10-Q 1 form_10q-111202.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number 0-23645 LEEDS FEDERAL BANKSHARES, INC (Exact name of registrant as specified in its charter) UNITED STATES 52-2062351 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 1101 Maiden Choice Lane, Baltimore, Maryland 21229 (Address of principal executive offices) Registrant's telephone number, including area code: 410-242-1234 Former name, former address and former fiscal year, if changed since last report: N/A Indicated by a check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 4,550,931 shares of the Registrant's common stock outstanding as of September 30, 2002. LEEDS FEDERAL BANKSHARES, INC. INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 2002 (unaudited), and June 30, 2002 3 Consolidated Statements of Income and Comprehensive Income (unaudited) for the three months ended September 30, 2002 and 2001 4 Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2002 and 2001 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 Item 4. Controls and Procedures 11 PART II. OTHER INFORMATION 12 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements LEEDS FEDERAL BANKSHARES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See accompanying notes to consolidated financial statements. 3 LEEDS FEDERAL BANKSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

See accompanying notes to consolidated financial statements. 4 LEEDS FEDERAL BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

See accompanying notes to consolidated financial statements. 5 LEEDS FEDERAL BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (unaudited) (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of Leeds Federal Bankshares, Inc. (the Company), its wholly owned subsidiary, Leeds Federal Savings Bank and Leeds Investment Corporation, a wholly owned subsidiary of Leeds Federal Savings Bank. Adjustments, consisting of normal recurring adjustments, which, in the opinion of management are necessary for a fair presentation of financial position and results of operations have been recorded. The financial statements have been prepared using the accounting policies described in the June 30, 2002 Annual Report. The results of operations for the three months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the entire year. (2) Reclassification of Prior Year's Statements Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation. (3) Dividends on Common Stock On September 11, 2002, the Company declared a quarterly cash dividend of $.15 per share. The dividends were payable to stockholders of record as of October 2, 2002 and were paid on October 16, 2002. Leeds Federal Bankshares, M.H.C. (the MHC) , which owns 3,300,000 shares of stock in the Company, waived receipt of its quarterly dividend, thereby reducing the actual dividend payout to approximately $187,000. The dollar amount of dividends waived by the MHC is considered as a restriction on the retained earnings of the Company. The amount of any dividend waived by the MHC shall be available for declaration as a dividend solely to the MHC. At September 30, 2002, the cumulative amount of such waived dividends was $14.2 million. (4) Net Income per Share of Common Stock Basic earnings 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. Information related to the calculation of net income per share of common stock is summarized as follows: 6

7 LEEDS FEDERAL BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements In addition to historical information, this Quarterly Report contains forward-looking statements. The forward-looking statements contained in this document are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers should not place undue reliance on these forward-looking statements, as they reflect management's analysis as of the date of this report. The Company has no obligation to update or revise these forward-looking statements to reflect events or circumstances that occur after the date of this report. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including current reports filed on Form 8-K. Discussion of Financial Condition Changes from June 30, 2002 to September 30, 2002 Cash on hand and due from banks, interest bearing deposits, other liquid investments and investment securities totaled approximately $168.1 million at September 30, 2002, an increase of approximately $15.6 million, or 10.2%, from June 30, 2002. Mortgage-backed securities totaled $31.1 million, a decrease of $1.9 million, or 5.8%, due to the repayment of principal. Loans receivable totaled $241.6 million, a decrease of $3.4 million, or 1.4%, due primarily to a decrease in mortgage originations and higher repayments of principal. Deposits increased approximately $12 million to a total of $396.3 million at September 30, 2002. Such increase was primarily attributable to general market trends. The Company has offered savings rates that are competitive with other banks. However, it has not relied on brokered funds or negotiated jumbo certificates to achieve increased deposit levels. Total stockholders'equity increased $537,000, or 1%, to $53.3 million at September 30, 2002, compared to $52.7 million at June 30, 2002, due principally to the earnings of the Company of $724,000 less dividends declared on common stock of $188,000. Comparison of Operating Results for the Three Months Ended September 30, 2002 and 2001. General The Company's net income for the three months ended September 30, 2002, totaled $724,000, an increase of $140,000, or 24% as compared to $584,000 for the three months ended September 30, 2001, due principally to an increase in net interest income and a decrease in noninterest expenses. Unrealized losses on securities available-for-sale, net of tax, increased $197,000 resulting in accumulated other comprehensive income of $2.3 million for the three months ended September 30, 2002, as a result of a decrease in the fair value of the Company's investment securities available-for-sale, principally the Company's Federal Home Loan Mortgage Corporation preferred stock. 8 Net Interest Income Interest income on loans for the three months ended September 30, 2002, increased $228,000, to $4.2 million, from $3.9 million for the three months ended September 30, 2001. The average balances of loans increased by $22.2 million while the average yield on loans decreased to 6.8%, from 7.1%, for the same period in 2001. The increase in the average balance of loans was the result of increased loan originations during the last half of the fiscal year ended in June 30, 2002. The decrease in the average yield on loans was due to lower rates on new originated loans and repayments on higher yielding loans. Interest income on mortgage-backed securities increased $89,000 to $507,000 for the three months ended September 30, 2002, compared to $418,000 for the three months ended September 30, 2001. The average yield on mortgage-backed securities decreased to 6.2%, from 6.7%, while the average balance of mortgage-backed securities increased by $7.7 million to $32.6 million for the three months ended September 30, 2002, compared to $24.9 million for the same period last year. The increases in the average balance of mortgage-backed securities for the three months ended September 30, 2002, were the result of purchases of new mortgage-backed securities, totaling $20.0 million over the past fifteen months, offset by repayments of principal. The decrease in average yield on mortgage-backed securities for the period was attributable to general market rates of the newly purchased securities. Interest income on investment securities and short-term investments ("Investments") decreased by $763,000, to $812,000 for the three months ended September 30, 2002, from $1.5 million for the three months ended September 30, 2001. The average balance of Investments increased by $30.3 million to $150.5 million for the three months ended September 30, 2002, from $120.2 million for the same period in the prior year, while yield on Investments decreased to 2.2% from 5.2%. The increase in average balance of Investments for the three months ended September 30, 2002, was principally the result of deposit inflows. The changes in average yield on Investments for the period was due to changes in market rates on short-term investments. Total interest expense decreased by approximately $568,000 during the quarter ended September 30, 2002, to $3.8 million from $4.3 million for the quarter ended September 30, 2001. This decrease was the result of a decrease in average rates paid on deposits to 3.9%, from 5.2%, partially offset by an increase in average balances of interest bearing liabilities outstanding to $389.8 million from $330.8 million. The increase in average balance of interest bearing liabilities outstanding for the three months ended September 30, 2002, as compared to the same period last year, was due to increased customer deposits, while the decrease in average rates paid on deposits for these periods was due to general market conditions. As a result of the foregoing changes, the decrease in interest income was more than offset by a decrease in interest expense resulting in an increase in net interest income of $122,000, or 7.6%, to $1.7 million during the three months ended September 30, 2002, as compared to $1.6 million during the three months ended September 30, 2001. Provision for Loan Losses The Company maintains an allowance for loan losses, which was $553,000 and $559,000 at September 30, 2002 and June 30, 2002 respectively, 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 9 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 had no provision for loan losses for the three months ended September 30, 2002 and 2001. Management believes that, on an overall basis, the allowance for loan losses at September 30, 2002 is sufficient to address the credit risk of the Bank. Noninterest Income Noninterest income increased $17,000 to $168,000, from $151,000 for the three months ended September 30, 2002. The increase was primarily the result of increases in income from life insurance contracts and increases in service fee income. Noninterest Expense Noninterest expense for the three months ended September 30, 2002, decreased by $163,000 to $823,000, from $986,000,for the three months ended September 30, 2001. Compensation and employee benefits decreased $68,000 to $490,000 for the three months ended September 30, 2002, from $526,000 for the same period last year, due primarily to lower expenses related to the Employee Stock Ownership Plan. Other expenses decreased by $117,000 for the quarter ended September 30, 2002, due to a decrease in expenses related to the previously announced merger. Provision for Income Taxes Provision for income taxes for the three months ended September 30, 2002, totaled $359,000, compared to $196,000 for the three months ended September 30, 2001. The effective income tax rate for the three months ended September 30, 2002, was 33.1%, compared to 25.1% for the three months ended September 30, 2001. The higher effective rate in the quarter ended September 30, 2002, reflects the fact that a higher portion of the Company's pretax income consists of income that is subject to federal and state income taxes. Classified Assets There were four loans totaling $41,000 which were 90 or more days delinquent but still accruing at September 30, 2002, and no such loans at June 30, 2002. Real Estate Owned totaled $2.6 million at September 30, 2002 and June 30, 2002. A public sale for the property was held on June 10, 2002. However, to date the purchaser has not settled on the contract. The Company's counsel is pursuing all possible options in completing the transaction; however, there can be no assurances that the sale will close. Liquidity The Company is required to maintain levels of liquid assets as defined by Office of Thrift Supervision regulations to support safe and sound operations. The Company's liquidity ratio averaged 47.99% during the quarter ended September 30, 2002, and equaled 50.11% at September 30, 2002. 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK For information regarding market risk at June 30, 2002 see "Management of Market Risk" in the "Management Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's 2002 Annual Report to Stockholders. The market risk of the Company has not experienced any material changes as of September 30, 2002 from June 30, 2002. Additionally, refer to "Net Interest Income" in Item 2- Management's Discussion and Analysis of Results of Operations and Financial Condition for additional quantitative and qualitative discussions about market risk at September 30, 2002. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 11 PART II. OTHER INFORMATION Item 1 - Legal Proceedings The Company is not involved in any litigation, nor is it aware of any pending litigation, other than legal proceedings incidental to the Bank's business. In the opinion of management, no material loss is expected from any such claims or lawsuits. Item 2 - Changes in Securities and Use of Proceeds None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information . None Item 6 - Exhibits and Reports on Form 8-K On September 12, 2002, the Company filed a Current Report on Form 8-K under Item 5, Other Events, to report the extension of the Agreement and Plan of Merger, and to report the modification of the structure of the transaction by eliminating the merger of Leeds Mid-Tier into Northwest Mid-Tier. The following Exhibits are filed as part of this report: Exhibit No. Description 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. LEEDS FEDERAL BANKSHARES, INC. Date: November 12, 2002 By: /s/ Gordon E. Clark --------------------------------------- Gordon E. Clark President and Chief Executive Officer Date: November 12, 2002 By: /s/ Kathleen Trumpler --------------------------------------- Kathleen Trumpler Treasurer and Chief Financial Officer 13 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Gordon E. Clark, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-K of Leeds Federal Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 12, 2002 /s/ Gordon E. Clark --------------------- ----------------------------------- Date Gordon E. Clark President and Chief Executive Officer Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Kathleen G. Trumpler, Treasurer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Leeds Federal Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 12, 2002 /s/ Kathleen G. Trumpler --------------------- ----------------------------------- Date Kathleen G. Trumpler, Treasurer (Chief Financial Officer)

LEEDS FEDERAL BANKSHARES 10-Q