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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
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 No.: 0-23101
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LAUREL CAPITAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1717451
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2724 HARTS RUN ROAD
ALLISON PARK, PENNSYLVANIA 15101
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(Address) (Zip Code)
Registrant's telephone number, including area code: (412) 487-7400
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 $.01 PER SHARE)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required 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
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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 /
As of September 25, 1997, the aggregate value of the 1,349,063 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
96,894 shares held by all directors and officers of the Registrant as a group,
was approximately $33.8 million. This figure is based on the mean of the bid and
asked prices of $25.06 per share of the Registrant's Common Stock on September
25, 1997.
Number of shares of Common Stock outstanding as of September 25, 1997:
1,445,957
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended June 30,
1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1997 are incorporated into
Part III, Items 10 through 13 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Laurel Capital Group, Inc. (the "Company") is a bank holding company
whose primary asset is the common stock of its wholly owned subsidiary Laurel
Savings Bank ("Laurel Savings" or the "Bank"). The Bank's business is conducted
through its corporate headquarters located in Allison Park, Pennsylvania as
well as four branch offices located in Allegheny County and one branch office
located in Butler County, Pennsylvania. At June 30, 1997, the Company had total
assets of $212.0 million and stockholders' equity of $21.3 million or 10.0% of
total assets. In addition, at such date, the Bank's core capital of $20.8
million and tier I and tier II risk-based capital of $20.8 million and $22.2
million, respectively, exceeded the required amounts by $12.4 million, $16.5
million and $13.5 million, respectively. The Bank's corporate headquarters is
located at 2724 Harts Run Road, Allison Park, Pennsylvania, and its telephone
number is (412) 487-7400.
Laurel Savings is primarily engaged in attracting deposits from the
general public and using these funds to originate permanent first mortgage
loans on single-family residential properties, and, to a lesser extent,
multi-family residential loans, construction loans, commercial real estate
loans and consumer loans. Laurel Savings' revenue is primarily derived from
interest income on its loan portfolio. The Bank's principal expenses are
interest expense on deposits and other operating expenses. The principal
sources of funds for Laurel Savings' lending activities are its deposits and
amortization and prepayments of outstanding loans.
Deposits with Laurel Savings are insured to the maximum extent
provided by law through the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC"). Laurel
Savings is subject to examination and comprehensive regulation by the
Pennsylvania Department of Banking ("Department") and the FDIC. The Bank is
also a member of the Federal Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh"
or "FHLB"), which is one of the 12 regional banks comprising the Federal Home
Loan Bank System ("FHLB System"). The Bank is also subject to regulations of
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
governing reserves required to be maintained against deposits and certain other
matters.
MARKET AREA
The Bank's principal market area consists of Allegheny and Butler
counties, Pennsylvania, which includes the City of Pittsburgh, the region's
major metropolitan center and the hub of the Pittsburgh Metropolitan
Statistical Area ("MSA"), one of the nation's largest. The Bank's business is
conducted through its corporate office located in Allison Park, a suburb of
Pittsburgh, and five branch offices. Substantially all of the Bank's deposits
are received from residents of its principal market area and most of its loans
are secured by properties in Allegheny and Butler counties. Although the Bank
has no branches in downtown Pittsburgh, the Bank participates in the MAC(TM)
and Cirrus(TM) automatic teller machine ("ATM") networks which provide
customers with access to their deposits at thousands of locations throughout
metropolitan Pittsburgh and Pennsylvania as
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well as other states.
The population of the Bank's principal market is approximately 1.5
million. The area's economy has been undergoing a rapid transition from heavy
industry to one of service, health care, advanced technology, light
manufacturing and education industries. As a result of this transition, the
unemployment in Allegheny County, the Bank's largest market area, is 4.7%
compared to 5.3% for the state of Pennsylvania and 4.8% for the United States.
The region also is one of the nation's largest corporate and financial centers
which contributes to a fairly stable real estate market. Housing costs are
below the national average resulting in over 67% of the area's residents owning
their own home. The area's median housing cost is approximately $82,000 while
the average sales price is approximately $105,000. While the area will likely
experience job losses to corporate mergers and downsizing in the future, the
Company believes the diversity of the area's industry will continue to provide
a stable economy.
LENDING ACTIVITIES
GENERAL. Laurel Savings has traditionally concentrated its lending
activities on conventional first mortgage loans secured by residential
property. Conventional loans are neither insured by the Federal Housing
Administration ("FHA") nor partially guaranteed by the Department of Veterans'
Affairs ("VA"). At June 30, 1997, Laurel Savings' total loan portfolio
amounted to $149.1 million ("total loan portfolio"), representing approximately
70.3% of the Bank's total assets at that date. Permanent loans secured by
single-family (one-to-four units) residential properties amounted to $114.0
million or 76.5% of the total loan portfolio at June 30, 1997. At June 30,
1997, multi-family (over four units) residential loans amounted to $2.7 million
or 1.8% of the total loan portfolio while construction loans (all of which were
for the construction of single-family residential properties) totalled $3.1
million or 2.1% of the total loan portfolio and commercial real estate loans
totalled $5.7 million or 3.8% of the total loan portfolio. The Bank's consumer
loans, the second largest component of the Bank's total loan portfolio,
amounted to $23.6 million or 15.8% of such portfolio at June 30, 1997.
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The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
As of June 30,
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1997 1996 1995
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Amount % Amount % Amount %
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(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $114,062 76.5% $113,160 76.1% $113,243 76.1%
Multi-family 2,740 1.8 2,811 1.9 3,281 2.2
Construction(1) 3,079 2.1 4,281 2.9 4,754 3.2
Commercial 5,676 3.8 5,788 3.9 7,002 4.7
-------- ----- -------- ----- -------- ------
Total real estate loans 125,557 84.2 126,040 84.8 128,280 86.2
Consumer loans(2) 23,584 15.8 22,630 15.2 20,444 13.8
-------- ----- -------- ----- -------- ------
Total loans $149,141 100.0% $148,670 100.0% $148,724 100.0%
-------- ===== -------- ===== -------- =====
Less:
Loans in process (1,634) (2,148) (2,377)
Allowance for possible loan
losses (1,943) (1,899) (1,893)
Unamortized discounts and
Fees (894) (1,091) (1,363)
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Net loans receivable $144,670 $143,532 $143,091
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</TABLE>
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(1) The $3.1 million construction loan portfolio outstanding at June 30,
1997 consisted of adjustable-rate construction loans totalling $3.0
million and fixed-rate construction loans totalling $100,000.
(2) Consumer loans consist primarily of installment loans, auto loans,
home equity loans, home improvement loans, commercial loans, mobile
home loans, and loans on savings accounts. For additional information
regarding these loans, see Note 4 to the Notes to Consolidated
Financial Statements in the Company's 1997 Annual Report to
Stockholders ("Annual Report") set forth as Exhibit 13 hereto.
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CONTRACTUAL MATURITIES OF LOANS. The following table sets forth the
contractual principal repayments of the total loan portfolio of the Bank as of
June 30, 1997 by categories of loans. Loans with adjustable interest rates are
shown in the year that they are contractually due. The amounts shown for each
period do not take into account either loan prepayments or scheduled
amortization of the Bank's loan portfolio.
<TABLE>
<CAPTION>
Contractual Maturities in Year Ended June 30,
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Total
Outstanding
At June 30, 1999- 2001- 2003- 2008- 2019 and
1997 1998 2000 2002 2007 2018 Thereafter
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(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate mortgage
Loans $ 80,846 $ 4,130 $ 7,529 $ 8,082 $21,861 $22,103 $17,141
Adjustable-rate
mortgage loans 41,632 2,133 2,021 2,295 6,715 14,656 13,812
Construction 3,079 3,079 -- -- -- -- --
Consumer and other
Loans 23,584 8,423 6,395 3,317 3,811 1,638 --
-------- ------- ------- ------- ------- ------- -------
Total $149,141 $17,765 $15,945(1) $13,694(1) $32,387(1) $38,397(1) $30,953(1)
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</TABLE>
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(1) Of the $131.4 million of principal repayments contractually due after
June 30, 1998, $91.9 million have fixed-rates of interest and $39.5
million have adjustable or floating rates of interest.
Contractual maturities of loans do not reflect the actual term of the
Bank's loan portfolio. The average life of mortgage loans is substantially less
than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. Scheduled principal amortization also reduces the average maturity of
the loan portfolio. The average life of mortgage loans tends to increase,
however, when current mortgage rates substantially exceed rates on existing
mortgages and conversely, decrease when rates on existing mortgages
substantially exceed current mortgage loan rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. All of the Bank's mortgage
lending is subject to its written, nondiscriminatory underwriting standards and
to loan origination procedures prescribed by its Board of Trustees. Decisions
on loan applications are made on the basis of detailed applications and
property valuations by independent appraisers approved by the Board of
Trustees. The loan applications are designed to determine the borrower's
ability to repay, and the more significant items on the applications are
verified through the use of credit reports, financial statements and
confirmations.
Mortgage loans have been originated by the Bank primarily through
referrals from real
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estate brokers, builders and walk-in customers, as well as through refinancing
for existing customers. The Bank's consumer loans have been originated
primarily through walk-in customers and dealer-referred customers, and its
construction loans have been originated primarily through local contractors and
some walk-in customers.
It is the Bank's policy to obtain title insurance policies insuring
that the Bank has a valid lien on mortgaged real estate. Borrowers must obtain
fire and casualty insurance policies prior to closing and, when the property is
in a flood plain as designated by the Department of Housing and Urban
Development, flood insurance policies. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest
to a mortgage escrow account from which the Bank makes disbursements for items
such as real estate taxes, hazard insurance premiums and private mortgage
insurance premiums as they are due.
Under policies adopted by the Bank's Board of Trustees, the Bank
limits the loan-to-value ratio to 95% on residential mortgage loans and
requires that private mortgage insurance be obtained that reduces the Bank's
loan-to-value ratio to 80%. The loan-to-value ratio on second mortgages may not
exceed 80% including the amount of the first mortgage on the property.
Construction and commercial real estate loans generally are made for 80% and
75% or less, respectively, of the appraised value of the property. With respect
to construction loans, such value reflects the projected value of the property
upon completion.
Historically, the Bank has not been an active purchaser or seller of
loans. The sales activity conducted by the Bank during fiscal 1997, 1996 and
1995 primarily focused on the sale of student loans.
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The following table shows total loan origination, purchase and
repayment activities of the Bank during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
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1997 1996 1995
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(In Thousands)
<S> <C> <C> <C>
Real estate originations:
Residential:
Single-family $ 9,798 $14,002 $20,218
Multi-family 550 -- --
Commercial 835 -- --
Construction(1) 3,829 3,455 3,488
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Total real estate loan
Originations 15,012 17,457 23,706
Consumer and other loan
Originations 15,390 13,154 12,553
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Total loan originations 30,402 30,611 36,259
Loan participation interests
Purchased 29 -- 450
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Total loan originations
and loan participation
interests purchased 30,431 30,611 36,709
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Students loans sold 719 550 362
Loan participation interests
Sold -- 68 225
Principal loan repayments 28,530 29,319 22,934
Other, net(2) 44 233 280
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Total principal loan
repayments and other 29,293 30,170 23,831
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Net increase in loans
receivable, net $ 1,138 $ 441 $12,878
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</TABLE>
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(1) Construction loans are classified as either a residential or
commercial real estate loan at the time of origination depending on
the nature of the property securing the loan. Construction loan
originations totalled $3.8 million during fiscal 1997, of which
$800,000 were fixed-rate, single-family residential loans and $3.0
million were adjustable-rate, single-family residential loans.
(2) Includes transfers to real estate owned and all activity in the
allowance for possible loan losses.
LENDING PROGRAMS AND POLICY
RESIDENTIAL LENDING. Historically, Laurel Savings concentrated its
lending activity on the origination of long-term, fixed-rate residential
mortgage loans secured by one-to-four family residential properties. As a
result, at June 30, 1997, $69.4 million or 46.5% of the Bank's total loan
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portfolio consisted of long-term loans with fixed-rates of interest which were
secured by first mortgages on one-to-four family residential properties. During
fiscal 1997, 1996 and 1995, the Bank originated $4.3 million, $9.7 million and
$8.0 million, respectively, of fixed-rate mortgage loans. However, due to the
interest rate environment during fiscal 1997, the Bank found the largest
portion of its single-family loan demand to be for adjustable-rate loans.
The Bank's fixed-rate loans generally have maturities ranging from 15
to 30 years and are fully amortizing with monthly payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. Such
loans are originated under terms, conditions and documentation which permit
them to be sold to U.S. Government sponsored agencies. The Bank's fixed-rate
loans customarily include "due on sale" clauses, which give the Bank the right
to declare a loan immediately due and payable in the event the borrower sells
or otherwise disposes of the real property subject to the mortgage or the loan
is not repaid.
In addition, Laurel Savings originates ARMs with up to a 30-year
amortization schedule. On all ARMs currently offered by the Bank, payments are
adjusted with each interest rate adjustment so that the term of the ARM is not
affected. The Bank currently offers one, three, and five year adjustable rate
loans. Interest rate adjustments occur every one, three or five years and are
based on the weekly average yield on U.S. Treasury Securities adjusted to a
constant maturity that matches the loan type. All three loan types limit
interest rate increases to 6% over the life of the loan and limit decreases to
2% below the initial rate. The one year ARM has a 2% maximum increase per
adjustment while the three and five year loans have a maximum increase of 3%
per adjustment. All of these loans may be converted to fixed rate loans. The
Bank does not offer ARMs with below market introductory or "teaser" rates.
Although Laurel Savings intends to continue to emphasize the origination of
ARMs in order to reduce the impact on its operations of rapid increases in
market rates of interest, such loans generally do not adjust as rapidly as
changes in the Bank's cost of funds. At June 30, 1997, $44.7 million or 29.9%
of the Bank's total loan portfolio consisted of ARMs on one-to-four family
residential real estate.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. Laurel Savings
originated $835,000 of commercial real estate loans and $550,000 of
multi-family residential real estate loans in fiscal 1997. At June 30, 1997,
the Bank's multi-family residential real estate loans and commercial real
estate loans amounted to $2.7 million and $5.7 million, respectively, or 1.8%
and 3.8% of the total loan portfolio, respectively. Such loans generally earn
rates of interest which exceed the rates on residential real estate loans and
are usually for shorter terms. Such loans have been generally offered with
interest rates that adjust annually at 1% to 2% over the Bank Prime Lending
Rate as published in the Wall Street Journal. These loans have up to 30-year
amortization schedules. The Bank's multi-family real estate loans are secured
primarily by apartment buildings and its commercial real estate loans are
secured primarily by other income-producing properties located in the
Pittsburgh MSA, including office buildings and warehouses. Of the $8.4 million
of commercial and multi-family loans at June 30, 1997, $2.9 million have fixed
rates of interest and $5.5 million have adjustable rates of interest.
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Multi-family and commercial real estate lending entails significant
additional risks as compared with single-family residential property lending.
Multi-family and commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project. The success of such projects is sensitive to changes
in supply and demand conditions in the market for multi-family and commercial
real estate as well as economic conditions generally. Due to certain
difficulties the Bank has experienced with its commercial real estate lending
in the past, it has limited its involvement in this type of lending in recent
years. As of June 30, 1997, the Bank's five largest outstanding commercial real
estate loans consisted of two loans to two separate borrowers secured by three
commercial office buildings having balances of $751,000 and $425,000,
respectively; one loan on a combination commercial/multi-family building having
a balance of $591,000, one loan on a church for $440,000 and one loan on a
restaurant for $323,000. At June 30, 1997, all of such loans were current in
accordance with their original terms.
The Bank evaluates all aspects of commercial and multi-family real
estate loan transactions in order to mitigate the risk to the Bank to the
greatest extent possible. The Bank seeks to ensure that the property securing
the loan will generate sufficient cash flow to adequately cover operating
expenses and debt service payments. To this end, permanent commercial and
multi-family real estate loans are generally made at a loan-to-value ratio of
75% or less and with a minimum debt service coverage generally of one to one
and one-half times net rental income. In underwriting commercial and
multi-family real estate loans, consideration is given to the property's
operating history, future operating projections, current and projected
occupancy, position in the local and regional market, location and physical
condition. The underwriting analysis also includes credit checks and a review
of the financial condition of the borrower. A narrative appraisal report
prepared by an outside appraiser qualified by an independent member of the
American Institute of Appraisers ("MAI") or a similar organization is
commissioned by the Bank to substantiate property values for commercial and
multi-family real estate loan transactions, which appraisal, in final form, the
Bank obtains prior to closing the loan. The Bank also obtains in virtually all
cases full personal loan guarantees from the borrower, or in the case of a
corporate borrower, the loan guarantees from the persons controlling the
borrower.
CONSTRUCTION LENDING. The Bank's construction loans accounted for
25.6% of the real estate loans originated in fiscal 1997, 19.8% in fiscal 1996
and 14.7% in fiscal 1995. Such loans are generally used to fund the
construction of residential properties for owner-occupancy although the Bank
has originated commercial construction and land acquisition and development
loans to a limited degree. Most of the Bank's residential construction loans
are originated in connection with providing permanent financing on the
construction project. The interest rate on the permanent loan is set at the
time of the origination of the construction loan. Construction loans are
classified as either residential or commercial real estate loans at the time of
origination, depending on the nature of the property securing the loan. At June
30, 1997, construction loans amounted to $3.1 million, all of which are for the
construction of residential properties.
A significant portion of the Bank's loans are made to builders on both
presold and unsold properties. Speculative construction loans on unsold
properties carry more risk than presold or individual construction loans
originated by the Bank because the payoff for the loan is dependent on the
builder's ability to sell the property prior to the time that the construction
loan is due. The Bank attempts to mitigate these risks by, among other things,
working with builders with whom it has
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established relationships and by generally limiting the number of unsold homes
under construction.
The Bank has been active in residential construction lending for many
years and intends to continue its involvement in such lending in the future.
Although the Bank has not experienced any significant difficulties,
construction lending is generally considered to involve a higher degree of risk
of loss than long-term financing on improved, occupied real estate. Risk of
loss on construction loans is dependent largely upon the accuracy of the
initial appraisal of the property's projected value at completion of
construction as well as the estimated costs of construction, including
interest. During the construction phase, a number of factors could result in
delays and cost overruns. If either estimate proves to be inaccurate and the
borrower is unable to provide additional funds, the lender may be required to
advance funds beyond the amount originally committed to permit completion of
the project and/or be confronted at the maturity of the construction loan with
a project whose value is insufficient to assure full repayment. In addition, if
the borrower is unable to obtain permanent financing prior to the expiration of
the term of the construction loan and has not sold his or her existing
residence due to market conditions, the Bank could experience a risk of loss in
the event of the borrower's existing residence is not sold for an extended
period of time. In such instance, the Bank generally requires the borrower to
sell the construction property, rent the property or execute a deed-in-lieu of
foreclosure.
CONSUMER LENDING. While the Bank has continued to emphasize the
origination of consumer loans, installment loans and home equity loans, such
loans have decreased as a percentage of the total loan portfolio from 19.4% of
the total loan portfolio at June 30, 1992 to 15.8% of the total loan portfolio
at June 30, 1997, primarily as a result of the Bank's reduced involvement in
third party dealer originated home improvement loans during the past five
fiscal years. The Bank originated $15.4 million, $13.2 million and $12.6
million of consumer loans in fiscal 1997, 1996 and 1995 out of total loan
originations and purchases of $30.4 million, $30.6 million and $36.7 million,
respectively. Although consumer loans may involve a greater risk of loss than
residential real estate loans due to the nature of the collateral involved (or
the absence of collateral), the Bank carefully reviews the creditworthiness of
the borrower and, where applicable, the value of the collateral for such loans.
However, since the amount outstanding on each individual loan is smaller, the
risk of financial loss per loan is lower when compared to mortgage and
commercial lending. In order to provide for potential losses in the portfolio,
the Bank has established an allowance for losses on consumer and other
non-first mortgage loans which totalled $585,000 at June 30, 1997.
Installment loans, consisting primarily of home equity loans, and
commercial loans accounted for $22.2 million or 94.1% of all consumer loans at
June 30, 1997. Installment loans can be for any purpose and generally have
terms of less than five years with fixed rates of interest. Home equity loans
typically have fixed interest rates and terms up to 20 years, although a
majority of such loans have terms of ten years or less. The Bank does not
require that it hold the first mortgage on the secured property. The Bank also
offers a home equity line of credit with an adjustable rate of interest.
Loans on savings accounts are also offered with the interest rate set
at the higher of the underlying collateral rate plus 3% or the current Federal
Reserve Board discount rate plus 5%, the interest rate being adjusted if the
rate on the account or the Federal Reserve Board discount rate changes. Such
loans are generally made for up to 90% of the amount in the savings account and
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accounted for $288,000 or 1.2% of the consumer loan portfolio at June 30, 1997.
The Bank has also purchased packages of insured mobile home loans.
Such loans bear favorable rates of interest and are fully insured. If any of
such loans is delinquent more than 90 days, the loan is paid off by the
insurer. At June 30, 1997, such loans accounted for $747,000 or 3.2% of the
consumer loan portfolio.
REGULATORY REQUIREMENTS. Under the provisions of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), the
aggregate amount of loans that the Bank may make to any one borrower is limited
to the loans to one borrower limitations applicable to national banks (i.e.,
15% of unimpaired capital and unimpaired surplus plus an additional 10% of
unimpaired capital and unimpaired surplus when the loan is fully secured by
readily marketable securities). At June 30, 1997, the Bank's loans to one
borrower limit was approximately $3.2 million and the largest aggregate amount
of loans by the Bank to any one borrower, including related entities, was
$826,000, $798,000 of which was secured by office buildings and $28,000 was
extended for the construction of single-family homes. These loans were current
as of June 30, 1997.
Federal and Department regulations as well as the Pennsylvania Banking
Act of 1965, as amended (the "Act") also limit the amount of a real estate loan
made by a Pennsylvania-chartered state savings bank to a specified percentage
of the value of the property securing the loan (referred to as the
"loan-to-value ratio"). Such regulations provide that at the time of
origination, a real estate loan may not exceed 100% of the appraised value of
the secured property. Maximum loan-to-value ratios for each type of real estate
loan made by an institution are to be established by the institution's board of
trustees. If the amount of a home loan originated or refinanced is in excess of
80% of the appraised value, the institution is required to obtain private
mortgage insurance on the portion of the principal amount of the loan that
exceeds 80% of the appraised value of the secured property.
LOAN SERVICING AND LOAN FEES
Interest rates charged by Laurel Savings on mortgage loans are
primarily determined by competitive loan rates offered in its market area.
Mortgage loan rates reflect factors such as general interest rate levels, the
supply of money available to the savings industry and the demand for such
loans. These factors are, in turn, affected by general economic conditions,
the monetary policies of the federal government, including the Federal Reserve
Board, the general supply of money in the economy, tax policies and
governmental budget matters.
In addition to interest earned on loans and income from servicing of
loans, the Bank receives fees in connection with loan modifications, late
payments, changes of property ownership and for miscellaneous services related
to its loans. Funds from these activities varies from period to period with the
volume and type of loans originated, sold and purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in the markets served by the Bank. The fees received by the Bank in
connection with the origination of mortgage loans on existing properties
generally amount from zero to three points, with a point being equivalent to 1%
of the principal amount of the loan.
In accordance with Statement of Financial Accounting Standards No. 91,
loan origination
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fees and certain related direct loan origination costs are offset and the
resulting net amount is deferred and amortized over the life of the related
loans as an adjustment to the yield of such related loans. In addition,
commitment fees are offset against related direct costs and the resulting net
amount is generally recognized over the life of the related loans as an
adjustment of yield, if the commitment is exercised, or if the commitment
expires unexercised, recognized upon expiration of the commitment.
NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
When a borrower fails to make a required payment on a loan, Laurel
Savings attempts to cause the deficiency to be cured by contacting the borrower
and seeking payment. A late charge is generally assessed after 20 days.
Contacts are generally made after a payment is more than 30 days past due. In
most cases, the deficiencies are cured promptly. If the delinquency exceeds 90
days and is not cured through the Bank's normal collection procedures, the Bank
will generally institute measures to remedy the default, including in the case
of mortgage loans, commencing a foreclosure action or accepting from the
mortgagor a voluntary deed of the secured property in lieu of foreclosure or,
obtaining from the borrower the collateral which secures a non-mortgage
obligation.
Loans are placed on nonaccrual status when, in the judgment of
management, the probability of collection is deemed to be insufficient to
warrant further accrual. Loans which are delinquent 90 days or more are placed
on nonaccrual status. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is deducted from interest income. Consumer loans
more than 120 days or 180 days delinquent (depending on the nature of the loan)
are generally required to be written off.
If a foreclosure action is instituted and the loan is not reinstated,
paid in full or refinanced, the property is sold at a public auction at which
the Bank may participate as a bidder at the sale. If the Bank is the successful
bidder, the acquired property is then included in the Bank's "real estate
owned" account until it is sold. The Bank is permitted to finance the sales of
these properties by "loans to facilitate," which involve a lower down payment
or a longer term than would be generally allowed by the Bank's underwriting
standards. At June 30, 1997, the Bank had one loan to facilitate amounting to
$33,200.
The remedies available to the Bank in the event of a default or
delinquency with respect to certain residential mortgage loans, and the
procedures by which such remedies may be exercised, are subject to Pennsylvania
law and regulations. Under Pennsylvania law, a lender is prohibited from
accelerating the maturity of a residential mortgage loan, commencing any legal
action (including foreclosure proceedings) to collect on such loan, or taking
possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrower's right to correct such delinquency.
In addition, the lender's ability to exercise any remedies it may have with
respect to loans for one- or two-family principal residences located in
Pennsylvania is further restricted (including the lender's right to foreclose
on such property) until the lender has provided the delinquent borrower with
written notice detailing the borrower's rights to seek consumer credit
counseling and state financial assistance and until the borrower has exhausted
or failed to pursue such rights. These provisions of Pennsylvania law may delay
for several months the Bank's ability to foreclose upon residential loans
secured by real estate located in the Commonwealth of
11
<PAGE> 13
Pennsylvania. In addition, the uniform Federal National Mortgage Association
("FNMA")/ Federal Home Loan Mortgage Corporation ("FHLMC") lending documents
used by the Bank, as well as most other residential lenders in Pennsylvania,
require notice and a right to cure similar to that provided under Pennsylvania
law.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or fair
value at the date of acquisition and any write-down resulting therefrom is
charged to the allowance for losses. Similar treatment is accorded to the
collateral of loans which have been deemed to constitute in-substance
foreclosures. All costs incurred in maintaining the Bank's interest in the
property are capitalized between the date the loan becomes delinquent and the
date of acquisition. After the date of acquisition, all costs incurred in
maintaining the property are expensed and costs incurred for the improvement or
development of such property are capitalized.
12
<PAGE> 14
The following table sets forth information regarding the Bank's
nonaccrual loans and real estate owned at the dates indicated. The Bank did not
have any troubled debt restructurings at June 30, 1997.
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Nonaccruing loans:
Single-family residential real estate $ 600 $ 364 $ 289
Commercial real estate 158 198 149
Multi-family residential 28 39 49
Consumer and other loans 129 11 34
----- ----- -----
Total nonaccruing loans $ 915 $ 612 $ 521
===== ===== =====
Total nonperforming loans as a
percentage of net loans receivable .63% .43% .36%
=== === ===
Total real estate owned, net of related
reserves $ -- $ 219 $ 157
==== ===== =====
Total nonperforming loans and real
estate owned as a percentage of total assets .43% .42% .36%
=== === ===
</TABLE>
Management does not currently expect to incur any material losses on
any of such loans and properties, net of any specific reserves.
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories: "substandard,"
"doubtful" and "loss." For assets classified "substandard" and "doubtful," the
institution is required to establish prudent general loan loss reserves in
accordance with GAAP. Assets classified "loss" must be either completely
written off or supported by a 100% specific reserve. A classification category
designated "special mention" also must be established and maintained for assets
not currently requiring classification but having potential weaknesses or risk
characteristics that could result in future problems. An institution is
required to develop an in-house program to classify its assets, including
investments in subsidiaries, on a regular basis and to set aside appropriate
loss reserves on the basis of such classification. At June 30, 1997, the Bank's
classified assets totalled $2.2 million, of which $1.8 million were assets
classified as substandard and $377,000 were assets classified as loss. Assets
classified as substandard consisted of the Bank's nonperforming residential,
multi-family and commercial real estate loans, consumer loans and real estate
owned, certain loans which were delinquent between 15 and 90 days and other
current loans which have in the past displayed characteristics which reflect
potential weaknesses.
ALLOWANCES FOR ESTIMATED LOAN LOSSES. Provisions for possible losses
on first mortgage and other loans are charged to earnings in amounts that
result in allowances sufficient, in management's judgment, to cover anticipated
losses. In determining the appropriate level of provisions for possible loan
losses, consideration is given to general economic conditions,
13
<PAGE> 15
diversification of loan portfolios, historical loss experience, identified
credit problems, delinquency levels and adequacy of collateral. The Bank's
allowances for loan losses totalled $1.9 million at June 30, 1997 or 212.4% of
total nonperforming loans at such date. The Bank's management believes that its
present allowances for losses are adequate. However, while management uses the
best information available to make such determinations, future adjustments to
the loan loss allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for
possible loan losses. Such agencies may require the Bank to recognize additions
to such allowance based on their judgements about information available to them
at the time of their examination.
The Bank's asset classification committee, consisting of the Assistant
Vice President-Credit and Collections, Chief Executive Officer and Senior
Vice President-Finance, meets on at least a quarterly basis. The committee
reviews all non-performing assets to determine the adequacy of resources.
Adjustments are made as needed and the committee's findings are summarized in a
detailed report submitted to the Board of Trustees.
14
<PAGE> 16
The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of
period $1,899 $1,893 $1,819
------ ------ ------
Charge-offs:
Residential real estate (15) (20) (4)
Commercial real estate -- (10) (22)
Consumer (39) (51) (85)
------ ------ ------
Total charge-offs (54) (81) (111)
------ ------ ------
Recoveries:
Residential real estate -- 1 6
Consumer 68 56 79
------ ------ ------
Total recoveries 68 57 85
------ ------ ------
Net recoveries (charge-offs) 14 (24) (26)
------ ------ ------
Provision for losses on loans 30 30 100
------ ------ ------
Balance at end of period $1,943 $1,899 $1,893
====== ====== ======
Allowance for loan losses as a
percent of total net loans
outstanding 1.34% 1.32% 1.32%
====== ====== ======
Allowance for loan losses as a
percent of nonperforming loans 212.35% 310.29% 363.34%
====== ====== ======
Ratio of net charge-offs to
average loans outstanding --% (0.02)% (0.02)%
====== ====== ======
</TABLE>
15
<PAGE> 17
The following table sets forth information concerning the allocation
of the Bank's allowance for loan losses by loan category at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Total Loans Amount Total Loans Amount Total Loans
-----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate(1) $ 600 78.6% $ 598 79.0% $ 605 79.3%
Multi-family real estate 29 1.8 30 1.9 35 2.2
Commercial real estate 237 3.8 231 3.9 241 4.7
Consumer 250 15.8 234 15.2 213 13.8
Unallocated 827 -- 806 -- 799 --
------ ----- ------ ----- ------ -----
Total $1,943 100.0% $1,893 100.0% $1,893 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
- ----------------------------
(1) Includes construction loans.
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Association. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the Government National
Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. government and
guarantees the timely payment of interest and the ultimate return of principal
within one year. The FHLMC mortgage-backed securities are not backed by the
full faith and credit of the United States, but because the FHLMC is a U.S.
government sponsored enterprise, these securities are considered high quality
investments with minimal credit risks. The GNMA is a government agency within
the Department of Housing and Urban Development which is intended to help
finance government assisted housing programs. The GNMA guarantees the timely
payment of principal and interest, and GNMA securities are backed by the full
faith and credit of the U.S. Government. The FNMA guarantees the timely payment
of principal and interest, and FNMA securities are indirect obligations of the
U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or
16
<PAGE> 18
adjustable rate, as well as the prepayment risk, are passed on to the
certificate holder. Accordingly, the life of a mortgage-backed pass-through
security approximates the life of the underlying mortgages.
The following table sets forth the composition and amortized cost of the
Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1997 1996 1995
------------ ------------ -----------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
GNMA $ -- $ -- $ 5,286
FNMA -- -- 1,399
FHLMC -- -- 481
FNMA Remic 200 254 327
FHLMC Remic 900 1,130 493
Other 120 162 236
------ ------- -------
Total $1,220 $ 1,546 $ 8,222
====== ======= =======
Mortgage-backed securities available
for sale:
GNMA $4,900 $ 5,885 $ 2,536
FNMA 4,050 4,397 1,612
FHLMC 307 437 558
FNMA Remic 284 284 --
FHLMC Remic 3,526 2,926 --
------- ------- -------
Total $13,067 $13,929 $ 4,706
======= ======= =======
</TABLE>
17
<PAGE> 19
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at June 30, 1997 is
presented below.
<TABLE>
<CAPTION>
Amounts at June 30, 1997 Which Mature In
-------------------------------------------------------------------------
After Five
One Year After One to To Over 10
or Less Five Years 10 Years Years Total
----------- -------------- -------------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $-- $ -- $ -- $ -- $ --
FNMA -- -- -- -- --
FHLMC -- -- -- -- --
FNMA Remic -- -- -- 200 200
FHLMC Remic -- -- -- 900 900
Other -- -- -- 120 120
Total $-- $ -- $ -- $1,220 $1,220
==== === === ===== =====
Weighted average yield --% --% --% 7.0% 7.0%
==== === === ===== =====
Mortgage-backed securities available
for sale:
GNMA $ -- $ -- $ -- $4,900 $4,900
FNMA 115 340 96 3,498 4,049
FHLMC 90 -- -- 217 307
FNMA Remic -- -- -- 284 284
FHLMC Remic -- -- -- 3,527 3,527
----- ---- --- ------ ------
Total $ 205 $ 340 $ 96 $12,426 $13,067
===== ==== === ====== ======
Weighted average yield 8.4% 6.3% 9.4% 7.3% 7.3%
=== === === === ===
</TABLE>
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank. At June 30, 1997, none of the Bank's
mortgage-backed securities were pledged to secure obligations of the Bank.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments
that are faster than anticipated may shorten the life of the security and
adversely affect its yield to maturity. The yield is based upon the interest
income and the amortization of any premium or discount related to the
mortgage-backed security. In accordance with generally accepted accounting
principles, premiums and discounts are amortized over the estimated lives of
the loans, which decrease and increase interest income, respectively. The
prepayment assumptions used to determine the amortization period for premiums
and discounts can significantly affect the yield of the mortgage-backed
security, and these assumptions are reviewed periodically to reflect actual
prepayments. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates
18
<PAGE> 20
generally is the most significant determinant of the rate of prepayments.
During periods of falling mortgage interest rates, if the coupon rate of the
underlying mortgages exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related security. Under such circumstances,
the Bank may be subject to reinvestment risk because to the extent that the
Bank's mortgage-backed securities amortize or prepay faster than anticipated,
the Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate.
For additional information relating to the Bank's mortgage-backed
securities, see Notes 1 and 2 of the Notes to the Consolidated Financial
Statements.
INVESTMENT SECURITIES. Under federal regulations, the Bank is permitted
to make certain securities investments. Investment decisions are made by
authorized officers of Laurel Savings within policies established by Laurel
Savings' Board of Trustees.
The Bank is authorized to invest in obligations issued or fully
guaranteed by the United States, certain federal agency obligations, certain
time deposits, negotiable certificates of deposit issued by commercial banks
and other insured financial institutions, investment grade corporate debt
securities and other specified investments.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Statement 115 requires that investments be
classified as either: (1) Securities Held to Maturity - debt securities that
the Company has the positive intent and ability to hold to maturity and
reported at amortized cost; (2) Trading Securities - debt and equity securities
bought and held principally for the purpose of selling them in the near term
and reported at fair value, with unrealized gains and losses included in the
current period earnings; or (3) Securities Available for Sale - debt and equity
securities not classified as either Securities Held to Maturity or Trading
Securities and reported at fair value, with unrealized gains and losses
included as a separate component of stockholders' equity.
Effective July 1, 1994, the Company adopted Statement 115 and has
reported the cumulative effect of this change in the method of accounting for
investment securities in the June 30, 1995, statement of operations.
In the year ended June 30, 1994, and prior years, securities were
classified as either investment or available for sale securities when
purchased. The Company classified securities as investment securities when it
had the positive intent and ability to hold the securities to maturity. The
Company classified securities as available for sale securities when the intent
was to hold securities for indefinite periods of time as part of the Company's
asset/liability management strategy.
19
<PAGE> 21
The following table sets forth the composition and maturities of the
Bank's investment securities portfolio at June 30, 1997.
<TABLE>
<CAPTION>
Amounts at June 30, 1997 Which Mature In
-------------------------------------------------------------------------
One Year 1 to 5 5 to 10 Over 10
or Less Years Years Years Total
----------- --------- --------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Investment securities:
Corporate notes and
commercial paper $ -- $4,000 $5,498 $5,996 $15,494
====== ====== ====== ====== =======
Weighted average
yield --% 7.1% 7.4% 8.0% 7.6%
====== ====== ====== ====== =======
Investment securities available
for sale:
Corporate notes and
commercial paper $ -- $ -- $1,500 $ -- $ 1,500
Municipal obligations -- -- -- 4,541 4,541
Shay Financial
Services Arms Fund (1) 8,832 -- -- -- 8,832
FMNA preferred stock (1) 250 -- -- -- 250
FHLMC stock (1) 250 -- -- -- 250
------ ------ ------ ------ -------
Total $9,332 $ -- 1,500 $4,541 $15,373
====== ====== ====== ====== =======
Weighted average
yield 6.1% --% 7.6% 5.7% 6.1%
====== ====== ====== ====== =======
</TABLE>
- ---------------
(1) Such investment securities have no stated contractual maturity.
20
<PAGE> 22
The following table sets forth the composition and amortized cost of the
Bank's investment securities at each of the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------
1997 1996 1995
--------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Investment securities:
Corporate notes and
Commercial paper $15,494 $9,948 $9,655
====== ===== =====
Investment securities
Available for sale:
U.S. Treasury notes $ -- $ -- $1,996
Corporate Notes and
Commercial paper 1,500 1,000 --
Municipal obligations 4,541 2,315 --
Financial Institutions
Insurance Group, Inc. stock -- 25 25
Shay Financial Services:
ARMs Fund 8,832 8,317 --
FMNA preferred stock 250 -- --
FHLMC stock 250 -- --
------ ------ -----
$15,373 $11,657 $2,021
====== ====== =====
</TABLE>
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been the principal source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives funds from
loan repayments. Borrowings may be used on a short-term basis to compensate for
seasonal or other reductions in deposits or inflows at less than projected
levels, as well as on a longer term basis to support expanded lending
activities or asset/liability management. During fiscal 1997, the Bank borrowed
$22.0 million in FHLB advances for asset/liability management purposes.
DEPOSITS. In recent years, the Bank has been required by market
conditions to rely increasingly on newly authorized types of short-term
certificate accounts and other deposit alternatives which have no fixed term
and that pay interest at rates that are more responsive to market interest
rates than the passbook accounts and regulated fixed-rate, fixed-term
certificates that were historically the Bank's primary sources of deposits. The
types of deposits currently offered by the Bank include passbook savings
accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit
accounts ("MMDAs"), and certificates of deposit ranging in terms from 91 days
to ten years.
Included among these savings programs are individual retirement accounts
("IRA") and Keogh
21
<PAGE> 23
accounts.
The following table sets forth the distribution of the Bank's deposits by
type of deposit at the dates indicated.
<TABLE>
<CAPTION>
As of June 30,
----------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------------- ----------- ----------- ------------ ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts $ 27,690 15.8% $ 28,890 17.4% $ 28,890 17.7%
NOW Accounts 23,819 13.6 18,633 12.2 18,633 11.4
MMDAs 18,047 10.3 20,859 11.2 20,859 12.8
Fixed-rate certificates 72,871 41.7 63,306 40.7 63,306 38.7
Jumbo certificates 3,650 2.1 2,761 1.4 2,761 1.7
IRA and Keogh accounts 28,946 16.5 28,859 17.1 28,859 17.7
-------- ----- -------- ----- -------- -----
Total $175,019 100.0% $163,308 100.0% $163,308 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The large variety of savings accounts offered by the Bank has increased
the Bank's ability to retain deposits and allowed it to be more competitive in
obtaining new funds, but has not eliminated the threat of disintermediation
(the flow of funds away from savings institutions into direct investment
vehicles such as government and corporate securities). However, these accounts
have been more costly than traditional accounts in periods of rising interest
rates. In addition, the Bank has become increasingly sensitive to short-term
fluctuations in deposit flows, as customers have become more rate conscious. As
customers have become more rate conscious and willing to move funds into higher
yielding accounts, the ability of the Bank to attract and maintain deposits and
the Bank's cost of funds have been, and will continue to be, significantly
affected by money market conditions.
22
<PAGE> 24
The following table sets forth information relating to the Bank's deposit
flows during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1997 1996 1995
------------ ------------ -----------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before
interest credited $ 4,066 $ (4,730) $ 639
Interest credited 6,270 6,105 5,490
-------- ------- -------
$ 10,336 $ 1,375 $ 6,129
======== ======= =======
</TABLE>
The principal methods used by Laurel Savings to attract deposits include
the offering of a wide variety of services and accounts, competitive interest
rates, and convenient office locations and service hours. The Bank uses
traditional marketing methods to attract new customers and deposits, including
mass media advertising and direct mailings. The development of new deposit
accounts and services within the past several years has enhanced the Bank's
deposit gathering function. The Bank has also adopted a tiered pricing program
for its certificate accounts, providing higher rates of interest on its
long-term certificates in order to encourage depositors to invest in
certificates with longer maturities, thus reducing the interest-rate
sensitivity of the Bank's deposit portfolio.
The Bank's deposits are obtained primarily from persons who are residents
of Pennsylvania, particularly Allegheny and Butler counties. The Bank does not
advertise for deposits outside of Pennsylvania and management believes that an
insignificant amount of the Bank's deposits were held by nonresidents of
Pennsylvania at June 30, 1997. The Bank has not used brokers to obtain funds to
date and management of the Bank does not intend to utilize brokers to obtain
such deposits in the future.
The following table presents, by various interest rate categories, the
amounts of certificates of deposit at the dates indicated and the amounts at
June 30, 1997 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at June 30, 1997 Maturing
As of June 30, in the Year Ended June,
------------------------ ----------------------------------------------
1996 1997 1998 1999 2000 Thereafter
-------- -------- -------- -------- -------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
2.00% to 3.99% $ 847 $ -- $ -- $ -- $ -- $ --
4.00% to 5.99% 64,275 62,012 44,514 10,107 2,265 5,126
6.00% to 7.99% 26,810 38,683 20,738 7,502 5,110 5,783
8.00% to 9.99% 5,225 4,772 2,520 1,800 425 27
10.00% to 11.99% 230 2,520 -- -- -- --
------- -------- ------- ------- ------ -------
Total $97,387 $105,467 $67,772 $18,959 $7,800 $10,936
======= ======== ======= ======= ====== =======
</TABLE>
23
<PAGE> 25
The Bank has attempted to encourage such certificate holders to invest
the proceeds of their maturing certificates in longer term certificates of
deposit by offering commensurately higher interest rates in order to reduce the
vulnerability of the Bank to interest rate risk. To insure a continuity of this
trend, as well as to maintain adequate deposit levels, the Bank expects to
offer competitive rates relative to its marketplace. The Bank is confident that
by competitively pricing these certificates, balance levels deemed appropriate
by management can be achieved on a continuing basis. If necessary, the Bank
also has the capacity to borrow from the FHLB of Pittsburgh and from other
sources to maintain adequate liquidity.
As of June 30, 1997, certificates of deposit in amounts of $100,000 or
more in the Bank amounted to $3.6 million. The following table sets forth as of
June 30, 1997 the distribution of certificates of deposit of $100,000 or more
by time remaining to maturity.
<TABLE>
<CAPTION>
----------------------
Amount
----------------------
(In Thousands)
<S> <C>
Three months or less $1,034
Over three through six months 1,296
Over six though 12 months 620
Over 12 months 700
------
Total $3,650
======
</TABLE>
24
<PAGE> 26
The following table presents information concerning deposit accounts at
June 30, 1997, including the weighted average rate and the scheduled maturity
of certificates of deposit.
<TABLE>
<CAPTION>
% of Total Average
Amounts Deposits Rate
------------ ------------ ---------
(In Thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 27,690 15.8% 2.48%
Now accounts 23,819 13.6 1.11
MMDA's 18,043 10.3 2.38
-------- ----- -----
Total 69,552 39.7 1.98
-------- ----- -----
Certificates maturing by quarter:
September 30, 1997 17,106 9.8 5.13
December 31, 1997 16,887 9.6 5.80
March 31, 199 21,598 12.3 6.28
June 30, 1998 12,182 7.0 5.71
September 30, 1998 7,150 4.1 5.84
December 31, 1998 4,163 2.4 6.15
March 31, 1999 4,668 2.7 6.13
June 30, 1999 2,979 1.7 6.00
September 30, 1999 2,370 1.4 6.19
December 31, 1999 1,053 .6 5.88
March 31, 2000 1,829 1.0 6.13
June 30, 2000 2,548 1.5 6.09
Thereafter 10,934 6.2 6.00
-------- ----- -----
Total certificate accounts 105,467 60.3 5.86
-------- ----- -----
Total deposits $175,019 100.0% 4.32%
======== ===== =====
</TABLE>
BORROWINGS. Laurel Savings may obtain advances from the FHLB of
Pittsburgh upon the security of the capital stock of the FHLB which it owns,
deposits with the FHLB of Pittsburgh and certain of its home mortgages,
provided certain standards related to creditworthiness are met. Such advances
are made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. FHLB advances are generally
available to meet seasonal and other withdrawals of savings accounts and to
expand lending, as well as to aid the efforts of members to establish better
asset/liability management by extending the maturities of liabilities. At June
30, 1997, 1996 and 1995, the Bank had $11.0 million, $6.3 million and $2.0
million, respectively, of FHLB advances outstanding.
25
<PAGE> 27
The following table presents certain information regarding short-term
FHLB advances for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1997 1996 1995
----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $ 9,353 $ 5,122 $ 655
Maximum amount
outstanding at any month-
end during the period $ 11,046 $ 6,328 $ 2,000
Weighted average interest
rate during the period 5.66% 5.87% 7.07%
Amount outstanding at the
end of the period $ 11,044 $ 6,327 $ 2,000
Weighted average rate at the
end of the period 5.75% 5.52% 7.07%
</TABLE>
Many financial institutions obtain funds from sales of securities to
institutional investors under agreements to repurchase ("institutional
repurchase agreements"), which are considered borrowings. The Bank has not
utilized and has no present intention to utilize institutional repurchase
agreements as a source of funds.
SUBSIDIARIES
The Bank has one wholly owned subsidiary, Laurel Financial Services
Corporation ("LFSC"), which is the result of combining its former wholly owned
subsidiaries of All-Par Service Corporation and Pesa Service Corporation. LFSC
is currently inactive. At June 30, 1997, LFSC had no assets or liabilities.
26
<PAGE> 28
EMPLOYEES
The Bank had 42 full-time employees and 9 part-time employees as of
June 30, 1997. None of the employees are represented by a collective bargaining
agent, and the Bank believes it enjoys good relations with its personnel.
COMPETITION
The Bank's primary market area consists of Allegheny and Butler
counties, Pennsylvania, in the north suburban Pittsburgh area. Substantially
all of the Bank's savings deposits are received from residents of its primary
market area, and most of its loans are secured by properties in this area.
Laurel Savings faces substantial competition both in attracting
deposits and in making mortgage and other loans in its primary market area.
Competition for the origination of real estate loans principally comes from
other savings institutions, commercial banks and mortgage-banking companies
located in the Pittsburgh MSA. The Bank's most direct competition for deposits
has historically also come from other savings institutions, commercial banks
and credit unions located in the Pittsburgh MSA. In times of high interest
rates, Laurel Savings also encounters significant competition for investors'
funds from short-term money market securities and other corporate and
government securities.
Laurel Savings competes for loans principally through the use of
competitive interest rates and loan fees it charges on its loan programs.
Further, Laurel Savings believes it offers a high degree of professionalism and
quality in the services it provides borrowers and their real estate brokers. It
competes for deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours, and convenient branch locations with
interbranch deposit and withdrawal privileges at each.
27
<PAGE> 29
REGULATION
Set forth below is a brief description of certain laws and regulations
which together with the descriptions of laws and regulations contained
elsewhere herein, are deemed material to an investor's understanding of the
extent to which the Company and the Savings Bank are regulated. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. The Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is
subject to regulation and supervision by the Federal Reserve Board and the
Department. The Company is required to file annually a report of its operations
with, and will be subject to examination by, the Federal Reserve Board and the
Department.
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the
bank holding company are located unless specifically authorized by applicable
state law. Pennsylvania banking law permits the interstate acquisition of
banking institutions by bank holding companies on a regional and reciprocal
basis. See "- Interstate Acquisitions." No approval under the BHCA is required,
however, for a bank holding company already owning or controlling 50% of the
voting shares of a bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company
that is not a bank and from engaging in any business other than banking or
managing or controlling banks. Under the BHCA, the Federal Reserve Board is
authorized to approve the ownership of shares by a bank holding company in any
company, the activities of which the Federal Reserve Board has determined to be
so closely related to banking or to managing or controlling banks as to be a
proper incident thereto. In making such determinations, the Federal Reserve
Board is required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
28
<PAGE> 30
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier
services. The Federal Reserve Board also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies
generally consists of the sum of common stockholders' equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind
and amount of such stocks which may be included as Tier I capital), less
goodwill. Tier II capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as Tier I
capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential
and commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not (90 days or more)
past-due or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal
Reserve Board requires bank holding companies to maintain a minimum leverage
capital ratio of Tier I capital to total assets of 3.0%. Total assets for this
purpose does not include goodwill and any other intangible assets and
investments that the Federal Reserve Board determines should be deducted from
Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I
leverage capital ratio requirement is the minimum for the top-rated bank
holding companies without any supervisory, financial or operational weaknesses
or deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies will be expected to maintain Tier I
leverage capital ratios of at least 4.0% to 5.0% or more, depending on their
overall condition.
The Company is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
29
<PAGE> 31
COMMITMENTS TO AFFILIATED INSTITUTIONS. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances when it might
not do so absent such policy. The legality and precise scope of this policy is
unclear, however, in light of recent judicial precedent.
THE BANK
GENERAL. The Bank is incorporated under the Pennsylvania Banking Code
of 1965, as amended (the "Banking Code") and is subject to extensive regulation
and examination by the Department and by the FDIC, which insures its deposits
to the maximum extent permitted by law, and is subject to certain requirements
established by the Federal Reserve Board. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits,
the timing of the availability of deposited funds and the nature and amount of
and collateral for certain loans. There are periodic examinations by the
Department and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or the Congress
could have a material adverse impact on the Company, the Bank and their
operations.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and
are backed by the full faith and credit of the U.S. Government. As insurer, the
FDIC is authorized to conduct examination of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to
pose a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
The BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions in the lowest risk category. Deposit insurance premiums
from SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation
to eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders
of SAIF-assessable deposits pay a one-time special
30
<PAGE> 32
assessment to recapitalize the SAIF. The legislation also provided for the
merger of the BIF and the SAIF, with such merger being conditioned upon the
prior elimination of the thrift charter. Effective October 8, 1996, FDIC
regulations imposed a one-time special assessment equal to 65.7 basis points
for all SAIF-assessable deposits as of March 31, 1995, which was collected on
November 27, 1996.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective BIF and SAIF rates both range from zero basis points to 27 basis
points. From 1997 through 1999, FDIC-insured institutions will pay
approximately 1.3 basis points of their BIF-assessable deposits and 6.4 basis
points of their SAIF-assessable deposits to fund the Financing Corporation.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe of unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which would
result in termination of the Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I
leverage capital requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100 to 200 basis
points for all other state-chartered, non-member banks, which effectively will
increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0%
or more. Under the FDIC's regulation, highest-rated banks are those that the
FDIC determines are not anticipating or experiencing significant growth and
have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, which
are considered a strong banking organization and are rated composite 1 under
the Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit and relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-
31
<PAGE> 33
based capital standard for savings banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2 capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory
convertible securities, certain subordinated debt and intermediate preferred
stock and general allowances for loan and lease losses. Allowance for loan and
lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 1997, the
Bank met each of its capital requirements.
32
<PAGE> 34
The following table sets forth certain information concerning the
Bank's regulatory capital at June 30, 1997.
<TABLE>
<CAPTION>
------------ ----------- -----------
Tier 1 Tier 1
Tier 1 Risk- Risk-
Core Based Based
Capital Capital Capital
------------ ----------- -----------
<S> <C> <C> <C>
Equity Capital (1) $ 21,028 $ 21,028 $ 21,028
Less unrealized securities gains (206) (206) (206)
Plus general valuation allowances (2) -- -- 1,352
------- ------- -------
Total regulatory capital 20,822 20,822 22,174
Minimum required capital 8,403 4,327 8,655
------- ------- -------
Excess regulatory capital $ 12,419 $ 16,495 $ 13,519
======= ======= =======
Regulatory capital as a percentage (3) 9.91% 19.35% 20.61%
Minimum required capital percentage 4.00 4.00 8.00
------ ------ ------
Excess regulatory capital percentage 6.70% 15.35% 12.61%
====== ====== ======
</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
June 30, 1997.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total assets
of $210,082. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighed assets of $107,596.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially
the same as those defined by the FDIC.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state
33
<PAGE> 35
bank generally may not directly or indirectly acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank. An insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary, (ii) investing as a
limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if certain
requirements are met. In addition, an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements.
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal
and foreign laws. A Pennsylvania savings bank may locate or change the location
of its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less
frequently than once every two years. Although the Department may accept the
examinations and reports of the FDIC in lieu of the Department's examination,
the present practice is for the Department to conduct individual examinations.
The Department may order any savings bank to discontinue any violation of law
or unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause
at a hearing before the Department why such person should not be removed.
INTERSTATE ACQUISITIONS. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in Delaware, the District
of Columbia, Indiana, Kentucky, Maryland, New Jersey, Ohio, Virginia and West
Virginia (collectively, "regional institutions") to
34
<PAGE> 36
acquire the voting stock of, merge or consolidate with, or purchase assets and
assume liabilities of, a Pennsylvania-chartered savings bank, (collectively,
"Pennsylvania institutions") and (ii) the establishment of branches in
Pennsylvania by regional institutions, in each case subject to certain
conditions including reciprocal legislation in the state in which the regional
institution seeking entry into Pennsylvania is located permitting comparable
entry by Pennsylvania institutions and approval by the Pennsylvania Department
of Banking. The statute also provides for nationwide branching by
Pennsylvania-chartered savings banks and savings and loan associations, subject
to Pennsylvania Department of Banking approval and certain other conditions. Of
the states within the region, Delaware, Maryland, New Jersey, Ohio and West
Virginia currently have laws that permit Pennsylvania institutions to branch
into such states and/or acquire savings institutions located in such states.
MISCELLANEOUS. The Bank is subject to certain restrictions on loans to
the Company, on investments in the stock or securities thereof, on the taking
of such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The Bank
is also subject to certain restrictions on most types of transactions with the
Company, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms. In
addition, there will be various limitations on the distribution of dividends to
the Company by the Bank.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws
include substantial enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
35
<PAGE> 37
TAXATION
FEDERAL AND STATE TAXATION
The Company and Bank are subject to federal income tax under the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Company and
the Bank.
FISCAL YEAR. The Company and the Bank file consolidated federal
income tax returns on the basis of a fiscal year ending on June 30.
ACCRUAL METHOD OF ACCOUNTING. For federal income tax purposes, the
Company and the Bank currently reports its income and expenses on the accrual
basis method of accounting, for filing federal income tax returns.
BAD DEBT RESERVES. Savings institutions such as the Bank, which meet
certain definitional tests primarily relating to their assets and the nature of
their businesses, are permitted to establish a reserve for bad debts and to
make annual additions to the reserve. These additions may, within specified
formula limits, be deducted in arriving at the Bank's taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Bank's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by interests in real property) and all other
loans ("non-qualifying loans"). The deduction with respect to nonqualifying
loans must be computed under the experience method, which essentially allows a
deduction for the Bank's actual charge-offs while a deduction with respect to
qualifying loans may be computed using a percentage based on actual loss
experience or a percentage of taxable income. Reasonable additions to the
reserve for losses on nonqualifying loans must be based upon actual loss
experience and would reduce the current years addition to the reserve for
losses on qualifying real property loans, unless that addition is also
determined under the experienced method. The sum of the additions to each
reserve for each year is the Bank's annual bad debt deduction.
Under the experience method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum
of the loans outstanding at the close of those six years or (ii) the balance in
the reserve account at the close of the last taxable year prior to the most
recent adoption of the experience method or on December 31, 1969, whichever is
later (assuming that the loans outstanding have not declined since then) (the
"base year"). For taxable years beginning after 1987, the base year shall be
the last taxable year beginning before 1988.
Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and
with certain adjustments. The
36
<PAGE> 38
availability of the percentage of taxable income method has permitted a
qualifying savings institution to be taxed at a significantly lower maximum
effective marginal federal income tax rate rather than that applicable to
corporations in general. This resulted generally in a maximum effective
marginal federal income tax rate payable by a qualifying savings institution
fully able to use the maximum deduction permitted under the percentage of
taxable income method, in the absence of other factors affecting taxable
income, of 31.3%. As of June 30, 1997, at least 60% of the Bank's assets were
"qualifying assets" described in Section 7701(a)(19)(C) of the Code, and the
Bank anticipates that at least 60% of its assets will continue to be qualifying
assets in the immediate future. If this ceases to be the case, the Bank may be
required to restore some portion of its bad debt reserve to taxable income in
the future.
Under the percentage of taxable income method, the bad debt deduction
for an addition to the reserve for qualifying real property loans cannot exceed
the amount necessary to increase the balance in this reserve to an amount equal
to 6% of such loans outstanding at the end of the taxable year. Based on
experience, it is not expected that this restriction will be a limiting factor
in the immediate future. The bad debt deduction is also limited to the amount
which when added to the addition to the reserve for losses on nonqualifying
loans, equals the amount by which 12% of deposits at the close of the year
exceeds the sum of surplus, undivided profits and reserves at the beginning of
the year. It is not expected that these restrictions will be a limiting factor
for the Bank in the foreseeable future. In addition, the deduction for
qualifying real property loans is reduced by an amount equal to all or part of
the deduction for nonqualifying loans.
Recently enacted legislation (i) repeals the provision of the Code
which authorizes use of the percentage of taxable income method by qualifying
savings institutions to determine deductions for bad debts, effective for
taxable years beginning after 1995, and (ii) requires that a savings
institution recapture for tax purposes (i.e. take into income) over a six-year
period it applicable excess reserves, which for a thrift institution such as
the Bank which becomes a "small bank," as defined in the Code, generally is the
excess of the balance of its bad debt reserves as of the close of its last
taxable year beginning before January 1, 1996 over the balance of such reserves
as of the close of its last taxable year beginning before January 1, 1988,
which recapture would be suspended for any tax year that begins after December
31, 1995 and before January 1, 1998 (thus a maximum of two years) in which a
savings institution originates an amount of residential loans which is not less
than the average of the principal amount of such loans made by a savings
institution during its six most recent taxable years beginning before January
1, 1996. As an institution with less than $500.0 million in assets, the Bank
can elect to either use the experience method available to commercial banks of
this size or it can adopt the specific charge-off method applicable to "large
banks" (banks with total assets in excess of $500.0 million). The Company does
not believe that these provisions will have a material adverse affect on the
Company's financial condition or results of operations.
The above-reference legislation also repeals certain provisions of the
Code that only apply to thrift institutions to which Section 593 applies: (I)
the denial of a portion of certain tax credits to a thrift institution; (ii)
the special rules with respect to the foreclosure of property securing loans of
a thrift institution; (iii) the reduction in the dividends received deduction
of a thrift institution; and (iv) the ability of a thrift institution to use a
net operation loss to offset its income from a residual
37
<PAGE> 39
interest in a real estate mortgage investment conduit. It is not anticipated
that the repeal of these provisions will have a material adverse effect on the
Company's financial condition or results of operations.
DISTRIBUTIONS. If the Bank makes a distribution to stockholders, and
the distribution is treated as being from its accumulated bad debt reserves,
the distribution will cause the Bank to have additional taxable income. A
distribution to stockholders is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "nondividend distribution." A distribution in respect of
stock is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, exceeds the
Bank's current and post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a nondividend distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. The Code imposes the corporate minimum tax from an add-on
tax to an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally will apply to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and will be
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of the bad debt deduction
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax-exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other
than certain qualified bonds and (b) 75% of the excess (if any) of (i) 75% of
adjusted current earnings as defined in the Code, over (ii) AMTI (determined
without regard to this preference and prior to reduction by net operating
losses).
NET OPERATING LOSS CARRYOVERS. The Bank may carry back net operating
losses ("NOLS") to the preceding three taxable years and forward to the
succeeding 15 taxable years. Losses incurred by savings institutions in years
beginning after 1981 and before 1986 may be carried back ten years and forward
eight years. Losses attributable to years before 1982 may be carried back ten
years and forward five years.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate
net capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, however, if a corporation owns less than 20% of the stock of a
corporation distributing a dividend, it may deduct only 70% of dividends
received or accrued on its behalf. A corporation may deduct 100% of dividends
from a member of the same affiliated group of corporations.
Laurel Savings' federal income tax returns for its tax years beginning
after June 30, 1992 and subsequent periods are open under the statute of
limitations and are subject to review by the Internal Revenue Service.
38
<PAGE> 40
Recent Legislation. On August 10, 1993, the President signed the
Revenue Reconciliation Act of 1993 into law. This legislation contains wide
ranging revisions to the existing tax law, including increasing the effective
tax rate to 35% for corporations with taxable income in excess of $10 million,
and reducing the deductibility of meal and entertainment expenses to 50%. While
this revision of the tax law is not expected to have an immediate effect on the
Bank, two items with potential future impact are the ability to amortize
intangible business assets such as core deposit intangibles, and the
possibility of implementing mark-to market rules for certain securities held or
acquired by a broker/dealer, as defined by the Internal Revenue Code. At August
10, 1993, the Bank had no intangible business assets recorded, nor are any such
assets contemplated in the near term. In addition, regulations have not been
issued detailing the determination and implementation procedures for
mark-to-market accounting, for tax purposes, for certain investment securities.
As such, and pending the issuance of final regulations, the impact of this
legislation is not expected to have a material impact on the Bank's or
operations.
STATE TAXATION
The Company is subject to the Pennsylvania Corporate Net Income Tax
and Capital Stock and Franchise Tax. The Corporate Net Income Tax rate is
currently 12.25% and is imposed on the Company's unconsolidated taxable income
for federal purposes with certain adjustments. In general, the Capital Stock
Tax is a property tax imposed at a rate of 1.3% of a corporation's capital
stock value, which is determined in accordance with a fixed formula based an
average net income and net worth.
The Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act ("MITA"), which previously imposed a tax at the rate of
11.5% on the Bank's net earnings, determined in accordance with GAAP, as shown
on its books. For fiscal years beginning in 1983, and thereafter, net operating
losses may be carried forward and allowed as a deduction for three succeeding
years. MITA exempts the Bank from all other corporate taxes imposed by
Pennsylvania for state tax purposes, and from all local taxes imposed by
political subdivisions thereof, except taxes on real estate and real estate
transfers.
In calculating its income for purposes of the MITA, the Bank
previously included interest earned on obligations of the United States and the
Commonwealth of Pennsylvania. However, the Pennsylvania Supreme Court ruled in
1987 that such interest income did not need to be included in calculating
income for purposes of the MITA. The MITA tax rate is currently 11.5%.
39
<PAGE> 41
ITEM 2. PROPERTIES.
The following table sets forth certain information as of June 30, 1997
with respect to the offices of the Company and Laurel Savings.
<TABLE>
<CAPTION>
Net Book Value of Property or
Owned or Lease Leasehold Improvements as of
Location Leased Expiration Date June 30, 1997
- ------------------------------ ----------- ------------------ ---------------------------------
<S> <C> <C> <C>
Allegheny County:
363 Butler Street,
Etna Owned $ 167
1416 Mt. Royal Blvd.
Glenshaw Owned 188
1801 Jancey Street
Morningside, Pittsburgh Leased 2001(1) --
2724 Harts Run Road
Allison Park Owned 412
744 Little Deer Creek Road
Russellton Owned 101
Butler County:
125 West Main Street
Saxonburg Owned 216
</TABLE>
- -------------
(1) There is presently a five year option to extend this lease.
The Bank also has ATMs in its branch offices located at 363 Butler
Street, 744 Little Deer Creek Road, Russellton, 2724 Harts Run Road and 125
West Main Street. The Bank participates in the MAC(TM) and Cirrus(TM) shared
ATM network systems which provides customers with access to their deposits at
thousands of locations throughout Pennsylvania, the United States and many
foreign countries.
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Bank are not involved in any pending legal
proceedings other than routine, non-material legal proceedings occurring in the
ordinary course of business.
40
<PAGE> 42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from
pages 1 and 3 of the Company's Annual Report to Stockholders attached hereto as
Exhibit 13 (the "1997 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page
29 of the Company's 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from
pages 30 to 42 of the Company's 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from
pages 7 to 28 of the Company's 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
"Information With Respect to Nominees for Director, Directors Whose Terms
Continue and Executive Officers" in the Bank's Proxy Statement for the Annual
Meeting of Stockholders for fiscal 1997 ("Proxy Statement").
41
<PAGE> 43
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
"Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
"Principal Holders of Common Stock" and "Information With Respect to Nominees
For Director, Directors Whose Term Continues and Executive Officers" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13 hereto):
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 1997 and
1996
Consolidated Statements of Operations for the Years Ended June 30,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended June 30,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
42
<PAGE> 44
(3) The following exhibits are filed as part of this Form 10-K and
this list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Exhibits Page
--- -------- ----
<S> <C> <C>
3.1* Articles of Incorporation
3.2* Bylaws
4 * Common Stock Certificate
10.1* 1987 Stock Compensation Program
10.2** 1993 Key Employee Stock Compensation Program
10.3* 1993 Directors' Stock Option Plan
10.4 1996 Stock Option Plan
10.5 Employment agreement between Laurel Savings Bank and
Edwin R. Maus
11 Earnings Per Share Computation
13 1997 Annual Report to Stockholders
21 See "Business - Subsidiaries"
for the required information.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement
on Form S-4.
** Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1994.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1997.
(c) See (a)(3) above for all exhibits and the Exhibit Index.
(d) There are no other financial statements and Financial Statement
Schedules which were excluded from the 1997 Annual Report to Stockholders which
are required to be included herein.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Edwin R. Maus
------------------------
Date: September 29, 1997 Edwin R. Maus, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Arthur G. Borland Date: September 29, 1997
- ----------------------------------
Arthur G. Borland, Director
/s/ Richard J. Cessar Date: September 29, 1997
- ----------------------------------
Richard J. Cessar, Chairman of the Board
/s/ Annette D. Ganassi Date: September 29, 1997
- ----------------------------------
Annette D. Ganassi, Director
/s/ Richard S. Hamilton Date: September 29, 1997
- ----------------------------------
Richard S. Hamilton, Director
/s/ Harvey J. Haughton Date: September 29, 1997
- ----------------------------------
Harvey J. Haughton, Director
44
<PAGE> 46
/s/ Edwin R. Maus Date: September 29, 1997
- ----------------------------------
Edwin R. Maus, Director, President
and Chief Executive Officer
/s/ J. Harold Norris Date: September 29, 1997
- ----------------------------------
J. Harold Norris, Director
/s/ John A. Howard, Jr. Date: September 29, 1997
- ----------------------------------
John A. Howard, Jr., Senior Vice President,
Chief Financial Officer and Corporate Secretary/
Treasurer
45
<PAGE> 1
Exhibit 10.4
LAUREL CAPITAL GROUP, INC.
1996 STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
Laurel Capital Group, Inc. (the "Corporation") hereby establishes this
1996 Stock Option Plan (the "Plan") upon the terms and conditions hereinafter
stated.
ARTICLE II
PURPOSE OF THE PLAN
The purpose of this Plan is to improve the growth and profitability of
the Corporation and its Subsidiary Companies by providing Employees and
Non-Employee Directors with a proprietary interest in the Corporation as an
incentive to contribute to the success of the Corporation and its Subsidiary
Companies, and rewarding those Employees for outstanding performance and the
attainment of targeted goals. All Incentive Stock Options issued under this
Plan are intended to comply with the requirements of Section 422 of the Code,
and the regulations thereunder, and all provisions hereunder shall be read,
interpreted and applied with that purpose in mind.
ARTICLE III
DEFINITIONS
3.01 "Award" means an Option or Stock Appreciation Right granted
pursuant to the terms of this Plan.
3.02 "Bank" means Laurel Savings Bank, the wholly owned subsidiary of
the Corporation.
3.03 "Board" means the Board of Directors of the Corporation.
3.04 "Code" means the Internal Revenue Code of 1986, as amended.
3.05 "Committee" means a committee of two or more directors appointed
by the Board pursuant to Article IV hereof, none of whom shall be an Officer or
Employee of the Corporation.
3.06 "Common Stock" means shares of the common stock, $.01 par value
per share, of the Corporation.
3.07 "Disability" means any physical or mental impairment which
qualifies an Employee for disability benefits under the applicable long-term
disability plan maintained by the Corporation or a Subsidiary Company, or, if
no such plan applies, which would qualify such Employee for disability benefits
under the Federal Social Security System.
3.08 "Effective Date" means the day upon which the Board approves this
Plan.
3.09 "Employee" means any person who is employed by the Corporation or
a Subsidiary Company, or is an Officer of the Corporation or a Subsidiary
Company, but not including directors who are not also Officers of or otherwise
employed by the Corporation or a Subsidiary Company.
1
<PAGE> 2
3.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
3.11 "Fair Market Value" shall be equal to the fair market value per
share of the Corporation's Common Stock on the date an Award is granted. For
purposes hereof, the Fair Market Value of a share of Common Stock shall be the
closing sale price of a share of Common Stock on the date in question (or, if
such day is not a trading day in the U.S. markets, on the nearest preceding
trading day), as reported with respect to the principal market (or the
composite of the markets, if more than one) or national quotation system in
which such shares are then traded, or if no such closing prices are reported,
the mean between the high bid and low asked prices that day on the principal
market or national quotation system then in use, or if no such quotations are
available, the price furnished by a professional securities dealer making a
market in such shares selected by the Committee.
3.12 "Incentive Stock Option" means any Option granted under this Plan
which the Board intends (at the time it is granted) to be an incentive stock
option within the meaning of Section 422 of the Code or any successor thereto.
3.13 "Non-Employee Director" means a member of the Board who is not an
Officer or Employee of the Corporation or any Subsidiary Company.
3.14 "Non-Qualified Option" means any Option granted under this Plan
which is not an Incentive Stock Option.
3.15 "Officer" means an Employee whose position in the Corporation or
Subsidiary Company is that of a corporate officer, as determined by the Board.
3.16 "Option" means a right granted under this Plan to purchase Common
Stock.
3.17 "Optionee" means an Employee or Non-Employee Director or former
Employee or Non-Employee Director to whom an Option is granted under the Plan.
3.18 "Retirement" means a termination of employment upon or after
attainment of age sixty-five (65) or such earlier age as may be specified in
any applicable qualified pension benefit plan maintained by the Corporation or
a Subsidiary Company.
3.19 "Stock Appreciation Right" means a right to surrender an Option in
consideration for a payment by the Corporation in cash and/or Common Stock, as
provided in the discretion of the Committee in accordance with Section 8.10.
3.20 "Subsidiary Companies" means those subsidiaries of the
Corporation, including the Bank, which meet the definition of "subsidiary
corporations" set forth in Section 425(f) of the Code, at the time of granting
of the Option in question.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 DUTIES OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, as appointed from time to time by the Board
pursuant to Section 4.02. The Committee shall have the authority in its
absolute discretion to adopt, amend and rescind such rules, regulations and
procedures as, in its opinion, may be advisable in the administration of the
Plan, including, without limitation, rules, regulations and procedures which
(i) deal with satisfaction of an Optionee's tax withholding obligation pursuant
to Section 12.02 hereof, (ii) include arrangements to facilitate the Optionee's
ability to borrow funds for payment of the exercise
2
<PAGE> 3
or purchase price of an Award, if applicable, from securities brokers and
dealers, and (iii) include arrangements which provide for the payment of some
or all of such exercise or purchase price by delivery of previously-owned
shares of Common Stock or other property and/or by withholding some of the
shares of Common Stock which are being acquired. The interpretation and
construction by the Committee of any provisions of the Plan, any rule,
regulation or procedure adopted by it pursuant thereto or of any Award shall be
final and binding.
4.02 APPOINTMENT AND OPERATION OF THE COMMITTEE. The members of the
Committee shall be appointed by, and will serve at the pleasure of, the Board.
The Board from time to time may remove members from, or add members to, the
Committee, provided the Committee shall continue to consist of two or more
members of the Board, none of whom shall be an Officer or Employee of the
Corporation. The Committee shall act by vote or written consent of a majority
of its members. Subject to the express provisions and limitations of the Plan,
the Committee may adopt such rules, regulations and procedures as it deems
appropriate for the conduct of its affairs. It may appoint one of its members
to be chairman and any person, whether or not a member, to be its secretary or
agent. The Committee shall report its actions and decisions to the Board at
appropriate times but in no event less than one time per calendar year.
4.03 REVOCATION FOR MISCONDUCT. The Committee may by resolution
immediately revoke, rescind and terminate any Option, or portion thereof, to
the extent not yet vested, or any Stock Appreciation Right, to the extent not
yet exercised, previously granted or awarded under this Plan to an Employee who
is discharged from the employ of the Corporation or a Subsidiary Company for
cause, which, for purposes hereof, shall mean termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order. Options
granted to a Non-Employee Director who is removed for cause pursuant to the
Corporation's Articles of Incorporation shall terminate as of the effective
date of such removal.
4.04 LIMITATION ON LIABILITY. No member of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan, any rule, regulation or procedure adopted by it pursuant thereto or any
Awards granted under it. If a member of the Committee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Corporation shall, subject to the requirements of
applicable laws and regulations, indemnify such member against all liabilities
and expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Corporation and its
Subsidiary Companies and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
4.05 COMPLIANCE WITH LAW AND REGULATIONS. All Awards granted hereunder
shall be subject to all applicable federal and state laws, rules and
regulations and to such approvals by any government or regulatory agency as may
be required. The Corporation shall not be required to issue or deliver any
certificates for shares of Common Stock prior to the completion of any
registration or qualification of or obtaining of consents or approvals with
respect to such shares under any Federal or state law or any rule or regulation
of any government body, which the Corporation shall, in its sole discretion,
determine to be necessary or advisable. Moreover, no Option or Stock
Appreciation Right may be exercised if such exercise would be contrary to
applicable laws and regulations.
4.06 RESTRICTIONS ON TRANSFER. The Corporation may place a legend upon
any certificate representing shares acquired pursuant to an Award granted
hereunder noting that the transfer of such shares may be restricted by
applicable laws and regulations.
3
<PAGE> 4
ARTICLE V
ELIGIBILITY
Awards may be granted to such Employees or Non-Employee Directors of
the Corporation and its Subsidiary Companies as may be designated from time to
time by the Committee. Awards may not be granted to individuals who are not
Employees or Non-Employee Directors of either the Corporation or its Subsidiary
Companies. Non-Employee Directors shall be eligible to receive only
Non-Qualified Options pursuant to Section 8.02 of the Plan.
ARTICLE VI
COMMON STOCK COVERED BY THE PLAN
6.01 OPTION SHARES. The aggregate number of shares of Common Stock
which may be issued pursuant to this Plan, subject to adjustment as provided in
Article IX, shall be 75,562 which is equal to 4.99% of the issued and
outstanding shares of Common Stock as of September 30, 1996, the voting record
date for the 1996 Annual Meeting. None of such shares shall be the subject of
more than one Award at any time, but if an Option as to any shares is
surrendered before exercise, or expires or terminates for any reason without
having been exercised in full, or for any other reason ceases to be
exercisable, the number of shares covered thereby shall again become available
for grant under the Plan as if no Awards had been previously granted with
respect to such shares. Notwithstanding the foregoing, if an Option is
surrendered in connection with the exercise of a Stock Appreciation Right, the
number of shares covered thereby shall not be available for grant under the
Plan.
6.02 SOURCE OF SHARES. The shares of Common Stock issued under the Plan
may be authorized but unissued shares, treasury shares or shares purchased by
the Corporation on the open market or from private sources for use under the
Plan.
ARTICLE VII
DETERMINATION OF
AWARDS, NUMBER OF SHARES, ETC.
The Committee shall, in its discretion, determine from time to time
which Employees will be granted Awards under the Plan, the number of shares of
Common Stock subject to each Award, whether each Option will be an Incentive
Stock Option or a Non-Qualified Stock Option and the exercise price of an
Option. In making all such determinations there shall be taken into account the
duties, responsibilities and performance of each respective Employee, his
present and potential contributions to the growth and success of the
Corporation, his salary and such other factors as the Committee shall deem
relevant to accomplishing the purposes of the Plan. Non-Employee Directors
shall be eligible to receive only Non-Qualified Options pursuant to Section
8.02 of the Plan.
ARTICLE VIII
OPTIONS AND STOCK APPRECIATION RIGHTS
Each Option granted hereunder shall be on the following terms and
conditions:
8.01 STOCK OPTION AGREEMENT. The proper Officers on behalf of the
Corporation and each Optionee shall execute a Stock Option Agreement which
shall set forth the total number of shares of Common Stock to which it
pertains, the exercise price, whether it is a Non-Qualified Option or an
Incentive Stock Option, and such other terms, conditions, restrictions and
privileges as the Committee in each instance shall deem appropriate,
4
<PAGE> 5
provided they are not inconsistent with the terms, conditions and provisions of
this Plan. Each Optionee shall receive a copy of his executed Stock Option
Agreement.
8.02 (A) INITIAL GRANTS TO NON-EMPLOYEE DIRECTORS. Non-Qualified
Options to purchase shares of Common Stock shall be initially granted to each
Non-Employee Director as of the day that the Plan is approved by stockholders
of the Corporation, effective at such time and with a per share exercise price
equal to the Fair Market Value of a share of Common Stock on such date.
(B) VESTING AND EXERCISE OF OPTIONS. Non-Qualified Options
granted to Non-Employee Directors shall be vested and exercisable over three
years at the rate of 33.3% per year commencing on the date of grant.
8.03 OPTION EXERCISE PRICE.
(A) INCENTIVE STOCK OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of an Incentive Stock
Option shall be no less than one hundred percent (100%) of the Fair Market
Value of a share of Common Stock at the time such Incentive Stock Option is
granted, except as provided in Section 8.10(b).
(B) NON-QUALIFIED OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of a Non-Qualified Option
shall be established by the Committee at the time of grant, but in no event
shall be less than the greater of (i) the par value or (ii) one hundred percent
(100%) of the Fair Market Value of a share of Common Stock at the time such
Non-Qualified Option is granted.
8.04 VESTING AND EXERCISE OF OPTIONS.
(A) GENERAL RULES. Incentive Stock Options and Non-Qualified
Options granted to Employees shall become vested and exercisable at the rate,
to the extent and subject to such limitations as may be specified by the
Committee, provided, however, that in the case of any Option exercisable within
the first six months following the date the Option is granted, the shares of
Common Stock received upon the exercise of such Option may not be sold or
disposed of by the Optionee for the first six months following the date of
grant. Notwithstanding the foregoing, no vesting shall occur on or after an
Optionee's employment or service with the Corporation and all Subsidiary
Companies is terminated for any reason other than his death or Disability. In
determining the number of shares of Common Stock with respect to which Options
are vested and/or exercisable, fractional shares will be rounded up to the
nearest whole number if the fraction is 0.5 or higher, and down if it is less.
(B) ACCELERATED VESTING UPON DEATH, DISABILITY OR RETIREMENT.
Unless the Committee shall specifically state otherwise at the time an Option
is granted, all Options granted under this Plan shall become vested and
exercisable in full on the date an Optionee terminates his employment or
service with the Corporation or a Subsidiary Company because of his death,
Disability or Retirement.
(C) ACCELERATED VESTING FOR CHANGES IN CONTROL. Notwithstanding
the general rule described in Section 8.04(a), all outstanding Options shall
become immediately vested and exercisable in the event there is a change in
control of the Corporation. A "change in control of the Corporation" for this
purpose shall mean a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Exchange Act, or any successor thereto, whether or not the
Corporation in fact is required to comply with Regulation 14A thereunder.
5
<PAGE> 6
8.05 DURATION OF OPTIONS.
(A) GENERAL RULE. Except as provided in Sections 8.05(b) and
8.10, each Option or portion thereof granted to Employees shall be exercisable
at any time on or after it vests and becomes exercisable until the earlier of
(i) ten (10) years after its date of grant or (ii) three (3) months after the
date on which the Optionee ceases to be employed by the Corporation and all
Subsidiary Companies, unless the Committee in its discretion decides at the
time of grant to extend such period of exercise upon termination of employment
or service from three (3) months to a period not exceeding five (5) years. Each
Option or portion thereof granted to Non-Employee Directors shall be
exercisable at any time on or after it vests until ten (10) years after the
date of grant.
(B) EXCEPTION FOR TERMINATION DUE TO DEATH, DISABILITY OR
RETIREMENT. If an Employee dies while in the employ or service of the
Corporation or a Subsidiary Company or terminates employment or service with
the Corporation or a Subsidiary Company as a result of Disability or Retirement
without having fully exercised his Options, the Optionee or the executors,
administrators, legatees or distributees of his estate shall have the right,
during the twelve-month period following the earlier of his death, Disability
or Retirement, to exercise such Options to the extent vested on the date of
such death, Disability or Retirement. If a Non- Employee Director dies while
serving as a Non-Employee Director or within three (3) years following the
termination of service as a Non-Employee Director as a result of Disability,
Retirement or resignation without fully exercising his Options, the
Non-Employee Director's executors, administrators, legatees or distributees of
his estate shall have the right, during the twelve-month period following such
death, to exercise such Options. In no event, however, shall any Option be
exercisable more than ten (10) years from the date it was granted.
8.06 NONASSIGNABILITY. Options shall not be transferable by an Optionee
except by will or the laws of descent or distribution, and during an Optionee's
lifetime shall be exercisable only by such Optionee or the Optionee's guardian
or legal representative.
8.07 MANNER OF EXERCISE. Options may be exercised in part or in whole
and at one time or from time to time. The procedures for exercise shall be set
forth in the written Stock Option Agreement provided for in Section 8.01 above.
8.08 PAYMENT FOR SHARES. Payment in full of the purchase price for
shares of Common Stock purchased pursuant to the exercise of any Option shall
be made to the Corporation upon exercise of the Option. All shares sold under
the Plan shall be fully paid and nonassessable. Payment for shares may be made
by the Optionee in cash or, at the discretion of the Committee, by delivering
shares of Common Stock (including shares acquired pursuant to the exercise of
an Option) or other property equal in Fair Market Value to the purchase price
of the shares to be acquired pursuant to the Option, by withholding some of the
shares of Common Stock which are being purchased upon exercise of an Option, or
any combination of the foregoing. Notwithstanding the foregoing, payment may
also be made by delivering a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the Corporation the
amount of sale or loan proceeds to pay the exercise price.
8.09 VOTING AND DIVIDEND RIGHTS. No Optionee shall have any voting or
dividend rights or other rights of a stockholder in respect of any shares of
Common Stock covered by an Option prior to the time that his name is recorded
on the Corporation's stockholder ledger as the holder of record of such shares
acquired pursuant to an exercise of an Option.
8.10 ADDITIONAL TERMS APPLICABLE TO INCENTIVE STOCK OPTIONS. All
Options issued under the Plan as Incentive Stock Options will be subject, in
addition to the terms detailed in Sections 8.01 to 8.09 above, to those
contained in this Section 8.10.
6
<PAGE> 7
(A) Notwithstanding any contrary provisions contained elsewhere
in this Plan and as long as required by Section 422 of the Code, the aggregate
Fair Market Value, determined as of the time an Incentive Stock Option is
granted, of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year, under
this Plan and stock options that satisfy the requirements of Section 422 of the
Code under any other stock option plan or plans maintained by the Corporation
(or any parent or Subsidiary Company), shall not exceed $100,000.
(B) LIMITATION ON TEN PERCENT STOCKHOLDERS. The price at which
shares of Common Stock may be purchased upon exercise of an Incentive Stock
Option granted to an individual who, at the time such Incentive Stock Option is
granted, owns, directly or indirectly, more than ten percent (10%) of the total
combined voting power of all classes of stock issued to stockholders of the
Corporation or any Subsidiary Company, shall be no less than one hundred and
ten percent (110%) of the Fair Market Value of a share of the Common Stock of
the Corporation at the time of grant, and such Incentive Stock Option shall by
its terms not be exercisable after the earlier of the date determined under
Section 8.04 or the expiration of five (5) years from the date such Incentive
Stock Option is granted.
(C) NOTICE OF DISPOSITION; WITHHOLDING; ESCROW. An Optionee
shall immediately notify the Corporation in writing of any sale, transfer,
assignment or other disposition (or action constituting a disqualifying
disposition within the meaning of Section 421 of the Code) of any shares of
Common Stock acquired through exercise of an Incentive Stock Option, within two
(2) years after the grant of such Incentive Stock Option or within one (1) year
after the acquisition of such shares, setting forth the date and manner of
disposition, the number of shares disposed of and the price at which such
shares were disposed of. The Corporation shall be entitled to withhold from any
compensation or other payments then or thereafter due to the Optionee such
amounts as may be necessary to satisfy any withholding requirements of Federal
or state law or regulation and, further, to collect from the Optionee any
additional amounts which may be required for such purpose. The Committee may,
in its discretion, require shares of Common Stock acquired by an Optionee upon
exercise of an Incentive Stock Option to be held in an escrow arrangement for
the purpose of enabling compliance with the provisions of this Section 8.10(c).
8.11 STOCK APPRECIATION RIGHTS.
(A) GENERAL TERMS AND CONDITIONS. The Committee may, but shall
not be obligated to, authorize the Corporation, on such terms and conditions as
it deems appropriate in each case, to grant rights to Optionees to surrender an
exercisable Option, or any portion thereof, in consideration for the payment by
the Corporation of an amount equal to the excess of the Fair Market Value of
the shares of Common Stock subject to the Option, or portion thereof,
surrendered over the exercise price of the Option with respect to such shares
(any such authorized surrender and payment being hereinafter referred to as a
"Stock Appreciation Right"). Such payment, at the discretion of the Committee,
may be made in shares of Common Stock valued at the then Fair Market Value
thereof, or in cash, or partly in cash and partly in shares of Common Stock.
The terms and conditions set with respect to a Stock Appreciation Right
may include (without limitation), subject to other provisions of this Section
8.11 and the Plan, the period during which, date by which or event upon which
the Stock Appreciation Right may be exercised; the method for valuing shares of
Common Stock for purposes of this Section 8.11; a ceiling on the amount of
consideration which the Corporation may pay in connection with exercise and
cancellation of the Stock Appreciation Right; and arrangements for income tax
withholding. The Committee shall have complete discretion to determine whether,
when and to whom Stock Appreciation Rights may be granted. Notwithstanding the
foregoing, the Corporation may not permit the exercise of a Stock Appreciation
Right issued pursuant to this Plan until this Plan has been outstanding for at
least six months from the date of grant.
(B) TIME LIMITATIONS. If a holder of a Stock Appreciation Right
terminates service with the Corporation as an Officer or Employee, the Stock
Appreciation Right may be exercised only within the period,
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if any, within which the Option to which it relates may be exercised.
Notwithstanding the foregoing, any election by an Optionee to exercise the
Stock Appreciation Rights provided in this Plan shall be made during the period
beginning on the third business day following the release for publication of
quarterly or annual financial information required to be prepared and
disseminated by the Corporation pursuant to the requirements of the Exchange
Act and ending on the twelfth business day following such date. The required
release of information shall be deemed to have been satisfied when the
specified financial data appears on or in a wire service, financial news
service or newspaper of general circulation or is otherwise first made publicly
available.
(C) EFFECTS OF EXERCISE OF STOCK APPRECIATION RIGHTS OR OPTIONS.
Upon the exercise of a Stock Appreciation Right, the number of shares of Common
Stock available under the Option to which it relates shall decrease by a number
equal to the number of shares for which the Stock Appreciation Right was
exercised. Upon the exercise of an Option, any related Stock Appreciation Right
shall terminate as to any number of shares of Common Stock subject to the Stock
Appreciation Right that exceeds the total number of shares for which the Option
remains unexercised.
(D) TIME OF GRANT. A Stock Appreciation Right may be granted
concurrently with the Option to which it relates or at any time thereafter
prior to the exercise or expiration of such Option.
(E) NON-TRANSFERABLE. The holder of a Stock Appreciation Right
may not transfer or assign the Stock Appreciation Right otherwise than by will
or in accordance with the laws of descent and distribution, and during a
holder's lifetime a Stock Appreciation Right may be exercisable only by the
holder.
ARTICLE IX
ADJUSTMENTS FOR CAPITAL CHANGES
The aggregate number of shares of Common Stock available for issuance
under this Plan, the number of shares to which any Award relates and the
exercise price per share of Common Stock under any Option shall be
proportionately adjusted for any increase or decrease in the total number of
outstanding shares of Common Stock issued subsequent to the effective date of
this Plan resulting from a split, subdivision or consolidation of shares or any
other capital adjustment, the payment of a stock dividend, or other increase or
decrease in such shares effected without receipt or payment of consideration by
the Corporation. If, upon a merger, consolidation, reorganization, liquidation,
recapitalization or the like of the Corporation, the shares of the
Corporation's Common Stock shall be exchanged for other securities of the
Corporation or of another corporation, each recipient of an Award shall be
entitled, subject to the conditions herein stated, to purchase or acquire such
number of shares of Common Stock or amount of other securities of the
Corporation or such other corporation as were exchangeable for the number of
shares of Common Stock of the Corporation which such optionees would have been
entitled to purchase or acquire except for such action, and appropriate
adjustments shall be made to the per share exercise price of outstanding
Options.
ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
The Board may, by resolution, at any time terminate or amend the Plan
with respect to any shares of Common Stock as to which Awards have not been
granted, subject to any required stockholder approval or any stockholder
approval which the Board may deem to be advisable for any reason, such as for
the purpose of obtaining or retaining any statutory or regulatory benefits
under tax, securities or other laws or satisfying any applicable stock exchange
listing requirements. The Board may not, without the consent of the holder of
an Award, alter or impair any Award previously granted or awarded under this
Plan as specifically authorized herein. Notwithstanding anything contained in
this Plan to the contrary, the provisions of Articles V, VII and VIII of this
Plan relating to Awards granted to Non-Employee Directors shall not be amended
more than once
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every six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules and
regulations promulgated under such statutes.
ARTICLE XI
EMPLOYMENT RIGHTS
Neither the Plan nor the grant of any Awards hereunder nor any action
taken by the Committee or the Board in connection with the Plan shall create
any right on the part of any Employee or Non-Employee Director of the
Corporation or a Subsidiary Company to continue in such capacity.
ARTICLE XII
WITHHOLDING
12.01 TAX WITHHOLDING. The Corporation may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes, and if the amount of such cash payment is
insufficient, the Corporation may require the Optionee to pay to the
Corporation the amount required to be withheld as a condition to delivering the
shares acquired pursuant to an Award. The Corporation also may withhold or
collect amounts with respect to a disqualifying disposition of shares of Common
Stock acquired pursuant to exercise of an Incentive Stock Option, as provided
in Section 8.10(c).
12.02 METHODS OF TAX WITHHOLDING. The Committee is authorized to adopt
rules, regulations or procedures which provide for the satisfaction of an
Optionee's tax withholding obligation by the retention of shares of Common
Stock to which the Employee would otherwise be entitled pursuant to an Award
and/or by the Optionee's delivery of previously-owned shares of Common Stock or
other property.
ARTICLE XIII
EFFECTIVE DATE OF THE PLAN; TERM
13.01 EFFECTIVE DATE OF THE PLAN. This Plan shall become effective on
the Effective Date; however, no Awards may be granted hereunder unless this
Plan is approved by the requisite vote of the holders of the outstanding voting
shares of the Corporation at a meeting of stockholders of the Corporation held
within twelve (12) months of the Effective Date.
13.02 TERM OF PLAN. Unless sooner terminated, this Plan shall remain in
effect for a period of ten (10) years ending on the tenth anniversary of the
Effective Date. Termination of the Plan shall not affect any Awards previously
granted and such Awards shall remain valid and in effect until they have been
fully exercised or earned, are surrendered or by their terms expire or are
forfeited.
ARTICLE XIV
MISCELLANEOUS
14.01 GOVERNING LAW. To the extent not governed by Federal law, this
Plan shall be construed under the laws of the Commonwealth of Pennsylvania.
14.02 PRONOUNS. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun, and the singular shall include the plural.
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EXHIBIT 10.5
AGREEMENT
THIS AGREEMENT is effective as of the 8th day of February 1997,
between Laurel Capital Group, Inc. (the "Corporation"), a
Pennsylvania-chartered bank holding company, and Laurel Savings Bank (the
"Bank" ), a Pennsylvania-chartered savings bank and a wholly owned subsidiary
of the Corporation (collectively the "Employers"), and Edwin R. Maus (the
"Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and
the Bank, and the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under certain specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
For purposes of this paragraph, no act or failure to act on the Executive's
part shall be considered "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Employers.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the
<PAGE> 2
2
Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor
thereto, whether or not the Corporation is registered under the Exchange Act;
provided that, without limitation, such a change in control shall be deemed to
have occurred if (A) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Corporation or the Bank representing 25% or more of the combined voting
power of the Corporation's or the Bank's then outstanding securities; or (B)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Corporation or the Bank
cease for any reason to constitute at least a majority thereof unless the
election, or the nomination for election by stockholders, of each new director
was approved by a vote of at least two thirds of the directors then still in
office who were directors at the beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination
is given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits
under the applicable long-term disability plan maintained by the Employers or
any subsidiary or, if no such plan applies, which would qualify the Executive
for disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following
a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, the failure to elect
or to re-elect or to appoint or to re-appoint the Executive to the
offices of President and Chief Executive Officer of the Employers or a
material adverse change made by the Employers in the Executive's
functions, duties or responsibilities as President and Chief Executive
Officer of the Employers immediately prior to a Change in Control of
the Corporation;
<PAGE> 3
3
(ii) Without the Executive's express written consent, a reduction by the
Employers in the Executive's Base Salary as the same may be increased
from time to time or, except to the extent permitted by Section 3(b)
hereof, a reduction in the package of fringe benefits provided to the
Executive, taken as a whole;
(iii) The principal executive office of the Employers is relocated outside
of the Pittsburgh, Pennsylvania metropolitan area or, without the
Executive's express written consent, the Employers require the
Executive to be based anywhere other than an area in which the
Employer's principal executive office is located, except for required
travel on business of the Employers to an extent substantially
consistent with the Executive's present business travel obligations;
(iv) Any purported termination of the Executive's employment for Cause,
Disability or Retirement which is not effected pursuant to a Notice of
Termination satisfying the requirements of paragraph (i) below; or
(v) The failure by the Employers to obtain the assumption of and agreement
to perform this Agreement by any successor as contemplated in Section
9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
a written "Notice of Termination" to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
that thirty (30) nor more that ninety (90) days after such Notice of
Termination is given, except in the case of the Employer's termination of
Executive's employment for Cause; and (iv) is given in the manner specified in
Section 10 hereof.
(j) RETIREMENT. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Employee in accordance with the Employers' retirement policies, including early
retirement, generally
<PAGE> 4
4
applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as President and Chief
Executive Officer of the Corporation and President and Chief Executive Officer
of the Bank and Executive hereby accepts said employment and agrees to render
such services to the Employers on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall be for three
years, commencing on the date of this Agreement and, subject to the
requirements of the succeeding sentence, shall be deemed automatically, without
further action, to extend for an additional year on each annual anniversary of
the date of this Agreement. Prior to the anniversary of the date of this
Agreement and each annual anniversary thereafter, the Board of Directors of the
Employers shall consider and review (with appropriate corporate documentation
thereof, and after taking into account all relevant factors, including the
Executive's performance hereunder) extension of the term under this Agreement,
and the term shall continue to extend in the manner set forth above unless
either the Board of Directors does not approve such extension and provides
written notice to the Executive of such event or the Executive gives written
notice to the Employers of the Executive's election not to extend the term, in
each case with such written notice to be given not less than thirty (30) days
prior to any such anniversary date. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employers as may be consistent with his titles
and from time to time assigned to him by the Employers' Boards of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $128,000 per year
("Base Salary"), which may be increased from time to time in such amounts as
may be determined by the Boards of Directors of the Employers, and may not be
decreased without the Executive's express written consent. In addition to his
Base Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Board of Directors of
the Employers.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges
<PAGE> 5
5
given to employees and executives of the Employers, to the extent commensurate
with his then duties and responsibilities, as fixed by the Boards of Directors
of the Employers. The Employers shall not make any changes in such plans,
benefits or privileges which would adversely affect Executive's rights or
benefits thereunder, unless such change occurs pursuant to a program applicable
to all executive officers of the Employers and does not result in a
proportionately greater adverse change in the rights of or benefits to
Executive as compared with any other executive officer of the Employers.
Nothing paid to Executive under any plan or arrangement presently in effect or
made available in the future shall be deemed to be in lieu of the salary
payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time
to time by the Board of Directors of the Employers, which shall in no event be
less than four weeks per annum. Executive shall not be entitled to receive any
additional compensation from the Employers for failure to take a vacation.
Executive shall be able to accumulate unused vacation time from one year to the
next, not to exceed eight (8) weeks.
(d) During the term of this Agreement, including any renewal thereof,
the Employers shall provide the Executive with a full-sized, four-door
automobile for the Executive's use, which automobile shall be replaced during
the term hereof and any renewal thereof no less frequently than every three
years. The Executive may purchase the Employer-provided automobile at fair
market value.
(e) The Employers shall provide medical coverage for the benefit of
the Executive and his spouse until the Executive shall have attained the age of
65; furthermore, in the event of the death of the Executive prior to attaining
age 65, the Employers shall provide the Executive's spouse with said medical
coverage until such spouse is eligible for state or federal government
subsidized medical benefits, but in no event shall such spouse be entitled to
said medical coverage after attaining age 65.
4. EXPENSES. The Employers shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance or in connection with the business of the Employers, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Employers.
If such expenses are paid in the first instance by the
<PAGE> 6
6
Executive, the Employers shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employers shall have the right, at any time upon prior Notice
of Termination, to terminate the Executive's employment hereunder for any
reason, including without limitation termination for Cause, Disability or
Retirement, and the Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by
the Employers for Cause, Disability or Retirement or in the event of the
Executive's death, or (ii) Executive terminates his employment hereunder other
than for Good Reason, the Executive shall have no right pursuant to the terms
of this Agreement to compensation or other benefits for any period after the
applicable Date of Termination except as otherwise provided herein.
(c)(i) In the event that the Executive's employment is terminated by
the Employers for other than Cause, Disability, Retirement or the Executive's
death, or such employment is terminated by the Executive due to a material
breach of this Agreement by the Employers which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Employers, and as of the Executive's Date of Termination
no Change in Control of the Corporation has occurred, no written agreement
which contemplated a Change in Control of the Corporation and which still is in
effect has been entered into by either or both of the Employers and no
discussions and/or negotiations are being conducted which relate to the same,
then the Employers shall, subject to the provisions of Section 6 hereof, if
applicable:
(A) pay to the Executive, in twelve (12) equal monthly
installments beginning with the first business day of the
month following the Date of Termination, an aggregate cash
severance amount equal to the Executive's Base Salary as of
his Date of Termination, and
(B) maintain and provide for a period ending at the earlier
of (i) the expiration of twelve (12) months from the
Executive's Date of Termination or (ii) the date of the
Executive's full-time employment by another employer
(provided that the Executive is entitled under the terms of
such employment to benefits substantially similar to those
described in this subparagraph (B)), at same relative cost to
the Executive as paid thereby
<PAGE> 7
7
prior to the Date of Termination, the Executive's continued
participation in all group insurance, life insurance, health
and accident, disability and other employee benefit plans,
programs and arrangements in which the Executive was entitled
to participate immediately prior to the Date of Termination
(other than stock options and restricted stock plans of the
Employers), provided that in the event that the Executive's
continued eligibility and participation in any plan, program
or arrangement as provided in this subparagraph (B) is
barred, or during such period any such plan, program or
arrangement is discontinued or the benefits thereunder are
materially reduced, the Employers shall arrange to provide
the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans,
programs and arrangements immediately prior to the Date of
Termination, provided, however that Executive agrees to pay
that portion of the cost thereof that is equal to the amount
paid thereby for such benefits prior to the Date of
Termination while in the employ of Employers.
(C) The severance amount and benefits required to be paid or
provided to the Executive under subparagraphs (A) and (B)
above may be paid to the Executive in a lump sum within five
(5) days of the Date of Termination if the Employers and the
Executive agree to such lump sum payment.
(ii) In the event that the Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's
death, or such employment is terminated by the Executive due to a material
breach of this Agreement by the Employers which has not been cured within
fifteen (15) days after written notice of non-compliance has been given by the
Executive to the Employers or for Good Reason, and on or prior to the
Executive's Date of Termination there has been a Change in Control of the
Corporation or a written agreement which comtemplates a Change in Control of
the Corporation and which still is in effect has been entered into by either or
both of the Employers or discussions and/or negotiations are being conducted by
either of such entities which relate to the same, then the Employers shall,
subject to the provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, in thirty-six (36) equal monthly
installments beginning with the first business day of the
month following the Date of Termination, an aggregate cash
severance amount equal to 2.99 times the
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Executive's average annual compensation payable by the
Employers and included in the Executive's gross income for
the five taxable years ending before the date on which the
Date of Termination occurs (or such portion of such period
during which the Executive was employed by the Employers),
and
(B) maintain and provide for a period ending at the earlier
of (i) the expiration of thirty-six (36) months from the
Executive's Date of Termination of (ii) the date of the
Executive's full-time employment by another employer
(provided that the Executive is entitled under the terms of
such employment to benefits substantially similar to those
described in this subparagraph (B)), at the same relative
cost to the Executive as paid thereby prior to the Date of
Termination, the Executive's continued participation in all
group insurance, life insurance, health and accident,
disability and other employee benefits plans, programs and
arrangements in which the Executive was entitled to
participate immediately prior to the Date of Termination
(other than stock option and restricted stock plans of the
Employers), provided that in the event that the Executive's
continued eligibility and participation in any plan, program
or arrangement as provided in this subparagraph (B) is
barred, or during such period any such plan, program or
arrangement is discontinued or the benefits thereunder are
materially reduced, the Employers shall arrange to provide
the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans,
programs and arrangements immediately prior to the Date of
Termination, provided, however, that Executive agrees to pay
that portion of the cost thereof equal to the amount paid
thereby for such benefits prior to the Date of Termination
while in the employ of the Employers.
(C) The severance amount and benefits required to be paid or
provided to the Executive under subparagraphs (A) and (B)
above may be paid to the Executive in a lump sum within five
(5) days of the Date of Termination if the Employers and the
Executive agree to such lump sum payment.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 5 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code,
<PAGE> 9
9
the payments and benefits pursuant to Section 5 hereof shall be reduced, in the
manner determined by the Executive, by the amount, if any, which is the minimum
necessary to result in no portion of the payments and benefits under Section 5
being non-deductible to either of the Employers pursuant to Section 280G of the
Code and subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 5 shall be based upon the opinion of independent tax counsel
selected by the Employers and paid by the Employers. Such counsel shall be
reasonably acceptable to the Executive. Such counsel shall promptly prepare the
foregoing opinion, but in no event later than thirty (30) days from the Date of
Termination, and may use such actuaries as such counsel deems necessary or
advisable for the purpose. In the event that the Employers and/or the Executive
do not agree with the opinion of such counsel, (i) the Employers shall pay to
the Executive the maximum amount of payments and benefits pursuant to Section 5
(the particular benefits being selected by the Executive), which such opinion
of counsel, indicates that there is a high probability, will not result in any
portion of such payments and benefits so paid being non-deductible by the
Employers and subject (with respect to the Executive) to the imposition of the
excise tax imposed under Section 4999 of the Code and (ii) the Employers may
request, and Executive shall have the right to demand that the Employers
request, a ruling from the IRS as to whether the disputed payments and benefits
otherwise payable pursuant to Section 5 hereof have such consequences. Any such
request for a ruling from the IRS shall be promptly prepared and filed by the
Employers, but in no event later than thirty (30) days from the date of the
opinion of counsel referred to above, and shall be subject to Executive's
approval prior to filing, which shall not be unreasonably withheld. The
Employers and Executive agree to be bound by any ruling received from the IRS
and to make appropriate payments to each other to reflect any such rulings,
together with interest at the applicable federal rate provided for in Section
7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of
any payments of benefits to which the Executive may be entitled upon
termination of employment under any circumstances other than as specified in
this Section 6, or a reduction in the payments and benefits specified in
Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor, except as
otherwise provided herein, shall the amount of any such benefits be reduced by
any compensation earned by the Executive as a result of employment by another
employer after the Date of Termination or otherwise.
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(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefits
plans of the Employers or otherwise.
8. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. ASSIGNABILITY. The Employers may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Employers may hereafter merge or
consolidate or to which the Employers may transfer all or substantially all of
their assets, if in any such case said corporation, bank or other entity shall
by operation of law or expressly in writing assume all obligations of the
Employers hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employers: Chairman of the Board
Laurel Capital Group, Inc.
2724 Harts Run Road
Allison Park, Pennsylvania 15101
To the Executive: Edwin R. Maus
2570 Cole Road
Wexford, Pennsylvania 15090
11. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer of officers as
may be specifically designated by the Board of Directors of the Employers to
sign on its behalf. No waiver by any party hereto at any time of any breach by
any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the
<PAGE> 11
11
same or at any prior or subsequent time.
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the
Commonwealth of Pennsylvania.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Employers to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Employers hereunder, such right shall be no
greater that the right of any unsecured general creditor of the Employers.
14. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and affect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. REGULATORY PROHIBITION. Notwithstanding any other provision of
this Agreement to the contrary, any payments made to the Executive pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1828(k)) and any regulations promulgated thereunder.
<PAGE> 12
12
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: LAUREL CAPITAL GROUP, INC.
______________________________ By: ________________________________
John A. Howard, Jr., Secretary Richard J. Cessar
Chairman of the Board
Attest: LAUREL SAVINGS BANK
______________________________ By: ________________________________
John A. Howard, Jr., Secretary Richard J. Cessar
Chairman of the Board
Attest:
______________________________ By: ________________________________
Edwin R. Maus
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1995 (1) JUNE 30, 1996 JUNE 30, 1997
----------------- ------------- -------------
<S> <C> <C> <C>
NET INCOME $2,543,000 $2,665,000 $2,319,000
---------- ---------- ----------
PRIMARY:
NUMBER OF SHARES OUTSTANDING 1,521,406 1,548,971 1,550,439
EARNINGS PER SHARE $1.67 $1.72 $1.50
----- ----- -----
FULLY DILUTED:
NUMBER OF SHARES OUTSTANDING 1,533,806 1,548,924 1,566,960
EARNINGS PER SHARE $1.66 $1.72 $1.48
----- ----- -----
</TABLE>
- -----------------
(1) NUMBER OF SHARES AND PER SHARE AMOUNTS ADJUSTED TO REFLECT THE EFFECTS OF
THE THREE-FOR-TWO STOCK SPLIT PAID ON SEPTEMBER 15, 1995.
<PAGE> 1
Exhibit 13
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
At June 30, 1997 and 1996
<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 406 $ 520
Money market investments 9,086 6,291
Interest-earning deposits with other institutions 5,843 2,807
Investment securities available for sale (note 2) 15,494 11,639
Investment securities (market value of $15,504 and $9,944)
(note 2) 15,494 9,948
Mortgage-backed securities available for sale (note 3) 13,259 14,021
Mortgage-backed securities (market value of $1,230 and $1,542)
(note 3) 1,220 1,546
Loans receivable, held for sale (note 4) 1,827 1,627
Loans receivable, net of unearned discounts of $34 and $84 146,613 145,431
Allowance for possible loan losses (1,943) (1,899)
- -----------------------------------------------------------------------------------------
Loans receivable, net (notes 4 and 5) 144,670 143,532
Federal Home Loan Bank Stock (note 6) 1,277 1,275
Real estate owned -- 219
Accrued interest receivable:
Loans 894 894
Interest-earning deposits and investments 505 233
Mortgage-backed securities 86 92
Office properties and equipment, net of accumulated depreciation
(note 7) 1,267 1,246
Prepaid expenses and sundry assets 659 1,057
- -----------------------------------------------------------------------------------------
Total Assets $211,987 $196,947
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits (note 8) $175,019 $164,683
FHLB Advances (note 9) 11,044 6,327
Advance deposits by borrowers for taxes and insurance 3,154 3,321
Accrued interest payable on savings deposits 533 574
Accrued income taxes (note 10) 289 410
Other accrued expenses and sundry liabilities 686 546
- -----------------------------------------------------------------------------------------
Total Liabilities 190,725 175,861
- -----------------------------------------------------------------------------------------
Stockholders' Equity (note 11)
Common stock, $.01 par value; 5,000,000 shares authorized;
1,518,609 and 1,512,667 shares issued respectively 15 15
Additional paid-in capital 4,690 4,646
Treasury stock, at cost (75,780 shares) (1,626) --
Retained earnings 18,095 16,436
Unrealized gains on securities available for sale, net of tax 206 49
Stock held in deferred compensation trust (note 12) (118) (60)
- -----------------------------------------------------------------------------------------
Total Stockholders' Equity 21,262 21,086
- -----------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $211,987 $196,947
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 2
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 11,835 $ 11,964 $ 11,615
Mortgage-backed securities 1,036 953 1,009
Investments 2,311 1,683 1,084
Interest-earning deposits 160 185 126
- -------------------------------------------------------------------------------------------------
Total interest income 15,342 14,785 13,834
Interest expense:
Savings deposits (note 8) 7,182 7,018 6,301
Borrowings (note 9) 533 301 46
- -------------------------------------------------------------------------------------------------
Total interest expense 7,715 7,319 6,347
- -------------------------------------------------------------------------------------------------
Net interest income before provision for possible
loan losses 7,627 7,466 7,487
Provision for possible loan losses (note 4) 30 30 100
- -------------------------------------------------------------------------------------------------
Net interest income after provision for possible
loan losses 7,597 7,436 7,387
- -------------------------------------------------------------------------------------------------
Other income:
Service charges 476 405 403
Net gain (loss) on sales of investments and
mortgage-backed securities available for sale 113 85 (33)
Gain on the sale of loans held for sale 12 7 2
Other operating income 116 130 110
- -------------------------------------------------------------------------------------------------
Total other income 717 627 482
- -------------------------------------------------------------------------------------------------
Operating expenses:
Compensation and employee benefits (note 12) 1,750 1,693 1,665
Premises and occupancy costs 491 466 431
Federal insurance premiums 149 374 362
Special SAIF assessment 1,059 -- --
Net (income) loss on real estate owned (31) 5 (31)
Data processing expense 252 249 239
Professional fees 178 244 286
Other operating expenses 803 746 800
- -------------------------------------------------------------------------------------------------
Total operating expenses 4,651 3,777 3,752
- -------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
change in accounting principle 3,663 4,286 4,117
- -------------------------------------------------------------------------------------------------
Provision for income taxes (note 10)
Federal 1,091 1,319 1,314
State 253 302 290
- -------------------------------------------------------------------------------------------------
Total income taxes 1,344 1,621 1,604
- -------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle 2,319 2,665 2,513
Cumulative effect of change in accounting principle -- -- 30
- -------------------------------------------------------------------------------------------------
Net income $ 2,319 $ 2,665 $ 2,543
=================================================================================================
Earnings per share(note 1)
Primary
Net income before cumulative effect of change in
accounting principle $ 1.50 $ 1.72 $ 1.65
Cumulative effect of change in accounting
principle -- -- 0.02
- -------------------------------------------------------------------------------------------------
Net income $ 1.50 $ 1.72 $ 1.67
Average number of shares outstanding 1,550,439 1,548,971 1,521,406
Fully diluted
Net income before cumulative effect of change in
accounting principle $ 1.48 $ 1.72 $ 1.64
Cumulative effect of change in accounting
principle -- -- 0.02
- -------------------------------------------------------------------------------------------------
Net income $ 1.48 $ 1.72 $ 1.66
Average number of shares outstanding 1,566,960 1,548,924 1,533,806
=================================================================================================
Dividends per share $ 0.44 $ 0.29 $ 0.21
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 3
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Unrealized
Gains
(Losses) on Stock Held
Additional Securities in Deferred Total
Common Paid-in Treasury Retained Available Compensation Stockholders'
(in thousands) Stock Capital Stock Earnings for Sale Trust Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $10 $ 4,508 -- $11,979 ($15) -- $16,482
Stock options exercised
(2,610 shares) -- 36 -- -- -- -- 36
Retroactive effect of
stock issued as a
result of stock split
declared on August
17, 1995 5 (5) -- -- -- -- --
Dividends paid -- -- -- (305) -- -- (305)
Unrealized gains on
securities available
for sale -- -- -- -- 162 -- 162
Net income -- -- -- 2,543 -- -- 2,543
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $15 $4,539 -- $14,217 $147 -- $18,918
Stock options exercised
(20,409 shares) -- 107 -- -- -- -- 107
Dividends paid -- -- -- (446) -- -- (446)
Unrealized losses on
securities available
for sale -- -- -- -- (98) -- (98)
Stock purchased by
deferred compensation
trust -- -- -- -- -- (60) (60)
Net income -- -- -- 2,665 -- -- 2,665
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $15 $4,646 -- $16,436 $49 ($60) $21,086
Stock options exercised
(5,942 shares) -- 44 -- -- -- -- 44
Dividends paid -- -- -- (660) -- -- (660)
Treasury stock
purchased (75,780
shares) -- -- (1,626) -- -- -- (1,626)
Unrealized gains on
securities available
for sale -- -- -- -- 157 -- 157
Stock purchased by
deferred compensation
trust -- -- -- -- -- (58) (58)
Net income -- -- -- 2,319 -- -- 2,319
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $15 $4,690 ($1,626) $18,095 $206 ($118) $21,262
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 4
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Net income: $ 2,319 $ 2,665 $ 2,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 139 117 114
Provision for possible loan losses 30 30 100
Net gain on sale of real estate owned (42) (10) (56)
Net (gain) loss on the sale of investments and
mortgage-backed securities available for sale (113) (85) 33
Gain on the sale of loans held for sale (12) (7) (2)
Amortization of deferred loan fees (166) (234) (202)
Origination of loans held for sale (907) (966) (961)
Proceeds from sale of loans held for sale 719 550 362
Increase in accrued interest receivable (266) (71) (177)
(Decrease) Increase in accrued interest payable (41) 53 40
Other--net 278 78 (88)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,938 2,120 1,706
- ----------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities (12,994) (10,157) (5,905)
Purchase of investment securities available for sale (5,156) (10,571) (98)
Purchase of mortgage-backed securities -- (900) (1,245)
Purchase of mortgage-backed securities available for sale (600) (5,216) --
Purchase of FHLB stock (2) (15) (207)
Proceeds from investment maturities 7,950 10,500 2,043
Proceeds from sale of investment securities available for
sale 1,053 349 6,106
Proceeds from sale of mortgage-backed securities available
for sale -- 703 839
Principal repayments of investment and mortgage-backed
securities available for sale 1,459 1,655 918
Principal repayments of investment and mortgage-backed
securities 326 1,261 972
Increase in loans (1,002) (394) (13,001)
Proceeds from sale of real estate owned 261 105 279
Net additions to office properties and equipment (160) (180) (6)
- ----------------------------------------------------------------------------------------------------
Net cash used by investing activities (8,865) (12,860) (9,305)
- ----------------------------------------------------------------------------------------------------
Financing activities:
Net increase (decrease) in demand and club accounts 2,256 (1,086) (8,619)
Net increase in time deposit accounts 8,080 2,461 14,748
Net increase in FHLB advances 4,717 4,327 2,000
(Decrease) increase in advance deposits by borrowers for
taxes and insurance (167) (77) 511
Stock options exercised 44 107 36
Acquisition of treasury stock (1,626) -- --
Dividends paid (660) (446) (305)
- ----------------------------------------------------------------------------------------------------
Net cash used by financing activities 12,644 5,286 8,371
- ----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 5,717 (5,454) 772
Cash and cash equivalents at beginning of period 9,618 15,072 14,300
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,335 $ 9,618 $ 15,072
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $ 7,223 $ 6,997 $ 6,261
Interest on FHLB advances 503 295 34
Income taxes 1,216 1,581 1,907
Transfer of loans to real estate owned -- 227 206
Transfer of investment securities to available for sale -- 1,402 25
Transfer of mortgage-backed securities to available for sale -- 6,461 6,422
Cash paid during the period for interest includes interest credited on deposits of $6,270, $6,105
and $5,490 for the years ended June 30, 1997, 1996 and 1995, respectively.
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 5
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATION AND USE OF ESTIMATES
Laurel Capital is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended. The only significant asset is the
stock of its wholly-owned subsidiary, Laurel Savings Bank, a
Pennsylvania-chartered state savings bank. The Bank conducts business
through its six offices located in Allegheny and Butler counties.
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 certain assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of related revenue and
expense during the reporting period. Actual results could differ from those
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Laurel
Capital Group, Inc. and its wholly owned subsidiary, Laurel Savings Bank,
after elimination of intercompany accounts and transactions.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS 115 requires that
investments be classified as either: (1) Securities Held to Maturity-- debt
securities that the Company has the positive intent and ability to hold to
maturity and reported at amortized cost; (2) Trading Securities--debt and
equity securities bought and held principally for the purpose of selling
them in the near term and reported at fair value, with unrealized gains and
losses included in the current period earnings; or (3) Securities Available
for Sale--debt and equity securities not classified as either Securities
Held to Maturity or Trading Securities and reported at fair value, with
unrealized gains and losses included as a separate component of
stockholders' equity.
Effective July 1, 1994, the Company adopted SFAS 115 and has reported the
cumulative effect of this change in the method of accounting for investment
securities in the June 30, 1995, statement of operations.
REAL ESTATE OWNED
Real estate owned consists of properties acquired through foreclosure and
are recorded at the lower of cost (principal balance of the former mortgage
loan plus costs of obtaining title and possession) or fair value at the
date of acquisition. Costs relating to development and improvement of the
property are capitalized, whereas costs of holding such real estate are
expensed as incurred. Additional write downs are charged to income, and the
carrying value of the property reduced, when the fair value of the
property, less costs to sell, is less than the carrying value.
PROVISIONS FOR POSSIBLE LOAN LOSSES
Provisions for possible loan losses are charged to operations in amounts
that result in allowances sufficient, in management's judgment, to cover
anticipated losses based on past and expected future loss experience and
economic conditions.
OFFICE PROPERTIES AND EQUIPMENT
Depreciation is computed on the straight-line method over the estimated
useful lives of the related assets.
INTEREST ON SAVINGS
Interest on savings deposits is accrued and charged to expense monthly and
is paid or credited in accordance with the terms of the respective
accounts.
11
<PAGE> 6
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company has defined cash and cash
equivalents as cash, interest-earning deposits with other institutions, and
money market investments.
LOANS
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 SFAS 114, "Accounting by Creditors for Impairment of a
Loan" and SFAS 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures", an amendment of SFAS 114,
effective July 1, 1995. These statements address the accounting by
creditors for 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 SFAS 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 SFAS 114
using major risk calculations, but on a loan by loan basis. 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. Consumer loans more than 120 days or 180
days delinquent (depending on the nature of the loan) are generally
required to be written off.
Any excess of the Bank's recorded investment in the loans over the measured
value of the loans in accordance with SFAS 114 are provided for in the
allowance for loan losses. The Bank review its loans for impairment on a
quarterly basis.
The Company is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the commitment. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amount does not necessarily represent
future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis using the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the counter-party.
Loans receivable classified as held for sale are recorded in the financial
statements at the lower of cost or market.
12
<PAGE> 7
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
INCOME TAXES
In February 1992, FASB issued SFAS 109, "Accounting for Income Taxes' which
requires use of the asset and liability method of accounting for income
taxes. Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. The Company adopted SFAS
109 effective July 1, 1993.
EARNINGS PER SHARE
Earnings per share is computed using the treasury stock method to calculate
weighted average number of shares of common stock and common stock
equivalents outstanding during the period. The weighted average number,
including common stock equivalents, used to calculate primary earnings per
share for 1997, 1996 and 1995 was 1,550,439, 1,548,971 and 1,521,406,
respectively. The weighted average number used to calculate fully diluted
earnings per share for 1997, 1996 and 1995 was 1,566,960, 1,548,924 and
1,533,806, respectively.
RECLASSIFICATION
Certain items previously reported have been reclassified to conform with
the current year's reporting format.
(2) INVESTMENT SECURITIES
Investment securities are comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Face/Par Cost Appreciation Depreciation Value
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
AT JUNE 30, 1997:
Corporate notes and
commercial paper $15,000 $15,494 $37 $27 $15,504
=============================================================================================
AT JUNE 30, 1996:
Corporate notes and
commercial paper $9,950 $9,948 $15 $19 $9,944
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortized Market
Face/Par Cost Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
At June 30, 1997, the contractual maturities of the
debt securities are:
Due after one year through five years $ 4,000 $ 4,000 $ 4,005
Due after five years through ten years 5,500 5,498 5,496
Due after ten years 6,000 5,996 6,003
- ---------------------------------------------------------------------------------------------
$15,500 $15,494 $15,504
=============================================================================================
</TABLE>
Note continued
13
<PAGE> 8
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
Investment securities available for sale are comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Face/Par Cost Appreciation Depreciation Value
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
AT JUNE 30, 1997:
Corporate notes and
commercial paper $1,500 $1,500 $3 $2 $1,501
Municipal
obligations 4,600 4,541 102 5 4,638
Federal National
Mortgage
Association pre-
ferred stock 250 250 9 -- 259
Federal Home Loan
Mortgage
Corporation stock 250 250 4 -- 254
Shay Financial
Services ARMs
Fund 8,832 8,832 10 -- 8,842
- ---------------------------------------------------------------------------------------------
$15,432 $15,373 $128 $7 $15,494
=============================================================================================
AT JUNE 30, 1996:
Corporate notes and
commercial paper $1,000 $1,000 -- $6 $994
Municipal
obligations 2,350 2,315 7 50 2,272
Financial
Institutions
Insurance Group,
Ltd stock 50 25 73 -- 98
Shay Financial
Services ARMs
Fund 8,317 8,317 -- 42 8,275
- ---------------------------------------------------------------------------------------------
$11,717 $11,657 $80 $98 $11,639
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortized Market
Face/Par Cost Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
At June 30, 1997, the contractual maturities of the debt securities available for
sale are:
Due after five years through ten years $1,500 $ 1,500 $1,502
Due after ten years 4,600 4,542 4,639
- ---------------------------------------------------------------------------------------------
$6,100 $ 6,042 $6,141
=============================================================================================
</TABLE>
The Federal National Mortgage Association preferred stock, Federal Home Loan
Mortgage Corporation stock, Shay Financial Services ARMs Fund and Financial
Institutions Insurance Group, Ltd stock have no stated maturity.
Proceeds from the sale of investment securities available for sale during 1997,
1996 and 1995 were $1,053, $349 and $6,106, respectively.
Gross gains of $113 and $37 were realized on these sales in 1997 and 1996. There
were no realized gains in 1995.
There were no realized losses in 1997 and 1996 and $74 of realized losses in
1995.
During fiscal 1996, the Company transferred investment securities with a fair
market value of approximately $1.4 million to its available for sale portfolio
in accordance with the the FASB's one-time opportunity to reclassify debt and
equity securities under SFAS 115.
14
<PAGE> 9
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities were comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At June 30, 1997 Cost Appreciation Depreciation Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association REMIC 200 6 -- 206
Federal Home Loan Mortgage
Corporation REMIC 900 5 -- 905
Other 120 -- 1 119
- ---------------------------------------------------------------------------------------------
$1,220 $11 $ 1 $1,230
=============================================================================================
At June 30, 1996
- ---------------------------------------------------------------------------------------------
Federal National Mortgage
Association REMIC $ 254 $ 5 $-- $ 259
Federal Home Loan Mortgage
Corporation REMIC 1,130 -- 9 1,121
Other 162 -- -- 162
- ---------------------------------------------------------------------------------------------
$1,546 $ 5 $ 9 $1,542
=============================================================================================
</TABLE>
Mortgage-backed securities available for sale were comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At June 30, 1997 Cost Appreciation Depreciation Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National
Mortgage Association $ 4,900 $182 $ 2 $ 5,080
Federal National Mortgage
Association 4,050 16 34 4,032
Federal Home Loan Mortgage
Corporation 307 7 -- 314
Federal National Mortgage
Association REMIC 284 3 -- 287
Federal Home Loan Mortgage
Corporation REMIC 3,526 20 -- 3,546
- ---------------------------------------------------------------------------------------------
$13,067 $228 $36 $13,259
=============================================================================================
At June 30, 1996
- ---------------------------------------------------------------------------------------------
Government National
Mortgage Association $ 5,885 $172 $ 5 $ 6,052
Federal National Mortgage
Association 4,397 15 88 4,324
Federal Home Loan Mortgage
Corporation 437 12 -- 449
Federal National Mortgage
Association REMIC 284 -- -- 284
Federal Home Loan Mortgage
Corporation REMIC 2,926 -- 14 2,912
- ---------------------------------------------------------------------------------------------
$13,929 $199 $107 $14,021
=============================================================================================
</TABLE>
Prepayments may shorten the lives of these mortgage-backed securities.
There were no sales of mortgage-backed securities during 1997. Proceeds from the
sale of mortgage-backed securities available for sale during 1996 and 1995 were
$703 and $839, respectively. Gross gains of $48 and $40 were realized on the
sales in 1996 and 1995, respectively.
15
<PAGE> 10
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(4) LOANS RECEIVABLE
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
June 30,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------------------
First mortgage loans:
Conventional:
1 to 4 family dwellings $113,986 $113,050
Multi-family dwellings 2,740 2,811
Commercial 5,676 5,788
- ------------------------------------------------------------------------------------------
122,402 121,649
Guaranteed or insured 76 110
- ------------------------------------------------------------------------------------------
Total long term with monthly amortization 122,478 121,759
Construction and development loans 3,079 4,281
- ------------------------------------------------------------------------------------------
125,557 126,040
Less: Allowance for possible losses (1,358) (1,363)
Loans in process (1,634) (2,148)
Deferred loan fees (860) (1,007)
- ------------------------------------------------------------------------------------------
121,705 121,522
- ------------------------------------------------------------------------------------------
Consumer loans:
Home improvement loans (net of unearned discounts
of $34 and $84) 291 604
Mobile home loans 747 1,157
Loans secured by savings accounts 288 316
Installment loans 21,226 19,492
Commercial loans 998 977
- ------------------------------------------------------------------------------------------
23,550 22,546
Less: Allowance for possible losses (585) (536)
- ------------------------------------------------------------------------------------------
22,965 22,010
- ------------------------------------------------------------------------------------------
$144,670 $143,532
==========================================================================================
</TABLE>
At June 30, 1997 and 1996, the Company had a commitment to sell its guaranteed
student loan portfolio totaling $1,827 and $1,627, respectively.
Outstanding commitments to originate loans:
<TABLE>
<CAPTION>
June 30,
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Fixed rates (7.625% to 8.250% and 7.250% to 8.000%) $ 498 $ 462
Variable rates 523 2,425
- ------------------------------------------------------------------------------------------
1,021 2,887
Other loans--fixed rates 264 289
Unused lines of credit 5,049 4,264
- ------------------------------------------------------------------------------------------
$6,334 $7,440
==========================================================================================
</TABLE>
The Company's customers have unused lines of credit as follows: secured (home
equity), builder lines of credit, and all other lines of credit. The amount
available at June 30, 1997 for each type was $2,473, $1,558 and $1,018,
respectively. The amount available at June 30, 1996 for each type was $1,861,
$1,510 and $893, respectively. The interest rate for each loan is based on the
prevailing market conditions at the time of funding.
The Company serviced loans for others of $1,229, $1,107 and $1,699 at June 30,
1997, 1996 and 1995, respectively. These loans serviced for others are not
assets of the Company and are appropriately excluded from the Company's
financial statements. Fidelity bond and errors and omission insurance coverage
is maintained with respect to these loans.
16
<PAGE> 11
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
At June 30, 1997, over 99.5% of the Company's net mortgage loan portfolio was
secured by properties located in Pennsylvania. The Company does not believe it
has significant concentrations of credit risk to any one group of borrowers
given its underwriting and collateral requirements.
(5) ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
Changes in the allowances for possible losses on loans are as follows:
<TABLE>
<CAPTION>
First
Consumer Mortgage
Loans Loans
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at June 30, 1994 $455 $1,364
Provision for losses 66 34
Charge-offs (85) (26)
Recoveries 79 6
- -----------------------------------------------------------------------------------------
Balance at June 30, 1995 $515 $1,378
Provision for losses 16 14
Charge-offs (51) (30)
Recoveries 56 1
- -----------------------------------------------------------------------------------------
Balance at June 30, 1996 $536 $1,363
Provision for losses 20 10
Charge-offs (39) (15)
Recoveries 68 --
- -----------------------------------------------------------------------------------------
Balance at June 30, 1997 $585 $1,358
=========================================================================================
</TABLE>
Management believes that the allowance for losses on loans was adequate at June
30, 1997. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions and other factors. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowance for losses on loans. Such agencies may require the Company
to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
At June 30, 1997, the recorded investment in loans that are considered to be
impaired under FAS 114 was $482. Included in this amount is $104 of impaired
loans for which the related allowance for credit losses is $2 and $335 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
fiscal years ended June 30, 1997 and 1996 was approximately $437 and $449,
respectively. For the fiscal years ended June 30, 1997 and 1996, the Company
recognized interest income on those impaired loans of $2 and $6, respectively,
which was recognized using the cash basis of income recognition.
Non-accrual loans at June 30, 1997, 1996 and 1995 were approximately $915, $612
and $521, respectively. The foregone interest on these loans for the fiscal
years ended June 30, 1997, 1996 and 1995 was approximately $65, $40 and $43,
respectively. The amount of interest income on such loans actually included in
income in fiscal 1997, 1996 and 1995 was $27, $31 and $28, respectively. There
were no commitments to lend additional funds to borrowers whose loans were in
non-accrual status.
(6) FEDERAL HOME LOAN BANK STOCK
The Company is a member of the Federal Home Loan Bank ("FHLB") System. As a
member, the Company maintains an investment in the capital stock of the FHLB of
Pittsburgh, at cost, in an amount not less than the greater of 1% of its
qualifying assets, as defined by the FHLB of Pittsburgh, or 5% of its
outstanding advances, if any, from the FHLB of Pittsburgh as calculated at
December 31 of each year.
17
<PAGE> 12
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(7) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Land and improvements $ 226 $ 226
Office buildings and improvements 2,118 2,071
Furniture, fixtures and equipment 487 375
- -----------------------------------------------------------------------------------------
Total, at cost 2,831 2,672
Less accumulated depreciation (1,564) (1,426)
- -----------------------------------------------------------------------------------------
$ 1,267 $ 1,246
=========================================================================================
</TABLE>
Depreciation expense for the periods ended June 30, 1997, 1996 and 1995 was
$139, $117 and $114, respectively.
(8) SAVINGS DEPOSITS
Savings deposit balances and interest rates are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Range Interest Rate
at at June 30, June 30,
June 30, 1997 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Demand and club
accounts 2.00 to 2.50% 2.48% 2.49% $ 27,690 $ 28,704
Money market deposit
accounts 2.27 to 2.46% 2.38 2.39 18,043 18,477
NOW accounts 0 to 1.50% 1.11 1.15 23,819 20,115
- ------------------------------------------------------------------------------------------------
69,552 67,296
- ------------------------------------------------------------------------------------------------
TIME DEPOSITS: 3.01 to 4.00% -- 1,889
4.01 to 5.00 26,525 27,019
5.01 to 6.00 37,213 38,045
6.01 to 7.00 29,327 17,022
7.01 to 8.00 7,722 8,104
8.01 to 9.00 3,891 4,331
9.01 to 10.00 789 977
- ------------------------------------------------------------------------------------------------
5.86 5.72 $105,467 $ 97,387
- ------------------------------------------------------------------------------------------------
4.32% 4.22% $175,019 $164,683
================================================================================================
</TABLE>
At June 30, 1997 and 1996, time deposits with balances in excess of $100,000
amounted to $3.6 million and $2.2 million, respectively.
Note continued
18
<PAGE> 13
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
The contractual maturity of time deposits is as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Under 12 months $ 67,772 $47,688
12 months to 24 months 18,960 29,484
24 months to 36 months 7,799 6,098
36 months to 48 months 3,453 4,495
48 months to 60 months 2,248 2,978
Over 60 months 5,235 6,644
- ------------------------------------------------------------------------------------------
$105,467 $97,387
==========================================================================================
</TABLE>
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Passbook and club accounts $ 696 $ 703 $ 749
Money market deposit accounts 437 463 567
NOW accounts 242 221 224
Time deposits 5,807 5,631 4,761
- ---------------------------------------------------------------------------------------------
$7,182 $7,018 $6,301
=============================================================================================
</TABLE>
(9) FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized as follows:
<TABLE>
<CAPTION>
Interest June 30,
Due Date Rate 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
July 15, 1996 5.42% -- $ 900
July 19, 1996 5.48 -- 3,279
September 23, 1996 5.57 -- 2,000
July 15, 1997 5.66 $ 900 --
July 17, 1997 5.67 2,000 --
August 4, 1997 5.94 1,000 --
August 20, 1997 5.72 1,000 --
August 22, 1997 5.67 1,000 --
January 30, 1998 5.67 1,000 --
August 9, 1999 6.11 2,000 --
February 14, 2002 5.48 2,000 --
November 13, 2015 6.54 144 148
</TABLE>
At June 30, 1997, the Bank had nine fixed rate advances from the FHLB of
Pittsburgh. Fixed rate advances are subject to a prepayment fee in the event the
advances are repaid prior to maturity. The prepayment fee is equal to the
present value of the difference between cash flows generated by the advance at
the advance rate from the date of prepayment until the original maturity date
and an advance of the same amount at the interest rate posted by the FHLB on the
date of prepayment for an advance of comparable maturity.
Under a blanket collateral pledge agreement, the Bank has pledged as collateral
for advances from the FHLB of Pittsburgh, certain qualifying collateral, such as
mortgage-backed securities and loans, with weighted collateral values determined
by the FHLB of Pittsburgh equal to at least the unpaid amount of outstanding
advances.
The Bank has a line of credit with the FHLB of Pittsburgh (Flexline), which is
approximately $12.0 million, and expires on March 25, 1998. There are no
commitment fees associated with this line of credit and the FHLB of Pittsburgh
may reduce or terminate the line at any time. When used, interest is charged at
the FHLB's posted rates, which change daily, and the loan can be repaid at any
time but in no event later than March 25, 1997. The Bank has yet to use this
credit line and has no plans to do so in the immediate future. However, funds
remain available up to the $12.0 million commitment at daily rates posted by the
FHLB.
19
<PAGE> 14
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(10) INCOME TAXES
Total income tax expense for the years ended June 30, 1997, 1996 and 1995
consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,156 $1,230 $1,116
State 253 302 290
- -------------------------------------------------------------------------------------------
$1,409 $1,532 $1,406
- -------------------------------------------------------------------------------------------
Deferred:
Federal $ (65) $ 89 $ 198
- -------------------------------------------------------------------------------------------
$1,344 $1,621 $1,604
===========================================================================================
</TABLE>
Total income tax provision for the years ended June 30, 1997, 1996 and 1995 was
allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $1,344 $1,621 $1,604
Stockholders' equity:
Unrealized gains (losses) on investment securities 81 (54) 86
- --------------------------------------------------------------------------------------------
$1,425 $1,567 $1,690
============================================================================================
</TABLE>
A reconciliation from the expected statutory income tax rate to the actual
effective tax rate expressed as a percentage of pre-tax income for the years
ended June 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 4.6 4.6 4.6
Other, net (1.9) (.8) --
- -----------------------------------------------------------------------------------------
36.7% 37.8% 38.6%
=========================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related
valuation allowance as of June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred loan fees $ 209 $ 244
Tax vs. book loan loss reserve 326 232
Writedown of investments 8 8
Other 142 130
- -------------------------------------------------------------------------------------------
Gross deferred tax assets $ 685 $ 614
Valuation allowance -- --
- -------------------------------------------------------------------------------------------
Net deferred tax asset $ 685 $ 614
DEFERRED TAX LIABILITIES:
Investment Securities $(106) $ (25)
Property, plant & equipment (93) (84)
Prepaid expense (22) (26)
- -------------------------------------------------------------------------------------------
Gross deferred tax liability (221) (135)
- -------------------------------------------------------------------------------------------
Net deferred tax asset $ 464 $ 479
===========================================================================================
</TABLE>
Note continued
20
<PAGE> 15
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
The Bank has determined that no valuation reserve is necessary for the deferred
tax asset since it is more likely than not that the deferred tax asset will be
realized through carryback to taxable income in prior years, future reversals of
existing differences and to a lesser extent, through future taxable income.
SFAS 109 treats tax basis bad debt reserves established after 1987 as temporary
differences on which deferred income taxes have been provided. Deferred taxes
are not required to be provided on tax bad debt reserves recorded in 1987 and
prior years (base year bad debt reserves). Approximately $2,217 of the balances
in retained income at June 30, 1997, represent base year bad debt deductions for
tax purposes only. No provision for federal income tax has been made for such
amount. Should amounts previously claimed as a bad debt deduction be used for
any purpose other than to absorb bad debts (which is not anticipated), tax
liabilities will be incurred at the rate then in effect.
On August 20, 1996, President Clinton signed legislation which eliminated the
percentage of taxable income bad debt deduction for thrift institutions for tax
years beginning after December 31, 1995. This new legislation also requires a
thrift to generally recapture the excess of its current tax reserves in excess
of its 1987 base year reserves. As the Bank has previously provided deferred
taxes on this amount, no financial statement tax expense should result from this
new legislation.
(11) STOCKHOLDERS' EQUITY
The Bank 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
Bank's financial statement. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory account
practices. The Bank'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 Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defines) to average assets (as
defined). Management, believes, as of June 30, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
21
<PAGE> 16
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
The following table sets forth certain information concerning the Company's
regulatory capital at
June 30, 1997 and 1996.
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
Tier I Tier II Tier I Tier II
Tier I Risk- Risk- Tier I Risk- Risk-
Core Based Based Core Based Based
Capital Capital Capital Capital Capital Capital
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Equity Capital (1) $21,028 $ 21,028 $ 21,028 $20,918 $ 20,918 $ 20,918
Less unrealized securities
gains (206) (206) (206) (49) (49) (49)
Plus general valuation
allowances (2) -- -- 1,352 -- -- 1,263
- ---------------------------------------------------------------------------------------------------------
Total regulatory
capital 20,822 20,822 22,174 20,869 20,869 22,132
Minimum required capital 8,403 4,327 8,655 7,801 4,043 8,085
- ---------------------------------------------------------------------------------------------------------
Excess regulatory
capital $12,419 $ 16,495 $ 13,519 $13,068 $ 16,826 $ 14,047
- ---------------------------------------------------------------------------------------------------------
Minimum required capital to
be well capitalized under
Prompt Corrective Action
Provisions $10,504 $ 6,456 $ 10,760 $ 9,751 $ 6,026 $ 10,043
=========================================================================================================
Regulatory capital as a
percentage (3) 9.91% 19.35% 20.61% 10.70% 20.78% 22.04%
Minimum required capital
percentage 4.00 4.00 8.00 4.00 4.00 8.00
- ---------------------------------------------------------------------------------------------------------
Excess regulatory
capital percentage 5.91% 15.35% 12.61% 6.70% 16.78% 14.04%
- ---------------------------------------------------------------------------------------------------------
Minimum required capital
percentage to be well
capitalized under Prompt
Corrective Action
Provisions 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
=========================================================================================================
</TABLE>
(1) Represents equity capital of the Bank as reported to the FDIC and the
Department of Banking on Form 033 for the quarter ended June 30, 1997 and
1996.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total average
assets of $210,082 and $195,029 at June 30, 1997 and 1996, respectively.
Tier I and Tier II risk-based capital are calculated as a percentage of
adjusted risk weighted assets of $107,596 and $100,433 at June 30, 1997 and
1996, respectively.
22
<PAGE> 17
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(12) EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution plan in which substantially all
employees participate. The plan requires employer contributions of five percent
of total compensation of each participant. Employees are also permitted to make
contributions. Total plan expense was $69, $65 and $66 during fiscal 1997, 1996,
and 1995 respectively.
The Bank sponsors a nonqualified deferred compensation plan for key officers of
the Bank. This plan is structured as a "rabbi trust". The amount of compensation
to be deferred under the plan is determined each year by the officers.
(13) STOCK COMPENSATION PROGRAMS
In fiscal 1988, the Company adopted an Employee Stock Compensation Program under
which shares of common stock can be issued. Under the 1988 Program, each
eligible participant may be granted options to purchase common stock at an
amount equal to or less than the fair market value of the shares at the time of
the grant of the option. At June 30, 1997, there were 625 remaining shares
available to be granted as determined by the Program Administrators.
In fiscal 1994, the Company adopted the 1993 Key Employee Stock Compensation
Program ("Employee Program") and the 1993 Directors' Stock Option Plan
("Directors' Plan"). Under the 1993 Employee Program, each eligible participant
may be granted options to purchase common stock at an amount equal to or less
than the fair market value of the shares at the time of the grant of the
options. At June 30, 1997, there were 6,937 remaining shares available to be
granted as determined by the Program Administrators. Under the 1993 Directors'
Plan, each person who serves as a non-employee director of the Company
immediately following each annual meeting shall be granted as of such date an
option to purchase 937 shares of common stock exercisable at a price equal to
the fair market value on the date of the grant. At June 30, 1997 there were
14,067 remaining shares available to be granted under the terms of the plan.
In fiscal 1997, the Company adopted the 1996 Key Employee Stock Compensation
Program ("Employee Program") and the 1996 Directors' Stock Option Plan
("Directors' Plan"). Under the 1996 Employee Program, each eligible participant
may be granted options to purchase common stock at an amount equal to or less
than the fair market value of the shares at the time of the grant of the
options. At June 30, 1997, there were 56,674 remaining shares available to be
granted as determined by the Program Administrators. Under the 1996 Directors'
Plan, each person who served as a non-employee director of the Company
immediately following the last adjournment of the 1996 annual meeting was
granted as of such date an option to purchase 3,148 shares of common stock
exercisable at a price equal to the fair market value on the date of the grant.
Such stock options to directors will be vested and exercisable over three years
at the rate of 33.3% per year. At June 30, 1997, 6,296 shares of the 18,888
granted during fiscal 1997 were vested and exercisable. At June 30, 1997 there
were no remaining shares available to be granted under the terms of the plan.
Each option granted under all five stock option plans will expire no later than
10 years from the date on which the option was or is granted. For the periods
presented, options granted for all Plans were granted at the fair market value
at the date of the grant.
Note continued
23
<PAGE> 18
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Average 1993 Average 1993 Average 1996 Average 1996 Average
1988 Exercise Employee Exercise Director Exercise Employee Exercise Director Exercise
Program Price Program Price Program Price Program Price Program Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30,
1994 55,496 $11.43 26,998 $19.00 5,000 $16.60
Granted -- -- -- -- 3,500 11.87
Exercised (2,610) 13.80 -- -- -- --
Forfeited (202) 11.47 (250) 12.67 -- --
Stock
split 26,313 7.54 13,372 12.67 5,555 11.44
- ---------------------------------------------------------------------------------------------------------------------------------
June 30,
1995 78,997 7.54 40,120 12.67 14,055 11.44
Granted 2,695 16.38 34,500 16.08 6,559 16.00
Exercised (17,910) 4.36 (625) 12.67 (1,874) 11.07
Forfeited -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
June 30,
1996 63,782 8.80 73,995 14.26 18,740 13.08 -- -- -- --
Granted -- -- -- -- 5,622 15.88 -- -- 18,888 $15.88
Exercised (4,680) 6.37 (325) 12.67 (937) 11.07 -- -- -- --
Forfeited (625) 11.43 -- -- (2,811) 12.98 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
June 30,
1997 58,477 $8.97 73,670 $14.27 20,614 $13.95 -- -- 18,888 15.88
- ---------------------------------------------------------------------------------------------------------------------------------
Average
con-
tractual
life
remaining
in
years 5.2 7.8 8.1 9.4
Option
price
per
share $3.24-$16.375 $12.67-$16.375 $11.07-$16.00 $15.88
Options
availa-
ble for
granting
at June
30,
1997 625 6,937 14,067 56,674 --
=================================================================================================================================
</TABLE>
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 1996 under the 1988 and 1993 Employee Programs was
$4.18. The fair value of the options granted under the 1993 Director Program was
$4.08. The fair value of options granted during fiscal 1997 under the 1993 and
1996 Director Program was $4.15.
At June 30, 1997, 1996, and 1995, 149,296, 140,428 and 130,206 shares were
immediately exercisable at average prices of $12.08, $11.41 and $9.42,
respectively.
In October, 1995, the FASB issued Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes a fair value based method of accounting for stock-based compensation
plans. Effective for fiscal years beginning after December 15, 1995, SFAS 123
allows financial institutions to expense an estimated fair value of stock
options or to continue to measure compensation expense for stock option plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"). Entities that elect to continue to measure
compensation expense based on APB No. 25 must provide pro forma disclosures of
net income and earnings per share as if the fair value method of accounting had
been applied. The Company has elected to continue to measure compensation cost
using the intrinsic value method prescribed by APB No. 25. Had the Company used
the fair value method, net income and earnings per share would have been as
follows (In thousands, except per share data):
<TABLE>
<CAPTION>
June 30
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net income
As reported $2,319 $2,665
Pro Forma $2,293 $2,495
- -----------------------------------------------------------------------------------------
Primary earnings per share
As reported $1.50 $1.72
Pro Forma $1.48 $1.61
- -----------------------------------------------------------------------------------------
Fully diluted earnings per share
As reported $1.48 $1.72
Pro Forma $1.46 $1.61
- -----------------------------------------------------------------------------------------
</TABLE>
The fair value for these options was estimated at the date of grant using a
Black-Scholes Option Valuation Model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of
24
<PAGE> 19
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
6.51% and 6.27%; dividend yields of 2.3% and 2.1%; volatility factors of the
expected market price of the Company's common stock of 17.2% and 15.7%; and a
weighted-average expected life of the options of 7 years. The pro forma net
income and earnings per share in the table above reflect only options granted in
fiscal 1997 and 1996. Therefore, the full impact of calculating the cost for
stock options under the fair value method of SFAS 123 is not reflected in the
pro forma net income and earnings per share amounts presented above because
compensation cost is reflected over the options' vesting periods and
compensation cost for options granted prior to July 1, 1996 is not considered.
The Black-Scholes Option Valuation Model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjectivity
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Month Periods Ended
September 30 December 31 March 31 June 30
1996/1997:
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Interest income $3,773 $3,823 $3,831 $3,916
Interest expense 1,868 1,912 1,942 1,993
- ------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 1,905 1,911 1,889 1,923
Provision for possible loan losses 8 7 8 7
Other income 168 234 143 172
Operating expenses 1,972 900 873 906
- ------------------------------------------------------------------------------------------------
Income before income taxes 93 1,238 1,151 1,182
Provision for income taxes 25 462 421 436
- ------------------------------------------------------------------------------------------------
Net income $ 68 $ 776 $ 730 $ 746
================================================================================================
Earnings per share:
Primary .04 $ .50 $ .46 $ .49
Fully diluted $ .04 $ .50 $ .46 $ .49
- ------------------------------------------------------------------------------------------------
Dividends per share $ .11 $ .11 $ .11 $ .11
================================================================================================
1995/1996:
- ------------------------------------------------------------------------------------------------
Interest income $3,718 $3,699 $3,690 $3,678
Interest expense 1,867 1,848 1,828 1,776
- ------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 1,851 1,851 1,862 1,902
Provision for possible loan losses 10 8 7 5
Other income 191 164 124 148
Operating expenses 925 975 894 983
- ------------------------------------------------------------------------------------------------
Income before income taxes 1,107 1,032 1,085 1,062
Provision for income taxes 430 390 417 384
- ------------------------------------------------------------------------------------------------
Net income $ 677 $ 642 $ 668 $ 678
================================================================================================
Earnings per share:
Primary $ .44 $ .41 $ .43 $ .44
Fully diluted $ .44 $ .41 $ .43 $ .44
- ------------------------------------------------------------------------------------------------
Dividends per share $ .05 $ .08 $ .08 $ .08
================================================================================================
</TABLE>
As a result of rounding, the sum of quarterly amounts may not equal the annual
amounts.
25
<PAGE> 20
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the Consolidated
Statement of Financial Condition. FAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of Laurel Capital Group, Inc. The carrying amounts reported in the Consolidated
Statement of Financial Condition approximate fair value for the following
financial instruments; cash, money market investments, interest-earning deposits
with other institutions, investment securities available for sale, Federal Home
Loan Bank stock and all deposits except time deposits.
At June 30, 1997, the fair market value of both investments and mortgage-backed
securities exceeded the net carrying value by approximately $10, respectively.
At June 30, 1996, the net carrying value of investments and mortgage-backed
securities both exceeded the fair market value by approximately $4. Estimated
fair values are based on quoted market prices, dealer quotes, and prices
obtained from independent pricing services. Refer to Notes and 3 herein for the
detail on breakdowns by type of investment products.
The fair value of loans and loans held for sale exceeded the carrying value by
approximately $3,293 and $1,282 at June 30, 1997 and 1996, respectively. Loans
with comparable characteristics including collateral and repricing structures
were segregated for valuation purposes. Each loan pool was separately valued
utilizing a discounted cash flow analysis. Projected monthly cash flows were
discounted to present value using a market rate for comparable loans.
Characteristics of comparable loans included remaining term, coupon interest and
estimated prepayments speeds.
The carrying amounts and estimated fair values of deposits at June 30, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Noninterest-bearing:
Demand accounts $ 6,274 $ 6,274 $ 4,860 $ 4,860
Interest-bearing:
NOW and MMDA accounts 35,588 35,588 33,732 33,732
Passbook accounts 27,690 27,690 28,704 28,704
Time deposits 105,467 104,740 97,387 96,753
- ---------------------------------------------------------------------------------------------
Total Deposits $175,019 $174,292 $164,683 $164,049
=============================================================================================
</TABLE>
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. Fair values for time deposits are estimated using
a discounted cash flow calculation that applies contractual cost currently being
paid on the existing portfolio to current market rates being offered locally for
deposits of similar remaining maturities. The mark-to-market valuation
adjustment for the time deposit portfolio consists of the present value of the
difference of these two cash flows, discounted at the assumed market rate of the
corresponding maturity.
The carrying amounts and estimated fair values of borrowed funds at June 30,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Borrowed funds:
FHLB advances $11,044 $11,028 $6,327 $6,314
=============================================================================================
</TABLE>
The fair value of borrowed funds is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
advances of similar remaining maturities.
26
<PAGE> 21
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
There is no material difference between the carrying value and the estimated
fair value of the Company's off-balance sheet items which totaled $6.3 million
and $7.4 million at June 30, 1997 and 1996, respectively, and are primarily
comprised of unfunded loan commitments which are generally priced at market at
the time of funding.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgements regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
(16) LAUREL CAPITAL GROUP, INC.
(PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30, June 30,
STATEMENT OF FINANCIAL CONDITION 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 213 $ 154
Other equity investments 182 87
Investment in Laurel Savings Bank 21,029 20,918
- ---------------------------------------------------------------------------------------
Total assets $21,424 $21,159
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other accrued expenses $ 162 $ 73
- ---------------------------------------------------------------------------------------
162 73
- ---------------------------------------------------------------------------------------
Stockholders' equity 21,262 21,086
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $21,424 $21,159
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, June 30, June 30,
STATEMENT OF OPERATIONS 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before equity in undistributed earnings of
subsidiary--dividends from subsidiary $2,301 $ 120 $ --
Other equity income 95 87 --
Equity in undistributed income of Laurel Savings
Bank 13 2,531 2,543
- ---------------------------------------------------------------------------------------
2,409 2,738 2,543
- ---------------------------------------------------------------------------------------
Other operating expenses 86 63 --
- ---------------------------------------------------------------------------------------
Income before income taxes 2,323 2,675 2,543
Provision for income taxes 4 10 --
- ---------------------------------------------------------------------------------------
Net income $2,319 $2,665 $2,543
=======================================================================================
</TABLE>
Note continued
27
<PAGE> 22
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, June 30, June 30,
STATEMENT OF CASH FLOWS 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 2,319 $ 2,665 $ 2,543
Undistributed income of Laurel Savings Bank (13) (2,531) (2,543)
Adjustments to reconcile net income to net cash
provided by operating activities:
Other--net (5) (14) --
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 2,301 120 --
- ------------------------------------------------------------------------------------
Financing activities:
Acquisition of treasury stock (1,626) -- --
Stock options exercised 44 107 36
Dividends paid (660) (446) (305)
- ------------------------------------------------------------------------------------
Net cash provided by financing activities (2,242) (339) (269)
- ------------------------------------------------------------------------------------
Net change in cash and cash equivalents 59 (219) (269)
- ------------------------------------------------------------------------------------
Cash and cash equivalents at the beginning of the
period $ 154 $ 373 $ 642
Net change during the period 59 (219) (269)
- ------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 213 $ 154 $ 373
====================================================================================
</TABLE>
(17) CONTINGENT LIABILITIES
The Company is subject to a number of asserted and unasserted potential claims
in the normal course of business. In the opinion of management and legal
counsel, the resolution of these claims will not have a material adverse effect
on the Company's financial position, liquidity or results of operation.
28
<PAGE> 23
LOGO LAUREL CAPITAL GROUP, INC.
SELECTED FIVE YEAR FINANCIAL DATA
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
June 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $211,987 $196,947 $188,916 $177,729 $175,931
Loans, net 144,670 143,532 143,091 130,213 129,949
Loans held for sale 1,827 1,627 1,205 604 2,613
Mortgage-backed securities 1,220 1,546 8,222 14,371 19,747
Mortgage-backed securities
available for sale 13,259 14,021 4,892 -- --
Investment securities 15,494 9,948 9,655 5,818 4,659
Investment securities available
for sale 15,494 11,639 2,057 8,004 --
Money market investments 9,086 6,291 12,085 9,729 11,324
Savings deposits 175,019 164,683 163,308 157,179 158,132
FHLB advances 11,044 6,327 2,000 -- --
Stockholders' equity 21,262 21,086 18,918 16,482 13,845
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
June 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $15,342 $14,785 $13,834 $13,258 $14,400
Interest expense 7,715 7,319 6,347 5,989 7,057
- ----------------------------------------------------------------------------------------------
Net interest income before
provision for possible loan
losses 7,627 7,466 7,487 7,269 7,343
Provision for possible loan
losses 30 30 100 135 385
- ----------------------------------------------------------------------------------------------
Net interest income after
provision for possible loan
losses 7,597 7,436 7,387 7,134 6,958
Net gain (loss) on
investments, loans and
mortgage-backed securities
available for sale 125 92 (31) (147) 31
Other income 592 535 513 521 562
Operating expenses 4,651 3,777 3,752 3,602 3,625
- ----------------------------------------------------------------------------------------------
Income before income taxes 3,663 4,286 4,117 3,906 3,926
Income tax expense 1,344 1,621 1,604 1,562 1,586
- ----------------------------------------------------------------------------------------------
Net income before cumulative
effect of change in
accounting principle 2,319 2,665 2,513 2,344 2,340
Cumulative effect of change in
accounting principle -- -- 30 500 --
- ----------------------------------------------------------------------------------------------
Net income $ 2,319 $ 2,665 $ 2,543 $ 2,844 $ 2,340
==============================================================================================
Fully diluted earnings per
share before cumulative
effect of change in
accounting principle $ 1.48 $ 1.72 $ 1.64 $ 1.55 $ 1.55
Cumulative effect of change in
accounting principle -- -- .02 .33 --
==============================================================================================
Fully diluted earnings per
share $ 1.48 $ 1.72 $ 1.66 $ 1.88 $ 1.55
==============================================================================================
</TABLE>
STATISTICAL PROFILE:
<TABLE>
<CAPTION>
June 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.13% 1.39% 1.41% 1.62% 1.35%
Return on average equity 10.82% 13.29% 14.33% 18.57% 18.45%
Average equity to average assets
ratio 10.47% 10.43% 9.85% 8.71% 7.33%
Dividend payout ratio 29.73% 16.86% 12.70% 9.00% 9.00%
==============================================================================================
</TABLE>
29
<PAGE> 24
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
In fiscal 1997, the Company reported net income of $2.3 million or $1.48 per
share on a fully diluted basis compared to $2.7 million or $1.72 per share for
fiscal 1996 and $2.5 million or $1.66 per share for fiscal 1995. The net income
for fiscal 1997 includes a special one-time after tax charge of $636,000 or
$0.41 per share to recapitalize the SAIF. Excluding that charge, net income for
fiscal 1997 would have been approximately $3.0 million or $1.89 per share and
would have achieved the Company's highest level of net earnings. Included in the
$2.5 million of net income for fiscal 1995 was a $30,000 cumulative effect of a
change in an accounting principle which relates to the adoption of Financial
Accounting Standards Board's ("FASB") Statement No. 115 relating to the
accounting for debt and equity securities.
Excluding the special one-time SAIF charge, the Company continued to report
strong returns on average assets (ROA) and average equity (ROE). The ROA for
fiscal 1997, 1996 and 1995 was 1.44%, 1.39% and 1.41%, respectively. The ROE for
fiscal 1997, 1996 and 1995 was 13.79%, 13.29% and 14.33%, respectively. Also
during fiscal 1997, the Company completed a 5% stock repurchase program, and
experienced continued growth in assets and equity.
The Company's ongoing emphasis on controlling its non-interest expenses has
resulted in a low ratio of such expenses to total average assets and the
continued outperformance by the Company relative to such ratio for national
thrift industry averages of similarily sized institutions.
Total loan origination during fiscal 1997 was about the same as compared to
fiscal 1996. Mortgage lending activity decreased during fiscal 1997 as compared
to the prior year and was concentrated more on the origination of adjustable
rate mortgages due to current conditions in the Company's market area. However,
consumer lending activity increased during the same time period due to the
Company's continued emphasis on consumer lending.
Efforts continue to further diversify the Company's assets by emphasizing loans
and investments having relatively shorter terms and/or adjustable rates such as
secured home equity line-of-credit loans, consumer installment loans and
investments in adjustable-rate mortgage-backed securities.
All known trends, events, uncertainties and current recommendations by the
regulatory authorities that would have a material effect on the Company's
liquidity, capital resources and results of operations have been considered in
the following discussion and analysis.
ASSET AND LIABILITY MANAGEMENT
The Company's vulnerability to interest rate risk exists to the extent that its
interest-bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest-earning
assets, which consist primarily of intermediate or long-term real estate loans
and investment and mortgage-backed securities.
The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of such assets and liabilities
were perfectly matched, and if the interest rates borne by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest income and on the net present
value of the Company's interest-earning assets and interest-bearing liabilities.
Management and the Board are responsible for managing interest rate risk and
employing risk management policies that monitor and limit exposure to interest
rate risk. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. These analyses
provide a range of potential impacts on net interest income and portfolio equity
caused by interest rate movements.
The Company uses financial modeling to measure the impact of changes in interest
rates on the net interest margin. Assumptions used by the Office of Thrift
Supervision are made regarding loan prepayments and amortization rates of
passbook and NOW account withdrawal rates. In addition, certain financial
instruments
30
<PAGE> 25
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
may provide customers with a degree of "optionality,' whereby a shift in
interest rates may result in customers changing to an alternative financial
instrument, such as from a variable to fixed rate loan product. Thus, the
effects of changes in future interest rates on these assumptions may cause
actual results to differ from simulated results.
The Company has established the following guidelines for assuming interest rate
risk:
Net interest margin simulation - Given a +/-200 basis point parallel shift in
interest rates, the estimated net interest margin may not change by more than
10% for a one-year period.
Portfolio equity simulation - Portfolio equity is the net present value of the
Company's existing assets, liabilities. Given a +200 basis point change in
interest rates, portfolio equity may not decrease by more than 50% of total
shareholders' equity. Given a -200 basis point change in interest rates,
portfolio equity may not decrease by more than 20% of total shareholders'
equity.
The following table illustrates the simulated impact of a 100 basis point or 200
basis point upward or downward movement in interest rates on net interest
income, return on average equity and earnings per share. This analysis was done
assuming that interest-earning asset levels at June 30, 1997 remained constant.
The impact of the rate movements was developed by simulating the effect of rates
changing over a twelve-month period from the June 30, 1997 levels.
Interest Rate Simulation Sensitivity Analysis
- --------------------------------------------------------------------------------
Movements in interest rates from June 30, 1997 rates
<TABLE>
<CAPTION>
Increase Decrease
Simulated impact in the next 12 months -------------------- --------------------
Compared with June 30, 1997: +100 bp +200 bp -100 bp -200 bp
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net interest revenue increase/(decrease) 3.1% 1.0% (3.4)% (7.4)%
Return on average equity
increase/(decrease) 116bp 37bp (127)bp (276)bp
Earnings per share increase/(decrease) $.16 $.05 $(.17) $(.38)
-------- -------- -------- --------
</TABLE>
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. The following table presents a summary of the Company's gap
position at June 30, 1997. In preparing the table below, adjustable-rate loans
are included in the period in which the interest rates are next scheduled to
adjust rather than in the period in which the loans mature. In addition, the
assumptions used by the Office of Thrift Supervision for regulatory purposes
have been made with respect to loan prepayments and contractual amortization
rates and passbook and NOW account withdrawal rates. The above assumptions may
not be indicative of the actual prepayments and withdrawals which may be
experienced by the Company.
31
<PAGE> 26
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months 4-12 1-5 Over 5
Interest Sensitivity Period or Less Months Years Years Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Loans and mortgage-backed
securities $29,916 $ 38,477 $52,942 $42,301 $163,636
Investment securities 21,950 -- 10,353 13,614 45,917
- ----------------------------------------------------------------------------------------------
Total rate sensitive assets $51,866 $ 38,477 $63,295 $55,915 $209,553
==============================================================================================
Rate sensitive liabilities:
Deposits:
Certificates of deposit $17,106 $ 50,666 $32,461 $ 5,235 $105,468
NOW and money funds 7,741 13,004 10,464 4,379 35,588
Passbooks 1,265 3,455 11,810 11,158 27,688
- ----------------------------------------------------------------------------------------------
Total deposits $26,112 $ 67,125 $54,735 $20,772 $168,744
Borrowings 5,900 3,000 2,000 144 11,044
- ----------------------------------------------------------------------------------------------
Total rate sensitive liabilities $32,012 $ 70,125 $56,735 $20,916 $179,788
==============================================================================================
Interest sensitivity GAP:
Interval 19,854 (31,648) 6,560 34,999 --
Cumulative $19,854 $(11,794) $(5,234) $29,765 $ 29,765
==============================================================================================
Ratio of cumulative GAP to total
assets 9.37% -5.56% -2.47% 14.04%
==============================================================================================
</TABLE>
The Company targets its one year gap to be in the range of +10.0% to -10.0%. At
June 30, 1997 and 1996, the Company's one year gap was -5.56% and -4.37%,
respectively. As part of its effort to minimize the impact changes in interest
rates have on operating results, the Company continues to emphasize the
origination of interest-earning assets with adjustable rates and shorter
maturities and to extend the terms of its interest-bearing liabilities. The
Company also maintains a high level of liquid assets, which includes assets
available for sale, that could be reinvested at higher yields if interest rates
were to rise. Management believes its asset and liability strategies reduce the
Company's vulnerability to fluctuations in interest rates.
FINANCIAL CONDITION
The Company's consolidated assets totalled approximately $212.0 million at June
30, 1997, an increase of $15.0 million or 7.6% from June 30, 1996. The growth in
assets was primarily the result of increases in investment securities and
investment securities available for sale, interest-bearing deposits with other
institutions and money market investment securities which were partially offset
by a decrease in both mortgage-backed securities and mortgage-backed securities
available for sale. The growth was funded primarily from increases in Federal
Home Loan Bank Advances and savings deposits and income generated from current
earnings.
32
<PAGE> 27
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The following table presents the average daily balances of interest-earning
assets and interest-bearing liabilities for the years ended June 30, 1997, 1996
and 1995, which management believes is representative of the operations of the
Company.
<TABLE>
<CAPTION>
Year Ended June 30,
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans1 $122,406 $122,487 $121,129
Consumer and other loans1 24,401 21,959 19,436
- -------------------------------------------------------------------------------------------
Total loans 146,807 144,446 140,565
Mortgage-backed securities 14,658 13,029 13,841
Investment securities 35,513 26,717 18,580
Interest-bearing deposits 3,029 3,366 2,440
- -------------------------------------------------------------------------------------------
Total interest-earning assets $200,007 $187,558 $175,426
===========================================================================================
Interest-bearing liabilities:
Passbook and club accounts $ 27,830 $ 28,163 $ 29,882
NOW and money market deposit accounts 34,763 34,081 37,732
Certificates of deposit 100,969 95,788 85,981
Borrowings 9,353 5,122 655
- -------------------------------------------------------------------------------------------
Total interest-bearing liabilities $172,915 $163,154 $154,250
- -------------------------------------------------------------------------------------------
Net earning assets $ 27,092 $ 24,404 $ 21,176
- -------------------------------------------------------------------------------------------
Average interest-earning assets as a percent of
average interest-bearing liabilities 115.7% 115.0% 113.7%
===========================================================================================
</TABLE>
(1) Includes loans on which the Company has discontinued accruing interest.
The Company continually seeks to increase its level of profitability while
maintaining its asset quality. This emphasis on earnings and asset quality has
resulted in an increase in net income from $2.3 million for fiscal 1993 to $3.0
million for fiscal 1997, excluding the SAIF adjustment, and a continued decrease
in in the ratio of non-performing assets to total assets from .47% at June 30,
1993 to .43% at June 30, 1997. The Company has also focused its efforts on more
evenly matching the maturities and/or repricing characteristics of its
interest-earning assets and interest-bearing liabilities in order to minimize
fluctuations that may occur due to changes in market interest rates.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
The Company's investment securities totaled $15.5 million at June 30, 1997, an
increase of $5.6 million or 55.8% compared to June 30, 1996. The increase was
primarily due to purchases of $13.0 million of investment securities during
fiscal 1997 which was partially offset by $7.4 million of securities which
matured or were called during the period. The Company primarily invests in
government and corporate notes and bonds. Investment securities available for
sale totaled $15.5 million at June 30, 1997, or an increase of $3.9 million
compared to June 30, 1996. The increase was primarily due to the purchase of
approximately $2.3 million of municipal bonds. The increase in purchases of
investment securities and investment securities available for sale was primarily
due to the investment of the funds generated from the increases in savings
deposits and FHLB advances.
MORTGAGE-BACKED SECURITIES AND MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
The total of all mortgage-backed securities was $14.5 million at June 30, 1997,
a decrease of $1.1 million or 7.0% compared to June 30, 1996. This decrease was
primarily due a reduction in the volume of purchases of these securities in
fiscal 1997 as compared to fiscal 1996. During fiscal 1997, the Company
purchased approximately $600,000 of adjustable-rate mortgage-backed securities
as compared to the purchase of $5.2 million of such securities in the prior
fiscal year.
33
<PAGE> 28
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
Loans receivable increased $1.1 million or .8% to $144.7 million during the
fiscal year ended June 30, 1997, as compared to an increase of $441,000 or .3%
for the fiscal year ended June 30, 1996. Mortgage loan originations in fiscal
years 1997 and 1996 amounted to $15.0 million, and $17.5 million, respectively.
The Company originated primarily adjustable rate loans in fiscal 1997 due to
current conditions in the Bank's market area. Of the total amount of mortgage
and construction loans originated in fiscal 1997, $9.8 million or 65.4% were
adjustable-rate mortgages as compared to $6.5 million or 37.1% in fiscal 1996.
Fixed-rate mortgage and construction loan originations decreased in fiscal 1997
to $5.2 million or 34.6% as compared to $11.0 million or 37.0% in fiscal 1996.
Other loan originations and purchases, including home equity and other
installment loans, totalled $15.4 million in fiscal 1997, $13.2 million in
fiscal 1996, and $12.6 million in fiscal 1995. The Company has placed a greater
emphasis on other installment lending, including home equity loans, personal
loans, auto loans and other secured lines of credit.
DEPOSIT PORTFOLIO
Savings deposits increased $10.3 million to $175.0 million during fiscal 1997.
This increase was due to the combined result of $4.0 million of net deposit
growth and interest credited of approximately $6.3 million. Deposit increases
occurred in certificate of deposit accounts and NOW/checking accounts partially
offset by decreases in money market accounts and passbook accounts.
For the years ended June 30, 1997, 1996 and 1995, the Company had certificates
of deposit with remaining terms to maturity of three (3) to ten (10) years
aggregating $10.9 million, $14.1 million and $13.1 million, respectively. As
part of its asset and liability planning, the Company attempts to attract longer
term deposits, thereby reducing the interest rate sensitivity of its
interest-bearing liabilities.
BORROWINGS
Borrowings, consisting of Federal Home Loan Bank advances, increased from $6.3
million at June 30, 1996 to $11.0 million at June 30, 1997. The Company used the
additional funds as part of its asset and liability management strategy.
STOCKHOLDERS' EQUITY
Stockholders' equity increased $176,000 or .8% to $21.3 million at June 30, 1997
compared to $21.1 million at June 30, 1996. This increase resulted from net
income of $2.3 million, $157,000 of unrealized gains on investments available
for sale plus $44,000 of stock options exercised. These increases were reduced
by the repurchase of $1.6 million of the Company's common stock, the payment of
cash dividends of $660,000 on the Company's common stock and the purchase of
$58,000 of the Company's stock held in a deferred compensation trust. Under
regulations adopted by the Federal Deposit Insurance Corporation ("FDIC"), the
Company is required to maintain Tier I (Core) capital equal to at least 4% of
the Company's adjusted total assets, and Tier II (Supplementary) risk-based
capital equal to at least 8% of the risk-weighted assets. At June 30, 1997, the
Company exceeded all of its regulatory capital requirements. See "Liquidity and
Capital Resources."
34
<PAGE> 29
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The results of operations of the Company depend substantially on its net
interest income, which is determined by the interest rate spread between the
Company's interest-earning assets and interest-bearing liabilities and the
relative amounts of such assets and liabilities. The following table sets forth
the average yields earned on the Company's interest-earning assets and the
average rates paid on its interest-bearing liabilities for the periods
indicated, the weighted average yields and the rates at June 30, 1997, the
resulting average interest rate spreads, and the net yield on interest-earning
assets.
<TABLE>
<CAPTION>
At June 30, Year Ended June 30,
1997 1997 1996 1995
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Average yield on1:
Mortgage loans 7.72% 7.97% 8.15% 8.10%
Consumer loans 8.63 8.50 9.01 9.26
- ---------------------------------------------------------------------------------------------
Total loans 7.87 8.06 8.28 8.26
Mortgage-backed securities 7.23 7.07 7.31 7.29
Investment securities 6.66 6.51 6.30 5.83
Interest-earning deposits 6.26 5.28 5.50 5.16
- ---------------------------------------------------------------------------------------------
Total interest-earning assets 7.56 7.67 7.88 7.89
=============================================================================================
Average rates paid on1:
Passbook and club accounts 2.49 2.50 2.50 2.51
NOW and money market accounts 1.95 1.95 2.01 2.10
Certificates of deposit 5.86 5.75 5.88 5.54
Borrowings 5.75 5.66 5.88 7.07
- ---------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.56 4.46 4.49 4.11
- ---------------------------------------------------------------------------------------------
Average interest rate spread 3.00% 3.21% 3.39% 3.78%
=============================================================================================
Net yield on interest-earning assets2 N/A 3.82% 3.98% 4.27%
=============================================================================================
</TABLE>
(1) Average yields and rates are calculated by dividing the interest income or
expense for the period by the average daily balance which, with respect to
loans and loans held for sale, includes loans on which the Company has
discontinued accruing interest. The weighted averages at June 30, 1997 are
based on the weighted average contractual rates.
(2) Net interest income divided by average interest-earning assets.
35
<PAGE> 30
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
The following table presents certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (1) changes in
rate (change in rate multiplied by old volume), (2) changes in volume (changes
in volume multiplied by old rate), and (3) changes in rate-volume (change in
rate multiplied by the change in volume). Changes in net interest income due to
both volume and rate were combined with the changes of each based on their
proportionate amounts.
<TABLE>
<CAPTION>
Fiscal 1997
Compared to Fiscal 1996
Increase (Decrease) Due to
- -------------------------------------------------------------------------------------------
Rate/
Rate Volume Volume Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans $(219) $ (7) $ -- $(226)
Consumer loans (111) 220 (12) 97
Mortgage-backed securities (32) 119 (4) 83
Investment securities 56 554 18 628
Interest-earning deposits (7) (19) 1 (25)
- -------------------------------------------------------------------------------------------
Total (313) 867 3 557
- -------------------------------------------------------------------------------------------
Interest expense on interest-bearing
liabilities:
Deposits (79) 246 (3) 164
Borrowings (11) 252 (9) 232
- -------------------------------------------------------------------------------------------
Total (90) 498 (12) 396
- -------------------------------------------------------------------------------------------
Net change in net interest income $(223) $369 $ 15 $ 161
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996
Compared to Fiscal 1995
Increase (Decrease) Due to
- -------------------------------------------------------------------------------------------
Rate/
Rate Volume Volume Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans $ 59 $110 $ 1 $ 170
Consumer loans (48) 234 (6) 180
Mortgage-backed securities 3 (59) -- (56)
Investment securities 86 475 38 599
Interest-earning deposits 8 48 3 59
- -------------------------------------------------------------------------------------------
Total 108 808 36 952
- -------------------------------------------------------------------------------------------
Interest expense on interest-bearing
liabilities:
Deposits 521 182 15 718
Borrowings (8) 314 (51) 255
- -------------------------------------------------------------------------------------------
Total 513 496 (36) 973
- -------------------------------------------------------------------------------------------
Net change in net interest income $(405) $312 $ 72 $ (21)
===========================================================================================
</TABLE>
36
<PAGE> 31
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
INTEREST INCOME ON LOANS AND LOANS HELD FOR SALE
Interest on loans and loans held for sale decreased by $129,000 or 1.1% in
fiscal 1997 primarily due to a decrease in the average yield earned on the
portfolio from 8.28% during fiscal 1996 to 8.06% during fiscal 1997. The average
balance of the mortgage loan portfolio decreased by $81,000 or .1% and the
average balance of the consumer loan portfolio increased by $2.4 million or
11.1% during fiscal 1997. Interest on loans and loans held for sale increased
$349,000 or 3.0% in fiscal 1996 primarily due to a $3.9 million or 2.8% increase
in the average balance of the loan portfolio. The average yield earned on the
portfolio increased slightly to 8.28% during fiscal 1996 from 8.26% during
fiscal 1995. The average balance of the mortgage loan portfolio increased $1.3
million or 1.1% and the average balance of the consumer loan portfolio increased
$2.5 million or 13.0% during fiscal 1996. The increase in the average balance of
the loan portfolio during both fiscal 1997 and 1996 was primarily due to
continued originations. The decrease in the average yield during fiscal 1997 was
primarily due to increased originations of adjustable-rate mortgage loans which
generally have lower initial rates of interest compared to fixed rate loans and
the increased originations of home equity loans and auto loans that have lower
rates of interest due to the competitive interest rates in the CompanyIs market
area.
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES AND
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Interest income on mortgage-backed securities increased $83,000 or 8.7% during
fiscal 1997 primarily due to a $1.6 million increase in the average outstanding
balance. The increase in the average outstanding balance was due to the purchase
of $5.2 million of these securities during the third and fourth quarters of
fiscal 1996. The yield on mortgage-backed securities decreased from 7.31% in
fiscal 1996 to 7.07% in fiscal 1997. Interest income on mortgage-backed
securities decreased $56,000 or 5.6% during fiscal 1996 primarily due to a
$812,000 or 5.9% decrease in the average outstanding balance. The decline in the
average balance was primarily due to repayments of the loans underlying the
mortgage-backed securities and the sale of approximately $703,000 of
mortgage-backed securities available for sale. The yield on mortgage-backed
securities increased slightly from 7.29% in fiscal 1995 to 7.31% in fiscal 1996.
INTEREST INCOME ON INVESTMENTS AND INVESTMENTS AVAILABLE FOR SALE
Interest on investments and investments available for sale, consisting primarily
of U.S. Government and agency securities, high-grade corporate notes, mutual
funds, municipal bonds and FHLB stock, increased by $628,000 or 37.3% during
fiscal 1997 primarily due to an $8.8 million increase in the average balance of
these securities. In addition, the average yield on these investments increased
from 6.30% in fiscal 1996 to 6.51% in fiscal 1997. The increase in the average
outstanding balance during fiscal 1997 was primarily due to the increased
purchases of these securities with the funds generated from the increases in
savings deposits and FHLB advances. Interest on investments and investments
available for sale increased by $599,000 or 55.3% during fiscal 1996 primarily
due to a $8.1 million or 43.8% increase in the average balance of these
securities. In addition, the average yield on these investments increased from
5.83% in fiscal 1995 to 6.30% in fiscal 1996. The increase in the average
outstanding balance during fiscal 1996 was primarily due to increased purchases
of these securities due to the decline in loan originations as a result of the
general real estate market in the Company's area. The increase in yield during
fiscal 1996 primarily reflects the general rise in interest rates.
37
<PAGE> 32
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
INTEREST INCOME ON INTEREST-EARNING DEPOSITS
Interest on deposits, consisting of interest-bearing deposits maintained with
the FHLB of Pittsburgh, decreased by $25,000 or 13.5% during fiscal 1997
compared to fiscal 1996 and increased by $59,000 or 46.8% during fiscal 1996
compared to fiscal 1995. The decrease in fiscal 1997 was primarily due to a
$337,000 decrease in the average outstanding balance of these deposits. In
addition, the average yield decreased from 5.50% in fiscal 1996 to 5.28% in
fiscal 1997. The increase in fiscal 1996 was primarily due to a $926,000 or
38.0% increase in the average outstanding balance of these deposits. In
addition, the average yield increased from 5.16% in fiscal 1995 to 5.50% in
fiscal 1996.
INTEREST EXPENSE ON SAVINGS DEPOSITS
Interest expense on savings deposits increased by $164,000 or 2.3% in fiscal
1997 primarily due to a $5.5 million increase in the average balance of savings
deposits. This increase was partially offset by a decrease in the average rate
paid on deposits from 4.44% in fiscal 1996 to 4.39% in fiscal 1997. The increase
in the average balance of deposits during fiscal 1997 was primarily due to
increased marketing of the Company's certificate of deposit and checking
products. Interest expense on savings deposits increased $717,000 or 11.4% in
fiscal 1996 primarily due to an increase in the average rate paid on deposits
from 4.10% in fiscal 1995 to 4.44% in fiscal 1996. The average balance of
savings deposits increased by $4.4 million or 2.9% during fiscal 1996. The
increase in the average rate paid on savings deposits during fiscal 1996 was
primarily due to the migration of deposits from lower yielding passbook and
money market funds into certificates of deposit which have higher rates of
interest.
INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings increased $232,000 in fiscal 1997 primarily due
to a $4.2 million increase in the average outstanding balance which was
partially offset by a decrease in the average rate paid on borrowings from 5.88%
in fiscal 1996 to 5.66% in fiscal 1997. Interest expense on borrowings increased
$255,000 in fiscal 1996 primarily due to a $4.5 million increase in the average
outstanding balance which was partially offset by a decrease in the average rate
paid on borrowings from 7.02% in fiscal 1995 to 5.88% in fiscal 1996. The
increased borrowings during fiscal 1997 and 1996 were used by the Company as
part of its asset and liability strategy.
NET INTEREST INCOME
Net interest income increased by $161,000 or 2.2% in fiscal 1997 as compared to
fiscal 1996 and decreased by $21,000 or .3% in fiscal 1996 over the prior fiscal
year. The increase in fiscal 1997 was primarily due to the increases in the
average outstanding balance of investments and investments available for sale,
loans receivable and mortgage-backed securities and mortgage-backed securities
available for sale. These increases were partially offset by increases in the
average outstanding balance of savings deposits and borrowings. The decrease in
fiscal 1996 was primarily due to an increase in the average rate paid on
deposits and increases in the average outstanding balances of such deposits and
borrowings. These increases were partially offset by increases in the average
outstanding balances of investments and loans.
Interest-earning assets as a percent of interest-bearing liabilities amounted to
115.7%, 115.0% and 113.7% at June 30, 1997, 1996 and 1995, respectively, and the
average interest rate spread was 3.21%, 3.39% and 3.78% for fiscal 1997, 1996
and 1995, respectively. The Company's average interest rate spread has decreased
from 3.78% in fiscal 1995 to 3.21% in fiscal 1997, primarily due to increases in
the average rates paid on the Company's savings deposits. The Company's net
interest income continued to exceed its total other expenses in fiscal 1997 and
1996, and the Company intends to continue to manage its assets and liabilities
in order to maintain its net interest income at levels in excess of total other
expenses.
38
<PAGE> 33
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES
Financial institutions are subject to the risk of possible loan losses as one of
the costs of lending. While the Company recognizes as losses all loans which are
determined to be uncollectible, experience dictates that at any point in time,
losses may exist in the portfolio which cannot be specifically identified. As a
result, a provision for such unidentifiable losses is established and charged
against current earnings to represent management's best estimate of such
potential losses. The provision for possible loan losses for fiscal 1997, 1996
and 1995 amounted to $30,000, $30,000 and $100,000, respectively.
At June 30, 1997, 1996 and 1995, the allowance for possible loan losses was $1.9
million or 1.3% of the total loan portfolio. As a percentage of non-performing
loans (loans delinquent 90 days and over, net of specific reserves) the
allowances for possible loan losses were 212.4%, 310.3%, and 363.3% at June 30,
1997, 1996 and 1995, respectively.
A review is conducted at least quarterly by management to determine that the
allowance for possible loan losses is adequate to absorb estimated loan losses.
Additionally, steps have been taken to strengthen and improve the Company's
overall underwriting, collection and recovery procedures. These steps are
expected to limit or reduce the level of loan losses in the future. In
determining the level of allowances for possible loan losses required,
consideration is given to general economic conditions, diversification of loan
portfolios, historical 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 reserves
may be necessary due to changes in economic conditions. In addition, as an
integral part of their periodic examination, the various regulatory agencies
review the adequacy of the Company's allowances for possible loan losses. An
agency may require the Company to make additions to the allowances based on
their judgement. No such additions were required to be made during the Company's
most recent examination.
During fiscal 1996, the Company adopted FASB Statement No. 114 "Accounting by
Creditors for Impairment of a Loan." FAS 114 defines the term "impaired loan"
and gives the creditor ways to measure the impairment. The measurement of
impairment may be based on (1) the present value of the expected future cash
flows of the impaired loan discounted at the loan's original effective interest
rate, (2) the observable market price of the impaired loan or (3) the fair value
of the collateral of a collateral dependent loan. The adoption of FAS 114 has
not been material to the Company's operations.
OTHER INCOME
Fees and service charges increased by $71,000 or 17.5% in fiscal 1997 and by
$2,000 or .5% in fiscal 1996. The increase in fiscal 1997 was primarily due to
increases in the fees and service charges earned on the Bank's NOW accounts.
During fiscal 1997, the Company realized net gains of $125,000 on investments,
mortgage-backed securities and loans in its available for sale portfolio. Gains
of $113,000 and $12,000 were recorded on the sale of investment securities and
loans, respectively. During fiscal 1996, the Company realized net gains of
$92,000 on investments, mortgage-backed securities and loans available for sale.
Gains of $48,000, $37,000 and $7,000 were recorded on the sale of
mortgage-backed securities, investment securities and loans, respectively.
Other operating income, which primarily consists of miscellaneous fees, rents,
and other income, was $116,000, $130,000 and $110,000 in fiscal 1997, 1996 and
1995, respectively. The decrease in fiscal 1997 was primarily due to a decrease
in other non-operating income resulting from a settlement of litigation received
by the Company in fiscal 1996.
Total other income increased $90,000 or 14.4% in fiscal 1997 and by $145,000 or
30.1% in fiscal 1996. The increase in fiscal 1997 was primarily due to the
increases in fees and service charges and gains on the sale of investments,
mortgage-backed securities and loans available for sale. The increase in fiscal
1996 was primarily due to increases in the gains on the sale of investments,
mortgage-backed securities and loans available for sale and in other operating
income.
39
<PAGE> 34
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Compensation and employee benefits, which is the largest component of total
operating expenses, increased by $57,000 or 3.4% in fiscal 1997 and by $28,000
or 1.7% in fiscal 1996. The increase in fiscal 1997 was primarily due to normal
salary and benefit increases. The increase in fiscal 1996 was primarily due to
normal salary and benefit increases that were partially offset by certain
reductions in staff that occurred during fiscal 1995.
Premises and occupancy expense increased by $25,000 or 5.4% in fiscal 1997 and
by $35,000 or 8.1% in fiscal 1996. The increase in fiscal 1997 was primarily due
to increases in furniture, fixture and equipment depreciation and expenses and
office building depreciation. The increases in depreciation were due to
renovations made during fiscal 1997. The increase in fiscal 1996 was primarily
due to increases in furniture, fixtures and equipment expense and repairs and
maintenance.
Federal insurance premiums increased by $834,000 or 223.0% in fiscal 1997 and by
$12,000 or 3.3% in fiscal 1996. The increase in fiscal 1997 was due to the $1.1
million pre-tax charge for the FDIC's one-time special assessment to
recapitalize the SAIF. Excluding this charge, Federal insurance premiums
decreased $225,000 or 60.2% during fiscal 1997. The amount of the premium is
based upon the average amount of deposits outstanding. The premium rate for
Federal deposit insurance decreased to approximately 6.5 basis points in fiscal
1997 from 23 basis points in fiscal 1996 as a result of the recapitalization of
the SAIF.
In fiscal 1997, the Company had a net gain of $31,000 from its real estate owned
("REO"). In fiscal 1996 and 1995, the Company incurred a net loss of $5,000 and
a net gain of $31,000, respectively.
Data processing expenses increased by $3,000 or 1.2% in fiscal 1997 and by
$10,000 or 4.2% in fiscal 1996. The increase in both fiscal 1997 and 1996 was
primarily attributable to increases in certain service bureau charges.
Professional fees decreased by $66,000 in fiscal 1997 and by $42,000 in fiscal
1996. The decrease in both years was primarily due to decreased legal expenses.
INCOME TAXES
Income taxes decreased $277,000 or 17.1% in fiscal 1997 and increased $17,000 or
1.1% in fiscal 1996 over the comparable prior years. The decrease in fiscal 1997
was primarily due to lower pre-tax income as a result of the $1.1 million
one-time special FDIC assessment. The increase in fiscal 1996 was due to a
$169,000 or 4.1% increase in income before income taxes partially offset by a
decrease in the Company's effective tax rate.
NET INCOME
Net income decreased $346,000 or 13.0% in fiscal 1997 primarily due to the $1.1
million pre-tax special one-time SAIF assessment. Excluding that assessment, net
income increased $290,000 or 10.9%. Net income increased $122,000 or 4.8% in
fiscal 1996 primarily due to a $145,000 increase in other income and a $49,000
increase in net interest income after provision for loan losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets increased from $188.9 million at June 30, 1995 to $196.9
million at June 30, 1996, and to $212.0 million at June 30, 1997. Stockholders'
equity increased from $18.9 million at June 30, 1995 to $21.1 million at June
30, 1996, and $21.3 million at June 30, 1997. At June 30, 1997, stockholders'
equity amounted to 10.0% of the Company's total assets under generally accepted
accounting principles ("GAAP").
The Company is currently required to maintain Tier I (Core) capital equal to at
least 4.0% of its adjusted total assets and Tier II (Supplementary) risk-based
capital equal to at least 8.0% of its risk-weighted assets. At June 30, 1997,
the Company substantially exceeded all of these requirements with Tier I and
Tier II ratios of 9.91% and 20.61%, respectively.
During the fiscal years ended June 30, 1997, 1996 and 1995, the Company had
positive cash flows from operating activities. Cash and cash equivalents
increased by $5.7 million, decreased by $5.5 million and
40
<PAGE> 35
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
increased by $772,000 for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively. See Consolidated Statements of Cash Flows.
Cash flows from operating activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to net income and
operations. Operating activities provided $1.9 million of cash in fiscal 1997,
$2.1 million in fiscal 1996 and $1.7 million in fiscal 1995.
Investing activities used cash on a net basis of $8.9 million in fiscal 1997,
$12.9 million in fiscal 1996, and $9.3 million in fiscal 1995. This was
primarily due to the amount of loans originated and the purchase of investment
securities and mortgage-backed securities which were greater than cash provided
by the sales, maturities and periodic principal payments received on investments
and loans.
Cash flows from financing activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to changes in deposits and
borrowings. Financing activities generated $12.6 million of cash in fiscal 1997,
due to a net increase of $5.3 million in FHLB advances, $10.3 million in
deposits and $44,000 from stock options exercised. These increases were
partially offset by $1.6 million of treasury stock acquired, $660,000 of cash
dividends paid and a decrease of $167,000 in advance deposits by borrowers for
taxes and insurance. During fiscal 1996, financing activities generated $5.3
million of cash due to a net increase of $4.3 million in FHLB advances, $1.4
million in deposits and $77,000 from stock options exercised. These increases
were partially offset by $446,000 of cash dividends paid and a decrease of
$77,000 in advance deposits by borrowers for taxes and insurance.
The Company's primary source of funds consists of deposits bearing market rates
of interest, loan repayments and current earnings. Also, advances from the FHLB
of Pittsburgh may be used on short term basis to compensate for savings outflows
or on a long term basis to support expanded lending and investment activities.
The Company uses its capital resources principally to meet its on-going
commitments to fund maturing certificates of deposit and deposit withdrawals,
fund existing and continuing loan commitments, maintain its liquidity and meet
operating expenses. At June 30, 1997, the Company had commitments to originate
loans totalling $6.3 million. Scheduled maturities of certificates of deposit
during fiscal 1998 totalled $67.8 million at June 30, 1997. Management believes
that by evaluating competitive instruments and pricing in its market area, the
Company can generally retain a substantial portion of its maturing certificates
of deposit.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with GAAP, which requires 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 the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effect 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, since
such prices are affected by inflation to a larger extent than interest rates.
RECENT LEGISLATION
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF.
Effective October 8, 1996, the FDIC imposed a one-time special assessment equal
to 65.7 basis points for all SAIF-assessable deposits as of March 31, 1995,
which was collected on November 27, 1996. The Company's one-time special
assessment amounted to $1.1 million. Net of related tax benefits, the one-time
special assessment amounted to $636,000. The payment of the special assessment
reduced the Company's capital by the amount of the assessment.
Following the imposition of the one-time special assessment, the FDIC lowered
assessment rates for SAIF members to reduce the disparity in the assessment
rates paid by BIF and SAIF members. Beginning October 1, 1996, effective SAIF
rates range from zero basis points to 27 basis points which is the same range of
premiums
41
<PAGE> 36
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
as the BIF rates. From 1997 through 1999, FDIC-insured institutions will pay 6.4
basis points of their SAIF-assessable deposits and approximately 1.3 basis
points of their BIF-assessable deposits to fund the Financing Corporation. Based
upon the $175.6 million of SAIF-assessable deposits at June 30, 1997, the
Company would expect to pay approximately $28,000 in insurance premiums per
quarter during 1997.
RECENT ACCOUNTING DEVELOPMENTS
On July 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS
No. 121 establishes guidelines for recognition of impairment losses related to
long-lived assets and certain intangibles and related goodwill for both assets
held and used as well as assets held for disposition. This statement excludes
financial instruments, long-term customer relationships of financial
institutions, mortgage and other servicing rights and deferred tax assets.
Adoption of this statement was immaterial to the Company's financial position
and results of operations.
On January 1, 1997, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," became effective. SFAS No.
125 establishes the criteria for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125
supersedes several accounting standards including SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The adoption of SFAS No. 125 was immaterial to the
Company's financial position and results of operations.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share." SFAS No.
128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of Basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. The
effect of SFAS No. 128 on the Company's EPS is not expected to be significant.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information About
Capital Structure." SFAS No. 129 continues the existing requirements to disclose
the pertinent rights and privileges of all securities other than ordinary common
stock but expands the number of companies subject to portions of its
requirements. Specifically, the Statement requires all entities to provide the
capital structure disclosures previously required by APB Opinion No. 15.
Companies that were exempt from the provision of APB Opinion No. 15 will now
need to make those disclosures. This standard is not expected to impact the
Company's current presentation regarding capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
42
<PAGE> 1
Exhibit 23
KPMG Peat Marwick LLP
One Mellon Bank Center Telephone 412 391 9710 Telefax 412 391 8963
Pittsburgh, PA 15219 Telex 7106642199 PMM & CO PGH
The Board of Directors
Laurel Capital Group, Inc.:
We consent to incorporation by reference in the Registration Statement No.
33-080798 on Form S-8 of Laurel Capital Group, Inc. of our report dated August
8, 1997, relating to the consolidated statements of financial condition of
Laurel Capital Group, Inc. and subsidiary as of June 30, 1997, and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1997,
which report appears in the June 30, 1997, annual report on Form 10-K of Laurel
Capital Group, Inc.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000892158
<NAME> LAUREL SAVINGS
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 406
<INT-BEARING-DEPOSITS> 5,843
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,753
<INVESTMENTS-CARRYING> 16,714
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<LOANS> 146,613
<ALLOWANCE> 1,943
<TOTAL-ASSETS> 211,987
<DEPOSITS> 175,019
<SHORT-TERM> 6,900
<LIABILITIES-OTHER> 4,662
<LONG-TERM> 4,144
0
0
<COMMON> 15
<OTHER-SE> 21,244
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<INTEREST-LOAN> 11,835
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<EXTRAORDINARY> 0
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