<PAGE> 1
LOGO LAUREL CAPITAL GROUP, INC.
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
KPMG Letterhead
<TABLE>
<S> <C>
One Mellon Bank Center Telephone 412 391 9710
Pittsburgh, PA 15219 Fax 412 391 8963
</TABLE>
THE BOARD OF DIRECTORS AND STOCKHOLDERS
LAUREL CAPITAL GROUP, INC.:
We have audited the accompanying consolidated statements of financial condition
of Laurel Capital Group, Inc. and subsidiary as of June 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Laurel Capital
Group, Inc. and subsidiary at June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
August 11, 2000
Footnote graphic
KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is
a member of KPMG International, a Swiss association.
6
<PAGE> 2
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
At June 30, 2000 and 1999
<TABLE>
<CAPTION>
(in thousands, except per share data) 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 822 $ 690
Money market investments -- 3,711
Interest-earning deposits with other institutions 4,096 7,710
Investment securities available for sale (note 2) 38,665 35,549
Investment securities held to maturity (market value of
$21,144 and $12,224)(note 2) 21,931 12,439
Mortgage-backed securities available for sale (note 3) 10,947 11,868
Mortgage-backed securities held to maturity (market value of
$396 and $1,074) (note 3) 397 1,072
Loans receivable, held for sale (note 4) 1,514 1,562
Loans receivable, net of unearned discounts of $-- and $2 171,319 153,256
Allowance for loan losses (1,798) (1,866)
----------------------------------------------------------------------------------
Loans receivable, net (notes 4 and 5) 169,521 151,390
Federal Home Loan Bank stock (note 6) 1,671 1,277
Real estate owned -- 377
Accrued interest receivable:
Loans 874 846
Interest-earning deposits and investments 790 492
Mortgage-backed securities 67 71
Office properties and equipment, net of accumulated
depreciation (note 7) 1,413 1,458
Prepaid expenses and sundry assets 1,365 962
----------------------------------------------------------------------------------
Total Assets $254,073 $231,474
----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits (note 8) $192,663 $182,118
FHLB advances (note 9) 33,424 20,029
Advance deposits by borrowers for taxes and insurance 3,092 3,020
Accrued interest payable on savings deposits 404 500
Accrued income taxes (note 10) 239 294
Other accrued expenses and sundry liabilities 1,005 983
----------------------------------------------------------------------------------
Total Liabilities 230,827 206,944
----------------------------------------------------------------------------------
Stockholders' Equity (note 11)
Common stock, $.01 par value; 5,000,000 shares authorized;
2,329,272 and 2,324,298 shares issued, respectively 23 23
Additional paid-in capital 5,224 5,197
Treasury stock, at cost (328,670 and 152,120 shares,
respectively) (4,711) (2,270)
Retained earnings 24,120 22,070
Accumulated other comprehensive income (loss), net of tax
$(518) and $(98), respectively (1,007) (190)
Stock held in deferred compensation trust (403) (300)
----------------------------------------------------------------------------------
Total Stockholders' Equity 23,246 24,530
----------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $254,073 $231,474
----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 3
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
For the years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
(in thousands, except for per share data) 2000 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 11,967 $ 11,854 $ 11,819
Mortgage-backed securities 836 791 970
Investment securities:
Taxable 1,379 1,423 1,649
Tax-exempt 2,342 1,131 1,011
Interest-earning deposits 86 453 316
--------------------------------------------------------------------------------------------
Total interest income 16,610 15,652 15,765
Interest expense:
Savings deposits (note 8) 7,291 7,059 7,349
FHLB advances (note 9) 1,290 1,008 720
--------------------------------------------------------------------------------------------
Total interest expense 8,581 8,067 8,069
--------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 8,029 7,585 7,696
Provision for loan losses 18 18 18
--------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,011 7,567 7,678
--------------------------------------------------------------------------------------------
Other income:
Service charges 566 542 595
Gain on the sale of investment securities
available for sale -- 296 186
Gain on the sale of loans held for sale 12 17 32
Other operating income 262 205 203
--------------------------------------------------------------------------------------------
Total other income 840 1,060 1,016
--------------------------------------------------------------------------------------------
Operating expenses:
Compensation and employee benefits (note 12) 1,880 1,805 1,734
Premises and occupancy costs 569 504 488
Federal insurance premiums 72 105 109
Net loss (income) on real estate owned 32 26 (5)
Data processing expense 207 208 255
Professional fees 214 224 487
Other operating expenses 945 911 863
--------------------------------------------------------------------------------------------
Total operating expenses 3,919 3,783 3,931
--------------------------------------------------------------------------------------------
Income before income taxes 4,932 4,844 4,763
--------------------------------------------------------------------------------------------
Provision for income taxes (note 10)
Federal 1,298 1,329 1,383
State 226 332 329
--------------------------------------------------------------------------------------------
Total income taxes 1,524 1,661 1,712
--------------------------------------------------------------------------------------------
Net income $ 3,408 $ 3,183 $ 3,051
--------------------------------------------------------------------------------------------
Earnings per share (note 1)
Basic
Net income $ 1.62 $ 1.45 $ 1.40
Average number of shares outstanding 2,107,711 2,188,014 2,176,893
--------------------------------------------------------------------------------------------
Diluted
Net income $ 1.56 $ 1.39 $ 1.32
Average number of shares outstanding 2,180,490 2,294,324 2,312,389
--------------------------------------------------------------------------------------------
Dividends paid per share $ .64 $ .60 $ .44
--------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 4
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
For the years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Stock Held
Additional Income in Deferred Total
Common Paid-in Treasury Retained (Loss) Compensation Stockholders'
(in thousands) Stock Capital Stock Earnings Net of Tax Trust Equity
<S> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------
Balance, June 30,
1997 $15 $4,690 $(1,626) $18,095 $ 206 $(118) $21,262
Comprehensive income:
Net income -- -- -- 3,051 -- -- 3,051
Other comprehensive
income -- -- -- -- 84 -- 84
----------------------------------------------------------------------------------------------------------------
Total comprehensive
income -- -- -- 3,051 84 -- 3,135
Stock options
exercised (27,227
shares) -- 141 -- -- -- -- 141
Retroactive effect of
stock issued as a
result of stock
split declared on
December 18, 1997 8 (8) -- -- -- -- --
Dividends paid -- -- -- (946) -- -- (946)
Stock purchased by
deferred
compensation trust -- -- -- -- -- (86) (86)
----------------------------------------------------------------------------------------------------------------
Balance June 30, 1998 $23 $4,823 $(1,626) $20,200 $ 290 $(204) $23,506
Comprehensive income:
Net income -- -- -- 3,183 -- -- 3,183
Other comprehensive
loss, net of tax
$(121) -- -- -- -- (235) -- (235)
Reclassification
adjustment, net
of tax, $(126) -- -- -- -- (245) -- (245)
----------------------------------------------------------------------------------------------------------------
Total comprehensive
income -- -- -- 3,183 (480) -- 2,703
Stock options
exercised (19,243
shares) -- 155 -- -- -- -- 155
Dividends paid -- -- -- (1,313) -- -- (1,313)
Treasury stock
purchased (38,450
shares) -- -- (644) -- -- -- (644)
Deferred compensation
payable in common
stock -- 219 -- -- -- -- 219
Stock purchased by
deferred
compensation trust -- -- -- -- -- (96) (96)
----------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 $23 $5,197 $(2,270) $22,070 $ (190) $(300) $24,530
Comprehensive income:
Net income -- -- -- 3,408 -- -- 3,408
Other comprehensive
loss, net of tax
$(420) -- -- -- -- (817) -- (817)
----------------------------------------------------------------------------------------------------------------
Total comprehensive
(loss) income -- -- -- 3,408 (817) -- 2,591
Stock options
exercised (4,974
shares) -- 27 -- -- -- -- 27
Dividends paid -- -- -- (1,358) -- -- (1,358)
Treasury stock
purchased (176,550
shares) -- -- (2,441) -- -- -- (2,441)
Stock purchased by
deferred
compensation trust -- -- -- -- -- (103) (103)
----------------------------------------------------------------------------------------------------------------
Balance, June 30,
2000 $23 $5,224 $(4,711) $24,120 $(1,007) $(403) $23,246
----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 5
LOGO LAUREL CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
Net income: $ 3,408 $ 3,183 $ 3,051
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 206 147 149
Provision for loan losses 18 18 18
Net loss (gain) on the sale of real estate owned 18 15 (16)
Net gain on the sale of investment securities
available for sale -- (296) (186)
Gain on the sale of loans held for sale (12) (17) (32)
Amortization of deferred loan fees (104) (169) (214)
Origination of loans held for sale (805) (864) (881)
Proceeds from the sale of loans held for sale 865 952 1,107
(Increase) decrease in accrued interest receivable (322) (76) 152
Decrease in accrued interest payable (96) (23) (10)
Other--net (23) 3 304
----------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,153 2,873 3,442
----------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities held to maturity (13,523) (14,387) (19,160)
Purchase of investment securities available for sale (4,264) (13,912) (14,567)
Purchase of mortgage-backed securities held to maturity -- (1,011) --
Purchase of mortgage-backed securities available for sale (1,000) (3,970) --
Purchase of FHLB stock (394) -- --
Proceeds from maturities of investment securities held to
maturity 4,050 16,000 20,655
Proceeds from maturities of investment securities
available for sale -- 3 1,500
Proceeds from maturities of mortgage-backed securities
available for sale 164 28 192
Proceeds from the sale of investment securities available
for sale -- 3,581 3,240
Principal repayments of mortgage-backed securities
available for sale 1,573 3,388 1,616
Principal repayments of mortgage-backed securities held to
maturity 675 990 169
Increase in loans (18,263) (450) (6,591)
Proceeds from the sale of real estate owned 557 85 206
Net additions to office properties and equipment (161) (283) (204)
----------------------------------------------------------------------------------------------
Net cash used by investing activities (30,586) (9,938) (12,944)
----------------------------------------------------------------------------------------------
Financing activities:
Net increase in demand and club accounts 3,387 1,840 1,341
Net increase (decrease) in time deposit accounts 7,158 4,888 (970)
Net increase in FHLB advances 13,395 2,996 5,989
Increase (decrease) in advance deposits by borrowers for
taxes and insurance 72 (123) (11)
Stock options exercised 27 155 141
Acquisition of treasury stock (2,441) (644) --
Dividends paid (1,358) (1,313) (946)
----------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,240 7,799 5,544
----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (7,193) 734 (3,958)
Cash and cash equivalents at beginning of period 12,111 11,377 15,335
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,918 $ 12,111 $ 11,377
----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $ 7,387 $ 7,082 $ 7,359
Interest on FHLB advances 1,344 1,005 611
Income taxes 1,579 1,535 1,839
Transfer of loans to real estate owned 204 335 333
Cash paid during the period for interest includes interest credited on deposits of $6,455,
$6,178 and $6,449 for the years ended June 30, 2000, 1999 and 1998, respectively.
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 6
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATION AND USE OF ESTIMATES
Laurel Capital is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended. Laurel Capital's only significant
asset is the stock of its wholly-owned subsidiary, Laurel Savings Bank, a
Pennsylvania-chartered state savings bank. The Bank conducts business
through its six offices located in Allegheny and Butler counties.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of related revenue and
expense during the reporting period. Actual results could differ from those
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Laurel
Capital Group, Inc. and its wholly-owned subsidiary, Laurel Savings Bank,
after elimination of intercompany accounts and transactions.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Statement of Financial Accounting Standards ("SFAS") No. 115 requires that
investments be classified as either: (1) Securities Held to
Maturity -- debt securities that the Company has the positive intent and
ability to hold to maturity and reported at amortized cost; (2) Trading
Securities -- debt and equity securities bought and held principally for
the purpose of selling them in the near term and reported at fair value,
with unrealized gains and losses included in the current period earnings;
or (3) Securities Available for Sale -- debt and equity securities not
classified as either Securities Held to Maturity or Trading Securities and
reported at fair value, with unrealized gains and losses included in
accumulated other comprehensive income. The cost of securities sold is
determined on a specific identification basis.
REAL ESTATE OWNED
Real estate owned consists of properties acquired through foreclosure and
are recorded at the lower of cost (principal balance of the former mortgage
loan plus costs of obtaining title and possession) or fair value at the
date of acquisition. Costs relating to development and improvement of the
property are capitalized, whereas costs of holding such real estate are
expensed as incurred. Additional write-downs are charged to income, and the
carrying value of the property reduced, when the fair value of the
property, less costs to sell, is less than the carrying value.
PROVISIONS FOR LOAN LOSSES
Provisions for loan losses are charged to operations in amounts that result
in an allowance appropriate, in management's judgment, to cover probable
losses inherent in the loan portfolio based on past and expected loss
experience and economic conditions.
OFFICE PROPERTIES AND EQUIPMENT
Depreciation is computed on the straight-line method over the estimated
useful lives of the related assets.
11
<PAGE> 7
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
INTEREST ON SAVINGS
Interest on savings deposits is accrued and charged to expense monthly and
is paid or credited in accordance with the terms of the respective
accounts.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company has defined cash and cash
equivalents as cash, interest-earning deposits with other institutions and
money market investments.
LOANS
Loans receivable are stated at unpaid principal balances net of the
allowance for loan losses and net of deferred loan fees and discounts. In
accordance with SFAS Nos. 114 and 118, the Bank considers all one-to-four
family residential mortgage loans and all consumer loans (as presented in
Note 4) to be smaller homogeneous loans. As such, these loans are
collectively evaluated for impairment. Loans within the scope of these
statements are considered impaired when, based on current information and
events, it is probable that all principal and interest will not be
collected in accordance with the contractual terms of the loans. Management
determines the impairment of loans based on knowledge of the borrower's
ability to repay the loan according to the contractual agreement, the
borrower's repayment history and the fair value of collateral for certain
collateral dependent loans. Pursuant to SFAS 114, management does not
consider an insignificant delay or insignificant shortfall to impair a
loan. Management has determined that a delay less than 90 days will be
considered an insignificant delay and that an amount less than $5,000 will
be considered an insignificant shortfall. The Bank does not apply SFAS 114
using major risk calculations but on a loan by loan basis. All loans are
charged off when management determines that principal and interest are not
collectible.
Any excess of the Bank's recorded investment in the loans over the measured
value of the loans in accordance with SFAS 114 is provided for in the
allowance for loan losses. The Bank reviews its loans for impairment on a
quarterly basis.
The accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or
when the loan becomes 90 days past due, whichever occurs first. When
interest accrual is discontinued, all unpaid accrued interest is reserved.
Such interest ultimately collected is credited to income in the period of
recovery or applied to reduce principal if there is sufficient doubt about
the collectibility of principal. Consumer loans more than 120 days or 180
days delinquent (depending on the nature of the loan) are generally
required to be written off.
The Company is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the commitment. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amount does not necessarily represent
future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis using the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the counter-party.
Loans receivable classified as held for sale are recorded in the financial
statements at the lower of cost or market.
12
<PAGE> 8
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
EARNINGS PER SHARE ("EPS")
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. All weighted average share and
per share amounts reflect the three-for-two stock split paid on January 16,
1998.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
June 30,
2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 3,408 $ 3,183 $ 3,051
Weighted average shares outstanding 2,107,711 2,188,014 2,176,893
Earnings per share $ 1.62 $ 1.45 $ 1.40
Diluted earnings per share:
Net income $ 3,408 $ 3,183 $ 3,051
Weighted average shares outstanding 2,107,711 2,188,014 2,176,893
Dilutive effect of employee stock options 72,779 106,310 135,496
-----------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 2,180,490 2,294,324 2,312,389
Earnings per share $ 1.56 $ 1.39 $ 1.32
-----------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 9
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130
which 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 fiscal years ended June 30,
2000, 1999 and 1998, the Company's total comprehensive income was $2,591,
$2,703 and $3,135, respectively. Total comprehensive income is comprised of
net income of $3,408, $3,183 and $3,051, respectively, and other
comprehensive income (loss) of $(817), $(480) and $84, net of tax,
respectively. Other comprehensive income consists of unrealized gains and
losses on investment securities and mortgage-backed securities available
for sale.
RECLASSIFICATION
Certain items previously reported have been reclassified to conform with
the current year's reporting format.
(2) INVESTMENT SECURITIES
Investment securities held to maturity are comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Face/Par Cost Appreciation Depreciation Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AT JUNE 30, 2000:
Corporate notes and
commercial paper $21,945 $21,931 $-- $787 $21,144
--------------------------------------------------------------------------------------------------------
AT JUNE 30, 1999:
Corporate notes and
commercial paper $12,445 $12,439 $-- $215 $12,224
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Market
Face/Par Cost Value
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
At June 30, 2000, the contractual maturities of the debt securities held to
maturity are:
Due after one year through five years $2,500 $2,499 $ 2,412
Due after five years through ten years 7,500 7,498 7,298
Due after ten years 11,945 11,934 11,434
------------------------------------------------------------------------------------------
$21,945 $21,931 $21,144
------------------------------------------------------------------------------------------
</TABLE>
Note continued
14
<PAGE> 10
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
Investment securities available for sale are comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Face/Par Cost Appreciation Depreciation Value
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------
AT JUNE 30, 2000:
Municipal obligations $22,535 $21,500 $112 $1,137 $20,475
Federal National Mortgage
Association preferred
stock 250 250 -- 1 249
Federal Home Loan Mortgage
Corporation preferred
stock 250 250 -- 1 249
Federal National Mortgage
Association stock 723 723 12 83 652
Federal Home Loan Mortgage
Corporation stock 590 590 4 88 506
SLM Student Loan Trust 625 606 18 -- 624
Standard Insurance Company
stock 4 4 1 -- 5
Shay Financial Services
ARMs Fund 16,137 16,137 -- 232 15,905
--------------------------------------------------------------------------------------------------------------
$41,114 $40,060 $147 $1,542 $38,665
--------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1999:
Municipal obligations $18,420 $18,301 $186 $ 646 $17,841
Federal National Mortgage
Association preferred
stock 250 250 11 -- 261
Federal Home Loan Mortgage
Corporation preferred
stock 250 250 10 -- 260
Federal National Mortgage
Association stock 582 582 101 -- 683
Federal Home Loan Mortgage
Corporation stock 480 480 99 -- 579
SLM Student Loan Trust 804 783 19 -- 802
Standard Insurance Company
stock 4 4 1 -- 5
Shay Financial Services
ARMs Fund 15,240 15,240 -- 122 15,118
--------------------------------------------------------------------------------------------------------------
$36,030 $35,890 $427 $ 768 $35,549
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Market
Face/Par Cost Value
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
At June 30, 2000, the contractual maturities of the debt securities available for sale
are:
Due after five years through ten years $ 815 $ 792 $ 814
Due after ten years 22,345 21,314 20,285
-----------------------------------------------------------------------------------------------------
$23,160 $22,106 $21,099
-----------------------------------------------------------------------------------------------------
</TABLE>
The Federal National Mortgage Association preferred and common stock, Federal
Home Loan Mortgage Corporation preferred and common stock, Standard Insurance
Company stock and Shay Financial Services ARMs Fund have no stated maturity.
Proceeds from the sale of investment securities available for sale during 1999
and 1998 were $3,581 and $3,240, respectively. There were no such sales during
fiscal 2000.
Gross gains of $296 and $186 were realized on these sales in 1999 and 1998,
respectively. There were no such gains realized during fiscal 2000.
There were no realized losses in 2000, 1999 and 1998.
15
<PAGE> 11
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity were comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At June 30, 2000 Cost Appreciation Depreciation Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association REMIC $ 74 $ 2 $-- $ 76
Federal Home Loan Mortgage
Corporation REMIC 323 -- 3 320
-----------------------------------------------------------------------------------------------------
$ 397 $ 2 $ 3 $ 396
-----------------------------------------------------------------------------------------------------
At June 30, 1999
-----------------------------------------------------------------------------------------------------
Federal National Mortgage
Association REMIC $ 100 $ 3 $-- $ 103
Federal Home Loan Mortgage
Corporation REMIC 972 -- 1 971
-----------------------------------------------------------------------------------------------------
$1,072 $ 3 $ 1 $1,074
-----------------------------------------------------------------------------------------------------
</TABLE>
Mortgage-backed securities available for sale were comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At June 30, 2000 Cost Appreciation Depreciation Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National
Mortgage Association $ 4,197 $ 37 $ 54 $ 4,180
Federal National Mortgage
Association 3,318 3 126 3,195
Federal Home Loan Mortgage
Corporation 979 1 17 963
Federal Home Loan Mortgage
Corporation REMIC 2,584 25 -- 2,609
-----------------------------------------------------------------------------------------------------
$11,078 $ 66 $197 $10,947
-----------------------------------------------------------------------------------------------------
At June 30, 1999
-----------------------------------------------------------------------------------------------------
Government National
Mortgage Association $ 4,721 $ 79 $ 28 $ 4,772
Federal National Mortgage
Association 4,042 8 47 4,003
Federal Home Loan Mortgage
Corporation 58 -- -- 58
Federal Home Loan Mortgage
Corporation REMIC 2,994 41 -- 3,035
-----------------------------------------------------------------------------------------------------
$11,815 $128 $ 75 $11,868
-----------------------------------------------------------------------------------------------------
</TABLE>
Prepayments may shorten the lives of these mortgage-backed securities.
There were no sales of mortgage-backed securities available for sale during
2000, 1999 and 1998.
16
<PAGE> 12
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(4) LOANS RECEIVABLE
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
June 30,
2000 1999
<S> <C> <C>
---------------------------------------------------------------------------------------
First mortgage loans:
Conventional:
1 to 4 family dwellings $125,242 $112,295
Multi-family dwellings 2,476 1,612
Commercial 5,391 5,375
---------------------------------------------------------------------------------------
133,109 119,282
Guaranteed or insured 34 39
---------------------------------------------------------------------------------------
Total long term with monthly amortization 133,143 119,321
Construction and development loans 10,167 2,268
---------------------------------------------------------------------------------------
143,310 121,589
Less: Loans in process (7,796) (987)
Deferred loan fees (224) (386)
---------------------------------------------------------------------------------------
135,290 120,216
---------------------------------------------------------------------------------------
Commercial loans 919 941
Consumer loans:
Home improvement loans (net of unearned discounts of $--
and $2) -- 21
Loans secured by savings accounts 211 276
Installment loans 34,899 31,802
---------------------------------------------------------------------------------------
36,029 33,040
---------------------------------------------------------------------------------------
171,319 153,256
Less: Allowance for loan losses (1,798) (1,866)
---------------------------------------------------------------------------------------
$169,521 $151,390
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
---------------------------------------------------------------------------------------
</TABLE>
At June 30, 2000 and 1999, the Company had a commitment to sell its guaranteed
student loan portfolio totaling $1,514 and $1,562, respectively.
Outstanding commitments to originate loans:
<TABLE>
<CAPTION>
June 30,
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Fixed rates (8.25% to 8.75% and 6.50% to 9.75%) $ 952 $1,624
Variable rates 2,627 589
---------------------------------------------------------------------------------------
3,579 2,213
Other loans--fixed rates 525 460
Unused lines of credit 4,983 4,319
---------------------------------------------------------------------------------------
$9,087 $6,992
---------------------------------------------------------------------------------------
</TABLE>
The Company's customers have unused lines of credit as follows: secured (home
equity), builder lines of credit and all other lines of credit. The amount
available at June 30, 2000 for each type was $3,120, $578 and $1,285,
respectively. The amount available at June 30, 1999 for each type was $3,120,
$397 and $802, respectively. The interest rate for each loan is based on the
prevailing market conditions at the time of funding.
The Company serviced loans for others of $481, $762 and $1,118 at June 30, 2000,
1999 and 1998, respectively. These loans serviced for others are not assets of
the Company and are appropriately excluded from the Company's financial
statements. Fidelity bond and errors and omission insurance coverage is
maintained with respect to these loans.
At June 30, 2000, over 99.8% of the Company's net mortgage loan portfolio was
secured by properties located in Pennsylvania. The Company does not believe it
has significant concentrations of credit risk to any one group of borrowers
given its underwriting and collateral requirements.
17
<PAGE> 13
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(5) ALLOWANCE FOR LOSSES ON LOANS
Changes in the allowance for losses on loans are as follows:
<TABLE>
<S> <C>
--------------------------------------------------------------------
Balance at June 30, 1997 $1,943
Provision for losses 18
Charge-offs (152)
Recoveries 43
--------------------------------------------------------------------
Balance at June 30, 1998 $1,852
Provision for losses 18
Charge-offs (61)
Recoveries 57
--------------------------------------------------------------------
Balance at June 30, 1999 $1,866
Provision for losses 18
Charge-offs (99)
Recoveries 13
--------------------------------------------------------------------
Balance at June 30, 2000 $1,798
--------------------------------------------------------------------
</TABLE>
Management believes that the allowance for losses on loans was appropriate at
June 30, 2000. While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes in
economic conditions and other factors. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowance for losses on loans. Such agencies may require the Company
to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
At June 30, 2000 and 1999, the recorded investment in loans that are considered
to be impaired under SFAS 114 was $332 and $281, respectively. Included in the
amount at June 30, 2000 is $79 of impaired loans for which the related allowance
for loan losses is $3 and $253 of impaired loans that, as a result of
write-downs, do not have an allowance for loan losses. Included in the amount at
June 30, 1999 is $88 of impaired loans for which the related allowance for loan
losses is $3 and $193 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 fiscal years ended June 30, 2000, 1999 and 1998 was
approximately $304, $291 and $358, respectively. For the fiscal years ended June
30, 2000, 1999 and 1998, the Company recognized interest income on those
impaired loans of $3, $6 and $5, respectively, which was recognized using the
cash basis of income recognition.
Non-accrual loans at June 30, 2000, 1999 and 1998 were approximately $560, $476
and $561, respectively. The foregone interest on these loans for the fiscal
years ended June 30, 2000, 1999 and 1998 was approximately $64, $48 and $37,
respectively. The amount of interest income on such loans actually included in
income in fiscal 2000, 1999 and 1998 was $11, $15 and $28, respectively. There
were no commitments to lend additional funds to borrowers whose loans were in
non-accrual status.
(6) FEDERAL HOME LOAN BANK STOCK
The Company is a member of the Federal Home Loan Bank ("FHLB") System. As a
member, the Company maintains an investment in the capital stock of the FHLB of
Pittsburgh, at cost, in an amount not less than the greater of 1% of its
qualifying assets, as defined by the FHLB of Pittsburgh, or 5% of its
outstanding advances, if any, from the FHLB of Pittsburgh as calculated at
December 31 of each year.
18
<PAGE> 14
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(7) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
June 30,
2000 1999
<S> <C> <C>
-------------------------------------------------------------------------------------
Land and land improvements $ 412 $ 333
Office buildings and improvements 2,123 2,123
Furniture, fixtures and equipment 944 862
-------------------------------------------------------------------------------------
Total, at cost 3,479 3,318
Less accumulated depreciation (2,066) (1,860)
-------------------------------------------------------------------------------------
$ 1,413 $ 1,458
-------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the periods ended June 30, 2000, 1999 and 1998 was
$206, $147 and $149, respectively.
(8)SAVINGS DEPOSITS
Savings deposit balances and interest rates are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Rate Interest Rate
at at June 30, June 30,
June 30, 2000 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
Demand and club accounts 1.00 to 2.15% 2.13% 2.14% $ 31,257 $ 30,426
Money market deposit
accounts 0 to 2.38 2.24 2.23 15,812 15,750
NOW deposits 0 to 1.50 1.02 1.05 29,049 26,555
--------------------------------------------------------------------------------------------------------
76,118 72,731
--------------------------------------------------------------------------------------------------------
Time deposits: 3.01 to 4.00 679 1,369
4.01 to 5.00 24,904 35,641
5.01 to 6.00 44,660 57,931
6.01 to 7.00 44,331 12,959
7.01 to 8.00 1,936 1,049
8.01 to 9.00 35 438
--------------------------------------------------------------------------------------------------------
5.67 5.31 $116,545 $109,387
--------------------------------------------------------------------------------------------------------
4.11% 3.89% $192,663 $182,118
--------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 2000 and 1999, time deposits with balances in excess of $100,000
amounted to $2.1 million and $1.5 million, respectively.
The contractual maturity of time deposits is as follows:
<TABLE>
<CAPTION>
June 30,
2000 1999
<S> <C> <C>
---------------------------------------------------------------------------------------
Under 12 months $ 61,679 $ 63,316
12 months to 24 months 28,840 26,420
24 months to 36 months 15,883 7,434
36 months to 48 months 1,187 3,972
48 months to 60 months 2,384 1,623
Over 60 months 6,572 6,622
---------------------------------------------------------------------------------------
$116,545 $109,387
---------------------------------------------------------------------------------------
Note continued
</TABLE>
19
<PAGE> 15
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
2000 1999 1998
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
Passbook and club accounts $ 651 $ 635 $ 690
Money market deposit accounts 354 354 416
NOW accounts 276 267 251
Time deposits 6,010 5,803 5,992
----------------------------------------------------------------------------------------------
$7,291 $7,059 $7,349
----------------------------------------------------------------------------------------------
</TABLE>
(9) FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized as follows:
<TABLE>
<CAPTION>
Interest June 30,
Due Date Rate 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 9, 1999 6.11 $ -- $ 2,000
September 14, 1999 5.00 -- 900
July 3, 2000 7.00 14,500 --
November 24, 2000 5.80 793 793
February 14, 2002 5.48 -- 2,000
December 31, 2002 5.38 -- 6,200
January 23, 2008 4.94 -- 2,000
February 20, 2008 5.48 3,000 3,000
December 18, 2008 5.15 3,000 3,000
October 22, 2009 5.52 1,500 --
June 30, 2010 6.18 10,500 --
November 13, 2015 6.51 131 136
-----------------------------------------------------------------------------------------
$33,424 $20,029
-----------------------------------------------------------------------------------------
</TABLE>
Under a blanket collateral pledge agreement, the Bank has pledged as collateral
for advances from the FHLB of Pittsburgh certain qualifying collateral, such as
mortgage-backed securities and loans, with weighted collateral values determined
by the FHLB of Pittsburgh equal to at least the unpaid amount of outstanding
advances.
The Bank has an available line of credit with the FHLB of Pittsburgh equal to
its maximum borrowing capacity less any outstanding advances. As of June 30,
2000 this was approximately $101.8 million. There are no commitment fees
associated with this line of credit. When used, interest is charged at the
FHLB's posted rates, which change daily, and the loan can be repaid at any time.
The Bank has yet to use this credit line and has no plans to do so in the
immediate future.
(10) INCOME TAXES
Total income tax expense for the years ended June 30, 2000, 1999 and 1998
consisted of:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
----------------------------------------------------------------------------------------
Current:
Federal $1,358 $1,392 $1,322
State 226 332 329
----------------------------------------------------------------------------------------
1,584 1,724 1,651
----------------------------------------------------------------------------------------
Deferred:
Federal (60) (63) 61
----------------------------------------------------------------------------------------
$1,524 $1,661 $1,712
----------------------------------------------------------------------------------------
Note continued
</TABLE>
20
<PAGE> 16
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
Total income tax provision for the years ended June 30, 2000, 1999 and 1998 was
allocated as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $1,524 $1,661 $1,712
Stockholders' equity:
Accumulated other comprehensive income (loss) (420) (247) 43
----------------------------------------------------------------------------------------
$1,104 $1,414 $1,755
----------------------------------------------------------------------------------------
</TABLE>
A reconciliation from the expected statutory income tax rate to the actual
effective tax rate expressed as a percentage of pre-tax income for the years
ended June 30, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 3.0 4.5 4.6
Other, net (0.2) .1 (.8)
Tax exempt income, net (5.9) (4.3) (1.9)
--------------------------------------------------------------------------------------
30.9% 34.3% 35.9%
--------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related
valuation allowances as of June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred loan fees $ 103 $ 129
Loan loss reserve 478 434
Investment securities 518 98
Other 157 123
--------------------------------------------------------------------------------------
Gross deferred tax assets 1,256 784
Valuation allowance -- --
--------------------------------------------------------------------------------------
Net deferred tax asset 1,256 784
DEFERRED TAX LIABILITIES:
Property, plant and equipment (85) (89)
Prepaid expense (21) (25)
--------------------------------------------------------------------------------------
Gross deferred tax liability (106) (114)
--------------------------------------------------------------------------------------
Net deferred tax asset $1,150 $ 670
--------------------------------------------------------------------------------------
</TABLE>
The Company has determined that no valuation reserve is necessary for any
deferred tax asset since it is more likely than not that the deferred tax assets
will be realized through carryback to taxable income in prior years, future
reversals of existing differences and to a lesser extent, through future taxable
income. SFAS 109 treats tax basis bad debt reserves established after 1987 as
temporary differences on which deferred income taxes have been provided.
Deferred taxes are not required to be provided on tax bad debt reserves recorded
in 1987 and prior years (base year bad debt reserves). Approximately $2,217 of
the balances in retained earnings at June 30, 2000 represent base year bad debt
deductions for tax purposes only. No provision for federal income tax has been
made for such amount. Should amounts previously claimed as bad debt deduction be
used for any purpose other than to absorb bad debts (which is not anticipated),
tax liabilities will be incurred at the rate then in effect.
21
<PAGE> 17
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(11) STOCKHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). As of June 30, 2000, the Bank meets all capital adequacy requirements
to which it is subject.
As of June 30, 2000, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The following table sets forth certain information concerning the Bank's
regulatory capital at June 30, 2000 and 1999.
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
Tier I Tier II Tier I Tier II
Tier I Risk- Risk- Tier I Risk- Risk-
Core Based Based Core Based Based
Capital Capital Capital Capital Capital Capital
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
Equity Capital (1) $23,344 $23,344 $23,344 $24,022 $24,022 $24,022
Plus general valuation
allowances (2) 1,774 1,530
--------------------------------------------------------------------------------------------------
Total regulatory capital 23,344 23,344 25,118 24,022 24,022 25,552
Minimum required capital 9,902 5,676 11,353 9,183 4,897 9,795
--------------------------------------------------------------------------------------------------
Excess regulatory capital $13,442 $17,668 $13,765 $14,839 $19,125 $15,757
--------------------------------------------------------------------------------------------------
Minimum required capital to be well
capitalized under Prompt
Corrective Action Provisions $12,378 $ 8,513 $14,188 $11,479 $ 7,326 $12,210
--------------------------------------------------------------------------------------------------
Regulatory capital as a
percentage (3) 9.43% 16.45% 17.70% 10.46% 19.67% 20.93%
Minimum required capital percentage 4.00 4.00 8.00 4.00 4.00 8.00
--------------------------------------------------------------------------------------------------
Excess regulatory capital
percentage 5.43% 12.45% 9.70% 6.46% 15.67% 12.93%
--------------------------------------------------------------------------------------------------
Minimum required capital percentage
to be well capitalized under
Prompt Corrective Action
Provisions 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
--------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents equity capital of the Bank as reported to the FDIC and the
Department of Banking on Form 033 for the quarters ended June 30, 2000 and
1999.
(2) Limited to 1.25% of risk weighted assets.
(3) Tier I capital is calculated as a percentage of adjusted total average
assets of $247,551 and $229,587 at June 30, 2000 and 1999, respectively.
Tier I and Tier II risk-based capital are calculated as a percentage of
adjusted risk-weighted assets of $141,884 and $122,098 at June 30, 2000 and
1999, respectively.
22
<PAGE> 18
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(12) EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution plan in which substantially all
employees participate. The plan requires employer contributions of five percent
of total compensation of each participant. Employees are also permitted to make
contributions. Total plan expense was $73, $67 and $70 during fiscal 2000, 1999,
and 1998, respectively.
The Bank sponsors a nonqualified deferred compensation plan for key officers of
the Bank. This plan is structured as a "rabbi trust." The amount of compensation
to be deferred under the plan is determined each year by the officers.
(13) STOCK COMPENSATION PROGRAMS
In fiscal 1988, the Company adopted an Employee Stock Compensation Program under
which shares of common stock could be issued. Under the 1988 Program, each
eligible participant may be granted options to purchase common stock at an
amount equal to or less than the fair market value of the shares at the time of
the grant of the option. At June 30, 2000, there were no remaining shares
available to be granted.
In fiscal 1994, the Company adopted the 1993 Key Employee Stock Compensation
Program ("1993 Employee Program") and the 1993 Directors' Stock Option Plan
("1993 Directors' Plan"). Under the 1993 Employee Program, each eligible
participant may be granted options to purchase common stock at an amount equal
to or less than the fair market value of the shares at the time of the grant of
the options. At June 30, 2000, there were 10,405 remaining shares available to
be granted as determined by the Program Administrators. Under the 1993
Directors' Plan, each person who served as a non-employee Director of the
Company immediately following the adjournment of such annual meeting was granted
as of such date an option to purchase 1,405 shares of common stock exercisable
at a price equal to the fair market value on the date of the grant. At June 30,
2000 there were no remaining shares available to be granted under the terms of
the 1993 Directors' Plan.
In fiscal 1997, the Company adopted the 1996 Key Employee Stock Compensation
Program ("1996 Employee Program") and the 1996 Directors' Stock Option Plan
("1996 Directors' Plan"). Under the 1996 Employee Program, each eligible
participant may be granted options to purchase common stock at an amount equal
to or less than the fair market value of the shares at the time of the grant of
the options. During fiscal 1999, options to purchase 52,500 shares of common
stock were granted to key employees at a price equal to the fair market value on
the date of the grant. Such stock options will be vested and exercisable over
four years at the rate of 25% per year. At June 30, 2000, there were 33,511
remaining shares available to be granted as determined by the Program
Administrators. Under the 1996 Directors' Plan, each person who served as a
non-employee director of the Company immediately following the adjournment of
the 1996 annual meeting was granted as of such date an option to purchase 4,722
shares of common stock exercisable at a price equal to the fair market value on
the date of the grant. All of the 28,332 options granted under the 1996
Directors' Plan have vested and are exercisable. At June 30, 2000 there were no
remaining shares available to be granted under the terms of the 1996 Directors'
Plan.
Note continued
23
<PAGE> 19
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
Each option granted under all five stock option plans will expire no later than
10 years from the date on which the option was or is granted. For the periods
presented, options granted for all plans were granted at the fair market value
at the date of the grant.
<TABLE>
<CAPTION>
Average 1993 Average 1993 Average 1996 Average 1996
1988 Exercise Employee Exercise Director Exercise Employee Exercise Director
Program Price Program Price Plan Price Program Price Plan
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997 87,700 $5.98 110,501 $9.51 30,910 $ 9.30 -- -- 28,332
Granted -- -- -- -- 8,430 18.00 -- -- --
Exercised (22,953) 4.41 (1,464) 8.78 (2,810) 9.29 -- -- --
Forfeited -- -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 1998 64,747 $6.54 109,037 $9.52 36,530 $11.31 -- -- 28,332
Granted -- -- -- -- 8,430 19.50 52,500 15.75 --
Exercised (8,068) 6.49 (10,070) 9.40 (1,105) 7.91 -- -- --
Forfeited -- -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 1999 56,679 $6.54 98,967 $9.53 43,855 $12.97 52,500 $15.75 28,332
Granted -- -- -- -- 4,236 14.69 -- -- --
Exercised (4,532) 5.15 (142) 8.44 (300) 7.91 -- -- --
Forfeited (5,935) -- -- -- -- -- (1,000) -- --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 2000 46,212 $6.63 98,825 $9.53 47,791 $13.15 51,500 $15.75 28,332
-----------------------------------------------------------------------------------------------------------------------------
Actual contractual
life remaining in
years 2.8 4.4 6.5 8.9 6.4
Option price per
share $2.73-$11.00 $8.44-$10.92 $7.38-$18.00 $15.75 $10.59
Options available to
be granted at June
30, 2000 -- 10,405 -- 33,511 --
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Average
Exercise
Price
<S> <C>
June 30, 1997 $10.59
Granted --
Exercised --
Forfeited --
----------------------------------------
June 30, 1998 $10.59
Granted --
Exercised --
Forfeited --
-------------------------------------------------
June 30, 1999 $10.59
Granted --
Exercised --
Forfeited --
----------------------------------------------------------
June 30, 2000 $10.59
-------------------------------------------------------------------
Actual contractual
life remaining in
years
Option price per
share
Options available to
be granted at June
30, 2000
----------------------------------------------------------------------------
</TABLE>
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 2000 under the 1993 Director Plan was $2.71. The
fair value of options granted during fiscal 1999 under the 1993 Director Plan
and the 1996 Employee Program was $4.04 and $3.27, respectively. The fair value
of options granted during fiscal 1998 under the 1993 Directors Plan was $4.18.
At June 30, 2000, 1999 and 1998, 242,759, 238,508 and 223,723 shares were
immediately exercisable at average prices of $10.37, $9.86 and $9.00,
respectively.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123 establishes a fair value based method of accounting for
stock-based compensation plans. Effective for fiscal years beginning after
December 15, 1995, SFAS 123 allows companies to expense an estimated fair value
of stock options or to continue to measure compensation expense for stock option
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"). Entities that elect to continue to measure
compensation expense based on APB No. 25 must provide pro forma disclosures of
net income and earnings per share as if the fair value method of accounting had
been applied. The Company has elected to continue to measure compensation cost
using the intrinsic value method prescribed by APB No. 25. Had the Company used
the fair value method, net income and earnings per share would have been as
follows (In thousands, except per share data):
<TABLE>
<CAPTION>
June 30
2000 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $3,408 $3,183 $3,051
Pro forma $3,351 $3,140 $3,010
----------------------------------------------------------------------------------------
Basic earnings per share
As reported $1.62 $1.45 $1.40
Pro forma $1.59 $1.43 $1.38
----------------------------------------------------------------------------------------
Diluted earnings per share
As reported $1.56 $1.39 $1.32
Pro forma $1.53 $1.37 $1.30
----------------------------------------------------------------------------------------
Note continued
</TABLE>
24
<PAGE> 20
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
The fair value for these options was estimated at the date of grant using a
Black-Scholes Option Valuation Model with the following weighted-average
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of
6.12%, 6.01% and 5.63%; dividend yields of 4.8%, 3.8% and 2.6%; volatility
factors of the expected market price of the Company's common stock of 22.9%,
20.9% and 18.6%; and a weighted-average expected life of the options of 6.5
years. The pro forma net income and earnings per share amounts in the table
above reflect only options granted subsequent to July 1, 1996. Therefore, the
full impact of calculating the cost for stock options under the fair value
method of SFAS 123 is not reflected in the pro forma net income and earnings per
share amounts presented above because compensation cost is reflected over the
options' vesting periods and compensation cost for options granted prior to July
1, 1996 is not considered.
The Black-Scholes Option Valuation Model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjectivity
of input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Month Periods Ended
1999/2000: September 30 December 31 March 31 June 30
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
Interest income $4,019 $4,053 $4,154 $4,384
Interest expense 2,039 2,082 2,158 2,302
----------------------------------------------------------------------------------------
Net interest income before
provision for possible loan
losses 1,980 1,971 1,996 2,082
Provision for possible loan
losses 5 4 4 5
Other income 203 201 199 237
Operating expenses 1,000 998 934 987
----------------------------------------------------------------------------------------
Income before income taxes 1,178 1,170 1,257 1,327
Provision for income taxes 363 365 388 408
----------------------------------------------------------------------------------------
Net income $ 815 $ 805 $ 869 $ 919
----------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.38 $ 0.38 $ 0.41 $ 0.45
Diluted $ 0.36 $ 0.36 $ 0.40 $ 0.44
----------------------------------------------------------------------------------------
Dividends per share $ 0.16 $ 0.16 $ 0.16 $ 0.16
----------------------------------------------------------------------------------------
1998/1999:
----------------------------------------------------------------------------------------
Interest income $3,973 $3,884 $3,900 $3,895
Interest expense 2,042 2,022 1,995 2,008
----------------------------------------------------------------------------------------
Net interest income before
provision for possible loan
losses 1,931 1,862 1,905 1,887
Provision for possible loan losses 4 5 5 4
Other income 279 362 171 248
Operating expenses 964 953 915 951
----------------------------------------------------------------------------------------
Income before income taxes 1,242 1,266 1,156 1,180
Provision for income taxes 437 441 385 398
----------------------------------------------------------------------------------------
Net income $ 805 $ 825 $ 771 $ 782
----------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.37 $ 0.38 $ 0.35 $ 0.36
Diluted $ 0.35 $ 0.36 $ 0.34 $ 0.34
----------------------------------------------------------------------------------------
Dividends per share $ 0.15 $ 0.15 $ 0.15 $ 0.15
----------------------------------------------------------------------------------------
</TABLE>
As a result of rounding, the sum of quarterly amounts may not equal the annual
amounts.
25
<PAGE> 21
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the Consolidated Statement of Financial Condition. SFAS 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The carrying
amounts reported in the Consolidated Statement of Financial Condition
approximate fair value for the following financial instruments; cash, money
market investments, interest-earning deposits with other institutions,
investment securities and mortgage-backed securities available for sale, FHLB
stock and all deposits except time deposits.
At both June 30, 2000 and 1999, the net carrying value of investment securities
held to maturity exceeded the estimated fair value by approximately $787 and
$215, respectively. At June 30, 2000 the net carrying value of mortgage-backed
securities held to maturity exceeded the fair market value by approximately $1.
At June 30, 1999, the fair market value of mortgage-backed securities held to
maturity exceeded the net carrying value by approximately $2. Estimated fair
values are based on quoted market prices, dealer quotes, and prices obtained
from independent pricing services. Refer to Notes 2 and 3 herein for the detail
on breakdowns by type of investment and mortgage-backed securities.
The fair value of loans and loans held for sale exceeded the carrying value by
approximately $2,705 and $687 at June 30, 2000 and 1999, respectively. Loans
with comparable characteristics including collateral and repricing structures
were segregated for valuation purposes. Each loan pool was separately valued
utilizing a discounted cash flow analysis. Projected monthly cash flows were
discounted to present value using a market rate for comparable loans.
Characteristics of comparable loans included remaining term, coupon interest and
estimated prepayment speeds.
The carrying amounts and estimated fair values of deposits at June 30, 2000 and
1999 were as follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Non-interest-bearing:
Demand accounts $ 8,652 $ 8,652 $ 7,339 $ 7,339
Interest-bearing:
Now and MMDA accounts 36,209 36,209 34,966 34,966
Passbook accounts 31,257 31,257 30,426 30,426
Time deposits 116,545 114,530 109,387 108,006
-----------------------------------------------------------------------------------------------------
Total Deposits $192,663 $190,648 $182,118 $180,737
-----------------------------------------------------------------------------------------------------
</TABLE>
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. Fair values for time deposits are estimated using
a discounted cash flow calculation that applies contractual cost currently being
paid in the existing portfolio to current market rates being offered locally for
deposits of similar remaining maturities. The mark-to-market valuation
adjustment for the time deposit portfolio consists of the present value of the
difference of these two cash flows, discounted at the assumed market rate of the
corresponding maturity.
The carrying amounts and estimated fair values of borrowed funds at June 30,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Borrowed funds:
FHLB advances $ 33,424 $ 33,046 $ 20,029 $ 19,895
-----------------------------------------------------------------------------------------------------
Note continued
</TABLE>
26
<PAGE> 22
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
The fair value of borrowed funds is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
advances of similar remaining maturities.
There is no material difference between the carrying value and the estimated
fair value of the Company's off-balance sheet items which totaled $9.1 million
and $7.0 million at June 30, 2000 and 1999, respectively, and are primarily
comprised of unfunded loan commitments which are generally priced at market at
the time of funding.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgements regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
(16) LAUREL CAPITAL GROUP, INC.
(PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30, June 30,
STATEMENT OF FINANCIAL CONDITION 2000 1999
<S> <C> <C>
------------------------------------------------------------------------------------
ASSETS
Cash $ 591 $ 503
Other assets -- 340
Investment in Laurel Savings Bank 22,724 24,022
------------------------------------------------------------------------------------
Total assets $23,315 $24,865
------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other accrued expenses $ 69 $ 335
------------------------------------------------------------------------------------
69 335
------------------------------------------------------------------------------------
Stockholders' equity 23,246 24,530
------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $23,315 $24,865
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, June 30, June 30,
STATEMENT OF OPERATIONS 2000 1999 1998
<S> <C> <C> <C>
-------------------------------------------------------------------------------------
Dividends from subsidiary $3,860 $1,967 $ 930
Other income -- 57 102
Equity in undistributed income of Laurel Savings
Bank (377) 1,248 2,104
-------------------------------------------------------------------------------------
3,483 3,272 3,136
-------------------------------------------------------------------------------------
Operating expenses 113 94 71
-------------------------------------------------------------------------------------
Income before income taxes 3,370 3,178 3,065
Provision (credit) for income taxes (38) (5) 14
-------------------------------------------------------------------------------------
Net income $3,408 $3,183 $3,051
-------------------------------------------------------------------------------------
Note continued
</TABLE>
27
<PAGE> 23
LOGO LAUREL CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, June 30, June 30,
STATEMENT OF CASH FLOWS 2000 1999 1998
<S> <C> <C> <C>
-------------------------------------------------------------------------------------
Net income $ 3,408 $ 3,183 $ 3,051
Undistributed income of Laurel Savings Bank 377 (1,248) (2,104)
Adjustments to reconcile net income to net cash
provided by operating activities:
Other--net 75 32 (17)
-------------------------------------------------------------------------------------
Net cash provided by operating activities 3,860 1,967 930
-------------------------------------------------------------------------------------
Financing activities:
Acquisition of treasury stock (2,441) (644) --
Stock options exercised 27 155 141
Dividends paid (1,358) (1,313) (946)
-------------------------------------------------------------------------------------
Net cash used by financing activities (3,772) (1,802) (805)
-------------------------------------------------------------------------------------
Net change in cash and cash equivalents 88 165 125
-------------------------------------------------------------------------------------
Cash and cash equivalents at the beginning of the
period $ 503 $ 338 $ 213
Net change during the period 88 165 125
-------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 591 $ 503 $ 338
-------------------------------------------------------------------------------------
</TABLE>
(17) STOCK SPLIT
On December 18, 1997, the Company's Board of Directors declared a three-for-two
stock split payable on January 16, 1998 to stockholders of record on January 2,
1998. An amount equal to the par value of the shares issued has been transferred
from additional paid-in capital to common stock. The number of shares and per
share amounts have been restated to reflect this distribution.
(18) CONTINGENT LIABILITIES
The Company is subject to a number of asserted and unasserted potential claims
in the normal course of business. In the opinion of management, after
consultation with legal counsel, the resolution of these claims will not have a
material adverse effect on the Company's financial position, liquidity or
results of operation.
28
<PAGE> 24
LOGO LAUREL CAPITAL GROUP, INC.
SELECTED FIVE YEAR FINANCIAL DATA
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
June 30,
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $254,073 $231,474 $220,986 $211,987 $196,947
Loans, net 169,521 151,390 151,124 144,670 143,532
Loans held for sale 1,514 1,562 1,633 1,827 1,627
Mortgage-backed securities held
to maturity 397 1,072 1,051 1,220 1,546
Mortgage-backed securities
available for sale 10,947 11,868 11,554 13,259 14,021
Investment securities held to
maturity 21,931 12,439 14,003 15,494 9,948
Investment securities available
for sale 38,665 35,549 25,539 15,494 11,639
Money market investments -- 3,711 3,532 9,086 6,291
Deposits 192,663 182,118 175,390 175,019 164,683
FHLB advances 33,424 20,029 17,033 11,044 6,327
Stockholders' equity 23,246 24,530 23,506 21,262 21,086
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
June 30,
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $16,610 $15,652 $15,765 $15,342 $14,785
Interest expense 8,581 8,067 8,069 7,715 7,319
-----------------------------------------------------------------------------------------
Net interest income before
provision for loan losses 8,029 7,585 7,696 7,627 7,466
Provision for loan losses 18 18 18 30 30
-----------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 8,011 7,567 7,678 7,597 7,436
Net gain on investments, loans
and mortgage-backed
securities available for
sale 12 313 218 125 92
Other income 828 707 764 592 535
Operating expenses 3,919 3,743 3,897 4,651 3,777
-----------------------------------------------------------------------------------------
Income before income taxes 4,932 4,844 4,763 3,663 4,286
Income tax expense 1,524 1,661 1,712 1,344 1,621
-----------------------------------------------------------------------------------------
Net income $ 3,408 $ 3,183 $ 3,051 $ 2,319 $ 2,665
-----------------------------------------------------------------------------------------
Diluted earnings per share $ 1.56 $ 1.39 $ 1.32 $ 1.00 $ 1.15
-----------------------------------------------------------------------------------------
</TABLE>
STATISTICAL PROFILE:
<TABLE>
<CAPTION>
June 30,
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.43% 1.41% 1.43% 1.13% 1.39%
Return on average equity 14.27% 13.04% 13.58% 10.82% 13.29%
Average equity to average assets
ratio 10.03% 10.84% 10.49% 10.47% 10.43%
Dividend payout ratio 41.03% 43.17% 33.33% 29.33% 16.81%
-----------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 25
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
OVERVIEW
For fiscal 2000, the Company continued achieving its goal of profitable
controlled growth with a recorded net income of $3.4 million or $1.56 per share
on a diluted basis compared to $3.2 million or $1.39 per share for fiscal 1999
and $3.1 million or $1.32 per share for fiscal 1998.
The Company continued to report strong returns on average assets (ROA) and
average equity (ROE). The ROA for fiscal 2000, 1999 and 1998 was 1.43%, 1.41%
and 1.43%, respectively. The ROE for fiscal 2000, 1999 and 1998 was 14.27%,
13.04% and 13.58%, respectively. Also during fiscal 2000, the Company's total
assets increased 9.8% to $254.1 million.
The Company's ongoing emphasis on controlling its non-interest expenses has
resulted in a low ratio of such expenses to total average assets and a low
efficiency ratio. These ratios for the Company continue to exceed such ratios
for national thrift industry averages of similarily sized institutions.
Total loan origination during fiscal 2000 was $57.0 million or a 37.3% increase
compared to fiscal 1999. Mortgage lending activity increased during fiscal 2000
as compared to the prior year and was concentrated more on the origination of
adjustable rate mortgages due to current conditions in the Company's market
area. In addition, consumer lending activity decreased by 22.0% during the same
time period.
The Company continues its efforts to further diversify its assets by emphasizing
loans and investments having relatively shorter terms and/or adjustable rates
such as secured home equity line-of-credit loans and consumer installment loans.
All known trends, events, uncertainties and current recommendations by the
regulatory authorities that would have a material effect on the Company's
liquidity, capital resources and results of operations have been considered in
the following discussion and analysis.
ASSET AND LIABILITY MANAGEMENT
The Company's vulnerability to interest rate risk exists to the extent that its
interest-bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest-earning
assets, which consist primarily of intermediate or long-term real estate loans
and investment and mortgage-backed securities.
The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of such assets and liabilities
were perfectly matched, and if the interest rates borne by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest income and on the net present
value of the Company's interest-earning assets and interest-bearing liabilities.
Management and the Board are responsible for managing interest rate risk and
employing risk management policies that monitor and limit exposure to interest
rate risk. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. These analyses
provide a range of potential impacts on net interest income and portfolio equity
caused by interest rate movements.
The Company uses financial modeling to measure the impact of changes in interest
rates on the net interest margin. Assumptions used by the Office of Thrift
Supervision are made regarding loan prepayments and amortization rates of
passbook and NOW account withdrawal rates. In addition, certain financial
instruments may provide customers with a degree of "optionality," whereby a
shift in interest rates may result in customers changing to an alternative
financial instrument, such as from a variable to fixed rate loan product. Thus,
the effects of changes in future interest rates on these assumptions may cause
actual results to differ from simulated results.
30
<PAGE> 26
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
The Company has established the following guidelines for assuming interest rate
risk:
Net interest margin simulation -- Given a +/-200 basis point ("bp") parallel
shift in interest rates, the estimated net interest margin may not change by
more than 10% for a one-year period. Portfolio equity simulation -- Portfolio
equity is the net present value of the Company's existing assets and
liabilities. Given a +200 basis point change in interest rates, portfolio equity
may not decrease by more than 50% of total shareholders' equity. Given a -200
basis point change in interest rates, portfolio equity may not decrease by more
than 20% of total shareholders' equity.
The following table illustrates the simulated impact of a 100 basis point or 200
basis point upward or downward movement in interest rates on net interest
income, return on average equity and earnings per share. This analysis was done
assuming that interest-earning asset levels at June 30, 2000 remained constant.
The impact of the rate movements was developed by simulating the effect of rates
changing over a twelve-month period from the June 30, 2000 levels.
Interest rate simulation sensitivity analysis
--------------------------------------------------------------------------------
Movements in interest rates from June 30, 2000 rates
<TABLE>
Increase Decrease
Simulated impact in the next 12 months ------------------- -------------------
Compared with June 30, 2000: +100 bp +200 bp -100 bp -200 bp
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net interest revenue increase/(decrease) (1.1)% (6.9)% (.7)% (2.7)%
Return on average equity
increase/(decrease) (39)bp (243)bp (24)bp (94)bp
Diluted earnings per share
increase/(decrease) $(.04) $(.27) $(.03) $(.10)
----- ----- ----- -----
</TABLE>
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. The following table presents a summary of the Company's gap
position at June 30, 2000. In preparing the table below, adjustable-rate loans
are included in the period in which the interest rates are next scheduled to
adjust rather than in the period in which the loans mature. In addition, the
assumptions used by the Office of Thrift Supervision for regulatory purposes
have been made with respect to loan prepayments and contractual amortization
rates and passbook and NOW account withdrawal rates. The above assumptions may
not be indicative of the actual prepayments and withdrawals which may be
experienced by the Company.
31
<PAGE> 27
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3
Months 4-12 1-5 Over 5
Interest Sensitivity Period or Less Months Years Years Total
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
Rate sensitive assets:
Loans and mortgage-backed
securities $ 21,832 $ 33,401 $ 71,362 $57,582 $184,177
Investment securities 4,720 15,905 2,499 40,404 63,528
------------------------------------------------------------------------------------------
Total rate sensitive assets $ 26,552 $ 49,306 $ 73,861 $97,986 $247,705
------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Deposits:
Certificates of deposit $ 19,990 $ 41,690 $ 48,293 $ 6,572 $116,545
NOW and money funds 7,334 12,708 11,328 4,836 36,206
Passbooks 1,428 3,899 13,332 12,598 31,257
------------------------------------------------------------------------------------------
Total deposits $ 28,752 $ 58,297 $ 72,953 $24,006 $184,008
Borrowings 14,500 2,293 13,500 3,131 33,424
------------------------------------------------------------------------------------------
Total rate sensitive liabilities $ 43,252 $ 60,590 $ 86,453 $27,137 $217,432
------------------------------------------------------------------------------------------
Interest sensitivity GAP:
Interval (16,700) (11,284) (12,592) 70,849 --
Cumulative $(16,700) $(27,984) $(40,576) $30,273 $ 30,273
------------------------------------------------------------------------------------------
Ratio of cumulative GAP to total
assets (6.57)% (11.01)% (15.97)% 11.92%
------------------------------------------------------------------------------------------
</TABLE>
The Company targets its one year gap to be in the range of +10.0% to -10.0%. At
June 30, 2000 and 1999, the Company's one year gap was (11.01)% and (4.08)%,
respectively. As part of its effort to minimize the impact changes in interest
rates have on operating results, the Company continues to emphasize the
origination of interest-earning assets with adjustable rates and shorter
maturities and to extend the terms of its interest-bearing liabilities. The
Company also maintains a high level of liquid assets, which includes assets
available for sale, that could be reinvested at higher yields if interest rates
were to rise. Management believes its asset and liability strategies reduce the
Company's vulnerability to fluctuations in interest rates.
32
<PAGE> 28
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
FINANCIAL CONDITION
The Company's consolidated assets totaled approximately $254.1 million at June
30, 2000, an increase of $22.6 million or 9.8% from June 30, 1999. The growth in
assets was primarily the result of increases in loans receivable and investment
securities held to maturity. The growth was funded primarily from increases in
savings deposits, FHLB advances and income generated from current earnings.
The following table presents an analysis of the Company's average balance sheet,
net interest income and average yields earned on its interest-bearing assets and
average rates paid on its interest-bearing liabilities for the periods and as of
the date indicated. Information is based on average daily balances during the
periods presented which management believes is representative of the operations
of the Company.
<TABLE>
<CAPTION>
At Year Ended June 30,
June 30, 2000 1999 1998
2000 ---------------------------------------------------------------------------------------------
Average Average Average Average
Yield/ Average Yield Average Yield Average Yield
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------------
Interest-earning
assets:
Mortgage loans 1 7.50% $121,733 $ 9,169 7.53% $122,194 $9,326 7.63% $121,266 $ 9,666 7.97%
Consumer and other
loans 1 8.18 35,348 2,798 7.92 31,669 2,528 7.98 25,637 2,153 8.40
---------------------------------------------------------------------------------------------------------------------------------
Total loans 7.64 157,081 11,967 7.62 153,863 11,854 7.70 146,903 11,819 8.05
Mortgage-backed
securities 7.19 12,275 836 6.81 11,824 791 6.69 13,567 970 7.15
Investment securities 6.65 60,544 3,721 6.15 45,626 2,554 5.60 42,688 2,660 6.23
Interest-bearing
deposits 6.97 1,607 86 5.35 9,379 453 4.83 5,853 316 5.40
---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 7.36% 231,507 $16,610 7.17% 220,692 $15,652 7.09% 209,011 $15,765 7.54%
Non-interest-earning
assets 6,610 4,584 5,083
---------------------------------------------------------------------------------------------------------------------------------
Total Assets $238,117 $225,276 $214,094
---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Savings deposits 4.31 $177,201 $ 7,291 4.11% $169,209 $7,059 4.17% $166,498 $ 7,349 4.41
Borrowings 6.34 22,736 1,290 5.67 18,555 1,008 5.43 12,998 720 5.54
---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 4.62% 199,937 $ 8,581 4.29% 187,764 $8,067 4.30% 179,496 $ 8,069 4.50%
Non-interest-bearing
liabilities 14,302 13,096 12,135
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 214,239 200,860 191,631
Stockholders' equity 23,878 24,416 22,463
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $238,117 $225,276 $214,094
---------------------------------------------------------------------------------------------------------------------------------
Net earning assets $ 31,570 $ 32,928 $ 29,515
Net interest income/
average interest rate
spread 2.74% $ 8,029 2.88% $7,585 2.79% $ 7,696 3.04%
Net yield on interest-
earning assets 3.47% 3.44% 3.68%
Average
interest-earning
assets as a percent
of average
interest-bearing
liabilities 115.8% 117.4% 116.4%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1Includes loans on which the Company has discontinued accruing interest.
The Company continually seeks to increase its level of profitability while
maintaining its asset quality. This emphasis on earnings and asset quality has
resulted in an increase in net income from $2.7 million for fiscal 1996 to $3.4
million for fiscal 2000 and a .22% ratio of non-performing assets to total
assets at June 30, 2000. The Company has continued to focus its efforts on more
evenly matching the maturities and/or repricing characteristics of its
interest-earning assets and interest-bearing liabilities in order to minimize
fluctuations that may occur due to changes in market interest rates.
33
<PAGE> 29
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
INVESTMENT SECURITIES HELD TO MATURITY AND INVESTMENT SECURITIES AVAILABLE FOR
SALE
The Company's investment securities held to maturity totaled $21.9 million at
June 30, 2000 which was an increase of $9.5 million or 76.3% compared to the
level at June 30, 1999. The increase was primarily due to the purchase of $13.5
million of such securities during fiscal 2000 partially offset by the maturity
of $4.1 million of securities during the same period. The Company primarily
invests in government and corporate notes and bonds. Investment securities
available for sale totaled $38.7 million at June 30, 2000 or an increase of $3.1
million compared to June 30, 1999. The increase was primarily due to the
purchases of approximately $3.1 million of municipal bonds. The increase in
purchases of investment securities held to maturity and investment securities
available for sale was primarily due to the investment of the funds generated
from the increases in savings deposits and FHLB advances.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY AND MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
The total of all mortgage-backed securities was $11.3 million at June 30, 2000,
a decrease of $1.6 million or 12.3% compared to the level at June 30, 1999. This
decrease was primarily due a decrease in the volume of purchases of these
securities in fiscal 2000 as compared to fiscal 1999. During fiscal 2000, the
Company purchased $1.0 million of these securities compared to $5.0 million in
the prior fiscal year. The principal repayments on all mortgage-backed
securities during fiscal 2000 exceeded the purchases made during the period.
LOAN PORTFOLIO
Loans receivable increased $18.1 million or 12.0% to $169.5 million during the
fiscal year ended June 30, 2000 as compared to an increase of $266,000 or .2%
for the fiscal year ended June 30, 1999. Mortgage loan originations in fiscal
years 2000 and 1999 amounted to $40.5 million and $21.4 million, respectively.
The Company originated primarily adjustable-rate loans in fiscal 2000 due to
current market conditions in the Bank's market area. Of the total amount of
mortgage and construction loans originated in fiscal 2000, $28.4 million or
70.1% were adjustable-rate mortgages as compared to $2.0 million or 9.5% in
fiscal 1999. Fixed-rate mortgage and construction loan originations totaled
$12.1 million or 29.9% of total mortgage and construction loans originated in
fiscal 2000 as compared to $19.4 million or 90.5% of total mortgage and
construction loans originated in fiscal 1999.
Consumer loan originations, including home equity and other installment loans,
totaled $16.4 million in fiscal 2000, $20.1 million in fiscal 1999 and $17.5
million in fiscal 1998. The Company attempts to place a greater emphasis on
other installment lending including home equity loans, personal loans, auto
loans and other secured lines of credit due to the shorter term and higher yield
associated with such loans.
34
<PAGE> 30
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
DEPOSIT PORTFOLIO
Savings deposits increased $10.5 million to $192.7 million during fiscal 2000.
This increase was due to the combined result of $4.1 million of net deposit
growth and interest credited of approximately $6.4 million. Deposit increases
occurred in certificate of deposit accounts, NOW/checking accounts, passbook
accounts and in money market accounts.
For the years ended June 30, 1999, 1998 and 1997, the Company had certificates
of deposit with remaining terms to maturity of three (3) to ten (10) years
aggregating $10.1 million, $12.2 million and $11.4 million, respectively. As
part of its asset and liability planning, the Company attempts to attract
longer-term deposits, thereby reducing the interest rate sensitivity of its
interest-bearing liabilities.
BORROWINGS
Borrowings, consisting of FHLB advances, increased from $20.0 million at June
30, 1999 to $33.4 million at June 30, 2000. The Company used the additional
funds as part of its asset and liability management strategy and to fund its
loan and investment portfolio growth.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased $1.3 million or 5.2% to $23.2 million at June 30,
2000 compared to $24.5 million at June 30, 1999. This decrease primarily
resulted from the repurchase of $2.4 million of the Company's common stock, the
payment of cash dividends of $1.4 million and the purchase of $103,000 of the
Company's stock held in a deferred compensation trust. These decreases were
partially offset by comprehensive income of $2.6 million and $27,000 of stock
options exercised. Under regulations adopted by the Federal Deposit Insurance
Corporation ("FDIC"), the Company is required to maintain Tier I (Core) capital
equal to at least 4% of the Company's adjusted total assets and Tier II
(Supplementary) risk-based capital equal to at least 8% of the risk-weighted
assets. At June 30, 2000, the Company exceeded all of its regulatory capital
requirements. See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
The results of operations of the Company depend substantially on its net
interest income, which is determined by the interest rate spread between the
Company's interest-earning assets and interest-bearing liabilities and the
relative amounts of such assets and liabilities.
35
<PAGE> 31
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
The following table presents certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (1) changes in
rate (change in rate multiplied by old volume), (2) changes in volume (changes
in volume multiplied by old rate), and (3) changes in rate-volume (change in
rate multiplied by the change in volume). Changes in net interest income due to
both volume and rate were combined with the changes of each based on their
proportionate amounts.
<TABLE>
<CAPTION>
Fiscal 2000
Compared to Fiscal 1999
Increase (Decrease) due to
---------------------------------------------------------------------------------------------
Rate/
Rate Volume Volume Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans $(122) $ (35) $ -- $ (157)
Consumer loans (21) 293 (2) 270
Mortgage-backed securities 14 30 1 45
Investment securities 250 835 82 1,167
Interest-earning deposits 49 (375) (41) (367)
---------------------------------------------------------------------------------------------
Total 170 748 40 958
---------------------------------------------------------------------------------------------
Interest expense on interest-bearing
liabilities:
Deposits (97) 334 (5) 232
Borrowings 45 227 10 282
---------------------------------------------------------------------------------------------
Total (52) 561 5 514
---------------------------------------------------------------------------------------------
Net change in net interest income $ 222 $ 187 $ 35 $ 444
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999
Compared to Fiscal 1998
Increase (Decrease) due to
---------------------------------------------------------------------------------------------
Rate/
Rate Volume Volume Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans $(411) $ 74 $ (3) $(340)
Consumer loans (107) 507 (25) 375
Mortgage-backed securities (62) (125) 8 (179)
Investment securities (270) 183 (19) (106)
Interest-earning deposits (33) 190 (20) 137
---------------------------------------------------------------------------------------------
Total (883) 829 (59) (113)
---------------------------------------------------------------------------------------------
Interest expense on interest-bearing
liabilities:
Deposits (403) 120 (7) (290)
Borrowings (14) 308 (6) 288
---------------------------------------------------------------------------------------------
Total (417) 428 (13) (2)
---------------------------------------------------------------------------------------------
Net change in net interest income $(466) $ 401 $(46) $(111)
---------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 32
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
INTEREST INCOME ON LOANS AND LOANS HELD FOR SALE
Interest on loans and loans held for sale increased by $113,000 or 1.0% in
fiscal 2000 primarily due to a $3.2 million increase in the average balance of
the portfolio and, in particular, the consumer loan portfolio. This increase was
partially offset by a decrease in the average yield earned on the portfolio from
7.70% during fiscal 1999 to 7.62% during fiscal 2000. The average balance of the
consumer loan portfolio increased by $3.7 million or 11.6% and the average
balance of the mortgage loan portfolio decreased by $461,000 or .4% during
fiscal 2000. Interest on loans and loans held for sale increased by $35,000 or
.3% in fiscal 1999 primarily due to a $7.0 million increase in the average
balance of the portfolio and, in particular, the consumer loan portfolio. This
increase was partially offset by a decrease in the average yield earned on the
portfolio from 8.05% during fiscal 1998 to 7.70% during fiscal 1999. The average
balance of the consumer loan portfolio increased by $6.0 million or 23.5% and
the average balance of the mortgage loan portfolio increased by $928,000 or .8%
during fiscal 1999. The decrease in the average yield during fiscal 2000 and
fiscal 1999 was primarily due to increased originations of fixed-rate mortgage
loans and home equity loans that had lower rates of interest due to the
competitive interest rates in the Company's market area. Also contributing to
the decrease was the increased origination of adjustable-rate mortgage loans
during fiscal 2000 that generally have lower initial rates of interest.
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES HELD TO MATURITY AND
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Interest income on all mortgage-backed securities increased by $45,000 or 5.7%
during fiscal 2000 primarily due to a $451,000 or 3.8% increase in the average
outstanding balance of the portfolio. Also contributing to this increase was an
increase in the average yield from 6.69% in fiscal 1999 to 6.81% in fiscal 2000.
Interest income on all mortgage-backed securities decreased by $179,000 or 18.5%
during fiscal 1999 primarily due to a $1.7 million or 12.9% decrease in the
average outstanding balance of the portfolio. Also contributing to this decrease
was a decrease in the average yield from 7.15% in fiscal 1998 to 6.69% in fiscal
1999.
INTEREST INCOME ON INVESTMENTS HELD TO MATURITY AND INVESTMENTS AVAILABLE FOR
SALE
Interest on investments held to maturity and investments available for sale
increased by $1.2 million or 45.7% during fiscal 2000 primarily due to a $14.9
million or 32.7% increase in the average outstanding balance of such securities.
Also contributing to the increase was an increase in the average yield on these
investments from 5.60% in fiscal 1999 to 6.15% in fiscal 2000. The increase in
the yield was primarily due to increases in market interest rates. Interest on
investments held to maturity and investments available for sale decreased by
$106,000 or 4.0% during fiscal 1999 primarily due to a decrease in the average
yield on these investments from 6.23% in fiscal 1998 to 5.60% in fiscal 1999.
This decrease was partially offset by a $2.9 million or 6.9% increase in the
average balance of these securities during fiscal 1999. The increase in the
average outstanding balance during both fiscal 2000 and 1999 was primarily due
to the increased purchases of these securities with the funds generated from the
increases in savings deposits and FHLB advances.
37
<PAGE> 33
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
INTEREST INCOME ON INTEREST-EARNING DEPOSITS
Interest on deposits, consisting of interest-earning deposits maintained with
the FHLB of Pittsburgh, decreased $367,000 or 81.0% during fiscal 2000 compared
to fiscal 1999 and increased by $137,000 or 43.4% during fiscal 1999 compared to
fiscal 1998. The decrease in fiscal 2000 was primarily due to a $7.8 million or
82.9% decrease in the average outstanding balance of these deposits as such
funds were used to fund increased loan originations and investment security
purchases during the period. The increase in fiscal 1999 was primarily due to a
$3.5 million increase in the average outstanding balance of these deposits. Also
contributing to the increase in fiscal 2000 was an increase in the average yield
from 4.83% in fiscal 1999 to 5.35% in fiscal 2000 reflecting a rise in market
interest rates.
INTEREST EXPENSE ON SAVINGS DEPOSITS
Interest expense on savings deposits increased by $232,000 or 3.3% in fiscal
2000 primarily due to an $8.0 million or 4.7% increase in the average
outstanding balance of savings deposits. This increase was partially offset by a
decrease in the average rate paid on deposits from 4.17% in fiscal 1999 to 4.11%
in fiscal 2000. Interest expense on savings deposits decreased by $290,000 or
3.9% in fiscal 1999 primarily due to a decrease in the average rate paid on
deposits from 4.41% in fiscal 1998 to 4.17% in fiscal 1999. This decrease was
partially offset by a $2.7 million increase in the average outstanding balance
of savings deposits. The increase in the average balance of deposits during both
fiscal 2000 and 1999 was primarily due to increased marketing of the Company's
certificate of deposit and checking products.
INTEREST EXPENSE ON BORROWINGS
Interest on borrowings increased $282,000 or 28.0% in fiscal 2000 primarily due
to a $4.2 million or 22.5% increase in the average outstanding balance of FHLB
advances. In addition, the average rate paid on borrowings increased from 5.43%
in fiscal 1999 to 5.67% in fiscal 2000. Interest on borrowings increased
$288,000 or 40.0% in fiscal 1999 primarily due to a $5.6 million or 42.8%
increase in the average outstanding balance. This increase was partially offset
by a decrease in the average rate paid on borrowings from 5.54% in fiscal 1998
to 5.43% in fiscal 1999. The Company used the funds borrowed during fiscal 2000
and 1999 as part of its asset and liability strategy.
NET INTEREST INCOME
Net interest income increased by $444,000 or 5.9% in fiscal 2000 as compared to
fiscal 1999 and decreased by $111,000 or 1.4% in fiscal 1999 over the prior
fiscal year. The increase in fiscal 2000 was primarily due to increases in the
average outstanding balances of the loan, mortgage-backed security and
investment portfolios partially offset by a decrease in the average outstanding
balance of interest-earning deposits with other institutions and increases in
average outstanding balances of savings deposits and borrowings. The decrease in
fiscal 1999 was primarily due to decreases in the average yields on the loan and
the investment portfolios and an increase in the average outstanding balance of
borrowings partially offset by a decrease in the average rate paid on deposits.
Interest-earning assets as a percent of interest-bearing liabilities amounted to
115.8%, 117.4% and 116.4% at June 30, 2000, 1999 and 1998, respectively, and the
average interest rate spread was 2.88%, 2.79% and 3.04% for fiscal 2000, 1999
and 1998, respectively. The Company's average interest rate spread has decreased
from 3.04% in fiscal 1998 to 2.88% in fiscal 2000 primarily due to decreases in
the average rates earned on the Company's loan and investment portfolios. The
Company's net interest income continued to exceed its total other expenses in
fiscal 2000 and 1999, and the Company intends to continue to manage its assets
and liabilities in order to maintain its net interest income at levels in excess
of total other expenses.
38
<PAGE> 34
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
Financial institutions are subject to the risk of loan losses as one of the
costs of lending. While the Company recognizes as losses all loans which are
determined to be uncollectible, experience dictates that at any point in time,
losses may exist in the portfolio which cannot be specifically identified. As a
result, a provision for such unidentifiable losses is established and charged
against current earnings to represent management's best estimate of such
probable losses. The provision for loan losses amounted to $18,000 for each of
fiscal 2000, 1999 and 1998. Such provisions were the result of an analysis of
the allowance for loan losses performed in connection with a review of the
Company's loan portfolio.
At June 30, 2000, 1999 and 1998, the allowance for loan losses was approximately
$1.8 million, $1.9 million and $1.9 million, respectively. This amount
represented 1.1%, 1.2% and 1.2%, respectively, of the total loan portfolio at
such dates.
A review 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 fiscal year ended June 30, 2000. 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
Fees and service charges increased by $24,000 or 4.4% to $566,000 in fiscal 2000
and decreased by $53,000 or 8.9% in fiscal 1999. The increase in fiscal 2000 was
primarily due to higher fees realized from various products and services offered
by the Bank. The decrease in fiscal 1999 was primarily due to decreases in the
amount of fees and service charges earned on the Bank's NOW accounts.
During fiscal 2000, the Company realized net gains of $12,000 on the sale of
investments, mortgage-backed securities and loans in its available for sale
portfolio. These gains were realized solely on the sale of loans held for sale
as there were no sales of investments or mortgage-backed securities during
fiscal 2000. During fiscal 1999, the Company realized net gains of $313,000 on
investments, mortgage-backed securities and loans in its available for sale
portfolio. Gains of $296,000 and $17,000 were recorded on the sale of investment
securities and loans, respectively.
Other operating income, which primarily consists of miscellaneous fees, rents,
and other income, was $262,000, $205,000 and $203,000 in fiscal 2000, 1999 and
1998, respectively. The increase in fiscal 2000 was primarily due to an increase
in ATM fees.
Total other income decreased $220,000 or 20.8% in fiscal 2000 and increased by
$44,000 or 4.3% in fiscal 1999. The decrease in fiscal 2000 was primarily due to
decreases in gains on the sale of investment securities and mortgage-backed
securities available for sale. The increase in fiscal 1999 was primarily due to
increases in gains on the sale of investment securities and loans available for
sale.
39
<PAGE> 35
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
OPERATING EXPENSES
Compensation and employee benefits, which is the largest component of total
operating expenses, increased by $75,000 or 4.2% in fiscal 2000 and increased by
$71,000 or 4.1% in fiscal 1999. The increase in both fiscal 2000 and 1999 was
primarily due to normal salary and benefit increases.
Premises and occupancy expense increased by $65,000 or 12.9% in fiscal 2000 and
by $16,000 or 3.3% in fiscal 1999. The increase in fiscal 2000 was primarily due
to increases in furniture, fixture and equipment depreciation and repairs and
maintenance partially offset by decreases in furniture, fixtures and equipment
expenses and office building depreciation. The increase in fiscal 1999 was
primarily due to an increase in furniture, fixtures and equipment expenses
partially offset by a decrease in repairs and maintenance.
Federal insurance premiums decreased by $33,000 or 31.4% in fiscal 2000 and
decreased by $4,000 or 3.7% in fiscal 1999. The decrease in fiscal 2000 was due
to the lowering of the rate paid by SAIF insured institutions to support the
interest payments on the Financing Corporation ("FICO") Bonds. The amount of the
premium is based upon the average amount of deposits outstanding.
For fiscal 2000 and 1999, the Company had net losses of $32,000 and $26,000,
respectively, from its real estate owned ("REO"). In fiscal 1998, the Company
recorded a net gain of $5,000.
Data processing expenses decreased by $1,000 or .5% in fiscal 2000 and by
$47,000 or 18.4% in fiscal 1999. The decrease in fiscal 1999 was the result of
decreased pricing.
Professional fees decreased by $10,000 in fiscal 2000 and by $263,000 in fiscal
1999. The decrease in both fiscal 2000 and 1999 was primarily due to reduced
legal fees incurred in litigation brought by the Company against another
financial institution.
INCOME TAXES
Income taxes decreased $137,000 or 8.3% in fiscal 2000 and by $51,000 or 3.0% in
fiscal 1999. The decrease in both fiscal 2000 and 1999 was due to a decrease in
the Company's effective tax rate due to increased purchases of non-taxable
municipal obligations.
NET INCOME
Net income increased $225,000 or 7.1% in fiscal 2000 and increased $132,000 or
4.3% in fiscal 1999. The increase in fiscal 2000 was due to a $444,000 increase
in net interest income and a $137,000 decrease in income tax expense partially
offset by a $220,000 decrease in total other income and a $136,000 increase in
total other operating expenses. The increase in fiscal 1999 was due to a
$148,000 decrease in total other operating expenses, a $51,000 decrease in
income tax expense and a $44,000 increase in total other income partially offset
by a $111,000 decrease in net interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets increased from $221.0 million at June 30, 1998 to $231.5
million at June 30, 1999, and to $254.1 million at June 30, 2000. Stockholders'
equity increased from $23.5 million at June 30, 1998 to $24.5 million at June
30, 1999 and decreased to $23.2 million at June 30, 2000. At June 30, 2000,
stockholders' equity amounted to 9.15% of the Company's total assets under
generally accepted accounting principles ("GAAP").
The Company is currently required to maintain Tier I (Core) capital equal to at
least 4.0% of its adjusted total assets and Tier II (Supplementary) risk-based
capital equal to at least 8.0% of its risk-weighted assets. At June 30, 2000,
the Company substantially exceeded all of these requirements with Tier I and
Tier II ratios of 9.43% and 17.70%, respectively.
During the fiscal years ended June 30, 2000, 1999 and 1998, the Company had
positive cash flows from operating activities. Cash and cash equivalents
decreased by $7.2 million, increased by $734,000 and decreased by $4.0 million
for the fiscal years ended June 30, 2000, 1999 and 1998, respectively. See
Consolidated Statements of Cash Flows.
40
<PAGE> 36
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Cash flows from operating activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to net income and
operations. Operating activities provided $3.2 million of cash in fiscal 2000,
$2.9 million in fiscal 1999 and $3.4 million in fiscal 1998.
Investing activities used cash on a net basis of $30.6 million in fiscal 2000,
$9.9 million in fiscal 1999 and $12.9 million in fiscal 1998. This was primarily
due to the amount of loans originated and the purchase of investment securities
and mortgage-backed securities which were greater than cash provided by the
sales, maturities and periodic principal payments received on investments and
loans.
Cash flows from financing activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to changes in deposits and
borrowings. Financing activities generated $20.2 million of cash in fiscal 2000
due to a net increase of $13.4 million in FHLB advances, $10.5 million in
deposits, $72,000 in advance deposits by borrowers for taxes and insurance and
$27,000 from stock options exercised. These increases were partially offset by
$2.4 million of treasury stock acquired and $1.4 million of cash dividends paid.
Financing activities generated $7.8 million of cash in fiscal 1999 due to a net
increase of $6.7 million in deposits, $3.0 million in FHLB advances and $155,000
from stock options exercised. These increases were partially offset by $1.3
million of cash dividends paid, $644,000 of treasury stock acquired and a
decrease of $123,000 in advance deposits by borrowers for taxes and insurance.
The Company's primary source of funds consists of deposits bearing market rates
of interest, loan repayments and current earnings. Also, advances from the FHLB
of Pittsburgh may be used on short-term basis to compensate for savings outflows
or on a long-term basis to support lending and investment activities.
The Company uses its capital resources principally to meet its on-going
commitments to fund maturing certificates of deposit and deposit withdrawals,
fund existing and continuing loan commitments, maintain its liquidity and meet
operating expenses. At June 30, 2000, the Company had commitments to originate
loans totaling $9.1 million. Scheduled maturities of certificates of deposit
during fiscal 2001 totaled $61.7 million at June 30, 2000. Management believes
that by evaluating competitive instruments and pricing in its market area, the
Company can generally retain a substantial portion of its maturing certificates
of deposit.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with GAAP, which requires the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effect of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
41
<PAGE> 37
LOGO LAUREL CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
YEAR 2000
The Company established a management committee to identify all of its functions
potentially affected by the year 2000 date change, help ensure that
re-programming or replacement of all critical systems occurred and to formulate
contingency plans in the event any of those critical systems failed.
The Company experienced no known disruptions as a result of the year 2000 date
change and intends to continue monitoring its critical systems at various other
date changes during the year 2000.
RECENT ACCOUNTING DEVELOPMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," and
SFAS No. 138, "Accounting for Certain Derivative Investments and Certain Hedging
Activities -- An Amendment of FASB Statement No. 133," requires that derivative
instruments be carried at fair value on the balance sheet. The statement
continues to allow derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statements also provide for offsetting changes in fair value or
cash flows of both the derivative and the hedged asset or liability to be
recognized in earnings in the same period; however, any changes in fair value or
cash flow that represent the ineffective portion of a hedge are required to be
recognized in earnings and cannot be deferred. For derivative instruments not
accounted for as hedges, changes in fair value are required to be recognized in
earnings.
The provisions of this statement as amended, are effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
anticipate any material impact on the Company's financial position, results of
operations and cash flow subsequent to the effective date of this statement as
no such instruments are used by the Company.
42
