<PAGE> 1
Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended: September 30, 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 Number: 0-23101
LAUREL CAPITAL GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1717451
- ------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2724 Harts Run Road
Allison Park, Pennsylvania 15101
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: (412) 487-7404
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
The number of shares outstanding for each of the issuer's classes of common
stock, as of the latest practicable date is:
Class: Common stock, par value $.01 per share
Outstanding at October 30, 1997: 1,446,825 shares
<PAGE> 2
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of ..... 1
September 30, 1997 (Unaudited) and June 30, 1997
Consolidated Statements of Operations for the Three ..... 2
Months Ended September 30, 1997 and 1996 (Unaudited)
Consolidated Statements of Stockholders' Equity for the ..... 3
Three Months Ended September 30, 1997 (Unaudited)
Consolidated Statements of Cash Flows for the Three ..... 4
Months Ended September 30, 1997 and 1996 (Unaudited)
Notes to (Unaudited) Consolidated Financial Statements ..... 5-8
Item 2. Management's Discussion and Analysis of Financial ..... 9-14
Condition and Results of Operations
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings ..... 15
Item 2. Changes in Securities ..... 15
Item 3. Defaults upon Senior Securities ..... 15
Item 4. Submission of Matters to a Vote of ..... 15
Security Holders
Item 5. Other Information ..... 15
Item 6. Exhibits and Reports on Form 8-K ..... 15
Signatures ..... 16
</TABLE>
<PAGE> 3
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
<TABLE>
<CAPTION>
September 30 June 30,
1997 1997
- ----------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $895 $406
Money market investments 7,210 9,086
Interest-earning deposits with other institutions 4,294 5,843
Investment securities available for sale 16,064 15,494
Investment securities (market value of $17,031 and $15,504) 16,950 15,494
Mortgage-backed securities available for sale 13,077 13,259
Mortgage-backed securities (market value of $1,213 and $1,230) 1,197 1,220
Loans receivable, held for sale 1,622 1,827
Loans receivable, net of unearned discounts of $25 and $34 145,918 146,613
Allowance for possible loan losses (1,842) (1,943)
- ----------------------------------------------------------------------------------------------------
Loans receivable, net 144,076 144,670
Federal Home Loan Bank Stock 1,277 1,277
Real estate owned 96 ---
Accrued interest receivable:
Loans 847 894
Interest-earning deposits and investments 317 505
Mortgage-backed securities 84 86
Office properties and equipment, net of accumulated depreciation 1,336 1,267
Prepaid expenses and sundry assets 638 659
- ----------------------------------------------------------------------------------------------------
Total Assets $209,980 $211,987
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $172,801 $175,019
FHLB Advances 11,043 11,044
Advance deposits by borrowers for taxes and insurance 1,159 3,154
Accrued interest payable on savings deposits 1,589 533
Accrued income taxes 499 289
Other accrued expenses and sundry liabilities 908 686
- ----------------------------------------------------------------------------------------------------
Total Liabilities 187,999 190,725
- ----------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value; 5,000,000
shares authorized; 1,521,737 and 1,518,609 shares
issued respectively 15 15
Additional paid-in capital 4,702 4,690
Treasury stock, at cost (75,780 shares) (1,626) (1,626)
Retained earnings 18,684 18,095
Unrealized gains on securities available for sale, net of tax 324 206
Stock held in deferred compensation trust (118) (118)
- ----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 21,981 21,262
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $209,980 $211,987
====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-1-
<PAGE> 4
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended September 30, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------
1997 1996
--------- ----------
<S> <C> <C>
Interest Income:
Loans 2,950 2,981
Mortgage-backed securities 255 269
Investments 639 491
Interest-earning deposits 74 32
--------- ----------
Total interest income 3,918 3,773
Interest expense:
Savings deposits 1,901 1,757
Borrowings 120 111
--------- ----------
Total interest expense 2,021 1,868
--------- ----------
Net interest income before provision
for possible loan losses 1,897 1,905
Provision for possible loan losses 8 8
--------- ----------
Net interest income after provision
for possible loan losses 1,889 1,897
--------- ----------
Other income:
Service charges 142 124
Net gain on sale of investments and
mortgage-backed securities available for sale 30 6
Gain on the sale of loans held for sale 11 7
Other operating income 42 31
--------- ----------
Total other income 225 168
--------- ----------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 446 418
Premises and occupancy costs 121 118
Federal insurance premiums 27 94
Special SAIF assessment --- 1,059
Net income (loss) on real estate owned --- (8)
Data processing expense 62 59
Professional fees 42 43
Other operating expenses 185 189
--------- ----------
Total operating expenses 883 1,972
--------- ----------
Income before income taxes 1,231 93
--------- ----------
Provision for income taxes:
Federal 369 18
State 85 7
--------- ----------
Total income taxes 454 25
--------- ----------
Net income 777 68
========= ==========
Earnings per share
Primary $0.51 $0.04
========= ==========
Fully diluted $0.51 $0.04
========= ==========
Dividends per share $0.13 $0.11
========= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-2-
<PAGE> 5
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the Three Months Ended September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Gains Stock Held in
Additional on Securities Deferred Total
Common Paid-in Treasury Retained Available Compensation Stockholders'
Stock Capital Stock Earnings for sale Trust Equity
----------- ----------- ----------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $15 $4,690 ($1,626) $18,095 $206 ($118) $21,262
Stock options exercised
(3,128 shares) --- 12 --- --- --- --- 12
Dividends on common stock
at $0.13 per share --- --- --- (188) --- --- (188)
Unrealized gains on
securities available
for sale --- --- --- --- 118 --- 118
Net income --- --- --- 777 --- --- 777
----------- ----------- ---------- ---------- -------------- ------------- -------------
Balance, September 30, 1997 $15 $4,702 ($1,626) $18,684 $324 ($118) $21,981
============ =========== ========== ========== ============== ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE> 6
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
(Unaudited)
For the Three Months Ended September 30, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income: $777 $68
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 37 32
Provision for possible loan losses 8 8
Net gain on sale of real estate owned --- (18)
Net gain on sale of investments and mortgage-backed
securities available for sale (30) (6)
Gain on the sale of loans held for sale (11) (7)
Amortization of deferred loan fees (37) (36)
Origination of loans held for sale (366) (309)
Proceeds from sale of loans held for sale 582 366
Decrease (increase) in accrued interest receivable 237 (79)
Increase in accrued interest payable 1,056 903
Other - net 390 893
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,643 1,815
- -------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities (8,455) (5,000)
Purchase of investment securities available for sale (822) (1,882)
Proceeds from investment maturities 7,000 250
Proceeds from sale of investment securities available for sale 370 276
Principal repayments of investment and
mortgage-backed securities available for sale 274 387
Principal repayments of investment and
mortgage-backed securities 23 113
Decrease (increase) in loans 527 (3,247)
Proceeds from sale of real estate owned --- 87
Net additions to office properties and equipment (106) (51)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,189) (9,067)
- -------------------------------------------------------------------------------------------------------------------
Financing activities:
Net (decrease) increase in demand and club accounts (1,887) 133
Net (decrease) increase in time deposit accounts (331) 2,203
Net (decrease) increase in FHLB advances (1) 2,720
Decrease in advance deposits by borrowers
for taxes and insurance (1,995) (1,898)
Stock options exercised 12 13
Dividends paid (188) (167)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (4,390) 3,004
- -------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (2,936) (4,248)
Cash and cash equivalents at beginning of period 15,335 9,618
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $12,399 $5,370
===================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $845 $854
Interest on FHLB advances 140 104
Income taxes 292 68
Transfer of loans to real estate owned 96 ---
Cash paid during the period for interest includes interest credited on deposits of $625 and
$656 for the three months ended September 30, 1997 and 1996, respectively.
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-4-
<PAGE> 7
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and, therefore, do not
include all the information or footnotes necessary for a complete presentation
of financial condition, results of operation and cash flows in conformity with
generally accepted accounting principles. However, all adjustments, consisting
only of normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation, have been included. Significant accounting
policies have not changed since June 30, 1997. The results of operations for
the three months ended September 30, 1997 are not necessarily indicative of the
results which may be expected for the entire fiscal year. The financial
statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in Laurel Capital Group,
Inc.'s ( the "Company") 1997 Annual Report to Stockholders for the year ended
June 30, 1997. All amounts presented in the Notes to Unaudited Consolidated
Financial Statements are presented in thousands except share data.
EARNINGS PER SHARE
The average number of common and common equivalent shares used to calculate
fully diluted earnings per share for the three months ended September 30, 1997
and 1996 was 1,527,861 and 1,553,253, respectively. The average number of
common and common equivalent shares used to calculate primary earnings per
share for the three months ended September 30, 1997 and 1996 was 1,518,199 and
1,549,093, respectively.
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.
-5-
<PAGE> 8
SECURITIES
The Company accounts for investments in debt and equity securities in
accordance with Financial Accounting Standards Board ("FASB") Statement No. 115
("FAS 115"). FAS 115 requires that investments be classified as either: (1)
Securities Held to Maturity- reported at amortized cost, (2) Trading
Securities- reported at fair value, or (3) Securities Available for
Sale- reported at fair value. Unrealized gains and losses for trading
securities are reported in earnings while unrealized gains and losses for
securities available for sale are reported as a separate component of equity.
Unrealized gains of $324, net of tax, on investments classified as available
for sale is recorded as a separate component of equity at September 30, 1997.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances net of the allowance
for possible loan losses, net deferred loan fees and discounts. The Company
adopted FAS 114, "Accounting by Creditors for Impairment of a Loan" and FAS
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", an amendment of FAS 114, effective July 1, 1995. These statements
address the accounting by creditors for 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-balance homogeneous loans. Loans within the scope of these
statements are considered impaired when, based on current information and
events, it is probable that all principal and interest will not be collected in
accordance with the contractual terms of the loans. Management determines the
impairment of loans based on knowledge of the borrower's ability to repay the
loan according to the contractual agreement, the borrower's repayment history
and the fair value of collateral for certain collateral dependent loans.
Pursuant to FAS 114 paragraph 8, management does not consider an insignificant
delay or insignificant shortfall to impair a loan. Management has determined
that a delay less than 90 days will be considered an insignificant delay and
that an amount less than $5,000 will be considered an insignificant shortfall.
The Bank does not apply FAS 114 using major risk characteristics for groups of
loans, 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 FAS 114 is provided for in the allowance
for loan losses. The Bank reviews its loans for impairment on a quarterly
basis.
Loans receivable classified as held for sale are recorded in the financial
statements at the lower of cost or market.
(2) CONTINGENT LIABILITIES
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management and
legal counsel, the resolution of these claims is not expected to have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
-6-
<PAGE> 9
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment securities available for sale are comprised of the following:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1997:
Corporate notes and commercial paper $1,500 $2 $ --- 1,502
Municipal obligations 4,887 160 --- 5,047
FNMA preferred stock 250 11 --- 261
FHLMC stock 250 9 --- 259
Shay Financial Services
ARMs Fund 8,967 28 --- 8,995
-----------------------------------------------------
15,854 210 --- 16,064
Mortgage-backed securities 12,795 290 8 13,077
-----------------------------------------------------
Total $28,649 $500 $8 $29,141
=====================================================
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997, the contractual maturities of the Amortized Fair
debt securities available for sale are: Cost Value
---------------------------
<S> <C> <C>
Due after five years through ten years $1,500 $1,502
Due after ten years 4,887 5,047
---------------------------
$6,387 $6,549
===========================
</TABLE>
Mortgage-backed securities are shown at their contractual maturity dates.
Actual repayments may be different due to prepayments on the loans
underlying the securities. The FNMA stock, FHLMC stock and Shay Financial
Services ARMs Fund have no stated maturity.
Note: There were gross realized gains of $30 and $6 recorded during the
three months ended September 30, 1997 and 1996, respectively, on the
sale of investment securities available for sale. Proceeds from the
sale of investment securities available for sale during the three
months ended September 30, 1997 and 1996 were $370 and $276,
respectively.
Investment securities are comprised of the following:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1997:
Corporate notes and commercial paper $16,950 $85 $4 $17,031
Mortgage-backed securities 1,197 17 1 1,213
-----------------------------------------------------
Total $18,147 $102 $5 $18,244
=====================================================
</TABLE>
At September 30, 1997, the contractual maturities of the debt securities are:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------------------------
<S> <C> <C>
Due after one year through five years $4,956 $4,967
Due after five years through ten years 6,997 7,008
Due after five years through ten years 4,997 5,056
---------------------------
$16,950 $17,031
===========================
</TABLE>
Mortgage-backed securities are shown at their contractual maturity dates.
Actual repayments may be different due to prepayments on the loans
underlying the securities.
-7-
<PAGE> 10
(4) Loans Receivable
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
----------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Conventional:
1 to 4 family dwellings $113,118 $113,986
Multi-family dwellings 2,670 2,740
Commercial 5,729 5,676
----------------------------------------------------------------------------------------------
121,517 122,402
Guaranteed or insured 74 76
----------------------------------------------------------------------------------------------
Total long term with monthly amortization 121,591 122,478
Construction and development loans 2,694 3,079
----------------------------------------------------------------------------------------------
124,285 125,557
Less: Allowance for possible losses (1,301) (1,358)
Loans in process (887) (1,634)
Deferred loan fees (817) (860)
----------------------------------------------------------------------------------------------
121,280 121,705
----------------------------------------------------------------------------------------------
Consumer loans:
Home improvement loans (net of unearned
discounts of $25 and $34) 236 291
Mobile home loans 501 747
Loans secured by savings accounts 281 288
Commercial loans 890 998
Installment loans 21,429 21,226
----------------------------------------------------------------------------------------------
23,337 23,550
Less: Allowance for possible losses (541) (585)
----------------------------------------------------------------------------------------------
22,796 22,965
----------------------------------------------------------------------------------------------
$144,076 $144,670
==============================================================================================
</TABLE>
Changes in the allowance for possible loan losses for the three months
ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of the fiscal year $1,943 $1,899
Provision for losses 8 8
Charge-offs (113) (21)
Recoveries 4 21
----------------------------------------------------------------------------------------------
Balance at September 30, $1,842 $1,907
==============================================================================================
</TABLE>
At September 30, 1997, the recorded investment in loans that are considered to
be impaired under Statement 114 was $411. Included in this amount is $175 of
impaired loans for which the related allowance for credit losses is $8, and
$236 of impaired loans that as a result of write-downs do not have an allowance
for credit losses. The average recorded investment in impaired loans during the
three months ended September 30, 1997 was approximately $446. For the three
months ended September 30, 1997, the Company recognized interest income on
those impaired loans of $1 which was recognized using the cash basis method of
income recognition.
<TABLE>
<CAPTION>
September 30,
1997 1996
-----------------------------------
<S> <C> <C>
Non-accrual loans $816 $733
Non-accrual loans as a percent of total loans 0.57% 0.50%
---------------------------------------------
All loans 90 days or more past due are reported as non-accrual.
</TABLE>
-8-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
BALANCE SHEET DATA At September 30,
1997 1996
------------ ------------
(In thousands except per share data)
(Unaudited)
<S> <C> <C>
Total assets $209,980 $201,911
Money market investments 7,210 1,344
Interest-earning deposits with other institutions 4,294 3,485
Investment securities available for sale 16,064 13,278
Investment securities 16,950 14,698
Mortgage-backed securities available for sale 13,077 13,625
Mortgage-backed securities 1,197 1,433
Loans receivable held for sale 1,622 1,577
Loans receivable, net 144,076 146,807
Savings deposits 172,801 167,019
FHLB advances 11,043 9,047
Retained earnings 18,684 16,337
Stockholders' equity 21,981 21,008
Stockholders' equity per share $15.20 $13.87
</TABLE>
<TABLE>
<CAPTION>
STATISTICAL PROFILE Three months ended
September 30,
-----------------------------------
1997 1996
-----------------------------------
<S> <C> <C>
Average yield earned on all interest-earning assets 7.66% 7.73%
Average rate paid on all interest-bearing liabilities 4.53 4.40
Average interest rate spread 3.13 3.33
Net yield on average interest-earning assets 3.71 3.90
Average interest-earning assets as a percentage of
average interest-bearing liabilities 115.62 115.82
Return on average assets (1) (2) 1.48 0.14
Return on average assets (1) (3) 1.48 1.44
Return on average equity (1) (2) 14.41 1.28
Return on average equity (1) (3) 14.41 13.58
Average equity to average assets 10.27 10.61
</TABLE>
- ----------------------------------------------------
(1) Amounts are annualized.
(2) Percentages for the three months ended September 30, 1996, after effect of
the one-time special SAIF assessment.
(3) Percentages for the three months ended September 30, 1996, before effect of
the one-time special SAIF assessment.
-9-
<PAGE> 12
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL. Laurel Capital Group, Inc.'s (the "Company") only significant asset is
the stock it owns of its wholly-owned subsidiary, Laurel Savings Bank (the
"Bank"). The Company's net income for the three months ended September 30, 1997
was $777,000 compared to $68,000 for the same period in the prior year. The
$68,000 of net income during the three months ended September 30, 1996 reflects
the effect of the imposition of a $1.1 million pre-tax charge for the Federal
Deposit Insurance Corporation's ("FDIC") one-time special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"). For the three
months ended September 30, 1997, other expenses decreased by $1.1 million
primarily due to the SAIF assessment and other income increased by $57,000 or
33.9% compared to the same period in the prior year. Such benefits were
partially offset by a $429,000 increase in income tax expense and a $8,000
decrease in net interest income. These and other significant fluctuations are
discussed below.
NET INTEREST INCOME. The Company's operating results depend substantially on
the Bank's net interest income, which is determined by the average interest
rate spread between the Bank's interest-earning assets and interest-bearing
liabilities and the relative amounts of such assets and liabilities. Net
interest income decreased by $8,000 or .4% during the three months ended
September 30, 1997 as compared to the same period of the prior year. The
decrease was primarily due to a decrease in the average interest rate spread
from 3.33% for the quarter ended September 30, 1996 to 3.13% for the quarter
ended September 30, 1997. This decrease was partially offset by a $900,000 or
3.4% increase in average net earning assets for the quarter ended September 30,
1997 as compared to the quarter ended September 30, 1996. The decrease in the
average interest rate spread was primarily due to an increase in the average
interest rate paid on interest-bearing liabilities from 4.40% for the quarter
ended September 30, 1996 to 4.53% for the quarter ended September 30, 1997. In
addition, the average rate earned on the Bank's interest-earning assets
decreased from 7.73% for the quarter ended September 30, 1996 to 7.66% for the
quarter ended September 30, 1997.
Interest income on loans receivable and loans held for sale decreased by
$31,000 or 1.0% during the three months ended September 30, 1997 as compared to
the same period in the prior year. This was primarily due to a $3.3 million or
2.7% decrease in the average outstanding balance of mortgage loans receivable
for the quarter ended September 30, 1997 as compared to the same period of the
prior year. This decrease was partially offset by a $669,000 or 2.8% increase
in the average outstanding balance of consumer loans receivable for the quarter
ended September 30, 1997 as compared to the same period in the prior year. In
addition, the average yield on loans receivable increased from 8.07% for the
quarter ended September 30, 1996 to 8.18% for the quarter ended September 30,
1997. The increase in the average yield on loans receivable was primarily due
to an increase in the origination of fixed rate mortgage loans which generally
have higher rates of interest compared to adjustable rate loans. The Bank
continues to emphasize the origination of consumer loan products as part of its
Asset/Liability management due to their generally shorter terms.
Interest on mortgage-backed securities and mortgage-backed securities available
for sale decreased by $14,000 or 5.2% during the quarter ended September 30,
1997 as compared to the September 30, 1996 quarter. This decrease was primarily
due to a
-10-
<PAGE> 13
$1.1 million or 7.2% decrease in the average outstanding balance of
mortgage-backed securities during the quarter ended September 30, 1997 as
compared to the September 30, 1996 quarter. This decrease was partially offset
by an increase in the average yield on mortgage-backed securities from 7.05%
for the quarter ended September 30, 1996 to 7.20% for the quarter ended
September 30, 1997. At September 30, 1997, the Bank's portfolio of
mortgage-backed securities available for sale had net unrealized gains of
$282,000. The available for sale portfolio consists of fixed and adjustable
rate securities with an average yield of 7.36% at September 30, 1997. Rising
interest rates would reduce the unrealized gains in this portfolio if the fixed
rate securities were not sold. The held to maturity portfolio consists of three
adjustable rate collateralized mortgage obligations (CMO's) with an average
yield of 6.92% at September 30, 1997. At September 30, 1997, the Bank's
portfolio of mortgage-backed securities had net unrealized gains of $16,000. In
periods of rising interest rates, unrealized losses could occur due to the
timing difference of when the securities reprice. The Bank uses these
securities as part of its Asset/Liability strategy. See Note 3 of "Notes to
Unaudited Consolidated Financial Statements."
Interest income on investments and investments available for sale increased
during the three months ended September 30, 1997 by $148,000 or 30.1% from the
comparable period in 1996, primarily due to a $9.8 million or 32.5% increase in
the average outstanding balance of such securities for the quarter ended
September 30, 1997 as compared to the quarter ended September 30, 1996. This
increase was partially offset by a decrease in the average yield on investment
securities from 6.50% for the quarter ended September 30, 1996 to 6.37% for the
quarter ended September 30, 1997. The increase in the average outstanding
balance was primarily due to the investment of increased savings deposits and
funds borrowed from the Federal Home Loan Bank ("FHLB"). At September 30, 1997,
the Bank's portfolio of investment securities available for sale and investment
securities held to maturity had net unrealized gains of $210,000 and $81,000,
respectively. See Note 3 of "Notes to Unaudited Consolidated Financial
Statements."
Interest income on interest-earning deposits increased during the three months
ended September 30, 1997 by $42,000 or 131.3% from the comparable period in
1996. This increase was primarily due to an increase of $2.9 million or 118.5%
in the average outstanding balance of interest-earning deposits for the quarter
ended September 30, 1997 as compared to the September 30, 1996 quarter. Also
contributing to the increase in interest income on interest-earning deposits
was an increase in the average yield on interest-earning deposits from 5.21%
for the quarter ended September 30, 1996 to 5.50% for the quarter ended
September 30, 1997.
Interest expense on deposits increased by $144,000 or 8.2% for the quarter
ended September 30, 1997, compared to the same period in 1996 primarily due to
a $7.4 million or 4.6% increase in the average outstanding balance of deposits
during the quarter ended September 30, 1997 as compared to the same period of
the prior year. In addition, the average interest rate paid on savings deposits
increased slightly from 4.34% for the quarter ended September 30, 1996 to 4.48%
for the quarter ended September 30, 1997.
-11-
<PAGE> 14
Interest expense on borrowings increased $9,000 or 8.1% for the quarter ended
September 30, 1997 compared to the quarter ended September 30, 1996 due to a
$610,000 or 7.7% increase in the average outstanding balance of FHLB advances.
The average rate paid on borrowings increased slightly from 5.58% for the
quarter ended September 30, 1996 to 5.59% for the quarter ended September 30,
1997.
PROVISION FOR POSSIBLE LOAN LOSSES. The Bank provided $8,000 to its allowance
for possible loan losses for each of the quarters ended September 30, 1997 and
1996, respectively. Such provisions were the result of an analysis of the
adequacy of the allowance for possible loan losses in connection with a review
of the Bank's loan portfolio.
At September 30, 1997 and 1996, the Bank's allowance for possible loan losses
amounted to $1.8 million and $1.9 million, respectively, or 1.3% of the total
loan portfolio. As a percentage of non-performing loans (loans delinquent 90
days and over), the allowance for possible loan losses was 225.7% and 260.2% at
September 30, 1997 and 1996, respectively.
A review of the loan portfolio is conducted at least quarterly by management to
determine that the allowance for possible loan losses is adequate to absorb
estimated future loan losses. In determining the appropriate level of the
allowance for possible loan losses required, consideration is given to general
economic conditions, diversification of loan portfolios, historic loss
experience, identified credit problems, delinquency levels and adequacy of
collateral. Although management believes that the current allowance for
possible loan losses is adequate, future additions to the reserve may be
necessary due to changes in economic conditions and other factors. In addition,
as an integral part of their periodic examination, certain regulatory agencies
review the adequacy of the Bank's allowance for possible loan losses and may
direct the Bank to make additions to the allowance based on their judgement. No
such additions were required to be made during the Company's most recent
examination.
OTHER INCOME. Total other income increased by $57,000 or 33.9% to $225,000 for
the quarter ended September 30, 1997 as compared to the same period in 1996.
This was primarily due to a $24,000 increase in net gains on the sale of
investments available for sale, an $18,000 increase in fees and service
charges, an $11,000 increase in other income and a $4,000 increase in gains on
the sale of loans receivable held for sale during the three months ended
September 30, 1997 as compared to the same period in the prior year.
OPERATING EXPENSES. Total operating expenses decreased by $1.1 million or 55.2%
during the quarter ended September 30, 1997 as compared to the comparable 1996
quarter. This decrease was primarily due to the $1.1 million pre-tax SAIF
assessment during the quarter ended September 30, 1996, a $67,000 decrease in
federal insurance premiums, and $4,000 decrease in other operating expenses.
Such decreases were partially offset by a $28,000 increase in compensation and
benefits, a $8,000 net increase in real estate owned expenses and a $3,000
increase in both premises and occupancy and data processing expenses. The
decrease in federal insurance premiums was due to the premiums being lowered
for SAIF insured institutions for the quarterly insurance period beginning
January 1, 1997. The Bank currently pays approximately 6.30 basis points for
each $100.00 of insured deposits.
-12-
<PAGE> 15
INCOME TAX EXPENSE. Income tax expense increased by $429,000 for the quarter
ended September 30, 1997 as compared to the quarter ended September 30, 1996 as
a result of the SAIF assessment recorded during the quarter ended September 30,
1996.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets decreased by $2.0 million or 1.0% from June 30, 1997 to September
30, 1997. The largest decreases were a $1.9 million decrease in money market
investments, a $1.5 million decrease in interest-earning deposits with other
institutions and a $594,000 decrease in net loans receivable. These decreases
were partially offset by a $1.5 million increase in investment securities and a
$570,000 increase in investment securities available for sale. The largest
components of change in liabilities were a $2.2 million decrease in savings
deposits and a $2.0 million decrease in advance deposits by borrowers for taxes
and insurance partially offset by a $1.1 million increase in accrued interest
payable. The decrease in money market investments and interest-earning deposits
in other institutions was primarily due to the use of such assets to fund the
purchases of investment securities and the decreases in savings deposits.
Under regulations adopted by the FDIC, the Bank is required to maintain Tier I
(Core) capital equal to at least 4% of the Bank's adjusted total assets, and
Tier II (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At September 30, 1997, the Bank exceeded all of these
requirements, with Tier I and Tier II ratios of 10.19% and 21.37%,
respectively.
-13-
<PAGE> 16
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1997.
<TABLE>
<CAPTION>
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
-------- ---------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C>
Equity Capital (1) $21,746 $21,746 $21,746
Less unrealized securities gains (324) (324) (324)
Plus general valuation allowances (2) - - 1,338
------- ------- -------
Total regulatory capital 21,422 21,422 22,760
Minimum required capital 8,409 4,281 8,561
------- ------- ------
Excess regulatory capital $13,013 $17,141 $14,199
======= ======= =======
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $10,511 $ 6,391 $10,651
======= ======= =======
Regulatory capital as a percentage (3) 10.19% 20.11% 21.37%
Minimum required capital percentage 4.00 4.00 8.00
---- ----- ----
Excess regulatory capital percentage 6.19% 16.11% 13.37%
==== ===== =====
Minimum required capital percentage
to be well capitalized under Prompt
Corrective Action Provisions 5.00% 6.00% 10.00%
==== ===== =====
</TABLE>
- ----------------------------------------
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 033 for the three months ended
September 30, 1997.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets of
$210,213. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $106,513.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services as measured by the
consumer price index.
-14-
<PAGE> 17
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
PART II
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings at the present
time other than those generally associated with the normal course of
business. In the opinion of management and legal counsel, the
resolution of these claims are not expected to have a material adverse
effect on the Company's financial position, liquidity or results of
operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company outsources its primary data processing functions. A
challenging problem exits as the millennium ("year 2000") approaches
as many computer systems worldwide do not have the capability of
recognizing the year 2000 or years thereafter. To date, the Company
has received confirmations from its primary vendors that plans have
been developed by them to address and correct the issues associated
with the year 2000 problem.
The Company has established a management committee to identify all of
its functions potentially affected by the year 2000, and to ensure
that re-programming of the affected systems will be completed by
December 31, 1998, thus allowing adequate time for testing. The
Company does not anticipate that the year 2000 issue will pose any
significant operational problems or will have any material impact on
its results of operations. However, if the modifications and
conversions are not completed timely, the year 2000 problem may have a
material impact on the operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
None
-15-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
LAUREL CAPITAL GROUP, INC.
/s/ EDWIN R. MAUS
- ---------------------------------------
Edwin R. Maus
President and Chief Executive Officer
/s/ JOHN A. HOWARD, JR.
- ---------------------------------------
John A. Howard, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 14, 1997
-16-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000892158
<NAME> LAUREL CAPITAL GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 895
<INT-BEARING-DEPOSITS> 4,294
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,141
<INVESTMENTS-CARRYING> 18,147
<INVESTMENTS-MARKET> 18,244
<LOANS> 145,918
<ALLOWANCE> 1,842
<TOTAL-ASSETS> 209,980
<DEPOSITS> 172,801
<SHORT-TERM> 6,900
<LIABILITIES-OTHER> 4,155
<LONG-TERM> 4,143
0
0
<COMMON> 15
<OTHER-SE> 21,966
<TOTAL-LIABILITIES-AND-EQUITY> 209,980
<INTEREST-LOAN> 2,950
<INTEREST-INVEST> 639
<INTEREST-OTHER> 329
<INTEREST-TOTAL> 3,918
<INTEREST-DEPOSIT> 1,901
<INTEREST-EXPENSE> 2,021
<INTEREST-INCOME-NET> 1,897
<LOAN-LOSSES> 8
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 883
<INCOME-PRETAX> 1,231
<INCOME-PRE-EXTRAORDINARY> 1,231
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 777
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<YIELD-ACTUAL> 3.13
<LOANS-NON> 816
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,943
<CHARGE-OFFS> 113
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,842
<ALLOWANCE-DOMESTIC> 1,842
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
