1
OFFICE OF THRIFT SUPERVISION
1700 G STREET, N.W.
WASHINGTON, D.C. 20552
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended June 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------- ----------------
OTS DOCKET NUMBER 1272
LEEDS FEDERAL SAVINGS BANK
------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 52-1865050
------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1101 MAIDEN CHOICE LANE, BALTIMORE, MARYLAND 21229
- -------------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
(410) 242-1234
-------------------------------
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject to
such requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The issuer's revenues for the fiscal year ended June 30, 1997, were
$19.6 million.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing sales price of the
Registrant's stock, as reported on the Nasdaq National Market on September 5,
1997, was approximately $35.6 million. This amount includes shares held by the
Registrant's ESOP, and excludes shares held by Leeds Federal Bankshares,
M.H.C., and the Registrant's directors and senior officers. As of September 5,
1997, there were issued and outstanding 3,454,736 shares of the Registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
June 30, 1997 (Parts II and III).
2. Proxy Statement for the 1997 Annual Meeting of Stockholders (Parts I
and III).
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Leeds Federal Savings Bank ("Leeds Federal" or the "Bank") is a
federally chartered savings bank that conducts its operations from a single
facility located in Arbutus, Baltimore County, Maryland. The Bank is the
successor to Leeds Federal Savings and Loan Association, which was chartered
originally in 1923. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF"). The Bank has been a member of the Federal Home Loan Bank System
since 1938. At June 30, 1997, the Bank had total assets of $287.0 million,
total deposits of $232.6 million, and stockholders' equity of $46.7 million.
The Bank is a community-oriented savings institution that is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market area, and investing such deposits in fixed-rate one- to
four-family residential real estate mortgages and adjustable rate home equity
loans and, to a lesser extent, commercial real estate loans and consumer loans.
To the extent available funds exceed local mortgage loan demand, the Bank also
invests in mortgage-backed securities issued or guaranteed by the United States
Government or agencies thereof, secured short-term loans to commercial banks,
interest-earning deposits in other institutions, and other short- and
medium-term investments.
The Bank's market area comprises parts of the Maryland counties of
Baltimore, Howard, Harford, Anne Arundel, and Carroll, and Baltimore City. The
Bank's market area has a diverse base, although it is significantly influenced
by the federal government and the defense industry.
The Bank's executive offices are located at 1101 Maiden Choice Lane,
Baltimore, Maryland 21229, and its telephone number at that address is (410)
242-1234.
MUTUAL HOLDING COMPANY REORGANIZATION
The Bank was formed on April 29, 1994, as a result of the
reorganization (the "Reorganization") of Leeds Federal Savings and Loan
Association, a federally chartered mutual savings and loan association (the
"Mutual Association") into a federal mutual holding company structure.
Pursuant to the Reorganization (i) the Bank was formed as a subsidiary of the
Mutual Association, (ii) the Mutual Association transferred substantially all
of its assets and all of its liabilities to the Bank, and (iii) the Mutual
Association converted its mutual charter into a mutual holding company charter
and was renamed Leeds Federal Bankshares, M.H.C. (the "Holding Company").
Concurrently with the Reorganization, 1,200,000 shares of the Bank's common
stock (the "Common Stock") representing 35.3% of the issued and outstanding
shares of the Common Stock, were sold to the Bank's Employee Stock Ownership
Plan and certain depositors of the Bank, at a price of $10.00 per share.
RECENT DEVELOPMENTS
On July 8, 1997, the Bank announced that the Office of Thrift
Supervision (the "OTS") approved the Bank's application to reorganize into a
two-tier mutual holding company structure. The Bank anticipates that this
restructuring will provide enhanced ability to invest through a mid-tier stock
holding company, facilitate mergers and acquisitions, and facilitate stock
repurchases.
MARKET AREA/LOCAL ECONOMY
The Bank's market area comprises parts of the Maryland counties of
Baltimore, Howard, Harford, Anne Arundel, and Carroll, and Baltimore City,
which are part of the Baltimore metropolitan area. Baltimore City is located
approximately 30 miles from Washington, D.C., and is part of the
Washington-Baltimore Standard Metropolitan Statistical Area. The Bank's market
area has a diverse base, although it is significantly influenced by the federal
government and the defense industry. The federal government is one of the
area's largest employers.
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Headquartered within the Bank's market area are a number of federal government
agencies, including the Social Security Administration and the Health Care
Financing Administration. Other major employers and industries within the
Bank's market area include General Motors Truck and Bus Group, Pepsi-Cola
Company, Black and Decker Corporation, Sweetheart Cup Company, Inc., Johns
Hopkins University, the University of Maryland--Baltimore County, the
University of Maryland--Baltimore, McCormick and Company, Inc., Bethlehem Steel
Corp., Westinghouse Electronic Systems Group, Fort Meade, Proctor and Gamble
Cosmetic and Fragrance Products, The Baltimore Sun, Baltimore Gas and Electric
Company, Giant Food, Inc., Bell Atlantic, Blue Cross and Blue Shield of
Maryland, USF&G Corporation, Crown Central Petroleum, St. 1Agnes Hospital, and
The Ryland Group, Inc. The Baltimore metropolitan area also has an active
tourism industry, and is home to the Baltimore Orioles professional baseball
team, the Baltimore Ravens professional football team, the Inner Harbor, and
the National Aquarium. As of 1990, the population of the Baltimore
metropolitan area was approximately two million. The Baltimore metropolitan
area experienced significant economic growth during the 1970's and 1980's. In
the early 1990s the real estate market had suffered a recession; however, the
area has been slowly recovering from this recession.
LENDING ACTIVITIES
Loan and Mortgage-Backed Securities Portfolio Composition. The
principal components of the Bank's loan portfolio are fixed-rate conventional
first mortgage loans secured by one- to four-family residential real estate,
home equity loans, and, to a much lesser extent, commercial real estate and
consumer loans. At June 30, 1997, the Bank's net loans receivable totalled
$174.9 million, of which $155.2 million, or 88.7%, were one- to four-family
residential real estate mortgage loans, $13.0 million, or 7.4%, were home
equity loans, $5.1 million, or 2.9%, were consumer loans, and $3.8 million, or
2.2%, were commercial real estate loans.
The Bank also invests in mortgage-backed securities including
pass-through certificates and, to a much lesser extent, collateralized mortgage
obligations ("CMOs"). At June 30, 1997, mortgage-backed securities totalled
$22.3 million, or 7.8%, of total assets. At June 30, 1997, 44.7% of the Bank's
mortgage-backed securities were secured by adjustable rate mortgage ("ARM")
loans, and 5.9% were secured by loans with terms of less than five years.
Pass-through certificates totalled $20.3 million, or 91.3%, of the Bank's total
mortgage-backed securities portfolio at June 30, 1997. All of the Bank's
pass-through certificates are insured or guaranteed by Freddie Mac, Ginnie Mae
("GNMA"), or Fannie Mae ("FNMA"). CMOs totalled $1.9 million, or 8.4%, of the
Bank's total mortgage-backed securities portfolio on June 30, 1997, all of
which were backed by federal agency collateral. The Bank's policy is to hold
mortgage-backed securities to maturity.
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Analysis of Loan Portfolio. Set forth below are selected data
relating to the composition of the Bank's loan portfolio by type of loan as of
the dates indicated.
At June 30,
------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- -------- ------- --------- -----------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $ 155,233 88.8% $ 137,700 90.1% $ 127,511 90.4%
Home equity 13,024 7.4 11,692 7.7 10,108 7.2
Commercial 3,763 2.2 1,548 1.0 1,494 1.0
--------- ------ ---------- ----- ---------- -----
Total real estate loans 172,020 98.4 150,940 98.8 139,113 98.6
Consumer loans 5,069 2.9 3,295 2.2 2,324 1.6
Accrued interest receivable 783 .4 679 .4 616 .4
--------- ------- ---------- ------ ---------- -----
Total loans receivable 177,872 101.7 154,914 101.4 142,053 100.6
Less:
Undisbursed loan proceeds 1,668 (1.0) 1,196 (.8) 121 (.1)
Net deferred loan fees 790 (.4) 588 (.4) 498 (.3)
Allowance for loan losses 536 (.3) 375 (.2) 341 (.2)
--------- ---- ---------- ------- ---------- ----
Total loans receivable, net $ 174,878 100.0% $ 152,755 100.0% $ 141,093 100.0%
========= ===== ========== ===== ========== =====
Mortgage-backed securities $ 22,294 $ 29,095 $ 34,957
========= ========== ==========
At June 30,
------------------------------------------
1994 1993
------------------- -----------------
Amount Percent Amount Percent
-------- --------- -------- --------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $ 131,751 92.0% $ 127,890 92.5%
Home equity 10,055 7.0 9,895 7.1
Commercial 1,672 1.2 1,529 1.1
--------- ------ ---------- -----
Total real estate loans 143,478 100.2 139,314 100.7
Consumer loans 773 .5 403 .3
Accrued interest receivable 620 .4 671 .5
--------- ------ ---------- ----
Total loans receivable 144,871 101.1 140,388 101.5
Less:
Undisbursed loan proceeds 625 (.4) 498 (.4)
Net deferred loan fees 677 (.5) 1,295 (.9)
Allowance for loan losses 318 (.2) 254 (.2)
--------- ------- ---------- ------
Total loans receivable, net $ 143,251 100.0% $ 138,341 100.0%
========= ===== ========== =====
Mortgage-backed securities $ 38,149 $ 42,120
========= ==========
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Loan and Mortgage-Backed Securities Maturity Schedule. The following
table sets forth the maturity or period of repricing of the Bank's loan and
mortgage-backed securities portfolio at June 30, 1997. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans
are included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due.
Beyond
Within 1-3 3-5 5-10 10-20 20
1 Year Years Years Years Years Years Total
--------- -------- -------- --------- -------- ---------- ---------
(In Thousands)
Real estate loans:
One- to four-family residential . . . . $ 171 $3,435 $12,561 $31,819 $70,339 $36,908 $155,233
Home equity . . . . . . . . . . . . . . 9,135 214 805 2,817 53 -- 13,024
Commercial . . . . . . . . . . . . . . 2,500 1,263 -- -- -- -- 3,763
Consumer loans . . . . . . . . . . . . . 380 1,068 3,377 244 -- -- 5,069
Accrued interest receivable . . . . . . . 783 -- -- -- -- -- 783
------ ------ ------- ------- ------ ------ -------
Total loans . . . . . . . . . . . 12,969 5,980 16,743 34,880 70,392 36,908 177,872
------ ------ ------- ------- ------ ------ --------
Mortgage-backed securities (1) . . . . . 12,189 2,577 -- 5,024 -- 2,565 22,355
------ ------ ------- ------- ------ ------ -------
Total loans and
mortgage-backed securities . . . . $25,158 $8,557 $16,743 $39,904 $70,392 $39,473 $200,227
======= ====== ======= ======= ======= ======= ========
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(1) Does not include discounts and premiums.
Fixed- and Adjustable-Rate Loan and Mortgage-Backed Securities
Schedule. The following table sets forth at June 30, 1997, the dollar amount
of fixed rate loans and mortgage-backed securities that mature after June 30,
1998, and all adjustable rate loans and mortgage-backed securities that mature
or reprice after June 30, 1998.
Fixed Adjustable Total
----------- ---------- -----------
(In Thousands)
Real estate loans:
One- to four-family residential . . . . . . . . . . . . $ 146,155 $ 8,907 $ 155,062
Home equity . . . . . . . . . . . . . . . . . . . . . . 3,889 -- 3,889
Commercial . . . . . . . . . . . . . . . . . . . . . . -- 1,263 1,263
Consumer loans . . . . . . . . . . . . . . . . . . . . 4,689 -- 4,689
--------- -------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 154,733 $ 10,170 $ 164,903
========= ======== =========
Mortgage-backed securities . . . . . . . . . . . . . . . $ 10,166 $ -- $ 10,166
========= ======== =========
One- to Four-Family Residential Real Estate Loans. The Bank's primary
lending activity currently consists of the origination of fixed rate one- to
four-family owner-occupied residential mortgage loans, virtually all of which
are collateralized by properties located in the Bank's market area. The Bank
also originates fixed/adjustable first mortgage loans, which have fixed rates
for the first five or seven years, then adjust annually thereafter. The Bank
also originates one- to four-family construction loans that convert to
permanent loans after the initial construction period which generally does not
exceed nine months. The Bank is a portfolio lender. It has not sold loans in
the secondary mortgage market; however, it may conduct limited secondary market
sales in the future. One- to four-family loans are underwritten and originated
according to policies approved by the board of directors.
The Bank currently offers fixed rate one- to four-family residential
mortgage loans with terms ranging from 5 to 30 years. One- to four-family
residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or
prepay loans at their option. The average length of time that the Bank's one-
to four-family residential mortgage loans remain outstanding varies
significantly
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depending upon trends in market interest rates and other factors. In recent
years, the average maturity of the Bank's mortgage loans has decreased
significantly due to unprecedented volume of refinancing activity.
Accordingly, estimates of the average length of one- to four-family loans that
remain outstanding cannot be made with any degree of accuracy.
Originations of fixed rate mortgage loans are monitored on an ongoing
basis and are affected significantly by the level of market interest rates, the
Bank's interest rate risk position, and loan products offered by the Bank's
competitors. The Bank's fixed rate mortgage loans amortize on a monthly basis
with principal and interest due each month. To make the Bank's loan portfolio
more interest rate sensitive, the Bank currently emphasizes the origination of
fixed rate loans with terms of 15 years or less and fixed/adjustable rate
loans.
The Bank's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Bank's fixed rate mortgage loan
portfolio, and the Bank has generally exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies limit the maximum
loan-to-value ratio on fixed rate loans without private mortgage insurance to
80% of the lesser of the appraised value or the purchase price of the property
to serve as collateral for the loan.
The Bank makes one- to four-family real estate loans with
loan-to-value ratios of up to 95%; however, for one- to four-family real estate
loans with loan-to-value ratios of between 80% and 95%, the Bank requires the
first 20% of the loan amount to be covered by private mortgage insurance. The
Bank requires fire and casualty insurance, as well as a title policy, on all
properties securing real estate loans made by the Bank.
Commercial Real Estate Loans. The Bank originates commercial real
estate loans on a limited basis. At June 30, 1997, the Bank had two such loans
which represented 2.2% of the Bank's loan portfolio. The Bank generally does
not solicit such loans, and originates such loans selectively and on a
case-by-case basis. Because of the increased credit risk associated with such
loans and the low level of demand for such loans in the Bank's primary market
area, the Bank does not expect commercial real estate lending to constitute a
significant part of loan originations in the foreseeable future. At June 30,
1997, the Bank's commercial real estate loan portfolio totalled $3.8 million.
The largest loan at June 30, 1997 was a $2.5 million, 18 month loan on a
property located in Baltimore City which ultimately will be developed into a
retirement facility.
Home Equity Loans. The Bank also originates variable and fixed rate
home equity loans. As of June 30, 1997, variable rate home equity loans
totalled $9.1 million, or 5.1%, of the Bank's total loan portfolio. The
interest rates of the Bank's variable rate home equity loans adjust based on
the prime interest rate and are generally for terms of up to 15 years. At June
30, 1997, fixed rate home equity loans totalled $3.9 million. The Bank's home
equity loans are secured by the borrower's principal residence with a maximum
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of 75% or less.
Consumer Loans. To a much lesser extent, the Bank also originates
consumer loans collateralized by automobiles, mobile homes, boats, recreational
vehicles, deposit accounts and other personal property. Consumer loans entail
greater credit risk than do residential mortgage loans, particularly in the
case of consumer loans that are secured by assets that depreciate rapidly, such
as automobiles, mobile homes, boats, and recreational vehicles.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as mortgage brokers,
real estate agent referrals, existing customers, borrowers, builders,
attorneys, and walk-in customers. Upon receiving a loan application, the Bank
obtains a credit report and employment verification to verify specific
information relating to the applicant's employment, income, and credit
standing. In the
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case of a real estate loan, an appraiser approved by the Bank appraises the
real estate intended to collateralize the proposed loan. An underwriter in the
Bank's loan department checks the loan application file for accuracy and
completeness, and verifies the information provided. Pursuant to the Bank's
written loan policies, all loans are approved by the board of directors, which
meets weekly. After the loan is approved, a loan commitment letter is promptly
issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest
rate, amortization term, a brief description of the required collateral, and
required insurance coverage. Commitments are typically issued for 60-day
periods in the case of loans to refinance, 90-day periods in the case of loans
to purchase existing real estate, and 120-day periods for construction loans.
The borrower must provide proof of fire and casualty insurance on the property
serving as collateral, which insurance must be maintained during the full term
of the loan. Title insurance, based on a title search of the property, is
required on all loans secured by real property. At June 30, 1997, the Bank had
outstanding loan commitments of $1.9 million. This amount does not include
$13.9 million of undisbursed lines of credit on home equity loans, and the
unfunded portion of loans in process.
Origination, Purchase and Sale of Loans. The table below shows the
Bank's originations of loans for the periods indicated.
Years Ended June 30,
--------------------------------------------------
1997 1996 1995
---------- ----------- ------------
(In Thousands)
Loans receivable at beginning of period . $153,039 $ 141,316 $ 143,626
Originations:
Real estate:
One- to four-family residential . . . 35,919 32,514 14,030
Home equity (1) . . . . . . . . . . . 7,657 10,355 5,923
Commercial . . . . . . . . . . . . . 2,500 100 --
Consumer passbook loans (2) . . . . . . (39) 14 63
Consumer loans, other . . . . . . . . . 2,699 1,892 1,934
-------- -------- ---------
Total originations . . . . . . . . 48,736 44,875 21,950
-------- -------- ---------
Transfer of mortgage loans
to foreclosed real estate . . . -- --
Repayments . . . . . . . . . . . . . . . (26,364) (33,152) (24,260)
Loan charge-off/transfer provision . . . 11 -- --
-------- --------- ---------
Net loan activity . . . . . . . . . . . . 22,383 11,723 (2,310)
-------- -------- ---------
Total loans receivable at end
of period . . . . . . . . . . $175,422 $153,039 $ 141,316
======== ======== =========
- -----------------------
(1) Includes disbursements from existing home equity loans.
(2) Represents net changes in ending balances.
Loan Origination Fees and Other Income. In addition to interest
earned on loans, the Bank generally receives fees in connection with loan
originations. Such loan origination fees, net of costs to originate, are
deferred and amortized using an interest method over the contractual life of
the loan. Fees deferred are recognized into income immediately upon prepayment
of the related loan. At June 30, 1997, the Bank had $790,000 of deferred loan
origination fees. Such fees vary with the volume and type of loans and
commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand and
availability of money. In addition to loan origination fees, the Bank also
receives other fees, service charges, and other income that consist primarily
of deposit transaction account service charges and late charges. The Bank
recognized fees and service charges of $130,000, $116,000 and $75,000, for the
fiscal years ended June 30, 1997, 1996, and 1995, respectively.
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MORTGAGE-BACKED SECURITIES
A significant part of the Bank's business involves investments in
mortgage-backed securities, all of which are issued or guaranteed by the United
States Government or an agency thereof. At June 30,1997, all of the Bank's
mortgage-backed securities were insured or guaranteed by a United States
Government agency or sponsored corporation. The Bank's mortgage-backed
securities portfolio includes primarily pass-through certificates and, to a
lesser extent, CMOs. The Bank invests in mortgage-backed securities to
supplement local loan originations as well as to reduce interest rate risk
exposure.
The Bank's pass-through certificates represent a participation
interest in a pool of single-family mortgages, the principal and interest
payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interest in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies that guarantee the payment of principal
and interest to investors, include Freddie Mac, GNMA, or the FNMA.
Pass-through certificates typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates and maturities that are within a specified range. The
underlying pool of mortgages can be composed of either fixed rate mortgage
loans or ARM loans. The interest rate risk characteristics of the underlying
pool of mortgages, i.e., fixed rate or adjustable rate, are passed on to the
certificate holder.
CMOs are securities created by segregating or partitioning cash flows
from mortgage pass-through securities or from pools of mortgage loans. CMOs
provide a broad range of mortgage investment vehicles by tailoring cash flows
from mortgages to meet the varied risk and return preferences of investors.
These securities enable the issuer to "carve up" the cash flow from the
underlying securities and thereby create multiple classes of securities with
different maturity and risk characteristics. CMOs are typically issued by a
special-purpose entity (the "issuer") that may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. Accordingly, a
CMO instrument may be purchased in equity form (e.g., trust interests, stock
and partnership interests) or non-equity form (e.g., participating debt
securities). All of the Bank's CMOs are non-equity interests. CMOs are
collateralized by mortgage loans or mortgage-backed securities that are
transferred to the CMO trust or pool by a sponsor. The issue is structured so
that collections from the underlying collateral provide a cash flow to make
principal and interest payments on the obligations, or "tranches," of the
issuer.
Set forth below is information relating to the Bank's purchases, sales
and repayments of mortgage-backed securities for the periods indicated.
Years Ended June 30,
--------------------------------------------------
1997 1996 1995
---------- ----------- ------------
(In Thousands)
Mortgage-backed securities at
beginning of period . . . . . . . . . . $ 29,095 $ 34,957 $ 38,149
Purchases . . . . . . . . . . . . . . . . -- -- 1,020
Repayments . . . . . . . . . . . . . . . (6,791) (5,878) (4,260)
Other (1) . . . . . . . . . . . . . . . (10) 16 48
-------- --------- ---------
Mortgage-backed securities at end of period $ 22,294 $ 29,095 $ 34,957
======== ======== =========
- -----------------------
(1) Includes discount (premium) amortization and accrued interest receivable.
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The following table sets forth selected data relating to the
composition of the Bank's mortgage-backed securities as of the dates indicated.
At June 30,
--------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
$ % $ % $ %
--------- --------- -------- -------- --------- --------
(Dollars in Thousands)
Pass-through certificates:
Adjustable . . . . . . . . . . . $ 9,970 44.7% $ 11,704 40.2% $ 13,669 39.1%
Fixed . . . . . . . . . . . . . . 10,375 46.6 15,431 53.0 19,345 55.3
--------- -------- -------- -------- --------- -------
Total pass-through
certificates . . . . . . 20,345 91.3 27,135 93.2 33,014 94.4
--------- -------- -------- -------- --------- -------
CMOs:
Adjustable . . . . . . . . . . . 1,876 8.4 1,876 6.5 1,876 5.4
--------- -------- -------- -------- --------- -------
Total CMOs . . . . . . . . . 1,876 8.4 1,876 6.5 1,876 5.4
--------- -------- -------- -------- --------- -------
Other (1) . . . . . . . . . . . . 73 .3 84 .3 67 .2
--------- --------- -------- -------- --------- -------
Total mortgage-backed
securities . . . . . $ 22,294 100.0% $ 29,095 100.0% $ 34,957 100.0%
========= ======= ======== ======== ========= =======
- ---------------------
(1) Includes discount (premium) amortization and accrued interest receivable.
At June 30, 1997, mortgage-backed securities totaled $22.3 million, or
7.8%, of total assets. ARM loans collateralized 44.7% of the Bank's
mortgage-backed securities portfolio, and loans with terms of less than five
years collateralized 5.9% of the Bank's mortgage-backed securities portfolio.
Pass-through certificates totaled $20.3 million, or 91.3%, of the Bank's total
mortgage-backed securities portfolio at June 30, 1997. All of the Bank's
pass-through certificates are insured or guaranteed by the Freddie Mac, the
GNMA, or the FNMA. CMOs totaled $1.9 million, or 8.4%, of the Bank's total
mortgage-backed securities portfolio on that same date, all of which were
backed by federal agency collateral. At June 30, 1997, all the Bank's
mortgage-backed securities were held for investment. At June 30, 1997, the
Bank's mortgage-backed securities portfolio had a fair market value of $22.8
million.
Effective February 1992, the OTS adopted Thrift Bulletin 52 ("TB 52").
Among other things, TB 52 sets forth certain guidelines with respect to
depository institutions' investment in certain "high risk mortgage securities."
"High-risk mortgage securities" are defined as any mortgage derivative product
that at the time of purchase, or at any subsequent date, meets any of three
tests that are set forth in TB 52. High-risk mortgage securities may be
purchased only in limited circumstances, and if held in a portfolio, must be
reported as trading assets at market value, or as available-for-sale assets at
the lower of cost or market value. Mortgage securities that were not high risk
securities when originally acquired that subsequently became high risk may be
reported as held to maturity. In certain circumstances, OTS examiners may seek
the orderly divestiture of high-risk mortgage securities, in which case the
securities must be reported as available for sale. As of June 30, 1997, the
Bank did not hold any "high-risk mortgage securities" in its portfolio.
DELINQUENCIES AND CLASSIFIED ASSETS
Delinquencies. The Bank's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to
the borrower requesting payment, plus a late charge. If delinquency continues,
on the first day of the second month, a delinquent notice is mailed along with
a letter advising that the mortgagors are in violation of the terms of their
mortgage contract. If a loan becomes 60 days past due, the loan becomes
subject to possible legal action. The Bank's attorney has been authorized by
the Board of Directors to send a letter on the first day of the third month
advising of pending legal action. This letter grants mortgagors an additional
15 days to bring the account to date prior to start of any legal action. If
not paid, foreclosure proceedings are initiated.
-8-
10
It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The
mortgagors are required to submit a written repayment schedule which is closely
monitored for compliance. Under these terms, the account is brought to date,
usually within a few months.
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on a nonaccrual status when, in the opinion of management, the
collection of additional interest is doubtful. Mortgage loans are placed on
nonaccrual status generally when either principal or interest is more than 90
days past due. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is deemed REO until such time as it is sold. When REO
is acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations. At June 30, 1993, the Bank held
$116,000 of REO, which was sold during the three months ended September 30,
1993. This was the only REO held by the Bank in the past several years.
Delinquent Loans and Nonperforming Assets. The following table sets
forth information regarding loans delinquent 90 days or more, real estate owned
by the Bank and other nonperforming assets at the dates indicated. As of the
dates indicated, the Bank did not have any material restructured loans within
the meaning of SFAS 15. At June 30, 1997, the Bank had two loans on nonaccrual
status, totaling $88,000.
At June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Delinquent loans:
One- to four-family residential . . . $ 88 $ 100 $ 104 $ 20 $ 90
Consumer loans . . . . . . . . . . . -- -- 7 -- --
------- ------- ------ ----- -----
Total delinquent loans . . . . . $ 88 $ 100 $ 111 $ 20 $ 90
======= ======= ====== ===== =====
Total real estate owned (1) . . . . . . . -- $ -- $ -- $ -- $ 116
Other nonperforming assets . . . . . . . -- 90 150 -- --
------- ------- ------ ----- -----
Total nonperforming assets . . . -- $ 90 $ 150 $ -- $ 116
======= ======= ====== ===== =====
Total loans delinquent 90 days or more to
net loans receivable . . . . . . . . .05% .07% .08% .01% .06%
Total loans delinquent 90 days or more to
total assets . . . . . . . . . . . . .03% .04% .04% --% .04%
Total nonperforming loans and nonperforming
assets to total assets . . . . . . . .03% .07% .10% --% .08%
- ----------------------
(1) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this
property was recorded at the lower of its fair value or the principal
balance of the related loan.
During the year ended June 30, 1997, gross interest income of
approximately $6,800 would have been recorded on nonperforming and restructured
loans, under their original terms, if the loans had been current throughout the
period. $3,553 was actually recorded on these assets during the year ended
June 30, 1997.
The following table sets forth information with respect to loans
delinquent 60-89 days and 90 days or more in the Bank's portfolio at the dates
indicated.
At June 30,
--------------------------------------------------
1997 1996 1995
---------- ----------- ------------
(In Thousands)
Loans delinquent 60-89 days . . . . . . . $ 32 $ 14 $ 82
Loans delinquent 90 days or more . . . . 88 102 111
-------- -------- ---------
Total delinquent 60 days or more . . . $ 120 $ 116 $ 193
======== ======== =========
-9-
11
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at June 30, 1997.
At June 30, 1997
---------------------------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent . . . . . . . . . . . . . . . $ 32 1
Loans 90 days or more delinquent . . . . . . . . . . . . . . 88 2
Commercial real estate:
Loans 60 to 89 days delinquent . . . . . . . . . . . . . . . -- --
Loans 90 days or more delinquent . . . . . . . . . . . . . . -- --
Consumer loans 90 days or more delinquent . . . . . . . . . . . . -- --
Foreclosed real estate and repossessions . . . . . . . . . . . . -- --
Other nonperforming assets . . . . . . . . . . . . . . . . . . . -- --
Restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15 (not included
in other nonperforming categories above) . . . . . . . . . . -- --
Loans to facilitate sale of real estate owned . . . . . . . . . . -- --
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized
by the "distinct possibility" that the savings institution will sustain "some
loss" if the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard," with the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets that do not expose the savings institution to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are required to be designated "special
mention" by management. Loans designated as special mention are generally
loans that, while current in required payments, have exhibited some potential
weaknesses that, if not corrected, could increase the level of risk in the
future. At June 30, 1997, the Bank had one loan totalling $14,000 classified
as special mention, which was secured by a one- to four-family residence.
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At June 30,
--------------------------------------------------
1997 1996 1995
---------- ----------- ------------
(In Thousands)
Substandard assets (1) . . . . . . . . . $ -- $ 90 $ 150
Doubtful assets . . . . . . . . . . . . . -- -- --
Loss assets . . . . . . . . . . . . . . . -- -- --
-------- --------- ---------
Total classified assets . . . . . . . $ -- $ 90 $ 150
======== ========= =========
- -----------------------------
(1) Includes REO and other nonperforming assets.
-10-
12
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the estimated losses that may be incurred. The Bank regularly reviews its
loan portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectability of interest and principal may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral. During the years ended June 30, 1997, 1996 and 1995, the Bank
added $151,000, $34,000, and $24,000, respectively, to the provision for loan
losses. The Bank's allowance for loan losses totaled $536,000, $375,000, and
$341,000, at June 30, 1997, 1996, and 1995, respectively.
Management believes that the allowances for losses on loans and
investments in real estate are adequate. While management uses available
information to recognize losses on loans and investments in real estate, future
additions to the allowances may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowances for losses
on loans and investments in real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
Of the total allowance for loan losses, 61.9% has been allocated to one- to
four-family residential real estate loans.
At June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Total loans outstanding . . . . . . . . . . . . . $ 174,878 $ 152,755 $ 141,093 $ 143,252 $ 138,341
Average loans outstanding . . . . . . . . . . . . 164,321 143,126 143,829 140,624 139,937
Allowance balances (at beginning of period) . . . 375 341 317 254 197
Provision for losses on real estate loans . . . . 151 34 24 63 56
Transfer from provision for other assets . . . . 30 -- -- -- --
Charge-offs . . . . . . . . . . . . . . . . . . . (20) -- -- -- --
--------- --------- --------- --------- ----------
Allowance balance (at end of period) . . $ 536 $ 375 $ 341 $ 317 $ 254
========= ========= ========= ========= ==========
Allowance for loan losses as a
percentage of net loans receivable
at end of period . . . . . . . . . . . . . . .31% .25% .24% .22% .18%
INVESTMENT ACTIVITIES
The Bank's investment portfolio comprises investment securities,
securities purchased under agreements to resell, secured short-term loans to
commercial banks, Federal Home Loan Bank stock, and interest-earning deposits
in other institutions. The Bank has no investments in corporate or unrated
securities. At June 30, 1997, $35.1 million, or 42.2%, of the Bank's
investment portfolio was scheduled to mature in one year or less, $14.5
million, or 17.4%, was scheduled to mature in from one to five years, and $33.7
million was scheduled to mature in over five years.
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. See "Regulation--Federal Regulation of Savings
Institutions--Liquidity." The Bank generally has maintained a portfolio of
liquid assets that exceeds regulatory requirements. Management believes that
the higher levels are prudent because of the possibility that interest rates
may increase. By maintaining high levels of liquidity, the Bank is able to
reinvest its assets more quickly in response to changes in market interest
rates, thereby reducing its exposure to interest rate volatility. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
the level of yield that will be available in the future, as well as
management's projections as to the short term demand for funds to be
-11-
13
used in the Bank's loan origination and other activities. Currently, due to
lower demand for loans, the Bank's liquidity levels are higher than they have
been in recent periods.
Investment Portfolio. The following table sets forth the carrying
value of the Bank's investment portfolio at the dates indicated.
At June 30,
--------------------------------------------------
1997 1996 1995
---------- ----------- ----------
(In Thousands)
Investment securities:
U.S. Government and agency obligations $ 49,393 $ 57,269 $ 51,018
Freddie Mac preferred stock . . . . . 2,384 1,456 1,171
-------- -------- -----------
Total investment securities . . . 51,777 58,725 52,189
Securities purchased under agreements
to resell . . . . . . . . . . . . . . 5,518 2,467 2,033
Short-term investments . . . . . . . . . 2,722 -- --
Secured short-term loans to commercial
banks (1) . . . . . . . . . . . . . . 9,736 11,360 9,725
FHLB stock . . . . . . . . . . . . . . . 2,377 2,377 2,377
Interest-earning deposits in other institutions 11,172 10,450 12,321
-------- -------- -----------
Total investments . . . . . . . . $ 83,302 $ 85,379 $ 78,645
======== ======== ===========
- ----------------
(1) Includes Federal Funds sold and other deposits.
-12-
14
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average
yields for the Bank's investment portfolio at June 30, 1997.
At June 30, 1997
--------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
------------------------ ----------------------- ----------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- ------------- ---------------------- --------- -------------
(Dollars in Thousands)
Investment securities:
U.S. Government
agency securities . . . . . . . . . . $ 749 -- % $ 13,500 6.80% $ 22,829 7.11%
U.S. Government
treasury securities . . . . . . . . . 491 5.31 1,000 7.50 -- --
Freddie Mac preferred stock . . . . . . 2,384 1.07 -- -- -- --
-------- ------ ---------- ------ --------- -------
Total investment securities . . . $ 3,624 1.42% $ 14,500 6.85% $ 22,829 7.11%
Securities purchased under
agreements to resell . . . . . . . . 5,518 5.15 -- -- -- --
Short-term investments . . . . . . . . 2,722 4.61 -- -- -- --
Secured short-term loans to
commercial banks . . . . . . . . . . 9,736 5.47 -- -- -- --
FHLB stock . . . . . . . . . . . . . 2,377 7.25 -- -- -- --
Interest earning deposits in
other institutions . . . . . . . . 11,172 5.62 -- -- -- --
-------- ------ ---------- ------ --------- -------
Total investments . . . . . . . . $ 35,149 5.10% $ 14,500 6.85% $ 22,829 7.11%
======== ====== ========== ====== ========= =======
At June 30, 1997
------------------------------------------------------------------
More than Ten Years Total
----------------------- --------------------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Market Average
Value Yield Value Value Yield
--------- ------------ -------- ----------------------
(Dollars in Thousands)
Investment securities:
U.S. Government
agency securities . . . . . . . . . . $ 10,824 7.33% $ 47,902 $ 47,648 6.96%
U.S. Government
treasury securities . . . . . . . . . -- -- 1,491 1,491 6.78
Freddie Mac preferred stock . . . . . . -- -- 2,384 2,384 1.07
---------- ------- --------- ---------- ---------
Total investment securities . . . $ 10,824 7.33% $ 51,777 $ 51,523 6.68%
Securities purchased under
agreements to resell . . . . . . . . -- -- 5,518 5,518 5.15
Short-term investments . . . . . . . . -- -- 2,722 2,722 4.61
Secured short-term loans to
commercial banks . . . . . . . . . . -- -- 9,736 9,736 5.47
FHLB stock . . . . . . . . . . . . . -- -- 2,377 2,377 7.25
Interest earning deposits in
other institutions . . . . . . . . -- -- 11,172 11,172 5.62
---------- ------- --------- ---------- ---------
Total investments . . . . . . . . $ 10,824 7.33% $ 83,302 $ 83,048 6.25%
========== ======= ========= ========== =========
-13-
15
SOURCES OF FUNDS
General. The Bank's deposit-gathering activities are currently
conducted from the Bank's facility in Arbutus, Maryland. Deposits are the
major source of the Bank's funds for lending and other investment purposes. In
addition to deposits, the Bank derives funds from the amortization and
prepayment of loans and mortgage-backed securities, the maturity of investment
securities, and operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes. Historically, the Bank has maintained a
high level of liquidity, and only rarely uses borrowed funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook and statement savings
accounts, money market deposits, term certificate accounts and individual
retirement accounts. Deposit account terms vary according to the minimum
balance required, the period of time during which the funds must remain on
deposit, and the interest rate, among other factors. The maximum rate of
interest which the Bank must pay is not established by regulatory authority.
The Bank regularly evaluates its internal cost of funds, surveys rates offered
by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate. The
Bank has sought to decrease the risk associated with changes in interest rates
by offering competitive rates on deposit accounts and by pricing certificates
of deposit to provide customers with incentives to choose certificates of
deposit. The Bank does not obtain funds through brokers, through a
solicitation of funds outside its market area, nor by offering negotiated rates
on certificates of deposit in excess of $100,000.
Savings Portfolio. Savings in the Bank as of June 30, 1997 were
represented by the various types of deposit programs described below.
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Savings
- ------------- ------------ ----------------------------- -------- ---------- ---------
(In Thousands)
--% None Noninterest-bearing demand $ 500 $ 571 .25%
2.03 None NOW Accounts 300 4,544 1.95
3.35 None Passbooks and Statement Savings 50 18,741 8.06
4.77 None Money Market Accounts 100 75,023 32.26
3.37 None Anniversary Bonus Account 100 6,491 2.79
3.35 None Club Accounts 5 117 .05
Certificates of Deposit
-----------------------
4.25 3 months Fixed term, fixed rate 1,000 478 .21
5.17 6 months Fixed term, fixed rate 1,000 6,658 2.86
5.33 12 months Fixed term, fixed rate 1,000 26,615 11.44
5.45 13 months Fixed term, fixed rate 10,000 1,406 .60
5.38 18 months Fixed term, fixed rate 1,000 8,116 3.49
5.66 24 months Fixed term, fixed rate 1,000 23,651 10.17
6.03 36 months Fixed term, fixed rate 1,000 22,332 9.60
5.90 48 months Fixed term, fixed rate 1,000 860 .37
6.39 60 months Fixed term, fixed rate 1,000 18,983 8.16
5.46 Various (15-20) Fixed term, fixed rate 5,000 6,077 2.61
5.61 Various (14-25) Fixed term, variable rate 1,000 11,589 4.98
7.50 Various (3-60) Fixed term, fixed rate 90,000 338 .15
------- -----
$232,590 100.0%
======== =====
-14-
16
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
At June 30,
----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Balance Percent (1) Change (2) Balance Percent (1) Change (2)
--------- ----------- ---------- --------- ----------- --------
(Dollars in Thousands)
Anniversary bonus account . . . . . $ 6,491 2.79% ($1,289) $ 7,780 3.5% $ (4,800)
NOW and demand accounts . . . . . . 5,115 2.20 892 4,223 1.9 958
Passbooks, statements and clubs . . 18,858 8.11 436 18,422 8.3 (1,027)
Money market deposit accounts . . . 75,023 32.26 6,936 68,087 30.6 6,106
Time deposits that mature:
within 12 months . . . . . . . 76,622 32.94 6,505 70,117 31.6 (1,131)
within 13-36 months . . . . . . 43,824 18.84 2,716 41,108 18.5 9,275
beyond 36 months . . . . . . . 6,657 2.86 (5,752) 12,409 5.6 1,351
------- ----- -------- -------- ---- --------
Total deposits . . . . . . $232,590 100.0% $10,444 $222,146 100.0% $ 10,732
======== ===== ======= ======== ===== ========
At June 30,
----------------------------------------------------------
1995 1994
--------------------------------- --------------------
Balance Percent(1) Change(2) Balance Percent(1)
--------- ---------- --------- -------- ----------
(Dollars in Thousands)
Anniversary bonus account . . . . . $ 12,580 6.0% $(14,018) $26,598 12.6%
NOW and demand accounts . . . . . . 3,265 1.5 638 2,627 1.2
Passbooks, statements and clubs . . 19,449 9.2 (4,184) 23,633 11.2
Money market deposit accounts . . . 61,981 29.3 14,499 47,482 22.7
Time deposits that mature:
within 12 months . . . . . . . 71,248 33.7 (155) 71,403 33.9
within 13-36 months . . . . . . 31,833 15.1 (1,837) 33,670 16.0
beyond 36 months . . . . . . . 11,058 5.2 5,999 5,059 2.4
-------- ---- ------- -------- ----
Total deposits . . . . . . $211,414 100.0% $ 942 $210,472 100.0%
======== ===== ====== ======== =====
- ------------------------------
(1) Represents percentage of total deposits.
(2) Represents increase (decrease) in balance from end of prior period.
-15-
17
Time Deposit Rates. The following table sets forth the time deposits
in the Bank classified by rates as of the dates indicated:
At June 30,
-----------------------------------------------
1997 1996 1995
-------- --------- ---------
Rate (In Thousands)
- ----
3.99% or less . . . . . . . . . . . . . . $ -- $ -- $ 209
4.00 - 5.99% . . . . . . . . . . . . . . 96,982 75,296 41,206
6.00 - 7.99% . . . . . . . . . . . . . . 30,121 48,338 69,252
8.00 - 9.99% . . . . . . . . . . . . . . -- -- 3,472
-------- --------- ---------
$127,103 $ 123,634 $ 114,139
======== ========= =========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposit at June 30, 1997.
Amount Due
-------------------------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
---------- --------- --------- ------- -----------
Rate (In Thousands)
- ----
3.99% or less . . . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
4.00 - 5.99% . . . . . . . . . . . . 61,404 25,955 5,825 3,798 96,982
6.00 - 7.99% . . . . . . . . . . . . 15,218 3,504 8,540 2,859 30,121
8.00 - 9.99% . . . . . . . . . . . . -- -- -- -- --
------- ------- -------- ------- --------
. . . . . . . . . . . . . . . . . . . $76,622 $29,459 $ 14,365 $ 6,657 $127,103
======= ======= ======== ======= ========
Large Certificates of Deposit Maturities. The following table
indicates the amount of the Bank's certificates of deposit of $100,000 or more
by time remaining until maturity at June 30, 1997. This amount does not
include other savings account deposits of $100,000 or more, which totaled
approximately $20.0 million at June 30, 1997.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less . . . . . . . . . . . . . . . . . . . . . . . $ 811
Three through six months . . . . . . . . . . . . . . . . . . . . . 3,366
Six through twelve months . . . . . . . . . . . . . . . . . . . . 4,220
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . 10,725
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,122
=======
Change in Deposits. The following table sets forth changes in total
deposits of the Bank for the periods indicated:
At June 30,
--------------------------------------------------
1997 1996 1995
---------- ----------- ------------
Rate (In Thousands)
- ----
Balance at beginning of period . . . . . $222,146 $ 211,414 $ 210,472
Net withdrawals . . . . . . . . . . . . . (1,105) (424) (8,919)
Interest credited . . . . . . . . . . . . 11,549 11,156 9,861
-------- -------- ---------
Ending balance . . . . . . . . . . . 232,590 222,146 211,414
-------- --------- ---------
Net increase (decrease) in deposits $ 10,444 $ 10,732 $ 942
======== ========= =========
-16-
18
BORROWINGS
Deposits are the Bank's primary source of funds. The Bank may also obtain
funds from the FHLB and through reverse repurchase agreements. FHLB advances
are collateralized by selected assets of the Bank. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Bank, for purposes other than
meeting withdrawals, fluctuates from time to time in accordance with the
policies of the OTS and the FHLB. The maximum amount of FHLB advances to a
member institution generally is reduced by borrowings from any other source.
As part of the Reorganization, the Employee Stock Ownership Plan and Trust (the
"ESOP") borrowed funds from an unrelated third party lender to finance the
purchase of 96,000 shares of the Common Stock issued in the offering. The loan
will be repaid principally from the Bank's contributions to the ESOP over a
period of up to ten years. At June 30, 1997, the balance on the ESOP loan was
$648,000 and was reported as an obligation of the Bank.
Although the Bank has rarely done so, it may also sell securities under
agreements to repurchase with selected dealers (reverse repurchase agreements)
as a means of obtaining short-term funds as market conditions permit. In a
reverse repurchase agreement, a fixed dollar amount of securities would be sold
to a dealer under an agreement to repurchase the securities at a specific price
within a specific period of time, typically not more than 180 days. Reverse
repurchase agreements are treated as financings of the Bank and the obligations
to repurchase securities sold are reflected as a liability of the Bank. The
dollar amount of securities underlying the agreements remain an asset of the
Bank. There were no securities sold under agreements to repurchase outstanding
at June 30, 1997.
COMPETITION
As of June 30, 1997, the Bank was the fourth largest savings institution
headquartered in the Bank's market area. The Bank encounters strong
competition both in attracting deposits and in originating real estate and
other loans. Its most direct competition for deposits has historically come
from commercial and savings banks, other savings associations, and credit
unions in its market area. Competition for loans comes from such financial
institutions as well as mortgage banking companies. The Bank expects continued
strong competition in the foreseeable future, including increased competition
from "super-regional" banks entering the market by purchasing large banks and
savings banks. Many such institutions have greater financial and marketing
resources available to them than does the Bank. The Bank competes for savings
deposits by offering depositors a high level of personal service and a wide
range of competitively priced financial services. In recent years, additional
strong competition has come from stock and bond dealers and brokers. The Bank
competes for real estate loans primarily through the interest rates and loan
fees it charges and advertising.
SUBSIDIARY ACTIVITIES
Effective May 1, 1997, the Bank organized an investment subsidiary in
Delaware, Leeds Federal Investment Corporation. The subsidiary will buy, sell
and hold some or all of the Bank's consolidated investment securities,
interest-earning deposits, and other investments. The subsidiary will not
engage in any activity in which the Bank could not (either by regulation or by
Bank policy) engage itself. Management believes that because of lower
expenses, including state taxes, the Bank's consolidated after-tax earnings on
the investment held by the Subsidiary will exceed such earnings if the Bank
held the investments itself.
At June 30, 1997, the Subsidiary held investment assets totaling $33.2
million. Net Income after provision for Federal Income Tax for the two months
of operations totaled $248,000.
PERSONNEL
As of June 30, 1997, the Bank had 27 full-time and 8 part-time employees.
None of the Bank's employees is represented by a collective bargaining group.
The Bank believes its relationship with its employees to be good.
-17-
19
REGULATION
As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of and owns stock in the FHLB of Atlanta, which is
one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration
of the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form
and content of the Bank's mortgage documents. Any change in such regulation,
whether by the FDIC, OTS, or Congress, could have a material adverse impact on
the Holding Company and the Bank and their operations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
Business Activities. The activities of savings institutions are governed
by the Home Owners' Loan act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act (the "FDI Act"). The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits
by savings institutions that are troubled or not well-capitalized, (2) prohibit
the acquisition of any corporate debt security that is not rated in one of the
four highest rating categories, (3) restrict the aggregate amount of loans
secured by non-residential real estate property to 400% of capital, (4) permit
savings and loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire
healthy savings institutions. The description of statutory provisions and
regulations applicable to savings associations set forth herein does not
purport to be a complete description of such statutes and regulations and their
effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally,
savings institutions may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus on an unsecured basis. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. The Bank's maximum
loans to one borrower limit was $7.0 million at June 30, 1997. As of June 30,
1997, the Bank was in compliance with its loans-to-one-borrower limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to
conduct business) in certain "qualified thrift investments," primarily
residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly average basis in 9 out of
every 12 months. A savings association that fails the QTL test must either
convert to a bank charter or operate under certain restrictions. As of June
30, 1997, the Bank maintained 81.9% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution, such as the Bank, that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but
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without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would
not be undercapitalized, as that term is defined in the OTS Prompt Corrective
Action regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit
a proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In addition, OTS regulations require the Holding Company to notify the OTS
of any proposed waiver of its right to receive dividends. It is the OTS'
recent practice to review dividend waiver notices on a case-by-case basis, and,
in general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for
as long as the savings association subsidiary is controlled by the mutual
holding company, the dollar amount of dividends waived by the mutual holding
company are considered as a restriction on the retained earnings of the savings
association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association (and the savings association's capital ratios adjusted accordingly)
in evaluating any proposed dividend under OTS capital distribution regulations;
and (v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe-harbor percentage limitations. Under the proposal a
savings institution may make a capital distribution without notice to the OTS
(unless it is a subsidiary of a holding company) provided that it has a CAMEL 1
or 2 rating, is not in troubled condition and would remain adequately
capitalized (as defined by regulation) following the proposed distribution.
Savings institutions that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net
income to date during the calendar year. A savings association may not make a
capital distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. A savings
institution will be considered in troubled condition if it has a CAMEL rating
of 4 or 5, is subject to an enforcement action relating to its safety and
soundness or financial viability or has been informed in writing by the OTS
that it is in troubled condition. As under the current rule, the OTS may
object to a capital distribution if it would constitute an unsafe or unsound
practice. No assurance may be given as to whether or in what form the
regulations may be adopted.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
U.S. Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of not less than a specified percentage of its net withdrawable
deposit accounts plus borrowings payable in one year or less. This liquidity
requirement which is currently 5%, may be changed from time to time by the OTS
to any amount within the range of 4% to 10% depending upon economic conditions
and the savings flow of member institutions. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average
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liquidity ratio for June 1997 was 19.9%, which exceeded the then applicable
requirements. The Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's consolidated total assets, as reported in the institution's
latest quarterly thrift financial report. Based on assets at June 30, 1997,
the Bank has a semi-annual assessment of approximately $38,000.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA rating system identifies four levels of
performance that may describe an institution's record of meeting community
needs: outstanding, satisfactory, needs to improve and substantial
non-compliance. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The CRA regulations were recently revised.
The OTS assesses the CRA performance of a savings institution under lending,
service and investment tests, and based on such assessment, will assign an
institution in one of the four above-referenced ratings. The Bank received a
"satisfactory" CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to
any affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% stockholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder.
Among other things, these regulations generally require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals
and do not involve more than the normal risk of repayment. Regulation O also
places individual and aggregate limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and requires
certain approval procedures to be followed. At June 30, 1997, the Bank was in
compliance with the regulations.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless
disregard is made, in which case penalties may be as high as $1 million
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per day. Criminal penalties for most financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. Under the FDI
Act, the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances.
The federal banking agencies recently adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set
forth in the Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; and compensation, fees and benefits. The agencies
also adopted additions to the guidelines which require institutions to examine
asset quality and earnings standards. If the appropriate federal banking
agency determines that an institution fails to meet any standard prescribed by
the Guidelines, the agency may require the institution to submit to the agency
an acceptable plan to achieve compliance with the standard, as required by the
FDI Act. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain qualifying supervisory
goodwill and certain purchased mortgage servicing rights ("PMSRs"). Tangible
capital is defined as core capital less all intangible assets (including
supervisory goodwill) plus a specified amount of PMSRs. The OTS regulations
also require that, in meeting the tangible ratio, leverage and risk-based
capital standards, institutions must deduct investments in and loans to
subsidiaries engaged in activities not permissible for a national bank, and
unrealized gains (losses) on certain available for sale securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core
capital and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the
OTS believes are inherent in the type of asset. The components of Tier 1
(core) capital are equivalent to those discussed earlier under the 3.0%
leverage ratio standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and allowance for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25%.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
At June 30, 1997, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of June 30, 1997.
At June 30, 1997
--------------------------
Percent of
Amount Assets (1)
------ ----------
(Dollars in Thousands)
Tangible capital:
Capital level . . . . . . . . . . . . . . . . . . . . . . . $ 45,333 15.92%
Requirement . . . . . . . . . . . . . . . . . . . . . . . . 4,271 1.50
-------- -------
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,062 14.42%
======== =======
Core capital:
Capital level . . . . . . . . . . . . . . . . . . . . . . . $ 45,333 15.92%
Requirement (2) . . . . . . . . . . . . . . . . . . . . . . 8,541 3.00
-------- -------
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Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,792 12.92%
======== =======
Risk-based capital:
Capital level . . . . . . . . . . . . . . . . . . . . . . . $ 45,869 35.39%
Requirement . . . . . . . . . . . . . . . . . . . . . . . . 10,369 8.00
-------- -------
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,500 27.39%
======== =======
- ------------------------
(1) Tangible and core capital levels are calculated on the basis of a
percentage of total adjusted assets; risk-based capital levels are
calculated on the basis of a percentage of risk-weighted assets.
(2) The OTS has proposed a core capital requirement for savings associations
comparable to the new requirement for national banks. The OTS proposed
core capital ratio would be at least 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness with a 4% to 5% core capital requirement for all other thrifts.
The OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash
flows from assets, liabilities and off-balance sheet contracts) that would
result from a hypothetical 200-basis point increase or decrease in market
interest rates, divided by the estimated economic value of the association's
assets. In calculating its total capital under the risk-based rule, a savings
association whose measured interest rate risk exposure exceeds 2%, must deduct
an interest rate component equal to one-half of the excess change. Although
institutions, such as the Bank, with less than $300 million in assets and
risk-based capital ratios above 12% are exempt from the new rule, the Bank
voluntarily provides to the OTS the information necessary for the OTS to
calculate the Bank's IRR. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a
case-by-case basis.
The IRR component is measured in terms of the sensitivity of its net
portfolio value ("NPV") to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. The following table presents the OTS'
quarterly pro forma computations of the Bank's NPV as of June 30, 1997, based
on information provided to the OTS by the Bank.
NPV AS PERCENTAGE OF
CHANGE IN PRESENT VALUE OF ASSETS
INTEREST RATES NET PORTFOLIO VALUE -------------------------
IN BASIS POINTS ------------------------------------- BASIS POINT
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
-------------- -------- --------- -------- --------- ------
(DOLLARS IN THOUSANDS)
400 $ 28,068 (25,324) -47% 10.67% -753
300 34,040 (19,352) -36% 12.60% -561
200 40,353 (13,040) -24% 14.53% -367
100 46,900 (6,493) -12% 16.43% -178
Static 53,392 -- -- 18.21% --
(100) 59,267 5,874 +11% 19.73% +152
(200) 63,479 10,086 +19% 20.74% +253
(300) 66,953 13,560 +25% 21.53% +332
(400) 71,444 18,052 +34% 22.54% +433
Based on the OTS' computations, the Bank's measured IRR exceeded 2% of the
estimated market value of its assets at June 30, 1997. If the measured
IRR exceeds 2% for the next two quarters, and if the Bank were not exempt, the
Bank's risk-based capital ratio would be reduced.
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PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. Generally, a savings institution that has total risk-based
capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio
that is less than 4.0% is considered to be undercapitalized. A savings
institution that has the total risk-based capital less than 6.0%, a Tier 1 core
risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious risk to the FDIC. The
FDIC also has the authority to initiate enforcement actions against savings
banks, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
In September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of March 31,
1995. The assessment was 65.7 basis points per $100 in deposits, payable on
November 30, 1996. For the Bank, the assessment amounted to $1.4 million (or
$849,000 when adjusted for taxes), based on the Bank's deposits on March 31,
1995. In addition, beginning January 1, 1997, pursuant to the legislation,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by Bank Insurance Fund ("BIF") -insured
institutions and SAIF-insured institutions. The FICO assessment will be 1.29
basis points per $100 in BIF deposits and 6.44 basis points per $100 in SAIF
deposits. Beginning January 1, 2000, the FICO interest payments will be paid
pro rata by banks and thrifts based on deposits (approximately 2.4 basis points
per $100 in deposits).
The legislation further provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would eliminate
the federal thrift charter and OTS. The bills would require that all federal
savings associations convert to national banks or state depository institutions
by no later than January 1, 1998 in one bill and June 30, 1998 in the other and
would treat all state savings associations as state banks for purposes of
federal banking laws. Subject to a narrow grandfathering, all savings and loan
holding companies would become subject to the same regulation as bank holding
companies under the pending legislative proposals. Under such proposals, any
lawful activity in which a savings association participates would be permitted
for up to two years following the effective date of its conversion to the new
charter, with two additional one-year extensions which may be granted as the
discretion of the regulator. The legislative proposals would also abolish the
OTS and transfer its functions to the federal bank regulators with respect to
the institutions and to the Federal Reserve Board with respect to the
regulation of holding companies. The Bank is unable to predict whether the
legislation will be enacted or, given such uncertainty, determine the extent to
which the legislation, if enacted, would affect its business. The Bank is also
unable to predict whether the SAIF and BIF funds will eventually be merged.
While the legislation has reduced the disparity between premiums paid
on BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
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disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least January 1, 1999. Under the
legislation, the Bank anticipates that its ongoing annual SAIF premiums will be
approximately $224,000.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB-Atlanta stock, at June 30,
1997, of $2.4 million.
The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs.
These requirements could reduce the amount of dividends that the FHLBs pay to
their members and could also result in the FHLBs imposing a higher rate of
interest on advances to their members. Over the past five years such dividends
have averaged 6.81%, and were 7.25% for the fiscal year ended June 30, 1997.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $52.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $52.0 million, the reserve requirement is
$1.6 million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in
excess of $52.0 million. The first $4.2 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve Board) are exempted
from the reserve requirements. The Bank is in compliance with the foregoing
requirements. The balances maintained to meet the reserve requirements imposed
by the FRB may be used to satisfy liquidity requirements imposed by the OTS.
HOLDING COMPANY REGULATION
General. The Holding Company is a non-diversified mutual savings and
loan holding company within the meaning of the HOLA, as amended. As such, the
Holding Company is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Holding Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict
or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Bank must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Holding Company
generally will not be restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a QTL. Upon any nonsupervisory acquisition by the Holding Company of
another savings association or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Holding Company would become
a multiple savings and loan holding company (if the acquired institution is
held as a separate subsidiary) and would be subject to extensive limitations on
the types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the
prior approval of the OTS, and activities authorized by OTS regulation. The
OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
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The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a non-subsidiary savings institution, a
non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by the HOLA; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources, future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance fund, the convenience and needs of the community and competitive
factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among
other things, that (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interests of
its depositors; or (iii) the competency, experience or integrity of the
acquiring person or the proposed management personnel indicates that it would
not be in the interest of the depositors or the public to permit the
acquisition of control by such person.
Restrictions Applicable to Mutual Holding Companies. Pursuant to
Section 10(o) of the HOLA and OTS regulations, a mutual holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company; one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of
which is available for purchase by a savings association under federal law or
under the law of any state where the subsidiary savings association or
associations share their home offices; (v) furnishing or performing management
services for a savings association subsidiary of such company; (vi) holding,
managing or liquidating assets owned or acquired from a savings subsidiary of
such company; (vii) holding or managing properties used or occupied by a
savings association subsidiary of such company properties used or occupied by a
savings association subsidiary of such company; (viii) acting as trustee under
deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by
regulation, has determined to be permissible for bank holding companies under
Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by
regulation, prohibits or limits any such activity for savings and loan holding
companies; or (B) in which multiple savings and loan holding companies were
authorized (by regulation) to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the Director. If a mutual holding company
acquires or merges with another holding company, the holding company acquired
or the holding company resulting from such merger or acquisition may only
invest in assets and engage in activities listed in (i) through (x) above, and
has a period of two years to cease any non-conforming activities and divest of
any non-conforming investments.
FEDERAL AND STATE TAXATION
Federal Taxation. For federal income tax purposes, the Bank files a
federal income tax return on a fiscal year basis. The Holding Company owns
less than 80% of the outstanding Common Stock of the Bank. As such, the
Holding Company will not be permitted to file a consolidated federal income tax
return with the Bank. Because the Holding Company has nominal assets other
than the stock of the Bank, it will have no material federal income tax
liability.
The Federal tax bad debt reserve method available to thrift
institutions was repealed in 1996 for tax years beginning after 1995. As a
result, the Bank must change to a reserve method based on actual experience to
compute its bad debt deduction. In addition, the Bank is required to recapture
into income the portion of its bad debt reserves that exceeds its base year
reserves, of approximately $1,550,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable
income ratably (on a straight-line basis) over a six-year period. If the Bank
meets a "residential loan requirement" for a tax year beginning in 1996 or
1997, the recapture of the reserves will be
-25-
27
suspended for such tax year. Thus, recapture can potentially be deferred for
up to two years. The residential loan requirement is met if the principal
amount of housing loans made by the Bank during the year at issue (1996 and
1997) is at least as much as the average of the principal amount of loans made
during the six most recent tax years prior to 1996. Refinancings and home
equity loans are excluded.
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 109 "Accounting for Income Taxes"
("SFAS 109"). The Bank currently is accounting for income taxes in accordance
with SFAS No. 109. The asset and liability method accounts for deferred income
taxes by applying the enacted statutory rates in effect at the balance sheet
date to differences between the book cost and the tax cost of assets and
liabilities. The resulting deferred tax liabilities and assets are adjusted to
reflect changes in tax laws. SFAS 109 was implemented by the Bank effective
July 1, 1992.
The Bank is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Bank's regular income tax for the year.
The alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference items,
including the following: (i) 100% of the excess of a thrift institution's bad
debt deduction over the amount that would have been allowable on the basis of
actual experience; and (ii) interest on certain tax-exempt bonds issued after
August 7, 1986. In addition, for purposes of the new alternative minimum tax,
the amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
The Bank was audited by the Internal Revenue Service for the tax year
ended June 30, 1995. There were no adjustments made as a result of that audit.
The State of Maryland has not audited the Bank within the past five years. See
Notes 1 and 9 to the Financial Statements.
State Taxation. The State of Maryland generally imposes a franchise
tax on thrift institutions computed at a rate of 7% of net earnings. For the
purpose of the 7% franchise tax, net earnings are defined as the net income of
the thrift institution as determined for federal corporate income tax purposes,
plus (i) interest income from obligations of the United States, of any state,
including Maryland and of any county, municipal or public corporation
authority, special district or political subdivision of any state, including
Maryland, (ii) any profit realized from the sale or exchange of bonds issued by
the State of Maryland or any of its political subdivisions, and (iii) any
deduction for state income taxes.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is information, as of June 30, 1997, concerning the
Registrant's executive officers. All of the executive officers have held the
positions listed below since the time the registrant was organized in April
1994. In addition, all of the executive officers of the Registrant are
officers of the Bank holding the same position as listed below. There are no
arrangements or understandings between the Registrant and any of persons named
below with respect to which he or she was or is to be selected as an officer.
Name Age Position
---- --- --------
John F. Amer 71 Chairman of the Board
Gordon E. Clark 55 President, Chief Executive Officer and Director
Marguerite F. Wolf 70 Vice Chairman and Director
Joan H. McCleary 63 Director and Secretary to the Board
Dale R. Douglas 55 Vice President
Kathleen J. Trumpler 59 Treasurer
Vernon J. Miller 67 Vice President
-26-
28
ITEM 2. DESCRIPTION OF PROPERTY
(a) The Bank conducts its business through a single facility
located in Arbutus, Baltimore County, Maryland. The facility opened and has
been owned by the Bank since 1960. At June 30, 1997, the net book value of the
Bank's property and equipment was $864,00.
(b) INVESTMENT POLICIES. For a description of the Bank's policies
(all of which may be changed without a vote of the Bank's security holders) and
the limitations on the percentage of assets which may be invested in any one
investment, or type of investment with respect to: (1) investments in real
estate or interests in real estate; (2) investments in real estate mortgages;
and (3) securities of or interests in persons primarily engaged in real estate
activities, reference is made hereunder to the information presented above
under "Item 1. Description of Business."
(c) DESCRIPTION OF REAL ESTATE AND OPERATING DATA. Not
Applicable; the book value of each of the Bank's properties is less than 10% of
the Bank's total consolidated assets at June 30, 1997.
ITEM 3. LEGAL PROCEEDINGS
The Bank is periodically involved in claims and lawsuits that are
incident to the Bank's business. At June 30, 1997, the Bank was not involved
in any such claim or lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the fourth quarter of the fiscal year covered by this report,
the Registrant did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The "Common Stock and Related Matters" and "Stockholder Information"
sections of the Registrant's Annual Report to Stockholders for the fiscal year
ended June 30, 1997 (the "1997 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 1997 Annual Report to
Stockholders are incorporated herein by this reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Registrant's 1997 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the
1997 Annual Report to Stockholders are incorporated herein by this reference.
ITEM 7. FINANCIAL STATEMENTS
The material identified in Item 13(a)(1) hereof is incorporated herein
by reference.
-27-
29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The "Proposal I--Election of Directors" section of the Registrant's
definitive proxy statement for its 1997 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference. In addition, see Item
1. "Executive Officers of the Registrant" for information concerning the Bank's
executive officers.
ITEM 10. EXECUTIVE COMPENSATION
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Proposal I--Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following documents appear in sections of the Registrant's 1997 Annual
Report to Stockholders under the same captions, and are incorporated herein by
reference. No other sections of the 1997 Annual Report to Stockholders are
incorporated herein by this reference.
(i) Selected Financial and Other Data;
(ii) Management's Discussion and Analysis of Financial
Condition and Results of Operations;
(iii) Independent Auditors' Report;
(iv) Statements of Financial Condition;
(v) Statements of Income;
(vi) Statements of Stockholders' Equity;
(vii) Statements of Cash Flows; and
-28-
30
(viii) Notes to Financial Statements.
With the exception of the aforementioned sections, the Registrant's
1997 Annual Report to Stockholders is not deemed filed as part of this Annual
Report on Form 10-KSB, and no other sections of the 1997 Annual Report to
Stockholders are incorporated herein by this reference.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Financial
Statements.
(a)(3) Exhibits
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-KSB Report
- -------------- -------- ----------------- ------------------
3 Articles of Incorporation * Not Applicable
3 Bylaws * Not Applicable
4 Instruments defining the * Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10.1 Leeds Federal Savings Bank and ** Not Applicable
Leeds Federal Bankshares, M.H.C.
1994 Recognition and Retention Plan
10.2 Leeds Federal Savings Bank and ** Not Applicable
Leeds Federal Bankshares, M.H.C.
1994 Stock Option Plan
10.3 Employment Agreement with * Not Applicable
Gordon E. Clark, Jr.
11 Statement re: computation Not Not Applicable
of per share earnings Required
13 Form of Annual Report to 13 Exhibit 13
Security Holders
16 Letter re: change in certifying None Not Applicable
accountants
18 Letter re: change in accounting None Not Applicable
principles
21 Subsidiaries of Registrant None Not Applicable
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
-29-
31
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
- -------------------
* Filed as exhibits to the Bank's Combined Form MHC-1/MHC-2 Application
filed with the OTS on December 6, 1993, as amended on January 19,
1994. All such previously filed documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-B.
** Filed as exhibits to, and incorporated by reference from, the Bank's
Quarterly Report on Form 10-Q filed on February 14, 1995.
(b) Reports on Form 8-K:
The Registrant has not filed a Current Report on Form 8-K during the
year ended June 30, 1997.
-30-
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LEEDS FEDERAL SAVINGS BANK
Date: September 26, 1997 By: /s/ Gordon E. Clark
---------------------------------------
Gordon E. Clark, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Gordon E. Clark By: /s/ Kathleen G. Trumpler
------------------------------------------ ------------------------------------------
Gordon E. Clark, President, Chief Kathleen G. Trumpler, Treasurer
Executive Officer and Director (Principal Financial/Accounting Officer)
(Principal Executive Officer)
Date: September 26, 1997 Date: September 26, 1997
By: /s/ John F. Amer By: /s/ Marguerite E. Wolf
------------------------------------------ ------------------------------------------
John F. Amer, Chairman Marguerite E. Wolf, Vice Chairman
Date: September 26, 1997 Date: September 26, 1997
By: /s/ Joan H. McCleary By: /s/ Raymond J. Hartman, Jr.
------------------------------------------ ------------------------------------------
Joan H. McCleary, Director Raymond J. Hartman, Jr., Director
Date: September 26, 1997 Date: September 26, 1997
By: /s/ John F. Doyle
------------------------------------------
John F. Doyle, Director
Date: September 26, 1997
-31-
33
EXHIBIT 13
1997 ANNUAL REPORT TO STOCKHOLDERS
34
1997 ANNUAL REPORT TO STOCKHOLDERS
LEEDS FEDERAL SAVINGS BANK
35
TABLE OF CONTENTS
Page
Message to Our Stockholders................................................................... 1
Selected Consolidated Financial and Other Data................................................ 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 4
Selected Quarterly Financial Data (Unaudited)................................................. 14
Common Stock and Related Matters.............................................................. 14
Independent Auditors' Report.................................................................. F-1
Statements of Consolidated Financial Condition................................................ F-2
Statements of Consolidated Income............................................................. F-3
Statements of Consolidated Stockholders' Equity............................................... F-4
Statements of Consolidated Cash Flows......................................................... F-5
Notes to Consolidated Financial Statements.................................................... F-7
36
[LEEDS FEDERAL SAVINGS BANK LETTERHEAD]
September 15, 1997
To Our Shareholders:
We are pleased to report the financial results of Leeds Federal Savings Bank. On
June 30, 1997, the Bank had total assets of $287.0 million and stockholders'
equity of $46.7 million, which resulted in a capital to assets ratio of 16.3%.
The Bank's relatively high level of capital provides Leeds Federal with a strong
foundation for future growth and new business opportunities.
Further, the establishment of a new stock holding company parent of the Bank
will allow Leeds Federal many of the opportunities available to stock holding
companies while still retaining the benefits of the mutual holding company
structure. A complete description of the transaction is found in the proxy
statement you are receiving with this report.
Before the one-time SAIF assessment imposed by the FDIC, the Bank's net income
for the fiscal year ended June 30, 1997, was $3.2 million, or $.94 per share of
common stock, compared to $2.8 million, or $.82 per share, for the year ended
June 30, 1996. Net income for the year ended June 30, 1997, represents a return
of 1.2% of average assets and 7.1% of average equity. After considering the
after tax effect of the SAIF assessment, net income for the year was $2.4
million, or $.69 per share. The increase in net income for the year ended June
30, 1997, resulted from an increase in net interest income when compared with
the same period last year. This increase in net interest income was principally
the result of a decrease in the Bank's cost of interest bearing liabilities.
During the year, we continued to emphasize residential real estate financing.
The Bank's conservative underwriting guidelines are evidenced by the fact we
have few non-performing loans. Additionally, we have continued to maintain a low
level of noninterest expense; our noninterest expense to average assets ratio,
before the SAIF assessment, was 1.05% for the fiscal year ended June 30, 1997,
compared to 1.17% for the prior year. The enclosed annual report discusses Leeds
Federal's operating results through June 30, 1997, in more detail.
As an independent community bank, our goal is to provide personalized, quality
financial services with the needs of our neighbors in mind. Our deposits are
received from within our community and reinvested right here in mortgages within
our community. "Independent" to our shareholders means they have also shared in
the success and growth of their community bank, reflected in the value of our
shared investment in the stock of Leeds Federal.
Thank you for the confidence you have placed in Leeds Federal Savings Bank. We
hope to justify that confidence by continuing to be the leading community-based
financial institution we have been for the past 74 years.
Sincerely,
/s/ JOHN F. AMER /s/ GORDON E. CLARK
John F. Amer Gordon E. Clark
Chairman President and CEO
37
(THIS PAGE INTENTIONALLY LEFT BLANK)
38
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and other data of
Leeds Federal Savings Bank ("Leeds Federal" or the "Bank") at the dates and for
the periods indicated. For additional information about the Bank, reference is
made to "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Bank and related
notes included elsewhere herein.
AT JUNE 30,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ----------- ------------ -------------
(IN THOUSANDS)
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
Total assets..................................... $ 286,999 $ 273,278 $ 260,145 $ 255,221 $ 242,544
Loans receivable, net............................ 174,878 152,755 141,093 143,252 138,341
Investments (1).................................. 83,302 85,379 78,645 69,064 57,449
Mortgage-backed securities....................... 22,294 29,095 34,957 38,149 42,120
Deposits......................................... 232,590 222,146 211,414 210,472 212,865
Borrowed funds................................... 648 744 840 930 --
Stockholders' equity, substantially restricted... 46,741 44,192 41,738 38,281 24,713
- ------------------------------------
(1) Includes investment securities, interest-bearing deposits, and other
investments.
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ---------- ----------- -----------
(IN THOUSANDS)
SELECTED CONSOLIDATED OPERATING DATA:
Interest income............................... $ 19,606 $ 18,567 $ 17,602 $ 16,870 $ 18,333
Interest expense.............................. 11,613 11,232 9,945 9,360 10,067
---------- ---------- ---------- ---------- ----------
Net interest income before provision
for losses............................ 7,993 7,335 7,657 7,510 8,266
Provision for loan losses..................... 151 33 24 63 56
Provision for losses on deposit............... -- -- 30 -- --
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
losses................................ 7,842 7,302 7,603 7,447 8,210
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service fees and charges.................. 130 116 74 66 70
Other income ............................. 140 168 160 165 36
---------- ---------- ---------- ---------- ----------
Total noninterest income.......... 270 284 234 231 106
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits........ 1,528 1,516 1,440 822 704
Occupancy................................. 197 192 182 175 160
SAIF deposit insurance premiums........... 1,755 558 558 560 502
Advertising............................... 172 216 179 147 116
Other..................................... 637 580 629 469 530
---------- ---------- ---------- ---------- ----------
Total noninterest expenses........ 4,289 3,062 2,988 2,173 2,012
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes...... 3,823 4,524 4,849 5,505 6,304
Provision for income tax . . . ............... 1,458 1,737 1,922 2,090 2,428
Cumulative effect of change in accounting
for income taxes.......................... -- -- -- -- (254)
---------- ---------- ---------- ---------- ----------
Net income........................ $ 2,365 $ 2,787 $ 2,927 $ 3,415 $ 3,622
========== ========== ========== ========== ==========
Net income before one-time SAIF assessment.... $ 3,214
==========
2
39
AT OR FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ------------ ------------ ---------- --------
KEY OPERATING RATIOS AND OTHER DATA:
Return on average assets (net income
divided by average total assets)....................... .85% 1.06% 1.17% 1.37% 1.55%
Return on average assets before one-time SAIF
assessment in the year ended June 30, 1997*............ 1.16
Return on average equity (net income
divided by average equity)............................. 5.26 6.50 7.30 12.12 15.72
Return on average equity before one-time SAIF
assessment in the year ended June 30, 1997*............ 7.14
Equity to assets at period end............................. 16.29 16.17 16.04 15.00 10.19
Net interest rate spread (difference between
average yield on interest-earning assets
and average cost of interest-bearing liabilities)...... 2.12 2.00 2.34 2.58 3.08
Net interest margin (net interest income as a
percentage of average interest-earning assets)......... 2.94 2.85 3.11 3.08 3.57
Retained earnings to average assets ratio
(average retained earnings divided by
average total assets).................................. 16.18 16.36 15.96 11.34 9.86
Noninterest income to average assets....................... .10 .11 .09 .09 .05
Noninterest expense to average assets...................... 1.54 1.17 1.19 .87 .86
Noninterest expense to average assets before one-time
SAIF assessment in the year ended June 30, 1997*....... 1.05
Nonperforming loans to total loans......................... .05 .06 .07 -- --
Nonperforming assets to total assets....................... .03 .07 .10 -- .05
Average interest-earning assets to
average interest-bearing liabilities................... 119.15 119.50 118.97 112.91 111.39
Allowance for losses
to nonperforming assets................................ 609.09 213.67 146.15 -- 218.97
Net interest income to noninterest expense................. 186.36 239.54 256.26 345.61 410.83
Net interest income to noninterest expense before
one-time SAIF assessment in the year ended
June 30, 1997*.......................................... 275.05
Net interest income after provision for
losses, to total noninterest expense................... 182.84 238.44 254.45 342.68 408.05
Net interest income after provision for
losses, to total noninterest expense before one-time
SAIF assessment in the year ended June 30, 1997*....... 269.86
Regulatory capital ratios:
Tangible............................................... 15.92 15.98 15.78 15.00 10.18
Core................................................... 15.92 15.98 15.78 15.00 10.18
Risk-based............................................. 35.39 37.56 41.89 37.92 24.77
Number of full-service offices............................. 1 1 1 1 1
- -------------------------
* See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Deposit Insurance Premiums."
3
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
securities, interest-earning deposits at other institutions, investment
securities and other investments, and the interest paid on interest-bearing
liabilities. Net interest income is a function of the Bank's interest rate
spread, which is the difference between the average yield on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to
interest-bearing liabilities. The Bank's earnings also are affected by its level
of noninterest income including primarily service fees and charges, and
noninterest expense, including primarily compensation and employee benefits, and
Savings Association Insurance Fund ("SAIF") deposit insurance premiums. Earnings
of the Bank also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities, which events are beyond the control of
the Bank.
BUSINESS STRATEGY
The Bank's current business strategy is to operate as a
well-capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Bank has sought
to implement this strategy by using only retail deposits as its source of funds
and maintaining a substantial part of its assets in loans secured by one- to
four-family residential real estate located in the Bank's market area, home
equity loans, consumer loans, mortgage-backed securities and in other liquid
investment securities. Specifically, the Bank's business strategy incorporates
the following elements: (1) operating as a community-oriented financial
institution, maintaining a strong core customer base by providing quality
service and offering customers the access to senior management and services that
a community-based institution can offer; (2) maintaining high asset quality by
emphasizing investment in residential mortgage loans, mortgage-backed securities
and other securities issued or guaranteed by the United States Government or
agencies thereof; (3) maintaining capital in excess of regulatory requirements
and growing only to the extent that adequate capital levels can be maintained;
and (4) managing interest rate risk exposure while achieving desirable levels of
profitability.
RESULTS OF OPERATIONS
The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
securities, interest-earning deposits at other institutions, investment
securities and other investments, and the interest paid on interest-bearing
liabilities, which since 1989 have consisted primarily of savings deposits. The
Bank had net income of $2.4 million for the year ended June 30, 1997. Net income
totaled $2.8 million and $2.9 million for fiscal 1996 and 1995, respectively.
Interest Income. Total interest income increased by $1.0 million, or
5.4%, to $19.6 million for the year ended June 30, 1997, from $18.6 million for
the year ended June 30, 1996. The increase in interest income was primarily due
to an increase in balance of average interest earning assets to $272.3 million
for the year ended June 30, 1997, from $257.1 million for the prior year, while
the yield on average interest earning assets remained relatively unchanged at
7.2%. The increase in average interest earning assets during the year ended June
30, 1997, resulted primarily from an increase in average loans, offset by
decreases in investment securities and mortgage-backed securities.
4
41
Interest on mortgage loans increased by $1.2 million, or 11.0%, to
$12.1 million for the year ended June 30, 1997, from $10.9 for the year ended
June 30, 1996, primarily because of an increase in average mortgage loans to
$159.9 million for the year ended June 30, 1997, from $140.5 million for the
year ended June 30, 1996, partially offset by a decrease in average yield on
mortgage loans to 7.6% from 7.8%. The increase in average mortgage loans
resulted from increased loan demand in the Bank's community and from an increase
in the volume of loan originations from brokers. The lower yield on mortgage
loans reflected the reinvestment of the proceeds of prepayments at lower
yielding mortgage loans than those in the portfolio. Interest income on consumer
loans increased by $123,000 to $307,000 for the year ended June 30, 1997, from
$184,000 for the prior year. The increase was due to an increase in average
balance on consumer loans to $4.4 million, from $2.7 million, reflecting the
Bank's continuing marketing efforts for consumer loans during the year. Interest
income on mortgage-backed securities decreased $455,000, or 19.8%, to $1.9
million for the year ended June 30, 1997, from $2.3 million for the prior year.
The decrease was principally due to a $6.4 million decrease in average balance
in mortgage-backed securities to $25.8 million for the year ended June 30, 1997,
from $32.2 million for the prior year. Interest income on investment securities
decreased by $51,000, to $3.7 million for the year ended June 30, 1997, from
$3.8 million for the prior year. Such increase was the result of an increase in
yield on investment securities to 6.9% from 6.5%, offset by a $3.2 million
decrease in average balance of investment securities to $54.0 million for the
year ended June 30, 1997, from $57.2 million for the year ended June 30, 1996.
The decrease in average balances of investment securities was the result of
increased mortgage loan originations. Interest income from interest earning
deposits remained relatively unchanged at $1.2 million for the years ended June
30, 1997 and 1996. Yield on interest earning deposits decreased to 5.5% from
5.6% for the same periods. Interest income on other investments increased
$178,000 to $387,000 for the year ended June 30, 1997, from $209,000 for the
prior year. Such increase was the result of an increase in average balance of
other investments of $2.5 million, and increase in the average yield on other
investments to 6.5% from 6.0% for the same periods.
Total interest income increased by $965,000, or 5.5%, to $18.6
million for the year ended June 30, 1996, from $17.6 million for the year ended
June 30, 1995. The increase in interest income was primarily due to an increase
in the balance of average interest earning assets to $257.1 million for the year
ended June 30, 1996, from $246.6 million for the prior year, and an increase in
the yield on average interest earning assets to 7.2%, from 7.1%. The increase in
average interest earning assets during the year ended June 30, 1996 resulted
primarily from an increase in average investment securities and interest earning
deposits, offset by decreases in mortgage-backed securities and other
investments. The increase in average yield resulted primarily from increases in
rates earned on investment securities, interest earning deposits and other
investments during the year ended June 30, 1996, as compared to 1995.
Interest on mortgage loans decreased by $273,000, or 2.4%, to $10.9
million for the year ended June 30, 1996, from $11.2 million for the year ended
June 30, 1995, primarily because of a decrease in average yield on mortgage
loans to 7.8% from 7.9%, and an $815,000 decrease in average mortgage loans to
$140.5 million for the year ended June 30, 1996, from $141.3 million for the
year ended June 30, 1995. The lower yield on mortgage loans reflected
significant loan prepayments and the reinvestment of the proceeds of such
prepayments in lower yielding mortgage loans. Interest income on consumer loans
increased by $80,000 to $184,000 for the year ended June 30, 1996 from $104,000
for the prior year. The increase was due to an increase in average balance of
consumer loans to $2.7 million, from $1.5 million, reflecting the Bank's
continuing marketing efforts for consumer loans during the year. Interest income
on mortgage-backed securities decreased $223,000, or 8.8%, to $2.3 million for
the year ended June 30, 1996, from $2.5 million for the prior year. The decrease
was principally due to a $4.5 million decrease in average balance of
mortgage-backed securities to $32.2 million for the year ended June 30, 1996,
from $36.7 million for the prior year, partially offset by an increase in yield
to 7.2% from 6.9% for the prior year. Interest income on investment securities
increased by $1.4 million, or 58.5%, to $3.8 million for
5
42
the year ended June 30, 1996, from $2.4 million for the prior year. Such
increase was the result of a $16.8 million increase in average balance of
investment securities to $57.2 million for the year ended June 30, 1996, from
$40.3 million for the year ended June 30, 1995, and an increase in yield on
investment securities to 6.6% from 5.9% for the same periods. The increase in
average balances of investment securities was the result of reinvestment of
proceeds from prepayments of mortgage-backed securities and the investment of
additional funds from increases in savings deposits. Interest income from
interest earning deposits increased by $154,000, or 14.9%, for the year ended
June 30, 1996, to $1.2 million from $1.0 million for the prior year, as a result
of a $2.3 million increase in average balances of interest earning deposits to
$21.1 million from $18.8 million, and an increase in yield on interest earning
deposits to 5.6% from 5.5% for the same periods.
Interest Expense. Total interest expense increased by $381,000, or
3.4%, to $11.6 million for the year ended June 30, 1997, from $11.2 million for
the year ended June 30, 1996. Such increase was the result of an increase in
average balances in interest-bearing liabilities of $13.3 million to $228.5
million for the year ended June 30, 1997, from $215.2 million for the prior
period, partially offset by a decrease in cost of average interest-bearing
liabilities to 5.1% from 5.2%.
Total interest expense increased by $1.3 million, or 12.9%, to $11.2
million for the year ended June 30, 1996, from $9.9 million for the year ended
June 30, 1995. Such increase was the result of an increase in the cost of
average interest bearing liabilities of 5.2% from 4.8%, and an increase in
average balances of interest bearing liabilities of $7.9 million to $215.2
million from $207.3 million for the same periods. The increase in the cost of
average interest bearing liabilities was attributable to the effect of the
increased rates offered on deposit accounts, principally time deposits, during
the last two quarters of fiscal 1995.
Net Interest Income. Net interest income increased by $657,000, or
9.0%, to $8.0 million for the year ended June 30, 1997, from $7.3 million for
the year ended June 30, 1996. This increase was due principally to a decrease in
the Bank's cost of interest-bearing liabilities. See "--Asset and Liability
Management-Interest Rate Sensitivity Analysis."
Net interest income decreased by $322,000, or 4.2%, to $7.3 million
for the year ended June 30, 1996, from $7.7 million for the same period in 1995.
This decrease was due principally to the Bank's cost on its shorter term savings
deposits increasing more rapidly than its yield on longer term interest earning
assets.
Provision for Losses. The Bank maintains an allowance for loan
losses based upon management's evaluation of risks in the loan portfolio, the
Bank's past loan loss experience, and current and expected future economic
conditions. The Bank's provision for loan losses increased to $151,000 for the
year ended June 30, 1997, from $33,000 for the same period in 1996. The Bank's
provision for loan losses increased to $33,000 for the year ended June 30, 1996,
from $24,000 for the same period in 1995. Management believes that it has
maintained the Bank's allowance for loan losses at a level that is adequate to
provide for loan losses, although there can be no assurance that such losses
will not exceed estimated amounts. See Notes 1 and 6 of Notes to the
Consolidated Financial Statements for additional information on the allowance
for loan losses.
Noninterest Income. Noninterest income decreased by $14,000 to
$270,000 for year ended June 30, 1997, from $284,000 for the prior year. The
decrease was due principally to decreases in dividends received on life
insurance investments, partially offset by an increase in loan processing fees
collected during the year.
6
43
Noninterest income increased by $50,000 to $284,000 for the year
ended June 30, 1996, from $234,000 for the prior year. The increase was due
principally to additional loan processing fees collected during the year, and
from market value increases in dividends received on life insurance investments.
Noninterest Expenses. Before considering the one-time SAIF
assessment of $1.4 million, offset by the reduction in the SAIF premiums for
periods beginning January 1, 1997, noninterest expense remained relatively
unchanged at $2.9 million for the year ended June 30, 1997, compared to the
prior year. There were no significant changes in the major expense categories.
Noninterest expense increased by $74,000, or 2.5%, to $3.1 million
for the year ended June 30, 1996, from $3.0 million for the prior year.
Compensation and employee benefits increased by $76,000, or 5.3%, to $1.5
million for the year, from $1.4 million for the prior year, due principally to
the hiring of additional staff and normal increases in salaries and employee
benefit programs. Advertising expenses increased by $37,000 to $216,000 for the
year, reflecting additional marketing costs incurred with the major addition of
a new drive-thru and ATM facility. Other expenses decreased by $49,000 to
$580,000 for the year, resulting primarily from a decreasing reliance on outside
professionals when compared to fiscal 1995, our first year as a public company.
Before considering the one-time SAIF assessment, the ratio of
noninterest expenses to average assets was 1.05% and 1.17% for the years ending
June 30, 1997 and 1996, respectively. After the one-time SAIF assessment, such
ratio was 1.54% for the year ended June 30, 1997.
Provision for income taxes decreased by $279,000 to $1.5 million for
the year ended June 30, 1997, from $1.7 million for the prior year. This
reflects a reduction of $700,000 in income before income taxes in fiscal year
1997.
Provision for income taxes decreased by $185,000 to $1.7 million for
the year ended June 30, 1996, from $1.9 million for the prior year. This
reflects a reduction of $325,000 in income before income taxes in 1996. The
Bank's effective tax rates were 38% for both years ended June 30, 1997 and 1996.
Deposit Insurance Premiums. The deposits of the Bank are presently
insured by the SAIF, which along with the Bank Insurance Fund (the "BIF"), is
one of the two insurance funds administered by the FDIC. In September 1996,
Congress enacted legislation to recapitalize the SAIF by a one-time assessment
on all SAIF-insured deposits held as of March 31, 1995. The assessment was 65.7
basis points per $100 in deposits, payable on November 30, 1996. For the Bank,
the assessment amounted to $1.4 million (or $849,000 when adjusted for taxes),
based on the Bank's SAIF-insured deposits of $210.5 million. In addition,
beginning January 1, 1997, pursuant to the legislation, interest payments on
FICO bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation are
paid jointly by BIF-insured institutions and SAIF-insured institutions. The FICO
assessment is 1.29 basis points per $100 in BIF deposits and 6.44 basis points
per $100 in SAIF deposits. Beginning January 1, 2000, the FICO interest payments
will be paid pro-rata by banks and thrifts based on deposits (approximately 2.4
basis points per $100 in deposits). The BIF and SAIF will be merged on January
1, 1999, provided the bank and saving association charters are merged by that
date. In that event, pro-rata FICO sharing will begin on January 1, 1999.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the
7
44
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily balances.
YEAR ENDED JUNE 30,
------------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans (1)................... $ 159,899 $ 12,133 7.59% $ 140,472 $ 10,911 7.77%
Consumer loans and other loans....... 4,422 307 6.94 2,654 184 6.93
Mortgage-backed securities........... 25,829 1,862 7.21 32,206 2,317 7.19
Investment securities................ 54,006 3,710 6.87 57,191 3,761 6.58
Interest-earning deposits (2)........ 22,100 1,206 5.46 21,143 1,185 5.60
Other investments (3)................ 5,995 387 6.46 3,465 209 6.03
---------- --------- ---- ---------- --------- ------
Total interest-earning assets 272,252 19,605 7.20 257,131 18,567 7.22
-------- ---------
Noninterest-earning assets............... 5,807 5,031
---------- ----------
Total assets.................. $ 278,059 $ 262,162
========== ==========
Interest-bearing liabilities:
Savings deposits and other........... $ 227,785 11,549 5.07 $ 214,382 11,164 5.21
Borrowed funds....................... 713 64 8.98 792 68 8.59
---------- --------- ---- ---------- --------- ------
Total interest-bearing
liabilities.............. 228,498 11,613 5.08 215,174 11,232 5.22
--------- ---- --------- ------
Noninterest-bearing liabilities.......... 4,572 4,088
---------- ----------
Total liabilities............ 233,070 219,262
Retained earnings........................ 44,989 42,900
---------- ----------
Total liabilities and
retained earnings........ $ 278,059 $ 262,162
========== ==========
Net interest income...................... $ 7,992 $ 7,335
========= =========
Net interest rate spread (4)............. 2.12% 2.00%
==== ====
Net interest margin (5).................. 2.94% 2.85%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 119.15% 119.50%
====== ======
YEAR ENDED JUNE 30,
------------------------------------
1995
------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans (1)................... $ 142,287 11,184 7.86%
Consumer loans and other loans....... 1,542 104 6.74
Mortgage-backed securities........... 36,723 2,540 6.92
Investment securities................ 40,347 2,373 5.88
Interest-earning deposits (2)........ 18,801 1,031 5.48
Other investments (3)................ 6,884 370 5.37
---------- --------- ------
Total interest-earning assets 246,584 17,602 7.14
---------
Noninterest-earning assets............... 4,532
----------
Total assets.................. $ 251,116
==========
Interest-bearing liabilities:
Savings deposits and other........... $ 206,367 9,864 4.78
Borrowed funds....................... 893 81 9.07
---------- --------- ------
Total interest-bearing
liabilities.............. 207,260 9,945 4.80
--------- ------
Noninterest-bearing liabilities.......... 3,771
----------
Total liabilities............ 211,031
Retained earnings........................ 40,085
----------
Total liabilities and
retained earnings........ $ 251,116
==========
Net interest income...................... $ 7,657
=========
Net interest rate spread (4)............. 2.34%
====
Net interest margin (5).................. 3.11%
====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 118.97%
======
- ----------------------------------------
(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes securities purchased under agreement to resell, Federal Home Loan
Bank stock, and mutual funds.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
8
45
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
YEAR ENDED JUNE 30,
-----------------------------------------------------
1997 VS. 1996
-----------------------------------------------------
INCREASE/(DECREASE)
DUE TO
----------------------------------- TOTAL
RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE)
-------- ---------- -------- ----------
(IN THOUSANDS)
Interest income:
Mortgage loans (1).............. $ 1,509 $ (253) $ (34) $ 1,222
Consumer and other loans........ 122 -- 1 123
Mortgage-backed securities...... (459) 6 (2) (455)
Investment securities........... (210) 166 (7) (51)
Interest earning deposits (2)... 54 (30) (3) 21
Other investments (3)........... 153 15 10 178
--------- --------- ------- ---------
Total interest-earning
assets.............. 1,169 (96) (35) 1,038
--------- --------- ------- ---------
Interest expense.................... 696 (301) (14) 381
--------- --------- ------- ---------
Change in net interest income....... $ 473 $ 205 $ (21) $ 657
========= ========= ======= =========
YEAR ENDED JUNE 30,
--------------------------------------------------------
1996 VS. 1995
--------------------------------------------------------
INCREASE/(DECREASE)
DUE TO
---------------------------------------- TOTAL
RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE)
-------- ---------- -------- ----------
(IN THOUSANDS)
Interest income:
Mortgage loans (1).............. $ (143) $ (128) $ (2) $ (273)
Consumer and other loans........ 75 3 2 80
Mortgage-backed securities...... (313) 99 (9) (223)
Investment securities........... 990 282 116 1,388
Interest earning deposits (2)... 128 23 3 154
Other investments (3)........... (184) 45 (22) (161)
--------- --------- ------- ---------
Total interest-earning
assets.............. 553 324 88 965
--------- --------- ------- ---------
Interest expense.................... 380 870 37 1,287
--------- --------- ------- ---------
Change in net interest income....... $ 173 $ (546) $ 51 $ (322)
========= ========= ======= =========
- -----------------------------------------
(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes securities purchased under agreement to resell, Federal Home Loan
Bank stock, and mutual funds.
ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are "interest rate sensitive"
and by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to positively affect net interest income. Similarly,
during a period of falling interest rates, a negative gap would tend to
positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
The Bank's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities and interest
rates of its interest rate sensitive assets and liabilities by emphasizing
fixed-rate one- to four-family mortgage loans with terms of 15 years or less,
adjustable rate first mortgages and home equity loans, and maintaining
relatively high levels of liquidity. By maintaining
9
46
a significant percentage of its assets in cash and other liquid investments, the
Bank is able to reinvest a higher percentage of its assets more quickly in
response to changes in market interest rates, thereby reducing its exposure to
interest rate volatility. In addition, the Bank offers competitive rates on
deposit accounts and prices certificates of deposit to provide customers with
incentives to choose certificates of deposit with longer terms.
The Bank has an Asset-Liability Management Committee which is
responsible for reviewing the Bank's asset and liability policies. The Committee
meets weekly and reports monthly to the Board of Directors on interest rate
risks and trends, as well as liquidity and capital ratios and requirements.
Net Portfolio Value. Interest rate risk is also measured in terms of
the sensitivity of the Bank's net portfolio value to changes in interest rates.
The Office of Thrift Supervision (the "OTS") adopted a final rule in August 1993
incorporating an interest rate risk ("IRR") component into the risk-based
capital rules. The new rule became effective January 1, 1994. However, the IRR
capital component discussed below has been postponed until the OTS publishes
guidelines under which an institution may appeal such a deduction. Institutions,
such as the Bank, with less than $300 million in assets and risk-based capital
ratios above 12% are exempt from the new rule. However, the Bank voluntarily
provides to the OTS the information necessary for the OTS to calculate the
Bank's IRR.
The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of a hypothetical 200 basis point change in market interest
rates. A resulting change in NPV of more than 2% of the estimated economic
(present) value of its assets will require the institution to deduct from its
capital 50% of that excess change. The following table presents the OTS'
quarterly pro forma computations of the Bank's NPV as of June 30, 1997, based on
information provided to the OTS by the Bank.
NPV AS PERCENTAGE OF
CHANGE IN PRESENT VALUE OF ASSETS
INTEREST RATES NET PORTFOLIO VALUE ------------------------------
IN BASIS POINTS -------------------------------------------- BASIS POINT
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
---------------- -------- --------- -------- --------- ------
(DOLLARS IN THOUSANDS)
400 $ 28,068 (25,324) -47% 10.67% -753
300 34,040 (19,352) -36% 12.60% -561
200 40,353 (13,040) -24% 14.53% -367
100 46,900 (6,493) -12% 16.43% -178
Static 53,392 -- -- 18.21% --
(100) 59,267 5,874 +11% 19.73% +152
(200) 63,479 10,086 +19% 20.74% +253
(300) 66,953 13,560 +25% 21.53% +332
(400) 71,444 18,052 +34% 22.54% +433
Based on the OTS' computations, the Bank's measured IRR exceeded 2%
of the estimated market value of its assets at June 30, 1997. If the measured
IRR exceeds 2% for the next two quarters, and if the Bank were not exempt, the
Bank's risk-based capital ratio would be reduced. It is not expected that such
reduction would affect the Bank's ability to meet its minimum capital
requirements.
10
47
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 5.0%. The
Bank's liquidity ratio averaged 19.9% during the month of June 1997. The Bank
adjusts its liquidity levels in order to meet funding needs of deposit outflows,
payment of real estate taxes on mortgage loans, repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments, and earnings and funds provided from
operations. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Bank manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Bank invests in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
At June 30, 1997, $35.1 million, or 42.2%, of the Bank's investment portfolio
was scheduled to mature in one year or less, $14.5 million, or 17.4%, was
scheduled to mature in one to five years, and $33.7 million was scheduled to
mature in over five years. Assets qualifying for liquidity outstanding at June
30, 1997, amounted to $52.7 million. For additional information about cash flows
from the Bank's operating, financing, and investing activities, see Consolidated
Statements of Cash Flows included in the Consolidated Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash are net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds; however, the Bank has never borrowed funds from the FHLB.
At June 30, 1997, the Bank had outstanding loan commitments of $1.9
million. This amount does not include $13.9 million of undisbursed lines of
credit on home equity loans, and the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year at June 30,
1997, totaled $76.6 million. Based on prior experience, management believes that
a significant portion of such deposits will remain with the Bank.
11
48
At June 30, 1997, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of June 30, 1997.
AT JUNE 30, 1997
----------------------------------
PERCENT OF
AMOUNT ASSETS (1)
------ ----------
(DOLLARS IN THOUSANDS)
Tangible capital:
Capital level........................................... $ 45,333 15.92%
Requirement............................................. 4,271 1.50
----------- --------
Excess.................................................. $ 41,062 14.42%
=========== =======
Core capital:
Capital level........................................... $ 45,333 15.92%
Requirement............................................. 8,541 3.00
----------- --------
Excess.................................................. $ 36,792 12.92%
=========== =======
Risk-based capital:
Capital level........................................... $ 45,869 35.39%
Requirement ............................................ 10,369 8.00
----------- --------
Excess.................................................. $ 35,500 27.39%
=========== =======
- -----------------------
(1) Tangible and core capital levels are calculated on the basis of a
percentage of total adjusted assets; risk-based capital levels are
calculated on the basis of a percentage of risk-weighted assets.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Bank are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Earnings Per Share. In February 1997, the FASB issued SFAS No. 128,
Earnings per Share ("SFAS 128"), which is effective for financial statements
issued for periods ending after December 15, 1997. SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS") and replaces
the presentation of primary EPS with a presentation of basic EPS. It requires
dual presentation of basic and diluted EPS on the face of the consolidated
statement of income and reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Earlier application is not permitted but disclosure of pro forma
EPS amounts computed using the standards established by SFAS No. 128 is
permitted for periods ending prior to the effective date.
12
49
Pro forma EPS of the Bank determined in accordance with SFAS No. 128
are as follows for the years ended June 30:
YEAR ENDED JUNE 30,
--------------------------------------------------------
1997 1996 1995
------------ ------------ --------
Basic $ .69 $ .82 $ .87
Diluted .69 .82 .87
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. It does not,
however, specify when to recognize or how to measure items that make up
comprehensive income.
SFAS No. 130 is effective for both interim and annual periods
beginning after December 15, 1997. Earlier application is permitted. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement.
In June 1997, the FASB issued No. 131, Disclosures about Segments of
an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. Earlier application is encouraged. Management
has not determined when it will adopt the provisions of SFAS No. 131 but
believes that it will not have a material effect on the Bank's financial
position or results of operations.
13
50
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly financial data for the years ended
June 30, 1997 and 1996 is as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL 1997
- -----------
Interest income $ 4,793 $ 4,856 $ 4,911 $ 5,046
Net interest income 1,891 1,945 2,050 2,107
Provision for losses 21 82 30 18
Income before provision
for income taxes (186) 1,193 1,402 1,414
Net income (108) 728 861 884
Net income per common share:
Primary (.03) .21 .25 .26
Fully-diluted (.03) .21 .25 .26
FISCAL 1996
- -----------
Interest income 4,540 4,610 4,701 4,717
Net interest income 1,727 1,787 1,924 1,897
Provision for losses -- -- -- 34
Income before provision
for income taxes 1,043 1,099 1,244 1,137
Net income 639 675 766 707
Net income per common share:
Primary .19 .20 .23 .21
Fully-diluted .19 .20 .23 .21
COMMON STOCK AND RELATED MATTERS
Effective April 29, 1994, the Bank reorganized from mutual to stock
form and established Leeds Federal Bankshares, M.H.C., a mutual holding company
(the "Holding Company"). In the Bank's initial public offering of Common Stock,
which closed on April 29, 1994, 2,200,000 shares of Common Stock were issued to
the Holding Company, and 1,200,000 shares were issued and sold to the Bank's
customers at a price of $10.00 per share. On such date, the Bank's Common Stock
began to trade over-the-counter on the Nasdaq National Market using the symbol
"LFED." The following table sets forth the high and low trading prices of the
Bank's common stock for the past two fiscal years, together with the cash
dividends declared.
14
51
FISCAL YEAR ENDED CASH DIVIDENDS
JUNE 30, 1996 HIGH LOW DECLARED
----------------- -------- ------- --------------
First quarter $16.25 $12.625 $.16
Second quarter 16.75 14.50 .16
Third quarter 15.25 14.00 .16
Fourth quarter 15.00 13.50 .16
FISCAL YEAR ENDED
JUNE 30, 1997
-----------------
First quarter $14.00 $13.00 $.17
Second quarter 16.75 15.00 .17
Third quarter 19.00 15.50 .19
Fourth quarter 20.00 17.75 .19
As of June 30, 1997, the Bank had 3,454,736 shares of Common Stock
outstanding, including 2,200,000 shares held by the Holding Company, and
1,254,736 shares that were publicly held. As of such date the Bank had
approximately 579 stockholders. This does not reflect the number of persons
whose stock is in nominee or "street" name accounts through brokers.
Payment of dividends on the Common Stock is subject to determination
and declaration by the Board of Directors and will depend upon a number of
factors, including capital requirements, regulatory limitations on the payment
of dividends, the Bank's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
OTS regulations impose limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by a savings
association to repurchase or otherwise acquire its stock, payments to
stockholders of another savings association in a cash-out merger, and other
distributions charged against capital. The regulations establish a three-tiered
system of regulation, with the greatest flexibility being afforded to
well-capitalized or Tier 1 savings associations. As of the date hereof, the Bank
was a Tier 1 association. Accordingly, under the OTS capital distribution
regulations, the Bank would be permitted to pay dividends during any calendar
year up to 100 percent of its net income during that calendar year, plus the
amount that would reduce by one-half its surplus capital ratio at the beginning
of the calendar year.
In addition to the foregoing, earnings of the Bank appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other distributions to stockholders without
payment of taxes at the then-current tax rate by the Bank on the amount of
earnings removed from the reserves for such distributions. The Bank intends to
make full use of this favorable tax treatment and does not contemplate any
distribution by the Bank in a manner that would limit the Bank's bad debt
deduction or create federal tax liability.
15
52
The Holding Company has waived the right to receive all dividends
paid by the Bank. OTS regulations require the Holding Company to notify the OTS
of any proposed waiver of the right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by-case basis, and, in
general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association
(and the savings association's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
16
53
(THIS PAGE INTENTIONALLY LEFT BLANK)
54
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Leeds Federal Savings Bank
Baltimore, Maryland:
We have audited the accompanying consolidated statements of financial condition
of Leeds Federal Savings Bank and subsidiary (the Bank) as of June 30, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
1997. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Leeds Federal
Savings Bank and subsidiary as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Baltimore, Maryland
August 8, 1997
55
LEEDS FEDERAL SAVINGS BANK
Consolidated Statements of Financial Condition
June 30, 1997 and 1996
==============================================================================================================================
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash, including interest-bearing deposits of $11,172,475 in
1997 and $10,450,239 in 1996 $ 13,330,928 12,094,102
Short-term investments 2,722,336 -
Secured short-term loans to commercial banks 9,735,532 11,360,341
Securities purchased under agreements to resell (fair value
of $5,541,565 in 1997 and $2,541,550 in 1996) (note 2) 5,517,903 2,467,214
Securities available for sale, amortized cost of $5,862,754 and
$5,558,527, respectively (note 3) 8,162,419 6,758,706
Investment securities (fair value of $43,360,574 in 1997
and $50,915,502 in 1996) (note 4) 43,614,562 51,965,727
Mortgage-backed securities, net (fair value of $22,777,192
in 1997 and $29,354,840 in 1996) (note 5) 22,294,337 29,095,316
Loans receivable, net (note 6) 174,877,796 152,754,751
Investment in Federal Home Loan Bank of Atlanta stock,
at cost (note 10) 2,377,200 2,377,200
Property and equipment, net (note 7) 863,823 950,765
Cash surrender value of life insurance (note 11) 3,153,193 3,018,531
Prepaid expenses and other assets 309,808 394,425
Ground rents owned, at cost 39,500 41,100
- ------------------------------------------------------------------------------------------------------------------------------
$ 286,999,337 273,278,178
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts (note 8) $ 232,590,009 222,146,018
Borrowed funds - Employee Stock Ownership Plan (note 12) 648,000 744,000
Advance payments by borrowers for taxes,
insurance and ground rents 4,804,060 4,560,492
Federal and state income taxes (note 9):
Currently payable 335,841 128,240
Deferred 1,062,219 758,849
Accrued expenses and other liabilities (note 11) 817,871 748,399
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 240,258,000 229,085,998
Stockholders' equity (notes 10, 12, 16 and 18):
Common stock, $1 par value; 20,000,000 shares authorized; issued and
outstanding 3,454,736 shares in 1997 and 3,448,000 in 1996 3,454,736 3,448,000
Additional paid-in-capital 10,675,480 10,535,007
Employee stock ownership plan (591,300) (700,380)
Management recognition plan (60,141) (152,428)
Retained income, substantially restricted 31,854,434 30,341,307
Unrealized gains on securities available for sale, net 1,408,128 720,674
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 46,741,337 44,192,180
- ------------------------------------------------------------------------------------------------------------------------------
Commitments (notes 6, 11 and 12)
- ------------------------------------------------------------------------------------------------------------------------------
$ 286,999,337 273,278,178
==============================================================================================================================
See accompanying notes to consolidated financial statements.
F-2
56
LEEDS FEDERAL SAVINGS BANK
Consolidated Statements of Income
Years ended June 30, 1997, 1996 and 1995
===================================================================================================================================
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income:
First mortgage and other loans $ 12,440,362 11,094,708 11,287,389
Mortgage-backed securities 1,862,074 2,316,785 2,540,347
Investment securities, certificates of deposit and
short-term investments 5,303,280 5,156,029 3,773,776
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 19,605,716 18,567,522 17,601,512
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings accounts (note 8) 11,548,634 11,156,258 9,861,306
Other 64,473 75,929 83,756
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,613,107 11,232,187 9,945,062
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,992,609 7,335,335 7,656,450
Provision for loan losses (note 6) 151,240 33,581 23,826
Provision for losses on deposit - - 30,000
- -----------------------------------------------------------------------------------------------------------------------------------
151,240 33,581 53,826
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,841,369 7,301,754 7,602,624
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service fees and charges 130,202 115,797 74,525
Other 140,288 168,142 159,568
- -----------------------------------------------------------------------------------------------------------------------------------
270,490 283,939 234,093
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 1,528,280 1,516,477 1,440,062
Occupancy expense 197,067 191,947 181,718
SAIF deposit insurance premiums 1,755,113 557,535 558,078
Advertising 171,385 216,051 178,881
Other 636,941 580,277 628,687
- -----------------------------------------------------------------------------------------------------------------------------------
4,288,786 3,062,287 2,987,426
- -----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 3,823,073 4,523,406 4,849,291
Provision for income taxes (note 9) 1,457,942 1,736,762 1,922,299
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,365,131 2,786,644 2,926,992
===================================================================================================================================
Net income per share of common stock (note 1):
Primary $ .69 .82 .87
===================================================================================================================================
Fully-diluted $ .69 .82 .87
===================================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
57
LEEDS FEDERAL SAVINGS BANK
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997, 1996 and 1995
=============================================================================================================================
Employee Retained
Additional stock Management income,
Common paid-in ownership recognition substantially
stock capital plan plan restricted
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 $ 3,400,000 9,944,686 (933,896) - 25,870,499
Compensation expense - Employee
Stock Ownership Plan (ESOP) - 18,027 119,556 - -
Adoption of Management
Recognition Plan (MRP) 48,000 522,000 - (570,000) -
Compensation expense - MRP - - - 219,479 -
Change in unrealized gains on
securities available for sale, net - - - - -
Dividends ($.465 per share) - - - - (517,826)
Net income - - - - 2,926,992
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 3,448,000 10,484,713 (814,340) (350,521) 28,279,665
Compensation expense - ESOP - 50,294 113,960 - -
Compensation expense - MRP - - - 198,093 -
Amortization of net unrealized
holding loss - - - - (1,439)
Change in unrealized gains on
securities available for sale, net - - - - -
Dividends ($.64 per share) - - - - (723,563)
Net income - - - - 2,786,644
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 $ 3,448,000 10,535,007 (700,380) (152,428) 30,341,307
Compensation expense - ESOP - 63,663 109,080 - -
Compensation expense - MRP - - - 92,287 -
Amortization of net unrealized
holding loss - - - - (15,996)
Change in unrealized gains on
securities available for sale, net - - - - -
Exercise of stock options 6,736 76,810 - - -
Dividends ($.72 per share) - - - - (836,008)
Net income - - - - 2,365,131
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $ 3,454,736 10,675,480 (591,300) (60,141) 31,854,434
=============================================================================================================================
============================================================================
Unrealized
gains on
securities Total
available stockholders'
for sale, net equity
- ----------------------------------------------------------------------------
Balance at June 30, 1994 - 38,281,289
Compensation expense - Employee
Stock Ownership Plan (ESOP) - 137,583
Adoption of Management
Recognition Plan (MRP) - -
Compensation expense - MRP - 219,479
Change in unrealized gains on
securities available for sale, net 690,211 690,211
Dividends ($.465 per share) - (517,826)
Net income - 2,926,992
- ---------------------------------------------------------------------------
Balance at June 30, 1995 690,211 41,737,728
Compensation expense - ESOP - 164,254
Compensation expense - MRP - 198,093
Amortization of net unrealized
holding loss 1,439 -
Change in unrealized gains on
securities available for sale, net 29,024 29,024
Dividends ($.64 per share) - (723,563)
Net income - 2,786,644
- ---------------------------------------------------------------------------
Balance at June 30, 1996 720,674 44,192,180
Compensation expense - ESOP - 172,743
Compensation expense - MRP - 92,287
Amortization of net unrealized
holding loss 15,996 -
Change in unrealized gains on
securities available for sale, net 671,458 671,458
Exercise of stock options - 83,546
Dividends ($.72 per share) - (836,008)
Net income - 2,365,131
- ---------------------------------------------------------------------------
Balance at June 30, 1997 1,408,128 46,741,337
===========================================================================
See accompanying notes to consolidated financial statements.
F-4
58
LEEDS FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
===================================================================================================================================
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,365,131 2,786,644 2,926,992
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of loan fees (80,728) (157,068) (204,112)
Provision for loan losses 151,240 33,581 23,826
Accretion of premiums (discounts) on
investment securities and mortgage-
backed securities (54,991) (53,764) (45,230)
Loss on sale of assets, net - 17,025 -
Depreciation 121,209 105,666 91,936
Non-cash compensation under stock-based
benefit plans 265,030 362,347 357,062
Deferred income tax provision (134,722) (166,981) (75,108)
Decrease (increase) in accrued interest receivable
on securities and loans receivable 6,225 (284,232) (217,123)
Increase in income taxes currently
payable 207,601 15,185 38,611
Increase in accrued expenses and
other liabilities 69,472 211,897 284,790
Increase in unearned loan fees, net 282,353 247,297 25,577
Decrease (increase) in prepaid expenses and
other assets 84,617 (44,120) (197,283)
Amortization of net unrealized
holding loss (15,996) (1,439) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,266,441 3,072,038 3,009,938
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities of certificates of deposit - - 6,499,000
Purchases of securities available for sale (300,000) (11,000,000) -
Purchase of investment securities
held to maturity (6,399,906) (32,155,000) (30,948,603)
Maturity of investment securities
held to maturity 14,728,283 36,895,410 10,000,000
Loan disbursements, net of repayments (22,372,160) (11,723,086) 2,309,310
Purchase of mortgage-backed securities
held to maturity - - (1,020,000)
- ----------------------------------------------------------------------------------------------------------------------------------
(Continued)
F-5
59
LEEDS FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
=========================================================================================================================
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities, continued:
Mortgage-backed securities held to maturity
principal repayments $ 6,790,616 5,877,674 4,261,066
Purchases of property and equipment (34,267) (385,488) (152,299)
Investment in life insurance policies (134,662) (156,214) (165,323)
Sale of ground rents owned 1,600 - 15,750
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,720,496) (12,646,704) (9,201,099)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payment of dividends (836,008) (723,563) (517,826)
Repayment of borrowed funds (96,000) (96,000) (90,376)
Net increase in savings accounts 10,443,991 10,731,778 942,216
Increase (decrease) in advance payments
by borrowers for taxes, insurance and
ground rents 243,568 (47,211) (56,233)
Exercise of stock options 83,546 - -
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,839,097 9,865,004 277,781
Net increase (decrease) in cash and cash equivalents 5,385,042 290,338 (5,913,380)
Cash and cash equivalents at beginning of year 25,921,657 25,631,319 31,544,699
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 31,306,699 25,921,657 25,631,319
=========================================================================================================================
Noncash investing activities:
Retirement of property and equipment $ 1,363 109,693 40,092
=========================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
60
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
===============================================================================
(1) DESCRIPTION OF BUSINESS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND OTHER MATTERS
DESCRIPTION OF BUSINESS AND REORGANIZATION
Leeds Federal Savings Bank (the Bank) is a federally-chartered
savings bank that conducts its operations from a single facility
located in Arbutus, Baltimore County, Maryland. The Bank was
originally chartered in 1923 as a state mutual savings and loan
association and in 1935 became a federally-chartered mutual savings
association operating under the name Leeds Federal Savings and Loan
Association (Association). Effective April 29, 1994, the
Association's ownership structure was reorganized and it became a
wholly-owned capital stock savings association subsidiary of Leeds
Federal Bankshares, M.H.C. (MHC), a federal mutual holding company.
Under the terms of the reorganization, the membership rights of the
Association's members became membership rights in the mutual holding
company. The reorganization was accounted for in a manner similar to
that of a pooling-of-interests. Effective in January, 1994, the
Office of Thrift Supervision (OTS) approved the Association's
application to change its charter to that of a federal savings bank
and to change its name to Leeds Federal Savings Bank.
Effective in July, 1997, the OTS approved the reorganization
(Reorganization) of the Bank into a two-tier mutual holding company
structure with the establishment of a federally chartered
corporation as the stock holding company parent of the Bank. Upon
completion of the Reorganization, MHC, the Bank's existing mutual
holding company, will own a majority of the common stock of the new
stock holding company, which will own 100% of the common stock of
the Bank. The Reorganization will be implemented pursuant to the
Plan of Reorganization which the Board of Directors anticipates will
be adopted by the stockholders at its annual stockholders meeting.
Pursuant to the Reorganization, each share of Bank common stock held
by existing stockholders of the Bank would be exchanged for a share
of common stock of the stock holding company. The reorganization of
the Bank will be structured as a tax-free reorganization and will be
accounted for as a pooling of interests.
The primary business of Leeds Federal Savings Bank is attracting
deposits from individuals and corporate customers and originating
mortgage loans secured by residential real estate properties. The
Bank is subject to competition from other financial institutions in
attracting and retaining deposits and in making loans. The Bank is
also subject to the regulations of certain agencies of the federal
government and undergoes periodic examinations by those agencies.
(Continued)
F-7
61
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(1) CONTINUED
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Leeds
Federal Savings Bank and its wholly-owned subsidiary, Leeds
Investment Corporation (the Subsidiary) (collectively, the Bank).
The Subsidiary was incorporated in Delaware in April, 1997, for the
purpose of holding investment securities, interest-earning deposits
and other investments. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statements
of financial condition and income and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses. In connection with this determination, management
obtains independent appraisals for significant properties and
prepares fair value analyses as appropriate.
Management believes that the allowance for losses on loans is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions, particularly in the state
of Maryland. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for losses on loans. Such agencies may require the
Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.
SHORT-TERM INVESTMENTS
Short-term investments, which consist of money market accounts, are
stated at the lower of cost or market.
SECURED SHORT-TERM LOANS TO COMMERCIAL BANKS
Secured short-term loans to commercial banks consist of Federal
funds sold which are carried at cost and approximate fair value.
Generally, Federal funds are purchased and sold for one-day periods.
(Continued)
F-8
62
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(1) CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on a straight-line method
over the estimated useful lives of the assets. Additions and
betterments are capitalized, and charges for repairs and maintenance
are expensed when incurred. The related cost and accumulated
depreciation are eliminated from the accounts when an asset is sold
or retired and the resultant gain or loss is credited or charged to
income.
LOAN FEES
Loan origination and commitment fees are deferred initially and
amortized into income over the contractual life of the loan using
the interest method. Under certain circumstances, commitment fees
are recognized over the commitment period or upon the expiration of
the commitment. In addition, certain incremental direct loan
origination costs are deferred and recognized over the contractual
life of the loan using the interest method as a reduction of the
yield. Deferred fees and costs are combined where applicable and the
net amount is amortized.
REAL ESTATE OWNED
Real estate owned consists of real estate acquired through
foreclosure and in-substance foreclosure and is initially recorded
at the lower of cost or fair value and subsequently at the lower of
cost or fair value, less estimated selling expenses. Costs relating
to holding such real estate are charged against income in the
current period, while costs relating to improving such real estate
are capitalized until a salable condition is reached.
INCOME TAXES
Under the asset and liability method required by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
(SFAS No. 109), deferred income taxes are recognized, with certain
exceptions, for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities based
on enacted tax rates expected to be in effect when such amounts are
realized or settled. Deferred tax assets are recognized only to the
extent that it is more likely than not that such amounts will be
realized based on consideration of available evidence, including tax
planning strategies and other factors.
(Continued)
F-9
63
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(1) CONTINUED
SFAS No. 109 allows for a continuing exception of providing a
deferred tax liability for bad debt reserves for tax purposes of
qualified thrift lenders, such as the Bank, that arose in fiscal
years beginning before December 31, 1987. Such bad debt reserve for
the Bank amounted to approximately $7,100,000 with an income tax
effect of approximately $2,700,000 at June 30, 1997. This bad debt
reserve would become taxable if certain conditions are met by the
Bank.
Under SFAS No. 109, the effects of changes in tax laws or rates on
deferred tax assets and liabilities are recognized in the period
that includes the enactment date.
Interest on potential problem loans is not accrued when, in the
opinion of management, full collection of principal or interest is
in doubt, or payment of principal or interest has become 90 days
past due. Any interest ultimately collected on such loans is
recorded in income in the period of recovery.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans is determined based on
management's review of the loan portfolio and analyses of borrowers'
ability to pay, past collection experience, risk characteristics of
individual loans or groups of similar loans and underlying
collateral, current and prospective economic conditions and the
status of nonperforming loans. Loans or portions thereof are charged
off when considered, in the opinion of management, uncollectible.
Certain impaired loans are measured on the present value of expected
future cash flows discounted at the loan's effective interest rate,
or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Impaired loans are generally placed in nonaccrual status on the
earlier of the date that management determines that the collection
of principal and/or interest is in doubt or the date that principal
or interest is 90 days or more past-due.
An allocated valuation allowance for impaired loans, if any, is
included in the Bank's allowance for credit losses. An impaired loan
is charged-off when the loan, or a portion thereof, is considered
uncollectible or transferred to real estate owned.
(Continued)
F-10
64
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(1) CONTINUED
The Bank recognizes interest income for impaired loans consistent
with its method for nonaccrual loans. Specifically, interest
payments received are recognized as interest income or, if the
ultimate collectibility of principal is in doubt, are applied to
principal.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Debt securities that the Bank has the positive intent and ability to
hold to maturity are classified as held to maturity and recorded at
amortized cost. Debt and equity securities not classified as held to
maturity and equity securities with readily determinable fair values
are classified as trading securities if bought and held principally
for the purpose of selling them in the near term. Trading securities
are reported at fair value, with unrealized gains and losses
included in earnings. Investments not classified as held to maturity
or trading are considered available for sale and are reported at
fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of
tax effects. Fair value is determined based on bid prices published
in financial newspapers or bid quotations received from securities
dealers. For purposes of computing realized gains or losses on the
sales of investments, cost is determined by using the specific
identification method. Gains and losses on sales of securities are
recognized at the time of sale. Premiums and discounts on investment
and mortgage-backed securities are amortized over the term of the
security using methods that approximate the interest method.
In November 1995, the Financial Accounting Standards Board announced
its intention to allow a one-time change in the classification of
securities, providing such change was effected by December 31, 1995.
Management utilized this opportunity and on December 31, 1995
designated certain available-for-sale investment securities, with an
amortized cost of $7,100,000 and an unrealized net loss of $28,405,
as held-to-maturity. Management also designated held to maturity
investment securities with an amortized cost of $1,500,000 as
available for sale.
STOCK-BASED COMPENSATION
The Bank adopted the provisions of Statement of Financial Accounting
Standards No. 123 Accounting for Awards of Stock-Based Compensation
to Employees (SFAS No. 123) as of July 1, 1996 using the intrinsic
value-based method. SFAS No. 123 defines a fair value based method
of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of
accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees (Opinion 25). Under the fair value based
(Continued)
F-11
65
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(1) CONTINUED
method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which
is usually the vesting period. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock. Most
fixed stock option plans -- the most common type of stock
compensation plan -- have no intrinsic value at grant date, and
under Opinion 25 no compensation cost is recognized for them.
Compensation cost is recognized for other types of stock based
compensation plans under Opinion 25, including plans with variable,
usually performance-based, features. SFAS No. 123 requires that an
employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the
method used to account for them. The adoption of SFAS No. 123 did
not have a material impact on the Bank's financial statements. The
Bank made no grants of stock options during fiscal year 1996 or 1997
and therefore there are no required disclosures about stock-based
employee compensation.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
The Bank adopted the provisions of Statement of Financial Accounting
Standards No. 125 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS No. 125)
as of January 1, 1997. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities and
requires, among other things, the Bank to record at fair value,
assets and liabilities resulting from a transfer of financial
assets. In December 1996 SFAS No. 127 was issued which deferred the
effective date of certain provisions of SFAS No. 125 related to
repurchase agreements, securities lending and similar transactions
until January 1, 1998. The adoption of the currently effective
portions of SFAS No. 125 did not have a material impact on the
Bank's financial statements.
STATEMENT OF CASH FLOWS
Cash equivalents include interest bearing deposits, money market
accounts, secured short-term loans to commercial banks, and
securities purchased under agreements to resell. For purposes of the
consolidated statement of cash flows, the Bank considers all highly
liquid investments with original maturities of three months or less
to be cash equivalents.
The Bank made income tax payments of approximately $1,375,000,
$1,815,000 and $1,890,000 in 1997, 1996 and 1995, respectively. The
Bank paid approximately $11,613,000, $11,232,000 and $9,945,000 in
interest on deposits and other borrowings in 1997, 1996 and 1995,
respectively.
(Continued)
F-12
66
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(2) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank purchases securities under agreements to resell (repurchase
agreements). The amounts advanced under the agreements represent
short-term loans and are reflected as short-term investments in the
consolidated statements of financial condition.
Securities purchased under agreements to resell at June 30 are
summarized as follows:
1997 1996
---------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, fair value of $5,541,565 and
$2,541,550 at June 30, 1997 and 1996, respectively. $ 5,517,903 2,467,214
===============================================================================================================
The securities underlying the agreements are book entry securities
which were delivered by appropriate entry in the Bank's account
maintained at Signet Bank, Richmond, Virginia under a written
custodial agreement that explicitly recognizes the Bank's interest
in the securities. Agreements outstanding at June 30, 1997 and 1996
have original maturities of three months or less. The agreements
relating to mortgage-backed securities are agreements to resell the
same securities. Securities purchased under agreements to resell
averaged $3,654,000, $2,285,000 and $3,777,000 during 1997, 1996 and
1995, respectively. The maximum amounts outstanding at any month-end
were $5,517,903, $2,467,214 and $7,403,067 during 1997, 1996 and
1995, respectively.
(3) SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale
are summarized as follows at June 30:
1997
----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
-----------------------------------------------------------------------------------------------------------------------
U.S. government and agency obligations due:
Beyond 5 years but within 10 years $ 4,700,000 - (22,671) 4,677,329
Beyond 10 years 1,000,000 - (4,824) 995,176
Federal Home Loan Mortgage Corporation
preferred stock 56,760 2,327,160 - 2,383,920
-----------------------------------------------------------------------------------------------------------------------
5,756,760 2,327,160 (27,495) 8,056,425
Accrued interest receivable 105,994 - - 105,994
-----------------------------------------------------------------------------------------------------------------------
$ 5,862,754 2,327,160 (27,495) 8,162,419
=======================================================================================================================
(Continued)
F-13
67
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(3) CONTINUED
1996
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
------------------------------------------------------------------------------------------------------------------------
U.S. government and agency obligations due:
Beyond 5 years but within 10 years $ 4,700,000 - (160,896) 4,539,104
Beyond 10 years 700,000 - (38,059) 661,941
Federal Home Loan Mortgage Corporation
preferred stock 56,760 1,399,134 - 1,455,894
------------------------------------------------------------------------------------------------------------------------
5,456,760 1,399,134 (198,955) 6,656,939
Accrued interest receivable 101,767 - - 101,767
------------------------------------------------------------------------------------------------------------------------
$ 5,558,527 1,399,134 (198,955) 6,758,706
========================================================================================================================
(4) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are
summarized as follows at June 30:
1997
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
-----------------------------------------------------------------------------------------------------------------------
U.S. Government and agency obligations $ 42,971,175 122,014 (376,002) 42,717,187
Accrued interest receivable 643,387 - - 643,387
-----------------------------------------------------------------------------------------------------------------------
$ 43,614,562 122,014 (376,002) 43,360,574
========================================================================================================================
1996
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---------------------------------------------------------------------------------------------------------------------
U.S. Government and agency obligations $ 51,252,002 92,117 (1,142,342) 50,201,777
Accrued interest receivable 713,725 - - 713,725
---------------------------------------------------------------------------------------------------------------------
$ 51,965,727 92,117 (1,142,342) 50,915,502
=====================================================================================================================
(Continued)
F-14
68
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(4) CONTINUED
Investment securities mature as follows at June 30:
1997 1996
----------------------------------- -------------------------------------
Amortized Amortized
cost Fair value cost Fair value
---------------------------------------------------------------------------------------------------------------------
Due within 12 months $ 491,437 491,437 6,161,206 6,149,978
Due beyond 12 months
but within 5 years 14,500,000 14,527,148 13,017,517 12,926,876
Due beyond 5 years
but within 10 years 18,151,359 17,992,813 21,899,869 21,264,231
Due beyond 10 years 9,828,379 9,705,789 10,173,410 9,860,692
---------------------------------------------------------------------------------------------------------------------
$ 42,971,175 42,717,187 51,252,002 50,201,777
=====================================================================================================================
(5) MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities are
summarized as follows at June 30:
1997
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
----------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association $ 12,636,297 434,087 - 13,070,384
Federal National Mortgage Association 3,738,027 23,042 (510) 3,760,559
Federal Home Loan Mortgage Corporation 3,910,141 36,846 - 3,946,987
Collateralized Mortgage Obligation - FNMA
REMIC 1,875,870 - (10,610) 1,865,260
----------------------------------------------------------------------------------------------------------------------
22,160,335 493,975 (11,120) 22,643,190
Accrued interest receivable 134,002 - - 134,002
----------------------------------------------------------------------------------------------------------------------
$ 22,294,337 493,975 (11,120) 22,777,192
======================================================================================================================
(Continued)
F-15
69
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(5) CONTINUED
1996
----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association $ 15,404,575 277,197 (18,028) 15,663,744
Federal National Mortgage Association 4,553,402 16,501 (32,191) 4,537,712
Federal Home Loan Mortgage Corporation 7,083,603 38,063 (14,796) 7,106,870
Collateralized Mortgage Obligation - FNMA
REMIC 1,875,870 - (7,222) 1,868,648
------------------------------------------------------------------------------------------------------------------------
28,917,450 331,761 (72,237) 29,176,974
Accrued interest receivable 177,866 - - 177,866
------------------------------------------------------------------------------------------------------------------------
$ 29,095,316 331,761 (72,237) 29,354,840
========================================================================================================================
A summary of maturities of mortgage-backed securities at June 30:
1997 1996
-------------------------------------- --------------------------------------
Amortized Amortized
cost Fair value cost Fair value
----------------------------------------------------------------------------------------------------------------------
Due within 12 months $ 832,307 839,180 2,361,696 2,370,080
Due beyond 12 months
but within 5 years 3,156,477 3,199,376 4,224,924 4,256,146
Due beyond 5 years but
within 10 years 4,314,490 4,347,676 1,339,456 1,396,183
Beyond 10 years 13,857,061 14,256,958 20,991,374 21,154,565
----------------------------------------------------------------------------------------------------------------------
$ 22,160,335 22,643,190 28,917,450 29,176,974
======================================================================================================================
(Continued)
F-16
70
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(6) LOANS RECEIVABLE
Loans receivable and accrued interest thereon were as follows at
June 30:
1997 1996
-----------------------------------------------------------------------------------------------------------------
First mortgage loans:
One-to-four family residential $ 152,462,834 136,382,820
Commercial 3,763,211 1,548,279
Construction 2,770,243 1,317,750
-----------------------------------------------------------------------------------------------------------------
158,996,288 139,248,849
Home equity loans 13,024,084 11,691,799
Loans secured by savings accounts 358,065 397,345
Consumer loans 4,711,033 2,897,717
Accrued interest receivable 782,294 678,544
-----------------------------------------------------------------------------------------------------------------
177,871,764 154,914,254
Less:
Allowance for loan losses 536,280 374,797
Unearned loan fees 790,021 588,396
Undisbursed portion of loans in process 1,667,667 1,196,310
-----------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 174,877,796 152,754,751
=================================================================================================================
Substantially all of the Bank's loans receivable are mortgage loans
secured by residential real estate properties located in the state
of Maryland. Loans are extended only after evaluation by management
of customers' creditworthiness, the loan to value ratio and other
relevant factors. The Bank generally does not lend more than 80% of
the appraised value of a property and requires private mortgage
insurance on residential mortgages with loan-to-value ratios in
excess of 80%. In addition, the Bank generally obtains personal
guarantees of repayment from borrowers and/or others for
construction, commercial and multifamily residential loans and
disburses the proceeds of construction and similar loans only as
work progresses on the related property.
Residential lending is generally considered to involve less risk
than other forms of lending, although payment experience on these
loans is dependent to some extent on economic and market conditions
in the Bank's lending area.
Nonaccrual loans totaled approximately $88,000 and $100,000 at
June 30, 1997 and 1996, respectively. No loans were impaired,
as defined, during 1997 and 1996.
(Continued)
F-17
71
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(6) CONTINUED
Activity in the allowance for loan losses is summarized as follows:
1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Beginning balance $ 374,797 341,216 317,390
Provision for loan losses 151,240 33,581 23,826
Charge-offs (19,757) - -
Transfer from provision for losses on deposit 30,000 - -
----------------------------------------------------------------------------------------------------------------
Ending balance $ 536,280 374,797 341,216
================================================================================================================
The Bank had outstanding mortgage loan commitments, exclusive of the
undisbursed portion of loans in process, of approximately $1,136,000
and $715,000 for fixed rate and floating rate loans, respectively,
at June 30, 1997. The interest rate range on fixed rate mortgage
loan commitments was 7.38% to 8.00% and all commitments expire
within one year.
(7) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at June 30:
Useful life
1997 1996 in years
-------------------------------------------------------------------------------------------------------------
Land $ 68,449 68,449 -
Building and improvements 817,112 791,882 50 years
Furniture, fixtures and equipment 896,902 889,228 3-10 years
------------------------------------------------------------------------------------------- =============
Total, at cost 1,782,463 1,749,559
Less accumulated depreciation 918,640 798,794
-------------------------------------------------------------------------------------------
Ending balance $ 863,823 950,765
===========================================================================================
(Continued)
F-18
72
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(8) SAVINGS ACCOUNTS
Savings accounts are summarized as follows at June 30:
Weighted average rate 1997 1996
------------------------- -------------------------- ---------------------------
Type of Account 1997 1996 Amount % Amount %
-----------------------------------------------------------------------------------------------------------------------
Certificates 5.70% 5.85% $ 127,102,568 55% $ 123,633,575 56%
----------------------------------------------------------------------------------------------------------------------
Anniversary bonus account 3.37% 3.31% 6,491,093 3 7,779,822 3
Money Market Deposit 4.77% 4.70% 75,023,364 32 68,087,447 31
Passbook 3.35% 3.35% 18,857,971 8 18,422,510 8
NOW and demand deposits 1.80% 1.65% 5,115,013 2 4,222,664 2
----------------------------------------------------------------------------------------------------------------------
105,487,441 45 98,512,443 44
----------------------------------------------------------------------------------------------------------------------
$ 232,590,009 100% $ 222,146,018 100%
======================================================================================================================
Certificate accounts mature
as follows:
Within 12 months $ 76,622,105 60% $ 70,116,902 57%
12 to 24 months 29,458,472 23 31,156,021 25
24 to 36 months 14,365,437 12 9,951,847 8
36 to 48 months 4,185,933 3 8,574,822 7
48 to 60 months 2,470,621 2 3,833,983 3
----------------------------------------------------------------------------------------------------------------------
$ 127,102,568 100% $ 123,633,575 100%
======================================================================================================================
At June 30, 1997 and 1996, the Bank had customer deposits in savings
accounts of $100,000 or more of approximately $39,141,000 and
$34,781,000, respectively.
Interest expense on savings deposits consists of the following for
the years ended June 30:
1997 1996 1995
--------------------------------------------------------------------------------------------------------
Time deposits $ 7,212,849 7,059,387 5,829,693
Checking and money market 3,734,784 3,493,648 3,325,838
Passbook and other 601,001 603,223 705,775
--------------------------------------------------------------------------------------------------------
$ 11,548,634 11,156,258 9,861,306
========================================================================================================
(Continued)
F-19
73
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(9) INCOME TAXES
The provision for income taxes is comprised of the following for the
years ended June 30:
1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Current:
Federal $ 1,326,458 1,558,683 1,635,371
State 266,206 345,060 362,036
----------------------------------------------------------------------------------------------------------------
1,592,664 1,903,743 1,997,407
----------------------------------------------------------------------------------------------------------------
Deferred:
Federal (110,303) (136,715) (61,494)
State (24,419) (30,266) (13,614)
----------------------------------------------------------------------------------------------------------------
(134,722) (166,981) (75,108)
----------------------------------------------------------------------------------------------------------------
$ 1,457,942 1,736,762 1,922,299
================================================================================================================
The net deferred tax liability at June 30, 1997 and 1996 consists of
total deferred tax assets of $728,389 and $696,490, respectively and
deferred tax liabilities of $1,790,608 and $1,455,339, respectively.
The tax effects of temporary differences between the financial
reporting and income tax basis of assets and liabilities relate to
the following:
June 30
-------------------------------------
1997 1996
------------------------------------------------------------------------------------------------------------------
Interest and fees on loans $ 122,406 165,483
Tax bad debt reserve in excess of base year (499,829) (599,794)
Allowance for losses on loans 207,111 144,747
Allowance for losses on deposit - 11,586
Federal Home Loan Bank stock dividends (373,687) (373,687)
Deferred compensation 127,157 78,433
Management Recognition Plan 129,276 133,003
Unrealized gains on securities available for sale, net (891,537) (453,445)
Other, net 116,884 134,825
------------------------------------------------------------------------------------------------------------------
$ (1,062,219) (758,849)
==================================================================================================================
(Continued)
F-20
74
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(9) CONTINUED
A reconciliation between the provision for income taxes and the
amount computed by multiplying income before income taxes by the
statutory Federal income tax rate (34%) is as follows for the years
ended June 30:
1997 1996 1995
---------------------------------------------------------------------------------------------------------------------
Federal income taxes at statutory rate $ 1,299,845 1,537,958 1,648,759
State income taxes, net of Federal income tax benefit 159,579 207,764 229,959
Other, net (1,482) (8,960) 43,581
---------------------------------------------------------------------------------------------------------------------
$ 1,457,942 1,736,762 1,922,299
=====================================================================================================================
(10) REGULATORY MATTERS
The Federal Deposit Insurance Corporation, through the Savings
Association Insurance Fund (SAIF), insures deposits of
accountholders up to $100,000. The Bank pays an annual premium to
provide for this insurance. The Bank is also a member of the Federal
Home Loan Bank System and is required to maintain an investment in
the stock of the Federal Home Loan Bank of Atlanta equal to at least
1% of the unpaid principal balances of its residential mortgage
loans, .3% of its total assets or 5% of its outstanding advances
from the Bank, whichever is greater. Purchases and sales of stock
are made directly with the Bank at par value.
During 1997, the Bank paid a special assessment of approximately
$1,383,000 as a result of the federally-mandated recapitalization of
the SAIF. The assessment was required of substantially all
SAIF-insured depository institutions and was charged to noninterest
expense.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
(Continued)
F-21
75
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(10) CONTINUED
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (as
defined in the regulations and as set forth in the table below, as
defined) of total and Tier I capital (as defined) to risk-weighted
assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of June 30, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the Office of
Thrift Supervision (OTS) categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. 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
institution's category.
The Bank's actual capital amounts and ratios are also presented in
the table (in thousands).
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------ -------------------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------
As of June 30, 1997:
Tangible capital (a) $ 45,333 15.92% $ 4,271 1.50% $ 14,235 greater than 5%
Core capital (a) 45,333 15.92% 8,541 3.00% 17,082 greater than 6%
Risk-based
capital (b) 45,869 35.39% 10,369 8.00% 12,962 greater than 10%
As of June 30, 1996:
Tangible capital (a) 43,471 15.98% 4,081 1.50% 13,603 greater than 5%
Core capital (a) 43,471 15.98% 8,162 3.00% 16,324 greater than 6%
Risk-based
capital (b) 43,836 37.56% 9,337 8.00% 11,671 greater than 10%
=======================================================================================================================
(a) Percentage of Capital to Average Assets
(b) Percentage of Capital to Risk Weighted Assets
(Continued)
F-22
76
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(11) RETIREMENT BENEFIT AND DEFERRED COMPENSATION PLANS
The Bank has a 401(k) Employee Investment Plan covering
substantially all employees. Participation is voluntary and employee
contributions are based on a percentage of compensation, ranging
from a minimum of 1% to a maximum of 10%. The Bank matches the
employee's contribution not to exceed 6% of compensation or a
maximum of $2,400 annually. The Bank contributed a total of $29,565,
$29,466 and $22,697 for the years ended June 30, 1997, 1996 and
1995, respectively.
During 1993, the Bank implemented a supplemental retirement income
plan (SERP) for executive officers. The SERP supplements the 401(k)
plan to bring officer retirement benefits up to targeted levels (2%
for each year of service, not to exceed 70% of final salary). In
addition, the SERP provides death benefit protection for officers'
spouses. The cost of each participant's retirement benefits are
being expensed and accrued over the participant's active employment
so as to result in a liability at the retirement date equal to the
present value of the benefits expected to be provided.
The unit credit method is being used to accrue the projected
benefit. Under this method, the present value of each executive's
benefits will be expensed and accrued over the projected remaining
employment period. At retirement, the present value of the benefit
obligation will be fully accrued. Under the terms of the agreement,
"vesting" is limited to the amount accrued on the books (or less if
the years of service are not sufficient). Therefore, the Bank's
benefit accrual is always equal to or greater than the present value
of the benefit obligation in the event of termination of employment
prior to retirement age.
The accrued liability under the SERP amounted to $158,850 and
$282,770 as of and for the years ended June 30, 1997 and 1996,
respectively. The accrued liability is included in accrued expenses
and other liabilities. The Bank expensed $103,877, $118,403 and
$93,386 under the SERP for the years ended June 30, 1997, 1996 and
1995, respectively.
The Bank has invested in whole-life insurance policies on the lives
of the individual participants for purposes of providing income and
assets in the future to offset the costs of the plan. The life
insurance companies and related investments are as follows at June
30:
1997 1996
-------------------------------------------------------------------------------------------------------
Transamerica $ 2,185,807 2,079,104
Massachusetts Mutual 548,928 536,729
Pacific Mutual 418,458 402,698
-------------------------------------------------------------------------------------------------------
$ 3,153,193 3,018,531
=======================================================================================================
(Continued)
F-23
77
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(11) CONTINUED
During 1993, the Bank implemented a plan for the deferral of
Directors' fees, which is non-qualified for income tax purposes. The
plan is optional, and fees deferred are recorded as an expense and
an unfunded liability of the Bank. The accrued liability for these
benefits amounted to $256,487 and $177,645 at June 30, 1997 and
1996, respectively.
The Bank also has deferred compensation agreements with one current
officer to provide certain death and retirement benefits. The
benefits payable are accrued annually by charges to income amounting
to $1,383 in 1997, 1996 and 1995. The accrued liability for these
benefits amounted to $26,827 and $25,444 at June 30, 1997 and 1996,
respectively, and is included in accrued expenses and other
liabilities.
During 1997, the Bank established a Directors Retirement Plan, which
is a non-qualified plan for income tax purposes that guarantees each
Director will be paid 75% of their current salary for 10 years or
until death after they retire. The benefits payable are accrued
annually and are based on the retirement age selected by each
director and an assumed 4% increase in salaries until retirement.
The accrued liability for these benefits amount to $45,938 at June
30, 1997, and is included in accrued expenses and other liabilities.
(12) STOCK BASED BENEFIT PLANS
The Bank has established an Employee Stock Ownership Plan (ESOP) for
its employees. All employees of the Bank who attain the age of 21
and complete one year of service with the Bank will be eligible to
participate in the ESOP. Participants will become 100% vested in
their accounts after five years of service with the Bank or, if
earlier, upon death, disability or attainment of normal retirement
age. Participants will receive credit for service with the Bank
prior to the establishment of the ESOP. On April 29, 1994 the ESOP
borrowed $960,000 from an unrelated third party lender under a ten
year term bearing interest at prime less .25% per annum, with
payments of principal and interest due quarterly. Annual principal
payments amount to $96,000. The proceeds of the loan were used by
the ESOP to acquire 96,000 shares of the Bank's common stock upon
conversion to a capital stock form of organization. The ESOP holds
the common stock in a trust for allocation among participating
employees, which occurs as the ESOP repays the loan. The ESOP's
sources of repayment of the loan are dividends on the common stock,
if any, either held in trust or allocated to the participants'
accounts, and quarterly contributions from the Bank to the ESOP and
earnings thereon. For the years ended June 30, 1997, 1996 and 1995
the Bank made contributions to the ESOP of $153,895, $160,789 and
$163,778, respectively.
(Continued)
F-24
78
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(12) CONTINUED
The Bank recognizes the cost of the ESOP in accordance with AICPA
Statement of Position 93-6 Employers' Accounting for Employee Stock
Ownership Plans. 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 condition. As shares are
released from collateral, the Bank reports compensation expense
equal to the current market price of the shares and the shares
become outstanding for earnings-per-share computations. Dividends on
allocated shares are recorded as a reduction of retained earnings;
dividends on unallocated shares are recorded as a reduction of debt
and accrued interest. The Bank recognized interest expense of
$57,895, $64,789 and $73,402 and compensation expense of $172,743,
$164,254 and $137,583, respectively, related to the ESOP for the
years ended June 30, 1997, 1996 and 1995. The amount of dividends on
ESOP shares used for debt service by the ESOP for the years ended
June 30, 1997 and 1996 was $50,204 and $52,236, respectively. The
related tax benefits to the Bank for dividends paid to the ESOP were
not material. The ESOP shares as of June 30 were as follows:
1997 1996
--------------------------------------------------------------------------------------------------------------
Allocated shares 31,558 20,366
Shares earned, but unallocated 5,422 5,768
Unearned shares 59,020 69,866
--------------------------------------------------------------------------------------------------------------
96,000 96,000
--------------------------------------------------------------------------------------------------------------
Fair value of unearned shares at June 30 $ 1,128,758 960,658
==============================================================================================================
Effective October 28, 1994 the Bank established a Management
Recognition Plan (MRP) to retain personnel of experience and ability
in key positions of responsibility. Members of the Board of
Directors and certain executive officers of the Bank will receive a
total of 48,000 shares of stock. These shares were issued at the
time the MRP was adopted. Participants in the MRP become one-fifth
vested in the shares that they are awarded under the MRP on each
anniversary of the effective date of the MRP except for certain
members of the Board of Directors who have elected to delay their
vesting.
In accordance with generally accepted accounting principles, common
stock purchased by the MRP represents unearned compensation and,
accordingly, is reflected as a reduction of capital and recognized
as expense and additions to capital as the awards are earned.
Compensation expense in the amount of the fair market value of the
common stock at the date of the grant is recognized on a pro-rata
basis over the years during which the shares are earned. If a
participant terminates employment for reasons other than death,
retirement or disability, he or she forfeits all rights to unvested
shares. The Bank recognized compensation expense of $92,287 and
$198,093 for fiscal years ended June 30, 1997 and 1996 related to
MRP awards.
(Continued)
F-25
79
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(13) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the financial Accounting Standards Board issued
Statement of financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions (SFAS No.
106). SFAS No. 106 is effective for certain enterprises for fiscal
years beginning after December 15, 1994, with earlier adoption
encouraged. The statement generally requires a calculation of the
actuarial present value of anticipated benefits to be provided and
an accrual and allocation of those benefits through a charge to
operating expense in the periods in which employees must render the
services to receive such benefits. The Bank offers a postretirement
health care benefit plan to certain employees and Directors and
adopted the provisions of SFAS No. 106 on July 1, 1995. Such
postretirement benefits costs for 1997 and 1996 were $46,000 and
$45,000, respectively. Prior to adoption of SFAS No. 106, the Bank
recognized the costs of these benefits by expensing the benefits as
paid. During 1995 the Bank paid approximately $5,700 for benefits
under the postretirement health care benefit plan.
Net costs included the following components for the year ended June
30, 1997 and 1996:
Service cost $ 9,000 9,000
Interest cost 22,000 21,000
Amortization of transition obligation 15,000 15,000
------------------------------------------------------------------------------------------------------------------
Net cost $ 46,000 45,000
==================================================================================================================
A summary of the unfunded plan's status and the Bank's recorded
liability recognized in the balance sheet at June 30 follows:
1997 1996
----------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ (181,000) (168,000)
Fully eligible active employees (24,000) (22,000)
Other active participants (132,000) (122,000)
----------------------------------------------------------------------------------------------------------------------
(337,000) (312,000)
Unrecognized transition obligation 262,000 277,000
----------------------------------------------------------------------------------------------------------------------
Recorded liability $ (75,000) (35,000)
======================================================================================================================
The assumed health care cost trend rate used to measure the expected
cost of benefits covered by the plan for 1998 is 8.0%, and decreases
by .5% each year until 2004, when a 5% rate is used as the ultimate
trend rate. An increase of 1% in the assumed health care cost trend
rate for each future year will increase service and interest cost by
$5,000 and increase the accumulated postretirement benefit
obligation for health care benefits by $46,000. A weighted average
assumed discount rate of 7.5% is used to measure the accumulated
postretirement benefit obligation.
(Continued)
F-26
80
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(14) FINANCIAL INSTRUMENTS
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument is represented by the
contract amount of the financial instrument. The Bank uses the same
credit policies in making commitments for off-balance-sheet
financial instruments as it does for on-balance-sheet financial
instruments. Financial instruments with off-balance-sheet risk are
as follows at June 30, 1997:
Contract
amount
----------------------------------------------------------------------------------------------------
Undisbursed lines of credit on home equity loans $ 13,916,000
Residential mortgage loans to be funded 1,851,000
----------------------------------------------------------------------------------------------------
$ 15,767,000
====================================================================================================
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses. The Bank evaluates each customer's
creditworthiness on a case-by-case basis.
The Bank has an unsecured line of credit with First National Bank
of Maryland for $2 million. There were no borrowings as of June
30, 1997.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments (SFAS No. 107), requires
all entities to disclose the estimated fair value of certain on- and
off-balance sheet financial instruments. Fair value estimates and
the method and assumptions used to determine them are set forth
below for financial instruments outstanding at June 30, 1997 and
1996.
(Continued)
F-27
81
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(15) CONTINUED
The carrying value and estimated fair value of financial instruments
is summarized as follows at June 30:
1997 1996
----------------------------------- -----------------------------------
Carrying Fair Carrying Fair
amount value amount value
-----------------------------------------------------------------------------------------------------------------------
Assets:
Cash and interest-bearing deposits $ 13,330,928 13,331,000 12,094,102 12,094,000
Short-term investments 2,722,336 2,722,000 - -
Secured short-term loans to
commercial banks 9,735,532 9,736,000 11,360,341 11,360,000
Securities purchased under
agreements to resell 5,517,903 5,518,000 2,467,214 2,467,000
Securities available for sale 8,162,419 8,162,000 6,758,706 6,759,000
Investment securities 43,614,562 43,361,000 51,965,727 50,916,000
Mortgage-backed securities 22,294,337 22,777,000 29,095,316 29,355,000
Loans receivable 174,877,796 175,303,000 152,754,751 150,058,000
Liabilities:
Savings accounts 232,590,009 232,979,000 222,146,018 223,030,000
Borrowed funds 648,000 648,000 744,000 744,000
Advances payments by borrowers
for taxes, insurance and
ground rents 4,804,060 4,804,000 4,560,492 4,560,000
=======================================================================================================================
CASH, CASH EQUIVALENTS, INVESTMENTS AND MORTGAGE-BACKED SECURITIES
For cash and cash equivalents, the carry value approximates fair
value due to the short maturity of these instruments. The fair value
of U.S. Government and agency obligations, equity securities and
mortgage-backed securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers. The fair value of Federal Home Loan Bank stock
is estimated to be equal to its carrying amount given it is not a
publicly traded equity security, it has an adjustable dividend rate,
and all transactions in the stock are executed at the stated par
value.
LOANS RECEIVABLE
The fair value of loans receivable is estimated by discounting
future cash flows using current rates for which similar loans would
be made to borrowers with similar credit history and maturities.
(Continued)
F-28
82
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(15) CONTINUED
SAVINGS ACCOUNTS, BORROWED FUNDS AND ADVANCE PAYMENTS BY BORROWERS
FOR TAXES, INSURANCE AND GROUND RENTS
The fair value of savings accounts, other than certificate accounts,
and advance payments by borrowers for taxes, insurance and ground
rents is the amount payable on demand at June 30. The fair value of
certificate accounts is based on the lower of redemption (net of
penalty) or discounted value of contractual cash flows. Discount
rates for certificates of deposit are estimated using the rates
currently offered by the Bank for accounts with similar remaining
maturities. Borrowed funds are considered to be at fair value due to
their adjustable rate nature.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
value of unrecognized financial instruments is estimated to equal
the carrying value. See note 14 to the consolidated financial
statements for the carrying amounts of unrecognized financial
instruments.
(16) PLAN OF REORGANIZATION, STOCK ISSUE AND STOCKHOLDERS' EQUITY
In March 1994, the Association's members approved a plan of
reorganization from a mutual savings association to a mutual holding
company. Pursuant to the plan of reorganization the Association
transferred substantially all of its assets and all of its
liabilities to a new federally-chartered stock savings association
which became a wholly-owned subsidiary of Leeds Federal Bankshares,
M.H.C. (MHC), a federal mutual holding company. The reorganization
was consummated on April 29, 1994.
The principal purpose of the reorganization was to reorganize the
Association into a corporate form that provides it with more
flexibility to raise capital, diversify operations and establish
employee incentive plans. Under the terms of the reorganization the
membership rights of the Association's members became rights in the
mutual holding company. The reorganization was accounted for in a
manner similar to that of a pooling-of-interests.
As discussed in note 1 to the financial statements, the Association
also adopted a federal savings bank charter and changed its name to
Leeds Federal Savings Bank.
(Continued)
F-29
83
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(16) CONTINUED
Under the corporate form of organization, the Bank has the authority
to issue shares of capital stock to persons other than MHC up to
49.9% (a minority ownership interest) of the shares issued and
outstanding. The reorganization was consummated on April 29, 1994,
with the issuance and sale of 1.2 million shares of common stock at
$10.00 per share in a public offering and the issuance of 2.2
million shares of common stock to MHC by the Bank.
OTS regulations impose limitations on all capital distributions by
savings institutions. Capital distributions include cash dividends,
payments to repurchase or otherwise acquire the savings
association's share, payments to shareholders of another institution
in a cash-out merger, and other distributions charged against
capital. The rule establishes three tiers of institutions. An
institution that exceeds all fully phased-in capital requirements
before and after a proposed capital distribution ("Tier 1
institution") may, after prior notice but without the approval of
the OTS, make capital distributions during a year up to 100% of its
net income to date during the year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the year;
or 75% of its net income over the most recent four-quarter period.
Any additional capital distributed requires prior regulatory
approval.
An institution that meets its regulatory capital requirement, but
not its fully phased-in capital requirement before or after its
capital distribution ("Tier 2 institution") may, after prior notice
but without the approval of the OTS, make capital distributions of:
up to 75% of its net income over the most recent four quarter period
if it satisfies the risk-based capital requirement that would be
applicable to it on January 1, 1993, computed based on its current
portfolio; up to 50% of its net income over the most recent four
quarter period if it satisfies the risk based capital standard that
was applicable to it on January 1, 1991, computed based on its
current portfolio; and up to 25% of its net income over the most
recent four quarter period if it satisfies its current risk based
capital requirement. In computing the institution's permissible
percentage of capital distributions, previous distributions made
during the prior four period quarter must be included.
A savings institution that does not meet its current regulatory
capital requirement before or after payment of a proposed capital
distribution ("Tier 3 institution") may not make any capital
distributions without the prior approval of the OTS.
In addition, the OTS would prohibit a proposed capital distribution
by any institution which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. In addition, FDICIA
provides that, as a general rule, a financial institution may not
make a capital distribution if it would be undercapitalized after
making the capital distribution. Also, an institution meeting the
Tier 1 capital criteria which has been notified that it needs more
than normal supervision will be treated as a Tier 2 or Tier 3
institution unless the OTS deems otherwise.
(Continued)
F-30
84
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(16) CONTINUED
MHC waived receipt of its quarterly dividends, thereby reducing the
actual dividend payout. The dollar amount of dividends waived by MHC
are considered as a restriction on the retained earnings of the
Bank. The amount of any dividend waived by MHC shall be available
for declaration as a dividend solely to MHC. At June 30, 1997, the
cumulative amount of such waived dividends was $4,129,400.
(17) NET INCOME PER SHARE OF COMMON STOCK
Primary net income per share for the years ended June 30, 1997, 1996
and 1995 has been computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding of
3,423,560, 3,399,743 and 3,365,776, respectively.
Weighted average shares used in computing fully diluted net income
per common share were 3,436,657, 3,399,743 and 3,369,806 for the
years ended June 30, 1997, 1996 and 1995, respectively. It is
assumed that all dilutive stock options are exercised at the later
of the beginning of the year or the date of the grant, and the
proceeds used to purchase shares of common stock. The fully diluted
weighted average shares reflect the maximum dilutive effect of stock
issuable upon the exercise of stock options.
(18) STOCK OPTION PLAN
In October 1994, the Bank approved the Stock Option Plan (Option
Plan), whereby 120,000 shares of common stock were granted to
officers and directors of the Bank. Options granted under the Option
Plan may be Incentive Stock Options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, or
nonqualifying stock options. The 48,000 shares for directors vested
at grant date, while the 72,000 shares for the officers vest at a
rate of 20 percent per year. Options are exercisable at the market
price of the common stock on the date of grant which was $11.875 per
share. The options must be exercised within 10 years from the date
of grant.
(Continued)
F-31
85
LEEDS FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
===============================================================================
(18) CONTINUED
A summary of changes in shares under option and options exercisable
for the years ended June 30 is presented below:
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 120,000 120,000 -
Granted - - 120,000
Canceled (5,264) - -
Exercised (6,736) - -
-----------------------------------------------------------------------------------------------------------------
Outstanding at end of year 108,000 120,000 120,000
-----------------------------------------------------------------------------------------------------------------
Exercisable at end of year 84,000 76,800 62,400
=================================================================================================================
F-32
86
BOARD OF DIRECTORS
[PHOTO]
ROW 1: Gordon E. Clark (President and CEO), John F. Amer (Chairman), Marguerite
E. Wolf (Vice Chairman)
ROW 2: Joan H. McCleary (Secretary to the Board), John F. Doyle, Raymond J.
Hartman, Jr.
Photography by Jean Clayton
EXECUTIVE OFFICERS
Gordon E. Clark, President and CEO
Kathleen G. Trumpler, Treasurer and CFO Vernon J. Miller, Vice President
Dale R. Douglas, Vice President Margaret I. Balsamo, Secretary
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 4:00 p.m., on Wednesday,
October 22, 1997, at 1101 Maiden Choice Lane, Baltimore, Maryland.
STOCK LISTING
The Bank's Common Stock trades over-the-counter on the Nasdaq National Market
under the symbol LFED.
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Ave., NW
Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITOR
KPMG Peat Marwick LLP
111 South Calvert Street
Baltimore, Maryland 21202
TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
ANNUAL REPORT ON FORM 10-KSB
A copy of the Bank's Form 10-KSB for the fiscal year ended June 30, 1997, will
be furnished without charge to Stockholders as of September 5, 1997, upon
written request to the Secretary, Leeds Federal Savings Bank, 1101 Maiden Choice
Lane, Baltimore, Maryland 21229 410-242-1234.