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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
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.: 0-23010
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LAUREL CAPITAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1717451
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2724 HARTS RUN ROAD
ALLISON PARK, PENNSYLVANIA 15101
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(Address) (Zip Code)
Registrant's telephone number, including area code: (412) 487-7400
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
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. [ ]
As of September 13, 2002, the aggregate value of the shares of Common Stock of
the Registrant issued and outstanding on such date, which excludes shares held
by all directors and officers of the Registrant as a group, was approximately
$34.4 million. This figure is based on the mean of the bid and asked prices of
$19.675 per share of the Registrant's Common Stock on September 13, 2002.
Number of shares of Common Stock outstanding as of September 13, 2002: 1,879,724
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,
2002 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 2002 are incorporated into
Part III, Items 10 through 13 of this Form 10-K.
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. Additionally, the Bank has one active subsidiary,
Laurel Financial Group, Inc. ("LFG") whose headquarters are located in
Wilmington, Delaware. At June 30, 2002 LFG had assets of approximately $5.5
million consisting primarily of single-family residential loans. At June 30,
2002, the Company had total assets of $278.1 million and stockholders' equity of
$26.6 million or 9.56% of total assets. In addition, at such date, the Bank's
core capital of $25.5 million and tier I and tier II risk-based capital of $25.5
million and $27.4 million, respectively, exceeded the required amounts by $14.8
million, $19.8 million and $16.0 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"). 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 STAR(TM), Cirrus(TM), Money Station(TM) and Jeanie(TM)
automatic teller machine ("ATM") networks which provide customers with access
to their deposits at
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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-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 4.7%
compared to 5.5% for the state of Pennsylvania and 5.9% for the United States.
Housing costs are below the national average resulting in over 71.8% of the
area's residents owning their own home. 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, 2002, Laurel Savings' total loan portfolio amounted to $184.8
million, representing approximately 66.5% of the Bank's total assets at that
date. Permanent loans secured by single-family (one-to-four units) residential
properties amounted to $131.3 million or 71.1% of the total loan portfolio at
June 30, 2002. At June 30, 2002, multi-family (over four units) residential
loans amounted to $3.2 million or 1.7% of the total loan portfolio while
construction loans (all of which were for the construction of single-family
residential properties) totaled $9.7 million or 5.3% of the total loan portfolio
and commercial real estate loans totaled $4.5 million or 2.4% of the total loan
portfolio. The Bank's consumer loans, the second largest component of the Bank's
total loan portfolio, amounted to $34.5 million or 18.7% of such portfolio at
June 30, 2002. Commercial loans, which make up the remainder of the portfolio,
amounted to $1.6 million or 0.8% of the loans outstanding at June 30, 2002.
2
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
As of June 30,
---------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
------ -- ------ -- ------ -- ------ -- ------ --
(Dollars in Thousands)
Real estate loans:
Single-family $131,359 71.1% $130,039 70.3% $125,276 69.8% $112,334 72.6% $114,972 73.9%
Multi-family 3,202 1.7% 2,892 1.6% 2,476 1.4% 1,612 1.0% 2,474 1.6%
Construction (1) 9,687 5.3% 10,763 5.8% 10,167 5.7% 2,268 1.5% 4,341 2.8%
Commercial 4,496 2.4% 5,051 2.7% 5,391 3.0% 5,375 3.5% 6,391 4.1%
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total real estate
loans 148,744 80.5% 148,745 80.4% 143,310 79.9% 121,589 78.6% 128,178 82.4%
Commercial loans 1,560 .8% 1,707 .9% 919 .5% 941 .6% 650 .4%
Consumer loans (2) 34,461 18.7% 34,441 18.7% 35,110 19.6% 32,101 20.8% 26,723 17.2%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total loans $184,765 100.0% $184,893 100.0% $179,339 100.0% $154,631 100.0% $155,551 100.0%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Loans in process (4,719) (6,160) (7,796) (987) (1,953)
Allowance for loan
losses (1,803) (1,759) (1,798) (1,866) (1,852)
Unamortized costs
and fees 79 (66) (224) (388) (622)
-- ---- ----- ----- -----
Net loans receivable $178,322 $176,908 $169,521 $151,390 $151,124
======== ======== ======== ======== ========
Loans held for sale (3) $1,371 $1,701 $1,514 $1,562 $1,633
====== ====== ====== ====== ======
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(1) The $9.7 million construction loan portfolio outstanding at June 30, 2002
consisted of adjustable-rate construction loans totaling $4.7 million and
fixed-rate construction loans totaling $5.0 million.
(2) Consumer loans consist primarily of installment loans, auto loans, home
equity 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 2002 Annual Report to Stockholders ("Annual
Report") set forth as Exhibit 13 hereto.
(3) Loans held for sale consist of guaranteed student loans.
3
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, 2002 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.
Contractual Maturities in Year Ended June 30,
----------------------------------------------------------------------------------------------
Total
Outstanding
At June 30, 2004- 2006- 2008- 2013- 2024 and
2002 2003 2005 2007 2012 2023 Thereafter
----------- ------ ------ ------ ------ ------ ----------
(In Thousands)
Fixed-rate mortgage
Loans $ 99,590 $4.363 $ 9,078 $9,518 $20,601 $34,367 $21,663
Adjustable-rate
mortgage loans 39,467 1,259 1,788 1,935 5,686 13,454 15,345
Construction 9,687 9,687 -- -- -- -- --
Consumer and other
Loans 36,021 8,184 9,480 6,373 8,313 3,671 --
------ ----- ----- ----- ----- ----- ------
Total $184,765 $23,493 $20,346(1) $17,826(1) $34,600(1) $51,492(1) $37,008(1)
======== ======= ======= ======= ======= ======= =======
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(1) Of the $161.3 million of principal repayments contractually due after June
30, 2003, $120.6 million have fixed interest rates and $40.7 million have
adjustable or floating interest rates.
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. Loan originations are derived from
a number of sources such as mortgage correspondents, mortgage bankers, existing
customers, borrowers, builders and walk-in customers. 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.
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
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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 2002, 2001 and 2000
primarily focused on the sale of student loans.
The following table shows total loan origination, purchase and repayment
activities of the Bank during the periods indicated.
Year Ended June 30,
2002 2001 2000 1999 1998
--------- --------- --------- --------- -------
(In Thousands)
Real estate originations:
Residential:
Single-family 30,238 $13,790 $28,560 $18,252 $19,654
Multi-family 1,179 1,267 836 -- --
Commercial 1,070 530 119 -- 360
Construction (1) 11,926 12,268 11,026 2,691 6,020
------- ------- ------- ------- -------
Total real estate loan
originations 44,413 27,855 40,541 20,943 26,034
Consumer and other loan
originations (2) 21,773 13,702 16,424 20,044 17,465
------- ------- ------- ------- -------
Total loan originations 66,186 41,557 56,965 40,987 43,499
Loan participation interests
purchased -- -- -- 500 1,000
------- ------- ------- ------- -------
Total loan originations
and loan participation
interests purchased 66,186 41,557 56,965 41,487 44,499
------- ------- ------- ------- -------
Students loans sold 1,098 687 865 952 1,107
Principal loan repayments 63,759 32,842 37,881 39,991 36,890
Other, net (3) 245 454 136 349 242
------- ------- ------- ------- -------
Total principal loan
repayments and other 65,102 33,983 38,882 41,292 38,239
------- ------- ------- ------- -------
Net increase in loans
receivable, net and loans
held for sale $ 1,084 $ 7,574 $18,083 $ 195 $ 6,260
======= ======= ======= ======= =======
5
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(1) Construction loans are classified as either a residential or commercial
real estate loan at the time of origination depending on the nature of the
property securing the loan. Construction loan originations totaled $11.9
million during fiscal 2002, of which $6.6 million were adjustable-rate,
single-family residential loans and $5.3 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, 2002, $94.3 million or 51.0% of the Bank's total loan
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 2002, 2001 and 2000, the Bank originated $22.5 million, $8.6 million and
$7.3 million, respectively, of fixed-rate single-family mortgage loans. Due to
the lower interest rate environment during fiscal 2002, the Bank found the
largest portion of its single-family loan demand to be for fixed-rate loans.
The Bank's fixed-rate loans generally have maturities ranging from 15 to 30
years and are fully amortizing with monthly payments sufficient to repay the
total amount of the loan with interest by the end of the loan term. Such loans
are originated under terms, conditions and documentation which permit them to be
sold to U.S. Government sponsored agencies. The Bank's fixed-rate loans
customarily include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage or the loan is
not repaid.
In addition, Laurel Savings originates 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, 2002, $36.9 million or 20.0% of
the Bank's total loan portfolio consisted of ARMs on one-to-four family
residential real estate.
6
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. The Bank originated $1.2
million of multi-family residential real estate loans and $1.1 million of
commercial real estate loans in fiscal 2002. At June 30, 2002, the Bank's
multi-family residential real estate loans and commercial real estate loans
amounted to $3.2 million and $4.5 million, respectively, or 1.7% and 2.4% of the
total loan portfolio, respectively. Such loans generally earn rates of interest
which exceed the rates on single-family 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 $7.7 million of
commercial and multi-family loans at June 30, 2002, $5.2 million have fixed
rates of interest and $2.5 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 market for multi-family and commercial real
estate as well as economic conditions. 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 26.9% of
the real estate loans originated in fiscal 2002, 44.0% in fiscal 2001 and 27.2%
in fiscal 2000. 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
7
commercial real estate loans at the time of origination, depending on the nature
of the property securing the loan. At June 30, 2002, construction loans amounted
to $9.7 million, all of which were originated for the construction of
residential properties. The origination of construction loans during fiscal 2002
was primarily due to the continued demand for new homes in the Bank's market
area.
The majority of the Bank's construction loans are made to homeowners.
Speculative construction loans on unsold properties carry more risk than
pre-sold or individual construction loans originated by the Bank because the
payoff for the loan is dependent on the builder's ability to sell the property
prior to the time that the construction loan is due. The Bank attempts to
mitigate these risks by, among other things, working with builders with whom it
has established relationships and by generally limiting the number of unsold
homes under construction.
The Bank has been active in residential construction lending for many years
and intends to continue its involvement in such lending in the future. Although
the Bank has not experienced any significant difficulties, construction lending
is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on
construction loans 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. As a result, such loans
have increased as a percentage of the total loan portfolio from 17.2% of the
total loan portfolio at June 30, 1998 to 18.7% of the total loan portfolio at
June 30, 2002, primarily as a result of the Bank's increased origination of
fixed-rate home equity loans. The Bank originated $21.8 million, $13.7 million
and $16.4 million of consumer loans in fiscal 2002, 2001 and 2000 out of total
loan originations and purchases of $66.2 million, $41.6 million and $57.0
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
$34.2 million or 99.3% of all consumer loans at June 30, 2002. 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.
8
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 $227,000 or .7% of the consumer loan portfolio at June 30, 2002.
REGULATORY REQUIREMENTS. The aggregate amount of loans that the Bank may
make to any one borrower is limited to 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, 2002,
the Bank's loans to one borrower limit was approximately $4.0 million and the
largest aggregate amount of loans by the Bank to any one borrower, including
related entities, was $1.1 million primarily secured by single family
residences. These loans were current in accordance with their original terms as
of June 30, 2002.
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 vary 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.
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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.
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, 2002, the Bank had no existing loans to facilitate.
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.
10
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.
The following table sets forth information regarding the Bank's non-accrual
loans and real estate owned at the dates indicated. The Bank did not have any
troubled debt restructurings at June 30, 2002.
June 30,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Single-family residential real estate $232 $ 467 $ 476 $ 364 $ 355
Commercial real estate -- 31 36 -- 119
Multi-family residential -- -- 22 22 23
Consumer and other loans 55 25 26 90 64
---- ----- ----- ----- -----
Total non-accruing loans $287 $ 523 $ 560 $ 476 $ 561
==== ===== ===== ===== =====
Total non-performing loans as a
percentage of net loans receivable .11% .30% .33% .31% .37%
=== === === === ===
Total real estate owned, net of related
reserves $131 $ 290 $ -- $ 377 $ 143
==== ===== ===== ===== =====
Total non-performing loans and real
estate owned as a percentage of total assets .12% .20% .22% .37% .32%
==== === === === ===
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 as loss must be completely written off. A category designated
"special mention" also must be established and maintained for assets not
currently requiring classification under federal regulations 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,
2002, the Bank's classified assets and real estate owned totaled $438,000. The
classified assets were all classified as substandard which consisted of the
Bank's non-performing residential real estate loans, consumer loans, 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.
11
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, 2002 or 919.9% of total non-performing loans at such
date. The Bank's management believes that its present allowances for 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.
12
The following table sets forth an analysis of the Bank's allowance for loan
losses during the periods indicated:
Year Ended June 30,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $1,759 $1,798 $1,866 $1,852 $1,943
Charge offs:
Residential real estate - (56) (53) (14) (71)
Commercial real estate - - - - (20)
Consumer (20) (19) (46) (47) (61)
---------------------------------------------------------------
Total charge offs (20) (75) (99) (61) (152)
---------------------------------------------------------------
Recoveries:
Residential real estate 20 - - - -
Consumer 26 18 13 57 43
---------------------------------------------------------------
Total recoveries 46 18 13 57 43
---------------------------------------------------------------
Net recoveries (chargeoffs) 26 (57) (86) (4) (109)
Provision for losses on loans 18 18 18 18 18
----- ---- ---- ---- ----
Balance at end of period $1,803 $1,759 $1,798 $1,866 $1,852
====== ====== ====== ====== ======
Allowance for loan losses as
a percent of total net loans
outstanding 1.00% 0.99% 1.06% 1.23% 1.23%
===== ==== ==== ==== ====
Allowance for loan losses as
a percent of non-performing
loans 919.90% 336.33% 321.07% 392.02% 330.12%
====== ====== ====== ====== ======
Ratio of net recoveries
(chargeoffs) to average loans
outstanding 0.01% -0.03% -0.05% 0.00% -0.07%
==== ===== ===== ==== =====
13
The following table sets forth information concerning the allocation of the
Bank's allowance for loan losses by loan category at the dates indicated.
June 30,
--------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
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)
Residential real estate(1) $973 76.3% $901 76.1% $898 75.5% $873 74.1% $603 76.7%
Multi-family real estate 32 1.7% 29 1.6% 25 1.4% 17 1.0% 26 1.6%
Commercial real estate 67 2.4% 83 2.7% 164 3.0% 177 3.5% 203 4.1%
Consumer and other 731 19.6% 746 19.6% 711 20.1% 655 21.4% 282 17.6%
Unallocated -- -- -- -- -- -- 144 -- 738 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,803 100.0% $1,759 100.0% $1,798 100.0% $1,866 100.0% $1,852 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- ----------------------------
(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 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.
14
The following table sets forth the composition and amortized cost of the
Bank's mortgage-backed securities at the dates indicated.
June 30,
-----------------------------------------------------------
2002 2001 2000
------ ------ ------
(In Thousands)
Mortgage-backed securities held to maturity:
FNMA Remic $ 40 $ 57 $ 74
FHLMC Remic -- 93 323
------ ------ -------
Total $ 40 $ 150 $ 397
====== ====== =======
Mortgage-backed securities available for sale:
GNMA $2,034 $3,424 $ 4,197
FNMA 2,597 3,027 3,318
FNMA Remic 789 -- --
FHLMC 1,523 818 979
FHLMC Remic 824 2,578 2,584
------ ------ -------
Total $7,767 $9,847 $11,078
====== ====== =======
15
Information regarding the contractual maturities and weighted average yield
of the Bank's mortgage-backed securities portfolio at June 30, 2002 is presented
below.
Amounts at June 30, 2002 Which Mature in
---------------------------------------------------------------------------------
After Five
One Year After One to To Over 10
or Less Five Years 10 Years Years Total
------- ---------- -------- ------- -----
(Dollars in Thousands)
Mortgage-backed securities
held to maturity:
FNMA Remic $ -- $ -- $ -- $ 40 $ 40
========= ==== ========= ==== ====
Weighted average yield --% --% --% 2.7% 2.7%
==== ==== ==== ==== ====
Mortgage-backed securities
available for sale:
GNMA $ -- $ -- $ -- $ 2,034 $ 2,034
FNMA -- -- -- 2,597 2,597
FNMA Remic 789 789
FHLMC -- -- -- 1,523 1,523
FHLMC Remic -- -- -- 824 824
---- ---- ---- -------- -------
Total $ -- $ -- $ -- $ 7,767 $ 7,767
==== ==== ==== ======== =======
Weighted average yield --% --% --% 6.1 % 6.1%
==== ==== ==== ==== ====
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, 2002, 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.
16
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.
June 30,
---------------------------------------------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Investment securities held to maturity:
Corporate notes and commercial paper $11,909 $13,937 $21,931
======= ======= ======
Investment securities available for sale:
Municipal obligations $18,232 $20,335 $21,500
Shay Financial Services ARM Fund 17,845 17,179 16,137
FNMA preferred stock 250 250 250
FHLMC preferred stock 750 750 250
FNMA stock 631 249 723
FHLMC stock 514 199 590
SLM Student Loan Trust 207 445 606
Standard Insurance Company stock -- 4 4
------- ------- -------
Total $38,429 $39,411 $40,060
======= ======= =======
17
The following table sets forth the composition and maturities of the Bank's
investment securities portfolio at June 30, 2002.
Amounts At June 30, 2002 Which Mature in
-------------------------------------------------------------------------
One Year 1 to 5 5 to 10 Over 10
or Less Years Years Years Total
--------- ------ ------- ------- -----
(Dollars in Thousands)
Investment securities held to maturity:
Corporate notes and
commercial paper $ 4,412 $2,500 $2,000 $ 2,997 $11,909
======= ====== ====== ======= =======
Weighted average yield 2.5% 4.3% 7.3% 8.2 % 5.1%
====== ====== ====== ======= =======
Investment securities available for sale:
Municipal obligations $ -- $ -- $ 187 $18,045 $18,232
Shay Financial Services
ARM Fund (1) 17,845 -- -- -- 17,845
FMNA preferred stock (1) 250 -- -- -- 250
FHLMC preferred stock (1) 750 -- -- -- 750
FMNA stock (1) 631 -- -- -- 631
FHLMC stock (1) 514 -- -- -- 514
SLM Student Loan Trust -- 207 -- -- 207
------- ------ ------ ------- -------
Total $19,990 $ 207 $ 187 $18,045 $38,429
======= ====== ====== ======= =======
Weighted average yield 3.4% 3.0% 5.9% 5.3% 4.2%
=== === === === ===
- ---------------------
(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.
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.
18
The following table sets forth the distribution of the Bank's deposits by
type of deposit at the dates indicated.
As of June 30,
--------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Passbook and club accounts $32,534 14.4% $30,401 14.8% $ 31,257 16.2%
NOW accounts 33,159 14.7 30,177 14.7 29,049 15.1
MMDAs 17,200 7.6 15,756 7.6 15,812 8.2
Fixed-rate certificates 104,036 46.2 94,161 45.8 84,811 44.0
Jumbo certificates 4,994 2.2 4,131 2.0 2,107 1.1
IRA and Keogh accounts 33,496 14.9 31,010 15.1 29,627 15.4
-------- ----- -------- ----- -------- -----
Total $225,419 100.0% $205,636 100.0% $192,663 100.0%
======== ===== ======== ===== ======== =====
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.
The following table sets forth information relating to the Bank's deposit
flows during the periods indicated.
Year Ended June 30,
-----------------------------------------
2002 2001 2000
------- ------- -------
(In Thousands)
Increase before interest credited $13,276 $ 5,921 $ 4,090
Interest credited 6,507 7,052 6,455
------- ------- -------
Total increase $19,783 $12,973 $10,545
======= ======= =======
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.
19
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, 2002. 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, 2002 which mature during the periods indicated.
As of June 30, Amount at June 30, 2002 Maturing in
the Year Ending June,
2001 2002 2003 2004 2005 Thereafter
---- ---- ---- ---- ---- ----------
(In Thousands)
Certificate Accounts:
0.00% to 1.99% $ 1,944 $ 6,149 $ 6,144 $ -- $ 5 $ --
2.00% to 3.99% 62,102 34,401 25,825 7,330 1,128 118
4.00% to 5.99% 65,256 63,918 17,373 27,193 5,425 13,927
6.00% to 7.99% -- 38,058 28,480 3,442 1,605 4,531
------- ------- ------- ------- ------ -------
Total $129,302 $142,526 $77,822 $37,965 $8,163 $18,576
======== ======== ======= ======= ====== =======
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, 2002, certificates of deposit in amounts of $100,000 or more
in the Bank amounted to $5.0 million. The following table sets forth as of June
30, 2002 the distribution of certificates of deposit of $100,000 or more by time
remaining to maturity.
Amount
-----------
(In Thousands)
Three months or less $ 828
Over three through six months 2,545
Over six though 12 months 300
Over 12 months 1,321
------
Total $4,994
======
20
The following table presents information concerning deposit accounts at
June 30, 2002, including the weighted average rate and the scheduled maturity of
certificates of deposit.
Amounts % of Total Average
(in thousands) Deposits Rate
Passbook and club accounts $ 32,534 14.4% 0.75%
Now accounts 33,159 14.7 0.16
MMDA's 17,200 7.6 1.07
------------------ ---------------- ------------
Total 82,893 36.8 0.58
------------------ ---------------- ------------
Certificates maturing by quarter:
September 30, 2002 22,865 10.1 4.31
December 31, 2002 22,963 10.2 4.47
March 31, 2003 18,791 8.3 4.51
June 30, 2003 13,204 5.9 5.64
September 30, 2003 20,740 9.2 4.64
December 31, 2003 8,305 3.7 4.38
March 31, 2004 5,271 2.3 4.48
June 30, 2004 3,648 1.6 4.09
September 30, 2004 3,407 1.5 4.56
December 31, 2004 2,792 1.2 4.49
March 31, 2005 917 0.4 4.94
June 30, 2005 1,048 0.5 5.65
Thereafter 18,575 8.2 5.52
------------------ ---------------- ------------
Total certificate accounts 142,526 63.2 4.72
------------------ ---------------- ------------
Total deposits $225,419 100.0% 3.20%
================== ================ ============
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, 2002, 2001 and 2000, the
Bank had $21.6 million, $21.6 million and $33.4 million, respectively, of FHLB
advances outstanding.
21
The following table presents certain information regarding FHLB advances
for the periods indicated:
Year Ended June 30,
---------------------------------------------------
2002 2001 2000
------------- ------------- -------------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $21,623 $31,927 $ 22,736
Maximum amount
outstanding at any month-
end during the period $21,625 $41,923 $ 33,424
Weighted average interest
rate during the period 5.82% 6.18% 5.67%
Amount outstanding at the
end of the period $21,620 $21,626 $ 33,424
Weighted average rate at the
end of the period 5.82% 5.82% 6.34%
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 two wholly owned subsidiaries, Laurel Financial Group, Inc.
("LFG"), and Laurel Financial Services Corporation ("LFSC"). LFG is a Delaware
business corporation formed in June 2002 to invest in single-family residential
loans and investment securities that the Bank is permitted to hold directly
under the Pennsylvania Banking Code of 1965, as amended (the "Banking Code"). At
June 30, 2002, LFG had assets of approximately $5.5 million which consisted
primarily of single-family residential loans. LFSC is currently inactive. At
June 30, 2002, LFSC had no assets or liabilities.
EMPLOYEES
The Bank had 43 full-time employees and 13 part-time employees as of June
30, 2002. None of the employees are represented by a collective bargaining
agreement, and the Bank believes it enjoys good relations with its personnel.
22
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.
23
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
24
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.
25
THE BANK
GENERAL. The Bank is incorporated under 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,
26
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, 2002, the
Bank exceeded each of its capital requirements.
27
The following table sets forth certain information concerning the Bank's
regulatory capital at June 30, 2002.
Tier 1 Tier 2
Tier 1 Risk- Risk-
Core Based Based
Capital Capital Capital
--------- --------- ---------
(Dollars In Thousands)
Equity capital (1) $ 25,499 $ 25,499 $ 27,372
Plus general valuation allowances (2) -- -- 1,774
Plus allowable unrealized gains -- -- 99
-------- -------- --------
Total regulatory capital 25,499 25,499 27,372
Minimum required capital 10,749 5,678 11,356
-------- -------- --------
Excess regulatory capital $ 14,750 $ 19,821 $ 16,016
======== ======== ========
Regulatory capital as a percentage (3) 9.49% 17.97% 19.29%
Minimum required capital percentage 4.00 4.00 8.00
-------- -------- --------
Excess regulatory capital percentage 5.49% 13.97% 11.29%
======== ======== ========
- -------------------------------
(1) Represents equity capital of the Bank as reported to the FDIC and the
Department for the quarter ended June 30, 2002
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total assets of
$268,734. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighed assets of $141,922.
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
28
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 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.
29
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 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.
30
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, 2002, 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, 1998 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
the 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.
31
ITEM 2. PROPERTIES.
The following table sets forth certain information as of June 30, 2002 with
respect to the offices of the Company and Laurel Savings.
Net Book Value of Property or
Owned or Lease Leasehold Improvements as of
Location Leased Expiration Date June 30, 2002
- -------------------------------- -------------- ---------------------- --------------------------------
Allegheny County:
363 Butler Street
Etna Owned $ 91
1416 Mt. Royal Blvd.
Glenshaw Owned 74
1801 Jancey Street
Morningside, Pittsburgh Leased 2006(1) --
2724 Harts Run Road
Allison Park Owned 460
744 Little Deer Creek Road
Russellton Owned 75
Butler County:
125 West Main Street
Saxonburg Owned 146
- ---------------------
(1) At June 30, 2006, the Bank will have an option to extend this lease for an
additional five years.
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 STAR(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.
32
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 "2002 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 30
of the Company's 2002 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 31
to 42 of the Company's 2002 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages 31
to 33 of the Company's 2002 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 7
to 29 of the Company's 2002 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 2002 ("Proxy Statement").
33
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, 2002 and 2001
Consolidated Statements of Operations for the Years Ended June 30, 2002,
2001 and 2000
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended June 30, 2002,
2001 and 2000
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.
34
(3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
No. Exhibits Page
---- -------- ----
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 2000 Stock Option Plan ****
10.6 Employment agreement between Laurel Savings Bank and
Edwin R. Maus ***
11 Earnings Per Share Computation
13 2002 Annual Report to Stockholders
21 See "Business - Subsidiaries"
for the required information.
23 Consent of KPMG LLP
99.1 Certification of President and CEO pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Senior Vice President and CFO
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
* 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.
**** Incorporated by reference to the Company's proxy statement dated
October 6, 2000.
(b) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 2002.
(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 2002 Annual Report to
Stockholders which are required to be included herein.
35
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 30, 2002 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 30, 2002
- --------------------------------------------------
Arthur G. Borland, Director
/s/ Richard J. Cessar Date: September 30, 2002
- --------------------------------------------------
Richard J. Cessar, Chairman of the Board
/s/ Annette D. Ganassi Date: September 30, 2002
- --------------------------------------------------
Annette D. Ganassi, Director
/s/ Richard S. Hamilton Date: September 30, 2002
- --------------------------------------------------
Richard S. Hamilton, Director
/s/ Edwin R. Maus Date: September 30, 2002
- --------------------------------------------------
Edwin R. Maus, Director, President
and Chief Executive Officer
/s/ J. Harold Norris Date: September 30, 2002
- --------------------------------------------------
J. Harold Norris, Director
/s/ John A. Howard, Jr. Date: September 30, 2002
- --------------------------------------------------
John A. Howard, Jr., Senior Vice President,
Chief Financial Officer and Corporate Secretary/
Treasurer
36
I, Edwin R. Maus, certify that:
1. I have reviewed this annual report on Form 10-K of Laurel Capital Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
September 30, 2002
/s/ Edwin R. Maus
- -----------------
Edwin R. Maus
President and Chief Executive Officer
I, John A. Howard Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Laurel Capital Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
September 30, 2002
/s/ John A. Howard, Jr.
- -----------------------
John A. Howard, Jr.
Senior Vice President and Chief Financial Officer