EXHIBIT 13
2002 ANNUAL REPORT TO STOCKHOLDERS
2002 ANNUAL REPORT TO STOCKHOLDERS
LEEDS FEDERAL BANKSHARES, INC.
TABLE OF CONTENTS
Page
Message to Our Stockholders....................................... 1
Selected Consolidated Financial and Other Data.................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 4
Selected Quarterly Financial Data................................. 14
Common Stock and Related Matters.................................. 15
Independent Auditors' Report...................................... F-1
Consolidated Statements of Financial Condition.................... F-2
Consolidated Statements of Income and Comprehensive Income........ F-3
Consolidated Statements of Stockholders' Equity................... F-4
Consolidated Statements of Cash Flows............................. F-5
Notes to Consolidated Financial Statements........................ F-7
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and other data of
Leeds Federal Bankshares, Inc. (the "Company"), or, prior to January 21, 1998,
Leeds Federal Savings Bank (the "Bank") at the dates and for the periods
indicated. For additional information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.
At June 30,
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2002 2001 2000 1999 1998
---------- ---------- ---------- ----------- ----------
(In Thousands)
Selected Consolidated Financial Condition Data
Total assets........................................... $444,329 $ 378,500 $ 337,048 $ 331,642 $ 302,737
Loans receivable, net.................................. 245,000 217,183 219,204 203,886 190,181
Investments* .......................................... 145,667 122,266 95,935 102,572 85,355
Mortgage-backed securities............................. 32.960 20,021 8,317 10,008 16,412
Deposits............................................... 384,320 320,471 281,866 274,626 245,270
Borrowed funds......................................... 79 274 384 471 552
Stockholders' equity, substantially restricted......... 52,722 50,889 47,409 48,504 49,308
- ------------------------------------
* Includes investment securities, interest-bearing deposits, and other investments.
Year Ended June 30,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ----------- ----------
(In Thousands Except Per Share Data)
Selected Consolidated Operating Data:
Interest income....................................... $ 22,991 $ 22,957 $ 22,070 $ 20,842 $ 20,309
Interest expense...................................... 16,683 15,664 13,928 13,009 12,171
---------- ---------- ---------- ----------- ----------
Net interest income before provision for loan losses 6,308 7,293 8,142 7,833 8,138
Provision for loan losses............................. (170) -- 21 39 192
---------- ---------- ---------- ----------- ----------
Net interest income after provision for loan losses. 6,478 7,293 8,121 7,794 7,946
---------- ---------- ---------- ----------- ----------
Noninterest income:
Service fees and charges............................ 234 200 156 132 137
Other income........................................ 475 380 288 268 213
---------- ---------- ---------- ----------- ----------
Total noninterest income.......................... 709 580 444 400 350
---------- ---------- ---------- ----------- ----------
Noninterest expense:
Compensation and employee benefits.................. 2,109 1,994 1,759 1,573 1,770
Occupancy........................................... 311 339 260 222 195
Professional fees................................... 370 156 90 106 119
SAIF deposit insurance premiums..................... 145 131 184 222 222
Advertising......................................... 90 181 159 128 208
Other ............................................. 990 701 627 590 581
---------- ---------- ---------- ----------- ----------
Total noninterest expenses........................ 4,015 3,502 3,079 2,841 3,095
---------- ---------- ---------- ----------- ----------
Income before provision for income taxes.............. 3,172 4,371 5,486 5,353 5,201
Provision for income taxes............................ 815 1,486 1,891 1,889 1,895
---------- ---------- ---------- ----------- ----------
Net income..................................... $ 2,357 $ 2,885 $ 3,595 $ 3,464 $ 3,306
---------- ========== ========== =========== ==========
Net income per common share
Basic............................................... $ 0.52 $ 0.64 $ 0.78 $ 0.69 $ 0.65
Diluted............................................. 0.51 0.63 0.77 0.69 0.64
Dividends declared per common share................... 0.60 0.60 0.59 0.56 0.55
========== ========== ========== =========== ==========
2
At or for the Year Ended June 30,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ----------- -----------
Key Operating Ratios and Other Data:
Return on average assets (net income divided
by average total assets).................................... .56% .83% 1.08% 1.11% 1.13%
Return on average equity (net income divided
by average equity).......................................... 4.56 5.88 7.54 7.05 6.86
Net interest rate spread (difference between average yield
on interest-earning assets and average cost of interest-
bearing liabilities)........................................ 1.08 1.48 1.86 1.80 2.03
Net interest margin (net interest income as a
percentage of average interest-earning assets).............. 1.57 2.17 2.53 2.57 2.85
Net interest income to noninterest expense.................... 157.11 208.25 264.44 275.71 262.94
Net interest income after provision for loan
losses, to total noninterest expense........................ 161.34 208.25 263.75 274.33 256.74
Noninterest income to average assets.......................... .17 .17 .13 .13 .12
Noninterest expense to average assets......................... .96 1.01 .93 .91 1.06
Nonperforming loans to total loans............................ .10 -- 1.16 1.36 1.32
Nonperforming assets to total assets.......................... .62 .67 .76 .83 .83
Average interest-earning assets to average
interest-bearing liabilities................................ 111.73 114.76 115.43 118.03 119.46
Stockholders' equity to average assets (average stock-
holders' equity divided by average total assets)............ 12.38 14.13 14.33 15.68 16.49
Equity to assets at period end................................ 11.87 13.44 14.07 14.63 16.28
Number of full-service offices................................ 2 2 2 1 1
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The earnings of the Company depend primarily on the earnings of Leeds
Federal Savings Bank (the "Bank"). The Company and the Bank are discussed herein
on a consolidated basis. The Company's earnings depend primarily on its net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-earning deposits at other institutions,
investment securities and other investments, and the interest paid on
interest-bearing liabilities. Net interest income is a function of the Company's
interest rate spread, which is the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest- earning
assets as compared to interest-bearing liabilities. The Company's earnings also
are affected by its level of noninterest income, including primarily service
fees and charges, and noninterest expense, including primarily compensation and
employee benefits, professional fees and occupancy costs. Earnings of the
Company also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities, which events are beyond the control of
the Company.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are subject to certain risks and uncertainties,
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, changes in
demand for loans in the Company's market area, and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. Undue reliance should not be placed on any such
forward-looking statements, which speak only as of the date made. Moreover, the
factors listed above could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
any opinions or statements expressed with respect to future periods in any
current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Business Strategy
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and community-oriented savings bank dedicated to
providing quality customer service. Generally, the Company has sought to
implement this strategy by using only retail deposits as its source of funds and
maintaining a substantial part of its assets in loans secured by one- to
four-family residential real estate located in the Company's market area, home
equity loans, consumer loans, mortgage-backed securities and in other liquid
investment securities. Specifically, the Company's business strategy
incorporates the following elements: (1) operating as a community-oriented
financial institution, maintaining a strong core customer base by providing
quality service and offering customers the access to senior management
4
and services that a community-based institution can offer; (2) maintaining high
asset quality by emphasizing investment in residential mortgage loans,
mortgage-backed securities and other securities issued or guaranteed by the
United States Government or agencies thereof; (3) maintaining capital in excess
of regulatory requirements and growing only to the extent that adequate capital
levels can be maintained; and (4) managing interest rate risk exposure while
achieving desirable levels of profitability.
Financial Condition
Assets. Cash on hand and due from banks, interest bearing deposits,
other short-term investments and investment securities totaled approximately
$152.5 million at June 30, 2002, an increase of approximately $25.4 million, or
20.0%, from June 30, 2001 due to deposit inflows in excess of funds required for
mortgage originations. Mortgage-backed securities totaled $33.0 million, an
increase of $13.0 million, or 65.0%, due primarily to purchases of new
mortgage-backed securities. Loans receivable totaled $245.0 million, an increase
of $27.8 million, or 12.8%, due primarily to increased mortgage originations.
Liabilities. Deposits increased $63.8 million, or 19.9%, to a total of
$384.3 million at June 30, 2002, compared to June 30, 2001. Such increase was
principally attributable to a general market trend of investors placing funds
into deposits instead of the equity markets. The Company has offered savings
rates that are competitive with other financial institutions. However, it has
not solicited brokered funds or negotiated jumbo certificates to achieve
increased deposit levels.
Stockholders' Equity. Total stockholders equity increased $1.8 million,
or 3.5%, to $52.7 million at June 30, 2002, compared to June 30, 2001. The
increase was primarily attributable to the earnings of the Company of $2.4
million plus $511,000 for compensation expense for the ESOP, less dividends
declared on common stock of $727,000 and a decrease in other comprehensive
income due to a decrease in market value of securities available-for-sale of
$308,000.
Results of Operations
The net income of the Company depends primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-earning deposits at other institutions,
investment securities and other investments, and the interest paid on
interest-bearing liabilities, which consist primarily of savings deposits. The
Company had net income of $2.4 million for the year ended June 30, 2002. Net
income totaled $2.9 million and $3.6 million for 2001 and 2000, respectively.
Interest Income. Total interest income remained relatively unchanged at
$23.0 million for the years ended June 30, 2002 and June 30, 2001. Average
interest-earning assets increased to $402.6 million for the year ended June 30,
2002, from $336.0 million for the prior year, while the average yield on
interest-earnings assets decreased to 5.71%, from 6.83%. The increase in average
interest earning assets during the year ended June 30, 2002 resulted primarily
from an increase in mortgage loans and other investments, partially offset by a
decrease in investment securities. The decrease in average yield was primarily
due to lower market interest rates on investment securities and other
investments.
Interest on mortgage loans increased by $1.0 million, or 6.6%, to $16.1
million for the year ended June 30, 2002. The average balance of mortgage loans
increased $19.4 million, or 9.2%, while the average yield on mortgage loans
decreased to 6.95%, from 7.12%. Interest income on consumer loans
5
decreased by $12,000 to $292,000 for the year ended June 30, 2002, from $304,000
for the prior year. The decrease was due to a decrease in average balance of
consumer loans to $3.8 million from $4.1 million. The average yield on consumer
loans for the year ended June 30, 2002, increased to 7.6%, from 7.3%. Interest
income on mortgage-backed securities increased $1.3 million, to $2.0 million for
the year ended June 30, 2002, from $714,000 for the prior year. The increase was
principally due to a $22.1 million increase in average balance of
mortgage-backed securities to $31.7 million for the year ended June 30, 2002,
from $9.6 million for the prior year. The average yield on mortgage-backed
securities for the year ended June 30, 2002, decreased to 6.4%, from 7.5% due to
lower market rates. Interest income on investment securities decreased by $2.5
million, to $2.1 million for the year ended June 30, 2002, from $4.6 million for
the prior year. Such decrease was the result of a decrease in the average yield
on investment securities to 5.6%, from 6.8%, and a $30.1 million decrease in
average balance of investment securities to $37.4 million for the year ended
June 30, 2002, from $67.5 million for the year ended June 30, 2001. The decrease
in the average balance of investment securities was the result of the calls of
callable securities. Interest income from interest-earning deposits decreased by
$762,000 to $381,000 for the year ended June 30, 2002, from $1.1 million for the
prior year. The average balance of interest earning deposits decreased to $16.3
million for the year ended June 30, 2002, from $20.1 million for the prior year.
The average yield on interest-earning deposits for the year ended June 30, 2002,
decreased to 2.3% from 5.7%, due to decreases in market interest rates during
the year. Interest income from other investments increased by $1.0 million to
$2.1 million, for the year ended June 30, 2002, from $1.1 million for the prior
year. The average balance of other investments increased due to repayments on
investment securities and deposit inflows by $59.2 million to $81.6 million for
the year ended June 30, 2002, from $22.4 million for the prior year, while the
average yield on other investments decreased to 2.6% for the period, from 4.8%
due to decreases in short-term interest rates.
Total interest income increased by $887,000, or 4.0%, to $23.0 million
for the year ended June 30, 2001, from $22.1 million for the year ended June 30,
2000. The increase in interest income was primarily due to an increase in the
balance of average interest earning assets to $336.0 million for the year ended
June 30, 2001, from $322.3 million for the prior year, offset by a slight
decrease in the average yield on interest earnings assets to 6.83%, from 6.85%.
The increase in average interest-earning assets during the year ended June 30,
2001, resulted primarily from an increase in interest-earning deposits and other
investments, partially offset by a decrease in investment securities.
Interest on mortgage loans increased slightly by $54,000, or 0.4%, to
$15.1 million for the year ended June 30, 2001. Average balance of mortgage
loans decreased $743,000, or 0.3%, while the average yield on mortgage loans
increased to 7.12%, from 7.06%. Interest income on consumer loans increased by
$29,000 to $304,000 for the year ended June 30, 2001, from $275,000 for the
prior year. The increase was due to an increase in average balance of consumer
loans to $4.1 million from $3.8 million. The average yield on consumer loans for
the year ended June 30, 2001, increased to 7.3%, from 7.2%. Interest income on
mortgage-backed securities increased $77,000, or 12.1%, to $714,000 for the year
ended June 30, 2001, from $637,000 for the prior year. The increase was
principally due to a $446,000 increase in average balance of mortgage-backed
securities to $9.6 million for the year ended June 30, 2001, from $9.1 million
for the prior year. The average yield on mortgage-backed securities for the year
ended June 30, 2001, increased to 7.4%, from 7.0%. Interest income on investment
securities decreased by $144,000, to $4.6 million for the year ended June 30,
2001, from $4.8 million for the prior year. Such decrease was the result of a
$4.2 million decrease in average balance of investment securities to $67.5
million for the year ended June 30, 2001, from $71.7 million for the year ended
June 30, 2000, offset by an increase in the average yield on investment
securities to 6.8%, from 6.6%. The decrease in the average balance of investment
securities was the result of maturities. Interest income from interest- earning
deposits increased by $538,000 to $1.1 million for the year ended June 30, 2001,
from $605,000
6
for the prior year. The average balance of interest earning deposits increased
to $20.1 million for the year ended June 30, 2001, from $10.9 million for the
prior year. Such increase was the result of maturities of investment securities
and deposit inflows. The average yield on interest-earning deposits for the year
ended June 30, 2001, increased to 5.7% from 5.6%, due to increases in market
interest rates during the year. Interest income from other investments increased
by $332,000 to $1.1 million, for the year ended June 30, 2001, from $742,000 for
the prior year. The average balance of other investments increased by $8.7
million to $22.4 million for the year ended June 30, 2001, from $13.7 million
for the prior year, while the average yield on other investments decreased to
4.8% for the period, from 5.4% due to decreases in short-term interest rates.
Interest Expense. Total interest expense increased by $1.0 million, or
6.5%, to $16.7 million for the year ended June 30, 2002, from $15.7 million for
the year ended June 30, 2001. Such increase was the result of an increase in the
average balance of interest-bearing liabilities of $67.5 million to $360.3
million for the year ended June 30, 2002, from $292.8 million for the prior year
due to strong deposit inflows, partially offset by a decrease in the average
cost of interest-bearing liabilities to 4.6% from 5.4%. The lower cost reflects
generally lower market rates during the year and a shorter average maturity of
deposits.
Total interest expense increased by $1.7 million, or 12.5%, to $15.7
million for the year ended June 30, 2001, from $13.9 million for the year ended
June 30, 2000. Such increase was the result of an increase in the average
balance of interest-bearing liabilities of $13.6 million to $292.8 million for
the year ended June 30, 2001, from $279.2 million for the prior year and an
increase in the average cost of interest-bearing liabilities to 5.4% from 5.0%.
The higher cost reflects generally higher market rates in the first half on the
year and the longer average maturity of deposits.
Net Interest Income. Net interest income decreased by $985,000, or
13.5% to $6.3 million for the year ended June 30, 2002, from $7.3 million for
the year ended June 30, 2001. This decrease was due principally to a decrease in
the average interest rate spread to 1.08% from 1.48%. This decrease was caused
primarily by a 112 basis point decrease in the average yield on interest earning
assets, partially offset by a 72 basis point decrease in the cost of interest
bearing liabilities.
Net interest income decreased by $849,000, or 10.4%. to $7.3 million for
the year ended June 30, 2001, from $8.1 million for the year ended June 30,
2000. This decrease was due principally to a decrease in the average interest
rate spread to 1.48% from 1.86%. This decrease was caused primarily by a 37
basis points increase in the average cost of deposits and a $13.6 million
increase in the average balance of deposits, as well as a 2 basis points
decrease in the average yield on interest-earning assets.
Provision for Loan Losses. The Company maintains an allowance for loan
losses, which was $559,000 at June 30, 2002, in accordance with accounting
principles generally accepted in the United States of America. The allowance
exists to cover probable losses inherent in the Company's loan portfolio. In
addition to historical loss experience, the Company considers other factors that
are likely to cause loan losses, including changes in economic and business
conditions, changes in the composition and volume of the portfolio, trends in
the level of past due and classified loans and the status of nonperforming
loans. The Company reduced its allowance for loan losses by a credit to the
provision for loan losses of $170,000 for the year ended June 30, 2002. The
Company has experienced continued high credit quality, even in the current
economic downturn. The Company's provision for loan losses was $154 for the year
ended June 30, 2001 and $21,000 for the year ended June 30, 2000. Management
believes that, on an overall basis, the allowance for loan losses at June 30,
2002 is sufficient to address the credit risk of the Bank.
7
Noninterest Income. Noninterest income increased by $129,000 to
$709,000 for the year ended June 30, 2002, from $580,000 for the year ended June
30, 2001. The increase was due to increases in service fees and charges and
increases in the cash surrender value of life insurance investments.
Noninterest income increased by $135,000 to $580,000 for the year ended
June 30, 2001, from $445,000 for the year ended June 30, 2000. The increase was
due to increases in service fees and charges and increases in the cash surrender
value of life insurance investments.
Noninterest Expense. Noninterest expense increased by $513,000, to $4.0
million for the year ended June 30, 2002, from $3.5 million for the year ended
June 30, 2001. Compensation and employee benefits increased by $115,000 to $2.1
million for the year ended June 30, 2002, from $2.0 million for the prior year
due primarily to increased expense recognized on our Employee Stock Ownership
Plan. Professional fees increased $215,000 to $371,000 for the year ended June
30, 2002, due principally to expenses incurred in connection with the proposed
merger with Northwest Bancorp, Inc. and Northwest Bancorp, MHC. Advertising
decreased $91,000 to $90,000 for the year ended June 30, 2002 from $181,000 for
the prior year in response to changes in market conditions. Other expenses
increased $289,000 to $990,000 for the year ended June 30, 2002, from $701,000
for the prior year, due principally to an increase in real estate owned expense
of $159,000 and increases in other operating expenses.
Noninterest expense increased by $423,000, to $3.5 million for the year
ended June 30, 2001, from $3.1 million for the year ended June 30, 2000.
Compensation and employee benefits increased by $234,000 to $2.0 million for the
year ended June 30, 2001, from $1.8 million for the prior year. The increase was
due principally to additional staffing in the Bank's branch office and other
normal increases in salary levels. Occupancy expense, advertising and other
expenses also increased, principally due to additional costs in operating the
new branch. Savings Association Insurance Fund ("SAIF") deposit insurance
premiums decreased due to a decrease in the premium rate assessed.
The ratio of noninterest expenses to average assets was 0.96%, 1.01%,
and 0.93% for the years ending June 30, 2002, 2001 and 2000, respectively.
The provision for income taxes was approximately $815,000, $1.5 million
and $1.9 million for the years ended June 30, 2002, 2001 and 2000. The effective
tax rates were 25.7%, 34.0% and 34.5% for the years ended June 30, 2002, 2001
and 2000, respectively. The lower effective rates in 2002 reflects the fact that
a higher portion of the Company's pretax income consists of income that is not
subject to federal and state income taxes, including an increase in the cash
surrender value of life insurance investments. The decrease in the effective tax
rate in 2001 was due to lower state income taxes.
Other Comprehensive Income. The accumulated unrealized gains on
securities available-for- sale, net of related income taxes, decreased $308,000
for the year ended June 30, 2002, as compared to an increase of $1.2 million and
a decrease of $802,000 for the years ended June 30, 2001 and 2000, respectively.
These changes primarily reflect fluctuations in interest rates and general
market trends.
8
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances.
Year Ended June 30,
-------------------------------------------------------------------------------------
2002 2001
---------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ ------------ ------------ ----------- ----------- -----------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans (1)....................... $ 231,763 16,113 6.95% $ 212,328 15,108 7.12%
Consumer and other loans................. 3,847 292 7.59 4,139 304 7.34
Mortgage-backed securities............... 31,676 2,033 6.42 9,587 714 7.45
Investment securities.................... 37,360 2,084 5.58 67,499 4,613 6.83
Interest-earning deposits (2)............ 16,335 381 2.33 20,077 1,143 5.69
Other investments (3).................... 81,613 2,088 2.56 22,352 1,075 4.81
------------ ------------ --------- ----------- ----------- --------
Total interest-earning assets......... 402,594 22,991 5.71 335,982 22,957 6.83
------------ --------- ----------- --------
Noninterest-earning assets................. 15,053 11,473
------------ -----------
Total assets.......................... $ 417,647 $ 347,455
============ ===========
Interest-bearing liabilities:
Savings deposits......................... $ 360,178 16,675 4.63 $ 292,453 15,638 5.35
Other borrowed funds..................... 165 8 4.85 318 26 8.18
------------ ------------ --------- ----------- ----------- --------
Total interest-bearing liabilities.... 360,343 16,683 4.63 292,771 15,664 5.35
------------ --------- ----------- --------
Noninterest-bearing liabilities............ 5,605 5,592
------------ -----------
Total liabilities..................... 365,948 298,363
Stockholders' equity....................... 51,699 49,092
------------ -----------
Total liabilities and
stockholders' equity.................. $ 417,647 $ 347,455
============ ===========
Net interest income........................ $ 6,308 $ 7,293
------------ ===========
Net interest rate spread (4)............... 1.08% 1.48%
========= ========
Net interest margin (5).................... 1.57% 2.17%
========= ========
Average interest-earning assets to
Average interest-bearing liabilities....... 111.73% 114.76%
========= ========
Year Ended June 30,
----------------------------------------------
2000
----------------------------------------------
Average
Average Yield/
Balance Interest Cost
----------- ------------ ------------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans (1)....................... $ 213,071 $ 15,054 7.06%
Consumer and other loans................. 3,836 275 7.17
Mortgage-backed securities............... 9,141 637 6.97
Investment securities.................... 71,687 4,757 6.64
Interest-earning deposits (2)............ 10,889 605 5.56
Other investments (3).................... 13,660 742 5.44
----------- ------------ ---------
Total interest-earning assets......... 322,284 22,070 6.85
------------ ---------
Noninterest-earning assets................. 10,348
-----------
Total assets.......................... $ 332,632
===========
Interest-bearing liabilities:
Savings deposits......................... $ 278,775 13,890 4.98
Other borrowed funds..................... 422 38 9.00
----------- ------------ ---------
Total interest-bearing liabilities.... 279,197 13,928 4.99
------------ ---------
Noninterest-bearing liabilities............ 5,774
-----------
Total liabilities..................... 284,971
Stockholders' equity....................... 47,661
-----------
Total liabilities and
stockholders' equity.................. $ 332,632
===========
Net interest income........................ $ 8,142
============
Net interest rate spread (4)............... 1.86%
=========
Net interest margin (5).................... 2.53%
=========
Average interest-earning assets to
Average interest-bearing liabilities....... 115.43%
=========
- ----------------------------------------
(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes Federal Home Loan Bank stock and other assets.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
9
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
Year Ended June 30,
------------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
---------------------------------------------- -------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
---------------------------------- Total ------------------------------------ Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
----------- ---------- ----------- ----------- ------------ ---------- ------------ -----------
(In Thousands)
Interest income:
Mortgage loans (1)............... $ 1,384 $ (360) $ (19) $ 1,005 $ (52) $ 128 $ (22) $ 54
Consumer and other loans......... (21) 10 (1) (12) 22 6 1 29
Mortgage-backed securities....... 1,646 (99) (228) 1,319 31 43 3 77
Investment securities............ (2,058) (844) 373 (2,529) (278) 136 (2) (144)
Interest-earning deposits (2).... (213) (675) 126 (762) 511 14 13 538
Other investments (3)............ 2,850 (503) (1,334) 1,013 473 (86) (54) 333
--------- -------- --------- --------- -------- -------- --------- ---------
Total interest-earning assets.... 3,588 (2,471) (1,083) 34 707 241 (61) 887
--------- -------- ---------- --------- -------- -------- ---------- ---------
Interest expense................... 3,615 (2,108) (488) 1,019 677 1,005 54 1,736
--------- -------- ---------- --------- -------- -------- --------- ---------
Change in net interest income...... $ (27) $ (363) $ (595) $ (985) $ 30 $ (764) $ (115) $ (849)
========= ======== ========= ========= ======== ======== ========= =========
- -----------------------------------------
(1) Includes one- to four-family residential real estate loans, home equity
loans, and commercial real estate loans.
(2) Includes secured short term loans to commercial banks and interest-earning
deposits in other institutions.
(3) Includes Federal Home Loan Bank stock and other assets.
Management of Market Risk
Like other financial institution holding companies, the Company's most
significant form of market risk is interest rate risk. The Company is subject to
interest rate risk because its liabilities generally have shorter terms or
maturities than its assets. As a result, its liabilities are more sensitive to
changes in market interest rates. The general objective of the Company's
interest rate risk management is to determine the appropriate level of risk
given the Company's business strategy, and then manage that risk in a manner
that is consistent with the Company's policy to reduce exposure of the Company's
net interest income to changes in market interest rates.
The Company's policy in recent years has been to attempt to better
match the maturities and interest rates of its interest rate sensitive assets
and liabilities by emphasizing fixed-rate one- to four- family mortgage loans
with terms of 15 years or less, adjustable-rate first mortgages and home equity
loans, and to maintain relatively high levels of liquidity. By maintaining a
significant percentage of its assets in cash and other liquid investments, the
Company is able to reinvest a higher percentage of its assets more quickly in
response to changes in market interest rates, thereby reducing its exposure to
interest rate volatility. The Company does not utilize derivative instruments or
engage in other hedging activities to manage interest rate risk.
The Company has an Asset-Liability Management Committee which is
responsible for reviewing the Company's asset and liability policies. The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital requirements.
The Company measures interest rate risk in terms of the sensitivity of
the Company's net
10
portfolio value ("NPV") to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. The following table presents the pro forma
computations of the Company's NPV as of June 30, 2002. Given the current low
level of interest rates and the low probability of further significant declines
in absolute rates, we did not calculate NPV for interest rate decreases of
greater then 100 basis points.
NPV as Percentage of
Change in Present Value of Assets
Interest Rates Net Portfolio Value --------------------------------
in Basis Points --------------------------------------------------- Basis Point
(Rate Shock) $ Amount $ Change % Change NPV Ratio Change
--------------- --------------- ------------- ------------- -------------- --------------
(Dollars in Thousands)
300 34,061 (28,134) (45)% 8.03% (551)bp
200 42,262 (18,933) (30)% 9.93% (361)bp
100 53,156 (9,069) (15)% 11.87% (168)bp
Static 62,195 -- -- 13.55% --
(100) 66,093 3,899 6% 14.20% 65bp
The above table indicates that at June 30, 2002, in the event of a
sudden and sustained increase in prevailing market rates, the Company's NPV
would be expected to decrease, and that in the event of a sudden and sustained
decrease in prevailing market interest rates, the Company's NPV would be
expected to increase. The Company's Board of Directors reviews the Company's NPV
position quarterly, and, if estimated changes in NPV are not within the targets
established by the Board, the Board may direct management to adjust the asset
and liability mix to bring interest rate risk within Board approved targets.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. The NPV table presented above
assumes that the composition of the Company's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. It also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing characteristics of specific assets and liabilities.
Accordingly, although the NPV table provides an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Company's net interest income and will differ
from actual results.
11
Liquidity and Capital Resources
The Bank is required to maintain liquid assets, as defined by Office of
Thrift Supervision ("OTS") regulations, to operate in a safe and sound manner.
The Bank adjusts its liquidity levels in order to meet funding needs of deposit
outflows, payment of real estate taxes on mortgage loans and loan commitments.
The Bank also adjusts liquidity as appropriate to meet its asset and liability
management objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments, and earnings and funds provided from
operations. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Bank manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Bank invests in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
Assets qualifying for liquidity at June 30, 2002, totaled $140.4 million. For
additional information about cash flows from the Bank's operating, financing,
and investing activities, see "Consolidated Statements of Cash Flows" included
in the Consolidated Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash are net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds; however, the Bank has never borrowed funds from the FHLB.
At June 30, 2002, the Bank had outstanding loan commitments of $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.
Certificates of deposit scheduled to mature in less than one year at June 30,
2002, totaled $206.3 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Bank.
At June 30, 2002, the Bank exceeded OTS capital requirements. Set forth
below is a summary of the Bank's compliance with the following OTS capital
standards as of June 30, 2002.
Minimum To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- --------------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio(1)
---------- ---------- ---------- ---------- ----------- ---------
As of June 30, 2002:
Tier I core capital.................... $ 49,961 11.35% $ 17,607 4.00% $ 22,009 >5.0%
Tier I risk-based capital.............. 49,961 18.55 10,772 4.00 16,159 >6.0
Total risk-based capital............... 52,338 19.43 21,545 8.00 26,931 >10.0
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
12
Impact of Inflation and Changing Prices
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
There are no recently issued accounting standards anticipated to have
an impact on future consolidated financial statements.
13
SELECTED QUARTERLY FINANCIAL DATA
A summary of selected quarterly financial data for the years ended June
30, 2002 and 2001 is as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------
(In Thousands Except Per Share Data)
Fiscal 2002
Interest income........................ $ 5,940 $ 5,666 $ 5,696 $ 5,689
Net interest income.................... 1,616 1,359 1,542 1,791
Provision for loan losses.............. ---- ----- ---- (170)
Income before provision
for income taxes..................... 780 580 746 1,066
Net income............................. 584 464 557 752
========== =========== ========== ==========
Net income per common share:
Basic................................ $ .13 $ .10 $ .12 $ .17
Diluted.............................. .13 .10 .12 .16
========== =========== ========== ==========
Fiscal 2001
Interest income........................ $ 5,710 $ 5,714 $ 5,718 $ 5,815
Net interest income.................... 1,928 1,824 1,822 1,719
Provision for loan losses.............. -- -- -- --
Income before provision
for income taxes..................... 1,245 1,103 1,007 1,016
Net income............................. 798 750 666 671
========== =========== ========== ==========
Net income per common share:
Basic................................ $ .17 $ .17 $ .15 $ .15
Diluted.............................. .17 .16 .15 .15
========== =========== ========== ==========
14
COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market
under the symbol "LFED." As of August 20, 2002, the Company had five registered
market makers, 396 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
4,550,931 shares outstanding. As of such date, Leeds Federal Bankshares, M.H.C.
(the "Mutual Holding Company"), the Company's mutual holding company, held
3,300,000 shares of common stock and stockholders other than the Mutual Holding
Company held 1,250,931 shares.
The following table sets forth market price and dividend information
for the common stock for each quarter of the previous two fiscal years.
Fiscal Year Ended Cash Dividends
June 30, 2002 High Low Declared
--------------------- ------------ ------------ --------------------
First quarter $ 31.34 $ 15.40 $ .15
Second quarter 32.35 31.00 .15
Third quarter 32.00 31.13 .15
Fourth quarter 31.99 30.75 .15
Fiscal Year Ended Cash Dividends
June 30, 2001 High Low Declared
--------------------- ------------ ------------ --------------------
First quarter $ 14.25 $ 10.44 $ .15
Second quarter 14.19 12.38 .15
Third quarter 13.56 12.69 .15
Fourth quarter 16.90 13.10 .15
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and will depend upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, the Company's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
OTS regulations impose limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by a savings
institution to repurchase or otherwise acquire its stock, payments to
stockholders of another savings institution in a cash-out merger, and other
distributions charged against capital. The regulations establish a three-tiered
system of regulation, with the greatest flexibility being afforded to
well-capitalized or Tier 1 savings associations. As of June 30, 2002, the most
recent notification categorized the Bank as "well-capitalized." Accordingly,
under the OTS capital distribution regulations, the Bank would be permitted to
pay, upon notice to the OTS, dividends during any calendar year up to 100% of
its net income during that calendar year, plus its retained net income for the
preceding two years.
In addition to the foregoing, earnings of the Company appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other
15
distributions to stockholders without payment of taxes at the then-current tax
rate by the Company on the amount of earnings removed from the reserves for such
distributions. The Company intends to make full use of this favorable tax
treatment and does not contemplate any distribution by the Company in a manner
that would create federal tax liability.
The Mutual Holding Company has waived the receipt of all dividends paid
by the Company. OTS regulations require the Mutual Holding Company to notify the
OTS of any proposed waiver of the receipt of dividends. 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.
16
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
Leeds Federal Bankshares, Inc.
Baltimore, Maryland:
We have audited the accompanying consolidated statements of financial condition
of Leeds Federal Bankshares, Inc. and subsidiary as of June 30, 2002 and 2001,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Leeds Federal
Bankshares, Inc. and subsidiary as of June 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2002 in conformity with accounting principles generally
accepted in the United States of America.
\s\ KPMG LLP
August 2, 2002, except for note 18
as to which the date is August 28, 2002
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 2002 and 2001
Assets 2002 2001
------------- -----------
Cash, including interest-bearing deposits of $1,929,277 in 2002
and $2,198,218 in 2001 .......................................... $ 8,784,723 7,015,942
Short-term investments ............................................ 100,612,524 35,334,058
Secured short-term loans to commercial banks ...................... 19,848,989 16,225,333
Securities available-for-sale, amortized cost of $1,156,760 in 2002
and $1,256,760 in 2001 (note 2) ................................. 5,199,177 5,802,094
Investment securities held-to-maturity (fair value of $15,450,753
in 2002 and $59,451,083 in 2001) (note 3) ....................... 15,498,705 60,518,903
Mortgage-backed securities held-to-maturity (fair value of
$33,475,666 in 2002 and $20,018,094 in 2001) (note 4) ........... 32,959,769 20,021,025
Loans receivable, net (note 5) .................................... 245,000,388 217,182,587
Investment in Federal Home Loan Bank of Atlanta stock,
at cost (note 10) ............................................... 2,578,200 2,187,200
Property and equipment, net (note 6) .............................. 2,076,698 2,205,229
Cash surrender value of life insurance (note 11) .................. 7,455,859 7,023,712
Accrued interest receivable ....................................... 1,587,932 2,236,760
Other real estate owned (note 7) .................................. 2,538,455 2,540,127
Prepaid expenses and other assets ................................. 187,948 207,267
------------- ------------
$ 444,329,367 378,500,237
============= ============
Liabilities and Stockholders' Equity
Liabilities:
Savings accounts (note 8) ....................................... $ 384,320,466 320,470,865
Borrowed funds - employee stock ownership plan (note 12) ........ 79,238 274,123
Advance payments by borrowers for taxes, insurance and
ground rents .................................................. 3,576,296 3,515,261
Federal and state income taxes (note 9):
Currently payable ............................................. 581,948 218,075
Deferred ...................................................... 953,198 1,219,523
Accrued expenses and other liabilities (notes 11 and 13) ........ 2,095,787 1,913,349
------------- ------------
Total liabilities ........................................... 391,606,933 327,611,196
------------- ------------
Stockholders' equity (notes 10, 12, and 15):
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 5,205,597 shares ....................................... 5,205,597 5,205,597
Additional paid-in-capital ...................................... 10,022,486 9,667,133
Unearned employee stock ownership plan shares ................... (24,826) (180,672)
Treasury stock, at cost; 667,416 shares ........................ (8,336,969) (8,336,969)
Retained income, substantially restricted ....................... 43,381,082 41,750,444
Accumulated other comprehensive income .......................... 2,475,064 2,783,508
------------- ------------
Total stockholders' equity .................................. 52,722,434 50,889,041
Commitments (notes 11, 12, and 14)
------------- ------------
$ 444,329,367 378,500,237
============= ============
See accompanying notes to consolidated financial statements.
2
LEEDS FEDERAL BANKSHARES, INC.AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
------------ ---------- ----------
Interest income:
First mortgage and other loans ...................... $ 16,404,890 15,411,216 15,328,947
Investment securities and short-term investments .... 4,553,484 6,832,640 6,104,071
Mortgage-backed securities .......................... 2,032,949 713,592 636,556
------------ ---------- -----------
Total interest income ........................... 22,991,323 22,957,448 22,069,574
------------ ---------- -----------
Interest expense:
Savings accounts (note 8) ........................... 16,674,802 15,635,632 13,889,755
Other ............................................... 8,570 28,701 38,030
------------ ---------- -----------
Total interest expense .......................... 16,683,372 15,664,333 13,927,785
------------ ---------- -----------
Net interest income ............................. 6,307,951 7,293,115 8,141,789
Provision for loan losses (note 5) .................... (170,000) 154 20,983
------------ ---------- -----------
Net interest income after provision
for loan losses ............................... 6,477,951 7,292,961 8,120,806
------------ ---------- -----------
Non-interest income:
Service fees and charges ............................ 234,230 199,809 156,241
Increase in cash surrender value of life insurance .. 432,147 336,175 288,064
Other ............................................... 42,989 44,178 520
------------ ---------- -----------
709,366 580,162 444,825
------------ ---------- -----------
Non-interest expense:
Compensation and employee benefits .................. 2,109,057 1,993,616 1,759,282
Occupancy expense ................................... 310,821 338,892 259,710
Professional fees ................................... 370,725 156,110 89,809
SAIF deposit insurance premiums (note 10) ........... 144,631 131,153 184,213
Advertising ......................................... 89,928 181,365 158,807
Other ............................................... 990,010 700,892 627,377
------------ ---------- -----------
4,015,172 3,502,028 3,079,198
------------ ---------- -----------
Income before provision for
income taxes .................................. 3,172,145 4,371,095 5,486,433
Provision for income taxes (note 9) ................... 814,955 1,485,890 1,891,125
------------ ---------- -----------
Net income ...................................... 2,357,190 2,885,205 3,595,308
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities
available-for-sale, net of tax expense (benefit) of
($194,473) in 2002, $772,072 in 2001 and
($491,100) in 2000 ................................ (308,444) 1,246,505 (801,885)
------------ ---------- -----------
Comprehensive income ............................ $ 2,048,746 4,131,710 2,793,423
============ ========== ===========
Net income per share of common stock (note 16):
Basic ............................................... $ 0.52 0.64 0.78
Diluted ............................................. 0.51 0.63 0.77
============ ========== ===========
See accompanying notes to consolidated financial statements.
3
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2002, 2001, and 2000
Unearned Retained Accumulated
employee income, other Total
Additional stock ownership Treasury substantially comprehensive stockholders'
Common stock paid-in capital plan shares stock, at cost restricted income equity
------------ --------------- --------------- -------------- ------------- ------------- -------------
Balance at June 30, 1999 ..... $5,195,597 9,367,161 (390,682) (4,740,869) 36,734,317 2,338,888 48,504,412
Compensation expense - ESOP .. -- 48,535 93,616 -- -- -- 142,151
Exercise of stock options .... 10,000 69,200 -- -- -- -- 79,200
Income tax benefit of stock
awards and stock options ... -- 121,915 -- -- -- -- 121,915
Dividends ($0.59 per share) .. -- -- -- -- (755,778) -- (755,778)
Net income ................... -- -- -- -- 3,595,308 -- 3,595,308
Other comprehensive income ... -- -- -- -- -- (801,885) (801,885)
Purchases of treasury stock .. -- -- -- (3,475,850) -- -- (3,475,850)
---------- ---------- -------- ---------- ---------- --------- ----------
Balance at June 30, 2000 ..... 5,205,597 9,606,811 (297,066) (8,216,719) 39,573,847 1,537,003 47,409,473
Compensation expense - ESOP .. -- 60,322 116,394 -- -- -- 176,716
Dividends ($0.60 per share) .. -- -- -- -- (708,608) -- (708,608)
Net income ................... -- -- -- -- 2,885,205 -- 2,885,205
Other comprehensive income ... -- -- -- -- -- 1,246,505 1,246,505
Purchases of treasury stock .. -- -- -- (120,250) -- -- (120,250)
---------- ---------- -------- ---------- ---------- --------- ----------
Balance at June 30, 2001 ..... 5,205,597 9,667,133 (180,672) (8,336,969) 41,750,444 2,783,508 50,889,041
Compensation expense - ESOP .. -- 355,353 155,846 -- -- -- 511,199
Dividends ($0.60 per share) .. -- -- -- -- (726,552) -- (726,552)
Net income ................... -- -- -- -- 2,357,190 -- 2,357,190
Other comprehensive income ... -- -- -- -- -- (308,444) (308,444)
---------- ---------- -------- ---------- ---------- --------- ----------
Balance at June 30, 2002 ..... $5,205,597 10,022,486 (24,826) (8,336,969) 43,381,082 2,475,064 52,722,434
========== ========== ======== ========== ========== ========= ==========
See accompanying notes to consolidated financial statements.
4
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
------------- ---------- -----------
Cash flows from operating activities:
Net income .................................. $ 2,357,190 2,885,205 3,595,308
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of loan fees .................. (161,788) (131,709) (80,866)
Provision for loan losses ............... (170,000) 154 20,983
Accretion of premiums (discounts) on
investment and mortgage-backed
securities ............................ (55,619) 16,489 (10,650)
Depreciation ............................ 153,673 175,679 144,237
Noncash compensation under stock-based
benefit plans ......................... 511,199 176,716 142,151
Income tax benefit of stock awards
and stock options ..................... -- -- 121,915
Deferred income tax benefit ............. (71,852) (45,852) (409,400)
Increase in cash surrender value of life
insurance ............................. (432,147) (336,175) (288,064)
(Increase) decrease in accrued interest
receivable ............................ 648,828 (119,905) (122,251)
(Increase) decrease in prepaid expenses
and other assets ...................... 20,991 278,962 (282,209)
Increase (decrease) in income taxes
currently payable ..................... 363,873 (49,208) 159,706
Increase in accrued expenses and other
liabilities ........................... 182,438 359,213 250,517
Increase (decrease) in unearned loan fees (131,574) 46,391 55,222
------------- ----------- -----------
Net cash provided by operating
activities ........................ 3,215,212 3,255,960 3,296,599
------------- ----------- -----------
Cash flows from investing activities:
Purchases of securities available-for-sale .. (1,000,000) -- --
Maturities of securities available-for-sale . 1,100,000 1,475,000 --
Purchases of investment securities
held-to-maturity .......................... (15,698,875) (485,240) (1,700,000)
Maturities of and principal repayments on
investment securities held-to-maturity .... 60,734,556 7,386,542 477,213
Purchases of mortgage-backed securities
held-to-maturity .......................... (19,394,884) (13,778,195) (400,000)
Principal repayments on mortgage-backed
securities held-to-maturity ............... 6,496,276 2,030,168 2,099,013
Purchases of Federal Home Loan Bank of
Atlanta stock ............................. (391,000) -- (251,500)
Loan disbursements, net of repayments ....... (27,354,439) (433,943) (15,312,776)
Purchases of property and equipment ......... (25,142) (138,125) (902,400)
------------- ----------- -----------
Net cash provided (used) by
investing activities .............. 4,466,492 (3,943,793) (15,990,450)
------------- ----------- -----------
5
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
------------- ---------- -----------
Cash flows from financing activities:
Payment of dividends ........................ $ (726,552) (708,608) (788,434)
Repayment of borrowed funds ................. (194,885) (109,877) (86,813)
Net increase in savings accounts ............ 63,849,601 38,604,659 7,240,595
(Decrease) increase in advance payments by
borrowers for taxes, insurance and
ground rents .............................. 61,035 (1,558,645) (129,626)
Purchases of treasury stock ................. -- (120,250) (3,475,850)
Exercise of stock options ................... -- -- 79,200
------------- ----------- -----------
Net cash provided by financing
activities ........................ 62,989,199 36,107,279 2,839,072
------------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents .............. 70,670,903 35,419,446 (9,854,779)
Cash and cash equivalents at beginning of year 58,575,333 23,155,887 33,010,666
------------- ----------- -----------
Cash and cash equivalents at end of year ...... $ 129,246,236 58,575,333 23,155,887
============= =========== ===========
See accompanying notes to consolidated financial statements.
6
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(1) Description of Business, Summary of Significant Accounting Policies, and
Other Matters
(a) Business
Leeds Federal Bankshares, Inc. (the Company) is a federally chartered
corporation which owns all of the issued and outstanding common stock
of Leeds Federal Savings Bank (the Bank), a federally-chartered
savings bank that conducts its operations through branches in
Baltimore County and Howard County, Maryland. At June 30, 2002,
approximately 73% of the outstanding shares of common stock of the
Company were held by Leeds Federal Bankshares, M.H.C. (MHC), a federal
mutual holding company.
The primary business of the Bank is attracting deposits from
individual and corporate customers and originating mortgage loans
secured by residential real estate properties. The Bank is subject to
competition from other financial institutions in attracting and
retaining deposits and in making loans. The Bank is also subject to
the regulations of certain agencies of the federal government and
undergoes periodic examinations by those agencies.
(b) Basis of Presentation
The consolidated financial statements include the accounts of the
Company, the Bank and its wholly owned subsidiaries, Leeds Investment
Corporation and Leeds Investor Services, Inc. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of the dates of the statements of financial
condition and the reported amounts of income and expenses for the
periods. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and the valuation of real estate owned. In connection
with the determination of the allowance for loan losses and the
valuation of real estate owned, management obtains independent
appraisals for significant properties and prepares fair value
analyses, as appropriate. Management believes that the allowance for
losses on loans is adequate and that real estate owned is carried at
an appropriate value. While management uses available information to
make the required estimates, additional provisions for losses may be
necessary based on changes in economic conditions, particularly in the
State of Maryland. In addition, various regulatory agencies, as an
integral part of their examination processes, periodically review the
Bank's allowance for losses on loans and the valuation of real estate
owned. Such agencies may require the Bank to recognize additional
provisions for losses based on their judgments about information
available to them at the time of their examinations.
(c) Short-Term Investments
Short-term investments, which consist of money market accounts, are
carried at cost which approximates fair value.
(Continued)
7
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(d) Secured Short-Term Loans to Commercial Banks
Secured short-term loans to commercial banks, which consist of Federal
funds sold, are carried at cost which approximates fair value.
Generally, Federal funds are purchased and sold for one-day periods.
(e) Investment Securities and Mortgage-Backed Securities
The Company classifies its securities into one of three categories.
Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity and recorded at
amortized cost. Debt securities not classified as held-to-maturity and
equity securities with readily determinable fair values are classified
as trading securities if bought and held principally for the purpose
of selling them in the near term. Trading securities are reported at
fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as held-to-maturity or
trading are considered available-for-sale and are reported at fair
value with unrealized gains and losses, net of the related tax
effects, excluded from income and reported as an item of other
comprehensive income until realized. Fair value is determined based on
published bid prices or bid quotations received from securities
dealers. Realized gains or losses on sales of investments are
determined using the specific identification method and are recognized
at the time of sale. Premiums and discounts on investment and
mortgage-backed securities are amortized over the term of the security
using methods that approximate the interest method.
(f) Loan Fees
Loan origination and commitment fees and direct origination costs of
income fees are deferred and amortized into income over the
contractual lives of the related loans using the interest method.
Under certain circumstances, commitment fees are recognized over the
commitment period or upon the expiration of the commitment.
(g) Loans Receivable
Loans are stated at the amount of unpaid principal reduced by unearned
loan fees and the allowance for loan losses. Interest on loans is not
accrued when, in the opinion of management, full collection of
principal or interest is in doubt, or payment of principal or interest
has become 90 days past due. Interest accrued prior to a loan becoming
90 days past due is not retained in income. Any interest ultimately
collected on such loans is recorded in income in the period of
recovery.
The provision for losses on loans is determined based on management's
review of the loan portfolio. The Company's objective is to ensure
that the allowance is adequate to cover probable credit losses
inherent in the loan portfolio at the date of each statement of
financial condition. Management considers a number of factors in
estimating the required level of the allowance. These factors include
historical loss experience in the loan portfolio; the levels and
trends in past-due and nonaccrual loans; the status of nonaccrual
loans and other loans identified as having the potential for further
deterioration; credit risk and industry concentrations; trends in loan
volume; the effects of any changes in lending policies and procedures
or underwriting standards; and a continuing evaluation of the economic
environment. The Company's estimate of the required allowance is
subject to revision as these factors change and is sensitive to the
effects of economic and market conditions on borrowers. Loans or
portions thereof are charged off when considered uncollectible by
management.
(Continued)
8
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Loans that experience insignificant payment delays (90 days or less)
or shortfalls generally are not considered impaired. Impairment of a
loan is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or at the
loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. If the measure of the impaired loan
is less than the recorded investment in the loan, an impairment is
recognized through a valuation allowance and a corresponding provision
for loan losses.
Large groups of smaller balance homogenous loans, including
residential mortgage loans and consumer installment loans, are
collectively evaluated for impairment. Accordingly, individual
consumer and residential loans are not separately identified for
impairment disclosures.
(h) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Additions and
betterments are capitalized and charges for repairs and maintenance
are expensed as incurred. The related cost and accumulated
depreciation are eliminated from the accounts when an asset is sold or
retired and the related gain or loss is credited or charged to income.
(i) Other Real Estate Owned
Real estate acquired through foreclosure is classified as other real
estate owned and recorded at the lower of cost or fair value less
estimated costs to sell. Costs relating to holding real estate are
charged to expense, while costs relating to improving real estate are
capitalized, if recoverable, until a salable condition is reached.
(j) Income Taxes
Deferred income taxes are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized, with
certain exceptions, for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities based
on enacted tax rates expected to be in effect when such amounts are
realized or settled. Deferred tax assets are recognized only to the
extent that it is more likely than not that such amounts will be
realized based on consideration of available evidence, including tax
planning strategies and other factors. The effects of changes in tax
laws or rates on deferred tax assets and liabilities are recognized in
the period that includes the enactment date.
(Continued)
9
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Qualified thrift lenders such as the Bank are not required to provide
a deferred tax liability for bad debt reserves for tax purposes that
arose in fiscal years beginning before December 31, 1987. Such bad
debt reserve for the Bank amounted to approximately $7,100,000 with an
income tax effect of approximately $2,700,000 at June 30, 2002. This
bad debt reserve would become taxable in the future if the Bank fails
to meet certain conditions.
(k) Stock-Based Compensation
The Company uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is
recognized for awards of shares of common stock to employees only if
the quoted market price of the stock at the grant date (or other
measurement date, if later) is greater than the amount the employee
must pay to acquire the stock. Compensation cost is recorded on a
pro-rata basis as the employees perform the services required to
acquire the stock.
The Company has established an employee stock ownership plan (ESOP)
for its employees. The Company recognizes the costs associated with
the ESOP in accordance with provisions of AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans.
Accordingly, compensation expense is recorded based on the market
value of shares committed-to-be-released to the ESOP for allocation to
participants for services rendered.
(l) Comprehensive Income
Comprehensive income includes all changes in stockholders' equity
during a period, except those relating to investments by and
distributions to stockholders. The Company's comprehensive income
consists of net earnings and unrealized gains and losses on securities
available-for-sale and is presented in the statements of income and
comprehensive income. Accumulated other comprehensive income is
displayed as a separate component of stockholders' equity.
(m) Cash Equivalents and Supplemental Cash Flow Information
For purposes of the consolidated statements of cash flows, all highly
liquid investments with maturities at dates of purchase of three
months or less are considered to be cash equivalents. Cash equivalents
include interest-bearing deposits, short-term investments and secured
short-term loans to commercial banks.
Income tax payments were approximately $523,000, $1,581,000, and
$1,985,000 in 2002, 2001, and 2000, respectively. Interest paid on
savings accounts and borrowings aggregated approximately $16,687,000,
$15,668,000, and $13,928,000 in 2002, 2001, and 2000, respectively. In
2001, a loan receivable with a carrying value of $2,540,127 was
transferred to other real estate owned.
(n) Reclassifications
Certain amounts for 2001 and 2000 have been reclassified to conform
with the presentation for 2002.
(Continued)
10
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(2) Securities Available-for-Sale
Securities available-for-sale are summarized as follows at June 30:
2002
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---------- ---------- ---------- ----------
U.S. Government and agency
obligations due beyond ten years .. $1,000,000 -- (73,437) 926,563
Federal Home Loan Mortgage
Corporation (FHLMC) preferred
stock ............................. 56,760 4,111,694 -- 4,168,454
Other equity securities ............. 100,000 4,160 -- 104,160
---------- --------- ------- ---------
$1,156,760 4,115,854 (73,437) 5,199,177
========== ========= ======= =========
2001
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---------- ---------- ---------- ----------
U.S. Government and agency
obligations due beyond ten years .. $1,100,000 -- (7,502) 1,092,498
FHLMC preferred stock ............... 56,760 4,578,836 -- 4,635,596
Other equity securities ............. 100,000 -- (26,000) 74,000
---------- --------- ------- ---------
$1,256,760 4,578,836 (33,502) 5,802,094
========== ========= ======= =========
(3) Investment Securities Held-to-Maturity
Investment securities held-to-maturity are summarized as follows at June
30:
2002 2001
----------- ----------
U.S. Government and agency obligations:
Amortized cost ................................. $15,498,705 60,518,903
Gross unrealized gains ......................... 40,929 19,485
Gross unrealized losses ........................ (88,881) (1,087,305)
----------- ----------
Fair value ................................. $15,450,753 59,451,083
=========== ==========
(Continued)
11
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Investment securities mature as follows at June 30:
2002 2001
------------------------ ----------------------
Amortized Amortized
cost Fair value cost Fair value
----------- ---------- ---------- ----------
Due within 12 months ......... $ -- -- 1,900,000 1,896,906
Due beyond 5 years
but within 10 years ..... 500,000 497,344 1,800,000 1,797,624
Due beyond 10 years .......... 14,998,705 14,953,409 56,818,903 55,756,553
----------- ---------- ---------- ----------
$15,498,705 15,450,753 60,518,903 59,451,083
=========== ========== ========== ==========
(4) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities held-to-maturity are summarized as follows at
June 30:
2002
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
----------- ---------- ---------- ----------
Government National Mortgage
Association (GNMA) ........... $ 3,986,067 137,658 -- 4,123,725
Federal National Mortgage
Association (FNMA) ........... 27,106,233 376,541 (12,545) 27,470,229
FHLMC .......................... 1,622,440 14,451 (562) 1,636,329
Collateralized Mortgage
Obligation -- FNMA
REMIC ........................ 245,029 354 -- 245,383
----------- ------- ------- ----------
$32,959,769 529,004 (13,107) 33,475,666
=========== ======= ======= ==========
2001
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
----------- ---------- ---------- ----------
GNMA ........................... $ 6,001,005 143,035 (14,417) 6,129,623
FNMA ........................... 13,033,532 28,611 (177,926) 12,884,217
FHLMC .......................... 500,100 16,203 -- 516,303
Collateralized Mortgage
Obligation -- FNMA
REMIC ........................ 486,388 1,563 -- 487,951
----------- ------- -------- ----------
$20,021,025 189,412 (192,343) 20,018,094
=========== ======= ======== ==========
(Continued)
12
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(5) Loans Receivable
Loans receivable are summarized as follows at June 30:
2002 2001
------------ -----------
First mortgage loans:
One-to four-family residential ................ $228,232,970 200,466,473
Construction .................................. 5,693,156 6,168,853
------------ -----------
233,926,126 206,635,326
Home equity loans ............................... 10,912,785 12,130,758
Loans secured by savings accounts ............... 509,998 483,807
Consumer loans .................................. 3,062,510 3,648,703
------------ -----------
248,411,419 222,898,594
Less:
Allowance for loan losses ..................... 558,810 731,641
Unearned loan fees ............................ 255,055 548,417
Undisbursed portion of loans in process ....... 2,597,166 4,435,949
------------ -----------
Loans receivable, net ..................... $245,000,388 217,182,587
============ ===========
Substantially all of the loans receivable are mortgage loans secured by
residential real estate properties located in the State of Maryland. Loans
are extended only after evaluation by management of customers'
creditworthiness, the loan-to-value ratio and other relevant factors. The
Bank generally does not lend more than 80% of the appraised value of a
property and, with limited exceptions, requires private mortgage insurance
on residential mortgages with loan-to-value ratios in excess of 80%. In
addition, the Bank generally obtains personal guarantees of repayment from
borrowers and/or others for construction and commercial loans and disburses
the proceeds of construction and similar loans only as work progresses on
the related properties.
Residential lending is generally considered to involve less risk than other
forms of lending, although payment experience on these loans is dependent
to some extent on economic and market conditions in the Bank's lending
area.
There were no nonaccrual loans at June 30, 2002 and 2001. For the year
ended June 30, 2000, the amount of interest income that would have been
recorded on loans in nonaccrual status at year end had such loans performed
in accordance with their terms was approximately $305,000. The actual
interest income recorded on these loans for the year ended June 30, 2000
was approximately $2,000.
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
2002 2001 2000
-------- ------- -------
Beginning balance ......................... $731,641 741,678 725,152
Provision for loan losses ................. (170,000) 154 20,983
Charge-offs ............................... (2,831) (10,191) (4,457)
-------- ------- -------
Ending balance ............................ $558,810 731,641 741,678
======== ======= =======
(Continued)
13
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(6) Property and Equipment
Property and equipment are summarized as follows at June 30:
Useful life
2002 2001 in years
---------- --------- -----------
Land ................................. $ 729,749 729,749 --
Building and improvements ............ 1,717,157 1,717,157 50 years
Furniture, fixtures, and equipment ... 1,155,633 1,165,410 3-10 years
---------- ---------
Total, at cost ................. 3,602,539 3,612,316
Less accumulated depreciation ........ 1,525,841 1,407,087
---------- ---------
Property and equipment, net .... $2,076,698 2,205,229
========== =========
(7) Other Real Estate Owned
At June 30, 2002, other real estate owned consists of a commercial property
which is under a contract for sale.
(8) Savings Accounts
Savings accounts are summarized as follows at June 30:
Weighted average rate 2002 2001
--------------------- ------------------- -------------------
Type of Account 2002 2001 Amount % Amount %
- ------------------- -------- -------- ------------ ---- ------------ ----
Certificates ........ 5.26% 5.78% $288,637,333 75% $238,761,753 75%
Anniversary bonus ... -- 3.32% -- -- 3,188,871 1%
Money Market ........ 3.00% 4.69% 58,058,875 16% 45,950,302 14%
Passbook ............ 2.50% 3.15% 24,522,018 6% 21,780,408 7%
NOW and demand ...... 1.00% 1.99% 13,102,240 3% 10,789,531 3%
------------ ---- ------------ ----
$384,320,466 100% $320,470,865 100%
============ ==== ============ ====
Certificate accounts mature as follows:
Within 12 months ........................ $206,298,974 71% $132,022,035 56%
12 to 24 months ......................... 64,174,258 22% 86,817,784 36%
24 to 36 months ......................... 10,833,317 4% 10,241,842 4%
36 to 48 months ......................... 4,985,765 2% 5,081,886 2%
48 to 60 months ......................... 2,345,019 1% 4,598,206 2%
------------ ---- ------------ ----
$288,637,333 100% $238,761,753 100%
============ ==== ============ ====
At June 30, 2002 and 2001, the Bank had customer deposits in savings
accounts of $100,000 or more of approximately $135,701,000 and $88,236,000,
respectively.
(Continued)
14
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Interest expense on savings accounts consists of the following for the
years ended June 30:
2002 2001 2000
----------- ---------- ----------
Time deposits .................... $14,420,431 12,486,143 10,289,585
Checking and money market ........ 1,680,887 2,504,553 2,972,732
Passbook and other ............... 573,484 644,936 627,438
----------- ---------- ----------
$16,674,802 15,635,632 13,889,755
=========== ========== ==========
(9) Income Taxes
The provision for income taxes is comprised of the following for the years
ended June 30:
2002 2001 2000
----------- ---------- -----------
Current:
Federal ............ $ 886,807 1,608,854 2,240,711
State .............. -- (77,112) 59,814
----------- ---------- ----------
886,807 1,531,742 2,300,525
----------- ---------- ----------
Deferred:
Federal ............ (58,829) (37,541) (367,454)
State .............. (13,023) (8,311) (41,946)
----------- ---------- ----------
(71,852) (45,852) (409,400)
----------- ---------- ----------
$ 814,955 1,485,890 1,891,125
=========== ========== ==========
The net deferred tax liability at June 30, 2002 and 2001 consists of total
deferred tax assets of $914,843 and $937,341, respectively, and total
deferred tax liabilities of $1,868,041 and $2,156,864, respectively. The
tax effects of temporary differences between the financial reporting and
income tax basis of assets and liabilities relate to the following at June
30:
2002 2001
----------- ----------
Tax bad debt reserve in excess of base year ..... $ -- (99,966)
Allowance for losses on loans ................... 215,812 282,560
Federal Home Loan Bank stock dividends .......... (304,291) (304,291)
Compensation plans .............................. 616,879 553,894
Unrealized gains on securities
available-for-sale, net ....................... (1,558,134) (1,752,607)
Other, net ...................................... 76,536 100,887
----------- ----------
$ (953,198) (1,219,523)
=========== ==========
(Continued)
15
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Reconciliations between the provisions for income taxes computed by
multiplying income before income taxes by the statutory Federal income tax
rate (34%) and the actual provisions for income taxes are as follows for
the years ended June 30:
2002 2001 2000
---------- --------- ---------
Federal income taxes at statutory rate .... $1,078,529 1,486,172 1,865,387
State income taxes, net of Federal
income tax effect ....................... (8,595) (56,379) 11,793
Permanent difference for increase in
cash surrender value of life insurance .. (289,930) -- --
Other, net ................................ 34,951 56,097 13,945
---------- --------- ---------
$ 814,955 1,485,890 1,891,125
========== ========= =========
(10) Regulatory Matters
The Federal Deposit Insurance Corporation, through the Savings Association
Insurance Fund (SAIF), insures deposits of accountholders up to $100,000.
The Bank pays an annual premium to provide for this insurance. The Bank is
also a member of the Federal Home Loan Bank System and is required to
maintain an investment in the stock of the Federal Home Loan Bank of
Atlanta (FHLB) equal to at least 1% of the unpaid principal balances of its
residential mortgage loans, 0.3% of its total assets or 5% of its
outstanding advances from the FHLB, whichever is greater. Purchases and
sales of stock are made directly with the FHLB at par value.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (as defined in the
regulations and as set forth in the table below). As of June 30, 2002, the
most recent notification from the Office of Thrift Supervision (OTS)
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
(Continued)
16
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Regulatory capital amounts and ratios for the Bank are as follows (in
thousands):
To be well
Minimum capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ -----
As of June 30, 2002:
Tier I core capital (a) . $49,961 11.35% $17,607 4% $22,009 5%
Risk-based capital (b):
Tier I ................ 49,961 18.55% 10,772 4% 16,159 6%
Total ................. 52,338 19.43% 21,545 8% 26,931 10%
As of June 30, 2001:
Tier I core capital (a) . $47,692 12.76% $14,954 4% $18,692 5%
Risk-based capital (b):
Tier I ................ 47,692 24.36% 7,833 4% 11,749 6%
Total ................. 51,224 26.16% 15,665 8% 19,582 10%
(a) Percentage of capital to ending assets.
(b) Percentage of risk-based capital to ending risk-weighted assets.
(11) Retirement and Deferred Compensation Plans
The Bank has a 401(k) Employee Investment Plan covering substantially all
employees. Participation is voluntary and employee contributions are based
on a percentage of compensation, ranging from 1% to 10%. The Bank matches
employees' contributions, not to exceed 6% of compensation or a maximum of
$2,400 annually. The Bank's contributions were $41,918, $39,995, and
$38,644 for the years ended June 30, 2002, 2001, and 2000, respectively.
The Bank has a supplemental retirement income plan (SERP) for executive
officers. The SERP supplements the 401(k) plan to bring officer retirement
benefits up to targeted levels (2% for each year of service, not to exceed
70% of final salary). In addition, the SERP provides death benefit
protection for officers' beneficiaries. The cost of each participant's
retirement benefits is accrued over the participant's active employment.
The accrued liability under the SERP was approximately $135,000 and
$165,000, as of June 30, 2002 and 2001, respectively. Compensation cost
related to the SERP was $188,725, $158,540, and $129,001 for the years
ended June 30, 2002, 2001, and 2000, respectively.
The Bank also has a deferred compensation agreement with one officer to
provide certain death and retirement benefits. The benefits payable are
accrued annually by charges to income of $1,383. The accrued liability for
these benefits amounted to $33,742 and $32,359 at June 30, 2002 and 2001,
respectively, and is included in accrued expenses and other liabilities.
(Continued)
17
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The Bank has a Directors Retirement Plan which is a nonqualified plan for
income tax purposes. Under the plan, each director will be paid 75% of
annual directors' fees for ten years after retirement or until death. The
benefits payable are accrued annually and are based on the retirement age
selected by each director and an assumed 4% increase in annual fees until
retirement. The accrued liability under this plan was $772,291 and $642,161
at June 30, 2002 and 2001, respectively, and is included in accrued
expenses and other liabilities. Compensation cost related to this plan was
$204,651, $234,940, and $144,400 for the years ended June 30, 2002, 2001,
and 2000, respectively.
The Bank also has an optional plan for the deferral of directors' fees
which is nonqualified for income tax purposes. The accrued liability under
this plan was $656,249 and $594,969 at June 30, 2002 and 2001,
respectively, and is included in accrued expenses and other liabilities.
The Bank has invested in whole-life insurance policies on the lives of the
individual participants for purposes of providing income and assets in the
future to offset the costs of the officers and directors' plans. The life
insurance companies and related investments are as follows at June 30:
2002 2001
---------- ---------
Transamerica ............................ $3,943,520 3,702,794
Massachusetts Mutual .................... 703,302 670,458
Pacific Mutual .......................... 2,809,037 2,650,460
---------- ---------
$7,455,859 7,023,712
========== =========
(12) Stock-Based Benefit Plans
Employees who attain the age of 21 and complete one year of service with
the Bank are eligible to participate in the Company's ESOP. Participants
are 100% vested in their accounts after five years of service with the Bank
or, if earlier, upon death, disability, or attainment of normal retirement
age. Participants received credit for service with the Bank prior to the
establishment of the ESOP.
In 1994, the ESOP borrowed $960,000 from an unrelated third party lender
under a ten year loan bearing interest at the Federal funds rate plus 2.5%
per annum, with payments of principal and interest due quarterly. Annual
principal payments are $96,000. The proceeds of the loan were used by the
ESOP to acquire 144,000 shares of the Bank's common stock upon its
conversion to a capital stock form of organization. The ESOP holds the
common stock in a trust for allocation among participating employees, which
occurs as the ESOP repays the loan. The ESOP's sources of repayment of the
loan are dividends on the common stock, if any, either held in trust or
allocated to the participants' accounts, and quarterly contributions from
the Bank to the ESOP and earnings thereon. For the years ended June 30,
2002, 2001, and 2000 the Bank made contributions to the ESOP of $133,312,
$136,101, and $130,385, respectively.
(Continued)
18
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The debt of the ESOP is recorded as debt of the Company and the shares
pledged as collateral are reported as unearned ESOP shares in the statement
of financial condition. Dividends on allocated shares are recorded as a
reduction of retained earnings; dividends on unallocated shares are
recorded as a reduction of debt and accrued interest. The Bank recognized
interest expense of $7,970, $26,224, and $34,385, respectively, and
compensation expense of $441,457, $162,839, and 141,548, respectively,
related to the ESOP for the years ended June 30, 2002, 2001, and 2000.
Dividends on unallocated ESOP shares used for debt service were $16,352,
$26,546, and $33,303 for the years ended June 30, 2002, 2001, and 2000,
respectively. The related tax benefits to the Bank for dividends paid to
the ESOP were not material. The ESOP shares were as follows at June 30:
2002 2001
-------- -------
Allocated shares .................................. 126,991 107,923
Shares earned, but unallocated .................... 13,606 7,152
Unearned shares ................................... 3,403 28,925
-------- -------
144,000 144,000
======== =======
Fair value of unearned shares at June 30 .......... $108,796 455,566
======== =======
In 1994, the Company adopted a Stock Option Plan (Option Plan), under which
180,000 shares of common stock were granted to directors and officers of
the Bank. Options granted under the Option Plan may be Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or nonqualifying stock options. The 72,000 options
granted to directors vested at grant date, while the 108,000 options
granted to officers vested at a rate of 20% per year. Options are
exercisable at $7.92 per share, the market price of the common stock on the
date of grant, and must be exercised within ten years from the date of
grant.
A summary of changes in shares under option and options exercisable is as
follows for the years ended June 30:
2002 2001 2000
------- ------- -------
Outstanding at beginning of year ...... 138,500 138,500 148,500
Exercised ............................. -- -- (10,000)
------- ------- -------
Outstanding at end of year ............ 138,500 138,500 138,500
------- ------- -------
Exercisable at end of year ............ 138,500 138,500 138,500
======= ======= =======
(13) Postretirement Benefits Other Than Pensions
The Bank offers a postretirement health care benefit plan to certain
directors and employees. The net cost of the plan was approximately
$38,000, $38,000, and $39,000 for the years ended June 30, 2002, 2001, and
2000, respectively. The accrued liability for these benefits was
approximately $225,000 and $201,000 at June 30, 2002 and 2001,
respectively, and is included in accrued expenses and other liabilities.
(Continued)
19
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(14) Financial Instruments
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business, including mortgage loan commitments and
lines of credit on home equity loans. These instruments involve, to various
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to a financial instrument is represented by the contract amount
of the financial instrument. The Bank uses the same credit policies in
making commitments for off-balance-sheet financial instruments as it does
for on-balance-sheet financial instruments. Financial instruments with
off-balance-sheet risk are as follows at June 30, 2002:
Contract
amount
-----------
Undisbursed lines of credit on home equity loans ............. $13,300,000
Residential mortgage loans to be funded ...................... 3,981,000
-----------
$17,281,000
===========
The Bank's outstanding mortgage loan commitments at June 30, 2002 were all
for fixed rate loans. The interest rate range on these commitments was
5.875% to 7.875% and all commitments expire within one year. The loan
commitments and undisbursed lines of credit are expected to be settled at
face amount or expire unused. The fair value of these commitments was not
significant at June 30, 2002.
The Bank has an unsecured line of credit and a reverse repurchase line of
credit with a commercial bank for up to $2 million and $3 million,
respectively. There were no borrowings outstanding as of June 30, 2002.
(Continued)
20
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The carrying amounts and estimated fair values of financial instruments are
summarized as follows at June 30:
2002 2001
-------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
------------ ----------- ----------- -----------
Assets:
Cash and interest-bearing
deposits .................. $ 8,784,723 8,785,000 7,015,942 7,016,000
Short-term investments ...... 100,612,524 100,613,000 35,334,058 35,334,000
Secured short-term loans to
commercial banks .......... 19,848,989 19,849,000 16,225,333 16,225,000
Securities available-for-sale 5,199,177 5,199,000 5,802,094 5,802,000
Investment securities
held-to-maturity .......... 15,498,705 15,451,000 60,518,903 59,451,000
Mortgage-backed securities
held-to-maturity .......... 32,959,769 33,476,000 20,021,025 20,018,000
Loans receivable ............ 245,000,388 250,291,000 217,182,587 216,542,000
Investment in Federal Home
Loan Bank stock ........... 2,578,200 2,578,000 2,187,200 2,187,000
Accrued interest receivable . 1,587,932 1,588,000 2,236,760 2,237,000
Liabilities:
Savings accounts ............ 384,320,466 389,496,000 320,470,865 324,175,000
Borrowed funds .............. 79,238 79,000 274,123 274,000
Advances payments by
borrowers for taxes,
insurance, and ground
rents ..................... 3,576,296 3,576,000 3,515,261 3,515,000
The methods and assumptions used to determine fair value estimates at June
30, 2002 and 2001 are set forth below.
(a) Cash, Cash Equivalents, Investments, and Mortgage-Backed Securities
For cash and cash equivalents, the carrying value approximates fair
value due to the short maturity of these instruments. The fair values
of U.S. Government and agency obligations, equity securities, and
mortgage-backed securities are estimated based on published bid prices
or bid quotations received from securities dealers. The fair value of
Federal Home Loan Bank stock is estimated to be equal to its carrying
amount since it is not a publicly traded equity security, it has an
adjustable dividend rate and all transactions in the stock are
executed at the stated par value.
(b) Loans Receivable
The fair value of loans receivable is estimated by discounting
anticipated future cash flows (based on contractual maturities,
weighted average coupons, and prepayment assumptions) at current
market rates for loans to borrowers with similar credit histories.
(Continued)
21
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(c) Savings Accounts, Borrowed Funds, and Advance Payments by Borrowers
for Taxes, Insurance, and Ground Rents
The fair value of savings accounts, other than certificate accounts,
and advance payments by borrowers for taxes, insurance, and ground
rents is the amount payable on demand at June 30. The fair value of
certificate accounts is based on the lower of redemption value (net of
penalty) or the discounted value of contractual cash flows. Discount
rates are estimated using current market rates for accounts with
similar remaining maturities. Borrowed funds are considered to be at
fair value due to their adjustable rate nature.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about financial instruments.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(15) Stockholders' Equity
In March 1994, the members of Leeds Federal Savings Association (the
Association) approved a plan of reorganization from a mutual savings
association to a mutual holding company. Pursuant to the plan of
reorganization, the Association transferred substantially all of its assets
and all of its liabilities to a new federally-chartered stock savings
association which became a wholly owned subsidiary of MHC. The
reorganization was consummated in April 1994.
The principal purpose of the reorganization was to organize the Association
into a corporate form so that it would have more flexibility to raise
capital, diversify operations and establish employee incentive plans. Under
the terms of the reorganization, the membership rights of the Association's
members became rights in the mutual holding company and the Company has the
authority to issue shares of capital stock to persons other than MHC for up
to 49.9% (a minority ownership interest) of the shares issued and
outstanding.
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the institution's shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The regulations establish three
tiers of institutions. An institution, such as the Bank, that exceeds all
capital requirements before and after a proposed capital distribution (Tier
1 institution) may, after prior notice but without the approval of the OTS,
make capital distributions during a year up to 100% of its net income to
date during the year plus its retained net income for the preceding two
years. Any additional capital distributions require OTS approval.
MHC has waived receipt of its quarterly dividends, thereby reducing the
actual dividend payout by the Company in 2002 and prior years. The
dividends waived by MHC are considered as a restriction on the retained
earnings of the Bank. The amount of any dividend waived by MHC is available
for declaration as a dividend solely to MHC. At June 30, 2002, the
cumulative amount of such waived dividends was $13,688,400.
(Continued)
22
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
At June 30, 2002, the Company was authorized to repurchase up to 1,023,441
shares of common stock pursuant to its repurchase plan. No shares were
purchased in 2002. During the years ended June 30, 2001 and 2000, the
Company purchased 11,000 and 324,475 shares, respectively, at an average
cost per share of $10.93 and $10.71, respectively.
(16) Net Income Per Share of Common Stock
Basic earning per share (EPS) is calculated by dividing net income by the
weighted average number of common shares outstanding for the applicable
period. Diluted EPS is calculated after adjusting the numerator and the
denominator of the basic EPS calculation for the effect of all dilutive
potential common shares outstanding during the period. The dilutive effects
of options and any unvested restricted stock awards are computed during the
"treasury stock" method. Unearned ESOP shares are not included in
outstanding shares.
Information related to the calculation of net income per share of common
stock is summarized as follows for the years ended June 30:
2002 2001 2000
---------------------- --------------------- ---------------------
Basic Diluted Basic Diluted Basic Diluted
---------- --------- --------- --------- --------- ---------
Net income .......... $2,357,190 2,357,190 2,885,205 2,885,205 3,595,308 3,595,308
========== ========= ========= ========= ========= =========
Weighted average
shares outstanding 4,532,087 4,532,087 4,508,026 4,508,026 4,634,155 4,634,155
Dilutive securities:
Options ........... -- 101,588 -- 55,618 -- 31,764
---------- --------- --------- --------- --------- ---------
Adjusted weighted
average shares used
in EPS calculations 4,532,087 4,633,675 4,508,026 4,563,644 4,634,155 4,665,919
========== ========= ========= ========= ========= =========
(Continued)
23
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(17) Condensed Financial Information (Parent Company Only)
Summarized financial information for the Company is as follows as of and
for the years ended June 30:
Statements of Financial Condition
2002 2001
----------- ----------
Cash .......................................... $ 168,494 502,248
Securities available-for-sale ................. 117,921 83,605
Deferred tax asset ............................ -- 9,822
Investment in Bank ............................ 52,633,639 50,491,891
----------- ----------
$52,920,054 51,087,566
=========== ==========
Deferred tax liability ........................ $ 1,817 --
Accrued expenses and other liabilities ........ 195,803 198,525
Stockholders' equity .......................... 52,722,434 50,889,041
----------- ----------
$52,920,054 51,087,566
=========== ==========
Statements of Income
2002 2001 2000
---------- --------- ---------
Interest income ........................ $ 26,105 28,288 23,129
Equity in net income of subsidiary ..... 2,341,162 2,869,740 3,586,547
---------- --------- ---------
Income before provision for
income taxes ................... 2,367,267 2,898,028 3,609,676
Provision for income taxes ............. 10,077 12,823 14,368
---------- --------- ---------
Net income ....................... $2,357,190 2,885,205 3,595,308
========== ========= =========
(Continued)
24
LEEDS FEDERAL BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Statements of Cash Flows
2002 2001 2000
----------- ---------- ----------
Cash flows from operating activities:
Net income .................................... $ 2,357,190 2,885,205 3,595,308
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiary ........ (2,341,162) (2,869,740) (3,586,547)
Other, net ................................ (366,134) 429,606 (238,472)
----------- ---------- ----------
Net cash (used) provided by operating
activities ............................ (350,106) 445,071 (229,711)
----------- ---------- ----------
Cash flows from investing activities:
Dividend distribution from bank ............... 742,904 742,904 4,335,000
Cash flows from financing activities:
Payment of dividends .......................... (726,552) (708,608) (788,434)
Purchases of treasury stock ................... -- (120,250) (3,475,850)
Exercise of stock options ..................... -- -- 79,200
----------- ---------- ----------
Net cash used by financing activities ... (726,552) (828,858) (4,185,084)
----------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents ...................... (333,754) 359,117 (79,795)
Cash and cash equivalents at beginning of year .. 502,248 143,131 222,926
----------- ---------- ----------
Cash and cash equivalents at end of year ........ $ 168,494 502,248 143,131
=========== ========== ==========
(18) Proposed Merger
On August 16, 2001, Northwest Bancorp, Inc. (Northwest Bancorp) and the
Company announced that they, along with Northwest Bancorp, MHC (Northwest
MHC) and MHC, had entered into an agreement under which Northwest Bancorp
and Northwest MHC would acquire the Company and MHC, respectively. Under
terms of the agreement, the Company's stockholders, other than MHC, will
receive $32.00 for each share of the Company's common stock and shares of
the Company's common stock held by MHC will be cancelled.
The transaction is subject to the approval of the OTS and the application
is on file with the OTS but has not yet been approved. Under terms of the
merger agreement, as amended, the transaction is to be completed by
December 31, 2002, and the Company will become a wholly owned subsidiary of
Northwest MHC.
25