SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________________
Commission File No. 0-23645
LEEDS FEDERAL BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
United States 52-2062351
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(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
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to
Section 12(g) of the Act: Common Stock, par value $1.00 per share
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(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 aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing sales price of the
Registrant's stock, as reported on the Nasdaq National Market on August 20,
2002, was approximately $33.6 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 August 20, 2002, there
were issued and outstanding 4,550,931 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, 2002 (Parts II and III).
2. Proxy Statement for the 2002 Annual Meeting of Stockholders (Parts I and
III).
PART I
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ITEM 1. Business
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General
Leeds Federal Bankshares, Inc.
Leeds Federal Bankshares, Inc. (the "Company") is a federal corporation
which was organized on November 21, 1997. The only significant asset of the
Company is its investment in Leeds Federal Savings Bank (the "Bank"). The
Company is majority-owned by Leeds Federal Bankshares, M.H.C., a
federally-chartered mutual holding company (the "Mutual Holding Company"). At
June 30, 2002, the Company had total assets of $444.3 million and stockholders'
equity of $52.7 million.
The Company's principal office is located at 1101 Maiden Choice Lane,
Baltimore, Maryland 21229, and its telephone number at that address is (410)
242-1234.
Leeds Federal Savings Bank
The Bank is a federally-chartered savings bank headquartered in Baltimore,
Maryland. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The
Bank has been a member of the Federal Home Loan Bank System ("FHLB") since 1938.
The Bank is a community-oriented savings bank 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
mortgage loans and adjustable rate home equity loans and, to a lesser extent,
commercial real estate loans and consumer loans. To the extent available funds
exceed local mortgage loan demand, the Bank also invests in mortgage-backed
securities issued or guaranteed by the United States Government or agencies
thereof, secured short-term loans to commercial banks, interest-earning deposits
in other institutions, and other short- and medium-term investments.
The Bank's executive offices are located at 1101 Maiden Choice Lane,
Baltimore, Maryland 21229, and its telephone number at that address is (410)
242-1234.
Recent Developments
On August 16, 2001, the Company, the Mutual Holding Company and the Bank
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Northwest Bancorp, Inc. ("Northwest Mid-Tier"), its mutual holding company,
Northwest Bancorp, MHC ("Northwest MHC"), and its subsidiary savings bank,
Northwest Savings Bank ("Northwest Bank") Under the terms of the Merger
Agreement, the Mutual Holding Company would be merged with and into Northwest
MHC with Northwest MHC as the surviving institution, and the Company would be
merged with and into Northwest Mid-Tier with Northwest Mid-Tier as the surviving
institution. The Company's stockholders other than the Mutual Holding Company
would receive $32.00 in cash for each share of Leeds Mid-Tier.
The Merger Agreement provided that either party may terminate the Merger
Agreement if the closing date shall not have occurred on or before April 30,
2002, subject to extension in certain circumstances. On April 30, 2002, the
parties entered into an Agreement extending the deadline for closing the
acquisition until August 28, 2002. On August 28, 2002, the parties entered into
a Second Amendment to Agreement and Plan of Merger further extending the
deadline for closing the acquisition until December 31, 2002. On August 28,
2002, the parties also entered into a Third Amendment to Agreement and Plan of
Merger to modify the structure of the transaction by eliminating the merger of
the Company into Northwest Mid-Tier and to make other technical changes to the
Merger Agreement to effect the revised structure. As a result of such change,
the Bank will become a wholly-owned subsidiary of Northwest MHC and the Bank
will not be part of the Northwest Mid-Tier consolidated group immediately after
the merger. The $32.00 per share cash consideration to be paid to the public
stockholders of the Company and all other terms and conditions of the merger
will remain unchanged.
1
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 economic base, although it is significantly influenced by the
federal government and the defense industry. The federal government is one of
the area's largest employers. Headquartered within the Bank's market area are a
number of federal government agencies, including the Social Security
Administration and the Health Care Financing Administration. Other major
employers and industries within the Bank's market area include General Motors
Truck and Bus Group, Pepsi-Cola Company, Black and Decker Corporation, Johns
Hopkins University, the University of Maryland--Baltimore County, the University
of Maryland--Baltimore, McCormick and Company, Inc., Bethlehem Steel Corp.,
Northrup Grumman, Fort Meade, Proctor and Gamble Cosmetic and Fragrance
Products, The Baltimore Sun, Baltimore Gas and Electric Company, Giant Food,
Inc., Verizon, Blue Cross and Blue Shield of Maryland, Crown Central Petroleum,
St. Agnes Hospital, and The Ryland Group, Inc. The Baltimore metropolitan area
also has an active tourism industry, and is home to the Baltimore Orioles
professional baseball team, the Baltimore Ravens professional football team, the
Inner Harbor, and the National Aquarium.
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The principal
components of the Bank's loan portfolio are fixed-rate and adjustable-rate
conventional first mortgage loans secured by one- to four-family residential
real estate, home equity loans, and, to a much lesser extent, commercial real
estate and consumer loans. At June 30, 2002, the Bank's net loans receivable
totaled $245.0 million, of which $233.9 million, or 95.5%, were one- to
four-family residential real estate mortgage loans, $10.9 million, or 4.5%, were
home equity loans and $3.6 million, or 1.4%, were consumer 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, 2002, mortgage-backed securities totaled $33.0 million, or
7.4%, of total assets. At June 30, 2002, 2.3% of the Bank's mortgage-backed
securities were secured by adjustable rate mortgage ("ARM") loans. Pass-through
certificates totaled $32.9 million, or 99.7%, of the Bank's total
mortgage-backed securities portfolio at June 30, 2002. All of the Bank's
pass-through certificates are insured or guaranteed by Freddie Mac, Ginnie Mae,
or Fannie Mae. CMOs totaled $245,000, or 0.7%, of the Bank's total
mortgage-backed securities portfolio at June 30, 2002, all of which were backed
by federal agency collateral. The Bank's policy is to hold mortgage-backed
securities to maturity.
2
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,
---------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential
and construction ................ $233,926 95.5% $206,635 95.1% $204,581 93.3% $189,326 92.9% $172,152 90.5%
Home equity ....................... 10,913 4.5 12,131 5.6 11,071 5.1 11,454 5.6 12,769 6.7
Commercial ........................ -- -- -- -- 2,500 1.1 2,500 1.2 3,738 2.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans ......... 244,839 100.0 218,766 100.7 218,152 99.5 203,280 99.7 188,659 99.2
Consumer loans ...................... 3,572 1.4 4,133 1.9 3,807 1.7 3,976 2.0 5,072 2.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable .......... 248,411 101.4 222,899 102.6 221,959 101.2 207,256 101.7 193,731 101.9
Less:
Undisbursed portion of loans
in process ...................... 2,597 (1.1) 4,436 (2.0) 1,248 (.6) 1,905 (.9) 2,025 (1.1)
Unearned loan fees ................ 255 (.1) 548 (.3) 765 (.3) 740 (.4) 802 (.4)
Allowance for loan losses ......... 559 (.2) 732 (.3) 742 (.3) 725 (.4) 723 (.4)
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable, net ..... $245,000 100.0% $217,183 100.0% $219,204 100.0% $203,886 100.0% $190,181 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ========
Mortgage-backed securities .......... $ 32,960 $ 20,021 $ 8,317 $ 10,008 $ 16,412
======== ======== ======== ======== ========
3
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, 2002. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable rate ("ARM") loans, floating
rate loans and mortgage-backed securities are included in the period in which
interest rates are next scheduled to adjust rather than in which they
contractually mature, and fixed rate loans are included in the period in which
the final contractual repayment is due.
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
and construction ............... $ 6,934 $ 5,333 $ 7,021 $28,034 $72,741 $113,863 $233,926
Home equity ...................... 6,721 178 1,310 2,694 10 -- 10,913
Consumer loans ................... 603 1,056 1,701 103 109 -- 3,572
------- ------- ------- ------- ------- ------- -------
Total loans .................... 14,258 6,567 10,032 30,831 72,860 113,863 248,411
------- ------- ------- ------- ------- ------- -------
Mortgage-backed securities (1) ..... 2,282 11 851 61 439 29,455 33,099
------- ------- ------- ------- ------- ------- -------
Total loans and mortgage-backed
securities ..................... $16,540 $ 6,578 $10,883 $30,892 $73,299 $143,318 $281,510
======= ======= ======= ======= ======= ======== ========
- ----------
(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, 2002, the dollar amount of fixed rate
loans and mortgage-backed securities that mature after June 30, 2003, and all
adjustable rate loans and mortgage-backed securities that mature or reprice
after June 30, 2003.
Fixed Adjustable Total
-------- ---------- --------
(In Thousands)
Real estate loans:
One- to four-family residential
and construction ....................... $218,602 $ 8,390 $226,992
Home equity .............................. 4,192 -- 4,192
Consumer loans ........................... 2,969 -- 2,969
-------- --------- --------
Total .................................... $225,763 $ 8,390 $234,153
======== ========= ========
Mortgage-backed securities (1) ............. $ 30,817 $ -- $ 30,817
======== ========= ========
- ----------
(1) Does not include discounts and premiums.
One- to Four-Family Residential and Construction Real Estate Loans. The
Bank's primary lending activity currently consists of the origination of fixed
rate one- to four-family owner-occupied residential mortgage loans, virtually
all of which are collateralized by properties located in the Bank's market area.
The Bank also originates fixed/adjustable first mortgage loans, which have fixed
rates for the first five or seven years, then adjust annually thereafter. The
Bank also originates one- to four-family construction loans that convert to
permanent loans after the initial construction period, which generally does not
exceed nine months. The Bank is a portfolio lender. It has not sold loans in the
secondary mortgage market; however, it may conduct limited secondary market
sales in the future. One- to four-family loans are underwritten and originated
according to policies approved by the board of directors.
The Bank currently offers fixed rate one- to four-family residential
mortgage loans with terms ranging from 5 to 30 years. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The average length of time that the Bank's one- to
four-family residential mortgage loans remain outstanding varies significantly
depending upon trends in market interest rates and other factors. In recent
years, the average maturity of the Bank's mortgage loans has decreased
significantly due to the unprecedented volume of refinancing activity.
Accordingly, estimates of the average maturity 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
4
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 provide the Bank with the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the underlying real property serving as
security for the loan. Due-on-sale clauses are an important means of adjusting
the rates on the Bank's fixed rate mortgage loan portfolio, and the Bank has
generally exercised its rights under these clauses.
Regulations limit the amount that a savings institution may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Bank's lending policies limit the maximum loan-to-value ratio
on fixed rate loans without private mortgage insurance to 80% of the lesser of
the appraised value or the purchase price of the property to serve as collateral
for the loan.
The Bank makes one-to-four family real estate loans with loan-to-value
ratios of up to 95%; however, for one- to four-family real estate loans with
loan-to-value ratios greater than 80%, the Bank requires the first 20% of the
loan amount to be covered by private mortgage insurance. The Bank has a
first-time home buyer program targeted to low to moderate income borrowers. The
loan-to-value ratio on these loans is 100%. The Bank requires fire and casualty
insurance, as well as a title policy, on all properties securing real estate
loans made by the Bank.
Commercial Real Estate Loans. The Bank originates commercial real estate
loans on a limited basis, although the Bank had no such loans outstanding at
June 30, 2002. 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 its loan originations in the foreseeable future.
Home Equity Loans. The Bank also originates variable and fixed rate home
equity loans. As of June 30, 2002, variable rate home equity loans totaled $6.7
million, or 3.0%, of the Bank's total loan portfolio. The interest rates on the
Bank's variable rate home equity loans adjust based on changes in the prime
interest rate and are generally for terms of up to 15 years. At June 30, 2002,
fixed rate home equity loans totaled $4.2 million. The Bank's home equity loans
are secured by the borrower's principal residence with a maximum loan-to-value
ratio, including the principal balances of both the first and second mortgage
loans, of 75% or less.
Consumer Loans. To a much lesser extent, the Bank also originates consumer
loans collateralized principally by automobiles and deposit accounts. Consumer
loans involve greater credit risk than residential mortgage loans, particularly
in the case of consumer loans that are secured by assets that depreciate
rapidly, such as automobiles.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as mortgage brokers, real
estate agent referrals, existing customers, borrowers, builders, attorneys, and
walk-in customers. Upon receiving a loan application, the Bank obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Bank appraises the real estate
intended to collateralize the proposed loan. An underwriter in the Bank's loan
department checks the loan application file for accuracy and completeness, and
verifies the information provided. Pursuant to the Bank's written loan policies,
all loans are 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, 2002, the Bank had outstanding loan
commitments of
5
$4.0 million. This amount does not include $13.3 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
loan activity for the periods indicated.
Years Ended June 30,
------------------------------
2002 2001 2000
-------- -------- --------
(In Thousands)
Loans receivable at beginning of period,
excluding loans in process .................. $218,463 $220,711 $205,351
Originations:
Real estate:
One- to four-family residential ........... 87,206 31,806 38,599
Home equity (1) ........................... 6,952 7,322 4,407
Commercial ................................ -- -- --
Consumer passbook loans (2) ................. 26 38 9
Consumer loans, other ....................... 1,142 2,176 1,952
-------- -------- --------
Total originations ........................ 95,326 41,342 44,967
-------- -------- --------
Repayments .................................... (67,934) (41,080) (29,590)
Transfer to real estate owned ................. (38) (2,500) --
Loan charge-off ............................... (3) (10) (17)
-------- -------- --------
Net loan activity ............................. 27,351 (2,248) 15,360
-------- -------- --------
Total loans receivable at end of period,
excluding loans in process ............ $245,814 $218,463 $220,711
======== ======== ========
- ----------
(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, 2002, the Bank had $255,000 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 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 $234,000, $200,000 and $156,000, for the fiscal years ended June 30, 2002,
2001 and 2000, respectively.
Mortgage-Backed Securities
The Bank's business also involves investments in mortgage-backed
securities. At June 30, 2002, 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
6
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,
----------------------------------
2002 2001 2000
------- ------- -------
(In Thousands)
Mortgage-backed securities at
beginning of period ................... $20,021 $ 8,317 $10,008
Purchases ............................... 19,395 13,778 400
Repayments .............................. (6,496) (2,030) (2,099)
Other (1) ............................... (40) (44) 8
------- ------- -------
Mortgage-backed securities at
end of period ......................... $32,960 $20,021 $ 8,317
======= ======= =======
- ----------
(1) Includes net discount/premium amortization.
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,
----------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Pass-through certificates:
Adjustable ............................. $ 2,283 6.9% $ 3,541 17.7% $ 4,563 54.9%
Fixed .................................. 30,571 92.8 16,058 80.2 3,228 38.8
------- ----- ------- ----- ------- -----
Total pass-through certificates ...... 32,854 99.7 19,599 97.9 7,791 93.7
------- ----- ------- ----- ------- -----
CMOs:
Adjustable ............................. 245 .7 486 2.4 548 6.6
------- ----- ------- ----- ------- -----
Total CMOs ........................... 245 .7 486 2.4 548 6.6
------- ----- ------- ----- ------- -----
Unamortized discount and premium ....... (139) (.4) (64) (.3) (22) (.3)
------- ----- ------- ----- ------- -----
Total mortgage-backed securities ..... $32,960 100.0% $20,021 100.0% $ 8,317 100.0%
======= ===== ======= ===== ======= =====
At June 30, 2002, mortgage-backed securities totaled $33.0 million, or
7.4%, of total assets. ARM loans collateralized 6.9% of the Bank's
mortgage-backed securities portfolio. Pass-through certificates totaled $32.8
million, or 99.7%, of the Bank's total mortgage-backed securities portfolio at
June 30, 2002. All of the Bank's pass-through certificates are insured or
guaranteed by Freddie Mac, GNMA, or FNMA. CMOs totaled $245,000, or 0.7%, 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, 2002, all the Bank's
mortgage-backed securities were held for investment. At June 30, 2002, the
Bank's mortgage-backed securities portfolio had a fair market value of $33.5
million.
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when a loan is
15 days past due, a late charge notice is sent to the borrower requesting
payment, plus a late charge. If delinquency continues, on the first day of the
second month, a delinquent notice is mailed along with a letter advising that
the mortgagors are in violation of the terms of their mortgage contract. If a
loan becomes 60 days past due, the loan becomes subject to possible legal
action. The Bank's attorney has been authorized by the Board of Directors to
send a letter on the first day of the third month advising of pending legal
action. This letter grants mortgagors an additional 15 days to bring the account
to date prior to the start of any legal action. If not paid, foreclosure
proceedings are initiated.
7
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 real estate owned until such time as it is sold.
When real estate owned 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.
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, 2002, the Bank had no loans on nonaccrual
status. At June 30, 2002, the Company had $2.5 million in real estate owned,
consisting primarily of a commercial property. A foreclosure sale for the
property was held on June 10, 2002. The settlement of the sale has not yet
occurred.
At June 30,
--------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
Delinquent loans:
One- to four-family residential ....... $ 232 $ -- $ 48 $ 264 $ 19
Consumer loans ........................ 23 22 -- -- --
Commercial loans ...................... -- -- 2,500 2,500 2,500
------ ------ ------ ------ ------
Total delinquent loans .............. $ 255 $ 22 $2,548 $2,764 $2,519
------ ------ ------ ------ ------
Total real estate owned (1) ............. $2,538 $2,540 $ -- $ -- $ --
Other nonperforming assets .............. -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming assets .......... $2,538 $2,540 $ -- $ -- $ --
====== ====== ====== ====== ======
Total loans delinquent 90 days or
more to net loans receivable .......... .01% .01% 1.16% 1.36% 1.32%
Total loans delinquent 90 days or
more to total assets .................. .01% .01% .76% .83% .83%
Total delinquent loans and nonperforming
assets to total assets ................ .63% .67% .76% .83% .83%
- ----------
(1) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, these
properties are recorded at the lower of their fair value less estimated
costs to sell or the principal balance of the related loans.
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,
------------------------
2002 2001 2000
------ ------ ------
(In Thousands)
Loans delinquent 60-89 days ........................ $ 226 $ 382 $ 56
Loans delinquent 90 days or more ................... 255 22 2,548
------ ------ ------
Total delinquent 60 days or more ............... $ 481 $ 404 $2,604
====== ====== ======
8
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at June 30, 2002.
At June 30, 2002
-------------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent ............................................... $ 195 3
Loans 90 days or more delinquent ............................................. 232 2
Commercial real estate:
Loans 60 to 89 days delinquent ............................................... -- --
Loans 90 days or more delinquent ............................................. -- --
Consumer loans 90 days or more delinquent ...................................... 23 5
Foreclosed real estate and repossessions ....................................... 2,538 2
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, 2002, the
Bank had no loans classified as special mention.
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At June 30,
------------------------
2002 2001 2000
------ ------ ------
(In Thousands)
Substandard assets (1) .............................. $2,770 $2,591 $2,557
Doubtful assets ..................................... 5 -- 43
Loss assets ......................................... -- -- --
------ ------ ------
Total classified assets ......................... $2,775 $2,591 $2,600
====== ====== ======
- ----------
(1) Includes real estate owned and other nonperforming assets.
Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
estimated losses that may be incurred. The Bank regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectability of interest and principal may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral. During the year ended June 30, 2002, the Bank reduced its allowance
for loan losses by $170,000. The Bank has experienced continued high credit
quality, even in the current economic downturn. During the years ended June 30,
2001 and 2000, the Bank added $154 and $21,000, respectively, to the provision
for loan losses. The Bank's allowance for loan losses totaled $559,000, $732,000
and $742,000, at June 30, 2002, 2001 and 2000, respectively.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowances may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination processes, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize
9
additions to the allowance based on their judgments about information available
to them at the time of their examinations.
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated. Of the
total allowance for loan losses at June 30, 2002, $489,000 has been allocated to
one- to four-family residential real estate loans, and $70,000 to consumer
loans.
At or For the Years Ended June 30,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in Thousands)
Total loans outstanding .......................... $245,000 $217,183 $219,204 $203,886 $190,181
Average loans outstanding ........................ 235,610 216,467 216,907 195,371 182,882
Allowance balances (at beginning of period) ...... 732 742 725 723 536
Provision for losses on real estate loans ........ (170) -- 21 39 192
Charge-offs ...................................... (3) (10) (4) (37) (5)
-------- -------- -------- -------- --------
Allowance balances (at end of period) ............ $ 559 $ 732 $ 742 $ 725 $ 723
======== ======== ======== ======== ========
Allowance for loan losses as a percentage of
net loans receivable at end of period .......... .23% .34% .33% .35% .38%
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, 2002, $125.0 million, or 85.8%, of the Bank's investment portfolio was
scheduled to mature in one year or less, and $20.7 million, or 14.2%, was
scheduled to mature in over five years.
The Bank is required under federal regulations to maintain liquid assets
that may be invested in specified short-term securities and certain other
investments. Management believes that the higher levels are prudent because of
the possibility that interest rates may increase. By maintaining high levels of
liquidity, the Bank is able to reinvest its assets more quickly in response to
changes in market interest rates, thereby reducing its exposure to interest rate
volatility. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short-term demand for funds to be
used in the Bank's loan origination and other activities. Currently, due to
savings deposit growth, the Bank's liquidity levels are higher than they have
been in recent periods.
Investment Portfolio. The following table sets forth the carrying value of
the Bank's investment portfolio at the dates indicated.
At June 30,
----------------------------
2002 2001 2000
-------- -------- --------
(In Thousands)
Investment securities:
U.S. Government and agency obligations .......... $ 16,426 $ 61,611 $ 69,844
Freddie Mac preferred stock ..................... 4,168 4,636 2,759
Other equity securities ......................... 104 74 48
-------- -------- --------
Total investment securities ................... 20,698 66,321 72,651
Short-term investments/money market accounts ...... 100,613 35,334 9,552
Secured short-term loans to commercial banks (1) .. 19,849 16,225 9,563
FHLB stock ........................................ 2,578 2,187 2,187
Interest-earning deposits in other institutions ... 1,929 2,199 1,982
-------- -------- --------
Total investments ............................. $145,667 $122,266 $ 95,935
======== ======== ========
- ----------
(1) Includes Federal Funds sold and other deposits.
10
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, 2002.
At June 30, 2002
------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total
------------------- ------------------- ------------------- ------------------- ----------------------------
Annualized Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- -------- ----------
(Dollars in Thousands)
Investment securities:
US. Government
agency securities . $ -- --% $ -- --% $ 500 5.67% $15,926 6.53% $ 16,426 $ 16,377 6.50%
Freddie Mac preferred
stock ............. -- -- -- -- -- -- 4,168 1.37 4,168 4,168 1.37
Other equity
securities ........ -- -- -- -- -- -- 104 3.84 104 104 3.84
-------- ---- ------ ---- ------ ---- ------- ---- -------- -------- ----
Total investment
securities ...... -- -- -- -- 500 5.67 20,198 5.45 20,698 20,649 5.48
Short-term investments/
money market accounts 100,613 1.88 -- -- -- -- -- -- 100,613 100,613 1.88
Secured short-term
loans to commercial
banks ............... 19,849 1.54 -- -- -- -- -- -- 19,849 19,849 1.54
FHLB stock ............ 2,578 5.31 -- -- -- -- -- -- 2,578 2,578 5.31
Interest-earning
deposits in other
institutions ........ 1,929 2.51 -- -- -- -- -- -- 1,929 1,929 2.51
-------- ---- ------ ---- ------ ---- ------- ---- -------- -------- ----
Total investments . $124,969 1.91% $ -- --% $ 500 5.67% $20,198 5.45% $145,667 $145,618 2.41%
======== ==== ====== ==== ====== ==== ======= ==== ======== ======== ====
11
Sources of Funds
General. The Bank accepts deposits from its main office in Arbutus,
Maryland and from its branch office in Elkridge, Maryland. Deposits are the
major source of the Bank's funds for lending and other investment purposes.
Other sources of funds are the amortization and prepayment of loans and
mortgage-backed securities, maturing 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. The Bank offers 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 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 does not obtain funds through brokers, and does not offer
negotiated rates on certificates of deposit in excess of $100,000.
Savings Portfolio. Savings in the Bank as of June 30, 2002 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 $ 1,757 .46%
.75 None NOW Accounts 300 11,345 2.91
2.25 None Passbooks and Statement Savings 50 24,296 6.32
2.86 None Money Market Accounts 100 58,059 15.11
2.90 None Club Accounts 5 226 .06
Certificates of Deposit
-----------------------
2.42 3 months Fixed term, fixed rate 1,000 276 .07
2.60 6 months Fixed term, fixed rate 1,000 2,990 .78
3.38 12 months Fixed term, fixed rate 1,000 29,181 7.59
3.16 13 months Fixed term, fixed rate 10,000 307 .08
4.27 18 months Fixed term, fixed rate 1,000 6,445 1.68
4.27 18 months Fixed term, fixed rate 5,000 166,486 43.36
5.00 24 months Fixed term, fixed rate 1,000 22,928 5.97
6.62 25 months Fixed term, fixed rate 5,000 15,437 4.02
5.40 36 months Fixed term, fixed rate 1,000 18,032 4.69
5.47 48 months Fixed term, fixed rate 1,000 1,075 .28
5.88 60 months Fixed term, fixed rate 1,000 18,991 4.94
3.71 Various (15-20) Fixed term, fixed rate 5,000 3,732 .97
4.10 Various (14-25) Fixed term, variable rate 1,000 2,540 .65
6.72 Various (3-60) Fixed term, fixed rate 90,000 217 .06
-------- ------
$384,320 100.00%
======== ======
12
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,
-------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------- -------------------------------
Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1) Change(2)
-------- ---------- --------- -------- ---------- --------- -------- ---------- ---------
(Dollars in Thousands)
Anniversary bonus account(3) ..... $ -- --% $(3,189) $ 3,189 .99% $ (414) $ 3,603 1.28% $ (863)
NOW and demand accounts .......... 13,102 3.41 2,312 10,790 3.36 1,639 9,151 3.25 2,178
Passbooks, statements and clubs .. 24,522 6.38 2,742 21,780 6.80 336 21,444 7.61 1,283
Money market deposit accounts .... 58,059 15.10 12,109 45,950 14.34 (4,471) 50,421 17.88 (10,948)
Time deposits that mature:
within 12 months ............... 206,299 53.68 74,277 132,022 41.20 (543) 132,565 47.03 34,002
within 13-36 months ............ 75,007 19.52 (22,053) 97,060 30.29 40,539 56,521 20.05 (19,534)
beyond 36 months ............... 7,331 1.91 (2,349) 9,680 3.02 1,519 8,161 2.90 1,122
-------- ------ ------- -------- ------ ------- -------- ------ -------
Total deposits ............... $384,320 100.0% $63,849 $320,471 100.0% $38,605 $281,866 100.00% $ 7,240
======== ====== ======= ======== ====== ======= ======== ====== =======
At June 30,
-------------------------------
1999
-------------------------------
Balance Percent(1) Change(2)
-------- ---------- ---------
(Dollars in Thousands)
Anniversary bonus account(3) ..... $ 4,466 1.63% $ (691)
NOW and demand accounts .......... 6,973 2.54 685
Passbooks, statements and clubs .. 20,161 7.34 1,809
Money market deposit accounts .... 61,369 22.35 (2,423)
Time deposits that mature:
within 12 months ............... 98,563 35.89 7,397
within 13-36 months ............ 76,055 27.69 21,692
beyond 36 months ............... 7,039 2.56 887
-------- ------ -------
Total deposits ............... $274,626 100.00% $29,356
======== ====== =======
- ----------
(1) Represents percentage of total deposits.
(2) Represents increase (decrease) in balance from end of prior period.
(3) The Bank discontinued these accounts in 2002.
13
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,
------------------------------
2002 2001 2000
-------- -------- --------
Rate (In Thousands)
- ----
0.00 - 2.99% .................................. $ 48,977 $ -- $ --
3.00 - 5.99% .................................. 199,462 163,377 140,298
6.00 - 7.99% .................................. 40,198 75,385 56,949
-------- -------- --------
$288,637 $238,762 $197,247
======== ======== ========
Large Certificates of Deposit Maturities. The following table indicates the
amount of the Bank's certificates of deposit of $100,000 or more by time
remaining until maturity at June 30, 2002. This amount does not include other
savings account deposits of $100,000 or more, which totaled approximately $22.6
million at June 30, 2002.
Certificates
Maturity Period of Deposit
- --------------- --------------
(In Thousands)
Three months or less ........................................... $ 21,080
Three through six months ....................................... 26,052
Six through twelve months ...................................... 37,294
Over twelve months ............................................. 28,708
--------
Total ..................................................... $113,134
========
Change in Deposits. The following table sets forth changes in total
deposits of the Bank for the periods indicated:
At or For the Years Ended June 30,
----------------------------------
2002 2001 2000
-------- -------- --------
(In Thousands)
Balance at beginning of period ............. $320,471 $281,866 $274,626
Net (withdrawals)/deposits ................. 47,174 22,969 (6,650)
Interest credited .......................... 16,675 15,636 13,890
-------- -------- --------
Ending balance ............................. $384,320 $320,471 $281,866
======== ======== ========
Net increase in deposits ................... $ 63,849 $ 38,605 $ 7,240
======== ======== ========
Borrowings
Deposits are the Bank's primary source of funds. The Bank may also obtain
funds from the FHLB and through reverse repurchase agreements. FHLB advances are
collateralized by selected assets of the Bank. Such advances are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the OTS and the
FHLB. The maximum amount of FHLB advances to a member institution generally is
reduced by borrowings from any other source. In 1994, the Employee Stock
Ownership Plan and Trust ("ESOP") borrowed funds from an unrelated third party
lender to finance the purchase of 144,000 shares of Common Stock. The loan will
be repaid principally from the Bank's contributions to the ESOP over a period of
up to ten years. At June 30, 2002, the balance on the ESOP loan was $79,000 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
securities underlying the agreements remain an asset of the Bank. There were no
securities sold under agreements to repurchase outstanding at June 30, 2002.
14
Competition
As of June 30, 2002, the Bank was the third largest savings institution
headquartered in the Bank's market area. The Bank encounters strong competition
both in attracting deposits and in originating real estate and other loans. Its
most direct competition for deposits has historically come from commercial and
savings banks, other savings associations, and credit unions in its market area.
Competition for loans comes from such financial institutions as well as mortgage
banking companies. The Bank expects continued strong competition in the
foreseeable future, including increased competition from "super-regional" banks
entering the market by purchasing banks and savings banks. These super-regional
banks have greater financial and marketing resources than the Bank. The Bank
competes for savings deposits by offering depositors a high level of personal
service and a wide range of competitively priced financial services. In recent
years, additional strong competition has come from stock and bond dealers and
brokers. The Bank competes for real estate loans primarily through the interest
rates and loan fees it charges and advertising.
Personnel
As of June 30, 2002, the Bank had 30 full-time and six part-time employees.
None of the Bank's employees is represented by a collective bargaining group.
The Bank believes it has a good relationship with its employees.
Regulation
As a federally-chartered SAIF-insured savings institution, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of and owns stock in the FHLB of Atlanta, which is
one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision, among other things, governs capital requirements,
liquidity and types 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 of its examinations regarding operations and regulatory
compliance for consideration by the Bank's Board of Directors. The FDIC also
examines the Bank in its role as the administrator of the SAIF. The Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, or Congress,
could have a material adverse impact on the Company, the Mutual Holding Company
and the Bank. The description of statutory provisions and regulations applicable
to savings institutions set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
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"). These banking statutes, among
other things, (1) govern the permissible lending and investment activities of
federal savings banks and their holding companies, (2) establish minimum capital
requirements, (3) govern branching and acquisitions of other banks and savings
institutions. Federal savings institutions may invest in the following loans
without limitation as a percentage of assets; deposit account loans; loans
secured by residential real estate; FNMA or Freddie Mac securities; home
improvement loans; credit card loans and education loans. Commercial real estate
loans are limited to 40% of the savings institution's capital. Commercial
business loans may not exceed 20% of assets, and amounts in excess of 10% of
assets may be for small business loans only; and consumer loans may not exceed
35% of the savings institution's assets. A federal savings institution may
invest up to 3% of its assets in a service corporation subsidiary, provided that
at least one-half of the investment in excess of 1% is primarily for community
development purposes. The description of statutory provisions and regulations
applicable to savings institutions set forth herein does not purport to be a
complete description of such statutes and regulations and their effect on the
Bank.
Loans to One Borrower. Federal 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
15
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 $7.9 million at June 30, 2002. As of June 30, 2002, the Bank was in
compliance with its loans-to-one-borrower limitations.
Qualified Thrift Lender Requirement. Federal savings institutions must be
qualified thrift lenders ("QTL"). To be a QTL, the Bank can either satisfy the
QTL test under OTS regulations, or the domestic building and loan association
("DBLA") test of the Internal Revenue Code of 1986, as amended (the "Code").
Under the QTL test, a savings bank is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments,"
primarily residential mortgages and related investments, including certain
mortgage-backed and related securities, on a monthly basis in 9 out of every 12
months.
Under the DBLA test, an institution must meet a "business operations test"
and a "60% of assets test." The business operations test requires the business
of a DBLA to consist primarily of acquiring the savings of the public and
investing in loans. An institution meets the public savings requirements when it
meets one of two conditions: (i) the institution acquires its savings in
conformity with OTS rules and regulations; or (ii) the general public holds more
than 75% of its deposits, withdrawable shares, and other obligations. The
general public may not include family or related business groups or persons who
are officers or directors of the institution. The 60% of assets test requires
that at least 60% of a DBLA's assets must consist of assets that thrifts
normally hold, except for consumer loans that are not educational loans. Unlike
the QTL test, the DBLA test does not include mortgage loans originated and sold
into the secondary market and subsidiary investments. A savings bank that fails
to be a QTL must either convert to a bank charter or operate under certain
restrictions. As of June 30, 2002, the Bank maintained 80.6% of its portfolio
assets in qualified thrift investments and, therefore, met the QTL test.
Limitations on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. A "well capitalized" institution can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year in an amount up to 100 percent of its net income during the calendar year,
plus its retained net income for the preceding two years. As of June 30, 2002,
the Bank was a "well-capitalized" institution.
In addition, OTS regulations require the Mutual Holding Company to notify
the OTS of any proposed waiver of its right to receive dividends. The OTS will
not object to a notice of intent to waive dividends if the waiver would not be
detrimental to the safe and sound operation of a mutual holding company's
underlying savings association, and the mutual holding company's board of
directors determines that the waiver is consistent with the directors' fiduciary
duties to the mutual holding company.
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, 2002, the Bank
has a semi-annual assessment of approximately $49,000.
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 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
16
ratings. The Bank received a "needs to improve" 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, 2002, the Bank was in compliance
with these 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 per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
The federal banking agencies have adopted a 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 systems;
credit underwriting; loan documentation; interest rate risk exposure; asset
growth; and compensation, fees and benefits. The agencies also adopted final
rules which require institutions to examine asset quality and earnings
standards. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 4% tier 1 core capital ratio, a
4% tier 1 risk-based ratio, and an 8% total risk-based ratio. Tier 1 core
capital is defined as common stockholders' equity less investments in and
advances to "nonincludable" subsidiaries, goodwill and other intangible assets,
nonqualifying equity instruments and disallowed servicing assets, and other
disallowed assets; plus accumulated losses (gains) on certain available-for-sale
securities and cash flow hedges (net of taxes), qualifying intangible assets,
minority interest in includable consolidated subsidiaries, and mutual
institutions' nonwithdrawable deposit accounts. Adjusted total assets is defined
as total assets less assets of "nonincludable" subsidiaries, goodwill and other
intangible assets and disallowed servicing assets and other
17
disallowed assets; plus accumulated losses (gains) on certain available-for sale
securities and cash flow hedges, and qualifying intangible assets. Total
risk-based capital is defined as tier 1 (core) capital plus 45% of unrealized
gains on available-for-sale equity securities, qualifying subordinated debt and
redeemable preferred stock, capital certificates, nonwithdrawable deposit
accounts not included in core capital, other equity instruments and allowances
for loan and lease losses; less equity investment and other assets required to
be deducted, low-level recourse deduction and capital reduction for
interest-rate risk exposure.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet assets, 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.
At June 30, 2002, the Bank exceeded each of the three OTS capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of June 30, 2002.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ---------------------- --------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio (1)
------ --------- ------ --------- ------ ---------
As of June 30, 2002:
Tier I core capital ............... $ 49,961 11.35% $ 17,607 4.00% $ 22,009 > 5.00%
Tier I risk-based capital ......... 49,961 18.55 10,772 4.00 16,159 > 6.00
Total risk-based capital .......... 52,338 19.43 21,545 8.00 26,931 > 10.00
- ----------
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
Prompt Corrective Regulatory Action
Under the OTS prompt corrective action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's 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 may 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.
18
The minimum annual deposit insurance premiums are currently assessed at
the rate of .065% of deposits for all SAIF-insured members. The FDIC, however,
is authorized to raise premiums in certain circumstances related to fund losses
and severe economic circumstances and has exercised this authority several times
with respect to premiums paid to the Bank Insurance Fund ("BIF") by commercial
banks and BIF-member savings associations.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize the predecessor to the SAIF. During 1999, payments
for SAIF members approximated 6.1 basis points, while BIF members paid 1.2 basis
points. Since January 1, 2000, there has been equal sharing of Financing
Corporation payments between members of both insurance funds.
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 of Atlanta, is required to
acquire and hold shares of capital stock in the FHLB of Atlanta 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 5% of
its advances (borrowings) from the FHLB, whichever is greater. The Bank was in
compliance with this requirement with an investment in FHLB of Atlanta stock, at
June 30, 2002, of $2.6 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. Over the past five years such dividends have averaged
7.4%, and were 5.3% for the fiscal year ended June 30, 2002.
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 $41.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $41.3 million, the reserve requirement is $1.4
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $41.3
million. The first $5.7 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.
The USA PATRIOT Act
In response to the events of September 11th, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering
program.
19
o Section 326 of the Act authorizes the Secretary of the Department
of Treasury, in conjunction with other bank regulators, to issue
regulations by October 26, 2002 that provide for minimum
standards with respect to customer identification at the time new
accounts are opened.
o Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking
accounts or correspondence accounts in the United States for
non-United States persons or their representatives (including
foreign individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect
and report money laundering.
o Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign
banks that do not have a physical presence in any country), and
will be subject to certain record keeping obligations with
respect to correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Federal Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement regulations
pursuant to the USA PATRIOT Act. These proposed and interim regulations would
require financial institutions to adopt the policies and procedures contemplated
by the USA PATRIOT Act.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered or that file reports under
the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act
establishes: (i) new requirements for audit committees, including independence,
expertise, and responsibilities; (ii) additional responsibilities regarding
financial statements for the Chief Executive Officer and Chief Financial Officer
of the reporting company; (iii) new standards for auditors and regulation of
audits; (iv) increased disclosure and reporting obligations for the reporting
company and its directors and executive officers; and (v) new and increased
civil and criminal penalties for violation of the securities laws. Many of the
provisions became effective immediately while other provisions become effective
over a period of 30 to 270 days and are subject to rulemaking by the Securities
and Exchange Commission. Although we anticipate that the Company will incur
additional expense in complying with the provisions of the Sarbanes-Oxley Act
and the resulting regulations, management does not expect that such compliance
will have a material impact on results of operations or financial condition.
Holding Company Regulation
General. The Company and the Mutual Holding Company are mutual holding
companies within the meaning of the HOLA and are registered with the OTS and are
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and the Mutual Holding Company and any non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
Restrictions Applicable to Mutual Holding Companies. Pursuant to
Section 10(o) of the HOLA and OTS regulations, a mutual holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
20
(vii) holding or managing 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, unless the Director, by regulation, prohibits or
limits any such activity for savings and loan holding companies; or (B) is
permissible for financial holding companies under Section 4(k) of the Bank
Holding Company Act and regulations of the Federal Reserve Board thereunder. 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.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another control
of savings institution or holding company thereof, without prior written
approval of the OTS. It also prohibits the acquisition of, with certain
exceptions, more than 5% of the voting stock of the savings institution or
holding company without the prior approval of the OTS; 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.
A stock holding company subsidiary of a mutual holding company is
permitted to engage in activities that are permitted for its mutual holding
company parent and to have the same indemnification and employment contract
restrictions that are imposed on the mutual holding company parent.
Federal and State Taxation
General. The Bank and the Company are subject to federal income
taxation in the same manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Company.
Deferred income taxes are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized, with certain
exceptions, for temporary differences between the financial reporting basis and
income tax basis of assets and liabilities based on enacted tax rates expected
to be in effect when such amounts are realized or settled. Deferred tax assets
are recognized only to the extent that it is more likely than not that such
amounts will be realized based on consideration of available evidence, including
tax planning strategies and other factors. The effects of changes in tax laws or
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
The Bank was audited by the Internal Revenue Service for the tax year
ended June 30, 1995. There were no adjustments made as a result of that audit.
The State of Maryland has not audited the Bank within the past five years. See
Notes 1 and 9 to the Financial Statements.
State Taxation. For the year ended June 30, 2002, the State of Maryland
changed the way they tax financial institutions to an income tax of
approximately 7% on income measured substantially the same as for federal
corporate income tax purposes except that interest on U.S. Government
obligations is not taxable. For the year ended June 30, 2001, 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 were 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, 2002, concerning the
Company's executive officers. All of the executive officers have held the
positions listed below since the time the Company was organized in November
1997. In addition, all of the executive officers of the Company are officers of
21
the Bank holding the same position as listed below. There are no arrangements or
understandings between the Company 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 76 Chairman of the Board
Gordon E. Clark 60 President, Chief Executive Officer and
Director
Marguerite E. Wolf 75 Vice Chairman and Director
Joan H. McCleary 68 Director and Secretary to the Board
Dale R. Douglas 60 Senior Vice President
Kathleen G. Trumpler 64 Treasurer
ITEM 2. Properties
(a) The Company currently conducts its business through two full
service banking offices. The following table sets forth the Company's offices as
of June 30, 2002:
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
- -------- ----- -------- ----------
1101 Maiden Choice Lane Owned 1960 --
Baltimore, Maryland 21229
6959 Marshalee Drive Owned 2000 --
Elkridge, Maryland 21075
(b) Investment Policies. For a description of the Company's policies
(all of which may be changed without a vote of the Company's security holders)
and the limitations on the percentage of assets which may be invested in any one
investment, or type of investment with respect to: (1) investments in real
estate or interests in real estate; (2) investments in real estate mortgages;
and (3) securities of or interests in persons primarily engaged in real estate
activities, reference is made hereunder to the information presented above under
"Item 1. Description of Business."
(c) Description of Real Estate and Operating Data. Not Applicable; the
book value of each of the Company's properties is less than 10% of the Company's
total consolidated assets at June 30, 2002.
ITEM 3. Legal Proceedings
The Company is periodically involved in claims and lawsuits that are
incident to the Company's business. At June 30, 2002, the Company 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 Company did not submit any matters to the vote of security holders.
22
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The "Common Stock and Related Matters" and "Common Stock and Related
Matters" sections of the Company's annual report to stockholders for the fiscal
year ended June 30, 2002 (the "2002 Annual Report to Stockholders") are
incorporated herein by reference. No other sections of the 2002 Annual Report to
Stockholders are incorporated herein by this reference.
ITEM 6. Selected Financial Data
The "Selected Quarterly Financial Data" of the Company's annual report
to stockholders for the 2002 Annual Report to Stockholders are incorporated
herein by reference. No other sections of the 2002 Annual Report to Stockholders
are incorporated herein by this reference.
ITEM 7. 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 Company's 2002 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2002
Annual Report to Stockholders are incorporated herein by this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's 2002 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2002
Annual Report to Stockholders are incorporated herein by this reference.
ITEM 8. Financial Statements and Supplemental Data
The following sections from the Company's 2002 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2002
Annual Report to Stockholders are incorporated herein by this reference.
(i) Independent Auditors' Report;
(ii) Consolidated Statements of Financial Condition;
(iii) Consolidated Statements of Income and Comprehensive Income;
(iv) Consolidated Statements of Stockholders' Equity;
(v) Consolidated Statements of Cash Flows; and
(vi) Notes to Consolidated Financial Statements.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The "Proposal I--Election of Directors" section of the Company's
definitive proxy statement for its 2002 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference. In addition, see Item 1.
"Executive Officers of the Company" for information concerning the Bank's
executive officers.
23
ITEM 11. Executive Compensation
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The Company does not have any equity compensation program that was not
approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of June 30, 2002 regarding
equity compensation to directors and executive officers of the Company that has
been approved by stockholders.
=================================================================================================
Number of securities to be
issued upon exercise of Number of securities
Equity compensation plans outstanding options and Weighted average remaining available for
approved by stockholders rights exercise price issuance under plan
- -------------------------------------------------------------------------------------------------
Stock Option Plan..... 138,500 $7.92 --
- -------------------------------------------------------------------------------------------------
Total............. 138,500 $7.92 --
=================================================================================================
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 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-K Report
-------------- -------- ------------------ ----------------
2.1 Agreement and Plan of Merger by and * Not Applicable
among Northwest Savings Bank, Northwest
Bancorp, Inc., Northwest Bancorp, MHC
and Leeds Federal Savings Bank, Leeds Federal
Bankshares, Inc., and Leeds Federal Bankshares,
MHC dated as of August 16, 2001
2.2 Agreement by and among Northwest ** Not Applicable
Savings Bank, Northwest Bancorp, Inc.,
Northwest Bancorp, MHC and Leeds Federal Savings
Bank, Leeds Federal Bankshares, Inc., and Leeds Federal
Bankshares, MHC dated as of April 30, 2002
2.3 Second Amendment to Agreement and *** Not Applicable
Plan of Merger by and among Northwest
Savings Bank, Northwest Bancorp, Inc., Northwest
Bancorp, MHC and Leeds Federal Savings
Bank, Leeds Federal Bankshares, Inc., and Leeds
Federal Bankshares, MHC dated as of August 28, 2002
2.4 Third Amendment to Agreement and *** Not Applicable
Plan of Merger by and among Northwest
Savings Bank, Northwest Bancorp, Inc., Northwest
Bancorp, MHC and Leeds Federal Savings Bank,
Leeds Federal Bankshares, Inc., and Leeds Federal
Bankshares, MHC dated as of August 28, 2002
3 Articles of Incorporation **** Not Applicable
3 Bylaws **** Not Applicable
24
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 21 Exhibit 21
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
23 Consent of Experts and Counsel 23 Exhibit 23
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Certification of Chief Executive Officer 99 Exhibit 99
and chief financial officer
pursuant to section 906
of the Sarbanes-Oxley act of 2002
* Filed as an exhibit to the Company's Current Report on Form 8-K (File
No. 0-23645) filed with the SEC on August 24, 2001. This previously
filed document is incorporated by reference in accordance with Item 601
of Regulation S-K.
** Filed as an exhibit to the Company's Current Report on Form 8-K (File
No. 0-23645) filed with the SEC on May 10, 2002. This previously filed
document is are incorporated by reference in accordance with Item 601
of Regulation S-K.
*** Filed as exhibits to the Company's Current Report on Form 8-K (File No.
0-23645) filed with the SEC on September 12, 2002. All such previously
filed documents are incorporated by reference in accordance with Item
601 of Regulation S-K.
**** Filed as exhibits to the Company's Registration Statement on Form S-8
(File No. 333-44899) filed with the SEC on January 26, 1998. All such
previously filed documents are incorporated by reference in accordance
with Item 601 of Regulation S-K.
***** Filed as exhibits to the Company's Current Report Form 8-K (File No.
0-23645) filed with the SEC on January 21, 1998. All such previously
filed documents are incorporated by reference in accordance with Item
601 of Regulation S-K.
****** Filed as an exhibit to the Company's Annual Report on Form 10-K (file
No. 0-23645) filed with the SEC on September 29, 1998. This previously
filed document is incorporated by reference in accordance with Item 601
of Regulation S-K.
25
(b) Reports on Form 8-K:
On May 10, 2002, the Company filed a Current Report on Form
8-K under Item 5, Other Events, to report the initial extension of the
Agreement and Plan of Merger as discussed above in "Item 1- Business-
Recent Developments."
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LEEDS FEDERAL BANKSHARES, INC.
Date: September 25, 2002 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 Company
and in the capacities and on the dates indicated.
By: /s/ Gordon E. Clark By: /s/ Kathleen G. Trumpler
--------------------------------- ---------------------------------
Gordon E. Clark, President, Chief Kathleen G. Trumpler, Treasurer
Executive Officer and Director (Principal Financial/Accounting
(Principal Executive Officer) Officer)
Date: September 25, 2002 Date: September 25, 2002
By: /s/ John F. Amer By: /s/ Marguerite E. Wolf
--------------------------------- ---------------------------------
John F. Amer, Chairman Marguerite E. Wolf, Vice Chairman
Date: September 25, 2002 Date: September 25, 2002
By: /s/ Joan H. McCleary By: /s/ Raymond J. Hartman
--------------------------------- ---------------------------------
Joan H. McCleary, Director Raymond J. Hartman, Director
Date: September 25, 2002 Date: September 25, 2002
27
Certification pursuant to Rule 13a-14
Of the Securities Exchange Act of 1934, as Amended,
As adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Gordon E. Clark, President and Chief Executive Officer of Leeds Federal
Bankshares, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Leeds Federal
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this annual report.
September 25, 2002 /s/ Gordon E. Clark
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Date Gordon E. Clark
President and Chief Executive Officer
Certification pursuant to Rule 13a-14
Of the Securities Exchange Act of 1934, as amended,
As adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Kathleen G. Trumpler, Treasurer of Leeds Federal Bankshares, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Leeds Federal
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this annual report.
September 25, 2002 /s/ Kathleen G. Trumpler
- --------------------------------- -------------------------------------
Date Kathleen G. Trumpler
Treasurer (Chief Financial Officer)