<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, 1999
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 1, 1999: 2,141,506 shares
<PAGE> 2
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
INDEX
PAGE
----
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition as of 1
September 30, 1999 and June 30, 1999
Consolidated Statements of Operations for the Three 2
Months Ended September 30, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the 3
Three Months Ended September 30, 1999
Consolidated Statements of Cash Flows for the Three 4
Months Ended September 30, 1999 and 1998
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
<PAGE> 3
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
<S> <C> <C>
Cash $ 1,270 $ 690
Money market investments -- 3,711
Interest-earning deposits with other institutions 1,752 7,710
Investment securities available for sale 36,615 35,549
Investment securities held to maturity (market value of $20,544 and $12,224) 20,937 12,439
Mortgage-backed securities available for sale 12,023 11,868
Mortgage-backed securities held to maturity (market value of $718 and $1,074) 717 1,072
Loans receivable, held for sale 1,433 1,562
Loans receivable, net of unearned discounts of $1 and $2 154,235 153,256
Allowance for loan losses (1,860) (1,866)
- ------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 152,375 151,390
Federal Home Loan Bank Stock 1,277 1,277
Real estate owned 340 377
Accrued interest receivable:
Loans 831 846
Interest-earning deposits and investments 540 492
Mortgage-backed securities 71 71
Office properties and equipment, net of accumulated depreciation 1,476 1,458
Prepaid expenses and sundry assets 1,216 962
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $232,873 $231,474
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $181,804 $182,118
FHLB Advances 23,128 20,029
Advance deposits by borrowers for taxes and insurance 1,013 3,020
Accrued interest payable 1,435 500
Accrued income taxes 582 294
Other accrued expenses and sundry liabilities 886 983
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 208,848 206,944
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value; 5,000,000
shares authorized; 2,324,665 and 2,324,298 shares
issued, respectively 23 23
Additional paid-in capital 5,199 5,197
Treasury stock, at cost (183,020 and 152,120 shares) (2,746) (2,270)
Retained earnings 22,538 22,070
Accumulated other comprehensive loss, net of tax (667) (190)
Stock held in deferred compensation trust (322) (300)
- ------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 24,025 24,530
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $232,873 $231,474
========================================================================================================================
</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, 1999 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Interest Income:
Loans $2,908 $3,002
Mortgage-backed securities 217 210
Investments 869 660
Interest-earning deposits 25 101
---------------- ---------------
Total interest income 4,019 3,973
Interest expense:
Savings deposits 1,767 1,808
Borrowings 272 234
---------------- ---------------
Total interest expense 2,039 2,042
---------------- ---------------
Net interest income before provision
for loan losses 1,980 1,931
Provision for loan losses 5 4
---------------- ---------------
Net interest income after provision
for loan losses 1,975 1,927
---------------- ---------------
Other income:
Service charges 135 153
Net gain on sale of investments and
mortgage-backed securities available for sale -- 66
Gain on the sale of loans held for sale 7 8
Other operating income 61 52
---------------- ---------------
Total other income 203 279
---------------- ---------------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 464 469
Premises and occupancy costs 151 122
Federal insurance premiums 26 26
Net loss on real estate owned 40 4
Data processing expense 52 50
Professional fees 40 84
Other operating expenses 227 209
---------------- ---------------
Total operating expenses 1,000 964
---------------- ---------------
Income before income taxes 1,178 1,242
---------------- ---------------
Provision for income taxes:
Federal 304 352
State 59 85
---------------- ---------------
Total income taxes 363 437
---------------- ---------------
Net income $ 815 $ 805
================ ===============
Earnings per share
Basic $ 0.38 $ 0.37
================ ===============
Diluted $ 0.36 $ 0.35
================ ===============
Dividends per share $ 0.16 $ 0.15
================ ===============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
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<PAGE> 5
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the Three Months Ended September 30, 1999
(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, 1999 $23 $5,197 ($2,270) $22,070 ($190) ($300) $24,530
Comprehensive income:
Net income -- -- -- 815 -- -- 815
Other comprehensive loss,
net of tax $(246) -- -- -- -- (477) -- (477)
------- ------------ --------- --------- -------------- -------------- ----------------
Total comprehensive income -- -- -- 815 (477) -- 338
Stock options exercised
(367 shares) -- 2 -- -- -- -- 2
Dividends on common stock
at $0.16 per share -- -- -- (347) -- -- (347)
Treasury stock purchased -- -- (476) -- -- -- (476)
Net purchase of stock in
deferred compensation trust -- -- -- -- -- (22) (22)
------- ------------ --------- --------- -------------- -------------- ----------------
Balance, September 30, 1999 $23 $5,199 ($2,746) $22,538 ($667) ($322) $24,025
======= ============ ========= ========= ============== ============== ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
-3-
<PAGE> 6
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended September 30, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income: $ 815 $ 805
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 47 37
Provision for loan losses 5 4
Net loss on sale of real estate owned 29 2
Net gain on sale of investment securities available for sale -- (66)
Gain on the sale of loans held for sale (7) (8)
Amortization of deferred loan fees (35) (35)
Origination of loans held for sale (297) (303)
Proceeds from sale of loans held for sale 433 406
(Increase) decrease in accrued interest receivable (33) 17
Increase in accrued interest payable 935 977
Other - net 194 91
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,086 1,927
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities held to maturity (8,494) (1,000)
Purchase of investment securities available for sale (1,793) (3,063)
Purchase of mortgage-backed securities held to maturity -- (1,011)
Purchase of mortgage-backed securities available for sale (1,000) --
Proceeds from maturities of investment securities held to maturity -- 3,000
Proceeds from maturities of mortgage-backed securities held to maturity -- 2,000
Proceeds from sale of investment securities available for sale -- 1,394
Principal repayments of investment and
mortgage-backed securities available for sale 807 975
Principal repayments of investment and
mortgage-backed securities held to maturity 355 16
Increase in loans (955) (1,096)
Proceeds from sale of real estate owned 13 79
Net additions to office properties and equipment (65) (13)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (11,132) 1,281
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net decrease in demand and club accounts (468) (836)
Net increase in time deposit accounts 154 1,220
Net increase (decrease) in FHLB advances 3,099 (1)
Decrease in advance deposits by borrowers
for taxes and insurance (2,007) (1,983)
Stock options exercised 2 121
Acquisition of treasury stock (476) --
Dividends paid (347) (330)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities (43) (1,809)
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (9,089) 1,399
Cash and cash equivalents at beginning of period 12,111 11,377
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,022 $ 12,776
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $ 832 $ 831
Interest on FHLB advances 286 236
Income taxes 76 85
Transfer of loans to real estate owned -- --
Cash paid during the period for interest includes interest credited on deposits of $627 and $629 for the three
months ended September 30, 1999 and 1998, 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, 1999 AND JUNE 30, 1999
(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, 1999. The results of operations for the
three months ended September 30, 1999 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") 1999 Annual Report to Stockholders for the year ended June 30, 1999.
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,
1999 1998
---------------- ----------------
<S> <C> <C>
Basic earnings per share:
Net income $ 815 $ 805
Weighted average shares outstanding 2,158,628 2,202,104
Earnings per share $ 0.38 $ 0.37
Diluted earnings per share:
Net income $ 815 $ 805
Weighted average shares outstanding 2,158,628 2,202,104
Dilutive effect of employee
stock options 88,691 119,022
---------- ----------
Diluted weighted shares outstanding 2,247,319 2,321,126
Earnings per share $ 0.36 $ 0.35
</TABLE>
-5-
<PAGE> 8
SECURITIES
- ----------
The Company accounts for investments in debt and equity securities in accordance
with FASB Statement No. 115 ("SFAS 115"). SFAS 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, 1999 and 1998, the Company's total
comprehensive income was $338 and $1,060, respectively. Total comprehensive
income is comprised of net income of $815 and $805, respectively, and other
comprehensive income (loss) of $(477) and $255, net of tax, respectively. Other
comprehensive income consists of unrealized gains and losses on investment
securities and mortgage-backed securities available for sale, net of tax.
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 SFAS 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", an amendment of SFAS 114, effective July 1, 1995. These statements
address the accounting by creditors for impairment of certain loans. They apply
to all creditors and to all loans, uncollateralized as well as collateralized,
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. The Bank considers all one-to-four family
residential mortgage loans and all consumer loans (as presented in Note 4) to be
smaller-balance homogeneous loans. Loans within the scope of these statements
are considered impaired when, based on current information and events, it is
probable that all principal and interest will not be collected in accordance
with the contractual terms of the loans. Management determines the impairment of
loans based on knowledge of the borrower's ability to repay the loan according
to the contractual agreement, the borrower's repayment history and the fair
value of collateral for certain collateral dependent loans. Pursuant to SFAS 114
paragraph 8, management does not consider an insignificant delay or
insignificant
-6-
<PAGE> 9
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 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
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At September 30, 1999:
Municipal obligations $19,911 $ 155 $ 1,113 $18,953
FNMA preferred stock 250 9 -- 259
FHLMC preferred stock 250 7 -- 257
FNMA common stock 582 65 20 627
FHLMC common stock 481 61 22 520
SLM Student Loan Trust 719 16 -- 735
Standard Insurance Company stock 4 -- -- 4
Shay Financial Services
ARMs Fund 15,444 -- 184 15,260
-----------------------------------------------------------------------------
37,641 313 1,339 36,615
Mortgage-backed securities available for sale 12,008 105 90 12,023
-----------------------------------------------------------------------------
Total $49,649 $ 418 $ 1,429 $48,638
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999, the contractual maturities of the debt securities Amortized Fair
available for sale are: Cost Value
---------------------------
<S> <C> <C>
Due after five years through ten years $ 719 $ 735
Due after ten years 19,911 18,953
---------------------------
Total $20,630 $19,688
===========================
</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, Standard
Insurance Company stock and the Shay Financial Services ARMs Fund have
no stated maturity.
Note: There were no sales of investment securities available for sale
during the three months ended September 30, 1999. Gross realized
gains of $66 were recorded during the three months ended
September 30, 1998 on the. sale of such securities. Proceeds from the
sale of investments available for sale during the three months ended
September 30, 1998 were $1,394.
Investment and mortgage-backed securities held to maturity are comprised of
the following:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At September 30, 1999:
Corporate notes and commercial paper $20,937 $ 7 $ 400 $20,544
Mortgage-backed securities 717 3 2 718
--------------------------------------------------------------------------------
Total $21,654 $ 10 $ 402 $21,262
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999, the contractual maturities of the debt securities Amortized Fair
held to maturity are: Cost Value
---------------------------
<S> <C> <C>
Due after one year through five years $ 1,499 $ 1,473
Due after five years through ten years 3,499 3,428
Due after ten years 15,939 15,643
---------------------------
Total $20,937 $20,544
===========================
Mortgage-backed securities have various contractual maturity dates. Actual repayments may be
different due to prepayments on the loans underlying the securities.
</TABLE>
-8-
<PAGE> 11
(4) LOANS RECEIVABLE
----------------
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
1 to 4 family dwellings $112,261 $112,295
Multi-family dwellings 1,580 1,612
Commercial 5,396 5,375
Guaranteed or insured 38 39
Construction and development loans 2,860 2,268
- ---------------------------------------------------------------------------------------------------------------------------
122,135 121,589
Consumer loans:
Home improvement loans (net of unearned
discounts of $1 and $2) 13 21
Loans secured by savings accounts 212 276
Commercial loans 1,361 941
Installment loans 32,613 31,802
- ---------------------------------------------------------------------------------------------------------------------------
34,199 33,040
- ---------------------------------------------------------------------------------------------------------------------------
Loans receivable, net of unearned discounts 156,334 154,629
Less: Allowance for loan losses (1,860) (1,866)
Loans in process (1,763) (987)
Deferred loan fees (336) (386)
- ---------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $152,375 $151,390
===========================================================================================================================
Changes in the allowance for loan losses for the
three months ended September 30, 1999 and 1998 are as follows:
Fiscal Fiscal
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Balance at beginning of the fiscal year $1,866 $1,852
Provision for losses 5 4
Charge-offs (13) (24)
Recoveries 2 13
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, $1,860 $1,845
===========================================================================================================================
</TABLE>
At September 30, 1999, the recorded investment in loans that are
considered to be impaired under SFAS 114 was $295. Included in this
amount is $89 of impaired loans for which the related allowance for
loan losses is $3, and $206 of impaired loans that as a result of
write-downs do not have an allowance for loan losses. The average
recorded investment in impaired loans during the three months ended
September 30, 1999 was approximately $288. For the three months ended
September 30, 1999, the Company recognized interest income on those
impaired loans of $2 which was recognized using the cash basis method
of income recognition.
<TABLE>
September 30,
1999 1998
--------------------------------------
<S> <C> <C>
Non-accrual loans $566 $534
Non-accrual loans as a percent of total loans 0.37 % 0.35 %
</TABLE>
- ------------------------------------------
All loans 90 days or more past due are reported as non-accrual.
-9-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
BALANCE SHEET DATA At September 30,
1999 1998
---- ----
(In thousands except per share data)
------------------------------------
(Unaudited)
<S> <C> <C>
Total assets $232,873 $221,369
Money market investments -- 3,581
Interest-earning deposits with other institutions 1,752 8,494
Investment securities available for sale 36,615 27,688
Investment securities held to maturity 20,937 10,005
Mortgage-backed securities available for sale 12,023 10,555
Mortgage-backed securities held to maturity 717 2,046
Loans receivable held for sale 1,433 1,538
Loans receivable, net 152,375 152,251
Savings deposits 181,804 175,774
FHLB advances 23,128 17,032
Retained earnings 22,538 20,675
Stockholders' equity 24,025 24,561
Stockholders' equity per share $ 11.22 $ 11.13
</TABLE>
<TABLE>
<CAPTION>
STATISTICAL PROFILE Three months ended
September 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
Average yield earned on all interest-earning assets 7.11 % 7.31 %
Average rate paid on all interest-bearing liabilities 4.16 4.38
Average interest rate spread 2.95 2.93
Net yield on average interest-earning assets 3.50 3.55
Average interest-earning assets as a percentage of
average interest-bearing liabilities 116.19 117.43
Return on average assets (1) 1.41 1.45
Return on average equity (1) 13.41 13.46
Average equity to average assets 10.48 10.79
</TABLE>
- -----------------------------------------------------
(1) Amounts are annualized .
-10-
<PAGE> 13
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30,1999 AND 1998
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, 1999
was $815,000 compared to $805,000 for the same period in the prior year. The
increase of $10,000 or 1.2% was primarily the result of a $74,000 or 16.9%
decrease in income tax expense and a $49,000 or 2.5% increase in net interest
income partially offset by a decrease of $76,000 or 27.2% in other income and an
increase of $36,000 or 3.7% in other 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 $49,000 or 2.5% during the three months ended
September 30, 1999 as compared to the same period of the prior year. The
increase was primarily due to a $13.7 million or 30.9% increase in the average
outstanding balance of investment securities for the quarter ended September 30,
1999 as compared to the quarter ended September 30, 1998. Also contributing to
the increase in net interest income was an increase in the average interest rate
spread from 2.93% for the quarter ended September 30, 1998 to 2.95% for the
quarter ended September 30, 1999. These increases were partially offset by a
$760,000 or 2.4% decrease in the average outstanding balance of net earning
assets for the quarter ended September 30, 1999 compared to the quarter ended
September 30, 1998.
Interest income on loans receivable and loans held for sale decreased by $94,000
or 3.1% during the three months ended September 30, 1999 as compared to the same
period in the prior year. The average outstanding balance of loans receivable
decreased by $812,000 or .5% for the quarter ended September 30, 1999 as
compared to the same period in the prior year. In addition, the average yield on
loans receivable decreased from 7.86% for the quarter ended September 30, 1998
to 7.66% for the quarter ended September 30, 1999. The decrease in the average
outstanding balance of loans receivable was due to a $5.7 million or 4.6%
decrease in the average outstanding balance of mortgage loans which was
partially offset by a $4.9 million or 16.9% increase in the average outstanding
balance of consumer 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 held to maturity and mortgage-backed
securities available for sale increased by $7,000 or 3.3% during the quarter
ended September 30, 1999 as compared to the September 30, 1998 quarter. This
increase was primarily due to a $1.2 million or 9.9% increase in the average
outstanding balance of mortgage-backed securities during the quarter ended
September 30, 1999 as compared to the September 30, 1998 quarter. This increase
was partially offset by a decrease in the average yield on mortgage-backed
securities from 7.03% for the quarter ended September 30, 1998 to 6.61% for the
quarter ended September 30, 1999. At September 30, 1999, the Bank's portfolio of
mortgage-backed securities available for sale had net unrealized gains of
$15,000. This portfolio consists of fixed and adjustable rate securities with an
average yield of 6.81% at September 30, 1999. Rising interest rates would reduce
the unrealized gains in this portfolio if the fixed rate
-11-
<PAGE> 14
securities are not sold. The mortgage-backed securities held to maturity
portfolio consists of two adjustable-rate and one fixed-rate collateralized
mortgage obligations (CMO's) with an average yield of 6.02% at September 30,
1999. At September 30, 1999, the Bank's portfolio of mortgage-backed securities
held to maturity had net unrealized gains of $1,000. 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 held to maturity and investments available for
sale increased during the three months ended September 30, 1999 by $209,000 or
31.7% from the comparable period in 1998, primarily due to a $13.7 million or
30.9% increase in the average outstanding balance of such securities for the
quarter ended September 30, 1999 as compared to the quarter ended September 30,
1998. In addition, the average yield on investment securities increased from
5.90% for the quarter ended September 30, 1998 to 5.94% for the quarter ended
September 30, 1999. 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, 1999,
the Bank's portfolio of investment securities available for sale and investment
securities held to maturity had net unrealized losses of $1.0 million and
$393,000, respectively. See Note 3 of "Notes to Unaudited Consolidated Financial
Statements."
Interest income on interest-earning deposits decreased during the three months
ended September 30, 1999 by $76,000 or 75.3% from the comparable period in 1998.
This decrease was primarily due to a decrease of $5.3 million or 72.3% in the
average outstanding balance of interest-earning deposits for the quarter ended
September 30, 1999 as compared to the September 30, 1998 quarter. The average
yield on interest-earning deposits decreased from 5.46% for the quarter ended
September 30, 1998 to 4.88% for the quarter ended September 30, 1999.
Interest expense on interest-bearing deposits decreased by $41,000 or 2.3% for
the quarter ended September 30, 1999, compared to the same period in 1998. The
decrease was primarily due to a decrease in the average interest rate paid on
savings deposits from 4.27% for the three months ended September 30, 1998 to
4.02% for the three months ended September 30, 1999. This decrease was partially
offset by a $6.4 million or 3.8% increase in the average outstanding balance of
such deposits during the three months ended September 30, 1999 as compared to
the same period of the prior year.
Interest expense on borrowings increased $38,000 or 16.2% for the quarter ended
September 30, 1999 compared to the quarter ended September 30, 1998 due to a
$3.1 million or 18.4% increase in the average outstanding balance of FHLB
advances. The average rate paid on borrowings decreased from 5.45% for the
quarter ended September 30, 1998 to 5.35% for the quarter ended September 30,
1999.
PROVISION FOR LOAN LOSSES. The Bank provided $5,000 and $4,000 to its allowance
for loan losses for the quarters ended September 30, 1999 and 1998,
respectively. Such provisions were the result of an analysis of the allowance
for loan losses in connection with a review of the Bank's loan portfolio.
-12-
<PAGE> 15
At both September 30, 1999 and 1998, the Bank's allowance for loan losses
amounted to $1.9 million or 1.2% of the total loan portfolio.
A review of the loan portfolio is conducted at least quarterly by management to
determine that the allowance for loan losses is appropriate to absorb estimated
loan losses. In determining the appropriate level of the allowance for 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. In consideration of the above,
management has assessed the risks in the loan portfolio and has determined that
no significant changes have occurred during the three months ended September 30,
1999. Thus, the level of the allowance for loan losses is substantially
unchanged from June 30, 1999. Although management believes that the current
allowance for loan losses is appropriate, 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 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 decreased by $76,000 or 27.2% to $203,000 for
the quarter ended September 30, 1999 as compared to the same period in 1998.
This was primarily due to a $66,000 decrease in net gains on the sale of
investments available for sale and a $18,000 decrease in fees and service
charges partially offset by a $9,000 increase in other operating income.
OPERATING EXPENSES. Total operating expenses increased by $36,000 or 3.7% during
the quarter ended September 30, 1999 as compared to the comparable quarter in
1998. This increase was primarily due to a $36,000 increase in net real estate
owned expense, a $29,000 increase in premises and occupancy expense and a
$18,000 increase in other operating expenses. These increases were partially
offset by a decrease of $44,000 in professional fees and a $5,000 decrease in
compensation and benefits expense. The decrease in professional fees was
primarily due to a decrease in legal fees incurred in litigation brought by the
Bank against another financial institution.
INCOME TAX EXPENSE. Income tax expense decreased by $74,000 for the quarter
ended September 30, 1999 as compared to the quarter ended September 30, 1998
primarily as a result of a decrease in the effective tax rate from 35.2% for the
1998 quarter to 30.8% for the 1999 quarter. This decrease was primarily due to
increased purchases of non-taxable municipal obligations by the Company during
the past year.
YEAR 2000.
The Company outsources its primary data processing functions. A challenging
problem exists as the millennium ("year 2000") or ("Y2K") 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 with emphasis placed on "mission
critical" functions. Due to the critical issues of the Y2K problem, quarterly
reports are made
-13-
<PAGE> 16
to Company's Board of Directors detailing the progress made in preparing for the
year 2000. The Committee developed a Year 2000 Plan to ensure the re-programming
or replacement of the affected systems. The plan was developed using recommended
guidance provided by the Company's primary regulator and encompasses five
phases: awareness, assessment, renovation, validation and implementation. These
phases have enabled the Company to identify problem areas, develop appropriate
plans for action and ensure adequate testing of the affected systems to validate
the Company's readiness for the year 2000.
As part of its Year 2000 Plan, the Company has developed a Business Resumption
Contingency Plan to address actions to be taken in the event a mission critical
system fails to perform in a normal manner due to a system or supplier failure.
In addition to regulatory reviews, the Company's Year 2000 plan has been
reviewed by an independent third party and found to be appropriate.
The Company has also contacted its largest borrowers to determine the extent
they may be materially affected by potential year 2000 problems. To date, the
Company has received confirmations from its mission critical vendors that
corrections have been made and testing has been completed to address the issues
associated with the year 2000 problem.
During the fourth quarter of fiscal 1999, the Company completed the replacement
of various hardware and software components at a cost of approximately $300,000
that will be depreciated over future periods. In addition, the Company has begun
to address the potential liquidity risks posed by the year 2000 and believes it
has adequate alternative funding sources available to adequately serve the needs
of its customers.
The Company does not anticipate that the year 2000 issue will pose any
significant operational problems or will have any material impact on its results
of operations. However, the failure of external power or telecommunication
suppliers may have a material impact on the operations of the Company.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets increased by $1.4 million or .6% from June 30, 1999 to September
30, 1999. The largest increases were a $8.5 million increase in investment
securities held to maturity, a $1.1 million increase in investment securities
available for sale and a $985,000 increase in loans receivable, net. These
increases were partially offset by a $6.0 million decrease in interest-earning
deposits with other institutions and a $3.7 million decrease in money market
investments. The largest components of change in liabilities were a $3.1 million
increase in FHLB advances and a $935,000 increase in accrued interest payable
partially offset by a $2.0 million decrease in advance deposits by borrowers for
taxes and insurance.
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, 1999, the Bank exceeded all of these
requirements, with Tier I and Tier II ratios of 10.13% and 19.47%, respectively.
-14-
<PAGE> 17
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1999.
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- ------- -------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Equity Capital (1) $23,524 $23,524 $23,524
Less unrealized securities gains - - -
Plus general valuation allowances (2) - - 1,617
------- ------- ------
Total regulatory capital 23,524 23,524 25,141
Minimum required capital 9,291 5,174 10,347
------- ------- ------
Excess regulatory capital $14,233 $18,350 $14,794
======= ======= =======
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $11,614 $ 7,746 $12,910
======= ======= =======
Regulatory capital as a percentage (3) 10.13% 18.22% 19.47%
Minimum required capital percentage 4.00 4.00 8.00
------- ------- ------
Excess regulatory capital percentage 6.13% 14.22% 11.47%
======= ======= =======
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, 1999.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets of
$232,273. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $129,099.
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 1999 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, 1999.
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
-----------------
None
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 15, 1999
-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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,270
<INT-BEARING-DEPOSITS> 1,752
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,638
<INVESTMENTS-CARRYING> 21,654
<INVESTMENTS-MARKET> 21,262
<LOANS> 154,235
<ALLOWANCE> 1,860
<TOTAL-ASSETS> 232,873
<DEPOSITS> 181,804
<SHORT-TERM> 6,793
<LIABILITIES-OTHER> 3,916
<LONG-TERM> 16,335
0
0
<COMMON> 23
<OTHER-SE> 24,002
<TOTAL-LIABILITIES-AND-EQUITY> 232,873
<INTEREST-LOAN> 2,908
<INTEREST-INVEST> 869
<INTEREST-OTHER> 242
<INTEREST-TOTAL> 4,019
<INTEREST-DEPOSIT> 1,767
<INTEREST-EXPENSE> 2,039
<INTEREST-INCOME-NET> 1,980
<LOAN-LOSSES> 5
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,000
<INCOME-PRETAX> 1,178
<INCOME-PRE-EXTRAORDINARY> 363
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 815
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 3.50
<LOANS-NON> 566
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,866
<CHARGE-OFFS> 13
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<ALLOWANCE-CLOSE> 1,860
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</TABLE>
