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 September 30, 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
------------------------------
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 November 12, 2002: 1,133,293
NITTANY FINANCIAL CORP.
INDEX
Page
Number
-----------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
September 30, 2002 and December 31, 2001
Consolidated Statement of Income (Unaudited)
for the Three and Nine Months ended September 30, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 30, 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 11
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default Upon Senior Securities 17
Item 4. Submissions of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8 - K 17-18
SIGNATURES 19
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
2002 2001
-------------- --------------
ASSETS
Cash and due from banks $ 779,473 $ 359,187
Interest-bearing deposits with other banks 19,202,465 5,753,971
Investment securities available for sale 7,064,869 13,188,065
Investment securities held to maturity (estimated
market value of $36,231,115 and $27,789,824) 35,903,630 27,796,205
Loans receivable (net of allowance for loan losses
of $1,053,750 and $649,565) 110,868,055 73,787,410
Premises and equipment 1,893,129 1,344,262
Federal Home Loan Bank stock 715,100 710,700
Intangible assets 799,217 799,217
Accrued interest and other assets 1,155,078 1,043,117
------------- -------------
TOTAL ASSETS $ 178,381,016 $ 124,782,134
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 7,194,682 $ 4,094,714
Interest-bearing demand 21,466,911 14,802,415
Money market 23,021,449 13,827,084
Savings 78,081,447 46,864,234
Time 17,919,355 18,932,789
------------- -------------
Total deposits 147,683,844 98,521,236
Short-term borrowings 9,616,230 8,714,554
Other borrowings 10,666,338 7,813,775
Accrued interest payable and other liabilities 827,026 770,753
------------- -------------
TOTAL LIABILITIES 168,793,438 115,820,318
------------- -------------
STOCKHOLDERS' EQUITY
Serial preferred 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 113,346 113,329
Additional paid-in capital 11,071,157 11,069,804
Retained deficit (1,569,645) (2,155,207)
Accumulated other comprehensive loss (27,280) (66,110)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 9,587,578 8,961,816
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,381,016 $ 124,782,134
============= =============
See accompanying notes to the consolidated financial statements.
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 1,860,797 $ 1,129,794 $ 4,949,651 $ 3,060,137
Interest-bearing deposits with other banks 43,673 115,255 108,236 261,726
Investment securities 400,910 293,030 1,303,893 814,283
----------------- ----------------- ----------------- -----------------
Total interest and dividend income 2,305,380 1,538,079 6,361,780 4,136,146
----------------- ----------------- ----------------- -----------------
INTEREST EXPENSE
Deposits 1,008,544 886,533 2,789,419 2,248,780
Short-term borrowings 53,040 17,998 153,333 53,801
Other borrowings 110,817 102,759 340,876 350,332
----------------- ----------------- ----------------- -----------------
Total interest expense 1,172,401 1,007,290 3,283,628 2,652,913
----------------- ----------------- ----------------- -----------------
NET INTEREST INCOME 1,132,979 530,789 3,078,152 1,483,233
Provision for loan losses 142,000 88,500 410,000 178,500
----------------- ----------------- ----------------- -----------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 990,979 442,289 2,668,152 1,304,733
----------------- ----------------- ----------------- -----------------
NONINTEREST INCOME
Service fees on deposit accounts 119,717 96,328 333,036 250,243
Investment security gain - 21,487 7,630 21,487
Other 41,652 28,665 98,730 70,150
----------------- ----------------- ----------------- -----------------
Total noninterest income 161,369 146,480 439,396 341,880
----------------- ----------------- ----------------- -----------------
NONINTEREST EXPENSE
Compensation and employee benefits 423,796 266,744 1,154,024 735,164
Occupancy and equipment 124,102 88,322 373,090 254,714
Other 237,650 211,702 762,123 583,587
----------------- ----------------- ----------------- -----------------
Total noninterest expense 785,548 566,768 2,289,237 1,573,465
----------------- ----------------- ----------------- -----------------
Income before income taxes 366,800 22,001 818,311 73,148
Income taxes 130,749 500 232,749 500
----------------- ----------------- ----------------- -----------------
NET INCOME $ 236,051 $ 21,501 $ 585,562 $ 72,648
================= ================= ================= =================
EARNINGS PER SHARE
Basic $ 0.21 $ 0.02 $ 0.52 $ 0.09
Diluted 0.19 0.02 0.49 0.09
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,133,311 880,410 1,133,299 814,131
Diluted 1,218,284 886,168 1,200,692 820,633
See accompanying notes to the consolidated financial statements.
4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
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 585,562 585,562 $ 585,562
Other comprehensive income:
Unrealized gain on available for
sale securities, net of taxes
of $20,003 38,830 38,830 38,830
----------
Comprehensive income $ 624,392
==========
Exercise of stock options 17 1,353 1,370
---------- ------------- ------------ ---------- ------------
Balance, September 30, 2002 $ 113,346 $ 11,071,157 $ (1,569,645) $ (27,280) $ 9,587,578
========== ============= ============ ========== ============
2002
----------
Components of other comprehensive loss:
Change in net unrealized loss on investment securities available for sale $ 43,866
Realized gains included in net income, net of taxes of $2,787 (5,036)
----------
Total $ 38,830
==========
See accompanying notes to the consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2002 2001
-------------- ----------------
OPERATING ACTIVITIES
Net income $ 585,562 $ 72,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 410,000 178,500
Depreciation, amortization, and accretion, net 292,445 152,542
Investment security gains (7,630) (21,487)
Decrease (increase) in accrued interest receivable (264,417) 3,272
Decrease in accrued interest payable (55,478) (55,535)
Other, net 244,204 1,603,025
------------- -------------
Net cash provided by operating activities 1,204,686 $ 1,932,965
------------- -------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sale 37,630 2,388,750
Proceeds from principal repayments and maturities 6,090,451 7,050,151
Investment securities held to maturity:
Purchases (26,458,521) (18,704,991)
Proceeds from principal repayments and maturities 18,270,784 2,317,805
Net increase in loans receivable (37,481,590) (16,341,344)
Purchase of FHLB stock (4,400) -
Purchase of premises and equipment (708,477) (927,871)
-------------- -------------
Net cash used for investing activities (40,254,123) (24,217,500)
-------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 49,162,608 34,738,095
Net increase (decrease) in short-term borrowings 901,676 (435,274)
Proceeds from other borrowings 4,000,000 -
Repayment of other borrowings (1,147,437) (738,582)
Exercise of stock options 1,370 -
Net proceeds from sale of common stock - 1,620,842
------------- -------------
Net cash provided by financing activities 52,918,217 35,185,081
------------- -------------
Increase in cash and cash equivalents 13,868,780 12,900,546
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,113,158 4,233,404
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,981,938 $ 17,133,950
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and borrowings $ 4,180,914 $ 2,708,448
Income taxes 119,000 500
See accompanying notes to the 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 and nine months ended September 30, 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 nine-months ended September 30, 2002 and 2001, the diluted
number of shares outstanding from employee stock options was 67,393 and 6,502,
respectively. For the three months ended September 30, 2002 and 2001, the
diluted number of shares outstanding from employee stock options was 84,973 and
5,758, respectively.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the nine months ended September
30, 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 September 30, 2002, comprehensive income totaled
$279,946. For the three and nine-
7
months ended September 30, 2001, comprehensive income totaled $21,709 and
$183,204.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations,
effective for all business combinations initiated after June 30, 2001, as well
as all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. FAS No. 141 also specifies criteria which
must be met for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. The adoption of
FAS No. 141 did not have a material effect on the Company's financial position
or results of operations.
On January 1, 2002, the Company adopted FAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
This statement changes the accounting for goodwill from an amortization method
to an impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. However, this new statement did not amend FAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions, which requires
recognition and amortization of unidentified intangible assets relating to the
acquisition of financial institutions or branches thereof. The FASB has
undertaken a limited scope project to reconsider the provisions of FAS No. 72 in
2002 and has issued an exposure draft of a proposed statement, Acquisitions of
Certain Financial Institutions, that would remove acquisitions of financial
institutions from the scope of FAS No. 72. The adoption of this proposed
statement would require all goodwill originating from acquisitions that meet the
definition of a business combination as defined in Emerging Issues Task Force
Issue ("EITF") No. 98-3 to be discontinued. The adoption of FAS No. 142 did not
have a material effect on the Company's financial position or results of
operations. However, the Company continues to amortize intangible assets of
$775.4 million that meet the requirements of FAS No. 72.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability be recognized
when incurred for the retirement of a long-lived asset and the value of the
asset be increased by that amount. The statement also requires that the
liability be maintained at its present value in subsequent periods and outlines
certain disclosures for such obligations. The new statement takes effect for
fiscal years beginning after June 15, 2002. The adoption of this statement,
which is effective January 1, 2003, is not expected to have a material effect on
the Company's financial statements.
On January 1, 2002, the Company adopted FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment
8
of a Business. FAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value less costs to
sell. The adoption of FAS No. 144 did not have a material effect on the
Company's financial statements.
In April 2002, the FASB issued FAS No. 145, "Recission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FASB FAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement also makes technical corrections to existing pronouncements, which are
not substantive but in some cases may change accounting practice. FAS No. 145 is
effective for transactions occurring after May 15, 2002. The adoption of FAS No.
145 did not have a material effect on the Company's financial position or
results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial statements.
On October 1, 2002, the FASB issued FAS No. 147, Acquisitions of Certain
Financial Institutions, effective for all business combinations initiated after
October 1, 2002. This Statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises. This Statement removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of FAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method. The acquisition of all or part of a financial institution that
meets the definition of a business combination shall be accounted for by the
purchase method in accordance with FAS No. 141, Business Combinations, and FAS
No. 142, Goodwill and Other Intangible Assets. This Statement also provides
guidance on the accounting for the impairment or disposal of acquired long-term
customer-relationship intangible assets (such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets), including those acquired in transactions between two or more mutual
enterprises. Upon adoption of this statement, the Company retroactively ceased
the amortization of $799,000 in goodwill associated with branch acquisitions.
The Company will continue to review the remaining goodwill on an annual basis
for impairment. Had the new accounting standard been effective in 2001 for the
three and nine months
9
periods, net income would have been $30,000, or $03 per diluted share and
$97,000, or $.12 per diluted share, respectively.
NOTE 5 - RESTATEMENT OF FINANCIAL STATEMENTS
On October 1, 2002, the FASB issued FAS No. 147 which changes the accounting for
goodwill from an amortization approach to an impairment-only approach as of the
effective date that FAS No. 142 was adopted, which in the Company's case is
January 1, 2002. As a result of complying with FAS No. 147, the Company is
required to restate earnings for the first and second fiscal quarters of 2002.
The following table details the changes on net income and earnings per share as
a result of this restatement:
Three Months Ended Three Months Ended Six Months Ended
March 31, 2002 June 30, 2002 June 30, 2002
Previously As Previously As Previously As
Reported Restated Reported Restated Reported Restated
------------- ------------ ------------ ------------ ------------- ------------
Net income $ 175,530 $ 183,430 $ 173,981 $ 181,795 $ 349,511 $ 365,226
Earnings Per Share:
Basic $ 0.15 $ 0.16 $ 0.15 $ 0.16 $ 0.31 $ 0.32
Diluted 0.15 0.16 0.14 0.14 0.29 0.30
10
MANAGEMENT'S 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.
Overview
Our business is conducted principally through Nittany Bank. Nittany
Bank provides a full range of banking services with an emphasis on residential
and commercial real estate lending, consumer lending, commercial lending and
retail deposits. At September 30, 2002, we had consolidated assets of $178
million, loans receivable (net of reserve) of $111 million, deposits of $148
million, and stockholders' equity of $9.6 million. Net income for the three
months ended September 30, 2002 increased $214,000 to $236,000, or $.19 per
diluted share, from $22,000, or $.02 per diluted share, for the same 2001
period. Net income for the nine months ended September 30, 2002 increased
$513,000 to $586,000, or $.49 per diluted share, from $73,000, or $.09 per
diluted share, for the same 2001 period.
The three and nine month 2002 results reflect the adoption of a new
accounting standard eliminating the amortization of goodwill expense beginning
January 1, 2002. Had the new accounting standard been effective in the 2001
third quarter and nine months period, net income would have been $12,000 or $.01
per diluted share and $36,000 or $.03 per diluted share, respectively. Refer to
note 16 of the consolidated financial statements.
Comparison of Financial Condition
Asset growth for the period continued to remain strong. Total assets
increased $53,599,000 to $178,381,000 at September 30, 2002 from $124,782,000 at
December 31, 2001. Additionally, the growth in assets for the quarter ended
September 30, 2002 represented an increase of $23,473,000 from June 30, 2002.
11
Cash and cash equivalents increased $13,869,000 to $19,982,000 at
September 30, 2002 as compared to $6,113,000 December 31, 2001. For the quarter
ended September 30, 2002, cash and cash equivalents increased by $9,642,000 from
June 30, 2002. The changes in cash and cash equivalents resulted from temporary
fluctuations with interest-bearing deposits with other banks due to the timing
of customer activity and investments purchased.
Investment securities available for sale decreased $6,123,000 to
$7,065,000 at September 30, 2002 as compared to $13,188,000 at December 31,
2001. Additionally, investment securities held to maturity increased $8,108,000
to $35,904,000 at September 30, 2002 from $27,796,000 at December 31, 2001.
During the current year, we purchased $26,459,000 of held to maturity securities
which were partially funded by $18,271,000 of proceeds received from principal
repayments and maturities of held to maturity and available for sale securities.
For the quarter ended September 30, 2002, investment securities available for
sale decreased $3,718,000 as compared to June 30, 2002. Additionally, investment
securities held to maturity at September 30, 2002 increased $2,662,000 as
compared to June 30, 2002. During year 2002, government agency securities
increased as a percentage of the total portfolio from approximately 19% to 27%
while mortgage backed securities have decreased from approximately 77% of the
total portfolio to 67%.
Loans receivable, net of allowance for loan losses, increased
$37,081,000 to $110,868,000 at September 30, 2002 from $73,787,000 at December
31, 2001. For the quarter ended September 30, 2002, loans receivable, net
increased $14,864,000 from June 30, 2002. Of such increase in loans receivable,
net for the quarter ended September 30, 2002, real estate loans increased
approximately $13,948,000. At September 30, 2002, commercial real estate loans
increased $1,318,000 and 1 to 4 family residential loans increased $12,872,000.
The increase in loans receivable resulted from the economic health of our market
area and the strategic, service-oriented marketing approach taken by management
to meet the lending needs of the area. As of September 30, 2002, we had
additional commitments to fund loan demand of $15,777,000 of which approximately
$4,339,000 relates to commercial and commercial real estate.
The allowance for loans is increased by provisions for loan losses,
which is charged against earnings, and is reduced by charge-offs and increased
by recoveries. At September 30, 2002, our allowance for loan losses increased
$404,000 to $1,054,000 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 for the nine months
ended September 30, 2002 of $410,000, offset by loan
12
charge offs of $6,000. For the quarter ended September 30, 2002, we added
$142,000 to the allowance.
The additions to the allowance for loan losses are based upon a
determination by management that it believes is appropriate. Due to our lack of
historical experience since we are newly formed, management bases its
determination upon such factors as the volume and type of loans that we
originate, the amount and trends relating to our delinquent and non-performing
loans, regulatory policies, general economic conditions and other factors
relating to the collectibility of loans in our portfolio. Although we maintain
our allowance for loan losses at a level that we consider to be adequate to
provide for the inherent risk of loss in our loan portfolio, there can be no
assurance that additional losses will not be required in future periods.
Total deposits increased $49,163,000 to $147,684,000 at September 30,
2002 from $98,521,000 at December 31, 2001. At September 30, 2002, the nittany
savings deposit account added to our deposit base approximately $77,525,000. For
the quarter ended September 30, 2002, interest bearing demand deposits increased
$4,277,000 and nittany savings deposits increased $7,877,000 from June 30, 2002.
The nittany savings deposit product is a competitive deposit account with a
tiered annual interest rate of 3.00% for balances over $2,500 for the current
period. Due to the continued decreases of short term interest rates over the
past year, the nittany savings deposit has helped to increase our deposit base.
Total borrowings increased $3,753,000 to $20,282,000 at September 30,
2002 from $16,529,000 at December 31, 2001. Of such increase $2,000,000 was
related to lines of credit from two local banks. Such funds were used to provide
additional capital to Nittany Bank. The remaining funds of approximately
$1,700,000 were from the Federal Home Loan Bank of Pittsburgh ("FHLB") and were
relatively short term (3-5 years) in nature. The FHLB funds were used to fund
loan growth and to lock in a supply of low cost funds.
Stockholder's equity increased $626,000 to $9,588,000 at September 30,
2002 from $8,962,000 at December 31, 2001, as a result of net income of $586,000
and a decline in accumulative other comprehensive loss of $39,000. Accumulated
other comprehensive loss decreased as a result of changes in the 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 from period to period depending on economic and
interest rate conditions.
13
Results of Operations
Net income for the three months ended September 30, 2002 increased
$214,000 to $236,000 from $22,000 for the same 2001 period. Net income for the
nine months ended September 30, 2002 increased $513,000 to $586,000 from $73,000
for the same 2001 period. During both time periods, increases in net interest
income were offset by increases in noninterest expense. Interest income and
interest expense increased substantially during the year because of the dramatic
growth in real estate loans and the nittany savings deposit product. Basic and
diluted earnings per share increased to $.52 and $.49 per share, respectively,
for the nine months ended September 30, 2002 as compared to $.09 and $.09 for
the same period of year 2001.
Net interest income for the three months ended September 30, 2002
increased $602,000 to $1,133,000 as compared to $531,000 for the same 2001
period. Interest and dividend income increased $767,000 to $2,305,000 for the
three months ended September 30, 2002 from $1,538,000 for the same 2001 year
period. Increased interest and dividend income for the current three months
ended September 30, 2002 was influenced primarily by increases in interest
earned on loans receivable of $731,000. The average yield on interest earning
assets decreased to 5.85% for the three-months ended September 30, 2002 from
6.54% for the same period ended 2001. The average yield on loans receivable
decreased for the three months ended September 30, 2002 by 81 basis points as
compared to the same 2001 period.
Net interest income for nine months ended September 30, 2002 increased
$1,595,000 to $3,078,000 from $1,483,000 for the same 2001 period. Interest and
dividend income increased $2,226,000 to $6,362,000 for the nine months ended
September 30, 2002 from $4,136,000 for the same 2001 period. The increased
interest and dividend income was primarily a result of increases in interest
earned on loans receivable of $1,890,000. The average yield on interest earning
assets declined to 5.97% for the nine months ended September 30, 2002 from 6.94%
for the same period ended 2001. The significant increase in residential real
estate lending was partially offset but the reduction in yield on loans
receivable of 93 basis points in 2002 as compared to 2001.
Interest expense for the three months ended September 30, 2002
increased $165,000 to $1,172,000 from $1,007,000 for the same 2001 period and
was influenced primarily by an increase in average balance of interest bearing
deposits of $51 million. However, average cost of fund for interest bearing
liabilities decreased 153 basis points to 3.24% from 4.77% for the three months
ended September 30, 2002 as compared to the same 2001 period. Additionally,
average cost of funds for deposits decreased 149 basis points for the current
three month period as compared to the same 2001 period.
14
Interest expense for the nine months ended September 30, 2002 increased
$631,000 to $3,284,000 from $2,653,000 for the same 2001 period and was
influenced mainly by an increase in interest expense on deposits of $540,000.
However, average cost of fund for interest bearing liabilities decreased 163
basis points to 3.36% for the nine months ended September 30, 2002 from 4.99%
for the same period ended 2001. Additionally, average cost of funds for deposits
decreased 159 basis points for the current nine -month period as compared to the
same 2001 period.
Total noninterest income increased $15,000 and $97,000, respectively
for the current three and nine months ended September 30, 2002. 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. For the three and nine months ended September 30, 2002,
service fees on deposit accounts increased $24,000 and $83,000 , respectively,
and have progressively increased during each quarter as the number of accounts
and volume of related transactions have increased. Additionally, for the three
and nine months ended September 30, 2002, Nittany Asset Management contributed
approximately $33,000 and $83,000, respectively in commission and management
fees, an increase of $18,000 and $35,000, respectively over the same periods in
2001.
Total noninterest expenses increased $219,000 and $716,000 for the
three and nine months ended September 30, 2002 as compared to the same periods
ended 2001. The increase in total noninterest expenses for both periods was
primarily related to operating a larger organization that resulted from the
opening of an additional office during the first quarter of 2002, as well as the
related marketing efforts to increase visibility within the Company's market.
Salary and benefits costs increased in connection with the new office, as five
full-time staff were hired. In addition, occupancy and equipment expenses
increased as well due to the new branch operations. For the three and nine
months ended September 30, 2002, Nittany Asset Management operations contributed
approximately $18,000 and $46,000 , respectively of other operating expense, an
increase of $4,000 and $1,000, respectively, over the same periods in 2001.
Noninterest expense was also lower due to the adoption of a new accounting
standard which eliminates the amortization of goodwill expense beginning January
1, 2002.
15
Liquidity and Capital Resources
Our primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans, proceeds from maturities, sales and
repayments of investment securities and FHLB advances. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. Management monitors liquidity daily, and on
a monthly basis incorporates liquidity management into its asset/liability
management program.
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 Nittany Bank's total
risk-based, tier I risk-based and tier I leverage capital ratios in order to
assess compliance with regulatory guidelines. At September 30, 2002, the Company
and Nittany Bank's total risk-based, tier I risk-based and tier I leverage
ratios were 11.20%, 10.00%, 5.00% and 13.10%, 11.92%, 5.93%, respectively.
16
Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
---------------------------------------------------
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-QSB, the Registrant's principal executive officer and
principal financial officer have concluded that the Registrant's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in internal controls. There were no significant changes in
-----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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 **
17
99.0 Independent Accountants Report
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002.
* 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
18
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: November 13, 2002 By: /s/David Z. Richards
-------------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: November 13, 2002 By: /s/Gary M. Bradley
-------------------------------------------
Gary M. Bradley
Vice President and Chief Accounting Officer
19
CERTIFICATION
Pursuant to Section 302 of the Securities Exchange Act of 1934
I, David Z. Richards, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Nittany Financial
Corp. ("the Registrant").
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("the Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ David Z. Richards
---------------------
David Z. Richards
President
CERTIFICATION
Pursuant to Section 302 of the Securities Exchange Act of 1934
I, Gary M. Bradley, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Nittany Financial
Corp. ("the Registrant").
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("the Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Gary M. Bradley
-------------------
Gary M. Bradley
Vice President and Chief Accounting Officer