SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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: 1652923 shares of common
stock, par value $.42 per share, as of September 30, 1995.
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-QSB
FOR THE NINE MONTHS ENDED September 30, 1995
INDEX
-----
Page Number
-----------
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1995
and December 31, 1994................................ 3
Consolidated Statement of Income for the three and
nine months ended September 30, 1995 and 1994........ 4
Earnings Per Share for the three and nine months
ended September 30, 1995 and 1994.................... 4
Consolidated Statement of Cash Flows for the nine
months ended September 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.......................... 20
Signatures................................................ 21
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------------------------------
(in thousands) (in thousands)
<S> <C> <C>
ASSETS
- ------------------------------------------------------
Cash and cash equivalents............................. $ 11,218 $10,719
Held-to-maturity securities (estimated fair market
value of $33,981 and $40,674, respectively)........ 33,813 42,535
Available-for-sale securities......................... 42,973 34,142
Mortgage loans held for resale........................ 1,614 119
Loans and leases...................................... 156,127 144,372
Less unearned income and loan fees................. (8,866) (7,977)
Less allowance for possible credit losses.......... (1,528) (1,496)
-------- ---------
Net Loans.................................... 147,347 135,018
Premises and equipment, net........................... 7,917 7,015
Accrued interest receivable........................... 2,000 2,066
Foreclosed assets held for sale....................... 265 191
Other assets.......................................... 4,015 4,439
-------- ---------
TOTAL ASSETS.......................................... $249,548 $236,125
======== ========
LIABILITIES
- ------------------------------------------------------
Deposits:
Noninterest-bearing................................ $ 28,143 $24,880
Interest-bearing:
Demand....................................... 26,416 26,099
Savings...................................... 41,029 40,888
Time......................................... 88,217 75,657
Time $100,000 and over....................... 30,205 24,663
-------- ---------
Total Deposits............................... 214,010 192,187
Accrued interest payable.............................. 2,296 1,672
Federal Funds Purchased............................... 2,900 --
Securities sold under agreements to repurchase........ 400 1,000
Short-term borrowings................................. 5,000 9,750
Long-term debt........................................ 5,187 15,219
Other liabilities..................................... 1,285 498
-------- ---------
Total Liabilities............................ 231,078 220,326
-------- ---------
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
1,652,923 shares.................................... 694 688
Capital surplus....................................... 9,349 9,139
Retained earnings .................................... 8,696 7,783
Net unrealized losses on available-for-sale
securities.......................................... (269) (1,811)
-------- ---------
Total Stockholders' Equity................... 18,470 15,799
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $249,548 $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>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
- -------------------------------------------------
Loans and leases................................. $9,730 $7,295 $3,417 $2,563
Investment Securities
Taxable...................................... 3,226 1,646 1,040 810
Exempt from federal income taxes.. 715 837 233 291
Dividends.................................... 97 38 35 19
------ ------ ------ ------
Total Investment Securities Income 4,038 2,521 1,308 1,120
------ ------ ------ ------
Deposits in banks................................ 21 3 3 --
Federal funds sold............................... 134 70 24 37
------ ------ ------- ------
TOTAL INTEREST INCOME..................... 13,923 9,889 4,752 3,722
------ ------ ------- ------
INTEREST EXPENSE:
- -------------------------------------------------
Deposits......................................... 6,117 3,592 2,150 1,377
Long-term debt................................... 1,029 428 286 240
Federal funds purchased.......................... 23 -- -- --
Short-term borrowings............................ 20 57 23 --
Securities sold under agreements to repurchase 45 -- -- --
------ ------ ------- ------
TOTAL INTEREST EXPENSE..................... 7,234 4,077 2,459 1,617
------ ------ ------- ------
NET INTEREST INCOME.............................. 6,689 5,812 2,293 2,105
PROVISION FOR POSSIBLE
CREDIT LOSSES........ ......................... 500 285 140 85
------ ------ ------- ------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES..................... 6,189 5,527 2,153 2,007
------ ------ ------- ------
OTHER OPERATING INCOME:
- -------------------------------------------------
Loan origination fees............................ 78 368 64 16
Customer service charges and fees................ 781 490 305 171
Mortgage servicing fees.......................... 222 139 74 (53)
Gain on available-for-sale securities............ 251 106 24 --
Trading account security gains (losses), net -- (7) -- --
Gain (loss) on sale of mortgage loans, net 107 (71) 67 (4)
Other income..................................... 502 255 272 119
------ ------ ------- ------
TOTAL OTHER OPERATING INCOME.............. 1,941 1,280 806 278
------ ------ ------- ------
OTHER OPERATING EXPENSES:
- -------------------------------------------------
Salaries and benefits............................ 2,706 2,200 912 779
Occupancy expense................................ 774 677 254 226
Equipment expense................................ 672 446 313 151
FDIC assessment.................................. 202 251 (8) 90
Advertising...................................... 193 187 41 71
Other expenses................................... 1,591 1,155 601 346
------ ------ ------- ------
TOTAL OTHER OPERATING EXPENSES............ 6,138 4,916 2,113 1,663
------ ------ ------- ------
INCOME BEFORE PROVISION FOR
INCOME TAXES.................................... 1,992 1,891 846 622
PROVISION FOR INCOME TAXES....................... 415 360 175 110
------ ------ ------- ------
NET INCOME....................................... $1,577 $1,531 $671 $512
====== ====== ======= ======
Earnings per share: $0.96 $0.94 $0.41 $0.31
====== ====== ======= ======
Dividends per share: $0.40 $0.37 $0.14 $0.13
====== ====== ======= ======
Weighted average no. of shares outstanding: 1,645 1,630 1,645 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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1994
-------------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ----------------------------------------------------------
Net income ............................................. $ 1,577 $ 1,531
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible credit losses ................ 500 285
Depreciation, amortization and accretion ............ 673 517
(Increase) decrease in mortgage loans held for resale (1,495) 11,742
Investment security gains (losses), net ............. (251) (92)
Loss on sale of foreclosed assets ................... 60 12
Loss on sale of equipment ........................... 2 9
(Increase) decrease in accrued interest receivable .. 66 (407)
Increase (decrease) in accrued interest payable ..... 624 736
(Increase) decrease in other assets ................. (376) (1,819)
Increase (decrease) in other liabilities ............ 826 136
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .................................. 2,206 12,650
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
- ----------------------------------------------------------
Held-to-maturity securities:
Proceeds from maturities of investment securities .... 12,967 1,024
Purchases of securities .............................. (4,246) (19,901)
Available-for-sale securities::
Proceeds from maturities of securities ............... 3,440 3,694
Proceeds from sales of securities .................... 8,213 12,852
Purchases of securities .............................. (17,878) (15,285)
Net (increase) decrease in loans and leases ............ (11,729) (49,927)
Purchases of premises and equipment .................... (1,602) (917)
Proceeds from sale of equipment ........................ 2 15
Proceeds from sale of foreclosed assets ................ 266 236
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ................................ (10,567) (68,209)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
- ----------------------------------------------------------
Net increase in deposits ............................... 21,823 37,637
Increase (decrease) in federal funds purchased ......... 400 --
Increase (decrease) in short-term borrowings ........... (7,250) 2,975
Increase (decrease) in securities sold under
agreements to repurchase ............................. (600) 1,000
Proceeds from long-term debt ........................... 15,000 15,000
Principal payments on long-term debt ................... (20,071) (31)
Proceeds from issuance of common stock ................. 216 --
Cash dividends paid .................................... (658) (603)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .................................. 8,860 55,978
-------- --------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ........... 499 419
CASH & CASH EQUIVALENTS AT
BEGINNING OF PERIOD ................................... 10,719 9,800
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD ................ $ 11,218 $ 10,219
======== ========
CASH PAID DURING THE YEAR FOR:
Interest .............................................. $ 7,858 $ 3,341
======== ========
Income taxes .......................................... $ 328 $ 305
======== ========
</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
consolidated 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 changes in its financial position 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. Approximately $18.4 million in mortgage loans were swapped
for participation certificates during the first nine 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>
4. RECLASSIFICATIONS
-----------------
Certain prior years amounts have been reclassified to conform to the
1994 reporting format.
5. The financial information as of December 31, 1994 and for the interim
periods ended September 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 September 30, 1995 consisted of the following:
Borrowings with the Federal Home Loan Bank.................$5,000,000
==========
Long-term debt at September 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.................$5,000,000
----------
Total.............................................$5,187,000
==========
Annual maturities of the long term debt are as follows: $31,200 in
1995; $62,400 in 1996; $62,400 in 1997; $31,000 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 September 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 nine months of 1995 increased 3% compared to
the same period in 1994. Net income was positively influenced by a 15% growth in
net interest income. Offsetting this positive factor was a 25% increase in other
operating expenses, which was primarily attributable to the expenses associated
with the Company's newest branch offices. Also, the increase in earnings was a
result of the increase in customer service charges and fees. Loan Origination
fees decreased from $368,000 in the third quarter 1994 to $78,000 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 .83% in 1995 compared to 1.05% in 1994. The ROE was 12.27%
for the first nine months of 1995 compared to 12.19% 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 nine months of 1995 net interest income increased 15% 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 $53 million greater at September 30, 1995 compared
to the same period in 1994. Average loans grew by 21% or $24.7 million in the
first nine months of 1995. Average commercial loans increased by 4%, real estate
mortgage loans by 25.5% and consumer loans by 39%. The increased loan volume
resulted in a 33% growth in loan interest income. Commercial loan income
increased by 25%, mortgage loan income grew by 39% and consumer loan income
increased by 35%. Due to the higher interest rate environment which continued
into the first nine months of 1995, the average yield on loans and leases
increased by 80 basis points to 9.10% in 1995 from 8.30% in 1994.
<PAGE>
Investment securities income increased 49% and is directly attributable
to higher volume levels during the period. Tax exempt state and municipal
securities income decreased 14.5% or $185 thousand due to maturities of tax
exempt securities without similar reinvestments. U.S. government agencies income
grew by 96% or $1.58 million, again because of volume. Other securities income
grew by $930 thousand due to the increase in dividends received on both Federal
Reserve Bank and Federal Home Loan Bank stock. Gross unrealized gains on held to
maturity securities were approximately $154 thousand while gross unrealized
losses amounted to $365 thousand.
Total interest expense increased 77% or $3.2 million in the first nine
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 demand deposits currently
represent 37% of interest-bearing deposits compared to 52% in September, 1994.
Total interest expense associated with these types of deposits increased 17% or
$232 thousand during the third quarter of 1995. Total average certificates of
deposit increased 68%, but due to the repricing frequency of these deposits and
higher rates, interest expense increased by 104%. The effect of the higher
average rates resulted in a 110 basis point increase in the cost of
interest-bearing deposits, from 3.43% at September 1994 to 4.53% at September
1995.
Average total borrowings were approximately $24.3 million at September
30, 1995 compared to $13.4 million at September 30, 1994. The majority of the
borrowings were utilized as part of investment and asset liability strategies to
increase interest income.
During the first nine months of 1995, the average yield on earning
assets increased by 47 basis points and cost of interest-bearing liabilities
increased by 113 basis points. The net effect was a 66 basis point decrease in
the net interest margin from 4.76% in 1994 to 4.10% 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>
<TABLE>
<CAPTION>
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
For nine months ended September 30, 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Annual Income/ Average Annual Income/
Balance (1) Rate Expense Balance Rate Expense
----------- ---- ------- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 2,929 6.12% $ 134 $ 1,190 7.86% $ 70
Deposits in Federal Home Loan Bank 340 8.26% 21 80 5.01% 3
Investment Securities:
U.S. government agencies 63,788 6.76% 3,226 36,690 6.00% 1,646
State and municipal (2) 17,142 8.45% 1,083 18,847 9.00% 1,268
Other securities 1,940 6.68% 97 1,010 5.03% 38
-------- ------ ------- ------- ------ ------
Total Securities $ 82,870 7.11% 4,406 56,547 6.98% 2,952
Loans and Leases:
Commercial, financial and industrial 43,274 10.09% 3,265 41,487 8.44% 2,620
Real estate-construction and mortgage 63,105 8.42% 3,972 50,269 7.60% 2,859
Installment loans to individuals (3) 34,612 9.11% 2,358 24,534 9.40% 1,725
Lease financing (3) 1,182 9.73% 86 1,154 10.54% 91
-------- ------ ------- ------- ------ ------
Total Loans and Leases $142,173 9.10% 9,681 117,444 8.30% 7,295
Total earning assets 228,312 8.34% 14,242 175,261 7.87% 10,320
Cash and due from banks 10,778 -- -- 10,385 -- --
Premises and equipment 7,684 -- -- 6,381 -- --
Other, less allowance for credit losses
and loan fees 4,614 -- -- 2,074 -- --
-------- ------ ------- ------- ------ ------
Total Assets $251,388 7.57% $14,242 $194,101 7.11% $ 10,320
======== ====== ======= ======== ====== ========
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand $ 25,630 2.43% $ 465 $ 25,695 2.38% $ 458
Savings 41,834 3.66% 1,146 46,782 2.63% 921
Time 86,615 5.46% 3,535 52,883 4.48% 1,773
Time over $100,000 26,659 4.87% 971 14,667 4.01% 440
-------- ------ ------- ------- ------ ------
Total Interest-Bearing Deposits $180,738 4.53% 6,117 140,027 3.43% 3,592
Federal Funds Purchased 517 5.17% 20 0 0 0
Short-term borrowings 3,491 6.20% 162 2,637 2.89% 57
Long-term debt 19,705 6.19% 912 10,662 5.30% 423
Securities sold under agreements to repurchase 590 5.21% 23 111 6.02% 5
-------- ------ ------- ------- ------ ------
Total Interest-Bearing Liabilities 205,041 4.72% 7,234 153,437 3.55% 4.077
Demand - noninterest - bearing 25,879 -- -- 22,535 -- --
Other liabilities 3,386 -- -- 1,385 -- --
-------- ------ ------- ------- ------ ------
Total Liabilities 234,306 4.13% 7,234 177,357 3.07% 4,077
Stockholders' equity 17,082 -- -- 16,744 -- --
-------- ------ ------- ------- ------ ------
Total Liabilities and Stockholders' Equity $ 251,388 3.85% 7,234 $194,101 2.81% $4,077
======== ====== ======= ======== ====== ========
Margin Analysis
Interest income/earning assets 8.34% $14,242 7.87% $10,320
Interest expense/earning assets 4.24% 7,234 3.11% 4,077
------ ------- ------ ------
Net interest income/earning assets 4.10% $7,008 4.76% $6,243
====== ======= ====== ======
</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.
(4) Does not include recovered interest of $49,000 on nonaccrual loan paid off
during period.
<PAGE>
Rate/Volume Variance Analysis Calculation
- -----------------------------------------
for nine months ended September 30, 1995
<TABLE>
<CAPTION>
1995 Compared to 1994
---------------------
Total Caused by
Variance Rate Volume
----------------------------------
<S> <C> <C> <C>
Interest Income:
Federal funds sold $ 64 $ 17 $ 47
Deposits in Federal Home Loan Bank 18 3 15
Investment Securities:
U.S. government agencies 1,580 232 1,348
State and municipal (185) (74) (111)
Other securities 59 16 43
---------------------------------
Total Investment Securities 1,454 174 1,280
---------------------------------
Loans and Leases:
Commercial, financial and industrial 645 528 117
Real estate-construction and mortgage 1,113 328 785
Installment loans to individuals 633 (56) 689
Lease financing (5) (7) 2
---------------------------------
Total Loans and Leases 2,386 793 1,593
---------------------------------
Total Earning Assets 3,922 987 2,935
---------------------------------
Interest Expense:
Interest-bearing deposits:
Demand 7 8 (1)
Savings 225 393 (168)
Time 1,762 447 1,315
Time over $100,000 531 110 421
---------------------------------
Total Interest-Bearing Deposits 2,525 958 1,567
Federal Funds Purchased 20 0 20
Short-term borrowings 105 82 23
Long-term debt 489 81 408
Securities sold under agreements to repurchase 18 (1) 19
---------------------------------
Total Interest-Bearing Liabilities 3,157 1,120 2,037
---------------------------------
Net Interest Income Variances $ 765 ($ 133) $ 898
=================================
</TABLE>
(5) 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 nine months of 1995, increased
52% from the same period in 1994. Loan origination fees decreased by 79% or $290
thousand, because of the decline in residential mortgage loans sold for cash.
Mortgage servicing fee income increased by 60% or $83 thousand when compared to
the first nine 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 nine months of 1994 compared to no activity in the comparable period of
1995. Overall, the effect of higher interest rates negatively impacted income
security prices in the first nine months of 1995.
Customer service charges and fees, which include fees on demand deposit
accounts, item processing and return items, increased 59% in the first nine
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 97% in the first nine 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 nine months of 1995, total other operating expenses
increased 25% over the same period in 1994. Salaries and benefits, which is the
most significant of the non-interest expenses, increased by 23% or $506 thousand
over 1994 amounts. The increase is due to the additional staffing needs in both
branch and administrative offices, merit increases and the added costs
associated with health care insurance and other benefits which are provided by
the Company.
At September 30, 1995, equipment and occupancy expenses increased by
51% and 14%, respectively, when compared to the same period in 1994. The
increase in both of these expenses are directly related to the addition of four
branch offices which opened in the past twelve months, the mortgage loan and
administrative center which opened in January of 94, the acquisition and
installation of an entirely new computer system, and the overall increases in
overhead expenses at all branch offices.
<PAGE>
The 20% decrease in the FDIC insurance assessment is directly related
to the growth in the Company's deposit base, which was offset in the third
quarter 1995 by an FDIC refund of assessments paid for the period from June 1,
1995 through September 30, 1995. The refund was a result of the FDIC assessment
reduced from 23 cents per $100 deposits to 4 cents per $100 deposits, effective
June 1, 1995. Advertising expense increased 3% due to the extensive marketing of
the Company's products and services. Other expenses increased by 38% over the
same period in 1994 and include such costs as legal fees, professional and audit
fees and other general operating expenses.
INCOME TAXES
------------
The provision for income taxes as of September 1995 increased 15% in
the first nine months of 1995 compared to the same period in 1994. The effective
tax rate for the first nine months of 1995 was 21% compared to 19% 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, including but not limited
to, general economic factors, volume of specific types of loans, collateral
adequacy and potential losses from significant borrowers. At monthly meetings,
the loan review committee analyzes information relative to both specific credits
and the total portfolio in general. The information is then used to determine
the amount to be charged to the provision which thereby increases the allowance
for possible credit losses.
At September 30, 1995 the amount charged to operating expense for the
provision for possible credit losses was $500 thousand compared to $285 thousand
at September 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. Based on the review of specific loans and total loans in
general, management believes that the allowance for possible credit losses is
adequate. The allowance for possible credit losses was 1.04% at September 30,
1995 compared to 1.10% at September 30, 1994.
FINANCIAL CONDITION
-------------------
At September 30, 1995, the Company's total assets were $249.5 million,
representing an increase of $13.4 million or 5.7% from the December 31, 1994
balance of $236.1 million. The increase in assets is primarily attributable to a
$12.3 million growth in total loans.
Investment securities, after an increase to $88.1 million at June 30,
1995, returned to the reported level at December 31, 1994. The net increase of
$11.4 million at June 30, 1995 was attributable to asset, liability and
investment strategies that were implemented during the period to increase
interest income. During the first six months of 1995, the Company purchased $10
million of securities with funds borrowed from the Federal Home Loan Bank of
Pittsburgh. The strategy that was employed provided a favorable yield pickup
between the invested and borrowed funds. During the third quarter 1995, $11
million of Federal Home Loan Bank multi step-up bonds were called and settled,
which proceeds were used to pay back Federal Home Loan Bank borrowings.
<PAGE>
Total net loans increased by $12.3 million from $135 million at year
end 1994, to $147.3 million at September 30, 1995. Residential mortgage loans
increased $7.5 million from December 31, 1994 to September 30, 1995. The
increase is attributable to the increased mortgage loan activity during the
period, particularly during the third quarter of 1995. Consumer loans, net of
unearned discounts, grew by $2.3 million or 6.6% largely due to the Company's
marketing efforts on both direct and indirect lending programs to consumers.
Commercial loans increased $2.5 million or 5.5% at September 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 $21.8 million or 11.4% from $192.2 million at
year end 1994 to $214 million at September 30, 1995. Noninterest-bearing demand
deposits increased $3.3 million or 13.1% during the first nine months of 1995.
In aggregate, savings accounts and interest-bearing demand deposits increased by
$458 thousand or 1% during the period. As a percentage of total deposits,
savings and interest-bearing demand deposits represented 31.5% at September 30,
1995, compared to 34.9% at year end 1994. These deposits continue to be very
attractive to consumers because of their liquidity feature. Time deposits,
including certificates of deposit in denominations of $100 thousand or more,
increased $18.1 million or 18% during the period. There were no brokered
deposits within the Company's deposit base at September 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.
NONPERFORMING ASSETS
--------------------
Nonperforming assets include nonperforming loans and foreclosed assets
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 September 30,
1995 and 1994.
<PAGE>
1995 1994
---- ----
(Dollars in thousands)
Loans past due 90 days or more $1,040 $1,284
Nonaccrual loans ................... 1,815 1,931
------ ------
Total nonperforming loans ........ 2,856 3,215
Foreclosed assets held for sale 265 119
------ ------
Total nonperforming assets ....... $3,121 $3,334
====== ======
Nonperforming loans as a percent
of loans.......................... 2.03% 2.47%
Nonperforming assets as a percent
assets............................ 1.25% 1.47%
Nonperforming assets at September 30, 1995 decreased $213 thousand or
6.4% compared to the same period in 1994. Nonaccrual loans were $116 thousand
lower at September 30, 1995 compared to September 30, 1994. Real estate loans
represent $469 thousand of nonaccrual loans while loans to commercial borrowers
represent the remaining $1,346 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 decreased $244 thousand or 19% from 1994
levels. Approximately 57.5% percent of the delinquent loans are residential
mortgages, 8.4% are consumer installment and 34.1% are loans to commercial
borrowers. At quarterly loan review meetings, management reviews the status of
these loans with regard to legal proceedings and collection efforts.
Foreclosed assets held for sale consists of properties that are
acquired by legal proceedings and are carried at the lower of fair value minus
estimated costs to sell, or cost.
No material losses are expected upon the sale of the property.
POTENTIAL PROBLEM LOANS
-----------------------
At September 30, 1995, the Company had approximately $348,000 of
problem loans which were 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 September 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 repayment 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 September 30, 1995, the Company maintained $11.2 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 $43 million in investment
securities available for sale. This combined total of $54.2 million represented
22% of total assets at September 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
September 30, 1995, approximately 86% 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 provided by operating activities was $2.2 million at September
30, 1995, as compared to net cash provided by operating activities of $12.7
million for the comparable period in 1994. The $10.5 million decrease is
primarily related to a decrease in mortgage loans held for resale. Net cash used
in investing activities was $10.5 million at September 30, 1995 compared to
$68.2 million at September 30, 1994. Approximately $20.1 million of the net
decrease was a reduction in the purchase of securities. A reduction of $38.2
million in loan and lease funding makes up the remaining decrease in cash used
in investing activities.
Net cash provided by financing activities decreased to $8.9 million at
September 30, 1995 from $55.9 million at September 30, 1994, a net decrease of
$47 million. The net decrease of $20 million in long-term debt was the result of
an investment strategy funded by Federal Home Loan Bank borrowings, which were
paid back through September 30, 1995. The net change in short-term borrowings
and deposits were $10.2 million and $15.8 million, respectively, at September
30, 1995.
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 quarterly to monitor the ratio of interest
sensitive assets to interest sensitive liabilities.
<PAGE>
The Company's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This is accomplished by measuring 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 September 30, 1995, the Company maintained a one year cumulative GAP
of negative $25.3 million or 10.1% 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.
The following table sets forth the Company's interest sensitivity gap
position as of September 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) $ 12,807 $ 6,468 $ 13,161 $ 44,756 $ 77,192
Loans 45,535 21,620 25,533 54,657 147,345
-------- -------- -------- -------- --------
Total $ 58,342 $ 28,088 $ 38,694 $ 99,413 $224,537
======== ======== ======== ======== ========
Interest-bearing
transaction deposits(1) $ 6,745 $ 6,745 $ 13,490 $ 40,465 $67,445
Time 23,100 32,715 16,523 15,878 88,216
Time over $100,000 13,514 15,586 564 542 30,206
Short-term borrowings 2,900 -- -- -- 2,900
Repurchase agreements 400 -- -- -- 400
Long-term debt 5,002 5,006 15 164 10,187
-------- -------- -------- -------- --------
Total $ 51,661 $ 60,052 $ 30,592 $ 57,049 $199,354
======== ======== ======== ======== ========
Gap $ 6,681 ($31,964) $ 8,102 $ 42,364
======== ======== ======== ========
Cumulative Gap $ 6,681 ($25,283) ($ 17,181) $ 25,183
======== ======== ======== ========
</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.
<PAGE>
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.
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............................. $ 18,740
Intangible assets........................... (229)
--------
Tier I capital(1)........................... 18,511
Tier II Capital............................. 1,476
--------
Total Risk-Based Capital.................... $ 19,987
========
Total Risk-Weighted Assets.................. $148,246
Tier I Ratio................................ 12.49%
Risk-Based Capital Ratio.................... 13.48%
Tier I Leverage Ratio....................... 7.39%
(1) Gross of unrealized losses on available-for-sale securities. If
unrealized losses on available for sale securities were included, Tier
I capital is 12.25%, total risk-based capital ratio is 13.25%, and the
Tier I leverage ratio is 7.28%.
<PAGE>
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.
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 additional banking offices will continue
to 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 on the Company's
earnings until the growth in deposits reaches 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 no reports on Form 8-K for the quarter ended
September 30, 1995.
<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: November 2, 1995 By /s/ JOHN G. MARTINES
-----------------------------------
John G. Martines
CHIEF EXECUTIVE OFFICER
/S/ JOSEPH J. EARYES
-----------------------------------
Joseph J. Earyes, CPA
SR. VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000723878
<NAME> LAKE ARIEL BANCORP, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 11,086
<INT-BEARING-DEPOSITS> 132
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,973
<INVESTMENTS-CARRYING> 33,813
<INVESTMENTS-MARKET> 76,954
<LOANS> 148,875
<ALLOWANCE> 1,528
<TOTAL-ASSETS> 249,548
<DEPOSITS> 214,010
<SHORT-TERM> 8,300
<LIABILITIES-OTHER> 3,581
<LONG-TERM> 5,187
<COMMON> 694
0
0
<OTHER-SE> 17,776
<TOTAL-LIABILITIES-AND-EQUITY> 249,548
<INTEREST-LOAN> 9,730
<INTEREST-INVEST> 4,038
<INTEREST-OTHER> 155
<INTEREST-TOTAL> 13,923
<INTEREST-DEPOSIT> 6,117
<INTEREST-EXPENSE> 1,117
<INTEREST-INCOME-NET> 6,689
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 251
<EXPENSE-OTHER> 1,591
<INCOME-PRETAX> 1,992
<INCOME-PRE-EXTRAORDINARY> 1,577
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,577
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
<YIELD-ACTUAL> 0
<LOANS-NON> 1,815
<LOANS-PAST> 1,040
<LOANS-TROUBLED> 2,856
<LOANS-PROBLEM> 348
<ALLOWANCE-OPEN> 1,496
<CHARGE-OFFS> 512
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 1,528
<ALLOWANCE-DOMESTIC> 1,528
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,528
</TABLE>
