<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 March 31, 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: 1,666,192 shares of common
stock, par value $.42 per share, as of March 31, 1996.
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INDEX
Page Number
-----------
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995.................................. 3
Consolidated Statements of Income and
Earnings Per Share for the three months ended
March 31, 1996 and 1995................................ 4
Consolidated Statement of Cash Flows for the three
months ended March 31, 1996 and 1995................... 5
Notes to Consolidated Financial Statements................ 6-7
Item 2. Management's Discussion and Analysis or
Plan of Operations..................................... 8-19
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.......................... N/A
Signatures................................................ 20
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1996 1995
--------------------------
(in thousands)
ASSETS
Cash and cash equivalents.......................... $10,439 $12,519
Held-to-maturity securities (fair value of
$22,539 and $22,866, respectively)............ 22,699 22,589
Available-for-sale securities...................... 62,921 50,580
Loans and leases................................... 160,142 159,170
Mortgage loans held for resale..................... 6,221 3,405
Less unearned income and loan fees........... (8,381) (8,612)
Less allowance for possible credit losses...... (1,737) (1,657)
-------- --------
Net Loans................................. 156,245 152,306
Premises and equipment, net........................ 7,697 7,785
Accrued interest receivable........................ 2,197 1,971
Foreclosed assets held for sale.................... 186 52
Other assets....................................... 4,109 4,057
-------- --------
TOTAL ASSETS........................... $266,493 $251,859
======== ========
LIABILITIES
Deposits:
Noninterest-bearing............................. $27,197 $26,866
Interest-bearing:
Demand.................................... 23,151 25,686
Savings................................... 39,765 39,388
Time...................................... 103,499 89,876
Time $100,000 and over................... 31,849 26,943
-------- --------
Total Deposits............................ 225,461 208,759
Accrued interest payable........................... 1,683 1,746
Securities sold under agreements to repurchase.. 400 400
Short-term borrowings.............................. 2,500 5,000
Long-term debt..................................... 15,156 15,156
Other liabilities.................................. 1,339 1,289
-------- --------
Total Liabilities......................... 246,539 232,350
-------- --------
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
1,666,192 shares................................. 700 696
Capital surplus.................................... 9,532 9,414
Retained earnings ................................. 9,572 9,118
Net unrealized gains (losses) on available-for-sale
securities......................................... 150 281
-------- --------
Total Stockholders' Equity................ 19,954 19,509
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY................ $266,493 $251,859
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
MARCH 31,
---------
1996 1995
------------------------
(in thousands except
per share data)
INTEREST INCOME:
Loans and leases.............................. $3,477 $3,063
Investment Securities
Taxable.................................... 952 1,050
Exempt from federal income taxes........... 241 256
Dividends.................................. 25 31
------ ------
Total Investment Securities Income....... 1,218 1,337
------ ------
Deposits in banks............................. 1 5
Federal funds sold............................ 44 25
------ ------
TOTAL INTEREST INCOME..................... 4,740 4,430
------ ------
INTEREST EXPENSE:
Deposits...................................... 2,044 1,855
Long-term debt................................ 300 306
Federal funds purchased....................... 2 5
Short-term borrowings......................... 3 45
Securities sold under agreements to repurchase 5 3
------ ------
TOTAL INTEREST EXPENSE........................ 2,354 2,214
------ ------
NET INTEREST INCOME........................... 2,386 2,216
PROVISION FOR POSSIBLE CREDIT LOSSES.......... 115 135
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES................. 2,271 2,081
------ ------
OTHER OPERATING INCOME:
Loan origination fees......................... 91 14
Customer service charges and fees............. 288 220
Mortgage servicing fees....................... 85 75
Investment security gains (losses), net (48) 35
Gain (loss) on sale of mortgage loans, net. 19 24
Other income.................................. 156 106
------ ------
TOTAL OTHER OPERATING INCOME 591 474
------ ------
OTHER OPERATING EXPENSES:
Salaries and benefits......................... 906 899
Occupancy expense............................. 279 272
Equipment expense............................. 198 164
FDIC assessment............................... 1 121
Advertising................................... 47 92
Other expenses................................ 523 455
------ ------
TOTAL OTHER OPERATING EXPENSES........... 1,954 2,003
------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES...... 908 552
PROVISION FOR INCOME TAXES.................... 205 105
------ ------
NET INCOME.................................... $703 $447
====== ======
Earnings per share: $0.42 $0.27
====== ======
Dividends per share: $0.15 $0.13
====== ======
Weighted average number of shares outstanding: 1,662 1,640
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
----------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $703 $447
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible credit losses................. 115 135
Depreciation, amortization and accretion............. 177 179
Deferred income taxes................................
(Increase) decrease in mortgage loans held for resale (2,816) (1,054)
Investment security (gains) losses, net.............. 48 (35)
Loss on sale of foreclosed assets.................... 0 0
(Gain) loss on sale of leased assets................. 0 0
(Gain) loss on sale of equipment..................... 0 2
(Increase) decrease in accrued interest receivable... (226) 74
Increase (decrease) in accrued interest payable...... (63) 257
(Increase) decrease in other assets.................. 63 (619)
Increase (decrease) in other liabilities............. 50 580
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................................... (1,949) (34)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities of investment securities..... 20 211
Purchases of securities .............................. (314) 0
Available-for-sale securities:
Proceeds from maturities of securities................ 4,202 1,310
Proceeds from sales of securities..................... 5,233 850
Purchases of securities............................... (22,063) (11,932)
Net (increase) decrease in loans and leases............. (1,372) (1,845)
Purchases of premises and equipment..................... (95) (1,271)
Proceeds from sale of leased assets..................... 0 0
Proceeds from sale of equipment......................... 0 2
Proceeds from sale of foreclosed assets................. 0 96
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES................................. (14,206) (12,579)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................ 16,702 13,928
Increase (decrease) in short-term borrowings............ (2,500) (9,750)
Increase (decrease) in securities sold under agreements
to repurchase......................................... 0 (500)
Proceeds from long-term debt............................ 0 15,000
Principal payments on long-term debt.................... 0 (2,500)
Proceeds from issuance of common stock.................. 122 106
Cash dividends.......................................... (249) (213)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES................................... 14,075 16,071
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (2,080) 3,458
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD.................................... 12,519 10,719
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $10,439 $14,177
======= =======
CASH PAID DURING THE YEAR FOR:
Interest............................................... $2,128 $1,957
======= =======
Income taxes........................................... $250 $91
======= =======
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 quarters of 1996 and 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.
The Company has no derivative financial instruments requiring disclosure under
SFAS No. 119.
<PAGE>
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 March 31, 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 March 31, 1996 consisted of the following:
Borrowings from The Federal Home Loan Bank................. $2,500,000
Long-term debt at March 31, 1996 consisted of the following:
Unsecured notes, payable in the amount
of $31,200 semiannually, maturing
April 22, 1998.............................................$ 156,000
Borrowings with The Federal Home Loan Bank.................$15,000,000
-----------
Total....................................................$15,156,000
===========
Annual maturities of the long-term debt are as follows: $62,400 in
1996; $62,400 in 1997; $31,200 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 March 31, 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 three months of 1996 increased 57% compared to
the same period in 1995. Net income was positively influenced by a 9% growth in
net interest income after provision for possible credit losses and a 25%
increase in other operating income, while effectively controlling overhead costs
which decreased by 2%. The primary reason for the decrease is the 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 1.09% in 1996 compared to .73% in 1995. The ROE was 14.15%
for the first quarter of 1996 compared to 11.31% 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 quarter of 1996 net interest income (tax equivalent basis)
increased 7% over the same period in 1995, primarily due to the positive
improvement in the net income variances of earning assets over interest-bearing
liabilities. Average loans and leases grew by 12% or $16 million in the first
quarter of 1996. Average commercial loans increased by 7%, real estate mortgage
loans by 21% and consumer loans and lease financing by 2%. The increase in
interest and fees on loans resulted from the growth in all loan categories.
Commercial loan income increased by 2%, mortgage loan income grew by 26% and
consumer loan income increased by 10%.
<PAGE>
Investment securities income decreased 9% and is directly attributable
to lower volume levels during the quarter. Tax exempt state and municipal
securities income decreased 6% due to lower yields as a result of a decline in
the prime borrowing rate for all tax-exempt securities of the same quality. U.S.
government agencies income decreased by 10% because of volume. Gross unrealized
gains on held to maturity securities were approximately $310 thousand while
gross unrealized losses amounted to $470 thousand.
Total interest expense increased by 6% in the first quarter of 1996 due
to the higher levels of average interest-bearing deposit accounts. Average time
(certificates of deposit) deposits and rates on new borrowings from the Federal
Home Loan Bank contributed heavily to the growth. In aggregate, average savings
and interest-bearing demand deposits currently represent 34% of interest-bearing
deposits compared to 37% in March 1995. Total interest expense associated with
these types of deposits increased 28% or $111 thousand during the first quarter
of 1996. Total average certificates of deposit increased 14%, but due to the
repricing frequency of these deposits and the overall lower rates, interest
expense on certificates of deposit increased by 5%. The effect of the higher
average rates resulted in an 8 basis point increase in the cost of interest-
bearing deposits, from 4.26% at March 1995 to 4.34% at March 1996.
Average total borrowings were $20.2 million in the first quarter of
1996 compared to $28.2 million in the first quarter of 1995. At March 31, 1996,
both short-term and long-term borrowings were used to fund earning asset growth.
During the first quarter of 1996, the average yield on earning assets
increased by 18 basis points and cost of interest-bearing liabilities increased
by 7 basis points. The net effect was a basis point decrease in the net interest
margin from 4.15% in 1995 to 4.26% 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 three months ended March 31, 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 $ 3,331 5.30% $ 44 $1,760 5.70% $ 25
Investment Securities:
U.S. government agencies 58,588 6.52% 952 65,430 6.44% 1,050
State and municipal (2) 17,505 8.36% 365 17,412 8.94% 388
Other securities 1,368 7.33% 25 2,477 5.02% 31
-------- ------ ------ -------- ------ ------
Total Securities 77,461 6.95% 1,342 85,319 6.91% 1,469
-------- ------ ------ -------- ------ ------
Loans and Leases:
Commercial, financial and industrial 47,139 9.57% 1,125 44,071 10.03% 1,102
Real estate-construction and mortgage 73,341 8.27% 1,513 60,714 7.91% 1,197
Installment loans to individuals (3) 33,537 9.51% 795 33,333 8.86% 736
Lease financing (3) 1,613 10.94% 44 1,172 9.58% 28
-------- ------ ------ -------- ------ ------
Total Loans and Leases 155,630 8.96% 3,477 139,290 8.82% 3,063
-------- ------ ------ -------- ------ ------
Total earning assets 236,422 8.25% 4,863 226,369 8.07% 4,557
Cash and due from banks 10,122 -- -- 10,447 -- --
Premises and equipment 7,723 -- -- 7,157 -- --
Other, less allowance for credit losses
and loan fees 4,293 -- -- 2,942 -- --
-------- ------ ------ -------- ------ ------
Total Assets $258,560 7.54% $4,863 $246,915 7.40% $4,557
======== ====== ====== ======== ====== ======
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand $ 25,053 2.03% $ 127 $ 23,832 0.88% $ 52
Savings 39,188 3.88% 379 41,062 3.35% 343
Time 96,370 4.97% 1,193 84,141 5.93% 1,245
Time over $100,000 28,221 4.90% 345 25,504 3.38% 215
-------- ------ ------ -------- ------ ------
Total Interest-Bearing Deposits 188,832 4.34% 2,044 174,539 4.26% 1,855
-------- ------ ------ -------- ------ ------
Short-term borrowings 4,670 5.50% 64 4,671 4.29% 50
Long-term debt 15,156 6.38% 241 22,732 5.40% 306
Securities sold under agreements
to repurchase 400 5.01% 5 775 -- 3
-------- ------ ------ -------- ------ ------
Total Interest-Bearing Liabilities 209,058 4.52% 2,354 202,717 4.38% 2,214
Demand - noninterest - bearing 26,617 -- -- 25,165 -- --
Other liabilities 2,966 -- -- 2,697 -- --
-------- ------ ------ -------- ------ ------
Total Liabilities 238,641 3.96% 2,354 230,579 3.85% 2,214
Stockholders' equity 19,919 -- -- 16,336 -- --
-------- ------ ------ -------- ------ ------
Total Liabilities and Stockholders'
Equity $258,560 3.65% $2,354 $246,915 3.60% $2,214
======== ====== ====== ======== ====== ======
Margin Analysis
Interest income/earning assets 8.25% $4,863 8.07% $4,557
Interest expense/earning assets 3.99% 2,354 3.92% 2,214
------ ------ ------ ------
Net interest income/earning assets 4.26% $2,509 4.15% $2,343
====== ====== ====== ======
(Percentages may not add due to rounding.)
</TABLE>
(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>
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis Calculation
- ----------------------------------------- 1996 Compared to 1995
----------------------
Total Caused by
Variance Rate Volume
-----------------------------------------------
<S> <C> <C> <C>
Interest Income:
Federal funds sold $19 ($14) $33
Investment Securities:
U.S. government agencies (98) 13 (111)
State and municipal (23) (25) 2
Other securities (6) 11 (17)
---------------------------------------------
Total Investment Securities (127) (1) (126)
---------------------------------------------
Loans and Leases:
Commercial, financial and industrial 23 (52) 75
Real estate-construction and mortgage 316 58 258
Installment loans to individuals 59 54 5
Lease financing 16 4 12
---------------------------------------------
Total Loans and Leases 414 64 350
Total Earning Assets 306 49 257
---------------------------------------------
Interest Expense:
Interest-bearing deposits
Demand 75 72 3
Savings 36 52 (16)
Time (52) (219) 167
Time over $100,000 130 105 25
---------------------------------------------
Total Interest-Bearing Deposits 189 10 179
Short-term borrowings 14 14 0
Long-term debt (65) 50 (115)
Securities sold under agreements
to repurchase 2 3 (1)
---------------------------------------------
Total Interest-Bearing Liabilities 140 77 63
---------------------------------------------
Net Interest Income Variances $ 166 ($28) $194
---------------------------------------------
</TABLE>
(4) The portion 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 three months of 1996 increased
25% from the same period in 1995. Loan origination fees increased six-fold and
mortgage servicing fee income increased by 13% when compared to the first
quarter 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 the first quarters of 1996 and
1995.
Customer service charges and fees, which include fees on demand deposit
accounts, item processing and return items, increased 31% in the first quarter
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 by 47% in the first quarter 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 three months of 1996, total other operating expenses
decreased 2% over the same period in 1995. Salaries and benefits, which
represent one of the most significant portions of operating expenses, increased
by 1% in the first quarter of 1996 compared to 1995. The modest increase is due
to the additional number of employees, merit increases and the added costs
associated with health care insurance and other benefits which are provided by
the Company. Occupancy expense increased by 3% in 1996 compared to the same
period in 1995. Equipment expense increased by 21% in 1996 compared to the first
quarter 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 $121 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 15% 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 March 1996 doubled in the first
quarter of 1996 compared to the same period in 1995. The increase is primarily
attributable to the 64% increase in pre-tax income. The effective tax rate for
the first quarter of 1996 was 23% as compared to 19% for 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 quarterly meetings, the loan
review committee is presented with a report that contains 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 March 31, 1996 the amount charged to operating expense for the
provision for possible credit losses was $115 thousand compared to $135 thousand
at March 31, 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 as a percent of
total loans was 1.10% at March 31, 1996 compared to .99% at March 31, 1995.
FINANCIAL CONDITION
- -------------------
At March 31, 1996, the Company's total assets were $266.5 million,
representing an increase of $14.6 million or 6% from the December 31, 1995
balance of $251.9 million. The increase in assets is primarily attributable to a
$12 million growth in securities and $4 million increase in net loans.
Investment securities increased 17% from $73.2 million at December 31,
1995, to $85.6 million at March 31, 1996. The net increase of $12.4 million was
attributable to investment of excess liquidity generated during the first
quarter of 1996.
Total net loans increased by $4 million from $152 million at year end
1995, to $156 million at March 31, 1996. The increase in net loans resulted from
the Company's deposit-base growth and increased marketing efforts. Mortgage
loans increased by $1 million or 1% at March 31, 1996. Mortgage loans held for
resale increased to $6 million at March 31, 1996 from $3 million at December 31,
1995. Consumer loans decreased by $800 thousand or 2%. Commercial loans
increased $600 thousand or 1% at March 31, 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 $16.7 million or 8% from $208.8 million at
year-end 1995 to $225.5 million at March 31, 1996. Noninterest-bearing demand
deposits increased $331 thousand during the first quarter of 1996. In aggregate,
savings accounts and interest-bearing demand deposits decreased by $2.2 million
or 3% during the period. As a percentage of total deposits, savings and
interest-bearing demand deposits represented 28% at March 31, 1996, versus 31%
at year-end 1995. These deposits typically pay the lowest rate of interest. Over
the past year, as investment rates continued their upward trend, savings and
interest-bearing demand deposits became less attractive to consumers because of
their lower rates offered as compared to other short-term deposit products. Time
deposits, which include certificates of deposit in denominations of $100
thousand or more, increased $18.5 million or 16% during the period. There were
no brokered deposits within the Company's deposit base at March 31, 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 March 31, 1996
and 1995.
March 31,
1996 1995
---- ----
(in thousands)
Loans past due 90 days or more................. $1,205 $1,750
Impaired loans on nonaccrual status............ 990 1,163
Other Nonaccrual loans......................... 472 700
------ -----
Total nonperforming loans.................... 2,667 3,613
Foreclosed assets held for sale................ 186 145
------ ------
Total nonperforming assets................... $2,853 $3,758
====== ======
Nonperforming loans as a percent
of loans..................................... 1.69% 2.62%
Nonperforming assets as a percent
assets....................................... 1.07% 1.50%
<PAGE>
Nonperforming assets at March 31, 1996 decreased $905 thousand compared
to the same period in 1995. Nonaccrual loans decreased $401 thousand at March
31, 1996 compared to the same period in 1995. Real estate loans represent $471
thousand of nonaccrual loans while loans to commercial borrowers represent the
remaining $990 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 $545 thousand from 1995
levels. Of the delinquent loans, 36.13% are real estate secured, 31.98% are
consumer installment and 31.89% 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 increased $41 thousand compared to the
first quarter of 1995. The Company expects the sales of the properties to be
completed during the second quarter of 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 March 31, 1996, the Company maintained $10.4 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 $6.2 million of
mortgage loans held for resale and $63 million in available-for-sale securities.
This combined total of $79.6 million represented 30% of total assets at March
31, 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
March 31, 1996, approximately 85% of the Company's assets were funded by core
deposits acquired within its market area. An additional 7.5% of the assets were
funded by the Company's equity. These two components provide a substantial and
stable source of funds.
Net cash used in operating activities was $1.9 million at March 31,
1996, as compared to net cash used in operating activities of $34 thousand for
the comparable period in 1995. This $1.56 million decrease is primarily related
to a net $1.8 million increase in mortgage loans held for resale. Net cash used
in investing activities increased $1.6 million in 1996 was attributable to
proceeds from maturities, proceeds from sales and purchases of investment
securities. Net cash provided by financing activities decreased $2 million from
1995. A net increase in deposits of $2.8 million was used to repay borrowings,
resulting in a net decrease of $2.5 million in borrowing activities.
INTEREST RATE SENSITIVITY
- -------------------------
Interest rate sensitivity management involves the matching of maturity
and repricing dates of earning assets and interest-bearing liabilities to help
insure the Company's earnings against extreme fluctuations in interest rates.
The Company's Asset/Liability Committee ("ALCO"), which is comprised of senior
management and board members, meets monthly to monitor the ratio of interest
sensitive assets to interest sensitive liabilities.
The Company's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This is accomplished through the measurement of the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. The goal
of maintaining a reasonable balance between interest sensitive assets and
interest sensitive liabilities is accomplished through the Company's
asset/liability management program.
To manage the interest sensitivity position, an asset/ liability model
called "gap analysis" is used to monitor the difference in the volume of the
Company's interest sensitive assets and liabilities that mature or reprice
within given periods. A positive gap (asset sensitive) indicates that more
assets reprice during a given period compared to liabilities, while a negative
gap (liability sensitive) has the opposite effect. The use of this model assists
the ALCO to gauge the effects of interest rate changes on interest sensitive
assets and liabilities in order to determine what impact these rate changes will
have upon the net interest spread.
At March 31, 1996, the Company maintained a one year cumulative GAP of
negative $20.3 million or 8.4% of total interest-earning assets. The effect of
this GAP position provided a negative mismatch of assets and liabilities which
can expose the Company to interest rate risk during a period of rising interest
rates.
<PAGE>
The following table sets forth the Company's interest sensitivity gap
position as of March 31, 1996. Included in loans, in the over one year period,
are $6.2 million of residential mortgages that can be sold in the secondary
market.
<TABLE>
<CAPTION>
3 months 3 through 1 through Over Total
or less 12 months 3 years 3 years
-------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities(1)(2) $20,055 $17,788 $12,182 $35,367 $ 85,392
Loans(2) 41,835 20,275 31,973 62,167 156,250
------- -------- ------- -------- --------
Total $61,890 $38,063 $44,155 $97,534 $241,642
======= ======== ======== ======= ========
Interest-bearing
transaction deposits(3) $ 0 $ 5,308 $36,688 $20,921 $ 62,917
Time 22,515 56,023 13,608 13,077 105,223
Time over $100,000 9,331 19,213 807 775 30,126
Repurchase agreements 400 -- -- -- 400
Short term borrowings -- 2,500 -- -- 2,500
Long-term debt 5,002 5 12 10,136 15,155
------- -------- -------- ------- --------
Total $37,248 $83,049 $51,115 $44,909 $216,321
======= ======== ======== ======= ========
Gap $24,642 $(44,986) $( 6,960) $52,625
======= ========= ======== =======
Cumulative Gap $24,642 $(20,344) $(27,304) $25,321
======= ======== ======== =======
</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. Accordingly, these deposits are assumed to be
withdrawn according to historical experience which management considers
reasonable at this time. However, the effective maturities are not outside the
FDICIA 305 maturity distribution limits for non-maturing deposits.
Upon reviewing the current interest sensitivity scenario, decreasing
interest rates could positively affect net income because the Company is
liability sensitive. In a rising interest rate environment, net income could be
negatively affected because more liabilities than assets will reprice during a
given period. However, this analysis is only a simulation tool used to gauge the
effects of a changing interest rate scenario. Other factors such as product
pricing, customer preference and local market conditions play an important part
of interest rate risk management.
<PAGE>
CAPITAL
- -------
The adequacy of the Company's capital is reviewed on an ongoing basis
with reference to size, composition and quality of the Company's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
As required by the federal banking regulatory authorities, new
guidelines have been adopted to measure capital adequacy. Under the guidelines,
certain minimum ratios are required for core capital and total capital as a
percentage of risk-weighted assets and other off-balance sheet instruments. For
the Company, Tier I capital consists of common stockholders' equity less
intangible assets, and Tier II capital includes the allowable portion of the
allowance for possible loan losses, currently limited to 1.25% of risk-weighted
assets. 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 new guidelines.
Primary capital.................................. $ 19,803
Intangible assets................................ (194)
Tier I Capital................................... $ 19,609
Tier II Capital.................................. 1,685
--------
Total Risk-Based Capital......................... $ 21,294
========
Total Risk-Weighted Assets....................... $154,429
Tier I Ratio..................................... 12.70%
Risk-Based Capital Ratio......................... 13.79%
EFFECTS OF INFLATION
- --------------------
The majority of assets and liabilities of financial institutions are
monetary in nature and therefore differ substantially from commercial
enterprises who have significant investments in fixed assets, inventory and raw
materials. Inflation can impact asset growth in the banking industry with
respect to the needs of equity capital. Inflation can also have a direct impact
on noninterest expenses such as salaries, benefits and other expenses. These
expenses are watched very closely by management since they tend to increase
during periods of rising inflation.
<PAGE>
Management's belief is that a significant impact on earnings depends on its
ability to react to changes in interest rates. Through its Asset/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 branch openings, such as salaries and benefits, advertising, overhead
expenses and marketing will have a negative impact the Company's earnings until
the growth in deposits reach a level to offset these expenses.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-K
Exhibit Number Description of Exhibit
-------------- ----------------------
2 None
4 None
11 None
15 None
18 None
19 None
20 None
23 None
24 None
25 None
28 None
(b) Reports on /Form 8-K
The Registrant has filed no reports on Form 8-K for the quarter ended
March 31, 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 May 2, 1996 By
------------------------------------
John G. Martines
CHIEF EXECUTIVE OFFICER
------------------------------------
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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,584
<INT-BEARING-DEPOSITS> 105
<FED-FUNDS-SOLD> 750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,921
<INVESTMENTS-CARRYING> 22,699
<INVESTMENTS-MARKET> 85,460
<LOANS> 157,982
<ALLOWANCE> 1,737
<TOTAL-ASSETS> 266,493
<DEPOSITS> 225,461
<SHORT-TERM> 2,900
<LIABILITIES-OTHER> 3,022
<LONG-TERM> 15,156
0
0
<COMMON> 700
<OTHER-SE> 19,254
<TOTAL-LIABILITIES-AND-EQUITY> 266,493
<INTEREST-LOAN> 3,477
<INTEREST-INVEST> 1,218
<INTEREST-OTHER> 45
<INTEREST-TOTAL> 4,740
<INTEREST-DEPOSIT> 2,044
<INTEREST-EXPENSE> 310
<INTEREST-INCOME-NET> 2,386
<LOAN-LOSSES> 115
<SECURITIES-GAINS> (48)
<EXPENSE-OTHER> 1,954
<INCOME-PRETAX> 908
<INCOME-PRE-EXTRAORDINARY> 908
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<YIELD-ACTUAL> 0
<LOANS-NON> 1,462
<LOANS-PAST> 1,205
<LOANS-TROUBLED> 2,667
<LOANS-PROBLEM> 790,000
<ALLOWANCE-OPEN> 1,657
<CHARGE-OFFS> 92
<RECOVERIES> 57
<ALLOWANCE-CLOSE> 1,737
<ALLOWANCE-DOMESTIC> 1,737
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,737
</TABLE>
