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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X]
For the fiscal year ended December 31, 1995
OR
[ ]
For the transition period from _____________to________________
Commission file Number: 2-85306
LAKE ARIEL BANCORP, INC.
(Exact name of registrant as specified in its charter)
23-2244948
(I.R.S. Employer Identification Number)
Post Office Box 67, Route 191, Lake Ariel, Pennsylvania 18436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 698-5695
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.42 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
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
----- -----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The aggregate market value of the voting stock held by
non-affiliates of the registrant based on a closing sale price: $18,818,366 at
March 19, 1996.
As of March 19, 1996, the registrant had outstanding
1,662,911 shares of its common stock, par value $.42 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to stockholders of the
registrant for the year ended December 31, 1995, are incorporated by reference
in Part II of this Annual Report.
Page 1 of ____
Exhibit Index on Page 35
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LAKE ARIEL BANCORP, INC.
FORM 10-KSB
Index
<TABLE>
<CAPTION>
Part I Page
- ------ ----
<S> <C>
Item 1. Description of the Business...................................... 3
Item 2. Description of Property.......................................... 17
Item 3. Legal Proceedings................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.............. Not Applicable
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters............................................. 19
Item 6. Management's Discussion and Analysis............................. 21
Item 7. Financial Statements............................................. 21
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. Not Applicable
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act.................................................... 22
Item 10. Executive Compensation........................................... 26
Item 11. Security Ownership of Certain Beneficial Owners
and Management.................................................. 27
Item 12. Certain Relationships and Related Transactions................... 29
Item 13. Exhibits and Reports on Form 8-K................................. 30
Signatures..................................................................... 32
Exhibit Index.................................................................. 35
</TABLE>
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LAKE ARIEL BANCORP, INC.
FORM 10-KSB
Part I
Item 1. Description of the Business
General
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Lake Ariel Bancorp, Inc. ("Bancorp"), a Pennsylvania business
corporation, is a bank holding company, registered with and supervised by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Bancorp was organized on May 23, 1983, and commenced operations on November 26,
1983. Bancorp has one wholly-owned subsidiary, LA Bank, National Association
(the "Bank"). Bancorp's business has consisted primarily of managing and
supervising the Bank, and its principal source of income has been dividends paid
by the Bank. At December 31, 1995, Bancorp had total consolidated assets,
deposits and stockholders' equity of approximately $251.9 million, $208.8
million and $19.5 million, respectively.
The Bank was organized in 1910. The Bank is a national banking
association that is a member of the Federal Reserve System and the deposits of
which are insured by the Federal Deposit Insurance Corporation (the "FDIC")
under the Bank Insurance Fund ("BIF"). On May 10, 1993, the Bank changed its
legal name to "LA Bank, National Association." As of December 31, 1995, the Bank
has ten branch locations, in addition to its main office in Lake Ariel, Wayne
County (two branches within Wayne County, six branches within Lackawanna County
and two branches within Pike County), an operations center (within Wayne County,
Pennsylvania), and an Administration and Loan Center (within Lackawanna County,
Pennsylvania) and is a full service commercial bank providing a wide range of
services to individuals and small to medium sized businesses in its Northeastern
Pennsylvania market area, including accepting time, demand, and savings deposits
and making secured and unsecured commercial, real estate and consumer loans. The
Bank has one subsidiary, LA Lease, Inc., that engages in the leasing of personal
property.
Supervision and Regulation - Bancorp
------------------------------------
Bancorp is subject to the jurisdiction of the Securities and
Exchange Commission ("SEC") and of state securities laws administrators for
matters relating to the offering and sale of its securities. Bancorp is
currently subject to the SEC's rules and regulations relating to periodic
reporting, insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934 (the "Exchange Act").
Furthermore, Bancorp qualifies as a "small business issuer" as that term is
defined under Item 10 of Regulation S-B of the SEC, and has elected to make its
SEC filings under the disclosure requirements afforded to small business
issuers.
Bancorp is also subject to the provisions of the Bank Holding
Company Act of 1956, as amended ("Bank Holding Company Act"), and to supervision
by the Federal Reserve Board. The Bank Holding Company Act will require Bancorp
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to secure the prior approval of the Federal Reserve Board before it owns or
controls, directly or indirectly, more than 5% of the voting shares of
substantially all of the assets of any institution, including another bank. The
Bank Holding Company Act prohibits acquisition by Bancorp of more than 5% of the
voting shares of, or interest in, or substantially all of the assets of, any
bank located outside Pennsylvania unless such an acquisition is specifically
authorized by laws of the state in which such bank is located.
A bank holding company is prohibited from engaging in or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of
control of a bank holding company, such as Bancorp, without prior notice to the
Federal Reserve Board. Control is defined for this purpose as the power,
directly or indirectly, to direct the management or policies of a bank holding
company or to vote twenty-five percent (25%) (or ten percent (10%), if no other
person or persons acting on concert, holds a greater percentage of the Common
Stock) or more of Bancorp's Common Stock.
Bancorp is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of Bancorp and any or all of its subsidiaries. Further,
under Section 106 of the 1970 amendments to the Bank Holding Company Act and the
Federal Reserve Board's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit or provision of credit or provision of any property or
services. The so-called "Anti-tie-in" provisions state generally that a bank may
not extend credit, lease, sell property or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to its bank holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other credit or service
from a competitor of the bank, its bank holding company or any subsidiary of its
bank holding company.
Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or any of its subsidiaries, on investments in
the stock or other securities of the bank holding company and on taking of such
stock or securities as collateral for loans to any borrower.
Permitted Non-Banking Activities
--------------------------------
The Federal Reserve Board permits bank holding companies to
engage in non-banking activities so closely related to banking, managing or
controlling banks as to be a proper incident thereto. While the types of
permissible activities are subject to change by the Federal Reserve Board, the
principal non-banking activities that presently may be conducted by a bank
holding company are:
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1. Making, acquiring or servicing loans and other extensions
of credit for its own account or for the account of others, such as would be
made by the following types of companies: consumer finance, credit card,
mortgage, commercial finance and factoring.
2. Operating as an industrial bank, Morris Plan bank or
industrial loan company in the manner authorized by state law so long as the
institution does not accept demand deposits or make commercial loans.
3. Operating as a trust company in the manner authorized by
federal or state law so long as the institution does not make certain types of
loans or investments or accept deposits, except as may be permitted by the
Federal Reserve Board.
4. Subject to certain limitations, acting as an investment or
financial advisor to investment companies and other persons.
5. Leasing personal and real property or acting as agent,
broker, or advisor in leasing property, provided that it is reasonably
anticipated that the transaction will compensate the lessor for not less than
the lessor's full investment in the property and provided further that the
lessor may rely on estimated residual values of up to 100% of the acquisition
cost of the leased property.
6. Making equity and debt investments in corporations or
projects designed primarily to promote community welfare, such as the economic
rehabilitation and development of low-income areas by providing housing,
services or jobs for residents.
7. Providing to others financially oriented data processing
or bookkeeping services.
8. Subject to certain limitations, acting as an insurance
principal, agent or broker in relation to insurance for itself and its
subsidiaries or for insurance directly related to extensions of credit by the
bank holding company system.
9. Owning, controlling or operating a savings association, if
the savings association engages only in deposit taking activities and lending,
and other activities permissible for bank holding companies.
10. Providing courier services of a limited character.
11. Subject to certain limitations, providing management
consulting advice to nonaffiliated banks and nonbank depository institutions.
12. Selling money orders having a face value of $1,000 or
less, travelers' checks and United States savings bonds.
13. Performing appraisals of real estate and personal
property, including securities.
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14. Subject to certain conditions, acting as intermediary for
the financing of commercial or industrial income-producing real estate by
arranging for the transfer of the title, control and risk of such a real estate
project to one or more investors.
15. Subject to certain limitations, providing full-service
brokerage and financial advisory activities; and selling, solely as an agent or
broker for customers, shares of investment companies advised by an affiliate of
the bank holding company or providing investment advice to customers about the
purchase and sale of shares of investment companies advised by an affiliate of
the bank holding company.
16. Underwriting and dealing in obligations of the United
States, general obligations of states and their political subdivisions and other
obligations such as bankers' acceptances and certificates of deposits.
17. Subject to certain limitations, providing by any means,
general information and statistical forecasting with respect to foreign exchange
markets; advisory services designed to assist customers in monitoring,
evaluating and managing their foreign exchange exposures; and certain
transactional services with respect to foreign exchange.
18. Subject to certain limitations, acting as a futures
commission merchant in the execution and clearance on major commodity exchanges
of futures contracts and options on futures contracts for bullion, foreign
exchange, government securities, certificates of deposit and other money market
instruments.
19. Subject to certain limitations, providing commodity
trading and futures commission merchant advice, including counsel, publications,
written analysis and reports.
20. Providing consumer financial counseling that involves
counseling, educational courses and distribution of instructional materials to
individuals on consumer-oriented financial management matters, including debt
consolidation, mortgage applications, bankruptcy, budget management, real estate
tax shelters, tax planning, retirement and estate planning, insurance and
general investment management, so long as this activity does not include the
sale of specific products or investments.
21. Providing tax planning and preparation advice such as
strategies designed to minimize tax liabilities and includes, for individuals,
analysis of the tax implications of retirement plans, estate planning and family
trusts. For a corporation, tax planning includes the analysis of the tax
implications of mergers and acquisitions, portfolio mix, specific investments,
previous tax payments and year-end tax planning. Tax preparation involves the
preparation of tax forms and advice concerning liability based on records and
receipts supplied by the client.
22. Providing check guaranty services to subscribing
merchants.
23. Subject to certain limitations, operating a collection
agency.
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24. Operating a credit bureau that maintains files on the past
credit history of consumers and providing such information to a lender that is
considering a borrower's application for credit, provided that the credit bureau
does not grant preferential treatment to an affiliated bank in the bank holding
company system.
Except for its indirect subsidiary, LA Lease, Inc. with
respect to the leasing of personal property, Bancorp has not and does not intend
to commence or conduct any of the above-delineated activities during the
calendar years 1995 and 1996, respectively.
Pennsylvania Banking Law
------------------------
Under the Pennsylvania Banking Code of 1965, as amended (the
"Code"), Bancorp is permitted to control an unlimited number of banks. However,
Bancorp would be required, under the Bank Holding Company Act, to obtain the
prior approval of the Federal Reserve Board before it could acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank, if, after such acquisition,
it would own or control more than five percent (5%) of the voting shares of such
bank.
Interstate Banking and Branching
--------------------------------
On September 29, 1994, the President signed into law the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The following discussion describes those provisions
of the Interstate Banking Act that would pertain to Bancorp. It is not an
exhaustive description of all provisions of the Interstate Banking Act.
In general, the Federal Reserve Board may approve an
application by Bancorp to acquire control of, or acquire all or substantially
all of the assets of, a bank located outside of the Commonwealth of Pennsylvania
without regard to whether such acquisition is prohibited under the law of any
state. The Federal Reserve Board may approve such application if it finds, among
other things, that Bancorp is "adequately capitalized" and "adequately managed."
Moreover, the Federal Reserve Board may not approve such acquisition if the
target bank has not been in existence for the minimum period of time, if any,
required by such target bank's "host" state. The Federal Reserve Board may,
however, approve the acquisition of the target bank that has been in existence
for at least five years without regard to any longer minimum period of time
required under the law of the "host" state of the target bank. These above
provisions took effect on September 30, 1995.
Furthermore, the Interstate Banking Law provides that,
beginning June 1, 1997, appropriate federal supervisory agencies may approve a
merger of the Bank with another bank located in a different state or the
establishment by the Bank of a new branch office either by acquisition or de
novo, unless the Commonwealth of Pennsylvania enacts a law prior to June 1,
1997, allowing an interstate merger or expressly prohibiting merger with an
out-of-state bank. The Commonwealth of Pennsylvania has enacted a law to
"opt-in" early to these interstate mergers.
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Moreover, the Interstate Banking Law provides that the Bank
may establish and operate a de novo branch in any state that "opts-in" to de
novo branching. A "de novo branch" is a branch office that is originally
established as a branch and does not become a branch as a result of an
acquisition or merger. The Commonwealth of Pennsylvania has enacted a law to
"opt-in" early to de novo interstate branching.
On December 13, 1995, the Banking Commissioners of the states
of Delaware, Maryland, Pennsylvania and Virginia executed a Cooperative
Agreement which governs the manner in which state-chartered banks with branches
in multiple states will be supervised. This Cooperative Agreement was
necessitated by the Interstate Banking Law and was drafted to create a level
playing field for state-chartered banks with respect to supervision and
regulation of branch offices in a multiple state setting. Specifically, this
agreement outlines general principles for determining whether home or host state
law applies, including the following: (1) host state law applies to operational
issues relating to a branch located in a host state, including antitrust,
community reinvestment, consumer protection, usury and fair lending laws; (2)
the state law of the home state will apply to corporate structure issues, such
as, charter, by-laws, incorporation, liquidation, stockholders and directors,
capital and investments; and (3) bank powers issues will be resolved with
reference to both home and host state laws. The Bank is a national association
and is governed by, among other laws and regulations, the National Bank Act and
regulations promulgated by the Comptroller of the Currency. Therefore, the
Cooperative Agreement does not apply to the Bank.
As of the filing date of this report, Bancorp and the Bank
have no plans to engage in interstate banking or branching.
Legislation and Regulatory Changes
----------------------------------
From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Bancorp and its subsidiary bank. Certain
changes of potential significance to Bancorp which have been enacted or
promulgated, as the case may be, by Congress or various regulatory agencies,
respectively, are discussed below.
Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA")
-----------------------------------------------------------
On August 9, 1989, major reform and financing legislation,
i.e., FIRREA, was enacted into law in order to restructure the regulation of the
thrift industry, to address the financial condition of the Federal Savings and
Loan Insurance Corporation and to enhance the supervisory and enforcement powers
of the Federal bank and thrift regulatory agencies. The Office of the
Comptroller of the Currency ("OCC"), as the primary Federal regulator of the
Bank, is primarily responsible for supervision of the Bank. The OCC and FDIC
have far greater flexibility to impose supervisory agreements on an institution
that fails to comply with its regulatory requirements, particularly with respect
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to the capital requirements. Possible enforcement actions include the imposition
of a capital plan, termination of deposit insurance and removal or temporary
suspension of an officer, director or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three
levels, with amounts increasing with the severity of the violation. The first
tier provides for civil penalties of up to $5,000 per day for any violation of
law or regulation. A civil penalty of up to $25,000 per day may be assessed if
more than a minimal loss or a pattern of misconduct is involved. Finally, a
civil penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1.0 million per violation, up to $5.0 million for continuing
violations or for the actual amount of gain or loss. These monetary penalties
may be combined with prison sentences for up to five years.
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA")
-------------------------------------------------------------
General. The FDICIA was enacted in December, 1991, and
reformed a variety of bank regulatory laws. Some of these reforms have a direct
impact on the Bank. Certain of these provisions are discussed below.
Examinations and Audits. Annual full-scope, on-site
examinations are required for all FDIC-insured institutions with assets of $500
million or more. For bank holding companies with $500 million or more in assets,
the independent accountants of such companies shall attest to the accuracy of
management's report. Such accountants shall also monitor management's compliance
with governing laws and regulations. Such companies are also required to select
an independent audit committee composed of outside directors who are independent
of management, to review with management and the independent accountants the
reports that must be submitted to the appropriate bank regulatory agencies. If
the independent accountants resign or are dismissed, written notification must
be given to the FDIC and to the appropriate federal and state bank regulatory
agency.
Prompt Corrective Action. In order to reduce losses to the
deposit insurance funds, the FDICIA established a format to more closely monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDICIA established five "Capital" categories. They are: (1)
well-capitalized; (2) adequately capitalized; (3) undercapitalized; (4)
significantly undercapitalized; and (5) critically undercapitalized. The overall
goal of these new capital measures is to impose more scrutiny and operational
restrictions on depository institutions as they descend the capital categories
from well capitalized to critically undercapitalized.
The FDIC, the OCC, the Federal Reserve Board and the Office of
Thrift Supervision have issued jointly final regulations relating to these
capital categories and prompt corrective action. These capital measures for
prompt corrective action are defined as follows:
A "well-capitalized" institution would be one that has at
least a 10% total risk-based capital ratio, a 6% or greater Tier I risk-based
capital ratio, a 5% or greater Tier I leverage capital ratio, and is not subject
to any written order or final directive by the FDIC to meet and maintain a
specific capital level.
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An "adequately capitalized" institution would be one that
meets the required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I leverage capital ratio of at least 4% and an 8% or
greater total risk-based capital ratio. Since the risk-based standards also
require at least half of the total risk-based capital requirement to be in the
form of Tier I capital, this also will mean that an institution would need to
maintain at least a 4% Tier I risk-based capital ratio. Thus, an institution
would need to meet each of the required minimum capital levels in order to be
deemed "adequately capitalized."
An "undercapitalized" institution would fail to meet one or
more of the required minimum capital levels for an "adequately capitalized"
institution. An "undercapitalized" institution must file a capital restoration
plan and is automatically subject to restrictions on dividends, management fees
and asset growth. In addition, the institution is prohibited from making
acquisitions, opening new branches or engaging in new lines of business without
the prior approval of its primary federal regulator. A number of other
discretionary restrictions also may be imposed on a case-by-case basis, and
harsher restrictions that otherwise would apply to "significantly
undercapitalized" institutions may be imposed on an "undercapitalized"
institution that fails to file or implement an acceptable capital restoration
plan.
A "significantly undercapitalized" institution would have a
total risk-based capital ratio of less than 6%, a Tier I risk-based capital
ratio of less than 3%, or a Tier I leverage capital ratio of less than 3%, as
the case may be. Institutions in this category would be subject to all the
restrictions that apply to "undercapitalized" institutions. Certain other
mandatory prohibitions also would apply, such as restrictions against the
payment of bonuses or raises to senior executive officers without the prior
approval of the institution's primary federal regulator. A number of other
restrictions may be imposed.
A "critically undercapitalized" institution would be one with
a tangible equity (Tier I capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, the FDIC's rule implementing this
provision of FDICIA also addresses certain other provisions for which the FDIC
has been accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes "critically undercapitalized" is
prohibited from taking the following actions without the prior written approval
of its primary federal supervisory agency: engaging in any material transactions
other than in the usual course of business; extending credit for highly
leveraged transactions ("HLTs"); amending its charter or bylaws; making any
material changes in accounting methods; engaging in certain transactions with
affiliates; paying excessive compensation or bonuses; and paying interest on
liabilities exceeding the prevailing rates in the institution's market area. In
addition, a "critically undercapitalized" institution is prohibited from paying
interest or principal on its subordinated debt and is subject to being placed in
conservatorship or receivership if its tangible equity capital level is not
increased within certain mandated time frames.
At any time, an institution's primary federal supervisory
agency may reclassify it into a lower capital category. All institutions are
prohibited from declaring any dividends, making any other capital distribution,
or paying a management fee if it would result in downward movement into any of
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the three undercapitalized categories. The FDICIA provides an exception to this
requirement for stock redemptions that do not lower an institution's capital and
would improve its financial condition, if the appropriate federal supervisory
agency has consulted with the FDIC and approved the redemption.
The regulation requires institutions to notify the FDIC
following any material event that would cause such institution to be placed in a
lower category. Additionally, the FDIC monitors capital levels through call
reports and examination reports.
Deposit Insurance. On January 1, 1994, the FDIC implemented
the permanent Risk Related Premium System (the "RRPS") with respect to the
assessments and payment of deposit insurance premiums.
Under the RRPS, the FDIC, on a semiannual basis, will assign
each institution to one of three capital groups (well-capitalized, adequately
capitalized or undercapitalized, in each case as these terms are defined for
purposes of prompt corrective action rules described above) and further assign
such institution to one of three subgroups within a capital group corresponding
to the FDIC's judgment of its strength based on supervisory evaluations,
including examination reports, statistical analysis and other information
relevant to gauging the risk posed by the institution. Only institutions with a
total capital to risk-adjusted assets ratio of 10.00% or greater, a Tier I
capital to risk-adjusted assets ratio of 5% or a greater and a Tier I leverage
ratio of 5% or greater, are assigned to the well-capitalized group.
Effective January 1, 1996, the FDIC board of directors has
further reduced BIF premiums. Highly-rated institutions will pay only the
statutory minimum of $2,000 annually for FDIC insurance. The remaining
institutions will pay on a scale ranging from 3 to 30 cents per every $100 of
insured deposits, which is down from the scale in the latter half of 1995 of 4
to 31 cents. If such lower FDIC insurance premium rates were to have been in
effect for all of 1995, then Bancorp would have paid $220,000 less in such
premiums based upon current deposit levels.
Real Estate Lending Standards. Pursuant to the FDICIA, the OCC
and other federal banking agencies adopted real estate lending guidelines which
would set loan-to-value ("LTV") ratios for different types of real estate loans.
A LTV ratio is generally defined as the total loan amount divided by the
appraised value of the property at the time the loan is originated. If the
institution does not hold a first lien position, the total loan amount would be
combined with the amount of all senior liens when calculating the ratio. In
addition to establishing the LTV ratios, the guidelines require all real estate
loans to be based upon proper loan documentation and a recent appraisal of the
property.
Bank Enterprise Act of 1991. Within the overall FDICIA is a
separate subtitle called the "Bank Enterprise Act of 1991." The purpose of this
Act is to encourage banking institutions to establish "basic transaction
services for consumers" or so-called "lifeline accounts." The FDIC assessment
rate is reduced for all lifeline depository accounts. This Act establishes ten
(10) factors which are the minimum requirements to qualify as a lifeline
depository account. Some of these factors relate to minimum opening and balance
amounts, minimum number of monthly withdrawals, the absence of discriminatory
practices against low-income individuals and minimum service charges and fees.
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Moreover, the Housing and Community Development Act of 1972 requires that the
FDIC's risk-based assessment system include provisions regarding life-line
accounts. Assessment rates applicable to life-line accounts are to be
established by FDIC rule.
Truth in Savings Act. The FDICIA also contains the Truth in
Savings Act ("TSA"). The Federal Reserve Board has adopted regulations
("Regulation DD") under the TSA. The purpose of TSA is to require the clear and
uniform disclosure of the rates of interest which are payable on deposit
accounts by depository institutions and the fees that are assessable against
deposit accounts, so that consumers can make a meaningful comparison between the
competing claims of banks with regard to deposit accounts and products. In
addition to disclosures to be provided when a customer establishes a deposit
account, TSA requires the depository institution to include, in a clear and
conspicuous manner, the following information with each periodic statement of a
deposit account: (1) the annual percentage yield earned; (2) the amount of
interest earned; (3) the amount of any fees and charges imposed; and (4) the
number of days in the reporting period. TSA allows for civil lawsuits to be
initiated by customers if the depository institution violates any provision or
regulation under TSA.
Regulatory Capital Requirements
-------------------------------
The following table presents Bancorp's consolidated capital
ratios at December 31, 1995.
(In Thousands)
Tier I Capital.............................................. $19,026
Tier II Capital............................................. 1,605
-------
Total Capital............................................... $20,631
=======
Adjusted Total Average Assets............................... $251,102
Total Adjusted Risk-Weighted Assets(1)...................... $149,274
Tier I Risk-Based Capital Ratio(2).......................... 12.75%
Required Tier I Risk-Based Capital Ratio.................... 4.00%
Excess Tier I Risk-Based Capital Ratio...................... 8.75%
Total Risk-Based Capital Ratio(3)........................... 13.82%
Required Total Risk-Based Capital Ratio..................... 8.00%
Excess Total Risk-Based Capital Ratio....................... 5.82%
Tier I Leverage Ratio(4).................................... 7.59%
Required Tier I Leverage Ratio.............................. 4.00%
Excess Tier I Leverage Ratio................................ 3.59%
- ------------------------------
(1) Includes off-balance sheet items at credit-equivalent values less
intangible assets.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I
Capital to Total Adjusted Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and
Tier II Capital to Total Adjusted Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets.
12
<PAGE>
Bancorp was required to implement, on January 1, 1994,
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FASB 115"). For financial reporting
purposes, FASB 115 changed the composition of stockholders' equity 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. The implementation of FASB 115 had no effect on the
computation of the regulatory capital ratios of Bancorp.
Effective January 27, 1995, the FDIC has issued a final rule
with respect to the implementation of FASB 115 for regulatory capital reporting
purposes. Under this final rule, net unrealized holding losses on
available-for-sale equity securities (but not debt securities) with readily
determinable fair values will be included (i.e., deducted) when calculating
Bancorp's consolidated Tier 1 capital. All other unrealized holding gains and
losses on available-for-sale securities will be excluded (i.e., not deducted)
from Bancorp's consolidated Tier 1 capital. Such final rule had no material
effect on Bancorp's consolidated Tier 1 capital.
Bancorp's ability to maintain the required levels of capital
is substantially dependent upon the success of Bancorp's capital and business
plans; the impact of future economic events on Bancorp's loan customers; and
Bancorp's ability to manage its interest rate risk and investment portfolio and
control its growth and other operating expenses.
Effect of Government Monetary Policies
--------------------------------------
The earnings of Bancorp are and will be affected by domestic
economic conditions and the monetary and fiscal policies of the United States
government and its agencies.
The monetary policies of the Federal Reserve Board have had,
and will likely continue to have, an important impact on the operating results
of commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulations of, among other things, the discount rate
on borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.
History and Business - Bank
---------------------------
The Bank's legal headquarters are located on Route 191, Lake
Ariel, Pennsylvania. On May 10, 1993, the Bank changed its legal name to "LA
Bank, National Association" and is currently trading as LA Bank, N.A., a
subsidiary of Lake Ariel Bancorp, Inc.
As of December 31, 1995, the Bank had total assets of $251.9
million, total shareholders' equity of $19.5 million and total deposits and
other liabilities of $232.3 million.
13
<PAGE>
The Bank engages in a full-service commercial banking
business, including accepting time and demand deposits, and making secured and
unsecured commercial and consumer loans. The Bank's business is not seasonal in
nature. Its deposits are insured by the FDIC to the extent provided by law.
At December 31, 1995, the Bank had 97 full-time employees and
27 part-time employees. The Bank is not a party to any collective bargaining
agreement.
Market Area
-----------
The Bank competes actively with other area commercial banks
and savings and loan associations, many of which are larger than the Bank, as
well as with major regional banking and financial institutions headquartered in
Wilkes-Barre and Scranton, Pennsylvania. The Bank's major competitors in its
market area are, in alphabetical order: First Fidelity Bank, N.A., Pennsylvania
(to be acquired by First Union Corporation, Charlotte, North Carolina); Meridian
Bank (to be acquired by Corestates Financial Corporation, Philadelphia,
Pennsylvania); Pioneer American Bank, N.A.; PNC Bank, N.A.; Wayne Bank; First
National Community Bank; Fidelity Deposit & Discount Bank; First National Bank
of Jermyn; Penn Security Bank and Trust Company; NBO National Bank; and
Community Bank & Trust Co. The Bank is generally competitive with all competing
financial institutions in its service area with respect to interest rates paid
on time and savings deposits, service charges on deposit accounts and interest
rates charged on loans.
Supervision and Regulation - Bank
---------------------------------
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose deposits are
insured by the FDIC. Bank operations are also subject to regulations of the OCC,
the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC, that
regularly examines the Bank. The OCC has the authority under the Financial
Institutions Supervisory Act to prevent a national bank from engaging in an
unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a bank may make,
the reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
consolidations and the establishment of branches. All banks in Pennsylvania are
permitted to maintain branch offices in any county of the state. Branches of
national banks may be established only after approval by the OCC. The OCC is
required to grant approval only if it finds that there is a need for banking
services or facilities such as are contemplated by the proposed branch. The OCC
may disapprove the application if the bank does not have the capital and surplus
deemed necessary by the OCC, or if the application relates to the establishment
of a branch in a county contiguous to the county in which the applicant's
principal place of business is located, and another banking institution that has
its principal place of business in the county in which the proposed branch would
14
<PAGE>
be located, has in good faith, notified the OCC of its intention to establish a
branch in the same municipal location in which the proposed branch would be
located.
Multi-bank holding companies are permitted in Pennsylvania
within certain limitations. See sections entitled "Pennsylvania Banking Law" and
"Interstate Banking and Branching."
A subsidiary bank of a bank holding company is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries and on
taking such stock or securities as collateral for loans. The Federal Reserve Act
and Federal Reserve Board regulations also place certain limitations and
reporting requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
Federal law also prohibits acquisitions of control of a bank
holding company without prior notice to certain federal bank regulators. Control
is defined for this purpose as the power, directly or indirectly, to influence
the management or policies of the bank or bank holding company or to vote
twenty-five percent (25%) or more of any class of voting securities of the bank
holding company.
From time to time, various types of federal and state
legislation have been proposed that could result in additional regulations of,
and restrictions on, the business of the Bank. It cannot be predicted whether
any such legislation will be adopted or how such legislation would affect the
business of the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank's business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.
Under the Federal Deposit Insurance Act, the OCC possesses the
power to prohibit institutions regulated by it (such as the Bank) from engaging
in any activity that would be an unsafe and unsound banking practice and in
violation of the law. Moreover, the Financial Institutions and Interest Rate
Control Act of 1987 ("FIRA") generally expands the circumstances under which
officers or directors of a bank may be removed by the institution's federal
supervisory agency; restricts lending by a bank to its executive officers,
directors, principal shareholders or related interests thereof; restricts
management personnel of a bank from serving as directors in other management
positions with certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic area; and restricts
management personnel from borrowing from another institution that has a
correspondent relationship with their bank. Additionally, FIRA requires that no
person may acquire control of a bank unless the appropriate federal supervisory
agency has been given 60-days prior written notice and within that time has not
disapproved the acquisition or extended the period for disapproval.
15
<PAGE>
Under the Bank Secrecy Act ("BSA"), the Bank is required to
report to the Internal Revenue Service currency transactions of more than
$10,000 or multiple transactions of which the Bank is aware in any one day that
aggregate in excess of $10,000. Civil and criminal penalties are provided under
the BSA for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
The Garn-St Germain Depository Institutions Act of 1982 ("1982
Act"), removes certain restrictions on the lending powers and liberalizes the
depository abilities of the Bank. The 1982 Act also amends FIRA (see above) by
eliminating certain statutory limits on lending of a bank to its executive
officers, directors, principal shareholders or related interests thereof and by
relaxing certain reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank relationships
by management personnel.
Community Reinvestment Act
--------------------------
The Community Reinvestment Act of 1977, as amended (the
"CRA"), and the regulations promulgated to implement the CRA are designed to
create a system for bank regulatory agencies to evaluate a depository
institution's record in meeting the credit needs of its community. Until May
1995, a depository institution was evaluated for CRA compliance based upon 12
assessment factors.
The CRA regulations were completely revised as of May 4, 1995,
to establish new performance-based standards for use in examining a depository
institution's compliance with the CRA (the "revised CRA regulations"). The
revised CRA regulations establish new tests for evaluating both small and large
depository institutions' investment in the community. A "small bank" is defined
as a bank which has total assets of less than $250 million and is independent or
is an affiliate of a holding company with less than $1 billion in assets.
Pursuant to the revised CRA regulations, a depository institution which
qualifies as a "small bank" will be examined under a streamlined procedure which
emphasizes lending activities. The streamlined examination procedures for a
small bank became effective on January 1, 1996.
A large retail institution is one which does not meet the
"small bank" definition, above. A large retail institution can be evaluated
under one of two tests: (1) a three-part test evaluating the institution's
lending, service and investment performance; or (2) a "strategic plan" designed
by the institution with community involvement and approved by the appropriate
federal bank regulator. A large institution must choose one of these options
prior to July 1997, but may opt to be examined under one of these two options
prior to that time. Effective January 1, 1996, a large retail institution that
opts to be examined pursuant to a strategic plan may submit its strategic plan
to the bank regulators for approval.
In addition, the revised CRA regulations include separate
rules regarding the manner in which "wholesale banks" and "limited purpose
banks" will be evaluated for compliance.
The new CRA regulations will be phased in over a two-year
period, beginning July 1, 1995, with a final effective date of July 1, 1997.
Until the applicable test is phased in, institutions may be examined under the
prior CRA regulations.
16
<PAGE>
On December 27, 1995, the federal banking regulators issued a
joint final rule containing technical amendments to the revised CRA regulations.
Specifically, the recent technical amendments clarify the various effective
dates in the revised CRA regulations, correct certain cross references and state
that once an institution becomes subject to the requirements of the revised CRA
regulations, it must comply with all aspects of the revised CRA regulations,
regardless of the effective date of certain provisions. Similarly, once an
institution is subject to the revised CRA regulations, the prior CRA regulations
do not apply to that institution.
For the purposes of the revised CRA regulations, the Bank is
deemed to be a large depository institution, based upon financial information as
of December 31, 1995. In the future, the Bank will be evaluated for CRA
compliance using the three-part, performance-based test. Under the 12 assessment
factors contained in the prior CRA regulations, the Bank received a
"satisfactory" rating for 1994. No examination was scheduled or was conducted
for 1995. The Bank expects to receive a rating under the revised CRA regulations
which is consistent with its prior examination rating.
Concentration
-------------
Bancorp and the Bank are not dependent for deposits nor
exposed by loan concentrations to a single customer or to a small group of
customers the loss of any one or more of which would have a materially adverse
effect on the financial condition of Bancorp or the Bank.
Business - LA Lease, Inc.
-------------------------
The principal office of LA Lease, Inc. is located at Routes
247 and 348, Lake Ariel, Pennsylvania 18436 (the Mt. Cobb branch of the Bank).
As of December 31, 1995, LA Lease, Inc. had total assets of
$1.485 million, total shareholders' equity of $(28) thousand and other
liabilities of $1.513 million.
LA Lease, Inc. provides financing to consumers and businesses
in the form of vehicle and equipment leases. The business of LA Lease, Inc. is
not seasonal in nature.
Item 2. Description of Property
Bancorp owns or leases no properties, except through the Bank.
The following is selective information about the Bank's properties:
<TABLE>
<CAPTION>
Type of Square
Property Location Ownership Footage Use
- -------- -------- --------- ------- ---
<S> <C> <C> <C> <C>
1 Route 191 Own 3000 Banking services and
Lake Ariel, PA Main Office.
2 Route 191 Own 1800 Greene-Dreher branch
Newfoundland, PA
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Type of Square
Property Location Ownership Footage Use
- -------- -------- --------- ------- ---
<S> <C> <C> <C> <C>
3 Routes 191 and 590 Own 2900 Hamlin Corners branch
Hamlin, PA
4 Routes 247 and 348 Own 2400 Mt. Cobb branch
Lake Ariel, PA
5 Route 6 Lease 2800 Eynon branch
Scranton-Carbondale Highway
6 Keyser Avenue Lease 3000 Keyser Valley branch
Scranton, PA
7 The Mall at Steamtown Lease 1867 Steamtown branch
Lackawanna Avenue
Scranton, PA
8 East Grove Street & Own 3000 Clarks Green branch
South Abington Road
Clarks Green, PA
9 Route 6 Lease 5535 Carbondale branch
Ames Shopping Plaza
10 Routes 6 and 209 Own 11000 Milford branch
Milford, PA
11 Route 739 Lease 1250 Lords Valley branch
Lords Valley Shopping Plaza
12 Route 191 Own 5900 Operations Center
Hamlin, PA
13 Keyser Avenue Lease 7500 Administration & Loan Center
Scranton, PA
</TABLE>
For information with respect to obligations for lease rentals,
refer to Note 5 of the Notes to Consolidated Financial Statements in Bancorp's
Annual Report filed at Exhibit 13 hereto and is incorporated in its entirety by
reference. The branches that are under lease have customary commercial lease
options to extend the terms of the applicable lease.
It is management's opinion that the facilities currently
utilized are suitable and adequate for current and immediate future purposes.
18
<PAGE>
Item 3. Legal Proceedings
General
-------
The nature of Bancorp's and the Bank's business generates a
certain amount of litigation involving matters arising in the ordinary course of
business. However, in the opinion of management of Bancorp and the Bank, there
are no proceedings pending to which Bancorp and the Bank are a party or to which
their property is subject, which, if determined adversely to Bancorp and the
Bank, would be material in relation to Bancorp's and the Bank's undivided
profits or financial condition, nor are there any proceedings pending other than
ordinary routine litigation incident to the business of Bancorp and the Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against Bancorp and the Bank by government authorities or others.
Environmental Issues
--------------------
There are several federal and state statutes that govern the
obligations of financial institutions with respect to environmental issues.
Besides being responsible under such statutes for its own conduct, a bank also
may be held liable under certain circumstances for actions of borrowers or other
third parties on properties that collateralize loans held by the bank. Such
potential liability may far exceed the original amount of the loan made by the
bank. Currently, the Bank are not a party to any pending legal proceedings under
any environmental statue nor are the Bank aware of any circumstances that may
give rise to liability of them under any such statute.
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
Bancorp's Common Stock is listed on the NASDAQ Stock Market
under Small-Cap Issues under the symbol "LABN" or designation "Lake Ariel." The
following table sets forth: (1) the quarterly average bid and asked prices for a
share of Bancorp's Common Stock during the periods indicated; and (2) quarterly
dividends on a share of the Common Stock with respect to each quarter since
January 1, 1994. The following quotations represent prices between buyers and
sellers and do not include retail markup, markdown or commission. They may not
necessarily represent actual transactions.
Average Stock Prices
--------------------- Dividends
Bid Asked Declared
--- ----- ---------
1994:
First quarter $14.00 $14.50 $.12
Second quarter $13.50 $14.50 $.12
Third quarter $15.25 $16.25 $.13
Fourth quarter $17.50 $18.50 $.18
19
<PAGE>
Average Stock Prices
--------------------- Dividends
Bid Asked Declared
--- ----- ---------
1995:
First quarter $16.50 $17.50 $.13
Second quarter $16.00 $17.00 $.13
Third quarter $14.50 $15.50 $.14
Fourth quarter $14.75 $16.25 $.19
As of March 19, 1996, Bancorp had approximately 1,161
shareholders of record.
Since its formation in 1983 as the parent holding company of
the Bank, Bancorp has paid cash dividends. It is the present intention of
Bancorp's Board of Directors to continue the dividend payment policy, although
the payment of future dividends must necessarily depend upon earnings, financial
condition, appropriate restrictions under applicable law and other factors
relevant at the time the Board of Directors considers any declaration of
dividends. Cash available for the payment of dividends must initially come from
dividends paid by the Bank to Bancorp. Therefore, the restrictions on the Bank's
dividend payments are directly applicable to Bancorp.
Dividend Restrictions on the Bank
---------------------------------
The OCC has issued rules governing the payment of dividends by
national banks. Consequently, the Bank (which is subject to these rules) may not
pay dividends from capital (unimpaired common and preferred stock outstanding)
but only from retained earnings after deducting losses and bad debts therefrom.
"Bad debts" are defined as matured obligations in which interest is past due and
unpaid for ninety (90) days, but do not include well-secured obligations that
are in the process of collection.
Previously, the Bank was permitted to add the balances in its
allowance for possible credit and lease losses in determining retained earnings,
but the OCC's new regulations prohibit that practice. However, to the extent
that (1) the Bank has capital surplus in an amount in excess of common capital
and (2) if the Bank can prove that such surplus resulted from prior period
earnings, the Bank, upon approval of the OCC, may transfer earned surplus to
retained earnings and thereby increase its dividend paying capacity.
If, however, the Bank has insufficient retained earnings to
pay a dividend, the OCC's regulations allow the Bank to reduce its capital to a
specified level and to pay dividends upon receipt of the approval of the OCC as
well as that of the holders of two thirds of the outstanding shares of the
Common Stock.
The Bank is allowed to pay dividends no more frequently than
quarterly. Moreover, the Bank must obtain the OCC's approval before paying a
dividend if the total of all dividends declared by the Bank in any calendar year
would exceed the total of (1) the Bank's net profits for that year plus (2) its
retained net profits for the immediately preceding two years less (3) any
required transfers to surplus or a fund for the retirement of preferred stock.
20
<PAGE>
The Bank may not pay any dividends on its capital stock during
the period in which it may be in default in the payment of its assessment for
deposit insurance premium due to the FDIC, nor may it pay dividends on Common
Stock until any cumulative dividends on the Bank's preferred stock (if any) have
been paid in full. The Bank has never been in default in the payments of its
assessments to the FDIC; and, moreover, the Bank has no outstanding preferred
stock. In addition, under the Federal Deposit Insurance Act, dividends cannot be
declared and paid if the OCC obtains a cease and desist order because such
payment would constitute an unsafe and unsound banking practice. As of December
31, 1995, there was $2.6 million in unrestricted retained earnings and net
income available at the Bank that could be paid as a dividend to Bancorp under
the current OCC regulations.
Dividend Restrictions on Bancorp
--------------------------------
Under the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"), Bancorp may not pay a dividend if, after giving effect
thereto, either (a) Bancorp would be unable to pay its debts as they become due
in the usual course of business or (b) Bancorp's total assets would be less than
its total liabilities. The determination of total assets and liabilities may be
based upon: (i) financial statements prepared on the basis of generally accepted
accounting principles; (ii) financial statements that are prepared on the basis
of other accounting practices and principles that are reasonable under the
circumstances; or (iii) a fair valuation or other method that is reasonable
under the circumstances.
Item 6. Management's Discussion and Analysis
The caption "Management's Discussion and Analysis" contained
in excerpts from Bancorp's Annual Report (at page 21 thereto) filed at Exhibit
13 hereto is incorporated in its entirety by reference under this Item 6.
Item 7. Financial Statements
Bancorp's Consolidated Financial Statements and notes thereto
contained in excerpts from Bancorp's Annual Report (beginning at page 30
thereto) filed at Exhibit 13 hereto are incorporated in their entirety by
reference under this Item 7.
21
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
INFORMATION AS TO NOMINEES,
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains certain information with respect
to the nominees and the directors whose terms of office expire in 1996, 1997 and
1998, respectively.
<TABLE>
<CAPTION>
Principal Occupation Director Since
Name Age for Past Five Years Corporation/Bank
- ---- --- -------------------- ----------------
<S> <C> <C> <C>
Nominees for Class 3 Directors Whose Term Will Expire In 1999 and Current
Class 3 Directors Whose Term Expires in 1996
John G. Martines 49 President of the Bank and 1983/1979
(1)(3)(5)(7) Chief Executive Officer of
the Corporation
Harry F. 60 Partner of Schoenagel and 1985/1985
Schoenagel Schoenagel (general civil
(1)(2)(6)(7) engineering and surveying)
</TABLE>
<TABLE>
<CAPTION>
Principal Occupation Director Since
Name Age for Past Five Years Corporation/Bank
- ---- --- -------------------- ----------------
<S> <C> <C> <C>
Class 2 Directors Whose Term Expires In 1997
Bruce D. Howe 64 President of John T. Howe, Inc. 1983/1977
(3)(4)(5) (a company that operates local
fuel and heating oil companies,
a motel and an interstate truck
stop) and President of Howe's
Twin Rocks, Inc. (a local restaurant).
Peter O. Clauss 66 Retired; Former President of 1988/1988
(3)(5)(6)(7) C & D Builders Inc.
(construction of residential and
light commercial buildings)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation Director Since
Name Age for Past Five Years Corporation/Bank
- ---- --- -------------------- ----------------
<S> <C> <C> <C>
Class 1 Directors Whose Term Expires In 1998
Donald E. 59 Self-employed insurance broker 1983/1972
Chapman and real estate developer
(1)(2)(4)(6)(7)
Arthur M. Davis 68 President of Lake Ariel 1983/1969
(1)(2)(6)(7) Hardware & Supply Co., Inc.
William C. Gumble 58 Retired Attorney-at-law 1985/1985
(3)(4)(5)
</TABLE>
- ------------------------------
(1) Member of the Loan Review Committee of the Bank. This committee reviews
past due and classified loans and actions to be taken. Moreover, this
committee determines the adequacy of the loan loss reserve and the
amount to be charged for the provision of loan losses. The committee
met six (6) times in 1995.
(2) Member of the Audit Committee of the Bank. This committee reviews the
reports of the auditors and the results of examinations by the Federal
Reserve System and Comptroller of the Currency. This committee makes
recommendations to the Board based upon a review of the reports and
regulatory examinations. This committee met three (3) times in 1995.
(3) Member of the Asset/Liability Management Committee of the Bank. This
committee reviews quarterly the asset/liability management report and
the investment portfolio. In addition, this committee reviews
strategies for GAP analysis, liquidity, tax position and various
profitability ratios. Moreover, this committee determines product
pricing and development. This committee met five (5) times in 1995.
(4) Member of the Executive Committee of the Bank. This committee reviews
annually the profit sharing and benefit plans of the Bank as well as
salaries and promotions. The committee makes recommendations to the
Board of Directors of the Bank on changes in the employee benefit
plans, compensation, promotions and the contribution to the profit
sharing plan. This committee also reviews non-personnel matters such as
bank expansion and profitability. This committee met two (2) times in
1995.
(5) Member of the Loan Committee of the Bank. This committee meets to
consider and recommend approval of loans in the principal amount of
$100,000 or more. Directors receive no additional compensation for
attendance at meetings of this committee. This committee met
twenty-four (24) times in 1995.
(6) Member of Benefit/Compensation Committee of the Bank. This committee
meets to perform on annual review of executive salary increases and
executive stock option grants. This committee met one (1) time in 1995.
(7) Member of 401(k) Committee of the Bank. This committee meets to review
semi-annual investment results of plan funds, makes recommendations and
changes to available investment options, reviews IRS and DOL legal
participation, discrimination and other issues, and recommends annual
Bank contributions to plan. This committee met one (1) time in 1995.
During 1995, the Board of Directors of the Corporation held
six (6) meetings. Directors received no additional remuneration for attendance
at meetings of the Board of Directors of the Corporation.
Each of the Directors attended at least 75% of the combined
total number of meetings of the Corporation's and Bank's Board of Directors and
of the committees on which they serve.
23
<PAGE>
The Board of Directors of the Corporation has at present no
standing committees. The Corporation does not have a nominating committee. A
shareholder who desires to propose an individual for consideration by the Board
of Directors as a nominee for director should submit a proposal in writing to
the Secretary of the Corporation in accordance with Section 202 of the
Corporation's By-laws.
Principal Officers of the Corporation
The following table sets forth selected information about the
principal officers of the Corporation, each of whom is selected by the Board of
Directors and each of whom holds office at the discretion of the Board of
Directors:
<TABLE>
<CAPTION>
Bank
Held Employee Number of Shares Age as of
Name Since Since Beneficially Owned(1) March 19, 1996
- ---- ----- -------- --------------------- --------------
<S> <C> <C> <C> <C>
Bruce D. Howe, President 1983 (2) 170,720 64
John G. Martines, Chief 1983 (3) 96,426 49
Executive Officer
Donald E. Chapman, Secretary 1983 (2) 55,666 59
Louis M. Martarano, Vice 1989 (3) 35,502 45
President and Assistant Secretary
Joseph J. Earyes, Vice President 1995 (3) 16,625 39
and Treasurer
</TABLE>
- ----------------------------
(1) See notes under the caption "Beneficial Ownership by Officers,
Directors and Nominees" for shareholdings of these officers.
(2) Messrs. Howe, Chapman and Davis are not employees of the Corporation.
(3) Messrs. Martines, Martarano, and Earyes are full-time salaried employees
of the Bank.
Principal Officers of the Bank
The following table sets forth selected information about the
principal officers of the Bank, each of whom is elected by the Board of
Directors of the Bank and each of whom holds office at the discretion of the
Board of Directors of the Bank:
<TABLE>
<CAPTION>
Bank Number Age as of
Held Employee of Shares March 19,
Name Office/Position with Bank Since Since Owned 1996
- ---- ------------------------- ----- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Bruce D. Howe Chairman of the Board 1986 (1) 170,720 (2) 64
John G. Martines President and CEO 1986 1979 96,426 (2) 49
Louis M. Martarano Senior Vice President and 1990 1981 35,502 (2) 45
Chief Operating Officer
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Bank Number Age as of
Held Employee of Shares March 19,
Name Office/Position with Bank Since Since Owned 1996
- ---- ------------------------- ----- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Joseph J. Earyes Senior Vice President and 1995 1995 16,625 (2) 39
Chief Financial Officer
Christe A. Casciano Vice President 1990 1990 267 39
Kathleen L. Enslin Vice President and 1992 1975 2,927 38
Cashier
Cynthia A. Smaniotto Vice President 1992 1974 1,214 38
Karen T. Pasternak Vice President 1992 1987 560 49
Gregory G. Gula Vice President 1992 1990 191 33
William R. Kerstetter Vice President 1992 1992 503 44
Theodore G. Daniels Vice President 1993 1993 161 65
</TABLE>
- ----------------------------
(1) Mr. Howe is not an employee of the Bank.
(2) See notes under the caption "Beneficial Ownership by Officers, Directors
and Nominees" for shareholdings of these officers.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Corporation's officers and directors, and persons who own more than ten
percent of a registered class of the Corporation's equity securities (in this
case the Corporation's Common Stock), to file reports of ownership and changes
in ownership with the SEC. Officers, directors and greater than ten-percent
shareholders are required by SEC regulation to furnish the Corporation with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Forms 5 were required for those persons, the Corporation believes that,
during the period January 1, 1995 through December 31, 1995, all filing
requirements applicable to its officers, directors and greater than ten-percent
shareholders were complied with.
25
<PAGE>
Item 10. Executive Compensation
The following table sets forth the total compensation for
services in all capacities paid by the Corporation and the Bank (1) during 1995,
1994, and 1993, to the Corporation's Chief Executive Officer and the Bank's
President, (2) during 1995, 1994 and 1993, to the Corporation's Vice President
and the Bank's Senior Vice President and Chief Operating Officer, and (3) during
1995, to the Corporation's Vice President and the Bank's Senior Vice President
and Chief Financial Officer. No other executive officer's annual compensation
exceeded $100,000 for the years presented and therefore is not required to be
presented.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------------
Securities
Other Annual Underlying All Other
Name and Fiscal Salary Bonus Compensation Options/ Compensation
Principal Position Year ($) ($) ($) SARs(#) ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John G. Martines (President of the 1995 138,007 35,000 26,108 (1) 40,000(2) 19,498 (3)
Bank and Chief Executive Officer 1994 130,005 30,000 19,811 (4) 25,000(2) 21,435 (5)
of the Corporation) 1993 115,536 25,000 21,639 (6) 20,212 (7)
Louis M. Martarano (Senior Vice 1995 97,154 13,500 8,796 (8) 15,000(2) 15,013 (9)
President and Chief Operating 1994 91,750 12,500 3,452 (10) 10,000(2) 15,903 (11)
Officer of the Bank and Vice 1993 80,301 10,000 4,002 (12) 14,333 (13)
President of the Corporation)
Joseph J. Earyes (Senior Vice 1995 70,207 6,500 4,345 (14) 10,000(2) 11,398 (15)
President and Chief Financial
Officer of the Bank and Vice
President and Treasurer of the
Corporation)
</TABLE>
(1) Includes $6,148 paid on behalf of Mr. Martines for initial and periodic
club dues; $12,000 paid to Mr. Martines for directors' fees; $4,791
paid pursuant to the Salary Continuation Plan; and $3,169 representing
the personal use value of a company-owned automobile.
(2) For further information on these stock options, see "Stock Option Plan"
below.
(3) Of the $19,498 paid to Mr. Martines in 1995 as All Other Compensation,
$2,098 and $3,888 was for life and medical insurance premiums,
respectively; and $13,512 was accrued by the Corporation for the
benefit of Mr. Martines pursuant to a profit-sharing/401(k) plan.
(4) Includes $3,405 paid on behalf of Mr. Martines for periodic club dues;
$13,350 paid to Mr. Martines for directors' fees; $1,128 paid pursuant
to the Salary Continuation Plan; and $1,928 representing the personal
use value of a company-owned automobile.
(5) Of the $21,435 paid to Mr. Martines in 1994 as All Other Compensation,
$2,073 and $4,362 was for life and medical insurance premiums,
respectively; and $15,000 was accrued by the Corporation for the
benefit of Mr. Martines pursuant to a profit-sharing retirement plan.
(6) Includes $4,202 paid on behalf of Mr. Martines for periodic club dues;
$14,000 paid to Mr. Martines for directors' fees; $1,121 paid pursuant
to the Salary Continuation Plan; and $2,316 representing the personal
use value of a company-owned automobile.
(7) Of the $20,212 paid to Mr. Martines in 1993 as All Other Compensation,
$1,874 and $4,325 was for life and medical insurance premiums,
respectively; and $14,013 was accrued by the Corporation for the
benefit of Mr. Martines pursuant to a profit-sharing retirement plan.
26
<PAGE>
(8) Includes $6,500 paid on behalf of Mr. Martarano for initial and periodic
club dues and $2,296
representing the personal use value of a company-owned automobile.
(9) Of the $15,013 paid to Mr. Martarano in 1995 as All Other Compensation,
$1,022 and $4,281 was for life and medical insurance premiums,
respectively; and $9,710 was accrued by the Corporation for the benefit
of Mr. Martarano pursuant to a profit-sharing/401(k) plan.
(10) Includes $1,510 paid on behalf of Mr. Martarano for periodic club dues
and $1,942 representing the personal use value of a company-owned
automobile.
(11) Of the $15,903 paid to Mr. Martarano in 1994 as All Other Compensation,
$1,050 and $4,428 was for life and medical insurance premiums,
respectively; and $10,425 was accrued by the Corporation for the
benefit of Mr. Martarano pursuant to a profit-sharing retirement plan.
(12) Includes $1,362 paid on behalf of Mr. Martarano for periodic club dues
and $2,640 representing the personal use value of a company-owned
automobile.
(13) Of the $14,333 paid to Mr. Martarano in 1993 as All Other Compensation,
$949 and $4,325 was for life and medical insurance premiums,
respectively; and $9,059 was accrued by the Corporation for the benefit
of Mr. Martarano pursuant to a profit-sharing retirement plan.
(14) Includes $3,580 paid on behalf of Mr. Earyes for periodic club dues and
$765 representing the personal use value of a company-owned automobile.
(15) Of the $11,398 paid to Mr. Earyes in 1995 as All Other Compensation,
$406 and $4,280 was for life and medical insurance premiums,
respectively; and $6,712 was accrued by the Corporation for the benefit
of Mr. Earyes pursuant to a profit-sharing/401(k) plan.
Directors' Compensation
During 1995, the Bank's Board of Directors met on a monthly
basis; Directors received $1,000 per month and were allowed one paid absence per
year; and Bruce D. Howe, the Chairman, received $500 in addition to his monthly
Directors' fee of $1,000 or $1,500 per month in the aggregate. Mr. Howe was also
allowed one paid absence per year from a meeting of the Bank's Board of
Directors. During 1995, the Board of Directors of the Corporation held six (6)
meetings. Directors received no remuneration for attendance at meetings of the
Board of Directors of the Corporation in excess of remuneration each of them
received for attendance at meetings of the Board of Directors of the Bank.
Item 11. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL BENEFICIAL OWNERS OF THE CORPORATION'S STOCK
Principal Owners
The following table sets forth, as of March 19, 1996, the name
and address of each person who owns of record or who is known by the Board of
Directors to be the beneficial owner of more than five percent (5%) of the
Corporation's outstanding Common Stock, the number of shares beneficially owned
by such person and the percentage of the Corporation's outstanding Common Stock
so owned.
27
<PAGE>
<TABLE>
<CAPTION>
Percent of Outstanding
Shares Beneficially Common Stock
Name and Address Owned (1) Beneficially Owned
- ---------------- ------------------- -----------------------
<S> <C> <C>
Bruce D. Howe(4)(11) 170,720 10.3%
R.D. #6, Box 6332
Lake Ariel, PA 18436
John G. Martines (5)(13) 96,426 5.5%
RD #1 Newton Lake
824 Sunset Avenue
Carbondale, PA 18407
</TABLE>
Beneficial Ownership by Officers, Directors and Nominees
The following table sets forth as of March 14, 1995, the
amount and percentage of the Common Stock of the Corporation beneficially owned
by each director, each nominee, each executive officer, and all officers and
directors of the Corporation as a group.
Name of Individual Amount and Nature of Percent
or Identity of Group Beneficial Ownership(1)(2) of Class
- -------------------- -------------------------- --------
Donald E. Chapman(3)(6) 55,666 3.3%
Peter O. Clauss(4)(7) 21,975 1.3%
Arthur M. Davis(3)(8) 33,638 2.0%
Joseph J. Earyes(9) 16,625 1.0%
William C. Gumble(3)(10) 50,707 3.0%
Bruce D. Howe(4)(11) 170,720 10.3%
Louis M. Martarano(12) 35,502 2.1%
John G. Martines(5)(13) 96,426 5.5%
Harry F. Schoenagel(5)(14) 41,145 2.5%
All Officers and Directors
as a Group (7 directors,
5 officers, 9 persons in total) 522,404 29.6%
- ------------------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the Securities and Exchange
Commission ("SEC") and may include securities owned by or for the
individual's spouse and minor children and any other relative who has
the same home, as well as securities to which the individual has or
shares voting or investment power or has the right to acquire
beneficial ownership within 60 days after March 19, 1996. Beneficial
ownership may be disclaimed as to certain of the securities.
(2) Information furnished by the directors and the Corporation.
(3) A Class 1 Director Whose Term Expires in 1998.
(4) A Class 2 Director Whose Term Expires in 1997.
(5) Nominees for Class 3 Director Whose Term Will Expire in 1999 and Class 3
Directors Whose Term Expires in 1996.
28
<PAGE>
(6) Of the 55,666 shares beneficially owned by Donald E. Chapman, 16,116
are owned by him individually; 36,098 are owned jointly with his
spouse; 2,393 are held individually by his spouse; and 1,059 are held
jointly with his son.
(7) Of the 21,975 shares beneficially owned by Peter O. Clauss, 8,644 are
held by him individually, 12,331 are owned jointly with his wife; and
1,000 are owned individually by his spouse.
(8) Of the 33,638 shares beneficially owned by Arthur M. Davis, 15,205 are
owned by him individually; 16,969 are owned jointly with his wife; and
1,464 are owned by Lake Ariel Hardware & Supply Co., Inc., of which Mr.
Davis is President..
(9) Of the 16,625 shares beneficially owned by Joseph J. Earyes, 5,700 are
owned by him individually, 925 are held jointly with his spouse; and
10,000 shares may be acquired at any time by the exercise of stock
options.
(10) All shares are held individually.
(11) Of the 170,720 shares beneficially owned by Bruce D. Howe, 152,794 are
owned by him individually; 16,196 are owned jointly with his spouse;
and 1,730 are owned individually by his spouse.
(12) Of the 35,502 shares beneficially owned by Louis M. Martarano, 1,014
are owned by him individually; 7,582 are owned jointly with his wife;
1,270 shares held as custodian for his two sons; 636 shares as
custodian for his daughter; and 25,000 shares may be acquired at any
time by the exercise of stock options.
(13) Of the 96,426 shares beneficially owned by John G. Martines, 7,474 are
owned by him individually; 23,952 are held jointly with his spouse; and
65,000 shares may be acquired at any time by the exercise of stock
options.
(14) Of the 41,145 shares beneficially owned by Harry F. Schoenagel, 16,107
are owned by him individually; 3,000 are owned jointly with his spouse;
and 22,038 are owned by his spouse individually.
Item 12. Certain Relationships and Related Transactions
There have been no material transactions since January 1,
1995, nor are any such transactions currently proposed, to which the Corporation
or the Bank was or is to be a party and in which any director or executive
officer of the Corporation, or any beneficial owner of more than 5% of the
Common Stock of the Corporation (or any associate thereof, respectively), had or
will have a material interest. The Corporation and the Bank have had and intend
to continue to have banking and financial transactions in the ordinary course of
business with directors and executive officers of the Corporation and the Bank
and their respective associates on comparable terms and with similar interest
rates as those prevailing from time to time for other non-affiliated customers
of the Corporation and the Bank. Total loans outstanding from the Corporation
and the Bank, at December 31, 1995, to the Corporation's and the Bank's officers
and directors as a group and members of their immediate families and companies
in which they had an ownership interest of 10% or more was $953 thousand or 4.9%
of the Bank's total equity capital accounts. The largest amount of indebtedness
outstanding at any time during fiscal year 1995 to the above identified group
was $1.21 million or 6.2% of the Bank's total equity capital accounts. Such
loans do not involve more than the normal risk of collectibility nor do they
present other unfavorable features.
29
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
- -------------------------- ----------------------
2 None.
3A Amended Articles of Incorporation of
Bancorp filed at Exhibit 3A on March 25,
1988 and March 24, 1993, to Forms 10-K
for the fiscal year ended December 31,
1987 (No. 2-85306), and 10-KSB for the
period ended December 31, 1992
(No. 2-85306), respectively, and hereby
incorporated by reference. Photocopy of
the Articles of Amendment of Bancorp,
dated August 18, 1993, to effect, among
other things, a 3-for-1 stock split,
filed at Exhibit 3A on September 3, 1993,
to Form S-1 (No. 33-68470) and hereby
incorporated by reference.
3B Amended By-laws of Bancorp filed on
March 25, 1988, at Exhibit 3B, to Form
10-K for the fiscal year ended December
31, 1987 (No. 2-85306), and hereby
incorporated by reference.
4 None.
9 None.
10A Photocopy of the Executive Employment
Agreement dated September 1, 1993, among
Bancorp, the Bank and John G. Martines,
the Chief Executive Officer of Bancorp
and President of the Bank, filed at
Exhibit 10A on September 3, 1993, to
Form S-1 (No. 33-68470), and hereby
incorporated by reference.
10B Photocopy of the Executive Employment
Agreement dated September 1, 1993, among
Bancorp, the Bank and Louis M.
Martarano, Vice President of Bancorp and
Senior Vice President of the Bank, filed
at Exhibit 10B on September 3, 1993, to
Form S-1 (No. 33-68470), and hereby
incorporated by reference.
11 None.
13 Portions of the Annual Report to
Shareholders for Fiscal Year Ended
December 31, 1995.
16 None.
18 None.
30
<PAGE>
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
- -------------------------- ----------------------
21 List of Subsidiaries of Bancorp.
22 None.
23 None.
24 None.
27 None.
28 None.
(b) Reports on Form 8-K.
Bancorp filed no reports on Form 8-K for the quarter ended
December 31, 1995.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LAKE ARIEL BANCORP, INC.
(Bancorp)
By: /s/ John G. Martines
----------------------
John G. Martines
Chief Executive Officer
Date: March 19, 1996
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ Bruce D. Howe
----------------------
Bruce D. Howe
President and Director
Date: March 19, 1996
By: /s/ John G. Martines
----------------------
John G. Martines
Chief Executive Officer
and Director
(Chief Executive Officer)
Date: March 19, 1996
By: /s/ Peter O. Clauss
----------------------
Peter O. Clauss
Director
Date: March 19, 1996
32
<PAGE>
By: /s/ Donald E. Chapman
----------------------
Donald E. Chapman
Secretary and Director
Date: March 19, 1996
By: /s/ Arthur M. Davis
----------------------
Arthur M. Davis
Director
Date: March 19, 1996
By: /s/ Harry F. Schoenagel
------------------------
Harry F. Schoenagel
Director
Date: March 19, 1996
By: /s/ William C. Gumble
----------------------
William C. Gumble
Director
Date: March 19, 1996
By: /s/ Louis M. Martarano
----------------------
Louis M. Martarano
Vice President and Assistant
Secretary
Date: March 19, 1996
33
<PAGE>
By: /s/ Joseph J. Earyes
----------------------
Joseph J. Earyes, CPA
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 19, 1996
34
<PAGE>
INDEX TO EXHIBITS
Item Number Description Page
- ----------- ----------- ----
13 Portions of the Annual Report to
Shareholders for the Fiscal Year
Ended December 31, 1995...................... 36
21 List of Subsidiaries of Bancorp................
<PAGE>
EXHIBIT 13
PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
<PAGE>
Management's Discussion and Analysis
The consolidated financial review of Lake Ariel Bancorp, Inc. (LAB) provides a
comparison of the performance of the Company for the years ended December 31,
1995, 1994, and 1993. The financial information presented should be reviewed in
conjunction with the consolidated financial statements and accompanying notes.
Background
Lake Ariel Bancorp, Inc. is a one bank holding company whose principal
subsidiary is LA Bank, N.A. LAB operates eleven full-service branch banking
offices in its principal market area in Wayne, Lackawanna, and Pike Counties. At
December 31, 1995, LAB had 111 full-time equivalent employees.
Analysis of Results of Operation
Summary of Net Income
In 1995, net income increased 8% over 1994, while net income in 1994 increased
4% over 1993. On a per share basis, net income was $1.40 per share, when
compared to $1.30 for 1994. Weighted average shares outstanding for 1995 were
1,652,000 shares as compared with 1,631,000 shares for 1994. This reflects a
full year's impact in 1994 of the 3-for-1 stock split and the common stock sale
in 1994.
The growth in net income during 1995 is again attributable to the improvement in
net interest income, which increased by 10% for the year, coupled with a 48% or
$802 thousand increase in other operating income. This net increase more than
offsets the 14% increase in other operating expenses. The Company will continue
to focus its efforts toward retail banking services within its market area with
specific attention given to increasing market share.
The 4% increase in net income during 1994 was attributable to the improvement in
the net interest margin and higher noninterest income, offset by increased
operating costs due to new branch offices, our new state-of-the-art computer
system, and general inflationary increases.
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
sources used to fund these assets are 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.
In 1995, net interest income increased by $844 thousand or 10% over 1994 levels.
During 1995, net interest income was negatively impacted by the relatively
higher cost of funds than in 1994. However, the continued strong growth of
earning assets provided a significant positive variance in net interest income
growth.
Average earning assets grew by 24% or $44 million over 1994 levels. Average
loans and leases increased by 19% or $23.2 million from 1994 levels. Average
commercial loans grew 6% or $2.5 million over 1994 levels. Interest income on
commercial loans increased $789 thousand or 22%, due to both the increased
volume and the increasing rates through most of 1995. The national prime rate,
an index to which the majority of these loans are tied, was 8.50% at both
December 31, 1995 and 1994, after peaking at 9.00% in June, 1995. Average real
estate loans increased 23%, which contributed to a 29% increase in interest
income. Average consumer loans, which include credit card receivables, increased
$8.5 million or 31% over 1994, and resulted in a 29% increase in related
interest income.
<PAGE>
On average, investment securities increased $19 million or 31% over 1994 levels,
compared to a $32 million or 109% increase in 1994. Income earned on investment
securities increased by 34% in 1995 compared to an 80% growth in 1994. As is
discussed under Financial Condition, the asset/liability management and
investment strategies that were employed during 1995 generated increased volume
thus creating a substantial increase in investment income. The mix of securities
in the investment portfolio changed considerably during 1995. Taxable
securities, which represented 69% of the investment portfolio in 1994, increased
to 79% in 1995. Tax-exempt securities now represent 21% of the portfolio
compared to 31% in 1994. In 1995, taxable securities, in most cases, provided
better after-tax investment returns than tax-exempt issues in similar maturity
and quality ranges. Accordingly, average balances on U.S. government agency
securities increased $21 million in 1995.
Average interest-bearing deposits increased $35 million or 24% in 1995. As
interest rates began to rise in 1994 and continued to rise through most of 1995,
more depositors sought higher rate, longer-term deposits. Savings and
interest-bearing demand deposits, which averaged $71.7 million in 1994, have
decreased to $67.1 million in 1995. As a percentage of total average
interest-bearing deposits, savings and interest-bearing demand deposits
represent 37% of the total in 1995 compared to 49% in 1994. Due to the shift in
the mix of deposits, the rates at which they were repricing and the volume
increase, interest expense on deposits increased $3 million, or 57% in 1995.
These results are reflected in the cost of funds which increased 96 basis points
or 27% from 1994 through 1995, while the volume increased by 24%. There were no
brokered deposits within the Company's deposit base during 1995, 1994 or 1993.
Short-term borrowings, which include federal funds purchased and securities sold
under agreements to repurchase, averaged $5.2 million in 1995 compared to $5.5
million in 1994. These borrowings remained relatively constant through 1995.
The overall effect of the increase in interest rates, the shift in mix of
deposit accounts and the growth in earning assets still produced a positive net
interest margin, in spite of overall decreasing margins. The net interest margin
decreased by 56 basis points to 4.15% in 1995 from 4.71% in 1994. During 1996,
the net interest margin is expected to improve because of the anticipated
decrease in the Company's cost of funds (based on the current decrease in the
national prime rate), while maintaining the current rate of interest income on
earning assets.
In 1994, net interest income grew by 23%, or $1.6 million over the same period
in 1993. Factors that had a significant positive impact on this growth were the
relative low cost of funds and the continued strong growth of earning assets,
which grew 40% over 1993 levels.
The following tables provide 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 expenses are presented on a tax-equivalent basis using the marginal
federal income tax rate of 34% each year.
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest Average Annual Interest
Balance Rate Income/ Balance Rate Income/ Balance Rate Income/
(1) Expense (1) Expense (1) Expense
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $2,889 5.33% 154 $1,835 4.03% $74 $1,671 2.99% $50
Deposits in Federal Home Loan Bank 479 4.59% 22 121 3.31% 4 -- -- --
Investment Securities:
U.S. government agencies 61,842 6.77% 4.187 41,237 6.17% 2,544 14,044 6.91% 970
State and municipal (2) 16,890 8.57% 1,448 18,932 8.95% 1,695 15,065 9.28% 1,398
Other securities 1,790 6.54% 117 1,210 4.38% 53 274 4.01% 11
------- ---- ------ ------ ----- ------ ------- ----- ------
Total Investment Securities 80,522 7.14% 5,752 61,379 6.99% 4,292 29,383 8.10% 2,379
Loans and Leases:
Commercial, financial and industrial 44,438 10.00% 4,444 41,975 8.71% 3,655 36,976 8.08% 2,986
Real estate-construction and mortgage 65,250 8.15% 5,318 52,990 7.76% 4,114 44,460 8.68% 3,860
Installment loans to individuals (3) 34,664 9.31% 3,226 26,459 9.33% 2,469 18,709 10.52% 1,969
Lease financing (3) 1,431 8.67% 124 1,158 10.79% 125 1,130 11.42% 129
------- ---- ------ ------ ----- ------ ------- ----- ------
Total Loans and Leases 145,783 8.99% 13,112 122,582 8.45% 10,363 101,275 8.83% 8,944
Total Earning Assets 229,673 8.29% 19,040 185,917 7.92% 14,733 132,329 8.59% 11,373
Cash and due from banks 9,368 -- -- 9,598 -- -- 7,176 -- --
Premises and equipment, net 7,718 -- -- 6,489 -- -- 4,702 -- --
Other assets, less allowance for possible
credit losses, loan fees and adjustment
for SFAS No. 115 4,343 -- -- 1,673 -- -- 2,271 -- --
------- ---- ------ ------ ----- ------ ------- ----- ------
Total Assets $251,102 7.58% $19,040 $203,677 7.23% $14,733 $146,478 7.76% $11,373
======== ==== ======= ======== ==== ======= ======== ==== =======
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand $25,993 2.38% $618 $26,094 2.42% $ 631 $19,535 2.51% $490
Savings 41,186 3.70% 1,524 45,600 2.61% 1,192 42,051 3.00% 1,263
Time 86,980 5.37% 4,671 58,092 4.59% 2,669 46,443 4.62% 2,147
Time over $100,000 26,960 5.04% 1,360 16,461 4.24% 698 8,005 3.96% 317
------- ---- ------ ------ ----- ------ ------- ----- ------
Total Interest-Bearing Deposits 181,119 4.51% 8,173 146,247 3.55% 5,190 116,034 3.63% 4,217
Short-term borrowings 4,698 5.39% 253 4,805 4.29% 206 929 4.20% 39
Securities sold under agreements
to repurchase 546 5.31% 29 731 4.10% 30 -- -- --
Long-term debt 17,898 5.92% 1,059 10,601 5.10% 541 185 7.03% 13
------- ---- ------ ------ ----- ------ ------- ----- ------
Total Interest-Bearing Liabilities 204,261 4.66% 9,514 162,384 3.67% 5,967 117,148 3.64% 4,269
Noninterest-bearing demand deposits 26,172 -- -- 23,479 -- -- 17,504 -- --
Other liabilities 3,157 -- -- 1,535 -- -- 1,268 -- --
------- ---- ------ ------ ----- ------ ------- ----- ------
Total Liabilities 233,590 4.07% 9,514 187,398 3.18% 5,967 135,920 3.14% 4,269
Stockholders' Equity 17,512 -- -- 16,279 -- -- 10,558 --
------- ---- ------ ------ ----- ------ ------- ----- ------
Total Liabilities and
Stockholders' Equity $251,102 3.79% $9,514 $203,677 2.93% $5,967 $146,478 2.91% $4,269
======== ==== ====== ======== ==== ====== ======== ==== ======
Margin Analysis
Interest income/earning assets 8.29% $19,040 7.92% $14,733 8.59% $11,373
Interest expense/earning assets 4.14% 9,514 3.21% 5,967 3.23% 4,269
---- ----- ---- ----- ---- -----
Net interest income/earning assets 4.15% $9,526 4.71% $8,766 5.36% $ 7,104
==== ====== ==== ====== ==== ========
</TABLE>
(Percentage distributions may not add due to rounding.)
(1) Average balances have been computed using month-end balances. Nonaccrual
loans are included in loan balances.
(2) Interest and yield are presented on a tax-equivalent basis using 34% for
1995, 1994, and 1993. (3) Installment loans and leases are presented net of
unearned interest.
<PAGE>
Rate/Volume Variance Analysis Calculation
<TABLE>
<CAPTION>
1995 Compared to 1994 (1) 1994 Compared to 1993 (1)
Total Caused by Total Caused by
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
<S> <C> <C> <C> <C> <C>
Interest Income
Federal funds sold $ 80 $ 28 $ 52 $ 24 $ 54 $ (30)
Deposits in Federal Home Loan Bank 18 10 8 4 -- 4
Investment Securities:
U.S. government agencies 1,643 268 1,375 1,574 (114) 1,688
State and municipal (247) (69) (178) 297 (51) 348
Other securities 64 33 31 42 1 41
------- ------ ------ ------ ----- ------
Total Investment Securities 1,460 232 1,228 1,913 (164) 2,077
Loans and Leases:
Commercial, financial and industrial 789 566 223 669 246 423
Real estate-construction and mortgage 1,204 213 991 254 (436) 690
Installment loans to individuals 757 (7) 764 500 (243) 743
Lease financing (1) (28) 27 (4) (7) 3
------- ------ ------ ------ ----- ------
Total Loans and Leases 2,749 744 2,005 1,419 (440) 1,859
------- ------ ------ ------ ----- ------
Total Earning Assets 4,307 1,014 3,293 3,360 (550) 3,910
------- ------ ------ ------ ----- ------
Interest Expense
Interest-Bearing Deposits:
Demand (13) (11) (2) 141 (18) 159
Savings 332 557 (225) (71) (172) 101
Time 2,002 508 1,494 522 (13) 535
Time over $100,000 662 151 511 381 23 358
------- ------ ------ ------ ----- ------
Total Interest-Bearing Deposits 2,983 1,205 1,778 973 (180) 1,153
Short-term borrowings 47 52 (5) 167 1 166
Securities sold under agreements
to repurchase (1) 7 (8) 30 -- 30
Long-term debt 518 125 393 528 (4) 532
------- ------ ------ ------ ----- ------
Total Interest-Bearing Liabilities 3,547 1,389 2,158 1,698 (183) 1,881
------- ------ ------ ------ ----- ------
Net Interest Income Variances $ 760 $ (375) $ 1,135 $ 1,662 $ (367) $ 2,029
======= ======= ======= ======= ======= =======
</TABLE>
(1) The portion of the total change attributable to both 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>
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. Management considers various conditions including loan
concentrations, charge-off history, delinquent loan percentages, review of
specific loans and general economic conditions. For instance, management employs
a loan grading of larger loans (usually loans of $500,000 or more) to ensure the
early identification of potential problem loans which may have a potential
negative impact on the future earnings of the Company. Quarterly, the loan
review committee reviews pertinent information relative to both specific credits
and the total portfolio in general. Such information is used in determining the
amount to be charged to the provision for possible credit losses, which thereby
increases the allowance for possible credit losses.
During 1995, the provision for possible credit losses was $810 thousand compared
to $375 thousand in 1994. In 1995, the provision for possible credit losses was
125% of net charge-offs compared to 90% in 1994. The provision represented
management's assessment of the risks inherent in the loan and lease portfolio
while providing the amounts necessary to cover charge-offs.
In 1995, net charge-offs increased 53% compared to a 21% increase in 1994. The
increase in the current year's net charge-offs is primarily attributed to the
real estate mortgage sector. The Company wrote down one commercial real estate
mortgage during 1995 which had been in litigation for approximately three years.
The Company does not anticipate any further write-downs or losses as a result of
this litigation. The ratio of net charge-offs to average loans outstanding was
at .44% for 1995 and .35% for 1994.
Net charge-offs on commercial and industrial loans for 1995 were $286 thousand
or 44% of net charge-offs compared to $309 thousand or 73% of net charge-offs in
1994. Consumer and credit card, and real estate related debt accounted for 25%
and 31% of net charge-offs, respectively. Included in net real estate related
charge-offs is a commercial real estate mortgage in the amount of approximately
$600 thousand which was written down by $200 thousand during 1995. As discussed
previously, no further losses are anticipated.
Other Operating Income
1995 1994 1993
---- ---- ----
(in thousands)
Loan origination fees $ 179 $ 422 $ 696
Customer service charges and fees 1,066 683 566
Mortgage servicing fees 302 221 220
Investment security gains, net 331 112 31
Gain (loss) on sales of mortgages, net 132 (131) 428
Other income 471 372 362
------ ------ ------
Total other operating income $2,481 $1,679 $2,303
====== ====== ======
Other operating income increased $802 thousand or 48% in 1995 compared to a
decrease of $624 thousand or 27% in 1994. Fees generated from the origination
and sale of residential mortgage loans provided 7% or $179 thousand of total
other operating income. These fees decreased by 58% or $243 thousand, because of
the decline in residential mortgage loans sold for cash. Mortgage servicing fees
are earned by servicing residential mortgage loans for investors in the
secondary market. Mortgage servicing fee income increased by 37% or $81 thousand
when compared to 1994. These fees are directly influenced by the volume of loans
that are sold in the secondary market. Gains or losses on sales of mortgage
loans occur when the coupon rates on mortgage loans exceed or fall short of the
yields required by the purchasers. The net gain of $132 thousand recorded in
1995, compared with the net loss of $131 thousand in 1994, is indicative of the
changes in interest rates during the periods in which the sales occurred.
Fee income from service charges on demand deposits, item processing, return
items and other service fees increased 56% or $383 thousand in 1995. These fees,
which represented 43% of other operating income, are influenced by both pricing
changes and increases in the number of consumer and business demand deposit
accounts which increased $2 million in 1995.
<PAGE>
Net gains on available-for-sale securities represented approximately 13% of
other operating income in 1995. The sales of these securities in 1995 resulted
from the Company's decision to liquidate certain securities to capture market
gains with the ability to reinvest in bonds with similar risk and yield.
Included in other income are earnings on directors' life insurance policies,
credit card annual fees and merchant discounts, safe deposit box rentals and
other general service fees. The increase in these fees in 1995 was 27% compared
to 3% in 1994. Fees from credit card holders and other fee income contributed to
the 1995 increase.
In 1994, other operating income decreased 27% primarily as a direct result of
the impact of rising interest rates which reduced the volume of new and
refinanced mortgage loans and the same negative effect on sales of mortgages.
Mortgage servicing fees remained constant at the 1993 level. Customer service
charges grew by 21% primarily due to the additional number of demand deposit
accounts. Other income grew 3% due to fees from credit card holders.
Other Operating Expenses
1995 1994 1993
---- ---- ----
(in thousands)
Salaries and benefits $3,559 $3,003 $2,414
Equipment expense 747 602 422
Occupancy expense 1,036 923 666
FDIC insurance 222 321 282
Foreclosed asset expenses 26 44 135
Amortization of intangible assets 108 108 153
Advertising 242 243 185
Other expenses 1,823 1,587 1,334
------ ------ ------
Total other operating expenses $7,763 $6,831 $5,591
====== ====== ======
Total other operating expenses increased 14% in 1995, most of which was directly
related to the payment of salaries and benefits. Salaries and benefits, which is
the most significant of the non-interest expenses, increased by 19% or $556
thousand over 1994 amounts. The increase is due to the additional staffing needs
in both branch and administrative offices, merit increases and the added costs
associated with health care insurance and other benefits which are provided by
the Company.
Equipment and occupancy expenses increased 24% and 12%, respectively, during
1995. Again, the increases in these expenses are primarily attributable to the
past growth in the number of branch offices, in addition to overall increases in
overhead expenses, maintenance costs and equipment upgrades throughout the
branch network. The increase in both of these expenses is directly related to
the maturing and growth in operations of four branch offices which opened in the
past two years, the expanded usage of the mortgage loan and administrative
center, which opened in January of 1994, the acquisition and installation of an
entirely new computer system, and the overall increases in overhead expenses at
all Bank facilities.
FDIC insurance assessments decreased by 31% or $99 thousand. The 31% decrease in
the FDIC insurance assessment is directly related to an FDIC refund of
assessments paid for the period from June 1, 1995 through September 30, 1995.
The refund was a result of the FDIC assessment reduced from 23 cents per $100
deposits to 4 cents per $100 deposits, effective June 1, 1995. Foreclosed asset
expenses decreased 41% or $18 thousand in 1995. The decrease was a result of the
disposition of properties without any material losses. Amortization of
intangible assets remained constant in 1995 and is related to the premium the
Company paid for the core deposits when it acquired the Milford Branch office.
Advertising expenses also remained constant in 1995. Other expenses grew by $236
thousand or 15% in 1995 and include such costs as legal fees, professional and
audit, state shares tax, directors' fees and other general operating expenses.
<PAGE>
Total other operating expenses increased 22% in 1994 with much of the increase
related to the two newest branch offices. Salaries and benefits rose by 24%
because of added staff levels, merit increases and health care costs. Equipment
expenses grew by 43% due to recurring costs such as maintenance, replacements
and upgrades. Occupancy expenses were up 39% because of the additional
facilities acquired and the general increases in overhead costs at all banking
offices. FDIC insurance assessment increased by 14% due to both the higher fees
charged and the overall growth in deposits. Expenses related to foreclosed
assets include maintenance, repairs, taxes, insurance, legal fees and writedowns
on properties. These expenses were 1% of total operating expenses in 1994
compared to 2% in 1993. The 31% increase in advertising expenses is a reflection
of the extensive marketing of the Company's loan and deposit products, the name
change of the Company's banking subsidiary and the additional expenses
associated with the opening of two new branch offices. Other expenses, which
increased by 19%, include costs such as legal fees, professional and audit,
state shares tax, directors' fees, bonus incentives, amortization of intangible
assets and other general operating expenses.
Income Taxes
The provision for income taxes increased 19% or $100 thousand in 1995 compared
to a 12% or $71 thousand decrease in 1994. Pretax income increased 10% or $279
thousand in 1995 as compared to a 1 % or $38 thousand decrease in 1994.
Financial Condition
Statement of Condition
At December 31, 1995, the Company's total assets were $251.9 million,
representing an increase of $15.8 million or 7% from the December 31, 1994
balance of $236.1 million. The increase in assets is primarily attributable to a
$17 million growth in net loans.
The amortized cost of investment securities, both held-to-maturity (HTM) and
available-for-sale (AFS), decreased $6.7 million or 8% from December 31, 1994 to
December 31, 1995. However, the continued attention given to management's
asset/liability and investment strategies resulted in an increase in net
interest income while controlling interest rate risk. By again utilizing
structured borrowings with the Federal Home Loan Bank, the Company was able to
purchase both taxable and tax-exempt investments that provided a favorable yield
pickup between the borrowed and invested funds. During 1995, the Company
purchased securities with funds borrowed from the Federal Home Loan Bank of
Pittsburgh. The strategy that was employed provided a favorable yield pickup
between the invested and borrowed funds. During the third quarter 1995, $11
million of Federal Home Loan Bank multi step-up bonds were called and settled,
which proceeds were used to pay back Federal Home Loan Bank borrowings. The
Company again borrowed from the Federal Home Loan Bank during the fourth quarter
1995 to again accomplish strategic asset/liability and interest rate risk
management objectives. At December 31, 1995, gross unrealized gains in the
held-to-maturity investments were $396 thousand while gross unrealized losses
amounted to $119 thousand.
Between November 15, 1995 and December 31, 1995, the Financial Accounting
Standards Board allowed a one-time transfer from HTM to AFS that will not call
into question an institution's future intent to hold other securities to
maturity. On November 15, 1995, the Bank transferred approximately $11 million
in securities from AFS to HTM and another $19 million from HTM to AFS. The
result was a total book value increase of $293 thousand, of which $279 thousand
was recognized in the Bank's book equity at November 15, 1995.
<PAGE>
The maturity distribution and yield of all investment securities at December 31,
1995 (prior to the adjustment for SFAS No. 115) are as follows:
<TABLE>
<CAPTION>
Within Two- Six- After No
One Five Ten Ten Fixed
Year Years Years Years Maturity Total
---- ----- ----- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies
and corporations $3,421 $3,853 $6,147 $40,685 $ -- $54,106
Yield 5.05% 7.28% 6.16% 6.80% 6.65%
Obligations of states and
political subdivisions 210 2,605 6,018 8,501 17,334
Yield (1) 10.68% 7.75% 8.37% 11.12% 9.65%
Equity securities 1,304 1,304
Yield 6.72% 6.72%
------ ------ ------- ------- ------ --------
Total maturities $3,631 $6,458 $12,165 $49,186 $1,304 $72,744
====== ====== ======= ======= ====== ========
Weighted yield 5.37% 7.47% 8.37% 7.54% 6.72% 7.36%
</TABLE>
(1) Yields on obligations of states and political subdivisions are presented on
a tax-equivalent basis utilizing an effective tax rate of 34% for all
maturities.
Total net loans increased by 13% from $135 million at the end of 1994, to $152
million at the end of 1995. The increase in net loans is directly related to the
significant growth in consumer loans and residential mortgages. Residential
mortgage loans, which include real estate construction loans, increased $13.6
million or 23% from year-end 1994 to 1995. Residential mortgage loans
represented the most significant increase of net loans in 1995. At December 31,
1995, net consumer loans totaled $43 million, or $2 million higher than the
December 31, 1994 balance of $41 million. The increases in home improvement
loans and the expansion of the Company's indirect lending program to automobile
dealers provided the majority of growth in the consumer portfolio. Commercial
loans increased $2 million or 5% in 1995. Commercial loans consist of loans made
to small businesses within the Company's market area and are generally secured
by real estate and other assets of the borrowers.
Total deposits increased $16.6 million or 9% from $192.2 million in 1994 to
$208.8 million in 1995. Noninterest-bearing demand deposits increased by $2
million, most of which is attributable to the opening of the Company's four
newest branch offices. In aggregate, savings and interest-bearing demand
deposits decreased by $2 million or 3% from 1994 to 1995. As a percentage of
total deposits, savings and interest-bearing demand deposits represented 31% in
1995, compared to 35% in 1994. Savings deposits decreased by $1.5 million in
1995 as interest rates continued to rise and certificates of deposits offered
competitive alternatives. Time deposits, which include certificates of deposit
in denominations of $100 thousand or more, increased $16.5 million or 16% in
1995. As a percentage of total deposits, these deposits increased to 56% in 1995
from 52% in 1994. Certificates of deposits in the amount of $100 thousand or
more grew from $24.7 million at December 31, 1994 to $26.9 million at December
31, 1995. Approximately, $5.2 million or 19% of the growth was from public funds
of school districts, county governments and local municipalities located within
the Company's market area.
The Company considers its current deposit base to be stable and generally
consumer in nature. The deposit mix is, in general, equally distributed among
all products without any significant concentrations.
Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed assets held for
sale. Nonperforming loans consist of loans where the principal and/or interest
is 90 days or more past due and loans that have been placed on nonaccrual
status. When loans are placed on nonaccrual status, income from the current
period is reversed from current earnings and interest from prior periods is
charged to the allowance for possible credit losses. Consumer loans are
charged-off when principal or interest is 120 days or more delinquent, or are
placed on nonaccrual status if a sufficient amount of collateral exists. The
following table represents nonperforming assets of the Company for 1995, 1994
and 1993:
<PAGE>
1995 1994 1993
---- ----- -----
(in thousands)
Loans past due 90 days or more $1,716 $1,125 $1,501
Impaired loans in nonaccrual status 1,216 -- --
Other nonaccrual loans 487 1,786 1,585
------ ------ ------
Total nonperforming loans 3,419 2,911 3,086
Foreclosed assets held for sale 52 191 119
------ ------ ------
Total nonperforming assets $3,471 $3,102 $3,205
====== ====== ======
Nonperforming loans as a
percentage of loans 2.19% 2.13% 2.78%
Nonperforming assets as a
percentage of assets 1.36% 1.31% 1.89%
Nonperforming loans increased 16% from year-end 1994. Nonaccrual loans decreased
$83 thousand or 5% from year-end 1994. Commercial loans accounted for 71% of all
nonaccruals, followed by real estate loans at 28% and consumer installment loans
at 1%. Within the $1.7 million of total nonaccrual loans, 96% are secured by
mortgages, primarily first liens, against residential or commercial properties.
Legal proceedings on the nonaccrual loans are ongoing and are reviewed by
management on a continuing basis. No material losses are expected as a result of
these proceedings. Loans past due ninety days or more increased $591 thousand
from 1994 year-end levels. These loans include $767 thousand in real estate
mortgages, $531 thousand in consumer credit, $373 thousand in commercial loans
and $51 thousand in leasing. These loans are reviewed by management at its
quarterly loan review meetings regarding collection efforts.
Foreclosed assets held for sale were $52 thousand at year-end 1995 compared to
$191 thousand at year-end 1994. The Company does not expect any material losses
on the sales of these properties based on current appraised values exceeding
book values.
Potential Problem Loans
At December 31, 1995, the Company had approximately $1.5 million 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 December 31, 1995.
Allowance for Possible Credit Losses
The Company determines the provision for possible credit losses through a
quarterly review of the loan portfolio. Factors such as declining economic
trends, the volume of nonperforming loans, concentrations of credit risk,
adverse situations that may affect the borrower's ability to repay, prior loss
experience within the various categories of the portfolio and current economic
conditions are considered when reviewing the risks in the portfolio. Larger
exposures are analyzed individually. Over the past several years, the Company
has implemented stringent underwriting standards in commercial lending which
resulted in a decrease in the allowance for possible credit losses. While
management believes the allowance for possible credit losses is currently
adequate, future additions to the allowance may be necessary based on changes in
economic conditions. The adequacy of the allowance for possible credit losses is
reviewed quarterly by a loan review committee comprised of members of the Board
of Directors and senior management of the Company. The full Board of Directors
reviews the relevant ratios with respect to the allowance after the loan review
committee makes its recommendations. At December 31, 1995, the allowance for
possible credit losses was 1.08% of loans compared to 1.10% in 1994 and 1.39% in
1993. Although the allowance decreased while total net loans increased in 1995,
the growth was concentrated in the least risky categories, such as residential
and consumer loans.
The allowance for possible credit losses has been allocated by category as set
forth in the following table. Amounts shown in the table do not purport to be an
indication of future charge-off trends. Percentages shown in the table represent
the percentage of loans by type to total loans.
<PAGE>
1995 1994 1993
---- ---- ----
(in thousands)
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Real estate $ 279 17 $ 370 43 $ 198 46
Commercial and industrial 700 42 631 32 924 35
Consumer installment 437 26 386 24 259 18
Lease financing 52 3 52 1 55 1
Unallocated 189 12 57 -- 108 --
------ ---- ------ ------ ------ ------
Total $1,657 100 $1,496 100 $1,544 100
====== ==== ====== ====== ====== ======
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 payments on loans and investments,
sales of assets, growth in core deposits, short and long-term borrowings,
repurchase agreements and other fees and charges. 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 the level of interest rates.
At December 31, 1995, the Company maintained $12.5 million in cash and cash
equivalents in the form of cash and due from banks (including Federal funds
sold). In addition, the Company had $50.6 million of available-for-sale
investment securities. This combined total of $63.1 million represented 25% of
total assets at December 31, 1995, as compared to $44.8 million or 19% of total
assets at December 31, 1994. The Company believes that its liquidity is
adequate.
The Company considers its primary source of liquidity to be its core deposit
base. This funding source has grown steadily over the years and consists of
deposits from customers throughout the branch network. At December 31, 1995,
approximately 83% of the Company's assets were funded by core deposits acquired
within its market area, and 8% 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 $740 thousand for the year ended
December 31, 1995, as compared to net cash provided by operating activities of
$14.2 million for the comparable period in 1994. This $13.4 million decrease is
primarily related to the decrease in mortgage loans held for resale. Net cash
used in investing activities decreased $69.3 million in 1995 compared to a $50.8
million increase in 1994. The net cash flows from securities accounted for $47
million of the change. Net cash provided by financing activities decreased $55
million from 1994. The growth in core deposits provided $16.5 million cash flow
in 1995 versus $46.1 in 1994. The net decrease of $19 million in borrowings and
long-term debt was the result of loan demand and an investment strategy funded
by Federal Home Loan Bank borrowings, which were paid back during 1995. As
discussed previously, the Company borrowed funds from the Federal Home Loan Bank
of Pittsburgh under both short and long-term borrowing arrangements. The
borrowings mature at various periods through November, 2005.
The Company also places emphasis on maintaining additional sources of asset
liquidity. Other liquid assets include mortgage loans held for resale. The
Company also has established lines of credit with correspondent banks for
short-term borrowing needs in addition to an estimated borrowing capacity of
approximately $90 million with the Federal Home Loan Bank of Pittsburgh. In
viewing the combination of all of these factors, management considers the
Company's liquidity position, both short and long-term, to be sufficient to meet
its cash flow needs.
Interest Rate Sensitivity
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, the Company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.
<PAGE>
The ratio between assets and liabilities repricing in specific time intervals is
referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps
can be managed to take advantage of the slope of the yield curve as well as
forecasted changes in the level of interest rate changes.
One major objective of the Company when managing the rate sensitivity of its
assets and liabilities is to stabilize net interest income. The management of
and authority to assume interest rate risk is the responsibility of the
Company's Asset/Liability Committee ("ALCO"), which is comprised of senior
management and Board members. ALCO meets quarterly to monitor the ratio of
interest sensitive assets to interest sensitive liabilities. The process to
review interest rate risk management is a regular part of management of the
Company. Consistent policies and practices of measuring and reporting interest
rate risk exposure, particularly regarding the treatment of noncontractual
assets and liabilities, are in effect. In addition, there is an annual process
to review the interest rate risk policy with the Board of Directors which
includes limits on the impact to earnings from shifts in interest rates.
The Company employs computerized net interest income simulation modeling to
assist in quantifying interest rate risk exposure. This process measures and
quantifies the impact on net interest income through varying interest rate
changes and balance sheet compositions.
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 the 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 the end of 1995, the Company moved toward a more defensive stance for
reducing the interest rate risk inherent within the balance sheet. The overall
goal was to reduce the exposure of the Company's earnings and market value of
equity to rising interest rates.
Two reasons existed for this change. First, interest rates had fallen during the
second half of 1995, with a further decrease in the national prime rate
projected. Second, the Company's adjusted asset/liability position strongly
favored falling rates, since the Company is negatively gapped. With rates
unlikely to fall dramatically further, the following strategies of shortening
the asset maturities within the balance sheet was undertaken.
The first strategy involved a Federal Home Loan Bank arbitrage of borrowing
fixed-rate long-term and buying Adjustable Rate Mortgage securities (ARM's).
Secondly, in December 1995, the Company undertook an evaluation designed to
reduce the interest rate risk exposure in the single family, fixed rate mortgage
portfolio. The Company sold the majority of the fixed rate portfolio with
maturities in excess of 180 months. The proceeds were reinvested in short-term
ARM's.
In January, 1996, the last strategy was executed. Long-term mortgage-backed
securities were sold, with the proceeds also reinvested into ARM's.
The strategy for 1996 involves continuing to be defensive by both paying down
Federal Home Loan Bank borrowings and purchasing adjustable rate securities. In
addition, attractive callable agency bonds will be added. With rates unlikely to
fall dramatically further, their call risk is mitigated. Finally, should
interest rates rise by 200 basis points, the ARM's will be liquidated and higher
fixed rate yields will be locked into the portfolio by extending maturities.
The Company's modeling results at December 31, 1995, indicate that the level of
net interest income at risk due to varying interest rate movements is within
internal risk tolerance guidelines. These guidelines restrict the impact on net
interest income to less than 10 percent assuming a 200 basis point increase or
decrease in market interest rates.
<PAGE>
At December 31, 1995, the Company maintained a one year cumulative GAP of
negative $9.7 million or 3.84% of total assets. The effect of this GAP position
provided a negative mismatch of assets and liabilities which exposes the Company
to interest rate risk during a period of rising interest rates such as was
experienced in 1995.
The following table, "Statement of Interest Sensitivity Gap," reflects the
Company's gap position at December 31, 1995:
<TABLE>
<CAPTION>
STATEMENT OF INTEREST SENSITIVITY GAP
(in thousands)
3 months 3 through 1 through Over
or less 12 months 3 years 3 years Total
------- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Investment securities(1) $12,955 $15,426 $10,730 $34,585 $ 73,695
Loans(1) 44,878 23,816 26,733 56,879 152,306
------ ------ ------ ------ -------
Total Rate Sensitive Assets $57,833 $39,242 $37,463 $91,464 $226,002
======= ======== ======= ======= ========
Interest-bearing
transaction deposits (2) $ 6,507 $ 6,507 $13,014 $39,046 $ 65,074
Time 16,161 41,614 16,292 15,809 89,876
Time over $100,000 11,001 14,552 705 685 26,943
Short-term borrowings 2,500 2,500 -- -- 5,000
Repurchase agreements 400 -- -- -- 400
Long-term debt 5,002 5 12 10,137 15,156
------ ------ ------ ------ -------
Total $41,571 $65,178 $30,023 $65,677 $202,449
======= ======== ======= ======= ========
Interest Sensitivity Gap $16,262 $(25,936) $ 7,440 $25,787
Cumulative Gap $16,262 $ (9,674) $(2,234) $23,553
Cumulative Gap to Total Assets 6.46% (3.84)% (.89)% 9.35%
</TABLE>
(1) 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.
(2) 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.
Upon reviewing the current interest sensitivity scenario for the next 12 months,
decreasing interest rates could positively effect 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.
Certain shortcomings are inherent in the method of analysis presented in the
above table. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgages,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. The ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest rate increase.
Capital
The adequacy of the Company's capital is reviewed on an ongoing basis with
reference to size, composition and quality of its resources. An adequate capital
base is important for continued growth and expansion in addition to providing an
added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio, defined as
the ratio of common stockholders' equity less intangible assets, to average
quarterly assets less intangible assets. The leverage ratio at December 31, 1995
was 7.59% compared to 8.51% at December 31, 1994. For 1995 and 1994, the ratios
were well above minimum regulatory guidelines.
<PAGE>
As required by federal banking authorities, 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 certain off-balance-sheet instruments. For the Company, Tier I
capital (core capital) consists of common stockholders' equity less intangible
assets, and Tier II capital includes the allowance for possible credit losses,
which cannot exceed 1.25% of risk-weighted assets. Regulatory guidelines require
that core capital and total risk-based capital must be at least 4.00% and 8.00%,
respectively. The table below illustrates the Company's capital ratios as
required under the guidelines.
Primary Capital $19,228
Intangible Assets (202)
-------
Tier I Capital $19,026
Tier II Capital 1,605
-------
Total Risk-Based Capital $20,631
=======
Total Risk-Weighted Assets $149,274
========
Tier I Ratio 12.75%
=====
Risk-Based Capital Ratio 13.82%
=====
Forward Outlook
The performance of a bank is affected more by changes in interest rates than by
inflation; therefore, the effect of inflation is normally not as significant as
it is on other businesses and industries. During periods of high inflation, the
money supply usually increases and banks normally experience above average
growth in assets, loans, and deposits. A bank's operating expenses will usually
increase during inflationary times as the prices of goods and services increase.
A bank's performance is also affected during recessionary periods. In times of
recession, a bank usually experiences a tightening on its earning assets and on
its profits. A recession is usually an indicator of higher unemployment rates,
which could mean an increase in the number of nonperforming loans because of
continued layoffs and other deteriorations of consumers' financial conditions.
In 1994, rates began moving steadily upward as the Federal Reserve Bank
tightened its monetary policy. In early 1995, rates rose again and continued
rising through the middle of the year, with the national prime rate peaking at
9.00%. During the last half of 1995, the national prime rate fell to 8.50% at
December 31, 1995. Of course, management and the Board of Directors do not have
the ability to determine if another rate increase will occur; however, it is
felt that the Company is very well positioned to meet the challenges and effects
of a rising interest rate environment. The Company's commitment to remaining a
community-based organization is strong and the intention is to recognize steady
growth in its consumer, mortgage and commercial loan portfolios while obtaining
and maintaining a strong core deposit base.
The Company will begin accounting for mortgage servicing rights as of January 1,
1996. No material effect on net income is expected.
The banking and financial services industries are ever-changing. At the time of
this writing, the Company was not aware of any pending pronouncements that would
have a material impact on the results of operations. The Federal Deposit
Insurance Corporation (FDIC), in November, 1995, reduced the insurance premiums
paid by some banks from 23 cents per $100 in deposits to 0 cents per $100 in
deposits, plus the statutory annual minimum of $2,000 for the highest-rated,
well-capitalized institutions. The Company falls into this category of
institutions. The new rate structure is effective for the first semi-annual 1996
assessment period.
Beginning September 1995, bank holding companies may acquire banks in other
states without regard to state law. In addition, banks can merge with other
banks in another state beginning in June 1997. Predictions are that
consolidation will occur as the banking industry strives for greater cost
efficiencies and market share. Management believes that such consolidation may
enhance its competitive position as a community bank.
A normal examination of the Bank by the OCC in 1995 resulted in no significant
findings and no impact is anticipated on current or future operations.
<PAGE>
Consolidated Balance Sheet
December 31,
------------
1995 1994
---- ----
(in thousands)
ASSETS
Cash and cash equivalents $ 12,519 $ 10,719
Held-to-maturity securities (fair value of
$22,866 and $40,674 in 1995 and 1994, respectively) 22,589 42,535
Available-for-sale securities 50,580 34,142
Loans and leases 159,170 144,372
Mortgage loans held for resale 3,405 119
Less unearned income and loan fees (8,612) (7,977)
Less allowance for possible credit losses (1,657) (1,496)
--------- ---------
Net Loans 152,306 135,018
Premises and equipment, net 7,785 7,015
Accrued interest receivable 1,971 2,066
Foreclosed assets held for sale 52 191
Other assets 4,057 4,439
--------- ---------
TOTAL ASSETS $ 251,859 $ 236,125
========= =========
LIABILITIES
Deposits:
Noninterest-bearing $ 26,866 $ 24,880
Interest-bearing:
Demand 25,686 26,099
Savings 39,388 40,888
Time 89,876 75,657
Time $100,000 and over 26,943 24,663
--------- ---------
Total Deposits 208,759 192,187
Accrued interest payable 1,746 1,672
Short-term borrowings 5,000 9,750
Securities sold under agreements to repurchase 400 1,000
Long-term debt 15,156 15,219
Other liabilities 1,289 498
--------- ---------
Total Liabilities 232,350 220,326
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of
$1.25 par value each; no outstanding shares -- --
Common stock: Authorized, 5,000,000 shares of $.42
par value each; issued and outstanding 1,657,449
shares in 1995 and 1,638,541 shares in 1994 696 688
Capital surplus 9,414 9,139
Retained earnings 9,118 7,783
Net unrealized gains (losses) on available-for-sale
securities 281 (1,811)
--------- ---------
Total Stockholders' Equity 19,509 15,799
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 251,859 $ 236,125
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases $13,112 $10,363 $8,944
Investment Securities:
Taxable 4,187 2,544 970
Exempt from federal income taxes 956 1,119 923
Dividends 117 53 8
-------- -------- --------
Total Investment Securities Income 5,260 3,716 1,901
-------- -------- --------
Deposits in bank 22 4 3
Federal funds sold 154 74 50
-------- -------- --------
TOTAL INTEREST INCOME 18,548 14,157 10,898
-------- -------- --------
INTEREST EXPENSE
Deposits 8,165 5,190 4,217
Long-term debt 1,215 541 13
Short-term borrowings 105 206 39
Securities sold under agreements
to repurchase 29 30 --
-------- -------- --------
TOTAL INTEREST EXPENSE 9,514 5,967 4,269
-------- -------- --------
NET INTEREST INCOME 9,034 8,190 6,629
PROVISION FOR POSSIBLE CREDIT LOSSES 810 375 640
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 8,224 7,815 5,989
-------- -------- --------
OTHER OPERATING INCOME
Loan origination fees 179 422 696
Customer service charges and fees 1,066 683 566
Mortgage servicing fees 302 221 220
Investment security gains, net 331 112 31
Gain (loss) on sale of mortgage loans, net 132 (131) 428
Other income 471 372 362
-------- -------- --------
TOTAL OTHER OPERATING INCOME 2,481 1,679 2,303
-------- -------- --------
OTHER OPERATING EXPENSES
Salaries and benefits 3,559 3,003 2,414
Equipment expense 855 602 422
Occupancy expense 1,036 923 666
FDIC assessment 222 321 282
Foreclosed asset expenses 26 44 135
Advertising 242 243 185
Other expenses 1,823 1,695 1,487
-------- -------- --------
TOTAL OTHER OPERATING EXPENSES 7,763 6,831 5,591
-------- -------- --------
<PAGE>
INCOME BEFORE PROVISION FOR INCOME
TAXES AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 2,942 2,663 2,701
PROVISION FOR INCOME TAXES 635 535 606
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 2,307 2,128 2,095
CUMULATIVE EFFECT ON PRIOR YEARS
(TO DECEMBER 31, 1992) OF A CHANGE
IN ACCOUNTING FOR INCOME TAXES -- -- (43)
------ ------ ------
NET INCOME $2,307 $2,128 $2,052
====== ====== ======
EARNINGS PER SHARE:
Income before cumulative effect of
a change in accounting principle $1.40 $1.30 $1.71
Cumulative effect of change in
accounting principle -- -- (0.04)
------ ------ ------
EARNINGS PER SHARE $1.40 $1.30 $1.67
====== ====== ======
DIVIDENDS PER SHARE $0.59 $0.55 $0.41
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,652 1,631 1,224
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
On Available-
Common Capital Retained For-Sale
Stock Surplus Earnings Securities Total
------ ------- -------- -------------- -----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1992 $502 $3,811 $5,008 $ 9,321
Net income 2,052 2,052
Issuance of 424,228 shares of
common stock 179 5,223 5,402
Change in par value 4 (4)
Cash dividends declared ($.41 per share) (503) (503)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1993 685 9,034 6,553 16,272
Net income 2,128 2,128
Issuance of 8,541 shares of common stock
through Dividend Reinvestment Plan 3 105 108
Cash dividends declared ($.55 per share) (898) (898)
Implementation of SFAS No. 115 $602 602
Change in net unrealized securities
gains (losses) (2,413) (2,413)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1994 688 9,139 7,783 (1,811) 15,799
Net income 2,307 2,307
Issuance of 16,809 shares of common stock
through Dividend Reinvestment Plan 7 252 259
Issuance of 2,099 shares of common stock
through Employee Stock Purchase Plan 1 23 24
Cash dividends declared ($.59 per share) (972) (972)
Change in net unrealized securities
gains (losses) 2,092 2,092
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1995 $696 $9,414 $9,118 $281 $19,509
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,307 $2,128 $2,052
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for possible credit losses 810 375 640
Depreciation, amortization and accretion 710 685 473
Deferred income taxes 8 85 (200)
(Increase) decrease in mortgage loans held for resale (3,286) 11,623 (6,101)
Investment securities (gains) losses, net (331) (112) (31)
Loss on sale of foreclosed assets 93 12 44
(Gain) loss on sale of leased assets (5) (2) (1)
(Gain) loss on sale of equipment 138 11 --
(Increase) decrease in accrued interest receivable 95 (615) (310)
Increase (decrease) in accrued interest payable 74 899 158
(Increase) decrease in other assets (695) (1,219) 214
Increase (decrease) in other liabilities 822 314 (397)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 740 14,184 (3,459)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities :
Proceeds from maturities 17,060 1,336 4,311
Proceeds from sales -- -- 506
Purchases (4,947) (20,001) (8,163)
Available-for-sale securities:
Proceeds from maturities 3,955 4,201 --
Proceeds from sales 18,702 19,179 --
Purchases (27,729) (17,160) --
Net (increase) decrease in loans and leases (15,229) (64,873) (23,620)
Purchases of premises and equipment (1,659) (1,666) (2,029)
Proceeds from sale of leased assets 20 15 --
Proceeds from sale of equipment 8 15 --
Proceeds from sale of foreclosed assets 448 283 1,108
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (9,371) (78,671) (27,887)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 16,572 46,133 23,881
Increase (decrease) in short-term borrowings (9,750) 4,125 5,625
Increase (decrease) in securities sold under
agreements to repurchase (600) 1,000 --
Proceeds from long-term debt 25,000 15,000 312
Principal payments on long-term debt (20,102) (62) (31)
Proceeds from issuance of common stock 283 108 5,402
Cash dividends (972) (898) (503)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 10,431 65,406 34,686
-------- -------- --------
<PAGE>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,800 919 3,340
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,719 9,800 6,460
------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $12,519 $10,719 $9,800
======= ======== ========
CASH PAID DURING THE YEAR FOR:
Interest $9,588 $5,068 $4,111
======= ======== ========
Income taxes $578 $385 $1,096
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Operations
Lake Ariel Bancorp, Inc. is a one bank holding company whose principal
subsidiary is LA Bank, N.A. LA Bank's subsidiary, LA Lease, Inc., primarily
provides equipment leases to small business entities.
The Company provides a variety of financial services to individuals and
corporate customers through its eleven branch banking offices in Wayne,
Lackawanna and Pike Counties. The Bank's primary deposit products are both
noninterest and interest-bearing demand deposits and certificates of deposit.
Its primary lending products are single-family residential loans which qualify
for sale on the secondary residential loan market.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Lake
Ariel Bancorp, Inc. and its wholly owned subsidiary, LA Bank, N.A. including its
subsidiary, LA Lease, Inc. (collectively, "Company"). All material intercompany
balances and accounts are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for possible credit losses and the
valuation of assets acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowances for possible
credit losses and foreclosed assets, management obtains independent appraisals
for significant properties.
A majority of the Company's loan portfolio consists of single-family residential
loans in the Northeastern Pennsylvania area. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed assets
are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
leases and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for possible credit losses and foreclosed assets. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for possible credit losses and foreclosed assets may change
materially in the near term.
Investment Securities
Held-to-maturity securities are bonds, notes and debentures for which the
Company has the positive intent and ability to hold to maturity. These
securities are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
<PAGE>
Government bonds held principally for resale in the near term, and
mortgage-backed securities held for sale in conjunction with the Company's
mortgage banking activities, are classified as trading account securities and
are recorded at their fair values. Unrealized gains and losses on trading
account securities are included immediately in other income. The Company neither
held nor purchased securities which would be categorized as trading account
securities for the year ended December 31, 1995.
Available-for-sale securities consist of bonds, notes, debentures and certain
equity securities not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized.
Investment gains and losses are determined using the specific identification
method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-owns
of the individual securities to their face value. The related write-downs are
included in earnings as realized losses.
Derivative Financial Instruments
The Company has no derivative financial instruments requiring disclosure under
SFAS No. 119.
Mortgage Loans Held for Resale
Mortgage loans originated and intended for resale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
These loans are sold in whole and without recourse to the Company.
Loans and Leases
Loans are reported at the principal balance outstanding, net of unearned
interest, net deferred loan fees and the allowance for possible credit losses.
Unearned interest on installment loans is recognized as income using the
actuarial method. Interest on all other loans is recognized on the accrual
basis, based on the principal amount outstanding. Loan fees, including
origination and commitment fees, less certain direct loan origination costs, are
deferred and recognized over the estimated lives of the related loans as an
adjustment to yield. The unamortized balance of these fees and costs are
included as part of the loan balance to which it relates. Prior to 1988, such
fees and costs were recognized as income or expense when collected or paid.
Impaired loans are placed in a nonaccrual status when management believes that
the collection of principal or interest is uncertain, unless the loans are both
in the process of collection and well secured. When interest accrual is
discontinued, income recorded in the current year is reversed and the accrued
interest from prior years is charged to the allowance for possible credit
losses.
Implementation of SFAS No. 114 and SFAS No. 118 related to impaired loans did
not have a material effect on the financial statements.
Allowance for Possible Credit Losses
The allowance for possible credit losses is established through a provision for
possible credit losses as a charge to operating expense. The Company provides
for possible credit losses based on an evaluation of the risk associated with
the Company's loan portfolio, prior loan loss experience, economic conditions
and other factors. Loans are charged against the allowance for possible credit
losses when management believes that the collection of principal is unlikely.
Recoveries on previously charged-off loans are added to the allowance for
possible credit losses.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of fair value minus
estimated costs to sell, or cost.
<PAGE>
Loan Servicing and Loan Servicing Rights
The Company services real estate loans, which are not included in the
accompanying consolidated balance sheet, for investors in the secondary mortgage
market. The approximate total amount of mortgages serviced amounted to
$121,375,000, $113,551,000 and $86,295,000 at December 31, 1995, 1994 and 1993,
respectively.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Routine
maintenance and repair expenditures are expended as incurred while significant
expenditures are capitalized. Depreciation expense is determined primarily on
the straight-line method over the following ranges of useful lives:
Buildings and improvements 10 to 40 years
Furniture, fixtures and equipment 5 to 20 years
Core Deposit Intangible Assets
Core deposit intangible assets are included in other assets and are being
amortized over a period of six to eight years using the straight-line method.
Amortization for 1995, 1994 and 1993 was $108,000, $108,000 and $153,000,
respectively.
Employee Benefit Plans
The Company maintains and funds a defined contribution profit-sharing plan which
covers substantially all eligible employees. The Company also adopted (effective
July 1, 1995) and maintains a 401(k) savings plan. Substantially all of the
Company's employees are eligible to participate in the profit-sharing/401(k)
savings plan on the January 1 or July 1 following their completion of six months
of service and attaining age 20 1/2.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 106, Accounting for Postretirement
Benefits other than Pensions. This statement, which was required to be adopted
no later than 1993, focuses principally on postretirement benefits. Currently,
the Company does not provide material postretirement benefits; therefore, it was
not impacted by the provisions of SFAS No. 106.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes to the tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
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.
In 1995, 1994 and 1993, the Company transferred $422,000, $367,000 and $240,000,
respectively, from its loan portfolio to foreclosed assets held for sale.
<PAGE>
During 1995, 1994 and 1993, the Company swapped $430,000, $23,479,000 and
$12,716,000, respectively, of its mortgage loans for participation certificates
of a similar amount issued by the Federal Home Loan Mortgage Corporation. These
investments do not involve the transfer of cash for cash flow purposes.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumption used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Earnings Per Share
Earnings per share is computed using the weighted average number of shares
outstanding after giving retroactive effect to the 3-for-1 stock split,
effective August 18, 1993 and the assumed exercise of stock options.. The
weighted average number of shares outstanding was 1,652,000 in 1995, 1,631,000
in 1994 and 1,224,000 in 1993.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1995
reporting format.
2. Restrictions on Cash and Due From Bank Accounts
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The average monthly balance required during 1995 and 1994 was
approximately $375,000. In addition, at December 31, 1995 and 1994, required
compensating reserve balances with correspondent banks were $1,881,000 and
$2,226,000, respectively.
Deposits with any one financial institution are insured up to $100,000. The
Company maintains cash and cash equivalents with certain other financial
institutions in excess of the insured amount.
3. Investment Securities
Debt and equity securities have been classified in the consolidated statements
of financial condition according to management's intent. The carrying amount of
securities and their approximate fair values at December 31, 1995 and 1994 were
as follows (in thousands):
December 31, 1995
-----------------
Available-for-sale securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government agencies
and corporations $43,041 $335 $169 $43,207
Obligations of states and
political subdivisions 5,810 267 8 6,069
----- --- ---- -------
Total debt securities 48,851 602 177 49,276
Equity securities 1,304 -- -- 1,304
------ ----- ---- -------
Total $50,155 $ 602 $177 $50,580
======= ======== ==== ======
<PAGE>
Held-to-maturity securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. government agencies
and corporations $11,065 $ -- $119 $10,946
Obligations of states and
political subdivisions 11,524 396 -- 11,920
------- ---- ---- ------
Total $22,589 $396 $119 $22,866
======= ==== ==== =======
December 31, 1994
-----------------
Available-for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. government agencies
and corporations $27,348 $-- $2,328 $25,020
Obligations of states and
political subdivisions 6,919 13 429 6,503
------- --- ----- ------
Total debt securities 34,267 13 2,757 31,523
Equity securities 2,619 -- -- 2,619
------ --- ------ -----
Total $36,886 $13 $2,757 $34,142
======= === ====== =======
Held-to-maturity securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. government agencies
and corporations $31,611 $ 6 $1,637 $29,980
Obligations of states and
political subdivisions 10,924 79 309 10,694
------ --- ------ -------
Total $42,535 $85 $1,946 $40,674
======= === ======= =======
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1995, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available-for-sale securities Held-to-maturity securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 3,631 $ 3,628 $- $ --
Due after one year through five years 6,358 6,429 -- --
Due after five years through ten years 9,043 9,270 2,930 3,023
Due after ten years 29,819 29,949 19,659 19,843
------- ------- ------- -------
Total $48,851 $49,276 $22,589 $22,866
======= ======= ======= =======
</TABLE>
<PAGE>
Gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows for the year ended December 31, 1995 and 1994 (in
thousands):
December 31,
------------
Gross realized gains: 1995 1994
---- ----
U.S. government agencies
and corporations $309 $ 78
Obligations of states and
political subdivisions 36 58
---- ----
Total $345 $136
==== ====
Gross realized losses:
U.S. government agencies
and corporations $ 14 $ 13
Obligations of states and
political subdivisions -- 11
---- ----
Total $ 14 $ 24
==== ====
Gross realized gains on sales of investments were $31,000 in 1993.
Investment securities carried at $20,713,000 in 1995 and $18,338,000 in 1994
were pledged to secure governmental deposits, public deposits, etc. as required
by law. There is no significant concentration of investments in any individual
security issue (excluding U.S. government and its agencies) that was in excess
of 10% of stockholders' equity.
Investment securities with an amortized cost of $19,131,000 and fair value of
$19,436,000 were transferred from the held-to-maturity category to the
available-for-sale category. In addition, investment securities with an
amortized cost of $11,298,000 and fair value of $11,302,000 were transferred
from the available-for-sale category to the held-to-maturity category.
The unamortized premiums on mortgage-backed securities amounted to $283,000 and
$110,000 as of December 31, 1995 and 1994, respectively. The unaccreted discount
on mortgage-backed securities amounted to $320,000 and $39,000 as of December
31, 1995 and 1994, respectively.
4. Loans and Leases
A summary of the outstanding loans and leases by major categories at December 31
is as follows:
(in thousands)
--------------
1995 1994
---- ----
Real estate-construction $ 4,726 $ 2,406
Real estate-mortgage 68,006 56,858
Commercial and industrial 45,210 43,269
Consumer installment 42,891 40,839
Lease financing 1,742 1,119
Unearned income (7,641) (6,947)
Unearned loan fees, net (971) (1,030)
-------- --------
Total loans and leases 153,963 136,514
Allowance for possible credit losses (1,657) (1,496)
-------- --------
Net loans and leases $152,306 $135,018
======== ========
<PAGE>
Total nonaccrual loans outstanding at December 31, 1995 were approximately
$1,703,000 as compared to $1,786,000 at December 31, 1994. Included in
nonaccrual loans are $1,216,000 of impaired loans in nonaccrual status, for
which $700,000 has been provided for in the allowance for possible credit losses
to cover potential losses from these impaired loans. At December 31, 1995 and
1994, there were no outstanding commitments to lend funds to debtors with
nonaccrual loans. At December 31, 1995 and 1994, no loans were being accounted
for as a troubled debt restructuring. Accruing loans past due ninety days or
more as to principal or interest amounted to $1,716,000 and $1,125,000 at
December 31, 1995 and 1994, respectively.
Further information regarding the balance of nonaccrual loans at December 31,
1995, and related interest payment information, is as follows (in thousands):
<TABLE>
<CAPTION>
Cash Payments Received During 1995
Were Applied As Follows:
Book Contractual Recovery
Balance Balance Interest Of Prior Reduction Of
12/31/95 12/31/95 Income Charge-Off Principal
-------- -------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Contractually past due with:
Substantial performance $ -- $ -- $ $ -- $ --
Limited performance 137 137 1 -- 51
No performance 1,091 1,291 -- -- --
Contractually current, however:
Payment of full principal or
interest in doubt 272 272 -- -- --
Other 203 203 11 -- 11
------ ------ --- ----- ----
Total $1,703 $1,903 $12 $ -- $ 62
====== ====== === ===== ====
</TABLE>
At December 31, 1995 and 1994, certain officers and directors and/or companies
in which they have 10% or more beneficial ownership were indebted to the Company
in the aggregate amount of $317,000 and $428,000, respectively. Such
indebtedness was incurred in the ordinary course of business on substantially
the same terms as those prevailing at the time for comparable transactions with
other persons. New loans in 1995 and 1994 were $19,000 and $78,000,
respectively, while payments were $130,000 and $133,000, respectively, during
the same periods.
A summary of selected loan maturities and interest sensitivity analysis at
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Maturity Distribution
And Interest Rate Sensitivity
(in thousands)
Within One Two-Five After Five
Year Years Years Total
<S> <C> <C> <C> <C>
Real estate-construction $ 4,726 $ -- $ -- $ 4,726
Commercial and industrial 7,772 8,175 29,263 45,210
------- ------ ------- -------
Total $12,498 $8,175 $29,263 $49,936
======= ====== ======= =======
Fixed interest rate $ 5,343 $1,884 $ 7,299 $14,526
Adjustable interest rate 7,155 6,291 21,964 35,410
----- ----- ------ ------
Total $12,498 $8,175 $29,263 $49,936
======= ====== ======= =======
</TABLE>
The maturity of loans is based upon contractual terms. The Company may, however,
extend the stated maturities at current rates and terms for economic or market
reasons.
<PAGE>
Changes in the allowance for possible credit losses for the years ended December
31, 1995, 1994 and 1993 were as follows:
(in thousands)
1995 1994 1993
Balance at beginning of period $1,496 $1,544 $1,254
Charge-offs:
Real estate-construction -- -- --
Real estate-mortgage 200 14 --
Commercial and industrial 294 321 211
Consumer installment 206 157 196
Lease financing -- 7 39
------ ------ ------
Total 700 499 446
------ ------ ------
Recoveries:
Real estate-construction -- -- --
Real estate-mortgage -- 2 --
Commercial and industrial 8 12 8
Consumer installment 43 58 82
Lease financing -- 4 6
------ ------ ------
Total 51 76 96
------ ------ ------
Net charge-offs 649 423 350
Provision for possible credit losses 810 375 640
------ ------ ------
Balance at end of period $1,657 $1,496 $1,544
====== ====== ======
Ratio of net charge-offs during period to
average loans outstanding during period .44% .35% .35%
====== ====== ======
5. Premises and Equipment
Premises and equipment at December 31 are summarized as follows:
(in thousands)
1995 1994
Land and land improvements $1,019 $ 1,016
Buildings and improvements 5,375 5,220
Furniture, fixtures and equipment 4,413 3,509
----- -----
Total 10,807 9,745
Less accumulated depreciation 3,022 2,730
----- -----
Net $ 7,785 $ 7,015
======= =======
Depreciation expense was $743,000, $619,000 and $424,000 in 1995, 1994 and 1993,
respectively.
<PAGE>
Certain facilities and equipment are leased under short and long-term agreements
expiring at various dates to the year 2003. Rental expenses on these operating
leases amounted to $339,000 in 1995, $274,000 in 1994 and $176,000 in 1993.
Required future minimum annual rentals under all such noncancelable operating
leases are as follows (in thousands):
1996 $ 323
1997 292
1998 233
1999 210
2000 151
Thereafter 430
---
Total $1,639
======
6. Deposits
Included in interest-bearing deposits are certificates of deposit in amounts of
$100,000 or more. There are no brokered deposits included in certificates of
deposit of $100,000 or more. These certificates of deposit and their remaining
maturities at December 31 are as follows:
(in thousands)
1995 1994
Three months or less $11,708 $ 9,664
Over three through six months 5,701 6,503
Over six through twelve months 8,213 6,424
Over twelve months 1,321 2,072
------- ------
Total $26,943 $24,663
======= =======
7. Short-term Borrowings
At December 31, 1995, outstanding short-term borrowings were $5,000,000 compared
to $9,750,000 at December 31, 1994. The maximum amount of outstanding month-end
short-term borrowings during 1995, 1994 and 1993 were $10,050,000, $11,750,000
and $5,625,000, respectively. The approximate average amount outstanding during
1995 and 1994 was $5,037,000 and $4,805,000, respectively. The average interest
rate on the balances during 1995 and 1994 were 5.66% and 4.29%, respectively.
Investment securities are pledged to collateralize the $5,000,000 in borrowings
with the Federal Home Loan Bank of Pittsburgh.
8. Long-term Debt
Long-term debt at December 31 is as follows:
(in thousands)
1995 1994
Unsecured notes, payable in
the amount of $31,200 semiannually plus accrued
interest at the New York City prime
interest rate, maturing April 22, 1998 $ 156 $ 219
Collateralized borrowings, interest
payable monthly and principal at maturity;
interest rates are both fixed and
variable and range from 6.27% to 6.69%
at December 31, 1995 15,000 15,000
------ ------
Total $15,156 $15,219
======= =======
Annual maturities of 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. Investment securities are pledged to collateralize the $15,000,000 in
borrowings with the Federal Home Loan Bank of Pittsburgh.
<PAGE>
9. Common Stock
During 1994, the Company implemented a Key Employee Stock Option Plan. Options
are granted to purchase common stock at prices not less than the fair market
value of the common stock on the date of grant. One-hundred thousand shares of
common stock have been reserved for this plan. Under the plan, 65,000 options
and 35,000 options were granted at a price of $14.49 and $15.12 per share during
the years ended December 31, 1995 and 1994, respectively.
There have been no options exercised.
The Company also reserved 50,000 shares of common stock under the Company's
Employee Stock Purchase Plan. Under the terms of the plan, employees may
purchase common stock of the Company at 85% of the fair market value. Employees
pay for their stock purchases through periodic payroll deductions subject to a
limit of 10% of base pay. During 1995, 2,099 shares were purchased under the
plan. As of December 31, 1994, there were no transactions under the plan.
A Dividend Reinvestment and Stock Purchase Plan was implemented during the year
ended December 31, 1994 to provide stockholders an opportunity to automatically
reinvest their dividends in shares of common stock. Three-hundred thousand
shares of common stock are reserved under this plan. The price per share of
common stock purchased from the Company is 95% of the fair market value on the
quarterly dividend payment date. During the years ended December 31, 1995 and
1994, 16,809 and 8,541 shares, respectively, were issued under this plan.
10. Income Taxes
The following temporary differences gave rise to the deferred tax asset included
in other assets at December 31, 1995 and 1994 (in thousands):
1995 1994
---- ----
Deferred tax assets:
Unrealized losses on available-for-sale
securities $ -- $933
Allowance for possible credit losses 385 352
Loan fees and costs 330 350
Deferred compensation 76 52
---- -----
Total 791 1,687
---- ------
Deferred tax liabilities:
Unrealized gains on available-for-
sale securities (145) --
Depreciation (204) (190)
Bond accretion (25) (22)
Leasing (130) (102)
----- -----
Total (504) (314)
----- -----
Deferred tax asset, net $287 $1,373
===== ======
The provision for income taxes is comprised of the following components (in
thousands):
Year Ended December 31,
1995 1994 1993
---- ---- ----
Current $627 $450 $806
Deferred 8 85 (200)
---- ---- ----
Total $635 $535 $606
==== ==== ====
<PAGE>
The following tabulation presents a reconciliation of the expected provision for
income taxes (in thousands), determined by using the current federal income tax
rate of 34% in 1995, 1994 and 1993 to the actual provision for income taxes
reflected in the accompanying consolidated financial statements.
Year Ended December 31,
1995 1994 1993
Provision at the expected statutory rate $1,000 $905 $918
Effect of tax-exempt income (323) (380) (314)
Other items (42) 10 2
------ ----- ------
Provision for income taxes $635 $535 $606
===== ==== ======
11. Employee Benefit Plans
The Company has an established profit-sharing plan for the benefit of its
employees. Contributions to the profit-sharing plan are made at the discretion
of the Board of Directors, funded currently, and amounted to $181,000 in 1995,
$223,000 in 1994 and $171,000 in 1993.
The Company also maintains a 401(k) savings plan. The Company contributes 50% of
the employee contribution up to 6% of compensation. The Company's 1995
contribution to this plan was $25,000.
12. Regulatory Restrictions
Various regulatory agencies require banks and bank holding companies to maintain
a leverage ratio of core capital to total assets at a prescribed level,
currently 3%. In addition, bank regulators have issued risk-based guidelines.
Under such guidelines, minimum ratios of core capital and total qualifying
capital as a percentage of risk-weighted assets and certain off-balance sheet
items of 4.00% and 8.00%, respectively, are required. At December 31, 1995, the
Company met all requirements. Core capital was $19,026,000 or 12.75% of total
risk-weighted assets, while total qualifying capital was $20,631,000 or 13.82%
of total risk-weighted assets.
The Company may not pay dividends in any year in excess of the total of the
current year's net income and the retained net income of the prior two years
without the approval of the Federal Reserve Board. Accordingly, Company
dividends in 1996 may not exceed $2,565,000 plus Company net income for 1996.
Similar banking regulations limit the amount of dividends that may be paid to
the Company by its bank subsidiary without prior approval of the Comptroller of
the Currency.
13. Off-balance Sheet Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit, interest rate or liquidity risk in excess of the amount recognized in
the consolidated balance sheet. The contract amount of these instruments
expresses the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss from nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit and financial guarantees written is represented by the contractual
amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with off-balance sheet credit risk.
<PAGE>
The financial instruments whose contract amounts represent credit risk at
December 31 were as follows (in thousands):
1995 1994
---- ----
Commitments to extend credit $14,816 $13,969
Standby letters of credit $632 $844
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company, on an
extension of credit is based on management's credit assessment of the
counterparty.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. Those guarantees are
issued primarily to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
14. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and cash equivalents approximate those assets' fair
values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgements regarding future expected
loss experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value. Mortgage loans held for resale
are valued based on available market quotations.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates its fair value.
Short-term borrowings and notes payable: The carrying amounts of short-term
borrowings and notes payable approximate their fair values.
Other liabilities: Commitments to extend credit were evaluated and fair value
was estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates.
<PAGE>
Financial Assets and Liabilities
The following represents the carrying values and estimated fair values as of
December 31, 1995:
Carrying Estimated
Value Fair Value
----- ----------
FINANCIAL ASSETS:
Cash and Cash Equivalents $12,519 $12,519
Investment Securities 73,169 73,446
Net Loans 152,306 151,495
Accrued Interest Receivable 1,971 1,971
FINANCIAL LIABILITIES:
Deposits $208,759 $210,534
Accrued Interest Payable 1,746 1,746
Short-Term Borrowings 5,000 5,000
Securities Sold Under Agreements
to repurchase 400 400
Long-term Debt 15,156 15,086
15. Change in Capital Structure
Effective August 18, 1993, the Company implemented changes in its capital
structure. The authorized number of shares of common stock was increased from
2,000,000 shares to 5,000,000 shares. In addition, the par value per share of
common stock was changed from $1.25 to $.42, thereby effecting a 3-for-1 stock
split. A transfer of $4,019 from retained earnings to common stock was made in
connection with the change in par value.
16. Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
122, Accounting for Mortgage Servicing Rights, which must be adopted as of
January 1, 1996. SFAS No. 122 requires recognition of the right to service
mortgage loans for others as an asset. Recognition of this asset increases any
future gain or decreases any future loss on the sale of mortgage loans held for
resale. In addition, future income from servicing these loans will be reduced by
the annual amortization of the amount capitalized. SFAS No. 122 will be adopted
prospectively and the Company does not expect that it will have a material
effect on net income in 1996.
17. Condensed Financial Information -Parent Company Only
Condensed parent company only financial information is as follows (in
thousands):
Condensed Balance Sheet
December 31,
1995 1994
---- ----
Assets:
Cash $ - $ 108
Investment in subsidiary 19,509 15,691
------ ------
Total Assets $19,509 $15,799
======= =======
Liabilities and Stockholders' Equity:
Stockholders' equity $19,509 $15,799
======= =======
<PAGE>
Condensed Statement of Income
Year Ended December 31,
1995 1994 1993
---- ---- ----
Earnings of Subsidiary:
Received as dividends $ 972 $ 898 $ 503
Undistributed 1,335 1,230 1,549
----- ------ ------
Net Income $2,307 $2,128 $2,052
====== ====== ======
Condensed Statement of Cash Flows
Year Ended December 31,
1995 1994 1993
---- ---- ----
Operating Activities:
Net income $2,307 $2,128 $2,052
Less undistributed earnings
of subsidiary 1,335 1,230 1,549
----- ----- -----
Net cash provided by
operating activities 972 898 503
----- ----- -----
Investing Activities:
Investment in subsidiary (391) -- (5,402)
----- ----- -----
Financing Activities:
Cash dividends paid
to stockholders (972) (898) (503)
Issuance of common stock 283 108 5,402
----- ----- -----
Net cash provided by (used in)
financing activities (689) (790) 4,899
----- ----- -----
Increase (decrease) in Cash (108) $108 $ --
Cash at Beginning of Year 108 -- --
----- ----- ----
Cash at End of Year $ -- $108 $ --
===== ======= =====
18. Contingencies
On February 5, 1996, a complaint was filed against the Bank and certain
directors and officers of the Bank. The plaintiffs demanded monetary and
punitive damages and the additional payment of plaintiffs' attorneys' fees and
disbursements and other court-related costs. The Company and the Bank expect it
to be determined that these allegations lack any merit and an unfavorable
outcome to the Company and the Bank is considered remote. Counsel representing
the Company and the Bank, while currently not able to provide a complete
evaluation of either the potential outcome or an estimate of the loss in the
event of an unfavorable outcome, advise that no information has been provided to
them that would cause them to disagree with the Company and the Bank. The
Company and the Bank intend to vigorously defend themselves against these
allegations. No provision for any liability has been made in the accompanying
financial statements as of December 31, 1995.
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Lake Ariel Bancorp, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Lake Ariel
Bancorp, Inc. and Subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lake Ariel Bancorp,
Inc. and Subsidiary as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
In 1993, the Company changed its method of accounting for income taxes by
adopting Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," and in 1994 changed its method of accounting for investments by
adopting Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
Wilkes-Barre, Pennsylvania
January 22, 1996, except for Note 18, as to which the date is February 29, 1996
<PAGE>
COMMON STOCK MARKET PRICE AND DIVIDENDS PER SHARE
Lake Ariel Bancorp, Inc. common stock is listed on the NASDAQ Stock Market under
Small-Cap Issues under the symbol "LABN" or designation "Lake Ariel." The
following table sets forth: (1) the quarterly average bid and asked prices for a
share of Bancorp's Common Stock during the periods indicated; and (2) quarterly
dividends on a share of the Common Stock with respect to each quarter since
January 1, 1994. The following quotations represent prices between buyers and
sellers and do not include retail markup, markdown or commission. They may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Average Stock Prices
-------------------- Dividends
Bid Asked Declared
--- ----- --------
<S> <C> <C> <C>
1995:
First quarter . . . . . . . . . . . . . $16.50 $17.50 $.13
Second quarter . . . . . . . . . . . $16.00 $17.00 $.13
Third quarter . . . . . . . . . . . . . $14.50 $15.50 $.14
Fourth quarter . . . . . . . . . . . . $14.75 $16.25 $.19
Average Stock Prices
-------------------- Dividends
Bid Asked Declared
--- ----- --------
1994:
First quarter . . . . . . . . . . . . . $14.00 $14.50 $.12
Second quarter . . . . . . . . . . . $13.50 $14.50 $.12
Third quarter . . . . . . . . . . . . . $15.25 $16.25 $.13
Fourth quarter . . . . . . . . . . . . $17.50 $18.50 $.18
</TABLE>
<TABLE>
<CAPTION>
MARKET MAKERS
<S> <C> <C>
Herzog, Heine, Geduld, Inc. Janney Montgomery Scott, Inc. Ryan, Beck and Co.
26 Broadway 1801 Market Street 80 Main Street
New York, NY 10004 Philadelphia, PA 19103 West Orange, NJ 07052
1-800-221-3600 1-800-526-6397 1-800-325-7926
Hopper Soliday & Co., Inc. Legg Mason Wood Walker, Inc. Wheat First Securities
1703 Oregon Pike 330 Montage Mountain Road P.O. Box 6570
Lancaster, PA 17601 Scranton, PA 18507 Glen Allen, VA 23058
1-800-526-6371 1-800-346-4346 1-800-727-0304
</TABLE>
<PAGE>
INVESTOR INFORMATION
STOCK LISTING Lake Ariel Bancorp, Inc. common stock is listed on the NASDAQ
Stock Market under Small-Cap Issues. In newspaper listings, Lake Ariel shares
are frequently listed as "Lake Ariel" or "LABN".
TRANSFER AGENT American Stock Transfer & Trust Company, 40 Wall Street, 46th
Floor, New York, New York 10005. Stockholders who may have questions regarding
their stock ownership should contact Shareholder Services at 1-800-937-5449.
DIVIDEND CALENDAR Dividends on Lake Ariel Bancorp's common stock, if approved by
the Board of Directors, are customarily paid on March 15, June 15, September 15,
and December 15.
CORPORATE OFFICE INDEPENDENT AUDITORS
Lake Ariel Bancorp, Inc. Parente, Randolph, Orlando, Carey & Associates
P.O. Box 67 46 Public Square
Lake Ariel, PA 18436 Wilkes-Barre, PA 18701
(717)698-5695 (717)820-0100
AUTOMATIC DIVIDEND REINVESTMENT PLAN Common stockholders of Lake Ariel Bancorp,
Inc. may have their dividends reinvested automatically in Lake Ariel common
shares at a 5% discount from the "Fair Market Value" on the quarterly dividend
payment date. Stockholders participating in the plan may also purchase, per
quarter, up to $2,500 in additional shares at the price per share determined on
the quarterly dividend payment date. There are no brokerage fees, commissions or
service charges on any stock purchases made by plan participants. Information
regarding the plan is available by contacting American Stock Transfer and Trust
Company, Dividend Reinvestment Department, 40 Wall Street, 46th Floor, New York,
New York 10005, 1-800-278-4353.
DIVIDEND DIRECT DEPOSIT Common stockholders of Lake Ariel Bancorp, Inc. may have
their dividends deposited electronically into their bank account by contacting
Shareholder Services, American Stock Transfer & Trust Company, 40 Wall Street,
46th Floor, New York, New York 10005, 1-800-937-5449.
SEC REPORTS AND ADDITIONAL INFORMATION Upon written request of any stockholder,
investor or analyst, a copy of the Corporation's report on Form 10-KSB for its
fiscal year ended December 31, 1995, including financial statements and the
schedules thereto, required to be filed with the Securities and Exchange
Commission, may be obtained, without charge, by contracting the Chief Financial
Officer, Lake Ariel Bancorp, Inc., P.O. Box 67, Route 191, Lake Ariel, PA 18436
(717)698-5695.
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF BANCORP
Direct Subsidiary: LA Bank, National Association, chartered
under the laws of the United States of America, a
national banking association.
Indirect Subsidiary: LA Lease, Inc., chartered under the laws of
the Commonwealth of Pennsylvania, a Pennsylvania
business corporation and wholly-owned subsidiary of LA
Bank, National Associatio
<TABLE> <S> <C>
<ARTICLE> 9
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,447
<INT-BEARING-DEPOSITS> 122
<FED-FUNDS-SOLD> 950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,580
<INVESTMENTS-CARRYING> 22,589
<INVESTMENTS-MARKET> 73,446
<LOANS> 153,963
<ALLOWANCE> 1,657
<TOTAL-ASSETS> 251,859
<DEPOSITS> 208,759
<SHORT-TERM> 5,400
<LIABILITIES-OTHER> 3,035
<LONG-TERM> 15,156
0
0
<COMMON> 696
<OTHER-SE> 18,813
<TOTAL-LIABILITIES-AND-EQUITY> 251,859
<INTEREST-LOAN> 13,112
<INTEREST-INVEST> 5,260
<INTEREST-OTHER> 176
<INTEREST-TOTAL> 18,548
<INTEREST-DEPOSIT> 8,165
<INTEREST-EXPENSE> 1,349
<INTEREST-INCOME-NET> 9,034
<LOAN-LOSSES> 810
<SECURITIES-GAINS> 331
<EXPENSE-OTHER> 7,763
<INCOME-PRETAX> 2,942
<INCOME-PRE-EXTRAORDINARY> 2,307
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,307
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 0
<LOANS-NON> 1,703
<LOANS-PAST> 1,716
<LOANS-TROUBLED> 3,419
<LOANS-PROBLEM> 1,500
<ALLOWANCE-OPEN> 1,496
<CHARGE-OFFS> 700
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 1,657
<ALLOWANCE-DOMESTIC> 1,657
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,657
</TABLE>
