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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:

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(Dollar amounts in thousands)

 

Commitments to grant loans

 

$

41,321

 

$

18,166

 

Unfunded commitments under lines of credit

 

113,360

 

103,984

 

Financial and performance standby letters of credit

 

12,750

 

9,166

 

 

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.

 

 

 

Banking
and
Financial
Services

 

Insurance
Services

 

Investment
Services

 

Total

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2004

 

 

 

 

 

 

 

 

 

Net interest income and other income from external sources

 

$

6,148

 

$

2,827

 

$

134

 

$

9,109

 

Income (loss) before income taxes

 

1,445

 

541

 

(27

)

1,959

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2003

 

 

 

 

 

 

 

 

 

Net interest income and other income from external sources

 

$

8,520

 

$

2,290

 

$

189

 

$

10,999

 

Income (loss) before income taxes

 

1,372

 

345

 

(56

)

1,661

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2004

 

 

 

 

 

 

 

 

 

Net interest income and other income from external sources

 

$

17,489

 

$

8,058

 

$

383

 

$

25,930

 

Income (loss) before income taxes

 

3,495

 

1,504

 

(108

)

4,891

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2003

 

 

 

 

 

 

 

 

 

Net interest income and other income from external sources

 

$

19,674

 

$

6,786

 

$

559

 

$

27,019

 

Income (loss) before income taxes

 

4,054

 

1,147

 

(326

)

4,875

 

 

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



 

9.           Acquisitions and Divestitures

 

On April 16, 2004, the Company and its banking subsidiary, Leesport Bank, entered into an agreement and plan of merger with Madison Bancshares Group, Ltd. (“Madison”) and its banking subsidiary, Madison Bank.  The agreement provides, among other things, for the merger of Madison Bank into Leesport Bank, with Leesport Bank surviving the merger as a subsidiary of the Company.  The former Madison Bank will become a division of Leesport Bank operated under the trade name, “Madison Bank”..  As of September 30, 2004, Madison had total assets of $216.6 million, loans of $197.5 million and deposits of $179.4 million.  The merger agreement provides for each of the approximately 2.17 million shares of Madison’s common stock to be exchanged for 0.6028 shares of the Company’s common stock.  In addition, each of the options and warrants to acquire Madison’s stock received cash for the difference between their option price and $15.65.  The acquisition received all required regulatory and shareholder approvals and was completed on October 1, 2004.

 

On September 30, 2003, the Company acquired certain assets of CrosStates Insurance Consultants, Inc. (CrosStates), a full service insurance agency that specializes in property and casualty insurance headquartered in Langhorne, Pennsylvania.  CrosStates has become a division of the Company’s Essick & Barr, LLC insurance agency.  As a result of this acquisition, Essick & Barr, LLC expanded its retail and commercial insurance presence in southeastern Pennsylvania counties.  The Company paid cash of $1.0 million for CrosStates on September 30, 2003 and recorded a liability of $1.4 million, payable in cash and stock at the then current market value.  This liability is included in other liabilities.  After the first and second years following the acquisition, $1.0 million and $0.4 million, respectively, will be paid.  Also, there are contingent payments totaling up to $1.2 million, payable in cash and stock at the then current market value based on CrosStates achieving certain annual revenue levels through September 30, 2006.  This transaction was accounted for under the purchase method of accounting.  Accordingly, the results of operations of the Company include CrosStates’ results since October 1, 2003.

 

On September 5, 2003, the Company completed the transaction with The Legacy Bank, Harrisburg, Pennsylvania, to sell its three most northern financial centers: Shenandoah, located in northern Schuylkill County, and Drums and Hazleton, located in Luzerne County.  Included in the sale were approximately $59.6 million in deposits and related accrued interest, loans of approximately $24 million and other assets of approximately $1.0 million.

 

10.         Investment in Limited Partnership

 

On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank will receive special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included in other assets and is not guaranteed.  It is accounted for in accordance with Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures,” using the equity method. This agreement was accompanied by a payment of $1,675,000.  The associated non-interest bearing promissory note payable included in other liabilities was $1,650,000 at September 30, 2004 and $3,325,000 at December 31, 2003.  Installments are payable as requested.  The next scheduled payment is October 1, 2004 for $600,000.  The Company expects the installments to be fully funded by January 2005.

 

11.         Recent Accounting Pronouncements

 

During March 2004, the Financial Accounting Standards Board (FASB) issued an exposure draft of a new standard entitled “Share Based Payment,” which would amend FASB Statement No. 123 and FASB Statement No. 95, “Statement of Cash Flows.” The new accounting standard, as proposed, would require the expensing of stock options issued by the Company in the financial statements using a fair-value-based method and would be effective for periods beginning after June 15, 2005. See Note 6 “Stock Option Plans” for pro forma disclosures regarding the effect on net income and income per share if we had applied the fair value recognition provisions of the SFAS No. 123. Depending on the method adopted by the Company to calculate stock-based compensation expense upon the adoption of Share Based Payment, the pro forma disclosure in Note 6 may not be indicative of the stock-based compensation expense to be recognized in periods beginning after June 15, 2005..

 

In March 2004, the SEC released Staff Accounting Bulletin (SAB) No. 105, “Application of Accounting Principles to Loan Commitments.”  SAB 105 provides guidance about the measurements of loan commitments recognized at fair value under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  SAB 105 also

 

11



 

requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies.  SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004.  The adoption of SAB 105 is not expected to have a material effect on our consolidated financial statements.

 

In March 2004, The FASB’s Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No., 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1).  EITF 03-1 provides guidance regarding the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and to equity securities accounted for under the cost method.  Included in EITF 03-1 is guidance on how to account for impairments that are solely due to interest rate changes, including changes resulting from increases in sector credit spreads.  This guidance was to become effective for reporting periods beginning after June 15, 2004.  However, on September 30, 2004, the FASB issued a Staff Position that delays the effective date for the recognition and measurement guidance of EITF 03-1 until additional clarifying guidance is issued.  This additional guidance is expected to be issued during and be effective for the fourth quarter of 2004.  We are not able to assess the impact of the adoption of EITF 03-1 until final guidance is issued.

 

12



 

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Critical Accounting Policies

 

Note 1 to the Company’s consolidated financial statements (included in Item 8 of the 10-K) lists significant accounting policies used in the development and presentation of its financial statements.  This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

 

The most significant estimates in the preparation of the Company’s financial statements are for the provision and allowance for loans losses, revenue recognition and insurance activities, stock based compensation, derivative financial instruments, purchase accounting, goodwill and intangible assets.

 

Results of Operations

 

OVERVIEW

 

Net income for the Company for the quarter ended September 30, 2004 was $1.55 million, an increase of 28.6%, as compared to $1.21 million for the same period in 2003.  For the first nine months of 2004, net income was $4.03 million, an increase of 14.6%, as compared to $3.52 million for the same period in 2003.  Basic and diluted earnings per share were $.46 and $.45, respectively, for the third quarter of 2004 compared to basic and diluted earnings per share of $.36 and $.35, respectively, for the same period of 2003.  For the first nine months of 2004, basic and diluted earnings per share were $1.18 and $1.16, respectively, for the third quarter of 2004 compared to basic and diluted earnings per share of $1.04 and $1.03, respectively, for the same period of 2003.

 

The following are the key ratios for the Company as of September 30:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

.97

%

.80

%

.86

%

.81

%

Return on average shareholders’ equity

 

11.53

%

9.15

%

9.95

%

8.87

%

Dividend payout ratio

 

51.93

%

46.06

%

48.79

%

46.57

%

Average shareholders’ equity to average assets

 

8.44

%

9.08

%

8.66

%

9.11

%

 

Net Interest Income

 

Net interest income is a primary source of revenue for the Company.  Net interest 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 short and long-term borrowed funds.  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 margin is on a fully taxable equivalent basis, using a 34% tax rate.

 

Net interest income for the three months ended September 30, 2004 was $4.72 million, an increase of $843,000, or 21.8%, compared to the $3.88 million reported for the third quarter of 2003. Net interest income for the nine months ended September 30, 2004 was $13.70 million, an increase of $1.71 million, or 14.3%, compared to the $11.99 million reported for the same period of 2003.  The net interest margin increased to 3.44% for the third quarter of 2004 from 2.92% for the third quarter of 2003.  The net interest margin increased to 3.47% for the first nine months of 2004 from 3.14% for

 

13



 

the same period of 2003. The improvement in net interest margin for the three and nine month periods, as compared to the same periods in 2003, is due to an increase in the investment portfolio yield, increased non-interest bearing deposits, maturities of higher priced certificates of deposit and lower long-term borrowing costs.

 

The following summarizes net interest margin information:

 

 

 

Three Months Ended September 30,

 

 

 

2004

 

2003

 

 

 

Average
Balance

 

Interest
Income/
Expense

 

%
Rate

 

Average
Balance

 

Interest
Income/
Expense

 

%
Rate

 

 

 

(Dollar amounts in thousands)

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans: (1) (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

263,534

 

$

4,063

 

6.10

 

$

229,613

 

$

3,568

 

6.17

 

Mortgage

 

39,550

 

611

 

6.18

 

44,609

 

831

 

7.45

 

Consumer

 

92,855

 

1,316

 

5.70

 

81,347

 

1,150

 

5.61

 

Other

 

922

 

 

 

2,317

 

 

 

Investments (2)

 

174,616

 

1,881

 

4.31

 

186,567

 

1,738

 

3.70

 

Federal funds sold

 

 

 

 

128

 

 

 

Other short-term investments

 

 

 

 

922

 

2

 

.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

$

571,477

 

$

7,871

 

5.45

 

$

545,503

 

$

7,289

 

5.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

199,883

 

$

567

 

1.14

 

$

178,505

 

$

452

 

1.00

 

Certificates of deposit

 

171,326

 

1,556

 

3.65

 

163,325

 

1,588

 

3.86

 

Securities sold under agreement to repurchase

 

45,205

 

198

 

1.72

 

20,074

 

69

 

1.36

 

Short-term borrowings

 

31,973

 

132

 

1.67

 

17,802

 

57

 

1.27

 

Long-term borrowings

 

36,783

 

311

 

3.34

 

78,158

 

905

 

4.59

 

Junior subordinated debt/mandatory redeemable capital securities

 

15,000

 

221

 

5.90

 

15,000

 

209

 

5.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

500,170

 

2,985

 

2.40

 

472,864

 

3,280

 

2.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

71,723

 

 

 

 

68,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of funds

 

$

571,893

 

2,985

 

2.10

 

$

541,861

 

3,280

 

2.40

 

Net interest margin (fully taxable equivalent)

 

 

 

$

4,886

 

3.44

 

 

 

$

4,009

 

2.92

 

 

14



 

 

 

Nine Months Ended September 30,

 

 

 

2004

 

2003

 

 

 

Average
Balance

 

Interest
Income/
Expense

 

%
Rate

 

Average
Balance

 

Interest
Income/
Expense

 

%
Rate

 

 

 

(Dollar amounts in thousands)

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans: (1) (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

248,683

 

$

11,348

 

6.00

 

$

223,863

 

$

10,865

 

6.49

 

Mortgage

 

39,237

 

1,963

 

6.57

 

50,289

 

2,600

 

6.82

 

Consumer

 

89,058

 

3,689

 

5.53

 

77,594

 

3,540

 

6.10

 

Other

 

754

 

 

 

1,855

 

 

 

Investments (2)

 

185,700

 

5,938

 

4.20

 

169,802

 

5,099

 

4.02

 

Federal funds sold

 

 

 

 

952

 

9

 

1.26

 

Other short-term investments

 

 

 

 

845

 

8

 

1.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

$

563,432

 

$

22,938

 

5.35

 

$

525,200

 

$

22,121

 

5.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

188,972

 

$

1,623

 

1.15

 

$

174,003

 

$

1,379

 

1.06

 

Certificates of deposit

 

169,200

 

4,614

 

3.64

 

162,755

 

4,803

 

3.95

 

Securities sold under agreement to repurchase

 

42,068

 

561

 

1.75

 

19,600

 

205

 

1.40

 

Short-term borrowings

 

42,866

 

436

 

1.36

 

9,628

 

97

 

1.35

 

Long-term borrowings

 

34,832

 

889

 

3.35

 

75,818

 

2,653

 

4.68

 

Junior subordinated debt/mandatory redeemable capital securities

 

15,000

 

616

 

5.49

 

15,000

 

640

 

5.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

492,938

 

8,739

 

2.37

 

456,804

 

9,777

 

2.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

68,728

 

 

 

 

65,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of funds

 

$

561,666

 

8,739

 

2.08

 

$

521,887

 

9,777

 

2.50

 

Net interest margin (fully taxable equivalent)

 

 

 

$

14,199

 

3.47

 

 

 

$

12,344

 

3.14

 

 


(1)   Loan fees have been included in the interest income totals presented.  Nonaccrual loans have been included in average loan balances.

 

(2)   Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.

 

Average interest-earning assets for the three months ended September 30, 2004 were $571.5 million, a $26.0 million, or 4.8%, increase over average interest-earning assets of $545.5 million for the third quarter of 2003.  Average interest-earning assets for the nine months ended September 30, 2004 were $563.4 million, a $38.2 million, or 7.3%, increase over average interest-earning assets of $525.2 million for the first nine months of 2003.  The yield on average interest-earning assets increased by 15 basis points, to 5.45%, for the third quarter of 2004 compared to the same period of 2003.  The yield on average interest-earning assets decreased by 28 basis points, to 5.35% for the first nine months of 2004 compared to the same period of 2003.

 

Average interest-bearing liabilities for the three months ended September 30, 2004 were $500.2 million, a $27.3 million, or 5.8%, increase over average interest-bearing liabilities of $472.9 million for the same period of 2003.  Average interest-bearing liabilities for the first nine months ended September 30, 2004 were $492.9 million, a $36.1 million, or 7.9%, increase over average interest-bearing liabilities of $456.8 million for the same period of 2003. In addition, the average noninterest-bearing deposits increased to $71.7 million for the three months ended September 30, 2004, from $69.0 million for the same time period of 2003.  The interest rate on the total cost of funds decreased by 30 basis points, to 2.10% for the three months ended September 30, 2004 compared to the same period of 2003.  The average noninterest-bearing deposits increased to $68.7 million for the nine months ended September 30, 2004, from $65.1 million for the same time period of 2003.  The interest rate on the total cost of funds decreased by 42 basis points, to 2.08%, for the nine months ended September 30, 2004 compared to the same period of 2003.

 

15



 

The lower yield on average earning assets for the first nine months of 2004, as compared to the first nine months of 2003, is primarily the result of increased commercial and consumer loan volume at lower current market rates thereby reducing the yield.  The higher yield on average earning assets for the three month period ending September 30, 2004, as compared to the three month period ending September 30, 2003, is primarily the result of increased consumer loan volume at increased current market rates, including our prime rate, and lower levels of premium amortization in the investment portfolio thereby increasing the yield.

 

The lower cost of supporting liabilities is the combined result of reducing deposit product interest rates during 2003 and throughout 2004, the increase in non-interest-bearing deposits and lower yields on long-term borrowings.  On September 30, 2003, the Company prepaid $40.9 million of fixed rate, high cost Federal Home Loan Bank (FHLB) advances in order to improve future net interest income.  The FHLB advances were replaced with lower cost borrowings and certificates of deposit.

 

Provision for Loan Losses

 

The provision for loan losses for the quarter ended September 30, 2004 was $240,000 compared to $75,000 for the same period of 2003. The provision for loan losses for the nine months ended September 30, 2004 was $900,000 compared to $745,000 for the same period of 2003.  The provision reflects the amount deemed appropriate by management to provide an adequate reserve to meet the present risk characteristics of the loan portfolio.  The Company continues to maintain strong asset quality ratios in light of the continued growth in the Company’s loan portfolio and management’s assessment of the credit quality factors existing at this time.  The ratio of the allowance for loan losses to loans outstanding at September 30, 2004 and September 30, 2003 was 1.25% and 1.22%, respectively.  Please see further discussion under the caption “Allowance for Loan Losses.”

 

Other Income

 

Total other income for the three months ended September 30, 2004 totaled $4.4 million, a decrease of $2.7 million, or 38.4%, over other income of $7.1 million for the same period in 2003.  Total other income for the nine months ended September 30, 2004 totaled $12.2 million, a decrease of $2.8 million, or 18.7%, over other income of $15.0 million for the same period in 2003.  Included in total other income for the three months ended September 30, 2003 is the gain of $3.1 million on the sale of the Company’s three most northern financial centers.

 

Customer service fees increased 12.2% for the third quarter of 2004 as compared to the same period in 2003, from $393,000 to $441,000.  Customer service fees increased 14.6% for the first nine months of 2004 as compared to the same period in 2003, from $1.1 million to $1.3 million.  These increases are primarily due to an expanded customer base, new services, and a new fee-pricing schedule.

 

Income from mortgage banking activities decreased by $417,000, or 60.0%, for the third quarter of 2004 as compared to the same period in 2003, from $695,000 to $278,000. Income from mortgage banking activities decreased by $1.4 million, or 64.6%, for the first nine months of 2004 as compared to the same period in 2003, from $2,155,000 to $762,000.  These decreases are primarily due to the slowdown in the refinance market due to higher interest rates.

 

One of the Company’s sources of other income is commissions and other revenue generated primarily through sales of insurance products through the Company’s insurance subsidiary, Essick & Barr, LLC.  Revenues from insurance operations totaled $2.8 million for the third quarter of 2004 compared to $2.3 million for the same period in 2003, an increase of 23.1%.  Revenues from insurance operations totaled $8.1 million for the first nine months of 2004 compared to $6.8 million for the same period in 2003, an increase of 18.7%.  These increases are primarily the result of the acquisition of certain assets of the CrosStates agency on September 30, 2003 and expanded growth in insurance sales.  Additionally, insurance and annuity commissions generated through the Company’s wealth management subsidiary, Leesport Wealth Management, LLC, increased to $49,000, for the third quarter of 2004, from $42,000 for the same period in 2003 and increased to $243,000 for the first nine months of 2004, from $87,000 for the same period in 2003.

 

Brokerage and investment advisory commissions and fees decreased to $134,000, or 29.1%, for the third quarter of 2004, from $189,000 for the same period 2003.  Brokerage and investment advisory commissions and fees decreased to $383,000, or 31.5%, for the first nine months of 2004, from $559,000 for the same period 2003.  These decreases are primarily due to decreased volume in brokerage and investment advisory activity.

 

16



 

Included in other income are $202,000 and $125,000 of gains on the sale of equity securities for the first nine months of 2004 and 2003, respectively.  Net gains on the sale of loans increased to $380,000, or 83.6%, for the third quarter of 2004, from $207,000 for the same period 2003.  Net gains on the sale of loans increased to $431,000, or 89.0%, for the first nine months of 2004, from $228,000 for the same period 2003.

 

Other income decreased 3.2% for the third quarter of 2004 as compared to the same period in 2003, to $329,000 from $340,000.  Other income increased 12.5% for the first nine months of 2004 as compared to the same period in 2003, to $1,101,000 from $979,000.  This change is primarily due to the increase in the cash surrender value of bank owned life insurance of $484,000 in 2004, as compared to $286,000 in 2003.  The company purchased an additional $3.8 million of bank owned life insurance in July 2003.  Also included are losses of $83,000 and $249,000, respectively, for the three and nine month periods of 2004, on the Company’s investment in an affordable housing, corporate tax credit limited partnership, which is discussed under “Income Taxes”.

 

Other Expense

 

Total other expense for the quarter ended September 30, 2004 was $6.9 million compared to $9.3 million for the quarter ended September 30, 2003, a 25.4% decrease.  Other expense for the first nine months of 2004 was $20.1 million compared to $21.4 million for the same period of 2003, a 5.9% decrease.  Included in total other expenses for the three and nine months ended September 30, 2003 are $2.5 million in prepayment expenses on $40.9 million of FHLB advances refinanced on September 30, 2003.

 

Salary and benefits expense for the third quarter of 2004 increased by 17.6% to $4.1 million from $3.5 million for the same period of 2003. Salary and benefits expense for the first nine months of 2004 increased by 14.6% to $11.6 million from $10.2 million for the same period of 2003. This increase is primarily the result of an increase in the number of full time equivalent employees to 241 at September 30, 2004 from 228 at September 30, 2003, overall merit increases applied to base salaries during the past twelve months and increases in employee health insurance costs consistent with national trends.  The increase in full time equivalent employees is due primarily to the CrosStates acquisition partially offset by the sale of three financial centers in 2003.  Salaries and benefits expense also includes accrued employee incentive compensation of $315,000 for the quarter ended September 30, 2004 compared to $47,000 for the same period in 2003 and $470,000 for the nine months ended September 30, 2004 compared to $188,000 for the same period in 2003.  Also included in salaries and benefits expense are total commissions paid of $236,000 for the quarter ended September 30, 2004 compared to $358,000 for the same period in 2003 and $736,000 for the nine months ended September 30, 2004 compared to $904,000 for the same period in 2003.  These decreases are due primarily to reduced amounts paid to mortgage originators due to the slowdown in the refinance market.

 

Occupancy expense for the third quarter of 2004 was $543,000, a $20,000, or 3.8%, increase over the $523,000 for the same period of 2003.  Occupancy expense for the first nine months of 2004 was $1,588,000, an $89,000, or 5.9%, increase over the $1,499,000 for the same period of 2003.  These increases are primarily attributable to the addition and related construction costs of two financial service centers, our new operations center, and expenses related to the acquisition of CrosStates Insurance in 2003, partially offset by the sale of three financial centers in 2003.

 

Equipment expense increased 10.0%, to $471,000 for the third quarter of 2004 from $428,000 for the same period in 2003.  Equipment expense increased 26.6%, to $1,356,000 for the first nine months of 2004 from $1,071,000 for the same period in 2003.  These increases are primarily attributable to the addition of two financial service centers, our new operations center, and expenses related to the acquisition of CrosStates Insurance in 2003, partially offset by the sale of three financial centers in 2003.

 

The amortization of identifiable intangible assets for the third quarter of 2004 was $94,000 compared to $68,000 for the same period of 2003. The amortization of identifiable intangible assets for the first nine months of 2004 was $272,000 compared to $205,000 for the same period of 2003.  These increases are primarily attributable to the acquisition of CrosStates Insurance in 2003.

 

Outside processing expenses decreased 19.2% to $471,000 for the third quarter of 2004 from $583,000 for the same period of 2003.  Outside processing expenses decreased 12.4% to $1,492,000 for the first nine months of 2004 from $1,703,000 for the same period of 2003.  These decreases are primarily the result of conversion related expenses incurred in 2003 associated with the change to Metavante Corporation, our core banking system provider, enabling our financial centers to provide a better platform for delivering improved customer service and lower account processing costs.

 

17



 

Income Taxes

 

The effective income tax rate for the Company for the third quarter of 2004 was 20.67% compared to 27.27% for the same period of 2003. The effective income tax rate for the Company for the first nine months of 2004 was 17.52% compared to 27.79% for the same period of 2003.  The effective income tax rate for the first three and nine months of 2004 was lower than the rate for the comparable periods in 2003 primarily as a result of the increase in tax-advantaged income from additional bank owned life insurance, an increase in tax-advantaged income from tax exempt loans and a federal tax benefit of $440,000 from our $5.0 million investment in an affordable housing, corporate tax credit limited partnership.

 

Financial Condition

 

The total assets of the Company at September 30, 2004 were $644.4 million, an increase of approximately $22.1 million, or 4.7% annualized, since December 31, 2003.

 

Mortgage Loans Held for Sale

 

Mortgage loans held for sale increased $503,000, or 52.4% annualized, to $1.8 million at September 30, 2004 from $1.3 million at December 31, 2003.  This increase is related to the timing of when loans are closed and sold in the secondary market.

 

Securities Available for Sale

 

Investment securities available for sale decreased 17.2% to $174.8 million at September 30, 2004 from $200.7 million at December 31, 2003. Investment securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity.  The decrease during the first nine months of 2004 was a result of our strategy to use principal paydowns to fund loan growth and to reduce overnight borrowings.

 

Loans

 

Total loans increased to $399.7 million at September 30, 2004 from $357.5 million at December 31, 2003, an increase of $42.2 million, or 15.7% annualized.

 

The components of loans were as follows:

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(Dollar amounts in thousands)

 

Residential real estate

 

$

109,499

 

$

97,796

 

Commercial

 

112,226

 

101,208

 

Commercial, secured by real estate

 

115,757

 

101,360

 

Consumer, net of unearned income

 

10,648

 

11,285

 

Home equity lines of credit

 

51,562

 

45,833

 

Loans

 

399,692

 

357,482

 

 

 

 

 

 

 

Allowance for loan losses

 

(5,012

)

(4,356

)

 

 

 

 

 

 

Loans, net of allowance for loan losses

 

$

394,680

 

$

353,126

 

 

Loans secured by residential real estate (not including home equity lending products) increased $11.7 million, or 16.0% annualized, between December 31, 2003 and September 30, 2004, from $97.8 million to $109.5 million.  This increase is primarily due to the slow down in loan refinancing due to increases in current market rates.  This increase is also net of approximately $2.9 million of lower yielding, fixed rate mortgage portfolio loans sold during the period.

 

Commercial loans increased to $228.0 million at September 30, 2004 from $202.6 million at December 31, 2003, an increase of $25.4 million, or 16.7% annualized.  The increase is due primarily to an increase in variable-rate term loans and lines of credit and tax exempt loans.  This increase is also net of approximately $4.2 million of commercial loans and $1.4 million of SBA loans sold during the period.

 

18



 

In addition, home equity lines of credit increased to $51.6 million at September 30, 2004 from $45.8 million at December 31, 2003, an increase of $5.7 million, or 16.7% annualized.  This increase is primarily the result of marketing efforts relating to our home equity products.

 

Allowance for Loan Losses

 

The allowance for loan losses at September 30, 2004 was $5.0 million compared to $4.4 million at December 31, 2003.  Additions to the allowance are made from time to time based upon management’s assessment of credit quality factors existing at that time.  The Company performs a review of the credit quality of its loan portfolio on a monthly basis to determine the adequacy of the allowance for loan losses. The allowance at September 30, 2004 was 1.25% of outstanding loans compared to 1.22% of outstanding loans at December 31, 2003.

 

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.  Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.  Management regularly assesses the adequacy of the allowance by performing an ongoing evaluation of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, the value of any underlying collateral, risk characteristics in the loan portfolio, local and national economic conditions, and other relevant factors.  Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change.  Based upon the results of such reviews, management believes that the allowance for loan losses at September 30, 2004 was adequate to absorb credit losses inherent in the portfolio at that date.

 

The following table shows the activity in the Company’s allowance for loan losses:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,
2004

 

September 30,
2003

 

September 30,
2004

 

September 30,
2003

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance of allowance for loan losses, beginning of period

 

$

4,801

 

$

4,208

 

$

4,356

 

$

4,182

 

Loans charged-off:

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

(38

)

16

 

(86

)

(732

)

Real estate – mortgage

 

(6

)

(178

)

(158

)

(178

)

Consumer

 

(18

)

40

 

(49

)

(10

)

Total loans charged-off

 

(62

)

(122

)

(293

)

(920

)

Recoveries of loans previously charged-off

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

10

 

47

 

15

 

149

 

Real estate – mortgage

 

8

 

(33

)

11

 

8

 

Consumer

 

15

 

(11

)

23

 

 

Total recoveries

 

33

 

3

 

49

 

157

 

Net loans charged-off

 

(29

)

(119

)

(244

)

(763

)

Provision for loan losses

 

240

 

75

 

900

 

745

 

Balance, end of period

 

$

5,012

 

$

4,164

 

$

5,012

 

$

4,164

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to average loans

 

.03

%

.13

%

.09

%

.29

%

Allowance for loan losses to loans outstanding

 

1.25

%

1.22

%

1.25

%

1.22

%

Loans outstanding at end of period (net of unearned income)

 

$

399,692

 

$

340,178

 

$

399,692

 

$

340,178

 

Average balance of loans outstanding during the period

 

$

396,861

 

$

357,886

 

$

377,732

 

$

353,601

 

 

19



 

The following table summarizes the Company’s non-performing assets:

 

 

 

September 30
2004

 

December 31,
2003

 

 

 

(Dollar amounts in thousands)

 

Non-accrual loans

 

 

 

 

 

Real estate – mortgage

 

$

376

 

$

129

 

Consumer

 

117

 

18

 

Commercial, financial and agricultural

 

570

 

674

 

Total

 

1,063

 

821

 

 

 

 

 

 

 

Loans past due 90 days or more and still accruing

 

 

 

 

 

Real estate – mortgage

 

91

 

46

 

Consumer

 

 

16

 

Commercial, financial and agricultural

 

202

 

 

Total

 

293

 

62

 

 

 

 

 

 

 

Troubled debt restructurings

 

299

 

631

 

 

 

 

 

 

 

Total non-performing loans

 

1,655

 

1,514

 

 

 

 

 

 

 

Other real estate owned

 

19

 

309

 

 

 

 

 

 

 

Total non-performing assets

 

$

1,674

 

$

1,823

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.41

%

0.42

%

Non-performing assets to total loans plus OREO

 

0.42

%

0.51

%

 

Premises and Equipment

 

Components of premises and equipment were as follows:

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(Dollar amounts in thousands)

 

Land and land improvements

 

$

2,296

 

$

2,094

 

Buildings

 

5,992

 

5,982

 

Leasehold improvements

 

2,033

 

2,028

 

Furniture and equipment

 

7,795

 

5,574

 

 

 

18,116

 

15,678

 

 

 

 

 

 

 

Less: accumulated depreciation

 

3,491

 

2,771

 

 

 

 

 

 

 

Premises and equipment, net

 

$

14,625

 

$

12,907

 

 

Additions in 2004 include approximately $211,000 for renovations to the Hamburg financial center and approximately $536,000 in new computer and other equipment purchases.

 

20



 

Deposits

 

Total deposits at September 30, 2004 were $438.0 million compared to $408.6 million at December 31, 2003, an increase of $29.4 million, or 9.6% annualized.

 

The components of deposits were as follows:

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(Dollar amounts in thousands)

 

Demand, non-interest bearing

 

$

69,737

 

$

67,711

 

Demand, interest bearing

 

137,094

 

118,395

 

Savings

 

65,466

 

54,835

 

Time, $100,000 and over

 

41,226

 

43,202

 

Time, other

 

124,492

 

124,439

 

 

 

 

 

 

 

Total deposits

 

$

438,015

 

$

408,582

 

 

The increase is due primarily to the continuing success of our retail marketing programs and excellent customer service.

 

Borrowings

 

Total debt and borrowings decreased by $15.4 million, or 13.4% annualized, to $137.8 million at September 30, 2004 from $153.2 million at December 31, 2003.  Federal funds purchased decreased by $31.1 million, or 66.8% annualized, to $31.0 million at September 30, 2004 from $62.1 million at December 31, 2003.  Long-term debt, composed of borrowings with the Federal Home Loan Bank, increased by $8.0 million, or 30.9% annualized, to $42.5 million at September 30, 2004 from $34.5 million at December 31, 2003.  The decrease in total debt and borrowings was primarily accomplished throughout the nine months of 2004 using proceeds from investment securities paydowns and increases in deposit account balances.  Junior subordinated debt/mandatory redeemable capital debentures remained unchanged from December 31, 2003 to September 30, 2004.

 

Off Balance Sheet Commitments

 

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 sheet.

 

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 Company’s financial instrument commitments is as follows:

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(Dollar amounts in thousands)

 

Commitments to grant loans

 

$

41,321

 

$

18,166

 

Unfunded commitments under lines of credit

 

113,360

 

103,984

 

Financial and performance standby letters of credit

 

12,750

 

9,166

 

 

21



 

Capital

 

Total shareholders’ equity increased $2.3 million, to $55.7 million at September 30, 2004 from $53.4 million at December 31, 2003.  The increase is the net result of net income for the period of $4.0 million less dividends declared of $2.0 million, proceeds of $474,000 from the issuance of shares of common stock under the Company’s employee and director stock purchase plans and directors compensation, net decrease in unrealized gain on securities available for sale, net of tax, of $397,000, the purchase of treasury stock of $140,000 and the reissuance of treasury stock of $364,000 in connection with earn-outs of contingent consideration to principals from the acquisition of The Boothby Group insurance agency and First Affiliated Investments.

 

Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and financial holding companies.  The measurements that incorporate the varying degrees of risk contained in the Company’s balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions.

 

As required by 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 plus mandatory redeemable capital securities less intangible assets, and Tier II capital includes Tier I capital plus 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 and Tier II capital.

 

The following table sets forth the Company’s capital amounts and ratios.

 

 

 

September 30
2004

 

December 31,
2003

 

 

 

(Dollar amounts in thousands)

 

Tier I

 

 

 

 

 

Common shareholders’ equity (excluding unrealized gains (losses) on securities)

 

$

55,869

 

$

53,104

 

Disallowed intangible assets

 

(13,722

)

(13,597

)

Junior subordinated debt/mandatory redeemable capital debentures

 

15,000

 

15,000

 

Tier II

 

 

 

 

 

Allowable portion of allowance for loan losses

 

5,012

 

4,356

 

Unrealized gains on available for sale equity securities

 

 

223

 

 

 

 

 

 

 

Risk-based capital

 

$

62,159

 

$

59,086

 

 

 

 

 

 

 

 

 

Risk adjusted assets (including off-balance sheet exposures)

 

$

471,454

 

$

472,838

 

 

 

 

 

 

 

Leverage ratio

 

9.20

%

9.32

%

Tier I risk-based capital ratio

 

12.13

%

11.53

%

Total risk-based capital ratio

 

13.20

%

12.50

%

 

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.

 

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.

 

22



 

An important indicator in the banking industry is the leverage ratio, defined as the ratio of Tier I capital less intangible assets, to average quarterly assets less intangible assets.  The leverage ratio at September 30, 2004 was 9.20% compared to 9.32% at December 31, 2003.  The decrease in this ratio resulted primarily from a larger increase in the risk adjusted assets compared to a smaller increase in risk-based capital. The junior subordinated debt and mandatory redeemable securities are included, for regulatory purposes, as Tier I capital with certain limiting restrictions.  At September 30, 2004, the entire amount of these securities was allowable to be included as Tier I capital for the Company.  For both periods, the capital ratios were above minimum regulatory guidelines.

 

On March 23, 2000 and September 26, 2002, the Company established First Leesport Capital Trust I and Leesport Capital Trust II, respectively, in which the Company owns all of the common equity.  First Leesport Capital I issued $5 million of mandatory redeemable capital securities carrying an interest rate of 10.875%, and Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of 3 month LIBOR plus 3.45%.  These debentures are the sole assets of the Trusts.  These securities must be redeemed in March 2030 and September 2032, respectively, but may be redeemed earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier I capital for the Company.  In October 2002, the Company entered into an interest rate swap agreement that effectively converts the $5 million of fixed-rate capital securities to a floating interest rate of six month LIBOR plus 5.25%.

 

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 reporting 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 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.

 

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.

 

Liquidity and Interest Rate Sensitivity

 

The banking industry has been required to adapt to an environment in which interest rates may be volatile and in which deposit deregulation has provided customers with the opportunity to invest in liquid, interest rate-sensitive deposits.  The banking industry has adapted to this environment by using a process known as asset/liability management.

 

Adequate liquidity means the ability to obtain sufficient cash to meet all current and projected needs promptly and at a reasonable cost.  These needs include deposit withdrawal, liability runoff, and increased loan demand.  The principal sources of liquidity are deposit generation, overnight federal funds transactions with other financial institutions, investment securities portfolio maturities and cash flows, and maturing loans and loan payments.  The Bank can also package and sell residential mortgage loans into the secondary market.  Other sources of liquidity are term borrowings from the Federal Home Loan Bank, and the discount window of the Federal Reserve Bank.  In view of all factors involved, the Bank’s management believes that liquidity is being maintained at an adequate level.

 

23



 

At September 30, 2004, the Company had a total of $137.8 million, or 21.4%, of total assets in borrowed funds.  These borrowings included $49.3 million of repurchase agreements with customers, $31.0 million of federal funds purchased, $42.5 million of term borrowings with the Federal Home Loan Bank, and $15.0 million in mandatory redeemable capital securities.  The FHLB borrowings have final maturities ranging from January 2005 through February 2009 at interest rates ranging from 1.67% to 4.97%.  At September 30, 2004, the Company had a maximum borrowing capacity with the Federal Home Loan Bank of approximately $138.3 million.

 

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 on assets and liabilities.  With the exception of the majority of residential mortgage loans, loans generally are written having terms that provide for a readjustment of the interest rate at specified times during the term of the loan. In addition, interest rates offered for all types of deposit instruments are reviewed weekly and are established on a basis consistent with funding needs and maintaining a desirable spread between cost and return. The Bank does not use reverse repurchase agreements in its asset/liability management practices at this time.

 

During October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding mandatory redeemable capital debentures to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Company’s variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contracts to be negligible.

 

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes in the Company’s assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC.

 

Item 4 - Controls and Procedures

 

The Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’s Chief Executive Officer and Chief financial Officer conclude that the Company’s disclosure controls and procedures are effective as of September 30, 2004.  There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Securities and Exchange Commission rules define “disclosure controls and procedures” as controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time specified in the Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

24



 

PART II - OTHER INFORMATION

 

Item 1     Legal Proceedings - None

 

Item 2     Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table sets forth certain information relating to shares of the Company’s common stock repurchased by the company during the quarter ended September 30, 2004.

 

Period

 

Total
Number of
Shares (or
Units)
Purchased

 

Average Price
Paid per Share
(or Units)
Purchased

 

Total Number of
Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs

 

Maximum
Number (or
Approximate
Dollar value) of
Shares (or units)
That May Yet Be
Purchased Under
the Plans or
Programs

 

 

 

 

 

 

 

 

 

 

 

Month #1 (July 1 – July 31, 2004)

 

 

$

 

 

100,513

 

 

 

 

 

 

 

 

 

 

 

Month #2 (August 1 – August 31, 2004)

 

 

$

 

 

100,513

 

 

 

 

 

 

 

 

 

 

 

Month #3 (September 1 – September 30, 2004)

 

 

$

 

 

100,513

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

 

100,513

 

 

On May 20, 2004, the Company announced the extension of its stock repurchase plan, originally effective January 1, 2003, for the repurchase of up to 162,000 shares of the Company’s common stock.

 

Item 3         Defaults Upon Senior Securities – None

 

Item 4         Submission of Matters to Vote of Security Holders – None

 

Item 5         Other Information - None

 

25



 

Item 6         Exhibits

 

Exhibit No.

 

Title

 

 

 

 

3.1

 

 

Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.)

 

 

 

 

3.2

 

 

Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.)

 

 

 

 

31.1

 

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

 

 

 

 

 

 

31.2

 

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

 

 

 

 

 

 

32.1

 

 

Rule 1350 Certification of Chief Executive Officer and Chief Financial Officer

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

LEESPORT FINANCIAL CORP.

 

 

 

(Registrant)

 

 

 

 

 

 

Dated: November 15, 2004

By

/s/Raymond H. Melcher, Jr.

 

 

 

 

 

 

 

 

 

 

Raymond H. Melcher, Jr.

 

 

 

 

Chairman, President and Chief

 

 

 

 

Executive Officer

 

 

 

 

 

 

 

Dated: November 15, 2004

By

/s/Edward C. Barrett

 

 

 

 

 

 

 

 

 

 

Edward C. Barrett

 

 

 

 

Executive Vice President and

 

 

 

 

Chief Financial Officer

 

 

 

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