans exceed or fall
short of the yields required by the purchasers. The net gain recorded in 1995,
compared with the net loss in 1994, is indicative of the changes in interest
rates during the periods in which the sales occurred.
Trading account activity produced a net loss of $7 thousand in the
first six months of 1994 compared to no activity in the comparable period of
1995. Overall, the effect of higher interest rates negatively impacted income in
the first six months of 1995.
Customer service charges and fees, which include fees on demand deposit
accounts, item processing and return items, increased 49% in the first six
months of 1995. The increase is directly related to the growth in the number of
both consumer and business demand deposits and the fees associated with each
type of account.
Other income increased 69% in the first six months of 1995 compared to
the same period in 1994. Included in other income are earnings on director's
life insurance policies, credit card annual fees and merchant discounts, safe
deposit box rentals, rental income on excess office space in one of the
Company's branch offices and other general service fees.
OTHER OPERATING EXPENSES
For the first six months of 1995, total other operating expenses
increased 24% over the same period in 1994. Salaries and benefits, which
represents one of the most significant portions of operating expenses, increased
by 26% or $373 thousand in the first six months of 1995 compared to 1994. The
increase is due to the additional number of employees, merit increases and the
added costs associated with health care insurance and other benefits which are
provided by the Company.
Equipment expense grew by 22% while occupancy expense increased by 15%
in 1995 compared to the same period in 1994. The increase in both of these
expenses is directly related to the overall increases in overhead expenses at
all branch offices.
The 30% increase in the FDIC insurance assessment reflects the growth
in the Company's deposit base. Other expenses increased by 22% over the same
period in 1994 and include such costs as legal fees, professional and audit fees
and other general operating expenses.
<PAGE>
INCOME TAXES
The provision for income taxes as of June 1995 decreased 4% in the
first six months of 1995 compared to the same period in 1994. The effective tax
rate for the first six months of 1995 was 21% compared to 20% in the same period
in 1994.
PROVISION FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses is based on management's
evaluation of the allowance for possible credit losses in relation to the credit
risk inherent in the loan portfolio. In establishing the amount of provision
required, management considers a variety of factors, included but not limited
to, general economic factors, volume of specific types of loans, collateral
adequacy and potential losses from significant borrowers. The Company has
strengthened its internal loan review process by implementing stringent
analytical standards in the review procedure. At monthly meetings, the loan
review committee analyzes information relative to both specific credits and the
total portfolio in general. The information is used to determine the amount to
be charged to the provision which thereby increases the allowance for possible
credit losses.
At June 30, 1995 the amount charged to operating expense for the
provision for possible credit losses was $360 thousand compared to $200 thousand
at June 30, 1994. The provision represents management's assessment of the risks
inherent in the loan and lease portfolio while providing amounts necessary to
cover charge-offs. The allowance for possible credit losses was 1.15% at June
30, 1995 compared to 1.17% at June 30, 1994.
FINANCIAL CONDITION
At June 30, 1995, the Company's total assets were $258.1 million,
representing an increase of $22 million or 9% from the December 31, 1994 balance
of $236.1 million. The increase in assets is primarily attributable to a $11.4
million growth in securities and a $6.4 million growth in total loans.
Investment securities increased 15% from $76.7 million at December 31,
1994, to $88.1 million at June 30, 1995. The net increase of $11.4 million was
attributable to both a decrease in demand for residential mortgage loans and an
investment strategy that was implemented during the period to increase earnings.
The Company purchased $10 million of securities with funds borrowed from the
Federal Home Loan Bank of Pittsburgh. The strategy that was employed provides a
favorable yield pickup between the invested and borrowed funds.
Total net loans increased by $6.4 million from $135 million at year end
1994, to $141.4 million at June 30, 1995. Residential mortgage loans increased
$5.2 million from December 31, 1994 to June 30, 1995. The increase is
attributable to the increased mortgage loan activity during the period,
particularly during the second quarter of 1995. Consumer loans, net of unearned
discounts, grew by $1.5 million or 5.6% largely due to the Company's marketing
efforts on both direct and indirect lending programs to consumers. Commercial
loans decreased $328 thousand or .7 % at June 30, 1995. Commercial loans consist
of loans made to small businesses within the Company's market area and are
generally secured by real estate and other assets of the borrowers.
Total deposits increased $17.7 million or 9% from $192.2 million at
year end 1994 to $209.9 million at June 30, 1995. Noninterest-bearing demand
deposits increased $17 thousand during the first six months of 1995. In
aggregate, savings accounts and interest-bearing demand deposits increased by
$3.7 million or 5.5% during the period. As a percentage of total deposits,
savings and interest-bearing demand deposits represented 33.7% at June 30, 1995,
compared to 34.9% at year end 1994. These deposits continue to be very
attractive to consumers because of their liquidity feature and their
competitiveness with respect to rates offered on other short-term deposit
products. Time deposits, which include certificates of deposit in denominations
of $100 thousand or more, increased $14 million or 14% during the period. There
were no brokered deposits within the Company's deposit base at June 30, 1995.
The Company considers its current deposit base to be stable and
generally consumer in nature. The deposit mix is, in general, equally
distributed among all products without any significant concentrations.
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and foreclosed real
estate held for sale. Nonperforming loans consist of loans where the principal,
interest, or both is 90 or more days past due and loans that have been placed on
nonaccrual. When loans are placed on nonaccrual, income from the current period
is reversed from current earnings and interest from prior periods is charged to
the allowance for possible credit losses. Consumer loans are charged off when
principal or interest is 120 or more days delinquent, or are placed on
nonaccrual if the collateral is sufficient to recover the principal. The
following table represents nonperforming assets of the Company at June 30, 1995
and 1994.
1995 1994
------ -----
(Dollars in thousands)
Loans past due 90 days or more.......................... $1,140 $ 989
Nonaccrual loans........................................ 2,192 1,814
------ ------
Total nonperforming loans............................. 3,332 2,803
Foreclosed assets held for sale......................... 320 36
------ ------
Total nonperforming assets............................ $3,652 $2,839
====== ======
Nonperforming loans as a percent
of loans.............................................. 2.43% 2.37%
Nonperforming assets as a percent
assets................................................ 1.41% 1.37%
Nonperforming assets at June 30, 1995 increased $813 thousand or 28.6%
compared to the same period in 1994. Nonaccrual loans increased $378 thousand at
June 30, 1995 compared to the same period in 1994. Real estate loans represent
$669 thousand of nonaccrual loans while loans to commercial borrowers represent
the remaining $1,523 million balance. Generally, commercial loans are secured by
real estate and other assets of the borrowers. No material losses are expected
from legal proceedings on nonaccrual loans.
Loans past due 90 days or more increased $151 thousand from 1994
levels. Of the delinquent loans, 66.80% are residential mortgages, 22.5% are
consumer installment and 10.7% are real estate secured loans to commercial
borrowers. At monthly loan review meetings, management reviews the status of
these loans with regard to legal proceedings and collection efforts.
Foreclosed assets held for sale increased $284 thousand compared to the
first six months of 1994. The Company has signed sales agreements for the
remaining balance of $136 thousand and expects the sales of the properties to be
completed during the third quarter of 1995.
POTENTIAL PROBLEM LOANS
At June 30, 1995, the Company had approximately $360 thousand of
potential problem loans not included in the nonperforming loan classification.
Known information about possible credit problems related to these borrowers
caused management to have serious doubts as to the ability of such borrowers to
comply with present loan repayment terms and may result in future classification
of such loans as nonperforming. These potential problem loans were taken into
consideration by management when determining the adequacy of the allowance for
possible credit losses at June 30, 1995.
<PAGE>
LIQUIDITY AND FUNDS MANAGEMENT
Liquidity management is to ensure that adequate funds will be available
to meet anticipated and unanticipated deposit withdrawals, debt servicing
payments, investment commitments, commercial and consumer loan demand and
ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short- and
long-term borrowings and repurchase agreements. Regular loan payments are a
dependable source of funds, while the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates.
At June 30, 1995, the Company maintained $13.1 million in cash and cash
equivalents (including Federal funds sold) in the form of cash and due from
banks (after reserve requirements) in addition to $45.3 million in investment
securities available for sale. This combined total of $58.4 million represented
23% of total assets at June 30, 1995. The Company believes that its liquidity
is adequate.
The Company considers its primary source of liquidity to be its core
deposit base. This funding source had grown steadily over the years and consists
of deposits from customers throughout the branch network. The Company will
continue to promote the acquisition of deposits through its branch offices. At
June 30, 1995, approximately 81% of the Company's assets were funded by core
deposits acquired within its market area. An additional 7% of the assets were
funded by the Company's equity. These two components provide a substantial and
stable source of funds.
Net cash used by operating activities was $1.8 million at June 30,
1995, as compared to net cash provided by operating activities of $12.2 million
for the comparable period in 1994. The $14 million decrease is primarily related
to $14.7 million decrease in mortgage loans held for resale. Net cash used in
investing activities was $14.4 million at June 30, 1995 compared to $44.9
million at June 30, 1994. Approximately $30.5 million of the net increase was
attributable to loan growth and $700 thousand to fund investment securities.
Net cash provided by financing activities increased to $18.5 million at
June 30, 1995 from $37.6 million at June 30, 1994. A net decrease in deposits of
$10 million and a net increase of principal payments on long-term debt of $10
million produced the net decrease in cash provided by financing activities.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management involves the matching of maturity
and repricing dates of earning assets and interest-bearing liabilities to help
insure the Company's earnings against extreme fluctuations in interest rates.
The Company's Asset/Liability Committee ("ALCO"), which is comprised of senior
management and board members, meets monthly to monitor the ratio of interest
sensitive assets to interest sensitive liabilities.
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 sensitive assets and
interest sensitive liabilities is accomplished through the Company's
asset/liability management program.
To manage the interest sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of the
Company's interest sensitive assets and liabilities that mature or reprice
within given periods. 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 use of this model assists
the ALCO to gauge the effects of interest rate changes on interest sensitive
assets and liabilities in order to determine what impact these rate changes will
have upon the net interest spread.
At June 30, 1995, the Company maintained a one year cumulative GAP of
negative $27.8 million or 10.8% of total assets. The effect of this GAP position
provided a negative mismatch of assets and liabilities which can expose the
Company to interest rate risk during a period of rising interest rates.
<PAGE>
The following table sets forth the Company's interest sensitivity gap
position as of June 30, 1995.
<TABLE>
<CAPTION>
(in thousands)
3 months 3 through 1 through Over Total
or less 12 months 3 years 3 years
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities(2) .................... $ 20,483 $ 13,527 $ 10,152 $ 44,429 $ 88,591
Loans ....................................... 37,411 16,545 25,057 62,451 141,464
-------- -------- -------- -------- --------
Total ..................................... $ 57,894 $ 30,072 $ 35,209 $106,880 $230,055
======== ======== ======== ======== ========
Interest-bearing
transaction deposits(1) .................... $ 5,579 $ 5,579 $ 11,158 $ 33,478 $ 55,794
Time ........................................ 17,844 39,039 16,056 15,506 88,445
Time over $100,000 .......................... 9,356 13,965 1,305 1,261 25,887
Short-term borrowings ....................... 6,400 -- -- -- 6,400
Repurchase agreements ....................... 500 -- -- -- 500
Long-term debt .............................. 15,002 2,506 2,515 164 20,187
-------- -------- -------- -------- --------
Total ..................................... $ 54,681 $ 61,089 $ 31,034 $ 50,409 $197,213
======== ======== ======== ======== ========
Gap ......................................... $ 3,213 $(31,017) $ 4,175 $ 56,471
======== ======== ======== ========
Cumulative Gap .............................. $ 3,213 $(27,804) $(23,629) $ 32,842
======== ======== ======== ========
</TABLE>
(1) 10% of interest-bearing transaction deposits are estimated to reprice within
three months or less.
(2) Gross of unrealized gains/losses on available for sale securities.
Upon reviewing the current interest sensitivity scenario, decreasing
interest rates could positively affect net income because the Company is
liability sensitive. In a rising interest rate environment, net income could be
negatively affected because more liabilities than assets will reprice during a
given period. However, this analysis is only a simulation tool used to gauge the
effects of a changing interest rate scenario. Other factors such as product
pricing, customer preference and local market conditions play an important part
of interest rate risk management.
<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 common stockholders' equity less
intangible assets, and Tier II capital includes the allowable portion of the
allowance for possible loan losses, currently limited to 1.25% of risk-weighted
assets. Regulatory guidelines require that core capital and total risk-based
capital must be at least 4.00% and 8.00%, respectively. The following table
illustrates the Company's capital ratios as required under the new guidelines.
Primary capital....................... $18,253
Intangible assets...................... (257)
-------
Tier I capital(1)..................... $ 17,996
Tier II Capital....................... $ 1,646
Total Risk-Based Capital.............. $19,642
========
Total Risk-Weighted Assets............ $146,499
Tier I Ratio.......................... 12.28%
Risk-Based Capital Ratio.............. 13.41%
Tier I Leverage Ratio................. 7.18%
(1) Gross of unrealized losses on available-for-sale securities. If unrealized
losses on available for sale securities were included, Tier I capital is
12.09%, total risk-based capital ratio is 13.22%, and the Tier I leverage
ratio is 7.10%.
EFFECTS OF INFLATION
The majority of assets and liabilities of financial institutions are
monetary in nature and therefore differ substantially from commercial
enterprises who have significant investments in fixed assets, inventory and raw
materials. Inflation can impact asset growth in the banking industry with
respect to the needs of equity capital. Inflation can also have a direct impact
on noninterest expenses such as salaries, benefits and other expenses. These
expenses are watched very closely by management since they tend to increase
during periods of rising inflation.
<PAGE>
Management's belief is that a significant impact on earnings depends on
its ability to react to changes in interest rates. Through its asset and
liability committee, the Company continually monitors interest rate sensitivity
of its earning assets and interest-bearing liabilities to minimize any adverse
effects on future earnings.
FUTURE OUTLOOK
Management is hopeful that the newest additional banking offices will
expand the Company's deposit base by attracting new depositors while providing
quality service to both new and existing customers. The initial costs associated
with the branch openings, such as salaries and benefits, advertising, overhead
expenses and marketing, will have a negative impact the Company's earnings until
the growth in deposits reach a level to offset these expenses.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-K
Exhibit Number Description of Exhibit
-------------- ----------------------
2 None
4 None
11 None
15 None
18 None
19 None
20 None
23 None
24 None
25 None
28 None
(b) Reports on /Form 8-K
The Registrant has filed one report on Form 8-K for the quarter ended
June 30, 1995 (copy attached).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKE ARIEL BANCORP, INC.
Date August 7, 1995 By ________________________________
John G. Martines
CHIEF EXECUTIVE OFFICER
--------------------------------
Joseph J. Earyes, CPA
SR. VICE PRESIDENT
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<CIK> 0000723878
<NAME> Lake Ariel Bancorp, Inc.
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<PERIOD-TYPE> 3-MOS
<CASH> 12,958
<INT-BEARING-DEPOSITS> 103
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,313
<INVESTMENTS-CARRYING> 42,852
<INVESTMENTS-MARKET> 88,291
<LOANS> 140,040
<ALLOWANCE> (1,646)
<TOTAL-ASSETS> 258,128
<DEPOSITS> 209,907
<SHORT-TERM> 2,500
<LIABILITIES-OTHER> 1,261
<LONG-TERM> 20,187
<COMMON> 693
0
0
<OTHER-SE> 17,279
<TOTAL-LIABILITIES-AND-EQUITY> 258,128
<INTEREST-LOAN> 6,313
<INTEREST-INVEST> 2,730
<INTEREST-OTHER> 128
<INTEREST-TOTAL> 9,171
<INTEREST-DEPOSIT> 3,967
<INTEREST-EXPENSE> 808
<INTEREST-INCOME-NET> 4,396
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 227
<EXPENSE-OTHER> 990
<INCOME-PRETAX> 1,146
<INCOME-PRE-EXTRAORDINARY> 906
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 906
<EPS-PRIMARY> $.55
<EPS-DILUTED> $.55
<YIELD-ACTUAL> 0
<LOANS-NON> 2,192
<LOANS-PAST> 1,140
<LOANS-TROUBLED> 3,332
<LOANS-PROBLEM> 360
<ALLOWANCE-OPEN> 1,496
<CHARGE-OFFS> 244
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 1,646
<ALLOWANCE-DOMESTIC> 1,646
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,646
</TABLE>
