SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____to_____
Commission file Number: 2-85306
LAKE ARIEL BANCORP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2244948
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Post Office Box 67, Route 191, Lake Ariel, Pennsylvania 18436
(Address of principal executive offices) (Zip Code)
Registrant=s telephone number, including area code: (717) 698-5695
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.21 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant=s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on average bid and asked prices: $58,453,883 million at
March 17, 1998.
As of March 17, 1998, the registrant had outstanding 4,562,148 shares of
its common stock, par value $.21 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to shareholders of the
registrant for the year ended December 31, 1997, are incorporated by reference
in Part II of this Annual Report.
Page 1 of 82
Exhibit Index on Page 41
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LAKE ARIEL BANCORP, INC.
FORM 10-K
Index
Part I Page
Item 1. Business....................................... 3
Item 2. Properties..................................... 22
Item 3. Legal Proceedings.............................. 23
Item 4. Submission of Matters to a Vote of Security Holders.. Not Applicable
Part II
Item 5. Market for the Registrant=s Common Equity and
Related Shareholder Matters..................... 24
Item 6. Selected Financial Data......................... 26
Item 7. Management=s Discussion and Analysis of Financial
Condition and Results of Operations.............. 26
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................ 27
Item 8. Financial Statements and Supplementary Data....... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. Not Applicable
Part III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation.......................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................... 33
Item 13. Certain Relationships and Related Transactions.... 35
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................... 36
Signatures ......................................... 38
Exhibit Index ......................................... 41
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LAKE ARIEL BANCORP, INC.
FORM 10-K
Part I
Item 1. Business
General
Lake Ariel Bancorp, Inc.("Bancorp"), a Pennsylvania business corporation,
is a bank holding company, registered with and supervised by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). Bancorp
was organized on May 23, 1983, and commenced operations on November 26, 1983.
Bancorp has one wholly-owned subsidiary, LA Bank, National Association (the
"Bank"). Bancorp's business has consisted primarily of managing and supervising
the Bank, and its principal source of income has been dividends paid by the
Bank. At December 31, 1997, Bancorp had total consolidated assets, deposits and
stockholders' equity of approximately $368.1 million, $280.5 million and $35.8
million, respectively.
The Bank was organized in 1910. The Bank is a national banking association
that is a member of the Federal Reserve System and the deposits of which are
insured by the Federal Deposit Insurance Corporation (the "FDIC") under the Bank
Insurance Fund ("BIF"). The Bank has fifteen (15) branch locations (three
branches within Wayne County, seven branches within Lackawanna County, four
branches within Pike County and one branch within Monroe County), and a
Financial Center (within Lackawanna County, Pennsylvania). The Bank is a full
service commercial bank providing a wide range of services to individuals and
small to medium sized businesses in its Northeastern Pennsylvania market area,
including accepting time, demand, and savings deposits and making secured and
unsecured commercial, real estate and consumer loans. The Bank has two
subsidiaries, LA Lease, Inc., that engages in the leasing of personal property,
and Ariel Financial Services, Inc., a newly formed business unit offering
stocks, bonds, annuities and other insurance-related products.
Supervision and Regulation - Bancorp
Bancorp is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") relating to the offering and sale of its securities. Bancorp
is currently subject to the SEC's rules and regulations relating to periodic
reporting, insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934 (the "Exchange Act").
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Bancorp is also subject to the provisions of the Bank Holding Company Act
of 1956, as amended ("Bank Holding Company Act"), and to supervision by the
Federal Reserve Board. The Bank Holding Company Act will require Bancorp to
secure the prior approval of the Federal Reserve Board before it owns or
controls, directly or indirectly, more than 5% of the voting shares of
substantially all of the assets of any institution, including another bank. The
Bank Holding Company Act prohibits acquisition by Bancorp of more than 5% of the
voting shares of, or interest in, or substantially all of the assets of, any
bank located outside Pennsylvania unless such an acquisition is specifically
authorized by laws of the state in which such bank is located.
A bank holding company is prohibited from engaging in or acquiring direct
or indirect control of more than 5% of the voting shares of any company engaged
in non-banking activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making this
determination, the Federal Reserve Board considers whether the performance of
these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of control of a
bank holding company, such as Bancorp, without prior notice to the Federal
Reserve Board. Control is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a bank holding company or to
vote twenty-five percent (25%) (or ten percent (10%), if no other person or
persons acting on concert, holds a greater percentage of the Common Stock) or
more of Bancorp's Common Stock.
Bancorp is required to file an annual report with the Federal Reserve Board
and any additional information that the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board may also
make examinations of Bancorp and any or all of its subsidiaries. Subject to
certain exceptions, a bank holding company and its subsidiaries are generally
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or provision of credit or provision of any property or
services. The so-called AAnti-tie-in@ provisions state generally that a bank may
not extend credit, lease, sell property or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to its bank holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other credit or service
from a competitor of the bank, its bank holding company or any subsidiary of its
bank holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
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Permitted Non-Banking Activities
The Federal Reserve Board permits bank holding companies or their
subsidiaries to engage in nonbanking activities so closely related to banking or
managing or controlling banks as to be a proper incident thereto. While the
types of permissible activities are subject to change by the Federal Reserve
Board, the principal nonbanking activities that presently may be conducted by a
bank holding company or its subsidiary without prior approval of the Federal
Reserve Board are:
(1) Extending credit and servicing loans. Making, acquiring, brokering, or
servicing loans or other extensions of credit (including factoring, issuing
letters of credit and accepting drafts) for the company's account or for the
account of others.
(2) Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans or other
extensions of credit, as determined by the Federal Reserve Board. The Federal
Reserve Board has determined that the following activities are usual in
connection with making, acquiring, brokering or servicing loans or other
extensions of credit:
(i) Real estate and personal property appraising. Performing appraisals of real
estate and tangible and intangible personal property, including securities.
(ii) Arranging commercial real estate equity financing. Acting as intermediary
for the financing of commercial or industrial income-producing real estate
by arranging for the transfer of the title, control, and risk of such a
real estate project to one or more investors, if the bank holding company
and its affiliates do not have an interest in, or participate in managing
or developing, a real estate project for which it arranges equity
financing, and do not promote or sponsor the development of the property.
(iii)Check-guaranty services. Authorizing a subscribing merchant to accept
personal checks tendered by the merchant's customers in payment for goods
and services, and purchasing from the merchant validly authorized checks
that are subsequently dishonored.
(iv) Collection agency services. Collecting overdue accounts receivable, either
retail or commercial.
(v) Credit bureau services. Maintaining information related to the credit
history of consumers and providing the information to a credit grantor who
is considering a borrower's application for credit or who has extended
credit to the borrower.
(vi) Asset management, servicing, and collection activities. Engaging under
contract with a third party in asset management, servicing, and collection
of assets of a type that an insured depository institution may originate
and own, if the company does not engage in real property management or real
estate brokerage services as part of these services.
<PAGE>
(vii)Acquiring debt in default. Acquiring debt that is in default at the time
of acquisition under certain conditions.
(viii) Real estate settlement servicing. Providing real estate settlement
services.
(3) Leasing personal or real property. Leasing personal or real property or
acting as agent, broker, or adviser in leasing such property under certain
conditions.
(4) Operating nonbank depository institutions:
(i) Industrial banking. Owning, controlling, or operating an industrial bank,
Morris Plan bank, or industrial loan company, so long as the institution is
not a bank.
(ii) Operating savings association. Owning, controlling or operating a savings
association, if the savings association engages only in deposit-taking
activities, lending, and other activities that are permissible for bank
holding companies.
(5) Trust company functions. Performing functions or activities that may be
performed by a trust company (including activities of a fiduciary, agency, or
custodial nature), in the manner authorized by federal or state law, so long as
the company is not a bank for purposes of the Bank Holding Company Act.
(6) Financial and investment advisory activities. Acting as investment or
financial advisor to any person, including (without, in any way, limiting the
foregoing):
(i) Serving as investment adviser (as defined in section
2(a)(20) of the Investment Company Act of 1940, 15 U.S.C.
80a-2(a)(20)), to an investment company registered under that act,
including sponsoring, organizing, and managing a closed-end investment
company;
(ii) Furnishing general economic information and advice,
general economic statistical forecasting services, and industry
studies;
(iii) Providing advice in connection with mergers,
acquisitions, divestitures, investments, joint ventures, leveraged
buyouts, recapitalizations, capital structurings, financing
transactions and similar transactions, and conducting financial
feasibility studies;
(iv) Providing information, statistical forecasting, and
advice with respect to any transaction in foreign exchange, swaps, and
similar transactions, commodities, and any forward contract, option,
future, option on a future, and similar instruments;
<PAGE>
(v) Providing educational courses, and instructional materials
to consumers on individual financial management matters; and
(vi) Providing tax-planning and tax-preparation services to
any person.
(7) Agency transactional services for customer investments:
(i) Securities brokerage. Providing securities brokerage
services (including securities clearing and/or securities execution
services on an exchange), whether alone or in combination with
investment advisory services, and incidental activities (including
related securities credit activities and custodial services), if the
securities brokerage services are restricted to buying and selling
securities solely as agent for the account of customers and do not
include securities underwriting or dealing.
(ii) Riskless principal transactions. Buying and selling in
the secondary market all types of securities on the order of customers
as a "riskless principal" to the extent of engaging in a transaction in
which the company, after receiving an order to buy (or sell) a security
from a customer, purchases (or sells) the security for its own account
to offset a contemporaneous sale to (or purchase from) the customer.
This does not include:
(A) Selling bank-ineligible securities at the order
of a customer that is the issuer of the securities, or selling
bank-ineligible securities in any transaction where the
company has a contractual agreement to place the securities as
agent of the issuer; or
(B) Acting as a riskless principal in any transaction
involving a bank-ineligible security for which the company or
any of its affiliates acts as underwriter (during the period
of the underwriting or for 30 days thereafter) or dealer.
(iii) Private placement services. Acting as agent for the
private placement of securities in accordance with the requirements of
the Securities Act of 1933 ("1933 Act") and the rules of the Securities
and Exchange Commission, if the company engaged in the activity does
not purchase or repurchase for its own account the securities being
placed, or hold in inventory unsold portions of issues of these
securities.
(iv) Futures commission merchant. Acting as a futures
commission merchant ("FCM") for unaffiliated persons in the execution,
clearance, or execution and clearance of any futures contract and
option on a futures contract traded on an exchange in the United States
or abroad under certain conditions.
(v) Other transactional services. Providing to customers as
agent transactional services with respect to swaps and similar
transactions.
<PAGE>
(8) Investment transactions as principal:
(i) Underwriting and dealing in government obligations and
money market instruments. Underwriting and dealing in obligations of
the United States, general obligations of states and their political
subdivisions, and other obligations that state member banks of the
Federal Reserve System may be authorized to underwrite and deal in
under 12 U.S.C. 24 and 335, including banker's acceptances and
certificates of deposit, under the same limitations as would be
applicable if the activity were performed by the bank holding company's
subsidiary member banks or its subsidiary nonmember banks as if they
were member banks.
(ii) Investing and trading activities. Engaging as principal
in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options on
futures, swaps, and similar contracts, whether traded on
exchanges or not, based on any rate, price, financial asset
(including gold, silver, platinum, palladium, copper, or any
other metal approved by the Board), nonfinancial asset, or
group of assets, other than a bank-ineligible security under
certain conditions.
(C) Forward contracts, options, futures, options on
futures, swaps, and similar contracts, whether traded on
exchanges or not, based on an index of a rate, a price, or the
value of any financial asset, nonfinancial asset, or group of
assets, if the contract requires such settlement.
(iii) Buying and selling bullion, and related activities.
Buying, selling and storing bars, rounds, bullion, and coins of gold,
silver, platinum, palladium, copper, and any other metal approved by
the Federal Reserve Board, for the company's own account and the
account of others, and providing incidental services such as arranging
for storage, safe custody, assaying, and shipment.
(9) Management consulting and counseling activities:
(i) Management consulting. Providing management consulting
advice under certain conditions.
(ii) Employee benefits consulting services. Providing
consulting services to employee benefit, compensation and insurance
plans, including designing plans, assisting in
<PAGE>
the implementation of plans, providing administrative services to
plans, and developing employee communication programs for plans.
(iii) Career counseling services. Providing career
counseling services to: (A) A financial organization
and individuals currently employed by, or
recently displaced from, a financial organization;
(B)Individuals who are seeking employment at a
financial organization; and
(C) Individuals who are currently employed in or who
seek positions in the finance, accounting, and audit
departments of any company.
(10) Support services:
(i) Courier services. Providing courier services for:
(A) Checks, commercial papers, documents, and written
instruments (excluding currency or bearer-type negotiable
instruments) that are exchanged among banks and financial
institutions; and
(B) Audit and accounting media of a banking or
financial nature and other business records and documents used
in processing such media.
(ii) Printing and selling MICR-encoded items. Printing
and selling checks and related documents,
including corporate image checks, cash tickets,
voucher checks, deposit slips, savings withdrawal
packages, and other forms that require Magnetic
Ink Character Recognition ("MICR") encoding.
(11) Insurance agency and underwriting:
(i) Credit insurance. Acting as principal, agent, or broker
for insurance (including home mortgage redemption insurance) that is:
(A) Directly related to an extension of credit
by the bank holding company or any of its subsidiaries; and
(B) Limited to ensuring the repayment of the
outstanding balance due on the extension of credit in the
event of the death, disability, or involuntary unemployment of
the debtor.
(ii) Finance company subsidiary. Acting as agent or broker for
insurance directly
<PAGE>
related to an extension of credit by a finance company that is a
subsidiary of a bank holding company under certain conditions.
(iii) Insurance in small towns. Engaging in any insurance
agency activity in a place where the bank holding company or a
subsidiary of the bank holding company has a lending office and that:
(A)Has a population not exceeding 5,000 (as shown in
the preceding decennial census); or
(B) Has inadequate insurance agency facilities, as
determined by the Federal Reserve Board, after notice and
opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982.
Under certain restrictions, engaging in any specific insurance-agency
activity if the bank holding company, or subsidiary conducting the
specific activity, conducted such activity on May 1, 1982, or received
the Federal Reserve Board approval to conduct such activity on or
before May 1, 1982.
(v) Supervision of retail insurance agents. Supervising on
behalf of insurance underwriters the activities of retail insurance
agents who sell:
(A) Fidelity insurance and property and casualty
insurance on the real and personal property used in the
operations of the bank holding company or its subsidiaries;
and
(B) Group insurance that protects the employees of
the bank holding company or its subsidiaries.
(vi) Small bank holding companies. Engaging in any
insurance-agency activity if the bank holding company has total
consolidated assets of $50 million or less.
(vii) Insurance-agency activities conducted before 1971.
Engaging in any insurance-agency activity performed at any location in
the United States directly or indirectly by a bank holding company that
was engaged in insurance-agency activities prior to January 1, 1971, as
a consequence of approval by the Federal Reserve Board prior to January
1, 1971.
(12) Community development activities:
(i) Financing and investment activities. Making equity and
debt investments in corporations or projects designed primarily to
promote community welfare, such as the economic rehabilitation and
development of low-income areas by providing housing, services, or jobs
for residents.
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(ii) Advisory activities. Providing advisory and related
services for programs designed primarily to promote community welfare.
(13) Money orders, savings bonds, and traveler's checks. The issuance
and sale at retail of money orders and similar consumer-type payment
instruments; the sale of U.S. savings bonds; and the issuance and sale of
traveler's checks.
(14) Data processing. Providing data processing and data processing and
data transmission services, facilities (including data processing and data
transmission hardware, software, documentation, or operating personnel), data
bases, advice, and access to such services, facilities, or data bases by any
technological means under certain conditions.
Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended (the ACode@),
Bancorp is permitted to control an unlimited number of banks. However, Bancorp
would be required, under the Bank Holding Company Act, to obtain the prior
approval of the Federal Reserve Board before it could acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank, if, after such acquisition,
it would own or control more than five percent (5%) of the voting shares of such
bank.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Law"), amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The interstate banking provisions allow for the acquisition by a bank
holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
were allowed effective June 1, 1997; however, states may "opt-out" of the merger
and purchase and assumption provisions by enacting a law which specifically
prohibits such interstate transactions. States could, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to June 1, 1997. States could also enact legislation to allow for de novo
interstate branching of out-of-state banks. In July 1995, Pennsylvania adopted
"opt-in" legislation which allows such transactions.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Bancorp and its subsidiary bank. Certain
changes of potential significance to Bancorp which have been enacted or
promulgated, as the case may be, by Congress or various regulatory agencies,
respectively, are discussed below.
<PAGE>
Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA")
On August 9, 1989, major reform and financing legislation, i.e., FIRREA,
was enacted into law in order to restructure the regulation of the thrift
industry, to address the financial condition of the Federal Savings and Loan
Insurance Corporation and to enhance the supervisory and enforcement powers of
the Federal bank and thrift regulatory agencies. The Office of the Comptroller
of the Currency ("OCC"), as the primary Federal regulator of the Bank, is
primarily responsible for supervision of the Bank. The OCC and FDIC have far
greater flexibility to impose supervisory agreements on an institution that
fails to comply with its regulatory requirements, particularly with respect to
the capital requirements. Possible enforcement actions include the imposition of
a capital plan, termination of deposit insurance and removal or temporary
suspension of an officer, director or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three levels, with
amounts increasing with the severity of the violation. The first tier provides
for civil penalties of up to $5,000 per day for any violation of law or
regulation. A civil penalty of up to $25,000 per day may be assessed if more
than a minimal loss or a pattern of misconduct is involved. Finally, a civil
penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1.0 million per violation, up to $5.0 million for continuing
violations or for the actual amount of gain or loss. These monetary penalties
may be combined with prison sentences for up to five years.
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
General. The FDICIA reformed a variety of bank regulatory laws. Certain of
these provisions are discussed below.
Examinations and Audits. Annual full-scope, on-site examinations are
required for all FDIC-insured institutions with assets of $500 million or more.
For bank holding companies with $500 million or more in assets, the independent
accountants of such companies shall attest to the accuracy of management=s
report. Such accountants shall also monitor management=s compliance with
governing laws and regulations. Such companies are also required to select an
independent audit committee composed of outside directors who are independent of
management, to review with management and the independent accountants the
reports that must be submitted to the appropriate bank regulatory agencies. If
the independent accountants resign or are dismissed, written notification must
be given to the FDIC and to the appropriate federal and state bank regulatory
agency.
<PAGE>
Prompt Corrective Action. In order to reduce losses to the deposit
insurance funds, the FDICIA established a format to more closely monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDICIA established five ACapital@ categories. They are: (1)
well-capitalized; (2) adequately capitalized; (3) undercapitalized; (4)
significantly undercapitalized; and (5) critically undercapitalized. The overall
goal of these new capital measures is to impose more scrutiny and operational
restrictions on depository institutions as they descend the capital categories
from well capitalized to critically undercapitalized.
The FDIC, the OCC, the Federal Reserve Board and the Office of Thrift
Supervision have issued jointly final regulations relating to these capital
categories and prompt corrective action. These capital measures for prompt
corrective action are defined as follows:
A "well-capitalized" institution would be one that has at least a 10% total
risk-based capital ratio, a 6% or greater Tier I risk-based capital ratio, a 5%
or greater Tier I leverage capital ratio, and is not subject to any written
order or final directive by the FDIC to meet and maintain a specific capital
level.
An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
Awell-capitalized@ institution. The existing capital rules generally require
banks to maintain a Tier I leverage capital ratio of at least 4% and an 8% or
greater total risk-based capital ratio. Since the risk-based standards also
require at least half of the total risk-based capital requirement to be in the
form of Tier I capital, this also will mean that an institution would need to
maintain at least a 4% Tier I risk-based capital ratio. Thus, an institution
would need to meet each of the required minimum capital levels in order to be
deemed "adequately capitalized."
An "undercapitalized" institution would fail to meet one or more of the
required minimum capital levels for an "adequately capitalized" institution. An
"undercapitalized" institution must file a capital restoration plan and is
automatically subject to restrictions on dividends, management fees and asset
growth. In addition, the institution is prohibited from making acquisitions,
opening new branches or engaging in new lines of business without the prior
approval of its primary federal regulator. A number of other discretionary
restrictions also may be imposed on a case-by-case basis, and harsher
restrictions that otherwise would apply to "significantly undercapitalized"
institutions may be imposed on an "undercapitalized" institution that fails to
file or implement an acceptable capital restoration plan.
A "significantly undercapitalized" institution would have a total
risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of
less than 3%, or a Tier I leverage capital ratio of less than 3%, as the case
may be. Institutions in this category would be subject to all the restrictions
that apply to "undercapitalized" institutions. Certain other mandatory
prohibitions also would apply, such as restrictions against the payment of
bonuses or raises to senior executive officers without the prior approval of the
institution=s primary federal regulator. A number of other restrictions may be
imposed.
A "critically undercapitalized" institution would be one with a tangible
equity (Tier I capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, the FDIC's rule implementing this
provision of FDICIA also addresses certain other provisions for which the FDIC
has been accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes Acritically undercapitalized@ is
prohibited from taking the following actions without the prior written approval
of its primary federal supervisory agency: engaging in any material transactions
other than in the usual course of business; extending credit for highly
leveraged transactions ("HLTs"); amending its charter or bylaws; making any
material changes in accounting methods; engaging in certain transactions with
affiliates; paying excessive compensation or bonuses; and paying interest on
liabilities exceeding the prevailing rates in the institution's market area. In
addition, a "critically undercapitalized" institution is prohibited from paying
interest or principal on its subordinated debt and is subject to being placed in
conservatorship or receivership if its tangible equity capital level is not
increased within certain mandated time frames.
At any time, an institution's primary federal supervisory agency may
reclassify it into a lower capital category. All institutions are prohibited
from declaring any dividends, making any other capital distribution, or paying a
management fee if it would result in downward movement into any of the three
undercapitalized categories. The FDICIA provides an exception to this
requirement for stock redemptions that do not lower an institution's capital and
would improve its financial condition, if the appropriate federal supervisory
agency has consulted with the FDIC and approved the redemption.
The regulation requires institutions to notify the FDIC following any
material event that would cause such institution to be placed in a lower
category. Additionally, the FDIC monitors capital levels through call reports
and examination reports.
<PAGE>
Real Estate Lending Standards. Pursuant to the FDICIA, the OCC and other
federal banking agencies adopted real estate lending guidelines which would set
loan-to-value ("LTV") ratios for different types of real estate loans. A LTV
ratio is generally defined as the total loan amount divided by the appraised
value of the property at the time the loan is originated. If the institution
does not hold a first lien position, the total loan amount would be combined
with the amount of all senior liens when calculating the ratio. In addition to
establishing the LTV ratios, the guidelines require all real estate loans to be
based upon proper loan documentation and a recent appraisal of the property.
Bank Enterprise Act of 1991. Within the overall FDICIA is a separate
subtitle called the "Bank Enterprise Act of 1991." The purpose of this Act is to
encourage banking institutions to establish Abasic transaction services for
consumers@ or so-called Alifeline accounts.@ The FDIC assessment rate is reduced
for all lifeline depository accounts. This Act establishes ten (10) factors
which are the minimum requirements to qualify as a lifeline depository account.
Some of these factors relate to minimum opening and balance amounts, minimum
number of monthly withdrawals, the absence of discriminatory practices against
low-income individuals and minimum service charges and fees. Moreover, the
Housing and Community Development Act of 1972 requires that the FDIC's
risk-based assessment system include provisions regarding life-line accounts.
Assessment rates applicable to life-line accounts are to be established by FDIC
rule.
Truth in Savings Act. The FDICIA also contains the Truth in Savings Act
("TSA"). The Federal Reserve Board has adopted regulations (ARegulation DD@)
under the TSA. The purpose of TSA is to require the clear and uniform disclosure
of the rates of interest which are payable on deposit accounts by depository
institutions and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. In addition to disclosures to be
provided when a customer establishes a deposit account, TSA requires the
depository institution to include, in a clear and conspicuous manner, the
following information with each periodic statement of a deposit account: (1) the
annual percentage yield earned; (2) the amount of interest earned; (3) the
amount of any fees and charges imposed; and (4) the number of days in the
reporting period. TSA allows for civil lawsuits to be initiated by customers if
the depository institution violates any provision or regulation under TSA.
<PAGE>
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all
insured depository institutions that results in the assessment of premiums based
on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual
basis, assigns each institution to one of three capital groups (well
capitalized, adequately capitalized or under capitalized) and further assigns
such institution to one of three subgroups within a capital group corresponding
to the FDIC's judgment of the institution's strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.0% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a
Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized
group.
<PAGE>
Over the last two years, FDIC insurance assessments have seen several
changes for both BIF and SAIF institutions. The most recent change occurred on
September 30, 1996, when the President signed into law a bill designed to remedy
the disparity between BIF and SAIF deposit premiums. The first part of the bill
called for the SAIF to be capitalized by a one-time assessment on all SAIF
insured deposits held as of March 31, 1995. This assessment, which was 65.7
cents per $100 in deposits, raised approximately $4.7 billion to bring the SAIF
up to is required 1.25 reserve ratio. This special assessment, paid on November
30, 1996, had no effect on the Bank. The second part of the bill remedied the
future anticipated shortfall with respect to the payment of FICO interest. For
1997 through 1999, the banking industry will help pay the FICO interest payments
at an assessment rate that is one-fifth the rate paid by thrifts. The FICO
assessment on BIF insured deposits is 1.29 cents per $100 in deposits; for SAIF
insured deposits it is 6.44 cents per $100 in deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro-rata by banks and thrifts
based on deposits. At December 31, 1997, the FICO interest assessment paid by
the Bank was approximately $30,000. The Bank has not been required to pay any
FDIC insurance assessments since the fourth quarter of 1996 because BIF has met
its statutorily required ratios and the Bank is categorized as "well
capitalized."
Regulatory Capital Requirements
The following table presents Bancorp=s consolidated capital ratios at
December 31, 1997.
(In Thousands)
Tier I Capital...................................... $35,232
Tier II Capital...................................... 2,041
Total Capital........................................ $37,273
Adjusted Total Average Assets........................ $344,066
Total Adjusted Risk-Weighted Assets(1)............... $205,743
Tier I Risk-Based Capital Ratio(2)..................... 17.12%
Required Tier I Risk-Based Capital Ratio............. 4.00%
Excess Tier I Risk-Based Capital Ratio................. 13.12%
Total Risk-Based Capital Ratio(3)...................... 18.12%
Required Total Risk-Based Capital Ratio................ 8.00%
Excess Total Risk-Based Capital Ratio.................. 10.12%
Tier I Leverage Ratio(4)............................... 10.26%
Required Tier I Leverage Ratio......................... 4.00%
Excess Tier I Leverage Ratio........................... 6.26%
- ------------------------------
(1) Includes off-balance sheet items at credit-equivalent values less
intangible assets.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I
Capital to Total Adjusted Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and
Tier II Capital to Total Adjusted Risk- Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets.
<PAGE>
Bancorp's ability to maintain the required levels of capital is
substantially dependent upon the success of Bancorp's capital and business
plans; the impact of future economic events on Bancorp's loan customers; and
Bancorp's ability to manage its interest rate risk and investment portfolio and
control its growth and other operating expenses.
Effect of Government Monetary Policies
The earnings of Bancorp are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies.
The monetary policies of the Federal Reserve Board have had, and will
likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulations of, among other things, the discount rate
on borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.
History and Business - Bank
The Bank's legal headquarters are located on Route 191, Lake Ariel,
Pennsylvania.
As of December 31, 1997, the Bank had total assets of $368.1 million, total
shareholders' equity of $35.8 million and total deposits and other liabilities
of $332.3 million.
The Bank engages in a full-service commercial banking business, including
accepting time and demand deposits, and making secured and unsecured commercial
and consumer loans. The Bank=s business is not seasonal in nature. Its deposits
are insured by the FDIC to the extent provided by law.
At December 31, 1997, the Bank had 109 full-time employees and 39 part-time
employees. The Bank is not a party to any collective bargaining agreement.
<PAGE>
Market Area
The Bank competes actively with other area commercial banks and savings and
loan associations, many of which are larger than the Bank, as well as with major
regional banking and financial institutions headquartered in Wilkes-Barre and
Scranton, Pennsylvania. The Bank's major competitors in its market area are, in
alphabetical order: Community Bank & Trust Co.; Corestates Financial
Corporation, Philadelphia, Pennsylvania; Fidelity Deposit & Discount Bank; First
National Bank of Jermyn; First National Community Bank; First Union Corporation,
Charlotte, North Carolina; NBO National Bank; Penn Security Bank and Trust
Company; Pioneer American Bank, N.A.; PNC Bank, N.A.; and Wayne Bank. The Bank
is generally competitive with all competing financial institutions in its
service area with respect to interest rates paid on time and savings deposits,
service charges on deposit accounts and interest rates charged on loans.
Supervision and Regulation - Bank
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC. Bank operations are also subject to regulations of the OCC, the
Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC, that regularly
examines the Bank. The OCC has the authority under the Financial Institutions
Supervisory Act to prevent a national bank from engaging in an unsafe or unsound
practice in conducting its business.
Federal and state banking laws and regulations govern, among other things,
the scope of a bank=s business, the investments a bank may make, the reserves
against deposits a bank must maintain, loans a bank makes and collateral it
takes, the activities of a bank with respect to mergers and consolidations and
the establishment of branches. All banks in Pennsylvania are permitted to
maintain branch offices in any county of the state. Branches of national banks
may be established only after approval by the OCC. The OCC is required to grant
approval only if it finds that there is a need for banking services or
facilities such as are contemplated by the proposed branch. The OCC may
disapprove the application if the bank does not have the capital and surplus
deemed necessary by the OCC, or if the application relates to the establishment
of a branch in a county contiguous to the county in which the applicant=s
principal place of business is located, and another banking institution that has
its principal place of business in the county in which the proposed branch would
be located, has in good faith, notified the OCC of its intention to establish a
branch in the same municipal location in which the proposed branch would be
located.
Multi-bank holding companies are permitted in Pennsylvania within certain
limitations. See sections entitled "Pennsylvania Banking Law" and "Interstate
Banking and Branching."
<PAGE>
A subsidiary bank of a bank holding company is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on taking
such stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interests of such principal
shareholders. In addition, such legislation and regulations may affect the terms
upon which any person becoming a principal shareholder of a holding company may
obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
Federal law also prohibits acquisitions of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to influence the
management or policies of the bank or bank holding company or to vote
twenty-five percent (25%) or more of any class of voting securities of the bank
holding company.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulations of, and restrictions on,
the business of the Bank. It cannot be predicted whether any such legislation
will be adopted or how such legislation would affect the business of the Bank.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the Bank=s business is particularly susceptible to being
affected by federal legislation and regulations that may increase the costs of
doing business.
<PAGE>
Under the Federal Deposit Insurance Act, the OCC possesses the power to
prohibit institutions regulated by it (such as the Bank) from engaging in any
activity that would be an unsafe and unsound banking practice and in violation
of the law. Moreover, the Financial Institutions and Interest Rate Control Act
of 1987 ("FIRA") generally expands the circumstances under which officers or
directors of a bank may be removed by the institution's federal supervisory
agency; restricts lending by a bank to its executive officers, directors,
principal shareholders or related interests thereof; restricts management
personnel of a bank from serving as directors in other management positions with
certain depository institutions whose assets exceed a specified amount or which
have an office within a specified geographic area; and restricts management
personnel from borrowing from another institution that has a correspondent
relationship with their bank. Additionally, FIRA requires that no person may
acquire control of a bank unless the appropriate federal supervisory agency has
been given 60-days prior written notice and within that time has not disapproved
the acquisition or extended the period for disapproval.
Under the Bank Secrecy Act ("BSA"), the Bank is required to report to the
Internal Revenue Service currency transactions of more than $10,000 or multiple
transactions of which the Bank is aware in any one day that aggregate in excess
of $10,000. Civil and criminal penalties are provided under the BSA for failure
to file a required report, for failure to supply information required by the BSA
or for filing a false or fraudulent report.
The Garn-St Germain Depository Institutions Act of 1982 ("1982 Act"),
removes certain restrictions on the lending powers and liberalizes the
depository abilities of the Bank. The 1982 Act also amends FIRA (see above) by
eliminating certain statutory limits on lending of a bank to its executive
officers, directors, principal shareholders or related interests thereof and by
relaxing certain reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank relationships
by management personnel.
Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the "CRA"), and the
regulations promulgated to implement the CRA are designed to create a system for
bank regulatory agencies to evaluate a depository institution=s record in
meeting the credit needs of its community. Until May 1995, a depository
institution was evaluated for CRA compliance based upon 12 assessment factors.
The CRA regulations were completely revised as of May 4, 1995, to establish
new performance-based standards for use in examining a depository institution=s
compliance with the CRA (the "revised CRA regulations"). The revised CRA
regulations establish new tests for evaluating both small and large depository
institutions' investment in the community. A "small bank" is defined as a bank
which has total assets of less than $250 million and is independent or is an
affiliate of a holding company with less than $1 billion in assets. Pursuant to
the revised CRA regulations, a depository institution which qualifies as a
Asmall bank@ will be examined under a streamlined procedure which emphasizes
lending activities. The streamlined examination procedures for a small bank
became effective on January 1, 1996.
A large retail institution is one which does not meet the Asmall bank@
definition, above. A large retail institution can be evaluated under one of two
tests: (1) a three-part test evaluating the institution=s lending, service and
investment performance; or (2) a "strategic plan" designed by the institution
with community involvement and approved by the appropriate federal bank
regulator. A large institution must choose one of these options prior to July
1997, but may opt to be examined under one of these two options prior to that
time. Effective January 1, 1996, a large retail institution that opts to be
examined pursuant to a strategic plan may submit its strategic plan to the bank
regulators for approval.
In addition, the revised CRA regulations include separate rules regarding
the manner in which Awholesale banks@ and Alimited purpose banks@ will be
evaluated for compliance.
The new CRA regulations were phased in over a two-year period, beginning
July 1, 1995, with a final effective date of July 1, 1997. Until the applicable
test was phased in, institutions were examined under the prior CRA regulations.
<PAGE>
On December 27, 1995, the federal banking regulators issued a joint final
rule containing technical amendments to the revised CRA regulations.
Specifically, the recent technical amendments clarify the various effective
dates in the revised CRA regulations, correct certain cross references and state
that once an institution becomes subject to the requirements of the revised CRA
regulations, it must comply with all aspects of the revised CRA regulations,
regardless of the effective date of certain provisions. Similarly, once an
institution is subject to the revised CRA regulations, the prior CRA regulations
do not apply to that institution.
For the purposes of the revised CRA regulations, the Bank is deemed to be a
large depository institution, based upon financial information as of December
31, 1997. In the future, the Bank will be evaluated for CRA compliance using the
three-part, performance-based test. The Bank had a CRA Compliance examination in
1996 and received a "satisfactory" rating. The Bank did not have a CRA
compliance examination in 1997.
Concentration
Bancorp and the Bank are not dependent for deposits nor exposed by loan
concentrations to a single customer or to a small group of customers the loss of
any one or more of which would have a materially adverse effect on the financial
condition of Bancorp or the Bank.
Business - LA Lease, Inc.
The principal office of LA Lease, Inc. is located at Route 191, Lake Ariel,
Pennsylvania 18436 (the Lake Ariel branch of the Bank).
As of December 31, 1997, LA Lease, Inc. had total assets of $3.2 million,
total shareholders' equity of $100 thousand and other liabilities of $3.1
million.
LA Lease, Inc. provides financing to consumers and businesses in the form
of vehicle and equipment leases. The business of LA Lease, Inc. is not seasonal
in nature.
Business - Ariel Financial Services, Inc.
The principal office of Ariel Financial Services, Inc. is located at Route
191, Lake Ariel, Pennsylvania 18436 (the Lake Ariel branch of the Bank).
This subsidiary of LA Bank was incorporated on July 11, 1997, to deliver
non-depository investment and annuity products to the customers of LA Bank. As
of December 31, 1997, Ariel Financial Services, Inc. had no material assets or
liabilities.
<PAGE>
Item 2. Properties
Bancorp owns or leases no properties, except through the Bank. The
following is selective information about the Bank's properties:
Type of Square
Property Location Ownership Footage Use
1 Route 191 Own 3,000 Banking services and
Lake Ariel, PA Main Office
2 Route 191 Own 1,800 Greene-Dreher branch
Newfoundland, PA
3 Routes 191 and 590 Own 2,900 Hamlin Corners branch
Hamlin, PA
4 Routes 247 and 348 Own 2,400 Mt. Cobb branch
Lake Ariel, PA
5 Route 6 Own 2,800 Eynon branch
Scranton-Carbondale
Highway
6 Keyser Avenue Own 3,000 Keyser Valley branch
Scranton, PA
7 The Mall at Steamtown Lease 1,867 Steamtown branch
Lackawanna Avenue
Scranton, PA
8 East Grove Street & Own 3,000 Clarks Green branch
South Abington Road
Clarks Green, PA
9 Route 6 Lease 5,535 Carbondale branch
Ames Shopping Plaza
10 Routes 6 and 209 Own 11,000 Milford Township branch
Milford, PA
11 Route 739 Lease 1,250 Lords Valley branch
Lords Valley Shopping Plaza
12 HC6 Box 6931 Lease 2,600 Lake Wallenpaupack
Hawley, PA Branch
13 214 W. Harford Street Own 10,350 Milford Branch
Milford, PA
14 Route 390-Barrett Township Own 3,700 Mountainhome Branch
Mountainhome, PA
15 409 Lackawanna Avenue Lease 670 Scranton Branch
Scranton, PA
16 409 Lackawanna Avenue Lease 20,800 Financial Center
Suite 201
Scranton, PA
17 Keyser Avenue Own 7,500 Commercial Rental Prop.
Scranton, PA
<PAGE>
For information with respect to obligations for lease rentals, refer to
Note 5 of the Notes to Consolidated Financial Statements in Bancorp=s Annual
Report filed at Exhibit 13 hereto and is incorporated in its entirety by
reference. The branches that are under lease have customary commercial lease
options to extend the terms of the applicable lease.
It is management=s opinion that the facilities currently utilized are
suitable and adequate for current and immediate future purposes.
Item 3. Legal Proceedings
General
The nature of Bancorp=s and the Bank=s business generates a certain amount
of litigation involving matters arising in the ordinary course of business.
However, in the opinion of management of Bancorp and the Bank, there are no
proceedings pending to which Bancorp and the Bank are a party or to which their
property is subject, which, if determined adversely to Bancorp and the Bank,
would be material in relation to Bancorp=s and the Bank=s undivided profits or
financial condition, nor are there any proceedings pending other than ordinary
routine litigation incident to the business of Bancorp and the Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against Bancorp and the Bank by government authorities or others.
Environmental Issues
There are several federal and state statutes that govern the obligations of
financial institutions with respect to environmental issues. Besides being
responsible under such statutes for its own conduct, a bank also may be held
liable under certain circumstances for actions of borrowers or other third
parties on properties that collateralize loans held by the bank. Such potential
liability may far exceed the original amount of the loan made by the bank.
Currently, the Bank is not a party to any pending legal proceedings under any
environmental statue nor is the Bank aware of any circumstances that may give
rise to liability of them under any such statute.
<PAGE>
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
The Company's common stock has been listed on the Nasdaq National Market
since November 21, 1997, and was previously listed on the Nasdaq Small-Cap
Market since December 9, 1993. "The Nasdaq Stock Market" or "Nasdaq" is a
highly-regulated electronic securities market comprised of competing Market
Makers whose trading is supported by a communications network linking them to
quotation dissemination, trade reporting, and order execution systems. This
market also provides specialized automation services for screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational services tailored to the needs of the securities industry,
investors and issuers. The Nasdaq Stock Market consists of two distinct market
tiers: the Nasdaq National Market(R) and the Nasdaq SmallCap MarketsSM. The
Nasdaq Stock Market is operated by the Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National Association of Securities Dealers, Inc. The Nasdaq
National Market symbol for the Company's common stock is "LABN." At December 31,
1997, the total number of holders of record of the common stock was
approximately 1200.
The table below presents the high and low bid prices reported for the
Common Stock and the cash dividends declared on such Common Stock for the
periods indicated. The range of high and low prices is based on trade prices
reported on the Nasdaq Small-Cap Market, except for the fourth quarter of 1997.
Market quotations reflect inter-dealer prices, without retail mark-up, markdown,
or commission, and may not necessarily reflect actual transactions. On December
31, 1997, the closing price of share of Common Stock on the Nasdaq National
Market was $17.75. All prices and dividends have been restated to reflect the 5%
stock dividends paid in October 1997 and 1996, and the two-for-one stock split
effective on November 10, 1997.
Year Quarter High Low Dividends Declared
1997 4th $ 22.00 $13.90 $0.13
3rd 14.05 9.50 0.09
2nd 9.75 9.50 0.08
1st 11.30 9.75 0.08
1996 4th $ 12.15 $ 7.5 $ 0.11
3rd 8.20 7.20 0.08
2nd 7.60 6.45 0.08
1st 7.70 6.70 0.08
1995 4th 6.80 6.70 0.09
3rd 7.60 6.25 0.07
2nd 7.50 7.15 0.06
1st 7.95 7.40 0.06
As of March 17, 1998, Bancorp had approximately 1400 shareholders of
record.
Since 1983, Bancorp has paid cash dividends. It is the present intention of
Bancorp=s Board of Directors to continue the dividend payment policy, although
the payment of future dividends must necessarily depend upon earnings, financial
condition, appropriate restrictions under applicable law and other factors
relevant at the time the Board of Directors considers any declaration of
dividends. Cash available for the payment of dividends must initially come from
dividends paid by the Bank to Bancorp. Therefore, the restrictions on the Bank=s
dividend payments are directly applicable to Bancorp.
Dividend Restrictions on the Bank
The OCC has issued rules governing the payment of dividends by national
banks. Consequently, the Bank (which is subject to these rules) may not pay
dividends from capital (unimpaired common and preferred stock outstanding) but
only from retained earnings after deducting losses and bad debts therefrom. ABad
debts@ are defined as matured obligations in which interest is past due and
unpaid for ninety (90) days, but do not include well-secured obligations that
are in the process of collection.
Previously, the Bank was permitted to add the balances in its allowance for
possible credit and lease losses in determining retained earnings, but the OCC=s
new regulations prohibit that practice. However, to the extent that (1) the Bank
has capital surplus in an amount in excess of common capital and (2) if the Bank
can prove that such surplus resulted from prior period earnings, the Bank, upon
approval of the OCC, may transfer earned surplus to retained earnings and
thereby increase its dividend paying capacity.
If, however, the Bank has insufficient retained earnings to pay a dividend,
the OCC's regulations allow the Bank to reduce its capital to a specified level
and to pay dividends upon receipt of the approval of the OCC as well as that of
the holders of two thirds of the outstanding shares of the Common Stock.
The Bank is allowed to pay dividends no more frequently than quarterly.
Moreover, the Bank must obtain the OCC=s approval before paying a dividend if
the total of all dividends declared by the Bank in any calendar year would
exceed the total of (1) the Bank=s net profits for that year plus (2) its
retained net profits for the immediately preceding two years less (3) any
required transfers to surplus or a fund for the retirement of preferred stock.
The Bank may not pay any dividends on its capital stock during the period
in which it may be in default in the payment of its assessment for deposit
insurance premium due to the FDIC, nor may it pay dividends on Common Stock
until any cumulative dividends on the Bank=s preferred stock (if any) have been
paid in full. The Bank has never been in default in the payments of its
assessments to the FDIC; and, moreover, the Bank has no outstanding preferred
stock. In addition, under the Federal Deposit Insurance Act, dividends cannot be
declared and paid if the OCC obtains a cease and desist order because such
payment would constitute an unsafe and unsound banking practice. As of December
31, 1997, there was $3.9 million in unrestricted retained earnings and net
income available at the Bank that could be paid as a dividend to Bancorp under
the current OCC regulations.
<PAGE>
Dividend Restrictions on Bancorp
Under the Pennsylvania Business Corporation Law of 1988, as amended (the
"BCL"), Bancorp may not pay a dividend if, after giving effect thereto, either
(a) Bancorp would be unable to pay its debts as they become due in the usual
course of business or (b) Bancorp=s total assets would be less than its total
liabilities. The determination of total assets and liabilities may be based
upon: (i) financial statements prepared on the basis of generally accepted
accounting principles; (ii) financial statements that are prepared on the basis
of other accounting practices and principles that are reasonable under the
circumstances; or (iii) a fair valuation or other method that is reasonable
under the circumstances.
Item 6. Selected Financial Data
The information called for by this item is filed at Exhibit 99A hereto and
is incorporated in its entirety by reference under this Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The caption "Management's Discussion and Analysis" contained in excerpts
from Bancorp=s Annual Report (beginning at page 13 thereto) filed at Exhibit 13
hereto is incorporated in its entirety by reference under this Item 7.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The caption "Interest Rate Risk Management" contained in the "Management's
Discussion and Analysis" section of Bancorp's Annual Report (beginning at page
24 thereto) filed at Exhibit 13 hereto is incorporated in its entirety by
reference under this Item 7A.
Item 8. Financial Statements and Supplementary Data
Bancorp's Consolidated Financial Statements and notes thereto contained in
excerpts from Bancorp's Annual Report (beginning at page 38 thereto) filed at
Exhibit 13 hereto are incorporated in their entirety by reference under this
Item 8.
Part III
Item 10. Directors and Executive Officers of the Registrant
The following table contains certain information with respect to the
nominees and the directors whose terms of office expire in 1998, 1999 and 2000,
respectively.
Principal Occupation Director Since
Name Age for Past Five Years Corporation/Bank
Class 1 Directors Whose Term Expires In 1998 And
Nominees For Class 1 Director Whose Term Expires in 2001
Donald E. Chapman 61 Self-employed insurance broker and 1983/1972
(1)(2)(4)(6)(7) real estate developer
Paul D. Horger 60 Partner in the Law Firm of Oliver, 1998/1997
(3)(5)(7) Price & Rhodes
William C. Gumble 60 Retired Attorney-at-law 1985/1985
3)(4)(5)(6)(7)
Class 1 Director Whose Term Expires In 1998
Arthur M. Davis 70 President of the Lake Ariel 1983/1969
(3)(5)(8) Hardware & Supply Co., Inc.
Class 3 Directors Whose Term Expires In 1999
John G. Martines 51 President of the Bank and Chief 1983/1979
(1)(3)(5)(7) Executive Officer of the Corporation
Harry F. Schoenagel 62 Partner of Schoenagel and Schoenagel 1985/1985
(1)(2)(6)(7) (general civil engineering and surveying)
Class 2 Directors Whose Term Expires In 2000
Bruce D. Howe 66 President of John T. Howe, Inc.
(3)(4)(5) (a company 1983/1977
that operates local fuel and heating oil
companies, a motel and an interstate truck
stop) and President of Howe's Twin Rocks,
Inc. (a local restaurant).
Peter O. Clauss 68 Retired; Former President of C & D 1988/1988
(1)(2) Builders Inc. (construction of residential
and light commercial buildings)
- --------------------
(1) Member of the Loan Review Committee of the Bank. This committee reviews
past due and classified loans and actions to be taken. Moreover, this
committee determines the adequacy of the loan loss reserve and the
amount to be charged for the provision of loan losses. The committee
met four (4) times in 1997.
(2) Member of the Audit Committee of the Bank. This committee reviews the
reports of the auditors and the results of examinations by the Federal
Reserve System and Comptroller of the Currency. This committee makes
recommendations to the Board based upon a review of the reports and
regulatory examinations. This committee met four (4) times in 1997.
(3) Member of the Asset/Liability Management Committee of the Bank. This
committee reviews quarterly the asset/liability management report and
the investment portfolio. In addition, this committee reviews
strategies for GAP analysis, liquidity, tax position and various
profitability ratios. Moreover, this committee determines product
pricing and development, and budgeting. This committee met four (4)
times in 1997.
(4) Member of the Executive Committee of the Bank. This committee reviews
annually the profit sharing and benefit plans of the Bank as well as
salaries and promotions. The committee makes recommendations to the
Board of Directors of the Bank on changes in the employee benefit
plans, compensation, promotions and the contribution to the profit
sharing plan. This committee also reviews non-personnel matters such as
bank expansion and profitability. This committee met two (2) in 1997.
(5) Member of the Loan Committee of the Bank. This committee meets to
consider and recommend approval of loans in the principal amount of
$100,000 or more. Directors receive no additional compensation for
attendance at meetings of this committee. This committee met
twenty-four (24) times in 1997.
(6) Member of Benefit/Compensation Committee of the Bank. This committee
meets to perform on annual review of executive salary increases and
executive stock option grants. This committee met two (2) times in
1997.
(7) Member of 401(k) Committee of the Bank. This committee meets to review
semi-annual investment results of plan funds, makes recommendations and
changes to available investment options, reviews IRS and DOL legal
participation, discrimination and other issues, and recommends annual Bank
contributions to plan. This committee met two (2) times in 1997.
(8) Mr. Davis has reached the mandatory retirement age and will automatically
no longer be a member of the Board of Directors as of April 27, 1998.
During 1997, the Board of Directors of the Corporation held six (6)
meetings. Directors received no additional remuneration for attendance at
meetings of the Board of Directors of the Corporation.
<PAGE>
Each of the Directors attended at least 75% of the combined total number of
meetings of the Corporation's and Bank's Board of Directors and of the
committees on which they serve.
The Board of Directors of the Corporation has at present no standing
committees. The Corporation does not have a nominating committee. A shareholder
who desires to propose an individual for consideration by the Board of Directors
as a nominee for director should submit a proposal in writing to the Secretary
of the Corporation in accordance with Section 202 of the Corporation's By-laws.
On January 3, 1997, Mr. Martines voluntarily entered into a consent decree
with respect to a complaint filed by the SEC in connection with the purchase by
Mr. Martines of securities of First Eastern Corporation ("First Eastern") prior
to the announcement by PNC Bank Corp. ("PNC") that PNC would purchase First
Eastern. The complaint alleged that Mr. Martines purchased such securities based
upon information given to him by a director of First Eastern. In order to avoid
the costs of pursuing a successful defense and upon advice of his counsel, Mr.
Martines agreed to enter into such consent decree without admitting or denying
any of the allegations in the SEC's complaint.
The Board of Directors considered this matter and concluded that this
action by Mr. Martines had no effect on his ability to successfully manage the
Corporation and the Bank and had no detrimental effect on the short-term and
long-term prospects of the Corporation and the Bank.
Principal Officers of the Corporation
The following table sets forth selected information about the principal
officers of the Corporation, each of whom is selected by the Board of Directors
and each of whom holds office at the discretion of the Board of Directors:
Bank Number Age as of
Held Employee of Shares March 17, 1998
Name Since Since Beneficially
Owned(1)
Bruce D. Howe, President 1983 (2) 376,428 66
John G. Martines, Chief 1983 (3) 199,984 51
Executive Officer
Donald E. Chapman, Secretary 1983 (2) 125,589 61
Louis M. Martarano, Vice 1989 (3) 81,938 47
President and Assistant Secretary
Joseph J. Earyes, Vice President 1995 (3) 40,427 41
and Treasurer
- -------------------------
(1) See notes under the caption "Beneficial Ownership by Officers, Directors
and Nominees" for shareholdings of these officers.
(2) Messrs. Howe and Chapman are not employees of the Corporation.
(3) Messrs. Martines, Martarano, and Earyes are full-time salaried employees of
the Bank.
Principal Officers of the Bank
The following table sets forth selected information about the principal
officers of the Bank, each of whom is elected by the Board of Directors of the
Bank and each of whom holds office at the discretion of the Board of Directors
of the Bank:
<TABLE>
<CAPTION>
Bank Number Age as of
Held Employee of Shares March 17,
Name Office/Position with Bank Since Since Owned 1998
<S> <C> <C> <C> <C> <C>
Bruce D. Howe Chairman of the Board 1986 (1) 376,428 66
John G. Martines President and CEO 1986 1979 199,984 51
Louis M. Martarano Executive Vice President and 1990 1981 81,938 47
Chief Operating Officer
Joseph J. Earyes Executive Vice President and 1995 1995 40,427 41
Chief Financial Officer
Donald E. Chapman Secretary 1983 (1) 125,589 61
<FN>
- ----------------------------
(1) Mr. Howe and Mr. Chapman are not employees of the Bank.
(2) See notes under the caption "Beneficial Ownership by Officers,
Directors and Nominees" for shareholdings of these officers.
</FN>
</TABLE>
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation=s officers and directors, and persons who own more than ten percent
of a registered class of the Corporation=s equity securities (in this case the
Corporation=s Common Stock), to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than ten-percent
shareholders are required by SEC regulation to furnish the Corporation with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Corporation believes that, during the period
January 1, 1997 through December 31, 1997, all filing requirements applicable to
its officers, directors and greater than ten-percent shareholders were complied
with.
<PAGE>
Item 11. Executive Compensation
The following table sets forth the total compensation for services in all
capacities paid by the Corporation and the Bank during 1997, 1996, and 1995, to
the Corporation's Chief Executive Officer and the Bank's President, the
Corporation's Vice President and the Bank's Executive Vice President and Chief
Operating Officer, the Corporation's Vice President and the Bank's Executive
Vice President and Chief Financial Officer. No other executive officer's annual
salary and bonus exceeded $100,000 for the years presented and therefore is not
required to be presented.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and Fiscal Other Annual Securities All Other
Principal Position Year Salary Bonus Compensation Underlying Compensation
($) ($) ($) Options/ ($)
SARs(#)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John G. Martines (President of the 1997 168,461 78,312 72,587 - 25,963(3)
Bank and Chief Executive Officer 1996 157,972 44,000 25,564 - 22,612(5)
of the Corporation) 1995 138,007 35,000 26,108 88,200(2) 19,498(7)
Louis M. Martarano (Executive 1997 112,249 34,625 21,253 - 23,189(9)
Vice President and Chief 1996 109,056 20,000 4,260 - 19,602(11)
Operating Officer of the Bank and 1995 97,154 13,500 8,796 33,075(2) 15,013(13)
Vice President of the Corporation)
Joseph J. Earyes (Executive Vice
President and Chief Financial 1997 93,903 31,250 15,205 - 20,569(15)
Officer of the Bank and Vice 1996 87,521 16,000 6,147 - 16,225(17)
President and Treasurer of the 1995 70,207 6,500 4,345 22,050(2) 11,398(19)
Corporation)
<FN>
(1) Includes $4,606 paid on behalf of Mr. Martines for periodic club dues;
$12,000 paid to Mr. Martines for directors' fees; $3,986 paid pursuant
to the Salary Continuation Plan; $48,447 paid pursuant to the
Supplemental Executive Retirement Plan and $3,548 representing the
personal use value of a company-owned automobile.
(2) For further information on these stock options, see "Stock Option
Plan" below.
(3) Of the $25,963 paid to Mr. Martines in 1997 as All Other Compensation,
$3,658 and $4,755 was for life and medical insurance premiums,
respectively; and $17,550 was accrued by the Corporation for the
benefit of Mr.
Martines pursuant to a profit-sharing retirement plan.
(4) Includes $6,825 paid on behalf of Mr. Martines for periodic club dues;
$12,000 paid to Mr. Martines for directors' fees; $3,440 paid pursuant
to the Salary Continuation Plan; and $3,299 representing the personal
use value of a company-owned automobile.
(5) Of the $22,612 paid to Mr. Martines in 1996 as All Other Compensation,
$2,632 and $3,230 was for life and medical insurance premiums,
respectively; and $16,750 was accrued by the Corporation for the
benefit of Mr.
Martines pursuant to a profit-sharing/401(k) plan.
(6) Includes $6,148 paid on behalf of Mr. Martines for initial and periodic
club dues; $12,000 paid to Mr. Martines for directors' fees; $4,791
paid pursuant to the Salary Continuation Plan; and $3,169 representing
the personal use value of a company-owned automobile.
<PAGE>
(7) Of the $19,498 paid to Mr. Martines in 1995 as All Other Compensation,
$2,098 and $3,888 was for life and medical insurance premiums,
respectively; and $13,512 was accrued by the Corporation for the
benefit of Mr.
Martines pursuant to a profit-sharing/401(k) plan.
(8) Includes $1,640 paid on behalf of Mr. Martarano for periodic club dues;
$17,171 paid pursuant to the Supplemental Executive Retirement Plan;
and $2,442 representing the personal use value of a company-owned
automobile.
(9) Of the $23,189 paid to Mr. Martarano in 1997 as All Other Compensation,
$1,987 and $5,046 was for life and medical insurance premiums,
respectively; and $16,156 was accrued by the Corporation for the
benefit of Mr.
Martarano pursuant to a profit-sharing retirement plan.
(10) Includes $1,852 paid on behalf of Mr. Martarano for periodic club dues
and $2,408 representing the personal use value of a company-owned
automobile.
(11) Of the $19,602 paid to Mr. Martarano in 1996 as All Other Compensation,
$1,448 and $3,886 was for life and medical insurance premiums,
respectively; and $14,268 was accrued by the Corporation for the
benefit of Mr. Martarano pursuant to a profit-sharing/401(k) plan.
(12) Includes $6,500 paid on behalf of Mr. Martarano for initial and
periodic club dues and $2,296 representing the personal use value of a
company-owned automobile.
(13) Of the $15,013 paid to Mr. Martarano in 1995 as All Other Compensation,
$1,022 and $4,281 was for life and medical insurance premiums,
respectively; and $9,710 was accrued by the Corporation for the benefit
of Mr. Martarano pursuant to a profit-sharing/401(k) plan.
(14) Includes $4,200 paid on behalf of Mr. Earyes for periodic club dues,
$9,100 paid pursuant to the Supplemental Executive Retirement Plan; and
$1,905 representing the personal use value of a company-owned
automobile.
(15) Of the $20,569 paid to Mr. Earyes in 1997 as All Other Compensation,
$1,757 and $5,046 was for life and medical insurance premiums,
respectively; and $13,766 was accrued by the Corporation for the
benefit of Mr.
Earyes pursuant to a profit-sharing/401(k) plan.
(16) Includes $4,317 paid on behalf of Mr. Earyes for periodic club dues
and $1,830 representing the personal use value of a company-owned
automobile.
(17) Of the $16,225 paid to Mr. Earyes in 1996 as All Other Compensation,
$747 and $4,036 was for life and medical insurance premiums,
respectively; and $11,442 was accrued by the Corporation for the
benefit of Mr.
Earyes pursuant to a profit-sharing/401(k) plan.
(18) Includes $3,580 paid on behalf of Mr. Earyes for periodic club dues
and $765 representing the personal use value of a company-owned
automobile.
(19) Of the $11,398 paid to Mr. Earyes in 1995 as All Other Compensation,
$406 and $4,280 was for life and medical insurance premiums,
respectively; and $6,712 was accrued by the Corporation for the benefit
of Mr. Earyes pursuant to a profit-sharing/401(k) plan.
</FN>
</TABLE>
Directors' Compensation
During 1997, the Bank's Board of Directors met on a monthly basis;
Directors received $1,000 per month and were allowed one paid absence per year;
and Bruce D. Howe, the Chairman, received $500 in addition to his monthly
Directors= fee of $1,000 or $1,500 per month in the aggregate. Mr. Howe was also
allowed one paid absence per year from a meeting of the Bank=s Board of
Directors. During 1997, the Board of Directors of the Corporation held six (6)
meetings. Directors received no remuneration for attendance at meetings of the
Board of Directors of the Corporation in excess of remuneration each of them
received for attendance at meetings of the Board of Directors of the Bank.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Beneficial Owners of the Corporation's Stock
Principal Owners
The following table sets forth, as of March 17, 1998, the name
and address of each person who owns of record or who is known by the Board of
Directors to be the beneficial owner of more than five percent (5%) of the
Corporation's outstanding Common Stock, the number of shares beneficially owned
by such person and the percentage of the Corporation's outstanding Common Stock
so owned.
Percent of Outstanding
Shares Beneficially Common Stock
Name and Address Owned (1) Beneficially Owned
Bruce D. Howe(2) 376,428 8.3%
R.D. #6, Box 6332
Lake Ariel, PA 18436
- -------------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the Securities and Exchange
Commission ("SEC") and may include securities owned by or for the
individual's spouse and minor children and any other relative who has
the same home, as well as securities to which the individual has or
shares voting or investment power or has the right to acquire
beneficial ownership within 60 days after March 17, 1998. Beneficial
ownership may be disclaimed as to certain of the securities.
(2) Of the 376,428 shares beneficially owned by Bruce D. Howe, 244,716 are
owned by him individually; 127,902 are owned jointly with his spouse;
and 3,810 are owned individually by his spouse.
Beneficial Ownership by Officers, Directors and Nominees
The following table sets forth as of March 17, 1998, the amount and
percentage of the Common Stock of the Corporation beneficially owned by each
director, each nominee, each executive officer, and all officers and directors
of the Corporation as a group.
<PAGE>
Name of Individual Amount and Nature of Percent
or Identity of Group Beneficial Ownership(1)(2) of Class
- ------------------------------------------------------------------------------
Donald E. Chapman(3)(4) 125,589 2.8%
Peter O. Clauss(5)(6) 53,999 1.2%
Arthur M. Davis (15)(16) 75,920 1.7%
Joseph J. Earyes(8) 40,427 0.9%
William C. Gumble(3)(9) 113,702 2.5%
Paul D. Horger(3)(7) 10,044 0.2%
Bruce D. Howe(5)(10) 376,428 8.3%
Louis M. Martarano(11) 81,938 1.8%
John G. Martines(12)(13) 199,984 4.2%
Harry F. Schoenagel(12)(14) 87,052 1.9%
All Officers and Directors
as a Group (7 directors,
5 officers, 9 persons in total) 1,165,083 24.3%
- ----
(1) See footnote (1) under the caption entitled "Principal Owners" for the
definition of "beneficial ownership."
(2) Information furnished by the directors and the Corporation.
(3) Nominees for Class 1 Director Whose Term Will Expire in 2001 and
current Class 1 Directors Whose Term Expires in 1998.
(4) Of the 125,589 shares beneficially owned by Donald E. Chapman, 36,288
are owned by him individually; 79,594 are owned jointly with his
spouse; 5,782 are held individually by his spouse; 2,524 are held
jointly with his son; and 1,401 shares are held individually by his son
who has the same home.
(5) A Class 2 Director Whose Term Expires in 2000.
(6) Of the 53,999 shares beneficially owned by Peter O. Clauss, 19,231 are
held by him individually; 27,188 are owned jointly with his wife; and
7,580 are owned individually by his spouse.
(7) All shares are held individually.
(8) Of the 40,427 shares beneficially owned by Joseph J. Earyes, 13,117 are
owned by him individually; 3,376 are held jointly with his spouse; and
23,934 shares may be acquired at any time by the exercise of stock
options.
(9) All shares are held individually.
(10) See footnote (2) under the caption entitled "Principal Owners" for the
definition of "beneficial ownership."
(11) Of the 81,938 shares beneficially owned by Louis M. Martarano, 2,482 are
owned by him individually; 20,090 are owned jointly with his wife; 1,751
shares held as custodian for his two sons; 237 shares as custodian for his
daughter; and 57,378 shares may be acquired at any time by the exercise of
stock options.
(12) A Class 3 Director Whose Term Expires in 1999.
(13) Of the 199,984 shares beneficially owned by John G. Martines, 16,284 are
owned by him individually; 23,600 are held jointly with his spouse; 13,430
are held individually by his spouse; and 146,670 shares may be acquired at
any time by the exercise of stock options.
(14) Of the 87,052 shares beneficially owned by Harry F. Schoenagel, 33,681 are
owned by him individually; 6,614 are owned jointly with his spouse; and
46,757 are owned by his spouse individually.
(15) A Class 1 Director whose term expires in 1998.
(16) Of the 75,920 shares beneficially owned by Arthur M. Davis, 33,524 are
owned by him individually; 37,414 are owned jointly with his wife; 1,756
are owned by his spouse; and 3,226 are owned by Lake Ariel Hardware &
Supply Co., Inc., of which Mr. Davis is President.
<PAGE>
Item 13. Certain Relationships and Related Transactions
Paul D. Horger is a current Class 1 director and nominee for Class 1
director. Mr. Horger is a partner in the law firm of Oliver, Price & Rhodes of
Scranton, Pennsylvania. During 1997, the Bank engaged Oliver, Price & Rhodes to
represent it on various legal matters. In addition, customers of the Bank paid
fees to Oliver, Price & Rhodes in connection with commercial loan transactions
and mortgage foreclosures involving the Bank. In 1997, Oliver, Price & Rhodes
received $123,952.22 in fees on such matters involving the Bank. The Corporation
and the Bank intend, during 1998, to continue to engage Oliver, Price & Rhodes
in such legal matters as they arise.
Except as described above, there have been no material transactions since
January 1, 1997, nor are any such transactions currently proposed, to which the
Corporation or the Bank was or is to be a party and in which any director or
executive officer of the Corporation, or any beneficial owner of more than 5% of
the Common Stock of the Corporation (or any associate thereof, respectively),
had or will have a material interest. The Corporation and the Bank have had and
intend to continue to have banking and financial transactions in the ordinary
course of business with directors and executive officers of the Corporation and
the Bank and their respective associates on comparable terms and with similar
interest rates as those prevailing from time to time for other non-affiliated
customers of the Corporation and the Bank. Total loans outstanding from the
Corporation and the Bank, at December 31, 1997, to the Corporation's and the
Bank's officers and directors as a group and members of their immediate families
and companies in which they had an ownership interest of 10% or more was
$996,000 million or 2.8% of the Bank's total equity capital accounts. The
largest amount of indebtedness outstanding at any time during fiscal year 1997
to the above identified group was $1.2 million or 3.4% of the Bank's total
equity capital accounts. Such loans do not involve more than the normal risk of
collectibility nor do they present other unfavorable features.
<PAGE>
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number
Referred to
Item 601 of
Regulation S-K Description of Exhibit
2 None.
3A Amended Articles of Incorporation of Bancorp filed at Exhibit 3A on
March 25, 1988 and March 24, 1993, to Forms 10-K for the fiscal year
ended December 31, 1987 (No. 2-85306), and 10-KSB for the period ended
December 31, 1992 (No. 2-85306), respectively, and hereby incorporated
by reference. Photocopy of the Articles of Amendment of Bancorp, dated
August 18, 1993, to effect, among other things, a 3-for-1 stock split,
filed at Exhibit 3A on September 3, 1993, to Form S-1 (No. 33-68470)
and hereby incorporated by reference.
3B Amended By-laws of Bancorp filed on March 25, 1988, at Exhibit 3B, to
Form 10-K for the fiscal year ended December 31, 1987 (No. 2-85306),
and hereby incorporated by reference.
4 None.
9 None.
10A Photocopy of the Executive Employment Agreement dated September 1,
1993, among Bancorp, the Bank and John G. Martines, the Chief
Executive Officer of Bancorp and President of the Bank, filed at
Exhibit 10A on September 3, 1993, to Form S-1 (No. 33- 68470), and
hereby incorporated by reference.
10B Photocopy of the Executive Employment Agreement dated September 1,
1993, among Bancorp, the Bank and Louis M. Martarano, Vice President
of Bancorp and Senior Vice President of the Bank, filed at Exhibit 10B
on September 3, 1993, to Form S-1 (No. 33-68470), and hereby
incorporated by reference.
10C Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March
11, 1997, between the Bank and John G. Martines, Chief Executive
Officer of the Bancorp and President of the Bank, relating to the
supplemental executive retirement plan of the Bank.
<PAGE>
10D Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March
11, 1997, between the Bank and Louis M. Martarano, Vice President of
the Bancorp and Executive Vice President and Chief Operating Officer
of the Bank, relating to the supplemental executive retirement plan of
the Bank.
10E Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March
11, 1997, between the Bank and Joseph J. Earyes, CPA, Vice President
and Treasurer of the Bancorp and Executive Vice President and Chief
Financial Officer of the Bank, relating to the supplemental executive
retirement plan of the Bank.
11 None.
12 None.
13 Annual Report to Shareholders for Fiscal Year Ended December 31, 1997.
16 None.
18 None.
21 List of Subsidiaries of Bancorp.
22 None.
23 None.
24 None.
27 Financial Data Schedule.
28 None.
99A Selected 5-Year Financial Data and Selected Year- End Balances.
(b) Reports on Form 8-K for quarter ended December 31, 1997.
- - Form 8-K was filed on December 30, 1997 reporting the completion of and
results of the sale of 805,000 shares of common stock of Lake Ariel
Bancorp, Inc. through a secondary offering.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LAKE ARIEL BANCORP, INC.
(Bancorp)
By: /s/ John G. Martines
John G. Martines
Chief Executive Officer
Date: March 18, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Bruce D. Howe
Bruce D. Howe
President and Director
Date: March 18, 1998
By: /s/ John G. Martines
John G. Martines
Chief Executive Officer
and Director
(Chief Executive Officer)
Date: March 18, 1998
By: /s/ Peter O. Clauss
Peter O. Clauss
Director
Date: March 18, 1998
By: /s/ Donald E. Chapman
Donald E. Chapman
Secretary and Director
Date: March 18, 1998
By: /s/ Arthur M. Davis
Arthur M. Davis
Director
Date: March 18, 1998
By: /s/ Harry F. Schoenagel
Harry F. Schoenagel
Director
Date: March 18, 1998
By: /s/ William C. Gumble
William C. Gumble
Director
Date: March 18, 1998
By: /s/ Paul D. Horger
Paul D. Horger
Director
Date: March 18, 1998
By: /s/ Louis M. Martarano
Louis M. Martarano
Vice President and Assistant
Secretary
Date: March 18, 1998
By: /s/ Joseph J. Earyes
Joseph J. Earyes, CPA
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 18, 1998
<PAGE>
INDEX TO EXHIBITS
Item Number Description Page
10C Copy of the LA Bank, N.A. Salary
Continuation Agreement, dated
March 11, 1997, between the Bank
and John G. Martines, Chief Executive
Officer of the Bancorp and President
of the Bank, relating to the supple-
mental executive retirement plan of
the Bank................................ 42
10D Copy of the LA Bank, N.A. Salary
Continuation Agreement, dated
March 11, 1997, between the Bank
and Louis M. Martarano, Vice
President of the Bancorp and Executive
Vice President and Chief Operating
Officer of the Bank, relating to the
supplemental executive retirement plan
of the Bank............................... 54
10E Copy of the LA Bank, N.A. Salary
Continuation Agreement, dated
March 11, 1997, between the Bank
and Joseph J. Earyes, CPA, Vice President
and Treasurer of the Bancorp and Executive
Vice President and Chief Financial Officer
of the Bank, relating to the supplemental
executive retirement plan of the Bank..... 66
13 Annual Report to Shareholder
for the Fiscal Year Ended
December 31, 1997....................... 78
21 List of Subsidiaries of Bancorp..............79
99A Selected 5-Year Financial Data and
Selected Year-End Balances................. 80
27 Financial Data Schedule.................... 82
EXHIBIT 10C
Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March 11, 1997,
between the Bank and John G. Martines, Chief Executive Officer of the Bancorp
and President of the Bank, relating to the supplemental executive retirement
plan of the Bank.
<PAGE>
LA BANK, N.A.
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this 11 day of March, 1997, by and between the LA
BANK, N.A., a national banking association located in Lake Ariel, Pennsylvania
(the "Company") and JOHN MARTINES (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
1.1.1 "Change of Control" means the transfer of 51% or more of the
Company's outstanding voting common stock followed within twelve (12) months by
replacement of fifty percent (50%) or more of the members of the Company's Board
of Directors.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
1.1.3 "Disability" means the Executive suffering a sickness, accident or
injury which, in the judgment of a physician satisfactory to the Company,
prevents the Executive from performing substantially all of the Executive's
normal duties for the Company. As a condition to any benefits, the Company may
require the Executive to submit to such physical or mental evaluations and tests
as the Company's Board of Directors deems appropriate.
1.1.4 "Early Termination" means the Termination of Employment before Normal
Retirement Age for reasons other than death, Disability, Termination for Cause
or following a Change of Control.
1.1.5. "Early Termination Date" means the month, day and year in which
Early Termination occurs.
1.1.6 "Normal Retirement Age" means the Executive's 62nd birthday.
1.1.7 "Normal Retirement Date" means the later of the Normal Retirement Age
or Termination of Employment.
1.1.8 "Plan Year" means a twelve-month period commencing on March 11 and
ending on March 10 of each year. The initial Plan Year shall commence on the
effective date of this Agreement.
1.1.9 "Projected Accrued Benefit" means the Company's accumulated accrued
liability for the Executive's targeted normal retirement benefit under Section
2.1. For each year, the annual benefits are estimated using the interest method
of accounting, an 8% interest rate, monthly benefit payments and monthly
compounding.
1.1.10 "Termination for Cause" See Section 5.2.
<PAGE>
1.1.11 "Termination of Employment" means that the Executive ceases to be
employed by the Company for any reason whatsoever other than by reason of a
leave of absence which is approved by the Company. For purposes of this
Agreement, if there is a dispute over the employment status of the Executive or
the date of the Executive's Termination of Employment, the Company shall have
the sole and absolute right to decide the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or after
the Normal Retirement Age for reasons other than death, the Company shall pay to
the Executive the benefit described in this Section 2.1.
2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is
$184,000. The Company may increase the annual benefit under this Section 2.1 at
the sole and absolute discretion of the Company's Board of Directors. Any
increase in the annual benefit shall require the recalculation of all the
amounts on Schedules A and B attached hereto. The annual benefit amounts of
Schedules A and B are calculated by amortizing the Projected Accrued Benefit,
using the interest method of accounting, an 8% discount rate, monthly
compounding and monthly payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to the
Executive in 12 equal monthly installments payable on the first day of each
month commencing with the month following the Executive's Normal Retirement Date
and continuing for 179 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the first
benefit payment, and continuing on each subsequent anniversary, the Company's
Board of Directors, in its sole discretion, may increase the benefit.
2.2 Early Termination Benefit. Upon Early Termination, the Company shall
pay to the Executive the benefit described in this Section 2.2.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is the
benefit amount set forth in Schedule A, Column C for the Plan Year ending
immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to the
Executive in 12 equal monthly installments payable on the first day of each
month commencing with the month following the Normal Retirement Date and
continuing for 179 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3.
2.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.3.
2.3.1 Amount of Benefit. The lump sum benefit under this Section 2.3 is the
Accrued Benefit set forth in Schedule A, Column B, for the Plan Year ending
immediately prior to the date in which Termination of Employment occurs.
2.3.2 Payment of Benefit. The Company shall pay the benefit to the
Executive in a lump sum within 60 days after the date of the Executive's
Termination of Employment.
2.3.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3.
<PAGE>
2.4 Change of Control Benefit. If the Executive is in active service at the
time of a Change of Control, the Company shall pay to the Executive the benefit
described in this Section 2.4 in lieu of any other benefit under this Agreement.
2.4.1 Amount of Benefit. The annual benefit is the annual benefit amount
set forth in Schedule A, Column D, for the Plan Year ending immediately prior to
the Plan Year in which the Change of Control occurred.
<PAGE>
2.4.2 Payment of Benefit. The Company shall pay the annual benefit amount
to the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Normal Retirement Date and
continuing for 179 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive's beneficiary the
benefit described in this Section 3.1.
3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is the
Normal Retirement Benefit amount described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to the
beneficiary in 12 equal monthly installments payable on the first day of each
month commencing with the month following the Executive's death and continuing
for 179 additional months.
<PAGE>
3.2 Death During Benefit Period. If the Executive dies after the benefit
payments have commenced under this Agreement but before receiving all such
payments, the Company shall pay the remaining benefits to the Executive's
beneficiary at the same time and in the same amounts they would have been paid
to the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits Commence.
If the Executive is entitled to benefit payments under this Agreement, but dies
prior to receiving said benefit payments, the Company shall pay the Executive's
beneficiary the benefit described in this Section 3.3.
3.3.1 Amount of Benefit. The annual benefit under this Section 3.3 is the
benefit amount that would have been paid to the Executive pursuant to Schedule
B, Column C, for the Plan Year ending immediately prior to the Plan Year in
which death occurred.
3.3.2 Payment of Benefit. The Company shall pay the annual benefit amount
to the beneficiary in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's date of death and
continuing for 179 additional months.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Company. The Executive may revoke
or modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted
by the Company during the Executive's lifetime. The Executive's beneficiary
designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as
beneficiary and the marriage is subsequently dissolved. If the Executive
dies without a valid beneficiary designation, all payments shall be made to
the Executive's estate.
<PAGE>
4.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incapacitated, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incapacitated
person or incapable person. The Company may require proof of incapacity,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would be
an excess parachute payment under Section 280G of the Code.
5.2 Termination for Cause. If the Company terminates the
Executive's employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving
moral turpitude; or
5.2.3 Fraud, dishonesty or willful violation of any law or
significant Company policy committed in connection with the
Executive's employment and resulting in a material adverse effect on
the Company.
<PAGE>
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the Company,
engages in, becomes interested in, directly or indirectly, as a sole proprietor,
as a partner in a partnership, or as a substantial shareholder in a corporation,
or becomes associated with, in the capacity of employee, director, officer,
principal, agent, trustee or in any other capacity whatsoever, any enterprise
conducted in the trading area (a twenty-five mile radius) of Route 191, Lake
Ariel, PA 18436, 120 N. Keyser Avenue, Scranton, PA 18504 or both, and which
enterprise is, or may deemed to be, competitive with any business carried on by
the Company as of the date of termination of the Executive's employment or his
retirement. This section shall not apply following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this
Agreement, or if the Executive has made any material misstatement of
fact on any application for life insurance purchased by the Company.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify the Executive or the
Executive's beneficiary in writing, within ninety (90) days of his or her
written application for benefits, of his or her eligibility or noneligibility
for benefits under the Agreement. If the Company determines that the Executive
or the Executive's beneficiary is not eligible for benefits or full benefits,
the notice shall set forth (1) the specific reasons for such denial, (2) a
specific reference to the provisions of the Agreement on which the denial is
based, (3) a description of any additional information or material necessary for
the claimant to perfect his or her claim, and a description of why it is needed,
and (4) an explanation of the Agreement's claims review procedure and other
appropriate information as to the steps to be taken if the Executive or the
Executive's beneficiary wishes to have the claim reviewed. If the Company
determines that there are special circumstances requiring additional time to
make a decision, the Company shall notify the Executive or the Executive's
beneficiary of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
<PAGE>
6.2 Review Procedure. If the Executive or the Executive's beneficiary is
determined by the Company not to be eligible for benefits, or if the Executive
or the Executive's beneficiary believes that he or she is entitled to greater or
different benefits, the Executive or the Executive's beneficiary shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
Executive or the Executive's beneficiary believes entitle him or her to benefits
or to greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Executive or the
Executive's beneficiary (and counsel, if any) an opportunity to present his or
her position to the Company orally or in writing, and the Executive or the
Executive's beneficiary (or counsel) shall have the right to review th pertinent
documents. The Company shall notify the Executive or the Executive's beneficiary
of its decision in writing within the sixty-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Executive or the Executive's beneficiary and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing,
the sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Executive or the Executive's beneficiary.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment policy
or contract. It does not give the Executive the right to remain an employee
of the Company, nor does it interfere with the Company's right to discharge
the Executive. It also does not require the Executive to remain an employee
nor interfere with the Executive's right to terminate employment at any
time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are required
to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the State of Pennsylvania, except to the extent
preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay
such benefits. The rights to benefits are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any insurance on the Executive's
life is a general asset of the Company to which the Executive and
beneficiary have no preferred or secured claim.
<PAGE>
8.7 Recovery of Estate Taxes. If the Executive's gross estate for federal
estate tax purposes includes any amount determined by reference to and on
account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to
recover from the beneficiary receiving such benefit under the terms of the
Agreement, an amount by which the total estate tax due by the Executive's
estate, exceeds the total estate tax which would have been payable if the
value of such benefit had not been included in the Executive's gross
estate. If there is more than one person receiving such benefit, the right
of recovery shall be against each such person. In the event the beneficiary
has a liability hereunder, the beneficiary may petition the Company for a
lump sum payment in an amount not to exceed the beneficiary's liability
hereunder.
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No
rights are granted to the Executive by virtue of this Agreement other than
those specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for
the Agreement;
8.9.3 Maintaining a record of benefit payments; and
8.9.4 Establishing rules and prescribing any forms necessary
or desirable to administer the Agreement.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: COMPANY:
LA BANK, N.A.
/s/ John G. Martines By /s/ Donald E. Chapman
John Martines Title Secretary
<PAGE>
EXHIBIT 10D
Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March 11, 1997,
between the Bank and Louis M. Martarano, Vice President of the Bancorp and
Executive Vice President and Chief Operating Officer of the Bank, relating to
the supplemental executive retirement plan of the Bank.
<PAGE>
LA BANK, N.A.
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this 11 day of March, 1997, by and between the LA
BANK, N.A., a national banking association located in Lake Ariel, Pennsylvania
(the "Company") and LOUIS MARTARANO (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the
Executive. The Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
1.1.1 "Change of Control" means the transfer of 51% or more of the
Company's outstanding voting common stock followed within twelve (12)
months by the Executive's Termination of Employment for reasons other
than death, disability or retirement.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
1.1.3 "Disability" means the Executive suffering a sickness, accident
or injury which, in the judgment of a physician satisfactory to the
Company, prevents the Executive from performing substantially all of
the Executive's normal duties for the Company. As a condition to any
benefits, the Company may require the Executive to submit to such
physical or mental evaluations and tests as the Company's Board of
Directors deems appropriate.
1.1.4 "Early Termination" means the Termination of Employment before
Normal Retirement Age for reasons other than death, Disability,
Termination for Cause or following a Change of Control.
1.1.5 "Early Termination Date" means the month, day and year in which
Early Termination occurs.
1.1.6 "Normal Retirement Age" means the Executive's 62nd birthday.
1.1.7 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.8 "Plan Year" means a twelve-month period commencing on March 11
and ending on March 10 of each year. The initial Plan Year shall
commence on the effective date of this Agreement.
1.1.9 "Projected Accrued Benefit" means the Company's accumulated
accrued liability for the Executive's targeted normal retirement
benefit under Section 2.1. For each year, the annual benefits are
estimated using the interest method of accounting, an 8% interest
rate, monthly benefit payments and monthly compounding.
1.1.10 "Termination for Cause" See Section 5.2.
<PAGE>
1.1.11 "Termination of Employment" means that the Executive ceases to
be employed by the Company for any reason whatsoever other than by
reason of a leave of absence which is approved by the Company. For
purposes of this Agreement, if there is a dispute over the employment
status of the Executive or the date of the Executive's Termination of
Employment, the Company shall have the sole and absolute right to
decide the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or
after the Normal Retirement Age for reasons other than death, the
Company shall pay to the Executive the benefit described in this
Section 2.1.
2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is
$105,000. The Company may increase the annual benefit under this
Section 2.1 at the sole and absolute discretion of the Company's Board
of Directors. Any increase in the annual benefit shall require the
recalculation of all the amounts on Schedules A and B attached hereto.
The annual benefit amounts of Schedules A and B are calculated by
amortizing the Projected Accrued Benefit, using the interest method of
accounting, an 8% discount rate, monthly compounding and monthly
payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Executive's
Normal Retirement Date and continuing for 179 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the
first benefit payment, and continuing on each subsequent anniversary,
the Company's Board of Directors, in its sole discretion, may increase
the benefit.
<PAGE>
2.2 Early Termination Benefit. Upon Early Termination, the Company
shall pay to the Executive the benefit described in this Section 2.2.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is
the benefit amount set forth in Schedule A, Column C for the Plan Year
ending immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Normal
Retirement Date and continuing for 179 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
2.3 Disability Benefit. If the Executive terminates employment due
to Disability prior to Normal Retirement Age, the Company shall pay to
the Executive the benefit described in this Section 2.3.
2.3.1 Amount of Benefit. The lump sum benefit under this Section 2.3
is the Accrued Benefit set forth in Schedule A, Column B, for the Plan
Year ending immediately prior to the date in which Termination of
Employment occurs.
2.3.2 Payment of Benefit. The Company shall pay the benefit to the
Executive in a lump sum within 60 days after the date of the
Executive's Termination of Employment.
2.3.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
2.4 Change of Control Benefit. Upon a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.4
in lieu of any other benefit under this Agreement.
<PAGE>
2.4.1 Amount of Benefit. The annual benefit is the annual benefit
amount set forth in Schedule A, Column C, for the Plan Year ending
immediately prior to the Plan Year in which the Change of Control
occurred.
2.4.2 Payment of Benefit. The Company shall pay the annual benefit
amount to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following the
Normal Retirement Age and continuing for 179 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the
active service of the Company, the Company shall pay to the
Executive's beneficiary the benefit described in this Section 3.1.
3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is
the Normal Retirement Benefit amount described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the beneficiary in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Executive's
death and continuing for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before
receiving all such payments, the Company shall pay the remaining
benefits to the Executive's beneficiary at the same time and in the
same amounts they would have been paid to the Executive had the
Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefit payments under this
Agreement, but dies prior to receiving said benefit payments, the
Company shall pay the Executive's beneficiary the benefit described in
this Section 3.3.
3.3.1 Amount of Benefit. The annual benefit under this Section 3.3 is
the benefit amount that would have been paid to the Executive pursuant
to Schedule B, Column C, for the Plan Year ending immediately prior to
the Plan Year in which death occurred.
3.3.2 Payment of Benefit. The Company shall pay the annual benefit
amount to the beneficiary in 12 equal monthly installments payable on
the first day of each month commencing with the month following the
Executive's date of death and continuing for 179 additional months.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Company. The
Executive may revoke or modify the designation at any time by filing a
new designation. However, designations will only be effective if
signed by the Executive and accepted by the Company during the
Executive's lifetime. The Executive's beneficiary designation shall be
deemed automatically revoked if the beneficiary predeceases the
Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a
valid beneficiary designation, all payments shall be made to the
Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incapacitated, or to a person incapable of handling
the disposition of his or her property, the Company may pay such
benefit to the guardian, legal representative or person having the
care or custody of such minor, incapacitated person or incapable
person. The Company may require proof of incapacity, minority or
guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from
all liability with respect to such benefit.
<PAGE>
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would be an
excess parachute payment under Section 280G of the Code.
5.2 Termination for Cause. If the Company terminates the Executive's
employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
5.2.3 Fraud, dishonesty or willful violation of any law or significant
Company policy committed in connection with the Executive's employment
and resulting in a material adverse effect on the Company.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the
Company, engages in, becomes interested in, directly or indirectly, as
a sole proprietor, as a partner in a partnership, or as a substantial
shareholder in a corporation, or becomes associated with, in the
capacity of employee, director, officer, principal, agent, trustee or
in any other capacity whatsoever, any enterprise conducted in the
trading area (a twenty-five mile radius) of Route 191, Lake Ariel, PA
18436, 120 N. Keyser Avenue, Scranton, PA 18504 or both, and which
enterprise is, or may deemed to be, competitive with any business
carried on by the Company as of the date of termination of the
Executive's employment or his retirement. This section shall not apply
following a Change of Control.
<PAGE>
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this
Agreement, or if the Executive has made any material misstatement of
fact on any application for life insurance purchased by the Company.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify the Executive or the
Executive's beneficiary in writing, within ninety (90) days of his or her
written application for benefits, of his or her eligibility or noneligibility
for benefits under the Agreement. If the Company determines that the Executive
or the Executive's beneficiary is not eligible for benefits or full benefits,
the notice shall set forth (1) the specific reasons for such denial, (2) a
specific reference to the provisions of the Agreement on which the denial is
based, (3) a description of any additional information or material necessary for
the claimant to perfect his or her claim, and a description of why it is needed,
and (4) an explanation of the Agreement's claims review procedure and other
appropriate information as to the steps to be taken if the Executive or the
Executive's beneficiary wishes to have the claim reviewed. If the Company
determines that there are special circumstances requiring additional time to
make a decision, the Company shall notify the Executive or the Executive's
beneficiary of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
6.2 Review Procedure. If the Executive or the Executive's beneficiary is
determined by the Company not to be eligible for benefits, or if the Executive
or the Executive's beneficiary believes that he or she is entitled to greater or
different benefits, the Executive or the Executive's beneficiary shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
Executive or the Executive's beneficiary believes entitle him or her to benefits
or to greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Executive or the
Executive's beneficiary (and counsel, if any) an opportunity to present his or
her position to the Company orally or in writing, and the Executive or the
Executive's beneficiary (or counsel) shall have the right to review th pertinent
documents. The Company shall notify the Executive or the Executive's beneficiary
of its decision in writing within the sixty-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Executive or the Executive's beneficiary and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing,
the sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Executive or the Executive's beneficiary.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain
an employee of the Company, nor does it interfere with the Company's
right to discharge the Executive. It also does not require the
Executive to remain an employee nor interfere with the Executive's
right to terminate employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this
Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the State of Pennsylvania, except to the
extent preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under
this Agreement. The benefits represent the mere promise by the Company
to pay such benefits. The rights to benefits are not subject in any
manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors. Any
insurance on the Executive's life is a general asset of the Company to
which the Executive and beneficiary have no preferred or secured
claim.
8.7 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by
reference to and on account of this Agreement, and if the beneficiary
is other than the Executive's estate, then the Executive's estate
shall be entitled to recover from the beneficiary receiving such
benefit under the terms of the Agreement, an amount by which the total
estate tax due by the Executive's estate, exceeds the total estate tax
which would have been payable if the value of such benefit had not
been included in the Executive's gross estate. If there is more than
one person receiving such benefit, the right of recovery shall be
against each such person. In the event the beneficiary has a liability
hereunder, the beneficiary may petition the Company for a lump sum
payment in an amount not to exceed the beneficiary's liability
hereunder.
<PAGE>
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof.
No rights are granted to the Executive by virtue of this Agreement
other than those specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for the
Agreement;
8.9.3 Maintaining a record of benefit payments; and
8.9.4 Establishing rules and prescribing any forms necessary or
desirable to administer the Agreement.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: COMPANY:
LA BANK, N.A.
/s/ Louis Martarano By /s/ Donald E. Chapman
Louis Martarano Title Secretary
EXHIBIT 10E
Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March 11, 1997,
between the Bank and Joseph J. Earyes, CPA, Vice President and Treasurer of the
Bancorp and Executive Vice President and Chief Financial Officer of the Bank,
relating to the supplemental executive retirement plan of the Bank.
<PAGE>
LA BANK, N.A.
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this 11 day of March, 1997, by and between the LA
BANK, N.A., a national banking association located in Lake Ariel, Pennsylvania
(the "Company") and JOSEPH EARYES (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the
Executive. The Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
1.1.1 "Change of Control" means the transfer of 51% or more of the
Company's outstanding voting common stock followed within twelve (12)
months by the Executive's Termination of Employment for reasons other
than death, disability or retirement.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
1.1.3 "Disability" means the Executive suffering a sickness, accident
or injury which, in the judgment of a physician satisfactory to the
Company, prevents the Executive from performing substantially all of
the Executive's normal duties for the Company. As a condition to any
benefits, the Company may require the Executive to submit to such
physical or mental evaluations and tests as the Company's Board of
Directors deems appropriate.
1.1.4 "Early Termination" means the Termination of Employment before
Normal Retirement Age for reasons other than death, Disability,
Termination for Cause or following a Change of Control.
1.1.5 "Early Termination Date" means the month, day and year in which
Early Termination occurs.
1.1.6 "Normal Retirement Age" means the Executive's 62nd birthday.
1.1.7 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.8 "Plan Year" means a twelve-month period commencing on March 11
and ending on March 10 of each year. The initial Plan Year shall
commence on the effective date of this Agreement.
1.1.9 "Projected Accrued Benefit" means the Company's accumulated
accrued liability for the Executive's targeted normal retirement
benefit under Section 2.1. For each year, the annual benefits are
estimated using the interest method of accounting, an 8% interest
rate, monthly benefit payments and monthly compounding.
1.1.10 "Termination for Cause" See Section 5.2.
1.1.11 "Termination of Employment" means that the Executive ceases to
be employed by the Company for any reason whatsoever other than by
reason of a leave of absence which is approved by the Company. For
purposes of this Agreement, if there is a dispute over the employment
status of the Executive or the date of the Executive's Termination of
Employment, the Company shall have the sole and absolute right to
decide the dispute.
<PAGE>
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or
after the Normal Retirement Age for reasons other than death, the
Company shall pay to the Executive the benefit described in this
Section 2.1.
2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is
$103,000. The Company may increase the annual benefit under this
Section 2.1 at the sole and absolute discretion of the Company's Board
of Directors. Any increase in the annual benefit shall require the
recalculation of all the amounts on Schedules A and B attached hereto.
The annual benefit amounts of Schedules A and B are calculated by
amortizing the Projected Accrued Benefit, using the interest method of
accounting, an 8% discount rate, monthly compounding and monthly
payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Executive's
Normal Retirement Date and continuing for 179 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the
first benefit payment, and continuing on each subsequent anniversary,
the Company's Board of Directors, in its sole discretion, may increase
the benefit.
<PAGE>
2.2 Early Termination Benefit. Upon Early Termination, the Company
shall pay to the Executive the benefit described in this Section 2.2.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is
the benefit amount set forth in Schedule A, Column C for the Plan Year
ending immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Normal
Retirement Date and continuing for 179 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
2.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to
the Executive the benefit described in this Section 2.3.
2.3.1 Amount of Benefit. The lump sum benefit under this Section 2.3
is the Accrued Benefit set forth in Schedule A, Column B, for the Plan
Year ending immediately prior to the date in which Termination of
Employment occurs.
2.3.2 Payment of Benefit. The Company shall pay the benefit to the
Executive in a lump sum within 60 days after the date of the
Executive's Termination of Employment.
2.3.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
<PAGE>
2.4 Change of Control Benefit. Upon a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.4
in lieu of any other benefit under this Agreement.
2.4.1 Amount of Benefit. The annual benefit is the annual benefit
amount set forth in Schedule A, Column C, for the Plan Year ending
immediately prior to the Plan Year in which the Change of Control
occurred.
2.4.2 Payment of Benefit. The Company shall pay the annual benefit
amount to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following the
Normal Retirement Age and continuing for 179 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the
active service of the Company, the Company shall pay to the
Executive's beneficiary the benefit described in this Section 3.1.
3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is
the Normal Retirement Benefit amount described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the beneficiary in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Executive's
death and continuing for 179 additional months.
<PAGE>
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before
receiving all such payments, the Company shall pay the remaining
benefits to the Executive's beneficiary at the same time and in the
same amounts they would have been paid to the Executive had the
Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefit payments under this
Agreement, but dies prior to receiving said benefit payments, the
Company shall pay the Executive's beneficiary the benefit described in
this Section 3.3.
3.3.1 Amount of Benefit. The annual benefit under this Section 3.3 is
the benefit amount that would have been paid to the Executive pursuant
to Schedule B, Column C, for the Plan Year ending immediately prior to
the Plan Year in which death occurred.
3.3.2 Payment of Benefit. The Company shall pay the annual benefit
amount to the beneficiary in 12 equal monthly installments payable on
the first day of each month commencing with the month following the
Executive's date of death and continuing for 179 additional months.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Company. The
Executive may revoke or modify the designation at any time by filing a
new designation. However, designations will only be effective if
signed by the Executive and accepted by the Company during the
Executive's lifetime. The Executive's beneficiary designation shall be
deemed automatically revoked if the beneficiary predeceases the
Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a
valid beneficiary designation, all payments shall be made to the
Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incapacitated, or to a person incapable of handling
the disposition of his or her property, the Company may pay such
benefit to the guardian, legal representative or person having the
care or custody of such minor, incapacitated person or incapable
person. The Company may require proof of incapacity, minority or
guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from
all liability with respect to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would be an
excess parachute payment under Section 280G of the Code.
5.2 Termination for Cause. If the Company terminates the Executive's
employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
5.2.3 Fraud, dishonesty or willful violation of any law or significant
Company policy committed in connection with the Executive's employment
and resulting in a material adverse effect on the Company.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the
Company, engages in, becomes interested in, directly or indirectly, as
a sole proprietor, as a partner in a partnership, or as a substantial
shareholder in a corporation, or becomes associated with, in the
capacity of employee, director, officer, principal, agent, trustee or
in any other capacity whatsoever, any enterprise conducted in the
trading area (a twenty-five mile radius) of Route 191, Lake Ariel, PA
18436, 120 N. Keyser Avenue, Scranton, PA 18504 or both, and which
enterprise is, or may deemed to be, competitive with any business
carried on by the Company as of the date of termination of the
Executive's employment or his retirement. This section shall not apply
following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this
Agreement, or if the Executive has made any material misstatement of
fact on any application for life insurance purchased by the Company.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify the Executive or the
Executive's beneficiary in writing, within ninety (90) days of his or her
written application for benefits, of his or her eligibility or noneligibility
for benefits under the Agreement. If the Company determines that the Executive
or the Executive's beneficiary is not eligible for benefits or full benefits,
the notice shall set forth (1) the specific reasons for such denial, (2) a
specific reference to the provisions of the Agreement on which the denial is
based, (3) a description of any additional information or material necessary for
the claimant to perfect his or her claim, and a description of why it is needed,
and (4) an explanation of the Agreement's claims review procedure and other
appropriate information as to the steps to be taken if the Executive or the
Executive's beneficiary wishes to have the claim reviewed. If the Company
determines that there are special circumstances requiring additional time to
make a decision, the Company shall notify the Executive or the Executive's
beneficiary of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
6.2 Review Procedure. If the Executive or the Executive's beneficiary is
determined by the Company not to be eligible for benefits, or if the Executive
or the Executive's beneficiary believes that he or she is entitled to greater or
different benefits, the Executive or the Executive's beneficiary shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
Executive or the Executive's beneficiary believes entitle him or her to benefits
or to greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Executive or the
Executive's beneficiary (and counsel, if any) an opportunity to present his or
her position to the Company orally or in writing, and the Executive or the
Executive's beneficiary (or counsel) shall have the right to review th pertinent
documents. The Company shall notify the Executive or the Executive's beneficiary
of its decision in writing within the sixty-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Executive or the Executive's beneficiary and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing,
the sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Executive or the Executive's beneficiary.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain
an employee of the Company, nor does it interfere with the Company's
right to discharge the Executive. It also does not require the
Executive to remain an employee nor interfere with the Executive's
right to terminate employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this
Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the State of Pennsylvania, except to the
extent preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under
this Agreement. The benefits represent the mere promise by the Company
to pay such benefits. The rights to benefits are not subject in any
manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors. Any
insurance on the Executive's life is a general asset of the Company to
which the Executive and beneficiary have no preferred or secured
claim.
8.7 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by
reference to and on account of this Agreement, and if the beneficiary
is other than the Executive's estate, then the Executive's estate
shall be entitled to recover from the beneficiary receiving such
benefit under the terms of the Agreement, an amount by which the total
estate tax due by the Executive's estate, exceeds the total estate tax
which would have been payable if the value of such benefit had not
been included in the Executive's gross estate. If there is more than
one person receiving such benefit, the right of recovery shall be
against each such person. In the event the beneficiary has a liability
hereunder, the beneficiary may petition the Company for a lump sum
payment in an amount not to exceed the beneficiary's liability
hereunder.
<PAGE>
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof.
No rights are granted to the Executive by virtue of this Agreement
other than those specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for the
Agreement;
8.9.3 Maintaining a record of benefit payments; and
8.9.4 Establishing rules and prescribing any forms necessary or
desirable to administer the Agreement.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: COMPANY:
LA BANK, N.A.
/s/ Joseph Earyes By /s/ Donald E. Chapman
Joseph Earyes
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
<PAGE>
LAKE ARIEL BANCORP, INC.
1997 ANNUAL REPORT
<PAGE>
LAKE ARIEL BANCORP, INC. 1997 ANNUAL REPORT
TABLE OF CONTENTS
- -Financial Highlights
- -Message to Our Stockholders
- -Board of Directors
- -On The Move
- -Responsibilities for Preparation of Financial Statements
- -Financial Review: Management's Discussion and Analysis
- -Consolidated Financial Statements
-Balance Sheet
-Statement of Income
-Statement of Changes in Stockholders' Equity
-Statement of Cash Flows
-Notes to Consolidated Financial Statements
-Independent Auditor's Report
- -Investor Information
- -Company Directors and Officers
- -Office Locations
- -Business Development Boards
Except for historical information that is contained in this annual report,
certain matters presented in this report may contain forward-looking statements
that involve risks and uncertainties in the banking industry, including timely
availability and acceptance of new products, the impact of competitive products
and pricing, the management of growth and the other risks detailed from time to
time in the Company's SEC reports, including the report on Form 10-K for the
year ended December 31, 1997, and the section in this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS - 1997
EARNINGS AND DIVIDENDS
<CAPTION>
(dollars in thousands, except per share data)
1997 1996 1995 1994 1993
Percent/Basis Point Percent/Basis Point Percent/Basis Point
Amount Change Amount Change Amount Change Amount Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income ........................... $3,431 13.2% $3,031 31.4% $2,307 8.4% $2,128 $2,052
Earnings Per Share - Basic* .......... $0.92 12.2% $0.82 30.2% $0.63 6.8% $0.59 $0.76
Earnings Per Share - Diluted* ........ $0.88 7.3% $0.82 30.2% $0.63 6.8% $0.59 $0.76
Dividends Per Share* ................. $0.38 18.8% $0.32 18.5% $0.27 8.0% $0.25 $0.19
Return on Average Total Assets ....... 1.00% -9 bpts. 1.09% +17 bpts 0.92% -12 bpt 1.04% 1.40%
Return on Average Stockholders' Equity 15.24% +27 bpts 14.97% +180 bpt 13.17% +10 bpt 13.07% 19.44%
Dividend Payout Ratio ................ 39.90% - 39.14% - 42.13% - 42.15% 24.51%
</TABLE>
<TABLE>
FINANCIAL POSITION
<CAPTION>
1997 1996 1995 1994 1993
Percent/Basis Point Percent/Basis Point Percent/Basis Point
Amount Change Amount Change Amount Change Amount Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Assets ....................... $368,073 23.6% $297,906 18.3% $251,859 6.7% $236,125 $169,189
Total Deposits ..................... $280,450 10.8% $253,196 21.3% $208,759 8.6% $192,187 $146,054
Net Loans .......................... $208,236 18.3% $175,990 15.6% $152,306 12.8% $135,018 $109,302
Stockholders' Equity** ............. $35,815 69.2% $21,172 8.5% $19,509 23.5% $15,799 $16,272
Book Value Per Share* .............. $7.87 37.6% $5.72 2.1% $5.60 22.0% $4.59 $4.52
Stockholders' Equity to Total Assets 9.73% +262 bpt 7.11% -64 bpts 7.75% +106 bpt 6.69% 9.62%
<FN>
*Reflects adjustment for 5% stock dividends issued on October 1, 1997
and 1996, and a two-for-one stock split effective November 10, 1997.
**Beginning with 1994, reflects adjustment to capital as a result of
the implementation of SFAS No. 115.
</FN>
</TABLE>
<PAGE>
MESSAGE TO OUR STOCKHOLDERS
Company Overview
1997 was a landmark year for Lake Ariel Bancorp, Inc. (the "Company").
Strategic moves were made in order to establish a foundation to take the Company
into the next level of financial growth and profitability.
During 1997, to meet the challenges of the 21st Century, the Company
completed a very successful stock sale; consolidated its Administration and
Operations to a new Financial Center; more than doubled the capabilities of its
computer system; and formed a new subsidiary, Ariel Financial Services, Inc., to
meet the ever growing demand for non-traditional bank products.
Success, however, is only measured by the financial performance we
achieved in 1997. Assets, deposits, net income, dividend payment, and
stockholders' equity all reached record levels. Our primary objective is to
create value for our stockholders. 1997 will always be viewed as the year that
produced unprecedented results for our stockholders.
Stockholders' Value
Significant events during 1997 had major impacts on the Company's
capital position:
- - $12 million stock sale completed
- - Nasdaq National Market listing (LABN)
- - 5% stock dividend - 2-for-1 stock split
- - Cash dividend increased by 15%
- - 15.24% Return on Average Equity
- - 64% Increase in Market Value
- - 74% Return to Stockholders
During the fourth quarter of 1997, the Company raised $12 million in
new capital by selling 805,000 shares of common stock at $16.00 per share. At
year-end 1997, our Company was in a very strong capital position. Stockholders'
equity was at $36 million. The Tier I, or core capital ratio was 17.12% and the
total risk-based capital ratio was at 18.12%, this is in comparison to
regulatory minimums of 4% and 8%, respectively.
The new capital will be used to continue the Bank's expansion goals.
In addition to the stock sale, the Company had a 2-for-1 stock split on
November 10, 1997 and, on November 21, 1997, was listed on the Nasdaq National
Market.
During 1997, for the 14th consecutive year, the Company increased its
per share cash dividend from $.32 in 1996 to $.38 in 1997, a 19% increase and,
also, for the second consecutive year, paid a 5% stock dividend. Per share
information for all prior years has been restated to reflect the effects of the
stock split and this stock dividend.
Our return on average stockholders' equity continued to be exceptional
in 1997 at 15.24%, up 27 basis points from 14.97% in 1996. Return on
stockholders' equity is arguably the most important measure of a bank's
performance and our return ranks us among the top performing financial
institutions reported in the industry.
Book value increased from $5.72 in 1996 to $7.87 in 1997, an increase
of 38%. The Company's (LABN) market price closed at $17.75 per share on December
31, 1997, an increase of 64% from $10.83 (adjusted) at December 31, 1996.
By factoring in the cash and stock dividends and the increase in the
market price of the common stock, our stockholders realized an incredible 74%
return on their investment in 1997.
<PAGE>
Net Income
1997 proved to be another strong earnings performance for the
Company: - Record Earnings - $3,431,000 - up 13% - Return On
Average Assets - 1.00% - 9.6% Growth in Net Interest Income -
Earnings per share - basic - $0.92 - Earnings per share -
diluted - $0.88
The Company's net income for 1997 was $3,431,000, 13.2% higher than the
$3,031,000 reported for 1996. Net income was positively influenced by a 9.6%
growth in net interest income after provision for possible credit losses and a
25.7% growth in other operating income. Overhead costs were $9.2 million for
1997, an increase of $1.2 million or 15.2% from $8.0 million reported in 1996.
Overhead costs were impacted by the opening of three branch offices in the
fourth quarter of 1996.
Operating earnings for the year were at $.92 per share - basic and
$0.88 per share - diluted compared to $.82 per share - basic and diluted in
1996. Return on average assets was 1.00% for 1997.
Growth
1997 proved to be another year of exceptional increases:
- Assets - 24%
- Deposits - 11%
- Loans - 18%
- Investment Securities - 32%
Total assets increased to $368.1 million at year-end 1997, an increase
of $70.2 million or 23.6% from $297.9 million at December 31, 1996. This
increase was primarily attributable to a $27.8 million growth in securities and
$32.2 million growth in net loans and leases.
Investment securities increased to $114.8 million at year-end, an
increase of $27.8 million or 31.9% from $87.0 million at December 31, 1996. This
increase was attributable to an investment strategy implemented in January, 1997
whereby the Company borrowed $25 million from the Federal Home Loan Bank of
Pittsburgh ("FHLB") and invested in a combination of various fixed and variable
rate investments.
Total net loans increased to $208.2 million at December 31, 1997, an
increase of $32.2 million or 18.3% from $176.0 million at December 31, 1996. For
the year 1997, residential mortgage loans increased to $103.0 million, an
increase of $15.4 million or 17.6% from $87.6 million at December 31, 1996. This
increase was attributable to the increased mortgage loan activity during the
period, particularly during the second half of 1997, net of mortgage loans sold
during 1997 of approximately $28.9 million. As of year end, LA Bank was
servicing over $130,000,000 in residential mortgage loans.
During 1997, total deposits increased to $280.5 million, an increase of
$27.3 million or 10.8% from $253.2 million at December 31, 1996.
New Financial Center
In November, 1997, our Company solidified our presence in downtown
Scranton with the opening of its new Financial Center in the Historic Oppenheim
Building. LA Bank consolidated its Executive, Administrative, Operations, Data
Processing and other non-branch activities into this building's 21,000 sq. ft.
second floor.
In addition to the needed space and the potential for future growth,
the move gave us access to a greater infrastructure for training, the
availability of superior telecommunications systems and the quality of a larger
potential work force.
Also, the location of the new financial center reinforces our presence
and image which should give us an advantage over other community banks in
Northeastern Pennsylvania.
<PAGE>
Strengthening the Organization - Branches, Personnel and Technology
In October of 1997, our 15th branch location was opened on the first
floor of the Oppenheim Building in Downtown Scranton. This new branch office
will enable us to better serve the needs of the downtown employers, employees
and shoppers.
During 1998, the Company will be bringing its services to two new
locations, thanks to LA Bank's satellite branches planned for the new Wal-Mart
Supercenters at the Dickson City Crossings and at the location on Route 6,
Honesdale. The new branches in the Wal-Mart Supercenters will be the Bank's 16th
and 17th full-service branches and the first to be located in a retail store. As
we grow our franchise, plans for additional locations are progressing to
increase our presence in the market place. The continued rapid growth of our
Company includes the expansion into new markets with additional products. To
achieve these goals, management and technology changes are necessary. Looking
forward to the 21st Century, technology will be vital to the success of our
institution. In 1997, we more than doubled the capacity of our existing
electronic data processing system.
During 1997 and during the first quarter of 1998, the following changes
were made to strengthen our organization: Lou Martarano and Joe Earyes were both
elevated to Executive Vice President and Cindy Smaniotto, Karen Pasternak and
Jack Foley were all promoted to Senior Vice President. Also, Tom Dziak, Dan
Santaniello and Tom Byrne were all promoted to Vice President, while new
Assistant Vice Presidents included Jennifer Nichols, Bonnie Robinson and Lynn
Thiel, Auditor. Susan Lenko became Assistant Cashier and IRA Administrator. Sal
DeFrancesco became our new Assistant Vice President and Controller and new
Branch Managers included Marilynn Palmer in Mountainhome and Sheila Dick in
Carbondale.
In December, 1997, Attorney Paul D. Horger was appointed to the LA
Bank's Board of Directors and in January, 1998, he was appointed to the
Company's Board of Directors. Attorney Horger adds tremendous experience and
wisdom to our Board and will fill the vacancy of Director Arthur Davis who will
be retiring when his term expires in April 1998. Mr. Davis has been a valuable
member of our Board for the past 29 years and we extend our gratitude for his
loyal support of our organization.
Marketing, Products and Services
During 1997, great emphasis was placed on marketing the Bank's mortgage
program. During the first quarter, LA Bank established a new Smart Mortgage
Direct Information toll free number, 1-888-343-HOUSE which allows potential new
mortgage customers the opportunity to speak directly to a mortgage
representative to receive information on LA Bank's mortgage rates and products.
During the third quarter, LA Bank introduced a new "Welcome Home" mortgage
pre-approval program. The program takes home financing a step further by
allowing customers to be pre-approved before shopping for a new home. This
program has been a tremendous help in evaluating how much a first-time homeowner
can afford before making any commitment.
During the second quarter, the Bank's Home Equity Line of Credit was
revised. The PrimeLine Equity Loan offered an introductory rate of 6.99% APR.
This product was marketed aggressively during the year to new and existing
customers.
In the third quarter, a new Business Development Software program was
installed to track business generated by officers' calls, follow-up contacts,
cross sell ratios and teller referrals. The system generates reports for senior
management which will evaluate the performance of each officer in relation to
their goals, and will also identify the quality of the calls.
<PAGE>
Also, during the year, LA Bank's site on the World Wide Web was updated
on a monthly basis to keep the information on our home page current. All print
and broadcast advertising reference our site address and reciprocal links were
established with the Scranton/Wilkes-Barre Red Barons and to the Nasdaq page,
allowing browsers the opportunity to receive accurate, real-time market quotes
of the stock price for the Company's shares or request a copy of our annual
report on-line. In 1997, the web site was made interactive to allow browsers to
request information on-line and even contact our Executive Officers and
Marketing Department. A new financial information page was added which contains
LA Bank's current financial information. This web site will be updated and
expanded during 1998.
In 1997, notification was received that LA Bank earned a superior
ranking for the period ended December 31, 1996 as published by "Bank Financial
Quarterly", one of the nation's prime sources of bank quality rankings as
published by IDC Financial Publishing. The superior rating achieved by LA Bank
indicates LA Bank is one of the safest institutions in the United States.
In addition, LA Bank was the recipient of an award for outstanding
participation during Community Banking Week, held in April each year. LA Bank
won the award for the Best Children's Project in Pennsylvania in the $176-$400
million asset category. LA Bank offers a Kids Top Savings Account which includes
no minimum balance requirements, a Polaroid Print Kids Photo ID and
fingerprinting provided at no charge at time of account opening, and an age
appropriate gift which focuses on educating the accountholders. In addition, LA
Bank sends periodic newsletters to reinforce these concepts.
Ariel Financial Services, Inc.
To meet the ever growing demand for non-traditional bank products,
Ariel Financial Services, Inc. ("Ariel Financial Services") was formed in 1997.
We fully expect that Ariel Financial Services will bring added
dimension to our organization by allowing us to be more competitive in the ever
changing financial markets. These new non-traditional bank products will prevent
disintermediation; create one-stop customer shopping; satisfy the needs of
tomorrow's more sophisticated customer; and most importantly, generate fee
income.
The need for Ariel Financial Services is dictated by the ever growing
"Baby Boomer" market. This generation of investors makes different savings and
investment choices than their parents, and the ability to deliver products such
as mutual funds, securities, annuities (fixed and variable) and various
insurance products is essential to retain and attract these sophisticated
investors.
We expect Ariel Financial Services to not only help retain our existing
customer base, but also to add customers to our organization. The added fee
income generated from these new products will help offset the shrinking interest
margin of our traditional bank deposits.
Community Reinvestment and Development
During 1997, LA Bank continued to participate in the Scranton
Neighborhood Housing Mortgage Program. The program provides financing to low to
moderate income families that would not normally be eligible for a mortgage
loan, thereby giving them the opportunity to purchase a home. LA Bank also
maintains their own "Welcome Home" program for first time homebuyers in the
low-to-moderate income level and makes homeownership a reality for many
customers who would not qualify under our normal underwriting guidelines. The
program has been a great success and will continue to be offered again in 1998.
During the first quarter of 1997, a Smart Mortgage Direct Planning
guide was developed to help educate first time homebuyers on the mortgage
process covering topics from the application process through closing. In
addition, a new ATM/Visa Check Card safety brochure was developed to educate
accountholders of the risk associated with using and maintaining an electronic
banking card.
<PAGE>
During April, LA Bank sponsored its third annual homebuyers fair at LA
Bank's Loan Center on Keyser Avenue in Scranton. The event offers prospective
homebuyers the opportunity to meet with originators, attorneys, builders and
insurance agents to discuss the various aspects of the homebuying process.
Also during the year, LA Bank funded a $800,000 revolving loan for
United Neighborhood Centers of Lackawanna County ("UNC") to fund renovation
costs to the Progressive Center. The center is located in a central city
neighborhood with the highest poverty rate in Lackawanna County. This center
houses the services for families in crisis; a day care program; an after-school
program for local children; an evening program for teens and young adults; plus
many other vital programs for the low and moderate income families of the local
community.
Year In Review
For the year ended December 31, 1997, LA Bank achieved record results
in all major aspects of financial measurements. We are very proud of this year's
performance and believe our strategy gives us optimism for future years.
Looking to the future, management believes that an excellent financial
franchise has been established. The Company has exercised a broad involvement in
the various communities it serves and continues to meet the credit needs of all
community segments. We believe that the Company's current commercial and retail
loan growth momentum, balance sheet strength, and operating efficiency provide
the nucleus for continued and improved earnings trends.
We thank our Board of Directors, Business Development Boards,
management and employees for making 1997 a very successful year. Their effort
and support, coupled with invaluable experience, are appreciated by all of us.
Once again, as a stockholder, we sincerely hope that you continue to support,
promote and patronize LA Bank so that we may continue in our efforts to grow as
a strong locally-owned community bank.
John G. Martines
Chief Executive Officer of the Corporation and President and Chief Executive
Officer of the Subsidiaries
Bruce D. Howe
President of the Corporation
and Chairman of the Subsidiaries
<PAGE>
Board of Directors
William C. Gumble, Esquire - Age 60. Attorney Gumble has served on the
Board of Directors since 1985. He resides in Paupack, Pike County. He
retired from an active law practice in 1993. He has held office as
County Solicitor and District Attorney of Pike County.
Arthur M. Davis- Age 70. Mr. Davis is the senior member of our Board
of Directors, elected to the Board in 1969. He is President of Lake
Ariel Hardware and is a lifelong resident of Lake Ariel.
Bruce D. Howe- Age 66. Mr. Howe is Chairman of the Board of LA Bank,
N.A., and is a resident of Lake Ariel. He is President of John T.
Howe, Inc. which operates local fuel and heating oil companies, a
motel, interstate truck stop and convenient stores. He is also
President of Howe's Twin Rocks, Inc., a local restaurant.
Harry F. Schoenagel- Age 62. Mr. Schoenagel was elected to the Board
of Directors in 1985. He is a resident of Greentown and is a partner
in Schoenagel & Schoenagel Associates, a local engineering and
surveying company located in Pike County.
John G. Martines- Age 51. Mr. Martines is Bank President and CEO and
has been employed by the Bank and on the Board of Directors since
1979. He is a resident of Newton Lake, Greenfield Township, Lackawanna
County.
Peter O. Clauss- Age 68. Mr. Clauss has served on the Board since
1986. He was the former President of C & D Builders, Inc., a
contracting firm, and is presently retired and a resident of Lake
Ariel.
Donald E. Chapman- Age 61. Mr. Chapman has been on the Board of
Directors since 1972. He is a resident of Lake Ariel and owner of a
Nationwide Insurance agency for the past 35 years. He also serves as a
Wayne County Commissioner.
Paul D. Horger, Esquire - Age 60. Attorney Horger is the newest member
on the Board. A practicing attorney for 34 years, Attorney Horger is
Senior Partner at the law firm of Oliver, Price & Rhodes in Scranton,
Pennsylvania.
In April 1998, after 29 years with our Company, Arthur M. Davis retired as a
member of our Board of Directors. His general business understanding helped set
the stage for the Company's growth to its present size from a single bank in
Lake Ariel, Pennsylvania. As important as his strategic leadership was his
strong commitment to customer satisfaction, and his active support of community
involvement. We wish him many more years of good health and happiness.
<PAGE>
Board of Directors
1997 continued to be a year of growth for LA Bank. Throughout the year, we
expanded our coverage area to include four counties: Lackawanna, Wayne, Pike and
Monroe. Throughout the last decade and a half, LA Bank has achieved financial
strength and market share by growing from a single unit financial institution
into a 15 branch, $368 million asset bank. Although we have grown at an
exceptional pace, our focus on increased profitability and enhanced stockholder
value continue without sacrificing the quality products and services we offer to
the markets we reach. Technological innovation, the directives of our Board,
management's leadership and employee services allow LA Bank to remain reactive
to consumer needs while maintaining a pool of resources to meet proactive
consumer demands.
<PAGE>
"LA Bank is committed to meeting the ongoing financial needs of our customers
and prospective customers in ways that will allow us to reward the dedication of
our employees and shareholders." Our corporate mission statement continually
reminds us we are united with our customers, employees, and shareholders in a
sphere of common interest. We are challenged to meet the ongoing and
ever-changing needs of our customers, each reflective of their unique lifestyles
and situations. We meet this challenge by continually developing and improving a
full line of products and services to enhance the successful financial goals of
those who call LA Bank their Bank. Whether our customers begin their
relationship as a child, a teen, or a senior, LA Bank's diverse products and
responsive service establishes our position as your bank. Large or small,
corporate or personal, LA Bank offers a full banking relationship to our
customers allowing us to reward the dedication of our employees and
shareholders. Our unique relationships have led us to dedicate this year's
annual report to those whose lives we affect and in turn affect us, those who
have just begun to know and grow with us, as well as those who have partnered
with us throughout their ever-changing lives. We are LA Bank.
<PAGE>
Responsibilities for Preparation of Financial Statements
The management of Lake Ariel Bancorp, Inc. ("the Company") is
responsible for the preparation, integrity and fair presentation of the
financial statements, as well as other information contained in the annual
report. Estimates are an integral part of preparing financial statements as
management must make informed judgements about the expected effects of events
and transactions prior to their definitive resolution.
In meeting its responsibility for the reliability of the financial
statements, the Company depends on its system of internal accounting controls.
This system is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with the appropriate
corporate authorization and recorded properly to permit the preparation of
financial statements in accordance with generally accepted accounting
principles. Although accounting control procedures are designed to achieve these
objectives, it must be recognized that errors or irregularities may nevertheless
occur. The effectiveness of the system of accounting controls is reviewed
continually throughout the year by an established program of internal audit.
These controls are constantly modified and improved in response to changes in
business conditions and operations. The design, monitoring and revision of
internal accounting controls involve, among other considerations, management's
judgement with respect to the relative cost and expected benefits of specific
control measures. The Company believes that its accounting controls provide
reasonable assurance that errors or irregularities that could be material to the
financial statements are prevented or would be detected within a timely period
by employees in the normal course of performing their assigned functions.
Management discharges its responsibility for the financial statements
through the Audit Committee of the Board of Directors, comprised entirely of
Directors who are not Company employees. This responsibility includes general
oversight of the Company's accounting system, internal accounting controls,
financial accounting and reporting matters and regulatory reports. The
independent auditors and the Company's internal audit department have direct
access to the Audit Committee, and meet with it, with and without management
being present, to discuss auditing and financial reporting matters.
The accompanying financial statements have been audited by Parente,
Randolph, Orlando, Carey & Associates, Certified Public Accountants, for the
purpose of rendering an independent professional opinion, and their report is
included herein.
Joseph J. Earyes, CPA
Vice President and Treasurer
<PAGE>
Management's Discussion and Analysis
The consolidated financial review of Lake Ariel Bancorp, Inc. ("the Company")
provides a comparison of the performance of the Company for the years ended
December 31, 1997, 1996, and 1995. The financial information presented should be
reviewed in conjunction with the consolidated financial statements and
accompanying notes appearing elsewhere in this annual report.
Background
The Company is a one bank holding company whose principal subsidiary is LA Bank,
N.A. The Company operates 15 full-service branch banking offices in its
principal market area in Lackawanna, Monroe, Pike and Wayne Counties. At
December 31, 1997, the Company had 133 full-time equivalent employees.
Analysis of Results of Operation
Overview
Net income for 1997 increased to $3.4 million, an increase of $400,000
or 13.2% over 1996. Net income for 1996 was $3.0 million, an increase of
$724,000 or 31.4% over 1995. On a per share basis, net income was $0.92 basic
and $0.88 diluted in 1997, $0.82 basic and diluted in 1996 and $0.63 basic and
diluted in 1995. Weighted average shares outstanding for 1997, 1996 and 1995
were 3,886,000, 3,686,000, and 3,641,000, respectively. Earnings per share and
weighted average shares outstanding reflect adjustment for the 5% stock
dividends paid on October 1, 1997 and 1996, and the two-for-one stock split
effective November 10, 1997.
The growth in net income during 1997 was attributable to the
improvement in net interest income, which increased to $10.3 million, an
increase of $903,000 or 9.6% over 1996, and which was coupled with an increase
in other operating income to $3.4 million, an increase of $695,000 or 25.7% over
1996. This increase more than offset the increase in other operating expenses to
$9.2 million, an increase of $1.2 million or 15.2% over 1996. The Company
continued to focus its efforts toward retail banking services within its market
area with specific attention given to increasing market share.
The growth in net income in 1996 was also attributable to the
improvement in net interest income, which increased to $9.4 million, an increase
of $1.2 million or 14.8% over 1995 and which was also coupled with an increase
in other operating income to $2.7 million, an increase of $225,000 or 9.1% over
1995. This increase more than offset the increase in other operating expenses to
$8.0 million, an increase of $234,000 or 3.0% over 1995.
Analysis of Net Interest Income
In 1997, net interest income (tax-equivalent basis) increased to $11.9
million, an increase of $1.3 million or 12.0% over 1996 levels. Average loans
and leases increased to $194.1 million, an increase of $28.8 million or 17.4%
over 1996. Average commercial loans grew to $61.2 million, an increase of $12.6
million or 25.8% over 1996 levels. Interest income on commercial loans increased
to $6.0 million, an increase of $1.4 million or 29.8% over 1996. This was due to
increased volume and increased lending rates through most of 1997. The national
prime rate as reported in a national publication published daily, an index to
which the majority of these loans were tied, was 8.5% and 8.25% at December 31,
1997 and 1996, respectively. Average real estate loans increased 15.7%, which
contributed to a 12.2% increase in interest income on real estate loans. Average
consumer loans, which included credit card receivables and leases, increased
$3.6 million or 9.8% over 1996, and resulted in a 4.4% increase in related
interest income.
Net interest income (tax-equivalent basis) for 1996 increased to $10.7
million, an increase of $1.1 million or 11.9% over 1995. This increase was due
to the continued strong growth of earning assets, which grew 10.6% over 1995
levels.
<PAGE>
On average, investment securities in 1997 increased to $114.2 million,
an increase of $28.9 million or 33.9% over 1996 levels. Investment securities in
1996 increased to $85.3 million, an increase of $4.8 million or 5.9% over 1995
levels. Income earned on investment securities increased to $8.3 million, an
increase of $2.2 million or 36.2% over 1996. Income earned in 1996 increased to
$6.1 million, an increase of $330,000 or 5.7% over 1995. As is discussed under
"Financial Condition," the asset/liability management and investment strategies
that were employed during 1997 resulted in increased holdings of investment
securities and created an increase in investment income. The mix of securities
in the investment portfolio changed slightly during 1997. Taxable securities,
which represented 76.1% of the investment portfolio in 1996, decreased to 73.9%
or $84.4 million in 1997. At December 31, 1997, tax-exempt securities
represented 26.1% of the portfolio compared to 23.9% in 1996 and 21.0% in 1995.
In 1997, tax-exempt securities, for part of the year, provided better after-tax
investment returns than taxable issues in similar maturity and quality ranges.
Accordingly, average balances on state and municipal securities at December 31,
1997 increased to $29.8 million, an increase of $9.4 million or 46.1% over 1996.
Average balances on state and municipal securities at December 31, 1996
increased to $20.4 million, an increase of $3.5 million or 20.7% from $16.9
million at December 31, 1995.
Average interest-bearing deposits at December 31, 1997 increased to
$232.6 million, an increase of $28.7 million or 14.1% over 1996. Average
interest-bearing deposits at December 31, 1996 increased to $203.9 million, an
increase of $22.8 million or 12.6% from $181.1 million at December 31, 1995. As
interest rates rose in 1995 and continued constant through most of 1996 and
1997, more depositors sought higher rate, longer-term deposits. Savings and
interest-bearing demand deposits at December 31, 1997 increased to $70.6
million, an increase of $6.4 million or 9.9% over 1996. Savings and
interest-bearing demand deposits at December 31, 1996 decreased to $64.2
million, a decrease of $2.9 million or 4.4% from $67.2 million at December 31,
1995. As a percentage of total average interest-bearing deposits, savings and
interest-bearing demand deposits represented 30.4% in 1997, 31.5% in 1996 and
37.1% in 1995. Due to the shift in the mix of deposits, the rates at which they
were repricing and the volume increase, interest expense on deposits at December
31, 1997 increased to $10.4 million, an increase of $1.4 million or 16.1% over
1996. Interest expense on deposits at December 31, 1996 increased to $9.0
million, an increase of $784,000 or 9.6% from $8.2 million at December 31, 1995.
These results were reflected in the cost of funds which increased 1.8% from 1996
through 1997, and decreased 2.7% from 1995 to 1996, while volume increased 14.1%
and 12.6%, respectively. However, interest expense as a percent of earning
assets increased by 31 basis points from 4.01% in 1996 to 4.32% in 1997 due to
the volume increase in interest bearing liabilities and the increase in the
related interest rates paid. There were no brokered deposits within the
Company's deposit base during 1997, 1996 and 1995.
Short-term borrowings, which included federal funds purchased and
securities sold under agreements to repurchase, averaged $2.1 million in 1997,
$3.7 million in 1996 and $5.2 million in 1995. These borrowings remained
relatively constant through 1997.
The overall effect of the increase in interest rates paid, the shift in
mix of and growth in deposit accounts and long-term debt and the growth in
earning assets produced a negative impact on net interest margin. The net
interest margin decreased by 39 basis points to 3.81% in 1997 from 4.20% in
1996. The net interest margin was 4.15% in 1995.
The following tables provide an analysis of changes in net interest
income with regard to volume, rate and yields of interest-bearing assets and
liabilities based on average balances for each period. Components of interest
income and expenses are presented on a tax-equivalent basis using the statutory
federal income tax rate of 34.0% each year.
<PAGE>
<TABLE>
<CAPTION>
For The Year Ended December 31,
1997 1996 1995
Average Interest Average Interest Average Interest
Balance Income/ Yield/ Balance Income/ Yield/ Balance Income/ Yield/
(1) Expense Rate (1) Expense Rate (1) Expense Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold ....................... $4,640 $264 5.69% $3,124 $ 164 5.25% $2,889 $154 5.33%
Deposits in Federal Home Loan Bank ....... 160 9 5.63 145 6 4.14 479 22 4.59
Investment securities:
U.S. government agencies .............. 81,567 5,738 7.03 63,443 4,323 6.81 61,842 4,187 6.77
State and municipal(2) ................ 29,798 2,391 8.02 20,393 1,673 8.20 16,890 1,448 8.57
Other securities ...................... 2,850 154 5.40 1,460 86 5.89 1,790 117 6.54
Total investment securities ......... 114,215 8,283 7.25 85,296 6,082 7.13 80,522 5,752 7.14
Loans and leases:
Commercial, financial and industrial(3) 61,163 5,952 9.73 48,626 4,585 9.43 44,438 4,444 10.00
Real estate-construction and mortgage . 92,998 7,356 7.91 80,395 6,557 8.16 65,250 5,318 8.15
Installment loans to individuals(4) .. 36,793 3,299 8.97 34,213 3,251 9.50 34,664 3,226 9.31
Lease financing(4) .................... 3,110 302 9.71 2,114 199 9.41 1,431 124 8.67
Total loans and leases .............. 194,064 16,909 8.71 165,348 14,592 8.83 145,783 13,112 8.99
Total earning assets ..................... 313,079 25,465 8.13 253,913 20,844 8.21 229,673 19,040 8.29
Cash and due from banks .................. 10,469 9,834 9,368
Premises and equipment ................... 10,901 7,769 7,718
Other, less allowance for credit losses
and loan fees ......................... 9,617 5,438 4,343
Total assets ............................. $344,066 $276,954 $251,102
Liabilities and stockholders' equity:
Interest-bearing deposits:
Demand ................................ $30,245 $627 2.07 $25,764 $537 2.08% $25,993 $618 2.38%
Savings ............................... 40,377 1,611 3.99 38,472 1,549 4.03 41,186 1,524 3.70
Time .................................. 123,054 6,157 5.00 105,883 5,350 5.05 86,980 4,671 5.37
Time over $100,000 .................... 38,918 2,000 5.14 33,811 1,521 4.50 26,960 1,360 5.04
Total interest-bearing deposits ..... 232,594 10,395 4.47 203,930 8,957 4.39 181,119 8,173 4.51
Short-term borrowings .................... 1,843 99 5.37 3,312 174 5.25 4,698 253 5.39
Securities sold under agreements
to repurchase ......................... 259 13 5.02 338 17 5.03 546 29 5.31
Long-term debt ........................... 47,663 3,018 6.33 16,275 1,035 6.36 17,898 1,059 5.92
Total interest-bearing liabilities ....... 282,359 13,525 4.79 223,855 10,183 4.55 204,26 9,514 4.66
Demand - noninterest - bearing ........... 35,518 29,545 26,172
Other liabilities ........................ 3,674 3,312 3,157
Total liabilities ........................ 321,551 256,712 233,590
Stockholders' equity ..................... 22,515 20,242 17,512
Total liabilities and stockholders' equity $344,066 $276,954 $251,102
Net interest income ...................... $11,940 $10,661 $9,526
Net interest spread ...................... 3.34% 3.66% 3.63%
Net interest margin(5) ................... 3.81% 4.20% 4.15%
<FN>
- ------------------------------
(1) Average balances have been computed using daily balances in 1997 and 1996
and month-end balances in 1995. Nonaccrual loans are included in loan
balances.
(2) Interest and yield are presented on a tax-equivalent basis using a 34.0%
statutory tax rate for 1997, 1996 and 1995.
(3) Does not include recovered interest of $49,000 on a nonaccrual loan paid
off during 1995.
(4) Installment loans and leases are presented net of unearned interest.
(5) Represents the difference between interest earned and interest paid,
divided by average total earning assets.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 Compared to 1996(1) 1996 Compared to 1995(1)
Caused by Total Caused by Total
Volume Rate Variance Volume Rate Variance
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold............................ $ 85 $15 $100 $ 12 $ (2) $10
Deposits in Federal Home Loan Bank ................. 1 2 3 (14) (2) (16)
Investment securities .............................. 2,101 100 2,201 377 (47) 330
Loans and leases ................................... 2,553 (236) 2,317 1,663 (183) 1,480
Total interest income ................................. 4,740 (119) 4,621 2,038 (234) 1,804
Interest expense:
Demand and savings deposits ........................ 169 (17) 152 (108) 52 (56)
Time deposits ...................................... 1,105 181 1,286 1,283 (443) 840
Borrowed funds ..................................... 1,904 - 1,904 (183) 68 (115)
Total interest expense ................................ 3,178 164 3,342 992 (323) 669
Net interest income.............................. $1,562 $(283) $1,279 $1,046 $89 $1,135
<FN>
- ------------------------------
(1) The portion of the total change attributable to both volume and rate
changes during the period has been allocated to the volume and rate
components based upon the absolute dollar amount of the change in each
component prior to the allocation.
</FN>
</TABLE>
Provision for Possible Credit Losses
The provision for possible credit losses for the year ended December
31, 1997 increased to $780,000, an increase of $130,000 or 20.0% over 1996. The
provision for possible credit losses for 1996 decreased to $650,000, a decrease
of $160,000 or 19.8% from $810,000 for 1995. In 1997, the provision for possible
credit losses was 155.7% of net charge-offs, compared to 136.3% in 1996 and
124.8% in 1995. The provision represented management's assessment of the risks
inherent in the loan and lease portfolio while providing the amounts necessary
to cover potential charge-offs.
Net charge-offs in 1997 increased to $501,000, an increase of $24,000
or 5.0% over 1996. Net charge-offs in 1996 decreased to $477,000, a decrease of
$172,000 or 26.5% from $649,000 in 1995. The net charge-offs in 1997 were
primarily attributed to the consumer installment loans and credit card
portfolio. The net charge-offs in 1996 were primarily attributed to the
commercial real estate loan portfolio. The ratio of net charge-offs to average
loans outstanding was at 0.26% for 1997, 0.30% for 1996 and 0.44% for 1995.
Net charge-offs on commercial and industrial loans for 1997 were
$64,000 or 12.8% of net charge-offs compared to $118,000 or 24.7% of net
charge-offs for 1996 and $286,000 or 44.1% of net charge-offs for 1995. Consumer
and credit card and real estate related debt accounted for 87.2% in 1997, 75.3%
in 1996 and 55.9% in 1995, of net charge-offs, respectively.
Other Operating Income
Other operating income in 1997 increased to $3.4 million, an increase
of $695,000 or 25.7% over 1996. Other operating income in 1996 increased to $2.7
million, an increase of $225,000 or 9.1% from $2.5 million in 1995. Fees
generated from the origination and sale of residential mortgage loans provided
$183,000 or 5.4% in 1997, $266,000 or 9.8% in 1996 and $179,000 or 7.2% in 1995,
of other operating income. Mortgage servicing fee income in 1997 increased to
$349,000, an increase of $22,000 or 6.7% over 1996. Such income in 1996
increased to $327,000, an increase of $25,000 or 8.3% from $302,000 in 1995.
These fees were directly influenced by the volume of loans that were sold in the
secondary market. Gains or losses on sales of mortgage loans occurred when the
coupon rates on mortgage loans exceeded or fell short of the yields required by
the purchasers. The net gain of $404,000 recorded in 1997, compared with the net
gain of $114,000 in 1996 and net gain of $132,000 in 1995, was indicative of the
changes in interest rates during the periods in which the sales occurred.
<PAGE>
Fee income from service charges on demand deposits, item processing,
return items and other service fees in 1997 remained constant with 1996 at $1.2
million. Such income in 1996 increased to $1.2 million, an increase of $151,000
or 14.2% from $1.1 million in 1995. These fees, which represented 36.7% of other
operating income, were influenced by both pricing changes and increases in the
number of consumer and business demand deposit accounts which increased $11.8
million or 19.9% in 1997 over 1996.
Net gains on available-for-sale securities represented approximately
6.3% in 1997, 1.6% in 1996 and 13.3% in 1995 of other operating income,
respectively. The sales of these securities resulted from the Company's decision
to liquidate certain securities to capture market gains with the ability to
reinvest in bonds with similar risk and yield.
Included in other income are earnings on directors' 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. These fees in 1997 increased to $1.0 million, an
increase of $265,000 or 35.9% over 1996. These fees in 1996 increased to
$739,000, an increase of $268,000 or 56.9% from $471,000 in 1995. Automated
teller machine income, which did not exist in the same period in 1996,
represented $196,000 of the increase. Earnings on directors' and officers' life
insurance policies represented $161,000 of the remaining increase.
Other Operating Expenses
Other operating expenses in 1997 increased to $9.2 million, an increase
of $1.2 million or 15.0% over 1996. Other operating expenses in 1996 increased
to $8.0 million, an increase of $200,000 or 2.6% from $7.8 million in 1995.
Salaries and benefits, which were the most significant of the noninterest
expenses, increased in each of the years reported. Salaries and benefits for
1997 increased to $4.2 million, an increase of $522,000 or 14.2% over 1996.
Salaries and benefits in 1996 increased to $3.7 million, an increase of $125,000
or 3.5% from $3.6 million in 1995. These increases were due to the additional
staffing needs in both new and existing branch and administrative offices, merit
increases and the added costs associated with health care insurance and other
benefits which were provided by the Company.
Equipment and occupancy expenses in 1997 increased to $2.3 million, an
increase of $389,000 or 20.7% over 1996. Such expenses in 1996 remained constant
at $1.9 million as compared to 1995. Again, these increases were primarily
attributable to the growth in the number of branch offices, in addition to
overall increases in overhead expenses, maintenance costs and equipment upgrades
(including computer hardware and software) throughout the branch network.
FDIC insurance assessments decreased from $222,000 in 1995, to $2,000
in 1996 and $0 in 1997. The decrease in the FDIC insurance assessment reflected
the decision by the FDIC in late 1995 to charge well-capitalized banks a $1,000
semi-annual membership fee without any deposit-based insurance premium, then
reducing this amount to zero in 1997. Foreclosed asset expenses in 1997 were
$39,000, a decrease of $12,000 or 23.5% over 1996. The decrease was a result of
the sales of properties in 1997 without any material additions. Foreclosed asset
expenses in 1996 were $51,000, an increase of $25,000 or 96.2% over 1995.
Amortization of intangible assets increased to $154,000 in 1997, an
increase of $46,000 or 42.6% over 1996, and was related to the premium the
Company paid for the core deposits when it acquired the Milford Township Branch
office, and the deposit customer lists when it acquired the Milford and
Mountainhome Branch offices. Amortization of intangible assets remained constant
in 1996 and 1995 at $108,000 and was related to the premium the Company paid for
the core deposits when it acquired the Milford Township Branch office.
Advertising expenses also remained relatively constant in 1997, 1996 and 1995.
Other expenses in 1997 increased to $2.5 million, an increase of
$328,000 or 15.0% over 1996. Other expenses in 1996 increased to $2.2 million,
an increase of $336,000 or 18.2% over 1995. Included in these expenses were such
costs as legal fees, professional and audit, state shares' tax, directors' fees
and other general operating expenses.
<PAGE>
Provision For Income Taxes
The provision for income taxes for the year ended December 31, 1997 was $1.1
million, a decrease of 1.3% or $15 thousand in 1997. For 1996, the provision for
income taxes was $1.1 million, an increase of $485,000 or 76.4% over the 1995
provision of $635,000. The effective tax rate for 1997, 1996, and 1995 was
24.4%, 27.0% and 21.6%, respectively.
Financial Condition
December 31, 1997 Compared to December 31, 1996
The Company's total assets increased to $368.1 million at December 31,
1997, an increase of $70.2 million or 23.6% from $297.9 million at December 31,
1996. The increase in assets was primarily attributable to a $32.2 million
growth in net loans and a $27.8 million increase in investment securities.
The amortized cost of investment securities, including held-to-maturity
(HTM) and available-for-sale (AFS), increased to $114.8 million at December 31,
1997, an increase of $27.8 million or 31.9% from $87.0 million at December 31,
1996. The continued attention given to management's asset/liability and
investment strategies resulted in an increase in net interest income while
controlling interest rate risk. Due to the significant increase in deposits and
by again utilizing structured borrowings with the FHLB, the Company was able to
purchase both taxable and tax-exempt investments that provided a favorable
spread between the interest rate on deposits and borrowings versus the yield on
invested funds. During 1997, the Company purchased $25 million of securities
with funds borrowed from the FHLB. The strategy that was employed provided a
favorable spread between the rates on invested and borrowed funds. At December
31, 1997, gross unrealized gains in the HTM investments were $868,900 while
gross unrealized losses amounted to $106,800.
The following table presents the maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 1997.
Weighted average yields on tax-exempt obligations have been computed on a
taxable equivalent basis.
<TABLE>
<CAPTION>
Available for Sale December 31, 1997
After 1 Year But After 5 Years But After 10 Years
Within 1 Year Within 5 Years Within 10 Years or no maturity Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. government agencies and
corporations ................... $257 8.16% $- - % $12,644 6.70% $33,433 7.18% $46,334 7.05%
Obligations of state and
political subdivisions ......... 515 7.66 704 7.91 650 7.60 5,418 7.76 7,287 7.76
Equity securities ................. - - - - 2,913 4.80 2,913 4.80
Total securities available for sale $772 7.82% $704 7.91% $13,294 6.74% $41,764 7.09% $56,534 7.03%
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity December 31, 1997
After 1 Year But After 5 Years But After 10 Years
Within 1 Year Within 5 Years Within 10 Years or no maturity Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. government agencies and
corporations ................. $ - - $ - - $10,200 7.55% $23,692 7.13% $33,892 7.25%
Obligations of state and
political subdivisions ....... - - 1,284 7.10% 9,851 7.48% 13,218 8.18% 24,353 7.84
Total securities held to maturity $ - - $1,284 7.10% $20,051 7.51% $36,910 7.50% $58,245 7.50%
</TABLE>
<PAGE>
A summary of securities available for sale and securities held to
maturity at December 31, 1997, 1996, 1995, 1994 and 1993 follows (in thousands):
<TABLE>
<CAPTION>
Securities
Available for Sale
at December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
U.S. government agencies and corporations ........ $46,334 $50,253 $43,041 $27,348 $22,736
Obligations of states and political subdivisions . 7,287 9,066 5,810 6,919 16,836
Equity securities(1) ............................. 2,913 1,443 1,304 2,619 579
Total amortized cost of securities ............... $56,534 $60,762 $50,155 $36,886 $40,151
Total fair value of securities ................... $56,545 $60,399 $50,580 $34,142 $41,657
<FN>
(1) Comprised mostly of FHLB stock, Federal Reserve Bank stock and a
Pennsylvania community bank stock.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Securities
Held to Maturity
at December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
U.S. government agencies and corporations ........ $33,892 $10,841 $11,065 $31,611 $ -
Obligations of states and political subdivisions . 24,353 15,760 11,524 10,924 -
Equity securities ................................ - - - -
Total amortized cost of securities ............... $58,245 $26,601 $22,589 $42,535 $ -
Total fair value of securities ................... $59,008 $26,564 $22,866 $40,674 $ -
</TABLE>
A summary of the outstanding loans and leases by major categories at December 31
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(in thousands)
<S> <C> <C> <C> <C> <C>
Real estate-construction $3,338 $3,214 $4,726 $2,406 $3,547
Real estate-mortgage 99,637 84,352 68,006 56,858 47,573
Commercial and industrial 69,479 51,485 45,210 43,269 39,259
Consumer installment 40,912 45,170 42,891 40,839 24,020
Lease financing 3,711 2,588 1,742 1,119 1,313
Unearned income (6,067) (8,091) (7,641) (6,947) (3,812)
Unearned loan fees, net (665) (898) (971) (1,030) (1,054)
Total loans and leases 210,345 177,820 153,963 136,514 110,846
Allowance for possible credit losses (2,109) (1,830) (1,657) (1,496) (1,544)
Net loans and leases $208,236 $175,990 $152,306 $135,018 $109,302
</TABLE>
<PAGE>
Total net loans increased to $208.2 million at December 31, 1997, an
increase of $32.2 million or 18.3% from $176.0 million at December 31, 1996. The
increase in net loans was directly related to the significant growth in
commercial loans and residential mortgages. Residential mortgage loans, which
included real estate construction loans, increased to $103.0 million at December
31, 1997, an increase of $15.4 million or 17.6% from $87.6 million at December
31, 1996.
Consumer loans, net of unearned discounts, decreased to $38.6 million
at December 31, 1997, a decrease of $1.1 million or 2.8% from $39.7 million at
December 31, 1996. Commercial loans increased to $69.5 million at December 31,
1997, an increase of $18.0 million or 34.9% from $51.5 million at December 31,
1996. Commercial loans consisted of loans made to small businesses within the
Company's market area and were generally secured by real estate and other assets
of the borrowers.
Life insurance cash surrender value increased to $7.9 million at
December 31, 1997, an increase of $5.4 million or 216% from $2.5 million at
December 31, 1996. The increase represents an investment in 1997 in various life
insurance policies to fund both a non-qualified supplemental retirement plan
(SERP) and an officer group term life insurance replacement plan on the
executive officers and certain other officers of the Company.
Total deposits increased to $280.5 million at December 31, 1997, an
increase of $27.3 million or 10.8% from $253.2 million at December 31, 1996.
Noninterest-bearing demand deposits increased to $39.7 million at December 31,
1997, an increase of $7.2 million or 22.0% from $32.5 million at December 31,
1996. In the aggregate, savings and interest-bearing demand deposits increased
to $68.2 million at December 31, 1997, an increase of $3.4 million or 5.3% from
$64.8 million at December 31, 1996. As a percentage of total deposits, savings
and interest-bearing demand deposits represented 24.3% in 1997, compared to
25.6% in 1996. Savings deposits decreased to $36.4 million at December 31, 1997,
a decrease of $1.3 million or 3.4% from $37.7 million at December 31, 1996. This
decrease is because of the rise in interest rates and, therefore, certificates
of deposit offered a competitive alternative for customers. Time deposits, which
include certificates of deposit in denominations of $100,000 or more, increased
to $172.6 million at December 31, 1997, an increase of $16.7 million or 10.7%
from $155.9 million at December 31, 1996. As a percentage of total deposits,
these deposits remained constant at 61.5% in 1997 from 61.6% in 1996.
Approximately $3.3 million or 19.8% of this growth was from public funds of
school districts and local governments located within the Company's market area.
Included in interest-bearing deposits are certificates of deposit in amounts of
$100,000 or more. There are no brokered deposits included in certificates of
deposit of $100,000 or more. These certificates of deposit and their remaining
maturities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(in thousands)
<S> <C> <C> <C> <C> <C>
Three months or less $15,217 $11,375 $11,708 $9,664 $4,526
Over three through six months 12,956 17,847 5,701 6,503 2,960
Over six through twelve months 6,814 6,376 8,213 6,424 2,130
Over twelve months 9,032 4,642 1,321 2,072 957
Total $44,019 $40,240 $26,943 $24,663 $10,573
</TABLE>
<PAGE>
Nonperforming Assets
Nonperforming assets included nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consisted of loans where the principal and/or
interest was 90 days or more past due and loans that had been placed on
nonaccrual status. When loans were placed on nonaccrual status, income from the
current period was reversed from current earnings and interest from prior
periods was charged to the allowance for possible credit losses. Consumer loans
were charged-off when principal or interest was 120 days or more delinquent, or
were placed on nonaccrual status if a sufficient amount of collateral existed.
The following table shows information concerning loan delinquency and other
nonperforming assets of the Company for 1997, 1996, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $1,453 $1,593 $1,716 $1,125 $1,501
Impaired loans in nonaccrual status 411 542 1,216 - -
Other nonaccrual loans 123 73 487 1,786 1,585
Total nonperforming loans 1,987 2,208 3,419 2,911 3,086
Foreclosed assets held for sale 523 841 52 191 119
Total nonperforming assets $2,510 $3,049 $3,471 $3,102 $3,205
Nonperforming loans as a
percentage of loans .94% 1.24% 2.19% 2.13% 2.78%
Nonperforming assets as a
percentage of assets .68% 1.02% 1.36% 1.31% 1.89%
</TABLE>
The following summary shows the impact on interest income on nonaccrual
and restructured loans for the periods indicated:
For the Year Ended
December 31,
1997 1996 1995 1994 1993
(in thousands)
Interest income that would
have been recorded had
the loan been in accordance
with their original terms . $51 $92 $187 $171 $209
Interest income included in
net income ................ 21 7 12 - -
Nonperforming loans decreased 10.0% from year-end 1996. Nonaccrual
loans decreased $81,000 or 13.2% from year-end 1996. Commercial loans accounted
for 77.0% of all nonaccruals, followed by real estate loans at 23.0%. Within the
$534,000 of total nonaccrual loans, 100.0% were secured by mortgages, primarily
first liens, against residential or commercial properties. Loans past due 90
days or more decreased $140,000 from 1996 year-end levels. These loans included
$396,000 in real estate mortgages, $235,000 in consumer credit, $746,000 in
commercial loans and $76,000 in leasing. These loans were reviewed by management
at its quarterly loan review meetings regarding collection efforts.
<PAGE>
Legal proceedings on the nonaccrual loans are ongoing, routine, and are
reviewed by management on a continuing basis. No material losses are expected as
a result of these proceedings.
Foreclosed assets held for sale were $523,000 at year-end 1997 compared
to $841,000 at year-end 1996. The decrease was a result of sales during the year
without any substantial additions. The Company does not expect any material
losses on the sales of these properties based on current appraised values
exceeding book values. See "Factors That May Affect Future Results" for factors
that could affect sales prices of foreclosed assets.
Potential Problem Loans
At December 31, 1997, the Company had approximately $2.1 million of
potential problem loans not included in the nonperforming loan classification.
Known information about possible credit problems related to these borrowers
caused management to have serious doubts as to the ability of such borrowers to
comply with present loan repayment terms and may result in future classification
of such loans as nonperforming. These potential problem loans were taken into
consideration by management when determining the adequacy of the allowance for
possible credit losses at December 31, 1997. See "Factors That May Affect Future
Results" for further discussion.
Allowance for Possible Credit Losses
The Company determined the provision for possible credit losses through
a quarterly review of the loan portfolio. Factors such as declining economic
trends; the volume of nonperforming loans; concentrations of credit risk;
adverse situations that may affect the borrower's ability to repay; prior loss
experience within the various categories of the portfolio; and current economic
conditions were considered when reviewing the risks in the portfolio. Larger
exposures were analyzed individually. Over the past several years, the Company
implemented more stringent underwriting standards in commercial lending as this
category of loans continues to grow. While management believed the allowance for
possible credit losses was adequate, future additions to the allowance may be
necessary based on changes in economic conditions. The adequacy of the allowance
for possible credit losses was reviewed quarterly by a loan review committee
comprised of members of the Board of Directors and senior management of the
Company. The full Board of Directors reviewed the relevant ratios with respect
to the allowance after the loan review committee made its recommendations. At
December 31, 1997, the allowance for possible credit losses was 1.00% of loans
compared to 1.03% at December 31, 1996 and 1.08% at December 31, 1995. For
further discussion on factors that could influence the allowance for possible
credit losses, see "Factors That May Affect Future Results."
<PAGE>
Changes in the allowance for possible credit losses for the years ended December
31, 1997, 1996, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,830 $1,657 $1,496 $1,544 $1,254
Charge-offs:
Real estate-construction - - - - -
Real estate-mortgage 103 143 200 14 -
Commercial and industrial 106 158 294 321 211
Consumer installment 363 274 206 157 196
Lease financing 11 - - 7 39
Total 583 575 700 499 446
Recoveries:
Real estate-construction - - - - -
Real estate-mortgage - - - 2 -
Commercial and industrial 42 40 8 12 8
Consumer installment 40 58 43 58 82
Lease financing - - - 4 6
Total 82 98 51 76 96
Net charge-offs 501 477 649 423 350
Provision for possible credit losses 780 650 810 375 640
Balance at end of period $2,109 $1,830 $1,657 $1,496 $1,544
Ratio of net charge-offs during period to
average loans outstanding during period 0.26% 0.30% 0.44% 0.35% 0.35%
</TABLE>
The Company's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for possible credit losses among various
categories. At December 31, 1997, approximately 63% of the allowance for
possible credit losses is allocated to general risk to protect the Company
against potential yet undetermined losses. The allocation is based upon
historical experience. The entire allowance for possible credit losses is
available to absorb future loan losses in any loan category.
<PAGE>
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Amt toLoans(1) Amt toLoans(1) Amt to Loans(1) Amt to Loans(1) Amt Loans(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Allocation of allowance for possible credit losses:
Real Estate ....................................... $278 49% $248 49% $279 47% $370 43% $198 46%
Commercial and industrial ......................... 868 33 574 29 700 29 631 32 924 35
Consumer installment .............................. 465 19 428 21 437 23 386 24 259 18
Lease financing ................................... 68 1 62 1 52 1 52 1 55 1
Unallocated ....................................... 430 - 518 - 189 - 57 - 108 -
Total ....................................... $2,109 100% $1,830 100% $1,657 100% $1,496 100% $1,544 100%
<FN>
(1) Loans, net of unearned income.
</FN>
</TABLE>
Interest Rate Risk Management
The following discussion contains certain forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995). These
forward-looking statements may involve significant risks and uncertainties that
are described under the caption "Factors That May Affect Future Results."
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, the Company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.
Asset/Liability Management. One major objective of the Company when
managing the rate sensitivity of its assets and liabilities is to stabilize net
interest income. The management of and authority to assume interest rate risk is
the responsibility of the Company's Asset/Liability Committee ("ALCO"), which is
comprised of senior management and Board members. ALCO meets quarterly to
monitor the ratio of interest sensitive assets to interest sensitive
liabilities. The process to review interest rate risk management is a regular
part of management of the Company. Consistent policies and practices of
measuring and reporting interest rate risk exposure, particularly regarding the
treatment of noncontractual assets and liabilities, are in effect. In addition,
there is an annual process to review the interest rate risk policy with the
Board of Directors which includes limits on the impact to earnings from shifts
in interest rates.
Interest Rate Risk Measurement. Interest rate risk is monitored through
the use of three complementary measures: static gap analysis, earnings at risk
simulation and economic value at risk simulation. While each of the interest
rate risk measurements has limitations, taken together they represent a
reasonably comprehensive view of the magnitude of interest rate risk in the
Company and the distribution of risk along the yield curve, the level of risk
through time, and the amount of exposure to changes in certain interest rate
relationships.
Static Gap. The ratio between assets and liabilities repricing in
specific time intervals is referred to as an interest rate sensitivity gap.
Interest rate sensitivity gaps can be managed to take advantage of the slope of
the yield curve as well as forecasted changes in the level of interest rate
changes.
<PAGE>
To manage this interest rate sensitivity gap position, an
asset/liability model called "static gap analysis" is used to monitor the
difference in the volume of the Company's interest sensitive assets and
liabilities that mature or reprice within given periods. A positive gap (asset
sensitive) indicates that more assets reprice during a given period compared to
liabilities, while a negative gap (liability sensitive) has the opposite effect.
The Company employs computerized net interest income simulation modeling to
assist in quantifying interest rate risk exposure. This process measures and
quantifies the impact on net interest income through varying interest rate
changes and balance sheet compositions. The use of this model assists the ALCO
to gauge the effects of the interest rate changes on interest sensitive assets
and liabilities in order to determine what impact these rate changes will have
upon the net interest spread.
At December 31, 1997, LA Bank maintained a one year cumulative gap of
negative $14.4 million or 3.90% of total assets. The effect of this gap position
provided a negative mismatch of assets and liabilities which can expose LA Bank
to interest rate risk during a period of rising interest rates.
<TABLE>
<CAPTION>
Interest Sensitivity Gap at December 31, 1997
3 months 3 through 1 through Over
or less 12 months 3 years 3 years Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .................. $17,109 $ - $ - $ - $17,109
Investment securities(1)(2) ................ 7,327 7,369 17,385 82,697 114,778
Loans(2) ................................... 84,683 36,224 34,462 52,764 208,133
Fixed and other assets ..................... - - - 27,864 27,864
Total assets ............................... $109,119 $43,593 $51,847 $163,325 $367,884
Non interest-bearing transaction deposits(3) $9,950 $ - $9,950 $19,901 $39,801
Interest-bearing transaction deposits(3) ... - 6,412 19,820 41,972 68,204
Time ....................................... 35,069 55,039 19,562 18,868 128,538
Time over $100,000 ......................... 15,127 20,089 4,481 4,322 44,019
Repurchase agreements ...................... 200 - - - 200
Short-term borrowings ...................... 730 12,098 - - 12,828
Long-term debt ............................. 10,590 1,770 4,721 17,748 34,829
Other liabilities .......................... - - - 3,659 3,659
Total Liabilities ..................... $71,666 $95,408 $58,534 $106,470 $332,078
Interest sensitivity gap ................... $37,453 $(51,815) $(6,687) $56,855
Cumulative gap ............................. $37,453 $(14,362) $(21,049) $35,806
Cumulative gap to total assets ............. 10.18% (3.90)% (5.72)% 9.73%
<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) LA Bank's demand and savings accounts were generally subject to
immediate withdrawal. However, management considers a certain amount of
such accounts to be core accounts having significantly longer effective
maturities based on the retention experiences of such deposits in
changing interest rate environments. The effective maturities presented
are the FDICIA 305 recommended maturity distribution limits for
nonmaturing deposits.
</FN>
</TABLE>
Upon reviewing the current interest sensitivity scenario, decreasing
interest rates could positively effect net income because the Company is
liability sensitive. In a rising interest rate environment, net income could be
negatively affected because more liabilities than assets will reprice during a
given period.
Certain shortcomings are inherent in the method of analysis presented
in the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in calculating the table. The ability of many borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate
increase.
<PAGE>
Earnings at Risk and Economic Value at Risk Simulations. The Company
recognizes that more sophisticated tools exist for measuring the interest rate
risk in the balance sheet beyond static gap analysis. Although it will continue
to measure its static gap position, the Company utilizes additional modeling for
identifying and measuring the interest rate risk in the overall balance sheet.
The ALCO is responsible for focusing on "earnings at risk" and "economic value
at risk", and how both relate to the risk-based capital position when analyzing
the interest rate risk.
Earnings at Risk. Earnings at risk simulation measures the change in
net interest income and net income should interest rates rise and fall. The
simulation recognizes that not all assets and liabilities reprice one for one
with market rates (e.g., savings rate). The ALCO looks at "earnings at risk" to
determine income changes from a base case scenario under an increase and
decrease of 200 basis points in interest rates simulation model.
Economic Value at Risk. Earnings at risk simulation measures the
short-term risk in the balance sheet. Economic value (or portfolio equity) at
risk measures the long-term risk by finding the net present value of the future
cashflows from the Company's existing assets and liabilities. The ALCO examines
this ratio quarterly utilizing an increase and decrease of 200 basis points in
interest rates simulation model. The ALCO recognizes that, in some instances,
this ratio may contradict the "earnings at risk" ratio.
The following table illustrates the simulated impact of 200 basis
points upward or downward movement in interest rates on net interest income, net
income, and the change in economic value (portfolio equity). This analysis
assumed that interest-earning asset and interest-bearing liability levels at
December 31, 1997 remained constant. The impact of the rate movements was
developed by simulating the effect of rates changing over a twelve-month period
from the December 31, 1997 levels.
Rates +200 Rates -200
Earnings at risk:
Percent change in:
Net Interest Income ..... 1.92% (2.83)%
Net Income .............. 4.25 (6.26)
Economic value at risk:
Percent change in:
Market value of portfolio
equity (MVPE) ........... (10.99) 2.94
MVPE as a percent of
book assets ............. (1.39) 0.37
Economic value has the most meaning when viewed within the context of
risk-based capital. Therefore, the economic value may change beyond the
Company's policy guideline for a short period of time as long as the risk-based
capital ratio (after adjusting for the excess equity exposure) is greater than
10%.
Capital
The adequacy of the Company's capital is reviewed on an ongoing basis
with regard to size, composition and quality of the Company's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio,
defined as the ratio of common stockholders' equity less intangible assets, to
average quarterly assets less intangible assets. The leverage ratio at December
31, 1997 was 10.26% compared to 8.24% at December 31, 1996. This increase is the
direct result of the increase in average assets in 1997 caused by the borrowings
from the FHLB which were invested in investment grade securities, in addition to
the increase in stockholders' equity as a result of the public stock offering in
1997. For 1997 and 1996, the ratios were well above minimum regulatory
guidelines.
<PAGE>
As required by the federal banking regulatory authorities, guidelines
have been adopted to measure capital adequacy. Under the guidelines, certain
minimum ratios are required for core capital and total capital as a percentage
of risk-weighted assets and other off-balance sheet instruments. For the
Company, Tier I capital consists of common stockholders' equity less intangible
assets, and Tier II capital includes the allowable portion of the allowance for
possible loan losses, currently limited to 1.25% of risk-weighted assets. By
regulatory guidelines, neither Tier I nor Tier II capital reflect the adjustment
of SFAS No. 115, which requires adjustment in financial statements prepared in
accordance with generally accepted accounting principles by including as a
separate component of equity, the amount of net unrealized holding gains or
losses on debt and equity securities that are deemed to be available-for-sale.
At December 31, 1997
(Dollars in thousands)
Primary capital .......... $35,805
Intangible assets ........ 573
Tier I capital ........... 35,232
Tier II capital .......... 2,041
Total risk-based capital . $37,273
Total risk-weighted assets $205,743
Tier I ratio ............. 17.12%
Risk-based capital ratio . 18.12%
Tier I leverage ratio .... 10.26%
Regulatory guidelines require that core capital and total risk-based
capital must be at least 4.0% and 8.0%, respectively.
Liquidity and Funds Management
Liquidity management is to ensure that adequate funds will be available
to meet anticipated and unanticipated deposit withdrawals, debt servicing
payments, investment commitments, commercial and consumer loan demand and
ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short- and
long-term borrowings and repurchase agreements. Regular loan payments are a
dependable source of funds, while the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates.
At December 31, 1997, the Company maintained $17.1 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 $621,000 of
mortgage loans held for resale and $56.5 million in AFS securities. This
combined total of $74.2 million represented 20.2% of total assets at December
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 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
December 31, 1997, approximately 76.2% of the Company's assets were funded by
core deposits acquired within its market area. An additional 9.7% of the assets
were funded by the Company's equity. These two components provide a substantial
and stable source of funds.
<PAGE>
Net cash provided by operating activities was $4.9 million for the year
ended December 31, 1997, as compared to net cash provided by operating
activities of $6.3 million for the comparable period in 1996. This $1.4 million
decrease is primarily related to a net $3.4 million decrease in the change in
mortgage loans held for resale. Net cash used in investing activities increased
$23.3 million for the year ended December 31, 1997, from $46.2 million to $69.5
million, which was primarily attributable to purchases of investment securities
and an increase in loans and leases. Net cash provided by financing activities
increased $22.4 million from 1996. A net increase in FHLB borrowings of $25.0
million and proceeds from issuance of common stock of $12.0 million were used to
fund investment purchases. A net decrease in the annual growth of deposits from
1996 to 1997 of $17.2 million was the other major component impacting funds
provided by financing activities.
Future Outlook
In 1995, interest rates began moving steadily upward as the Federal
Reserve Board tightened its monetary policy. In early 1995, interest rates rose
and continued rising through the middle of the year, with the national prime
lending rate peaking at 9.0%. The national prime lending rate fell to 8.5% at
December 31, 1995, falling again to 8.25% in February 1996, where it remained at
December 31, 1996. In March 1997, the national prime lending rate increased to
its current level of 8.5%. Management and the Board of Directors do not have the
ability to determine if another rate increase will occur; however, the Company
believes it is very well prepared to meet the challenges and effects of a rising
interest rate environment. Management's belief is that a significant impact on
earnings depends on its ability to react to changes in interest rates. Through
its ALCO, the Company continually monitors interest rate sensitivity of its
earning assets and interest-bearing liabilities to minimize any adverse effects
on future earnings. The Company's commitment to remaining a community-based
organization is strong and the intention is to recognize steady growth in its
consumer, mortgage and commercial loan portfolios while obtaining and
maintaining a strong core deposit base.
The banking and financial services industries are constantly changing.
The Company is not aware of any pending pronouncements that would have a
material impact on the results of operations.
Beginning September 1995, bank holding companies are permitted to
acquire banks in other states without regard to state law. In addition, banks
can merge with other banks in another state beginning in September 1997.
Predictions are that consolidation will occur as the banking industry strives
for greater cost efficiencies and market share. Management believes that such
consolidation may enhance its competitive position as a community bank.
A normal examination of LA Bank by the Office of the Comptroller of the
Currency ("OCC") in 1997 resulted in no significant findings and no impact is
anticipated on current or future operations.
The FDIC Board of Directors voted on November 26, 1996, to retain the
existing BIF assessment schedule of 0 to 27 basis points (annual rates) for the
first semiannual period of 1997, and to collect an assessment against BIF -
assessable deposits to be paid to the Financing Corporation ("FICO"). In
addition, the Board eliminated the $2,000 minimum annual assessment and
authorized the refund of the fourth-quarter minimum assessment of $500 paid by
certain BIF-insured institutions on September 30, 1996. LA Bank's current and
future FDIC BIF assessment is expected to be $0; however, the FICO assessment
for 1998 is expected to be approximately $35,000.
In 1996, LA Bank acquired the real estate and deposit customer lists of
the Milford (Pike County) and Mountainhome (Monroe County) branches of PNC Bank.
These branches opened in December 1996. The amortization of the customer lists
was $100,000 for 1997.
On May 19, 1997, the OCC granted approval to establish a new branch in
downtown Scranton (Lackawanna County). LA Bank's downtown Scranton Branch and
its new Financial Center, both located in the historic Oppenheim Building,
opened in October 1997.
<PAGE>
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.
Year 2000 Compliance; Management Information Systems
The Board of Directors has established a Year 2000 compliance committee
to address the risks of the critical internal bank systems that are affected by
date sensitive applications, as well as external systems provided by third
parties. A comprehensive plan was developed detailing the sequence of events and
actions to be taken as the Year 2000 approaches.
The Company has conducted a comprehensive review of its computer
systems that could be affected by the "Year 2000" issue and does not believe the
amounts to be expended over the next two years will have a material impact on
its earnings or financial position. It is anticipated that any modifications to
existing hardware and software will be completed by December 31, 1998, thus
leaving the year 1999 for systems testing. However, no assurance can be made
that the systems of others that the Company relies upon will be converted on a
timely basis, or that their failure to be compliant would not have an adverse
effect on the Company.
In October 1997, the Company purchased and installed an upgrade to its
current systems to improve efficiencies of operations and position itself for
future growth. The cost of the new system was approximately $775,000.
Preconversion testing demonstrated that the new hardware and software are Year
2000 compliant.
Factors That May Affect Future Results
General
Banking is affected, directly and indirectly, by local, domestic and
international economic and political conditions, and by government monetary and
fiscal policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the control of the Company may adversely affect the
future results of operations of the Company. Management does not expect any one
particular factor to affect results of operations. A downward trend in several
areas, however, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to maintain or increase
profitability. Therefore, there is no assurance that the Company will be able to
continue its current rate of profitability and growth. See "Business - Allowance
For Possible Credit Losses."
Interest Rates
The Company's earnings depend, to a large extent, upon net interest
income, which is primarily influenced by the relationship between its cost of
funds (deposits and borrowings) and the yield on its interest-earning assets
(loans and investments). This relationship, known as the net interest spread, is
subject to fluctuate and is affected by regulatory, economic and competitive
factors which influence interest rates, the volume, rate and mix of
interest-earning assets and interest-bearing liabilities, and the level of
nonperforming assets. As part of its interest rate risk management strategy,
management seeks to control its exposure to interest rate changes by managing
the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities. Through its asset/liability committee, the Company
continually monitors interest rate sensitivity of its earning assets and
interest-bearing liabilities to minimize any adverse effects on future earnings.
<PAGE>
As of December 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 $14.4 million, representing a
cumulative one-year interest rate sensitivity gap as a percentage of total
assets of negative 3.90%. This condition suggests that the yield on the
Company's interest-earning assets should adjust to changes in market interest
rates at a slower rate than the cost of the Company's interest-bearing
liabilities. Consequently, the Company's net interest income could decrease
during periods of rising interest rates. See "Interest Rate Risk Management."
Adequacy of Allowance for Possible Credit Losses
In originating loans, there is a likelihood that some credit losses
will occur. This risk of loss varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness and debt servicing
capacity of the borrower over the term of the loan and, in the case of a
collateralized loan, the value and marketability of the collateral securing the
loan. Management maintains an allowance for possible credit losses based on,
among other things, historical loan loss experience, known inherent risks in the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and an evaluation of
current economic conditions. Management believes that the allowance for possible
credit losses is adequate. There can be no assurance that nonperforming loans
will not increase in the future.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's ability to react to changes in
interest rates. As discussed previously, management attempts to maintain an
essentially balanced position between rate sensitive assets and liabilities over
a one year time horizon in order to protect net interest income from being
affected by wide interest rate fluctuations.
New Financial Accounting Standards
Mortgage Servicing Rights
In 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which amends Statement No. 65, "Accounting for Certain
Mortgage Banking Activities." The Statement applies to all mortgage banking
activities in which a mortgage loan is originated or purchased and then sold or
securitized with the right to service the loan retained by the seller. The total
cost of the mortgage loans is allocated between the mortgage servicing rights
and the mortgage loans based on their relative fair values. The mortgage
servicing rights are capitalized as assets and amortized over the period of
estimated net servicing income. Additionally, they are subject to an impairment
analysis based on their fair value in future periods. The Statement was
effective for transactions in which mortgage loans are sold or securitized
beginning January 1, 1996. The impact on the Company's financial position and
results of operations will be dependent upon the future volume of mortgage loans
sold with servicing rights retained. In 1996 and 1997, the impact was
immaterial.
<PAGE>
Stock-Based Compensation
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard provides the Company with a choice of how to
account for the issuance of stock options and other stock grants. The Statement
encourages companies to account for stock options at their fair value and
recognize the expense as compensation over the service period, but also permits
companies to follow existing accounting rules under Accounting Principles Board
("APB") Opinion No. 25. Companies electing to follow APB Opinion No. 25 rules
will be required to disclose pro forma net income and earnings per share
information as if the new fair value approach had been adopted. The Company is
continuing to follow existing accounting rules under APB Opinion No. 25 for
options granted, with pro forma disclosure in the footnotes to the consolidated
financial statements.
Earnings Per Share and Capital Structure
In 1997, the FASB issued Statement No.128, "Earnings Per Share" and
Statement No. 129, "Disclosure of Information about Capital
Structure." Both Statements are effective for periods ending after
December 15, 1997. Statement No. 128 is designed to simplify the
computation of earnings per share and will require disclosure of
"basic earnings per share" and, if applicable, "diluted earnings per
share." Statement No. 128 requires restatement of all prior period
earnings per share data when adopted. The adoption of Statement No.
129 had no impact on the Company.
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. Statement No. 130 requires that all items
that are required to be recognized as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement does not require a specific format
for that financial statement, but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. The impact of this Statement on the Company would be to
require additional disclosures in the Company's financial statements.
Operating Segment Disclosure
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Statement No. 131 is effective for periods beginning after December
15, 1997. The impact, if any, of this Statement on the Company will be to
require additional disclosures in the Company's financial statements.
<PAGE>
<TABLE>
Consolidated Balance Sheet
<CAPTION>
December 31,
1997 1996
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $17,109 $15,971
Available-for-sale securities 56,545 60,399
Held-to-maturity securities (fair value of
$59,008 and $26,564 in 1997 and 1996, respectively) 58,245 26,601
Loans and leases 216,465 186,494
Mortgage loans held for resale 621 315
Less unearned income and loan fees (6,741) (8,989)
Less allowance for possible credit losses (2,109) (1,830)
Net loans and leases 208,236 175,990
Premises and equipment, net 13,744 10,005
Accrued interest receivable 3,005 2,349
Foreclosed assets held for sale 523 841
Life insurance cash surrender value 7,891 2,539
Other assets 2,775 3,211
TOTAL ASSETS $368,073 $297,906
LIABILITIES
Deposits:
Noninterest-bearing $39,689 $32,539
Interest-bearing:
Demand 31,767 27,070
Savings 36,437 37,713
Time 128,538 115,634
Time $100,000 and over 44,019 40,240
Total Deposits 280,450 253,196
Accrued interest payable 2,975 2,416
Securities sold under agreements to repurchase 200 300
Long-term debt 47,656 20,023
Other liabilities 977 799
Total Liabilities 332,258 276,734
STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of
$1.25 par value each; no outstanding shares - -
Common stock: Authorized, 10,000,000 shares of $.21
par value each; issued and outstanding 4,548,383
shares in 1997 and 3,699,730 shares in 1996 956 740
Capital surplus 25,717 11,099
Retained earnings 9,135 9,572
Net unrealized gains (losses) on available-for-sale securities 7 (239)
Total Stockholders' Equity 35,815 21,172
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $368,073 $297,906
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statement of Income
Year Ended December 31,
1997 1996 1995
(in thousands, except per share data)
INTEREST INCOME
Loans and leases $16,907 $14,592 $13,112
Investment securities:
Taxable 5,738 4,323 4,187
Exempt from federal income taxes 1,578 1,104 956
Dividends 154 86 117
Total investment securities income 7,470 5,513 5,260
Deposits in bank 9 6 22
Federal funds sold 264 164 154
TOTAL INTEREST INCOME 24,650 20,275 18,548
INTEREST EXPENSE
Deposits 10,395 8,957 8,165
Long-term debt 3,018 1,143 1,215
Short-term borrowings 99 66 105
Securities sold under agreements
to repurchase 13 17 29
TOTAL INTEREST EXPENSE 13,525 10,183 9,514
NET INTEREST INCOME 11,125 10,092 9,034
PROVISION FOR POSSIBLE CREDIT LOSSES 780 650 810
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 10,345 9,442 8,224
OTHER OPERATING INCOME
Loan origination fees 183 266 179
Customer service charges and fees 1,247 1,217 1,066
Mortgage servicing fees 349 327 302
Investment security gains, net 214 43 331
Gain (loss) on sale of loans, net 404 114 132
Life insurance earnings 288 127 87
Other income 716 612 384
TOTAL OTHER OPERATING INCOME 3,401 2,706 2,481
OTHER OPERATING EXPENSES
Salaries and benefits 4,206 3,684 3,559
Occupancy expense 1,334 1,053 1,036
Equipment expense 932 824 855
FDIC assessment - 2 222
Advertising 225 249 242
Other expenses 2,513 2,185 1,849
TOTAL OTHER OPERATING EXPENSES 9,210 7,997 7,763
<PAGE>
INCOME BEFORE PROVISION FOR INCOME
TAXES 4,536 4,151 2,942
PROVISION FOR INCOME TAXES 1,105 1,120 635
NET INCOME $3,431 $3,031 $2,307
EARNINGS PER SHARE - BASIC* $0.92 $0.82 $0.63
EARNINGS PER SHARE - DILUTED* $0.88 $0.82 $0.63
DIVIDENDS PER SHARE* $0.38 $0.32 $0.27
*Reflects adjustment for 5% stock dividends issued on October 1, 1997 and 1996,
and a two-for-one stock split effective November 10, 1997 (See Note 12).
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
Consolidated Statement of Changes in Stockholders' Equity
<CAPTION>
Common Capital Retained Net Unrealized Total
Stock Surplus Earnings Gains (Losses)
On Available-
For-Sale
Securities
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 $688 $9,139 $7,783 $(1,811) $15,799
Net income 2,307 2,307
Issuance of 16,809 shares of common stock
through Dividend Reinvestment Plan 7 252 259
Issuance of 2,099 shares of common stock
through Employee Stock Purchase Plan 1 23 24
Cash dividends declared ($.27 per share)* (972) (972)
Change in net unrealized securities
gains (losses) 2,092 2,092
BALANCES, DECEMBER 31, 1995 696 9,414 9,118 281 19,509
Net income 3,031 3,031
Issuance of 16,053 shares of common stock
through Dividend Reinvestment Plan 7 265 272
Issuance of 5,462 shares of common stock
through Employee Stock Purchase Plan 2 70 72
Cash dividends declared ($.32 per share)* (1,186) (1,186)
Stock dividend declared (5% on
October 1, 1996) 35 1,350 (1,385) -
Cash paid for fractional shares on
stock dividend (6) (6)
Change in net unrealized securities
gains (losses) (520) (520)
BALANCES, DECEMBER 31, 1996 740 11,099 9,572 (239) 21,172
Net income 3,431 3,431
Issuance of 33,625 shares of common stock
through Dividend Reinvestment Plan* 8 393 401
Issuance of 11,028 shares of common stock
through Employee Stock Purchase Plan* 2 67 69
Cash dividends declared ($.38 per share)* (1,369) (1,369)
Stock dividend declared (5% on
October 1, 1997) 37 2,448 (2,485) -
Cash paid for fractional shares on
stock dividend (14) (14)
Sale of 805,000 shares of common stock
through secondary stock offering 169 11,710 11,879
Change in net unrealized securities
gains (losses) 246 246
BALANCES, DECEMBER 31, 1997 $956 $25,717 $9,135 $7 $35,815
</TABLE>
*Reflects adjustment for 5% stock dividends issued on October 1, 1997 and 1996,
and a two-for-one stock split effective November 10, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
Consolidated Statement of Cash Flows
<CAPTION>
Year Ended December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,431 $3,031 $2,307
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses 780 650 810
Depreciation, amortization and accretion 935 720 710
Deferred income taxes (62) 45 8
Writedown of foreclosed assets held for sale 213 - -
Investment security gains, net (214) (43) (331)
(Gain) on sale of loans (404) (114) (132)
(Gain) loss on sale of foreclosed assets 6 (1) 93
(Gain) loss on sale of leased assets - 2 (5)
(Gain) loss on sale of equipment 38 (1) 138
(Increase) decrease in mortgage loans held for resale (306) 3,090 (3,286)
(Increase) decrease in accrued interest receivable (656) (378) 95
Increase in accrued interest payable 559 670 74
(Increase) decrease in other assets 371 (869) (695)
Increase (decrease) in other liabilities 178 (490) 822
NET CASH PROVIDED BY
OPERATING ACTIVITIES 4,869 6,312 608
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities and paydowns 2,974 339 17,060
Purchases (34,618) (4,351) (4,947)
Available-for-sale securities:
Proceeds from maturities and paydowns 10,106 6,505 3,955
Proceeds from sales 29,522 34,130 18,702
Purchases (35,193) (51,190) (27,729)
Purchase of life insurance policies (5,352) - -
Increase in loans and leases (61,670) (39,923) (31,215)
Purchases of premises and equipment (4,959) (2,962) (1,659)
Proceeds from sale of loans 28,939 11,734 16,118
Proceeds from sale of leased assets - 19 20
Proceeds from sale of equipment 253 13 8
Proceeds from sale of foreclosed assets 514 70 448
Purchase of intangible assets - (600) -
NET CASH USED IN INVESTING ACTIVITIES (69,484) (46,216) (9,239)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 27,254 44,437 16,572
Decrease in short-term borrowings - (5,000) (9,750)
Decrease in securities sold under
agreements to repurchase (100) (100) (600)
Proceeds from long-term debt 30,029 5,000 25,000
Principal payments on long-term debt (2,396) (133) (20,102)
Proceeds from issuance of common stock 12,349 344 283
Cash dividends (1,383) (1,192) (972)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 65,753 43,356 10,431
INCREASE IN CASH AND
CASH EQUIVALENTS 1,138 3,452 1,800
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 15,971 12,519 10,719
CASH AND CASH EQUIVALENTS AT
END OF YEAR $17,109 $15,971 $12,519
CASH PAID DURING THE YEAR FOR:
Interest $12,966 $9,513 $9,588
Income taxes $932 $1,025 $578
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation The accompanying consolidated financial
statements include the accounts of Lake Ariel Bancorp, Inc. and its
wholly owned subsidiary, LA Bank, N.A. including its subsidiaries, LA
Lease, Inc. and Ariel Financial Services, Inc. (collectively,
"Company"). All material intercompany balances and transactions are
eliminated in consolidation.
Nature of Operations
Lake Ariel Bancorp, Inc. is a one bank holding company whose principal
subsidiary is LA Bank, N.A. LA Lease, Inc., provides auto and equipment leases
to individuals and small business entities. Ariel Financial Services, a newly
formed business unit, offers stocks, bonds, annuities and other
insurance-related products.
The Company provides a variety of financial services to individuals and
corporate customers through its fifteen branch banking offices in Wayne,
Lackawanna, Pike and Monroe Counties. The Bank's primary deposit products are
both noninterest and interest-bearing demand deposits and certificates of
deposit. Its primary lending products are single-family residential loans which
qualify for sale on the secondary residential loan market.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for possible credit losses and the
valuation of assets acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowances for possible
credit losses and foreclosed assets, management obtains independent appraisals
for significant properties.
A majority of the Company's loan portfolio consists of single-family residential
loans in the Northeastern Pennsylvania area. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed assets
are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
leases and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for possible credit losses and foreclosed assets. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for possible credit losses and foreclosed assets may change
materially in the near term.
Investment Securities
Held-to-maturity securities are bonds, notes and debentures for which the
Company has the positive intent and ability to hold to maturity. These
securities are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
<PAGE>
Government bonds held principally for resale in the near term, and
mortgage-backed securities held for sale in conjunction with the Company's
mortgage banking activities, are classified as trading account securities and
are recorded at their fair values. Unrealized gains and losses on trading
account securities are included immediately in other income. The Company neither
held nor purchased securities which would be categorized as trading account
securities during the years ended December 31, 1997, 1996, and 1995.
Available-for-sale securities consist of bonds, notes, debentures and certain
equity securities not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized.
Investment gains and losses are determined using the specific identification
method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their face value. The related write-downs are
included in earnings as realized losses.
Derivative Financial Instruments
The Company has no derivative financial instruments requiring
disclosure under SFAS No. 119.
Mortgage Loans Held for Resale
Mortgage loans originated and intended for resale in the secondary
market are carried at the lower of cost or fair value in the
aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income. These loans are sold in whole and
without recourse to the Company.
Loans and Leases
Loans are reported at the principal balance outstanding, net of unearned
interest, net deferred loan fees and the allowance for possible credit losses.
Unearned interest on installment loans is recognized as income using the
actuarial method. Interest on all other loans is recognized on the accrual
basis, based on the principal amount outstanding. Loan fees, including
origination and commitment fees, less certain direct loan origination costs, are
deferred and recognized over the estimated lives of the related loans as an
adjustment to yield. The unamortized balance of these fees and costs are
included as part of the loan balance to which it relates. Prior to 1988, such
fees and costs were recognized as income or expense when collected or paid.
Impaired loans are placed in a nonaccrual status when management believes that
the collection of principal or interest is uncertain, unless the loans are both
in the process of collection and well secured. When interest accrual is
discontinued, income recorded in the current year is reversed and the accrued
interest from prior years is charged to the allowance for possible credit
losses.
Allowance for Possible Credit Losses
The allowance for possible credit losses is established through a provision for
possible credit losses as a charge to operating expense. The Company provides
for possible credit losses based on an evaluation of the risk associated with
the Company's loan portfolio, prior loan loss experience, economic conditions
and other factors. Loans are charged against the allowance for possible credit
losses when management believes that the collection of principal is unlikely.
Recoveries on previously charged-off loans are added to the allowance for
possible credit losses.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of fair value minus
estimated costs to sell, or cost.
<PAGE>
Loan Servicing and Loan Servicing Rights
The Company services real estate loans for investors in the secondary mortgage
market, which are not included in the accompanying consolidated balance sheet.
The approximate total amount of mortgages serviced amounted to $131,509,000,
$119,898,000, and $121,375,000 at December 31, 1997, 1996 and 1995,
respectively.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the following predominant risk characteristics of the underlying loans:
stated term of the loan and interest rate. The amount of impairment recognized
is the amount by which the capitalized mortgage servicing rights for a stratum
exceed their fair value.
When participating interests in loans sold have an average contractual interest
rate, adjusted for normal servicing fees, that differs from the agreed yield to
the purchaser, gains or losses are recognized equal to the present value of such
differential over the estimated remaining life of such loans. The resulting
"excess servicing receivable" or "deferred servicing revenue" is amortized over
the estimated life using a method approximating the interest method.
Quoted market prices are not available for the excess servicing receivables.
Thus, the excess servicing receivables and the amortization thereon are
periodically evaluated in relation to estimated future servicing revenues,
taking into consideration changes in interest rates, current prepayment rates,
and expected future cash flows. The Company evaluates the carrying value of the
excess servicing receivables by estimating the future servicing income of the
excess servicing receivables based on management's best estimate of remaining
loan lives and discounted at the original discount rate.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Routine
maintenance and repair expenditures are expended as incurred while significant
expenditures are capitalized. Depreciation expense is determined primarily on
the straight-line method over the following ranges of useful lives:
Buildings and improvements 10 to 40 years
Furniture, fixtures and equipment 5 to 20 years
Intangible Assets
Core deposit intangible assets and customer lists acquired are included in other
assets and are being amortized over a period of six to eight years using the
straight-line method. Amortization for 1997, 1996 and 1995 was $154,000,
$108,000, and $108,000, respectively.
Employee Benefit Plans
The Company maintains and funds a defined contribution profit-sharing plan which
covers substantially all eligible employees. The Company also adopted (effective
July 1, 1995) and maintains a 401(k) savings plan. Substantially all of the
Company's employees are eligible to participate in the profit-sharing/401(k)
savings plan on the January 1 or July 1 following their completion of six months
of service and attaining age 20 1/2.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes to the tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
<PAGE>
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Cash Flows
The Company considers amounts due from banks and federal funds sold as cash
equivalents. Generally, federal funds are sold for one-day periods.
In 1997, 1996 and 1995, the Company transferred $420,000, $858,000, and
$422,000, respectively, from its loan portfolio to foreclosed assets held for
sale.
No mortgage loans were swapped for participation certificates during 1997 or
1996. During 1995, the Company swapped $430,000 of its mortgage loans for
participation certificates of a similar amount issued by the Federal Home Loan
Mortgage Corporation. These investments do not involve the transfer of cash for
cash flow purposes.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumption used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
reporting format.
2. Restrictions on Cash and Due From Bank Accounts
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The average monthly balance required during 1997 and 1996 was
approximately $375,000. In addition, at December 31, 1997 and 1996, required
compensating reserve balances with correspondent banks were $2,003,000 and
$2,010,000, respectively.
Deposits with any one financial institution are insured up to $100,000. The
Company maintains cash and cash equivalents with certain other financial
institutions in excess of the insured amount.
<PAGE>
3. Investment Securities
Debt and equity securities have been classified in the consolidated balance
sheet according to management's intent. The carrying amount of securities and
their approximate fair values at December 31, 1997 and 1996 were as follows (in
thousands):
December 31, 1997
Available-for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. government agencies
and corporations $46,334 $120 $258 $46,196
Obligations of states and
political subdivisions 7,287 149 - 7,436
Total debt securities 53,621 269 258 53,632
Restricted equity securities 2,913 - - 2,913
Total $56,534 $269 $258 $56,545
Held-to-maturity securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. government agencies
and corporations $33,892 $260 $103 $34,049
Obligations of states and
political subdivisions 24,353 609 3 24,959
Total $58,245 $869 $106 $59,008
December 31, 1996
Available-for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. government agencies
and corporations $50,253 $100 $549 $49,804
Obligations of states and
political subdivisions 9,066 120 34 9,152
Total debt securities 59,319 220 583 58,956
Restricted equity securities 1,443 - - 1,443
Total $60,762 $220 $583 $60,399
Held-to-maturity securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. government agencies
and corporations $10,841 $ - $370 $10,471
Obligations of states and
political subdivisions 15,760 368 35 16,093
Total $26,601 $368 $405 $26,564
<PAGE>
The amortized cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Available-for-sale securities Held-to-maturity securities
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $772 $777 $ - $ -
Due after one year through five years 704 706 1,284 1,290
Due after five years through ten years 13,293 13,213 20,052 20,624
Due after ten years 41,765 41,849 36,909 37,094
Total $56,534 $56,545 $58,245 $59,008
Gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows for the years ended December 31, 1997, 1996, and 1995
(in thousands):
December 31,
Gross realized gains: 1997 1996 1995
U.S. government agencies
and corporations $116 $78 $309
Obligations of states and
political subdivisions 119 114 36
Total $235 $192 $345
Gross realized losses:
U.S. government agencies
and corporations $21 $149 $14
Obligations of states and
political subdivisions - - -
Total $21 $149 $14
Investment securities carried at $35,953,000 in 1997 and $17,144,000 in 1996
were pledged to secure governmental deposits, public deposits, etc. as required
by law. There is no significant concentration of investments in any individual
security issue (excluding U.S. government and its agencies) that was in excess
of 10% of stockholders' equity.
The unamortized premiums on mortgage-backed securities amounted to $817,000 and
$557,000 as of December 31, 1997 and 1996, respectively. The unaccreted discount
on mortgage-backed securities amounted to $14,000 and $208,000 as of December
31, 1997 and 1996, respectively.
<PAGE>
4. Loans and Leases
A summary of the outstanding loans and leases by major categories at December 31
is as follows:
1997 1996
(in thousands)
Real estate-construction $3,338 $3,214
Real estate-mortgage 99,637 84,352
Commercial and industrial 69,479 51,485
Consumer installment 40,912 45,170
Lease financing 3,711 2,588
Unearned income (6,067) (8,091)
Unearned loan fees, net (665) (898)
Total loans and leases 210,345 177,820
Allowance for possible credit losses (2,109) (1,830)
Net loans and leases $208,236 $175,990
Total nonaccrual loans outstanding at December 31, 1997 were approximately
$534,000 as compared to $615,000 at December 31, 1996. Included in nonaccrual
loans are $411,000 of impaired loans in nonaccrual status, for which $248,000
has been provided for in the allowance for possible credit losses to cover
potential losses from these impaired loans. At December 31, 1997 and 1996, there
were no outstanding commitments to lend funds to debtors with nonaccrual loans.
At December 31, 1997 and 1996, no loans were being accounted for as a troubled
debt restructuring. Accruing loans past due 90 days or more as to principal or
interest amounted to $1,453,000 and $1,593,000 at December 31, 1997 and 1996,
respectively.
Further information regarding the balance of nonaccrual loans at December 31,
1997, and related interest payment information, is as follows (in thousands):
<TABLE>
Cash Payments Received During 1997
Were Applied As Follows:
<CAPTION>
Book Contractual Recovery
Balance Balance Interest Of Prior Reduction Of
12/31/97 12/31/97 Income Charge-Off Principal
<S> <C> <C> <C> <C> <C> <C>
Contractually past due with:
Substantial performance $45 $45 $2 $ - $3
Limited performance 220 220 13 - 119
No performance 104 104 - - -
Contractually current, however:
Payment of full principal or
interest in doubt 76 76 - - 5
Other 89 89 6 - -
Total $534 $534 $21 $ - $127
</TABLE>
At December 31, 1997 and 1996, certain officers and directors and/or companies
in which they have 10% or more beneficial ownership were indebted to the Company
in the aggregate amount of $370,000 and $421,000, respectively. Such
indebtedness was incurred in the ordinary course of business, and on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons. New loans in 1997 and 1996 were $17,000 and
$363,000, respectively, while payments were $68,000 and $259,000 respectively,
during the same periods.
<PAGE>
A summary of selected loan maturities and interest sensitivity analysis at
December 31, 1997 is as follows:
Maturity Distribution
And Interest Rate Sensitivity
Within One Two-Five After Five
Year Years Years Total
(in thousands)
Real estate-construction $3 $ - $ - $3
Commercial and industrial 11 10 48 69
Total $14 $10 $48 $72
Predetermined interest rate $3 $5 $10 $18
Floating or adjustable
interest rate 11 5 38 54
Total $14 $10 $48 $72
The maturity of loans is based upon contractual terms. The Company may, however,
extend the stated maturities at current rates and terms for economic or market
reasons.
Changes in the allowance for possible credit losses for the years ended December
31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
(dollars in thousands)
Balance at beginning of period $1,830 $1,657 $1,496
Charge-offs:
Real estate-construction - - -
Real estate-mortgage 103 143 200
Commercial and industrial 106 158 294
Consumer installment 363 274 206
Lease financing 11 - -
Total 583 575 700
Recoveries:
Real estate-construction - - -
Real estate-mortgage - - -
Commercial and industrial 42 40 8
Consumer installment 40 58 43
Lease financing - - -
Total 82 98 51
Net charge-offs 501 477 649
Provision for possible credit losses 780 650 810
Balance at end of period $2,109 $1,830 $1,657
Ratio of net charge-offs during period to
average loans outstanding during period 0.26% 0.30% 0.44%
<PAGE>
5. Premises and Equipment
Premises and equipment at December 31 are summarized as follows:
1997 1996
(in thousands)
Land and land improvements $1,545 $1,420
Buildings and improvements 10,301 7,446
Furniture, fixtures and equipment 6,195 4,853
Total 18,041 13,719
Less accumulated depreciation 4,297 3,714
Net $13,744 $10,005
Depreciation expense was $932,000, $730,000, and $743,000 in 1997, 1996 and
1995, respectively.
Certain facilities and equipment are leased under agreements expiring at various
dates to the year 2003. Rental expenses on these operating leases amounted to
$439,000 in 1997, $348,000 in 1996 and $339,000 in 1995. Required future minimum
annual rentals under all such noncancelable operating leases as of December 31,
1997 are as follows (in thousands):
1998 $489
1999 519
2000 538
2001 559
2002 523
Thereafter 1,420
Total $4,048
6. Deposits
Included in interest-bearing deposits are certificates of deposit in amounts of
$100,000 or more. There are no brokered deposits included in certificates of
deposit of $100,000 or more. These certificates of deposit and their remaining
maturities at December 31 are as follows:
1997 1996
(in thousands)
Three months or less $15,217 $11,375
Over three through six months 12,956 17,847
Over six through twelve months 6,814 6,376
Over twelve months 9,032 4,642
Total $44,019 $40,240
<PAGE>
The aggregate amount of maturities for each of the five years following December
31, 1997 for all time deposits with a remaining term of over twelve months at
December 31, 1997 are as follows (in thousands):
1998 $55
1999 34,779
2000 8,430
2001 2,530
2002 1,725
Thereafter 193
Total $47,712
7. Short-term Borrowings
There were no short-term borrowings outstanding at December 31, 1997 and 1996.
The maximum amount of outstanding month-end short-term borrowings during 1996
and 1995 was $5,000,000 and $10,050,000, respectively. The approximate average
amount outstanding during 1996 and 1995 was $2,179,000 and $5,037,000,
respectively. The average interest rate on the balances during 1996 and 1995 was
5.25% and 5.39%, respectively.
The Company maintains a U.S. Treasury tax and loan note option account for the
deposit of withholding taxes, corporate income taxes and certain other payments
to the federal government. Deposits are subject to withdrawal and are evidenced
by an open-ended interest-bearing note. Borrowings under this note option
account were approximately $1.0 million at December 31, 1997 and 1996,
respectively, and approximately $100,000 at December 31, 1995. These deposits
are included in interest-bearing demand deposits for each period presented.
The Company has a flexible line of credit commitment available from the FHLB for
borrowings of up to approximately $10.0 million, expiring March 25, 1998. There
were no borrowings under this line of credit at December 31, 1997 or 1996.
8. Long-term Debt
Long-term debt at December 31 is as follows:
1997 1996
(in thousands)
Unsecured notes, payable in the
amount of $31,200 semiannually plus accrued
interest at the New York City prime
interest rate, maturing April 22, 1998 $31 $94
Collateralized borrowings, interest and
principal payable monthly; fixed interest
rate ranging from 6.40% to 6.49%, maturing
October 17, 2001 and January 22, 2002 12,625 4,929
Collateralized borrowings, interest
payable monthly and principal at
maturity; interest rates are both
fixed and variable and range from
LIBOR to 6.45% at December 31, 1997 35,000 15,000
Total $47,656 $20,023
Annual maturities of long-term debt are as follows: $12,828,000 in 1998,
$2,981,000 in 1999, $8,178,000 in 2000, $8,282,000 in 2001, $10,387,000 in 2002
and $5,000,000 in 2005. Investment securities are pledged to collateralize the
$42,597,000 in borrowings with the Federal Home Loan Bank of Pittsburgh.
<PAGE>
9. Common Stock
The Company has reserved 100,000 shares under its 1994 Stock Option Plan
("Option Plan"). Options are granted to purchase common stock at prices not less
than the fair market value of the common stock on the date of grant. Such shares
have been adjusted pursuant to paragraph 13 of the Company's 1994 Stock Option
Plan to reflect the 5% dividends payable in common stock on October 1, 1997 and
1996 and the two-for-one stock split effective November 10, 1997. The following
information has been adjusted to increase the outstanding stock options to
220,500 shares and reduce the respective exercise prices.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Option Plan. Accordingly, no compensation
expense has been recognized for the Option Plan. Had compensation cost for the
Option Plan been determined based on the fair values at the grant dates for
awards consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below for the year ended December 31, 1995:
As Reported Pro Forma
Net Income (in thousands): $2,307 $2,121
Earnings per share: $.63 $.58
For purposes of the pro forma calculations, the fair value of each option grant
is estimated using the Black-Scholes option - pricing model with the following
weighted - average assumptions for grants issued in 1995:
Dividend yield 3.80%
Expected volatility 28.14%
Risk-free interest rate 6.66%
Expected lives 10 years
A summary of the status of the Company's Option Plan as of December 31, 1997,
1996 and 1995, and changes during the years then ended, is presented below:
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding
beginning of year 220,500 $6.67 220,500 $6.67 77,175 $6.86
Granted - - 143,325 6.57
Exercised - - -
Forfeited - - -
Outstanding, end of year 220,500 $6.67 220,500 $6.67 220,500 $6.67
The following summarizes information about stock options outstanding at December
31, 1997:
Weighted-Average
Remaining
Exercise Price Number Contractual Life Options Exercisable
$6.86 77,175 6.6 years 77,175
$6.57 143,325 7.6 years 143,325
<PAGE>
The Company reserved 50,000 shares of common stock under the Company's Employee
Stock Purchase Plan, increased to 100,000 effective November 10, 1997, as a
result of the two-for-one stock split. Under the terms of the plan, employees
may purchase common stock of the Company at 85% of the fair market value.
Employees pay for their stock purchases through periodic payroll deductions
subject to a limit of 10% of base pay. During 1997, 1996 and 1995, 11,028
(adjusted), 5,462 and 2,099 shares, respectively, were purchased under the plan.
A Dividend Reinvestment and Stock Purchase Plan was implemented during the year
ended December 31, 1994 to provide stockholders an opportunity to automatically
reinvest their dividends in shares of common stock. Three-hundred thousand
shares of common stock are reserved under this plan. The price per share of
common stock purchased from the Company is 95% of the fair market value on the
quarterly dividend payment date. During the years ended December 31, 1997, 1996
and 1995, 33,625 (adjusted), 16,053 and 16,809 shares, respectively, were issued
under this plan.
10. Income Taxes
The following temporary differences gave rise to the deferred tax asset included
in other assets at December 31, 1997 and 1996 (in thousands):
1997 1996
Deferred tax assets:
Unrealized losses on available-for-sale
securities $ - $123
Allowance for possible credit losses 473 361
Loan fees and costs 130 231
Deferred compensation 156 104
Amortization of core deposits 21 -
Foreclosed assets held for sale 34 -
Total 814 819
Deferred tax liabilities:
Unrealized gains on available-for-
sale securities (4) -
Depreciation (228) (199)
Bond accretion (21) (23)
Leasing (194) (166)
Total (447) (388)
Deferred tax asset, net $367 $431
The provision for income taxes is comprised of the following components (in
thousands):
Year Ended December 31,
1997 1996 1995
Current $1,167 $1,075 $627
Deferred (62) 45 8
Total $1,105 $1,120 $635
<PAGE>
The following tabulation presents a reconciliation of the expected provision for
income taxes (in thousands), determined by using the current federal income tax
rate of 34% in 1997, 1996, 1995 to the actual provision for income taxes
reflected in the accompanying consolidated financial statements.
Year Ended December 31,
1997 1996 1995
Provision at the expected statutory rate $1,542 $1,411 $1,000
Effect of tax-exempt income (537) (322) (323)
Other items 100 31 (42)
Provision for income taxes $1,105 $1,120 $635
11. Employee Benefit Plans
The Company has a profit-sharing plan for the benefit of its employees.
Contributions to the profit-sharing plan are made at the discretion of the Board
of Directors, funded currently, and amounted to $251,000 in 1997, $214,000 in
1996, and $181,000 in 1995.
The Company also maintains a 401(k) savings plan. The Company contributes 50% of
the employee contribution up to 6% of compensation. The Company's 1997, 1996 and
1995 contributions to this plan were $70,000, $58,000 and $25,000, respectively.
12. Earnings Per Share
Earnings per share (EPS) is computed using the weighted-average number of shares
of common stock outstanding after giving effect to the 5% stock dividends issued
on October 1, 1997 and 1996, the two-for-one stock split effective November 10,
1997, and the assumed exercise of stock options.
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," which changed the computation of
earnings per share ("EPS") and requires presentation of two new amounts, basic
and diluted EPS, and additional informational disclosures. The adoption of SFAS
No. 128 is required for all reporting periods after December 15, 1997 and
requires restatement for all prior periods.
The adoption of SFAS No. 128 had no effect on 1996 and 1995 EPS.
<PAGE>
The following data shows the amounts used in computing earnings per share and
the effects on income and the weighted average number of shares of dilutive
potential common stock for the years ended December 31, 1997, 1996 and 1995. The
common shares denominators for 1996 and 1995 have been adjusted for the 1997 5%
stock dividend and two-for-one stock split. The 1995 common stock denominator
has also been adjusted for the 1996 5% stock dividend.
<TABLE>
<CAPTION>
Income Common Shares
Numerator Denominator EPS
<S> <C> <C> <C>
1997
Basic EPS $3,431,000 3,748,000 $0.92
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 220,500
Hypothetical share repurchase at $17.75 (82,500)
Diluted EPS $3,431,000 3,886,000 $0.88
1996
Basic EPS $3,031,000 3,676,400 $0.82
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 220,500
Hypothetical share repurchase at $6 98 (210,900)
Diluted EPS $3,031,000 3,686,000 $0.82
1995
Basic EPS $2,307,000 3,625,700 $0.63
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 220,500
Hypothetical share repurchase at $7.17 (205,200)
Diluted EPS $2,307,000 3,641,000 $0.63
</TABLE>
<PAGE>
13. Regulatory Matters
The Company may not pay dividends in any year in excess of the total of the
current year's net income and the retained net income of the prior two years
without the approval of the Federal Reserve Board. Accordingly, Company
dividends in 1998 may not exceed $3,887,000 plus Company net income for 1998.
Similar banking regulations limit the amount of dividends that may be paid to
the Company by its bank subsidiary without prior approval of the Comptroller of
the Currency.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Company meets all capital adequacy requirements to which it is subject.
To be categorized as well capitalized, the bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below. There are no conditions or events since that notification that
management believes have changed the institution's category. The Company's
actual capital amounts (in thousands) and ratios are also presented in the
table. No amounts were deducted from capital for interest-rate risk in either
year.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $37,273 18.12% $16,500 8.0% $20,600 10.0%
Tier I Capital
(to Risk Weighted Assets) $35,232 17.12% $8,250 4.0% $12,400 6.0%
Tier I Capital
(to Average Assets) $35,232 10.26% $13,800 4.0% $17,200 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $22,417 12.72% $14,100 8.0% $17,600 10.0%
Tier I Capital
(to Risk Weighted Assets) $20,650 11.72% $7,050 4.0% $10,570 6.0%
Tier I Capital
(to Average Assets) $20,650 7.46% $11,100 4.0% $13,850 5.0%
</TABLE>
<PAGE>
14. Off-Balance Sheet Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit, interest rate or liquidity risk in excess of the amount recognized in
the consolidated balance sheet. The contract amount of these instruments
expresses the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss from nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit and financial guarantees written is represented by the contractual
amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with off-balance sheet credit risk.
The financial instruments whose contract amounts represent credit risk at
December 31 were as follows (in thousands):
1997 1996
Commitments to extend credit $16,985 $16,458
Standby letters of credit $1,226 $953
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company, on an
extension of credit is based on management's credit assessment of the
counterparty.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. Those guarantees are
issued primarily to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
15. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and cash equivalents approximate those assets' fair
values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgements regarding future expected
loss experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value. Mortgage loans held for resale
are valued based on available market quotations.
<PAGE>
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates its fair value.
Short-term borrowings and notes payable: The carrying amounts of short-term
borrowings and notes payable approximate their fair values.
Other liabilities: Commitments to extend credit were evaluated and fair value
was estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates.
Financial Assets and Liabilities
The following represents the carrying values and estimated fair values as of
December 31:
1997 1996
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
(in thousands)
FINANCIAL ASSETS:
Cash and cash equivalents $17,109 $17,109 $15,971 $15,971
Investment securities 114,790 115,553 87,000 86,963
Net loans 208,236 209,254 175,990 181,587
Accrued interest receivable 3,005 3,005 2,349 2,349
FINANCIAL LIABILITIES:
Deposits $280,450 $282,614 $253,196 $254,536
Accrued interest payable 2,975 2,975 2,416 2,416
Short-term borrowings - - - -
Securities sold under agreements
to repurchase 200 200 300 300
Long-term debt 47,656 47,704 20,023 19,652
Commitments 18,211 18,211 17,411 17,411
16. Condensed Financial Information -Parent Company Only
Condensed parent company only financial information is as follows (in
thousands):
Condensed Balance Sheet
December 31,
1997 1996
Assets:
Cash $ - $ -
Investment in subsidiary 35,815 21,172
Total Assets $35,815 $21,172
Liabilities and Stockholders' Equity:
Stockholders' equity $35,815 $21,172
<PAGE>
Condensed Statement of Income
Year Ended December 31,
1997 1996 1995
Earnings of Subsidiary:
Received as dividends $1,369 $1,287 $972
Undistributed 2,062 1,744 1,335
Net Income $3,431 $3,031 $2,307
Condensed Statement of Cash Flows
Year Ended December 31,
1997 1996 1995
Operating Activities:
Net income $3,431 $3,031 $2,307
Less undistributed earnings
of subsidiary 2,062 1,744 1,335
Net cash provided by
operating activities 1,369 1,287 972
Investing Activities:
Investment in subsidiary (12,349) (445) (391)
Financing Activities:
Cash dividends paid
to stockholders (1,369) (1,186) (972)
Issuance of common stock 12,349 344 283
Net cash used in
financing activities 10,980 (842) (689)
Increase (decrease) in Cash - - (108)
Cash at Beginning of Year - - 108
Cash at End of Year $ - $ - $ -
17. Contingencies
On February 5, 1996, a complaint was filed against LA Bank ("the Bank") and
certain directors and officers of the Bank. The plaintiffs demanded monetary and
punitive damages and the additional payment of plaintiffs' attorneys' fees and
disbursements and other court-related costs. Counsel representing the Company
and the Bank are not currently able to provide an evaluation of the likelihood
of an unfavorable outcome since an unfavorable outcome is neither probable nor
remote. In addition, an estimate of the loss or range of loss, in the event of
an unfavorable outcome, has not been provided since the probability of the
inaccuracy of such an estimate is more than slight. No provision for any
liability has been made in the accompanying financial statements as of December
31, 1997 and 1996.
<PAGE>
18. Significant Group Concentrations of Credit Risk
Most of the Company's business activity is with customers located within
Pennsylvania. Investments in state and municipal securities typically involve
governmental entities within the Company's market area. Concentrations of
credit, as defined by the Company's loan policy, are groupings of loans with a
common repayment source that exceed 25% of the Company's capital. As of December
31, 1997, the Company had no such credit concentrations.
The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers. The Company, as a matter of policy, does not
extend credit in excess of 50% of the Bank's regulatory legal lending limit to
any single borrower or group of related borrowers.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
19. Selected Quarterly Financial Data (Unaudited) (in thousands, except per
share data)
Quarter Ending
March 31, June 30, Sept 30, Dec 31,
1997 1997 1997 1997
Interest income $5,820 $6,049 $6,383 $6,398
Interest expense 3,096 3,308 3,506 3,615
Net interest income 2,724 2,741 2,877 2,783
Provision for possible credit losses 125 255 350 50
Investment security gains (losses), net (8) (1) 89 134
Net income 730 806 861 1,034
Earnings per share - basic* 0.20 0.21 0.23 0.28
Earnings per share - diluted* $0.19 $0.20 $0.22 $0.27
Quarter Ending
March 31, June 30, Sept 30, Dec 31,
1996 1996 1996 1996
Interest income $4,740 $5,007 $5,177 $5,351
Interest expense 2,354 2,505 2,563 2,761
Net interest income 2,386 2,502 2,614 2,590
Provision for possible credit losses 115 135 175 225
Investment security gains (losses), net (48) 1 90 -
Net income 703 798 777 753
Earnings per share - basic* 0.19 0.22 0.21 0.20
Earnings per share - diluted* $0.19 $0.22 $0.21 $0.20
*Reflects adjustment for 5% stock dividends issued on October 1, 1997 and 1996,
and a two-for-one stock split effective November 10, 1997.
<PAGE>
Independent Auditor's Report
Board of Directors and Stockholders
Lake Ariel Bancorp, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Lake Ariel
Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lake Ariel Bancorp,
Inc. and Subsidiary as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, in
1997 the Company changed its method of computing earnings per share by
adopting Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
Parente, Randolph, Orlando, Carey & Associates
Wilkes-Barre, Pennsylvania
January 30, 1998
<PAGE>
INVESTOR INFORMATION
MARKET INFORMATION
The Company's common stock has been listed on the Nasdaq National Market since
November 21, 1997, and was previously listed on the Nasdaq Small-Cap Market
since December 9, 1993. "The Nasdaq Stock Market" or "Nasdaq" is a
highly-regulated electronic securities market comprised of competing Market
Makers whose trading is supported by a communications network linking them to
quotation dissemination, trade reporting, and order execution systems. This
market also provides specialized automation services for screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational services tailored to the needs of the securities industry,
investors and issuers. The Nasdaq Stock Market consists of two distinct market
tiers: the Nasdaq National Market(R) and the Nasdaq SmallCap Markets. The Nasdaq
Stock Market is operated by the Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National Association of Securities Dealers, Inc. The Nasdaq
National Market symbol for the Company's common stock is "LABN." At December 31,
1997, the total number of holders of record of the common stock was
approximately 1,200.
The table below presents the high and low bid prices reported for the Common
Stock and the cash dividends declared on such Common Stock for the periods
indicated. The range of high and low prices is based on trade prices reported on
the Nasdaq Small-Cap Market, except for the fourth quarter of 1997. Market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not necessarily reflect actual transactions. On December 31,
1997, the closing price of a share of Common Stock on the Nasdaq National Market
was $17.75. All prices and dividends have been restated to reflect the 5% stock
dividends paid in October 1997 and 1996, and the two-for-one stock split
effective on November 10, 1997.
Year Quarter High Low Dividends Declared
1997 4th $22.00 $13.90 $0.13
3rd 14.05 9.50 0.09
2nd 9.75 9.50 0.08
1st 11.30 9.75 0.08
1996 4th 12.15 7.55 0.11
3rd 8.20 7.20 0.08
2nd 7.60 6.45 0.08
1st 7.70 6.70 0.08
1995 4th 6.80 6.70 0.09
3rd 7.60 6.25 0.07
2nd 7.50 7.15 0.06
1st 7.95 7.40 0.06
MARKET MAKERS
Herzog, Heine, Geduld, Inc. Janney Montgomery Scott, Inc. Ryan, Beck and Co.
26 Broadway 1801 Market Street 80 Main Street
New York, NY 10004 Philadelphia, PA 19103 West Orange,NJ 07052
1-800-221-3600 1-800-526-6397 1-800-325-7926
M.H. Myerson & Co., Inc. Legg Mason Wood Walker, Inc Wheat First Union
525 Washington Boulevard 330 Montage Mountain Road 901 E. Byrd Street
P.O. Box 260 Scranton, PA 18507 P.O. Box 1357
Jersey City, NJ 07303 1-800-346-4346 Richmond, VA 23219
(212)425-1212 804-649-2311
<PAGE>
TRANSFER AGENT American Stock Transfer & Trust Company, 40 Wall Street, 46th
Floor, New York, New York 10005. Stockholders who may have questions regarding
their stock ownership should contact Shareholder Services at 1- 800-937-5449.
DIVIDEND CALENDAR Dividends on Lake Ariel Bancorp's common stock, if approved by
the Board of Directors, are customarily paid on March 15, June 15, September 15,
and December 15.
INDEPENDENT AUDITORS CORPORATE COUNSEL
Parente, Randolph, Orlando, Oliver, Price & Rhodes
Carey & Associates Suite 300
46 Public Square 220 Penn Avenue
Wilkes-Barre, PA 18701 Scranton, PA 18501
(717)820-0100 (717)343-6581
AUTOMATIC DIVIDEND REINVESTMENT PLAN Common stockholders of Lake Ariel
Bancorp, Inc. may have their dividends reinvested automatically in
Lake Ariel common shares at a 5% discount from the "Fair Market Value"
on the quarterly dividend payment date. Stockholders participating in
the plan may also purchase, per quarter, up to $2,500 in additional
shares at the price per share determined on the quarterly dividend
payment date. There are no brokerage fees, commissions or service
charges on any stock purchases made by plan participants. Information
regarding the plan is available by contacting American Stock Transfer
and Trust Company, Dividend Reinvestment Department, 40 Wall Street,
46th Floor, New York, New York 10005, 1-800-278-4353.
DIVIDEND DIRECT DEPOSIT Common stockholders of Lake Ariel Bancorp, Inc. may have
their dividends deposited electronically into their bank account by contacting
Shareholder Services, American Stock Transfer & Trust Company, 40 Wall Street,
46th Floor, New York, New York 10005, 1-800-937-5449.
SEC REPORTS AND ADDITIONAL INFORMATION Upon written request of any stockholder,
investor or analyst, a copy of the Corporation's report on Form 10-K for its
fiscal year ended December 31, 1997, including financial statements and the
schedules thereto, required to be filed with the Securities and Exchange
Commission, may be obtained, without charge, by contacting the Chief Financial
Officer, Lake Ariel Bancorp, Inc., 409 Lackawanna Avenue, Suite 201, Scranton,
PA 18503, (717)343-8200.
INTERNET ADDRESS ON THE WORLD WIDE WEB
http://www.labank.com
E.MAIL ADDRESS
[email protected]
<PAGE>
<TABLE>
<CAPTION>
Administration Division
<S> <C> <C>
Lake Ariel Bancorp, Inc.
Officers Karen T. Pasternak Gary S. Lavelle
Bruce D. Howe Sr. Vice President Assistant Vice President
President Cynthia A. Smaniotto John J. Morgan
John G. Martines Sr. Vice President Assistant Vice President
Chief Executive Officer Kathy Enslin Jennifer K. Nichols
Louis M. Martarano Vice President & Cashier Assistant Vice President
Vice President & Assistant Sec. Gregory G. Gula Jeri S. Prussia
Joseph J. Earyes, CPA Vice President Assistant Vice President
Vice President & Treasurer Daniel J. Santaniello Bonnie Robinson
Donald E. Chapman Vice President Assistant Vice President
Secretary Salvatore R. DeFrancesco, Jr., CPA Marcy Swingle
Assistant Vice President & Controller Assistant Vice President
Timothy S. Dunn Lynn M. Thiel
Assistant Vice President Assistant Vice President
Directors of Kathleen Horan & Internal Auditor
Corporation and Bank Assistant Vice President Susan T. Lenko
Donald E. Chapman Assistant Cashier
Peter O. Clauss
Arthur M. Davis Retail Division
William C. Gumble
Paul D. Horger, Esq. John Foley William Kerstetter
Bruce D. Howe Sr. Vice President Vice President
John G. Martines Thomas Byrne Doris Hellerman
Harry F. Schoenagel Vice President Assistant Vice President
Theodore Daniels Penny Cola
Vice President Assistant Cashier
Thomas Dziak
Vice President
Lake Ariel Branch Milford Township
Treva J. Day Cynthia Halliday
LA Bank, N.A. Assistant Vice President & Branch Manager
Executive Officers Branch Manager
Bruce D. Howe Clarks Green Branch
Chairman Ellen Ball
John G. Martines Mt. Cobb Branch Branch Manager
President and Chief Exec.officer Daniel Roberts
Louis M. Martarano Branch Manager The Mall At Steamtown Branch
Executive Vice President & Patricia A. Jenkins
Chief Operating Officer Greene-Dreher Branch Branch Manager
Joseph J. Earyes, CPA Mary Ellen Bentler
Executive Vice President & Branch Manager Lords Valley Branch
Chief Financial Officer Laura Schultz
Donald E. Chapman Hamlin Corners Branch Branch Manager
Secretary Ann O'Reilly
Branch Manager Carbondale Branch
Sheila Dick
Eynon Branch Branch Manager
LA Lease, Inc. Peter Misura
Officers Assistant Vice President & Lake Wallenpaupack Branch
Bruce D. Howe Branch Manager Beverly Simons
Chairman Autumn Molinaro Branch Manager
John G. Martines Assistant Branch Manager
President and Chief Exec.Officer Milford Branch
Thomas Byrne Keyser Valley Branch John Gouse
Vice President Doreen Swingle Assistant Vice President &
Joseph J. Earyes, CPA Branch Manager Branch Manager
Secretary & Treasurer
<PAGE>
Ariel Financial Services, Inc. Mountainhome Branch
Officers Marilynn Palmer
Bruce D. Howe Branch Manager
Chairman
John G. Martines Scranton Branch
President and Chief Exec.Officer Patricia A. Jenkins
Joseph J. Earyes, CPA Branch Manager
Vice President
Louis M. Martarano
Secretary and Treasurer
Mortgage Loan Originators
Peter Bilyk
Kathy Smith
Lori A. Rudalavage
Steve Zazzera
</TABLE>
<PAGE>
OFFICE LOCATIONS
CORPORATE ADDRESSES BRANCH ADDRESSES
Lake Ariel Bancorp, Inc. Lake Ariel Clarks Green
P.O. Box 67 P.O. Box 67 318 East Grove Street
Route 191 Route 191 Clarks Green, PA 18411
Lake Ariel, PA 18436 Lake Ariel, PA 18436 (717)587-0505
(717)698-5695 (717)698-5695
The Mall At Steamtown
LA Bank, N.A. Mt. Cobb 220 The Mall at Steamtown
P.O. Box 67 Routes 348 & 247 Scranton, PA 18503
Route 191 Lake Ariel, PA 18436 (717)341-8000
Lake Ariel, PA 18436 (717)689-2694
1-800-4LA-BANK Lords Valley
(Pennsylvania only) Greene-Dreher Lords Valley Shop Plaza
Route 191 Route 739, South
LA Bank, N.A. Newfoundland, PA 18445 Lords Valley, PA 18428
Financial Center (717)676-4767 (717)775-8800
409 Lackawanna Ave, St. 201
Scranton, PA 18503-2045 Hamlin Corners Carbondale
(717)343-8200 Route 191 & 590 93 Brooklyn Street
Hamlin, PA 18427 Ames Shopping Plaza
LA Lease Inc. (717)689-0944 Carbondale, PA 18407
P.O. Box 67 (717)282-7400
Route 191 Eynon
Lake Ariel, PA 18436 685 Scrant-Carbale Hwy. Lake Wallenpaupack
(717)698-5695 Eynon, PA 18403-1022 HC 6 Box 6931
(717)876-1637 / 342-2242 Hawley, PA 18428
(717)226-5300
Ariel Financial Services,Inc. Keyser Valley
P.O. Box 67 130 N. Keyser Avenue Milford
Route 191 Scranton, PA 18504 214 W. Harford Street
Lake Ariel, PA 18436 (717)341-8100 Milford, PA 18337
(717)698-8400 (717)296-0200
(717)876-8400 Milford Township
Routes 6 & 209 Mountainhome
Milford, PA 18337 Route 390 Barrett Twp.
(717)296-5600 Mountainhome, PA 18342
(717)595-6400
Scranton
409 Lackawanna Avenue,
Suite 101
Scranton, PA 18503-2049
(717)341-8200
Ariel Financial Services, Inc.
(2 Locations)
Lake Ariel Office Eynon Office
P.O. Box 67 685 Scranton-Carbondale Hwy.
Route 191 Eynon, PA 18403-1022
Lake Ariel, PA 18436 (717)876-8400
(717)698-8400
<PAGE>
Business Development Boards
Lackawanna Region Lake Region Pocono Region
Martin Andrews Joseph P. Ceresko T. Scott Brown
Eli Arenberg Edward Cimoch Victor Decker, Esq.
Francis Bianconi Forrest Compton Robert E. Derse
Ervin Brong Joseph M. Dombrowski Peter Helms
Carol Chisdak John W. Donaghy Donald W. Henderson M.D.
Harry T. Coleman, Esq. Jeanne Heater Douglas J. Jacobs, Esq.
Dominick Cruciani, M.D. Harry Howell Joseph F. Kameen, Esq.
Gilbert Hoban Andrew J. Krompasky Michelle Koziara
Joseph Karam Kerry Nix Robert Lankenau
Kevin K. Kearney James R. Shorten Ellen McDermott
Ron Leas Brian Smolsky Dr. Michael Newmark
Robert A. Mazzoni John E. Spewak Edward S. Nikles
Mark Suchter Alice Trunzo Robert Pityo
John J. Vanston Joanne C. Valanda Edmund J. Riess, Jr.
Joseph Zandarski, PhD., CPA Michael Walker, Esq. William Sanquilly
Sandor Zangardi Louis J. Zefran Edward J. Shafer
George Schmitt
Thomas H. Wiss, IV
David Zeiler
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF BANCORP
Direct Subsidiary: LA Bank, National Association, chartered under the laws of
the United States of America, a national banking association.
Indirect Subsidiaries: -LA Lease, Inc., incorporated under the laws of the
Commonwealth of Pennsylvania, a Pennsylvania business corporation and
wholly-owned subsidiary of LA Bank, National Association.
-Ariel Financial Services, Inc., incorporated under the laws
of the Commonwealth of Pennsylvania, a Pennsylvania business
corporation and wholly-owned subsidiary of LA Bank, National
Association.
EXHIBIT 99A
SELECTED 5-YEAR FINANCIAL DATA
AND SELECTED YEAR-END BALANCES
<PAGE>
<TABLE>
LAKE ARIEL BANCORP, INC.
SELECTED FINANCIAL DATA
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $24,650 $20,275 $18,548 $14,157 $10,898
Interest expense 13,525 10,183 9,514 5,967 4,269
Net interest income 11,125 10,092 9,034 8,190 6,629
Provision for possible credit losses 780 650 810 375 640
Other operating income 3,401 2,706 2,481 1,679 2,303
Other operating expenses 9,210 7,997 7,763 6,831 5,591
Income before income taxes 4,536 4,151 2,942 2,663 2,658(2)
Provision for income taxes 1,105 1,120 635 535 606
Net income 3,431 3,031 2,307 2,128 2,052
Earnings per share - Basic(1) .92 .82 .63 .59 .76
Earnings per share - Diluted(1) .88 .82 .63 .59 .76
Dividends per share .38 .32 .27 .25 .19
<FN>
- -------------------------
(1) Reflects adjustment for 5% stock dividends issued on October 1, 1997 and
1996, and two-for-one stock split effective November 10, 1997.
(2) Reflects adjustment for cumulative effect of a change in accounting for
income taxes.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year-End Balances
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $368,073 $297,906 $251,859 $236,125 $169,189
Investment securities 114,790 87,000 73,169 76,677 40,151
Loans and leases, net 208,236 175,990 152,306 135,018 109,302
Deposits 280,450 253,196 208,759 192,187 146,054
Long-term debt 47,656 20,023 15,156 15,219 281
Stockholders= equity 35,815 21,172 19,509 15,799 16,272
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000723878
<NAME> Lake Ariel Bancorp, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,288
<INT-BEARING-DEPOSITS> 120
<FED-FUNDS-SOLD> 7,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,545
<INVESTMENTS-CARRYING> 58,245
<INVESTMENTS-MARKET> 59,008
<LOANS> 210,345
<ALLOWANCE> 2,109
<TOTAL-ASSETS> 368,073
<DEPOSITS> 280,450
<SHORT-TERM> 200
<LIABILITIES-OTHER> 3,952
<LONG-TERM> 47,656
0
0
<COMMON> 956
<OTHER-SE> 34,859
<TOTAL-LIABILITIES-AND-EQUITY> 368,073
<INTEREST-LOAN> 16,907
<INTEREST-INVEST> 7,470
<INTEREST-OTHER> 273
<INTEREST-TOTAL> 24,650
<INTEREST-DEPOSIT> 10,395
<INTEREST-EXPENSE> 3,130
<INTEREST-INCOME-NET> 11,125
<LOAN-LOSSES> 780
<SECURITIES-GAINS> 214
<EXPENSE-OTHER> 9,210
<INCOME-PRETAX> 4,536
<INCOME-PRE-EXTRAORDINARY> 3,431
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,431
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 0
<LOANS-NON> 534
<LOANS-PAST> 1,453
<LOANS-TROUBLED> 1,987
<LOANS-PROBLEM> 2,100
<ALLOWANCE-OPEN> 1,830
<CHARGE-OFFS> 583
<RECOVERIES> 82
<ALLOWANCE-CLOSE> 2,109
<ALLOWANCE-DOMESTIC> 2,109
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,109
</TABLE>
