UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10 - QSB
- -----
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- ----- OF 1934
For the quarterly period ended March 31, 2003
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 outstanding at May 12, 2003:
Class: Common Stock, par value $.10 per share: 1,403,225
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
NITTANY FINANCIAL CORP.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
March 31, 2003 and December 31, 2002 2
Consolidated Statement of Income (Unaudited)
for the Three Months ended March 31, 2003 and 2002 3
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) for the Three Months ended March 31, 2003 4
Consolidated Statement of Cash Flows (Unaudited)
for the Three Months ended March 31, 2003 and 2002 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8 - K 17
SIGNATURES 19
CERTIFICATIONS 20-21
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31,
2003 2002
------------- -------------
ASSETS
Cash and due from banks $ 732,371 $ 618,937
Interest-bearing deposits with other banks 13,431,570 5,233,136
Investment securities available for sale 5,385,428 6,024,009
Investment securities held to maturity (estimated
market value of $45,417,119 and $38,727,663) 45,058,375 38,359,925
Loans receivable (net of allowance for loan losses
of $1,257,285 and $1,177,141) 130,819,188 124,254,560
Premises and equipment 1,926,136 1,941,009
Federal Home Loan Bank stock 1,175,400 1,175,400
Intangible assets 1,763,231 799,217
Accrued interest and other assets 1,615,581 1,252,839
------------- -------------
TOTAL ASSETS $ 201,907,280 $ 179,659,032
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 7,295,990 $ 6,159,204
Interest-bearing demand 19,365,720 18,717,951
Money market 32,438,949 27,517,955
Savings 98,513,640 86,498,462
Time 18,030,593 17,958,397
------------- -------------
Total deposits 175,644,892 156,851,969
Short-term borrowings 3,742,655 1,141,104
Other borrowings 10,924,172 10,615,650
Accrued interest payable and other liabilities 798,584 1,145,853
------------- -------------
TOTAL LIABILITIES 191,110,303 169,754,576
------------- -------------
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, 1,403,225 and 1,367,230 issued and outstanding 140,323 136,723
Additional paid-in capital 11,636,312 11,045,912
Retained deficit (969,465) (1,268,694)
Accumulated other comprehensive loss (10,193) (9,485)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 10,796,977 9,904,456
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 201,907,280 $ 179,659,032
============= =============
See accompanying notes to unaudited consolidated financial statements
2
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Period Ended March 31,
2003 2002
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans, including fees $2,108,213 $1,449,268
Interest-bearing deposits with other banks 26,868 21,491
Investment securities 369,311 454,488
---------- ----------
Total interest and dividend income 2,504,392 1,925,247
---------- ----------
INTEREST EXPENSE
Deposits 1,062,622 834,931
Short-term borrowings 12,110 52,071
Other borrowings 131,423 111,388
---------- ----------
Total interest expense 1,206,155 998,390
---------- ----------
NET INTEREST INCOME 1,298,237 926,857
Provision for loan losses 90,000 150,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,208,237 776,857
---------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 118,825 96,794
Investment security gain 6,691 7,630
Asset management fees 339,144 21,003
Other 9,094 1,700
---------- ----------
Total noninterest income 473,754 127,127
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 518,726 330,457
Occupancy and equipment 144,976 117,046
Professional fees 48,024 24,382
Data processing fees 77,653 62,742
Supplies, printing, and postage 37,157 33,903
Advertising 37,350 30,384
ATM processing fees 32,300 30,594
Commission expense 217,825 -
Other 109,141 56,946
---------- ----------
Total noninterest expense 1,223,152 686,454
---------- ----------
Income before income taxes 458,839 217,530
Income taxes 159,610 34,100
---------- ----------
NET INCOME $ 299,229 $ 183,430
========== ==========
EARNINGS PER SHARE
Basic $ 0.21 $ 0.13
Diluted 0.20 0.13
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,402,825 1,359,952
Diluted 1,525,349 1,410,352
See accompanying notes to unaudited consolidated financial statements
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional Other Total Compre-
Common Paid-in Retained Comprehensive Stockholders' hensive
Stock Capital Deficit Loss Equity Income
-------- ----------- -------- ------------- ------------- -----------
Balance, December 31, 2002 $136,723 $11,045,912 $(1,268,694) $ (9,485) $ 9,904,456
Net income 299,229 299,229 $299,229
Other comprehensive income:
Unrealized loss on available for sale securities
net of reclassification adjustment,
net of tax benefit of $364 (708) (708) (708)
--------
Comprehensive income $298,521
========
Issuance of common shares (36,000 shares) 3,600 590,400 594,000
-------- ----------- ----------- -------- -----------
Balance, March 31, 2003 $140,323 $11,636,312 $ (969,465) $(10,193) $10,796,977
======== =========== =========== ======== ===========
2002
--------
Components of other comprehensive income:
Change in net unrealized loss on
investment securities available for sale $ 3,708
Realized gains included in net income, net of taxes of $2,275 (4,416)
--------
Total $ (708)
========
See accompanying notes to unaudited consolidated financial statements
4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three-months ended March 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 299,229 $ 183,430
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for loan losses 90,000 150,000
Depreciation, amortization, and accretion, net 258,305 122,930
Investment security gains (losses) 6,691 (7,630)
Increase in accrued interest receivable (141,401) (14,913)
Increase (decrease) in accrued interest payable (170,320) 81,909
Other, net (397,925) (28,033)
------------ ------------
Net cash provided by operating (used for) activities (55,421) 487,693
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (28,069) -
Proceeds from sale 26,901 37,630
Proceeds from principal repayments and maturities 617,631 848,267
Investment securities held to maturity:
Purchases (14,910,684) -
Proceeds from principal repayments and maturities 8,049,792 3,353,182
Net increase in loans receivable (6,676,627) (12,399,865)
Redemption of FHLB stock - 800
Purchase of subsidiary (964,014) -
Purchase of premises and equipment (44,637) (561,626)
------------ ------------
Net cash used for investing activities (13,929,707) (8,721,612)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 18,792,923 16,010,924
Net increase in short-term borrowings 2,601,551 165,707
Proceeds from other borrowings 360,000 -
Repayment of other borrowings (51,478) (48,384)
Proceeds from issuance of common stock 594,000 -
------------ ------------
Net cash provided by financing activities 22,296,996 16,128,247
------------ ------------
Increase in cash and cash equivalents 8,311,868 7,894,328
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,852,073 6,113,158
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,163,941 $ 14,007,486
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and borrowings $ 1,376,475 $ 916,481
Income taxes 550,000 75,000
See accompanying notes to unaudited consolidated financial statements.
5
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 March 31, 2003 are not
necessarily indicative of the results to be expected for the fiscal year ended
December 31, 2003 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, 2002, 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, 2003 and 2002, the diluted
number of shares outstanding from employee stock options was 123,134 and 50,400,
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, 2003, 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, 2002, comprehensive income totaled $141,375.
6
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("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
adoption of this statement, which was effective January 1, 2003, did not have a
material effect on the Company's financial position or results of operations.
In April 2002, the FASB issued FAS No. 145, Rescission 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 APB Opinion No. 30 will now be used to classify those gains and losses. This
statement also amends 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. The provisions of this statement
related to the rescission of FAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishments of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB Opinion No. 30 for classification as an extraordinary
item shall be reclassified. Early adoption of the provisions of this statement
related to FAS No. 13 shall be effective for transactions occurring after May
15, 2002. All other provisions of this statement shall be effective for
financial statements issued on or after May 15, 2002. The adoption of this
statement 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 is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of this statement did
not have a material effect on the Company's financial position or results of
operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting
for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of
FAS No. 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. Under the provisions
of FAS No. 123, companies that adopted the preferable, fair value based method
were required to apply that method prospectively for new stock option awards.
This contributed to a "ramp-up"
7
effect on stock-based compensation expense in the first few years following
adoption, which caused concern for companies and investors because of the lack
of consistency in reported results. To address that concern, FAS No. 148
provides two additional methods of transition that reflect an entity's full
complement of stock-based compensation expense immediately upon adoption,
thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity
and prominence of disclosures about the pro forma effects of using the fair
value based method of accounting for stock-based compensation for all
companies--regardless of the accounting method used--by requiring that the data
be presented more prominently and in a more user-friendly format in the
footnotes to the financial statements. In addition, the statement improves the
timeliness of those disclosures by requiring that this information be included
in interim as well as annual financial statements. The transition guidance and
annual disclosure provisions of FAS No. 148 are effective for fiscal years
ending after December 15, 2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002
The following table represents the effect on net income and earnings per share
had the stock-based employee compensation expense been recognized:
Three Months Ended March 31,
2003 2002
----------- -----------
Net income, as reported: $ 299,229 $ 183,430
Less proforma expense related
to stock options 25,369 40,683
----------- -----------
Proforma net income 273,860 142,747
=========== ===========
Basic net income per common share:
As reported $ 0.21 $ 0.13
Pro forma 0.20 0.10
Diluted net income per common share:
As reported $ 0.20 $ 0.13
Pro forma 0.18 0.10
In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in FAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
8
of cash flows. FAS No.149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this statement that relate to FAS No. 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
In November, 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation did
not have a material effect on the Company's financial position or results of
operations.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that by
requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements
9
of this interpretation apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The adoption of this interpretation has not and is not expected to
have a material effect on the Company's financial position or results of
operations.
10
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, but are
not limited to, changes in interest rates, the ability to control costs and
expenses, and general economic conditions.
Overview
Nittany Financial Corp. ("Nittany") is a unitary thrift holding company
organized in 1997 for the purpose of establishing a de novo community bank in
State College, Pennsylvania. Nittany Bank (the "Bank") commenced operations as a
wholly-owned FDIC-insured federal savings bank subsidiary of Nittany on October
26, 1998. At March 31, 2003, the business operations of Nittany included three
operating subsidiaries (collectively defined as the "Company", unless the
context indicates otherwise), as follows:
o Nittany Bank commenced banking operations in October 1998 as a
federally-insured federal savings bank with two offices at 116 East
College Avenue and 1276 North Atherton, State College, Pennsylvania.
On August 7, 2000, a third branch office was opened at 129 Rolling
Ridge Drive in State College and on January 14, 2002, a fourth State
College branch office opened at 2541 East College Avenue.
o Nittany Asset Management, Inc. was formed in May 1999 primarily to
offer various types of investment products and services. This
subsidiary is headquartered at 2541 East College Avenue, State
College, Pennsylvania and began operations in November 1999.
o On January 1, 2003, Nittany Financial Corp. acquired Vantage
Investment Advisors, LLC ("Vantage") for consideration consisting of
cash, the assumption of Vantage debt, and 36,000 shares of the
Company's stock. Vantage is a registered investment advisor which
manages investment assets in excess of $140 million. This subsidiary
is also headquartered at 2541 East College Avenue in State College.
Our retail business is conducted principally through Nittany Bank. Nittany Bank
provides a wide range of retail banking services with an emphasis on residential
and commercial real estate lending, consumer lending, commercial lending and
retail deposits. At March 31, 2003, we had consolidated assets of $202 million,
loans receivable (net of allowance for loan losses) of $131 million, deposits of
$176 million, and stockholders' equity of $10.8 million. Net income for the
quarter ended March 31, 2003 increased $123,000 to $299,000 or $.20 per diluted
share, from
11
$176,000 or $.12 per diluted share, for the same 2002 period. This included an
income tax expense of $160,000 for 2003, compared to $34,000 for the same 2002
quarter.
COMPARISON OF FINANCIAL CONDITION
Total assets increased $22,248,000 to $201,907,000 at March 31, 2003 from
$179,659,000 at December 31, 2002. Strong growth in residential and commercial
real estate loans resulted in an increase in net loans receivable of $6,564,000
which were primarily funded through increased balances in the savings deposit
products of $12,016,000 for the quarter. Total assets included $1.8 million of
intangible assets from the acquisition of Vantage and the Bank's original core
deposits. Amortization of goodwill was discontinued as of December 31, 2001
based on the adoption of Financial Accounting Standards Nos. 142 and 147.
Cash and cash equivalents increased $8,312,000 at March 31, 2003 as compared to
December 31, 2002. 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 $5,385,000 at March 31,
2003 from $6,024,000 at December 31, 2002 and investment securities held to
maturity increased to $45,058,000 at March 31, 2003 from $38,360,000 at December
31, 2002. The increase in the investment securities' held to maturity portfolio
resulted primarily from the investment of savings deposits not yet needed to
fund loan growth .
Net loans receivable increased to $130,819,000 at March 31, 2003 from
$124,255,000 at December 31, 2002. The increase in net loans receivable resulted
from the strong real estate market of the Company's market area, low market
interest rates, and the strategic, service-oriented marketing approach taken by
management to meet the lending needs of the area. At March 31, 2003, commercial
real estate loans grew to $25,654,000 from $22,002,000 at December 31, 2002 and
1 to 4 family residential mortgage balances grew by $4,233,000 to $84,501,000
from $80,268,000 at December 31, 2002. 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, 2003, the Company had
additional commitments to fund loan demand of $9.2 million, of which
approximately $3.5 million relates to commercial customers.
At March 31, 2003, the Company's allowance for loan losses increased by $80,000
to $1,257,000 from $1,177,000 at December 31, 2002. The increase resulted from
additional loan loss provisions of $90,000 for the growth in residential
mortgages which were partially offset by charge-offs for the quarter.
12
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, 2003, there can be no assurance
that additional losses will not be required in future periods.
Total deposits increased by $18,793,000 to $175,645,000 at March 31, 2003 as
compared to $156,852,000 at December 31, 2002. Of such increase, the Nittany
Savings deposit account accounted for approximately $12,016,000 to the amount.
The Nittany Savings deposit is a competitive deposit account with a tiered
annual interest rate of 2.50 % for balances over $2,500 for 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 $10,797,000 at March 31, 2003 as a result of
net income of $299,000 offset by an increase of $1,000 in net unrealized loss on
investment securities available for sale. Because of interest rate volatility
and an illiquid market for some of the investment securities, accumulated other
comprehensive loss could materially fluctuate for each interim period and
year-end period depending on economic and interest rate conditions. In addition,
36,000 of new shares were issued at $16.50 per share on January 1, 2003 in the
acquisition of Vantage.
RESULTS OF OPERATIONS
Net income of $299,000 for the period ended March 31, 2003 increased by $116,000
as compared to the same period ended 2002 as increases in net interest income
and noninterest income of $371,000 and $347,000, respectively, were partially
offset by increases in noninterest expense and taxes. Basic and diluted earnings
per share increased to $.21 and $.20 per share, respectively for the three month
period ended March 31, 2003 compared to $.13 and $.13 per share, respectively
for the three month period ended March 31, 2002.
Net interest income for the three months ended March 31, 2003 was $1,298,000 as
compared to $927,000 for the same period ended 2002. Interest income increased
$579,000 for 2003 as compared to the prior year period and was influenced mainly
by increases in interest earned on loans receivable of $659,000. The increase in
interest income was the result of an increase of $34.4 million in average
balances of interest-earning assets that primarily resulted from a $30.0 million
increase in the average balance of loans receivable. The yield on interest
earning assets decreased to 5.43% for the three months ended March 31, 2003 from
6.09% for the same period ended 2002 as interest rates continued to drop for the
quarter. Although there were significant increases in residential real estate
lending, the yield on the loans receivable decreased 76 basis points in 2003 as
compared to 2002.
13
Interest expense increased $208,000 for 2003 as compared to the prior year
period and was influenced mainly by an increase in interest expense on deposits
of $228,000. This increase was primarily attributable to an increase in the
average balance of interest-bearing deposits of $36,775,000. The average
balances of savings deposit accounts increased $23,728,000 as a result of
customer service, referrals, marketing efforts and competitive rates of the
Nittany Savings product. The cost of funds decreased to 2.82% for the three
month period ended March 31, 2003 from 3.52% for the same period ended 2002 as a
result of a general reduction in market interest rate levels and a decrease in
the rates paid on deposits.
Total noninterest income for the three months ended March 31, 2003 increased
$347,000 as compared to the same period ended 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. Service fees on deposit accounts increased $22,000 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, 2003, commissions and management fees from Vantage and Nittany Asset
Management increased by $318,000 over the same period of 2002. Note that Vantage
was acquired in January of this year.
Total noninterest expenses increased $537,000 for the three months ended March
31, 2003, as compared to the same period ended 2002. The increase in total
noninterest expenses for the current period was primarily related to the larger
organization that resulted from the acquisition of Vantage as well as the
related marketing efforts to increase visibility within the Company's market
area, annual merit increases and bonuses given to employees, and data processing
expenses. Vantage paid $218,000 of solicitors' fees for the quarter.
Income tax expense of $160,000 was recognized in the first quarter of 2003,
compared to $34,000 for the same period of 2002, as all operating loss
carryforwards had been utilized during the previous 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.
14
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, 2003, 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
10.9%, 9.7%, 5.0% and 12.6%, 11.4%, 5.6%, respectively, at March 31, 2003.
15
Item 3. 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.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in securities and use of proceeds
None
Item 3. Defaults upon 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 **
99.0 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.
17
(1) A Report on Form 8-K was filed on April 30, 2003 pursuant to
Items 7 and 12 in accordance with Release No. 34-47583 to report
earnings for the quarter ended March 31, 2003.
(2) A Report on Form 8-K was filed on April 25, 2003 pursuant to
items 5 and 7 announcing that the Registrant was filing a
Registration Statement with the Securities and Exchange
Commission to sell up to 149,500 additional shares of Common
Stock.
(3) A Report on Form 8-K was filed on February 13, 2003 pursuant to
items 5 and 7 to report earnings for the quarter and year ended
December 31, 2002.
(4) A report on Form 8-K was filed on January 17, 2003, pursuant to
items 5, 7 and 9 announcing that that the Registrant's Board of
Directors declared a six-for-five stock split payable in the form
of a 20% stock dividend on the Company's outstanding common
stock.
(5) A Report on Form 8-K was filed on January 10, 2003 pursuant to
items 5, 7 and 9 announcing the Registrant's new branch office
location at 1900 South Atherton St.
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: May 14, 2003 By: /s/David Z. Richards
-------------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: May 14, 2003 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: 5/14/03 /s/ David Z. Richards
------------------------------------------
David Z. Richards
President
20
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: 5/14/03 /s/ Gary M. Bradley
-------------------------------------------
Gary M. Bradley
Vice President and Chief Accounting Officer
21