SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
[ ] 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)
(570) 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: 4,850,753 shares of common
stock, par value $0.21 per share, as of June 30, 1999.
1
<PAGE>
LAKE ARIEL BANCORP, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1999
INDEX
Page Number
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998............................. 3
Consolidated Statement of Income for the six
months ended June 30, 1999 and 1998.............. 4
Consolidated Statement of Cash Flows for the six
months ended June 30, 1999 and 1998.............. 6
Notes to Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis or
Plan of Operations............................. 11 - 34
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................... 22
Part II - Other Information
Item 1. Legal Proceedings...................................... N/A
Item 2. Changes in Securities................................. N/A
Item 3. Defaults Upon Senior Securities....................... N/A
Item 4. Submission of Matters to a Vote of Security
Holders........................................... N/A
Item 5. Other Information..................................... N/A
Item 6. Exhibits and Reports on Form 8-K..................... 34
Signatures............................................ 35
2
<PAGE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
(in thousands) (in thousands)
ASSETS
Cash and cash equivalents ........................ $ 13,507 $ 19,004
Available-for-sale securities .................... 148,950 80,591
Held-to-maturity securities (fair value of $45,901
and $112,353, respectively) ...................... 47,959 111,826
Loans and leases ................................. 248,650 229,555
Mortgage loans held for resale ................... 272 2,710
Less unearned income and loan fees ............ (3,563) (5,151)
Less allowance for possible credit losses ..... (2,350) (2,360)
--------- ---------
Net loans and leases .................... 243,009 224,754
Premises and equipment, net ...................... 18,098 17,364
Accrued interest receivable ...................... 3,435 3,210
Foreclosed assets held for sale .................. 899 358
Life insurance cash surrender value .............. 9,176 8,788
Other assets ..................................... 7,861 8,794
--------- ---------
TOTAL ASSETS ............................ $ 492,894 $ 474,689
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ........................... $ 56,479 $ 52,410
Interest-bearing:
Demand .................................. 54,400 41,811
Savings ................................. 41,389 38,525
Time .................................... 141,192 137,053
Time $100,000 and over .................. 37,150 42,943
--------- ---------
Total Deposits .......................... 330,610 312,742
Accrued interest payable ......................... 2,908 3,260
Federal funds purchased .......................... 2,985 --
Securities sold under agreements to repurchase ... 5,739 3,283
Long-term debt ................................... 113,967 115,459
Other liabilities ................................ 1,606 2,005
--------- ---------
Total Liabilities ....................... 457,815 436,749
--------- ---------
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
4,850,753 shares in 1999 and 4,820,192 in 1998 . 1,019 1,012
Capital surplus .................................. 29,880 29,563
Retained earnings ................................ 8,607 7,620
Accumulated other comprehensive income ........... (4,427) (255)
--------- ---------
Total Stockholders' Equity .............. 35,079 37,940
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................. $ 492,894 $ 474,689
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
<TABLE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
--------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases ............................. $ 9,467 $ 9,102 $ 4,794 $ 4,573
Investment Securities
Taxable .................................. 4,658 4,211 2,344 2,179
Exempt from federal income taxes ......... 938 836 504 421
Dividends ................................ 226 120 107 67
------- ------- ------- -------
Total Investment Securities Income .... 5,822 5,167 2,955 2,667
------- ------- ------- -------
Deposits in banks ............................ 5 7 2 3
Federal funds sold ........................... 118 45 66 10
------- ------- ------- -------
TOTAL INTEREST INCOME ................. 15,412 14,321 7,817 7,253
------- ------- ------- -------
INTEREST EXPENSE:
Deposits ..................................... 5,441 5,413 2,725 2,687
Long-term debt ............................... 3,173 2,718 1,589 1,458
Federal funds purchased ...................... 35 33 27 14
Short-term borrowings ........................ 12 15 5 5
Securities sold under agreements to repurchase 121 19 66 18
------- ------- ------- -------
TOTAL INTEREST EXPENSE ................. 8,782 8,198 4,412 4,182
------- ------- ------- -------
NET INTEREST INCOME .......................... 6,630 6,123 3,405 3,071
PROVISION FOR POSSIBLE
CREDIT LOSSES .............................. 400 325 255 125
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES ................. 6,230 5,798 3,150 2,946
------- ------- ------- -------
OTHER OPERATING INCOME:
Loan origination fees ........................ 86 67 72 67
Customer service charges and fees ............ 940 675 492 341
Mortgage servicing fees ...................... 131 148 65 71
Investment security gains (losses), net ...... 23 78 8 23
Gain (loss) on sale of loans, net ............ 325 258 256 179
Gain (loss) on sale of assets, net ........... 7 265 7 (46)
Other income ................................. 803 676 384 364
------- ------- ------- -------
TOTAL OTHER OPERATING INCOME .......... 2,315 2,167 1,284 999
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Salaries and benefits ........................ 2,805 2,346 1,451 1,162
Occupancy expense ............................ 830 752 418 383
Equipment expense ............................ 696 593 370 305
Advertising .................................. 194 171 64 95
Other expenses ............................... 1,635 1,388 843 689
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES ........ 6,160 5,250 3,146 2,634
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES ................................ 2,385 2,715 1,288 1,311
PROVISION FOR INCOME TAXES ................... 570 630 300 305
------- ------- ------- -------
NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE ........... 1,815 2,085 988 1,006
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX ............ 138 -- -- --
------- ------- ------- -------
NET INCOME ................................... $ 1,953 $ 2,085 $ 988 $ 1,006
======= ======= ======= =======
<PAGE>
4
Earnings per share-basic*:
Before cumulative effect ................... $ 0.37 $ 0.44 $ 0.20 $ 0.21
Cumulative effect .......................... 0.03 -- -- --
------- ------- ------- -------
Net Income ................................. $ 0.40 $ 0.44 $ 0.20 $ 0.21
======= ======= ======= =======
Earnings per share-diluted*:
Before cumulative effect ................... $ 0.37 $ 0.42 $ 0.20 $ 0.20
Cumulative effect .......................... 0.03 -- -- --
------- ------- ------- -------
Net Income ................................. $ 0.40 $ 0.42 $ 0.20 $ 0.20
======= ======= ======= =======
Dividends per share .......................... $ 0.20 $ 0.18 $ 0.10 $ 0.09
======= ======= ======= =======
Fully diluted weighted average no ............
of shares outstanding*: ..................... 4,939 4,921 4,939 4,921
</TABLE>
*Reflects adjustment for 5% stock dividend issued on October 1, 1998. The
accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
<TABLE>
LAKE ARIEL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 1,953 $ 2,085
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses .................. 400 325
Depreciation, amortization, and accretion ............. 955 698
Deferred income taxes ................................. 1,743 (9)
Writedown of foreclosed assets held for sale .......... 103 --
Investment security (gain) loss, net .................. (23) (76)
Investment security (gain) loss, net from
change in accounting principle, net of tax .......... (138) --
(Gain) on sale of loans ............................... (325) (258)
(Gain) loss on sale of foreclosed assets .............. (2) 72
(Gain) on sale of leased assets ....................... (5) --
(Gain) on sale of credit card portfolio ............... -- (337)
Decrease (increase) in mortgage loans held for resale . 2,763 8,184
(Increase) in accrued interest receivable ............. (225) (216)
(Decrease) in accrued interest payable ................ (352) (228)
(Increase) decrease in other assets ................... 1,339 (2,458)
Increase (decrease) in other liabilities .............. (444) 216
-------- --------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ..................................... 7,742 7,998
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities and paydowns .................. 2,171 8,910
Purchases .............................................. (9,413) (59,272)
Available-for-sale securities:
Proceeds from maturities and paydowns .................. 10,804 2,140
Proceeds from sales .................................... 45,276 16,796
Purchases .............................................. (59,644) (16,626)
(Increase) of life insurance policies cash surrender value (388) (498)
(Increase) decrease in loans and leases .................. (21,885) (13,799)
Purchases of premises and equipment ...................... (1,489) (2,690)
Proceeds from sale of credit card portfolio .............. -- 355
Proceeds from sale of leased assets ...................... 5 --
Proceeds from sale of foreclosed assets .................. 150 334
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................... (34,413) (64,350)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ................................. 17,868 3,147
Increase in Federal funds purchased ...................... 2,985 --
Increase in securities sold under agreements
to repurchase ......................................... 2,456 1,795
Proceeds from long-term debt ............................. -- 50,658
Principal payments on long-term debt ..................... (1,492) (1,410)
Proceeds from issuance of common stock ................... 324 286
Cash dividends ........................................... (967) (821)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .................................... 21,174 53,655
-------- --------
6
<PAGE>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................................ (5,497) (2,697)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ....................................... 19,004 17,109
-------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30, 1999 ................. $ 13,507 $ 14,412
======== ========
CASH PAID YEAR TO DATE FOR:
Interest ................................................ $ 9,134 $ 8,198
======== ========
Income taxes ............................................ $ 500 $ 650
======== ========
</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, 1998 is audited and for the interim
periods ended June 30, 1999 and 1998 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 six months of 1999 or 1998.
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.
SFAS No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded 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. In connection
with the first quarter 1999 implementation of SFAS No. 133, the Company
transferred $71,137,000 of debt securities classified as held-to-maturity to the
available-for- sale category. Such transfer will not call into question the
Company's future intention to hold other debt to maturity. Certain of these debt
securities were subsequently sold at a total gain of $183,000. Since both the
adoption of SFAS No. 133 and subsequent sale of these securities were within the
same reporting period, the gain is reported as a cumulative effect of change in
accounting principle, net of tax. Any other 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.
4. RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to the
1999 reporting format.
9
<PAGE>
5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
There were no short-term borrowings at June 30, 1999.
Long-term debt at June 30, 1999 consisted of the following (in
thousands):
Unsecured note, payable in the amount
of $850.32 monthly, fixed interest rate
of 2.9%, maturing November, 2000..........................$ 14
Mortgage, payable in the amount
of $7,500.00 monthly, maturing May, 2008................... 605
Borrowings with The Federal Home Loan Bank................... 113,348
--------
Total......................................................$113,967
========
Annual maturities of the long-term debt are as follows: $1,540 in 1999;
$8,232 in 2000; $8,339 in 2001; $5,448 in 2002; $50,065 in 2003; $69 in 2004;
$30,074 in 2005; $79 in 2006; $85 in 2007, and $10,036 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.
10
<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
June 30, 1999 and 1998. 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 June 30, 1999, the Company had 170 full-time equivalent employees.
NET INTEREST INCOME
Net income for the first six months of 1999 decreased to $1.953
million, a decrease of $132,000 or 6.3% from 1998. Net income for the first six
months of 1998 was $2.085 million, an increase of $549,000 or 35.7% over 1997.
On a per share basis, net income was $0.40 basic and $0.40 diluted in 1999 and
$0.44 basic and $0.42 diluted in 1998. Weighted average shares outstanding -
diluted at June 30, 1999 and 1998 were 4,939,000, and 4,921,000, respectively.
Earnings per share and weighted average shares outstanding reflect adjustment
for the 5% stock dividends paid on October 1, 1998 and 1997, and the two-for-one
stock split effective November 10, 1997.
Net income for the first quarter of 1998 included a one-time gain of
$348,000 from the sale of the credit card portfolio. Excluding this 1998
nonrecurring item, year-to-date June 30, 1999 net income increased by 12% over
the same period for 1998.
Net interest income improved in 1999, which increased to $6.6 million,
an increase of $507,000 or 8.3% over 1998. Other operating income increased to
$2.5 million (including the realized gain of $183,000 on security sales reported
as cumulative effect of change in accounting principle from the adoption of SFAS
No. 133), an increase of $331,000 or 15.3% from 1998. Other operating income for
1998 included a $348,000 gain from the sale of the credit card portfolio.
Excluding this 1998 nonrecurring item, other operating income for 1999 increased
by 37.4% over 1998. The increase reflects gains of $207,000 recognized on the
sale of investment securities and a 39.6% increase in fees and other income
charged to customers as a result of both volume and rate increases. The increase
in other operating expenses, which increased to $6.2 million, an increase of
$910,000 or 17.3% over 1998, is the direct result of the additional salaries and
benefits, occupancy and equipment expenses related to the new branches added in
1998. The Company continued to focus its efforts toward retail banking services
within its market area in 1998 with specific attention given to increasing
market share.
11
<PAGE>
The growth in net income in 1998 was attributable to the improvement in
net interest income, which increased to $6.1 million, an increase of $658,000 or
12.0% over 1997, and which was also coupled with an increase in other operating
income to $1.6 million, an increase of $153,000 or 10.8% over 1997. This
increase more than offset the increase in other operating expenses to $5.3
million, an increase of $789,000 or 17.7% over 1997.
Analysis of Net Interest Income
For the first six months of 1999, net interest income (tax-equivalent
basis) increased to $7.1 million, an increase of $525,000 or 8.0% over 1998
levels. Average loans and leases increased to $237.1 million, an increase of
$23.4 million or 10.9% over 1998. Average commercial loans grew to $89.7
million, an increase of $14.1 million or 18.7% over 1998 levels. Interest income
on commercial loans increased to $3.6 million, an increase of $203,000 or 6.0%
over 1998. This was due to increased volume. The national prime rate as reported
in a national publication published daily, an index to which the majority of
these loans were tied, was 8.00% at June 30, 1999 and 8.50% at June 30, 1998.
Average real estate loans decreased 1.8%. Decreasing rates contributed to a 6.2%
decrease in interest income on real estate loans. Average consumer loans, which
included leases, increased $11.1 million or 33.7% over 1998, and resulted in a
23.5% increase in related interest income.
Net interest income (tax-equivalent basis) for the first six months of
1998 increased to $6.6 million, an increase of $691,000 or 11.8% over 1997. This
increase was due to the continued strong growth of earning assets, which grew
23.7% over 1997 levels.
On average, investment securities in 1999 increased to $192.1 million,
an increase of $32.0 million or 20.0% over 1998 levels. Investment securities in
1998 increased to $160.1 million, an increase of $46.4 million or 40.8% over
1997 levels. Income earned on investment securities increased to $6.3 million,
an increase of $707,000 or 12.6% over 1998. Income earned in 1998 increased to
$5.6 million, an increase of $1.4 million or 36.4% over 1997. As is discussed
under "Financial Condition," the asset/liability management and investment
strategies that were employed during 1999 and 1998 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 1999.
Taxable securities, which represented 79.8% of the investment portfolio in 1998,
increased to 80.4% or $154.5 million in 1999. At June 30, 1999, tax-exempt
securities represented 19.6% of the portfolio compared to 20.2% 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 June 30, 1999
increased to $37.6 million, an increase of $5.2 million or 16.1% over 1998.
Average interest-bearing deposits at June 30, 1999 increased to $264.7
million, an increase of $26.4 million or 11.1% over 1998.
12
<PAGE>
Average savings and interest-bearing demand deposits at June 30, 1999
increased to $87.5 million, an increase of $15.2 million or 21.1% over 1998. As
a percentage of total average interest-bearing deposits, savings and
interest-bearing demand deposits represented 33.1% in 1999 and 30.3% in 1998.
Due to the increase in the volume of lower interest-bearing deposits, the rates
at which time deposits were repricing and the volume increases, interest expense
on deposits for the six months ended June 30, 1999 and 1998 remained constant at
$5.4 million. These results were reflected in the cost of funds on deposits
which decreased 9.4% from 1998 through 1999, while volume increased 11.1%. There
were no brokered deposits within the Company's deposit base during 1999 or 1998.
Short-term borrowings, including federal funds purchased, and
securities sold under agreements to repurchase, averaged $7.1 million in 1999
and $1.9 million in 1998.
Interest expense as a percent of earning assets decreased by 29 basis
points from 4.37% in 1998 to 4.05% in 1999 due to the volume increase in
interest-bearing liabilities, the mix in the makeup of the interest-bearing
deposits, and the decrease in the related interest rates paid.
The overall effect of the decrease in yield on investments and loans
and leases, decrease 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 23
basis points to 3.27% in 1999 from 3.50% in 1998.
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.
13
<PAGE>
<TABLE>
<CAPTION>
For Six Months Ended June 30,
1999 1998
------------------------------------------------------------------------------------------
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 ................... $ 5,201 $ 118 4.55% $ 1,680 $ 45 5.37%
Deposits in Federal Home Loan Bank ... 172 5 5.83 289 7 4.86
Investment securities:
U.S. government agencies ............. 147,527 4,659 6.33 122,526 4,211 6.89
State and municipal(2) ............... 37,574 1,420 7.58 32,357 1,267 7.85
Other securities ..................... 6,985 226 6.49 5,233 120 4.60
------- ---- -------- -----
Total investment securities .......... 192,086 6,305 6.58 160,116 5,598 7.01
Loans and leases:
Commercial, financial and industrial . 89,723 3,596 8.04 75,617 3,393 9.00
Real estate-construction and mortgage 103,272 3,829 7.44 105,127 4,084 7.79
Installment loans to individuals(3) .. 40,668 1,753 8.64 29,427 1,408 9.60
Lease financing(3) ................... 3,484 258 14.85 3,595 220 12.27
--------- -------- ------- -----
Total loans and leases ............... 237,147 9,436 7.98 213,766 9,105 8.54
Total earning assets ................. 434,606 15,864 7.32 375,851 14,755 7.87
Cash and due from banks .............. 11,098 9,815
Premises and equipment ............... 18,051 13,827
Other, less allowance for credit losses
and loan fees ........................ 16,022 12,978
--------- --------
Total assets ......................... $479,777 $412,471
========= ========
Liabilities and stockholders' equity:
Interest-bearing deposits:
Demand ............................... $ 45,937 $ 550 2.40% $ 31,717 $ 334 2.11%
Savings .............................. 41,548 325 1.57 40,538 462 2.29
Time ................................. 135,711 3,587 5.30 125,200 3,501 5.61
Time over $100,000 ................... 41,486 991 4.79 40,869 1,116 5.48
-------- --------- -------- -----
Total interest-bearing deposits ...... 264,682 5,453 4.13 238,324 5,413 4.56
Federal funds purchased .............. 686 17 4.97 1,127 33 5.87
Short-term borrowings ................ 724 18 4.99 648 16 4.95
Securities sold under agreements
to repurchase ........................ 5,703 121 4.26 118 3 5.10
Long-term debt ....................... 114,599 3,173 5.55 90,339 2,733 6.07
-------- --------- -------- -----
Total interest-bearing liabilities ... 386,394 8,782 4.57 330,556 8,198 4.99
--------- --------
Demand - noninterest - bearing ....... 51,356 41,552
Other liabilities .................... 4,571 4,212
--------- --------
Total liabilities .................... 442,321 376,320
Stockholders' equity ................. 37,456 36,151
--------- --------
Total liabilities and stockholders' equity $479,777 $412,471
========= ========
Net interest income .................. $ 7,082 $ 6,557
========= ========
Net interest spread .................. 4.05% 4.37%
====== ========
Net interest margin(4) ............... 3.27% 3.50%
========= ========
<FN>
- ------------------------------
(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 assets.
</FN>
</TABLE>
14
<PAGE>
1999 Compared to 1998(1)
Caused by Total
Volume Rate Variance
(In thousands)
Interest income:
Federal funds sold ............... $ 80 $ (7) $ 73
Deposits in Federal Home Loan Bank (3) 1 (2)
Investment securities ............ 1,056 (349) 707
Loans and leases ................. 1,024 (693) 331
----- -------- -------
Total interest income ............... 2,157 (1,048) 1,109
----- ------- ------
Interest expense:
Demand and savings deposits ...... 176 (97) 79
Time deposits .................... 301 (340) (39)
Borrowed funds ................... 796 (252) 544
----- -------- -------
Total interest expense .............. 1,273 (689) 584
----- -------- -------
Net interest income ................. $ 884 $ (359) $ 525
====== ======= ======
- ------------------------------
(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 six months ended June
30, 1999 increased to $400,000, an increase of $75,000 or 23.1% over 1998. In
1999, the provision for possible credit losses was 97.6% of net charge-offs,
compared to 121% in 1998. 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 1999 increased to $410,000, an increase of $143,000
or 53.6% over the same period in 1998. The net charge-offs in 1999 were
primarily attributed to the commercial and consumer installment loan portfolio.
Net charge-offs on commercial and industrial loans for 1999 were
$237,000 or 57.8% of net charge-offs in 1999 compared to $87,000 of net
charge-offs for 1998. Consumer and credit card, lease financing, and real estate
related debt accounted for 42.2% in 1999 and 68.0% in 1998, of net charge-offs,
respectively.
15
<PAGE>
OTHER OPERATING INCOME
Other operating income in the first six months of 1999 increased to
$2.5 million (including the realized gain of $183,000 on security sales reported
as cumulative effect of change in accounting principle from the adoption of SFAS
No. 133), an increase of $331,000 or 15.3% from 1998. The 1998 amount reflects a
gain of $348,000 recognized on the sale of our credit card portfolio. Excluding
this gain, 1999 other operating income represents an increase of 37.3% over
1998. Mortgage servicing fee income in 1999 decreased to $131,000, a decrease of
$17,000 or 11.5% over 1998. These fees were directly influenced by the volume of
loans that were sold in the secondary market, net of loans paid off. 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 $325,000 recorded in 1999, compared with the net gain of $258,000 in
1998, 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 1999 increased to $940,000, an increase
of $265,000 or 39.3%. These fees, which represented 37.6% of other operating
income (including SFAS No. 133 gains), 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
8.2% in 1999 and 3.6% in 1998 of other operating income (including SFAS No. 133
gains), respectively. Reported on the consolidated statement of income for 1999
as "Cumulative Effect of Change in Accounting Principle, Net of Tax" are
additional available-for-sale security sales. The gain of $183,000 less income
taxes of $45,000 represents the transfer of securities from held-to- maturity to
the available-for-sale category and then sold, all within the first quarter. The
opportunity to transfer and the subsequent accounting treatment are as per SFAS
No. 133. 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 1999 increased to
$803,000, an increase of $127,000 or 18.8% over 1998.
16
<PAGE>
OTHER OPERATING EXPENSES
Other operating expenses in 1999 increased to $6.2 million, an increase
of $910,000 or 17.3% over 1998. Salaries and benefits, which were the most
significant of the noninterest expenses, increased in each of the years
reported. Salaries and benefits for 1999 increased to $2.8 million, an increase
of $459,000 or 19.6% over 1998. 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 1999 increased to $1.5 million, an
increase of $181,000 or 13.5% over 1998. 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), and the Year 2000 testing and
related equipment costs throughout the branch network.
FDIC insurance assessments decreased from $222,000 in 1995, to $2,000
in 1996, $0 in 1997 and 1998. 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 1999 increased to $1.6 million, an increase of
$247,000 or 17.8% over 1998. 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 six months ended June 30, 1999
was $615,000, a decrease of 2.4% or $15,000 in 1999. The effective tax rate for
1999 and 1998 was 23.9% and 23.2%, respectively.
FINANCIAL CONDITION
June 30, 1999 Compared to December 31, 1998
The Company's total assets increased to $492.9 million at June 30,
1999, an increase of $18.2 million or 3.8% from $474.7 million at December 31,
1998. The increase in assets was primarily attributable to a $18.3 million
growth in net loans and leases and a $6.5 million decrease in Federal Funds
sold.
17
<PAGE>
The amortized cost of investment securities, including held-to-maturity
(HTM) and available-for-sale (AFS), increased to $203.3 million at June 30,
1999, an increase of $10.5 million or 5.4% from $192.8 million at December 31,
1998. 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. In 1999, LA Bank, like most financial
institutions, experienced decreasing yields. This was the result of many
callable or mortgage related securities paying off quicker than expected,
causing reinvestment into lower yielding securities. If securities were owned at
a premium, the early payoff also had the effect of lowering the yield being
earned.
An investment strategy was implemented to combat decreasing yields.
First, sales of faster paying, lower yielding securities were replaced with
lower coupon, lower priced, longer term, higher yielding securities. Secondly,
municipal securities with short remaining terms were sold at a profit
(approximately $183,000) and reinvested into like-kind, longer-term municipal
securities without sacrificing yield or risk. At June 30, 1999, gross unrealized
gains in the HTM investments were $258,000 while gross unrealized losses
amounted to $2,316,000.
The following table presents the maturity distribution and weighted
average yield of the securities portfolio of the Company at June 30, 1999.
Weighted average yields on tax-exempt obligations have been computed on a
taxable equivalent basis.
<TABLE>
<CAPTION>
Available-for-Sale June 30, 1999
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> <C> <C> <C> <C>
(Dollars in thousands)
Amortized cost:
U.S. government agencies and
corporations............... $ 14,972 6.92% $ 35,974 6.76 $ 14,641 6.61% $ 60,578 6.66% $126,165 6.72%
Obligations of state and
political subdivisions..... - - 405 6.84 394 6.46 21,299 6.84 22,098 6.84
Equity securities............. - - - - - - 7,106 6.37 7,106 6.37
---------- ----- --------- ------- --------
Total securities
available-for-sale $ 14,972 6.92% $ 36,379 6.76% $ 15,035 6.61% $ 88,983 6.68% $155,369 6.72%
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity June 30, 1999
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> <C> <C> <C> <C>
(Dollars in thousands)
Amortized cost:
U.S. government agencies and
corporations............... $ 1,262 6.08% $ 5,048 6.08% $ 6,310 6.08% $ 11,398 6.08% $ 24,018 6.08%
Obligations of state and
political subdivisions..... - - 298 7.11 6,333 7.49 17,310 7.20 23,941 7.28
----------- --------- ------ -------- --------
Total securities
held-to-maturity $ 1,262 6.08% $ 5,346 6.14% $ 12,643 6.79% $ 28,708 6.75% $ 47,959 6.68%
======== ======== ======== ========
</TABLE>
18
<PAGE>
Total net loans increased to $243.0 million at June 30, 1999, an
increase of $18.2 million or 8.1% from $224.8 million at December 31, 1998. The
increase in net loans was directly related to the growth in commercial loans.
Residential mortgage loans, which included real estate construction loans,
decreased to $97.6 million at June 30, 1999, a decrease of $9.1 million or 8.2%
from $106.7 million at December 31, 1998. Approximately $13.8 million of
mortgage loans were sold during the first six months of 1999.
Consumer loans and leases, net of unearned discounts, increased to
$51.2 million at June 30, 1999, an increase of $9.5 million or 22.7% from $41.7
million at December 31, 1998. Commercial loans increased to $95.4 million at
June 30, 1999, an increase of $16.1 million or 20.3% from $79.3 million at
December 31, 1998. 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 $9.2 million at June
30, 1999, an increase of $388,000 or 4.4% from $8.8 million at December 31,
1998. This 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 $330.6 million at June 30, 1999, an increase of
$17.9 million or 5.7% from $312.7 million at December 31, 1998.
Noninterest-bearing demand deposits increased to $56.5 million at June 30, 1999,
an increase of $4.1 million or 7.7% from $52.4 million at December 31, 1998. In
the aggregate, savings and interest-bearing demand deposits increased to $95.8
million at June 30, 1999, an increase of $15.5 million or 19.2% from $80.3
million at December 31, 1998. As a percentage of total deposits, savings and
interest-bearing demand deposits represented 29.0% in 1999, compared to 25.7% in
1998. Time deposits, which include certificates of deposit in denominations of
$100,000 or more, decreased to $178.3 million at June 30, 1999, a decrease of
$1.7 million or .92% from $180.0 million at December 31, 1998. As a percentage
of total deposits, these deposits represented 53.9% in 1999 and 57.5% in 1998.
Approximately $7.2 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
19
<PAGE>
<
Company at June 30, 1999 and December 31, 1998:
1999 1998
(in thousands)
Loans past due 90 days or more $ 346 $ 759
Impaired loans in nonaccrual status 1,875 2,088
Other nonaccrual loans 319 308
------- -------
Total nonperforming loans 2,540 3,155
Foreclosed assets held for sale 898 357
------- --------
Total nonperforming assets $3,438 $3,512
====== =======
Nonperforming loans as a
percentage of loans 1.04% 1.39%
Nonperforming assets as a
percentage of assets .70% 0.74%
Nonperforming loans decreased 19.5% from year-end 1998. Nonaccrual loans
decreased $202,000 or 8.4% from year-end 1998.Commercial loans accounted for
85.5% of all nonaccruals, followed by real estate loans at 14.5%. Within the
$2.194 million of total nonaccrual loans, 91.9% were secured by mortgages,
primarily first liens, against residential or commercial properties. Loans past
due 90 days or more decreased $413,000 from 1998 year-end levels. These loans
included $318,000 in real estate mortgages, $28,000 in consumer credit, $0 in
commercial loans and $0 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 $898,000 at June 30, 1999 compared
to $357,000 at year-end 1998. The increase was a result of problem credits going
through the foreclosure process. The number of properties increased from five to
nine. Two new commercial properties were added, accounting for $415,000 of the
increase. 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 June 30, 1999, the Company had approximately $1.8 million of
potential problem loans not included in the nonperforming loan classification.
Known information about possible credit problems related to these borrowers
caused management to have serious doubts as to the ability of such borrowers to
comply with present loan repayment terms and may result in future classification
of such loans as nonperforming. These potential problem loans were taken into
consideration by management when determining the adequacy of the allowance for
possible credit losses at June 30, 1999. See "Factors That May Affect Future
Results" for further discussion.
20
<PAGE>
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
June 30, 1999 and December 31, 1998, the allowance for possible credit losses
was 0.96% and 1.04% of loans, respectively. 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 June 30, 1999 and
December 31, 1998 were as follows:
1999 1998
(dollars in thousands)
Balance at beginning of period $2,360 $2,109
------- -------
Charge-offs:
Real estate-construction -- --
Real estate-mortgage 61 122
Commercial and industrial 239 512
Consumer installment 130 282
Lease financing 30 29
--------- --------
Total 460 945
-------- --------
Recoveries:
Real estate-construction -- --
Real estate-mortgage -- --
Commercial and industrial 2 6
Consumer installment 46 59
Lease financing 2 --
---------- -------
Total 50 65
------------------
Net charge-offs 410 880
------------------
Provision for possible credit losses 400 1,130
------------------
Balance at end of period $2,350 $2,360
======= =======
Ratio of net charge-offs during
period to average loans
outstanding during period 0.17% 0.40%
======= ====
21
<PAGE>
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 June 30, 1999, approximately 71.2% 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.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
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 ....................................... $ 312 39% $ 281 46%
Commercial and industrial ......................... 1,242 40 1,230 36
Consumer installment .............................. 669 19 361 16
Lease financing ................................... 94 2 92 2
Unallocated ....................................... 33 -- 396 --
-------------- ------- ---
Total ....................................... $2,350 100% $2,360 100%
====== ==== ====== ====
<FN>
(1) Loans, net of unearned income.
</FN>
</TABLE>
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.
22
<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 June 30, 1999, LA Bank maintained a one year cumulative gap of
negative $8.8 million or 1.79% 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 increasing interest rates. Conversely,
in a decreasing interest rate environment, net income could be positively
affected because more liabilities than assets will reprice during a given
period.
<TABLE>
<CAPTION>
Interest Sensitivity Gap at June 30, 1999
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> <C>
Cash and cash equivalents................... $ 269 $ 806 $ - $ 12,432 $ 13,507
Investment securities(1)(2)................. 12,036 18,046 32,070 134,470 196,622
Loans(2).................................... 56,787 63,556 59,718 62,720 242,781
Fixed and other assets...................... - - - 39,599 39,599
-------------------------- ------------- ---------- ------------
Total assets................................ $ 69,092 $ 82,408 $ 91,788 $ 249,221 $ 492,509
========= ========= ========== ========= ==========
Non interest-bearing transaction deposits(3) $ - $ - $ 28,266 $ 28,266 $ 56,532
Interest-bearing transaction deposits(3) 1,696 17,097 21,290 58,237 98,320
Time........................................ 28,024 70,665 39,968 4 138,661
Time over $100,000.......................... 8,123 17,900 11,128 - 37,151
Short-term borrowings....................... 9,013 866 2,014 - 11,893
Long-term debt.............................. 5,486 1,457 33,422 70,433 110,798
Other liabilities........................... - - - 4,363 4,363
---------------------------------------- ----------- ------------
Total Liabilities...................... $ 52,342 $ 107,985 $ 136,088 $ 161,303 $ 457,718
========= ========= ========= ========= ==========
Interest sensitivity gap....................$ 16,750 $ (25,577) $ (44,300) $ 87,918
========== ========== ========== ==========
Cumulative gap..............................$ 16,750 $ (8,827) $ (53,127) $ 34,791
========== =========== ========== ==========
Cumulative gap to total assets.............. 3.40% (1.79)% (10.79)% 7.06%
<FN>
23
<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.
</FN>
</TABLE>
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.
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
June 30, 1999 remained constant. The impact of the rate movements was developed
by simulating the effect of rates changing over a twelve-month period from the
June 30, 1999 levels.
24
<PAGE>
Rates +200 Rates -200
Earnings at risk:
Percent change in:
Net Interest Income 0.6% (5.2)%
Net Income 2.5% (11.6)%
Economic value at risk:
Percent change in:
Economic value of equity (25.9)% (2.6)%
Economic value of equity as a
percent of book assets (3.1)% (0.3)%
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 June 30,
1999 was 7.67% compared to 7.72% at December 31, 1998. For 1999 and 1998, 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.
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.
25
<PAGE>
At June 30, 1999
(Dollars in thousands)
Primary capital...................................... $ 39,218
Intangible assets.................................... 2,160
----------
Tier I capital....................................... 37,058
Tier II capital...................................... 2,256
----------
Total risk-based capital............................. $ 39,314
=========
Total risk-weighted assets........................... $266,682
Tier I ratio......................................... 13.90%
Risk-based capital ratio............................. 14.74%
Tier I leverage ratio................................ 7.67%
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 June 30, 1999, the Company maintained $13.5 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 $272,000 of
mortgage loans held for resale and $148.9 million in AFS securities. This
combined total of $162.7 million represented 33.0% of total assets at June 30,
1999. The Company believes that its liquidity is adequate.
The Company considers its primary source of liquidity to be its core
deposit base. This funding source has grown steadily over the years and consists
of deposits from customers throughout the branch network. The Company will
continue to promote the acquisition of deposits through its branch offices. At
June 30, 1999, approximately 67.1% of the Company's assets were funded by core
deposits acquired within its market area. An additional 7.1% of the assets were
funded by the Company's equity. These two components provide a substantial and
stable source of funds.
Net cash provided by operating activities was $7.7 million for the six
months ended June 30, 1999, as compared to net cash used by operating activities
of $4.7 million for the comparable period in 1998. This $12.4 million increase
is primarily related to a net $7.3 million decrease in the change in mortgage
loans held for resale. Net cash used in investing activities decreased $29.9
million for the six months ended June 30, 1999, from $64.3 million to $34.4
million, which was primarily attributable to the decrease in purchases of
investment securities. Net cash provided by financing activities decreased $32.4
million from 1998. A net increase in FHLB borrowings of $50.7 million during the
six months ended June 30, 1998 was used to fund investment purchases.
26
<PAGE>
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
8.5%. Beginning with September 1998 through November 1998, the national prime
lending rate fell in three separate adjustments to 7.75%. On July 1, 1999, the
national prime lending rate increased to 8.00%, based on changes to the Federal
Funds rate by the Federal Open Market Committee. 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.
A normal examination of LA Bank by the Office of the Comptroller of the
Currency ("OCC") in 1998 resulted in no significant findings and no impact is
anticipated on current or future operations.
LA Bank's current and future FDIC BIF assessment is expected to be $0;
however, the FICO assessment for 1999 is expected to be approximately $45,000.
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. In September 1998, LA Bank acquired the
fixed assets and deposits of the Mountainhome (Monroe County) branch of Mellon
Bank. The acquired office was consolidated into LA Bank's existing Mountainhome
branch. The amortization of the customer lists and deposit premium was $205,000
for 1998 and is expected to be $300,000 for 1999.
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 short-term negative
impact on the Company's earnings until the growth in deposits reaches a level to
offset these expenses. The potential for future earnings growth is positive and
should provide a favorable return for our stockholders.
27
<PAGE>
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, Loan Operations
Officer, and Branch Administration Officers. The committee currently meets
weekly to discuss the progress of the project.
An outline was developed by the Y2K 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 was
contracted to assist and act as a consultant to the Company with the Year 2000
testing. The Company simulated its entire technology platform into the Year 2000
to conduct transactional testing.
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 customers' Company
statements.
The Year 2000 Committee has established a timeline for Year 2000
Readiness. This timeline is updated as actions are completed.
28
<PAGE>
<TABLE>
<CAPTION>
TIME LINE
AWARENESS AND ASSESSMENT RENOVATION, TESTING, IMPLEMENTATION PHASES
<S> <C> <C> <C>
*2nd Quarter 1997 *3rd Quarter 1997 *4th Quarter 1997 *1st Quarter 1998
- -Y2K Committee was formed. Compliant 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
- -Terminals were tested. -Y2K Outline was developed. critical application. contacted as to their Y2K status.
-Committee Chairpersons attended Y2K training.
-PC's and proof machines were tested for Y2K
compliance.
-Assessment of all vendors & hardware was
completed.
*2nd Quarter 1998 *3rd Quarter 1998 *4th Quarter 1998 1st/2nd Quarter 1999
- -Tested ITI core applications. -All depositors were sent a -Sought alternate hardware and software -Implement any new
- -Began renovation of PC's and letter stating the bank's vendors for those applications that hardware and/or software
routers. Y2K status. were not Y2K compliant. vendors.
- -Prepared contingency plan. -Continued testing core -Continued testing core applications -Continue testing core
applications for critical dates. for critical dates. applications for critical
-Commercial customers with a -Partnered with Unisys Corp. to dates.
borrowing relationship between conduct Y2K testing. The Bank's -Complete renovations.
$150,000 to $250,000, and technology platform was aged into -Test non mission critical
any others heavily reliant on the Year 2000 and transactional equipment with date
technology were assessed testing was conducted. sensitive operating
for Y2K status. controls or calendar
functions.
*Denotes completion
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
YEAR 2000 BUDGET
In accordance with the Office of the Comptroller of the Currency Year 2000
advisory letters, the Y2K Committee has prepared a budget of current and
anticipated expenditures. The following is a breakdown as of January 1, 1999:
<S> <C> <C>
Vendor Description Amount
Unisys Corporation Y2K analysis, ITI, Wide Area Network,
and Clear Path testing $ 69,959
Retec Corporation ATM memory, processor and software upgrade 23,350
Barefoot Technology Y2K test server setup and server 2,130
Compliance Technology Systems Wire Transfer Control System 1,500
Information Technology, Inc. Year 2000 ITI Training Seminar 1,473
Sheshunoff Information Services Year 2000 Planning & Consulting Manual 392
MK Business Machines, Inc. ATM NCR 7760 year wheel upgrade 265
Amerigo Inc. Purchase new PC's to replace non Y2K
compliant PC's 12,250
Infinity Technology Group Assist with upgrading PC's 3,840
Mortgage Banker Assoc. Freddie Mac Delinquency and Investor Reporting 1,750
**Unisys Corporation/ Change non Y2K check processing software
Information Technology Inc. and check sorter equipment 246,163
Mellon Network Services ATM Y2K Testing 2,750
TOTAL $365,822
</TABLE>
**The purchase of the check sorter equipment was a Y2K issue as well as
improving the efficiency of the Bank's overall operations. The existing check
processing software and equipment could have been upgraded to be Y2K compliant
for approximately $80,000.
30
<PAGE>
The core business processes that the Year 2000 Committee has identified
are Information Technology Incorporated, Bankers Systems Incorporated,
Attachmate Incorporated, Unisys Corporation, NCR, Novell Incorporated, and
Leasetek Incorporated. The Company is very optimistic that by conducting the
necessary tests there will not be any
interruption of services.
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 a very intensive testing schedule.
The Company has already conducted detailed testing of this process and currently
has generated a schedule that will continue throughout the Year 1999. All system
renovations have been completed and fully implemented.
The Company has developed a written contingency plan to handle the most
reasonably likely worst case scenarios. The plan addresses alternate vendors for
these mission critical applications, a timeline for implementation and action,
circumstances and trigger dates, and 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 implementating
changes. 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. Therefore, the
Company cannot currently quantify the potential financial impact of a worst case
scenario created by Y2K failures.
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. Testing has 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."
31
<PAGE>
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.
As of June 30, 1999, 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 $8.8 million, representing a
cumulative one-year interest rate sensitivity gap as a percentage of total
assets of negative 1.79%. 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.
32
<PAGE>
NEW FINANCIAL ACCOUNTING STANDARDS
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 was 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 would be to
require additional disclosures in the Company's financial statements. There was
no impact on the Company's financial statements in 1999 or 1998.
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
embedded 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. In
connection with the implementation of FASB No. 133, the Company may transfer
debt securities classified as held-to-maturities to the available-for-sale
category. Such a transfer will not call into question the Company's intention to
hold other debt to maturity in the future. 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. The
Company adopted FASB No. 133 in 1999. The Company transferred $71,137,000 of
debt securities classified as held-to-maturity to the available-for-sale
category. Certain of these debt securities were subsequently sold at a total
gain of $183,000. Since both the adoption of SFAS No. 133 and subsequent sale of
these securities were within the same reporting period, the gain is reported as
a cumulative effect of change in accounting principle, net of tax. Any other
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.
33
<PAGE>
Accounting for Mortgage-Backed Securities after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise
Statement of Financial Accounting Standards No. 134 amends FASB No. 65,
Accounting for Certain Mortgage Banking Activities. The amendment provides that
after the securitization of a mortgage loan held for sale, any retained
mortgage-backed securities shall be classified in accordance with the provisions
of FASB No. 115. However, a mortgage banking enterprise must classify as trading
any retained mortgage-backed securities that it commits to sell before or during
the securitization process. The adoption of Statement No. 134 in 1998 had no
impact on the Company for 1999 or 1998.
Part II - Other Information
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
34
<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: August 2, 1999 By ________________________________
John G. Martines
CHIEF EXECUTIVE OFFICER
--------------------------------
Joseph J. Earyes, CPA
VICE PRESIDENT and
TREASURER
35
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000723878
<NAME> LAKE ARIEL BANCORP, INC. FORM 10-Q
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,432
<INT-BEARING-DEPOSITS> 1,075
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,950
<INVESTMENTS-CARRYING> 47,959
<INVESTMENTS-MARKET> 45,901
<LOANS> 245,359
<ALLOWANCE> 2,350
<TOTAL-ASSETS> 492,894
<DEPOSITS> 330,610
<SHORT-TERM> 8,724
<LIABILITIES-OTHER> 4,514
<LONG-TERM> 113,967
0
0
<COMMON> 1,019
<OTHER-SE> 34,060
<TOTAL-LIABILITIES-AND-EQUITY> 492,894
<INTEREST-LOAN> 9,467
<INTEREST-INVEST> 5,822
<INTEREST-OTHER> 123
<INTEREST-TOTAL> 15,412
<INTEREST-DEPOSIT> 5,441
<INTEREST-EXPENSE> 3,341
<INTEREST-INCOME-NET> 6,630
<LOAN-LOSSES> 400
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 1,635
<INCOME-PRETAX> 1,815
<INCOME-PRE-EXTRAORDINARY> 1,815
<EXTRAORDINARY> 0
<CHANGES> 138
<NET-INCOME> 1,953
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 0
<LOANS-NON> 2,194
<LOANS-PAST> 346
<LOANS-TROUBLED> 2,540
<LOANS-PROBLEM> 1,800
<ALLOWANCE-OPEN> 2,360
<CHARGE-OFFS> 460
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 2,350
<ALLOWANCE-DOMESTIC> 2,350
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,350
</TABLE>
