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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, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
----------------
Commission File 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
---
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 1, 2002: 1,876,187 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, 2002 and June 30, 2002
Consolidated Statements of Operations for the three ..... 2
months ended September 30, 2002 and 2001
Consolidated Statement of Stockholders' Equity for the ..... 3
three months ended September 30, 2002
Consolidated Statements of Cash Flows for the three ..... 4
months ended September 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements ..... 5-10
Item 2. Management's Discussion and Analysis of Financial ..... 11-17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 17
Item 4. Controls and Procedures ..... 17
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings ..... 18
Item 2. Changes in Securities and Use of Proceeds ..... 18
Item 3. Defaults Upon Senior Securities ..... 18
Item 4. Submission of Matters to a Vote of
Security Holders ..... 18-19
Item 5. Other Information ..... 19
Item 6. Exhibits and Reports on Form 8-K ..... 19
Signatures ..... 20
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
September 30, June 30,
2002 2002
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Cash $ 1,083 $ 1,051
Money market investments 844 --
Interest-earning deposits with other institutions 31,415 32,812
Investment securities available for sale 41,923 39,156
Investment securities held to maturity (market value of $10,062 and $12,127) 9,904 11,909
Mortgage-backed securities available for sale 9,575 7,998
Mortgage-backed securities held to maturity (market value of $38 and $41) 37 40
Loans receivable, held for sale 1,319 1,371
Loans receivable 177,104 180,125
Allowance for loan losses (1,791) (1,803)
- ---------------------------------------------------------------------------------------------------------------------
Loans receivable, net 175,313 178,322
Federal Home Loan Bank stock 1,637 1,637
Real estate owned 129 131
Accrued interest receivable:
Loans 840 915
Interest-earning deposits and investments 356 537
Mortgage-backed securities 49 40
Office properties and equipment, net of accumulated depreciation 1,255 1,184
Prepaid expenses and sundry assets 735 958
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 276,414 $ 278,061
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $ 224,092 $ 225,419
Federal Home Loan Bank advances 21,619 21,620
Advance deposits by borrowers for taxes and insurance 545 2,506
Accrued interest payable 1,551 522
Accrued income taxes 397 289
Other accrued expenses and sundry liabilities 1,097 1,152
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities 249,301 251,508
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value; 5,000,000 shares
authorized; 2,359,812 and 2,356,401 shares
issued, respectively 24 24
Additional paid-in capital 5,415 5,389
Treasury stock, at cost (475,975 and 473,675 shares) (7,245) (7,157)
Retained earnings 28,448 28,103
Accumulated other comprehensive income, net of tax 909 632
Stock held in deferred compensation trust (438) (438)
- ---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,113 26,553
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 276,414 $ 278,061
=====================================================================================================================
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, 2002 and 2001
(In thousands, except per share data)
Three months ended
September 30,
----------------------------
2002 2001
------ ------
Interest income:
Loans $3,129 $3,390
Mortgage-backed securities 134 150
Investments 581 726
Interest-earning deposits 118 93
------ ------
Total interest income 3,962 4,359
Interest expense:
Savings deposits 1,780 2,108
Borrowings 321 321
------ ------
Total interest expense 2,101 2,429
------ ------
Net interest income before provision
for loan losses 1,861 1,930
Provision for loan losses 3 5
------ ------
Net interest income after provision
for loan losses 1,858 1,925
------ ------
Other income:
Service charges 187 211
Net gain on sale of securities available for sale 4 --
Gain on the sale of loans held for sale 5 11
Other operating income 15 18
------ ------
Total other income 211 240
------ ------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 541 511
Premises and occupancy costs 148 131
Federal insurance premiums 9 9
Net loss on real estate owned 4 7
Data processing expense 74 59
Professional fees 49 24
Other operating expenses 220 251
------ ------
Total operating expenses 1,045 992
------ ------
Income before income taxes 1,024 1,173
------ ------
Provision for income taxes:
Federal 264 304
State 58 65
------ ------
Total income taxes 322 369
------ ------
Net income $702 $804
====== ======
Earnings per share
Basic $0.37 $0.41
====== ======
Diluted $0.35 $0.39
====== ======
Dividends per share $0.19 $0.18
====== ======
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, 2002
(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, 2002 $24 $5,389 ($7,157) $28,103 $632 ($438) $26,553
Comprehensive income:
Net income - - - 702 - - 702
Other comprehensive
income, net of
tax $143 - - - - 277 - 277
--------- ----------- ------------ ------------ -------------- --------------- --------------
Total comprehensive income - - - 702 277 - 979
Stock options exercised
(3,411 shares) - 26 - - - - 26
Dividends on common stock
at $0.19 per share - - - (357) - - (357)
Treasury stock purchased - - (88) - - - (88)
--------- ----------- ------------ ------------ -------------- --------------- --------------
Balance, September 30, 2002 $24 $5,415 ($7,245) $28,448 $909 ($438) $27,113
========= =========== ============ ============ ============== =============== ==============
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, 2002 and 2001
(In thousands)
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Net income: 702 804
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 48 47
Provision for loan losses 3 5
Net gain on sale of investment securities available for sale (4) --
Gain on the sale of loans held for sale (5) (11)
Net amortization (accretion) of deferred loan fees/costs 50 (25)
Origination of loans held for sale (256) (340)
Proceeds from sale of loans held for sale 313 539
Decrease in accrued interest receivable 247 235
Increase in accrued interest payable 1,029 1,186
Other - net 96 355
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,223 2,795
- ---------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities held to maturity (3,000) --
Purchase of investment securities available for sale (2,752) (889)
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 303 750
Principal repayments and maturities of investment securities held to maturity 5,000 6,445
Principal repayments and maturities of mortgage-backed securities available for sale 1,097 712
Principal repayments and maturities of mortgage-backed securities held to maturity 3 96
Decrease in loans receivable 2,956 2,364
Additions to office properties and equipment (119) (2)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 964 9,476
- ---------------------------------------------------------------------------------------------------------------------
Financing activities:
Net decrease in demand and club accounts (569) (398)
Net decrease in time deposit accounts (758) (203)
Net decrease in FHLB advances (1) (1)
Decrease in advance deposits by borrowers for taxes and insurance (1,961) (1,983)
Stock options exercised 26 22
Acquisition of treasury stock (88) (274)
Dividends paid (357) (352)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (3,708) (3,189)
- ---------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (521) 9,082
Cash and cash equivalents at beginning of period 33,863 9,714
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 33,342 18,796
=====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits 751 922
Interest on FHLB advances 321 321
Income taxes 132 197
Cash paid during the period for interest includes interest credited on
deposits of $478 and $627 for the three months ended September 30, 2002
and 2001, respectively
Investment securities held to maturity totaling $2,032 were purchased
during the period ended September 30, 2001 but did not
settle until subsequent to the period end. There were no such purchases
during the period ended September 30, 2002.
=====================================================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2002 and June 30, 2002
(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
generally accepted accounting principles. 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, 2002. The results of operations for the
three months ended September 30, 2002 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") 2002 Annual Report to Stockholders for the
year ended June 30, 2002. 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,
2002 2001
------------- -----------
Basic earnings per share:
Net income $702 $804
Weighted average shares outstanding 1,882,328 1,955,821
Earnings per share $0.37 $0.41
Diluted earnings per share:
Net income $702 $804
Weighted average shares outstanding 1,882,328 1,955,821
Dilutive effect of employee
stock options 108,671 88,188
------- ------
Diluted weighted shares outstanding 1,990,999 2,044,009
Earnings per share $0.35 $0.39
Options to purchase 108,671 shares of common stock were outstanding during the
three months ended September 30, 2002 and were 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
Options to purchase 8,430 shares of common stock at $18.00 and 8,430 shares of
common stock at $19.50 per share were outstanding during the three months ended
September 30, 2001, but were not included in the computation of diluted earnings
per share because the option exercise price was greater than the average market
price of the common shares, and therefore, the effect would be antidilutive.
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, 2002 and 2001, the Company's total
comprehensive income was $979 and $1,121, respectively. Total comprehensive
income is comprised of net income of $702 and $804, respectively, and other
comprehensive income of $277 and $317, 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. 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
6
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 $5,000 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 accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes 90 days past due, whichever occurs first. When interest accrual
is discontinued, all unpaid accrued interest is reserved. Such interest
ultimately collected is credited to income in the period of recovery or applied
to reduce principal if there is sufficient doubt about the 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, 2002:
Municipal obligations $18,247 $ 984 $ -- $19,231
Government Agency Notes 1,999 17 -- 2,016
FHLMC preferred stock 750 38 -- 788
FNMA common stock 966 49 122 893
FHLMC common stock 786 88 35 839
SLMA Student Loan Trust 155 12 -- 167
Shay Financial Services ARM Fund 17,989 -- -- 17,989
------------------------------------------------
40,892 1,188 157 41,923
Mortgage-backed securities available for sale 9,229 351 5 9,575
------------------------------------------------
Total 50,121 1,539 162 51,498
================================================
At September 30, 2002, the contractual maturities of the debt securities Amortized Fair
available for sale are: Cost Value
-------------------------
Due in one through five years 2,154 2,183
Due after five years through ten years 187 191
Due after ten years 18,060 19,040
-------------------------
Total 20,401 21,414
=========================
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
and the Shay Financial Services ARM Fund have no stated maturity.
Note: Proceeds from the sale of mortgage-backed securities available
for sale during the three months ended September 30, 2002 and
2001 were $963,000 and $--, respectively. Gross realized gains on
those sales were $4 and $--, respectively.
There were no sales of investment securities available for sale
during the three months ended September 30, 2002 and 2001.
Investment and mortgage-backed securities held to maturity are
comprised of the following:
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
AT SEPTEMBER 30, 2002
Corporate and Agency bonds $9,904 $159 $1 $10,062
Mortgage-backed securities 37 1 -- 38
---------------------------------------------------------------------
Total $9,941 $160 $1 $10,100
=====================================================================
At September 30, 2002, the contractual maturities of the debt securities Amortized Fair
held to maturity are: Cost Value
------------------------------
Due in less than one year $4,406 $4,407
Due after one year through five years 2,499 2,522
Due after ten years 2,999 3,133
------------------------------
Total $9,904 $10,062
==============================
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,
2002 2002
-------------------------------------------------------------------------------------------------------------------
First mortgage loans:
1 to 4 family dwellings $126,063 $131,336
Multi-family dwellings 3,214 3,202
Commercial 5,680 4,496
Guaranteed or insured 22 23
Construction and development loans 10,869 9,687
-------------------------------------------------------------------------------------------------------------------
145,848 148,744
Commercial loans 2,030 1,560
Consumer loans:
Loans secured by savings accounts 206 227
Installment loans 34,694 34,234
-------------------------------------------------------------------------------------------------------------------
36,930 36,021
-------------------------------------------------------------------------------------------------------------------
Loans receivable, net of unearned discounts 182,778 184,765
Less: Allowance for loan losses (1,791) (1,803)
Loans in process (5,779) (4,719)
Net deferred loan origination costs (fees collected) 105 79
-------------------------------------------------------------------------------------------------------------------
Loans receivable, net $175,313 $178,322
===================================================================================================================
Changes in the allowance for loan losses for the three months ended
September 30, 2002 and 2001 are as follows:
Fiscal Fiscal
2003 2002
-------------------------------------------------------------------------------------------------------------------
Balance at beginning of the fiscal year $1,803 $1,759
Provision for losses 3 5
Charge-offs (16) (4)
Recoveries 1 1
-------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 and 2001 $1,791 $1,761
===================================================================================================================
At September 30, 2002, there were no loans that are considered to be
impaired under SFAS 114.
September 30,
2002 2001
--------------------------
Non-accrual loans $275 $507
Non-accrual loans as a percent of total loans, net 0.16 % 0.29 %
- ------------------------------
All loans 90 days or more past due are reported as non-accrual.
9
(5) ACQUISITION
-----------
On September 12, 2002, the Company announced it had entered into a definitive
agreement to acquire SFSB Holding Company and Stanton Federal Savings Bank. As
of June 30, 2002, SFSB Holding Company had total assets of $53.5 million,
deposits of $42.7 million and stockholders' equity of $7.1 million. Pending
approval by SFSB Holding Company's stockholders and applicable regulatory
authorities, the transaction is expected to be completed in the first quarter of
calendar year 2003.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET DATA At September 30,
2002 2001
---- ----
(In thousands except per share data)
----------------------------------
Unaudited)
Total assets $276,414 $259,563
Interest-earning deposits with other institutions 31,415 17,935
Investment securities available for sale 41,923 40,234
Investment securities held to maturity 9,904 9,526
Mortgage-backed securities available for sale 9,575 9,409
Mortgage-backed securities held to maturity 37 54
Loans receivable held for sale 1,319 1,513
Loans receivable, net 175,313 174,564
Savings deposits 224,092 205,035
FHLB advances 21,619 21,625
Retained earnings 28,448 26,879
Stockholders' equity 27,113 26,648
Stockholders' equity per share $14.39 $13.70
STATISTICAL PROFILE Three months ended
September 30,
--------------------------------
2002 2001
---- ----
Average yield earned on all interest-earning assets 5.84 % 6.95 %
Average rate paid on all interest-bearing liabilities 3.57 4.48
Average interest rate spread 2.27 2.47
Net yield on average interest-earning assets 2.73 3.08
Average interest-earning assets as a percentage of
average interest-bearing liabilities 115.83 116.65
Return on average assets (1) 1.01 1.25
Return on average equity (1) 10.49 12.14
Average equity to average assets 9.63 10.27
- --------------------------------------
(1) Amounts are annualized
11
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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, 2002
was $702,000 compared to $804,000 for the same period in the prior year. The
decrease of $102,000 or 12.69% was primarily the result of a $69,000 decrease in
net interest income, a $29,000 decrease in total other income and a $53,000
increase in total operating expense partially offset by a $47,000 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 $69,000 or 3.58% during the three months ended
September 30, 2002 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 2.47% for the quarter ended September 30, 2001 to 2.27% for the quarter
ended September 30, 2002. This decrease was partially offset by an increase in
the average balance of net earning assets of $1.5 million or 4.08%.
Interest income on loans receivable and loans held for sale decreased by
$261,000 or 7.70% during the three months ended September 30, 2002 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 7.68% to 7.07% for the
three months ended September 30, 2001 and 2002, respectively. The average
outstanding balance of loans receivable increased $571,000 or 0.32% compared to
the same period in the prior year. The increase in the average outstanding
balance of loans receivable was due to a $452,000 or 0.32% increase in the
average outstanding balance of mortgage loans and a $119,000 or 0.33% increase
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 in excess of loan repayments. The decrease in the
average yield was primarily due to generally lower market interest rates.
Interest on mortgage-backed securities held to maturity and mortgage-backed
securities available for sale decreased by $16,000 or 10.67% during the quarter
ended September 30, 2002 as compared to the September 30, 2001 quarter. This
decrease was primarily due to a decrease in the average yield on mortgage-backed
securities from 6.25% for the quarter ended September 30, 2001 to 5.68% for the
quarter ended September 30, 2002. Additionally, the average outstanding balance
of mortgage-backed securities during the quarter ended September 30, 2002 as
compared to the September 30, 2001 quarter decreased $172,000 or 1.79%. This
decrease was primarily due to a decline in market interest rates which resulted
in increased repayments. At September 30, 2002, the Bank's portfolio of
mortgage-backed securities available for sale had net unrealized gains of
$346,000. This portfolio consists of fixed and adjustable rate securities with
an average yield of 5.48% at September 30, 2002. Rising interest rates would
decrease the unrealized gains in this 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)
12
with a yield of 2.69% at September 30, 2002. At September 30, 2002, the Bank's
portfolio of mortgage-backed securities held to maturity had an amortized cost
and fair market value of $37,000 and $38,000, 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, 2002 by $145,000 or 19.97% from the comparable period in 2001, primarily due
to a decrease in the average yield on investment securities from 5.48% for the
quarter ended September 30, 2001 to 4.27% for the quarter ended September 30,
2002, reflecting the lower interest rate environment in the 2002 period. This
decrease was partially offset by a $1.4 million or 10.59% increase in the
average outstanding balance for the quarter ended September 30, 2002 as compared
to the same period in the prior fiscal year. The increase in the average
outstanding balance was primarily due to purchases of relatively short-term
government agency notes. At September 30, 2002, the Bank's portfolio of
investment securities available for sale and investment securities held to
maturity had net unrealized gains of $1.0 million and $158,000, respectively.
See Note 3 of "Notes to Unaudited Consolidated Financial Statements."
Interest income on interest-earning deposits increased during the three months
ended September 30, 2002 by $25,000 or 26.88% from the comparable period in
2001. This increase was primarily due to an increase of $19.0 million or 170.58%
in the average outstanding balance of interest-earning deposits for the quarter
ended September 30, 2002 as compared to the September 30, 2001 quarter. This
increase was, to a large extent, offset by a decrease in the average yield on
interest-earning deposits from 3.31% for the quarter ended September 30, 2001 to
1.54% for the quarter ended September 30, 2002. The increase in the average
balance was primarily a result of increases in deposit balances and the
temporary investment of funds from the repayment of loans and investment and
mortgage-backed securities.
Interest expense on interest-bearing deposits decreased by $328,000 or 15.56%
for the quarter ended September 30, 2002, compared to the same period in 2001.
The decrease was primarily due to a decrease in the average interest rate paid
on savings deposits from 4.33% for the three months ended September 30, 2001 to
3.33% for the three months ended September 30, 2002, reflecting the lower
interest rate environment in the 2002 period. This decrease was partially offset
by a $19.4 million or 10.02% increase in the average outstanding balance of such
deposits during the three months ended September 30, 2002 as compared to the
same period of the prior year.
Interest expense on borrowings for the quarter ended September 30, 2002 compared
to the quarter ended September 30, 2001 remained the same. This consistency was
the result of an insignificant change in the average outstanding balance of FHLB
advances coupled with the steady average rate paid on borrowings of 5.89%.
PROVISION FOR LOAN LOSSES. The Bank provided $3,000 to its allowance for loan
losses for the quarter ended September 30, 2002 and $5,000 to its allowance for
loan losses for the quarter ended September 30, 2001. Such provisions were the
result of an analysis of the allowance for loan losses
13
in connection with a review of the Bank's loan portfolio.
At both September 30, 2002 and 2001, the Bank's allowance for loan losses
amounted to $1.8 million or 1.01% and 1.00%, respectively, 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,
2002. Thus, the level of the allowance for loan losses is substantially
unchanged from June 30, 2002. 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 $29,000 or 12.08% to $211,000 for
the quarter ended September 30, 2002 as compared to the same period in 2001.
This was the result of a decrease in service charge income of $24,000, as well
as a $6,000 decrease in the gain on the sale of loans held for sale and a $3,000
decrease in other operating income partially offset by a $4,000 increase in the
gain on the sale of investments and mortgage-backed securities available for
sale.
OPERATING EXPENSES. Total operating expenses increased by $53,000 or 5.34%
during the quarter ended September 30, 2002 as compared to the same quarter in
2001. This increase was primarily due to a $30,000 increase in compensation and
benefits expense and a $25,000 increase in professional fees. The 5.87% increase
in compensation and benefits expense was primarily due to normal salary
increases. The 104.16% increase in professional fees was due to increased legal
fees during the period. Additionally, premises and occupancy expense increased
$17,000 and data processing expense increased $15,000. These increases were
partially offset by a $31,000 decrease in other operating expenses and a $3,000
decrease in net loss on real estate owned.
INCOME TAX EXPENSE. Income tax expense decreased by $47,000 for the quarter
ended September 30, 2002 as compared to the quarter ended September 30, 2001
primarily as a result of lower pre-tax income. Additionally, the effective tax
rate decreased slightly from 31.47% for the 2001 quarter to 31.45% for the 2002
quarter.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets decreased by $1.6 million or 0.59% from June 30, 2002 to September
30, 2002. The largest decrease was a $3.0 million decrease in
14
loans receivable, net. Additionally, there was a $2.0 million decrease in
investment securities held to maturity and a $1.4 million decrease in
interest-earning deposits with other institutions. These decreases were
partially offset by a $2.8 million increase in investment securities available
for sale and a $1.6 million increase in mortgage-backed securities available for
sale. The largest components of change in liabilities were a $2.0 million
decrease in advance deposits by borrowers for taxes and insurance and a $1.3
million decrease in savings deposits. These decreases were partially 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, 2002, the
Bank exceeded all of these requirements, with Tier I and Tier II ratios of 9.31%
and 19.35%, respectively.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 2002.
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- --------- ---------
(Dollar amounts in thousands)
Equity capital (1) $25,865 $25,865 $25,865
Plus general valuation allowances (2) - - 1,787
Plus allowable unrealized gains - - 8
------- ------- ------
Total regulatory capital 25,865 25,865 27,660
Minimum required capital 11,118 5,717 11,434
------- ------- ------
Excess regulatory capital $14,747 $20,148 $16,226
======= ======= =======
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $13,897 $ 8,576 $14,293
======= ======= =======
Regulatory capital as a percentage (3) 9.31% 18.10% 19.36%
Minimum required capital percentage 4.00 4.00 8.00
---- ----- ----
Excess regulatory capital percentage 5.31% 14.10% 11.36%
==== ===== =====
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, 2002.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets of
$277,945. Tier I and Tier II risk-based capital are calculated as
percentage of adjusted risk-weighted assets of $142,946.
15
ACQUISITION
On September 12, 2002 the Company announced it had entered into a definitive
agreement to acquire SFSB Holding Company and Stanton Federal Savings Bank. The
transaction is expected to be completed in the first quarter of calendar year
2003. See Note 5 to Consolidated Financial Statements.
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 pages 13 and 14
herein.
ACCOUNTING DEVELOPMENTS
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of; however, it retains many of the
fundamental provisions of that statement.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in APB No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced management's ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. Early application is
16
encouraged. The provisions of SFAS No. 144 generally are to be applied
prospectively. The adoption of SFAS No. 144 did not have a material effect on
the financial position, results of operations or liquidity of 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 2002 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, 2002.
CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (its principal
executive officer and principal financial officer, respectively) have evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures within 90 days of the filing date of this Form 10-Q.
Based on their evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that these disclosure controls and procedures are
effective. There have been no significant changes to the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of such evaluation.
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.
17
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
PART II
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
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
A. The Annual Meeting of Stockholders was held on October 24, 2002
and the following items were submitted to the stockholders of the
Company for approval:
1. To elect one director for a term of one year and two
directors for a term of three years or until their
successors have been elected and qualified
Nominee for a one-year term:
Edwin R. Maus
For: 1,614,182
Withheld: 85,516
Nominees for a three-year term:
Richard S. Hamilton
For: 1,649,570
Withheld: 50,128
J. Harold Norris
For: 1,652,748
Withheld: 46,950
2. To ratify the appointment of KPMG LLP, as the Company's
independent auditors for the fiscal year ending June 30,
2003.
For: 1,628,567
Against: 68,591
Abstain: 2,540
18
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
99.1 Certification of President and CEO pursuant to section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Senior Vice President and CFO pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
-------------------
On September 27, 2002, Laurel Capital Group, Inc. ("Laurel")
filed a Form 8-K to report under "Item 5. Other Events" that
Laurel and SFSB Holding Company ("SFSB") entered into an
Agreement and Plan of Reorganization which sets forth the terms
and conditions under which SFSB will be acquired by Laurel. No
financial statements were required to be filed with the Form 8-K.
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 14, 2002
20
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Edwin R. Maus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laurel Capital Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ( the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly
21
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002
/s/ Edwin R. Maus
- -----------------
Edwin R. Maus
President and Chief Executive Officer
22
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John A. Howard Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laurel Capital Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ( the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
d. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly
23
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002
/s/ John A. Howard, Jr.
- ----------------------
John A. Howard Jr.
Senior Vice President and Chief Financial Officer
24