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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, 2004
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, 2004: 1,938,946 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
September 30, 2004 and June 30, 2004 ..... 1
Consolidated Statements of Operations for the three
months ended September 30, 2004 and 2003 ..... 2
Consolidated Statement of Stockholders' Equity for the
three months ended September 30, 2004 ..... 3
Consolidated Statements of Cash Flows for the three
months ended September 30, 2004 and 2003 ..... 4
Notes to Unaudited Consolidated Financial Statements ..... 5-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..... 12-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 17
Item 4. Controls and Procedures ..... 17-18
Part II - Other Information
Item 1. Legal Proceedings ..... 18
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities ..... 18
Item 3. Defaults Upon Senior Securities ..... 18
Item 4. Submission of Matters to a Vote of
Security Holders ..... 19
Item 5. Other Information ..... 19
Item 6. Exhibits ..... 19
Signatures ..... 20
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,
2004 2004
- -------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Cash $2,442 $1,991
Money market investments 283 283
Interest-earning deposits with other institutions 24,227 25,401
Investment securities available for sale 45,159 47,669
Investment securities held to maturity (market value of $12,213 and $12,183) 12,194 12,210
Mortgage-backed securities available for sale 19,231 21,024
Loans receivable, held for sale 956 1,130
Loans receivable 188,091 175,323
Allowance for loan losses (1,992) (2,032)
- -------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 186,099 173,291
Federal Home Loan Bank stock 1,984 1,879
Other repossessed assets 40 -
Accrued interest receivable:
Loans 691 659
Interest-earning deposits and investments 252 384
Mortgage-backed securities 79 80
Office properties and equipment, net of accumulated depreciation 2,193 2,243
Goodwill 2,158 2,158
Other intangible assets 1,422 1,511
Prepaid income tax - 129
Prepaid expenses and sundry assets 7,223 7,333
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $306,633 $299,375
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $251,553 $246,179
Federal Home Loan Bank advances 21,607 21,609
Advance deposits by borrowers for taxes and insurance 947 2,142
Accrued interest payable 1,228 619
Accrued income taxes 121 -
Other accrued expenses and sundry liabilities 3,672 1,701
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 279,128 272,250
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, $.01 par value; 5,000,000
shares authorized; 2,453,274 and 2,453,274 shares
issued, respectively 24 24
Additional paid-in capital 6,204 6,243
Treasury stock, at cost (524,670 and 524,670 shares) (8,238) (8,238)
Retained earnings 29,482 29,380
Accumulated other comprehensive income, net of tax 535 218
Stock held in deferred compensation trust (502) (502)
- -------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,505 27,125
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $306,633 $299,375
- -------------------------------------------------------------------------------------------------------------------------
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, 2004 and 2003
(In thousands, except per share data)
Three months ended
September 30,
----------------------
2004 2003
------ ------
Interest income:
Loans $2,537 $2,685
Mortgage-backed securities 186 140
Investments 497 537
Interest-earning deposits 104 105
------ ------
Total interest income 3,324 3,467
Interest expense:
Savings deposits 1,195 1,368
Borrowings 321 332
------ ------
Total interest expense 1,516 1,700
------ ------
Net interest income before provision
for loan losses 1,808 1,767
Provision for loan losses 3 3
------ ------
Net interest income after provision
for loan losses 1,805 1,764
------ ------
Other income:
Service charges 286 328
Gain on the sale of loans held for sale 6 6
Income from bank owned life insurance 64 65
Other operating income 13 21
------ ------
Total other income 369 420
------ ------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 717 701
Premises and occupancy costs 207 193
Federal insurance premiums 9 10
Data processing expense 101 115
Professional fees 63 49
Amortization of core deposit intangible 89 102
Other operating expenses 286 340
------ ------
Total operating expenses 1,472 1,510
------ ------
Income before income taxes 702 674
------ ------
Provision for income taxes:
Federal 180 168
State 34 36
------ ------
Total income taxes 214 204
------ ------
Net income $ 488 $ 470
====== ======
Earnings per share
Basic $ 0.25 $ 0.25
====== ======
Diluted $ 0.25 $ 0.24
====== ======
Dividends per share $ 0.20 $ 0.20
====== ======
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, 2004
(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, 2004 $ 24 $ 6,243 ($ 8,238) $ 29,380 $ 218 ($ 502) $ 27,125
Comprehensive income:
Net income -- -- -- 488 -- -- 488
Other comprehensive income,
net of tax $163 -- -- -- -- 317 -- 317
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- -- 488 317 -- 805
Other stock option activity -- (39) -- -- -- -- (39)
Dividends on common stock
at $0.20 per share -- -- -- (386) -- -- (386)
-------- -------- -------- -------- -------- -------- --------
Balance, September 30, 2004 $ 24 $ 6,204 ($ 8,238) $ 29,482 $ 535 ($ 502) $ 27,505
======== ======== ======== ======== ======== ======== ========
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, 2004 and 2003
(In thousands)
2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Net income: $ 488 $ 470
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 68 66
Provision for loan losses 3 3
Gain on the sale of loans held for sale (6) (6)
Net amortization of deferred loan costs 57 37
Origination of loans held for sale (141) (262)
Proceeds from sale of loans held for sale 321 319
Decrease in accrued interest receivable 101 145
Increase in accrued interest payable 609 667
Amortization of the core deposit intangible 89 102
Increase in cash surrender value (53) (65)
Increase in taxes payable 250 152
Other - net (67) (83)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,719 1,545
- --------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities held to maturity (3,300) (8,000)
Purchase of investment securities available for sale (1,139) -
Principal repayments and maturities of investment securities available for sale 4,065 2,597
Principal repayments and maturities of investment securities held to maturity 5,315 5,000
Principal repayments and maturities of mortgage-backed securities available for sale 1,857 3,030
Principal repayments and maturities of mortgage-backed securities held to maturity - 2
(Increase) decrease in loans receivable (12,908) 23,164
Increase in FHLB stock (105) (52)
Additions to office properties and equipment (18) (84)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (6,233) 25,657
- --------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net decrease in demand and club accounts (2,648) (3,088)
Net increase (decrease) in time deposit accounts 8,022 (11,256)
Net decrease in FHLB advances (2) (40)
Decrease in advance deposits by borrowers for taxes and insurance (1,195) (1,680)
Stock options exercised - 26
Dividends paid (386) (377)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 3,791 (16,415)
- --------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (723) 10,787
Cash and cash equivalents at beginning of period 27,675 53,425
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,952 $ 64,212
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- --------------------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $ 586 $ 701
Interest on FHLB advances 321 371
Income taxes 77 75
Transfer of loans to other real estate owned 40 15
Cash paid during the period for interest includes interest credited on deposits of $396
and $469 for the three months ended September 30, 2004 and 2003, respectively.
Investment securities held to maturity totaling $2,000 were purchased during the period
ended September 30, 2004 but did not settle until subsequent to the period end. There
were no such purchases during the period ended September 30, 2003.
- --------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND JUNE 30, 2004
(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 operations 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, 2004.
The results of operations for the three months ended September 30, 2004 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") 2004 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,
----------------------------
2004 2003
---------- ----------
Basic earnings per share:
Net income $ 488 $ 470
Weighted average shares outstanding 1,928,604 1,883,871
Earnings per share $ 0.25 $ 0.25
Diluted earnings per share:
Net income $ 488 $ 470
Weighted average shares outstanding 1,928,604 1,883,871
Dilutive effect of employee
stock options 60,205 102,002
---------- ----------
Diluted weighted shares outstanding 1,988,809 1,985,873
Earnings per share $ 0.25 $ 0.24
Options to purchase 155,079 and 242,865 shares of common stock were outstanding
at September 30, 2004 and 2003, 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 resulting in none of the options having an
antidilutive effect.
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, 2004 and 2003, the Company's total
comprehensive income was $805 and $176, respectively. Total comprehensive income
is comprised of net income of $488 and $470, respectively, and other
comprehensive income (loss) of $317 and $(294), 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. Financial institutions
are subject to the risk of loan losses as one of the costs of lending. While the
Company recognizes as losses all loans that are determined to be uncollectible,
experience dictates that at any point in time, losses may exist in the portfolio
which cannot be specifically identified. As a result, a provision for such
unidentifiable losses is established and charged against current earnings to
represent management's best estimate of such probable losses. The 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
6
smaller-balance homogeneous loans. Loans within the scope of these statements
are considered impaired when, based on current information and events, it is
probable that all principal and interest will not be collected in accordance
with the contractual terms of the loans. Management determines the impairment of
loans based on knowledge of the borrower's ability to repay the loan according
to the contractual agreement, the borrower's repayment history and the fair
value of collateral for certain collateral dependent loans. Pursuant to SFAS 114
paragraph 8, management does not consider an insignificant delay or
insignificant 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 will be considered an insignificant shortfall. The Bank does not
apply SFAS 114 using major risk characteristics for groups of loans, but on a
loan by loan basis. All loans are charged off when management determines that
principal and interest are not collectible.
The accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes 90 days past due, whichever occurs first. 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.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company has defined cash and cash
equivalents as cash, money market investments and interest-earning deposits with
other institutions.
(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, 2004:
Municipal obligations $ 8,258 $ 631 $ -- $ 8,889
FHLMC preferred stock 750 20 -- 770
FNMA common stock 583 68 18 633
FHLMC common stock 684 230 -- 914
Agency Notes 8,439 43 2 8,480
Corporate notes 1,078 45 -- 1,123
Shay Financial Services ARM Fund 23,412 -- 266 23,146
CRA Qualified Investment Fund 1,000 -- 12 988
Other 220 -- 4 216
----------------------------------------------------
44,424 1,037 302 45,159
Mortgage-backed securities available for sale 19,156 166 91 19,231
----------------------------------------------------
Total $63,580 $ 1,203 $ 393 $64,390
----------------------------------------------------
At September 30, 2004, the contractual maturities of the debt securities Amortized Fair
available for sale are: Cost Value
-----------------------------
Due after one year through five years $ 2,554 $ 2,555
Due after five years through ten years 5,727 5,919
Due after ten years 28,650 29,249
-----------------------------
Total $ 36,931 $ 37,723
=============================
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: There were no sales of investment or mortgage-backed
securities during the three months ended September 30, 2004
or 2003.
Investment securities held to maturity are comprised of the following:
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
AT SEPTEMBER 30, 2004
Corporate and Agency bonds $ 10,200 $ 34 $ 15 $10,219
Commercial Paper 1,994 - - 1,994
---------------------------------------------------
Total $ 12,194 $ 34 $ 15 $12,213
---------------------------------------------------
At September 30, 2004, the contractual maturities of the debt securities Amortized Fair
held to maturity are: Cost Value
----------------------------
Due in one year or less $ 1,994 $ 1,994
Due after one year through five years 9,200 9,198
Due after five years through ten years - -
Due after ten years 1,000 1,021
----------------------------
Total $12,194 $12,213
============================
8
(4) LOANS RECEIVABLE
Loans receivable are comprised of the following:
September 30, June 30,
2004 2004
------------------------------------------------------------------------------------------------------------------
First mortgage loans:
1 to 4 family dwellings $139,892 $125,304
Multi-family dwellings 1,572 1,616
Commercial 4,853 6,322
Construction and development loans 4,203 5,247
------------------------------------------------------------------------------------------------------------------
150,520 138,489
Commercial and other loans 1,095 1,475
Consumer loans:
Loans secured by savings accounts 252 285
Installment loans 37,788 38,010
------------------------------------------------------------------------------------------------------------------
39,135 39,770
------------------------------------------------------------------------------------------------------------------
Loans receivable, net of unearned discounts 189,655 178,259
Less: Allowance for loan losses (1,992) (2,032)
Loans in process (2,116) (3,459)
Net deferred loan origination costs 552 523
------------------------------------------------------------------------------------------------------------------
Loans receivable, net $186,099 $173,291
------------------------------------------------------------------------------------------------------------------
Changes in the allowance for loan losses for the
three months ended September 30, 2004 and 2003 are as follows:
September 30, September 30,
2004 2003
------------------------------------------------------------------------------------------------------------------
Balance at beginning of the fiscal year $2,032 $2,006
Provision for losses 3 3
Charge-offs (45) (4)
Recoveries 2 -
------------------------------------------------------------------------------------------------------------------
Allowance for loan losses $1,992 $2,005
------------------------------------------------------------------------------------------------------------------
At September 30, 2004, there were no loans that are considered to be
impaired under SFAS 114.
September 30,
2004 2003
-----------------------------------
Non-accrual loans $1,985 $1,142
Non-accrual loans as a percent of total loans, net 1.07% 0.72%
--------------------------------------------
All loans 90 days or more past due are reported as non-accrual.
The non-accrual loans at September 30, 2004 include one commercial loan
having a balance of $377,000 and two single family loans having a
combined balance of $464,000 which management anticipates being
resolved within the next six months.
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 $30 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,
2004 2003
---- ----
Net Income
As reported $ 488 $ 470
Deduct total stock-based compensation expense
determined under fair-value based method for
all awards, net of tax (-) (3)
----- -----
Pro forma $ 488 $ 467
Basic earnings per share
As reported $0.25 $0.25
Pro forma $0.25 $0.25
Diluted earnings per share
As reported $0.25 $0.24
Pro forma $0.25 $0.24
There was no stock-based employee compensation expense included in reported net
income during the three months ended September 30, 2004 and 2003.
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, 2004.
The following table provides information for intangible assets subject to
amortization for the periods indicated:
For the three months ended
September 30
2004 2003
Amortized intangible assets:
Core deposit intangible - gross $1,511 $1,905
Less: accumulated amortization (89) (102)
------ ------
Core deposit intangible - net $1,422 $1,803
====== ======
The following information shows the actual amortization expense for the current
period and the estimated amortization expense for each of the five succeeding
fiscal years:
------------------------------------------------------------------
For the three months ended 9/30/04 $ 89
------------------------------------------------------------------
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
------------------------------------------------------------------
For the fiscal year ended 6/30/09 158
------------------------------------------------------------------
(8) POST-RETIREMENT BENEFITS
For the three months ended September 30, 2004, the Company had service costs and
interest costs of $28 and $1, respectively, related to the Supplemental
Executive Retirement Plan and the Trustee Deferred Compensation/Retirement Plan.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
BALANCE SHEET DATA At September 30,
2004 2003
---- ----
(In thousands except per share data)
------------------------------------
(Unaudited)
Total assets $306,633 $307,278
Interest-earning deposits with other institutions 24,227 61,490
Investment securities available for sale 45,159 43,747
Investment securities held to maturity 12,194 12,216
Mortgage-backed securities available for sale 19,231 10,372
Mortgage-backed securities held to maturity - 25
Loans receivable, held for sale 956 1,388
Loans receivable, net 186,099 157,983
Savings deposits 251,553 251,236
FHLB advances 21,607 24,632
Retained earnings 29,482 29,301
Stockholders' equity 27,505 27,509
Stockholders' equity per share $ 14.26 $ 14.59
STATISTICAL PROFILE Three months ended
September 30,
---------------------------
2004 2003
---- ----
Average yield earned on all interest-earning assets 4.58% 4.64%
Average rate paid on all interest-bearing liabilities 2.34 2.48
Average interest rate spread 2.24 2.16
Net yield on average interest-earning assets 2.49 2.36
Average interest-earning assets as a percentage of
average interest-bearing liabilities 113.02 112.04
Return on average assets (1) 0.64 0.60
Return on average equity (1) 7.14 6.85
Average equity to average assets 8.96 8.68
- ----------------
(1) Amounts are annualized.
12
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
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, 2004
was $488,000 compared to $470,000 for the same period in the prior year. The
increase of $18,000 or 3.83% was primarily the result of a $41,000 increase in
net interest income and a $38,000 decrease in total operating expense partially
offset by a $51,000 decrease in total other income and a $10,000 increase 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 increased by $41,000 or 2.32% during the three months ended
September 30, 2004 as compared to the same period of the prior year. The
increase was primarily due to an increase in the average balance of net earning
assets of $6.1 million or 22.45%. Additionally, the average interest rate spread
increased from 2.16% for the quarter ended September 30, 2003 to 2.24% for the
quarter ended September 30, 2004.
Interest income on loans receivable and loans held for sale decreased by
$148,000 or 5.51% during the three months ended September 30, 2004 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 6.31% to 5.55% for the
three months ended September 30, 2004 and 2003, respectively. Substantially
offsetting the decrease resulting from the lower average yield was an increase
in the average outstanding balance of loans receivable of $12.8 million or 7.46%
compared to the same period in the prior year. The increase in the average
outstanding balance of loans receivable was due to a $16.9 million or 13.28%
increase in the average outstanding balance of mortgage loans, partially offset
by a $4.1 million or 9.40% decrease in the average outstanding balance of
consumer and other loans. The increase in the average outstanding balance of
loans receivable was primarily the result of increased loan originations coupled
with the continued slowdown of loan repayments. The decrease in the average
yield was primarily due to the generally lower interest rate environment and the
increased origination of adjustable rate mortgages that traditionally carry
lower introductory rates of interest.
Interest on mortgage-backed securities held to maturity and mortgage-backed
securities available for sale increased by $46,000 or 32.86% during the quarter
ended September 30, 2004 as compared to the September 30, 2003 quarter. This
increase was primarily due to an $8.2 million or 67.51% increase in the average
outstanding balance of mortgage-backed securities from September 30, 2003 to
September 30, 2004. This increase was partially offset by a decrease in the
average yield on mortgage-backed securities from 4.63% for the quarter ended
September 30, 2003 to 3.67% for the quarter ended September 30, 2004. The
increase in the average outstanding balance was primarily due to mortgage-backed
securities purchased during the period. At September 30, 2004, the Bank's
portfolio of mortgage-backed securities available for sale had net unrealized
gains of $75,000. This portfolio consists of fixed and adjustable rate
securities with an average
13
yield of 4.09% at September 30, 2004. Rising interest rates would decrease the
unrealized gains in this portfolio if the fixed rate securities were not sold.
There were no mortgage-backed securities held to maturity. 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, 2004. The decrease of $40,000 or 7.45% from the comparable period in 2003
was primarily due to a decrease in the average outstanding balance of $5.2
million or 8.02% during the period. This decrease was slightly offset by an
increase in the average yield on investment securities from 3.31% for the
quarter ended September 30, 2003 to 3.33% for the quarter ended September 30,
2004. The decrease in the average outstanding balance was the result of
securities called during the period. At September 30, 2004, the Bank's portfolio
of investment securities available for sale and investment securities held to
maturity had net unrealized gains of $735,000 and $19,000, 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, 2004 by $1,000 or 0.95% from the comparable period in 2003.
This slight decrease was primarily due to a decrease of $25.5 million or 49.12%
in the average outstanding balance of interest-earning deposits. This decrease
was, to a large extent, offset by an increase in the average yield earned on
such deposits from 0.80% for the quarter ended September 30, 2003 to 1.56% for
the quarter ended September 30, 2004. The decrease in the average balance was
primarily due to the utilization of interest-earning deposits to fund loans and
the outflow of savings deposits from September 30, 2003 to September 30, 2004.
Interest expense on interest-bearing deposits decreased by $173,000 or 12.65%
for the quarter ended September 30, 2004, compared to the same period in 2003.
The decrease was primarily due to a decrease in the average interest rate paid
on savings deposits from 2.19% for the three months ended September 30, 2003 to
2.02% for the three months ended September 30, 2004, reflecting the continued
lower interest rate environment in the 2004 period. Additionally, the average
outstanding balance of interest-bearing deposits decreased $12.7 million or
5.14% from September 30, 2003 to September 30, 2004. The decrease in the average
outstanding balance was primarily due to depositors seeking alternative higher
yielding investments.
Interest expense on borrowings decreased $11,000 or 3.31% for the quarter ended
September 30, 2004 compared to the quarter ended September 30, 2003 primarily
due to a $3.1 million decrease in the average outstanding balance of FHLB
advances. Partially offsetting the decrease in interest expense resulting from
the lower average balance was an increase in the average rate paid on such
advances from 5.27% at September 30, 2003 to 5.81% at September 30, 2004.
PROVISION FOR LOAN LOSSES. The Bank provided $3,000 to its allowance for loan
losses for each of the quarters ended September 30, 2004 and 2003, 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.
14
At September 30, 2004, the Bank's allowance for loan losses amounted to $2.0
million or 1.07% of the total 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.
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, 2004. Thus, the level of the allowance for loan losses is
substantially unchanged from June 30, 2004. 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 decreased by $51,000 or 12.14% to $369,000 for
the quarter ended September 30, 2004 as compared to the same period in 2003.
This was the result of a decrease in service charge income of $42,000, as well
as an $8,000 decrease in other operating income and a $1,000 decrease in income
from bank owned life insurance. The decrease in service charge income was
primarily related to a timing difference with regard to the recognition of
various fees in conjunction with the acquisition of SFSB Holding Company on
March 28, 2003.
OPERATING EXPENSES. Total operating expenses decreased by $38,000 or 2.52%
during the quarter ended September 30, 2004 as compared to the same quarter in
2003. This decrease was primarily due to a $54,000 decrease in other operating
expenses, a $13,000 decrease in the amortization of core deposit intangible and
a $14,000 decrease in data processing expense. These decreases were largely
offset by a $16,000 increase in compensation and benefits, a $14,000 increase in
premises and occupancy expense and a $14,000 increase in professional fees. The
decrease in other operating expenses was the result of increased efficiencies
attained throughout the period with regard to various items.
INCOME TAX EXPENSE. Income tax expense increased by $10,000 for the quarter
ended September 30, 2004 as compared to the quarter ended September 30, 2003
primarily as a result of increased pre-tax income. Additionally, the effective
tax rate increased slightly from 30.27% for the 2003 quarter to 30.48% for the
2004 quarter.
15
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets increased by $7.3 million or 2.42% from June 30, 2004 to September
30, 2004. The largest increase was a $12.8 million increase in loans receivable,
net and a $451,000 increase in cash. These increases were partially offset by a
$2.5 million decrease in investment securities available for sale, a $1.7
million decrease in mortgage-backed securities available for sale and a $1.2
million decrease in interest-earning deposits with other institutions. The
largest components of change in liabilities were a $5.4 million increase in
savings deposits, a $2.0 million increase in other accrued expenses and sundry
liabilities, a $1.2 million decrease in advance deposits by borrowers for taxes
and insurance and a $600,000 increase in accrued interest payable on savings
deposits. Funds from deposits and repayments or maturities of investment and
mortgage-backed securities were used to fund loan originations.
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, 2004, the
Bank exceeded all of these requirements, with Tier I and Tier II ratios of 7.70%
and 16.46%, respectively.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 2004.
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- ------- ---------
(Dollar amounts in thousands)
Equity capital (1) $23,241 $23,241 $23,241
Plus general valuation allowances (2) -- -- 1,919
------- ------- -------
Total regulatory capital 23,241 23,241 25,160
Minimum required capital 12,081 6,116 12,232
------- ------- -------
Excess regulatory capital $11,160 $17,125 $12,928
======= ======= =======
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $15,101 $ 9,170 $15,283
======= ======= =======
Regulatory capital as a percentage (3) 7.70% 15.21% 16.46%
Minimum required capital percentage 4.00 4.00 8.00
------- ------- -------
Excess regulatory capital percentage 3.70% 11.21% 8.46%
======= ======= =======
Minimum required capital percentage
to be well capitalized under Prompt
Corrective Action Provisions 5.00% 6.00% 10.00%
======= ======= =======
- --------------------------
(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, 2004.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets of
$302,014. Tier I and Tier II risk-based capital are calculated as
percentage of adjusted risk-weighted assets of $152,825.
16
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, 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 14 herein.
ACCOUNTING DEVELOPMENTS
There are no new standards issued and not yet effective that will have a
material impact on the Company.
ITEM 3. 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 2004 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, 2004.
ITEM 4. 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, 2004. 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.
17
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 2005 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, Use of Proceeds and Issuer Purchases of Equity
Securities
None
Item 3. Defaults Upon Senior Securities
None
18
Item 4. Submission of Matters to a Vote of Security Holders
A. The Annual Meeting of Stockholders was held on October 28, 2004 and
the following items were submitted to the stockholders of the Company
for approval:
1. To elect one director for a term of three years or until his
successor has been elected and qualified
Richard J. Cessar
For: 1,655,012
Withheld: 86,828
2. To ratify the appointment of KPMG LLP, as the Company's
independent auditors for the fiscal year ending June 30, 2005.
For: 1,664,961
Against: 72,240
Abstain: 4,639
3. Shareholder proposal to require the Company to expense stock
options as set forth in the proxy statement.
For: 280,066
Against: 680,579
Abstain: 229,067
Broker Non-Vote: 552,128
Item 5. Other Information
None
Item 6. 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
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
LAUREL CAPITAL GROUP, INC.
/s/ Edwin R. Maus
- -----------------------------------------
Edwin R. Maus
President and Chief Executive Officer
/s/ John A. Howard, Jr.
- -----------------------------------------
John A. Howard, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 15, 2004
20