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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 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 No.: 0-23010
LAUREL CAPITAL GROUP, INC.
-----------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1717451
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2724 HARTS RUN ROAD
ALLISON PARK, PENNSYLVANIA 15101
- -------------------------------- ---------------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (412) 487-7400
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of September 15, 2003, the aggregate value of the shares of Common Stock of
the Registrant issued and outstanding on such date, which excludes shares held
by all directors and officers of the Registrant as a group, was approximately
$35.6 million. This figure is based on the mean of the bid and asked prices of
$20.45 per share of the Registrant's Common Stock on September 15, 2003.
Number of shares of Common Stock outstanding as of September 15, 2003: 1,884,567
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended June 30,
2003 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2003 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 14 of this Form
10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Laurel Capital Group, Inc. (the "Company") is a bank holding company
whose primary asset is the common stock of its wholly owned subsidiary Laurel
Savings Bank ("Laurel Savings" or the "Bank"). The Bank's business is conducted
through its corporate headquarters located in Allison Park, Pennsylvania as well
as six branch offices located in Allegheny County and one branch office located
in Butler County, Pennsylvania. Additionally, the Bank has one active
subsidiary, Laurel Financial Group, Inc. ("LFG") whose headquarters are located
in Wilmington, Delaware. At June 30, 2003 LFG had assets of approximately $5.8
million consisting primarily of single-family residential loans. At June 30,
2003, the Company had total assets of $322.7 million and stockholders' equity of
$27.7 million or 8.58% of total assets. In addition, at such date, the Bank's
core capital of $22.8 million and Tier I and Tier II risk-based capital of $22.8
million and $24.9 million, respectively, exceeded the required amounts by $10.7
million, $16.2 million and $11.6 million, respectively. The Bank's corporate
headquarters is located at 2724 Harts Run Road, Allison Park, Pennsylvania, its
telephone number is (412) 487-7400 and its internet address is WWW.LAURELSB.COM.
Laurel Savings is primarily engaged in attracting deposits from the
general public and using these funds to originate permanent first mortgage loans
on single-family residential properties, and, to a lesser extent, multi-family
residential loans, construction and development loans, commercial real estate
loans and consumer loans. Laurel Savings' revenue is primarily derived from
interest income on its loan portfolio. The Bank's principal expenses are
interest expense on deposits and other operating expenses. The principal sources
of funds for Laurel Savings' lending activities are its deposits and
amortization and prepayments of outstanding loans and investment securities.
Deposits with Laurel Savings are insured to the maximum extent provided
by law through the Savings Association Insurance Fund ("SAIF") administered by
the Federal Deposit Insurance Corporation ("FDIC"). Laurel Savings is subject to
examination and comprehensive regulation by the Pennsylvania Department of
Banking ("Department") and the FDIC. The Bank is also a member of the Federal
Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh" or "FHLB"), which is one of
the 12 regional banks comprising the Federal Home Loan Bank System ("FHLB
System"). The Bank is also subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.
MARKET AREA
The Bank's principal market area consists of Allegheny and Butler
counties, Pennsylvania, which includes the City of Pittsburgh, the region's
major metropolitan center and the hub of the Pittsburgh Metropolitan Statistical
Area ("MSA"). The Bank's business is conducted through its corporate office
located in Allison Park, a suburb of Pittsburgh, and seven branch offices.
Substantially all of the Bank's deposits are received from residents of its
principal market area and most of its loans are secured by properties in
Allegheny and Butler counties. Although the Bank has no branches in downtown
Pittsburgh, the Bank participates in the STAR(TM), Cirrus(TM), Pulse(TM) and
Jeanie(TM) automatic teller machine ("ATM") networks which provide customers
with access to their deposits at thousands of
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locations throughout metropolitan Pittsburgh and Pennsylvania, as well as other
states. The Bank is also a member of the Freedom ATM Alliance (the "Alliance"),
a consortium of 27 financial institutions, the majority of which are located in
southwestern Pennsylvania. The Alliance provides surcharge-free transactions to
customers of Alliance members at over 440 ATMs throughout the region.
The population of the Bank's principal market area is approximately 1.5
million. The area's economy has been undergoing a transition from heavy industry
to one of service, health care, advanced technology, light manufacturing and
education industries. As a result of this transition, unemployment in the
Pittsburgh MSA is 5.7% compared to 5.7% for the state of Pennsylvania and 6.4%
for the United States. Housing costs are below the national average resulting in
over 71.7% of the area's residents owning their own home. While the area will
likely experience job losses to corporate mergers and downsizing in the future,
the Company believes the diversity of the area's industry will continue to
provide a stable economy.
LENDING ACTIVITIES
GENERAL. Laurel Savings has traditionally concentrated its lending
activities on conventional first mortgage loans secured by residential property.
Conventional loans are neither insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Department of Veterans' Affairs ("VA").
At June 30, 2003, Laurel Savings' total loan portfolio amounted to $190.1
million, representing approximately 58.9% of the Bank's total assets at that
date. Permanent loans secured by single-family (one-to-four units) residential
properties amounted to $119.0 million or 62.6% of the total loan portfolio at
June 30, 2003. At June 30, 2003, multi-family (over four units) residential
loans amounted to $2.6 million or 1.4% of the total loan portfolio while
construction and development loans totaled $14.7 million or 7.7% of the total
loan portfolio and commercial real estate loans totaled $5.3 million or 2.8% of
the total loan portfolio. The Bank's consumer loans, the second largest
component of the Bank's total loan portfolio, amounted to $45.5 million or 23.9%
of such portfolio at June 30, 2003. Commercial and other loans, which make up
the remainder of the portfolio, amounted to $3.0 million or 1.6% of the loans
outstanding at June 30, 2003.
3
The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
As of June 30,
----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- --------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in Thousands)
Real estate loans:
Single-family $118,962 62.6% $131,359 71.1% $130,039 70.3% $125,276 69.8% $112,334 72.6%
Multi-family 2,640 1.4% 3,202 1.7% 2,892 1.6% 2,476 1.4% 1,612 1.0%
Construction and
development (1) 14,728 7.7% 9,687 5.3% 10,763 5.8% 10,167 5.7% 2,268 1.5%
Commercial 5,337 2.8% 4,496 2.4% 5,051 2.7% 5,391 3.0% 5,375 3.5%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 141,667 74.5% 148,744 80.5% 148,745 80.4% 143,310 79.9% 121,589 78.6%
Commercial and other loans 3,012 1.6% 1,560 .8% 1,707 .9% 919 .5% 941 .6%
Consumer loans (2) 45,463 23.9% 34,461 18.7% 34,441 18.7% 35,110 19.6% 32,101 20.8%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans $190,142 100.0% $184,765 100.0% $184,893 100.0% $179,339 100.0% $154,631 100.0%
-------- ===== -------- ===== -------- ===== -------- ===== -------- =====
Less:
Loans in process (7,314) (4,719) (6,160) (7,796) (987)
Allowance for
loan losses (2,006) (1,803) (1,759) (1,798) (1,866)
Unamortized costs and
fees 380 79 (66) (224) (388)
-------- -------- -------- -------- --------
Net loans receivable $181,202 $178,322 $176,908 $169,521 $151,390
======== ======== ======== ======== ========
Loans held for sale (3) $ 1,439 $ 1,371 $ 1,701 $ 1,514 $ 1,562
======== ======== ======== ======== ========
- ------------------
(1) The $14.7 million construction and development loan portfolio
outstanding at June 30, 2003 consisted of adjustable-rate construction
loans totaling $5.8 million and fixed-rate construction loans totaling
$8.9 million.
(2) Consumer loans consist primarily of installment loans, auto loans, home
equity loans and loans on savings accounts. For additional information
regarding these loans, see Note 4 to the Notes to Consolidated
Financial Statements in the Company's 2003 Annual Report to
Stockholders ("Annual Report") set forth as Exhibit 13 hereto.
(3) Loans held for sale consist of guaranteed student loans.
4
MATURITIES AND REPRICING OF LOANS. The following table sets forth the
contractual principal repayments of the total loan portfolio of the Bank as of
June 30, 2003 by categories of loans. Loans with adjustable interest rates are
shown in the year that interest rates are next scheduled to adjust rather than
the year that they are contractually due. Fixed rate loans are included in the
year that they are contractually due. The amounts shown for each period do not
take into account either loan prepayments or scheduled amortization of the
Bank's loan portfolio.
Loan Maturities and Repricing in Year Ended June 30,
-----------------------------------------------------------------------------------
Total
Outstanding at 2005 - 2007 - 2009 - 2025 and
June 30, 2003 2004 2006 2008 2014 2015 - 2024 Thereafter
------------- -------- -------- -------- -------- ----------- ----------
(In Thousands)
Fixed-rate mortgage
loans $104,100 $ 341 $ 195 $ 1,057 $ 9,338 $ 39,483 $ 53,686
Adjustable-rate
mortgage loans 22,839 12,249 3,886 6,423 281 - -
Construction 14,728 10,797 - 2,500 1,431 - -
Consumer and other
loans 48,475 3,027 3,399 11,424 13,857 14,592 2,176
-------- -------- -------- -------- -------- -------- --------
Total $190,142 $ 26,414 $ 7,480 $ 21,404 $ 24,907 $ 54,075 $ 55,862
======== ======== ======== ======== ======== ======== ========
Contractual repayments due after June 30, 2004 amount to $141.1 million
for fixed interest rate loans and $24.9 million for adjustable or floating
interest rate loans. Contractual maturities of loans do not reflect the actual
term of the Bank's loan portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
because of enforcement of due-on-sale clauses which give the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. Scheduled principal amortization also reduces the average
maturity of the loan portfolio. The average life of mortgage loans tends to
increase, however, when current mortgage rates substantially exceed rates on
existing mortgages and conversely, decrease when rates on existing mortgages
substantially exceed current mortgage loan rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. Loan originations are derived
from a number of sources such as mortgage correspondents, mortgage bankers,
existing customers, borrowers, builders and walk-in customers. All of the Bank's
mortgage lending is subject to its written, nondiscriminatory underwriting
standards and to loan origination procedures prescribed by its Board of
Trustees. Decisions on loan applications are made on the basis of detailed
applications and property valuations by independent appraisers approved by the
Board of Trustees. The loan applications are designed to determine the
borrower's ability to repay, and the more significant items on the applications
are verified through the use of credit reports, financial statements and
confirmations.
It is the Bank's policy to obtain title insurance policies insuring
that the Bank has a valid lien on mortgaged real estate. Borrowers must obtain
fire and casualty insurance policies prior to closing and, when the property is
in a flood plain as designated by the Department of Housing and Urban
Development, flood insurance policies. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the
5
Bank makes disbursements for items such as real estate taxes, hazard insurance
premiums and private mortgage insurance premiums as they are due.
Under policies adopted by the Bank's Board of Trustees, the Bank limits
the loan-to-value ratio to 95% on residential mortgage loans and requires that
private mortgage insurance be obtained that reduces the Bank's loan-to-value
ratio to 80%. The loan-to-value ratio on second mortgages may not exceed 100% of
the property value including the amount of the first mortgage on the property.
Construction and development and commercial real estate loans generally are made
for no more than 95% and 80%, respectively, of the appraised value of the
property. With respect to construction and development loans, such value
reflects the projected value of the property upon completion.
Historically, the Bank has not been an active purchaser or seller of
loans. The sales activity conducted by the Bank during fiscal 2003, 2002 and
2001 primarily focused on the sale of student loans.
The following table shows total loan origination, purchase and
repayment activities of the Bank during the periods indicated.
Year Ended June 30,
2003 2002 2001 2000 1999
------- -------- ------- ------- -------
(In Thousands)
Real estate originations:
Residential:
Single-family $28,881 $30,238 $13,790 $28,560 $18,252
Multi-family 124 1,179 1,267 836 --
Commercial 1,256 1,070 530 119 --
Construction and development (1) 14,396 11,926 12,268 11,026 2,691
------- ------- ------- ------- -------
Total real estate
loan originations 44,657 44,413 27,855 40,541 20,943
Consumer and other loan
originations (2) 24,960 21,773 13,702 16,424 20,044
------- ------- ------- ------- -------
Total loan originations 69,617 66,186 41,557 56,965 40,987
Loan participation interests
purchased -- -- -- -- 500
Loans acquired 24,555 -- -- -- --
------- ------- ------- ------- -------
Total loan
originations, loan
participation
interests purchased
and loans acquired 94,172 66,186 41,557 56,965 41,487
------- ------- ------- ------- -------
Students loans sold 612 1,098 687 865 952
Principal loan repayments 90,383 63,759 32,842 37,881 39,991
Other, net (3) 229 245 454 136 349
------- ------- ------- ------- -------
Total principal loan
repayments and other 91,224 65,102 33,983 38,882 41,292
------- ------- ------- ------- -------
Net increase in loans receivable,
net and loans held for sale $ 2,948 $ 1,084 $ 7,574 $18,083 $ 195
======= ======= ======= ======= =======
6
- ----------------------
(1) Construction and development loans are classified as either a
residential or commercial real estate loan at the time of origination
depending on the nature of the property securing the loan. Construction
loan originations totaled $14.4 million during fiscal 2003, of which
$7.1 million were adjustable-rate loans and $7.3 million were
fixed-rate loans.
(2) Includes student loans held for sale
(3) Includes transfers to real estate owned and all activity in the
allowance for possible loan losses.
LENDING PROGRAMS AND POLICIES
RESIDENTIAL LENDING. Historically, the Banks' lending activity has
consisted largely of the origination of long-term, fixed-rate residential
mortgage loans secured by one-to-four family residential properties. As a
result, at June 30, 2003, $98.9 million or 52.0% of the Bank's total loan
portfolio consisted of long-term loans with fixed-rates of interest which were
secured by first mortgages on one-to-four family residential properties. During
fiscal 2003, 2002 and 2001, the Bank originated $26.3 million, $22.5 million and
$8.6 million, respectively, of fixed-rate single-family mortgage loans. Due to
the lower interest rate environment during fiscal 2003 and 2002, the Bank found
the largest portion of its single-family loan demand to be for fixed-rate loans.
The significant increase in principal loan repayments in fiscal 2003 and 2002
primarily relates to refinancing activity concerning one-to-four family loans in
the low interest rate environment.
The Bank's fixed-rate loans generally have maturities ranging from 15
to 30 years and are fully amortizing with monthly payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. Such
loans are originated under terms, conditions and documentation which permit them
to be sold to U.S. Government sponsored agencies. The Bank's fixed-rate loans
customarily include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage or the loan is
not repaid.
In addition, Laurel Savings originates adjustable rate mortgages
("ARMs") with up to a 30-year amortization schedule. On all ARMs currently
offered by the Bank, payments are adjusted with each interest rate adjustment so
that the term of the ARM is not affected. The Bank currently offers one, three,
and five year adjustable rate loans. Interest rate adjustments occur every one,
three or five years and are based on the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity that matches the loan type. All three
loan types limit interest rate increases to 6% over the life of the loan and
limit decreases to 2% below the initial rate. The one year ARM has a 2% maximum
increase per adjustment while the three and five year loans have a maximum
increase of 3% per adjustment. All of these loans may be converted to fixed rate
loans. The Bank does not offer ARMs with below market introductory or "teaser"
rates. Although Laurel Savings intends to continue to emphasize the origination
of ARMs in order to reduce the impact on its operations of rapid increases in
market rates of interest, such loans generally do not adjust as rapidly as
changes in the Bank's cost of funds. At June 30, 2003, $20.1 million or 10.6% of
the Bank's total loan portfolio consisted of ARMs on one-to-four family
residential real estate.
7
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. The Bank originated
$124,000 of multi-family residential real estate loans and $1.3 million of
commercial real estate loans in fiscal 2003. At June 30, 2003, the Bank's
multi-family residential real estate loans and commercial real estate loans
amounted to $2.6 million and $5.3 million, respectively, or 1.4% and 2.8% of the
total loan portfolio, respectively. Such loans generally earn rates of that
which exceed the rates on single-family residential real estate loans and are
usually for shorter terms. Such loans are offered with interest rates that
generally adjust annually at 1% to 2% over the Bank Prime Lending Rate as
published in the Wall Street Journal or are fixed for the term of the loan.
These loans have up to 30-year amortization schedules. The Bank's multi-family
real estate loans are secured primarily by apartment buildings and its
commercial real estate loans are secured primarily by other income-producing
properties located in the Pittsburgh MSA, including office buildings and
warehouses. Of the $8.0 million of commercial and multi-family loans at June 30,
2003, $6.5 million have fixed rates of interest and $1.4 million have adjustable
rates of interest.
Multi-family and commercial real estate lending entails significant
additional risks as compared with single-family residential property lending.
Multi-family and commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project. The success of such projects is sensitive to changes in
supply and demand conditions in the market for multi-family and commercial real
estate as well as economic conditions. Due to the Bank's low level of
non-performing loans and the generally higher rates of interest earned on
commercial real estate and multi-family loans the Bank plans to increase its
origination of these types of loans in the future.
The Bank evaluates all aspects of commercial and multi-family real
estate loan transactions in order to mitigate the risk to the Bank to the
greatest extent possible. The Bank seeks to ensure that the property securing
the loan will generate sufficient cash flow to adequately cover operating
expenses and debt service payments. To this end, permanent commercial and
multi-family real estate loans are generally made at a loan-to-value ratio of
75% or less and with a minimum debt service coverage generally of one to one and
one-half times net rental income. In underwriting commercial and multi-family
real estate loans, consideration is given to the property's operating history,
future operating projections, current and projected occupancy, position in the
local and regional market, location and physical condition. The underwriting
analysis also includes credit checks and a review of the financial condition of
the borrower. A narrative appraisal report prepared by an outside appraiser,
qualified by an independent member of the American Institute of Appraisers
("MAI") or a similar organization, is commissioned by the Bank to substantiate
property values for commercial and multi-family real estate loan transactions,
which appraisal, in final form, the Bank obtains prior to closing the loan. The
Bank also obtains in virtually all cases full personal loan guarantees from the
borrower, or in the case of a corporate borrower, the loan guarantees from the
persons controlling the borrower.
CONSTRUCTION AND DEVELOPMENT LENDING. The Bank's construction and
development loans accounted for 32.2% of the real estate loans originated in
fiscal 2003, 26.9% in fiscal 2002 and 44.0% in fiscal 2001. Such loans are
generally used to fund the construction of residential properties for
owner-occupancy although the Bank has originated commercial construction and
land acquisition and development loans to a limited degree. Most of the Bank's
residential construction loans are originated in connection with providing
permanent financing on the construction project. The interest rate on the
permanent loan is set at the time of the origination of the construction loan.
Construction and development loans are classified as either residential or
commercial real estate loans at the time of
8
origination, depending on the nature of the property securing the loan. At June
30, 2003, construction and development loans amounted to $14.7 million. The
origination of construction and development loans during fiscal 2003 was
primarily due to the continued demand for new homes in the Bank's market area.
The majority of the Bank's construction and development loans are made
to homeowners. Speculative construction loans on unsold properties carry more
risk than pre-sold or individual construction loans originated by the Bank
because the payoff for the loan is dependent on the builder's ability to sell
the property prior to the time that the construction loan is due. The Bank
attempts to mitigate these risks by, among other things, working with builders
with whom it has established relationships and by generally limiting the number
of unsold homes under construction.
The Bank has been active in residential construction lending for many
years and intends to continue its involvement in such lending in the future.
Although the Bank has not experienced any significant difficulties, construction
lending is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on
construction loans is dependent largely upon the accuracy of the initial
appraisal of the property's projected value at completion of construction as
well as the estimated costs of construction, including interest. During the
construction phase, a number of factors could result in delays and cost
overruns. If either estimate proves to be inaccurate and the borrower is unable
to provide additional funds, the lender may be required to advance funds beyond
the amount originally committed to permit completion of the project and/or be
confronted at the maturity of the construction loan with a project whose value
is insufficient to assure full repayment. In addition, if the borrower is unable
to obtain permanent financing prior to the expiration of the term of the
construction loan and has not sold his or her existing residence due to market
conditions, the Bank could experience a risk of loss in the event of the
borrower's existing residence is not sold for an extended period of time. In
such instance, the Bank generally requires the borrower to sell the construction
property, rent the property or execute a deed-in-lieu of foreclosure.
CONSUMER LENDING. The Bank has continued to emphasize the origination
of consumer loans. As a result, such loans have increased as a percentage of the
total loan portfolio from 20.8% of the total loan portfolio at June 30, 1999 to
23.9% of the total loan portfolio at June 30, 2003, primarily as a result of the
Bank's increased origination of fixed-rate home equity loans. The Bank
originated $25.0 million, $21.8 million and $13.7 million of consumer loans in
fiscal 2003, 2002 and 2001 out of total loan originations, purchases and
acquisitions of $94.2 million, $66.2 million and $41.6 million, respectively.
Although consumer loans may involve a greater risk of loss than residential real
estate loans due to the nature of the collateral involved (or the absence of
collateral), the Bank carefully reviews the creditworthiness of the borrower
and, where applicable, the value of the collateral for such loans. However,
since the amount outstanding on each individual loan is smaller, the risk of
financial loss per loan is lower when compared to mortgage and commercial
lending.
Installment loans accounted for $45.1 million or 99.2% of all consumer
loans at June 30, 2003. Installment loans generally have terms of less than five
years with fixed rates of interest. Home equity loans, which make up the
majority of the Bank's total installment loans, typically have fixed interest
rates and terms up to 20 years, although a majority of such loans have terms of
ten years or less. The Bank does not require that it hold the first mortgage on
the secured property. The Bank also offers a home equity line of credit with an
adjustable rate of interest.
9
Loans on savings accounts are also offered with the interest rates
generally set at the higher of the underlying collateral rate plus 3% or the
current Federal Reserve Board discount rate plus 5%. The interest rate is
adjusted if the rate on the account or the Federal Reserve Board discount rate
changes. Such loans are generally made for up to 90% of the amount in the
savings account and accounted for $350,000 or 0.8% of the consumer loan
portfolio at June 30, 2003.
REGULATORY REQUIREMENTS. The aggregate amount of loans that the Bank
may make to any one borrower is limited to 15% of unimpaired capital and
unimpaired surplus plus an additional 10% of unimpaired capital and unimpaired
surplus when the loan is fully secured by readily marketable securities. At June
30, 2003, the Bank's loans to one borrower limit was approximately $4.0 million.
The largest aggregate amount of loans by the Bank to any one borrower, including
related entities, was a $2.5 million construction loan for the development of
single and multi-family residences. This loan was current in accordance with its
original terms as of June 30, 2003.
The Bank is also subject to regulations which limit the amount of a
real estate loan to a specified percentage of the value of the property securing
the loan (referred to as the "loan-to-value ratio"). Such regulations provide
that at the time of origination, a real estate loan may not exceed 100% of the
appraised value of the secured property. Maximum loan-to-value ratios for each
type of real estate loan made by an institution are to be established by the
institution's board of trustees. If the amount of a home loan originated or
refinanced is in excess of 80% of the appraised value, the institution is
required to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the secured
property.
LOAN SERVICING AND LOAN FEES
Interest rates charged by Laurel Savings on mortgage loans are
primarily determined by competitive loan rates offered in its market area.
Mortgage loan rates reflect factors such as general interest rate levels, the
supply of money available to the savings industry and the demand for such loans.
These factors are, in turn, affected by general economic conditions, the
monetary policies of the federal government, including the Federal Reserve
Board, the general supply of money in the economy, tax policies and governmental
budget matters.
In addition to interest earned on loans and income from servicing of
loans, the Bank receives fees in connection with loan modifications, late
payments, changes of property ownership and for miscellaneous services related
to its loans. Funds from these activities vary from period to period with the
volume and type of loans originated, sold and purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in the markets served by the Bank. The fees received by the Bank in
connection with the origination of mortgage loans on existing properties
generally range from zero to three points, with a point being equivalent to 1%
of the principal amount of the loan.
Loan origination fees and certain related direct loan origination costs
are offset and the resulting net amount is deferred and amortized over the life
of the related loans as an adjustment to the yield of such related loans. In
addition, commitment fees are offset against related direct costs and the
resulting net amount is generally recognized over the life of the related loans
as an adjustment to the yield, if the commitment is exercised, or if the
commitment expires unexercised, recognized upon expiration of the commitment.
10
NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
When a borrower fails to make a required payment on a loan, Laurel
Savings attempts to cause the deficiency to be cured by contacting the borrower
and seeking payment. A late charge is generally assessed after 20 days. Contacts
are generally made after a payment is more than 30 days past due. In most cases,
the deficiencies are cured promptly. If the delinquency exceeds 90 days and is
not cured through the Bank's normal collection procedures, the Bank will
generally institute measures to remedy the default including, in the case of
mortgage loans, commencing a foreclosure action, accepting from the mortgagor a
voluntary deed of the secured property in lieu of foreclosure or obtaining from
the borrower the collateral which secures a non-mortgage obligation.
The recognition of interest income on all loans is discontinued when,
in the judgment of management, the probability of collection is deemed to be
insufficient or when the loan becomes 90 days past due, whichever occurs first.
All unpaid accrued interest on such loans is reserved. Consumer loans more than
120 days or 180 days delinquent (depending on the nature of the loan) are
generally required to be written off.
If a foreclosure action is instituted and the loan is not reinstated,
paid in full or refinanced, the property is sold at a public auction at which
the Bank may participate as a bidder at the sale. If the Bank is the successful
bidder, the acquired property is then included in the Bank's "real estate owned"
account until it is sold. The Bank is permitted to finance the sales of these
properties by "loans to facilitate," which involve a lower down payment or a
longer term than would be generally allowed by the Bank's underwriting
standards. At June 30, 2003, the Bank had no loans to facilitate.
The remedies available to the Bank in the event of a default or
delinquency with respect to certain residential mortgage loans, and the
procedures by which such remedies may be exercised, are subject to Pennsylvania
law and regulations. Under Pennsylvania law, a lender is prohibited from
accelerating the maturity of a residential mortgage loan, commencing any legal
action (including foreclosure proceedings) to collect on such loan, or taking
possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrower's right to correct such delinquency.
In addition, the lender's ability to exercise any remedies it may have with
respect to loans for one- or two-family principal residences located in
Pennsylvania is further restricted (including the lender's right to foreclose on
such property) until the lender has provided the delinquent borrower with
written notice detailing the borrower's rights to seek consumer credit
counseling and state financial assistance and until the borrower has exhausted
or failed to pursue such rights. These provisions of Pennsylvania law may delay
for several months the Bank's ability to foreclose upon residential loans
secured by real estate located in the Commonwealth of Pennsylvania. In addition,
the uniform Federal National Mortgage Association ("FNMA")/ Federal Home Loan
Mortgage Corporation ("FHLMC") lending documents used by the Bank, as well as
most other residential lenders in Pennsylvania, require notice and a right to
cure similar to that provided under Pennsylvania law.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or fair value at
the date of acquisition and any write-down resulting therefrom is charged to the
allowance for losses. All costs incurred in maintaining the Bank's interest in
the property are capitalized between the date the loan becomes delinquent and
the date of acquisition. After the date of acquisition,
11
all costs incurred in maintaining the property are expensed and costs incurred
for the improvement or development of such property are capitalized.
The following table sets forth information regarding the Bank's
non-accrual loans and real estate owned at the dates indicated. The Bank did not
have any troubled debt restructurings at June 30, 2003.
June 30,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Single-family residential real estate $ 572 $ 232 $ 467 $ 476 $ 364
Commercial real estate 282 - 31 36 -
Multi-family residential - - - 22 22
Consumer and other loans 102 55 25 26 90
----------- ------------ ---------- ----------- ---------
Total non-accruing loans $ 956 $ 287 $ 523 $ 560 $ 476
=========== ============ ========== =========== =========
Total non-performing loans as a percentage
of net loans receivable 0.53% 0.11% 0.30% 0.33% 0.31%
=========== ============ ========== =========== =========
Total real estate owned, net of related
reserves $ - $ 131 $ 290 $ - $ 377
=========== ============ ========== =========== =========
Total non-performing loans and real estate
owned as a percentage of total assets 0.30% 0.12% 0.20% 0.22% 0.37%
=========== ============ ========== =========== =========
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories: "substandard,"
"doubtful" and "loss." For assets classified as substandard and doubtful, the
institution is required to establish prudent general loan loss reserves in
accordance with accounting principles generally accepted in the United States of
America. Assets classified as loss must be completely written off. A category
designated "special mention" also must be established and maintained for assets
not currently requiring classification under federal regulations but having
potential weaknesses or risk characteristics that could result in future
problems. An institution is required to develop an in-house program to classify
its assets, including investments in subsidiaries, on a regular basis and to set
aside appropriate loss reserves on the basis of such classification. At June 30,
2003, the Bank's classified assets totaled $1.5 million of which $1.4 million
was classified as substandard and $70,000 was classified as doubtful. Classified
assets consists of the Bank's non-performing residential real estate loans,
consumer loans, certain loans which were delinquent between 15 and 90 days and
other current loans which have in the past displayed characteristics which
reflect potential weaknesses.
ALLOWANCES FOR ESTIMATED LOAN LOSSES. Provisions for loan losses on
first mortgage and other loans are charged to earnings in amounts that result in
allowances sufficient, in management's judgment, to cover anticipated losses in
the Bank's loan portfolio. In determining the appropriate level of provisions
for loan losses, consideration is given to general economic conditions,
diversification of loan portfolios, historical loss experience, identified
credit problems, delinquency levels and adequacy of collateral. The Bank's
allowances for loan losses totaled $2.0 million at June 30, 2003 or 1.1% of
total net loans outstanding at such date. The Bank's management believes that
its present allowances for
12
losses are sufficient to cover anticipated losses in the Bank's loan portfolio.
However, while management uses the best information available to make such
determinations, future adjustments to the loan loss allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to such allowance based on their judgements about
information available to them at the time of their examination.
The Bank's asset classification committee, consisting of the Vice
President - Credit and Collections, the Chief Executive Officer and the Senior
Vice President-Finance, meets on at least a quarterly basis. The committee
reviews all non-performing assets to determine the adequacy of reserves.
Adjustments are made as needed and the committee's findings are summarized in a
detailed report submitted to the Board of Trustees.
13
The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated:
Year Ended June 30,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $ 1,803 $ 1,759 $ 1,798 $ 1,866 $ 1,852
Charge offs:
Residential real estate (2) - (56) (53) (14)
Commercial real estate - - - - -
Consumer (28) (20) (19) (46) (47)
----------- ------------ ---------- ----------- ---------
Total charge offs (30) (20) (75) (99) (61)
----------- ------------ ---------- ----------- ---------
Recoveries:
Residential real estate - 20 - - -
Consumer 12 26 18 13 57
----------- ------------ ---------- ----------- ---------
Total recoveries 12 46 18 13 57
----------- ------------ ---------- ----------- ---------
Net (chargeoffs) recoveries (18) 26 (57) (86) (4)
Provision for losses on loans 12 18 18 18 18
Allowance on loans acquired from
Stanton Federal Savings Bank 209 - - - -
----------- ------------ ---------- ----------- ---------
Balance at end of period $ 2,006 $ 1,803 $ 1,759 $ 1,798 $ 1,866
=========== ============ ========== =========== =========
Allowance for loan losses as a
percent of total net loans
outstanding 1.11% 1.00% 0.99% 1.06% 1.23%
=========== ============ ========== =========== =========
Ratio of net (chargeoffs) recoveries
to average loans outstanding -0.02% 0.01% -0.03% -0.05% 0.00%
=========== ============ ========== =========== =========
14
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.
June 30,
----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------- -------- ------ -------- ------ --------
(Dollars in Thousands)
Residential real estate(1) $ 867 70.3% $ 973 76.4% $ 901 76.1% $ 898 75.5% $ 873 74.1%
Multi-family real estate 26 1.4% 32 1.7% 29 1.6% 25 1.4% 17 1.0%
Commercial real estate 148 2.8% 67 2.4% 83 2.7% 164 3.0% 177 3.5%
Consumer and other 965 25.5% 731 19.5% 746 19.6% 711 20.1% 655 21.4%
Unallocated -- -- -- -- -- -- -- -- 144 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,006 100.0% $1,803 100.0% $1,759 100.0% $1,798 100.0% $1,866 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- ---------------------
(1) Includes construction and development loans.
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the FHLMC, the FNMA and the Government National Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. government and
it guarantees the timely payment of interest and the ultimate return of
principal within one year. The FHLMC mortgage-backed securities are not backed
by the full faith and credit of the United States, but because the FHLMC is a
U.S. government sponsored enterprise, these securities are considered high
quality investments with minimal credit risks. The GNMA is a government agency
within the Department of Housing and Urban Development which is intended to help
finance government assisted housing programs. The GNMA guarantees the timely
payment of principal and interest, and GNMA securities are backed by the full
faith and credit of the U.S. Government. The FNMA guarantees the timely payment
of principal and interest, and FNMA securities are indirect obligations of the
U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly, the
life of a mortgage-backed
15
pass-through security approximates the life of the underlying mortgages.
The following table sets forth the composition and amortized cost of the
Bank's mortgage-backed securities at the dates indicated.
June 30,
---------------------------
2003 2002 2001
------- ------- -------
(In Thousands)
Mortgage-backed securities held to maturity:
FNMA REMIC $ 27 $ 40 $ 57
FHLMC REMIC -- -- 93
------- ------- -------
Total $ 27 $ 40 $ 150
======= ======= =======
Mortgage-backed securities available for sale:
GNMA $ 3,283 $ 2,034 $ 3,424
FNMA 4,521 2,597 3,027
FNMA REMIC 432 789 --
FHLMC 1,710 1,523 818
FHLMC REMIC 3,139 824 2,578
Other - REMIC 232 -- --
------- ------- -------
Total $13,317 $ 7,767 $ 9,847
======= ======= =======
16
Information regarding the contractual maturities and weighted average yield
of the Bank's mortgage-backed securities portfolio at June 30, 2003 is presented
below.
Amounts at June 30, 2003 Which Mature in
--------------------------------------------------------------
After Five
One Year After One to To Over 10
or Less Five Years 10 Years Years Total
-------- ------------ ---------- ------- -------
(Dollars in Thousands)
Mortgage-backed securities
held to maturity:
FNMA REMIC $ -- $ -- $ -- $ 27 $ 27
======= ======= ======= ======= =======
Weighted average yield --% --% --% 1.9% 1.9%
======= ======= ======= ======= =======
Mortgage-backed securities
available for sale:
GNMA $ -- $ -- $ 355 $ 2,928 $ 3,283
FNMA -- -- 77 4,444 4,521
FNMA REMIC 432 432
FHLMC -- -- 163 1,547 1,710
FHLMC REMIC 1,198 1,941 3,139
Other - REMIC -- -- -- 232 232
------- ------- ------- ------- -------
Total $ -- $ -- $ 1,793 $11,524 $13,317
======= ======= ======= ======= =======
Weighted average yield --% --% 5.1% 5.6% 5.5%
======= ======= ======= ======= =======
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank. At June 30, 2003, none of the Bank's
mortgage-backed securities were pledged to secure obligations of the Bank.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with accounting principles generally accepted in the
United States of America, premiums and discounts are amortized over the
estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because
to the extent that the Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate.
17
For additional information relating to the Bank's mortgage-backed
securities, see Notes 1 and 3 of the Notes to the Consolidated Financial
Statements.
INVESTMENT SECURITIES. Under federal regulations, the Bank is permitted to
make certain securities investments. Investment decisions are made by authorized
officers of Laurel Savings within policies established by Laurel Savings' Board
of Trustees.
The Bank is authorized to invest in obligations issued or fully guaranteed
by the United States, certain federal agency obligations, certain time deposits,
negotiable certificates of deposit issued by commercial banks and other insured
financial institutions, investment grade corporate debt securities and other
specified investments.
The following table sets forth the composition and amortized cost of the
Bank's investment securities at each of the dates indicated.
June 30,
---------------------------
2003 2002 2001
------- ------- -------
(In Thousands)
Investment securities held to maturity:
Corporate notes and commercial paper $ 9,207 $11,909 $13,937
======= ======= =======
Investment securities available for sale:
Municipal obligations $15,373 $18,232 $20,335
Shay Financial Services ARM Fund 22,785 17,845 17,179
FNMA preferred stock - 250 250
FHLMC preferred stock 750 750 750
FNMA stock 965 631 249
FHLMC stock 999 514 199
Corporate notes 3,135 - -
CRA Qualified Investment Fund 1,000 - -
Other 460 - -
SLM Student Loan Trust - 207 445
Standard Insurance Company stock - - 4
------- ------- -------
Total $45,467 $38,429 $39,411
======= ======= =======
18
The following table sets forth the composition and maturities of the
Bank's investment securities portfolio at June 30, 2003.
Amounts at June 30, 2003 Which Mature In
---------------------------------------------
One Year 1 to 5 5 to 10 Over 10
or Less Years Years Years Total
-------- -------- -------- -------- --------
(Dollars in Thousands)
Investment securities held to maturity:
Corporate notes and commercial paper $ 1,998 $ 500 $ 3,709 $ 3,000 $ 9,207
======== ======== ======== ======== ========
Weighted average yield 1.52% 6.74% 3.04% 5.97% 3.87%
======== ======== ======== ======== ========
Investment securities available for sale:
Municipal obligations $ 57 $ - $ 187 $ 15,129 $ 15,373
Shay Financial Services ARM Fund (1) 22,785 - - - 22,785
FHLMC preferred stock (1) 750 - - - 750
FMNA stock (1) 965 - - - 965
FHLMC stock (1) 999 - - - 999
Corporate notes -- 1,000 1,814 321 3,135
CRA Qualified Investment Fund (1) 1,000 1,000
Other 220 - - 240 460
-------- -------- -------- -------- --------
Total $ 26,776 $ 1,000 $ 2,001 $ 15,690 $ 45,467
======== ======== ======== ======== ========
Weighted average yield 2.36% 3.16% 5.21% 5.47% 3.61%
======== ======== ======== ======== ========
- ---------------------
(1) Such investment securities have no stated contractual maturity.
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have
traditionally been the principal source of the Bank's funds for use in lending
and for other general business purposes. In addition to deposits, the Bank
derives funds from loan repayments and maturities and repayments of investment
and mortgage-backed securities. Borrowings may be used on a short-term basis to
compensate for seasonal or other reductions in deposits or inflows at less than
projected levels, as well as on a longer term basis to support expanded lending
activities or asset/liability management.
DEPOSITS. The types of deposits currently offered by the Bank include
passbook savings accounts, negotiable order of withdrawal ("NOW") accounts,
money market deposit accounts ("MMDAs"), and certificates of deposit ranging in
terms from 91 days to ten years. Included among these savings programs are
individual retirement accounts ("IRA") and Keogh accounts. Historically,
fixed-rate, fixed-term certificates have represented the primary source of
deposits.
19
The following table sets forth the distribution of the Bank's deposits
by type of deposit at the dates indicated.
As of June 30,
---------------------------------------------------------------
2003 2002 2001
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Demand and club accounts $ 47,532 17.9% $ 32,534 14.4% $ 30,401 14.8%
NOW deposits 42,390 16.0% 33,159 14.7% 30,177 14.7%
MMDA's 19,106 7.2% 17,200 7.6% 15,756 7.7%
Fixed-rate certificates 117,432 44.2% 109,030 48.4% 98,292 47.8%
IRA and Keogh accounts 39,120 14.7% 33,496 14.9% 31,010 15.1%
-------- ----- -------- ---- -------- -----
Total $265,580 100.0% $225,419 100.0% $205,636 100.0%
======== ===== ======== ===== ======== =====
The large variety of savings accounts offered by the Bank has increased
the Bank's ability to retain deposits and allowed it to be more competitive in
obtaining new funds, but has not eliminated the threat of disintermediation (the
flow of funds away from savings institutions into direct investment vehicles
such as government and corporate securities). In addition, the Bank has become
increasingly sensitive to short-term fluctuations in deposit flows, due to
customers becoming more rate conscious. As customers have become more rate
conscious and willing to move funds into higher yielding accounts, the ability
of the Bank to attract and maintain deposits and the Bank's cost of funds have
been, and will continue to be, significantly affected by market conditions.
The following table sets forth information relating to the Bank's
deposit flows during the periods indicated.
Year Ended June 30,
-------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
(Decrease) increase before interest credited ($ 6,319) $ 13,276 $ 5,921
Interest credited 5,268 6,507 7,052
Deposits acquired 41,212 - -
-------- -------- --------
Total increase $40,161 $ 19,783 $ 12,973
======= ======== ========
The principal methods used by Laurel Savings to attract deposits
include the offering of a wide variety of services and accounts, competitive
interest rates, and convenient office locations and service hours. The Bank uses
traditional marketing methods to attract new customers and deposits, including
mass media advertising and direct mailings. The development of new deposit
accounts and services within the past several years has enhanced the Bank's
deposit gathering function. The Bank has also adopted a tiered pricing program
for its certificate accounts, providing higher rates of interest on its
long-term certificates in order to encourage depositors to invest in
certificates with longer maturities, thus reducing the interest-rate sensitivity
of the Bank's deposit portfolio.
20
The Bank's deposits are obtained primarily from persons who are
residents of Pennsylvania, particularly Allegheny and Butler counties. The Bank
does not advertise for deposits outside of Pennsylvania and management believes
that an insignificant amount of the Bank's deposits were held by nonresidents of
Pennsylvania at June 30, 2003. The Bank has not used brokers to obtain funds to
date and management of the Bank does not intend to utilize brokers to obtain
such deposits in the future.
The following table presents, by various interest rate categories, the
amounts of certificates of deposit at June 30, 2003 and 2002, as well as the
amounts which mature during the periods indicated.
As of June 30, Amount at June 30, 2003 maturing in the year ending June 30,
2002 2003 2004 2005 2006 Thereafter
---- ---- ---- ---- ---- ----------
(In Thousands)
Certificate Accounts:
0.00% to 1.99% $ 6,149 $ 22,231 $ 20,473 $ 1,234 $ 524 $ -
2.00% to 3.99% 34,401 60,372 32,647 13,092 5,177 9,456
4.00% to 5.99% 63,918 62,531 29,395 5,673 3,818 23,645
6.00% to 7.99% 38,058 11,418 4,578 1,601 1,410 3,829
-------- -------- -------- -------- --------- ---------
Total $142,526 $156,552 $ 87,093 $ 21,600 $ 10,929 $ 36,930
======== ======== ======== ======== ========= =========
The Bank has attempted to encourage certificate holders to invest the
proceeds of their maturing certificates in longer term certificates of deposit
by offering commensurately higher interest rates in order to reduce the
vulnerability of the Bank to interest rate risk. To ensure a continuity of this
trend, as well as to maintain adequate deposit levels, the Bank expects to offer
competitive rates relative to its marketplace. The Bank is confident that by
competitively pricing these certificates, balance levels deemed appropriate by
management can be achieved on a continuing basis. If necessary, the Bank also
has the capacity to borrow from the FHLB of Pittsburgh and from other sources to
maintain adequate liquidity.
As of June 30, 2003, certificates of deposit in amounts of $100,000 or
more in the Bank amounted to $20.6 million. The following table sets forth as of
June 30, 2003 the distribution of certificates of deposit of $100,000 or more by
time remaining to maturity.
Amount
------
(In Thousands)
Three months or less $ 4,639
Over three through six months 1,734
Over six though 12 months 3,360
Over 12 months 10,897
---------
Total $ 20,631
=========
21
The following table presents information concerning deposit accounts at
June 30, 2003, including the weighted average rate and the scheduled maturity of
certificates of deposit.
Amounts % of Total Average
(In Thousands) Deposits Rate
Demand and club accounts $ 47,532 17.9% 0.31%
Now deposits 42,390 16.0 0.06
MMDA's 19,106 7.2 0.74
-------- ----- ----
Total 109,028 41.1 0.29
-------- ----- ----
Certificates maturing by quarter:
September 30, 2003 33,023 12.4 3.80
December 31, 2003 22,571 8.5 3.12
March 31, 2004 18,858 7.1 2.79
June 30, 2004 12,641 4.8 2.69
September 30, 2004 9,914 3.7 3.28
December 31, 2004 4,448 1.7 3.79
March 31, 2005 3,737 1.4 3.18
June 30, 2005 3,501 1.3 3.56
September 30, 2005 2,298 0.9 3.48
December 31, 2005 2,722 1.0 3.40
March 31, 2006 3,725 1.4 4.62
June 30, 2006 2,184 0.8 3.80
Thereafter 36,930 13.9 4.61
-------- ----- ----
Total certificate accounts 156,552 58.9 3.64
-------- ----- ----
Total deposits $265,580 100.0% 2.27%
======== ===== ====
BORROWINGS. Laurel Savings may obtain advances from the FHLB of
Pittsburgh upon the security of the capital stock of the FHLB which it owns,
deposits with the FHLB of Pittsburgh and certain of its home mortgages, provided
certain standards related to creditworthiness are met. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. FHLB advances are generally available to
meet seasonal and other withdrawals of savings accounts and to expand lending,
as well as to aid the efforts of members to establish better asset/liability
management by extending the maturities of liabilities. At June 30, 2003, 2002
and 2001, the Bank had $24.7 million, $21.6 million and $21.6 million,
respectively, of FHLB advances outstanding.
22
The following table presents certain information regarding FHLB
advances for the periods indicated:
Year Ended June 30,
---------------------------
2003 2002 2001
------- ------- -------
(Dollars in Thousands)
FHLB advances:
Average balance outstanding $22,372 $21,623 $31,927
Maximum amount outstanding at
any month-end during the period $24,700 $21,625 $41,923
Weighted average interest rate
during the period 5.70% 5.82% 6.18%
Amount outstanding at the end
of the period $24,672 $21,620 $21,626
Weighted average rate at the
end of the period 5.26% 5.82% 5.82%
Many financial institutions obtain funds from sales of securities to
institutional investors under agreements to repurchase ("institutional
repurchase agreements"), which are considered borrowings. The Bank has not
utilized and has no present intention to utilize institutional repurchase
agreements as a source of funds.
SUBSIDIARIES
The Bank has two wholly owned subsidiaries, Laurel Financial Group,
Inc. ("LFG"), and Laurel Financial Services Corporation ("LFSC"). LFG is a
Delaware business corporation formed in June 2002 to invest in single-family
residential loans and investment securities that the Bank is permitted to hold
directly under the Pennsylvania Banking Code of 1965, as amended (the "Banking
Code"). At June 30, 2003, LFG had assets of approximately $5.8 million which
consisted primarily of single-family residential loans. LFSC is currently
inactive. At June 30, 2003, LFSC had no assets or liabilities.
EMPLOYEES
The Bank had 47 full-time employees and 15 part-time employees as of
June 30, 2003. None of the employees are represented by a collective bargaining
agreement, and the Bank believes it enjoys good relations with its personnel.
COMPETITION
The Bank's primary market area consists of Allegheny and Butler
counties, Pennsylvania, in the north suburban Pittsburgh area. Substantially all
of the Bank's savings deposits are received from residents of its primary market
area, and most of its loans are secured by properties in this area.
23
Laurel Savings faces substantial competition both in attracting
deposits and in making mortgage and other loans in its primary market area.
Competition for the origination of real estate loans principally comes from
other savings institutions, commercial banks and mortgage-banking companies
located in the Pittsburgh MSA. The Bank's most direct competition for deposits
has historically also come from other savings institutions, commercial banks and
credit unions located in the Pittsburgh MSA. In times of high interest rates,
Laurel Savings also encounters significant competition for investors' funds from
short-term money market securities and other corporate and government
securities.
Laurel Savings competes for loans principally through the use of
competitive interest rates and loan fees it charges on its loan programs.
Further, Laurel Savings believes it offers a high degree of professionalism and
quality in the services it provides borrowers and their real estate brokers. It
competes for deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours, and convenient branch locations with
interbranch deposit and withdrawal privileges at each.
24
REGULATION
Set forth below is a brief description of certain laws and regulations
which together with the descriptions of laws and regulations contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Bank are regulated. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
THE COMPANY
GENERAL. The Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is
subject to regulation and supervision by the Federal Reserve Board and the
Department. The Company is required to file annually a report of its operations
with, and is subject to examination by, the Federal Reserve Board and the
Department.
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. Pennsylvania banking law permits the interstate acquisition of banking
institutions by bank holding companies on a regional and reciprocal basis. See
"- The Bank - Interstate Acquisitions." No approval under the BHCA is required,
however, for a bank holding company already owning or controlling 50% of the
voting shares of a bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and
25
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not (90 days or more) past-due or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.
The Company is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
26
THE BANK
GENERAL. The Bank is incorporated under the Banking Code and is subject
to extensive regulation and examination by the Department and by the FDIC, which
insures its deposits to the maximum extent permitted by law, and is subject to
certain requirements established by the Federal Reserve Board. The federal and
state laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for certain loans. There are periodic examinations by
the Department and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or the Congress
could have a material adverse impact on the Company, the Bank and their
operations.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examination of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing significant growth and have well diversified
risk, including no undue interest rate risk exposure,
27
excellent asset quality, high liquidity, good earnings and, in general, which
are considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill, and certain purchased mortgage
servicing rights and purchased credit and relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of Tier 2 capital include
certain perpetual preferred stock, certain mandatory convertible securities,
certain subordinated debt and intermediate preferred stock and general
allowances for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 2003, the
Bank exceeded each of its capital requirements.
28
The following table sets forth certain information concerning the
Bank's regulatory capital at June 30, 2003.
Tier 1 Tier 2
Tier 1 Risk- Risk-
Core Based Based
Capital Capital Capital
------- ------- -------
(Dollars In Thousands)
Equity capital (1) $22,846 $22,846 $22,846
Plus general valuation allowances (2) -- -- 2,006
Plus allowable unrealized gains -- -- 12
------- ------- -------
Total regulatory capital 22,846 22,846 24,864
Minimum required capital 12,176 6,620 13,240
------- ------- -------
Excess regulatory capital $10,670 $16,226 $11,624
======= ======= =======
Regulatory capital as a percentage (3) 7.51% 13.80% 15.02%
Minimum required capital percentage 4.00 4.00 8.00
------- ------- -------
Excess regulatory capital percentage 3.51% 9.80% 7.02%
======= ======= =======
- -------------------------------
(1) Represents equity capital of the Bank as reported to the FDIC and the
Department for the quarter ended June 30, 2003.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total average
assets of $304,409. Tier I and Tier II risk-based capital are
calculated as a percentage of adjusted risk-weighed assets of $165,503.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may
29
not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv) acquiring
or retaining the voting shares of a depository institution if certain
requirements are met. In addition, an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements.
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
INTERSTATE ACQUISITIONS. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in Delaware, the District of
Columbia, Indiana, Kentucky, Maryland, New Jersey, Ohio, Virginia and West
Virginia (collectively, "regional institutions") to acquire the voting stock of,
merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered savings bank, (collectively, "Pennsylvania institutions")
and (ii) the establishment of branches in Pennsylvania by regional institutions,
in each case subject to certain conditions including reciprocal legislation in
the state in which the regional institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania institutions and approval by
the Pennsylvania Department of Banking. The statute also provides for nationwide
branching by Pennsylvania-chartered savings banks and savings and loan
associations, subject to Pennsylvania Department of Banking approval and certain
other conditions. Of the states within the region, Delaware, Maryland, New
Jersey, Ohio and West Virginia currently have laws that permit Pennsylvania
institutions to branch into such states and/or acquire savings institutions
located in such states.
30
TAXATION
FEDERAL AND STATE TAXATION
The Company and Bank are subject to federal income tax under the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Company and
the Bank.
FISCAL YEAR. The Company and the Bank file consolidated federal income
tax returns on the basis of a fiscal year ending on June 30.
ACCRUAL METHOD OF ACCOUNTING. For federal income tax purposes, the
Company and the Bank currently report income and expenses on the accrual basis
method of accounting.
BAD DEBT RESERVES. Savings institutions such as the Bank, having
average adjusted assets of less than $500 million are allowed to utilize the
experience method of Code Section 585 to compute its bad debt deduction.
The experience method permits the Bank to deduct an amount necessary to
increase its reserve for loan losses, with certain limitations, to a level
computed using a six-year moving average based on the total loans outstanding at
the close of the taxable year. The Bank may also use the specific charge-off
method.
The bad debt deduction under the experience method is equal to the
greater of two alternatives. Under the first alternative, the Bank computes the
ratio of: (1) total bad debts net of recoveries sustained during the taxable
year and during the five preceding taxable years; to (2) the sum of "loan
outstanding" at the close of each of those six years. This ration is then
applied to the loans outstanding at the close of the taxable year, and the
result of this calculation constitutes the maximum reserve balance. The maximum
addition for the taxable year under the first alternative is the amount required
to bring the reserve to this balance. Under the second alternative (referred to
as the minimum addition rule), the Bank can claim a deduction to bring the
reserve balance to the base-year level.
DISTRIBUTIONS. If the Bank makes a distribution to stockholders, and
the distribution is treated as being from its accumulated bad debt reserves, the
distribution will cause the Bank to have additional taxable income. A
distribution to stockholders is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "nondividend distribution." A distribution in respect of stock
is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, exceeds the
Bank's current and post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a nondividend distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. The Code imposes the corporate minimum tax from an add-on
tax to an
31
alternative minimum tax at a rate of 20%. The alternative minimum tax generally
will apply to a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI") and will be payable to the
extent such AMTI is in excess of an exemption amount. The Code provides that an
item of tax preference is the excess of the bad debt deduction over the amount
allowable under the experience method. The other items of tax preference that
constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) 75% of adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses).
NET OPERATING LOSS CARRYOVERS. For tax years ending in 2003, financial
institutions like the Bank may carry back a net operating loss ("NOL") to the
preceding two taxable years and forward to the succeeding 20 taxable years. As
of June 30, 2003, the Bank had a NOL carryover of approximately $1.3 million for
federal income tax purposes. This NOL was acquired as part of the acquisition of
SFSB Holding Company which occurred during the current fiscal year.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, however, if a corporation owns less than 20% of the stock of a
corporation distributing a dividend, it may deduct only 70% of dividends
received or accrued on its behalf. A corporation may deduct 100% of dividends
from a member of the same affiliated group of corporations.
The Company's federal income tax returns for its tax years beginning
after June 30, 1999 and subsequent periods are open under the statute of
limitations and are subject to review by the Internal Revenue Service.
STATE TAXATION. The Company is subject to the Corporate Net Income Tax
and the Capital Stock Tax of the Commonwealth of Pennsylvania. Dividends
received from the Bank qualify for a 100% dividends received deduction and are
not subject to Corporate Net Income Tax. In addition, the Company's investments
in its subsidiaries qualify as exempt intangible assets and greatly reduce the
amount of Capital Stock Tax assessed.
The Bank is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Bank's financial net income determined
in accordance with generally accepted accounting principles with certain
adjustments. The tax rate under the Mutual Thrift Institutions Tax is 11.5%.
Interest on state and federal obligations is excluded from net income. An
allocable portion of interest expense incurred to carry the obligations is
disallowed as a deduction.
32
ITEM 2. PROPERTIES.
The following table sets forth certain information as of June 30, 2003
with respect to the offices of the Company and Laurel Savings.
Net Book Value of Property
Owned or Lease or Leasehold Improvements as
Location Leased Expiration Date of June 30, 2003
- ---------------------------------------- --------- ---------------- -----------------------------
Allegheny County:
363 Butler Street
Etna, Pittsburgh Owned $80
1416 Mt. Royal Blvd.
Glenshaw Owned 67
1801 Jancey Street
Morningside, Pittsburgh Leased 2006(1) --
2724 Harts Run Road
Allison Park Owned 439
744 Little Deer Creek Road
Russellton Owned 348
5200 Butler Street
Lawrenceville, Pittsburgh Owned 145
900 Saxonburg Boulevard
Shaler, Pittsburgh Owned 617
Butler County:
125 West Main Street
Saxonburg Owned 134
- -------------------
(1) At June 30, 2006, the Bank will have an option to extend this lease for an
additional five years.
The Bank also has ATMs at its branch offices located at 363 Butler
Street, 1801 Jancey Street, 2724 Harts Run Road, 744 Little Deer Creek Road, 125
West Main Street and 900 Saxonburg Boulevard. The Bank participates in the
STAR(TM), Cirrus(TM), Pluse(TM) and Jeanie(TM) shared ATM network systems which
provides customers with access to their deposits at thousands of locations
throughout Pennsylvania, the United States and many foreign countries.
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Bank are not involved in any pending legal
proceedings other than routine, non-material legal proceedings occurring in the
ordinary course of business.
33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from pages
1 and 3 of the Company's Annual Report to Stockholders attached hereto as
Exhibit 13 (the "2003 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page
31 of the Company's 2003 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
32 to 44 of the Company's 2003 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
32 to 34 of the Company's 2003 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
7 to 30 of the Company's 2003 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of June 30, 2003. Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and
34
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the fourth fiscal quarter of fiscal 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
"Information With Respect to Nominees for Director, Directors Whose Terms
Continue and Executive Officers" in the Company's Proxy Statement for the Annual
Meeting of Stockholders for fiscal 2003 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
"Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from
"Principal Holders of Common Stock" and "Information With Respect to Nominees
For Director, Directors Whose Term Continues and Executive Officers" in the
Proxy Statement.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14,PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
PART IV.
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13 hereto):
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 2003 and
2002
35
Consolidated Statements of Operations for the Years Ended June 30,
2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended June 30,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted
because of the absence of conditions under which they are
required or because the required information is included in
the consolidated financial statements and related notes
thereto.
(3) The following exhibits are filed as part of this Form 10-K and
this list includes the Exhibit Index.
No. Exhibits Page
- ---- -------------------------------------------------------------------------------------------------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Common Stock Certificate *
10.1 1987 Stock Compensation Program *
10.2 1993 Key Employee Stock Compensation Program **
10.3 1993 Directors' Stock Option Plan **
10.4 1996 Stock Option Plan ***
10.5 2000 Stock Option Plan ****
10.6 Employment agreement between Laurel Savings Bank and Edwin R. Maus ***
11 Earnings Per Share Computation
13 2003 Annual Report to Stockholders
21 See "Business - Subsidiaries" for the required information.
23 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350)
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350)
36
* Incorporated by reference to the Company's Registration Statement on
Form S-4.
** Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1994.
*** Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1997.
**** Incorporated by reference to the Company's proxy statement dated
October 6, 2000.
(b) Reports on Form 8-K
On May 16, 2003, the Company filed a Form 8-K to report under "Item 9.
Regulation FD Disclosure (Results of Operations and Financial
Condition)" the results of its operations for the quarter ended March
31, 2003. No financial statements were required to be filed with the
Form 8-K.
(c) See (a)(3) above for all exhibits and the Exhibit Index.
(d) There are no other financial statements and financial
statement schedules which were excluded from the 2003 Annual
Report to Stockholders which are required to be included
herein.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAUREL CAPITAL GROUP, INC.
By: /s/ Edwin R. Maus
-----------------
Date: September 29, 2003 Edwin R. Maus, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Arthur G. Borland Date: September 29, 2003
- -------------------------------------------------
Arthur G. Borland, Director
/s/ Richard J. Cessar Date: September 29, 2003
- -------------------------------------------------
Richard J. Cessar, Chairman of the Board
/s/ Annette D. Ganassi Date: September 29, 2003
- -------------------------------------------------
Annette D. Ganassi, Director
/s/ Richard S. Hamilton Date: September 29, 2003
- -------------------------------------------------
Richard S. Hamilton, Director
/s/ Edwin R. Maus Date: September 29, 2003
- -------------------------------------------------
Edwin R. Maus, Director, President
and Chief Executive Officer
38
/s/ J. Harold Norris Date: September 29, 2003
- -------------------------------------------------
J. Harold Norris, Director
/s/ John A. Howard, Jr. Date: September 29, 2003
- -------------------------------------------------
John A. Howard, Jr., Senior Vice President,
Chief Financial Officer and Corporate Secretary/
Treasurer
39