UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-14577
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 23-2980576
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31 W. Broad Street, Hazleton, Pennsylvania 18201
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(570) 454-0824
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changes since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: the Issuer had 1,356,885
shares of common stock, par value $0.01 per share, outstanding as of February
11, 2000.
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at
December 31, 1999 (unaudited) and June 30, 1999 .................. 1
Consolidated Income Statement and Statement of
Comprehensive Income for the Three and Six Months
Ended December 31, 1999 and 1998 (unaudited) ..................... 2
Consolidated Statement of Changes in Equity
for the Six Months Ended December 31, 1999 ....................... 4
Consolidated Statement of Cash Flows for the
Six Months Ended December 31, 1999 and 1998 ...................... 5
Notes to Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation .......... 6
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 13
Item 2. Changes in Securities and Use of Proceeds ........................ 13
Item 3. Defaults Upon Senior Securities .................................. 14
Item 4. Submission of Matters to a Vote of Security Holders .............. 14
Item 5. Other Information ................................................ 14
Item 6. Exhibits and Reports on Form 8-K ................................. 15
SIGNATURES .................................................................. 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Balance Sheet
December 31, 1999 (unaudited) and June 30, 1999
(In thousands, except share and per share information)
December 31, June 30,
1999 1999
--------- ---------
(Unaudited)
Assets:
Cash and cash equivalents ................................ $ 2,293 $ 1,853
Interest-bearing deposits with banks ..................... 9,715 13,383
--------- ---------
Total cash and cash equivalents ....................... 12,008 15,236
Held-to-maturity securities .............................. 5,290 1,492
(fair value of $4,345 at 12/99 and $1,492 at 6/99)
Available for sale securities ............................ 32,742 27,424
Loans (less allowance for loan loss of $430 at 12/99 ..... 78,986 72,789
and $419 at 6/99)
Property and equipment, net .............................. 1,271 1,281
Accrued interest receivable .............................. 885 836
Real estate owned, net ................................... 186 53
Other assets ............................................. 432 420
--------- ---------
Total assets .................................... $ 131,800 $ 119,531
========= =========
Liabilities and Equity:
Deposits ................................................. $ 100,135 $ 95,815
Advances from borrowers for taxes and insurance .......... 19 26
Borrowed funds ........................................... 12,000 1,000
Accrued interest payable and other liabilities ........... (168) 174
--------- ---------
Total liabilities ............................... 111,986 97,015
Common Stock ($.01 par value; 6,000,000 authorized shares,
1,356,885 shares issued ............................... 16 16
Additional paid-in capital ............................... 14,869 14,869
Unearned Employee Stock Ownership Plan (ESOP) shares ..... (1,194) (1,227)
Treasury stock ........................................... (2,377) --
Retained earnings - substantially restricted ............. 9,933 9,596
Accumulated other comprehensive income ................... (1,433) (738)
--------- ---------
Total equity .................................... 19,814 22,516
--------- ---------
Total liabilities and equity .................... $ 131,800 $ 119,531
========= =========
1
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Income Statement
For the Three Months Ended December 31, 1999 and December 31, 1998
(In thousands)
December 31, December 31,
1999 1998
------- -------
(Unaudited)
Interest income:
Loans ............................................. $ 1,459 $ 1,294
Interest and dividends on securities:
Taxable .................................. 500 299
Non-taxable .............................. 114 11
Dividends ................................ 10 10
Interest-bearing deposits with banks ..... 106 240
------- -------
Total interest income ........... 2,189 1,854
Interest expense:
Deposits .......................................... 1,017 1,066
FHLB advances and other borrowings ................ 170 --
------- -------
Total interest expense ................... 1,187 1,066
Net interest income ............................... 1,002 788
Provision for loan losses ......................... -- 50
------- -------
Net interest income after provision for loan losses 1,002 738
Noninterest income:
Other loan fees and service charges ............... 73 75
Gain (loss) on sale of:
Real estate owned ........................ (28) (113)
Other .................................... 15 10
------- -------
Total noninterest income ........ 60 (28)
Noninterest Expense:
Salaries and net employee benefits ................ 444 357
Occupancy costs ................................... 60 67
Federal deposit insurance premiums ................ 15 15
Data processing ................................... 36 36
Professional fees ................................. 57 16
Foreclosed real estate expenses, net .............. 35 41
Charitable contributions .......................... 2 755
Other noninterest expense ......................... 175 122
------- -------
Total noninterest expense ....... 824 1,409
Income before provision for income taxes ................... 238 (699)
Income tax provision ....................................... 64 (222)
------- -------
Net income ................................................. $ 174 $ (477)
======= =======
2
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Income Statement
For the Six Months Ended December 31, 1999 and December 31, 1998
(In thousands)
December 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
Interest income:
Loans ............................................. $ 2,885 $ 2,630
Interest and dividends on securities:
Taxable ........................................ 963 620
Non-taxable .................................... 234 18
Dividends ...................................... 20 19
Interest-bearing deposits with banks ........... 239 486
------- -------
Total interest income ...................... 4,341 3,773
Interest expense:
Deposits .......................................... 1,987 2,151
FHLB advances and other borrowings ................ 220 --
------- -------
Total interest expense ......................... 2,207 2,151
Net interest income ............................... 2,134 1,622
Provision for loan losses ......................... 9 55
------- -------
Net interest income after provision for loan losses 2,125 1,567
Noninterest income:
Other loan fees and service charges ............... 165 144
Gain (loss) on sale of:
Real estate owned .............................. (49) (111)
Other .......................................... 26 21
------- -------
Total noninterest income ................... 142 54
Noninterest Expense:
Salaries and net employee benefits ................ 832 679
Occupancy costs ................................... 129 136
Federal deposit insurance premiums ................ 29 30
Data processing ................................... 75 74
Professional fees ................................. 136 53
Foreclosed real estate expenses, net .............. 68 72
Charitable contributions .......................... 6 757
Other noninterest expense ......................... 311 228
------- -------
Total noninterest expense .................. 1,586 2,029
Income (Loss) before provision for income taxes ....... 681 (408)
Income tax provision (benefit) ........................ 189 (130)
------- -------
Net income (loss) ..................................... $ 492 $ (278)
======= =======
3
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Statement of Comprehensive Income
For the Three Months Ended December 31, 1999 and December 31, 1998
(In thousands)
December 31, December 31,
1999 1998
----------------- -----------------
(Unaudited)
Net income ........................................................... $ 174 $(476)
Increase/(decrease) in unrealized losses available-for-sale securities (581) (47)
----- ------
Comprehensive income ................................................. $ 407 $ (523)
===== ======
For the Six Months Ended December 31, 1999 and December 31, 1998
(In thousands)
December 31, December 31,
1999 1998
---------------- ----------------
(Unaudited)
Net income (loss)..................................................... $ 491 $(278)
Increase (decrease) in unrealized losses available-for-sale securities (1,008) 2
------ -----
Comprehensive income (loss) $ (517) $(276)
====== =====
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Statement of Changes in Equity
For the Three Months Ended December 31, 1999
(In thousands)
Accumulated
Additional Other
Common Paid-in Treasury Retained Comprehensive Net
Stock Capital ESOP Stock Earnings (Loss) Equity
----- ------- ---- ----- -------- ------ ------
Balance at June 30, 1999 ....... $ 16 $ 14,869 $ (1,227) $ -- $ 9,596 $ (738) $ 22,516
Net income ..................... -- -- -- 492 -- 492
Dividend payment ............... -- -- -- (155) -- (155)
Increase in unrealized losses on
available-for-sale securities -- -- -- -- -- (695) (695)
ESOP shares earned ............. -- -- 33 -- -- -- 33
Stock repurchase ............... -- -- -- (2,377) -- -- (2,377)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1999 ... $ 16 $ 14,869 $ (1,194) $ (2,377) $ 9,933 $ (1,433) $ 19,814
======== ======== ======== ======== ======== ======== ========
4
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Statement of Cash Flows
For Six Months Ended December 31, 1999 and 1998
(In thousands)
December 31, December 31,
1999 1998
-------- --------
(unaudited)
Operating activities:
Net income (loss) ............................................. $ 492 $ (279)
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses and foreclosed real estate .......... 9 55
Amortization and accretion on investment securities ........... 104 81
Depreciation and amortization ................................. 152 74
Dividend Payment .............................................. (155) --
(Gain) Loss on sale of real estate acquired through foreclosure (133) 4
Change in assets and liabilities:
Accrued interest receivable .......................... (51) 98
Other assets ......................................... (355) (1,388)
Accrued interest payable and other liabilities ....... (342) 284
-------- --------
Net cash provided by operating activities ..................... (279) (1,071)
-------- --------
Investment activities:
Purchase of held-to-maturity securities ....................... (8,640) --
Purchase of available-for-sale securities ..................... (6,984) (8,120)
Proceeds from maturities of held-to-maturity securities ....... 4,559 --
Proceeds from the call of held-to-maturity securities ......... 6 6,435
Proceeds from maturities, calls and principal paydowns on
available-for-sale securities ........................ 250 600
Proceeds from principal paydowns of held-to-maturity securities 283 715
Loans made to customers, net of principal collected ........... (6,205) (2,773)
Release - ESOP shares ......................................... 33 --
Acquisition of office premises and equipment .................. (142) (12)
Proceeds from sale of foreclosed real estate .................. (9) 349
-------- --------
Net cash used in investing activities ......................... (16,849) (2,806)
-------- --------
Financing activities:
Net increase in deposit accounts .............................. 4,320 2,360
Net (decrease) in advances from borrowers
for taxes and insurance .............................. (7) (17)
Purchase - treasury stock ..................................... (2,377) --
Borrowed funds ................................................ 11,000 --
Net proceeds from issuance of common stock .................... -- 16,145
-------- --------
Net cash provided by financing activities ..................... 12,936 18,488
-------- --------
Increase (decrease) by cash and equivalents ................... (3,229) 16,152
Cash and equivalents - beginning of the period ................ 15,236 11,858
-------- --------
Cash and equivalents - end of period .......................... $ 12,007 $ 28,010
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid on deposits ............................ 1,987 2,151
Income taxes paid .................................... 189 (130)
Supplemental Disclosure of Non-Cash Information:
Transfer from loans to real estate owned ............. 200 638
5
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Notes to Consolidated Financial Statements
(1) Organization
Security of Pennsylvania Financial Corp. (the Company") was
incorporated under the laws of Delaware in August 1998 for the purpose of
serving as the holding company of Security Savings Association of Hazleton (the
"Association") as part of the Association's conversion from the mutual to stock
form of organization (the "Conversion"). The Company is a savings and loan
holding company and is subject to regulation by the Office of Thrift Supervision
(the "OTS"). The Association is regulated by the Commonwealth of Pennsylvania,
the OTS and the Federal Deposit Insurance Corporation. The Conversion, completed
on December 30, 1998 resulted in the Company issuing an aggregate of 1,587,000
shares of its common stock, par value $.01 per share, at a price of $10 per
share, of which 1,511,617 shares were issued in a subscription offering and
75,383 shares were issued and sold to Security Savings Charitable Foundation.
Prior to the Conversion, the Company had not engaged in any material operations.
(2) Accounting Principles
The accompanying unaudited financial statements of Security of
Pennsylvania Financial Corp. have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-QSB and Regulation S-B. Accordingly, the financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the current
fiscal year.
For further information, refer to the consolidated financial statements
included in the Company's Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission.
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended December 31, 1999, and
should be read in conjunction with the Company's Consolidated Financial
Statements and the notes thereto, appearing in Part I, Item 1 of this document.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking
6
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company and the
subsidiaries include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the SEC.
The Company does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
General
Security of Pennsylvania Financial Corp. (the "Company") is the holding
company for Security Savings Association of Hazleton (the "Association"), a
Pennsylvania chartered capital stock savings association. The Association's
results of operations are dependent primarily on net interest income, which is
the difference between the income earned on its loan and investment portfolios
and its cost of funds, consisting of the interest paid on deposits and
borrowings. Results of operations are also affected by the Association's
provision for loan losses, loan and security sales activities, service charges
and other fee income, and non-interest expense. The Association's non-interest
expense principally consists of compensation and employee benefits, office
occupancy and equipment expense, federal deposit insurance premiums, data
processing, advertising and business promotion and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
Management Strategy
The Company's operating strategy has been that of a community-based
banking institution, offering a wide variety of savings products to its retail
customers, while concentrating on residential and consumer lending and, to a
lesser extent, multi-family and commercial real estate and construction lending.
Additionally, in February 1999, the Association opened a commercial loan
department. The Association expects to expand its services in that area. In
order to promote long-term financial strength and profitability, the
Association's operating strategy has focused on: (i) maintaining strong asset
quality by originating primarily one- to four-family mortgage loans and
7
home equity loans and lines of credit secured by residential real estate located
in its market area; (ii) managing its interest rate risk within the context of
its significant fixed-rate one- to four-family mortgage lending activity; (iii)
providing products and delivery systems directed at the needs and expectations
of its customer base, including through taking advantage of technological
advances when appropriate; and (iv) maintaining a strong regulatory capital
position.
Comparison of Financial Condition at December 31, 1999 and June 30, 1999
Total assets increased $12.3 million, or 10.3%, from $119.5 million at
June 30, 1999 to $131.8 million at December 31, 1999. This increase was
primarily due to a $9.1 million increase in our investment portfolio from $28.9
million at June 30, 1999 to $38.0 million at December 31, 1999. In addition, the
loan portfolio increased $6.2 million from $72.8 million at June 30, 1999 to
$79.0 million at December 31, 1999. The increase was primarily due to a $3.2
million increase in real estate loans and a $3.1 million increase in commercial
loans, offset by a $162,000 decrease in consumer loans. The increase in
commercial loans was primarily due to the increased efforts of the commercial
loan department, which was formed in February 1999.
This increase in assets was primarily funded by an $11.0 million
increase in borrowings from the Federal Home Loan Bank, which went from $1.0
million at June 30, 1999 to $12.0 million at December 31, 1999. Additionally,
deposits increased $4.3 million from $95.8 million at June 30, 1999 to $100.1
million at December 31, 1999. The increase in deposits was due to more
aggressive pricing of certificates of deposit during the quarter which resulted
in an increase in certificates of deposit of $4.1 million. The increase in
certificates of deposit reflected both an infusion of new deposits and a shift
in the deposit mix to certificates of deposit from passbook savings accounts,
which decreased by $1.6 million. The increase in deposits was also attributable
to a $1.8 million increase in NOW and money market accounts.
Total equity decreased $2.7 million, or 12.0%, from $22.5 million at
June 30, 1999 to $19.8 million at December 31, 1999. This decrease was primarily
due to repurchase of 230,115 shares of stock at a total cost of $2.4 million
during the quarter, offset by net income for the quarter of $174,000.
Comparison of Operating Results for the Three Months Ended
December 31, 1999 and 1998
General. The Company reported net income of $174,000 for the three
months ended December 31, 1999 compared to a net loss of $476,000 for the three
months ended December 31, 1998. The loss reported in 1998 was due to a one-time
expense of $754,000 in connection with the funding of a charitable foundation
established in connection with the Association's conversion to the stock form of
ownership in December 1998. Excluding the foundation contribution, the Company
would have reported net income of approximately $276,000 for the three months
ended December 31, 1999.
Interest Income. Total interest income increased $335,000, or 18.1%,
for the three month
8
period ended December 31, 1999 compared to the comparable period for the
previous year. The increase in interest income was primarily due to an increase
in interest on investment securities of $305,000 and an increase in interest
earned on loans of $165,000, both of which were due to the higher average
balances of the respective portfolios. The higher average balances of the
investment and loan portfolios were funded primarily with additional borrowings
from the Federal Home Loan Bank and, to a lesser extent, from increased
deposits. These increases were offset by a $134,000 decrease in the interest
income earned from interest-bearing deposits with banks, due to the decrease in
the amount of certificates of deposits invested at other financial institutions.
The decrease in interest-bearing deposits was due to the Company's decision to
utilize the funds which became available as the certificates of deposit matured
to fund the stock repurchase and to increase liquidity in preparation for Y2K in
lieu of reinvesting such funds.
Interest Expense. Interest expense increased by $121,000, or 11.4%, for
the three month period ended December 31, 1999 compared to the same period last
year primarily due to the increased cost of interest on borrowed funds of
$170,000 due to a higher average balance on such borrowings to fund the growth
in the loan and securities portfolios. This was offset by a decrease in interest
on deposits of $49,000 due to a decrease in the average balance on deposits of
$2.0 million, or 2.0% from $101.0 million for the three months ended December
31, 1998 to $99.0 million for the three months ended December 31, 1999 and a 16
basis point decrease in the average rate paid on deposits from 4.26% for the
three months ended December 31, 1998 to 4.10% for the three months ended
December 31, 1999.
Provision for Loan Losses. The Company's provision for loan losses
decreased $50,000 for the three month period ended December 31, 1999 as compared
to the same period one year ago. The decrease was based on the Company's monthly
review of the loan portfolio, the level of charged-off and non-performing loans,
real estate owned, loan commitments, unused lines-of-credit, as well as an
evaluation of the general economic conditions in the Company's market area.
Increased and more efficient collection efforts have resulted in a better
control of delinquent accounts, thus allowing the Association to maintain the
allowance for loan losses at approximately the same level as it was at December
31, 1998. The allowance for loan losses was $430,000 and $419,000 at December
31, 1999 and December 31, 1998, respectively. The allowance for loan losses
represents 67.8% of nonperforming loans and 0.54% of total loans at December 31,
1999 and 27.1% of nonperforming loans and 0.59% of total loans at December 31,
1998.
Non-interest Income. Non-interest income increased $88,000 for the
three months ended December 31, 1999 compared to the period ended December 31,
1998. This increase was primarily due to an $85,000, or 75.2%, decrease in
losses and write-downs on the sale of real estate owned from $113,000 for the
period ended December 31, 1998 to $27,000 for the period ended December 31,
1999. This decrease was primarily due to the fewer number of foreclosed
properties due to increased and more efficient collection efforts prior to
foreclosure which enabled the Association to avoid the foreclosure process.
Non-interest Expense. Non-interest expense decreased $585,000, or
41.5%, from $1.4 million at December 31, 1998 to $824,000 at December 31, 1999.
The decrease in non-interest
9
expense was primarily due to the one-time cost of $754,000 of establishing the
charitable foundation during the three months ended December 31, 1998. Excluding
that one-time charge, non-interest expense increased $169,000, or 25.8%, from
$655,000 for the three months ended December 31, 1998 to $824,000 for the three
months ended December 31, 1999. This increase was primarily due to an $87,000,
or 24.4%, increase in salary and net employee benefits due to the staffing of
the new commercial loan department established in February 1999 and due to
normal annual salary increases and bonuses. Also contributing to the increase in
non-interest expense was a $41,000 increase in professional fees and a $53,000
increase in other non-interest expense, primarily due to the increased reporting
and regulatory costs of a publicly held company.
Provision for Income Taxes. The Company had an increase in provision
for income taxes of $286,000 for the period ended December 31, 1999, from an
expense of $64,000 for the period ended December 31, 1999 compared to a benefit
of $222,000 at December 31, 1998. The benefit for the three months ended
December 31, 1998 was the result of the operating loss created by and charitable
deduction received through the one-time charitable contribution to the
foundation.
Comparison of Operating Results for the Six Months Ended
December 31, 1998 and 1998
General. The Company reported net income of $492,000 for the six months
ended December 31, 1999 compared to a net loss of $278,000 for the six months
ended December 31, 1998. The loss reported in 1998 was due to a one-time expense
of $754,000 in connection with the funding of a charitable foundation
established in connection with the Association's conversion to the stock form of
ownership in December 1998. Excluding the foundation contribution, the Company
would have reported net income of approximately $476,000 for the six months
ended December 31, 1999.
Interest Income. Total interest income increased $569,000, or 15.1%,
for the six month period ended December 31, 1999 compared to the same period for
the previous year. The increase in interest income was primarily due to an
increase in interest on investment securities of $559,000 and an increase in
interest on loans of $225,000, both of which were due to the higher average
balances of the respective portfolios. The higher average balances were funded
primarily by additional advances from the Federal Home Loan Bank. These
increases were offset by a $247,000 decrease in the interest income earned from
interest-bearing deposits with banks, due to the decrease in the amount of
certificates of deposits invested at other financial institutions. The decrease
in interest-bearing deposits was due to the Company's decision to use the funds
which became available as certificates of deposit matured to fund stock
repurchase and to increase liquidity in preparation for Y2K concerns in lieu of
reinvestment of such funds.
Interest Expense. Interest expense increased $57,000 for the six month
period ended December 31, 1999 as compared to the same period one year ago. The
increase was the result of a $221,000 increase in interest on borrowed funds as
a result of utilizing borrowings from the Federal Home Loan Bank to fund the
purchase of additional investment securities and to fund loan growth. This
increase was offset by a $163,000 decrease in interest expense on deposits as
the average balance of deposits decreased $4.2 million, or 4.1%, from $102.1
million for the six months ended
10
December 31, 1998, to $97.9 million for the six months ended December 31, 1999.
A 7 basis point decrease in the average rate paid on deposits from 4.21% for the
six months ended December 31, 1998 to 4.14% for the six months ended December
31, 1999 also contributed to the decrease in the interest expense on deposits.
Provision for Loan Losses. The Company's provision for loan losses
decreased $46,000 for the six month period ended December 31, 1999, from $55,000
for the six month period ended December 31, 1998 to $9,000 for the six month
period ended December 31, 1999. Increased and more efficient collection efforts
have maintained better control of the Association's delinquent accounts and thus
allow the Association to maintain this level of allowance for loan losses.
Non-interest Income. Non-interest income increased $87,000 for the six
month period ended December 31, 1999 compared to the same period the previous
year. The increase was primarily due to a $62,000, or 55.9%, decrease in losses
and write-downs on the sale of real estate owned from $111,000 for the period
ended December 31, 1998 to $49,000 for the period ended December 31, 1999
primarily due to the fewer number of foreclosed properties due to increased and
more efficient collection efforts prior to foreclosure which enabled the
Association to avoid the foreclosure process. Also contributing to this increase
was a $20,000 increase in other loan fees and service charges for the six month
period ended December 31, 1999 associated with a higher volume of loan
originations during the first six months of 1999 compared to the same period the
previous years.
Non-interest Expense. Non-interest expense decreased $443,000 from $2.0
million for the six months ended December 31, 1998 to $1.6 million for the six
months ended December 31, 1999. The decrease was primarily due to the one-time
cost of $754,000 to fund the charitable foundation established in connection
with the Association's conversion to stock form. Notwithstanding the charitable
contribution to the foundation, non-interest expense increased $311,000, or
24.4%, from $1.3 million for the six months ended December 31, 1998 to $1.6
million for the six months ended December 31, 1999. This increase was primarily
due to increases in salary and net employee benefits of $153,000 due primarily
to the staffing of the new commercial loan department established in February
1999 and to normal annual salary increases and bonuses. Also contributing to the
increase in non-interest expense was an $83,000 increase in professional fees
and a $83,000 increase in other non-interest expense, primarily due to the
increased reporting and regulatory costs of a publicly held company.
Provision for Income Taxes. The Company had an increase in provision
for income taxes of $319,000 for the period ended December 31, 1999, from an
expense of $189,000 for the period ended December 31, 1999 compared to a benefit
of $130,000 at December 31, 1998. The benefit for the six months ended December
31, 1998 was the result of the operating loss created by and the charitable
contribution received through the one-time charitable contribution to the
foundation.
11
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities. The
Company uses the funds generated to support its lending and investment
activities as well as any other demands for liquidity such as deposit outflows.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows, mortgage prepayments and the exercise of call features are
greatly influenced by general interest rates, economic conditions and
competition. The Company has continued to maintain levels of liquid assets
greater than those required by Office of Thrift Supervision regulations. This
requirement of the Office of Thrift Supervision, which may be varied at the
direction of the Office of Thrift Supervision depending upon economic conditions
and deposit flows, is based upon a percentage of deposits and short-term
borrowings. The Company's currently required liquidity ratio is 4.0%. At
December 31, 1999 and 1998 the Company's liquidity ratios were 33.3% and 31.7%,
respectively.
At December 31, 1999, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $16.4 million, or 12.4% of
total adjusted assets, which is above the required level of $2.0 million, or
1.5%; core capital of $16.4 million, or 12.4%, of total adjusted assets, which
is above the required level of $5.3 million, or 4.0%; and risk-based capital of
$16.8 million, or 30.1%, of risk-weighted assets, which is above the required
level of $4.5 million, or 8.0%.
The Company has other sources of liquidity if a need for additional
funds arises, including Federal Home Loan Bank advances. At December 31, 1999,
the Company had advances outstanding from the Federal Home Loan Bank of $12.0
million and at December 31, 1999 had an overall borrowing capacity from the
Federal Home Loan Bank of $63.9 million.
The Company's most liquid assets are cash and due from banks,
interest-bearing deposits with banks and its investment and mortgage-related
securities available-for-sale. The levels of these assets are dependent on the
Company's operating, financing, lending and investing activities during any
given period. At December 31, 1999, cash and due from banks, interest-bearing
deposits with banks and investment securities available for sale totaled $44.7
million, or 33.9% of total assets.
At December 31, 1999, the Company had commitments to originate loans
and unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $4.4 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate accounts, which are scheduled to mature in less than one year from
December 31, 1999, totaled $24.4 million. The Company expects that substantially
all of the maturing certificate accounts will be retained by the Company at
maturity.
Year 2000 Transition
In connection with the change to the year 2000, an important business
issue existed regarding how existing application software programs and operating
systems accommodated this date value.
12
Many existing application software products were designed to accommodate only
two-digits. For example, "96" was stored on the system and represented 1996. Due
to the Association's preparation efforts and testing, the Association
experienced no problems with the transition to the Year 2000. The cost to the
Association to prepare for the Year 2000, including an upgrade of its internal
system, but excluding additional staff time, amounted to less than $50,000.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
connection with the implementation of this statement, the Company, as of April
1, 1999, transferred debt securities classified as held-to-maturity to the
available-for-sale category. Such transfer will not call into question the
Company's intention to hold other debt to maturity in the future. This statement
was originally effective for financial statements for periods beginning after
June 15, 1999, but has been extended to periods beginning after June 15, 2000..
Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
Issued in October 1998, SFAS No. 134 was effective the first fiscal quarter
beginning after December 15, 1998. This statement further amends Statement 65 to
require that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classifies the resulting mortgage backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. This statement conforms the subsequent accounting for
securities retained after securitization of mortgage loans by a mortgage banking
enterprise with a subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
13
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On October 25, 1999, the Company held its Annual Meeting of
Stockholders. At that meeting the following items were brought before the
stockholders for a vote and the results were as indicated.
1. Election of Directors.
For % Withheld %
--------- ---- ------ ---
Richard C. Laubach 1,432,306 97.1 43,086 2.9
John J. Raynock 1,431,919 97.1 43,473 2.9
2. Approval of the 1999 Stock-Based Incentive Plan.
Broker
For % Withheld % Abstain % Non-Votes %
------- ---- ------ --- ----- --- --------- ----
922,199 58.1 78,929 5.0 3,579 0.2 470,685 29.7
3. Ratification of Parente, Orlando, Carey & Associates as independent
auditors for the fiscal year ended June 30, 2000.
For % Withheld % Abstain %
--------- ---- ------ --- ------ ---
1,426,349 89.9 28,823 1.8 20,220 1.2
Item 5. Other Information.
None.
14
Item 6. Exhibits and Reports on Form 8-K (ss.249.308 of this Chapter).
(a) Exhibits
2.1 Amended Plan of Conversion (including the
Stock Articles of Incorporation and Bylaws
of the Security Savings Association of
Hazleton)*
3.1 Certificate of Incorporation of Security of
Pennsylvania Financial Corp.*
3.2 Bylaws of Security of Pennsylvania Financial
Corp.*
10.1 Security of Pennsylvania Financial Corp.
1999 Stock-Based Incentive Plan**
11.0 Statement regarding Computation of Per Share
Earnings
27.0 Financial Data Schedule
-----------------------------
* Incorporated by reference into this document
from the Exhibits to the Form SB-2,
Registration Statement, and any amendments
thereto, Registration No. 333-63271.
** Incorporated by reference into this document
from the Proxy Statement as filed by the
Company on September 20, 1999.
(b) Reports on Form 8-K
On October 1, 1999, the Company filed an 8-K
to announce it had received regulatory clearance to
repurchase 5% of its outstanding shares. The press
release announcing the receipt of regulatory
clearance was filed by exhibit.
On October 19, 1999, the Company filed an
8-K to announce it had completed its repurchase of 5%
of its outstanding shares. The press release
announcing the completion of the stock repurchase was
filed by exhibit.
On November 26, 1999, the Company filed an
8-K to announce it had received regulatory clearance
to repurchase 10% of its outstanding shares. The
press release announcing the receipt of regulatory
clearance was filed by exhibit.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer
caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Dated: February 11, 2000 By: /s/ Richard C. Laubach
----------------------
Richard C. Laubach
President and Chief Executive Officer
(principal executive officer)
Dated: February 11, 2000 By: /s/ David P. Marchetti, Sr.
---------------------------
David P. Marchetti, Sr.
Chief Financial Officer and
Treasurer (principal financial
and accounting officer)
16