<PAGE> 1
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2000 Commission File Number 0-22224
--------------------------------------------------------------------------------
LEDGER CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (I.R.S. Employer Identification No.)
5555 N. Port Washington Road
Glendale, Wisconsin 53217
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 290-7900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes |X| No |_|
(2) Yes |X| No |_|
The number of shares outstanding of the issuer's common stock, par value $1.00
per share, was 2,435,141 at November 10, 2000, the latest practicable date.
--------------------------------------------------------------------------------
<PAGE> 2
LEDGER CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 2000 and June 30, 2000
(unaudited).......................................... 1
Consolidated Statements of Income for the Three
Months ended September 30, 2000 and 1999
(unaudited).......................................... 2
Consolidated Statements of Shareholders' Equity
for the Three Months ended September 30, 2000
and 1999 (unaudited)................................. 3
Consolidated Statements of Cash Flows for the
Three Months ended September 30, 2000 and
1999 (unaudited)..................................... 4
Notes to Consolidated Financial Statements
(unaudited).......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 13
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.......................................... 26
Part II. Other Information
Item 1. Legal Proceedings...................................... 27
Item 2. Changes in Securities and Use of Proceeds.............. 27
Item 3. Defaults Upon Senior Securities........................ 27
Item 4. Submission of Matters to a Vote of
Security Holders..................................... 27
Item 5. Other Information...................................... 27
Item 6. Exhibits and Reports on Form 8-K....................... 28
Signature Page......................................... 29
<PAGE> 3
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- ---------
<S> <C> <C>
ASSETS
Cash and non-interest bearing deposits ......................... $ 2,695 $ 2,782
Interest-bearing deposits ...................................... 11,592 13,777
--------- ---------
Cash and cash equivalents ...................................... 14,287 16,559
Securities available-for-sale (at fair value):
Investment securities ........................................ 38,827 38,315
Mortgage-backed and related securities ....................... 34,283 35,944
Securities held-to-maturity:
Mortgage-backed and related securities (fair value -
$14,064 at September 30, 2000; $14,685 at June 30, 2000) ..... 14,246 15,017
Loans held for sale, at lower of cost or market ................ 1,430 1,122
Loans receivable, net .......................................... 388,706 391,764
Investment in Federal Home Loan Bank stock, at cost ........... 7,900 7,760
Foreclosed properties, net ..................................... 1,145 1,114
Office properties and equipment ................................ 5,467 5,461
Prepaid expenses and other assets .............................. 7,592 6,528
--------- ---------
Total assets ......................................... $ 513,883 $ 519,584
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ..................................................... $ 335,265 $ 345,318
Notes payable and other borrowings ........................... 132,770 132,040
Advance payments by borrowers for taxes and insurance ........ 5,320 3,724
Accrued interest on deposit accounts and other borrowings .... 4,422 3,421
Accrued expenses and other liabilities ....................... 1,753 1,726
--------- ---------
Total liabilities .................................... $ 479,530 $ 486,229
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding ........................................... -- --
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 3,162,500 shares; outstanding 2,563,241 shares at
September 30, 2000 and June 30, 2000 ....................... 3,162 3,162
Additional paid-in capital ................................... 10,120 10,075
Unearned ESOP compensation ................................... (281) (311)
Unearned restricted stock awards ............................. (74) (74)
Other comprehensive loss ..................................... (1,585) (2,059)
Treasury stock, at cost: 599,259 shares at September 30, 2000
and June 30, 2000 .......................................... (5,824) (5,824)
Retained earnings, substantially restricted .................. 28,835 28,386
--------- ---------
Total shareholders' equity ........................... $ 34,353 $ 33,355
--------- ---------
Total liabilities and shareholders' equity ........... $ 513,883 $ 519,584
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
1
<PAGE> 4
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
---------------
2000 1999
------ ------
<S> <C> <C>
INTEREST INCOME:
Loans receivable ........................................ $8,004 $6,077
Mortgage-backed and related securities .................. 887 1,575
Securities and interest-bearing deposits ................ 1,075 1,099
------ ------
Total interest income ......................... 9,966 8,751
INTEREST EXPENSE:
Deposits ................................................ 5,264 3,634
Advance payments by borrowers for taxes and insurance ... 24 24
Notes payable and other borrowings ...................... 1,961 2,104
------ ------
Total interest expense ........................ 7,249 5,762
------ ------
Net interest income ..................................... 2,717 2,989
Provision for losses on loans ........................... 80 120
------ ------
Net interest income after provision for losses on loans . 2,637 2,869
NON-INTEREST INCOME:
Service charges on loans ................................ 74 57
Service charges on deposit accounts ..................... 113 122
Loan servicing fees, net ................................ 19 12
Insurance commissions ................................... 35 12
Gain on sale of securities and
mortgage-backed and related securities, net ......... 0 54
Gain on sale of loans ................................... 112 96
Other income ............................................ 34 54
------ ------
Total non-interest income ..................... 387 407
NON-INTEREST EXPENSE:
Compensation and benefits ............................... 1,335 1,334
Marketing ............................................... 54 53
Occupancy and equipment ................................. 392 393
Deposit insurance premiums .............................. 17 45
Other non-interest expense .............................. 359 335
------ ------
Total non-interest expense .................... 2,157 2,160
------ ------
Income before income taxes .............................. 867 1,116
Income taxes ............................................ 295 361
------ ------
Net income ......................................... $ 572 $ 755
====== ======
Earnings per share - (basic) ....................... $ 0.23 $ 0.28
====== ======
Earnings per share - (diluted) ..................... $ 0.23 $ 0.28
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
2
<PAGE> 5
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Unearned Other Total
Common Paid-In ESOP Restricted Retained Treasury Comprehensive Shareholders'
Stock Capital Compensation Stock Earnings Stock loss Equity
------- --------- ------------ ---------- --------- -------- ------------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Balance at June 30, 2000 ...... $ 3,162 $ 10,075 ($ 311) ($ 74) $ 28,386 ($ 5,824) ($ 2,059) $ 33,355
Net income .................... -- -- -- -- 572 -- -- 572
Accumulated other comprehensive
income:
Unrealized holding gain
arising during the
period On available-
for-sale securities
portfolio .............. -- -- -- -- -- -- 862 770
Loss on derivative
hedging instrument ..... -- -- -- -- -- -- (92) --
Income tax effect ........ -- -- -- -- -- -- (296) (296)
--------
Comprehensive income .......... -- -- -- -- -- -- -- 474
Cash Dividends ($.05 per share) -- -- -- -- (123) -- -- (123)
Amortization of unearned ESOP
and Restricted stock award
compensation ............... -- 45 30 -- -- -- -- --
------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2000.. $ 3,162 $ 10,120 ($ 281) ($ 74) $ 28,835 ($ 5,824) ($ 1,585) $ 34,353
======== ======== ======== ======== ======== ======== ======== ========
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Balance at June 30, 1999....... $ 3,162 $ 9,937 ($ 405) ($ 78) $ 25,765 ($ 2,796) ($ 1,089) $ 34,496
Net income .................... -- -- -- -- 755 -- -- 755
Other comprehensive income:
Unrealized holding loss
arising during period .... -- -- -- -- -- -- (492) (492)
Re-classification
adjustment for gains
realized in income........ -- -- -- -- -- -- (54) (54)
Income tax effect ......... -- -- -- -- -- -- 213 213
--------
Comprehensive loss ........... -- -- -- -- -- -- -- (333)
Amortization of unearned ESOP
and restricted stock award
compensation............... -- 68 30 2 -- -- -- 100
Purchase of treasury stock
(108,000 shares) .......... -- -- -- -- -- (1,338) -- (1,338)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1999. $ 3,162 $ 10,005 ($ 375) ($ 76) $ 26,520 ($ 4,134) ($ 1,422) $ 33,680
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
3
<PAGE> 6
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income .................................................... $ 572 $ 755
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans ............................... 80 120
Provision for depreciation and amortization ................. 138 119
Net gain on sales of investments and
mortgage-backed and related securities .................... -- (54)
Net gain on sale of loans ................................... (112) (96)
Amortization of unearned ESOP and restricted stock awards ... 75 100
Loans originated for sale ................................... (9,158) (4,558)
Sales of loans originated for sale .......................... 8,850 4,625
Increase in prepaid expenses and other assets ............... (1,360) (1,282)
Decrease in payables for investments purchased .............. -- (9,909)
Increase (decrease) in accrued expenses and other liabilities 1,028 (71)
Other adjustments ........................................... (61) 533
-------- --------
Net cash provided by (used in) operating activities ........... 52 (9,718)
-------- --------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale ....... -- 11,507
Proceeds from the maturity of securities available-for-sale ... -- 4,000
Purchases of securities available-for-sale .................... -- (29,800)
Purchases of mortgage-backed and related securities ........... -- (3,937)
Principal collected on mortgage-backed and related securities . 2,770 16,195
Net (increase) decrease in loans receivable ................... 3,028 (52,359)
Purchase of Federal Home Loan Bank stock ...................... (140) (510)
Purchases of office properties and equipment, net ............. (132) (64)
-------- --------
Net cash provided by (used in) investing activities ........... 5,526 (54,968)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in deposits ........................... (10,053) 31,074
Proceeds from long-term notes payable to Federal Home Loan Bank 30,000 20,000
Repayment of long-term notes payable to Federal Home Loan Bank (20,000) (5,000)
Net increase (decrease) in
short-term notes payable and other borrowings ............... (9,270) 15,859
Purchase of treasury stock .................................... -- (1,338)
Cash dividends ................................................ (123) --
Net increase in advance payments by borrowers for
taxes and insurance ......................................... 1,596 1,543
-------- --------
Net cash provided by (used in) financing activities ........... (7,850) 62,138
-------- --------
Decrease in cash and cash equivalents ......................... (2,272) (2,548)
Cash and cash equivalents at beginning of period .............. 16,559 8,599
-------- --------
Cash and cash equivalents at end of period .................... $ 14,287 $ 6,051
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
4
<PAGE> 7
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to
deposit accounts) ...................................... $6,247 $5,525
Income taxes paid ......................................... $ 330 $ 493
Non-cash transactions:
Loans transferred to foreclosed properties ................ $ 62 $1,272
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
5
<PAGE> 8
LEDGER CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) NAME CHANGE
Effective on October 26, 2000, Hallmark Capital Corp. changed its' name to
Ledger Capital Corp. and its wholly-owned subsidiary, West Allis Savings Bank
has changed its name to Ledger Bank, S.S.B.
(2) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods have been included.
The results of operations and other data for the three months ended September
30, 2000 are not necessarily indicative of results that may be expected for the
entire fiscal year ending June 30, 2001.
The unaudited consolidated financial statements include the accounts of Ledger
Capital Corp. (the "Company") and its wholly-owned subsidiary, Ledger Bank,
S.S.B. and subsidiaries (the "Bank") as of and for the three months ended
September 30, 2000. All material intercompany accounts and transactions have
been eliminated in consolidation.
(3) STOCK BENEFITS AND INCENTIVE PLANS
At September 30, 2000, the Company has reserved 375,642 shares of common stock
for a non-qualified stock option plan and 18,462 shares of ungranted restricted
common stock reserved for employees and directors. With respect to options,
which have not been granted, the option exercise price cannot be less than the
fair market value of the underlying common stock as of the date of option grant,
and the maximum term cannot exceed ten years. At September 30, 2000 there were
325,280 stock options outstanding. The Company granted options to purchase
15,500 shares of common stock with an exercise price of $9.75 to officers on
August 22, 2000.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
SHARES OPTION
UNDER PRICE PER
OPTION SHARE
------- ----------------
<S> <C> <C> <C>
Outstanding at June 30, 2000.............. 279,480 $ 4.00 - $ 14.63
Granted............................... 15,500 $ 9.75
------- ----------------
Outstanding at September 30, 2000....... 294,980 $ 4.00 - $ 14.63
</TABLE>
The Board of Directors approved the grant of 30,300 performance based stock
options, effective September 28, 2000. These stock option grants provide the CEO
and the COO of the Company, as well as the four outside directors, an
opportunity to buy up to a specified number of shares of the Company if certain
performance levels are reached for the periods ended June 30, 2001, 2002 and
2003. These options have 10-year terms, but only vest if the target performance
is met for a period. If a performance target is met in the second or third year
of the plan, previously unvested options for the years in which performance
targets were not met, also vest.
6
<PAGE> 9
(3) STOCK BENEFITS AND INCENTIVE PLANS (CONT.)
The options have an exercise price equal to 100% of the market value on the date
of grant. These options will be accounted for as variable plan options and
compensation expense will be recorded based upon the difference in the market
value and the exercise price of the stock on the date on which the options vest.
No compensation expense was accrued for the three months ended September 30,
2000.
A summary of the status of the Company's performance-based stock option plans as
of September 30, 2000 and the changes during the year ended is presented below:
Performance Options:
<TABLE>
<CAPTION>
SHARES WEIGHTED-
UNDER AVERGAGE
OPTION EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at June 30, 2000................... --
Granted.................................... 30,300 $ 10.688
------ --------
Outstanding at September 30, 2000.............. 30,300 $ 10.688
Options Exercisable at September 30, 2000...... --
Weighted-average Remaining Contractual Life
(in Years).................................. 10
</TABLE>
(4) EARNINGS PER SHARE
Basic earnings per share of common stock for the three months ended September
30, 2000 and September 30, 1999 have been computed by dividing net income for
the period by the weighted average number of shares of common stock reduced by
ungranted restricted stock and uncommitted ESOP shares. Diluted earnings per
share is calculated by dividing net income by the sum of the weighted average
shares used in the basic earnings per share calculation plus the effect of
dilutive stock options. The effect of dilutive stock options is calculated using
the treasury stock method. The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended Sept. 30, 2000 Ended Sept. 30, 1999
-------------------------- --------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 2,563,241 2,563,241 2,787,071 2,787,071
Ungranted restricted stock ............... (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares .................. (84,333) (84,333) (107,525) (107,525)
Common stock equivalents due to
dilutive effect of stock options ...... -- 72,755 -- 82,779
----------- ----------- ----------- -----------
Total weighted average common shares
and equivalents outstanding ........... 2,460,446 2,533,201 2,661,084 2,743,863
=========== =========== =========== ===========
Net income for period ................. $ 572,000 $ 572,000 $ 755,000 $ 755,000
Earnings per share .................... $ 0.23 $ 0.23 $ 0.28 $ 0.28
=========== =========== =========== ===========
</TABLE>
7
<PAGE> 10
(5) COMMITMENTS AND CONTINGENCIES
Commitments to originate mortgage loans of $2.0 million at September 30, 2000
represent amounts which the Bank expects to fund during the quarter ending
December 31, 2000. The fair value of commitments to originate mortgage loans is
not material. There were no commitments to sell fixed-rate mortgage loans at
September 30, 2000. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $12.7 million and $6.2 million,
respectively, as of September 30, 2000. Also, the Bank had unused credit under
existing commercial line-of-credit loans of $1.7 million at September 30, 2000.
The Bank had no commitments to purchase fixed-rate mortgage related securities
as of September 30, 2000.
(6) REGULATORY CAPITAL ANALYSIS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt and 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
also are 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 (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). As of September 30, 2000, management believes that the Bank
meets all capital adequacy requirements to which it is subject.
As of September 30, 2000, the Bank is well capitalized as defined by regulatory
standards. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the table below. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the tables below.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Tier I Capital Leverage (to Average Assets):
Consolidated ............................. $35,323 6.84% $15,483 3.00% N/A N/A
West Allis Savings Bank .................. 34,693 6.73 15,459 3.00 25,766 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated ............................. 35,323 9.85 14,339 4.00 N/A N/A
West Allis Savings Bank .................. 34,693 9.67 14,353 4.00 21,568 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated ............................. 38,503 10.74 28,677 8.00 N/A N/A
West Allis Savings Bank .................. 37,873 10.55 28,706 8.00 35,946 10.00
</TABLE>
As a state-chartered savings bank, the Bank also is subject to a minimum
regulatory capital requirement of the State of Wisconsin. At September 30, 2000,
on a fully-phased-in basis of 6.0%, the Bank had actual capital of $36,863,000
with a required amount of $31,049,000, for excess capital of $5,814,000. There
is no requirement to calculate the amount to be well capitalized under prompt
corrective action provisions on a consolidated basis.
8
<PAGE> 11
9
<PAGE> 12
(7) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
SEPT. 30, 2000 JUNE 30, 2000
----------------------- -----------------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential one-to-four family ........ $ 181,318 44.9% $ 186,276 45.1% ($ 4,958)
Home equity ........................... 21,886 5.4% 21,758 5.3% 128
Residential multi-family .............. 43,576 10.8% 41,751 10.1% 1,825
Commercial real estate ................ 86,655 21.4% 86,521 21.0% 134
Residential construction .............. 18,270 4.5% 21,284 5.1% (3,014)
Other construction and land ........... 24,586 6.1% 27,179 6.6% (2,593)
--------- --------- --------- --------- ---------
Total real estate mortgage loans.... 376,291 93.1% 384,769 93.2% (8,478)
Consumer-related loans:
Automobile ............................ 255 0.1% 262 0.1% (7)
Credit card ........................... 2,107 0.5% 2,112 0.5% (5)
Other consumer loans .................. 777 0.2% 853 0.2% (76)
--------- --------- --------- --------- ---------
Total consumer-related loans ....... 3,139 0.8% 3,227 0.8% (88)
--------- --------- --------- --------- ---------
Commercial loans .......................... 24,725 6.1% 24,589 6.0% 136
--------- --------- --------- --------- ---------
Gross loans ........................ 404,155 100.0% 412,585 100.0% ($ 8,430)
Accrued interest receivable ............... 1,907 2,031
Less:
Undisbursed portion of loan proceeds... (13,151) (18,589)
Deferred loan fees .................... (600) (630)
Deferred interest on sale of REO ...... (60) (61)
Deferred gain on sale of REO .......... (57) (58)
Unearned interest ..................... (307) (313)
Allowances for loan losses ............ (3,181) (3,201)
---------- ---------
$ 388,706 $ 391,764
========== =========
</TABLE>
Loans serviced for investors totaled $49.2 million and $48.6 million at
September 30, 2000 and June 30, 2000, respectively.
10
<PAGE> 13
(8) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SEPT. 30, 2000 JUNE 30, 2000
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Advances from
Federal Home Loan Bank..... 2000 $ -- --% $ 5,000 6.60%
2001 3,000 5.91 3,000 5.91
2002 5,000 6.43 5,000 6.43
2003 13,030 6.12 3,030 5.59
2004 45,000 6.00 50,000 5.63
2005 45,000 6.15 35,000 6.03
2007 6,500 6.03 6,500 6.52
2008 5,000 4.35 5,000 4.35
-------- ---- -------- ----
$122,530 6.02% $112,530 5.83%
===== =====
Open line of credit
With Wells Fargo Bank.... 2001 $ 1,000 7.88% $ 1,000 7.88%
Securities sold under
Agreements to repurchase 2000 9,240 5.87 18,510 6.24%
-------- --------
$132,770 $132,040
======== ========
</TABLE>
FHLB advances totaled $122.5 million, or 92.3%, and $112.5 million, or 85.2%, of
total borrowings at September 30, 2000 and June 30, 2000, respectively. Certain
advances are callable by the FHLB. Advances callable within one year amount to
$70.0 million at September 30, 2000 and June 30, 2000. The Company is required
to maintain as collateral unencumbered one-to-four family mortgage loans in its
portfolio such that the outstanding balance of FHLB advances does not exceed 60%
of the book value of this collateral. The Company had delivered mortgage-backed
securities with a carrying value of $37.3 million and $38.7 million at September
30, 2000 and June 30, 2000, respectively. In addition, all FHLB advances are
collateralized by all Federal Home Loan Bank stock and are subject to prepayment
penalties. The Company's unused advance line with the Federal Home Loan Bank was
$17.1 million based upon collateral pledged at September 30, 2000. FHLB variable
rate term borrowings consist of $5.0 million tied to the one-month LIBOR index.
The Company enters into sales of mortgage-backed securities with agreements to
repurchase identical securities (reverse repurchase agreements) and
substantially identical securities (dollar reverse repurchase agreements). These
transactions are treated as financings with the obligations to repurchase
securities reflected as a liability. The dollar amount of securities underlying
the agreements remains in the asset accounts. The securities underlying the
agreements are delivered to the counterparty's account. Securities sold under
agreements to repurchase were $9.2 million and $18.5 million at September 30,
2000 and June 30, 2000, respectively.
The Company has a line of credit facility with a third party lender that was
originated in fiscal 2000. The line of credit provides the holding company with
a source of funding to acquire commercial real estate loans and to make further
capital investment in the Bank. The line of credit has a variable rate tied to
the Federal Funds rate.
11
<PAGE> 14
(9) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan (ESOP) covering all full-time
employees of the Company who have attained age 21 and completed one year of
service during which they work at least 1,000 hours. The ESOP initially borrowed
$1.0 million from the Company and purchased 253,000 common shares issued in
connection with the Bank's conversion from mutual to stock form in 1993
(Conversion). The debt bears a variable interest rate based on the borrower's
prime lending rate which was 9.5% at September 30, 2000. The balance of this
loan was $404,800 and $506,000 at September 30, 2000 and 1999, respectively. The
Bank makes annual contributions to the ESOP equal to the ESOP's debt service.
All dividends received by the ESOP are paid to the ESOP cash accounts. As the
debt is repaid, shares are released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. The Company
accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the debt of the ESOP is recorded as debt and the shares pledged as
collateral are reported as unearned ESOP shares in the statement of financial
position. As the shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares. The excess
of the current market price of shares released over the cost of those shares is
credited to additional paid-in-capital. As shares are released, they become
outstanding for earnings-per-share computations. Dividends on allocated ESOP
shares are recorded as a reduction of shareholders' equity; dividends on
unallocated ESOP shares are recorded as compensation expense. ESOP compensation
expense for the three months ended September 30, 2000 and 1999 was $79,000 and
$98,000, respectively.
The following is a summary of ESOP shares at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Shares
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Allocated shares ................................... 136,675 114,988
Unreleased shares .................................. 83,309 107,441
---------- ----------
Total ESOP shares .................................. 219,984 222,429
========== ==========
Fair value of unreleased shares at September 30, ... $ 890,000 $1,179,000
========== ==========
</TABLE>
12
<PAGE> 15
(10) ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES
During the fiscal year ended June 30, 2000, the Company entered into interest
rate caps with a notional amount of $75.0 million with maturity dates ranging
from June 14, 2001 to January 3, 2002. The interest rate caps are carried at
fair market value of $23,000 and $166,000 in the Consolidated Statement of
Financial Condition at September 30 and June 30, 2000, respectively. The change
in the time value of the interest rate caps is included in expense for the
quarter and the change that relates to the difference in fair value of the
interest rate caps is recorded as Other Comprehensive Income(Loss). At September
30, 2000, the Company continued to designate these caps as a cash flow hedge of
the interest rate risk on short-term wholesale certificates of deposit which
renew every 90 days and are indexed to the 3-month LIBOR. The caps are tied to
the 3-month LIBOR interest rate with a 7% strike rate. Cash payments will be
received by the Company if the 3-month LIBOR exceeds 7%.
The Company formally documents all relationships between hedging instruments and
hedged items as well as its risk-management objective and strategy for
undertaking the hedge transaction. This process includes linking derivatives
that are designated as fair value or cash flow hedges to specific recorded
assets or liabilities or to firm commitments on forecasted transactions.
The Company formally assesses at inception and on an ongoing basis, whether
derivatives that are used in hedging transactions have been highly effective in
offsetting fair values or cash flows of hedged items and whether they are
expected to continue to be highly effective in the future.
If at any time the Company determined that the hedge was no longer highly
effective, or if the hedged forecasted transactions were not executed, hedge
accounting would be discontinued and the derivative instrument would continue to
be marked to its fair value with gains or losses recognized in non-interest
income. The change in fair value of derivative instruments designated as cash
flow hedges will be recognized in other comprehensive income in future periods
and the changes in the fair value of derivative instruments designated as fair
value hedges will be recognized in non-interest income or expense.
At September 30, 2000, the interest rate caps are the only derivative
instruments used by the Company to manage interest rate risk. The Company's
derivative activities are monitored by its Asset Liability Committee as part of
that Committee's oversight of risk management and asset/liability functions.
12
<PAGE> 16
LEDGER CAPITAL CORP. AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings with the
Securities and Exchange Commission, in annual reports or press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as: "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," "intends
to" or similar expressions. 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, and to advise readers that various factors could affect the
Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market rates, (ii) general economic
conditions, (iii) legislative/regulatory changes, (iv) monetary and fiscal
policies of the U.S. Treasury and Federal Reserve, (v) changes in the quality or
composition of the Company's loan and investment portfolios, (vi) demand for
loan products, (vii) deposit flows, (viii) competition, (ix) demand for
financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
GENERAL
Ledger Capital Corp. (the "Company") is a holding company incorporated under the
laws of the State of Wisconsin and is engaged in the financial services business
through its wholly-owned subsidiary, Ledger Bank, S.S.B. (the "Bank"), a
Wisconsin state-chartered stock savings bank headquartered in Milwaukee,
Wisconsin. The Company's initial public offering was consummated in December
1993, and the Company acquired all of the outstanding common stock of the Bank
issued in the mutual to stock conversion of the Bank (the "Conversion") on
December 30, 1993.
The Company's primary strategy since the Conversion through fiscal 2000 has been
to focus on effectively utilizing the capital acquired in the Conversion to fund
asset growth and asset portfolio diversification into higher-yielding assets.
This strategy resulted in an increase in the Company's asset size from $179.6
million at June 30, 1994 to $513.9 million at September 30, 2000. The Company's
asset growth has come primarily through (i) the origination and purchase of
mortgage loans (principally loans secured by one-to-four family owner-occupied
homes) within and outside of the Company's primary lending area, (ii) the
purchase of mortgage-backed and related securities, and (iii) the origination
and purchase of commercial real-estate and business loans within and outside of
the Company's primary lending area. This asset growth was funded through
significant increases in Federal Home Loan Bank ("FHLB") advances and other
borrowings, and increases in deposits consisting primarily of brokered and
non-brokered wholesale deposits.
The Company's asset portfolio diversification has been achieved by altering the
composition of loans and securities originated, purchased, sold and held in the
total asset portfolio. In particular, the Company has focused on originating and
purchasing higher-yielding non-conforming one-to-four family, multi-family,
commercial real estate and commercial business loans secured by properties or
assets located within the Company's primary lending area (as defined herein) and
outside of the Company's primary lending area, to either replace or supplement
lower-yielding one-to-four family mortgage loans and principal run-off from the
mortgage securities portfolio. For the three months ended September 30, 2000,
the Company originated and purchased loans or participation interests (loan
production) totaling $31.4 million and $5.4 million, respectively (total loan
production of $36.8 million), as compared to the three months ended September
30, 2000 when originated and purchased loans and participation interests totaled
$32.0 million
13
<PAGE> 17
and $46.5 million, respectively (total loan production of $78.5 million).
Approximately $5.4 million and $45.0 million of the Company's total loan
production related to properties or business assets located outside of the
Company's primary lending area in the three months ended September 30, 2000 and
1999, respectively.
The Company has substantially completed its strategy of utilizing the capital
acquired in the Conversion to fund asset growth and asset portfolio
diversification into higher-yielding assets. In fiscal 2001, the Company does
not intend to significantly grow in asset size from $519.6 million at June 30,
2000. Under FDIC regulatory capital adequacy guidelines, the Bank must maintain
certain amounts and ratios of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined in the regulations) in order to
maintain its status as a well-capitalized institution. As of June 30, 2000 and
September 30, 2000, the Bank was fully-leveraged from a risk-based capital
standpoint, with a ratio of total capital to risk-weighted assets of 10.34% and
10.54%, respectively (with a required ratio of 10%). See Note 6 to the Company's
Notes to Consolidated Financial Statements. Therefore, in fiscal 2001, in order
to maintain its well-capitalized status, the Bank will only be able to increase
its asset base to the extent of net retained earnings.
The Company intends to continue to maximize the yield on its loan portfolio in
fiscal 2001 by maintaining the portfolio percentage composition of
higher-yielding non-conforming one-to-four family, multi-family, commercial real
estate and commercial business loans and selling substantially all of its
current year lower-yielding one-to-four family mortgage loans originated. The
Company projects that total loan production will be approximately $200 million
in fiscal 2001 compared to $259.3 million in fiscal 2000. The Company
anticipates that approximately half of its total loan production in fiscal 2001
will be generated from the purchase of loans secured by properties located
outside of its primary market area. A significant portion of out-of-market
purchases are expected to relate to non-conforming one-to-four family mortgage
loans, multi-family and commercial real-estate loans.
The Company intends to evaluate the benefits of converting the Bank from a state
thrift charter to a state bank charter in 2001. Under regulations established
for state savings banks by the Wisconsin Department of Financial Institutions
("DFI"), the Bank is limited in the amount of commercial real estate and
commercial business loans it can hold in its loan portfolio. The DFI approved
limit for the Bank was 30% of the Bank's total asset base at September 30, 2000
and June 30, 2000. At September 30, 2000, the Bank had $136.0 million of such
loans in its portfolio, representing 26.4% of the Bank's total asset base of
$514.3 million. At June 30, 2000, the Bank had $138.3 million of such loans in
its portfolio, representing 26.6% of the Bank's asset base of $520.0 million.
The Company projects that the percentage of total assets represented by
commercial real estate and commercial business loans will not increase
significantly in fiscal 2001 as a substantial portion of these new originations
and purchases are expected to be sold in the secondary market. Thus, while
management believes that this regulatory limit is currently sufficient to meet
the Bank's business strategy in fiscal 2001, the Company intends to evaluate
whether a state bank charter would provide more lending flexibility.
The Company intends to begin the process of increasing the level of core retail
deposits relative to brokered and non-brokered wholesale deposits which is
expected to reduce the overall cost of liabilities for the Company. This process
began in fiscal 2001 with the change of the name of the bank to Ledger Bank,
S.S.B. from West Allis Savings Bank, and will continue with the opening of a new
full-service banking center in Glendale, Wisconsin, implementing a proactive
internal sales culture, and by offering an internet-only deposit product.
The Company changed its bank name from West Allis Savings Bank to Ledger Bank,
S.S.B. during the second quarter of fiscal 2001. The new name, Ledger Bank,
S.S.B., was strategically selected to pay tribute to the Bank's 81-year old
heritage as a trustworthy, solid community bank and to act as a vehicle to
demonstrate the Bank's commitment to future growth. The Company believes the new
name will enable it to create a differentiated, customer-focused, financial
services brand in the market. The new name became official on October 26, 2000,
the day following the Company's annual meeting of shareholders, with a local
media and promotional campaign. The Company believes the new name will help
enhance the Bank's growth plans to increase its market share around each current
branch office, opening a new full-service banking center as well as the ongoing
sales efforts of its residential lending officers and
14
<PAGE> 18
business loan officers throughout southeastern Wisconsin. The Company intends to
support the new name and enhanced brand identity through increased marketing
expenditures in fiscal 2001.
A new full-service banking center in Glendale, Wisconsin is expected to be
operating during the third quarter of fiscal 2001. This north shore location
currently serves as the executive and administrative headquarters for the
Company and Bank. Location-specific market research was conducted during fiscal
2000 by a third party company, placing this site as one of the top five
locations for attracting core deposit balances in Milwaukee County. The
full-service banking center will offer traditional deposit products and
services, discount brokerage services, and mortgage, consumer and commercial
business lending services. The Company expects to incur significant non-interest
expenses in connection with opening the new banking center.
During fiscal 2001, the Company also intends to generate additional non-interest
income from existing and new revenue sources. This is expected to be
accomplished by (i) continuing to generate commercial lending and deposit
activities through the commercial lending division, (ii) increasing fee income
opportunities within the residential mortgage lending division through the sale
of one-to-four family mortgage loans and referral of subprime mortgage loans,
(iii) increasing fees from its insurance subsidiary, Ledger Investment Services,
Inc., and (iv) expanding commercial mortgage banking activities during fiscal
2001.
In fiscal 2001, the Company intends to continue pursuing commercial lending
activities through its commercial banking division as another source of
additional fee income and higher-yielding assets. The focus of the Company's
commercial division will be the origination and purchase of small business loans
and leases, as well as the acquisition of business deposits. During fiscal 2000,
the Company originated and purchased $158.2 million of multi-family, commercial
real estate, multi-family construction, commercial construction and commercial
business loans, lines of credit and leases, of which $80.9 million were
purchases and $77.3 were originations. Management currently projects that the
commercial lending division will significantly decrease its origination and
purchase activity (by approximately 50%) during fiscal 2001 in order to maintain
a minimal growth rate in the Company's asset base. The Company also expects
increased fee income from the commercial banking division resulting from a
growth in business deposit relationships.
During the balance of fiscal 2001, the Company also intends to increase its
non-interest income by expanding the secondary marketing activities of its
residential mortgage division, generating additional fee income through the sale
of mortgage credit and life insurance, and through the referral of subprime
mortgage loans to a third party lender. The Company expects one-to-four family
mortgage loan originations to increase despite the generally higher level of
market interest rates due to increased marketing activities and expansion of our
retail banking centers. It is currently anticipated that substantially all of
the 30-year fixed rate conforming one-to-four family mortgage loans originated
in fiscal 2001 will be sold in the secondary market resulting in income from
gains on loans sold.
The Company expects its insurance subsidiary, Ledger Investment Services, Inc.,
to generate additional fee income in fiscal 2001 from the sale of securities,
mutual funds, annuities and life insurance products by licensed investment
brokers. The Company attributes the projected growth in fee income to the
overall business strategy of adding a new retail banking center and the
implementation of a proactive sales culture in fiscal 2001.
During fiscal 2001, the Company also intends to generate non-interest income by
leveraging its existing commercial lending capabilities through the origination,
selling and servicing of commercial real estate mortgages on a national basis,
with primary concentration in the southwest and western regions of the country.
While the Company primarily expects to originate and purchase commercial real
estate mortgages on a national basis, it also may originate and purchase loans
or participation interests in loans secured by multi-family real estate and
commercial business assets. The new commercial mortgage banking operation,
Ledger Financial, Inc. ("LFI"), will be a wholly-owned subsidiary of the
Company. LFI will originate loans from a third party commercial real-estate
broker on a non-exclusive basis and act as the lender of record until the loan
is sold without recourse, generally within 45 days of the loan closing. LFI will
retain the servicing rights to these loans and receive a servicing fee. The
Company estimates that
15
<PAGE> 19
during fiscal 2001 LFI will originate, sell and service approximately $50 - $100
million of commercial real estate mortgage loans on a national basis, with
primary concentration in the southwest and western regions of the country.
During the three months ended September 30, 2000 LFI did not originate, sell or
service any loans. LFI revenues, generated primarily through the collection of
originating and servicing fees, are projected to be approximately $150,000 -
$300,000 in fiscal 2001. The primary benefit of the expansion of the Bank's
commercial lending activities is to gain economies of scale through the ability
to leverage existing staff, expertise level, overhead and infrastructure in
order to increase fee income without a significant incremental increase in
expenses.
The Company expects to incur significant increases in non-interest expense as a
result of implementing its strategic business plan in fiscal 2001. In addition,
the Company's negative interest rate gap position (37.6% at September 30, 2000)
will likely reduce net income in the event of an increase in market interest
rates. To mitigate the Company's exposure to rising interest rate levels, the
Company intends to decrease its negative interest rate gap position by
lengthening the maturities of its wholesale funding sources (wholesale brokered
CDs and FHLB advances). The Company also may implement hedging strategies
involving derivative financial instruments such as options and interest rate
swaps during fiscal 2001. See "Management's Discussion and Analysis of Financial
Condition - Asset/Liability Management." As a result of the projected expense
increases and narrowing of interest margin due to the gap position and the
generally higher level of interest rates, the Company expects net income in
fiscal 2001 to fall below reported net income for 2000. Despite the projected
decline in net income, the Company believes the strategic benefits of the
expanded sales and branch activities will have a long-term positive impact on
the Company's results of operations and franchise value.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered
deposits, proceeds from principal and interest payments on loans, principal and
interest payments on mortgage-backed and related securities, FHLB-Chicago
advances and reverse repurchase agreements. Alternative funding sources are
evaluated and utilized based upon factors such as interest rates, availability,
maturity, administrative costs and retention capability. Although maturity and
scheduled amortization of loans are predictable sources of funds, deposit flows,
mortgage prepayments and prepayments on mortgage-backed and related securities
are influenced significantly by general interest rates, economic conditions and
competition. Mortgage loans and mortgage securities prepayments increased in
fiscal 1999 overall as interest rates declined significantly during the first
half of the fiscal year before increasing in the last half of the fiscal year.
As a result of the upward trend in interest rates that extended through most of
fiscal 2000, mortgage loan and mortgage securities prepayments and gain on sales
of loans have decreased compared to the fiscal 1999 period. Interest rates have
decreased slightly during the three months ended September 30, 2000 producing an
increase in gains on the sales of loans for the period.
The primary investing activity of the Company is the origination and purchase of
loans and the purchase of mortgage-backed and related securities. For the three
months ended September 30, 2000, the Company originated and purchased loans
totaling $31.3 million and $5.4 million, respectively, as compared to the three
months ended September 30, 1999 when originated and purchased loans totaled
$32.0 million and $46.5 million, respectively. Purchases of mortgage-backed and
related securities held-to-maturity for the three months ended September 30,
2000 and 1999 totaled $0 and $3.9 million, respectively. There were no purchases
of investment securities held-to-maturity for the three months ended September
30, 2000 and 1999.
For the three months ended September 30, 2000 and 1999, these activities were
funded primarily by principal repayments on loans of $34.2 million and $31.0
million, respectively; principal repayments on mortgage-backed and related
securities of $2.8 million and $16.2 million, respectively; proceeds from the
sale of mortgage loans of $8.9 million and $4.6 million, respectively; net
proceeds from notes payable to the FHLB-Chicago of $0 and $21.5 million,
respectively; and a net increase in deposits of $31.1 million during the 1999
period. There were no purchases of securities available-for-sale for the three
months ended September 30, 2000, compared to purchases of $29.8 million and
sales of $11.5 million for the three months
16
<PAGE> 20
ended September 30, 1999. There were no purchases or sales of trading securities
for the three months ended September 30, 2000 and 1999.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Wisconsin Department of Financial Institutions, Division of
Savings and Loan for state-chartered stock savings banks. Savings banks are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers acceptances, certain corporate debt
securities, securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8.0%. The
Company's liquidity ratio was 11.10% at September 30, 2000. The Company adjusts
its liquidity levels to meet various funding needs and to meet its asset and
liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The levels of these assets
are dependent on the Company's operating, financing, lending and investing
activities during any given period. At September 30, 2000 and June 30, 2000,
cash and cash equivalents were $14.3 million and $16.6 million, respectively.
The decrease in cash and cash equivalents was due to a decrease in deposits.
Liquidity management for the Company is both an ongoing and long-term function
of the Company's asset/liability management strategy. Excess funds generally are
invested in short-term investments such as federal funds or overnight deposits
at the FHLB-Chicago. Whenever the Company requires funds beyond its ability to
generate them internally, additional sources of funds are available and obtained
from the wholesale brokered and non-brokered market as well as the unused credit
line from the FHLB-Chicago (subject to the Board-imposed and regulatory
limitations discussed herein), and funds also may be available through reverse
repurchase agreements wherein the Company pledges investment, mortgage-backed or
related securities. The Company maintains a federal funds open line of credit in
the amount of $10.0 million with a correspondent bank which does not require the
direct pledging of any assets and could be used to replace a portion of its
interest rate sensitive liabilities such as borrowings and deposits should such
funding sources become difficult to obtain or retain due to an adverse interest
rate environment. Also, during the three months ended September 30, 2000, the
Company secured an additional $10.0 million federal funds open line of credit
with a separate correspondent bank. In addition, the Company maintains a
relatively high level of liquid assets, such as investment securities and
mortgage-backed and related securities available-for-sale, in order to insure
sufficient sources of funds are available to meet the Company's liquidity needs.
At September 30, 2000, retail and wholesale certificates of deposit totaled
$57.3 million and $216.1 million, respectively. Management believes that a
significant portion of its retail deposits will remain with the Company and, in
the case of wholesale brokered deposits, may be replaced with similar type
accounts should the level of interest rates change. However, in the event of a
significant increase in market interest rates, the cost of obtaining replacement
wholesale deposits and FHLB advances would increase as well.
The Bank's Board of Directors has set a maximum limitation of total borrowings
equal to 32% of total assets. The internal limitation is 3% below the allowable
borrowing limit (for all borrowings including FHLB advances and reverse
repurchase agreements) of 35% of total assets established by the FHLB-Chicago.
At September 30, 2000, FHLB advances totaled $123.5 million or 24.0% of the
Bank's total assets. At September 30, 2000, securities sold under agreements to
repurchase were $9.2 million or 1.8% of the Bank's total assets. At September
30, 2000, the Bank had unused borrowing authority under the borrowing
limitations established by the Board of Directors of $31.2 million and $46.6
million under the FHLB total asset limitation. The Bank has and intends to
continue to fund asset growth in fiscal 2001 through modest increases in FHLB
advances, and maintain the 3% excess borrowing cushion through modest increases
in FHLB advances and reverse repurchase agreements.
The Company has various unfunded commitments at September 30, 2000 which
represent amounts the Company expects to fund during the quarter ended December
31, 2000. For a summary of such commitments, see discussion under footnote (4)
"Commitments and Contingencies" contained in the section entitled, "Notes to
Consolidated Financial Statements." The Company anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process to the issuance of firm commitments.
17
<PAGE> 21
CHANGE IN FINANCIAL CONDITION
Total assets decreased $5.7 million, or 1.1%, from $519.6 million at June 30,
2000 to $513.9 million at September 30, 2000. This decrease is primarily
reflected in a decrease in loans receivable, cash and cash equivalents,
mortgage-backed and related securities available-for-sale and deposits. Cash and
cash equivalents were $14.3 million and $16.6 million at September 30, 2000 and
June 30, 1999, respectively. The decrease in cash and cash equivalents was due
to a decrease in deposits.
Loans receivable decreased to $388.7 million at September 30, 2000 compared to
$391.8 million at June 30, 2000. The decrease in loans receivable at September
30, 2000 as compared to June 30, 2000 is primarily the result of management's
decision to decrease the level of loans purchased to increase the Bank's ratio
of total capital to risk-weighted assets. At September 30, 2000, the ratio of
total capital to risk-weighted assets was 10.54% as compared to 10.34% at June
30, 2000.
Total mortgage loans originated and purchased amounted to $36.8 million ($5.4
million of which were purchased mortgage loans) and $78.5 million ($46.5 million
of which were purchased mortgage loans) for the three months ended September 30,
2000 and 1999, respectively. At September 30, 2000, the multifamily and
commercial components of the Company's loan portfolio totaled $179.5 million, or
44.4% of the total loan portfolio, compared to $144.2 million, or 40.4% of the
total loan portfolio at September 30, 1999.
During the three months ended September 30, 2000, the Company did not originate
or purchase non-conforming one-to-four family mortgage loans as compared to the
three months ended September 30, 1999 when the Company purchased $26.4 million
in non-conforming one-to-four family mortgage loans. Of the $31.4 million in
loans originated during the three months ended September 30, 2000, $10.7 million
were conforming one-to-four family mortgage loans, $10.1 million were commerical
business loans, $3.2 million were home equity loans, $3.1 million were
multi-family mortgage loans, $2.9 million were commercial real estate loans and
$1.4 million were consumer-related loans. The increase in commercial business
loans originated for the three months ended September 30, 2000 as compared to
the comparable 1999 period reflects a significant increase in the refinance of
commercial business loans during the 2000 period. Of the $5.4 million in loans
purchased during the three months ended September 30, 2000, all were commercial
real estate loans purchased outside of the Company's primary lending area.
Of the $32.0 million in loans originated during the three months ended September
30, 1999, $11.9 million were conforming one-to-four family mortgage loans, $6.7
million were multi-family mortgage loans, $6.3 million were commercial real
estate loans, $2.9 million were commerical business loans, $2.8 million were
home equity loans and $1.4 million were consumer-related loans. Of the $46.5
million in loans purchased during the three months ended September 30, 1999,
$26.4 million were non-conforming one-to-four family mortgage loans purchased
outside of the primary lending area, $11.7 million were commercial real estate
loans purchased outside of the primary lending area, $4.9 million were
multi-family mortgage loans purchased outside of the primary lending area, $1.5
million were commercial real estate loans purchased inside of the primary
lending area, $1.5 million were commercial business loans purchased outside of
the primary lending area and $500,000 was a land loan purchased outside of the
primary lending area.
Sales of fixed-rate mortgage loans totaled $8.9 million and $4.6 million for the
three months ended September 30, 2000 and 1999, respectively. The increase in
the sales of fixed-rate mortgage loans is due to management's intent to sell a
greater number of these loans originated in the three months ended September 30,
2000 as compared to September 30, 1999.
Securities available-for-sale decreased to $73.1 million at September 30, 2000
compared to $74.3 million at June 30, 2000. Mortgage-backed and related
securities available-for-sale decreased to $34.3 million at September 30, 2000
compared to $35.9 million at June 30, 2000. Securities held-to-maturity
decreased to $14.2 million at September 30, 2000 compared to $15.0 million at
June 30, 2000. The decrease in securities available-for-sale and securities
held-to-maturity was the result of not replacing the principal repayments with
purchased securities.
18
<PAGE> 22
Deposits decreased $10.0 million to $335.3 million at September 30, 2000 from
$345.3 million at June 30, 2000. The decrease in deposits was primarily due to
the Company's decrease in originated and purchased loans during the three months
ended September 30, 2000. Brokered certificates of deposit totaled $204.8
million at September 30, 2000, representing 61.1% of total deposits as compared
to $216.2 million, or 62.6% of total deposits, at June 30, 2000. Non-brokered
wholesale deposits totaled $11.2 million at September 30, 2000, representing
3.3% of total deposits as compared to $14.2 million, or 4.1% of total deposits
at June 30, 2000. Deposits are the Company's primary source of externally
generated funds. The level of deposits is heavily influenced by such factors as
the general level of short- and long-term interest rates as well as alternative
yields that investors may obtain on competing investment securities such as
money market mutual funds.
FHLB-Chicago advances increased to $123.5 million at September 30, 2000 compared
to $112.5 million at June 30, 2000. Securities sold under agreements to
repurchase decreased to $9.2 million at September 30, 2000 compared to $18.5
million at June 30, 2000. The Company has increased its use of FHLB-Chicago
advances and decreased its use of securities sold under agreements to repurchase
as a cost efficient way to increase the maturity of the Company's liabilities
and improve the Company's negative interest rate gap.
ASSET/LIABILITY MANAGEMENT
The Company closely monitors interest rate risk in an attempt to manage the
extent to which net interest income is significantly affected by changes in
market interest rates. In managing the Company's interest rate risk during the
three months ended September 30, 2000, the Company utilized FHLB advances to
lenghten the maturity of it's interest costing liabilities due primarily to the
attractive rates offered on FHLB advances as compared to retail and wholesale
deposits. During the three months ended September 30, 2000 the Company did not
increase it's use of derivative securities to hedge it's negative interest rate
gap. For a summary of derivative securities activities, see discussion under
footnote (9) "Accounting for Derivative Investments and Hedging Activities"
contained in the section entitled, "Notes to Consolidated Financial Statements".
At September 30, 2000, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 37.6% of total assets as compared to a
negative 41.1% at June 30, 2000.
The decrease in the Company's negative one-year gap reflects the increased use
of longer-term maturity FHLB advances to fund the asset base. Beginning in
January 2000 and in conjunction with the increased negative gap position of the
Company, management with the approval of the Board of Directors has started to
manage the interest rate risk on the Company's short-term wholesale certificates
of deposit using interest rate caps to limit the Company's exposure to rising
interest rates. See Footnote (9) "Accounting for Derivative Investments and
Hedging Activities" for discussion of the caps. At September, 2000, the notional
amount of the interest rate caps was $75 million with maturity dates of June 14,
2001 and January 3, 2002. The interest rate caps are tied to the 3-month LIBOR
interest rate with a 7.0% strike rate. Payments will be received by the Bank if
the 3-month LIBOR increases over the 7.0% strike rate. The unamortized cost and
fair value of the interest rate caps was $23,000 and $166,000 at September 30,
2000 and June 30, 2000, respectively, and is recorded as an other asset in the
Consolidated Statement of Financial Condition. The change in the time value of
the caps of $51,000 was recognized in Interest Expense in the Consolidated
Statements of Income and the change in fair value of $92,000 was recognized as a
compenent of Accumulated Other Comprehensive Loss for the three months ended
September 30, 2000. There are certain risks associated with interest rate caps,
including the risk that the counterparty may default and that there may not be
an exact correlation between the indices on which the interest rate cap
agreements are based and the terms of the hedged liabilities. In order to offset
these risks, the Company generally enters into interest rate cap agreements only
with nationally recognized securities firms and monitors the credit status of
counterparties, the level of collateral for such caps and the correlation
between the hedged liabilities and the indices utilized.
During periods of rising interest rates, a negative interest rate sensitivity
gap would tend to negatively affect net interest income, while a positive
interest rate sensitivity gap would positively affect net income.
Notwithstanding, the potential positive effect of the Company's one-year gap
position during periods of falling interest rates, the Company could experience
substantial prepayments of its fixed rate mortgage loans and
19
<PAGE> 23
mortgage-backed and related securities, which would result in the reinvestment
of such proceeds at market rates which would be lower than the then current
rates.
20
<PAGE> 24
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at September 30, 2000 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
---------------------------------------------------------------
MORE THAN MORE THAN
WITHIN FOUR TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
--------- --------- ---------- ----------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate.................................. $ 18,006 $ 28,278 $74,842 $67,144 $62,518 $250,788
Adjustable rate............................. 25,291 44,917 33,888 4,171 1,129 109,396
Consumer loans (2)............................... 146 2,336 395 136 - 3,013
Commercial loans (2)............................. 4,334 11,396 6,191 2,105 - 24,026
Mortgage-backed and related securities:
Fixed rate and securities
available-for-sale............................... 1,437 3,925 8,158 5,744 9,363 28,627
Adjustable rate............................. 11,849 8,053 - - - 19,902
Investment securities and
securities available-for-sale ................. 19,725 726 - 9,774 28,094 58,319
-------- -------- -------- -------- ------- --------
Total interest-earning assets............... $ 80,788 $ 99,631 $123,474 $89,074 $101,104 $494,071
======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts................................ $ 255 $ 764 $ 1,212 $ 594 $ 571 $ 3,396
Money market deposit accounts............... 5,006 15,017 11,212 1,794 341 33,370
Passbook savings accounts................... 1,266 3,798 6,025 2,952 2,837 16,878
Certificates of deposit..................... 130,684 123,490 16,867 2,181 - 273,222
Escrow deposits............................. 5,320 - - - - 5,320
Borrowings(4)
FHLB advances and other borrowings.......... 45,240 43,000 13,030 25,000 6,500 132,770
-------- -------- -------- -------- ------- --------
Total interest-bearing liabilities.......... $187,771 $186,069 $ 48,346 $ 32,521 $ 10,249 $464,956
======== ======== ======== ======== ======== ========
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities.............. ($106,983) ($ 86,438) $ 75,128 $ 56,553 $ 90,855 $ 29,115
======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities................... ($106,983) ($193,421) ($118,293) ($ 61,740) $ 29,115 $ 29,115
======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets................... (20.8)% (37.6)% (23.0)% (12.0)% 5.7% 5.7%
==== ==== ==== ==== === ===
</TABLE>
-------------------------------------
[FN]
(1) Adjustable- and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing the
Company's historical prepayment statistics modified for forecasted
statistics using annual prepayment rates ranging from 5% to 20%, based on
the loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned credit
insurance premiums, deferred loan fees, purchased loan discounts and the
allowance for loan losses, which aggregated $16.9 million at September 30,
2000.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain historical
amount of such accounts to be core deposits having significantly longer
effective maturities and times to repricing based on the Company's
historical retention of such deposits in changing interest rate
environments. NOW accounts, passbook savings accounts and money market
deposit accounts are assumed to be withdrawn at annual rates of 30%, 30%
and 60%, respectively, of the declining balance of such accounts during the
period shown. The withdrawal rates used are higher than the Company's
historical rates but are considered by management to be more indicative of
expected withdrawal rates currently. If all of the Company's NOW accounts,
passbook savings accounts and money market deposit accounts had been
assumed to be subject to repricing within one year, the one-year cumulative
deficiency of interest-earning assets over interest-bearing liabilities
would have been $219.9 million or 42.8% of total assets.
(4) Adjustable- and floating-rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
21
<PAGE> 25
ASSET QUALITY
The Company and the Bank regularly review assets to determine proper valuation.
The review consists of an update of the historical loss experience, valuation of
the underlying collateral and the outlook for the economy in general as well as
the regulatory environment.
The following table sets forth information regarding the Bank's non-accrual
loans and foreclosed properties at the dates indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
SEP 30 JUN 30 MAR 31 DEC 31 SEP 30
2000 2000 2000 1999 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans............................ $1,990 $1,798 $1,812 $2,100 $1,100
Non-accrual consumer loans............................ 48 54 63 65 49
Non-accrual commercial loans & leases................. - - 163 - -
------ ------ ------ ------ ------
Total non-accrual loans............................... $2,038 $1,852 $2,038 $2,165 $1,149
====== ====== ====== ====== ======
Loans 90 days or more
delinquent and still accruing....................... 16 18 118 118 82
------ ------ ------ ------ ------
Total non-performing loans............................ $2.054 $1.870 $2.156 $2,283 $1.231
====== ====== ====== ====== ======
Non-accrual investment securities..................... - - - - 235
Total foreclosed real estate net of
related allowance for losses ....................... 1,145 1,114 960 960 1,893
------ ------ ------ ------ ------
Total non-performing assets........................... $3,199 $2,984 $3,116 $3,243 $3,359
====== ====== ====== ====== ======
Non-performing loans to
gross loans receivable.............................. 0.51% 0.45% 0.54% 0.61% 0.34%
===== ===== ===== ===== =====
Non-performing assets to
total assets ....................................... 0.62% 0.57% 0.61% 0.63% 0.64%
===== ===== ===== ===== =====
</TABLE>
At September 30, 2000, non-performing loans increased to $2.1 million from $1.9
million at June 30, 2000. The increase is due primarily to the increase in
non-accrual one-to-four family mortgage loans. Impaired loans decreased to
$589,000 at September 30, 2000 from $880,000 at June 30, 2000. Impaired loans
consist primarily of commercial and commercial real estate loans for which,
based on current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Management believes that these loans are adequately collateralized
and/or have specific loan loss reserves established which are adequate to absorb
probable losses related to resolution.
Potential problem loans are loans where known information about possible credit
problems of borrowers causes management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms. The decision by
management to categorize a loan as a potential problem loan does not necessarily
indicate that the Company expects losses to occur, but that management
recognizes there is a higher degree of risk associated with these performing
loans. At September, 2000, the Bank had a potential problem loan with a balance
of $1.2 million secured by 9 first lien one-to-four family mortgages held in
trust for the benefit of the Bank and a secondary payee under the loan
obligation. The original balance of the loan was $4.1 million. At September 30,
2000, the loan was current as to payment of principal and interest. Proceeds
from payments made to the trustee from potential homeowners (occupying the
properties under 2-year leases with an option to purchase at an agreed upon
price upon expiration of the lease-term), or from any other eventual sale of the
one-to-four family residences securing the obligation, are to be applied by the
trustee first to the repayment of the total of all principal and interest due
the Bank, with any excess over such amounts becoming due to the secondary payee.
The Bank assumed responsibility for receipt and servicing of payments from the
potential homeowners upon the secondary payee's filing of bankruptcy in June
1999. The Bank also removed a third party bank as the bond trustee and appointed
itself as trustee in December 1999. The one-to-four family properties securing
22
<PAGE> 26
the obligation are located in the Bank's primary lending area and management
believes the underlying value of the properties and the Bank's first lien status
are sufficient to prevent any significant loss from this credit.
ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Bank's allowance for loan
losses:
<TABLE>
<CAPTION>
THREE MONTHS YEAR THREE MONTHS
ENDED ENDED ENDED
SEPT. 30, 2000 JUNE 30, 2000 SEPT. 30, 1999
-------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period .............................. $ 3,201 $ 2,648 $ 2,648
Additions charged to expense:
Multi-family and commercial real estate ................... 60 499 120
Consumer................................................... 20 143 -
Commercial................................................. - 229 -
------- ------- -------
80 871 120
Recoveries:
Consumer................................................... 14 22 6
Charge-offs:
One- to four-family........................................ (57) (43) -
Multi-family & commercial real estate...................... - (119) -
Consumer................................................... (57) (178) (9)
------- ------- -------
(114) (340) (9)
------- ------- -------
Net charge-offs............................................ (100) (318) (3)
------- ------- -------
Balance at end of period................................... $ 3,181 $ 3,201 $ 2,765
======= ======= =======
Allowance for loan losses to
non-performing loans at end
of the period.............................................. 154.85% 171.26% 224.55%
======= ======= =======
Allowance for loan losses to
total loans at end of the period........................... 0.79% 0.78% 0.77%
======= ======= =======
</TABLE>
The level of allowance for loan losses at September 30, 2000, reflects the
continued low level of charged off loans. Management believes that the allowance
for loan losses is adequate as of September 30, 2000.
23
<PAGE> 27
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
GENERAL
Net income for the three months ended September 30, 2000 decreased to $572,000
from $755,000 for the comparable 1999 period. The decrease in net income was
primarily due to a decrease in net interest income. Return on average equity
decreased to 6.79% for the three months ended September 30, 2000 from 8.85% for
the comparable 1999 period. Return on average assets decreased to 0.45% for the
three months ended September 30, 2000 from 0.61% for the comparable 1999 period.
The decrease in the return on average equity and the return on average assets is
due to the decrease in net income for the three months ended September 30, 2000.
The decrease is primarily due to a decrease in net interest income for the three
months ended September 30, 2000 compared to September 30, 1999.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 1999
-------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
---------- -------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans.......................... $363,059 $7,283 8.02% $277,129 $5,481 7.91%
Consumer loans.......................... 3,095 103 13.31 3,616 126 13.94
Commercial loans........................ 23,545 618 10.50 18,617 470 10.10
-------- ------ -------- ------
Total loans.......................... 389,699 8,004 8.22 299,362 6,077 8.12
Securities held-to-maturity:
Mortgage-backed securities............ 1,351 20 5.92 10,183 161 6.32
Mortgage related securities........... 13,329 228 6.84 43,858 702 6.40
-------- ------ -------- ------
Total mortgage-backed
and related securities.............. 14,680 248 6.76 54,041 863 6.39
Investment and other securities......... 13,329 212 6.28 8,322 112 5.38
Securities available-for-sale........... 73,457 1,351 7.36 101,583 1,586 6.25
Federal Home Loan Bank stock............ 7,872 151 7.67 6,702 113 6.74
-------- ------ -------- ------
Total interest-earning assets......... 499,206 9,966 7.99 470,010 8,751 7.45
Non-interest earning assets............... 13,043 21,926
-------- --------
Total assets.......................... $512,249 $491,936
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts............................ $ 3,215 6 0.75% $ 2,816 12 1.70%
Money market deposit accounts........... 30,215 400 5.30 35,860 400 4.46
Passbook accounts....................... 17,563 126 2.87 20,697 151 2.92
Certificates of deposit................. 279,590 4,733 6.77 231,101 3,071 5.32
-------- ------ -------- ------
Total deposits......................... 330,583 5,265 6.37 290,474 3,634 5.00
Advance payments by borrowers
for taxes and insurance................. 4,575 24 2.10 4,028 24 2.38
Borrowings................................ 130,074 1,961 6.03 148,350 2,104 5.67
-------- ------ -------- ------
Total interest-bearing
liabilities............................. 465,232 7,250 6.23 442,852 5,762 5.20
Non-interest bearing deposits
and liabilities......................... 13,320 14,968
Shareholders' equity...................... 33,697 34,116
-------- --------
Total liabilities and
shareholders' equity................ $512,249 $491,936
======== ========
Net interest income/interest rate
spread.................................... $2,717 1.76% $2,989 2.25%
====== ===== ====== =====
Net earning assets/net interest
margin.................................... $ 33,974 2.18% $ 27,158 2.54%
======== ===== ======== =====
</TABLE>
24
<PAGE> 28
Net interest income before provision for losses on loans decreased $272,000, or
9.1%, to $2.7 million for the three months ended September 30, 2000 from $3.0
million for the comparable 1999 period. Interest income increased $1.2 million
for the three months ended September 30, 2000, partially offset by an increase
in interest expense of $1.5 million. The level of net interest income primarily
reflects a decrease in interest rate spread to 1.76% for the three months ended
September 30, 2000 from 2.25% for the comparable 1999 period offset by a 6.2%
increase in average interest-earning assets to $499.2 million for the three
months ended September 30, 2000 from $470.0 million for the comparable 1999
period and by a 25.1% increase in the excess of the Company's average
interest-earning assets over average interest-bearing liabilities to $34.0
million for the three months ended September 30, 2000 from $27.2 million for the
comparable 1999 period. The decrease in interest rate spread was primarily due
to higher costing deposits and borrowings in the 2000 period as compared to the
1999 period.
INTEREST INCOME
Interest income increased 13.9% to $10.0 million for the three months ended
September 30, 2000 from $8.8 million for the comparable 1999 period. The
increase in interest income was the result of an increase in average
interest-earning assets of 6.2% to $499.2 million for the three months ended
September 30, 2000 from $470.0 million for the comparable 1999 period and an
increase of 54 basis points in the yield on interest-earning assets to 7.99% for
the three months ended September 30, 2000 from 7.45% for the comparable 1999
period. Interest income on loans increased 31.7% to $8.0 million for the three
months ended September 30, 2000, from $6.1 million for the comparable 1999
period. The increase was the result of an increase in the Company's average
gross loans of 30.2% to $389.7 million for the three months ended September 30,
2000 from $299.4 million for the comparable 1999 period and by an increase in
average yield to 8.22% for the 2000 period from 8.12% for the comparable 1999
period. Gross loans increased primarily as a result of the Company purchasing
more loans in the secondary market and increases in multi-family and commercial
components of the portfolio and retaining substantially all of its adjustable
and short-term fixed rate loan originations. See "Change in Financial Condition"
for a discussion of the increase in gross loans. The increase in yield is
attributable to the increase in loans originated and purchased at higher
interest rates and the upward increase on adjustable rate loans since the period
ending September 30, 1999.
Interest income on mortgage-backed securities decreased 87.6% to $20,000 for the
three months ended September 30, 2000 from $161,000 for the comparable 1999
period. The decrease was primarily due to a decrease in average balances to $1.4
million for the three months ended September 30, 2000 from $10.2 million for the
comparable 1999 period and by a decrease in average yield to 5.92% for the 2000
period from 6.32% for the 1999 period. Interest income on mortgage-related
securities decreased 67.5% to $228,000 for the three months ended September 30,
2000 from $702,000 for the comparable 1999 period. The decrease was primarily
due to a decrease in average balances to $13.3 million for the three months
ended September 30, 2000 from $43.9 million for the comparable 1999 period,
offset by an increase in yield to 6.84% for the 2000 period from 6.40% for the
1999 period. The decrease in average balances mortgage-backed securities and
mortgage-related securities was primarily due to the sale of $2.8 million and
$23.1 million, respectively, in the three months ended September 30, 2000. The
increase in average yield on mortgage-related securities was primarily due to
accelerated amortization of purchase premiums on mortgage related securities due
to faster than projected principal repayments during the 1999 period. The
decrease in average balances of mortgage-backed and related securities is due to
management's decision to replace securities that were sold and repaid with
loans. Interest income on investment securities and securities
available-for-sale and investment and other securities decreased 8.0% to $1.6
million for the three months ended September 30, 2000 from $1.7 million for the
comparable 1999 period. The decrease was primarily due to a decrease in average
balances to $87.0 million for the three months ended September 30, 2000 from
$109.9 million for the 1999 period, offset by an increase in average yield to
7.19% for the three months ended September 30, 2000 from 6.18% for the
comparable 1999 period. The decrease in securities available-for-sale was due to
management's decision to sell securities during the 2000 period to fund loan
originations and purchases. The increased average yield was primarily
attributable to the increase in interest rates during fiscal year 2000.
25
<PAGE> 29
INTEREST EXPENSE
Interest expense increased 25.8% to $7.3 million for the three months ended
September 30, 2000 from $5.8 million for the comparable 1999 period. The
increase was the result of an increase in the average rate paid on
interest-bearing liabilities to 6.23% for the 2000 period from 5.20% for the
1999 period and a 5.1% increase in the average amount of interest-bearing
liabilities to $465.2 million for the three months ended September 30, 2000
compared to $442.9 million for the comparable 1999 period. The increased
balances of certificate of deposit accounts and borrowings at higher average
interest rates was the primary reason for the increase in the average rate paid
on the interest-bearing liabilities for the three months ended September 30,
2000 as compared to the 1999 period. Interest expense on deposits increased
44.9% to $5.3 million for the three months ended September 30, 2000 from $3.6
million for the comparable 1999 period. The increase was the result of an
increase in the average rate paid to 6.37% for the three months ended September
30, 2000 from 5.00% for the 1999 period and by an increase in average balances
of 13.8% to $330.6 million for the three months ended September 30, 2000 from
$290.5 million for the comparable 1999 period. The increase in deposits was
primarily due to an increase of 20.9% in certificates of deposit accounts to
$279.6 million for the three months ended September 30, 2000 from $231.1 million
for the comparable 1999 period, with an increase in the average rate paid to
6.77% for the 2000 period from 5.32% for the 1999 period. NOW accounts increased
14.2% to $3.2 million for the three months ended September 30, 2000 from $2.8
million for the comparable 1999 period, offset by a decrease in average rate
paid to 0.75% for the 2000 period from 1.70% for the 1999 period.
Offsetting the increases in deposits was a decrease in money market deposit
accounts of 15.7% to $30.2 million for the three months ended September 30, 2000
from $35.9 million for the comparable 1999 period, and a decrease in passbook
accounts of 15.1% to $17.6 million for the three months ended September 30, 2000
from $20.7 million for the comparable 1999 period. Money market deposit accounts
decreased primarily due to higher rates offered in the Company's local market
during the three months ended September 30, 2000. The Company's increase in
certificates of deposit was the result of aggressive marketing and pricing and
the use of brokered certificates of deposit. Of the $279.6 million in the
average balance of certificates of deposit for the three months ended September
30, 2000, $222.4 million, or 79.5%, represented brokered certificates of deposit
compared to $111.5 million, or 48.3%, for the 1999 period. The average rate paid
on brokered certificates of deposit increased to 6.81% for the three months
ended September 30, 2000 from 5.38% for the comparable 1999 period. The increase
was primarily due to the increased interest rate environment in the 2000 period
as compared to the 1999 period. Interest on borrowings (FHLB advances and
reverse repurchase agreements) decreased 6.8% to $2.0 million for the three
months ended September 30, 2000 from $2.1 million for the comparable 1999
period. The decrease was primarily due to the decrease in average balances of
FHLB advances and reverse repurchase agreements of 12.3% to $130.1 million for
the three months ended September 30, 2000 from $148.4 million for the comparable
1999 period, offset by an increase in the average rate paid to 6.03% for the
2000 period from 5.67% for the 1999 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased 33.3% to $80,000 for the three
months ended September 30, 2000 from $120,000 for the comparable 1999 period.
The level of allowance for losses on loans generally is determined by the Bank's
historical loan loss experience, the condition and composition of the Bank's
loan portfolio, underlying collateral and existing general economic conditions.
Based on management's evaluation of the loan portfolio during the three months
ended September 30, 2000, the allowance for losses was $3.2 million at September
30 and June 30, 2000. While the allowance for losses on loans remained
unchanged, the allowance for loan losses as a percentage of gross loans
increased to 0.79% at September 30, 2000 from 0.78% at June 30, 2000, reflecting
a decline in the level of gross loans outstanding and the continued low level of
loans charged off. The amount of non-performing loans at September 30, 2000 was
$2.1 million, or 0.51% of gross loans, compared to $1.9 million, or 0.45% of
gross loans, at June 30, 2000 and $1.2 million or 0.34% of gross loans at
September 30, 1999. Management believes that these loans are adequately
collateralized and/or have specific loan loss reserves established which are
adequate to absorb probable losses related to resolution. The increase in the
allowance as a percentage of loans during the three months ended September 30,
2000 reflects a slightly higher level of non-performing assets at September 30,
2000.
26
<PAGE> 30
NON-INTEREST INCOME
Non-interest income decreased 4.9% to $387,000 for the three months ended
September 30, 2000 from $407,000 for the comparable 1999 period. The largest
components of the decrease were a decrease in gains on the sale of securities
and mortgage-backed and related securities to $0 for the three months ended
September 30, 2000 from $54,000 for the comparable 1999 period, a decrease in
other non-interest income to $34,000 for the three months ended September 30,
2000 from $54,000 for the comparable 1999 period and a decrease in service
charges on deposit accounts to $113,000 for the three months ended September 30,
2000 from $122,000 for the comparable 1999 period. Partially offsetting the
decreases in non-interest income was an increase in insurance commissions to
$35,000 for the three months ended September 30, 2000 from $12,000 for the
comparable 1999 period and an increase in gains on the sale loans to $112,000
for the three months ended September 30, 2000 from $96,000 for the comparable
1999 period. The decrease in gains on the securities and mortgage-backed and
related securities reflects management's decision to sell securities from the
available-for-sale portfolio in the 1999 period to partially fund loan growth.
NON-INTEREST EXPENSE
Non-interest expense decreased 0.1% to $2.157 million for the three months ended
September 30, 2000 from $2.160 million for the comparable 1999 period. The
decrease was primarily due to a decrease in deposit insurance premiums of
$28,000 to $17,000 for the three months ended September 30, 2000 from $45,000
for the comparable 1999 period. Partially, offsetting the decrease was an
increase in other non-interest expense of $24,000 to $359,000 for the three
months ended September 30, 2000 from $335,000 for the comparable 1999 period.
The decrease in deposit insurance premiums relates to a decreased premium rate
charged by the FDIC for deposit insurance in the 2000 period. The increase in
other non-interest expense is primarily due to increases in printing, office
supplies, organization dues, legal and other miscellaneous expenses.
INCOME TAX EXPENSE
Income tax expense for the three months ended September 30, 2000, was $295,000
or $66,000 lower than the comparable 1999 period as a result of lower income
before income taxes. The effective tax rate increased from 32.3% for the 1999
period to 34.0% for the 2000 period as a result of lower anticipated tax credits
on investments in low income housing partnerships.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options but has decided to purchase interest rate caps to manage the
interest rate risk on the Company's short-term wholesale certificates of
deposit. The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments consist primarily of commitments to
extend credit. These instruments involve to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated
balance sheets. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Company.
The information required herein pursuant to Item 305 of Regulation S-K is
incorporated by reference in sections entitled "Liquidity and Capital Resources"
from pages 16 to 17 and "Asset/Liability Management" from pages 19 to 20 hereof.
27
<PAGE> 31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to legal
proceedings arising out of its lending activities and other operations.
However, there are no pending legal proceedings of which the Company or
the Bank is a party which, if determined adversely to the Company or the
Bank, would have a material adverse effect on the consolidated financial
position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on October
25, 2000. There were 2,563,241 shares of Common Stock of the Company
entitled to vote at the Annual Meeting, and 2,186,763 shares present at
the meeting by holders thereof in person or by proxy, which constituted
a quorum. The following is a summary of the results of the votes:
<TABLE>
<CAPTION>
NUMBER OF VOTES
---------------------------------------------------
Against or Broker
For Withheld Abstain Non-Votes
----- ------------- ------- ----------
<S> <C> <C> <C> <C>
Nominee for Director for
Three-Year Term Expiring in 2003
James D. Smessaert.................................. 1,868,538 318,225 - -
Ratification of KPMG LLP as independent
auditors for fiscal year ending
June 30, 2001 ............................................. 2,170,774 15,989 - -
Approval of an amendment of the Company's Articles of
Incorporation to change the name of the Company to
Ledger Capital Corp........................................ 1,762,064 424,699 - -
</TABLE>
The continuing directors of the Company include: Donald A. Zellmer,
Martin Hedrich, Jr., Peter A. Gilbert, Reginald M. Hislop, III and
Charles E. Rickheim.
ITEM 5. OTHER INFORMATION
On October 31, 2000, the Company announced it had declared a dividend of
$0.05 per share on the common stock of the Company. The dividend will be
payable on November 24, 2000 to shareholders of record as of November
10, 2000.
On August 31, 2000, the Company announced it had adopted a share
repurchase program for its common stock to purchase up to 5%, or
approximately 128,162 shares. The repurchased shares will become
treasury shares and will be used for general corporate purposes. The
Company had purchased 0 and 128,100 shares of common stock pursuant to
the repurchase program at September 30, 2000 and October 31, 2000,
respectively.
28
<PAGE> 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K:
-------------------
On October 26, 2000, the Company filed a Current Report on Form 8-K
reporting that the shareholders of the Company adopted a proposal to
change the Company's name to "Ledger Capital Corp.".
Exhibits:
--------
3.2 Amended Bylaws of Registrant
11 Computation of Earnings per Share - See Note 4 to the
unaudited Consolidated Financial Statements
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
29
<PAGE> 33
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ledger Capital Corp.
--------------------
(Registrant)
Date: November 13, 2000 /s/ James D. Smessaert
----------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: November 13, 2000 /s/ Arthur E. Thompson
----------------------
Arthur E. Thompson
Chief Financial Officer
30
<PAGE> 34
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ledger Capital Corp.
--------------------
(Registrant)
Date: November 13, 2000
--------------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: November 13, 2000
--------------------------------
Arthur E. Thompson
Chief Financial Officer
33
<PAGE> 35
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.2 Amended Bylaws of Registrant
27 Financial Data Schedule
</TABLE>
34
