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 June 30, 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
------------------------------
Nittany Financial Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2925762
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 August 11, 2003: 1,560,898
Transitional Small Business Issuer Format (check one) Yes No X
NITTANY FINANCIAL CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
June 30, 2003 and December 31, 2002
Consolidated Statement of Income (Unaudited)
for the Three and Six Months ended June 30, 2003
and 2002 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) for the Six Months ended
June 30, 2003 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 2003 and 2002 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 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
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2003 2002
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 278,978 $ 618,937
Interest-bearing deposits with other banks 12,977,478 5,233,136
Investment securities available for sale 4,967,169 6,024,009
Investment securities held to maturity (estimated
market value of $42,807,220 and $38,727,663) 42,451,514 38,359,925
Loans receivable (net of allowance for loan losses
of $1,440,799 and $1,177,141) 153,329,470 124,254,560
Premises and equipment 2,028,433 1,941,009
Federal Home Loan Bank stock 1,241,000 1,175,400
Goodwill 1,763,231 799,217
Accrued interest receivable and other assets 1,933,527 1,252,839
------------- -------------
TOTAL ASSETS $ 220,970,800 $ 179,659,032
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 7,809,067 $ 6,159,204
Interest-bearing demand 21,115,869 18,717,951
Money market 32,794,857 27,517,955
Savings 109,631,769 86,498,462
Time 19,149,732 17,958,397
------------- -------------
Total deposits 190,501,294 156,851,969
Short-term borrowings 5,267,883 1,141,104
Other borrowings 10,871,890 10,615,650
Accrued interest payable and other liabilities 800,557 1,145,853
------------- -------------
TOTAL LIABILITIES 207,441,624 169,754,576
------------- -------------
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, 1,560,898 and 1,367,225 issued and outstanding 156,090 136,723
Additional paid-in capital 13,989,501 11,045,912
Retained deficit (613,862) (1,268,694)
Accumulated other comprehensive loss (2,553) (9,485)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 13,529,176 9,904,456
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 220,970,800 $ 179,659,032
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Three-Months Ended June 30, Six-Months Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 2,302,577 $ 1,639,586 $ 4,410,790 $ 3,088,854
Interest-bearing deposits with other banks 13,037 43,072 39,905 64,563
Investment securities 377,023 448,495 746,334 902,983
----------- ----------- ----------- -----------
Total interest and dividend income 2,692,637 2,131,153 5,197,029 4,056,400
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,056,983 945,944 2,119,605 1,780,875
Short-term borrowings 12,878 48,222 24,988 100,293
Other borrowings 130,218 118,671 261,641 230,059
----------- ----------- ----------- -----------
Total interest expense 1,200,079 1,112,837 2,406,234 2,111,227
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,492,558 1,018,316 2,790,795 1,945,173
Provision for loan losses 188,000 118,000 278,000 268,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,304,558 900,316 2,512,795 1,677,173
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 126,632 116,525 245,457 213,319
Investment security gain - - 6,691 7,630
Asset management fees 150,526 - 489,670 -
Other 77,851 34,375 86,945 57,078
----------- ----------- ----------- -----------
Total noninterest income 355,009 150,900 828,763 278,027
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 544,386 399,771 1,063,112 730,228
Occupancy and equipment 148,245 131,942 293,221 248,988
Professional fees 53,725 41,356 101,749 65,738
Data processing fees 95,608 59,932 173,261 122,674
Supplies, printing, and postage 31,518 31,924 68,675 65,827
Advertising 24,442 31,156 61,792 61,540
ATM processing fees 30,322 33,528 62,622 64,122
Commission expense 77,298 - 295,123 -
Other 109,331 61,309 218,472 120,761
----------- ----------- ----------- -----------
Total noninterest expense 1,114,875 790,918 2,338,027 1,479,878
----------- ----------- ----------- -----------
Income before income taxes 544,692 260,298 1,003,531 475,322
Income taxes 189,089 78,503 348,699 110,096
----------- ----------- ----------- -----------
NET INCOME $ 355,603 $ 181,795 $ 654,832 $ 365,226
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.25 $ 0.13 $ 0.47 $ 0.27
Diluted 0.23 0.13 0.43 0.25
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,408,449 1,359,952 1,405,653 1,359,952
Diluted 1,529,307 1,430,274 1,527,344 1,448,508
See accompanying notes to the unaudited consolidated financial statements.
4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
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 654,832 654,832 $654,832
Other comprehensive income:
Unrealized gain on available for sale
securities net of reclassification
adjustment, net of taxes of $3,571 6,932 6,932 6,932
--------
Comprehensive income $661,764
========
Exercise of stock options 16 1,092 1,108
Issuance of 36,000 shares of common stock 3,600 590,400 594,000
Sale of 157,515 shares of common stock,
net of offering costs 15,751 2,352,097 2,367,848
-------- ----------- ----------- ------- -----------
Balance, June 30, 2003 $156,090 $13,989,501 $ (613,862) $(2,553) $13,529,176
======== =========== =========== ======= ===========
2003
--------
Components of other comprehensive income:
Change in net unrealized gain on
investment securities available
for sale $11,348
Realized gains included in net income,
net of taxes of $2,275 (4,416)
-------
Total $ 6,932
=======
See accompanying notes to the unaudited consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six-Months Ended June 30,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 654,832 $ 365,226
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 278,000 268,000
Depreciation, amortization, and accretion, net 509,503 182,747
Investment security gains (6,691) (7,630)
Increase in accrued interest receivable (115,856) (137,411)
Decrease in accrued interest payable (259,453) (59,720)
Decrease in income taxes payable (676,000) (8,904)
Other, net 186,618 140,563
------------ ------------
Net cash provided by operating activities 570,953 742,871
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (19,826) --
Proceeds from sale 26,637 37,630
Proceeds from principal repayments and maturities 1,040,647 2,324,347
Investment securities held to maturity:
Purchases (29,941,878) (10,737,445)
Proceeds from principal repayments and maturities 25,486,230 5,251,778
Net increase in loans receivable (29,517,912) (22,482,045)
Purchase of FHLB stock (65,600) (4,400)
Acquisition of subsidiary (370,014) --
Purchase of premises and equipment (206,154) (681,957)
------------ ------------
Net cash used for investing activities (33,567,870) (26,292,092)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 33,649,325 28,844,843
Net increase in short-term borrowings 4,126,779 29,272
Proceeds from other borrowings 360,000 2,000,000
Repayment of other borrowings (103,760) (1,097,526)
Exercise of stock options 1,108 --
Proceeds from the sale of common stock 2,352,113 --
Issuance of common stock 15,751 --
------------ ------------
Net cash provided by financing activities 40,401,300 29,776,589
------------ ------------
Increase in cash and cash equivalents 7,404,383 4,227,368
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,852,073 6,113,158
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,256,456 $ 10,340,526
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 2,665,687 $ 3,004,271
Income taxes 1,020,000 119,000
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"), Nittany Asset
Management, Inc, and Vantage Investment Advisors, LLC. 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 six months ended June 30, 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 June 30, 2003 and 2002, the diluted
number of shares outstanding from employee stock options was 120,858 and 88,556,
respectively. For the six-months ended June 30, 2003 and 2002, the diluted
number of shares outstanding from employee stock options was 121,691 and 70,322,
respectively.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the six months ended June 30,
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 June 30, 2003, comprehensive income totaled $363,243. For the three
and six-months ended June 30, 2002, comprehensive income totaled $210,971 and
$344,446.
7
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 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" 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
8
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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported: $355,603 $181,795 $654,832 $365,226
Less proforma expense related
to stock options 43,886 40,683 87,771 81,366
-------- -------- -------- --------
Proforma net income $311,717 $141,112 $567,061 $283,860
======== ======== ======== ========
Basic net income per common share:
As reported $ 0.25 $ 0.13 $ 0.47 $ 0.26
Pro forma 0.22 0.10 0.40 0.21
Diluted net income per common share:
As reported $ 0.23 $ 0.13 $ 0.43 $ 0.24
Pro forma 0.20 0.10 0.37 0.20
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
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. The adoption of this statement is not expected to have
a material effect on the Company's financial position or results of operations.
In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Such instruments may have
been previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period
9
beginning after June 15, 2003. The adoption of this statement is not expected to
have a material effect on the Company's reported equity.
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 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.
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
10
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 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.26 $ 0.27
Diluted 0.13 0.13 0.12 0.13 0.24 0.25
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
Nittany Financial Corp. ("Nittany") is a unitary thrift holding company
organized in 1997 for the purpose of establishing a hometown 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 June 30, 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 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. In July, 2003, the 129 Rolling Ridge Drive office moved to a
larger location in the same general area of State College, PA.
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.
11
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. The Company recognized goodwill of approximately $1.0
million Vantage is a registered investment advisor which manages
investment assets in excess of $180 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 banking services with an emphasis on residential
and commercial real estate lending, consumer lending, commercial lending and
retail deposits. At June 30, 2003, we had consolidated assets of $221 million,
loans receivable (net of allowance for loan losses) of $153 million, deposits of
$191 million, and stockholders' equity of $13.5 million. Net income for the
quarter ended June 30, 2003 increased $174,000 to $356,000 or $.23 per diluted
share, from $182,000 or $.13 per diluted share, for the same 2002 period. This
included an income tax expense of $189,000 for 2003 compared to $78,000 for the
same 2002 quarter.
Comparison of Financial Condition
Total assets increased $41,312,000 to $220,971,000 at June 30, 2003 from
$179,659,000 at December 31, 2002. The growth in assets for the quarter ended
June 30, 2003 represented an increase of $19,064,000 from March 31, 2003. The
Bank's asset growth was driven primarily by strong growth in the 1-4 family
residential loan portfolio, which has been funded by steady increases in
deposits.
Cash and cash equivalents increased $7,404,000 to $13,256,000 at June 30,
2003 as compared to $5,852,000 at December 31, 2002. For the quarter ended June
30, 2003, cash and cash equivalents decreased by $908,000 from March 31, 2003.
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. Nittany's primary depository is the Federal
Home Loan Bank of Pittsburgh.
Investment securities available for sale decreased $1,057,000 to $4,967,000
at June 30, 2003 as compared to $6,024,000 at December 31, 2002. Additionally,
investment securities held to maturity increased $4,092,000 to $42,452,000 at
June 30, 2003 from $38,360,000 at December 31, 2002. During the current period,
we purchased $29,942,000 of held to maturity securities which were partially
funded by $25,486,000 of proceeds received from principal repayments and
maturities of held to maturity securities. For the quarter ended June 30, 2003,
investment securities available for sale decreased $418,000 as compared to March
31, 2003. Additionally, investment securities held to maturity at June 30, 2003
decreased $2,606,000 as compared to March 31, 2003.
Approximately $30,800,000 of gross loans closed during the quarter, and
loans receivable, net of allowance for loan losses, increased $29,074,000 to
$153,329,000 at June 30, 2003 from $124,255,000 at December 31, 2002. The net
growth was less than the gross loans booked because of principal reductions and
a high level of refinancing activity. For the quarter ended June 30, 2003, loans
receivable, net increased $22,510,000 from March 31, 2003. Of such increase in
loans receivable, net for the quarter ended June 30, 2003, 1-4 family
residential loans increased approximately $17,128,000. The increase in loans
receivable resulted from the
12
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 June
30, 2003, we had additional commitments to fund loan demand of $9,473,000 of
which approximately $5,905,000 relates to commercial and commercial real estate.
The allowance for loan losses is increased by provisions for loan losses,
which is charged against earnings, and is reduced by charge-offs and increased
by recoveries. At June 30, 2003, our allowance for loan losses increased
$264,000 to $1,441,000 from $1,177,000 at December 31, 2002. The increased
allowance resulted from a loan loss provision for the six months ended June 30,
2003 of $278,000 offset by loan chargeoffs of $17,000 and recoveries of $3,000.
For the quarter ended June 30, 2002, we increased the allowance by $188,000.
The additions to the allowance for loan losses are based on growth of
residential and commercial loans and upon a further 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 $33,649,000 to $190,501,000 at June 30, 2003 from
$156,852,000 at December 31, 2002. At June 30, 2003, the Nittany savings deposit
account added to our deposit base approximately $22,693,000. For the quarter
ended June 30, 2003, interest bearing demand deposits increased $1,749,000 and
Nittany savings deposits increased $10,808,000 from March 31, 2003. The Nittany
savings deposit product is a competitive deposit account with a tiered annual
interest rate of 2.25% for balances over $2,500 for the current period.
Increases in Nittany's checking and savings products continue to be the primary
source of core deposit growth.
Stockholder's equity increased $3,625,000 to $13,529,000 at June 30, 2003
from $9,904,000 at December 31, 2002, as a result of net income of $655,000, a
decline in accumulative other comprehensive loss of $7,000, and a stock offering
of 157,515 shares @ $15.50 per share during the quarter. The proceeds of the
offering were approximately $2.4 million. 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.
Results of Operations
Net income for the three months ended June 30, 2003 increased $174,000 to
$356,000 from $182,000 for the same 2002 period. Net income for the six months
ended June 30, 2003 increased $290,000 to $655,000 from $365,000 for the same
2002 period. The increases in net income for both the three and six month
periods were attributable to a $404,000 increase in net interest income and a
$204,000 increase in noninterest income attributable largely to Vantage, which
became a subsidiary of the Company in 2003. These positive developments were
more than sufficient to offset a $305,000 increase in noninterest expense and
$119,000 increase in
13
income taxes. Basic and diluted earnings per share increased to $.47 and $.43
per share for the six months ended June 30, 2003 as compared to $.27 and $.25
for the same period of year 2002.
Net interest income for the three months ended June 30, 2003 increased
$475,000 to $1,493,000 as compared to $1,018,000 for the same 2002 period.
Interest and dividend income increased $562,000 to $2,693,000 for the three
months ended June 30, 2003 from $2,131,000 for the same 2002 year period.
Increased interest and dividend income for the current three months ended June
30, 2003 was influenced primarily by increases in interest earned on loans
receivable of $663,000. Reflecting declining market interest rates, the average
yield on interest earning assets decreased to 5.37% for the three-months ended
June 30, 2003 from 6.02% for the same period ended 2002. The average yield on
loans receivable decreased for the three months ended June 30, 2003 by 76 basis
points as compared to the same 2002 period. These declines in yields, however,
were more than offset by continued strong growth in the amount of earning
assets. At June 30, 2003, the three and six month average balances of interest
earning assets were $200 million and $193 million, respectively, compared to
$142 million and $134 million for the comparable 2002 periods.
Net interest income for six months ended June 30, 2003 increased $846,000
to $2,791,000 from $1,945,000 for the same 2002 period. Interest and dividend
income increased $1,141,000 to $5,197,000 for the six months ended June 30, 2003
from $4,056,000 for the same 2002 period. The increased interest and dividend
income was primarily a result of increases in interest earned on loans
receivable of $1,322,000. The average yield on interest earning assets declined
to 5.39% for the six months ended June 30, 2003 from 6.05% for the same period
ended 2002. The significant increase in residential real estate lending was
partially offset but the reduction in yield on loans receivable of 71 basis
points in 2003 as compared to 2002.
Interest expense for the three months ended June 30, 2003 increased $87,000
to $1,200,000 from $1,113,000 for the same 2002 period and was influenced
primarily by an increase in average balance of interest bearing deposits of
$62,543,000. However, the average cost of funds for interest bearing liabilities
decreased 83 basis points to 2.59% from 3.42% for the three months ended June
30, 2003 as compared to the same 2002 period. Additionally, the average cost of
funds for deposits decreased 92 basis points for the current three month period
as compared to the same 2002 period.
Interest expense for the six months ended June 30, 2003 increased $295,000
to $2,406,000 from $2,111,000 for the same 2002 period and was influenced
primarily by an increase in interest expense on deposits of $339,000. However,
the average cost of funds for interest bearing liabilities decreased 75 basis
points to 2.68% for the six months ended June 30, 2003 from 3.43% for the same
period ended 2002. Additionally, the average cost of funds for deposits
decreased 82 basis points for the current six month period as compared to the
same 2002 period.
14
Management's monitoring and adjusting of loan and deposit rates increased
the Bank's net interest margin by 9 basis points to 2.98% from 2.89% at June 30,
2002, a period of dramatic interest rate volatility.
Total noninterest income increased $204,000, a 135% increase, and $551,000,
a 198% increase, respectively for the three and six month periods ending June
30, 2003. 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. Additionally, for the three and six
months ended June 30, 2003, Vantage and Nittany Asset Management contributed
approximately $339,000 and $544,000, respectively in commission and management
fees. Note that Vantage was acquired on January 1, 2003 and did not contribute
to earnings in the 2002 period.
Total noninterest expenses increased $324,000 and $858,000 for the three
and six months ended June 30, 2003 as compared to the same periods ended 2002.
The increase in total noninterest expenses for both periods was related to
operating a larger organization which resulted from the acquisition of Vantage,
marketing efforts to increase visibility, and higher data processing fees caused
by the growing number of loan and deposit accounts. Salary and benefits costs
increased in connection with the acquisition of Vantage as three full-time staff
were hired. For the three and six months ended June 30, 2003, Vantage and
Nittany Asset Management operations contributed approximately $326,000 and
$510,000, respectively of other operating expense. Note that Vantage was
acquired on January 1, 2003.
For the three and six months ended June 30, 2003, the Company incurred
income tax expense of $189,000 and $349,000, respectively, compared to $78,000
and $110,000, respectively, for the three and six months ended June 30, 2002.
The higher income tax expense during 2003 periods reflects the Company's
increased earnings during 2003 plus the use of remaining loss carryforwards in
2002. The Company's effective tax rates for both the three and six month periods
ended June 30, 2003 were 34.7% compared to 29.5% and 23.2%, respectively for the
2002 periods.
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
15
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 June 30, 2003, the Company's total
risk-based, tier I risk-based and tier I leverage ratios were 11.5%, 10.2% and
5.4%, respectively, and Nittany Bank's total risk-based, tier I risk-based and
tier I leverage ratios were 12.6%, 11.4% and 5.9%, respectively.
Item 3. Controls and Procedures
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following represents the results of matters submitted to a
vote of the stockholders at the annual meeting held on May 23,
2003:
Election of a Director for term to expire in 2007:
D. Michael Taylor was elected by the following vote:
For: 1,186,857
Votes Withheld: 6,369
J. Gary McShea was elected by the following vote:
For: 1,188,684
Votes Withheld: 4,542
S.R. Snodgrass A.C. was selected as the Company's independent
auditors for the fiscal year 2003 by the following vote:
For: 1,190,877
Against: 396
Votes Withheld: 1,953
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 **
31.1 Certification Pursuant to Section 302 of the Securities
Exchange Act of 1934 - David Z. Richards
17
31.2 Certification Pursuant to Section 302 of the Securities
Exchange Act of 1934 - Gary M. Bradley
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act 0f 2002.
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.
(1) A Report on Form 8-K was filed on June 27, 2003 pursuant to items 7 and
9 announcing that the Registrant has closed the additional common stock
offering previously announced April 25, 2003.
(2) A Report on Form 8-K was filed on June 3, 2003 pursuant to items 7 and
9 announcing that the Registrant completed the additional common stock
offering previously announced April 25, 2003.
(3) A Report on Form 8-K was filed on May 19, 2003 pursuant to items 5 and
7 announcing that the Registrant has commenced the additional common stock
offering previously announced April 25, 2003.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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: August 12, 2003 By: /s/David Z. Richards
--------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: August 12, 2003 By: /s/Gary M. Bradley
--------------------------------------
Gary M. Bradley
Vice President and Chief Accounting
Officer