EXHIBIT 13
2000 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
2000 ANNUAL REPORT TO STOCKHOLDERS
LEEDS FEDERAL BANKSHARES, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
Message to Our Stockholders.............................................. 1
Selected Consolidated Financial and Other Data........................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 4
Selected Quarterly Financial Data........................................ 14
Common Stock and Related Matters......................................... 15
Independent Auditors' Report............................................. F-1
Consolidated Statements of Financial Condition........................... F-2
Consolidated Statements of Income and Comprehensive Income............... F-3
Consolidated Statements of Stockholders' Equity.......................... F-4
Consolidated Statements of Cash Flows.................................... F-5
Notes to Consolidated Financial Statements............................... F-7
<PAGE>
[LETTERHEAD OF LEEDS FEDERAL BANKSHARES, INC.]
September 25, 2000
To Our Stockholders:
We are pleased to report the financial results of Leeds Federal Bankshares, Inc.
On June 30, 2000, the Company had total assets of $337.0 million and
stockholders' equity of $47.4 million, which resulted in a capital-to-assets
ratio of 14.1%. The Company's relatively high level of capital provides us with
a strong foundation for future growth and new business opportunities.
During this year, we continued to repurchase our common stock. At August 15,
2000, we had repurchased 667,416 shares. Quarterly dividends have continued at
$.15 per share. We believe these are important means for us to invest our
capital resources and to enhance stockholder value.
The Company's net income for the fiscal year ended June 30, 2000, was $3.6
million, or $.77 per diluted share of common stock, compared to $3.5 million, or
$.69 per diluted share for the previous fiscal year. We continue to emphasize
residential real estate financing, as evidenced by an increase of $15.3 million
in loans receivable. Our low ratio of noninterest expense to average assets was
.93% and .91% for the fiscal years ended June 30, 2000 and 1999, respectively.
The enclosed annual report discusses our operating results through June 30,
2000, in more detail.
The board, management and staff are dedicated to providing the quality financial
services our customers have come to expect from an independent community bank.
Our deposits are received from within our community and reinvested in mortgages
within our community. Our stockholders have shared in the success and growth of
their community bank.
Thank you for the confidence you have placed in Leeds Federal. We hope to
justify that confidence by continuing to be a leading community-based financial
institution and by sharing our growth and our success with our stockholders.
Sincerely,
/s/ John F. Amer /s/ Gordon E. Clark
--------------------- -------------------------------------
John F. Amer Gordon E. Clark
Chairman President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and other data of
Leeds Federal Bankshares, Inc. (the "Company"), or, prior to January 21, 1998,
Leeds Federal Savings Bank (the "Bank") at the dates and for the periods
indicated. For additional information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Condition Data
Total assets.................................... $ 337,048 $ 331,642 $ 302,737 $ 286,999 $273,278
Loans receivable, net........................... 219,204 203,886 190,181 174,095 152,076
Investments* ................................... 95,935 102,572 85,355 82,553 84,564
Mortgage-backed securities...................... 8,317 10,008 16,412 22,160 28,917
Deposits........................................ 281,866 274,626 245,270 232,590 222,146
Borrowed funds.................................. 384 471 552 648 744
Stockholders' equity, substantially restricted.. 47,409 48,504 49,308 46,741 44,192
</TABLE>
-----------
* Includes investment securities, interest-bearing deposits, and other
investments.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Operating Data:
Interest income................................ $ 22,070 $ 20,842 $ 20,309 $ 19,606 $ 18,567
Interest expense............................... 13,928 13,009 12,171 11,613 11,232
--------- --------- --------- --------- --------
Net interest income before provision for losses 8,142 7,833 8,138 7,993 7,335
Provision for loan losses...................... 21 39 192 151 33
--------- --------- --------- --------- --------
Net interest income after provision for losses 8,121 7,794 7,946 7,842 7,302
--------- --------- --------- --------- --------
Noninterest income:
Service fees and charges..................... 156 132 137 130 116
Other income ................................ 288 268 213 140 168
--------- --------- --------- --------- --------
Total noninterest income................... 444 400 350 270 284
--------- --------- --------- --------- --------
Noninterest expense:
Compensation and employee benefits........... 1,759 1,573 1,770 1,528 1,516
Occupancy.................................... 260 222 195 197 192
SAIF deposit insurance premiums.............. 184 222 222 1,755 558
Advertising.................................. 159 128 208 172 216
Other ..................................... 717 696 700 637 580
--------- --------- --------- --------- --------
Total noninterest expenses................. 3,079 2,841 3,095 4,289 3,062
--------- --------- --------- --------- --------
Income before provision for income taxes....... 5,486 5,353 5,201 3,823 4,524
Provision for income taxes..................... 1,891 1,889 1,895 1,458 1,737
--------- --------- --------- --------- --------
Net income............................... $ 3,595 $ 3,464 $ 3,306 $ 2,365 $ 2,787
========= ========= ========= ========= ========
Net income per common share
Basic........................................ $ 0.78 $ 0.69 $ 0.65 $ 0.46 $ 0.55
Diluted...................................... 0.77 0.69 0.64 0.46 0.55
Dividends declared per common share............ 0.58 0.56 0.55 0.48 0.44
========= ========= ========= ========= ========
</TABLE>
2
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<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Key Operating Ratios and Other Data:
Return on average assets (net income
divided by average total assets)* .... 1.08% 1.11% 1.13% .85% 1.06%
Return on average equity (net income
divided by average equity)* .......... 7.54 7.05 6.86 5.26 6.50
Net interest rate spread (difference
between average yield on interest-
earning assets and average cost of
interest-bearing liabilities) ........ 1.86 1.80 2.03 2.12 2.00
Net interest margin (net interest
income as a percentage of average
interest-earning assets) ............ 2.53 2.57 2.85 2.94 2.85
Net interest income to noninterest
expense* ............................. 264.44 275.71 262.94 186.36 239.54
Net interest income after provision
for losses, to total noninterest
expense* ............................. 263.75 274.33 256.74 182.84 238.44
Noninterest income to average assets .. .13 .13 .12 .10 .11
Noninterest expense to average assets* .93 .91 1.06 1.54 1.17
Nonperforming loans to total loans .... 1.16 1.36 1.32 .05 .06
Nonperforming assets to total assets .. .76 .83 .83 .03 .07
Average interest-earning assets to
average interest-bearing liabilities . 115.43 118.03 119.46 119.15 119.50
Allowance for losses to nonperforming
assets ............................... 29.12 26.24 28.70 609.09 213.67
Stockholders' equity to average assets
(average stock-holders' equity divided
by average total assets) 14.33 ....... 15.68 16.49 16.18 16.36
Equity to assets at period end ........ 14.07 14.63 16.28 16.29 16.17
Number of full-service offices ........ 2 1 1 1 1
</TABLE>
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* Excluding the one-time assessment to recapitalize the Savings Association
Insurance Fund, for the year ended June 30, 1997, return on average assets
was 1.16%, return on average equity was 7.14%, noninterest expense to
average assets was 1.05%, net interest income to noninterest expense was
275.05% and net interest income after provision for loan losses to total
noninterest expense was 269.86%.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The earnings of the Company depend primarily on the earnings of Leeds
Federal Savings Bank (the "Bank"), which is discussed herein on a consolidated
basis. The Company's earnings depend primarily on its level of net interest
income, which is the difference between interest earned on the Company's
interest- earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-earning deposits at other institutions,
investment securities and other investments, and the interest paid on
interest-bearing liabilities. Net interest income is a function of the Company's
interest rate spread, which is the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest-bearing liabilities. The Company's earnings also
are affected by its level of noninterest income, including primarily service
fees and charges, and noninterest expense, including primarily compensation and
employee benefits, occupancy costs and Savings Association Insurance Fund
("SAIF") deposit insurance premiums. Earnings of the Company also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Company.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such Statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, and changes
in demand for loans in the Company's market area, competition and information
provided by third-party vendors that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Business Strategy
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Company has
sought to implement this strategy by using only retail deposits as its source of
funds and maintaining a substantial part of its assets in loans secured by one-
to four-family residential real estate located in the Company's market area,
home equity loans, consumer loans, mortgage-backed securities and in other
liquid investment securities. Specifically, the Company's business strategy
incorporates the following elements: (1) operating as a community-oriented
financial institution, maintaining a strong core
4
<PAGE>
customer base by providing quality service and offering customers the access to
senior management and services that a community-based institution can offer; (2)
maintaining high asset quality by emphasizing investment in residential mortgage
loans, mortgage-backed securities and other securities issued or guaranteed by
the United States Government or agencies thereof; (3) maintaining capital in
excess of regulatory requirements and growing only to the extent that adequate
capital levels can be maintained; and (4) managing interest rate risk exposure
while achieving desirable levels of profitability.
Results of Operations
The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-earning deposits at other institutions,
investment securities and other investments, and the interest paid on
interest-bearing liabilities, which consist primarily of savings deposits. The
Company had net income of $3.6 million for the year ended June 30, 2000. Net
income totaled $3.5 million and $3.3 million for fiscal 1999 and 1998,
respectively.
Interest Income. Total interest income increased by $1.2 million, or
5.9%, to $22.1 million for the year ended June 30, 2000, from $20.8 million of
the year ended June 30, 1999. The increase in interest income was primarily due
to an increase in the balance of average interest-earning assets to $322.3
million for the year ended June 30, 2000, from $305.1 million for the prior
year, and a small increase in the yield on average interest-earnings assets to
6.9%, from 6.8%. The increase in average interest-earning assets during the year
ended June 30, 2000, resulted primarily from an increase in mortgage loans,
partially offset by a decrease in mortgage-backed securities. The increase in
average yield was caused primarily by increases in yield on short-term
investments, partially offset by a decrease in yield on mortgage loans.
Interest on mortgage loans increased by $1.1 million, or 7.5%, to $15.1
million for the year ended June 30, 2000, from $14.0 million for the year ended
June 30, 1999, primarily because of an increase in average mortgage loans to
$213.1 million for the year ended June 30, 2000, from $190.1 million for the
year ended June 30, 1999, partially offset by a decrease in average yield on
mortgage loans to 7.1% from 7.3%. The increase in average mortgage loans
resulted from increased loan demand in the Bank's community and from an increase
in the volume of loan originations from brokers. The lower yield on mortgage
loans reflected generally lower market rates, including the effect of
reinvesting the proceeds of loan prepayments in lower yielding mortgage loans.
Interest income on consumer loans decreased by $54,000 to $275,000 for the year
ended June 30, 2000, from $329,000 for the prior year. The decrease was due to a
decrease in average balance of consumer loans to $3.8 million from $4.5 million,
as a result of reduced marketing of consumer loans during the year. Yield on
consumer loans for the year ended June 30, 2000, decreased to 7.2%, from 7.3%.
Interest income on mortgage-backed securities decreased $280,000, or 30.5%, to
$637,000 for the year ended June 30, 2000, from $917,000 for the prior year. The
decrease was principally due to a $4.1 million decrease in average balance of
mortgage-backed securities to $9.1 million for the year ended June 30, 2000,
from $13.2 million for the prior year. Yield on mortgage-backed securities for
the year ended June 30, 2000, increased to 7.0%, from 6.9%. Interest income on
investment securities increased by $1.1 million, to $4.8 million for the year
ended June 30, 2000, from $3.6 million for the prior year. Such increase was the
result of a $17.4 million increase in average balance of investment securities
to $71.7 million for the year ended June 30, 2000, from $54.3 million for the
year ended June 30, 1999. The increase in the average balance of investment
securities was primarily the result of a decrease in short-term interest-earning
deposits. Interest income from interest-earning deposits decreased by $798,000
to $605,000 for the year ended June 30, 2000, from $1.4 million for the prior
year. Such decrease was primarily the result of purchase of longer- term
investment securities. Yield on interest-earning deposits for the year ended
June 30, 2000, increased to 5.6%, from 4.9%, due to increases in market rates
during the year.
5
<PAGE>
Total interest income increased by $533,000, or 2.6%, to $20.8 million
for the year ended June 30, 1999, from $20.3 million for the year ended June 30,
1998. The increase in interest income was primarily due to an increase in the
balance of average interest-earning assets to $305.1 million for the year ended
June 30, 1999, from $285.4 million for the prior year, partially offset by a
decrease in yield on average interest- earning assets to 6.8%, from 7.1%. The
increase in average interest-earning assets during the year ended June 30, 1999
resulted primarily from an increase in average loans and investment securities,
partially offset by a decrease in mortgage-backed securities. The decrease in
the average yield was caused primarily by decreases in market rates on mortgage
loans and short-term investments.
Interest on mortgage loans increased by $631,000, or 4.7%, to $14.0
million for the year ended June 30, 1999, from $13.4 for the year ended June 30,
1998, primarily because of an increase in average mortgage loans to $190.8
million for the year ended June 30, 1999, from $177.8 million for the year ended
June 30, 1998, partially offset by a decrease in average yield on mortgage loans
to 7.3% from 7.5%. The increase in average mortgage loans resulted from
increased loan demand in the Bank's community and from an increase in the volume
of loan originations from brokers. The lower yield on mortgage loans reflected
generally lower market rates, including the effects of reinvesting the proceeds
of loan prepayments in lower yielding mortgage loans. Interest income on
consumer loans decreased by $30,000 to $329,000 for the year ended June 30,
1999, from $359,000 for the prior year. The decrease was due to a decrease in
average balance of consumer loans to $4.5 million from $5.1 million, as a result
of reduced marketing of consumer loans during the year. Yield on consumer loans
for the year ended June 30, 1999, increased to 7.3%, from 7.1% for the prior
year. Interest income on mortgage-backed securities decreased $506,000, or
35.6%, to $917,000 for the year ended June 30, 1999, from $1.4 million for the
prior year. The decrease was principally due to a $6.4 million decrease in
average balance of mortgage-backed securities to $13.2 million for the year
ended June 30, 1999, from $19.6 million for the prior year. Interest income on
investment securities increased by $536,000, to $3.6 million for the year ended
June 30, 1999, from $3.1 million for the prior year. Such increase was the
result of an $8.0 million increase in average balance of investment securities
to $54.3 million for the year ended June 30, 1999, from $46.3 million for the
year ended June 30, 1998. The increase in the average balance of investment
securities was the result of increases in savings deposits. Interest income from
interest-earning deposits decreased by $135,000 to $1.4 million for the year
ended June 30, 1999, from $1.5 million for the prior year. Yield on
interest-earning deposits decreased to 4.9% from 5.7% for the prior year.
Interest income on other investments increased $37,000 to $539,000 for the year
ended June 30, 1999, from $502,000 for the prior year. Such increase was the
result of an increase in average balance of other investments of $3.8 million,
partially offset by a decrease in the average yield on other investments to 4.1%
from 5.3% for the prior year.
Interest Expense. Total interest expense increased by $919,000, or
7.1%, to $13.9 million for the year ended June 30, 2000, from $13.0 million for
the year ended June 30, 1999. Such increase was principally the result of an
increase in the average balance in interest bearing liabilities of $20.7 million
to $279.2 million for the year ended June 30, 2000, from $258.5 million for the
prior year.
Total interest expense increased by $838,000, or 6.9%, to $13.0 million
for the year ended June 30, 1999, from $12.2 million for the year ended June 30,
1998. Such increase was principally the result of an increase in the average
balance in interest bearing liabilities of $19.6 million to $258.5 million for
the year ended June 30, 1999, from $238.9 million for the prior year.
Net Interest Income. Net interest income increased by $309,000, or
3.9%, to $8.1 million for the year ended June 30, 2000, from $7.8 million for
the year ended June 30, 1999. This increase was due principally to slightly
lower rates paid on deposits, partially offset by a decrease in the ratio of
average interest-earning assets to average interest-bearing liabilities.
6
<PAGE>
Net interest income decreased by $305,000, or 3.7%, to $7.8 million for
the year ended June 30, 1999, from $8.1 million for the year ended June 30,
1998. This decrease was due principally to a decrease in the ratio of average
interest-earning assets to average interest bearing liabilities, and a decrease
in yield on interest-earning assets.
Provision for Losses. The Company maintains an allowance for loan
losses, which was $742,000 at June 30, 2000, in accordance with generally
accepted accounting principles. The allowance exists to absorb known and
inherent losses in the Company's overall loan portfolio. In addition to
historical loss experience, the Company considers other factors that are likely
to cause loan losses, including changes in economic and business conditions and
developments, changes in the nature and volume of the portfolio, trends in the
level of past due and classified loans and the status of nonperforming loans.
The Company's provision for loan losses decreased to $21,000 for the year ended
June 30, 2000, from $39,000 for the year ended June 30, 1999. The Company's
allowance for loan losses as a percentage of nonperforming loans was 29.1% and
26.2% at June 30, 2000 and 1999, respectively, and the Company's nonperforming
loans as a percentage of total loans was 1.2% at June 30, 2000 and 1.4% at June
30, 1999. At June 30 2000 and 1999, nonperforming loans consisted primarily of a
$2.5 million commercial mortgage loan which was due in June 1998. The borrower
has declared bankruptcy and foreclosure proceedings are in progress. Based on a
recent appraisal of the property securing the loan and other relevant factors,
management does not believe that the Company will incur a significant loss on
this loan. Management also believes that, on an overall basis, the allowance for
loan losses at June 30, 2000, is sufficient to address the credit risk in the
loan portfolio.
Noninterest Income. Noninterest income increased by $44,000 to $445,000
for the year ended June 30, 2000, from $400,000 for the year ended June 30,
1999. The increase was due to increases in service fees and charges and
increases in the cash surrender value of life insurance investments.
Noninterest income increased by $50,000 to $400,000 for the year ended
June 30, 1999, from $350,000 for the year ended June 30, 1998. The increase was
due principally to increases in the cash surrender value of life insurance
investments.
Noninterest Expense. Noninterest expense increased by $238,000, to $3.1
million for the year ended June 30, 2000, from $2.8 million for the year ended
June 30, 1999. Compensation and employee benefits increased by $186,000 to $1.8
million for the year ended June 30, 2000, from $1.6 million for the prior year.
The increase was due principally to staffing added for a new branch office and
other normal increases in salary levels. Occupancy expenses, advertising and
other expenses also increased principally due to additional costs of opening and
operating the new branch. These increases were partially offset by a decrease in
SAIF deposit insurance premiums due to a decrease in the premium rate assessed
on insured deposits.
Noninterest expense decreased by $254,000, to $2.8 million for the year
ended June 30, 1999, from $3.1 million for the year ended June 30, 1999.
Compensation and employee benefits decreased by $196,000, to $1.6 million for
the year ended June 30, 1999, from $1.8 million for the prior year. The decrease
was due principally to a decrease of $116,000 in Employee Stock Ownership Plan
("ESOP") contribution expense as a result of decreases in the price of ESOP
shares, the basis used to determine the expense. Other decreases in compensation
and employee benefits were primarily the result of the retirement of an officer.
Advertising decreased due to a decreased emphasis on advertising.
The ratio of noninterest expenses to average assets was .93%, 0.91% and
1.06% for the years ending June 30, 2000, 1999 and 1998, respectively.
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The provision for income taxes was approximately $1.9 million for the
years ended June 30, 2000, 1999 and 1998. The effective tax rates were 34.5%,
35.3% and 36.4% for the years ending June 30,2000, 1999 and 1998, respectively.
The decrease in the effective rates in 2000 and 1999 was due to lower state
income taxes.
Other comprehensive income. The accumulated unrealized gains on
securities available-for-sale, net of related income taxes, decreased $802,000
for the year ended June 30, 2000, as compared to increases of $376,000 and
$554,000 for the years ended June 30, 1999 and 1998, respectively. These changes
primarily reflect fluctuations in interest rates and general market trends.
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<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ------------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1).............. $213,071 $ 15,054 7.06% $ 190,836 $ 14,007 7.34% $177,817 $ 13,376 7.52%
Consumer and other loans....... 3,836 275 7.17 4,535 329 7.25 5,065 359 7.09
Mortgage-backed securities..... 9,141 637 6.97 13,210 917 6.94 19,604 1,423 7.26
Investment securities.......... 71,687 4,757 6.64 54,322 3,647 6.71 46,311 3,111 6.72
Interest-earning deposits(2)... 10,889 6.05 5.56 28,931 1,403 4.85 27,161 1,538 5.66
Other investments(3)........... 13,660 7.42 5.44 13,221 539 4.08 9,424 502 5.33
-------- --------- ------- --------- --------- ------- -------- --------- -------
Total interest-earning assets 322,284 22,070 6.85 305,055 20,842 6.83 285,382 20,309 7.12
--------- ------- --------- ------- --------- -------
Noninterest-earning assets....... 10,348 8,353 7,046
-------- --------- --------
Total assets................. $332,632 $ 313,408 $292,428
======== ========= ========
Interest-bearing liabilities:
Savings deposits.............. $278,775 13,890 4.98 $ 257,942 12,965 5.03 $238,272 12,114 5.09
Other borrowed funds.......... 422 38 9.00 518 44 8.49 616 57 8.28
-------- --------- ------- --------- --------- ------- -------- --------- -------
Total interest-bearing
liabilities ............... 279,197 13,928 4.99 258,460 13,009 5.03 238,888 12,171 5.09
--------- ------- --------- ------- --------- -------
Noninterest-bearing
liabilities ................... 5,774 5,800 5,331
-------- --------- --------
Total liabilities........... 284,971 264,260 244,219
Stockholders' equity............ 47,661 49,148 48,209
-------- --------- --------
Total liabilities and
stockholders' equity........ $332,632 $ 313,408 $292,428
======== ========= ========
Net interest income............. $ 8,142 $ 7,833 $ 8,138
========= ========= =========
Net interest rate spread (4).... 1.86% 1.80% 2.03%
======= ======= =======
Net interest margin (5)......... 2.53% 2.57% 2.85%
======= ======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities... 115.43% 118.03% 119.46%
======= ======= =======
</TABLE>
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(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes Federal Home Loan Bank stock and other assets.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
9
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Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest- bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------------------ -------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
----------------------------- Total ----------------------------- Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------ ---- ------ ---------- ------ ---- ------ ----------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)........... $ 1,632 $ (534) $ (51) $ 1,047 $ 979 $ (320) $ (28) $ 631
Consumer and other loans.... (51) (4) 1 (54) (38) 8 -- (30)
Mortgage-backed securities.. (283) 4 (1) (280) (464) (62) 20 (506)
Investment securities....... 1,165 (38) (17) 1,110 538 (5) 3 536
Interest-earning deposits(2) (875) 205 (128) (798) 100 (220) (15) (135)
Other investments(3)........ 18 180 5 203 203 (117) (48) 37
------- ------- ------- ------- ------- ------ ------ ------
Total interest-earning
assets .................... 1,606 (187) (191) 1,228 1,317 (716) (68) 533
------- ------- ------- ------- ------- ------ ------ ------
Interest expense.............. 1,043 (103) (21) 919 996 (143) (15) 838
------- ------- ------- ------- ------- ------ ------ ------
Change in net interest
income....................... $ 563 $ (84) $ (170) $ 309 $ 321 $ (573) $ (53) $ (305)
======= ======= ======= ======= ======= ====== ====== ======
</TABLE>
-------------
(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes Federal Home Loan Bank stock and other assets.
Management of Market Risk
Like other financial institution holding companies, the Company's most
significant form of market risk is interest rate risk. The Company is subject to
interest rate risk because its liabilities generally have shorter terms or
maturities than its assets. As a result, its liabilities are more sensitive to
changes in market interest rates. The general objective of the Company's
interest rate risk management is to determine the appropriate level of risk
given the Company's business strategy, and then manage that risk in a manner
that is consistent with the Company's policy to reduce exposure of the Company's
net interest income to changes in market interest rates.
The Company's policy in recent years has been to attempt to better
match the maturities and interest rates of its interest rate sensitive assets
and liabilities by emphasizing fixed-rate one- to four-family mortgage loans
with terms of 15 years or less, adjustable-rate first mortgages and home equity
loans, and to maintain relatively high levels of liquidity. By maintaining a
significant percentage of its assets in cash and other liquid investments, the
Company is able to reinvest a higher percentage of its assets more quickly in
response to changes in market interest rates, thereby reducing its exposure to
interest rate volatility. The Company does not utilize derivative instruments or
engage in other hedging activities to manage interest rate risk.
10
<PAGE>
The Company has an Asset-Liability Management Committee which is
responsible for reviewing the Company's asset and liability policies. The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital ratios and requirements.
The Company measures interest rate risk in terms of the sensitivity of
the Company's net portfolio value ("NPV") to changes in interest rates. NPV is
the difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. The following table presents the
pro forma computations of the Company's NPV as of June 30, 2000.
<TABLE>
<CAPTION>
NPV as Percentage of
Change in Present Value of Assets
Interest Rates Net Portfolio Value ------------------------------
in Basis Points ---------------------------------------------- Basis Point
(Rate Shock) $ Amount $ Change % Change NPV Ratio Change
------------ -------- -------- -------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
300 13,319 (34,094) (72)% 4.50% (964)bp
200 22,778 (24,635) (52)% 7.42% (672)bp
100 32,895 (14,518) (31)% 10.31% (383)bp
Static 47,413 -- -- 14.14% --
(100) 51,961 4,548 10% 15.21% 107bp
(200) 56,179 8,766 18% 16.15% 201bp
(300) 57,510 10,098 21% 16.38% 224bp
</TABLE>
The above table indicates that at June 30, 2000, in the event of a
sudden and sustained increase in prevailing market rates, the Company's NPV
would be expected to decrease, and that in the event of a sudden and sustained
decrease in prevailing market interest rates, the Company's NPV would be
expected to increase. The Company's Board of Directors reviews the Company's NPV
position quarterly, and, if estimated changes in NPV are not within the targets
established by the Board, the Board may direct management to adjust the asset
and liability mix to bring interest rate risk within Board approved targets.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. The NPV table presented above
assumes that the composition of the Company's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. It also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing characteristics of specific assets and liabilities.
Accordingly, although the NPV table provides an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Company's net interest income and will differ
from actual results.
11
<PAGE>
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as
defined by Office of Thrift Supervision ("OTS") regulations. This requirement,
which varies from time to time depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
required ratio currently is 4%. The Bank's liquidity ratio averaged 36.2% during
the quarter ended June 30, 2000. The Bank adjusts its liquidity levels in order
to meet funding needs of deposit outflows, payment of real estate taxes on
mortgage loans and loan commitments. The Bank also adjusts liquidity as
appropriate to meet its asset and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments, and earnings and funds provided from
operations. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Bank manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Bank invests in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
Assets qualifying for liquidity held at June 30, 2000, amounted to $101.9
million. For additional information about cash flows from the Bank's operating,
financing, and investing activities, see "Consolidated Statements of Cash Flows"
included in the Consolidated Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash are net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds; however, the Bank has never borrowed funds from the FHLB.
At June 30, 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.
Certificates of deposit scheduled to mature in less than one year at June 30,
2000, totaled $132.6 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Bank.
At June 30, 2000, the Bank exceeded OTS capital requirements. Set forth
below is a summary of the Bank's compliance with the following OTS capital
standards as of June 30, 2000.
<TABLE>
<CAPTION>
Minimum To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- ---------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio(1)
------ --------- ------ --------- ------ --------
As of June 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Tier I core capital............... $ 45,491 13.6% $ 13,375 4.0% $ 16,719 >5.0%
Tier I risk-based capital......... 45,491 27.7 6,566 4.0 9,849 >6.0
Total risk-based capital.......... 47,393 28.9 13,133 8.0 16,416 >10.0
</TABLE>
-------------
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
12
<PAGE>
Impact of Inflation and Changing Prices
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
assets or liabilities in the statement of financial position and measure those
instruments at fair value and is effective with respect to the Company in the
first quarter of 2001. The adoption of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
Common Stock Repurchase Plan
As of June 30, 2000, the Company was authorized to repurchase up to
1,023,441 shares of its common stock pursuant to its Stock Repurchase Plan.
During the years ended June 30, 2000, and 1999, the Company repurchased 324,475
and 292,736 shares at an average cost of $10.71 and $13.56 per share,
respectively.
13
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
A summary of selected quarterly financial data for the years ended June
30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands Except Per Share Data)
Fiscal 2000
-----------
<S> <C> <C> <C> <C>
Interest income.................. $ 5,448 $ 5,498 $ 5,542 $ 5,582
Net interest income.............. 2,027 2,039 2,073 2,003
Provision for losses............. 12 9 -- --
Income before provision
for income taxes............... 1,431 1,360 1,429 1,266
Net income....................... 931 892 940 832
========= ======== ========= ========
Net income per common share:
Basic.......................... $ .20 $ .19 $ .21 $ .18
Diluted........................ .19 .19 .21 .18
========= ======== ========= ========
Fiscal 1999
-----------
Interest income.................. $ 5,267 $ 5,147 $ 5,149 $ 5,279
Net interest income.............. 2,069 1,915 1,904 1,945
Provision for losses............. 29 2 -- 8
Income before provision
for income taxes............... 1,437 1,330 1,268 1,318
Net income....................... 923 856 818 867
========= ======== ========= ========
Net income per common share:
Basic.......................... $ .18 $ .17 $ .16 $ .18
Diluted........................ .18 .17 .16 .18
========= ======== ========= ========
</TABLE>
14
<PAGE>
COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market
under the symbol "LFED." As of August 15, 2000, the Company had 5 registered
market makers, 474 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
4,538,181 shares outstanding. As of such date, Leeds Federal Bankshares, M.H.C.
(the "Mutual Holding Company"), the Company's mutual holding company, held
3,300,000 shares of common stock and stockholders other than the Mutual Holding
Company held 1,238,181 shares.
The following table sets forth market price and dividend information
for the common stock for each quarter of the previous two fiscal years.
Fiscal Year Ended Cash Dividends
June 30, 2000 High Low Declared
----------------- --------- --------- --------------
First quarter $ 11.88 $ 10.38 $ .14
Second quarter 10.75 8.50 .15
Third quarter 10.25 9.00 .15
Fourth quarter 11.06 9.63 .15
Fiscal Year Ended Cash Dividends
June 30, 1999 High Low Declared
----------------- --------- --------- --------------
First quarter $ 18.88 $ 15.50 $ .14
Second quarter 15.75 11.75 .14
Third quarter 14.75 12.00 .14
Fourth quarter 12.50 10.75 .14
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and will depend upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, the Company's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
OTS regulations impose limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by a savings
institution to repurchase or otherwise acquire its stock, payments to
stockholders of another savings institution in a cash-out merger, and other
distributions charged against capital. The regulations establish a three-tiered
system of regulation, with the greatest flexibility being afforded to
well-capitalized or Tier 1 savings associations. As of June 30, 2000, the most
recent notification categorized the Bank as "well-capitalized." Accordingly,
under the OTS capital distribution regulations, the Bank would be permitted to
pay, upon notice to the OTS, dividends during any calendar year up to 100
percent of its net income during that calendar year, plus its retained net
income for the preceding two years.
In addition to the foregoing, earnings of the Company appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other distributions to stockholders without
payment of taxes at the then-current tax rate by the Company on the amount of
earnings removed from the reserves for such distributions. The Company intends
to make full use of this favorable tax treatment and does not contemplate any
distribution by the Company in a manner that would create federal tax liability.
The Mutual Holding Company has waived the receipt of all dividends paid
by the Company. OTS regulations require the Mutual Holding Company to notify the
OTS of any proposed waiver of the receipt of dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by case-basis, and, in
general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such a waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary
15
<PAGE>
is controlled by the mutual holding company, the dollar amount of dividends
waived by the mutual holding company is considered as a restriction on the
retained earnings of the savings association in a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS No. 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association (and the savings association's capital ratios adjusted accordingly)
in evaluating any proposed dividend under OTS capital distribution regulations;
and (v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
16
<PAGE>
Independent Auditors' Report
The Board of Directors
Leeds Federal Bankshares, Inc.
Baltimore, Maryland:
We have audited the accompanying consolidated statements of financial condition
of Leeds Federal Bankshares, Inc. and subsidiary as of June 30, 2000 and 1999,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Leeds Federal
Bankshares, Inc. and subsidiary as of June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
------------------------
August 18, 2000
F-1
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Financial Condition
June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
Assets
<S> <C> <C>
Cash, including interest-bearing deposits of $1,982,152 in
2000 and $4,964,126 in 1999 .......................................................... $ 4,041,162 10,057,442
Short-term investments ................................................................. 9,551,979 12,941,254
Secured short-term loans to commercial banks ........................................... 9,562,746 10,011,970
Securities available-for-sale, amortized cost of $2,731,760 (note 3) ................... 5,258,493 6,551,478
Investment securities held-to-maturity (fair value of $62,206,406
in 2000 and $63,428,635 in 1999 (note 4) ............................................. 67,392,698 66,167,181
Mortgage-backed securities held-to-maturity (fair value of
$8,342,663 in 2000 and $10,214,065 in 1999) (note 5) ................................. 8,317,018 10,008,111
Loans receivable, net (note 6) ......................................................... 219,203,607 203,886,170
Investment in Federal Home Loan Bank of Atlanta stock, at cost (note 10) ............... 2,187,200 1,935,700
Property and equipment, net (note 7) ................................................... 2,242,783 1,484,620
Cash surrender value of life insurance (note 11) ....................................... 6,687,537 6,399,473
Accrued interest receivable ............................................................ 2,116,855 1,994,604
Prepaid expenses and other assets ...................................................... 486,229 204,020
------------- -------------
$ 337,048,307 331,642,023
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Savings accounts (note 8) ............................................................ $ 281,866,206 274,625,611
Borrowed funds-- Employee Stock Ownership Plan (note 12) ............................. 384,000 470,813
Advance payments by borrowers for taxes, insurance
and ground rents ................................................................... 5,073,906 5,203,532
Federal and state income taxes (note 9):
Currently payable .................................................................. 267,283 107,577
Deferred ........................................................................... 493,303 1,393,803
Accrued expenses and other liabilities (notes 11 and 13) ............................. 1,554,136 1,336,275
------------- -------------
Total liabilities ............................................................... 289,638,834 283,137,611
------------- -------------
Stockholders' equity (notes 10, 12 and 15):
Common stock, $1 par value; 20,000,000 shares authorized; 5,205,597
and 5,195,597 shares issued in 2000 and 1999, respectively ......................... 5,205,597 5,195,597
Additional paid-in-capital ........................................................... 9,606,811 9,367,161
Unearned employee stock ownership plan shares ........................................ (297,066) (390,682)
Treasury stock, at cost; 656,416 and 331,941 shares
in 2000 and 1999, respectively ..................................................... (8,216,719) (4,740,869)
Retained income, substantially restricted ............................................ 39,573,847 36,734,317
Accumulated other comprehensive income ............................................... 1,537,003 2,338,888
------------- -------------
Total stockholders' equity ...................................................... 47,409,473 48,504,412
------------- -------------
Commitments (notes 11, 12 and 14)
$ 337,048,307 331,642,023
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Income and Comprehensive Income
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Interest income:
First mortgage and other loans ..... $ 15,328,947 14,336,211 13,734,747
Investment securities and short-
term investments .................. 6,104,071 5,588,307 5,150,921
Mortgage-backed securities ......... 636,556 917,074 1,423,221
------------ ------------ ------------
Total interest income .... 22,069,574 20,841,592 20,308,889
------------ ------------ ------------
Interest expense:
Savings accounts (note 8) .......... 13,889,755 12,965,300 12,114,148
Other .............................. 38,030 43,489 56,971
------------ ------------ ------------
Total interest expense ... 13,927,785 13,008,789 12,171,119
------------ ------------ ------------
Net interest income ...... 8,141,789 7,832,803 8,137,770
Provision for loan losses (note 6) ...... 20,983 39,412 191,705
------------ ------------ ------------
Net interest income after
provision for loan losses 8,120,806 7,793,391 7,946,065
------------ ------------ ------------
Noninterest income:
Service fees and charges ........... 156,241 132,219 137,190
Other .............................. 288,584 268,175 212,889
------------ ------------ ------------
444,825 400,394 350,079
------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits . 1,759,282 1,573,399 1,769,715
Occupancy expense .................. 259,710 221,527 195,151
SAIF deposit insurance premiums
(note 10) ......................... 184,213 222,022 222,147
Advertising ........................ 158,807 127,933 208,165
Other .............................. 717,186 696,020 699,885
------------ ------------ ------------
3,079,198 2,840,901 3,095,063
------------ ------------ ------------
Income before provision
for income taxes ........ 5,486,433 5,352,884 5,201,081
Provision for income taxes (note 9) ..... 1,891,125 1,889,368 1,895,072
------------ ------------ ------------
Net income ............... 3,595,308 3,463,516 3,306,009
Other comprehensive income, net of tax:
Unrealized gain (loss) on
securities available-for-sale,
net ............................. (801,885) 376,407 554,353
------------ ------------ ------------
Comprehensive income ..... $ 2,793,423 3,839,923 3,860,362
============ ============ ============
Net income per share of common stock
(note 16):
Basic .............................. $ 0.78 0.69 0.65
Diluted ............................ 0.77 0.69 0.64
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Unearned
employee
stock Retained Accumu- Total
Additional ownership Treasury income, lated other stock-
Common paid-in plan stock, substantially comprehen- holders'
stock capital shares at cost restricted sive income equity
----- ------- ------ ------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 .... $ 5,182,097 8,887,978 (591,300) -- 31,854,434 1,408,128 46,741,337
Compensation expense-- ESOP . -- 217,378 103,409 -- -- -- 320,787
Compensation expense-- MRP .. -- 48,234 -- -- -- -- 48,234
Other comprehensive income .. -- -- -- -- -- 554,353 554,353
Exercise of stock options ... 13,500 93,420 -- -- -- -- 106,920
Dividends ($.55 per share) .. -- -- -- -- (997,700) -- (997,700)
Net income .................. -- -- -- -- 3,306,009 -- 3,306,009
Purchases of treasury stock . -- -- -- (772,430) -- -- (772,430)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 .... 5,195,597 9,247,010 (487,891) (772,430) 34,162,743 1,962,481 49,307,510
Compensation expense-- ESOP . -- 108,244 97,209 -- -- -- 205,453
Compensation expense-- MRP .. -- 11,907 -- -- -- -- 11,907
Other comprehensive income .. -- -- -- -- -- 376,407 376,407
Dividends ($.56 per share) .. -- -- -- -- (891,942) -- (891,942)
Net income .................. -- -- -- -- 3,463,516 -- 3,463,516
Purchases of treasury stock . -- -- -- (3,968,439) -- -- (3,968,439)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 .... 5,195,597 9,367,161 (390,682) (4,740,869) 36,734,317 2,338,888 48,504,412
Compensation expense-- ESOP . -- 48,535 93,616 -- -- -- 142,151
Other comprehensive income .. -- -- -- -- -- (801,885) (801,885)
Exercise of stock options ... 10,000 69,200 -- -- -- -- 79,200
Income tax benefit of MRP
awards and stock options -- 121,915 -- -- -- -- 121,915
Dividends ($.59 per share) .. -- -- -- -- (755,778) -- (755,778)
Net income .................. -- -- -- -- 3,595,308 -- 3,595,308
Purchases of treasury stock . -- -- -- (3,475,850) -- -- (3,475,850)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 .... $ 5,205,597 9,606,811 (297,066) (8,216,719) 39,573,847 1,537,003 47,409,473
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .................................... $ 3,595,308 3,463,516 3,306,009
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of loan fees ................. (80,866) (218,168) (98,772)
Provision for loan losses .............. 20,983 39,412 191,705
Accretion of discounts on investment
securities and mortgage-
backed securities ................... (10,650) (10,763) (18,835)
Loss (gain) on sale of assets, net ..... -- 2,190 (1,806)
Depreciation ........................... 144,237 133,791 125,639
Noncash compensation under stock-
based benefit plans ................. 142,151 217,360 369,021
Income tax benefit of MRP awards
and stock options ................... 121,915 -- --
Deferred income tax benefit ............ (409,400) (171,083) (86,626)
Increase in accrued interest receivable (122,251) (161,286) (44,708)
Increase (decrease) in income taxes
currently payable ................... 159,706 (26,099) (202,165)
Increase in accrued expenses and
other liabilities ................... 250,517 260,991 329,633
Increase in unearned loan fees ......... 55,222 155,797 110,922
Increase in prepaid expenses and
other assets ........................ (282,209) (2,812) (14,333)
------------ ------------ ------------
Net cash provided by
operating activities ............ 3,584,663 3,682,846 3,965,684
------------ ------------ ------------
Cash flows from investing activities:
Purchases of securities available-for-sale .... -- (1,000,000) (1,175,000)
Maturities of securities available-for-sale ... -- 3,000,000 2,200,000
Purchase of investment securities
held-to-maturity ........................... (1,700,000) (69,225,000) (35,903,264)
Maturities of and principal repayments on
investment securities held-to-maturity ..... 477,213 43,041,421 38,888,255
Purchase of mortgage-backed securities
held-to-maturity ........................... (400,000) -- --
Principal repayments on mortgage-backed
securities held-to-maturity ................ 2,099,013 6,414,919 5,769,485
(Purchase) sale of Federal Home Loan
Bank of Atlanta stock ...................... (251,500) 441,500 --
Loan disbursements, net of repayments ......... (15,312,776) (13,681,964) (16,289,600)
Purchases of property and equipment ........... (902,400) (769,336) (117,276)
Sale of property and equipment ................ -- -- 6,001
Investment in life insurance policies ......... (288,064) (266,544) (2,979,736)
Sale of ground rents owned .................... -- -- 39,500
------------ ------------ ------------
Net cash used in investing activities (16,278,514) (32,045,004) (9,561,635)
------------ ------------ ------------
</TABLE>
(Continued)
F-5
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Cash flows from financing activities:
<S> <C> <C> <C>
Payment of dividends ....................... (788,434) (988,540) (973,322)
Repayment of borrowed funds ................ (86,813) (81,187) (96,000)
Net increase in savings accounts ........... 7,240,595 29,356,009 12,679,593
(Decrease) increase in advance payments
by borrowers for taxes, insurance and
ground rents ............................ (129,626) 197,512 201,960
Purchases of treasury stock ................ (3,475,850) (3,968,439) (772,430)
Exercise of stock options .................. 79,200 -- 106,920
------------ ------------ ------------
Net cash provided by
financing activities ......... 2,839,072 24,515,355 11,146,721
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents ......... (9,854,779) (3,846,803) 5,550,770
Cash and cash equivalents at beginning of year 33,010,666 36,857,469 31,306,699
------------ ------------ ------------
Cash and cash equivalents at end of year ..... $ 23,155,887 33,010,666 36,857,469
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(1) Description of Business, Summary of Significant Accounting Policies and
Other Matters
(a) Business
Leeds Federal Bankshares, Inc. (the Company) is a federally chartered
corporation which owns all of the issued and outstanding common stock
of Leeds Federal Savings Bank (the Bank), a federally-chartered
savings bank that conducts its operations through branches in
Baltimore County and Howard County, Maryland. At June 30, 2000,
approximately 73% of the outstanding shares of common stock of the
Company were held by Leeds Federal Bankshares, M.H.C. (MHC), a federal
mutual holding company.
The primary business of the Bank is attracting deposits from
individuals and corporate customers and originating mortgage loans
secured by residential real estate properties. The Bank is subject to
competition from other financial institutions in attracting and
retaining deposits and in making loans. The Bank is also subject to
the regulations of certain agencies of the federal government and
undergoes periodic examinations by those agencies.
(b) Basis of Presentation
The consolidated financial statements include the accounts of the
Company, the Bank and its wholly owned subsidiaries, Leeds Investment
Corporation and Leeds Investor Services, Inc. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of the dates of the statements of financial
condition and the reported amounts of income and expenses for the
periods. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses. In connection with this determination, management
obtains independent appraisals for significant properties and prepares
fair value analyses, as appropriate. Management believes that the
allowance for losses on loans is adequate. While management uses
available information to recognize losses on loans, future additions
to the allowance may be necessary based on changes in economic
conditions, particularly in the State of Maryland. In addition,
various regulatory agencies, as an integral part of their examination
processes, periodically review the Bank's allowance for losses on
loans. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to
them at the time of their examinations.
(c) Short-Term Investments
Short-term investments, which consist of money market accounts, are
carried at cost which approximates fair value.
(d) Secured Short-Term Loans to Commercial Banks
Secured short-term loans to commercial banks, which consist of Federal
funds sold, are carried at cost which approximates fair value.
Generally, Federal funds are purchased and sold for one-day periods.
(Continued)
F-7
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(e) Investment Securities and Mortgage-Backed Securities
Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity and recorded at
amortized cost. Debt securities not classified as held-to-maturity and
equity securities with readily determinable fair values are classified
as trading securities if bought and held principally for the purpose
of selling them in the near term. Trading securities are reported at
fair value, with unrealized gains and losses included in earnings.
Investments not classified as held-to-maturity or trading are
considered available-for-sale and are reported at fair value with
unrealized gains and losses, net of the related tax effects, excluded
from income and reported as an item of other comprehensive income
until realized. Fair value is determined based on published bid prices
or bid quotations received from securities dealers. Realized gains or
losses on the sales of investments are determined using the specific
identification method and are recognized at the time of sale. Premiums
and discounts on investment and mortgage-backed securities are
amortized over the term of the security using methods that approximate
the interest method.
(f) Loan Fees
Loan origination and commitment fees and direct origination costs of
loans are deferred and amortized into income over the contractual
lives of the related loans using the interest method. Under certain
circumstances, commitment fees are recognized over the commitment
period or upon the expiration of the commitment
(g) Loans Receivable
Loans are stated at the amount of unpaid principal reduced by unearned
income and the allowance for loan losses. Interest on loans is not
accrued when, in the opinion of management, full collection of
principal or interest is in doubt, or payment of principal or interest
has become 90 days past due. Interest accrued prior to a loan becoming
90 days past due is not retained in income. Any interest ultimately
collected on such loans is recorded in income in the period of
recovery.
The provision for losses on loans is determined based on management's
review of the loan portfolio and analyses of borrowers' ability to
pay, past collection experience, risk characteristics of individual
loans or groups of similar loans and underlying collateral, current
economic conditions, the status of nonperforming loans, and other
relevant factors. Loans or portions thereof are charged off when
considered uncollectible by management.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Loans that experience insignificant payment delays (90 days or less)
or shortfalls generally are not considered impaired. Impairment of a
loan is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or at the
loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. If the measure of the impaired loan
is less than the recorded investment in the loan, an impairment is
recognized through a valuation allowance and a corresponding provision
for loan losses.
Large groups of smaller balance homogenous loans, including
residential mortgage loans and consumer installment loans, are
collectively evaluated for impairment. Accordingly, individual
consumer and residential loans are not separately identified for
impairment disclosures.
(Continued)
F-8
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(h) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Additions and
betterments are capitalized, and charges for repairs and maintenance
are expensed as incurred. The related cost and accumulated
depreciation are eliminated from the accounts when an asset is sold or
retired and the resultant gain or loss is credited or charged to
income.
(i) Real Estate Owned
Real estate acquired through foreclosure is recorded at the lower of
cost or fair value less estimated costs to sell. Costs relating to
holding real estate are charged against income, while costs relating
to improving real estate are capitalized until a salable condition is
reached.
(j) Income Taxes
Deferred income taxes are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized, with
certain exceptions, for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities based
on enacted tax rates expected to be in effect when such amounts are
realized or settled. Deferred tax assets are recognized only to the
extent that it is more likely than not that such amounts will be
realized based on consideration of available evidence, including tax
planning strategies and other factors. The effects of changes in tax
laws or rates on deferred tax assets and liabilities are recognized in
the period that includes the enactment date.
Qualified thrift lenders such as the Bank are not required to provide
a deferred tax liability for bad debt reserves for tax purposes that
arose in fiscal years beginning before December 31, 1987. Such bad
debt reserve for the Bank amounted to approximately $7,100,000 with an
income tax effect of approximately $2,700,000 at June 30, 2000. This
bad debt reserve could become taxable in the future if certain
conditions are met by the Bank.
(k) Stock-Based Compensation
The Company uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is
recognized for awards of shares of common stock to employees only if
the quoted market price of the stock at the grant date (or other
measurement date, if later) is greater than the amount the employee
must pay to acquire the stock. Compensation cost is recorded on a
pro-rata basis as the employees perform the services required to
acquire the stock.
The Company has established an Employee Stock Ownership Plan (ESOP)
for its employees. The Company recognizes the costs associated with
the ESOP in accordance with provisions of AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans.
Accordingly, compensation expense is recorded based on the market
value of shares committed-to-be-released to the ESOP for allocation to
participants for services rendered.
(Continued)
F-9
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(l) Comprehensive Income
Comprehensive income includes all changes in stockholders' equity
during a period, except those relating to investments by and
distributions to stockholders. The Company's comprehensive income
consists of net earnings and unrealized gains and losses on securities
available-for-sale and is presented in the statements of income and
comprehensive income. Accumulated other comprehensive income is
displayed as a separate component of stockholders' equity.
(m) Cash Equivalents and Cash Flow Information
For purposes of the consolidated statement of cash flows, all highly
liquid investments with maturities at dates of purchase of three
months or less are considered to be cash equivalents. Cash equivalents
include interest-bearing deposits, short-term investments and secured
short-term loans to commercial banks.
The Company made income tax payments of approximately $1,985,000,
$2,169,000 and $2,184,000 in 2000, 1999 and 1998, respectively. The
Company paid approximately $13,928,000, $13,012,000 and $12,159,000 in
interest on deposits and other borrowings in 2000, 1999 and 1998,
respectively.
(2) Securities Purchased Under Agreements to Resell
The Bank periodically purchases securities under agreements to resell
(repurchase agreements). The amounts advanced under the agreements
represent short-term loans and are reflected as short-term investments in
the consolidated statements of financial condition.
The securities underlying the agreements are generally book entry
securities which are delivered by appropriate entry in the Bank's account
maintained at a commercial bank under a written custodial agreement that
explicitly recognizes the Bank's interest in the securities. There were no
securities purchased under agreements to resell at June 30, 2000 or 1999
and the Bank did not enter into any repurchase agreements in 2000 or 1999.
Securities purchased under agreements to resell averaged $3,412,000 during
1998, and the maximum amount outstanding at any month-end was $7,037,000.
(Continued)
F-10
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(3) Securities Available-for-Sale
Securities available-for-sale are summarized as follows at June 30:
<TABLE>
<CAPTION>
2000
--------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations
due:
Beyond 5 years but within 10 years $ 500,000 -- (10,156) 489,844
Beyond 10 years .................. 2,075,000 -- (112,887) 1,962,113
Federal Home Loan Mortgage Corporation
(FHLMC) preferred stock ............ 56,760 2,701,776 -- 2,758,536
Other equity securities ................ 100,000 -- (52,000) 48,000
---------- ---------- ---------- ----------
$2,731,760 2,701,776 (175,043) 5,258,493
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations
due:
Beyond 5 years but within 10 years $ 500,000 938 -- 500,938
Beyond 10 years .................. 2,075,000 -- (42,956) 2,032,044
FHLMC preferred stock .................. 56,760 3,893,736 -- 3,950,496
Other equity securities ................ 100,000 -- (32,000) 68,000
---------- ---------- ---------- ----------
$2,731,760 3,894,674 (74,956) 6,551,478
========== ========== ========== ==========
</TABLE>
(Continued)
F-11
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(4) Investment Securities Held-to-Maturity
Investment securities held-to-maturity are summarized as follows at June
30:
<TABLE>
<CAPTION>
2000
-----------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations ......... $67,392,698 25,120 (5,211,412) 62,206,406
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations ......... $66,167,181 47,331 (2,785,877) 63,428,635
=========== =========== =========== ===========
</TABLE>
Investment securities mature as follows at June 30:
2000 1999
------------------------ ------------------------
Amortized Amortized
cost Fair value cost Fair value
---- ---------- ---- ----------
Due within 12 months ... $ 487,445 487,445 575,879 575,879
Due beyond 12 months
but within 5 years ... 1,800,000 1,790,933 1,600,000 1,633,283
Due beyond 5 years
but within 10 years .. 1,800,000 1,690,370 2,000,000 1,941,710
Due beyond 10 years .... 63,305,253 58,237,658 61,991,302 59,277,763
----------- ----------- ----------- -----------
$67,392,698 62,206,406 66,167,181 63,428,635
=========== =========== =========== ===========
(Continued)
F-12
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(5) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities held-to-maturity are summarized as follows at
June 30:
2000
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---- ----- ------ ----------
Government National
Mortgage Association
(GNMA) .............. $ 5,756,560 51,400 (4,503) 5,803,457
Federal National
Mortgage Association
(FNMA) .............. 1,256,720 908 (14,615) 1,243,013
FHLMC ................ 755,331 2,033 (6,478) 750,886
Collateralized
Mortgage Obligation--
FNMA REMIC .......... 548,407 -- (3,100) 545,307
----------- ----------- ----------- -----------
$ 8,317,018 54,341 (28,696) 8,342,663
=========== =========== =========== ===========
1999
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---- ----- ------ ----------
GNMA ................. $ 6,676,664 168,976 -- 6,845,640
FNMA ................. 1,478,778 10,523 -- 1,489,301
FHLMC ................ 1,245,714 16,047 -- 1,261,761
Collateralized
Mortgage Obligation--
FNMA REMIC .......... 606,955 10,408 -- 617,363
----------- ----------- ----------- -----------
$10,008,111 205,954 -- 10,214,065
=========== =========== =========== ===========
(Continued)
F-13
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(6) Loans Receivable
Loans receivable are summarized as follows at June 30:
2000 1999
---- ----
First mortgage loans:
One-to-four family residential ............ $202,342,561 186,040,721
Commercial ................................ 2,500,000 2,500,000
Construction .............................. 2,238,615 3,284,893
------------ ------------
207,081,176 191,825,614
Home equity loans .............................. 11,070,571 11,454,227
Loans secured by savings accounts .............. 445,401 436,745
Consumer loans ................................. 3,361,863 3,539,664
------------ ------------
221,959,011 207,256,250
Less:
Allowance for loan losses ................. 741,678 725,152
Unearned loan fees ........................ 765,444 739,800
Undisbursed portion of loans in process ... 1,248,282 1,905,128
------------ ------------
Loans receivable, net .......... $219,203,607 203,886,170
============ ============
Substantially all of the loans receivable are mortgage loans secured by
residential real estate properties located in the State of Maryland. Loans
are extended only after evaluation by management of customers'
creditworthiness, the loan-to-value ratio and other relevant factors. The
Bank generally does not lend more than 80% of the appraised value of a
property and, with limited exceptions, requires private mortgage insurance
on residential mortgages with loan-to-value ratios in excess of 80%. In
addition, the Bank generally obtains personal guarantees of repayment from
borrowers and/or others for construction and commercial loans and disburses
the proceeds of construction and similar loans only as work progresses on
the related properties.
Residential lending is generally considered to involve less risk than other
forms of lending, although payment experience on these loans is dependent
to some extent on economic and market conditions in the Bank's lending
area.
Nonaccrual loans totaled approximately $2,547,823 and $2,764,000 at June
30, 2000 and 1999, respectively. For the years ended June 30, 2000, 1999
and 1998, the amount of interest income that would have been recorded on
loans in nonaccrual status at year end had such loans performed in
accordance with their terms was approximately $305,000, $286,000 and
$281,000, respectively. The actual interest income recorded on these loans
for the years ended June 30, 2000, 1999 and 1998 was approximately $2,000,
$193,000 and $211,000, respectively. At June 30, 2000 and 1999 the Bank has
one impaired loan with an unpaid principal balance of approximately
$2,500,000. No interest income was recognized on this loan during
impairment and an allocation of approximately $250,000 was included in the
allowance for loan losses relating to this loan at each date.
(Continued)
F-14
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
2000 1999 1998
---- ---- ----
Beginning balance .............. $ 725,152 722,860 536,280
Provision for loan losses ...... 20,983 39,412 191,705
Charge-offs .................... (4,457) (37,120) (5,125)
--------- --------- ---------
Ending balance ........ $ 741,678 725,152 722,860
========= ========= =========
(7) Property and Equipment
Property and equipment are summarized as follows at June 30:
Useful life
2000 1999 in years
---- ---- --------
Land ................................. $ 729,749 729,749 --
Building and improvements ............ 1,569,628 925,789 50 years
Furniture, fixtures and equipment .... 1,246,580 988,019 3-10 years
========== ========== ==========
Total, at cost ................... 3,545,957 2,643,557
Less accumulated depreciation ........ 1,303,174 1,158,937
---------- ----------
Property and equipment, net ...... $2,242,783 1,484,620
========== ==========
(Continued)
F-15
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(8) Savings Accounts
Savings accounts are summarized as follows at June 30:
<TABLE>
<CAPTION>
Weighted
average
rate 2000 1999
-------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Account 2000 1999 Amount % Amount %
Certificates 5.74% 5.35% $197,247,164 70% $181,657,046 66%
Anniversary bonus 3.32% 3.33% 3,603,206 1 4,466,317 2
Money Market 4.78% 4.68% 50,420,733 18 61,368,492 22
Passbook 3.15% 3.15% 21,443,796 8 20,160,926 7
NOW and demand 1.99% 1.99% 9,151,307 3 6,972,830 3
---- ---- --------- ---- --------- ----
$281,866,206 100% $274,625,611 100%
============ ==== ============ ====
Certificate accounts
mature as follows:
Within 12 months $132,565,286 67% $ 98,562,974 54%
12 to 24 months 45,886,252 23% 65,163,034 36
24 to 36 months 10,634,922 5% 10,891,676 6
36 to 48 months 3,374,479 2% 3,705,841 2
48 to 60 months 4,786,225 3% 3,333,521 2
-- -- ------------ ---- ------------ ----
$197,247,164 100% $181,657,046 100%
============ ==== ============ ====
</TABLE>
At June 30, 2000 and 1999, the Bank had customer deposits in savings
accounts of $100,000 or more of approximately $65,096,000 and $58,989,000,
respectively.
Interest expense on savings accounts consists of the following for the
years ended June 30:
2000 1999 1998
---- ---- ----
Time deposits .................. $10,289,585 9,132,231 7,905,150
Checking and money market ...... 2,972,732 3,237,150 3,607,568
Passbook and other ............. 627,438 595,919 601,430
----------- ----------- -----------
$13,889,755 12,965,300 12,114,148
=========== =========== ===========
(Continued)
F-16
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(9) Income Taxes
The provision for income taxes is comprised of the following for the years
ended June 30:
2000 1999 1998
---- ---- ----
Current:
Federal ............. $ 2,240,711 1,852,003 1,767,197
State ............... 59,814 208,448 214,501
----------- ----------- -----------
2,300,525 2,060,451 1,981,698
----------- ----------- -----------
Deferred:
Federal ............. (367,454) (140,074) (70,925)
State ............... (41,946) (31,009) (15,701)
----------- ----------- -----------
(409,400) (171,083) (86,626)
----------- ----------- -----------
$ 1,891,125 1,889,368 1,895,072
=========== =========== ===========
The net deferred tax liability at June 30, 2000 and 1999 consists of total
deferred tax assets of $986,743 and $729,237, respectively, and total
deferred tax liabilities of $1,480,046 and $2,123,040, respectively. The
tax effects of temporary differences between the financial reporting and
income tax basis of assets and liabilities relate to the following at June
30:
2000 1999
---- ----
Tax bad debt reserve in excess
of base year ................................ $ (199,931) (299,897)
Allowance for losses on loans ................ 286,436 280,054
Federal Home Loan Bank stock dividends ....... (304,291) (304,291)
Compensation plans ........................... 435,483 324,927
Unrealized gains on securities
available-for-sale, net ..................... (980,511) (1,480,830)
Other, net ................................... 269,511 86,234
----------- -----------
$ (493,303) (1,393,803)
=========== ===========
Reconciliations between the provisions for income taxes computed by
multiplying income before income taxes by the statutory Federal income tax
rate (34%) and the actual provisions for income taxes are as follows for
the years ended June 30:
2000 1999 1998
---- ---- ----
Federal income taxes at
statutory rate .................... $1,865,387 1,819,981 1,768,368
State income taxes, net
of Federal income tax benefit ..... 11,793 114,054 131,208
Other, net ......................... 13,945 (44,667) (4,504)
---------- ---------- ----------
$1,891,125 1,889,368 1,895,072
========== ========== ==========
(Continued)
F-17
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(10) Regulatory Matters
The Federal Deposit Insurance Corporation, through the Savings Association
Insurance Fund (SAIF), insures deposits of accountholders up to $100,000.
The Bank pays an annual premium to provide for this insurance. The Bank is
also a member of the Federal Home Loan Bank System and is required to
maintain an investment in the stock of the Federal Home Loan Bank of
Atlanta (FHLB) equal to at least 1% of the unpaid principal balances of its
residential mortgage loans, or 5% of its outstanding advances from the
Bank, whichever is greater. Purchases and sales of stock are made directly
with the FHLB at par value.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (as defined in the
regulations and as set forth in the table below). As of June 30, 2000, the
most recent notification from the Office of Thrift Supervision (OTS)
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
Regulatory capital amounts and ratios for the Bank are as follows (in
thousands):
<TABLE>
<CAPTION>
To be well
Minimum capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
-------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Tier I core capital (a) $45,491 13.60% $13,375 4% $16,719 >5%
Tier I risk-based capital (b) 45,491 27.71% 6,566 4% 9,849 >6%
Total risk-based capital (b) 47,393 28.87% 13,133 8% 16,416 >10%
As of June 30, 1999:
Tier I core capital (a) 46,062 14.06% 13,109 4% 16,386 >5%
Tier I risk-based capital (b) 46,062 28.71% 6,418 4% 9,627 >6%
Total risk-based capital (b) 48,520 30.24% 12,837 8% 16,046 >10%
</TABLE>
-------------
(a) Percentage of capital to ending assets.
(b) Percentage of risk-based capital to ending risk-weighted assets.
(Continued)
F-18
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(11) Retirement and Deferred Compensation Plans
The Bank has a 401(k) Employee Investment Plan covering substantially all
employees. Participation is voluntary and employee contributions are based
on a percentage of compensation, ranging from a minimum of 1% to a maximum
of 10%. The Bank matches employees' contributions, not to exceed 6% of
compensation or a maximum of $2,400 annually. The Bank's contributions were
$38,644, $37,936, and $34,432 for the years ended June 30, 2000, 1999 and
1998, respectively.
The Bank has a supplemental retirement income plan (SERP) for executive
officers. The SERP supplements the 401(k) plan to bring officer retirement
benefits up to targeted levels (2% for each year of service, not to exceed
70% of final salary). In addition, the SERP provides death benefit
protection for officers' beneficiaries. The cost of each participant's
retirement benefits is accrued over the participant's active employment.
The accrued liability under the SERP was approximately $186,000 and
$204,000 as of June 30, 2000 and 1999, respectively. Compensation cost
related to the SERP was $129,001, $118,640, and $116,468 for the years
ended June 30, 2000, 1999 and 1998, respectively.
The Bank also has a deferred compensation agreement with one officer to
provide certain death and retirement benefits. The benefits payable are
accrued by annually by charges to income of $1,383. The accrued liability
for these benefits amounted to $30,976 and $29,593 at June 30, 2000 and
1999, respectively, and is included in accrued expenses and other
liabilities.
The Bank has a Directors Retirement Plan which is a nonqualified plan for
income tax purposes. Under the plan, each director will be paid 75% of
annual directors' fees for ten years or until death after retirement. The
benefits payable are accrued annually and are based on the retirement age
selected by each director and an assumed 4% increase in annual fees until
retirement. The accrued liability under this plan was $413,410 and $269,010
at June 30, 2000 and 1999, respectively, and is included in accrued
expenses and other liabilities. Compensation cost related to this plan was
$144,400 $117,658 and $105,414 for the years ended June 30, 2000, 1999 and
1998, respectively.
The Bank also has an optional plan for the deferral of directors' fees
which is nonqualified for income tax purposes. The accrued liability under
this plan was $497,504 and $410,187 at June 30, 2000 and 1999,
respectively, and is included in accrued expenses and other liabilities.
The Bank has invested in whole-life insurance policies on the lives of the
individual participants for purposes of providing income and assets in the
future to offset the costs of the officers and directors' plans. The life
insurance companies and related investments are as follows at June 30:
2000 1999
---- ----
Transamerica ........................... $3,518,280 3,341,297
American General ....................... 2,046,057 1,969,051
Massachusetts Mutual ................... 638,642 608,533
Pacific Mutual ......................... 484,558 480,592
---------- ----------
$6,687,537 6,399,473
========== ==========
(Continued)
F-19
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(12) Stock-Based Benefit Plans
Employees who attain the age of 21 and complete one year of service with
the Bank are eligible to participate in the Company's ESOP. Participants
are 100% vested in their accounts after five years of service with the Bank
or, if earlier, upon death, disability or attainment of normal retirement
age. Participants received credit for service with the Bank prior to the
establishment of the ESOP.
In 1994 the ESOP borrowed $960,000 from an unrelated third party lender
under a ten year loan bearing interest at the Federal funds rate plus 2.5%
per annum, with payments of principal and interest due quarterly. Annual
principal payments are $96,000. The proceeds of the loan were used by the
ESOP to acquire 144,000 shares of the Bank's common stock upon its
conversion to a capital stock form of organization. The ESOP holds the
common stock in a trust for allocation among participating employees, which
occurs as the ESOP repays the loan. The ESOP's sources of repayment of the
loan are dividends on the common stock, if any, either held in trust or
allocated to the participants' accounts, and quarterly contributions from
the Bank to the ESOP and earnings thereon. For the years ended June 30,
2000, 1999 and 1998 the Bank made contributions to the ESOP of $130,385,
$134,790 and $146,944, respectively.
The debt of the ESOP is recorded as debt of the Company and the shares
pledged as collateral are reported as unearned ESOP shares in the statement
of financial condition. Dividends on allocated shares are recorded as a
reduction of retained earnings; dividends on unallocated shares are
recorded as a reduction of debt and accrued interest. The Bank recognized
interest expense of $34,385, $38,790 and $50,944, respectively, and
compensation expense of $141,548, $205,453 and $320,787, respectively,
related to the ESOP for the years ended June 30, 2000, 1999 and 1998.
Dividends on ESOP shares used for debt service were $33,303, $40,963 and
$48,380 for the years ended June 30, 2000, 1999 and 1998, respectively. The
related tax benefits to the Bank for dividends paid to the ESOP were not
material. The ESOP shares as of June 30 were as follows:
2000 1999
---- ----
Allocated shares ................................. 92,263 78,417
Shares earned, but unallocated ................... 6,935 7,466
Unearned shares .................................. 44,802 58,117
-------- --------
144,000 144,000
-------- --------
Fair value of unearned shares at June 30 ......... $467,621 639,287
======== ========
In 1994 the Company established a Management Recognition Plan (MRP) to
retain personnel of experience and ability in key positions of
responsibility. Under the MRP, members of the Board of Directors and
certain executive officers of the Company were issued a total of 72,000
shares of common stock. Participants become one-fifth vested in the shares
awarded on January 1 of each year from 1995 to 1999. There was no
compensation expenses related to the MRP during the year ended June 30,
2000. Compensation expense was $11,907 and $48,234 for the years ended June
30, 1999 and 1998, respectively.
(Continued)
F-20
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
In 1994, the Company adopted a Stock Option Plan (Option Plan), under which
180,000 shares of common stock were granted to officers and directors of
the Bank. Options granted under the Option Plan may be Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or nonqualifying stock options. The 72,000 options
granted to directors vested at grant date, while the 108,000 options
granted to officers vest at a rate of 20% per year. Options are exercisable
at the market price of the common stock on the date of grant which was
$7.92 per share. The options must be exercised within ten years from the
date of grant.
A summary of changes in shares under option and options exercisable for the
years ended June 30 is presented below:
2000 1999 1998
---- ---- ----
Outstanding at beginning of year ...... 148,500 148,500 162,000
Exercised ............................. (10,000) -- (13,500)
-------- -------- --------
Outstanding at end of year ..... 138,500 148,500 148,500
-------- -------- --------
Exercisable at end of year ............ 138,500 148,500 133,200
======== ======== ========
(13) Postretirement Benefits Other Than Pensions
The Bank offers a postretirement health care benefit plan to certain
Directors and employees. The net cost of the plan was approximately
$39,000, $46,000 and $46,000 for each of the years ended June 30, 2000,
1999 and 1998, respectively. The accrued liability for these benefits was
approximately $175,000 and $147,000 at June 30, 2000 and 1999,
respectively, and is included in accrued expenses and other liabilities.
(14) Financial Instruments
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business, including mortgage loan commitments and
lines of credit on home equity loans. These instruments involve, to various
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to a financial instrument is represented by the contract amount
of the financial instrument. The Bank uses the same credit policies in
making commitments for off-balance-sheet financial instruments as it does
for on-balance-sheet financial instruments. Financial instruments with
off-balance-sheet risk are as follows at June 30, 2000:
Contract
amount
------
Undisbursed lines of credit on home equity loans ............. $13,209,000
Residential mortgage loans to be funded ...................... 910,000
-----------
$14,119,000
===========
(Continued)
F-21
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
The Bank had outstanding mortgage loan commitments, exclusive of the
undisbursed portion of loans in process, of approximately $568,000 for
fixed rate loans and $342,000 for floating rate loans at June 30, 2000. The
interest rate range on fixed rate mortgage loan commitments was 8.00% to
8.75% and all commitments expire within one year. The loan commitments and
undisbursed lines of credit are expected to be settled at face amount or
expire unused. The fair value of these commitments was not significant at
June 30, 2000.
The Bank has an unsecured line of credit with a commercial bank for up to
$2 million. There were no borrowings outstanding as of June 30, 2000.
The carrying amounts and estimated fair values of financial instruments are
summarized as follows at June 30:
<TABLE>
<CAPTION>
2000 1999
-------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing
deposits ................. $ 4,041,162 4,041,000 10,057,442 10,057,000
Short-term investments ....... 9,551,979 9,552,000 12,941,254 12,941,000
Secured short-term loans to
commercial banks ......... 9,562,746 9,563,000 10,011,970 10,012,000
Securities available-for-sale 5,258,493 5,258,000 6,551,478 6,551,000
Investment securities
held-to-maturity ......... 67,392,698 62,206,000 66,167,181 63,429,000
Mortgage-backed securities
held-to-maturity ......... 8,317,018 8,343,000 10,008,111 10,214,000
Loans receivable ............. 219,203,607 210,975,000 203,886,170 202,890,000
Investment in Federal Home
Loan Bank stock .......... 2,187,200 2,187,000 1,935,700 1,936,000
Accrued interest receivable .. 2,116,855 2,117,000 1,994,604 1,995,000
Liabilities:
Savings accounts ............. 281,866,206 281,357,000 274,625,611 275,218,000
Borrowed funds ............... 384,000 384,000 470,813 471,000
Advances payments by
borrowers for taxes,
insurance and ground rents 5,073,906 5,074,000 5,203,532 5,204,000
============ ============ ============ ============
</TABLE>
(Continued)
F-22
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
the methods and assumptions used to determine fair value estimates are set
forth below.
(a) Cash, Cash Equivalents, Investments and Mortgage-Backed Securities
For cash and cash equivalents, the carrying value approximates fair
value due to the short maturity of these instruments. The fair values
of U.S. Government and agency obligations, equity securities and
mortgage-backed securities are estimated based on published bid prices
or bid quotations received from securities dealers. The fair value of
Federal Home Loan Bank stock is estimated to be equal to its carrying
amount since it is not a publicly traded equity security, it has an
adjustable dividend rate and all transactions in the stock are
executed at the stated par value.
(b) Loans Receivable
The fair value of loans receivable is estimated by discounting
anticipated future cash flows (based on contractual maturities and
weighted-average coupons and prepayment assumptions) at rates
currently offered by the Bank for loans to borrowers with similar
credit histories.
(c) Savings Accounts, Borrowed Funds and Advance Payments by Borrowers for
Taxes, Insurance and Ground Rents
The fair value of savings accounts, other than certificate accounts,
and advance payments by borrowers for taxes, insurance and ground
rents is the amount payable on demand at June 30. The fair value of
certificate accounts is based on the lower of redemption value (net of
penalty) or the discounted value of contractual cash flows. Discount
rates are estimated using the rates currently offered by the Bank for
accounts with similar remaining maturities. Borrowed funds are
considered to be at fair value due to their adjustable rate nature.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about financial instruments.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(15) Stockholders' Equity
In March 1994, the members of Leeds Federal Savings Association (the
Association) approved a plan of reorganization from a mutual savings
association to a mutual holding company. Pursuant to the plan of
reorganization, the Association transferred substantially all of its assets
and all of its liabilities to a new federally-chartered stock savings
association which became a wholly owned subsidiary of MHC. The
reorganization was consummated in April 1994.
(Continued)
F-23
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
The principal purpose of the reorganization was to organize the Association
into a corporate form so that it would have more flexibility to raise
capital, diversify operations and establish employee incentive plans. Under
the terms of the reorganization, the membership rights of the Association's
members became rights in the mutual holding company and the Company has the
authority to issue shares of capital stock to persons other than MHC for up
to 49.9% (a minority ownership interest) of the shares issued and
outstanding.
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the institution's shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The regulations establish three
tiers of institutions. An institution, such as the Bank, that exceeds all
capital requirements before and after a proposed capital distribution
("Tier 1 institution") may, after prior notice but without the approval of
the OTS, make capital distributions during a year up to 100% of its net
income to date during the year plus its retained net income for the
preceding two years. Any additional capital distributions require OTS
approval.
MHC has waived receipt of its quarterly dividends, thereby reducing the
actual dividend payout by the Company in 1999 and prior years. The
dividends waived by MHC are considered as a restriction on the retained
earnings of the Bank. The amount of any dividend waived by MHC is available
for declaration as a dividend solely to MHC. At June 30, 2000, the
cumulative amount of such waived dividends was $9,728,400.
At June 30, 2000, the Company was authorized to repurchase up to 1,023,441
shares of common stock pursuant to its repurchase plan. During the years
ended June 30, 2000, 1999 and 1998, the Company purchased 324,475, 292,736
and 39,205 shares, respectively, at an average cost per share of $10.71,
$13.56 and $19.70, respectively.
(16) Net Income Per Share of Common Stock
Basic earning per share (EPS) is calculated by dividing net income by the
weighted average number of common shares outstanding for the applicable
period. Diluted EPS is calculated after adjusting the numerator and the
denominator of the basic EPS calculation for the effect of all dilutive
potential common shares outstanding during the period. The dilutive effects
of options and unvested restricted stock awards are computed during the
"treasury stock" method. Unearned ESOP shares are not included in
outstanding shares.
(Continued)
F-24
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
Information related to the calculation of net income per share of common
stock is summarized as follows for the years ended June 30:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ---------------------- ----------------------
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Net income .............. $3,595,308 3,595,308 3,463,516 3,463,516 3,306,009 3,306,009
Dividends on unvested
common stock
awards ............... -- -- -- -- (7,872) (3,107)
---------- ---------- ---------- ---------- ---------- ----------
Adjusted net income used
in EPS calculations .. $3,595,308 3,595,308 3,463,516 3,463,516 3,298,137 3,302,902
========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding .......... 4,634,155 4,634,155 4,983,896 4,983,896 5,091,918 5,091,918
Dilutive securities:
Options .............. -- 31,764 -- 64,867 -- 89,885
Unvested common stock
awards .............. -- -- -- -- -- 8,716
---------- ---------- ---------- ---------- ---------- ----------
Adjusted weighted average
shares used in EPS
calculations ......... 4,634,155 4,665,919 4,983,896 5,048,763 5,091,918 5,190,519
========== ========== ========== ========== ========== ==========
</TABLE>
(Continued)
F-25
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(17) Condensed Financial Information (Parent Company Only)
Summarized financial information for the Company is as follows as of and
for the years ended June 30:
2000 1999
---- ----
Statements of Financial Condition
Cash ........................................... $ 143,131 222,926
Securities available-for-sale .................. 53,240 68,000
Deferred tax asset ............................. 19,822 12,352
Other assets ................................... 200,000 --
Investment in Bank ............................. 47,180,556 48,421,166
----------- -----------
$47,596,749 48,724,444
=========== ===========
Accrued expenses and other liabilities ......... $ 187,276 220,032
Stockholders' equity ........................... 47,409,473 48,504,412
----------- -----------
$47,596,749 48,724,444
=========== ===========
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statements of Income
Interest income ......................... $ 23,129 14,975 1,903
Equity in net income of subsidiary ...... 3,586,547 3,449,274 3,304,106
---------- ---------- ----------
Income before provision for
income taxes ..................... 3,609,676 3,464,249 3,306,009
Provision for income taxes .............. 14,368 733 --
---------- ----------
Net income ........................ $3,595,308 3,463,516 3,306,009
========== ========== ==========
</TABLE>
(Continued)
F-26
<PAGE>
LEEDS FEDERAL BANKSHARES, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statements of Cash Flows
Cash flows from operating activities:
Net income ......................................... $ 3,595,308 3,463,516 3,306,009
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiary .......... (3,586,547) (3,449,274) (3,304,106)
Other, net .................................. (238,472) -- --
----------- ----------- -----------
Net cash (used) provided by operating
activities .......................... (229,711) 14,242 1,903
----------- ----------- -----------
Cash flows from investing activities:
Dividend distribution from bank .................... 4,335,000 5,240,000 850,000
Purchase of securities available-for-sale .......... -- (100,000) --
----------- ----------- -----------
Net cash provided by investing activities 4,335,000 5,140,000 850,000
----------- ----------- -----------
Cash flows from financing activities:
Payment of dividends ............................... (788,434) (988,540) (260,730)
Purchases of treasury stock ........................ (3,475,850) (3,968,439) (772,430)
Exercise of stock options .......................... 79,200 -- 106,920
Net proceeds of stock exchanged .................... -- -- 100,000
----------- ----------- -----------
Net cash used by financing activities ... (4,185,084) (4,956,979) (826,240)
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents .................... (79,795) 197,263 25,663
Cash and cash equivalents at beginning of year .......... 222,926 25,663 --
----------- ----------- -----------
Cash and cash equivalents at end of year ................ $ 143,131 222,926 25,663
=========== =========== ===========
</TABLE>
F-27
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
--------------
The Annual Meeting of Stockholders will be held at 4:00 p.m., on October 25,
2000, at the Company's office at 1101 Maiden Choice Lane, Baltimore, Maryland.
Stock Listing
-------------
The Company's Common Stock trades over-the-counter on the Nasdaq National Market
under the symbol "LFED."
Special Counsel
---------------
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Washington, D.C. 20015
Independent Auditors
--------------------
KPMG LLP
111 South Calvert Street
Baltimore, Maryland 21202
Transfer Agent
--------------
American Stock Transfer and Trust Company
59 Maiden Lane
New York, New York 10007
Annual Report on Form 10-KSB
----------------------------
A copy of the Company's Form 10-KSB for the fiscal year ended June 30, 2000,
will be furnished without charge to stockholders as of September 6, 2000, upon
written request to the Secretary, Leeds Federal Bankshares, Inc., 1101 Maiden
Choice Lane, Baltimore, Maryland 21229.
