SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended June 30, 1998
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. 0-23645
LEEDS FEDERAL BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
United States 52-2062351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1101 Maiden Choice Lane, Baltimore, Maryland 21229
- -------------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
(410) 242-1234
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
----
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
value $1.00 per share
---------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
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. [X].
The issuer's revenues for the fiscal year ended June 30, 1998, were
$20.7 million.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing sales price of the
Registrant's stock, as reported on the Nasdaq National Market on September 1,
1998, was approximately $27.3 million. This amount includes shares held by the
Registrant's ESOP, and excludes shares held by Leeds Federal Bankshares, M.H.C.,
and the Registrant's directors and senior officers. As of September 1, 1998,
there were issued and outstanding 5,138,158 shares of the Registrant's Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended June 30,
1998 (Parts II and III).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
ITEM 1. Description of Business
General
Leeds Federal Bankshares, Inc.
Leeds Federal Bankshares, Inc. (the "Company") is a federal corporation
which was organized on November 21, 1997. The only significant asset of the
Company is its investment in Leeds Federal Savings Bank (the "Bank"). The
Company is majority-owned by Leeds Federal Bankshares, M.H.C., a
federally-chartered mutual holding company (the "Mutual Holding Company"). On
January 21, 1998, the Company acquired all of the issued and outstanding common
stock of the Bank in connection with the Bank's reorganization into the
"two-tier" form of mutual holding company ownership. At that time, each share of
the Bank's common stock was automatically converted into one share of Company
common stock, par value $1.00 per share (the "Common Stock"). At June 30, 1998,
the Company had total assets of $302.7 million and stockholders' equity of $49.3
million.
The Company's principal office is located at 1101 Maiden Choice Lane,
Baltimore, Maryland 21229, and its telephone number at that address is (410)
242-1234.
Leeds Federal Savings Bank
The Bank is a federally-chartered savings bank headquartered in
Baltimore, Maryland. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB")
since 1938.
The Bank is a community-oriented savings institution that is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market area, and investing such deposits in fixed-rate one- to
four-family residential real estate mortgages and adjustable rate home equity
loans and, to a lesser extent, commercial real estate loans and consumer loans.
To the extent available funds exceed local mortgage loan demand, the Bank also
invests in mortgage-backed securities issued or guaranteed by the United States
Government or agencies thereof, secured short-term loans to commercial banks,
interest-earning deposits in other institutions, and other short- and
medium-term investments.
The Bank's executive offices are located at 1101 Maiden Choice Lane,
Baltimore, Maryland 21229, and its telephone number at that address is (410)
242-1234.
Market Area/Local Economy
The Bank's market area comprises parts of the Maryland counties of
Baltimore, Howard, Harford, Anne Arundel, and Carroll, and Baltimore City, which
are part of the Baltimore metropolitan area. Baltimore City is located
approximately 30 miles from Washington, D.C., and is part of the
Washington-Baltimore Standard Metropolitan Statistical Area. The Bank's market
area has a diverse base, although it is significantly influenced by the federal
government and the defense industry. The federal government is one of the area's
largest employers. Headquartered within the Bank's market area are a number of
federal government agencies, including the Social Security Administration and
the Health Care Financing Administration. Other major employers and industries
within the Bank's market area include General Motors Truck and Bus Group,
Pepsi-Cola Company, Black and Decker Corporation, Johns Hopkins University, the
University of Maryland--Baltimore County, the University of Maryland--Baltimore,
McCormick and Company, Inc., Bethlehem Steel Corp., Northrup Grumman, Fort
Meade, Proctor and Gamble Cosmetic and Fragrance Products, The Baltimore Sun,
Baltimore Gas and Electric Company, Giant Food, Inc., Bell Atlantic, Blue Cross
and Blue Shield of Maryland, USF&G Corporation, Crown Central Petroleum, St.
Agnes Hospital, and The Ryland Group, Inc. The Baltimore metropolitan area also
has an active tourism industry, and is home to the Baltimore Orioles
professional baseball team, the Baltimore Ravens professional football team, the
Inner Harbor, and the National Aquarium. As of 1990, the population of the
Baltimore
<PAGE>
metropolitan area was approximately two million. The Baltimore metropolitan area
experienced significant economic growth during the 1970's and 1980's. In the
early 1990s the real estate market had suffered a recession; however, the area
has been slowly recovering from this recession.
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The
principal components of the Bank's loan portfolio are fixed-rate conventional
first mortgage loans secured by one- to four-family residential real estate,
home equity loans, and, to a much lesser extent, commercial real estate and
consumer loans. At June 30, 1998, the Bank's net loans receivable totaled $191.0
million, of which $172.2 million, or 90.2%, were one- to four-family residential
real estate mortgage loans, $12.8 million, or 6.7%, were home equity loans, $5.1
million, or 2.7%, were consumer loans, and $3.7 million, or 1.9%, were
commercial real estate loans.
The Bank also invests in mortgage-backed securities including
pass-through certificates and, to a much lesser extent, collateralized mortgage
obligations ("CMOs"). At June 30, 1998, mortgage-backed securities totaled $16.5
million, or 5.5%, of total assets. At June 30, 1998, 46.2% of the Bank's
mortgage-backed securities were secured by adjustable rate mortgage ("ARM")
loans, and 13.0% were secured by loans with terms of less than five years.
Pass-through certificates totaled $14.6 million, or 88.7%, of the Bank's total
mortgage-backed securities portfolio at June 30, 1998. All of the Bank's
pass-through certificates are insured or guaranteed by Freddie Mac, Ginnie Mae
("GNMA"), or Fannie Mae ("FNMA"). CMOs totaled $1.8 million, or 10.7%, of the
Bank's total mortgage-backed securities portfolio on June 30, 1998, all of which
were backed by federal agency collateral. The Bank's policy is to hold
mortgage-backed securities to maturity.
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<PAGE>
Analysis of Loan Portfolio. Set forth below are selected data relating
to the composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ----------------- ---------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family
residential and construction $172,152 90.1% $155,233 88.8% $137,700 90.1% $ 127,511 90.4% $ 131,751 92.0%
Home equity.................. 12,769 6.7 13,024 7.4 11,692 7.7 10,108 7.2 10,055 7.0
Commercial................... 3,738 2.0 3,763 2.2 1,548 1.0 1,494 1.0 1,672 1.2
------- ------ ------- ------ --------- ----- --------- ----- --------- ------
Total real estate loans.... 188,659 98.8 172,020 98.4 150,940 98.8 139,113 98.6 143,478 100.2
Consumer loans................. 5,072 2.7 5,069 2.9 3,295 2.2 2,324 1.6 773 .5
Accrued interest receivable.... 784 .4 783 .4 679 .4 616 .4 620 .4
------- ------ ------- ------ --------- ----- --------- ----- --------- ------
Total loans receivable..... 194,515 101.9 177,872 101.7 154,914 101.4 142,053 100.6 144,871 101.1
Less:
Undisbursed portion of
loans in process............. 2,025 (1.1) 1,668 (1.0) 1,196 (.8) 121 (.1) 625 (.4)
Unearned loan fees............ 802 (.4) 790 (.4) 588 (.4) 498 (.3) 677 (.5)
Allowance for loan losses..... 722 (.4) 536 (.3) 375 (.2) 341 (.2) 318 (.2)
------- ------ ------ ------ --------- ----- -------- ----- -------- ------
Total loans receivable, net $190,966 100.0% $174,878 100.0% $152,755 100.0% $141,093 100.0% $143,251 100.0%
======= ===== ======= ===== ======== ===== ======== ===== ======== ======
Mortgage-backed securities..... $ 16,514 $ 22,294 $ 29,095 $ 34,957 $ 38,149
======= ======= ======== ======== ========
</TABLE>
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<PAGE>
Loan and Mortgage-Backed Securities Maturity Schedule. The following
table sets forth the maturity or period of repricing of the Bank's loan and
mortgage-backed securities portfolio at June 30, 1998. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due.
<TABLE>
<CAPTION>
Beyond
Within 1-3 3-5 5-10 10-20 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential
and construction ............. $ 5,526 $ 5,136 $ 13,606 $ 38,821 $ 62,395 $ 46,668 $172,152
Home equity ................... 8,516 365 622 3,208 58 -- 12,769
Commercial .................... 2,500 1,238 -- -- -- -- 3,738
Consumer loans ................. 522 1,345 3,071 134 -- -- 5,072
Accrued interest receivable .... 784 -- -- -- -- -- 784
-------- -------- -------- -------- -------- -------- --------
Total loans ............... 17,848 8,084 17,299 42,163 62,453 46,668 194,515
-------- -------- -------- -------- -------- -------- --------
Mortgage-backed securities(1) .. 10,612 421 584 3,134 569 1,234 16,554
-------- -------- -------- -------- -------- -------- --------
Total loans and
mortgage-backed securities ... $ 28,460 $ 8,505 $ 17,883 $ 45,297 $ 63,022 $ 47,902 $211,069
======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------------
(1) Does not include discounts and premiums.
Fixed- and Adjustable-Rate Loan and Mortgage-Backed Securities
Schedule. The following table sets forth at June 30, 1998, the dollar amount of
fixed rate loans and mortgage-backed securities that mature after June 30, 1999,
and all adjustable rate loans and mortgage-backed securities that mature or
reprice after June 30, 1999.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Real estate loans:
One- to four-family residential
and construction .................... $153,736 $ 12,890 $166,626
Home equity ........................... 4,253 -- 4,253
Commercial ............................ -- 1,238 1,238
Consumer loans ........................ 4,550 -- 4,550
-------- -------- --------
Total ............................... $162,539 $ 14,128 $176,667
======== ======== ========
Mortgage-backed securities .............. $ 5,942 $ -- $ 5,942
======== ======== ========
One- to Four-Family Residential and Construction Real Estate Loans.
The Bank's primary lending activity currently consists of the origination of
fixed rate one- to four-family owner-occupied residential mortgage loans,
virtually all of which are collateralized by properties located in the Bank's
market area. The Bank also originates fixed/adjustable first mortgage loans,
which have fixed rates for the first five or seven years, then adjust annually
thereafter. The Bank also originates one- to four-family construction loans that
convert to permanent loans after the initial construction period which generally
does not exceed nine months. The Bank is a portfolio lender. It has not sold
loans in the secondary mortgage market; however, it may conduct limited
secondary market sales in the future. t One- to four-family loans are
underwritten and originated according to policies approved by the board of
directors.
The Bank currently offers fixed rate one- to four-family residential
mortgage loans with terms ranging from 5 to 30 years. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
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<PAGE>
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The average length of time that the Bank's one- to
four-family residential mortgage loans remain outstanding varies significantly
depending upon trends in market interest rates and other factors. In recent
years, the average maturity of the Bank's mortgage loans has decreased
significantly due to unprecedented volume of refinancing activity. Accordingly,
estimates of the average length of one- to four-family loans that remain
outstanding cannot be made with any degree of accuracy.
Originations of fixed rate mortgage loans are monitored on an ongoing
basis and are affected significantly by the level of market interest rates, the
Bank's interest rate risk position, and loan products offered by the Bank's
competitors. The Bank's fixed rate mortgage loans amortize on a monthly basis
with principal and interest due each month. To make the Bank's loan portfolio
more interest rate sensitive, the Bank currently emphasizes the origination of
fixed rate loans with terms of 15 years or less and fixed/adjustable rate loans.
The Bank's one-to-four family residential first mortgage loans
customarily include due-on-sale clauses, which provides the Bank with the right
to declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed rate mortgage loan portfolio, and the
Bank has generally exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies limit the maximum
loan-to-value ratio on fixed rate loans without private mortgage insurance to
80% of the lesser of the appraised value or the purchase price of the property
to serve as collateral for the loan.
The Bank makes one-to-four family real estate loans with loan-to-value
ratios of up to 95%; however, for one- to four-family real estate loans with
loan-to-value ratios of between 80% and 95%, the Bank requires the first 20% of
the loan amount to be covered by private mortgage insurance. The Bank requires
fire and casualty insurance, as well as a title policy, on all properties
securing real estate loans made by the Bank.
Commercial Real Estate Loans. The Bank originates commercial real
estate loans on a limited basis. At June 30, 1998, the Bank had two such loans
which represented 2.0% of the Bank's loan portfolio. The Bank generally does not
solicit such loans, and originates such loans selectively and on a case-by-case
basis. Because of the increased credit risk associated with such loans and the
low level of demand for such loans in the Bank's primary market area, the Bank
does not expect commercial real estate lending to constitute a significant part
of loan originations in the foreseeable future. At June 30, 1998, the Bank's
commercial real estate loan portfolio totaled $3.7 million. The largest loan at
June 30, 1998 was a $2.5 million, 18 month loan on a PUD property which is
planned to be developed into a retirement facility.
Home Equity Loans. The Bank also originates variable and fixed rate
home equity loans. As of June 30, 1998, variable rate home equity loans totaled
$8.5 million, or 4.4%, of the Bank's total loan portfolio. The interest rates of
the Bank's variable rate home equity loans adjust based on the prime interest
rate and are generally for terms of up to 15 years. At June 30, 1998, fixed rate
home equity loans totaled $4.3 million. The Bank's home equity loans are secured
by the borrower's principal residence with a maximum loan-to-value ratio,
including the principal balances of both the first and second mortgage loans, of
75% or less.
Consumer Loans. To a much lesser extent, the Bank also originates
consumer loans collateralized by automobiles, mobile homes, boats, recreational
vehicles, deposit accounts and other personal property. Consumer loans entail
greater credit risk than do residential mortgage loans, particularly in the case
of consumer loans that are secured by assets that depreciate rapidly, such as
automobiles, mobile homes, boats, and recreational vehicles.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as mortgage brokers, real
estate agent referrals, existing customers, borrowers, builders, attorneys,
-5-
<PAGE>
and walk-in customers. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's employment, income, and credit standing. In the case
of a real estate loan, an appraiser approved by the Bank appraises the real
estate intended to collateralize the proposed loan. An underwriter in the Bank's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. Pursuant to the Bank's written loan
policies, all loans are approved by the board of directors, which meets weekly.
After the loan is approved, a loan commitment letter is promptly issued to the
borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Commitments are typically issued for 60-day periods in the
case of loans to refinance, 90-day periods in the case of loans to purchase
existing real estate, and 120-day periods for construction loans. The borrower
must provide proof of fire and casualty insurance on the property serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance, based on a title search of the property, is required on all
loans secured by real property. At June 30, 1998, the Bank had outstanding loan
commitments of $1.0 million. This amount does not include $15.2 million of
undisbursed lines of credit on home equity loans, and the unfunded portion of
loans in process.
Origination, Purchase and Sale of Loans. The table below shows the
Bank's originations of loans for the periods indicated.
1998 1997 1996
---- ---- ----
(In Thousands)
Loans receivable at beginning of period . $ 175,422 $ 153,039 $ 141,316
Originations:
Real estate:
One- to four-family residential ....... 41,205 35,919 32,514
Home equity (1) ...................... 7,571 7,657 10,355
Commercial ........................... -- 2,500 100
Consumer passbook loans (2) ............ 81 (39) 14
Consumer loans, other .................. 1,785 2,699 1,892
--------- --------- ---------
Total originations .................. 50,642 48,736 44,875
--------- --------- ---------
Transfer of mortgage loans
to foreclosed real estate ............. -- -- --
Repayments .............................. (34,353) (26,364) (33,152)
Loan charge-off/transfer provision ...... (5) 11 --
--------- --------- ---------
Net loan activity ....................... 16,284 22,383 11,723
--------- --------- ---------
Total loans receivable at
end of period ...................... $ 191,706 $ 175,422 $ 153,039
========= ========= =========
- --------
(1) Includes disbursements from existing home equity loans.
(2) Represents net changes in ending balances.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Bank generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using an interest method over the contractual life of the loan. Fees
deferred are recognized into income immediately upon prepayment of the related
loan. At June 30, 1998, the Bank had $802,000 of deferred loan origination fees.
Such fees vary with the volume and type of loans and commitments made and
purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. In
addition to loan origination fees, the Bank also receives other fees, service
charges, and other income that consist primarily of deposit transaction account
service charges and late charges. The Bank recognized fees and
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<PAGE>
service charges of $137,000, $130,000 and $116,000, for the fiscal years ended
June 30, 1998, 1997, and 1996, respectively.
Mortgage-Backed Securities
A significant part of the Bank's business involves investments in
mortgage-backed securities, all of which are issued or guaranteed by the United
States Government or an agency thereof. At June 30, 1998, all of the Bank's
mortgage-backed securities were insured or guaranteed by a United States
Government agency or sponsored corporation. The Bank's mortgage-backed
securities portfolio includes primarily pass-through certificates and, to a
lesser extent, CMOs. The Bank invests in mortgage-backed securities to
supplement local loan originations as well as to reduce interest rate risk
exposure.
The Bank's pass-through certificates represent a participation interest
in a pool of single-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interest in the form of securities, to investors such as the Bank.
Such quasi-governmental agencies that guarantee the payment of principal and
interest to investors, include Freddie Mac, GNMA, or the FNMA. Pass-through
certificates typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
and maturities that are within a specified range. The underlying pool of
mortgages can be composed of either fixed rate mortgage loans or ARM loans. The
interest rate risk characteristics of the underlying pool of mortgages, i.e.,
fixed rate or adjustable rate, are passed on to the certificate holder.
CMOs are securities created by segregating or partitioning cash flows
from mortgage pass-through securities or from pools of mortgage loans. CMOs
provide a broad range of mortgage investment vehicles by tailoring cash flows
from mortgages to meet the varied risk and return preferences of investors.
These securities enable the issuer to "carve up" the cash flow from the
underlying securities and thereby create multiple classes of securities with
different maturity and risk characteristics. CMOs are typically issued by a
special-purpose entity (the "issuer") that may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. Accordingly, a
CMO instrument may be purchased in equity form (e.g., trust interests, stock and
partnership interests) or non-equity form (e.g., participating debt securities).
All of the Bank's CMOs are non-equity interests. CMOs are collateralized by
mortgage loans or mortgage-backed securities that are transferred to the CMO
trust or pool by a sponsor. The issuey is structured so that collections from
the underlying collateral provide a cash flow to make principal and interest
payments on the obligations, or "tranches," of the issuer.
Set forth below is information relating to the Bank's purchases, sales
and repayments of mortgage-backed securities for the periods indicated.
Years Ended June 30,
----------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Mortgage-backed securities at
beginning of period .............. $ 22,294 $ 29,095 434,957
Purchases ......................... -- -- --
Repayments ........................ (5,769) (6,791) (5,878)
Other (1) ........................ (11) (10) 16
--------- --------- ---------
Mortgage-backed securities at
end of period .................... $ 16,514 $ 22,294 $ 29,095
========= ========= =========
- ------------
(1) Includes discount (premium) amortization and accrued interest receivable.
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<PAGE>
The following table sets forth selected data relating to the
composition of the Bank's mortgage-backed securities as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1998 1997 1996
---------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Pass-through certificates:
<S> <C> <C> <C> <C> <C> <C>
Adjustable ........................ $ 7,624 46.2% $ 9,970 44.7% $11,704 40.2%
Fixed ............................. 7,068 42.8 10,375 46.6 15,431 53.0
------- ----- ------- ----- ------- -----
Total pass-through certificates 14,692 89.0 20,345 91.3 27,135 93.2
------- ----- ------- ----- ------- -----
CMOs:
Adjustable ........................ 1,759 10.7 1,876 8.4 1,876 6.5
------- ----- ------- ----- ------- -----
Total CMOs .................... 1,759 10.7 1,876 8.4 1,876 6.5
------- ----- ------- ----- ------- -----
Other(1) .......................... 63 0.3 73 0.3 84 .3
------- ----- ------- ----- ------- -----
Total mortgage-backed securities $16,514 100.0% $22,294 100.0% $29,095 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ---------
(1) Includes discount (premium) amortization and accrued interest receivable.
At June 30, 1998, mortgage-backed securities totaled $16.5 million, or
5.5%, of total assets. ARM loans collateralized 46.2% of the Bank's
mortgage-backed securities portfolio, and loans with terms of less than five
years collateralized 13.0% of the Bank's mortgage-backed securities portfolio.
Pass-through certificates totaled $14.6 million, or 88.7%, of the Bank's total
mortgage-backed securities portfolio at June 30, 1998. All of the Bank's pass-
through certificates are insured or guaranteed by the Freddie Mac, the GNMA, or
the FNMA. CMOs totaled $1.8 million, or 10.7%, of the Bank's total
mortgage-backed securities portfolio on that same date, all of which were backed
by federal agency collateral. At June 30, 1998, all the Bank's mortgage-backed
securities were held for investment. At June 30, 1998, the Bank's
mortgage-backed securities portfolio had a fair market value of $16.9 million.
Effective February 1992, the Office of Thrift Supervision ("OTS")
adopted Thrift Bulletin 52 ("TB 52"). Among other things, TB 52 sets forth
certain guidelines with respect to depository institutions' investment in
certain "high risk mortgage securities." "High-risk mortgage securities" are
defined as any mortgage derivative product that at the time of purchase, or at
any subsequent date, meets any of three tests that are set forth in TB 52.
High-risk mortgage securities may be purchased only in limited circumstances,
and if held in a portfolio, must be reported as trading assets at market value,
or as available-for-sale assets at the lower of cost or market value. Mortgage
securities that were not high risk securities when originally acquired that
subsequently became high risk may be reported as held to maturity. In certain
circumstances, OTS examiners may seek the orderly divestiture of high-risk
mortgage securities, in which case the securities must be reported as available
for sale. As of June 30, 1998, the Bank did not hold any "high-risk mortgage
securities" in its portfolio.
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. If delinquency continues, on
the first day of the second month, a delinquent notice is mailed along with a
letter advising that the mortgagors are in violation of the terms of their
mortgage contract. If a loan becomes 60 days past due, the loan becomes subject
to possible legal action. The Bank's attorney has been authorized by the Board
of Directors to send a letter on the first day of the third month advising of
pending legal action. This letter grants mortgagors an additional 15 days to
bring the account to date prior to start of any legal action. If not paid,
foreclosure proceedings are initiated.
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<PAGE>
It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The
mortgagors are required to submit a written repayment schedule which is closely
monitored for compliance. Under these terms, the account is brought to date,
usually within a few months.
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on a nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Mortgage loans are placed on nonaccrual
status generally when either principal or interest is more than 90 days past
due. Interest accrued and unpaid at the time a loan is placed on nonaccrual
status is charged against interest income.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is deemed REO until such time as it is sold. When REO is
acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations. At June 30, 1993, the Bank held $116,000
of REO, which was sold during the three months ended September 30, 1993. This
was the only REO held by the Bank in the past several years.
Delinquent Loans and Nonperforming Assets. The following table sets
forth information regarding loans delinquent 90 days or more, real estate owned
by the Bank and other nonperforming assets at the dates indicated. As of the
dates indicated, the Bank did not have any material restructured loans within
the meaning of SFAS 15. At June 30, 1998, the Bank had two loans on nonaccrual
status, totaling $2.5 million. The increase in delinquent loans was due to a
$2.5 million commercial loan that became nonperforming during the fiscal year
ended June 30, 1998. The nonperforming loan matured in June 1998. In August
1998, the borrower paid all interest due on the loan through October 31, 1998,
although the principal was not repaid and the loan continued to be in default.
The borrower has informed the Bank that it has received a lender's commitment to
refinance the loan, although there can be no assurance that such refinancing
will be obtained. Management also obtained an appraisal in August 1998, and
based in part on such appraisal, management believes the Bank will not incur a
material loss on this loan. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Provision
for Losses."
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Delinquent loans:
<S> <C> <C> <C> <C> <C>
One- to four-family residential......... $ 19 $ 88 $ 100 $ 104 $ 20
Consumer loans.......................... -- -- -- 7 --
Commercial loans........................ 2,500 -- -- -- --
------- ------ ------ ----- -----
Total delinquent loans.............. $ 2,519 $ 88 $ 100 $ 111 $ 20
======= ====== ====== ===== =====
Total real estate owned (1)................. -- -- $ -- $ -- $ --
Other nonperforming assets................. -- -- 90 150 --
------- ------ ------ ----- -----
Total nonperforming assets.......... -- -- $ 90 $ 150 $ --
======= ====== ====== ===== =====
Total loans delinquent 90 days or more to
net loans receivable.................... 1.32% .05% .07% .08% .01%
Total loans delinquent 90 days or more to
total assets............................ .83% .03% .04% .04% --%
Total nonperforming loans and nonperforming
assets to total assets.................. .83% .03% .07% .10% --%
</TABLE>
- --------
(1) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
was recorded at the lower of its fair value or the principal balance of the
related loan.
During the year ended June 30, 1998, gross interest income of
approximately $281,000 would have been recorded on nonperforming and
restructured loans, under their original terms, if the loans had been current
throughout the period. $211,000 was actually recorded on these assets during the
year ended June 30, 1998.
-9-
<PAGE>
The following table sets forth information with respect to loans
delinquent 60-89 days and 90 days or more in the Bank's portfolio at the dates
indicated.
At June 30,
------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Loans delinquent 60-89 days ................ $ 169 $ 32 $ 14
------
Loans delinquent 90 days or more ........... $2,519 88 102
------ ------ ------
Total delinquent 60 days or more ......... $2,688 $ 120 $ 116
====== ====== ======
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at June 30, 1998.
At June 30, 1998
---------------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent ..................$ 169 1
Loans 90 days or more delinquent ................ 19 1
Commercial real estate:
Loans 60 to 89 days delinquent .................. -- --
Loans 90 days or more delinquent ................ 2,500 1
Consumer loans 90 days or more delinquent ......... -- --
Foreclosed real estate and repossessions .......... -- --
Other nonperforming assets ........................ -- --
Restructured loans within the meaning of
Statement of Financial Accounting
Standards No. 15 (not included in other
nonperforming categories above) .................. -- --
Loans to facilitate sale of real
estate owned ..................................... -- --
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. At June 30, 1998, the
Bank had 1 loan totaling $169,000 classified as special mention, secured by one-
to four family residence.
-10-
<PAGE>
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At June 30,
-----------------------------------
1998 1997 1996
(In Thousands)
Substandard assets (1) ............ $ 2,519 $ -- $90
Doubtful assets ................... -- -- --
Loss assets ....................... -- -- --
--------- ---------- ---
Total classified assets ........ $ 2,519 $ -- $90
========= ========== ===
- --------------
(1) Includes REO and other nonperforming assets.
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the estimated losses that may be incurred. The Bank regularly reviews its
loan portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectability of interest and principal may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral. During the years ended June 30, 1998, 1997 and 1996, the Bank added
$192,000, $151,000 and $34,000, respectively, to the provision for loan losses.
The Bank's allowance for loan losses totaled $723,000, $536,000 and $375,000, at
June 30, 1998, 1997, and 1996, respectively.
Management believes that the allowances for losses on loans and
investments in real estate are adequate. While management uses available
information to recognize losses on loans and investments in real estate, future
additions to the allowances 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 allowances for losses
on loans and investments in real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
Of the total allowance for loan losses, 35.2% has been allocated to one- to
four- family residential real estate loans.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ................... $ 190,966 $ 174,878 $ 152,755 $ 141,093 $ 143,252
Average loans outstanding ................. 182,882 164,321 143,126 143,829 140,624
Allowance balances (at beginning of period) 536 375 341 317 254
Provision for losses on real estate loans . 192 151 34 24 63
Transfer from provision for other assets .. -- 30 -- -- --
Charge-offs ............................... (5) (20) -- -- --
--------- --------- --------- --------- ---------
Allowance balance (at end
of period) ............................... $ 723 $ 536 $ 375 $ 341 $ 317
========= ========= ========= ========= =========
Allowance for loan losses as a
percentage of net loans receivable
at end of period ......................... .38% .31% .25% .24% .22%
</TABLE>
Investment Activities
The Bank's investment portfolio comprises investment securities,
securities purchased under agreements to resell, secured short-term loans to
commercial banks, Federal Home Loan Bank stock, and interest-earning deposits
-11-
<PAGE>
in other institutions. The Bank has no investments in corporate or unrated
securities. At June 30, 1998, $44.0 million, or 51.0%, of the Bank's investment
portfolio was scheduled to mature in one year or less, $3.8 million, or 4.4%,
was scheduled to mature in from one to five years, and $38.4 million was
scheduled to mature in over five years.
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. See "Regulation--Federal Regulation of Savings
Institutions--Liquidity." The Bank generally has maintained a portfolio of
liquid assets that exceeds regulatory requirements. Management believes that the
higher levels are prudent because of the possibility that interest rates may
increase. By maintaining high levels of liquidity, the Bank is able to reinvest
its assets more quickly in response to changes in market interest rates, thereby
reducing its exposure to interest rate volatility. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in the Bank's loan origination and
other activities. Currently, due to lower demand for loans, the Bank's liquidity
levels are higher than they have been in recent periods.
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment portfolio at the dates indicated.
At June 30,
---------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Investment securities:
U.S. Government and agency obligations ......... $49,393 $45,499 $57,269
Freddie Mac preferred stock .................... 1,456 2,384 3,205
------- ------- -------
Total investment securities .................. $58,725 $51,777 $48,704
Securities purchased under agreements
to resell ...................................... -- 5,518 2,467
Short-term investments/money market
accounts ....................................... 4,777 2,722 --
Secured short-term loans to commercial
banks(1) ...................................... 18,405 9,736 11,360
FHLB stock ....................................... 2,377 2,377 2,377
Interest-earning deposits in other institutions .. 11,906 11,172 10,450
------- ------- -------
Total investments ............................ $86,169 $83,302 $85,379
======= ======= =======
- ----------
(1) Includes Federal Funds sold and other deposits.
-12-
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Bank's investment portfolio at June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------- ------------------- -------------------- --------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government
agency securities ....... $ 2,809 5.35% $ 2,800 5.84% $ 7,882 6.90% $30,511 7.10%
U.S. Government
treasury securities ..... 497 5.37 1,000 7.50 -- -- -- --
Freddie Mac preferred
stock ................... 3,205 0.01 -- -- -- -- -- --
------- ------ ------- ------- ------- ------- ------- -------
Total investment
securities............ $ 6,511 2.10% $ 3,800 6.28% $ 7,882 6.90% $30,511 7.10%
Securities purchased
under agreements to
resell ................... -- -- -- -- -- -- -- --
Short-term investments/
money market accounts ..... 4,777 6.16 -- -- -- -- -- --
Secured short-term
loans to commercial
banks .................... 18,405 5.76 -- -- -- -- -- --
FHLB stock ................ 2,377 7.31 -- -- -- -- -- --
Interest earning
deposits in other
institutions ............. 11,906 5.80 -- -- -- -- -- --
------- ------ ------- ------- ------- ------- ------- -------
Total investments ...... $43,976 5.36% $ 3,800 6.28% $ 7,882 6.90% $30,511 7.10%
======= ====== ======= ======= ======= ======= ======= =======
</TABLE>
At June 30, 1998
---------------------------
Total
---------------------------
Annualized
Weighted
Carrying Market Average
Value Value Yield
----- ----- -----
(Dollars in Thousands)
Investment securities:
U.S. Government
agency securities ....... $44,002 $43,914 6.87%
U.S. Government
treasury securities ..... 1,497 1,497 6.79
Freddie Mac preferred
stock ................... 3,205 3,205 0.01
------- ------- ----
Total investment
securities............ $48,704 $48,616 6.42%
Securities purchased
under agreements to
resell ................... -- -- --
Short-term investments/
money market accounts ..... 4,777 4,777 6.16
Secured short-term
loans to commercial
banks .................... 18,405 18,405 5.76
FHLB stock ................ 2,377 2,377 7.31
Interest earning
deposits in other
institutions ............. 11,906 11,906 5.80
------- ------- ----
Total investments ...... $86,169 $86,081 6.20%
======= ======= ====
-13-
<PAGE>
Sources of Funds
General. The Bank's deposit-gathering activities are currently
conducted from the Bank's facility in Arbutus, Maryland. Deposits are the major
source of the Bank's funds for lending and other investment purposes. In
addition to deposits, the Bank derives funds from the amortization and
prepayment of loans and mortgage-backed securities, n the maturity of investment
securities, and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes. Historically, the Bank has maintained a high level of
liquidity, and only rarely uses borrowed funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook and statement savings
accounts, money market deposits, term certificate accounts and individual
retirement accounts. Deposit account terms vary according to the minimum balance
required, the period of time during which the funds must remain on deposit, and
the interest rate, among other factors. The maximum rate of interest which the
Bank must pay is not established by regulatory authority. The Bank regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Bank's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. The Bank has
sought to decrease the risk associated with changes in interest rates by
offering competitive rates on deposit accounts and by pricing certificates of
deposit to provide customers with incentives to choose certificates of deposit.
The Bank does not obtain funds through brokers, through a solicitation of funds
outside its market area, nor by offering negotiated rates on certificates of
deposit in excess of $100,000.
Savings Portfolio. Savings in the Bank as of June 30, 1998 were
represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Savings
- ------------- ------------ ----------------------------- -------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
--% None Noninterest-bearing demand $ 500 $ 550 0.22%
2.04 None NOW Accounts 300 5,738 2.34
3.35 None Passbooks and Statement Savings 50 18,213 7.43
4.77 None Money Market Accounts 100 63,792 26.01
3.33 None Anniversary Bonus Account 100 5,107 2.08
3.35 None Club Accounts 5 139 0.06
Certificates of Deposit
-----------------------------
4.25 3 months Fixed term, fixed rate 1,000 365 0.15
5.22 6 months Fixed term, fixed rate 1,000 6,304 2.56
5.42 12 months Fixed term, fixed rate 1,000 22,493 9.17
5.45 13 months Fixed term, fixed rate 10,000 976 0.40
5.56 18 months Fixed term, fixed rate 1,000 9,195 3.75
5.54 24 months Fixed term, fixed rate 1,000 20,211 8.24
5.70 36 months Fixed term, fixed rate 1,000 18,220 7.43
6.04 48 months Fixed term, fixed rate 1,000 1,073 0.44
6.35 60 months Fixed term, fixed rate 1,000 21,725 8.86
5.59 Various (15-20) Fixed term, fixed rate 5,000 41,498 16.92
5.51 Various (14-25) Fixed term, variable rate 1,000 9,307 3.79
7.50 Various ( 3-60) Fixed term, fixed rate 90,000 364 0.15
------- ------
$245,270 100.00%
======= ======
</TABLE>
-14-
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
----------------------------- ---------------------------- ---------------------------- ------------------
Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1)
------- --------- --------- ------- --------- --------- ------- ---------- --------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Anniversary bonus
account...............$ 5,107 2.08% $(1,384) $ 6,491 2.79% $(1,289) $ 7,780 3.5% $(4,800) $ 12,580 6.0%
NOW and demand accounts 6,288 2.56 1,173 5,115 2.20 892 4,223 1.9 958 3,265 1.5
Passbooks, statements
and clubs............. 18,352 7.49 (506) 18,858 8.11 436 18,422 8.3 (1,027) 19,449 9.2
Money market deposit
accounts.............. 63,792 26.01 (11,231) 75,023 32.26 6,936 68,087 30.6 6,106 61,981 29.3
Time deposits that
mature:
within 12 months... 91,166 37.17 14,544 76,622 32.94 6,505 70,117 31.6 (1,131) 71,248 33.7
within 13-36 months 54,413 22.18 10,589 43,824 18.84 2,716 41,108 18.5 9,275 31,833 15.1
beyond 36 months... 6,152 2.51 (505) 6,657 2.86 (5,752) 12,409 5.6 1,351 11,058 5.2
-------- ------- ------- -------- ------ ------- -------- ------ ------- -------- ------
Total deposits.$245,270 100.0% $12,680 $232,590 100.0% $10,444 $222,146 100.0% $10,732 $211,414 100.0%
======== ======= ======= ======== ====== ======= ======== ====== ======= ======== ======
</TABLE>
- --------
(1) Represents percentage of total deposits.
(2) Represents increase (decrease) in balance from end of prior period.
-15-
<PAGE>
Time Deposit Rates. The following table sets forth the time deposits in
the Bank classified by rates as of the dates indicated:
At June 30,
------------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Rate
----
4.00 - 5.99% ................ $132,687 $ 96,982 $ 75,296
6.00 - 7.99% ................ 19,044 30,121 48,338
-------- -------- --------
$151,731 $127,103 $123,634
======== ======== ========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposit at June 30, 1998.
Amount Due
-------------------------------------------------------------
Less Than1-2 2-3 After
One Year Years Years 3 Years Total
-------- ----- ----- ------- -----
(In Thousands)
4.00 - 5.99%...... $84,424 $35,056 $ 7,155 $ 6,052 $132,687
6.00 - 7.99%...... 6,742 9,310 2,892 100 19,044
-------- -------- -------- ------- --------
$ 91,166 $ 44,366 $ 10,047 $ 6,152 $151,731
======== ======== ======== ======= ========
Large Certificates of Deposit Maturities. The following table indicates
the amount of the Bank's certificates of deposit of $100,000 or more by time
remaining until maturity at June 30, 1998. This amount does not include other
savings account deposits of $100,000 or more, which totaled approximately $22.0
million at June 30, 1998.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less.............................. $ 2,916
Three through six months.......................... 2,864
Six through twelve months......................... 10,634
Over twelve months................................ 10,243
-------
Total........................................ $26,657
=======
Change in Deposits. The following table sets forth changes in total
deposits of the Bank for the periods indicated:
At June 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Rate
----
Balance at beginning of period ..... $ 232,590 $ 222,146 $ 211,414
---------
Net (withdrawals)/deposits ......... 566 (1,105) (424)
Interest credited .................. 12,114 11,549 11,156
--------- ---------
Ending balance ................... $ 245,270 $ 232,590 222,146
========= --------- ---------
Net increase (decrease)
in deposits ...................... $ 12,680 $ 10,444 $ 10,732
========= ========= =========
Borrowings
Deposits are the Bank's primary source of funds. The Bank may also
obtain funds from the FHLB and through reverse repurchase agreements. FHLB
advances are collateralized by selected assets of the Bank. Such advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Bank, for
-16-
<PAGE>
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB. The maximum amount of FHLB
advances to a member institution generally is reduced by borrowings from any
other source. As part of the Reorganization, the Employee Stock Ownership Plan
and Trust (ESOP) borrowed funds from an unrelated third party lender to finance
the purchase of 144,000 shares of the Common Stock issued in the offering
(adjusted for the Bank's three-for-two stock split in the form of a stock
dividend which was paid November 1997). The loan will be repaid principally from
the Bank's contributions to the ESOP over a period of up to ten years. At June
30, 1998, the balance on the ESOP loan was $552,000 and was reported as an
obligation of the Bank.
Although the Bank has rarely done so, it may also sell securities under
agreements to repurchase with selected dealers (reverse repurchase agreements)
as a means of obtaining short-term funds as market conditions permit. In a
reverse repurchase agreement, a fixed dollar amount of securities would be sold
to a dealer under an agreement to repurchase the securities at a specific price
within a specific period of time, typically not more than 180 days. Reverse
repurchase agreements are treated as financings of the Bank and the obligations
to repurchase securities sold are reflected as a liability of the Bank. The
dollar amount of securities underlying the agreements remain an asset of the
Bank. There were no securities sold under agreements to repurchase outstanding
at June 30, 1998.
Competition
As of June 30, 1998, the Bank was the fourth largest savings
institution headquartered in the Bank's market area. The Bank encounters strong
competition both in attracting deposits and in originating real estate and other
loans. Its most direct competition for deposits has historically come from
commercial and savings banks, other savings associations, and credit unions in
its market area. Competition for loans comes from such financial institutions as
well as mortgage banking companies. The Bank expects continued strong
competition in the foreseeable future, including increased competition from
"super-regional" banks entering the market by purchasing large banks and savings
banks. Many such institutions have greater financial and marketing resources
available to them than does the Bank. The Bank competes for savings deposits by
offering depositors a high level of personal service and a wide range of
competitively priced financial services. In recent years, additional strong
competition has come from stock and bond dealers and brokers. The Bank competes
for real estate loans primarily through the interest rates and loan fees it
charges and advertising.
Personnel
As of June 30, 1998, the Bank had 25 full-time and 8 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
Regulation
As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of and owns stock in the FHLB of Atlanta, which is
one of the twelve regional banks in the Federal Home Loan Bank System. 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 Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Company, the Mutual Holding Company and the Bank and their operations.
-17-
<PAGE>
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions. The description of statutory provisions and regulations
applicable to savings associations set forth herein does not purport to be a
complete description of such statutes and regulations and their effect on the
Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus on an unsecured basis. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate. The Bank's maximum loans to
one borrower limit was $7.4 million at June 30, 1998. As of June 30, 1998, the
Bank was in compliance with its loans-to-one-borrower limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of June 30, 1998, the Bank maintained
87.5% of its portfolio assets in qualified thrift investments and, therefore,
met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal s supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for
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<PAGE>
as long as the savings association subsidiary is controlled by the mutual
holding company, the dollar amount of dividends waived by the mutual holding
company are considered as a restriction on the retained earnings of the savings
association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association (and the savings association's capital ratios adjusted accordingly)
in evaluating any proposed dividend under OTS capital distribution regulations;
and (v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
institution may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition and would remain adequately capitalized (as
defined by regulation) following the proposed distribution. Savings institutions
that would remain adequately capitalized following the proposed distribution but
do not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. A savings institution will be considered in
troubled condition if it has a CAMEL rating of 4 or 5, is subject to an
enforcement action relating to its safety and soundness or financial viability
or has been informed in writing by the OTS that it is in troubled condition. As
under the current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. The Bank is required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which varies from time
to time depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio currently
is 4.0%. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for the quarter ended June 30,
1998 was 40.6%, which exceeded the then applicable requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's consolidated total assets, as reported in the institution's latest
quarterly thrift financial report. Based on assets at June 30, 1998, the Bank
has a semi-annual assessment of approximately $39,000.
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA rating system identifies four levels
of performance that may describe an institution's record of meeting community
needs: outstanding, satisfactory, needs to improve and substantial
non-compliance. The CRA also requires all institutions to make public disclosure
of their CRA ratings. The CRA regulations were recently revised. The OTS
assesses the CRA performance of a savings institution under lending, service and
investment tests, and based on such assessment, will assign an institution in
one of the four above-referenced ratings. The Bank received a "satisfactory" CRA
rating under the current CRA regulations in its most recent federal examination
by the OTS.
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<PAGE>
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations generally require such loans
to be made on terms substantially the same as those offered to unaffiliated
individuals and do not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and requires certain approval procedures to be followed. At June 30,
1998, the Bank was in compliance with the regulations.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
The federal banking agencies recently adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted final rules which require institutions to examine asset quality and
earnings standards. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
purchased mortgage servicing rights ("PMSRs"). Tangible capital is defined as
core capital less all intangible assets (including supervisory goodwill) plus a
specified
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<PAGE>
amount of PMSRs. The OTS regulations also require that, in meeting the tangible
ratio, leverage and risk-based capital standards, institutions must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank, and unrealized gains (losses) on certain available for sale
securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
At June 30, 1998, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of June 30, 1998.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ --------------------
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
------ -------- ------ -------- ------ --------
As of June 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
Tier I core capital............... $47,346 15.80% $11,985 4.00% $14,982 >5%
Tier I risk-based capital......... 47,346 32.76 5,781 4.00 8,672 >6%
Total risk-based capital.......... 48,069 33.26 11,563 8.00 14,453 >10%
</TABLE>
- ---------------
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk- based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC
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determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings banks,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The minimum annual deposit insurance premiums are currently assessed at
the rate of .065% of deposits for all SAIF-insured members. The FDIC, however,
is authorized to raise premiums in certain circumstances related to fund losses
and severe economic circumstances and has exercise this authority several times
with respect to premium paid to the Bank Insurance Fund ("BIF") by commercial
banks and BIF-member savings association.
In September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of March 31,
1995. The assessment was 65.7 basis points per $100 in deposits, payable on
November 30, 1996. For the Bank, the assessment amounted to $1.4 million (or
$849,000 when adjusted for taxes), based on the Bank's deposits on March 31,
1995. In addition, pursuant to the legislation, interest payments on FICO bonds
issued in the late 1980's by the Financing Corporation to recapitalize the now
defunct Federal Savings and Loan Insurance Corporation are paid jointly by
BIF-insured institutions and SAIF-insured institutions. The FICO assessment was
1.29 basis points per $100 in BIF deposits and 6.1 basis points per $100 in SAIF
deposits. Beginning January 1, 2000, the FICO interest payments will be paid pro
rata by banks and thrifts based on deposits (approximately 2.4 basis points per
$100 in deposits).
The legislation further provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date. The
Bank cannot determine whether, or in what form such legislation may eventually
be enacted and there can be no assurance that any legislation that is enacted
would not adversely affect the Bank or the Company.
While the legislation has reduced the disparity between premiums paid
on BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least January 1, 1999. The Bank's SAIF
premium for the fiscal year ended June 30, 1998 was $222,000.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB-Atlanta stock, at June 30, 1998, of $2.4
million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. Over the past five years such dividends have averaged
6.84%, and were 7.31% for the fiscal year ended June 30, 1998.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $52.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $52.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of
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$52.0 million. The first $4.2 million of otherwise reservable balances (subject
to adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
General. The Company and the Mutual Holding Company are non-diversified
savings and loan holding companies within the meaning of the HOLA, as amended.
As such, the Company and the Mutual Holding Company are registered with the OTS
and are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and the Mutual Holding Company and any non- savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
Restrictions Applicable to Mutual Holding Companies. Pursuant to
Section 10(o) of the HOLA and OTS regulations, a mutual holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company; one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non- conforming activities and divest of any non-conforming
investments.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other that those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fun, the convenience and needs
of the community and competitive factors.
Restrictions Applicable to Federally-Chartered Stock Holding Companies
he OTS recently adopted new regulations governing the two-tier mutual holding
company form of organization and mid-tier stock holding companies that are
controlled by mutual holding companies. A stock holding company subsidiary of a
mutual holding company is permitted to engage in activities that are permitted
for its mutual holding company parent and to have the same indemnification and
employment contract restrictions imposed that are on the mutual holding company
parent.
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<PAGE>
Federal and State Taxation
Federal Taxation. The Bank and the Company are subject to federal
income taxation in the same manner as other corporations, with some exceptions
discussed below. 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.
In February 1992, the FASB issued SFAS 109 "Accounting for Income
Taxes." The Company currently is accounting for income taxes in accordance with
SFAS No. 109. The asset and liability method accounts for deferred income taxes
by applying the enacted statutory rates in effect at the balance sheet date to
differences between the book cost and the tax cost of assets and liabilities.
The resulting deferred tax liabilities and assets are adjusted to reflect
changes in tax laws. SFAS 109 was implemented by the Bank effective July 1,
1992.
The Bank was audited by the Internal Revenue Service for the tax year
ended June 30, 1995. There were no adjustments made as a result of that audit.
The State of Maryland has not audited the Bank within the past five years. See
Notes 1 and 9 to the Financial Statements.
State Taxation. The State of Maryland generally imposes a franchise tax
on thrift institutions computed at a rate of 7% of net earnings. For the purpose
of the 7% franchise tax, net earnings are defined as the net income of the
thrift institution as determined for federal corporate income tax purposes, plus
(i) interest income from obligations of the United States, of any state,
including Maryland and of any county, municipal or public corporation authority,
special district or political subdivision of any state, including Maryland, (ii)
any profit realized from the sale or exchange of bonds issued by the State of
Maryland or any of its political subdivisions, and (iii) any deduction for state
income taxes.
Executive Officers of the Registrant
Listed below is information, as of June 30, 1998, concerning the
Registrant's executive officers. All of the executive officers have held the
positions listed below since the time the registrant was organized in November
1997. In addition, all of the executive officers of the Registrant are officers
of the Bank holding the same position as listed below. There are no arrangements
or understandings between the Registrant and any of persons named below with
respect to which he or she was or is to be selected as an officer.
Name Age Position
- ---- --- --------
John F. Amer 72 Chairman of the Board
Gordon E. Clark 56 President, Chief Executive Officer and Director
Marguerite F. Wolf 71 Vice Chairman and Director
Joan H. McCleary 64 Director and Secretary to the Board
Dale R. Douglas 56 Senior Vice President
Kathleen G. Trumpler 60 Treasurer
ITEM 2. Description of Property
(a) The Company conducts its business through a single facility located
in Arbutus, Baltimore County, Maryland. The facility opened and has been owned
by the Bank since 1960. At June 30, 1998, the net book value of the Company's
property and equipment was $851,000.
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<PAGE>
(b) Investment Policies. For a description of the Company's policies
(all of which may be changed without a vote of the Company's security holders)
and the limitations on the percentage of assets which may be invested in any one
investment, or type of investment with respect to: (1) investments in real
estate or interests in real estate; (2) investments in real estate mortgages;
and (3) securities of or interests in persons primarily engaged in real estate
activities, reference is made hereunder to the information presented above under
"Item 1. Description of Business."
(c) Description of Real Estate and Operating Data. Not Applicable; the
book value of each of the Company's properties is less than 10% of the Company's
total consolidated assets at June 30, 1998.
ITEM 3. Legal Proceedings
The Company is periodically involved in claims and lawsuits that are
incident to the Company's business. At June 30, 1998, the Company was not
involved in any such claim or lawsuit.
ITEM 4. Submission of Matters to a Vote of Security-Holders
During the fourth quarter of the fiscal year covered by this report,
the Registrant did not submit any matters to the vote of security holders.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The "Common Stock and Related Matters" and "Stockholder Information"
sections of the Registrant's annual report to stockholders for the fiscal year
ended June 30, 1998 (the "1998 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 1998 Annual Report to Stockholders
are incorporated herein by this reference.
ITEM 6. Management's Discussion and Analysis or Plan of Operations
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Registrant's 1998 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1998
Annual Report to Stockholders are incorporated herein by this reference.
ITEM 7. Financial Statements
The material identified in Item 13(a)(1) hereof is incorporated herein
by reference.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The "Proposal I--Election of Directors" section of the Registrant's
definitive proxy statement for its 1998 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference. In addition, see Item 1.
"Executive Officers of the Registrant" for information concerning the Bank's
executive officers.
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<PAGE>
ITEM 10. Executive Compensation
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 12. Certain Relationships and Related Transactions
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
()(1) Financial Statements
The following documents appear in sections of the Registrant's 1998
Annual Report to Stockholders under the same captions, and are incorporated
herein by reference. No other sections of the 1998 Annual Report to Stockholders
are incorporated herein by this reference.
(i) Selected Financial and Other Data;
(ii) Management's Discussion and Analysis of Financial Condition and
Results of Operations;
(iii) Independent Auditors' Report;
(iv) Statements of Financial Condition;
(v) Statements of Income;
(vi) Statements of Stockholders' Equity;
(vii) Statements of Cash Flows; and
(viii) Notes to Financial Statements.
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<PAGE>
With the exception of the aforementioned sections, the Registrant's
1998 Annual Report to Stockholders is not deemed filed as part of this Annual
Report on Form 10-KSB, and no other sections of the 1998 Annual Report to
Stockholders are incorporated herein by this reference.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Financial
Statements.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-KSB Report
-------------- -------- ------ ------------------
<S> <C> <C> <C>
3 Articles of Incorporation * Not Applicable
3 Bylaws * Not Applicable
4 Instruments defining the * Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10.1 Leeds Federal Savings Bank and ** Not Applicable
Leeds Federal Bankshares, M.H.C.
1994 Recognition and Retention Plan
10.2 Leeds Federal Savings Bank and ** Not Applicable
Leeds Federal Bankshares, M.H.C.
1994 Stock Option Plan
10.3 Employment Agreement with 10.3 Exhibit 10.3
Gordon E. Clark, Jr.
11 Statement re: computation Not Not Applicable
of per share earnings Required
13 Form of Annual Report to 13 Exhibit 13
Security Holders
16 Letter re: change in certifying None Not Applicable
accountants
18 Letter re: change in accounting None Not Applicable
principles
21 Subsidiaries of Registrant None Not Applicable
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-KSB Report
-------------- -------- ------ ------------------
<S> <C> <C> <C>
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
</TABLE>
- -------------
* Filed as exhibits to the Company's Registration Statement on Form S-8 (File
No. 333-44899) filed with the SEC on January 26, 1998. All such previously
filed documents are incorporated by reference in accordance with Item 601
of Regulation S-B.
** Filed as exhibits to the Company's Current Report Form 8-K (File No.
0-23645) filed with the SEC on January 21, 1998. All such previously filed
documents are incorporated by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K:
Not applicable.
-28-
<PAGE>
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.
LEEDS FEDERAL BANKSHARES, INC.
Date: September 25, 1998 By: /s/ Gordon E. Clark
-------------------------------
Gordon E. Clark, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange 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.
By: /s/ Gordon E. Clark By: /s/ Kathleen G. Trumpler
--------------------------------- -------------------------------
Gordon E. Clark, President, Chief Kathleen G. Trumpler, Treasurer
Executive Officer and Director (Principal Financial/Accounting
Principal Executive Officer) Officer)
Date: September 25, 1998 Date: September 25, 1998
By: /s/ John F. Amer By: /s/ Marguerite E. Wolf
--------------------------------- -------------------------------
John F. Amer, Chairman Marguerite E. Wolf,
Vice Chairman
Date: September 25, 1998 Date: September 25, 1998
By: /s/ Joan H. McCleary By: /s/ Raymond J. Hartman
---------------------------------- -------------------------------
Joan H. McCleary, Director Raymond J. Hartman, Director
Date: September 25, 1998 Date: September 25, 1998
By: /s/ John F. Doyle
----------------------------------
John F. Doyle, Director
Date: September 25, 1998
-29-
EXHIBIT 10.3
EMPLOYMENT AGREEMENT WITH
GORDON E. CLARK, JR.
<PAGE>
LEEDS FEDERAL SAVINGS BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of April 29, 1994, by and between
Leeds Federal Savings Bank (the "Bank"), a federally chartered savings
institution, with its principal administrative office at 1101 Maiden Choice
Lane, Baltimore, Maryland 21229 and Gordon E. Clark, Jr. (the "Executive"). Any
reference to "Company" herein shall mean Leeds Federal Bankshares, MHC or any
successor thereto.
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as President and Chief Executive Officer of the Bank. During said period,
Executive also agrees to serve, if elected, as an officer and director of any
subsidiary or affiliate of the Bank. Failure to reelect Executive as President
and Chief Executive Officer without the consent of the Executive during the term
of this Agreement shall constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall
begin as of the date first above written and shall continue for a period of
thirty-six (36) full calendar months thereafter. Commencing on the first
anniversary date of this Agreement, and continuing at each anniversary date
thereafter, the Agreement shall renew for an additional year such that the
remaining term shall be three (3) years unless written notice is provided to
Executive at least ten (10) days and not more than thirty (30) days prior to any
such anniversary date, that his employment shall cease at the end of twenty-four
(24) months following such anniversary date. Prior to each notice period for
non-renewal, the disinterested members of the Board of Directors of the Bank
("Board") will conduct a comprehensive performance evaluation and review of the
Executive for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
<PAGE>
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $105,000 per year
("Base Salary"). Such Base Salary shall be payable semi-monthly. During the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than one year from the
date hereof. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase Executive's Base Salary. In addition to the
Base Salary provided in this Section 3(a), the Bank shall provide Executive at
no cost to Executive with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan of the Bank in which Executive is eligible to participate. Nothing paid
to the Executive under any such plan or arrangement will be deemed to be in lieu
of other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing his
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs
(a), (b) and (c) of this Section 3 shall be paid by the Bank and the Company,
respectively on a pro rata basis based upon the amount of service the Executive
devotes to the Bank and Company, respectively.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 8 and 15.
(a) The provisions of this Section shall apply upon the occurrence of
an Event of Termination (as herein defined) during the Executive's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Company of Executive's full-time employment
hereunder for any reason other than, (A) Disability or Retirement as defined in
Section 6 below, (B) a Change in Control, as defined in Section 5(a) hereof, or
(C) Termination for Cause as defined in Section 7 hereof; or (ii) Executive's
resignation from the Bank's employ, upon any (A) failure to elect or reelect or
to appoint or reappoint Executive as President and Chief Operating Officer, (B)
material change in Executive's
2
<PAGE>
function, duties, or responsibilities, which change would cause Executive's
position to become one of lesser responsibility, importance, or scope from the
position and attributes thereof described in Section 1, above, (C) a relocation
of Executive's principal place of employment by more than 30 miles from its
location at the effective date of this Agreement, or a material reduction in the
benefits and perquisites to the Executive from those being provided as of the
effective date of this Agreement, (D) liquidation or dissolution of the Bank or
Company other than liquidations or dissolutions that are caused by
reorganizations that do not affect the status of Executive, or (E) breach of
this Agreement by the Bank. Upon the occurrence of any event described in
clauses (ii)(A), (B), (C), (D) or (E), above, Executive shall have the right to
elect to terminate his employment under this Agreement by resignation upon sixty
(60) days prior written notice given within a reasonable period of time not to
exceed four calendar months after the initial event giving rise to said right to
elect. Notwithstanding the preceding sentence, in the event of a continuing
breach of this Agreement by the Bank, the Executive, after giving due notice
within the prescribed time frame of an initial event specified above, shall not
waive any of his rights solely under this Agreement and this Section 4 by virtue
of the fact that Executive has submitted his resignation but has remained in the
employment of the Bank and is engaged in good faith discussions to resolve any
occurrence of an event described in clauses (A), (B), (C), (D) and (E) above.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of the Agreement or
three (3) times the average of the three preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during such years,
and the amount of any benefits received pursuant to any employee benefit plans
on behalf of the Executive, maintained by the Bank during such years; provided,
however, that if the Bank is not in compliance with its minimum capital
requirements or if such payments would cause the Bank's capital to be reduced
below its minimum capital requirements, such payments shall be deferred until
such time as the Bank is in capital compliance, and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year. At the election of
the Executive, which election is to be made within thirty (30) days of an Event
of Termination, such payments shall be made in a lump sum or paid monthly during
the remaining term of the agreement following the Executive's termination. In
the event that no election is made, payment to the Executive will be made on a
monthly basis during the remaining term of the agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment.
(c) Notwithstanding the provisions of Sections 4(a) and (b), and in the
event that there has not been a change in control as defined in Section 5(a),
upon the Voluntary Termination by the Executive upon giving sixty days notice to
the Bank (which shall not be deemed to constitute an "Event of Termination" as
defined herein), the Bank, at the discretion of the Board of Directors, shall
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a severance payment in an
amount to be determined by the Board of Directors at the time of such Voluntary
Termination by the Executive. Such severance payment shall not exceed three (3)
times the average of the three preceding years' Base Salary, including bonuses
and any other cash compensation paid to the Executive during such years, and the
amount of any benefits received pursuant to any employee benefit plans, on
behalf of the Executive, maintained by the Bank during such years; provided,
however, that if the Bank is not in compliance with its minimum capital
requirements or if such payments would cause the Bank's capital to be reduced
below its minimum capital requirements, such payments shall be deferred until
such time as the Bank is in capital compliance, and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base
3
<PAGE>
Salary for the immediately preceding year. At the election of the Executive,
which election is to be made within thirty (30) days of Executive's Voluntary
Termination, any payments shall be made in a lump sum or paid monthly during the
remaining term of the agreement following the Executive's termination. In the
event that no election is made, any payment to the Executive will be made on a
monthly basis during the remaining term of the agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment.
(d) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination, provided that such benefits shall not be provided in the event they
should constitute an unsafe or unsound banking practice relating to executive
compensation and employment contracts pursuant to 12 C.F.R. ss.ss. 63.39 and
563.161, as is now or hereafter in effect. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
(e) In the event that the Executive is receiving monthly payments
pursuant to Section 4(b) or (c) hereof, on an annual basis, thereafter, between
the dates of January 1 and January 31 of each year, Executive shall elect
whether the balance of the amount payable under the Agreement at that time shall
be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable
for the year for which such election is made.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or Company, as set forth below. For
purposes of this Agreement, a "Change in Control" of the Bank or Company shall
mean:
(1) a reorganization, merger, merger conversion, consolidation or sale
of all or substantially all of the assets of the Bank, the Company or the Stock
Holding Company, or a similar transaction in which the Bank, the Company or the
Stock Holding Company is not the resulting entity and that is not approved by a
majority of the Board of Directors of the Bank, the Company or the Stock Holding
Company;
(2) individuals who constitute the Incumbent Board of the Bank, the
Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; or
(3) a change in control within the meaning of 12 C.F.R. ss. 574.4, as
determined by the board of directors of the Bank or the Company; provided,
however, that a change in control shall not be deemed to occur if the
transaction(s) constituting a change in control is approved by a majority of the
board of directors of the Bank or the Company, as the case may be.
(4) In the event that the Company converts to the Stock Holding Company
on a stand-alone basis, a "change in control" of the Bank or the Stock Holding
Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), or results in a Change in Control of the Bank
or the Stock Holding Company within the meaning of the Home Owners' Loan Act of
1933 and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof, (b)
without limitation shall be deemed to have occurred at such time as (i) any
"person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act)
other than the Stock Holding Company is or becomes a
4
<PAGE>
"beneficial owner" (as defined in Rule 13-d under the Exchange Act) directly or
indirectly, of securities of the Bank representing 25% or more of the Bank's
outstanding securities ordinarily having the right to vote at the election of
directors except for any securities of the Bank received by the Stock Holding
Company in connection with the Reorganization and any securities purchased by
the Bank's employee stock ownership plan and trust shall not be counted in
determining whether such plan is the beneficial owner of more than 25% of the
Bank's securities, (ii) a proxy statement soliciting proxies from stockholders
of the Bank, by someone other than the current management of the Bank, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Stock Holding Company of the Bank or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged or converted
into cash or property or securities not issued by the Bank or the Stock Holding
Company, or (iii) a tender offer is made for 25% or more of the voting
securities of the Bank and the shareholders owning beneficially or of record 25%
or more of the outstanding securities of the Bank have tendered or offered to
sell their shares pursuant to such tender offer and such tendered shares have
been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or
the Company shall not be deemed to have occurred if the Company ceases to own at
least 51% of all outstanding shares of stock of the Bank in connection with a
conversion of the Company from mutual to stock form.
For these purposes, "Incumbent Board" means, in the case of (i) the
Company or the Stock Holding Company, or (ii) the Bank, the Board of Directors
of the Company or the Bank, respectively, on the date hereof, provided that any
person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by members or stockholders was
approved by the same nominating committee serving under an Incumbent Board,
shall be considered as though he were a member of the Incumbent Board.
Also for these purposes, Stock Holding Company means the holding
company resulting from a stock conversion of the Company from the mutual to
stock form of organization either on a stand-alone basis or in the context of a
merger conversion, as provided by regulations of the Office of Thrift
Supervision.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred, Executive shall be entitled to the benefits
provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon
his subsequent termination of employment at any time during the term of this
Agreement, regardless of whether such termination results from (i) his
resignation or (ii) his dismissal upon the Change in Control.
(c) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank shall pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of the Agreement or
2.99 times the average of the five preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during such years,
and the amount of any contributions made to any employee benefit plans, on
behalf of the Executive, maintained by the Bank during such years. Such payment
shall be made by the Bank on the Date of Termination. At the election of the
Executive, which election shall be made no later than the Date of Termination
following a Change in Control, such payment may be made in a lump sum or paid in
equal monthly installments during the thirty-six (36) months following the
5
<PAGE>
Executive's termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of the
Agreement.
(d) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. Such coverage and
payments shall cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive will be
entitled to any benefits granted to him pursuant to any Stock Option Plan of the
Bank or Holding Company.
(f) Upon the occurrence of a Change in Control the Executive will be
entitled to any benefits awarded to him under the Bank's Recognition and
Retention Plan or any restricted stock plan in effect.
(g) In the event that the Executive is receiving monthly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis. Such election shall be irrevocable for the
year for which such election is made.
(h) Notwithstanding the preceding paragraphs of this Section 5, in the
event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive under said paragraphs (the
"Termination Benefits") would be deemed to include an
"excess parachute payment" under Section 280G of the
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to the total amount of payments permissible under
Section 280G of the Code or any successor thereto,
then the Termination Benefits to be paid to Executive shall be
so reduced so as to be a Non-Triggering Amount.
(i) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
(j) Any payments made to Executive pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1818(k) and any regulations promulgated thereunder.
(k) The Executive shall not be entitled to any payments pursuant to
this Section 5 if the Bank is not in compliance with its minimum capital
requirements or if such payments would cause the Bank's capital to be reduced
below its minimum capital requirements, such payments shall be deferred until
such times as the Bank is in capital compliance and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year.
6
<PAGE>
6. TERMINATION UPON RETIREMENT OR DISABILITY
Termination by the Bank of the Executive based on "Retirement" shall
mean termination in accordance with the Bank's retirement policy or in
accordance with any retirement arrangement established with Executive's consent
with respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Bank and
other plans to which Executive is a party.
Termination by the Bank of Executive's employment based on "Disability"
shall mean termination because of any physical or mental impairment which
qualifies the Executive for disability benefits under the applicable long-term
disability plan maintained by the Bank or, if no such plan applies, which would
qualify the Executive for disability benefits under the federal social security
system.
7. TERMINATION FOR CAUSE
The term "Termination for Cause' shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing in the
savings institutions industry. For purposes of this paragraph, no act or failure
to act on the part of Executive shall be considered "willful" unless done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's action or omission was in the best interest of the
Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. Any stock options granted to Executive
under any stock option plan of the Bank, the Company or any subsidiary or
affiliate thereof, shall become null and void effective upon Executive's receipt
of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not
be exercisable by Executive at any time subsequent to such Termination for
Cause.
8. NOTICE
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except
7
<PAGE>
upon the occurrence of a Change in Control and voluntary termination by the
Executive in which case the Date of Termination shall be the date specified in
the Notice, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal having expired and no appeal having
been perfected) and provided further that the Date of Termination shall be
extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank
will continue to pay Executive his full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, Base
Salary) and continue Executive as a participant in all compensation, benefit and
insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement,
provided such dispute is resolved within nine months after the Date of
Termination specified in the Notice or Termination; notwithstanding the
foregoing no compensation or benefits shall be paid to Executive in the event
the Executive is Terminated for Cause. In the event that such Termination for
Cause is found to have been wrongful or such dispute is otherwise decided in
Executive's favor, the Executive shall be entitled to receive all compensation
and benefits which accrued for up to a period of nine months after the
Termination for Cause. If such dispute is not resolved within such nine- month
period, the Bank shall not be obligated, upon final resolution of such dispute,
to pay Executive compensation and other payments accruing more than nine months
from the Date of the Termination specified in the Notice of Termination. Amounts
paid under this Section are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 9 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to the Bank as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4(c) hereof, if the Board of Directors offers Executive the full
amount of severance payment set forth in Section 4(c) hereof, or if Executive
accepts any partial severance payment offered by the Board of Directors,
Executive agrees not to compete with the Bank and/or the Company for a period of
three years following such termination within 100 miles of any city, town or
county in which the Bank and/or the Company has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
such area, Executive shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the Bank and/or the
Company. The parties hereto, recognizing that irreparable injury will result to
the Bank and/or the Company, its business and property in the event of
Executive's breach of this Subsection 10(a) agree that in the event of any such
breach by Executive, the Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by
8
<PAGE>
Executive, Executive's partners, agents, servants, employers, employees and all
persons acting for or with Executive. Nothing herein will be construed as
prohibiting the Bank and/or the Company from pursuing any other remedies
available to the Bank and/or the Company for such breach or threatened breach,
including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank, and
Executive may disclose any information regarding the Bank or the Company which
is otherwise publicly available. In the event of a breach or threatened breach
by the Executive of the Provisions of this Section 10, the Bank will be entitled
to an injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
payment and provision of all amounts and benefits due hereunder to Executive
and, if such amounts and benefits due from the Bank are not timely paid or
provided by the Bank, such amounts and benefits shall be paid or provided by the
Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
9
<PAGE>
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time, but
any termination by the Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 7
hereinabove.
(b) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C.
ss. 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's
obligations under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Executive all or part of
the compensation withheld while their contract obligations were suspended and
(ii) reinstate (in whole or in part) any of the obligations which were
suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution, (i) by the Federal
Deposit Insurance Corporation ("FDIC"), at the time FDIC enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) (12 U.S.C. ss. 1823(c)) of the Federal Deposit
Insurance Act, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989; or (ii) by the Office of Thrift Supervision ("OTS") at
the time the OTS or its District Director approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the OTS or FDIC to be in an unsafe or
10
<PAGE>
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
16. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Maryland,
but only to the extent not superseded by federal law.
19. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, provided that the dispute or interpretation has been
settled by Executive and the Bank or resolved in the Executive's favor.
21. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under federal law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank (whether or not he continues to be a director or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements (such settlements must be
approved by the Board of Directors of the Bank). If such action, suit or
proceeding is brought against Executive in his capacity as an officer or
director of the Bank, however, such indemnification shall not extend to matters
as to which Executive is finally adjudged to be liable for willful misconduct in
the
11
<PAGE>
performance of his duties. No Indemnification shall be paid that would violate
12 U.S.C. 1828(K) or any regulations promulgated thereunder, or 12 C.F.R.
544.122.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
12
EXHIBIT 13
1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
TABLE OF CONTENTS
Page
----
Message to Our Stockholders.............................................. 1
Selected Consolidated Financial and Other Data........................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 4
Selected Quarterly Financial Data (Unaudited)............................ 15
Common Stock and Related Matters......................................... 15
Independent Auditors' Report............................................. F-1
Statements of Consolidated Financial Condition........................... F-2
Statements of Consolidated Income........................................ F-3
Statements of Consolidated Stockholders' Equity.......................... F-4
Statements of Consolidated Cash Flows.................................... F-5
Notes to Consolidated Financial Statements............................... F-7
<PAGE>
[LETTERHEAD OF LEEDS FEDERAL BANKSHARES, INC.]
September 16, 1998
To Our Shareholders:
We are pleased to report to you the results of our year ended June 30, 1998. In
January 1998, Leeds Federal Savings Bank was reorganized with the establishment
of Leeds Federal Bankshares, Inc., as the new stock holding company parent of
the Bank. This will allow the Company many of the opportunities available to
stock holding companies while still retaining the benefits of the mutual holding
company structure. An opportunity we have already implemented is a plan to
repurchase up to 275,000 shares of the Company's common stock. This is an
important means for us to enhance stockholder value and invest capital
resources.
The Company's net income for the fiscal year ended June 30, 1998, was $3.3
million, or $.64 per diluted share of common stock, compared to $3.2 million, or
$.63 per diluted share, before the one-time SAIF assessment imposed by the FDIC,
for the year ended June 30, 1997. After considering the after-tax effect of the
SAIF assessment, net income for the year ended June 30, 1997, was $2.4 million.
During the year, we continued to emphasize residential real estate financing, as
evidenced by an increase of $16.1 million in loans receivable. We have continued
to maintain a low level of noninterest expense; our noninterest expense to
average assets ratio was 1.06% and 1.05% (before the SAIF assessment) for the
fiscal years ended June 30, 1998 and 1997, respectively. The enclosed annual
report discusses in more detail Leeds Federal's operating results through June
30, 1998.
The board, management and staff are dedicated to providing the quality financial
services our customers have come to expect from an independent community bank.
Our deposits are received from within our community and reinvested in mortgages
within our community. Our shareholders have shared in the success and growth of
their community bank, reflected in the value of our shared investment in the
stock of Leeds Federal.
Thank you for the confidence you have placed in Leeds Federal. We hope to
justify that confidence by continuing to be the leading community based
financial institution we have been for the past 75 years.
Sincerely,
/s/John F. Amer /s/Gordon E. Clark
John F. Amer Gordon E. Clark
Chairman President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and other data of
Leeds Federal Bankshares, Inc. (the "Company"), or, prior to January 21, 1998,
Leeds Federal Savings Bank (the "Bank") at the dates and for the periods
indicated. For additional information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ------
(In Thousands)
Selected Consolidated Financial Condition Data
<S> <C> <C> <C> <C> <C>
Total assets.................................... $ 302,737 $ 286,999 $ 273,278 $ 260,145 $255,221
Loans receivable, net........................... 190,966 174,878 152,755 141,093 143,252
Investments(1).................................. 86,169 83,302 85,379 78,645 69,064
Mortgage-backed securities...................... 16,514 22,294 29,095 34,957 38,149
Deposits........................................ 245,270 232,590 222,146 211,414 210,472
Borrowed funds.................................. 552 648 744 840 930
Stockholders' equity, substantially restricted.. 49,308 46,741 44,192 41,738 38,281
</TABLE>
- -----------------
(1) Includes investment securities, interest-bearing deposits, and other
investments.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- -------
(In Thousands Except Per Share Data)
Selected Consolidated Operating Data:
<S> <C> <C> <C> <C> <C>
Interest income................................ $ 20,309 $ 19,606 $ 18,567 $ 17,602 $ 16,870
Interest expense............................... 12,171 11,613 11,232 9,945 9,360
--------- --------- --------- --------- --------
Net interest income before provision for losses 8,138 7,993 7,335 7,657 7,510
Provision for loan losses...................... 192 151 33 24 63
Provision for losses on deposit................ -- -- -- 30 --
--------- --------- --------- --------- --------
Net interest income after provision for losses 7,946 7,842 7,302 7,603 7,447
--------- --------- --------- --------- --------
Noninterest income:
Service fees and charges..................... 137 130 116 74 66
Other income ................................ 213 140 168 160 165
--------- --------- --------- --------- --------
Total noninterest income................... 350 270 284 234 231
--------- --------- --------- --------- --------
Noninterest expense:
Compensation and employee benefits........... 1,770 1,528 1,516 1,440 822
Occupancy.................................... 195 197 192 182 175
SAIF deposit insurance premiums.............. 222 1,755 558 558 560
Advertising.................................. 208 172 216 179 147
Other ..................................... 700 637 580 629 469
--------- --------- --------- --------- --------
Total noninterest expenses................. 3,095 4,289 3,062 2,988 2,173
--------- --------- --------- --------- --------
Income before provision for income taxes....... 5,201 3,823 4,524 4,849 5,505
Provision for income tax . . . ................ 1,895 1,458 1,737 1,922 2,090
--------- --------- --------- --------- --------
Net income............................... $ 3,306 $ 2,365 $ 2,787 $ 2,927 $ 3,415
========= ========= ========= ========= ========
Net income per common share (1)
Basic........................................ $ 0.65 $ 0.46 $ 0.55 $ 0.59 $ 0.12(2)
Diluted...................................... $ 0.64 $ 0.46 $ 0.55 $ 0.59 $ 0.12(2)
Dividends declared per common share............ $ 0.55 $ 0.48 $ 0.44 $ 0.31 $ 0.03
</TABLE>
- ----------
(1) Information has been restated to reflect November 1997 three-for-two stock
split.
(2) Information provided for period from April 29, 1994, the date of the Bank's
mutual holding company reorganization, through June 30, 1994. On a pro
forma annualized basis, basic and diluted earnings per share would have
been $0.76 and $0.76, respectively.
2
<PAGE>
OPERATING RESULTS
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Key Operating Ratios and Other Data:
Return on average assets (net income divided
by average total assets)* ....................... 1.13% .85% 1.06% 1.17% 1.37%
Return on average equity (net income divided
by average equity)* ............................. 6.86 5.26 6.50 7.30 12.12
Net interest rate spread (difference between
average yield on interest-earning assets
and average cost of interest-bearing liabilities) 2.03 2.12 2.00 2.34 2.58
Net interest margin (net interest income as a
percentage of average interest-earning assets) . 2.85 2.94 2.85 3.11 3.08
Net interest income to noninterest expense* ....... 262.94 186.36 239.54 256.26 345.61
Net interest income after provision for
losses, to total noninterest expense* ........... 256.74 182.84 238.44 254.45 342.68
Noninterest income to average assets .............. .12 .10 .11 .09 .09
Noninterest expense to average assets* ............ 1.06 1.54 1.17 1.19 .87
Nonperforming loans to total loans ................ 1.32 .05 .06 .07 --
Nonperforming assets to total assets .............. .83 .03 .07 .10 --
Average interest-earning assets to average
interest-bearing liabilities .................... 119.46 119.15 119.50 118.97 112.91
Allowance for losses to nonperforming assets ...... 28.70 609.09 213.67 146.15 --
Retained earnings to average assets ratio
(average retained earnings divided by
average total assets) ........................... 16.49 16.18 16.36 15.96 11.34
Equity to assets at period end .................... 16.28 16.29 16.17 16.04 15.00
Number of full-service offices .................... 1 1 1 1 1
</TABLE>
- ----------
* Excluding the one-time assessment to recapitalize the SAIF, for the year
ended June 30, 1997, return on average assets was 1.16%, return on average
equity was 7.14%, noninterest expense to average assets was 1.05%, net
interest income to noninterest expense was 275.05% and net interest income
after provision for loan losses to total noninterest expense was 269.86%.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Deposit Insurance Premiums."
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The earnings of the Company depend primarily on the earnings of Leeds
Federal Savings Bank (the "Bank"), which is discussed herein on a consolidated
basis. The Company's earnings depend primarily on its level of net interest
income, which is the difference between interest earned on the Company's
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
securities, interest-earning deposits at other institutions, investment
securities and other investments, and the interest paid on interest-bearing
liabilities. Net interest income is a function of the Company's interest rate
spread, which is the difference between the average yield on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to
interest-bearing liabilities. The Company's earnings also are affected by its
level of noninterest income including primarily service fees and charges, and
noninterest expense, including primarily compensation and employee benefits, and
Savings Association Insurance Fund ("SAIF") deposit insurance premiums. Earnings
of the Company also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Company.
Business Strategy
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Company has
sought to implement this strategy by using only retail deposits as its source of
funds and maintaining a substantial part of its assets in loans secured by one-
to four-family residential real estate located in the Company's market area,
home equity loans, consumer loans, mortgage-backed securities and in other
liquid investment securities. Specifically, the Company's business strategy
incorporates the following elements: (1) operating as a community-oriented
financial institution, maintaining a strong core customer base by providing
quality service and offering customers the access to senior management and
services that a community-based institution can offer; (2) maintaining high
asset quality by emphasizing investment in residential mortgage loans,
mortgage-backed securities and other securities issued or guaranteed by the
United States Government or agencies thereof; (3) maintaining capital in excess
of regulatory requirements and growing only to the extent that adequate capital
levels can be maintained; and (4) managing interest rate risk exposure while
achieving desirable levels of profitability.
Results of Operations
The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-earning deposits at other institutions,
investment securities and other investments, and the interest paid on
interest-bearing liabilities, which since 1989 have consisted primarily of
savings deposits. The Company had net income of $3.3 million for the year ended
June 30, 1998. Net income totaled $2.4 million and $2.8 million for fiscal 1997
and 1996, respectively.
Interest Income. Total interest income increased by $703,000, or 3.6%,
to $20.3 million for the year ended June 30, 1998, from $19.6 million for the
year ended June 30, 1997. The increase in interest income
4
<PAGE>
was primarily due to an increase in balance of average interest earning assets
to $285.4 million for the year ended June 30, 1998, from $272.3 million for the
prior year, partially offset by a decrease in yield on average interest earning
assets to 7.1%, from 7.2%. The increase in average interest earning assets
during the year ended June 30, 1998, resulted primarily from an increase in
average loans, offset by decreases in mortgage-backed securities.
Interest on mortgage loans increased by $1.3 million, or 10.2%, to
$13.4 million for the year ended June 30, 1998, from $12.1 million for the year
ended June 30, 1997, primarily because of an increase in average mortgage loans
to $177.8 million for the year ended June 30, 1998, from $159.9 million for the
year ended June 30, 1997, partially offset by a decrease in average yield on
mortgage loans to 7.5% from 7.6%. The increase in average mortgage loans
resulted from increased loan demand in the Bank's community and from an increase
in the volume of loan originations from brokers. The lower yield on mortgage
loans reflected the reinvestment of the proceeds of loan prepayments at lower
yielding mortgage loans than those in the portfolio. Interest income on consumer
loans increased by $52,000 to $359,000 for the year ended June 30, 1998, from
$307,000 for the prior year. The increase was due to an increase in average
balance in consumer loans to $5.1 million, from $4.4 million. The average yield
on consumer loans for the year ended June 30, 1998 increased to 7.1%, from 6.9%
for the prior year. Interest income on mortgage-backed securities decreased
$439,000, or 23.6%, to $1.4 million for the year ended June 30, 1998, from $1.9
million for the prior year. The decrease was principally due to a $6.2 million
decrease in average balance in mortgage-backed securities to $19.6 million for
the year ended June 30, 1998, from $25.8 million for the prior year. Interest
income on investment securities decreased by $599,000, to $3.1 million for the
year ended June 30, 1998, from $3.7 million for the prior year. Such decrease
was the result of a decrease in yield on investment securities to 6.7% from
6.9%, and a $7.7 million decrease in average balance of investment securities to
$46.3 million for the year ended June 30, 1998, from $54.0 million for the year
ended June 30, 1997. The decrease in average balances of investment securities
was the result of increased mortgage loan originations. Interest income from
interest earning deposits increased by $332,000 to $1.5 million for the year
ended June 30, 1998, from $1.2 million for the prior year. Yield on interest
earning deposits increased to 5.7% from 5.5% for the same period. Interest
income on other investments increased by $115,000 to $502,000 for the year ended
June 30, 1998, from $387,000 for the prior year. Such increase was the result of
an increase in average balance of other investments of $3.4 million, partially
offset by a decrease in the average yield on other investments to 5.3% from 6.5%
for the same periods.
Total interest income increased by $1.0 million, or 5.4%, to $19.6
million for the year ended June 30, 1997, from $18.6 million for the year ended
June 30, 1996. The increase in interest income was primarily due to an increase
in balance of average interest earning assets to $272.3 million for the year
ended June 30, 1997, from $257.1 million for the prior year, while the yield on
average interest earning assets remained relatively unchanged at 7.2%. The
increase in average interest earning assets during the year ended June 30, 1997,
resulted primarily from an increase in average loans, offset by decreases in
investment securities and mortgage-backed securities.
Interest on mortgage loans increased by $1.2 million, or 11.0%, to
$12.1 million for the year ended June 30, 1997, from $10.9 million for the year
ended June 30, 1996, primarily because of an increase in average mortgage loans
to $159.9 million for the year ended June 30, 1997, from $140.5 million for the
year ended June 30, 1996, partially offset by a decrease in average yield on
mortgage loans to 7.6% from 7.8%. The increase in average mortgage loans
resulted from increased loan demand in the Company's community and from an
increase in the volume of loan originations from brokers. The lower yield on
mortgage loans reflected the reinvestment of the proceeds of prepayments at
lower yielding mortgage loans than those in the
5
<PAGE>
portfolio. Interest income on consumer loans increased by $123,000 to $307,000
for the year ended June 30, 1997, from $184,000 for the prior year. The increase
was due to an increase in average balance on consumer loans to $4.4 million,
from $2.7 million, reflecting the Company's continuing marketing efforts for
consumer loans during the year. Interest income on mortgage-backed securities
decreased $455,000, or 19.8%, to $1.9 million for the year ended June 30, 1997,
from $2.3 million for the prior year. The decrease was principally due to a $6.4
million decrease in average balance in mortgage-backed securities to $25.8
million for the year ended June 30, 1997, from $32.2 million for the prior year.
Interest income on investment securities decreased by $51,000, to $3.7 million
for the year ended June 30, 1997, from $3.8 million for the prior year. Such
decrease was the result of a $3.2 million decrease in average balance of
investment securities to $54.0 million for the year ended June 30, 1997, from
$57.2 million, partially offset by an increase in yield on investment securities
to 6.9% from 6.5%, for the year ended June 30, 1996. The decrease in average
balance of investment securities was the result of increased mortgage loan
originations. Interest income from interest earning deposits remained relatively
unchanged at $1.2 million for the years ended June 30, 1997 and 1996. Yield on
interest earning deposits decreased to 5.5% from 5.6% for the same periods.
Interest income on other investments increased $178,000 to $387,000 for the year
ended June 30, 1997, from $209,000 for the prior year. Such increase was the
result of an increase in average balance of other investments of $2.5 million,
and increase in the average yield on other investments to 6.5% from 6.0% for the
same periods.
Interest Expense. Total interest expense increased by $558,000, or
4.8%, to $12.2 million for the year ended June 30, 1998, from $11.6 million for
the year ended June 30, 1997. Such increase was the result of an increase in
average balance of interest bearing liabilities of $10.4 million to $238.9
million for the year ended June 30, 1998, from $228.5 million for the prior
period.
Total interest expense increased by $381,000, or 3.4%, to $11.6 million
for the year ended June 30, 1997, from $11.2 million for the year ended June 30,
1996. Such increase was the result of an increase in average balance of
interest-bearing liabilities of $13.3 million to $228.5 million for the year
ended June 30, 1997, from $215.2 million for the prior period, partially offset
by a decrease in cost of average interest-bearing liabilities to 5.1% from 5.2%.
Net Interest Income. Net interest income increased by $145,000, or
1.8%, to $8.1 million for the year ended June 30, 1998, from $8.0 million for
the year ended June 30, 1997. This increase was due principally to an increase
in the ratio of average interest earning assets to average interest bearing
liabilities, partially offset by the decrease in yield on interest earning
assets. See "--Management of Market Risk."
Net interest income increased by $657,000, or 9.0%, to $8.0 million for
the year ended June 30, 1997, from $7.3 million for the year ended June 30,
1996. This increase was due principally to a decrease in the Company's cost of
interest-bearing liabilities.
Provision for Losses. The Company maintains an allowance for loan
losses based upon management's evaluation of risks in the loan portfolio, the
Company's past loan loss experience, current and expected future economic
conditions, and other relevant factors. The Company's provision for loan losses
increased to $192,000 for the year ended June 30, 1998, from $151,000 for the
same period in 1997. The Company's allowance for loan losses as a percentage of
nonperforming loans was 28.70% and 609.09% at June 30, 1998 and 1997,
respectively, and the Company's nonperforming loans as a percentage of total
loans was 1.32% and .05% at June 30, 1998 and 1997, respectively. The increase
in nonperforming loans was due to a $2.5 million commercial loan that became
nonperforming during the fiscal year ended June 30, 1998.
6
<PAGE>
The nonperforming loan matured in June 1998. In August 1998, the borrower paid
all interest due on the loan through October 31, 1998, although the principal
was not repaid and the loan continued to be in default. The borrower has
informed the Company that it has received a lender's commitment to refinance the
loan, although there can be no assurance that such refinancing will be obtained.
Management also obtained an appraisal in August 1998, and based in part on such
appraisal, management believes the Company will not incur a material loss on
this loan. The Company's provision for loan losses increased to $151,000 for the
year ended June 30, 1997, from $33,000 for the same period in 1996. Management
believes that it has maintained the Company's allowance for loan losses at a
level that is adequate to provide for loan losses, although there can be no
assurance that such losses will not exceed estimated amounts. See Notes 1 and 6
of Notes to the Consolidated Financial Statements for additional information on
the allowance for loan losses.
Noninterest Income. Noninterest income increased by $80,000 to $350,000
for the year ended June 30, 1998, from $270,000 for the prior year. The increase
was due principally to increases in cash surrender value of life insurance
investments.
Noninterest income decreased by $14,000 to $270,000 for year ended June
30, 1997, from $284,000 for the prior year. The decrease was due principally to
decreases in dividends received on life insurance investments, partially offset
by an increase in loan processing fees collected during the year.
Noninterest Expense. Noninterest expense increased by $189,000 to $3.1
million, for the year ended June 30, 1998, from $2.9 million for the prior year,
before considering the one-time SAIF assessment of $1.4 million. Compensation
and employee benefits increased by $242,000 to $1.8 million for the year ended
June 30, 1998, from $1.5 million for the prior year. The increase was due
principally to an increase of $148,000 in ESOP contribution expense as a result
of increases in the market price of ESOP shares, the basis of the charge to
expense. Other increases in compensation and employee benefits were the result
of additional staffing and normal increases in salaries and benefits.
Advertising and other expenses increased due to additional marketing and normal
increases in other expenses.
Before considering the one-time SAIF assessment of $1.4 million, offset
by the reduction in the SAIF premiums for periods beginning January 1, 1997,
noninterest expense remained relatively unchanged at $2.9 million for the year
ended June 30, 1997, compared to the prior year. There were no significant
changes in the major expense categories.
Before considering the one-time SAIF assessment, the ratio of
noninterest expenses to average assets was 1.06%, 1.05% and 1.17% for the years
ending June 30, 1998, 1997 and 1996, respectively. After the one- time SAIF
assessment, such ratio was 1.54% for the year ended June 30, 1997.
Provisions for income taxes increased by $437,000 to $1.9 million for
the year ended June 30, 1998, from $1.5 million for the prior year. This
reflects an increase of $1.4 million in income before income taxes in fiscal
year 1998. The Company's effective tax rates were 36.4% and 38.1% for the years
ending June 30, 1998 and 1997, respectively. The decrease was due to increased
state tax-free investments.
Provision for income taxes decreased by $279,000 to $1.5 million for
the year ended June 30, 1997, from $1.7 million for the prior year. This
reflects a reduction of $700,000 in income before income taxes in fiscal year
1997.
7
<PAGE>
Deposit Insurance Premiums. The deposits of the Company are presently
insured by the SAIF, which along with the Bank Insurance Fund (the "BIF"), is
one of the two insurance funds administered by the FDIC. In September 1996,
Congress enacted legislation to recapitalize the SAIF by a one-time assessment
on all SAIF-insured deposits held as of March 31, 1995. The assessment was 65.7
basis points per $100 in deposits, payable on November 30, 1996. For the
Company, the assessment amounted to $1.4 million (or $849,000 when adjusted for
taxes), based on the Company's SAIF-insured deposits of $210.5 million. In
addition, pursuant to the legislation, interest payments on FICO bonds issued in
the late 1980's by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation are now paid jointly by
BIF-insured institutions and SAIF-insured institutions. The FICO assessment is
1.29 basis points per $100 in BIF deposits and 6.1 basis points per $100 in SAIF
deposits. Beginning January 1, 2000, the FICO interest payments will be paid
pro-rata by banks and thrifts based on deposits (approximately 2.4 basis points
per $100 in deposits). The BIF and SAIF will be merged on January 1, 1999,
provided the bank and saving association charters are merged by that date. In
that event, pro-rata FICO sharing will begin on January 1, 1999.
8
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans (1)................ $177,817 $13,376 7.52% $159,899 $12,134 7.59% $140,472 $ 10,911 7.77%
Consumer loans and other loans.... 5,065 359 7.09 4,422 307 6.94 2,654 184 6.93
Mortgage-backed securities........ 19,604 1,423 7.26 25,829 1,862 7.21 32,206 2,317 7.19
Investment securities............. 46,311 3,111 6.72 54,006 3,710 6.87 57,191 3,761 6.58
Interest-earning deposits (2)..... 27,161 1,538 5.66 22,100 1,206 5.46 21,143 1,185 5.60
Other investments (3)............. 9,424 502 5.33 5,995 387 6.46 3,465 209 6.03
-------- ------ ---- ------- -------- ---- -------- -------- ----
Total interest-earning assets... 285,382 20,309 7.12 272,252 19,606 7.20 257,131 18,567 7.22
-------- --------
Noninterest-earning assets.......... 7,046 5,807 5,031
-------- ------- --------
Total assets.................... $292,428 $278,059 $262,162
======== ======== ========
Interest-bearing liabilities:
Savings deposits.................. $238,272 12,114 5.09 $227,785 11,549 5.07 $214,382 11,164 5.21
Other borrowed funds.............. 616 57 8.28 713 64 8.98 792 68 8.59
-------- ------ ---- ------- -------- ---- -------- -------- ----
Total interest-bearing liabilities 238,888 12,171 5.09 228,498 11,613 5.08 215,174 11,232 5.22
-------- ---- -------- ----
Noninterest-bearing liabilities..... 5,331 4,572 4,088
-------- ------- --------
Total liabilities............... 244,219 233,070 219,262
Retained earnings................... 48,209 44,989 42,900
-------- ------- --------
Total liabilities and retained
earnings...................... $292,428 $278,059 $262,162
======== ======== ========
Net interest income................. $8,138 $ 7,993 $ 7,335
====== ======== ========
Net interest rate spread (4)........ 2.03% 2.12% 2.00%
==== ==== ====
Net interest margin (5)............. 2.85% 2.94% 2.85%
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 119.46% 119.15% 119.50%
====== ====== ======
</TABLE>
- ----------
(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes securities purchased under agreement to resell, Federal Home Loan
Bank stock, and mutual funds.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------------ ------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
----------------------------- Total ----------------------------- Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------ ---- ------ ---------- ------ ---- ------ ----------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans (1).......... $ 1,360 $ (112) $ (6) $ 1,242 $ 1,509 $ (253) $ (34) $1,222
Consumer and other loans.... 45 6 1 52 122 -- 1 123
Mortgage-backed securities.. (449) 13 (3) (439) (459) 6 (2) (455)
Investment securities....... (529) (81) 11 (599) (210) 166 (7) (51)
Interest earning deposits (2) 276 44 12 332 54 (30) (3) 21
Other investments (3)....... 222 (68) (39) 115 153 15 10 178
------- ------- ------- ------- ------- ------- ------- ------
Total interest-earning
assets.................... 925 (198) (24) 703 1,169 (96) (35) 1,038
------- ------- ------- ------- ------- ------- ------- ------
Interest expense.............. 528 23 7 558 696 (301) (14) 381
------- ------- ------- ------- ------- ------- ------- ------
Change in net interest income. $ 397 $ (221) $ (31) $ 145 $ 473 $ 205 $ (21) $ 657
======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
- -----------
(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes securities purchased under agreement to resell, Federal Home Loan
Bank stock, and mutual funds.
Management of Market Risk
Like other financial institution holding companies, the Company's most
significant form of market risk is interest rate risk. The Company is subject to
interest rate risk because its liabilities generally have shorter terms or
maturities than its assets. As a result, its liabilities are more sensitive to
changes in market interest rates. The general objective of the Company's
interest rate risk management is to determine the appropriate level of risk
given the Company's business strategy, and then manage that risk in a manner
that is consistent with the Company's policy to reduce exposure of the Company's
net interest income to changes in market interest rates.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities and interest
rates of its interest rate sensitive assets and liabilities by emphasizing
fixed-rate one- to four-family mortgage loans with terms of 15 years or less,
adjustable rate first mortgages and home equity loans, and maintaining
relatively high levels of liquidity. By maintaining a significant percentage of
its assets in cash and other liquid investments, the Company is able to reinvest
a higher percentage of its assets more quickly in response to changes in market
interest rates, thereby reducing its exposure to interest rate volatility. In
addition, the Company offers competitive rates on deposit accounts and prices
certificates of deposit to provide customers with incentives to choose
certificates of deposit with
10
<PAGE>
longer terms. The Company does not utilize derivative instruments or engage in
other hedging activities to manage interest rate risk.
The Company has an Asset-Liability Management Committee which is
responsible for reviewing the Company's asset and liability policies. The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital ratios and requirements.
The Company measures interest rate risk in terms of the sensitivity of
the Company's net portfolio value ("NPV") to changes in interest rates. NPV is
the difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. The following table presents the
pro forma computations of the Company's NPV as of June 30, 1998.
<TABLE>
<CAPTION>
NPV as Percentage of
Change in Present Value of Assets
Interest Rates Net Portfolio Value ----------------------------
in Basis Points ------------------------------------------- Basis Point
(Rate Shock) Amount $ Change % Change NPV Ratio Change
------------ ------ -------- -------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 29,788 (29,585) (50%) 10.72% (822)
300 36,831 (22,542) (38%) 12.86% (608)
200 44,324 (15,049) (25%) 15.01% (394)
100 52,049 (7,324) (12%) 17.09% (185)
Static 59,373 -- -- 18.94% --
(100) 66,026 6,653 11% 20.53% 158
(200) 71,728 12,355 21% 21.80% 286
(300) 78,229 18,856 32% 23.20% 426
(400) 85,855 26,482 45% 24.78% 583
</TABLE>
The above table indicates that at June 30, 1998, in the event of a
sudden and sustained increase in prevailing market rates, the Company's NPV
would be expected to decrease, and that in the event of a sudden and sustained
decrease in prevailing market interest rates, the Company's NPV would be
expected to increase. The Company's Board of Directors reviews the Company's NPV
position quarterly, and, if estimated changes in NPV are not within the targets
established by the Board, the Board may direct management to adjust its asset
and liability mix to bring interest rate risk within Board approved targets.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. The NPV table presented above
assumes that the composition of the Company's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. It also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing characteristics of specific assets and liabilities.
Accordingly, although the NPV table provides an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Company's net interest income and will differ
from actual results.
11
<PAGE>
Liquidity and Capital Resources
The Company is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4.0%. The
Company's liquidity ratio averaged 40.56% during the quarter ended June 30,
1998. The Company adjusts its liquidity levels in order to meet funding needs of
deposit outflows, payment of real estate taxes on mortgage loans, repayment of
borrowings and loan commitments. The Company also adjusts liquidity as
appropriate to meet its asset and liability management objectives.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments, and earnings and funds provided from
operations. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Company invests in
short-term interest-earning assets, which provide liquidity to meet lending
requirements. Assets qualifying for liquidity outstanding at June 30, 1998,
amounted to $97.2 million. For additional information about cash flows from the
Company's operating, financing, and investing activities, see Consolidated
Statements of Cash Flows included in the Consolidated Financial Statements.
A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash are net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds; however, the Company has never borrowed funds from the FHLB.
At June 30, 1998, the Company had outstanding loan commitments of $1.0
million. This amount does not include $13.2 million of undisbursed lines of
credit on home equity loans, and the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year at June 30,
1998, totaled $91.2 million. Based on prior experience, management believes that
a significant portion of such deposits will remain with the Company.
12
<PAGE>
At June 30, 1998, the Company exceeded OTS capital requirements on a
fully phased-in basis. Set forth below is a summary of the Company's compliance
with the following OTS capital standards as of June 30, 1998.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ --------------------
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
------ -------- ------ -------- ------ --------
As of June 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
Tier I core capital............... $ 47,346 15.80% $ 11,985 4.00% $ 14,982 >5%
Tier I risk-based capital......... 47,346 32.76 5,781 4.00 8,672 >6%
Total risk-based capital.......... 48,069 33.26 11,563 8.00 14,453 >10%
</TABLE>
- --------------
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
Impact of Inflation and Changing Prices
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
In June 1997, the FASB issued No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. Earlier
application is encouraged. Management believes that adoption of the provision of
SFAS No. 131 will not have a material effect on the Company's financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 requires that an entity
reorganize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It is effective
for all fiscal quarters or fiscal years beginning after June 15, 1999. Initial
application of this Statement should be as of the beginning of an entity's
fiscal quarter on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. Earlier application is
encouraged, but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS No. 133. It should not be applied retroactively to
financial statements of prior periods. Management has
13
<PAGE>
not determined when it will adopt the provisions of SFAS No. 133 but believes
that it will not have a material effect on the Company's financial position or
results of operations.
Capability of the Company's Data Processing Software and Hardware to Accommodate
the Year 2000
The Company relies upon computers for the daily conduct of its business
and for data processing generally. There is concern among industry experts that
commencing on January 1, 2000, computers will be unable to "read" the new year
and there may be widespread computer malfunctions. The Year 2000 issue is the
result of computer programs being written using two digits rather than four to
define the applicable year. Any of the Company's computer programs that would
have date sensitive software may recognize a date during "00" as the year 1900
rather than the year 2000. This could result in a systems failure or
miscalculations causing disruptions of operations. Management has assessed its
electronic systems, programs, applications and other electronic components used
in the operation of the Company. The Company contracts with service bureaus to
provide the majority of its data processing and is dependent upon purchased
application software. Management believes that it has implemented a plan
pursuant to which the progress toward full compliance of its service bureau and
other software vendors will be tracked and tested well in advance of January 1,
2000. Beginning in the third quarter of 1998, the Company will coordinate
end-to-end tests with primary servicers, which allow the Company to simulate
daily processing on sensitive century dates. The Company expects to complete the
Year 2000 project by December 31, 1998. The Company is currently developing a
contingency plan in the event that the Company's testing discloses potential
failures by either service bureaus or internal systems upon which the Company
relies, or in the event that unforseeable external factors disrupt the Company's
normal operations as the year 2000 approaches. There can be no assurance that
the Company's contingency plan will fully mitigate the effects of such potential
failures. The Company has not incurred any material costs, and management
believes that the Company will not incur material costs in connection with the
year 2000 issue, although there can be no assurances in this regard.
Reorganization into the Two-Tier Mutual Holding Company Structure
Effective January 21, 1998, the Bank completed its reorganization into
a two-tier mutual holding company structure (the "Reorganization") with the
establishment of the Company as the stock holding company parent of the Bank. As
a result of the Reorganization, Leeds Federal Bankshares, M.H.C., the Bank's
mutual holding company, owns a majority of the common stock of the Company,
which owns 100% of the common stock of the Bank. Management believes that the
two-tier holding company structure allows the new Company to retain the benefits
of the mutual holding company structure, and at the same time gives the Company
many of the opportunities available to stock holding companies that are not
currently available in a mutual holding company structure. The mid-tier
structure offers the Company greater flexibility to structure and complete
mergers and acquisitions, to diversity operations, and to repurchase outstanding
shares of common stock.
Stock Repurchase Plan to Repurchase Up to 275,000 Shares of Common Stock
On April 15, 1998, the Company authorized a plan to repurchase up to
275,000 shares, or approximately 5.3% of its common stock, as a part of its
capital management strategy. As of June 30, 1998, the Company had repurchased
39,205 shares of its common stock. The Company has and will utilize available
cash over a period of approximately a year to effect any further repurchases.
14
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly financial data for the years ended June
30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands Except Per Share Data)
Fiscal 1998
- -----------
<S> <C> <C> <C> <C>
Interest income.................. $ 5,030 $ 5,074 $ 5,091 $ 5,114
Net interest income.............. 2,041 2,047 2,056 1,994
Provision for losses............. 3 8 -- 181
Income before provision
for income taxes............... 1,366 1,292 1,359 1,184
Net income....................... 864 819 864 759
Net income per common share:
Basic.......................... .17 .16 .17 .15
Diluted........................ .16 .16 .17 .15
Fiscal 1997
- -----------
Interest income.................. $ 4,793 $ 4,856 $ 4,911 $ 5,046
Net interest income.............. 1,891 1,945 2,050 2,107
Provision for losses............. 21 82 30 18
Income before provision
for income taxes............... (186) 1,193 1,402 1,414
Net income....................... (108) 728 861 884
Net income per common share:
Basic.......................... (.02) .14 .17 .17
Diluted........................ (.02) .14 .17 .17
</TABLE>
COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market
under the symbol "LFED." As of July 31, 1998, the Company had 5 registered
market makers, 528 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
5,151,392 shares outstanding. As of such date, Leeds Federal Bankshares, M.H.C.
(the "Mutual Holding Company"), the Company's mutual holding company, held
3,300,000 shares of common stock and stockholders other than the Mutual Holding
Company held 1,851,392 shares.
15
<PAGE>
The following table sets forth market price and dividend information
for the common stock or, prior to the completion of the Bank's reorganization
into the two-tier mutual holding company structure, which was completed on
January 21, 1998, the Bank's common stock. Information is presented for each
quarter of the previous two calendar years. All information has been revised to
reflect the Company's November 1997 three-for-two stock split.
Fiscal Year Ended Cash Dividends
June 30, 1997 High Low Declared
------------- ---- --- --------
First quarter $ 9.34 $ 8.67 $ .11
Second quarter 11.17 10.01 .11
Third quarter 12.67 10.34 .13
Fourth quarter 13.34 11.84 .13
Fiscal Year Ended Cash Dividends
June 30, 1998 High Low Declared
------------- ---- --- --------
First quarter $ 21.51 $ 12.76 $ .13
Second quarter 23.50 20.18 .14
Third quarter 23.00 21.00 .14
Fourth quarter 22.50 18.75 .14
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and will depend upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, the Company's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
OTS regulations impose limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by a savings
institution to repurchase or otherwise acquire its stock, payments to
stockholders of another savings institution in a cash-out merger, and other
distributions charged against capital. The regulations establish a three-tiered
system of regulation, with the greatest flexibility being afforded to
well-capitalized or Tier 1 savings associations. As of the date hereof, the Bank
was a Tier 1 institution. Accordingly, under the OTS capital distribution
regulations, the Bank would be permitted to pay dividends during any calendar
year up to 100 percent of its net income during that calendar year, plus the
amount that would reduce by one-half its surplus capital ratio at the beginning
of the calendar year.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. The Bank intends to make full
use of this favorable tax treatment and does not contemplate any distribution by
the Bank in a manner that would limit the Bank's bad debt deduction or create
federal tax liability.
16
<PAGE>
The Mutual Holding Company has waived the right to receive all
dividends paid by the Company. OTS regulations require the Mutual Holding
Company to notify the OTS of any proposed waiver of the right to receive
dividends. It is the OTS' recent practice to review dividend waiver notices on a
case-by case-basis, and, in general, not object to any such waiver if: (i) the
mutual holding company's board of directors determines that such a waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association as a note to the financial statements; (iii) the amount of
any dividend waived by the mutual holding company is available for declaration
as a dividend solely to the mutual holding company, and, in accordance with SFAS
5, where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; (iv) the amount of any waived dividend is considered as having
been paid by the savings association (and the savings association's capital
ratios adjusted accordingly) in evaluating any proposed dividend under OTS
capital distribution regulations; and (v) in the event the mutual holding
company converts to stock form, the appraisal submitted to the OTS in connection
with the conversion application takes into account the aggregate amount of the
dividends waived by the mutual holding company.
17
<PAGE>
Independent Auditors' Report
The Board of Directors
Leeds Federal Bankshares, Inc.
Baltimore, Maryland:
We have audited the accompanying consolidated statements of financial condition
of Leeds Federal Bankshares, Inc. and subsidiary (the Company) as of June 30,
1998 and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Leeds Federal
Bankshares, Inc. and subsidiary as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
Baltimore, Maryland
August 7, 1998
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Assets
Cash, including interest-bearing deposits of
$11,906,061 in 1998 and $11,172,475 in 1997 ... $ 13,675,554 13,330,928
Short-term investments ......................... 4,776,681 2,722,336
Secured short-term loans to commercial banks ... 18,405,234 9,735,532
Securities purchased under agreements to resell
(fair value of $5,541,565 in 1997) (note 2) ... -- 5,517,903
Securities available for sale, amortized cost
of $4,860,269 and $5,862,754,
respectively (note 3) ......................... 8,034,695 8,162,419
Investment securities held to maturity (fair
value of $40,581,752 in 1998 and $43,360,574 in
1997) (note 4) ................................ 40,669,525 43,614,562
Mortgage-backed securities held to maturity
(fair value of $16,923,543 in 1998
and $22,777,192 in 1997) (note 5) ............. 16,514,383 22,294,337
Loans receivable, net (note 6) ................. 190,965,595 174,877,796
Investment in Federal Home Loan Bank of
Atlanta stock, at cost (note 10) .............. 2,377,200 2,377,200
Property and equipment, net (note 7) ........... 851,265 863,823
Cash surrender value of life insurance (note 11) 6,132,929 3,153,193
Prepaid expenses and other assets .............. 333,630 309,808
Ground rents owned, at cost .................... -- 39,500
- --------------------------------------------------------------------------------
$ 302,736,691 286,999,337
================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Savings accounts (note 8) .................. $ 245,269,602 232,590,009
Borrowed funds - Employee Stock
Ownership Plan (note 12) .................. 552,000 648,000
Advance payments by borrowers for
taxes, insurance and ground rents ......... 5,006,020 4,804,060
Federal and state income taxes (note 9):
Currently payable ..................... 133,676 335,841
Deferred .............................. 1,296,001 1,062,219
Accrued expenses and other liabilities
(notes 11 and 13) ......................... 1,171,882 817,871
- --------------------------------------------------------------------------------
Total liabilities .............................. 253,429,181 240,258,000
Stockholders' equity (notes 10, 12,
16 and 18):
Common stock, $1 par value; 20,000,000
shares authorized; issued and
outstanding 5,195,597 shares in 1998
and 5,182,097 in 1997 ..................... 5,195,597 5,182,097
Additional paid-in-capital ................. 9,258,917 8,948,119
Employee stock ownership plan .............. (487,891) (591,300)
Management recognition plan ................ (11,907) (60,141)
Treasury stock, at cost; 39,205 shares
at June 30, 1998 .......................... (772,430) --
Retained income, substantially restricted .. 34,162,743 31,854,434
Accumulated other comprehensive income ..... 1,962,481 1,408,128
- --------------------------------------------------------------------------------
Total stockholders' equity ..................... 49,307,510 46,741,337
- --------------------------------------------------------------------------------
Commitments (notes 6, 11 and 12)
- --------------------------------------------------------------------------------
$ 302,736,691 286,999,337
================================================================================
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Income
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
First mortgage and other loans ....................... $13,734,747 12,440,362 11,094,708
Mortgage-backed securities ........................... 1,423,221 1,862,074 2,316,785
Investment securities and short-term investments ..... 5,150,921 5,303,280 5,156,029
- ------------------------------------------------------------------------------------------------------
Total interest income ...................................... 20,308,889 19,605,716 18,567,522
- ------------------------------------------------------------------------------------------------------
Interest expense:
Savings accounts (note 8) ............................ 12,114,148 11,548,634 11,156,258
Other ................................................ 56,971 64,473 75,929
- ------------------------------------------------------------------------------------------------------
Total interest expense ..................................... 12,171,119 11,613,107 11,232,187
- ------------------------------------------------------------------------------------------------------
Net interest income ........................................ 8,137,770 7,992,609 7,335,335
Provision for loan losses (note 6) ......................... 191,705 151,240 33,581
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ........ 7,946,065 7,841,369 7,301,754
- ------------------------------------------------------------------------------------------------------
Noninterest income:
Service fees and charges ............................. 137,190 130,202 115,797
Other ................................................ 212,889 140,288 168,142
- ------------------------------------------------------------------------------------------------------
350,079 270,490 283,939
- ------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits ................... 1,769,715 1,528,280 1,516,477
Occupancy expense .................................... 195,151 197,067 191,947
SAIF deposit insurance premiums ...................... 222,147 1,755,113 557,535
Advertising .......................................... 208,165 171,385 216,051
Other ................................................ 699,885 636,941 580,277
- ------------------------------------------------------------------------------------------------------
3,095,063 4,288,786 3,062,287
- ------------------------------------------------------------------------------------------------------
Income before provision for income taxes ................... 5,201,081 3,823,073 4,523,406
Provision for income taxes (note 9) ........................ 1,895,072 1,457,942 1,736,762
- ------------------------------------------------------------------------------------------------------
Net income ................................................. 3,306,009 2,365,131 2,786,644
Changes in accumulated other comprehensive income:
Unrealized gains on securities available-for-sale, net 554,353 671,458 29,024
Amortization of net unrealized holding loss .......... -- 15,996 1,439
- ------------------------------------------------------------------------------------------------------
Total comprehensive income ................................. $ 3,860,362 3,052,585 2,817,107
======================================================================================================
Net income per share of common stock (note 17):
Basic ................................................ $ 0.65 0.46 0.55
- ------------------------------------------------------------------------------------------------------
Diluted .............................................. $ 0.64 0.46 0.55
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Employee Retained Accumu- Total
Additional stock Management Treasury income, lated other stock-
Common paid-in ownership recognition stock, substantially comprehen- holders'
stock capital plan plan at cost restricted sive income equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995 as previously
reported ........... $ 3,448,000 10,484,713 (814,340) (350,521) -- 28,279,665 690,211 41,737,728
Three-for-two common
stock split ........ 1,723,993 (1,723,993) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30,
1995 as adjusted ... 5,171,993 8,760,720 (814,340) (350,521) -- 28,279,665 690,211 41,737,728
Compensation expense-
ESOP ............... -- 50,294 113,960 -- -- -- -- 164,254
Compensation expense-
MRP ................ -- -- -- 198,093 -- -- -- 198,093
Amortization of net
unrealized holding
loss ............... -- -- -- -- -- (1,439) 1,439 --
Other comprehensive
income ............. -- -- -- -- -- -- 29,024 29,024
Dividends ($.64 per
share) ............. -- -- -- -- -- (723,563) -- (723,563)
Net income .......... -- -- -- -- -- 2,786,644 -- 2,786,644
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30,
1996 ............... 5,171,993 8,811,014 (700,380) (152,428) -- 30,341,307 720,674 44,192,180
Compensation expense-
ESOP ............... -- 63,663 109,080 -- -- -- -- 172,743
Compensation expense-
MRP ................ -- -- -- 92,287 -- -- -- 92,287
Amortization of net
unrealized holding
loss ............... -- -- -- -- -- (15,996) 15,996 --
Other comprehensive
income ............. -- -- -- -- -- -- 671,458 671,458
Exercise of stock
options ............ 10,104 73,442 -- -- -- -- -- 83,546
Dividends ($.72 per
share) ............. -- -- -- -- -- (836,008) -- (836,008)
Net income .......... -- -- -- -- -- 2,365,131 -- 2,365,131
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30,
1997 ............... 5,182,097 8,948,119 (591,300) (60,141) -- 31,854,434 1,408,128 46,741,337
Compensation expense-
ESOP ............... -- 217,378 103,409 -- -- -- -- 320,787
Compensation expense-
MRP ................ -- -- -- 48,234 -- -- -- 48,234
Other comprehensive
income ............. -- -- -- -- -- -- 554,353 554,353
Exercise of stock
options ............ 13,500 93,420 -- -- -- -- -- 106,920
Dividends ($.55 per
share) ............. -- -- -- -- -- (997,700) -- (997,700)
Net income .......... -- -- -- -- -- 3,306,009 -- 3,306,009
Purchase of treasury
stock .............. -- -- -- -- (772,430) -- -- (772,430)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30,
1998 ............... $ 5,195,597 9,258,917 (487,891) (11,907) (772,430) 34,162,743 1,962,481 49,307,510
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................... $ 3,306,009 2,365,131 2,786,644
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of loan fees ................. (98,772) (80,728) (157,068)
Provision for loan losses ................. 191,705 151,240 33,581
Accretion of premiums (discounts) on
investment securities and mortgage-
backed securities ...................... (18,835) (54,991) (53,764)
Loss (gain) on sale of assets, net ........ (1,806) -- 17,025
Depreciation .............................. 125,639 121,209 105,666
Non-cash compensation under stock-based
benefit plans .......................... 369,021 265,030 362,347
Deferred income tax benefit ............... (86,626) (134,722) (166,981)
Decrease (increase) in accrued interest
receivable on securities and loans
receivable ............................. (35,219) 6,225 (284,232)
Increase (decrease) in income taxes
currently payable ...................... (202,165) 207,601 15,185
Increase in accrued expenses and other
liabilities ............................ 354,011 69,472 211,897
Increase in unearned loan fees, net ....... 110,922 282,353 247,297
Decrease (increase) in prepaid expenses and
other assets ........................... (23,822) 84,617 (44,120)
Amortization of net unrealized holding loss -- (15,996) (1,439)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities ......... 3,990,062 3,266,441 3,072,038
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of securities available for sale .... (1,175,000) (300,000) (11,000,000)
Maturities of securities available for sale ... 2,200,000 -- --
Purchase of investment securities held
to maturity ................................. (35,903,264) (6,399,906) (32,155,000)
Maturity of investment securities held
to maturity ................................. 38,888,255 14,728,283 36,895,410
Loan disbursements, net of repayments ......... (16,289,600) (22,372,160) (11,723,086)
</TABLE>
(Continued)
F-5
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows, continued
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Cash flows from investing
activities, continued:
Mortgage-backed securities
held to maturity principal
repayments .................... $ 5,769,485 6,790,616 5,877,674
Purchases of property and
equipment ..................... (117,276) (34,267) (385,488)
Sale of property and equipment . 6,001 -- --
Investment in life insurance
policies ...................... (2,979,736) (134,662) (156,214)
Sale of ground rents owned ..... 39,500 1,600 --
- --------------------------------------------------------------------------------
Net cash used in investing
activities ...................... (9,561,635) (7,720,496) (12,646,704)
- --------------------------------------------------------------------------------
Cash flows from financing
activities:
Payment of dividends ........... (997,700) (836,008) (723,563)
Repayment of borrowed funds .... (96,000) (96,000) (96,000)
Net increase in savings accounts 12,679,593 10,443,991 10,731,778
Increase (decrease) in advance
payments by borrowers for
taxes, insurance and ground
rents ......................... 201,960 243,568 (47,211)
Purchase of treasury stock ..... (772,430)
Exercise of stock options ...... 106,920 83,546 --
- --------------------------------------------------------------------------------
Net cash provided by financing
activities ...................... 11,122,343 9,839,097 9,865,004
Net increase in cash and cash
equivalents ..................... 5,550,770 5,385,042 290,338
Cash and cash equivalents at
beginning of year ............... 31,306,699 25,921,657 25,631,319
- --------------------------------------------------------------------------------
Cash and cash equivalents at
end of year ..................... $ 36,857,469 31,306,699 25,921,657
================================================================================
Noncash investing activities:
Retirement of property
and equipment ................. $ 13,941 1,363 109,693
================================================================================
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
(1) Description of Business, Summary of Significant Accounting Policies and
Other Matters
Description of Business and Reorganization
Leeds Federal Savings Bank (the Bank) is a federally-chartered savings
bank that conducts its operations from a single facility located in
Arbutus, Baltimore County, Maryland. The Bank was originally chartered
in 1923 as a state mutual savings and loan association and in 1935
became a federally-chartered mutual savings association operating under
the name Leeds Federal Savings and Loan Association (Association).
Effective April 29, 1994, the Association's ownership structure was
reorganized and it became a wholly owned capital stock savings
association subsidiary of Leeds Federal Bankshares, M.H.C. (MHC), a
federal mutual holding company. Under the terms of the reorganization,
the membership rights of the Association's members became membership
rights in the mutual holding company. The reorganization was accounted
for in a manner similar to that of a pooling of interests. Effective in
January 1994, the Office of Thrift Supervision (OTS) approved the
Association's application to change its charter to that of a federal
savings bank and to change its name to Leeds Federal Savings Bank.
Effective January 21, 1998, the Bank completed its reorganization
(Reorganization) into a two-tier mutual holding company structure with
the establishment of a federally chartered corporation as the stock
holding company parent of the Bank. As a result of the Reorganization,
MHC, the Bank's existing mutual holding company, owns a majority of the
common stock of the new stock holding company, Leeds Federal
Bankshares, Inc., which owns 100% of the common stock of the Bank. The
Reorganization was implemented pursuant to the Plan of Reorganization
which was adopted by the stockholders at its 1997 annual stockholders
meeting. Pursuant to the Reorganization, each share of Bank common
stock held by existing stockholders of the Bank was exchanged for a
share of common stock of the stock holding company. The reorganization
of the Bank was structured as a tax-free reorganization and was
accounted for similar to that of a pooling of interests.
The primary business of Leeds Federal Savings Bank is attracting
deposits from individuals and corporate customers and originating
mortgage loans secured by residential real estate properties. The Bank
is subject to competition from other financial institutions in
attracting and retaining deposits and in making loans. The Bank is also
subject to the regulations of certain agencies of the federal
government and undergoes periodic examinations by those agencies.
(Continued)
F-7
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Continued
Basis of Presentation
The consolidated financial statements include the accounts of Leeds
Federal Bankshares, Inc. (the Company) and its wholly owned subsidiary,
Leeds Federal Savings Bank. Leeds Investment Corporation (the
Subsidiary), is a wholly owned subsidiary of Leeds Federal Savings Bank
(collectively, the Bank). The Subsidiary was incorporated in Delaware
in April 1997, for the purpose of holding investment securities,
interest-earning deposits and other investments. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statements of
financial condition and income and expenses for the period. Actual
results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
losses. In connection with this determination, management obtains
independent appraisals for significant properties and prepares fair
value analyses as appropriate.
Management believes that the allowance for losses on loans is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions, particularly in the state of Maryland.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
losses on loans. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination.
Short-Term Investments
Short-term investments, which consist of money market accounts, are
stated at the lower of cost or market.
Secured Short-Term Loans to Commercial Banks
Secured short-term loans to commercial banks consist of Federal funds
sold which are carried at cost and approximate fair value. Generally,
Federal funds are purchased and sold for one-day periods.
(Continued)
F-8
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Continued
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on a straight-line method over
the estimated useful lives of the assets. Additions and betterments are
capitalized, and charges for repairs and maintenance are expensed when
incurred. The related cost and accumulated depreciation are eliminated
from the accounts when an asset is sold or retired and the resultant
gain or loss is credited or charged to income.
Loan Fees
Loan origination and commitment fees are deferred initially and
amortized into income over the contractual life of the loan using the
interest method. Under certain circumstances, commitment fees are
recognized over the commitment period or upon the expiration of the
commitment. In addition, certain incremental direct loan origination
costs are deferred and recognized over the contractual life of the loan
using the interest method as a reduction of the yield. Deferred fees
and costs are combined where applicable and the net amount is
amortized.
Real Estate Owned
Real estate owned consists of real estate acquired through foreclosure
and in-substance foreclosure and is initially recorded at the lower of
cost or fair value and subsequently at the lower of cost or fair value,
less estimated selling expenses. Costs relating to holding such real
estate are charged against income in the current period, while costs
relating to improving such real estate are capitalized until a salable
condition is reached.
Income Taxes
Under the asset and liability method, deferred income taxes are
recognized, with certain exceptions, for temporary differences between
the financial reporting basis and income tax basis of assets and
liabilities based on enacted tax rates expected to be in effect when
such amounts are realized or settled. Deferred tax assets are
recognized only to the extent that it is more likely than not that such
amounts will be realized based on consideration of available evidence,
including tax planning strategies and other factors.
(Continued)
F-9
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Continued
SFAS No. 109 allows for a continuing exception of providing a deferred
tax liability for bad debt reserves for tax purposes of qualified
thrift lenders, such as the Bank, that arose in fiscal years beginning
before December 31, 1987. Such bad debt reserve for the Bank amounted
to approximately $7,100,000 with an income tax effect of approximately
$2,700,000 at June 30, 1998. This bad debt reserve would become taxable
if certain conditions are met by the Bank.
The effects of changes in tax laws or rates on deferred tax assets and
liabilities are recognized in the period that includes the enactment
date.
Provision for Losses on Loans
The provision for losses on loans is determined based on management's
review of the loan portfolio and analyses of borrowers' ability to pay,
past collection experience, risk characteristics of individual loans or
groups of similar loans and underlying collateral, current and
prospective economic conditions and the status of nonperforming loans.
Loans or portions thereof are charged off when considered, in the
opinion of management, uncollectible.
Certain impaired loans are measured on the present value of expected
future cash flows discounted at the loan's effective interest rate, or
at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. An allocated valuation
allowance for impaired loans, if any, is included in the Bank's
allowance for credit losses. An impaired loan is charged-off when the
loan, or a portion thereof, is considered uncollectible or transferred
to real estate owned.
Impaired loans are generally placed in nonaccrual status on the earlier
of the date that management determines that the collection of principal
and/or interest is in doubt or the date that principal or interest is
90 days or more past due.
Interest on potential problem loans is not accrued when, in the opinion
of management, full collection of principal or interest is in doubt, or
payment of principal or interest has become 90 days past due. Any
interest ultimately collected on such loans is recorded in income in
the period of recovery.
(Continued)
F-10
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Continued
The Bank recognizes interest income for impaired loans consistent with
its method for nonaccrual loans. Specifically, interest payments
received are recognized as interest income or, if the ultimate
collectibility of principal is in doubt, are applied to principal.
Investment Securities and Mortgage-Backed Securities
Debt securities that the Bank has the positive intent and ability to
hold to maturity are classified as held to maturity and recorded at
amortized cost. Debt and equity securities not classified as held to
maturity and equity securities with readily determinable fair values
are classified as trading securities if bought and held principally for
the purpose of selling them in the near term. Trading securities are
reported at fair value, with unrealized gains and losses included in
earnings. Investments not classified as held to maturity or trading are
considered available for sale and are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of tax effects. Fair
value is determined based on bid prices published in financial
newspapers or bid quotations received from securities dealers. For
purposes of computing realized gains or losses on the sales of
investments, cost is determined by using the specific identification
method. Gains and losses on sales of securities are recognized at the
time of sale. Premiums and discounts on investment and mortgage-backed
securities are amortized over the term of the security using methods
that approximate the interest method.
Stock-Based Compensation
The Bank adopted the provisions of Statement of Financial Accounting
Standards No. 123 Accounting for Awards of Stock-Based Compensation to
Employees (SFAS No. 123) as of July 1, 1996 using the intrinsic
value-based method. SFAS No. 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument,
and encourages all entities to adopt that method of accounting for all
of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25).
Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the
stock. Most fixed stock option plans -- the most common type of stock
compensation plan -- have no intrinsic value at grant date, and under
Opinion 25 no compensation cost is recognized for them. Compensation
cost is recognized for other types of stock based compensation plans
under Opinion 25, including
(Continued)
F-11
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Continued
plans with variable, usually performance-based, features. SFAS No. 123
requires that an employer's financial statements include certain
disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. The adoption of SFAS
No. 123 did not have a material impact on the Bank's financial
statements. The Bank made no grants of stock options during fiscal
years 1998, 1997 or 1996 and therefore there are no required
disclosures about stock-based employee compensation.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No.
130). SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are rquired to be
recognized under accounting standards as components of comprehensive
income are to be reported in an annual financial statement that is
displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in
equity of an enterprise during a period of transactions and other
events and circumstances from nonowner sources. Comprehensive income
will thus represent the sum of net income and other accumulated
comprehensive income. The accumulated balance of other accumulated
comprehensive income is required to be displyed separately from
retained earnings and additional paid-in capital in the statement of
financial position. The adoption of SFAS No. 130 resulted primarily in
the Company reporting unrealized gains and losses on available-for-sale
securities in other comprehensive income.
Statement of Cash Flows
Cash equivalents include interest bearing deposits, money market
accounts, secured short-term loans to commercial banks, and securities
purchased under agreements to resell. For purposes of the consolidated
statement of cash flows, the Bank considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
The Company made income tax payments of approximately $2,184,000,
$1,375,000 and $1,815,000 in 1998, 1997 and 1996, respectively. The
Company paid approximately $12,159,000, $11,613,000 and $11,232,000 in
interest on deposits and other borrowings in 1998, 1997 and 1996,
respectively.
(Continued)
F-12
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) Securities Purchased Under Agreements to Resell
The Bank purchases securities under agreements to resell (repurchase
agreements). The amounts advanced under the agreements represent
short-term loans and are reflected as short-term investments in the
consolidated statements of financial condition.
Securities purchased under agreements to resell at June 30 are
summarized as follows:
1998 1997
-----------------------------------------------------------------------
Mortgage-backed securities, fair value of
$0 and $5,541,565 at June 30, 1998
and 1997, respectively........................ $ -- 5,517,903
=======================================================================
The securities underlying the agreements are book entry securities
which were delivered by appropriate entry in the Bank's account
maintained at Signet Bank, Richmond, Virginia under a written custodial
agreement that explicitly recognizes the Bank's interest in the
securities. Agreements outstanding at June 30, 1997 have original
maturities of three months or less. The agreements relating to
mortgage-backed securities are agreements to resell the same
securities. Securities purchased under agreements to resell averaged
$3,412,000, $3,654,000 and $2,285,000 during 1998, 1997 and 1996,
respectively. The maximum amounts outstanding at any month-end were
$7,036,728, $5,517,903 and $2,467,214 during 1998, 1997 and 1996,
respectively.
(3) Securities Available for Sale
The amortized cost and fair value of securities available for sale are
summarized as follows at June 30:
1998
-----------------------------------------
Gross Gross
Amoritized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
U.S. government and agency
obligations due:
Beyond 5 years but
within 10 years.......... $2,800,000 16,917 -- 2,816,917
Beyond 10 years.......... 1,875,000 8,748 -- 1,883,748
Federal Home Loan Mortgage
Corporation preferred stock. 56,760 3,148,761 -- 3,205,521
-----------------------------------------------------------------------
4,731,760 3,174,426 -- 7,906,186
Accrued interest receivable... 128,509 -- -- 128,509
-----------------------------------------------------------------------
$4,860,269 3,174,426 -- 8,034,695
=======================================================================
(Continued)
F-13
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) Continued
1997
-----------------------------------------
Gross Gross
Amoritized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
U.S. government and agency
obligations due:
Beyond 5 years but
within 10 years.......... $4,700,000 -- (22,671) 4,677,329
Beyond 10 years.......... 1,000,000 -- (4,824) 995,176
Federal Home Loan Mortgage
Corporation preferred stock. 56,760 2,327,160 -- 2,383,920
-----------------------------------------------------------------------
5,756,760 2,327,160 (27,495) 8,056,425
Accrued interest receivable... 105,994 -- -- 105,994
-----------------------------------------------------------------------
$5,862,754 2,327,160 (27,495) 8,162,419
=======================================================================
(4) Investment Securities Held to Maturity
The amortized cost and fair value of investment securities are
summarized as follows at June 30:
1998
-------------------------------------------
Gross Gross
Amoritized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
U.S. government and
agency obligations..... $39,984,056 122,160 (209,933) 39,896,283
Accrued interest
receivable............. 685,469 -- -- 685,469
-----------------------------------------------------------------------
$40,669,525 122,160 (209,933) 40,581,752
=======================================================================
1997
-------------------------------------------
Gross Gross
Amoritized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
U.S. government and
agency obligations..... $42,971,175 122,014 (376,002) 41,717,187
Accrued interest
receivable............. 643,387 -- -- 643,387
-----------------------------------------------------------------------
$43,614,562 122,014 (376,002) 43,360,574
=======================================================================
(Continued)
F-14
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) Continued
Investment securities mature as follows at June 30:
1998 1997
----------------------- -----------------------
Amoritized Fair Amoritized Fair
cost value cost value
-----------------------------------------------------------------------
Due with 12 months.... $ 2,491,898 2,488,368 491,437 491,437
Due beyond 12 months
but within 5 years.. 3,800,000 3,850,700 14,500,000 14,527,148
Due beyond 5 years
but within 10 years. 5,065,000 5,044,285 18,151,359 17,992,813
Due beyond 10 years... 28,627,158 28,511,930 9,828,379 9,705,789
-----------------------------------------------------------------------
$39,984,056 39,896,283 42,971,175 42,717,187
=======================================================================
(5) Mortgage-Backed Securities Held to Maturity
The amortized cost and fair value of mortgage-backed securities are
summarized as follows at June 30:
1998
-----------------------------------------
Gross Gross
Amoritized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
Government National Mortgage
Association................ $ 9,572,963 321,723 -- 9,894,686
Federal National Mortgage
Association................ 2,597,401 43,028 -- 2,640,429
Federal Home Loan
Mortgage Corporation....... 2,481,929 35,557 -- 2,517,486
Collateralized Mortgage
Obligation--FNMA REMIC.... 1,759,520 8,852 -- 1,768,372
-----------------------------------------------------------------------
16,411,813 409,160 -- 16,820,973
Accrued interest receivable.. 102,570 -- -- 102,570
-----------------------------------------------------------------------
$16,514,383 409,160 -- 16,923,543
=======================================================================
(Continued)
F-15
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Continued
1997
-----------------------------------------
Gross Gross
Amoritized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
Government National Mortgage
Association................ $12,636,297 434,087 -- 13,070,384
Federal National Mortgage
Association................ 3,738,027 23,042 (510) 3,760,559
Federal Home Loan
Mortgage Corporation....... 3,910,141 36,846 -- 3,946,987
Collateralized Mortgage
Obligation--FNMA REMIC.... 1,875,870 -- (10,610) 1,865,260
-----------------------------------------------------------------------
22,160,335 493,975 (11,120) 22,643,190
Accrued interest receivable.. 134,002 -- -- 134,002
-----------------------------------------------------------------------
$22,294,337 493,975 (11,120) 22,777,192
=======================================================================
A summary of contractual maturities of mortgage-backed securities at
June 30:
1998 1997
----------------------- -----------------------
Amoritized Fair Amoritized Fair
cost value cost value
-----------------------------------------------------------------------
Due with 12 months.... $ 1,124,638 1,127,061 832,307 839,180
Due beyond 12 months
but within 5 years.. 1,007,709 1,028,060 3,156,477 3,199,376
Due beyond 5 years
but within 10 years. 3,417,449 3,487,855 4,314,490 4,347,676
Due beyond 10 years... 10,862,017 11,177,997 13,857,061 14,256,958
-----------------------------------------------------------------------
$16,411,813 16,820,973 22,160,335 22,643,190
=======================================================================
(Continued)
F-16
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Loans Receivable
Loans receivable and accrued interest thereon were as follows at June
30:
1998 1997
-----------------------------------------------------------------------
First mortgage loans:
One-to-four family residential........... $167,421,983 152,462,834
Commercial............................... 3,738,433 3,763,211
Construction............................. 4,730,199 2,770,243
-----------------------------------------------------------------------
175,890,615 158,996,288
Home equity loans.......................... 12,768,944 13,024,084
Loans secured by savings accounts.......... 438,831 358,065
Consumer loans............................. 4,632,750 4,711,033
Accrued interest receivable................ 784,348 782,294
-----------------------------------------------------------------------
194,515,488 177,871,764
Less:
Allowance for loan losses................ 722,860 536,280
Unearned loan fees....................... 802,171 790,021
Undisbursed portion of loans in process.. 2,024,862 1,667,667
-----------------------------------------------------------------------
Loans receivable, net...................... $190,965,595 174,877,796
=======================================================================
Substantially all of the Bank's loans receivable are mortgage loans
secured by residential real estate properties located in the state of
Maryland. Loans are extended only after evaluation by management of
customers' creditworthiness, the loan to value ratio and other relevant
factors. The Bank generally does not lend more than 80% of the
appraised value of a property and requires private mortgage insurance
on residential mortgages with loan-to-value ratios in excess of 80%. In
addition, the Bank generally obtains personal guarantees of repayment
from borrowers and/or others for construction, commercial and
multifamily residential loans and disburses the proceeds of
construction and similar loans only as work progresses on the related
property.
Residential lending is generally considered to involve less risk than
other forms of lending, although payment experience on these loans is
dependent to some extent on economic and market conditions in the
Bank's lending area.
Nonaccrual loans totaled approximately $2,519,000 and $88,000 at June
30, 1998 and 1997, respectively. For the years ended June 30, 1998,
1997 and 1996, the amount of interest income that would have been
recorded on loans in nonaccrual status at year end had such loans
performed in accordance with their terms was approximately $281,000,
$7,000 and $9,000, respectively. The actual interest income recorded on
these loans for the years ended June 30, 1998, 1997 and 1996 was
approximately $211,000, $4,000 and $7,000, respectively. No loans were
impaired, as defined, during 1998, 1997 and 1996.
(Continued)
F-17
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Continued
Activity in the allowance for loan losses is summarized as follows:
1998 1997 1996
-----------------------------------------------------------------------
Beginning balance..................... $536,280 374,797 341,216
Provision for loan losses............. 191,705 151,240 33,581
Charge-offs........................... (5,125) (19,757) --
Transfer from provision for losses
on deposit.......................... -- 30,000 --
-----------------------------------------------------------------------
Ending balance........................ $722,860 536,280 374,797
=======================================================================
(7) Property and Equipment
Property and equipment are summarized as follows at June 30:
Useful
life in
1998 1997 years
-----------------------------------------------------------------------
Land................................. $ 68,449 68,449 --
Building and improvements............ 864,388 817,112 50 years
Furniture, fixtures and equipment.... 948,766 896,902 3-10 years
----------------------------------------------------------- ==========
Total, at cost........................ 1,881,603 1,782,463
Less accumulated depreciation......... 1,030,338 918,640
------------------------------------------------------------
Ending balance........................ $ 851,265 863,823
============================================================
(Continued)
F-18
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Savings Accounts
Savings accounts are summarized as follows at June 30:
Weighted
average rate 1998 1997
------------ ------------------ ------------------
Type of Account 1998 1997 Amount % Amount %
- --------------------------------------------------------------------------------
Certificates ............... 5.66% 5.70% $151,731,316 62% $127,102,568 55%
- --------------------------------------------------------------------------------
Anniversary bonus account .. 3.33% 3.37% 5,106,781 2 6,491,093 3
Money Market Deposit ....... 4.78% 4.77% 63,792,586 26 75,023,364 32
Passbook ................... 3.35% 3.35% 18,352,118 7 18,857,971 8
NOW and demand deposits .... 1.86% 1.80% 6,286,801 3 5,115,013 2
- --------------------------------------------------------------------------------
93,538,286 38 105,487,441 45
- --------------------------------------------------------------------------------
$245,269,602 100% $232,590,009 100%
================================================================================
Certificate accounts mature as follows:
Within 12 months ...................... $ 91,165,891 60% $ 76,622,105 60%
12 to 24 months ....................... 44,366,567 29 29,458,472 23
24 to 36 months ....................... 10,046,627 7 14,365,437 12
36 to 48 months ....................... 3,118,966 2 4,185,933 3
48 to 60 months ....................... 3,033,265 2 2,470,621 2
- --------------------------------------------------------------------------------
$151,731,316 100% $127,102,568 100%
================================================================================
At June 30, 1998 and 1997, the Bank had customer deposits in savings
accounts of $100,000 or more of approximately $48,655,000 and $39,141,000,
respectively.
Interest expense on savings deposits consists of the following for the
years ended June 30:
1998 1997 1996
---------------------------------------------------------------------------
Time deposits .................. $ 7,905,150 7,212,849 7,059,387
Checking and money market ...... 3,607,568 3,734,784 3,493,648
Passbook and other ............. 601,430 601,001 603,223
---------------------------------------------------------------------------
$12,114,148 11,548,634 11,156,258
===========================================================================
(Continued)
F-19
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Income Taxes
The provision for income taxes is comprised of the following for the years
ended June 30:
1998 1997 1996
---------------------------------------------------------------------------
Current:
Federal ........................ $1,767,197 1,326,458 1,558,683
State .......................... 214,501 266,206 345,060
---------------------------------------------------------------------------
1,981,698 1,592,664 1,903,743
---------------------------------------------------------------------------
Deferred:
Federal ........................ (70,925) (110,303) (136,715)
State .......................... (15,701) (24,419) (30,266)
---------------------------------------------------------------------------
(86,626) (134,722) (166,981)
---------------------------------------------------------------------------
$1,895,072 1,457,942 1,736,762
===========================================================================
The net deferred tax liability at June 30, 1998 and 1997 consists of total
deferred tax assets of $793,358 and $728,389, respectively and deferred tax
liabilities of $2,089,359 and $1,790,608, respectively. The tax effects of
temporary differences between the financial reporting and income tax basis
of assets and liabilities relate to the following:
June 30
-------------------------
1998 1997
---------------------------------------------------------------------------
Interest and fees on loans ...................... $ -- 122,406
Tax bad debt reserve in excess of base year ..... (399,863) (499,829)
Allowance for losses on loans ................... 279,169 207,111
Federal Home Loan Bank stock dividends .......... (373,687) (373,687)
Deferred compensation ........................... 203,886 127,157
Management Recognition Plan ..................... 116,776 129,276
Unrealized gains on securities available
for sale, net ................................. (1,211,945) (891,537)
Other, net ...................................... 89,663 116,884
---------------------------------------------------------------------------
$(1,296,001) (1,062,219)
===========================================================================
(Continued)
F-20
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Continued
A reconciliation between the provision for income taxes and the amount
computed by multiplying income before income taxes by the statutory Federal
income tax rate (34%) is as follows for the years ended June 30:
1998 1997 1996
---------------------------------------------------------------------------
Federal income taxes at statutory rate .. $1,768,368 1,299,845 1,537,958
State income taxes, net of Federal
income tax benefit .................... 131,208 159,579 207,764
Other, net .............................. (4,504) (1,482) (8,960)
---------------------------------------------------------------------------
$1,895,072 1,457,942 1,736,762
===========================================================================
(10) Regulatory Matters
The Federal Deposit Insurance Corporation, through the Savings Association
Insurance Fund (SAIF), insures deposits of accountholders up to $100,000.
The Bank pays an annual premium to provide for this insurance. The Bank is
also a member of the Federal Home Loan Bank System and is required to
maintain an investment in the stock of the Federal Home Loan Bank of
Atlanta equal to at least 1% of the unpaid principal balances of its
residential mortgage loans, .3% of its total assets or 5% of its
outstanding advances from the Bank, whichever is greater. Purchases and
sales of stock are made directly with the Bank at par value.
During 1997, the Bank paid a special assessment of approximately $1,383,000
as a result of the federally-mandated recapitalization of the SAIF. The
assessment was required of substantially all SAIF-insured depository
institutions and was charged to noninterest expense.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
(Continued)
F-21
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Continued
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (as defined in the
regulations and as set forth in the table below, as defined). Management
believes, as of June 30, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the
institution's category.
Regulatory capital amounts and ratios for the Bank are as follows (in
thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Tier I core capital(a) ........ $47,346 15.80% $11,985 4.00% $14,982 greater than 5%
Tier I risk-based capital(b) .. 47,346 32.76% 5,781 4.00% 8,672 greater than 6%
Total risk-based capital(b) ... 48,069 33.26% 11,563 8.00% 14,453 greater than 10%
As of June 30, 1997:
Tier I core capital(a) ........ $45,333 15.92% $11,389 4.00% $14,235 greater than 5%
Tier I risk-based capital(b) .. 45,333 34.98% 5,185 4.00% 7,777 greater than 6%
Total risk-based capital(b) ... 45,869 35.39% 10,369 8.00% 12,962 greater than 10%
===============================================================================================
</TABLE>
(a) Percentage of capital to ending assets
(b) Percentage of risk-based capital to ending risk-weighted assets
(Continued)
F-22
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Retirement Benefit and Deferred Compensation Plans
The Bank has a 401(k) Employee Investment Plan covering substantially all
employees. Participation is voluntary and employee contributions are based
on a percentage of compensation, ranging from a minimum of 1% to a maximum
of 10%. The Bank matches the employee's contribution not to exceed 6% of
compensation or a maximum of $2,400 annually. The Bank contributed a total
of $34,432, $29,565 and $29,466 for the years ended June 30, 1998, 1997 and
1996, respectively.
During 1993, the Bank implemented a supplemental retirement income plan
(SERP) for executive officers. The SERP supplements the 401(k) plan to
bring officer retirement benefits up to targeted levels (2% for each year
of service, not to exceed 70% of final salary). In addition, the SERP
provides death benefit protection for officers' beneficiaries. The cost of
each participant's retirement benefits are being expensed and accrued over
the participant's active employment so as to result in a liability at the
retirement date equal to the present value of the benefits expected to be
provided.
The accrued liability under the SERP amounted to $184,723 and $158,850 as
of June 30, 1998 and 1997, respectively. The accrued liability is included
in accrued expenses and other liabilities. The Bank expensed $116,468,
$103,877 and $118,403 under the SERP for the years ended June 30, 1998,
1997 and 1996, respectively.
During 1993, the Bank implemented a plan for the deferral of Directors'
fees, which is non-qualified for income tax purposes. The plan is optional,
and fees deferred are recorded as an expense and an unfunded liability of
the Bank. The accrued liability for these benefits amounted to $348,367 and
$256,487 at June 30, 1998 and 1997, respectively, and is included in
accrued expenses and other liabilities. The Bank expensed $94,692, $78,842
and $66,834 for the years ended June 30, 1998, 1997, and 1996,
respectively.
The Bank also has deferred compensation agreements with one current officer
to provide certain death and retirement benefits. The benefits payable are
accrued annually by charges to income amounting to $1,383 in 1998, 1997 and
1996. The accrued liability for these benefits amounted to $28,210 and
$26,827 at June 30, 1998 and 1997, respectively, and is included in accrued
expenses and other liabilities.
During 1997, the Bank established a Directors Retirement Plan, which is a
non-qualified plan for income tax purposes that guarantees each Director
will be paid 75% of their current fees for 10 years or until death after
they retire. The benefits payable are accrued annually and are based on the
retirement age selected by each director and an assumed 4% increase in
salaries until retirement. The accrued liability for these benefits amount
to $151,352 and $45,938 at June 30, 1998 and June 1997, respectively, and
is included in accrued expenses and other liabilities. The Bank expensed
$105,414 and $45,938 for the years ended June 30, 1998 and 1997.
(Continued)
F-23
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Continued
The Bank has invested in whole-life insurance policies on the lives of the
individual participants for purposes of providing income and assets in the
future to offset the costs of the officers and directors' plans. The life
insurance companies and related investments are as follows at June 30:
1998 1997
---------------------------------------------------------------------------
Transamerica ................................... $3,218,642 2,185,807
American General ............................... 1,885,608 --
Massachusetts Mutual ........................... 578,777 548,928
Pacific Mutual ................................. 449,902 418,458
---------------------------------------------------------------------------
$6,132,929 3,153,193
===========================================================================
(12) Stock Based Benefit Plans
The Bank has established an Employee Stock Ownership Plan (ESOP) for its
employees. All employees of the Bank who attain the age of 21 and complete
one year of service with the Bank will be eligible to participate in the
ESOP. Participants will become 100% vested in their accounts after five
years of service with the Bank or, if earlier, upon death, disability or
attainment of normal retirement age. Participants will receive credit for
service with the Bank prior to the establishment of the ESOP. On April 29,
1994 the ESOP borrowed $960,000 from an unrelated third party lender under
a ten year term bearing interest at Federal funds rate plus 2.5% per annum,
with payments of principal and interest due quarterly. Annual principal
payments amount to $96,000. The proceeds of the loan were used by the ESOP
to acquire 144,000 shares of the Bank's common stock upon conversion to a
capital stock form of organization. The ESOP holds the common stock in a
trust for allocation among participating employees, which occurs as the
ESOP repays the loan. The ESOP's sources of repayment of the loan are
dividends on the common stock, if any, either held in trust or allocated to
the participants' accounts, and quarterly contributions from the Bank to
the ESOP and earnings thereon. For the years ended June 30, 1998, 1997 and
1996 the Bank made contributions to the ESOP of $146,944, $153,895 and
$160,789, respectively.
The Bank recognizes the cost of the ESOP in accordance with AICPA Statement
of Position 93-6 Employers' Accounting for Employee Stock Ownership Plans.
Accordingly, the debt of the ESOP is recorded as debt and the shares
pledged as collateral are reported as unearned ESOP shares in the statement
of financial condition. As shares are released from collateral, the Bank
reports compensation expense equal to the current market price of the
shares and the shares become outstanding for earnings-per-share
computations. Dividends on allocated shares are recorded as a reduction of
retained earnings; dividends on unallocated shares are recorded as a
reduction of debt and accrued interest. The Bank recognized interest
expense of $50,944, $57,895 and $64,789 and compensation expense of
(Continued)
F-24
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Continued
$320,787, $172,743 and $164,254, respectively, related to the ESOP for the
years ended June 30, 1998, 1997 and 1996. The amount of dividends on ESOP
shares used for debt service by the ESOP for the years ended June 30, 1998
and 1997 was $48,380 and $50,204, respectively. The related tax benefits to
the Bank for dividends paid to the ESOP were not material. The ESOP shares
as of June 30 were as follows:
1998 1997
---------------------------------------------------------------------------
Allocated shares ............................... 63,286 47,337
Shares earned, but unallocated ................. 7,587 8,133
Unearned shares ................................ 73,127 88,530
---------------------------------------------------------------------------
144,000 144,000
---------------------------------------------------------------------------
Fair value of unearned shares at June 30 ....... $1,334,568 1,128,758
===========================================================================
Effective October 28, 1994 the Bank established a Management Recognition
Plan (MRP) to retain personnel of experience and ability in key positions
of responsibility. Members of the Board of Directors and certain executive
officers of the Bank will receive a total of 72,000 shares of stock. These
shares were issued at the time the MRP was adopted. Participants in the MRP
generally become one-fifth vested in the shares that they are awarded under
the MRP on each anniversary of the effective date of the MRP.
In accordance with generally accepted accounting principles, common stock
purchased by the MRP represents unearned compensation and, accordingly, is
reflected as a reduction of capital and recognized as expense and additions
to capital as the awards are earned. Compensation expense in the amount of
the fair market value of the common stock at the date of the grant is
recognized on a pro-rata basis over the years during which the shares are
earned. If a participant terminates employment for reasons other than
death, retirement or disability, he or she forfeits all rights to unvested
shares. The Bank recognized compensation expense of $48,234 and $92,287 for
fiscal years ended June 30, 1998 and 1997 related to MRP awards.
(13) Postretirement Benefits Other Than Pensions
Postretirement benefits other than pensions generally require a calculation
of the actuarial present value of anticipated benefits to be provided and
an accrual and allocation of those benefits through a charge to operating
expense in the periods in which employees must render the services to
receive such benefits. The Bank offers a postretirement health care benefit
plan to certain employees and Directors. Such postretirement benefits costs
were $46,000 for 1998 and 1997 and $45,000 for 1996.
(Continued)
F-25
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) Continued
Net costs included the following components for the years ended June 30:
1998 1997 1996
---------------------------------------------------------------------------
Service cost ................................. $ 9,000 9,000 9,000
Interest cost ................................ 22,000 22,000 21,000
Amortization of transition obligation ........ 15,000 15,000 15,000
---------------------------------------------------------------------------
Net cost ..................................... $46,000 46,000 45,000
===========================================================================
A summary of the unfunded plan's status and the Bank's recorded liability
recognized in the balance sheet at June 30 follows:
1998 1997
---------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees ....................................... $(193,000) (181,000)
Fully eligible active employees ................ (26,000) (24,000)
Other active participants ...................... (140,000) (132,000)
---------------------------------------------------------------------------
(359,000) (337,000)
Unrecognized transition obligation ............... 247,000 262,000
---------------------------------------------------------------------------
Recorded liability ............................... $(112,000) (75,000)
===========================================================================
The assumed health care cost trend rate used to measure the expected cost
of benefits covered by the plan for 1998 is 8.0%, and decreases by .5% each
year until 2004, when a 5% rate is used as the ultimate trend rate. An
increase of 1% in the assumed health care cost trend rate for each future
year will increase service and interest cost by $5,000 and increase the
accumulated postretirement benefit obligation for health care benefits by
$46,000. A weighted average assumed discount rate of 7.5% is used to
measure the accumulated postretirement benefit obligation.
(Continued)
F-26
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(14) Financial Instruments
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument is represented by the contract
amount of the financial instrument. The Bank uses the same credit policies
in making commitments for off-balance-sheet financial instruments as it
does for on-balance-sheet financial instruments. Financial instruments with
off-balance-sheet risk are as follows at June 30, 1998:
Contract
amount
---------------------------------------------------------------------------
Undisbursed lines of credit on home equity loans ............. $13,182,000
Residential mortgage loans to be funded ...................... 1,023,000
---------------------------------------------------------------------------
$14,205,000
===========================================================================
The Bank had outstanding mortgage loan commitments, exclusive of the
undisbursed portion of loans in process, of approximately $1,023,000 for
fixed rate loans at June 30, 1998. There were no outstanding mortgage loan
commitments for floating rate loans at June 30, 1998. The interest rate
range on fixed rate mortgage loan commitments was 6.50% to 7.88% and all
commitments expire within one year.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. The Bank evaluates each customer's creditworthiness on a
case-by-case basis.
The Bank has an unsecured line of credit with First National Bank of
Maryland for $2 million. There were no borrowings as of June 30, 1998.
(15) Disclosures About Fair Value of Financial Instruments
All entities are required to disclose the estimated fair value of certain
on- and off-balance sheet financial instruments. Fair value estimates and
the method and assumptions used to determine them are set forth below for
financial instruments outstanding at June 30, 1998 and 1997.
(Continued)
F-27
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(15) Continued
The carrying value and estimated fair value of financial instruments is
summarized as follows at June 30:
1998 1997
------------------------ ----------------------
Carrying Fair Carrying Fair
amount value amount value
- --------------------------------------------------------------------------------
Assets:
Cash and interest-bearing
deposits .................. $ 13,675,554 13,676,000 13,330,928 13,331,000
Short-term investments ...... 4,776,681 4,777,000 2,722,336 2,722,000
Short-term loans to
commerical banks .......... 18,405,234 18,405,000 9,735,532 9,736,000
Securities purchased under
agreements to resell ...... -- -- 5,517,903 5,542,000
Securities available for sale 8,034,695 8,035,000 8,162,419 8,162,000
Investment securities ....... 40,669,525 40,582,000 43,614,562 43,361,000
Mortgage-backed securities .. 16,514,383 16,924,000 22,294,337 22,777,000
Loans receivable ............ 190,965,595 194,222,000 174,877,796 175,303,000
Liabilities:
Savings accounts ............ 245,269,602 245,777,000 232,590,009 232,979,000
Borrowed funds .............. 552,000 552,000 648,000 648,000
Advances payments by
borrowers for taxes,
insurance and ground rents $ 5,006,020 5,006,000 4,804,060 4,804,000
================================================================================
Cash, Cash Equivalents, Investments and Mortgage-Backed Securities
For cash and cash equivalents, the carrying value approximates fair value
due to the short maturity of these instruments. The fair value of U.S.
Government and agency obligations, equity securities and mortgage-backed
securities is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of Federal Home Loan Bank stock is estimated to be equal to its
carrying amount since it is not a publicly traded equity security, it has
an adjustable dividend rate, and all transactions in the stock are executed
at the stated par value.
Loans Receivable
The fair value of loans receivable is estimated by discounting future cash
flows using current rates for which similar loans would be made to
borrowers with similar credit history and maturities.
(Continued)
F-28
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(15) Continued
Savings Accounts, Borrowed Funds and Advance Payments by Borrowers for
Taxes, Insurance and Ground Rents
The fair value of savings accounts, other than certificate accounts, and
advance payments by borrowers for taxes, insurance and ground rents is the
amount payable on demand at June 30. The fair value of certificate accounts
is based on the lower of redemption (net of penalty) or discounted value of
contractual cash flows. Discount rates for certificates of deposit are
estimated using the rates currently offered by the Bank for accounts with
similar remaining maturities. Borrowed funds are considered to be at fair
value due to their adjustable rate nature.
Commitments to Extend Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of unrecognized financial instruments is estimated to
equal the carrying value. See note 14 to the consolidated financial
statements for the contract amounts of unrecognized financial instruments.
(16) Plan of Reorganization, Stock Issue and Stockholders' Equity
In March 1994, the Association's members approved a plan of reorganization
from a mutual savings association to a mutual holding company. Pursuant to
the plan of reorganization the Association transferred substantially all of
its assets and all of its liabilities to a new federally-chartered stock
savings association which became a wholly owned subsidiary of Leeds Federal
Bankshares, M.H.C. (MHC), a federal mutual holding company. The
reorganization was consummated on April 29, 1994.
The principal purpose of the reorganization was to reorganize the
Association into a corporate form that provides it with more flexibility to
raise capital, diversify operations and establish employee incentive plans.
Under the terms of the reorganization the membership rights of the
Association's members became rights in the mutual holding company. The
reorganization was accounted for in a manner similar to that of a pooling
of interests.
As discussed in note 1 to the financial statements, the Association also
adopted a federal savings bank charter and changed its name to Leeds
Federal Savings Bank.
(Continued)
F-29
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(16) Continued
Under the corporate form of organization, the Bank has the authority to
issue shares of capital stock to persons other than MHC up to 49.9% (a
minority ownership interest) of the shares issued and outstanding. The
reorganization was consummated on April 29, 1994, with the issuance and
sale of 1.2 million shares of common stock at $10.00 per share in a public
offering and the issuance of 2.2 million shares of common stock to MHC by
the Bank.
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's share, payments
to shareholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers of
institutions. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") may, after prior notice but without the approval of the OTS,
make capital distributions during a year up to 100% of its net income to
date during the year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in
capital requirements) at the beginning of the year; or 75% of its net
income over the most recent four-quarter period. Any additional capital
distributed requires prior regulatory approval.
An institution that meets its regulatory capital requirement, but not its
fully phased-in capital requirement before or after its capital
distribution ("Tier 2 institution") may, after prior notice but without the
approval of the OTS, make capital distributions of: up to 75% of its net
income over the most recent four quarter period if it satisfies the
risk-based capital requirement that would be applicable to it on January 1,
1993, computed based on its current portfolio; up to 50% of its net income
over the most recent four quarter period if it satisfies the risk based
capital standard that was applicable to it on January 1, 1991, computed
based on its current portfolio; and up to 25% of its net income over the
most recent four-quarter period if it satisfies its current risk based
capital requirement. In computing the institution's permissible percentage
of capital distributions, previous distributions made during the prior four
quarter period must be included.
A savings institution that does not meet its current regulatory capital
requirement before or after payment of a proposed capital distribution
("Tier 3 institution") may not make any capital distributions without the
prior approval of the OTS.
In addition, the OTS would prohibit a proposed capital distribution by any
institution which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In addition, FDICIA provides that, as a general rule, a financial
institution may not make a capital distribution if it would be
undercapitalized after making the capital distribution. Also, an
institution meeting the Tier 1 capital criteria which has been notified
that it needs more than normal supervision will be treated as a Tier 2 or
Tier 3 institution unless the OTS deems otherwise.
(Continued)
F-30
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(16) Continued
MHC waived receipt of its quarterly dividends, thereby reducing the actual
dividend payout. The dollar amount of dividends waived by MHC are
considered as a restriction on the retained earnings of the Bank. The
amount of any dividend waived by MHC shall be available for declaration as
a dividend solely to MHC. At June 30, 1998, the cumulative amount of such
waived dividends was $5,933,400.
(17) Net Income Per Share of Common Stock
On October 22, 1997, the Board of Directors declared a three-for-two split
of the Company's common stock, effected in the form of a stock dividend
paid on November 19, 1997 to shareholders of record on November 5, 1997.
All agreements concerning stock options and other commitments payable in
shares of the Company's common stock provide for the issuance of additional
shares due to the declaration of the stock split. An amount equal to the
par value of the common shares issued plus cash paid in lieu of fractional
shares was transferred from additional paid in capital to the common stock
account. This transfer has been reflected in the Consolidated Statements of
Stockholders' Equity at June 30, 1995. All references to number of shares,
except shares authorized, and to per share information in the consolidated
financial statements have been adjusted to reflect the stock split on a
retroactive basis.
The Company adopted Statement of Financial Accounting Standards No. 128
Earnings per Share (SFAS No. 128) in 1998. SFAS No. 128 establishes revised
standards for computing and presenting earning per share (EPS) data. It
requires dual presentation of "basic" and "diluted" EPS on the face of the
statements of income and reconciliation of the numerators and denominators
used in the basic and diluted EPS calculations. As required by SFAS No.128,
EPS data for prior periods presented have been restated to conform to the
new standard.
Basic EPS is calculated by dividing net income by the weighted average
number of common shares outstanding for the applicable period. Diluted EPS
is calculated after adjusting the numerator and the denominator of the
basic EPS calculation for the effect of all dilutive potential common
shares outstanding during the period. The dilutive effects of options and
unvested restricted stock awards are computed during the "treasury stock"
method.
(Continued)
F-31
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) Continued
Unearned ESOP shares are not included in outstanding shares. Information
related to the calculation of net income per share of common stock is
summarized as follows for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income .................. $3,306,000 3,306,009 2,365,131 2,365,131 2,786,644 2,786,644
Dividends on unvested
common stock awards--MRP .. (7,872) (3,107) (13,824) (10,250) (18,153) (13,452)
- -----------------------------------------------------------------------------------------------
Adjusted net income used
in EPS calculations ....... $3,298,137 3,302,902 2,351,307 2,354,881 2,768,491 2,773,192
===============================================================================================
Weighted average shares
outstanding ............... 5,091,918 5,091,918 5,062,986 5,062,986 5,023,822 5,023,822
Dilutive securities:
Options ................... -- 89,885 -- 41,888 -- 32,761
Unvested common stock
awards--MRP ............. -- 8,716 -- 7,447 -- 7,818
- -----------------------------------------------------------------------------------------------
Adjusted weighted average
shares used in EPS
calculations .............. 5,091,918 5,190,519 5,062,986 5,112,321 5,023,822 5,064,401
===============================================================================================
</TABLE>
(18) Stock Option Plan
In October 1994, the Bank approved the Stock Option Plan (Option Plan),
whereby 180,000 shares of common stock were granted to officers and
directors of the Bank. Options granted under the Option Plan may be
Incentive Stock Options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or nonqualifying stock options. The
72,000 shares for directors vested at grant date, while the 108,000 shares
for the officers vest at a rate of 20 percent per year. Options are
exercisable at the market price of the common stock on the date of grant
which was $7.91 per share. The options must be exercised within 10 years
from the date of grant.
A summary of changes in shares under option and options exercisable for the
years ended June 30 is presented below:
1998 1997 1996
---------------------------------------------------------------------------
Outstanding at beginning of year ............. 162,000 180,000 180,000
Granted ...................................... -- -- --
Canceled ..................................... -- (7,896) --
Exercised .................................... (13,500) (10,104) --
---------------------------------------------------------------------------
Outstanding at end of year ................... 148,500 162,000 180,000
---------------------------------------------------------------------------
Exercisable at end of year ................... 133,200 126,000 115,200
===========================================================================
(Continued)
F-32
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(19) Condensed Financial Information (Parent Company Only)
Summarized financial information for the Company is as follows as of and
for the year ended June 30, 1998:
Statement of Financial Condition
Cash ......................................................... $ 25,663
Dividend receivable from Bank ................................ 375,000
Investment in Bank ........................................... 49,165,472
---------------------------------------------------------------------------
$49,566,135
===========================================================================
Accrued expenses and other liabilities ....................... $ 258,625
Stockholders' equity ......................................... 49,307,510
---------------------------------------------------------------------------
$49,566,135
===========================================================================
Statement of Income
Distributed income ........................................... $ 1,225,000
Interest income .............................................. 1,903
---------------------------------------------------------------------------
Income before provision for income taxes ..................... 1,226,903
Provision for income taxes ................................... --
---------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiary 1,226,903
Equity in undistributed net income of subsidiary ............. 2,079,106
---------------------------------------------------------------------------
Net income ................................................... $ 3,306,009
===========================================================================
Statement of Cash Flows
Cash flows from operating activities:
Net income ................................................. $ 3,306,009
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary ....... (2,079,106)
Increase in dividends receivable ....................... (375,000)
---------------------------------------------------------------------------
Net cash provided by operating activities .................... $ 851,903
---------------------------------------------------------------------------
(Continued)
F-33
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(19) Continued
Statement of Cash Flows (continued)
Cash flows from financing activities:
Payment of dividends ....................................... $ (260,730)
Purchase of treasury stock ................................. (772,430)
Exercise of stock options .................................. 106,920
Net proceeds from stock exchanged .......................... 100,000
---------------------------------------------------------------------------
(826,240)
---------------------------------------------------------------------------
Net income in cash and cash equivalents ...................... 25,663
Cash and cash equivalents at beginning of year ............... --
---------------------------------------------------------------------------
Cash and cash equivalents at end of year ..................... $ 25,663
===========================================================================
F-34
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
- --------------
The Annual Meeting of Stockholders will be held at 4:00 p.m., on October 21,
1998, at the Company's office at 1101 Maiden Choice Lane, Baltimore, Maryland.
Stock Listing
- -------------
The Company's Common Stock trades over-the-counter on the Nasdaq National Market
under the symbol "LFED."
Special Counsel
- ---------------
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Washington, D.C. 20015
Independent Auditors
- --------------------
KPMG Peat Marwick LLP
111 South Calvert Street
Baltimore, Maryland 21202
Transfer Agent
- --------------
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
Annual Report on Form 10-KSB
- ----------------------------
A copy of the Company's Form 10-KSB for the fiscal year ended June 30, 1998,
will be furnished without charge to stockholders as of August 31, 1998, upon
written request to the Secretary, Leeds Federal Bankshares, Inc., 1101 Maiden
Choice Lane, Baltimore, Maryland 21229.
18
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Leeds Federal Bankshares, Inc.
Subsidiary Percentage Owned State of Incorporation
- ---------- ---------------- ----------------------
Leeds Federal Savings Bank 100% Federal
EXHIBIT 23
CONSENT OF EXPERTS AND COUNSEL
<PAGE>
Independent Auditors' Consent
The Board of Directors
Leeds Federal Bankshares, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333-44899) on Form S-8 of Leeds Federal Bankshares, Inc. of our report dated
August 7, 1998, relating to the consolidated statements of financial condition
of Leeds Federal Bankshares, Inc. and subsidiary as of June 30, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1998,
which report appears in the June 30, 1998 Annual Report on Form 10-KSB of Leeds
Federal Bankshares, Inc.
/s/KPMG Peat Marwick LLP
Baltimore, Maryland
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,676
<INT-BEARING-DEPOSITS> 244,720
<FED-FUNDS-SOLD> 18,405
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,035
<INVESTMENTS-CARRYING> 57,184
<INVESTMENTS-MARKET> 57,505
<LOANS> 190,966
<ALLOWANCE> 723
<TOTAL-ASSETS> 302,737
<DEPOSITS> 245,270
<SHORT-TERM> 552
<LIABILITIES-OTHER> 1,172
<LONG-TERM> 0
0
0
<COMMON> 5,196
<OTHER-SE> 44,112
<TOTAL-LIABILITIES-AND-EQUITY> 302,737
<INTEREST-LOAN> 13,735
<INTEREST-INVEST> 6,574
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 20,309
<INTEREST-DEPOSIT> 12,114
<INTEREST-EXPENSE> 57
<INTEREST-INCOME-NET> 8,138
<LOAN-LOSSES> 192
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 700
<INCOME-PRETAX> 5,201
<INCOME-PRE-EXTRAORDINARY> 5,201
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,306
<EPS-PRIMARY> .65
<EPS-DILUTED> .64
<YIELD-ACTUAL> 2.85
<LOANS-NON> 2,519
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,519
<ALLOWANCE-OPEN> 536
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 723
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 723
</TABLE>
