<PAGE>
Rule 424 (b)(1)
333-40473
PROSPECTUS
700,000 Shares
LAKE ARIEL BANCORP, INC.
Holding Company for
[GRAPHIC OMITTED]
Common Stock
---------------------
Lake Ariel Bancorp, Inc. (the "Company") hereby offers for sale 700,000
shares of its common stock, par value $0.21 per share (the "Common Stock"), at
an offering price of $16.00 per share (the "Offering"). The Common Stock is
traded on the Nasdaq National Market under the symbol "LABN." On December 5,
1997, the last reported sale price of the Common Stock was $18.375 per share.
See "Underwriting" for information relating to determination of the offering
price in the Offering.
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 9.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Public Discount(1) Company(2)
Per Share ...... $ 16.00 $ 0.88 $ 15.12
Total(3) ...... $11,200,000 $616,000 $10,584,000
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $300,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
an additional 105,000 shares of Common Stock, on the same terms and
conditions as set forth above, to cover over-allotments. If all of such
additional shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $12,880,000, $708,400 and
$12,171,600, respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the Underwriter, subject to
prior sale, when, as and if issued to and accepted by it. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of the shares of
Common Stock will be made at the offices of Janney Montgomery Scott Inc. on or
about December 18, 1997.
JANNEY MONTGOMERY SCOTT INC.
The date of this Prospectus is December 15, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed with the Commission are available for inspection and
copying at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such documents may also be
obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, copies of such documents may be obtained through the Commission's
Internet address at http://www.sec.gov. The Common Stock is authorized for
quotation on the Nasdaq National Market and, accordingly, such materials and
other information can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission under the Securities Act of
1993, as amended (including the rules and regulations thereunder, the
"Securities Act"), a Registration Statement on Form S-2 (No. 333-40473)
(including all amendments and exhibits thereto, the "Registration Statement")
with respect to the securities offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts
of which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement, including any amendments and exhibits
thereto, is available for inspection and copying as set forth above. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company will furnish to its shareholders annual reports containing
audited financial statements and will make available copies of quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
INFORMATION INCORPORATED BY REFERENCE
There are hereby incorporated by reference into this Prospectus and made a
part hereof the following documents filed by the Company with the Commission
pursuant to the Exchange Act: (i) the Annual Report on Form 10-K for the fiscal
year ended December 31, 1996; (ii) the Proxy Statement for the 1997 Annual
Meeting of Shareholders; (iii) the Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1997; (iv) Current Reports
on Form 8-K filed on May 7 and September 19, 1997; and (v) the description of
the Common Stock contained in the Company's Registration Statement on Form 8-A
filed pursuant to Section 12 of the Exchange Act, including any amendment
thereto or report filed under the Exchange Act for the purpose of updating such
description.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Any person to whom a copy of this Prospectus is delivered may obtain
without charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents,
unless such exhibits are specifically incorporated by reference herein.
Requests should be directed to Joseph J. Earyes, CPA, Chief Financial Officer,
Lake Ariel Bancorp, Inc., Financial Center - Oppenheim Building, 409 Lackawanna
Avenue, Suite 201, Scranton, Pennsylvania 18503-2045; (717) 343-8200.
2
<PAGE>
LAKE ARIEL BANCORP, INC.
SERVICE AREA MAP OF BANKING LOCATIONS OF LA BANK, N.A.
[GRAPHIC OMITTED]
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. This summary is provided for convenience, it should not be
considered complete and is qualified in its entirety by reference to the more
detailed information contained elsewhere in this Prospectus. Cross references
in this summary are to captions appearing in the body of this Prospectus.
Except as otherwise noted, all information contained in this Prospectus assumes
the Underwriter's over-allotment option is not exercised.
The Company is a Pennsylvania business corporation headquartered in Lake
Ariel, Pennsylvania, and is a registered bank holding company. The Company was
organized in May of 1983, and has one wholly-owned subsidiary, LA Bank, N. A.
("LA Bank").
LA Bank was founded in 1910 and is a national banking association and a
member of the Federal Reserve System ("FRB"). LA Bank is a full-service
commercial bank providing a range of services, including time and demand
deposit accounts, consumer, commercial and mortgage loans, and credit cards to
individuals and small to medium-sized businesses in its Northeastern
Pennsylvania market area. LA Bank has fifteen (15) branch locations located in
Lackawanna, Monroe, Pike and Wayne Counties.
LA Bank has two subsidiaries: LA Lease, Inc., a business unit that engages
in consumer and commercial leasing; and Ariel Financial Services, Inc., a newly
formed business unit which will offer stocks, bonds, annuities and other
insurance-related products.
Since December 31, 1994, the Company has grown substantially. Total assets
have grown from $236.1 million at December 31, 1994 to $363.6 million at
September 30, 1997. Total deposits have grown from $192.2 million at December
31, 1994 to $278.1 million at September 30, 1997, while net loans have grown
from $135.0 million at December 31, 1994 to $200.1 million at September 30,
1997. The Company believes its growth has been driven by the successful
execution of its operating strategy, the key elements of which include:
Maintaining a Community Focus. Northeastern Pennsylvania represents a
stable banking market with a diversified economy. LA Bank offers
individuals and small to medium-sized businesses a wide array of banking
products, informed and friendly service, extended operating hours,
consistently applied credit policies, and local, timely decision making.
All LA Bank customers are afforded direct access to LA Bank's President and
other executive officers.
Aggressively Expanding the Branch System. Management plans to continue
developing a cohesive network of branches that will more thoroughly serve
LA Bank's designated market area and will successfully penetrate new
markets in adjacent counties and municipalities. A significant portion of
the capital raised from this Offering will be used to fund the construction
and/or acquisition of new branch locations in contiguous counties where
significant opportunities exist to capture market share.
Capitalizing on Market Dynamics; Providing Attentive and Personalized
Service. The counties in which LA Bank competes have seen a significant
number of larger competitors acquired by large, out-of-market banking
institutions (PNC Bank Corp./First Eastern Corp.; CoreStates Bank,
N.A./Third National Bank & Trust Company; Mellon Bank, N.A./United Penn
Bank; First Empire Corp./ONBANCorp/Franklin First Savings Bank; First Union
National Bank/First Fidelity). The ensuing cultural changes in these
banking institutions have resulted in a change in their product and service
offerings. The Company has capitalized on these dynamics by offering a
community banking alternative to consumers and small businesses based upon
responsiveness, informed and friendly service, and consistently applied
credit policies and complemented by timely, local decision making and
easily accessible executive management.
Building a Sales and Service Culture. The Company instills a sales and
service oriented culture in its branch and lending personnel in order to
build customer relationships and maximize cross-selling opportunities. The
Company offers meaningful sales-based incentives to all customer contact
employees.
4
<PAGE>
Attracting Highly Experienced Personnel. LA Bank's executive officers
have a combined 55 years of banking experience in the market. LA Bank's
commercial lenders have a combined 77 years of experience in providing
high-quality service to small and medium-sized businesses in the region. As
a result of continued bank consolidation in the area, LA Bank has been able
to attract and retain experienced branch and lending personnel from much
larger institutions, who prefer to work within a community-oriented
organization serving consumers and small business people.
New Financial Center. The Company has consolidated its entire operations
and administration functions in the historic Oppenheim Building in
Scranton, Pennsylvania. This newly renovated building is the focal point of
a downtown revitalization program centered around the Mall at Steamtown in
the central business district of Scranton. This downtown presence should
provide LA Bank with a much higher profile in the marketplace. In
conjunction with this relocation, LA Bank has upgraded its computer and
data processing systems to handle more than twice the account volume that
the systems are currently supporting in anticipation of future growth.
Financial highlights of the Company and LA Bank include the following:
Profitability. The Company has been profitable since its formation in
1983. Net income increased to $2.4 million for the nine months ended
September 30, 1997 from $2.3 million for the nine months ended September
30, 1996. Net income increased to $3.0 million for the year ending December
31, 1996 from $2.1 million for the year ended December 31, 1994, an
increase of 42.8%. Return on average equity has consistently been above
13.0% for the last five years and increased to 14.7% for the nine months
ended September 30, 1997 from 13.1% for the year ended December 31, 1994.
Deposit/Loan Growth. Deposits have grown from $192.2 million at December
31, 1994 to $278.1 million at September 30, 1997, an increase of 44.7%. The
Company aggressively seeks to leverage deposit inflows into new loan
originations of residential mortgage, consumer, and commercial business
loans. As a result, total loans have grown from $136.5 million at December
31, 1994 to $202.4 million at September 30, 1997, an increase of 48.2%.
Asset Quality. LA Bank maintains a strong credit culture and emphasizes
conservative underwriting standards. Despite the rapid loan growth, LA
Bank's ratio of nonperforming assets to total assets was 0.72% at September
30, 1997, compared to 1.31% at December 31, 1994, while the allowance for
possible credit losses as a percentage of net loans has remained in excess
of 1.00%. At September 30, 1997, the allowance for possible credit losses
as a percentage of net loans was 1.06%. The allowance for possible credit
losses as a percentage of nonperforming loans increased to 96.14% at
September 30, 1997 from 51.39% at December 31, 1994.
Asset/Liability Management. The Company carefully manages its asset and
liability growth and inherent interest rate risk by utilizing deposit
pricing and matched funding programs to fund loan originations and
securities purchases. As a result, the Company's securities portfolio,
which consists almost entirely of triple A rated securities, has grown to
$121.8 million at September 30, 1997 from $76.7 million at December 31,
1994. The Company believes that its investment strategy and asset/liability
modeling techniques have allowed, and will continue to allow, it to
stabilize net earnings in changing interest rate environments.
Dividends. The Company paid a cash dividend since 1983 and has
consistently increased the dividend for each year. The Company maintains a
dividend payout ratio of approximately 40.0%. In addition, the Company has
paid a special cash dividend at the end of each fiscal year for five
consecutive years. At December 31, 1996, this special cash dividend was
$0.05 per share. The expected current annual dividend rate, inclusive of
special cash dividends, is approximately $0.37 per share. The Company has
also paid 5% stock dividends in October of 1997 and 1996, and declared a
two-for-one stock split in November 1997.
LA Bank is a member of the FRB and its deposits are insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") to
the fullest extent provided by law. The Company is headquartered at P.O. Box
67, Route 191, Lake Ariel, Pennsylvania 18436, and its telephone number is
(717) 698-5695. The principal executive offices of LA Bank are located at
Financial Center - Oppenheim Building, 409 Lackawanna Avenue, Suite 201,
Scranton, Pennsylvania 18503, and its telephone number is (717) 343-8200. LA
Bank's Internet address is http://www.labank.com.
5
<PAGE>
The Offering
Common Stock offered by
the Company............. 700,000 shares
Common Stock outstanding
prior to the Offering... 3,734,766 shares
Common Stock outstanding
after the Offering..... 4,434,766 shares
Dividends................ Currently paid quarterly at the annual rate of
$0.375 per share. Purchasers in this Offering will
first be eligible to receive dividends in March
1998. See "Market For Common Stock And Related
Shareholder Matters -- Dividends."
Use of Proceeds.......... The Company intends to contribute the net proceeds
from the Offering to LA Bank. LA Bank expects to use
the net proceeds to fund branch expansion and to
support growth in its loan and securities portfolio.
The capital provided by the Offering will support
the growth of LA Bank, including future branch
expansion. See "Use Of Proceeds."
Nasdaq National Market
Symbol.................. LABN
6
<PAGE>
Summary Selected Consolidated Financial Data
The following is selected Consolidated Financial Data for the Company at
and for the nine months ended September 30, 1997 and 1996 and for each of the
five years in the period ended December 31, 1996. The following financial data
is qualified by reference to the more detailed information contained in the
consolidated financial statements and notes thereto included elsewhere herein.
See "Consolidated Financial Statements." The results of operations for the nine
months ended September 30, 1997 and 1996 are not audited but, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations of such periods
have been included. The results for the nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the full
year or for any other interim period. The data for each of the five years ended
December 31, 1996 are derived from the Company's audited, consolidated
financial statements for such periods which have been audited by Parente,
Randolph, Orlando, Carey & Associates, independent certified public
accountants.
<TABLE>
<CAPTION>
At or for the Nine
Months Ended
September 30,
-----------------------------
1997 1996
------------- --------------
(In thousands, except per
share data)
<S> <C> <C>
Income Statement Data:
Total interest income .................. $ 18,252 $ 14,924
Total interest expense .................. 9,910 7,422
--------- ----------
Net interest income ..................... 8,342 7,502
Provision for possible credit losses .... 730 425
Other operating income .................. 2,324 1,889
Other operating expenses ............... 6,774 5,853
Federal income taxes .................. 765 835
--------- ----------
Net income .............................. $ 2,397 $ 2,278
========= ==========
Per Share Data:
Earnings per share(1)(2) ............... $ 0.63 $ 0.62
Cash dividends declared per
share(2) .............................. 0.25 0.22
Book value per share(3) ............... 6.21 5.53
Average shares outstanding(2) ......... 3,839 3,698
Balance Sheet Data:
Total assets ........................... $ 363,621 $ 284,236
Total loans, net ........................ 200,221 171,488
Total securities ........................ 121,781 87,101
Total deposits ........................ 278,137 239,722
FHLB advances - long term ............... 48,328 15,125
Total shareholders' equity ............ 23,183 20,447
Performance Ratios:
Return on average assets(4) ............ 0.94% 1.12%
Return on average shareholders'
equity(4) .............................. 14.67 15.14
Net interest margin (4)(5) ............ 3.87 4.24
Total other operating expenses as a
percentage of average assets(4) ...... 2.67 2.88
Asset Quality Ratios:
Allowance for possible credit losses
as a percentage of loans, net ......... 1.06% 1.04%
Allowance for possible credit losses
as a percentage of nonperforming
loans(6) .............................. 96.14 87.16
Nonperforming loans as a percent-
age of total loans, net(6) 1.03 0.88
Nonperforming assets as a percent-
age of total assets(6) 0.72 0.80
Net charge-offs as a percentage of
average net loans ..................... 0.22 0.19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total interest income .................. $ 20,275 $ 18,548 $ 14,157 $ 10,898 $ 10,037
Total interest expense .................. 10,183 9,514 5,967 4,269 4,567
---------- ---------- ---------- ---------- ----------
Net interest income ..................... 10,092 9,034 8,190 6,629 5,470
Provision for possible credit losses .... 650 810 375 640 831
Other operating income .................. 2,706 2,481 1,679 2,303 1,613
Other operating expenses ............... 7,997 7,763 6,831 5,591 4,562
Federal income taxes .................. 1,120 635 535 606 362
---------- ---------- ---------- ---------- ----------
Net income .............................. $ 3,031 $ 2,307 $ 2,128 $ 2,052 $ 1,328
========== ========== ========== ========== ==========
Per Share Data:
Earnings per share(1)(2) ............... $ 0.82 $ 0.63 $ 0.59 $ 0.76 $ 0.52
Cash dividends declared per
share(2) .............................. 0.32 0.27 0.25 0.19 0.16
Book value per share(3) ............... 5.72 5.60 4.59 4.52 3.38
Average shares outstanding(2) ......... 3,686 3,641 3,595 2,699 2,575
Balance Sheet Data:
Total assets ........................... $ 297,906 $ 251,859 $ 236,125 $ 169,189 $ 132,690
Total loans, net ........................ 175,990 152,306 135,018 109,302 93,176
Total securities ........................ 87,000 73,169 76,677 40,151 24,107
Total deposits ........................ 253,196 208,759 192,187 146,054 122,173
FHLB advances - long term ............... 20,023 15,156 15,219 281 --
Total shareholders' equity ............ 21,172 19,509 15,799 16,272 9,321
Performance Ratios:
Return on average assets(4) ............ 1.09% 0.92% 1.04% 1.40% 1.09%
Return on average shareholders'
equity(4) .............................. 14.97 13.17 13.07 19.44 15.01
Net interest margin (4)(5) ............ 4.20 4.15 4.71 5.36 5.23
Total other operating expenses as a
percentage of average assets(4) ...... 2.89 3.09 3.35 3.81 3.72
Asset Quality Ratios:
Allowance for possible credit losses
as a percentage of loans, net ......... 1.03% 1.08% 1.11% 1.41% 1.35%
Allowance for possible credit losses
as a percentage of nonperforming
loans(6) .............................. 82.88 48.46 51.39 50.03 40.95
Nonperforming loans as a percent-
age of total loans, net(6) 1.24 2.19 2.13 2.78 3.24
Nonperforming assets as a percent-
age of total assets(6) 1.02 1.36 1.31 1.89 3.09
Net charge-offs as a percentage of
average net loans ..................... 0.30 0.45 0.35 0.35 0.79
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
At or for the Nine
Months Ended
September 30, At or for the Year Ended December 31,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
Liquidity and Capital Ratios:
<S> <C> <C> <C> <C> <C> <C> <C>
Equity to assets(7) ......... 6.43% 7.19% 7.11% 7.75% 6.69% 9.62% 7.02%
Tier 1 capital to risk-weighted
assets(8) .................. 10.46 12.44 11.72 12.75 12.47 14.56 9.67
Leverage ratio(8)(9) ......... 6.69 7.49 7.41 7.59 8.51 10.85 7.19
Total capital to risk-weighted
assets(8) .................. 11.45 13.46 12.72 13.82 13.55 15.81 10.92
Dividend payout ratio ......... 35.06 35.12 39.14 42.13 42.15 24.51 30.26
</TABLE>
- ------------
(1) Based upon average shares and common share equivalents outstanding.
(2) Average shares outstanding and per common share data are adjusted for 5%
stock dividends issued October 1, 1997 and 1996, and a two-for-one stock
split effective November 10, 1997.
(3) Based upon total shares issued and outstanding at the end of each
respective period adjusted for 5% stock dividends issued October 1, 1997
and 1996, and a two-for-one stock split effective November 10, 1997.
(4) Annualized ratios at September 30, 1997 and 1996.
(5) Represents net interest income as a percentage of average total
interest-earning assets, calculated on a tax-equivalent basis.
(6) Nonperforming loans are comprised of (i) loans which are on a nonaccrual
basis, (ii) accruing loans that are 90 days or more past due, and (iii)
restructured loans. Nonperforming assets are comprised of nonperforming
loans and foreclosed real estate (assets acquired in foreclosure).
(7) Based upon average balances for the respective periods.
(8) Based on the FRB risk-based capital guidelines, as applicable to the
Company. LA Bank is subject to similar requirements imposed by the Office
of the Comptroller of the Currency (the "OCC").
(9) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets less intangible assets.
8
<PAGE>
RISK FACTORS
When used in this Prospectus, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers that all forward-looking
statements, which speak only as of the date made, and to advise readers that
various risks and uncertainties, including regional and national economic
conditions, changes in market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected. The risks
highlighted herein should not be assumed to be the only risks that could affect
future performance of the Company. See also "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations -- Factors That May
Affect Future Results."
Ability of the Company to Implement its Growth Strategy and Manage Growth
The Company's goal is to open, on average, three new branches per year in
1998 and 1999. In the last twelve months, the Company has opened four new
branches in areas with significant concentrations of commercial activity as
part of its growth strategy. The Company believes it has in place the
management, systems, including data processing systems, internal controls and
strong credit culture to support continued growth and expansion. However, the
Company's continued growth and expansion depends on the ability of its officers
and key employees to manage such growth effectively, to attract and retain
skilled employees and to maintain adequate internal controls and a strong
credit culture. Accordingly, there can be no assurance that the Company will be
successful in achieving its expansion goals, and the failure to do so could
adversely affect the Company's financial condition and results of operations.
One result of adding new branches is an increase in noninterest expense.
These costs are associated with branch construction and renovation, increased
staffing and equipment necessary to operate new branches. Since branch
expansion is a key part of the Company's growth plans, purchasers of Common
Stock should expect noninterest expense to increase.
Limited Public Market for Common Stock
The Company's Common Stock is traded on the Nasdaq National Market.
Trading volume has averaged approximately 1,320 shares per day for the first
three quarters of 1997. Accordingly, a regular and active market has not yet
developed. Upon completion of the Offering, the number of outstanding shares of
Common Stock will increase by at least 700,000 shares. The Offering will
materially increase the number of shares of Common Stock held by
non-affiliates. However, no assurance can be given that an active market will
develop, and the price of the Common Stock may remain susceptible to short-term
volatility caused by large trades. See "Market For Common Stock And Related
Shareholder Matters" and "Security Ownership Of Certain Beneficial Owners And
Management."
Competition
LA Bank faces significant competition from many other banks, savings
institutions and other financial institutions which have branch offices or
otherwise operate in LA Bank's market area, as well as many other companies now
offering a variety of financial services. Many of these competitors have
substantially greater financial resources than LA Bank, including a larger
capital base that allows them to attract customers seeking larger loans than LA
Bank is able to make and offer services that LA Bank does not currently offer.
LA Bank also faces competition from the large number of community banks
headquartered in LA Bank's market area, which focus on the same customers and
offer similar services. See "Business -- Competition."
Reliance on Existing Management
The operations of the Company to date have been largely dependent on
existing management. The loss to the Company of one or more of its existing
executive officers could have a material adverse effect on its business and
results of operations. The Company has entered into employment agreements with
certain of the executive officers of the Company and LA Bank. See "Executive
Compensation -- Executive Employment Agreements."
9
<PAGE>
Economic Conditions and Related Uncertainties
Commercial banking is affected, directly and indirectly, by local,
domestic, and international economic and political conditions, and by
government monetary and fiscal policies. Conditions such as inflation,
recession, unemployment, volatile interest rates, tight money supply, scarce
natural resources, real estate values, international conflicts and other
factors beyond the control of the Company and LA Bank may adversely affect the
potential profitability of the Company and LA Bank. Management does not expect
any one particular factor to affect LA Bank's results of operations. However, a
continued downtrend in several areas, such as real estate, construction and
consumer spending, could have an adverse impact on LA Bank's ability to
maintain or increase profitability.
Federal and State Government Regulation
The operations of the Company and LA Bank are heavily regulated and will
be affected by present and future legislation and by the policies established
from time to time by various federal and state regulatory authorities. In
particular, the monetary policies of the FRB have had a significant effect on
the operating results of banks in the past, and are expected to continue to do
so in the future. See "Business -- Supervision and Regulation."
USE OF PROCEEDS
The net proceeds from the sale of Common Stock offered hereby are
estimated to be approximately $10,284,000 after deduction of the underwriting
discount and estimated expenses (approximately $11,871,600 if the
Underwriter's over-allotment option is exercised in full). The Company
presently intends to contribute the net proceeds to LA Bank. LA Bank expects
the net proceeds to be used to fund branch expansion and support growth in the
loan and securities portfolios. The precise amounts and timing of the
application of cash proceeds will depend, among other things, upon the funding
requirements of LA Bank and the availability of other funds. Pending
application, the net proceeds are expected to be invested in short-term
government or investment grade obligations.
10
<PAGE>
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock has been listed on the Nasdaq National Market
since November 21, 1997, and was previously listed on the Nasdaq Small-Cap
Market since December 9, 1993. The Nasdaq National Market symbol for the Common
Stock is "LABN." At September 30, 1997, the total number of holders of record
of the Common Stock was approximately 1,200.
The table below presents the high and low bid prices reported for the
Common Stock and the cash dividends declared on such Common Stock for the
periods indicated. The range of high and low prices is based on trade prices
reported on the Nasdaq Small-Cap Market. Market quotations reflect inter-dealer
prices, without retail mark-up, markdown, or commission, and may not
necessarily reflect actual transactions. On December 2, 1997, the closing price
of a share of Common Stock on the Nasdaq National Market was $17.00. All prices
and dividends have been restated to reflect the 5% stock dividends paid in
October 1997 and 1996, and the two-for-one stock split effective on November
10, 1997.
Year Quarter High Low Dividends Declared
- ----------- --------- --------- -------- -------------------
1997 3rd $14.05 $9.50 $0.09
2nd 9.75 9.50 0.08
1st 11.30 9.75 0.08
1996 4th 12.15 7.55 0.11
3rd 8.20 7.20 0.08
2nd 7.60 6.45 0.08
1st 7.70 6.70 0.08
1995 4th 6.80 6.70 0.09
3rd 7.60 6.25 0.07
2nd 7.50 7.15 0.06
1st 7.95 7.40 0.06
Dividends
Purchasers in the Offering will first be eligible to receive dividends in
March of 1998. It has been the Company's policy to pay cash dividends in March,
June, September and December of each year to shareholders of record on or about
the twenty-first day of the month prior to the month in which the dividend is
paid, as and if declared by the Company's Board of Directors out of legally
available funds. However, the continuation of this policy and the timing and
amount of future dividends will depend upon earnings, capital levels, cash
requirements, the financial condition of the Company and LA Bank, applicable
government regulations and policies and other factors deemed relevant by the
Company's Board of Directors, including the amount of dividends payable to the
Company by LA Bank.
The principal source of income and cash flow for the Company, including
cash flow to pay dividends on the Common Stock, is dividends from LA Bank.
Various federal and state laws, regulations and policies limit the ability of
LA Bank to pay dividends to the Company. For certain limitations on LA Bank's
ability to pay dividends to the Company, see "Business -- Regulatory
Restrictions on Dividends and Note 12 to the Consolidated Financial Statements
at page F-25.
11
<PAGE>
CAPITALIZATION
The following tables present the consolidated capitalization and certain
capital ratios of the Company at September 30, 1997, and, as adjusted as of
such date to give effect to the issuance and sale of the shares of Common Stock
offered hereby (after giving effect to the estimated underwriting discount, the
payment of estimated issuance expenses and assuming no exercise of the
Underwriter's over-allotment option) at an offering price of $16.00 per share.
This table should be read in conjunction with the historical consolidated
financial statements of the Company and the related notes thereto set forth
elsewhere herein.
<TABLE>
<CAPTION>
At September 30, 1997
------------------------------
Historical As Adjusted(1)
------------ ---------------
(In thousands)
<S> <C> <C>
Long-term debt ...................................................... $ 48,328 $ 48,328
======== ========
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 $0.42 par value each; 1,778,937 out-
standing shares 747 --
Authorized 10,000,000 shares of $0.21 par value each; 4,434,766 out-
standing shares -- 931
Capital surplus ...................................................... 11,408 21,508
Retained earnings ................................................... 11,049 11,049
Net unrealized gains (losses) on available-for-sale securities ...... (21) (21)
-------- --------
Total stockholders' equity .......................................... $ 23,183 $ 33,467
======== ========
Total long-term debt and stockholders' equity ........................ $ 71,511 $ 81,795
======== ========
</TABLE>
- ------------
(1) All accounts have been restated to give effect to the 5% stock dividend
paid on October 1, 1997, and the two-for-one stock split and increase in
authorized shares of the Common Stock from 5,000,000 to 10,000,000 shares
which were effective on November 10, 1997.
<TABLE>
<CAPTION>
Capital Ratios
-----------------------------------------------------------
Minimum
Actual at Regulatory
September 30, 1997 As Adjusted(1) Requirement(2)
-------------------- ---------------- -----------------
<S> <C> <C> <C>
Capital Ratios:
Tier 1 capital to risk-weighted assets ...... 10.46% 14.82%(3) 4.00%(3)
Total capital to risk-weighted assets ...... 11.45 15.79 (3) 8.00 (3)
Leverage ratio(4)(5) ........................ 6.69 9.71 5.00
</TABLE>
- ------------
(1) Assumes that the Company's total assets will increase by the amount of the
estimated net proceeds from the issuance and sale of the Common Stock
offered hereby.
(2) Based on the risk-based capital guidelines of the FRB, a bank holding
company, such as the Company, is required to maintain a Tier 1 capital to
risk-weighted assets ratio of 4.00% and a total capital to risk-weighted
assets ratio of 8.00%. LA Bank is subject to similar capital requirements
also adopted by the OCC. At September 30, 1997, the Company and LA Bank each
exceeded their respective regulatory requirements. See "Business --
Supervision and Regulation."
(3) Assumes a risk-weighted factor of 59.00% (the average risk-weighting factor
for the Company's total assets at September 30, 1997) for the net proceeds
from the issuance and sale of the Common Stock offered hereby. See
"Business -- Supervision and Regulation" for a discussion of risk-based
capital guidelines and the FRB's minimum leverage ratio requirement.
(4) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets less intangible assets.
(5) Based on the FRB's guidelines, a bank holding company, such as the Company,
generally is required to maintain a leverage ratio of 3.00% plus an
additional amount of at least 100 to 200 basis points.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
LA Bank was founded in Lake Ariel, Pennsylvania, in 1910 as the First
National Bank of Lake Ariel. A holding company, Lake Ariel Bancorp, Inc., was
organized in 1983 and the bank changed its name to LA Bank in 1993.
In 1993, LA Bank initiated a more aggressive branch expansion plan and
marketing program designed to increase its presence and market share in
existing and new markets. The Company's growth strategy relies primarily on the
further development of its community-based retail banking network. In addition
to traditional banking facilities, LA Bank anticipates opening banking
facilities inside two new Wal-Mart superstores expected to open during 1998.
Future growth plans include opening banking facilities in Luzerne County.
Luzerne County, based on FDIC deposit data for June 1996, had total deposits of
$4.4 billion. In addition, the county is dominated by large, super-regional
bank holding companies against whom LA Bank has historically competed
successfully. It is the Company's intention to develop a cohesive branch
presence supported by LA Bank's active and multi-faceted marketing programs.
The Company's long-term plan is to be the largest, locally-headquartered bank
holding company in Northeastern Pennsylvania.
During 1995, the Company's senior management team was strengthened by
naming Louis M. Martarano as Executive Vice President and Chief Operating
Officer. Mr. Martarano has been part of the Company's management team since
1981. Mr. Martarano's dedication and experience made him well positioned for
his new duties.
In January 1995, Joseph J. Earyes, CPA, joined the Company as Executive
Vice President and Chief Financial Officer. Mr. Earyes' financial and
management background as a partner in the accounting firm of Parente, Randolph,
Orlando, Carey & Associates has solidified the Company's executive management
team.
During 1996, the Company's management team was strengthened with the
hiring of John "Jack" Foley as Vice President in charge of the Company's loan
departments. Mr. Foley's experience and expertise added strength specifically
to the Company's commercial loan department.
LA Bank's most recent branch expansion was during 1996, when LA Bank
opened three branches. LA Bank's twelfth branch in Lake Wallenpaupack (Pike
County) opened in November 1996. In addition, LA Bank acquired the real estate
and deposit customer lists of the Milford (Pike County) and Mountainhome
(Monroe County) branches of PNC Bank. These branches opened in December 1996.
The expected amortization of these customer lists is $100,000 for 1997.
On May 19, 1997, the OCC granted approval to establish a new branch in
downtown Scranton (Lackawanna County). LA Bank's downtown Scranton Branch and
its new Financial Center, both located in the historic Oppenheim Building,
opened in October 1997.
Management believes that the newest additional banking offices will
continue to expand the Company's deposit base by attracting new depositors,
while providing quality service to both new and existing customers. The initial
costs associated with the branch openings, such as salaries and benefits,
advertising, overhead expenses and marketing will have a negative impact on the
Company's earnings until the growth in deposits reaches a level to offset these
expenses.
The Company has paid a cash dividend since 1983 and has consistently
increased the dividend for each year. The Company maintains a dividend payout
ratio of approximately 40.0%. In addition, the Company has paid a special cash
dividend at the end of each fiscal year for five consecutive years. At
December 31, 1996, this special cash dividend was $0.05 per share. The
expected current annual dividend rate, inclusive of special cash dividends, is
approximately $0.37 per share. The Company has also paid 5% stock dividends in
October of 1997 and 1996, and declared a two-for-one stock split in November
1997.
The following discussion and analysis of financial condition and results
of operations of the Company provides a comparison of the performance of the
Company for the periods indicated. The financial information presented should
be reviewed in conjunction with the consolidated financial statements of the
Company, including the related notes thereto, included elsewhere herein.
13
<PAGE>
Comparison of Results of Operations for the Nine Months Ended September 30,
1997 and 1996
Overview
The Company's net income for the first nine months ended September 30,
1997 was $2.4 million, 4.3% higher than the $2.3 million reported for the same
period in 1996. Net income was positively influenced by a 7.6% growth in net
interest income after provision for possible credit losses and a 23.0% growth
in other operating income. Overhead costs were $6.8 million for the nine months
ended September 30, 1997, an increase of $900,000 or 15.3% from $5.9 million
reported for the same period in 1996. Overhead costs were impacted by the
opening of the Company's three newest branch offices in the fourth quarter of
1996.
Profitability for financial institutions can be measured by the return on
average assets (ROA) and the return on average equity (ROE). On an annualized
basis, the ROA for the first nine months of 1997 was 0.94%, compared to 1.12%
for the same period in 1996. The ROE was 14.67% for the first nine months of
1997 compared to 15.14% for the same period in 1996.
Analysis of Net Interest Income
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities. The
primary sources used by the Company to fund these assets were deposits,
borrowed funds and capital. The following table provides an analysis of changes
in net interest income with regard to volume, rate and yields of
interest-bearing assets and liabilities based on daily average balances for
each period. Components of interest income and expense are presented on a tax
equivalent basis using the federal income tax rate of 34.0% for each period.
<TABLE>
<CAPTION>
For The Nine Months Ended September 30,
-------------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
Average Interest Average Interest
Balance Income/ Yield/ Balance Income/ Yield/
(1) Expense Rate (1) Expense Rate
---------- ---------- ---------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold ........................... $ 4,611 $ 196 5.68% $ 2,336 $ 93 5.32%
Deposits in Federal Home Loan Bank ......... 224 7 4.18 126 4 4.24
Investment securities:
U.S. government agencies .................. 82,274 4,340 7.05 64,050 3,250 6.78
State and municipal(2) ..................... 29,394 1,770 8.05 19,420 1,206 8.30
Other securities ........................... 2,806 114 5.43 1,427 68 6.37
-------- -------- -------- -------
Total securities ........................... 114,474 6,224 7.27 84,897 4,524 7.12
Loans and leases:
Commercial, financial and industrial ...... 61,811 4,292 9.28 47,483 3,270 9.21
Real estate-construction and mortgage ...... 90,116 5,426 8.05 78,997 4,775 8.08
Installment loans to individuals(3) ......... 34,590 2,491 9.63 33,752 2,538 10.05
Lease financing(3) ........................ 2,584 218 11.28 2,011 130 8.64
-------- -------- -------- -------
Total loans and leases ..................... 189,101 12,427 8.79 162,243 10,713 8.83
Total earning assets ........................ 308,410 18,854 8.17 249,602 15,334 8.21
Cash and due from banks ..................... 10,131 10,083
Premises and equipment ..................... 10,261 7,626
Other, less allowance for credit losses and
loan fees ................................. 9,436 4,010
-------- --------
Total assets ................................. $338,238 $271,321
======== ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For The Nine Months Ended September 30,
--------------------------------------------------------------------
1997 1996
---------------------------------- -------------------------------
Average Interest Average Interest
Balance Income/ Yield/ Balance Income/ Yield/
(1) Expense Rate (1) Expense Rate
---------- ---------- -------- --------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Liabilities and stockholders' equity:
Interest-bearing deposits:
Demand ............................................. $ 30,026 $ 460 2.05% $ 25,404 $ 391 2.06%
Savings .......................................... 38,677 585 2.02 38,825 1,168 4.02
Time ............................................. 120,441 4,804 5.33 103,740 3,902 5.03
Time over $100,000 ................................. 40,064 1,723 5.75 31,640 1,073 4.53
-------- ------ -------- -------
Total interest-bearing deposits .................. 229,208 7,572 4.42 199,609 6,534 4.38
Federal funds purchased ........................... 530 23 5.80 547 22 5.38
Short-term borrowings .............................. 591 26 5.88 3,000 113 5.04
Long-term debt .................................... 47,593 2,278 6.40 15,657 740 6.32
Securities sold under agreements to repurchase ...... 279 11 5.27 350 13 4.97
-------- ------ -------- -------
Total interest-bearing liabilities .................. 278,201 9,910 4.76 219,163 7,422 4.53
------ -------
Demand - noninterest - bearing ..................... 34,768 28,846
Other liabilities ................................. 3,490 3,253
-------- --------
Total liabilities ................................. 316,459 251,262
Stockholders' equity .............................. 21,779 20,059
-------- --------
Total liabilities and stockholders' equity ......... $338,238 $271,321
======== ========
Net interest income ................................. $8,944 $7,912
====== =======
Net interest spread ................................. 3.41% 3.68%
==== ====
Net interest margin(4) .............................. 3.87% 4.24%
==== ====
</TABLE>
- ------------
(1) Average balances have been computed using daily balances. Nonaccrual loans
are included in loan balances.
(2) Interest and yield are presented on a tax equivalent basis using a 34.0%
statutory tax rate for each period.
(3) Installment loans and leases are presented net of unearned interest.
(4) Represents the difference between interest earned and interest paid,
divided by average total earning assets (annualized).
15
<PAGE>
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and
rate components of interest income and interest expense. The following table
sets forth an analysis of volume and rate changes in net interest income for
the periods indicated. For purposes of this table, changes in interest income
and interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates.
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
1997 Compared to 1996(1)
--------------------------------
Caused by
-------------------- Total
Volume Rate Variance
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Interest income:
Federal funds sold ..................... $ 96 $ 7 $ 103
Deposits in Federal Home Loan Bank ...... 3 -- 3
Investment securities .................. 1,616 84 1,700
Loans and leases ........................ 1,587 127 1,714
------ ------ ------
Total interest income ..................... 3,302 218 3,520
------ ------ ------
Interest expense:
Demand and savings deposits ............ 66 (580) (514)
Time deposits ........................... 979 573 1,552
Borrowed funds ........................... 1,416 34 1,450
------ ------ ------
Total interest expense .................. 2,461 27 2,488
------ ------ ------
Net interest income ..................... $ 841 $ 191 $1,032
====== ====== ======
</TABLE>
- ------------
(1) The proportion of the total change attributable to volume and rate changes
during the period has been allocated to the volume and rate components
based upon the absolute dollar amount of the change in each component
prior to the allocation.
Net interest margin decreased 37 basis points to 3.87% for the nine months
ended September 30, 1997, compared to 4.24% for the nine months ended September
30, 1996, calculated on a tax-equivalent basis. Net interest margin decreased
for the reported period in 1997 as compared to the same period in 1996
primarily due to the overall volume increases in interest-bearing deposits and
long-term debt, coupled with the overall rate increase paid on all
interest-bearing liabilities. For the period ended September 30, 1997, the
average yield on interest earning assets, on a tax-equivalent basis, decreased
4 basis points to 8.17% from 8.21% for the same period in 1996.
The Company's net interest income, calculated on a tax-equivalent basis,
increased $1.0 million, or 12.7% to $8.9 million, during the nine months ended
September 30, 1997, from $7.9 million during the same period in 1996. The
increase in net interest income was primarily due to the increased volume of
earning assets. Total average earning assets increased to $308.4 million, an
increase of $58.8 million or 23.6% compared to the same period in 1996. Average
loans and leases increased to $189.1 million, an increase of $26.9 million or
16.6% compared to the same period in 1996. Average commercial loans increased
to $61.8 million, an increase of $14.3 million or 30.2%; real estate mortgage
loans increased to $90.1 million, an increase of $11.1 million or 14.1%; and
consumer loans and lease financing increased to $37.2 million, an increase of
$1.4 million or 3.9%. Commercial loan income increased to $4.3 million, an
increase of $1.0 million or 31.3%; mortgage loan income increased to $5.4
million, an increase of $651,000 or 13.6%; and consumer loan income increased
to $2.7 million, an increase of $41,000 or 1.5%.
Investment securities income increased to $6.2 million, an increase of
$1.7 million or 37.6% compared to the same period in 1996. This increase was
directly attributable to higher volume levels and increased yields. Tax exempt
state and municipal securities income increased to $1.8 million, an increase of
$564,000 or 46.8% as a result of higher volumes in tax-exempt securities. From
a Federal income tax standpoint, a mid-1996 strategy which continued into 1997
of increased investments in tax-exempt securities provided more favorable
16
<PAGE>
returns than were available in taxable securities. Income from U.S. government
agencies securities increased to $4.3 million, an increase of $1.1 million or
33.5% because of higher volume levels and increased yields. During the last
half of 1996 and the first half of 1997 the Company purchased approximately
$35.0 million of securities with funds borrowed from the FHLB. The strategy
that was employed provided a positive spread between the yield on invested
securities and the cost of borrowed funds. Gross unrealized gains on
held-to-maturity securities were approximately $721,000 while gross unrealized
losses amounted to $231,000.
Total interest expense increased to $9.9 million, an increase of $2.5
million or 33.5% compared to the same reported period in 1996. This increase
was the result of higher levels of average interest-bearing liabilities.
Average time (certificates of deposit) deposits and long-term borrowings
significantly contributed to such increase. In the aggregate, average savings
and interest-bearing demand deposits currently amount to $68.7 million or 30.0%
of interest-bearing deposits compared to $64.2 million or 33.0% for the same
reported period in 1996. Total interest expense associated with these types of
deposits decreased to $1.0 million, a decrease of $514,000 or 33.0%, during the
third quarter of 1997. Total average certificates of deposit increased to
$160.5 million, an increase of $25.1 million or 18.6% as compared to the same
reported period in 1996. This increase was primarily due to the repricing
frequency of these deposits and rate changes. Interest expense related to these
deposits increased to $6.5 million, an increase of $1.6 million or 31.2% as
compared to the same reportable period in 1996. The effect of higher average
rates resulted in a 4 basis point increase in the cost of interest-bearing
deposits from 4.38% at September 30, 1996, to 4.42% at September 30, 1997.
Average total borrowings increased to $49.0 million, an increase of $29.4
million or 150.0%, compared to $19.6 million in the third quarter of 1996. At
September 30, 1997, both short-term and long-term borrowings were used to fund
earning asset growth.
During the first nine months of 1997, the average yield on earning assets
decreased by 4 basis points and the cost of interest-bearing liabilities
increased by 33 basis points. The net effect was a 37 basis point decrease in
the net interest margin from 4.24% in 1996 to 3.87% in 1997.
Provision for Possible Credit Losses
The provision for possible credit losses is based on management's
evaluation of the allowance for possible credit losses in relation to the
credit risk inherent in the loan portfolio. In establishing the amount of
provision required, management considers a variety of factors, including, but
not limited to, general economic factors, volume of specific types of loans,
collateral adequacy and potential losses from significant borrowers. The
Company has strengthened its internal loan review process by implementing
stringent analytical standards in the review procedure. For example, management
uses a loan grading of larger loans (usually loans of $500,000 or more) to
insure the early identification of potential problem loans which could have a
potential negative impact on the future earnings of the Company. At quarterly
meetings, the loan review committee analyzes information relative to both
specific credits and the total portfolio in general. The information is used to
determine the amount to be charged to the provision, which thereby increases
the allowance for possible credit losses. For a discussion on some of the
factors that could influence management's evaluation of the allowance for
possible credit losses, see "Factors That May Affect Future Results."
At September 30, 1997 the amount charged to operating expense for the
provision for possible credit losses was $730,000 compared to $425,000 at
September 30, 1996, or an increase of 71.8%. In addition to the overall
increase in the loan portfolio, this increased provision was mainly attributed
to specific reserves being established for three commercial credits where
collateral re-evaluations have taken place due to a decline in the financial
condition of the borrowers. The provision represents management's assessment of
the risks inherent in the loan and lease portfolio while providing amounts
necessary to cover potential charge-offs. The allowance for possible credit
losses as a percentage of net loans was 1.06% at September 30, 1997 compared to
1.02% at September 30, 1996. Delinquencies were 1.03% of total loans at
September 30, 1997, compared to 0.88% at September 30, 1996.
Other Operating Income
Other operating income for the nine months ended September 30, 1997,
increased to $2.3 million, an increase of $435,000 or 23.0%, as compared to the
same reported period in 1996. Loan origination fees increased
17
<PAGE>
to $168,000, an increase of $8,000 or 5%, as compared to the same reported
period in 1996. Such increase was due to the volume of residential mortgage
loans sold for cash. Mortgage servicing fee income increased to $258,000, an
increase of $11,000 or 4.5%, as compared to the first nine months of 1996.
These fees are directly influenced by the volume of loans that are sold in the
secondary market. The net gain on sales of mortgage loans increased to $185,000
in 1997, an increase of $124,000 or 203.3% over 1996, which is indicative of
the changing market conditions during the periods in which the sales occurred.
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.
Customer service charges and fees, which include fees on demand deposit
accounts, item processing and return items, was $905,000, a decrease of $4,000
or 0.4% in the first nine months of 1997, as compared to the same period in
1996. The decrease was directly related to both the mix of consumer and
business demand deposits and the servicing fees associated with each type of
account.
Other income increased to $728,000, an increase of $259,000 or 55.2% in
the first nine months of 1997 compared to the same period in 1996. Included in
other income were earnings on directors' and officers' life insurance policies,
credit card annual fees and merchant discounts, safe deposit box rentals,
rental income on excess office space in two of the Company's branch offices,
automated teller machine surcharge income, commissions on check orders and
other general service fees. The increase was mostly attributable to automated
teller machine income, which did not exist in the same period in 1996, and
which represented $145,000 of the increase. Earnings on directors' and
officers' life insurance policies represented $95,000 of the remaining
increase.
Other Operating Expenses
Other operating expenses increased to $6.8 million, an increase of
$921,000 or 15.7%, as compared to the same reportable period in 1996. Salaries
and benefits, which represent the most significant portion of operating
expenses, increased to $3.1 million, an increase of $451,000 or 16.9%, compared
to the same reportable period in 1996. This increase was due to the additional
employees hired at the new branch offices which opened in the fourth quarter of
1996; merit increases; and the added costs associated with health care
insurance and other benefits which are provided by the Company. Occupancy
expense increased to $986,000, an increase of $187,000 or 23.4%, as compared to
the same reportable period in 1996. Equipment expense increased to $657,000, an
increase of $34,000 or 5.5%, as compared to the same reportable period in 1996.
Besides the increased cost of computer equipment and related software costs,
the increase in both of these expenses was directly related to the increase in
overhead expenses at all branch offices plus the costs associated with opening
and operating the three newest branch offices. Other expenses increased to $1.8
million, an increase of $258,000 or 16.3% over the same period in 1996 and
include such costs as legal fees, professional and audit fees and other general
operating expenses.
Provision for Income Taxes
The provision for income taxes for the nine months ended September 30,
1997 and 1996 was $765,000 and $835,000, respectively. The effective tax rate
for the third quarter of 1997 was 24.2% as compared to 26.8% in the third
quarter of 1996.
Comparison of Results of Operations for the Years Ended December 31, 1996, 1995
and 1994
Overview
Net income for 1996 increased to $3.0 million, an increase of $724,000 or
31.4% over 1995. Net income for 1995 was $2.3 million, an increase of $179,000
or 8.4% over 1994. On a per share basis, net income was $.82 in 1996, $.63 in
1995 and $.59 in 1994. Weighted average shares outstanding for 1996, 1995 and
1994 were 3,686,000, 3,641,000 and 3,595,000, respectively. Earnings per share
and weighted average shares outstanding reflect adjustment for the 5% stock
dividends paid on October 1, 1997 and 1996 and the two-for-one stock split
effective November 10, 1997.
The growth in net income during 1996 was attributable to the improvement
in net interest income, which increased to $9.4 million, an increase of $1.2
million or 14.8% over 1995, and which was coupled with an
18
<PAGE>
increase in other operating income to $2.7 million, an increase of $225,000 or
9.1% over 1995. This increase more than offset the increase in other operating
expenses to $8.0 million, an increase of $234,000 or 3.0% over 1995. The
Company continued to focus its efforts toward retail banking services within
its market area with specific attention given to increasing market share.
The growth in net income in 1995 was also attributable to the improvement
in net interest income, which increased to $8.2 million, an increase of
$409,000 or 5.2% over 1994 and which was also coupled with an increase in other
operating income to $2.5 million, an increase of $802,000 or 47.8% over 1994.
This increase more than offset the increase in other operating expenses to $7.8
million, an increase of $932,000 or 13.6% over 1994.
Analysis of Net Interest Income
In 1996, net interest income (tax-equivalent basis) increased to $10.7
million, an increase of $1.1 million or 11.9% over 1995 levels. Average loans
and leases increased to $165.3 million, an increase of $19.6 million or 13.4%
over 1995. Average commercial loans grew to $48.6 million, an increase of $4.2
million or 9.4% over 1995 levels. Interest income on commercial loans increased
to $4.6 million, an increase of $141,000 or 3.2% over 1995. This was due to
increased volume, which was only partially offset by the decreasing rates
through most of 1996. The national prime rate as reported in a national
publication published daily, an index to which the majority of these loans were
tied, was 8.25% and 8.5% at December 31, 1996 and 1995, respectively. Average
real estate loans increased 23.2%, which contributed to a 23.3% increase in
interest income on real estate loans. Average consumer loans, which included
credit card receivables, increased $232,000 or 0.6% over 1995, and resulted in
a 3.0% increase in related interest income.
Net interest income (tax-equivalent basis) for 1995 increased to $9.5
million, an increase of $760,000 or 8.7% over 1994. This increase was due to
the continued strong growth of earning assets, which grew 23.5% over 1994
levels.
On average, investment securities in 1996 increased to $85.3 million, an
increase of $4.8 million or 5.9% over 1995 levels. Investment securities in
1995 increased to $80.5 million, an increase of $19.1 million or 31.2% over
1994 levels. Income earned on investment securities increased to $6.1 million,
an increase of $330,000 or 5.7% over 1995. Income earned in 1995 increased to
$5.8 million, an increase of $1.5 million or 34.0% over 1994. As is discussed
under "Financial Condition," the asset/liability management and investment
strategies that were employed during 1996 resulted in increased holdings of
investment securities thus creating an increase in investment income. The mix
of securities in the investment portfolio changed slightly during 1996. Taxable
securities, which represented 79.0% of the investment portfolio in 1995,
decreased to 76.1% or $64.9 million in 1996. At December 31, 1996, tax-exempt
securities represented 23.9% of the portfolio compared to 21.0% in 1995 and
30.8% in 1994. In 1996, tax-exempt securities, for part of the year, provided
better after-tax investment returns than taxable issues in similar maturity and
quality ranges. In addition, from a Federal income tax standpoint, a mid-year
strategy of increased investments in tax-exempt securities provided more
favorable returns than were available in taxable securities. Accordingly,
average balances on state and municipal securities at December 31, 1996
increased to $20.4 million, an increase of $3.5 million or 20.7% over 1995.
Average balances on state and municipal securities at December 31, 1995
decreased to $16.9 million, a decrease of $2.0 million or 10.5% from $18.9
million at December 31, 1994.
Average interest-bearing deposits at December 31, 1996 increased to $203.9
million, an increase of $22.8 million or 12.6% over 1995. Average
interest-bearing deposits at December 31, 1995 increased to $181.1 million, an
increase of $34.9 million or 23.8% from $146.2 million at December 31, 1994. As
interest rates rose in 1995 and continued constant through most of 1996, more
depositors sought higher rate, longer-term deposits. Savings and
interest-bearing demand deposits at December 31, 1996 decreased to $64.2
million, a decrease of $3.0 million or 4.5% over 1995. Savings and
interest-bearing demand deposits at December 31, 1995 decreased to $67.2
million, a decrease of $4.5 million or 6.2% from $71.7 million at December 31,
1994. As a percentage of total average interest-bearing deposits, savings and
interest-bearing demand deposits represented 31.5% in 1996, 37.1% in 1995 and
49.0% 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 at
December 31, 1996 increased to $9.0 million, an increase of $784,000 or 9.6%
over 1995. Interest expense on deposits at December 31, 1995 increased to $8.2
19
<PAGE>
million, an increase of $3.0 million or 57.5% from $5.2 million at December 31,
1994. These results were reflected in the cost of funds which decreased 2.7%
from 1995 through 1996, and increased 27.0% from 1994 to 1995, while volume
increased 12.6% and 23.8%, respectively. However, interest expense as a percent
of earning assets decreased by 13 basis points from 4.14% in 1995 to 4.01% in
1996 due to the volume increase in earning assets. There were no brokered
deposits within the Company's deposit base during 1996, 1995 and 1994.
Short-term borrowings, which included federal funds purchased and
securities sold under agreements to repurchase, averaged $3.7 million in 1996,
$5.2 million in 1995 and $5.5 million in 1994. These borrowings remained
relatively constant through 1996. During 1996, borrowings of $5.0 million from
the FHLB were repaid.
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
impact on net interest margin, in spite of overall decreasing margins. The net
interest margin increased by 5 basis points to 4.20% in 1996 from 4.15% in
1995. The net interest margin was 4.71% in 1994.
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 average balances for each period. Components of interest
income and expenses are presented on a tax-equivalent basis using the statutory
federal income tax rate of 34.0% each year.
20
<PAGE>
<TABLE>
<CAPTION>
For The Year Ended December 31,
--------------------------------------------------------------------
1996 1995
-------------------------------- ----------------------------------
Average Interest Average Interest
Balance Income/ Yield/ Balance Income/ Yield/
(1) Expense Rate (1) Expense Rate
---------- ---------- -------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold .................. $ 3,124 $ 164 5.25% $ 2,889 $ 154 5.33%
Deposits in Federal Home Loan
Bank ................................. 145 6 4.14 479 22 4.59
Investment securities:
U.S. government agencies ............ 63,443 4,323 6.81 61,842 4,187 6.77
State and municipal(2) ............... 20,393 1,673 8.20 16,890 1,448 8.57
Other securities ..................... 1,460 86 5.89 1,790 117 6.54
-------- -------- -------- --------
Total investment securities ......... 85,296 6,082 7.13 80,522 5,752 7.14
Loans and leases:
Commercial, financial and
industrial(3) ..................... 48,626 4,585 9.43 44,438 4,444 10.00
Real estate-construction and
mortgage ........................... 80,395 6,557 8.16 65,250 5,318 8.15
Installment loans to individuals(4) 34,213 3,251 9.50 34,664 3,226 9.31
Lease financing(4) .................. 2,114 199 9.41 1,431 124 8.67
-------- -------- -------- --------
Total loans and leases ............ 165,348 14,592 8.83 145,783 13,112 8.99
Total earning assets .................. 253,913 20,844 8.21 229,673 19,040 8.29
Cash and due from banks. ............ 9,834 9,368
Premises and equipment ............... 7,769 7,718
Other, less allowance for credit
losses and loan fees ............... 5,438 4,343
-------- --------
Total assets ........................ $276,954 $251,102
======== ========
Liabilities and stockholders' equity:
Interest-bearing deposits:
Demand .............................. $ 25,764 $ 537 2.08% $ 25,993 $ 618 2.38%
Savings .............................. 38,472 1,549 4.03 41,186 1,524 3.70
Time ................................. 105,883 5,350 5.05 86,980 4,671 5.37
Time over $100,000 .................. 33,811 1,521 4.50 26,960 1,360 5.04
-------- -------- -------- --------
Total interest-bearing deposits ..... 203,930 8,957 4.39 181,119 8,173 4.51
Short-term borrowings ............... 3,312 174 5.25 4,698 253 5.39
Securities sold under agreements to
repurchase ........................... 338 17 5.03 546 29 5.31
Long-term debt ........................ 16,275 1,035 6.36 17,898 1,059 5.92
-------- -------- -------- --------
Total interest-bearing liabilities ... 223,855 10,183 4.55 204,261 9,514 4.66
-------- --------
Demand -- noninterest-bearing ......... 29,545 26,172
Other liabilities ..................... 3,312 3,157
-------- --------
Total liabilities ..................... 256,712 233,590
Stockholders' equity .................. 20,242 17,512
-------- --------
Total liabilities and stockholders'
equity .............................. $276,954 $251,102
======== ========
Net interest income .................. $ 10,661 $ 9,526
======== ========
Net interest spread. .................. 3.66% 3.63%
==== =====
Net interest margin(5) ............... 4.20% 4.15%
==== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994
---------------------------------
Average Interest
Balance Income/ Yield/
(1) Expense Rate
---------- --------- ----------
<S> <C> <C> <C>
Earning assets:
Federal funds sold .................. $ 1,835 $ 74 4.03%
Deposits in Federal Home Loan
Bank ................................. 121 4 3.31
Investment securities:
U.S. government agencies ............ 41,237 2,544 6.17
State and municipal(2) ............... 18,932 1,695 8.95
Other securities ..................... 1,210 53 4.38
-------- -------
Total investment securities ......... 61,379 4,292 6.99
Loans and leases:
Commercial, financial and
industrial(3) ..................... 41,975 3,655 8.71
Real estate-construction and
mortgage ........................... 52,990 4,114 7.76
Installment loans to individuals(4) 26,459 2,469 9.33
Lease financing(4) .................. 1,158 125 10.79
-------- -------
Total loans and leases ............ 122,582 10,363 8.45
Total earning assets .................. 185,917 14,733 7.91
Cash and due from banks. ............ 9,598
Premises and equipment ............... 6,489
Other, less allowance for credit
losses and loan fees ............... 1,673
--------
Total assets ........................ $203,677
========
Liabilities and stockholders' equity:
Interest-bearing deposits:
Demand .............................. $ 26,094 $ 631 2.42%
Savings .............................. 45,600 1,192 2.61
Time ................................. 58,092 2,669 4.59
Time over $100,000 .................. 16,461 698 4.24
-------- -------
Total interest-bearing deposits ..... 146,247 5,190 3.55
Short-term borrowings ............... 4,805 206 4.29
Securities sold under agreements to
repurchase ........................... 731 30 4.10
Long-term debt ........................ 10,601 541 5.10
-------- -------
Total interest-bearing liabilities ... 162,384 5,967 3.67
-------
Demand -- noninterest-bearing ......... 23,479
Other liabilities ..................... 1,535
--------
Total liabilities ..................... 187,398
Stockholders' equity .................. 16,279
--------
Total liabilities and stockholders'
equity .............................. $203,677
========
Net interest income .................. $ 8,766
=======
Net interest spread. .................. 4.24%
=====
Net interest margin(5) ............... 4.71%
=====
</TABLE>
- ------------
(1) Average balances have been computed using daily balances in 1996 and
month-end balances in 1995 and 1994. Nonaccrual loans are included in loan
balances.
(2) Interest and yield are presented on a tax-equivalent basis using a 34.0%
statutory tax rate for 1996, 1995, and 1994.
(3) Does not include recovered interest of $49,000 on nonaccrual loan paid off
during 1995.
(4) Installment loans and leases are presented net of unearned interest.
(5) Represents the difference between interest earned and interest paid,
divided by average total earning assets.
21
<PAGE>
<TABLE>
<CAPTION>
1996 Compared to 1995(1) 1995 Compared to 1994(1)
------------------------------------ ----------------------------------
Caused by Caused by
----------------------- Total ---------------------- Total
Volume Rate Variance Volume Rate Variance
--------- ----------- ---------- -------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold ..................... $ 12 $ (2) $ 10 $ 52 $ 28 $ 80
Deposits in Federal Home Loan Bank ...... (14) (2) (16) 8 10 18
Investment securities .................. 377 (47) 330 1,228 232 1,460
Loans and leases ........................ 1,663 (183) 1,480 2,005 744 2,749
------ ------- ------ ------ ------- -------
Total interest income ..................... 2,038 (234) 1,804 3,293 1,014 4,307
------ ------- ------ ------ ------- -------
Interest expense:
Demand and savings deposits ............ (108) 52 (56) (227) 546 319
Time deposits ........................... 1,283 (443) 840 2,005 659 2,664
Borrowed funds ........................... (183) 68 (115) 380 184 564
------ ------- ------ ------ ------- -------
Total interest expense ..................... 992 (323) 669 2,158 1,389 3,547
------ ------- ------ ------ ------- -------
Net interest income ........................ $1,046 $ 89 $1,135 $1,135 $ (375) $ 760
====== ======= ====== ====== ======= =======
</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.
Provision for Possible Credit Losses
The provision for possible credit losses at December 31, 1996 decreased to
$650,000, a decrease of $160,000 or 19.8% over 1995. The provision for possible
credit losses at December 31, 1995 increased to $810,000, an increase of
$435,000 or 116.0% from $375,000 at December 31, 1994. In 1996, the provision
for possible credit losses was 136.0% of net charge-offs, compared to 125.0% in
1995 and 89.0% 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 potential charge-offs.
Net charge-offs in 1996 decreased to $477,000, a decrease of $172,000 or
26.5% over 1995. Net charge-offs in 1995 increased to $649,000, an increase of
$226,000 or 53.4% from $423,000 in 1994. The net charge-offs in 1996 were
primarily attributed to the commercial real estate loan portfolio. The Company
wrote down one commercial real estate loan during 1996 which had been in
litigation for approximately one year. The net charge-offs in 1995 were
primarily attributed to the real estate mortgage loan portfolio. The Company
wrote down one commercial real estate mortgage during 1995 which had been in
litigation for approximately three years. The net charge-offs in 1994 were
primarily attributed to the commercial loan portfolio. The ratio of net
charge-offs to average loans outstanding was at 0.30% for 1996, 0 .44% for 1995
and 0.35% for 1994.
Net charge-offs on commercial and industrial loans for 1996 were $118,000
or 25.0% of net charge-offs compared to $286,000 or 44.0% of net charge-offs
for 1995 and $309,000 or 73.0% of net charge-offs for 1994. Consumer and credit
card, and real estate related debt accounted for 75.0% in 1996, 56.0% in 1995
and 27.0% in 1994, of net charge-offs, respectively.
Other Operating Income
Other operating income in 1996 increased to $2.7 million, an increase of
$225,000 or 9.1% over 1995. Other operating income in 1995 increased to $2.5
million, an increase of $802,000 or 47.8% from $1.7 million in 1994. Fees
generated from the origination and sale of residential mortgage loans provided
$266,000 or 9.8% in 1996, $179,000 or 7.2% in 1995 and $422,000 or 25.1% in
1994, of other operating income. Mortgage servicing fee income in 1996
increased to $327,000, an increase of $25,000 or 8.3% over 1995. Such income in
1995 increased to $302,000, an increase of $81,000 or 36.7% from $221,000 in
1994. These fees were directly influenced by the volume of loans that were sold
in the secondary market. Gains or losses on sales of mortgage
22
<PAGE>
loans occurred when the coupon rates on mortgage loans exceeded or fell short
of the yields required by the purchasers. The net gain of $114,000 recorded in
1996, compared with the net gain of $132,000 in 1995 and net loss of $131,000
in 1994, was 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 in 1996 increased to $1.2 million, an
increase of $151,000 or 14.2% over 1995. Such income in 1995 increased to $1.1
million, an increase of $417,000 or 61.1% from $683,000 in 1994. These fees,
which represented 45.0% of other operating income, were influenced by both
pricing changes and increases in the number of consumer and business demand
deposit accounts which increased $7.0 million or 13.4% in 1996 over 1995.
Net gains on available-for-sale securities represented approximately 1.6%
in 1996, 13.3% in 1995 and 6.7% in 1994 of other operating income,
respectively. The sales of these securities 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. These fees in 1996 increased to
$739,000, an increase of $268,000 or 57.0% over 1995. These fees in 1995
increased to $471,000, an increase of $99,000 or 26.6% from $372,000 in 1994.
Fees from credit card holders and other fee income contributed to the 1996
increase.
Other Operating Expenses
Other operating expenses in 1996 increased to $8.0 million, an increase of
$200,000 or 2.6% over 1995. Other operating expenses in 1995 increased to $7.8
million, an increase of $1.0 million or 14.7% from $6.8 million in 1994.
Salaries and benefits, which were the most significant of the noninterest
expenses, increased in each of the years reported. Salaries and benefits for
1996 increased to $3.7 million, an increase of $100,000 or 2.8% over 1995.
Salaries and benefits in 1995 increased to $3.6 million, an increase of
$600,000 or 20.0% from $3.0 million in 1994. These increases were due to the
additional staffing needs in both new and existing branch and administrative
offices, merit increases and the added costs associated with health care
insurance and other benefits which were provided by the Company.
Equipment and occupancy expenses in 1996 remained constant at $1.9 million
as compared to 1995. Such expenses in 1995 increased to $1.9 million, an
increase of $400,000 or 26.7% over 1994. Again, these increases were primarily
attributable to the growth in the number of branch offices, in addition to
overall increases in overhead expenses, maintenance costs and equipment
upgrades (including computer hardware and software) throughout the branch
network.
FDIC insurance assessments decreased from $321,000 in 1994 to $222,000 in
1995 and to $2,000 in 1996. The decrease in the FDIC insurance assessment
reflected the decision by the FDIC in late 1995 to charge well-capitalized
banks a $1,000 semi-annual membership fee without any deposit-based insurance
premium. Foreclosed asset expenses in 1996 were $51,000, an increase of $25,000
or 96.2% over 1995. The increase was a result of the acquisition of properties
in 1996 without any material dispositions. Foreclosed asset expenses in 1995
were $26,000, a decrease of $18,000 or 40.9% over 1994.
Amortization of intangible assets remained constant in 1996, 1995 and 1994
at $108,000 and was related to the premium the Company paid for the core
deposits when it acquired the Milford Township Branch office. Advertising
expenses also remained relatively constant in 1996, 1995 and 1994.
Other expenses in 1996 increased to $2.0 million, an increase of $200,000
or 11.1% over 1995. Other expenses in 1995 increased to $1.8 million, an
increase of $100,000 or 5.9% over 1994. Included in these expenses were such
costs as legal fees, professional and audit, state shares' tax, directors' fees
and other general operating expenses.
Provision for Income Taxes
The provision for income taxes in 1996 increased to $1.1 million, an
increase of $500,000 or 83.3% over 1995. The provision for income taxes in 1995
increased to $635,000, an increase of $100,000 or 18.7% from $535,000 in 1994.
The effective tax rates for 1996, 1995 and 1994 were 27.0%, 22.0% and 20.0%,
respectively.
23
<PAGE>
Financial Condition
September 30, 1997 Compared to December 31, 1996
Total assets increased to $363.6 million at September 30, 1997, an
increase of $65.7 million or 22.1% from $297.9 million at December 31, 1996.
This increase in assets was primarily attributable to a $34.8 million growth in
securities and a $24.2 million growth in net loans and leases. In addition,
other assets increased by $6.3 million principally due to the purchase of life
insurance contracts on key employees to fund simplified employee retirement
plans and officers' life insurance policies.
Investment securities increased to $121.8 million at September 30, 1997,
an increase of $34.8 million or 40.0% from $87.0 million at December 31, 1996.
This increase was attributable to an investment strategy implemented in January
1997, whereby the Company borrowed $25.0 million from the FHLB and invested in
a combination of various fixed and variable rate investments.
Total net loans increased to $200.2 million at September 30, 1997, an
increase of $24.2 million or 13.8% from $176.0 million at December 31, 1996.
Residential mortgage loans increased to $94.8 million at September 30, 1997, an
increase of $7.3 million or 8.3% from $87.5 million at December 31, 1996. This
increase was attributable to the increased mortgage loan activity during the
period, particularly during the second and third quarters of 1997, net of
mortgage loans sold during the first nine months of 1997 of approximately $20.7
million. Consumer loans, net of unearned discounts, remained relatively
constant with year-end 1996 amounts. Commercial loans increased to $65.1
million at September 30, 1997, an increase of $13.7 million or 26.5% from $51.4
million at December 31, 1996. Commercial loans consisted of loans made to small
businesses within the Company's market area and were generally secured by real
estate and other assets of the borrowers.
Total deposits increased to $278.1 million at September 30, 1997, an
increase of $24.9 million or 9.8% from $253.2 million at December 31, 1996.
Noninterest-bearing demand deposits increased to $36.9 million at September 30,
1997, an increase of $4.3 million or 13.3% from $32.5 million at December 31,
1996. In the aggregate, savings accounts and interest-bearing demand deposits
increased to $71.9 million at September 30, 1997, an increase of $7.1 million
or 10.9% from $64.8 million at December 31, 1996. As a percentage of total
deposits, savings and interest-bearing demand deposits represented
approximately 25.7% at September 30, 1997 and December 31, 1996. These deposits
continued to be very attractive to consumers because of their liquidity feature
and their competitiveness with respect to rates offered on other short-term
deposit products. Time deposits, which include certificates of deposit in
denominations of $100,000 or more, increased to $169.4 million at September 30,
1997, an increase of $13.5 million or 8.7% from $155.9 million at December 31,
1996. There were no brokered deposits within the Company's deposit base at
September 30, 1997 and December 31, 1996.
The Company considers its current deposit base to be stable and generally
consumer in nature. The deposit mix is, in general, equally distributed among
all products without any significant concentrations. For a discussion of
factors that could adversely affect the stability of the Company's current
deposit base, see "Factors That May Affect Future Results."
December 31, 1996 Compared to December 31, 1995
The Company's total assets increased to $297.9 million at December 31,
1996, an increase of $46.0 million or 18.3% from $251.9 million at December 31,
1995. The increase in assets was primarily attributable to a $23.7 million
growth in net loans and a $13.8 million increase in investment securities.
The amortized cost of investment securities (including held-to-maturity
(HTM) and available-for-sale (AFS)) increased to $87.0 million at December 31,
1996, an increase of $14.6 million or 20.1% from $72.4 million at December 31,
1995. 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. Due to the significant increase in deposits and
by again utilizing structured borrowings with the FHLB, the Company was able to
purchase both taxable and tax-exempt investments that provided a favorable
spread between the interest rate on deposits and borrowings versus the yield on
invested funds. During 1996, the Company purchased $10.0 million of securities
with funds borrowed from the FHLB. The strategy that was employed provided a
favorable spread between the rates on invested and borrowed funds. At December
31, 1996, gross unrealized gains in the HTM investments were $368,000 while
gross unrealized losses amounted to $405,000.
24
<PAGE>
Total net loans increased to $176.0 million at December 31, 1996, an
increase of $23.7 million or 15.6% from $152.3 million at December 31, 1995.
The increase in net loans was directly related to the significant growth in
commercial loans and residential mortgages. Residential mortgage loans, which
included real estate construction loans, increased to $87.6 million at December
31, 1996, an increase of $14.8 million or 20.4% from $72.7 million at December
31, 1995. Residential mortgage loans represented the most significant increase
of net loans in 1996.
Consumer loans, net of unearned discounts, increased to $39.7 million at
December 31, 1996, an increase of $2.7 million or 7.2% from $37.0 million at
December 31, 1995. 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 to
$51.5 million at December 31, 1996, an increase of $6.3 million or 13.9% from
$45.2 million at December 31, 1995. Commercial loans consisted of loans made to
small businesses within the Company's market area and were generally secured by
real estate and other assets of the borrowers.
Total deposits increased to $253.2 million at December 31, 1996, an
increase of $44.4 million or 21.3% from $208.8 million at December 31, 1995.
Noninterest-bearing demand deposits increased to $32.5 million at December 31,
1996, an increase of $5.7 million or 21.1% from $26.9 million at December 31,
1995. In the aggregate, savings and interest-bearing demand deposits decreased
to $64.8 million at December 31, 1996, a decrease of $291,000 or 1.0% from
$65.1 million at December 31, 1995. As a percentage of total deposits, savings
and interest-bearing demand deposits represented 25.6% in 1996, compared to
31.2% in 1995. Savings deposits decreased to $37.7 million at December 31,
1996, a decrease of $1.7 million or 4.3% from $39.4 million at December 31,
1995. This decrease is because of the rise in interest rates and, therefore,
certificates of deposit offered a competitive alternative for customers. Time
deposits, which include certificates of deposit in denominations of $100,000 or
more, increased to $155.9 million at December 31, 1996, an increase of $39.1
million or 33.4% from $116.8 million at December 31, 1995. As a percentage of
total deposits, these deposits increased to 61.6% in 1996 from 56.0% in 1995.
Approximately $8.3 million or 62.0% of this growth was from public funds of
school districts and local governments located within the Company's market
area.
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
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.
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.
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 Company employs
computerized net interest income simulation modeling to assist in quantifying
interest rate risk exposure. This
25
<PAGE>
process measures and quantifies the impact on net interest income through
varying interest rate changes and balance sheet compositions. 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 September 30, 1997, LA Bank maintained a one year cumulative gap of
negative $7.1 million or 2.0% of total assets. The effect of this gap position
provided a negative mismatch of assets and liabilities which can expose LA Bank
to interest rate risk during a period of rising interest rates.
<TABLE>
<CAPTION>
Interest Sensitivity Gap at September 30, 1997
-------------------------------------------------------------------------
3 months 3 through 1 through Over
or less 12 months 3 years 3 years Total
------------- ------------- ------------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ........................ $ 13,738 $ -- $ -- $ -- $ 13,738
Investment securities(1)(2) ........................ 20,239 14,710 31,411 55,451 121,811
Loans(2) .......................................... 78,087 29,184 34,428 56,178 197,877
Fixed and other assets ........................... -- -- -- 30,375 30,375
--------- -------- ------- --------- --------
Total assets .................................... $ 112,064 $ 43,894 $65,839 $ 142,004 $363,801
========= ======== ======= ========= ========
Non interest-bearing transaction deposits(3) ...... $ 9,228 $ -- 9,228 $ 18,457 $ 36,913
Interest-bearing transaction deposits(3) ......... -- 6,263 20,934 44,672 71,869
Time ............................................. 28,940 64,490 17,890 17,191 128,511
Time over $100,000 ................................. 12,142 19,724 4,598 4,419 40,883
Repurchase agreements .............................. 200 -- -- -- 200
Short-term borrowings. ........................... 9,405 314 838 1,484 12,041
Long-term debt .................................... 10,599 1,797 14,793 18,397 45,586
Other liabilities ................................. -- -- -- 4,364 4,364
--------- -------- ------- --------- --------
Total .......................................... $ 70,514 $ 92,588 $68,281 $ 108,984 $340,367
========= ======== ======= ========= ========
Interest sensitivity gap ........................... $ 41,550 $(48,694) $(2,442) $ 33,020
========= ======== ======= =========
Cumulative gap .................................... $ 41,550 $ (7,144) $(9,586) $ 23,434
========= ======== ======= =========
Cumulative gap to total assets ..................... 11.4% (2.0)% (2.6)% 6.4%
</TABLE>
- ------------
(1) Gross of unrealized gains/losses on available for sale securities.
(2) Investments and loans are included in the earlier of the period in which
interest rates were next scheduled to adjust or the period in which they
are due. In addition, loans were included in the periods in which they are
scheduled to be repaid based on scheduled amortization. For amortizing
loans and mortgage-backed securities, annual prepayment rates are assumed
reflecting historical experience as well as management's knowledge and
experience of its loan products.
(3) LA Bank's demand and savings accounts were generally subject to immediate
withdrawal. However, management considers a certain amount of such
accounts to be core accounts having significantly longer effective
maturities based on the retention experiences of such deposits in changing
interest rate environments. The effective maturities presented are the
FDICIA 305 recommended maturity distribution limits for nonmaturing
deposits.
Upon reviewing the current interest sensitivity scenario, 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. See "Factors That May Affect Future Results" for
further discussion.
26
<PAGE>
Capital
The adequacy of the Company's capital is reviewed on an ongoing basis with
regard to size, composition and quality of the Company's resources. An adequate
capital base is important for continued growth and expansion in addition to
providing an added protection against unexpected losses.
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
September 30, 1997 was 6.69% compared to 7.49% at September 30, 1996. This
decrease is the direct result of the increase in average assets in 1997 caused
by the borrowings from the FHLB which were invested in investment grade
securities. For 1997 and 1996, the ratios were well above minimum regulatory
guidelines.
As required by the federal banking regulatory 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 other off-balance sheet instruments. For the Company,
Tier I capital consists of common stockholders' equity less intangible assets,
and Tier II capital includes the allowable portion of the allowance for
possible loan losses, currently limited to 1.25% of risk-weighted assets. By
regulatory guidelines, neither Tier I nor Tier II capital reflect the
adjustment of SFAS No. 115, which requires adjustment in financial statements
prepared in accordance with generally accepted accounting principles by
including as a separate component of equity, the amount of net unrealized
holding gains or losses on debt and equity securities that are deemed to be
available-for-sale.
At September 30, 1997
-----------------------
(Dollars in thousands)
Primary capital .................. $ 23,183
Intangible assets ............... 603
---------
Tier I capital .................. 22,580
Tier II capital .................. 2,153
---------
Total risk-based capital ......... $ 24,733
=========
Total risk-weighted assets ...... $ 215,922
Tier I ratio ..................... 10.46%
Risk-based capital ratio ......... 11.45%
Tier I leverage ratio ............ 6.69%
Regulatory guidelines require that core capital and total risk-based
capital must be at least 4.0% and 8.0%, respectively.
Liquidity and Funds Management
Liquidity management is to ensure that adequate funds will be available to
meet anticipated and unanticipated deposit withdrawals, debt servicing
payments, investment commitments, commercial and consumer loan demand and
ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short- and
long-term borrowings and repurchase agreements. Regular loan payments are a
dependable source of funds, while the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates.
At September 30, 1997, the Company maintained $13.7 million in cash and
cash equivalents (including Federal funds sold) in the form of cash and due
from banks (after reserve requirements). In addition, the Company had $4.0
million of mortgage loans held for resale and $63.9 million in AFS securities.
This combined total of $81.6 million represented 22.4% of total assets at
September 30, 1997. 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. The
27
<PAGE>
Company will continue to promote the acquisition of deposits through its branch
offices. At September 30, 1997, approximately 76.5% of the Company's assets
were funded by core deposits acquired within its market area. An additional
6.4% of the assets were funded by the Company's equity. These two components
provide a substantial and stable source of funds.
Net cash used in operating activities was $5.8 million for the nine months
ended September 30, 1997, as compared to net cash provided by operating
activities of $3.9 million for the comparable period in 1996. This $9.7 million
decrease is primarily related to a net $4.5 million increase in the change in
mortgage loans held for resale and a net $6.0 million increase in the change in
other assets. Net cash used in investing activities increased $21.9 million for
the nine months ended September 30, 1997, from $36.4 million to $58.3 million,
which was primarily attributable to purchases of investment securities. Net
cash provided by financing activities increased $31.4 million from 1996. A net
increase in FHLB borrowings of $30.0 million and short-term borrowings of $9.5
million was used to fund investment purchases. A net decrease in the growth of
deposits of $6.0 million was the other major component impacting funds provided
by financing activities.
Future Outlook
In 1995, interest rates began moving steadily upward as the FRB tightened
its monetary policy. In early 1995, interest rates rose and continued rising
through the middle of the year, with the national prime lending rate peaking at
9.0%. The national prime lending rate fell to 8.5% at December 31, 1995,
falling again to 8.25% in February 1996, where it remained at December 31,
1996. In March 1997, the national prime lending rate increased to its current
level of 8.5%. Management and the Board of Directors do not have the ability to
determine if another rate increase will occur; however, the Company believes it
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 banking and financial services industries are constantly changing. The
Company is not aware of any pending pronouncements that would have a material
impact on the results of operations.
Beginning September 1995, bank holding companies are permitted to acquire
banks in other states without regard to state law. In addition, banks can merge
with other banks in another state beginning in September 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 LA Bank by the OCC in 1997 resulted in no
significant findings and no impact is anticipated on current or future
operations.
The FDIC Board of Directors voted on November 26, 1996, to retain the
existing BIF assessment schedule of 0 to 27 basis points (annual rates) for the
first semiannual period of 1997, and to collect an assessment against BIF
assessable deposits to be paid to the Financing Corporation ("FICO"). In
addition, the Board eliminated the $2,000 minimum annual assessment and
authorized the refund of the fourth-quarter minimum assessment of $500 paid by
certain BIF-insured institutions on September 30, 1996. LA Bank's current and
future FDIC BIF assessment is expected to be $0; however, the FICO assessment
for 1997 is expected to be approximately $30,000.
The Company's twelfth branch in Lake Wallenpaupack (Pike County) opened in
November 1996. In addition, the Company acquired the real estate and deposit
customer lists of the Milford (Pike County) and Mountainhome (Monroe County)
branches of PNC Bank. These branches opened in December 1996. The expected
amortization of the customer lists is $100,000 for 1997.
On May 19, 1997, the OCC granted approval to establish a new branch in
downtown Scranton (Lackawanna County). LA Bank's downtown Scranton Branch and
its new Financial Center, both located in the historic Oppenheim Building,
opened in October 1997.
Management is hopeful that the newest additional banking offices will
continue to expand the Company's deposit base by attracting new depositors,
while providing quality service to both new and existing customers. The initial
costs associated with the branch openings, such as salaries and benefits,
advertising, overhead expenses and marketing will have a negative impact on the
Company's earnings until the growth in deposits reaches a level to offset these
expenses.
28
<PAGE>
Management's belief is that a significant impact on earnings depends on
its ability to react to changes in interest rates. Through its ALCO, the
Company continually monitors interest rate sensitivity of its earning assets
and interest-bearing liabilities to minimize any adverse effects on future
earnings.
Factors That May Affect Future Results
General
Banking is affected, directly and indirectly, by local, domestic and
international economic and political conditions, and by government monetary and
fiscal policies. Conditions such as inflation, recession, unemployment,
volatile interest rates, tight money supply, real estate values, international
conflicts and other factors beyond the control of the Company may adversely
affect the future results of operations of the Company. Management does not
expect any one particular factor to affect results of operations. A downward
trend in several areas, however, including real estate, construction and
consumer spending, could have an adverse impact on the Company's ability to
maintain or increase profitability. Therefore, there is no assurance that the
Company will be able to continue their current rates of income and growth. See
"Business-Allowance For Possible Credit Losses."
Interest Rates
The Company's earnings depend, to a large extent, upon net interest
income, which is primarily influenced by the relationship between its cost of
funds (deposits and borrowings) and the yield on its interest-earning assets
(loans and investments). This relationship, known as the net interest spread,
is subject to fluctuate and is affected by regulatory, economic and competitive
factors which influence interest rates, the volume, rate and mix of
interest-earning assets and interest-bearing liabilities, and the level of
nonperforming assets. As part of its interest rate risk management strategy,
management seeks to control its exposure to interest rate changes by managing
the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities. Through its asset/liability committee, the
Company continually monitors interest rate sensitivity of its earning assets
and interest-bearing liabilities to minimize any adverse effects on future
earnings.
As of September 30, 1997, total interest-earning assets maturing or
repricing within one year were less than total interest-bearing liabilities
maturing or repricing in the same period by $7.1 million, representing a
cumulative one-year interest rate sensitivity gap as a percentage of total
assets of negative 2.0%. This condition suggests that the yield on the
Company's interest-earning assets should adjust to changes in market interest
rates at a slower rate than the cost of the Company's interest-bearing
liabilities. Consequently, the Company's net interest income could decrease
during periods of rising interest rates. See "Interest Rate Risk Management."
Adequacy of Allowance for Possible Credit Losses
In originating loans, there is a likelihood that some credit losses will
occur. This risk of loss varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness and debt
servicing capacity of the borrower over the term of the loan and, in the case
of a collateralized loan, the value and marketability of the collateral
securing the loan. Management maintains an allowance for possible credit losses
based on, among other things, historical loan loss experience, known inherent
risks in the loan portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and an
evaluation of current economic conditions. Management believes that the
allowance for possible credit losses is adequate. There can be no assurance
that nonperforming loans will not increase in the future.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from
most commercial and industrial companies that have significant investments in
fixed assets or inventories. Management believes that the most significant
impact of inflation on financial results is the Company's ability to react to
changes in interest rates. As discussed previously, management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest
income from being affected by wide interest rate fluctuations.
29
<PAGE>
New Financial Accounting Standards
Mortgage Servicing Rights
In 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which amends Statement No. 65, "Accounting for Certain Mortgage
Banking Activities." The Statement applies to all mortgage banking activities
in which a mortgage loan is originated or purchased and then sold or
securitized with the right to service the loan retained by the seller. The
total cost of the mortgage loans is allocated between the mortgage servicing
rights and the mortgage loans based on their relative fair values. The mortgage
servicing rights are capitalized as assets and amortized over the period of
estimated net servicing income. Additionally, they are subject to an impairment
analysis based on their fair value in future periods. The Statement was
effective for transactions in which mortgage loans are sold or securitized
beginning January 1, 1996. The impact on the Company's financial position and
results of operations will be dependent upon the future volume of mortgage
loans sold with servicing rights retained. In 1996 and 1997, the impact was
immaterial.
Stock-Based Compensation
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard provides the Company with a choice of how to
account for the issuance of stock options and other stock grants. The Statement
encourages companies to account for stock options at their fair value and
recognize the expense as compensation over the service period, but also permits
companies to follow existing accounting rules under Accounting Principles Board
("APB") Opinion No. 25. Companies electing to follow APB Opinion No. 25 rules
will be required to disclose pro forma net income and earnings per share
information as if the new fair value approach had been adopted. The Company is
continuing to follow existing accounting rules under APB Opinion No. 25 for
options granted, with pro forma disclosure in the footnotes to the consolidated
financial statements.
Earnings Per Share and Capital Structure
In 1997, the FASB issued Statement No. 128, "Earnings Per Share" and
Statement No. 129, "Disclosure of Information about Capital Structure." Both
Statements are effective for periods ending after December 15, 1997. Statement
No. 128 is designed to simplify the computation of earnings per share and will
require disclosure of "basic earnings per share" and, if applicable, "diluted
earnings per share." Earlier application is not permitted for Statement No. 128
and it will require restatement of all prior period earnings per share data
when adopted. The Statement is not expected to materially impact the reported
earnings per share of the Company. The adoption of Statement No. 129 will have
no impact on the Company.
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement No. 130 requires that all items that are
required to be recognized as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for
that financial statement, but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. The impact of this Statement on the Company would be to
require additional disclosures in the Company's financial statements.
Operating Segment Disclosure
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement No. 131 is effective for
periods beginning after December 15, 1997. The impact, if any, of this
Statement on the Company will be to require additional disclosures in the
Company's financial statements.
30
<PAGE>
BUSINESS
General
The Company is a Pennsylvania business corporation headquartered in Lake
Ariel, Pennsylvania, and is a registered bank holding company. The Company was
organized in May of 1983, and has one wholly-owned subsidiary, LA Bank, N.A.
LA Bank was organized in 1910 and is a national banking association and a
member of the FRB. LA Bank's deposits are insured by the FDIC to the fullest
extent provided by law. LA Bank is a full-service commercial bank providing a
range of services, including time and demand deposit accounts, consumer,
commercial and mortgage loans, and credit cards to individuals and small to
medium-sized businesses in its Northeastern Pennsylvania market area. LA Bank
has fifteen (15) branch locations located in Lackawanna, Wayne, Pike and
Monroe Counties.
LA Bank has two subsidiaries: LA Lease, Inc., a business unit that engages
in consumer and commercial leasing; and Ariel Financial Services, Inc., a newly
formed business unit offering stocks, bonds, annuities and other
insurance-related products.
At September 30, 1997, the Company had total assets, total deposits, net
loans, and stockholder's equity of $363.6 million, $278.1 million, $200.1
million, and $23.1 million, respectively.
Market Overview
LA Bank's market area is a five county region consisting of Lackawanna,
Luzerne, Monroe, Pike, and Wayne Counties in the Northeast corner of
Pennsylvania. This area has a combined population of 646,000 residents and
includes the cities of Scranton and Wilkes-Barre, the region's two largest
municipalities with populations of 85,000 and 50,000, respectively.
As of June 30, 1996, there were 34 banking institutions operating a total
of 278 branches and having total deposits of $9.6 billion in the four county
area in which LA Bank currently has its branch offices. LA Bank's six
Lackawanna County branches have 3.7% of the total deposits in the county, the
three Pike County branches have 12.7% of the total deposits in the county, and
the two Wayne County branches had approximately 13.1% of the total deposits in
the county. LA Bank's twelfth branch in Lake Wallenpaupack (Pike County) opened
in November 1996. In December 1996, the Company acquired two branches from a
larger, super-regional bank holding company, one in Pike County and one in
Monroe County. LA Bank's downtown Scranton branch and its new Financial Center,
both located in the historic Oppenheim Building, opened in October 1997.
Operating Strategy
Since December 31, 1994, the Company has grown substantially. Total assets
have grown from $236.1 million at December 31, 1994 to $363.6 million at
September 30, 1997. Total deposits have grown from $192.2 million at December
31, 1994 to $278.1 million at September 30, 1997, while net loans have grown
from $135.0 million at December 31, 1994 to $200.1 million at September 30,
1997. The Company believes its growth has been driven by the successful
execution of its operating strategy, the key elements of which include:
Maintaining a Community Focus
Northeastern Pennsylvania represents a stable banking market with a
diversified economy. LA Bank offers individuals and small to medium-sized
businesses a wide array of banking products, informed and friendly service,
extended operating hours, consistently applied credit policies, and local,
timely decision making. All LA Bank customers are afforded direct access to LA
Bank's President and other executive officers.
31
<PAGE>
Aggressively Expanding the Branch System
Management plans to continue developing a cohesive network of branches
that will more thoroughly serve LA Bank's designated market area and will
successfully penetrate new markets in adjacent counties and municipalities. A
significant portion of the capital raised from this offering will be used to
fund the construction and/or acquisition of new branch locations in contiguous
counties where significant opportunities exist to capture market share.
Capitalizing on Market Dynamics; Providing Attentive and Personalized Service
The counties in which LA Bank competes have seen a significant number of
larger competitors acquired by large, out-of-market banking institutions (PNC
Bank Corp./First Eastern Corp.; CoreStates Bank, N.A./Third National Bank &
Trust Company; Mellon Bank, N.A./United Penn Bank; First Empire
Corp./ONBANCorp/Franklin First Savings Bank; First Union National Bank/First
Fidelity). The ensuing cultural changes in these banking institutions have
resulted in a change in their product and service offerings. The Company has
capitalized on these dynamics by offering a community banking alternative to
consumer and small businesses based upon responsiveness, informed and friendly
service, and consistently applied credit policies and complemented by timely,
local decision making and easily accessible executive management.
Building a Sales and Service Culture
The Company instills a sales and service oriented culture in its branch
and lending personnel in order to build customer relationships and maximize
cross-selling opportunities. The Company offers meaningful sales-based
incentives to all its customer contact employees.
Attracting Highly Experienced Personnel
LA Bank's executive officers have a combined 55 years of banking
experience in the market. LA Bank's commercial lenders have a combined 77 years
of experience in providing high-quality service to small and medium-sized
businesses in the region. As a result of continued bank consolidation in the
area, LA Bank has been able to attract and retain experienced branch and
lending personnel from much larger institutions, who prefer to work within a
community oriented organization serving consumers and small business people.
New Financial Center
The Company has consolidated its entire operations and administration
functions in the historic Oppenheim Building in Scranton, Pennsylvania. This
newly renovated building is the focal point of a downtown revitalization
program centered around the Mall at Steamtown in the central business district
of Scranton. This downtown presence should provide LA Bank with a much higher
profile in the marketplace. In conjunction with this relocation, LA Bank has
upgraded its computer and data processing systems to handle more than twice the
account volume that the systems are currently supporting in anticipation of
future growth.
Products and Services
LA Bank offers a range of commercial and retail banking services to its
customers, including personal and business checking and savings accounts,
certificates of deposit, residential mortgage, and consumer and commercial
loans. While LA Bank's borrowing customers typically borrow between $5,000 and
$100,000, LA Bank's legal lending limit is $3.5 million. LA Bank will seek to
arrange larger loans on a participation basis with other financial
institutions. In addition, LA Bank provides travelers' checks, wire transfers,
and other typical banking services. LA Bank is a member of the MAC/Plus
network, provides clients with access to automated teller machines worldwide,
and makes credit cards and VISA CheckCards available to its customers.
LA Bank's leasing subsidiary offers consumer and commercial leasing to
both bank and non-bank customers. Leasing products are available for personal
and commercial vehicles, equipment and machinery. LA Bank's brokerage
subsidiary will offer (pending OCC approval) bank customers access to mutual
funds, stocks, bonds, and other securities, as well as, annuities, whole life
insurance and other alternative investment vehicles.
32
<PAGE>
Branch Expansion Plans and Growth Strategy
The Company has achieved its rapid expansion and market penetration by
expanding its branch presence into those markets in which it has identified
growth opportunities. Management's goal when establishing a new branch is to
achieve a deposit base whereby the branch will become profitable in three years
or less. LA Bank opened its Lake Wallenpaupack Branch in Wayne County in
November 1996, and its Milford and Mountainhome Branches in Pike and Monroe
Counties, respectively, in December 1996. LA Bank's Scranton branch in
Lackawanna County is located in the historic Oppenheim Building and opened for
business on October 8, 1997.
The Company currently is opening approximately 50 new accounts per day and
seeks to acquire new customers and new accounts by leveraging its marketing
strategy which highlights LA Bank's attractive product offerings and its
personalized approach to community banking. The Company believes that its
product offerings, which feature market competitive interest rates on selected
products, low minimum balance requirements, and discounted loan fees, coupled
with its continued introduction of new products, such as its VISA CheckCard,
will continue to contribute to account and deposit growth. LA Bank's goal is to
leverage deposit inflows into new loan originations. Since December 31, 1994,
deposits have grown 44.7% from $192.2 million to $278.1 million at September
30, 1997. Net loans have grown 48.2% from $135.0 million at December 31, 1994
to $200.1 million at September 30, 1997.
Year 2000 Compliance; Management Information Systems
The Board of Directors has established a Year 2000 compliance committee to
address the risks of the critical internal bank systems that are affected by
date sensitive applications, as well as external systems provided by third
parties. A comprehensive plan was developed detailing the sequence of events
and actions to be taken as the Year 2000 approaches.
In October 1997, the Company purchased and installed an upgrade to its
current systems to improve efficiencies of operations and position itself for
future growth. The cost of the new system was approximately $775,000.
Preconversion testing demonstrated that the new hardware and software are Year
2000 compliant. Further testing will be performed as needed to ensure future
hardware upgrades or software additions meet the same level of compliance.
Loan Portfolio
The Company's loan portfolio consists of commercial loans, residential
one-to-four-family mortgage loans, home equity lines of credit, and consumer
loans. Commercial loans are primarily made to small businesses and
professionals in the form of term loans and for working capital purposes with
maturities generally between one and five years. The majority of these
commercial loans are collateralized by real estate and further secured by
personal guarantees. In 1996, the Company originated $19.0 million in
commercial loans.
The Company is one of the largest originators of residential mortgage
loans in its Northeastern Pennsylvania market area. In 1996, the Company
originated $40.0 million in residential mortgage loans. Substantially all
30-year fixed rate mortgages are resold in the secondary market. The Company
retains servicing rights on those loans sold in the secondary market.
The Company's net loans at September 30, 1997 totaled $200.2 million, an
increase of $24.2 million, or 13.8%, compared to net loans at December 31, 1996
of $176.0 million. This follows an increase of $23.7 million, or 15.5%, from
the $152.3 million amount of net loans at December 31, 1995. These increases
reflect continued loan demand from the Company's target customers.
33
<PAGE>
The following tables set forth (i) the Company's loans by major categories
as of the dates indicated and (ii) the Company's loan origination activity by
major categories for the periods indicated:
Loan Portfolio Composition
<TABLE>
<CAPTION>
At September 30, At December 31,
------------------------ ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate -- construction ... $ 5,023 $ 4,258 $ 3,214 $ 4,726 $ 2,406 $ 3,547 $ 3,146
Real estate -- mortgage ......... 88,681 86,454 84,352 68,006 56,858 47,573 37,922
Commercial and industrial ...... 65,141 40,822 51,485 45,210 43,269 39,259 35,043
Consumer installment ............ 47,093 48,510 45,170 42,891 40,839 24,020 21,273
Lease financing ............... 3,770 2,235 2,588 1,742 1,119 1,313 1,417
Unearned income ............... (6,681) (8,058) (8,091) (7,641) (6,947) (3,812) (3,687)
Unearned loan fees, net ......... (653) (966) (898) (971) (1,030) (1,054) (684)
-------- -------- -------- -------- -------- -------- --------
Total loans and leases ......... 202,374 173,255 177,820 153,963 136,514 110,846 94,430
Allowance for possible credit
losses ........................ (2,153) (1,767) (1,830) (1,657) (1,496) (1,544) (1,254)
-------- -------- -------- -------- -------- -------- --------
Net loans and leases ............ $200,221 $171,488 $175,990 $152,306 $135,018 $109,302 $ 93,176
======== ======== ======== ======== ======== ======== ========
</TABLE>
Loan Originations
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial:
Real estate secured/construction ...... $19,339 $ 6,890 $ 8,768 $ 2,153 $ 6,164
Non-real estate secured/unsecured ...... 15,538 6,910 10,510 10,452 3,152
------- ------- ------- ------- -------
Total commercial ..................... $34,877 $13,800 $19,278 $12,605 $ 9,316
======= ======= ======= ======= =======
Residential:
Mortgages .............................. $22,969 $24,564 $28,498 $15,341 $24,396
Construction ........................... 11,288 8,939 11,896 2,684 --
------- ------- ------- ------- -------
Total residential ..................... $34,257 $33,503 $40,394 $18,025 $24,396
======= ======= ======= ======= =======
Consumer:
Installment ........................... $14,877 $16,118 $21,152 $16,969 $16,966
Home equity lines-secured ............... 4,177 3,078 3,859 2,743 4,119
Lines of credit-unsecured ............... 154 264 355 171 131
------- ------- ------- ------- -------
Total consumer ........................ $19,208 $19,460 $25,366 $19,883 $21,216
======= ======= ======= ======= =======
</TABLE>
34
<PAGE>
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of the dates indicated,
which are due in (i) one year or less, (ii) more than one year through five
years and (iii) over five years, is shown in the following table. Loan balances
are also categorized according to their sensitivity to changes in interest
rates.
<TABLE>
<CAPTION>
At September 30, 1997 At December 31, 1996
-------------------------------------------- -------------------------------------------
Within Two- After Within Two- After
One Five Five One Five Five
Year Years Years Total Year Years Years Total
--------- -------- --------- --------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction ...... $ 5,023 $ -- $ -- $ 5,023 $ 3,214 $ -- $ -- $ 3,214
Commercial and industrial ...... 13,396 7,449 44,296 65,141 11,590 7,633 32,262 51,485
------- ------ ------- ------- ------- ------ ------- -------
Total ........................ $18,419 $7,449 $44,296 $70,164 $14,804 $7,633 $32,262 $54,699
======= ====== ======= ======= ======= ====== ======= =======
Fixed interest rate ............ $ 5,312 $3,208 $ 8,895 $17,415 $ 4,075 $2,943 $ 6,821 $13,839
Adjustable interest rate ...... 13,107 4,241 35,401 52,749 10,729 4,690 25,441 40,860
------- ------ ------- ------- ------- ------ ------- -------
Total ........................ $18,419 $7,449 $44,296 $70,164 $14,804 $7,633 $32,262 $54,699
======= ====== ======= ======= ======= ====== ======= =======
</TABLE>
In the ordinary course of business, loans maturing within one year may be
renewed, in whole or in part, as to principal amount, at interest rates
prevailing at the date of renewal.
Credit Quality
The following summary shows information concerning loan delinquency and
other nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Loans past due 90 days or more ............ $ 1,495 $ 811
Impaired loans in nonaccrual status ...... 453 711
Other nonaccrual loans .................. 122 73
------- -------
Total nonperforming loans ............ 2,070 1,595
Foreclosed assets held for sale ......... 561 691
------- -------
Total nonperforming assets(1) ......... $ 2,631 $ 2,286
======= =======
Nonperforming loans as a percentage of
loans .................................... 1.03% 0.88%
Nonperforming assets as a percentage of
assets ................................. 0.72 0.80
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more ............ $ 1,593 $ 1,176 $ 1,125 $ 1,501 $ 1,153
Impaired loans in nonaccrual status ...... 542 1,216 -- -- --
Other nonaccrual loans .................. 73 487 1,786 1,585 1,909
------- ------- ------- ------- -------
Total nonperforming loans ............ 2,208 3,419 2,911 3,086 3,062
Foreclosed assets held for sale ......... 841 52 191 119 1,031
------- ------- ------- ------- -------
Total nonperforming assets(1) ......... $ 3,049 $ 3,471 $ 3,102 $ 3,205 $ 4,093
======= ======= ======= ======= =======
Nonperforming loans as a percentage of
loans .................................... 1.24% 2.19% 2.13% 2.78% 3.24%
Nonperforming assets as a percentage of
assets ................................. 1.02 1.36 1.31 1.89 3.09
</TABLE>
- ------------
(1) Nonperforming assets included nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consisted of loans where the principal
and/or interest was 90 days or more past due and loans that had been
placed on nonaccrual status. When loans were placed on nonaccrual status,
income from the current period was reversed from current earnings and
interest from prior periods was charged to the allowance for possible
credit losses. Consumer loans were charged-off when principal or interest
was 120 days or more delinquent, or were placed on nonaccrual status if a
sufficient amount of collateral existed.
35
<PAGE>
The following summary shows the impact on interest income on nonaccrual
and restructured loans for the periods indicated:
<TABLE>
<CAPTION>
For the Nine For the Year
Months Ended Ended
September 30, December 31,
--------------- --------------
1997 1996 1996 1995
------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest income that would have been recorded
had the loans been in accordance with their
original terms .............................. $30 $64 $92 $187
Interest income included in net income ...... 30 7 7 12
</TABLE>
Restructured loans are loans that have been modified by extending terms,
or reducing interest rates of a troubled borrower's debt, to provide for the
repayment of both principal and interest. At September 30, 1997, there were
three restructured loans in the aggregate amount of $450,437.
Concentrations of credit, as defined by LA Bank's loan policy, are
groupings of loans with a common repayment source that exceed 25.0% of LA
Bank's capital. As of September 30, 1997, LA Bank's receivables from,
guarantees of, and obligations of companies in the used automobile sales
industry were approximately $10.0 million, 43.0% of capital. This dealer
related debt was comprised of floor plan inventory lines of credit, real estate
secured operating lines of credit, business term loans, which were mainly real
estate secured, and recourse or repurchase third party paper. Additionally,
obligations such as residential mortgages and other personal debt whose
repayment is dependent on the operation of these dealerships is included in
this concentration. Overall, these relationships have been handled in a
satisfactory manner.
Foreclosed real estate is initially recorded at fair value, net of
estimated selling costs at the date of foreclosure, thereby establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of cost or fair value, less
estimated costs to sell. Revenues and expenses from operations and changes in
the valuation allowance are included in other expenses.
Potential problem loans consist of loans that are included in performing
loans, but for which potential credit problems of the borrowers have caused
management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At September 30, 1997,
potential problem loans of $1.7 million were identified by management.
36
<PAGE>
Allowance for Possible Credit Losses
A detailed analysis of the Company's allowance for possible credit losses
for the nine month periods ended September 30, 1997 and 1996 and for each of
the years in the five year period ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period ...... $ 1,830 $ 1,657
------- -------
Charge-offs:
Real estate-construction ............ -- --
Real estate-mortgage ............... 104 143
Commercial and industrial ......... 96 46
Consumer installment ............... 280 208
Lease financing ..................... 2 --
------- -------
Total ........................... 482 397
------- -------
Recoveries:
Real estate-construction ............ -- --
Real estate-mortgage ............... -- --
Commercial and industrial ............ 40 33
Consumer installment ............... 35 49
Lease financing ..................... -- --
------- -------
Total ........................... 75 82
------- -------
Net charge-offs ..................... 407 315
------- -------
Provision for possible credit losses. 730 425
------- -------
Balance at end of period ............ $ 2,153 $ 1,767
======= =======
Ratio of net charge-offs during
period to average loans
outstanding during period ......... 0.22% 0.19%
Ratio of allowance for possible
credit losses to:
Total loans, net of unearned
income ........................... 1.06 1.04
Total nonperforming loans ......... 96.14 87.16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ...... $ 1,657 $ 1,496 $ 1,544 $ 1,254 $ 1,114
------- ------- ------- ------- -------
Charge-offs:
Real estate-construction ............ -- -- -- -- --
Real estate-mortgage ............... 143 200 14 -- 28
Commercial and industrial ......... 158 294 321 211 449
Consumer installment ............... 274 206 157 196 275
Lease financing ..................... -- -- 7 39 44
------- ------- ------- ------- -------
Total ........................... 575 700 499 446 796
------- ------- ------- ------- -------
Recoveries:
Real estate-construction ............ -- -- -- -- --
Real estate-mortgage ............... -- -- 2 -- 19
Commercial and industrial ............ 40 8 12 8 18
Consumer installment ............... 58 43 58 82 68
Lease financing ..................... -- -- 4 6 --
------- ------- ------- ------- -------
Total ........................... 98 51 76 96 105
------- ------- ------- ------- -------
Net charge-offs ..................... 477 649 423 350 691
------- ------- ------- ------- -------
Provision for possible credit losses. 650 810 375 640 831
------- ------- ------- ------- -------
Balance at end of period ............ $ 1,830 $ 1,657 $ 1,496 $ 1,544 $ 1,254
======= ======= ======= ======= =======
Ratio of net charge-offs during
period to average loans
outstanding during period ......... 0.30% 0.44% 0.35% 0.35% 0.79%
Ratio of allowance for possible
credit losses to:
Total loans, net of unearned
income ........................... 1.03 1.08 1.11 1.41 1.35
Total nonperforming loans ......... 82.88 48.46 51.39 50.03 40.95
</TABLE>
Management makes monthly determinations as to an appropriate provision
from earnings necessary to maintain an allowance for possible credit losses
that is adequate for potential yet undetermined losses. This determination
includes a review of loans that are current, but which management has
determined for a variety of reasons require more careful monitoring going
forward. The dollar amount charged to earnings is determined based upon several
factors including: a continuing review of delinquent, classified and nonaccrual
loans, large loans, and overall portfolio quality; regular examination and
review of the loan portfolio by regulatory authorities; analytical review of
loan charge-off experience, delinquency rates, other relevant historical and
peer statistical ratios; and management's judgment with respect to local and
general economic conditions and their impact on the existing loan portfolio.
Determining the appropriate level of the allowance for possible credit
losses at any given date is difficult, particularly in a continually changing
economy. In management's opinion, the allowance for possible credit losses was
adequate at September 30, 1997. However, there can be no assurance that, if
asset quality deteriorates in future periods, additions to the allowance for
possible credit losses will not be required.
37
<PAGE>
LA Bank's management is unable to determine in what loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for possible credit losses among various
categories. At September 30, 1997, approximately 63.0% of the allowance for
possible credit losses is allocated to general risk to protect LA Bank against
potential yet undetermined losses. The allocation is based upon historical
experience. The entire allowance for possible credit losses is available to
absorb future loan losses in any loan category.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------
1997 1996
------------------------ -----------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
Amount to Loans(1) Amount to Loans(1)
-------- ------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allocation of allowance for possible credit
loses:
Real Estate .............................. $ 266 46% $ 246 52%
Commercial and industrial ............... 822 32 624 24
Consumer installment ..................... 524 20 398 23
Lease financing ........................ 74 2 52 1
Unallocated .............................. 467 -- 447 --
------ -- ------ --
Total ................................. $2,153 100% $1,767 100%
====== === ====== ===
</TABLE>
- ------------
(1) Loans, net of unearned income.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
Amount to Loans(1) Amount to Loans(1) Amount to Loans(1)
-------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allocation of
allowance for
possible credit
losses:
Real Estate ............ $ 248 49% $ 279 47% $ 370 43%
Commercial and
industrial ............ 574 29 700 29 631 32
Consumer installment . 428 21 437 23 386 24
Lease financing ......... 62 1 52 1 52 1
Unallocated ............ 518 -- 189 -- 57 --
------ ------ ------ ------ ------ ------
Total .................. $1,830 100% $1,657 100% $1,496 100%
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1993 1992
----------------------- ----------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
Amount to Loans(1) Amount to Loans(1)
-------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Allocation of
allowance for
possible credit
losses:
Real Estate ............ $ 198 46% $ 145 43%
Commercial and
industrial ............ 924 35 802 37
Consumer installment . 259 18 133 18
Lease financing ......... 55 1 22 2
Unallocated ............ 108 -- 152 --
------ ------ ------ ------
Total .................. $1,544 100% $1,254 100%
====== ====== ====== ======
</TABLE>
- ------------
(1) Loans, net of unearned income.
Securities Portfolio
The Company's securities portfolio is intended to provide liquidity,
reduce interest rate risk and contribute to earnings while exposing the Company
to reduced credit risk. The securities portfolio has grown from $73.2 million
at December 31, 1995 to $87.0 million at December 31, 1996, and $121.8 million
at September 30, 1997. This increase is due in large part to matched funding
programs employed by the Company that use FHLB advances and the deposit inflows
at existing and new branches to fund both loan originations and securities
purchases. The purpose of these matched funding programs is to target earnings
growth and net interest margin increases while managing liquidity, credit,
market and interest rate risk. From time to time a specific matched funding
program may attempt to achieve current earnings benefits from future growth in
deposits that management is reasonably confident will occur.
38
<PAGE>
A summary of securities available for sale and securities held to maturity
at September 30, 1997 and 1996 and at December 31, 1996, 1995 and 1994 follows.
<TABLE>
<CAPTION>
Securities Securities
Available for Sale Held to Maturity
at September 30 at September 30,
--------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
U.S. government agencies and corporations ...... $51,252 $54,523 $35,169 $10,881
Obligations of states and political subdivisions. 9,525 5,239 22,701 15,773
Equity securities(1) ........................... 3,166 1,443 -- --
------- ------- ------- -------
Total amortized cost of securities ............ $63,943 $61,205 $57,870 $26,654
======= ======= ======= =======
Total fair value of securities .................. $63,911 $60,447 $58,360 $26,260
======= ======= ======= =======
</TABLE>
- ------------
(1) Comprised mostly of FHLB stock, Federal Reserve Bank stock and a
Pennsylvania community bank stock.
<TABLE>
<CAPTION>
Securities Securities
Available Held to Maturity
at December 31, at December 31,
--------------------------------- -------------------------------
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies and corporations ...... $50,253 $43,041 $27,348 $10,841 $11,065 $31,611
Obligations of states and political subdivisions. 9,066 5,810 6,919 15,760 11,524 10,924
Equity securities(1) ........................... 1,443 1,304 2,619 -- -- --
------- ------- ------- ------- ------- -------
Total amortized cost of securities ............ $60,762 $50,155 $36,886 $26,601 $22,589 $42,535
======= ======= ======= ======= ======= =======
Total fair value of securities .................. $60,399 $50,580 $34,142 $26,564 $22,866 $40,674
======= ======= ======= ======= ======= =======
</TABLE>
- ------------
(1) Comprised mostly of FHLB stock, Federal Reserve Bank stock and a
Pennsylvania community bank stock.
<PAGE>
The following table presents the maturity distribution and weighted
average yield of the securities portfolio of the Company at September 30, 1997
and December 31, 1996. Weighted average yields on tax-exempt obligations have
been computed on a taxable equivalent basis.
<TABLE>
<CAPTION>
Available for Sale September 30, 1997
------------------------------------------
After 1 Year But
Within 1 Year Within 5 Years
-------------------- --------------------
Amount Yield Amount Yield
-------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amortized cost:
U.S. government agencies
and corporations ............ $245 7.50% $ 259 8.54%
Obligations of state and
political subdivisions ...... 205 6.36 1,320 7.79
Equity securities ............ -- -- -- --
---- ------
Total securities available for
sale ........................ $450 6.98% $1,579 7.91%
==== ======
<CAPTION>
After 5 Years But After 10 Years
Within 10 Years or no maturity Total
--------------------- --------------------- -----------------
Amount Yield Amount Yield Amount Yield
--------- ---------- --------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. government agencies
and corporations ............ $19,832 7.04% $30,916 7.11% $51,252 7.09%
Obligations of state and
political subdivisions ...... 525 7.55 7,475 7.83 9,525 7.78
Equity securities ............ -- -- 3,166 4.80 3,166 4.80
------- ------- -------
Total securities available for
sale ........................ $20,357 7.05% $41,557 7.06% $63,943 7.08%
======= ======= =======
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Available for Sale December 31, 1996
-----------------------------------------------------------------------------------------------
After 1 Year But After 5 Years But After 10 Years
Within 1 Year Within 5 Years Within 10 Years or no maturity Total
----------------- ----------------- ------------------ ------------------ -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- --------- ------- --------- ------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. government
agencies and
corporations ......... $ 410 7.79% $ 298 8.51% $12,831 6.97% $36,714 7.02% $50,253 7.02%
Obligations of
state and
political
subdivisions ......... 645 6.89 2,110 7.90 823 7.93 5,488 8.16 9,066 7.99
Equity securities ..... -- -- -- -- -- -- 1,443 5.98 1,443 5.98
------ ------ ------- ------- -------
Total securities
available for
sale ............... $1,055 7.24% $2,408 7.98% $13,654 7.03% $43,645 7.13% $60,762 7.14%
====== ====== ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Held to Maturity September 30, 1997
--------------------------------------------------------------------------------------------------------
After 1 Year But After 5 Years But After 10 Years
Within 1 Year Within 5 Years Within 10 Years or no maturity Total
------------------ ------------------ ------------------- ------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- --------- ------- --------- ------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. government
agencies and
corporations ...... $ -- -- $ -- -- $10,200 7.55% $24,969 7.09% $35,169 7.22%
Obligations of
state and
political
subdivisions ...... -- -- -- -- 8,655 7.48 14,046 8.19 22,701 7.88
-------- -------- ------- ------- -------
Total securities
held to
maturity ......... $ -- -- $ -- -- $18,855 7.52% $39,015 7.47% $57,870 7.50%
======== ======== ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Held to Maturity December 31, 1996
-------------------------------------------------------------------------------------------------------
After 1 Year But After 5 Years But After 10 Years
Within 1 Year Within 5 Years Within 10 Years or no maturity Total
------------------ ------------------ ------------------ ------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- --------- ------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. government
agencies and
corporations ...... $ -- -- $ -- -- $ -- --% $10,841 6.40% $10,841 6.40%
Obligations of
state and
political
subdivisions ...... -- -- -- -- 7,686 7.53 8,074 8.36 15,760 7.96
-------- -------- ------ ------- -------
Total securities
held to
maturity ......... $ -- -- $ -- -- $7,686 7.53% $18,915 7.24% $26,601 7.32%
======== ======== ====== ======= =======
</TABLE>
LA Bank maintains a securities portfolio for the secondary application of
funds as well as a secondary source of liquidity.
At September 30, 1997, securities having an amortized cost of $24.3
million were pledged as collateral for public funds and other purposes as
required or permitted by law.
Neither the Company nor LA Bank holds securities of any one issuer,
excluding U.S. treasuries and U.S. agencies, that exceeded 10.0% of
stockholders' equity at September 30, 1997, or any prior period end.
40
<PAGE>
Deposit Structure
The following is a distribution of the average balances of LA Bank's
deposits and the average rates paid thereon for the nine months ended September
30, 1997 and 1996, and for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
September 30, December 31,
---------------------------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994
------------------- ------------------- ------------------- ------------------- ------------------
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand--
noninterest
bearing ............ $ 34,768 $ 28,846 $ 29,545 $ 26,172 $ 23,479
Demand--
interest-
bearing ............ 30,026 2.05% 25,404 2.06% 25,764 2.08% 25,993 2.38% 26,094 2.42%
Savings ............ 38,677 2.02 38,825 4.02 38,472 4.03 41,186 3.70 45,600 2.61
Time, $100,000
and over ............ 40,064 5.75 31,640 4.53 33,811 4.50 26,960 5.04 16,461 4.24
Time, other ......... 120,441 5.33 103,740 5.03 105,883 5.05 86,980 5.37 58,902 4.59
-------- -------- -------- -------- --------
Total deposits . $263,976 $228,455 $233,475 $207,291 $170,536
======== ======== ======== ======== ========
</TABLE>
The following is a breakdown, by maturities, of the Company's time
certificates of deposit issued in denominations of $100,000 or more as of
September 30, 1997 and 1996, and December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Certificates of $100,000 or more
--------------------------------------------------------
At September 30, At December 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Maturing in:
Three months or less ............... $12,077 $12,158 $11,375 $11,708 $ 9,664
Over three through six months ...... 14,558 13,039 17,847 5,701 6,503
Over six through twelve months ...... 5,116 4,813 6,376 8,213 6,424
Over twelve months .................. 9,132 2,676 4,642 1,321 2,072
------- ------- ------- ------- -------
Total ........................... $40,883 $32,686 $40,240 $26,943 $24,663
======= ======= ======= ======= =======
</TABLE>
Long-Term Debt and Other Borrowings
LA Bank maintains a U.S. Treasury tax and loan note option account for the
deposit of withholding taxes, corporate income taxes and certain other payments
to the federal government. Deposits are subject to withdrawal and are evidenced
by an open-ended interest-bearing note. Borrowings under this note option
account were approximately $1.0 million at September 30, 1997 and 1996,
respectively.
LA Bank has a flexible line of credit commitment available from the FHLB
for borrowings of up to approximately $10.0 million, expiring March 25, 1998.
There were borrowings of $4.8 million and $5.2 million under this line of
credit at September 30, 1997 and 1996, respectively.
LA Bank had no other short-term borrowings from the FHLB at September 30,
1997 and 1996.
41
<PAGE>
Long-term debt consisted of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- --------
(In thousands)
<S> <C> <C>
Advances from the FHLB bearing interest at a weighted average rate of 6.28% and
5.25% as of September 30, 1997 and 1996, respectively ........................ $48,328 $15,125
======= =======
</TABLE>
Maturities of long-term debt at September 30, 1997 are as follows (in
thousands):
1997 .................. $ 700
1998 .................. 12,818
1999 .................. 2,972
2000 .................. 8,169
2001 .................. 8,282
2002 .................. 10,837
2005 .................. 5,000
-------
$48,328
=======
LA Bank has maximum borrowing capacity with the FHLB of approximately
$117.8 million. Advances from the FHLB are secured by qualifying assets of LA
Bank.
LA Lease, Inc.
The principal office of LA Lease, Inc. is located at Route 191, Lake
Ariel, Pennsylvania 18436 (the main branch of LA Bank).
As of September 30, 1997 and December 31, 1996, LA Lease, Inc. had total
assets of $3.1 million and $2.2 million, total shareholders' equity of $77,000
and $25,000 and total liabilities of $3.0 million and $2.2 million,
respectively. LA Lease, Inc. has obtained all of its financing from LA Bank.
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.
Ariel Financial Services, Inc.
The principal office of Ariel Financial Services, Inc. is located at LA
Bank's new financial, operations and administrative center in the Oppenheim
Building, 409 Lackawanna Avenue, Suite 201, Scranton, Pennsylvania 18503-2045.
This subsidiary of LA Bank was incorporated on July 11, 1997, to deliver
non-depository investment and annuity products to the customers of LA Bank. As
of October 31, 1997, Ariel Financial Services, Inc. had no material assets or
liabilities.
Competition
LA Bank faces significant competition from other commercial banks, savings
banks, savings and loan associations and several other financial and investment
service institutions in the communities it serves. Several of these
institutions are affiliated with major banking and financial institutions which
are substantially larger and have greater financial resources than the Company
and LA Bank. As the financial services industry continues to consolidate,
competition affecting LA Bank may increase. For most of the services that LA
Bank performs, there is also competition from credit unions and issuers of
commercial paper and money market funds. Such institutions, as well as
brokerage firms, consumer finance companies, insurance companies and pension
trusts, are important competitors for various types of financial services.
42
<PAGE>
Properties
The Company owns or leases no properties, except through LA Bank. The
following is selective information about LA Bank's properties:
<TABLE>
<CAPTION>
Type of Square
Property Location Ownership Footage Use
- ---------- ---------------------------- ----------- --------- ---------------------------------
<S> <C> <C> <C> <C>
1 Route 191 Own 3,000 Banking services and main office
Lake Ariel, PA
2 Route 191 Own 1,800 Greene-Dreher branch
Newfoundland, PA
3 Routes 191 and 590 Own 2,900 Hamlin Corners branch
Hamlin, PA
4 Routes 247 and 348 Own 2,400 Mt. Cobb branch
Lake Ariel, PA
5 Route 6 Own 2,800 Eynon branch
Scranton-Carbondale Highway
6 Keyser Avenue Own 3,000 Keyser Valley branch
Scranton, PA
7 The Mall at Steamtown Lease 1,867 Steamtown branch
Lackawanna Avenue
Scranton, PA
8 East Grove Street & Own 3,000 Clarks Green branch
South Abington Road
Clarks Green, PA
9 Route 6 Lease 5,535 Carbondale branch
Ames Shopping Plaza
10 Routes 6 and 209 Own 11,000 Milford Township branch
Milford, PA
11 Route 739 Lease 1,250 Lords Valley branch
Lords Valley Shopping Plaza
12 HC6 Box 6931 Lease 2,600 Lake Wallenpaupack branch
Hawley, PA
13 214 W. Harford Street Own 10,350 Milford branch
Milford, PA
14 Route 390-Barrett Township Own 3,700 Mountainhome branch
Mountainhome, PA
15 409 Lackawanna Avenue Lease 670 Scranton branch
Scranton, PA
16 409 Lackawanna Avenue, Lease 20,800 Financial Center
Suite 201
Scranton, PA
17 Keyser Avenue Own 7,500 Commercial rental property
Scranton, PA
</TABLE>
For information with respect to obligations for lease rentals at December
31, 1996, refer to Note 5 of the Notes to Consolidated Financial Statements at
page F-21 herein. 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.
43
<PAGE>
Legal Proceedings
The nature of the Company's and LA 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 the Company and LA Bank,
there are no proceedings pending to which the Company and LA Bank are a party
or to which their property is subject, which, if determined adversely to the
Company and LA Bank, would be material in relation to the Company's and LA
Bank's undivided profits or financial condition, nor are there any proceedings
pending other than ordinary routine litigation incident to the business of the
Company and LA Bank. In addition, no material proceedings are pending or are
known to be threatened or contemplated against the Company and LA Bank by
government authorities or others.
LA Bank and certain of its officers and employees are defendants in an
action brought by the Chapter 7 Bankruptcy Trustee for two former customers of
LA Bank. Although the complaint seeks $4.0 million in damages from LA Bank and
the other defendants, LA Bank and the Bankruptcy Trustee have agreed to settle
all claims against all defendants upon the payment by LA Bank of $85,000 to the
Trustee and have filed a motion with the Bankruptcy Court to have the
settlement approved. The former customers have filed an objection to such
motion. It is impossible to predict with any certainty whether the agreed upon
settlement will be approved by the Bankruptcy Court over the objection raised
by LA Bank's former customers.
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 LA Bank. Such potential
liability may far exceed the original amount of the loan made by LA Bank.
Currently, LA Bank is not a party to any pending legal proceedings under any
environmental statue nor is LA Bank aware of any circumstances that may give
rise to liability of it under any such statute.
Supervision and Regulation
Various requirements and restrictions under the laws of the United States
and the Commonwealth of Pennsylvania affect the Company and LA Bank.
The Company is a bank holding company subject to supervision and
regulation by the FRB under the Bank Holding Company Act of 1956, as amended.
As a bank holding company, the Company's activities and those of its subsidiary
are limited to the business of banking and activities closely related or
incidental to banking, and the Company may not directly or indirectly acquire
the ownership or control of more than 5.0% of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the FRB.
LA Bank is subject to supervision and examination by applicable federal
banking agencies. LA Bank is a member of the FRB, and therefore, subject to the
regulations of the FRB. LA Bank is also a national banking association subject
to supervision and regulation by the OCC.
In addition, because the deposits of LA Bank are insured by the FDIC, LA
Bank is subject to regulation by the FDIC. LA Bank is also subject to
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operations of LA Bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the FRB in
attempting to control the money supply and credit availability in order to
influence the economy.
44
<PAGE>
Holding Company Structure
LA Bank is subject to restrictions under federal law which limit its
ability to transfer funds to the Company, whether in the form of loans, other
extensions of credit, investments or asset purchases. Such transfers by LA Bank
to the Company are generally limited in amount to 10.0% of LA Bank's capital
and surplus. Furthermore, such loans and extensions of credit are required to
be secured in specific amounts, and all transactions are required to be on an
arm's length basis. LA Bank has never made any loan or extension of credit to
the Company nor has it purchased any assets from the Company.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to LA Bank and to commit resources to support LA Bank, i.e.,
to downstream funds to LA Bank. This support may be required at times when,
absent such policy, the bank holding company might not otherwise provide such
support. Any capital loans by a bank holding company to LA Bank are subordinate
in right of payment to deposits and to certain other indebtedness of LA Bank.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of
LA Bank will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Regulatory Restrictions on Dividends
The OCC has issued rules governing the payment of dividends by national
banks. Consequently, LA 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 90 days, but do not include well-secured obligations that are in
the process of collection.
Previously, LA 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)
LA Bank has capital surplus in an amount in excess of common capital and (2) if
LA Bank can prove that such surplus resulted from prior period earnings, LA
Bank, upon approval of the OCC, may transfer earned surplus to retained
earnings and thereby increase its dividend paying capacity. If, however, LA
Bank has insufficient retained earnings to pay a dividend, the OCC's
regulations allow LA Bank to reduce its capital to a specified level and to pay
dividends upon receipt of the approval of the OCC.
LA Bank is allowed to pay dividends no more frequently than quarterly.
Moreover, LA Bank must obtain the OCC's approval before paying a dividend if
the total of all dividends declared by LA Bank in any calendar year would
exceed the total of (1) LA 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.
LA Bank may not pay any dividends on its capital stock during any period
in which it is in default in the payment of its assessment for deposit
insurance premiums due to the FDIC, nor may it pay dividends on its Common
Stock until any cumulative dividends on LA Bank's preferred stock (if any) have
been paid in full. LA Bank has never been in default in the payment of
assessments to the FDIC; and, moreover, LA 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
September 30, 1997, there was $4.2 million in unrestricted retained earnings
and net income available at LA Bank that could be paid in dividends to the
Company under the current OCC regulations.
Under the Pennsylvania Business Corporation Law of 1988, as amended (the
"BCL"), the Company may not pay a dividend if, after giving effect thereto,
either (a) the Company would be unable to pay its debts as they become due in
the usual course of business or (b) the Company'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.
45
<PAGE>
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual basis,
assigns each institution to one of three capital groups (well capitalized,
adequately capitalized or under capitalized) and further assigns such
institution to one of three subgroups within a capital group corresponding to
the FDIC's judgment of the institution's 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 10.0% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and
a Tier 1 leverage ratio of 5.0% or greater, are assigned to the
well-capitalized group.
Over the last two years, FDIC insurance assessments have seen several
changes for both BIF and SAIF institutions. The most recent change occurred on
September 30, 1996, when the President signed into law a bill designed to
remedy the disparity between BIF and SAIF deposit premiums. The first part of
the bill called for the SAIF to be capitalized by a one-time assessment on all
SAIF insured deposits held as of March 31, 1995. This assessment, which was
65.7 cents per $100 in deposits, raised approximately $4.7 billion to bring the
SAIF up to its required 1.25 reserve ratio. This special assessment, paid on
November 30, 1996, had no effect on LA Bank. The second part of the bill
remedied the future anticipated shortfall with respect to the payment of FICO
interest. For 1997 through 1999, the banking industry will help pay the FICO
interest payments at an assessment rate that is 1/5 the rate paid by thrifts.
The FICO assessment on BIF insured deposits is 1.29 cents per $100 in deposits;
for SAIF insured deposits it is 6.44 cents per $100 in deposits. Beginning
January 1, 2000, the FICO interest payments will be paid pro-rata by banks and
thrifts based on deposits. At December 31, 1996, the Company estimated the FICO
interest assessment to be approximately $32,700 for 1997. For the nine month
period ended September 30, 1997, the Company paid FICO expenses of
approximately $24,200. LA Bank has not been required to pay any FDIC insurance
assessments since the fourth quarter of 1996 because BIF has met its
statutorily required ratios and LA Bank is categorized as "well capitalized."
Capital Adequacy
The FRB adopted risk-based capital guidelines for bank holding companies,
such as the Company. The required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) is 8.0%. At least half of the total capital is required to
be "Tier 1 capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder ("Tier 2
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio
of 3.0% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant
growth or expansion. All other bank holding companies are required to maintain
a leverage ratio of at least 1.0% to 2.0% above the 3.0% stated minimum. The
Company is in compliance with these guidelines. LA Bank is subject to similar
capital requirements also adopted by the FRB.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Law"), amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The interstate banking provisions allow for the acquisition by a
bank holding company of a bank located in another state.
46
<PAGE>
Interstate bank mergers and branch purchase and assumption transactions
were allowed effective June 1, 1997; however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting a law which
specifically prohibits such interstate transactions. States could, in the
alternative, enact legislation to allow interstate merger and purchase and
assumption transactions prior to June 1, 1997. States could also enact
legislation to allow for de novo interstate branching by out-of-state banks. In
July 1995, Pennsylvania adopted "opt-in" legislation which allows such
transactions.
47
<PAGE>
MANAGEMENT
The following sets forth selected information concerning the Company's and
LA Bank's executive officers as of November 10, 1997:
<TABLE>
<CAPTION>
Name Age Title
- ----------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Bruce D. Howe(1) ............ 65 President of the Company and Chairman of LA Bank
John G. Martines ............ 51 Chief Executive Officer of the Company and Presi-
dent and Chief Executive Officer of LA Bank
Donald E. Chapman(1) ...... 61 Secretary of the Company
Louis M. Martarano ......... 46 Vice President and Assistant Secretary of the Com-
pany and Executive Vice President and Chief Oper-
ating Officer of LA Bank
Joseph J. Earyes, CPA ...... 41 Vice President and Treasurer of the Company and
Executive Vice President and Chief Financial Officer
of LA Bank
</TABLE>
- ------------
(1) Messrs. Howe and Chapman are not active employees of the Company and LA
Bank.
Bruce D. Howe. Mr. Howe is President of the Company and Chairman of the
Board of LA Bank. He is President of John T. Howe, Inc., which operates local
fuel and heating oil companies, a motel, and an interstate truck stop. He is
also President of Howe's Twin Rocks, Inc., a local restaurant.
John G. Martines. Mr. Martines has been President and Chief Executive
Officer of LA Bank since 1979 and Chief Executive Officer of the Company since
inception in 1983. He served as Assistant Vice President and Lending Officer at
Scranton National Bank from 1973 to 1979 and as a National Bank Examiner with
the OCC from 1968 to 1973.
Donald E. Chapman. Mr. Chapman is Secretary of the Company. He has been on
the Board of Directors since 1972 and has been owner of a Nationwide Insurance
agency for the past 36 years.
Louis M. Martarano. Mr. Martarano is Vice President and Assistant
Secretary of the Company and Executive Vice President and Chief Operating
Officer of LA Bank. He has been employed by LA Bank for 16 years, serving as
Chief Operating Officer since January 1995. Previously, he was Senior Vice
President and Chief Financial Officer from 1990 to 1995. He served as Vice
President, Residential Mortgage Lending from 1985 to 1990 and Branch Manager
from 1981 to 1985.
Joseph J. Earyes, CPA. Mr. Earyes has been Vice President and Treasurer of
the Company since April 1995. He has been the Executive Vice President and
Chief Financial Officer of LA Bank since January 1995. Prior thereto, he was a
Partner with the public accounting firm of Parente, Randolph, Orlando, Carey &
Associates.
On January 3, 1997, Mr. Martines voluntarily entered into a consent decree
with respect to a complaint filed by the Commission in connection with the
purchase by Mr. Martines of securities of First Eastern Corporation ("First
Eastern") prior to the announcement by PNC Bank Corp. ("PNC") that PNC would
purchase First Eastern. The complaint alleged that Mr. Martines purchased such
securities based upon information given to him by a director of First Eastern.
In order to avoid the costs of pursuing a successful defense and upon advice of
his counsel, Mr. Martines agreed to enter into such consent decree without
admitting or denying any of the allegations in the Commission's complaint.
The Board of Directors considered this matter and concluded that this
action by Mr. Martines had no effect on his ability to successfully manage the
Company and LA Bank and had no detrimental effect on the short-term and
long-term prospects of the Company and LA Bank.
48
<PAGE>
The following table sets forth information concerning the Company's directors
as of November 10, 1997:
<TABLE>
<CAPTION>
Director Since
Name Age Principal Occupation for Past Five Years Company/LA Bank
- --------------------------- ----- ------------------------------------------------- ----------------
<S> <C> <C> <C>
Donald E. Chapman ......... 61 Self-employed insurance broker and real estate 1983/1972
(1)(2)(3)(4)(5)(6) developer
Peter O. Clauss ......... 68 Retired; Former President of C & D Builders 1988/1988
(4)(5)(9) Inc. (construction of residential and light com-
mercial buildings)
Arthur M. Davis ......... 69 President of Lake Ariel Hardware & Supply 1983/1969
(6)(7)(8) Co., Inc.
William C. Gumble ......... 59 Retired Attorney-at-law 1985/1985
(1)(2)(3)(6)(7)(8)
Bruce D. Howe ............ 65 President of John T. Howe, Inc. (a company 1983/1977
(1)(4)(5)(9) that operates local fuel and heating oil compa-
nies, a motel and an interstate truck stop) and
President of Howe's Twin Rocks, Inc. (a local
restaurant)
John G. Martines ......... 51 President of LA Bank and Chief Executive 1983/1979
(1)(3)(4)(7)(8)(10) Officer of the Company
Harry F. Schoenagel ...... 62 Partner of Schoenagel and Schoenagel (general 1985/1985
(2)(3)(7)(8)(10) civil engineering and surveying)
</TABLE>
- ------------
(1) Member of the Executive Committee of LA Bank.
(2) Member of Benefit/Compensation Committee of LA Bank.
(3) Member of 401(k) Committee of LA Bank.
(4) Member of the Loan Review Committee of LA Bank.
(5) Member of the Audit Committee of LA Bank.
(6) Class 1 Director whose term expires in 1998.
(7) Member of the Asset/Liability Management Committee of LA Bank.
(8) Member of the Loan Committee of LA Bank.
(9) Class 2 Director whose term expires in 2000.
(10) Class 3 Director whose term expires in 1999.
49
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 10, 1997, the amount and
percentage of the Common Stock beneficially owned by each person who is known
to the Company to own more than five percent of the Common Stock, each
director, each named executive officer and all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Principal Shareholders and Directors(1) Beneficial Ownership(2)(3) Percent of Class
- ------------------------------------------------------------------- ---------------------------- -----------------
<S> <C> <C>
Donald E. Chapman(4) ............................................. 125,539 3.36
Peter O. Clauss(5) ................................................ 53,824 1.44
Arthur M. Davis(6) ................................................ 74,164 1.99
William C. Gumble(7) ............................................. 112,852 3.02
Bruce D. Howe(8) ................................................ 376,428 10.08
John G. Martines(9) ............................................. 204,539 5.48
Harry F. Schoenagel(10) .......................................... 90,718 2.43
Other Named Executive Officers:
Louis M. Martarano(11) .......................................... 79,660 2.13
Joseph J. Earyes, CPA(12) ....................................... 37,733 1.01
All directors and executive officers as a group (9 persons) ...... 1,155,457 30.94
</TABLE>
- ------------
(1) The address of each principal shareholder is LA Bank, N.A., Route 191,
Lake Ariel, Pennsylvania 18436.
(2) 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 Commission 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 November 10, 1997.
Beneficial ownership may be disclaimed as to certain of the securities.
(3) Information furnished by the directors, officers and the Company. (4) Of
the 125,539 shares beneficially owned by Donald E. Chapman, 36,288 are
owned by him individually; 79,594 are owned jointly with his spouse; 5,782
are held individually by his spouse; 2,492 are held jointly with his son;
and 1,383 are held individually by his son who has the same home.
(5) Of 53,824 shares beneficially owned by Peter O. Clauss, 19,056 are held by
him individually; 27,188 are owned jointly with his wife; and 7,580 are
owned individually by his spouse.
(6) Of the 74,164 shares beneficially owned by Arthur M. Davis, 33,524 are
owned by him individually; 37,414 are owned jointly with his wife; and
3,226 are owned by Lake Ariel Hardware & Supply Co., Inc., of which Mr.
Davis is President.
(7) All shares are held individually.
(8) Of the 376,428 shares beneficially owned by Bruce D. Howe, 244,716 are
owned by him individually; 127,902 are owned jointly with his spouse; and
3,810 are owned individually by his spouse.
(9) Of the 204,539 shares beneficially owned by John G. Martines, 16,284 are
owned by him individually; 31,500 are held jointly with his spouse; 13,430
are held individually by his spouse; and 143,325 shares may be acquired at
any time by the exercise of stock options.
(10) Of the 90,718 shares beneficially owned by Harry F. Schoenagel, 35,514 are
owned by him individually; 6,614 are owned jointly with his spouse; and
48,590 are owned by his spouse individually.
(11) Of the 79,660 shares beneficially owned by Louis M. Martarano, 2,482 are
owned by him individually; 20,090 are owned jointly with his wife; 1,728
shares held as custodian for his two sons; 235 shares as custodian for his
daughter; and 55,125 shares may be acquired at any time by the exercise of
stock options.
(12) Of the 37,733 shares beneficially owned by Joseph J. Earyes, CPA, 12,842
are owned by him individually; 2,841 are held jointly with his spouse; and
22,050 shares may be acquired at any time by the exercise of stock
options.
50
<PAGE>
EXECUTIVE COMPENSATION
Compensation Paid to Executive Officers
The following table sets forth the total compensation for services in all
capacities paid by the Company and LA Bank (1) during 1996, 1995 and 1994, to
the Company's Chief Executive Officer and LA Bank's President, (2) during 1996,
1995 and 1994, to the Company's Vice President and LA Bank's Executive Vice
President and Chief Operating Officer, and (3) during 1996 and 1995, to the
Company's Vice President and LA Bank's Executive Vice President and Chief
Financial Officer. No other executive officer's annual salary and bonus
exceeded $100,000 for the years presented and therefore is not required to be
presented.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Fiscal
Name and Principal Position Year
- ------------------------------------------------- --------
<S> <C>
John G. Martines (President of LA Bank and 1996
Chief Executive Officer of the Company) 1995
1994
Louis M. Martarano (Executive Vice President 1996
and Chief Operating Officer of LA Bank and 1995
Vice President of the Company) 1994
Joseph J. Earyes, CPA (Executive Vice President 1996
and Chief Financial Officer of LA Bank and Vice 1995
President and Treasurer of the Company)
<CAPTION>
Annual Compensation
-------------------------------------------------------------------------
Securities
Other Annual Underlying All Other
Salary Bonus Compensation Options/ Compensation
Name and Principal Position ($) ($) ($) SARs(#) ($)
- ------------------------------------------------- --------- -------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
John G. Martines (President of LA Bank and 157,972 44,000 25,564(1) --(2) 22,612(3)
Chief Executive Officer of the Company) 138,007 35,000 26,108(4) 88,200(2) 19,498(5)
130,005 30,000 19,811(6) 55,125(2) 21,435(7)
Louis M. Martarano (Executive Vice President 109,056 20,000 4,260(8) --(2) 19,602(9)
and Chief Operating Officer of LA Bank and 97,154 13,500 8,796(10) 33,075(2) 15,013(11)
Vice President of the Company) 91,750 12,500 3,452(12) 22,050(2) 15,903(13)
Joseph J. Earyes, CPA (Executive Vice President 87,521 16,000 6,147(14) --(2) 16,225(15)
and Chief Financial Officer of LA Bank and Vice 70,207 6,500 4,345(16) 22,050(2) 11,398(17)
President and Treasurer of the Company)
</TABLE>
<PAGE>
- ------------
(1) Includes $6,825 paid on behalf of Mr. Martines for periodic club dues;
$12,000 paid to Mr. Martines for directors' fees; $3,440 paid pursuant to
the Salary Continuation Plan; and $3,299 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 $22,612 paid to Mr. Martines in 1996 as All Other Compensation;
$2,632 and $3,230 was for life and medical insurance premiums,
respectively; and $16,750 was accrued by the Company for the benefit of
Mr. Martines pursuant to a profit-sharing/401(k) plan.
(4) 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.
(5) 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 Company for the benefit of
Mr. Martines pursuant to a profit-sharing/401(k) plan.
(6) 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.
(7) 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 Company for the benefit of
Mr. Martines pursuant to a profit-sharing retirement plan.
(8) Includes $1,852 paid on behalf of Mr. Martarano for periodic club dues and
$2,408 representing the personal use value of a company-owned automobile.
51
<PAGE>
(9) Of the $19,602 paid to Mr. Martarano in 1996 as All Other Compensation;
$1,448 and $3,886 was for life and medical insurance premiums,
respectively; and $14,268 was accrued by the Company for the benefit of
Mr. Martarano pursuant to a profit-sharing/401(k) plan.
(10) 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.
(11) 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 Company for the benefit of Mr.
Martarano pursuant to a profit-sharing/401(k) plan.
(12) 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.
(13) 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 Company for the benefit of
Mr. Martarano pursuant to a profit-sharing retirement plan.
(14) Includes $4,317 paid on behalf of Mr. Earyes for periodic club dues and
$1,830 representing the personal use value of a company-owned automobile.
(15) Of the $16,225 paid to Mr. Earyes in 1996 as All Other Compensation; $747
and $4,036 was for life and medical insurance premiums, respectively; and
$11,442 was accrued by the Company for the benefit of Mr. Earyes pursuant
to a profit-sharing/401(k) plan.
(16) 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.
(17) 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 Company for the benefit of Mr. Earyes pursuant
to a profit-sharing/401(k) plan.
Directors' Compensation
During 1996, LA 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 LA Bank's Board of
Directors. During 1996, the Board of Directors of the Company held six (6)
meetings. Directors received no remuneration for attendance at meetings of the
Board of Directors of the Company in excess of remuneration each of them
received for attendance at meetings of the Board of Directors of LA Bank.
Salary Continuation Plan for Directors
LA Bank has entered into an agreement with its directors to establish a
non-qualified salary continuation plan (the "Salary Continuation Plan"). If
such director continues to serve as a director of the Company until he attains
sixty-five (65) years of age, the Company agrees to pay him a guaranteed annual
payment in each of ten years on the first day of the month following such
director's 65th birthday. Each director's guaranteed annual payment is based
upon the future value of the life insurance purchased with the funds which
would otherwise be used to pay the directors' compensation. If such director
attains sixty-five (65) years of age, but dies before receiving ten annual
payments, then the Company will continue to make these payments to such
director's designated beneficiary or to the representative of his estate. In
the event that such director dies while serving as a director but prior to the
attainment of sixty-five (65) years of age, then the Company shall remit a
guaranteed annual payment for a period of ten years to such director's
designated beneficiary or to the representative of his estate. LA Bank has
obtained life insurance (designating LA Bank as the beneficiary) on each
participating director in an amount which will cover LA Bank's obligations
under the Salary Continuation Plan. This plan is based upon certain actuarial
assumptions in seeking funding through life insurance policies. In 1996, LA
Bank accrued $80,490 as an expense for the Salary Continuation Plan, of which
approximately $3,440 was allocated to Mr. Martines.
52
<PAGE>
The salary continuation plan for Messrs. Martines, Howe, Chapman and Davis
was established in July 1987; for Messrs. Gumble and Schoenagel in July 1990;
and for Mr. Clauss, in July 1993.
Executive Employment Agreements
John G. Martines currently serves as the Chief Executive Officer of the
Company and the President and Chief Executive Officer of LA Bank. The Company
and LA Bank entered into a 5-year employment agreement with Mr. Martines on
September 1, 1993. Mr. Martines' annual base salary at the commencement of the
agreement was $125,000. His salary will increase each year in accordance with a
merit review by the Board of Directors. Under the agreement, his salary is
increased each year by not less than the average increase of other senior
executive personnel. Mr. Martines receives the employee fringe benefits that
are received by all personnel of LA Bank as well as standard perquisites that
are given to officers of comparable financial institutions in similar
capacities. Mr. Martines has agreed to serve as the Chief Executive Officer of
the Company without any additional compensation. At the end of each year of the
agreement, the term is automatically extended for one additional year;
therefore, there is a constant 5-year term in effect on the first day of
September of each year.
Mr. Martines may unilaterally terminate his employment with the Company
and LA Bank if: (1) his health should become impaired to an extent that it
makes continued performance of his duties hazardous to his physical or mental
health or his life; (2) without his consent, any assignment of duties or
limitation of powers is made that is not contemplated by the agreement; (3) he
is removed or is not re-elected to any of the positions that he holds currently
(except if terminated for cause); (4) a reduction in the rate of compensation
is made; (5) without his consent, the current fringe benefits and perquisites
are modified or terminated; or (6) there is a "change in control."
For purposes of the agreement, a "change in control" means: (1) the
acquisition of the beneficial ownership of at least twenty-five percent (25.0%)
of the Company's voting securities or all or substantially all of the assets of
the Company or LA Bank or both by a single person or entity or a group of
affiliated persons or entities; (2) the merger, consolidation or combination of
the Company or LA Bank or both with an unaffiliated corporation in which the
directors of the Company or LA Bank or both, immediately prior to such merger,
consolidation or combination constitute less than a majority of the board of
directors of the surviving, new or combined entity; or (3) during any period of
two consecutive years during the term of the agreement, persons who at the
beginning of such period constitute the Board of Directors of the Company cease
for any reason to constitute at least a majority thereof. The date of a change
in control shall mean the earlier of: (1) the first date on which a person,
entity, or group of affiliated persons or entities, acquire the beneficial
ownership of twenty-five percent (25.0%) or more of the Company's voting
securities; (2) the date of the transfer of all or substantially all of the
Company's or LA Bank's assets; (3) the date on which a merger, consolidation or
combination is consummated; or (4) the date on which persons who formerly
constituted a majority of the Board of Directors of the Company ceased to be a
majority.
Upon termination of employment by Mr. Martines for the above reasons, LA
Bank shall pay to him, no later than 30 days after the date of termination and
for a period of three years, annual compensation prorated into monthly payments
equal to his annual base salary on the date of termination or on the date six
months prior to the date of termination, whichever is greater. In the event of
termination as a result of a change in control, Mr. Martines may, at his
option, elect to receive in one lump sum the aggregate present value of the
above termination payments. The present value shall be determined by the
federal discount rate published under Section 1274(d) of the Internal Revenue
Code of 1986, as amended, then in effect, and compounded semi-annually.
Louis M. Martarano currently serves as the Vice President and Assistant
Secretary of the Company and the Executive Vice President of LA Bank. The
Company and LA Bank entered into a 5-year employment agreement with Mr.
Martarano on September 1, 1993. Mr. Martarano's annual base salary at the
commencement of the agreement was $87,500. His salary will increase each year
in accordance with the terms of the agreement. Under the agreement, his salary
is increased each year by not less than the average increase of other senior
executive personnel. Mr. Martarano receives the employee fringe benefits that
are received by all personnel of LA Bank, as well as standard perquisites that
are given to officers of comparable financial institutions in similar
capacities. Mr. Martarano has agreed to serve as Vice President and Assistant
Secretary of the Company without any additional compensation. At the end of
each year of the term of the agreement, the term is automatically extended for
one additional year; therefore, there is a constant 5-year term in effect on
the first day of September of each year.
53
<PAGE>
The agreement with Mr. Martarano has the same terms and conditions as
described above, with respect to the agreement with Mr. Martines relating to
voluntary termination by Mr. Martarano, to a change in control of the Company
and to termination payments.
1994 Stock Option Plan
The Option Plan is intended to secure for the Company and its shareholders
the benefits arising from share ownership by those officers and key employees
of the Company and LA Bank who will be responsible for the Company's future
growth and continued success. The following table presents the grants that were
made in 1995 and 1994 to the persons so indicated, which represents all of the
options approved under the plan. Options are granted with an exercise price
equal to the fair market value of the Company's Common Stock at the date the
option is granted.
STOCK OPTION GRANTS
<TABLE>
<CAPTION>
Individual Grants (1)
----------------------------------
Potential Realizable
Value at
Assumed Annual Rates
Percentage of Stock
Number of of Total Price Appreciation
Securities Options for
Underlying Granted to Exercise or Option Term(3)
Options Employees in Base Price Expiration --------------------
Name Granted(2) Fiscal Year ($/Sh)(2) Date 5.0%($) 10.0%($)
- ------------------------------------- ------------------ -------------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John G. Martines (President of LA 88,200 (Granted- 62.0 6.57 August 8, 364,266 923,454
Bank and Chief Executive Officer of August 8, 1995) 2005
the Company) 55,125 (Granted- 71.0 6.86 August 7, 237,589 602,516
August 7, 1994) 2004
Louis M. Martarano (Executive Vice 33,075 (Granted- 23.0 6.57 August 8, 136,600 346,295
President and Chief Operating August 8, 1995) 2005
Officer of LA Bank and Vice 22,050 (Granted- 29.0 6.86 August 7, 95,036 241,007
President of the Company) August 7, 1994) 2004
Joseph J. Earyes, CPA (Executive 22,050 (Granted- 15.0 6.57 August 8, 91,067 230,864
Vice President and Chief Financial August 8, 1995) 2005
Officer of LA Bank and Vice
President and Treasurer of the
Company)
</TABLE>
- ------------
(1) No options have been exercised by Messrs. Martines, Martarano, and Earyes
as of September 30, 1997.
(2) All outstanding options are adjusted to reflect the 5% dividend payable in
Common Stock on October 1, 1996 and 1997, and the two-for-one stock split
effective November 10, 1997.
(3) All amounts are calculated by multiplying the difference in the assumed
stock price appreciation and base price by the number of securities
underlying the options granted.
1997 Stock Option Plan
At the 1997 Annual Meeting of Shareholders held on April 29, 1997, the
shareholders approved the Company's 1997 Stock Option Plan which set aside no
more than 100,000 shares, adjusted for the two-for-one stock split effective
November 10, 1997 (subject to further anti-dilution adjustments) of the Common
Stock for issuance under such plan. This plan constitutes an element of the
Company's 1997 At-Risk Compensation Plan. Each year's cash bonus is determined
by the extent to which financial targets for the year are achieved by the
Company. Each participant in the At-Risk Compensation Plan will also receive
stock options with an aggregate exercise price equal to the amount of cash
bonus for the year payable to the participant. Options are granted with an
exercise price equal to the fair market value of the Company's Common Stock at
the date the option is granted.
54
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no material transactions since January 1, 1996, nor are
any such transactions currently proposed, to which the Company or LA Bank was
or is to be a party and in which any director or executive officer of the
Company, or any beneficial owner of more than 5.0% of the Common Stock of the
Company (or any associate thereof, respectively), had or will have a material
interest. The Company and LA 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 Company and LA 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
Company and LA Bank. Total loans outstanding from the Company and LA Bank, at
December 31, 1996, to the Company's and LA Bank's officers and directors as a
group and members of their immediate families and companies in which they had
an ownership interest of 10.0% or more were $1.2 million or 5.6% of the
Company's total stockholders' equity. The largest amount of indebtedness
outstanding at any time during fiscal year 1996 to the above identified group
was $1.6 million or 7.8% of the Company's total stockholders' equity. At
September 30, 1997, the amount of indebtedness outstanding to the above
identified group was $602,000 or 2.6% of LA Bank's total stockholders' equity.
Such loans do not involve more than the normal risk of collectibility nor do
they present other unfavorable features.
DESCRIPTION OF COMMON STOCK
The following is a summary of the material provisions of the Company's
Articles of Incorporation and Bylaws. This summary does not purport to be
complete and is qualified in its entirety by reference to such instruments,
each of which is incorporated by reference as an exhibit in the Registration
Statement of which this Prospectus forms a part.
Authorized Common and Preferred Stock
The Company has 10,000,000 shares of authorized Common Stock and 1,000,000
shares of authorized Preferred Stock. None of the shares of Preferred Stock are
outstanding. As of November 10, 1997, 3,734,766 shares of the Common Stock were
outstanding.
Dividends
For information relating to the Company's dividend policy, see "Market For
Common Stock And Related Shareholder Matters -- Dividends."
Employee Stock Purchase Plan
The Company reserved 50,000 shares of the Common Stock under this plan,
which was increased to 100,000 shares effective November 10, 1997, as a result
of the two-for-one stock split. Employees may purchase shares of the Common
Stock at 85.0% of the then prevailing per share market prices. Employees pay
for such stock purchases through periodic payroll deductions subject to a limit
of 10.0% of base pay. During 1996 and 1995, 5,462 and 2,099 shares,
respectively, were purchased under this plan.
Dividend Reinvestment and Stock Purchase Plan
The Company established a dividend reinvestment and stock purchase plan
available to shareholders who elect to (i) reinvest their cash dividends and
(ii) make voluntary cash payments for the purchase of additional shares of
Common Stock. The Common Stock is purchased from authorized but unissued
shares, substantially at prevailing market prices. The Company has reserved
600,000 shares of Common Stock for possible issuance under the plan. Stock
purchases under the plan totaled 11,909 shares in the nine months ended
September 30, 1997, and 16,053 and 16,809 shares in 1996 and 1995,
respectively.
Special Charter and Pennsylvania Corporate Law Provisions
The Company's Amended Articles of Incorporation and Bylaws contain certain
provisions that may have the effect of deterring or discouraging, among other
things, a nonnegotiated tender or exchange offer for the Common Stock, a proxy
contest for control of the Company, the assumption of control of the Company by
a holder of a large block of the Common Stock and the removal of the Company's
management. These provisions: (1) divide the Board of Directors into three
classes serving staggered three-year terms; (2) require that shares with at
least 66 2/3% of total voting power approve any merger, consolidation,
dissolution, liquidation and other
55
<PAGE>
similar transactions; (3) require that shares with at least 66 2/3% of total
voting power approve any amendment of those provisions of the Amended Articles
of Incorporation pertaining to shareholder approval of any merger,
consolidation, dissolution or liquidation; (4) permit the Board of Directors to
oppose a tender offer or other offer for the Company's securities on the basis
of factors other than the economic benefit to shareholders; (5) eliminate
cumulative voting in elections of directors; and (6) require advance notice of
nominations for the election of directors.
The Pennsylvania Business Corporation Law contains certain provisions that
will become applicable to the Company that may have similar effects. These
provisions, among other things: (1) require that, following any acquisition by
any person or group of 20.0% of a public corporation's voting power, the
remaining shareholders have the right to receive payment for their shares, in
cash, from such person or group in an amount equal to the "fair value" of the
shares, including an increment representing a proportion of any value payable
for control of the corporation; and (2) prohibit for five years, subject to
certain exceptions, a "business combination" (which includes a merger or
consolidation of the corporation or a sale, lease or exchange of assets) with a
shareholder or group of shareholders beneficially owning 20.0% or more of a
public corporation's voting power.
In April, 1990, Pennsylvania adopted legislation further amending the
Pennsylvania Business Corporation Law. To the extent applicable to the Company
at the present time, this legislation generally (1) expands the factors and
groups (including shareholders) that the Board of Directors can consider in
determining whether a certain action is in the best interests of the
corporation; (2) provides that the Board need not consider the interests of any
particular group as dominant or controlling; (3) provides that directors, in
order to satisfy the presumption that they have acted in the best interests of
the corporation, need not satisfy any greater obligation or higher burden of
proof with respect to actions relating to an acquisition or potential
acquisition of control; (4) provides that actions relating to acquisitions of
control that are approved by a majority of "disinterested directors" are
presumed to satisfy the directors' standard of care unless it is proven by
clear and convincing evidence that the directors did not assent to such action
in good faith after reasonable investigation; and (5) provides that the
fiduciary duty of directors is solely to the corporation and may be enforced by
the corporation or by a shareholder in a derivative action, but not by a
shareholder directly. One of the effects of these fiduciary duty provisions may
be to make it more difficult for a shareholder to successfully challenge the
actions of the Board of Directors in a potential change in control context.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the form of which is filed as an Exhibit to the Registration
Statement of which this Prospectus is a part), the Company has agreed to sell
to Janney Montgomery Scott Inc. (the "Underwriter"), and the Underwriter has
agreed to purchase from the Company, 700,000 shares of the Common Stock.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all shares of the Common
Stock offered hereby (other than those subject to the over-allotment option
described below) if any shares are purchased. The Underwriter has advised the
Company that it proposes initially to offer the shares of Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $0.50 per share. The Underwriter may allow and such dealers may reallow a
concession not in excess of $0.10 per share to other dealers. After the
initial public offering, the public offering price and such concessions may be
changed.
The Company has granted the Underwriter an option, exercisable within 30
days of the date of this Prospectus, to purchase up to 105,000 additional
shares of Common Stock from the Company at the same price per share as the
initial 700,000 shares of Common Stock to be purchased by the Underwriter. The
Underwriter may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock that the Underwriter has agreed to purchase.
The Company and its directors and executive officers have agreed that they
will not, with certain exceptions, publicly sell or otherwise dispose of any
shares of Common Stock, except the shares of the Common Stock offered hereby,
for 180 days from the date of this Prospectus without the prior written consent
of the Underwriter.
56
<PAGE>
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriter may be required to
make in respect thereof. The Underwriting Agreement also provides for the
payment of a $100,000 nonaccountable expense allowance to the Underwriter in
connection with the Offering.
The public offering price of the Common Stock offered hereby was
determined by negotiation between the Company and the Underwriter. Among the
factors considered in determining the public offering price are certain
financial information of the Company, an assessment of the Company's prospects
and factors relating to the market value of the Company and other publicly
traded financial institutions, and the volume of trades in the Common Stock.
In order to facilitate the Offering of the Common Stock, the Underwriter
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriter may overallot in
connection with the Offering, creating a short position in the Common Stock for
its own account. In addition, to cover overallotments or to stabilize the price
of the Common Stock, the Underwriter may bid for, and purchase, Common Stock in
the open market. Finally, the Underwriter may reclaim selling concessions
allowed to a dealer for distributing the Common Stock in the offering, if the
syndicate repurchases previously distributed Common Stock in transactions to
cover syndicate short positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriter is not required
to engage in these activities, and may end any of these activities at any time.
INDEMNIFICATION
Pennsylvania law provides that a Pennsylvania corporation may indemnify
directors, officers, employees and agents of the corporation against
liabilities they may incur in such capacities for any action taken or any
failure to act, whether or not the corporation would have the power to
indemnify the person under any provision of law, unless such action or failure
to act is determined by a court to have constituted recklessness or willful
misconduct. Pennsylvania law also permits the adoption of a Bylaw amendment,
approved by shareholders, providing for the elimination of a director's
liability for monetary damages for any action taken or any failure to take any
action unless (1) the director has breached or failed to perform the duties of
his office and (2) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
The Bylaws of the Company provide for (1) indemnification of directors,
officers, employees and agents of the registrant and its subsidiaries and (2)
the elimination of a director's liability for monetary damages, to the fullest
extent permitted by Pennsylvania law.
Directors and officers also are insured against certain liabilities for
their actions, as such, by an insurance policy obtained by the Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to the directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Schnader Harrison Segal & Lewis LLP, Harrisburg, Pennsylvania.
Certain legal matters will be passed upon for the Underwriter by Stevens & Lee,
Reading, Pennsylvania.
EXPERTS
The consolidated financial statements appearing in this Prospectus have
been audited by Parente, Randolph, Orlando, Carey & Associates, Wilkes-Barre,
Pennsylvania, independent certified public accountants, to the extent and for
the periods indicated in their report appearing elsewhere herein, and are
included in reliance upon such report and upon the authority of such firm as
experts in accounting and auditing.
57
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Lake Ariel Bancorp, Inc.:
<TABLE>
<S> <C>
Financial Statements (Unaudited)
Consolidated Balance Sheet - As of September 30, 1997 and December 31, 1996 ............ F-2
Consolidated Statement of Income - For the nine and three months ended September 30, 1997
and 1996 .............................................................................. F-3
Consolidated Statement of Stockholders' Equity - As of September 30, 1997 ............... F-4
Consolidated Statement of Stockholders' Equity - As of September 30, 1996 ............... F-5
Consolidated Statement of Cash Flows - For the nine months ended September 30, 1997
and 1996 .............................................................................. F-6
Notes to Consolidated Financial Statements ............................................. F-7
Financial Statements (Audited)
Report of Independent Certified Public Accountants .................................... F-9
Consolidated Balance Sheet - As of December 31, 1996 and 1995 ........................... F-10
Consolidated Statement of Income - For the years ended December 31, 1996, 1995 and 1994 F-11
Consolidated Statement of Stockholders' Equity - For the years ended December 31, 1996,
1995 and 1994 ........................................................................... F-12
Consolidated Statement of Cash Flows - For the years ended December 31, 1996, 1995
and 1994 .............................................................................. F-13
Notes to Consolidated Financial Statements ............................................. F-14
</TABLE>
F-1
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- -------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................................... $ 13,739 $ 15,971
Available-for-sale securities ................................................ 63,911 60,399
Held-to-maturity securities (fair value of $58,360 and $26,564, respectively) 57,870 26,601
Loans and leases ............................................................ 205,712 186,494
Mortgage loans held for resale ............................................. 3,996 315
Less unearned income and loan fees .......................................... (7,334) (8,989)
Less allowance for possible credit losses ................................. (2,153) (1,830)
-------- --------
Net Loans ............................................................... 200,221 175,990
Premises and equipment, net ................................................ 12,214 10,005
Accrued interest receivable ................................................ 3,095 2,349
Foreclosed assets held for sale ............................................. 561 841
Other assets ............................................................... 12,010 5,750
-------- --------
Total Assets ......................................................... $363,621 $297,906
======== ========
LIABILITIES
Deposits:
Noninterest-bearing ......................................................... $ 36,875 $ 32,539
Interest-bearing:
Demand .................................................................. 32,183 27,070
Savings .................................................................. 39,685 37,713
Time ..................................................................... 128,511 115,634
Time $100,000 and over ................................................... 40,883 40,240
-------- --------
Total Deposits ......................................................... 278,137 253,196
Accrued interest payable ................................................... 3,144 2,416
Federal funds purchased ...................................................... 4,800 --
Securities sold under agreements to repurchase .............................. 200 300
Short-term borrowings ...................................................... 4,500 --
Long-term debt ............................................................... 48,328 20,023
Other liabilities ............................................................ 1,329 799
-------- --------
Total Liabilities ...................................................... 340,438 276,734
-------- --------
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 $0.42 par value each; issued and
outstanding 1,778,937 shares in 1997 and 1,761,776 in 1996 .................. 747 740
Capital surplus ............................................................ 11,408 11,099
Retained earnings ............................................................ 11,049 9,572
Net unrealized securities gains (losses) on available-for-sale securities ... (21) (239)
-------- --------
Total Stockholders' Equity ............................................. 23,183 21,172
-------- --------
Total Liabilities and Stockholders' Equity ........................... $363,621 $297,906
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income
Loans and leases ....................................... $12,427 $10,713 $ 4,388 $ 3,697
Investment Securities
Taxable ............................................. 4,340 3,250 1,477 1,157
Exempt from federal income taxes ..................... 1,168 796 390 287
Dividends ............................................. 114 68 51 27
------- ------- ------- -------
Total Investment Securities Income .................. 5,622 4,114 1,918 1,471
------- ------- ------- -------
Deposits in banks .................................... 7 4 2 1
Federal funds sold .................................... 196 93 75 8
------- ------- ------- -------
Total interest income .............................. 18,252 14,924 6,383 5,177
------- ------- ------- -------
Interest expense
Deposit ................................................ 7,572 6,534 2,686 2,270
Long-term debt ....................................... 2,262 740 755 252
Federal funds purchased .............................. 20 22 10 18
Short-term borrowings ................................. 45 113 31 20
Securities sold under agreements to repurchase ......... 11 13 4 3
------- ------- ------- -------
Total interest expense .............................. 9,910 7,422 3,506 2,563
------- ------- ------- -------
Net interest income .................................... 8,342 7,502 2,877 2,614
Provision for possible credit losses .................. 730 425 350 175
------- ------- ------- -------
Net interest income after provision for possible credit
losses ................................................ 7,612 7,077 2,527 2,439
------- ------- ------- -------
Other operating income
Loan origination fees ................................. 168 160 19 13
Customer service charges and fees ..................... 905 909 304 303
Mortgage servicing fees .............................. 258 247 90 80
Gain (loss) on available-for-sale securities ......... 80 43 89 90
Gain (loss) on sale of loans, net ..................... 185 61 63 2
Other income .......................................... 728 469 332 162
------- ------- ------- -------
Total other operating income ........................ 2,324 1,889 897 650
------- ------- ------- -------
Other operating expenses
Salaries and benefits ................................. 3,112 2,661 1,062 900
Occupancy expense .................................... 986 799 315 259
Equipment expense .................................... 657 623 214 209
Advertising .......................................... 177 186 49 39
Other expenses ....................................... 1,842 1,584 673 585
------- ------- ------- -------
Total other operating expenses ..................... 6,774 5,853 2,313 1,992
------- ------- ------- -------
Income before provision for income taxes ............... 3,162 3,113 1,111 1,097
Provision for income taxes ........................... 795 835 250 320
------- ------- ------- -------
Net income ............................................. $ 2,397 $ 2,278 $ 861 $ 777
======= ======= ======= =======
Earnings per share(1) ................................. $ 0.63 $ 0.62 $ 0.22 $ 0.21
======= ======= ======= =======
Dividends per share(1) ................................. $ 0.25 $ 0.22 $ 0.09 $ 0.08
======= ======= ======= =======
Weighted average number of shares outstanding(1) ...... 3,839 3,698 3,839 3,698
</TABLE>
- ------------
(1) Reflects adjustment for 5% stock dividends issued on October 1, 1997 and
1996, and a two-for-one stock split effective November 10, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY --
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<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, 1996 ............ $740 $11,099 $ 9,572 $ (239) $21,172
Net income .............................. -- -- 2,397 -- 2,397
Issuance of 11,909 shares of common
stock through Dividend Reinvestment
Plan ................................. 5 242 -- -- 247
Issuance of 5,252 shares of common
stock through Employee Stock Pur-
chase Plan 2 67 -- -- 69
Cash dividends declared ............... -- -- (920) -- (920)
Change in net unrealized securities gains
(losses) .............................. -- -- -- 218 218
---- ------- ------- ------ -------
Balances, September 30, 1997 ............ $747 $11,408 $11,049 $ (21) $23,183
==== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY --
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<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, 1995 ............ $696 $9,414 $ 9,118 $ 281 $19,509
Net income .............................. -- -- 2,278 -- 2,278
Issuance of 10,966 shares of common
stock through Dividend Reinvestment
Plan ................................. 5 165 -- -- 170
Issuance of 5,462 shares of common
stock through Employee Stock Pur-
chase Plan 2 69 -- -- 71
Cash dividends declared ............... -- -- (800) -- (800)
Change in net unrealized securities gains
(losses) .............................. -- -- -- (781) (781)
---- ------- ------- ------ -------
Balances, September 30, 1996 ............ $703 $9,648 $10,596 $ (500) $20,447
==== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS --
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September
30,
1997 1996
------------- -----------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities .................................
Net income ............................................................ $ 2,397 $ 2,278
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for possible credit losses ................................. 730 425
Depreciation, amortization and accretion ........................... 647 540
(Increase) decrease in mortgage loans held for resale ............... (3,681) 812
Investment security (gains) losses, net .............................. (80) (43)
Loss on sale of foreclosed assets .................................... 100 40
(Gain) loss on sale of equipment .................................... (5) --
(Increase) decrease in accrued interest receivable .................. (746) (255)
Increase (decrease) in accrued interest payable ..................... 728 673
(Increase) decrease in other assets ................................. (6,373) (342)
Increase (decrease) in other liabilities ........................... 530 (266)
---------- ---------
Net Cash Provided by (Used in) Operating Activities .................. (5,753) 3,862
---------- ---------
Cash Flows from Investing Activities
Held-to-maturity securities:
Proceeds from maturities ............................................. 2,911 392
Purchases ............................................................ (34,180) (4,457)
Available-for-sale securities:
Proceeds from maturities ............................................. 3,133 7,369
Proceeds from sales ................................................ 10,737 22,186
Purchases ............................................................ (16,966) (40,553)
Net (increase) decrease in loans and leases ........................... (21,545) (21,167)
Purchases of premises and equipment ................................. (2,860) (194)
Proceeds from sale of equipment ....................................... 5 --
Proceeds from sale of foreclosed assets .............................. 445 69
---------- ---------
Net Cash Provided by (Used in) Investing Activities .................. (58,320) (36,355)
---------- ---------
Cash Flows From Financing Activities
Net increase in deposits ............................................. 24,941 30,963
Increase (decrease) in Federal funds purchased ........................ 4,800 --
Increase (decrease) in short-term borrowings ........................ 4,500 (5,000)
Increase (decrease) in securities sold under agreements to repurchase . (100) (100)
Proceeds from long-term debt .......................................... 30,000 --
Principal payments on long-term debt ................................. (1,695) (31)
Proceeds from issuance of common stock .............................. 316 241
Cash dividends ...................................................... (921) (800)
---------- ---------
Net Cash Provided by (Used in) Financing Activities .................. 61,841 30,473
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents ..................... (2,232) (2,020)
Cash and Cash Equivalents at Beginning of Period ..................... 15,971 12,519
---------- ---------
Cash and Cash Equivalents at End of Period ........................... $ 13,739 $ 10,499
========== =========
Cash Paid During The Period For:
Interest ............................................................ $ 9,182 $ 6,749
========== =========
Income taxes ......................................................... $ 552 $ 775
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The financial information as of December 31, 1996 is audited and for the
interim periods ended September 30, 1997 and 1996 included herein is unaudited;
however, such information reflects all adjustments consisting of only normal
recurring adjustments, which are, in the opinion of management, necessary to a
fair presentation of the results for the interim periods.
1. REPORTING AND ACCOUNTING POLICIES
Principles of Consolidation
The accounting and financial reporting policies of Lake Ariel Bancorp,
Inc. and its subsidiary conform to generally accepted accounting principles and
to general practice within the banking industry. The consolidated statements
include the accounts of Lake Ariel Bancorp, Inc. and its wholly owned
subsidiary, LA Bank, N.A. (Bank) including its subsidiary, LA Lease, Inc.
(collectively, Company). All material intercompany accounts and transactions
have been eliminated in consolidation. The accompanying interim financial
statements are unaudited. In management's opinion, the consolidated financial
statements reflect a fair presentation of the consolidated financial position
of Lake Ariel Bancorp, Inc. and subsidiary, and the results of its operations
and its cash flows for the interim periods presented, in conformity with
generally accepted accounting principles.
2. CASH FLOWS
The Company considers amounts due from banks and federal funds sold as
cash equivalents. Generally, federal funds are sold for one-day periods.
From time to time, the Company swaps its residential mortgage loans for
participation certificates of a similar amount issued by the Federal Home Loan
Mortgage Corporation. These certificates do not involve the transfer of cash
for cash flow purposes. No mortgage loans were swapped for participation
certificates during the first nine months of 1997 or 1996.
3. INVESTMENT SECURITIES
SFAS No. 115 requires the classification of securities as
held-to-maturity, available-for-sale or trading. Securities, other than
securities classified as available-for-sale, are carried at amortized cost if
management has the ability and intent to hold these securities to maturity.
Securities expected to be held for an indefinite period of time and not held
until maturity are classified as available-for-sale and are carried at
estimated fair value. Decisions to sell these securities are determined by the
Company's financial position, including but not limited to, liquidity, interest
rate risk, asset liability management strategies, regulatory requirements, tax
considerations or capital adequacy. Gains or losses on investment securities
are computed using the specific identification method.
The Company has no derivative financial instruments requiring disclosure
under SFAS No. 119.
4. RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to the 1997
reporting format.
F-7
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 -- (Continued)
5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
There were no short-term borrowings at September 30, 1997.
Long-term debt at September 30, 1997 consisted of the following:
<TABLE>
<S> <C>
Unsecured notes, payable in the amount of $31,200 semiannually, maturing April 22,
1998. ........................................................................... $ 62,000
Borrowings with The Federal Home Loan Bank ....................................... 48,266,000
-----------
Total ........................................................................ $48,328,000
===========
</TABLE>
Annual maturities of the long-term debt are as follows: $699,600 in 1997;
$12,818,200 in 1998; $2,971,900 in 1999; $8,169,100 in 2000; $8,281,700 in
2001; $10,387,500 in 2002; $5,000,000 in 2005.
The borrowings with the Federal Home Loan Bank of Pittsburgh (FHLB)
require the Company to maintain collateral with a fair value in an amount which
approximates the total outstanding debt. In addition, the Company must maintain
its membership with the FHLB.
F-8
<PAGE>
LAKE ARIEL BANCORP, INC.
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, 1996 and 1995, 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, 1996. 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
also 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Parente, Randolph, Orlando, Carey & Associates
Wilkes-Barre, Pennsylvania
January 24, 1997 (except for Notes 1, 9, 18 and 19, as to which the date is
November 10, 1997)
F-9
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET -- AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................................... $ 15,971 $ 12,519
Available-for-sale securities ....................................... 60,399 50,580
Held-to-maturity securities (fair value of $26,564 and $22,866 in 1996
and 1995, respectively) ............................................. 26,601 22,589
Loans and leases ................................................... 186,494 159,170
Mortgage loans held for resale ....................................... 315 3,405
Less unearned income and loan fees ................................. (8,989) (8,612)
Less allowance for possible credit losses ........................... (1,830) (1,657)
-------- --------
Net loans and leases ............................................. 175,990 152,306
Premises and equipment, net .......................................... 10,005 7,785
Accrued interest receivable .......................................... 2,349 1,971
Foreclosed assets held for sale .................................... 841 52
Other assets ......................................................... 5,750 4,057
-------- --------
Total Assets ................................................... $297,906 $251,859
======== ========
LIABILITIES
Deposits:
Noninterest-bearing ................................................ $ 32,539 $ 26,866
Interest-bearing:
Demand ............................................................ 27,070 25,686
Savings ......................................................... 37,713 39,388
Time ............................................................ 115,634 89,876
Time $100,000 and over............................................. 40,240 26,943
-------- --------
Total Deposits ................................................ 253,196 208,759
Accrued interest payable ............................................. 2,416 1,746
Short-term borrowings ................................................ -- 5,000
Securities sold under agreements to repurchase ..................... 300 400
Long-term debt ...................................................... 20,023 15,156
Other liabilities ................................................... 799 1,289
-------- --------
Total Liabilities ............................................. 276,734 232,350
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of $1.25 par value each;
no outstanding shares ............................................. -- --
Common stock: Authorized, 5,000,000 shares of $.42 par value each;
issued and outstanding 1,761,776 shares in 1996 and 1,657,449
shares in 1995 ...................................................... 740 696
Capital surplus ...................................................... 11,099 9,414
Retained earnings ................................................... 9,572 9,118
Net unrealized gains (losses) on available-for-sale securities ...... (239) 281
-------- --------
Total Stockholders' Equity .................................... 21,172 19,509
-------- --------
Total Liabilities and Stockholders' Equity ..................... $297,906 $251,859
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME --
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- -----------
(Dollars in thousands, except share
data)
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases .................................... $14,592 $13,112 $10,363
Investment securities:
Taxable ............................................. 4,323 4,187 2,544
Exempt from federal income taxes .................. 1,104 956 1,119
Dividends .......................................... 86 117 53
------- ------- -------
Total investment securities income ............... 5,513 5,260 3,716
------- ------- -------
Deposits in bank .................................... 6 22 4
Federal funds sold ................................. 164 154 74
------- ------- -------
TOTAL INTEREST INCOME ........................ 20,275 18,548 14,157
------- ------- -------
INTEREST EXPENSE
Deposits ............................................. 8,957 8,165 5,190
Long-term debt ....................................... 1,143 1,215 541
Short-term borrowings .............................. 66 105 206
Securities sold under agreements to repurchase ...... 17 29 30
------- ------- -------
TOTAL INTEREST EXPENSE ........................ 10,183 9,514 5,967
------- ------- -------
NET INTEREST INCOME ................................. 10,092 9,034 8,190
PROVISION FOR POSSIBLE CREDIT LOSSES ............... 650 810 375
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES .............................. 9,442 8,224 7,815
------- ------- -------
OTHER OPERATING INCOME
Loan origination fees .............................. 266 179 422
Customer service charges and fees .................. 1,217 1,066 683
Mortgage servicing fees .............................. 327 302 221
Investment security gains, net ..................... 43 331 112
Gain (loss) on sale of loans, net .................. 114 132 (131)
Other income ....................................... 739 471 372
------- ------- -------
TOTAL OTHER OPERATING INCOME .................. 2,706 2,481 1,679
------- ------- -------
OTHER OPERATING EXPENSES
Salaries and benefits .............................. 3,684 3,559 3,003
Occupancy expense .................................... 1,053 1,036 923
Equipment expense .................................... 824 855 602
FDIC assessment .................................... 2 222 321
Foreclosed asset expenses ........................... 51 26 44
Advertising .......................................... 249 242 243
Other expenses ....................................... 2,134 1,823 1,695
------- ------- -------
TOTAL OTHER OPERATING EXPENSES ............... 7,997 7,763 6,831
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES. 4,151 2,942 2,663
PROVISION FOR INCOME TAXES ........................... 1,120 635 535
------- ------- -------
NET INCOME .......................................... $ 3,031 $ 2,307 $ 2,128
======= ======= =======
EARNINGS PER SHARE(1) .............................. $ 0.82 $ 0.63 $ 0.59
======= ======= =======
DIVIDENDS PER SHARE(1) .............................. $ 0.32 $ 0.27 $ 0.25
======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING(1)....................................... 3,686 3,641 3,595
</TABLE>
- ------------
(1) Reflects adjustment for 5% stock dividends issued on October 1, 1997 and
1996, and a two-for-one stock split effective November 10, 1997. (See Note
19.)
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY --
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 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 ($0.25 per
share)(1) ................................. -- -- (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 ($0.27 per
share)(1) ................................. -- -- (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
Net income ................................. -- -- 3,031 -- 3,031
Issuance of 16,053 shares of common stock
through Dividend Reinvestment Plan ......... 7 265 -- -- 272
Issuance of 5,462 shares of common stock
through Employee Stock Purchase Plan ...... 2 70 -- -- 72
Cash dividends declared ($0.32 per
share)(1) ................................. -- -- (1,186) -- (1,186)
Stock dividend declared (5% on October 1,
1996) .................................... 35 1,350 (1,385) -- --
Cash paid for fractional shares on stock
dividend ................................. -- -- (6) -- (6)
Change in net unrealized securities gains
(losses) ................................. -- -- -- (520) (520)
---- ------- --------- -------- ---------
BALANCES, DECEMBER 31, 1996 ............... $740 $11,099 $ 9,572 $ (239) $21,172
==== ======= ========= ======== =========
</TABLE>
- ------------
(1) Reflects adjustment for 5% stock dividends issued on October 1, 1997 and
1996, and a two-for-one stock split effective November 10, 1997. (See Note
19.)
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS --
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................... $ 3,031 $ 2,307 $ 2,128
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible credit losses ........................ 650 810 375
Depreciation, amortization and accretion .................. 720 710 685
Deferred income taxes ....................................... 45 8 85
(Increase) decrease in mortgage loans held for resale ...... 3,090 (3,286) 11,623
Investment security gains, net .............................. (43) (331) (112)
(Gain) loss on sale of foreclosed assets .................. (1) 93 12
(Gain) loss on sale of leased assets ........................ 2 (5) (2)
(Gain) loss on sale of equipment ........................... (1) 138 11
(Increase) decrease in accrued interest receivable ......... (378) 95 (615)
Increase in accrued interest payable ........................ 670 74 899
Increase in other assets .................................... (869) (695) (1,219)
Increase (decrease) in other liabilities ..................... (490) 822 314
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 6,426 740 14,184
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities :
Proceeds from maturities .................................... 339 17,060 1,336
Purchases ................................................... (4,351) (4,947) (20,001)
Available-for-sale securities:
Proceeds from maturities .................................... 6,505 3,955 4,201
Proceeds from sales ....................................... 34,130 18,702 19,179
Purchases ................................................... (51,190) (27,729) (17,160)
Net increase in loans and leases ........................... (28,303) (15,229) (64,873)
Purchases of premises and equipment ........................ (2,962) (1,659) (1,666)
Proceeds from sale of leased assets ........................ 19 20 15
Proceeds from sale of equipment .............................. 13 8 15
Proceeds from sale of foreclosed assets ..................... 70 448 283
Purchase of intangible assets .............................. (600) -- --
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ........................ (46,330) (9,371) (78,671)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits .................................... 44,437 16,572 46,133
Increase (decrease) in short-term borrowings ............... (5,000) (9,750) 4,125
Decrease in securities sold under agreements to repurchase (100) (600) 1,000
Proceeds from long-term debt ................................. 5,000 25,000 15,000
Principal payments on long-term debt ........................ (133) (20,102) (62)
Proceeds from issuance of common stock ..................... 344 283 108
Cash dividends ............................................. (1,192) (972) (898)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES . 43,356 10,431 65,406
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS ........................ 3,452 1,800 919
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR ...................................................... 12,519 10,719 9,800
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR. $ 15,971 $ 12,519 $ 10,719
========== ========== ==========
CASH PAID DURING THE YEAR FOR:
Interest ................................................... $ 9,513 $ 9,588 $ 5,068
========== ========== ==========
Income taxes ................................................ $ 1,025 $ 578 $ 385
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
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 transactions are eliminated in
consolidation.
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 fourteen branch banking offices in Wayne,
Lackawanna, Pike and Monroe 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.
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.
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 during the years ended December 31, 1996, 1995 and 1994.
F-14
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. Summary of Significant Accounting Policies -- (Continued)
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-downs 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 fair 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.
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.
Loan Servicing and Loan Servicing Rights
The Company services real estate loans for investors in the secondary
mortgage market, which are not included in the accompanying consolidated
balance sheet. The approximate total amount of mortgages serviced amounted to
$119,898,000, $121,375,000 and $113,551,000 at December 31, 1996, 1995 and
1994, respectively.
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights.
F-15
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. Summary of Significant Accounting Policies -- (Continued)
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the following predominant risk characteristics of the underlying
loans: stated term of the loan and interest rate. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing rights for
a stratum exceed their fair value.
When participating interests in loans sold have an average contractual
interest rate, adjusted for normal servicing fees, that differs from the agreed
yield to the purchaser, gains or losses are recognized equal to the present
value of such differential over the estimated remaining life of such loans. The
resulting "excess servicing receivable" or "deferred servicing revenue" is
amortized over the estimated life using a method approximating the interest
method.
Quoted market prices are not available for the excess servicing
receivables. Thus, the excess servicing receivables and the amortization
thereon are periodically evaluated in relation to estimated future servicing
revenues, taking into consideration changes in interest rates, current
prepayment rates, and expected future cash flows. The Company evaluates the
carrying value of the excess servicing receivables by estimating the future
servicing income of the excess servicing receivables based on management's best
estimate of remaining loan lives and discounted at the original discount rate.
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
Intangible Assets
Core deposit intangible assets and customer lists acquired are included in
other assets and are being amortized over a period of six to eight years using
the straight-line method. Amortization for 1996, 1995 and 1994 was $108,000 per
year.
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.
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.
F-16
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. Summary of Significant Accounting Policies -- (Continued)
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 1996, 1995 and 1994, the Company transferred $858,000, $422,000 and
$367,000, respectively, from its loan portfolio to foreclosed assets held for
sale.
During 1995 and 1994, the Company swapped $430,000 and $23,479,000,
respectively, of its mortgage loans for participation certificates of a similar
amount issued by the Federal Home Loan Mortgage Corporation. No mortgage loans
were swapped for participation certificates during 1996. 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 effect to the 5% stock dividends issued on October 1,
1997 and 1996, the two-for-one stock split effective November 10, 1997, and the
assumed exercise of stock options. The weighted average number of shares
outstanding was 3,686,000 in 1996, 3,641,000 in 1995 and 3,595,000 in 1994.
(See Note 19.)
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
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 1996 and 1995 was
approximately $375,000. In addition, at December 31, 1996 and 1995, required
compensating reserve balances with correspondent banks were $2,010,000 and
$1,881,000, 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.
F-17
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Investment Securities
Debt and equity securities have been classified in the consolidated
balance sheet according to management's intent. The carrying amount of
securities and their approximate fair values at December 31, 1996 and 1995 were
as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. government agencies and corporations ............ $50,253 $100 $549 $49,804
------- ---- ---- -------
Obligations of states and political subdivisions ...... 9,066 120 34 9,152
------- ---- ---- -------
Total debt securities ................................. 59,319 220 583 58,956
Equity securities .................................... 1,443 -- -- 1,443
------- ---- ---- -------
Total ................................................ $60,762 $220 $583 $60,399
======= ==== ==== =======
Held-to-maturity securities:
U.S. government agencies and corporations ............ $10,841 $ -- $370 $10,471
Obligations of states and political subdivisions ...... 15,760 368 35 16,093
------- ---- ---- -------
Total ................................................ $26,601 $368 $405 $26,564
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Available-for-sale securities:
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
======= ==== ==== =======
Held-to-maturity securities:
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
======= ==== ==== =======
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1996, 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 Held-to-maturity
securities securities
----------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Due in one year or less ..................... $ 1,055 $ 1,068 $ -- $ --
Due after one year through five years ...... 2,408 2,429 -- --
Due after five years through ten years ...... 13,654 13,583 7,686 7,808
Due after ten years ........................ 42,202 41,876 18,915 18,756
------- ------- ------- -------
Total ....................................... $59,319 $58,956 $26,601 $26,564
======= ======= ======= =======
</TABLE>
F-18
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Investment Securities -- (Continued)
Gross realized gains and gross realized losses on sales of
available-for-sale securities were as follows for the years ended December 31,
1996, 1995, and 1994 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Gross realized gains:
U.S. government agencies and corporations ............ $ 78 $309 $ 78
Obligations of states and political subdivisions ...... 114 36 58
---- ---- ----
Total ................................................ $192 $345 $136
==== ==== ====
Gross realized losses:
U.S. government agencies and corporations ............ $149 $ 14 $ 13
Obligations of states and political subdivisions ...... -- -- 11
---- ---- ----
Total ................................................ $149 $ 14 $ 24
==== ==== ====
</TABLE>
Investment securities carried at $17,144,000 in 1996 and $20,713,000 in
1995 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.
The unamortized premiums on mortgage-backed securities amounted to
$557,000 and $283,000 as of December 31, 1996 and 1995, respectively. The
unaccreted discount on mortgage-backed securities amounted to $208,000 and
$320,000 as of December 31, 1996 and 1995, respectively.
4. Loans and Leases
A summary of the outstanding loans and leases by major categories at
December 31 is as follows:
1996 1995
----------- -----------
(In thousands)
Real estate-construction .................. $ 3,214 $ 4,726
Real estate-mortgage ..................... 84,352 68,006
Commercial and industrial .................. 51,485 45,210
Consumer installment ..................... 45,170 42,891
Lease financing ........................... 2,588 1,742
Unearned income ........................... (8,091) (7,641)
Unearned loan fees, net .................. (898) (971)
-------- ---------
Total loans and leases .................. 177,820 153,963
Allowance for possible credit losses ...... (1,830) (1,657)
-------- ---------
Net loans and leases ..................... $175,990 $ 152,306
======== =========
Total nonaccrual loans outstanding at December 31, 1996 were approximately
$615,000 as compared to $1,703,000 at December 31, 1995. Included in nonaccrual
loans are $542,000 of impaired loans in nonaccrual status, for which $184,000
has been provided for in the allowance for possible credit losses to cover
potential losses from these impaired loans. At December 31, 1996 and 1995,
there were no outstanding commitments to lend funds to debtors with nonaccrual
loans. At December 31, 1996 and 1995, 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 $1,593,000 and $1,716,000 at December 31,
1996 and 1995, respectively.
F-19
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Loans and Leases -- (Continued)
Further information regarding the balance of nonaccrual loans at December
31, 1996, and related interest payment information, is as follows (in
thousands):
<TABLE>
<CAPTION>
Cash Payments Received During 1996 Were Applied As Follows:
----------------------------------------------------------------------
Book Contractual Recovery
Balance Balance Interest Of Prior Reduction Of
12/31/96 12/31/96 Income Charge-Off Principal
---------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Contractually past due with:
Substantial performance. ...... $ 82 $ 82 $ -- $ -- $ 4
Limited performance ............ 103 103 4 -- 7
No performance ............... 135 144 -- -- --
Contractually current, however:
Payment of full principal or
interest in doubt ............ 207 207 -- -- 65
Other ........................ 88 88 3 -- 3
---- ---- ---- -------- ---
Total ........................ $615 $624 $ 7 $ -- $79
==== ==== ==== ======== ===
</TABLE>
At December 31, 1996 and 1995, 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 $421,000 and $317,000 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 1996 and 1995 were $363,000 and $19,000,
respectively, while payments were $259,000 and $130,000 respectively, during
the same periods.
A summary of selected loan maturities and interest sensitivity analysis at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Maturity Distribution And Interest Rate
Sensitivity
--------------------------------------------------
Within One Two-Five After Five
Year Years Years Total
------------ ---------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate-construction ...... $ 3,214 $ -- $ -- $ 3,214
Commercial and industrial ...... 11,590 7,633 32,262 51,485
------- ------ ------- -------
Total ........................ $14,804 $7,633 $32,262 $54,699
======= ====== ======= =======
Fixed interest rate ............ $ 4,075 $2,943 $ 6,821 $13,839
Adjustable interest rate ...... 10,729 4,690 25,441 40,860
------- ------ ------- -------
Total ........................ $14,804 $7,633 $32,262 $54,699
======= ====== ======= =======
</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.
F-20
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Loans and Leases -- (Continued)
Changes in the allowance for possible credit losses for the years ended
December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period ........................ $ 1,657 $ 1,496 $ 1,544
------- ------- -------
Charge-offs:
Real estate-construction ........................... -- -- --
Real estate-mortgage ................................. 143 200 14
Commercial and industrial ........................... 158 294 321
Consumer installment ................................. 274 206 157
Lease financing. .................................... -- -- 7
------- ------- -------
Total. ............................................. 575 700 499
------- ------- -------
Recoveries:
Real estate-construction ........................... -- -- --
Real estate-mortgage ................................. -- -- 2
Commercial and industrial ........................... 40 8 12
Consumer installment ................................. 58 43 58
Lease financing .................................... -- -- 4
------- ------- -------
Total. ............................................. 98 51 76
------- ------- -------
Net charge-offs ....................................... 477 649 423
Provision for possible credit losses .................. 650 810 375
------- ------- -------
Balance at end of period .............................. $ 1,830 $ 1,657 $ 1,496
======= ======= =======
Ratio of net charge-offs during period to average loans
outstanding during period ........................... 0.30% 0.44% 0.35%
======= ======= =======
</TABLE>
5. Premises and Equipment
Premises and equipment at December 31 are summarized as follows:
1996 1995
--------- --------
(In thousands)
Land and land improvements ............ $ 1,420 $ 1,019
Buildings and improvements ............ 7,446 5,375
Furniture, fixtures and equipment ...... 4,853 4,413
------- -------
Total ................................. 13,719 10,807
Less accumulated depreciation ......... 3,714 3,022
------- -------
Net .................................... $10,005 $ 7,785
======= =======
Depreciation expense was $730,000, $743,000, and $619,000 in 1996, 1995
and 1994, respectively.
F-21
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Premises and Equipment -- (Continued)
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 $348,000 in 1996, $339,000 in 1995 and $274,000 in
1994. Required future minimum annual rentals under all such noncancelable
operating leases as of December 31, 1996 are as follows (in thousands):
1997 ........................... $ 399
1998 ........................... 344
1999 ........................... 316
2000 ........................... 253
2001 ........................... 186
Thereafter ..................... 1,368
------
Total ........................ $2,866
======
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:
1996 1995
--------- --------
(In thousands)
Three months or less ............... $11,375 $11,708
Over three through six months ...... 17,847 5,701
Over six through twelve months ...... 6,376 8,213
Over twelve months .................. 4,642 1,321
------- -------
Total .............................. $40,240 $26,943
======= =======
7. Short-Term Borrowings
There were no short-term borrowings outstanding at December 31, 1996 as
compared to $5,000,000 at December 31, 1995. The maximum amount of outstanding
month-end short-term borrowings during 1996, 1995 and 1994 were $5,000,000,
$10,050,000, and $11,750,000, respectively. The approximate average amount
outstanding during 1996, 1995, and 1994 was $2,179,000, $5,037,000, and
$4,805,000 respectively. The average interest rate on the balances during 1996,
1995, and 1994 were 5.25%, 5.39%, and 4.29%, respectively.
8. Long-Term Debt
Long-term debt at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- --------
(In thousands)
<S> <C> <C>
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 ............................................................... $ 94 $ 156
Collateralized borrowings, interest and principal payable monthly; fixed
interest rate of 6.49%, maturing October 17, 2001 ..................... 4,929 --
Collateralized borrowings, interest payable monthly and principal at matu-
rity; interest rates are both fixed and variable and range from prime to
6.41% at December 31, 1996. ............................................. 15,000 15,000
------- -------
Total .................................................................. $20,023 $15,156
======= =======
</TABLE>
F-22
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Long-Term Debt -- (Continued)
Annual maturities of long-term debt are as follows: $942,000 in 1997,
$969,900 in 1998, $1,001,200 in 1999, $6,068,200 in 2000, $1,041,800 in 2001,
$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.
9. Common Stock (See Note 19)
The Company has reserved 100,000 shares under its 1994 Stock Option Plan
("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. Such
shares have been adjusted pursuant to paragraph 13 of the Company's 1994 Stock
Option Plan to reflect the 5% dividends payable in common stock on October 1,
1997 and 1996, and a two-for-one stock split effective on November 10, 1997.
The following information has been adjusted to increase the outstanding stock
options to 220,500 shares and reduce the respective exercise prices.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Option Plan. Accordingly, no compensation
expense has been recognized for the Option Plan. Had compensation cost for the
Option Plan been determined based on the fair values at the grant dates for
awards consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below for the year ended December 31, 1995:
As Reported Pro Forma
------------- ----------
Net income (in thousands) ...... $2,307 $2,121
Earnings per share ............ $ 0.63 $ 0.58
For purposes of the pro forma calculations, the fair value of each option
grant is estimated using the Black-Scholes option - pricing model with the
following weighted - average assumptions for grants issued in 1995:
Dividend yield ............... 3.80%
Expected volatility ......... 28.14%
Risk-free interest rate ...... 6.66%
Expected lives ............... 10 year
A summary of the status of the Company's Option Plan as of December 31,
1996, 1995 and 1994, and changes during the years then ended, is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year ...... 220,500 $6.67 77,175 $ 6.86 -- $ --
Granted. ........................... -- -- 143,325 6.57 77,175 6.86
Exercised. ........................ -- -- -- -- -- --
Forfeited ........................... -- -- -- -- -- --
------- ----- ------- ------ ------ -----
Outstanding, end of year ......... 220,500 $6.67 220,500 $ 6.67 77,175 $6.86
======= ===== ======= ====== ====== =====
</TABLE>
F-23
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Common Stock (See Note 19) -- (Continued)
The following summarizes information about stock options outstanding at
December 31, 1996:
Weighted-Average
Remaining
Exercise Price Number Contractual Life Options Exercisable
- ---------------- --------- ------------------ --------------------
$6.86 77,175 7.6 years 77,175
$6.57 143,325 8.6 years 143,325
The Company reserved 50,000 shares of common stock under the Company's
Employee Stock Purchase Plan increased to 100,000 effective November 10, 1997,
as a result of the two-for-one stock split. 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 1996 and 1995, 5,462
and 2,099 shares, respectively, were purchased 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, 1996 and 1995, 16,053 and 16,809 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, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Unrealized losses on available-for-sale securities ...... $ 123 $ --
Allowance for possible credit losses ..................... 361 316
Loan fees and costs .................................... 231 289
Deferred compensation .................................... 104 76
------ ------
Total ................................................ 819 681
------ ------
Deferred tax liabilities:
Unrealized gains on available-for-sale securities ...... -- (145)
Depreciation ............................................. (199) (168)
Bond accretion .......................................... (23) (25)
Leasing ................................................ (166) (135)
------ ------
Total ................................................ (388) (473)
------ ------
Deferred tax asset, net .............................. $ 431 $ 208
====== ======
</TABLE>
The provision for income taxes is comprised of the following components
(in thousands):
Year Ended December 31,
-------------------------
1996 1995 1994
-------- ------ -----
Current ...... $1,075 $627 $450
Deferred ...... 45 8 85
------ ---- ----
Total. ...... $1,120 $635 $535
====== ==== ====
F-24
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Income Taxes -- (Continued)
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 1996, 1995 and 1994 to the actual provision
for income taxes reflected in the accompanying consolidated financial
statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Provision at the expected statutory rate ...... $1,411 $1,000 $ 905
Effect of tax-exempt income .................. (322) (323) (380)
Other items .................................... 31 (42) 10
------ ------ ------
Provision for income taxes .................. $1,120 $ 635 $ 535
====== ====== ======
</TABLE>
11. Employee Benefit Plans
The Company has a 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 $214,000 in 1996,
$181,000 in 1995, and $223,000 in 1994.
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 1996
and 1995 contributions to this plan were $58,000 and $25,000, respectively.
12. Regulatory Matters
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 1997 may not exceed $1,789,000 plus Company net income for 1997.
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.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996, that
the Company meets all capital adequacy requirements to which it is subject.
F-25
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. Regulatory Matters -- (Continued)
To be categorized as well capitalized, the bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table below. There are no conditions or events since that notification that
management believes have changed the institution's category. The Company's
actual capital amounts (in thousands) and ratios are also presented in the
table. No amounts were deducted from capital for interest-rate risk in either
year.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets) ........................... $22,417 12.72% $14,100 8.0% $17,600 10.0%
Tier I Capital (to Risk Weighted
Assets) ........................... $20,650 11.72% $ 7,050 4.0% $10,570 6.0%
Tier I Capital (to Average Assets) . $20,650 7.46% $11,100 4.0% $13,850 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted
Assets) ........................... $20,631 13.82% $11,940 8.0% $14,930 10.0%
Tier I Capital (to Risk Weighted
Assets) ........................... $19,026 12.75% $ 5,970 4.0% $ 8,960 6.0%
Tier I Capital (to Average Assets) . $19,026 7.58% $10,040 4.0% $12,560 5.0%
</TABLE>
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.
The financial instruments whose contract amounts represent credit risk at
December 31 were as follows (in thousands):
1996 1995
--------- --------
Commitments to extend credit ...... $16,458 $14,816
Standby letters of credit. ......... $ 953 $ 632
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
F-26
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Off-Balance Sheet Financial Instruments -- (Continued)
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.
F-27
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. Fair Values of Financial Instruments -- (Continued)
Financial Assets and Liabilities
The following represents the carrying values and estimated fair values as
of December 31, 1996:
<TABLE>
<CAPTION>
1996 1995
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ------------ ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and Cash Equivalents ........................ $ 15,971 $ 15,971 $ 12,519 $ 12,519
Investment Securities ........................... 87,000 86,963 73,169 73,446
Net Loans ....................................... 175,990 181,587 152,306 151,495
Accrued Interest Receivable ..................... 2,349 2,349 1,971 1,971
FINANCIAL LIABILITIES
Deposits ....................................... $253,196 $254,536 $208,759 $210,534
Accrued Interest Payable ........................ 2,416 2,416 1,746 1,746
Short-Term Borrowings ........................... -- -- 5,000 5,000
Securities Sold Under Agreements to repurchase . 300 300 400 400
Long-term Debt ................................. 20,023 19,652 15,156 15,086
</TABLE>
15. Condensed Financial Information -- Parent Company Only
Condensed parent company only financial information is as follows (in
thousands):
Condensed Balance
Sheet
December 31,
--------------------
1996 1995
--------- --------
Assets:
Cash .............................. $ -- $ --
Investment in subsidiary ......... 21,172 19,509
------- -------
Total Assets ..................... $21,172 $19,509
======= =======
Liabilities and Stockholders' Equity:
Stockholders' equity ............... $21,172 $19,509
======= =======
Condensed Statement of Income
Year Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- -------
Earnings of Subsidiary:
Received as dividends ...... $1,287 $ 972 $ 898
Undistributed ............... 1,744 1,335 1,230
------ ------ ------
Net Income ............... $3,031 $2,307 $2,128
====== ====== ======
F-28
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Condensed Financial Information -- Parent Company Only -- (Continued)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flow
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income ....................................... $ 3,031 $2,307 $2,128
Less undistributed earnings of subsidiary. ...... 1,744 1,335 1,230
-------- ------ ------
Net cash provided by operating activities. ...... 1,287 972 898
-------- ------ ------
Investing Activities:
Investment in subsidiary ........................ (445) (391) --
-------- ------ ------
Financing Activities:
Cash dividends paid to stockholders. ............ (1,186) (972) (898)
Issuance of common stock ........................ 344 283 108
-------- ------ ------
Net cash used in financing activities. ......... (842) (689) (790)
-------- ------ ------
Increase (decrease) in Cash ..................... -- (108) 108
Cash at Beginning of Year ........................ -- 108 --
-------- ------ ------
Cash at End of Year $ ........................... -- $ -- $ 108
======== ====== ======
</TABLE>
16. Contingencies
On February 5, 1996, a complaint was filed against LA Bank ("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. Counsel
representing the Company and the Bank are not currently able to provide an
evaluation of the likelihood of an unfavorable outcome since an unfavorable
outcome is neither probable nor remote. In addition, an estimate of the loss or
range of loss, in the event of an unfavorable outcome, has not been provided
since the probability of the inaccuracy of such an estimate is more than
slight. No provision for any liability has been made in the accompanying
financial statements as of December 31, 1996.
17. Significant Group Concentrations of Credit Risk
Most of the Company's business activity is with customers located within
the state. Investments in state and municipal securities typically involve
governmental entities within the Company's market area. Concentrations of
credit, as defined by the Company's loan policy, are groupings of loans with a
common repayment source that exceed 25% of the Company's capital. As of
December 31, 1996, the Company's receivables from, guarantees of, and
obligations of companies in the used automobile sales industry were
approximately $6.5 million, or 31% of capital. This dealer-related debt was
comprised of floorplan inventory lines of credit, real estate secured operating
lines of credit, business term loans which were mainly real estate secured, and
recourse or repurchase third-party paper. Additionally, obligations such as
residential mortgages and other personal debt, whose repayment is dependent on
the operation of these dealerships, is included in this concentration. Overall,
these relationships have been handled in a satisfactory manner.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Commercial and standby letters of credit
were granted primarily to commercial borrowers. The Company, as a matter of
policy, does not extend credit in excess of 50% of the Company's regulatory
legal lending limit to any single borrower or group of related borrowers.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
F-29
<PAGE>
LAKE ARIEL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
18. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter Ending
----------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
----------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Interest income .............................. $4,740 $5,007 $5,177 $5,351
Interest expense. ........................... 2,354 2,505 2,563 2,761
Net interest income ........................... 2,386 2,502 2,614 2,590
Provision for possible credit losses. ......... 115 135 175 225
Investment security gains (losses), net ...... (48) 1 90 --
Net income. ................................. 703 798 777 753
Earnings per share(1) ........................ $ 0.19 $ 0.22 $ 0.21 $ 0.20
</TABLE>
<TABLE>
<CAPTION>
Quarter Ending
----------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
----------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Interest income .............................. $4,430 $4,741 $4,752 $4,625
Interest expense. ........................... 2,214 2,561 2,459 2,280
Net interest income ........................... 2,216 2,180 2,293 2,345
Provision for possible credit losses. ......... 135 225 140 310
Investment security gains (losses), net ...... -- 227 24 80
Net income. ................................. 447 459 671 730
Earnings per share(1) ........................ $ 0.12 $ 0.12 $ 0.19 $ 0.20
</TABLE>
- ------------
(1) Reflects adjustment for 5% stock dividends issued on October 1, 1997 and
1996, and a two-for-one stock split effective November 10, 1997. (See Note
19.)
19. Subsequent Events
On October 1, 1997, the Company paid a 5% stock dividend on its common
stock, which resulted in an additional 88,463 shares being issued. The Company
also issued a two-for-one stock split effective November 10, 1997, resulting in
an additional 1,867,383 shares being issued. The weighted average number of
shares outstanding, earnings per share and dividends per share for the years
ended December 31, 1996, 1995 and 1994 reflect the issuance of these new
shares. (See Notes 1, 9 and 18.)
F-30
<PAGE>
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No dealer, salesperson or any other individual has been authorized to
give any information or make any representations not contained in this
Prospectus in connection with the offering covered by this Prospectus. If given
or made, such information or representations must not be relied on as having
been authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction where, or to any person to whom, it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has not been any change in the facts set forth in this Prospectus or
in the affairs of the Company since the date hereof. Until January 26, 1998,
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
--------------------------------------------
TABLE OF CONTENTS
Page
---------
Available Information. ........................... 2
Information Incorporated By Reference. ............ 2
Prospectus Summary .............................. 4
Risk Factors .................................... 9
Use of Proceeds. ................................. 10
Market for Common Stock and Related
Shareholder Matters ........................... 11
Capitalization .................................... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations. .................................... 13
Business .......................................... 31
Management ....................................... 48
Security Ownership of Certain Beneficial
Owners and Management ........................ 50
Executive Compensation ........................... 51
Certain Relationships and Related
Transactions. ................................. 55
Description of Common Stock. ..................... 55
Underwriting .................................... 56
Indemnification. ................................. 57
Legal Matters. .................................... 57
Experts. .......................................... 57
Index to Consolidated Financial Statements. ...... F-1
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
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700,000 Shares
Lake Ariel Bancorp, Inc.
Holding Company for
[GRAPHIC OMITTED]
Common Stock
----------------------------------------
PROSPECTUS
----------------------------------------
December 15, 1997
JANNEY MONTGOMERY SCOTT INC.
- --------------------------------------------------------------------------------
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