SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
----------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-23645
LEEDS FEDERAL BANKSHARES, INC
-----------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 52-2062351
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1101 Maiden Choice Lane, Baltimore, Maryland 21229
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(Address of principal executive offices)
Registrant's telephone number, including area code: 410-242-1234
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Former name, former address and former fiscal year, if changed since last report
Indicated by a check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 4,937,156 shares
of the Registrant's common stock outstanding as of May 1, 1999.
<PAGE>
LEEDS FEDERAL BANKSHARES, INC
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1999 (unaudited), and June 30, 1998 ...................... 1
Consolidated Statements of Income and Comprehensive Income (unaudited)
for the three months and nine months ended March, 1999 and 1998 .... 2
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended March 31, 1999 and 1998 ...................................... 3
Notes to Consolidated Financial Statements (unaudited) ............... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................ 8
PART II. OTHER INFORMATION ............................................... 12
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
LEEDS FEDERAL BANKSHARES,INC.
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
March 31, June 30,
1999 1998
------------ -----------
(unaudited) (audited)
Assets
- ------
Cash:
On hand and due from banks ..................... $ 1,865,412 1,769,493
Interest-bearing deposits ...................... 12,430,791 11,906,061
Short-term investments ........................... 4,925,375 4,776,681
Secured short-term loans to commercial banks ..... 19,007,560 18,405,234
Investment securities, net (held to maturity) .... 59,117,579 40,669,525
Investment securities, net (available for sale) .. 6,509,312 8,034,695
Mortgage backed securities, net (held to maturity) 11,436,851 16,514,383
Loans receivable, net ............................ 196,175,951 190,965,595
Investment in Federal Home Loan Bank of Atlanta
stock, at cost ................................. 2,377,200 2,377,200
Property and equipment, net ...................... 1,455,944 851,265
Cash surrender value of life insurance ........... 6,339,113 6,132,929
Prepaid expenses and other assets ................ 266,967 333,630
------------ -----------
$321,908,055 302,736,691
------------ -----------
Liabilities and Stockholders' Equity
- ------------------------------------
Savings accounts ................................. $265,848,472 245,269,602
Borrowed funds-Employee Stock Ownership Plan ..... 504,000 552,000
Advance payments by borrowers for taxes, insurance
and ground rents ............................... 3,808,171 5,006,020
Federal and state income taxes:
Currently payable .............................. 187,618 133,676
Deferred ....................................... 1,560,760 1,296,001
Accrued expenses and other liabilities ........... 1,250,231 1,171,882
------------ -----------
Total Liabilities ............................ 273,159,252 253,429,181
------------ -----------
Stockholders' Equity:
Common Stock $1 par value:
20,000,000 shares authorized; 5,195,597 shares
issued and 4,943,444 and 5,156,392 shares
outstanding .................................. 5,195,597 5,195,597
Additional paid-in capital ....................... 9,350,679 9,258,917
Employee stock ownership plan .................... (414,154) (487,891)
Management recognition plan ...................... -0- (11,907)
Treasury stock, at cost (252,153 shares and
39,205 shares) ................................. (3,827,107) (772,430)
Retained income, substantially restricted ........ 36,074,849 34,162,743
Accumulated other comprehensive income ........... 2,368,939 1,962,481
------------ -----------
Total Stockholders' Equity ................... 48,748,803 49,307,510
------------ -----------
$321,908,055 302,736,691
------------ -----------
See accompanying notes to consolidated financial statements.
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<PAGE>
LEEDS FEDERAL BANKSHARES, INC
Consolidated Statements of Income and Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31, Ended March 31,
----------------------- --------------------
1999 1998 1999 1998
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income:
First mortgage and other loans ...................... $10,837,239 10,244,123 3,530,935 3,505,603
Mortgage-backed securities .......................... 733,143 1,107,812 208,634 340,438
Investment securities and short term investments .... 3,992,352 3,842,790 1,409,245 1,245,234
----------- ---------- --------- ---------
Total interest income ............................. 15,562,734 15,194,725 5,148,814 5,091,275
----------- ---------- --------- ---------
Interest expense:
Savings accounts .................................... 9,645,274 9,007,802 3,235,966 3,021,146
Other ............................................... 30,156 42,920 9,069 14,029
----------- ---------- --------- ---------
Total interest expense ............................ 9,675,430 9,050,722 3,245,035 3,035,175
----------- ---------- --------- ---------
Net interest income ............................... 5,887,304 6,144,003 1,903,779 2,056,100
Provision for loan losses ........................... 30,916 10,886 -0- -0-
----------- ---------- --------- ---------
Net interest income after provision for loan losses 5,856,388 6,133,117 1,903,779 2,056,100
----------- ---------- --------- ---------
Noninterest income:
Service fees and charges ............................ 98,697 105,740 31,456 31,886
Other ............................................... 207,790 143,723 67,128 72,057
----------- ---------- --------- ---------
306,487 249,463 98,584 103,943
----------- ---------- --------- ---------
Noninterest expense:
Compensation and employee benefits .................. 1,191,123 1,341,327 407,582 446,464
Occupancy ........................................... 169,425 147,524 63,310 50,638
SAIF deposit insurance premiums ..................... 167,122 166,217 54,862 55,212
Advertising ......................................... 88,013 159,061 37,994 43,080
Other ............................................... 512,463 551,179 170,879 205,786
----------- ---------- --------- ---------
2,128,146 2,365,308 734,627 801,180
----------- ---------- --------- ---------
Income before provision for income taxes ............ 4,034,729 4,017,272 1,267,736 1,358,863
Provision for income taxes: ........................... 1,438,274 1,470,390 450,086 495,209
----------- ---------- --------- ---------
Net Income ........................................ 2,596,455 2,546,882 817,650 863,654
Changes in accumulated other comprehensinve income--
unrealized gains, (losses) on securities available
for sale, net ....................................... 406,458 567,596 (320,162) 240,022
----------- ---------- --------- ---------
Comprehensive income .................................. $ 3,002,913 3,114,478 497,488 1,103,676
----------- ---------- --------- ---------
Net income per share of common stock
Basic ............................................... $ .52 $ .50 $ .16 $ .17
------ ------ ------ ------
Diluted ............................................. $ .51 $ .49 $ .16 $ .17
------ ------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income ................................................. $ 2,596,455 2,546,882
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of loan fees, premiums and discounts, net . (185,378) (67,962)
Provision for loan losses .............................. 30,916 10,886
Accretion of premiums(discounts) on investments
securities and mortgage-backed securities, net ....... (31,765) (13,661)
Gain on sale of fixed asset ............................ -0- (1,800)
Depreciation ........................................... 102,488 77,864
Non-cash compensation under stock based benefit plans .. 177,406 270,340
(Increase)decrease in accrued interest receivable on
securities and loans receivable ...................... (53,904) 204,278
Increase (decrease) in income taxes currently payable .. 53,942 (178,472)
Increase in accrued expenses and other liabilities ..... 78,349 216,924
Increase (decrease) in unearned loan fees .............. (58,825) 4,038
(Increase) decrease in prepaid expenses and other assets 66,663 (42,075)
----------- -----------
Net cash provided by operating activities .......... 2,776,347 3,027,242
----------- -----------
Cash flows from investing activities:
Purchase of investment securities held to maturity ......... (60,680,000) (22,456,844)
Purchase of securities available for sale .................. (900,000) (1,175,000)
Maturity of investment securities held to maturity ......... 42,371,803 31,585,031
Maturity of securities available for sale .................. 3,000,000 700,000
Principal repayment of investment securities ............... -0- 6,623
Loan disbursements, net of repayments ...................... (4,932,532) (12,775,450)
Mortgage-backed securities held to maturity principal
repayments ............................................... 5,055,407 4,120,708
Purchases of property and equipment ........................ (707,167) (92,767)
Sale of property and equipment ............................. -0- 6,994
Sale of ground rents owned ................................. -0- 39,500
Investment in life insurance policies ...................... (206,184) (2,912,988)
----------- -----------
Net cash used in investing activities .............. (16,998,673) (2,954,191)
----------- -----------
</TABLE>
-3-
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Net increase in savings accounts .......................... 20,578,870 10,220,448
Decrease in advance payments by borrowers for
taxes, insurance and ground rents ....................... (1,197,849) (1,087,393)
Payment of dividends ...................................... (684,349) (732,707)
Purchase of treasury stock ................................ (3,054,677) (83,055)
Repayment of borrowed funds ............................... (48,000) (72,000)
----------- -----------
Net cash provided by financing activities .......... 15,593,995 8,245,293
----------- -----------
Net increase in cash and cash equivalents .................... 1,371,669 8,318,344
Cash and cash equivalents at beginning of period ............. 36,857,469 31,306,699
----------- -----------
Cash and cash equivalents at end of period ................... $38,229,138 39,625,043
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Leeds Federal Bankshares, Inc.(the Company) and its wholly owned subsidiary,
Leeds Federal Savings Bank. Leeds Investment Corporation (the Subsidiary), is a
wholly owned subsidiary of Leeds Federal Savings Bank (collectively, the Bank).
Adjustments, consisting of normal recurring adjustments, which, in the opinion
of management are necessary for a fair presentation of financial position and
results of operations have been recorded. The financial statements have been
prepared using the accounting policies described in the June 30, 1998 Annual
Report. The results of operations for the three months and nine months ended
March 31, 1999, are not necessarily indicative of the results that may be
expected for the entire year.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of financial condition
and income and comprehensive income for the period. Actual results could differ
significantly from those estimates.
(2) Net Income per Share of Common Stock
Basic earnings 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. Information related to the calculation of net
income per share of common stock is summarized as follows:
-5-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended March 31, Ended March 31,
1999 1998
---------------------- ---------------------
Basic Diluted Basic Diluted
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Income .......................... $2,596,455 2,596,445 2,546,882 2,546,882
Dividends on unvested common stock .. (4,032) (2,362) (5,861) (2,318)
---------- --------- --------- ---------
Adjusted net income used in EPS
calculations ...................... $2,592,423 2,594,093 2,541,021 2,544,564
---------- --------- --------- ---------
Weighted average shares outstanding . 5,024,652 5,024,652 5,086,817 5,086,817
Dilutive securities:
Options ........................... -0- 70,037 -0- 97,944
Unvested common stock awards ...... -0- -0- -0- 8,704
---------- --------- --------- ---------
Adjusted weighted-average shares used
in EPS computation ................ 5,024,652 5,094,689 5,086,817 5,193,465
---------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1999 1998
---------------------- ---------------------
Basic Diluted Basic Diluted
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Income .......................... $ 817,650 817,650 863,654 863,654
Dividends on unvested common stock .. -0- -0- (2,016) (732)
---------- --------- --------- ---------
Adjusted net income used in EPS
calculations ...................... $ 817,650 817,650 861,638 862,922
---------- --------- --------- ---------
Weighted average shares outstanding . 4,960,555 4,960,555 5,086,817 5,086,817
Dilutive securities:
Options ........................... -0- 61,511 -0- 103,206
Unvested common stock awards ...... -0- -0- -0- 9,172
---------- --------- --------- ---------
Adjusted weighted-average shares used
in EPS computation ................ 4,960,555 5,022,066 5,086,817 5,199,195
---------- --------- --------- ---------
</TABLE>
-6-
<PAGE>
(3) Dividends on Common Stock
On March 16, 1999, the Company declared a quarterly cash dividend of $.14
per share. The dividends were payable to stockholders of record as of April 7,
1999 and were paid on April 21, 1999. Leeds Federal Bankshares, M.H.C. (the
MHC), which owns 3,300,000 shares of stock in the Company, waived receipt of its
quarterly dividend, thereby reducing the actual dividend payout to approximately
$230,000. The dollar amount of dividends waived by the MHC is considered as a
restriction on the retained earnings of the Company. The amount of any dividend
waived by the MHC shall be available for declaration of a dividend solely to the
MHC. At March 31, 1999, the cumulative amount of such waived dividends was
$7,319,400.
(4) 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, 1999. Initial
application of this Statement should be as of the beginning of an entity's
fiscal quarter. On that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. Earlier application is
encouraged, but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS No. 133. It should not be applied retroactively to
financial statements of prior periods. Management has not determined when it
will adopt the provisions of SFAS No. 133 but believes that it will not have a
material effect on the Company's financial position or results of operations.
-7-
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
In addition to historical information, this Quarterly Report contains
forward-looking statements. The forward-looking statements contained in this
document are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in this section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers should not place undue reliance on these forward-looking statements, as
they reflect management's analysis as of the date of this report. The Company
has no obligation to update or revise these forward-looking statements to
reflect events or circumstances that occur after the date of this report.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange Commission,
including current reports filed on Form 8-K.
Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
Cash on hand and due from banks, interest bearing deposits, other liquid
investments and investment securities totaled approximately $106.2 million, an
increase of approximately $18.3 million from June 30, 1998 levels.
Mortgage-backed securities totaled $11.4 million, a decrease of $5.1 million,
due to repayments of principal. Loans receivable totaled $196.2 million, an
increase of $5.2 million, mainly in residential mortgages. The increase was
funded by increased savings deposits and the decrease in mortgage backed
securities.
Savings accounts increased approximately $20.5 million, to a total of
$265.8 million at March 31, 1999. Such increase was primarily attributable to
the general market interest rate trends. The Company has offered savings rates
that are competitive with other institutions. However, it has not relied on
brokered funds or negotiated jumbo certificates to maintain deposit levels.
The Company is subject to capital standards which generally require the
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the Tier 1 core capital requirement, the Tier 1 risk
based capital requirement and the total risk-based capital requirement. At March
31, 1999, the Company had Tier 1 core capital of $46.4 million, or 14.6% of
total adjusted assets, which was $33.7 million in excess of the requirement of
minimum core capital of $12.7 million, or 4.0% of total adjusted assets; Tier 1
risk-based capital of $46.4 million, or 30.9% of risk weighted assets, which was
$40.4 million in excess of the requirement of a minimum risk-based capital of 4%
of risk weighted assets; and total risk-based capital of $48.9 million, or 32.6%
of risk weighted assets, which was $36.9 million in excess of the requirement of
a minimum total risk-based capital of 8% of total risk weighted assets.
Comparison of Operating Results for Three and Nine Month Periods Ended
March 31, 1999 and 1998.
- ----------------------------------------------------------------------
The Company's net income for the three months ended March 31, 1999, totaled
$818,000, a decrease of $46,000, as compared to $864,000 for the three months
ended March 31, 1998. Such decrease was due primarily to a decrease in net
interest income, partially offset by a decrease in noninterest expenses. The
Company's net income for the nine months ended March 31, 1999, totaled $2.6
million, an increase of $50,000, or 1.9%, from net income of $2.5 million for
the nine months ended March 31, 1998. Such increase was due to an increase in
noninterest income and a decrease in noninterest expense, partially offset by a
decrease in net interest income.
-8-
<PAGE>
Net Interest Income
- -------------------
Interest income on loans remained relatively unchanged at $3.5 million for
the three months ended March 31, 1999, and March 31, 1998. The average yield on
loans for the three months ended March 31, 1999, decreased to 7.2%, from 7.6%
for the same period last year, while the balance of average loans increased by
$10.2 million to $195.9 million. Interest income on loans for the nine months
ended March 31, 1999, totaled $10.8 million, an increase of $593,000, as
compared to the nine months ended March 31, 1998. The average balances of loans
increased by $13.5 million, to $194.2 million, for the period, while the average
yield on loans decreased to 7.4%, from 7.6%. The decrease in the average yield
on loans was due principally to lower rates on newly originated mortgages and
the effect of a nonperforming $2.5 million commercial loan.
Interest income on mortgage-backed securities decreased by $131,000, or
38.5%, to $209,000 for the three months ended March 31, 1999, from $340,000
during the three months ended March 31, 1998. The average yield on
mortgage-backed securities decreased to 6.8%, from 7.3%, while the average
balance of mortgage-backed securities decreased by $6.7 million to $12.3 million
from $19.0 million, for the three months ended March 31, 1999, compared to the
same period last year. Interest income on mortgage-backed securities decreased
by $375,000, to $733,000 for the nine months ended March 31, 1999, as compared
to $1.1 million for the same period last year. The average yield on
mortgage-backed securities decreased to 7.0%, from 7.3%, while the average
balance of mortgage-backed securities decreased by $6.4 million to $14.0 million
from $20.4 million, for the nine months ended March 31, 1998.
Interest income on investment securities and short-term investments
("Investments") increased by $164,000, or 13.2%, to $1.4 million during the
three months ended March 31, 1999, from $1.2 million during the three months
ended March 31, 1998. This increase in interest income from Investments, was due
to a $21.8 million increase in average balance of Investments to $103.0 million
from $81.2 million, partially offset by a decrease in average yield of
Investments to 5.5%, from 6.1%. Interest on Investments increased by $150,000,
or 3.9%, to $4.0 million during the nine months ended March 31, 1999, from $3.8
million during the nine months ended March 31, 1998. Such increase was
attributable to an $11.0 million increase in average balance of Investments to
$92.8 million, from $81.8 million, partially offset by a decrease in average
yield of Investments to 5.7% from 6.3%.
Total interest expense increased by approximately $210,000 during the
quarter ended March 31, 1999 to $3.2 million from $3.0 million for the quarter
ended March 31, 1998. This increase was the result of an increase in average
interest bearing liabilities to $262.1 million from $240.8 million, while the
average rate paid on deposits remained relatively unchanged at 5.0%. For the
nine months ended March 31, 1999, total interest expense increased by $624,000
to $9.7 million, from $9.1 million for the nine months ended March 31, 1998. The
increase was the result of a $17.6 million increase in average balances to
$254.4 million from $236.8 million, while the average rate paid on deposits
remained relatively unchanged at 5.1%.
As a result of the foregoing changes, net interest income decreased by
$152,000 to $1.9 million during the three months ended March 31, 1999, as
compared to $2.1 million for the three months ended March 31, 1998. During the
nine months ended March 31, 1999, net interest income decreased by 257,000, or
4.2%, to $5.9 million from $6.1 million for the same period last year.
Provision for Loan Losses
- -------------------------
The Company had no provision for loan losses for the quarters ended March
31, 1999, and 1998. During the nine months ended March 31, 1999, and 1998, the
Company had a provision for loan losses of $31,000 and $11,000, respectively.
The allowance for loan losses which was $754,000 at March 31, 1999, is
established in accordance with generally accepted accounting principles and
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 estimated credit losses associated with the loan portfolio;
namely, changes in economic and business conditions and developments, changes in
the nature and volume of the portfolio and trends in the level of its past due
and classified loans. Based on management's review and analysis, the allowance
for loan losses as of March 31, 1999, was considered adequate.
-9-
<PAGE>
Noninterest Income
- ------------------
Noninterest income decreased by approximately $5,000 to $99,000 during the
three months ended March 31, 1999, as compared to $104,000 during the three
months ended March 31, 1998. For the nine months ended March 31, 1999,
noninterest income increased $57,000 to $306,000, as compared to the same period
last year, due to an increase in income on life insurance investments.
Noninterest Expense
- -------------------
Noninterest expense for the three months ended March 31, 1999, decreased by
approximately $66,000, or 8.2%, to $735,000 from $801,000 during the three
months ended March 31, 1998. Compensation and employee benefits expense
decreased by $39,000 for the quarter ended March 31, 1999, due principally to a
decrease in the non-cash charges for ESOP contributions which are accounted for
at the current market price of the Company's stock. Other expenses decreased by
$35,000 during the quarter ended March 31, 1999, as a result of general
decreases in expenses. During the nine months ended March 31, 1999, noninterest
expense decreased $237,000, or 10.0%, to $2.1 million, from 2.4 million.
Compensation and employee benefits decreased $150,000, Advertising by $71,000,
due principally to non-cash charges for ESOP contributions and lower levels of
advertising during the nine months ended March 31, 1999, compared to the same
period last year.
Provision for Income Taxes
- --------------------------
The effective income tax rates for the three months and nine months ended
March 31, 1999, were approximately 35.5% and 35.6%, respectively, compared to
36.4% and 36.6%, respectively for the three months and nine months ended March
31, 1998. The decrease was due to increased state tax free investments.
Classified Loans
- ----------------
Loans which were 90 or more days delinquent but still accruing totaled
$19,000 at March 31, 1999, and $5,000 at June 30, 1998. Loans 90 or more days
delinquent and not accruing totaled $2.6 million at March 31, 1999, and $2.5
million at June 30, 1998. At March 31, 1999, the Company had a $2.5 million loan
which matured in June, 1998, and has not been repaid. Subsequent to March 31,
1999, the borrower has declared bankruptcy, and the scheduled foreclosure
proceedings on the loan have been temporarily suspended. Management has obtained
an appraisal, and based on the appraisal and other factors, believes the Company
will not incur a material loss on this loan.
Liquidity
- ---------
The Company is required to maintain levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time (currently set
at 4%) depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Company's liquidity ratio
averaged 41.8% during the quarter ended March 31, 1999, and equaled 42.9% at
March 31, 1999.
-10-
<PAGE>
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 able 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 comprise of five phases; assessment,
evaluation, renovation, validation and implementation. The Company has
substantially completed all of the five phases for both its internal systems and
those of outside vendors and servicers of systems we use. 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
enable the Company to continue to offer basic services to its customers.
Extensive training of its personnel and testing of the contingency plan has
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 Up To 275,000 Shares of Common Stock
- ------------------------------------------------------------------------
As of March 31, 1999, the Company has repurchased 252,153 shares of its
common stock in connection with its plan to repurchase up to 275,000 shares, or
approximately 5.3%, of its outstanding shares of common stock as part of its
capital management strategy.
-11-
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Legal Proceedings
- -----------------
The Bank is not involved in any litigation, nor is it aware of any pending
litigation, other than legal proceedings incidental to the Bank's business. In
the opinion of management, no material loss is expected from any such claims or
lawsuits.
Exhibits and Report on Form 8-K
- -------------------------------
(a) The following exhibits are filed as part of this report: Exhibit 27,
EDGAR Financial Data Schedule
(b) No Form 8-K reports were filed during the quarter.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
LEEDS FEDERAL BANKSHARES, INC.
Date: May 11, 1999 By: /s/ Gordon E. Clark
--------------------- -------------------------------------
Gordon E. Clark
President and Chief Executive Officer
Date: May 11, 1999 By: /s/ Kathleen Trumpler
--------------------- -------------------------------------
Kathleen Trumpler
Treasurer and Chief Financial Officer
-13-
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