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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: March 31, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
---------------- ---------------
Commission File Number: 0-23010
LAUREL CAPITAL GROUP, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1717451
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2724 Harts Run Road
Allison Park, Pennsylvania 15101
- ------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: (412) 487-7404
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
The number of shares outstanding for each of the issuer's classes of common
stock, as of the latest practicable date is:
Class: Common stock, par value $.01 per share
Outstanding at May 15, 2003: 1,879,964 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
March 31, 2003 and June 30, 2002 1
Consolidated Statements of Operations for the Three
and Nine months ended March 31, 2003 and 2002 2
Consolidated Statement of Stockholders' Equity for the
nine months ended March 31, 2003 3
Consolidated Statements of Cash Flows for the nine
months Ended March 31, 2003 and 2002 4
Notes to Unaudited Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of Financial 12-20
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
Part II - Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
March 31, June 30,
2003 2002
- --------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Cash $2,180 $1,051
Money Market Investments $1,184 -
Interest-earning deposits with other institutions 32,476 32,812
Investment securities available for sale 51,310 39,156
Investment securities held to maturity (market value of $12,601 and $12,127) 12,518 11,909
Mortgage-backed securities available for sale 16,001 7,998
Mortgage-backed securities held to maturity (market value of $30 and $41) 30 40
Loans receivable, held for sale 1,586 1,371
Loans receivable 189,185 180,125
Allowance for loan losses (2,014) (1,803)
- --------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 187,171 178,322
Federal Home Loan Bank stock 2,223 1,637
Real estate owned 130 131
Accrued interest receivable:
Loans 804 915
Interest-earning deposits and investments 466 537
Mortgage-backed securities 38 40
Office properties and equipment, net of accumulated depreciation 2,359 1,184
Goodwill 2,682 -
Intangible Asset 2,006 -
Prepaid expenses and sundry assets 1,591 958
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $316,755 $278,061
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $259,388 $225,419
Federal Home Loan Bank advances 24,713 21,620
Advance deposits by borrowers for taxes and insurance 1,971 2,506
Accrued interest payable 1,282 522
Accrued income taxes 51 289
Other accrued expenses and sundry liabilities 1,965 1,152
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 289,370 251,508
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value; 5,000,000
shares authorized; 2,366,639 and 2,356,401 shares
issued, respectively 24 24
Additional paid-in capital 5,470 5,389
Treasury stock, at cost (483,975 and 473,675 shares) (7,405) (7,157)
Retained earnings 29,010 28,103
Accumulated other comprehensive income, net of tax 724 632
Stock held in deferred compensation trust (438) (438)
- --------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,385 26,553
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $316,755 $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 and Nine Months Ended March 31, 2003 and 2002
(In thousands, except per share data)
Three months ended Nine months ended
March 31, March 31,
------------------------------- ---------------------------------
2003 2002 2003 2002
------------- -------------- --------------- --------------
Interest income:
Loans $2,805 $3,217 $8,945 $9,842
Mortgage-backed securities 112 121 369 402
Investments 578 599 1,725 1,975
Interest-earning deposits 69 51 274 224
------------- -------------- --------------- --------------
Total interest income 3,564 3,988 11,313 12,443
Interest expense:
Savings deposits 1,461 1,735 4,876 5,792
Borrowings 315 314 957 957
------------- -------------- --------------- --------------
Total interest expense 1,776 2,049 5,833 6,749
------------- -------------- --------------- --------------
Net interest income before provision
for loan losses 1,788 1,939 5,480 5,694
Provision for loan losses 3 5 9 14
------------- -------------- --------------- --------------
Net interest income after provision
for loan losses 1,785 1,934 5,471 5,680
------------- -------------- --------------- --------------
Other income:
Service charges 179 190 583 624
Net gain on sale of securities available for sale - - 4 55
Gain on the sale of loans held for sale - 4 7 18
Other operating income 24 18 59 53
------------- -------------- --------------- --------------
Total other income 203 212 653 750
------------- -------------- --------------- --------------
Operating expenses:
Compensation, payroll taxes and
fringe benefits 554 521 1,609 1,532
Premises and occupancy costs 213 136 494 417
Federal insurance premiums 9 9 28 28
Net loss on real estate owned 1 20 12 29
Data processing expense 66 61 205 178
Professional fees 30 35 113 103
Other operating expenses 310 263 797 760
------------- -------------- --------------- --------------
Total operating expenses 1,183 1,045 3,258 3,047
---------------- --------------- ---------------- ---------------
Income before income taxes 805 1,101 2,866 3,383
------------- -------------- --------------- --------------
Provision for income taxes:
Federal 194 287 727 875
State 44 64 161 195
------------- -------------- --------------- --------------
Total income taxes 238 351 888 1,070
------------- -------------- --------------- --------------
Net income $567 $750 $1,978 $2,313
============= ============== =============== ==============
Earnings per share
Basic $0.30 $0.39 $1.05 $1.19
============= ============== =============== ==============
Diluted $0.29 $0.37 $1.00 $1.13
============= ============== =============== ==============
Dividends per share $0.19 $0.18 $0.57 $0.54
============= ============== =============== ==============
See accompanying notes to unaudited consolidated financial statements
2
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the Nine Months Ended March 31, 2003
(In thousands)
Accumulated
Other Stock Held in
Additional Comprehensive Deferred Total
Common Paid-in Treasury Retained Income, Compensation Stockholders'
Stock Capital Stock Earnings Net of Tax Trust Equity
--------- -------- --------- --------- -------------- ------------- -------------
Balance, June 30, 2002 $24 $5,389 ($7,157) $28,103 $632 ($438) $26,553
Comprehensive income:
Net income - - - 1,978 - - 1,978
Other comprehensive income,
net of tax $47 - - - - 92 - 92
---- ------- -------- -------- ----- ------- --------
Total comprehensive income - - - 1,978 92 - 2,070
Stock options exercised
(10,238 shares) - 81 - - - - 81
Dividends on common stock
at $0.57 per share - - - (1,071) - - (1,071)
Treasury stock purchased - - (248) - - - (248)
---- ------- -------- -------- ----- ------- --------
Balance, March 31, 2003 $24 $5,470 ($7,405) $29,010 $724 ($438) $27,385
==== ======= ======== ======== ===== ======= ========
See accompanying notes to unaudited consolidated financial statements
3
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended March 31, 2003 and 2002
(In thousands)
2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Net income: $1,978 $2,313
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 207 143
Provision for loan losses 9 14
Net (gain) loss on sale of real estate owned (5) 20
Net gain on sale of investment securities available for sale (4) (55)
Gain on the sale of loans held for sale (7) (18)
Net Amortization (accretion) of deferred loan fees 146 -
Origination of loans held for sale (665) (721)
Proceeds from sale of loans held for sale 457 953
Decrease in accrued interest receivable 334 386
Increase in accrued interest payable 728 926
Other - net (250) (128)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,928 3,833
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities held to maturity (17,950) (8,010)
Purchase of investment securities available for sale (4,982) (1,772)
Purchase of mortgage-backed securities available for sale (5,487) (1,027)
Purchase of FHLB stock (248) -
Proceeds from sale of investment securities available for sale 963 358
Principal repayments and maturities of investment securities available for sale 1,809 2,100
Principal repayments and maturities of investment securities held to maturity 17,400 9,445
Principal repayments and maturities of mortgage-backed securities available for sale 4,113 3,129
Principal repayments and maturities of mortgage-backed securities held to maturity 10 105
Decrease (increase) in loans receivable 13,333 (255)
Proceeds from sale of real estate owned 32 278
Acquisition - net of cash and cash equivalents (248) -
Net additions to office properties and equipment (577) (79)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 8,168 4,272
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in demand and club accounts 1,004 4,959
Net decrease in time deposit accounts (8,247) (3,673)
Net decrease in FHLB advances (4) (4)
Decrease in advance deposits by borrowers for taxes and insurance (634) (259)
Stock options exercised 81 43
Acquisition of treasury stock (248) (686)
Dividends paid (1,071) (1,052)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (9,119) (672)
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,977 7,433
Cash and cash equivalents at beginning of period 33,863 9,714
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $35,840 $17,147
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest on savings deposits $4,876 $4,886
Interest on FHLB advances 957 954
Income taxes 1,027 1,132
Transfer of loans to real estate owned 26 210
Cash paid during the period for interest includes interest credited on
deposits of $3,750 and $4,092 for the nine months ended March 31, 2003 and
2002, respectively.
Assets acquired and liabilities assumed in conjunction with the
acquisition of SFSB Holding Company and Stanton Federal Savings Bank:
Fair value of assets acquired 54,473
Fair value of liabilities assumed (45,143)
-------
Excess of assets acquired over liabilities assumed 9,330
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
4
LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 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
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, 2002.
The results of operations for the three and nine months ended March 31, 2003 are
not necessarily indicative of the results which may be expected for the entire
fiscal year. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in Laurel Capital Group, Inc.'s (the "Company") 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 Nine months ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic earnings per share:
Net income $ 567 $ 750 $ 1,978 $ 2,313
Weighted average shares outstanding 1,881,271 1,934,369 1,880,767 1,945,130
Earnings per share $ 0.30 $ 0.39 $ 1.05 $ 1.19
Diluted earnings per share:
Net income $ 567 $ 750 $ 1,978 $ 2,313
Weighted average shares outstanding 1,881,271 1,934,369 1,880,767 1,945,130
Dilutive effect of employee
stock options 95,082 106,423 102,130 95,105
---------- ---------- ---------- ----------
Diluted weighted shares outstanding 1,976,353 2,040,792 1,982,897 2,040,235
Earnings per share $ 0.29 $ 0.37 $ 1.00 $ 1.13
Options to purchase 8,430 shares of common stock at $19.50 were outstanding
during the three months ended March 31, 2003 but were not included in the
computation of diluted earnings per share. These options were excluded because
the option exercise price was greater than the average market price of the
common shares resulting in an antidilutive effect. All outstanding options
during the nine months ended March 31, 2003 were included in the computation of
diluted earnings per share because the
5
option exercise price for these options was less than the average market price
of the common shares.
Options to purchase 8,430 shares of common stock at $18.00 and 16,860 shares of
common stock at prices ranging from $18.00 to $19.50 were outstanding during the
three and nine months ended March 31, 2002, respectively, 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 the 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 nine
months ended March 31, 2003 and 2002, the Company's total comprehensive income
was $2,070 and $2,182, respectively. Total comprehensive income is comprised of
net income of $1,978 and $2,313, respectively, and other comprehensive
income(loss) of $92 and $(131), 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 possible 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
6
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 $5,000 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.
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 MARCH 31, 2003:
Municipal obligations $18,457 $815 - $19,272
US Government Agency Securities $4,039 $28 - 4,067
Corporate Bonds $1,084 - - 1,084
Trust Preferred Securities $250 - - 250
FHLMC preferred stock 750 33 - 783
FNMA common stock 966 14 - 980
FHLMC common stock 998 10 - 1,008
SLMA Student Loan Trust 9 2 - 11
CRA Mutual Fund 1,000 - - 1,000
Scudder/Kemper US Government Securities Fund 220 - - 220
Shay Financial Services ARM Fund 22,653 - 18 22,635
-----------------------------------------------------------
50,426 902 18 51,310
Mortgage-backed securities available for sale 15,788 238 25 16,001
-----------------------------------------------------------
Total $66,214 $1,140 $43 $67,311
-----------------------------------------------------------
At March 31, 2003, the contractual maturities of the Amortized Fair
debt securities available for sale are: Cost Value
------------------------------
Due after five years through ten years $6,711 $6,883
Due after ten years 32,916 33,802
------------------------------
Total $39,627 $40,685
==============================
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, CRA Mutual Fund and Shay
Financial Services ARM Fund have no stated maturity.
Note: Proceeds from the sale of investments and mortgage-backed securities
available for sale during the nine months ended March 31, 2003 and 2002
were $963 and $358, respectively. Gross realized gains on those sales were
$4 and $55, respectively.
Investment and mortgage-backed securities held to maturity are comprised of the
following:
Amortized Gross Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
AT MARCH 31, 2003
Corporate and Agency bonds $12,518 $156 $73 $12,601
Mortgage-backed securities 30 - - 30
-----------------------------------------------------------
Total $12,548 $156 $73 $12,631
-----------------------------------------------------------
At March 31, 2003, the contractual maturities of the Amortized Fair
debt securities held to maturity are: Cost Value
------------------------------
Due after one year through five years $4,494 $4,507
Due after five years through ten years 3,025 2,954
Due after ten years 5,029 5,170
------------------------------
Total $12,548 $12,631
==============================
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:
March 31, June 30,
2003 2002
--------------------------------------------------------------------------------------------------------------------
First mortgage loans:
1 to 4 family dwellings $130,784 $131,359
Multi-family dwellings 2,681 3,202
Commercial 5,544 4,496
Construction and development loans 10,673 9,687
--------------------------------------------------------------------------------------------------------------------
149,682 148,744
Commercial loans 1,052 1,560
Consumer loans:
Loans secured by savings accounts 491 227
Installment loans 43,314 34,234
--------------------------------------------------------------------------------------------------------------------
44,857 36,021
--------------------------------------------------------------------------------------------------------------------
Loans receivable, net of unearned discounts 194,539 184,765
Less: Allowance for loan losses (2,014) (1,803)
Loans in process (5,505) (4,719)
Net deferred loan origination costs (fees collected) 151 79
--------------------------------------------------------------------------------------------------------------------
Loans receivable, net $187,171 $178,322
--------------------------------------------------------------------------------------------------------------------
Changes in the allowance for loan losses for the nine months ended
March 31, 2003 and 2002 are as follows:
Fiscal Fiscal
2003 2002
--------------------------------------------------------------------------------------------------------------------
Balance at beginning of the fiscal year $1,803 $1,759
Provision for losses 9 14
Charge-offs (18) (20)
Recoveries 11 36
Allowance on loans acquired from Stanton Federal Savings Bank 209 -
--------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2003 and 2002 $2,014 $1,789
--------------------------------------------------------------------------------------------------------------------
At March 31, 2003, there were no loans that are considered to be
impaired under SFAS 114.
March 31,
2003 2002
-------------------------------------
Non-accrual loans $953 $193
Non-accrual loans as a percent of total loans, net 0.51 % 0.11 %
- ------------------
All loans 90 days or more past due are reported as non-accrual.
9
(5) ACQUISITION
On March 28, 2003, the Company completed the acquisition of SFSB Holding Company
and Stanton Federal Savings Bank. SFSB Holding Company was the holding company
for Stanton Federal Savings Bank, a federal savings bank founded in 1890. As a
result of the acquisition, the Company is expected to have an increased market
share in their market area. Additionally, the Company expects to reduce and
eliminate certain costs identified through the acquisition process.
Under the terms of the agreement, shareholders received $19.05 in cash for each
share of SFSB Holding Company common stock, or approximately $9.2 million.
The acquisition was accounted for under the purchase method of accounting in
accordance with Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations," and Statement No. 142, "Goodwill and Other Intangible
Assets." With regard to the transaction, the Company acquired loans with a fair
value of approximately $24.2 million, investment and mortgage-backed securities
with a fair value of approximately $16.5 million, deposits with a fair value of
approximately $41.2 million and a Federal Home Loan Bank advance with a fair
value of approximately $3.1 million. Goodwill and core deposit intangibles
arising from the transaction were approximately $2.7 million and $2.0 million,
respectively. The estimated useful life for the amortization of the core deposit
intangible is expected to be 10 years.
The following summarizes the estimated fair value of the assets acquired and the
liabilities assumed at the date of acquisition. The Company has received initial
third party valuations of certain intangible assets, however, the allocation of
the purchase price is subject to refinement.
MARCH 31, 2003
Cash and cash equivalents $ 9,083
Interest earning assets 39,081
Property and equipment 805
Intangible assets 2,006
Goodwill 2,682
Other Assets 816
----------------
Total assets acquired 54,473
----------------
Interest bearing deposits 37,707
Non-interest bearing deposits 3,505
Short-term debt 3,097
Other non-interest bearing liabilities 834
----------------
Total liabilities assumed 45,143
----------------
Net assets acquired $9,330
----------------
(6) 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
10
potential amount of future payments the Company could be required to make under
these guarantees is $215,000 of which 100% is fully collateralized. Currently,
no liability has been recognized by the Company for these obligations. There are
no recourse provisions that would enable the Company to recover any amounts from
third parties.
(7) 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 March 31, Nine Months ended March 31,
2003 2002 2003 2002
---- ---- ---- ----
Net Income
As reported $567 $750 $1,978 $2,313
Pro forma $553 $736 $1,937 $2,272
Basic earnings per share
As reported $0.30 $0.39 $1.05 $1.19
Pro forma $0.29 $0.38 $1.03 $1.17
Diluted earnings per share
As reported $0.29 $0.37 $1.00 $1.13
Pro forma $0.28 $0.36 $0.98 $1.11
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET DATA At March 31, 2002
2003 2002
---- ----
(In thousands except per share data)
------------------------------------
(Unaudited)
Total assets $316,755 $260,568
Interest-earning deposits with other institutions 32,476 16,110
Investment securities available for sale 51,310 39,000
Investment securities held to maturity 12,518 12,488
Mortgage-backed securities available for sale 16,001 7,895
Mortgage-backed securities held to maturity 30 45
Loans receivable held for sale 1,586 1,486
Loans receivable, net 187,171 176,939
Savings deposits 259,388 206,922
FHLB advances 24,713 21,622
Retained earnings 29,010 27,688
Stockholders' equity 27,385 26,600
Stockholders' equity per share $14.55 $13.81
STATISTICAL PROFILE Three months ended Nine months ended
March 31, March 31,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Average yield earned on all interest-earning assets 5.47 % 6.39 % 5.66 % 6.62 %
Average rate paid on all interest-bearing liabilities 3.16 3.84 3.37 4.18
Average interest rate spread 2.31 2.55 2.29 2.44
Net yield on average interest-earning assets 2.72 3.09 2.74 3.03
Average interest-earning assets as a percentage of
average interest-bearing liabilities 115.14 116.20 115.47 116.44
Return on average assets (1) 0.83 1.16 0.96 1.20
Return on average equity (1) 8.29 11.20 9.76 11.56
Average equity to average assets 10.01 10.37 9.82 10.34
- --------------------------
(1) Amounts are annualized
12
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
GENERAL. Laurel Capital Group, Inc.'s (the "Company") only significant asset is
the stock it owns of its wholly-owned subsidiary, Laurel Savings Bank (the
"Bank"). The Company's net income for the three months ended March 31, 2003 was
$567,000 compared to $750,000 for the same period in the prior year. The
decrease of $183,000 or 24.40% was primarily the result of a $151,000 decrease
in net interest income, a $138,000 increase in total operating expenses and a
$9,000 decrease in other income partially offset by a $113,000 decrease in
income taxes. These and other significant fluctuations are discussed below.
There was little or no impact to the average balances discussed below resulting
from the acquisition of SFSB Holding Company and Stanton Federal Savings Bank.
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 $151,000 or 7.79% during the three months ended
March 31, 2003 as compared to the same period of the prior year. The decrease
was primarily due to a decrease in the average interest rate spread from 2.55%
for the quarter ended March 31, 2002 to 2.31% for the quarter ended March 31,
2003. This decrease was partially offset by an increase in the average balance
of net earning assets of $11.2 million or 4.45%.
Interest income on loans receivable and loans held for sale decreased by
$412,000 or 12.81% during the three months ended March 31, 2003 as compared to
the same period in the prior year. This decrease was primarily due to a decrease
of $10.1 million or 5.72% in the average outstanding balance of loans receivable
compared to the same period in the prior year. The decrease in the average
outstanding balance of loans receivable was due to a $12.0 million or 8.48%
decrease in the average outstanding balance of mortgage loans which was
partially offset by a $1.9 million or 5.29% increase in the average outstanding
balance of consumer loans. Additionally, the average yield on loans receivable
decreased from 7.29% to 6.74% for the three months ended March 31, 2002 and
2003, respectively. The decrease in the average outstanding balance of loans
receivable was primarily the result of loan repayments in excess of loan
originations. 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 $9,000 or 7.44% during the quarter
ended March 31, 2003 as compared to the March 31, 2002 quarter. This decrease
was primarily due to a decrease in the average yield on mortgage-backed
securities from 5.81% for the quarter ended March 31, 2002 to 5.00% for the
quarter ended March 31, 2003. Slightly offsetting the decrease resulting from
the decline in the average yield was an increase in the average outstanding
balance of mortgage-backed securities of $633,000 or 7.60% during the quarter
ended March 31, 2003 as compared to the March 31, 2002 quarter. The decrease in
the average yield was primarily due to a decline in market interest rates which
resulted in increased repayments and downward re-pricing of adjustable rate
securities. At March 31, 2003, the Bank's portfolio of mortgage-backed
securities available for sale had net unrealized gains of $213,000. This
portfolio consists of fixed and adjustable rate securities with an average yield
of 5.35% at March 31, 2003. Rising interest rates would decrease the
13
unrealized gains in this portfolio if the fixed rate securities are not sold.
The mortgage-backed securities held to maturity portfolio consists of one
adjustable-rate collateralized mortgage obligation (CMO) with a yield of 2.53%
at March 31, 2003. At March 31, 2003, the Bank's portfolio of mortgage-backed
securities held to maturity had an amortized cost and fair market value of
$30,000. 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 investments held to maturity and investments available for
sale decreased during the three months ended March 31, 2003 by $21,000 or 3.51%
from the comparable period in 2002, primarily due to a decrease in the average
yield on investment securities from 4.57% for the quarter ended March 31, 2002
to 3.82% for the quarter ended March 31, 2003. The average outstanding balance
of investment securities increased $8.3 million or 15.55% for the quarter ended
March 31, 2003 as compared to the same period in the prior fiscal year. The
increase in the average outstanding balance was primarily due to purchases made
during the period. At March 31, 2003, the Bank's portfolio of investment
securities available for sale and investment securities held to maturity had net
unrealized gains of $884,000 and $83,000, respectively. See Note 3 of "Notes to
Unaudited Consolidated Financial Statements."
Interest income on interest-earning deposits increased during the three months
ended March 31, 2003 by $18,000 or 35.29% from the comparable period in 2002.
This increase was primarily due to an increase of $12.4 million or 92.81% in the
average outstanding balance of interest-earning deposits for the quarter ended
March 31, 2003 as compared to the March 31, 2002 quarter. This increase was, to
a large extent, offset by a decrease in the average yield on interest-earning
deposits from 1.55% for the quarter ended March 31, 2002 to 1.06% for the
quarter ended March 31, 2003. The increase in the average balance was primarily
due to increases in deposit balances and the investment of excess funds
resulting from repayments of loans and investment and mortgage-backed
securities.
Interest expense on interest-bearing deposits decreased by $274,000 or 15.79%
for the quarter ended March 31, 2003, compared to the same period in 2002. The
decrease was primarily due to a decrease in the average interest rate paid on
savings deposits from 3.62% for the three months ended March 31, 2002 to 2.87%
for the three months ended March 31, 2003. This decrease was partially offset by
an $11.7 million or 6.02% increase in the average outstanding balance of such
deposits during the three months ended March 31, 2003 as compared to the same
period of the prior year.
Interest expense on borrowings for the quarter ended March 31, 2003 compared to
the quarter ended March 31, 2002 remained relatively the same. This consistency
was the result of an insignificant change in the average outstanding balance of
FHLB advances coupled with a constant average rate paid on borrowings of 5.81%.
PROVISION FOR LOAN LOSSES. The Bank provided $3,000 to its allowance for loan
losses for the quarter ended March 31, 2003 and $5,000 to its allowance for loan
losses for the quarter ended March 31, 2002. Such provisions were the result of
an analysis of the allowance for loan losses in connection with a review of the
Bank's loan portfolio.
At March 31, 2003, the allowance for loan losses amounted to $2.0 million or
1.06% of
14
the total loan portfolio compared to $1.8 million or 1.00% of the total loan
portfolio at March 31, 2002. The increase in the allowance for loan losses was
primarily the result of the acquisition of loans and their corresponding
allowance for loan losses related to the purchase of SFSB Holding Company.
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 nine months ended March 31,
2003. Thus, the level of the allowance for loan losses as a percentage of the
loan portfolio 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 $9,000 or 4.25% to $203,000 for
the quarter ended March 31, 2003 as compared to the same period in 2002. This
was the result of a decrease in service charge income of $11,000 and a $4,000
decrease in the gain on the sale of loans held for sale partially offset by a
$6,000 increase in other operating income.
OPERATING EXPENSES. Total operating expenses increased by $138,000 or 13.21%
during the quarter ended March 31, 2003 as compared to the same quarter in 2002.
This increase was primarily due to a $77,000 increase in premises and occupancy
expense, a $47,000 increase in other operating expenses and a $33,000 increase
in compensation and benefits expense. The $77,000 increase in premises and
occupancy expense was primarily the result of one-time expenses related to the
recent change in data processors. Additionally, data processing expense
increased $5,000. These increases were partially offset by a $19,000 decrease in
net loss on real estate owned and a $5,000 decrease in professional fees.
INCOME TAX EXPENSE. Income tax expense decreased by $113,000 for the quarter
ended March 31, 2003 as compared to the quarter ended March 31, 2002 primarily
as a result of lower pre-tax income. Additionally, the effective tax rate
decreased slightly from 31.88% for the 2002 quarter to 29.57% for the 2003
quarter.
15
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
GENERAL. The Company's net income for the nine months ended March 31, 2003 was
$2.0 million compared to $2.3 million for the same period in the prior year. The
decrease of $335,000 or 14.48% was primarily the result of a $214,000 decrease
in net interest income, a $211,000 increase in other operating expense and a
$97,000 decrease in other income partially offset by a $182,000 decrease in
income taxes. These and other significant fluctuations are discussed below.
There was little or no impact to the average balances discussed below resulting
from the acquisition of SFSB Holding Company and Stanton Federal Savings Bank.
NET INTEREST INCOME. Net interest income decreased by $214,000 or 3.76% during
the nine months ended March 31, 2003 as compared to the same period of the prior
year. The decrease was primarily due to a decrease in the average interest rate
spread from 2.44% for the nine months ended March 31, 2002 to 2.29% for the nine
months ended March 31, 2003. This decrease was slightly offset by an increase in
the average balance of net earning assets of $283,000 or 0.80%.
Interest income on loans receivable and loans held for sale decreased by
$897,000 or 9.11% during the nine months ended March 31, 2003 as compared to the
same period in the prior year. This decrease was primarily due to a decrease in
the average yield on loans receivable from 7.45% for the nine months ended March
31, 2002 to 6.93% for the nine months ended March 31, 2003. Additionally, the
average outstanding balance of loans receivable decreased $4.1 million or 2.31%
compared to the same period in the prior year. The decrease in the average
outstanding balance of loans receivable was primarily due to a $5.0 million or
3.58% decrease in the average outstanding balance of mortgage loans which was
partially offset by a $943,000 or 2.62% increase in the average outstanding
balance of consumer loans. The decrease in the average yield was primarily due
to lower market interest rates.
Interest on mortgage-backed securities held to maturity and mortgage-backed
securities available for sale decreased by $33,000 or 8.21% during the nine
months ended March 31, 2003 as compared to the same period in the prior year.
This decrease was primarily due to a decrease in the average yield on
mortgage-backed securities from 6.01% to 5.34% for the nine months ended March
31, 2002 and 2003, respectively. This decrease was partially offset by a
$288,000 or 3.23% increase in the average outstanding balance of mortgage-backed
securities during the nine months ended March 31, 2003 as compared to the nine
months ended March 31, 2002.
Interest income on investments held to maturity and investments available for
sale decreased during the nine months ended March 31, 2003 by $250,000 or 12.66%
from the comparable period in 2002. This decrease was primarily due to a
decrease in the average yield on investment securities from 5.05% for the nine
months ended March 31, 2002 to 3.99% for the nine months ended March 31, 2003.
Partially offsetting the decrease resulting from the decline in the average
yield was a $5.5 million or 10.52% increase in the average outstanding balance
of investment securities. The increase in the average outstanding balance was
primarily due to purchases made during the period.
16
Interest income on interest-earning deposits increased during the nine months
ended March 31, 2003 by $50,000 or 22.32% from the comparable period in 2002.
This increase was primarily due to an increase of $14.0 million or 102.63% in
the average outstanding balance of interest-earning deposits for the nine months
ended March 31, 2003 as compared to the same period in the prior year. This
increase was, to a large extent, offset by a decrease in the average yield on
interest-earning deposits from 2.19% for the nine months ended March 31, 2002 to
1.30% for the nine months ended March 31, 2003. The increase in the average
balance was primarily due to increases in deposit balances and repayments of
investment and mortgage-backed securities which exceeded the demand for loans.
Interest expense on interest-bearing deposits decreased by $916,000 or 15.81%
for the nine months ended March 31, 2003 compared to the same period in 2002.
The decrease was primarily due to a decrease in the average interest rate paid
on savings deposits from 3.98% for the nine months ended March 31, 2002 to 3.11%
for the nine months ended March 31, 2003. This decrease was partially offset by
an increase of $15.4 million or 7.94% in the average outstanding balance of
savings deposits during the nine months ended March 31, 2003 as compared to the
same period of the prior year.
Interest expense on borrowings for the nine months ended March 31, 2003 compared
to the nine months ended March 31, 2002 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 5.81%.
PROVISION FOR LOAN LOSSES. The Bank provided $9,000 to its allowance for loan
losses for the nine months ended March 31, 2003 and $14,000 for the nine months
ended March 31, 2002. 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.
OTHER INCOME. Total other income decreased by $97,000 or 12.93% to $653,000 for
the nine months ended March 31, 2003 as compared to the same period in 2002.
This was primarily the result of a $51,000 decrease in the net gain on the sale
of investments and mortgage-backed securities available for sale, a $41,000
decrease in service charges and an $11,000 decrease in the gain on the sale of
loans held for sale. These decreases were partially offset by a $6,000 increase
in other operating income.
OPERATING EXPENSES. Total operating expenses increased by $211,000 or 6.92%
during the nine months ended March 31, 2003 as compared to the same period in
2002. This increase was primarily due to a $77,000 increase in compensation and
benefits, a $77,000 increase in premises and occupancy expense and a $37,000
increase in other operating expense. Additionally, there was a $27,000 increase
in data processing expense and a $10,000 increase in professional fees. The
$77,000 increase in premises and occupancy expense was primarily the result of
one-time expenses related to the recent change in data processors. These
increases were partially offset by a $17,000 decrease in net loss on real estate
owned.
INCOME TAX EXPENSE. Income tax expense decreased by $182,000 or 17.01% for the
nine months ended March 31, 2003 as compared to the nine months ended March 31,
2002 primarily as a result of lower pre-tax income. Additionally, the effective
tax rate decreased slightly from 31.63% for the nine months ended March 31, 2002
to 30.98% for the same period in 2003.
17
FINANCIAL CONDITION AND CAPITAL RESOURCES
Total assets increased by $38.7 million or 13.92% from June 30, 2002 to March
31, 2003. The majority of this increase was comprised of an increase in
marketable securities of $20.1 million or 35.32% and an increase in loans of
$8.8 million or 4.96% both of which resulted primarily from the acquisition of
SFSB Holding Company and Stanton Federal Savings Bank. Additionally, goodwill
and other intangible assets were established with regard to the acquisition of
Stanton Federal Savings Bank in the amount of $2.7 million and $2.0 million,
respectively. Deposits increased $34.0 million and borrowed funds increased $3.1
million primarily resulting from the acquisition of Stanton Federal Savings
Bank. See Note 5 of "Notes to Unaudited Consolidated Financial Statements."
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 March 31, 2003, the Bank
exceeded all of these requirements, with Tier I and Tier II ratios of 8.29% and
12.96%, respectively.
The following table sets forth certain information concerning the Bank's
regulatory capital at March 31, 2003.
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- ------- -------
(Dollar amounts in thousands)
Equity capital (1) $22,243 $22,243 $22,243
Plus general valuation allowances (2) - - 2.014
Plus allowable unrealized gains - - 18
------- ------- ------
Total regulatory capital 22,243 22,243 24,275
Minimum required capital 10,737 7,494 14,987
------- ------- ------
Excess regulatory capital $11,506 $14,749 $9,288
======= ======= ======
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $13,422 $11,240 $18,734
======= ======= =======
Regulatory capital as a percentage (3) 8.29% 11.87% 12.96%
Minimum required capital percentage 4.00 4.00 8.00
---- ----- ----
Excess regulatory capital percentage 4.29% 7.87% 4.96%
==== ===== =====
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 March 31, 2003.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total assets
of $268,432. Tier I and Tier II risk-based capital are calculated as
percentage of adjusted risk-weighted assets of $187,341.
18
ACQUISITION
On March 28, 2003, the Company completed the acquisition of SFSB Holding Company
and Stanton Federal Savings Bank. See Note 5 of "Notes to Unaudited Consolidated
Financial Statements."
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 pages 13 and 16
herein.
ACCOUNTING DEVELOPMENTS
In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147 "Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9." This statement addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for transactions between two or more mutual enterprises.
This statement removes the acquisitions of financial institutions from the scope
of FASB Statement No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions" and FASB Interpretation No. 9, "Applying APB Opinions No.
16 and 17 When a Savings and Loan Association or a Similar Institution is
Acquired in a Business Combination Accounted for by the Purchase Method." The
acquisition of all or part of a financial institution that meets the definition
of a business combination shall now be accounted for by the purchase method in
accordance with FASB Statement No. 141, "Business Combinations." The new
guidance was effective immediately but had no effect on the Company's results of
operation or financial condition.
19
In November 2002, FASB issued FASB Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates on the existing
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued ("disclosure
requirements"). This interpretation also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee ("recognition and measurement
provisions"). The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The recognition and measurement provisions did
not have a material effect on the Company. The disclosure requirements are
effective for interim and annual periods ending after December 15, 2002. The
Company's disclosure of guarantees is included in Note 6 to the Notes to
Unaudited Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." This statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The new
guidance was effective for interim periods beginning after December 15, 2002.
The pro forma disclosure requirements are included in the notes to unaudited
consolidated financial statements.
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
20
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
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
None
Item 5. Other Information
None
21
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 March 28, 2003, Laurel Capital Group, Inc. ("Laurel") filed
a Form 8-K to report under "Item 5. Other Events" that Laurel
had completed the acquisition of SFSB Holding Company and its
wholly owned subsidiary, Stanton Federal Savings Bank. No
financial statements were required to be filed with the Form
8-K.
22
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: May 20, 2003
23
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 theregistrant'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 affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 20, 2003
/s/ Edwin R. Maus
- -------------------------------------
Edwin R. Maus
President and Chief Executive Officer
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 affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 20, 2003
/s/ John A. Howard, Jr.
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John A. Howard Jr.
Senior Vice President and
Chief Financial Officer