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 March 31, 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:
1,771,328 shares of common stock, par value $.42 per share, as of
March 31, 1997.
LAKE ARIEL BANCORP, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1997
INDEX
Page Number
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997
and December 31,1996........................... 3
Consolidated Statements of Income and
Earnings Per Share for the three months ended
March 31, 1997 and 1996......................... 4
Consolidated Statement of Cash Flows for the three
months ended March 31, 1997 and 1996.............. 5
Notes to Consolidated Financial Statements......... 6-7
Item 2. Management's Discussion and Analysis or
Plan of Operations.............................. 8-21
Part II - Other Information
Item 1. Legal Proceedings................................. N/A
Item 2. Changes in Securities............................. N/A
Item 3. Defaults Upon Senior Securities.................... N/A
Item 4. Submission of Matters to a Vote of Security
Holders....................................... N/A
Item 5. Other Information................................ N/A
Item 6. Exhibits and Reports on Form 8-K................. N/A
Signatures.................................................. 22
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents..................... $ 8,565 15,971
Available-for-sale securities...................... 61,061 60,399
Held-to-maturity securities (fair value of $57,250
and $26,564 in 1997 and 1996, respectively).. 57,942 26,601
Loans and leases........................................191,392 186,494
Mortgage loans held for resale....................... 726 315
Less unearned income and loan fees............. (8,419) (8,989)
Less allowance for possible credit losses....... (1,847) (1,830)
Net Loans and Leases...................... 181,852 175,990
Premises and equipment, net......................... 10,061 10,005
Accrued interest receivable.......................... 2,864 2,349
Foreclosed assets held for sale....................... 821 841
Other assets.......................................... 5,332 5,750
TOTAL ASSETS............................ $328,498 $297,906
LIABILITIES
Deposits:
Noninterest-bearing................................... $31,522 $32,539
Interest-bearing:
Demand......................................... 26,958 27,070
Savings.......................................... 38,692 37,713
Time............................................. 115,077 115,634
Time $100,000 and over.................... 41,290 40,240
Total Deposits................................. 253,539 253,196
Accrued interest payable............................... 2,348 2,416
Securities sold under agreements to repurchase... 300 300
Long-term debt.......................................... 49,667 20,023
Other liabilities.......................................... 1,132 799
Total Liabilities.............................. 306,986 276,734
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
1,771,328 shares in 1997 and 1,761,776 shares in 1996 744 740
Capital surplus........................................... 11,250 11,099
Retained earnings ...................................... 10,001 9,572
Net unrealized gains (losses) on available-for-sale
securities................................................ (483) (239)
Total Stockholders' Equity................. 21,512 21,172
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............. $328,498 $297,906
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<CAPTION>
MARCH 31,
1997 1996
(in thousands except per share data)
<S> <C> <C>
INTEREST INCOME:
Loans and leases................................ $3,938 $3,477
Investment Securities:
Taxable....................................... 1,428 952
Exempt from federal income taxes........ 377 241
Dividends...................................... 28 25
Total Investment Securities Income..... 1,833 1,218
Deposits in bank................................. 4 1
Federal funds sold............................... 45 44
TOTAL INTEREST INCOME........... 5,820 4,740
INTEREST EXPENSE:
Deposits............................................ 2,386 2,044
Long-term debt................................... 699 300
Federal funds purchased........................ 1 2
Short-term borrowings.......................... 6 3
Securities sold under agreements to repurchase 4 5
TOTAL INTEREST EXPENSE.......... 3,096 2,354
NET INTEREST INCOME.................. 2,724 2,386
PROVISION FOR POSSIBLE CREDIT LOSSES 125 115
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES.... 2,599 2,271
OTHER OPERATING INCOME:
Loan origination fees............................ 34 91
Customer service charges and fees........... 301 288
Mortgage servicing fees........................ 81 85
Investment security gains (losses), net (8) (48)
Gain (loss) on sale of loans, net.............. 16 19
Other income..................................... 188 156
TOTAL OTHER OPERATING INCOME 612 591
OTHER OPERATING EXPENSES:
Salaries and benefits............................ 1,076 906
Occupancy expense............................. 354 279
Equipment expense............................. 220 198
Advertising....................................... 35 47
Other expenses.................................. 541 524
TOTAL OTHER OPERATING EXPENSES 2,226 1,954
INCOME BEFORE PROVISION FOR INCOME TAXES 985 908
PROVISION FOR INCOME TAXES.... 255 205
NET INCOME................................. $730 $703
Earnings per share*: $0.41 $0.40
Dividends per share: $0.17 $0.15
Fully diluted weighted average number of shares outstanding*: 1,796 1,752
<FN>
*Reflects adjustment for 5% stock dividend issued on October 1, 1996.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $730 $703
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible credit losses................. 125 115
Depreciation, amortization and accretion........... 211 177
(Increase) decrease in mortgage loans
held for resale.................................... (411) (2,816)
Investment security (gains) losses, net............. 8 48
(Gain) loss on sale of equipment.................... (5) 0
(Increase) decrease in accrued interest receivable (515) (226)
Increase (decrease) in accrued interest payable... (68) (63)
(Increase) decrease in other assets.................. 560 63
Increase (decrease) in other liabilities.............. 333 50
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES........................... 968 (1,949)
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities............................. 1,186 203
Purchases ............................................... (32,527) (314)
Available-for-sale securities:
Proceeds from maturities ............................ 942 4,202
Proceeds from sales .................................. 0 5,233
Purchases ....................................... (2,000) (22,063)
Net (increase) decrease in loans and leases......... (5,599) (1,372)
Purchases of premises and equipment............... (266)
(95)
Proceeds from sale of equipment..................... 5 0
Proceeds from sale of foreclosed assets............. 43 0
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES......................... (38,216) (14,206)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................. 343 16,702
Increase (decrease) in short-term borrowings....... 0 (2,500)
Proceeds from long-term debt......................... 30,000 0
Principal payments on long-term debt............... (356) 0
Proceeds from issuance of common stock.......... 155 122
Cash dividends........................................... (300) (249)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.................................. 29,842 14,075
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,406) (2,080)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD.......................... 15,971 12,519
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 8,565 $10,439
CASH PAID DURING THE YEAR FOR:
Interest................................................... $3,164 $2,128
Income taxes............................................ $ 0 $ 250
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
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
quarters of 1997 and 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 March 31, 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 March 31, 1997.
Long-term debt at March 31, 1997 consisted of the following:
Unsecured notes, payable in the amount
of $31,200 semiannually, maturing
April 22, 1998....................................$ 94,000
Borrowings with The Federal Home Loan Bank of Pittsburgh
.........................................................$49,573,000
Total....................................................$49,667,000
Annual maturities of the long-term debt are as follows:
$2,038,100 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; and
$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
March 31, 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 three months of 1997 increased 4%
compared to the same period in 1996. Net income was positively
influenced by a 14% growth in net interest income after provision
for possible credit losses and a 4% increase in other operating
income, while overhead costs increased by 14%. The primary reason
for the increase is the expenses associated with our three newest
branch offices which opened 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 .90% in 1997 compared to
1.09% in 1996. The ROE was 13.70% for the first quarter of 1997
compared to 14.15% 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 quarter of 1997 net interest income (tax
equivalent basis) increased 16% over the same period in 1996,
primarily due to the positive variance of income earned over
interest paid. Average loans and leases grew by 17% or $27 million
in the first quarter of 1997. Average commercial loans increased by
19%, real estate mortgage loans by 21% and consumer loans and lease
financing by 5%. The increase in interest and fees on loans
resulted from the growth in all loan categories. Commercial loan
income increased by 12%, mortgage loan income grew by 17% and
consumer loan and lease finance income increased by 6%.
Investment securities income increased 51% and is directly
attributable to higher volume levels and increased yields during the
quarter. Tax exempt state and municipal securities income increased
56% 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 50% because of higher volume levels and increased
yields. During the last half of 1996 and the first quarter 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 $251 thousand while gross unrealized losses amounted
to $943 thousand.
Total interest expense increased by 32% in the first quarter
of 1997 due to the higher levels of average interest-bearing deposit
accounts and FHLB borrowings. Average time (certificates of
deposit) deposits and rates on new borrowings from the FHLB
contributed heavily to the growth. In aggregate, average savings
and interest-bearing demand deposits currently represent 30% of
interest-bearing deposits compared to 34% in March 1996. Total
interest expense associated with these types of deposits decreased
37% or $185 thousand during the first quarter of 1997. Total
average certificates of deposit increased 25%, but due to the
repricing frequency of these deposits and the overall higher rates,
interest expense on certificates of deposit increased by 34%. The
effect of the higher average rates resulted in a 4 basis point
increase in the cost of interest-bearing deposits, from 4.34% at
March 1996 to 4.38% at March 1997.
Average total borrowings were $45.3 million in the first
quarter of 1997 compared to $20.2 million in the first quarter of
1996. At March 31, 1997, both short-term and long-term borrowings
were used to fund earning asset growth.
During the first quarter of 1997, the average yield on earning
assets decreased by 7 basis points and cost of interest-bearing
liabilities increased by 22 basis points. The net effect was a
basis point decrease in the net interest margin from 4.26% in 1996
to 3.97% 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.
<PAGE>
<TABLE>
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential (in thousands)
For three months ended March 31, 1997 1996
<CAPTION>
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 $ 2,987 6.11% $ 45 $3,331 5.06% $ 42
Deposits in Federal Home Loan Bank3185.10% 4 142 5.65% 2
Investment Securities:
U.S. government agencies 81,967 7.07% 1,428 58,588 6.52% 952
State and municipal (2) 28,350 8.17% 571 17,505 8.36% 365
Other securities 2,523 4.50% 28 1,368 7.33% 25
Total Investment Securities 112,840 7.29% 2,027 77,461 6.95% 1,342
Loans and Leases:
Commercial, financial and
industrial 56,235 9.26% 1,284 47,139 9.57% 1,125
Real estate-construction
and mortgage 89,024 8.04% 1,764 73,341 8.27% 1,513
Installment loans to
individuals (3) 34,768 9.77% 838 33,537 9.51% 795
Lease financing (3) 2,165 10.30% 55 1,613 10.94% 44
Total Loans and Leases 182,192 8.77% 3,941 155,630 8.96% 3,477
Total Earning Assets 298,337 8.18% 6,017 236,564 8.25% 4,863
Cash and due from banks 8,506 -- -- 9,980 -- --
Premises and equipment, net 10,021 -- -- 7,723 -- --
Other, less allowance for possible credit losses
and loan fees 5,989 -- -- 4,293 -- --
Total Assets $322,853 7.56% $6,017 $258,560 7.54% $4,863
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:
Demand $ 27,742 1.94% $ 133 $ 25,053 2.03% $ 127
Savings 37,621 2.03% 188 39,188 3.88% 379
Time 114,785 5.25% 1,487 96,370 4.97% 1,193
Time over $100,000 40,679 5.76% 578 28,221 4.90% 345
Total Interest-Bearing
Deposits 220,827 4.38% 2,386 188,832 4.34% 2,044
Short-term borrowings 75 5.41% 1 4,670 5.50% 64
Securities sold under agreements
to repurchase 300 5.41% 4 400 5.01% 5
Long-term debt 44,949 6.36% 705 15,156 6.38% 241
Total Interest-Bearing
Liabilities 266,151 4.72% 3,096 209,058 4.52% 2,354
Noninterest-bearing demand
deposits 32,007 -- -- 26,617 -- --
Other liabilities 3,387 -- -- 2,966 -- --
Total Liabilities 301,545 4.16% 3,096 238,641 3.96% 2,354
Stockholders' equity 21,308 -- -- 19,919 -- --
Total Liabilities and Stockholders'
Equity $322,853 3.89% $3,096 $258,560 3.65% $2,354
Margin Analysis
Interest income/earning assets 8.18% $6,017 8.25% $4,863
Interest expense/earning assets 4.21% 3,096 3.99% 2,354
Net interest income/earning assets 3.97% $2,921 4.26% $2,509
<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.
</TABLE>
<TABLE>
Rate/Volume Variance Analysis Calculation
1997 Compared to 1996 (4)
<CAPTION>
Total Caused by
Variance Rate
Volume<S> <C> <C> <C>
Interest Income:
Federal funds sold $ 3 $ 8 ($5)
Deposits in Federal Home Loan Bank2 0 2
Investment Securities:
U.S. government agencies 476 83 393
State and municipal 206 (10) 216
Other securities 3 (13) 16
Total Investment Securities 685 60 625
Loans and Leases:
Commercial, financial and
industrial 159 (40) 199
Real estate-construction and
mortgage 251 (48) 299
Installment loans to individuals 43 18 25
Lease financing 11 (3) 14
Total Loans and Leases 464 (73) 537
Total Earning Assets 1,154 (5) 1,159
Interest Expense:
Interest-bearing deposits
Demand 6 (6) 12
Savings (191) (176) (15)
Time 294 70 224
Time over $100,000 233 67 166
Total Interest-Bearing Deposits 342 (45) 387
Short-term borrowings (63) (1) (62)
Securities sold under agreements
to repurchase (1) 0 (1)
Long-term debt 464 (1) 465
Total Interest-Bearing Liabilities 742 (47) 789
Net Interest Income Variances $ 412 $42 $370
<FN>
(4) The portion of the total change attributable to volume and rate
changes during
the period has been allocated to the volume and rate components based
upon
the absolute dollar amount of the change in each component prior to
the allocation.
/TABLE
<PAGE>
OTHER OPERATING INCOME
Other operating income, during the first
three months of 1997, increased 4% from the same
period in 1996. Loan origination fees decreased by
over 60% and mortgage servicing fee income decreased
by 5% when compared to the first quarter 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, increased 5% in the
first quarter of 1997. The increase is directly
related to the growth in the number of both consumer
and business demand deposits and the fees associated
with each type of account.
Other income increased by 21% in the first
quarter of 1997 compared to the same period in 1996.
Included in other income are earnings on director's
life insurance policies, credit card annual fees and
merchant discounts, safe deposit box rentals, rental
income on excess office space, and other general
service fees.
There was no trading account activity during
the first quarters of 1997 and 1996.
OTHER OPERATING EXPENSES
For the first three months of 1997, total
other operating expenses increased 14% over the same
period in 1996. Salaries and benefits, which
represent one of the most significant portions of
operating expenses, increased by 19% in the first
quarter of 1997 compared to 1996. The increase is
due to the additional number of employees in the
three 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 27% in 1997 compared
to the same period in 1996. Equipment expense
increased by 11% 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 3% 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 March
1997 increased by 25% in the first quarter of 1997
compared to the same period in 1996. The increase is
primarily attributable to the increase in pre-tax
income in addition to changes in the amount of tax-free and
nondeductible items. The effective tax rate
for the first quarter of 1997 was 26% as compared to
23% for 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 is presented with a report that contains
information relative to both specific credits and the
total portfolio in general. The information is used
to determine the amount to be charged to the
provision which thereby increases the allowance for
possible credit losses.
At March 31, 1997 the amount charged to
operating expense for the provision for possible
credit losses was $125 thousand compared to $115
thousand at March 31, 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 as a percent of total loans
was 1.01% at March 31, 1997 compared to 1.10% at
March 31, 1996.
FINANCIAL CONDITION
At March 31, 1997, the Company's total
assets were $328.5 million, representing an increase
of $30.6 million or 8% from the December 31, 1996
balance of $297.9 million. The increase in assets is
primarily attributable to a $32 million growth in
investment securities and $6 million increase in net
loans and leases.
Investment securities increased 37% from $87
million at December 31, 1996, to $119 million at
March 31, 1997. The net increase of $32 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 and leases increased by $6
million from $176 million at year end 1996, to $182
million at March 31, 1997. The increase in net loans
and leases resulted from the Company's long-term
borrowings and increased marketing efforts. Mortgage
loans increased by $2 million or 2% at March 31,
1997. Mortgage loans held for resale increased to
$700 thousand at March 31, 1997 from $300 thousand at
December 31, 1996. Consumer loans decreased by $1
million or 3%. Commercial loans increased $5 million
or 9% at March 31, 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 $300 thousand or 8%
from $253.2 million at year-end 1996 to $253.5
million at March 31, 1997. Noninterest-bearing
demand deposits decreased $1 million during the first
quarter of 1997. In aggregate, savings accounts and
interest-bearing demand deposits increased by $1
million or 1% during the period. As a percentage of
total deposits, savings and interest-bearing demand
deposits represented 26% at both March 31, 1997, and
at year-end 1996. These deposits typically pay the
lowest rate of interest. Over the past year, as
investment rates continued their upward trend,
savings and interest-bearing demand deposits became
less attractive to consumers because of their lower
rates offered as compared to other short-term deposit
products. Time deposits, which include certificates
of deposit in denominations of $100 thousand or more,
increased $500 thousand or less than 1% during the
period. There were no brokered deposits within the
Company's deposit base at March 31, 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 March 31, 1997
and 1996.
March 31,
1997 1996
(in thousands)
Loans past due 90 days or
more........................... $1,245 $1,205
Impaired loans on nonaccrual
status.......................... 814 990
Other Nonaccrual loans......... 74 472
Total nonperforming
loans........................... 2,133 2,667
Foreclosed assets held for
sale.......................... 821 186
Total nonperforming
assets............................. $2,954 $2,853
Nonperforming loans as a percent
of loans....................... 1.16% 1.69%
Nonperforming assets as a percent
assets......................... .90% 1.07%
Nonperforming assets at March 31, 1997
increased $101 thousand compared to the same period
in 1996. Nonaccrual loans decreased $574 thousand at
March 31, 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 $766 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 $40
thousand from 1996 levels. Of the delinquent loans,
81.5% are real estate secured, 18.2% are consumer
installment and .3% are loans to commercial
borrowers. At quarterly loan review meetings,
management reviews the status of these loans with
regard to legal proceedings and collection efforts.
Foreclosed assets held for sale increased
$635 thousand compared to the first quarter of 1996.
The Company expects the sales of the properties to be
completed during the second quarter of 1997.
POTENTIAL PROBLEM LOANS
At March 31, 1996, the Company had
approximately $1,147,000 of problem loans which were
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 March 31,
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 March 31, 1997, the Company maintained
$8.6 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 $700 thousand of mortgage loans held for
resale and $61 million in available-for-sale
securities. This combined total of $70.3 million
represented 21% of total assets at March 31, 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 had grown steadily over the years and consists
of deposits from customers throughout the branch
network. The Company will continue to promote the
acquisition of deposits through its branch offices.
At March 31, 1997, approximately 77% 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 provided by operating activities
was $1 million at March 31, 1997, as compared to net
cash used in operating activities of $1.9 million for
the comparable period in 1996. This $2.9 million
increase is primarily related to a net $2.4 million
decrease in mortgage loans held for resale. Net cash
used in investing activities increased $24 million in
1997, primarily attributable to purchases of
investment securities. Net cash provided by
financing activities increased $16 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 $16 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 against extreme
fluctuations in interest rates. The Company's
Asset/Liability Committee ("ALCO"), which is
comprised of senior management and board members,
meets monthly to monitor the ratio of interest
sensitive assets to interest sensitive liabilities.
The Company's principal financial objective
is to achieve long-term profitability while managing
its exposure to fluctuations in interest rates. This
is accomplished through the measurement of the
relationship between interest rate sensitive assets
and interest rate sensitive liabilities. The goal of
maintaining a reasonable balance between interest
sensitive assets and interest sensitive liabilities
is accomplished through the Company's asset/liability
management program.
To manage the interest sensitivity position,
an asset/ liability model called "gap analysis" is
used to monitor the difference in the volume of the
Company's interest sensitive assets and liabilities
that mature or reprice within given periods. A
positive gap (asset sensitive) indicates that more
assets reprice during a given period compared to
liabilities, while a negative gap (liability
sensitive) has the opposite effect. The use of this
model assists the ALCO to gauge the effects of
interest rate changes on interest sensitive assets
and liabilities in order to determine what impact
these rate changes will have upon the net interest
spread.
At March 31, 1997, the Company maintained a
one year cumulative GAP of negative $14.2 million
or 4.32% 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 March 31,
1997. Included in loans, in the over one year
period, are $726 thousand of residential mortgages
that can be sold in the secondary market.
<TABLE>
<CAPTION>
3 months 3 through 1 through Over Total
or less 12 months 3 years 3 years
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $7,115 $ - $ - $ - $ 7,115
Investment securities(1)(2)31,469 14,033 14,013 61,669 121,184
Loans(2) 45,440 25,920 39,680 70,728 181,768
Fixed and Other Assets - - - 19,381 19,381
Total $84,024 $39,953 $53,693 $151,778 $329,448
Non interest-bearing
transaction deposits(2)$7,888 $ - $ 7,887 15,774 $ 31,549
Interest-bearing
transaction deposits (2) - 5,192 19,177 41,283 65,652
Time 29,012 44,003 21,551 20,510 115,076
Time over $100,000 20,785 15,855 2,382 2,267 41,289
Repurchase agreements 300 - - - 300
Short-term borrowings 695 1,992 - - 2,687
Long-term debt 10,668 1,818 14,848 19,647 46,981
Other Liabilities - - - 3,919 3,919
Total $69,348 $68,860 $65,845 $103,400 $307,453
Interest Sensitivity
Gap $14,676 $(28,907)$(12,152)$48,378
Cumulative Gap $14,676 $(14,231)$(26,383)$21,995
Cumulative Gap to
Total Assets 4.45% (4.33)% (8.03)% 6.70%
<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 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.
</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 March 31, 1997 was
8.03% compared to 7.38% at March 31, 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 less
intangible assets, and Tier II capital includes the
allowable portion of the allowance for possible loan
losses, currently limited to 1.25% of risk-weighted
assets. By regulatory guidelines, neither Tier I nor
Tier II capital reflect the adjustment of FASB 115,
which requires adjustment in financial statements
prepared in accordance with generally accepted
accounting principles by including as a separate
component of equity, the amount of net unrealized
holding gains or losses on debt and equity securities
that are deemed to be available-for-sale.
Regulatory guidelines require that core capital and
total risk-based capital must be at least 4.00% and
8.00%, respectively. The following table illustrates
the Company's capital ratios as required under the
new guidelines.
Primary capital................... $ 21,995
Intangible assets................ (666)
Tier I Capital..................... $21,329
Tier II Capital.................... 1,781
Total Risk-Based Capital......... $ 23,110
Total Risk-Weighted Assets......... $185,749
Tier I Ratio........................ 11.48%
Risk-Based Capital Ratio........... 12.44%
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 is
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 March 31, 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 $14.2 million,
representing a cumulative one-year interest rate
sensitivity gap as a percentage of total assets of
negative 4.32%. 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 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 every-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.
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 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.
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
The Registrant has filed no reports on Form
8-K for the quarter ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
LAKE ARIEL BANCORP, INC.
Date May 7, 1997 By
John G. Martines
CHIEF EXECUTIVE OFFICER
Joseph J. Earyes, CPA
VICE PRESIDENT AND TREASURER
