<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended: September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
Commission File Number: 0-23101
LAUREL CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1717451
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2724 Harts Run Road
Allison Park, Pennsylvania 15101
(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: (412) 487-7404
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 preceding 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
The number of shares outstanding for each of the issuer's classes of common
stock, as of the latest practicable date is:
Class: Common stock, par value $.01 per share
Outstanding at October 31, 1996: 1,515,385 shares
<PAGE>
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of ..... 1
September 30, 1996 (Unaudited) and June 30, 1996
Consolidated Statements of Operations for the Three ..... 2
Months Ended September 30, 1996 and 1995 (Unaudited)
Consolidated Statements of Stockholders' Equity for the..... 3
Three Months Ended September 30, 1996 (Unaudited)
Consolidated Statements of Cash Flows for the Three ..... 4
Months Ended September 30, 1996 and 1995 (Unaudited)
Notes to (Unaudited) Consolidated Financial Statements ..... 5-9
Item 2. Management's Discussion and Analysis of Financial ..... 10-15
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ..... 16
Item 2. Changes in Securities ..... 16
Item 3. Defaults upon Senior Securities ..... 16
Item 4. Submission of Matters to a Vote of ..... 16
Security Holders
Item 5. Other Information ..... 16
Item 6. Exhibits and Reports on Form 8-K ..... 16
Signatures ..... 17
</TABLE>
<PAGE>
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash $ 541 $ 520
Money market investments 1,344 6,291
Interest-earning deposits with other institutions 3,485 2,807
Investment securities available for sale 13,278 11,639
Investment securities (market value of $14,682 and $9,944) 14,698 9,948
Mortgage-backed securities available for sale 13,625 14,021
Mortgage-backed securities (market value of $1,430 and $1,542) 1,433 1,546
Loans receivable, held for sale 1,577 1,627
Loans receivable, net of unearned discounts of $70 and $84 148,714 145,431
Allowance for possible loan losses (1,907) (1,899)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 146,807 143,532
Federal Home Loan Bank Stock 1,275 1,275
Real estate owned 150 219
Accrued interest receivable:
Deposits and investments 302 233
Mortgage-backed securities 89 92
Loans 907 894
Office properties and equipment, net of accumulated depreciation 1,265 1,246
Prepaid expenses and sundry assets 1,135 1,057
- ---------------------------------------------------------------------------------------------------------------------------------
$201,911 $196,947
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $167,019 $164,683
FHLB Advances 9,047 6,327
Advance deposits by borrowers for taxes and insurance 1,423 3,321
Accrued interest payable on savings deposits 1,477 574
Accrued income taxes 428 410
Other accrued expenses and sundry liabilities 1,509 546
- ---------------------------------------------------------------------------------------------------------------------------------
180,903 175,861
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value; 5,000,000
shares authorized; 1,514,285 and 1,498,635 shares
issued and outstanding, respectively 15 15
Additional paid-in capital 4,659 4,646
Retained earnings 16,337 16,436
Unrealized gains on securities available for sale, net of tax 60 49
Stock held in deferred compensation trust (63) (60)
- ---------------------------------------------------------------------------------------------------------------------------------
21,008 21,086
- ---------------------------------------------------------------------------------------------------------------------------------
$201,911 $196,947
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
- -------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Interest Income:
Loans $2,981 $3,017
Mortgage-backed securities 269 235
Investments 491 427
Interest-earning deposits 32 39
------ ------
Total interest income 3,773 3,718
Interest expense:
Savings deposits 1,757 1,795
Borrowings 111 72
------ ------
Total interest expense 1,868 1,867
------ ------
Net interest income before provision
for possible loan losses 1,905 1,851
Provision for possible loan losses 8 10
------ ------
Net interest income after provision
for possible loan losses 1,897 1,841
------ ------
Other income:
Service charges 124 100
Net gain on sale of investments and
mortgage-backed securities available for sale 6 63
Gain on the sale of loans held for sale 7 2
Other operating income 31 26
------ ------
Total other income 168 191
------ ------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 418 414
Premises and occupancy costs 118 116
Federal insurance premiums 94 93
Special SAIF assessment 1,059 --
Net income on real estate owned (8) (3)
Data processing expense 59 64
Professional fees 43 83
Other operating expenses 189 158
------ ------
Total operating expenses 1,972 925
------ ------
Income before income taxes 93 1,107
------ ------
Provision for income taxes:
Federal 18 352
State 7 78
------ ------
Total income taxes 25 430
------ ------
Net income $68 $677
------ ------
------ ------
Net income per share $0.04 $0.44
------ ------
------ ------
Dividends per share $0.08 $0.05
------ ------
------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
RETAINED GAINS STOCK HELD IN
ADDITIONAL EARNINGS -- ON SECURITIES DEFERRED TOTAL
COMMON PAID-IN SUBSTANTIALLY AVAILABLE COMPENSATION STOCKHOLDERS'
STOCK CAPITAL RESTRICTED FOR SALE TRUST EQUITY
------ ---------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $15 $4,646 $16,436 $49 (60) $21,086
Stock options exercised
(1,618 shares) 13 13
Dividends on common stock
at $0.11 per share (167) (167)
Unrealized gains on
securities available
for sale 11 11
Unrealized gains on stock held
in deferred compensation trust (3) (3)
Net income 68 68
------ ---------- ------------- ------------- ------------ ---------
Balance, September 30, 1996 $15 $4,659 $16,337 $60 ($63) $21,008
------ ---------- ------------- ------------- ------------ ---------
------ ---------- ------------- ------------- ------------ ---------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net income: $68 $677
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 32 28
Provision for possible loan losses 8 10
Net gain on real estate owned (18) (6)
Net gain on sale of investments and mortgage-
backed securities available for sale (6) (63)
Gain on the sale of loans held for sale (7) (2)
Amortization of deferred loan fees (36) (53)
Origination of loans held for sale (309) (337)
Proceeds from sale of loans held for sale 366 205
Increase in accrued interest receivable (79) (27)
Increase in accrued interest payable 903 970
Other--net 893 331
- -------------------------------------------------------------------------------
Net cash provided by operating activities 1,815 1,733
- -------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities (5,000) (6,156)
Purchase of investment securities available
for sale (1,882) (3,355)
Proceeds from investment maturities 250 500
Proceeds from sale of investment securities
available for sale 276 202
Proceeds from sale of mortgage-backed securities
available for sale -- 703
Principal repayments of investment and
mortgage-backed securities available for sale 387 223
Principal repayments of investment and
mortgage-backed securities 113 532
Increase in loans (3,247) (1,490)
Proceeds from sale of real estate owned 87 62
Net additions to office properties and equipment (51) (49)
- -------------------------------------------------------------------------------
Net cash (used) provided by investing
activities (9,067) (8,828)
- -------------------------------------------------------------------------------
Financing activities:
Net increase (decrease) in demand and club accounts 133 (1,628)
Net increase (decrease) in time deposit accounts 2,203 (303)
Proceeds from FHLB advances 8,000 3,278
Repayment of FHLB advances (5,280) --
Decrease in advance deposits by borrowers
for taxes and insurance (1,898) (1,934)
Stock options exercised 13 42
Dividends paid (167) (84)
- -------------------------------------------------------------------------------
Net cash used by financing activities 3,004 (629)
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents (4,248) (7,724)
Cash and cash equivalents at beginning of period 9,618 15,072
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $5,370 $7,348
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $854 $825
Interest on FHLB advances 104 57
Income taxes 68 83
Transfer of loans to real estate owned -- 18
Cash paid during the period for interest includes interest credited on
deposits of $656 and $612 for the three months ended September 30, 1996
and 1995, respectively.
- -------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all the information or footnotes necessary for a complete
presentation of financial condition, results of operation and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting only of normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation, have been
included. Significant accounting policies have not changed since June 30,
1996. The results of operations for the three months ended September 30,
1996 are not necessarily indicative of the results which may be expected for
the entire fiscal year. The financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in Laurel Capital Group, Inc.'s ( the "Company") 1996
Annual Report to Stockholders for the year ended June 30, 1996. All amounts
presented in the Notes to Unaudited Consolidated Financial Statements are
presented in thousands except share data.
EARNINGS PER SHARE
The average number of common and common equivalent shares used to calculate
earnings per share for the three months ended September 30, 1996 and 1995 was
1,553,253 and 1,547,485, respectively.
SECURITIES
The Company accounts for investments and debt and equity securities in
accordance with Financial Accounting Standards Board ("FASB") Statement No.
115 ("FAS 115"). FAS 115 requires that investments be classified as either:
(1) Securities Held to Maturity- reported at amortized cost, (2) Trading
Securities- reported at fair value, or (3) Securities Available for
Sale-reported at fair value. Unrealized gains and losses for trading
securities are reported in earnings while unrealized gains and losses for
securities available for sale are reported as a separate component of equity.
Unrealized gains of $60 net of tax on assets classified as available for sale
is recorded as a separate component of equity at September 30, 1996.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances net of the allowance
for possible loan losses, net deferred loan fees and discounts. The Company
adopted FAS 114, "Accounting by Creditors for Impairment of a Loan" and FAS 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", an amendment of FAS 114, effective July 1, 1995. These statements
address the accounting by creditors for
<PAGE>
impairment of certain loans. They apply to all creditors and to all loans,
uncollateralized as well as collateralized, except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. The Bank considers all one-to-four family residential mortgage
loans and all consumer loans (as presented in Note 4) to be smaller
homogeneous loans. Loans within the scope of these statements are considered
impaired when, based on current information and events, it is probable that
all principal and interest will not be collected in accordance with the
contractual terms of the loans. Management determines the impairment of
loans based on knowledge of the borrower's ability to repay the loan
according to the contractual agreement, the borrower's repayment history and
the fair value of collateral for certain collateral dependent loans.
Pursuant to FAS 114 paragraph 8, management does not consider an
insignificant delay or insignificant shortfall to impair a loan. Management
has determined that a delay less than 90 days will be considered an
insignificant delay and that an amount less than $5,000 will be considered an
insignificant shortfall. The Bank does not apply FAS 114 using major risk
characteristics for group of loans, but on a loan by loan basis. Non-accrual
loans are not necessarily considered to be impaired if management believes
that it is probable that all principal and interest will be collected in
accordance with the contractual terms of the loan. All loans are charged off
when management determines that principal and interest are not collectible.
The accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes 90 days past due, whichever occurs first. When interest
accrual is discontinued, all unpaid accrued interest is reserved. Such interest
ultimately collected is credited to income in the period of recovery or applied
to reduce principal if there is sufficient doubt about the collectability of
principal.
Any excess of the Bank's recorded investment in the loans over the measured
value of the loans in accordance with FAS 114 is provided for in the allowance
for loan losses. The Bank reviews its loans for impairment on a quarterly
basis.
(2) CONTINGENT LIABILITIES
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management and
legal counsel, the resolution of these claims is not expected to have a material
adverse effect on the Company's financial position, liquidity or results of
operations.
<PAGE>
(3) INVESTMENT SECURITIES
Investment securities available for sale are comprised of the following:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1996:
Corporate notes and commercial paper $ 1,000 -- $ 2 $ 998
Municipal obligations 3,554 16 49 3,521
FNMA preferred stock 250 -- -- 250
Financial Institutions Insurance
Group, Ltd stock 25 75 -- 100
Shay Financial Services
ARMs Fund 8,442 -- 33 8,409
-------------------------------------
13,271 91 84 13,278
Mortgage-backed securities 13,541 183 99 13,625
-------------------------------------
Total $26,812 $274 $183 $26,903
-------------------------------------
-------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
At September 30, 1996, the contractual maturities
of the debt securities available for sale are:
Due in one year or less $500 $501
Due after one year through five years 805 803
Due after five years through ten years 908 907
Due after ten years 15,882 15,933
-----------------
$18,095 $18,144
-----------------
-----------------
</TABLE>
Mortgage-backed securities are shown at their contractual maturity
dates. Actual repayments may be different due to prepayments on the loans
underlying the securities. The Financial Institutions Insurance Group, Ltd
stock, FNMA stock and Shay Financial Services ARMs Fund have no stated
maturity.
Note: There were gross realized gains of $6 and $63 recorded during the three
months ended September 30, 1996 and 1995, respectively, on the sale of
investment securities available for sale. Proceeds from the sale of
investment securities available for sale during the three months ended
September 30, 1996 and 1995 were $276 and $905, respectively.
Investment securities are comprised of the following:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1996:
Corporate notes and commercial paper $14,698 $19 $35 $14,682
Mortgage-backed securities 1,433 5 8 1,430
-------------------------------------
Total $16,131 $24 $43 $16,112
-------------------------------------
-------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
At September 30, 1996, the contractual maturities
of the debt securities are:
Due in one year or less $155 $150
Due after one year through five years 5,698 5,697
Due after five years through ten years 3,000 3,001
Due after five years through ten years 7,278 7,264
-----------------
$16,131 $16,112
-----------------
-----------------
</TABLE>
Mortgage-backed securities are shown at their contractual maturity dates.
Actual repayments may be different due to prepayments on the loans underlying
the securities.
<PAGE>
(4) Loans Receivable
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Conventional:
1 to 4 family dwellings $115,658 $113,050
Multi-family dwellings 2,692 2,811
Commercial 5,816 5,788
- -------------------------------------------------------------------------------
124,166 121,649
Guaranteed or insured 84 110
- -------------------------------------------------------------------------------
Total long term with monthly amortization 124,250 121,759
Construction and development loans 5,084 4,281
- -------------------------------------------------------------------------------
129,334 126,040
Less: Allowance for possible losses (1,365) (1,363)
Loans in process (2,751) (2,148)
Deferred loan fees (980) (1,007)
- -------------------------------------------------------------------------------
124,238 121,522
- -------------------------------------------------------------------------------
Consumer loans:
Home improvement loans (net of unearned
discounts of $70 and $84) 527 604
Mobile home loans 1,051 1,157
Loans secured by savings accounts 279 316
Installment loans 21,254 20,469
- -------------------------------------------------------------------------------
23,111 22,546
Less: Allowance for possible losses (542) (536)
- -------------------------------------------------------------------------------
22,569 22,010
- -------------------------------------------------------------------------------
$146,807 $143,532
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Note Continued
<PAGE>
Changes in the allowance for possible loan losses for the
three months ended September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of the fiscal year $1,899 $1,893 $1,819
Provision for losses 8 10 50
Charge-offs (21) (24) (53)
Recoveries 21 14 53
- -------------------------------------------------------------------------------
Balance at September 30, $1,907 $1,893 $1,869
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
At September 30, 1996, the recorded investment in loans that are considered
to be impaired under Statement 114 was $436. Included in this amount is $36
of impaired loans for which the related allowance for credit losses is $2,
and $400 of impaired loans that as a result of write-downs do not have an
allowance for credit losses. The average recorded investment in impaired
loans during the three months ended September 30, 1996 was approximately
$432. For the three months ended September 30, 1996, the Company recognized
interest income on those impaired loans of $1 which was recognized using the
cash basis method of income recognition.
<TABLE>
<CAPTION>
September 30,
1996 1995
--------------
<S> <C> <C>
Non-accrual loans $733 $639
NON-ACCRUAL LOANS AS A PERCENT OF TOTAL LOANS 0.50% 0.44%
</TABLE>
All loans 90 days or more past due are reported as non-accrual
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET DATA
<TABLE>
<CAPTION>
At SEPTEMBER 30,
1996 1995
--------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Totals assets $201,911 $190,222
Money market investments 1,344 --
Interest-earnings deposits with other
institutions 3,485 3,703
Investment securities available for sale 13,278 3,034
Over-night repurchase agreement -- 5,234
Investment securities 14,698 15,311
Mortgaged-backed securities available for sale 13,625 3,966
Mortgaged-backed securities 1,433 7,690
Loans receivable held for sale 1,577 1,339
Loans receivable, net 146,807 146,500
Savings deposits 167,019 161,377
FHLB advances 9,047 5,278
Retained earnings 16,337 14,810
Stockholders' equity 21,008 19,505
Stockholders' equity per share $13.87 $13.02
</TABLE>
STATISTICAL PROFILE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- --------
<S> <C> <C>
Average yield earned on all interest-
earning assets 7.73% 7.98%
Average rate paid on all interest-
bearing liabilities 4.40 4.54
Average interest rate spread 3.33 3.44
Net yield on average interest-earning
assets 3.90 3.97
Average interest-earning assets as a
percentage of average interest-
bearing liabilities 114.73 114.13
Return on average assets (1) (2) 0.14 1.42
Return on average assets (1) (3) 1.44 1.42
Return on average equity (1) (2) 1.28 14.10
Return on average equity (1) (3) 13.58 14.10
Average equity to average assets 10.61 10.07
</TABLE>
1) Amounts are annualized.
2) Percentages for the three months ended September 30, 1996, after effect of
the one-time special SAIF assessment.
3) Percentages for the three months ended September 30, 1996, before effect
of the one-time special SAIF assessment.
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. Laurel Capital Group, Inc.'s (the "Company") only significant asset
is the stock it owns of its wholly-owned subsidiary, Laurel Savings Bank (the
"Bank"). The Company's net income for the three months ended September 30,
1996 was $68,000 compared to $677,000 for the same period in the prior year.
The $68,000 of net income during the three months ended September 30, 1996
reflects the effect of the imposition of a $1.1 million pre-tax charge for
the Federal Deposit Insurance Corporation's ("FDIC") one-time special
assessment to recapitalize the Savings Association Insurance Fund. See "SAIF
Special Assessment". For the three months ended September 30, 1996, net
interest income increased by $54,000 or 2.9% and income tax expense decreased
$405,000 or 94.2% compared to the same period in the prior year. Such
benefits were offset by a $23,000 or 12.0% decrease in other income and a
$1.0 million or 113.2% increase in other expenses. The increase in other
expenses and decrease in income tax expense were due to the special SAIF
assessment. These and other significant fluctuations are discussed below.
NET INTEREST INCOME. The Company's operating results depend substantially on
the Bank's net interest income, which is determined by the average interest
rate spread between the Bank's interest-earning assets and interest-bearing
liabilities and the relative amounts of such assets and liabilities. Net
interest income increased by $54,000 or 2.9% during the three months ended
September 30, 1996 as compared to the same period of the prior year. The
increase was primarily due to a $3.6 million or 15.8% increase in average net
earning assets for the quarter ended September 30, 1996 as compared to the
quarter ended September 30, 1995. This increase was partially offset by a
decrease in the average interest rate spread from 3.44% for the quarter ended
September 30, 1995 to 3.33% for the quarter ended September 30, 1996. The
decrease in the average interest rate spread was primarily due to an decrease
in the average interest rate earned on the Bank's interest-earning assets
from 7.98% for the quarter ended September 30, 1995 to 7.73% for the quarter
ended September 30, 1996 primarily reflecting a general decrease in lending
rates of interest in the Bank's market area. This decrease was partially
offset by a decrease in the rate paid on interest-bearing liabilities from
4.54% for the quarter ended September 30, 1995 to 4.40% for the quarter ended
September 30, 1996.
Interest income on loans receivable and loans held for sale decreased by
$36,000 or 1.2% during the three months ended September 30, 1996 as compared
to the same period in the prior year. This was primarily due to a decrease
in the average yield on loans receivable from 8.35% for the quarter ended
September 30, 1995 to 8.07% for the quarter ended September 30, 1996. This
decrease was partially offset by a $3.0 million or 14.4% increase in the
average outstanding balance of consumer loans receivable for the quarter
ended September 30, 1996 as compared to the same period in the prior year
primarily as a result of the continued emphasis on the origination of
consumer loan products. The decrease in the average yield on loans
receivable was primarily due to a general decrease in lending rates in the
Bank's market area. The Bank continues to emphasize the origination of
consumer loan products as part of its Asset/Liability management due to their
generally shorter terms.
Interest on mortgage-backed securities and mortgage-backed securities
available for sale increased by $34,000 or 14.5% during the quarter ended
September 30, 1996 as compared to the September 30, 1995 quarter. This
increase was primarily due to a $2.7 million or 7.9% increase in the average
outstanding balance of mortgage-backed securities during the quarter ended
September 30, 1996 as compared to the September 30, 1995 quarter. Such
increase was primarily due the investment of excess funds into
mortgage-backed securities. This increase was partially offset by a decrease
in the average yield on mortgage-backed
<PAGE>
securities from 7.50% for the quarter ended September 30, 1995 to 7.05% for
the quarter ended September 30, 1996. At September 30, 1996, the Bank's
portfolio of mortgage-backed securities available for sale had net unrealized
gains of $84,000. The available for sale portfolio consists of fixed and
adjustable rate securities with an average yield of 7.29% at September 30,
1996. Rising interest rates would reduce the unrealized gains in this
portfolio if the fixed rate securities were not sold. The held to maturity
portfolio consists of three adjustable and one fixed rate collateralized
mortgage obligations (CMO's) with an average yield of 6.86% at September 30,
1996. At September 30, 1996, the Bank's portfolio of mortgage-backed
securities had net unrealized losses of $3,000. In periods of rising
interest rates, unrealized losses could occur due to the timing difference of
when the securities reprice. The Bank uses these securities as part of its
Asset/Liability strategy. See Note 3 of "Notes to Unaudited Consolidated
Financial Statements."
Interest income on investments and investments available for sale increased
during the three months ended September 30, 1996 by $64,000 or 15.0% from the
comparable prior period in 1995, due to a $3.5 million or 13.4% increase in
the average outstanding balance of such securities for the quarter ended
September 30, 1996 as compared to the quarter ended September 30, 1995. In
addition, the average yield on investment securities increased from 6.39% for
the quarter ended September 30, 1995 to 6.50% for the quarter ended September
30, 1996. The increase in the average outstanding balance was primarily due
to the investment of increased savings deposits and funds borrowed from the
Federal Home Loan Bank ("FHLB"). At September 30, 1996, the Bank's portfolio
of investment securities available for sale had net unrealized gains of
$7,000 and its portfolio of investment securities held to maturity had net
unrealized losses of $16,000. See Note 3 of "Notes to Unaudited Consolidated
Financial Statements."
At September 30, 1996, the Bank's investment securities included $500,000 of
step-up notes which meet some of the definitions of structured notes. The
note is issued by the Federal Home Loan Bank and matures in less than five
years. The interest rate on step-up notes is scheduled to increase by
pre-determined amounts on pre-determined dates, and the notes are callable at
par on each date the interest rate is scheduled to increase. If the step-up
interest rate exceeds the then current market rate for notes with similar
terms to the next adjustment date or maturity date, then the note would
generally be called and the Bank would have to re-invest the proceeds in the
lower interest rate environment. If the step-up interest rate is less than
the then current market rate, the note would generally not be called and the
Bank would continue to hold the note with a below market interest rate.
During the past year, the Company had approximately $2.5 million of step-up
notes that were called.
Interest income on interest-earning deposits decreased during the three
months ended September 30, 1996 by $7,000 or 18.0% from the comparable period
in 1995. This decrease was primarily due to a decrease of $221,000 or 8.3% in
the average outstanding balance of interest-earning deposits for the quarter
ended September 30, 1996 as compared to the September 30, 1995 quarter. Also
contributing to the decrease in interest income on interest-earning deposits
was a decrease in the average yield on interest-earning deposits from 5.71%
for the quarter ended September 30, 1995 to 5.21% for the quarter ended
September 30, 1996 as a result of the recent decreases in short-term interest
rates.
Interest expense on deposits decreased by $38,000 or 2.1% for the quarter
ended September 30, 1996, compared to the same period in 1995 primarily due
to an decrease in the average interest rate paid on deposits from 4.49% for
the quarter ended September 30, 1995 to 4.34% for the quarter ended September
30, 1996. The decrease in the average rate paid was primarily due to lower
interest rates paid on the Bank's certificate of deposit accounts.
<PAGE>
This decrease was partially offset by a $2.4 million or 1.5% increase in the
average outstanding balance of deposits during the quarter ended September
30, 1996 as compared to the same period of the prior year.
Interest expense on borrowings increased $39,000 or 54.2% for the quarter
ended September 30, 1996 compared to the quarter ended September 30, 1995
primarily due to a $3.2 million or 59.5% increase in the average outstanding
balance of FHLB advances. This increase was partially offset by a decrease
in the average rate paid on borrowings from 6.07% for the quarter ended
September 30, 1995 to 5.58% for the quarter ended September 30, 1996. The
increased advances were used to purchase investment securities with similar
maturities.
PROVISION FOR POSSIBLE LOAN LOSSES. The Bank provided $8,000 and $10,000 to
its allowance for possible loan losses for the quarters ended September 30,
1996 and 1995, respectively. Such provisions were the result of an analysis
of the adequacy of the allowance for possible loan losses in connection with
a review of the Bank's loan portfolio.
At each of September 30, 1996 and 1995, the Bank's allowance for possible
loan losses amounted to $1.9 million, or 1.3% of the total loan portfolio.
As a percentage of non-performing loans (loans delinquent 90 days and over),
the allowance for possible loan losses was 260.2% and 296.2% at September 30,
1996 and 1995, respectively.
A review of the loan portfolio is conducted at least quarterly by management
to determine that the allowance for possible loan losses is adequate to
absorb estimated future loan losses. In determining the appropriate level of
the allowance for possible loan losses required, consideration is given to
general economic conditions, diversification of loan portfolios, historic
loss experience, identified credit problems, delinquency levels and adequacy
of collateral. Although management believes that the current allowance for
possible loan losses is adequate, future additions to the reserve may be
necessary due to changes in economic conditions and other factors. In
addition, as an integral part of their periodic examination, certain
regulatory agencies review the adequacy of the Bank's allowance for possible
loan losses and may direct the Bank to make additions to the allowance based
on their judgement.
OTHER INCOME. Total other income decreased by $23,000 or 12.0% to $168,000
for the quarter ended September 30, 1996 as compared to the same period in
1995. This was primarily due to a $53,000 decrease in gains on sale of loans,
investments and mortgage-backed securities available for sale. Gains of
$65,000 were recorded during the quarter ended September 30, 1995 compared to
gains of $13,000 during the quarter ended September 30, 1996. This decrease
was partially offset by increases of $24,000 in fees and service charges and
$5,000 in other operating income during the three months ended September 30,
1996 as compared to the same period in the prior year.
OTHER EXPENSES. Total operating expenses increased by $1.0 million or 113.2%
during the quarter ended September 30, 1996 as compared to the comparable
1995 quarter. This increase was due to the $1.1 million pre-tax charge for
the FDIC's one-time special assessment to recapitalize the SAIF. Excluding
this one-time charge, total operating expenses decreased by $12,000 for the
quarter ended September 30, 1996 as compared to the quarter ended September
30, 1995. This decrease was due to decreases of $40,000 in professional fees,
$5,000 in data processing expenses, and $4,000 in net real estate owned
expenses, partially offset by increases of $31,000 in other operating
expenses, $4,000 in compensation and benefit expenses and $2,000 in premises
and occupancy expenses. The decrease in professional fees was primarily due
to a decrease in legal fees associated with litigation in the normal course
of business.
<PAGE>
INCOME TAX EXPENSE. Income tax expense decreased by $405,000 or 94.2% for the
quarter ended September 30, 1996 as compared to the quarter ended September
30, 1995 primarily as a result of lower pre-tax income due to the $1.1
million one-time FDIC assessment.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets increased by $5.0 million or 2.5% from June 30, 1996 to
September 30, 1996. The largest increases were a $4.8 million increase in
investment securities, a $3.2 million increase in net loans receivable and a
$1.6 million increase in investment securities available for sale. These
increases were partially offset by a $4.9 million decrease in money market
investments. The largest components of change in liabilities were a $2.7
million increase in FHLB advances and a $2.3 million increase in savings
deposits partially offset by a $1.9 million decrease in advance payment by
borrowers for taxes and insurance. The decrease in money market investments
was primarily due to the reinvestment of those funds into investment
securities and other short term investments.
Under regulations adopted by the FDIC, the Bank is required to maintain Tier
I (Core) capital equal to at least 4% of the Bank's adjusted total assets,
and Tier II (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At September 30, 1996, the Bank exceeded all of these
requirements, with Tier I and Tier II ratios of 10.34% and 20.71%,
respectively.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1996.
<TABLE>
<CAPTION>
TIER I TIER I TIER II
CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ----------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Equity Capital (1) $20,821 $20,821 $20,821
Less unrealized securities gains (60) (60) (60)
Plus general valuation allowances (2) -- -- 1,341
------- ------- -------
Total regulatory capital 20,761 20,761 22,102
Minimum required capital 8,034 4,291 8,583
------- ------- -------
Excess regulatory capital $12,727 $16,470 $13,519
------- ------- -------
------- ------- -------
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $10,042 $ 6,437 $10,672
------- ------- -------
------- ------- -------
Regulatory capital as a percentage (3) 10.34% 19.45% 20.71%
Minimum required capital percentage 4.00 4.00 8.00
------- ------- -------
Excess regulatory capital percentage 6.34% 15.45% 12.71%
------- ------- -------
------- ------- -------
Minimum required capital percentage
to be well capitalized under Prompt
Corrective Action Provisions 5.00% 6.00% 10.00%
------- ------- -------
------- ------- -------
</TABLE>
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 033 for the quarter ended
September 30, 1996.
<PAGE>
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets of
$200,838. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $106,721.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles, which require
the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the consumer price index.
SAIF SPECIAL ASSESSMENT
The deposits of the Bank are insured by the SAIF of the Federal Deposit
Insurance Corporation ("FDIC"). Both the SAIF and the Bank Insurance Fund
("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF had achieved a fully funded
status in contrast to the SAIF and the FDIC had recently reduced the average
deposit insurance premium paid by BIF-insured commercial banks to a level
substantially below the average premium paid by SAIF-insured institutions.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with the semiannual premium assessment on January
1, 1996, reduced deposit insurance premiums for BIF member institutions to
zero (subject to an annual minimum of $2,000) for institutions in the lowest
risk category. Deposit insurance premiums for SAIF members were maintained
at their then existing levels (23 basis points for institutions in the lowest
risk category). Accordingly, until the SAIF had attained a reserve ratio of
1.25% of insured deposits, SAIF members such as the Bank would have been
competitively disadvantaged as compared to commercial banks due to this
premium differential.
Legislation, passed by the U.S. House of Representatives and the Senate, was
signed into law by the President on September 30, 1996 to recapitalize the
SAIF. The special assessment was fully anticipated by the Bank because
legislation has been close to enactment on several occasions over the past
year. As a result of such legislation, the Bank was required to pay a
one-time assessment of 65.7 cents for every $100 of deposits which amounted
to $1.1 million pre-tax with a $635,000 after tax effect.
The legislation also mandated that SAIF-insured institutions' (such as the
Bank) deposit insurance premiums decline from 23 basis points to
approximately 6.4 basis points, effective January 1, 1997. The mandated
decline in the premium rate is expected to reduce the Bank's pre-tax annual
SAIF premiums by approximately $280,000 (based on current deposit levels).
The reduced future annual premiums will more than offset the negative impact
on the Bank's first quarter earnings.
<PAGE>
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
PART II
Item 1. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings at the present
time other than those generally associated with the normal course of
business. In the opinion of management and legal counsel, the
resolution of these claims are not expected to have a material
adverse effect on the Company's financial position, liquidity or
results of operations.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
LAUREL CAPITAL GROUP, INC.
/s/ Edwin R. Maus
- -------------------------------------
Edwin R. Maus
President and Chief Executive Officer
/s/ John A. Howard, Jr.
- -------------------------------------
John A. Howard, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 8, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 541
<INT-BEARING-DEPOSITS> 1,344
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,278
<INVESTMENTS-CARRYING> 14,698
<INVESTMENTS-MARKET> 14,682
<LOANS> 148,714
<ALLOWANCE> 1,907
<TOTAL-ASSETS> 201,911
<DEPOSITS> 167,019
<SHORT-TERM> 6,900
<LIABILITIES-OTHER> 4,837
<LONG-TERM> 2,147
0
0
<COMMON> 15
<OTHER-SE> 20,993
<TOTAL-LIABILITIES-AND-EQUITY> 201,911
<INTEREST-LOAN> 2,981
<INTEREST-INVEST> 491
<INTEREST-OTHER> 301
<INTEREST-TOTAL> 3,773
<INTEREST-DEPOSIT> 1,757
<INTEREST-EXPENSE> 1,868
<INTEREST-INCOME-NET> 1,905
<LOAN-LOSSES> 8
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 1,972
<INCOME-PRETAX> 93
<INCOME-PRE-EXTRAORDINARY> 93
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<YIELD-ACTUAL> 3.33
<LOANS-NON> 733
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,899
<CHARGE-OFFS> 21
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 1,907
<ALLOWANCE-DOMESTIC> 1,907
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
