<PAGE> 1
Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended: September 30, 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 Number: 0-23101
LAUREL CAPITAL GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1717451
- ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2724 Harts Run Road
Allison Park, Pennsylvania 15101
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: (412) 487-7404
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
The number of shares outstanding for each of the issuer's classes of common
stock, as of the latest practicable date is:
Class: Common stock, par value $.01 per share
Outstanding at November 3, 1998: 2,189,685 shares
<PAGE> 2
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of ..... 1
September 30, 1998 (Unaudited) and June 30, 1998
Consolidated Statements of Operations for the Three ..... 2
Months Ended September 30, 1998 and 1997 (Unaudited)
Consolidated Statements of Stockholders' Equity for the ..... 3
Three Months Ended September 30, 1998 (Unaudited)
Consolidated Statements of Cash Flows for the Three ..... 4
Months Ended September 30, 1998 and 1997 (Unaudited)
Notes to (Unaudited) Consolidated Financial Statements ..... 5-9
Item 2. Management's Discussion and Analysis of Financial ..... 10-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 16
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings ..... 16
Item 2. Changes in Securities and Use of Proceeds ..... 16
Item 3. Defaults upon Senior Securities ..... 16
Item 4. Submission of Matters to a Vote of ..... 16
Security Holders
Item 5. Other Information ..... 16
Item 6. Exhibits and Reports on Form 8-K ..... 16
Signatures ..... 17
</TABLE>
<PAGE> 3
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
- ------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $701 $753
Money market investments 3,581 3,532
Interest-earning deposits with other institutions 8,494 7,092
Investment securities available for sale 27,688 25,539
Investment securities (market value of $10,121 and $14,097) 10,005 14,003
Mortgage-backed securities available for sale 10,555 11,554
Mortgage-backed securities (market value of $2,061 and $1,068) 2,046 1,051
Loans receivable, held for sale 1,538 1,633
Loans receivable, net of unearned discounts of $6 and $7 154,096 152,976
Allowance for possible loan losses (1,845) (1,852)
- ------------------------------------------------------------------------------------------------------------
Loans receivable, net 152,251 151,124
Federal Home Loan Bank Stock 1,277 1,277
Real estate owned 62 143
Accrued interest receivable:
Loans 877 854
Interest-earning deposits and investments 367 406
Mortgage-backed securities 72 73
Office properties and equipment, net of accumulated depreciation 1,298 1,322
Prepaid expenses and sundry assets 557 630
- ------------------------------------------------------------------------------------------------------------
Total Assets $221,369 $220,986
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $175,774 $175,390
FHLB Advances 17,032 17,033
Advance deposits by borrowers for taxes and insurance 1,160 3,143
Accrued interest payable on savings deposits 1,500 523
Accrued income taxes 521 169
Other accrued expenses and sundry liabilities 821 1,222
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 196,808 197,480
- ------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value; 5,000,000
shares authorized; 2,320,055 and 2,305,055 shares
issued respectively 23 23
Additional paid-in capital 5,172 4,823
Treasury stock, at cost (113,670 shares) (1,626) (1,626)
Retained earnings 20,675 20,200
Accumulated other comprehensive income, net of tax 545 290
Stock held in deferred compensation trust (228) (204)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 24,561 23,506
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $221,369 $220,986
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-1-
<PAGE> 4
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended September 30, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Interest Income:
Loans $3,002 $2,950
Mortgage-backed securities 210 255
Investments 660 639
Interest-earning deposits 101 74
------ ------
Total interest income 3,973 3,918
Interest expense:
Savings deposits 1,808 1,901
Borrowings 234 120
------ ------
Total interest expense 2,042 2,021
------ ------
Net interest income before provision
for possible loan losses 1,931 1,897
Provision for possible loan losses 4 8
------ ------
Net interest income after provision
for possible loan losses 1,927 1,889
------ ------
Other income:
Service charges 153 142
Net gain on sale of investments and
mortgage-backed securities available for sale 66 30
Gain on the sale of loans held for sale 8 11
Other operating income 42 42
------ ------
Total other income 269 225
------ ------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 469 446
Premises and occupancy costs 124 121
Federal insurance premiums 26 27
Net loss on real estate owned 4 --
Data processing expense 50 62
Professional fees 84 42
Other operating expenses 197 185
------ ------
Total operating expenses 954 883
------ ------
Income before income taxes 1,242 1,231
------ ------
Provision for income taxes:
Federal 352 369
State 85 85
------ ------
Total income taxes 437 454
------ ------
Net income $ 805 $ 777
====== ======
Earnings per share
Basic $ 0.37 $ 0.36
====== ======
Diluted $ 0.35 $ 0.34
====== ======
Dividends per share $ 0.15 $ 0.13
====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-2-
<PAGE> 5
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the Three Months Ended September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other Stock Held in
Additional Comprehensive Deferred Total
Common Paid-in Treasury Retained Income Compensation Stockholders'
Stock Capital Stock Earnings Net of Tax Trust Equity
----- ------- ----- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $23 $4,823 ($1,626) $ 20,200 $290 ($204) $ 23,506
Stock options exercised
(15,000 shares) -- 121 -- -- -- -- 121
Dividends on common stock
at $0.15 per share -- -- -- (330) -- -- (330)
Unrealized gains on
securities available
for sale, net of tax -- -- -- -- 255 -- 255
Deferred compensation
payable in common stock -- 228 -- -- -- -- 228
Purchase of stock in
deferred compensation trust -- -- -- -- -- (24) (24)
Net income -- -- -- 805 -- -- 805
-------- -------- -------- -------- -------- -------- --------
Balance, September 30, 1998 $23 $5,172 ($1,626) $ 20,675 $545 ($228) $ 24,561
======== ======== ======== ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-3-
<PAGE> 6
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
(Unaudited)
For the Three Months Ended September 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income: $805 $777
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 37 37
Provision for possible loan losses 4 8
Net loss on sale of real estate owned 2 --
Net gain on sale of investments and mortgage-backed
securities available for sale (66) (30)
Gain on the sale of loans held for sale (8) (11)
Amortization of deferred loan fees (35) (37)
Origination of loans held for sale (303) (366)
Proceeds from sale of loans held for sale 406 582
Decrease in accrued interest receivable 17 237
Increase in accrued interest payable 977 1,056
Other - net 91 390
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,927 2,643
- ----------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities (1,000) (8,455)
Purchase of investment securities available for sale (3,063) (822)
Purchase of mortgage-backed securities (1,011) --
Proceeds from investment maturities 5,000 7,000
Proceeds from sale of investment securities available for sale 1,394 370
Principal repayments of investment and
mortgage-backed securities available for sale 975 274
Principal repayments of investment and
mortgage-backed securities 16 23
(Increase) decrease in loans (1,096) 527
Proceeds from sale of real estate owned 79 --
Net additions to office properties and equipment (13) (106)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,281 (1,189)
- ----------------------------------------------------------------------------------------------------------------
Financing activities:
Net decrease in demand and club accounts (836) (1,887)
Net increase (decrease) in time deposit accounts 1,220 (331)
Net decrease in FHLB advances (1) (1)
Decrease in advance deposits by borrowers
for taxes and insurance (1,983) (1,995)
Stock options exercised 121 12
Dividends paid (330) (188)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (1,809) (4,390)
- ----------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,399 (2,936)
Cash and cash equivalents at beginning of period 11,377 15,335
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,776 $ 12,399
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $ 831 $ 845
Interest on FHLB advances 236 140
Income taxes 85 292
Transfer of loans to real estate owned -- 96
Cash paid during the period for interest includes interest credited on
deposits of $629 and $625 for the three months ended September 30, 1998
and 1997, respectively
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-4-
<PAGE> 7
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and, therefore, do not include
all the information or footnotes necessary for a complete presentation of
financial condition, results of operation and cash flows in conformity with
generally accepted accounting principles. However, all adjustments, consisting
only of normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation, have been included. Significant accounting
policies have not changed since June 30, 1998 except for the adoption of the
Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standard No. 130, ("SFAS 130") "Reporting Comprehensive Income",
discussed below. The results of operations for the three months ended September
30, 1998 are not necessarily indicative of the results which may be expected for
the entire fiscal year. The financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in Laurel Capital Group, Inc.'s (the "Company") 1998 Annual Report to
Stockholders for the year ended June 30, 1998. All amounts presented in the
Notes to Unaudited Consolidated Financial Statements are presented in thousands
except share and per share data.
EARNINGS PER SHARE
- ------------------
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
-------------------------
<S> <C> <C>
Basic earnings per share:
Net income $805 $777
Weighted average shares outstanding 2,202,104 2,167,763
Earnings per share $0.37 $0.36
Diluted earnings per share:
Net income $805 $777
Weighted average shares outstanding 2,202,104 2,167,763
Dilutive effect of employee
Stock options 119,022 109,536
--------- ---------
Diluted weighted shares outstanding 2,321,126 2,277,299
Earnings per share $0.35 $0.34
</TABLE>
-5-
<PAGE> 8
SECURITIES
- ----------
The Company accounts for investments in debt and equity securities in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 115 ("FAS
115"). FAS 115 requires that investments be classified as either: (1) Securities
Held to Maturity- reported at amortized cost, (2) Trading Securities- reported
at fair value, or (3) Securities Available for Sale- reported at fair value.
Unrealized gains and losses for trading securities are reported in earnings
while unrealized gains and losses for securities available for sale are reported
as other comprehensive income in stockholders' equity.
COMPREHENSIVE INCOME
- --------------------
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. For the
three months ended September 30, 1998 and 1997, the Company's total
comprehensive income was $1,060 and $895, respectively. Total comprehensive
income is comprised of net income of $805 and $777 and other comprehensive
income of $255 and $118, net of tax, respectively. Other comprehensive income
consists of unrealized gains and losses on investment securities and
mortgage-backed securities available for sale.
LOANS RECEIVABLE
- ----------------
Loans receivable are stated at unpaid principal balances net of the allowance
for possible loan losses, net deferred loan fees and discounts. The Company
adopted FAS 114, "Accounting by Creditors for Impairment of a Loan" and FAS 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", an amendment of FAS 114, effective July 1, 1995. These statements
address the accounting by creditors for impairment of certain loans. They apply
to all creditors and to all loans, uncollateralized as well as collateralized,
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. The Bank considers all one-to-four family
residential mortgage loans and all consumer loans (as presented in Note 4) to be
smaller-balance homogeneous loans. Loans within the scope of these statements
are considered impaired when, based on current information and events, it is
probable that all principal and interest will not be collected in accordance
with the contractual terms of the loans. Management determines the impairment of
loans based on knowledge of the borrower's ability to repay the loan according
to
-6-
<PAGE> 9
the contractual agreement, the borrower's repayment history and the fair value
of collateral for certain collateral dependent loans. Pursuant to FAS 114
paragraph 8, management does not consider an insignificant delay or
insignificant shortfall to impair a loan. Management has determined that a delay
less than 90 days will be considered an insignificant delay and that an amount
less than $5,000 will be considered an insignificant shortfall. The Bank does
not apply FAS 114 using major risk characteristics for groups of loans, but on a
loan by loan basis. All loans are charged off when management determines that
principal and interest are not collectible.
The accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes 90 days past due, whichever occurs first. When interest accrual
is discontinued, all unpaid accrued interest is reserved. Such interest
ultimately collected is credited to income in the period of recovery or applied
to reduce principal if there is sufficient doubt about the collectability of
principal. Consumer loans more than 120 days or 180 days delinquent (depending
on the nature of the loan) are generally required to be written off.
Any excess of the Bank's recorded investment in the loans over the measured
value of the loans in accordance with FAS 114 is provided for in the allowance
for loan losses. The Bank reviews its loans for impairment on a quarterly basis.
Loans receivable classified as held for sale are recorded in the financial
statements in the aggregate at the lower of cost or market.
(2) CONTINGENT LIABILITIES
----------------------
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management and
legal counsel, the resolution of these claims is not expected to have a material
adverse effect on the Company's financial position, liquidity or results of
operations.
-7-
<PAGE> 10
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES
-----------------------------------------
Investment securities available for sale are comprised of the following:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 1998:
<S> <C> <C> <C> <C>
Municipal obligations $10,969 $430 $--- $11,399
FNMA preferred stock 250 19 --- 269
FHLMC preferred stock 250 16 --- 266
FNMA common stock 574 68 --- 642
FHLMC common stock 440 56 --- 496
Shay Financial Services
ARMs Fund 14,649 --- 33 14,616
--------------------------------------------------------------------------------
27,132 589 33 27,688
Mortgage-backed securities 10,286 270 1 10,555
--------------------------------------------------------------------------------
Total $37,418 $859 $34 $38,243
================================================================================
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998, the contractual maturities of the debt securities Amortized Fair
available for sale are: Cost Value
----------------------------------------
<S> <C> <C>
Due after ten years $10,969 $11,399
----------------------------------------
Total $10,969 $11,399
========================================
</TABLE>
Mortgage-backed securities have various contractual maturity dates. Actual
repayments may be different due to prepayments on the loans underlying the
securities. The FNMA stock, FHLMC stock and Shay Financial Services ARMs
Fund have no stated maturity.
Note: There were gross realized gains of $66 and $30 recorded during the
three months ended September 30, 1998 and 1997, respectively, on the
sale of investment securities available for sale. Proceeds from the
sale of investment securities available for sale during the three
months ended September 30, 1998 and 1997 were $1,394 and $370,
respectively.
Investment securities are comprised of the following:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1998:
Corporate notes and commercial paper $10,005 $116 --- $10,121
Mortgage-backed securities 2,046 15 --- 2,061
--------------------------------------------------------------------------------
Total $12,051 $131 --- $12,182
================================================================================
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998, the contractual maturities of the debt securities are: Amortized Fair
Cost Value
----------------------------------------
<S> <C> <C>
Due after five years through ten years $5,000 $5,043
Due after ten years 5,005 5,078
----------------------------------------
Total $10,005 $10,121
========================================
</TABLE>
Mortgage-backed securities have various contractual maturity dates. Actual
repayments may be different due to prepayments on the loans underlying the
securities.
-8-
<PAGE> 11
(4) LOANS RECEIVABLE
----------------
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Conventional:
1 to 4 family dwellings $115,935 $114,905
Multi-family dwellings 2,324 2,474
Commercial 5,361 6,391
- -------------------------------------------------------------------------------------------------------------------------------
123,620 123,770
Guaranteed or insured 65 67
- -------------------------------------------------------------------------------------------------------------------------------
Total long term with monthly amortization 123,685 123,837
Construction and development loans 4,247 4,341
- -------------------------------------------------------------------------------------------------------------------------------
127,932 128,178
Less: Allowance for possible losses (1,276) (1,274)
Loans in process (2,117) (1,953)
Deferred loan fees (565) (615)
- -------------------------------------------------------------------------------------------------------------------------------
123,974 124,336
- -------------------------------------------------------------------------------------------------------------------------------
Consumer loans:
Home improvement loans (net of unearned
discounts of $6 and $7) 68 92
Loans secured by savings accounts 328 335
Commercial loans 651 650
Installment loans 27,799 26,289
- -------------------------------------------------------------------------------------------------------------------------------
28,846 27,366
Less: Allowance for possible losses (569) (578)
- -------------------------------------------------------------------------------------------------------------------------------
28,277 26,788
- -------------------------------------------------------------------------------------------------------------------------------
$152,251 $151,124
===============================================================================================================================
Changes in the allowance for possible loan losses for the three months
ended September 30, 1998 and 1997 are as follows:
Fiscal Fiscal
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of the fiscal year $1,852 $1,943
Provision for losses 4 8
Charge-offs (24) (113)
Recoveries 13 4
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, $1,845 $1,842
===============================================================================================================================
</TABLE>
At September 30, 1998, the recorded investment in loans that are considered to
be impaired under SFAS 114 was $308. Included in this amount is $103 of impaired
loans for which the related allowance for credit losses is $4, and $205 of
impaired loans that as a result of write-downs do not have an allowance for
credit losses. The average recorded investment in impaired loans during the
three months ended September 30, 1998 was approximately $296. For the three
months ended September 30, 1998, the Company recognized interest income on those
impaired loans of $1 which was recognized using the cash basis method of income
recognition.
<TABLE>
<CAPTION>
September 30,
1998 1997
-----------------------------
<S> <C> <C>
Non-accrual loans $534 $816
Non-accrual loans as a percent of total loans 0.35% 0.57%
---------------------------------------------
All loans 90 days or more past due are reported as non-accrual.
</TABLE>
-9-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
BALANCE SHEET DATA At September 30,
1998 1997
---- ----
(In thousands except per share data)
------------------------------------
(Unaudited)
<S> <C> <C>
Total assets $221,369 $209,980
Money market investments 3,581 7,210
Interest-earning deposits with other institutions 8,494 4,294
Investment securities available for sale 27,688 16,064
Investment securities 10,005 16,950
Mortgage-backed securities available for sale 10,555 13,077
Mortgage-backed securities 2,046 1,197
Loans receivable held for sale 1,538 1,622
Loans receivable, net 152,251 144,076
Savings deposits 175,774 172,801
FHLB advances 17,032 11,043
Retained earnings 20,675 18,684
Stockholders' equity 24,561 21,981
Stockholders' equity per share (1) $11.13 $10.13
STATISTICAL PROFILE Three months ended
September 30,
--------------------------
1998 1997
---- ----
Average yield earned on all interest-earning assets 7.31% 7.66%
Average rate paid on all interest-bearing liabilities 4.38 4.53
Average interest rate spread 2.93 3.13
Net yield on average interest-earning assets 3.55 3.71
Average interest-earning assets as a percentage of
average interest-bearing liabilities 117.43 115.62
Return on average assets (2) 1.45 1.48
Return on average equity (2) 13.46 14.41
Average equity to average assets 10.79 10.27
</TABLE>
- ----------------------------
(1) Amounts reflect the effects of the three-for-two stock split paid on
January 16, 1998.
(2) Amounts are annualized.
-10-
<PAGE> 13
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30,1998 AND 1997
GENERAL. Laurel Capital Group, Inc.'s (the "Company") only significant asset is
the stock it owns of its wholly-owned subsidiary, Laurel Savings Bank (the
"Bank"). The Company's net income for the three months ended September 30, 1998
was $805,000 compared to $777,000 for the same period in the prior year. The
increase of $28,000 or 3.6% was primarily the result of a $44,000 or 19.6%
increase in other income, a $34,000 or 1.8% increase in net interest income and
a $17,000 or 3.7% decrease in income tax expense partially offset by a $71,000
or 8.0% increase in operating expenses. These and other significant fluctuations
are discussed below.
NET INTEREST INCOME. The Company's operating results depend substantially on the
Bank's net interest income, which is determined by the average interest rate
spread between the Bank's interest-earning assets and interest-bearing
liabilities and the relative amounts of such assets and liabilities. Net
interest income increased by $34,000 or 1.8% during the three months ended
September 30, 1998 as compared to the same period of the prior year. The
increase was primarily due to a $4.6 million or 16.8% increase in average net
earning assets for the quarter ended September 30,1998 as compared to the
quarter ended September 30, 1997. This increase was partially offset by a
decrease in the average interest rate spread from 3.13% for the quarter ended
September 30, 1997 to 2.93% for the quarter ended September 30, 1998. The
decrease in the average interest rate spread was primarily due to a decrease in
the average interest rate earned on interest-earning assets from 7.66% for the
quarter ended September 30,1997 to 7.31% for the quarter ended September 30,
1998. This decrease was partially offset by a decease in the average rate paid
on the Bank's interest-bearing liabilities from 4.48% for the quarter ended
September 30, 1997 to 4.38% for the quarter ended September 30, 1998.
Interest income on loans receivable and loans held for sale increased by $52,000
or 1.8% during the three months ended September 30, 1998 as compared to the same
period in the prior year. This was primarily due to an $8.5 million or 5.9%
increase in the average outstanding balance of loans receivable for the quarter
ended September 30, 1998 as compared to the same period in the prior year. This
increase was partially offset by a decrease in the average yield on loans
receivable from 8.18% for the quarter ended September 30, 1997 to 7.86% for the
quarter ended September 30, 1998. The increase in the average outstanding
balance of loans receivable was due to a $4.7 million or 19.5% increase in the
average outstanding balance of consumer loans and a $3.8 million or 3.2%
increase in the average outstanding balance of mortgage loans. The decrease in
the average yield was primarily due to lower market interest rates. The Bank
continues to emphasize the origination of consumer loan products as part of its
Asset/Liability management due to their generally shorter terms.
Interest on mortgage-backed securities and mortgage-backed securities available
for sale decreased by $45,000 or 17.7% during the quarter ended September 30,
1998 as compared to the September 30, 1997 quarter. This decrease was primarily
due to a $2.2 million or 15.7% decrease in the average outstanding balance of
mortgage-backed securities during the quarter ended September 30, 1998 as
compared to the September 30, 1997 quarter. In addition, the average yield on
mortgage-backed securities decreased from 7.20% for the quarter ended September
30, 1997 to 7.03% for the quarter ended September 30, 1998. At September 30,
1998, the Bank's portfolio of mortgage-backed securities available for sale had
net unrealized gains of $269,000.
-11-
<PAGE> 14
The available for sale portfolio consists of fixed and adjustable rate
securities with an average yield of 7.17% at September 30, 1998. Rising interest
rates would reduce the unrealized gains in this portfolio if the fixed rate
securities were not sold. The held to maturity portfolio consists of two
adjustable-rate and one fixed-rate collateralized mortgage obligations (CMO's)
with an average yield of 6.41% at September 30, 1998. At September 30, 1998, the
Bank's portfolio of mortgage-backed securities had net unrealized gains of
$15,000. In periods of rising interest rates, unrealized losses could occur due
to the timing difference of when the securities reprice. The Bank uses these
securities as part of its Asset/Liability strategy. See Note 3 of "Notes to
Unaudited Consolidated Financial Statements."
Interest income on investments and investments available for sale increased
during the three months ended September 30, 1998 by $21,000 or 3.3% from the
comparable period in 1997, primarily due to a $4.5 million or 11.4% increase in
the average outstanding balance of such securities for the quarter ended
September 30,1998 as compared to the quarter ended September 30, 1997. This
increase was partially offset by a decrease in the average yield on investment
securities from 6.37% for the quarter ended September 30, 1997 to 5.90% for the
quarter ended September 30, 1998. The increase in the average outstanding
balance was primarily due to the investment of increased savings deposits and
funds borrowed from the Federal Home Loan Bank ("FHLB") of Pittsburgh. At
September 30, 1998, the Bank's portfolio of investment securities available for
sale and investment securities held to maturity had net unrealized gains of
$556,000 and $116,000, respectively. See Note 3 of "Notes to Unaudited
Consolidated Financial Statements."
Interest income on interest-earning deposits increased during the three months
ended September 30,1998 by $27,000 or 36.5% from the comparable period in 1997.
This increase was primarily due to an increase of $2.0 million or 37.6% in the
average outstanding balance of interest-earning deposits for the quarter ended
September 30, 1998 as compared to the September 30, 1997 quarter. The average
yield on interest-earning deposits decreased from 5.50% for the quarter ended
September 30, 1997 to 5.46% for the quarter ended September 30, 1998.
Interest expense on deposits decreased by $93,000 or 4.9% for the quarter ended
September 30,1998, compared to the same period in 1997. The average outstanding
balance of deposits increased by $1.2 million or .7% during the quarter ended
September 30, 1998 as compared to the same period of the prior year. Such
increase was partially offset by a decrease in the average interest rate paid on
savings deposits from 4.48% for the quarter ended September 30, 1997 to 4.27%
for the quarter ended September 30, 1998.
Interest expense on borrowings increased $114,000 or 95.0% for the quarter ended
September 30, 1998 compared to the quarter ended September 30, 1997 due to a
$8.5 million or 100.0% increase in the average outstanding balance of FHLB
advances. The average rate paid on borrowings decreased from 5.59% for the
quarter ended September 30, 1997 to 5.45% for the quarter ended September 30,
1998.
PROVISION FOR POSSIBLE LOAN LOSSES. The Bank provided $4,000 and $8,000 to its
allowance for possible loan losses for the quarters ended September 30, 1998 and
1997, respectively. Such provisions were the result of an analysis of the
adequacy of the allowance for possible loan losses in connection with a review
of the Bank's loan portfolio.
-12-
<PAGE> 15
At both September 30, 1998 and 1997, the Bank's allowance for possible loan
losses amounted to $1.8 million or 1.2% and 1.3%, respectively, of the total
loan portfolio. As a percentage of non-performing loans (loans delinquent 90
days and over), the allowance for possible loan losses was 345.5% and 225.7% at
September 30, 1998 and 1997, respectively.
A review of the loan portfolio is conducted at least quarterly by management to
determine that the allowance for possible loan losses is adequate to absorb
estimated future loan losses. In determining the appropriate level of the
allowance for possible loan losses, consideration is given to general economic
conditions, diversification of loan portfolios, historic loss experience,
identified credit problems, delinquency levels and adequacy of collateral.
Although management believes that the current allowance for possible loan losses
is adequate, future additions to the reserve may be necessary due to changes in
economic conditions and other factors. In addition, as an integral part of their
periodic examination, certain regulatory agencies review the adequacy of the
Bank's allowance for possible loan losses and may direct the Bank to make
additions to the allowance based on their judgement. No such additions were
required to be made during the Company's most recent examination.
OTHER INCOME. Total other income increased by $44,000 or 19.6% to $269,000 for
the quarter ended September 30, 1998 as compared to the same period in 1997.
This was primarily due to a $36,000 increase in net gains on the sale of
investments available for sale and an $11,000 increase in fees and service
charges.
OPERATING EXPENSES. Total operating expenses increased by $71,000 or 8.0% during
the quarter ended September 30, 1998 as compared to the comparable 1997 quarter.
This increase was primarily due to a $42,000 increase in professional fees, a
$23,000 increase in compensation and benefits and a $12,000 increase in other
operating expense. These increases were partially offset by a $12,000 decrease
in data processing expense. The increase in professional fees was primarily due
to legal fees incurred in litigation brought by the Bank against another
financial institution.
INCOME TAX EXPENSE. Income tax expense decreased by $17,000 for the quarter
ended September 30, 1998 as compared to the quarter ended September 30, 1997
primarily as a result of a decrease in the effective tax rate from 36.9% for the
1997 quarter to 35.2% for the 1998 quarter. This decrease was primarily due to
increased purchases of non-taxable municipal obligations by the Company during
the past year.
-13-
<PAGE> 16
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.
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.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets increased by $383,000 or .2% from June 30, 1998 to September 30,
1998. The largest increases were a $2.1 million increase in investment
securities available for sale, a $1.4 million increase in interest-bearing
deposits with other institutions and a $1.1 million increase in loans
receivable, net. These increases were partially offset by a $4.0 million
decrease in investment securities. The largest components of change in
liabilities were a $2.0 million decrease in advance deposits by borrowers for
taxes and insurance partially offset by a $977,000 increase in accrued interest
payable.
Under regulations adopted by the FDIC, the Bank is required to maintain Tier I
(Core) capital equal to at least 4% of the Bank's adjusted total assets, and
Tier II (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At September 30, 1998, the Bank exceeded all of these
requirements, with Tier I and Tier II ratios of 10.50% and 21.38%, respectively.
-14-
<PAGE> 17
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1998.
<TABLE>
<CAPTION>
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- ---------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C>
Equity Capital (1) $23,829 $23,829 $23,829
Less unrealized securities gains (545) (545) (545)
Plus general valuation allowances (2) - - 1,451
------- ------- -------
Total regulatory capital 23,284 23,284 24,735
Minimum required capital 8,874 4,644 9,287
------- ------- -------
Excess regulatory capital $14,410 $18,640 $15,448
======= ======= =======
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $11,092 $ 6,942 $11,570
======= ======= =======
Regulatory capital as a percentage (3) 10.50% 20.12% 21.38%
Minimum required capital percentage 4.00 4.00 8.00
------- ------- -------
Excess regulatory capital percentage 6.50% 16.12% 13.38%
======= ======= =======
Minimum required capital percentage
to be well capitalized under Prompt
Corrective Action Provisions 5.00% 6.00% 10.00%
======= ======= =======
</TABLE>
- ------------------------------------------
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 033 for the three months ended
September 30, 1998.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets of
$221,845. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $115,700.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services as measured by the consumer price
index.
-15-
<PAGE> 18
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Bank's portfolio equity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1998 Annual Report to
Stockholders. There has been no material change in the Company's asset and
liability position or market value of portfolio equity since June 30, 1998.
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
PART II
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings at the present
time other than those generally associated with the normal course of
business. In the opinion of management and legal counsel, the
resolution of these claims are not expected to have a material adverse
effect on the Company's financial position, liquidity or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
On September 22, 1998, the Company announced its intent to repurchase
up to 110,000 shares or approximately 5.00% of the Company's common
stock over the next twelve months.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
-16-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
LAUREL CAPITAL GROUP, INC.
/s/ EDWIN R. MAUS
- -------------------------------------------------------
Edwin R. Maus
President and Chief Executive Officer
/s/ JOHN A. HOWARD, JR.
- -------------------------------------------------------
John A. Howard, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 12, 1998
-17-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION AND CONSOLIDATED STATEMENTS OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000892158
<NAME> LAUREL CAPITAL GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 701
<INT-BEARING-DEPOSITS> 8,494
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,243
<INVESTMENTS-CARRYING> 12,051
<INVESTMENTS-MARKET> 12,182
<LOANS> 154,096
<ALLOWANCE> 1,845
<TOTAL-ASSETS> 221,369
<DEPOSITS> 175,774
<SHORT-TERM> 2,900
<LIABILITIES-OTHER> 4,002
<LONG-TERM> 14,133
0
0
<COMMON> 23
<OTHER-SE> 24,538
<TOTAL-LIABILITIES-AND-EQUITY> 221,369
<INTEREST-LOAN> 3,002
<INTEREST-INVEST> 660
<INTEREST-OTHER> 311
<INTEREST-TOTAL> 3,973
<INTEREST-DEPOSIT> 1,808
<INTEREST-EXPENSE> 2,042
<INTEREST-INCOME-NET> 1,931
<LOAN-LOSSES> 4
<SECURITIES-GAINS> 74
<EXPENSE-OTHER> 954
<INCOME-PRETAX> 1,242
<INCOME-PRE-EXTRAORDINARY> 1,242
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 805
<EPS-PRIMARY> .37
<EPS-DILUTED> .35
<YIELD-ACTUAL> 3.55
<LOANS-NON> 534
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,845
<CHARGE-OFFS> 24
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1,845
<ALLOWANCE-DOMESTIC> 1,845
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
