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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, 1998
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 24, 1998, the aggregate value of the 2,052,041 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
154,069 shares held by all directors and officers of the Registrant as a
group, was approximately $38.7 million. This figure is based on the mean of the
bid and asked prices of $18.875 per share of the Registrant's Common Stock on
September 24, 1998.
Number of shares of Common Stock outstanding as of September 24, 1998:2,206,110
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,
1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1998 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, 1998, the Company had total assets
of $221.0 million and stockholders' equity of $23.5 million or 10.6% of total
assets. In addition, at such date, the Bank's core capital of $22.8 million and
tier I and tier II risk-based capital of $22.8 million and $24.3 million,
respectively, exceeded the required amounts by $14.1 million, $18.2 million and
$15.0 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 well as other states.
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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 4.1%
compared to 4.5% for the state of Pennsylvania and 4.6% 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 $88,000 while the
average sales price is approximately $116,000. 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, 1998, Laurel Savings' total loan portfolio amounted to $155.6
million ("total loan portfolio"), representing approximately 70.4% of the Bank's
total assets at that date. Permanent loans secured by single-family (one-to-four
units) residential properties amounted to $115.0 million or 73.9% of the total
loan portfolio at June 30, 1998. At June 30, 1998, multi-family (over four
units) residential loans amounted to $2.5 million or 1.6% of the total loan
portfolio while construction loans (all of which were for the construction of
single-family residential properties) totaled $4.3 million or 2.8% of the total
loan portfolio and commercial real estate loans totaled $6.4 million or 4.1% of
the total loan portfolio. The Bank's consumer loans, the second largest
component of the Bank's total loan portfolio, amounted to $27.4 million or 17.6%
of such portfolio at June 30, 1998.
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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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1998 1997 1996
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Amount % Amount % Amount %
----------- ---- -------- ----- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $114,972 73.9% $114,062 76.5% $113,160 76.1%
Multi-family 2,474 1.6 2,740 1.8 2,811 1.9
Construction(1) 4,341 2.8 3,079 2.1 4,281 2.9
Commercial 6,391 4.1 5,676 3.8 5,788 3.9
-------- ----- -------- ----- -------- -----
Total real estate loans 128,178 82.4 125,557 84.2 126,040 84.8
Consumer loans(2) 27,373 17.6 23,584 15.8 22,630 15.2
-------- ----- -------- ----- -------- -----
Total loans $155,551 100.0% $149,141 100.0% $148,670 100.0%
-------- ===== -------- ===== -------- =====
Less:
Loans in process (1,953) (1,634) (2,148)
Allowance for possible loan (1,852) (1,943) (1,899)
losses
Unamortized discounts and
fees (622) (894) (1,091)
-------- -------- --------
Net loans receivable $151,124 $144,670 $143,532
======== ======== ========
Loans held for sale (3) $1,633 $1,827 $1,627
======== ======== ========
</TABLE>
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(1) The $4.3 million construction loan portfolio outstanding at June 30,
1998 consisted of fixed-rate construction loans totaling $2.3 million
and adjustable-rate construction loans totaling $2.0 million.
(2) Consumer loans consist primarily of installment loans, auto loans, home
equity loans, home improvement loans, commercial 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 1998 Annual Report to Stockholders ("Annual Report") set
forth as Exhibit 13 hereto.
(3) Loans held for sale consist of guaranteed student loans.
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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, 1998 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, 2000- 2002- 2004- 2009- 2020 and
1998 1999 2001 2003 2008 2019 Thereafter
---- ---- ---- ---- ---- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate mortgage
Loans $ 82,137 $ 4,197 $ 7,886 $ 8,626 $21,708 $22,871 $16,849
Adjustable-rate
mortgage loans 41,700 1,940 2,092 2,396 6,672 14,870 13,730
Construction 4,341 4,341 -- -- -- -- --
Consumer and other
Loans 27,373 8,472 7,079 4,230 5,231 2,361 --
-------- ------- ------- ------- ------- ------- -------
Total $155,551 $18,950 $17,057(1) $15,252(1) $33,611(1) $40,102(1) $30,579(1)
======== ======= ======= ======= ======= ======= =======
</TABLE>
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(1) Of the $136.6 million of principal repayments contractually due after
June 30, 1999, $96.8 million have fixed-rates of interest and $39.8
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.
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Mortgage loans have been originated by the Bank primarily through
referrals from real 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 1998, 1997 and
1996 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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1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Real estate originations:
Residential:
Single-family $ 19,654 $ 9,798 $14,002
Multi-family -- 550 --
Commercial 360 835 --
Construction (1) 6,020 3,829 3,455
-------- ------- -------
Total real estate loan
originations 26,034 15,012 17,457
Consumer and other loan
originations (2) 17,465 15,390 13,154
-------- ------- -------
Total loan originations 43,499 30,402 30,611
Loan participation interests
purchased $1,000 29 --
-------- ------- -------
Total loan originations
and loan participation
interests purchased 44,499 30,431 30,611
-------- ------- -------
Students loans sold 1,107 719 550
Loan participation interests
sold -- -- 68
Principal loan repayments 36,890 28,330 28,897
Other, net (3) 242 44 233
-------- ------- -------
Total principal loan
repayments and other 38,239 29,093 29,748
-------- ------- -------
Net increase in loans
receivable, net and loans $ 6,260 $ 1,338 $ 863
held for sale ======== ======= =======
</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 totaled
$6.0 million during fiscal 1998, of which $3.0 million were fixed-rate,
single-family residential loans and $3.0 million were adjustable-rate,
single-family residential loans.
(2) Includes student loans held for sale
(3) Includes transfers to real estate owned and all activity in the
allowance for possible loan losses.
LENDING PROGRAMS AND POLICIES
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, 1998, $79.1 million or 50.9% 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 1998, 1997 and 1996, the Bank originated $14.3 million, $4.3 million and
$9.7 million, respectively, of fixed-rate mortgage loans. Due to the interest
rate environment during fiscal 1998, the Bank found the largest portion of its
single-family loan demand to be for fixed-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, 1998, $35.8 million or 23.0% 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 $360,000 of commercial real estate loans and purchased a $1.0 million
commercial real estate participation loan in fiscal 1998. The Bank originated no
multi-family residential real estate loans in fiscal 1998. At June 30, 1998, the
Bank's multi-family residential real estate loans and commercial real estate
loans amounted to $2.5 million and $6.4 million, respectively, or 1.6% and 4.1%
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 $8.9 million of commercial and
multi-family loans at June 30, 1998, $3.1 million have fixed rates of interest
and $5.8 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.
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 23.1%
of the real estate loans originated in fiscal 1998, 25.6% in fiscal 1997 and
19.8% in fiscal 1996. 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, 1998, construction loans amounted
to $4.3 million, all of which were originated for the construction of
residential properties.
A significant portion of the Bank's loans are made to builders on both
pre-sold and unsold properties. Speculative construction loans on unsold
properties carry more risk than pre-sold 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 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
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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. The Bank has continued to emphasize the origination
of consumer loans, installment loans and home equity loans, and such loans have
increased as a percentage of the total loan portfolio from 13.8% of the total
loan portfolio at June 30, 1995 to 17.6% of the total loan portfolio at June 30,
1998, primarily as a result of the Bank's increased origination of fixed-rate
home equity loans. The Bank originated $16.5 million, $15.4 million and $13.2
million of consumer loans in fiscal 1998, 1997 and 1996 out of total loan
originations and purchases of $44.5.4 million, $30.4 million and $30.6 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.
Installment loans, consisting primarily of home equity loans, and
commercial loans accounted for $26.9 million or 98.4% of all consumer loans at
June 30, 1998. Installment loans 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
accounted for $335,000 or 1.2% of the consumer loan portfolio at June 30, 1998.
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, 1998, the Bank's loans to one
borrower limit was approximately $3.4 million and the largest aggregate amount
of loans by the Bank to any one borrower, including related entities, was a
$984,000 participation loan secured by office buildings. This loan was current
as of June 30, 1998.
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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 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.
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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, 1998, the Bank had one loan to facilitate amounting to
$31,000.
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 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. 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.
11
<PAGE> 13
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, 1998.
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Nonaccruing loans:
Single-family residential real estate $355 $600 $364
Commercial real estate 119 158 198
Multi-family residential 23 28 39
Consumer and other loans 64 129 11
---- ---- ----
Total nonaccruing loans $561 $915 $612
==== ==== ====
Total nonperforming loans as a
percentage of net loans receivable .37% .63% .43%
==== ==== ====
Total real estate owned, net of related
reserves $143 $ -- $219
==== ==== ====
Total nonperforming loans and real
estate owned as a percentage of total assets .32% .43% .42%
==== ==== ====
</TABLE>
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, 1998, the Bank's classified assets
totaled $794,000, of which $612,000 were assets classified as substandard and
$182,000 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, diversification of loan
portfolios, historical loss experience, identified credit problems, delinquency
levels and adequacy of collateral. The Bank's allowances for loan losses totaled
$1.8 million at June 30, 1998 or 330.1% 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
12
<PAGE> 14
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.
13
<PAGE> 15
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>
Year Ended June 30,
-----------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of
Period $ 1,943 $ 1,899 $ 1,893
------- ------- -------
Charge-offs:
Residential real estate (71) (15) (20)
Commercial real estate (20) -- (10)
Consumer (61) (39) (51)
------- ------- -------
Total charge-offs (152) (54) (81)
------- ------- -------
Recoveries:
Residential real estate -- -- 1
Consumer 43 68 56
------- ------- -------
Total recoveries 43 68 57
------- ------- -------
Net (charge-offs) recoveries (109) 14 (24)
------- ------- -------
Provision for losses on loans 18 30 30
------- ------- -------
Balance at end of period $ 1,852 $ 1,943 $ 1,899
======= ======= =======
Allowance for loan losses as a
percent of total net loans
outstanding 1.23% 1.34% 1.32%
======= ======= =======
Allowance for loan losses as a
percent of nonperforming loans 330.12% 212.35% 310.29%
======= ======= =======
Ratio of net charge-offs to
average loans outstanding (.07)% --% (0.02)%
======= ======= =======
</TABLE>
14
<PAGE> 16
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,
---------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------
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) $ 603 76.7% $ 600 78.6% $ 598 79.0%
Multi-family real estate 26 1.6 29 1.8 30 1.9
Commercial real estate 203 4.1 237 3.8 231 3.9
Consumer 282 17.6 250 15.8 234 15.2
Unallocated 738 -- 827 -- 806 --
------ ----- ------ ----- ------ -----
Total $1,852 100.0% $1,943 100.0% $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 adjustable rate, as
15
<PAGE> 17
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,
-----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
GNMA $ -- $ -- $ --
FNMA -- -- --
FHLMC -- -- --
FNMA Remic 151 200 254
FHLMC Remic 900 900 1,130
Other -- 120 162
------- ------- --------
Total $ 1,051 $ 1,220 $ 1,546
======= ======= ========
Mortgage-backed securities available for sale:
GNMA $3,973 $4,900 $ 5,885
FNMA 3,424 4,050 4,397
FHLMC 183 307 437
FNMA Remic 228 284 284
FHLMC Remic 3,454 3,526 2,926
------- ------- --------
Total $11,262 $13,067 $ 13,929
======= ======= ========
</TABLE>
16
<PAGE> 18
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at June 30, 1998 is
presented below.
<TABLE>
<CAPTION>
Amounts at June 30, 1998 Which Mature In
-------------------------------------------------------------------------
One Year After One to After Five 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 -- -- -- 151 151
FHLMC Remic -- -- -- 900 900
--- ---- --- ------- -------
Total $-- $ -- $-- $ 1,051 $ 1,051
=== ==== === ======= =======
Weighted average yield --% --% --% 6.8% 6.8%
=== ==== === ======= =======
Mortgage-backed securities
available for sale:
GNMA $-- $ -- $-- $ 3,973 $ 3,973
FNMA -- 397 -- 3,027 3,424
FHLMC -- -- -- 183 183
FNMA Remic -- -- -- 228 228
FHLMC Remic -- -- -- 3,454 3,454
--- ---- --- ------- -------
Total $-- $397 $-- $10,865 $11,262
=== ==== === ======= =======
Weighted average yield --% 6.8% --% 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, 1998, 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 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
17
<PAGE> 19
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.
The following table sets forth the composition and maturities of the
Bank's investment securities portfolio at June 30, 1998.
<TABLE>
<CAPTION>
Amounts at June 30, 1998 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 $ -- $1,500 $ 6,498 $6,005 $14,003
======= ====== ======= ======= =======
Weighted average
yield --% 6.5% 6.8% 7.6% 7.1%
======= ====== ======= ======= =======
Investment securities available for sale:
Municipal obligations $ -- $ -- $ -- $ 8,914 $ 8,914
Shay Financial
Services Arms Fund (1) 14,444 -- -- -- 14,444
FNMA preferred stock (1) 250 250
FHLMC preferred stock (1) 250 250
FNMA stock (1) 610 -- -- -- 610
FHLMC stock (1) 925 -- -- -- 925
------- ------ ------- ------- -------
Total $16,479 $ -- $ -- $ 8,914 $25,393
======= ====== ======= ======= =======
Weighted average
yield 5.4% --% --% 5.4% 5.4%
======= ====== ======= ======= =======
</TABLE>
- ---------------------
(1) Such investment securities have no stated contractual maturity.
18
<PAGE> 20
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,
-------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Investment securities:
Corporate notes and
commercial paper $14,003 $15,494 $ 9,948
======= ======= =======
Investment securities available for sale:
Corporate notes and
commercial paper $ -- $ 1,500 $ 1,000
Municipal obligations 8,914 4,541 2,315
Financial Institutions
Insurance Group, Inc. stock -- -- 25
Shay Financial Services:
ARMs Fund 14,444 8,832 8,317
FNMA preferred stock 250 250 --
FHLMC preferred stock 250 -- --
FNMA stock 610 -- --
FHLMC stock 925 250 --
------- ------- -------
$25,393 $15,373 $11,657
======= ======= =======
</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 1998, the Bank borrowed $12.0
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 accounts.
19
<PAGE> 21
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,
--------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts $ 29,531 16.9% $ 27,690 15.8% $ 28,704 17.4%
NOW Accounts 24,916 14.2 23,819 13.6 20,115 12.2
MMDAs 16,444 9.4 18,047 10.3 18,477 11.2
Fixed-rate certificates 73,961 42.2 72,871 41.7 66,940 40.7
Jumbo certificates 2,000 1.1 3,650 2.1 2,233 1.4
IRA and Keogh accounts 28,538 16.2 28,946 16.5 28,214 17.1
-------- ----- -------- ----- -------- -----
Total $175,390 100.0% $175,019 100.0% $164,683 100.0%
======== ===== ======== ===== ======== =====
</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.
20
<PAGE> 22
The following table sets forth information relating to the Bank's deposit
flows during the periods indicated.
Year Ended June 30,
----------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
(Decrease) increase before
interest credited $ (6,078) $ 4,066 $(4,730)
Interest credited 6,449 6,270 6,105
-------- ------- -------
$ 371 $10,336 $ 1,375
======== ======= =======
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, 1998. 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, 1998 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at June 30, 1998 Maturing
As of June 30, in the Year Ended June,
--------------------- -----------------------------------------------
1997 1998 1999 2000 2001 Thereafter
---- ---- ---- ---- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
4.00% to 5.99% $ 62,012 $79,427 $ 44,800 $17,901 $ 10,903 $ 5,823
6.00% to 7.99% 38,683 22,791 7,120 7,700 2,381 5,590
8.00% to 9.99% 4,772 2,281 1,810 441 30 --
10.00% to 11.99% 2,520 -- -- -- -- --
-------- -------- -------- ------- -------- -------
Total $105,467 $104,499 $ 53,730 $26,042 $ 13,314 $11,413
======== ======== ======== ======= ======== =======
</TABLE>
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
21
<PAGE> 23
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, 1998, certificates of deposit in amounts of $100,000 or
more in the Bank amounted to $2.0 million. The following table sets forth as of
June 30, 1998 the distribution of certificates of deposit of $100,000 or more by
time remaining to maturity.
---------------
Amount
---------------
(In Thousands)
Three months or less $1,000
Over three through six months 200
Over six though 12 months 200
Over 12 months 600
------
Total $2,000
======
22
<PAGE> 24
The following table presents information concerning deposit accounts at
June 30, 1998, including the weighted average rate and the scheduled maturity of
certificates of deposit.
% of Total Average
Amounts Deposits Rate
------- -------- ----
(In Thousands)
Passbook and club accounts $ 29,531 16.8% 2.48%
Now accounts 24,916 14.2 1.01
MMDA's 16,444 9.4 2.23
-------- ----- ----
Total 70,891 40.4 1.91
-------- ----- ----
Certificates maturing by quarter:
September 30, 1998 19,517 11.1 5.39
December 31, 1998 11,500 6.6 5.39
March 31, 1999 12,425 7.1 5.56
June 30, 1999 10,288 5.9 5.53
September 30, 1999 8,547 4.9 5.73
December 31, 1999 5,621 3.2 5.84
March 31, 2000 5,053 2.9 5.87
June 30, 2000 6,821 3.9 5.88
September 30, 2000 3,927 2.2 5.76
December 31, 2000 3,101 1.8 5.78
March 31, 2001 4,117 2.3 5.64
June 30, 2001 2,169 1.2 6.23
Thereafter 11,413 6.5 5.99
-------- ----- ----
Total certificate accounts 104,499 59.6 5.65
-------- ----- ----
Total deposits $175,390 100.0% 4.14%
======== ===== ====
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, 1998, 1997
and 1996, the Bank had $17.0 million, $11.0 million and $6.3 million,
respectively, of FHLB advances outstanding.
23
<PAGE> 25
The following table presents certain information regarding short-term
FHLB advances for the periods indicated:
Year Ended June 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
FHLB advances:
Average balance outstanding $12,998 $ 9,353 $5,122
Maximum amount outstanding
at any month-end during
the period $17,035 $11,046 $6,328
Weighted average interest
rate during the period 5.54% 5.66% 5.87%
Amount outstanding at the
end of the period $17,033 $11,044 $6,327
Weighted average rate at the
end of the period 5.49% 5.75% 5.52%
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, 1998, LFSC had no assets or liabilities.
EMPLOYEES
The Bank had 40 full-time employees and 10 part-time employees as of
June 30, 1998. None of the employees are represented by a collective bargaining
agent, and the Bank believes it enjoys good relations with its personnel.
24
<PAGE> 26
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.
25
<PAGE> 27
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
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
26
<PAGE> 28
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.
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.
27
<PAGE> 29
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 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
28
<PAGE> 30
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-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, 1998, the
Bank met each of its capital requirements.
29
<PAGE> 31
The following table sets forth certain information concerning the
Bank's regulatory capital at June 30, 1998.
<TABLE>
<CAPTION>
------- ------- -------
Tier 1 Tier 1
Tier 1 Risk- Risk-
Core Based Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Equity Capital (1) $ 23,131 $ 23,131 $ 23,131
Less unrealized securities gains (290) (290) (290)
Plus general valuation allowances (2) -- -- 1,445
-------- -------- --------
Total regulatory capital 22,841 22,841 24,286
Minimum required capital 8,753 4,623 9,245
-------- -------- --------
Excess regulatory capital $ 14,088 $ 18,218 $ 15,041
======== ======== ========
Regulatory capital as a percentage (3) 10.44% 19.83% 21.09%
Minimum required capital percentage 4.00 4.00 8.00
-------- -------- --------
Excess regulatory capital percentage 6.44% 15.83% 13.09%
======== ======== ========
</TABLE>
- -----------------
(1) Represents equity capital of the Bank as reported to the FDIC and the
Department for the quarter ended June 30, 1998.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total assets
of $218,837. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighed assets of $115,158.
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 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
30
<PAGE> 32
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 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.
31
<PAGE> 33
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 are various limitations on the distribution of dividends to the
Company by the Bank.
32
<PAGE> 34
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 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
33
<PAGE> 35
under the percentage of taxable income method, in the absence of other factors
affecting taxable income, of 31.3%. As of June 30, 1998, 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 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
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<PAGE> 36
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.
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.
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<PAGE> 37
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%.
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<PAGE> 38
ITEM 2. PROPERTIES.
The following table sets forth certain information as of June 30, 1998
with respect to the offices of the Company and Laurel Savings.
<TABLE>
<CAPTION>
Owned Net Book Value of Property or
or Lease Leasehold Improvements as of
Location Leased Expiration Date June 30, 1998
- ------------------------------ ------------- ------------------ ----------------------------------
<S> <C> <C> <C>
Allegheny County:
363 Butler Street,
Etna Owned $ 152
1416 Mt. Royal Blvd.
Glenshaw Owned 172
1801 Jancey Street
Morningside, Pittsburgh Leased 2001(1) --
2724 Harts Run Road
Allison Park Owned 490
744 Little Deer Creek Road
Russellton Owned 97
Butler County:
125 West Main Street
Saxonburg Owned 199
</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.
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<PAGE> 39
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 "1998 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page
29 of the Company's 1998 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 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
30 to 32 of the Company's 1998 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 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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 1998 ("Proxy Statement").
38
<PAGE> 40
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, 1998
and 1997
Consolidated Statements of Operations for the Years Ended June 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended June 30,
1998, 1997 and 1996
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.
39
<PAGE> 41
(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 1998 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.
*** Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1997.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1998.
(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 1998 Annual Report to Stockholders which
are required to be included herein.
40
<PAGE> 42
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 28, 1998 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 28, 1998
- -------------------------------------------------
Arthur G. Borland, Director
/S/ RICHARD J. CESSAR Date: September 28, 1998
- -------------------------------------------------
Richard J. Cessar, Chairman of the Board
/S/ ANNETTE D. GANASSI Date: September 28, 1998
- -------------------------------------------------
Annette D. Ganassi, Director
/S/ RICHARD S. HAMILTON Date: September 28, 1998
- -------------------------------------------------
Richard S. Hamilton, Director
/S/ HARVEY J. HAUGHTON Date: September 28, 1998
- -------------------------------------------------
Harvey J. Haughton, Director
41
<PAGE> 43
/S/ EDWIN R. MAUS Date: September 28, 1998
- -------------------------------------------------
Edwin R. Maus, Director, President
and Chief Executive Officer
/S/ J. HAROLD NORRIS Date: September 28, 1998
- -------------------------------------------------
J. Harold Norris, Director
/S/ JOHN A. HOWARD, JR. Date: September 28, 1998
- -------------------------------------------------
John A. Howard, Jr., Senior Vice President,
Chief Financial Officer and Corporate Secretary/
Treasurer
42
<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, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
NET INCOME $2,665,000 $2,319,000 $3,051,000
========== ========== ==========
BASIC
NUMBER OF SHARES OUTSTANDING 2,256,238 2,247,021 2,176,893
EARNINGS PER SHARE $1.18 $1.03 $1.40
----- ----- -----
DILUTED:
NUMBER OF SHARES OUTSTANDING 2,323,455 2,325,658 2,312,389
EARNINGS PER SHARE $1.15 $1.00 $1.32
===== ===== =====
</TABLE>
_____________________
(1) NUMBER OF SHARES AND PER SHARE AMOUNTS ADJUSTED TO REFLECT
THE EFFECTS OF THE THREE-FOR-TWO STOCK SPLIT PAID ON
JANUARY 16, 1998.
<PAGE> 1
Exhibit 13
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
At June 30, 1998 and 1997
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 753 $ 406
Money market investments 3,532 9,086
Interest-earning deposits with other institutions 7,092 5,843
Investment securities available for sale (note 2) 25,539 15,494
Investment securities (market value of $14,097 and $15,504)
(note 2) 14,003 15,494
Mortgage-backed securities available for sale (note 3) 11,554 13,259
Mortgage-backed securities (market value of $1,068 and
$1,230) (note 3) 1,051 1,220
Loans receivable, held for sale (note 4) 1,633 1,827
Loans receivable, net of unearned discounts of $7 and $34 152,976 146,613
Allowance for possible loan losses (1,852) (1,943)
- ----------------------------------------------------------------------------------
Loans receivable, net (notes 4 and 5) 151,124 144,670
Federal Home Loan Bank Stock (note 6) 1,277 1,277
Real estate owned 143 --
Accrued interest receivable:
Loans 854 894
Interest-earning deposits and investments 406 505
Mortgage-backed securities 73 86
Office properties and equipment, net of accumulated
depreciation (note 7) 1,322 1,267
Prepaid expenses and sundry assets 630 659
- ----------------------------------------------------------------------------------
Total Assets $220,986 $211,987
- ----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits (note 8) $175,390 $175,019
FHLB Advances (note 9) 17,033 11,044
Advance deposits by borrowers for taxes and insurance 3,143 3,154
Accrued interest payable on savings deposits 523 533
Accrued income taxes (note 10) 169 289
Other accrued expenses and sundry liabilities 1,222 686
- ----------------------------------------------------------------------------------
Total Liabilities 197,480 190,725
- ----------------------------------------------------------------------------------
Stockholders' Equity (note 11)
Common stock, $.01 par value; 5,000,000 shares authorized;
2,305,055 and 2,277,913 shares issued, respectively 23 23
Additional paid-in capital 4,823 4,682
Treasury stock, at cost (113,670 shares) (1,626) (1,626)
Retained earnings 20,200 18,095
Unrealized gains on securities available for sale, net of
tax 290 206
Stock held in deferred compensation trust (204) (118)
- ----------------------------------------------------------------------------------
Total Stockholders' Equity 23,506 21,262
- ----------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $220,986 $211,987
- ----------------------------------------------------------------------------------
</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, 1998, 1997, and 1996
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 11,819 $ 11,835 $ 11,964
Mortgage-backed securities 970 1,036 953
Investments 2,660 2,311 1,683
Interest-earning deposits 316 160 185
- --------------------------------------------------------------------------------------------
Total interest income 15,765 15,342 14,785
Interest expense:
Savings deposits (note 8) 7,349 7,182 7,018
Borrowings (note 9) 720 533 301
- --------------------------------------------------------------------------------------------
Total interest expense 8,069 7,715 7,319
- --------------------------------------------------------------------------------------------
Net interest income before provision for possible
loan losses 7,696 7,627 7,466
Provision for possible loan losses 18 30 30
- --------------------------------------------------------------------------------------------
Net interest income after provision for possible
loan losses 7,678 7,597 7,436
- --------------------------------------------------------------------------------------------
Other income:
Service charges 595 476 405
Net gain on sales of investments and
mortgage-backed securities available for sale 186 113 85
Gain on the sale of loans held for sale 32 12 7
Other operating income 169 116 130
- --------------------------------------------------------------------------------------------
Total other income 982 717 627
- --------------------------------------------------------------------------------------------
Operating expenses:
Compensation and employee benefits (note 12) 1,734 1,750 1,693
Premises and occupancy costs 498 491 466
Federal insurance premiums 109 149 374
Special SAIF assessment -- 1,059 --
Net (income) loss on real estate owned (5) (31) 5
Data processing expense 255 252 249
Professional fees 487 178 244
Other operating expenses 819 803 746
- --------------------------------------------------------------------------------------------
Total operating expenses 3,897 4,651 3,777
- --------------------------------------------------------------------------------------------
Income before income taxes 4,763 3,663 4,286
- --------------------------------------------------------------------------------------------
Provision for income taxes (note 10)
Federal 1,383 1,091 1,319
State 329 253 302
- --------------------------------------------------------------------------------------------
Total income taxes 1,712 1,344 1,621
- --------------------------------------------------------------------------------------------
Net income $ 3,051 $ 2,319 $ 2,665
- --------------------------------------------------------------------------------------------
Earnings per share(note 1)
Basic
Net income $ 1.40 $ 1.03 $ 1.18
Average number of shares outstanding 2,176,893 2,247,021 2,256,238
- --------------------------------------------------------------------------------------------
Diluted
Net income $ 1.32 $ 1.00 $ 1.15
Average number of shares outstanding 2,312,389 2,325,658 2,323,455
- --------------------------------------------------------------------------------------------
Dividends paid per share $ 0.44 $ 0.29 $ 0.19
- --------------------------------------------------------------------------------------------
</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, 1998, 1997, and 1996
<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, 1995 $15 $4,539 -- $14,217 $147 -- $18,918
Stock options exercised
(30,613 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
(8,913 shares) -- 44 -- -- -- -- 44
Dividends paid -- -- -- (660) -- -- (660)
Treasury stock
purchased (113,670
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
Stock options exercised
(27,227 shares) -- 141 -- -- -- -- 141
Retroactive effect of
stock issued as a
result of stock split
declared on December
18, 1997 8 (8) -- -- -- -- --
Dividends paid -- -- -- (946) -- -- (946)
Unrealized gains on
securities available
for sale -- -- -- -- 84 -- 84
Stock purchased by
deferred compensation
trust -- -- -- -- -- (86) (86)
Net income -- -- -- 3,051 -- -- 3,051
- -----------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $23 $4,823 ($1,626) $20,200 $290 ($204) $23,506
- -----------------------------------------------------------------------------------------------------------------
</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, 1998, 1997, and 1996
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Net income: $ 3,051 $ 2,319 $ 2,665
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 149 139 117
Provision for possible loan losses 18 30 30
Net gain on the sale of real estate owned (16) (42) (10)
Net gain on the sale of investments and mortgage-backed
securities available for sale (186) (113) (85)
Gain on the sale of loans held for sale (32) (12) (7)
Amortization of deferred loan fees (214) (166) (234)
Origination of loans held for sale (881) (907) (966)
Proceeds from the sale of loans held for sale 1,107 719 550
Decrease (increase) in accrued interest receivable 152 (266) (71)
(Decrease) increase in accrued interest payable (10) (41) 53
Other--net 304 278 78
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,442 1,938 2,120
- ----------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities (19,160) (12,994) (10,157)
Purchase of investment securities available for sale (14,567) (5,156) (10,571)
Purchase of mortgage-backed securities -- -- (900)
Purchase of mortgage-backed securities available for sale -- (600) (5,216)
Purchase of FHLB stock -- (2) (15)
Proceeds from investment maturities 22,347 7,950 10,500
Proceeds from the sale of investment securities available
for sale 3,240 1,053 349
Proceeds from the sale of mortgage-backed securities
available for sale -- -- 703
Principal repayments of investment and mortgage-backed
securities
available for sale 1,616 1,459 1,655
Principal repayments of investment and mortgage-backed
securities 169 326 1,261
Increase in loans (6,591) (1,002) (394)
Proceeds from the sale of real estate owned 206 261 105
Net additions to office properties and equipment (204) (160) (180)
- ----------------------------------------------------------------------------------------------
Net cash used by investing activities (12,944) (8,865) (12,860)
- ----------------------------------------------------------------------------------------------
Financing activities:
Net increase (decrease) in demand and club accounts 1,341 2,256 (1,086)
Net (decrease) increase in time deposit accounts (970) 8,080 2,461
Net increase in FHLB advances 5,989 4,717 4,327
Decrease in advance deposits by borrowers for taxes and
insurance (11) (167) (77)
Stock options exercised 141 44 107
Acquisition of treasury stock -- (1,626) --
Dividends paid (946) (660) (446)
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,544 12,644 5,286
- ----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,958) 5,717 (5,454)
Cash and cash equivalents at beginning of period 15,335 9,618 15,072
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,377 $ 15,335 $ 9,618
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $ 7,359 $ 7,223 $ 6,997
Interest on FHLB advances 611 503 295
Income taxes 1,839 1,216 1,581
Transfer of loans to real estate owned 333 -- 227
Transfer of investment securities to available for sale -- -- 1,402
Transfer of mortgage-backed securities to available for sale -- -- 6,461
Cash paid during the period for interest includes interest credited on deposits of $6,449,
$6,270 and $6,105 for the years ended June 30, 1998, 1997 and 1996, 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
Statement of Financial Accounting Standards (SFAS) No. 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. The cost of securities sold is determined on a
specific identification basis.
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.
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.
11
<PAGE> 6
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
LOANS
Loans receivable are stated at unpaid principal balances net of the
allowance for possible loan losses and net of deferred loan fees and
discounts. In accordance with SFAS Nos. 114 and 118, 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. As such, these loans
are collectively evaluated for impairment. 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, 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.
Any excess of the Bank's recorded investment in the loans over the measured
value of the loans in accordance with SFAS 114 is provided for in the
allowance for loan losses. The Bank reviews its loans for impairment on a
quarterly basis.
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 collectibility 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.
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.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement 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. 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.
EARNINGS PER SHARE
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
12
<PAGE> 7
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
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 income statement.
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.
The Company adopted SFAS No. 128 as of December 31, 1997 and all prior
period per share amounts have been restated. In addition, all weighted
average share and per share amounts reflect the three-for-two stock split
paid on January 16, 1998.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 3,051 $ 2,319 $ 2,665
Weighted average shares outstanding 2,176,893 2,247,021 2,256,238
Earnings per share $ 1.40 $ 1.03 $ 1.18
Diluted earnings per share:
Net income $ 3,051 $ 2,319 $ 2,665
Weighted average shares outstanding 2,176,893 2,247,021 2,256,238
Dilutive effect of employee stock options 135,496 78,637 67,217
- -----------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 2,312,389 2,325,658 2,323,455
Earnings per share $ 1.32 $ 1.00 $ 1.15
- -----------------------------------------------------------------------------------------------
</TABLE>
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, 1998:
Corporate notes and
commercial paper $14,000 $14,003 $94 -- $14,097
- --------------------------------------------------------------------------------------------------------
AT JUNE 30, 1997:
Corporate notes and
commercial paper $15,000 $15,494 $37 $27 $15,504
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Market
Face/Par Cost Value
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
At June 30, 1998, the contractual maturities of the debt securities are:
Due after one year through five years $ 1,500 $ 1,500 $ 1,507
Due after five years through ten years 6,500 6,498 6,515
Due after ten years 6,000 6,005 6,075
- ------------------------------------------------------------------------------------------
$14,000 $14,003 $14,097
- ------------------------------------------------------------------------------------------
</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, 1998:
Municipal
obligations $ 8,990 $ 8,914 $190 $ 37 $ 9,067
Federal National
Mortgage
Association pre-
ferred stock 250 250 13 -- 263
Federal Home Loan
Mortgage
Corporation
preferred stock 250 250 15 -- 265
Federal National
Mortgage
Association stock 610 610 10 13 607
Federal Home Loan
Mortgage
Corporation stock 925 925 31 15 941
Shay Financial
Services ARMs
Fund 14,444 14,444 -- 48 14,396
- --------------------------------------------------------------------------------------------------------
$25,469 $25,393 $259 $113 $25,539
- --------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Market
Face/Par Cost Value
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
At June 30, 1998, the contractual maturities of the debt securities available for
sale are:
Due after ten years $8,990 $8,914 $9,067
- ------------------------------------------------------------------------------------------
</TABLE>
The Federal National Mortgage Association preferred and common stock, Federal
Home Loan Mortgage Corporation preferred and common stock, Shay Financial
Services ARMs Fund have no stated maturity.
Proceeds from the sale of investment securities available for sale during 1998,
1997 and 1996 were $3,240, $1,053 and $349, respectively.
Gross gains of $186, $113 and $37 were realized on these sales in 1998, 1997 and
1996, respectively.
There were no realized losses in 1998, 1997 and 1996.
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 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, 1998 Cost Appreciation Depreciation Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association REMIC 151 4 -- 155
Federal Home Loan Mortgage
Corporation REMIC 900 13 -- 913
- -----------------------------------------------------------------------------------------------------
$1,051 $17 $-- $1,068
- -----------------------------------------------------------------------------------------------------
At June 30, 1997
- -----------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------
</TABLE>
Mortgage-backed securities available for sale were comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At June 30, 1998 Cost Appreciation Depreciation Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National
Mortgage Association $ 3,973 $154 $-- $ 4,127
Federal National Mortgage
Association 3,424 71 -- 3,495
Federal Home Loan Mortgage
Corporation 183 6 -- 189
Federal National Mortgage
Association REMIC 228 -- 1 227
Federal Home Loan Mortgage
Corporation REMIC 3,454 62 -- 3,516
- -----------------------------------------------------------------------------------------------------
$11,262 $293 $ 1 $11,554
- -----------------------------------------------------------------------------------------------------
At June 30, 1997
- -----------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------
</TABLE>
Prepayments may shorten the lives of these mortgage-backed securities.
There were no sales of mortgage-backed securities during 1998 and 1997. Proceeds
from the sale of mortgage-backed securities available for sale during 1996 were
$703. Gross gains of $48 were recorded in 1996.
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,
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------
First mortgage loans:
Conventional:
1 to 4 family dwellings $114,905 $113,986
Multi-family dwellings 2,474 2,740
Commercial 6,391 5,676
- ---------------------------------------------------------------------------------------
123,770 122,402
Guaranteed or insured 67 76
- ---------------------------------------------------------------------------------------
Total long term with monthly amortization 123,837 122,478
Construction and development loans 4,341 3,079
- ---------------------------------------------------------------------------------------
128,178 125,557
Less: Allowance for possible losses (1,274) (1,358)
Loans in process (1,953) (1,634)
Deferred loan fees (615) (860)
- ---------------------------------------------------------------------------------------
124,336 121,705
- ---------------------------------------------------------------------------------------
Consumer loans:
Home improvement loans (net of unearned discounts
of $7 and $34) 92 291
Mobile home loans -- 747
Loans secured by savings accounts 335 288
Installment loans 26,289 21,226
Commercial loans 650 998
- ---------------------------------------------------------------------------------------
27,366 23,550
Less: Allowance for possible losses (578) (585)
- ---------------------------------------------------------------------------------------
26,788 22,965
- ---------------------------------------------------------------------------------------
$151,124 $144,670
- ---------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998 and 1997, the Company had a commitment to sell its guaranteed
student loan portfolio totaling $1,633 and $1,827, respectively.
Outstanding commitments to originate loans:
<TABLE>
<CAPTION>
June 30,
1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Fixed rates (6.50% to 7.75% and 7.625% to 8.25%) $1,626 $ 498
Variable rates 407 523
- -------------------------------------------------------------------------------------------
2,033 1,021
Other loans--fixed rates 617 264
Unused lines of credit 5,050 5,049
- -------------------------------------------------------------------------------------------
$7,700 $6,334
- -------------------------------------------------------------------------------------------
</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, 1998 for each type was $3,221, $933 and $896,
respectively. The amount available at June 30, 1997 for each type was $2,473,
$1,558 and $1,018, 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 $1,118, $1,229 and $1,289 at June 30,
1998, 1997 and 1996, 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.
Note continued
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, 1998, over 99.7% 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, 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
Provision for losses 11 7
Charge-offs (61) (91)
Recoveries 43 --
- ---------------------------------------------------------------------------------------------
Balance at June 30, 1998 $578 $1,274
- ---------------------------------------------------------------------------------------------
</TABLE>
Management believes that the allowance for losses on loans was adequate at June
30, 1998. 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 judgments about
information available to them at the time of their examination.
At June 30, 1998 and 1997, the recorded investment in loans that are considered
to be impaired under SFAS 114 were $285 and $482, respectively. Included in the
amount at June 30, 1998 is $103 of impaired loans for which the related
allowance for credit losses is $4 and $182 of impaired loans that as a result of
write-downs do not have an allowance for credit losses. Included in the amount
at June 30, 1997 is $104 of impaired loans for which the related allowance for
credit loses is $2 and $335 of impaired loans that as a result of write-down do
not have an allowance for credit losses. The average recorded investment in
impaired loans during the fiscal years ended June 30, 1998, 1997 and 1996 was
approximately $358, $437 and $449, respectively. For the fiscal years ended June
30, 1998, 1997 and 1996, the Company recognized interest income on those
impaired loans of $5, $2 and $6, respectively, which was recognized using the
cash basis of income recognition.
Non-accrual loans at June 30, 1998, 1997 and 1996 were approximately $561, $915
and $612, respectively. The foregone interest on these loans for the fiscal
years ended June 30, 1998, 1997 and 1996 was approximately $37, $65 and $40,
respectively. The amount of interest income on such loans actually included in
income in fiscal 1998, 1997 and 1996 was $28, $27 and $31, 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,
1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------------------
Land and land improvements $ 333 $ 226
Office buildings and improvements 2,123 2,118
Furniture, fixtures and equipment 579 487
- -------------------------------------------------------------------------------------
Total, at cost 3,035 2,831
Less accumulated depreciation (1,713) (1,564)
- -------------------------------------------------------------------------------------
$ 1,322 $ 1,267
- -------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the periods ended June 30, 1998, 1997 and 1996 was
$149, $139 and $117, 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, 1998 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Demand and club
accounts 1.00 to 2.50% 2.48% 2.48% $ 29,531 $ 27,690
Money market deposit
accounts 2.09 to 2.33% 2.23 2.38 16,444 18,043
NOW deposits 0 to 1.50% 1.01 1.11 24,916 23,819
- -------------------------------------------------------------------------------------------------------
70,891 69,552
- -------------------------------------------------------------------------------------------------------
TIME DEPOSITS: 4.01 to 5.00% 19,698 26,525
5.01 to 6.00 61,640 37,213
6.01 to 7.00 19,777 29,327
7.01 to 8.00 1,112 7,722
8.01 to 9.00 2,272 3,891
9.01 to 10.00 -- 789
- -------------------------------------------------------------------------------------------------------
5.65 5.86 $104,499 $105,467
- -------------------------------------------------------------------------------------------------------
4.14% 4.32% $175,390 $175,019
- -------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998 and 1997, time deposits with balances in excess of $100,000
amounted to $2.0 million and $3.6 million, respectively.
The contractual maturity of time deposits is as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------
Under 12 months $ 53,730 $ 67,772
12 months to 24 months 26,041 18,960
24 months to 36 months 13,314 7,799
36 months to 48 months 2,254 3,453
48 months to 60 months 4,036 2,248
Over 60 months 5,124 5,235
- ---------------------------------------------------------------------------------------
$104,499 $105,467
- ---------------------------------------------------------------------------------------
</TABLE>
Note continued
18
<PAGE> 13
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Passbook and club accounts $ 690 $ 696 $ 703
Money market deposit accounts 416 437 463
NOW accounts 251 242 221
Time deposits 5,992 5,807 5,631
- ----------------------------------------------------------------------------------------------
$7,349 $7,182 $7,018
- ----------------------------------------------------------------------------------------------
</TABLE>
(9) FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized as follows:
<TABLE>
<CAPTION>
Interest June 30,
Due Date Rate 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
September 16, 1998 5.61 $ 900 --
August 9, 1999 6.11 2,000 2,000
November 24, 2000 5.80 793 --
February 14, 2002 5.48 2,000 2,000
December 31, 2002 5.38 6,200 --
January 23, 2008 4.94 2,000 --
February 20, 2008 5.48 3,000 --
November 13, 2015 6.51 140 144
</TABLE>
At June 30, 1998, the Bank had seven 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 $12.6 million, and expires on March 25, 1999. 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, 1999. 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 $12.6 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, 1998, 1997 and 1996
consisted of:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,322 $1,156 $1,230
State 329 253 302
- ----------------------------------------------------------------------------------------
$1,651 $1,409 $1,532
- ----------------------------------------------------------------------------------------
Deferred:
Federal $ 61 $ (65) $ 89
- ----------------------------------------------------------------------------------------
$1,712 $1,344 $1,621
- ----------------------------------------------------------------------------------------
</TABLE>
Total income tax provision for the years ended June 30, 1998, 1997 and 1996 was
allocated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $1,712 $1,344 $1,621
Stockholders' equity:
Unrealized gains (losses) on investment securities 43 81 (54)
- -----------------------------------------------------------------------------------------
$1,755 $1,425 $1,567
- -----------------------------------------------------------------------------------------
</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, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------
<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 (2.7) (1.9) (.8)
- --------------------------------------------------------------------------------------
35.9% 36.7% 37.8%
- --------------------------------------------------------------------------------------
</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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred loan fees $ 168 $ 209
Tax vs. book loan loss reserve 362 326
Writedown of investments -- 8
Other 91 142
- --------------------------------------------------------------------------------------
Gross deferred tax assets $ 621 $ 685
Valuation allowance -- --
- --------------------------------------------------------------------------------------
Net deferred tax asset $ 621 $ 685
DEFERRED TAX LIABILITIES:
Investment Securities $(149) $(106)
Property, plant & equipment (92) (93)
Prepaid expense (20) (22)
- --------------------------------------------------------------------------------------
Gross deferred tax liability (261) (221)
- --------------------------------------------------------------------------------------
Net deferred tax asset $ 360 $ 464
- --------------------------------------------------------------------------------------
</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 any
deferred tax asset since it is more likely than not that the deferred tax
assets 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, 1998,
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 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.
(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 statements. 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 accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weighting, 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 defined) to
average assets (as defined). Management, believes, as of June 30, 1998,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of June 30, 1998, 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 and 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. Note continued
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, 1998 and 1997.
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
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) $23,131 $23,131 $23,131 $21,028 $21,028 $21,028
Less unrealized securities
gains (290) (290) (290) (206) (206) (206)
Plus general valuation
allowances (2) -- -- 1,445 -- -- 1,352
- ---------------------------------------------------------------------------------------------------
Total regulatory
capital 22,841 22,841 24,286 20,822 20,822 22,174
Minimum required capital 8,753 4,623 9,245 8,403 4,327 8,655
- ---------------------------------------------------------------------------------------------------
Excess regulatory
capital $14,088 $18,218 $15,041 $12,419 $16,495 $13,519
- ---------------------------------------------------------------------------------------------------
Minimum required capital to
be well capitalized under
Prompt Corrective Action
Provisions $10,504 $ 6,456 $10,760 $10,504 $ 6,456 $10,760
- ---------------------------------------------------------------------------------------------------
Regulatory capital as a
percentage (3) 10.44% 19.83% 21.09% 9.91% 19.35% 20.61%
Minimum required capital
percentage 4.00 4.00 8.00 4.00 4.00 8.00
- ---------------------------------------------------------------------------------------------------
Excess regulatory
capital percentage 6.44% 15.83% 13.09% 5.91% 15.35% 12.61%
- ---------------------------------------------------------------------------------------------------
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, 1998 and
1997.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total average
assets of $218,837 and $210,082 at June 30, 1998 and 1997, respectively.
Tier I and Tier II risk-based capital are calculated as a percentage of
adjusted risk-weighted assets of $115,158 and $107,596 at June 30, 1998 and
1997, 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 $70, $69 and $65
during fiscal 1998, 1997, and 1996, 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, 1998, there were 937
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 ("1993 Employee Program") and the 1993 Directors'
Stock Option Plan ("1993 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, 1998, there
were 10,405 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 the
last adjournment of such annual meeting shall be granted as of such date an
option to purchase 1,405 shares of common stock exercisable at a price
equal to the fair market value on the date of the grant. At June 30, 1998
there were 12,667 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 ("1996 Employee Program") and the 1996 Directors'
Stock Option Plan ("1996 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, 1998, there
were 85,011 remaining shares available to be granted as determined by the
Program Administrators. Under the 1996 Directors' Plan, each person who
serves as a non- employee director of the Company immediately following the
last adjournment of the 1996 annual meeting shall be granted as of such
date an option to purchase 4,722 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, 1998, 18,888 shares of the 28,332
granted during fiscal 1997 were vested and exercisable. At June 30, 1998
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
1988 Exercise Employee Exercise Director Exercise Employee Exercise Director
Program Price Program Price Program Price Program Price Program
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1995 118,480 $ 5.03 60,175 $ 8.45 21,074 $ 7.63
Granted 4,042 10.92 51,750 10.72 9,838 10.67
Exercised (26,865) 2.91 (937) 8.45 (2,811) 7.38
Forfeited -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1996 95,657 5.87 110,988 9.51 28,101 8.72 -- -- --
Granted -- -- -- -- 8,430 10.59 -- -- 28,332
Exercised (7,020) 4.25 (487) 8.45 (1,405) 7.38 -- -- --
Forfeited (937) 7.62 -- -- (4,216) 8.65 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1997 87,700 5.98 110,501 9.51 30,910 9.30 -- -- 28,332
Granted -- -- -- -- 8,430 18.00 -- -- --
Exercised (22,953) 4.41 (1,464) 8.78 (2,810) 9.29 -- -- --
Forfeited -- -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 64,747 $ 6.54 109,037 $ 9.52 36,530 $11.31 -- -- 28,332
- ------------------------------------------------------------------------------------------------------------------------------------
Actual contractual
life remaining in
years 4.8 6.8 7.6 8.4
Option price per
share $2.73-$11.00 $8.44-$10.92 $7.38-$18.00 $10.59
Options available to
be granted at June
30, 1998 937 10,405 12,667 85,011 --
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Average
Exercise
Price
<S> <C>
June 30, 1995
Granted
Exercised
Forfeited
- -------------------------------
June 30, 1996 --
Granted $10.59
Exercised --
Forfeited --
- -------------------------------
June 30, 1997 10.59
Granted --
Exercised --
Forfeited --
- -------------------------------
June 30, 1998 $10.59
- -------------------------------
Actual contractual
life remaining in
years
Option price per
share
Options available to
be granted at June
30, 1998
- -------------------------------
</TABLE>
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 1998 under the 1993 Director Program was $4.18.
The fair value of options granted during fiscal 1997 under the 1993 and 1996
Director Programs was $4.15. The fair value of options granted during fiscal
1996 under the 1988 and 1993 Employee Programs was $4.18 and the fair value of
options granted under the 1993 Director Program was $4.08.
At June 30, 1998, 1997, and 1996, 223,723, 223,944 and 210,642 shares were
immediately exercisable at average prices of $9.00, $8.05 and $7.61,
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 companies 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
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $3,051 $2,319 $2,665
Pro Forma $3,010 $2,293 $2,495
- ----------------------------------------------------------------------------------------
Basic earnings per share
As reported $1.40 $1.03 $1.18
Pro Forma $1.38 $1.02 $1.11
- ----------------------------------------------------------------------------------------
Diluted earnings per share
As reported $1.32 $1.00 $1.15
Pro Forma $1.30 $0.99 $1.07
- ----------------------------------------------------------------------------------------
</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 1998 and 1997, respectively: risk-free interest rates of 5.63%
and 6.51%; dividend yields of 2.6% and 2.3%; volatility factors of the expected
market price of the Company's common stock of 18.6% and 17.2%; and a
weighted-average expected life of the options of 7 years. The pro forma net
income and earnings per share amounts in the table above reflect only options
granted in
Note continued
24
<PAGE> 19
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
fiscal 1998, 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
1997/1998: September 30 December 31 March 31 June 30
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Interest income $3,918 $3,904 $3,970 $3,973
Interest expense 2,021 2,034 2,011 2,003
- --------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 1,897 1,870 1,959 1,970
Provision for possible loan losses 8 2 4 4
Other income 225 224 324 209
Operating expenses 883 1,033 956 1,025
- --------------------------------------------------------------------------------------------
Income before income taxes 1,231 1,059 1,323 1,150
Provision for income taxes 454 387 489 382
- --------------------------------------------------------------------------------------------
Net income $ 777 $ 672 $ 834 $ 768
- --------------------------------------------------------------------------------------------
Earnings per share:
Basic $ .36 $ .31 $ .38 $ .35
Diluted $ .34 $ .29 $ .36 $ .33
- --------------------------------------------------------------------------------------------
Dividends per share $ .09 $ .09 $ .13 $ .13
- --------------------------------------------------------------------------------------------
1996/1997:
- --------------------------------------------------------------------------------------------
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:
Basic $ .03 $ .34 $ .32 $ .34
Diluted $ .03 $ .33 $ .31 $ .32
- --------------------------------------------------------------------------------------------
Dividends per share $ .07 $ .07 $ .07 $ .07
- --------------------------------------------------------------------------------------------
</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. SFAS 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, 1998, the fair market value of both investments and mortgage-backed
securities exceeded the net carrying value by approximately $94 and $17,
respectively. At June 30, 1997, the fair market value of investments and
mortgage-backed securities both exceeded the net carrying value by approximately
$10. Estimated fair values are based on quoted market prices, dealer quotes, and
prices obtained from independent pricing services. Refer to Notes 2 and 3 herein
for the detail on breakdowns by type of investment and mortgage-backed
securities.
The fair value of loans and loans held for sale exceeded the carrying value by
approximately $4,713 and $3,293 at June 30, 1998 and 1997, 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 prepayment speeds.
The carrying amounts and estimated fair values of deposits at June 30, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Noninterest-bearing:
Demand accounts $ 8,002 $ 8,002 $ 6,274 $ 6,274
Interest-bearing:
NOW and MMDA accounts 33,358 33,358 35,588 35,588
Passbook accounts 29,531 29,531 27,690 27,690
Time deposits 104,499 104,244 105,467 104,740
- -----------------------------------------------------------------------------------------------------
Total Deposits $175,390 $175,135 $175,019 $174,292
- -----------------------------------------------------------------------------------------------------
</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 in 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,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Borrowed funds:
FHLB advances $17,033 $17,090 $11,044 $11,028
- -----------------------------------------------------------------------------------------------------
</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.
Note continued
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 $7.7 million
and $6.3 million at June 30, 1998 and 1997, 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 estimate.
(16) LAUREL CAPITAL GROUP, INC.
(PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30, June 30,
STATEMENT OF FINANCIAL CONDITION 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 338 $ 213
Other equity investments 284 182
Investment in Laurel Savings Bank 23,131 21,029
- ------------------------------------------------------------------------------------
Total assets $23,753 $21,424
- ------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other accrued expenses $ 247 $ 162
- ------------------------------------------------------------------------------------
247 162
- ------------------------------------------------------------------------------------
Stockholders' equity 23,506 21,262
- ------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $23,753 $21,424
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, June 30, June 30,
STATEMENT OF OPERATIONS 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before equity in undistributed earnings of
subsidiary--dividends from subsidiary $ 930 $2,301 $ 120
Other equity income 102 95 87
Equity in undistributed income of Laurel Savings
Bank 2,104 13 2,531
- ----------------------------------------------------------------------------------------
3,136 2,409 2,738
- ----------------------------------------------------------------------------------------
Other operating expenses 71 86 63
- ----------------------------------------------------------------------------------------
Income before income taxes 3,065 2,323 2,675
Provision for income taxes 14 4 10
- ----------------------------------------------------------------------------------------
Net income $3,051 $2,319 $2,665
- ----------------------------------------------------------------------------------------
</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 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 3,051 $ 2,319 $ 2,665
Undistributed income of Laurel Savings Bank (2,104) (13) (2,531)
Adjustments to reconcile net income to net cash
provided by operating activities:
Other--net (17) (5) (14)
- ---------------------------------------------------------------------------------------
Net cash provided by operating activities 930 2,301 120
- ---------------------------------------------------------------------------------------
Financing activities:
Acquisition of treasury stock -- (1,626) --
Stock options exercised 141 44 107
Dividends paid (946) (660) (446)
- ---------------------------------------------------------------------------------------
Net cash used by financing activities (805) (2,242) (339)
- ---------------------------------------------------------------------------------------
Net change in cash and cash equivalents 125 59 (219)
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at the beginning of the
period $ 213 $ 154 $ 373
Net change during the period 125 59 (219)
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 338 $ 213 $ 154
- ---------------------------------------------------------------------------------------
</TABLE>
(17) STOCK SPLIT
On December 18, 1997, the Company's Board of Directors declared a three-for-two
stock split payable on January 16, 1998 to stockholders of record on January 2,
1998. An amount equal to the par value of the shares issued has been transferred
from additional paid-in-capital to common stock. The number of shares and per
share amounts have been restated to reflect this distribution.
(18) 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, after
consultation with 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,
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $220,986 $211,987 $196,947 $188,916 $177,729
Loans, net 151,124 144,670 143,532 143,091 130,213
Loans held for sale 1,633 1,827 1,627 1,205 604
Mortgage-backed securities 1,051 1,220 1,546 8,222 14,371
Mortgage-backed securities
available for sale 11,554 13,259 14,021 4,892 --
Investment securities 14,003 15,494 9,948 9,655 5,818
Investment securities available
for sale 25,539 15,494 11,639 2,057 8,004
Money market investments 3,532 9,086 6,291 12,085 9,729
Deposits 175,390 175,019 164,683 163,308 157,179
FHLB advances 17,033 11,044 6,327 2,000 --
Stockholders' equity 23,506 21,262 21,086 18,918 16,482
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
June 30,
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $15,765 $15,342 $14,785 $13,834 $13,258
Interest expense 8,069 7,715 7,319 6,347 5,989
- -----------------------------------------------------------------------------------------
Net interest income before
provision for possible loan
losses 7,696 7,627 7,466 7,487 7,269
Provision for possible loan
losses 18 30 30 100 135
- -----------------------------------------------------------------------------------------
Net interest income after
provision for possible loan
losses 7,678 7,597 7,436 7,387 7,134
Net gain (loss) on
investments, loans and
mortgage-backed securities
available for sale 218 125 92 (31) (147)
Other income 764 592 535 513 521
Operating expenses 3,897 4,651 3,777 3,752 3,602
- -----------------------------------------------------------------------------------------
Income before income taxes 4,763 3,663 4,286 4,117 3,906
Income tax expense 1,712 1,344 1,621 1,604 1,562
- -----------------------------------------------------------------------------------------
Net income before cumulative
effect of change in
accounting principle 3,051 2,319 2,665 2,513 2,344
Cumulative effect of change in
accounting principle -- -- -- 30 500
- -----------------------------------------------------------------------------------------
Net income $ 3,051 $ 2,319 $ 2,665 $ 2,543 $ 2,844
- -----------------------------------------------------------------------------------------
Diluted earnings per share
before cumulative effect of
change in accounting
principle $ 1.32 $ 1.00 $ 1.15 $ 1.10 $ 1.03
Cumulative effect of change in
accounting principle -- -- -- .01 .22
- -----------------------------------------------------------------------------------------
Diluted earnings per share $ 1.32 $ 1.00 $ 1.15 $ 1.11 $ 1.25
- -----------------------------------------------------------------------------------------
</TABLE>
STATISTICAL PROFILE:
<TABLE>
<CAPTION>
June 30,
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.43% 1.13% 1.39% 1.41% 1.62%
Return on average equity 13.58% 10.82% 13.29% 14.33% 18.57%
Average equity to average assets
ratio 10.49% 10.47% 10.43% 9.85% 8.71%
Dividend payout ratio 33.33% 29.33% 16.81% 12.61% 9.06%
- -----------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 24
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
In fiscal 1998, the Company achieved its highest level of earnings with a
recorded net income of $3.1 million or $1.32 per share on a diluted basis
compared to $2.3 million or $1.00 per share for fiscal 1997 and $2.7 million or
$1.15 per share for fiscal 1996. The net income for fiscal 1997 includes a
special one-time after tax charge of $636,000 or $0.27 per share to recapitalize
the SAIF.
The Company continued to report strong returns on average assets (ROA) and
average equity (ROE). The ROA for fiscal 1998, 1997 and 1996 was 1.43%, 1.13%
and 1.39%, respectively. The ROE for fiscal 1998, 1997 and 1996 was 13.58%,
10.82% and 13.29%, respectively. Excluding the special one-time SAIF charge, the
ROA and ROE for fiscal 1997 would have been 1.44% and 13.79% respectively. Also
during fiscal 1998, the Company 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 1998 was a record $44.5 million or a 46.2%
increase compared to fiscal 1997. Mortgage lending activity increased during
fiscal 1998 as compared to the prior year and was concentrated more on the
origination of fixed rate mortgages due to current conditions in the Company's
market area. In addition, consumer lending activity increased by 13.5% during
the same time period due to the Company's continued emphasis on consumer
lending.
The Company continues its efforts to further diversify its assets by emphasizing
loans and investments having relatively shorter terms and/or adjustable rates
such as secured home equity line-of-credit loans and consumer installment loans.
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 may provide customers with a degree of "optionality," whereby a
shift in interest rates may result in a 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.
30
<PAGE> 25
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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 and 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, 1998 remained constant.
The impact of the rate movements was developed by simulating the effect of rates
changing over a twelve-month period from the June 30, 1998 levels. There has
been no material changes in the Company's asset and liability position or market
value of portfolio equity during fiscal 1998.
Interest Rate Simulation Sensitivity Analysis
- --------------------------------------------------------------------------------
Movements in interest rates from June 30, 1998 rates
<TABLE>
Increase Decrease
Simulated impact in the next 12 months ------------------- -------------------
Compared with June 30, 1998: +100 bp +200 bp -100 bp -200 bp
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net interest revenue
increase/(decrease) 3.3% 1.2% (4.0)% (9.2)%
Return on average equity
increase/(decrease) 117bp 42bp (141)bp (325)bp
Earnings per share
increase/(decrease) $.11 $.04 $(.14) $(.32)
--- ---- ----- -----
</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, 1998. 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 $31,076 $ 42,898 $56,577 $36,663 $167,214
Investment securities 16,118 14,396 2,500 15,075 48,089
- -----------------------------------------------------------------------------------------
Total rate sensitive assets $47,194 $ 57,294 $59,077 $51,738 $215,303
- -----------------------------------------------------------------------------------------
Rate sensitive liabilities:
Deposits:
Certificates of deposit $19,517 $ 34,213 $45,645 $ 5,124 $104,499
NOW and money funds 7,198 12,188 10,093 4,251 33,730
Passbooks 1,350 3,684 12,597 11,901 29,532
- -----------------------------------------------------------------------------------------
Total deposits $28,065 $ 50,085 $68,335 $21,276 $167,761
Borrowings 9,100 2,000 5,793 140 17,033
- -----------------------------------------------------------------------------------------
Total rate sensitive liabilities $37,165 $ 52,085 $74,128 $21,416 $184,794
- -----------------------------------------------------------------------------------------
Interest sensitivity GAP:
Interval 10,029 5,209 (15,051) 30,322 --
Cumulative $10,029 $ 15,238 $ 187 $30,509 $ 30,509
- -----------------------------------------------------------------------------------------
Ratio of cumulative GAP to total
assets 4.54% 6.90% -0.08% 13.81%
- -----------------------------------------------------------------------------------------
</TABLE>
The Company targets its one year gap to be in the range of +10.0% to -10.0%. At
June 30, 1998 and 1997, the Company's one year gap was 6.90% and -5.56%,
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 totaled approximately $221.0 million at June
30, 1998, an increase of $9.0 million or 4.3% from June 30, 1997. The growth in
assets was primarily the result of increases in investment securities available
for sale, loans receivable and interest-bearing deposits with other institutions
which were partially offset by a decrease in money market investment securities,
mortgage-backed securities and mortgage-backed securities available for sale and
investment securities. 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, 1998, 1997
and 1996, which management believes is representative of the operations of the
Company.
<TABLE>
<CAPTION>
Year Ended June 30,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans1 $121,266 $122,406 $122,487
Consumer and other loans1 25,637 24,401 21,959
- ----------------------------------------------------------------------------------------
Total loans 146,903 146,807 144,446
Mortgage-backed securities 13,567 14,658 13,029
Investment securities 42,688 35,513 26,717
Interest-bearing deposits 5,853 3,029 3,366
- ----------------------------------------------------------------------------------------
Total interest-earning assets $209,011 $200,007 $187,558
- ----------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook and club accounts $ 27,685 $ 27,830 $ 28,163
NOW and money market deposit accounts 34,608 34,763 34,081
Certificates of deposit 104,205 100,969 95,788
Borrowings 12,998 9,353 5,122
- ----------------------------------------------------------------------------------------
Total interest-bearing liabilities $179,496 $172,915 $163,154
- ----------------------------------------------------------------------------------------
Net earning assets $ 29,515 $ 27,092 $ 24,404
- ----------------------------------------------------------------------------------------
Average interest-earning assets as a percent of
average interest-bearing liabilities 116.4% 115.7% 115.0%
- ----------------------------------------------------------------------------------------
</TABLE>
1Includes 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, before cumulative
effect of change in accounting principal for fiscal 1994 to $3.0 million for
fiscal 1998 and a continued decrease in the ratio of non-performing assets to
total assets from .35 % at June 30, 1994 to .32% at June 30, 1998. The Company
has continued to focus 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.
33
<PAGE> 28
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
The Company's investment securities totaled $14.0 million at June 30, 1998, a
decrease of $1.5 million or 9.2% compared to June 30, 1997. The decrease was
primarily due to $20.7 million of investment securities which matured or were
called during fiscal 1998 which were partially offset by purchases of $19.2
million of securities during the period. The Company primarily invests in
government and corporate notes and bonds. Investment securities available for
sale totaled $25.5 million at June 30, 1998, or an increase of $10.0 million
compared to June 30, 1997. The increase was primarily due to the purchases of
approximately $5.0 million of an ARMs fund and approximately $4.4 of municipal
bonds. The increase in purchases of investment securities available for sale was
primarily due to the investment of the funds generated from the increases in
FHLB advances and savings deposits.
MORTGAGE-BACKED SECURITIES AND MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
The total of all mortgage-backed securities was $12.6 million at June 30, 1998,
a decrease of $1.9 million or 12.9% compared to June 30, 1997. This decrease was
primarily due a reduction in the volume of purchases of these securities in
fiscal 1998 as compared to fiscal 1997. During fiscal 1998, the Company
purchased none of these securities compared to approximately $600,000 of
adjustable-rate mortgage-backed securities in the prior fiscal year.
LOAN PORTFOLIO
Loans receivable increased $6.5 million or 4.5% to $151.1 million during the
fiscal year ended June 30, 1998, as compared to an increase of $1.1 million or
.8% for the fiscal year ended June 30, 1997. Mortgage loan originations in
fiscal years 1998 and 1997 amounted to $27.0 million, and $15.0 million,
respectively. The Company originated primarily fixed rate loans in fiscal 1998
due to current conditions in the Bank's market area. Of the total amount of
mortgage and construction loans originated in fiscal 1998, $16.3 million or
60.3% were fixed-rate mortgages as compared to $5.2 million or 34.6% in fiscal
1997. Adjustable-rate mortgage and construction loan originations totaled $10.7
million or 39.7% in fiscal 1998 as compared to $9.8 million or 65.4% in fiscal
1997.
Consumer loan originations, including home equity and other installment loans,
totaled $17.5 million in fiscal 1998, $15.4 million in fiscal 1997, and $13.2
million in fiscal 1996. 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 $371,000 to $175.4 million during fiscal 1998. This
increase was due to the combined result of $6.0 million of net deposit outflows
and interest credited of approximately $6.4 million. Deposit increases occurred
in passbook accounts and NOW/checking accounts partially offset by decreases in
money market accounts and certificate of deposit accounts.
For the years ended June 30, 1998, 1997 and 1996, the Company had certificates
of deposit with remaining terms to maturity of three (3) to ten (10) years
aggregating $11.4 million, $10.9 million and $14.1 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 $11.0
million at June 30, 1997 to $17.0 million at June 30, 1998. The Company used the
additional funds as part of its asset and liability management strategy.
34
<PAGE> 29
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Stockholders' equity increased $2.2 million or 10.6% to $23.5 million at June
30, 1998 compared to $21.3 million at June 30, 1997. This increase resulted from
net income of $3.0 million, $141,000 of stock options exercised plus $85,000 of
unrealized gains on investments available for sale. These increases were reduced
by the payment of cash dividends of $946,000 on the Company's common stock and
the purchase of $86,000 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,
1998, the Company exceeded all of its regulatory capital requirements. See
"Liquidity and Capital Resources."
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, 1998, the
resulting average interest rate spreads, and the net yield on interest-earning
assets.
<TABLE>
<CAPTION>
At
June 30, Year Ended June 30,
1998 1998 1997 1996
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Average yield on1:
Mortgage loans 7.54% 7.97% 7.97% 8.15%
Consumer loans 8.36 8.40 8.50 9.01
- ------------------------------------------------------------------------------------------
Total loans 7.69 8.05 8.06 8.28
Mortgage-backed securities 7.15 7.15 7.07 7.31
Investment securities 5.98 6.23 6.51 6.30
Interest-earning deposits 6.11 5.40 5.28 5.50
- ------------------------------------------------------------------------------------------
Total interest-earning assets 7.24 7.54 7.67 7.88
- ------------------------------------------------------------------------------------------
Average rates paid on1:
Passbook and club accounts 2.48 2.49 2.50 2.50
NOW and money market accounts 1.83 1.93 1.95 2.01
Certificates of deposit 5.65 5.75 5.75 5.88
Borrowings 5.48 5.54 5.66 5.88
- ------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.43 4.50 4.46 4.49
- ------------------------------------------------------------------------------------------
Average interest rate spread 2.81% 3.04% 3.21% 3.39%
- ------------------------------------------------------------------------------------------
Net yield on interest-earning assets2 N/A 3.68% 3.82% 3.98%
- ------------------------------------------------------------------------------------------
</TABLE>
1Average 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, 1998 are
based on the weighted average contractual rates.
2Net 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 1998
Compared to Fiscal 1997
Increase (Decrease) Due to
- ---------------------------------------------------------------------------------------------
Rate/
Rate Volume Volume Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans $ (3) $(91) $ -- $ (94)
Consumer loans (26) 105 (1) 78
Mortgage-backed securities 12 (77) (1) (66)
Investment securities (98) 467 (20) 349
Interest-earning deposits 4 149 3 156
- ---------------------------------------------------------------------------------------------
Total (111) 553 (19) 423
- ---------------------------------------------------------------------------------------------
Interest expense on interest-bearing
liabilities:
Deposits 37 129 1 167
Borrowings (11) 202 (4) 187
- ---------------------------------------------------------------------------------------------
Total 26 331 (3) 354
- ---------------------------------------------------------------------------------------------
Net change in net interest income $(137) $222 $ 16 $ 69
- ---------------------------------------------------------------------------------------------
</TABLE>
<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>
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 $16,000 or .1% in fiscal
1998 primarily due to a decrease in the average yield earned on the portfolio
from 8.06% during fiscal 1997 to 8.05% during fiscal 1998. The average balance
of the mortgage loan portfolio decreased by $1.1 million or .9% and the average
balance of the consumer loan portfolio increased by $1.2 million or 5.1% during
fiscal 1998. 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. 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
Company's market area.
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES AND
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Interest income on mortgage-backed securities decreased $66,000 or 6.4% during
fiscal 1998 primarily due to a $1.1 million decrease in the average outstanding
balance. This decrease was partially offset by an increase in the average yield
from 7.07% in fiscal 1997 to 7.15% in fiscal 1998. The decrease in the average
outstanding balance was primarily due to repayments of the loans underlying the
mortgage-backed securities. In addition, the Company purchased no such
securities during fiscal 1998. 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 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 $349,000 or 15.1% during
fiscal 1998 primarily due to an $7.2 million increase in the average balance of
these securities. This increase was partially offset by a decrease in the
average yield on these investments from 6.51% in fiscal 1997 to 6.23% in fiscal
1998. Interest on investments and investments available for sale, 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 both fiscal 1998 and 1997
was primarily due to the increased purchases of these securities with the funds
generated from the increases in savings deposits and FHLB advances.
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, increased $156,000 or 97.5% during fiscal 1998 compared
to fiscal 1997 and decreased by $25,000 or 13.5% during fiscal 1997 compared to
fiscal 1996. The increase in fiscal 1998 was primarily due to a $2.8 million
increase in the average outstanding balance of these deposits. In addition, the
average yield increased from 5.28% in fiscal 1997 to 5.40% in fiscal 1998. 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.
INTEREST EXPENSE ON SAVINGS DEPOSITS
Interest expense on savings deposits increased by $167,000 or 2.3% in fiscal
1998 primarily due to a $2.9 million increase in the average outstanding balance
of savings deposits. The average rate paid on deposits rose slightly from 5.39%
in fiscal 1997 to 5.41% in fiscal 1998. 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 both fiscal 1998 and 1997 was primarily due to increased marketing of the
Company's certificate of deposit and checking products.
INTEREST EXPENSE ON BORROWINGS
Interest on borrowings increased $187,000 or 35.1% in fiscal 1998 primarily due
to a $3.6 million increase in the average outstanding balance. In addition, the
average rate paid on borrowings decreased from 5.66% in fiscal 1997 to 5.54% in
fiscal 1998. 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. The increased borrowings
during fiscal 1998 and 1997 were used by the Company as part of its asset and
liability strategy.
NET INTEREST INCOME
Net interest income increased by $69,000 or .9% in fiscal 1998 as compared to
fiscal 1997 and increased by $161,000 or 2.2% in fiscal 1997 over the prior
fiscal year. The increase in fiscal 1998 was primarily due to increases in the
average outstanding balances of investments available for sale, loans receivable
and interest-earning deposits with other institutions partially offset by
increases in the average outstanding balances of deposit accounts and
borrowings. 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.
Interest-earning assets as a percent of interest-bearing liabilities amounted to
116.4%, 115.7% and 115.0% at June 30, 1998, 1997 and 1996, respectively, and the
average interest rate spread was 3.04%, 3.21% and 3.39% for fiscal 1998, 1997
and 1996, respectively. The Company's average interest rate spread has decreased
from 3.39% in fiscal 1996 to 3.04% in fiscal 1998 primarily due to decreases in
the average rates earned on the Company's loan portfolio. The Company's net
interest income continued to exceed its total other expenses in fiscal 1998 and
1997, 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 1998, 1997
and 1996 amounted to $18,000, $30,000 and $30,000, respectively.
At June 30, 1998, 1997 and 1996, the allowance for possible loan losses was
approximately $1.9 million or 1.2%, 1.3% and 1.3%, respectively 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 330.1%, 212.4%, and 310.3% at June 30, 1998, 1997 and 1996, 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 $119,000 or 25.0% in fiscal 1998 and by
$71,000 or 17.5% in fiscal 1997. The increase in both fiscal 1998 and 1997 was
primarily due to increases in the fees and service charges earned on the Bank's
NOW accounts.
During fiscal 1998, the Company realized net gains of $218,000 on investments,
mortgage-backed securities and loans in its available for sale portfolio. Gains
of $186,000 and $32,000 were recorded on the sale of investment securities and
loans, respectively. During fiscal 1997, the Company realized net gains of
$125,000 on investments, mortgage-backed securities and loans available for
sale. Gains of $113,000 and $12,000 were recorded on the sale of investment
securities and loans, respectively.
Other operating income, which primarily consists of miscellaneous fees, rents,
and other income, was $169,000, $116,000 and $130,000 in fiscal 1998, 1997 and
1996, respectively. The increase in fiscal 1998 was primarily due to an increase
in ATM fees. 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 $265,000 or 37.0% in fiscal 1998 and by $90,000 or
14.4% in fiscal 1997. The increases in both fiscal 1998 and 1997 were primarily
due to the increases in fees and service charges and gains on the sale of
investment securities and loans available for sale.
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, decreased by $16,000 or .9% in fiscal 1998 and increased by
$57,000 or 3.4% in fiscal 1997. The decrease in fiscal 1998 was primarily due to
an increase in the deferral of compensation costs associated with the
origination of loans as a result of the increased loan originations during
fiscal 1998. These deferred costs will be written off over future periods based
on the life of the loans. The decrease in fiscal 1998 was partially offset by
normal salary and benefit increases. The increase in fiscal 1997 was primarily
due to normal salary and benefit increases.
Premises and occupancy expense increased by $7,000 or 1.4% in fiscal 1998 and by
$25,000 or 5.4% in fiscal 1996. The increase in fiscal 1998 was primarily due to
increases in repairs and maintenance and furniture, fixture and equipment
depreciation which were partially offset by decreases in insurance and
furniture, fixture and equipment expenses. The increase in fiscal 1997 was
primarily due to increases in furniture, fixture and equipment depreciation and
expenses and office building depreciation.
Federal insurance premiums decreased by $40,000 or 26.9% in fiscal 1998 and
increased by $834,000 or 223.0% in fiscal 1997. The decrease in fiscal 1998 and
the increase in fiscal 1997 were due to the FDIC's one-time special assessment
to recapitalize the SAIF. In fiscal 1997 the Company incurred a $1.1 million
pre-tax charge as a result of this assessment however, the premium rate for
federal deposit insurance decreased to approximately 6.5 basis points in January
of 1997 from 23 basis points as a result of the recapitalization of the SAIF.
The amount of the premium is based upon the average amount of deposits
outstanding.
In fiscal 1998, the Company had a net gain of $5,000 from its real estate owned
("REO"). In fiscal 1997 and 1996, the Company had a net gain of $31,000 and a
net loss of $5,000, respectively.
Data processing expenses increased by $3,000 or 1.2% in both fiscal 1998 and
1997. The increase in both fiscal 1998 and 1997 was primarily attributable to
increases in certain service bureau charges.
Professional fees increased by $309,000 in fiscal 1998 and decreased by $66,000
in fiscal 1997. The increase in fiscal 1998 was primarily due to legal fees
incurred in litigation brought by the Bank against another financial
institution.
INCOME TAXES
Income taxes increased $368,000 or 27.4% in fiscal 1998 and decreased $277,000
or 17.1% in fiscal 1997 over the comparable prior years. The increase in fiscal
1998 was primarily due to higher pre-tax income partially offset by a decrease
in the Company's effective tax rate. 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.
NET INCOME
Net income increased $732,000 or 31.6% in fiscal 1998 and decreased $346,000 or
13.0% in fiscal 1997 primarily due to the $1.1 million pre-tax special one-time
SAIF assessment in fiscal 1997. Excluding that assessment, net income increased
$96,000 or 3.3% in fiscal 1998 and $290,000 or 10.9% in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets increased from $196.9 million at June 30, 1996 to $212.0
million at June 30, 1997, and to $221.0 million at June 30, 1998. Stockholders'
equity increased from $21.1 million at June 30, 1996 to $21.3 million at June
30, 1997, and $23.5 million at June 30, 1998. At June 30, 1998, stockholders'
equity amounted to 10.6% 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, 1998,
the Company substantially exceeded all of these requirements with Tier I and
Tier II ratios of 10.44% and 21.09%, respectively.
During the fiscal years ended June 30, 1998, 1997 and 1996, the Company had
positive cash flows from operating activities. Cash and cash equivalents
decreased by $4.0 million, increased by $5.7 million, decreased by
40
<PAGE> 35
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
$5.5 million for the fiscal years ended June 30, 1998, 1997 and 1996,
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 $3.4 million of cash in fiscal 1998,
$1.9 million in fiscal 1997 and $2.1 million in fiscal 1996.
Investing activities used cash on a net basis of $12.9 million in fiscal 1998,
$8.9 million in fiscal 1997 and $12.9 million in fiscal 1996. 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 $5.5 million of cash in fiscal 1998
due to a net increase of $6.0 million in FHLB advances, $371,000 in deposits and
$141,000 from stock options exercised. These increases were partially offset by
$946,000 of cash dividends paid and a decrease of $11,000 in advance deposits by
borrowers for taxes and insurance. 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.
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 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, 1998, the Company had commitments to originate
loans totalling $7.7 million. Scheduled maturities of certificates of deposit
during fiscal 1999 totaled $53.7 million at June 30, 1998. 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.
YEAR 2000
The Company outsources its primary data processing functions. A challenging
problem exists as the millennium ("year 2000") approaches as many computer
systems worldwide do not have the capability of recognizing the year 2000 or
years thereafter.
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 or replacement of the affected systems will be completed by
December 31, 1998, thus allowing adequate time for testing. The Company has also
contacted its largest borrowers to determine if they will be materially affected
by potential year 2000 problems. To date, the Company has received confirmations
from its primary vendors that corrections are being made and testing has begun
to address and correct the issues associated with the year 2000 problem. The
Company is formulating contingency plans for its major functions in the event
systems fail.
41
<PAGE> 36
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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. The Company anticipates replacement of various hardware and
software during fiscal 1999 at a cost of approximately $300,000 that will be
depreciated over future periods. 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.
RECENT ACCOUNTING DEVELOPMENTS
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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
31, 1997. Management does not anticipate that the adoption of this standard will
have a material impact on the Company's reporting.
42
<PAGE> 1
Exhibit 23
KPMG Peat Marwick LLP Telephone 412-391-9710
One Mellon Bank Center Telefax 412-391-8963
Pittsburgh, PA 15219 Telex 710-664-2199 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
11, 1998, relating to the consolidated statements of financial condition of
Laurel Capital Group, Inc. and subsidiary as of June 30, 1998 and 1997, 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, 1998, which
report appears in the June 30, 1998, annual report on Form 10-K of Laurel
Capital Group, Inc.
/s/ KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
September 28, 1998
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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.
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<NAME> LAUREL CAPITAL GROUP, INC.
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