SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
EXCHANGE ACT
For the transition period from
to
Commission file Number: 2-85306
Lake Ariel Bancorp, Inc.
(Exact name of small business issuer as specified in its
charter)
Pennsylvania
(State or other jurisdiction of incorporation or
organization)
23-2244948
(I.R.S. Employer Identification No.)
Post Office Box 67
Lake Ariel, Pennsylvania 18436
(Address of principal executive offices)
(Zip Code)
(717) 698-5695
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports
required to be filed by Section 13 or
15(d) of the Exchange Act of 1934 during the past 12 months
(or for such shorter period
that the registrant was required to file such reports), and
(2)has been subject to such filing
requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the
issuer's classes of common
equity, as of the latest practicable date: 1,775,555 shares
of common stock, par value
$.42 per share, as of June 30, 1997.
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1997
INDEX
Page Number
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
Consolidated Statement of Income for the three and
six months ended June 30, 1997 and 1996 4
Earnings Per Share for the three and six month
periods ended June 30, 1997 and 1996 4
Consolidated Statement of Cash Flows for the six
months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis or
Plan of Operations 8-22
Part II - Other Information
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security
Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23 <PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
(in thousands) (in thousands)
ASSETS
Cash and cash equivalents $14,013 $15,971
Federal funds sold 4,350 --
Total cash and cash
equivalents 18,363 15,971
Available-for-sale
securities. . . 55,499 60,399
Held-to-maturity securities
(fair value of $57,856
and $26,564, respectively) 57,604 26,601
Loans and leases 197,468 186,494
Mortgage loans held for
resale . . . . . . 997 315
Less unearned income
and loan fees. . . (7,887) (8,989)
Less allowance for
possible credit losses (1,922) (1,830)
Net Loans . . . . 188,656 175,990
Premises and equipment, net. 9,961 10,005
Accrued interest receivable. 2,787 2,349
Foreclosed assets held for
sale. 920 841
Other assets 10,247 5,750
TOTAL ASSETS. . $ 344,037 $ 297,906
LIABILITIES
Deposits:
Noninterest-bearing . $ 34,992 $ 32,539
Interest-bearing:
Demand. . . . . . . 31,384 27,070
Savings . . . . . 39,231 37,713
Time . 125,125 115,634
Time $100,000 and
over. . . 38,379 40.240
Total Deposits. 269,111 253,196
Accrued interest payable 2,361 2,416
Securities sold under
agreements to
repurchase 300 300
Short-term borrowings
-- --
Long-term debt . 49,000 20,023
Other liabilities. . . 1,007 799
Total Liabilities 321,779 276,734
STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of
$1.25 par value each;
no outstanding shares --- ---
Common stock: Authorized, 5,000,000 shares of
$.42 par value each; issued and outstanding
1,775,555 shares in 1997 and
1,761,776 in 1996 746 740
Capital surplus. 11,331 11,099
Retained earnings. . . 10,507 9,572
Net unrealized securities gains
(losses) onavailable-for-
sale securities (326) (239)
Total Stockholders'
Equity. . 22,258 21,172
Total Liabilities and
Stockholders' Equity $ 344,037 $ 297,906
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
(in thousands except per share data)
INTEREST INCOME:
Loans and leases $ 8,039 $7,016 $4,101 $3,539
Investment Securities
Taxable 2,863 2,093 1,435 1,141
Exempt from federal
income taxes 778 509 401 268
Dividends.. 63 41 35 16
Total Investment Securities
Income 3,704 2,643 1,871 1,425
Deposits in banks 5 3 1 2
Federal funds
sold 121 85 76 41
TOTAL INTEREST
INCOME 11,869 9,747 6,049 5,007
INTEREST EXPENSE:
Deposits 4,886 4,264 2,500 2,220
Long-term debt 1,487 488 788 244
Federal funds
purchased 10 4 9 2
Short-term
borrowings 14 93 8 34
Securities sold
under agreements to
repurchase 7 10 3 5
TOTAL INTEREST
EXPENSE. 6,404 4,859 3,308 2,505
NET INTEREST
INCOME 5,465 4,888 2,741 2,502
PROVISION FOR POSSIBLE
CREDIT LOSSES 380 250 255 135
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT
LOSSES. 5,085 4,638 2,486 2,367
OTHER OPERATING INCOME:
Loan origination
fees 149 147 115 56
Customer service
charges and fees 601 606 300 318
Mortgage servicing
fees 168 167 87 82
Gain (loss) on
available-for-sale
securities (9) (47) (1) 1
Gain (loss) on sale
of loans, net 122 59 106 40
Other income 396 307 208 151
TOTAL OTHER OPERATING
INCOME 1,427 1,239 815 648
OTHER OPERATING EXPENSES:
Salaries and
benefits 2,050 1,761 974 855
Occupancy expense 671 540 317 261
Equipment expense 443 414 223 216
Advertising 128 147 93 100
Other expenses 1,169 999 628 475
TOTAL OTHER OPERATING
EXPENSES 4,461 3,861 2,235 1,907
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,051 2,016 1,066 1,108
PROVISION FOR INCOME
TAXES 515 515 260 310
NET INCOME $1,536 $ 1,501 $ 806 $ 798
Earnings per
share*: $ 0.85 $ 0.85 $ 0.45 $ 0.45
Dividends per
share: $ 0.34 $ 0.31 $ 0.17 $ 0.16
Weighted average no. of shares
outstanding*: 1,798 1,761 1,798 1,761
*Reflects adjustment for 5% stock dividend issued on October
1, 1996.
The accompanying notes are an integral part of the
consolidated financial statements.<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1997 1996
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,536 $1,501
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible
credit losses 371 250
Depreciation, amortiz-
ation and accretion 429 358
(Increase) decrease in
mortgage loans held
for resale (682) 1,969
Investment security
(gains) losses, net 9 47
Loss on sale of fore-
closed assets 104 43
(Gain) loss on sale
of equipment (5) --
(Increase) decrease in
accrued interest
receivable (438) (348)
Increase (decrease) in
accrued interest
payable (55) 206
(Increase) decrease in
other assets (4,663) 24
Increase (decrease) in
other liabilities 208 (127)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (3,186) 3,923
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from
maturities 1,524 353
Purchases (32,527) (3,516)
Available-for-sale securities:
Proceeds from
maturities 1,716 6,358
Proceeds from sales 5,742 12,935
Purchases (2,491) (36,037)
Net (increase) decrease in
loans and leases (12,650) (11,769)
Purchases of premises
and equipment (382) (143)
Proceeds from sale of
equipment 5 --
Proceeds from sale of
foreclosed assets 112 13
NET CASH PROVIDED BY
(USED IN)INVESTING
ACTIVITIES (38,951) (31,806)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in
deposits 15,915 30,524
Increase (decrease) in
short-term borrowings (2,500)
Increase (decrease) in securities sold under
agreements to
repurchase -- (100)
Proceeds from long-term
debt 30,000 --
Principal payments on long-
term debt (1,023) (31)
Proceeds from issuance of
common stock 238 175
Cash dividends (601) (516)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 44,529 27,552
INCREASE (DECREASE) IN CASH & CASH
EQUIVALENTS 2,392 (331)
CASH & CASH EQUIVALENTS AT
BEGINNING OF PERIOD 15,971 12,519
CASH & CASH EQUIVALENTS AT END OF
PERIOD $18,363 $12,188
CASH PAID DURING THE YEAR FOR:
Interest $ 6,459 $4,653
Income taxes. $ 387 $525
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
LAKE ARIEL BANCORP,INC.
FORM 10-Q
Part I - Financial Information (Cont'd)
Item 1. Financial Statements (Cont'd)
Notes to Consolidated Financial Statements
1. REPORTING AND ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accounting and financial reporting policies of Lake
Ariel Bancorp, Inc. and its subsidiary conform to generally
accepted accounting principles and to general practice
within the banking industry. The consolidated statements
include the accounts of Lake Ariel Bancorp, Inc. and its
wholly owned subsidiary, LA Bank, N.A. (Bank) including its
subsidiary, LA Lease, Inc. (collectively, Company). All
material intercompany accounts and transactions have been
eliminated in consolidation. The accompanying interim
financial statements are unaudited. In management's
opinion, the consolidated financial statements reflect a
fair presentation of the consolidated financial position
of Lake Ariel Bancorp, Inc. and subsidiary, and the results
of its operations and its cash flows for the interim periods
presented, in conformity with generally accepted accounting
principles.
2. CASH FLOWS
The Company considers amounts due from banks and
federal funds sold as cash equivalents. Generally, federal
funds are sold for one-day periods.
From time to time, the Company swaps its residential
mortgage loans for participation certificates of a similar
amount issued by the Federal Home Loan Mortgage Corporation.
These certificates do not involve the transfer of cash for
cash flow purposes. No mortgage loans were swapped for
participation certificates during the first six months of
1997 or 1996.
3. INVESTMENT SECURITIES
SFAS No. 115 requires the classification of securities
as held-to-maturity, available-for-sale or trading.
Securities, other than securities classified as
available-for-sale, are carried at amortized cost if
management has the ability and intent to hold these
securities to maturity. Securities expected to be held for
an indefinite period of time and not held until maturity are
classified as available-for-sale and are carried at
estimated fair value. Decisions to sell these securities
are determined by the Company's financial position,
including but not limited to, liquidity, interest rate risk,
asset liability management strategies, regulatory
requirements, tax considerations or capital adequacy.
Gains or losses on investment securities are computed using
the specific identification method.
The Company has no derivative financial instruments
requiring disclosure under SFAS No. 119.
4. RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to
conform to the 1997 reporting format.
5. The financial information as of December 31, 1996 and
for the interim periods ended June 30, 1997 and 1996
included herein is unaudited; however, such information
reflects all adjustments consisting of only normal recurring
adjustments, which are, in the opinion of management,
necessary to a fair presentation of the results for the
interim periods.
6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
There were no short-term borrowings at June 30, 1997.
Long-term debt at June 30, 1997 consisted of the
following:
Unsecured notes, payable in the amount
of $31,200 semiannually, maturing
April 22,1998................ $ 62,000
Borrowings with The Federal Home Loan
Bank..................... 48,938,000
Total $ 49,000,000
Annual maturities of the long-term debt are as follows:
$1,371,100 in 1997; $2,818,100 in 1998; $12,971,900 in 1999;
$8,169,700 in 2000; $8,281,700 in 2001; $10,387,500 in 2002;
$5,000,000 in 2005.
The borrowings with the Federal Home Loan Bank of
Pittsburgh (FHLB) require the Company to maintain collateral
with a fair value in an amount which approximates the
total outstanding debt. In addition, the Company must
maintain its membership with the FHLB.
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-Q
Part I - Financial Information (Cont'd)
Item 2. Management's Discussion and Analysis or Plan of
Operations:
The consolidated financial review of the Company is
intended to compare the performance of the Company for the
periods ended June 30, 1997 and 1996. The review
of the information presented should be read in conjunction
with the consolidated financial statements and the
accompanying notes.
NET INCOME
Net income for the first six months of 1997 increased
2% compared to the same period in 1996. Net income was
positively influenced by a 10% growth in net interest income
after provision for possible credit losses and a 15% growth
in other operating income. However, overhead costs increased
by 16%, greatly impacted by the opening of our three
newest branch offices in the fourth quarter of 1996.
Profit performance for financial institutions is
measured by the return on average assets (ROA) and the
return on average equity (ROE). On an annualized basis, the
ROA was .93% in 1997 compared to 1.13% in 1996. The ROE was
14.33% for the first six months of 1997 compared to 15.16%
in 1996.
NET INTEREST INCOME
Net interest income is the difference between interest
income and fees on earning assets and interest expense on
deposits and borrowed funds. The principal components of
earning assets are loans and investment securities. The
primary sources used to fund these assets were deposits,
borrowed funds and capital. For purposes of this review,
income that is exempt from federal income taxes has been
adjusted to a tax equivalent basis using the statutory rate
of 34% for each period presented.
In the first six months of 1997 net interest income
(tax equivalent basis) increased 15% over the same period in
1996 primarily due to the increased volume of and returns on
earning assets. Total average earning assets were $59
million greater at June 30, 1997 compared to the same period
in 1996. Average loans and leases grew by 17% or $27
million in the first six months of 1997. Average commercial
loans increased by 24%, real estate mortgage loans by 19%
and consumer loans and lease financing by 3%. The increase
in volume of loans resulted in a 15% growth in loan interest
income. Commercial loan income increased by 20%, mortgage
loan income grew by 15% and consumer loan income increased
by 8%.
Investment securities income increased 41% and is
directly attributable to higher volume levels and increased
yields during the quarter. Tax exempt state and municipal
securities income increased 53% due to higher volumes in
tax-exempt securities. From a Federal income tax
standpoint, a mid-1996 strategy of increased investments in
tax-exempt securities provided more favorable returns than
were available in taxable securities. U.S. government
agencies income increased by 37% because of higher volume
levels and increased yields. During the last half of 1996
and the first half of 1997 the Company purchased
approximately $35 million of securities with funds
borrowed from the FHLB. The strategy that was employed
provided a yield pickup between the invested and borrowed
funds. Gross unrealized gains on held to maturity
securities were approximately $438 thousand while gross
unrealized losses amounted to $185 thousand.
Total interest expense increased 15% or $636 thousand
in the first six months of 1997 due to the higher levels of
average interest-bearing deposit accounts. Average time
(certificates of deposit) deposits contributed to the
growth. In aggregate, average savings and interest-bearing
deposits currently represent 30% of interest-bearing
deposits compared to 33% in June, 1996. Total interest
expense associated with these types of deposits decreased
$4 thousand during the second quarter of 1997. Total
average certificates of deposit increased 19%; due to the
repricing frequency of these deposits and rate changes,
interest expense increased by 18%. The effect of higher
average rates resulted in a basis point increase in the cost
of interest-bearing deposits, from 4.36% at June, 1996 to
4.39% at June, 1997.
Average total borrowings were $48 million in the second
quarter of 1997 compared to $19 million in the second
quarter of 1996. At June 30, 1997, both short-term and
long-term borrowings were used to fund earning asset growth.
During the first six months of 1997, the average yield
on earning assets decreased by 8 basis points and cost of
interest-bearing liabilities increased by 25 basis points.
The net effect was a 33 basis point decrease in the net
interest margin from 4.20% in 1996 to 3.87% percent in 1997.
The following table provides an analysis of changes in
net interest income with regard to volume, rate and yields
of interest-bearing assets and liabilities based on
month-end average balances for each period. Components of
interest income and expense are presented on a tax
equivalent basis using the federal income tax rate of 34%
for each period.
<TABLE>
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential
(in thousands)
<PAGE>
<CAPTION>
For six months ended June 30, 1997 1996
Interest Interest
Average Annual Income/ Average Annual Income/
Balance (1) Rate Expense Balance Rate Expense
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds
sold $4,223 5.75% $121 $2,822 6.04% $ 85
Deposits in Federal
Home Loan 226 4.44% 5 124 4.85% 3
Investment Securities:
U.S. government
agencies 81,783 7.02% 2,863 62,568 6.71% 2,093
State and
municipal (2) 29,197 8.10% 1,179 18,606 8.31% 771
Other securities 2,753 4.59% 63 1,417 5.80% 41
Total Securities 113,733 7.24% 4,105 82,591 7.05% 2,905
Loans and Leases:
Commercial, financial
and industrial 58,630 9.25% 2,703 47,398 9.51% 2,247
Real estate-construction
and mortgage 90,004 7.89% 3,543 75,821 8.15% 3,083
Installment loans to
individuals
(3) 34,591 9.62% 1,659 33,953 9.26% 1,567
Lease financing
(3) 2,433 11.05% 134 1,940 9.51% 92
Total Loans and
Leases 185,658 8.68% 8,039 159,112 8.81% 6,989
Total earning
assets 303,840 8.10% 12,270 244,649 8.18% 9,982
Cash and due from
banks 9,330 -- -- 10,579 -- --
Premises and
equipment 10,006 -- -- 7,695 -- --
Other, less allowance for credit losses
and loan fees 6,953 -- -- 3,736 -- --
Total Assets $330,129 7.45% $12,270 $266,659 7.51% $9,982
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand $28,428 2.07% $293 $24,841 2.03% $251
Savings 37,903 2.02% 381 39,059 2.19% 427
Time 117,846 5.36% 3,151 101,469 5.71% 2,889
Time over
$100,000 39,912 5.40% 1,075 30,674 4.56% 697
Total Interest-Bearing
Deposits 224,089 4.39% 4,900 196,043 4.36% 4,264
Federal Funds
Purchased 174 5.76% 5 149 5.38% 4
Short-term
borrowings 173 5.80% 5 3,786 4.93% 93
Long-term debt 47,098 6.33% 1,487 15,143 6.46% 488
Securities sold under
agreements to
repurchase 300 4.68% 7 371 5.41% 10
Total Interest-Bearing
Liabilities 271,834 4.74% 6,404 215,492 4.53% 4.859
Demand - noninterest -
bearing 33,40 -- -- 27,650 -- --
Other liabilities 3,449 -- -- 3,112 -- --
Total Liabilities 308,684 4.17% 6,404 246,254 3.97% 4,859
Stockholders'
equity 21,445 -- -- 20,405 -- --
Total Liabilities and
Stockholders'
Equity $330,129 3.90% $6,404 $266,659 3.66% $4,859
Margin Analysis
Interest income/
earning assets 8.10% $12,270 8.18% $9,982
Interest expense/
earning assets 4.23% 6,404 3.98% 4,859
Net interest income/
earning assets 3.87% $ 5,866 4.20% $5,123
<FN>
(Percentages may not add due to rounding.)
(1) Average balances have been computed using daily balances.
Nonaccrual loans are included in loan balances.
(2) Interest and yield are presented on a tax equivalent basis using 34% for each
period.
(3) Installment loans and leases are presented net of unearned interest.
</FN>
</TABLE>
<PAGE>
Rate/Volume Variance Analysis Calculation
for six months ended June 30, 1997
1997 Compared to 1996 (4)
Total Caused by
Variance Rate Volume
Interest Income:
Federal funds sold $ 36 $ (5) $ 41
Deposits in Federal
Home Loan Bank 2 2 0
Investment Securities:
U.S. government
agencies 770 102 668
State and municipal 408 (20) 428
Other securities 22 (9) 31
Total Investment
Securities 1,200 73 1,127
Loans and Leases:
Commercial, financial
and industrial 456 (62) 518
Real estate-construction
and mortgage 460 (99) 559
Installment loans to
individuals 92 63 29
Lease financing 42 16 26
Total Loans and
Leases 1,050 (82) 1,132
Total Earning Assets 2,288 (12) 2,300
Interest Expense:
Interest-bearing deposits:
Demand 42 5 37
Savings (46) (33) (13)
Time 262 (190) 452
Time over $100,000 378 145 233
Total Interest-
Bearing Deposits 636 (73) 709
Federal Funds
Purchased 1 0 1
Short-term borrowings (88) 16 (104)
Long-term debt 999 (10) 1,009
Securities sold under
agreements to
repurchase (3) (1) (2)
Total Interest-Bearing
Liabilities 1,545 (68) 1,613
Net Interest Income
Variances $ 743 $ 56 $ 687
(4) The proportion of the total change attributable to
volume and rate changes during the period has been allocated
to the volume and rate components based upon the absolute
dollar amount of the change in each component prior to the
allocation.
OTHER OPERATING INCOME
Other operating income, during the first six months
of 1997, increased 15% from the same period in 1996. Loan
origination fees increased $2 thousand, because of the
volume of residential mortgage loans sold for cash.
Mortgage servicing fee income increased by $1 thousand when
compared to the first six months of 1996. These fees are
directly influenced by the volume of loans that are sold in
the secondary market. Gains or losses on sales of mortgage
loans occur when the coupon rates on mortgage loans exceed
or fall short of the yields required by the purchasers. The
net gain recorded in 1997 and in 1996 is indicative of the
changing market conditions during the periods in which the
sales occurred.
Customer service charges and fees, which include
fees on demand deposit accounts,item processing and return
items, decreased $5 thousand or 1% in the first six months
of 1997. The decrease is directly related to both the mix
of consumer and business demand deposits and the servicing
fees associated with each type of account.
Other income increased 29% in the first six months
of 1997 compared to the same period in 1996. Included in
other income are earnings on directors' and officers' life
insurance policies, credit card annual fees and merchant
discounts, safe deposit box rentals, rental income on excess
office space in two of the Company's branch offices,
automated teller machine surcharge income, commissions on
check orders and other general service fees.
There was no trading account activity during the
first six months of 1997 and 1996.
OTHER OPERATING EXPENSES
For the first six months of 1997, total other
operating expenses increased 16% over the same period in
1996. Salaries and benefits, which represent one of the
most significant portions of operating expenses, increased
by 16% in the second quarter of 1997 compared to 1996. The
increase is due to the additional number of employees in
the newest branch offices which opened in the fourth quarter
of 1996, merit increases and the added costs associated with
health care insurance and other benefits which are
provided by the Company. Occupancy expense increased by 24%
in 1997 compared to the same period in 1996. Equipment
expense increased by 7% in 1997 compared to the first
quarter of 1996. Besides the increased cost of computer
equipment and related software costs, the increase in both
of these expenses is directly related to the overall
increases in overhead expenses at all branch offices plus
the costs associated with opening and operating the three
newest branch offices. Other expenses increased by 17% over
the same period in 1996 and include such costs as legal
fees, professional and audit fees and other general
operating expenses.
INCOME TAXES
The provision for income taxes as of June 1997 and
1996 was the same at $515 thousand. The effective tax rate
for the second quarter of 1997 was 25% as compared to 26% in
the same period in 1996.
PROVISION FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses is based
on management's evaluation of the allowance for possible
credit losses in relation to the credit risk inherent in the
loan portfolio. In establishing the amount of provision
required, management considers a variety of factors,
included but not limited to, general economic factors,
volume of specific types of loans, collateral adequacy and
potential losses from significant borrowers. The Company
has strengthened its internal loan review process by
implementing stringent analytical standards in the review
procedure. At quarterly meetings, the loan review committee
analyzes information relative to both specific credits
and the total portfolio in general. The information is used
to determine the amount to be charged to the provision which
thereby increases the allowance for possible credit losses.
At June 30, 1997 the amount charged to operating
expense for the provision for possible credit losses was
$380 thousand compared to $250 thousand at June 30, 1996.
The provision represents management's assessment of the
risks inherent in the loan and lease portfolio while
providing amounts necessary to cover charge-offs. The
allowance for possible credit losses was 1.01% at June 30,
1997 compared to 1.10% at June 30, 1996.
Changes in the allowance for possible credit losses for the
six months ended June 30,1997, 1996 and 1995 were as
follows:
1997 1996 1995
(in thousands)
Balance at beginning
of period $ 1,830 $ 1,657 $ 1,496
Charge-offs:
Real estate-construction 0 0 0
Real estate-mortgage 102 49 0
Commercial and
industrial 65 0 173
Consumer installment 180 135 71
Lease financing 0 0 0
Total 349 184 244
Recoveries:
Real estate-construction 0 0 0
Real estate-mortgage 0 0 0
Commercial and
industrial 37 30 4
Consumer installment 24 37 30
Lease financing 0 0 0
Total 61 67 34
Net charge-offs 288 117 210
Provision for possible
credit losses 380 250 360
Balance at end of period $ 1,922 $ 1,790 $1,646
Ratio of net charge-offs during
period to average loans
outstanding during period .16% .07% .15%<PAGE>
FINANCIAL CONDITION
At June 30, 1997, the Company's total assets were
$344 million, representing an increase of $46.1 million or
15% from the December 31, 1996 balance of $297.9 million.
The increase in assets is primarily attributable to a $26.1
million growth in securities and a $12.6 million growth in
net loans and leases.
Investment securities increased 30% from $87
million at December 31, 1996, to $113.1 million at June 30,
1997. The net increase of $26.1 million was attributable to
a strategic plan implemented in January, 1997 whereby the
Company borrowed $25 million from the FHLB and invested in a
combination of various fixed and variable rate investments.
Total net loans increased by $12.6 million from
$176 million at year-end 1996, to $188.6 million at June 30,
1997. Residential mortgage loans increased $2 million or 2%
from December 31, 1996 to June 30, 1997. The increase is
attributable to the increased mortgage loan activity during
the period, particularly during the second quarter of 1997,
net of mortgage loans sold during the first six months of
1997 of approximately $18 million. Consumer loans, net of
unearned discounts, remained constant with year-end
1996 amounts. Commercial loans increased $10.7 thousand or
20% at June 30, 1997. Commercial loans consist of loans
made to small businesses within the Company's market
area and are generally secured by real estate and other
assets of the borrowers.
Total deposits increased $15.9 million or 6% from
$253.2 million at year-end 1996 to $269.1 million at June
30, 1997. Noninterest-bearing demand deposits increased
$2.5 million during the first six months of 1997. In
aggregate, savings accounts and interest-bearing demand
deposits increased by $5.8 million or 9% during the period.
As a percentage of total deposits, savings and
interest-bearing demand deposits represented 26.2% at June
30, 1997, compared to 26% at year-end 1996. These deposits
continue to be very attractive to consumers because of their
liquidity feature and their competitiveness with respect to
rates offered on other short-term deposit products. Time
deposits, which include certificates of deposit in
denominations of $100 thousand or more, increased $7.6
million or 5% during the period. There were no brokered
deposits within the Company's deposit base at June 30, 1997.
The Company considers its current deposit base to
be stable and generally consumer in nature. The deposit mix
is, in general, equally distributed among all products
without any significant concentrations.
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans
and foreclosed real estate held for sale. Nonperforming
loans consist of loans where the principal, interest, or
both is 90 or more days past due and loans that have been
placed on nonaccrual. When loans are placed on nonaccrual,
income from the current period is reversed from current
earnings and interest from prior periods is charged to the
allowance for possible credit losses. Consumer loans are
charged off when principal or interest is 120 or more days
delinquent,
or are placed on nonaccrual if the collateral is sufficient
to recover the principal. The following table represents
nonperforming assets of the Company at June 30, 1997 and
1996.
1997 1996
(Dollars in thousands)
Loans past due 90 days or $1,588 $1,111
Impaired loans on nonaccrual status458 938
Other Nonaccrual loans 121 461
Total nonperforming loans 2,167 2,510
Foreclosed assets held for sale 920 188
Total nonperforming assets $3,087 $2,698
Nonperforming loans as a percent
of loans 1.14% 1.54%
Nonperforming assets as a percent
assets .90% .96%
Nonperforming assets at June 30, 1997 increased
$389 thousand or 14% compared to the same period in 1996.
Nonaccrual loans decreased $820 thousand at June 30, 1997
compared to the same period in 1996. Real estate loans
represent $122 thousand of
nonaccrual loans while loans to commercial borrowers
represent the remaining $457
thousand balance. Generally, commercial loans are secured
by real estate and other assets
of the borrowers. No material losses are expected from
legal proceedings on nonaccrual
loans.
Loans past due 90 days or more increased $477
thousand from 1996 levels. Of the delinquent loans, 28.6%
are residential mortgages, 44.3% are consumer installment
and 27.1% are real estate secured loans to commercial
borrowers. At quarterly loan review meetings, management
reviews the status of these loans with regard to legal
proceedings and collection efforts.
Foreclosed assets held for sale increased $732
thousand compared to the first six months of 1996. The
Company expects the sales of the properties to be completed
during the third quarter of 1997.
POTENTIAL PROBLEM LOANS
At June 30, 1997, the Company had approximately
$1.4 million of potential problem loans not included in the
nonperforming loan classification. Known information
about possible credit problems related to these borrowers
caused management to have serious doubts as to the ability
of such borrowers to comply with present loan repayment
terms and may result in future classification of such loans
as nonperforming. These potential problem loans were taken
into consideration by management when determining the
adequacy of the allowance for possible credit losses at June
30, 1997.
LIQUIDITY AND FUNDS MANAGEMENT
Liquidity management is to ensure that adequate
funds will be available to meet anticipated and
unanticipated deposit withdrawals, debt servicing payments,
investment commitments, commercial and consumer loan demand
and ongoing operating expenses. Funding sources include
principal repayments on loans and investments, sales of
assets, growth in core deposits, short- and long-term
borrowings and repurchase agreements. Regular loan payments
are a dependable source of funds, while the sale of loans
and investment securities, deposit flows, and loan
prepayments are significantly influenced by general economic
conditions and level of interest rates.
At June 30, 1997, the Company maintained $18.4
million in cash and cash equivalents (including Federal
funds sold) in the form of cash and due from banks (after
reserve requirements). In addition, the Company had $1
million of mortgage loans held for resale and $55.5 million
in available-for-sale securities. This combined total of
$74.9 million represented 21.8% of total assets at June 30,
1997. The Company believes that its liquidity is adequate.
The Company considers its primary source of
liquidity to be its core deposit base. This funding source
has grown steadily over the years and consists of deposits
from customers throughout the branch network. The Company
will continue to promote the acquisition of deposits through
its branch offices. At June 30, 1997, approximately 78%
of the Company's assets were funded by core deposits
acquired within its market area. An additional 6.5% of the
assets were funded by the Company's equity. These two
components provide a substantial and stable source of funds.
Net cash used by operating activities was $3.2
million at June 30, 1997, as compared to net cash provided
by operating activities of $3.9 million for the comparable
period in 1996. The $7.1 million decrease is primarily
related to a net $2.7 million increase in the change in
mortgage loans held for resale and a net $4.7 million
increase in the change in other assets. Net cash used in
investing activities increased $7 million in 1997, primarily
attributable to purchases of investment securities. Net
cash provided by financing activities increased $17 million
from 1996. A net increase in FHLB borrowings of $30 million
was used to fund investment purchases. A net decrease in
the growth of deposits of $14.6 million was the other major
component impacting funds provided by investing activities.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management involves the
matching of maturity and repricing dates of earning assets
and interest-bearing liabilities to help insure the
Company's earnings againstextreme fluctuations in interest
rates. The Company's Asset/Liability Committee ("ALCO"),
which is comprised of senior management and board members,
meets monthly to monitor the ratio of interest sensitive
assets to interest sensitive liabilities.
The Company's principal financial objective is to
achieve long-term profitability while managing its exposure
to fluctuations in interest rates. This is accomplished
through the measurement of the relationship between interest
rate sensitive assets and interest rate sensitive
liabilities. The goal of maintaining a reasonable balance
between interest sensitive assets and interest sensitive
liabilities is accomplished through the Company's
asset/liability management program.
To manage the interest sensitivity position, an
asset/liability model called "gap analysis" is used to
monitor the difference in the volume of the Company's
interest sensitive assets and liabilities that mature or
reprice within given periods. A positive gap (asset
sensitive) indicates that more assets reprice during a given
period compared to liabilities, while a negative gap
(liability sensitive) has the opposite effect. The use of
this model assists the ALCO to gauge the effects of interest
rate changes on interest sensitive assets and liabilities in
order to determine what impact these rate changes will have
upon the net interest spread.
At June 30, 1996, the Company maintained a one year
cumulative GAP of negative $26.4 million or 7.6% of total
assets. The effect of this GAP position provided a negative
mismatch of assets and liabilities which can expose the
Company to interest rate risk during a period of rising
interest rates.
The following table sets forth the Company's
interest sensitivity gap position as of June 30,1997.
<TABLE>
<CAPTION>
3 months 3 through 1 through Over Total
or less 12 months 3 years 3 years
(in thousands)
<S> <C> <C> <C> <C> >C>
Cash and Cash
Equivalents $ 14,012 $ - $ - $ - $ 14,012
Investment
securities
(1)(2) 9,345 5,401 26,681 76,310 117,737
Loans(2) 78,572 19,360 35,888 54,686 188,506
Fixed and Other
Assets - - - 24,791 24,791
Total $101,929 $ 24,761 $ 62,569 $155,787 $345,046
Non Interest-bearing
transaction
deposits(2) $ 8,758 $ - $ 8,758 $ 17,516 $ 35,032
Interest-bearing
transaction
deposits(2) - 7,212 20,463 42,940 70,615
Time 15,574 74,266 32,201 3,084 124,125
Time over
$100,000 13,036 18,738 3,368 3,237 38,379
Repurchase
agreements 300 - - - 300
Short-term
borrowings 1,670 1,104 - - 2,774
Long-term debt 10,601 1,804 14,811 19,010 46,226
Other Liabilities - - 4,010 4,010
Total $ 49,939 $103,124 $ 79,601 $ 89,797 $322,461
Interest Sens-
itivity Gap $ 51,990 $(78,363)$(17,032) $ 65,990
Cumulative Gap $ 51,990 $(26,373)$(43,405 $ 22,585
Cumulative Gap to
Total Assets 15.07% (7.64)% (12.58)% 6.5%
<FN>
(1) Gross of unrealized gains/losses on available for sale securities.
(2) Investments and loans are included in the earlier of the period in which
interest rates were next scheduled to adjust or the period in which they are
due. In addition, loans were included in the periods in which they are
scheduled to be repaid based on scheduled amortization. For amortizing loans
and mortgage-backed securities, annual prepayment
rates are assumed reflectinghistorical 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 considers a certain amount of such
accounts to be core accounts having significantly longer effective maturities
based on the retention experiences of such deposits in changing interest rate
environments. The effective maturities presented are the FDICIA 305
recommended maturity distribution limits for
non-maturing deposits.
</FN>
</TABLE>
Upon reviewing the current interest sensitivity
scenario, decreasing interest rates could positively affect
net income because the Company is liability sensitive. In a
rising interest rate environment, net income could be
negatively affected because more liabilities than assets
will reprice during a given period. However, this analysis
is only a simulation tool used to gauge the effects of a
changing interest rate scenario. Other factors such as
product pricing, customer preference and local market
conditions play an important part of interest rate risk
management.
CAPITAL
The adequacy of the Company's capital is reviewed
on an ongoing basis with reference to size, composition and
quality of the Company's resources. An adequate capital
base is important for continued growth and expansion in
addition to providing an added protection against unexpected
losses.
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 June 30, 1997 was 8.04% compared to 7.20% at June 30,
1996. For 1997 and 1996, the ratios were well above minimum
regulatory guidelines.
As required by the federal banking regulatory
authorities, new guidelines have been adopted to measure
capital adequacy. Under the guidelines, certain minimum
ratios are required for core capital and total capital as a
percentage of risk-weighted assets and other off-balance
sheet instruments. For the Company, Tier I capital consists
of common stockholders' equity lessintangible assets, and
Tier II capital includes the allowable portion of the
allowance for possible loan losses, currently limited to
1.25% of risk-weighted assets. By regulatory guidelines,
neither Tier I nor Tier II capital reflect the
adjustment of FASB 115, which requires adjustment in
financial statements prepared in accordance with generally
accepted accounting principles by including as a separate
component of equity, the amount of net unrealized holding
gains or losses on debt and equity securities that are
deemed to be available-for-sale.
Regulatory guidelines require that core capital and
total risk-based capital must be at least 4.00% and 8.00%,
respectively. The following table illustrates the Company's
capital ratios as required under the guidelines.
Primary capital $ 22,584
Intangible assets 639
Tier I capital(1) 22,563
Tier II Capital 1,852
Total Risk-Based Capital $ 24,415
Total Risk-Weighted Assets $ 199,245
Tier I Ratio 11.32%
Risk-Based Capital Ratio 12.25%
Tier I Leverage Ratio 8.04%
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 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 of future
earnings.
As of June 30, 1997, total interest-earning assets
maturing or repricing within one year were less than total
interest-bearing liabilities maturing or repricing in the
same
period by $26.4 million, representing a cumulative one-year
interest rate sensitivity gap as a percentage of total
assets of negative 7.6%. 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. The risk of loss varies with, among
other things, general economic conditions, the type of loan
being made, the credit-worthiness 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 the
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. In March, 1997, the
national prime rate increased to its current level of 8.50%
in an effort by the Federal Reserve System to steer the U.S.
economy away from inflationary tendencies. 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
are allowed to 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.
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 $30,000.
Our twelfth branch 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 1996. The
expected amortization of the customer lists is $100,000 for
1997.
On May 19, 1997, the Office of the Comptroller of
the Currency (OCC) granted approval to establish a new
branch in downtown Scranton (Lackawanna County). The
Bank's downtown Scranton Branch and its new Financial
Center, both located in the historic Oppenheim Building, are
scheduled to open in the fall of 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.
Management's belief is that a significant impact on
earnings depends on its ability to react to changes in
interest rates. Through its Asset/Liability Committee, the
Company continually monitors interest rate sensitivity of
its earning assets and interest-bearing liabilities to
minimize any adverse effects on future earnings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-K
Exhibit Number Description of Exhibit
2 None
4 None
11 None
15 None
18 None
19 None
20 None
23 None
24 None
25 None
28 None
(b) Reports on /Form 8-K
on May 7, 1997, the Registrant filed Form 8-K
reporting the annual shareholders' meeting approval of the
Lake Ariel Bancorp, Inc. 1997 Stock Option Plan.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned
thereunto duly
authorized.
LAKE ARIEL BANCORP, INC.
Date August 8, 1997
By ________________________________
John G. Martines
CHIEF EXECUTIVE OFFICER
________________________________
Joseph J. Earyes, CPA
VICE PRESIDENT and TREASURER
