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 March 31, 2000
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.
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(Exact name of small business issuer as specified in its charter)
Delaware 23-2980576
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31 W. Broad Street, Hazleton, Pennsylvania 18201
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(Address of principal executive offices) (Zip Code)
(570) 454-0824
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(Issuer's telephone number, including area code)
Not Applicable
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(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 May 9,
2000.
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
FORM 10-QSB
INDEX
Item 1. Financial Statements
Consolidated Balance Sheet at
March 31, 2000 (unaudited) and June 30, 1999................... 1
Consolidated Income Statement and Statement of
Comprehensive Income for the Three and Nine Months Ended
March 31, 2000 and 1999 (unaudited)........................... 2
Consolidated Statement of Changes in Equity
for the Nine Months Ended March 31, 2000 (unaudited)........... 4
Consolidated Statement of Cash Flows for the
Nine Months Ended March 31, 2000 and 1999 (unaudited).......... 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................................ 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
Item 5. Other Information.............................................. 13
Item 6. Exhibits and Reports on Form 8-K............................... 14
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Balance Sheet
March 31, 2000 (unaudited) and June 30, 1999
(In thousands, except share and per share information)
March 31, June 30,
2000 1999
--------- ---------
(Unaudited)
Assets:
Cash and cash equivalents .................................. $ 830 $ 1,853
Interest-bearing deposits with banks ....................... 9,704 13,383
--------- ---------
Total cash and cash equivalents ...................... 10,534 15,236
Held-to-maturity securities
(fair value of $7,194 at 3/00 and $1,492 at 6/99) ....... 7,955 1,492
Available for sale securities .............................. 33,101 27,425
Loans (less allowance for loan losses of $430 at 3/00
and $419 at 6/99) ....................................... 79,492 72,789
Property and equipment, net ................................ 1,247 1,281
Accrued interest receivable ................................ 893 835
Real estate owned, net ..................................... 113 53
Other assets ............................................... 1,065 420
--------- ---------
Total assets ............................................ $ 134,400 $ 119,531
========= =========
Liabilities and Equity:
Deposits ................................................... $ 100,314 $ 95,816
Advances from borrowers for taxes and insurance ............ 27 26
Borrowed funds ............................................. 14,000 1,000
Accrued interest payable and other liabilities ............. 618 174
--------- ---------
Total liabilities ....................................... 114,959 97,016
Common Stock ($.01 par value; 6,000,000 authorized shares,
1,587,000 shares issued) ................................ 16 16
Additional paid-in capital ................................. 14,867 14,869
Unearned employee stock ownership plan shares .............. (1,176) (1,227)
Treasury stock (230,115 shares, at cost) ................... (2,377) --
Common Stock acquired by stock benefit plans (63,480 shares) (584) --
Retained earnings - substantially restricted ............... 10,070 9,596
Accumulated other comprehensive loss ....................... (1,375) (739)
--------- ---------
Total equity ............................................ 19,441 22,515
--------- ---------
Total liabilities and equity ............................ $ 134,400 $ 119,531
========= =========
1
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Income Statement
For the Three Months Ended March 31, 2000 and March 31, 1999
(In thousands, except per share data)
March 31, March 31,
2000 1999
------- -------
(Unaudited)
Interest income:
Loans ................................................................... $ 1,491 $ 1,323
Interest and dividends on securities:
Taxable .............................................................. 567 203
Non-taxable .......................................................... 111 24
Dividends ............................................................ 10 10
Interest-bearing deposits with banks ................................. 135 451
------- -------
Total interest income ............................................ 2,314 2,011
Interest expense:
Deposits ................................................................ 1,034 987
Federal Home Loan Bank advances and other borrowings .................... 179 24
------- -------
Total interest expense ............................................... 1,213 1,011
Net interest income ..................................................... 1,101 1,000
Provision for loan losses ............................................... -- 10
------- -------
Net interest income after provision for loan losses ..................... 1,101 990
Noninterest income:
Other loan fees and service charges ..................................... 69 85
Other ................................................................... 14 14
------- -------
Total noninterest income ......................................... 83 99
Noninterest Expense:
Salaries and net employee benefits ...................................... 449 349
Occupancy costs ......................................................... 65 83
Federal deposit insurance premiums ...................................... 5 15
Data processing ......................................................... 41 45
Professional fees ....................................................... 56 39
Foreclosed real estate expenses ......................................... 51 83
Charitable contributions ................................................ 1 7
Other noninterest expense ............................................... 193 144
------- -------
Total noninterest expense ........................................ 861 765
Income before provision for income taxes .................................... 323 324
Income tax provision ........................................................ 118 77
------- -------
Net income .................................................................. $ 205 $ 247
======= =======
Earnings per share:
Basic ................................................................... $ 0.17 $ 0.17
======= =======
Diluted ................................................................. $ 0.16 $ 0.17
======= =======
2
SECURITY OF PENNSYLVANIA FINANCIAL CORP
Consolidated Income Statement
For the Nine Months Ended March 31, 2000 and March 31, 1999
(In thousands, except per share data)
March 31, March 31,
2000 1999
------- -------
(Unaudited)
Interest income:
Loans ................................................................... $ 4,353 $ 3,929
Interest and dividends on securities:
Taxable .............................................................. 1,458 549
Non-taxable .......................................................... 345 41
Dividends ............................................................ 30 29
Interest-bearing deposits with banks ................................. 441 1,202
------- -------
Total interest income ............................................ 6,627 5,750
Interest expense:
Deposits ................................................................ 3,016 3,129
Federal Home Loan Bank advances and other borrowings .................... 376 --
------- -------
Total interest expense ............................................... 3,392 3,129
Net interest income ..................................................... 3,235 2,621
Provision for loan losses ............................................... 9 65
------- -------
Net interest income after provision for loan losses ..................... 3,226 2,556
Noninterest income:
Other loan fees and service charges ..................................... 234 230
Other ................................................................... 39 34
------- -------
Total noninterest income ......................................... 273 264
Noninterest Expense:
Salaries and net employee benefits ...................................... 1,281 1,028
Occupancy costs ......................................................... 194 219
Federal deposit insurance premiums ...................................... 34 45
Data processing ......................................................... 116 120
Professional fees ....................................................... 192 91
Foreclosed real estate expenses ......................................... 168 266
Charitable contributions ................................................ 7 763
Other noninterest expense ............................................... 503 372
------- -------
Total noninterest expense ........................................ 2,495 2,904
Income (Loss) before provision for income taxes ............................. 1,004 (84)
Income tax provision (benefit) .............................................. 308 (53)
------- -------
Net income (loss) ........................................................... $ 696 $ (31)
======= =======
Earnings per share:
Basic ................................................................... $ 0.52 N/A
=======
Diluted ................................................................. $ 0.49 N/A
=======
3
SECURITY OF PENNSYLVANIA FINANCIAL CORP
Consolidated Statement of Comprehensive Income
For the Three Months Ended March 31, 2000 and March 31, 1999
(In thousands)
March 31, March 31,
2000 1999
---- ----
(Unaudited)
Net income............................................................... $205 $247
Increase/(decrease) in unrealized losses available-for-sale securities... 59 (126)
---- ----
Comprehensive income................................................. $264 $121
==== ====
For the Nine Months Ended March 31, 2000 and March 31, 1999
(In thousands)
March 31, March 31,
2000 1999
---- ----
(Unaudited)
Net income (loss).......................................................... $ 696 $ (31)
Decrease in unrealized losses available-for-sale securities................ (636) (125)
----- ------
Comprehensive income (loss)............................................. $ 60 $ (156)
===== ======
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Statement of Changes in Equity
(Unaudited)
For the Nine Months Ended March 31, 2000
(In thousands)
Accumulated
Additional Stock Other
Common Paid-in Treasury Benefit Retained Comprehensive Net
Stock Capital ESOP Stock Plans Earnings (Loss) Equity
----- ------- ---- ----- ----- -------- ------ ------
Balance at June 30, 1999........ $16 $14,869 $(1,227) $ -- $ -- $ 9,596 $ (739) $22,515
Net income ..................... -- -- -- 696 -- 696
Dividend paid................... -- -- -- (222) -- (222)
(Increase)/decrease in unrealized
losses on available-for-sale
securities................... -- -- -- -- -- -- (636) (636)
ESOP shares earned.............. -- (2) 51 -- -- -- -- 49
Stock repurchase................ -- -- -- (2,377) -- -- -- (2,377)
Common stock acquired for (584)
stock benefit plan........... -- -- -- -- (584) -- --
=== ======= ======= ======= ===== ======= ======= =======
Balance at March 31, 2000....... $16 $14,867 $(1,176) $(2,377) $(584) $10,070 $(1,375) $19,441
=== ======= ======= ======= ===== ======= ======= =======
4
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
Consolidated Statement of Cash Flows
For Nine Months Ended March 31, 2000 and 1999
(In thousands)
March 31, March 31,
2000 1999
-------- --------
Operating activities: (unaudited)
Net income/(loss) ............................................. $ 696 $ (31)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses and foreclosed real estate .......... 9 65
Amortization and accretion on investment securities ........... 1 (2)
Depreciation and amortization ................................. 78 109
Release - ESOP shares ......................................... 49 --
Loss on sale of real estate acquired through foreclosure ...... 34 37
Change in assets and liabilities:
Accrued interest receivable ............................... (58) (1)
Other assets .............................................. (331) (2,081)
Accrued interest payable and other liabilities ............ 444 275
-------- --------
Net cash provided by operating activities ..................... 922 (1,629)
-------- --------
Investment activities:
Purchase of held-to-maturity securities ....................... (14,811) (1,500)
Purchase of available-for-sale securities ..................... (8,531) (20,545)
Proceeds from maturities, calls and principal paydowns on
held-to-maturity securities ............................... 9,852 3,480
Proceeds from maturities, calls and principal paydowns on
available-for-sale securities ............................. 400 7,085
Loans made to customers, net of principal collected ........... (6,915) (38)
Acquisition of office premises and equipment .................. (44) (36)
Proceeds from sale of foreclosed real estate .................. 109 534
-------- --------
Net cash used in investing activities ......................... (19,940) (11,020)
-------- --------
Financing activities:
Net increase/(decrease) in deposit accounts ................... 4,498 (2,086)
Net increase/(decrease) in advances from borrowers
for taxes and insurance ................................... 1 (10)
Purchase - treasury stock ..................................... (2,377) --
Borrowed funds ................................................ 13,000 --
Net proceeds from issuance of common stock .................... -- 13,614
Dividend Payment .............................................. (222) --
Common stock acquired for stock benefit plans ................. (584) --
-------- --------
Net cash provided by financing activities ..................... 14,316 11,518
-------- --------
Decrease in cash and equivalents .............................. $ (4,702) $ (1,131)
Cash and equivalents - beginning of the period ................ 15,236 27,315
-------- --------
Cash and equivalents - end of period .......................... $ 10,534 $ 26,184
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid ............................................. $ 3,392 $ 3,129
Income taxes paid (refunded) .............................. $ 308 $ (65)
Supplemental Disclosure of Non-Cash Information:
Transfer from loans to real estate owned .................. $ 221 $ 50
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 nine months ended March 31, 2000 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 and nine months ended March 31, 2000,
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
6
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 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 Securities and Exchange Commission.
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 began offering commercial
7
loans through its commercial loan department. 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 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 March 31, 2000 and June 30, 1999
Total assets increased $14.2 million, or 11.9%, from $119.5 million at
June 30, 1999 to $133.7 million at March 31, 2000. The increase was primarily
due to a $12.1 million increase in the investment portfolio from $28.9 million
at June 30, 1999 to $41.0 million at March 31, 2000. In addition, the loan
portfolio increased $6.7 million from $72.8 million at June 30, 1999 to $79.5
million at March 31, 2000, primarily due to a $7.2 million increase in
commercial loans offset by a $470,000 decrease in net real estate loans. The
increase in commercial loans was primarily due to the increased efforts of the
commercial loan department, which was formed in February 1999.
The increase in assets was primarily funded by a $13.0 million increase
in borrowings from the Federal Home Loan Bank, which went from $1.0 million at
June 30, 1999 to $14.0 million at March 31, 2000. Additionally, deposits
increased $4.5 million from $95.8 million at June 30, 1999 to $100.3 million at
March 31, 2000. The increase in deposits was due primarily to more aggressive
pricing of certificates of deposit. Certificates of deposit increased $4.3
million, which reflected both in infusion of new deposits and a shift in the
deposit mix to certificates of deposit from passbook savings accounts, which
decreased $1.4 million. The increase in deposits was also attributable to a $1.6
million increase in NOW and money market accounts.
Total equity decreased $3.1 million, or 13.8%, from $22.5 million at
June 30, 1999 to $19.4 million at March 31, 2000. This decrease was primarily
due to repurchase of 230,115 shares of stock at a total cost of $2.4 million
during the quarter ended December 31, 1999 and, to a lesser extent, a $636,000
increase in unrealized losses on available-for-sale securities and stock
acquired for the 1999 Stock-Based Incentive Plan at a cost of approximately
$584,000 during the quarter ended March 31, 2000. The decreases were offset by
net income of $696,000 for the nine months ended March 31, 2000.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999
General. The Company reported net income of $205,000, or $0.17 per
share basic and $0.16 diluted, for the three months ended March 31, 2000
compared to net income of $247,000, or $0.17 per share basic and diluted, for
the three months ended March 31, 1999. The decrease in net income was primarily
due to an increase in non-interest expense and income tax provision for the
period ended March 31, 2000 offset in part by increases in net interest income
and non-interest income for the period.
8
Interest Income. Total interest income increased $303,000, or 15.1%,
for the three-month period ended March 31, 2000 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 $249,000 and an increase in
interest earned on loans of $168,000, both of which were due to higher average
balances in the respective portfolios. The increases were offset by a $114,000
decline in interest earned on interest-bearing deposits with banks, due to a
decrease in the amount of certificates of deposits invested at other financial
institutions. As the certificates of deposit investments matured, the proceeds
were used to fund normal operations including the growth in the loan and
securities portfolios.
Interest Expense. Interest expense increased $202,000, or 20.0%, for
the three months ended March 31, 2000 compared to the same period last year
primarily due to the increased cost of interest on borrowed funds of $155,000
due to the higher average balance on such borrowings. The balance of the
increase was due to an increase of $47,000 in the interest paid on deposit
accounts, due to the increase in the balance of these accounts of $4.5 million
since June 30, 1999, offset by a lower rate paid on NOW accounts. The additional
funds were used to fund the growth in the investment and loan portfolios.
Provision for Loan Losses. The Company's provision for loan losses
decreased $10,000 during the three-month period ended March 31, 2000 compared to
the same period last year. 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 effective collection efforts have resulted in 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 March 31, 1999. The
allowance for loan losses was $430,000 and $435,000 at March 31, 2000 and March
31, 1999, respectively. The allowance for loan losses represents 20.1% of
non-performing loans and 0.54% of total loans at March 31, 2000 and 36.2% of
non-performing loans and 0.62% of total loans at March 31, 1999.
Non-Interest Income. Non-interest income decreasd $16,000 for the three
months ended March 31, 2000 compared to the period ended March 31, 1999. This
was primarily due to a decrease in fees.
Non-Interest Expense. Non-interest expense increased $96,000, or 12.5%,
from $765,000 at March 31, 1999 to $861,000 at March 31, 2000. The increase was
primarily due to a $100,000 increase in salaries and benefits primarily due to
added staff in the commercial loan department and calendar year-end bonuses paid
to employees, and a $17,000 increase in professional fees primarily due to the
increased reporting and regulatory requirements of being a publicly held
company. Price increases for services were the major factor in the $49,000
increase in other expenses. The increase was partially offset by a decrease in
forclosed real estate expenses for the period ended March 31, 2000 because of a
decrease in the number of real estate owned properties acquired through
foreclosure.
9
Provision for Income Taxes. The Company had an increase in provision
for income taxes of $41,000 for the period ended March 31, 2000 to an expense of
$118,000 for the three month period ended March 31, 2000 from an expense of
$77,000 for the same period last year. The Company paid less for the period
ended March 31, 1999 as its tax expense on an annual basis was less due to the
operating loss caused by the one-time charitable contribution to establish the
Foundation.
Comparison of Operating Results for the Nine Months Ended March 31, 2000 and
1999
General. The Company reported net income of $696,000, or $0.52 per
share basic and $0.49 diluted for the nine months ended March 31, 2000 compared
to a net loss of $31,000 for the same period ended March 31, 1999. The loss for
the nine-month period ended March 31, 1999 was the result of a one-time charge
of $753,000 related to the establishment of the Security Savings Charitable
Foundation at the time of the conversion to the stock form of ownership on
December 31, 1998. If adjusted to eliminate that one-time charge, net income
would have approximated $722,000 for the nine-month period ended March 31, 1999.
Interest Income. Total interest income increased $877,000, or 15.3%,
for the nine-month period ended March 31, 2000 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 $810,000 and an increase in
interest on loans of $424,000, both of which were due to the higher average
balances of the respective portfolios. These increases were offset by a $358,000
decrease in the interest income earned from interest bearing deposits with
banks, due to the decrease in the amount of certificates of deposit invested at
other financial institutions. As certificates of deposit investments matured,
the proceeds were used to fund the stock repurchase and to increase liquidity in
preparation for Y2K.
Interest Expense. Interest expense increased $263,000, or 8.4%, for the
nine-month period ended March 31, 2000 compared to the same period last year.
The increase was primarily due to an increase of $376,000 in the interest paid
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. The increase was offset by a $113,000 decrease in interest expense on
deposits in part due to the decrease in the interest rate paid on NOW accounts.
The increase was also offset by a decrease in the average balance of deposits of
$3.5 million, from $101.6 million for the period ended March 31, 1999 to $98.1
million for the period ended March 31, 2000, primarily due to the withdrawal of
$2.6 million by depositors to purchase stock in the Company's public offering in
December 1998.
Provision for Loan Losses. The Company's provision for loan losses
decreased $56,000 for the nine-month period ended March 31, 2000 from $65,000
for the nine-month period ended March 31, 1999 to $9,000 for the nine-month
period ended March 31, 2000. Increased and more efficient collection efforts
have maintained better control of the Association's delinquent accounts and thus
allowed the Association to maintain this level of allowance for loan losses.
10
Non-interest Income. Non-interest income increased $9,000 for the
nine-month period ended March 31, 2000 compared to the same period the previous
year. The balance of the increase was attributable to modest increases in other
loan fees and service charges of $4,000 and a $5,000 increase in other
non-interest income for the nine-month period ended March 31, 2000 compared to
the same period the previous year.
Non-interest Expense. Non-interest expense decreased $409,000, or
14.1%, for the nine- month period ended March 31, 2000 compared to the
nine-month period ended March 31, 1999. The decrease was primarily due to the
one-time expense of funding the Security Savings Charitable Foundation in the
nine-month period ended March 31, 1999. Notwithstanding such expense, non-
interest expense would have increased $345,000, from the previous year period.
This increase was due to a $253,000 increase in salaries and employee benefits
primarily due to added staff in the commercial loan department and calendar
year-end bonuses awarded to the employees. In addition, professional fees
increased $101,000 for the nine-month period ended March 31, 2000 compared to
the same period one-year ago and other non-interest expense increased $131,000
for this period. The increases in professional fees and other non-interest
expense are primarily due to the increased reporting and regulatory costs of
being a publicly held company.
The increase was offset by a $98,000, or 36.8%, decrease in foreclosed
real estate losses from $266,000 for the nine-month period ended March 31, 1999
to $168,000 for the period ended March 31, 2000.
Provision for Income Taxes. The Company had an increase in provision
for income taxes of $361,000 for the period ended March 31, 2000, as a result of
the expense of $308,000 for the period ended March 31, 2000 compared to a
benefit of $53,000 for the period ended March 31, 1999. The benefit for the nine
months ended March 31, 1999 was the result of the operating loss created by the
charitable contribution received through the one-time charitable contribution to
the Foundation.
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 March
31, 2000 and 1999 the Company's liquidity ratios were 33.5% and 30.3%,
respectively.
11
At March 31, 2000, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $16.4 million, or 12.3% of
total adjusted assets, which is above the required level of $2.0 million, or
1.5%; core capital of $16.4 million, or 12.3%, 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 29.1%, of risk-weighted assets, which is above the required
level of $4.6 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 March 31, 2000, the
Company had advances outstanding from the Federal Home Loan Bank of $14.0
million and at March 31, 2000 had an overall borrowing capacity from the Federal
Home Loan Bank of $64.1 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 March 31, 2000, cash and due from banks, interest-bearing
deposits with banks and investment securities available for sale totaled $43.6
million, or 32.6% of total assets.
At March 31, 2000, the Company had commitments to originate loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $4.8 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
March 31, 2000, totaled $33.6 million. The Company expects that substantially
all of the maturing certificate accounts will be retained by the Company at
maturity.
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
12
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.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable.
Item 5. Other Information.
-----------------
None.
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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.*
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
(b) Reports on Form 8-K
None.
14
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: May 10, 2000 By: /s/Richard C. Laubach
---------------------
Richard C. Laubach
President and Chief Executive Officer
(principal executive officer)
Dated: May 10, 2000 By: /s/David P. Marchetti, Sr.
--------------------------
David P. Marchetti, Sr.
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
15