Item 1. Business
The Company
First Leesport Bancorp, Inc. (the "Company") is a Pennsylvania business corporation headquartered at 133 North Centre Avenue, Leesport, Pennsylvania 19533. The Company was organized as a bank holding company on January 1, 1986. The Company offers a wide array of financial services through its various subsidiaries. The Company's executive offices are located at 133 North Center Avenue, Leesport, Pennsylvania 19533.
The Bank
The Company wholly-owns its banking subsidiary, Leesport Bank ("Leesport Bank" or the "Bank"),a Pennsylvania chartered commercial bank. During the year ended December 31, 2000, the charters of The First National Bank of Leesport and Merchants Bank of Pennsylvania, both wholly-owned banking subsidiaries of the Company, were merged into a single charter under the name Leesport Bank. The First National Bank of Leesport was incorporated under the laws of the United States of America as a national bank in 1909. Since its inception, Leesport Bank, or its predecessor, the First National Bank of Leesport, has operated as a banking institution doing business in Berks County, Pennsylvania. Merchants Bank of Pennsylvania, a Pennsylvania chartered commercial bank, was acquired in 1999 as a result of the merger between the Company and Merchants of Shenandoah Ban-Corp. Merchants Bank of Pennsylvania, now a division of the Bank, operates in the counties of Schuylkill and Luzerne in Pennsylvania.
At December 31, 2000, the Company had total assets of $394 million, total stockholders' equity of $28 million, and total deposits of $296 million. The Company currently has the equivalent of 164 full-time employees.
The Company's and the Bank's main office is located at 133 North Centre Avenue, Leesport, Pennsylvania. Leesport Bank provides services to its customers through ten full service offices, seven of which operate under Leesport Bank's name in Leesport, Blandon, Bern Township, Wyomissing Hills, Breezy Corner, Hamburg, and Reading, all of which are in Berks County, Pennsylvania, and three of which operate under the name Merchants Bank, a division of Leesport Bank, in Shenandoah, Schuylkill County, in Drums and in Hazel Township, both located in Luzerne County. The Bank also operates a limited service facility in Wernersville, Berks County, Pennsylvania. All offices, except the Wernersville office, provide automated teller machine services. Each office except the Wernersville, Breezy Corner, and Drums branches provide drive-in facilities. (See "Properties.")
The Bank engages in full service commercial and consumer banking business, including such services as accepting deposits in the form of time, demand and savings accounts. Such time deposits include certificates of deposit, individual retirement accounts, Roth IRA accounts, and club accounts. The Bank's savings accounts include money market accounts, NOW accounts and traditional regular savings accounts. In addition to accepting deposits, the Bank makes both secured and unsecured commercial and consumer loans, finances commercial transactions, provides equipment lease and accounts receivable financing, makes construction and mortgage loans, including home equity loans, and rents safe deposit facilities. The Bank also provides small business loans and student loans.
Subsidiary Activities
The Company also owns First Leesport Capital Trust I (the "Trust"), a Delaware statutory business trust formed on March 9, 2000. The Trust issued $5 million of 10-7/8% fixed rate capital trust pass-through securities to investors. Leesport Bank has four wholly owned subsidiaries: Essick & Barr, Inc., a Berks County based general insurance agency ("Essick & Barr") which was acquired in 1998; First Leesport Wealth Management, Inc. ("FLWM"), an investment advisory business which was acquired in 1999; First Leesport Investment Group, Inc. ("FLIG"), which was formed in 1999 to purchase the securities brokerage business of KRJ & Associates; and Horizon Realty Solutions, Inc., which was formed during 2000 to provide title insurance and other real estate related services to its customers through a limited partnership. Both FLIG and FLWM are headquartered at 560 Van Reed Road, Suite 308, Wyomissing, Pennsylvania and collectively had 9 employees at December 31, 2000. Essick & Barr offers a full line of personal and commercial property and casualty insurance as well as group insurance for businesses, employee benefit plans, and life insurance. Headquartered in Leesport, Pennsylvania with a sales office at 108 South Fifth Street, Reading, Pennsylvania, Essick & Barr employed approximately 30 full-time employees at December 31, 2000.
Supervision and Regulation
Securities Regulation
The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities. In addition, the Company is subject to the Securities and Exchange Commission's rules and regulations relating to periodic reporting, proxy solicitation, and insider trading.
General
The Company is registered as a bank holding company and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Act of 1956, as amended. As a bank holding company, the Company's activities and those of its bank subsidiary are limited to the business of banking and activities closely related or incidental to banking. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board. The Federal Reserve Board has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to its bank subsidiaries during periods of financial stress or adversity.
The Bank Holding Company Act prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of, any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board. Additionally, the Bank Holding Company Act prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business, unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The types of businesses that are permissible for bank holding companies to own have been expanded by recent federal legislation; see discussion below.
As a Pennsylvania bank holding company for purposes of the Pennsylvania Banking Code, the Company is also subject to regulation and examination by the Pennsylvania Department of Banking.
Regulation of Leesport Bank
Leesport Bank is a Pennsylvania chartered bank and its deposits are insured (up to applicable limits) by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is subject to regulation and examination by the Federal Reserve Board, the Pennsylvania Department of Banking, and by the FDIC. The Community Reinvestment Act requires Leesport Bank to help meet the credit needs of the entire community where Leesport Bank operates, including low and moderate income neighborhoods. Leesport Bank's rating under the Community Reinvestment Act, assigned by the Federal Reserve Board pursuant to an examination of Leesport Bank, is important in determining whether The Bank may receive approval for, or utilize certain streamlined procedures in, applications to engage in new activities.
Leesport Bank is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Leesport Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
Capital Adequacy Guidelines
Bank holding companies are required to comply with the Federal Reserve Board's risk-based capital guidelines. The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be "Tier 1 capital," consisting principally of common shareholders' equity, less certain intangible assets. The remainder ("Tier 2 capital") may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, and a limited amount of the general loan loss allowance. The risk- based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio of a minimum level of Tier 1 capital (as determined under the risk-based capital guidelines) equal to 3% of average total consolidated assets for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 1% to 2% above the stated minimum. The Pennsylvania Department of Banking requires state chartered banks to maintain a 6% leverage capital level and 10% risk based capital, defined substantially the same as the federal regulations. The Bank is subject to almost identical capital requirements adopted by the FDIC.
Prompt Corrective Action Rules
The federal banking agencies have regulations defining the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The applicable federal bank regulator for a depository institution could, under certain circumstances, reclassify a "well-capitalized" institution as "adequately capitalized" or require an "adequately capitalized" or "undercapitalized" institution to comply with supervisory actions as if it were in the next lower category. Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings). The Company and the Bank each satisfy the criteria to be classified as "well capitalized" within the meaning of applicable regulations.
Regulatory Restrictions on Dividends
Dividend payments made by Leesport Bank to the Company are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the Federal Reserve Board. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, retained earnings). The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends if they are not classified as well capitalized or adequately capitalized.
Under these policies and subject to the restrictions applicable to the Bank, the Bank had approximately $13.35 million available for payment of dividends to the Company at December 31, 2000, without prior regulatory approval.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, each depository institution to one of three capital groups (well-capitalized, adequately capitalized or undercapitalized) and further assigns such institution to one of three subgroups within a capital group. The institution's subgroup assignment is based upon the FDIC's judgment of the institution's strength in light of supervisory evaluations, including examination reports, statistical analyses and other information relevant to measuring the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to risk-based assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the well- capitalized group. As of December 31, 2000, the Bank was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum amount required by law. Accordingly, the 2000 Bank Insurance Fund assessment rates ranged from zero for those institutions with the least risk, to $0.27 for every $100 of insured deposits for institutions deemed to have the highest risk. The Bank is in the category of institutions that presently pay nothing for deposit insurance. The FDIC adjusts the rates every six months.
While the Bank presently pays no premiums for deposit insurance, it is subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. Prior to 1997, only thrift institutions were subject to assessments to raise funds to pay the Financing Corporation bonds. Beginning in 2000, commercial banks and thrifts are subject to the same assessment for Financing Corporation bonds. The FDIC sets the Financing Corporation assessment rate every quarter. The Financing Corporation assessment for the Bank (and all other banks) for the first quarter of 2001 is an annual rate of $.0196 for each $100 of deposits.
New Legislation
Landmark legislation in the financial services area was signed into law by the President on November 12, 1999. The Gramm-Leach-Bliley Act dramatically changes certain banking laws that have been in effect since the early part of the 20th century. One of the most significant changes was that the separation between banking and the securities businesses mandated by the Glass-Steagall Act has now been removed, and the provisions of any state law that prohibits affiliation between banking and insurance entities have been preempted. Accordingly, the new legislation now permits firms engaged in underwriting and dealing in securities, and insurance companies, to own banking entities, and permits bank holding companies (and in some cases, banks) to own securities firms and insurance companies. The provisions of federal law that preclude banking entities from engaging in non-financially related activities, such as manufacturing, have not been changed. For example, a manufacturing company cannot own a bank and become a bank holding company, and a bank holding company cannot own a subsidiary that is not engaged in financial activities, as defined by the regulators.
The new legislation creates a new category of bank holding company called a "financial holding company." In order to avail itself of the expanded financial activities permitted under the new law, a bank holding company must notify the Federal Reserve Board ("Federal Reserve") that it elects to be a financial holding company. A bank holding company can make this election if it, and all its bank subsidiaries, are well capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating, each in accordance with the definitions prescribed by the Federal Reserve and the regulators of the subsidiary banks. Once a bank holding company makes such an election, and provided that the Federal Reserve does not object to such election by such bank holding company, the financial holding company may engage in financial activities (i.e, securities underwriting, insurance underwriting, and certain other activities that are financial in nature as to be determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business. This makes the regulatory approval process to engage in financial activities much more streamlined than it was under prior law.
The Company believes it qualifies to become a financial holding company, but has not yet determined whether or not it will file to become treated as one.
The new law makes major changes to the federal banking laws and makes a number of additions and revisions to numerous federal laws that affect the business of banking. For example, there is now a federal law on privacy with respect to customer information held by banks. The federal banking regulators are authorized to adopt rules regarding privacy for customer information. Banks must establish a disclosure policy for non- public customer information, disclose the policy to their customers, and give their customers the opportunity to object to non-public information being disclosed to a third party. Also, the Community Reinvestment Act ("CRA") has been amended by the new law to provide that small banks (those under $250 million in assets) that previously received an "outstanding" on their last CRA exam will not have to undergo another CRA exam for five years, or for four years if their last exam was "satisfactory." In addition, any CRA agreement entered into between a bank and a community group must be disclosed, with both the bank and the group receiving any grants from the bank detailing the amount of funding provided and what it was used for. The new law also requires a bank's policy on fees for transactions at ATM machines by non-customers to be conspicuously posted on the ATM. A number of other provisions affecting other general regulatory requirements for banking institutions were also adopted.
Pennsylvania banking law was amended in November 2000 to provide for complete parity of Pennsylvania banks with federally chartered banks in the area of permissible activities. Under Pennsylvania law as revised, the Bank may engage in any activity authorized for national banks or federal savings banks.
The subsidiaries of the Bank, Essick & Barr, FLIG, and FLWM, are subject to additional regulatory requirements. Essick & Barr is subject to Pennsylvania insurance laws and the regulations of the Pennsylvania Department of Insurance. The securities brokerage activities of FLIG are subject to regulation by the SEC and the NASD, and FLWM is a registered investment advisor subject to regulation by the Pennsylvania Securities Commission.
Item 2.
Item 2. Properties
The only real estate owned by the Company is a single- family home located adjacent to Leesport Bank's main office. This property is presently listed for sale. The Company's principal office is located in the main office of Leesport Bank at 133 North Centre Avenue, Leesport, Pennsylvania. The Company does not reimburse Leesport Bank for use of the property.
Listed below are the locations of properties owned by the Bank. Such properties are not subject to any mortgage, lien or encumbrance.
Property Location Address
1. Leesport 133-141 North Centre Avenue, Leesport, Pennsylvania
2. North Pointe 241 South Centre Avenue, Leesport, Pennsylvania
3. Wyomissing Hills 2228 State Hill Road, Wyomissing Hills, Pennsylvania
4. Reading 1210 Rockland Street Reading, Pennsylvania
5. Hamburg 801 South Fourth Street Hamburg, Pennsylvania
6. Bern Township 409 West Leesport Road Leesport, Pennsylvania
7. Shenandoah 101 North Main Street Shenandoah, Pennsylvania
8. Drums Rittenhouse Place Drums, Pennsylvania
Each of these bank offices, except Drums, provides drive-in facilities and automated teller machines. Leesport Bank leases the premises of its Wernersville branch, which does not have a drive-up facility or an automated teller machine. Leesport Bank also leases the property at which its Breezy Corner branch is located in Ruscombmanor Township, Berks County, Pennsylvania, the property at which its Blandon branch is located in Maidencreek Township, Berks County, Pennsylvania; the property at which its Wyomissing financial center is located at 1199 Berkshire Boulevard, Wyomissing, Berks County, Pennsylvania; and a branch facility in Hazle Township, Luzerne County, Pennsylvania.
Essick & Barr owns its sales office at 108 South Fifth Street, Reading, Pennsylvania.
FLIG and FLWM operate from leased office space located at 560 Van Reed Road, Suite 308, Wyomissing, Pennsylvania.
Item 3.
Item 3. Legal Proceedings
A certain amount of litigation arises in the ordinary course of the business of the Company, and the Company's subsidiaries. In the opinion of the management of the Company, there are no proceedings pending to which the Company, or the Company's subsidiaries are a party or to which their property is subject, that, if determined adversely to the Company or its subsidiaries, would be material in relation to the Company's shareholders' equity or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of the Company and its subsidiaries. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company or its subsidiaries by governmental authorities.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended December 31, 2000.
Item 4A. Executive Officers of the Registrant
Certain information, as of January 31, 2001 including principal occupation during the past five years, relating to each executive officer of the Company is set forth below:
PART II
Item 5.
Item 5. Market For Common Equity and Related Shareholder Matters.
As of December 31, 2000, there were 732 record holders of the Company's Common Stock. The market price of the Company's Common Stock for each quarter in 2000 and 1999 and the dividends declared on the Company's Common Stock for each quarter in 2000 and 1999 are set forth below.
Market Value of Common Stock
The Company's Common Stock is traded on the NASDAQ Small Capitalization Market under the symbol "FLPB."
The following table sets forth the high and low bid and asked information of the Company's common stock to the extent available, as reported by NASDAQ.
2000 1999 Bid Asked Bid Asked Qtr High Low High Low Qtr High Low High Low
1st $18.13 $12.50 $18.25 $12.75 1st $21.63 $20.00 $22.25 $20.75 2nd 17.75 15.06 18.00 15.63 2nd 20.38 20.13 21.00 20.25 3rd 16.13 13.50 16.50 13.63 3rd 20.13 18.50 20.63 19.00 4th 14.56 12.38 15.00 13.13 4th 16.75 16.00 19.00 18.00
The bid quotations reflect interdealer quotations, do not include retail mark ups, mark downs or commissions, and may not necessarily represent actual transactions. The bid information as stated is, to the knowledge of management of the Company, the best approximate value at the time indicated.
Dividend Information
Dividends on the Common Stock of First Leesport Bancorp, Inc. are payable on the 15th of January, April, July, and October.
Dividends Declared 2000 1999 1st Qtr. $.15 $.12 2nd Qtr. .15 .14 3rd Qtr. .15 .14 4th Qtr. .15 .14
The Company derives substantially all of its income from dividends paid to it by the Bank and its subsidiaries.
Item 6.
Item 6. Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data and management's discussion and analysis set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto, contained elsewhere herein.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company is a bank holding company. Leesport Bank is a wholly-owned subsidiary of the Company. Essick & Barr, FLIG and FLWM, and Horizon Realty Solutions are wholly-owned non-bank subsidiaries of Leesport Bank.
The financial statements have been restated to reflect the impact of the acquisition of Merchants of Shenandoah Ban-Corp on July 1, 1999, which was accounted for under the pooling of interests method of accounting. Merchants of Shenandoah Ban- Corp was a single-bank holding company acting as the parent company of Merchants Bank of Pennsylvania. Merchants Bank of Pennsylvania was a $60 million bank with three full-service offices, one in Shenandoah, Pennsylvania, one in Drums, Pennsylvania, and one just outside of Hazleton, Pennsylvania.
The costs of acquiring Merchants of Shenandoah Ban-Corp, including legal and professional expenses, system conversion costs, and investment banking activities, amounted to $544,000 before income tax considerations. In addition to the consolidation, the reorganization of the banks resulted in three retirement packages and their associated costs. These transactions added $270,000 to the acquisition costs noted above. The after tax cost of these merger, conversion and reorganization expenses amounted to $617,000. These costs were expensed during the third quarter of 1999.
The Company expanded into the securities sales business with its October 1, 1999 acquisition of two Wyomissing, Pennsylvania-based brokerage and financial management companies: Johnson Financial Group, Inc., and KRJ & Associates. As part of the acquisition, these companies were reorganized into First Leesport Investment Group, Inc., and First Leesport Wealth Management, Inc., respectively. This acquisition, combined with the purchase of Essick & Barr, Inc., of Reading, Pennsylvania, in December of 1998, provides the Company with a full array of financial products and services for its customers and affiliates.
During the year 2000, Horizon Realty Solutions, Inc. was formed as a subsidiary of Leesport Bank for the purpose of providing title insurance and other real estate related services to its customers through a limited partnership.
Financial Condition
The Company's total assets increased to $393.8 million at December 31, 2000, representing a growth rate of 9.82% from $358.6 million at December 31, 1999.
Cash and Investment Securities
Cash and balances due from banks decreased from December 31, 1999 to December 31, 2000 as the Bank had maintained higher than normal levels of cash at the end of 1999 to accommodate concerns about the effects of the Year 2000 on computer systems. There were, however, no significant problems realized by the Company as a result of the Year 2000. Cash and due from banks amounted to $11.6 million at the end of 2000 compared with $15.4 million at the end of 1999, a decrease of 24.28%. Interest bearing balances with other banks remained relatively flat at $506,000 at December 31, 2000 and $489,000 at December 31, 1999.
Investment securities increased to $74.4 million at December 31, 2000 from $72.1 million at December 31, 1999. Investment securities are used to supplement loan growth as necessary and to help manage the Company's level of liquid assets. Currently, all of the Company's securities are carried as available for sale.
Loans
Loans increased to $284.9 million by the end of 2000 from $253.2 million at the end of 1999, an increase of $31.7 million or 12.5%. Management has targeted the loan portfolio as a key to its continuing growth. A significant increase in the volume of commercial loans during 2000 and 1999 underscores that focus as the commercial portfolio increased to $139.8 million at December 31, 2000 from $107.1 million at December 31, 1999, an increase of $32.6 million or 30.4%. Loans secured by residential real estate, which include home equity lending products, decreased to $122.6 million from $125.1 million between the two dates, a decrease of $2.5 million or 2.0%. This decrease is primarily due to the sale of $6.2 million of outstanding balances of fixed rate residential real estate loans into the secondary market. In addition, the Company commits to sell a significant portion of its newly originated mortgages loans at the time of origination, mostly government agency qualified loans.
Premises and Equipment
Premises and equipment increased during 2000 to $8.4 million from $7.6 million at the end of 1999. This increased growth is primarily due to investments in bank processing technology and the construction of a new retail-banking facility at 241 South Centre Avenue, Leesport, Pennsylvania which will open in January of 2001.
Other Assets
Other assets, which include accrued interest receivable, increased to $17.6 million at December 31, 2000 from $12.7 million at December 31, 1999. Included in this total are the intangible assets recorded as a result of the Company's purchase of Essick & Barr, Inc., First Leesport Investment Group, Inc., and First Leesport Wealth Management, Inc. At December 31, 2000, these intangibles totaled $4.6 million. Another significant component of Other Assets includes the cash surrender value of certain life insurance policies used to fund deferred compensation plans for selected board members and senior officers. The value of these policies at the end of 2000 was $5.9 million.
Deposits and Borrowings
Total deposits increased by $27.0 million or 10.0%, growing from $269.3 million at December 31, 1999 to $296.4 million at December 31, 2000.
Non-interest bearing deposits increased to $38.2 million at December 31, 2000 from $30.9 million at December 31, 1999, an increase of $7.3 million or 23.6%. Management continues to promote growth in these types of deposits, which include the Free Checking product, as a method to help reduce the overall cost of the Company's funds. Interest bearing deposits increased by $19.7 million or 8.3%, growing from $238.4 million at December 31, 1999 to $258.1 million at December 31, 2000. Growth in certificates of deposit and money market deposits provided this increase.
Federal funds purchased and other funds borrowed from the Federal Home Loan Bank are used to supplement deposit growth. During 2000, the level of borrowed funds outstanding, including federal funds purchased and securities sold under agreements to repurchase, were $58.8 million at December 31, 2000 and $59.2 million at December 31, 1999.
Capital
The Company's Common Stock, Surplus and Retained Earnings increased by $1.0 million during 2000. Total Shareholders' Equity includes accumulated other comprehensive income, which includes an adjustment for the fair value of the Company's securities. This amount attempts to identify the impact to equity in the unlikely event that the Company's entire securities portfolio would be liquidated under current economic conditions. The amounts and types of securities held by the Company at the end of 2000 combined with current interest rates would have resulted in a decrease in equity, net of taxes, of $469,000. This compares with a decrease to equity of $2.1 million at the end of 1999. Retained Earnings, after the payment of dividends, primarily accounted for the increase in Shareholders' Equity, exclusive of the comprehensive loss.
Results of Operations
Net income for 2000 was $2.1 million or $1.15 per share compared to $1.4 million or $.76 per share for 1999 and $1.5 million or $.86 per share for 1998. Net income for 1999 and 1998 was affected by merger expenses and goodwill incurred through the acquisition of Merchants of Shenandoah Ban-Corp and the insurance and investment subsidiaries of the Company. Improvement of 5.1% in net interest income was recognized in 2000. The table below shows the after-tax net income after adjustments for certain items that are considered non-recurring and the effect of goodwill amortization.
2000 1999 1998
Net income (as reported) $2,126 $1,401 $1,511 One-time merger expense, net of taxes 0 617 0 Goodwill amortization 269 228 17 Adjusted net income 2,395 2,246 1,528 Percent increase (decrease) from prior year 6.6% 47.0% Adjusted net income per share $ 1.29 $ 1.22 $ .87 Percent increase (decrease) from prior year 5.7% 40.2%
Merger expenses of $544,000 in 1999 represent primarily professional services rendered in connection with the mergers executed in 1999. Certain employment situations were resolved during 1999 that resulted in additional expenses of $270,000 being incurred in 1999.
Return on average assets was 0.56% for 2000, 0.43% for 1999 and 0.55% for 1998. After adjustment for non-recurring expenses and goodwill amortization discussed above, return on average assets would have been 0.63% for 2000, 0.50% for 1999 and 0.55% for 1998.
Return on average shareholders' equity was 7.97% for 2000, 5.11% for 1999 and 5.85% for 1998. After adjustment for non- recurring expenses and goodwill amortization discussed above, return on average stockholders' equity would have been 8.98% for 2000, 7.27% for 1999 and 5.90% for 1998.
Net Interest Income
Net interest income is a primary source of revenue for the Company. This income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and borrowings from the Federal Home Loan Bank. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. All discussion of net interest income is on a fully taxable equivalent basis.
Net interest income for 2000 was $11.1 million, a 5.2% increase over 1999. Net interest income for 1998 was $9.1 million. Average earning assets increased by $55.7 million or 18.6% from 1999 to 2000. The net interest margin was 3.29% in 2000 and 3.71% in 1999. The primary growth in earning assets for 2000 and 1999 was in average loans outstanding. Average loans outstanding increased by 21.7% in 2000 and 33.4%in 1999. Average interest-bearing deposits increased by 11.1% in 2000 and 18.5% in 1999. The return on interest earning assets increased by 6 basis points from 1999 to 2000 while the cost of supporting liabilities increased by 48 basis points.
Other Income
The Company's primary source of other income for 2000 was commissions and other revenue generated through sales of insurance products through its insurance subsidiary, Essick & Barr, Inc. Revenues from insurance operations totaled $3.9 million in 2000 compared to $3.3 million in 1999 and $152,000 in 1998. Revenues generated from the Company's investment subsidiaries, First Leesport Investment Group, Inc., and First Leesport Wealth Management, Inc., totaled $956,000 in 2000 compared to $187,000 in 1999 and $0 in 1998.
The Company also relies on several other sources for its other income, including sales of newly originated mortgage loans and service charges on deposit accounts. The income recognized from mortgage banking activities was $220,000 in 2000, $198,000 in 1999 and $342,000 in 1998. Income from deposit service charges was $784,000 in 2000, $503,000 in 1999 and $397,000 in 1998. Other income includes other fees and commissions on bank products and services and amounted to $845,000 for 2000, $429,000 for 1999 and $200,000 for 1998.
Other Expenses
Total other expenses for 2000 were $14.0 million, a $1.9 million increase over 1999. Total other expenses for 1998 were $7.8 million.
Total salaries and employee benefits expense for 2000 was $7.5 million, a 28.2% increase over the $5.9 million reported for 1999. Total salary and benefits expense for 1998 was $3.8 million. Salary and benefit costs associated with the insurance and investment subsidiaries totaled approximately $2.8 million in 2000, $1.9 million in 1999 and $99,000 in 1998. The increase in salary and benefits expenses resulted from annual merit salary increases and additional personnel costs associated with constructing the professional infrastructure to manage the Company as it retooled for the future. Total occupancy expense increased by 24.4% in 2000 to $938,000 and had increased by 27.2% in 1999. Total equipment expense increased by 6.8% in 2000 to $853,000 from $799,000 in 1999. Total equipment expense had increased by 24.1% in 1999.
The expense related to other real estate owned totaled $202,000 in 2000, $210,000 in 1999, and $105,000 in 1998. The expense for 2000 included $60,000 of costs associated with writing down a single property and 1999 included $55,000 of costs associated with carrying and writing down a single rental property acquired during that year.
Marketing and advertising expenses were $575,000 in 2000, $422,000 in 1999 and $338,000 in 1998. The increase in marketing expense reflects the Company's efforts to increase awareness of its various product offerings and the costs associated with its new branch openings.
Expense incurred by the Company to receive professional services totaled $729,000 in 2000 compared to $420,000 in 1999 and $231,000 in 1998. Total merger expenses were $544,000 in 1999, and the cost of reorganizing the Banks' management team resulted in additional personnel costs amounting to $270,000 in 1999.
Interest Rate Sensitivity
Through the years, the banking industry has adapted to an environment in which interest rates have fluctuated dramatically and in which depositors have been provided with liquid, rate sensitive investment options. The industry utilizes a process known as asset/liability management as a means of managing this adaptation.
Asset/liability management is intended to provide for adequate liquidity and interest rate sensitivity by matching interest rate sensitive assets and liabilities and coordinating maturities and repricing characteristics on assets and liabilities.
Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Company's net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Company seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.
One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company's Asset/Liability Committee ("ALCO"), which is comprised of senior management and Board members. The ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of management of the Company. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings from shifts in interest rates.
To manage the interest rate sensitivity position, an asset/liability model called "gap analysis" is used to monitor the difference in the volume of the Company's interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect.
At December 31, 2000, the Company maintained a positive one-year cumulative gap. The effect of this gap position provided a mismatch of assets and liabilities which can expose the Company to interest rate risk during a period of falling interest rates.
Interest Sensitivity Gap at December 31, 2000
(1) Gross of unrealized gains/losses on available for sale securities.
(2) Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due.
(3) Demand and savings accounts are generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments.
Certain shortcomings are inherent in the method of analysis presented in the above table. Although certain assets and liabilities may have similar maturities or period of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.
The Company has also measured its sensitivity to interest rate movements through simulations of the effects of rate changes upon its net interest income. Interest rate movements of 100, 200 and 300 basis points upward and downward were applied to the Company's interest earning assets and interest bearing liabilities as of December 31, 2000. The results of these simulations indicate that approximately 6 percent of the Company's net interest income was at risk for the downward scenario of 300 basis points and approximately 3 percent and 2 percent of net interest income was at risk for the downward movements of 200 and 100 basis points. Upward movements of 100, 200 and 300 basis points were expected to have marginal positive effects upon the Company's net interest income.
Capital
Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the Bank's Balance Sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions.
The Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Company's capital, resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.
The adequacy of the Company's capital is reviewed on an ongoing basis with regard to size, composition and quality of the Company's resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders' equity less intangible assets, to average quarterly assets less intangible assets. The leverage ratio at December 31, 2000 was 7.49% compared to 6.61% at December 31, 1999. This increase is primarily the result of the issuance in 2000 of $5 million in mandatory redeemable capital debentures which are eligible for inclusion in Tier I capital calculations. For 2000, 1999 and 1998, the ratios were above minimum regulatory guidelines.
As required by the federal banking regulatory authorities, guidelines have been adopted to measure capital adequacy. Under the guidelines, certain minimum ratios are required for core capital and total capital as a percentage of risk-weighted assets and other off-balance sheet instruments. For the Company, Tier I capital consists of common shareholders' equity less intangible assets plus the mandatory redeemable capital debentures, and Tier II capital includes the allowable portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets. By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier I Capital.
The following table sets forth the Company's capital ratios.
Regulatory guidelines require that Tier I capital and total risk-based capital to risk-adjusted assets must be at least 4.0% and 8.0%, respectively.
Liquidity and Funds Management
Liquidity management ensures that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt servicing payments, investment commitments, commercial and consumer loan demand and ongoing operating expenses. Funding sources include principal repayments on loans and investment securities, sales of loans, growth in core deposits, short- and long-term borrowings and repurchase agreements. Regular loan payments are a dependable source of funds, while the sale of loans and investment securities, deposit flows, and loan prepayments are significantly influenced by general economic conditions and level of interest rates.
At December 31, 2000, the Company maintained $12.1 million in cash and cash equivalents primarily consisting of cash and due from banks. In addition, the Company had $74.4 million in securities available for sale. The combined total of $86.5 million represented 21.9% of total assets at December 31, 2000. The Company believes that its liquidity is adequate.
The Company considers its primary source of liquidity to be its core deposit base, which includes noninterest bearing and interest-bearing demand deposits, savings, and time deposits under $100,000. This funding source has grown steadily over the years and consists of deposits from customers throughout the branch network. The Company will continue to promote the growth of deposits through its branch offices. At December 31, 2000, approximately 69% of the Company's assets were funded by core deposits acquired within its market area. An additional 7% of the assets were funded by the Company's equity. These two components provide a substantial and stable source of funds.
Changes in Interest Income and Interest Expense
The following table 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 asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate), and (2) changes in rate (changes in rate multiplied by average volume).
ANALYSIS OF CHANGES IN INTEREST INCOME(1)(2)(3)
__________
(1) Loan fees have been included in the change in interest income totals presented. Nonaccrual loans have been included in average loan balances.
(2) Changes due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.
(3) Interest income on loans and investments is presented on a taxable equivalent basis.
Average Balances, Rates and Net Yield
The following table sets forth the average daily balances of major categories of interest earning assets and interest bearing liabilities, the average rate paid thereon, and the net interest margin for each of the periods indicated.
(1) Rates on loans and investment securities are reported on a tax-equivalent basis.
(2) Nonaccrual loans have been included in average loan balances.
Risk Elements
Non-performing loans, consisting of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and renegotiated troubled debt decreased to $2.6 million at December 31, 2000, down from $3.7 million at December 31, 1999. Generally, loans that are more than 90 days past due are placed on non-accrual status. As a percentage of total loans, non-performing loans represented 0.90% at December 31, 2000, down from 1.48% at December 31, 1999. The allowance for loan losses at year-end improved to 139.2% of non- performing loans at December 31, 2000 compared to 78.9% at December 31, 1999.
The following table is a summary of nonperforming loans and renegotiated loans for the years presented.
The Bank generally places a loan on non-accrual after the loan is more than 90 days past due.
At December 31, 2000, there were $1.58 million of commercial loans for which payments are current, but as to which the borrowers were experiencing significant financial difficulties, that were not classified as non-accrual.
The following summary shows the impact on interest income of nonaccrual and restructured loans for the year ended December 31, 2000 (in thousands):
Amount of interest income on loans which would have been recorded under original terms $102 Interest income reported during the period 0
Provision and Allowance for Loan Losses
The provision for loan losses for 2000 was $1.1 million compared to $1.3 million in 1999 and $620,000 in 1998. The Company performs a review of the credit quality of its loan portfolio on a quarterly basis to determine the adequacy of the allowance for possible loan losses. The Company experienced significant growth in the loan portfolio of 12.5% in 2000 and 29.7% in 1999. The allowance for loan losses at December 31, 2000 was $3.6 million or 1.25% of outstanding loans compared to $3.0 million or 1.17% of outstanding loans at December 31, 1999. The allowance for loan losses is an amount that management believes to be adequate to absorb potential losses in the loan portfolio. Additions to the allowance are charged through the provision for loan losses. Management considers various factors in assessing the adequacy of the loan loss allowance, including charge-off history, risk assessments of certain individual credits, adequacy of collateral, risk characteristics in the loan portfolio, and local and national economic conditions.
The following table details the allocation of the allowance for loan losses to the various loan categories. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future credit losses may occur. The total allowance is available to absorb losses from any segment of loans.
Allocation of Allowance for Loan Losses (In Thousands)
The following tables set forth an analysis of the Company's allowance for loan losses for the years presented and the allocation of the allowance.
Analysis of the Allowance for Loan Losses (In Thousands Except Ratios)
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expenses and reduced by net charge-offs. The Bank performs continuous credit reviews of the loan portfolio and considers current economic conditions, review of specific problem loans and other factors in determining the adequacy of the allowance balance.
Loan Portfolio
The following table sets forth the Company's loan distribution at December 31:
Loan Maturities
The following table shows the maturity of loans outstanding at December 31, 2000:
Maturities of Outstanding Loans (In Thousands)
Within After One After One But Within Five Year Five Years Years Total Commercial, Financial and Agricultural $28,548 $38,989 $73,888 $141,425
Maturity of Certificates of Deposit of $100,000 or More
The following table sets forth the amounts of the Bank's certificates of deposit of $100,000 or more by maturity date.
December 31, 2000 (In Thousands)
Three Months or Less $13,702 Over Three Through Six Months 4,895 Over Six Through Twelve Months 2,745 Over Twelve Months 5,223
TOTAL $26,565
Securities Portfolio Maturities and Yields
The following table sets forth information about the maturities and weighted average yield on the Company's securities portfolio. Floating rate, immediately repriceable items are included in the first column, and yields are not reported on a tax equivalent basis.
Securities Portfolio
The following table sets forth the carrying value of the Company's investment securities at its last three fiscal year ends:
As of December 31, 2000 1999 1998 (In Thousands)
U.S. Treasuries $ 3,115 $ 6,532 $10,038 U.S. Government Agencies 46,747 39,337 41,882 State and Political Subdivisions 12,086 18,681 16,759 Other Securities and Equity Securities 12,420 7,615 3,946
Total $74,368 $72,165 $72,625
For purposes of the above table, all securities are classified as available for sale and are reflected at fair value, except $428,000 of state and political subdivision obligations that were classified as held to maturity at December 31, 1998.
Average Deposits and Average Rates by Major Classification
The following table sets forth the average balances of the Bank's deposits and the average rates paid for the years presented.
Other Borrowed Funds
Short-term borrowings at December 31, 2000 consisted of overnight borrowings from the FHLB under a repurchase agreement, and repurchase agreements with customers. The borrowings are collateralized by certain qualifying assets of the Bank.
Federal funds purchased by the Bank were $600,000 and $23,567,000 at December 31, 2000, and 1999 respectively. The federal funds purchased typically mature in one day.
Information concerning the short-term borrowings is summarized as follows at December 31:
2000 1999 1998
Federal funds purchased: Average balance during the Year $17,699 $10,789 $1,420 Rate 6.06% 5.39% 6.03%
Securities sold under agreements to repurchase: Average balance during the year $9,673 $1,946 $313 Rate 5.73% 5.16% 4.96%
Other short-term borrowings: Average balance during the year $3,354 $0 $13,651 Rate 6.50% - 5.71%
Maximum month end balance of short-term borrowings during the year $15,659 $4,169 $5,709
Dividends and Shareholders' Equity
The Company declared cash dividends in 2000 of $0.60 per share, and $.54 per share in 1999. The Company's dividend payout ratio decreased from 69.5% in 1999 to 51.7% in 2000. The Company's ratio of average shareholders' equity to average assets for the year ended December 31, 2000 was 7.20%.
Years ended December 31, 2000 1999 1998
Return on assets .56% 0.43% 0.55% Return on equity 7.97% 5.11% 5.85% Dividend payout ratio 51.69% 69.45% 55.53% Average equity to average assets 7.20% 8.41% 9.40%
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The discussion concerning the effects of interest rate changes on the Company's estimated net interest income for the year ending December 31, 2000 set forth under "Management's Discussion and Analysis of financial Condition and Results of Operations - Interest Rate Sensitivity" in Item 7 hereof, is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors First Leesport Bancorp, Inc. Leesport, Pennsylvania
We have audited the accompanying consolidated balance sheets of First Leesport Bancorp, Inc., and its wholly-owned subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
The consolidated financial statements as of December 31, 1998 and for the year then ended have been restated to reflect the pooling of interests with Merchants of Shenandoah Bancorp (Merchants) as described in Note 2 to the consolidated financial statements. We did not audit the 1998 financial statements of Merchants, which statements reflect net interest income constituting 23% of consolidated net interest income for the year ended December 31, 1998. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Merchants as of December 31, 1998 and for the year then ended, is based solely on the report of the other auditors.
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 consolidated 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, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Leesport Bancorp, Inc. and its wholly-owned subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
Reading, Pennsylvania /s/ Beard Miller Company LLP February 7, 2001
FIRST LEESPORT BANCORP, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Consolidated Balance Sheets
December 31, 2000 1999 (In Thousands) ASSETS Cash and due from banks $ 11,643 $ 15,376 Interest-bearing deposits with other banks 506 489
Total cash and cash equivalents 12,149 15,865 Securities available for sale 74,368 72,165 Loans 284,863 253,194 Allowance for loan losses 3,571 2,954
Loans, net of allowance for loan losses 281,292 250,240
Premises and equipment, net 8,400 7,599 Goodwill, net of accumulated amortization 4,574 4,700 Other assets 13,043 8,049
Total assets $393,826 $358,618
LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits: Non-interest bearing $ 38,233 $ 30,941 Interest bearing 258,130 238,403
Total deposits 296,363 269,344
Securities sold under agreements to repurchase 14,663 4,608 Federal funds purchased 600 23,567 Long-term debt 43,500 31,000 Mandatory redeemable capital debentures 5,000 - Other liabilities 5,354 4,497
Total liabilities 365,480 333,016
Shareholders' equity Common stock, par value $5 per share; authorized 10,000,000 shares; Issued 1,858,919 shares 9,295 9,295 Surplus 4,996 4,988 Retained earnings 14,586 13,571 Accumulated other comprehensive loss (469) (2,134) Treasury stock, at cost; 4,960 shares in 2000; 9,060 shares in 1999 (62) (118)
Total shareholders' equity 28,346 25,602
Total liabilities and shareholders' equity $393,826 $358,618
See Notes to Consolidated Financial Statements.
Consolidated Statements of Income
Years Ended December 31, 2000 1999 1998 In Thousands, Except Per Share Amounts Interest income: Interest and fees on loans $ 22,249 $ 18,346 $ 14,229 Interest on securities: Taxable 3,941 3,439 3,366 Tax-exempt 849 874 825 Dividend income 284 169 71 Other interest income 148 82 57
Total interest income 27,471 22,910 18,548 Interest expense: Interest on deposits 11,990 10,177 8,563 Interest on short-term borrowings 1,757 1,062 474 Interest on long-term debt 2,215 1,124 454 Interest on mandatory redeem- able capital debentures 424 - -
Total interest expense 16,386 12,363 9,491
Net interest income 11,085 10,547 9,057
Provision for loan losses 1,082 1,270 620
Net interest income after provision for loan losses 10,003 9,277 8,437
Other income: Customer service fees 784 503 397 Mortgage banking activities, net 220 198 342 Commissions and fees from insurance sales 3,852 3,296 152 Broker and investment advisory commissions and fees 956 187 - Other income 845 429 200 Net realized gains on sales of securities 29 52 58
Total other income 6,686 4,665 1,149
Other expense: Salaries and employee benefits 7,505 5,856 3,768 Occupancy expense 938 754 593 Equipment expense 853 799 644 Taxes, other than federal income 224 263 242 Marketing and advertising expense 575 422 338 Professional services 729 420 231 Merger-related costs - 544 - Restructuring costs - 270 - Other expense 3,128 2,759 1,942
Total other expense 13,952 12,087 7,758
Income before federal income taxes 2,737 1,855 1,828
Federal income taxes 611 454 317
Net income $ 2,126 $ 1,401 $ 1,511
Net income excluding amorti- zation of goodwill $ 2,395 $ 1,629 $ 1,528
Basic and diluted earnings per share $ 1.15 $ .76 $ .86 Basic and diluted earnings per share, excluding amortization of goodwill $ 1.29 $ .89 $ .87
See Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders' Equity
See Notes to Consolidated financial Statements.
Consolidated Statements of Cash Flows
Years Ended December 31, 2000 1999 1998 In Thousands Cash Flows From Operating Activities Net income $ 2,126 $ 1,401 $ 1,511 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,082 1,270 620 Provision for depreciation 801 888 584 Amortization of goodwill 269 228 17 Deferred income taxes (235) (463) (36) Net (accretion) amortization of securities premiums and discounts (47) 27 86 Amortization of mortgage servicing rights 22 37 42 Net cash provided by (used for) loans held for sale (1,536) 111 260 Net loss (gain) on sales of securities available for sale and loans 174 (348) (319) Realized gain on sale of premises and equipment (246) - - Change in assets and liabil- ities, net of effects from acquisitions: Increase in other assets (1,101) (181) (972) Increase in other liabil- ities 809 34 806
Net cash provided by oper- ating activities 2,118 3,004 2,599
Cash Flows From Investing Activities Proceeds from sales of securities available for sale 11,030 15,449 1,946 Proceeds from principal repayments and maturities of securities available for sale 6,225 12,295 19,648 Proceeds from maturities and calls of securities held to maturity - - 590 Purchase of securities avail- able for sale (16,859) (31,650) (33,513) Net cash used in acquisi- tions (29) (523) (1,715) Net (increase) decrease in federal funds sold - 650 (318) Loans made to customers, net of principal collected (31,999) (58,150) (36,208) Purchase of life insurance policies (3,317) - - Purchase of premises and equipment (1,641) (1,861) (2,192) Proceeds from sale of premises and equipment 413 - - Net cash used in investing activities (36,177) (63,790) (51,762)
Cash Flows From Financing Activities Net increase in deposits 27,019 40,360 32,676 Net increase (decrease) in federal funds purchased (22,967) 18,058 1,695 Net proceeds (repayment) of short-term borrowings 10,055 (2,550) (842) Repayment of long-term debt (11,000) - - Proceeds from long-term debt 23,500 15,000 16,000 Issuance of mandatory redeem- able capital debentures 5,000 - - Deferred financing fees on redeemable capital debentures (229) - - Reissuance of treasury stock 64 - 6 Cash dividends paid (1,099) (982) (829)
Net cash provided by financ- ing activities 30,343 69,886 48,706
Increase (decrease) in cash and cash equivalents (3,716) 9,100 (457)
Cash and cash equivalents: January 1 15,865 6,765 7,222
December 31 $ 12,149 $ 15,865 $ 6,765
Cash payments for: Interest $ 15,973 $ 12,222 $ 9,407 Federal income taxes $ 875 $ 756 $ 526
See Notes to Consolidated Financial Statements.
1. Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include the accounts of First Leesport Bancorp, Inc. (the "Company"), a bank holding company and its wholly-owned subsidiaries, First Leesport Capital Trust I and Leesport Bank (the "Bank"),including the Bank's wholly-owned subsidiaries, Essick & Barr, Inc. ("Essick & Barr"), First Leesport Investment Group ("FLIG"), First Leesport Wealth Management ("FLWM"), and Horizon Realty Solutions ("Horizon Realty"). All significant intercompany accounts and transactions have been eliminated.
Nature of operations:
The Bank provides full banking services. Essick & Barr provides risk management services and personal and commercial insurance coverage through several insurance companies. FLIG and FLWM provide investment advisory and brokerage services. Horizon Realty is a real estate title insurance joint venture that provides title insurance and related services to Leesport Bank customers through a limited partnership. First Leesport Capital Trust I is the trust formed for the purpose of issuing the mandatory redeemable debentures on behalf of the Company. The Company and the Bank are subject to the regulations of various federal and state agencies and undergo periodic examinations by various regulatory authorities. The area served by the Bank and related subsidiaries is principally Berks, Luzerne and Schuylkill counties in Pennsylvania.
Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications:
For comparative purposes, prior years' consolidated financial statements have been reclassified to conform with report classifications of the current year.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing demand deposits in other banks.
Securities available for sale:
Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Bank's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using a method which approximates the interest method over the period to maturity.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
Loans:
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are stated at their outstanding unpaid principal balances, net of any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. These amounts are generally being amortized over the contractual life of the loan. Notes To Consolidated Financial Statements.
Allowance for loan losses:
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.
Loans held for sale:
Mortgage loans originated and intended for sale in the secondary market at the time of origination are carried at the lower of cost or estimated fair value. All sales are made without recourse. At December 31, 2000 and 1999 ,there were $2.07 million and $531,000, respectively, of residential mortgage loans held for sale, included in loans.
Foreclosed assets:
Foreclosed assets, which are recorded in other assets, include properties acquired through foreclosure or in full or partial satisfaction of the related loan.
Foreclosed assets are initially recorded at fair value, net of estimated selling costs, at the date of foreclosure. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value, less estimated costs to sell. Revenue and expense from operations and changes in the valuation allowance are included in other expense.
Premises and equipment:
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated depreciation methods over the estimated useful lives of the related assets.
Loan servicing:
Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount.
Goodwill:
Goodwill is the excess of the purchase price over the fair value of net assets of the entity acquired through a business combination that is recorded using the purchase method of accounting. Goodwill is being amortized using the straight-line method over periods ranging from 15 to 20 years and is periodically reviewed for impairment.
Other assets:
Financing costs related to the Company's issuance of mandatory redeemable capital debentures are being amortized over the life of the debentures and are included in other assets.
Federal income taxes:
Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the financial statements and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment.
Off-balance sheet financial instruments:
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, letters of credit and commitments to sell loans. Such financial instruments are recorded in the consolidated balance sheets when they become receivable or payable.
Advertising:
Advertising costs are expensed as incurred.
Earnings per share:
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares (stock options) had been issued, as well as any adjustments to income that would result from the assumed issuance. The effect of stock options was not dilutive for any periods presented. The weighted- average number of shares of common stock outstanding, as adjusted for a 5% stock dividend in 1999, was 1,851,764 in 2000, 1,840,049 in 1999 and 1,764,270 in 1998.
Comprehensive income:
Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects were as follows:
Years Ended December 31, 2000 1999 1998 In Thousands Unrealized holding gains (losses) on available for sale securities $2,552 $(4,339) $ 401 Less reclassification adjustment for gains realized in income (29) (52) (58)
Net unrealized gains (losses) 2,523 (4,391) 343
Tax effect (858) 1,491 (114)
Net of tax amount $1,665 $(2,900) $ 229
Segment reporting:
The Bank acts an as independent community financial services provider, and offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine networks, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail and mortgage banking operations of the Bank. As such, discrete financial information is not available and segment reporting would not be meaningful. See Note 19 for a discussion of insurance operations and investment advisory and brokerage operations.
New accounting standards:
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (as amended by Statement Nos. 137 and 138), "Accounting for Derivative Instruments and Hedging Activities". This statement and its amendments establish accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and require that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. The Statement requires that changes in the fair value of derivatives be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company adopted the Statement on January 1, 2001. The adoption of the Statement did not have a significant impact on the financial condition or results of operations of the Company.
In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement replaces SFAS NO. 125 of the same name. It revises the standards of securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This Statement is to be applied prospectively with certain exceptions. Other than these exceptions, earlier or retroactive application of its accounting provision is not permitted. The adoption of the Statement is not expected to have a significant impact on the Company.
2. Mergers And Acquisitions
On September 22, 2000 the charters of the wholly-owned banking subsidiaries of the Company, the First National Bank of Leesport and Merchants Bank of Pennsylvania, were merged into a single charter under the name Leesport Bank.
The consolidated financial statements give retroactive effect to the July 1999 pooling of interests merger of the Company and Merchants of Shenandoah Ban-Corp (Merchants) as more fully described below. As a result, the consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1999 and 1998, are presented as if the combining companies had been consolidated for that period. The consolidated statements of shareholders' equity reflect the accounts of the Company as if the common stock issued in the merger had been issued and outstanding during all periods presented.
On July 1, 1999, Merchants' shareholders received 1.5854 shares of the Company's common stock for each outstanding share, for a total of 484,561 shares. Cash was paid for fractional share interests. The merger was accounted for as a pooling of interests by the Company. Merger costs of approximately $544,000 consisting primarily of professional fees and related transaction costs were expensed in 1999 in connection with the merger.
The results of operations of the separate entities for periods prior to the combination were as follows:
Company Merchants Combined In Thousands
For the period from January 1, 1999 to June 30, 1999 (unaudited): Net interest income $3,898 $1,076 $4,974 Net income 885 254 1,139
For the year ended December 31, 1998: Net interest income $6,983 $2,074 $9,057 Net income 1,024 487 1,511
On January 29, 1999 the Company acquired EBFS, Inc., a licensed insurance agency and broker, through a payment of cash of $250,000. Additional consideration of $29,000 was paid in 2000. The acquisition has been accounted for as a purchase and results of operations of EBFS since the date of acquisition are included in the consolidated financial statements.
On September 30, 1999, the Company acquired an investment advisory firm and a brokerage firm that have been renamed First Leesport Wealth Management and First Leesport Investment Group. The Company issued 12,742 shares of its common stock and paid cash of $250,000 in exchange for stock of one entity and assets of a second entity. The acquisitions have been accounted for as purchases and the results of operations of these two entities since the date of acquisition are included in the consolidated financial statements.
On December 7, 1998, the Company completed its acquisition of Essick & Barr, Inc., an independent insurance agency. The Company issued 73,284 shares of its common stock and paid cash of $1,715,000 in exchange for all of the shares of common stock of Essick & Barr, Inc. The acquisition has been accounted for as a purchase and results of operations of Essick & Barr, Inc., since the date of acquisition are included in the consolidated financial statements.
3. Restrictions On Cash And Due From Banks
The Banks are required to maintain average reserve balances with the Federal Reserve Bank. For the years 2000 and 1999, the average of these daily reserve balances approximated $451,000 and $1,011,000, respectively.
4. Securities - Available For Sale
The amortized cost of securities and their approximate fair values at December 31 were as follows:
Equity securities are comprised of stock in the Federal Home Loan Bank, Atlantic Central Bankers' Bank and other bank stocks in 2000, as well as the Federal Reserve Bank in 1999.
The amortized cost and fair value of securities as of December 31, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain securities may be called or prepaid without penalty.
Amortized Fair Cost Value In Thousands Due in one year or less $ 4,905 $ 4,893 Due after one year through five years 9,150 9,178 Due after five years through ten years 25,608 25,112 Due after ten years 9,541 9,412 Mortgage-backed securities 21,952 21,846 Equity securities 3,923 3,927 $75,079 $74,368
Securities with a carrying amount of $39.71 million and $27.33 million at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.
Gains of $29,000, $52,000 and $58,000 were realized on sales of securities available for sale in 2000, 1999 and 1998, respectively.
5. Loans
The components of loans were as follows:
December 31, 2000 1999 In Thousands Residential real estate $114,920 $120,094 Commercial 104,758 82,139 Commercial secured by real estate 34,997 25,001 Consumer, net of unearned income 16,648 16,892 Home equity 7,718 5,008 Other 5,822 4,060
Loans 284,863 253,194
Allowance for loan losses (3,571) (2,954)
Loans, net of allowance for loan losses $281,292 $250,240
Changes in the allowance for loan losses were as follows:
Years Ended December 31, 2000 1999 1998 In Thousands Balance, beginning $2,954 $2,129 $1,837 Provision for loan losses 1,082 1,270 620 Loans charged off (555) (568) (424) Recoveries 90 123 96
Balance, ending $3,571 $2,954 $2,129
The recorded investment in impaired loans, not requiring an allowance for loan losses, was $471,000 at December 31, 2000 and $669,000 at December 31, 1999. The recorded investment in impaired loans requiring an allowance for loan losses was $1.01 million and $589,000 at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, the related allowance for loan losses associated with those loans was $517,000 and $221,000, respectively. For the years ended December 31, 2000, 1999 and 1998, the average recorded investment in these impaired loans was $1.50 million, $1.28 million and $556,000, respectively, and the interest income recognized on impaired loans was $61,000 for 2000 and $0 for 1999 and 1998.
6. Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of these loans as of December 31, 2000 and 1999 was $22.6 million and $16.7 million, respectively.
The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2000 and 1999, was $228,000 and $167,000, respectively. The fair value of these rights was $240,000 and $167,000, respectively. The fair value of servicing rights was determined using discount rates from 12.0 percent to 12.5 percent. Mortgage servicing rights of $244,000 were sold in 1999.
The following summarizes mortgage servicing rights capitalized and amortized:
Years Ended December 31, 2000 1999 1998 In Thousands Mortgage servicing rights capitalized $83 $170 $161
Mortgage servicing rights amortized $22 $ 23 $ 42
7. Premises And Equipment
Components of premises and equipment were as follows:
December 31, 2000 1999 In Thousands Land and land improvements $ 1,858 $ 1,595 Buildings 7,520 7,013 Furniture and equipment 5,393 4,947 Premises and equipment 14,771 13,555
Less accumulated depreciation 6,371 5,956
Premises and equipment, net $ 8,400 $ 7,599
Certain facilities and equipment are leased under various operating leases. Rental expense for these leases was $230,000, $177,000 and $93,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum rental commitments under noncancellable leases were as follows (in thousands):
2001 $ 543 2002 594 2003 537 2004 542 2005 551 Thereafter 4,850
$7,617
8. Deposits
The components of deposits were as follows:
Years ended December 31, 2000 1999 In Thousands Demand, non-interest bearing $ 38,233 $ 30,941 Demand, interest bearing 54,783 59,818 Savings 46,317 48,850 Time, $100,000 and over 26,565 16,226 Time, other 130,465 113,509
Total deposits $296,363 $269,344
At December 31, 2000, the scheduled maturities of time deposits were as follows (in thousands):
2001 $ 93,194 2002 49,866 2003 8,530 2004 2,471 2005 2,619 Thereafter 350 $157,030
9. Borrowings
The Bank had federal funds purchased and other short-term borrowings from the Federal Home Loan Bank at December 31, 2000 and 1999 in the amount of $600,000 and $23.57 million, respectively. The December 31, 2000 balance outstanding matured January 2, 2001, at an interest rate of 6.10%.
In addition, the Bank enters into agreements with customers as part of cash management services where the Bank sells securities to the customer overnight with the agreement to repurchase them at par. Securities sold under agreements to repurchase generally mature one day from the transaction date. The securities underlying the agreements were under the Bank's control. The outstanding balances and related information of securities sold under agreements to repurchase are summarized as follows:
Years Ended December 31, 2000 1999 Dollars In Thousands
Average balance during the year $ 9,673 $1,946 Average interest rate during the year 5.73% 5.16% Maximum month-end balance during the year $15,659 $ 4,169
Long-term debt consisted of the following:
December 31, 2000 1999 In Thousands Notes with the Federal Home Loan Bank (FHLB): Term Note Due October 2000 at 4.72% $ - $ 1,000 18 Month/6 Month Term Note Due July 2001, Variable at 6.83% 10,000 - 2 Year Term Note Due November 2002, Fixed at 6.57% 4,000 - 3 Year Term Note Due November 2003, Fixed at 6.59% 4,000 - 4 Year Term Note Due November 2004, Fixed at 6.63% 4,000 - 5 Year/2 Year Term Note Due December 2004, Fixed at 6.14%(1) 5,000 5,000 7 Year/2 Year Term Note Due April 2005, Fixed at 5.55%(1) - 10,000 10 Year/5 Year Term Note Due September 2008, Fixed at 4.92%(1) 5,000 5,000 10 Year/5 Year Term Note Due February 2009, Fixed at 4.97%(1) 5,000 5,000 10 Year/5 Year Term Note Due December 2009, Fixed at 6.30%(1) 5,000 5,000 42,000 31,000
Notes with other financial institutions: 5 Year Term Note Due March 2005, Fixed at 8.50% 500 - 5 Year Term Note Due March 2005, Fixed at 9.00%(2) 1,000 - $43,500 $31,000
(1) These notes contain a convertible option that allows the FHLB, at quarterly intervals, to change the note to an adjustable-rate advance at three-month LIBOR (6.40% at December 31, 2000) plus 14 to 16 basis points. If the note is converted, the option allows the Bank to put the funds back to the FHLB at par. The year/year refers to the maturity of the note (in years) and the term until the first convertible date.
(2) This note contains prepayment penalty provisions ranging from 3% in the first year to 1% in the fifth year.
Contractual maturities of long-term debt at December 31, 2000 were as follows (in thousands):
2001 $10,000 2002 4,000 2003 4,000 2004 9,000 2005 1,500 Thereafter 15,000
$43,500
The Bank has a maximum borrowing capacity with the Federal Home Loan Bank of approximately $123.0 million, of which $42.6 million was outstanding at December 31, 2000. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank.
10. Mandatory Redeemable Capital Debentures
First Leesport Capital Trust I, a Delaware statutory business trust, was formed on March 9, 2000 and is a wholly- owned subsidiary of the Company. The Trust issued $5 million of 10 7/8% fixed rate capital trust pass-through securities to investors. First Leesport Capital Trust I purchased $5 million of fixed rate junior subordinated deferrable interest debentures from First Leesport Bancorp. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The obligations under the debentures constitute a full and unconditional guarantee by First Leesport Bancorp of the obligations of the Trust under the capital securities. The capital securities are redeemable by First Leesport Bancorp on or after March 9, 2010, at stated premiums, or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier 1 Capital is no longer allowed, or certain other contingencies arise. The capital securities must be redeemed upon final maturity of the subordinated debentures on March 9, 2030.
11. Employee Benefits
In 2000, the Company established an Employee Stock Ownership Plan (ESOP) to provide its employees with future retirement plan assistance. The ESOP will invest primarily in the Company's common stock. During 2000, $167,000 was accrued to provide for contribution of shares to the Plan. No shares were purchased on behalf of the ESOP as of December 31, 2000.
Leesport Bank terminated its noncontributory defined benefit pension plan during 2000. This plan had covered all Leesport Bank employees who met the eligibility requirements. The Plan assets in excess of the projected benefit obligation were allocated to the Plan's eligible participants and a gain on the termination of $21,000 was recognized. The expense related to these plans was $88,000 for the year ended December 31, 1999, and $81,000 for the year ended December 31, 1998.
Net pension cost for this plan consisted of the following components:
Years Ended December 31, In thousands 1999 1998 Service cost (benefits earned) $ 134 $ 128 Interest cost on projected benefit obligation 115 109 Expected return on plan assets (150) (139) Net amortization and deferral (11) (17)
$ 88 $ 81
Assumptions used by Leesport Bank in the determination of pension plan information for 1999 and 1998 consisted of the following: Discount rate - 6.5%, rate of increase in compensation levels - 4.0%, expected long-term rate of return on plan assets - 8.0%.
The Company has a 401(k) Salary Deferral Plan. This plan covers all eligible employees who elect to contribute to the Plan. An employee who has attained 18 years of age and has been employed for at least 30 calendar days is eligible to participate in the Plan effective with the next quarterly enrollment period. Employees become eligible for the Company contribution to the Salary Deferral Plan at each future enrollment period upon completion of one year of service. Effective January 1, 2000, the Company contributed 100% of the first three percent of eligible employees' annual salary deferral and 50% of the next four percent of salary deferred. The Company previously contributed 50% of the employee's contribution up to a maximum of seven percent of annual salary. Contributions from the Company vest to the employee over a five year schedule. The annual expense included in salaries and employee benefits representing the expense of the Company's contribution was $257,000, $132,000, and $52,000 for the years ended December 31, 2000, 1999, and 1998, respectively.
The Company has entered into deferred compensation agreements with certain directors and a salary continuation plan for certain key employees. At December 31, 2000 and 1999, the present value of the future liability for these plans was $625,000 and $462,000, respectively. To fund the benefits under these agreements, the Company is the owner and beneficiary of life insurance policies on the lives of the directors and employees. These policies had an aggregate cash surrender value of $5.90 million and $2.28 million at December 31, 2000 and 1999, respectively. For the years ended December 31, 2000, 1999 and 1998, $226,000, $125,000 and $112,000, respectively, was charged to expense in connection with these agreements.
In May 2000, the Board of Directors of First Leesport Bancorp, Inc. adopted a non-compensatory Employee Stock Purchase Plan (ESPP). Under the ESPP, employees of the Company who elect to participate are eligible to purchase common stock at prices up to a 15 percent discount from the market value of the stock. The ESPP does not allow the discount in the event that the purchase price would fall below the Company's most recently reported book value per share. The ESPP allows an employee to make contributions through payroll deduction to purchase common shares up to 15 percent of annual compensation. The total number of shares of common stock that may be issued pursuant to the ESPP is 250,000. As of December 31, 2000 a total of 940 shares have been issued under the ESPP.
12. Stock Option Plans
The Company has an Employee Stock Incentive Plan that covers all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors. The Plan covers 210,000 shares of common stock. The option price for options issued under the Plan must be at least equal to 100% of the fair market value of the common stock on the date of grant and shall not be less than the stock's par value. Options granted under the Plan are exercisable over a period not less than six months after the date of grant, but no later than ten years after the date of grant in accordance with the vesting period as determined by the Plan committee. Options expire on the earlier of ten years after the date of grant, three months from the participants' termination of employment or one year from the date of the participants' death or disability.
The Company has an Independent Directors Stock Option Plan that covers 52,500 shares of common stock. The Plan covers all directors of the Company who are not employees. The option price for options issued under the Plan will be equal to the fair market value of the Company's common stock on the date of grant. Options are exercisable from the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant ceases to be a director of the Company or twelve months from the date of the participants' death or disability.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee and director stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by Financial Accounting Standards Board Statement 123, "Accounting and Disclosure of Stock-Based Compensation" (FASB 123), and has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value of options granted during 2000 and 1999 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions: risk-free interest rates of 4.71% to 6.63%; volatility factors of the expected market price of the Company's common stock of 12.77% to 21.82%; expected life of the options of 7 years and a cash dividend yield of 2.2%.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
Years Ended December 31, 2000 1999 1998 In Thousands, Except Per Share Data Net income: As reported $2,126 $1,401 $1,511 Pro forma $1,979 $1,305 $1,511 Earnings per share: As reported, basic and diluted $ 1.15 $ .76 $ .86 Pro forma, basic and diluted $ 1.07 $ .71 $ .86
Stock option transactions under the Plans were as follows:
Options available for grant at December 31, 2000 were 130,159.
Stock options outstanding at December 31, 2000, were exercisable at prices ranging from $13.75 to $25.95 a share. The weighted-average remaining contractual life of the above options is approximately 8 years.
13. Federal Income Taxes
The components of federal income tax expense were as follows:
Years Ended December 31, 2000 1999 1998 In Thousands Current $ 846 $ 917 $ 353 Deferred (235) (463) (36)
$ 611 $ 454 $ 317
Reconciliation of the statutory federal income tax expense computed at 34% to the federal income tax expense included in the consolidated statements of income is as follows:
Years Ended December 31, 2000 1999 1998 In Thousands Federal income tax at statutory rate $ 931 $ 631 $ 622 Tax exempt interest (378) (351) (333) Interest disallowance 59 41 49 Bank owned life insurance (107) (32) (38) Non-deductible goodwill 85 76 6 Non-deductible merger costs - 81 - Other 21 8 11
$ 611 $ 454 $ 317
The federal income tax provision includes $10,000, $18,000 and $20,000 in 2000, 1999 and 1998, respectively, of federal income taxes related to gains on the sale of securities.
Net deferred tax assets consisted of the following components:
December 31, 2000 1999 In Thousands Deferred tax assets: Allowance for loan losses $1,021 $ 806 Deferred compensation 214 157 Net unrealized losses on securities available for sale 242 1,100 Other 10 42 Total deferred tax assets 1,487 2,105
Deferred tax liabilities: Premises and equipment (86) (86) Mortgage servicing rights (77) (57) Other (6) (21) Total deferred tax liabilities (169) (164) Net deferred tax assets $1,318 $1,941
14. Transactions With Executive Officers And Directors
The Bank has had banking transactions in the ordinary course of business with its executive officers and directors and their related interests on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. At December 31, 2000 and 1999, these persons were indebted to the Bank for loans totaling $5.62 million and $6.24 million, respectively. During 2000, $649,000 of new loans were made and repayments totaled $1.27 million.
15. Regulatory Matters And Capital Adequacy
The Company and the Bank are 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 their financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The 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 Company and the Bank to maintain minimum amounts and ratios of total and tier I capital (as defined in the regulations) to risk-weighted assets, and of tier I capital to average assets. Management believes, as of December 31, 2000, that the Company and the Bank meet all minimum capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the Bank's primary regulator 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 its category.
The Company's and the Bank's actual capital amounts and ratios are presented below:
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. At December 31, 2000, the Bank had approximately $13.35 million available for payment of dividends to the Company. Loans or advances are limited to 10 percent of the Bank's capital stock and surplus on a secured basis.
As of December 31, 2000, the Company had declared a $.15 per share cash dividend for shareholders of record on January 3, 2001, payable January 12, 2001. The Company's Board of Directors declared a five percent stock dividend in December 1999 to shareholders of record on January 3, 2000, which was paid on January 17, 2000.
16. Financial Instruments With Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Bank's financial instrument commitments was as follows:
December 31, 2000 1999 In Thousands Commitments to grant loans $11,425 $15,737 Unfunded commitments under lines of credit 28,830 23,759 Outstanding letters of credit 291 550
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's credit worthiness on a case- by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Outstanding letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
17. Concentrations Of Credit Risk
The Bank grants commercial, residential and consumer loans to customers primarily located in Berks, Schuylkill and Luzerne counties in Pennsylvania. The concentrations of credit by type of loan are set forth in Note 5. Although the Bank has a diversified loan portfolio, its debtors' ability to honor these contracts is influenced by the region's economy.
18. Fair Value Of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re- evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at December 31, 2000 and 1999:
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values.
Securities available for sale:
Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans:
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (e.g., consumer loans and fixed rate mortgage loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposit liabilities:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and certain types of money market accounts) are considered to be equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits.
Securities sold under agreements to repurchase and federal funds purchased:
The carrying amounts of these short-term borrowings approximate their fair values.
Long-term debt:
The fair value of long-term debt is calculated based on the discounted value of contractual cash flows, using rates currently available for borrowings with similar maturities.
Mandatory redeemable capital debentures:
The fair value of these debentures is calculated based on the discounted value of contractual cash flows, using rates currently available.
Accrued interest receivable and payable:
The carrying amount of accrued interest receivable and accrued interest payable approximate its fair value.
Off-balance sheet instruments:
Fair values for the Bank's off-balance sheet instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments were as follows:
19. Segment And Related Information
The Company's insurance operations and brokerage and investment operations are managed separately from the traditional banking and related financial services that the Company also offers. These operations provide commercial insurance, individual and group benefit plans, personal insurance coverage, securities brokerage services, and investment advisory services. The brokerage and investment advisory operation was not material to the consolidated financial statements of the Company in 1999, and the insurance operation was not material to the consolidated financial statements of the Company in 1998.
Segment information for 2000 and 1999 is as follows (in thousands):
Income (loss) before federal income taxes, as presented above, reflects referral and management fees of approximately $614,000 and $179,000 that the insurance operation and the brokerage and investment operation, respectively, paid to the Bank during 2000. Referral and management fees of approximately $614,000 were paid by the insurance operation to the Bank in 1999.
20. First Leesport Bancorp, Inc. (Parent Company Only) Financial Information
20. First Leesport Bancorp, Inc. (Parent Company Only) Financial Information (continued)
STATEMENTS OF CASH FLOWS
21. Quarterly Data (Unaudited)
Merger and restructuring costs totaling $814,000 ($617,000 after tax) were expensed during the third quarter of 1999.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information relating to directors and executive officers of the Registrant is incorporated herein by reference to the information disclosed under the caption "MATTER NO. 1 - ELECTION OF DIRECTORS - Directors" included in the Registrant's Proxy Statement for the Annual meeting of Stockholders to be held on April 24, 2001.
Item 11.
Item 11. Executive Compensation
The information relating to executive compensation and directors' compensation is incorporated herein by reference to the information disclosed under the captions "MATTER NO. 1 - ELECTION OF DIRECTORS - Director Compensation; Executive Compensation; Executive Officer Agreements; Deferred Compensation and Salary Continuation Agreements; and Compensation Committee Interlocks and Insider Participation" included in the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2001.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the information disclosed under the caption "MATTER NO. 1 - ELECTION OF DIRECTORS - Directors - Director and Officer Stock Ownership" included in the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2001.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions is incorporated herein by reference to the information disclosed under the caption "MATTER NO. 1 - ELECTION OF DIRECTORS - Transactions with Management and Others" included in the Registrant's proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2001.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements.
Consolidated financial statements are included under Item 8 of Part II of this Form 10-K.
(b) 2. Financial Statement Schedules.
Financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.
3. Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of First Leesport Bancorp, Inc.
3.2 Bylaws of First Leesport Bancorp, Inc.
10.1 Contract between the First National Bank of Leesport and Bisys (Incorporated herein by reference to Exhibit 10.1 to Registrant's annual report on Form 10-KSB for the year ended December 31, 1998).
10.2 Severance Agreement between the First National Bank of Leesport and John T. Connelly (Incorporated herein by reference to Exhibit 10.2 to Registrant's annual report on Form 10-KSB for the year ended December 31, 1998).*
10.3 Employment Agreement between the First National Bank of Leesport and Raymond H. Melcher, Jr. (Incorporated herein by reference to Exhibit 10.4 to Registrant's annual report on Form 10-KSB for the year ended December 31, 1998).*
10.4 Supplemental Executive Retirement Plan (Incorporated herein by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).*
10.5 Deferred Compensation Plan for Directors (Incorporated herein by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).*
10.6 Non-Employee Director Compensation Plan (Incorporated by reference to Exhibit A to Registrant's Definitive Proxy Statement on Form 14A for the year ended December 31, 1999).*
10.7 1998 Employee Stock Incentive Plan (Incorporated by reference to Exhibit 10.9 to Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1998).*
10.8 1998 Independent Directors Stock Option Plan (Incorporated by reference to Exhibit 10.10 to Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1998).*
10.9 Employment Agreement, dated September 17, 1998, among First Leesport Bancorp, Inc., Essick & Barr, Inc. and Charles J. Hopkins (Incorporated by reference to Exhibit 10.12 to Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1998).*
10.10 Employment Agreement, dated October 1, 1999, among First Leesport Bancorp, Inc., First Leesport Investment Group, Inc., First Leesport Wealth Management, Inc. and Keith W. Johnson. (Incorporated herein by reference to Exhibit 10.12 of the Registrant's annual report on Form 10-K for the year ended December 31, 1990.)*
11 No statement setting forth the computation of per share earnings is included because such computation is reflected clearly in the financial statements set forth in response to Item 7 of this Report.
21 Subsidiaries of First Leesport Bancorp, Inc.
23.1 Consent of Beard Miller Company LLP.
23.2 Consent of Stokes & Hinds, LLC.
99 Report of Stokes & Hinds, LLC. _____________________
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The following report on Form 8-K was filed by the Company during the quarter ended December 31, 2000:
None.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 29, 2001 FIRST LEESPORT BANCORP, INC.
By:/s/Raymond H. Melcer, Jr. Raymond H. Melcher, Jr., Chairman, President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/Raymond H. Melcher, Jr. Chairman, March 29, 2001 Raymond H. Melcher, Jr. President and Chief Executive Officer, Director
/s/Kurt A. Phillips Chief Financial March 29, 2001 Kurt A. Phillips and Chief Accounting Officer
/s/Edward C. Barrett Director March 29, 2001 Edward C. Barrett
/s/James H. Burton Director March 29, 2001 James H. Burton
/s/Anthony R. Cali Director March 29, 2001 Anthony R. Cali
/s/John T. Connelly Director March 29, 2001 John T. Connelly
/s/Charles J. Hopkins Director March 29, 2000 Charles J. Hopkins
/s/Keith W. Johnson Director March 29, 2000 Keith W. Johnson
/s/William J. Keller Director March 29, 2001 William J.Keller
/s/Andrew J. Kuzneski, Jr. Director Andrew J. Kuzneski, Jr.
/s/Roland C. Moyer, Jr. Director March 29, 2001 Roland C. Moyer, Jr.
/s/Harry J. O'Neill III Director March 29, 2001 Harry J. O'Neill III
/s/Karen A. Rightmire Director March 29, 2001 Karen A. Rightmire
/s/Alfred J. Weber Director March 29, 2001 Alfred J. Weber
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Incorporation of First Leesport Bancorp, Inc.
3.2 Bylaws of First Leesport Bancorp, Inc.
21 Subsidiaries of First Leesport Bancorp, Inc.
23.1 Consent of Beard Miller Company LLP.
23.2 Consent of Stokes & Hinds, LLC.
99 Report of Stokes & Hinds, LLC.