SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file Number: 2-85306
Lake Ariel Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-2244948
(I.R.S. Employer Identification No.)
Post Office Box 67
Lake Ariel, Pennsylvania 18436
(Address of principal executive offices)
(Zip Code)
(717) 698-5695
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2)has been subject to such filing requirements for the past 90
days. Yes X No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 4,807,908 shares of
common stock, par value $.21 per share, as of November 6, 1998.
1
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1998
INDEX
Page Number
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997............................................... 3
Consolidated Statement of Income for the nine
months ended September 30, 1998 and 1997............................ 4
Consolidated Statement of Comprehensive Income for the nine
months ended September 30, 1998 and 1997............................ 5
Consolidated Statement of Cash Flows for the nine
months ended September 30, 1998 and 1997............................ 6
Notes to Consolidated Financial Statements.......................... 8
Item 2. Management's Discussion and Analysis or
Plan of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 21
Part II - Other Information
Item 1. Legal Proceedings................................................. N/A
Item 2. Changes in Securities............................................. N/A
Item 3. Defaults Upon Senior Securities................................... N/A
Item 4. Submission of Matters to a Vote of Security
Holders...................................................... N/A
Item 5. Other Information.................................................. 26
Item 6. Exhibits and Reports on Form 8-K................................... 37
Signatures......................................................... 38
2
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
(in thousands) (in thousands)
ASSETS
Cash and cash equivalents ......................... $ 20,016 $ 17,109
Available-for-sale securities ..................... 64,487 56,545
Held-to-maturity securities (fair value of $105,674
and $59,008, respectively) ........................ 104,471 58,245
Loans and leases .................................. 221,362 216,465
Mortgage loans held for resale .................... 5,412 621
Less unearned income and loan fees ............. (5,928) (6,741)
Less allowance for possible credit losses ...... (1,971) (2,109)
--------- ---------
Net loans and leases ............... 218,875 208,236
Premises and equipment, net ....................... 16,544 13,744
Accrued interest receivable ....................... 3,539 3,005
Foreclosed assets held for sale ................... 358 523
Life insurance cash surrender value ............... 8,490 7,891
Other assets ...................................... 7,926 2,775
--------- ---------
TOTAL ASSETS ....................... $ 444,706 $ 368,073
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ............................ $ 50,003 $ 39,689
Interest-bearing:
Demand ............................. 41,703 31,767
Savings ............................ 39,277 36,437
Time ............................... 132,228 128,538
Time $100,000 and over ............. 39,640 44,019
--------- ---------
Total Deposits ..................... 302,851 280,450
Accrued interest payable .......................... 3,222 2,975
Federal funds purchased ........................... -- --
Securities sold under agreements to repurchase .... 2,127 200
Long-term debt .................................... 96,188 47,656
Other liabilities ................................. 2,025 977
--------- ---------
Total Liabilities .................. 406,413 332,258
--------- ---------
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
4,579,295 shares in 1998 and 4,548,383 in 1997 .. 962 956
Capital surplus ................................... 26,107 25,717
Retained earnings ................................. 10,955 9,135
Net unrealized gains (losses) on
available-for-sale securities ................... 269 7
--------- ---------
Total Stockholders' Equity ......... 38,293 35,815
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ............. $ 444,706 $ 368,073
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases ......................................... $13,765 $12,427 $ 4,663 $ 4,388
Investment Securities
Taxable .............................................. 6,256 4,340 2,045 1,477
Exempt from federal income taxes ..................... 1,282 1,168 446 390
Dividends ............................................ 265 114 145 51
------- ------- ------- -------
Total Investment Securities Income ................ 7,803 5,622 2,636 1,918
------- ------- ------- -------
Deposits in banks ........................................ 8 7 1 2
Federal funds sold ....................................... 116 196 71 75
------- ------- ------- -------
TOTAL INTEREST INCOME ............................. 21,692 18,252 7,371 6,383
------- ------- ------- -------
INTEREST EXPENSE:
Deposits ................................................. 8,077 7,572 2,664 2,686
Long-term debt ........................................... 4,180 2,262 1,462 775
Federal funds purchased .................................. 35 20 2 10
Short-term borrowings .................................... 23 45 8 31
Securities sold under agreements to repurchase ........... 44 11 25 4
------- ------- ------- -------
TOTAL INTEREST EXPENSE ............................. 12,359 9,910 4,161 3,506
------- ------- ------- -------
NET INTEREST INCOME ...................................... 9,333 8,342 3,210 2,877
PROVISION FOR POSSIBLE
CREDIT LOSSES .......................................... 490 730 165 350
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES ............................. 8,843 7,612 3,045 2,527
------- ------- ------- -------
OTHER OPERATING INCOME:
Loan origination fees .................................... 67 168 -- 19
Customer service charges and fees ........................ 1,114 905 439 304
Mortgage servicing fees .................................. 220 258 72 90
Investment security gains (losses), net .................. 80 80 2 89
Gain (loss) on sale of loans, net ........................ 427 185 169 63
Gain (loss) on sale of assets, net ....................... 260 -- (5) --
Other income ............................................. 1,065 728 389 332
------- ------- ------- -------
TOTAL OTHER OPERATING INCOME ...................... 3,233 2,324 1,066 897
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Salaries and benefits .................................... 3,663 3,112 1,317 1,062
Occupancy expense ........................................ 1,120 986 368 315
Equipment expense ........................................ 880 657 287 214
Advertising .............................................. 286 177 115 49
Other expenses ........................................... 2,089 1,842 701 673
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES .................... 8,038 6,774 2,788 2,313
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES ............................................ 4,038 3,162 1,323 1,111
PROVISION FOR INCOME TAXES ............................... 930 765 300 250
------- ------- ------- -------
NET INCOME ............................................... $ 3,108 $ 2,397 $ 1,023 $ 861
======= ======= ======= =======
Earnings per share-basic*: ............................... $ 0.65 $ 0.61 $ 0.21 $ 0.22
======= ======= ======= =======
Earnings per share-diluted*: ............................. $ 0.64 $ 0.60 $ 0.21 $ 0.21
======= ======= ======= =======
Dividends per share: ..................................... $ 0.28 $ 0.25 $ 0.10 $ 0.09
======= ======= ======= =======
Fully diluted weighted average no. of shares outstanding*: 4,911 4,036 4,911 4,036
</TABLE>
*Reflects adjustment for 5% stock dividend issued on October 1, 1998 and 1997
and a two-for-one stock split effective November 10, 1997. The accompanying
notes are an integral part of the consolidated financial statements.
4
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
NET INCOME ....................................... $ 3,108 $ 2,397 $ 1,023 $ 861
Other comprehensive income (loss):
Unrealized holding gains on
available-for-sale securities
Gain (losses) arising during the period .... 477 421 521 354
Reclassification adjustment ................ (80) (80) (2) (89)
------- ------- ------- -------
Other comprehensive income (loss)
before income taxes ............................ 397 341 519 265
Income taxes related to other comprehensive income 135 116 177 91
------- ------- ------- -------
Other comprehensive income (loss),
net of income taxes ............................ 262 225 342 174
------- ------- ------- -------
COMPREHENSIVE INCOME ............................. $ 3,370 $ 2,622 $ 1,365 $ 1,035
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 3,108 $ 2,397
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses .................. 452 730
Depreciation, amortization, and accretion ............. 1,096 647
Deferred income taxes ................................. 15 --
Investment security (gain) loss, net .................. (78) (80)
(Gain) on sale of loans ............................... (427) (185)
Loss on sale of foreclosed assets ..................... 72 100
(Gain) on sale of credit card portfolio ............... (337) --
(Gain) loss on sale of equipment ...................... 4 (5)
(Increase) decrease in mortgage loans
held for resale ..................................... (4,791) (3,681)
(Increase) decrease in accrued interest receivable .... (534) (746)
Increase (decrease) in accrued interest payable ....... 247 728
(Increase) decrease in other assets ................... (4,495) (6,373)
Increase (decrease) in other liabilities .............. 1,048 530
-------- --------
NET CASH (USED) BY
OPERATING ACTIVITIES ..................................... (4,620) (5,938)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities and paydowns .................. 12,884 2,911
Purchases .............................................. (59,273) (34,180)
Available-for-sale securities:
Proceeds from maturities and paydowns .................. 3,375 3,133
Proceeds from sales .................................... 18,869 10,737
Purchases .............................................. (30,555) (16,966)
(Increase) of life insurance policies cash surrender value (599) --
(Increase) decrease in loans and leases .................. (33,520) (41,360)
Purchases of premises and equipment ...................... (3,746) (2,860)
Proceeds from sale of loans .............................. 25,290 20,000
Proceeds from sale of credit card portfolio .............. 2,453 --
Proceeds from sale of foreclosed assets .................. 334 445
Proceeds from sale of equipment .......................... 37 5
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................... (64,451) (58,135)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ...................... 22,401 24,941
Increase (decrease) in Federal funds purchased ........... -- 4,800
Increase (decrease) in short-term borrowings ............. -- 4,500
Increase (decrease) in securities sold under
agreements to repurchase .............................. 1,926 (100)
Proceeds from long-term debt ............................. 50,658 30,000
Principal payments on long-term debt ..................... (2,125) (1,695)
Proceeds from issuance of common stock ................... 396 316
Cash dividends ........................................... (1,278) (921)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .................................... 71,978 61,841
-------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................................ 2,907 (2,232)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ....................................... 17,109 15,971
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 20,016 $ 13,739
======== ========
CASH PAID DURING THE YEAR FOR:
Interest ................................................ $ 12,111 $ 9,182
======== ========
Income taxes ............................................ $ 800 $ 552
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-Q
Part I - Financial Information (Cont'd)
Item 1. Financial Statements (Cont'd)
Notes to Consolidated Financial Statements
The financial information as of December 31, 1997 is audited and for the interim
periods ended September 30, 1998 and 1997 included herein is unaudited; however,
such information reflects all adjustments consisting of only normal recurring
adjustments, which are, in the opinion of management, necessary to a fair
presentation of the results for the interim periods.
1. REPORTING AND ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accounting and financial reporting policies of Lake Ariel
Bancorp, Inc. and its subsidiary conform to generally accepted accounting
principles and to general practice within the banking industry. The consolidated
statements include the accounts of Lake Ariel Bancorp, Inc. and its wholly owned
subsidiary, LA Bank, N.A. (Bank) including its subsidiaries, LA Lease, Inc. and
Ariel Financial Services, Inc. (collectively, Company). All material
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim financial statements are unaudited. In management's
opinion, the consolidated financial statements reflect a fair presentation of
the consolidated financial position of Lake Ariel Bancorp, Inc. and subsidiary,
and the results of its operations and its cash flows for the interim periods
presented, in conformity with generally accepted accounting principles.
2. CASH FLOWS
The Company considers amounts due from banks and federal funds
sold as cash equivalents. Generally, federal funds are sold for one-day periods.
From time to time, the Company swaps its residential mortgage
loans for participation certificates of a similar amount issued by the Federal
Home Loan Mortgage Corporation. These certificates do not involve the transfer
of cash for cash flow purposes. No mortgage loans were swapped for participation
certificates during the first nine months of 1998 or 1997.
8
<PAGE>
3. INVESTMENT SECURITIES
SFAS No. 115 requires the classification of securities as
held-to-maturity, available- for-sale or trading. Securities, other than
securities classified as available-for-sale, are carried at amortized cost if
management has the ability and intent to hold these securities to maturity.
Securities expected to be held for an indefinite period of time and not held
until maturity are classified as available-for-sale and are carried at estimated
fair value. Decisions to sell these securities are determined by the Company's
financial position, including but not limited to, liquidity, interest rate risk,
asset liability management strategies, regulatory requirements, tax
considerations or capital adequacy. Gains or losses on investment securities are
computed using the specific identification method.
The Company has no derivative financial instruments requiring disclosure under
SFAS No. 119.
4. RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to
the 1998 reporting format.
5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
There were no short-term borrowings at September 30, 1998.
Long-term debt at September 30, 1998 consisted of the following
(in thousands):
Unsecured note, payable in the amount
of $850.32 monthly, fixed interest rate
of 2.9%, maturing November, 2000.......................$ 21
Mortgage, payable in the amount
of $7,500 monthly, maturing May 1, 2008............... 642
Borrowings with The Federal Home Loan Bank............... 95,525
Total..................................................$ 96,188
Annual maturities of the long-term debt are as follows: $15,728
in 1998; $3,032 in 1999; $8,232 in 2000; $8,339 in 2001; $5,448 in 2002; $50,065
in 2003; $69 in 2004; $5,074 in 2005; $79 in 2006; $85 in 2007, and $37 in 2008.
The borrowings with the Federal Home Loan Bank of Pittsburgh
(FHLB) require the Company to maintain collateral with a fair value in an amount
which approximates the total outstanding debt. In addition, the Company must
maintain its membership with the FHLB.
9
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-Q
Part I - Financial Information (Cont'd)
Item 2. Management's Discussion and Analysis or Plan of
Operations:
The consolidated financial review of Lake Ariel Bancorp, Inc. ("the Company")
provides a comparison of the performance of the Company for the periods ended
September 30, 1998 and 1997. 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 21 full-service branch banking offices in its
principal market area in Lackawanna, Luzerne, Monroe, Pike and Wayne Counties.
At September 30, 1998, the Company had 168 full-time equivalent employees.
NET INTEREST INCOME
Net income for the first nine months of 1998 increased to $3.108
million, an increase of $711,000 or 29.7% over 1997. Net income for the first
nine months of 1997 was $2.397 million, an increase of $119,000 or 5.2% over
1996. On a per share basis, net income was $0.65 basic and $0.64 diluted in 1998
and $0.61 basic and $0.60 diluted in 1997. Weighted average shares outstanding -
diluted at September 30, 1998 and 1997 were 4,911,000, and 4,036,000,
respectively. Earnings per share and weighted average shares outstanding reflect
adjustment for the 5% stock dividends paid on October 1, 1998, 1997 and 1996,
and the two-for-one stock split effective November 10, 1997.
The growth in net income during 1998 was attributable to the
improvement in net interest income, which increased to $9.3 million, an increase
of $991,000 or 11.9% over 1997, and which was coupled with an increase in other
operating income to $3.2 million, an increase of $909,000 or 39.1% over 1997.
The increase reflects a gain of $337,000 recognized on the sale of our credit
card portfolio, $427,000 from gains on sales of loans resulting from positive
market conditions for loan sales, and increases in fees and other income charged
to customers as a result of both volume and rate increases. This increase more
than offset the increase in other operating expenses, which increased to $8.0
million, an increase of $1.3 million or 18.7% over 1997. The Company continued
to focus its efforts toward retail banking services within its market area with
specific attention given to increasing market share. During the first nine
months of 1998, the Company opened six new branches to take
10
<PAGE>
advantage of strategic market opportunities. The new branches are mainly
responsible for the increases in salaries and benefits, occupancy and equipment
expenses.
The growth in net income in 1997 was also attributable to the
improvement in net interest income, which increased to $8.3 million, an increase
of $840,000 or 11.2% over 1996 and which was also coupled with an increase in
other operating income to $2.3 million, an increase of $435,000 or 23.0% over
1996. This increase more than offset the increase in other operating expenses to
$6.8 million, an increase of $921,000 or 15.7% over 1996.
Analysis of Net Interest Income
For the first nine months of 1998, net interest income
(tax-equivalent basis) increased to $10.0 million, an increase of $1.1 million
or 11.8% over 1997 levels. Average loans and leases increased to $215.5 million,
an increase of $26.4 million or 13.9% over 1997. Average commercial loans grew
to $77.0 million, an increase of $15.2 million or 24.6% over 1997 levels.
Interest income on commercial loans increased to $5.2 million, an increase of
$858,000 or 20.0% over 1997. This was due to increased volume through most of
1998. The national prime rate as reported in a national publication published
daily, an index to which the majority of these loans were tied, was 8.25% at
September 30, 1998 and 8.50% at September 30, 1997. Average real estate loans
increased 16.7%, which contributed to a 13.7% increase in interest income on
real estate loans. Average consumer loans, which included credit card
receivables (in 1997) and leases, decreased $3.9 million or 10.4% over 1997, and
resulted in a 9.5% decrease in related interest income.
Net interest income (tax-equivalent basis) for the first nine
months of 1997 increased to $8.9 million, an increase of $1.0 million or 13.0%
over 1996. This increase was due to the continued strong growth of earning
assets, which grew 23.6% over 1996 levels.
On average, investment securities in 1998 increased to $161.2
million, an increase of $46.7 million or 40.8% over 1997 levels. Investment
securities in 1997 increased to $114.5 million, an increase of $29.6 million or
34.8% over 1996 levels. Income earned on investment securities increased to $8.5
million, an increase of $2.2 million or 35.6% over 1997. Income earned in 1997
increased to $6.2 million, an increase of $1.7 million or 37.8% over 1996. As is
discussed under "Financial Condition," the asset/liability management and
investment strategies that were employed during 1998 and 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 1998. Taxable securities, which represented 71.9% of the
investment portfolio in 1997, increased to 76.0% or $122.6 million in 1998. At
September 30, 1998, tax-exempt securities represented 20.6% of the portfolio
compared to 25.7% in 1997. In 1998, 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 September 30, 1998 increased to $33.1 million, an
increase of $3.8 million or 12.8% over 1997.
11
<PAGE>
Average interest-bearing deposits at September 30, 1998 increased
to $238.8 million, an increase of $9.6 million or 4.2% over 1997. As interest
rates continued constant through most of 1997 and through September 30, 1998,
more depositors sought higher rate, longer-term deposits.
Average savings and interest-bearing demand deposits at September
30, 1998 increased to $86.7 million, an increase of $18.0 million or 26.2% over
1997. As a percentage of total average interest-bearing deposits, savings and
interest-bearing demand deposits represented 36.3% in 1998 and 30.0% in 1997.
Due to the shift in the mix of deposits, the rates at which they were repricing
and the volume increase, interest expense on deposits for the nine months ended
September 30, 1998 increased to $8.1 million, an increase of $505,000 or 6.7%
over 1997. These results were reflected in the cost of funds on deposits which
increased 6.7% from 1997 through 1998, while volume increased 2.3%. There were
no brokered deposits within the Company's deposit base during 1998 or 1997.
Short-term borrowings, including federal funds purchased, and
securities sold under agreements to repurchase, averaged $2.5 million in 1998
and $1.4 million in 1997.
Interest expense as a percent of earning assets increased by 5
basis points from 4.30% in 1997 to 4.35% in 1998 due to the volume increase in
interest bearing liabilities, the mix in the makeup of the interest-bearing
deposits, and the increase in the related interest rates paid.
The overall effect of the decrease in yield on investments and
loans and leases, 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 36 basis points to 3.52% in 1998 from 3.88% in 1997.
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% each year.
12
<PAGE>
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
1998 1997
----------------------------------- -----------------------------
Average Interest Average Interest
Balance Income/ Yield/ Balance Income/ Yield/
(1) Expense Rate (1) Expense Rate
------------ ------- ------ ---------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold ....................... $2,869 $116 5.41% $4,611 $196 5.68%
Deposits in Federal Home Loan Bank ....... 234 8 4.57 224 7 4.18
Investment securities:
U.S. government agencies ............. 122,578 6,256 6.82 82,274 4,340 7.05
State and municipal(2) ............... 33,146 1,942 7.83 29,394 1,770 8.05
Other securities ..................... 5,472 265 6.47 2,806 114 5.43
-------- -------- -------- -----
Total investment securities ...... 161,196 8,463 7.02 114,474 6,224 7.27
Loans and leases:
Commercial, financial and industrial . 77,021 5,150 8.94 61,811 4,292 9.28
Real estate-construction and mortgage 105,147 6,169 7.84 90,116 5,426 8.05
Installment loans to individuals(3) .. 29,451 2,094 9.51 34,590 2,491 9.63
Lease financing(3) ................... 3,843 357 12.42 2,584 218 11.28
-------- -------- -------- -----
Total loans and leases ........... 215,462 13,770 8.54 189,101 12,427 8.79
Total earning assets ..................... 379,761 22,357 7.87 308,410 18,854 8.17
Cash and due from banks .................. 10,328 10,131
Premises and equipment ................... 14,161 10,261
Other, less allowance for credit losses
and loan fees ........................ 13,510 9,436
-------- -----
Total assets ............................. $417,760 $338,238
======== =====
Liabilities and stockholders' equity:
Interest-bearing deposits:
Demand ............................... $33,457 $ 555 2.22% $30,026 $460 2.05%
Savings .............................. 53,244 1,122 2.82 38,677 585 2.02
Time ................................. 113,058 4,794 5.67 120,441 4,804 5.33
Time over $100,000 ................... 39,062 1,606 5.50 40,064 1,723 5.75
-------- -------- -------- -----
Total interest-bearing deposits .. 238,821 8,077 4.52 229,208 7,572 4.42
Federal funds purchased .................. 787 35 5.95 530 23 5.80
Short-term borrowings .................... 579 23 5.31 591 26 5.88
Securities sold under agreements
to repurchase ........................ 1,168 44 5.04 279 11 5.27
Long-term debt ........................... 92,394 4,180 6.05 47,593 2,278 6.40
-------- -------- -------- -----
Total interest-bearing liabilities ....... 333,749 12,359 4.95 278,201 9,910 4.76
-------- -----
Demand - noninterest - bearing ........... 42,874 34,768
Other liabilities ........................ 4,629 3,490
------ -----
Total liabilities ........................ 381,252 316,459
Stockholders' equity ..................... 36,508 21,779
------- -----
Total liabilities and stockholders' equity $417,760 $338,238
======== =====
Net interest income ...................... $9,998 $8,944
======== =====
Net interest spread ...................... 2.92% 3.41%
======== =====
Net interest margin(4) ................... 3.52% 3.88%
======== =====
</TABLE>
- ------------------------------
(1) Average balances have been computed using daily balances.
Nonaccrual loans are included in loan balances.
(2) Interest and yield are presented on a tax-equivalent basis using a 34.0%
statutory tax rate.
(3) Installment loans and leases are presented net of unearned interest.
(4) Represents the difference between interest earned and interest paid,
divided by average total earning
13
<PAGE>
1998 Compared to 1997(1)
Caused by Total
Volume Rate Variance
(In thousands)
Interest income:
Federal funds sold ..................... $(70) $(10) $(80)
Deposits in Federal Home Loan Bank ..... -- 1 1
Investment securities .................. 2,409 (170) 2,239
Loans and leases ....................... 1,651 (308) 1,343
------- ------- -------
Total interest income ...................... 3,990 (487) 3,503
------- ------- -------
Interest expense:
Demand and savings deposits ............ 318 314 632
Time deposits .......................... (357) 230 (127)
Borrowed funds ......................... 2,071 (127) 1,944
------- ------- -------
Total interest expense ..................... 2,032 417 2,449
------- ------- -------
Net interest income ........................ $1,958 $(904) $1,054
======= ======= =======
- ------------------------------
(1) The portion of the total change attributable to both volume and rate
changes during the period has been allocated to the volume and rate
components based upon the absolute dollar amount of the change in each
component prior to the allocation.
Provision for Possible Credit Losses
The provision for possible credit losses for the nine months
ended September 30, 1998 decreased to $490,000, a decrease of $240,000 or 32.9%
over 1997. In 1998, the provision for possible credit losses was 77.9% of net
charge-offs, compared to 179.4% in 1997. 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 1998 increased to $629,000, an increase of
$222,000 or 54.5% over the same period in 1997. The net charge-offs in 1998 were
primarily attributed to the commercial and consumer installment loan portfolio.
Net charge-offs on commercial and industrial loans for 1998 were
$385,000 or 61.3% of net charge-offs in 1998 compared to $56,000 or 13.8% of net
charge-offs for 1997. Consumer and credit card, lease financing, and real estate
related debt accounted for 38.7% in 1998 and 86.2% in 1997, of net charge-offs,
respectively.
14
<PAGE>
Other Operating Income
Other operating income in the first nine months of 1998 increased
to $3.2 million, an increase of $909,000 or 39.1% over 1997. Mortgage servicing
fee income in 1998 decreased to $220,000, a decrease of $38,000 or 14.7% over
1997. 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 $427,000 recorded in 1998, compared
with the net gain of $185,000 in 1997, was indicative of the changes in interest
rates during the periods in which the sales occurred.
Fee income from service charges on demand deposits, item
processing, return items and other service fees in 1998 increased to $1.1
million, an increase of $209,000 or 23.1%. These fees, which represented 34.5%
of other operating income, were influenced by both pricing changes and increases
in the number of consumer and business demand deposit accounts.
Net gains on available-for-sale securities represented
approximately 2.5% in 1998 and 3.4% in 1997 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 three of the
Company's branch offices, automated teller machine surcharge income, commissions
on check orders and other general service fees. Other income in 1998 increased
to $1.1 million, an increase of $337,000 or 46.3% over 1997. Earnings on
directors' and officers' life insurance policies represented $128,000 of the
increase.
OTHER OPERATING EXPENSES
Other operating expenses in 1998 increased to $8.0 million, an
increase of $1.3 million or 18.7% over 1997. Salaries and benefits, which were
the most significant of the noninterest expenses, increased in each of the years
reported. Salaries and benefits for 1998 increased to $3.7 million, an increase
of $551,000 or 17.7% over 1997. This increase was due to the additional staffing
needs in both new and existing branch and administrative offices, merit
increases and the added costs associated with health care insurance and other
benefits which were provided by the Company.
Equipment and occupancy expenses in 1998 increased to $2.0
million, an increase of $357,000 or 21.7% over 1997. 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.
15
<PAGE>
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 and beyond.
Other expenses in 1998 increased to $2.1 million, an increase of
$247,000 or 13.4% over 1997. Included in these expenses were such costs as legal
fees, professional and audit, state shares' tax, directors' fees and other
general operating expenses.
INCOME TAXES
The provision for income taxes for the nine months ended September 30, 1998 was
$930,000, an increase of 21.6% or $165,000 in 1998. The effective tax rate for
1998 and 1997 was 23.0% and 24.2%, respectively.
FINANCIAL CONDITION
September 30, 1998 Compared to December 31, 1997
The Company's total assets increased to $444.7 million at
September 30, 1998, an increase of $76.6 million or 20.8% from $368.1 million at
December 31, 1997. The increase in assets was primarily attributable to a $10.6
million growth in net loans and a $50.0 million purchase of investment
securities in January, 1998.
The amortized cost of investment securities, including
held-to-maturity (HTM) and available-for-sale (AFS), increased to $168.2 million
at September 30, 1998, an increase of $56.4 million or 50.5% from $111.8 million
at December 31, 1997. 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. 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 the first quarter of 1998, the Company purchased $50.0 million of
securities with funds borrowed from the FHLB. The strategy that was employed
provided a favorable spread between the rates on invested and borrowed funds. At
September 30, 1998, gross unrealized gains in the HTM investments were
$1,214,000 while gross unrealized losses amounted to $12,000.
The following table presents the maturity distribution and
weighted average yield of the securities portfolio of the Company at September
30, 1998. Weighted average yields on tax-exempt obligations have been computed
on a taxable equivalent basis.
16
<PAGE>
<TABLE>
<CAPTION>
Available for Sale September 30 , 1998
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 .................. $5,500 7.0% $8,492 7.0% $6,827 6.9% $23,808 6.6% $44,627 6.7%
Obligations of state and
political subdivisions ........ 100 7.5 855 7.1 324 7.5 11,916 7.1 13,195 7.1
Equity securities ................. -- -- - - - - 5,941 5.9 5,941 5.9
--- ---- ----- ------- ---
Total securities available for sale $5,600 7.0% $9,347 7.0% $7,151 6.9% $41,665 6.6% $63,763 6.7%
===== ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity September 30, 1998
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
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Amortized cost: ................. (Dollars in thousands)
U.S. government agencies and
corporations ................ $14,210 7.1% $36,873 6.9% $20,927 7.2% $8,534 6.8% $80,544 7.0%
Obligations of state and
political subdivisions ...... - - 1,286 6.5% 11,797 6.9% 10,845 7.7% 23,928 7.2%
------ -------- ------ -------- ---
Total securities held to maturity $14,210 7.1% $38,159 6.9% $32,724 7.1% $19,379 7.3% $104,472 7.0%
======== ====== ======== ======= ======== ===
</TABLE>
Total net loans increased to $218.9 million at September 30,
1998, an increase of $10.7 million or 5.1% from $208.2 million at December 31,
1997. The increase in net loans was directly related to the growth in commercial
loans and residential mortgages, reduced by the $25.3 million of mortgage loans
sold during the first nine months of 1998 and the sale of our $2.2 million
credit card portfolio. Residential mortgage loans, which included real estate
construction loans, increased to $108.1 million at September 30, 1998, an
increase of $5.1 million or 5.0% from $103.0 million at December 31, 1997.
Consumer loans and leases, net of unearned discounts, increased
to $38.9 million at September 30, 1998, an increase of $300,000 or 0.1% from
$38.6 million at December 31, 1997. Commercial loans increased to $80.2 million
at September 30, 1998, an increase of $10.7 million or 15.4% from $69.5 million
at December 31, 1997. 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 $8.5 million at
September 30, 1998, an increase of $600,000 or 7.6% from $7.9 million at
December 31, 1997. 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.
17
<PAGE>
Total deposits increased to $302.9 million at September 30, 1998,
an increase of $22.4 million or 8.0% from $280.5 million at December 31, 1997.
Noninterest-bearing demand deposits increased to $50.0 million at September 30,
1998, an increase of $10.3 million or 26.0% from $39.7 million at December 31,
1997. In the aggregate, savings and interest- bearing demand deposits increased
to $81.0 million at September 30, 1998, an increase of $12.8 million or 18.7%
from $68.2 million at December 31, 1997. As a percentage of total deposits,
savings and interest-bearing demand deposits represented 26.7% in 1998, compared
to 24.3% in 1997. Time deposits, which include certificates of deposit in
denominations of $100,000 or more, decreased to $171.9 million at September 30,
1998, a decrease of $689,000 or 0.4% from $172.6 million at December 31, 1997.
As a percentage of total deposits, these deposits represented 56.8% in 1998 and
61.5% in 1997. Approximately $10.4 million of these deposits are 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.
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 at September 30, 1998 and December 31, 1997:
1998 1997
(in thousands)
Loans past due 90 days or more .......... $1,979 $1,453
Impaired loans in nonaccrual status ..... 1,337 411
Other nonaccrual loans .................. 123 123
------ ------
Total nonperforming loans 3,439 1,987
Foreclosed assets held for sale ......... 358 523
------ ------
Total nonperforming assets $3,797 $2,510
====== ======
Nonperforming loans as a
percentage of loans ................ 1.56% 0.94%
Nonperforming assets as a
percentage of assets ............... 0.85% 0.68%
18
<PAGE>
Nonperforming loans increased 73.1% from year-end 1997.
Nonaccrual loans increased $926,000 or 173.4% from year-end 1997. Commercial
loans accounted for 91.6% of all nonaccruals, followed by real estate loans at
8.4%. Within the $1.5 million of total nonaccrual loans, 100% were secured by
mortgages, primarily first liens, against residential or commercial properties.
Loans past due 90 days or more increased $526,000 from 1997 year-end levels.
These loans included $497,000 in real estate mortgages, $292,000 in consumer
credit, $1.155 million in commercial loans and $35,000 in leasing. These loans
were reviewed by management at its quarterly loan review meetings regarding
collection efforts.
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 $358,000 at September 30,
1998 compared to $523,000 at year-end 1997. 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 September 30, 1998, the Company had approximately $1.3 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 September 30, 1998. 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
19
<PAGE>
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 both September 30, 1998 and
December 31, 1997, the allowance for possible credit losses was 1.00% of loans.
For further discussion on factors that could influence the allowance for
possible credit losses, see "Factors That May Affect Future Results."
Changes in the allowance for possible credit losses at September 30, 1998 and
December 31, 1997 were as follows:
1998 1997
(dollars in thousands)
Balance at beginning of period ..................... $2,109 $1,830
------ ------
Charge-offs:
Real estate-construction ............ -- --
Real estate-mortgage ................ 37 103
Commercial and industrial ........... 390 106
Consumer installment ................ 212 363
Lease financing ..................... 29 11
------ ------
Total ................. 668 583
------ ------
Recoveries:
Real estate-construction ............ -- --
Real estate-mortgage ................ -- --
Commercial and industrial ........... 5 42
Consumer installment ................ 35 40
Lease financing ..................... -- --
------ ------
Total ................. 40 82
------ ------
Net charge-offs .................................... 628 501
------ ------
Provision for possible credit losses ............... 490 780
------ ------
Balance at end of period ........................... $1,971 $2,109
====== ======
Ratio of net charge-offs during period to
average loans outstanding during period .......... 0.29% 0.26%
====== ======
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 September 30, 1998, approximately 70% 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.
20
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
Percent Percent
of Loans of Loans
in Each in Each
Category Category
Amount to Loans(1) Amount to Loans(1)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allocation of allowance for possible credit losses:
Real Estate ....................................... $331 49% $278 49%
Commercial and industrial ......................... 607 36 868 33
Consumer installment .............................. 440 13 465 17
Lease financing ................................... 77 2 68 1
Unallocated ....................................... 516 -- 430 --
------ ------ ------ ------
Total ....................................... $1,971 100% $2,109 100%
====== ====== ====== ======
</TABLE>
(1) Loans, net of unearned income.
Item 3.
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.
21
<PAGE>
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.
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 September 30, 1998, LA Bank maintained a one year cumulative
gap of negative $19.0 million or 4.27% of total assets. The effect of this gap
position provided a negative mismatch of assets and liabilities which can expose
LA Bank to interest rate risk during a period of rising interest rates.
<TABLE>
<CAPTION>
Interest Sensitivity Gap at September 30, 1998
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 .................. $6,980 $91 $ -- $12,946 $20,017
Investment securities(1)(2) ................ 25,685 15,761 32,318 94,879 168,643
Loans(2) ................................... 57,893 60,124 58,801 43,678 220,496
Fixed and other assets ..................... -- -- -- 35,056 35,056
--------- --------- --------- --------- ---------
Total assets ............................... $90,558 $75,976 $91,119 $186,559 $444,212
========= ========= ========= ========= =========
Non interest-bearing transaction deposits(3) $ -- $ -- $25,019 $25,019 $50,038
Interest-bearing transaction deposits(3) ... 1,221 14,088 17,906 51,016 84,231
Time ....................................... 27,580 79,716 11,892 9,789 128,977
Time over $100,000 ......................... 10,829 23,828 4,982 -- 39,639
Short-term borrowings ...................... 12,481 1,062 -- -- 13,543
Long-term debt ............................. 11,179 3,537 8,625 61,432 84,773
Other liabilities .......................... -- -- -- 5,033 5,033
--------- --------- --------- --------- -------
Total Liabilities .................. $ 63,290 $122,231 $68,424 $152,289 $406,234
========= ========= ========= ========= ========
Interest sensitivity gap ................... $27,268 $(46,255) $22,695 $34,270
========= ========= ========= =========
Cumulative gap ............................. $27,268 $(18,987) $3,708 $37,978
========= ========= ========= =========
Cumulative gap to total assets ............. 6.14% (4.27)% 0.83% 8.55%
</TABLE>
- -----------------------------
22
<PAGE>
(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
recommended maturity distribution limits for nonmaturing deposits based
on our historic deposit studies.
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.
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.
23
<PAGE>
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
September 30, 1998 remained constant. The impact of the rate movements was
developed by simulating the effect of rates changing over a twelve-month period
from the September 30, 1998 levels.
Rates +200 Rates -200
Earnings at risk:
Percent change in:
Net Interest Income (0.04)% (2.87)%
Net Income (0.18)% (7.02)%
Economic value at risk:
Percent change in:
Economic value of equity (12.10)% (12.70)%
Economic value of equity as a
percent of book assets (1.42)% (1.50)%
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 September 30, 1998 was 8.51% compared to 10.26% at December 31, 1997. This
decrease is the direct result of the increase in average assets in 1998 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 1998 and 1997, the ratios were well above
minimum regulatory guidelines.
As required by the federal banking regulatory authorities,
guidelines have been adopted to measure capital adequacy. Under the guidelines,
certain minimum ratios are required for core capital and total capital as a
percentage of risk-weighted assets and other off-balance sheet instruments. For
the Company, Tier I capital consists of common stockholders' equity less
intangible assets, and Tier II capital includes the allowable portion of the
allowance for possible loan losses, currently limited to 1.25% of risk-weighted
assets.
24
<PAGE>
By regulatory guidelines, neither Tier I nor Tier II capital reflect the
adjustment of SFAS No. 115, which requires adjustment in financial statements
prepared in accordance with generally accepted accounting principles by
including as a separate component of equity, the amount of net unrealized
holding gains or losses on debt and equity securities that are deemed to be
available-for-sale.
At September 30, 1998
(Dollars in thousands)
Primary capital $37,709
Intangible assets 2,370
--------
Tier I capital 35,339
Tier II capital 1,894
--------
Total risk-based capital $37,233
========
Total risk-weighted assets $242,387
Tier I ratio 14.58%
Risk-based capital ratio 15.36%
Tier I leverage ratio 8.51%
Regulatory guidelines require that core capital and total
risk-based capital must be at least 4.0 % and 8.0 %, respectively.
LIQUIDITY AND FUNDS MANAGEMENT
Liquidity management is to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
servicing payments, investment commitments, commercial and consumer loan demand
and ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short- and
long-term borrowings and repurchase agreements. Regular loan payments are a
dependable source of funds, while the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates.
At September 30, 1998, the Company maintained $20.0 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 $5.4
million of mortgage loans held for resale and $64.5 million in AFS securities.
This combined total of $89.9 million represented 20.2% of total assets at
September 30, 1998. 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 September 30, 1998 , approximately 68.1% of the Company's assets were funded
by core deposits acquired within its market area. An additional 8.6% of the
assets were funded by the Company's equity. These two components provide a
substantial and stable source of funds.
25
<PAGE>
Net cash used by operating activities was $4.6 million for the
nine months ended September 30, 1998, as compared to net cash used by operating
activities of $5.9 million for the comparable period in 1997. This $1.3 million
decrease is primarily related to a net $711,000 increase in net income and a net
$1.9 million decrease in the change in other assets. Net cash used in investing
activities increased $6.4 million for the year ended September 30, 1998, from
$58.1 million to $64.5 million, which was primarily attributable to purchases of
investment securities. Net cash provided by financing activities increased $10.1
million from 1997. A net increase in FHLB borrowings of $20.7 million was used
to fund investment purchases.
FUTURE OUTLOOK
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 June 1997, the national prime lending rate increased to 8.5% where it
stood until September, 1998 when the prime rate was reduced to 8.25%. In
October, 1998, the national prime lending rate fell again to its current level
of 8.00%. Management and the Board of Directors do not have the ability to
determine if another rate adjustment will occur; however, the Company believes
it is very well prepared to meet the challenges and effects of a changing
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 continue to 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.
26
<PAGE>
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 and is expected to be $100,000 in 1998.
On August 13, 1998, LA Bank announced it reached a definitive
agreement with Honesdale National Bank, Honesdale, PA to sell its Lake
Wallenpaupack and Lackawaxen branches located in Pike County. Management felt it
was a sound financial business decision for it to take advantage of this
opportunity and will, therefore, be in a better position to focus on its
expansion plans to the more populated areas of Northeastern Pennsylvania.
On September 4, 1998, LA Bank acquired the deposits and fixed
assets of Mellon Bank's Mountainhome branch. The acquired office was
consolidated into LA Bank's existing Mountainhome branch. LA Bank received
approximately $16 million of deposits for a premium of approximately $1.9
million. Amortization of the premium is $16,000 per month.
The OCC granted approval to establish new branches as follows:
Location Date Approved
Kingston 05/12/98
East Mountain (Scranton) 05/12/98
Wilkes-Barre Boulevard 09/02/98
In addition, the Company opened three new branches during 1998.
On March 18, 1998, a branch opened in the Wal-Mart Supercenter in Dickson City;
the Lackawaxen branch opened on April 2, 1998; the Wal-Mart Supercenter
Honesdale branch opened on June 17, 1998; the Taylor branch opened on August 14,
1998; the Tannersville branch opened on August 31, 1998; and the Wilkes-Barre
Public Square branch opened on September 14, 1998.
27
<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. Management thinks the market share opportunities and related profit
potential are here and during the next 6 months will continue to expand the
branch network to a total of 22 offices covering five counties. Management
expects its ambitious branch expansion to have a short-term negative impact on
earnings. However, the projections for future earnings growth is positive and
should provide a significant return for its stockholders.
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 Year 2000 (Y2K) Committee was formed in May 1997. The
Executive Vice President and Chief Operating Officer was named liaison to
executive management. Co- chairpersons of the committee are Senior Operations
Manager and Deposit Operations Manager. Other committee members include MIS
Supervisor, Controller, Senior Lending Officer, Loan Review Officer, Special
Assets Officer, and Internal Auditor. The committee currently meets weekly to
discuss the progress of the project.
An outline was developed by the Committee to manage the phases of
our year 2000 readiness program. The outline addresses the necessary phases
(identification, renovation, testing, and implementation) necessary to conduct a
detailed review of the Company's readiness.
A list was compiled of all vendors. The list included information
technology vendors and non-information technology vendors. The Company does not
utilize any in- house developed programs. A letter was sent to vendors early in
the third quarter of 1997 seeking assurance and testing scripts to ensure their
products are Year 2000 ready. Each vendor was evaluated and prioritized as to
the Company's reliance on the application. The Company's MIS Department has
conducted testing on all personal computers and file servers. Those that did not
successfully roll into the Year 2000 were replaced. Unisys Corporation has been
contracted to assist and consult the Company with the Year 2000 testing. The
Company is planning during the third quarter to age its entire operating system
Company wide and conduct detailed testing.
When conducting testing, we will identify any mission critical
application that is not Year 2000 ready. In the event an application is not
compliant, the Company will contract with an alternate vendor. The Year 2000
Committee has identified alternate vendors for each mission critical
application.
28
<PAGE>
Lending officers have compiled a Year 2000 questionnaire for each
client with a total lending relationship of $250,000 or more. Loan review has
incorporated into their evaluations of the borrower's credit worthiness the
question of the impact that the Year 2000 will have on an individual business
and the risk associated with non-compliance resulting in business disruption. A
Year 2000 legal addendum has been added to the loan documentation for all new
and renewed commercial loans.
Large depositors have also been personally contacted and made
aware of the Year 2000 issue and how it may effect them. The Company has also
developed a Year 2000 awareness brochure that was inserted with the customer's
Company statements.
The Year 2000 Committee has established a timeline for Year 2000
Readiness. This timeline is updated as actions are completed.
29
<PAGE>
<TABLE>
<CAPTION>
TIME LINE
AWARENESS AND ASSESSMENT PHASES
<S> <C> <C> <C> <C>
*2nd Quarter 1997 *3rd Quarter 1997 *4th Quarter 1997 *1st Quarter 1998
- -Y2K Committee was formed -Complaint letters were -Vendors were ranked -Commercial customers with a borrowing
- -Vendor list was compiled sent to all vendors according to mission relationship of $250,000 or greater were
- -P.O.S. terminals were tested -Y2K Outline was developed critical application contacted as to their Y2K status
-Committee Chairpersons attended ITI Y2K
training PC's and proof machines were
tested for Y2Kcompliance
-Assessment of all vendors & hardware was
completed
</TABLE>
*Denotes completion
30
<PAGE>
<TABLE>
<CAPTION>
TIME LINE
RENOVATION, TESTING AND IMPLEMENTATION PHASES
<S> <C> <C> <C>
*2nd Quarter 1998 *3rd Quarter 1998 4th Quarter 1998 1st Quarter 1999
- -Testing of ITI core applications -All depositors will be sent -Seek alternate hardware and -Implement any new hardware and/or
- -Begin renovation of PC's and a letter stating the bank's software vendors for those software vendors
routers Y2K status which are not Y2K ready -Continue testing core applications
- -Prepare contingency plan -Complete renovation -Continue testing core for critical dates
-Continue testing core applications for critical dates
applications for critical
dates
-Commercial customers
with a borrowing relationship
between $150,000 to $250,000,
and any others heavily reliant
on technology will be assessed for
Y2K status
</TABLE>
31
<PAGE>
In accordance with the Office of the Comptroller of Currency Year
2000 advisory letters, the Y2K committee has prepared a budget of current and
anticipated expenditures. The total budget for this project is $250,000. The
following is a breakdown as of June 30, 1998:
o **$11,250 has been spent to upgrade the personal computers at
various branch locations. The previous personal computers were
not Year 2000 ready.
o **$3,840 has been spent for an outside consultant to assist with the
upgrade of the branch personal computers.
o **$6,500 has been spent to purchase Year 2000 testing software
from ITI. This software enables us to age the ITI application
into the Year 2000 and perform testing to ensure compliance.
o **LA Bank has entered into a contract with Unisys that will allow
the bank to age the entire automated platform into the Year 2000
and perform testing on all mission critical applications. The
anticipated cost of this project is $55,000.
o **$20,000 has been budgeted to upgrade the operating system and
hardware for four NCR ATMs. This amount was based on a signed
contract that LA Bank has entered into with Retec Inc.
o LA Bank is currently reviewing proposals to upgrade the check
processing system due to the fact that the current system is not Year
2000 compliant. A proposal to upgrade the current system has been
received from NCR and the expenditures were estimated at approximately
$85,000. It is management's position that it may not be cost justified
to upgrade the current check processing system. With the Bank's rapid
growth, the current system will not be able to handle the increased
volume. A proposal from Unisys Corporation has been received to
replace the current system with a check and document image
environment. The costs associated with this project will be
capitalized and depreciated over the expected life.
The Year 2000 Committee will submit periodic updates of this budget.
** - Expense associated with these projects will be capitalized and
depreciated over the expected life of the assets.
The core business processes that the Year 2000 Committee has identified
are Information Technology Incorporated, Bankers Systems Incorporated,
Attachmate Incorporated, Unisys Corporation, NCR, Goldleaf Technologies
Incorporated, Novell Incorporated, and Leasetek Incorporated. All of these
processes will be tested during the third quarter of 1998. The Company is very
optimistic that by conducting the necessary tests there will not be any
interruption of services.
32
<PAGE>
The process that is most heavily relied upon in the Company's daily
operations is Information Technology Incorporated. Without this process, the
Company would not function adequately. The Year 2000 Committee has identified
this as a high-risk process and has developed out a very intensive testing
schedule. The Company has already conducted detailed testing of this process and
currently has generated a schedule that will continue into the Year 1999.
The Company has developed a written contingency plan. The plan addresses
alternate vendors for these mission critical applications, a timeline for
implementation and action, circumstances and trigger dates, core business
processes that pose the greatest amount of risk to the Company. The Y2K
committee will be responsible for updating the contingency plan, reporting
progress and implementation changes. A specific recovery plan for each core
business process will be developed after completion of the initial testing by
Unisys Corporation. The contingency plan will be modified to reflect any changes
at that time. 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 bank operating 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 "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
33
<PAGE>
assets and interest-bearing liabilities, and the level of nonperforming assets.
As part of its interest rate risk management strategy, management seeks to
control its exposure to interest rate changes by managing the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities. Through its asset/liability committee, the Company continually
monitors interest rate sensitivity of its earning assets and interest-bearing
liabilities to minimize any adverse effects on future earnings.
As of June 30, 1998, 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 $19.0 million, representing a cumulative
one-year interest rate sensitivity gap as a percentage of total assets of
negative 4.27%. 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.
34
<PAGE>
NEW FINANCIAL ACCOUNTING STANDARDS
Mortgage Servicing Rights
In 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which amends Statement No. 65, "Accounting for Certain
Mortgage Banking Activities." The Statement applies to all mortgage banking
activities in which a mortgage loan is originated or purchased and then sold or
securitized with the right to service the loan retained by the seller. The total
cost of the mortgage loans is allocated between the mortgage servicing rights
and the mortgage loans based on their relative fair values. The mortgage
servicing rights are capitalized as assets and amortized over the period of
estimated net servicing income. Additionally, they are subject to an impairment
analysis based on their fair value in future periods. The Statement was
effective for transactions in which mortgage loans are sold or securitized
beginning January 1, 1996. The impact on the Company's financial position and
results of operations will be dependent upon the future volume of mortgage loans
sold with servicing rights retained. In 1997 and 1998, the impact was
immaterial.
Stock-Based Compensation
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard provides the Company with a choice of how to
account for the issuance of stock options and other stock grants. The Statement
encourages companies to account for stock options at their fair value and
recognize the expense as compensation over the service period, but also permits
companies to follow existing accounting rules under Accounting Principles Board
("APB") Opinion No. 25. Companies electing to follow APB Opinion No. 25 rules
will be required to disclose pro forma net income and earnings per share
information as if the new fair value approach had been adopted. The Company is
continuing to follow existing accounting rules under APB Opinion No. 25 for
options granted, with pro forma disclosure in the footnotes to the consolidated
financial statements.
Earnings Per Share and Capital Structure
In 1997, the FASB issued Statement No.128, "Earnings Per Share" and
Statement No. 129, "Disclosure of Information about Capital Structure." Both
Statements are effective for periods ending after December 15, 1997. Statement
No. 128 is designed to simplify the computation of earnings per share and will
require disclosure of "basic earnings per share" and, if applicable, "diluted
earnings per share." 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.
35
<PAGE>
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 is 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 is to require
additional disclosures in the Company's financial statements.
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February, 1998, the FASB issued Statement No. 132. This
Statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer useful. This Statement is effective for fiscal years beginning
after December 15, 1997. The impact, if any, of this statement on the Company is
to require additional disclosure in the Company's financial statements.
Accounting for Derivative Instruments and Hedging Activities
FASB No. 133, issued in June 1998, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
impact on the Company's financial position and results of operations will be
dependent upon the future volume (if any) of acquisitions of derivative
instruments and hedging activities. In 1997 and 1998, the impact is immaterial.
36
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-K
Exhibit Number Description of Exhibit
2 None
3(i) None
3(ii) None
4 None
10 None
11 None
15 None
18 None
19 None
22 None
23 None
24 None
27 Financial Data Schedule
99 None
(b) Reports on Form 8-K
On September 10, 1998, the Registrant filed Form 8-K reporting a corporate
resolution of September 8, 1998 approving a 5% common stock dividend payable on
October 1, 1998.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKE ARIEL BANCORP, INC.
Date: November 10, 1998 By /s/ John G. Martines
----------------------
John G. Martines
CHIEF EXECUTIVE OFFICER
/s/ Joseph J. Earyes
Joseph J. Earyes, CPA
VICE PRESIDENT and TREASURER
38
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000723878
<NAME> LAKE ARIEL BANCORP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,945
<INT-BEARING-DEPOSITS> 121
<FED-FUNDS-SOLD> 6,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,487
<INVESTMENTS-CARRYING> 104,471
<INVESTMENTS-MARKET> 105,674
<LOANS> 220,846
<ALLOWANCE> 1,971
<TOTAL-ASSETS> 444,706
<DEPOSITS> 302,851
<SHORT-TERM> 2,127
<LIABILITIES-OTHER> 5,247
<LONG-TERM> 96,188
0
0
<COMMON> 962
<OTHER-SE> 37,331
<TOTAL-LIABILITIES-AND-EQUITY> 444,706
<INTEREST-LOAN> 13,765
<INTEREST-INVEST> 7,803
<INTEREST-OTHER> 124
<INTEREST-TOTAL> 21,692
<INTEREST-DEPOSIT> 8,077
<INTEREST-EXPENSE> 4,282
<INTEREST-INCOME-NET> 9,333
<LOAN-LOSSES> 490
<SECURITIES-GAINS> 80
<EXPENSE-OTHER> 8,038
<INCOME-PRETAX> 4,038
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<EXTRAORDINARY> 0
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<NET-INCOME> 3,108
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<LOANS-NON> 1,460
<LOANS-PAST> 1,979
<LOANS-TROUBLED> 3,439
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</TABLE>
