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Annual Report on Form 10-K
for the
Fiscal Year Ended December 31, 2002
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
----------------
ANNUAL REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File Number 0-14555
LEESPORT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
23-2354007
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1240 Broadcasting Road
Wyomissing, Pennsylvania 19610
(Address of Principal Executive Offices)
(610) 208-0966
Registrant's Telephone Number:
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $5.00 Par Value
(Title of Class)
The Registrant has (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ___ No _X_
As of June 30, 2002, the aggregate market value of the voting and non-voting
common stock of the registrant held by non-affiliates computed by reference to
the price at which the common stock was last sold was approximately $55.2
million.
Number of Shares of Common Stock Outstanding at February 20, 2003: 3,250,272.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement prepared in connection
with its Annual Meeting of Stockholders to be held on April 22, 2003 are
incorporated in Part III hereof.
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INDEX
PAGE
PART I
Item 1. Business .................................................................................. 2
Item 2. Properties ................................................................................ 8
Item 3. Legal Proceedings ......................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 10
Item 4A. Executive Officers of the Registrant ...................................................... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..................... 11
Item 6. Selected Financial Data ................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 30
Item 8. Financial Statements and Supplementary Data ............................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 62
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 62
Item 11. Executive Compensation .................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 62
Item 13. Certain Relationships and Related Transactions ............................................ 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 63
SIGNATURES ......................................................................................... 65
PART I
FORWARD LOOKING STATEMENTS
Except for historical information, this report may be deemed to contain "forward
looking" statements. Leesport Financial Corp. (the "Company") desires to avail
itself of the Safe Harbor provisions of the Private Securities Litigation Reform
Act of 1995 (the "Reform Act") and is including this cautionary statement for
the express purpose of availing itself of the protection afforded by the Reform
Act.
Examples of forward looking statements include, but are not limited to (a)
projections of or statements regarding future earnings, net interest income,
other income, earnings or loss per share, asset mix and quality, growth
prospects, capital structure and other financial terms, (b) statements of plans
and objectives of the Company or its management or Board of Directors, (c)
statements of future economic performance, and (d) statements of assumptions,
such as economic conditions in the Company's market areas, underlying other
statements and statements about the Company or its businesses. Such forward
looking statements can be identified by the use of forward looking terminology
such as "believes," "expects," "may," "intends," "will," "should,"
"anticipates," or the negative of any of the foregoing or other variations
thereon or comparable terminology, or by discussion of strategy.
No assurance can be given that the future results covered by the forward-looking
statements will be achieved. Such statements are subject to risks,
uncertainties, and other factors which could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Important factors that could impact the Company's operating results
include, but are not limited to, (i) the effects of changing economic conditions
in the Company's market areas and nationally, (ii) credit risks of commercial,
real estate, consumer and other lending activities, (iii) significant changes in
interest rates, (iv) changes in federal and state banking, insurance, and
investment laws and regulations which could impact the Company's operations, (v)
funding costs, and (vi) other external developments which could materially
affect the Company's business and operations.
Item 1. Business
The Company
Leesport Financial Corp. (the "Company") is a Pennsylvania business corporation
headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610. The
Company was organized as a bank holding company on January 1, 1986. On January
7, 2002, the Company filed an election with the Board of Governors of the
Federal Reserve System to become a financial holding company. The election
became effective on February 7, 2002. The Company offers a wide array of
financial services through its various subsidiaries. The Company's executive
offices are located at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610.
At December 31, 2002, the Company had total assets of $562 million, total
shareholders' equity of $53 million, and total deposits of $380 million.
The Bank
The Company's wholly-owned banking subsidiary is Leesport Bank ("Leesport Bank"
or the "Bank"), a Pennsylvania chartered commercial bank. During the year ended
December 31, 2000, the charters of The First National Bank of Leesport and
Merchants Bank of Pennsylvania, both wholly-owned banking subsidiaries of the
Company at that time, were merged into a single charter under the name Leesport
Bank. The First National Bank of Leesport was incorporated under the laws of the
United States of America as a national bank in 1909. Leesport Bank operates in
the counties of Berks, Schuylkill and Luzerne in Pennsylvania.
At December 31, 2002, the Bank had the equivalent of 162 full-time employees.
2
Leesport Bank provides services to its customers through fifteen full service
financial centers, which operate under Leesport Bank's name in Leesport,
Blandon, Bern Township, Wyomissing, Breezy Corner, Hamburg, Birdsboro, Northeast
Reading and Exeter Township all of which are in Berks County, Pennsylvania.
Leesport Bank also operates two financial centers in Schuylkill County, which
are located in Schuylkill Haven and Shenandoah, Pennsylvania and two financial
centers in Luzerne County, which are located in Drums and Hazelton,
Pennsylvania. The Bank also operates a limited service facility in Wernersville,
Berks County, Pennsylvania and a drive-up only facility in Hazleton, Luzerne
County, Pennsylvania. All full service facilities, except the Exeter financial
center, provide automated teller machine services. Each financial center, except
the Wernersville, Breezy Corner, and Exeter Township locations, provides
drive-in facilities. In addition, effective May 2003, Leesport Bank will have
completed the construction of its two new full service financial centers. One of
the two financial centers will be replacing the current temporary financial
center located in Exeter Township and the other is located in Sinking Spring.
(See "Properties.")
The Bank engages in full service commercial and consumer banking business,
including such services as accepting deposits in the form of time, demand and
savings accounts. Such time deposits include certificates of deposit, individual
retirement accounts, Roth IRA accounts. The Bank's savings accounts include
money market accounts, club accounts, NOW accounts and traditional regular
savings accounts. In addition to accepting deposits, the Bank makes both secured
and unsecured commercial and consumer loans, finances commercial transactions,
provides equipment lease and accounts receivable financing, makes construction
and mortgage loans, including home equity loans, and rents safe deposit
facilities. The Bank also provides small business loans and student loans.
In early 2001, the Bank formed a strategic alliance with INA Trust Company in
order to offer personal trust services to its customers. The alliance enabled
the Bank to enter the trust business quickly and without incurring significant
start-up expenses. Personal trust services through this alliance are offered by
the wealth management division.
Subsidiary Activities
Effective October 1, 2002, Essick & Barr, Inc., a Berks County based general
insurance agency ("Essick & Barr") was converted to a limited liability company,
and became a subsidiary of the Company and no longer a subsidiary of the Bank.
The Bank had three wholly-owned subsidiaries as of December 31, 2002: Leesport
Wealth Management, Inc. ("LWM"), an investment advisory business which was
acquired in 1999; Leesport Investment Group, Inc. ("LIG"), which was formed in
1999 to purchase the securities brokerage business of KRJ & Associates; Leesport
Realty Solutions, LLC, which was formed originally during 2000 to provide title
insurance and other real estate related services to its customers through
limited partnership arrangements with third parties involved in the real estate
services industry; and Leesport Mortgage, LLC, a 60% owned subsidiary, which was
jointly formed with a real estate company in May of 2002, to provide mortgage
brokerage services, including, without limitation, any activity in which a
mortgage broker may engage. It is operated as a permissible "affiliated business
arrangement" within the meaning of Real Estate Settlement Procedures Act of
1974.
Both LIG and LWM, which include the acquisition of certain assets of First
Affiliated Investment Group, an investment management and brokerage firm, as of
September 1, 2002, are headquartered at 1240 Broadcasting Road, Wyomissing,
Pennsylvania and collectively had 10 employees at December 31, 2002. Effective
February 28, 2003, LIG and LWM were converted to limited liability companies and
became wholly-owned subsidiaries of the Company.
Essick & Barr, which includes The Boothby Group, a $4 million revenue property
and casualty and employee benefits insurance agency acquired as of October 1,
2002, offers a full line of personal and commercial property and casualty
insurance as well as group insurance for businesses, employee benefit plans, and
life insurance. Headquartered in Reading, Pennsylvania with sales offices at 108
South Fifth Street, Reading, Pennsylvania; 460 Norristown Road, Blue Bell,
Pennsylvania and 1240
3
Broadcasting Road, Wyomissing, Pennsylvania, Essick & Barr had 54 full-time
employees at December 31, 2002.
Leesport Realty Solutions, LLC provides title insurance and other real estate
related services to the Company's customers through limited partnership
arrangements with unaffiliated third parties involved in the real estate
services industry. At December 31, 2002, Leesport Realty Solutions, LLC had
entered into three such arrangements as follows: Leesport Search and Settlement
Solutions (70% equity interest); New Millenium Abstract (20% equity interest);
and Spectrum Settlement Agency (4% equity interest). The capital contributions
of Leesport Realty Solutions, LLC in connection with the formation of each of
the limited partnerships were not material. None of the limited partnership
arrangements involves the use of a special purposes entity for financial
accounting purposes or any off-balance sheet financing technique, and neither
Leesport Realty Solutions, LLC, the Company, nor any other affiliate of the
Company has any continuing contractual financial commitment to the limited
partnerships beyond the amount of the initial capital contribution.
The Company also owns First Leesport Capital Trust I (the "Trust"), a Delaware
statutory business trust formed on March 9, 2000. The Trust has outstanding $5
million of 107/8% fixed rate mandatory redeemable capital securities. In
October, 2002 the Company entered into an interest rate swap agreement that
effectively converts the securities to a floating interest rate of six month
LIBOR plus 5.25%.
On September 26, 2002, the Company established Leesport Capital Trust II, a
Delaware statutory business trust, in which the Company owns all of the common
equity. Leesport Capital Trust II issued $10 million of mandatory redeemable
capital securities carrying a floating interest rate of three month LIBOR plus
3.45%. These debentures are the sole assets of the Trusts. These securities must
be redeemed in September 2032 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.
Competition
The Company faces substantial competition in originating loans, in attracting
deposits, and generating fee-based income. This competition comes principally
from other banks, savings institutions, credit unions, mortgage banking
companies and, with respect to deposits, institutions offering investment
alternatives, including money market funds. Due to the passage of landmark
banking legislation in November 1999, competition may increasingly come from
insurance companies, large securities firms and other financial services
institutions. As a result of consolidation in the banking industry, some of the
Company's competitors and their respective affiliates may enjoy advantages such
as greater financial resources, a wider geographic presence, a wider array of
services, or more favorable pricing alternatives and lower origination and
operating costs.
Supervision and Regulation
General
The Company is registered as a bank holding company, which has elected to be
treated as a financial holding company, and is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System under the
Bank Holding Act of 1956, as amended. As a bank holding company, the Company's
activities and those of its bank subsidiary are limited to the business of
banking and activities closely related or incidental to banking. Bank holding
companies are required to file periodic reports with and are subject to
examination by the Federal Reserve Board. The Federal Reserve Board has issued
regulations under the Bank Holding Company Act that require a bank holding
company to serve as a source of financial and managerial strength to its
subsidiary banks. As a result, the Federal Reserve Board, pursuant to such
regulations, may require the Company to stand ready to use its resources to
provide adequate capital funds to its bank subsidiary during periods of
financial stress or adversity.
4
The Bank Holding Company Act prohibits the Company from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock, or substantially all of the assets of any bank, or from merging or
consolidating with another bank holding company, without prior approval of the
Federal Reserve Board. Additionally, the Bank Holding Company Act prohibits the
Company from engaging in or from acquiring ownership or control of more than 5%
of the outstanding shares of any class of voting stock of any company engaged in
a non-banking business, unless such business is determined by the Federal
Reserve Board to be so closely related to banking as to be a proper incident
thereto. The types of businesses that are permissible for bank holding companies
to own were expanded by the Gramm-Leach-Bliley Act in 1999.
As a Pennsylvania bank holding company for purposes of the Pennsylvania Banking
Code, the Company is also subject to regulation and examination by the
Pennsylvania Department of Banking.
The Company is under the jurisdiction of the Securities and Exchange Commission
and of state securities commissions for matters relating to the offering and
sale of its securities. In addition, the Company is subject to the Securities
and Exchange Commission's rules and regulations relating to periodic reporting,
proxy solicitation, and insider trading.
Regulation of Leesport Bank
Leesport Bank is a Pennsylvania chartered bank, and its deposits are insured (up
to applicable limits) by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank is subject to regulation and
examination by the Federal Reserve Board, the Pennsylvania Department of
Banking, and by the FDIC. The Community Reinvestment Act requires Leesport Bank
to help meet the credit needs of the entire community where Leesport Bank
operates, including low and moderate income neighborhoods. Leesport Bank's
rating under the Community Reinvestment Act, assigned by the Federal Reserve
Board pursuant to an examination of Leesport Bank, is important in determining
whether the Bank may receive approval for, or utilize certain streamlined
procedures in, applications to engage in new activities.
Leesport Bank is also subject to requirements and restrictions under federal and
state law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of Leesport
Bank. In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to influence the
economy.
Capital Adequacy Guidelines
Bank holding companies are required to comply with the Federal Reserve Board's
risk-based capital guidelines. The required minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is required
to be "Tier 1 capital," consisting principally of common shareholders' equity,
less certain intangible assets. The remainder ("Tier 2 capital") may consist of
certain preferred stock, a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, and a limited amount of the
general loan loss allowance. The risk-based capital guidelines are required to
take adequate account of interest rate risk, concentration of credit risk, and
risks of nontraditional activities.
In addition to the risk-based capital guidelines, the Federal Reserve Board
requires a bank holding company to maintain a leverage ratio of a minimum level
of Tier 1 capital (as determined under the risk-based capital guidelines) equal
to 3% of average total consolidated assets for those bank holding companies
which have the highest regulatory examination ratings and are not contemplating
or experiencing significant growth or expansion. All other bank holding
companies are required to maintain a ratio of at least 1% to 2% above the stated
minimum. The Pennsylvania Department of Banking requires state chartered banks
to maintain a 6% leverage capital level and 10% risk based
5
capital, defined substantially the same as the federal regulations. The Bank is
subject to almost identical capital requirements adopted by the FDIC.
Prompt Corrective Action Rules
The federal banking agencies have regulations defining the levels at which an
insured institution would be considered "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The applicable federal bank regulator for a
depository institution could, under certain circumstances, reclassify a
"well-capitalized" institution as "adequately capitalized" or require an
"adequately capitalized" or "undercapitalized" institution to comply with
supervisory actions as if it were in the next lower category. Such a
reclassification could be made if the regulatory agency determines that the
institution is in an unsafe or unsound condition (which could include
unsatisfactory examination ratings). The Company and the Bank each satisfy the
criteria to be classified as "well capitalized" within the meaning of applicable
regulations.
Regulatory Restrictions on Dividends
Dividend payments made by Leesport Bank to the Company are subject to the
Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the
regulations of the Federal Reserve Board. Under the Banking Code, no dividends
may be paid except from "accumulated net earnings" (generally, retained
earnings). The Federal Reserve Board and the FDIC have formal and informal
policies which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings, with some
exceptions. The Prompt Corrective Action Rules, described above, further limit
the ability of banks to pay dividends if they are not classified as well
capitalized or adequately capitalized.
Under these policies and subject to the restrictions applicable to the Bank, the
Bank had approximately $4.2 million available for payment of dividends to the
Company at December 31, 2002, without prior regulatory approval.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium schedule, the
FDIC assigns, on a semiannual basis, each depository institution to one of three
capital groups (well-capitalized, adequately capitalized or undercapitalized)
and further assigns such institution to one of three subgroups within a capital
group. The institution's subgroup assignment is based upon the FDIC's judgment
of the institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
measuring the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to
risk-based assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or
greater, are assigned to the well-capitalized group. As of December 31, 2002,
the Bank was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 2002 Bank Insurance Fund assessment
rates ranged from zero for those institutions with the least risk, to $0.27 for
every $100 of insured deposits for institutions deemed to have the highest risk.
The Bank is in the category of institutions that presently pay nothing for
deposit insurance. The FDIC adjusts the rates every six months. The FDIC has
indicated from time to time that all banks may again be required to pay deposit
insurance premiums in the future if the current trend of the size of the deposit
insurance funds relative to all insured deposits continues.
While the Bank presently pays no premiums for deposit insurance, it is subject
to assessments to pay the interest on Financing Corporation bonds. The Financing
Corporation was created by Congress to issue bonds to finance the resolution of
failed thrift institutions. Prior to 1997, only thrift institutions were subject
to assessments to raise funds to pay the Financing Corporation bonds. Beginning
in 2000, commercial banks and thrifts are subject to the same assessment for
Financing
6
Corporation bonds. The FDIC sets the Financing Corporation assessment rate every
quarter. The Financing Corporation assessment for the Bank (and all other banks)
for the first quarter of 2003 is an annual rate of $.0168 for each $100 of
deposits.
Other Legislation
The Gramm-Leach-Bliley Act, passed in 1999, dramatically changed certain banking
laws. One of the most significant changes was that the separation between
banking and the securities businesses mandated by the Glass-Steagall Act has now
been removed, and the provisions of any state law that prohibits affiliation
between banking and insurance entities have been preempted. Accordingly, the
legislation now permits firms engaged in underwriting and dealing in securities,
and insurance companies, to own banking entities, and permits bank holding
companies (and in some cases, banks) to own securities firms and insurance
companies. The provisions of federal law that preclude banking entities from
engaging in non-financially related activities, such as manufacturing, have not
been changed. For example, a manufacturing company cannot own a bank and become
a bank holding company, and a bank holding company cannot own a subsidiary that
is not engaged in financial activities, as defined by the regulators.
The legislation creates a new category of bank holding company called a
"financial holding company." In order to avail itself of the expanded financial
activities permitted under the law, a bank holding company must notify the
Federal Reserve Board ("Federal Reserve") that it elects to be a financial
holding company. A bank holding company can make this election if it, and all
its bank subsidiaries, are well capitalized, well managed, and have at least a
satisfactory Community Reinvestment Act rating, each in accordance with the
definitions prescribed by the Federal Reserve and the regulators of the
subsidiary banks. Once a bank holding company makes such an election, and
provided that the Federal Reserve does not object to such election by such bank
holding company, the financial holding company may engage in financial
activities (i.e., securities underwriting, insurance underwriting, and certain
other activities that are financial in nature as to be determined by the Federal
Reserve) by simply giving a notice to the Federal Reserve within thirty days
after beginning such business or acquiring a company engaged in such business.
This makes the regulatory approval process to engage in financial activities
much more streamlined than under prior law.
On January 7, 2002, the Company filed an election with the Board of Governors of
the Federal Reserve System to become a financial holding company. The election
became effective in February 2002.
On July 30, 2002, the Sarbanes-Oxley Act of 2002 became law. The stated goals of
this sweeping legislation are to enhance penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures under the federal
securities laws. The Sarbanes-Oxley Act generally applies to all companies,
including the Company, that file or are required to file periodic reports with
the Securities and Exchange Commission under the Securities Exchange Act of
1934, or the Exchange Act. The legislation includes provisions, among other
things, governing the services that can be provided by a public company's
independent auditors and the procedures for approving such services, requiring
the chief executive officer and chief financial officer to certify certain
matters relating to the company's periodic filings under the Exchange Act,
requiring expedited filings of reports by insiders of their securities
transactions and containing other provisions relating to insider conflicts of
interest, increasing disclosure requirements relating to critical financial
accounting policies and their application, increasing penalties for securities
law violations, and creating a new public accounting oversight board, a
regulatory body subject to SEC jurisdiction with broad powers to set auditing,
quality control and ethics standards for accounting firms. The legislation also
requires the national securities exchanges and Nasdaq to adopt rules relating to
certain matters, including the independence of members a company's audit
committee as a condition to listing or continued listing. Given the extensive
SEC role in implementing rules relating to many of the new requirements, the
final scope of these requirements remains to be determined at this time,
although the Company does not believe that the application of these new rules to
the Company as they become effective will have a material effect on its
business, financial condition or results of operations.
7
Essick & Barr, LIG, and LWM are subject to additional regulatory requirements.
Essick & Barr is subject to Pennsylvania insurance laws and the regulations of
the Pennsylvania Department of Insurance. The securities brokerage activities of
LIG are subject to regulation by the SEC and the NASD, and LWM is a registered
investment advisor subject to regulation by the Securities and Exchange
Commission.
Item 2. Properties
The Company's principal office is located in the administration building at 1240
Broadcasting Road, Wyomissing, Pennsylvania.
Listed below are the locations of properties owned or leased by the Bank and its
subsidiaries. Owned properties are not subject to any mortgage, lien or
encumbrance.
Property Location Leased or Owned
- ---------------------------------- ---------------
Corporate Office Leased
1240 Broadcasting Road
Wyomissing, Pennsylvania
Leesport Operations Center Owned
133-144 North Centre Avenue
Leesport, Pennsylvania
North Pointe Financial Center Owned
241 South Centre Avenue
Leesport, Pennsylvania
Northeast Reading Financial Center Owned
1210 Rockland Street
Reading, Pennsylvania
Hamburg Financial Center Owned
801 South Fourth Street
Hamburg, Pennsylvania
Bern Township Financial Center Owned
909 West Leesport Road
Leesport, Pennsylvania
Shenandoah Financial Center Owned
101 North Main Street
Shenandoah, Pennsylvania
Drums Financial Center Leased
Rittenhouse Place
Drums, Pennsylvania
Wernersville Financial Center Leased
1 Reading Drive
Wernersville, Pennsylvania
Breezy Corner Financial Center Leased
3401-3 Pricetown Road
Fleetwood, Pennsylvania
Blandon Financial Center Leased
100 Plaza Drive
Blandon, Pennsylvania
8
Property Location Leased or Owned
- --------------------------------- ---------------
Wyomissing Financial Center Leased
1199 Berkshire Boulevard
Wyomissing, Pennsylvania
Maplewood Financial Center Leased
140 Cando Expressway
Hazleton, Pennsylvania
Schuylkill Haven Financial Center Leased
237 Route 61 South
Schuylkill Haven, Pennsylvania
Birdsboro Financial Center Leased
350 West Main Street
Birdsboro, Pennsylvania
Essick & Barr Sales Office Owned
108 South Fifth Street
Reading, Pennsylvania
Hazleton Drive-Up Leased
1 West Broad Street, Rear
Hazleton, Pennsylvania
Hazleton lot Owned
15th and McNair Streets
Hazleton, Pennsylvania
Exeter Financial Center Owned
(future site)
3943 Perkiomen Avenue
Reading, Pennsylvania
Sinking Spring Financial Center Leased
(future site)
Route 422
Sinking Spring, Pennsylvania
The Boothby Group Leased
460 Norristown Road
Blue Bell, Pennsylvania
All full service facilities, except the Exeter financial center, provide
automated teller machine services. Each financial center, except the
Wernersville, Breezy Corner, and Exeter Township locations, provides drive-in
facilities. Leesport Bank leases the premises of its Wernersville branch, which
does not have a drive-up facility or an automated teller machine.
Essick & Barr shares offices in the Company's administration building located at
1240 Broadcasting Road, Wyomissing, Pennsylvania. Essick & Barr is charged a pro
rata amount of the total lease expense.
LIG and LWM also share office space in the Company's administration building in
Wyomissing and are accordingly charged a pro rata amount of the total lease
expense.
Item 3. Legal Proceedings
A certain amount of litigation arises in the ordinary course of the business of
the Company, and the Company's subsidiaries. In the opinion of the management of
the Company, there are no proceedings pending to which the Company, or the
Company's subsidiaries are a party or to which their property is subject, that,
if determined adversely to the Company or its subsidiaries, would be material in
relation to the Company's shareholders' equity or financial condition, nor are
there any proceedings
9
pending other than ordinary routine litigation incident to the business of the
Company and its subsidiaries. In addition, no material proceedings are pending
or are known to be threatened or contemplated against the Company or its
subsidiaries by governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 2002.
Item 4A. Executive Officers of the Registrant
Certain information, as of January 31, 2003, including principal occupation
during the past five years, relating to each executive officer of the Company is
as follows:
Position
Name, Address, and Position Held Principal Occupation
Held with the Company Age Since for Past 5 Years
- ----------------------------------- ----- --------- --------------------------------
RAYMOND H. MELCHER, JR. 51 1998 Chairman, President and Chief
Wyomissing, Pennsylvania Executive Officer of the
Chairman, President and Chief Company since January 1, 2000;
Executive Officer prior thereto, President and
Chief Executive Officer of the
Company since June 1998; prior
thereto, President and Chief
Executive Officer of Security
National Bank of Pottstown
EDWARD C. BARRETT 54 2002 Senior Vice President and Chief
Wyomissing, Pennsylvania Administration Officer since
Senior Vice President and Chief July 1, 2002; prior thereto,
Administration Officer served on the Company's Board
of Directors since November 10,
1998 and was an independent
technology consultant since
January 1, 2001; prior thereto,
President of the Technology
Services Division of Verso
Technologies, Inc.
CHARLES J. HOPKINS 52 1998 President and CEO of Essick &
Wyomissing, Pennsylvania Barr, LLC since 1992
Senior Vice President of Leesport
Financial Corp.
KEITH W. JOHNSON, CFP 51 1999 President and Chief Executive
Wyomissing, Pennsylvania Officer of Leesport Investment
Senior Vice President of Leesport Group, Inc. and Leesport Wealth
Financial Corp. Management Inc. since 1999;
prior thereto, owner of KRJ &
Associates and Johnson
Financial Group Inc.
10
Position
Name, Address, and Position Held Principal Occupation
Held with the Company Age Since for Past 5 Years
- --------------------------------- ----- --------- ---------------------------------
STEPHEN A. MURRAY 49 2000 Senior Vice President and Chief
West Reading, Pennsylvania Financial Officer of the Company
Senior Vice President and Chief since May 2001; Vice President
Financial Officer and Controller of the Company
since May 2000; prior thereto,
Senior Funds Management
Officer, Fulton Financial
Corporation
JENETTE L. ECK 40 1998 Vice President of the Company
Centerport, Pennsylvania since 2001, Secretary of the
Vice President and Corporate Company since 1998, Executive
Secretary Assistant of the Company since
1996
PART II
Item 5. Market For Common Equity and Related Shareholder Matters.
As of December 31, 2002, there were 826 record holders of the Company's common
stock. The market price of the Company's common stock for each quarter in 2002
and 2001 and the dividends declared on the Company's common stock for each
quarter in 2002 and 2001 are set forth below.
Market Price of Common Stock
The Company's common stock began trading on the Nasdaq National Market under the
symbol "FLPB" on October 1, 2001. Prior to that time, the Company's common stock
was listed on the NASDAQ SmallCap Market. The following table sets forth, for
the fiscal quarters indicated, the high and low bid and asked price per share of
the Company's common stock, as reported on the Nasdaq National or SmallCap
Market (for periods prior to October 1, 2001, the date of listing the Company's
common stock on the Nasdaq National Market), respectively, for the periods
indicated:
Bid Asked
------------------ ------------------
High Low High Low
------ ------ ------ ------
2002
- ----
First quarter $17.10 $13.82 $17.37 $14.00
Second quarter 20.11 16.25 20.36 17.00
Third quarter 19.46 17.60 20.10 17.76
Fourth quarter 19.72 17.54 20.00 17.59
2001
- ----
First quarter $16.50 $13.50 $17.00 $14.38
Second quarter 16.00 14.20 16.63 15.00
Third quarter 16.30 13.00 16.85 14.25
Fourth quarter 15.75 13.90 16.10 14.00
11
Dividend Information
Dividends on the Company's common stock have historically been payable on the
15th of January, April, July, and October.
Dividends Declared
(Per share)
------------------
2002 2001
---- ----
First Quarter $.15 $.15
Second Quarter .16 .15
Third Quarter .16 .15
Fourth Quarter .16 .15
The Company derives a significant portion of its income from dividends paid to
it by the Bank. For a description of certain regulatory restrictions on the
payment of dividends by the Bank to the Company, see "Business--Regulatory
Restrictions on Dividends".
12
Item 6. Selected Financial Data
The selected consolidated financial and other data and management's discussion
and analysis set forth below is derived in part from, and should be read in
conjunction with, the consolidated financial statements and notes thereto
contained elsewhere herein.
Year Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands except per share data)
Selected Financial Data:
Total assets $562,372 $503,509 $393,826 $358,618 $289,945
Securities available for sale 157,564 146,957 74,368 72,165 72,202
Securities held to maturity -- -- -- -- 423
Loans, net of unearned income 335,184 301,923 282,798 253,194 195,287
Allowance for loan losses 4,182 3,723 3,571 2,954 2,129
Deposits 379,832 331,577 296,363 269,344 228,984
Short-term borrowings 34,119 53,574 15,263 28,175 12,667
Long-term debt 72,200 62,200 43,500 31,000 16,000
Mandatory redeemable capital
securities 15,000 5,000 5,000 -- --
Shareholders' equity 52,900 45,221 28,346 25,602 27,826
Book value per share 16.32 14.69 15.29 13.84 15.91
Selected Operating Data:
Interest income $ 30,630 $ 29,626 $ 27,471 $ 22,910 $ 18,548
Interest expense 14,113 17,053 16,386 12,363 9,491
-------- -------- -------- -------- --------
Net interest income before
provision for loan losses 16,517 12,573 11,085 10,547 9,057
Provision for loan losses 1,455 1,012 1,082 1,270 620
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 15,062 11,561 10,003 9,277 8,437
Other income 10,881 7,834 6,686 4,665 1,149
Other expense 19,038 15,500 14,000 12,080 7,758
-------- -------- -------- -------- --------
Income before income taxes 6,905 3,895 2,689 1,862 1,828
Income taxes 1,985 1,119 563 461 317
-------- -------- -------- -------- --------
Net income $ 4,920 $ 2,776 $ 2,126 $ 1,401 $ 1,511
======== ======== ======== ======== ========
Earnings per share-basic $ 1.57 $ 1.45 $ 1.15 $ 0.76 $ 0.86
Earnings per share-diluted $ 1.56 $ 1.45 $ 1.15 $ 0.76 $ 0.86
Cash dividends per share $ 0.63 $ 0.60 $ 0.60 $ 0.54 $ 0.49
Return on average assets .95% 0.64% 0.57% 0.43% 0.58%
Return on average shareholders'
equity 10.33% 8.67% 7.88% 5.24% 5.71%
Dividend payout ratio 40.38% 41.38% 52.17% 71.05% 56.98%
Average equity to average assets 9.72% 7.37% 7.17% 8.24% 10.08%
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company is a financial services company. As of December 31, 2002, Leesport
Bank and Essick & Barr, LLC were wholly-owned subsidiaries of the Company. As of
December 31, 2002, Leesport Investment Group, Inc., Leesport Wealth Management,
Inc., and Leesport Realty Solutions, LLC were wholly-owned, non-bank
subsidiaries of Leesport Bank. Leesport Mortgage, LLC is a 60% owned non-bank
subsidiary of Leesport Bank.
During 2000, Leesport Realty Solutions, LLC was formed as a subsidiary of
Leesport Bank for the purpose of providing title insurance and other real estate
related services to its customers through limited partnership arrangements with
third parties involved in the real estate services industry.
In May 2002, the Company's subsidiary, Leesport Bank, jointly formed Leesport
Mortgage LLC with a real estate company. Leesport Mortgage LLC was formed to
provide mortgage brokerage services, including, without limitation, any activity
in which a mortgage broker may engage. It is operated as a permissible
"affiliated business arrangement" within the meaning of the Real Estate
Settlement Procedures Act of 1974. Leesport Bank's initial investment was
$15,000.
On August 30, 2002, the Company completed its purchase of certain assets of
First Affiliated Investment Group, an investment management and brokerage firm
located in State College, Pennsylvania. In addition to cash payments of
$175,000, the Company issued 9,460 shares of its common stock at a price of
$18.50, resulting in an aggregate purchase price of $350,000 as of the closing
date. Contingent payments totaling up to $300,000, payable in stock at the then
current market values and/or cash are based upon achieving certain revenue
levels over the next three years.
On October 1, 2002, the Company completed its acquisition of 100% of the
outstanding common stock of The Boothby Group, Inc., a full service insurance
agency headquartered in Blue Bell, Pennsylvania. In addition to cash payments of
$3.6 million, the Company issued 132,448 shares of its common stock at a price
of $18.12 resulting in an aggregate purchase price of $6.0 million as of the
closing date. Contingent payments totaling up to $1.6 million, payable in shares
of the Company's common stock at the then current market values, are based on
The Boothby Group division of Essick & Barr achieving certain revenue levels
over the next five years.
Critical Accounting Policies
Disclosure of the Company's significant accounting policies is included in Note
1 to the consolidated financial statements. Certain of these policies are
particularly sensitive requiring significant judgement, estimates and
assumptions to be made by management. Additional information is contained in
Management's Discussion and Analysis and the Notes to the consolidated financial
statements for the most sensitive of these issues. These include, the provision
and allowance for loan losses (see pages 26-27), and revenue recognition for
insurance activities, and derivative financial instruments (see Notes 10 and
16), and purchase accounting, goodwill and intangible assets (see page 18 and
Note 2). These discussions, analysis and 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.
Results of Operations
Net income for 2002 was $4.9 million or $1.56 per share diluted compared to $2.8
million or $1.45 per share diluted for 2001 and $2.1 million or $1.15 per share
for 2000. These increases are a result of increasing net interest income and
other income each year, net of increases in other expenses. Detail regarding
changes in each of these areas follows.
Return on average assets was 0.95% for 2002, 0.64% for 2001 and 0.57% for 2000.
Return on average shareholders' equity was 10.33% for 2002, 8.67% for 2001 and
7.88% for 2000.
14
Net Interest Income
Net interest income is a primary source of revenue for the Company. This income
results from the difference between the interest and fees earned on loans and
investments and the interest paid on deposits to customers and other non-deposit
sources of funds, such as repurchase agreements and borrowings from the Federal
Home Loan Bank. Net interest margin is the difference between the gross
(tax-effected) yield on earning assets and the cost of interest bearing funds as
a percentage of earning assets. All discussion of net interest margin is on a
fully taxable equivalent basis.
Net interest income for 2002 was $16.5 million, a 31.4% increase over the $12.6
million in 2001, which was a 13.5% increase over the $11.1 million in 2000.
Average earning assets increased by $80.9 million or 20.2% from 2001 to 2002.
The net interest margin was 3.53% in 2002 and 3.28% in 2001. Net interest margin
increased during 2002 as a result of the decrease in time deposits average
balances and also the decrease in the interest rate percentage relating to these
time deposits. The approximate yield on time deposits was 4.68% and 6.01% for
2002 and 2001, respectively. Yields on interest bearing demand deposits
decreased from 3.23% in 2001 to 1.63% in 2002. The primary growth in earning
assets for 2002 was in average taxable securities and average loans. Average
taxable securities increased by 66.3% in 2002 and 35.4% in 2001. Average loans
outstanding increased by 11.1% in 2002 and 6.39% in 2001.
Average interest-bearing deposits increased by 37.5% in 2002 and 15.7% in 2001
while average borrowings increased by 48.4% in 2002 and decreased by 3.7% in
2001. The yield on interest earning assets decreased by 1.11% from 2001 to 2002,
and the cost of supporting liabilities decreased by 1.38% during the same time
period. These decreases are primarily due to market rate reductions.
It should be noted that the 48.4% increase in average borrowings for 2002, from
$63.7 million for 2001 to $94.6 million, is primarily a result of the Company
changing to an overnight fed funds purchase position to take advantage of the
low overnight rate environment and to help reduce the overall cost of funds.
At year-end 2002, actual balances for federal funds purchased and other
borrowings were $9.2 million and $97.1 million, respectively.
Other Income
Details of non-interest income follow:
2002 versus 2001 2001 versus 2000
----------------------------- -----------------------------
Increase/ Increase/
2002 (Decrease) % 2001 Decrease) % 2000
------- ---------- ----- ------ --------- ----- ------
(Dollars in thousands)
Customer service fees $ 1,275 $ 217 20.5 $1,058 $ 274 34.9 $ 784
Mortgage banking activities, net 1,546 297 23.8 1,249 1,029 467.7 220
Commissions and fees from
insurance sales 5,722 1,808 46.2 3,914 62 1.6 3,852
Broker and investment advisory
commissions and fees 744 18 2.5 726 (230) (24.1) 956
Gain on sale of loans 621 555 840.9 66 66 100.0 0
Other income 917 145 18.8 772 (73) (0.8) 845
Net realized gains on sale of
securities 56 7 69.0 49 20 69.0 29
------- ------ ------ ------ ------
Total $10,881 $3,047 38.9 $7,834 $2,021 17.2 $6,686
======= ====== ====== ====== ======
The Company's primary source of other income for 2002 was commissions and other
revenue generated through sales of insurance products through its insurance
subsidiary, Essick & Barr which included fourth quarter revenues from The
Boothby Group acquisition of $1.2 million. Revenues from insurance operations
totaled $5.7 million in 2002 compared to $3.9 million in 2001. Revenues
generated from the Bank's investment subsidiaries, LIG and LWM, increased to
$744,000 in 2002 from $726,000 in 2001.
15
The Company also relies on several other sources for its other income, including
sales of newly originated mortgage loans and service charges on deposit
accounts. The income recognized from mortgage banking activities was $1.5
million in 2002, $1.2 million in 2001 and $220,000 in 2000. The addition of new
mortgage originators and increased refinancing activities due to falling
interest rates contributed to this increase. Also included in income from loan
sales was a net gain of $461,000 for 2002 and a net loss of $162,000 in 2001
from the sale of $28 and $11.3 million, respectively of portfolio fixed rate
residential mortgage loans. Income from customer service fees was $1.3 million
in 2002, $1.1 million in 2001 and $784,000 in 2000. The continuing increases in
this category reflect an expanded customer base, new services, and the increased
effect of a new fee pricing structure implemented in 2001.
Other Expenses
Details of non-interest expense follow:
2002 versus 2001 2001 versus 2000
----------------------------- -----------------------------
Increase/ Increase/
2002 (Decrease) % 2001 Decrease) % 2000
------- ---------- ----- ------- --------- ----- -------
(Dollars in thousands)
Salaries and employee benefits $10,195 $2,189 27.3 $ 8,006 $ 501 6.7 $ 7,505
Occupancy expense 1,625 338 26.3 1,287 349 37.2 938
Equipment expense 1,189 227 23.6 962 109 12.8 853
Marketing and advertising expense 1,002 211 26.7 791 216 37.6 575
Professional services 987 309 45.6 678 (51) (7.0) 729
Other expense 4,040 264 7.0 3,776 376 11.1 3,400
------- ------ ------- ------ -------
Total $19,038 $3,538 22.8 $15,500 $1,500 10.7 $14,000
======= ====== ======= ====== =======
The largest component of non-interest expenses is salaries and employee
benefits, which increased $2.2 million, or 27.3% in 2002, after increasing
$501,000 or 6.7% in 2001 as compared to 2000. Full-time equivalent (FTE)
employees for the Company are 227, 193 and 160 for the years ended December 31,
2002, 2001 and 2000, respectively. From 2002 to 2001, this represents an 18%
increase in full-time equivalent employees, a result of acquisitions and the
continued growth of the Company.
Salary and benefit costs associated with the insurance and investment
subsidiaries totaled approximately $3.7 million in 2002, $2.9 million in 2001
and $2.8 million in 2000. These increases in salary and benefits expenses
resulted from annual merit increases and promotions, additional personnel costs
associated with the acquisitions of The Boothby Group and First Affiliated
Investment Group and continuing growth of the Company, and increases in employee
health insurance costs consistent with national trends.
Total occupancy expense increased by 26.3% in 2002 to $1.6 million, from $1.3
million in 2001 and increased by 37.2% in 2001 from $938,000 in 2000. Total
equipment expense increased by 23.6% in 2002 to $1.2 million from $962,000 in
2001 and increased by 12.8% in 2001 from $853,000 in 2000. The occupancy
increase in 2002 was primarily the result of acquisitions and the addition of a
new financial center location, while 2001 included the addition of the Company's
executive and administrative office building, the relocation of two existing
financial centers and the addition and renovation of two new financial centers.
The equipment expense increase in 2002 included improvements to our processing
and data line technology, while 2001 included new check imaging software and
equipment.
The expense related to foreclosed assets owned totaled $46,000 in 2002, $141,000
in 2001, and $202,000 in 2000, which is down 67% and 37% during 2002 and 2001,
respectively. The expense for 2002 included approximately $34,000 of costs
associated with foreclosure legal expenses and collection costs, and 2000
included $60,000 of costs associated with carrying and writing down a single
rental property acquired during that year.
Marketing and advertising expenses were $1 million in 2002, $791,000 in 2001 and
$575,000 in 2000, an increase of 26% and 38% in 2002 and 2001, respectively. The
increase in marketing expense reflects the Company's continuing efforts to
increase awareness of its various product offerings and the costs associated
with its new financial center openings.
16
Expense incurred by the Company for professional services totaled $987,000 in
2002 compared to $678,000 in 2001 and $729,000 in 2000. The increase in
professional services expense for 2002 was primarily the result of consulting
services from financial, legal and employee benefits companies, director fees
and corporate sponsorships/donations. These increases reflect the Company's
continuing commitment to improving the efficiency of the Company's operations
and enhancing our contribution as a good corporate citizen.
Income Taxes
The effective income tax rate for the Company for the years ended December 31,
2002, 2001 and 2000 was 28.75%, 28.73% and 20.94% respectively. The effective
tax rate for 2002 and 2001 was higher than the rate for 2000 primarily as the
result of a decrease in the amount of non-taxable interest income during 2002
and 2001.
Financial Condition
The Company's total assets increased to $562.3 million at December 31, 2002,
representing a growth rate of 11.7% from $503.5 million at December 31, 2001.
Cash and Securities Portfolio
Cash and balances due from banks decreased to $15.3 million at December 31, 2002
from $18.9 million at December 31, 2001. Average cash and due from banks
balances for 2002 and 2001 were $13.3 million and $12.2 million, respectively.
The securities portfolio increased 7.2% to $157.6 million at December 31, 2002,
from $147.0 million at December 31, 2001 primarily due to deposit balances
increasing more than loan balances, as well as increased short and long-term
borrowings to take advantage of the low rate environment. Securities are used to
supplement loan growth as necessary, to generate interest and dividend income,
to manage interest rate risk, and to provide liquidity. To accomplish these
ends, most of the purchases in the portfolio during 2002 were of mortgage backed
securities issued by US Government agencies. In addition, the Company purchased
$14 million in US Treasury notes with short-term maturities to utilize the
proceeds of its shareholder rights offering completed in December 2001.
Currently, all of the Company's securities are carried as available for sale.
At December 31, 2002, the securities balance included a net unrealized gain on
available for sale securities of $3.2 million versus a net unrealized gain of
$392,000 at December 31, 2001. The reduction in interest rates during 2002 was
primarily responsible for the appreciation in the fair market value of the
securities.
Loans
Loans increased to $335.2 million at December 31, 2002 from $301.9 million at
December 31, 2001, an increase of $33.3 million or 11.02%. Management has
targeted the loan portfolio as a key to the Company's continuing growth.
Specifically, the Company has shifted its lending focus to higher yielding
commercial loans made to small and medium sized businesses in its market area. A
significant increase in the volume of commercial loans during 2002 and 2001
underscores that focus as the commercial portfolio increased to $189.4 million
at December 31, 2002, from $166.6 million at December 31, 2001, an increase of
$22.8 million or 13.7%.
Loans secured by residential real estate decreased to $106 million at December
31, 2002, from $109 million as of December 31, 2001, a decrease of 3 million or
3%, due to the declining interest rate environment which caused an increase in
loan principal prepayments for these loans and from the sale of $28 million of
portfolio mortgage loans.
Home equity lending products increased to $26.6 million at December 31, 2002,
from $14.5 million as of December 31, 2001, an increase of $12.1 million or
82.7%. This increase is primarily due to the decline in interest rates and the
shift of consumer borrowing from mortgage loans to home equity lending products.
17
The loans held for sale category is comprised of $21.0 million of mortgage loans
committed for sale on the secondary market as of December 31, 2002 versus $12.2
million as of December 31, 2001.
These sales of residential real estate loans in the secondary market reflect the
Company's strategy of de-emphasizing the retention of long-term, fixed rate
loans in the portfolio, generating fees, improving interest-rate risk and
funding growth in higher yielding assets.
Premises and Equipment
Premises and equipment, net of accumulated depreciation and amortization,
increased during 2002 to $11.3 million from $9.6 million at the end of 2001.
Depreciation for the years ended December 31, 2002 and 2001 was $905,000 and
$571,000, respectively.
Major additions to this category in 2002 included the purchase of property
adjacent to the Hamburg financial center for $202,000 to be used for expansion,
the purchase of property in Exeter Township, Berks County, Pennsylvania for
$740,000 for the construction of a new financial center, expenditures for
furniture and equipment totaling approximately $87,000 for the temporary
financial center established in Exeter Township until the aforementioned
construction is completed during May, 2003 and the acquisition of The Boothby
Group which included $145,000 in premises and equipment assets.
In addition, the Bank received approval during the second quarter of 2002 from
the Federal Deposit Insurance Corporation and the Pennsylvania Department of
Banking to construct a new financial center in Sinking Spring, South Heidelberg
Township, Berks County, Pennsylvania. Total leasehold improvements increased to
$3.6 million from $2 million for the years ended December 31, 2002 and 2001,
respectively. This increase of $1.6 million is primarily due to construction in
process costs for the two new financial centers.
Goodwill and Intangible Assets
Goodwill increased to $8.3 million from $4.3 million for the year ended December
31, 2002 and 2001, respectively. The Company added $3.3 million in intangible
assets during the year 2002. These increases in goodwill and intangible assets
are the result of the Company's purchase The Boothby Group and First Affiliated
Investment Group.
Other Assets
Other assets, which include accrued interest receivable, increased to $13.6
million at December 31, 2002 from $12.5 million at December 31, 2001. Another
significant component of other assets is the cash surrender value of certain
life insurance policies used to fund deferred compensation plans for selected
board members and senior officers. The value of these policies at December 31,
2002 was $6.6 million and $6.3 million at December 31, 2001.
Deposits and Borrowings
Total deposits increased by $48.3 million or 14.6%, growing to $379.8 million at
December 31, 2002 from $331.6 million at December 31, 2001.
Non-interest bearing deposits increased to $60 million at December 31, 2002,
from $43.5 million at December 31, 2001, an increase of $16.5 million or 38.4%.
Management continues to promote growth in these types of deposits, which include
a free checking product, as a method to help reduce the overall cost of the
Company's funds. Interest bearing deposits increased by $31.7 million or 11%,
growing from $288.1 million at December 31, 2001 to $319.8 million at December
31, 2002. Money market and interest checking accounts increased 22.5%, or $21.7
million, and traditional savings accounts and certificates of deposit increased
5.2%, or $10 million. The increase in money market deposits was primarily the
result of successful promotional programs run during 2002, the addition of
financial services centers in 2002, and consumer uncertainty regarding financial
markets.
Borrowed funds from various sources are generally used to supplement deposit
growth. Short-term borrowings, which were comprised of federal funds purchased
from the Federal Home Loan Bank
18
and other correspondent banks and securities sold under agreements to
repurchase, were $34.1 million at December 31, 2002, and $53.6 million at
December 31, 2001. Long-term debt, which consisted of advances from the Federal
Home Loan Bank in 2002, and advances from the Federal Home Loan Bank and
borrowings from other financial institutions in 2001, totaled $72.2 million and
$62.2 million, respectively.
The increase in short-term borrowings and long-term debt were to take advantage
of the low interest rate environment and provide two to five year funding to
offset maturities in the certificates of deposit portfolio. These borrowed funds
were primarily reinvested into securities and loans.
Mandatory redeemable capital debentures increased to $15 million as of December
31, 2002 from $5 million as of December 31, 2001. Proceeds from the new issue
were used for the acquisitions of The Boothby Group and First Affiliated
Investment Group and to fund anticipated growth of earning assets.
In December 2001, the Company repaid $1.5 million of high interest rate
subordinated debt from other financial institutions.
Shareholders' Equity
The Company's common stock, surplus, retained earnings and accumulated other
comprehensive income for the years ended December 31, 2002 and 2001 increased by
$7.7 million and $16.9 million, respectively to $52.9 million and $45.2 million.
The increase for 2002 is primarily the result of the increase in net income to
$4.9 million from $2.8 million in 2001 and from common stock issued for the
acquisitions of The Boothby Group and First Affiliated Investment Group. The
increase for 2001 is primarily the result of the Company's shareholder rights
offering which was completed in December 2001. Through the rights offering, the
Company issued an additional 1.2 million shares of common stock at the offering
price of $13 per share. The offering resulted in net proceeds of $14.3 million.
Total shareholders' equity includes accumulated other comprehensive income,
which includes an adjustment for the fair value of the Company's securities
portfolio. This amount attempts to identify the impact to equity in the unlikely
event that the Company's entire securities portfolio would be liquidated under
current economic conditions. The amounts and types of securities held by the
Company at the end of 2002, combined with current interest rates, resulted in an
increase in equity, net of taxes, of $2.1 million. This compares with an
increase to equity, net of taxes, of $259,000 at the end of 2001. Retained
earnings, after the payment of dividends, accounted for an additional increase
of $2.9 million and $1.5 million during 2002 and 2001, respectively.
Interest Rate Sensitivity
Through the years, the banking industry has adapted to an environment in which
interest rates have fluctuated dramatically and in which depositors have been
provided with liquid, rate sensitive investment options. The industry utilizes a
process known as asset/liability management as a means of managing this
adaptation.
Asset/liability management is intended to provide for adequate liquidity and
interest rate sensitivity by matching interest rate sensitive assets and
liabilities and coordinating maturities and repricing characteristics on assets
and liabilities.
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, the Company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.
One major objective of the Company when managing the rate sensitivity of its
assets and liabilities is to stabilize net interest income. The management of
and authority to assume interest rate risk
19
is the responsibility of the Company's Asset/Liability Committee ("ALCO"), which
is comprised of senior management and Board members. The ALCO meets quarterly to
monitor the ratio of interest sensitive assets to interest sensitive
liabilities. The process to review interest rate risk management is a regular
part of management of the Company. In addition, there is an annual process to
review the interest rate risk policy with the Board of Directors which includes
limits on the impact to earnings from shifts in interest rates.
To manage the interest rate sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of the
Company's interest sensitive assets and liabilities that mature or reprice
within given periods. A positive gap (asset sensitive) indicates that more
assets reprice during a given period compared to liabilities, while a negative
gap (liability sensitive) has the opposite effect.
During October 2002, the Company entered into its first interest rate swap
agreement with a notional amount of $5 million. This derivative financial
instrument effectively converted fixed interst rate obligations of outstanding
mandatory redeemable capital debentures to variable interst 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.
At December 31, 2002, the Company maintained a positive one-year cumulative gap.
During 2002, the Company experienced an increase in principal paydowns in loans
and mortgage backed securities because of the declining interest rate
environment and increases in refinanced loans and is the primary reason why the
Company maintained this positive one-year cumulative gap position.
Interest Sensitivity Gap at December 31, 2002
3 to
0-3 months 12 months 1-3 years Over 3 years
---------- --------- --------- ------------
(Dollars in thousands)
Interest bearing deposits $ 472 $ 100 $ -- $ --
Securities(1),(2) 20,181 36,302 28,100 69,738
Loans(2) 102,205 76,037 97,730 59,212
-------- -------- -------- --------
Total rate sensitive assets 122,858 112,439 125,830 128,950
Interest bearing deposits(3) 94,967 5,500 14,806 53,484
Time deposits 24,381 41,223 61,931 23,525
Federal funds purchased 9,186 -- -- --
Short-term borrowed funds 24,933 -- -- --
Long-term borrowed funds 6,000 8,800 29,100 43,300
-------- -------- -------- --------
Total rate sensitive liabilities 159,467 55,523 105,837 120,309
-------- -------- -------- --------
Interest rate swap (5,000) -- -- --
-------- -------- -------- --------
Interest sensitivity gap $(41,609) $ 56,916 $ 19,993 $ 8,641
======== ======== ======== ========
Cumulative gap (41,609) 15,307 35,300 43,941
Cumulative gap to total assets (7.4%) 2.7% 6.3% 7.8%
- ----------
(1) Gross of unrealized gains/losses on available for sale securities.
(2) Securities and loans are included in the earlier of the period in which
interest rates were next scheduled to adjust or the period in which they
are due.
(3) Demand and savings accounts are generally subject to immediate withdrawal.
However, management considers a certain amount of such accounts to be core
accounts having significantly longer effective maturities based on the
retention experiences of such deposits in changing interest rate
environments.
Certain shortcomings are inherent in the method of analysis presented in the
above table. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in
20
different degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types of assets and
liabilities may lag behind changes in market interest rates. Certain assets,
such as adjustable-rate mortgages, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayment and early withdrawal levels may
deviate significantly from those assumed in calculating the table. The ability
of many borrowers to service their adjustable-rate debt may decrease in the
event of an interest rate increase.
The Company also measures its sensitivity to interest rate movements through
simulations of the effects of rate changes upon its net interest income.
Interest rate movements of 100, 200 and 300 basis points upward and downward
were applied to the Company's interest earning assets and interest bearing
liabilities as of December 31, 2002. The results of these simulations on net
interest income for 2002 are as follows:
Simulated % Change in 2002
Net Interest Income
------------------------------
Assumed Changes
in Interest Rates % Change
----------------- --------
-300 -9%
-200 -5%
-100 -2%
0 0%
+100 1%
+200 3%
+300 4%
o Economic value of shareholders' equity as a result of interest rate changes
is presented in the following hypothetical table. This analysis estimates
the projected change in the value of equity as of December 31, 2002 as a
result of hypothetical interest rate movements. The results of the
simulations in the down 200 and 300 basis points categories are close to or
at policy limits, however, it will be virtually impossible for the Federal
Reserve Bank to lower rates by more than 125 bps (the current Fed Funds
Rate) making the % changes theoretical and not practical.
Simulated % Change in
Economic Value of
Shareholders' Equity
----------------------------
Assumed Changes
in Basis Points % Change
--------------- --------
-300 -36%
-200 -25%
-100 -12%
0 0%
+100 -1%
+200 -4%
+300 -7%
Capital
Federal bank regulatory agencies have established certain capital-related
criteria that must be met by banks and bank holding companies. The measurements
which incorporate the varying degrees of risk contained within the balance sheet
and exposure to off-balance sheet commitments were established to provide a
framework for comparing different institutions.
The Company is not aware of any pending recommendations by regulatory
authorities that would have a material impact on the Company's capital,
resources, or liquidity if they were implemented, nor is the Company under any
agreements with any regulatory authorities.
21
The adequacy of the Company's capital is reviewed on an ongoing basis with
regard to size, composition and quality of the Company's resources. An adequate
capital base is important for continued growth and expansion in addition to
providing an added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio, defined as
the ratio of common shareholders' equity less intangible assets, to average
quarterly assets less intangible assets. The leverage ratio at December 31, 2002
was 9.94% compared to 10.03% at December 31, 2001. This increase is primarily
the result of the issuance in October 2002 of $10 million in trust preferred
securities which are eligible for inclusion in Tier I capital calculations. For
2002 and 2001, the ratios were above minimum regulatory guidelines.
As required by the federal banking regulatory authorities, guidelines have been
adopted to measure capital adequacy. Under the guidelines, certain minimum
ratios are required for core capital and total capital as a percentage of
risk-weighted assets and other off-balance sheet instruments. For the Company,
Tier I capital consists of common shareholders' equity less intangible assets
plus the mandatory redeemable capital debentures, and Tier II capital includes
the allowable portion of the allowance for loan losses, currently limited to
1.25% of risk-weighted assets. By regulatory guidelines, the separate component
of equity for unrealized appreciation or depreciation on available for sale
securities is excluded from Tier I Capital.
The following table sets forth the Company's capital ratios.
At December 31,
-----------------------
2002 2001
--------- ---------
(Dollars in thousands)
Tier I
Common shareholders' equity (excluding unrealized
gains (losses) on securities) $ 50,759 $ 44,962
Disallowed intangible assets (11,525) (4,346)
Mandatory redeemable capital debentures 15,000 5,000
Tier II
Allowable portion of allowance for Loan losses 4,182 3,722
Unrealized gains on available for sale equity securities 95 0
--------- ---------
Risk-based capital $ 58,511 $ 49,338
========= =========
Risk adjusted assets (including off-balance sheet exposures) $ 400,781 $ 333,809
========= =========
Leverage ratio 9.94% 10.03%
Tier I risk-based capital ratio 13.53% 13.67%
Total risk-based capital ratio 14.60% 14.78%
Regulatory guidelines require that Tier I capital and total risk-based capital
to risk-adjusted assets must be at least 4.0% and 8.0%, respectively.
Liquidity and Funds Management
Liquidity management ensures that adequate funds will be available to meet
anticipated and unanticipated deposit withdrawals, debt servicing payments,
investment commitments, commercial and consumer loan demand and ongoing
operating expenses. Funding sources include principal repayments on loans and
investment securities, sales of loans, growth in core deposits, short and
long-term borrowings and repurchase agreements. Regular loan payments are a
dependable source of funds, while the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates.
At December 31, 2002, the Company maintained $16.5 million in cash and cash
equivalents primarily consisting of cash and due from banks. In addition, the
Company had $157.6 million in securities available for sale. The combined total
of $174.1 million represented 31% of total assets at December 31, 2002.
22
The Company considers its primary source of liquidity to be its core deposit
base, which includes non-interest-bearing and interest-bearing demand deposits,
savings, and time deposits under $100,000. This funding source has grown
steadily over the years and consists of deposits from customers throughout the
financial center network. The Company will continue to promote the growth of
deposits through its financial center offices. At December 31, 2002,
approximately 63% of the Company's assets were funded by core deposits acquired
within its market area. An additional 9% of the assets were funded by the
Company's equity. These two components provide a substantial and stable source
of funds.
The Company's financial statements do not reflect various commitments that are
made in the normal course of business, which may involve some liquidity risk.
These commitments consist mainly of unfunded loans and letters of credit made
under the same standards as on-balance sheet instruments. Unused commitments, at
December 31, 2002 totaled $114.4 million. This consisted of $11.1 million in
commercial real estate and construction loans, $21.3 million in home equity
lines of credit, $4.9 million in standby letters of credit and the remainder in
other unused commitments. Because these instruments have fixed maturity dates,
and because many of them will expire without being drawn upon, they do not
generally present any significant liquidity risk to the Company. Any amounts
actually drawn upon, management believes, can be funded in the normal course of
operations. The Company has no investment in or financial relationship with any
unconsolidated entities that are reasonably likely to have a material effect on
liquidity or the availability of capital resources.
The following table represents the Company's aggregate on and off balance sheet
contractual obligations to make future payments.
December 31, 2002
-------------------------------------------------------
Less than Over
1 Year 1-3 Years 4-5 Years 5 Years Total
--------- --------- --------- -------- --------
(In thousands)
Time deposits $65,602 $61,931 $23,190 $ 335 $151,058
Long-term debt 14,800 29,100 13,300 15,000 72,200
Redeemable capital
debentures -- -- -- 15,000 15,000
Operating leases 693 1,393 1,331 5,749 9,166
Unconditional purchase
obligations 303 1,506 1,124 1,427 4,360
------- ------- ------- ------- --------
Total $81,398 $93,930 $38,945 $37,511 $251,784
======= ======= ======= ======= ========
Changes in Interest Income and Interest Expense
The following table sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate), and (2) changes in rate (changes in rate multiplied by
average volume).
23
Analysis of Changes in Interest Income (1)(2)(3)
2002/2001 Increase (Decrease) 2001/2000 Increase (Decrease)
Due to Change in Due to Change in
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands)
Interest-bearing deposits in other
banks and federal funds sold $ (279) $ (57) $ (336) $ 327 $ (80) $ 247
Securities (taxable) 3,476 (1,913) 1,563 1,486 (438) 1,048
Securities (tax-exempt) 201 (78) 123 (208) (69) (277)
Loans 2,606 (3,007) (401) 1,430 (364) 1,066
------- ------- ------- ------- ------- -------
Total Interest Income 6,004 (5,055) 949 3,035 (951) 2,084
Short-term borrowed funds 249 (371) (122) (928) (395) (1,323)
Long-term borrowed funds 1,652 (791) 861 934 (113) 821
Interest-bearing demand deposits 935 (1,811) (876) 1,177 (569) 608
Savings deposits 127 (327) (200) (210) (224) (434)
Time deposits (593) (2,010) (2,603) 1,075 (81) 994
------- ------- ------- ------- ------- -------
Total Interest Expense 2,370 (5,310) (2,940) 2,048 (1,382) 666
------- ------- ------- ------- ------- -------
Increase (Decrease) in
Net Interest Income $ 3,634 $ 255 $ 3,889 $ 987 $ 431 $ 1,418
- ----------
(1) Loan fees have been included in the change in interest income totals
presented. Nonaccrual loans have been included in average loan balances.
(2) Changes due to both volume and rates have been allocated in proportion to
the relationship of the dollar amount change in each.
(3) Interest income on loans and securities is presented on a taxable
equivalent basis.
Average Balances, Rates and Net Yield
The following table sets forth the average daily balances of major categories of
interest earning assets and interest bearing liabilities, the average rate paid
thereon, and the net interest margin for each of the periods indicated.
Year Ended December 31,
----------------------------
2002 2001 2000
--------------------------- ---------------------------- ------------------------------
Interest Interest Interest
Average Income/ % Average Income/ % Average Income/ %
Balances Expense Rate Balances Expense Rate Balances Expense Rate
-------- -------- ----- -------- -------- ------ -------- -------- ------
(In thousands except percentage data)
Interest Earning Assets:
Interest bearing deposits in other
banks and federal funds sold $ 3,318 $ 59 1.78 $ 11,313 $ 395 3.49 $ 3,526 $ 148 4.20
Securities (taxable) 134,511 6,804 5.06 80,873 5,241 6.48 59,713 4,193 7.02
Securities(tax-exempt)(1) 15,886 1,181 7.45 13,348 1,058 7.92 15,813 1,335 8.44
Loans (1)(2) 326,814 23,055 7.05 294,137 23,456 7.97 276,470 22,390 8.10
-------- ------- -------- ------- -------- -------
Total interest earning
assets $480,529 31,099 6.47 399,671 $30,150 7.54 355,522 $28,066 7.89
Interest Bearing Liabilities:
Interest bearing demand deposits $113,086 1,845 1.63 $ 84,157 2,721 3.23 $ 54,043 2,113 3.91
Savings deposits 49,122 564 1.15 42,107 764 1.81 51,044 1,198 2.35
Time deposits 151,056 7,071 4.68 160,918 9,674 6.01 143,186 8,680 6.06
Short-term borrowings 22,540 400 1.77 15,265 522 3.42 30,726 1,845 6.00
Long-term debt 72,021 3,579 4.97 48,472 2,821 5.82 35,108 2,127 6.06
Mandatory redeemable capital
debentures 7,548 654 8.66 5,000 551 11.02 3,866 424 10.97
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities $415,373 14,113 3.40 $355,919 17,053 4.79 $317,973 16,387 5.15
------- ------- -------
Noninterest bearing deposits $ 53,693 $ 39,055 $ 33,881
Net interest margin $16,986 3.53% $13,097 3.28% $11,679 3.29%
======= ======= =======
24
- ----------
(1) Rates on loans and investment securities are reported on a tax-equivalent
basis of 34%.
(2) Nonaccrual loans have been included in average loan balances.
Risk Elements
Non-performing loans, consisting of loans on non-accrual status, loans past due
90 days or more and still accruing interest, and renegotiated troubled debt
increased to $1.4 million at December 31, 2002, up from $931,000 at December 31,
2001. Generally, loans that are more than 90 days past due are placed on
non-accrual status. As a percentage of total loans, non-performing loans
represented .42% at December 31, 2002, up from .31% at December 31, 2001. The
allowance for loan losses represents 297.65% of non-performing loans at December
31, 2002, compared to 399.8% at December 31, 2001.
The Company continues to emphasize credit quality and believes that pre-funding
analysis and diligent intervention at the first signs of delinquency will help
to maintain these levels.
The following table is a summary of non-performing loans and renegotiated loans
for the years presented.
Non-performing Loans
(In thousands)
As of December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Nonaccrual loans
Real estate $ 258 $ 215 $ 682 $ 797 $ 721
Consumer 0 5 0 0 23
Commercial 971 531 419 1,192 232
------ ------ ------ ------ ------
Total 1,229 751 1,101 1,989 976
Loans past due 90 days or more and
still accruing interest
Real estate 0 0 265 363 454
Consumer 11 8 89 86 110
Commercial 53 56 116 226 825
------ ------ ------ ------ ------
Total loans past due 90 days or
more 64 64 470 675 1,389
Troubled debt restructurings
Real estate 0 0 0 0 0
Consumer 0 0 0 0 0
Commercial 112 116 994 1,084 387
------ ------ ------ ------ ------
Total troubled debt restructurings $ 112 $ 116 $ 994 $1,084 $ 387
------ ------ ------ ------ ------
Total non-performing loans $1,405 $ 931 $2,565 $3,748 $2,752
====== ====== ====== ====== ======
At December 31, 2002, there were $1.3 million of commercial loans for which
payments are current, but where the borrowers were experiencing significant
financial difficulties, that were not classified as non-accrual.
The following summary shows the impact on interest income of nonaccrual and
restructured loans for the year ended December 31, 2002 (in thousands):
Amount of interest income on loans that would have been
recorded under original terms $45
Interest income reported during the period $ 0
25
Provision and Allowance for Loan Losses
The provision for loan losses for 2002 was $1.5 million compared to $1.0 million
in 2001 and $1.1 million in 2000. 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 possible loan losses. The Company experienced significant
growth in the loan portfolio of 11.0% in 2002 and 6.8% in 2001. The allowance
for loan losses at December 31, 2002 was $4.2 million, or 1.25% of outstanding
loans, compared to $3.7 million or 1.23% of outstanding loans at December 31,
2001.
The allowance for loan losses is an amount that management believes to be
adequate to absorb potential losses in the loan portfolio. Additions to the
allowance are charged through the provision for loan losses. Management
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, value of any collateral, risk characteristics in the loan portfolio,
and local and national economic conditions. Significant loans are individually
analyzed, while other smaller balance loans are evaluated by loan category.
Based upon the results of such reviews, management believes that the allowance
for loan losses at December 31, 2002 was adequate to absorb credit losses
inherent in the portfolio as of that date.
The following table presents a comparative allocation of the allowance for loan
losses for each of the past five year-ends. Amounts were allocated to specific
loan categories based upon management's classification of loans under the
Company's internal loan grading system and assessment of near-term charge-offs
and losses existing in specific larger balance loans that are reviewed in detail
by the Company's internal loan review department and pools of other loans that
are not individually analyzed. The allocation is made for analytical purposes
and is not necessarily indicative of the categories in which future credit
losses may occur.
Allocation of Allowance for Loan Losses
(In thousands except percentage data)
as of December 31,
---------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial $3,095 53.4% $2,467 53.7% $2,225 51.5% $2,000 42.3% $1,028 27.1%
Residential Real Estate 374 42.7 648 42.5 648 31.2 196 47.4 741 59.9
Consumer 500 3.9 459 3.8 621 17.3 414 10.3 350 13.0
------ ------ ------ ------ ------
Total
Allocated 3,969 100.0 3,574 100.0 3,494 100.0 2,610 100.0 2,119 100.0
Unallocated 213 -- 149 -- 77 -- 344 -- 10 --
------ ------ ------ ------ ------
TOTAL $4,182 100.0% $3,723 100.0% $3,571 100.0% $2,954 100.0% $2,129 100.0%
====== ====== ====== ====== ======
The unallocated portion of the allowance is intended to provide for possible
losses that are not otherwise accounted for and to compensate for the imprecise
nature of estimating future loan losses. Management believes the allowance is
adequate to cover the inherent risks associated with the Company's loan
portfolio. While allocations have been established for particular loan
categories, management considers the entire allowance to be available to absorb
losses in any category.
The following tables set forth an analysis of the Company's allowance for loan
losses for the years presented.
26
Analysis of the Allowance for Loan Losses
(In thousands except ratios)
Year Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Balance, Beginning of Year $ 3,723 $ 3,571 $ 2,954 $ 2,129 $ 1,837
Charge-Offs:
Commercial 799 761 194 164 59
Residential Real Estate 57 85 245 136 181
Consumer 211 134 116 268 184
-------- -------- -------- -------- --------
Total 1,067 980 555 568 424
Recoveries:
Commercial 41 42 6 80 31
Residential Real Estate 10 22 43 6 13
Consumer 20 56 41 37 52
-------- -------- -------- -------- --------
Total 71 120 90 123 96
Net Charge-Offs 996 860 465 445 328
-------- -------- -------- -------- --------
Provision Charged to Operations 1,455 1,012 1,082 1,270 620
-------- -------- -------- -------- --------
Balance, End of Year $ 4,182 $ 3,723 $ 3,571 $ 2,954 $ 2,129
======== ======== ======== ======== ========
Average Loans $326,814 $294,136 $276,470 $227,241 $170,290
Ratio of Net Charge-Offs to Average Loans .30% .29% .17% .20% .19%
Ratio of Allowance to Loans, End of Year 1.25% 1.23% 1.25% 1.17% 1.10%
Loan Policy and Procedure
The Bank's loan policies and procedures have been approved by the Board of
Directors, based on the recommendation of the Bank's President, Chief Lending
Officer, Loan Review Officer, and the Risk Management Officer, who collectively
establish and monitor credit policy issues. Application of the loan policy is
the direct responsibility of those who participate either directly or
administratively in the lending function.
The Bank's commercial lending officers originate loan requests through a variety
of sources which include the Bank's existing customer base, referrals from
directors and various networking sources (accountants, attorneys, and realtors),
and market presence. Over the past several years, the Bank's commercial lending
efforts have been significantly increased through (1) the hiring of experienced
commercial lenders in the Bank's geographic markets, (2) the Bank's continued
participation in community and civic events, (3) strong networking efforts, (4)
local decision making, and (5) consolidation and other changes which are
occurring with respect to other local financial institutions.
The Bank's commercial lenders have approval authority up to designated
individual limits, along with joint lending authority up to $750,000. Loans in
excess of $750,000 are presented to the Bank's Credit Committee, comprised of
the President, Chief Lending Officer, Credit Manager, Loan Review Officer
(non-voting), and the commercial lenders. The Credit Committee can approve loans
up to $1,500,000 and recommend loans to the Executive Loan Committee for
approval up to $5,265,000 (which represents 65% of the Bank's legal lending
limit of $8,100,000). The Executive Loan Committee is comprised of the
President, Chief Lending Officer, Loan Review Officer (non-voting member) and
selected Board members. Loans up to the Bank's legal lending limit are submitted
to the Board for approval. The Bank has established an "in-house" lending limit
of 80% of its legal lending limit, and at this time has no loan relationships in
excess of its in-house limit.
The Bank has successfully implemented individual, joint, and committee level
approval procedures which have monitored and solidified credit quality as well
as provided lenders with a process that is responsive to customer needs.
The Bank manages credit risk in the loan portfolio through adherence to
consistent standards, guidelines, and limitations established by the credit
policy. The Bank's credit department, with the
27
loan officer, analyze the financial statements of the borrower, collateral
values, loan structure, and economic conditions, to then make a recommendation
to the appropriate approval authority. Commercial loans generally consist of
real estate secured loans, lines of credit, term, and equipment loans. The
Bank's underwriting policies impose strict collateral requirements and normally
will require the guaranty of the principals. For requests that qualify, the Bank
will use Small Business Administration guarantees to improve the credit quality
and support local small business.
The Bank's loan review officers/department conduct ongoing, independent reviews
of all new loan relationships to ensure adherence to established policies and
procedures, monitor compliance with applicable laws and regulations, and provide
objective measurement statistics. The Bank's loan review officers/department
submit quarterly reports to the Audit Committee and/or the Board on loan
concentrations, large loan relationships, collateral and documentation
exceptions, and relevant loan ratios pertaining to the Bank's loan loss
reserves, delinquency, and other key asset quality ratios.
Loan Portfolio
The following table sets forth the Company's loan distribution at the periods
presented:
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands)
Commercial, Financial, and Agricultural $179,144 $162,227 $141,425 $110,826 $ 71,941
Real Estate Construction 10,245 4,344 4,152 374 1,741
Residential Real Estate 132,714 123,976 112,855 120,094 103,106
Consumer 13,081 11,376 24,366 21,900 18,499
-------- -------- -------- -------- --------
Total $335,184 $301,923 $282,798 $253,194 $195,287
======== ======== ======== ======== ========
Loan Maturities
The following table shows the maturity of commercial, financial and agricultural
loans outstanding at December 31, 2002:
Maturities of Outstanding Loans
------------------------------------------
Within After One After
One But Within Five
Year Five Years Years Total
------- ---------- -------- --------
(In thousands)
Commercial, Financial and Agricultural $43,020 $24,118 $112,006 $179,144
Maturity of Certificates of Deposit of $100,000 or More
The following table sets forth the amounts of the Bank's certificates of deposit
of $100,000 or more by maturity date.
December 31, 2002
------------------
(In thousands)
Three Months or Less $ 9,098
Over Three Through Six Months 1,301
Over Six Through Twelve Months 2,581
Over Twelve Months 10,857
-------
TOTAL $23,837
=======
28
Securities Portfolio Maturities and Yields
The following table sets forth information about the maturities and weighted
average yield on the Company's securities portfolio. Floating rate, immediately
repriceable items are included in the first column, and yields are not reported
on a tax equivalent basis.
Amortized Cost at December 31, 2002
-----------------------------------------------------
Due in After 1 After 5
1 Year Year to Years to After
or Less 5 Years 10 Years 10 Years Total
------- ------- -------- -------- --------
(In thousands except percentage data)
Obligations of U.S. Government $4,000 $1,641 $ -- $ -- $ 5,641
Agencies and Corporations .97% 3.23% 0% 0% 1.60%
State and Municipal $ 0 $2,042 $5,782 $11,018 $ 18,842
Obligations 0% 5.73% 5.81% 5.16% 5.42%
Other Securities $4,302 $6,536 $ 686 $ 7,518 $ 19,042
5.80% 6.47% 6.42% 6.10% 6.15%
Mortgage Backed Securities $103,778
5.95%
Securities Portfolio
The following table sets forth the carrying value of the Company's investment
securities at its last three fiscal year ends:
As of December 31,
---------------------------------
2002 2001 2000
-------- -------- -------
(In thousands)
U.S. Treasuries $ -- $ 14,046 $ 3,115
U.S. Government Agencies 111,866 95,797 46,747
State and Political Subdivisions 19,314 16,879 12,086
Other Securities and Equity Securities 26,384 20,235 12,420
-------- -------- -------
Total $157,564 $146,957 $74,368
======== ======== =======
For purposes of the above table, all securities are classified as available for
sale and are reflected at fair value.
Average Deposits and Average Rates by Major Classification
The following table sets forth the average balances of the Bank's deposits and
the average rates paid for the years presented.
Year Ended December 31,
------------------------------------------------------
2002 2001 2000
--------------- --------------- ----------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- -----
(Dollars in thousands)
Non-interest bearing demand $ 53,693 $ 39,055 $ 33,881
Interest bearing demand 113,086 1.63% 84,157 3.23% 54,043 3.91%
Savings deposits 49,122 1.15% 42,107 1.81% 51,044 2.35%
Time deposits 151,056 4.68% 160,918 6.01% 143,186 6.06%
-------- -------- --------
Total $366,957 $326,237 $282,154
======== ======== ========
29
Other Borrowed Funds
Short-term borrowings at December 31, 2002 consisted of overnight borrowings
from the FHLB under a repurchase agreement, overnight borrowings from other
correspondent financial institutions, and repurchase agreements with customers.
The borrowings are collateralized by certain qualifying assets of the Bank.
In December 2001, the Company repaid two loans to other financial institutions
of $500,000 and $1.0 million to reduce interest expense. These loans carried
interest rates of 8.50% and 9.00%. The Company was assessed a prepayment penalty
on the $1.0 million loan in the amount of $25,000.
Federal funds purchased by the Bank were $9.2 million and $32.5 million at
December 31, 2002, and 2001, respectively. The federal funds purchased typically
mature in one day.
Information concerning the short-term borrowings is summarized as follows:
December 31,
-------------------------------------
2002 2001 2000
------- ------- -------
(In thousands except percentage data)
Federal funds purchased:
Average balance during the year $ 4,453 $ 1,806 $17,699
Rate 1.95% 2.16% 6.06%
Securities sold under agreements to repurchase:
Average balance during the year $18,087 $13,459 $ 9,673
Rate 1.73% 3.59% 5.73%
Other short-term borrowings:
Average balance during the year $ 0 $ 0 $ 3,354
Rate --% --% 6.50%
Maximum month end balance of short-term
borrowings during the year $37,693 $53,574 $15,659
Dividends and Shareholders' Equity
The Company declared cash dividends in 2002 of $.63 per share, and $.60 per
share in 2001.
Year ended December 31,
-----------------------
2002 2001 2000
----- ----- -----
Return on average assets 0.95% 0.64% 0.57%
Return on average equity 10.33% 8.67% 7.88%
Dividend payout ratio 40.38% 41.38% 52.17%
Average equity to average assets 9.72% 7.37% 7.17%
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The discussion concerning the effects of interest rate changes on the Company's
estimated net interest income for the year ending December 31, 2002 set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Interest Rate Sensitivity" in Item 7 hereof, is incorporated
herein by reference.
30
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Leesport Financial Corp.
Wyomissing, Pennsylvania
We have audited the accompanying consolidated balance sheets of Leesport
Financial Corp., and its wholly-owned subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Leesport Financial Corp. and its wholly-owned subsidiaries as of December 31,
2002 and 2001, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Notes 1 and 2 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," as of January 1, 2002, which changed its method of
accounting for goodwill and other intangible assets.
Reading, Pennsylvania /s/ Beard Miller Company LLP
January 24, 2003
31
LEESPORT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(Amounts in thousands, except share data)
December 31,
---------------------
2002 2001
-------- --------
ASSETS
Cash and due from banks $ 15,918 $ 18,885
Interest-bearing deposits in banks 572 831
-------- --------
Total cash and cash equivalents 16,490 19,716
Mortgage loans held for sale 20,977 12,209
Securities available for sale 157,564 146,957
Loans, net of allowance for loan losses
2002--$4,182; 2001--$3,723 331,002 298,200
Premises and equipment, net 11,298 9,623
Identifiable Intangible Assets 3,207 --
Goodwill 8,261 4,309
Other assets 13,573 12,495
-------- --------
Total assets $562,372 $503,509
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 60,015 $ 43,476
Interest bearing 319,817 288,101
-------- --------
Total deposits 379,832 331,577
Securities sold under agreements to repurchase 24,933 21,074
Federal funds purchased 9,186 32,500
Long-term debt 72,200 62,200
Mandatory redeemable capital debentures 15,000 5,000
Other liabilities 8,321 5,937
-------- --------
Total liabilities 509,472 458,288
-------- --------
Shareholders' equity
Common stock, par value $5 per share;
authorized 10,000,000 shares; issued and outstanding:
3,241,606 shares in 2002, 3,079,338 shares in 2001 16,208 15,397
Surplus 15,573 13,510
Retained earnings 18,978 16,055
Accumulated other comprehensive income 2,141 259
-------- --------
Total shareholders' equity 52,900 45,221
-------- --------
Total liabilities and shareholders' equity $562,372 $503,509
======== ========
See Notes to Consolidated Financial Statements.
32
LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
Years Ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Interest income:
Interest and fees on loans $22,971 $23,280 $22,249
Interest on securities:
Taxable 6,737 5,015 3,941
Tax-exempt 637 675 849
Dividend income 226 262 284
Interest on federal funds sold 36 323 97
Other interest income 23 71 51
------- ------- -------
Total interest income 30,630 29,626 27,471
------- ------- -------
Interest expense:
Interest on deposits 9,480 13,159 11,990
Interest on short-term borrowings 400 522 1,757
Interest on long-term debt 3,579 2,821 2,215
Interest on mandatory redeemable capital debentures 654 551 424
------- ------- -------
Total interest expense 14,113 17,053 16,386
------- ------- -------
Net interest income 16,517 12,573 11,085
Provision for loan losses 1,455 1,012 1,082
------- ------- -------
Net interest income after provision for loan losses 15,062 11,561 10,003
------- ------- -------
Other income:
Customer service fees 1,275 1,058 784
Mortgage banking activities, net 1,546 1,249 220
Commissions and fees from insurance sales 5,722 3,914 3,852
Broker and investment advisory commissions and fees 744 726 956
Gain on sale of loans 621 66 --
Other income 917 772 845
Net realized gains on sales of securities 56 49 29
------- ------- -------
Total other income 10,881 7,834 6,686
------- ------- -------
Other expense:
Salaries and employee benefits 10,195 8,006 7,505
Occupancy expense 1,625 1,287 938
Equipment expense 1,189 962 853
Marketing and advertising expense 1,002 791 575
Professional services 987 678 729
Other expense 4,040 3,776 3,400
------- ------- -------
Total other expense 19,038 15,500 14,000
------- ------- -------
Income before income taxes 6,905 3,895 2,689
Income taxes 1,985 1,119 563
------- ------- -------
Net income $ 4,920 $ 2,776 $ 2,126
======= ======= =======
Basic earnings per share $ 1.57 $ 1.45 $ 1.15
======= ======= =======
Diluted earnings per share $ 1.56 $ 1.45 $ 1.15
======= ======= =======
See Notes to Consolidated Financial Statements.
33
LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
Accum-
ulated
Common Stock Other
------------------- compre-
Number of hensive
Shares Par Retained Income Treasury
Issued Value Surplus Earnings (Loss) Stock Total
--------- ------- ------- -------- -------- -------- --------
Balance, December 31, 1999 1,858,919 $ 9,295 $ 4,988 $ 13,571 $ (2,134) $ (118) $ 25,602
--------
Comprehensive income:
Net income -- -- -- 2,126 -- -- 2,126
Change in net unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment -- -- -- -- 1,665 -- 1,665
--------
Total comprehensive income 3,791
--------
Reissuance of treasury stock in connection with
director and employee stock purchase plans -- -- 8 -- -- 56 64
Cash dividends declared ($.60 per share) -- -- -- (1,111) -- -- (1,111)
--------- ------- ------- -------- -------- ------ --------
Balance, December 31, 2000 1,858,919 9,295 4,996 14,586 (469) (62) 28,346
--------
Comprehensive income:
Net income -- -- -- 2,776 -- -- 2,776
Change in net unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment -- -- -- -- 728 -- 728
--------
Total comprehensive income -- -- -- -- -- -- 3,504
--------
Reissuance of treasury stock in connection with
director and employee stock purchase plans -- -- 7 -- -- 62 69
Common stock issued 1,220,419 6,102 8,507 -- -- -- 14,609
Cash dividends declared ($.60 per share) -- -- -- (1,307) -- -- (1,307)
--------- ------- ------- -------- -------- ------ --------
Balance, December 31, 2001 3,079,338 15,397 13,510 16,055 259 0 45,221
Comprehensive income:
Net income -- -- -- 4,920 -- -- 4,920
Change in net unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment -- -- -- -- 1,882 -- 1,882
--------
Total comprehensive income -- -- -- -- -- -- 6,802
--------
Common stock issued in connection with
acquisitions 141,908 709 1,866 -- -- -- 2,575
Common stock issued in connection with director
and employee stock purchase plans 20,360 102 197 -- -- -- 299
Cash dividends declared ($.63 per share) -- -- -- (1,997) -- -- (1,997)
--------- ------- ------- -------- -------- ------ --------
Balance, December 31, 2002 3,241,606 $16,208 $15,573 $ 18,978 $ 2,141 $ 0 $ 52,900
========= ======= ======= ======== ======== ====== ========
See Notes to Consolidated Financial Statements.
34
LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
(Amounts in thousands)
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Cash Flows From Operating Activities
Net income $ 4,920 $ 2,776 $ 2,126
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,455 1,012 1,082
Provision for depreciation 905 571 801
Provision for amortization 72 311 291
Deferred income taxes 115 109 (327)
Net amortization of securities premiums and
discounts 789 118 47
Net realized (gain) loss on sale of foreclosed real
estate (15) 54 98
Net gain on sales of securities available for sale (56) (49) (29)
Proceeds from sale of loans held for sale 75,193 32,363 8,473
Net (gain) loss on loans held for sale (1,937) (1,138) 308
Loans held for sale (82,024) (41,369) (10,846)
Realized (gain) loss on sale of premises and
equipment (22) 38 (246)
Earnings on investment in life insurance (330) (374) (311)
(Increase) decrease in accrued interest receivable
and other assets (1,630) 251 (2,031)
Increase in accrued interest payable and other
liabilities 1,336 583 1,115
--------- --------- ---------
Net Cash Provided by (Used in) Operating
Activities (1,229) (4,744) 551
--------- --------- ---------
Cash Flows From Investing Activities
Activity in available for sale securities:
Purchases (92,020) (118,251) (16,859)
Maturities, calls and principal repayments 68,998 17,999 6,680
Proceeds from sales 15,228 29,421 11,030
Net cash used in acquisitions (3,556) -- (29)
Net increase in loans receivable (34,445) (20,354) (30,594)
Net increase in Federal Home Loan Bank stock (695) (723) (552)
Purchase of life insurance policies -- -- (3,317)
Proceeds from sale of foreclosed real estate 230 455 399
Purchase of premises and equipment (2,603) (2,651) (1,772)
Proceeds from sale of premises and equipment 46 819 416
--------- --------- ---------
Net Cash Used in Investing Activities (48,817) (93,285) (34,598)
--------- --------- ---------
See Notes to Consolidated Financial Statements.
35
LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2002, 2001 and 2000
(Amounts in thousands)
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Cash Flows From Financing Activities
Net increase in deposits 48,255 35,214 27,019
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase (19,455) 38,311 (12,912)
Repayment of long-term debt (12,000) (1,500) (11,000)
Proceeds from long-term debt 22,000 20,200 23,500
Issuance of mandatory redeemable capital
debentures 10,000 -- 5,000
Deferred financing fees on redeemable capital
debentures (300) -- (229)
Reissuance of treasury stock -- 69 64
Net proceeds from issuance of common stock 299 14,609 --
Proceeds from the exercise of stock options 18 -- --
Cash dividends paid (1,997) (1,307) (1,111)
--------- --------- ---------
Net Cash Provided by Financing Activities 46,820 105,596 30,331
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (3,226) 7,567 (3,716)
Cash and cash equivalents:
January 1 19,716 12,149 15,865
--------- --------- ---------
December 31 $ 16,490 $ 19,716 $ 12,149
========= ========= =========
Cash payments for:
Interest $ 14,422 $ 16,627 $ 15,973
========= ========= =========
Income taxes $ 1,775 $ 1,095 $ 875
========= ========= =========
Supplemental Schedule of Noncash
Investing and Financing Activities
Other real estate acquired in settlement of loans $ 282 $ 369 $ 525
========= ========= =========
See Notes to Consolidated Financial Statements.
36
1. Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include the accounts of Leesport Financial
Corp. (the "Company"), a bank holding company, which has elected to be treated
as a financial holding company, and its wholly-owned subsidiaries, Essick &
Barr, LLC ("Essick & Barr"), Leesport Bank (the "Bank"), First Leesport Capital
Trust I and Leesport Capital Trust II. As of December 31, 2002, the Bank's
wholly-owned subsidiaries were Leesport Investment Group, Inc. ("LIG"), Leesport
Wealth Management, Inc. ("LWM") and Leesport Realty Solutions, LLC. All
significant intercompany accounts and transactions have been eliminated.
Nature of operations:
The Bank provides full banking services. Essick & Barr provides risk management
services and personal and commercial insurance coverage through several
insurance companies. LIG and LWM provide investment advisory and brokerage
services. Leesport Realty Solutions, LLC provides title insurance and other real
estate related services to the Company's customers through limited partnership
arrangements with unaffiliated third parties involved in the real estate
services industry. First Leesport Capital Trust I and Leesport Capital Trust II
are trusts formed for the purpose of issuing the mandatory redeemable debentures
on behalf of the Company. The Company and the Bank are subject to the
regulations of various federal and state agencies and undergo periodic
examinations by various regulatory authorities. The area served by the Company
and related subsidiaries is principally Berks, Luzerne, Montgomery and
Schuylkill counties in Pennsylvania.
Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications:
For comparative purposes, prior years' consolidated financial statements have
been reclassified to conform with report classifications of the current year.
The reclassifications had no effect on net income.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and interest-bearing deposits in other banks.
Securities available for sale:
Securities classified as available for sale are those securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movement in interest rates,
changes in maturity mix of the Bank's assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains and losses are
reported in other comprehensive income, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of the specific
securities sold, are included in earnings. Premiums and discounts are recognized
in interest income using a method which approximates the interest method over
the period to maturity.
Loans:
Loans that management has the intent and ability to hold for the foreseeable
future, or until maturity or pay-off, generally are stated at their outstanding
unpaid principal balances, net of any deferred
37
fees or costs on originated loans or unamortized premiums or discounts on
purchased loans. Interest income is accrued on the unpaid principal balance.
Loan origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the yield (interest income) of the related loans.
These amounts are generally being amortized over the contractual life of the
loan.
The accrual of interest is generally discontinued when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Interest received on nonaccrual loans
generally is either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Allowance for loan losses:
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows expected to be received on
impaired loans.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer, residential and home equity loans for impairment disclosures.
38
Loans held for sale:
Mortgage loans originated and intended for sale in the secondary market at the
time of origination are carried at the lower of cost or estimated fair value on
an aggregate basis. All sales are made without recourse. At December 31, 2002
and 2001, there were $21.0 million and $12.2 million, respectively, of
residential mortgage loans held for sale.
Foreclosed assets:
Foreclosed assets, which are recorded in other assets, include properties
acquired through foreclosure or in full or partial satisfaction of the related
loan.
Foreclosed assets are initially recorded at fair value, net of estimated selling
costs, at the date of foreclosure, establishing a new cost basis. After
foreclosure, valuations are periodically performed by management, and the real
estate is carried at the lower of carrying amount or fair value, less estimated
costs to sell. Revenue and expense from operations and changes in the valuation
allowance are included in other expense.
Premises and equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on straight-line and accelerated depreciation methods
over the estimated useful lives of the related assets.
Loan servicing:
Capitalized servicing rights are reported in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Servicing rights
are evaluated for impairment based upon the fair value of the rights as compared
to amortized cost. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. Impairment is recognized through a valuation
allowance to the extent that fair value is less than the capitalized amount.
Revenue recognition:
Insurance revenues are derived from commissions and fees. Commission revenues,
as well as the related premiums receivable and payable to insurance companies,
are recognized the later of the effective date of the insurance policy or the
date the client is billed, net of an allowance for estimated policy
cancellations. The reserve for policy cancellations is periodically evaluated
and adjusted as necessary. Commission revenues related to installment premiums
are recognized as billed. Commissions on premiums billed directly by insurance
companies are generally recognized as income when received. Contingent
commissions from insurance companies are generally recognized as revenue when
the data necessary to reasonably estimate such amounts is obtained. A contingent
commission is a commission paid by an insurance company that is based on the
overall profit and/or volume of the business placed with the insurance company.
Fee income is recognized as services are rendered.
Goodwill and other intangible assets:
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 revised the accounting for purchased intangible
assets and, in general, requires that goodwill no longer be amortized, but
rather that it be tested for impairment on an annual basis at the reporting unit
level, which is either at the same level or one level below an operating
segment. Other acquired intangible assets with finite lives, such as purchased
customer accounts, are required to be amortized over their estimated lives.
Prior to January 1, 2002, substantially all of the Company's goodwill was
amortized using the straight line method over fifteen to twenty years. Other
intangible assets are amortized using the straight line method over estimated
39
useful lives of four to twenty years. The Company periodically assesses whether
events or changes in circumstances indicate that the carrying amounts of
goodwill and other intangible assets may be impaired.
Other assets:
Financing costs related to the Company's issuance of mandatory redeemable
capital debentures are being amortized over the life of the debentures and are
included in other assets.
Income taxes:
Deferred taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities in the financial statements and their tax basis. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted through the
provision for income taxes for the effects of changes in tax laws and rates on
the date of enactment.
Off-balance sheet financial instruments:
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit. Such financial instruments are recorded in the consolidated balance
sheets when they become receivable or payable.
Derivative financial instruments:
Effective January 1, 2001, the Company adopted SFAS No. 133, as amended. SFAS
No. 133 established accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment
(fair-value hedge), (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (cash-flow hedge) or (c) a hedge of the foreign currency
exposure of a net investment in foreign operation, an unrecognized firm
commitment, an available for sale security, or a foreign currency denominated
forecasted transaction. Pursuant to SFAS No. 133, the accounting for changes in
the fair value of a derivative depends on the intended use of the derivative and
the resulting designation. An entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
Derivative use for the Company consists primarily of an interest rate swap
entered into in 2002 to in effect convert fixed rate capital debentures into
variable rate. The Company has designated its interest rate swap as a fair value
hedge as defined in SFAS No. 133. Because the critical term of the interest rate
swap match the terms of the trust preferred securities, the swap qualifies for
"short-cut method" accounting treatment under SFAS No. 133.
Advertising:
Advertising costs are expensed as incurred.
Earnings per common share:
Basic earnings per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is calculated by adjusting the weighted average number of shares of
common stock outstanding to include the effect of stock options, if dilutive,
using the treasury stock method.
40
The Company's calculation of earnings per share for the years ended December
31, 2002, 2001, and 2000 is as follows:
Weighted
Income average shares Per share
(numerator) (denominator) amount
------------- ---------------- ----------
(In thousands except per share data)
2002
Basic earnings per share:
Net income available to common stockholders $4,920 3,131 $ 1.57
Effect of dilutive stock options -- 15 ( .01)
------ ----- -------
Diluted earnings per share:
Net income available to common stockholders
plus assumed conversion $4,920 3,146 $ 1.56
====== ===== =======
2001
Basic earnings per share:
Net income available to common stockholders $2,776 1,911 $ 1.45
Effect of dilutive stock options -- 2 --
------ ----- -------
Diluted earnings per share:
Net income available to common stockholders
plus assumed conversion $2,776 1,913 $ 1.45
====== ===== =======
2000
Basic earnings per share:
Net income available to common stockholders $2,126 1,852 $ 1.15
Effect of dilutive stock options -- 2 --
------ ----- -------
Diluted earnings per share:
Net income available to common stockholders
plus assumed conversion $2,126 1,854 $ 1.15
====== ===== =======
Comprehensive income:
Accounting principles generally require that recognized revenue, expense, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income and related tax effects were as
follows:
Years Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
(In thousands)
Unrealized holding gains on available for
sale securities $ 2,908 $ 1,152 $ 2,552
Less reclassification adjustment for gains realized
in income (56) (49) (29)
------- ------- -------
Net unrealized gains 2,852 1,103 2,523
Tax effect (970) (375) (858)
------- ------- -------
Net of tax amount $ 1,882 $ 728 $ 1,665
======= ======= =======
41
Segment reporting:
The Bank acts as an independent community financial services provider, and
offers traditional banking and related financial services to individual,
business and government customers. Through its branch and automated teller
machine networks, the Bank offers a full array of commercial and retail
financial services, including the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage loans; and the providing of
other financial services. Management does not separately allocate expenses,
including the cost of funding loan demand, between the commercial, retail and
mortgage banking operations of the Bank. As such, discrete financial information
is not available and segment reporting would not be meaningful. See Note 19 for
a discussion of insurance operations and investment advisory and brokerage
operations.
Recently issued accounting standards:
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations," which addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
Statement became effective for the Company on January 1, 2003 and does not have
a significant impact on the Company's financial condition or results of
operations.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", which
nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and other Costs to Exit an Activity (including certain
costs incurred in a restructuring)." This statement delays recognition of these
costs until liabilities are incurred and requires fair value measurement. It
does no impact the recognition of liabilities incurred in connection with a
business combination or the disposal of long-lived assets. The provisions of
this statement are effective for exit or disposal activities initiated after
December 31, 2002 and are not expected to have a significant impact on the
Company's financial condition or results of operations.
2. Acquisitions
On August 30, 2002, the Company completed its purchase of certain assets of
First Affiliated Investment Group ("First Affiliated"), an investment management
and brokerage firm located in State College, Pennsylvania. In addition to cash
payments of $175,000, the Company issued 9,460 shares of its common stock at a
price of $18.50, resulting in an aggregate purchase price of $350,000.
Continquent payments totaling up to $300,000, payable in stock at the then
current market values and/or cash are based upon achieving certain revenue
levels over the next three years. The results of First Affiliated's operations
have been included in the consolidated financial statements since September 1,
2002.
On October 1, 2002, the Company acquired 100% of the outstanding shares of
common stock of The Boothby Group, Inc. ("Boothby") headquartered in Blue Bell,
Montgomery County, Pennsylvania. Boothby is a full service insurance agency that
provides a broad range of insurance products and services. Boothby has become a
division of Essick & Barr. As a result of this acquisition, Essick & Barr
expanded its retail and commercial insurance presence into Montgomery County. In
addition to cash payments of $3.6 million, the Company has issued 132,448 shares
of its common stock at a price of $18.12 resulting in an aggregate purchase
price of $6.0 million. Contingent payments totaling up to $1.6 million, payable
in the Company's common stock at the then current market value, are based on
Boothby achieving certain revenue levels over the next five years. The results
of Boothby's operations have been included in the consolidated financial
statements since October 1, 2002.
The allocation of the purchase price to specific assets and liabilities is
based, in part upon an outside appraisal of Boothby's long-lived assets. The
allocation is still preliminary at this time. The Company
42
expects to finalize the outside appraisal of the long-lived assets and the
determination of the fair value of all other Boothby assets and liabilities in
2003. None of the Boothby related goodwill is expected to be deductible for
income tax purposes.
The components of the purchase price and preliminary allocation are as follows
(in thousands):
Purchase price:
Cash $ 3,600
Stock issued (132,448 shares at $18.12) 2,400
Acquisition costs 162
-------
Total consideration and acquisition costs $ 6,162
=======
Preliminary allocation of purchase price:
Current assets $ 857
Property and equipment 145
Other assets 116
Identifiable intangible assets:
Purchased customer accounts
(20 year useful life) 2,036
Employment contracts (7 year useful life) 867
Trade name (5 year useful life) 149
-----
3,052
Goodwill 3,830
Deferred tax liabilities (1,020)
Liabilities assumed (818)
-------
Total preliminary allocation of purchase
price $ 6,162
=======
The following represents the unaudited pro forma results of the on-going
operations for Leesport Financial Corp. and Boothby as though the acquisition of
Boothby had occurred at the beginning of each period shown. The unaudited pro
forma information, however, is not necessarily indicative of the results that
would have resulted had the acquisition occurred at the beginning of the periods
presents, nor is it necessarily indicative of future results.
Pro Forma Pro Forma
Year Ended Year Ended
December 31, December 31,
2002 2001
------------ ------------
(In thousands except per
share amounts)
Revenues $ 29,881 $ 23,577
Net Income 4,588 2,888
Earnings per share (basic) 1.42 1.41
Earnings per share (diluted) 1.41 1.41
During the first quarter of 2002, the Company completed the transitional
impairment test of goodwill. In all instances, the estimated fair values of the
reporting segments exceeded their book values; and therefore, no write-down of
goodwill was required as of January 1, 2002.
As a result of the adoption of SFAS No. 142, the Company ceased amortization of
goodwill associated with previous acquisitions effective January 1, 2002. As
prescribed by SFAS No. 142, the following is a reconciliation of reported net
income and earnings per share and net income and earnings per share adjusted to
exclude the impact of amortization of goodwill for the years ended December 31,
2001 and 2000:
43
December 31,
------------------------------------
2002 2001 2000
------ ------ ------
(In thousands except per share amounts)
Net income, as reported $4,920 $2,776 $2,126
Add back: goodwill amortization,
net of tax -- 258 264
------ ------ ------
Adjusted net income $4,920 $3,034 $2,390
====== ====== ======
Earnings per share:
As reported basic $ 1.57 $ 1.45 $ 1.15
As adjusted basic 1.57 1.59 1.29
As reported diluted 1.56 1.45 1.15
As adjusted diluted 1.56 1.59 1.29
In accordance with the provisions of SFAS No. 142, the Company continues to
amortize other intangible assets over the estimated remaining life of each
respective asset. Amortizable intangible assets were composed of the following:
As of December 31, 2002
--------------------------
Gross
Carrying Accumulated
Amount Amortization
---------- -------------
($ in thousands)
Amortizable intangible assets:
Purchase of client accounts $2,036 $24
Employment contracts 910 32
Assets under management 184 10
Tradename 149 6
------ ---
Total $3,279 $72
====== ===
Aggregate Amortization Expense:
For the year ended December 31, 2002 $ 72
Estimated Amortization Expense:
For the year ended December 31, 2003 $275
For the year ended December 31, 2004 275
For the year ended December 31, 2005 275
For the year ended December 31, 2006 273
For the year ended December 31, 2007 262
The changes in the carrying amount of goodwill for the year ended December 31,
2002, are as follows:
Insurance Investment
Services Services
Segment Segment Total
--------- ---------- ------
($ in thousands)
Balance as of January 1, 2002 $3,786 $523 $4,309
Goodwill acquired during the year 3,830 122 3,952
------ ---- ------
Balance as of December 31, 2002 $7,616 $645 $8,261
====== ==== ======
3. Restrictions on Cash and Due from Banks
The Federal Reserve Bank requires the Bank to maintain average reserve balances.
For the years 2002 and 2001, the average of these daily reserve balances
approximated $1.4 million and $1.6 million, respectively.
44
4. Securities Available For Sale
The amortized cost of securities and their approximate fair values at December
31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
December 31, 2002:
U.S. Government agency securities $ 5,641 $ 14 $ -- $ 5,655
Mortgage-backed securities 103,778 2,531 (99) 106,210
Obligations of states and political subdivisions 18,842 531 (59) 19,314
Corporate debt securities 19,042 430 (317) 19,155
Equity securities 7,018 212 -- 7,230
-------- ------ ------ --------
$154,321 $3,718 $ (475) $157,564
======== ====== ====== ========
December 31, 2001:
U.S. Treasury securities $ 14,046 $ 3 $ (3) $ 14,046
U.S. Government agency securities 5,264 394 -- 5,658
Mortgage-backed securities 90,079 514 (454) 90,139
Obligations of states and political subdivisions 17,053 125 (299) 16,879
Corporate debt securities 14,323 137 (187) 14,273
Equity securities 5,800 176 (14) 5,962
-------- ------ ------ --------
$146,565 $1,349 $ (957) $146,957
======== ====== ====== ========
Equity securities include restricted stock in the Federal Home Loan Bank.
The amortized cost and fair value of securities as of December 31, 2002, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because certain securities may be called or prepaid
without penalty.
Amortized Fair
Cost Value
--------- --------
(In thousands)
Due in one year or less $ 11,918 $ 12,108
Due after one year through five years 3,106 3,124
Due after five years through ten years 3,943 4,017
Due after ten years 24,558 24,875
Mortgage-backed securities 103,778 106,210
Equity securities 7,018 7,230
-------- --------
$154,321 $157,564
======== ========
Securities with a carrying amount of $50.1 million and $56.3 million at December
31, 2002 and 2001, respectively, were pledged to secure securities sold under
agreements to repurchase, public deposits and for other purposes as required or
permitted by law.
Net gains of $56,000, $49,000 and $29,000 were realized on sales of securities
available for sale in 2002, 2001 and 2000, respectively.
45
5. Loans
The components of loans were as follows:
December 31,
----------------------
2002 2001
-------- --------
(In thousands)
Residential real estate $106,153 $109,435
Commercial 91,030 111,772
Commercial, secured by real estate 98,360 54,799
Consumer, net of unearned income 13,081 11,376
Home equity lines of credit 26,560 14,541
-------- --------
Loans 335,184 301,923
Allowance for loan losses (4,182) (3,723)
-------- --------
Loans, net of allowance for loan losses $331,002 $298,200
======== ========
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
-------------------------------
2002 2001 2000
------- ------ ------
(In thousands)
Balance, beginning $ 3,723 $3,571 $2,954
Provision for loan losses 1,455 1,012 1,082
Loans charged off (1,067) (980) (555)
Recoveries 71 120 90
------- ------ ------
Balance, ending $ 4,182 $3,723 $3,571
======= ====== ======
The recorded investment in impaired loans not requiring an allowance for loan
losses was $1.2 million at December 31, 2002 and $1.0 million at December 31,
2001. The recorded investment in impaired loans requiring an allowance for loan
losses was $2.0 million and $2.3 million at December 31, 2002 and 2001,
respectively. At December 31, 2002 and 2001, the related allowance for loan
losses associated with those loans was $1.1 million and $630,000, respectively.
For the years ended December 31, 2002, 2001 and 2000, the average recorded
investment in these impaired loans was $3.20 million, $3.24 million and $1.50
million, respectively; and the interest income recognized on impaired loans was
$226,000 for 2002, $257,000 for 2001 and $61,000 for 2000.
Loans on which the accrual of interest has been discontinued amounted to
$1,229,000 and $751,000 at December 31, 2002 and 2001 respectively. Loan
balances past due 90 days or more and still accruing interest but which
management expects will eventually be paid in full, amounted to $64,000 and
$64,000 at December 31, 2002 and 2001.
6. Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of these loans as of December 31,
2002 and 2001 was $53.5 million and $31.6 million, respectively.
The balance of capitalized servicing rights included in other assets at December
31, 2002 and 2001, was $561,000 and $371,000, respectively. The fair value of
these rights was $561,000 and $371,000, respectively. The fair value of
servicing rights was determined using discount rates of 10.0 percent.
46
The following summarizes mortgage servicing rights capitalized and amortized:
Years Ended December 31,
------------------------
2002 2001 2000
------ ------ -----
(In thousands)
Mortgage servicing rights capitalized $325 $187 $83
==== ==== ===
Mortgage servicing rights amortized $135 $ 44 $22
==== ==== ===
7. Premises and Equipment
Components of premises and equipment were as follows:
December 31,
------------------
2002 2001
------- ------
(In thousands)
Land and land improvements $ 1,447 $1,443
Buildings 4,893 5,035
Leasehold improvements 3,621 2,019
Furniture and equipment 4,262 3,410
------- ------
14,223 11,907
Less accumulated depreciation 2,925 2,284
------- ------
Premises and equipment, net $11,298 $9,623
======= ======
Certain facilities and equipment are leased under various operating leases.
Rental expense for these leases was $901,000, $624,000 and $302,000 for the
years ended December 31, 2002, 2001 and 2000, respectively. Future minimum
rental commitments under noncancellable leases as of December 31, 2002 were as
follows (in thousands):
2003 $ 693
2004 694
2005 699
2006 683
2007 648
Thereafter 5,749
------
$9,166
======
8. Deposits
The components of deposits were as follows:
December 31,
---------------------
2002 2001
-------- --------
(In thousands)
Demand, non-interest bearing $ 60,015 $ 43,476
Demand, interest bearing 118,392 96,672
Savings 50,367 41,338
Time, $100,000 and over 23,837 22,906
Time, other 127,221 127,185
-------- --------
Total deposits $379,832 $331,577
======== ========
47
At December 31, 2002, the scheduled maturities of time deposits were as follows
(in thousands):
2003 $ 65,602
2004 54,574
2005 7,357
2006 20,388
2007 2,802
Thereafter 335
--------
$151,058
========
9. Borrowings
At December 31, 2002, the Bank had purchased federal funds from the Federal Home
Loan Bank and other correspondent financial institutions totaling $9.2 million.
At December 31, 2001, the Bank had purchased federal funds from the Federal Home
Loan Bank in the amount of $32.5 million. The December 31, 2002 balances
outstanding matured as of January 31, 2003, at interest rates ranging from 1.44%
to 1.66%. The December 31, 2001 balances outstanding matured January 2, 2002, at
interest rates ranging from 1.58% to 2.31%.
In addition, the Bank enters into agreements with customers as part of cash
management services where the Bank sells securities to the customer overnight
with the agreement to repurchase them at par. Securities sold under agreements
to repurchase generally mature one day from the transaction date. The securities
underlying the agreements are under the Bank's control. The outstanding balances
and related information of securities sold under agreements to repurchase are
summarized as follows:
Years Ended December 31,
-------------------------
2002 2001
---- ----
(Dollars in thousands)
Average balance during the year $18,087 $13,459
Average interest rate during the year 1.73% 3.59%
Maximum month-end balance during the year $28,858 $22,313
Long-term debt consisted of the following:
December 31,
--------------------
2002 2001
-------- ---------
(In thousands)
Notes with the Federal Home Loan Bank (FHLB):
30 Day Term Note Due January 2002,
Fixed at 1.93% $ -- $3,000
1 Year Term Note Due August 2002,
Variable at 2.05% -- 3,000
2 Year Term Note Due November 2002,
Fixed at 6.57% -- 4,000
1 Year Term Note Due December 2002,
Fixed at 2.41% -- 2,000
1 Year Term Note Due January 2003,
Fixed at 2.20% 2,500 --
18 Month Term Note Due February 2003,
Fixed at 4.13% 3,500 3,500
2 Year Term Note Due December 2003,
Fixed at 3.39% 1,300 1,300
48
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
2 Year Term Note Due August 2003,
Fixed at 4.33% 3,500 3,500
3 Year Term Note Due November 2003,
Fixed at 6.59% 4,000 4,000
3 Year Term Note Due January 2004,
Fixed at 5.55% 10,000 10,000
2 Year Term Note Due June 2004,
Fixed at 3.34% 1,500 --
2 Year Term Note Due July 2004,
Fixed at 2.67% 2,000 --
4 Year Term Note Due November 2004,
Fixed at 6.63% 4,000 4,000
5 Year/2 Year Term Note Due December 2004,
Fixed at 6.14%(1) 5,000 5,000
3 Year Term Note Due December 2004,
Fixed at 4.23% 1,300 1,300
3 Year Term Note Due January 2005,
Fixed at 3.95% 2,500 --
3 Year Term Note Due June 2005,
Fixed at 3.91% 1,500 --
4 Year Term Note Due December 2005,
Fixed at 4.80% 1,300 1,300
4 Year Term Note Due July 2006,
Fixed at 3.69% 2,000 --
5 Year Term Note Due December 2006,
Fixed at 5.14% 1,300 1,300
4 Year Term Note Due December 2006,
Fixed at 3.13% 4,000 --
5 Year Term Note Due January 2007,
Fixed at 4.83% 2,500 --
5 Year Term Note Due June 2007,
Fixed at 4.62% 1,500 --
5 Year Term Note Due July 2007,
Fixed at 4.00% 2,000 --
10 Year/5 Year Term Note Due September 2008,
Fixed at 4.92%(1) 5,000 5,000
10 Year/5 Year Term Note Due February 2009,
Fixed at 4.97%(1) 5,000 5,000
10 Year/5 Year Term Note Due December 2009,
Fixed at 6.30%(1) 5,000 5,000
------- -------
$72,200 $62,200
======= =======
- ----------
(1) These notes contain a convertible option that allows the FHLB, at quarterly
intervals, to change the note to an adjustable-rate advance at three-month
LIBOR (1.38% at December 31, 2002) plus 14 to 16 basis points. If the note
is converted, the option allows the Bank to put the funds back to the FHLB
at par. The year/year refers to the maturity of the note (in years) and the
term until the first convertible date.
49
Contractual maturities of long-term debt at December 31, 2002 were as follows
(in thousands):
2003 $14,800
2004 23,800
2005 5,300
2006 7,300
2007 6,000
Thereafter 15,000
-------
$72,200
=======
The Bank has a maximum borrowing capacity with the Federal Home Loan Bank of
approximately $224.7 million, of which $76.1 million was outstanding at December
31, 2002. Advances from the Federal Home Loan Bank are secured by qualifying
assets of the Bank.
10. Mandatory Redeemable Capital Debentures
First Leesport Capital Trust I, a Delaware statutory business trust, was formed
on March 9, 2000 and is a wholly-owned subsidiary of the Company. The Trust
issued $5 million of 10 7/8% fixed rate capital trust pass-through securities to
investors. First Leesport Capital Trust I purchased $5 million of fixed rate
junior subordinated deferrable interest debentures from Leesport Financial Corp.
The debentures are the sole asset of the Trust. The terms of the junior
subordinated debentures are the same as the terms of the capital securities. The
obligations under the debentures constitute a full and unconditional guarantee
by Leesport Financial Corp. of the obligations of the Trust under the capital
securities. The capital securities are redeemable by Leesport Financial Corp. on
or after March 9, 2010, at stated premiums, or earlier if the deduction of
related interest for federal income taxes is prohibited, classification as Tier
1 Capital is no longer allowed, or certain other contingencies arise. The
capital securities must be redeemed upon final maturity of the subordinated
debentures on March 9, 2030. In October 2002, the Company entered into an
interest rate swap agreement that effectively converts the securities to a
floating interest rate of six month LIBOR plus 5.25% (7.07% at December 31,
2002).
On September 26, 2002, the Company established Leesport Capital Trust II, a
Delaware statutory business trust, in which the Company owns all of the common
equity. Leesport Capital Trust II issued $10 million of mandatory redeemable
capital securities carrying a floating interest rate of three month LIBOR plus
3.45% (5.25% at December 31, 2002). These debentures are the sole assets of the
Trusts. The terms of the junior subordinated debentures are the same as the
terms of the capital securities. The obligations under the debentures constitute
a full and unconditional guarantee by Leesport Financial Corp. of the
obligations of the Trust under the capital securities. These securities must be
redeemed in September 2032, but may be redeemed on or after November 7, 2007 or
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.
11. Employee Benefits
In 2000, the Company established an Employee Stock Ownership Plan (ESOP) to
provide its employees with future retirement plan assistance. The ESOP invests
primarily in the Company's common stock. Contributions to the Plan are at the
discretion of the Board of Directors. For the years ended December 31, 2002,
2001 and 2000, $178,000, $161,000 and $167,000, respectively, was accrued to
provide for contribution of shares to the Plan. During 2002 and 2001
respectively, 10,222 and 4,704 shares were purchased on behalf of the ESOP. No
shares were purchased duirng 2000.
Leesport Bank terminated its noncontributory defined benefit pension plan during
2000. This plan had covered all Leesport Bank employees who met the eligibility
requirements. The Plan assets in excess of the projected benefit obligation were
allocated to the Plan's eligible participants, and a gain on the termination of
$21,000 was recognized.
50
The Company has a 401(k) Salary Deferral Plan. This plan covers all eligible
employees who elect to contribute to the Plan. An employee who has attained 18
years of age and has been employed for at least 30 calendar days is eligible to
participate in the Plan effective with the next quarterly enrollment period.
Employees become eligible for the Company contribution to the Salary Deferral
Plan at each future enrollment period upon completion of one year of service.
The Company contributes 100% of the first three percent of eligible employees'
annual salary deferral and 50% of the next four percent of salary deferred.
Contributions from the Company vest to the employee over a five year schedule.
The annual expense included in salaries and employee benefits representing the
expense of the Company's contribution was $265,000, $217,000, and $257,000 for
the years ended December 31, 2002, 2001, and 2000, respectively.
The Company has entered into deferred compensation agreements with certain
directors and a salary continuation plan for certain key employees. At December
31, 2002 and 2001, the present value of the future liability for these plans was
$803,000 and $657,000, respectively. To fund the benefits under these
agreements, the Company is the owner and beneficiary of life insurance policies
on the lives of the directors and employees. These policies had an aggregate
cash surrender value of $6.6 million and $6.3 million at December 31, 2002 and
2001, respectively, which amounts are included in other assets. For the years
ended December 31, 2002, 2001 and 2000, $170,000, $98,000 and $226,000,
respectively, was charged to expense in connection with these agreements.
In May 2000, the Board of Directors of Leesport Financial Corporation adopted a
non-compensatory Employee Stock Purchase Plan (ESPP). Under the ESPP, employees
of the Company who elect to participate are eligible to purchase common stock at
prices up to a 15 percent discount from the market value of the stock. The ESPP
does not allow the discount in the event that the purchase price would fall
below the Company's most recently reported book value per share. The ESPP allows
an employee to make contributions through payroll deduction to purchase common
shares up to 15 percent of annual compensation. The total number of shares of
common stock that may be issued pursuant to the ESPP is 250,000. As of December
31, 2002, a total of 6,012 shares have been issued under the ESPP.
12. Stock Option Plans and Shareholders' Equity
The Company has an Employee Stock Incentive Plan that covers all officers and
key employees of the Company and its subsidiaries and is administered by a
committee of the Board of Directors. The Plan covers 210,000 shares of common
stock. The option price for options issued under the Plan must be at least equal
to 100% of the fair market value of the common stock on the date of grant and
shall not be less than the stock's par value. Options granted under the Plan are
exercisable over a period not less than six months after the date of grant, but
no later than ten years after the date of grant in accordance with the vesting
period as determined by the Plan committee. Options expire on the earlier of ten
years after the date of grant, three months from the 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 that covers 52,500
shares of common stock. The Plan covers all directors of the Company who are not
employees, and former directors who continue to be employed by the Company. The
option price for options issued under the Plan will be equal to the fair market
value of the Company's common stock on the date of grant. Options are
exercisable from the date of grant and expire on the earlier of ten years after
the date of grant, three months from the date the participant ceases to be a
director of the Company or the cessation of the participant's employment, or
twelve months from the date of the participant's death or disability.
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.
51
Years ended December 31,
--------------------------
2002 2001 2000
------ ------ ------
(In thousands)
Net income, as reported $4,920 $2,776 $2,126
Deduct total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (167) (154) (147)
------ ------ ------
Pro forma net income $4,753 $2,622 $1,979
====== ====== ======
Basic earnings per share:
As reported $ 1.57 $ 1.45 $ 1.15
Pro forma $ 1.52 $ 1.37 $ 1.07
Diluted earnings per share:
As reported $ 1.56 $ 1.45 $ 1.15
Pro forma $ 1.51 $ 1.37 $ 1.07
The fair value of options granted during 2002, 2001 and 2000 was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates of 3.34% to 4.97%;
volatility factors of the expected market price of the Company's common stock of
21.14% to 21.51%; expected life of the options of 7.8 years and a cash dividend
yield of 3.13% to 4.0%.
Stock option transactions under the Plans were as follows:
Years Ended December 31,
-------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- --------- ------- --------- ------- ---------
Outstanding at the beginning
of the year 181,554 $ 17.85 132,341 $ 18.86 94,653 $ 20.67
Granted 60,650 18.65 54,050 15.07 40,050 14.58
Exercised (1,158) 15.69 -- -- -- --
Forfeited (12,203) 17.40 (4,837) 14.53 (2,362) 18.39
------- -------- ------- -------- ------ --------
Outstanding at the end of
the year 228,843 $ 18.10 181,554 $ 17.85 132,341 $ 18.86
======= ======== ======= ======== ======= ========
Exercisable at December 31 114,631 $ 18.51 79,656 $ 19.12 46,397 $ 19.94
======= ======== ======= ======== ======= ========
Weighted-average fair value
of options granted during
the year $ 3.26 $ 2.98 $ 4.68
======== ======== ========
Options available for grant at December 31, 2002 and 2001 were 32,499 and 80,946
respectively.
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted Weighted
Options Average Average Options Average
Outstanding Remaining Exercise Outstanding Exercise
Range of Exercise Price 12/31/02 Term Price 12/31/02 Price
- ----------------------- ----------- --------- -------- ----------- --------
$13.75 to $15.65 78,190 8.6 $14.75 39,980 $14.75
16.38 to 19.29 59,895 7.8 17.27 32,945 17.27
19.43 to 22.14 43,350 9.5 19.57 3,780 19.57
22.74 to 25.95 47,408 5.9 23.32 37,926 23.32
The weighted-average remaining contractual life of the above options is
approximately 7.9 years.
52
In December 2001, the Company completed its shareholder rights offering. Through
the rights offering, the Company issued an additional 1.2 million shares of
common stock at the offering price of $13.00 per share. The offering resulted in
net proceeds of $14.3 million, after offering costs of $1.3 million.
13. Income Taxes
The components of income tax expense were as follows:
Years Ended December 31,
------------------------------
2002 2001 2000
------ ------ ------
(In thousands)
Current $1,870 $1,010 $ 890
Deferred 115 109 (327)
------ ------ ------
$1,985 $1,119 $ 563
====== ====== ======
Reconciliation of the statutory federal income tax expense computed at 34% to
the income tax expense included in the consolidated statements of income is as
follows:
Years Ended December 31,
------------------------------
2002 2001 2000
------ ------ ------
(In thousands)
Federal income tax at statutory rate $2,348 $1,324 $ 914
Tax exempt interest (314) (343) (378)
Interest disallowance 33 50 59
Bank owned life insurance (128) (112) (107)
Non-deductible goodwill amortization -- 83 85
Other 46 117 (10)
------ ------ ------
$1,985 $1,119 $ 563
====== ====== ======
The federal income tax provision includes $19,000, $17,000 and $10,000 in 2002,
2001 and 2000, respectively, of federal income taxes related to gains on the
sale of securities.
Net deferred tax assets (liabilities) consisted of the following components:
December 31,
------------------
2002 2001
------- -------
(In thousands)
Deferred tax assets:
Allowance for loan losses $ 1,249 $ 1,065
Deferred compensation 314 258
------- -------
Total deferred tax assets 1,563 1,323
------- -------
Deferred tax liabilities:
Premises and equipment (302) (185)
Net unrealized gains on securities available for sale (1,103) (133)
Goodwill (1,020) --
Mortgage servicing rights (191) (126)
Other (50) (45)
------- -------
Total deferred tax liabilities (2,666) (489)
------- -------
Net deferred tax assets (liabilities) $(1,103) $ 834
======= =======
53
14. Transactions With Executive Officers And Directors
The Bank has had banking transactions in the ordinary course of business with
its executive officers and directors and their related interests on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. At December 31, 2002 and 2001, these
persons were indebted to the Bank for loans totaling $7.89 million and $7.43
million, respectively. During 2002, $2.2 million of new loans were made and
repayments totaled $1.74 million.
15. Regulatory Matters And Capital Adequacy
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on their financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
its assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and tier I capital (as defined in the regulations) to risk-weighted assets, and
of tier I capital to average assets. Management believes, as of December 31,
2002, that the Company and the Bank meet all minimum capital adequacy
requirements to which they are subject.
As of December 31, 2002, the most recent notification from the Bank's primary
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed its category.
The Company's and the Bank's actual capital amounts and ratios are presented
below:
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
(Dollar amounts in thousands)
As of December 31, 2002:
Total capital (to risk-weighted assets):
Leesport Financial Corp. $58,511 14.60% $32,062 8.00% $40,078 10.00%
Leesport Bank 52,089 13.33 31,270 8.00 39,088 10.00
Tier I capital (to risk-weighted assets):
Leesport Financial Corp. 54,234 13.53 16,031 4.00 24,047 6.00
Leesport Bank 47,886 12.25 15,635 4.00 23,453 6.00
Tier I capital (to average assets):
Leesport Financial Corp. 54,234 9.94 21,819 4.00 27,274 5.00
Leesport Bank 47,886 8.82 21,721 4.00 27,151 5.00
As of December 31, 2001:
Total capital (to risk-weighted assets):
Leesport Financial Corp. $49,338 14.78% $26,705 8.00% $33,381 10.00%
Leesport Bank 33,520 10.13 26,474 8.00 33,092 10.00
Tier I capital (to risk-weighted assets):
Leesport Financial Corp. 45,616 13.67 13,352 4.00 20,029 6.00
Leesport Bank 29,798 9.00 13,237 4.00 19,856 6.00
Tier I capital (to average assets):
Leesport Financial Corp. 45,616 10.03 18,191 4.00 22,739 5.00
Leesport Bank 29,798 6.62 17,994 4.00 22,493 5.00
54
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. At December 31,
2002, the Bank had approximately $4.2 million available for payment of dividends
to the Company. Loans or advances are limited to 10 percent of the Bank's
capital stock and surplus on a secured basis. At December 31, 2002, the Bank had
secured loans outstanding to the Company totaling $1.01 million.
As of December 31, 2002, the Company had declared a $.16 per share cash dividend
for shareholders of record on January 2, 2003, payable January 15, 2003. As of
December 31, 2001, the Company had declared a $.15 per share cash dividend for
shareholders of record on January 2, 2002, payable January 15, 2002.
16. Financial Instruments With Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Bank's financial instrument
commitments is as follows:
December 31,
--------------------
2002 2001
------- -------
(In thousands)
Commitments to grant loans $11,114 $12,820
Unfunded commitments under lines of credit 98,289 49,696
Outstanding letters of credit 4,923 2,070
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal or commercial real
estate, accounts receivable, inventory and equipment.
Outstanding letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
In May 2002, the Company's subsidiary, Leesport Bank, jointly formed Leesport
Mortgage LLC with a real estate company. Leesport Mortgage LLC was formed to
provide mortgage brokerage services, including, without limitation, any activity
in which a mortgage broker may engage. It is operated as a permissible
"affiliated business arrangement" within the meaning of the Real Estate
Settlement Procedures Act of 1974. Leesport Bank's initial investment was
$15,000.
During October 2002, the Company enter into its first 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. This swap
has a notional amount equal to the outstanding principal amount of the related
trust preferred securities, together with the same payment dates,
55
maturity date and call provisions as the related trust preferred securities.
Under the swap, the Company pays interest at a variable rate equal to six month
LIBOR plus 5.25%, adjusted semiannually, 7.07% at December 31, 2002, and the
Company receives a fixed rate equal to the interest that the Company is
obligated to pay on the related trust preferred securities (107/8%). The Company
has designated its interest rate swap as a fair value hedge as defined in SFAS
No. 133. Because the critical terms of the interest rate swap match the terms of
the trust preferred securities, the swap qualifies for "short-cut method"
accounting treatment under SFAS No. 133.
The estimated fair value of the interest rate swap agreement represents the
amount the Company would have expected to receive (pay) to terminate such
contract. At December 31, 2002, the estimated fair value of the interest rate
swap agreement was $48,000 and was offset by unrealized losses resulting from
changes in the fair value of the related trust preferred security. The swap
agreement exposes the Company to market and credit risk if the counterparty
fails to perform. Credit risk is equal to the extent of a fair value gain on the
swap. The Company manages this risk by entering into the transaction with high
quality counterparties.
During the year ended December 31, 2002, the Company accrued amounts receivable
under the agreement of $40,000, which was recorded as a reduction of the
interest rates expense on the trust preferred securities.
17. Concentrations of Credit Risk
The Bank grants commercial, residential and consumer loans to customers
primarily located in Berks, Schuylkill and Luzerne counties in Pennsylvania. The
concentrations of credit by type of loan are set forth in Note 5. Although the
Bank has a diversified loan portfolio, its debtors' ability to honor these
contracts is influenced by the region's economy.
18. Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends and have
not been re-evaluated or updated for purposes of these consolidated financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets and liabilities. Due to a wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of
the Company's financial instruments at December 31, 2002 and 2001:
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for cash and short-term
instruments approximate those assets' fair values.
Securities available for sale:
Fair values for securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
56
Loans and loans held for sale:
For variable-rate and adjustable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying values. For
fixed-rate loans, fair values are estimated using quoted market prices, when
available, or discounted cash flows, at interest rates currently offered for
loans with similar terms to borrowers of similar credit quality.
Mortgage servicing rights:
The fair value of mortgage servicing rights is based on observable market prices
when available or the present value of expected future cash flows when not
available.
Interest rate swap:
The fair value of the interest rate swap agreement is based on the net present
value of expected future cash flows and is heavily dependent on interest rate
assumptions over the remaining term of the agreement.
Deposit liabilities:
The fair values disclosed for demand deposits (e.g., interest and non-interest
checking, savings and certain types of money market accounts) are considered to
be equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for fixed-rate time deposits are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on time deposits to a schedule of aggregated expected monthly maturities
on time deposits.
Securities sold under agreements to repurchase and federal funds purchased:
The carrying amounts of these short-term borrowings approximate their fair
values.
Long-term debt:
The fair value of long-term debt is calculated based on the discounted value of
contractual cash flows, using rates currently available for borrowings with
similar maturities.
Mandatory redeemable capital debentures:
The fair value of these debentures is calculated based on the discounted value
of contractual cash flows, using rates currently available.
Accrued interest receivable and payable:
The carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
Off-balance sheet instruments:
Fair values for the off-balance sheet instruments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing.
57
The estimated fair values of the Company's financial instruments were as
follows:
December 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
Financial Assets:
Cash and cash equivalents $ 16,490 $ 16,490 $ 19,716 $ 19,716
Mortgage loans held for sale 20,977 21,601 12,209 12,318
Securities 157,564 157,564 146,957 146,957
Loans, net 331,002 350,212 298,200 303,008
Mortgage servicing rights 561 561 371 371
Accrued interest receivable 2,459 2,459 2,728 2,728
Interest rate swap 48 48 -- --
Financial Liabilities:
Deposits 379,832 385,322 331,577 335,129
Securities sold under agreements to
repurchase 24,933 24,933 21,074 21,074
Federal funds purchased 9,186 9,186 32,500 32,500
Long-term debt 72,200 76,726 62,200 64,428
Mandatory redeemable capital debentures 15,048 15,048 5,000 4,905
Accrued interest payable 1,944 1,944 2,254 2,254
Off-Balance Sheet Financial Instruments:
Commitments to extend credit -- -- -- --
Standby letters of credit -- -- -- --
19. Segment and Related Information
The Company's insurance operations and brokerage and investment operations are
managed separately from the traditional banking and related financial services
that the Company also offers. These operations provide commercial insurance,
individual and group benefit plans, personal insurance coverage, securities
brokerage services, and investment advisory services.
Segment information for 2002, 2001 and 2000 is as follows (in thousands):
Banking and Brokerage and
Financial Investment
2002 Services Services Insurance Total
- --------------------------------------------------------------------------------------
Revenues from external customers $ 20,932 $ 744 $ 5,722 $ 27,398
Income (loss) before income taxes 5,243 (159) 1,821 6,905
Total assets 546,298 703 15,371 562,372
Purchases of premises and equipment 2,431 28 145 2,604
2001
- ----
Revenues from external customers $ 15,767 $ 726 $ 3,914 $ 20,407
Income (loss) before income taxes 2,992 (75) 978 3,895
Total assets 500,394 157 2,958 503,509
Purchases of premises and equipment 2,601 28 22 2,651
2000
- ----
Revenues from external customers $ 12,963 $ 956 $ 3,852 $ 17,771
Income before income taxes 1,465 228 996 2,689
Total assets 391,102 114 2,610 393,826
Purchases of premises and equipment 1,667 23 82 1,772
Income (loss) before income taxes, as presented above, does not reflect referral
and management fees of approximately $797,000 and $165,000 that the insurance
operation and the brokerage and investment operation, respectively, paid to the
Bank during 2002. For 2001, referral and
58
management fees of approximately $816,000 and $216,000 were paid by the
insurance operation and brokerage and investment operation, respectively.
Referral and management fees of approximately $614,000 and $179,000 were paid by
the insurance operation and the brokerage and investment operation,
respectively, to the Bank in 2000.
20. Leesport Financial Corp. (Parent Company Only) Financial Information
December 31, 2002 2001
- --------------------------------------------------------------------------------
(In thousands)
ASSETS
Cash $ 120 $ 195
Investment in bank subsidiary 50,982 34,403
Investment in non-bank subsidiaries 11,523 228
Securities available for sale 6,840 16,386
Premises and equipment and other assets 283 737
------- -------
Total assets $69,748 $51,949
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowed funds $ 1,010 $ 1,010
Other liabilities 838 718
Corporate obligation for mandatory redeemable
debentures 15,000 5,000
Shareholders' Equity 52,900 45,221
------- -------
Total liabilities and shareholders' equity $69,748 $51,949
======= =======
STATEMENTS OF INCOME
Years Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
(in thousands)
Dividends from bank subsidiary $ 2,000 $ 1,845 $ 2,165
Other income 412 325 233
Interest expense on corporate obligation for
mandatory redeemable capital debentures (694) (551) (424)
Other expense (859) (743) (645)
------- ------- -------
Income before equity in undistributed net income
of subsidiaries and income taxes 859 876 1,329
Income tax benefit (370) (334) (283)
Net equity in undistributed net income of
subsidiaries 3,691 1,566 514
------- ------- -------
Net income $ 4,920 $ 2,776 $ 2,126
======= ======= =======
59
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------
(in thousands)
Cash flows provided by operating activities
Net income $ 4,920 $ 2,776 $ 2,126
Depreciation and net amortization 4 7 4
(Equity in) excess of undistributed earnings of
subsidiaries (3,691) (1,566) (514)
Gain on sale of available for sale securities (148) (39) --
Increase (decrease) in other liabilities 121 450 (397)
(Increase) decrease in other assets 143 (162) (509)
Other, net 466 -- --
-------- -------- --------
Net cash provided by operating activities 1,815 1,466 710
-------- -------- --------
Cash flows used in investing activities
Purchase of investment securities (5,824) (14,999) (1,141)
Proceeds from sales of available for sale
securities 15,368 1,789 --
Proceeds from the sale of premises 24 -- --
Purchase of fixed assets (42) -- --
Investment in bank subsidiary (11,375) -- (5,190)
Investment in non-bank subsidiaries (8,343) -- (229)
-------- -------- --------
Net cash used in investing activities (10,192) (13,210) (6,560)
-------- -------- --------
Cash flows provided by financing activities
Proceeds from borrowings -- -- 1,500
Repayment of long-term debt -- (1,500) --
Issuance of mandatory redeemable capital
debentures 10,000 -- 5,000
Net proceeds from issuance of common stock 299 14,609 --
Reissuance of treasury stock -- 69 64
Cash dividends paid (1,997) (1,307) (1,099)
-------- -------- --------
Net cash provided by financing activities 8,302 11,871 5,465
-------- -------- --------
Increase (decrease) in cash (75) 127 (385)
Cash:
Beginning 195 68 453
-------- -------- --------
Ending $ 120 $ 195 $ 68
======== ======== ========
60
21. Quarterly Data (Unaudited)
Fourth Third Second First
Year Ended December 31, 2002 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Interest income $7,690 $7,815 $7,770 $7,355
Interest expense 3,457 3,560 3,507 3,589
------ ------ ------ ------
Net interest income 4,233 4,255 4,263 3,766
Provision for loan losses 405 390 345 315
------ ------ ------ ------
Net interest income after provision for loan
losses 3,828 3,865 3,918 3,451
Other income 4,287 2,338 2,108 2,148
Other expense 5,791 4,666 4,472 4,109
------ ------ ------ ------
Income before income taxes 2,324 1,537 1,554 1,490
Income taxes 720 429 431 405
------ ------ ------ ------
Net income $1,604 $1,108 $1,123 $1,085
====== ====== ====== ======
Earnings per common share:
Basic earnings per share $ .50 $ .36 $ .36 $ .35
====== ====== ====== ======
Diluted earnings per share $ .49 $ .36 $ .36 $ .35
====== ====== ====== ======
Year Ended December 31, 2001
- --------------------------------------------------------------------------------
Interest income $7,546 $7,388 $7,430 $7,262
Interest expense 3,876 4,251 4,439 4,487
------ ------ ------ ------
Net interest income 3,670 3,137 2,991 2,775
Provision for loan losses 272 225 225 290
------ ------ ------ ------
Net interest income after provision for loan
losses 3,398 2,912 2,766 2,485
Other income 2,122 2,117 1,945 1,650
Other expense 4,355 3,789 3,734 3,622
------ ------ ------ ------
Income before income taxes 1,165 1,240 977 513
Income taxes 314 438 265 102
------ ------ ------ ------
Net income $ 851 $ 802 $ 712 $ 411
====== ====== ====== ======
Earnings per common share, basic and
diluted $ .42 $ .43 $ .38 $ .22
====== ====== ====== ======
61
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to directors and executive officers of the Registrant
is incorporated herein by reference to the information disclosed under the
caption "MATTER NO. 1--ELECTION OF DIRECTORS--Directors" included in the
Registrant's Proxy Statement for the Annual meeting of Shareholders to be held
on April 22, 2003.
Item 11. Executive Compensation
The information relating to executive compensation and directors' compensation
is incorporated herein by reference to the information disclosed under the
captions "MATTER NO. 1--ELECTION OF DIRECTORS--Director Compensation; Executive
Compensation; Executive Officer Agreements; Deferred Compensation and Salary
Continuation Agreements; and Compensation Committee Interlocks and Insider
Participation" included in the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on April 22, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the information disclosed
under the caption "MATTER NO. 1--ELECTION OF DIRECTORS--Directors--Director and
Officer Stock Ownership" included in the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 22, 2003.
The following table provides certain information regarding securities issued or
issuable under the Company's equity compensation plans as of December 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
- ----------------------------------------------------------------------------------------------------
Number of
securities
remaining
Number of available for
securities to be future issuance
issued upon Weighted average under equity
exercise of exercise price of plans (excluding
outstanding outstanding securities
options, warrants options, warrants reflected in
Plan Category and rights and rights first column)
- ----------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders 228,843 $18.10 32,499
- ----------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders -0- N/A -0-
- ----------------------------------------------------------------------------------------------------
Total 228,843 $18.10 32,499
- ----------------------------------------------------------------------------------------------------
62
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions is
incorporated herein by reference to the information disclosed under the caption
"MATTER NO. 1--ELECTION OF DIRECTORS--Transactions with Management and Others"
included in the Registrant's proxy Statement for the Annual Meeting of
Shareholders to be held on April 22, 2003.
Item 14. Controls and Procedures
Within ninety days prior to filling this report, the Company, under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and the Chief Financial Officer, 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. There were no significant changes to the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Securities and Exchange Commission Rule 13a-14 defines "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,
control 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.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements.
Consolidated financial statements are included under Item 8 of Part II of this
Form 10-K.
(b) 2. Financial Statement Schedules.
Financial statement schedules are omitted because the required information is
either not applicable, not required or is shown in the respective financial
statements or in the notes thereto.
3. Exhibits
Exhibit No. Description
- ----------- ------------------------------------------------------------------
3.1 Articles of Incorporation of Leesport Financial Corporation
(incorporated by reference to Exhibit 3.1 of the Registrant's
Amended Report on Form 10-K for the year ended December 31,
2000).
3.2 Bylaws of Leesport Financial Corporation (incorporated by
reference to Exhibit 3.2 of the Registrant's Annual Report on
Form 10-K for the Year ended December 31, 2000).
4.1 Form of Rights Agreement, dated as of September 19, 2001, between
Leesport Financial Corporation and American Stock Transfer &
Trust Company as Rights Agent (incorporated by reference to
Exhibit 4.1 of Leesport Financial Corporation's Registration
Statement on Form 8-A, dated October 1, 2001).
10.1 Contract between the First National Bank of Leesport and Bisys
(Incorporated herein by reference to Exhibit 10.1 to Registrant's
annual report on Form 10-KSB for the year ended December 31,
1998).
63
Exhibit No. Description
- ----------- ------------------------------------------------------------------
10.2 Severance Agreement between the First National Bank of Leesport
and John T. Connelly (Incorporated herein by reference to Exhibit
10.2 to Registrant's annual report on Form 10-KSB for the year
ended December 31, 1998).*
10.3 Employment Agreement between the First National Bank of Leesport
and Raymond H. Melcher, Jr., as amended.*
10.4 Supplemental Executive Retirement Plan (Incorporated herein by
reference to Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996).*
10.5 Deferred Compensation Plan for Directors (Incorporated herein by
reference to Exhibit 10.2 to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996).*
10.6 Non-Employee Director Compensation Plan (Incorporated by
reference to Exhibit A to Registrant's Definitive Proxy Statement
on Form 14A for the year ended December 31, 1999).*
10.7 1998 Employee Stock Incentive Plan (Incorporated by reference to
Exhibit 10.9 to Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1998).*
10.8 1998 Independent Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.10 to Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1998).*
10.9 Employment Agreement, dated September 17, 1998, among Leesport
Financial Corp., Inc., Essick & Barr, Inc. and Charles J.
Hopkins, as amended.*
10.10 Employment Agreement, dated October 1, 1999, among Leesport
Financial Corp., Inc., Leesport Investment Group, Inc., Leesport
Wealth Management, Inc. and Keith W. Johnson, as amended.*
11 No statement setting forth the computation of per share earnings
is included because such computation is reflected clearly in the
financial statements set forth in response to Item 8 of this
Report.
21 Subsidiaries of Leesport Financial Corporation
23.1 Consent of Beard Miller Company LLP.
99.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer under Section 906 of
Sarbanes-Oxley Act of 2002.
- ----------
* Denotes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the Company
during the year ended December 31, 2002:
Form 8-K (Item 5) filed October 2, 2002/Announcement of the
Acquisition of The Boothby Group, a full service insurance
agency headquartered in Blue Bell, Montgomery County, PA.
64
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
March 21, 2003
LEESPORT FINANCIAL CORP.
By: /s/Raymond H. Melcher, Jr.
---------------------------
Raymond H. Melcher, Jr.,
Chairman, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/Raymond H. Melcher, Jr. Chairman, President and Chief March 21, 2003
- -------------------------- Executive Officer, Director
Raymond H. Melcher, Jr.
/s/Stephen A. Murray Chief Financial Officer March 21, 2003
- --------------------------
Stephen A. Murray
/s/James H. Burton Director March 21, 2003
- --------------------------
James H. Burton
/s/John T. Connelly Director March 21, 2003
- --------------------------
John T. Connelly
/s/Charles J. Hopkins Director March 21, 2003
- --------------------------
Charles J. Hopkins
/s/Keith W. Johnson Director March 21, 2003
- --------------------------
Keith W. Johnson
/s/William J. Keller Director March 21, 2003
- --------------------------
William J.Keller
/s/Andrew J. Kuzneski, Jr. Director March 21, 2003
- --------------------------
Andrew J. Kuzneski, Jr.
/s/Roland C. Moyer, Jr. Director March 21, 2003
- --------------------------
Roland C. Moyer, Jr.
/s/Harry J. O'Neill III Director March 21, 2003
- --------------------------
Harry J. O'Neill III
/s/Karen A. Rightmire Director March 21, 2003
- --------------------------
Karen A. Rightmire
/s/Alfred J. Weber Director March 21, 2003
- --------------------------
Alfred J. Weber
/s/Michael L. Shor Director March 21, 2003
- --------------------------
Michael L. Shor
/s/Frank C. Milewski Director March 21, 2003
- --------------------------
Frank C. Milewski
65
CERTIFICATIONS
I, Raymond H. Melcher, Jr., Chairman, President, and Chief Executive Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of Leesport Financial Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
By /s/Raymond H. Melcher, Jr.
---------------------------
Raymond H. Melcher, Jr.
Chairman, President and
Chief Executive Officer
66
CERTIFICATIONS
I, Stephen A. Murray, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Leesport Financial Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
By /s/Stephen A. Murray
---------------------------
Stephen A. Murray
Chief Financial Officer
67
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------------------
21 Subsidiaries of Leesport Financial Corporation
23.1 Consent of Beard Miller Company LLP.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
68
Board of Directors of Leesport Financial Corp.
James H. Burton
Self-employed consultant specializing in business turnarounds, start ups, and
strategic planning Serves on the Audit Committee and Executive Committee, and
Chairs the Governance Committee
John T. Connelly
Retired Chairman, President and Chief Executive Officer, Leesport Financial
Corp. and Leesport Bank Chairs the Executive Committee, and serves on the
Governance Committee and Human Resources Committee
Charles J. Hopkins
President and Chief Executive Officer, Essick & Barr Insurance Serves on the
Executive Committee
William J. Keller
Owner, William J. Keller Manufactured Housing Communities & Sales Serves on the
Audit Committee
Andrew J. Kuzneski, Jr.
President, A. J. Kuzneski, Jr., Inc., an insurance agency Chairs the Audit
Committee, and serves on the Executive Committee and Governance Committee
Raymond H. Melcher, Jr.
Chairman, President and Chief Executive Officer, Leesport Financial Corp. and
Leesport Bank Serves on the Asset-Liability Committee and Executive Committee
Frank C. Milewski
President and Chief Executive Officer, ReDCo Group, a company specializing in
Human Resources Management Serves on the Asset-Liability Committee and Audit
Committee
Roland C. Moyer, Jr.
Self-employed Tax Accountant and Investor Serves on the Human Resources
Committee
Harry J. O'Neill III
President, O'Neill Financial Group, a Personal Holding Company Serves on the
Audit Committee
Karen A. Rightmire
President, United Way of Berks County Chairs the Human Resources Committee, and
serves on the Executive Committee and Governance Committee
Michael L. Shor
Senior Vice President, Carpenter Technology Corporation, Special Alloys Division
Alfred J. Weber
President, Tweed-Weber, Inc., a Strategic Planning and Marketing Research Firm
Serves as Lead Director, and serves on the Executive Committee, Governance
Committee and Human Resources Committee
Directors of Leesport Bank
James H. Burton
John T. Connelly
Charles J. Hopkins
George W. Huss, Jr.
Retired
William J. Keller
M. Domer Leibensperger
President, Leibensperger Funeral Homes, Inc.
Raymond H. Melcher, Jr.
Frank C. Milewski
Roland C. Moyer, Jr.
Harry J. O'Neill III
Stephen F. Oravitz
Owner, Oravitz Home For Funerals, Inc.
Karen A. Rightmire
Michael L. Shor
Alfred J. Weber
Directors of Leesport Wealth Management, LLC
Raymond H. Melcher, Jr.
Chairman
John T. Connelly
Keith W. Johnson, CFP
President and Chief Executive Officer, Leesport Wealth Management, LLC
Richene R. Johnson
Vice President Operations, Leesport Wealth
Management, LLC
Andrew J. Kuzneski, Jr.
69
Directors of Leesport Realty Solutions, LLC
James E. Kirkpatrick
Senior Vice President and Chief Commercial Banking Officer, Leesport Bank
M. Domer Leibensperger
Raymond H. Melcher, Jr.
Stephen A. Murray
Senior Vice President and Chief Financial Officer, Leesport Financial Corp. and
Leesport Bank
Directors of Essick & Barr, LLC
Raymond H. Melcher, Jr.
Chairman
Richard C. Boothby
President, The Boothby Group
John T. Connelly
Retired Chairman, President and Chief Executive Officer, Leesport Financial
Corp. and Leesport Bank
Leonard J. Dombroski
Vice President Commercial Lines, Essick & Barr Insurance
David J. Greif
Vice President, Essick & Barr Insurance
Thomas S. Greenwood, Jr.
Principal, The Boothby Group
Charles J. Hopkins
President and Chief Executive Officer of Essick & Barr, LLC
Michael D. Hughes
Senior Vice President, Essick & Barr Insurance
Andrew J. Kuzneski, Jr.
President, A. J. Kuzneski, Jr., Inc., an Insurance Agency
Alfred J. Weber
President, Tweed-Weber, Inc., a Strategic Planning and Marketing Research Firm
Corporate Management
Raymond H. Melcher, Jr.
Chairman, President and Chief Executive Officer
Edward C. Barrett
Senior Vice President and Chief Administrative Officer
Paula Barron
Senior Vice President and Chief Marketing Officer
Jenette L. Eck
Vice President and Secretary Shareholder Relations and Risk Management
M. Jane Lauser
Senior Vice President and Operations & Information Technology Division Manager
Stephen A. Murray
Senior Vice President and Chief Financial Officer
Sheila L. Reppert
Vice President and Human Resources Division Manager
Kimberly M. Dove
Vice President and Internal Auditor
Thomas F. Keenan
Vice President and Controller
Lori A. Heyer
Assistant Vice President Human Resources
Emily A. Morad
Assistant Vice President Training and Education
Loren Berckey
Public Relations Officer
Diane Focht
Finance Officer
Frederick L. Leer
Accounting Officer
Kerry R. Neidig
Purchasing and Facilities Officer
Kelly Ostrowski
Direct Marketing Officer
James J. Trupp
Accounting Officer
Insurance Division Management
Raymond H. Melcher, Jr.
Chairman
Richard C. Boothby
President
The Boothby Group
Michael Bove
Principal
The Boothby Group
Leonard J. Dombroski
Vice President
Essick & Barr Insurance
James Fraatz
Controller
Essick & Barr LLC
Thomas Greenwood
Principal
The Boothby Group
David J. Greif
Vice President
Essick & Barr Insurance
Charles J. Hopkins
President
Essick & Barr Insurance
Michael D. Hughes
Senior Vice President
Essick & Barr Insurance
Betty Jones
Vice President
Christopher Kline
Insurance Officer
Essick & Barr Insurance
70
Eric Putsch
Principal
The Boothby Group
John Timmons
Director of Reinsurance
The Boothby Group
James Turner
Principal
The Boothby Group
Wealth Management Division Management
Raymond H. Melcher, Jr.
Chairman
Keith W. Johnson, CFP
President
Michael S. Flanagan
Vice President
Richene Johnson
Vice President
William H. Love
Director of Trust Services
Robert W. Muti
Director of Portfolio Management
Steven Schlegel
Vice President
Leesport Bank Management
Raymond H. Melcher, Jr.
Chairman, President and Chief Executive Officer
James E. Kirkpatrick
Senior Vice President and Chief Commercial Banking Officer
Lynda N. Mensch
Senior Vice President and Chief Retail Banking Officer
Cynthia Barnett
Vice President
Residential Mortgages
Gregory J. Barr
Vice President
Loan Review
David Dowd
Vice President
Commercial Loans
Clinton Hammond
Vice President and
Schuylkill Haven Manager
Luci Kulish
Vice President
Commercial Banking
Jan M. Pasdon
Vice President
Commercial Banking
Dorothy Pfeffer
Vice President and
Exeter Manager
Keith L. Phillips
Vice President
Commercial Banking
Timothy Romig
Vice President
Commercial Banking
Lisa M. Wortman
Vice President
Commercial Banking
Tina M. Ziolkowski
Vice President
Private Client Services
Holly A. Balatgek
Assistant Vice President
Branch Administration
Douglass A. Ball
Assistant Vice President
Commercial Banking
Dawn Christman
Assistant Vice President and
Leesport Manager
Deborah Fecera
Assistant Vice President and
Blandon Manager
Gloria Heffner
Assistant Vice President and
Operations Manager
Donald J. Heyer, Jr.
Assistant Vice President and
Consumer Loan Manager
Carol Hostetter
Assistant Vice President
Commercial Banking
David Jones
Assistant Vice President
Asset Recovery
Mark Ketch
Assistant Vice President
Commercial Banking
Gary W. Krick
Assistant Vice President
Asset Recovery
Tiffany Kulpowicz
Assistant Vice President
Commercial Banking
John Roach
Assistant Vice President
Commercial Banking
Sandra Scheetz
Assistant Vice President and
Wyomissing Manager
Kenneth Snyder
Assistant Vice President
Commercial Banking
Helms F. Buchman
Retail Banking Officer and
Shenandoah Manager
Kevin Giza
Mortgage Origination Officer
June Gowdy
Assistant Retail Banking Officer
Shenandoah Office
Kevin Kantner
Customer Service and
Web Banking Manager
Ruth Koller
Operations Officer
Lori J. Loose
Retail Banking Officer and
Northeast Reading Manager
71
Derek Moll
Retail Banking Officer and
Bern Township Manager
Susan Pecora
Retail Banking Officer
Drums Manager
Patricia Pinkerton
Operations Officer
Christine K. Rahn
Compliance Officer
Haniff Skeete
Mortgage Origination Officer
Kathleen Tokonitz
Mortgage Origination Officer
Linda Watkins
Mortgage Origination Officer
Joan M. Wood
Mortgage Origination Officer
72