UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______ to ______
Commission File Number 0-32623
Nittany Financial Corp.
-----------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-292576
- --------------------------------------------- ---------------------------------
(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
----------------
(Issuer's telephone number)
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 November 11, 2003:
Class: Common Stock, par value $.10 per share: 1,560,898
Transitional Small Business Disclosure 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
September 30, 2003 and December 31, 2002 ...................... 3
Consolidated Statement of Income (Unaudited)
for the Three and Nine Months ended September 30, 2003
and 2002....................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) for the Nine months ended September 30, 2003....... 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 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........................................ 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 16
Item 2. Changes in Securities and Use of Proceeds...................... 16
Item 3. Defaults Upon Senior Securities................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16
Item 5. Other Information.............................................. 16
Item 6 Exhibits and Reports on Form 8-K............................... 16
SIGNATURES
CERTIFICATIONS
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2003 2002
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 650,824 $ 618,937
Interest-bearing deposits with other banks 5,898,259 5,233,136
Investment securities available for sale 4,434,668 6,024,009
Investment securities held to maturity (estimated
market value of $43,972,991 and $38,727,663) 44,289,418 38,359,925
Loans receivable (net of allowance for loan losses
of $1,659,288 and $1,177,141) 176,115,140 124,254,560
Premises and equipment 2,574,556 1,941,009
Federal Home Loan Bank stock 1,549,000 1,175,400
Intangible assets 1,763,231 799,217
Accrued interest and other assets 1,908,986 1,252,839
------------- -------------
TOTAL ASSETS $ 239,184,082 $ 179,659,032
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 9,150,947 $ 6,159,204
Interest-bearing demand 19,807,856 18,717,951
Money market 34,743,942 27,517,955
Savings 122,556,546 86,498,462
Time 19,776,318 17,958,397
------------- -------------
Total deposits 206,035,609 156,851,969
Short-term borrowings 7,662,130 1,141,104
Other borrowings 10,958,792 10,615,650
Accrued interest payable and other liabilities 559,575 1,145,853
------------- -------------
TOTAL LIABILITIES 225,216,106 169,754,576
------------- -------------
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 1,367,230 issued and outstanding 156,090 136,723
Additional paid-in capital 13,973,134 11,045,912
Retained deficit (155,410) (1,268,694)
Accumulated other comprehensive loss (5,838) (9,485)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 13,967,976 9,904,456
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 239,184,082 $ 179,659,032
============= =============
See accompanying notes to the unaudited consolidated financial statements
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Three-Months Ended Nine-months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ---------
(unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees $2,601,103 $1,860,797 $7,011,893 $4,949,651
Interest-bearing deposits with other banks 8,898 43,673 48,803 108,236
Investment securities 328,101 400,910 1,074,435 1,303,893
---------- ---------- ---------- ---------
Total interest and dividend income 2,938,102 2,305,380 8,135,131 6,361,780
---------- ---------- ---------- ---------
INTEREST EXPENSE
Deposits 1,051,561 1,008,544 3,171,166 2,789,419
Short-term borrowings 19,023 53,040 44,011 153,333
Other borrowings 128,013 110,817 389,654 340,876
---------- ---------- ---------- ---------
Total interest expense 1,198,597 1,172,401 3,604,831 3,283,628
---------- ---------- ---------- ---------
NET INTEREST INCOME 1,739,505 1,132,979 4,530,300 3,078,152
Provision for loan losses 230,000 142,000 508,000 410,000
---------- ---------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,509,505 990,979 4,022,300 2,668,152
---------- ---------- ---------- ---------
NONINTEREST INCOME
Service fees on deposit accounts 124,980 119,717 370,437 333,036
Investment security gain - - 6,691 7,630
Asset management fees 231,764 - 721,434 -
Other 36,125 41,652 123,070 98,730
---------- ---------- ---------- ---------
Total noninterest income 392,869 161,369 1,221,632 439,396
---------- ---------- ---------- ---------
NONINTEREST EXPENSE
Compensation and employee benefits 544,768 388,630 1,607,880 1,118,858
Occupancy and equipment 180,397 124,102 473,618 373,090
Professional fees 55,676 41,364 157,425 107,102
Data processing fees 112,338 63,618 285,599 186,292
Supplies, printing, and postage 35,300 25,932 103,975 91,759
Advertising 42,594 30,381 104,386 91,921
ATM processing fees 34,635 32,945 97,257 97,067
Commission expense 90,385 - 385,508 -
Other 142,138 78,576 360,610 223,148
---------- ---------- ---------- ---------
Total noninterest expense 1,238,231 785,548 3,576,258 2,289,237
---------- ---------- ---------- ---------
Income before income taxes 664,143 366,800 1,667,674 818,311
Income taxes 205,691 130,749 554,390 232,749
---------- ---------- ---------- ---------
NET INCOME $ 458,452 $ 236,051 $1,113,284 $ 585,562
========== ========== ========== =========
EARNINGS PER SHARE
Basic $ 0.29 $ 0.17 $ 0.76 $ 0.43
Diluted 0.27 0.16 0.70 0.41
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,560,898 1,359,973 1,457,970 1,359,959
Diluted 1,687,013 1,461,941 1,581,135 1,440,830
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
-------- ----------- ----------- --------- -------------- --------------
(unaudited)
Balance, December 31, 2002 $136,723 $11,045,912 $(1,268,694) $(9,485) $ 9,904,456
Net income 1,113,284 1,113,284 $1,113,284
Other comprehensive income:
Unrealized gain on available for sale securities
net of reclassification adjustment,
net of taxes of $1,879 3,647 3,647 3,647
----------
Comprehensive income $1,116,931
==========
Exercise of stock options 16 1,092 1,108
Issuance of 36,000 shares of common 3,600 590,400 594,000
Sale of 157,515 shares of common stock, net
of offering costs 15,751 2,335,730 2,351,481
-------- ----------- ----------- --------- -----------
Balance, September 30, 2003 $156,090 $13,973,134 $ (155,410)$ $(5,838) $13,967,976
======== =========== =========== ========= ===========
2003
-----------
Components of other comprehensive income:
Change in net unrealized gain on
investment securities available for sale $ 8,063
Realized gains included in net income, net of taxes of $2,275 (4,416)
-----------
Total $ 3,647
===========
See accompanying notes to the unaudited consolidated financial statements
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine-months ended September 30,
2003 2002
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 1,113,284 $ 585,562
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 508,000 410,000
Depreciation, amortization, and accretion, net 772,963 292,445
Investment security gains (6,691) (7,630)
Increase in accrued interest receivable (198,645) (264,417)
Decrease in accrued interest payable (293,164) (55,478)
(Increase) decrease in taxes payable (526,757) 315,436
Other, net (218,384) (71,232)
------------ ------------
Net cash provided by operating activities 1,150,606 1,204,686
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (19,826) -
Proceeds from sale 26,637 37,630
Proceeds from principal repayments and maturities 1,555,738 6,090,451
Investment securities held to maturity:
Purchases (44,424,200) (26,458,521)
Proceeds from principal repayments and maturities 37,940,573 18,270,784
Net increase in loans receivable (52,370,615) (37,481,590)
Purchase of FHLB stock (373,600) (4,400)
Acquisition of subsidiary (370,014) -
Purchase of premises and equipment (849,686) (708,477)
Sale of premises and equipment 31,000 -
------------ ------------
Net cash used for investing activities (58,853,993) (40,254,123)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 49,183,640 49,162,608
Net increase in short-term borrowings 6,521,026 901,676
Proceeds from other borrowings 500,000 4,000,000
Repayment of other borrowings (156,858) (1,147,437)
Exercise of stock options 1,108 1,370
Proceeds from sale of common stock 2,351,481 -
------------ ------------
Net cash provided by financing activities 58,400,397 52,918,217
------------ ------------
Increase in cash and cash equivalents 697,010 13,868,780
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,852,073 6,113,158
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,549,083 $ 19,981,938
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and borrowings $ 3,897,995 $ 4,180,914
Income taxes 1,095,000 119,000
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 nine months ended September 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 September 30, 2003 and 2002, the diluted
number of shares outstanding from employee stock options was 126,115 and 84,973,
respectively. For the nine-months ended September 30, 2003 and 2002, the diluted
number of shares outstanding from employee stock options was 123,166 and 67,393
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, 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 September 30, 2003, comprehensive income totaled
$455,167. For the three and nine-months ended September 30, 2002, comprehensive
income totaled $279,946 and $624,392.
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
7
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 Nine Month Ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ------------- -----------
Net income, as reported: $ 458,452 $ 236,051 $ 1,113,284 $ 585,562
Less proforma expense related
to stock options
43,886 40,683 131,657 122,049
----------- ----------- ------------- -----------
Proforma net income $ 414,567 $ 195,368 $ 981,628 $ 463,513
=========== =========== ============= ===========
Basic net income per common share:
As reported $ 0.29 $ 0.17 $ 0.76 $ 0.43
Pro forma 0.27 0.14 0.67 0.34
Diluted net income per common share:
As reported $ 0.27 $ 0.16 $ 0.70 $ 0.41
Pro forma 0.25 0.13 0.62 0.32
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,
9
2003, and otherwise is effective at the beginning of the first interim period
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. In October,
2003, the FASB decided to defer to the fourth quarter from the third quarter the
implementation date for Interpretation No. 46. This deferral only applies to
variable interest entities that existed prior to February 1, 2003. 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'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 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 September 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 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. On July 28, 2003, the 129 Rolling Ridge Drive
office moved to a larger location at 1900 South Atherton Street
on the site of the former Shoney's Restaurant.
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 $ 189 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 September 30, 2003, we had consolidated assets
of $239 million, loans receivable (net of allowance for loan losses) of $176
million, deposits of $206 million, and stockholders' equity of $14.0 million.
Net income for the quarter ended September 30, 2003 increased $222,000 to
$458,000 or $.27 per diluted share, from $236,000 or
11
$.16 per diluted share, for the same 2002 period. This included an income tax
expense of $206,000 for 2003 compared to $131,000 for the same 2002 quarter.
Comparison of Financial Condition
Asset growth for the period continued to remain strong. Total assets
increased $59,525,000 to $239,184,000 at September 30, 2003 from $179,659,000 at
December 31, 2002. Additionally, the growth in assets for the quarter ended
September 30, 2003 represented an increase of $18,213,000 from June 30, 2003.
The Bank's asset growth was driven 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 $697,000 to $6,549,000 at September
30, 2003 as compared to $5,852,000 at December 31, 2002. For the quarter ended
September 30, 2003, cash and cash equivalents decreased by $6,707,000 from June
30, 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 $1,589,000 to
$4,435,000 at September 30, 2003 as compared to $6,024,000 at December 31, 2002.
Additionally, investment securities held to maturity increased $5,929,000 to
$44,289,000 at September 30, 2003 from $38,360,000 at December 31, 2002. During
the current period, we purchased $14,482,000 of held to maturity securities
which were partially funded by $12,455,000 of proceeds received from principal
repayments and maturities of held to maturity securities. For the quarter ended
September 30, 2003, investment securities available for sale decreased $532,000
as compared to June 30, 2003. Additionally, investment securities held to
maturity at September 30, 2003 increased $1,837,000 as compared to June 30,
2003.
For the quarter ended September 30, 2003, loans receivable, net of
allowance for loan losses, increased $22,786,000 from June 30, 2003. Of such
increase, 1-4 family residential loans increased $18,121,000. Year to date,
loans receivable, net of allowance for loan losses, increased $51,860,000 to
$176,115,000 from $124,255,000 at December 31, 2002. The net growth was less
than the loans booked because of principal reductions, unadvanced construction
loans, and a high level of refinancing activity. 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, 2003, we had additional
commitments to fund loan demand of $10,052,000 of which approximately $3,307,000
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, 2003, our allowance for loan losses increased
$482,000 to $1,659,000 from $1,177,000 at December 31, 2002. The increased
allowance resulted from a loan loss provision for the nine months ended
September 30, 2003 of $508,000 offset by loan chargeoffs of $28,000 and
recoveries of $3,000. For the quarter ended September 30, 2003, we added
$230,000 to the allowance.
12
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,
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 provisions will not be required in future
periods.
Total deposits increased $49,184,000 to $206,036,000 at September 30,
2003 from $156,852,000 at December 31, 2002. At September 30, 2003, the Nittany
savings deposit account added to our deposit base $122,557,000, an increase of
$12,925,000 from June 30, 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 $4,064,000 to $13,968,000 at September
30, 2003 from $9,904,000 at December 31, 2002, as a result of net income of
$1,113,000, a decline in accumulative other comprehensive loss of $3,000, and a
stock offering of 157,515 shares at $15.50 per share during the year. The net
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 September 30, 2003 increased
$222,000 to $458,000 from $236,000 for the same 2002 period. Net income for the
nine months ended September 30, 2003 increased $527,000 to $1,113,000 from
$586,000 for the same 2002 period. The increases in net income for both the
three and nine month periods were primarily attributable to strong growth in net
interest income. Also contributing to increased earnings was a higher level of
noninterest income attributable largely to Vantage, which became a subsidiary of
the Company in January 2003. These increases more than offset increases in
noninterest expense and income taxes. Basic and diluted earnings per share
increased to $.76 and $.70 per share for the nine months ended September 30,
2003 as compared to $.43 and $.41 for the same period of year 2002.
Net interest income for the three months ended September 30, 2003
increased $607,000 to $1,740,000 as compared to $1,133,000 for the same 2002
period. Interest and dividend income increased $633,000 to $2,938,000 for the
three months ended September 30, 2003 from $2,305,000 for the same 2002 year
period. Increased interest and dividend income for the current three months
ended September 30, 2003 was influenced primarily by increases in interest
earned on loans receivable of $740,000. Reflecting declining market interest
rates, the average yield on interest earning assets decreased to 5.18% for the
three-months ended September 30, 2003 from 5.85% for the same period ended 2002.
The average yield on loans receivable decreased for the three months ended
September 30, 2003 by 97 basis points as compared to the same 2002
13
period. These declines in yields, however, were more than offset by continued
strong growth in earning assets. At September 30, 2003, the three and nine month
average balances of interest earning assets were $229,920,000 and $202,910,000,
respectively, compared to $157,708,000 and $150,081,000 for the comparable 2002
periods.
Net interest income for nine months ended September 30, 2003 increased
$1,452,000 to $4,530,000 from $3,078,000 for the same 2002 period. Interest and
dividend income increased $1,773,000 to $8,135,000 for the nine months ended
September 30, 2003 from $6,362,000 for the same 2002 period. The increased
interest and dividend income was primarily a result of increases in interest
earned on loans receivable of $2,062,000. The average yield on interest earning
assets declined to 5.35% for the nine months ended September 30, 2003 from 5.91%
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 74 basis points in 2003 as compared to 2002.
Interest expense for the three months ended September 30, 2003
increased $27,000 to $1,199,000 from $1,172,000 for the same 2002 period. During
this period, there was an increase in average balance of interest bearing
deposits of $79,125,000 which was offset by a decrease in the average cost of
funds for interest bearing liabilities of 91 basis points to 2.33% from 3.24%.
Additionally, the average cost of funds for deposits decreased 87 basis points
to 2.18% from 3.05% for the current three month period as compared to the same
2002 period.
Interest expense for the nine months ended September 30, 2003 increased
$321,000 to $3,605,000 from $3,284,000 for the same 2002 period. This increase
was caused by an increase in interest expense on deposits of $382,000 offset by
a decrease in interest on short term borrowings of $109,000. Average cost of
funds for interest bearing liabilities decreased 67 basis points to 2.58% for
the nine months ended September 30, 2003 from 3.25% for the same period ended
2002. Additionally, average cost of funds for deposits decreased 70 basis points
for the current nine month period as compared to the same 2002 period.
Attention to the liquidity position of the Bank and management's
diligence in monitoring and adjusting loan and deposit rates has allowed the
Bank's net interest margin to decrease by only 2 basis points to 3.11% from
3.13% at December 31, 2002, a period of dramatic interest rate volatility.
Total noninterest income increased $232,000 and $783,000, respectively
for the three and nine month periods ending September 30, 2003. Noninterest
income is primarily comprised of service charges and fees on deposit account
activity, along with fee income derived from asset management services and
related commissions. Vantage contributed the majority of the increase during the
year. Note that Vantage was acquired on January 1, 2003 and therefore, did not
contribute to earnings in the 2002 period.
Total noninterest expenses increased $452,000 and $1,287,000 for the
three and nine months ended September 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 nine months ended
14
September 30, 2003, Vantage and Nittany Asset Management operations contributed
approximately $394,000 respectively of other operating expense (excluding the
internal management fee). Note that Vantage was acquired on January 1, 2003.
For the three and nine months ended September 30, 2003, the Company
incurred income tax expense of $206,000 and $554,000, respectively, compared to
$131,000 and $233,000, respectively, for the three and nine months ended
September 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 the nine month
period ended September 30, 2003 was 33% compared to 28% for the 2002 period.
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, 2003, the Company
and Nittany Bank's total risk-based, tier I risk-based and tier I leverage
ratios were 10.9%, 9.6%, 5.1% and 12.6%, 11.3%, 6.0%, 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.
15
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 **
31 Certifications pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 as amended
32 Certification Pursuant to Section 1350, of
the Sarbanes-Oxley Act 0f 2002.
99.0 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.
(i) The registrant filed a Report on Form 8-K on August 13,
2003, pursuant to Items 7 and 12, to announce earnings for
the quarter ended June 30, 2003.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Nittany Financial Corp.
Date: November 12, 2003 By:/s/David Z. Richards
-------------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: November 12, 2003 By:/s/Gary M. Bradley
-------------------------------------------
Gary M. Bradley
Vice President and Chief Accounting Officer