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Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended: September 30, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
---------------- ---------------
Commission File Number: 0-23010
LAUREL CAPITAL GROUP, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1717451
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2724 Harts Run Road
Allison Park, Pennsylvania 15101
- --------------------------------------- ------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: (412) 487-7404
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
The number of shares outstanding for each of the issuer's classes of common
stock, as of the latest practicable date is:
Class: Common stock, par value $.01 per share
Outstanding at November 10, 2003: 1,876,811 shares
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
INDEX
PAGE
----
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of 1
September 30, 2003 and June 30, 2003
Consolidated Statements of Operations for the three 2
months ended September 30, 2003 and 2002
Consolidated Statement of Stockholders' Equity for the 3
three months ended September 30, 2003
Consolidated Statements of Cash Flows for the three 4
months ended September 30, 2003 and 2002
Notes to Unaudited Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of Financial 12-18
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18-19
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
September 30, June 30,
2003 2003
- -------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Cash $ 2,582 $ 2,053
Money market investments 140 137
Interest-earning deposits with other institutions 61,490 51,235
Investment securities available for sale 43,747 46,603
Investment securities held to maturity (market value of $12,361 and $9,304) 12,216 9,207
Mortgage-backed securities available for sale 10,372 13,478
Mortgage-backed securities held to maturity (market value of $26 and $28) 25 27
Loans receivable, held for sale 1,388 1,439
Loans receivable 159,988 183,208
Allowance for loan losses (2,005) (2,006)
- -------------------------------------------------------------------------------------------------------------
Loans receivable, net 157,983 181,202
Federal Home Loan Bank stock 2,223 2,171
Other repossessed assets 15 -
Accrued interest receivable:
Loans 714 842
Interest-earning deposits and investments 440 442
Mortgage-backed securities 46 61
Office properties and equipment, net of accumulated depreciation 2,384 2,366
Goodwill 2,158 2,158
Other intangible assets 1,803 1,905
Prepaid expenses and sundry assets 7,552 7,408
- -------------------------------------------------------------------------------------------------------------
Total Assets $ 307,278 $ 322,734
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $ 251,236 $ 265,580
Federal Home Loan Bank advances 24,632 24,672
Advance deposits by borrowers for taxes and insurance 706 2,386
Accrued interest payable 1,210 543
Accrued income taxes 103 (49)
Other accrued expenses and sundry liabilities 1,882 1,918
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 279,769 295,050
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, $.01 par value; 5,000,000
shares authorized; 2,377,085 and 2,373,906 shares
issued, respectively 24 24
Additional paid-in capital 5,591 5,565
Treasury stock, at cost (491,675 and 491,675 shares) (7,552) (7,552)
Retained earnings 29,301 29,208
Accumulated other comprehensive income, net of tax 562 856
Stock held in deferred compensation trust (417) (417)
- -------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,509 27,684
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 307,278 $ 322,734
=============================================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended September 30, 2003 and 2002
(In thousands, except per share data)
Three months ended
September 30,
-----------------------
2003 2002
------- -------
Interest income:
Loans $ 2,685 $ 3,129
Mortgage-backed securities 140 134
Investments 537 581
Interest-earning deposits 105 118
------- -------
Total interest income 3,467 3,962
Interest expense:
Savings deposits 1,368 1,780
Borrowings 332 321
------- -------
Total interest expense 1,700 2,101
------- -------
Net interest income before provision
for loan losses 1,767 1,861
Provision for loan losses 3 3
------- -------
Net interest income after provision
for loan losses 1,764 1,858
------- -------
Other income:
Service charges 328 187
Net gain on sale of securities available for sale - 4
Gain on the sale of loans held for sale 6 5
Other operating income 86 15
------- -------
Total other income 420 211
------- -------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 701 541
Premises and occupancy costs 193 148
Federal insurance premiums 10 9
Net loss on real estate owned - 4
Data processing expense 115 74
Professional fees 49 49
Other operating expenses 442 220
------- -------
Total operating expenses 1,510 1,045
------- -------
Income before income taxes 674 1,024
------- -------
Provision for income taxes:
Federal 168 264
State 36 58
------- -------
Total income taxes 204 322
------- -------
Net income $ 470 $ 702
======= =======
Earnings per share
Basic $ 0.25 $ 0.37
======= =======
Diluted $ 0.24 $ 0.35
======= =======
Dividends per share $ 0.20 $ 0.19
======= =======
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the Three Months Ended September 30, 2003
(In thousands)
Accumulated
Other Stock Held in
Additional Comprehensive Deferred Total
Common Paid-in Treasury Retained Income, Compensation Stockholders'
Stock Capital Stock Earnings Net of Tax Trust Equity
--------- ---------- --------- --------- ------------- ------------ -------------
Balance, June 30, 2003 $24 $5,565 ($7,552) $29,208 $856 ($417) $27,684
Comprehensive income:
Net income - - - 470 - - 470
Other comprehensive loss,
net of tax $(151) - - - - (294) - (294)
--------- --------- --------- --------- --------- --------- ---------
Total comprehensive income - - - 470 (294) - 176
Stock options exercised
(3,179 shares) - 26 - - - - 26
Dividends on common stock
at $0.20 per share - - - (377) - - (377)
Treasury stock purchased - - - - - - 0
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 2003 $24 $5,591 ($7,552) $29,301 $562 ($417) $27,509
========= ========= ========= ========= ========= ========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended September 30, 2003 and 2002
(In thousands)
2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net income: $ 470 $ 702
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 66 48
Provision for loan losses 3 3
Net gain on sale of investment securities available for sale - (4)
Gain on the sale of loans held for sale (6) (5)
Net amortization of deferred loan fees 37 50
Origination of loans held for sale (262) (256)
Proceeds from sale of loans held for sale 319 313
Decrease in accrued interest receivable 145 247
Increase in accrued interest payable 667 1,029
Other - net 106 96
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,546 2,223
- ----------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities held to maturity (8,000) (3,000)
Purchase of investment securities available for sale - (2,752)
Purchase of mortgage-backed securities available for sale - (3,487)
Proceeds from sale of mortgage-backed securities available for sale - 963
Principal repayments and maturities of investment securities available for sale 2,597 303
Principal repayments and maturities of investment securities held to maturity 5,000 5,000
Principal repayments and maturities of mortgage-backed securities available for sale 3,030 1,097
Principal repayments and maturities of mortgage-backed securities held to maturity 2 3
Decrease in loans receivable 23,164 2,956
Increase in FHLB stock (52) -
Additions to office properties and equipment (84) (119)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 25,657 964
- ----------------------------------------------------------------------------------------------------------------------
Financing activities:
Net decrease in demand and club accounts (3,088) (569)
Net decrease in time deposit accounts (11,256) (758)
Net decrease in FHLB advances (40) (1)
Decrease in advance deposits by borrowers for taxes and insurance (1,680) (1,961)
Stock options exercised 26 26
Acquisition of treasury stock - (88)
Dividends paid (377) (357)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (16,415) (3,708)
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 10,788 (521)
Cash and cash equivalents at beginning of period 53,425 33,863
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 64,212 $ 33,342
======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits 701 751
Interest on FHLB advances 371 321
Income taxes 75 132
Transfer of loans to other real estate owned 15 -
Cash paid during the period for interest includes interest credited on
deposits of $469 and $478 for the three months ended September 30, 2003
and 2002, respectively.
======================================================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND JUNE 30, 2003
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and, therefore, do not include
all the information or footnotes necessary for a complete presentation of
financial condition, results of operation and cash flows in conformity with
accounting principles generally accepted in the United States of America.
However, all adjustments, consisting only of normal recurring adjustments which,
in the opinion of management, are necessary for a fair presentation, have been
included. Significant accounting policies have not changed since June 30, 2003.
The results of operations for the three months ended September 30, 2003 are not
necessarily indicative of the results which may be expected for the entire
fiscal year. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in Laurel Capital Group, Inc.'s (the "Company") 2003 Annual
Report to Stockholders. All amounts presented in the Notes to Unaudited
Consolidated Financial Statements are presented in thousands except share and
per share data.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
September 30,
2003 2002
-----------------------------
Basic earnings per share:
Net income $470 $702
Weighted average shares outstanding 1,883,871 1,882,328
Earnings per share $0.25 $0.37
Diluted earnings per share:
Net income $470 $702
Weighted average shares outstanding 1,883,871 1,882,328
Dilutive effect of employee
Stock options 102,002 108,671
---------- ----------
Diluted weighted shares outstanding 1,985,873 1,990,999
Earnings per share $0.24 $0.35
Options to purchase 242,865 and 260,138 shares of common stock were outstanding
at September 30, 2003 and 2002, respectively. The dilutive effect of these
options was included in the computation of diluted earnings per share because
the option exercise price for these options was less than the average market
price of the common shares.
5
SECURITIES
The Company accounts for investments in debt and equity securities in accordance
with the Financial Accounting Standards Board's ("FASB") Statement No. 115
("SFAS 115"). SFAS 115 requires that investments be classified as either: (1)
Securities Held to Maturity- reported at amortized cost, (2) Trading Securities-
reported at fair value, or (3) Securities Available for Sale- reported at fair
value. Unrealized gains and losses for trading securities are reported in
earnings while unrealized gains and losses for securities available for sale are
reported as other comprehensive income in stockholders' equity.
COMPREHENSIVE INCOME
The Company reports Comprehensive Income in accordance with SFAS No. 130 which
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. For the
three months ended September 30, 2003 and 2002, the Company's total
comprehensive income was $176 and $979, respectively. Total comprehensive income
is comprised of net income of $470 and $702, respectively, and other
comprehensive (loss) income of $(294) and $277, net of tax, respectively. Other
comprehensive income consists of unrealized gains and losses on investment
securities and mortgage-backed securities available for sale, net of tax.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances net of the allowance
for loan losses, net deferred loan fees and discounts. The Company accounts for
impaired loans in accordance with SFAS 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures", an amendment of SFAS 114. These
statements address the accounting by creditors for impairment of certain loans.
They apply to all creditors and to all loans, uncollateralized as well as
collateralized, except for large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment. Laurel Savings Bank ("the Bank")
considers all one-to-four family residential mortgage loans and all consumer
loans (as presented in Note 4) to be smaller-balance homogeneous loans. Loans
within the scope of these statements are considered impaired when, based on
current information and events, it is probable that all principal and interest
will not be collected in accordance with the contractual terms of the loans.
Management determines the impairment of loans based on knowledge of the
borrower's ability to repay the loan according to the contractual agreement, the
borrower's repayment history and the fair value of collateral for certain
collateral dependent loans. Pursuant to SFAS 114 paragraph 8, management does
not consider an
6
insignificant delay or insignificant shortfall to impair a loan. Management has
determined that a delay less than 90 days will be considered an insignificant
delay and that an amount less than $5,000 will be considered an insignificant
shortfall. The Bank does not apply SFAS 114 using major risk characteristics for
groups of loans, but on a loan by loan basis. All loans are charged off when
management determines that principal and interest are not collectible.
The recognition of interest income on all loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due or when the loan becomes 90 days past due, whichever occurs first. All
unpaid accrued interest on such loans is reserved. Such interest ultimately
collected is credited to income in the period of recovery or applied to reduce
principal if there is sufficient doubt about the collectability of principal.
Consumer loans more than 120 days or 180 days delinquent (depending on the
nature of the loan) are generally required to be written off.
Any excess of the Bank's recorded investment in the loans over the measured
value of the loans in accordance with FAS 114 is provided for in the allowance
for loan losses. The Bank reviews its loans for impairment on a quarterly basis.
Loans receivable classified as held for sale are recorded in the financial
statements in the aggregate at the lower of cost or market.
(2) CONTINGENT LIABILITIES
The Company is subject to asserted and unasserted potential claims encountered
in the normal course of business. In the opinion of management and legal
counsel, the resolution of these claims is not expected to have a material
adverse effect on the Company's financial position, liquidity or results of
operations.
7
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities available for sale are comprised
of the following:
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
AT SEPTEMBER 30, 2003:
Municipal obligations $ 13,806 $ 775 $ 4 $ 14,577
FHLMC preferred stock 750 20 - 770
FNMA common stock 966 118 31 1,053
FHLMC common stock 999 63 67 995
Corporate notes 1,081 27 11 1,097
Shay Financial Services ARM Fund 22,903 - 155 22,748
CRA Qualified Investment Fund 1,000 - 4 996
Other 1,488 26 3 1,511
---------------------------------------------------------------
42,993 1,029 275 43,747
Mortgage-backed securities available for sale 10,275 191 94 10,372
---------------------------------------------------------------
Total $ 53,268 $ 1,220 $ 369 $ 54,119
========= ========= ========= =========
At September 30, 2003, the contractual maturities of the debt securities Amortized Fair
available for sale are: Cost Value
---------------------------
Due in one year or less $ 56 $ 55
Due after one year through five years 160 163
Due after five years through ten years 3,030 3,069
Due after ten years 23,174 24,054
---------------------------
Total $ 26,420 $ 27,341
===========================
Mortgage-backed securities have various contractual maturity dates.
Actual repayments may be different due to prepayments on the loans
underlying the securities. The FNMA stock, FHLMC stock, Community
Reinvestment Act (CRA) Qualified Investment Fund and Shay Financial
Services ARM Fund have no stated maturity.
Note: The Company did not sell any mortgage-backed securities during the three
months ended September 30, 2003. Proceeds from the sale of
mortgage-backed securities available for sale during the three months
ended September 30, 2002 were $963,000. Gross realized gains on those
sales were $4.
There were no sales of investment securities available for sale during
the three months ended September 30, 2003 or 2002.
Investment and mortgage-backed securities held to maturity are comprised of
the following:
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
AT SEPTEMBER 30, 2003
Corporate and Agency bonds $ 9,221 $ 146 $ - $ 9,367
Commercial Paper 2,995 - 1 2,994
Mortgage-backed securities 25 1 - 26
---------------------------------------------------------------
Total $ 12,241 $ 147 $ 1 $ 12,387
===============================================================
At September 30, 2003, the contractual maturities of the debt securities Amortized Fair
held to maturity are: Cost Value
---------------------------
Due in one year or less $ 3,495 $ 3,511
Due after one year through five years 3,000 3,005
Due after five years through ten years 1,693 1,709
Due after ten years 4,053 4,162
---------------------------
Total $ 12,241 $ 12,387
===========================
Mortgage-backed securities have various contractual maturity dates.
Actual repayments may be different due to prepayments on the loans
underlying the securities.
8
(4) LOANS RECEIVABLE
Loans receivable are comprised of the following:
September 30, June 30,
2003 2003
- ----------------------------------------------------------------------------------------------
First mortgage loans:
1 to 4 family dwellings $ 103,523 $ 118,962
Multi-family dwellings 1,570 2,640
Commercial 4,315 5,337
Construction and development loans 10,542 14,728
- ----------------------------------------------------------------------------------------------
119,950 141,667
Commercial and other loans 3,012 3,012
Consumer loans:
Loans secured by savings accounts 373 350
Installment loans 40,397 45,113
- ----------------------------------------------------------------------------------------------
43,782 48,475
- ----------------------------------------------------------------------------------------------
Loans receivable, net of unearned discounts 163,732 190,142
Less: Allowance for loan losses (2,005) (2,006)
Loans in process (3,941) (7,314)
Net deferred loan origination costs 197 380
- ----------------------------------------------------------------------------------------------
Loans receivable, net $ 157,983 $ 181,202
==============================================================================================
Changes in the allowance for loan losses for the three months ended
September 30, 2003 and 2002 are as follows:
Fiscal Fiscal
2004 2003
- ---------------------------------------------------------------------------------------
Balance at beginning of the fiscal year $ 2,006 $ 1,803
Provision for losses 3 3
Charge-offs (4) (16)
Recoveries 0 1
- ---------------------------------------------------------------------------------------
Balance at September 30, 2003 and 2002 $ 2,005 $ 1,791
=======================================================================================
At September 30, 2003, there were no loans that are considered to be impaired
under SFAS 114.
September 30,
2003 2002
------------------------------
Non-accrual loans $1,142 $275
Non-accrual loans as a percent of total loans, net 0.72% 0.16%
- ------------------------------------------
All loans 90 days or more past due are reported as non-accrual.
9
(5) GUARANTEES
The Company issues standby letters of credit in the normal course of business.
Letters of credit are issued for a one-year period. The Company would be
required to perform under the standby letters of credit when drawn upon by the
guaranteed, in the case of nonperformance by the Company's customer. The maximum
potential amount of future payments the Company could be required to make under
these guarantees is $1.1 million of which 100% is fully collateralized.
Currently, the Company has not recognized a liability for the outstanding
obligations, as the amount of the liability is insignificant. There are no
recourse provisions that would enable the Company to recover any amounts from
third parties.
(6) STOCK-BASED COMPENSATION
SFAS 123 allows companies to expense an estimated fair value of stock options or
to continue to measure compensation expense for stock option plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"). Entities that elect to continue to measure compensation expense
based on APB No. 25 must provide pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
The Company has elected to continue to measure compensation cost using the
intrinsic value method prescribed by APB No. 25. Had the Company used the fair
value method, net income and earnings per share would have been as follows (In
thousands, except per share data):
Three Months Ended
September 30,
2003 2002
------- -------
Net Income
As reported $ 470 $ 702
Deduct total stock-based compensation expense
determined under fair-value based method for
all awards, net of tax (3) (14)
------- -------
Pro forma $ 467 $ 688
Basic earnings per share
As reported $ 0.25 $ 0.37
Pro forma $ 0.25 $ 0.37
Diluted earnings per share
As reported $ 0.24 $ 0.35
Pro forma $ 0.24 $ 0.35
There was no stock-based employee compensation expense included in reported net
income during the three months ended September 30, 2003 and 2002.
10
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
There have been no changes in the carrying value of goodwill during the three
months ended September 30, 2003.
The following table provides information for intangible assets subject to
amortization for the periods indicated:
For the three months ended
September 30
2003 2002
Amortized intangible assets:
Core deposit intangible - gross 1,905 --
Less: accumulated amortization (102) --
--------------------- -----------------------
Core deposit intangible - net 1,803 --
===================== =======================
The following information shows the actual amortization expense for the current
year and the estimated amortization expense for each of the five succeeding
fiscal years:
--------------------------------------- ------------------- -------------------------
For the three months ended
9/30/03 $102
--------------------------------------- ------------------- -------------------------
For the fiscal year ended
6/30/04 394
--------------------------------------- ------------------- -------------------------
For the fiscal year ended
6/30/05 340
--------------------------------------- ------------------- -------------------------
For the fiscal year ended
6/30/06 290
--------------------------------------- ------------------- -------------------------
For the fiscal year ended
6/30/07 243
--------------------------------------- ------------------- -------------------------
For the fiscal year ended
6/30/08 199
--------------------------------------- ------------------- -------------------------
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
BALANCE SHEET DATA At September 30,
2003 2002
---- ----
(In thousands except per share data)
------------------------------------
(Unaudited)
Total assets $307,278 $276,414
Interest-earning deposits with other institutions 61,490 31,415
Investment securities available for sale 43,747 41,923
Investment securities held to maturity 12,216 9,904
Mortgage-backed securities available for sale 10,372 9,575
Mortgage-backed securities held to maturity 25 37
Loans receivable held for sale 1,388 1,319
Loans receivable, net 157,983 175,313
Savings deposits 251,236 224,092
FHLB advances 24,632 21,619
Retained earnings 29,301 28,448
Stockholders' equity 27,509 27,113
Stockholders' equity per share $14.59 $14.39
STATISTICAL PROFILE Three months ended
September 30,
--------------------------------------
2003 2002
---- ----
Average yield earned on all interest-earning assets 4.64 % 5.84 %
Average rate paid on all interest-bearing liabilities 2.48 3.57
Average interest rate spread 2.16 2.27
Net yield on average interest-earning assets 2.36 2.73
Average interest-earning assets as a percentage of
average interest-bearing liabilities 112.04 115.83
Return on average assets (1) 0.60 1.01
Return on average equity (1) 6.85 10.49
Average equity to average assets 8.68 9.63
- -----------------------------------------------------
(1) Amounts are annualized
12
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
GENERAL. Laurel Capital Group, Inc.'s (the "Company") only significant asset is
the stock it owns of its wholly-owned subsidiary, Laurel Savings Bank (the
"Bank"). The Company's net income for the three months ended September 30, 2003
was $470,000 compared to $702,000 for the same period in the prior year. The
decrease of $232,000 or 33.05% was primarily the result of a $94,000 decrease in
net interest income, and a $465,000 increase in total operating expense
partially offset by a $209,000 increase in total other income and a $118,000
decrease in income taxes. These and other significant fluctuations are discussed
below.
NET INTEREST INCOME. The Company's operating results depend substantially on the
Bank's net interest income, which is determined by the average interest rate
spread between the Bank's interest-earning assets and interest-bearing
liabilities and the relative amounts of such assets and liabilities. Net
interest income decreased by $94,000 or 5.06% during the three months ended
September 30, 2003 as compared to the same period of the prior year. The
decrease was primarily due to a decrease in the average interest rate spread
from 2.27% for the quarter ended September 30, 2002 to 2.16% for the quarter
ended September 30, 2003. This decrease was partially offset by an increase in
the average balance of net earning assets of $33.6 million or 12.37%.
Interest income on loans receivable and loans held for sale decreased by
$444,000 or 14.19% during the three months ended September 30, 2003 as compared
to the same period in the prior year. This decrease was primarily due to a
decrease in the average yield on loans receivable from 7.07% to 6.31% for the
three months ended September 30, 2002 and 2003, respectively. Additionally, the
average outstanding balance of loans receivable decreased $6.6 million or 3.70%
compared to the same period in the prior year. The decrease in the average
outstanding balance of loans receivable was due to a $13.9 million or 9.80%
decrease in the average outstanding balance of mortgage loans, partially offset
by a $7.3 million or 19.82% increase in the average outstanding balance of
consumer and other loans. The decrease in the average outstanding balance of
loans receivable was primarily the result of continued loan repayments in excess
of loan originations. The decrease in the average yield was primarily due to the
generally lower interest rate environment.
Interest on mortgage-backed securities held to maturity and mortgage-backed
securities available for sale increased by $6,000 or 4.48% during the quarter
ended September 30, 2003 as compared to the September 30, 2002 quarter. This
increase was primarily due to a $2.7 million or 28.28% increase in the average
outstanding balance of mortgage-backed securities from September 30, 2002 to
September 30, 2003. This increase was partially offset by a decrease in the
average yield on mortgage-backed securities from 5.68% for the quarter ended
September 30, 2002 to 4.63% for the quarter ended September 30, 2003. The
increase in the average outstanding balance was primarily due to mortgage-backed
securities obtained as a result of the acquisition of SFSB Holding Company. At
September 30, 2003, the Bank's portfolio of mortgage-backed securities available
for sale had net unrealized gains of $97,000. This portfolio consists of fixed
and adjustable rate securities with an average yield of 5.49% at September 30,
2003. Rising interest rates would decrease the unrealized gains in this
13
portfolio if the fixed rate securities were not sold. The mortgage-backed
securities held to maturity portfolio consists of one adjustable-rate
collateralized mortgage obligation (CMO) with a yield of 1.85% at September 30,
2003. At September 30, 2003, the Bank's portfolio of mortgage-backed securities
held to maturity had an amortized cost and fair market value of $25,000 and
$26,000, respectively. In periods of rising interest rates, unrealized losses
could occur due to the timing difference of when the securities re-price. See
Note 3 of "Notes to Unaudited Consolidated Financial Statements."
Interest income on investment securities held to maturity and investment
securities available for sale decreased during the three months ended September
30, 2003. The decrease of $44,000 or 7.57% from the comparable period in 2002
was primarily due to a decrease in the average yield on investment securities
from 4.27% for the quarter ended September 30, 2002 to 3.31% for the quarter
ended September 30, 2003, reflecting the lower interest rate environment that
continued throughout the period. This decrease was partially offset by a $10.3
million or 19.16% increase in the average outstanding balance for the quarter
ended September 30, 2003 as compared to the same period in the prior fiscal
year. The increase in the average outstanding balance was primarily due to
investment securities obtained as a result of the acquisition of SFSB Holding
Company. At September 30, 2003, the Bank's portfolio of investment securities
available for sale and investment securities held to maturity had net unrealized
gains of $754,000 and $145,000, respectively. See Note 3 of "Notes to Unaudited
Consolidated Financial Statements."
Interest income on interest-earning deposits decreased during the three months
ended September 30, 2003 by $13,000 or 11.02% from the comparable period in
2002. This decrease was primarily due to a decrease in the average yield earned
on such deposits from 1.54% for the quarter ended September 30, 2002 to 0.80%
for the quarter ended September 30, 2003. This decrease was, to a large extent,
offset by an increase of $21.7 million or 71.75% in the average outstanding
balance of interest-earning deposits for the quarter ended September 30, 2003 as
compared to the September 30, 2002 quarter. The increase in the average balance
was primarily due to excess liquidity resulting from increased deposits from
September 30, 2002 to September 30, 2003 and loan and security repayments.
Interest expense on interest-bearing deposits decreased by $412,000 or 23.15%
for the quarter ended September 30, 2003, compared to the same period in 2002.
The decrease was primarily due to a decrease in the average interest rate paid
on savings deposits from 3.33% for the three months ended September 30, 2002 to
2.19% for the three months ended September 30, 2003, reflecting the lower
interest rate environment in the 2003 period. This decrease was partially offset
by a $35.0 million or 16.46% increase in the average outstanding balance of such
deposits during the three months ended September 30, 2003 as compared to the
same period of the prior year. The increase in the average outstanding balance
was primarily due to the deposits obtained as a result of the acquisition of
SFSB Holding Company.
Interest expense on borrowings increased $11,000 or 3.43% for the quarter ended
September 30, 2003 compared to the quarter ended September 30, 2002 primarily
due to a $3.0 million increase in the average outstanding balance of FHLB
advances. Partially offsetting the increase in interest expense resulting from
the higher average balance was a decrease in the average
14
rate paid on such advances from 5.81% at September 30, 2002 to 5.27% at
September 30, 2003.
PROVISION FOR LOAN LOSSES. The Bank provided $3,000 to its allowance for loan
losses for each of the quarters ended September 30, 2003 and 2002, respectively.
Such provisions were the result of an analysis of the allowance for loan losses
in connection with a review of the Bank's loan portfolio.
At September 30, 2003, the Bank's allowance for loan losses amounted to $2.0
million or 1.27% of the total loan portfolio. At September 30, 2002 the Bank's
allowance for loan losses amounted to $1.8 million or 1.01% of the total loan
portfolio.
A review of the loan portfolio is conducted at least quarterly by management to
determine that the allowance for loan losses is appropriate to absorb estimated
loan losses. In determining the appropriate level of the allowance for loan
losses, consideration is given to general economic conditions, diversification
of loan portfolios, historic loss experience, identified credit problems,
delinquency levels and adequacy of collateral. In consideration of the above,
management has assessed the risks in the loan portfolio and has determined that
no significant changes have occurred during the three months ended September 30,
2003. Thus, the level of the allowance for loan losses is substantially
unchanged from June 30, 2003. Although management believes that the current
allowance for loan losses is appropriate, future additions to the reserve may be
necessary due to changes in economic conditions and other factors. In addition,
as an integral part of their periodic examination, certain regulatory agencies
review the adequacy of the Bank's allowance for loan losses and may direct the
Bank to make additions to the allowance based on their judgment. No such
additions were required to be made during the Company's most recent examination.
OTHER INCOME. Total other income increased by $209,000 or 99.05% to $420,000 for
the quarter ended September 30, 2003 as compared to the same period in 2002.
This was the result of an increase in service charge income of $141,000, as well
as a $71,000 increase in other operating income and a $1,000 increase in the
gain on the sale of loans held for sale, partially offset by a $4,000 decrease
in the gain on the sale of investments and mortgage-backed securities available
for sale. The increase in service charge income was largely attributable to
activity related to the accounts obtained through the acquisition of SFSB
Holding Company. The increase in other operating income was primarily the result
of income earned on amounts deposited with various insurance companies.
OPERATING EXPENSES. Total operating expenses increased by $465,000 or 44.50%
during the quarter ended September 30, 2003 as compared to the same quarter in
2002. This increase was primarily due to a $222,000 increase in other operating
expenses, a $160,000 increase in compensation and benefits expense, a $45,000
increase in premises and occupancy expense and $41,000 increase in data
processing expense. These increases were slightly offset by a $4,000 decrease in
net loss on real estate owned. The increase in other operating expenses was
largely attributable to amortization of the core deposit intangible of $102,000
related to the acquisition of SFSB Holding Company. The increase in compensation
and benefits was primarily the result of increased staffing resulting from the
acquisition of SFSB
15
Holding Company and the hiring of new employees during the quarter.
INCOME TAX EXPENSE. Income tax expense decreased by $118,000 for the quarter
ended September 30, 2003 as compared to the quarter ended September 30, 2002
primarily as a result of lower pre-tax income. Additionally, the effective tax
rate decreased slightly from 31.45% for the 2002 quarter to 30.27% for the 2003
quarter.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets decreased by $15.5 million or 4.79% from June 30, 2003 to September
30, 2003. The largest decrease was a $23.2 million decrease in loans receivable,
net. Additionally, there was a $3.1 million decrease in mortgage-backed
securities available for sale and a $2.9 million decrease in investment
securities available for sale. These decreases were partially offset by a $10.3
million increase in interest-earning deposits with other institutions, a $3.0
million increase in investment securities held to maturity and a $529,000
increase in cash. The largest components of change in liabilities were a $14.3
million decrease in savings deposits and a $1.7 million decrease in advance
deposits by borrowers for taxes and insurance. These decreases were slightly
offset by an increase in accrued interest payable on savings deposits.
Under regulations adopted by the Federal Deposit Insurance Corporation ("FDIC"),
the Bank is required to maintain Tier I (Core) capital equal to at least 4% of
the Bank's adjusted total assets, and Tier II (Supplementary) risk-based capital
equal to at least 8% of the risk-weighted assets. At September 30, 2003, the
Bank exceeded all of these requirements, with Tier I and Tier II ratios of 7.22%
and 16.08%, respectively.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 2003.
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- --------- ---------
(Dollar amounts in thousands)
Equity capital (1) $22,573 $22,573 $22,573
Plus general valuation allowances (2) - - 1,905
------- ------- -------
Total regulatory capital 22,573 22,573 24,478
Minimum required capital 12,503 6,095 12,189
------- ------- ------
Excess regulatory capital $10,070 $16,478 $12,288
======= ======= =======
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $15,629 $ 9,136 $15,227
======= ======= =======
Regulatory capital as a percentage (3) 7.22% 14.82% 16.08%
Minimum required capital percentage 4.00 4.00 8.00
---- ----- ----
Excess regulatory capital percentage 3.22% 10.82% 8.08%
==== ===== =====
Minimum required capital percentage
to be well capitalized under Prompt
Corrective Action Provisions 5.00% 6.00% 10.00%
==== ===== =====
16
__________________________________
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 041 for the three months
ended September 30, 2003.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets of
$312,575. Tier I and Tier II risk-based capital are calculated as
percentage of adjusted risk-weighted assets of $152,267.
17
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services as measured by the consumer price
index.
CRITICAL ACCOUNTING POLICIES
Certain critical accounting policies affect the more significant judgments and
estimates used in the preparation of the consolidated financial statements. The
Company's single most critical accounting policy relates to the Company's
allowance for loan loss, which reflects the estimated losses resulting from the
inability of the Company's borrowers to make required loan payments. If the
financial condition of the Company's borrowers were to deteriorate, resulting in
an impairment of their ability to make payments, the Company's estimates would
be updated, and additional provisions for loan losses may be required. Further
discussion of the estimates used in determining the allowance for loan loss is
contained in the discussion on "Provision for Loan Losses" on page 15 herein.
ACCOUNTING DEVELOPMENTS
There are no new standards issued and not yet effective that will have a
material impact on the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Bank's portfolio equity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 2003 Annual Report to
Stockholders. There has been no material change in the Company's asset and
liability position or market value of portfolio equity since June 30, 2003.
CONROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of September 30, 2003. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and regulations and are
operating in an effective manner.
18
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the first fiscal quarter of fiscal 2004 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "except," "intend," "should" and similar expressions, or
the negative thereof, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future looking events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary from those described herein as anticipated,
believed, estimated, expected or intended. Factors that could have a material
adverse effect on our operations and future prospects include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Board of Governors
of the Federal Reserve System, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in our market area and accounting principles,
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements contained herein, and you should not place
undue reliance on such statements, which reflect our position as of the date of
this report.
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings at the
present time other than those generally associated with the
normal course of business. In the opinion of management and
legal counsel, the resolution of these claims are not
expected to have a material adverse effect on the Company's
financial position, liquidity or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
19
Item 4. Submission of Matters to a Vote of Security Holders
A. The Annual Meeting of Stockholders was held on October 16,
2003 and the following items were submitted to the
stockholders of the Company for approval:
1. To elect two directors for a term of three years or until their
successors have been elected and qualified
Nominees for a three-year term:
Annette D. Ganassi
For: 1,472,152
Withheld: 54,454
Edwin R. Maus
For: 1,437,027
Withheld: 89,579
2. To ratify the appointment of KPMG LLP, as the Company's
independent auditors for the fiscal year ending June 30, 2004.
For: 1,389,650
Against: 136,663
Abstain: 293
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to section 906
of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
On October 10, 2003, the Company filed a Form 8-K to report under
"Item 12. Results of Operations and Financial Condition" the results
of its operations for the year ended
20
June 30, 2003. No financial statements were required to be filed with
the Form 8-K.
On November 6, 2003 the Company filed a Form 8-K to report under
"Item 5. Other Events And Required FD Disclosure" the completion of
its fifth stock repurchase program. No financial statements were
required to be filed with the Form 8-K.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
LAUREL CAPITAL GROUP, INC.
/s/ Edwin R. Maus
- -----------------------------------------
Edwin R. Maus
President and Chief Executive Officer
/s/ John A. Howard, Jr.
- -----------------------------------------
John A. Howard, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 14, 2003
22