<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, 1996
[ ] 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: 1,669,667 shares of common
stock, par value $.42 per share, as of June 30, 1996.
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-QSB
FOR THE SIX MONTHS ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995.................................................... 3
Consolidated Statement of Income for the three and
six months ended June 30, 1996 and 1995.............................. 4
Earnings Per Share for the three and six month
periods ended June 30, 1996 and 1995.................................. 4
Consolidated Statement of Cash Flows for the six
months ended June 30, 1996 and 1995.................................. 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
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
(in thousand) (in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................... $ 12,188 $ 12,519
Held-to-maturity securities (fair value of
$25,052 and $22,866, respectively) ........... 25,752 22,589
Available-for-sale securities .................. 66,160 50,580
Loans and leases ............................... 170,702 159,170
Mortgage loans held for resale ................. 1,436 3,405
Less unearned income and loan fees .......... (8,684) (8,612)
Less allowance for possible credit losses ... (1,790) (1,657)
--------- ---------
Net Loans ............................. $161,66 152,306
Premises and equipment, net .................... 7,562 7,785
Accrued interest receivable .................... 2,319 1,971
Foreclosed assets held for sale ................ 188 52
Other assets ................................... 4,414 4,057
--------- ---------
TOTAL ASSETS .......................... $ 280,247 $ 251,859
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ......................... $ 30,305 $ 26,866
Interest-bearing:
Demand ................................ 25,724 25,686
Savings ............................... 38,255 39,388
Time .................................. 109,545 89,876
Time $100,000 and over ................ 35,454 26,943
--------- ---------
Total Deposits ........................ 239,283 208,759
Accrued interest payable ....................... 1,952 1,746
Securities sold under agreements to repurchase . 300 400
Short-term borrowings .......................... 2,500 5,000
Long-term debt ................................. 15,125 15,156
Other liabilities .............................. 1,162 1,289
--------- ---------
Total Liabilities ..................... 260,322 232,350
--------- ---------
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
1,669,667 shares ............................. 701 696
Capital surplus ................................ 9,584 9,414
Retained earnings .............................. 10,102 9,118
Net unrealized gains (losses) on
Available-for-sale securities ............... (462) 281
--------- ---------
Total Stockholders' Equity ............ 19,925 19,509
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................. $ 280,247 $ 251,859
========= =========
</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,
1996 1995 1996 1995
------- ------- ------ -------
(in thousands except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases ............................. $ 7,016 $ 6,313 $ 3,539 $ 3,250
Investment Securities
Taxable .................................. 2,093 2,186 1,141 1,136
Exempt from federal income taxes ......... 509 482 268 226
Dividends ................................ 41 62 16 31
------- ------- ------- -------
Total Investment Securities Income .... 2,643 2,730 1,425 1,393
------- ------- ------- -------
Deposits in banks ............................ 3 18 2 13
Federal funds sold ........................... 85 110 41 85
------- ------- ------- -------
TOTAL INTEREST INCOME ................. 9,747 9,171 5,007 4,741
------- ------- ------- -------
INTEREST EXPENSE:
Deposits ..................................... 4,264 3,967 2,220 2,112
Long-term debt ............................... 488 743 244 437
Federal funds purchased ...................... 4 7 2 2
Short-term borrowings ........................ 93 45 34 1
Securities sold under agreements to repurchase 10 1 5 9
------- ------- ------- -------
TOTAL INTEREST EXPENSE ................. 4,859 4,775 2,505 2,561
------- ------- ------- -------
NET INTEREST INCOME .......................... 4,888 4,396 2,502 2,180
PROVISION FOR POSSIBLE
CREDIT LOSSES .............................. 250 360 135 225
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES ................. 4,638 4,036 2,367 1,955
------- ------- ------- -------
OTHER OPERATING INCOME:
Loan origination fees ........................ 147 14 56 --
Customer service charges and fees ............ 606 476 318 256
Mortgage servicing fees ...................... 167 148 82 73
Investment security gains (losses) ........... (47) 227 1 192
Gain (loss) on sale of loans, net ............ 59 40 40 16
Other income ................................. 307 230 151 124
------- ------- ------- -------
TOTAL OTHER OPERATING INCOME .......... 1,239 1,135 648 661
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Salaries and benefits ........................ 1,761 1,794 855 895
Occupancy expense ............................ 540 520 261 248
Equipment expense ............................ 414 359 216 195
FDIC assessment .............................. 1 210 -- 89
Advertising .................................. 147 152 100 60
Other expenses ............................... 998 990 475 535
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES ........ 3,861 4,025 1,907 2,022
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES ................................ 2,016 1,146 1,108 594
PROVISION FOR INCOME TAXES ................... 515 240 310 135
------- ------- ------- -------
NET INCOME ................................... $ 1,501 $ 906 $ 798 $ 459
======= ======= ======= =======
Earnings per share: $ 0.90 $ 0.55 $ 0.48 $ 0.28
======= ======= ======= =======
Dividends per share: $ 0.31 $ 0.26 $ 0.16 $ 0.13
======= ======= ======= =======
Weighted average no. of shares outstanding: 1,677 1,644 1,677 1,644
</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,
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................. $ 1,501 $ 906
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible credit losses ................ 250 360
Depreciation, amortization and accretion ............ 358 363
(Increase) decrease in mortgage loans held for resale 1,969 (2,925)
Investment security gains (losses), net ............. 47 (227)
Loss on sale of foreclosed assets ................... 43 --
(Gain) loss on sale of equipment .................... -- 8
(Increase) decrease in accrued interest receivable .. (348) (841)
Increase (decrease) in accrued interest payable ..... 206 229
(Increase) decrease in other assets ................. 24 (435)
Increase (decrease) in other liabilities ............ (127) 802
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .................................. 3,923 (1,760)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities of investment securities .... 353 3,679
Purchases of securities .............................. (3,516) (3,996)
Available-for-sale securities:
Proceeds from maturities of securities ............... 6,358 1,774
Proceeds from sales of securities .................... 12,935 6,477
Purchases of securities .............................. (36,037) (16,869)
Net (increase) decrease in loans and leases ............ (11,769) (4,157)
Purchases of premises and equipment .................... (143) (1,511)
Proceeds from sale of equipment ........................ -- 2
Proceeds from sale of foreclosed assets ................ 13 167
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ................................ (31,806) (14,434)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ............................... 30,524 17,720
Increase (decrease) in federal funds purchased ......... -- 3,900
Increase (decrease) in short-term borrowings ........... (2,500) (7,250)
Increase (decrease) in securities sold under
agreements to repurchase ............................. (100) (500)
Proceeds from long-term debt ........................... -- 15,000
Principal payments on long-term debt ................... (31) (10,071)
Proceeds from issuance of common stock ................. 175 164
Cash dividends paid .................................... (516) (427)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .................................. 27,552 18,536
-------- --------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ........... (331) 2,342
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 12,519 10,719
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD ................ $ 12,188 $ 13,061
======== ========
CASH PAID DURING THE YEAR FOR:
Interest .............................................. $ 4,653 $ 4,546
======== ========
Income taxes .......................................... $ 525 $ 216
======== ========
</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 1996 or 1995.
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
1996 reporting format.
5. The financial information as of December 31, 1995 and for the interim
periods ended June 30, 1996 and 1995 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, 1996 consisted of the following:
Borrowings with the Federal Home Loan Bank................. $ 2,500,000
===========
Long-term debt at June 30, 1996 consisted of the following:
Unsecured notes, payable in the amount
of $31,200 semiannually, maturing
April 22, 1998............................................. $ 125,000
Borrowings with The Federal Home Loan Bank................. 15,000,000
-----------
Total.................................................... $15,125,000
===========
Annual maturities of the long term debt are as follows: $31,200 in
1996; $62,400 in 1997; $31,400 in 1998; $5,000,000 in 2000; $5,000,000 in 2002;
and $5,000,000 in 2005.
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, 1996 and 1995. 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 1996 increased 66% compared to
the same period in 1995. Net income was positively influenced by a 15% growth in
net interest income after provision for possible credit losses and a 9% growth
in other operating income, while effectively controlling overhead costs which
decreased by 4%. The primary reason for the modest decrease in overhead expenses
was the substantial reduction of FDIC expense in 1996.
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 1.13% in 1996 compared to .73% in 1995. The ROE was 15.16%
for the first six months of 1996 compared to 10.72% in 1995.
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 1996 net interest income (tax equivalent
basis) increased 10% over the same period in 1995 primarily due to the positive
improvement in the net interest expense charged on interest-bearing liabilities.
Total average earning assets were $16 million greater at June 30, 1996 compared
to the same period in 1995. Average loans and leases grew by 14% or $19 million
in the first six months of 1996. Average commercial loans increased by 10%, real
estate mortgage loans by 23% and consumer loans and lease financing by 2%. The
increase in volume of loans resulted in an 11% growth in loan interest income.
Commercial loan income increased by 3%, mortgage loan income grew by 21% and
consumer loan income increased by 4%.
<PAGE>
Investment securities income decreased 2% and is directly attributable
to slightly lower volume levels and yields during the period. Tax exempt state
and municipal securities income increased 6% or $41 thousand due to
reinvestments into tax-exempt securities. U.S. government agencies income
decreased by 4%, or $93 thousand, again because of volume. Other securities
income decreased 34%, 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 $129 thousand while
gross unrealized losses amounted to $829 thousand.
Total interest expense increased 2% or $84 thousand in the first six
months of 1996 due to the higher levels of average interest-bearing deposit
accounts. Average time (certificates of deposit) deposits contributed to the
growth. In aggregate, average savings and interest-bearing deposits currently
represent 33% of interest-bearing deposits compared to 37% in June, 1995. Total
interest expense associated with these types of deposits decreased 16% or $126
thousand during the second quarter of 1996. Total average certificates of
deposit increased 18%; due to the repricing frequency of these deposits and rate
changes, interest expense increased by 13%. The effect of lower average rates
resulted in a basis point decrease in the cost of interest-bearing deposits,
from 4.46% at June 1995 to 4.36% at June, 1996.
Average total borrowings were $19 million in the second quarter of 1996
compared to $28 million in the second quarter of 1995. At June 30, 1996, both
short-term and long-term borrowings were used to fund earning asset growth.
During the first six months of 1996, the average yield on earning
assets decreased by 9 basis points and cost of interest-bearing liabilities
decreased by 21 basis points. The net effect was a 12 basis point increase in
the net interest margin from 4.08% in 1995 to 4.20% percent in 1996.
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, 1996 1995
- ----------------------------- ----------------------------------- ----------------------------------
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 $ 2,822 6.04% $ 85 $ 3,565 6.19% $ 110
Deposits in Federal Home Loan Bank 124 4.85% 3 437 8.26% 18
Investment Securities:
U.S. government agencies 62,568 6.71% 2,093 65,426 6.70% 2,186
State and municipal (2) 18,606 8.31% 771 16,845 8.69% 730
Other securities 1,417 5.80% 41 2,207 5.63% 62
-------- ------ ------ ------- ------ --------
Total Securities $ 82,591 7.05% 2,905 84,478 7.07% 2,978
Loans and Leases:
Commercial, financial and industrial 47,398 9.51% 2,247 43,068 10.13% 2,176
Real estate-construction and mortgage 75,821 8.15% 3,083 61,821 8.25% 2,542
Installment loans to individuals (3) 33,953 9.26% 1,567 33,969 9.09% 1,539
Lease financing (3) 1,940 9.51% 92 1,168 9.62% 56
-------- ------ ------ ------- ------ --------
Total Loans and Leases $159,112 8.81% 6,989 140,026 9.04% 6,313
Total earning assets $244,649 8.18% 9,982 228,506 8.27% 9,419
Cash and due from banks 10,579 -- -- 8,752 -- --
Premises and equipment 7,695 -- -- 7,567 -- --
Other, less allowance for credit losses
and loan fees 3,736 -- -- 6,019 -- --
-------- ------ ------ ------- ------ --------
$266,659 7.51% $9,982 $250,846 7.53% $ 9,419
======== ===== ====== ======== ===== ========
Total Assets
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand $ 24,841 2.03%$ 251 $ 24,590 2.41% $ 296
Savings 39,059 2.19% 427 41,812 2.44% 508
Time 101,469 5.71% 2,889 85,925 6.02% 2,581
Time over $100,000 30,674 4.56% 697 25,916 4.05% 582
-------- ------ ------ ------- ------ --------
Total Interest-Bearing Deposits $196,043 4.36% 4,264 $178,243 4.46% 3,967
Federal Funds Purchased 149 5.38% 4 223 6.30% 7
Short-term borrowings 3,786 4.93% 93 3,558 2.54% 45
Long-term debt 15,143 6.46% 488 23,070 6.45% 743
Securities sold under agreements to repurchase 371 5.41% 10 657 3.97% 13
-------- ------ ------ ------- ------ --------
Total Interest-Bearing Liabilities 215,492 4.53% 4,859 205,751 4.67% 4.775
Demand - noninterest - bearing 27,650 -- -- 24,941 -- --
Other liabilities 3,112 -- -- 3,581 -- --
-------- ------ ------ ------- ------ --------
Total Liabilities 246,254 3.97% 4,859 234,273 4.10% 4,775
Stockholders' equity 20,405 16,573 -- --
-------- ------ ------ ------- ------ --------
Total Liabilities and Stockholders' Equit $266,659 3.66% $4,859 $250,846 3.83% $ 4,775
======== ===== ====== ======== ===== ========
Margin Analysis
Interest income/earning assets 8.18% $9,982 8.27% $ 9,419
Interest expense/earning assets 3.98% 4,859 4.19% 4,775
------ ------ ------ --------
Net interest income/earning assets 4.20% $5,123 4.08% $ 4,644
===== ====== ===== ========
</TABLE>
(Percentages may not add due to rounding.)
(1) Average balances have been computed using daily balances in 1996 and
month-end balances in 1995.
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, 1996
<TABLE>
<CAPTION>
1996 Compared to 1995 (4)
----------------------------------------
Total Caused by
Variance Rate Volume
-------- --------- ------
<S> <C> <C> <C>
Interest Income:
Federal funds sold (25) (3) (22)
Deposits in Federal Home Loan Bank (15) (5) (10)
Investment Securities:
U.S. government agencies (93) 3 (96)
State and municipal 41 (36) 77
Other securities (21) 2 (23)
----- ----- -----
Total Investment Securities (73) (31) (42)
----- ----- -----
Loans and Leases:
Commercial, financial and industrial 71 (142) 213
Real estate-construction and mortgage 541 (29) 570
Installment loans to individuals 28 29 (1)
Lease financing 36 (1) 37
----- ----- -----
Total Loans and Leases 676 (143) 819
Total Earning Assets 563 (182) 745
----- ----- -----
Interest Expense:
Interest-bearing deposits:
Demand (45) (48) 3
Savings (81) (49) (32)
Time 308 (147) 455
Time over $100,000 115 7 108
----- ----- -----
Total Interest-Bearing Deposits 297 (237) 534
Federal Funds Purchased (3) (1) (2)
Short-term borrowings 48 45 3
Long-term debt (255) 0 (255)
Securities sold under agreements to repurchase (3) 5 (8)
----- ----- -----
Total Interest-Bearing Liabilities 84 (188) 272
----- ----- -----
Net Interest Income Variances $ 479 $ 6 $ 473
===== ===== =====
</TABLE>
(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 1996, increased
9% from the same period in 1995. Loan origination fees increased ten-fold, or
$133 thousand, because of the volume of residential mortgage loans sold for
cash. Mortgage servicing fee income increased by 13% or $19 thousand when
compared to the first six months of 1995. 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
1996 and in 1995 is indicative of the changing market conditions during the
periods in which the sales occurred.
There was no trading account activity during the first six months of
1996 and 1995.
Customer service charges and fees, which include fees on demand deposit
accounts, item processing and return items, increased 27% in the first six
months of 1996. 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 34% in the first six months of 1996 compared to
the same period in 1995. 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 1996, total other operating expenses
decreased 4% over the same period in 1995. Salaries and benefits, which
represents one of the most significant portions of operating expenses, decreased
by 2% in the first six months of 1996 compared to 1995. The decrease is due to
turnover of employees, early retirements in 1995, and a change in the retirement
plan structure in the last six months of 1995. Occupancy expense increased by 4%
in 1996 compared to the same period in 1995. Equipment expense increased by 15%
in 1996 compared to the first six months of 1995. Besides the increased cost of
computer equipment and related software costs, the increase in both of these
expenses is directly related to the overall increases in overhead expenses at
all branch offices. The decrease in the FDIC insurance assessment from $210
thousand in 1995 to $1 in 1996 reflects the decision by the FDIC in late 1995 to
charge well capitalized banks a $1,000 semi-annual membership fee without any
deposit-based insurance premium. Other expenses increased by 1% over the same
period in 1995 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 June 1996 more than doubled in the
first six months of 1996 compared to the same period in 1995, due to the 76%
increase in pre-tax income. The effective tax rate for the first six months of
1996 was 26% compared to 21% in the same period in 1995.
<PAGE>
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, 1996 the amount charged to operating expense for the
provision for possible credit losses was $250 thousand compared to $360 thousand
at June 30, 1995. 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 1.10% at June
30, 1996 compared to 1.15% at June 30, 1995.
FINANCIAL CONDITION
At June 30, 1996, the Company's total assets were $280.2 million,
representing an increase of $28 million or 11% from the December 31, 1995
balance of $251.9 million. The increase in assets is primarily attributable to a
$19 million growth in securities and a $9 million growth in total loans.
Investment securities increased 26% from $73.2 million at December 31,
1995, to $91.9 million at June 30, 1996. The net increase of $18.7 million was
attributable to both an investment of liquidity generated by the increase in
deposits 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 $10 million from $152 million at year end
1995, to $162 million at June 30, 1996. Residential mortgage loans increased $8
million from December 31, 1995 to June 30, 1996. The increase is attributable to
the increased mortgage loan activity during the period, particularly during the
second quarter of 1996. Consumer loans, net of unearned discounts, grew by $800
thousand or 2% largely due to the Company's marketing efforts on both direct and
indirect lending programs to consumers. Commercial loans increased $467 thousand
or 1% at June 30, 1996. 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.
<PAGE>
Total deposits increased $30.5 million or 15% from $208.8 million at
year end 1995 to $239.3 million at June 30, 1996. Noninterest-bearing demand
deposits increased $3 million during the first six months of 1996. In aggregate,
savings accounts and interest-bearing demand deposits decreased by $ 1 million
or 2% during the period. As a percentage of total deposits, savings and
interest-bearing demand deposits represented 26.7% at June 30, 1996, compared to
33.7% at year end 1995. 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 $28 million or 24% during the period. There were no brokered deposits
within the Company's deposit base at June 30, 1996.
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 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, 1996
and 1995.
1996 1995
---- ----
(Dollars in thousands)
Loans past due 90 days or more................. $1,111 $1,140
Impaired loans on nonaccrual status............ 938 1,507
Other Nonaccrual loans......................... 461 685
------- ------
Total nonperforming loans.................... 2,510 3,332
Foreclosed assets held for sale................ 188 320
------- -------
Total nonperforming assets................... $2,698 $3,652
====== ======
Nonperforming loans as a percent
of loans..................................... 1.54% 2.43%
Nonperforming assets as a percent
assets....................................... .96% 1.41%
<PAGE>
Nonperforming assets at June 30, 1996 decreased $954 thousand or 26%
compared to the same period in 1995. Nonaccrual loans decreased $793 thousand at
June 30, 1996 compared to the same period in 1995. Real estate loans represent
$461 thousand of nonaccrual loans while loans to commercial borrowers represent
the remaining $938 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 $29 thousand from 1995 levels.
Of the delinquent loans, 49% are residential mortgages, 29% are consumer
installment and 22% are real estate secured 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 decreased $132 thousand compared to the
first six months of 1995. The Company expects the sales of the properties to be
completed during the third quarter of 1996.
POTENTIAL PROBLEM LOANS
At June 30, 1996, the Company had approximately $746 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, 1996.
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, 1996, the Company maintained $12.2 million in cash and cash
equivalents (including Federal funds sold) in the form of cash and due from
banks (after reserve requirements). In addition, the Company had $1.4 of
mortgage loans held for resale and $66.2 million in available-for-sale
securities. This combined total of $79.8 million represented 28.5% of total
assets at June 30, 1996. The Company believes that its liquidity is adequate.
<PAGE>
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, 1996, approximately 85% of the Company's assets were funded by core
deposits acquired within its market area. An additional 7.1% 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 $3.9 million at June 30,
1996, as compared to net cash used by operating activities of $1.8 million for
the comparable period in 1995. The $5.7 million increase is primarily related to
a $5 million decrease in mortgage loans held for resale. Net cash used in
investing activities was $31.8 million at June 30, 1996 compared to $14.4
million at June 30, 1995. Approximately $8 million of the net increase was
attributable to loan growth and $11 million to fund net investment security
activities.
Net cash provided by financing activities increased to $27.5 million at
June 30, 1996 from $18.5 million at June 30, 1995. A net increase in deposits of
$13 million and a net decrease in federal funds purchased of $4 million produced
the net increase 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.
<PAGE>
At June 30, 1996, the Company maintained a one year cumulative GAP of
negative $17 million or 6.09% 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 June 30, 1996.
<TABLE>
<CAPTION>
3 months 3 through 1 through Over
or less 12 months 3 years 3 years Total
-------- ---------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities(1)(2) $ 23,455 $ 13,877 $ 11,069 $ 45,912 $ 94,313
Loans(2) 40,582 23,179 33,940 63,920 161,621
-------- --------- --------- -------- --------
Total $ 64,037 $ 37,056 $ 45,009 $109,832 $255,934
======== ========= ========= ======== ========
Interest-bearing
transaction deposits(3) $ 0 $ 6,456 $ 37,096 $ 20,427 $ 63,979
Time 18,920 56,735 19,507 18,746 113,908
Time over $100,000 7,366 20,861 1,461 1,405 31,093
Repurchase agreements 300 -- -- -- 300
Short-term borrowings 2,500 -- -- -- 2,500
Long-term debt 5,001 4 10 10,110 15,125
--------- ---------- ---------- -------- ---------
Total $ 34,087 $ 84,056 $ 58,074 $ 50,688 $ 226,905
========= ========== ========== ======== ==========
Gap $ 29,950 $ (47,000) $ (13,065) $ 59,144
========= ========== =========== ========
Cumulative Gap $ 29,950 $ (17,050) $ (30,115) $ 29,029
========= ========== =========== ========
</TABLE>
(1) Gross of unrealized gains/losses on available for sale securities.
(2) Investments and loans are included in the earlier of the period in which
interest rates are next scheduled to adjust or the period in which they are due.
In addition, loans are included in the periods in which they are scheduled to be
repaid based on scheduled amortization. For amortizing loans and mortgage-backed
securities, annual prepayment rates are assumed reflecting historical experience
as well as management's knowledge and experience of its loan products.
(3) The Company's interest-bearing demand and savings accounts are generally
subject to immediate withdrawal. However, management considers a certain amount
of such accounts to be core accounts having significantly longer effective
maturities based on the retention experiences of such deposits in changing
interest rate environments. The effective maturities presented are the FDICIA
305 recommended maturity distribution limits for non-maturing deposits.
<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. By regulatory guidelines, neither Tier I nor Tier II capital reflect the
adjustment of FASB 115, which requires adjustment in financial statements
prepared in accordance with generally accepted accounting principles by
including as a separate component of equity, the amount of net unrealized
holding gains or losses on debt and equity securities that are deemed to be
available-for-sale.
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 guidelines.
<PAGE>
Primary capital..................................... $ 20,387
Intangible assets................................... (164)
--------
Tier I capital(1)................................... $ 20,223
Tier II Capital..................................... $ 1,738
Total Risk-Based Capital............................ $ 21,961
========
Total Risk-Weighted Assets.......................... $161,407
Tier I Ratio........................................ 12.53%
Risk-Based Capital Ratio............................ 13.61%
Tier I Leverage Ratio............................... 7.20%
(1) Gross of unrealized losses on available-for-sale securities. If
unrealized losses on available for sale securities were included, Tier
I capital is 12.30%, total risk-based capital ratio is 13.38%, and the
Tier I leverage ratio is 7.07%.
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 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, had a negative impact on the Company's earnings until
the growth in deposits reached or reaches a level to offset these expenses.
<PAGE>
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
June 30, 1996.
<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 2, 1996 By /s/ John G. Martines
--------------------------------
John G. Martines
CHIEF EXECUTIVE OFFICER
/s/ Joseph J. Earyes, CPA
--------------------------------
Joseph J. Earyes, CPA
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-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,368
<INT-BEARING-DEPOSITS> 120
<FED-FUNDS-SOLD> 1,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,160
<INVESTMENTS-CARRYING> 25,752
<INVESTMENTS-MARKET> 91,912
<LOANS> 163,454
<ALLOWANCE> 1,790
<TOTAL-ASSETS> 280,247
<DEPOSITS> 239,283
<SHORT-TERM> 2,800
<LIABILITIES-OTHER> 3,114
<LONG-TERM> 17,625
0
0
<COMMON> 701
<OTHER-SE> 19,224
<TOTAL-LIABILITIES-AND-EQUITY> 280,247
<INTEREST-LOAN> 7,016
<INTEREST-INVEST> 2,643
<INTEREST-OTHER> 88
<INTEREST-TOTAL> 9,747
<INTEREST-DEPOSIT> 4,264
<INTEREST-EXPENSE> 4,859
<INTEREST-INCOME-NET> 4,888
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 998
<INCOME-PRETAX> 2,016
<INCOME-PRE-EXTRAORDINARY> 2,016
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,501
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
<YIELD-ACTUAL> 0
<LOANS-NON> 1,399
<LOANS-PAST> 1,111
<LOANS-TROUBLED> 2,510
<LOANS-PROBLEM> 746
<ALLOWANCE-OPEN> 1,737
<CHARGE-OFFS> 92
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,790
<ALLOWANCE-DOMESTIC> 1,790
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,790
</TABLE>
