<PAGE> 1
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File No.: 0-23101
-------
LAUREL CAPITAL GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1717451
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2724 HARTS RUN ROAD
ALLISON PARK, PENNSYLVANIA 15101
--------------------------------- -------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (412) 487-7400
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 26, 2000, the aggregate value of the 1,798,716 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
164,165 shares held by all directors and officers of the Registrant as a group,
was approximately $26.0 million. This figure is based on the mean of the bid and
asked prices of $14.438 per share of the Registrant's Common Stock on
September 26, 2000.
Number of shares of Common Stock outstanding as of September 26, 2000: 1,962,881
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended June 30,
2000 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 2000 are incorporated into
Part III, Items 10 through 13 of this Form 10-K.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Laurel Capital Group, Inc. (the "Company") is a bank holding company
whose primary asset is the common stock of its wholly owned subsidiary Laurel
Savings Bank ("Laurel Savings" or the "Bank"). The Bank's business is conducted
through its corporate headquarters located in Allison Park, Pennsylvania as well
as four branch offices located in Allegheny County and one branch office located
in Butler County, Pennsylvania. At June 30, 2000, the Company had total assets
of $254.1 million and stockholders' equity of $23.2 million or 9.1% of total
assets. In addition, at such date, the Bank's core capital of $23.3 million and
tier I and tier II risk-based capital of $23.3 million and $25.1 million,
respectively, exceeded the required amounts by $13.4 million, $17.7 million and
$13.8 million, respectively. The Bank's corporate headquarters is located at
2724 Harts Run Road, Allison Park, Pennsylvania, its telephone number is (412)
487-7400 and its internet address is www.laurelsb.com.
Laurel Savings is primarily engaged in attracting deposits from the
general public and using these funds to originate permanent first mortgage loans
on single-family residential properties, and, to a lesser extent, multi-family
residential loans, construction loans, commercial real estate loans and consumer
loans. Laurel Savings' revenue is primarily derived from interest income on its
loan portfolio. The Bank's principal expenses are interest expense on deposits
and other operating expenses. The principal sources of funds for Laurel Savings'
lending activities are its deposits and amortization and prepayments of
outstanding loans.
Deposits with Laurel Savings are insured to the maximum extent provided
by law through the Savings Association Insurance Fund ("SAIF") administered by
the Federal Deposit Insurance Corporation ("FDIC"). Laurel Savings is subject to
examination and comprehensive regulation by the Pennsylvania Department of
Banking ("Department") and the FDIC. The Bank is also a member of the Federal
Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh" or "FHLB"), which is one of
the 12 regional banks comprising the Federal Home Loan Bank System ("FHLB
System"). The Bank is also subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.
MARKET AREA
The Bank's principal market area consists of Allegheny and Butler
counties, Pennsylvania, which includes the City of Pittsburgh, the region's
major metropolitan center and the hub of the Pittsburgh Metropolitan Statistical
Area ("MSA"), one of the nation's largest. The Bank's business is conducted
through its corporate office located in Allison Park, a suburb of Pittsburgh,
and five branch offices. Substantially all of the Bank's deposits are received
from residents of its principal market area and most of its loans are secured by
properties in Allegheny and Butler counties. Although the Bank has no branches
in downtown Pittsburgh, the Bank participates in the MACTM, CirrusTM, Money
StationTM and JeanieTM automatic teller machine ("ATM") networks which provide
customers with access to their deposits at thousands of locations throughout
metropolitan Pittsburgh and Pennsylvania as well as other states. The Bank is
also a member of the Freedom ATM Alliance a consortium of over 30 financial
institutions in the greater Pittsburgh market area. The Alliance provides
surcharge-
1
<PAGE> 3
free transactions to customers of Alliance members at over 230 ATMs through the
region.
The population of the Bank's principal market area is approximately 1.5
million. The area's economy has been undergoing a rapid transition from heavy
industry to one of service, health care, advanced technology, light
manufacturing and education industries. As a result of this transition, the
unemployment in Allegheny County, the Bank's largest market area, is 3.8%
compared to 4.3% for the state of Pennsylvania and 4.0% for the United States.
The region also is one of the nation's major corporate and financial centers
which contributes to a fairly stable real estate market. Housing costs are below
the national average resulting in over 73.2% of the area's residents owning
their own home. The area's median housing cost is approximately $96,000 while
the average sales price is approximately $123,000. While the area will likely
experience job losses to corporate mergers and downsizing in the future, the
Company believes the diversity of the area's industry will continue to provide a
stable economy.
LENDING ACTIVITIES
GENERAL. Laurel Savings has traditionally concentrated its lending
activities on conventional first mortgage loans secured by residential property.
Conventional loans are neither insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Department of Veterans' Affairs ("VA").
At June 30, 2000, Laurel Savings' total loan portfolio amounted to $179.3
million ("total loan portfolio"), representing approximately 70.6% of the Bank's
total assets at that date. Permanent loans secured by single-family (one-to-four
units) residential properties amounted to $125.3 million or 69.9% of the total
loan portfolio at June 30, 2000. At June 30, 2000, multi-family (over four
units) residential loans amounted to $2.5 million or 1.4% of the total loan
portfolio while construction loans (all of which were for the construction of
single-family residential properties) totaled $10.2 million or 5.7% of the total
loan portfolio and commercial real estate loans totaled $5.4 million or 3.0% of
the total loan portfolio. The Bank's consumer loans, the second largest
component of the Bank's total loan portfolio, amounted to $35.1 million or 19.6%
of such portfolio at June 30, 2000.
2
<PAGE> 4
The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
As of June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ------------------ ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $125,276 69.8% $112,334 72.6% $114,972 73.9% $114,062 76.5% $113,160 76.1%
Multi-family 2,476 1.4% 1,612 1.0% 2,474 1.6% 2,740 1.8% 2,811 1.9%
Construction (1) 10,167 5.7% 2,268 1.5% 4,341 2.8% 3,079 2.1% 4,281 2.9%
Commercial 5,391 3.0% 5,375 3.5% 6,391 4.1% 5,676 3.8% 5,788 3.9%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 143,310 79.9% 121,589 78.6% 128,178 82.4% 125,557 84.2% 126,040 84.8%
Commercial loans 919 .5% 941 .6% 650 .4% 998 .7% 977 .6%
Consumer loans (2) 35,110 19.6% 32,101 20.8% 26,723 17.2% 22,586 15.1% 21,653 14.6%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans $179,339 100.0% $154,631 100.0% $155,551 100.0% $149,141 100.0% $148,670 100.0%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Loans in process (7,796) (987) (1,953) (1,634) (2,148)
Allowance for loan losses (1,798) (1,866) (1,852) (1,943) (1,899)
Unamortized discounts and fees (224) (388) (622) (894) (1,091)
-------- -------- -------- -------- --------
Net loans receivable $169,521 $151,390 $151,124 $144,670 $143,532
======== ======== ======== ======== ========
Loans held for sale (3) $ 1,514 $ 1,562 $ 1,633 $ 1,827 $ 1,627
======== ======== ======== ======== ========
</TABLE>
----------
(1) The $10.2 million construction loan portfolio outstanding at June 30, 2000
consisted of adjustable-rate construction loans totaling $6.8 million and
fixed-rate construction loans totaling $3.4 million.
(2) Consumer loans consist primarily of installment loans, auto loans, home
equity loans, home improvement loans and loans on savings accounts. For
additional information regarding these loans, see Note 4 to the Notes to
Consolidated Financial Statements in the Company's 2000 Annual Report to
Stockholders ("Annual Report") set forth as Exhibit 13 hereto.
(3) Loans held for sale consist of guaranteed student loans.
3
<PAGE> 5
CONTRACTUAL MATURITIES OF LOANS. The following table sets forth the
contractual principal repayments of the total loan portfolio of the Bank as of
June 30, 2000 by categories of loans. Loans with adjustable interest rates are
shown in the year that they are contractually due. The amounts shown for each
period do not take into account either loan prepayments or scheduled
amortization of the Bank's loan portfolio.
<TABLE>
<CAPTION>
Contractual Maturities in Year Ended June 30,
------------------------------------------------------------------------------------------
Total
Outstanding
At June 30, 2002- 2004- 2006- 2011- 2022 and
2000 2001 2003 2005 2010 2021 Thereafter
----------- ------- ------- ------- ------- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate mortgage
loans $86,107 $ 4,282 $ 8,177 $ 8,779 $19,492 $27,577 $17,800
Adjustable-rate
mortgage loans 47,036 1,722 2,218 2,311 6,099 15,892 18,794
Construction 10,167 10,167 -- -- -- -- --
Consumer and other
loans 36,029 8,374 10,106 6,254 7,829 3,466 --
-------- ------- ------- ------- ------- ------- -------
Total $179,339 $24,545 $20,501(1) $17,344(1) $33,420(1) $46,935(1) $36,594(1)
======== ======= ======= ======= ======= ======= =======
</TABLE>
----------
(1) Of the $154.8 million of principal repayments contractually due after June
30, 2001, $107.1 million have fixed-rates of interest and $47.7 million
have adjustable or floating rates of interest.
Contractual maturities of loans do not reflect the actual term of the
Bank's loan portfolio. The average life of mortgage loans is substantially less
than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. Scheduled principal amortization also reduces the average maturity of
the loan portfolio. The average life of mortgage loans tends to increase,
however, when current mortgage rates substantially exceed rates on existing
mortgages and conversely, decrease when rates on existing mortgages
substantially exceed current mortgage loan rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. All of the Bank's mortgage
lending is subject to its written, nondiscriminatory underwriting standards and
to loan origination procedures prescribed by its Board of Trustees. Decisions on
loan applications are made on the basis of detailed applications and property
valuations by independent appraisers approved by the Board of Trustees. The loan
applications are designed to determine the borrower's ability to repay, and the
more significant items on the applications are verified through the use of
credit reports, financial statements and confirmations.
4
<PAGE> 6
During fiscal 2000, mortgage loans have been originated by the Bank
primarily through referrals from real estate loan brokers and to a lesser
extent, from builders, walk-in customers, as well as through refinancing for
existing customers. The Bank's consumer loans have been originated primarily
through its branch network and its construction loans have been originated
primarily through local contractors and some walk-in customers.
It is the Bank's policy to obtain title insurance policies insuring
that the Bank has a valid lien on mortgaged real estate. Borrowers must obtain
fire and casualty insurance policies prior to closing and, when the property is
in a flood plain as designated by the Department of Housing and Urban
Development, flood insurance policies. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes, hazard insurance premiums and private mortgage insurance
premiums as they are due.
Under policies adopted by the Bank's Board of Trustees, the Bank limits
the loan-to-value ratio to 95% on residential mortgage loans and requires that
private mortgage insurance be obtained that reduces the Bank's loan-to-value
ratio to 80%. The loan-to-value ratio on second mortgages may not exceed 100% of
the property value including the amount of the first mortgage on the property.
Construction and commercial real estate loans generally are made for no more
than 95% and 80%, respectively, of the appraised value of the property. With
respect to construction loans, such value reflects the projected value of the
property upon completion.
Historically, the Bank has not been an active purchaser or seller of
loans. The sales activity conducted by the Bank during fiscal 2000, 1999 and
1998 primarily focused on the sale of student loans.
5
<PAGE> 7
The following table shows total loan origination, purchase and
repayment activities of the Bank during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate originations:
Residential:
Single-family $28,560 $18,252 $19,654 $ 9,798 $14,002
Multi-family 836 -- -- 550 --
Commercial 119 -- 360 835 --
Construction (1) 11,026 2,691 6,020 3,829 3,455
------- ------- ------- ------- -------
Total real estate loan
originations 40,541 20,943 26,034 15,012 17,457
Consumer and other loan
originations (2) 16,424 20,044 17,465 15,390 13,154
------- ------- ------- ------- -------
Total loan originations 56,965 40,987 43,499 30,402 30,611
Loan participation interests
purchased -- 500 1,000 29 --
------- ------- ------- ------- -------
Total loan originations
and loan participation
interests purchased 56,965 41,487 44,499 30,431 30,611
------- ------- ------- ------- -------
Students loans sold 865 952 1,107 719 550
Loan participation interests
sold -- -- -- -- 68
Principal loan repayments 37,881 39,991 36,890 28,330 28,897
Other, net (3) 136 349 242 44 233
------- ------- ------- ------- -------
Total principal loan
repayments and other 38,882 41,292 38,239 29,093 29,748
------- ------- ------- ------- -------
Net increase in loans
receivable, net and loans
held for sale $18,083 $ 195 $ 6,260 $ 1,338 $ 863
======= ======= ======= ======= =======
</TABLE>
----------
(1) Construction loans are classified as either a residential or commercial
real estate loan at the time of origination depending on the nature of the
property securing the loan. Construction loan originations totaled $11.0
million during fiscal 2000, of which $7.1 million were adjustable-rate,
single-family residential loans and $3.9 million were fixed-rate,
single-family residential loans.
(2) Includes student loans held for sale
(3) Includes transfers to real estate owned and all activity in the allowance
for possible loan losses.
LENDING PROGRAMS AND POLICIES
RESIDENTIAL LENDING. Historically, Laurel Savings has concentrated its
lending activity on the origination of long-term, fixed-rate residential
mortgage loans secured by one-to-four family residential properties. As a
result, at June 30, 2000, $82.2 million or 45.8% of the Bank's total loan
6
<PAGE> 8
portfolio consisted of long-term loans with fixed-rates of interest which were
secured by first mortgages on one-to-four family residential properties. During
fiscal 2000, 1999 and 1998, the Bank originated $8.1 million, $17.3 million and
$14.3 million, respectively, of fixed-rate mortgage loans. Due to the relatively
higher interest rate environment during fiscal 2000, the Bank found the largest
portion of its single-family loan demand to be for adjustable-rate loans.
The Bank's fixed-rate loans generally have maturities ranging from 15
to 30 years and are fully amortizing with monthly payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. Such
loans are originated under terms, conditions and documentation which permit them
to be sold to U.S. Government sponsored agencies. The Bank's fixed-rate loans
customarily include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage or the loan is
not repaid.
In addition, Laurel Savings originates adjustable rate mortgages
("ARMs") with up to a 30-year amortization schedule. On all ARMs currently
offered by the Bank, payments are adjusted with each interest rate adjustment so
that the term of the ARM is not affected. The Bank currently offers one, three,
and five year adjustable rate loans. Interest rate adjustments occur every one,
three or five years and are based on the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity that matches the loan type. All three
loan types limit interest rate increases to 6% over the life of the loan and
limit decreases to 2% below the initial rate. The one year ARM has a 2% maximum
increase per adjustment while the three and five year loans have a maximum
increase of 3% per adjustment. All of these loans may be converted to fixed rate
loans. The Bank does not offer ARMs with below market introductory or "teaser"
rates. Although Laurel Savings intends to continue to emphasize the origination
of ARMs in order to reduce the impact on its operations of rapid increases in
market rates of interest, such loans generally do not adjust as rapidly as
changes in the Bank's cost of funds. At June 30, 2000, $43.0 million or 24.0% of
the Bank's total loan portfolio consisted of ARMs on one-to-four family
residential real estate.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. The Bank originated
$836,000 of multi-family residential real estate loans and $119,000 of
commercial real estate loans in fiscal 2000. At June 30, 2000, the Bank's
multi-family residential real estate loans and commercial real estate loans
amounted to $2.5 million and $5.4 million, respectively, or 1.4% and 3.0% of the
total loan portfolio, respectively. Such loans generally earn rates of interest
which exceed the rates on residential real estate loans and are usually for
shorter terms. Such loans have been generally offered with interest rates that
adjust annually at 1% to 2% over the Bank Prime Lending Rate as published in the
Wall Street Journal. These loans have up to 30-year amortization schedules. The
Bank's multi-family real estate loans are secured primarily by apartment
buildings and its commercial real estate loans are secured primarily by other
income-producing properties located in the Pittsburgh MSA, including office
buildings and warehouses. Of the $7.9 million of commercial and multi-family
loans at June 30, 2000, $4.1 million have fixed rates of interest and $3.8
million have adjustable rates of interest.
Multi-family and commercial real estate lending entails significant
additional risks as compared with single-family residential property lending.
Multi-family and commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project. The success of such projects is sensitive to changes in
supply and demand conditions in the
7
<PAGE> 9
market for multi-family and commercial real estate as well as economic
conditions generally. Due to the Bank's low level of non-performing loans and
the generally higher rates of interest earned on commercial real estate and
multi-family loans the Bank plans to increase its origination of these types of
loans in the future.
The Bank evaluates all aspects of commercial and multi-family real
estate loan transactions in order to mitigate the risk to the Bank to the
greatest extent possible. The Bank seeks to ensure that the property securing
the loan will generate sufficient cash flow to adequately cover operating
expenses and debt service payments. To this end, permanent commercial and
multi-family real estate loans are generally made at a loan-to-value ratio of
75% or less and with a minimum debt service coverage generally of one to one and
one-half times net rental income. In underwriting commercial and multi-family
real estate loans, consideration is given to the property's operating history,
future operating projections, current and projected occupancy, position in the
local and regional market, location and physical condition. The underwriting
analysis also includes credit checks and a review of the financial condition of
the borrower. A narrative appraisal report prepared by an outside appraiser,
qualified by an independent member of the American Institute of Appraisers
("MAI") or a similar organization, is commissioned by the Bank to substantiate
property values for commercial and multi-family real estate loan transactions,
which appraisal, in final form, the Bank obtains prior to closing the loan. The
Bank also obtains in virtually all cases full personal loan guarantees from the
borrower, or in the case of a corporate borrower, the loan guarantees from the
persons controlling the borrower.
CONSTRUCTION LENDING. The Bank's construction loans accounted for 27.2%
of the real estate loans originated in fiscal 2000, 12.8% in fiscal 1999 and
23.1% in fiscal 1998. Such loans are generally used to fund the construction of
residential properties for owner-occupancy although the Bank has originated
commercial construction and land acquisition and development loans to a limited
degree. Most of the Bank's residential construction loans are originated in
connection with providing permanent financing on the construction project. The
interest rate on the permanent loan is set at the time of the origination of the
construction loan. Construction loans are classified as either residential or
commercial real estate loans at the time of origination, depending on the nature
of the property securing the loan. At June 30, 2000, construction loans amounted
to $10.2 million, all of which were originated for the construction of
residential properties. The increase in origination of construction loans during
fiscal 2000 was primarily due to increased demand for new homes in the Bank's
market area.
A significant portion of the Bank's construction loans are made to
builders on pre-sold properties and to a lesser extent unsold properties.
Speculative construction loans on unsold properties carry more risk than
pre-sold or individual construction loans originated by the Bank because the
payoff for the loan is dependent on the builder's ability to sell the property
prior to the time that the construction loan is due. The Bank attempts to
mitigate these risks by, among other things, working with builders with whom it
has established relationships and by generally limiting the number of unsold
homes under construction.
The Bank has been active in residential construction lending for many
years and intends to continue its involvement in such lending in the future.
Although the Bank has not experienced any significant difficulties, construction
lending is generally considered to involve a higher degree of risk
8
<PAGE> 10
of loss than long-term financing on improved, occupied real estate. Risk of loss
on construction loans is dependent largely upon the accuracy of the initial
appraisal of the property's projected value at completion of construction as
well as the estimated costs of construction, including interest. During the
construction phase, a number of factors could result in delays and cost
overruns. If either estimate proves to be inaccurate and the borrower is unable
to provide additional funds, the lender may be required to advance funds beyond
the amount originally committed to permit completion of the project and/or be
confronted at the maturity of the construction loan with a project whose value
is insufficient to assure full repayment. In addition, if the borrower is unable
to obtain permanent financing prior to the expiration of the term of the
construction loan and has not sold his or her existing residence due to market
conditions, the Bank could experience a risk of loss in the event of the
borrower's existing residence is not sold for an extended period of time. In
such instance, the Bank generally requires the borrower to sell the construction
property, rent the property or execute a deed-in-lieu of foreclosure.
CONSUMER LENDING. The Bank has continued to emphasize the origination
of consumer loans, installment loans and home equity loans, and such loans have
increased as a percentage of the total loan portfolio from 14.6% of the total
loan portfolio at June 30, 1996 to 19.6% of the total loan portfolio at June 30,
2000, primarily as a result of the Bank's increased origination of fixed-rate
home equity loans. The Bank originated $16.4 million, $20.0 million and $17.5
million of consumer loans in fiscal 2000, 1999 and 1998 out of total loan
originations and purchases of $57.0 million, $41.5 million and $44.5 million,
respectively. Although consumer loans may involve a greater risk of loss than
residential real estate loans due to the nature of the collateral involved (or
the absence of collateral), the Bank carefully reviews the creditworthiness of
the borrower and, where applicable, the value of the collateral for such loans.
However, since the amount outstanding on each individual loan is smaller, the
risk of financial loss per loan is lower when compared to mortgage and
commercial lending.
Installment loans, consisting primarily of home equity loans, accounted
for $34.9 million or 99.4% of all consumer loans at June 30, 2000. Installment
loans generally have terms of less than five years with fixed rates of interest.
Home equity loans typically have fixed interest rates and terms up to 20 years,
although a majority of such loans have terms of ten years or less. The Bank does
not require that it hold the first mortgage on the secured property. The Bank
also offers a home equity line of credit with an adjustable rate of interest.
Loans on savings accounts are also offered with the interest rate set
at the higher of the underlying collateral rate plus 3% or the current Federal
Reserve Board discount rate plus 5%, the interest rate being adjusted if the
rate on the account or the Federal Reserve Board discount rate changes. Such
loans are generally made for up to 90% of the amount in the savings account and
accounted for $211,000 or .6% of the consumer loan portfolio at June 30, 2000.
REGULATORY REQUIREMENTS. Under the provisions of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), the
aggregate amount of loans that the Bank may make to any one borrower is limited
to the loans to one borrower limitations applicable to national banks (i.e., 15%
of unimpaired capital and unimpaired surplus plus an additional 10% of
unimpaired capital and unimpaired surplus when the loan is fully secured by
readily marketable securities). At June 30, 2000, the Bank's loans to one
borrower limit was approximately $3.5 million and the largest aggregate amount
of loans by the Bank to any one borrower, including related entities, was a
$714,000 loan secured by rental properties which includes an office building.
This loan was current as of June 30, 2000.
9
<PAGE> 11
Federal and Department regulations as well as the Pennsylvania Banking
Act of 1965, as amended (the "Act") also limit the amount of a real estate loan
made by a Pennsylvania-chartered state savings bank to a specified percentage of
the value of the property securing the loan (referred to as the "loan-to-value
ratio"). Such regulations provide that at the time of origination, a real estate
loan may not exceed 100% of the appraised value of the secured property. Maximum
loan-to-value ratios for each type of real estate loan made by an institution
are to be established by the institution's board of trustees. If the amount of a
home loan originated or refinanced is in excess of 80% of the appraised value,
the institution is required to obtain private mortgage insurance on the portion
of the principal amount of the loan that exceeds 80% of the appraised value of
the secured property.
LOAN SERVICING AND LOAN FEES
Interest rates charged by Laurel Savings on mortgage loans are
primarily determined by competitive loan rates offered in its market area.
Mortgage loan rates reflect factors such as general interest rate levels, the
supply of money available to the savings industry and the demand for such loans.
These factors are, in turn, affected by general economic conditions, the
monetary policies of the federal government, including the Federal Reserve
Board, the general supply of money in the economy, tax policies and governmental
budget matters.
In addition to interest earned on loans and income from servicing of
loans, the Bank receives fees in connection with loan modifications, late
payments, changes of property ownership and for miscellaneous services related
to its loans. Funds from these activities varies from period to period with the
volume and type of loans originated, sold and purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in the markets served by the Bank. The fees received by the Bank in
connection with the origination of mortgage loans on existing properties
generally amount from zero to three points, with a point being equivalent to 1%
of the principal amount of the loan.
In accordance with Statement of Financial Accounting Standards No. 91,
loan origination fees and certain related direct loan origination costs are
offset and the resulting net amount is deferred and amortized over the life of
the related loans as an adjustment to the yield of such related loans. In
addition, commitment fees are offset against related direct costs and the
resulting net amount is generally recognized over the life of the related loans
as an adjustment of yield, if the commitment is exercised, or if the commitment
expires unexercised, recognized upon expiration of the commitment.
NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
When a borrower fails to make a required payment on a loan, Laurel
Savings attempts to cause the deficiency to be cured by contacting the borrower
and seeking payment. A late charge is generally assessed after 20 days. Contacts
are generally made after a payment is more than 30 days past due. In most cases,
the deficiencies are cured promptly. If the delinquency exceeds 90 days and is
not cured through the Bank's normal collection procedures, the Bank will
generally institute measures to remedy the default, including in the case of
mortgage loans, commencing a foreclosure action or accepting from the mortgagor
a voluntary deed of the secured property in lieu of foreclosure or, obtaining
from the borrower the collateral which secures a non-mortgage obligation.
10
<PAGE> 12
Loans are placed on nonaccrual status when, in the judgment of
management, the probability of collection is deemed to be insufficient to
warrant further accrual. Loans which are delinquent 90 days or more are placed
on nonaccrual status. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is deducted from interest income. Consumer loans
more than 120 days or 180 days delinquent (depending on the nature of the loan)
are generally required to be written off.
If a foreclosure action is instituted and the loan is not reinstated,
paid in full or refinanced, the property is sold at a public auction at which
the Bank may participate as a bidder at the sale. If the Bank is the successful
bidder, the acquired property is then included in the Bank's "real estate owned"
account until it is sold. The Bank is permitted to finance the sales of these
properties by "loans to facilitate," which involve a lower down payment or a
longer term than would be generally allowed by the Bank's underwriting
standards. At June 30, 2000, the Bank had one loan to facilitate amounting to
$27,000.
The remedies available to the Bank in the event of a default or
delinquency with respect to certain residential mortgage loans, and the
procedures by which such remedies may be exercised, are subject to Pennsylvania
law and regulations. Under Pennsylvania law, a lender is prohibited from
accelerating the maturity of a residential mortgage loan, commencing any legal
action (including foreclosure proceedings) to collect on such loan, or taking
possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrower's right to correct such delinquency.
In addition, the lender's ability to exercise any remedies it may have with
respect to loans for one- or two-family principal residences located in
Pennsylvania is further restricted (including the lender's right to foreclose on
such property) until the lender has provided the delinquent borrower with
written notice detailing the borrower's rights to seek consumer credit
counseling and state financial assistance and until the borrower has exhausted
or failed to pursue such rights. These provisions of Pennsylvania law may delay
for several months the Bank's ability to foreclose upon residential loans
secured by real estate located in the Commonwealth of Pennsylvania. In addition,
the uniform Federal National Mortgage Association ("FNMA")/ Federal Home Loan
Mortgage Corporation ("FHLMC") lending documents used by the Bank, as well as
most other residential lenders in Pennsylvania, require notice and a right to
cure similar to that provided under Pennsylvania law.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or fair value at
the date of acquisition and any write-down resulting therefrom is charged to the
allowance for losses. All costs incurred in maintaining the Bank's interest in
the property are capitalized between the date the loan becomes delinquent and
the date of acquisition. After the date of acquisition, all costs incurred in
maintaining the property are expensed and costs incurred for the improvement or
development of such property are capitalized.
11
<PAGE> 13
The following table sets forth information regarding the Bank's
nonaccrual loans and real estate owned at the dates indicated. The Bank did not
have any troubled debt restructurings at June 30, 2000.
<TABLE>
<CAPTION>
June 30,
------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Single-family residential real estate $476 $364 $355 $600 $364
Commercial real estate 36 -- 119 158 198
Multi-family residential 22 22 23 28 39
Consumer and other loans 26 90 64 129 11
---- ---- ---- ---- ----
Total nonaccruing loans $560 $476 $561 $915 $612
==== ==== ==== ==== ====
Total nonperforming loans as a
percentage of net loans receivable .33% .31% .37% .63% .43%
==== ==== ==== ==== ====
Total real estate owned, net of related
reserves $ -- $377 $143 $ -- $219
==== ==== ==== ==== ====
Total nonperforming loans and real
estate owned as a percentage of total assets .22% .37% .32% .43% .42%
==== ==== ==== ==== ====
</TABLE>
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories: "substandard,"
"doubtful" and "loss." For assets classified as "substandard" and "doubtful,"
the institution is required to establish prudent general loan loss reserves in
accordance with Generally Accepted Accounting Principles ("GAAP"). Assets
classified "loss" must be completely written off. A category designated "special
mention" also must be established and maintained for assets not currently
requiring classification but having potential weaknesses or risk characteristics
that could result in future problems. An institution is required to develop an
in-house program to classify its assets, including investments in subsidiaries,
on a regular basis and to set aside appropriate loss reserves on the basis of
such classification. At June 30, 2000, the Bank's classified assets totaled
$606,000 all of which were assets classified as substandard. Assets classified
as substandard consisted of the Bank's nonperforming residential, multi-family
and commercial real estate loans, consumer loans and real estate owned, certain
loans which were delinquent between 15 and 90 days and other current loans which
have in the past displayed characteristics which reflect potential weaknesses.
ALLOWANCES FOR ESTIMATED LOAN LOSSES. Provisions for loan losses on
first mortgage and other loans are charged to earnings in amounts that result in
allowances appropriate, in management's judgment, to cover anticipated losses.
In determining the appropriate level of provisions for loan losses,
consideration is given to general economic conditions, diversification of loan
portfolios, historical loss experience, identified credit problems, delinquency
levels and adequacy of collateral. The Bank's allowances for loan losses totaled
$1.8 million at June 30, 2000 or 321.1% of total nonperforming loans at such
date. The Bank's management believes that its present allowances for
12
<PAGE> 14
losses are appropriate. However, while management uses the best information
available to make such determinations, future adjustments to the loan loss
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to such allowance based on their
judgements about information available to them at the time of their examination.
The Bank's asset classification committee, consisting of the Vice
President - Credit and Collections, the Chief Executive Officer and the Senior
Vice President-Finance, meets on at least a quarterly basis. The committee
reviews all non-performing assets to determine the adequacy of resources.
Adjustments are made as needed and the committee's findings are summarized in a
detailed report submitted to the Board of Trustees.
13
<PAGE> 15
The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $1,866 $1,852 $1,943 $1,899 $1,893
------ ------ ------ ------ ------
Charge-offs:
Residential real estate (53) (14) (71) (15) (20)
Commercial real estate -- -- (20) -- (10)
Consumer (46) (47) (61) (39) (51)
------ ------ ------ ------ ------
Total charge-offs (99) (61) (152) (54) (81)
------ ------ ------ ------ ------
Recoveries:
Residential real estate -- -- -- -- 1
Consumer 13 57 43 68 56
------ ------ ------ ------ ------
Total recoveries 13 57 43 68 57
------ ------ ------ ------ ------
Net (charge-offs) recoveries (86) (4) (109) 14 (24)
------ ------ ------ ------ ------
Provision for losses on loans 18 18 18 30 30
------ ------ ------ ------ ------
Balance at end of period $1,798 $1,866 $1,852 $1,943 $1,899
====== ====== ====== ====== ======
Allowance for loan losses as a
percent of total net loans
outstanding 1.06% 1.23% 1.23% 1.34% 1.32%
====== ====== ====== ====== ======
Allowance for loan losses as a
percent of nonperforming loans 321.07% 392.02% 330.12% 212.35% 310.29%
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding (.01)% --% (.07)% --% (0.02)%
====== ====== ====== ====== ======
</TABLE>
14
<PAGE> 16
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ -------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate(1) $ 898 75.5% $ 873 74.1% $ 603 76.7% $ 600 78.6% $ 598 79.0%
Multi-family real estate 25 1.4% 17 1.0% 26 1.6% 29 1.8% 30 1.9%
Commercial real estate 164 3.0% 177 3.5% 203 4.1% 237 3.8% 231 3.9%
Consumer and other 711 20.1% 655 21.4% 282 17.6% 250 15.8% 234 15.2%
Unallocated -- -- 144 -- 738 -- 827 -- 806 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $1,798 100.0% $1,866 100.0% $1,852 100.0% $1,943 100.0% $1,899 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
----------
(1) Includes construction loans.
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the FHLMC, the FNMA and the Government National Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. government and
it guarantees the timely payment of interest and the ultimate return of
principal within one year. The FHLMC mortgage-backed securities are not backed
by the full faith and credit of the United States, but because the FHLMC is a
U.S. government sponsored enterprise, these securities are considered high
quality investments with minimal credit risks. The GNMA is a government agency
within the Department of Housing and Urban Development which is intended to help
finance government assisted housing programs. The GNMA guarantees the timely
payment of principal and interest, and GNMA securities are backed by the full
faith and credit of the U.S. Government. The FNMA guarantees the timely payment
of principal and interest, and FNMA securities are indirect obligations of the
U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the
15
<PAGE> 17
securities are backed by pools of mortgages that have loans with interest rates
that are within a range and have varying maturities. The underlying pool of
mortgages, i.e., fixed rate or adjustable rate, as well as the prepayment risk,
are passed on to the certificate holder. Accordingly, the life of a
mortgage-backed pass-through security approximates the life of the underlying
mortgages.
The following table sets forth the composition and amortized cost of the
Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------
2000 1999 1998
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities held to maturity:
FNMA Remic $ 74 $ 100 $ 151
FHLMC Remic 323 972 900
------- ------- -------
Total $ 397 $ 1,072 $ 1,051
======= ======= =======
Mortgage-backed securities available for sale:
GNMA $ 4,197 $ 4,721 $ 3,973
FNMA 3,318 4,042 3,424
FHLMC 979 58 183
FNMA Remic -- -- 228
FHLMC Remic 2,584 2,994 3,454
------- ------- -------
Total $11,078 $11,815 $11,262
======= ======= =======
</TABLE>
16
<PAGE> 18
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at June 30, 2000 is
presented below.
<TABLE>
<CAPTION>
Amounts at June 30, 2000 Which Mature in
--------------------------------------------------------------
After Five
One Year After One to to Over 10
or Less Five Years 10 Years Years Total
-------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
FNMA Remic $ -- $ -- $ -- $ 74 $ 74
FHLMC Remic -- -- -- 323 323
---- ---- ---- ------- -------
Total $ -- $ -- $ -- $ 397 $ 397
==== ==== ==== ======= =======
Weighted average yield --% --% --% 6.6% 6.6%
==== ==== ==== ======= =======
Mortgage-backed securities
available for sale:
GNMA $ -- $ -- $ -- $ 4,197 $ 4,197
FNMA -- 17 -- 3,301 3,318
FHLMC -- -- -- 979 979
FHLMC Remic -- -- -- 2,584 2,584
---- ---- ---- ------- -------
Total $ -- $ 17 $ -- $11,061 $11,078
==== ==== ==== ======= =======
Weighted average yield --% 9.4% --% 7.1% 7.1%
==== ==== ==== ======= =======
</TABLE>
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank. At June 30, 2000, none of the Bank's
mortgage-backed securities were pledged to secure obligations of the Bank.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principles, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because to the extent that the Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the Bank
may not be able to reinvest the proceeds of such repayments and prepayments at a
comparable rate.
17
<PAGE> 19
For additional information relating to the Bank's mortgage-backed
securities, see Notes 1 and 3 of the Notes to the Consolidated Financial
Statements.
INVESTMENT SECURITIES. Under federal regulations, the Bank is permitted to
make certain securities investments. Investment decisions are made by authorized
officers of Laurel Savings within policies established by Laurel Savings' Board
of Trustees.
The Bank is authorized to invest in obligations issued or fully guaranteed
by the United States, certain federal agency obligations, certain time deposits,
negotiable certificates of deposit issued by commercial banks and other insured
financial institutions, investment grade corporate debt securities and other
specified investments.
The following table sets forth the composition and amortized cost of the
Bank's investment securities at each of the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------
2000 1999 1998
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Investment securities held to
maturity:
Corporate notes and
commercial paper $21,931 $12,439 $14,003
======= ======= =======
Investment securities available for sale:
Municipal obligations $21,500 $18,301 $ 8,914
Shay Financial Services
ARMs Fund 16,137 15,240 14,444
FNMA preferred stock 250 250 250
FHLMC preferred stock 250 250 250
FNMA stock 723 582 610
FHLMC stock 590 480 925
SLM Student Loan Trust 606 783 --
Standard Insurance Company stock 4 4 --
------- ------- -------
$40,060 $35,890 $25,393
======= ======= =======
</TABLE>
18
<PAGE> 20
The following table sets forth the composition and maturities of the
Bank's investment securities portfolio at June 30, 2000.
<TABLE>
<CAPTION>
Amounts at June 30, 2000 Which Mature In
---------------------------------------------------
One Year 1 to 5 5 to 10 Over 10
or Less Years Years Years Total
-------- ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Investment securities held to maturity:
Corporate notes and
commercial paper $ -- $2,499 $7,498 $11,934 $21,931
======= ====== ====== ======= =======
Weighted average
yield --% 6.4% 7.2% 7.6% 7.3%
======= ====== ====== ======= =======
Investment securities available for sale:
Municipal obligations $ -- $ -- $ 186 $21,314 $21,500
Shay Financial
Services Arms Fund (1) 16,137 -- -- -- 16,137
FMNA preferred stock (1) 250 -- -- -- 250
FHLMC preferred stock (1) 250 -- -- -- 250
FMNA stock (1) 723 -- -- -- 723
FHLMC stock (1) 590 -- -- -- 590
SLM Student Loan Trust -- -- 606 -- 606
Standard Insurance
Company stock (1) 4 -- -- -- 4
------- ------ ------ ------- -------
Total $17,954 $ -- $ 792 $21,314 $40,060
======= ====== ====== ======= =======
Weighted average
yield 6.0% --% 6.4% 5.4% 5.7%
======= ====== ====== ======= =======
</TABLE>
----------
(1) Such investment securities have no stated contractual maturity.
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been the principal source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives funds from
loan repayments and maturities and repayments of investment and mortgage-backed
securities. Borrowings may be used on a short-term basis to compensate for
seasonal or other reductions in deposits or inflows at less than projected
levels, as well as on a longer term basis to support expanded lending activities
or asset/liability management. During fiscal 2000, the Bank increased its
outstanding balance of FHLB advances by $13.4 million for asset/liability
management purposes.
19
<PAGE> 21
DEPOSITS. In recent years, the Bank has been required by market conditions
to rely increasingly on newly authorized types of short-term certificate
accounts and other deposit alternatives which have no fixed term and that pay
interest at rates that are more responsive to market interest rates than the
passbook accounts and regulated fixed-rate, fixed-term certificates that were
historically the Bank's primary sources of deposits. The types of deposits
currently offered by the Bank include passbook savings accounts, negotiable
order of withdrawal ("NOW") accounts, money market deposit accounts ("MMDAs"),
and certificates of deposit ranging in terms from 91 days to ten years. Included
among these savings programs are individual retirement accounts ("IRA") and
Keogh accounts.
The following table sets forth the distribution of the Bank's deposits by
type of deposit at the dates indicated.
<TABLE>
<CAPTION>
As of June 30,
-----------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- ----------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts $ 31,257 16.2% $ 30,426 16.7% $ 29,531 16.9%
NOW accounts 29,049 15.1 26,555 14.6 24,916 14.2
MMDAs 15,812 8.2 15,750 8.6 16,444 9.4
Fixed-rate certificates 84,811 44.0 79,518 43.7 73,961 42.2
Jumbo certificates 2,107 1.1 1,500 .8 2,000 1.1
IRA and Keogh accounts 29,627 15.4 28,369 15.6 28,538 16.2
-------- ----- -------- ----- -------- -----
Total $192,663 100.0% $182,118 100.0% $175,390 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The large variety of savings accounts offered by the Bank has increased
the Bank's ability to retain deposits and allowed it to be more competitive in
obtaining new funds, but has not eliminated the threat of disintermediation (the
flow of funds away from savings institutions into direct investment vehicles
such as government and corporate securities). However, these accounts have been
more costly than traditional accounts in periods of rising interest rates. In
addition, the Bank has become increasingly sensitive to short-term fluctuations
in deposit flows, due to customers becoming more rate conscious. As customers
have become more rate conscious and willing to move funds into higher yielding
accounts, the ability of the Bank to attract and maintain deposits and the
Bank's cost of funds have been, and will continue to be, significantly affected
by market conditions.
20
<PAGE> 22
The following table sets forth information relating to the Bank's deposit
flows during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
2000 1999 1998
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before
interest credited $ 4,090 $ 550 $(6,078)
Interest credited 6,455 6,178 6,449
------- ------- -------
$10,545 $ 6,728 $ 371
======= ======= =======
</TABLE>
The principal methods used by Laurel Savings to attract deposits include
the offering of a wide variety of services and accounts, competitive interest
rates, and convenient office locations and service hours. The Bank uses
traditional marketing methods to attract new customers and deposits, including
mass media advertising and direct mailings. The development of new deposit
accounts and services within the past several years has enhanced the Bank's
deposit gathering function. The Bank has also adopted a tiered pricing program
for its certificate accounts, providing higher rates of interest on its
long-term certificates in order to encourage depositors to invest in
certificates with longer maturities, thus reducing the interest-rate sensitivity
of the Bank's deposit portfolio.
The Bank's deposits are obtained primarily from persons who are residents
of Pennsylvania, particularly Allegheny and Butler counties. The Bank does not
advertise for deposits outside of Pennsylvania and management believes that an
insignificant amount of the Bank's deposits were held by nonresidents of
Pennsylvania at June 30, 2000. The Bank has not used brokers to obtain funds to
date and management of the Bank does not intend to utilize brokers to obtain
such deposits in the future.
The following table presents, by various interest rate categories, the
amounts of certificates of deposit at the dates indicated and the amounts at
June 30, 2000 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at June 30, 2000 Maturing
As of June 30, in the Year Ended June,
-------------------- ---------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
-------- -------- -------- ------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
2.00% to 3.99% $ 1,369 $ 364 $ 364 $ -- $ -- $ --
4.00% to 5.99% 91,112 68,203 47,798 12,518 3,244 4,643
6.00% to 7.99% 16,448 47,943 13,482 16,322 12,639 5,500
8.00% to 9.99% 458 35 35 -- -- --
-------- -------- -------- ------- -------- -------
Total $109,387 $116,545 $ 61,679 $28,840 $ 15,883 $10,143
======== ======== ======== ======= ======== =======
</TABLE>
21
<PAGE> 23
The Bank has attempted to encourage certificate holders to invest the
proceeds of their maturing certificates in longer term certificates of deposit
by offering commensurately higher interest rates in order to reduce the
vulnerability of the Bank to interest rate risk. To ensure a continuity of this
trend, as well as to maintain adequate deposit levels, the Bank expects to offer
competitive rates relative to its marketplace. The Bank is confident that by
competitively pricing these certificates, balance levels deemed appropriate by
management can be achieved on a continuing basis. If necessary, the Bank also
has the capacity to borrow from the FHLB of Pittsburgh and from other sources to
maintain adequate liquidity.
As of June 30, 2000, certificates of deposit in amounts of $100,000 or
more in the Bank amounted to $2.1 million. The following table sets forth as of
June 30, 2000 the distribution of certificates of deposit of $100,000 or more by
time remaining to maturity.
<TABLE>
<CAPTION>
Amount
--------------
(In Thousands)
<S> <C>
Three months or less $1,405
Over three through six months --
Over six though 12 months 300
Over 12 months 402
------
Total $2,107
======
</TABLE>
22
<PAGE> 24
The following table presents information concerning deposit accounts at
June 30, 2000, including the weighted average rate and the scheduled maturity of
certificates of deposit.
<TABLE>
<CAPTION>
% of Total Average
Amounts Deposits Rate
-------------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 31,257 16.2% 2.13%
Now accounts 29,049 15.1 1.02
MMDA's 15,812 8.2 2.24
-------- ----- ----
Total 76,118 39.5 1.73
-------- ----- ----
Certificates maturing by quarter:
September 30, 2000 19,990 10.4 5.11
December 31, 2000 14,255 7.4 5.20
March 31, 2001 16,835 8.7 5.52
June 30, 2001 10,599 5.5 5.64
September 30, 2001 12,762 6.6 5.88
December 31, 2001 9,428 4.9 5.88
March 31, 2002 5,160 2.7 5.98
June 30, 2002 1,490 0.8 5.60
September 30, 2002 5,654 2.9 6.30
December 31, 2002 7,045 3.7 6.68
March 31, 2003 1,219 0.6 5.59
June 30, 2003 1,965 1.0 6.90
Thereafter 10,143 5.3 5.97
-------- ----- ----
Total certificate accounts 116,545 60.5 5.67
-------- ----- ----
Total deposits $192,663 100.0% 4.11%
======== ===== ====
</TABLE>
BORROWINGS. Laurel Savings may obtain advances from the FHLB of
Pittsburgh upon the security of the capital stock of the FHLB which it owns,
deposits with the FHLB of Pittsburgh and certain of its home mortgages, provided
certain standards related to creditworthiness are met. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. FHLB advances are generally available to
meet seasonal and other withdrawals of savings accounts and to expand lending,
as well as to aid the efforts of members to establish better asset/liability
management by extending the maturities of liabilities. At June 30, 2000, 1999
and 1998, the Bank had $33.4 million, $20.0 million and $17.0 million,
respectively, of FHLB advances outstanding.
23
<PAGE> 25
The following table presents certain information regarding FHLB
advances for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $22,736 $18,555 $12,998
Maximum amount
outstanding at any month-
end during the period $33,424 $20,031 $17,035
Weighted average interest
rate during the period 5.67% 5.43% 5.54%
Amount outstanding at the
end of the period $33,424 $20,029 $17,033
Weighted average rate at the
end of the period 6.34% 5.41% 5.49%
</TABLE>
Many financial institutions obtain funds from sales of securities to
institutional investors under agreements to repurchase ("institutional
repurchase agreements"), which are considered borrowings. The Bank has not
utilized and has no present intention to utilize institutional repurchase
agreements as a source of funds.
SUBSIDIARIES
The Bank has one wholly owned subsidiary, Laurel Financial Services
Corporation ("LFSC"), which is the result of combining its former wholly owned
subsidiaries of All-Par Service Corporation and Pesa Service Corporation. LFSC
is currently inactive. At June 30, 2000, LFSC had no assets or liabilities.
EMPLOYEES
The Bank had 40 full-time employees and 10 part-time employees as of
June 30, 2000. None of the employees are represented by a collective bargaining
agent, and the Bank believes it enjoys good relations with its personnel.
24
<PAGE> 26
COMPETITION
The Bank's primary market area consists of Allegheny and Butler
counties, Pennsylvania, in the north suburban Pittsburgh area. Substantially all
of the Bank's savings deposits are received from residents of its primary market
area, and most of its loans are secured by properties in this area.
Laurel Savings faces substantial competition both in attracting
deposits and in making mortgage and other loans in its primary market area.
Competition for the origination of real estate loans principally comes from
other savings institutions, commercial banks and mortgage-banking companies
located in the Pittsburgh MSA. The Bank's most direct competition for deposits
has historically also come from other savings institutions, commercial banks and
credit unions located in the Pittsburgh MSA. In times of high interest rates,
Laurel Savings also encounters significant competition for investors' funds from
short-term money market securities and other corporate and government
securities.
Laurel Savings competes for loans principally through the use of
competitive interest rates and loan fees it charges on its loan programs.
Further, Laurel Savings believes it offers a high degree of professionalism and
quality in the services it provides borrowers and their real estate brokers. It
competes for deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours, and convenient branch locations with
interbranch deposit and withdrawal privileges at each.
25
<PAGE> 27
REGULATION
Set forth below is a brief description of certain laws and regulations
which together with the descriptions of laws and regulations contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Bank are regulated. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
THE COMPANY
GENERAL. The Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is
subject to regulation and supervision by the Federal Reserve Board and the
Department. The Company is required to file annually a report of its operations
with, and is subject to examination by, the Federal Reserve Board and the
Department.
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. Pennsylvania banking law permits the interstate acquisition of banking
institutions by bank holding companies on a regional and reciprocal basis. See
"- The Bank - Interstate Acquisitions." No approval under the BHCA is required,
however, for a bank holding company already owning or controlling 50% of the
voting shares of a bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier
26
<PAGE> 28
services. The Federal Reserve Board also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not (90 days or more) past-due or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.
The Company is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
27
<PAGE> 29
THE BANK
GENERAL. The Bank is incorporated under the Pennsylvania Banking Code
of 1965, as amended (the "Banking Code") and is subject to extensive regulation
and examination by the Department and by the FDIC, which insures its deposits to
the maximum extent permitted by law, and is subject to certain requirements
established by the Federal Reserve Board. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. There are periodic examinations by the Department
and the FDIC to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Department, the FDIC or the Congress could have a
material adverse impact on the Company, the Bank and their operations.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examination of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing significant growth and have well diversified
risk, including no undue interest rate risk exposure,
28
<PAGE> 30
excellent asset quality, high liquidity, good earnings and, in general, which
are considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill, and certain purchased mortgage
servicing rights and purchased credit and relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 2000, the
Bank met each of its capital requirements.
29
<PAGE> 31
The following table sets forth certain information concerning the
Bank's regulatory capital at June 30, 2000.
<TABLE>
<CAPTION>
Tier 1 Tier 2
Tier 1 Risk- Risk-
Core Based Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Equity Capital (1) $23,344 $23,344 $23,344
Plus general valuation allowances (2) -- -- 1,774
------- ------- -------
Total regulatory capital 23,344 23,344 25,118
Minimum required capital 9,902 5,676 11,353
------- ------- -------
Excess regulatory capital $13,442 $17,668 $13,765
======= ======= =======
Regulatory capital as a percentage (3) 9.43% 16.45% 17.70%
Minimum required capital percentage 4.00 4.00 8.00
------- ------- -------
Excess regulatory capital percentage 5.43% 12.45% 9.70%
======= ======= =======
</TABLE>
----------
(1) Represents equity capital of the Bank as reported to the FDIC and the
Department for the quarter ended June 30, 2000.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total assets of
$247,551. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighed assets of $141,884.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage
30
<PAGE> 32
or bankers' blanket bond group insurance coverage for insured depository
institutions, and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements.
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
INTERSTATE ACQUISITIONS. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in Delaware, the District of
Columbia, Indiana, Kentucky, Maryland, New Jersey, Ohio, Virginia and West
Virginia (collectively, "regional institutions") to acquire the voting stock of,
merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered savings bank, (collectively, "Pennsylvania institutions")
and (ii) the establishment of branches in Pennsylvania by regional institutions,
in each case subject to certain conditions including reciprocal legislation in
the state in which the regional institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania institutions and approval by
the Pennsylvania Department of Banking. The statute also provides for nationwide
branching by Pennsylvania-chartered savings banks and savings and loan
associations, subject to Pennsylvania Department of Banking approval and certain
other conditions. Of the states within the region, Delaware, Maryland, New
Jersey, Ohio and West Virginia currently have laws that permit Pennsylvania
institutions to branch into such states and/or acquire savings institutions
located in such states.
31
<PAGE> 33
TAXATION
FEDERAL AND STATE TAXATION
The Company and Bank are subject to federal income tax under the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Company and
the Bank.
FISCAL YEAR. The Company and the Bank file consolidated federal income
tax returns on the basis of a fiscal year ending on June 30.
ACCRUAL METHOD OF ACCOUNTING. For federal income tax purposes, the
Company and the Bank currently report income and expenses on the accrual basis
method of accounting.
BAD DEBT RESERVES. Savings institutions such as the Bank, having
average adjusted assets of less than $500 million are allowed to utilize the
experience method of Internal Revenue Code Section 585 to compute its bad debt
deduction.
The experience method permits the Bank to deduct an amount necessary to
increase its reserve for loan losses, with certain limitations, to a level
computed using a six-year moving average based on the total loans outstanding at
the close of the taxable year. The Bank may also use the specific charge-off
method.
The bad debt deduction under the experience method is equal to the
greater of two alternatives. Under the first alternative, the Bank computes the
ratio of: (1) total bad debts net of recoveries sustained during the taxable
year and during the five preceding taxable years; to (2) the sum of "loan
outstanding" at the close of each of those six years. This ration is then
applied to the loans outstanding at the close of the taxable year, and the
result of this calculation constitutes the maximum reserve balance. The maximum
addition for the taxable year under the first alternative is the amount required
to bring the reserve to this balance. Under the second alternative (referred to
as the minimum addition rule), the Bank can claim a deduction to bring the
reserve balance to the base-year level.
DISTRIBUTIONS. If the Bank makes a distribution to stockholders, and
the distribution is treated as being from its accumulated bad debt reserves, the
distribution will cause the Bank to have additional taxable income. A
distribution to stockholders is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "nondividend distribution." A distribution in respect of stock
is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, exceeds the
Bank's current and post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a nondividend distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
32
<PAGE> 34
MINIMUM TAX. The Code imposes the corporate minimum tax from an add-on
tax to an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally will apply to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and will be payable
to the extent such AMTI is in excess of an exemption amount. The Code provides
that an item of tax preference is the excess of the bad debt deduction over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) 75% of adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses).
NET OPERATING LOSS CARRYOVERS. For years beginning after August 5,
1997, financial institutions like the Bank may carry back net operating losses
("NOLs") to the preceding two taxable years and forward to the succeeding 20
taxable years. As of June 30, 2000, the Bank had no net operating loss carryover
for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, however, if a corporation owns less than 20% of the stock of a
corporation distributing a dividend, it may deduct only 70% of dividends
received or accrued on its behalf. A corporation may deduct 100% of dividends
from a member of the same affiliated group of corporations.
The Company's federal income tax returns for its tax years beginning
after June 30, 1997 and subsequent periods are open under the statute of
limitations and are subject to review by the Internal Revenue Service.
STATE TAXATION. The Company is subject to the Corporate Net Income Tax
and Capital Stock Tax of the Commonwealth of Pennsylvania. Dividends received
from the Bank qualify for a 100% dividends received deduction and are not
subject to Corporate Net Income Tax. In addition, the Company's investments in
its subsidiaries qualify as exempt intangible assets and greatly reduce the
amount of Capital Stock Tax assessed.
The Bank is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Bank's financial net income determined
in accordance with generally accepted accounting principles with certain
adjustments. The tax rate under the Mutual Thrift Institutions Tax is 11.5%.
Interest on state and federal obligations is excluded from net income. An
allocable portion of interest expense incurred to carry the obligations is
disallowed as a deduction.
33
<PAGE> 35
ITEM 2. PROPERTIES.
The following table sets forth certain information as of June 30, 2000
with respect to the offices of the Company and Laurel Savings.
<TABLE>
<CAPTION>
Net Book Value of Property or
Owned or Lease Leasehold Improvements as of
Location Leased Expiration Date June 30, 2000
---------------------------- -------- --------------- -----------------------------
<S> <C> <C> <C>
Allegheny County:
363 Butler Street
Etna Owned $ 102
1416 Mt. Royal Blvd.
Glenshaw Owned 153
1801 Jancey Street
Morningside, Pittsburgh Leased 2001(1) --
2724 Harts Run Road
Allison Park Owned 502
744 Little Deer Creek Road
Russellton Owned 80
Butler County:
125 West Main Street
Saxonburg Owned 169
</TABLE>
----------
(1) There is presently a five year option to extend this lease.
The Bank also has ATMs in its branch offices located at 363 Butler
Street, 744 Little Deer Creek Road, Russellton, 2724 Harts Run Road, 125 West
Main Street and 1801 Jancey Street. The Bank participates in the MAC(TM),
Cirrus(TM), Money Station(TM) and Jeanie(TM) shared ATM network systems which
provides customers with access to their deposits at thousands of locations
throughout Pennsylvania, the United States and many foreign countries.
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Bank are not involved in any pending legal
proceedings other than routine, non-material legal proceedings occurring in the
ordinary course of business.
34
<PAGE> 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from pages
1 and 3 of the Company's Annual Report to Stockholders attached hereto as
Exhibit 13 (the "2000 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page
29 of the Company's 2000 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
30 to 42 of the Company's 2000 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
30 to 32 of the Company's 2000 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
7 to 28 of the Company's 2000 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
"Information With Respect to Nominees for Director, Directors Whose Terms
Continue and Executive Officers" in the Company's Proxy Statement for the Annual
Meeting of Stockholders for fiscal 2000 ("Proxy Statement").
35
<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
"Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
"Principal Holders of Common Stock" and "Information With Respect to Nominees
For Director, Directors Whose Term Continues and Executive Officers" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13 hereto):
Independent Auditors' Report
Consolidated Statements of Financial Condition at
June 30, 2000 and 1999
Consolidated Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
36
<PAGE> 38
(3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Exhibits Page
--- -------- ----
<S> <C> <C>
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Common Stock Certificate *
10.1 1987 Stock Compensation Program *
10.2 1993 Key Employee Stock Compensation Program **
10.3 1993 Directors' Stock Option Plan **
10.4 1996 Stock Option Plan ***
10.5 Employment agreement between Laurel Savings Bank and
Edwin R. Maus ***
11 Earnings Per Share Computation
13 2000 Annual Report to Stockholders
21 See "Business - Subsidiaries"
for the required information.
23 Consent of KPMG LLP
27 Financial Data Schedule
</TABLE>
----------
* Incorporated by reference to the Company's Registration Statement on
Form S-4.
** Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1994.
*** Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1997.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 2000.
(c) See (a)(3) above for all exhibits and the Exhibit Index.
(d) There are no other financial statements and Financial Statement
Schedules which were excluded from the 2000 Annual Report to
Stockholders which are required to be included herein.
37
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAUREL CAPITAL GROUP, INC.
By: /s/ Edwin R. Maus
----------------------------
Date: September 28, 2000 Edwin R. Maus, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Arthur G. Borland Date: September 28, 2000
----------------------------------------------------
Arthur G. Borland, Director
/s/ Richard J. Cessar Date: September 28, 2000
----------------------------------------
Richard J. Cessar, Chairman of the Board
/s/ Annette D. Ganassi Date: September 28, 2000
----------------------------------------
Annette D. Ganassi, Director
/s/ Richard S. Hamilton Date: September 28, 2000
----------------------------------------
Richard S. Hamilton, Director
/s/ Harvey J. Haughton Date: September 28, 2000
----------------------------------------
Harvey J. Haughton, Director
38
<PAGE> 40
/s/ Edwin R. Maus Date: September 28, 2000
----------------------------------------
Edwin R. Maus, Director, President
and Chief Executive Officer
/s/ J. Harold Norris Date: September 28, 2000
----------------------------------------
J. Harold Norris, Director
/s/ John A. Howard, Jr. Date: September 28, 2000
----------------------------------------
John A. Howard, Jr., Senior Vice President,
Chief Financial Officer and Corporate
Secretary/Treasurer
39
