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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file Number: 2-85306
LAKE ARIEL BANCORP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2244948
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Post Office Box 67, Route 191, Lake Ariel, Pennsylvania 18436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 698-5695
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.42 per share
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by
non-affiliates of the registrant based on average bid and asked prices:
$27,580,258 million at March 18, 1997.
As of March 18, 1997, the registrant had outstanding 1,771,328
shares of its common stock, par value $.42 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to shareholders of the
registrant for the year ended December 31, 1996, are incorporated by reference
in Part II of this Annual Report.
Page 1 of 40
Exhibit Index on Page 36
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LAKE ARIEL BANCORP, INC.
FORM 10-K
Index
Part I Page
Item 1. Business............................................. 3
Item 2. Properties........................................... 17
Item 3. Legal Proceedings.................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.. Not Applicable
Part II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters........................ 19
Item 6. Selected Financial Data.............................. 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 21
Item 8. Financial Statements and Supplementary Data.......... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ Not Applicable
Part III
Item 10. Directors and Executive Officers of the Registrant... 22
Item 11. Executive Compensation............................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 27
Item 13. Certain Relationships and Related Transactions....... 29
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................... 30
Signatures ............................................... 32
Exhibit Index ............................................... 35
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LAKE ARIEL BANCORP, INC.
FORM 10-K
Part I
Item 1. Business
General
Lake Ariel Bancorp, Inc. ("Bancorp"), a Pennsylvania business
corporation, is a bank holding company, registered with and supervised by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Bancorp was organized on May 23, 1983, and commenced operations on November 26,
1983. Bancorp has one wholly-owned subsidiary, LA Bank, National Association
(the "Bank"). Bancorp's business has consisted primarily of managing and
supervising the Bank, and its principal source of income has been dividends paid
by the Bank. At December 31, 1996, Bancorp had total consolidated assets,
deposits and stockholders' equity of approximately $297.9 million, $253.2
million and $21.2 million, respectively.
The Bank was organized in 1910. The Bank is a national banking
association that is a member of the Federal Reserve System and the deposits of
which are insured by the Federal Deposit Insurance Corporation (the "FDIC")
under the Bank Insurance Fund ("BIF"). The Bank has thirteen (13) branch
locations, in addition to its main office in Lake Ariel, Wayne County (two
branches within Wayne County, six branches within Lackawanna County, four
branches within Pike County and one branch within Monroe County), an operations
center (within Wayne County, Pennsylvania), and an Administration and Loan
Center (within Lackawanna County, Pennsylvania) and is a full service commercial
bank providing a wide range of services to individuals and small to medium sized
businesses in its Northeastern Pennsylvania market area, including accepting
time, demand, and savings deposits and making secured and unsecured commercial,
real estate and consumer loans. The Bank has one subsidiary, LA Lease, Inc.,
that engages in the leasing of personal property.
Supervision and Regulation - Bancorp
Bancorp is subject to the jurisdiction of the Securities and
Exchange Commission ("SEC") relating to the offering and sale of its securities.
Bancorp is currently subject to the SEC's rules and regulations relating to
periodic reporting, insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934 (the "Exchange Act").
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Bancorp is also subject to the provisions of the Bank Holding
Company Act of 1956, as amended ("Bank Holding Company Act"), and to supervision
by the Federal Reserve Board. The Bank Holding Company Act will require Bancorp
to secure the prior approval of the Federal Reserve Board before it owns or
controls, directly or indirectly, more than 5% of the voting shares of
substantially all of the assets of any institution, including another bank. The
Bank Holding Company Act prohibits acquisition by Bancorp of more than 5% of the
voting shares of, or interest in, or substantially all of the assets of, any
bank located outside Pennsylvania unless such an acquisition is specifically
authorized by laws of the state in which such bank is located.
A bank holding company is prohibited from engaging in or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of
control of a bank holding company, such as Bancorp, without prior notice to the
Federal Reserve Board. Control is defined for this purpose as the power,
directly or indirectly, to direct the management or policies of a bank holding
company or to vote twenty-five percent (25%) (or ten percent (10%), if no other
person or persons acting on concert, holds a greater percentage of the Common
Stock) or more of Bancorp's Common Stock.
Bancorp is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of Bancorp and any or all of its subsidiaries. Subject to
certain exceptions, a bank holding company and its subsidiaries are generally
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or provision of credit or provision of any property or
services. The so-called "Anti-tie-in" provisions state generally that a bank may
not extend credit, lease, sell property or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to its bank holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other credit or service
from a competitor of the bank, its bank holding company or any subsidiary of its
bank holding company.
Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or any of its subsidiaries, on investments in
the stock or other securities of the bank holding company and on taking of such
stock or securities as collateral for loans to any borrower.
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Permitted Non-Banking Activities
The Federal Reserve Board permits bank holding companies to
engage in non-banking activities so closely related to banking, managing or
controlling banks as to be a proper incident thereto. While the types of
permissible activities are subject to change by the Federal Reserve Board, the
principal non-banking activities that presently may be conducted by a bank
holding company, without prior approval of the Federal Reserve Board, are:
1. Making, acquiring or servicing loans and other extensions
of credit for its own account or for the account of others, such as would be
made by the following types of companies: consumer finance, credit card,
mortgage, commercial finance and factoring.
2. Operating as an industrial bank, Morris Plan bank or
industrial loan company in the manner authorized by state law so long as the
institution does not accept demand deposits or make commercial loans.
3. Operating as a trust company in the manner authorized by
federal or state law so long as the institution does not make certain types of
loans or investments or accept deposits, except as may be permitted by the
Federal Reserve Board.
4. Subject to certain limitations, acting as an investment or
financial advisor to investment companies and other persons.
5. Leasing personal and real property or acting as agent,
broker, or advisor in leasing property, provided that it is reasonably
anticipated that the transaction will compensate the lessor for not less than
the lessor's full investment in the property and provided further that the
lessor may rely on estimated residual values of up to 100% of the acquisition
cost of the leased property.
6. Making equity and debt investments in corporations or
projects designed primarily to promote community welfare, such as the economic
rehabilitation and development of low-income areas by providing housing,
services or jobs for residents.
7. Providing to others financially oriented data processing or
bookkeeping services.
8. Subject to certain limitations: (a) acting as an insurance
principal, agent or broker in relation to insurance for itself and its
subsidiaries or for insurance directly related to extensions of credit by the
bank holding company system; (b) acting as agent or broker for insurance
directly related to an extension of credit by a finance company, that is a
subsidiary; and (c) engaging in any insurance agency activity in a place where
the bank holding company or a subsidiary of the bank holding company has a
lending office and that: (1) has a population not exceeding 5,000 and (2) has
inadequate insurance agency facilities.
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9. Owning, controlling or operating a savings association, if
the savings association engages only in deposit taking activities and lending,
and other activities permissible for bank holding companies.
10. Providing courier services of a limited character.
11. Subject to certain limitations, providing management
consulting advice to nonaffiliated banks and nonbank depository institutions.
12. Selling money orders having a face value of $1,000 or
less, travelers' checks and United States savings bonds.
13. Performing appraisals of real estate and personal
property, including securities.
14. Subject to certain conditions, acting as intermediary for
the financing of commercial or industrial income-producing real estate by
arranging for the transfer of the title, control and risk of such a real estate
project to one or more investors.
15. Subject to certain limitations, providing full-service
brokerage and financial advisory activities; and selling, solely as an agent or
broker for customers, shares of investment companies advised by an affiliate of
the bank holding company or providing investment advice to customers about the
purchase and sale of shares of investment companies advised by an affiliate of
the bank holding company.
16. Underwriting and dealing in obligations of the United
States, general obligations of states and their political subdivisions and other
obligations such as bankers' acceptances and certificates of deposits.
17. Subject to certain limitations, providing by any means,
general information and statistical forecasting with respect to foreign exchange
markets; advisory services designed to assist customers in monitoring,
evaluating and managing their foreign exchange exposures; and certain
transactional services with respect to foreign exchange.
18. Subject to certain limitations, acting as a futures
commission merchant in the execution and clearance on major commodity exchanges
of futures contracts and options on futures contracts for bullion, foreign
exchange, government securities, certificates of deposit and other money market
instruments.
19. Subject to certain limitations, providing commodity
trading and futures commission merchant advice, including counsel, publications,
written analysis and reports.
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20. Providing consumer financial counseling that involves
counseling, educational courses and distribution of instructional materials to
individuals on consumer-oriented financial management matters, including debt
consolidation, mortgage applications, bankruptcy, budget management, real estate
tax shelters, tax planning, retirement and estate planning, insurance and
general investment management, so long as this activity does not include the
sale of specific products or investments.
21. Providing tax planning and preparation advice such as
strategies designed to minimize tax liabilities and includes, for individuals,
analysis of the tax implications of retirement plans, estate planning and family
trusts. For a corporation, tax planning includes the analysis of the tax
implications of mergers and acquisitions, portfolio mix, specific investments,
previous tax payments and year-end tax planning. Tax preparation involves the
preparation of tax forms and advice concerning liability based on records and
receipts supplied by the client.
22. Providing check guaranty services to subscribing
merchants.
23. Subject to certain limitations, operating a collection
agency.
24. Operating a credit bureau that maintains files on the past
credit history of consumers and providing such information to a lender that is
considering a borrower's application for credit, provided that the credit bureau
does not grant preferential treatment to an affiliated bank in the bank holding
company system.
Except for its indirect subsidiary, LA Lease, Inc. with
respect to the leasing of personal property, Bancorp has not and does not intend
to commence or conduct any of the above-delineated activities during the
calendar years 1996 and 1997, respectively.
Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended (the
"Code"), Bancorp is permitted to control an unlimited number of banks. However,
Bancorp would be required, under the Bank Holding Company Act, to obtain the
prior approval of the Federal Reserve Board before it could acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank, if, after such acquisition,
it would own or control more than five percent (5%) of the voting shares of such
bank.
Interstate Banking and Branching
The following discussion describes those provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") that would pertain to Bancorp. It is not an exhaustive
description of all provisions of the Interstate Banking Act.
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In general, the Federal Reserve Board may approve an
application by Bancorp to acquire control of, or acquire all or substantially
all of the assets of, a bank located outside of the Commonwealth of Pennsylvania
without regard to whether such acquisition is prohibited under the law of any
state, but subject to certain state law restrictions and requirements enumerated
in the Interstate Banking Act. The Federal Reserve Board may approve such
application if it finds, among other things, that Bancorp is "adequately
capitalized" and "adequately managed." Moreover, the Federal Reserve Board may
not approve such acquisition if the target bank has not been in existence for
the minimum period of time, if any, required by such target bank's "home" state.
The Federal Reserve Board may, however, approve the acquisition of the target
bank that has been in existence for at least five years without regard to any
longer minimum period of time required under the law of the "home" state of the
target bank.
Furthermore, the Interstate Banking Law provides that,
beginning June 1, 1997, appropriate federal supervisory agencies may approve a
merger of the Bank with another bank located in a different state or the
establishment by the Bank of a new branch office either by acquisition or de
novo, unless the Commonwealth of Pennsylvania enacts a law prior to June 1,
1997, allowing an interstate merger or expressly prohibiting merger with an
out-of-state bank. The Commonwealth of Pennsylvania has enacted a law to "opt-
in" early to these interstate mergers.
Moreover, the Interstate Banking Law provides that the Bank
may establish and operate a de novo branch in any state that "opts-in" to de
novo branching. A "de novo branch" is a branch office that is originally
established as a branch and does not become a branch as a result of an
acquisition or merger. The Commonwealth of Pennsylvania has enacted a law to
"opt-in" early to de novo interstate branching.
As of May 2, 1996, the State Bank Supervisors of the states of
Alabama, Delaware, Maryland, New Jersey and North Carolina and the Commonwealths
of Pennsylvania and Virginia executed a Cooperative Agreement which governs the
manner in which state-chartered banks with branches in multiple states will be
supervised. This Cooperative Agreement was necessitated by the Interstate
Banking Law and was drafted to create a level playing field for state-chartered
banks with respect to supervision and regulation of branch offices in a multiple
state setting. Specifically, this agreement outlines general principles for
determining whether home or host state law applies, including the following: (1)
host state law applies to operational issues relating to a branch located in a
host state, including antitrust, community reinvestment, consumer protection,
usury and fair lending laws; (2) the state law of the home state will apply to
corporate structure issues, such as, charter, by-laws, incorporation,
liquidation, stockholders and directors, capital and investments; and (3) bank
powers issues will be resolved with reference to both home and host state laws.
The Bank is a national association and is governed by, among other laws and
regulations, the National Bank Act and regulations promulgated by the
Comptroller of the Currency. Therefore, the Cooperative Agreement does not apply
to the Bank.
As of the filing date of this report, Bancorp and the Bank
have no plans to engage in interstate banking or branching.
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Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Bancorp and its subsidiary bank. Certain
changes of potential significance to Bancorp which have been enacted or
promulgated, as the case may be, by Congress or various regulatory agencies,
respectively, are discussed below.
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Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation,
i.e., FIRREA, was enacted into law in order to restructure the regulation of the
thrift industry, to address the financial condition of the Federal Savings and
Loan Insurance Corporation and to enhance the supervisory and enforcement powers
of the Federal bank and thrift regulatory agencies. The Office of the
Comptroller of the Currency ("OCC"), as the primary Federal regulator of the
Bank, is primarily responsible for supervision of the Bank. The OCC and FDIC
have far greater flexibility to impose supervisory agreements on an institution
that fails to comply with its regulatory requirements, particularly with respect
to the capital requirements. Possible enforcement actions include the imposition
of a capital plan, termination of deposit insurance and removal or temporary
suspension of an officer, director or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three
levels, with amounts increasing with the severity of the violation. The first
tier provides for civil penalties of up to $5,000 per day for any violation of
law or regulation. A civil penalty of up to $25,000 per day may be assessed if
more than a minimal loss or a pattern of misconduct is involved. Finally, a
civil penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1.0 million per violation, up to $5.0 million for continuing
violations or for the actual amount of gain or loss. These monetary penalties
may be combined with prison sentences for up to five years.
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA")
General. The FDICIA reformed a variety of bank regulatory
laws. Certain of these provisions are discussed below.
Examinations and Audits. Annual full-scope, on-site
examinations are required for all FDIC-insured institutions with assets of $500
million or more. For bank holding companies with $500 million or more in assets,
the independent accountants of such companies shall attest to the accuracy of
management's report. Such accountants shall also monitor management's compliance
with governing laws and regulations. Such companies are also required to select
an independent audit committee composed of outside directors who are independent
of management, to review with management and the independent accountants the
reports that must be submitted to the appropriate bank regulatory agencies. If
the independent accountants resign or are dismissed, written notification must
be given to the FDIC and to the appropriate federal and state bank regulatory
agency.
Prompt Corrective Action. In order to reduce losses to the
deposit insurance funds, the FDICIA established a format to more closely monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDICIA established five "Capital" categories. They are: (1)
well-capitalized; (2) adequately capitalized; (3) undercapitalized;
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(4) significantly undercapitalized; and (5) critically undercapitalized. The
overall goal of these new capital measures is to impose more scrutiny and
operational restrictions on depository institutions as they descend the capital
categories from well capitalized to critically undercapitalized.
The FDIC, the OCC, the Federal Reserve Board and the Office of
Thrift Supervision have issued jointly final regulations relating to these
capital categories and prompt corrective action. These capital measures for
prompt corrective action are defined as follows:
A "well-capitalized" institution would be one that has at
least a 10% total risk-based capital ratio, a 6% or greater Tier I risk-based
capital ratio, a 5% or greater Tier I leverage capital ratio, and is not subject
to any written order or final directive by the FDIC to meet and maintain a
specific capital level.
An "adequately capitalized" institution would be one that
meets the required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I leverage capital ratio of at least 4% and an 8% or
greater total risk-based capital ratio. Since the risk-based standards also
require at least half of the total risk-based capital requirement to be in the
form of Tier I capital, this also will mean that an institution would need to
maintain at least a 4% Tier I risk-based capital ratio. Thus, an institution
would need to meet each of the required minimum capital levels in order to be
deemed "adequately capitalized."
An "undercapitalized" institution would fail to meet one or
more of the required minimum capital levels for an "adequately capitalized"
institution. An "undercapitalized" institution must file a capital restoration
plan and is automatically subject to restrictions on dividends, management fees
and asset growth. In addition, the institution is prohibited from making
acquisitions, opening new branches or engaging in new lines of business without
the prior approval of its primary federal regulator. A number of other
discretionary restrictions also may be imposed on a case-by-case basis, and
harsher restrictions that otherwise would apply to "significantly
undercapitalized" institutions may be imposed on an "undercapitalized"
institution that fails to file or implement an acceptable capital restoration
plan.
A "significantly undercapitalized" institution would have a
total risk-based capital ratio of less than 6%, a Tier I risk-based capital
ratio of less than 3%, or a Tier I leverage capital ratio of less than 3%, as
the case may be. Institutions in this category would be subject to all the
restrictions that apply to "undercapitalized" institutions. Certain other
mandatory prohibitions also would apply, such as restrictions against the
payment of bonuses or raises to senior executive officers without the prior
approval of the institution's primary federal regulator. A number of other
restrictions may be imposed.
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A "critically undercapitalized" institution would be one with
a tangible equity (Tier I capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, the FDIC's rule implementing this
provision of FDICIA also addresses certain other provisions for which the FDIC
has been accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes "critically undercapitalized" is
prohibited from taking the following actions without the prior written approval
of its primary federal supervisory agency: engaging in any material transactions
other than in the usual course of business; extending credit for highly
leveraged transactions ("HLTs"); amending its charter or bylaws; making any
material changes in accounting methods; engaging in certain transactions with
affiliates; paying excessive compensation or bonuses; and paying interest on
liabilities exceeding the prevailing rates in the institution's market area. In
addition, a "critically undercapitalized" institution is prohibited from paying
interest or principal on its subordinated debt and is subject to being placed in
conservatorship or receivership if its tangible equity capital level is not
increased within certain mandated time frames.
At any time, an institution's primary federal supervisory
agency may reclassify it into a lower capital category. All institutions are
prohibited from declaring any dividends, making any other capital distribution,
or paying a management fee if it would result in downward movement into any of
the three undercapitalized categories. The FDICIA provides an exception to this
requirement for stock redemptions that do not lower an institution's capital and
would improve its financial condition, if the appropriate federal supervisory
agency has consulted with the FDIC and approved the redemption.
The regulation requires institutions to notify the FDIC
following any material event that would cause such institution to be placed in a
lower category. Additionally, the FDIC monitors capital levels through call
reports and examination reports.
Deposit Insurance. As a result of the special assessment due
on October 1, 1996 and required by the Deposit Insurance Funds Act of 1996 (the
"Funds Act"), the Savings Association Insurance Fund ("SAIF") was capitalized at
the Designated Reserve Rate of 1.25 percent of estimated insured deposits on
October 1, 1996. The FDIC has, therefore, lowered the rates on assessments paid
to the SAIF. Effective January 1, 1997, the Funds Act separates the Financing
Corporation ("FICO") assessment to service the interest on its bond obligations
from the SAIF and BIF deposit insurance assessments. The amount assessed on the
Bank by the FICO will be in addition to any amount paid for deposit insurance.
FICO assessment rates for the first semi-annual period of 1997 were set at 1.3
basis points annually for BIF - assessable deposits (which are the type of
deposits held by the Bank) and 6.48 basis points annually for SAIF-assessable
deposits. The FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the BIF and SAIF are merged or until January 1,
2000, whichever occurs first.
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Real Estate Lending Standards. Pursuant to the FDICIA, the OCC
and other federal banking agencies adopted real estate lending guidelines which
would set loan-to-value ("LTV") ratios for different types of real estate loans.
A LTV ratio is generally defined as the total loan amount divided by the
appraised value of the property at the time the loan is originated. If the
institution does not hold a first lien position, the total loan amount would be
combined with the amount of all senior liens when calculating the ratio. In
addition to establishing the LTV ratios, the guidelines require all real estate
loans to be based upon proper loan documentation and a recent appraisal of the
property.
Bank Enterprise Act of 1991. Within the overall FDICIA is a
separate subtitle called the "Bank Enterprise Act of 1991." The purpose of this
Act is to encourage banking institutions to establish "basic transaction
services for consumers" or so-called "lifeline accounts." The FDIC assessment
rate is reduced for all lifeline depository accounts. This Act establishes ten
(10) factors which are the minimum requirements to qualify as a lifeline
depository account. Some of these factors relate to minimum opening and balance
amounts, minimum number of monthly withdrawals, the absence of discriminatory
practices against low-income individuals and minimum service charges and fees.
Moreover, the Housing and Community Development Act of 1972 requires that the
FDIC's risk-based assessment system include provisions regarding life-line
accounts. Assessment rates applicable to life-line accounts are to be
established by FDIC rule.
Truth in Savings Act. The FDICIA also contains the Truth in
Savings Act ("TSA"). The Federal Reserve Board has adopted regulations
("Regulation DD") under the TSA. The purpose of TSA is to require the clear and
uniform disclosure of the rates of interest which are payable on deposit
accounts by depository institutions and the fees that are assessable against
deposit accounts, so that consumers can make a meaningful comparison between the
competing claims of banks with regard to deposit accounts and products. In
addition to disclosures to be provided when a customer establishes a deposit
account, TSA requires the depository institution to include, in a clear and
conspicuous manner, the following information with each periodic statement of a
deposit account: (1) the annual percentage yield earned; (2) the amount of
interest earned; (3) the amount of any fees and charges imposed; and (4) the
number of days in the reporting period. TSA allows for civil lawsuits to be
initiated by customers if the depository institution violates any provision or
regulation under TSA.
Regulatory Capital Requirements
The following table presents Bancorp's consolidated capital
ratios at December 31, 1996.
(In Thousands)
Tier I Capital................................................ $20,650
Tier II Capital............................................... 1,767
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Total Capital................................................. $22,417
=======
Adjusted Total Average Assets................................. $276,954
Total Adjusted Risk-Weighted Assets(1)........................ $176,179
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Tier I Risk-Based Capital Ratio(2)............................ 11.72%
Required Tier I Risk-Based Capital Ratio...................... 4.00%
Excess Tier I Risk-Based Capital Ratio........................ 7.72%
Total Risk-Based Capital Ratio(3)............................. 12.72%
Required Total Risk-Based Capital Ratio....................... 8.00%
Excess Total Risk-Based Capital Ratio......................... 4.72%
Tier I Leverage Ratio(4)...................................... 7.46%
Required Tier I Leverage Ratio................................ 4.00%
Excess Tier I Leverage Ratio.................................. 3.46%
- ------------------------------
(1) Includes off-balance sheet items at credit-equivalent values less
intangible assets.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital
to Total Adjusted Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier
II Capital to Total Adjusted Risk- Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets.
Bancorp's ability to maintain the required levels of capital
is substantially dependent upon the success of Bancorp's capital and business
plans; the impact of future economic events on Bancorp's loan customers; and
Bancorp's ability to manage its interest rate risk and investment portfolio and
control its growth and other operating expenses.
Effect of Government Monetary Policies
The earnings of Bancorp are and will be affected by domestic
economic conditions and the monetary and fiscal policies of the United States
government and its agencies.
The monetary policies of the Federal Reserve Board have had,
and will likely continue to have, an important impact on the operating results
of commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulations of, among other things, the discount rate
on borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.
History and Business - Bank
The Bank's legal headquarters are located on Route 191, Lake
Ariel, Pennsylvania.
As of December 31, 1996, the Bank had total assets of $297.9
million, total shareholders' equity of $21.2 million and total deposits and
other liabilities of $276.7 million.
14
<PAGE>
The Bank engages in a full-service commercial banking
business, including accepting time and demand deposits, and making secured and
unsecured commercial and consumer loans. The Bank's business is not seasonal in
nature. Its deposits are insured by the FDIC to the extent provided by law.
At December 31, 1996, the Bank had 104 full-time employees and
31 part-time employees. The Bank is not a party to any collective bargaining
agreement.
Market Area
The Bank competes actively with other area commercial banks
and savings and loan associations, many of which are larger than the Bank, as
well as with major regional banking and financial institutions headquartered in
Wilkes-Barre and Scranton, Pennsylvania. The Bank's major competitors in its
market area are, in alphabetical order: Community Bank & Trust Co.; Corestates
Financial Corporation, Philadelphia, Pennsylvania; Fidelity Deposit & Discount
Bank; First National Bank of Jermyn; First National Community Bank; First Union
Corporation, Charlotte, North Carolina; NBO National Bank; Penn Security Bank
and Trust Company; Pioneer American Bank, N.A.; PNC Bank, N.A.; and Wayne Bank.
The Bank is generally competitive with all competing financial institutions in
its service area with respect to interest rates paid on time and savings
deposits, service charges on deposit accounts and interest rates charged on
loans.
Supervision and Regulation - Bank
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose deposits are
insured by the FDIC. Bank operations are also subject to regulations of the OCC,
the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC, that
regularly examines the Bank. The OCC has the authority under the Financial
Institutions Supervisory Act to prevent a national bank from engaging in an
unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a bank may make,
the reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
consolidations and the establishment of branches. All banks in Pennsylvania are
permitted to maintain branch offices in any county of the state. Branches of
national banks may be established only after approval by the OCC. The OCC is
required to grant approval only if it finds that there is a need for banking
services or facilities such as are contemplated by the proposed branch. The OCC
may disapprove the application if the bank does not have the capital and surplus
deemed necessary by the OCC, or if the application relates to the establishment
of a branch in a county contiguous to the county in which the applicant's
principal place of business is located, and another banking institution that has
its principal place of business in the county in which the proposed branch would
be located, has in good faith,
15
<PAGE>
notified the OCC of its intention to establish a branch in the same municipal
location in which the proposed branch would be located.
Multi-bank holding companies are permitted in Pennsylvania
within certain limitations. See sections entitled "Pennsylvania Banking Law" and
"Interstate Banking and Branching."
A subsidiary bank of a bank holding company is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries and on
taking such stock or securities as collateral for loans. The Federal Reserve Act
and Federal Reserve Board regulations also place certain limitations and
reporting requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
Federal law also prohibits acquisitions of control of a bank
holding company without prior notice to certain federal bank regulators. Control
is defined for this purpose as the power, directly or indirectly, to influence
the management or policies of the bank or bank holding company or to vote
twenty-five percent (25%) or more of any class of voting securities of the bank
holding company.
From time to time, various types of federal and state
legislation have been proposed that could result in additional regulations of,
and restrictions on, the business of the Bank. It cannot be predicted whether
any such legislation will be adopted or how such legislation would affect the
business of the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank's business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.
Under the Federal Deposit Insurance Act, the OCC possesses the
power to prohibit institutions regulated by it (such as the Bank) from engaging
in any activity that would be an unsafe and unsound banking practice and in
violation of the law. Moreover, the Financial Institutions and Interest Rate
Control Act of 1987 ("FIRA") generally expands the circumstances under which
officers or directors of a bank may be removed by the institution's federal
supervisory agency; restricts lending by a bank to its executive officers,
directors, principal shareholders or related interests thereof; restricts
management personnel of a bank from serving as directors in other management
positions with certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic area; and restricts
management personnel from borrowing from another institution that has a
correspondent relationship with their bank. Additionally, FIRA requires that no
person may acquire control of a bank unless the appropriate federal supervisory
agency has been given 60-days prior written notice and within that time has not
disapproved the acquisition or extended the period for disapproval.
16
<PAGE>
Under the Bank Secrecy Act ("BSA"), the Bank is required to
report to the Internal Revenue Service currency transactions of more than
$10,000 or multiple transactions of which the Bank is aware in any one day that
aggregate in excess of $10,000. Civil and criminal penalties are provided under
the BSA for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
The Garn-St Germain Depository Institutions Act of 1982 ("1982
Act"), removes certain restrictions on the lending powers and liberalizes the
depository abilities of the Bank. The 1982 Act also amends FIRA (see above) by
eliminating certain statutory limits on lending of a bank to its executive
officers, directors, principal shareholders or related interests thereof and by
relaxing certain reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank relationships
by management personnel.
Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the
"CRA"), and the regulations promulgated to implement the CRA are designed to
create a system for bank regulatory agencies to evaluate a depository
institution's record in meeting the credit needs of its community. Until May
1995, a depository institution was evaluated for CRA compliance based upon 12
assessment factors.
The CRA regulations were completely revised as of May 4, 1995,
to establish new performance-based standards for use in examining a depository
institution's compliance with the CRA (the "revised CRA regulations"). The
revised CRA regulations establish new tests for evaluating both small and large
depository institutions' investment in the community. A "small bank" is defined
as a bank which has total assets of less than $250 million and is independent or
is an affiliate of a holding company with less than $1 billion in assets.
Pursuant to the revised CRA regulations, a depository institution which
qualifies as a "small bank" will be examined under a streamlined procedure which
emphasizes lending activities. The streamlined examination procedures for a
small bank became effective on January 1, 1996.
A large retail institution is one which does not meet the
"small bank" definition, above. A large retail institution can be evaluated
under one of two tests: (1) a three-part test evaluating the institution's
lending, service and investment performance; or (2) a "strategic plan" designed
by the institution with community involvement and approved by the appropriate
federal bank regulator. A large institution must choose one of these options
prior to July 1997, but may opt to be examined under one of these two options
prior to that time. Effective January 1, 1996, a large retail institution that
opts to be examined pursuant to a strategic plan may submit its strategic plan
to the bank regulators for approval.
In addition, the revised CRA regulations include separate
rules regarding the manner in which "wholesale banks" and "limited purpose
banks" will be evaluated for compliance.
17
<PAGE>
The new CRA regulations will be phased in over a two-year
period, beginning July 1, 1995, with a final effective date of July 1, 1997.
Until the applicable test is phased in, institutions may be examined under the
prior CRA regulations.
On December 27, 1995, the federal banking regulators issued a
joint final rule containing technical amendments to the revised CRA regulations.
Specifically, the recent technical amendments clarify the various effective
dates in the revised CRA regulations, correct certain cross references and state
that once an institution becomes subject to the requirements of the revised CRA
regulations, it must comply with all aspects of the revised CRA regulations,
regardless of the effective date of certain provisions. Similarly, once an
institution is subject to the revised CRA regulations, the prior CRA regulations
do not apply to that institution.
For the purposes of the revised CRA regulations, the Bank is
deemed to be a large depository institution, based upon financial information as
of December 31, 1996. In the future, the Bank will be evaluated for CRA
compliance using the three-part, performance-based test. Under the 12 assessment
factors contained in the prior CRA regulations, the Bank received a
"satisfactory" rating in 1996.
Concentration
Bancorp and the Bank are not dependent for deposits nor
exposed by loan concentrations to a single customer or to a small group of
customers the loss of any one or more of which would have a materially adverse
effect on the financial condition of Bancorp or the Bank.
Business - LA Lease, Inc.
The principal office of LA Lease, Inc. is located at Routes
247 and 348, Lake Ariel, Pennsylvania 18436 (the Mt. Cobb branch of the Bank).
As of December 31, 1996, LA Lease, Inc. had total assets of
$2.2 million, total shareholders' equity of $25 thousand and other liabilities
of $2.175 million.
LA Lease, Inc. provides financing to consumers and businesses
in the form of vehicle and equipment leases. The business of LA Lease, Inc. is
not seasonal in nature.
Item 2. Properties
Bancorp owns or leases no properties, except through the Bank.
The following is selective information about the Bank's properties:
18
<PAGE>
<TABLE>
<CAPTION>
Type of Square
Property Location Ownership Footage Use
- -------- -------- --------- ------- ---
<S> <C> <C> <C> <C>
1 Route 191 Own 3,000 Banking services and
Lake Ariel, PA Main Office
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 Lease 2,800 Eynon branch
Scranton-Carbondale
Highway
6 Keyser Avenue Lease 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 Route 191 Own 5,900 Operations Center
Hamlin, PA
13 Keyser Avenue Lease 7,500 Administration and Loan
Scranton, PA Center
14 HC6 Box 6931 Lease 2,600 Lake Wallenpaupack
Hawley, PA Branch
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Type of Square
Property Location Ownership Footage Use
- -------- -------- --------- ------- ---
<S> <C> <C> <C> <C>
15 214 W. Harford Street Own 10,350 Milford Branch
Milford, PA
16 Route 390-Barrett Township Own 3,700 Mountainhome Branch
Mountainhome, PA
</TABLE>
For information with respect to obligations for lease rentals,
refer to Note 5 of the Notes to Consolidated Financial Statements in Bancorp's
Annual Report filed at Exhibit 13 hereto and is incorporated in its entirety by
reference. The branches that are under lease have customary commercial lease
options to extend the terms of the applicable lease.
It is management's opinion that the facilities currently
utilized are suitable and adequate for current and immediate future purposes.
Item 3. Legal Proceedings
General
The nature of Bancorp's and the Bank's business generates a
certain amount of litigation involving matters arising in the ordinary course of
business. However, in the opinion of management of Bancorp and the Bank, there
are no proceedings pending to which Bancorp and the Bank are a party or to which
their property is subject, which, if determined adversely to Bancorp and the
Bank, would be material in relation to Bancorp's and the Bank's undivided
profits or financial condition, nor are there any proceedings pending other than
ordinary routine litigation incident to the business of Bancorp and the Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against Bancorp and the Bank by government authorities or others.
Environmental Issues
There are several federal and state statutes that govern the
obligations of financial institutions with respect to environmental issues.
Besides being responsible under such statutes for its own conduct, a bank also
may be held liable under certain circumstances for actions of borrowers or other
third parties on properties that collateralize loans held by the bank. Such
potential liability may far exceed the original amount of the loan made by the
bank. Currently, the Bank are not a party to any pending legal proceedings under
any environmental statue nor are the Bank aware of any circumstances that may
give rise to liability of them under any such statute.
20
<PAGE>
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
Bancorp's Common Stock is listed on the NASDAQ Stock Market
under Small-Cap Issues under the symbol "LABN" or designation "Lake Ariel." The
following table sets forth: (1) the quarterly average bid and asked prices for a
share of Bancorp's Common Stock during the periods indicated; and (2) quarterly
dividends on a share of the Common Stock with respect to each quarter since
January 1, 1995. The following quotations represent prices between buyers and
sellers and do not include retail markup, markdown or commission. They may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Average Stock Prices Dividends
Bid Asked Declared
1995:
<S> <C> <C> <C>
First quarter.................................. $16.50 $17.50 $.13
Second quarter................................. $16.00 $17.00 $.13
Third quarter.................................. $14.50 $15.50 $.14
Fourth quarter................................. $14.75 $16.25 $.19
1996:
First quarter.................................. $15.25 $16.50 $.15
Second quarter................................. $15.75 $16.75 $.16
Third quarter.................................. $15.88 $17.25 $.17
Fourth quarter................................. $22.75 $23.75 $.22
</TABLE>
As of March 18, 1997, Bancorp had approximately 1,181
shareholders of record.
Since 1983, Bancorp has paid cash dividends. It is the present
intention of Bancorp's Board of Directors to continue the dividend payment
policy, although the payment of future dividends must necessarily depend upon
earnings, financial condition, appropriate restrictions under applicable law and
other factors relevant at the time the Board of Directors considers any
declaration of dividends. Cash available for the payment of dividends must
initially come from dividends paid by the Bank to Bancorp. Therefore, the
restrictions on the Bank's dividend payments are directly applicable to Bancorp.
Dividend Restrictions on the Bank
The OCC has issued rules governing the payment of dividends by
national banks. Consequently, the Bank (which is subject to these rules) may not
pay dividends from capital (unimpaired common and preferred stock outstanding)
but only from retained earnings after deducting losses and bad debts therefrom.
"Bad debts" are defined as matured obligations in which interest is past due and
unpaid for ninety (90) days, but do not include well-secured obligations that
are in the process of collection.
21
<PAGE>
Previously, the Bank was permitted to add the balances in its
allowance for possible credit and lease losses in determining retained earnings,
but the OCC's new regulations prohibit that practice. However, to the extent
that (1) the Bank has capital surplus in an amount in excess of common capital
and (2) if the Bank can prove that such surplus resulted from prior period
earnings, the Bank, upon approval of the OCC, may transfer earned surplus to
retained earnings and thereby increase its dividend paying capacity.
If, however, the Bank has insufficient retained earnings to
pay a dividend, the OCC's regulations allow the Bank to reduce its capital to a
specified level and to pay dividends upon receipt of the approval of the OCC as
well as that of the holders of two thirds of the outstanding shares of the
Common Stock.
The Bank is allowed to pay dividends no more frequently than
quarterly. Moreover, the Bank must obtain the OCC's approval before paying a
dividend if the total of all dividends declared by the Bank in any calendar year
would exceed the total of (1) the Bank's net profits for that year plus (2) its
retained net profits for the immediately preceding two years less (3) any
required transfers to surplus or a fund for the retirement of preferred stock.
The Bank may not pay any dividends on its capital stock during
the period in which it may be in default in the payment of its assessment for
deposit insurance premium due to the FDIC, nor may it pay dividends on Common
Stock until any cumulative dividends on the Bank's preferred stock (if any) have
been paid in full. The Bank has never been in default in the payments of its
assessments to the FDIC; and, moreover, the Bank has no outstanding preferred
stock. In addition, under the Federal Deposit Insurance Act, dividends cannot be
declared and paid if the OCC obtains a cease and desist order because such
payment would constitute an unsafe and unsound banking practice. As of December
31, 1996, there was $1.8 million in unrestricted retained earnings and net
income available at the Bank that could be paid as a dividend to Bancorp under
the current OCC regulations.
Dividend Restrictions on Bancorp
Under the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"), Bancorp may not pay a dividend if, after giving effect
thereto, either (a) Bancorp would be unable to pay its debts as they become due
in the usual course of business or (b) Bancorp's total assets would be less than
its total liabilities. The determination of total assets and liabilities may be
based upon: (i) financial statements prepared on the basis of generally accepted
accounting principles; (ii) financial statements that are prepared on the basis
of other accounting practices and principles that are reasonable under the
circumstances; or (iii) a fair valuation or other method that is reasonable
under the circumstances.
Item 6. Selected Financial Data
The information called for by this item is filed at Exhibit
99A hereto and is incorporated in its entirety by reference under this Item 6.
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The caption "Management's Discussion and Analysis" contained
in excerpts from Bancorp's Annual Report (beginning at page 18 thereto) filed at
Exhibit 13 hereto is incorporated in its entirety by reference under this Item
7.
Item 8. Financial Statements and Supplementary Data
Bancorp's Consolidated Financial Statements and notes thereto
contained in excerpts from Bancorp's Annual Report (beginning at page 33
thereto) filed at Exhibit 13 hereto are incorporated in their entirety by
reference under this Item 8.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information as to Nominees, Directors and Executive Officers
The following table contains certain information with respect
to the nominees and the directors whose terms of office expire in 1997, 1998 and
1999, respectively.
<TABLE>
<CAPTION>
Director Since
Name Age Principal Occupation for Past Five Years Corporation/Bank
- ---- --- ---------------------------------------- ----------------
<S> <C> <C>
Class 2 Directors Whose Term Will Expire In 1997 And A
Nominee For Class 2 Director Whose Term Expires In 2000
Bruce D. Howe 65 President of John T. Howe, Inc. (a company 1983/1977
(1)(2)(3) that operates local fuel and heating oil
companies, a motel and an interstate truck
stop) and President of Howe's Twin Rocks,
Inc. (a local restaurant)
Peter O. Clauss 67 Retired; Former President of C & D 1988/1988
(1)(3)(4)(5) Builders Inc. (construction of residential
and light commercial buildings)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Director Since
Name Age Principal Occupation for Past Five Years Corporation/Bank
- ---- --- ---------------------------------------- ----------------
<S> <C> <C> <C>
Class 1 Directors Whose Term Expires In 1998
Donald E. Chapman 60 Self-employed insurance broker and 1983/1972
(2)(4)(5)(6)(7) real estate developer
Arthur M. Davis 69 President of Lake Ariel Hardware & 1983/1969
(4)(5)(6)(7) Supply Co., Inc.
William C. Gumble 59 Retired Attorney-at-law 1985/1985
(1)(2)(3)
Class 3 Directors Whose Term Expires In 1999
John G. Martines 50 President of the Bank and Chief 1983/1979
(1)(3)(5)(6) Executive Officer of the Corporation
Harry F. 61 Partner of Schoenagel and Schoenagel 1985/1985
Schoenagel (general civil engineering and surveying)
(4)(5)(6)(7)
</TABLE>
- ------------------------------
(1) Member of the Asset/Liability Management Committee of the Bank. This
committee reviews quarterly the asset/liability management report and
the investment portfolio. In addition, this committee reviews
strategies for GAP analysis, liquidity, tax position and various
profitability ratios. Moreover, this committee determines product
pricing and development. This committee met four (4) times in 1996.
(2) Member of the Executive Committee of the Bank. This committee reviews
annually the profit sharing and benefit plans of the Bank as well as
salaries and promotions. This committee makes recommendations to the
Board of Directors of the Bank on changes in the employee benefit
plans, compensation, promotions and the contribution to the profit
sharing plan. This committee also reviews non-personnel matters such as
bank expansion and profitability. This committee met two (2) times in
1996.
(3) Member of the Loan Committee of the Bank. This committee meets to
consider and recommend approval of loans in the principal amount of
$100,000 or more. Directors receive no additional compensation for
attendance at meetings of this committee. This committee met
twenty-four (24) times in 1996.
(4) Member of Benefit/Compensation Committee of the Bank. This committee
meets to perform on annual review of executive salary increases and
executive stock option grants. This committee met two (2) times in
1996.
(5) Member of 401(k) Committee of the Bank. This committee meets to review
semi-annual investment results of plan funds, makes recommendations and
changes to available investment options, reviews IRS and DOL legal
participation, discrimination and other issues, and recommends annual
Bank contributions to plan. This committee met two (2) times in 1996.
(6) Member of the Loan Review Committee of the Bank. This committee reviews
past due and classified loans and actions to be taken. Moreover, this
committee determines the adequacy of the loan loss reserve and the
amount to be charged monthly for the provision of loan losses. This
committee met four (4) times in 1996.
24
<PAGE>
(7) Member of the Audit Committee of the Bank. This committee reviews the
reports of the auditors and the results of examinations by the Federal
Reserve System and Comptroller of the Currency. This committee makes
recommendations to the Board based upon a review of the reports and
regulatory examinations. This committee met four (4) times in 1996.
During 1996, the Board of Directors of the Corporation held
six (6) meetings. Directors received no additional remuneration for attendance
at meetings of the Board of Directors of the Corporation.
Each of the Directors attended at least 75% of the combined
total number of meetings of the Corporation's and the Bank's Board of Directors
and of the committees on which they serve.
The Board of Directors of the Corporation has at present no
standing committees. The Corporation does not have a nominating committee. A
shareholder who desires to propose an individual for consideration by the Board
of Directors as a nominee for director should submit a proposal in writing to
the Secretary of the Corporation in accordance with Section 202 of the
Corporation's By-laws.
Principal Officers of the Corporation
The following table sets forth selected information about the
principal officers of the Corporation, each of whom is selected by the Board of
Directors and each of whom holds office at the discretion of the Board of
Directors:
<TABLE>
<CAPTION>
Bank
Held Employee Number of Shares Age as of
Name Since Since Beneficially Owned(1) March 18, 1997
- ---- ----- ------------ --------------------- --------------
<S> <C> <C> <C> <C>
Bruce D. Howe, President 1983 (2) 179,253 65
John G. Martines, Chief 1983 (3) 102,401 50
Executive Officer
Donald E. Chapman, Secretary 1983 (2) 59,753 60
Louis M. Martarano, Vice 1989 (3) 37,902 46
President and Assistant Secretary
Joseph J. Earyes, Vice President 1995 (3) 17,917 40
and Treasurer
</TABLE>
- ----------------------------
(1) See notes under the caption "Beneficial Ownership by Officers,
Directors and Nominees" for shareholdings of these officers.
(2) Messrs. Howe, Chapman and Davis are not employees of the Corporation.
(3) Messrs. Martines, Martarano and Earyes are full-time salaried employees
of the Bank.
25
<PAGE>
Principal Officers of the Bank
The following table sets forth selected information about the
principal officers of the Bank, each of whom is elected by the Board of
Directors of the Bank and each of whom holds office at the discretion of the
Board of Directors of the Bank:
<TABLE>
<CAPTION>
Bank Number Age as of
Held Employee of Shares March 18,
Name Office/Position with Bank Since Since Owned 1997
- ---- ------------------------- ----- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Bruce D. Howe Chairman of the Board 1986 (1) 179,253 (2) 65
John G. Martines President and CEO 1986 1979 102,401 (2) 50
Louis M. Martarano Senior Vice President and 1990 1981 37,902 (2) 46
Chief Operating Officer
Joseph J. Earyes Senior Vice President and 1995 1995 17,917 (2) 40
Chief Financial Officer
Kathleen L. Enslin Vice President and 1992 1975 3,106 38
Cashier
Cynthia A. Smaniotto Vice President 1992 1974 1,353 39
Karen T. Pasternak Vice President 1992 1987 614 50
Gregory G. Gula Vice President 1992 1990 280 33
William R. Kerstetter Vice President 1992 1992 21 44
Theodore G. Daniels Vice President 1993 1993 336 65
John P. Foley Vice President 1995 1995 -0- 52
</TABLE>
- ----------------------------
(1) Mr. Howe is not an employee of the Bank.
(2) See notes under the caption "Beneficial Ownership by Officers,
Directors and Nominees" for shareholdings of these officers.
Section 16(a) of the Securities Exchange Act of 1934 requires
the Corporation's officers and directors, and persons who own more than ten
percent of a registered class of the Corporation's equity securities (in this
case the Corporation's Common Stock), to file reports of ownership and changes
in ownership with the SEC. Officers, directors and greater than ten-percent
shareholders are required by SEC regulation to furnish the Corporation with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Forms 5 were required for those persons, the Corporation believes that,
during the period January 1, 1996 through December 31, 1996, all filing
requirements applicable to its officers, directors and greater than ten-percent
shareholders were complied with.
26
<PAGE>
Item 11. Executive Compensation
The following table sets forth the total compensation for
services in all capacities paid by the Corporation and the Bank (1) during 1996,
1995 and 1994, to the Corporation's Chief Executive Officer and the Bank's
President, (2) during 1996, 1995 and 1994, to the Corporation's Vice President
and the Bank's Senior Vice President and Chief Operating Officer, and (3) during
1996 and 1995, to the Corporation's Vice President and Treasurer and the Bank's
Senior Vice President and Chief Financial Officer. No other executive officer's
annual salary and bonus exceeded $100,000 for the years presented and therefore
is not required to be presented.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------------
Securities
Other Annual Underlying All Other
Name and Fiscal Salary Bonus Compensation Options/ Compensation
Principal Position Year ($) ($) ($) SARs(#) ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John G. Martines (President of 1996 157,972 44,000 25,564 (1) - (2) 22,612 (3)
the Bank and Chief Executive 1995 138,007 35,000 26,108 (4) 42,000(2) 19,498 (5)
Officer of the Corporation) 1994 130,005 30,000 19,811 (6) 26,250(2) 21,435 (7)
)
Louis M. Martarano (Senior Vice 1996 109,056 20,000 4,260 (8) - (2) 19,602 (9)
President and Chief Operating 1995 97,154 13,500 8,796 (10) 15,750(2) 15,013 (11)
Officer of the Bank and Vice 1994 91,750 12,500 3,452 (12) 10,500(2) 15,903 (13)
President of the Corporation)
Joseph J. Earyes (Senior Vice 1996 87,521 16,000 6,147 (14) - (2) 16,225 (15)
President and Chief Financial 1995 70,207 6,500 4,345 (16) 10,500(2) 11,398 (17)
Officer of the Bank and Vice
President and Treasurer of the
Corporation)
</TABLE>
- ------------------------------
(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 Corporation 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 Corporation 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 Corporation for the
benefit of Mr. Martines pursuant to a profit-sharing retirement plan.
27
<PAGE>
(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.
(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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation for the benefit
of Mr. Earyes pursuant to a profit-sharing/401(k) plan.
Directors' Compensation
During 1996, the Bank's Board of Directors met on a monthly
basis; Directors received $1,000 per month and were allowed one paid absence per
year; and Bruce D. Howe, the Chairman, received $500 in addition to his monthly
Directors' fee of $1,000 or $1,500 per month in the aggregate. Mr. Howe was also
allowed one paid absence per year from a meeting of the Bank's Board of
Directors. During 1996, the Board of Directors of the Corporation held six (6)
meetings. Directors received no remuneration for attendance at meetings of the
Board of Directors of the Corporation in excess of remuneration each of them
received for attendance at meetings of the Board of Directors of the Bank.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Beneficial Owners of the Corporation's Stock
Principal Owners
The following table sets forth, as of March 18, 1997, the name
and address of each person who owns of record or who is known by the Board of
Directors to be the beneficial owner of more than five percent (5%) of the
Corporation's outstanding Common Stock, the number of shares beneficially owned
by such person and the percentage of the Corporation's outstanding Common Stock
so owned.
28
<PAGE>
Percent of Outstanding
Shares Beneficially Common Stock
Name and Address Owned(1) Beneficially Owned
- ---------------- ------------------- ----------------------
Bruce D. Howe 179,253 10.1%
R.D. #6, Box 6332
Lake Ariel, PA 18436
John G. Martines 102,401 5.6%
R.D. #1, Newton Lake
824 Sunset Avenue
Carbondale, PA 18407
- ------------------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the SEC and may include securities
owned by or for the individual's spouse and minor children and any
other relative who has the same home, as well as securities to which
the individual has or shares voting or investment power or has the
right to acquire beneficial ownership within 60 days after March 18,
1997. Beneficial ownership may be disclaimed as to certain of the
securities.
Beneficial Ownership by Officers, Directors and Nominees
The following table sets forth as of March 18, 1997, the
amount and percentage of the Common Stock of the Corporation beneficially owned
by each director, each nominee and all officers and directors of the Corporation
as a group.
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of Percent
or Identity of Group Beneficial Ownership(1)(2) of Class
- -------------------- -------------------------- --------
<S> <C> <C>
Donald E. Chapman(3)(6) 59,753 3.4%
Peter O. Clauss(4)(7) 25,632 1.4%
Arthur M. Davis(3)(8) 35,319 2.0%
Joseph J. Earyes(9) 17,917 1.0%
William C. Gumble(3)(10) 53,740 3.0%
Bruce D. Howe(4)(11) 179,253 10.1%
Louis M. Martarano(12) 37,902 2.1%
John G. Martines(5)(13) 102,401 5.6%
Harry F. Schoenagel(5)(14) 43,201 2.4%
All Officers and Directors
as a Group (7 directors,
5 officers, 9 persons in total) 555,118 29.6%
- ------------------------------
</TABLE>
(1) See footnote (1) under the caption entitled "Principal Owners" for the
definition of "beneficial ownership." (2) Information furnished by the
directors and the Corporation.
(3) A Class 1 Director Whose Term Expires in 1998.
(4) A Class 2 Director Whose Term Will Expire in 1997 and a Nominee For
Class 2 Director Whose Term Expires in 2000.
29
<PAGE>
(5) A Class 3 Director Whose Term Expires in 1999.
(6) Of the 59,753 shares beneficially owned by Donald E. Chapman, 17,281
are owned by him individually; 37,902 are owned jointly with his
spouse; 2,754 are held individually by his spouse; 1,168 are held
jointly with his son; and 648 shares are hold individually by his son
who has the same home.
(7) Of 25,632 shares beneficially owned by Peter O. Clauss, 9,075 are held
by him individually; 12,947 are owned jointly with his wife; and 3,610
are owned individually by his spouse.
(8) Of the 35,319 shares beneficially owned by Arthur M. Davis, 15,965 are
owned by him individually; 17,817 are owned jointly with his wife; and
1,537 are owned by Lake Ariel Hardware & Supply Co., Inc., of which Mr.
Davis is President.
(9) Of the 17,917 shares beneficially owned by Joseph J. Earyes, 6,116 are
owned by him individually; 1,301 are held jointly with his spouse; and
10,500 shares may be acquired at any time by the exercise of stock
options.
(10) All shares are held individually.
(11) Of the 179,253 shares beneficially owned by Bruce D. Howe, 160,433 are
owned by him individually; 17,005 are owned jointly with his spouse;
and 1,815 are owned individually by his spouse.
(12) Of the 37,884 shares beneficially owned by Louis M. Martarano, 1,182
are owned by him individually; 8,367 are owned jointly with his wife;
1,402 shares held as custodian for his two sons; 701 shares as
custodian for his daughter; and 26,250 shares may be acquired at any
time by the exercise of stock options.
(13) Of the 102,401 shares beneficially owned by John G. Martines, 7,755 are
owned by him individually; 20,000 are held jointly with his spouse;
6,396 are held individually by his spouse; and 68,250 shares may be
acquired at any time by the exercise of stock options.
(14) Of the 43,201 shares beneficially owned by Harry F. Schoenagel, 16,912
are owned by him individually; 3,150 are owned jointly with his spouse;
and 23,139 are owned by his spouse individually.
Item 13. 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 Corporation
or the Bank was or is to be a party and in which any director or executive
officer of the Corporation, or any beneficial owner of more than 5% of the
Common Stock of the Corporation (or any associate thereof, respectively), had or
will have a material interest. The Corporation and the Bank have had and intend
to continue to have banking and financial transactions in the ordinary course of
business with directors and executive officers of the Corporation and the Bank
and their respective associates on comparable terms and with similar interest
rates as those prevailing from time to time for other non-affiliated customers
of the Corporation and the Bank. Total loans outstanding from the Corporation
and the Bank, at December 31, 1996, to the Corporation's and the Bank's officers
and directors as a group and members of their immediate families and companies
in which they had an ownership interest of 10% or more was $1.184 million or
5.59% of the Bank's total equity capital accounts. The largest amount of
indebtedness outstanding at any time during fiscal year 1996 to the above
identified group was $1.640 million or 7.75% of the Bank's total equity capital
accounts. Such loans do not involve more than the normal risk of collectibility
nor do they present other unfavorable features.
30
<PAGE>
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
- -------------------------- ----------------------
2 None.
3A Amended Articles of Incorporation of Bancorp
filed at Exhibit 3A on March 25, 1988 and
March 24, 1993, to Forms 10-K for the fiscal
year ended December 31, 1987 (No. 2-85306),
and 10-KSB for the period ended December 31,
1992 (No. 2-85306), respectively, and
hereby incorporated by reference. Photocopy
of the Articles of Amendment of Bancorp,
dated August 18, 1993, to effect, among
other things, a 3-for-1 stock split, filed
at Exhibit 3A on September 3, 1993, to Form
S-1 (No. 33-68470) and hereby incorporated
by reference.
3B Amended By-laws of Bancorp filed on March
25, 1988, at Exhibit 3B, to Form 10-K for
the fiscal year ended December 31, 1987 (No.
2-85306), and hereby incorporated by
reference.
4 None.
9 None.
10A Photocopy of the Executive Employment
Agreement dated September 1, 1993, among
Bancorp, the Bank and John G. Martines, the
Chief Executive Officer of Bancorp and
President of the Bank, filed at Exhibit 10A
on September 3, 1993, to Form S-1 (No.
33-68470), and hereby incorporated by
reference.
10B Photocopy of the Executive Employment
Agreement dated September 1, 1993, among
Bancorp, the Bank and Louis M. Martarano,
Vice President of Bancorp and Senior Vice
President of the Bank, filed at Exhibit 10B
on September 3, 1993, to Form S-1 (No.
33-68470), and hereby incorporated by
reference.
11 None.
13 Annual Report to Shareholders for Fiscal
Year Ended December 31, 1996.
16 None.
18 None.
21 List of Subsidiaries of Bancorp.
22 None.
23 None.
31
<PAGE>
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
- -------------------------- ----------------------
24 None.
27 None.
28 None.
99A Selected 5-Year Financial Data and Selected
Year-End Balances.
(b) Reports on Form 8-K.
Bancorp filed no reports on Form 8-K for the quarter ended
December 31, 1996.
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LAKE ARIEL BANCORP, INC.
(Bancorp)
By: /s/ John G. Martines
-----------------------
John G. Martines
Chief Executive Officer
Date: March 18, 1997
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ Bruce D. Howe
----------------------------
Bruce D. Howe
President and Director
Date: March 18, 1997
By: /s/ John G. Martines
----------------------------
John G. Martines
Chief Executive Officer
and Director
(Chief Executive Officer)
Date: March 18, 1997
By: /s/ Peter O. Clauss
----------------------------
Peter O. Clauss
Director
Date: March 18, 1997
33
<PAGE>
By: /s/ Donald E. Chapman
----------------------------
Donald E. Chapman
Secretary and Director
Date: March 18, 1997
By: /s/ Arthur M. Davis
----------------------------
Arthur M. Davis
Treasurer and Director
Date: March 18, 1997
By: /s/ Harry F. Schoenagel
----------------------------
Harry F. Schoenagel
Director
Date: March 18, 1997
By: /s/ William C. Gumble
----------------------------
William C. Gumble
Director
Date: March 18, 1997
By: /s/ Louis M. Martarano
----------------------------
Louis M. Martarano
Vice President and Assistant
Secretary
Date: March 18, 1997
34
<PAGE>
By: /s/ Joseph J. Earyes
------------------------------
Joseph J. Earyes, CPA
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 18, 1997
35
<PAGE>
INDEX TO EXHIBITS
Item Number Description
13 Annual Report to Shareholders for the
Fiscal Year Ended December 31, 1996
21 List of Subsidiaries of Bancorp
27 Financial Data Schedule
99A Selected 5-Year Financial Data and
Selected Year-End Balances
36
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
<PAGE>
YOUR
PARTNER
FOR LIFE
LA BANK
LAKE ARIEL BANCORP, INC.
1996 ANNUAL REPORT
<PAGE>
YOUR
PARTNER
FOR LIFE
LAKE ARIEL BANCORP, INC. 1996 ANNUAL REPORT
TABLE OF CONTENTS
- -Financial Highlights 2
- -Message to Our Stockholders 3
- -Board of Directors 7
- -Your Partner for Life 8
- -Responsibilities for Preparation of Financial Statements 17
- -Financial Review: Management's Discussion and Analysis 18
- -Consolidated Financial Statements
-Balance Sheet 33
-Statement of Income 34
-Statement of Changes in Stockholders' Equity 36
-Statement of Cash Flows 37
-Notes to Consolidated Financial Statements 39
-Report of Independent Certified Public Accountants 56
- -Investor Information 58
- -Company Directors and Officers 59
- -Office Locations 61
- -Business Development Boards 62
1
<PAGE>
FINANCIAL HIGHLIGHTS - 1996
(dollars in thousands,
except per share data)
1996 1995 1994
-------- -------- --------
Total Assets ......................... $297,906 $251,859 $236,125
Total Deposits ....................... 253,196 208,759 192,187
Net Loans ............................ 175,990 152,306 135,018
Stockholders' Equity ................. 21,172 19,509 15,799
Book Value Per Share ................. 12.02 11.77 9.64
Net Income ........................... 3,031 2,307 2,128
Earnings Per Share* .................. 1.73 1.33 1.24
Dividends Per Share .................. 0.70 0.59 0.55
Return on Average Total Assets ....... 1.09% 0.92% 1.04%
Return on Average Stockholder's Equity 14.97% 13.17% 13.07%
Dividend Payout Ratio ................ 39.14% 42.13% 42.15%
Stockholders' Equity to Total Assets . 7.11% 7.75% 6.69%
*Reflects adjustment for 5% stock dividend issued on October 1, 1996.
2
<PAGE>
MESSAGE TO OUR STOCKHOLDERS
Financial Success
1996 was another extremely successful and exciting year for Lake Ariel
Bancorp, Inc. and its wholly owned subsidiary, LA Bank, N.A. Success can be
measured by our outstanding financial performance achieved in 1996. Our primary
objective is to create value for our shareholders. To that end, we produced
unprecedented results in 1996.
Assets and deposits grew at an exceptional rate compared to other
financial institutions reported in published national averages. Net income,
dividend payment, and stockholders' equity all reached record levels.
The past year was very challenging, but satisfying, to all our board
members, management and employees who are vital to our success.
Net Income - $3,031,000 - Up 31%
Net income reached an all time record high of $3,031,000 - up 31% from
1995 earnings of $2,307,000. Operating earnings for the year were $1.73 per
share compared to $1.33 per share in 1995 (after adjustment for 5% stock
dividend issued on October 1, 1996). Return on average assets increased 18% to
1.09% in 1996, up from .92% in 1995, a very significant measurement of our
earnings performance. Improvement in net interest income and improved expense
management were the primary factors in this performance.
Stockholder Value - 65% Return
At year-end 1996, our Company continued to be in a strong capital
position. Stockholders' equity was at $21,172,000. The Tier I, or core capital,
ratio was 11.72% and the total risk-based capital ratio was at 12.72%, this in
comparison to regulatory minimums of 4% and 8%, respectively. In view of our
strong capital position and record earnings, our Board of Directors voted to
increase cash dividends from $.59 in 1995 to $.70 per share and also pay a 5%
stock dividend during 1996. Our return on stockholders' equity increased 14%
from 13.17% in 1995 to 14.97% in 1996. Return on stockholders' equity is
arguably the most important measurement of a bank's performance and our return
ranks us among the top performing financial institutions reported in industry
reports.
As stated above, in addition to the 19% increase in cash dividends paid
during 1996, on October 1, 1996 a 5% stock dividend was paid to stockholders.
The market value of the Bank stock increased during 1996 from $14.75 on January
1 to close at $22.75 on December 31. By factoring in the 1996 dividend payment
of $.70 per share, in conjunction with the $8.00 per share appreciation in the
market value and the 5% stock dividend valued at $.83 per share, a 65% total
return to our stockholders in 1996 was realized.
Book value increased from $11.77 in 1995, up $.25 or 2.00%, to $12.02
in 1996. The Company's (LABN) market price closed at $22.75 per share on
December 31, 1996. At year end, the stock price was selling at 190% of book
value and at 13.2 times earnings.
Growth - Deposits Up 21%
1996 proved to be another year of exceptional growth. Total assets
increased by 18% and deposits by 21% to $297,906,000 and $253,196,000,
respectively.
Total loans increased by 16% to $175,990,000. During 1996, 490 or
$36,014,000 in residential mortgage loans were closed. Of this total, 130 or
$11,734,000 were sold or securitized in the secondary market.
At year-end, our mortgage loan servicing pool totaled $120,000,000.
This portfolio is expected to generate service fee income of approximately
$325,000 in 1997.
3
<PAGE>
Asset Quality
Favorable trends in credit quality continued as nonperforming assets as
a percent of total assets decreased 25% in 1996 to 1.02% compared to 1.36% in
1995.
Allowance for possible credit losses in 1996 grew to $1,830,000 or
1.03% of loans from $1,657,000 or 1.08% of loans in 1995. Provision for credit
losses decreased from $810,000 in 1995 to $650,000 in 1996. We are very
satisfied with our current asset quality and will continue to make it a top
priority.
Strengthening the Organization - Personnel, Branches, Products
As we continue to strive for improvement by expanding our markets and
products, management changes are necessary to achieve our goals.
During 1996, our management team was strengthened with the hiring of
John "Jack" Foley as Vice President in charge of the Bank's loan departments.
Jack's experience and expertise added strength specifically to our commercial
loan department.
Also during the year, Dan Santaniello was named Assistant Vice
President to oversee loan operations, Lynn Thiel was appointed Auditor, Kathy
Horan was named Assistant Vice President in charge of compliance and Marcy
Swingle was promoted to Assistant Vice President in the Human Resources
Department. Treva Day, Lake Ariel Branch Manager and Peter Misura, Eynon Branch
Manager were promoted to Assistant Vice President. Doris Hellerman was
transferred to the Administration Center and promoted to Assistant Vice
President in charge of consumer loans.
Three new branches were added in 1996. Lake Wallenpaupack opened on
November 25, 1996 and branches in Milford and Mountainhome were purchased from
PNC Bank and opened on December 23, 1996. These three new branches strengthened
our position in Pike County and extended our servicing area into Monroe County,
bringing our total banking network to fourteen offices serving Lackawanna,
Monroe, Pike and Wayne Counties. The value of our franchise will continue to
grow as we increase our strength in the marketplace with added locations and
strong financial performance.
During the early part of 1996, the Bank took its latest aggressive step
by becoming one of the first banks in the area to establish a presence on the
World Wide Web. Management believes that this electronic link to the future is a
great way to inform the community about LA Bank's products and services. Taking
a proactive step towards the technological future will ensure LA Bank's
continued position at the top of community banking. Net surfers can visit LA
Bank's new home page at http:/www.labank.com.
In the second quarter of the year, LA Bank also became one of the first
approved community banks in the area to participate in the IOLTA program
(Interest On Lawyers Trust Account). The account, which offers no minimum
balance requirement and pays the Bank's current Super Now interest rate, is
offered to lawyers who invest fiduciary funds for clients. The earnings on the
account may be conveyed to the IOLTA program which distributes the IOLTA funds
for the delivery of legal assistance to the poor and disadvantaged, legal
education clinical programs, the administration of justice and future
development of the IOLTA program.
Other new products or services introduced during the third quarter
include a budget checking account for low-volume consumer and business accounts.
These products were developed in response to customer requests received through
a customer survey solicited during "Customer Appreciation Week" held during the
year at all branch offices. The week long event offers the customer a chance to
visit with the staff, offer suggestions to improve service and request new
products not currently offered by the Bank.
In the fourth quarter of this year, the Bank also became one of the
leaders in the area in offering a new Visa(R) Check Card to the Bank's
customers. Tied to an LA Bank checking account, the card can be used to access
the customer's available checking balance at an ATM, or can be used as a check
replacement at merchant locations for purchases. The Bank hopes to attract new
customers to the Bank with the addition of this innovative new card.
4
<PAGE>
Community Reinvestment
During 1996, LA Bank was one of four Northeastern Pennsylvania
financial institutions to provide financing to preserve, renovate, and convert
The Hotel Jermyn in Scranton, Pennsylvania into 85 apartment units for the
elderly and people with disabilities.
In the spring of 1996, LA Bank revised its "Welcome Neighbor" Program.
This program was developed to assist first time home buyers with low to moderate
incomes by offering mortgage plans with reduced rates and points based on family
income. Also, LA Bank held its second annual Home Buyer's fair at the Keyser
Valley Community Center. This annual event is designed to satisfy the credit
needs of the residents of our local communities and to inform them of the
various types of mortgage financing options available to them. Builders,
lawyers, insurance agents, and mortgage loan originators were present to answer
questions prospective borrowers may have regarding the home buying and building
process.
LA Bank has always prided itself in being the area's leader in home
mortgage loans. In November of this year, we were notified by the Federal
Reserve Bank of Philadelphia that LA Bank was cited as the top mortgage lender
in Scranton for low and moderate income census tracts in 1995. The ranking was
based on information provided by the Department of Community and Consumer
Affairs, and included conventional mortgage lending for 1-4 unit, owner-occupied
residential properties. We are very proud of this accomplishment.
Your Partner For Life
For the year ended December 31, 1996, LA Bank achieved record results
in all major aspects of financialWe are proud of this year's performance and
believe our strategy gives us optimism for future years.
Our theme of this year's Annual Report is "Your Partner For Life". This
signifies our commitment to remain a community bank with local ownership and
management. We believe our philosophy of offering quality products with personal
customer service is vital to our existence and is the main reason we continue to
increase our market share within the communities we serve.
In June of 1996, LA Bank once again received the top rating "Blue
Ribbon Bank" by Veribanc, which is an award reserved for those highly rated
financial institutions which have demonstrated exceptional attitude for safety,
soundness and financial strength and is the oldest national accolade presented
to banks by private sector analysis.
Looking to the future, management believes that an excellent financial
franchise has been established. The Company has exercised a broad involvement in
the various communities it serves and continues to meet the credit needs of all
community segments. We believe that the Company's current commercial and retail
loan growth momentum, balance sheet strength, and operating efficiency provide
the nucleus for continued and improved earnings trends. However, for factors
that could influence these expectations, see "Factors That May Affect Future
Results" in the Management's Discussion and Analysis section of this annual
report.
Unfortunately, during the past year, we lost three members of our LA
Bank family. In February, 1996, Eugene M. Cook, who was a Director of the Bank
from 1960 to 1979 and Bank President from 1967 to 1979, passed away. Mr. Cook's
29 years of dedicated service to our institution will be deeply missed. The Cook
family has been a vital part of our organization since the Bank's founding in
1910.
Willis Gilpin, who joined our Bank in 1992 as a member of our Lake
Region Business Development Board, passed away after an illness in October,
1996. In January, 1997, Charles "Sid" Phillips passed away after a short
illness. Sid joined the Bank in 1986 as branch manager of our Greene-Dreher
Branch and after his retirement served on our Lake Region Business Development
Board. Both will be greatly missed and will be remembered for their contribution
and commitment to LA Bank.
5
<PAGE>
In 1996, we appointed several new members to our Business Development
Boards: Lake Region - Harry Howell, Brian Smolsky, Alice Trunzo and Michael
Walker, Esq.; Lackawanna Region - Ervin Brong, Dr. Dominick Cruciani, Ron Leas,
and Mark Suchter; Pocono Region - Donald W. Henderson, M.D. and Victor Decker,
Esq.
We thank our Board of Directors, Business Development Boards,
management and employees for making 1996 a very successful year. Their effort
and support, coupled with invaluable experience, are appreciated by all of us.
Once again, as a stockholder, we sincerely hope that you continue to support,
promote and patronize your Bank so that we may continue in our efforts to grow
as a strong locally-owned community bank.
John G. Martines
Chief Executive Officer of the Corporation and President and
Chief Executive Officer of the Subsidiaries
Bruce D. Howe
President of the Corporation
and Chairman of the Subsidiaries
6
<PAGE>
Board of Directors
Attorney William C. Gumble- Age 59. Attorney Gumble has served on the Board of
Directors since 1985. He resides in Paupack, Pike County. He retired from an
active law practice in 1993. He has held office as County Solicitor and District
Attorney of Pike County.
Arthur M. Davis- Age 69. Mr. Davis is the senior member of our Board of
Directors, elected to the Board in 1969. He is President of Lake Ariel Hardware
and is a lifelong resident of Lake Ariel.
Bruce D. Howe- Age 65. Mr. Howe is Chairman of the Board of LA Bank, N.A., and
is a resident of Lake Ariel. He is President of John T. Howe, Inc. which
operates local fuel and heating oil companies, a motel, interstate truck stop
and convenient stores.
Harry F. Schoenagel- Age 61. Mr. Schoenagel was elected to the Board of
Directors in 1985. He is a resident of Greentown and is a partner in Schoenagel
& Schoenagel Associates, a local engineering and surveying company located in
Pike County.
John G. Martines- Age 50. Mr. Martines is Bank President and CEO and has been
employed by the Bank and on the Board of Directors since 1979. He is a resident
of Newton Lake, Greenfield Township, Lackawanna County.
Peter O. Clauss- Age 67. Serving on the Board since 1986, Mr. Clauss is the
newest member. He was the former President of C & D Builders, Inc., a
contracting firm, and is presently retired and a resident of Lake Ariel.
Donald E. Chapman- Age 60. Mr. Chapman has been on the Board of Directors since
1972. He is a resident of Lake Ariel and owner of a Nationwide Insurance agency
for the past 35 years. He also serves as a Wayne County Commissioner.
7
<PAGE>
Caption:
Above: The Lake Ariel Bancorp Board members are pictured here, L to R: Attorney
Willian C. Gumble, Arthur M. Davis, Bruce D. Howe, Harry F. Schoenagel, John G.
Martine, Peter O. Clauss, Donald E. Chapman. The Board's membership has remained
stable and unchanged for most of the years since the formation of the Bancorp in
1983.
Board of Directors
1996 continued to be a year of growth for LA Bank. Throughout the year we
expanded our coverage area to include four counties: Lackawanna, Wayne, Pike and
Monroe. Throughout the last decade and a half LA Bank has achieved unprecedented
financial strength and market share by growing from a single unit financial
institution into a fourteen branch $298 million Bank. Although we have grown at
an exceptional pace, our focus on increased profitability and enhanced
stockholder value continue without sacrificing the quality products and services
we offer to the markets we reach. Technological innovation, the directives of
our Board, management's leadership and employee services allow LA Bank to remain
reactive to consumer needs while maintaining a pool of resources to meet
proactive consumer demands.
Caption:
Left: Member of the Board of Directors of the Lake Ariel Bancorp, Inc., Chairman
Bruce D. Howe (left), and Attorney William C. Gumble (right), are pictured
reviewing building plans for the LA Bank Lake Wallenpaupack Branch, opened
November, 1996.
Caption:
Right: Members of the Board of Directors of the Lake Ariel Bancorp, Inc., Harry
F. Schoenagel (left) and Arthur M. Davis (right) are pictured outside the new
Mountainhome Branch, opened December, 1996.
Caption:
Above: Members of the Board of Directors of the Lake Ariel Bancorp, Inc., John
G. Martines (left), Peter O. Clauss (Center), and Donald Chapman (right) meet in
the New Milford Facility, opened December, 1996.
8
<PAGE>
"LA Bank is committed to meeting the ongoing financial needs of our customers
and prospective customers in ways that will allow us to reward the dedication of
our employees and shareholders." Our corporate mission statement continually
reminds us we are united with our customers, employees, and shareholders in a
sphere of common interest. We are challenged to meet the ongoing and
ever-changing needs of our customers, each reflective of their unique lifestyles
and situations. We meet this challenge by continually developing and improving a
full line of products and services to enhance the successful financial goals of
those who call LA Bank their Bank. Whether our customers begin their
relationship as a child, a teen, or a senior, LA Bank's diverse products and
responsive service establishes our position as the Bank who is Your Partner For
Life. Large or small, corporate or personal, LA Bank offers a full banking
relationship to our customers allowing us to reward the dedication of our
employees and shareholders. Our unique relationships have lead us to dedicate
this year's annual report to those whose lives we affect and in turn effect us,
those who have just begun to know and grow with us, as well as those who have
partnered with us throughout their ever-changing lives. We are LA Bank, Your
Partner For Life.
9
<PAGE>
Caption: The Ceresko family of Mt. Cobb, featured on our cover and above, are
represented by Joseph S. and his wife Helen, Joseph P., his wife Nancy and their
children, Adam (11) and Ellen (4). The Ceresko's are the owners of Space Age
Plastics, a plastic product manufacturing company in Mt. Cobb, founded in 1966
by Joseph S. and Helen. Joseph S. began his affiliation with the Bank in 1981
when he became a charter member of LA Bank's Business Development Board. His
son, Joseph P. assumed his seat on the Board four years ago. Joseph P. notes,
"We have a great full-service relationship with LA Bank. We've used them since
the Mt. Cobb Branch opened. Being a Member of the Business Development Board has
allowed us to help enhance the progress of the Bank and our community."
10
<PAGE>
Kids' Top Accounts
The children of the communities we serve are our future and as a result LA Bank
introduced the Kids Top savings account in 1996. The Kids Top account is one of
twenty personal deposit products marketed by LA Bank that fulfill the needs of
specific market segments of the Bank's consumer base. The account strengthens LA
Bank's commitment to community service by providing free photographing and
fingerprinting of each child who participates. LA Bank's commitment to the youth
of our communities is further conveyed by our employees, like Ann Marie DeRigge,
who provided educational instruction about banking to youths involved in The
Junior Achievement Program (pictured above). LA Bank looks forward to each child
growing with us and taking advantage of the many other products we can offer
them throughout their journey as partners for life.
Caption: Left, Below and Right: A Clarks Summit elementary education class
learns about banking from Ann Marie DeRigge, one of LA Bank's 1996 Junior
Achievement Program participants.
Caption: Below and Below Right: A Kids Top Day was recently held at the Bank's
Mall at Steamtown Branch where the children were treated to a visit from
WOLF-TV's "Topper". The children were provided with light refreshments,
balloons, activity and coloring books and information our Kids Top account.
Caption: Bonnie Robinson, Assistant Cashier, interacts with children at "Kids
Top Day."
11
<PAGE>
Student Loans
LA Bank has assisted students in fulfilling their career ambitions by providing
student loans and accounts since 1910. LA Bank Branch Manager Pat Jenkins notes,
"We establish relationships with students that last a lifetime. We see many of
the students go on to become our community leaders of tomorrow." Our products
have offered financial assistance to professionals like educator Laurie Wagner
who has been an LA Bank customer since childhood. "As a member of the Lake Ariel
community, I began my relationship with LA Bank because it was a community bank.
I maintained my savings account with the Bank in my teens and received student
loans to help me pursue my undergraduate degree from Penn State University. I've
used LA for my home mortgage and auto loans. I've always felt there was
something special about the customer service I experienced."
Caption: Below Left and Right: Laurie Wagner, the daughter of Branch Manager
Treva Day, (pictured at right with Ann O'Reilly and Pat Jenkins) resides with
her husband Donald in Lake Ariel. Now at the "Head of Her Class", Laurie gives
back to the community by teaching 4th grade at the Robert D. Wilson School,
Western Wayne School District, Waymart, PA
Caption: Above Left and Below: Pat Jenkins, The Mall at Steamtown Branch
Manager, explains the economic benefits of enjoying a Graduate Checking Account
exempt from balance requirements to college students at the University of
Scranton's Orientation Day held this past summer.
12
<PAGE>
Auto Loans and Leases
Whether our customers are looking for their first car or seeking financing for
company vehicles, LA Bank specifically tailors our auto product financing to the
individual needs of our customers. LA Lease, our wholly-owned subsidiary and the
only locally-owned independent leasing company in PA, offers leasing as a
popular alternative to financing. Thomas Dziak notes, "Because we know our
customers needs are diverse, we help them define the best financial solution for
their situation."
For a fourth consecutive year, LA Bank's dealer services department co-sponsored
a Used Car Dealer Tent Sale. Held at the Viewmont Mall with six participating
automobile dealers, the tent sale resulted in the financing of over 87 vehicles,
generating over $830,000 for LA Bank's dealer services loan portfolio.
Caption: Center and Below: Getting a quick decision on an auto loan from LA Bank
(less than 24 hours) was important for Keith Yurgosky. "My wife Marion was
suddenly left without a car to use for her 70 mile commute to work. We needed a
car as quickly as possible and went to LA Bank's Used Car Dealer Tent Sale where
there was a tremendous selection of automobiles. Erv Brong of Pier Motors took
the time to get to know us and our needs. Because of LA Bank's low rates, and
the friendliness and professionalism we experienced, we financed our car through
them. In fact, we recently purchased our second automobile in October." The
Yurgosky's, of Jermyn, PA, are pictured below caring for their GEO Prism.
13
<PAGE>
Small Business Loans
Our customers know what they need to make their businesses competitive in
today's market, and they look to Jack Foley and Bill Kerstetter to get it. Jack
notes, "LA has the reputation for helping our customers become successful
because we are responsive to their needs for comprehensive banking services." LA
Bank strives to strengthen our communities by lending monies for equipment,
consolidation, expansion, modernization and other financing needs. We're proud
to enhance our communities by providing the financing which supports prosperity
through successful commerce and job opportunity.
Caption: Right and Below: Dunmore residents Margi and Bill McGrath, owners of
Universal Printing, are pictured in their Scranton facility. Universal
specializes in legal and financial printing as well as two-color traditional
commercial printing.
Caption: Margi notes, "We've had a relationship with LA since 1983. Without them
we wouldn't have grown as quickly as we have. Our business is capital intensive
and LA has been there for us. If ever there was a true example of how LA Bank
helps a business, this is it."
Caption: Above, Left and Below: Grace Farnham, Sole Proprietor of Combinations
by Grace, the Clarks Summit woman's boutique that supplied the upscale employee
uniforms for LA Bank notes, "My customers come to me for my personalized service
and advice on business and casual apparel and accessories.
Caption: After working with another bank and finding they were not responsive to
my needs, I contacted LA Bank. LA's Tom Byrne was such a gentleman. He took the
time to get to know me and what I needed. Within a week of application, it was
signed, sealed and delivered." LA Bank representatives met Ms. Farnham at a
local business card exchange, another example that illustrates how LA Bank is
the local community bank that is responsive to the demands of all of our
customers.
14
<PAGE>
Home Mortgage Loans
LA Bank has made real estate financing our specialty since 1910. Whether our
customers are looking for their primary home, vacation home, or to finance
construction, we've helped hundreds of families realize their dream. Mary and
Barry Mohr of New Hope PA (above) received the mortgage for their lake-front
vacation home from LA Bank. Mary notes, "We were working with a financial
institution out of New York City, and were approved for our mortgage when we
received a devastating telephone call. Our mortgage loan would be cancelled
unless we destroyed the guest home on the property. I couldn't believe it. Our
credit history and income were ideal for owning a second home and the guest home
was only five years old. I turned to Peter Bilyk at LA Bank. He took the time to
visit the property and knew it's value. Because of LA Bank, we will enjoy many
wonderful weekends at Lake Wallenpaupack."
Caption: This Page: Barry and Mary Mohr, an Electrical Engineer and Educator
from New Hope, PA have been banking with LA for approximately 3 years. "LA Bank
provided friendly service and competitive interest rates. They were caring at a
time when we needed it most. Peter Bilyk even called us approximately one year
after our closing with refinancing information; it saves us money monthly. He
didn't have to do that. That's service."
15
<PAGE>
Senior Accounts
LA Bank's Senior Account customers use our market specific products to help
plan, maintain and manage their finances. Our sound investment products, such as
our Certificates of Deposit, Add-On Cds and IRAs form the foundations for their
future financial security, while our Lifestyles and Lifestyles 55 accounts offer
our seniors immediate benefits which afford reduced costs, increased convenience
and special recognition. Karen Pasternak adds, "Our senior products provide
peace of mind to our customers. The customers work with our knowledgeable staff
to make 55 or better a time to enjoy the fruits of a successful life." Pictured
customers Joseph S. and Helen Ceresko note, "We opened our IRA accounts with LA
Bank in 1981. We are now at the time of our life when we see the benefits LA's
IRAs bring to us."
Caption: This Page: Joseph S. and Helen Ceresko enjoy low-cost, value-added
products designed for our senior customers. These products exemplify one more
way in which LA Bank meets the needs of the residents of our local communities.
16
<PAGE>
Responsibilities for Preparation of Financial Statements
The management of Lake Ariel Bancorp, Inc. ("LAB" or "the Company") is
responsible for the preparation, integrity and fair presentation of the
financial statements, as well as other information contained in the annual
report. Estimates are an integral part of preparing financial statements as
management must make informed judgements about the expected effects of events
and transactions prior to their definitive resolution.
In meeting its responsibility for the reliability of the financial
statements, the Company depends on its system of internal accounting controls.
This system is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with the appropriate
corporate authorization and recorded properly to permit the preparation of
financial statements in accordance with generally accepted accounting
principles. Although accounting control procedures are designed to achieve these
objectives, it must be recognized that errors or irregularities may nevertheless
occur. The effectiveness of the system of accounting controls is reviewed
continually throughout the year by an established program of internal audit.
These controls are constantly modified and improved in response to changes in
business conditions and operations. The design, monitoring and revision of
internal accounting controls involve, among other considerations, management's
judgement with respect to the relative cost and expected benefits of specific
control measures. The Company believes that its accounting controls provide
reasonable assurance that errors or irregularities that could be material to the
financial statements are prevented or would be detected within a timely period
by employees in the normal course of performing their assigned functions.
Management discharges its responsibility for the financial statements
through the Audit Committee of the Board of Directors, comprised entirely of
Directors who are not Company employees. This responsibility includes general
oversight of the Company's accounting system, internal accounting controls,
financial accounting and reporting matters and regulatory reports. The
independent auditors and the Company's internal audit department have direct
access to the Audit Committee, and meet with it, with and without management
being present, to discuss auditing and financial reporting matters.
The accompanying financial statements have been audited by Parente,
Randolph, Orlando, Carey & Associates, Certified Public Accountants, for the
purpose of rendering an independent professional opinion, and their report is
included herein.
Joseph J. Earyes, CPA
Vice President and Treasurer
17
<PAGE>
Management's Discussion and Analysis
The consolidated financial review of Lake Ariel Bancorp, Inc. ("LAB" or "the
Company") provides a comparison of the performance of the Company for the years
ended December 31, 1996, 1995, and 1994. The financial information presented
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes.
Background
Lake Ariel Bancorp, Inc. is a one bank holding company whose principal
subsidiary is LA Bank, N.A. LAB operates fourteen full-service branch banking
offices in its principal market area in Lackawanna, Monroe, Pike and Wayne
Counties. At December 31, 1996, LAB had 119 full-time equivalent employees.
Analysis of Results of Operation
Summary of Net Income
In 1996, net income increased 31% over 1995, while net income in 1995 increased
8% over 1994. On a per share basis, net income was $1.73 per share, when
compared to $1.33 for 1995. Weighted average shares outstanding for 1996 were
1,755,000 shares as compared with 1,652,000 shares for 1995. Earnings per share
and weighted average shares outstanding reflect adjustment for the 5% stock
dividend issued on October 1, 1996.
The growth in net income during 1996 is again attributable to the improvement in
net interest income, which increased by 12% for the year, coupled with a 9% or
$225 thousand increase in other operating income. This net increase more than
offset the 3% increase in other operating expenses. The Company will continue to
focus its efforts toward retail banking services within its market area with
specific attention given to increasing market share.
The growth in net income during 1995 is also attributable to the improvement in
net interest income, which increased by 10% for the year, coupled with a 48% or
$802 thousand increase in other operating income. This net increase more than
offset the 14% increase in other operating expenses.
Net Interest Income
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities. The
sources used to fund these assets are deposits, borrowed funds and capital. For
purposes of this review, income that is exempt from federal income taxes has
been adjusted to a tax equivalent basis using the statutory federal income tax
rate of 34% for each period.
In 1996, net interest income increased by $1.1 million or 12% over 1995 levels.
During 1996, net interest income was positively impacted by the volume increase
in earning assets and the positive improvement in the net interest expense
charged on interest-bearing liabilities.
Average earning assets grew by 11% or $24 million over 1995 levels. Average
loans and leases increased by 13% or $20 million from 1995 levels. Average
commercial loans grew 9% or $4 million over 1995 levels. Interest income on
commercial loans increased $141 thousand or 3%, due to the increased volume
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 are tied, was 8.25% and 8.50% at December 31, 1996 and
1995, respectively. Average real estate loans increased 23%, which contributed
to a 23% increase in interest income. Average consumer loans, which include
credit card receivables, increased $232 thousand or 1% over 1995, and resulted
in a 3% increase in related interest income.
18
<PAGE>
On average, investment securities increased $5 million or 6% over 1995 levels,
compared to a $19 million or 31% increase in 1995. Income earned on investment
securities increased by 6% in 1996 compared to a 34% growth in 1995. As is
discussed under Financial Condition, the asset/liability management and
investment strategies that were employed during 1996 generated increased volume
thus creating an increase in investment income. The mix of securities in the
investment portfolio changed slightly during 1996. Taxable securities, which
represented 79% of the investment portfolio in 1995, decreased to 76% in 1996.
Tax-exempt securities now represent 24% of the portfolio compared to 21% in
1995. 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 increased $3.5 million in 1996.
Average interest-bearing deposits increased $23 million or 13% in 1996. 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, which averaged $67.1 million in 1995, have
decreased to $64.2 million in 1996. As a percentage of total average
interest-bearing deposits, savings and interest-bearing demand deposits
represent 31% of the total in 1996 compared to 37% in 1995. Due to the shift in
the mix of deposits, the rates at which they were repricing and the volume
increase, interest expense on deposits increased $784 thousand, or 10% in 1996.
These results were reflected in the cost of funds which increased 7% from 1995
through 1996, while the volume increased by 10%. However, interest expense as a
percent of earning assets decreased by 13 basis points due to the volume
increase in earning assets. There were no brokered deposits within the Company's
deposit base during 1996, 1995 or 1994.
Short-term borrowings, which included federal funds purchased and securities
sold under agreements to repurchase, averaged $3.6 million in 1996 compared to
$5.2 million in 1995. These borrowings remained relatively constant through
1996. During 1996, borrowings of $5 million from the Federal Home Loan Bank of
Pittsburgh ("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.
During 1997, the net interest margin is expected to improve because of the
anticipated decrease in the Company's cost of funds while maintaining the
current rate of interest income on earning assets. However, for a discussion on
factors that could influence the net interest margin, see "Factors That May
Affect Future Results."
In 1995, net interest income grew by 9%, or $760 thousand over the same period
in 1994. The continued strong growth of earning assets, which grew 24% over 1994
levels, had a significant positive impact on this growth.
The following tables provide an analysis of changes in net interest income with
regard to volume, rate and yields of interest-bearing assets and liabilities
based on month-end average balances for each period. Components of interest
income and expenses are presented on a tax-equivalent basis using the statutory
federal income tax rate of 34% each year.
19
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest Average Annual Interest
Balance Rate Income/ Balance Rate Income/ Balance Rate Income/
(1) Expense (1) Expense (1) Expense
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 3,124 5.25% $ 164 $ 2,889 5.33% $ 154 $ 1,835 4.03% $ 74
Deposits in Federal Home Loan Bank 145 4.14% 6 479 4.59% 22 121 3.31% 4
Investment Securities:
U.S. government agencies 63,443 6.81% 4,323 61,842 6.77% 4,187 41,237 6.17% 2,544
State and municipal (2) 20,393 8.20% 1,673 16,890 8.57% 1,448 18,932 8.95% 1,695
Other securities 1,460 5.89% 86 1,790 6.54% 117 1,210 4.38% 53
-------- ----- ------- -------- ----- ------- -------- ------ ------
Total Investment Securities 85,296 7.13% 6,082 80,522 7.14% 5,752 61,379 6.99% 4,292
Loans and Leases:
Commercial, financial and industrial(4) 48,626 9.43% 4,585 44,438 10.00% 4,444 41,975 8.71% 3,655
Real estate-construction and mortgage 80,395 8.16% 6,557 65,250 8.15% 5,318 52,990 7.76% 4,114
Installment loans to individuals(3) 34,213 9.50% 3,251 34,664 9.31% 3,226 26,459 9.33% 2,469
Lease financing (3) 2,114 9.41% 199 1,431 8.67% 124 1,158 10.79% 125
-------- ----- ------- -------- ----- ------- -------- ----- ------
Total Loans and Leases 165,348 8.83% 14,592 145,783 8.99% 13,112 122,582 8.45% 10,363
Total Earning Assets 253,913 8.21% 20,844 229,673 8.29% 19,040 185,917 7.92% 14,733
Cash and due from banks 9,834 -- -- 9,368 -- -- 9,598 -- --
Premises and equipment, net 7,769 -- -- 7,718 -- -- 6,489 -- --
Other assets, less allowance for possible
credit losses and loan fees 5,438 -- -- 4,343 -- -- 1,673 -- --
------- ----- ------- -------- ----- ------- -------- ----- -------
Total Assets $276,954 7.53% $20,844 $251,102 7.58% $19,040 $203,677 7.23% $14,733
======== ===== ======= ======== ===== ======= ======== ===== =======
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand $ 25,764 2.08% $ 537 $ 25,993 2.38% $ 618 $ 26,094 2.42% $ 631
Savings 38,472 4.03% 1,549 41,186 3.70% 1,524 45,600 2.61% 1,192
Time 105,883 5.05% 5,350 86,980 5.37% 4,671 58,092 4.59% 2,669
Time over $100,000 33,811 4.50% 1,521 26,960 5.04% 1,360 16,461 4.24% 698
-------- ----- ------- -------- ----- ------- -------- ----- -------
Total Interest-Bearing Deposits 203,930 4.39% 8,957 181,119 4.51% 8,173 146,247 3.55% 5,190
Short-term borrowings 3,312 5.25% 174 4,698 5.39% 253 4,805 4.29% 206
Securities sold under agreements
to repurchase 338 5.03% 17 546 5.31% 29 731 4.10% 30
Long-term debt 16,275 6.36% 1,035 17,898 5.92% 1,059 10,601 5.10% 541
--------- ----- ------- -------- ----- ------- -------- ----- -------
Total Interest-Bearing Liabilities 223,855 4.55% 10,183 204,261 4.66% 9,514 162,384 3.67% 5,967
Noninterest-bearing demand deposits 29,545 -- -- 26,172 -- -- 23,479 -- --
Other liabilities 3,312 -- -- 3,157 -- -- 1,535 -- --
--------- ----- ------- -------- ----- ------- -------- ----- -------
Total Liabilities 256,712 3.97% 10,183 233,590 4.07% 9,514 187,398 3.18% 5,967
Stockholders' Equity 20,242 -- -- 17,512 -- -- 16,279 -- --
-------- ----- ------- -------- ----- ------- -------- ----- -------
Total Liabilities and
Stockholders' Equity $276,954 3.68% $10,183 $251,102 3.79% $ 9,514 $203,677 2.93% $ 5,967
======== ===== ======= ======== ===== ======= ======== ===== =======
Margin Analysis
Interest income/earning assets 8.21% $20,844 8.29% $19,040 7.92% $14,733
Interest expense/earning assets 4.01% 10,183 4.14% 9,514 3.21% 5,967
----- ------- ----- ------- ----- -------
Net interest income/earning assets 4.20% $10,661 4.15% $ 9,526 4.71% $ 8,766
===== ======= ===== ======= ===== =======
</TABLE>
(Percentage distributions may not add due to rounding.)
(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
34% for 1996, 1995, and 1994.
(3) Installment loans and leases are presented net of unearned interest.
(4) Does not include recovered interest of $49,000 on nonaccrual loan paid off
during 1995.
20
<PAGE>
Rate/Volume Variance Analysis Calculation
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1996 Compared to 1995 (5) 1995 Compared to 1994 (5)
- -----------------------------------------------------------------------------------------------------------------------
Total Caused by Total Caused by
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Federal funds sold $ 10 $ (2) $ 12 $ 80 $ 28 $ 52
Deposits in Federal Home Loan Bank (16) (2) (14) 18 10 8
Investment Securities:
U.S. government agencies 136 27 109 1,643 268 1,375
State and municipal 225 (63) 288 (247) (69) (178)
Other securities (31) (11) (20) 64 33 31
------- ------- ------- ------- ------- -------
Total Investment Securities 330 (47) 377 1,460 232 1,228
Loans and Leases:
Commercial, financial and industrial 141 (266) 407 789 566 223
Real estate-construction and mortgage 1,239 4 1,235 1,204 213 991
Installment loans to individuals 25 67 (42) 757 (7) 764
Lease financing 75 12 63 (1) (28) 27
------- ------- ------- ------- ------- -------
Total Loans and Leases 1,480 (183) 1,663 2,749 744 2,005
------- ------- ------- ------- ------- -------
Total Earning Assets 1,804 (234) 2,038 4,307 1,014 3,293
------- ------- ------- ------- ------- -------
Interest Expense
Interest-Bearing Deposits:
Demand (81) (77) (4) (13) (11) (2)
Savings 25 129 (104) 332 557 (225)
Time 679 (286) 965 2,002 508 1,494
Time over $100,000 161 (157) 318 662 151 511
------- ------- ------- ------- ------- -------
Total Interest-Bearing Deposits 784 (391) 1,175 2,983 1,205 1,778
Short-term borrowings (79) (6) (73) 47 52 (5)
Securities sold under agreements
to repurchase (12) (2) (10) (1) 7 (8)
Long-term debt (24) 76 (100) 518 125 393
------- ------- ------- ------- ------- -------
Total Interest-Bearing Liabilities 669 (323) 992 3,547 1,389 2,158
------- ------- ------- ------- ------- -------
Net Interest Income Variances $ 1,135 $ 89 $ 1,046 $ 760 $ (375) $ 1,135
======= ======= ======= ======= ======= =======
</TABLE>
(5) 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.
21
<PAGE>
Provision for Possible Credit Losses
The provision for possible credit losses was based on management's evaluation of
the allowance for possible credit losses in relation to the credit risk inherent
in the loan portfolio. Management considered various conditions including loan
concentrations, charge-off history, delinquent loan percentages, review of
specific loans and general economic conditions. For instance, management
employed a loan grading of larger loans (usually loans of $500,000 or more) to
ensure the early identification of potential problem loans which may have a
potential negative impact on the future earnings of the Company. Quarterly, the
loan review committee reviewed pertinent information relative to both specific
credits and the total portfolio in general. Such information was used in
determining the amount to be charged to the provision for possible credit
losses, which thereby increased 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."
During 1996, the provision for possible credit losses was $650 thousand compared
to $810 thousand in 1995. In 1996, the provision for possible credit losses was
136% of net charge-offs compared to 125% in 1995. The provision represented
management's assessment of the risks inherent in the loan and lease portfolio
while providing the amounts necessary to cover charge-offs.
In 1996, net charge-offs decreased 27% compared to a 53% increase in 1995. The
current year's net charge-offs is primarily attributed to the commercial real
estate sector. The Company wrote down one commercial real estate loan during
1996 which had been in litigation for approximately one year. The ratio of net
charge-offs to average loans outstanding was at .30% for 1996 and .44% for 1995.
Net charge-offs on commercial and industrial loans for 1996 were $118 thousand
or 25% of net charge-offs compared to $286 thousand or 44% of net charge-offs in
1995. Consumer and credit card, and real estate related debt accounted for 45%
and 30% of net charge-offs, respectively.
Other Operating Income
1996 1995 1994
---- ---- ----
(in thousands)
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 sales of loans, net 114 132 (131)
Other income 739 471 372
------- ------- -------
Total other operating income $ 2,706 $ 2,481 $ 1,679
======= ======= =======
Other operating income increased $225 thousand or 9% in 1996 compared to an
increase of $802 thousand or 48% in 1995. Fees generated from the origination
and sale of residential mortgage loans provided 10% or $266 thousand of total
other operating income. These fees increased by 49% or $87 thousand, because of
the increase in residential mortgage loans sold for cash. Mortgage servicing
fees were earned by servicing residential mortgage loans for investors in the
secondary market. Mortgage servicing fee income increased by 8% or $25 thousand
when compared to 1995. These fees were directly influenced by the volume of
loans that were sold in the secondary market. Gains or losses on sales of
mortgage 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 thousand
recorded in 1996, compared with the net gain of $132 thousand in 1995, 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 increased 14% or $151 thousand in 1996. These fees,
which represented 45% 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 million in 1996.
22
<PAGE>
Net gains on available-for-sale securities represented approximately 2% of other
operating income in 1996. The sales of these securities in 1996 resulted from
the Company's decision to liquidate certain securities to capture market gains
with the ability to reinvest in bonds with similar risk and yield.
Included in other income are earnings on directors' life insurance policies,
credit card annual fees and merchant discounts, safe deposit box rentals and
other general service fees. The increase in these fees in 1996 was 57% compared
to 27% in 1995. Fees from credit card holders and other fee income contributed
to the 1996 increase.
In 1995, other operating income increased 48% primarily as a direct result of
the impact of the volume of mortgage loans sold and the increase in demand
deposit accounts and related fees. Mortgage servicing fees increased by 37% or
$81 thousand. Customer service charges grew by 56% or $383 thousand primarily
due to the additional number of demand deposit accounts. Other income grew 27%
due to fees from credit card holders.
Other Operating Expenses
1996 1995 1994
------ ------ ------
(in thousands)
Salaries and benefits $3,684 $3,559 $3,003
Equipment expense 824 747 602
Occupancy expense 1,053 1,036 923
FDIC insurance 2 222 321
Foreclosed asset expenses 51 26 44
Amortization of intangible assets 108 108 108
Advertising 249 242 243
Other expenses 2,026 1,823 1,587
------ ------ ------
Total other operating expenses $7,997 $7,763 $6,831
====== ====== ======
Total other operating expenses increased 3% in 1996, most of which was directly
related to the payment of salaries and benefits. Salaries and benefits, which
were the most significant of the non-interest expenses, increased by 4% or $125
thousand over 1995 amounts. The increase was 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 increased 10% and 2%, respectively, during
1996. Again, the increases in these expenses 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 $222 thousand to $2 thousand. 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 doubled
to $51 thousand in 1996. The increase was a result of the acquisition of
properties in 1996 without any material dispositions. Amortization of intangible
assets remained constant in 1996 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 constant in 1996. Other expenses grew by $203
thousand or 11% in 1996 and include such costs as legal fees, professional and
audit, state shares tax, directors' fees and other general operating expenses.
Total other operating expenses increased 14% in 1995 with much of the increase
related to payment of salaries and benefits. Salaries and benefits rose by 19%
because of added staff levels, merit increases and health care costs. Equipment
expenses grew by 24% due to recurring costs such as maintenance, replacements
and upgrades. Occupancy expenses were up 12% because of the additional
facilities acquired and the general increases in overhead costs at all banking
offices. FDIC insurance assessment decreased by 31%. The 31% decrease in the
FDIC insurance assessment was directly related to an FDIC refund of assessments
paid for the period form June 1, 1995 through September 30, 1995. The refund was
a result of the FDIC assessment reduced from 23 cents per $100 deposits to 4
cents per $100 deposits, effective June 1, 1995. Expenses related to foreclosed
assets included maintenance, repairs, taxes, insurance, legal fees and
23
<PAGE>
writedowns on properties. These expenses were 1% of total operating expenses in
both 1995 and 1994. Advertising expenses remained constant in 1995. Other
expenses, which increased by 15%, included costs such as legal fees,
professional and audit, state shares tax, directors' fees, bonus incentives,
amortization of intangible assets and other general operating expenses.
Income Taxes
The provision for income taxes increased 76% or $485 thousand in 1996 compared
to a 19% or $100 thousand increase in 1995. Pretax income increased 41% or $1.2
million in 1996 as compared to a 10% or $279 thousand increase in 1995. The
effective tax rate for 1996 was 27% compared to 22% in 1995.
Financial Condition
Statement of Condition
At December 31, 1996, the Company's total assets were $297.9 million,
representing an increase of $46 million or 18% from the December 31, 1995
balance of $251.9 million. The increase in assets was primarily attributable to
a $24 million growth in net loans and a $14 million increase in investment
securities.
The amortized cost of investment securities, both held-to-maturity (HTM) and
available-for-sale (AFS), increased $15 million or 20% from December 31, 1995 to
December 31, 1996. 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 yield
pickup between the interest on deposits and borrowings versus the invested
funds. During 1996, the Company purchased $10 million of securities with funds
borrowed from the FHLB. The strategy that was employed provided a favorable
yield pickup between the invested and borrowed funds. At December 31, 1996,
gross unrealized gains in the held-to-maturity investments were $368 thousand
while gross unrealized losses amounted to $405 thousand.
The maturity distribution based on amortized cost and yield of all investment
securities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Within Two- Six- After No
One Five Ten Ten Fixed
Year Years Years Years Maturity Total
--------- --------- ---------- ---------- ---------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies
and corporations $ 410 $ 298 $ 12,831 $ 47,555 $ -- $61,094
Yield 7.79% 8.51% 6.97% 6.88% 6.91%
Obligations of states and
political subdivisions 645 2,110 8,509 13,562 24,826
Yield (1) 6.89% 7.90% 7.56% 8.22% 7.94%
Equity securities 1,443 1,443
Yield 5.98% 5.98%
--------- --------- ---------- ---------- ---------- -------
Total maturities $ 1,055 $ 2,408 $ 21,340 $ 61,117 $ 1,443 $87,363
========= ========= ========== ========== ========== =======
Weighted yield 7.24% 7.98% 7.21% 7.18% 5.98% 7.19%
</TABLE>
(1) Yields on obligations of states and political subdivisions are presented on
a tax-equivalent basis utilizing an effective tax rate of 34% for all
maturities.
Total net loans increased by 16% from $152 million at the end of 1995, to $176
million at the end of 1996. The increase in net loans was directly related to
the significant growth in consumer loans and residential mortgages. Residential
mortgage loans, which included real estate construction loans, increased $15
million or 20% from year-end 1995 to 1996. Residential mortgage loans
represented the most significant increase of net loans in 1996.
24
<PAGE>
At December 31, 1996, consumer loans, net of unearned discounts, totaled $37
million, or $2 million higher than the December 31, 1995 balance of $35 million.
The increases in home improvement loans and the expansion of the Company's
indirect lending program to automobile dealers provided the majority of growth
in the consumer portfolio. Commercial loans increased $6 million or 14% in 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 $44 million or 21% from $209 million in 1995 to $253
million in 1996. Noninterest-bearing demand deposits increased by $6 million.
In aggregate, savings and interest-bearing demand deposits decreased by $291
thousand or 1% from 1995 to 1996. As a percentage of total deposits, savings and
interest-bearing demand deposits represented 26% in 1996, compared to 31% in
1995. Savings deposits decreased by $1.7 million in 1996 as interest rates rose
and certificates of deposits offered competitive alternatives. Time deposits,
which include certificates of deposit in denominations of $100 thousand or more,
increased $39 million or 33% in 1996. As a percentage of total deposits, these
deposits increased to 62% in 1996 from 56% in 1995. Certificates of deposits in
the amount of $100 thousand or more grew from $26.9 million at December 31, 1995
to $40.2 million at December 31, 1996. Approximately, $8.3 million or 62% of the
growth was from public funds of school districts, county governments and local
municipalities located within the Company's market area.
The Company considers its current deposit base to be stable and generally
consumer in nature. The deposit mix was, 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."
Nonperforming Assets
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. The
following table represents nonperforming assets of the Company for 1996, 1995
and 1994:
1996 1995 1994
------ ------ ------
(in thousands)
Loans past due 90 days or more $1,593 $1,716 $1,125
Impaired loans in nonaccrual status 542 1,216 --
Other nonaccrual loans 73 487 1,786
------ ------ ------
Total nonperforming loans 2,208 3,419 2,911
Foreclosed assets held for sale 841 52 191
------ ------ ------
Total nonperforming assets $3,049 $3,471 $3,102
====== ====== ======
Nonperforming loans as a
percentage of loans 1.24% 2.19% 2.13%
Nonperforming assets as a
percentage of assets 1.02% 1.36% 1.31%
Nonperforming loans decreased 35% from year-end 1995. Nonaccrual loans decreased
$1.1 million or 64% from year-end 1995. Commercial loans accounted for 88% of
all nonaccruals, followed by real estate loans at 12%. Within the $615 thousand
of total nonaccrual loans, 100% were secured by mortgages, primarily first
liens, against residential or commercial properties. Loans past due ninety days
or more decreased $123 thousand from 1995 year-end levels. These loans included
$1.2 million in real estate mortgages, $293 thousand in consumer credit, $21
thousand in commercial loans and $103 thousand in leasing. These loans were
reviewed by management at its quarterly loan review meetings regarding
collection efforts.
25
<PAGE>
Legal proceedings on the nonaccrual loans are ongoing, routine, and are reviewed
by management on a continuing basis. No material losses are expected as a result
of these proceedings.
Foreclosed assets held for sale were $841 thousand at year-end 1996 compared to
$52 thousand at year-end 1995. The increase was a result of a foreclosure of a
commercial loan involving land for development and five residential properties.
The Company does not expect any material losses on the sales of these properties
based on current appraised values exceeding book values. See "Factors That May
Affect Future Results" for factors that could affect sales prices of foreclosed
assets.
Potential Problem Loans
At December 31, 1996, the Company had approximately $896 thousand of potential
problem loans not included in the nonperforming loan classification. Known
information about possible credit problems related to these borrowers caused
management to have serious doubts as to the ability of such borrowers to comply
with present loan repayment terms and may result in future classification of
such loans as nonperforming. These potential problem loans were taken into
consideration by management when determining the adequacy of the allowance for
possible credit losses at December 31, 1996. See "Factors That May Affect Future
Results" for further discussion.
Allowance for Possible Credit Losses
The Company determined the provision for possible credit losses through a
quarterly review of the loan portfolio. Factors such as declining economic
trends, the volume of nonperforming loans, concentrations of credit risk,
adverse situations that may affect the borrower's ability to repay, prior loss
experience within the various categories of the portfolio and current economic
conditions were considered when reviewing the risks in the portfolio. Larger
exposures were analyzed individually. Over the past several years, the Company
implemented stringent underwriting standards in commercial lending which
resulted in a decrease in the allowance for possible credit losses. While
management believed the allowance for possible credit losses was adequate,
future additions to the allowance may be necessary based on changes in economic
conditions. The adequacy of the allowance for possible credit losses was
reviewed quarterly by a loan review committee comprised of members of the Board
of Directors and senior management of the Company. The full Board of Directors
reviewed the relevant ratios with respect to the allowance after the loan review
committee made its recommendations. At December 31, 1996, the allowance for
possible credit losses was 1.03% of loans compared to 1.08% in 1995 and 1.10% in
1994. Although the allowance decreased while total net loans increased in 1996,
the growth was concentrated in the least risky categories, such as residential
and consumer loans. For further discussion on factors that could influence the
allowance for possible credit losses, see "Factors That May Affect Future
Results."
The allowance for possible credit losses has been allocated by category as set
forth in the following table. Amounts shown in the table do not purport to be an
indication of future charge-off trends. Percentages shown in the table represent
the percentage of loans by type to total loans.
1996 1995 1994
---- ---- ----
(in thousands)
Amount % Amount % Amount %
Real estate $ 248 14 $ 279 17 $ 370 43
Commercial and industrial 574 31 700 42 631 32
Consumer installment 428 23 437 26 386 24
Lease financing 62 3 52 3 52 1
Unallocated 518 29 189 12 57 --
------ ------ ------ ------ ------ ------
Total $1,830 100 $1,657 100 $1,496 100
====== ====== ====== ====== ====== ======
Liquidity and Funds Management
Liquidity management is to ensure that adequate funds will be available to meet
anticipated and unanticipated deposit withdrawals, debt servicing payments,
investment commitments, commercial and consumer loan demand and ongoing
operating expenses. Funding sources include payments on loans and investments,
sales of assets, growth in core deposits, short and long-term borrowings,
repurchase agreements and other fees and charges.
26
<PAGE>
Regular loan payments are a dependable source of funds, while the sale of loans
and investment securities, deposit flows and loan prepayments are significantly
influenced by general economic conditions and the level of interest rates. For
additional factors that could influence the Company's liquidity position, see
"Factors That May Affect Future Results."
At December 31, 1996, the Company maintained $16 million in cash and cash
equivalents in the form of cash and due from banks (including federal funds
sold). In addition, the Company had $60 million of available- for-sale
investment securities. This combined total of $76 million represented 26% of
total assets at December 31, 1996, as compared to $63.1 million or 25% of total
assets at December 31, 1995. The Company believes that its liquidity is
adequate.
The Company considered its primary source of liquidity to be its core deposit
base. This funding source has grown steadily over the years and consists of
deposits from customers throughout the branch network. At December 31, 1996,
approximately 85% of the Company's assets were funded by core deposits acquired
within its market area, and 7% of the assets were funded by the Company's
equity. These two components provide a substantial and stable source of funds.
Net cash provided by operating activities was $6.4 million for the year ended
December 31, 1996, as compared to $740 thousand for the comparable period in
1995. This $5.7 million increase was primarily related to the decrease in
mortgage loans held for resale. Net cash used in investing activities increased
$36 million in 1996 compared to a $69.3 million decrease in 1995. The net cash
used in securities transactions accounted for $22 million of the change. An
increase of $13 million in loan and lease funding made up the remaining increase
in cash used in investing activities. Net cash provided by financing activities
increased to $43.4 million at December 31, 1996 from $10.4 million at December
31, 1995, a net increase of $33 million. The net change in proceeds from and
repayments of both short-term and long-term borrowings of $5 million resulted in
a net increase in cash provided by financing activities. As discussed
previously, the Company borrowed funds from the FHLB under both short and
long-term borrowing arrangements. The borrowings mature at various periods
through November, 2005.
The Company also placed emphasis on maintaining additional sources of asset
liquidity. Other liquid assets included mortgage loans held for resale. The
Company also established lines of credit with correspondent banks for short-term
borrowing needs in addition to an estimated borrowing capacity of approximately
$103 million with the FHLB. In viewing the combination of all of these factors,
management considered the Company's liquidity position, both short and
long-term, to be sufficient to meet its cash flow needs.
Interest Rate Sensitivity
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, the Company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.
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.
27
<PAGE>
The Company employs computerized net interest income simulation modeling to
assist in quantifying interest rate risk exposure. This process measures and
quantifies the impact on net interest income through varying interest rate
changes and balance sheet compositions.
To manage the interest sensitivity position, an asset/liability model called
"gap analysis" is used to monitor the difference in the volume of the Company's
interest sensitive assets and liabilities that mature or reprice within given
periods. A positive gap (asset sensitive) indicates that more assets reprice
during a given period compared to liabilities, while a negative gap (liability
sensitive) has the opposite effect. The use of this model assists the ALCO to
gauge the effects of the interest rate changes on interest sensitive assets and
liabilities in order to determine what impact these rate changes will have upon
the net interest spread.
During 1995, the 2-year Treasury yield declined 247 basis points. Given this
decline, the odds (on a percentage basis) and market sentiment were building
toward a future rise in interest rates. Therefore, the Company adopted a
defensive asset/liability strategy. In January, 1996, low coupon mortgage
securities were sold and reinvested into adjustable rate securities. In
addition, the liability structure was extended utilizing FHLB advances. At the
time this strategy was adopted, management made the decision to extend duration
of its assets should interest rates rise to attractive levels.
By August, 1996, the 2-year Treasury yield had increased 117 basis points on
stronger than expected economic growth and inflation fears. At this point, the
Company began to extend duration slightly to capitalize on the higher yields now
available. Municipal bonds were also added at this time to shelter a portion of
the Company's income from federal income taxes.
By September, 1996, interest rates had trended down modestly as no inflationary
pressure materialized. At that time, the Company used the proceeds of a security
sale to pay off FHLB advances and to provide liquidity for loan demand. The
security transaction involved selling a combination of fixed and floating rate
securities, leaving virtually no impact on the asset/liability position.
During most of the fourth quarter of 1996, rates continued their decline. The
2-year Treasury yield fell an additional 49 basis points between September and
November, 1996, then reversed course and began to rise. With the interest rate
environment uncertain and rates nearing the lows of 1995, a decision was made to
return to a defensive stance. The Company executed an investment strategy,
purchasing adjustable rate securities for interest rate protection and municipal
bonds for call protection and federal income tax reduction.
Overall, the strategies were effective and well timed, coinciding with interest
rate changes during the year. Finally, the Company continued to utilize its
excess capital during 1996 in order to improve its return on equity for its
stockholders. The Company borrowed longer-term from the FHLB and purchased
mortgage related securities. The longer term nature of the borrowing and
investment had little impact on the asset/liability position. However, income
was enhanced from the resulting spread between the investment yields and
borrowing rates.
The strategy for 1997 involves continuing to be defensive by both borrowing from
the FHLB and purchasing adjustable rate securities. In addition, attractive
callable agency bonds will be added. With rates unlikely to fall, their call
risk is mitigated. Finally, should interest rates rise by 200 basis points, the
Adjustable Rate Mortgage securities ("ARMs") will be liquidated and higher fixed
rate yields will be locked into the portfolio by extending maturities.
The Company's modeling results at December 31, 1996, indicate that the level of
net interest income at risk due to varying interest rate movements was within
internal risk tolerance guidelines. These guidelines restricted the impact on
net interest income to less than 10 percent assuming a 200 basis point increase
or decrease in market interest rates.
At December 31, 1996, the Company maintained a one year cumulative GAP of
negative $13.6 million or 4.57% of total assets. The effect of this GAP position
provided a negative mismatch of assets and liabilities which exposes the Company
to interest rate risk during a period of rising interest rates such as was
experienced in 1996.
28
<PAGE>
The following table, "Statement of Interest Sensitivity Gap," reflects the
Company's gap position at December 31, 1996:
<TABLE>
<CAPTION>
STATEMENT OF INTEREST SENSITIVITY GAP
(in thousands)
3 months 3 through 1 through Over
or less 12 months 3 years 3 years Total
-------- --------- --------- -------- -----
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $ 11,370 $ -- $ -- $ -- $ 11,370
Investment securities(1)(2) 24,759 7,789 16,391 43,022 91,961
Loans(2) 46,302 24,892 37,067 67,640 175,901
Fixed and Other Assets -- -- -- 18,866 18,866
-------- -------- -------- -------- --------
Total Assets $ 82,431 $ 32,681 $ 53,458 $129,528 $298,098
======== ======== ======== ======== ========
Non interest-bearing transaction
deposits (2) $ 8,140 $ -- $ 8,140 $ 16,281 $ 32,561
Interest-bearing
transaction deposits (2) -- 5,341 18,903 40,547 64,791
Time 31,071 45,803 22,243 21,375 120,492
Time over $100,000 9,829 22,262 1,677 1,612 35,380
Repurchase agreements 300 -- -- -- 300
Short-term borrowings -- -- -- -- --
Long-term debt 5,232 750 2,000 12,040 20,022
Other Liabilities -- -- -- 3,141 3,141
-------- -------- -------- -------- --------
Total $ 54,572 $ 74,156 $ 52,963 $ 94,996 $276,687
======== ======== ======== ======== ========
Interest Sensitivity Gap $ 27,859 $(41,475) $ 495 $ 34,532
Cumulative Gap $ 27,859 $(13,616) $(13,121) $ 21,411
Cumulative Gap to Total Assets 9.35% (4.57)% (4.40)% 7.18%
</TABLE>
(1) Gross of unrealized gains/losses on available for sale securities.
(2) Investments and loans were included in the earlier of the period in which
interest rates were next scheduled to adjust or the period in which they were
due. In addition, loans were included in the periods in which they were
scheduled to be repaid based on scheduled amortization. For amortizing loans and
mortgage-backed securities, annual prepayment rates were assumed reflecting
historical experience as well as management's knowledge and experience of its
loan products.
(3) The Company's demand and savings accounts were generally subject to
immediate withdrawal. However, management considered a certain amount of such
accounts to be core accounts having significantly longer effective maturities
based on the retention experiences of such deposits in changing interest rate
environments. The effective maturities presented are the FDICIA 305 recommended
maturity distribution limits for non-maturing deposits.
Upon reviewing the current interest sensitivity scenario for the next 12 months,
decreasing interest rates could positively effect net income because the Company
is liability sensitive. In a rising interest rate environment, net income could
be negatively affected because more liabilities than assets will reprice during
a given period.
Certain shortcomings are inherent in the method of analysis presented in the
above table. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgages,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. The ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest rate increase. See
"Factors That May Affect Future Results" for further discussion.
29
<PAGE>
Capital
The adequacy of the Company's capital is reviewed on an ongoing basis with
reference to size, composition and quality of its resources. An adequate capital
base is important for continued growth and expansion in addition to providing an
added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio, defined as
the ratio of common stockholders' equity less intangible assets, to average
quarterly assets less intangible assets. The leverage ratio at December 31, 1996
was 8.24% compared to 7.59% at December 31, 1995. For 1996 and 1995, the ratios
were well above minimum regulatory guidelines.
As required by federal banking authorities, guidelines have been adopted to
measure capital adequacy. Under the guidelines, certain minimum ratios are
required for core capital and total capital as a percentage of risk-weighted
assets and certain off-balance-sheet instruments. For the Company, Tier I
capital (core capital) consists of common stockholders' equity less intangible
assets, and Tier II capital includes the allowance for possible credit losses,
which cannot exceed 1.25% of risk-weighted assets. Regulatory guidelines require
that core capital and total risk-based capital must be at least 4.00% and 8.00%,
respectively. The table below illustrates the Company's capital ratios as of
December 31, 1996 as required under the guidelines.
Primary Capital $ 21,412
Intangible Assets 762
--------
Tier I Capital $ 20,650
Tier II Capital 1,767
--------
Total Risk-Based capital $ 22,417
========
Total Risk-Weighted Assets $176,179
========
Tier I Ratio 11.72%
========
Risk-Based Capital Ratio 12.72%
========
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 and its Bank subsidiary may
adversely affect the future results of operations of the Company and its Bank
subsidiary. Management does not expect any one particular factor to affect the
Bank subsidiary's results of operations. A downward trend in several areas,
however, including real estate, construction and consumer spending, could have
an adverse impact on the Bank subsidiary's ability to maintain or increase
profitability. Therefore, there is no assurance that the Company and its Bank
subsidiary will be able to continue their current rates of income and growth.
See "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.
30
<PAGE>
As of December 31, 1996, 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 $13.6 million, representing a cumulative
one-year interest rate sensitivity gap as a percentage of total assets of
negative 4.57%. 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 Sensitivity."
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 currently believes that the allowance for possible credit losses is
adequate, but that there can be no assurance that nonperforming loans will not
increase in the future.
Local Economic Conditions. The success of the Company is dependent, to a certain
extent, upon the general economic conditions in the geographic market served by
the Bank subsidiary. Although the Company expects that economic conditions will
continue to be favorable in this market, no assurance can be given that these
economic conditions will continue. Adverse changes in economic conditions in the
geographic market that the Bank subsidiary serves would likely impair the Bank
subsidiary's ability to collect loans and could otherwise have a material
adverse effect on the consolidated results of operations and financial condition
of the Company.
Competition. The Banking industry is highly competitive, with rapid changes in
product delivery systems and in consolidation of service providers. Many of the
Company's competitors are bigger than the Company in terms of assets and have
substantially greater technical, marketing and financial resources. Because of
their size, many of these competitors can (and do) offer products and services
that the Company does not offer. The Company is constantly striving to meet the
convenience and needs of its customers and to enlarge its customer base. No
assurance can be given that these efforts will be successful in maintaining and
expanding the Company's customer base.
Future Outlook
In 1995, rates began moving steadily upward as the Federal Reserve System
tightened its monetary policy. In early 1995, rates rose and continued rising
through the middle of the year, with the national prime rate peaking at 9.00%.
The national prime rate fell to 8.50% at December 31, 1995, falling again to
8.25% in February, 1996, where it remained at December 31, 1996. Of course,
management and the Board of Directors do not have the ability to determine if
another rate increase will occur; however, it is felt that the Company is very
well positioned to meet the challenges and effects of a rising interest rate
environment. The Company's commitment to remaining a community-based
organization is strong and the intention is to recognize steady growth in its
consumer, mortgage and commercial loan portfolios while obtaining and
maintaining a strong core deposit base.
The banking and financial services industries are ever-changing. At the time of
this writing, the Company was not aware of any pending pronouncements that would
have a material impact on the results of operations.
Beginning September 1995, bank holding companies may acquire banks in other
states without regard to state law. In addition, banks can merge with other
banks in another state beginning in June 1997. Predictions are that
consolidation will occur as the banking industry strives for greater cost
efficiencies and market share. Management believes that such consolidation may
enhance its competitive position as a community bank.
A normal examination of the Bank by the Office of the Comptroller of the
Currency in 1996 resulted in no significant findings and no impact is
anticipated on current or future operations.
31
<PAGE>
The FDIC Board of Directors voted on November 26, 1996, to retain the existing
Bank Insurance Fund (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.
The Bank's current and future FDIC BIF assessment is expected to be $0; however,
the FICO assessment for 1997 is expected to be approximately $15,000.
Our twelfth branch office in Lake Wallenpaupack (Pike County) opened in
November, 1996. In addition, we 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 of this year. The expected
amortization of the customer lists is $100,000 for 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.
32
<PAGE>
Consolidated Balance Sheet
<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.
33
<PAGE>
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
(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
-------- -------- --------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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* $ 1.73 $ 1.33 $ 1.24
======== ======== ========
DIVIDENDS PER SHARE $ .70 $ 0.59 $ 0.55
======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING* 1,755 1,734 1,712
</TABLE>
*Reflects adjustment for 5% stock dividend issued on October 1, 1996.
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
On Available-
Common Capital Retained For-Sale
Stock Surplus Earnings Securities Total
-------- -------- -------- -------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1993 $ 685 $ 9,034 $ 6,553 $ 16,272
Net income 2,128 2,128
Issuance of 8,541 shares of common stock
through Dividend Reinvestment Plan 3 105 108
Cash dividends declared ($.55 per share) (898) (898)
Implementation of SFAS No. 115 $ 602 602
Change in net unrealized securities
gains (losses) (2,413) (2,413)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1994 688 9,139 7,783 (1,811) 15,799
Net income 2,307 2,307
Issuance of 16,809 shares of common stock
through Dividend Reinvestment Plan 7 252 259
Issuance of 2,099 shares of common stock
through Employee Stock Purchase Plan 1 23 24
Cash dividends declared ($.59 per share) (972) (972)
Change in net unrealized securities
gains (losses) 2,092 2,092
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1995 696 9,414 9,118 281 19,509
Net income 3,031 3,031
Issuance of 16,053 shares of common stock
through Dividend Reinvestment Plan 7 265 272
Issuance of 5,462 shares of common stock
through Employee Stock Purchase Plan 2 70 72
Cash dividends declared ($.70 per share) (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>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
Consolidated Statement of Cash Flows
<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
-------- -------- --------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
38
<PAGE>
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.
39
<PAGE>
Government bonds held principally for resale in the near term, and
mortgage-backed securities held for sale in conjunction with the Company's
mortgage banking activities, are classified as trading account securities and
are recorded at their fair values. Unrealized gains and losses on trading
account securities are included immediately in other income. The Company neither
held nor purchased securities which would be categorized as trading account
securities during the years ended December 31, 1996, 1995 and 1994.
Available-for-sale securities consist of bonds, notes, debentures and certain
equity securities not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized.
Investment gains and losses are determined using the specific identification
method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-owns
of the individual securities to their face value. The related write-downs are
included in earnings as realized losses.
Derivative Financial Instruments
The Company has no derivative financial instruments requiring disclosure under
SFAS No. 119.
Mortgage Loans Held for Resale
Mortgage loans originated and intended for resale in the secondary market are
carried at the lower of cost or 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.
40
<PAGE>
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. 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.
41
<PAGE>
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Cash Flows
The Company considers amounts due from banks and federal funds sold as cash
equivalents. Generally, federal funds are sold for one-day periods.
In 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 dividend issued on October 1,
1996 and the assumed exercise of stock options. The weighted average number of
shares outstanding was 1,755,000 in 1996, 1,734,000 in 1995 and 1,712,000 in
1994.
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.
42
<PAGE>
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
-----------------
Available-for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------------ ---------- -------
<S> <C> <C> <C> <C>
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:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
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
======= ======= ======= =======
December 31, 1995
-----------------
Available -for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------------ ---------- -------
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:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------------ ---------- -------
U.S. government agencies
and corporations $11,065 $ -- $ 119 $10,946
Obligations of states and
political subdivisions 11,524 396 - 11,920
------- ------- ------- -------
Total $22,589 $ 396 $ 119 $22,866
======= ======= ======= =======
</TABLE>
43
<PAGE>
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 securities Held-to-maturity 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>
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>
December 31,
------------
Gross realized gains: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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.
44
<PAGE>
4. Loans and Leases
A summary of the outstanding loans and leases by major categories at December 31
is as follows:
(in thousands)
1996 1995
---- ----
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.
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.
45
<PAGE>
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
(in thousands)
Within One Two-Five After Five
Year Years Years Total
<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.
Changes in the allowance for possible credit losses for the years ended December
31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
---- ---- ----
<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 .30% .44% .35%
====== ====== ======
</TABLE>
46
<PAGE>
5. Premises and Equipment
Premises and equipment at December 31 are summarized as follows:
(in thousands)
1996 1995
---- ----
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.
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:
(in thousands)
1996 1995
---- ----
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.
47
<PAGE>
8. Long-term Debt
Long-term debt at December 31 is as follows:
(in thousands)
1996 1995
---- ----
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
maturity; 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
======= =======
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
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% dividend payable in common stock on October 1, 1996. The
following information has been adjusted to increase the outstanding stock
options to 105,000 shares and reduce the respective exercise price by 5%.
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: $ 1.33 $ 1.22
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 years
48
<PAGE>
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 105,000 $14.01 36,750 $14.40 -- $ --
Granted -- 68,250 13.80 36,750 14.40
Exercised -- -- --
Forfeited -- -- --
------- ------- ------
Outstanding, end of year 105,000 $14.01 105,000 $14.01 36,750 $14.40
======= ======= ======
</TABLE>
The following summarizes information about stock options outstanding at December
31, 1996:
Weighted-Average
Remaining
Exercise Price Number Contractual Life Options Exercisable
$14.40 36,750 7.6 years 36,750
$13.80 68,250 8.6 years 68,250
The Company also reserved 50,000 shares of common stock under the Company's
Employee Stock Purchase Plan. Under the terms of the plan, employees may
purchase common stock of the Company at 85% of the fair market value. Employees
pay for their stock purchases through periodic payroll deductions subject to a
limit of 10% of base pay. During 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):
1996 1995
---- ----
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
----- -----
49
<PAGE>
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
====== ======
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
====== ====== ======
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.
Year Ended December 31,
1996 1995 1994
---- ---- ----
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
======= ======= =======
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.
50
<PAGE>
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.
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.
51
<PAGE>
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
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.
52
<PAGE>
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
====== ====== ======
53
<PAGE>
Condensed Statement of Cash Flows
Year Ended December 31,
1996 1995 1994
---- ---- ----
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
======= ======= =======
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.
54
<PAGE>
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 Bank'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.
18. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(in thousands except per share data)
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* $ .40 $ .46 $ .44 $ .43
</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* $ .25 $ .26 $ .40 $ .42
</TABLE>
*Reflects adjustment for 5% stock dividend issued on October 1, 1996.
55
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Lake Ariel Bancorp, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Lake Ariel
Bancorp, Inc. and Subsidiary as of December 31, 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 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.
Wilkes-Barre, Pennsylvania
January 24, 1997
56
<PAGE>
COMMON STOCK MARKET PRICE AND DIVIDENDS PER SHARE
Lake Ariel Bancorp, Inc. common stock is listed on the NASDAQ Stock Market under
Small-Cap Issues under the symbol "LABN" or designation "Lake Ariel." The
following table sets forth: (1) the quarter-end bid and asked prices for a share
of Bancorp's Common Stock during the periods indicated; and (2) quarterly
dividends on a share of the Common Stock with respect to each quarter since
January 1, 1995. The following quotations represent prices between buyers and
sellers and do not include retail markup, markdown or commission. They may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Average Stock Prices
--------------------- Dividends
Bid Asked Declared
--- ----- ---------
<S> <C> <C> <C>
1996:
First quarter ........................... $15.25 $16.50 $.15
Second quarter .......................... $15.75 $16.75 $.16
Third quarter ........................... $15.88 $17.25 $.17
Fourth quarter .......................... $22.75 $23.75 $.22
</TABLE>
<TABLE>
<CAPTION>
Average Stock Prices
--------------------- Dividends
Bid Asked Declared
--- ----- ---------
<S> <C> <C> <C>
1995:
First quarter ........................... $16.50 $17.50 $.13
Second quarter .......................... $16.00 $17.00 $.13
Third quarter ........................... $14.50 $15.50 $.14
Fourth quarter .......................... $14.75 $16.25 $.19
</TABLE>
MARKET MAKERS
<TABLE>
<CAPTION>
<S> <C> <C>
Herzog, Heine, Geduld, Inc. Janney Montgomery Scott, Inc. Ryan, Beck and Co.
26 Broadway 1801 Market Street 80 Main Street
New York, NY 10004 Philadelphia, PA 19103 West Orange, NJ 07052
1-800-221-3600 1-800-526-6397 1-800-325-7926
Hopper Soliday & Co., Inc. Legg Mason Wood Walker, Inc. Wheat First Securities
1703 Oregon Pike 330 Montage Mountain Road P.O. Box 6570
Lancaster, PA 17601 Scranton, PA 18507 Glen Allen, VA 23058
1-800-526-6371 1-800-346-4346 1-800-727-0304
J.C. Bradford & Co.
330 Commerce Street
Nashville, TN 37201
1-800-251-1060
</TABLE>
57
<PAGE>
INVESTOR INFORMATION
STOCK LISTING Lake Ariel Bancorp, Inc. common stock is listed on the NASDAQ
Stock Market under Small-Cap Issues. In newspaper listings, Lake Ariel shares
are frequently listed as "Lake Ariel" or "LABN".
TRANSFER AGENT American Stock Transfer & Trust Company, 40 Wall Street, 46th
Floor, New York, New York 10005. Stockholders who may have questions regarding
their stock ownership should contact Shareholder Services at 1-800-937-5449.
DIVIDEND CALENDAR Dividends on Lake Ariel Bancorp's common stock, if approved by
the Board of Directors, are customarily paid on March 15, June 15, September 15,
and December 15.
CORPORATE OFFICE INDEPENDENT AUDITORS
Lake Ariel Bancorp, Inc. Parente, Randolph, Orlando, Carey & Associates
P.O. Box 67 46 Public Square
Lake Ariel, PA 18436 Wilkes-Barre, PA 18701
(717)698-5695 (717)820-0100
AUTOMATIC DIVIDEND REINVESTMENT PLAN Common stockholders of Lake Ariel Bancorp,
Inc. may have their dividends reinvested automatically in Lake Ariel common
shares at a 5% discount from the "Fair Market Value" on the quarterly dividend
payment date. Stockholders participating in the plan may also purchase, per
quarter, up to $2,500 in additional shares at the price per share determined on
the quarterly dividend payment date. There are no brokerage fees, commissions or
service charges on any stock purchases made by plan participants. Information
regarding the plan is available by contacting American Stock Transfer and Trust
Company, Dividend Reinvestment Department, 40 Wall Street, 46th Floor, New York,
New York 10005, 1-800-278-4353.
DIVIDEND DIRECT DEPOSIT Common stockholders of Lake Ariel Bancorp, Inc. may have
their dividends deposited electronically into their bank account by contacting
Shareholder Services, American Stock Transfer & Trust Company, 40 Wall Street,
46th Floor, New York, New York 10005, 1-800-937-5449.
SEC REPORTS AND ADDITIONAL INFORMATION Upon written request of any stockholder,
investor or analyst, a copy of the Corporation's report on Form 10-K for its
fiscal year ended December 31, 1996, including financial statements and the
schedules thereto, required to be filed with the Securities and Exchange
Commission, may be obtained, without charge, by contracting the Chief Financial
Officer, Lake Ariel Bancorp, Inc., P.O. Box 67, Route 191, Lake Ariel, PA 18436
(717)698-5695.
INTERNET ADDRESS ON THE WORLD WIDE WEB
http://www.labank.com
E.MAIL ADDRESS
[email protected]
58
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Lake Ariel Bancorp, Inc. Administration Division
Officers Daniel Santaniello John J. Morgan
Assistant Vice President Assistant Vice President
Bruce D. Howe Kathy Enslin Gary Lavelle
President Vice President & Cashier Assistant Vice President
John G. Martines Gregory G. Gula Lynn M. Thiel
Chief Executive Officer Vice President Internal Auditor
Louis M. Martarano Karen T. Pasternak Marcy Swingle
Vice President & Assistant Secretary Vice President Assistant Vice President
Joseph J. Earyes, CPA Cynthia A. Smaniotto Kathleen Horan
Vice President & Treasurer Vice President Assistant Vice President
Donald E. Chapman Jeri S. Prussia Bonnie Robinson
Secretary Assistant Vice President Assistant Cashier
Stephanie A. Ganz, CPA Jennifer L. Klein
Directors of Assistant Vice President Assistant Cashier
Corporation and Bank & Controller
Donald E. Chapman
Peter O. Clauss
Arthur M. Davis Retail Division
William C. Gumble
Bruce D. Howe John Foley Theodore Daniels
John G. Martines Vice President Vice President
Harry F. Schoenagel William R. Kerstetter Thomas Dziak
Vice President Assistant Vice President
Thomas Byrne Penny Cola
Assistant Vice President Assistant Cashier
Larry Highhouse Doris Hellerman
Assistant Vice President Assistant Vice President
Lake Ariel Branch Clarks Green Branch
LA Bank, N.A. Treva J. Day Ellen Ball
Assistant Vice President & Branch Manager
Executive Officers Branch Manager Ann Marie DeRigge
Assistant Branch Manager
Bruce D. Howe Mt. Cobb Branch
Chairman Daniel Roberts The Mall At
John G. Martines Branch Manager Steamtown Branch
President and Chief Executive Officer Patricia A. Jenkins
Louis M. Martarano Greene-Dreher Branch Branch Manager
Senior Vice President & Mary Ellen Bentler
Chief Operating Officer Branch Manager Lords Valley Branch
Joseph J. Earyes, CPA Laura Schultz
Senior Vice President & Hamlin Corners Branch Branch Manager
Chief Financial Officer Ann O'Reilly
Donald E. Chapman Branch Manager Carbondale Branch
Secretary Cheryl Rupp
Eynon Branch Branch Manager
LA Lease, Inc. Pete Misura
Assistant Vice President & Lake Wallenpaupack Branch
Bruce D. Howe Branch Manager Beverly Simons
Chairman Autumn Molinaro Branch Manager
John G. Martines Assistant Branch Manager
President and Chief Executive Officer Milford Branch
Thomas Byrne Keyser Valley Branch John Gouse
Vice President Doreen Swingle Branch Manager
Stephanie A. Ganz, CPA Branch Manager
Secretary & Treasurer
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Mountainhome Branch
Milford Township Branch Marian Caprista
Cynthia Halliday Branch Manager
Branch Manager
Mortgage Loan Originators
Peter Bilyk Kathy Smith
Lori A. Rudalavage Steve Zazzera
</TABLE>
<PAGE>
OFFICE LOCATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
CORPORATE ADDRESSES BRANCH ADDRESSES
Lake Ariel Bancorp, Inc. Lake Ariel Clarks Green
P.O. Box 67 P.O. Box 67 318 East Grove Street
Route 191 Route 191 Clarks Green, PA 18411
Lake Ariel, PA 18436 Lake Ariel, PA 18436 (717) 587-0505
(717) 698-5695 (717) 698-5695
The Mall At Steamtown
LA Bank, N.A. Mt. Cobb 220 The Mall at Steamtown
P.O. Box 67 Routes 348 & 247 Scranton, PA 18503
Route 191 Lake Ariel, PA 18436 (717) 341-8000
Lake Ariel, PA 18436 (717) 689-2694
1-800-4LA-BANK Lords Valley
(Pennsylvania only) Greene-Dreher Lords Valley Shopping Plaza
Route 191 Route 739, South
LA Bank, N.A. Newfoundland, PA 18445 Lords Valley, PA 18428
Administration and Loan Center (717) 676-4767 (717) 775-8800
120 N. Keyser Avenue
Scranton, PA 18504 Hamlin Corners Carbondale
(717) 343-8200 Route 191 & 590 93 Brooklyn Street
Hamlin, PA 18427 Ames Shopping Plaza
LA Bank, N.A. (717) 689-0944 Carbondale, PA 18407
Operations Center (717) 282-7400
P.O. Box 790 Eynon
Route 191 S 685 Scranton-Carbondale Hwy. Lake Wallenpaupack
Hamlin, PA 18427 Eynon, PA 18403-1022 HC 6 Box 6931
(717) 689-5300 (717) 876-1637 / 342-2242 Hawley, PA 18428
(717) 226-5300
LA Lease, Inc. Keyser Valley
120 N. Keyser Avenue 130 N. Keyser Avenue Milford
Scranton, PA 18504 Scranton, PA 18504 214 W. Harford Street
(717) 343-8200 (717) 341-8100 Milford, PA 18337
(717) 296-0200
Milford Township
Routes 6 & 209 Mountainhome
Milford, PA 18337 Route 390 Barrett Twp.
(717) 296-5600 Mountainhome, PA 18342
(717) 595-6400
</TABLE>
61
<PAGE>
Business Development Boards
Lackawanna Region Lake Region Pocono Region
Martin Andrews Joseph P. Ceresko T. Scot Brown
Eli Arenberg Edward Cimoch Victor Decker, Esq.
Francis Bianconi Forrest Compton Robert E. Derse
Ervin Brong Joseph M. Dombrowski Peter Helms
Mary Alice Burke John W. Donaghy Donald W. Henderson, M.D.
Carol Chisdak Jeanne Heater* Douglas J. Jacobs, Esq.
Harry T. Coleman, Esq. Harry Howell Joseph F. Kameen, Esq.
Dr. Dominick Cruciani Andrew J. Krompasky Michelle Koziara
Gilbert Hoban* Kerry Nix Robert Lankenau
Joseph Karam James R. Shorten Ellen McDermott
Kevin K. Kearney Brian Smolsky Dr. Michael Newmark
Ron Leas John E. Spewak Edward S. Nikles
Robert A. Mazzoni Alice Trunzo Robert Pityo
Mark Suchter Joanne C. Valanda Edmund J. Riess, Jr.
John J. Vanston Michael Walker, Esq. William Sanquilly
Dr. Joseph Zandarski, CPA Louis J. Zefran Edward J. Shafer
Sandor Zangardi George Schmitt
Thomas H. Wiss, IV
David Zeiler
*Appointed January, 1997
62
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF BANCORP
Direct Subsidiary: LA Bank, National Association, chartered under the
laws of the United States of America, a national
banking association.
Indirect Subsidiary: LA Lease, Inc., chartered under the laws of the
Commonwealth of Pennsylvania, a Pennsylvania
business corporation and wholly-owned subsidiary
of LA Bank, National Association.
<PAGE>
EXHIBIT 99A
SELECTED 5-YEAR FINANCIAL DATA
AND SELECTED YEAR-END BALANCES
<PAGE>
LAKE ARIEL BANCORP, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $20,275 $18,548 $14,157 $10,898 $10,037
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
Income before income taxes 4,151 2,942 2,663 2,658(2) 1,690
Provision for income taxes 1,120 635 535 606 362
Net income 3,031 2,307 2,128 2,052 1,328
Earnings per share(1) 1.73 1.33 1.24 1.60 1.05
Dividends per share .70 .59 .55 .41 .33
</TABLE>
- -------------------------
(1) Reflects adjustment for 5% stock dividend issued on October 1, 1996.
(2) Reflects adjustment for cumulative effect of a change in accounting
for income taxes.
<TABLE>
<CAPTION>
Year-End Balances
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $297,906 $251,859 $236,125 $169,189 $132,690
Investment securities 87,000 73,169 76,677 40,151 24,107
Loans and leases, net 175,990 152,306 135,018 109,302 93,176
Deposits 253,196 208,759 192,187 146,054 122,173
Long-term debt 20,023 15,156 15,219 281 ----
Stockholders' equity 21,172 19,509 15,799 16,272 9,321
</TABLE>
39
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000723878
<NAME> LAKE ARIEL BANCORP, INC.
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,250
<INT-BEARING-DEPOSITS> 121
<FED-FUNDS-SOLD> 4,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,399
<INVESTMENTS-CARRYING> 26,601
<INVESTMENTS-MARKET> 26,564
<LOANS> 177,820
<ALLOWANCE> 1,830
<TOTAL-ASSETS> 297,906
<DEPOSITS> 253,196
<SHORT-TERM> 300
<LIABILITIES-OTHER> 3,215
<LONG-TERM> 20,023
0
0
<COMMON> 740
<OTHER-SE> 20,432
<TOTAL-LIABILITIES-AND-EQUITY> 297,906
<INTEREST-LOAN> 14,592
<INTEREST-INVEST> 5,513
<INTEREST-OTHER> 170
<INTEREST-TOTAL> 20,275
<INTEREST-DEPOSIT> 8,957
<INTEREST-EXPENSE> 1,226
<INTEREST-INCOME-NET> 10,092
<LOAN-LOSSES> 650
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 7,997
<INCOME-PRETAX> 4,151
<INCOME-PRE-EXTRAORDINARY> 3,031
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,031
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 0
<LOANS-NON> 615
<LOANS-PAST> 1,593
<LOANS-TROUBLED> 2,208
<LOANS-PROBLEM> 896
<ALLOWANCE-OPEN> 1,657
<CHARGE-OFFS> 575
<RECOVERIES> 98
<ALLOWANCE-CLOSE> 1,830
<ALLOWANCE-DOMESTIC> 1,830
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,830
</TABLE>
