SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file Number: 2-85306
LAKE ARIEL BANCORP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2244948
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Post Office Box 67, Route 191, Lake Ariel, Pennsylvania 18436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 698-5695
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.21 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on average closing bid and asked prices: $42,015,693 at
March 16, 1999.
As of March 16, 1999, the registrant had outstanding 4,838,386 shares of
its common stock, par value $.21 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to shareholders of the registrant for the year
ended December 31, 1998 and of the Proxy Statement for the 1999 Annual Meeting
of Shareholders, are incorporated by reference in Part II of this Annual Report.
Page 1 of 120
Exhibit Index on Page 26
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LAKE ARIEL BANCORP, INC.
FORM 10-K
Index
Part I Page
Item 1. Business....................................... 3
Item 2. Properties..................................... 16
Item 3. Legal Proceedings.............................. 18
Item 4. Submission of Matters to a Vote of
Security Holders......................... Not Applicable
Part II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters........................... 18
Item 6. Selected Financial Data........................ 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......... 20
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk............................. 20
Item 8. Financial Statements and Supplementary Data.... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......... 20
Part III
Item 10. Directors and Executive Officers of the Registrant. 20
Item 11. Executive Compensation......................... 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................ 21
Item 13. Certain Relationships and Related Transactions. 21
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................... 22
Signatures ............................................... 24
Exhibit Index ............................................... 26
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LAKE ARIEL BANCORP, INC.
FORM 10-K
Part I
Item 1. Business
General
Lake Ariel Bancorp, Inc. ("Bancorp"), a Pennsylvania business
corporation, is a bank holding company, registered with and supervised by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Bancorp was organized on May 23, 1983, and commenced operations on November 26,
1983. Bancorp has one wholly-owned subsidiary, LA Bank, National Association
(the "Bank"). Bancorp's business has consisted primarily of managing and
supervising the Bank, and its principal source of income has been dividends paid
by the Bank. At December 31, 1998, Bancorp had total consolidated assets,
deposits and stockholders' equity of approximately $474.7 million, $312.7
million and $37.9 million, respectively.
The Bank was organized in 1910. The Bank is a national banking
association that is a member of the Federal Reserve System and the deposits of
which are insured by the Federal Deposit Insurance Corporation (the "FDIC")
under the Bank Insurance Fund ("BIF"). The Bank has twenty-one (21) branch
locations (four branches within Wayne County, ten branches within Lackawanna
County, three branches within Pike County, two branches within Monroe County and
two branches within Luzerne County), and a Financial Center (within Lackawanna
County, Pennsylvania). The Bank is a full service commercial bank providing a
wide range of services to individuals and small to medium sized businesses in
its Northeastern Pennsylvania market area, including accepting time, demand, and
savings deposits and making secured and unsecured commercial, real estate and
consumer loans. The Bank has two subsidiaries, LA Lease, Inc., that engages in
the leasing of personal property, and Ariel Financial Services, Inc., a newly
formed business unit offering stocks, bonds, annuities and other
insurance-related products.
Supervision and Regulation - Bancorp
Bancorp is subject to the jurisdiction of the Securities and
Exchange Commission ("SEC") relating to the offering and sale of its securities.
Bancorp is currently subject to the SEC's rules and regulations relating to
periodic reporting, insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934 (the "Exchange Act").
Bancorp is also subject to the provisions of the Bank Holding
Company Act of 1956, as amended ("Bank Holding Company Act"), and to supervision
by the Federal Reserve Board. The Bank Holding Company Act will require Bancorp
to secure the prior approval of the Federal Reserve Board before it owns or
controls, directly or indirectly, more than 5% of the voting shares of
substantially all of the assets of any institution, including another bank. The
Bank Holding Company Act prohibits acquisition by Bancorp of more than 5% of the
voting shares of, or interest in, or substantially all of the assets of, any
bank located outside Pennsylvania unless such an acquisition is specifically
authorized by laws of the state in which such bank is located.
A bank holding company is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any company
engaged in non-banking activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making this
determination, the Federal Reserve Board considers whether the performance of
these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of
control of a bank holding company, such as Bancorp, without prior notice to the
Federal Reserve Board. Control is defined for this purpose as the power,
directly or indirectly, to direct the management or policies of a bank holding
company or to vote twenty-five percent (25%) (or ten percent (10%), if no other
person or persons acting on concert, holds a greater percentage of the Common
Stock) or more of Bancorp's Common Stock.
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Bancorp is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of Bancorp and any or all of its subsidiaries. Subject to
certain exceptions, a bank holding company and its subsidiaries are generally
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or provision of credit or provision of any property or
services. The so-called "Anti-tie-in" provisions state generally that a bank may
not extend credit, lease, sell property or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to its bank holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other credit or service
from a competitor of the bank, its bank holding company or any subsidiary of its
bank holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
Permitted Non-Banking Activities
The Federal Reserve Board permits bank holding companies or their
subsidiaries to engage in nonbanking activities so closely related to banking or
managing or controlling banks as to be a proper incident thereto. While the
types of permissible activities are subject to change by the Federal Reserve
Board, the principal nonbanking activities that presently may be conducted by a
bank holding company or its subsidiary without prior approval of the Federal
Reserve Board are:
(1) Extending credit and servicing loans. Making, acquiring,
brokering, or servicing loans or other extensions of credit (including
factoring, issuing letters of credit and accepting drafts) for the company's
account or for the account of others.
(2) Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans or other
extensions of credit, as determined by the Federal Reserve Board. The Federal
Reserve Board has determined that the following activities are usual in
connection with making, acquiring, brokering or servicing loans or other
extensions of credit:
(i) Real estate and personal property appraising.
Performing appraisals of real estate and tangible and intangible
personal property, including securities.
(ii) Arranging commercial real estate equity financing.
Acting as intermediary for the financing of commercial or
industrial income-producing real estate by arranging for the
transfer of the title, control, and risk of such a real estate
project to one or more investors, if the bank holding company and
its affiliates do not have an interest in, or participate in
managing or developing, a real estate project for which it
arranges equity financing, and do not promote or sponsor the
development of the property.
(iii) Check-guaranty services. Authorizing a subscribing
merchant to accept personal checks tendered by the merchant's
customers in payment for goods and services, and purchasing from
the merchant validly authorized checks that are subsequently
dishonored.
(iv) Collection agency services. Collecting overdue
accounts receivable, either retail or commercial.
(v) Credit bureau services. Maintaining information
related to the credit history of consumers and providing the
information to a credit grantor who is considering a borrower's
application for credit or who has extended credit to the borrower.
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(vi) Asset management, servicing, and collection
activities. Engaging under contract with a third party in asset
management, servicing, and collection of assets of a type that an
insured depository institution may originate and own, if the
company does not engage in real property management or real estate
brokerage services as part of these services.
(vii) Acquiring debt in default. Acquiring debt that is in
default at the time of acquisition under certain conditions.
(viii) Real estate settlement servicing. Providing real
estate settlement services.
(3) Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing such property under
certain conditions.
(4) Operating nonbank depository institutions:
(i) Industrial banking. Owning, controlling, or operating
an industrial bank, Morris Plan bank, or industrial loan company,
so long as the institution is not a bank.
(ii) Operating savings association. Owning, controlling or
operating a savings association, if the savings association
engages only in deposit-taking activities, lending, and other
activities that are permissible for bank holding companies.
(5) Trust company functions. Performing functions or activities
that may be performed by a trust company (including activities of a fiduciary,
agency, or custodial nature), in the manner authorized by federal or state law,
so long as the company is not a bank for purposes of the Bank Holding Company
Act.
(6) Financial and investment advisory activities. Acting as
investment or financial advisor to any person, including (without, in any way,
limiting the foregoing):
(i) Serving as investment adviser (as defined in section
2(a)(20) of the Investment Company Act of 1940, 15 U.S.C.
80a-2(a)(20)), to an investment company registered under that act,
including sponsoring, organizing, and managing a closed-end
investment company;
(ii) Furnishing general economic information and advice,
general economic statistical forecasting services, and industry
studies;
(iii) Providing advice in connection with mergers,
acquisitions, divestitures, investments, joint ventures, leveraged
buyouts, recapitalizations, capital structurings, financing
transactions and similar transactions, and conducting financial
feasibility studies;
(iv) Providing information, statistical forecasting, and
advice with respect to any transaction in foreign exchange, swaps,
and similar transactions, commodities, and any forward contract,
option, future, option on a future, and similar instruments;
(v) Providing educational courses, and instructional
materials to consumers on individual financial management matters;
and
(vi) Providing tax-planning and tax-preparation services
to any person.
(7) Agency transactional services for customer investments:
(i) Securities brokerage. Providing securities brokerage
services (including securities clearing and/or securities
execution services on an exchange), whether alone or in
combination with investment advisory services, and incidental
activities (including related securities credit activities and
custodial services), if the securities brokerage services are
restricted to buying and selling securities solely as agent for
the account of customers and do not include securities
underwriting or dealing.
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(ii) Riskless principal transactions. Buying and selling
in the secondary market all types of securities on the order of
customers as a "riskless principal" to the extent of engaging in a
transaction in which the company, after receiving an order to buy
(or sell) a security from a customer, purchases (or sells) the
security for its own account to offset a contemporaneous sale to
(or purchase from) the customer. This does not include:
(A) Selling bank-ineligible securities at the
order of a customer that is the issuer of the securities,
or selling bank-ineligible securities in any transaction
where the company has a contractual agreement to place the
securities as agent of the issuer; or
(B) Acting as a riskless principal in any
transaction involving a bank-ineligible security for which
the company or any of its affiliates acts as underwriter
(during the period of the underwriting or for 30 days
thereafter) or dealer.
(iii) Private placement services. Acting as agent for the
private placement of securities in accordance with the
requirements of the Securities Act of 1933 ("1933 Act") and the
rules of the Securities and Exchange Commission, if the company
engaged in the activity does not purchase or repurchase for its
own account the securities being placed, or hold in inventory
unsold portions of issues of these securities.
(iv) Futures commission merchant. Acting as a futures
commission merchant ("FCM") for unaffiliated persons in the
execution, clearance, or execution and clearance of any futures
contract and option on a futures contract traded on an exchange in
the United States or abroad under certain conditions.
(v) Other transactional services. Providing to customers
as agent transactional services with respect to swaps and similar
transactions.
(8) Investment transactions as principal:
(i) Underwriting and dealing in government obligations and
money market instruments. Underwriting and dealing in obligations
of the United States, general obligations of states and their
political subdivisions, and other obligations that state member
banks of the Federal Reserve System may be authorized to
underwrite and deal in under 12 U.S.C. 24 and 335, including
banker's acceptances and certificates of deposit, under the same
limitations as would be applicable if the activity were performed
by the bank holding company's subsidiary member banks or its
subsidiary nonmember banks as if they were member banks.
(ii) Investing and trading activities. Engaging as
principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options
on futures, swaps, and similar contracts, whether traded
on exchanges or not, based on any rate, price, financial
asset (including gold, silver, platinum, palladium,
copper, or any other metal approved by the Board),
nonfinancial asset, or group of assets, other than a
bank-ineligible security under certain conditions.
(C) Forward contracts, options, futures, options
on futures, swaps, and similar contracts, whether traded
on exchanges or not, based on an index of a rate, a price,
or the value of any financial asset, nonfinancial asset,
or group of assets, if the contract requires such
settlement.
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(iii) Buying and selling bullion, and related activities.
Buying, selling and storing bars, rounds, bullion, and coins of
gold, silver, platinum, palladium, copper, and any other metal
approved by the Federal Reserve Board, for the company's own
account and the account of others, and providing incidental
services such as arranging for storage, safe custody, assaying,
and shipment.
(9) Management consulting and counseling activities:
(i) Management consulting. Providing management consulting
advice under certain conditions.
(ii) Employee benefits consulting services. Providing
consulting services to employee benefit, compensation and
insurance plans, including designing plans, assisting in the
implementation of plans, providing administrative services to
plans, and developing employee communication programs for plans.
(iii) Career counseling services. Providing career
counseling services to:
(A) A financial organization and individuals
currently employed by, or recently displaced from, a
financial organization;
(B) Individuals who are seeking employment
at a financial organization; and
(C) Individuals who are currently employed in or
who seek positions in the finance, accounting, and audit
departments of any company.
(10) Support services:
(i) Courier services. Providing courier services for:
(A) Checks, commercial papers, documents, and
written instruments (excluding currency or bearer-type
negotiable instruments) that are exchanged among banks and
financial institutions; and
(B) Audit and accounting media of a banking or
financial nature and other business records and documents
used in processing such media.
(ii) Printing and selling MICR-encoded items. Printing and
selling checks and related documents, including corporate image
checks, cash tickets, voucher checks, deposit slips, savings
withdrawal packages, and other forms that require Magnetic Ink
Character Recognition ("MICR") encoding.
(11) Insurance agency and underwriting:
(i) Credit insurance. Acting as principal, agent, or
broker for insurance (including home mortgage redemption
insurance) that is:
(A) Directly related to an extension of credit
by the bank holding company or any of its subsidiaries;
and
(B) Limited to ensuring the repayment of the
outstanding balance due on the extension of credit in the
event of the death, disability, or involuntary
unemployment of the debtor.
(ii) Finance company subsidiary. Acting as agent or broker
for insurance directly related to an extension of credit by a
finance company that is a subsidiary of a bank holding company
under certain conditions.
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(iii) Insurance in small towns. Engaging in any insurance
agency activity in a place where the bank holding company or a
subsidiary of the bank holding company has a lending office and
that:
(A) Has a population not exceeding 5,000
(as shown in the preceding decennial census); or
(B) Has inadequate insurance agency facilities,
as determined by the Federal Reserve Board, after notice
and opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982.
Under certain restrictions, engaging in any specific
insurance-agency activity if the bank holding company, or
subsidiary conducting the specific activity, conducted such
activity on May 1, 1982, or received the Federal Reserve Board
approval to conduct such activity on or before May 1, 1982.
(v) Supervision of retail insurance agents. Supervising on
behalf of insurance underwriters the activities of retail
insurance agents who sell:
(A) Fidelity insurance and property and casualty
insurance on the real and personal property used in the
operations of the bank holding company or its
subsidiaries; and
(B) Group insurance that protects the employees
of the bank holding company or its subsidiaries.
(vi) Small bank holding companies. Engaging in any
insurance-agency activity if the bank holding company has total
consolidated assets of $50 million or less.
(vii) Insurance-agency activities conducted before 1971.
Engaging in any insurance-agency activity performed at any
location in the United States directly or indirectly by a bank
holding company that was engaged in insurance-agency activities
prior to January 1, 1971, as a consequence of approval by the
Federal Reserve Board prior to January 1, 1971.
(12) Community development activities:
(i) Financing and investment activities. Making equity and
debt investments in corporations or projects designed primarily to
promote community welfare, such as the economic rehabilitation and
development of low-income areas by providing housing, services, or
jobs for residents.
(ii) Advisory activities. Providing advisory and related
services for programs designed primarily to promote community
welfare.
(13) Money orders, savings bonds, and traveler's checks. The
issuance and sale at retail of money orders and similar consumer-type payment
instruments; the sale of U.S. savings bonds; and the issuance and sale of
traveler's checks.
(14) Data processing. Providing data processing and data
processing and data transmission services, facilities (including data processing
and data transmission hardware, software, documentation, or operating
personnel), data bases, advice, and access to such services, facilities, or data
bases by any technological means under certain conditions.
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Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended (the
"Code"), Bancorp is permitted to control an unlimited number of banks. However,
Bancorp would be required, under the Bank Holding Company Act, to obtain the
prior approval of the Federal Reserve Board before it could acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank, if, after such acquisition,
it would own or control more than five percent (5%) of the voting shares of such
bank.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking Law"), amended various federal banking laws to
provide for nationwide interstate banking, interstate bank mergers and
interstate branching. The interstate banking provisions allow for the
acquisition by a bank holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption
transactions were allowed effective June 1, 1997; however, states may "opt-out"
of the merger and purchase and assumption provisions by enacting a law which
specifically prohibits such interstate transactions. States could, in the
alternative, enact legislation to allow interstate merger and purchase and
assumption transactions prior to June 1, 1997. States could also enact
legislation to allow for de novo interstate branching of out-of-state banks. In
July 1995, Pennsylvania adopted "opt-in" legislation which allows such
transactions.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Bancorp and its subsidiary bank. Certain
changes of potential significance to Bancorp which have been enacted or
promulgated, as the case may be, by Congress or various regulatory agencies,
respectively, are discussed below.
Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation, i.e.,
FIRREA, was enacted into law in order to restructure the regulation of the
thrift industry, to address the financial condition of the Federal Savings and
Loan Insurance Corporation and to enhance the supervisory and enforcement powers
of the Federal bank and thrift regulatory agencies. The Office of the
Comptroller of the Currency ("OCC"), as the primary Federal regulator of the
Bank, is primarily responsible for supervision of the Bank. The OCC and FDIC
have far greater flexibility to impose supervisory agreements on an institution
that fails to comply with its regulatory requirements, particularly with respect
to the capital requirements. Possible enforcement actions include the imposition
of a capital plan, termination of deposit insurance and removal or temporary
suspension of an officer, director or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three levels,
with amounts increasing with the severity of the violation. The first tier
provides for civil penalties of up to $5,000 per day for any violation of law or
regulation. A civil penalty of up to $25,000 per day may be assessed if more
than a minimal loss or a pattern of misconduct is involved. Finally, a civil
penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1.0 million per violation, up to $5.0 million for continuing
violations or for the actual amount of gain or loss. These monetary penalties
may be combined with prison sentences for up to five years.
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Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA")
General. The FDICIA reformed a variety of bank regulatory laws.
Certain of these provisions are discussed below.
Examinations and Audits. Annual full-scope, on-site examinations
are required for all FDIC-insured institutions with assets of $500 million or
more. For bank holding companies with $500 million or more in assets, the
independent accountants of such companies shall attest to the accuracy of
management's report. Such accountants shall also monitor management's compliance
with governing laws and regulations. Such companies are also required to select
an independent audit committee composed of outside directors who are independent
of management, to review with management and the independent accountants the
reports that must be submitted to the appropriate bank regulatory agencies. If
the independent accountants resign or are dismissed, written notification must
be given to the FDIC and to the appropriate federal and state bank regulatory
agency.
Prompt Corrective Action. In order to reduce losses to the deposit
insurance funds, the FDICIA established a format to more closely monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDICIA established five "Capital" categories. They are: (1)
well-capitalized; (2) adequately capitalized; (3) undercapitalized; (4)
significantly undercapitalized; and (5) critically undercapitalized. The overall
goal of these new capital measures is to impose more scrutiny and operational
restrictions on depository institutions as they descend the capital categories
from well capitalized to critically undercapitalized.
The FDIC, the OCC, the Federal Reserve Board and the Office of
Thrift Supervision have issued jointly final regulations relating to these
capital categories and prompt corrective action. These capital measures for
prompt corrective action are defined as follows:
A "well-capitalized" institution would be one that has at least a
10% total risk-based capital ratio, a 6% or greater Tier I risk-based capital
ratio, a 5% or greater Tier I leverage capital ratio, and is not subject to any
written order or final directive by the FDIC to meet and maintain a specific
capital level.
An "adequately capitalized" institution would be one that meets
the required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I leverage capital ratio of at least 4% and an 8% or
greater total risk-based capital ratio. Since the risk-based standards also
require at least half of the total risk-based capital requirement to be in the
form of Tier I capital, this also will mean that an institution would need to
maintain at least a 4% Tier I risk-based capital ratio. Thus, an institution
would need to meet each of the required minimum capital levels in order to be
deemed "adequately capitalized."
An "undercapitalized" institution would fail to meet one or more
of the required minimum capital levels for an "adequately capitalized"
institution. An "undercapitalized" institution must file a capital restoration
plan and is automatically subject to restrictions on dividends, management fees
and asset growth. In addition, the institution is prohibited from making
acquisitions, opening new branches or engaging in new lines of business without
the prior approval of its primary federal regulator. A number of other
discretionary restrictions also may be imposed on a case-by-case basis, and
harsher restrictions that otherwise would apply to "significantly
undercapitalized" institutions may be imposed on an "undercapitalized"
institution that fails to file or implement an acceptable capital restoration
plan.
A "significantly undercapitalized" institution would have a total
risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of
less than 3%, or a Tier I leverage capital ratio of less than 3%, as the case
may be. Institutions in this category would be subject to all the restrictions
that apply to "undercapitalized" institutions. Certain other mandatory
prohibitions also would apply, such as restrictions against the payment of
bonuses or raises to senior executive officers without the prior approval of the
institution's primary federal regulator. A number of other restrictions may be
imposed.
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A "critically undercapitalized" institution would be one with a
tangible equity (Tier I capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, the FDIC's rule implementing this
provision of FDICIA also addresses certain other provisions for which the FDIC
has been accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes "critically
undercapitalized" is prohibited from taking the following actions without the
prior written approval of its primary federal supervisory agency: engaging in
any material transactions other than in the usual course of business; extending
credit for highly leveraged transactions ("HLTs"); amending its charter or
bylaws; making any material changes in accounting methods; engaging in certain
transactions with affiliates; paying excessive compensation or bonuses; and
paying interest on liabilities exceeding the prevailing rates in the
institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.
At any time, an institution's primary federal supervisory agency
may reclassify it into a lower capital category. All institutions are prohibited
from declaring any dividends, making any other capital distribution, or paying a
management fee if it would result in downward movement into any of the three
undercapitalized categories. The FDICIA provides an exception to this
requirement for stock redemptions that do not lower an institution's capital and
would improve its financial condition, if the appropriate federal supervisory
agency has consulted with the FDIC and approved the redemption.
The regulation requires institutions to notify the FDIC following
any material event that would cause such institution to be placed in a lower
category. Additionally, the FDIC monitors capital levels through call reports
and examination reports.
Real Estate Lending Standards. Pursuant to the FDICIA, the OCC and
other federal banking agencies adopted real estate lending guidelines which
would set loan-to-value ("LTV") ratios for different types of real estate loans.
A LTV ratio is generally defined as the total loan amount divided by the
appraised value of the property at the time the loan is originated. If the
institution does not hold a first lien position, the total loan amount would be
combined with the amount of all senior liens when calculating the ratio. In
addition to establishing the LTV ratios, the guidelines require all real estate
loans to be based upon proper loan documentation and a recent appraisal of the
property.
Bank Enterprise Act of 1991. Within the overall FDICIA is a
separate subtitle called the "Bank Enterprise Act of 1991." The purpose of this
Act is to encourage banking institutions to establish "basic transaction
services for consumers" or so-called "lifeline accounts." The FDIC assessment
rate is reduced for all lifeline depository accounts. This Act establishes ten
(10) factors which are the minimum requirements to qualify as a lifeline
depository account. Some of these factors relate to minimum opening and balance
amounts, minimum number of monthly withdrawals, the absence of discriminatory
practices against low-income individuals and minimum service charges and fees.
Moreover, the Housing and Community Development Act of 1972 requires that the
FDIC's risk-based assessment system include provisions regarding life-line
accounts. Assessment rates applicable to life-line accounts are to be
established by FDIC rule.
Truth in Savings Act. The FDICIA also contains the Truth in
Savings Act ("TSA"). The Federal Reserve Board has adopted regulations
("Regulation DD") under the TSA. The purpose of TSA is to require the clear and
uniform disclosure of the rates of interest which are payable on deposit
accounts by depository institutions and the fees that are assessable against
deposit accounts, so that consumers can make a meaningful comparison between the
competing claims of banks with regard to deposit accounts and products. In
addition to disclosures to be provided when a customer establishes a deposit
account, TSA requires the depository institution to include, in a clear and
conspicuous manner, the following information with each periodic statement of a
deposit account: (1) the annual percentage yield earned; (2) the amount of
interest earned; (3) the amount of any fees and charges imposed; and (4) the
number of days in the reporting period. TSA allows for civil lawsuits to be
initiated by customers if the depository institution violates any provision or
regulation under TSA.
11
<PAGE>
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all
insured depository institutions that results in the assessment of premiums based
on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual
basis, assigns each institution to one of three capital groups (well
capitalized, adequately capitalized or under capitalized) and further assigns
such institution to one of three subgroups within a capital group corresponding
to the FDIC's judgment of the institution's strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.0% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a
Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized
group.
Over the last two years, FDIC insurance assessments have seen
several changes for both BIF and SAIF institutions. The most recent change
occurred on September 30, 1996, when the President signed into law a bill
designed to remedy the disparity between BIF and SAIF deposit premiums. The
first part of the bill called for the SAIF to be capitalized by a one-time
assessment on all SAIF insured deposits held as of March 31, 1995. This
assessment, which was 65.7 cents per $100 in deposits, raised approximately $4.7
billion to bring the SAIF up to is required 1.25 reserve ratio. This special
assessment, paid on November 30, 1996, had no effect on the Bank. The second
part of the bill remedied the future anticipated shortfall with respect to the
payment of FICO interest. For 1997 through 1999, the banking industry will help
pay the FICO interest payments at an assessment rate that is one-fifth the rate
paid by thrifts. The FICO assessment on BIF insured deposits is 1.29 cents per
$100 in deposits; for SAIF insured deposits it is 6.44 cents per $100 in
deposits. Beginning January 1, 2000, the FICO interest payments will be paid
pro-rata by banks and thrifts based on deposits. At December 31, 1998, the FICO
interest assessment paid by the Bank was approximately $34,000. The Bank has not
been required to pay any FDIC insurance assessments since the fourth quarter of
1996 because BIF has met its statutorily required ratios and the Bank is
categorized as "well capitalized."
Regulatory Capital Requirements
The following table presents Bancorp's consolidated capital ratios
at December 31, 1998.
(In Thousands)
Tier I Capital................................................... $ 35,587
Tier II Capital.................................................. 2,360
Total Capital.................................................... $ 37,947
Adjusted Total Average Assets.................................... $461,050
Total Adjusted Risk-Weighted Assets(1)........................... $253,820
Tier I Risk-Based Capital Ratio(2)................................. 14.02%
Required Tier I Risk-Based Capital Ratio........................... 4.00%
Excess Tier I Risk-Based Capital Ratio............................. 10.02%
Total Risk-Based Capital Ratio(3)..................... ............ 14.95%
Required Total Risk-Based Capital Ratio............................ 8.00%
Excess Total Risk-Based Capital Ratio.............................. 6.95%
Tier I Leverage Ratio(4)........................................... 7.72%
Required Tier I Leverage Ratio..................................... 4.00%
Excess Tier I Leverage Ratio....................................... 3.72%
- ------------------------------
(1) Includes off-balance sheet items at credit-equivalent values less
intangible assets.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital
to Total Adjusted Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier
II Capital to Total Adjusted Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Adjusted
Total Average Assets.
12
<PAGE>
Bancorp's ability to maintain the required levels of capital is
substantially dependent upon the success of Bancorp's capital and business
plans; the impact of future economic events on Bancorp's loan customers; and
Bancorp's ability to manage its interest rate risk and investment portfolio and
control its growth and other operating expenses.
Effect of Government Monetary Policies
The earnings of Bancorp are and will be affected by domestic
economic conditions and the monetary and fiscal policies of the United States
government and its agencies.
The monetary policies of the Federal Reserve Board have had, and
will likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulations of, among other things, the discount rate
on borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.
History and Business - Bank
The Bank's legal headquarters are located on Route 191, Lake
Ariel, Pennsylvania.
As of December 31, 1998, the Bank had total assets of $474.3
million, total shareholders' equity of $37.6 million and total deposits and
other liabilities of $436.7 million.
The Bank engages in a full-service commercial banking business,
including accepting time and demand deposits, and making secured and unsecured
commercial and consumer loans. The Bank's business is not seasonal in nature.
Its deposits are insured by the FDIC to the extent provided by law.
At December 31, 1998, the Bank had 147 full-time employees and 40
part-time employees. The Bank is not a party to any collective bargaining
agreement.
Market Area
The Bank competes actively with other area commercial banks and
savings and loan associations, many of which are larger than the Bank, as well
as with major regional banking and financial institutions headquartered in
Wilkes-Barre and Scranton, Pennsylvania. The Bank's major competitors in its
market area are, in alphabetical order: Community Bank & Trust Co.; Fidelity
Deposit & Discount Bank; First Liberty Bank and Trust; First National Community
Bank; First Union Corporation, Charlotte, North Carolina; Penn Security Bank and
Trust Company; Pioneer American Bank, N.A.; PNC Bank, N.A.; and Wayne Bank. The
Bank is generally competitive with all competing financial institutions in its
service area with respect to interest rates paid on time and savings deposits,
service charges on deposit accounts and interest rates charged on loans.
Supervision and Regulation - Bank
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose deposits are
insured by the FDIC. Bank operations are also subject to regulations of the OCC,
the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC, that
regularly examines the Bank. The OCC has the authority under the Financial
Institutions Supervisory Act to prevent a national bank from engaging in an
unsafe or unsound practice in conducting its business.
13
<PAGE>
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
consolidations and the establishment of branches. All banks in Pennsylvania are
permitted to maintain branch offices in any county of the state. Branches of
national banks may be established only after approval by the OCC. The OCC is
required to grant approval only if it finds that there is a need for banking
services or facilities such as are contemplated by the proposed branch. The OCC
may disapprove the application if the bank does not have the capital and surplus
deemed necessary by the OCC, or if the application relates to the establishment
of a branch in a county contiguous to the county in which the applicant's
principal place of business is located, and another banking institution that has
its principal place of business in the county in which the proposed branch would
be located, has in good faith, notified the OCC of its intention to establish a
branch in the same municipal location in which the proposed branch would be
located.
Multi-bank holding companies are permitted in Pennsylvania within
certain limitations. See sections entitled "Pennsylvania Banking Law" and
"Interstate Banking and Branching."
A subsidiary bank of a bank holding company is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on taking
such stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interests of such principal
shareholders. In addition, such legislation and regulations may affect the terms
upon which any person becoming a principal shareholder of a holding company may
obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
Federal law also prohibits acquisitions of control of a bank
holding company without prior notice to certain federal bank regulators. Control
is defined for this purpose as the power, directly or indirectly, to influence
the management or policies of the bank or bank holding company or to vote
twenty-five percent (25%) or more of any class of voting securities of the bank
holding company.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulations of, and
restrictions on, the business of the Bank. It cannot be predicted whether any
such legislation will be adopted or how such legislation would affect the
business of the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank's business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.
Under the Federal Deposit Insurance Act, the OCC possesses the
power to prohibit institutions regulated by it (such as the Bank) from engaging
in any activity that would be an unsafe and unsound banking practice and in
violation of the law. Moreover, the Financial Institutions and Interest Rate
Control Act of 1987 ("FIRA") generally expands the circumstances under which
officers or directors of a bank may be removed by the institution's federal
supervisory agency; restricts lending by a bank to its executive officers,
directors, principal shareholders or related interests thereof; restricts
management personnel of a bank from serving as directors in other management
positions with certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic area; and restricts
management personnel from borrowing from another institution that has a
correspondent relationship with their bank. Additionally, FIRA requires that no
person may acquire control of a bank unless the appropriate federal supervisory
agency has been given 60-days prior written notice and within that time has not
disapproved the acquisition or extended the period for disapproval.
Under the Bank Secrecy Act ("BSA"), the Bank is required to report
to the Internal Revenue Service currency transactions of more than $10,000 or
multiple transactions of which the Bank is aware in any one day that aggregate
in excess of $10,000. Civil and criminal penalties are provided under the BSA
for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
14
<PAGE>
The Garn-St Germain Depository Institutions Act of 1982 ("1982
Act"), removes certain restrictions on the lending powers and liberalizes the
depository abilities of the Bank. The 1982 Act also amends FIRA (see above) by
eliminating certain statutory limits on lending of a bank to its executive
officers, directors, principal shareholders or related interests thereof and by
relaxing certain reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank relationships
by management personnel.
Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the "CRA"),
and the regulations promulgated to implement the CRA are designed to create a
system for bank regulatory agencies to evaluate a depository institution's
record in meeting the credit needs of its community. Until May 1995, a
depository institution was evaluated for CRA compliance based upon 12 assessment
factors.
The CRA regulations were completely revised as of May 4, 1995, to
establish new performance-based standards for use in examining a depository
institution's compliance with the CRA (the "revised CRA regulations"). The
revised CRA regulations establish new tests for evaluating both small and large
depository institutions' investment in the community. A "small bank" is defined
as a bank which has total assets of less than $250 million and is independent or
is an affiliate of a holding company with less than $1 billion in assets.
Pursuant to the revised CRA regulations, a depository institution which
qualifies as a "small bank" will be examined under a streamlined procedure which
emphasizes lending activities. The streamlined examination procedures for a
small bank became effective on January 1, 1996.
A large retail institution is one which does not meet the "small
bank" definition, above. A large retail institution can be evaluated under one
of two tests: (1) a three-part test evaluating the institution's lending,
service and investment performance; or (2) a "strategic plan" designed by the
institution with community involvement and approved by the appropriate federal
bank regulator. A large institution must choose one of these options prior to
July 1997, but may opt to be examined under one of these two options prior to
that time. Effective January 1, 1996, a large retail institution that opts to be
examined pursuant to a strategic plan may submit its strategic plan to the bank
regulators for approval.
In addition, the revised CRA regulations include separate rules
regarding the manner in which "wholesale banks" and "limited purpose banks" will
be evaluated for compliance.
The new CRA regulations were phased in over a two-year period,
beginning July 1, 1995, with a final effective date of July 1, 1997. Until the
applicable test was phased in, institutions were examined under the prior CRA
regulations.
On December 27, 1995, the federal banking regulators issued a
joint final rule containing technical amendments to the revised CRA regulations.
Specifically, the recent technical amendments clarify the various effective
dates in the revised CRA regulations, correct certain cross references and state
that once an institution becomes subject to the requirements of the revised CRA
regulations, it must comply with all aspects of the revised CRA regulations,
regardless of the effective date of certain provisions. Similarly, once an
institution is subject to the revised CRA regulations, the prior CRA regulations
do not apply to that institution.
For the purposes of the revised CRA regulations, the Bank is
deemed to be a large depository institution, based upon financial information as
of December 31, 1998. The Bank had a CRA Compliance examination in 1998 and
received a "satisfactory" rating. The Bank was evaluated for CRA compliance
using the three-part, performance-based test.
Concentration
Bancorp and the Bank are not dependent for deposits nor exposed by
loan concentrations to a single customer or to a small group of customers the
loss of any one or more of which would have a materially adverse effect on the
financial condition of Bancorp or the Bank.
15
<PAGE>
Business - LA Lease, Inc.
The principal office of LA Lease, Inc. is located at Route 191, Lake Ariel,
Pennsylvania 18436 (the Lake Ariel branch of the Bank).
As of December 31, 1998, LA Lease, Inc. had total assets of $5.7 million,
total shareholders' equity of $93 thousand and other liabilities of $5.6
million.
LA Lease, Inc. provides financing to consumers and businesses in the form
of vehicle and equipment leases. The business of LA Lease, Inc. is not seasonal
in nature.
Business - Ariel Financial Services, Inc.
The principal office of Ariel Financial Services, Inc. is located at Route
191, Lake Ariel, Pennsylvania 18436 (the Lake Ariel branch of the Bank).
This subsidiary of LA Bank was incorporated on July 11, 1997, to deliver
non-depository investment and annuity products to the customers of LA Bank. As
of December 31, 1998, Ariel Financial Services, Inc. had no material assets or
liabilities.
Item 2. Properties
Bancorp owns or leases no properties, except through the Bank. The
following is selective information about the Bank's properties:
<TABLE>
<CAPTION>
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
Type of Approximate
Property Location Ownership Square Footage Use
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
<S> <C> <C> <C> <C>
1 Route 191 Own 3,000 Banking Services and Main Office
Lake Ariel, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
2 Route 191 Own 1,800 Greene-Dreher Branch
Newfoundland, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
3 Routes 191 and 590 Own 2,900 Hamlin Corners Branch
Hamlin, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
4 Routes 247 and 348 Own 2,400 Mt. Cobb Branch
Lake Ariel, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
5 Route 5 Own 2,800 Eynon Branch
Scranton-Carbondale Highway
Eynon, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
6 Keyser Avenue Own 3,000 Keyser Valley Branch
Scranton, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
7 The Mall at Steamtown Lease 1,867 Steamtown Branch
Lackawanna Avenue
Scranton, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
8 East Grove Street and Own 3,000 Clarks Green Branch
South Abington Road
Clarks Green, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
9 Route 6 Lease 5,535 Carbondale Branch
Ames Shopping Plaza
Carbondale, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
10 Routes 6 and 209 Own 11,000 Milford Township Branch
Milford, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
11 Route 739 Lease 1,250 Lords Valley Branch
Lords Valley Shopping Plaza
Lords Valley, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
12 214 W. Harford Street Own 10,350 Milford Branch
Milford, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
13 Route 390-Barrett Township Own 3,700 Mountainhome Branch
Mountainhome, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
16
<PAGE>
14 409 Lackawanna Avenue Lease 670 Scranton Branch
Scranton, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
15 Commerce Boulevard Lease 500 Dickson City Branch
Suite 1
Dickson City, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
16 Old Willow Avenue Lease 500 Honesdale Branch
Suite 100
Honesdale, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
17 South Main Street Own 4,850 Taylor Branch
Taylor, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
18 Route 611 Lease 2,200 Tannersville Branch
Tannersville, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
19 Public Square Lease 1,500 Public Square Branch
Wilkes-Barre, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
20 Meadow Avenue Own 2,200 East Mountain Branch
Scranton, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
21 Wyoming Avenue Lease 2,250 Kingston Branch
Kingston, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
22 409 Lackawanna Avenue Lease 20,800 Financial Center
Suite 201
Scranton, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
23 Keyser Avenue Own 7,500 Commercial Rental Property
Scranton, PA
- ----------- --------------------------------- ------------- ----------------- ---------------------------------------
17
<PAGE>
For information with respect to obligations for lease rentals,
refer to Note 5 of the Notes to Consolidated Financial Statements in Bancorp's
Annual Report filed at Exhibit 13 hereto and is incorporated in its entirety by
reference. The branches that are under lease have customary commercial lease
options to extend the terms of the applicable lease.
It is management's opinion that the facilities currently utilized
are suitable and adequate for current and immediate future purposes.
Item 3. Legal Proceedings
General
The nature of Bancorp's and the Bank's business generates a
certain amount of litigation involving matters arising in the ordinary course of
business. However, in the opinion of management of Bancorp and the Bank, there
are no proceedings pending to which Bancorp and the Bank are a party or to which
their property is subject, which, if determined adversely to Bancorp and the
Bank, would be material in relation to Bancorp's and the Bank's undivided
profits or financial condition, nor are there any proceedings pending other than
ordinary routine litigation incident to the business of Bancorp and the Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against Bancorp and the Bank by government authorities or others.
Environmental Issues
There are several federal and state statutes that govern the
obligations of financial institutions with respect to environmental issues.
Besides being responsible under such statutes for its own conduct, a bank also
may be held liable under certain circumstances for actions of borrowers or other
third parties on properties that collateralize loans held by the bank. Such
potential liability may far exceed the original amount of the loan made by the
bank. Currently, the Bank is not a party to any pending legal proceedings under
any environmental statue nor is the Bank aware of any circumstances that may
give rise to liability of them under any such statute.
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
The Company's common stock has been listed on the Nasdaq National
Market since November 21, 1997, and was previously listed on the Nasdaq
Small-Cap Market since December 9, 1993. "The Nasdaq Stock Market" or "Nasdaq"
is a highly-regulated electronic securities market comprised of competing Market
Makers whose trading is supported by a communications network linking them to
quotation dissemination, trade reporting, and order execution systems. This
market also provides specialized automation services for screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational services tailored to the needs of the securities industry,
investors and issuers. The Nasdaq Stock Market consists of two distinct market
tiers: the Nasdaq National Market(R) and the Nasdaq SmallCap MarketsSM. The
Nasdaq Stock Market is operated by the Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National Association of Securities Dealers, Inc. The Nasdaq
National Market symbol for the Company's common stock is "LABN." At December 31,
1998, the total number of holders of record of the common stock was
approximately 1400.
The table below presents the high and low bid prices reported for
the Common Stock and the cash dividends declared on such Common Stock for the
periods indicated. The range of high and low prices is based on trade prices
reported on the Nasdaq National Market for 1998 year and fourth quarter of 1997.
The range of high and low prices for the first three quarters of 1997 and 1996
year is based on trade prices reported on the Nasdaq Small-Cap Market. Market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not necessarily reflect actual transactions. On December 31,
1998, the closing price of share of Common Stock on the Nasdaq National Market
was $12.375. All prices and dividends have been restated to reflect the 5% stock
dividends paid in October 1998, 1997 and 1996, and the two-for-one stock split
effective on November 10, 1997.
18
<PAGE>
Year Quarter High Low Dividends Declared
1998 4th $13.25 $11.75 $0.13
3rd 16.00 11.43 0.10
2nd 16.19 14.88 0.09
1st 16.55 14.76 0.09
1997 4th $20.95 $13.24 $0.13
3rd 13.38 9.05 0.09
2nd 9.29 9.05 0.08
1st 10.76 9.29 0.08
1996 4th $11.57 $7.19 $0.11
3rd 7.81 6.86 0.08
2nd 7.24 6.14 0.08
1st 7.33 6.38 0.08
As of March 16, 1999, Bancorp had approximately 1,472 shareholders
of record.
Since 1983, Bancorp has paid cash dividends. It is the present
intention of Bancorp's Board of Directors to continue the dividend payment
policy, although the payment of future dividends must necessarily depend upon
earnings, financial condition, appropriate restrictions under applicable law and
other factors relevant at the time the Board of Directors considers any
declaration of dividends. Cash available for the payment of dividends must
initially come from dividends paid by the Bank to Bancorp. Therefore, the
restrictions on the Bank's dividend payments are directly applicable to Bancorp.
Dividend Restrictions on the Bank
The OCC has issued rules governing the payment of dividends by
national banks. Consequently, the Bank (which is subject to these rules) may not
pay dividends from capital (unimpaired common and preferred stock outstanding)
but only from retained earnings after deducting losses and bad debts therefrom.
"Bad debts" are defined as matured obligations in which interest is past due and
unpaid for ninety (90) days, but do not include well-secured obligations that
are in the process of collection.
Previously, the Bank was permitted to add the balances in its
allowance for possible credit and lease losses in determining retained earnings,
but the OCC's new regulations prohibit that practice. However, to the extent
that (1) the Bank has capital surplus in an amount in excess of common capital
and (2) if the Bank can prove that such surplus resulted from prior period
earnings, the Bank, upon approval of the OCC, may transfer earned surplus to
retained earnings and thereby increase its dividend paying capacity.
If, however, the Bank has insufficient retained earnings to pay a
dividend, the OCC's regulations allow the Bank to reduce its capital to a
specified level and to pay dividends upon receipt of the approval of the OCC as
well as that of the holders of two thirds of the outstanding shares of the
Common Stock.
The Bank is allowed to pay dividends no more frequently than
quarterly. Moreover, the Bank must obtain the OCC's approval before paying a
dividend if the total of all dividends declared by the Bank in any calendar year
would exceed the total of (1) the Bank's net profits for that year plus (2) its
retained net profits for the immediately preceding two years less (3) any
required transfers to surplus or a fund for the retirement of preferred stock.
19
<PAGE>
The Bank may not pay any dividends on its capital stock during the
period in which it may be in default in the payment of its assessment for
deposit insurance premium due to the FDIC, nor may it pay dividends on Common
Stock until any cumulative dividends on the Bank's preferred stock (if any) have
been paid in full. The Bank has never been in default in the payments of its
assessments to the FDIC; and, moreover, the Bank has no outstanding preferred
stock. In addition, under the Federal Deposit Insurance Act, dividends cannot be
declared and paid if the OCC obtains a cease and desist order because such
payment would constitute an unsafe and unsound banking practice. As of December
31, 1998, there was $3.9 million in unrestricted retained earnings and net
income available at the Bank that could be paid as a dividend to Bancorp under
the current OCC regulations.
Dividend Restrictions on Bancorp
Under the Pennsylvania Business Corporation Law of 1988, as
amended (the `BCL'), Bancorp may not pay a dividend if, after giving effect
thereto, either (a) Bancorp would be unable to pay its debts as they become due
in the usual course of business or (b) Bancorp's total assets would be less than
its total liabilities. The determination of total assets and liabilities may be
based upon: (i) financial statements prepared on the basis of generally accepted
accounting principles; (ii) financial statements that are prepared on the basis
of other accounting practices and principles that are reasonable under the
circumstances; or (iii) a fair valuation or other method that is reasonable
under the circumstances.
Item 6. Selected Financial Data
The information called for by this item is filed at Exhibit 99A
hereto and is incorporated in its entirety by reference under this Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The caption "Management's Discussion and Analysis" contained in
excerpts from Bancorp's Annual Report (beginning at page 21 thereto) filed at
Exhibit 13 hereto is incorporated in its entirety by reference under this Item
7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The caption "Interest Rate Risk Management" contained in the
"Management's Discussion and Analysis" section of Bancorp's Annual Report
(beginning at page 28 thereto) filed at Exhibit 13 hereto is incorporated in its
entirety by reference under this Item 7A.
Item 8. Financial Statements and Supplementary Data
Bancorp's Consolidated Financial Statements and notes thereto
contained in excerpts from Bancorp's Annual Report (beginning at page 36
thereto) filed at Exhibit 13 hereto are incorporated in their entirety by
reference under this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Bancorp changed its independent certifying accountants for the
year ending December 31, 1999. The information concerning such change can be
found on Bancorp's Form 8-K, filed with the Securities and Exchange Commission
on January 15, 1999 (No. 2-85306), and hereby incorporated by reference into
this Item 9.
Part III
Item 10. Directors and Executive Officers of the Registrant
The captions "Board of Directors" and "Stock Ownership" contained
in Bancorp's Proxy Statement (at pages 2 and 5 thereof, respectively) filed at
Exhibit 99B hereto is incorporated in their entirety by reference under this
Item 10.
20
<PAGE>
Principal Officers of the Corporation
The following table sets forth selected information about the
principal officers of the Corporation, each of whom is selected by the Board of
Directors and each of whom holds office at the discretion of the Board of
Directors:
</TABLE>
<TABLE>
X
<CAPTION>
Held Corporation Number of Age as of
Name Office/Position with Corporation Since Employee Since Shares Owned March 16, 1999
<S> <C> <C> <C> <C> <C>
Bruce D. Howe President 1983 (2) 389,428 67
John G. Martines Chief Executive Officer 1983 (3) 221,199 52
Donald E. Chapman Secretary 1983 (2) 132,790 62
Louis M. Martarano Vice President and 1989 (3) 87,479 48
Assistant Secretary
Joseph J. Earyes Vice President and Treasurer 1995 (3) 44,426 42
<FN>
- -------------------------
(1) See notes under Item 12 "Security Ownership of Certain Beneficial Owners
and Management" for shareholdings of these officers.
(2) Messrs. Howe and Chapman are not employees of the Corporation.
(3) Messrs. Martines, Martarano, and Earyes are full-time salaried employees of
the Bank.
</FN>
</TABLE>
Principal Officers of the Bank
The following table sets forth selected information about the
principal officers of the Bank, each of whom is elected by the Board of
Directors of the Bank and each of whom holds office at the discretion of the
Board of Directors of the Bank:
<TABLE>
<CAPTION>
Held Bank Number of Age as of
Name Office/Position with Bank Since Employee Since Shares Owned March 16,1999
<S> <C> <C> <C> <C> <C>
Bruce D. Howe Chairman of the Board 1986 (1) 389,428 67
John G. Martines President and CEO 1986 1979 221,199 52
Louis M. Martarano Executive Vice President and 1990 1981 87,479 48
Chief Operating Officer
Joseph J. Earyes Executive Vice President and 1995 1995 44,426 42
Chief Financial Officer
Donald E. Chapman Secretary 1983 (1) 132,790 62
- ----------------------------
<FN>
(1) Mr. Howe and Mr. Chapman are not employees of the Bank.
(2) See notes under Item 12 "Security Ownership of Certain Beneficial Owners
and Management" for shareholdings of these officers.
</FN>
</TABLE>
Item 11. Executive Compensation
The caption "Execution Compensation" contained in Bancorp's Proxy
Statement (at page 6 thereof) filed at Exhibit 99B hereto is incorporated by its
entirety by reference under this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The caption "Stock Ownership" contained in Bancorp's Proxy
Statement (at page 5 thereof) filed at Exhibit 99B hereto is incorporated by its
entirety by reference under this Item 12.
Item 13. Certain Relationships and Related Transactions
The caption "Other Information" contained in Bancorp's Proxy
Statement (at page 13 thereof) filed at Exhibit 99B hereto is incorporated by
its entirety by reference under this Item 13.
21
<PAGE>
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
2 None.
3A Amended Articles of Incorporation of Bancorp filed at Exhibit 3A on March
25, 1988 and March 24, 1993, to Forms 10-K for the fiscal year ended
December 31, 1987 (No. 2-85306), and 10-KSB for the period ended December
31, 1992 (No. 2-85306), respectively, and hereby incorporated by reference.
Photocopy of the Articles of Amendment of Bancorp, dated August 18, 1993,
to effect, among other things, a 3-for-1 stock split, filed at Exhibit 3A
on September 3, 1993, to Form S-1 (No. 33-68470) and hereby incorporated by
reference.
3B Amended By-laws of Bancorp filed on March 25, 1988, at Exhibit 3B, to Form
10-K for the fiscal year ended December 31, 1987 (No. 2-85306), and hereby
incorporated by reference.
4 None.
9 None.
10A Photocopy of the Executive Employment Agreement dated September 1, 1993,
among Bancorp, the Bank and John G. Martines, the Chief Executive Officer
of Bancorp and President of the Bank, filed at Exhibit 10A on September 3,
1993, to Form S-1 (No. 33-68470), and hereby incorporated by reference.
10B Photocopy of the Executive Employment Agreement dated September 1, 1993,
among Bancorp, the Bank and Louis M. Martarano, Vice President of Bancorp
and Senior Vice President of the Bank, filed at Exhibit 10B on September 3,
1993, to Form S-1 (No. 33-68470), and hereby incorporated by reference.
10C Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March 11,
1997, between the Bank and John G. Martines, Chief Executive Officer of the
Bancorp and President of the Bank, relating to the supplemental executive
retirement plan of the Bank, filed at Exhibit 10C on March 18, 1998 to Form
10-K for the fiscal year ended December 31, 1997 (No. 2-85306), and hereby
incorporated by reference.
10D Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March 11,
1997, between the Bank and Louis M. Martarano, Vice President of the
Bancorp and Executive Vice President and Chief Operating Officer of the
Bank, relating to the supplemental executive retirement plan of the Bank,
filed at Exhibit 10D on March 18, 1998 to Form 10-K for the fiscal year
ended December 31, 1997 (No. 2-85306), and hereby incorporated by
reference.
22
<PAGE>
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
10E Copy of the LA Bank, N.A. Salary Continuation Agreement, dated March 11,
1997, between the Bank and Joseph J. Earyes, CPA, Vice President and
Treasurer of the Bancorp and Executive Vice President and Chief Financial
Officer of the Bank, relating to the supplemental executive retirement plan
of the Bank, filed at Exhibit 10E on March 18, 1998 to Form 10-K for the
fiscal year ended December 31, 1997 (No. 2-85306), and hereby incorporated
by reference.
11 None.
12 None.
13 Annual Report to Shareholders for Fiscal Year Ended December 31, 1998.
16 Current Report on Form 8-K, filed on January 15, 1999 (No. 2-85306), which
contains the information with respect to the change in Bancorp's certifying
accountant, and hereby incorporated by reference.
18 None.
21 List of Subsidiaries of Bancorp.
22 None.
23 None.
24 None.
27 Financial Data Schedule.
28 None.
99A Selected 5-Year Financial Data and Selected Year-End Balances.
99B Proxy Statement for the 1999 Annual Meeting of Shareholders To Be Held
April 27, 1999
(b) Reports on Form 8-K for quarter ended December 31, 1998.
A Form 8-K was filed on January 15, 1999, reporting the change in the
Registrant's certifying accountant and the appointment of new director to the
Board of Directors of the Corporation.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LAKE ARIEL BANCORP, INC.
(Bancorp)
By: ______________________________
John G. Martines
Chief Executive Officer
Date: March 17, 1999
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: ______________________________
Bruce D. Howe
President and Director
Date: March 17, 1999
By: ______________________________
John G. Martines
Chief Executive Officer and Director
(Chief Executive Officer)
Date: March 17, 1999
By: ______________________________
Peter O. Clauss
Director
Date: March 17, 1999
By: ______________________________
Donald E. Chapman
Secretary and Director
Date: March 17, 1999
24
<PAGE>
By: ______________________________
Kenneth M. Pollock
Director
Date: March 17, 1999
By: ______________________________
Harry F. Schoenagel
Director
Date: March 17, 1999
By: ______________________________
William C. Gumble
Director
Date: March 17, 1999
By: ______________________________
Paul D. Horger
Director
Date: March 17, 1999
By: ______________________________
Louis M. Martarano
Vice President and Assistant
Secretary
Date: March 17, 1999
By: ______________________________
Joseph J. Earyes, CPA
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 17, 1999
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LAKE ARIEL BANCORP, INC.
(Bancorp)
By: /s/ John G. Martines
John G. Martines
Chief Executive Officer
Date: March 17, 1999
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Bruce D. Howe
Bruce D. Howe
President and Director
Date: March 17, 1999
By: /s/ John G. Martines
John G. Martines
Chief Executive Officer and Director
(Chief Executive Officer)
Date: March 17, 1999
By: /s/ Peter O. Clauss
Peter O. Clauss
Director
Date: March 17, 1999
By: /s/ Donald E. Chapman
Donald E. Chapman
Secretary and Director
Date: March 17, 1999
26
<PAGE>
By: /s/ Kenneth M. Pollock
Kenneth M. Pollock
Director
Date: March 17, 1999
By: /s/ Harry F. Schoenagel
Harry F. Schoenagel
Director
Date: March 17, 1999
By: /s/ William C. Gumble
William C. Gumble
Director
Date: March 17, 1999
By: /s/ Paul D. Horger
Paul D. Horger
Director
Date: March 17, 1999
By: /s/ Louis M. Martarano
Louis M. Martarano
Vice President and Assistant
Secretary
Date: March 17, 1999
By: /s/ Joseph J. Earyes
Joseph J. Earyes, CPA
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 17, 1999
27
<PAGE>
INDEX TO EXHIBITS
Item Number Description Page
13 Annual Report to Shareholder for the Fiscal Year
Ended December 31, 1998...................................... 29
21 List of Subsidiaries of Bancorp.............................. 96
99A Selected 5-Year Financial Data and Selected
Year-End Balances............................................ 97
99B Proxy Statement for the 1999 Annual Meeting of
Shareholders To Be Held April 27, 1999....................... 99
27 Financial Data Schedule...................................... 119
28
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
29
<PAGE>
LAKE ARIEL BANCORP, INC.
1998 ANNUAL REPORT
30
<PAGE>
LAKE ARIEL BANCORP, INC. 1998 ANNUAL REPORT
TABLE OF CONTENTS
- -Financial Highlights
- -Message to Our Stockholders
- -Board of Directors
- -Landmarks
- -Responsibilities for Preparation of Financial Statements
- -Financial Review: Management's Discussion and Analysis
- -Consolidated Financial Statements
-Balance Sheet
-Statement of Income
-Statement of Changes in Stockholders' Equity
-Statement of Cash Flows
-Notes to Consolidated Financial Statements
-Independent Auditor's Report
- -Investor Information
- -Company Directors and Officers
- -Office Locations
- -Business Development Boards
Except for historical information that is contained in this annual report,
certain matters presented in this report may contain forward-looking statements
that involve risks and uncertainties in the banking industry, including timely
availability and acceptance of new products, the impact of competitive products
and pricing, the management of growth and the other risks detailed from time to
time in the Company's SEC reports, including the report on Form 10-K for the
year ended December 31, 1998, and the section in this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
31
<PAGE>
FINANCIAL HIGHLIGHTS - 1998
EARNINGS AND DIVIDENDS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Percent/Basis Point Percent/Basis Point Percent/Basis Point
Amount Change Amount Change Amount Change Amount Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income.......................... $3,771 9.9% $3,431 13.2% $3,031 31.4% $2,307 $2,128
Earnings Per Share - Basic*......... $0.79 -14.1% $0.88 12.2% $0.78 30.2% $0.60 $0.56
Earnings Per Share - Diluted*....... $0.77 -12.5% $0.84 7.3% $0.78 30.2% $0.60 $0.56
Dividends Per Share*................ $0.41 7.9% $0.38 18.8% $0.32 18.5% $0.27 $0.25
Return on Average Total Assets...... 0.88% 12 bpts. 1.00% -9 bpts. 1.09% +17 bpts. 0.92% 1.04%
Return on Average Stockholders' Equity10.27% 497 bpts. 15.24% +27 bpts. 14.97% +180 bpts. 13.17% 13.07%
Dividend Payout Ratio............... 50.43% - 39.90% - 39.14% - 42.13% 42.15%
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL POSITION
1998 1997 1996 1995 1994
Percent/Basis Point Percent/Basis Point Percent/Basis Point
Amount Change Amount Change Amount Change Amount Amount
<S> <C> <C> <C> <C> <C> <C>
Total Assets........................$474,689 29.0% $368,073 23.6% $297,906 18.3% $251,859 $236,125
Total Deposits......................$312,742 11.5% $280,450 10.8% $253,196 21.3% $208,759 $192,187
Net Loans...........................$224,754 7.9% $208,236 18.3% $175,990 15.6% $152,306 $135,018
Long-Term Debt......................$115,459 142.3% $47,656 138.0% $20,023 32.1% $15,156 $15,219
Stockholders' Equity**.............. $37,940 5.9% $35,815 69.2% $21,172 8.5% $19,509 $15,799
Book Value Per Share*............... $7.87 4.9% $7.50 37.6% $5.45 2.3% $5.33 $4.37
Stockholders' Equity to Total Assets 7.99% -174 bpts. 9.73% +262 bpts. 7.11% -64 bpts. 7.75% 6.69%
<FN>
*Reflects adjustment for 5% stock dividends issued on October 1, 1998, 1997 and
1996, and a two-for-one stock split effective November 10, 1997.
**Beginning with 1994, reflects adjustment to capital as a result of the
implementation of SFAS No. 115.
</FN>
</TABLE>
32
<PAGE>
MESSAGE TO OUR STOCKHOLDERS
Company Overview
1998-A Year of Building for the Future
Lake Ariel Bancorp, Inc. entered 1998 with the objective of
aggressively expanding its branch network. In the midst of continued mergers and
consolidations within our industry, Lake Ariel Bancorp, Inc. seized the
opportunity to enter new marketplaces and build new relationships (not just
branches) by offering quality customer service and localized decision making.
The past year could be described as the Company's most hectic, yet most
exciting year. During 1998, the following events had a major impact on our
branch network:
March 18 - Dickson City Branch in Wal-Mart Supercenter opened.
April 1 - Lackawaxen Branch opened.
May 18 - Wilkes-Barre Mortgage Loan Center opened.
June 17 - Honesdale Branch in the Wal-Mart Supercenter opened.
August 24 - Taylor Branch opened.
August 31 - Tannersville Branch opened.
September 8 - Groundbreaking for the Wilkes-Barre Boulevard Branch -
expected to open Spring, 1999.
September 9 - Purchased the Mellon Bank Mountainhome Branch.
September 14- Wilkes-Barre Public Square Branch opened.
November 23 - East Mountain Branch in Scranton opened.
December 7 - Kingston Branch opened.
December 11 - Sold Lackawaxen Branch to Honesdale National Bank.
December 11 -Sold Lake Wallenpaupack Branch to Honesdale National Bank.
Our financial franchise has now been established to span five counties
with 22 banking locations. The ultimate challenge starts in 1999 and continues
into the 21st Century - "Achieving outstanding financial performance and value
for our stockholders." Costs associated with the expansion of our branch network
had a negative impact on this year's earnings. A full year's effect of these
operations will hamper earnings during 1999, but we are optimistic that most of
our new branches will become profitable within two years and, therefore, have a
positive effect on earnings in the near future.
Stockholders' Value
Significant events during 1998 had major impacts on the Company's
capital position:
- - 5% stock dividend
- - Cash dividend increased by 8%
- - Cash dividend increased 17th consecutive year
- - 10.27% Return on Average Equity
At year-end 1998, our Company was in a very strong capital position.
Stockholders' equity was at $38 million. The Tier I, or core capital ratio was
14.07% and the total risk-based capital ratio was at 14.96%, this is in
comparison to regulatory minimums of 4% and 8%, respectively. The new capital
raised in December, 1997 has been used to continue the Bank's expansion goals.
During 1998, for the 17th consecutive year, the Company increased its per
share cash dividend from $0.38 in 1997 to $0.41 in 1998, an 8% increase and,
also, for the third consecutive year, paid a 5% stock dividend. Per share
information for all prior years has been restated to reflect the effects of this
stock dividend.
Our return on average stockholders' equity for 1998 was 10.27%, down
from 15.24% in 1997 due to the weighted average effect in 1998 of the sale of
$12 million of common stock in December, 1997. Return on stockholders' equity is
arguably the most important measure of a bank's performance.
33
<PAGE>
Book value increased from $7.50 in 1997 to $7.87 in 1998, an increase
of 5%. The Company's (LABN) market price closed at $12.375 per share on December
31, 1998 as compared to $17.75 at December 31, 1997. While the closing market
price at December 31, 1998 was somewhat disappointing, the price represents 16
times earnings and 157% of book value.
Net Income
1998 proved to be another strong earnings performance for the Company:
- - Record Earnings
- - $3,771,000 - up 10%
- - Return On Average Assets - 0.88%
- - 12% Growth in Net Interest Income
- - Earnings per share - basic - $0.79
- - Earnings per share - diluted - $0.77
The Company's net income for 1998 was $3,771,000, 9.9% higher than the
$3,431,000 reported for 1997. Net income was positively influenced by a 12.2%
growth in net interest income and a 45.1% growth in other operating income.
Overhead costs were $11.5 million for 1998, an increase of $2.2 million or 24.3%
from $9.2 million reported in 1997. Overhead costs were greatly impacted by the
growth in the number of branch offices in 1998.
Operating earnings for the year were at $0.79 per share - basic and
$0.77 per share - diluted compared to $0.88 per share - basic and $0.84 diluted
in 1997. Return on average assets was 0.88% for 1998.
Growth
1998 proved to be another year of exceptional increases:
- Assets - 29.0%
- Deposits - 11.5%
- Loans - 7.9%
- Investment Securities - 67.6%
Total assets increased to $474.7 million at year-end 1998, an increase
of $106.6 million or 29.0% from $368.1 million at December 31, 1997. This
increase was primarily attributable to a $16.5 million growth in securities and
$77.6 million growth in net loans and leases.
Investment securities increased to $192.4 million at year-end, an
increase of $77.6 million or 67.6% from $114.8 million at December 31, 1997.
This increase was attributable to an investment strategy implemented during 1998
whereby the Company borrowed $75 million from the Federal Home Loan Bank of
Pittsburgh ("FHLB") and invested in a combination of various fixed and variable
rate investments.
Total net loans increased to $224.7 million at December 31, 1998, an
increase of $16.5 million or 7.9% from $208.2 million at December 31, 1997. For
the year 1998, residential mortgage loans increased to $106.7 million, an
increase of $3.7 million or 3.4% from $103.0 million at December 31, 1997. This
increase was attributable to the increased mortgage loan activity during the
period, particularly during the second half of 1998, net of mortgage loans sold
during 1998 of approximately $34.9 million. As of year end, LA Bank was
servicing over $141 million in residential mortgage loans.
During 1998, total deposits increased to $312.7 million, an increase of
$32.3 million or 11.5% from $280.5 million at December 31, 1997.
Strengthening the Organization - Branches, Personnel and Technology
In order to accommodate our growth during 1998 the following personnel
changes were made. Branch operations were enhanced with the promotions of Treva
J. Day to Vice President, Regional Branch Administrator of Monroe, Pike and
Wayne Counties and Lynn P. Thiel to Vice President, Regional Branch
Administrator of Lackawanna and Luzerne Counties. Other promotions include Lisa
Dowse, Branch Manager, Lake Ariel; Joann Simyan, Assistant Branch Manager, Mt.
Cobb; Saundra Roeckel, Branch Sales Manager and Ellen Juseck, Assistant Branch
Sales Manager of our first in-store location in the Wal-Mart Supercenter in
Dickson City and Deborah Aragona, Branch Sales Manager and Annemarie Roberts,
34
<PAGE>
Assistant Branch Sales Manager of our second in-store location in the Honesdale
Wal-Mart Supercenter; Marjorie Kunkle, Branch Manager, Tannersville; Lauri
Nidoh, Branch Manager, Steamtown and Scranton; Debra Skurkis, Branch Manager,
Public Square; Sybil Kline, Branch Manager, East Mountain; Patricia Williamson,
Branch Manager, Kingston; Lisa Akulonis, Branch Manager, Eynon and Mary
Auffhammer, Branch Manager, Keyser Valley and Maryann McManus, Branch Manager,
Wilkes-Barre Boulevard.
Our sales team was refined with the addition of John Gouse as a
Business Development Officer for Monroe and Pike Counties; Mary Beth
Pasqualicchio, Branch Sales Officer; Cathy Langan, Mortgage Originator for Wayne
County; Paul Ochman, Mortgage Originator for Luzerne County; William Zernhelt,
Mortgage Originator for Pike County, and Theresa Yocum, Mortgage Originator for
Monroe County.
The lending staff was reinforced with the addition of Maureen Straub,
Senior Vice President, Commercial Loan Officer of Luzerne County; Paul Freeman,
Vice President, Commercial Loan Officer; Peter Misura, Assistant Vice President,
Consumer Loan Officer; Susan Mroczka, Consumer Loan Officer; Scott Hiller,
Assistant Vice President, Credit Analyst; and, Lawrence Highhouse, Assistant
Vice President, Collection Department Manager.
Finally, Daniel Santaniello was promoted to Senior Operations Officer
and Francis Chinchar to Data Processing Supervisor.
In January, 1999, Kenneth M. Pollock, President of HUD, Inc. t/a Emerald
Anthracite II, from Luzerne County, was appointed to the Company's Board of
Directors. He currently serves on the Boards of Pennsylvania Enterprises, Inc.,
PG Energy, and Penn State Wilkes-Barre Campus. We welcome Mr. Pollock's vast
experience and business leadership to our Company.
As a result of our new and increased presence in additional market
areas, we have expanded our Business Development Boards to include Monroe and
Luzerne County Boards. We have also appointed new, energetic members to the
existing Development Boards. We fully expect these Boards to provide an
additional source of referrals and new customers within the market areas they
serve.
Marketing, Products and Services
During 1998, the Company retained the services of a professional
advertising agency to develop a new marketing campaign to assist in the
marketing of the new branches which opened during the year. The Senior
Management team felt a strong campaign would also help launch our expansion into
Luzerne County where the Company had little name recognition. Print and
television ads, direct mail pieces and billboard treatments were developed which
proved to be an overwhelming success in all areas, not just Luzerne County.
Home equity loans and mortgage loans were aggressively marketed
throughout the year, which resulted in a record number of new loans originated.
LA Bank became one of the first community banks in the area to develop a Reverse
Mortgage Program, targeting senior citizens. This specialized program allows
seniors to borrow against the equity in their home, which then generates monthly
income that allows the money necessary for seniors to live a more comfortable
lifestyle and remain in their homes. In addition, the Bank was identified
through the Office of the Comptroller of the Currency as the number one lender
in Northeastern Pennsylvania for conventional home purchase mortgage loans.
During the first quarter of 1998, the Bank's newly formed company,
Ariel Financial Services, Inc., was introduced to employees through a series of
training sessions. Customers received communications throughout the year
regarding the services offered by Ariel Financial Services, Inc. and the Bank's
highly-trained investment specialists marketed the Company's products and
services to customers throughout the Bank's current twenty-one office branch
network.
Also, during the first quarter, two new retirement products were added
to the Bank's product line. The Education IRA and Roth IRA were introduced in
response to significant changes in legislation signed into law under the
Taxpayer Relief Act of 1997.
35
<PAGE>
In response to the mandates of Electronic Funds Transfer Act of 1999
(EFT99), new legislation affecting the direct deposit of government retirement
funds, the Bank's senior citizen program was heavily marketed throughout the
year to attract new customers. A senior citizen seminar was held in April which
addressed the new direct deposit mandate, investment services, estate planning
and reverse mortgages. The Bank's new senior travel club was also introduced.
The inaugural season of the travel club was an overwhelming success. The group
traveled to the Grand Candlelight Dinner Theater in Milton, Atlantic City
casinos and closed the year with a trip to The Big Apple to see a Broadway play.
The first of our SmartLine electronic banking products was introduced.
The SmartLine telephone voice response unit allows customers to access their
accounts, get information on certificates of deposit, loans, transfer funds
between accounts and obtain current deposit and loan rate information via a
touch-tone telephone. The new system allows customers 24-hour access to account
information without the assistance of a bank employee. Bill- payment services
will be added to the SmartLine in early spring of 1999.
The Bank kept abreast of current product marketing via the World Wide
Web by incorporating our print advertising with the `What's New Page'. In
addition to the outward change of our address to www.labank.com, LA Bank has
greatly improved our Internet speed and accessibility by housing our own
website. Browsers may now contact senior management and department heads
directly from the web page. LA Bank employees are afforded the opportunity to
procure product and sales manuals, in addition to employee handbooks via the
recently established intranet. This greatly reduces the amount of paper used and
allows for immediate updates and enhanced communication and efficiencies within
the Bank.
For the third consecutive year, we achieved two top ratings from
national financial review organizations. The Bank received IDC Financial
Publishing, Inc.'s Superior ranking and Bauer Financial Reports, Inc.'s 5-Star
rating, which recognizes the Bank as one of the safest financial institutions in
the United States. In addition, the Bank earned the distinction of an award
given by the Pennsylvania Community Bankers for the best community project in
our asset size during Community Banking week.
With the addition of our two new in-store branches, an entirely
different sales program was developed for these branches. The new program
includes extensive sales training for the staff, focusing on in-aisle selling,
development of sales promotions, and employee incentives. Each month, the branch
staff develops two promotions, which run concurrently during the month. The
staff are required during the day to go out in the aisle and talk to shoppers
about the convenience of 7-day a week banking, our products and services. The
sales staff at both in-store branches have developed unique and attractive
promotions that have contributed to the success of each of the branches.
Community Reinvestment and Development
During 1998, LA Bank continued to meet the credit needs of low and
moderate income families within their market area by offering innovative
mortgage products and participating with other local banks and agencies in
providing financing to families who would not normally qualify for traditional
mortgage loans. In addition, many of the Bank's loan officers are actively
involved with community organizations that focus on housing and credit needs.
The Bank's commitment to the communities it serves was confirmed when the Bank
was notified by the Office of the Comptroller of the Currency in 1998 that the
Bank is the number one Home Mortgage Disclosure Act (HMDA) lender for
conventional home purchase mortgages within Northeastern Pennsylvania. We are
all very proud of this achievement.
The Bank's "Welcome Neighbor" program for first time homebuyers in the low
and moderate income level was revised and improved during the year. Over $61
million of these loans were originated during 1998.
The Bank is also involved with the Office of Economic & Community
Development in the City of Scranton, which assists low and moderate income
individuals who are interested in becoming first time homeowners. The Bank's
management team works with a consortium of other local lenders in underwriting
and funding these loans.
36
<PAGE>
LA Bank also participates with the Pike County Planning and Development
Authority to rehabilitate residential real estate. The county provides grant
money and the Bank provides financing to low and moderate income individuals who
are remodeling deteriorated primary homes. Twenty-six loans were originated
during 1998 for a total of $286,000.
Year In Review
For the year ended December 31, 1998, LA Bank achieved substantial
growth and posted record high profits. We are very proud of this year's efforts
and performance and believe our aggressive strategy gives us reason for optimism
for future years.
Looking to the future, management believes that an excellent financial
institution has been established. The Company has exercised a broad involvement
in the various communities it serves and continues to meet the credit needs of
all community segments. We believe that the Company's current commercial and
retail loan growth momentum, balance sheet strength, and increased market share
provide the nucleus for continued and improved earnings trends.
We thank our Board of Directors, Business Development Boards,
management and employees for making 1998 a very successful year. Their effort
and support, coupled with invaluable experience, are appreciated by all of us.
Once again, as a stockholder, we sincerely hope that you continue to support,
promote and patronize LA Bank so that we may continue in our efforts to grow as
a strong locally-owned community bank.
John G. Martines
Chief Executive Officer of the Corporation and
President and Chief Executive Officer
of the Subsidiaries
Bruce D. Howe
President of the Corporation
and Chairman of the Subsidiaries
37
<PAGE>
Board of Directors
William C. Gumble, Esquire - Age 61. Attorney Gumble has served on the Board of
Directors since 1985. He resides in Paupack, Pike County. He retired from an
active law practice in 1993. He has held office as County Solicitor and District
Attorney of Pike County.
Bruce D. Howe- Age 67. Mr. Howe is Chairman of the Board of LA Bank, N.A., and
is a resident of Lake Ariel. He is President of John T. Howe, Inc. which
operates local fuel and heating oil companies, a motel, interstate truck stop
and convenient stores. He is also President of Howe's Twin Rocks, Inc., a local
restaurant.
Harry F. Schoenagel- Age 63. Mr. Schoenagel was elected to the Board of
Directors in 1985. He is a resident of Greentown and is a partner in Schoenagel
& Schoenagel Associates, a local engineering and surveying company located in
Pike County.
John G. Martines- Age 52. Mr. Martines is Bank President and CEO and has been
employed by the Bank and on the Board of Directors since 1979. He is a resident
of Newton Lake, Greenfield Township, Lackawanna County.
Peter O. Clauss- Age 69. Mr. Clauss has served on the Board since 1986. He was
the former President of C & D Builders, Inc., a contracting firm, and is
presently retired and a resident of Lake Ariel.
Donald E. Chapman- Age 62. Mr. Chapman has been on the Board of Directors since
1972. He is a resident of Lake Ariel and owner of a Nationwide Insurance agency
for the past 35 years. He also serves as a Wayne County Commissioner.
Paul D. Horger, Esquire - Age 61. Attorney Horger is a practicing attorney for
34 years. He is Senior Partner at the law firm of Oliver, Price & Rhodes in
Scranton, Pennsylvania.
Kenneth M. Pollock, Jr. - Age 41. Mr. Pollock is the newest member on the Board.
He is the President of HUD Inc. t/a Emerald Anthracite II and resides in
Huntsville in Luzerne County.
38
<PAGE>
BOARD
While the average LA Bank customer would not be nearly as familiar with the
faces of the Board members as they are with those of our staff which serves them
daily, it is the directives of our Board and their policy decisions that impact
the products and services our customers benefit from and from which our
stockholders ultimately derive financial reward. It is this entrepreneurial
spirit that has given us the momentum to expand, improving the products and
services we offer our customers, and culminating with our proud tradition of
financial reward to our stockholders. Our aggressive expansion into now a five
county territory, including the Luzerne County location pictured here, provides
new opportunities to the diverse populations of the communities we serve. We
welcome the new customer base which further increases our market share and
overall performance.
39
<PAGE>
LUZERNE COUNTY
Luzerne County has become a focal point for our continuing strength and
expansion. In May, 1998 we opened our first dedicated Mortgage Loan Center,
followed in September by a full-service branch at the same Luzerne County
landmark site, Public Square. December ushered in the opening of our Kingston
Branch, situated adjacent to the cherry-blossomed banks of the Susquehanna
River. We expect our third Luzerne County branch on the Wilkes-Barre Boulevard
to open in the spring of 1999. Our main Luzerne County location, this branch
will also be home for our Luzerne County commercial lending and other lending
functions.
There is no doubt that Public Square (pictured here) has long been the spiritual
center of Luzerne County. The Square houses other prominent landmarks, including
the Greater Wilkes-Barre Chamber of Business and Industry Center, the Kirby
Center for the Performing Arts, and, within walking distance, the Greco-Roman
style Luzerne County Courthouse. Nearby, numerous educational institutions and
businesses help shape the surrounding culture of our new locations and accent
the Public Square that symbolizes the aspirations of creating fine public spaces
for all to enjoy.
40
<PAGE>
LACKAWANNA COUNTY
LA Bank's presence in Lackawanna County has been recently marked by our
Financial Center, located in the heart of downtown Scranton. Simultaneously, the
greater Scranton area itself is becoming more identified with the concept of
Steamtown. Steamtown National Historic Site, pictured here, is truly a landmark
of national recognition. Drawing thousands of domestic and international rail
fans and historians, Steamtown is a memorial to one of the most prosperous times
in the history of the County. Today, one can enjoy the exhilaration of stepping
back in time to enjoy an excursion spotlighting the beauty of the Valley. As it
is true that life, times and means of transportation change, 1998 brought about
the opening of our newest Lackawanna branch locations at Dickson City, located
in the new Wal-Mart Supercenter; downtown Taylor; and, Meadow Avenue, located in
the busy East Mountain area of Scranton.
41
<PAGE>
WAYNE COUNTY
Despite LA Bank's multiple expansions throughout a five-county region of
Northeastern Pennsylvania, Wayne County -- the site of the founding of our
precursor, the First National Bank of Lake Ariel -- remains the spiritual home
to many who know the history of our founding on November 10, 1910. Today, Wayne
County houses three additional branches, including our newest office located
inside the Honesdale Wal-Mart Supercenter. Our Hamlin and Newfoundland locations
complete the list of our other Wayne County locations. This traditional rural
character is immediately evident from a drive through the Wayne County
countryside, where farming remains a way of life. The values of the farming
lifestyles are the landmark so reflective of this county. This lifestyle is well
represented by the Walter Krompasky Farm, principally a dairy operation, and one
of the oldest working farms located in the region.
42
<PAGE>
PIKE COUNTY
Pike County is home to three LA Bank branches, including one in downtown
Milford. The Columns, home to the Museum of the Pike County Historical Society,
a landmark of rich architectural distinction, can be seen when visiting our
branch. This county shares the tremendous natural beauty of the Pocono Mountains
bordering Monroe County, and together are noted as two of the fastest growing
counties in Pennsylvania. The Columns, pictured here, is proof that, despite the
Pocono's recreational opportunities and astounding natural aesthetics, it has
man-made wonders of equal beauty. Built originally as a summer estate for a
textile magnate before being deeded to the Historical Society in 1930, The
Columns is best known as the home of the Lincoln Flag, historically
authenticated as the flag which was placed under the head of the assassinated
President as he lay dying.
43
<PAGE>
MONROE COUNTY
A popular destination for tourists seeking to enjoy the fun the outdoors offers,
Monroe County was carved out of the original Northampton County, itself one of
the great land grants presented by the King of England to William Penn. The
county features spectacular recreational terrain and immense natural beauty. The
natural beauty of the Pocono Mountains in the county itself is a true landmark
and this beauty is captured in the spectacular photo of the Delaware River at
Shawnee. Home to one of LA Bank's newest branches, Tannersville is also home to
the Crossings, a popular shopping epicenter located just across the border from
New Jersey.
44
<PAGE>
Responsibilities for Preparation of Financial Statements
The management of Lake Ariel Bancorp, Inc. ("the Company") is
responsible for the preparation, integrity and fair presentation of the
financial statements, as well as other information contained in the annual
report. Estimates are an integral part of preparing financial statements as
management must make informed judgements about the expected effects of events
and transactions prior to their definitive resolution.
In meeting its responsibility for the reliability of the financial
statements, the Company depends on its system of internal accounting controls.
This system is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with the appropriate
corporate authorization and recorded properly to permit the preparation of
financial statements in accordance with generally accepted accounting
principles. Although accounting control procedures are designed to achieve these
objectives, it must be recognized that errors or irregularities may nevertheless
occur. The effectiveness of the system of accounting controls is reviewed
continually throughout the year by an established program of internal audit.
These controls are constantly modified and improved in response to changes in
business conditions and operations. The design, monitoring and revision of
internal accounting controls involve, among other considerations, management's
judgement with respect to the relative cost and expected benefits of specific
control measures. The Company believes that its accounting controls provide
reasonable assurance that errors or irregularities that could be material to the
financial statements are prevented or would be detected within a timely period
by employees in the normal course of performing their assigned functions.
Management discharges its responsibility for the financial statements
through the Audit Committee of the Board of Directors, comprised entirely of
Directors who are not Company employees. This responsibility includes general
oversight of the Company's accounting system, internal accounting controls,
financial accounting and reporting matters and regulatory reports. The
independent auditors and the Company's internal audit department have direct
access to the Audit Committee, and meet with it, with and without management
being present, to discuss auditing and financial reporting matters.
The accompanying financial statements have been audited by Parente,
Randolph, Orlando, Carey & Associates, Certified Public Accountants, for the
purpose of rendering an independent professional opinion, and their report is
included herein.
Joseph J. Earyes, CPA
Vice President and Treasurer
45
<PAGE>
Management's Discussion and Analysis
The consolidated financial review of Lake Ariel Bancorp, Inc. ("the
Company") provides a comparison of the performance of the Company for the years
ended December 31, 1998, 1997, and 1996. 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 December 31, 1998, the Company had 174 full-time equivalent employees. The
increase, 41 additional over 1997, was due to the additional staffing needs in
the new branches.
Analysis of Results of Operation
Overview
Net income for 1998 increased to $3.8 million, an increase of $340,000
or 9.9% over 1997. Net income for 1997 was $3.4 million, an increase of $400,000
or 13.2% over 1996. On a per share basis, net income was $0.79 basic and $0.77
diluted in 1998, $0.88 basic and $0.84 diluted in 1997 and $0.78 basic and
diluted in 1996. Weighted average diluted shares outstanding for 1998, 1997 and
1996 were 4,906,000, 3,886,000, and 3,686,000, 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 volume
improvement in net interest income after provision for possible credit losses,
which increased to $11.4 million, an increase of $1.0 million or 9.7% over 1997,
and which was coupled with an increase in other operating income to $4.9
million, an increase of $1.5 million or 45.1% over 1997. This increase more than
offset the increase in other operating expenses to $11.5 million, an increase of
$2.2 million or 24.3% over 1997. The Company continued to focus its efforts
toward retail banking services within its existing and new market areas with
specific attention given to increasing overall market share.
The growth in net income in 1997 was also attributable to the
improvement in net interest income after provision for possible credit losses,
which increased to $10.3 million, an increase of $903,000 or 9.6% over 1996 and
which was also coupled with an increase in other operating income to $3.4
million, an increase of $695,000 or 25.7% over 1996. This increase more than
offset the increase in other operating expenses to $9.2 million, an increase of
$1.2 million or 15.2% over 1996.
Analysis of Net Interest Income
In 1998, net interest income (tax-equivalent basis) increased to $13.4
million, an increase of $1.4 million or 11.9% over 1997 levels. Average loans
and leases increased to $218.6 million, an increase of $24.6 million or 12.7%
over 1997. Average commercial loans grew to $73.4 million, an increase of $12.2
million or 20.0% over 1997 levels. Interest income on commercial loans increased
to $6.6 million, an increase of $665,000 or 11.1% over 1997. This was due to
increased volumes 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 7.75% and 8.50% at December 31, 1998 and 1997,
respectively. Average real estate loans increased 14.5%, which contributed to a
12.0% increase in interest income on real estate loans. Average consumer loans,
which included credit card receivables and leases, decreased $1.2 million or
2.9% over 1997, and resulted in no change in related interest income, due to the
increased volume and rates from lease financing.
Net interest income (tax-equivalent basis) for 1997 increased to $11.9
million, an increase of $1.3 million or 12.0% over 1996. This increase was due
to the continued strong growth of earning assets, which grew 23.3% over 1996
levels.
46
<PAGE>
On average, investment securities in 1998 increased to $166.2 million,
an increase of $52.0 million or 45.5% over 1997 levels. Investment securities in
1997 increased to $114.2 million, an increase of $28.9 million or 33.9% over
1996 levels. Income earned on investment securities increased to $11.4 million,
an increase of $3.1 million or 37.8% over 1997. Income earned in 1997 increased
to $8.3 million, an increase of $2.2 million or 36.2% over 1996. As is discussed
under "Financial Condition", the asset/liability management and investment
strategies that were employed during 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 1998. Taxable
securities, which represented 73.9% of the investment portfolio in 1997,
increased to 80.2% or $133.3 million in 1998. At December 31, 1998, tax-exempt
securities represented 19.8% of the portfolio compared to 26.1% in 1997 and
23.9% in 1996. In 1998, tax-exempt securities provided similar after-tax
investment returns as taxable issues in similar maturity and quality ranges.
Accordingly, average balances on state and municipal securities at December 31,
1998 increased to $32.9 million, an increase of $3.1 million or 10.5% over 1997.
Average balances on state and municipal securities at December 31, 1997
increased to $29.8 million, an increase of $9.4 million or 46.1% from $20.4
million at December 31, 1996.
Average interest-bearing deposits at December 31, 1998 increased to
$243.4 million, an increase of $10.8 million or 4.6% over 1997. Average
interest-bearing deposits at December 31, 1997 increased to $232.6 million, an
increase of $28.7 million or 14.1% from $203.9 million at December 31, 1996.
Savings and interest-bearing demand deposits at December 31, 1998 increased to
$77.8 million, an increase of $7.1 million or 10.1% over 1997. Savings and
interest-bearing demand deposits at December 31, 1997 increased to $70.6
million, an increase of $6.4 million or 9.9% from $64.2 million at December 31,
1996. As a percentage of total average interest-bearing deposits, savings and
interest-bearing demand deposits represented 32.0% in 1998, 30.4% in 1997 and
31.5% in 1996. Average time deposits (including deposits greater than $100,000)
at December 31, 1998 increased to $165.6 million, an increase of $3.6 million or
2.2% over 1997. Average time deposits at December 31, 1997 increased to $162.0
million, an increase of $22.3 million or 15.9% over 1996. As a percentage of
total average interest-bearing deposits, time deposits represented 68.0% in
1998, 69.6% in 1997, and 68.5% in 1996. Due to the shift in the mix of deposits,
the rates at which they were repricing and the volume increase, interest expense
on deposits at December 31, 1998 increased to $10.9 million, an increase of
$462,000 or 4.4% over 1997. Interest expense on deposits at December 31, 1997
increased to $10.4 million, an increase of $1.4 million or 16.1% from $9.0
million at December 31, 1996. These results were reflected in the cost of funds
which decreased 2.2% from 1997 through 1998, and increased 1.8% from 1996 to
1997, while volume increased 4.6% and 14.1%, respectively. Interest expense as a
percent of earning assets decreased by 2 basis points from 4.32% in 1997 to
4.30% in 1998 due to the rate decrease paid on interest-bearing liabilities.
Short-term borrowings, which included federal funds purchased and
securities sold under agreements to repurchase, averaged $2.2 million in 1998,
$2.1 million in 1997 and $3.7 million in 1996. These borrowings remained
relatively constant through 1998.
The overall effect of the modest decrease in interest rates paid, the
shift in mix of and growth in deposit accounts and long-term debt and the
decreasing yields earned on earning assets produced a negative impact on net
interest margin. The net interest margin decreased by 38 basis points to 3.43%
in 1998 from 3.81% in 1997. The net interest margin was 4.20% in 1996. This
result is very indicative of a decreasing rate environment, which took place in
1998. Due to the large volume of variable rate securities and loans tied to the
national prime rate, the yield on earning assets decreased to 7.74% from 8.13%
in 1997, or a 39 basis point decrease. Similarly, the rate of interest expense
as a percent of earning assets decreased from 4.32% to 4.30% or 2 basis points.
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.
47
<PAGE>
<TABLE>
<CAPTION>
For The Year Ended December 31,
1998 1997 1996
Average Interest Average Interest Average Interest
Balance Income/ Yield/ Balance Income/ Yield/ Balance Income/ Yield/
(1) Expense Rate (1) Expense Rate (1) Expense Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold ....................... $4,028 $217 5.39% $4,640 $264 5.69% $3,124 164 5.25%
Deposits in Federal Home Loan Bank ....... 85 9 4.86 160 9 5.63 145 6 4.14
Investment securities:
U.S. government agencies .............. 127,571 8,430 6.61 81,567 5,738 7.03 63,443 4,323 6.81
State and municipal(2) ................ 32,922 2,567 7.80 29,798 2,391 8.02 20,393 1,673 8.20
Other securities ...................... 5,708 419 7.34 2,850 154 5.40 1,460 86 5.89
Total investment securities ......... 166,201 11,416 6.87 114,215 8,283 7.25 85,296 6,082 7.13
Loans and leases:
Commercial, financial and industrial(2) 73,393 6,617 9.02 61,163 5,952 9.73 48,626 4,585 9.43
Real estate-construction and mortgage . 106,508 8,240 7.74 92,998 7,356 7.91 80,395 6,557 8.16
Installment loans to individuals(3) .. 34,003 3,122 9.18 36,793 3,299 8.97 34,213 3,251 9.50
Lease financing(3) .................... 4,725 480 10.16 3,110 302 9.71 2,114 199 9.41
Total loans and leases .............. 218,629 18,459 8.44 194,064 16,909 8.71 165,348 14,592 8.83
Total earning assets ..................... 389,043 30,101 7.74 313,079 25,465 8.13 253,913 20,844 8.21
Cash and due from banks .................. 11,038 10,469 9,834
Premises and equipment ................... 14,794 10,901 7,769
Other, less allowance for credit losses
and loan fees ......................... 14,334 9,617 5,438
Total assets ............................. $429,209 $344,066 $276,954
Liabilities and stockholders= equity:
Interest-bearing deposits:
Demand ................................ $35,503 $806 2.27% $30,245 $627 2.07% $ 25,764 $537 2.08%
Savings ............................... 42,257 1,697 4.02 40,377 1,611 3.99 38,472 1,549 4.03
Time .................................. 126,525 6,288 4.97 123,054 6,157 5.00 105,883 5,350 5.05
Time over $100,000 .................... 39,090 2,066 5.29 38,918 2,000 5.14 33,811 1,521 4.50
Total interest-bearing deposits ..... 243,375 10,857 4.46 232,594 10,395 4.47 203,930 8,957 4.39
Short-term borrowings .................... 652 38 5.83 1,843 99 5.37 3,312 174 5.25
Securities sold under agreements
to repurchase ......................... 1,526 70 4.59 259 13 5.02 338 17 5.03
Long-term debt ........................... 96,817 5,775 5.96 47,663 3,018 6.33 16,275 1,035 6.36
Total interest-bearing liabilities ....... 342,370 16,740 4.89 282,359 13,525 4.79 223,855 10,183 4.55
Demand - noninterest - bearing ........... 45,289 35,518 29,545
Other liabilities ........................ 4,826 3,674 3,312
Total liabilities ........................ 392,485 321,551 256,712
Stockholders= equity ..................... 36,724 22,515 20,242
Total liabilities and stockholders= equity $429,209 $344,066 $276,954
Net interest income ...................... $13,361 $11,940 $10,661
Net interest spread ...................... 2.85% 3.34% 3.66%
Net interest margin(4) ................... 3.43% 3.81% 4.20%
</TABLE>
- ------------------------------
[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 for 1998, 1997 and 1996.
(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]
48
<PAGE>
<TABLE>
<CAPTION>
1998 Compared to 1997(1) 1997 Compared to 1996(1)
Caused by Total Caused by Total
Volume Rate Variance Volume Rate Variance
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income:
Federal funds sold............................ $ (34 )$(13) $(47) $ 85 $ 15 $100
Deposits in Federal Home Loan Bank ................. 1 (1) 0 1 2 3
Investment securities 3,501 (368) 3,133 2,101 100 2,201
Loans and leases ................................... 1,160 390 1,550 2,553 (236) 2,317
Total interest income ................................. 4,628 8 4,636 4,740 (119) 4,621
Interest expense:
Demand and savings deposits ........................ 190 75 265 169 (17) 152
Time deposits ...................................... 182 15 197 1,105 181 1,286
Borrowed funds ..................................... 2,932 (179) 2,753 1,904 - 1,904
Total interest expense ................................ 3,304 (89) 3,215 3,178 164 3,342
Net interest income............................. $1,324 $97 $1,421 $1,562 $(283) $1,279
<FN>
(1) The portion of the total change attributable to both volume and rate
changes during the period has been allocated to the volume and rate
components based upon the absolute dollar amount of the change in each
component prior to the allocation.
</FN>
</TABLE>
Provision for Possible Credit Losses
The provision for possible credit losses for the year ended December
31, 1998 increased to $1.1 million, an increase of $350,000 or 44.9% over 1997.
The provision for possible credit losses for 1997 increased to $780,000, an
increase of $130,000 or 20.0% from $650,000 for 1996. In 1998, the provision for
possible credit losses was 128.4% of net charge-offs, compared to 155.7% in 1997
and 136.3% in 1996. 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 $880,000, an increase of $379,000
or 75.6% over 1997. Net charge-offs in 1997 increased to $501,000, an increase
of $24,000 or 5.0% from $477,000 in 1996. The net charge-offs in 1998 were
primarily attributed to the commercial, consumer installment, and credit card
portfolios. The net charge-offs in 1997 were primarily attributed to the
consumer installment loans and credit card portfolio. The ratio of net
charge-offs to average loans outstanding was at 0.40% for 1998, 0.26% for 1997
and 0.30% for 1996.
Net charge-offs on commercial and industrial loans for 1998 were
$506,000 or 57.5% of net charge-offs compared to $64,000 or 12.8% of net
charge-offs for 1997 and $118,000 or 24.7% of net charge-offs for 1996. Consumer
and credit card and real estate related debt accounted for 42.5% in 1998, 87.2%
in 1997 and 75.3% in 1996, of net charge-offs, respectively.
Other Operating Income
Other operating income in 1998 increased to $4.9 million, an increase
of $1.5 million or 45.0% over 1997. Other operating income in 1997 increased to
$3.4 million, an increase of $695,000 or 25.7% from $2.7 million in 1996. Fees
generated from the origination and sale of residential mortgage loans provided
$39,000 or 1.0% in 1998, $183,000 or 5.4% in 1997 and $266,000 or 9.8% in 1996,
of other operating income. Mortgage servicing fee income, net of amortization of
mortgage servicing rights, decreased in 1998 to $294,000, a decrease of $16,000
or 5.1% over 1997. Such income in 1997 decreased to $310,000, a decrease of
$17,000 or 5.2% from $327,000 in 1996. These fees were directly influenced by
the volume of loans that were sold in the secondary market and the value of the
retained servicing rights. 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 $951,000 recorded in 1998, compared
with the net gain of $404,000 in 1997 and net gain of $114,000 in 1996, was
indicative of the changes in interest rates during the periods in which the
sales occurred.
49
<PAGE>
Fee income from service charges on demand deposits, item processing,
return items and other service fees increased to $1.6 million in 1998, an
increase of $329,000 or 26.4% over 1997. Such income in 1997 remained constant
with 1996 at $1.2 million. These fees, which represented 31.9% of other
operating income, were influenced by both pricing changes and increases in the
number of consumer and business demand deposit accounts which increased $22.8
million or 31.9% in 1998 over 1997.
Net gains on available-for-sale securities represented approximately
8.8% in 1998, 6.3% in 1997 and 1.6% in 1996 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 four of the Company's
branch offices, automated teller machine surcharge income, commissions on check
orders and other general service fees. These fees in 1998 increased to $1.7
million, an increase of $673,000 or 67.0% over 1997. These fees in 1997
increased to $1.0 million, an increase of $265,000 or 35.9% from $739,000 in
1996. Automated teller machine surcharge income represented $46,000 of the
increase. Earnings on directors' and officers' life insurance policies
represented $121,000 of the increase. Rental income represented $55,000 of the
increase. A gain of $240,000 on the sale of deposits and fixed assets of two
branch offices during the year represents the majority of the remaining
increase.
Other Operating Expenses
Other operating expenses in 1998 increased to $11.5 million, an
increase of $2.2 million or 24.3% over 1997. Other operating expenses in 1997
increased to $9.2 million, an increase of $1.2 million or 15.0% from $8.0
million in 1996. 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 $5.0 million, an increase of $807,000 or 19.2%
over 1997. Salaries and benefits in 1997 increased to $4.2 million, an increase
of $522,000 or 14.2% from $3.7 million in 1996. These increases were due to the
additional staffing needs in both new and existing branch and administrative
offices, merit increases and the added costs associated with health care
insurance and other benefits which were provided by the Company.
Equipment and occupancy expenses in 1998 increased to $2.7 million, an
increase of $462,000 or 20.4% over 1997. Such expenses in 1997 increased to $2.3
million, an increase of $389,000 or 20.7% over 1996. Again, these increases were
primarily attributable to the growth in the number of branch offices, in
addition to overall increases in overhead expenses, maintenance costs, 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 $0 in
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. In 1998 and 1997,
the FDIC charged no membership fee. Foreclosed asset expenses in 1998 were
$27,000, a decrease of $12,000 or 30.8% over 1997. The decrease was a result of
the sales of properties in 1998 without any material additions. Foreclosed asset
expenses in 1997 were $39,000, a decrease of $12,000 or 23.5% over 1996.
Amortization of intangible assets increased to $205,000 in 1998, an
increase of $51,000 or 33.1% over 1997, and was related to the premium the
Company paid for the core deposits and the deposit customer lists from acquired
branch offices. Amortization of intangible assets increased to $154,000 in 1997,
an increase of $46,000 or 42.6% over 1996, also related to the acquisition
premium paid for core deposits and customer lists. Advertising expenses
increased to $430,000 in 1998, an increase of $138,000 or 47.3% over 1997. The
increase is the result of expenses associated with a new advertising and
promotion campaign developed for 1998 as well as increased marketing costs in
our new market segments. Advertising expenses increased to $292,000 in 1997, an
increase of $43,000 or 17.3% over 1996.
50
<PAGE>
Other expenses in 1998 increased to $3.3 million, an increase of
$847,000 or 35.2% over 1997. Other expenses in 1997 increased to $2.4 million,
an increase of $273,000 or 12.8% over 1996. Included in these expenses were such
costs as legal fees, professional and audit, state shares' tax, directors' fees
and other general branch and administrative operating expenses.
Provision For Income Taxes
The provision for income taxes for the years ended December 31, 1998, 1997,
and 1996 was $1.1 million. The effective tax rate for 1998, 1997, and 1996 was
22.0%, 24.4% and 27.0%, respectively.
Financial Condition
December 31, 1998 Compared to December 31, 1997
The Company's total assets increased to $474.7 million at December 31,
1998, an increase of $106.6 million or 29.0% from $368.1 million at December 31,
1997. The increase in assets was primarily attributable to a $16.5 million
growth in net loans and a $77.6 million increase in investment securities.
The amortized cost of investment securities, including held-to-maturity
(HTM) and available-for-sale (AFS), increased to $192.8 million at December 31,
1998, an increase of $78.0 million or 67.9% from $114.8 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. Due to the significant increase in deposits and
by again utilizing structured borrowings with the FHLB, the Company was able to
purchase both taxable and tax-exempt investments that provided a favorable
spread between the interest rate on deposits and borrowings versus the yield on
invested funds. During 1998, the Company purchased $75 million of securities
with funds borrowed from the FHLB. The strategy that was employed provided a
favorable spread between the rates on invested and borrowed funds. At December
31, 1998, gross unrealized gains in the HTM investments were $858,000 while
gross unrealized losses amounted to $331,000.
The following table presents the maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 1998.
Weighted average yields on tax-exempt obligations have been computed on a
taxable equivalent basis.
<TABLE>
<CAPTION>
Available-for-Sale December 31, 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
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost: (Dollars in thousands)
U.S. government agencies and
corporations ................... $21,613 5.59%$11,161 6.70%$5,336 6.38%$26,222 6.88%$64,332 6.37%
Obligations of state and
political subdivisions ......... 100 7.80 755 6.97 494 6.50 8,171 6.78 9,520 6.79
Equity securities ................. -- - - - - - 5.88 7,125 5.88
Total securities available-for-sale $21,713 5.60%$11,916 6.72%$5,830 6.39%$41,518 6.69%$80,977 6.38%
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity December 31, 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> <C> <C> <C>
Amortized cost: (Dollars in thousands)
U.S. government agencies and
corporations ................. $24,592 6.62%$33,739 6.48% $6,161 6.30% $24,524 6.34% $89,016 6.47%
Obligations of state and
political subdivisions ....... - - 1,424 6.55 11,692 6.97 9,694 7.67 22,810 7.24
Total securities held-to-maturity $24,592 6.62%$35,163 6.48%$ 17,853 6.74%$ 34,218 6.72% $111,826 6.63%
</TABLE>
51
<PAGE>
A summary of securities available-for-sale and securities
held-to-maturity at December 31, 1998, 1997, 1996, 1995 and 1994 follows (in
thousands):
<TABLE>
<CAPTION>
Securities Available-for-Sale at December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
U.S. government agencies and corporations......... $64,332 $46,334 $50,253 $43,041 $27,348
Obligations of states and political subdivisions.. 9,520 7,287 9,066 5,810 6,919
Equity securities(1).............................. 7,125 2,913 1,443 1,304 2,619
Total amortized cost of securities................ $80,977 $56,534 $60,762 $50,155 $36,886
Total fair value of securities.................... $80,591 $56,545 $60,399 $50,580 $34,142
<FN>
(1) Comprised mostly of FHLB stock, Federal Reserve Bank stock and a
Pennsylvania community bank stock.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Securities Held-to-Maturity at December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
U.S. government agencies and corporations......... $ 89,016 $33,892 $10,841 $11,065 $31,611
Obligations of states and political subdivisions.. 22,810 24,353 15,760 11,524 10,924
Total amortized cost of securities................ $111,826 $58,245 $26,601 $22,589 $42,535
Total fair value of securities.................... $112,353 $59,008 $26,564 $22,866 $40,674
</TABLE>
A summary of the outstanding loans and leases by major categories at
December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(in thousands)
<S> <C> <C> <C> <C> <C>
Real estate-construction.......................... $ 3,522 $ 3,338 $ 3,214 $ 4,726 $ 2,406
Real estate-mortgage.............................. 103,151 99,637 84,352 68,006 56,858
Commercial and industrial......................... 79,293 69,479 51,485 45,210 43,269
Consumer installment.............................. 40,907 40,912 45,170 42,891 40,839
Lease financing................................... 5,392 3,711 2,588 1,742 1,119
Unearned income................................... (4,606) (6,067) (8,091) (7,641) (6,947)
Unearned loan fees, net........................... (545) (665) (898) (971) (1,030)
Total loans and leases....................... 227,114 210,345 177,820 153,963 136,514
Allowance for possible credit losses.............. (2,360) (2,109) (1,830) (1,657) (1,496)
Net loans and leases......................... $224,754 $208,236 $175,990 $152,306 $135,018
</TABLE>
Total net loans increased to $224.7 million at December 31, 1998, an
increase of $16.5 million or 7.9% from $208.2 million at December 31, 1997. The
increase in net loans was directly related to the significant growth in
commercial loans and residential mortgages. Residential mortgage loans (net of
mortgage loans sold during 1998 of $34.9 million), which included real estate
construction loans, increased to $106.7 million at December 31, 1998, an
increase of $3.7 million or 3.5% from $103.0 million at December 31, 1997.
52
<PAGE>
Consumer loans, net of unearned discounts, increased to $41.0 million
at December 31, 1998, an increase of $2.4 million or 6.2% from $38.6 million at
December 31, 1997. Commercial loans increased to $79.3 million at December 31,
1998, an increase of $9.8 million or 14.1% 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 $8.8 million at
December 31, 1998, an increase of $900,000 or 11.4% from $7.9 million at
December 31, 1997. The policies represent investments in various life insurance
contracts to fund directors' deferred compensation plans, 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 $312.7 million at December 31, 1998, an
increase of $32.3 million or 11.5% from $280.5 million at December 31, 1997.
Noninterest-bearing demand deposits increased to $52.4 million at December 31,
1998, an increase of $12.7 million or 32.1% from $39.7 million at December 31,
1997. In the aggregate, savings and interest-bearing demand deposits increased
to $80.3 million at December 31, 1998, an increase of $12.1 million or 17.8%
from $68.2 million at December 31, 1997. As a percentage of total deposits,
savings and interest-bearing demand deposits represented 25.7% in 1998, compared
to 24.3% in 1997. Savings deposits increased to $38.5 million at December 31,
1998, an increase of $2.1 million or 5.7% from $36.4 million at December 31,
1997. Time deposits, which include certificates of deposit in denominations of
$100,000 or more, increased to $180.0 million at December 31, 1998, an increase
of $7.4 million or 4.3% from $172.6 million at December 31, 1997. As a
percentage of total deposits, these deposits decreased to 57.6% in 1998 from
61.5% in 1997. Approximately $20.7 million or 6.6% of total 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. These certificates of deposit and their remaining
maturities at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(in thousands)
<S> <C> <C> <C> <C> <C>
Three months or less..................... $14,039 $15,217 $11,375 $11,708 $9,664
Over three through six months............ 11,217 12,956 17,847 5,701 6,503
Over six through twelve months........... 11,084 6,814 6,376 8,213 6,424
Over twelve months....................... 6,603 9,032 4,642 1,321 2,072
Total........................... $42,943 $44,019 $40,240 $26,943 $24,663
</TABLE>
53
<PAGE>
Nonperforming Assets
Nonperforming assets included nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consisted of loans where the principal and/or
interest was 90 days or more past due and loans that had been placed on
nonaccrual status. When loans were placed on nonaccrual status, income from the
current period was reversed from current earnings and interest from prior
periods was charged to the allowance for possible credit losses. Consumer loans
were charged-off when principal or interest was 120 days or more delinquent, or
were placed on nonaccrual status if a sufficient amount of collateral existed.
The following table shows information concerning loan delinquency and other
nonperforming assets of the Company for 1998, 1997, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more........... $ 759 $1,453 $1,593 $1,716 $1,125
Impaired loans in nonaccrual status...... 2,088 411 542 1,216 -
Other nonaccrual loans................... 308 123 73 487 1,786
Total nonperforming loans....... 3,155 1,987 2,208 3,419 2,911
Foreclosed assets held for sale.......... 357 523 841 52 191
Total nonperforming assets...... $3,512 $2,510 $3,049 $3,471 $3,102
Nonperforming loans as a
percentage of loans................. 1.39% .94% 1.24% 2.19% 2.13%
Nonperforming assets as a
percentage of assets................ .74% .68% 1.02% 1.36% 1.31%
</TABLE>
The following summary shows the impact on interest income on nonaccrual
and restructured loans for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996 1995 1994
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest income that would
have been recorded had
the loan been in accordance
with their original terms............. $167 $51 $92 $187 $171
Interest income included in
net income............................ 10 21 7 12 -
</TABLE>
Nonperforming loans increased 58.8% from year-end 1997. Nonaccrual
loans increased $1.9 million or in excess of three times from year-end 1997.
Commercial loans accounted for 87.2% of all nonaccruals, followed by real estate
loans at 12.8%. Within the $2.4 million of total nonaccrual loans, 100.0% were
secured by mortgages, primarily first liens, against residential or commercial
properties. Loans past due 90 days or more decreased $694,000 from 1997 year-end
levels. These loans included $420,000 in real estate mortgages, $68,000 in
consumer credit, $236,000 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
reviewed by management on a continuing basis. No material losses are expected as
a result of these proceedings.
Foreclosed assets held for sale were $357,000 at year-end 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.
54
<PAGE>
Potential Problem Loans
At December 31, 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 December 31, 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 changing economic
trends; the volume of nonperforming loans; concentrations of credit risk;
adverse situations that may affect the borrower's ability to repay; prior loss
experience within the various categories of the portfolio; and current economic
conditions were considered when reviewing the risks in the portfolio. Larger
exposures were analyzed individually. Over the past several years, the Company
implemented more stringent underwriting standards in commercial lending as this
category of loans continues to grow. While management believed the allowance for
possible credit losses was adequate, future additions to the allowance may be
necessary based on changes in economic conditions. The adequacy of the allowance
for possible credit losses was reviewed quarterly by a loan review committee
comprised of members of the Board of Directors and senior management of the
Company. The full Board of Directors reviewed the relevant ratios with respect
to the allowance after the loan review committee made its recommendations. At
December 31, 1998, the allowance for possible credit losses was 1.05% of loans
compared to 1.00% at December 31, 1997 and 1.03% at December 31, 1996. 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 for the years ended December
31, 1998, 1997, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more.................... $ 759 $1,453 $1,593 $1,716 $1,125
Balance at beginning of period.................... $2,109 $1,830 $1,657 $1,496 $1,544
Charge-offs:
Real estate-construction................. - - - - -
Real estate-mortgage..................... 122 103 143 200 14
Commercial and industrial................ 512 106 158 294 321
Consumer installment..................... 282 363 274 206 157
Lease financing.......................... 29 11 - - 7
Total........................... 945 583 575 700 499
Recoveries:
Real estate-construction................. - - - - -
Real estate-mortgage..................... - - - - 2
Commercial and industrial................ 6 42 40 8 12
Consumer installment..................... 59 40 58 43 58
Lease financing.......................... - - - - 4
Total........................... 65 82 98 51 76
Net charge-offs................................... 880 501 477 649 423
Provision for possible credit losses.............. 1,130 780 650 810 375
Balance at end of period.......................... $2,360 $2,109 $1,830 $1,657 $1,496
Ratio of net charge-offs during period to
average loans outstanding during period......... 0.40% 0.26% 0.30% 0.44% 0.35%
</TABLE>
The Company's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for possible credit losses among various
categories. At December 31, 1998, approximately 74.1% of the allowance for
possible credit losses is allocated to general risk to protect the Company
against probable 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>
At December 31,
1998 1997 1996 1995 1994
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Amount to Loans(1) Amount to Loans(1) Amount to Loans(1)Amount to Loans(1)Amount to Loans(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocation of allowance for possible credit losses:
Real estate............. $ 281 46% $ 278 48% $ 248 49% $ 279 47% $ 370 43%
Commercial and industrial 780 36 868 32 574 29 700 29 631 32
Consumer installment.... 361 16 465 19 428 21 437 23 386 24
Lease financing......... 92 2 68 1 62 1 52 1 52 1
Unallocated............. 846 - 430 - 518 - 189 - 57 -
Total............. $2,360 100% $2,109 100% $1,830 100% $1,657 100% $1,496 100%
<FN>
(1) Loans, net of unearned income.
</FN>
</TABLE>
Interest Rate Risk Management
The following discussion contains certain forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995). These
forward-looking statements may involve significant risks and uncertainties that
are described under the caption "Factors That May Affect Future Results."
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, the Company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.
Asset/Liability Management. One major objective of the Company when
managing the rate sensitivity of its assets and liabilities is to stabilize net
interest income. The management of and authority to assume interest rate risk is
the responsibility of the Company's Asset/Liability Committee ("ALCO"), which is
comprised of senior management and Board members. ALCO meets quarterly to
monitor the ratio of interest sensitive assets to interest sensitive
liabilities. The process to review interest rate risk management is a regular
part of management of the Company. Consistent policies and practices of
measuring and reporting interest rate risk exposure, particularly regarding the
treatment of noncontractual assets and liabilities, are in effect. In addition,
there is an annual process to review the interest rate risk policy with the
Board of Directors which includes limits on the impact to earnings from shifts
in interest rates.
Interest Rate Risk Measurement. Interest rate risk is monitored through
the use of three complementary measures: static gap analysis, earnings at risk
simulation and economic value at risk simulation. While each of the interest
rate risk measurements has limitations, taken together they represent a
reasonably comprehensive view of the magnitude of interest rate risk in the
Company and the distribution of risk along the yield curve, the level of risk
through time, and the amount of exposure to changes in certain interest rate
relationships.
56
<PAGE>
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 December 31, 1998, LA Bank maintained a one year cumulative gap of
positive $11.6 million or 2.45% of total assets. The effect of this gap position
provided a positive mismatch of assets and liabilities which can expose LA Bank
to interest rate risk during a period of decreasing interest rates. Conversely,
in a rising interest rate environment, net income could be positively affected
because more assets than liabilities will reprice during a given period.
57
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity Gap at December 31, 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................... $ 6,620 $ 241 $ - $ 12,143 $ 19,004
Investment securities(1)(2)................. 32,226 21,598 39,051 99,641 192,516
Loans(2).................................... 61,265 60,968 57,959 46,394 226,586
Fixed and other assets...................... - - - 36,204 36,204
Total assets................................ $100,111 $ 82,807 $97,010 $194,382 $474,310
Non interest-bearing transaction deposits(3) $ - $ - $26,225 $ 26,225 $ 52,450
Interest-bearing transaction deposits(3).... 1,263 13,671 17,325 49,263 81,522
Time ....................................... 45,808 62,641 15,041 12,369 135,859
Time over $100,000.......................... 14,041 22,401 634 5,867 42,943
Short-term borrowings....................... 3,496 641 1,529 647 6,313
Long-term debt.............................. 5,585 1,753 9,552 95,540 112,430
Other liabilities........................... - - - 4,986 4,986
Total Liabilities...................... $ 70,193 $101,107 $70,306 $194,897 $436,503
Interest sensitivity gap.................... $ 29,918 $(18,300) $26,704 $ (516)
Cumulative gap.............................. $ 29,918 $ 11,618 $38,322 $ 37,806
Cumulative gap to total assets.............. 6.31% 2.45% 8.08% 7.97%
<FN>
- ------------------------------
(1) Gross of unrealized gains/losses on available-for-sale securities.
(2) Investments and loans are included in the earlier of the period in
which interest rates were next scheduled to adjust or the period in
which they are due. In addition, loans were included in the periods in
which they are scheduled to be repaid based on scheduled amortization.
For amortizing loans and mortgage-backed securities, annual prepayment
rates are assumed reflecting historical experience as well as
management's knowledge and experience of its loan products.
(3) LA Bank's demand and savings accounts were generally subject to
immediate withdrawal. However, management considers a certain amount of
such accounts to be core accounts having significantly longer effective
maturities based on the retention experiences of such deposits in
changing interest rate environments. The effective maturities presented
are the recommended maturity distribution limits for nonmaturing
deposits based on historical 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.
58
<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
December 31, 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 December 31, 1998 levels.
Rates +200 Rates -200
Earnings at risk:
Percent change in:
Net Interest Income.......................... 8.42% (11.65)%
Net Income................................... 22.28 (29.48)
Economic value at risk:
Percent change in:
Economic value of equity..................... (2.48) (20.40)
Economic value of equity
as a percent of book assets................ (0.29) (2.39)
Economic value has the most meaning when viewed within the context of
risk-based capital. Therefore, the economic value may change beyond the
Company's policy guideline for a short period of time as long as the risk-based
capital ratio (after adjusting for the excess equity exposure) is greater than
10%.
Capital
The adequacy of the Company's capital is reviewed on an ongoing basis
with regard to size, composition and quality of the Company's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio,
defined as the ratio of common stockholders' equity less intangible assets, to
average quarterly assets less intangible assets. The leverage ratio at December
31, 1998 was 7.72% compared to 10.26% at December 31, 1997. This decrease in the
leverage ratio in 1998 was caused by the increase in average assets in 1998 due
to the borrowings from the FHLB which were invested in investment grade
securities. The higher leverage ratio in 1997 was the result of the public stock
offering in December, 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. 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.
59
<PAGE>
At December 31, 1998
(Dollars in thousands)
Primary capital...................................... $ 37,880
Intangible assets.................................... 2,293
Tier I capital....................................... 35,587
Tier II capital...................................... 2,268
Total risk-based capital............................. $ 37,855
Total risk-weighted assets........................... $252,967
Tier I ratio......................................... 14.07%
Risk-based capital ratio............................. 14.96%
Tier I leverage ratio................................ 7.72%
Regulatory guidelines require that core capital and total risk-based
capital must be at least 4.0% and 8.0%, respectively.
Liquidity and Funds Management
Liquidity management is to ensure that adequate funds will be available
to meet anticipated and unanticipated deposit withdrawals, debt servicing
payments, investment commitments, commercial and consumer loan demand and
ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short- and
long-term borrowings and repurchase agreements. Regular loan payments are a
dependable source of funds, while the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates.
At December 31, 1998, the Company maintained $19.0 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 $2.7 million of
mortgage loans held for resale and $80.6 million in AFS securities. This
combined total of $102.3 million represented 21.6% of total assets at December
31, 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
December 31, 1998, approximately 65.9% of the Company's assets were funded by
core deposits acquired within its market area. An additional 8.0% of the assets
were funded by the Company's equity. These two components provide a substantial
and stable source of funds.
Net cash used in operating activities was $422,000 for the year ended
December 31, 1998, as compared to net cash provided by operating activities of
$4.9 million for the comparable period in 1997. This $5.3 million decrease is
primarily related to a net $6.7 million increase in the change in mortgage loans
held for resale and other assets. Net cash used in investing activities
increased $30.0 million for the year ended December 31, 1998, from $69.5 million
to $99.5 million, which was primarily attributable to purchases of investment
securities. Net cash provided by financing activities increased $36.0 million
from 1997. A net increase in FHLB borrowings of $40.2 million were used to fund
investment purchases. A net increase in the annual growth of deposits from 1997
to 1998 of $5.0 million was the other major component impacting funds provided
by financing activities. Cash provided by financing activities for 1998 was
impacted by a net decrease of $11.8 million from net proceeds from issuance of
common stock.
60
<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 its current level of 7.75%.
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.
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.
61
<PAGE>
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.
62
<PAGE>
TIME LINE
AWARENESS AND ASSESSMENT RENOVATION, TESTING, IMPLEMENTATION PHASES
<TABLE>
<CAPTION>
*2nd Quarter 1997 *3rd Quarter 1997 *4th Quarter 1997 *1st Quarter 1998
<S> <C> <C> <C>
- -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
- -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 core applications. -All depositors were sent a -Sought alternate hardware and software -Implement any new hardware
- -Began renovation of PC's letter stating the bank's vendors for those applications that and/orsoftware vendors.
and routers. Y2K status. were not Y2K compliant. -Continue testing core applic-
- -Prepared contingency plan. -Continued testing core -Continued testing core applications ations for critical dates.
applications for critical dates. for critical dates. -Complete renovations.
-Commercial customers with a -Partnered with Unisys Corp. to -Test non mission critical
with borrowing relationship between conduct Y2K testing. The Bank's equipment date sensitive
$150,000 to $250,000, and technology platform was aged into operating controls or calendar
any others heavily reliant on the Year 2000 and transactional functions.
technology were assessed testing was conducted.
for Y2K status.
</TABLE>
*Denotes completion
63
<PAGE>
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:
<TABLE>
<CAPTION>
Vendor Description Amount
<S> <C> <C>
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
TOTAL $363,072
</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.
64
<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 into the Year 1999.
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. Preconversion testing demonstrated that the new hardware and software
are Year 2000 compliant.
Factors That May Affect Future Results
General
Banking is affected, directly and indirectly, by local, domestic and
international economic and political conditions, and by government monetary and
fiscal policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the control of the Company may adversely affect the
future results of operations of the Company. Management does not expect any one
particular factor to affect results of operations. A downward trend in several
areas, however, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to maintain or increase
profitability. Therefore, there is no assurance that the Company will be able to
continue its current rate of profitability and growth. See "Business - Allowance
For Possible Credit Losses."
Interest Rates
The Company's earnings depend, to a large extent, upon net interest
income, which is primarily influenced by the relationship between its cost of
funds (deposits and borrowings) and the yield on its interest-earning assets
(loans and investments). This relationship, known as the net interest spread, is
subject to fluctuate and is affected by regulatory, economic and competitive
factors which influence interest rates, the volume, rate and mix of
interest-earning assets and interest-bearing liabilities, and the level of
nonperforming assets. As part of its interest rate risk management strategy,
management seeks to control its exposure to interest rate changes by managing
the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities. Through its asset/liability committee, the Company
continually monitors interest rate sensitivity of its earning assets and
interest-bearing liabilities to minimize any adverse effects on future earnings.
665
<PAGE>
As of December 31, 1998, total interest-earning assets maturing or
repricing within one year were more than total interest-bearing liabilities
maturing or repricing in the same period by $11.6 million, representing a
cumulative one-year interest rate sensitivity gap as a percentage of total
assets of positive 2.45%. This condition suggests that the yield on the
Company's interest-earning assets should adjust to changes in market interest
rates at a faster rate than the cost of the Company's interest-bearing
liabilities. Consequently, the Company's net interest income could increase
during periods of rising interest rates. See "Interest Rate Risk Management."
Adequacy of Allowance for Possible Credit Losses
In originating loans, there is a likelihood that some credit losses
will occur. This risk of loss varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness and debt servicing
capacity of the borrower over the term of the loan and, in the case of a
collateralized loan, the value and marketability of the collateral securing the
loan. Management maintains an allowance for possible credit losses based on,
among other things, historical loan loss experience, known inherent risks in the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and an evaluation of
current economic conditions. Management believes that the allowance for possible
credit losses is adequate. There can be no assurance that nonperforming loans
will not increase in the future.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's ability to react to changes in
interest rates. As discussed previously, management attempts to maintain an
essentially balanced position between rate sensitive assets and liabilities over
a one year time horizon in order to protect net interest income from being
affected by wide interest rate fluctuations.
New Financial Accounting Standards
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 will be to
require additional disclosures in the Company's financial statements. There was
no impact on the Company's financial statements in 1998.
66
<PAGE>
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 plans to adopt FASB No. 133 in 1999. Management has not determined the
impact, if any, of this statement on the Company.
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 had no impact on
the Company.
67
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
December 31,
1998 1997
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 19,004 $ 17,109
Available-for-sale securities 80,591 56,545
Held-to-maturity securities (fair value of $112,353
and $59,008 in 1998 and 1997, respectively) 111,826 58,245
Loans and leases 229,555 216,465
Mortgage loans held for resale 2,710 621
Less unearned income and loan fees (5,151) (6,741)
Less allowance for possible credit losses (2,360) (2,109)
Net loans and leases 224,754 208,236
Premises and equipment, net 17,364 13,744
Accrued interest receivable 3,210 3,005
Foreclosed assets held for sale 358 523
Life insurance cash surrender value 8,788 7,891
Other assets 8,794 2,775
TOTAL ASSETS $474,689 $368,073
LIABILITIES
Deposits:
Noninterest-bearing $ 52,410 $ 39,689
Interest-bearing:
Demand 41,811 31,767
Savings 38,525 36,437
Time 137,053 128,538
Time $100,000 and over 42,943 44,019
Total Deposits 312,742 280,450
Accrued interest payable 3,260 2,975
Securities sold under agreements to repurchase 3,283 200
Long-term debt 115,459 47,656
Other liabilities 2,005 977
Total Liabilities 436,749 332,258
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 4,820,192
shares in 1998 and 4,548,383 shares in 1997 1,012 956
Capital surplus 29,563 25,717
Retained earnings 7,620 9,135
Accumulated other comprehensive income (255) 7
Total Stockholders' Equity 37,940 35,815
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $474,689 $368,073
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
68
<PAGE>
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases $18,452 $16,907 $14,592
Investment securities:
Taxable 8,429 5,738 4,323
Exempt from federal income taxes 1,694 1,578 1,104
Dividends 419 154 86
Total investment securities income 10,542 7,470 5,513
Deposits in bank 9 9 6
Federal funds sold 217 264 164
TOTAL INTEREST INCOME 29,220 24,650 20,275
INTEREST EXPENSE
Deposits 10,857 10,395 8,957
Long-term debt 5,744 3,018 1,143
Short-term borrowings 69 99 66
Securities sold under agreements to repurchase 70 13 17
TOTAL INTEREST EXPENSE 16,740 13,525 10,183
NET INTEREST INCOME 12,480 11,125 10,092
PROVISION FOR POSSIBLE CREDIT LOSSES 1,130 780 650
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 11,350 10,345 9,442
OTHER OPERATING INCOME
Loan origination fees 39 183 266
Customer service charges and fees 1,576 1,247 1,217
Mortgage servicing fees, net 294 310 327
Investment security gains, net 432 214 43
Gain (loss) on sale of loans, net 951 404 114
Gain (loss) on sale of assets, net (74) - -
Life insurance earnings 409 288 127
Other income 1,307 755 612
TOTAL OTHER OPERATING INCOME 4,934 3,401 2,706
OTHER OPERATING EXPENSES
Salaries and benefits 5,013 4,206 3,684
Occupancy expense 1,509 1,334 1,053
Equipment expense 1,219 932 824
Advertising 430 292 249
Foreclosed asset expenses 27 39 51
Other expenses 3,254 2,407 2,136
TOTAL OTHER OPERATING EXPENSES 11,452 9,210 7,997
INCOME BEFORE PROVISION FOR INCOME TAXES 4,832 4,536 4,151
PROVISION FOR INCOME TAXES 1,061 1,105 1,120
NET INCOME $ 3,771 $ 3,431 $ 3,031
EARNINGS PER SHARE - BASIC* $0.79 $0.88 $0.78
EARNINGS PER SHARE - DILUTED* $0.77 $0.84 $0.78
DIVIDENDS PER SHARE* $0.41 $0.38 $0.32
</TABLE>
*Reflects adjustment for 5% stock dividends issued on October 1, 1998, 1997 and
1996, and a two-for-one stock split effective November 10, 1997 (See Note 13).
The accompanying notes are an integral part of the consolidated financial
statements.
69
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income Total
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 $696 $9,414 $9,118 $281 $19,509
Comprehensive income:
Net income 3,031 3,031
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects (520) (520)
Total comprehensive income 2,511
Issuance of 16,856 shares of common stock
through Dividend Reinvestment Plan* 7 265 272
Issuance of 5,735 shares of common stock
through Employee Stock Purchase Plan* 2 70 72
Cash dividends declared ($.32 per share)* (1,186) (1,186)
Stock dividend declared (5% on October 1, 1996) 35 1,350 (1,385) -
Cash paid for fractional shares on stock dividend ____ ______ (6) ______ (6)
BALANCES, DECEMBER 31, 1996 740 11,099 9,572 (239) 21,172
Comprehensive income:
Net income 3,431 3,431
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects 246 246
Total comprehensive income 3,677
Issuance of 35,306 shares of common stock
through Dividend Reinvestment Plan* 8 393 401
Issuance of 11,579 shares of common stock
through Employee Stock Purchase Plan* 2 67 69
Cash dividends declared ($.38 per share)* (1,369) (1,369)
Stock dividend declared (5% on October 1, 1997) 37 2,448 (2,485) -
Cash paid for fractional shares on stock dividend (14) (14)
Sale of 845,250 shares of common stock
through secondary stock offering 169 11,710 11,879
BALANCES, DECEMBER 31, 1997 956 25,717 9,135 7 35,815
Comprehensive income:
Net income 3,771 3,771
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects (262) (262)
Total comprehensive income 3,509
Issuance of 38,890 shares of common stock
through Dividend Reinvestment Plan* 7 502 509
Issuance of 5,500 shares of common stock
through Employee Stock Purchase Plan* 1 25 26
Costs on sale of common stock through
secondary stock offering (11) (11)
Cash dividends declared ($.41 per share) (1,903) (1,903)
Stock dividend declared (5% on October 1, 1998) 48 3,319 (3,367) -
Cash paid for fractional shares on stock dividend _____ ______ (5) _____ (5)
BALANCES, DECEMBER 31, 1998 $1,012 $29,563 $7,620 $(255) $37,940
</TABLE>
*Reflects adjustment for 5% stock dividends issued on October 1, 1998, 1997 and
1996, and a two-for-one stock split effective November 10, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
70
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,771 $3,431 $3,031
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for possible credit losses 1,077 780 650
Depreciation, amortization and accretion 1,620 935 720
Deferred income taxes 158 (62) 45
Writedown of foreclosed assets held for sale 25 213 -
Investment security gains, net (432) (214) (43)
(Gain) on sale of loans (951) (404) (114)
(Gain) loss on sale of foreclosed assets 72 6 (1)
(Gain) loss on sale of leased assets - - 2
(Gain) loss on sale of equipment 2 38 (1)
(Increase) decrease in mortgage loans held for resale (2,089) (306) 3,090
(Increase) in accrued interest receivable (205) (656) (378)
Increase in accrued interest payable 285 559 670
(Increase) decrease in other assets (4,783) 371 (869)
Increase (decrease) in other liabilities 1,028 178 (490)
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (422) 4,869 6,312
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Proceeds from maturities and paydowns 30,140 2,974 339
Purchases (84,049) (34,618) (4,351)
Available-for-sale securities:
Proceeds from maturities and paydowns 4,989 10,106 6,505
Proceeds from sales 34,159 29,522 34,130
Purchases (62,565) (35,193) (51,190)
Purchase of life insurance policies (897) (5,352) -
Increase in loans and leases (52,203) (61,670) (39,923)
Purchases of premises and equipment (5,080) (4,959) (2,962)
Proceeds from sale of loans 37,382 28,939 11,734
Proceeds from sale of leased assets - - 19
Proceeds from sale of equipment 213 253 13
Proceeds from sale of foreclosed assets 334 514 70
Purchase of intangible assets (1,899) - (600)
NET CASH USED IN INVESTING ACTIVITIES (99,476) (69,484) (46,216)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 32,292 27,254 44,437
Decrease in short-term borrowings - - (5,000)
Increase (decrease) in securities sold under
agreements to repurchase 3,083 (100) (100)
Proceeds from long-term debt 85,658 30,029 5,000
Principal payments on long-term debt (17,854) (2,396) (133)
Net proceeds from issuance of common stock 517 12,349 344
Cash dividends (1,903) (1,383) (1,192)
NET CASH PROVIDED BY FINANCING ACTIVITIES 101,793 65,753 43,356
INCREASE IN CASH AND CASH EQUIVALENTS 1,895 1,138 3,452
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,109 15,971 12,519
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,004 $17,109 $15,971
CASH PAID DURING THE YEAR FOR:
Interest $16,455 $12,966 $ 9,513
Income taxes $850 $ 932 $ 1,025
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
71
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Lake
Ariel Bancorp, Inc. and its wholly owned subsidiary, LA Bank, N.A. including its
subsidiaries, LA Lease, Inc. and Ariel Financial Services, Inc. (collectively,
"Company"). All material intercompany balances and transactions are eliminated
in consolidation.
Nature of Operations
Lake Ariel Bancorp, Inc. is a one bank holding company whose principal
subsidiary is LA Bank, N.A. LA Lease, Inc., provides auto and equipment leases
to individuals and small business entities. Ariel Financial Services, a newly
formed business unit, offers stocks, bonds, annuities and other
insurance-related products.
The Company provides a variety of financial services to individuals and
corporate customers through its twenty-one branch banking offices in Wayne,
Luzerne, Lackawanna, Pike and Monroe Counties. The Bank's primary deposit
products are both noninterest and interest-bearing demand deposits and
certificates of deposit. Its primary lending products are single-family
residential loans which qualify for sale on the secondary residential loan
market.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for possible credit losses and the
valuation of assets acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowances for possible
credit losses and foreclosed assets, management obtains independent appraisals
for significant properties.
A majority of the Company's loan portfolio consists of single-family residential
loans in the Northeastern Pennsylvania area. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed assets
are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
leases and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for possible credit losses and foreclosed assets. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for possible credit losses and foreclosed assets may change
materially in the near term.
Investment Securities
Held-to-maturity securities are bonds, notes and debentures for which the
Company has the positive intent and ability to hold to maturity. These
securities are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
Government bonds held principally for resale in the near term, and
mortgage-backed securities held for sale in conjunction with the Company's
mortgage banking activities, are classified as trading account securities and
are recorded at their fair values. Unrealized gains and losses on trading
account securities are included immediately in other income. The Company neither
held nor purchased securities which would be categorized as trading account
securities during the years ended December 31, 1998, 1997 and 1996.
Available-for-sale securities consist of bonds, notes, debentures and certain
equity securities not classified as trading securities nor as held-to-maturity
securities. These unrealized holding gains and losses, net of tax, are the sole
component of accumulated other comprehensive income.
72
<PAGE>
Investment gains and losses are determined using the specific identification
method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their face value. The related write-downs are
included in earnings as realized losses.
Derivative Financial Instruments
The Company has no derivative financial instruments requiring disclosure under
SFAS No. 119.
Mortgage Loans Held for Resale
Mortgage loans originated and intended for resale in the secondary market are
carried at the lower of cost or fair value in the aggregate. Net unrealized
losses are recognized in a valuation allowance by charges to income. These loans
are sold in whole and without recourse to the Company.
Loans and Leases
Loans are reported at the principal balance outstanding, net of unearned
interest, net deferred loan fees and the allowance for possible credit losses.
Unearned interest on installment loans is recognized as income using the
actuarial method. Interest on all other loans is recognized on the accrual
basis, based on the principal amount outstanding. Loan fees, including
origination and commitment fees, less certain direct loan origination costs, are
deferred and recognized over the estimated lives of the related loans as an
adjustment to yield. The unamortized balance of these fees and costs are
included as part of the loan balance to which it relates. Prior to 1988, such
fees and costs were recognized as income or expense when collected or paid.
Impaired loans are placed in a nonaccrual status when management believes that
the collection of principal or interest is uncertain, unless the loans are both
in the process of collection and well secured. When interest accrual is
discontinued, income recorded in the current year is reversed and the accrued
interest from prior years is charged to the allowance for possible credit
losses.
Allowance for Possible Credit Losses
The allowance for possible credit losses is established through a provision for
possible credit losses as a charge to operating expense. The Company provides
for possible credit losses based on an evaluation of the risk associated with
the Company's loan portfolio, prior loan loss experience, economic conditions
and other factors. Loans are charged against the allowance for possible credit
losses when management believes that the collection of principal is unlikely.
Recoveries on previously charged-off loans are added to the allowance for
possible credit losses.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of fair value minus
estimated costs to sell, or cost.
Loan Servicing and Loan Servicing Rights
The Company services real estate loans for investors in the secondary mortgage
market, which are not included in the accompanying consolidated balance sheet.
The approximate total amount of mortgages serviced amounted to $141,381,000,
$131,509,000, and $119,898,000 at December 31, 1998, 1997 and 1996,
respectively.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans, stated
term of the loan and interest rate. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum exceed
their fair value.
73
<PAGE>
When participating interests in loans sold have an average contractual interest
rate, adjusted for normal servicing fees, that differs from the agreed yield to
the purchaser, gains or losses are recognized equal to the present value of such
differential over the estimated remaining life of such loans. The resulting
"excess servicing receivable" or "deferred servicing revenue" is amortized over
the estimated life using a method approximating the interest method.
Quoted market prices are not available for the excess servicing receivables.
Thus, the excess servicing receivables and the amortization thereon are
periodically evaluated in relation to estimated future servicing revenues,
taking into consideration changes in interest rates, current prepayment rates,
and expected future cash flows. The Company evaluates the carrying value of the
excess servicing receivables by estimating the future servicing income of the
excess servicing receivables based on management's best estimate of remaining
loan lives and discounted at the original discount rate.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Routine
maintenance and repair expenditures are expended as incurred while significant
expenditures are capitalized. Depreciation expense is determined primarily on
the straight-line method over the following ranges of useful lives:
Buildings and improvements 10 to 40 years
Furniture, fixtures and equipment 5 to 20 years
Intangible Assets
Core deposit intangible assets and customer lists acquired are included in other
assets and are being amortized over a period of six to twelve years using the
straight-line method. Amortization for 1998, 1997 and 1996 was $205,000,
$154,000, and $108,000, respectively.
Employee Benefit Plans
The Company maintains and funds a defined contribution profit-sharing plan which
covers substantially all eligible employees. The Company also maintains a 401(k)
savings plan. Substantially all of the Company's employees are eligible to
participate in the profit-sharing/401(k) savings plan on the January 1 or July 1
following their completion of six months of service and attaining age 20 1/2.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes to the tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Cash Flows
The Company considers amounts due from banks and federal funds sold as cash
equivalents. Generally, federal funds are sold for one-day periods.
In 1998, 1997 and 1996, the Company transferred $266,000, $420,000, and
$858,000, respectively, from its loan portfolio to foreclosed assets held for
sale.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumption used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
74
<PAGE>
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", as of
January 1, 1998. Accounting principles require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Bank's net income or stockholder's equity.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
reporting format.
2. Restrictions on Cash and Due From Bank Accounts
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The average monthly balance required during 1998 and 1997 was
approximately $375,000. In addition, at December 31, 1998 and 1997, required
compensating reserve balances with correspondent banks were $2,239,000 and
$2,003,000, respectively.
Deposits with any one financial institution are insured up to $100,000. The
Company maintains cash and cash equivalents with certain other financial
institutions in excess of the insured amount.
3. Investment Securities
Debt and equity securities have been classified in the consolidated balance
sheet according to management's intent. The carrying amount of securities and
their approximate fair values at December 31, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1998
Available-for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government agencies
and corporations $64,332 $ 91 $482 $63,941
Obligations of states and
political subdivisions 9,520 39 34 9,525
Total debt securities 73,852 130 516 73,466
Restricted equity securities 7,125 - - 7,125
Total $80,977 $130 $516 $80,591
Held-to-maturity securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. government agencies
and corporations $ 89,016 $152 $330 $ 88,838
Obligations of states and
political subdivisions 22,810 706 1 23,515
Total $111,826 $858 $331 $112,353
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
Available-for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government agencies
and corporations $46,334 $120 $258 $46,196
Obligations of states and
political subdivisions 7,287 149 - 7,436
Total debt securities 53,621 269 258 53,632
Restricted equity securities 2,913 - - 2,913
Total $56,534 $269 $258 $56,545
Held-to-maturity securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. government agencies
and corporations $33,892 $260 $103 $34,049
Obligations of states and
political subdivisions 24,353 609 3 24,959
Total $58,245 $869 $106 $59,008
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1998, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available-for-sale securities Held-to-maturity securities
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $21,713 $21,593 $ 24,593 $ 24,602
Due after one year through five years 11,916 11,816 35,163 35,201
Due after five years through ten years 5,830 5,843 17,852 18,070
Due after ten years 41,518 41,339 34,218 34,480
Total $80,977 $80,591 $111,826 $112,353
</TABLE>
Gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows for the years ended December 31, 1998, 1997, and 1996
(in thousands):
<TABLE>
<CAPTION>
December 31,
Gross realized gains: 1998 1997 1996
<S> <C> <C> <C>
U.S. government agencies and corporations $98 $116 $78
Obligations of states and political subdivisions 354 119 114
Total $452 $235 $192
Gross realized losses:
U.S. government agencies and corporations $14 $21 $149
Obligations of states and political subdivisions 6 - -
Total $20 $21 $149
</TABLE>
76
<PAGE>
Investment securities carried at $96,308,000 in 1998 and $35,953,000 in 1997
were pledged to secure Federal Home Loan Bank borrowings, governmental deposits,
public deposits, etc. as required by law. There is no significant concentration
of investments in any individual security issue (excluding U.S. government and
its agencies) that was in excess of 10% of stockholders' equity at December 31,
1998 or 1997.
The unamortized premiums on mortgage-backed securities amounted to $1,671,000
and $817,000 as of December 31, 1998 and 1997, respectively. The unaccreted
discount on mortgage-backed securities amounted to $318,000 and $14,000 as of
December 31, 1998 and 1997, respectively.
4. Loans and Leases
A summary of the outstanding loans and leases by major categories
at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Real estate-construction $ 3,522 $ 3,338
Real estate-mortgage 103,151 99,637
Commercial and industrial 79,293 69,479
Consumer installment 40,907 40,912
Lease financing 5,392 3,711
Unearned income (4,606) (6,067)
Unearned loan fees, net (545) (665)
Total loans and leases 227,114 210,345
Allowance for possible credit losses (2,360) (2,109)
Net loans and leases $224,754 $208,236
</TABLE>
Total nonaccrual loans outstanding at December 31, 1998 were approximately
$2,396,000 as compared to $534,000 at December 31, 1997. Included in nonaccrual
loans at December 31, 1998 and 1997 are $2,088,000 and $411,000, respectively,
of impaired loans in nonaccrual status, for which $452,000 and $248,000,
respectively, have been allocated in the allowance for possible credit losses to
cover potential losses from these impaired loans. At December 31, 1998 and 1997,
there were no outstanding commitments to lend funds to debtors with nonaccrual
loans. At December 31, 1998 and 1997, no loans were being accounted for as a
troubled debt restructuring. Accruing loans past due 90 days or more as to
principal or interest amounted to $759,000 and $1,453,000 at December 31, 1998
and 1997, respectively.
Further information regarding the balance of nonaccrual loans at December 31,
1998, and related interest payment information, is as follows (in thousands):
Cash Payments Received During 1998 Were Applied As Follows:
<TABLE>
<CAPTION>
Book Contractual Recovery
Balance Balance Interest Of Prior Reduction Of
12/31/98 12/31/98 Income Charge-Off Principal
<S> <C> <C> <C> <C> <C>
Contractually past due with:
Substantial performance $ 138 $ 138 $ 4 $ - $ 3
Limited performance 1,281 1,281 1 - 12
No performance 889 889 - - -
Contractually current, however:
Payment of full principal or
interest in doubt - - - - -
Other 88 88 5 - 1
Total $2,396 $2,396 $10 $ - $16
</TABLE>
77
<PAGE>
At December 31, 1998 and 1997, certain officers and directors and/or companies
in which they have 10% or more beneficial ownership were indebted to the Company
in the aggregate amount of $329,000 and $370,000, respectively. Such
indebtedness was incurred in the ordinary course of business, and on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons. New loans in 1998 and 1997 were $42,000 and
$17,000, respectively, while payments were $83,000 and $68,000 respectively,
during the same periods.
A summary of selected loan maturities and interest sensitivity analysis at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Maturity Distribution And Interest Rate Sensitivity
Within One Two-Five After Five
Year Years Years Total
(in thousands)
<S> <C> <C> <C> <C>
Real estate-construction $ 3,522 $ - $ - $ 3,522
Commercial and industrial 14,481 11,017 53,795 79,293
Total $18,003 $11,017 $53,795 $82,815
Predetermined interest rate $ 5,515 $ 5,934 $ 9,291 $20,735
Floating or adjustable
interest rate 12,493 5,083 44,504 62,080
Total $18,003 $11,017 $53,795 $82,815
</TABLE>
The maturity of loans is based upon contractual terms. The Company may, however,
extend the stated maturities at current rates and terms for economic or market
reasons.
Changes in the allowance for possible credit losses for the years ended December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $2,109 $1,830 $1,657
Charge-offs:
Real estate-construction - - -
Real estate-mortgage 122 103 143
Commercial and industrial 512 106 158
Consumer installment 282 363 274
Lease financing 29 11 -
Total 945 583 575
Recoveries:
Real estate-construction - - -
Real estate-mortgage - - -
Commercial and industrial 6 42 40
Consumer installment 59 40 58
Lease financing - - -
Total 65 82 98
Net charge-offs 880 501 477
Provision for possible credit losses 1,130 780 650
Balance at end of period $2,360 $2,109 $1,830
Ratio of net charge-offs during period to
average loans outstanding during period 0.40% 0.26% 0.30%
</TABLE>
78
<PAGE>
5. Premises and Equipment
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Land and land improvements $ 2,357 $ 1,545
Buildings and improvements 12,965 10,301
Furniture, fixtures and equipment 7,511 6,195
Total 22,833 18,041
Less accumulated depreciation 5,469 4,297
Net $17,364 $13,744
</TABLE>
Depreciation expense was $1,245,000, $932,000, and $730,000 in 1998, 1997 and
1996, respectively.
Certain facilities and equipment are leased under agreements expiring at various
dates to the year 2003. Rental expenses on these operating leases amounted to
$551,000 in 1998, $439,000 in 1997, and $348,000 in 1996. Required future
minimum annual rentals under all such noncancelable operating leases as of
December 31, 1998 are as follows (in thousands):
1999$ 510
2000 529
2001 551
2002 545
2003 469
Thereafter 1,610
Total $4,214
6. Deposits
There are no brokered deposits included in certificates of deposit of $100,000
or more. These certificates of deposit and their remaining maturities at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Three months or less $14,039 $15,217
Over three through six months 11,217 12,956
Over six through twelve months 11,084 6,814
Over twelve months 6,603 9,032
Total $42,943 $44,019
</TABLE>
The aggregate amount of maturities for each of the five years following December
31, 1998 for all time deposits with a remaining term of over twelve months at
December 31, 1998 are as follows (in thousands):
2000 $23,167
2001 7,756
2002 2,612
2003 2,209
2004 7
Thereafter 5
Total $35,756
79
<PAGE>
7. Short-term Borrowings
There were no short-term borrowings outstanding at December 31, 1998 and 1997.
The maximum amount of outstanding month-end short-term borrowings during 1998
and 1997 was $9,400,000 and $9,500,000, respectively. The approximate average
amount outstanding during 1998 and 1997 was $2,178,000 and $2,102,000,
respectively. The average interest rate on the balances during 1998 and 1997 was
4.96% and 5.33%, respectively.
The Company maintains a U.S. Treasury tax and loan note option account for the
deposit of withholding taxes, corporate income taxes and certain other payments
to the federal government. Deposits are subject to withdrawal and are evidenced
by an open-ended interest-bearing note. Borrowings under this note option
account were approximately $300,000 at December 31, 1998 and approximately
$1,000,000 at December 31, 1997. These deposits are included in interest-bearing
demand deposits for each period presented.
The Company has a line of credit commitment available from the Federal Home Loan
Bank for borrowings of up to approximately $10.0 million, expiring March 24,
1999. There were no borrowings under this line of credit at December 31, 1998 or
1997.
8. Long-term Debt
Long-term debt at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Unsecured notes, payable in the amount of $31,200
semiannually plus accrued
interest at the New York City prime
interest rate, maturing April 22, 1998* $ - $ 31
Collateralized borrowings, interest and
principal payable monthly; fixed interest rate
ranging from 6.40% to 6.60%,
maturing October 17, 2001, January 22, 2002 and
May 1, 2008 10,459 12,625
Collateralized borrowings, interest
payable monthly and principal at
maturity; interest rates are both
fixed and variable and range from
4.40% to 6.45% at December 31, 1998 105,000 35,000
Total $115,459 $47,656
</TABLE>
Annual maturities of long-term debt are as follows: $3,032,000 in 1999,
$8,232,000 in 2000, $8,339,000 in 2001, $5,448,000 in 2002, $50,065,000 in 2003,
$69,000 in 2004, $30,074,000 in 2005, $79,000 in 2006, $84,000 in 2007, and
$10,037,000 in 2008. Investment securities are pledged to collateralize the
borrowings with the Federal Home Loan Bank of Pittsburgh.
9. Common Stock
The Company has reserved 284,025 shares under its 1994 and 1997 Stock Option
Plans ("Option Plan"). Options are granted to purchase common stock at prices
not less than the fair market value of the common stock on the date of grant.
Such shares and prices have been adjusted to reflect the stock dividends and
stock split.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Option Plan. Accordingly, no compensation
expense has been recognized for the Option Plan. Had compensation cost for the
Option Plan been determined based on the fair values at the grant dates for
awards consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below for the year ended December 31, 1998:
80
<PAGE>
As Reported Pro Forma
Net Income (in thousands): $3,771 $3,726
Earnings per share-basic: $0.79 $0.78
For purposes of the pro forma calculations, the fair value of each option grant
is estimated using the Black-Scholes option - pricing model with the following
weighted - average assumptions for grants issued in 1995:
Dividend yield 3.51%
Expected volatility 36.73%
Risk-free interest rate 5.89%
Expected lives 10 years
A summary of the status of the Company's Option Plan as of December 31, 1998,
1997 and 1996, and changes during the years then ended, is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year 231,525 $ 6.35 231,525 $6.35 231,525 $6.35
Granted 11,667 16.28 - -
Exercised - - -
Forfeited - - -
Outstanding, end of year 243,192 $ 6.83 231,525 $6.35 231,525 $6.35
</TABLE>
The following summarizes information about stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Remaining
Exercise Price Number Contractual Life Options Exercisable
<S> <C> <C> <C>
$ 6.53 81,035 5.6 years 81,035
$ 6.26 150,490 6.6 years 150,490
$16.28 52,500 9.0 years 11,667
</TABLE>
The Company reserved 115,763 shares of common stock under the Company's Employee
Stock Purchase Plan, increased to 100,000 effective November 10, 1997, as a
result of the two-for-one stock split. Under the terms of the plan, employees
may purchase common stock of the Company at 85% of the fair market value.
Employees pay for their stock purchases through periodic payroll deductions
subject to a limit of 10% of base pay. During 1998, 1997 and 1996, 5,500,
11,579, and 5,735 shares, respectively, were purchased under the plan.
The Company has a Dividend Reinvestment and Stock Purchase Plan was implemented
during the year ended December 31, 1994 to provide stockholders an opportunity
to automatically reinvest their dividends in shares of common stock. Total
common shares of 694,575 are reserved under this plan. The price per share of
common stock purchased from the Company is 95% of the fair market value on the
quarterly dividend payment date. During the years ended December 31, 1998, 1997
and 1996, 38,890, 35,306, and 16,856 shares, respectively, were issued under
this plan.
81
<PAGE>
10. Other Comprehensive Income
The components of other comprehensive income and related tax effects are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Unrealized holding gains (losses)
on available-for-sale securities $ 35 $ 587 $(745)
Less reclassification adjustment for
gains realized in income (432) (214) (43)
Net unrealized gain (loss) (397) 373 (788)
Tax effect 135 (127) 268
Net of tax amount $(262) $ 246 $(520)
</TABLE>
11. Income Taxes
The following temporary differences gave rise to the net deferred tax asset at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Unrealized losses on available-for-sale
securities $ 131 $ -
Allowance for possible credit losses 551 473
Loan fees and costs 121 130
Deferred compensation 232 156
Amortization of core deposits 64 21
Foreclosed assets held for sale - 34
Total 1,099 814
Deferred tax liabilities:
Unrealized gains on available-for-
sale securities - (4)
Depreciation (305) (228)
Bond accretion (24) (21)
Leasing (399) (194)
Total (728) (447)
Deferred tax asset, net $ 371 $367
</TABLE>
The provision for income taxes is comprised of the following components (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Current $ 903 $1,167 $1,075
Deferred 158 (62) 45
Total $1,061 $1,105 $1,120
</TABLE>
82
<PAGE>
The following tabulation presents a reconciliation of the expected provision for
income taxes (in thousands), determined by using the current federal income tax
rate of 34% in 1998, 1997, 1996 to the actual provision for income taxes
reflected in the accompanying consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Provision at the expected statutory rate $1,643 $1,542 $1,411
Effect of tax-exempt income (580) (537) (322)
Other items (2) 100 31
Provision for income taxes $1,061 $1,105 $1,120
</TABLE>
12. Employee Benefit Plans
The Company has a profit-sharing plan for the benefit of its employees.
Contributions to the profit-sharing plan are made at the discretion of the Board
of Directors, funded currently, and amounted to $236,000 in 1998, $251,000 in
1997, and $214,000 in 1996.
The Company also maintains a 401(k) savings plan. The Company contributes 50% of
the employee contribution up to 6% of compensation. The Company's 1998, 1997 and
1996 contributions to this plan were $77,000, $70,000, and $58,000,
respectively.
13. Earnings Per Share
Earnings per share (EPS) is computed using the weighted-average number of shares
of common stock outstanding after giving effect to the 5% stock dividends issued
on October 1, 1998, 1997 and 1996, the two-for-one stock split effective
November 10, 1997, and the assumed exercise of stock options. The following data
shows the amounts used in computing earnings per share and the effects on income
and the weighted average number of shares of dilutive potential common stock for
the years ended December 31, 1998, 1997 and 1996. The common shares denominators
for 1997 and 1996 have been adjusted for the 1998 and 1997 5% stock dividend and
two-for-one stock split.
<TABLE>
<CAPTION>
Income Common Shares
Numerator Denominator EPS
<S> <C> <C> <C>
1998
Basic EPS $3,771,000 4,796,000 $0.79
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 243,000
Hypothetical share repurchase at $12.42 _________ (133,000)
Diluted EPS $3,771,000 4,906,000 $0.77
1997
Basic EPS $3,431,000 3,748,000 $0.88
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 220,500
Hypothetical share repurchase at $17.75 _________ (82,500)
Diluted EPS $3,431,000 3,886,000 $0.84
83
<PAGE>
1996
Basic EPS $3,031,000 3,676,400 $0.78
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 220,500
Hypothetical share repurchase at $6.98 _________ (210,900)
Diluted EPS $3,031,000 3,686,000 $0.78
</TABLE>
14. Regulatory Matters
The Company may not pay cash dividends in any year in excess of the total of the
current year's net income and the retained net income of the prior two years
without the approval of the Federal Reserve Board. Accordingly, Company cash
dividends in 1999 may not exceed $3,912,000 plus Company net income for 1999.
Similar banking regulations limit the amount of dividends that may be paid to
the Company by its bank subsidiary without prior approval of the Comptroller of
the Currency.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Company meets all capital adequacy requirements to which it is subject.
To be categorized as well capitalized, the bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below. There are no conditions or events since that notification that
management believes have changed the institution's category. The Company's
actual capital amounts (in thousands) and ratios are also presented in the
table. No amounts were deducted from capital for interest-rate risk in either
year.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $37,855 14.96% $20,250 8.0% $25,300 10.0%
Tier I Capital
(to Risk Weighted Assets) $35,587 14.07% $10,150 4.0% $15,200 6.0%
Tier I Capital
(to Average Assets) $35,587 7.72% $18,450 4.0% $23,050 5.0%
84
<PAGE>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $37,273 18.12% $16,500 8.0% $20,600 10.0%
Tier I Capital
(to Risk Weighted Assets) $35,232 17.12% $8,250 4.0% $12,400 6.0%
Tier I Capital
(to Average Assets) $35,232 10.26% $13,800 4.0% $17,200 5.0%
</TABLE>
15. Off-Balance Sheet Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit, interest rate or liquidity risk in excess of the amount recognized in
the consolidated balance sheet. The contract amount of these instruments
expresses the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss from nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit and financial guarantees written is represented by the contractual
amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with off-balance sheet credit risk.
The financial instruments whose contract amounts represent credit risk at
December 31, 1998 were as follows (in thousands):
Commitments to extend credit $15,123
Standby letters of credit $950
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company, on an
extension of credit is based on management's credit assessment of the
counterparty.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. Those guarantees are
issued primarily to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
16. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and cash equivalents approximate those assets' fair
values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
85
<PAGE>
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgements regarding future expected
loss experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value. Mortgage loans held for resale
are valued based on available market quotations.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates its fair value.
Short-term borrowings and notes payable: The carrying amounts of short-term
borrowings and notes payable approximate their fair values.
Other liabilities: Commitments to extend credit were evaluated and fair value
was estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates.
Financial Assets and Liabilities
The following represents the notional or carrying values and estimated fair
values as of December 31:
<TABLE>
<CAPTION>
1998 1997
Notional or Notional or
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
(in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $19,004 $19,004 $17,109 $17,109
Investment securities 192,417 192,944 114,790 115,553
Net loans 224,754 226,191 208,236 209,254
Accrued interest receivable 3,210 3,210 3,005 3,005
FINANCIAL LIABILITIES:
Deposits $312,742 $294,649 $280,450 $282,614
Accrued interest payable 3,260 3,260 2,975 2,975
Securities sold under agreements
to repurchase 3,283 3,283 200 200
Long-term debt 115,459 114,998 47,656 47,704
Commitments 16,073 16,073 18,211 18,211
</TABLE>
86
<PAGE>
17. Condensed Financial Information -Parent Company Only
Condensed parent company only financial information is as follows (in
thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheet
December 31,
<S> <C> <C>
1998 1997
Assets:
Cash$ - $ -
Investment securities 288 -
Investment in subsidiary 37,652 35,815
Total Assets $37,940 $35,815
Liabilities and Stockholders' Equity:
Stockholders' equity $37,940 $35,815
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Earnings of Subsidiary:
Received as dividends $2,218 $1,369 $1,287
Undistributed 1,553 2,062 1,744
Net Income $3,771 $3,431 $3,031
Condensed Statement of Cash Flows
Year Ended December 31,
1998 1997 1996
Operating Activities:
Net income $3,771 $ 3,431 $3,031
Less undistributed earnings
of subsidiary 1,553 2,062 1,744
Net cash provided by
operating activities 2,218 1,369 1,287
Investing Activities:
Purchase of investment
securities (288) - -
Investment in subsidiary (562) (12,349) (445)
Net cash used in investing
activities (850) (12,349) (445)
Financing Activities:
Cash dividends paid
to stockholders (1,903) (1,369) (1,186)
Issuance of common stock 535 12,349 344
Net cash provided by (used in)
financing activities (1,368) 10,980 (842)
Increase (decrease) in Cash - - -
Cash at Beginning of Year - - -
Cash at End of Year $ - $ - $ -
</TABLE>
87
<PAGE>
18. Contingencies
On February 5, 1996, a complaint was filed against LA Bank ("the Bank") and
certain directors and officers of the Bank. The plaintiffs demanded monetary and
punitive damages and the additional payment of plaintiffs' attorneys' fees and
disbursements and other court-related costs. Counsel representing the Company
and the Bank are not currently able to provide an evaluation of the likelihood
of an unfavorable outcome since an unfavorable outcome is neither probable nor
remote. In addition, an estimate of the loss or range of loss, in the event of
an unfavorable outcome, has not been provided since the probability of the
inaccuracy of such an estimate is more than slight. No provision for any
liability has been made in the accompanying financial statements as of December
31, 1998 and 1997.
19. Significant Group Concentrations of Credit Risk
Most of the Company's business activity is with customers located within
Pennsylvania. Investments in state and municipal securities typically involve
governmental entities within the Company's market area. Concentrations of
credit, as defined by the Company's loan policy, are groupings of loans with a
common repayment source that exceed 25% of the Company's capital. As of December
31, 1998, the Company had no such credit concentrations.
The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers. The Company, as a matter of policy, does not
extend credit in excess of 50% of the Bank's regulatory legal lending limit to
any single borrower or group of related borrowers.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
20. Selected Quarterly Financial Data (Unaudited) (in thousands, except
per share data)
<TABLE>
<CAPTION>
Quarter Ending
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
<S> <C> <C> <C> <C>
Interest income $7,068 $7,253 $7,371 $7,528
Interest expense 4,016 4,182 4,161 4,381
Net interest income 3,052 3,071 3,210 3,147
Provision for possible credit losses 200 125 165 640
Investment security gains (losses), net 55 23 2 352
Net income 1,079 1,006 1,023 663
Earnings per share - basic* 0.23 0.21 0.21 0.14
Earnings per share - diluted* 0.22 0.21 0.21 0.13
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Quarter Ending
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
Interest income $5,820 $6,049 $6,383 $6,398
Interest expense 3,096 3,308 3,506 3,615
Net interest income 2,724 2,741 2,877 2,783
Provision for possible credit losses 125 255 350 50
Investment security gains (losses), net (8) (1) 89 134
Net income 730 806 861 1,034
Earnings per share - basic* 0.19 0.20 0.22 0.27
Earnings per share - diluted* 0.18 0.19 0.21 0.26
</TABLE>
*Reflects adjustment for 5% stock dividends issued on October 1, 1998 and 1997,
and a two-for-one stock split effective November 10, 1997.
89
<PAGE>
Independent Auditor's Report
Board of Directors and Stockholders
Lake Ariel Bancorp, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Lake Ariel
Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lake Ariel Bancorp,
Inc. and Subsidiary as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Parente, Randolph, Orlando, Carey & Associates
Wilkes-Barre, Pennsylvania
January 25, 1999
90
<PAGE>
INVESTOR INFORMATION
MARKET INFORMATION
The Company's common stock has been listed on the Nasdaq National Market since
November 21, 1997, and was previously listed on the Nasdaq Small-Cap Market
since December 9, 1993. "The Nasdaq Stock Market" or "Nasdaq" is a
highly-regulated electronic securities market comprised of competing Market
Makers whose trading is supported by a communications network linking them to
quotation dissemination, trade reporting, and order execution systems. This
market also provides specialized automation services for screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational services tailored to the needs of the securities industry,
investors and issuers. The Nasdaq Stock Market consists of two distinct market
tiers: the Nasdaq National Market7 and the Nasdaq SmallCap Markets. The Nasdaq
Stock Market is operated by the Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National Association of Securities Dealers, Inc. The Nasdaq
National Market symbol for the Company's common stock is LABN. At December 31,
1998, the total number of holders of record of the common stock was
approximately 1,394.
The table below presents the high and low bid prices reported for the common
stock and the cash dividends declared on such common stock for the periods
indicated. The range of high and low prices is based on trade prices reported on
the Nasdaq Small-Cap Market, except for the fourth quarter of 1997 and all of
1998. Market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not necessarily reflect actual transactions.
On December 31, 1998, the closing price of a share of common stock on the Nasdaq
National Market was $12.375. All prices and dividends have been restated to
reflect the 5% stock dividends paid in October 1998, 1997 and 1996, and the
two-for-one stock split effective on November 10, 1997.
<TABLE>
<CAPTION>
Year Quarter High Low Dividends Declared
<S> <C> <C> <C> <C>
1998 4th $13.25 $11.75 $0.13
3rd 16.00 11.43 0.10
2nd 16.19 14.88 0.09
1st 16.55 14.76 0.09
1997 4th $20.95 $13.24 $0.13
3rd 13.38 9.05 0.09
2nd 9.29 9.05 0.08
1st 10.76 9.29 0.08
1996 4th $11.57 $7.19 $0.11
3rd 7.81 6.86 0.08
2nd 7.24 6.14 0.08
1st 7.33 6.38 0.08
</TABLE>
MARKET MAKERS
Janney Montgomery Scott, Inc. Knight Securities, Inc. Instinet Corporation
1801 Market Street 525 Washington Boulevard 875 3rd Avenue
11th Floor Newport Tower 29th Floor
Philadelphia, PA 19103 Jersey City, NJ 07310 New York, NY 10022
1-215-665-6500 1-800-222-4910 1-212-310-9550
Legg Mason Wood Walker, Inc. USCC Trading
One Battery Park Plaza 10 Exchange Place
26th Floor 22nd Floor
New York, NY 10004 Jersey City, NJ 07302
1-212-428-4949 1-800-526-3041
91
<PAGE>
TRANSFER AGENT American Stock Transfer & Trust Company, 40 Wall Street, 46th
Floor, New York, New York 10005. Stockholders who may have questions regarding
their stock ownership should contact Shareholder Services at 1-800-937-5449.
DIVIDEND CALENDAR Dividends on Lake Ariel Bancorp's common stock, if approved by
the Board of Directors, are customarily paid on March 15, June 15, September 15,
and December 15.
INDEPENDENT AUDITORS CORPORATE COUNSEL
Parente, Randolph, Orlando, Oliver, Price & Rhodes
Carey & Associates Suite 300
46 Public Square 220 Penn Avenue
Wilkes-Barre, PA 18701 Scranton, PA 18501
(570)820-0100 (570)343-6581
AUTOMATIC DIVIDEND REINVESTMENT PLAN Common stockholders of Lake Ariel Bancorp,
Inc. may have their dividends reinvested automatically in Lake Ariel common
shares at a 5% discount from the "Fair Market Value" on the quarterly dividend
payment date. Stockholders participating in the plan may also purchase, per
quarter, up to $2,500 in additional shares at the price per share determined on
the quarterly dividend payment date. There are no brokerage fees, commissions or
service charges on any stock purchases made by plan participants. Information
regarding the plan is available by contacting American Stock Transfer and Trust
Company, Dividend Reinvestment Department, 40 Wall Street, 46th Floor, New York,
New York 10005, 1-800-278-4353.
DIVIDEND DIRECT DEPOSIT Common stockholders of Lake Ariel Bancorp, Inc. may have
their dividends deposited electronically into their bank account by contacting
Shareholder Services, American Stock Transfer & Trust Company, 40 Wall Street,
46th Floor, New York, New York 10005, 1-800-937-5449.
SEC REPORTS AND ADDITIONAL INFORMATION Upon written request of any stockholder,
investor or analyst, a copy of the Corporation's report on Form 10-K for its
fiscal year ended December 31, 1998, including financial statements and the
schedules thereto, required to be filed with the Securities and Exchange
Commission, may be obtained, without charge, by contacting the Chief Financial
Officer, Lake Ariel Bancorp, Inc., 409 Lackawanna Avenue, Suite 201, Scranton,
PA 18503, (570)343-8200.
INTERNET ADDRESS ON THE WORLD WIDE WEB
http://www.labank.com
E-MAIL ADDRESS
[email protected]
92
<PAGE>
Lake Ariel Bancorp, Inc.
Officers
Bruce D. Howe
President
John G. Martines
Chief Executive Officer
Louis M. Martarano
Vice President & Assistant Secretary
Joseph J. Earyes, CPA
Vice President & Treasurer
Donald E. Chapman
Secretary
Directors of
Corporation and Bank
Donald E. Chapman
Peter O. Clauss
William C. Gumble
Paul D. Horger, Esq.
Bruce D. Howe
John G. Martines
Kenneth M. Pollock
Harry F. Schoenagel
LA Bank, N.A.
Executive Officers
Bruce D. Howe
Chairman
John G. Martines
President and Chief Executive Officer
Louis M. Martarano
Executive Vice President &
Chief Operating Officer
Joseph J. Earyes, CPA
Executive Vice President &
Chief Financial Officer
Donald E. Chapman
Secretary
LA Lease, Inc.
Officers
Bruce D. Howe
Chairman
John G. Martines
President and Chief Executive Officer
Thomas Dziak
Vice President
Joseph J. Earyes, CPA
Secretary & Treasurer
93
<PAGE>
Ariel Financial Services, Inc.
Officers
Bruce D. Howe
Chairman
John G. Martines
President and Chief Executive Officer
Joseph J. Earyes, CPA
Vice President
Louis M. Martarano
Secretary and Treasurer
Administration Division
Karen T. Pasternak Gary S. Lavelle
Sr. Vice President Assistant Vice President
Cynthia A. Smaniotto Jeri S. Prussia
Sr. Vice President Assistant Vice President
Treva J. Day Bonnie Robinson
Vice President Assistant Vice President
Kathy Enslin Marcy Swingle
Vice President & Cashier Assistant Vice President
Gregory G. Gula Susan T. Lenko
Vice President Assistant Cashier
Daniel J. Santaniello
Vice President
Lynn P. Thiel
Vice President
Salvatore R. DeFrancesco, Jr., CPA
Assistant Vice President
Lawrence H. Highhouse
Assistant Vice President
Scott P. Hiller
Assistant Vice President
94
<PAGE>
Retail Division
John Foley John A. Gouse
Sr. Vice President Assistant Vice President
Maureen Straub Doris Hellerman
Sr. Vice President Assistant Vice President
Theodore Daniels Peter Misura
Vice President Assistant Vice President
Thomas Dziak Thomas Wasilewski
Vice President Assistant Vice President
Paul R. Freeman Penny Cola
Vice President Assistant Cashier
William Kerstetter Susan Mroczka
Vice President Consumer Loan Officer
Lake Ariel Branch Milford Branch
Lisa A. Dowse Laura Schultz
Branch Manager Branch Manager
Mt. Cobb Branch Mountainhome Branch
Mary Ellen Bentler Marilynn Palmer
Branch Manager Branch Manager
Joann Simyan
Assistant Branch Manager Scranton Branch
Lauri A. Nidoh
Greene Dreher Branch Branch Manager
Mary Ellen Bentler
Branch Manager Dickson City Branch
Saundra Roeckel
Hamlin Corners Branch Branch Sales Manager
Ann O'Reilly Ellen T. Juseck
Branch Manager Assistant Branch Sales Mgr.
Eynon Branch Honesdale Branch
Lisa Akulonis Deborah A. Aragona
Branch Manager Branch Sales Manager
Autumn Molinaro Annemarie Roberts
Assistant Branch Manager Assistant Branch Sales Mgr.
Taylor Branch
Keyser Valley Branch Patricia A. Jenkins
Mary Auffhammer Branch Manager
Branch Manager
Tannersville Branch
Milford Township Branch Marjorie A. Kunkle
Cynthia Halliday Branch Manager
Branch Manager
Public Square Branch
Clarks Green Branch Debra A. Skurkis
Ellen Ball Branch Manager
Branch Manager
East Mountain Branch
The Mall At Steamtown Branch Sybil G. Kline
Lauri A. Nidoh Branch Manager
Branch Manager
Kingston Branch
Lords Valley Branch Patricia A. Williamson
Laura Schultz Branch Manager
Branch Manager Mortgage Loan Originators
Carbondale Branch Catherine Langan Paul S. Ochman
Sheila Dick Lori A. Rudalavage Theresa A. Yocum
Branch Manager William J. Zernhelt
95
<PAGE>
OFFICE LOCATIONS
<TABLE>
<CAPTION>
CORPORATE ADDRESSES BRANCH ADDRESSES
<S> <C> <C>
Lake Ariel Bancorp, Inc. Lake Ariel Milford
P.O. Box 67 P.O. Box 67 214 W. Harford Street
Route 191 Route 191 Milford, PA 18337
Lake Ariel, PA 18436 Lake Ariel, PA 18436 (570)296-0200
(570)698-5695 (570)698-5695
Mountainhome
LA Bank, N.A. Mt. Cobb Route 390 Barrett Twp.
P.O. Box 67 Routes 348 & 247 Mountainhome, PA 18342
Route 191 Lake Ariel, PA 18436 (570)595-6400
Lake Ariel, PA 18436 (570)689-2694
1-800-4LA-BANK Scranton
(Pennsylvania only) Greene-Dreher 409 Lackawanna Avenue
Route 191 Suite 101
LA Bank, N.A. Newfoundland, PA 18445 Scranton, PA 18503-2049
Financial Center (570)676-4767 (570)341-8200
409 Lackawanna Avenue, Suite 201
Scranton, PA 18503-2045 Hamlin Corners Dickson City
(570)343-8200 Routes 191 & 590 900 Commerce Boulevard
Hamlin, PA 18427 Suite 1
LA Lease Inc. (570)689-0944 Dickson City, PA 18519
P.O. Box 67 (570)489-6800
Route 191 Eynon
Ariel, PA 18436 685 Scranton-Carbondale Hwy. Honesdale
(570)698-5695 Eynon, PA 18403-1022 777 Old Willow Avenue Lake
(570)876-1637/342-2242 Suite 100
Ariel Financial Services, Inc. Honesdale, PA 18431
P.O. Box 67 Keyser Valley (570)253-3400
Route 191 130 N. Keyser Avenue
Lake Ariel, PA 18436 Scranton, PA 18504 Taylor
(570)698-8400 (570)341-8100 801 S. Main Street
(570)876-8400 Taylor, PA 18517
Milford Township (570)562-2500
Routes 6 & 209
Milford, PA 18337 Tannersville
(570)296-5600 P.O. Box 348
Tannersville, PA 18372
Clarks Green (570)620-0100
318 East Grove Street
Clarks Green, PA 18411 Public Square
(570)587-0505 4 Public Square
Wilkes-Barre, PA 18701
The Mall At Steamtown (570)823-2900
220 The Mall at Steamtown
Scranton, PA 18503 East Mountain
(717)341-8000 117 Meadow Avenue
Scranton, PA 18505
Lords Valley (570)341-8900
Lords Valley Shopping Plaza
Route 739, South Kingston
Lords Valley, PA 18428 247 Wyoming Avenue
(570)775-8800 Kingston, PA 18704
(570)283-0500
Carbondale
93 Brooklyn Street
Ames Shopping Plaza
Carbondale, PA 18407
(570)282-7400
Ariel Financial Services, Inc.
(2 Locations)
Lake Ariel Office Eynon Office
P.O. Box 67 685 Scranton-Carbondale Hwy.
Route 191 Eynon, PA 18403-1022
Lake Ariel, PA 18436 (717)876-8400
(717)698-8400
</TABLE>
96
<PAGE>
Business Development Boards
<PAGE>
Lackawanna County
Martin Andrews
Eli Arenberg
Francis Bianconi
George Bieber*
Ervin Brong
Carol Chisdak
Harry T. Coleman, Esq.
Dominick Cruciani, M.D.
Gilbert Hoban
William T. Jones, Esq.
Kevin K. Kearney
Ron Leas
Dave Maddocks*
Robert A. Mazzoni
Regina Peters*
Ted Reap*
Henry Roever*
Mark Suchter
John J. Vanston
Joseph Zandarski, Ph.D., CPA
Sandor Zangardi
Monroe County**
Dario Belardi
Janet Howe Bursis
Harry Callie
H. Jane Cilurso
John W. Donaghy
Tony Farda
Rich Gommel
Jeanne Heater
Virginia Hood
Ryan Martens
Don Mick
Kerry Nix
George Royle IV, Esq.
Dennis Slayton
John E. Spewak
Mark Vultagglio
Frank Young
Wayne County
Joseph P. Ceresko
Edward Cimoch
Forrest Compton
Joseph M. Dombrowski
Harry Howell
Andrew J. Krompasky
Susan Howe Kwiatek*
James R. Shorten
Brian Smolsky
Jeffrey S. Treat, Esq.*
Alice Trunzo
Joanne C. Valanda
Michael Walker, Esq.
Louis J. Zefran
Luzerne County**
Frank Conyngham
Mary Griffin Cummings, Esq.
Mary Erwine, RN
Joan Evans
John J. Joyce
Clayton Karambelas
Thomas J. McGrath, Jr.
Christine McLaughlin, Esq.
Barbara Metcalf
Joseph F. Perugino
Joseph Peterson
Robert Riley
Joseph R. Rogowicz
Lynda Strey-Rowinski
Robert S. Tambur
Pike County
Stacey Beecher Chelak, Esq.*
Victor Decker, Esq.
Robert E. Derse
Robert J. Glasgow*
Peter Helms
Donald W. Henderson, M.D.
Douglas J. Jacobs, Esq.
Joseph F. Kameen, Esq.
Robert Lankenau
Dr. Michael Newmark
Edward S. Nikles
Robert Pityo
Karen Quick*
Edmund J. Riess, Jr.
William Sanquilly
Edward J. Shafer
George Schmitt
Thomas H. Wiss, IV
David Zeiler
*New Board Members appointed in 1999
**New Boards added in 1999
97
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF BANCORP
Direct Subsidiary: LA Bank, National Association, chartered
under the laws of the United States of
America, a national banking association.
Indirect Subsidiaries: LA Lease, Inc., incorporated under the laws
of the Commonwealth of Pennsylvania, a
Pennsylvania business corporation and
wholly-owned subsidiary of LA Bank, National
Association.
Ariel Financial Services, Inc., incorporated
under the laws of the Commonwealth of
Pennsylvania, a Pennsylvania business
corporation and wholly-owned subsidiary of LA
Bank, National Association.
98
<PAGE>
EXHIBIT 99A
SELECTED 5-YEAR FINANCIAL DATA
AND SELECTED YEAR-END BALANCES
99
<PAGE>
LAKE ARIEL BANCORP, INC.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest Income $29,220 $24,650 $20,275 $18,548 $14,157
Interest Expense 16,740 13,525 10,183 9,514 5,967
Net interest income 12,480 11,125 10,092 9,034 8,190
Provision for possible credit losses 1,130 780 650 810 375
Other operating income 4,934 3,401 2,706 2,481 1,679
Other operating expenses 11,452 9,210 7,997 7,763 6,831
Income before income taxes 4,832 4,536 4,151 2,942 2,663
Provision for income taxes 1,061 1,105 1,120 635 535
Net income 3,771 3,431 3,031 2,307 2,128
Earnings per share - Basic (1) .79 .88 .78 .63 .59
Earnings per share - Diluted (1) .77 .84 .78 .63 .59
Dividends per share .41 .38 .32 .27 .25
<FN>
(1) Reflects adjustment for 5% stock dividends issued on October 1, 1998, 1997,
and 1996, and two-for-one stock split effective November 10, 1997.
</FN>
</TABLE>
Year End Balances
1998 1997 1996 1995 1994
Total assts $474,689 $368,073 $297,906 $251,859 $236,125
Investment securities 192,417 114,790 87,000 73,169 76,677
Loans and leases, net 224,754 208,236 175,990 152,306 135,018
Deposits 312,742 280,450 253,196 208,759 192,187
Long Term debt 115,459 47,656 20,023 15,156 15,219
Stockholders' equity 37,940 35,815 21,172 19,509 15,799
100
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000723878
<NAME> LAKE ARIEL BANCORP, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,143
<INT-BEARING-DEPOSITS> 321
<FED-FUNDS-SOLD> 6,540
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,303
<INVESTMENTS-CARRYING> 111,826
<INVESTMENTS-MARKET> 112,353
<LOANS> 227,114
<ALLOWANCE> 2,360
<TOTAL-ASSETS> 474,689
<DEPOSITS> 312,742
<SHORT-TERM> 3,283
<LIABILITIES-OTHER> 5,265
<LONG-TERM> 115,459
0
0
<COMMON> 1,012
<OTHER-SE> 36,928
<TOTAL-LIABILITIES-AND-EQUITY> 474,689
<INTEREST-LOAN> 18,452
<INTEREST-INVEST> 10,542
<INTEREST-OTHER> 226
<INTEREST-TOTAL> 29,220
<INTEREST-DEPOSIT> 10,857
<INTEREST-EXPENSE> 5,883
<INTEREST-INCOME-NET> 12,480
<LOAN-LOSSES> 1,130
<SECURITIES-GAINS> 432
<EXPENSE-OTHER> 11,452
<INCOME-PRETAX> 4,832
<INCOME-PRE-EXTRAORDINARY> 3,771
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,771
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.77
<YIELD-ACTUAL> 0
<LOANS-NON> 2,396
<LOANS-PAST> 759
<LOANS-TROUBLED> 3,155
<LOANS-PROBLEM> 1,300
<ALLOWANCE-OPEN> 2,109
<CHARGE-OFFS> 945
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 2,360
<ALLOWANCE-DOMESTIC> 2,360
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,360
</TABLE>
