UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10 - QSB
X QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934
For the quarterly period ended March 31, 2002
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
---
For the transition period from ______ to ______
Commission File Number 0-32623
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Nittany Financial Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2925762
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
2541 E. College Avenue, State College, Pennsylvania 16801
(Address of principal executive offices)
(814) 272 - 2265
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at May 10, 2002: 1,133,293
NITTANY FINANCIAL CORP.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
March 31, 2002 and December 31, 2001
Consolidated Statement of Income (Unaudited)
for the Three Months ended March 31, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Three Months ended March 31, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Default Upon Senior Securities 12
Item 4. Submissions of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8 - K 12
SIGNATURES 13
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31,
2002 2001
------------- -----------
ASSETS
Cash and due from banks $ 578,788 $ 359,187
Interest-bearing deposits with other banks 13,428,698 5,753,971
Investment securities available for sale 12,242,221 13,188,065
Investment securities held to maturity (market
value of $24,363,407 and $27,789,824) 24,403,351 27,796,205
Loans receivable (net of allowance for loan losses
of $798,622 and $649,565) 86,032,273 73,787,410
Premises and equipment 1,857,224 1,344,262
Federal Home Loan Bank stock 709,900 710,700
Intangible assets 787,247 799,217
Accrued interest and other assets 1,048,925 1,043,117
------------ ------------
TOTAL ASSETS $141,088,627 $124,782,134
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand 4,947,447 $ 4,094,714
Interest-bearing demand 14,275,780 14,802,415
Money market 16,363,621 13,827,084
Savings 58,652,921 46,864,234
Time 20,292,391 18,932,789
------------ ------------
Total deposits 114,532,160 98,521,236
Short-term borrowings 8,880,261 8,714,554
FHLB advances 7,765,391 7,813,775
Accrued interest payable and other liabilities 815,524 770,753
------------ ------------
TOTAL LIABILITIES 131,993,336 115,820,318
------------ ------------
STOCKHOLDER'S EQUITY
Serial perferred stock, no par value; 5,000,000 shares
authorized, none issued
Common stock, $.10 par value, 10,000,000 shares
authorized; 1,133,293 issued and outstanding 113,329 113,329
Additional paid-in capital 11,069,804 11,069,804
Retained deficit (1,979,677) (2,155,207)
Accumulated other comprehensive loss (108,165) (66,110)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,095,291 8,961,816
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $141,088,627 $124,782,134
============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended March 31,
2002 2001
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans, including fees $1,449,268 $ 922,688
Investment securities 21,491 296,032
Interest-bearing deposits with other banks 454,488 48,966
---------- ----------
Total interest and dividend income 1,925,247 1,267,686
---------- ----------
INTEREST EXPENSE
Deposits 834,931 645,402
Short-term borrowings 52,071 -
Other borrowings 111,388 141,902
---------- ----------
Total interest expense 998,390 787,304
---------- ----------
NET INTEREST INCOME 926,857 480,382
Provision for loan losses 150,000 40,500
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 776,857 439,882
---------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 96,794 69,623
Investment security gain 7,630 -
Other income 22,703 19,455
---------- ----------
Total noninterest income 127,127 89,078
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 330,457 221,905
Occupancy and equipment 117,046 85,400
Other 250,951 184,368
---------- ----------
Total noninterest expense 698,454 491,673
---------- ----------
Income before income taxes 205,530 37,287
Income taxes 30,000 -
---------- ----------
NET INCOME $ 175,530 $ 37,287
========== ==========
EARNINGS PER SHARE:
Basic $0.15 $0.05
Diuluted $0.15 $0.05
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,133,293 780,312
Diuluted 1,175,293 787,101
See accompanying notes to the unaudited consolidated financial statements.
4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Other
Additional Compre- Total Compre-
Common Paid-in Retained hensive Stockholders' hensive
Stock Capital Deficit Loss Equity Income
---------- ----------- ------------ ----------- ------------- ---------
Balance, December 31, 2001 $113,329 $11,069,804 $(2,155,207) $ (66,110) $8,961,816
Net income 175,530 175,530 $175,530
Other comprehensive income:
Unrealized loss on available for
sale securities, net of tax
benefit of $21,665 (42,055) (42,055) (42,055)
--------
Comprehensive income $133,475
-------- ----------- ----------- -------- ---------- ========
Balance, March 31, 2002 $113,329 $11,069,804 $(1,979,677) $(108,165) $9,095,291
======== =========== =========== ======== ==========
2002
----------
Components of other comprehensive loss:
Change in net unrealized loss on investment securities available for sale $ (37,019)
Realized gains included in net income, net of taxes of $2,594 (5,036)
-----------
Total $ (42,055)
===========
See accompanying notes to the unaudited consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
2002 2001
------------ -------------
OPERATING ACTIVITIES
Net income $ 175,530 $ 37,287
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 150,000 40,500
Depreciation, amortization, and accretion, net 130,830 49,979
Investment security gain (7,630) -
Increase (decrease) in accrued interest receivable (14,913) 89,858
Increase in accrued interest payable 81,909 112,115
Other, net (28,033) 61,735
----------- -----------
Net cash provided by operating activities 487,693 391,474
----------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sale 37,630 -
Proceeds from principal repayments and maturities 848,267 3,041,364
Investment securities held to maturity:
Proceeds from principal repayments and maturities 3,353,182 687,468
Net increase in loans receivable (12,399,865) (2,970,610)
Redemption of FHLB stock 800 -
Purchase of premises and equipment (561,626) (784,496)
----------- -----------
Net cash used for investing activities (8,721,612) (26,274)
----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 16,010,924 (205,269)
Net increase in short-term borrowings 165,707 2,611,110
Repayment of other borrowings (48,384) (663,581)
----------- -----------
Net cash provided by financing activities 16,128,247 1,742,260
----------- -----------
Increase in cash and cash equivalents 7,894,328 2,107,460
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,113,158 4,233,404
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,007,486 $ 6,340,864
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and borrowings $ 916,481 $ 675,189
Income taxes 75,000 -
See accompanying notes to the unaudited consolidated financial statements.
6
NITTANY FINANCIAL CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Nittany Financial Corp. (the "Company")
includes its wholly-owned subsidiaries, Nittany Bank (the "Bank") and Nittany
Asset Management, Inc. All significant intercompany items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments that are, in the
opinion of management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected for the fiscal year ended December 31,
2002 or any other future interim period.
These statements should be read in conjunction with the consolidated financial
statements and related notes for the year ended December 31, 2001, which are
incorporated by reference in the Company's Annual Report on Form 10-KSB.
NOTE 2 - EARNINGS PER SHARE
The Company provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities. For the three months ended March 31, 2002 and 2001, the diluted
number of shares outstanding from employee stock options was 42,000 and 6,789,
respectively.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the three months ended March
31, 2002, this activity is shown under the heading Comprehensive Income as
presented in the Consolidated Statement of Changes in Stockholders' Equity. For
the three months ended March 31, 2001, comprehensive income totaled $138,376.
7
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, the ability to control costs and expenses, and general
economic conditions.
COMPARISON OF FINANCIAL CONDITION
Total assets increased $16,307,000 to $141,089,000 at March 31, 2002 from
$124,782,000 at December 31, 2001. Strong growth in residential and commercial
real estate loans resulted in an increase in net loans receivable of $12,245,000
which were primarily funded through increased balances in the savings deposit
products of $11,835,000 for the quarter.
Cash and cash equivalents increased $7,895,000 at March 31, 2002 as compared to
December 31, 2001. This increase resulted from growth in deposits which exceeded
loan demand during the quarter. Management believes that the liquidity needs of
the Company are satisfied by the current balance of cash and cash equivalents,
readily available access to traditional funding sources, FHLB advances, and the
portion of the investment and loan portfolios which mature within one year.
These sources of funds will enable the Company to meet cash obligations and
off-balance sheet commitments as they come due.
Investment securities available for sale decreased to $12,242,000 at March 31,
2002 from $13,188,000 at December 31, 2001 and investment securities held to
maturity decreased to $24,403,000 at March 31, 2002 from $27,796,000 at December
31, 2001. The decreases in the investment securities portfolios resulted
primarily from $4,201,000 of proceeds received from principal repayments and
maturities. Management elected not to reinvest these funds into similar
securities at this time as higher yielding opportunities are being evaluated in
response to an increased loan demand.
Net loans receivable increased to $86,032,000 at March 31, 2002 from $73,787,000
at December 31, 2001. The increase in net loans receivable resulted from the
economic health of the Company's market area and the strategic, service-oriented
marketing approach taken by management to meet the lending needs of the area. At
March 31, 2002, commercial real estate grew to $16,256,000 from $13,097,000 at
December 31, 2001 and 1 to 4 family residential mortgage balances grew by
$6,797,000 to $51,478,000 from $44,681,000 at December 31, 2001. Management
attributes the increases in lending balances to continued customer referrals,
the economic climate within the market area, and competitive rates. As of March
31, 2002, the Company had additional commitments
8
to fund loan demand of $3.2 million of which approximately $2.5 million relates
to residential and commercial real estate.
At March 31, 2002, the Company's allowance for loan losses increased $149,000 to
$799,000 from $650,000 at December 31, 2001. This increase was primarily due to
the growth of residential and commercial real estate loans. The increased
allowance resulted from a loan loss provision of $150,000 and charge-offs of
$1,000 during the period.
The additions to the allowance for loan losses are based upon a careful analysis
by management of loan data. As the Company lacks substantial historical
experience, management must base its determination upon such factors as the
Company's volume and the type of loans that it originates, the amount and trends
relating to its delinquent and non-performing loans, regulatory policies,
general economic conditions and other factors relating to the collectibility of
loans in its portfolio. Although the Company maintains its allowance for loan
losses at a level that it considers to be adequate to provide for the inherent
risk of loss in its loan portfolio at March 31, 2002, there can be no assurance
that additional losses will not be required in future periods.
Premises and equipment increased $513,000 to $1,857,000 as of March 31, 2002
from $1,344,000 at December 31, 2001. The major portion of the increase resulted
from the Company's purchased and renovation of a commercial building at 2541
East College Avenue in State College. This property opened as a fourth branch
office and administrative center on January 14, 2002.
Total deposits increased by $16,011,000 to $114,532,000 at March 31, 2002 as
compared to $98,521,000 at December 31, 2001. Of such increase, the nittany
savings deposit account contributed approximately $11.1 million to the amount.
The nittany savings deposit is a competitive deposit account with a tiered
annual interest rate of 3.25 % for balances over $2,500 for the the current
period. Due to the continued decreases of short term interest rates over the
past year by the Federal Reserve, the nittany savings deposit has helped to
increase our deposit base.
Stockholder's equity increased to $9,095,000 at March 31, 2002 as a result of
net income of $176,000 offset by an increase of $42,000 in net unrealized loss
on investment securities available for sale due to fluctuations in interest
rates. Because of interest rate volatility, accumulated other comprehensive loss
could materially fluctuate for each interim period and year-end period depending
on economic and interest rate conditions
RESULTS OF OPERATIONS
Net income of $176,000 for the period ended March 31, 2002 increased by $139,000
as compared to the same period ended 2001 as increases in net interest income
and noninterest income of $447,000 and $38,000, respectively, were offset by
increases in noninterest expense. Basic and diluted earnings per share increased
to $.15 per share for the three month period ended March 31, 2002 compared to
$.05 per share for the three month period ended March 31, 2001.
9
Net interest income for the three months ended March 31, 2002 was $927,000 as
compared to $480,000 for the same period ended 2001. Interest income increased
$657,000 for 2002 as compared to the prior year period and was influenced mainly
by increases in interest earned on loans receivable of $526,000. Interest income
was primarily driven by an increase of $58.0 million in average balances of
interest-earning assets that primarily resulted from a $35.2 million increase in
the average balance of loans receivable. The yield on interest earning assets
decreased to 6.09% for the three months ended March 31, 2002 from 7.41% for the
same period ended 2001 as interest rates continued to drop for the quarter.
Although there were significant increases in residential and commercial real
estate lending, the yield on the loans receivable decreased 101 basis points in
2002 as compared to 2001.
Interest expense increased $211,000 for 2002 as compared to the prior year
period and was influenced mainly by an increase in interest expense on deposits
of $190,000. This increase was primarily attributable to an increase in the
average balance of interest-bearing deposits of $48.8 million. The average
balances of savings deposit accounts increased $45.0 million as a result of
marketing efforts and competitive rates of the Nittany Savings product. The cost
of funds decreased to 3.52% for the three month period ended March 31, 2002 from
5.21% for the same period ended 2001 as a result of a general reduction in
interest rate levels.
Total noninterest income for the three months ended March 31, 2002 increased
$38,000 as compared to the same period ended 2001. Noninterest income items are
primarily comprised of service charges and fees on deposit account activity,
along with fee income derived from asset management services and related
commissions. Service fees on deposit accounts increased $27,000 and have
progressively increased during each quarter as the number of accounts and volume
of related transactions have increased. Additionally, for the three-months ended
March 31, 2002, Nittany Asset Management contributed $21,000 in commission and
management fees, an increase of $7,000 over 2001.
Total noninterest expenses increased $207,000 for the three months ended March
31, 2002 as compared to the same period ended 2001. The increase in total
noninterest expenses for the current period was primarily related to the larger
organization that resulted from the opening of an additional branch and
administrative center during the first quarter, as well as the related marketing
efforts to increase visibility within the Company's market. On January 14, 2002,
the Company opened a new branch office and administrative center on East College
Avenue in State College. Salary and benefits costs increased in connection with
the staffing of this new branch office, as well as, annual merit increases given
to current staff. Occupancy and equipment expenses also increased due to the
opening of the new office. Additionally, for the three-months ended March 31,
2002, Nittany Asset Management operations contributed approximately $11,000 of
other operating expense, a decrease of $6,000 over 2001.
10
Income tax expense of $30,000 was recognized in the first quarter of 2002 in
anticipation that all operating loss carryforwards will be utilized during the
year.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, interest-bearing deposits
with other banks and, funds provided from operations. While scheduled repayments
of loans and mortgage-backed securities and maturities of investment securities
are predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions, and
competition. We use our liquid resources principally to fund loan commitments,
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry and similar matters. Management monitors projected liquidity
needs and determines the level desirable based in part on the Bank's commitments
to make loans and management's assessment of the Bank's ability to generate
funds.
Management monitors both the Company's and the Bank's total risk-based, Tier I
risk-based and tangible capital ratios in order to assess compliance with
regulatory guidelines. At March 31, 2002, both the Company and the Bank exceeded
the minimum risk-based and tangible capital ratio requirements. The Company's
and the Bank's risk-based, Tier I risk-based, and tangible capital ratios are
12.8%, 11.6%, 6.0% and 12.4%, 11.3%, 5.8%, respectively, at March 31, 2002.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in securities and use of proceeds
None
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Report or incorporated
herein by reference:
3(i) Amended Articles of Incorporation of Nittany Financial Corp. *
3(ii) Bylaws of Nittany Financial Corp. *
4 Specimen Stock Certificate of Nittany Financial Corp. *
10.1 Employment Agreement between the Bank and David Z. Richards *
10.2 Nittany Financial Corp. 1998 Stock Option Plan **
99.1 Independent Accountants Report
* Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-57277) declared effective
by the SEC on July 31, 1998.
** Incorporated by reference to the identically numbered exhibit to the
December 31, 1999 Form 10-KSB filed with the SEC on March 28, 2000.
(b) Reports on Form 8-K.
None
12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned and hereunto duly authorized.
Nittany Financial Corp.
Date: May 14, 2002 By: /s/David Z. Richards
-------------------------------------
David Z. Richards
President and Chief Executive Officer
13