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, 2000
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, 2000, were
$22.5 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 August 15,
2000, was approximately $11.7 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 August 15, 2000, there
were issued and outstanding 4,538,181 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, 2000 (Parts II and III).
2. Proxy Statement for the 2000 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, 2000,
the Company had total assets of $337.0 million and stockholders' equity of $47.3
million.
The Company's principal office is located at 1101 Maiden Choice Lane,
Baltimore, Maryland 21229, and its telephone number at that address is (410)
242-1234.
Leeds Federal Savings Bank
The Bank is a federally-chartered savings bank headquartered in
Baltimore, Maryland. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF"). The Bank has been a member of the Federal Home Loan Bank 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., Verizon, 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 and
adjustable-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, 2000, the Bank's net
loans receivable totaled $219.2 million, of which $204.6 million, or 93.3%, were
one- to four- family residential real estate mortgage loans, $11.1 million, or
5.1%, were home equity loans, $3.8 million, or 1.7%, were consumer loans, and
$2.5 million, or 1.1%, 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, 2000, mortgage-backed securities totaled $8.3
million, or 2.5%, of total assets. At June 30, 2000, 54.7% of the Bank's
mortgage-backed securities were secured by adjustable rate mortgage ("ARM")
loans, and 2.0% were secured by loans with terms of less than five years. Pass-
through certificates totaled $7.8 million, or 93.7%, of the Bank's total
mortgage-backed securities portfolio at June 30, 2000. All of the Bank's
pass-through certificates are insured or guaranteed by Freddie Mac, Ginnie Mae
("GNMA"), or Fannie Mae ("FNMA"). CMOs totaled $548,000, or 6.6%, of the Bank's
total mortgage-backed securities portfolio on June 30, 2000, 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,
-------------------------------------------------------------------------------------
2000 1999 1998 1997
------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential and
construction $204,581 93.3% $ 189,326 92.9% $ 172,152 90.5% $ 155,233 89.1%
Home equity............................... 11,071 5.1 11,454 5.6 12,769 6.7 13,024 7.5
Commercial................................ 2,500 1.1 2,500 1.2 3,738 2.0 3,763 2.2
------- ------ -------- ------ --------- ------- --------- -------
Total real estate loans.................. 218,152 99.5 203,280 99.7 188,659 99.2 172,020 98.8
Consumer loans.............................. 3,807 1.7 3,976 2.0 5,072 2.7 5,069 2.9
------- ------ -------- ------ --------- ------- --------- -------
Total loans receivable................... 221,959 101.2 207,256 101.7 193,731 101.9 177,089 101.7
Less:
Undisbursed portion of loans in process... 1,248 (.6) 1,905 (.9) 2,025 (1.1) 1,668 (1.0)
Unearned loan fees........................ 765 (.3) 740 (.4) 802 (.4) 790 (.4)
Allowance for loan losses................. 742 (.3) 725 (.4) 723 (.4) 536 (.3)
------- ------ -------- ------ --------- ------- --------- -------
Total loans receivable, net.............. 219,204 100.0% $203,886 100.0% $ 190,181 100.0% $ 174,095 100.0%
======= ====== ======== ====== ========= ======= ========= =======
Mortgage-backed securities.................. $ 8,317 $ 10,008 $ 16,412 $ 22,160
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-----------
1996
-------------------
Amount Percent
------ -------
(Dollars in Thousands)
<S> <C> <C>
Real estate loans:
One- to four-family residential and
construction $ 137,700 90.5%
Home equity............................... 11,692 7.7
Commercial................................ 1,548 1.0
--------- -------
Total real estate loans.................. 150,940 99.2
Consumer loans.............................. 3,295 2.2
--------- -------
Total loans receivable................... 154,235 101.4
Less:
Undisbursed portion of loans in process... 1,196 (.8)
Unearned loan fees........................ 588 (.4)
Allowance for loan losses................. 375 (.2)
--------- -------
Total loans receivable, net.............. $ 152,076 100.0%
========= =======
Mortgage-backed securities.................. $ 28,917
=========
</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, 2000. 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...................... $ 3,524 $ 7,973 $11,631 $34,146 $66,616 $80,691 $204,581
Home equity....................... 7,214 223 612 2,937 85 -- 11,071
Commercial........................ 2,500 -- -- -- -- -- 2,500
Consumer loans.................... 592 1,256 1,663 179 117 -- 3,807
------- ------- ------- ------- ------- ------- -------
Total loans...................... 13,830 9,452 13,906 37,262 66,818 80,691 221,959
------- ------- ------- ------- ------- ------- -------
Mortgage-backed securities (1) 5,111 131 -- 1,823 330 944 8,339
------- ------- ------- ------- ------- ------- -------
Total loans and mortgage-backed
securities..................... $18,941 $ 9,583 $13,906 $39,085 $67,148 $81,635 $230,298
======= ======= ======= ======= ======= ======= ========
</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, 2000, the dollar amount of
fixed rate loans and mortgage-backed securities that mature after June 30, 2001,
and all adjustable rate loans and mortgage-backed securities that mature or
reprice after June 30, 2001.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Real estate loans:
One- to four-family residential and
construction........................ $ 184,370 $ 16,687 $201,057
Home equity........................... 3,857 -- 3,857
Commercial............................ -- -- --
Consumer loans........................ 3,215 -- 3,215
--------- --------- --------
Total................................ $ 191,442 $ 16,687 $208,129
========= ========= ========
Mortgage-backed securities.............. $ 3,228 $ -- $ 3,228
========= ========= ========
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 institution 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 has a
first-time home buyer program targeted to low to moderate income borrowers. The
loan-to-value ratio on these loans is 100%. 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, 2000, the Bank had one such loan
which represented 1.1% 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, 2000, 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, 2000, variable rate home equity loans totaled
$7.2 million, or 3.3%, 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, 2000, fixed rate
home equity loans totaled $3.9 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
-5-
<PAGE>
approved by the board of directors, which meets weekly. After the loan is
approved, a loan commitment letter is promptly issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Commitments are typically issued for 60-day periods in the
case of loans to refinance, 90-day periods in the case of loans to purchase
existing real estate, and 120-day periods for construction loans. The borrower
must provide proof of fire and casualty insurance on the property serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance, based on a title search of the property, is required on all
loans secured by real property. At June 30, 2000, the Bank had outstanding loan
commitments of $910,000. This amount does not include $13.2 million of
undisbursed lines of credit on home equity loans, and the unfunded portion of
loans in process.
Origination, Purchase and Sale of Loans. The table below shows the
Bank's originations of loans for the periods indicated.
Years Ended June 30,
------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Loans receivable at beginning
of period, excluding loans
in process ............................. $ 205,351 $ 191,706 $ 175,421
Originations:
Real estate:
One- to four-family residential ....... 38,599 53,207 41,206
Home equity (1) ....................... 4,407 6,429 7,571
Commercial ............................ -- -- --
Consumer passbook loans (2) ............ 9 (40) 81
Consumer loans, other .................. 1,952 1,118 1,785
--------- --------- ---------
Total originations ................... 44,967 60,714 50,643
--------- --------- ---------
Repayments .............................. (29,590) (47,071) (34,353)
Loan charge-off/transfer provision ...... (17) 2 (5)
--------- --------- ---------
Net loan activity ....................... 15,360 13,645 16,285
--------- --------- ---------
Total loans receivable at end
of period, excluding loans
in process ........................ $ 220,711 $ 205,351 $ 191,706
========= ========= =========
----------
(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, 2000, the Bank had $765,000 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 $156,000, $132,000 and $137,000, for the fiscal years ended June 30, 2000,
1999 and 1998, respectively.
Mortgage-Backed Securities
The Bank's business also involves investments in mortgage-backed
securities. At June 30, 2000, 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.
-6-
<PAGE>
The Bank's pass-through certificates represent a participation interest
in a pool of single-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interest in the form of securities, to investors such as the Bank.
Such quasi-governmental agencies that guarantee the payment of principal and
interest to investors, include Freddie Mac, GNMA, or the FNMA. Pass-through
certificates typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
and maturities that are within a specified range. The underlying pool of
mortgages can be composed of either fixed rate mortgage loans or ARM loans. The
interest rate risk characteristics of the underlying pool of mortgages, i.e.,
fixed rate or adjustable rate, are passed on to the certificate holder.
CMOs are securities created by segregating or partitioning cash flows
from mortgage pass-through securities or from pools of mortgage loans. CMOs
provide a broad range of mortgage investment vehicles by tailoring cash flows
from mortgages to meet the varied risk and return preferences of investors.
These securities enable the issuer to "carve up" the cash flow from the
underlying securities and thereby create multiple classes of securities with
different maturity and risk characteristics. CMOs are typically issued by a
special-purpose entity (the "issuer") that may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. Accordingly, a
CMO instrument may be purchased in equity form (e.g., trust interests, stock and
partnership interests) or non-equity form (e.g., participating debt securities).
All of the Bank's CMOs are non-equity interests. CMOs are collateralized by
mortgage loans or mortgage-backed securities that are transferred to the CMO
trust or pool by a sponsor. The issuey is structured so that collections from
the underlying collateral provide a cash flow to make principal and interest
payments on the obligations, or "tranches," of the issuer.
Set forth below is information relating to the Bank's purchases, sales
and repayments of mortgage-backed securities for the periods indicated.
Years Ended June 30,
---------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Mortgage-backed securities
at beginning of period ........... $10,008 $ 16,412 $ 22,160
Purchases ......................... 400 -- --
Repayments ........................ (2,099) (6,415) (5,769)
Other (1) ......................... 8 11 21
------- -------- --------
Mortgage-backed securities
at end of period ................. $ 8,317 $ 10,008 $ 16,412
======= ======== ========
----------
(1) Includes net discount/premium amortization.
-7-
<PAGE>
The following table sets forth selected data relating to the
composition of the Bank's mortgage-backed securities as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Pass-through certificates:
<S> <C> <C> <C> <C> <C> <C>
Adjustable ............. $ 4,563 54.9% $ 5,495 54.9% $ 7,624 46.5%
Fixed .................. 3,228 38.8 3,935 39.3 7,068 43.0
------- ----- ------- ----- ------- -----
Total pass-through
certificates ....... 7,791 93.7 9,430 94.2 14,692 89.5
------- ----- ------- ----- ------- -----
CMOs:
Adjustable ............. 548 6.6 607 6.1 1,759 10.7
------- ----- ------- ----- ------- -----
Total CMOs ........... 548 6.6 607 6.1 1,759 10.7
------- ----- ------- ----- ------- -----
Unamortized discount
and premium .......... (22) (.3) (29) (0.3) (39) (0.2)
------- ----- ------- ----- ------- -----
Total mortgage-backed
securities ......... $ 8,317 100.0% $10,008 100.0% $16,412 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
At June 30, 2000, mortgage-backed securities totaled $8.3 million, or
2.5%, of total assets. ARM loans collateralized 61.5% of the Bank's
mortgage-backed securities portfolio, and loans with terms of less than five
years collateralized 2.0% of the Bank's mortgage-backed securities portfolio.
Pass-through certificates totaled $7.8 million, or 93.7%, of the Bank's total
mortgage-backed securities portfolio at June 30, 2000. All of the Bank's
pass-through certificates are insured or guaranteed by Freddie Mac, GNMA, or
FNMA. CMOs totaled $548,000, or 6.6%, 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, 2000, all the Bank's mortgage-backed securities
were held for investment. At June 30, 2000, the Bank's mortgage-backed
securities portfolio had a fair market value of $8.3 million.
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when a
loan is 15 days past due, a 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
nonaccrualstatus 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.
-8-
<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, 2000, the Bank had 3 loans on nonaccrual
status, totaling $2.5 million. At June 30, 2000, 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,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Delinquent loans:
One- to four-family residential ............. $ 48 $ 264 $ 19 $ 88 $ 100
Consumer loans .............................. -- -- -- -- --
Commercial loans ............................ 2,500 2,500 2,500 -- --
------ ------ ------ ------ ------
Total delinquent loans..................... $2,548 $2,764 $2,519 $ 88 $ 100
====== ====== ====== ====== ======
Total real estate owned (1) ................... $ -- $ -- $ -- $ -- $ --
Other nonperforming assets .................... -- -- -- -- 90
------ ------ ------ ------ ------
Total nonperforming asset ................. $ -- $ -- $ -- $ -- $ 90
====== ====== ====== ====== ======
Total loans delinquent 90 days or more
to net loans receivable ..................... 1.16% 1.36% 1.32% .05% .07%
Total loans delinquent 90 days or more
to total assets ............................. .76% .83% .83% .03% .04%
Total nonperforming loans and nonperforming
assets to total assets ...................... .76% .83% .83% .03% .07%
</TABLE>
----------
(1) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, these
properties are recorded at the lower of their fair value less estimated
costs to sell or the principal balance of the related loans.
During the year ended June 30, 2000, gross interest income of
approximately $305,000 would have been recorded on nonperforming and
restructured loans, under their original terms, if the loans had been current
throughout the period. Interest income of $2,000 was actually recorded on these
assets during the year ended June 30, 2000.
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,
------------------------
2000 1999 1998
------ ------ ------
(In Thousands)
Loans delinquent 60-89 days ......................... $ 56 $ 60 $ 169
Loans delinquent 90 days or more .................... $2,548 $2,764 $2,519
------ ------ ------
Total delinquent 60 days or more .............. $2,604 $2,824 $2,688
====== ====== ======
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at June 30, 2000.
At June 30, 2000
----------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent ............................. $ 56 2
Loans 90 days or more delinquent ........................... 48 2
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 ................ -- --
-9-
<PAGE>
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, 2000, the
Bank had no loans classified as special mention.
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At June 30,
----------------------------
2000 1999 1998
------ ------ ------
(In Thousands)
Substandard assets (1) ......................... $2,557 $2,764 $2,519
Doubtful assets ................................ 43 152 --
Loss assets .................................... -- -- --
------ ------ ------
Total classified assets ...................... $2,600 $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, 2000, 1999 and 1998, the Bank added
$21,000, $39,000 and $192,000, respectively, to the provision for loan losses.
The Bank's allowance for loan losses totaled $742,000, $725,000 and $723,000, at
June 30, 2000, 1999 and 1998, respectively.
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 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 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.
-10-
<PAGE>
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, 2000, $425,000 has been
allocated to one- to four-family residential real estate loans, $250,000 to
commercial real estate loans and $67,000 to consumer loans.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ....................... $219,204 $203,886 $190,181 $174,095 $152,076
Average loans outstanding ..................... 216,907 195,371 182,882 164,321 143,126
Allowance balances (at beginning of period) ... 725 723 536 375 341
Provision for losses on real estate loans 21 39 192 151 34
Transfer from provision for other assets ...... -- -- -- 30 --
Charge-offs ................................... (4) (37) (5) (20) --
-------- -------- -------- -------- --------
Allowance balances (at end of period) ......... $ 742 $ 725 $ 723 $ 536 $ 375
======== ======== ======== ======== ========
Allowance for loan losses as a percentage of
net loans receivable at end of period ....... .33% .35% .38% .31% .25%
</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, 2000, $23.8 million, or 24.8%, of the Bank's investment
portfolio was scheduled to mature in one year or less, $1.8 million, or 1.9%,
was scheduled to mature in from one to five years, and $70.4 million was
scheduled to mature in over five years.
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. See "Regulation--Federal Regulation of Savings
Institutions--Liquidity." The Bank generally has maintained a portfolio of
liquid assets that exceeds regulatory requirements. Management believes that the
higher levels are prudent because of the possibility that interest rates may
increase. By maintaining high levels of liquidity, the Bank is able to reinvest
its assets more quickly in response to changes in market interest rates, thereby
reducing its exposure to interest rate volatility. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Bank's loan origination and
other activities. Currently, due to 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,
----------------------------
2000 1999 1998
------- -------- -------
(In Thousands)
Investment securities:
U.S. Government and agency obligations ......... $69,844 $ 68,700 $44,685
Freddie Mac preferred stock .................... 2,759 3,950 3,205
Other equity securities ........................ 48 68 --
------- -------- -------
Total investment securities .................. $72,651 $ 72,718 $47,890
Short-term investments/money market accounts ..... 9,552 12,941 4,777
Secured short-term loans to commercial banks (1) . 9,563 10,012 18,405
FHLB stock ....................................... 2,187 1,936 2,377
Interest-earning deposits in other institutions .. 1,982 4,964 11,906
------- -------- -------
Total investments ............................ $95,935 $102,571 $85,355
======= ======== =======
----------
(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, 2000.
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------------------------------------------------------------------------------------
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:
U.S. Government agency
securities .......... $ -- --% $ 800 6.30% $2,290 6.67% $65,267 7.37% $68,366 $62,179 7.35%
U.S. Government
treasury securities . 487 6.04 1,000 7.50 -- -- -- -- 1,479 1,479 7.01
Freddie Mac preferred
stock ............... -- -- -- -- -- -- 2,759 1.70 2,758 2,759 1.70
Other equity
securities .......... -- -- -- -- -- -- 48 4.00 48 48 4.00
------- ---- ------ ---- ------ ---- ------- ---- ------- ------- ----
Total investment
securities ........ $ 487 6.04% $1,800 6.97% $2,290 6.67% $68,074 7.14% $72,651 $66,465 7.13%
Short-term investments/
money market accounts . 9,552 6.57 -- -- -- -- -- -- 9,557 9,552 6.57
Secured short-term loans
to commercial banks ... 9,563 6.15 -- -- -- -- -- -- 9,563 9,563 6.15
FHLB stock .............. 2,187 7.50 -- -- -- -- -- -- 2,187 2,187 7.50
Interest earning deposits
in other institutions . 1,982 6.45 -- -- -- -- -- -- 1,977 1,982 6.45
------- ---- ------ ---- ------ ---- ------- ---- ------- ------- ----
Total investments ... $23,771 6.47% $1,800 6.97% $2,290 6.67% $68,074 7.14% $95,935 $90,949 6.96%
======= ==== ====== ==== ====== ==== ======= ==== ======= ======= ====
</TABLE>
-13-
<PAGE>
Sources of Funds
General. The Bank's deposit-gathering activities are currently
conducted from the Bank's facility in Arbutus, Maryland and its branch office in
Elkridge, 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, 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, 2000 were
represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum of Total
Rate Minimum Term Checking and Savings Deposits Amount Balances Savings
-------- --------------- ------------------------------- ------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
--% None Noninterest-bearing demand $ 500 $ 1,419 .50%
1.99 None NOW Accounts 300 7,732 2.76
3.15 None Passbooks and Statement Savings 50 21,290 7.55
4.78 None Money Market Accounts 100 50,422 17.89
3.32 None Anniversary Bonus Account 100 3,603 1.28
3.35 None Club Accounts 5 154 .05
Certificates of Deposit
-----------------------
4.40 3 months Fixed term, fixed rate 1,000 178 .06
5.02 6 months Fixed term, fixed rate 1,000 3,446 1.22
5.91 12 months Fixed term, fixed rate 1,000 37,388 13.27
5.06 13 months Fixed term, fixed rate 10,000 738 .26
5.83 18 months Fixed term, fixed rate 1,000 5,290 1.88
5.48 18 months Fixed term, fixed rate 5,000 74,002 26.24
5.86 24 months Fixed term, fixed rate 1,000 23,626 8.38
6.85 25 months Fixed term, fixed rate 5,000 2,217 .79
5.79 36 months Fixed term, fixed rate 1,000 19,004 6.75
5.74 48 months Fixed term, fixed rate 1,000 1,336 .47
6.01 60 months Fixed term, fixed rate 1,000 17,539 6.22
5.46 Various (15-20) Fixed term, fixed rate 5,000 3,120 1.11
6.50 Various (14-25) Fixed term, variable rate 1,000 9,167 3.25
6.72 Various (3-60) Fixed term, fixed rate 90,000 195 .07
-------- ------
$281,866 100.00%
======== ======
</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,
-------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997
----------------------------- ----------------------------- ----------------------------- -------------------
Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1)
-------- ---------- --------- -------- ---------- --------- -------- ---------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Anniversary bonus
account ............ $ 3,603 1.28% $ (863) $ 4,466 1.63% $ (641) $ 5,107 2.08% $(1,384) $ 6,491 2.79%
NOW and demand
accounts ........... 9,151 3.25 2,178 6,973 2.54 685 6,288 2.56 1,173 5,115 2.20
Passbooks, statements
and clubs .......... 21,444 7.61 1,283 20,161 7.34 1,809 18,352 7.49 (506) 18,858 8.11
Money market deposit
accounts ........... 50,421 17.88 (10,948) 61,369 22.35 (2,423) 63,792 26.01 (11,231) 75,023 32.26
Time deposits that mature:
within 12 months ... 132,565 47.03 34,002 98,563 35.89 7,397 91,166 37.17 14,544 76,622 32.94
within 13-36 months 56,521 20.05 (19,534) 76,055 27.69 21,642 54,413 22.18 10,589 43,824 18.84
beyond 36 months ... 8,161 2.90 1,122 7,039 2.56 887 6,152 2.51 (505) 6,657 2.86
-------- ------ -------- -------- ------ ------- -------- ------ ------- -------- ------
Total deposits ... $281,866 100.00% $ 7,240 $274,626 100.00% $29,356 $245,270 100.00% $12,680 $232,590 100.00%
======== ====== ======== ======== ====== ======= ======== ====== ======= ======== ======
</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,
----------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
Rate
----
3.00 - 5.99% .............................. $140,298 $168,087 $132,687
6.00 - 7.99% .............................. 56,949 13,570 19,044
-------- -------- --------
$197,247 $181,657 $151,731
======== ======== ========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposit at June 30, 2000.
Amount Due
--------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
--------- ------- ------- ------- --------
(In Thousands)
Rate
----
3.00 - 5.99% .............. $100,359 $31,014 $ 5,239 $3,686 $140,298
6.00 - 7.99% .............. 32,206 14,872 5,396 4,475 56,949
-------- ------- ------- ------ --------
$132,565 $45,886 $10,635 $8,161 $197,247
======== ======= ======= ====== ========
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, 2000. This amount does not include other
savings account deposits of $100,000 or more, which totaled approximately $20.6
million at June 30, 2000.
Certificates
Maturity Period of Deposit
--------------- ------------
(In Thousands)
Three months or less ......................... $ 4,380
Three through six months ..................... 12,556
Six through twelve months .................... 13,000
Over twelve months ........................... 14,514
-------
Total .................................... $44,450
=======
Change in Deposits. The following table sets forth changes in total
deposits of the Bank for the periods indicated:
At June 30,
----------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
Rate
----
Balance at beginning of period ............. $274,626 $245,270 $232,590
Net (withdrawals)/deposits ................. (6,650) 16,391 566
Interest credited .......................... 13,890 12,965 12,114
-------- -------- --------
Ending balance ......................... $281,866 $274,626 $245,270
======== ======== ========
Net increase in deposits ............... $ 7,240 $ 29,356 $ 12,680
======== ======== ========
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 from any other source. In
1994, the Employee Stock Ownership Plan and Trust ("ESOP") borrowed funds from
an
-16-
<PAGE>
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, 2000, the balance on the ESOP
loan was $384,000 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, 2000.
Competition
As of June 30, 2000, the Bank was the third 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, 2000, the Bank had 31 full-time and 7 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 institution, 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 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation
-17-
<PAGE>
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 institutions 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 $7.1 million at June 30, 2000. As of June 30, 2000, 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, 2000, the Bank maintained 87.24% 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, 2000,
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 institution 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 institution,
which restriction, if material, is disclosed in the public financial statements
of the savings institution as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the
-18-
<PAGE>
savings institution determines that the payment of such dividend to the mutual
holding company is probable, an appropriate dollar amount is recorded as a
liability; and (iv) the amount of any waived dividend is considered as having
been paid by the savings institution (and the savings association's capital
ratios adjusted accordingly) in evaluating any proposed dividend under OTS
capital distribution regulations.
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,
2000 was 36.2%, 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, 2000, the Bank
has a semi-annual assessment of approximately $36,500.
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 based, in part, on the Bank's capital
position, and requires certain approval procedures to be followed. At June 30,
2000, the Bank was in compliance with the regulations.
-19-
<PAGE>
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 have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted final rules which require institutions to examine asset quality and
earnings standards. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 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, 2000, 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, 2000.
<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)
------- -------- ------- -------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Tier I core capital ............... $45,491 13.6% $13,375 4.0% $16,719 greater than 5.0%
Tier I risk-based capital ......... 45,491 27.7 6,566 4.0 9,849 greater than 6.0
Total risk-based capital .......... 47,393 28.9 13,133 8.0 16,416 greater than 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 exercised this authority several times
with respect to premiums paid to the Bank Insurance Fund ("BIF") by commercial
banks and BIF-member savings associations.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize the predecessor to the SAIF. During 1999, payments
for SAIF members approximated 6.1 basis points, while BIF members paid 1.2 basis
points. Since January 1, 2000, there has been equal sharing of Financing
Corporation payments between members of both insurance funds.
-21-
<PAGE>
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, 2000, of $2.2
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
7.41%, and were 7.69% for the fiscal year ended June 30, 2000.
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;
(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
-22-
<PAGE>
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
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, 2000, 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 74 Chairman of the Board
Gordon E. Clark 58 President, Chief Executive Officer and Director
Marguerite E. Wolf 73 Vice Chairman and Director
Joan H. McCleary 66 Director and Secretary to the Board
Dale R. Douglas 58 Senior Vice President
Kathleen G. Trumpler 62 Treasurer
ITEM 2. Description of Property
--------------------------------
(a) The Company currently conducts its business through 2 full service
banking offices. The following table sets forth the Company's offices as of June
30, 2000:
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
-------- ------ --------- -------------
1101 Maiden Choice Lane Owned 1960 --
Baltimore, Maryland 21229
6959 Marshalee Drive Owned 2000 --
Elkridge, Maryland 21075
(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, 2000.
ITEM 3. Legal Proceedings
--------------------------
The Company is periodically involved in claims and lawsuits that are
incident to the Company's business. At June 30, 2000, the Company was not
involved in any such claim or lawsuit.
-24-
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
During the fourth quarter of the fiscal year covered by this report,
the Registrant did not submit any matters to the vote of security holders.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
The "Common Stock and Related Matters" and "Stockholder Information"
sections of the Registrant's annual report to stockholders for the fiscal year
ended June 30, 2000 (the "2000 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 2000 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 2000 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2000
Annual Report to Stockholders are incorporated herein by this reference.
ITEM 7. Financial Statements
-----------------------------
The following sections from the Registrant's 2000 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2000
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 2000 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.
-25-
<PAGE>
ITEM 10. Executive Compensation
--------------------------------
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 12. Certain Relationships and Related Transactions
-------------------------------------------------------
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
--------
<TABLE>
<CAPTION>
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
13 Form of Annual Report to 13 Exhibit 13
Security Holders
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
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>
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 25, 2000 By: /s/ Gordon E. Clark
---------------------------------------
Gordon E. Clark,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Gordon E. Clark By: /s/ Kathleen G. Trumpler
--------------------------------- ---------------------------------
Gordon E. Clark, President, Chief Kathleen G. Trumpler, Treasurer
Executive Officer and Director (Principal Financial/Accounting
(Principal Executive Officer) Officer)
Date: September 25, 2000 Date: September 25, 2000
By: /s/ John F. Amer By: /s/ Marguerite E. Wolf
--------------------------------- ---------------------------------
John F. Amer, Chairman Marguerite E. Wolf, Vice Chairman
Date: September 25, 2000 Date: September 25, 2000
By: /s/ Joan H. McCleary By: /s/ Raymond J. Hartman
--------------------------------- ---------------------------------
Joan H. McCleary, Director Raymond J. Hartman, Director
Date: September 25, 2000 Date: September 25, 2000
By: /s/ John F. Doyle
---------------------------------
John F. Doyle, Director
Date: September 25, 2000
-28-
