SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý Quarterly Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934

 

for the Quarterly Period Ended September 30, 2004,

 

or

 

o Transition report pursuant to Section 13 or 15(d) Of the Exchange Act

 

for the Transition Period from          to          .

 

No. 0-14555

(Commission File Number)

 

LEESPORT FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA		23-2354007
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)
1240 Broadcasting Road, Wyomissing, Pennsylvania		19610
(Address of principal executive offices)		(Zip Code)

 

(610) 208-0966

(Registrants telephone number, including area code)

 

 

(Former name, former address and former fiscal year,

if changed since last report)

 

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o   No ý

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

COMMON STOCK ($5.00 Par Value)		Number of Shares Outstanding as of November 15, 2004 4,747,128
(Title of Class)		(Outstanding Shares)

 

 

Forward-looking Statements

 

Leesport Financial Corp. (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control).  The words “may,” “could,” “should,” would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

 

The Company cautions that the foregoing list of important factors is not exclusive.  Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report.  The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

2

 

Part I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

 

		September 30, 2004			December 31, 2003
		(Unaudited)
ASSETS
Cash and due from banks		$	17,849		$	15,227
Interest-bearing deposits in banks		22			11
Total cash and cash equivalents		17,871			15,238
Federal funds sold		—			1,100
Mortgage loans held for sale		1,783			1,280
Securities available for sale		174,792			200,650
Loans, net of allowance for loan losses 09/04 - $5,012, 12/03 - $4,356		394,680			353,126
Premises and equipment, net		14,625			12,907
Identifiable intangible assets		4,098			4,369
Goodwill		9,580			9,200
Bank owned life insurance		11,227			10,789
Other assets		15,754			13,593
TOTAL ASSETS		$	644,410		$	622,252
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest bearing		$	69,737		$	67,711
Interest bearing		368,278			340,871
Total deposits		438,015			408,582
Securities sold under agreements to repurchase		49,272			41,588
Federal funds purchased		31,000			62,090
Long-term debt		42,500			34,500
Mandatory redeemable capital debentures		—			15,000
Junior subordinated debt		15,000			—
Other liabilities		12,877			7,115
Total liabilities		588,664			568,875
Shareholders’ Equity
Common stock, $5.00 par value; Authorized 20,000,000 shares; 3,460,473 shares issued at September 30, 2004 and 3,439,310 shares issued at December 31, 2003		17,302			17,197
Surplus		18,858			18,426
Retained earnings		20,606			18,535
Accumulated other comprehensive (loss) income		(124		)	273
Treasury stock; 46,043 shares at September 30, 2004 and 55,487 shares at December 31, 2003, at cost		(896		)	(1,054		)
Total shareholders’ equity		55,746			53,377
Total liabilities and shareholders’ equity		$	644,410		$	622,252

 

See Notes to Consolidated Financial Statements.

 

3

 

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share data)

 

		Three Months Ended						Nine Months Ended
		September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
Interest income:
Interest and fees on loans		$	5,933		$	5,536		$	16,889		$	16,951
Interest on securities:
Taxable		1,503			1,350			4,635			4,062
Tax-exempt		163			229			612			585
Dividend income		101			41			299			152
Interest on federal funds sold		—			—			—			9
Other interest income		3			1			8			7
Total interest income		7,703			7,157			22,443			21,766
Interest expense:
Interest on deposits		2,123			2,040			6,237			6,182
Interest on short-term borrowings		132			58			436			97
Interest on securities sold under agreement to repurchase		198			69			561			205
Interest on long-term debt		311			909			889			2,657
Interest on mandatory redeemable capital debentures		—			206			—			636
Interest on junior subordinated debt		221			—			616			—
Total interest expense		2,985			3,282			8,739			9,777
Net interest income		4,718			3,875			13,704			11,989
Provision for loan losses		240			75			900			745
Net interest income after provision for loan losses		4,478			3,800			12,804			11,244
Other income:
Customer service fees		441			393			1,289			1,125
Mortgage banking activities		278			695			762			2,155
Commissions and fees from insurance sales		2,827			2,297			8,058			6,786
Brokerage and investment advisory commissions and fees		134			189			383			559
Gain on sale of loans		380			207			431			228
Gain on sale of financial centers		—			3,073			—			3,073
Other income		329			340			1,101			979
Net realized gains (losses) on sales of securities		2			(70		)	202			125
Total other income		4,391			7,124			12,226			15,030
Other expense:
Salaries and employee benefits		4,096			3,482			11,636			10,151
Occupancy expense		543			523			1,588			1,499
Equipment expense		471			428			1,356			1,071
Marketing and advertising expense		245			364			911			1,029
Amortization of identifiable intangible assets		94			68			272			205
Professional services		283			339			849			882
Outside processing		471			583			1,492			1,703
Insurance expense		152			116			374			301
FHLB prepayment expense		—			2,482			—			2,482
Other expense		555			878			1,661			2,076
Total other expense		6,910			9,263			20,139			21,399
Income before income taxes		1,959			1,661			4,891			4,875
Income taxes		405			453			857			1,355
Net income		$	1,554		$	1,208		$	4,034		$	3,520
EARNINGS PER SHARE DATA
Average shares outstanding		3,413,263			3,374,072			3,409,894			3,390,815
Basic earnings per share		$	0.46		$	0.36		$	1.18		$	1.04
Average shares outstanding for diluted earnings per share		3,461,831			3,410,607			3,468,410			3,427,350
Diluted earnings per share		$	0.45		$	0.35		$	1.16		$	1.03
Cash dividends declared per share		$	0.17		$	0.17		$	0.51		$	0.48

 

See Notes to Consolidated Financial Statements.

 

4

 

LEESPORT FINANCIAL CORP.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2004 and 2003

(Dollar amounts in thousands, except share data)

 

		Common Stock					Surplus			Retained Earnings			Accum- ulated Other Compre- hensive Income (Loss)			Treasury Stock			Total
		Number of Shares Issued		Par Value
Balance, December 31, 2003		3,439,310		$	17,197		$	18,426		$	18,535		$	273		$	(1,054	)	$	53,377
Net Income		—		—			—			4,034			—			—			4,034
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment		—		—			—			—			(397		)	—			(397		)
Total comprehensive income																			3,637
Purchase of treasury stock		—		—			—			—			—			(140		)	(140		)
Reissuance of treasury stock		—		—			63			—			—			298			361
Common stock issued in connection with directors compensation		6,890		34			128			—			—			—			162
Common stock issued in connection with directors and employee stock purchase plans		14,273		71			241			—			—			—			312
Cash dividends declared ($.51 per share)		—		—			—			(1,963		)	—			—			(1,963		)
Balance, September 30, 2004		3,460,473		$	17,302		$	18,858		$	20,606		$	(124	)	$	(896	)	$	55,746

 

		Common Stock							Surplus					Retained Earnings					Accum- ulated Other Compre- hensive Income (Loss)					Treasury Stock					Total
		Number of Shares Issued		Par Value
Balance, December 31, 2002		3,241,606			$	16,208				$	15,573				$	18,978				$	2,141				$	—				$	52,900
Net Income		—			—					—					3,520					—					—					3,520
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment		—			—					—					—					(2,503			)		—					(2,503			)
Total comprehensive income																														1,017
Purchase of treasury stock		—			—					—					—					—					(1,054			)		(1,054			)
Common stock issued in connection with directors compensation		7,953			40					115					—					—					—					155
Common stock issued in connection with directors and employee stock purchase plans		18,524			92					251					—					—					—					343
Common stock dividend (5%)		161,949			810					2,383					(3,200			)		—					—					(7			)
Cash dividends declared ($.48 per share)		—			—					—					(1,633			)		—					—					(1,633			)
Balance, September 30, 2003		3,430,032			$	17,150				$	18,322				$	17,665				$	(362		)		$	(1,054		)		$	51,721

 

See Notes to Consolidated Financial Statements.

 

5

 

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

		Nine Months Ended
		September 30, 2004			September 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	4,034		$	3,520
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		900			745
Provision for depreciation and amortization of premises and equipment		970			820
Amortization of identifiable intangible assets		272			205
Deferred income taxes		(361		)	375
Director stock compensation		162			155
Net amortization securities premiums and discounts		479			1,375
Amortization of mortgage servicing rights		88			285
Increase in mortgage servicing rights		(134		)	(114		)
Net realized (gains) losses on sale of foreclosed real estate		18			(5		)
Net realized gains on sales of securities		(202		)	(125		)
Proceeds from sales of loans held for sale		28,718			109,558
Net gains on sale of loans		(998		)	(2,108		)
Net change in loans held for sale		(28,222		)	(88,691		)
Increase in cash surrender value of life insurance		(438		)	(251		)
Gain on sale of financial centers		—			(3,073		)
(Increase) decrease in accrued interest receivable and other assets		(1,810		)	(851		)
Increase (decrease) in accrued interest payable and other liabilities		6,801			(1,322		)
NET CASH PROVIDED BY OPERATING ACTIVITIES		10,277			20,498
CASH FLOW FROM INVESTING ACTIVITIES
Available for sale securities:
Purchases		(35,831		)	(162,428		)
Principal repayments, maturities and calls		23,600			73,001
Proceeds from sales		36,568			53,473
Net decrease in federal funds sold		1,100			—
Net increase in loans receivable		(50,972		)	(30,016		)
Proceeds from sale of loans		8,518			—
Net (increase) decrease in Federal Home Loan Bank Stock		625			(1,172		)
Proceeds from sale of foreclosed real estate		272			301
Proceeds from sale of premises and equipment		—			1,674
Purchases of premises and equipment		(2,689		)	(5,387		)
Purchases of bank owned life insurance		—			(3,787		)
Net cash used in acquisitions		—			(1,045		)
Purchase of limited partnership investment		(1,675		)	—
NET CASH USED IN INVESTING ACTIVITIES		(20,484		)	(75,386		)
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposits		29,432			67,325
Net increase (decrease) in federal funds purchased		(31,090		)	35,989
Net increase in securities sold under agreements to repurchase		7,684			21,830
Proceeds from long-term debt		13,500			14,000
Repayments from long-term debt		(5,500		)	(50,396		)
Purchase of treasury stock		(140		)	(1,054		)
Proceeds from the exercise of stock options and stock purchase plans		312			343
Reissuance of treasury stock		361			—
Cash dividends paid		(1,719		)	(1,602		)
Cash disbursed with sale of financial centers		—			(30,702		)
NET CASH PROVIDED BY FINANCING ACTIVITIES		12,840			55,733
Increase in cash and cash equivalents		2,633			845
Cash and cash equivalents:
Beginning		15,238			16,490
Ending		$	17,871		$	17,335
Cash payments for:
Interest		$	9,054		$	10,667
Taxes		$	1,060		$	1,330
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans		$	—		$	229

 

See Notes to Consolidated Financial Statements.

 

6

 

LEESPORT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.          Basis of Presentation

 

The unaudited consolidated financial statements contained herein have been prepared in accordance with the instructions to Form 10-Q of Regulation S-X.  All significant intercompany accounts and transactions have been eliminated.  The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included.  For comparative purposes, prior years’ consolidated financial statements have been reclassified to conform to report classifications of the current year.  The reclassifications had no effect on net income.

 

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

The results of operations for the three and nine-month periods ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year.  For purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, and interest bearing deposits in other banks.  For further information, refer to the Consolidated Financial Statements and Footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

2.           Earnings Per Common 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.

 

Earnings per common share for the respective periods indicated have been computed based upon the following:

 

		Three Months Ended						Nine Months Ended
		September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
		(Dollar amounts in thousands)
Net income available to shareholders		$	1,554		$	1,208		$	4,034		$	3,520
Average shares outstanding		3,413,263			3,374,072			3,409,894			3,390,815
Effect of dilutive stock options		48,568			36,535			58,516			36,535
Average number of shares used to calculate diluted earnings per share		3,461,831			3,410,607			3,468,410			3,427,350

 

7

 

3.           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 (loss) and related tax effects were as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(Dollar amounts in thousands)
Unrealized holding gains (losses) on available for sale securities		$	4,373		$	(4,428	)	$	(400	)	$	(3,667	)
Reclassification adjustment for (gains) losses realized in income		(2		)	70			(202		)	(125		)
Net unrealized gains (losses)		4,371			(4,358		)	(602		)	(3,792		)
Income tax effect		(1,486		)	1,482			205			1,289
Other comprehensive income (loss)		$	2,885		$	(2,876	)	$	(397	)	$	(2,503	)

 

4.           Contingent Liabilities and Guarantees

 

In the ordinary course of business, the Company enters 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.

 

A summary of the contractual amount of the Company’s financial instrument commitments is as follows:

 

 

Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments.  The Company had $12,750,000 of financial and performance standby letters of credit as of September 30, 2004.  The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.

 

The majority of these standby letters of credit expire within the next 24 months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary.  Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of September 30, 2004 for guarantees under standby letters of credit is not material.

 

8

 

5.           Segment Information

 

The Company’s insurance operations and investment operations are managed separately from the traditional banking and related financial services that the Company also offers.  The insurance operation provides commercial, individual, and group benefit plans and personal coverage.  The investment operation provides individual financial, retirement and estate planning, investment advice and services, corporate and small business pension and retirement planning services.

 

 

6.           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 total number of shares available for issuance under the Plan is 420,500 shares.  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 not less than the stock’s par value.  Options granted under the Plan are exercisable over a period not less than twelve 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 participant’s termination of employment or one year from the date of the participant’s death or disability.

 

The Company has an Independent Directors Stock Option Plan.  The total number of shares available for issuance under the Plan is 105,125 shares.  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 granted under the plan are exercisable nine months after the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant’s relationship with the Company ceases or twelve months from the date of the participant’s death or disability.

 

9

 

The Company accounts for the above stock option plans under the recognition and measurement principles of APB opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” to stock-based compensation:

 

		Three Months Ended						Nine Months Ended
		September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
		(Dollar amounts in thousands except share data)
Net income as reported		$	1,554		$	1,208		$	4,034		$	3,520
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(21		)	(35		)	(114		)	(112		)
Pro forma net income		$	1,533		$	1,173		$	3,920		$	3,408
Basic earnings per share:
As reported		$	.46		$	.36		$	1.18		$	1.04
Pro forma		$	.45		$	.35		$	1.15		$	1.01
Diluted earnings per share:
As reported		$	.45		$	.35		$	1.16		$	1.03
Pro forma		$	.44		$	.34		$	1.13		$	.99

 

7.           Debt and Borrowings

 

Total debt decreased by $15.4 million or 10.1% to $137.8 million at September 30, 2004 from $153.2 million at December 31, 2003.  The decrease in total debt and borrowings was primarily due to the Company repaying overnight federal funds which declined to $31.0 million at September 30, 2004 from $62.1 million at December 31, 2003.  The repayment of these funds was primarily accomplished throughout the period using proceeds from investment securities pay downs, increases in deposit account balances and long-term borrowings which increased to $42.5 million at September 30, 2004 from $34.5 million at December 31, 2003.

 

8.           Junior Subordinated Debt

 

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” which was revised in December 2003.  This interpretation provides guidance for the consolidation of variable interest entities (VIEs).  First Leesport Capital Trust I and Leesport Capital Trust II (the “Trusts”) each qualify as a variable interest entity under FIN 46.  The Trusts issued mandatory redeemable preferred securities (Trust Preferred Securities) to third-party investors and loaned the proceeds to the Company.  The Trusts hold, as their sole assets, subordinated debentures issued by the company.

 

FIN 46 required the Company to deconsolidate the Trusts from the consolidated financial statements as of March 31, 2004.  There has been no restatement of prior periods.  The impact of this deconsolidation was to increase junior subordinated debentures by $15,000,000 and reduce the mandatory redeemable capital debentures line item by $15,000,000 which had represented the trust preferred securities of the trust.  The Company’s equity interest in the trust subsidiaries of $538,000, which had previously been eliminated in consolidation, is now reported in “Other assets”.  For regulatory purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice.  If regulators make a determination that trust Preferred Securities can no longer be considered in regulatory capital, the securities will become callable and the Company may redeem them.  The adoption of FIN 46 did not have an impact on the Company’s results of operations or liquidity.

 

10