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, 1999
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.
------------------------------
(Exact name of registrant as specified in its charter)
United States 52-2062351
------------- ----------
(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. [ ].
The issuer's revenues for the fiscal year ended June 30, 1999, were
$21.2 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 July 31, 1999,
was approximately $15.5 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 July 31, 1999, there
were issued and outstanding 4,810,656 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,
1999 (Parts II and III).
2. Proxy Statement for the 1999 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, 1999,
the Company had total assets of $331.6 million and stockholders' equity of $48.5
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 System
("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, 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.
<PAGE>
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, 1999, the Bank's net loans receivable totaled $203.9
million, of which $189.3 million, or 92.8%, were one- to four-family residential
real estate mortgage loans, $11.5 million, or 5.6%, were home equity loans, $4.0
million, or 2.0%, were consumer loans, and $2.5 million, or 1.2%, 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, 1999, mortgage-backed securities totaled $10.0
million, or 3.0%, of total assets. At June 30, 1999, 54.9% of the Bank's
mortgage-backed securities were secured by adjustable rate mortgage ("ARM")
loans, and 3.1% were secured by loans with terms of less than five years. Pass-
through certificates totaled $9.4 million, or 93.9%, of the Bank's total
mortgage-backed securities portfolio at June 30, 1999. All of the Bank's
pass-through certificates are insured or guaranteed by Freddie Mac, Ginnie Mae
("GNMA"), or Fannie Mae ("FNMA"). CMOs totaled $607,000 million, or 6.1%, of the
Bank's total mortgage-backed securities portfolio on June 30, 1999, all of which
were backed by federal agency collateral. The Bank's policy is to hold
mortgage-backed securities to maturity.
-2-
<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,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- ---------------- ----------------- ----------------
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 ........... $189,326 92.9% $172,152 90.5% $155,233 89.1% $137,700 90.5% $127,511 90.8%
Home equity ............. 11,454 5.6 12,769 6.7 13,024 7.5 11,692 7.7 10,108 7.2
Commercial .............. 2,500 1.2 3,738 2.0 3,763 2.2 1,548 1.0 1,494 1.1
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Total real estate
loans ................. 203,280 99.7 188,659 99.2 172,020 98.8 150,940 99.2 139,113 99.1
Consumer loans ........... 3,976 2.0 5,072 2.7 5,069 2.9 3,295 2.2 2,324 1.6
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Total loans receivable . 207,256 101.7 193,731 101.9 177,089 101.7 154,235 101.4 141,437 100.7
Less:
Undisbursed portion of
loans in process ....... 1,905 (.9) 2,025 (1.1) 1,668 (1.0) 1,196 (.8) 121 (.1)
Unearned loan fees ...... 740 (.4) 802 (.4) 790 (.4) 588 (.4) 498 (.4)
Allowance for loan
losses .................. 725 (.4) 723 (.4) 536 (.3) 375 (.2) 341 (.2)
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Total loans receivable,
net ................... $203,886 100.0% $190,181 100.0% $174,095 100.0% $152,076 100.0% $140,477 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Mortgage-backed securities $ 10,008 $ 16,412 $ 22,160 $ 28,917 $ 34,749
======== ======== ========= ======== ========
</TABLE>
-3-
<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, 1999. 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 rate ("ARM") loans, floating
rate loans and mortgage-backed securities 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 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 ...... $ 4,373 $ 6,174 $ 15,751 $ 29,600 $ 67,364 $ 66,064 $189,326
Home equity ........................ 7,763 267 629 2,780 15 -- 11,454
Commercial ......................... 2,500 -- -- -- -- -- 2,500
Consumer loans ..................... 533 1,781 1,579 83 -- -- 3,976
-------- -------- -------- -------- -------- -------- --------
Total loans ....................... 15,169 8,222 17,959 32,463 67,379 66,064 207,256
-------- -------- -------- -------- -------- -------- --------
Mortgage-backed securities (1) ....... 6,373 -- 312 2,176 399 777 10,037
-------- -------- -------- -------- -------- -------- --------
Total loans and mortgage-backed
securities ......................... $ 21,542 $ 8,222 $ 18,271 $ 34,639 $ 67,778 $ 66,841 $217,293
======== ======== ======== ======== ======== ======== ========
</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, 1999, the dollar amount of
fixed rate loans and mortgage-backed securities that mature after June 30, 2000,
and all adjustable rate loans and mortgage-backed securities that mature or
reprice after June 30, 2000.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Real estate loans:
One- to four-family
residential and construction ...... $173,724 $ 11,229 $184,953
Home equity ........................ 3,691 -- 3,691
Commercial ......................... -- -- --
Consumer loans ..................... 3,443 -- 3,443
-------- -------- --------
Total ............................. $180,858 $ 11,229 $192,087
======== ======== ========
Mortgage-backed securities ........... $ 3,664 $ -- $ 3,664
======== ======== ========
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
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,
-4-
<PAGE>
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, 1999, the Bank had one such loan
which represented 1.2% 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, 1999, the Bank's
commercial real estate loan totaled $2.5 million.
Home Equity Loans. The Bank also originates variable and fixed rate
home equity loans. As of June 30, 1999, variable rate home equity loans totaled
$7.8 million, or 3.8%, 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, 1999, fixed rate
home equity loans totaled $3.7 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 principally by automobiles and deposit accounts.
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.
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, 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.
-5-
<PAGE>
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, 1999, the Bank had outstanding loan
commitments of $6.4 million. This amount does not include $14.9 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.
Years Ended June 30,
------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Loans receivable at beginning
of period, excluding loans
in process ............................. $ 191,706 $ 175,421 $ 153,039
Originations:
Real estate:
One- to four-family residential ....... 53,207 41,206 35,919
Home equity (1) ....................... 6,429 7,571 7,657
Commercial ............................ -- -- 2,500
Consumer passbook loans (2) ............ (40) 81 (39)
Consumer loans, other .................. 1,118 1,785 2,699
--------- --------- ---------
Total originations ................... 60,714 50,643 48,736
--------- --------- ---------
Transfer of mortgage loans to
foreclosed real estate ............... -- --
Repayments .............................. (47,071) (34,353) (26,364)
Loan charge-off/transfer provision ...... 2 (5) 10
--------- --------- ---------
Net loan activity ....................... 13,645 16,285 22,382
--------- --------- ---------
Total loans receivable at end
of period, excluding loans
in process ........................ $ 205,351 $ 191,706 $ 175,421
========= ========= =========
- --------------
(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, 1999, the Bank had $740,000 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 service charges
of $132,000, $137,000 and $130,000, for the fiscal years ended June 30, 1999,
1998, and 1997, respectively.
Mortgage-Backed Securities
A significant part of the Bank's business involves investments in
mortgage-backed securities. At June 30, 1999, 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,
-6-
<PAGE>
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,
---------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Mortgage-backed securities
at beginning of period ........... $ 16,412 $ 22,160 $ 28,917
Purchases ......................... -- -- --
Repayments ........................ (6,415) (5,769) (6,791)
Other (1) ......................... 11 21 34
-------- -------- --------
Mortgage-backed securities
at end of period ................. $ 10,008 $ 16,412 $ 22,160
======== ======== ========
- --------
(1) Includes net discount/premium amortization.
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,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Pass-through certificates:
<S> <C> <C> <C> <C> <C> <C>
Adjustable ............. $ 5,495 54.9% $ 7,624 46.5% $ 9,970 45.0%
Fixed .................. 3,935 39.3 7,068 43.0 10,375 46.8
-------- ----- -------- ----- -------- -----
Total pass-through
certificates ......... 9,430 94.2 14,692 89.5 20,345 91.8
-------- ----- -------- ----- -------- -----
CMOs:
Adjustable ............. 607 6.1 1,759 10.7 1,876 8.5
-------- ----- -------- ----- -------- -----
Total CMOs ............ 607 6.1 1,759 10.7 1,876 8.5
-------- ----- -------- ----- -------- -----
Unamortized discount
and premium ........... (29) (0.3) (39) (0.2) (61) (0.3)
-------- ----- -------- ----- -------- -----
Total mortgage-backed
securities .......... $ 10,008 100.0% $ 16,412 100.0% $ 22,160 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
-7-
<PAGE>
At June 30, 1999, mortgage-backed securities totaled $10.0 million, or
3.0%, of total assets. ARM loans collateralized 61.0% of the Bank's
mortgage-backed securities portfolio, and loans with terms of less than five
years collateralized 5.8% of the Bank's mortgage-backed securities portfolio.
Pass-through certificates totaled $9.4 million, or 93.9%, of the Bank's total
mortgage-backed securities portfolio at June 30, 1999. All of the Bank's
pass-through certificates are insured or guaranteed by the Freddie Mac, the
GNMA, or the FNMA. CMOs totaled $607,000, or 6.1%, 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, 1999, all the Bank's mortgage-backed
securities were held for investment. At June 30, 1999, the Bank's
mortgage-backed securities portfolio had a fair market value of $10.2 million.
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 the start of any legal action. If not paid,
foreclosure proceedings are initiated.
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.
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<PAGE>
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, 1999, the Bank had six loans on nonaccrual
status, totaling $2.8 million. At June 30, 1999, the Company had a $2.5 million
loan which matured in June 1998, and has not been repaid. The borrower has
declared bankruptcy, and the scheduled foreclosure proceedings on the loan have
been temporarily suspended. Based on a current appraisal and other factors, the
Company believes it will not incur a material loss on this loan.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Delinquent loans:
<S> <C> <C> <C> <C> <C>
One- to four-family residential ... $ 264 $ 19 $ 88 $100 $104
Consumer loans .................... -- -- -- -- 7
Commercial loans .................. 2,500 2,500 -- -- --
--------- --------- ------ ---- ----
Total delinquent loans ........... $ 2,764 $ 2,519 $ 88 $100 $111
--------- ========= ====== ==== ====
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 .... 1.36% 1.32% .05% .07% .08%
Total loans delinquent 90 days
or more to total assets ............ .83% .83% .03% .04% .04%
Total nonperforming loans and
nonperforming assets to total assets .83% .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, 1999, gross interest income of
approximately $286,000 would have been recorded on nonperforming and
restructured loans, under their original terms, if the loans had been current
throughout the period. $193,000 was actually recorded on these assets during the
year ended June 30, 1999.
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,
------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Loans delinquent 60-89 days ................ $ 60 $ 169 $ 32
Loans delinquent 90 days or more ........... $2,764 $2,519 88
------ ------ ------
Total delinquent 60 days or more .......... $2,824 $2,688 $ 120
====== ====== ======
-9-
<PAGE>
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at June 30, 1999.
At June 30, 1999
-----------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent ..................... $ 60 1
Loans 90 days or more delinquent ................... 264 5
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, 1999, the
Bank had three loans totaling $230,000 classified as special mention, secured by
one- to four- family residences.
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At June 30,
---------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Substandard assets (1) ................. $2,764 $2,519 $ --
Doubtful assets ........................ 152 -- --
Loss assets ............................ -- -- --
------ ------ -------
Total classified assets ............. $2,916 $2,519 $ --
====== ====== =======
- --------
(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, 1999, 1998 and 1997, the Bank added
$39,000, $192,000 and $151,000, respectively, to the provision for loan losses.
The Bank's allowance for loan losses totaled $725,000, $723,000 and $536,000, at
June 30, 1999, 1998, and 1997, respectively.
-10-
<PAGE>
Management believes that the allowance 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 processes 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 allowance 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 at June 30, 1999, $404,000 has been
allocated to one- to four-family residential real estate loans, $250,000 to
commercial real estate loans and $71,000 to consumer loans.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding .................... $ 203,886 $ 190,181 $ 174,095 $ 152,076 $ 140,477
Average loans outstanding .................. 195,371 182,882 164,321 143,126 143,829
Allowance balances (at beginning of period) 723 536 375 341 317
Provision for losses on real estate loans .. 39 192 151 34 24
Transfer from provision for other assets ... -- -- 30 -- --
Charge-offs ................................ (37) (5) (20) -- --
--------- --------- --------- --------- ---------
Allowance balances (at end of period) ...... $ 725 $ 723 $ 536 $ 375 $ 341
========= ========= ========= ========= =========
Allowance for loan losses as a percentage of
net loans receivable at end of period .... .35% .38% .31% .25% .24%
</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 in
other institutions. The Bank has no investments in corporate or unrated
securities. At June 30, 1999, $30.3 million, or 29.6%, of the Bank's investment
portfolio was scheduled to mature in one year or less, $1.6 million, or 1.6%,
was scheduled to mature in from one to five years, and $70.6 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 savings deposit growth, the Bank's liquidity
levels are higher than they have been in recent periods.
-11-
<PAGE>
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment portfolio at the dates indicated.
At June 30,
------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Investment securities:
U.S. Government and agency obligations ...... $ 68,700 $ 44,685 $ 48,644
Freddie Mac preferred stock ................. 3,950 3,205 2,384
Other equity securities ..................... 68 -- --
-------- -------- --------
Total investment securities ............... $ 72,718 $ 47,890 $ 51,028
Securities purchased under agreements
to resell .................................... -- -- 5,518
Short-term investments/money market
accounts ..................................... 12,941 4,777 2,722
Secured short-term loans to
commercial banks (1) ......................... 10,012 18,405 9,736
FHLB stock .................................... 1,936 2,377 2,377
Interest-earning deposits in other
institutions ................................. 4,964 11,906 11,172
-------- -------- --------
Total investments ......................... $102,571 $ 85,355 $ 82,553
======== ======== ========
- ----------
(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, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total
--------------------------------------------------------------------------------------------------------
Annualized Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
US. Government agency
securities .............. $ -- --% $ 600 6.24% $2,501 6.61% $64,023 7.08% $67,124 $64,439 7.06%
U.S. Government treasury
securities .............. 576 4.76 1,000 7.50 -- -- -- -- 1,576 1,531 6.60
Freddie Mac preferred
stock ................... -- -- -- -- -- -- 3,950 .93 3,950 3,950 .98
Other equity
securities .............. -- -- -- -- -- -- 68 1.48 68 68 1.48
------ ---- ------ ---- ------ ---- ------- ---- ------- ------- ----
Total investment
securities .............. $ 576 4.76% $1,600 7.03% $2,501 6.61% $68,041 6.72% $72,718 $69,988 6.71%
Short-term investments/
money market accounts .... 12,941 4.97 -- -- -- -- -- -- 12,941 12,941 4.97
Secured short-term loans
to commercial banks ..... 10,012 4.73 -- -- -- -- -- -- 10,012 10,012 4.73
FHLB stock ............... 1,936 7.50 -- -- -- -- -- -- 1,936 1,936 7.50
Interest earning
deposits in other
institutions ............ 4,964 5.15 -- -- -- -- -- -- 4,964 4,964 5.15
------ ---- ------ ---- ------ ---- ------- ---- ------- ------- ----
Total investments ...... $30,429 5.08% $1,600 7.03% $2,501 6.61% $68,041 6.72% $102,571 $99,841 6.24%
======= ==== ====== ==== ====== ==== ======= ==== ======== ======= ====
</TABLE>
-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, 1999 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 $ 896 .33%
1.992 None NOW Accounts 300 6,076 2.21
3.151 None Passbooks and Statement Savings 50 20,018 7.29
4.685 None Money Market Accounts 100 61,368 22.35
3.334 None Anniversary Bonus Account 100 4,466 1.62
3.350 None Club Accounts 5 143 .05
Certificates of Deposit
-----------------------
3.95 3 months Fixed term, fixed rate 1,000 399 .15
4.69 6 months Fixed term, fixed rate 1,000 4,769 1.74
5.08 12 months Fixed term, fixed rate 1,000 22,370 8.15
5.04 13 months Fixed term, fixed rate 10,000 888 .32
5.25 18 months Fixed term, fixed rate 1,000 4,803 1.75
5.16 18 months Fixed term, fixed rate 5,000 71,593 26.07
5.41 24 months Fixed term, fixed rate 1,000 22,560 8.20
5.49 36 months Fixed term, fixed rate 1,000 18,296 6.66
5.60 48 months Fixed term, fixed rate 1,000 1,335 .49
6.32 60 months Fixed term, fixed rate 1,000 22,809 8.31
5.34 Various (15-20) Fixed term, fixed rate 5,000 3,619 1.32
5.00 Various (14-25) Fixed term, variable rate 1,000 7,826 2.85
7.50 Various (3-60) Fixed term, fixed rate 90,000 392 .14
-------- ------
$274,626 100.00%
======== ======
</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,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------- -------------------------- ------------------------- -------------------
Percent Change Percent Percent Percent
Balance (1) (2) Balance (1) Change Balance (1) Change Balance (1)
------- ------- ------- ------- ------- ------ ------- ------- ------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Anniversary bonus
account ............ $ 4,466 1.63% $ (641) $ 5,107 2.08% $(1,384) $ 6,491 2.79% $(1,289) $ 7,780 3.5%
NOW and demand
accounts ........... 6,973 2.54 685 6,288 2.56 1,173 5,115 2.20 892 4,223 1.9
Passbooks, statements
and clubs .......... 20,161 7.34 1,809 18,352 7.49 (506) 18,858 8.11 436 18,422 8.3
Money market deposit
accounts ........... 61,369 22.35 (2,423) 63,792 26.01 (11,231) 75,023 32.26 6,936 68,087 30.6
Time deposits that
mature:
within 12 months .. 98,563 35.89 7,397 91,166 37.17 14,544 76,622 32.94 6,505 70,117 31.6
within 13-36 months 76,055 27.69 21,642 54,413 22.18 10,589 43,824 18.84 2,716 41,108 18.5
beyond 36 months .. 7,039 2.56 887 6,152 2.51 (505) 6,657 2.86 (5,752) 12,409 5.6
-------- ------ ------- -------- ----- ------ -------- ----- ------ -------- ----
Total deposits ... $274,626 100.0% $29,356 $245,270 100.0% $12,680 $232,590 100.0% $10,444 $222,146 100.0%
======== ===== ======= ======== ===== ======= ======== ===== ======= ======== =====
</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,
------------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Rate
- ----
3.00 - 5.99% ................ $168,087 $132,687 $ 96,982
6.00 - 7.99% ................ 13,570 19,044 30,121
-------- -------- --------
$181,657 $151,731 $127,103
======== ======== ========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposit at June 30, 1999.
Amount Due
-------------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
-------- ----- ----- ------- -----
Rate (In Thousands)
- ----
3.00 - 5.99% ....... $ 88,009 $ 62,277 $ 10,790 $ 7,011 $168,087
6.00 - 7.99% ....... 10,554 2,886 102 28 13,570
-------- -------- -------- -------- --------
$ 98,563 $ 65,163 $ 10,892 $ 7,039 $181,657
======== ======== ======== ======== ========
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, 1999. This amount does not include other
savings account deposits of $100,000 or more, which totaled approximately $17.6
million at June 30, 1999.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less .......................... $ 6,750
Three through six months ...................... 4,852
Six through twelve months ..................... 9,442
Over twelve months ............................ 20,311
-------
Total .................................... $41,355
=======
Change in Deposits. The following table sets forth changes in total
deposits of the Bank for the periods indicated:
At June 30,
----------------------------------
1999 1998 1997
---- ---- ----
Rate (In Thousands)
- ----
Balance at beginning of period ............ $ 245,270 $ 232,590 $ 222,146
Net (withdrawals)/deposits ................ 16,391 566 (1,105)
Interest credited ......................... 12,965 12,114 11,549
--------- --------- ---------
Ending balance ...................... $ 274,626 $ 245,270 $ 232,590
========= ========= ---------
Net increase in deposits ............ $ 29,356 $ 12,680 $ 10,444
========= ========= =========
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 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
-16-
<PAGE>
from any other source. In 1994, 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 Common Stock. 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, 1999, the balance on the ESOP loan was $471,000 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
areverse 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, 1999.
Competition
As of June 30, 1999, 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, 1999, the Bank had 26 full-time and six 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.
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
-17-
<PAGE>
("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 $7.3 million at June 30, 1999. As of June 30, 1999, the
Bank was in compliance with its loans-to-one-borrower limitations.
Qualified Thrift Lender Requirement. The HOLA requires savings
institutions to be qualified thrift lenders ("QTL"). To be a QTL, the Bank can
either satisfy the QTL test, or the Domestic Building and Loan Association
("DBLA") Test of the Internal Revenue Code of 1986, as amended (the "Code").
Under the QTL test, a savings bank 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 basis in 9 out of every 12
months. Under the DBLA test, an institution must meet a "business operations
test" and a "60% of assets test." The business operations test requires the
business of a DBLA to consist primarily of acquiring the savings of the public
and investing in loans. An institution meets the public savings requirements
when it meets one of two conditions: (i) the institution acquires its savings in
conformity with OTS rules and regulations; or (ii) the general public holds more
than 75% of its deposits, withdrawable shares, and other obligations. The
general public may not include family or related business groups or persons who
are officers or directors of the institution.
The 60% of assets test requires that at least 60% of a DBLA's assets
must consist of assets that thrifts normally hold, except for consumer loans
that are not educational loans. The DBLA test does not include, as the QTL test
does to a limited or optional extent, mortgage loans originated and sold into
the secondary market and subsidiary investments. A savings bank that fails to be
a QTL must either convert to a bank charter or operate under certain
restrictions. As of June 30, 1999, the Bank maintained 83.6% 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. A "well capitalized" institution can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year in an amount up to 100 percent of its net income during the calendar year,
plus its retained net income for the preceding two years. As of June 30, 1999,
the Bank was a "well-capitalized" institution.
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 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
-18-
<PAGE>
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.
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%. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for the quarter ended June 30,
1999 was 43.2%, 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'sconsolidated total assets, as reported in the institution's latest
quarterly thrift financial report. Based on assets at June 30, 1999, the Bank
has a semi-annual assessment of approximately $36,000.
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.
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
-19-
<PAGE>
based, in part, on the Bank's capital position, and requires certain approval
procedures to be followed. At June 30, 1999, 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. A 4% tier 1 core capital ratio, a 4% tier 1
risk-based ratio, and an 8% total risk-based ratio. Tier 1 core capital is
defined as common stockholders' equity less investments in and advances to
"nonincludable" subsidiaries, goodwill and other intangible assets,
nonqualifying equity instruments and disallowed servicing assets, and other
disallowed assets; plus accumulated losses(gains) on certain available-for-sale
securities and cash flow hedges (net of taxes), qualifying intangible assets,
minority interest in includable consolidated subsidiaries, and mutual
institutions' nonwithdrawable deposit accounts. Adjusted total assets is defined
as total assets less assets of "nonincludable" subsidiaries, goodwill and other
intangible assets and disallowed servicing assets and other disallowed assets;
plus accumulated losses(gains) on certain available-for sale securities and cash
flow hedges, and qualifying intangible assets. Total risk-based capital is
defined as tier 1 (core) capital plus 45% of unrealized gains on
available-for-sale equity securities, qualifying subordinated debt and
redeemable preferred stock, capital certificates, nonwithdrawable deposit
accounts not included in core capital, other equity instruments and allowances
for loan and lease losses; less equity investment and other assets required to
be deducted, low-level recourse deduction and capital reduction for
interest-rate risk exposure.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, all 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.
-20-
<PAGE>
At June 30, 1999, 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, 1999.
<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, 1999:
<S> <C> <C> <C> <C> <C> <C>
Tier I core capital............... $ 46,062 14.1% $ 13,109 4.0% $ 16,386 > 5.0%
Tier I risk-based capital......... 46,062 28.7 6,418 4.0 9,627 > 6.0%
Total risk-based capital.......... 48,520 30.2 12,837 8.0 16,046 >10.0%
</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 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
-21-
<PAGE>
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).
Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and OTS. The Bank is unable to predict
whether the legislation will be enacted or, given such uncertainty, determine
the extent to which the legislation, if enacted, would affect its business. The
Bank is also unable to predict whether the SAIF and BIF funds will eventually be
merged.
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, 1999, of $1.9
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
7.2%, and were 7.5% for the fiscal year ended June 30, 1999.
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 $46.5 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $46.5 million, the reserve requirement is $1.4
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 $46.5
million. The first $4.9 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;
-22-
<PAGE>
(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 than 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 fund, the convenience and needs
of the community and competitive factors.
Restrictions Applicable to Federally-Chartered Stock Holding Companies
The 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.
Federal and State Taxation
General. 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.
Deferred income taxes are accounted for using the asset and liability
method. Under this 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. 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.
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.
-23-
<PAGE>
Executive Officers of the Registrant
Listed below is information, as of June 30, 1999, 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 73 Chairman of the Board
Gordon E. Clark 57 President, Chief Executive Officer and Director
Marguerite E. Wolf 72 Vice Chairman and Director
Joan H. McCleary 65 Director and Secretary to the Board
Dale R. Douglas 57 Senior Vice President
Kathleen G. Trumpler 61 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, 1999, the net book value of the Company's
property and equipment was $1.5 million.
(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, 1999.
ITEM 3. Legal Proceedings
The Company is periodically involved in claims and lawsuits that are
incident to the Company's business. At June 30, 1999, 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.
-24-
<PAGE>
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, 1999 (the "1999 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 1999 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 1999 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1999
Annual Report to Stockholders are incorporated herein by this reference.
ITEM 7. Financial Statements
The following sections from the Registrant's 1999 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1999
Annual Report to Stockholders are incorporated herein by this reference.
(i) Independent Auditors' Report;
(ii) Statements of Financial Condition;
(iii) Statements of Income and Comprehensive Income;
(iv) Statements of Stockholders' Equity;
(v) Statements of Cash Flows; and
(vi) Notes to Financial Statements.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
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 1999 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.
ITEM 10. Executive Compensation
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
-25-
<PAGE>
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 and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-B 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 *** Not Applicable
Gordon E. Clark, Jr.
11 Statement re: computation Not Not Applicable
of per share earnings Required
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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 21 Exhibit 21
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
23 Consent of Experts and Counsel 23 Exhibit 23
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.
*** Filed as an exhibit to the Company's Annual Report on Form 10-KSB (file No.
0-23645) filed with the SEC on September 29, 1998. This previously filed
document is incorporated by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K:
Not applicable.
-27-
<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 24, 1999 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 24, 1999 Date: September 24, 1999
By: \s\ John F. Amer By: \s\ Marguerite B. Wolf
--------------------------------- --------------------------------
John F. Amer, Chairman Marguerite E. Wolf, Vice
Chairman
Date: September 24, 1999 Date: September 24, 1999
By: \s\ Joan H. McCleary By: \s\ Raymond J. Hartman
--------------------------------- --------------------------------
Joan H. McCleary, Director Raymond J. Hartman, Director
Date: September 24, 1999 Date: September 24, 1999
By: \s\ John F. Doyle
----------------------------------
John F. Doyle, Director
Date: September 24, 1999
-28-
EXHIBIT 13
1999 ANNUAL REPORT TO STOCKHOLDERS
LEEDS FEDERAL BANKSHARES, INC.
<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 ........................................ 14
Common Stock and Related Matters ......................................... 15
Independent Auditors' Report ............................................. F-1
Consolidated Statements of Financial Condition ........................... F-2
Consolidated Statements of Income and Comprehensive Income ............... F-3
Consolidated Statements of Stockholders' Equity .......................... F-4
Consolidated Statements of Cash Flows .................................... F-5
Notes to Consolidated Financial Statements ............................... F-7
<PAGE>
[LETTERHEAD OF LEEDS FEDERAL BANKSHARES, INC.]
September 30, 1999
To Our Shareholders:
We are pleased to report the financial results of Leeds Federal Bankshares, Inc.
On June 30, 1999, the Company had total assets of $331.6 million and
stockholders' equity of $48.5 million, which resulted in a capital-to-assets
ratio of 14.6%. The Company's relatively high level of capital provides Leeds
Federal with a strong foundation for future growth and new business
opportunities.
As we reported last year, we have implemented a plan to repurchase some of our
common stock. At July 31, 1999, we have purchased 384,941 shares. 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, 1999, was $3.5
million, or $.69 per diluted share of common stock, compared to $3.3 million, or
$.64 per diluted share for the previous fiscal year. During the year, we
continued to emphasize residential real estate financing, as evidenced by an
increase of $13.7 million in loans receivable. We have continued to maintain a
low level of noninterest expense; our noninterest expense to average assets
ratio was .91% and 1.06% for the fiscal years ended June 30, 1999 and 1998,
respectively. The enclosed annual report discusses Leeds Federal's operating
results through June 30, 1999, in more detail.
Construction has begun on our new full service branch in Howard County. We hope
to open it in the quarter ending March 31, 2000. The 3,000 square foot branch is
our first, and we are excited about the growth potential of the area.
As an independent community bank, our goal is to provide the personalized
quality financial services our neighbors and customers have come to expect over
the past 76 years. We think the old-style banking approach of Leeds Federal is
based on a clear understanding of who are our customers and how best to deliver
the products they want and need. At the same time, though, we will aggressively
pursue new areas where we believe our banking philosophy can be implemented in
an efficient and profitable fashion.
Thank you for the confidence you have placed in Leeds Federal. We hope to
justify that confidence by continuing to be a leading community-based financial
institution and by sharing our growth and our success with our shareholders.
Sincerely,
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,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Selected Consolidated Financial Condition Data
<S> <C> <C> <C> <C> <C>
Total assets.................................... $ 331,642 $ 302,737 $ 286,999 $ 273,278 $260,145
Loans receivable, net........................... 203,886 190,181 174,095 152,076 140,477
Investments* ................................... 102,572 85,355 82,553 84,564 78,081
Mortgage-backed securities...................... 10,008 16,412 22,160 28,917 34,749
Deposits........................................ 274,626 245,270 232,590 222,146 211,414
Borrowed funds.................................. 471 552 648 744 840
Stockholders' equity, substantially restricted.. 48,504 49,308 46,741 44,192 41,738
</TABLE>
- ---------
* Includes investment securities, interest-bearing deposits, and other
investments.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands Except Per Share Data)
Selected Consolidated Operating Data:
<S> <C> <C> <C> <C> <C>
Interest income................................ $ 20,842 $ 20,309 $ 19,606 $ 18,567 $ 17,602
Interest expense............................... 13,009 12,171 11,613 11,232 9,945
--------- --------- --------- --------- --------
Net interest income before provision for losses 7,833 8,138 7,993 7,335 7,657
Provision for loan losses...................... 39 192 151 33 24
Provision for losses on deposit................ -- -- -- -- 30
--------- --------- --------- --------- --------
Net interest income after provision for losses 7,794 7,946 7,842 7,302 7,603
--------- --------- --------- --------- --------
Noninterest income:
Service fees and charges..................... 132 137 130 116 74
Other income ................................ 268 213 140 168 160
--------- --------- --------- --------- --------
Total noninterest income................... 400 350 270 284 234
--------- --------- --------- --------- --------
Noninterest expense:
Compensation and employee benefits........... 1,573 1,770 1,528 1,516 1,440
Occupancy.................................... 222 195 197 192 182
SAIF deposit insurance premiums.............. 222 222 1,755 558 558
Advertising.................................. 128 208 172 216 179
Other ..................................... 696 700 637 580 629
--------- --------- --------- --------- --------
Total noninterest expenses................. 2,841 3,095 4,289 3,062 2,988
--------- --------- --------- --------- --------
Income before provision for income taxes....... 5,353 5,201 3,823 4,524 4,849
Provision for income taxes..................... 1,889 1,895 1,458 1,737 1,922
--------- --------- --------- --------- --------
Net income............................... $ 3,464 $ 3,306 $ 2,365 $ 2,787 $ 2,927
========= ========= ========= ========= ========
Net income per common share
Basic........................................ $ 0.69 $ 0.65 $ 0.46 $ 0.55 $ 0.59
Diluted...................................... 0.69 0.64 0.46 0.55 0.59
Dividends declared per common share............ 0.56 0.55 0.48 0.44 0.31
========= ========= ========= ========= ========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Key Operating Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Return on average assets (net income divided
by average total assets)*...................... 1.11% 1.13% .85% 1.06% 1.17%
Return on average equity (net income divided
by average equity)*............................ 7.05 6.86 5.26 6.50 7.30
Net interest rate spread (difference between
average yield on interest-earning assets and
average cost of interest-bearing liabilities).. 1.80 2.03 2.12 2.00 2.34
Net interest margin (net interest income as a
percentage of average interest-earning assets). 2.57 2.85 2.94 2.85 3.11
Net interest income to noninterest expense*...... 275.71 262.94 186.36 239.54 256.26
Net interest income after provision for
losses, to total noninterest expense*.......... 274.33 256.74 182.84 238.44 254.45
Noninterest income to average assets............. .13 .12 .10 .11 .09
Noninterest expense to average assets*........... .91 1.06 1.54 1.17 1.19
Nonperforming loans to total loans............... 1.36 1.32 .05 .06 .07
Nonperforming assets to total assets............. .83 .83 .03 .07 .10
Average interest-earning assets to average
interest-bearing liabilities................... 118.03 119.46 119.15 119.50 118.97
Allowance for losses to nonperforming assets..... 26.24 28.70 609.09 213.67 146.15
Stockholders' equity to average assets
(average stock-holders' equity divided by
average total assets)........................... 15.68 16.49 16.18 16.36 15.96
Equity to assets at period end................... 14.63 16.28 16.29 16.17 16.04
Number of full-service offices................... 1 1 1 1 1
</TABLE>
- -----------
* Excluding the one-time assessment to recapitalize the Savings Association
Insurance Fund, 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.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such Statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, and changes
in demand for loans in the Company's market area, competition and information
provided by third-party vendors that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
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
4
<PAGE>
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 consist primarily of savings deposits. The
Company had net income of $3.5 million for the year ended June 30, 1999. Net
income totaled $3.3 million and $2.4 million for fiscal 1998 and 1997,
respectively.
Interest Income. Total interest income increased by $533,000, or 2.6%,
to $20.8 million for the year ended June 30, 1999, from $20.3 million for the
year ended June 30, 1998. The increase in interest income was primarily due to
an increase in the balance of average interest earning assets to $305.1 million
for the year ended June 30, 1999, from $285.4 million for the prior year,
partially offset by a decrease in yield on average interest earning assets to
6.8%, from 7.1%. The increase in average interest earning assets during the year
ended June 30, 1999 resulted primarily from an increase in average loans and
investment securities, partially offset by a decrease in mortgage-backed
securities. The decrease in the average yield was caused primarily by decreases
in market rates on mortgage loans and short-term investments.
Interest on mortgage loans increased by $631,000, or 4.7%, to $14.0
million for the year ended June 30, 1999, from $13.4 for the year ended June 30,
1998, primarily because of an increase in average mortgage loans to $190.8
million for the year ended June 30, 1999, from $177.8 million for the year ended
June 30, 1998, partially offset by a decrease in average yield on mortgage loans
to 7.3% from 7.5%. 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
generally lower market rates, including the reinvestment of the proceeds of loan
prepayments in lower yielding mortgage loans. Interest income on consumer loans
decreased by $30,000 to $329,000 for the year ended June 30, 1999, from $359,000
for the prior year. The decrease was due to a decrease in average balance of
consumer loans to $4.5 million from $5.1 million, as a result of reduced
marketing of consumer loans during the year. Yield on consumer loans for the
year ended June 30, 1999, increased to 7.3%, from 7.1% for the prior year.
Interest income on mortgage-backed securities decreased $506,000, or 35.6%, to
$917,000 for the year ended June 30, 1999, from $1.4 million for the prior year.
The decrease was principally due to a $6.4 million decrease in average balance
of mortgage-backed securities to $13.2 million for the year ended June 30, 1999,
from $19.6 million for the prior year. Interest income on investment securities
increased by $536,000, to $3.6 million for the year ended June 30, 1999, from
$3.1 million for the prior year. Such increase was the result of an $8.0 million
increase in average balance of investment securities to $54.3 million for the
year ended June 30, 1999, from $46.3 million for the year ended June 30, 1998.
The increase in the average balance of investment securities was the result of
increases in savings deposits. Interest income from interest earning deposits
decreased by $135,000 to $1.4 million for the year ended June 30, 1999, from
$1.5 million for the prior year. Yield on interest earning deposits decreased to
4.9% from 5.7% for the prior year. Interest income on other investments
increased $37,000 to $539,000 for the year ended June 30, 1999, from $502,000
for the
5
<PAGE>
prior year. Such increase was the result of an increase in average balance of
other investments of $3.8 million, partially offset by a decrease in the average
yield on other investments to 4.1% from 5.3% for the prior year.
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 was primarily due to an increase in
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 generally lower market rates, including the reinvestment of the
proceeds of loan prepayments in lower yielding mortgage loans. 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 of 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 of 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 prior year.
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
principally 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 prior year.
Interest Expense. Total interest expense increased by $838,000, or
6.9%, to $13.0 million for the year ended June 30, 1999, from $12.2 million for
the year ended June 20, 1998. Such increase was principally the result of an
increase in the average balance in interest bearing liabilities of $19.6 million
to $258.5 million for the year ended June 30, 1999, from $238.9 million for the
prior period.
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 principally 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.
6
<PAGE>
Net Interest Income. Net interest income decreased by $305,000, or
3.7%, to $7.8 million for the year ended June 30, 1999, from $8.1 million for
the year ended June 30, 1998. This decrease was due principally to a decrease in
the ratio of average interest earning assets to average interest bearing
liabilities, and a decrease in yield on interest earning assets.
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.
Provision for Losses. The Company maintains an allowance for loan
losses, which was $725,000 at June 30, 1999, in accordance with generally
accepted accounting principles. The allowance exists to absorb losses inherent
in the Company's overall loan portfolio. In addition to historical loss
experience, the Company considers other factors that are likely to cause loan
losses, including changes in economic and business conditions and developments,
changes in the nature and volume of the portfolio, trends in the level of past
due and classified loans and the status of nonperforming loans. The Company's
provision for loan losses decreased to $39,000 for the year ended June 30, 1999,
from $192,000 for the year ended June 30, 1998. The Company's allowance for loan
losses as a percentage of nonperforming loans was 26.2% and 28.7% at June 30,
1999 and 1998, respectively, and the Company's nonperforming loans as a
percentage of total loans was 1.4% at June 30, 1999 and 1.3% at June 30, 1998.
At June 30, 1999, nonperforming loans included a $2.5 million commercial
mortgage loan which matured in June 1998, and has not been repaid. The borrower
has declared bankruptcy, and the scheduled foreclosure proceedings have been
temporarily suspended. Based on a current appraisal and other factors, the
Company believes that it will not incur a material loss on this loan. The
Company also believes that the allowance for loan losses at June 30, 1999 was
adequate on an overall basis.
Noninterest Income. Noninterest income increased by $50,000 to $400,000
for the year ended June 30, 1999, from $350,000 for the year ended June 30,
1998. The increase was due principally to increases in the cash surrender value
of life insurance investments.
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 Expense. Noninterest expense decreased by $254,000, to $2.8
million for the year ended June 30, 1999, from $3.1 million for the year ended
June 30, 1999. Compensation and employee benefits decreased by $196,000, to $1.6
million for the year ended June 30, 1999, from $1.8 million for the prior year.
The decrease was due principally to a decrease of $116,000 in Employee Stock
Ownership Plan ("ESOP") contribution expense as a result of decreases in the
price of ESOP shares, the basis used to determine the expense. Other decreases
in compensation and employee benefits were primarily the result of the
retirement of an officer. Advertising decreased due to a decreased emphasis on
advertising.
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 a
one-time SAIF assessment of $1.4 million during the year ended June 30, 1997.
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. Other increases in
compensation and employee benefits were the result of additional staffing and
7
<PAGE>
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, the ratio of
noninterest expenses to average assets was 0.91%, 1.06% and 1.05% for the years
ending June 30, 1999, 1998 and 1997, respectively.
The provision for income taxes was approximately $1.9 million for the
years ended June 30, 1999 and 1998. The effective tax rates were 35.3% and 36.4%
for the years ending June 30, 1999 and 1998, respectively. The decrease in the
effective rate in 1999 was due to lower state income taxes.
The provision 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 in the effective rate
in 1998 was due to lower state income taxes.
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).
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,
---------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- -----------------------------
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>
Mortgage loans(1)............ $190,836 $ 14,007 7.34% $ 177,817 $ 13,376 7.52% $159,899 $ 12,134 7.59%
Consumer and other loans..... 4,535 329 7.25 5,065 359 7.09 4,422 307 6.94
Mortgage-backed securities... 13,210 917 6.94 19,604 1,423 7.26 25,829 1,862 7.21
Investment securities........ 54,322 3,647 6.71 46,311 3,111 6.72 54,006 3,710 6.87
Interest-earning deposits(2). 28,931 1,403 4.85 27,161 1,538 5.66 22,100 1,206 5.46
Other investments(3)......... 13,221 539 4.08 9,424 502 5.33 5,995 387 6.46
-------- --------- ------- --------- --------- ------- -------- --------- -------
Total interest-earning
assets.................... 305,055 20,842 6.83 285,382 20,309 7.12 272,252 19,606 7.20
--------- ------- --------- ------- --------- -------
Noninterest-earning assets..... 8,353 7,046 5,807
-------- --------- --------
Total assets............... $313,408 $ 292,428 $278,059
======== ========= ========
Interest-bearing liabilities:
Savings deposits............. $257,942 12,965 5.03 $ 238,272 12,114 5.09 $227,785 11,549 5.07
Other borrowed funds......... 518 44 8.49 616 57 8.28 713 64 8.98
-------- --------- ------- --------- --------- ------- -------- --------- -------
Total interest-bearing
liabilities............... 258,460 13,009 5.03 238,888 12,171 5.09 228,498 11,613 5.08
--------- ------- --------- ------- --------- -------
Noninterest-bearing
liabilities................... 5,800 5,331 4,572
-------- --------- --------
Total liabilities.......... 264,260 244,219 233,070
Stockholders' equity........... 49,148 48,209 44,989
-------- --------- --------
Total liabilities and
stockholders' equity....... $313,408 $ 292,428 $278,059
======== ========= ========
Net interest income............ $ 7,833 $ 8,138 $ 7,993
========= ========= =========
Net interest rate spread(4).... 1.80% 2.03% 2.12%
======= ======= =======
Net interest margin(5)......... 2.57% 2.85% 2.94%
======= ======= =======
Ratio of average interest-
earning assets to average
interest-bearing
liabilities.................. 118.03% 119.46% 119.15%
======= ======= =======
</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,
------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------------------- -----------------------------------------
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>
Mortgage loans (1) ....................... $ 979 $ (320) $ (28) $ 631 $ 1,360 $ (112) $ (6) $ 1,242
Consumer and other loans ................. (38) 8 -- (30) 45 6 1 52
Mortgage-backed securities ............... (464) (62) 20 (506) (449) 13 (3) (439)
Investment securities .................... 538 (5) 3 536 (529) (81) 11 (599)
Interest earning deposits (2) ............ 100 (220) (15) (135) 276 44 12 332
Other investments (3) .................... 202 (117) (48) 37 222 (68) (39) 115
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ............ 1,317 (716) (68) 533 925 (198) (24) 703
------- ------- ------- ------- ------- ------- ------- -------
Interest expense ........................... 996 (143) (15) 838 528 23 7 558
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income .............. $ 321 $ (573) $ (53) $ (305) $ 397 $ (221) $ (31) $ 145
======= ======= ======= ======= ======= ======= ======= =======
</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 by 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, 1999.
<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>
300 20,485 (31,198) (60) 6.86 (859)
200 29,907 (21,776) (42) 9.66 (579)
100 39,577 (12,106) (23) 12.33 (311)
Static 51,683 -- -- 15.45 --
(100) 55,152 3,469 7 16.24 79
(200) 57,694 6,011 12 16.77 132
(300) 59,155 7,472 14 17.03 158
</TABLE>
The above table indicates that at June 30, 1999, 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 the 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 requires 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 Bank is required to maintain minimum levels of liquid assets as
defined by Office of Thrift Supervision ("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%. The Bank's liquidity ratio averaged 43.2% during
the quarter ended June 30, 1999. The Bank 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 Bank also
adjusts liquidity as appropriate to meet its asset and liability management
objectives.
The Bank'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 Bank manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Bank invests in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
Assets qualifying for liquidity outstanding at June 30, 1999, amounted to $112.2
million. For additional information about cash flows from the Bank's operating,
financing, and investing activities, see Consolidated Statements of Cash Flows
included in the Consolidated Financial Statements.
A major portion of the Bank'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 Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds; however, the Bank has never borrowed funds from the FHLB.
At June 30, 1999, the Bank had outstanding loan commitments of $6.4
million. This amount does not include $16.7 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,
1999, totaled $99 million. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Bank.
At June 30, 1999, the Bank exceeded OTS capital requirements. Set forth
below is a summary of the Bank's compliance with the following OTS capital
standards as of June 30, 1999.
<TABLE>
<CAPTION>
Minimum 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, 1999:
<S> <C> <C> <C> <C> <C> <C>
Tier I core capital............... $46,062 14.1% $13,109 4.0% $16,386 >5.0%
Tier I risk-based capital......... 46,062 28.7 6,418 4.0 9,627 >6.0
Total risk-based capital.......... 48,520 30.2 12,837 8.0 16,046 >10.0
</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.
12
<PAGE>
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 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
recognize 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 of fiscal years beginning after June 15, 2000. 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 of
SFAS No. 133 is encouraged but it may not be applied retroactively to financial
statements of prior periods. Management has not determined when it will adopt
the provisions of SFAS No. 133, but believes that adoption 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 following information constitutes "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act.
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 ("Y2K") 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. The Board of Directors of the
Company formed a Y2K Project Team to address how the Bank will prepare for the
Y2K. The Project Team, with the strong support and involvement of senior
management, developed an Action Plan comprising of five phases; assessment,
evaluation, renovation, validation and implementation. The Company has
substantially completed all of the five phases for its internal systems. The
Company contracts with service bureaus to provide the majority of its data
processing and is dependent upon purchased application software. Management
believes that all "mission critical" systems have been identified and have been
tested for Y2K compliance. Bank personnel have participated with the major
provider of our systems in a test of our equipment and our connections to the
data center. Some of the smaller systems were tested by other institutions by
proxy, as defined by the regulators. The Company believes that the potential
effects on operations from Y2K issues can and will be addressed prior to the
Y2K. However, unforeseen circumstances could arise, disrupting normal business
operations. To this end, the Company has adopted a contingency plan to address
alternative methods to
13
<PAGE>
enable the Company to continue to offer basic services to its customers.
Extensive training of personnel and testing of the contingency plan have begun
and will continue throughout 1999. There can be no assurance that the Company's
contingency plan will fully mitigate the effects of such potential failures. The
Company has contacted its commercial borrowers and has been informed that they
are either compliant or in process of becoming compliant in connection with the
Year 2000 issue. As commercial loans represent less than 2% of its assets, the
Company believes that the effect of the Year 2000 issue on the Company's
commercial borrowers will not have an adverse effect on the Company in general.
The Company has not incurred any material costs, and management believes that it
will incur costs of no more than $25,000 in connection with the Y2K issue,
although there can be no assurances in this regard.
Stock Repurchase Plan To Repurchase Common Stock
As of June 30, 1999, the Company was authorized to repurchase up to
475,000 shares of its Common Stock pursuant to its Stock Repurchase Plan. During
the years ended June 30, 1999, and 1998, the Company repurchased 292,736 and
39,205 shares at an average cost of $13.56 and $19.70 per share, respectively.
SELECTED QUARTERLY FINANCIAL DATA
A summary of selected quarterly financial data for the years ended June
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Fiscal 1999
- -----------
Interest income.................. $ 5,267 $ 5,147 $ 5,149 $ 5,279
Net interest income.............. 2,069 1,915 1,904 1,945
Provision for losses............. 29 2 -- 8
Income before provision
for income taxes............... 1,437 1,330 1,268 1,318
Net income....................... 923 856 818 867
========= ======== ========= ========
Net income per common share:
Basic.......................... $ .18 $ .17 $ .16 $ .18
Diluted........................ .18 .17 .16 .18
========= ======== ========= ========
Fiscal 1998
- -----------
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
========= ======== ========= ========
</TABLE>
14
<PAGE>
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, 1999, the Company had 5 registered
market makers, 499 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
4,810,656 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 1,510,656 shares.
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 on January 21, 1998, the
Bank's common stock. Information is presented for each quarter of the previous
two fiscal years.
Fiscal Year Ended Cash Dividends
June 30, 1999 High Low Declared
- ---------------------- ------------- ------------- ---------------
First quarter $ 18.88 $ 15.50 $ .14
Second quarter 15.75 11.75 .14
Third quarter 14.75 12.00 .14
Fourth quarter 12.50 10.75 .14
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 June 30, 1999, the most
recent notification categorized the Bank as "well-capitalized." Accordingly,
under the OTS capital distribution regulations, the Bank would be permitted to
pay, upon notice to the OTS, dividends during any calendar year up to 100
percent of its net income during that calendar year, plus its retained net
income for the preceding two years.
In addition to the foregoing, earnings of the Company 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 Company on the amount of
earnings
15
<PAGE>
removed from the reserves for such distributions. The Company intends to make
full use of this favorable tax treatment and does not contemplate any
distribution by the Company in a manner that would create federal tax liability.
The Mutual Holding Company has waived the receipt of all dividends paid
by the Company. OTS regulations require the Mutual Holding Company to notify the
OTS of any proposed waiver of the receipt of 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 is
considered as a restriction on the retained earnings of the savings association
in 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 No. 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.
16
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
- --------------
The Annual Meeting of Stockholders will be held at 4:00 p.m., on November 3,
1999, 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 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, 1999,
will be furnished without charge to stockholders as of September 10, 1999, upon
written request to the Secretary, Leeds Federal Bankshares, Inc., 1101 Maiden
Choice Lane, Baltimore, Maryland 21229.
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,
1999 and 1998, and the related consolidated statements of income and
comprehensive income, stockholders' equity, and cash flows for each of the years
in the three-year period ended June 30, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Baltimore, Maryland
August 13, 1999
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
1999 1998
------------ -----------
Assets
Cash, including interest-bearing deposits of
$4,964,126 in 1999 and $11,906,061 in 1998 ....... $ 10,057,442 13,675,554
Short-term investments ............................. 12,941,254 4,776,681
Secured short-term loans to commercial banks ....... 10,011,970 18,405,234
Securities available for sale, amortized cost of
$2,731,760 and $4,731,760, respectively (note 3) . 6,551,478 7,906,186
Investment securities held to maturity (fair
value of $63,428,635 in 1999 and $39,896,283
in 1998) (note 4) ................................ 66,167,181 39,984,056
Mortgage-backed securities held to maturity
(fair value of $10,214,065 in 1999 and
$16,820,973 in 1998) (note 5) .................... 10,008,111 16,411,813
Loans receivable, net (note 6) ..................... 203,886,170 190,181,247
Investment in Federal Home Loan Bank of Atlanta
stock, at cost (note 10) ......................... 1,935,700 2,377,200
Property and equipment, net (note 7) ............... 1,484,620 851,265
Cash surrender value of life insurance (note 11) ... 6,399,473 6,132,929
Accrued interest receivable ........................ 1,994,604 1,833,318
Prepaid expenses and other assets .................. 204,020 201,208
------------ -----------
$331,642,023 302,736,691
============ ===========
Liabilities and Stockholders' Equity
Liabilities:
Savings accounts (note 8) ........................ $274,625,611 245,269,602
Borrowed funds-- Employee Stock Ownership
Plan (note 12) ................................. 470,813 552,000
Advance payments by borrowers for taxes,
insurance and ground rents ..................... 5,203,532 5,006,020
Federal and state income taxes (note 9):
Currently payable .............................. 107,577 133,676
Deferred ....................................... 1,393,803 1,296,001
Accrued expenses and other liabilities
(notes 11 and 13) .............................. 1,336,275 1,171,882
------------ -----------
Total liabilities .......................... 283,137,611 253,429,181
------------ -----------
Stockholders' equity (notes 10, 12, 16 and 18):
Common stock, $1 par value; 20,000,000 shares
authorized; 5,195,597 shares issued in 1999
and 1998 ....................................... 5,195,597 5,195,597
Additional paid-in-capital ....................... 9,367,161 9,247,010
Unearned employee stock ownership plan shares .... (390,682) (487,891)
Treasury stock, at cost; 331,941 and 39,205
shares, respectively ........................... (4,740,869) (772,430)
Retained income, substantially restricted ........ 36,734,317 34,162,743
Accumulated other comprehensive income ........... 2,338,888 1,962,481
------------ -----------
Total stockholders' equity ................. 48,504,412 49,307,510
------------ -----------
Commitments (notes 11, 12 and 14)
------------ -----------
$331,642,023 302,736,691
============ ===========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Income and Comprehensive Income
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
----------- ---------- ----------
Interest income:
First mortgage and other loans ........ $14,336,211 13,734,747 12,440,362
Mortgage-backed securities ............ 917,074 1,423,221 1,862,074
Investment securities and short-term
investments ......................... 5,588,307 5,150,921 5,303,280
----------- ---------- ----------
Total interest income ............. 20,841,592 20,308,889 19,605,716
----------- ---------- ----------
Interest expense:
Savings accounts (note 8) ............. 12,965,300 12,114,148 11,548,634
Other ................................. 43,489 56,971 64,473
----------- ---------- ----------
Total interest expense ............ 13,008,789 12,171,119 11,613,107
----------- ---------- ----------
Net interest income ............... 7,832,803 8,137,770 7,992,609
Provision for loan losses (note 6) ...... 39,412 191,705 151,240
----------- ---------- ----------
Net interest income after
provision for loan losses ....... 7,793,391 7,946,065 7,841,369
----------- ---------- ----------
Noninterest income:
Service fees and charges .............. 132,219 137,190 130,202
Other ................................. 268,175 212,889 140,288
----------- ---------- ----------
400,394 350,079 270,490
----------- ---------- ----------
Noninterest expense:
Compensation and employee benefits .... 1,573,399 1,769,715 1,528,280
Occupancy expense ..................... 221,527 195,151 197,067
SAIF deposit insurance premiums
(note 10) ........................... 222,022 222,147 1,755,113
Advertising ........................... 127,933 208,165 171,385
Other ................................. 696,020 699,885 636,941
----------- ---------- ----------
2,840,901 3,095,063 4,288,786
----------- ---------- ----------
Income before provision
for income taxes ................ 5,352,884 5,201,081 3,823,073
Provision for income taxes (note 9) ..... 1,889,368 1,895,072 1,457,942
----------- ---------- ----------
Net income ........................ 3,463,516 3,306,009 2,365,131
Other comprehensive income net of tax:
Unrealized gains on securities
available-for-sale, net ............. 376,407 554,353 687,454
----------- ---------- ----------
Comprehensive income .............. $ 3,839,923 3,860,362 3,052,585
=========== ========== ==========
Net income per share of common stock
(note 17):
Basic ............................... $ 0.69 0.65 0.46
Diluted ............................. 0.69 0.64 0.46
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Unearned
employee
stock Retained Accumu- Total
Additional ownership Treasury income, lated other stock-
Common paid-in plan stock, substantially comprehen- holders'
stock capital shares at cost restricted sive income equity
---------- ---------- --------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 .... $5,171,993 8,658,586 (700,380) -- 30,341,307 720,674 44,192,180
Compensation expense--ESOP .. -- 63,663 109,080 -- -- -- 172,743
Compensation expense--MRP ... -- 92,287 -- -- -- -- 92,287
Amortization of net
unrealized holding loss ... -- -- -- -- (15,996) 15,996 --
Other comprehensive income .. -- -- -- -- -- 671,458 671,458
Exercise of stock options ... 10,104 73,442 -- -- -- -- 83,546
Dividends ($.72 per share) .. -- -- -- -- (836,008) -- (836,008)
Net income .................. -- -- -- -- 2,365,131 -- 2,365,131
---------- --------- -------- ---------- ---------- --------- ----------
Balance at June 30, 1997 .... 5,182,097 8,887,978 (591,300) -- 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
Purchases of treasury stock . -- -- -- (772,430) -- -- (772,430)
---------- --------- -------- ---------- ---------- --------- ----------
Balance at June 30, 1998 .... $5,195,597 9,247,010 (487,891) (772,430) 34,162,743 1,962,481 49,307,510
Compensation expense--ESOP .. -- 108,244 97,209 -- -- -- 205,453
Compensation expense--MRP ... -- 11,907 -- -- -- -- 11,907
Other comprehensive income .. -- -- -- -- -- 376,407 376,407
Dividends ($.56 per share) .. -- -- -- -- (891,942) -- (891,942)
Net income .................. -- -- -- -- 3,463,516 -- 3,463,516
Purchases of treasury stock . -- -- -- (3,968,439) -- -- (3,968,439)
---------- --------- -------- ---------- ---------- --------- ----------
Balance at June 30, 1999 .... $5,195,597 9,367,161 (390,682) (4,740,869) 36,734,317 2,338,888 48,504,412
========== ========= ======== ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................. $ 3,463,516 3,306,009 2,365,131
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of loan fees .................. (218,168) (98,772) (80,728)
Provision for loan losses .................. 39,412 191,705 151,240
Accretion of premiums (discounts) on
investment securities and mortgage-
backed securities ........................ (10,763) (18,835) (54,991)
Loss (gain) on sale of assets, net ......... 2,190 (1,806) --
Depreciation ............................... 133,791 125,639 121,209
Noncash compensation under stock-
based benefit plans ...................... 217,360 369,021 265,030
Deferred income tax benefit ................ (171,083) (86,626) (134,722)
Increase in accrued interest receivable .... (161,286) (44,708) (2,646)
Increase (decrease) in income taxes
currently payable ........................ (26,099) (202,165) 207,601
Increase in accrued expenses and
other liabilities ........................ 260,991 329,633 69,472
Increase in unearned loan fees ............. 155,797 110,922 282,353
Decrease (increase) in prepaid expenses
and other assets ......................... (2,812) (14,333) 93,488
Amortization of net unrealized
holding loss ............................. -- -- (15,996)
----------- ----------- -----------
Net cash provided by
operating activities ................. 3,682,846 3,965,684 3,266,441
----------- ----------- -----------
Cash flows from investing activities:
Purchases of securities available for sale . (1,000,000) (1,175,000) (300,000)
Maturities of securities available for sale 3,000,000 2,200,000 --
Purchase of investment securities
held to maturity ......................... (69,225,000) (35,903,264) (6,399,906)
Maturity of investment securities
held to maturity ......................... 43,041,421 38,888,255 14,728,283
Sale of Federal Home Loan Bank of
Atlanta stock ............................ 441,500 -- --
Loan disbursements, net of repayments ...... (13,681,964) (16,289,600) (22,372,160)
Mortgage-backed securities held to
maturity principal repayments ............ 6,414,919 5,769,485 6,790,616
Purchases of property and equipment ........ (769,336) (117,276) (34,267)
Sale of property and equipment ............. -- 6,001 --
Investment in life insurance policies ...... (266,544) (2,979,736) (134,662)
Sale of ground rents owned ................. -- 39,500 1,600
----------- ----------- -----------
Net cash used in investing activities .. (32,045,004) (9,561,635) (7,720,496)
----------- ----------- -----------
</TABLE>
(Continued)
F-5
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Payment of dividends ....................... (988,540) (973,322) (836,008)
Repayment of borrowed funds ................ (81,187) (96,000) (96,000)
Net increase in savings accounts ........... 29,356,009 12,679,593 10,443,991
Increase in advance payments
by borrowers for taxes, insurance and
ground rents ............................. 197,512 201,960 243,568
Purchases of treasury stock ................ (3,968,439) (772,430) --
Exercise of stock options .................. -- 106,920 83,546
----------- ----------- -----------
Net cash provided by
financing activities ................. 24,515,355 11,146,721 9,839,097
Net increase (decrease) in cash
and cash equivalents ................. (3,846,803) 5,550,770 5,385,042
Cash and cash equivalents at beginning of year 36,857,469 31,306,699 25,921,657
----------- ----------- -----------
Cash and cash equivalents at end of year ..... $33,010,666 36,857,469 31,306,699
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(1) Description of business, Summary of Significant Accounting Policies and
Other Matters
(a) Description of Business and Reorganization
Leeds Federal Bankshares, Inc. (the Company) is a federally chartered
corporation which owns all of the issued and outstanding common stock
of Leeds Federal Savings Bank (the Bank), a federally-chartered
savings bank that conducts its operations from a single facility in
Arbutus in Baltimore County, Maryland. At June 30, 1999, approximately
64% of the issued shares of common stock of the Company were held by
Leeds Federal Bankshares, M.H.C. (MHC), a federal mutual holding
company.
The primary business of the 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.
(b) Basis of Presentation
The consolidated financial statements include the accounts of the
Company, the Bank and its wholly owned subsidiary, Leeds Investment
Corporation. 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 and disclosures of contingent assets
and liabilities as of the dates of the statements of financial
condition and the reported amounts of income and expenses for the
periods. 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 processes, 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 examinations.
(c) Short-Term Investments
Short-term investments, which consist of money market accounts, are
carried at cost which approximates fair value.
(d) Secured Short-Term Loans to Commercial Banks
Secured short-term loans to commercial banks, which consist of Federal
funds sold, are carried at cost which approximates fair value.
Generally, Federal funds are purchased and sold for one-day periods.
(Continued)
F-7
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(e) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Additions and
betterments are capitalized, and charges for repairs and maintenance
are expensed as 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.
(f) Loan Fees
Loan origination and commitment fees are deferred and amortized into
income over the contractual lives of the related loans using the
interest method. Under certain circumstances, commitment fees are
recognized over the commitment period or upon the expiration of the
commitment. Direct loan origination costs are deferred and recognized
as a reduction of yield over the contractual lives of the related
loans using the interest method. Deferred fees and costs are combined
where applicable and the net amount is amortized.
(g) Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the
lower of cost or fair value and subsequently at the lower of cost or
fair value, less estimated costs to sell. Costs relating to holding
real estate are charged against income, while costs relating to
improving real estate are capitalized until a salable condition is
reached.
(h) Income Taxes
Deferred income taxes are accounted for using the asset and liability
method. Under this 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. 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.
Qualified thrift lenders such as the Bank are not required to provide
a deferred tax liability for bad debt reserves for tax purposes 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, 1999. This
bad debt reserve would become taxable if certain conditions are met by
the Bank.
(i) Loans Receivable
Loans are stated at the amount of unpaid principal reduced by unearned
income and the allowance for credit losses. Interest on 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. Interest accrued prior to a loan becoming
90 days past due is not retained in income. Any interest ultimately
collected on such loans is recorded in income in the period of
recovery.
(Continued)
F-8
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
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
economic conditions, the status of nonperforming loans, and other
relevant factors. Loans or portions thereof are charged off when
considered, in the opinion of management, uncollectible.
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.
In accordance with SFAS No. 114 Accounting by Creditors for Impairment
of a Loan (SFAS No. 114), impairment of a loan is measured based 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. If the measure of the impaired loan is less than the
recorded investment in the loan, an impairment is recognized through a
valuation allowance. SFAS No. 114 does not apply to large groups of
smaller balance homogenous loans, including residential mortgage loans
and consumer installment loans, that are collectively evaluated for
impairment.
(j) Investment Securities and Mortgage-Backed Securities
Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and recorded at
amortized cost. Debt 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, net of the related tax effects, excluded
from income and reported as an item of other comprehensive income
until realized. Fair value is determined based on bid prices published
in financial newspapers or bid quotations received from securities
dealers. Realized gains or losses on the sales of investments are
determined 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.
(k) Stock-Based Compensation
The Company uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is
recognized for awards of shares of common stock to employees only if
the quoted market price of the stock at the grant date (or other
measurement date, if later) is greater than the amount the employee
must pay to acquire the stock. Compensation cost is recorded on a
pro-rata basis as the employees perform the services required to
acquire the stock.
The Company has established an Employee Stock Ownership Plan (ESOP)
for its employees. The Company recognizes the costs associated with
the ESOP in accordance with provisions of AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans.
Accordingly, compensation expense is recorded based on the market
value of shares committed-to-be-released to the ESOP for allocation to
participants for services rendered.
(Continued)
F-9
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(l) 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
presentation of comprehensive income and its components in financial
statements. Comprehensive income includes all changes in stockholders'
equity during a period, except those relating to investments by and
distributions to stockholders. The Company's comprehensive income
consists of net earnings and unrealized gains and losses on securities
available for sale and is presented in the statements of income and
comprehensive income. Accumulated other comprehensive income is
displayed as a separate component of stockholders' equity.
(m) Cash Equivalents and Cash Flow Information
For purposes of the consolidated statement of cash flows, all highly
liquid investments with original maturities of three months or less
are considered to be cash equivalents. Cash equivalents include
interest bearing deposits, money market accounts, secured short-term
loans to commercial banks and securities purchased under agreements to
resell.
The Company made income tax payments of approximately $2,169,000,
$2,184,000 and $1,375,000 in 1999, 1998 and 1997, respectively. The
Company paid approximately $13,012,000, $12,159,000 and $11,613,000 in
interest on deposits and other borrowings in 1999, 1998 and 1997,
respectively.
(n) Reclassifications
Certain amounts for 1998 and 1997 have been reclassified to conform to
the 1999 presentation.
(2) Securities Purchased Under Agreements to Resell
The Bank periodically 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.
The securities underlying the agreements are generally book entry
securities which are delivered by appropriate entry in the Bank's account
maintained at a commercial bank under a written custodial agreement that
explicitly recognizes the Bank's interest in the securities. There were no
securities purchased under agreements to resell at June 30, 1999 or 1998
and the Bank did not enter into any repurchase agreements in 1999.
Securities purchased under agreements to resell averaged $3,412,000 and
$3,654,000 during 1998 and 1997, respectively. The maximum amounts
outstanding at any month-end were $7,036,728 and $5,517,903 during 1998 and
1997, respectively.
(Continued)
F-10
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(3) Securities Available for Sale
The amortized cost and fair value of securities available for sale are
summarized as follows at June 30:
<TABLE>
<CAPTION>
1999
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government and agency obligations
due:
Beyond 5 years but within 10 years . $ 500,000 938 -- 500,938
Beyond 10 years .................... 2,075,000 -- (42,956) 2,032,044
Other equity securities ................ 100,000 -- (32,000) 68,000
Federal Home Loan Mortgage Corporation
preferred stock ...................... 56,760 3,893,736 -- 3,950,496
---------- ---------- ------- ---------
$2,731,760 3,894,674 (74,956) 6,551,478
========== ========== ======= =========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ======= =========
</TABLE>
(Continued)
F-11
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(4) Investment Securities Held to Maturity
The amortized cost and fair value of investment securities are summarized
as follows at June 30:
1999
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
----------- ---------- ---------- ----------
U.S. Government and agency
obligations ............. $66,167,181 47,331 (2,785,877) 63,428,635
=========== ======= ========== ==========
1998
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
----------- ---------- ---------- ----------
U.S. Government and agency
obligations ............. $39,984,056 122,160 (209,933) 39,896,283
=========== ======= ========== ==========
Investment securities mature as follows at June 30:
1999 1998
------------------------ ------------------------
Amortized Amortized
cost Fair value cost Fair value
----------- ---------- ----------- ----------
Due within 12 months ..... $ 575,879 575,879 2,491,898 2,489,368
Due beyond 12 months
but within 5 years ..... 1,600,000 1,633,283 3,800,000 3,850,700
Due beyond 5 years
but within 10 years .... 2,000,000 1,941,710 5,065,000 5,044,285
Due beyond 10 years ...... 61,991,302 59,277,763 28,627,158 28,511,930
----------- ---------- ---------- ----------
$66,167,181 63,428,635 39,984,056 39,896,283
=========== ========== ========== ==========
(Continued)
F-12
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(5) Mortgage-Backed Securities Held to Maturity
The amortized cost and fair value of mortgage-backed securities are
summarized as follows at June 30:
<TABLE>
<CAPTION>
1999
--------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Government National Mortgage
Association ...................... $ 6,676,664 168,976 -- 6,845,640
Federal National Mortgage
Association ...................... 1,478,778 10,523 -- 1,489,301
Federal Home Loan Mortgage
Corporation ...................... 1,245,714 16,047 -- 1,261,761
Collateralized Mortgage Obligation--
FNMA REMIC ....................... 606,955 10,408 -- 617,363
----------- ------- ------- ----------
$10,008,111 205,954 -- 10,214,065
=========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
=========== ======= ======= ==========
</TABLE>
(Continued)
F-13
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Contractual maturities of mortgage-backed securities are summarized as
follows at June 30:
1999 1998
------------------------ ------------------------
Amortized Amortized
cost Fair value cost Fair value
----------- ---------- ----------- ----------
Due within 12 months ..... $ 270,147 270,724 1,124,638 1,127,061
Due beyond 12 months
but within 5 years ..... 314,843 324,889 1,007,709 1,028,060
Due beyond 5 years but
within 10 years ........ 2,408,873 2,433,826 3,417,449 3,487,855
Beyond 10 years .......... 7,014,248 7,184,626 10,862,017 11,177,997
----------- ---------- ---------- ----------
$10,008,111 10,214,065 16,411,813 16,820,973
=========== ========== ========== ==========
(6) Loans Receivable
Loans receivable are summarized as follows at June 30:
1999 1998
------------ -----------
First mortgage loans:
One-to-four family residential ............... $186,040,721 167,421,983
Commercial ................................... 2,500,000 3,738,433
Construction ................................. 3,284,893 4,730,199
------------ -----------
191,825,614 175,890,615
Home equity loans .............................. 11,454,227 12,768,944
Loans secured by savings accounts .............. 436,745 438,831
Consumer loans ................................. 3,539,664 4,632,750
------------ -----------
207,256,250 193,731,140
Less:
Allowance for loan losses .................... 725,152 722,860
Unearned loan fees ........................... 739,800 802,171
Undisbursed portion of loans in process ...... 1,905,128 2,024,862
------------ -----------
Loans receivable, net .................... $203,886,170 190,181,247
============ ===========
Substantially all of the 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
(Continued)
F-14
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
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 and commercial 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 $2,764,000 and $2,519,000 at
June 30, 1999 and 1998, respectively. For the years ended June 30, 1999,
1998 and 1997, 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 $286,000, $281,000 and
$7,000, respectively. The actual interest income recorded on these loans
for the years ended June 30, 1999, 1998 and 1997 was approximately
$193,000, $211,000 and $4,000, respectively. At June 30, 1999 the Bank has
one impaired loan with an unpaid principal balance and average balance of
approximately $2,500,000. No interest income was recognized on this loan
during impairment and an allocation of approximately $250,000 was included
in the allowance for losses on loans relating to this loan at June 30,
1999.
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
1999 1998 1997
-------- ------- -------
Beginning balance ......................... $722,860 536,280 374,797
Provision for loan losses ................. 39,412 191,705 151,240
Charge-offs ............................... (37,120) (5,125) (19,757)
Transfer from provision for loss on deposit -- -- 30,000
-------- ------- -------
Ending balance ............................ $725,152 722,860 536,280
======== ======= =======
(7) Property and Equipment
Property and equipment are summarized as follows at June 30:
Useful life
1999 1998 in years
---------- --------- -----------
Land .................................... $ 729,749 68,449 --
Building and improvements ............... 925,789 864,388 50 years
Furniture, fixtures and equipment ....... 988,019 948,766 3-10 years
---------- --------- ==========
Total, at cost .................... 2,643,557 1,881,603
Less accumulated depreciation ........... 1,158,937 1,030,338
---------- ---------
Property and equipment, net ....... $1,484,620 851,265
========== =========
(Continued)
F-15
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(8) Savings Accounts
Savings accounts are summarized as follows at June 30:
Weighted
average
rate 1999 1998
------------- ----------------- -----------------
Type of Account 1999 1998 Amount % Amount %
--------------- ---- ---- ------------ --- ------------ ---
Certificates .......... 5.35% 5.66% $181,657,046 66% $151,731,316 62%
Anniversary bonus ..... 3.33% 3.33% 4,466,317 2 5,106,781 2
Money Market .......... 4.68% 4.78% 61,368,492 22 63,792,586 26
Passbook .............. 3.15% 3.35% 20,160,926 7 18,352,118 7
NOW and demand ........ 1.99% 1.86% 6,972,830 3 6,286,801 3
---- ---- ------------ --- ------------ ---
$274,625,611 100% $245,269,602 100%
============ === ============ ===
Certificate accounts mature as follows:
Within 12 months .................... $ 98,562,974 54% $ 91,165,891 60%
12 to 24 months ..................... 65,163,034 36 44,366,567 29
24 to 36 months ..................... 10,891,676 6 10,046,627 7
36 to 48 months ..................... 3,705,841 2 3,118,966 2
48 to 60 months ..................... 3,333,521 2 3,033,265 2
------------ --- ------------ ---
$181,657,046 100% $151,173,316 100%
============ === ============ ===
At June 30, 1999 and 1998, the Bank had customer deposits in savings
accounts of $100,000 or more of approximately $58,989,000 and $48,655,000,
respectively.
Interest expense on savings accounts consists of the following for the
years ended June 30:
1999 1998 1997
----------- ---------- ----------
Time deposits ...................... $ 9,132,231 7,905,150 7,212,849
Checking and money market .......... 3,237,150 3,607,568 3,734,784
Passbook and other ................. 595,919 601,430 601,001
----------- ---------- ----------
$12,965,300 12,114,148 11,548,634
=========== ========== ==========
(Continued)
F-16
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(9) Income Taxes
The provision for income taxes is comprised of the following for the years
ended June 30:
1999 1998 1997
---------- --------- ---------
Current:
Federal ....................... $1,852,003 1,767,197 1,326,458
State ......................... 208,448 214,501 266,206
---------- --------- ---------
2,060,451 1,981,698 1,592,664
---------- --------- ---------
Deferred:
Federal ....................... (140,074) (70,925) (110,303)
State ......................... (31,009) (15,701) (24,419)
---------- --------- ---------
(171,083) (86,626) (134,722)
---------- --------- ---------
$1,889,368 1,895,072 1,457,942
========== ========= =========
The net deferred tax liability at June 30, 1999 and 1998 consists of total
deferred tax assets of $729,237 and $793,358, respectively, and total
deferred tax liabilities of $2,123,040 and $2,089,359, respectively. The
tax effects of temporary differences between the financial reporting and
income tax basis of assets and liabilities relate to the following at June
30:
1999 1998
----------- ----------
Tax bad debt reserve in excess of base year ..... $ (299,897) (399,863)
Allowance for losses on loans ................... 280,054 279,169
Federal Home Loan Bank stock dividends .......... (304,291) (373,687)
Compensation plans .............................. 324,927 320,662
Unrealized gains on securities
available for sale, net ........................ (1,480,830) (1,211,945)
Other, net ...................................... 86,234 89,663
----------- ----------
$(1,393,803) (1,296,001)
=========== ==========
(Continued)
F-17
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Reconciliations between the provisions for income taxes computed by
multiplying income before income taxes by the statutory Federal income tax
rate (34%) and the actual provisions for income taxes are as follows for
the years ended June 30:
1999 1998 1997
---------- --------- ---------
Federal income taxes at
statutory rate ..................... $1,819,981 1,768,368 1,299,845
State income taxes, net of
Federal income tax benefit ......... 114,054 131,208 159,579
Other, net ........................... (44,667) (4,504) (1,482)
---------- --------- ---------
$1,889,368 1,895,072 1,457,942
========== ========= =========
(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 (FHLB) 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 FHLB 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 non-interest 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 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.
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, 1999, that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 1999, 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
Bank's category.
(Continued)
F-18
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Regulatory capital amounts and ratios for the Bank are as follows (in
thousands):
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized
For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
--------------- -------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ ---------------
As of June 30, 1999:
<S> <C> <C> <C> <C> <C> <C>
Tier I core capital(a) ............ $46,062 14.06% 13,109 4.00% 16,386 greater than 5%
Tier I risk-based capita(b) ....... 46,062 28.71% 6,418 4.00% 9,627 greater than 6%
Total risk-based capital(b) ....... 48,520 30.24% 12,837 8.00% 16,046 greater than 10%
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%
======= ===== ====== ==== ====== ===============
</TABLE>
- ----------
(a) Percentage of capital to ending assets.
(b) Percentage of risk-based capital to ending risk-weighted assets.
(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's contributions were
$37,936, $34,432 and $29,565 for the years ended June 30, 1999, 1998 and
1997, respectively.
The Bank has 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 is accrued over the participant's active employment.
The accrued liability under the SERP was $203,973 and $184,723 as of June
30, 1999 and 1998, respectively. Compensation cost related to the SERP was
$118,640, $116,468 and $103,877 for the years ended June 30, 1999, 1998 and
1997, respectively.
(Continued)
F-19
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
The Bank also has a deferred compensation agreement with one officer to
provide certain death and retirement benefits. The benefits payable are
accrued annually by charges to income amounting to $1,383 in 1999, 1998 and
1997. The accrued liability for these benefits amounted to $29,593 and
$28,210 at June 30, 1999 and 1998, respectively, and is included in accrued
expenses and other liabilities.
In 1997, the Bank established a Directors Retirement Plan which is a
nonqualified plan for income tax purposes. Under the plan, each director
will be paid 75% of annual directors' fees for ten years or until death
after retirement. The benefits payable are accrued annually and are based
on the retirement age selected by each director and an assumed 4% increase
in annual fees until retirement. The accrued liability under this plan was
$269,010 and $151,352 at June 30, 1999 and 1998, respectively, and is
included in accrued expenses and other liabilities. Compensation cost
related to this plan was $117,658, $105,414 and $45,938 for the years ended
June 30, 1999, 1998 and 1997, respectively.
The Bank also has an optional plan for the deferral of directors' fees
which is nonqualified for income tax purposes. The accrued liability under
this plan was $410,187 and $348,367 at June 30, 1999 and 1998,
respectively, and is included in accrued expenses and other liabilities.
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:
1999 1998
---------- ---------
Transamerica ................................. $3,341,297 3,218,642
American General ............................. 1,969,051 1,885,608
Connecticut Mutual ........................... 608,533 578,777
Pacific Mutual ............................... 480,592 449,902
---------- ---------
$6,399,473 6,132,929
========== =========
(12) Stock-Based Benefit Plans
Employees who attain the age of 21 and complete one year of service with
the Bank are eligible to participate in the Company's ESOP. Participants
are 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 received credit for service with the Bank prior to the
establishment of the ESOP.
In 1994 the ESOP borrowed $960,000 from an unrelated third party lender
under a ten year loan bearing interest at the Federal funds rate plus 2.5%
per annum, with payments of principal and interest due quarterly. Annual
principal payments are $96,000. The proceeds of the loan were used by the
ESOP to acquire 144,000 shares of the Bank's common stock upon its
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
(Continued)
F-20
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
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, 1999, 1998 and 1997 the Bank made contributions to the ESOP of
$134,790, $146,944 and $153,895, respectively.
The debt of the ESOP is recorded as debt of the Company and the shares
pledged as collateral are reported as unearned ESOP shares in the statement
of financial condition. 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 $38,790, $50,944 and $57,895, respectively, and
compensation expense of $205,453, $320,787 and $172,743, respectively,
related to the ESOP for the years ended June 30, 1999, 1998 and 1997.
Dividends on ESOP shares used for debt service were $40,963, $48,380 and
$50,204 for the years ended June 30, 1999, 1998 and 1997, 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:
1999 1998
-------- ---------
Allocated shares ............................... 78,417 63,286
Shares earned, but unallocated ................. 7,466 7,587
Unearned shares ................................ 58,117 73,127
-------- ---------
144,000 144,000
-------- ---------
Fair value of unearned shares at June 30 ....... $639,287 1,334,568
======== =========
In 1994 the Company established a Management Recognition Plan (MRP) to
retain personnel of experience and ability in key positions of
responsibility. Under the MRP, members of the Board of Directors and
certain executive officers of the Company were issued a total of 72,000
shares of common stock. Participants become one-fifth vested in the shares
awarded on January 1 of each year from 1995 to 1999. Compensation expense
related to the MRP was $11,907, $48,234 and $92,287 for the years ended
June 30, 1999, 1998 and 1997, respectively.
(13) Postretirement Benefits Other Than Pensions
The Bank offers a postretirement health care benefit plan to certain
Directors and employees. Net costs of the plan were $46,000 for each of the
years ended June 30, 1999, 1998 and 1997. The accrued liability for these
benefits was $147,000 and $112,000 at June 30, 1999 and 1998, respectively,
and is included in accrued expenses and other liabilities.
(Continued)
F-21
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(14) Financial Instruments
The Bank's exposure to credit loss in the event of nonperformance by the
other party to a 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, 1999:
Contract
amount
-----------
Undisbursed lines of credit on home equity loans ........... $16,729,000
Residential mortgage loans to be funded .................... 6,377,000
-----------
$23,106,000
===========
The Bank had outstanding mortgage loan commitments, exclusive of the
undisbursed portion of loans in process, of approximately $6,129,000 for
fixed rate loans and $248,000 for floating rate loans at June 30, 1999. The
interest rate range on fixed rate mortgage loan commitments was 6.38% to
7.38% 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 a commercial bank for up to
$2 million. There were no borrowings outstanding as of June 30, 1999.
(Continued)
F-22
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(15) Disclosures About Fair Value of Financial Instruments
The carrying value and estimated fair value of financial instruments are
summarized as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing
deposits .................... $10,057,442 10,057,000 13,675,554 13,676,000
Short-term investments ........ 12,941,254 12,941,000 4,776,681 4,777,000
Secured short-term loans to
commercial banks ............ 10,011,970 10,012,000 18,405,234 18,405,000
Securities available for sale . 6,551,478 6,551,000 7,906,186 7,906,000
Investment securities ......... 66,167,181 63,429,000 39,984,056 39,896,000
Mortgage-backed securities .... 10,008,111 10,214,000 16,411,813 16,821,000
Loans receivable .............. 203,886,170 202,890,000 190,181,247 193,438,000
Accrued interest receivable ... 1,994,604 1,995,000 1,833,318 1,833,000
Liabilities:
Savings accounts .............. 274,625,611 275,218,000 245,269,602 245,777,000
Borrowed funds ................ 470,813 471,000 552,000 552,000
Advances payments by
borrowers for taxes,
insurance and ground rents .. $ 5,203,532 5,204,000 5,006,020 5,006,000
=========== =========== =========== ===========
</TABLE>
Fair value estimates and the methods and assumptions used to determined
them are set forth below.
(a) 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 values
of U.S. Government and agency obligations, equity securities and
mortgage-backed securities are estimated based on published bid prices
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.
(Continued)
F-23
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(b) 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.
(c) 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 value (net of
penalty) or the 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.
(d) 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 their
carrying value.
(16) Stockholders' Equity
In March 1994, the members of Leeds Federal Savings Association (the
Association) 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 MHC. The
reorganization was consummated on April 29, 1994.
The principal purpose of the organization was to organize the Association
into a corporate form so that it would have 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 and the Company has the
authority to issue shares of capital stock to persons other than MHC for up
to 49.9% (a minority ownership interest) of the shares issued and
outstanding.
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 regulations establish three
tiers of institutions. An institution, such as the Bank, that exceeds all
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 its retained net income for the
preceding two years. Any additional capital distributions require OTS
approval.
(Continued)
F-24
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
MHC has waived receipt of its quarterly dividends, thereby reducing the
actual dividend payout by the Company in 1999 and prior years. The
dividends waived by MHC are considered as a restriction on the retained
earnings of the Bank. The amount of any dividend waived by MHC is available
for declaration as a dividend solely to MHC. At June 30, 1999, the
cumulative amount of such waived dividends was $7,781,400.
At June 30, 1999, the Company was authorized to repurchase up to 475,000
shares of common stock pursuant to its repurchase plan. During the years
ended June 30, 1999 and 1998, the Company purchased 292,736 and 39,205
shares, respectively, at an average cost per share of $13.56 and $19.70,
respectively.
(17) Net Income Per Share of Common Stock
Basic earning per share (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. 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>
1999 1998 1997
---------------------- --------------------- ---------------------
Basic Diluted Basic Diluted Basic Diluted
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income .............. $3,463,516 3,463,516 3,306,009 3,306,009 2,365,131 2,365,131
Dividends on unvested
common stock awards ... -- -- (7,872) (3,107) (13,824) (10,250)
---------- --------- --------- --------- --------- ---------
Adjusted net income used
in EPS calculations ... $3,463,516 3,463,516 3,298,137 3,302,902 2,351,307 2,354,881
========== ========= ========= ========= ========= =========
Weighted average shares
outstanding ........... 4,983,896 4,983,896 5,091,918 5,091,918 5,062,986 5,062,986
Dilutive securities:
Options ............... -- 64,867 -- 89,885 -- 41,888
Unvested common stock
awards .............. -- -- -- 8,716 -- 7,447
---------- --------- --------- --------- --------- ---------
Adjusted weighted average
shares used in EPS
calculations .......... 4,983,896 5,048,763 5,091,918 5,190,519 5,062,986 5,112,321
========== ========= ========= ========= ========= =========
</TABLE>
(Continued)
F-25
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(18) Stock Option Plan
In October 1994, the Company adopted a Stock Option Plan (Option Plan),
under which 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 options granted to directors vested at grant date, while the 108,000
options granted to 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 $7.92 per share. The options must be exercised within ten
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:
1999 1998 1997
------- ------- -------
Outstanding at beginning of year ......... 148,500 162,000 180,000
Granted .................................. -- -- --
Canceled ................................. -- -- (7,896)
Exercised ................................ -- (13,500) (10,104)
------- ------- -------
Outstanding at end of year ........... 148,500 148,500 162,000
------- ------- -------
Exercisable at end of year ............... 148,500 133,200 126,000
======= ======= =======
(Continued)
F-26
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(19) Condensed Financial Information (Parent Company Only)
Summarized financial information for the Company is as follows as of and
for the years ended June 30:
1999 1998
----------- ----------
Statements of Financial Condition
Cash ............................................ $ 222,926 25,663
Securities available for sale ................... 68,000 --
Deferred tax asset .............................. 12,352 --
Investment in Bank .............................. 48,421,166 49,540,472
----------- ----------
$48,724,444 49,566,135
=========== ==========
Accrued expenses and other liabilities .......... $ 220,032 258,625
Stockholders' equity ............................ 48,504,412 49,307,510
----------- ----------
..................................................... $48,724,444 49,566,135
=========== ==========
Statements of Income
Interest income ................................. $ 14,975 1,903
Equity in net income of subsidiary .............. 3,449,274 3,304,106
----------- ----------
Income before provision for income taxes 3,464,249 3,306,009
Provision for income taxes ...................... 733 --
----------- ----------
Net income .............................. $ 3,463,516 3,306,009
=========== ==========
Statements of Cash Flows
Cash flows from operating activities:
Net income .................................... $ 3,463,516 3,306,009
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiary ........ (3,449,274) (3,304,106)
----------- ----------
Net cash provided by operating activities 14,242 1,903
----------- ----------
Cash flows from investing activities:
Dividend distribution from bank ............... 5,240,000 850,000
Purchase of securities available for sale ..... (100,000) --
----------- ----------
Net cash provided by investing activities 5,140,000 850,000
----------- ----------
Cash flows from financing activities:
Payment of dividends .......................... (988,540) (260,730)
Purchases of treasury stock ................... (3,968,439) (772,430)
Exercise of stock options ..................... -- 106,920
Net proceeds of stock exchanged ............... -- 100,000
----------- ----------
Net cash used by financing activities ... (4,956,979) (826,240)
----------- ----------
Net increase in cash and cash equivalents 197,263 25,663
Cash and cash equivalents at beginning of year .. 25,663 --
----------- ----------
Cash and cash equivalents at end of year ........ $ 222,926 25,663
=========== ==========
F-27
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
Independent Auditors' Consent
The Board of Directors
Leeds Federal Bankshares, Inc.
We consent to the incorporation by reference in the Registration Statement (No.
333-44899) on Form S-8 of Leeds Federal Bankshares, Inc. of our report dated
August 13, 1999, relating to the consolidated statements of financial condition
of Leeds Federal Bankshares, Inc. and subsidiary as of June 30, 1999 and 1998,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1999, which report appears in the June 30, 1999 Annual
Report on Form 10-KSB of Leeds Federal Bankshares, Inc.
/s/ KPMG LLP
Baltimore, Maryland
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,093
<INT-BEARING-DEPOSITS> 4,964
<FED-FUNDS-SOLD> 10,012
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,551
<INVESTMENTS-CARRYING> 91,052
<INVESTMENTS-MARKET> 88,520
<LOANS> 203,886
<ALLOWANCE> 725
<TOTAL-ASSETS> 331,642
<DEPOSITS> 274,626
<SHORT-TERM> 471
<LIABILITIES-OTHER> 8,041
<LONG-TERM> 0
0
0
<COMMON> 5,196
<OTHER-SE> 43,308
<TOTAL-LIABILITIES-AND-EQUITY> 331,642
<INTEREST-LOAN> 14,337
<INTEREST-INVEST> 6,505
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 20,842
<INTEREST-DEPOSIT> 12,965
<INTEREST-EXPENSE> 13,009
<INTEREST-INCOME-NET> 7,833
<LOAN-LOSSES> 39
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,841
<INCOME-PRETAX> 5,353
<INCOME-PRE-EXTRAORDINARY> 3,464
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,464
<EPS-BASIC> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 2.6
<LOANS-NON> 2,800
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 723
<CHARGE-OFFS> 37
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 725
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 725
</TABLE>
