UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10 - QSB
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X QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
- ----- OF 1934
For the quarterly period ended June 30, 2004
- -----
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2925762
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2541 E. College Avenue, State College, Pennsylvania 16801
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(Address of principal executive offices)
(814) 272 - 2265
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(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 12, 2004: 1,924,621
NITTANY FINANCIAL CORP.
INDEX
Page
Number
-----------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
June 30, 2004 and December 31, 2003
Consolidated Statement of Income (Unaudited)
for the Six Months ended June 30, 2004 and 2003 4
Consolidated Statement of Income (Unaudited)
for the Three Months ended June 30, 2004 and 2003 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Six Months ended June 30, 2004 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 2004 and 2003 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 and Small Business Issuer
Purchases of Equity 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
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2004 2003
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 8,665,074 $ 805,812
Interest-bearing deposits with other banks 3,449,006 14,147,474
------------- -------------
Cash and cash equivalents 12,114,080 14,953,286
Investment securities available for sale 2,468,431 4,074,095
Investment securities held to maturity (estimated
market value of $41,309,945 and $39,168,895) 41,913,421 39,246,289
Loans receivable (net of allowance for loan losses
of $1,984,680 and $1,737,475) 213,606,805 182,742,537
Premises and equipment 2,521,636 2,570,953
Federal Home Loan Bank stock 1,724,000 1,311,300
Intangible assets 1,763,231 1,763,231
Accrued interest and other assets 1,986,734 1,925,622
------------- -------------
TOTAL ASSETS $ 278,098,338 $ 248,587,313
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 11,843,397 $ 7,880,177
Interest-bearing demand 24,321,562 21,902,355
Money market 35,341,260 34,237,951
Savings 152,444,179 136,273,936
Time 19,164,271 20,598,238
------------- -------------
Total deposits 243,114,669 220,892,657
Short-term borrowings 7,045,632 2,363,887
Other borrowings 11,069,475 9,829,866
Accrued interest payable and other liabilities 911,566 673,159
------------- -------------
TOTAL LIABILITIES 262,141,342 233,759,569
------------- -------------
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, 1,924,621 and 1,603,960 issued and outstanding 192,462 160,396
Additional paid-in capital 14,287,483 14,323,021
Retained earnings 1,490,267 356,344
Accumulated other comprehensive loss (13,216) (12,017)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 15,956,996 14,827,744
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,098,338 $ 248,587,313
============= =============
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,
2004 2003 2004 2003
---------- ---------- ---------- ----------
(unaudited) (unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees $3,009,369 $2,302,577 $5,767,209 $4,410,790
Interest-bearing deposits with other banks 9,840 13,037 25,206 39,905
Investment securities 351,957 377,023 743,016 746,334
---------- ---------- ---------- ----------
Total interest and dividend income 3,371,166 2,692,637 6,535,431 5,197,029
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,146,837 1,056,983 2,306,537 2,119,605
Short-term borrowings 18,033 12,878 24,014 24,988
Other borrowings 120,504 130,218 258,196 261,641
---------- ---------- ---------- ----------
Total interest expense 1,285,374 1,200,079 2,588,747 2,406,234
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,085,792 1,492,558 3,946,684 2,790,795
Provision for loan losses 194,000 188,000 304,000 278,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,891,792 1,304,558 3,642,684 2,512,795
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 174,307 126,632 320,368 245,457
Investment security gain - - - 6,691
Asset management fees and commissions 592,471 150,526 1,159,216 489,670
Other 44,536 77,851 54,666 86,945
---------- ---------- ---------- ----------
Total noninterest income 811,314 355,009 1,534,250 828,763
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 745,230 544,386 1,437,995 1,063,112
Occupancy and equipment 177,793 148,245 354,129 293,221
Professional fees 51,349 53,725 94,798 101,749
Data processing fees 111,164 95,608 230,171 173,261
Supplies, printing, and postage 31,938 31,518 64,931 68,675
Advertising 37,723 24,442 78,128 61,792
ATM processing fees 34,982 30,322 69,853 62,622
Commission expense 361,331 77,298 738,837 295,123
Other 174,724 109,331 340,169 218,472
---------- ---------- ---------- ----------
Total noninterest expense 1,726,234 1,114,875 3,409,011 2,338,027
---------- ---------- ---------- ----------
Income before income taxes 976,872 544,692 1,767,923 1,003,531
Income taxes 339,000 189,089 634,000 348,699
---------- ---------- ---------- ----------
NET INCOME $ 637,872 $ 355,603 $1,133,923 $ 654,832
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.33 $ 0.21 $ 0.59 $ 0.39
Diluted 0.31 0.19 0.55 0.36
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,924,621 1,690,139 1,924,621 1,686,784
Diluted 2,080,803 1,835,168 2,077,516 1,832,813
See accompanying notes to the unaudited consolidated financial statements.
4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other Total
Additional Compre- Stock- Compre-
Common Paid-in Retained hensive holders hensive
Stock Capital Earnings Loss Equity Income
-------- ----------- ---------- ---------- ------- ----------
(unaudited)
Balance, December 31, 2003 $160,396 $14,323,021 $ 356,344 $(12,017) $14,827,744
Net income 1,133,923 1,133,923 $1,133,923
Other comprehensive income:
Unrealized loss on
available for sale securities
net of tax benefit of $618 (1,199) (1,199) (1,199)
----------
Comprehensive income $1,132,724
==========
Twenty percent stock dividend
(including cash paid for
fractional shares) 32,066 (35,538) (3,472)
-------- ----------- ---------- -------- -----------
Balance, June 30, 2004 $192,462 $14,287,483 $1,490,267 $(13,216) $15,956,996
======== =========== ========== ======== ===========
See accompanying notes to the unaudited consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six-months ended June 30,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,133,923 $ 654,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 304,000 278,000
Depreciation, amortization, and accretion, net 389,880 509,525
Investment security gains - 6,691
Increase in accrued interest receivable (92,398) (115,856)
Increase (decrease) in accrued interest payable 3,577 (259,453)
Other, net 276,734 (489,382)
------------ ------------
Net cash provided by operating activities 2,015,716 584,357
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (80,881) (19,826)
Proceeds from sale - 26,637
Proceeds from principal repayments and maturities 1,674,415 1,027,265
Investment securities held to maturity:
Purchases (37,198,347) (29,941,878)
Proceeds from principal repayments and maturities 34,272,474 25,486,208
Net increase in loans receivable (31,168,568) (29,517,912)
Purchase of FHLB stock (412,700) (65,600)
Acquisition of subsidiary - (964,014)
Purchase of premises and equipment (81,209) (206,154)
------------ ------------
Net cash used for investing activities (32,994,816) (34,175,274)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 22,222,012 33,649,325
Net increase in short-term borrowings 4,681,745 4,126,779
Proceeds from other borrowings 1,350,000 360,000
Repayment of other borrowings (110,391) (103,760)
Cash paid in lieu of fractional shares (3,472) -
Exercise of stock options - 1,108
Issuance of common stock - 2,367,848
Issuance of common stock for the purchase of subsidiary - 594,000
------------ ------------
Net cash provided by financing activities 28,139,894 40,995,300
------------ ------------
Increase (decrease) in cash and cash equivalents (2,839,206) 7,404,383
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,953,286 5,852,073
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,114,080 $ 13,256,456
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 2,585,170 $ 2,665,687
Income taxes 659,000 1,020,000
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")
include its wholly-owned subsidiaries, Nittany Bank (the "Bank"), Nittany Asset
Management, Inc, and Vantage Investment Advisors, LLC. The Bank includes its
wholly-owned subsidiary, FTF Investments 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 six months ended June 30, 2004 are not
necessarily indicative of the results to be expected for the fiscal year ended
December 31, 2004, 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, 2003, which are
incorporated herein by reference to the Company's Annual Report on Form 10-KSB.
Stock-Based Compensation - The Company maintains a stock option plan for key
officers, employees, and nonemployee directors. Had compensation expense for the
stock option plan been recognized in accordance with the fair value accounting
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, net income applicable to common stock, basic, and
diluted net income per common share would have been as follows:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
-------- -------- ---------- --------
Net income, as reported: $637,872 $355,603 $1,133,923 $654,832
Less proforma expense related
to stock options 29,747 43,886 59,494 87,771
-------- -------- ---------- --------
Proforma net income $608,125 $311,717 $1,074,429 $567,061
======== ======== ========== ========
Basic net income per common share:
As reported $ 0.33 $ 0.21 $ 0.59 $ 0.39
Pro forma 0.32 0.18 0.56 0.34
Diluted net income per common share:
As reported $ 0.31 $ 0.19 $ 0.55 $ 0.36
Pro forma 0.29 0.17 0.52 0.31
7
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, 2004 and 2003, the diluted
number of shares outstanding from employee stock options was 156,182 and
145,030, respectively. For the six-months ended June 30, 2004 and 2003, the
diluted number of shares outstanding from employee stock options was 152,895 and
146,029, 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,
2004, 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, 2004, comprehensive income totaled $619,879. For the three
and six-months ended June 30, 2003, comprehensive income totaled $363,243 and
$661,764.
NOTE 4 - STOCK SPLIT
On February 24, 2004, the Board of Directors approved a six-for-five stock
split, effected in the form of a 20 percent stock dividend to stockholders of
record March 10, 2004, payable on March 31, 2004. As a result, 320,661
additional shares of the Company's stock were issued, common stock was increased
by $32,066, and surplus was decreased by $35,538.
Fractional shares were paid in cash. All average shares outstanding as of June
30, 2004, and all per share amounts as of June 30, 2004, included in the
financial statements are based on the increased number of shares after giving
retroactive effect to the stock split effected in the form of a stock dividend.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revision to Interpretation 46, Consolidation of Variable Interest Entities
("Interpretation"), which established standards for identifying a variable
interest entity ("VIE") and for determining under what circumstances a VIE
should be consolidated with its primary beneficiary. The Interpretation requires
consolidation of entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's residual returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. Prior to the interpretation, entities were generally consolidated by
an enterprise when it had a controlling financial interest through ownership of
a majority voting interest in the entity. The adoption of this Interpretation
did not have a material effect on the Company's financial position or results of
operations.
8
In December 2003, the FASB revised FAS No. 132, Employers' Disclosures about
Pension and Other Postretirement Benefit. This statement retains the disclosures
required by FAS No. 132, which standardized the disclosure requirements for
pensions and other postretirement benefits to the extent practicable and
requires additional information on changes in the benefit obligations and fair
value of plan assets. Additional disclosures include information describing the
types of plan assets, investment strategy, measurement date(s), plan
obligations, cash flows, and components of net periodic benefit cost recognized
during interim periods. This statement retains reduced disclosure requirements
for nonpublic entities from FAS No. 132, and it includes reduced disclosure for
certain of the new requirements. This statement is effective for financial
statements with fiscal years ending after December 15, 2003. The interim
disclosures required by this statement are effective for interim periods
beginning after December 15, 2003. The Company has adopted the revised
disclosure provisions.
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 June 30, 2004, 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 in State
College, Pennsylvania. Two State College offices were opened in August
2000 and January 2002. A lease was signed in June 2004 for a historic
property in downtown Bellefonte, Pennsylvania, a neighboring community
to State College, which will serve as the fifth branch, if it proves
to be suitable. The Bank formed a Delaware investment company called
FTF Investments Inc. during the first quarter of 2004 to aid in asset
utilization.
o Nittany Asset Management, Inc. was formed in May 1999 primarily to
offer investment products and services to retail customers. The
subsidiary is headquartered at 2541 East College Avenue, State
College, Pennsylvania.
9
o On January 1, 2003, Nittany Financial Corp. acquired Vantage
Investment Advisors, LLC ("Vantage"). Vantage is a registered
investment advisor, which currently manages investment assets in
excess of $245 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, 2004, we had consolidated assets of $278 million, loans
receivable (net of allowance for loan losses) of $214 million, deposits of $243
million, and stockholders' equity of $16.0 million. Net income for the quarter
ended June 30, 2004 increased $282,000 to $638,000 or $.31 per diluted share
from $356,000 or $.19 per diluted share for the same period in 2003. This
included an income tax expense of $339,000 for the quarter compared to $189,000
for the 2003 quarter.
COMPARISON OF FINANCIAL CONDITION
Total assets increased $29,511,000 to $278,098,000 at June 30, 2004 from
$248,587,000 at December 31, 2003. Strong growth in residential and commercial
real estate loans resulted in an increase in net loans receivable of
$30,864,000, which were primarily funded through growth in Nittany Savings
deposits, available cash and matured securities. Total assets included $1.8
million of intangible assets from the acquisition of Vantage and the Bank's
original core deposits. These intangibles are not currently being amortized.
Cash and cash equivalents decreased $2,839,000 at June 30, 2004 as compared to
December 31, 2003. This decrease resulted from growth in loan demand, which
exceeded deposits 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 $2,468,000 at June 30,
2004 from $4,074,000 at December 31, 2003 and investment securities held to
maturity increased to $41,913,000 at June 30, 2004 from $39,246,000 at December
31, 2003. 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 $213,607,000 at June 30, 2004 from
$182,743,000 at December 31, 2003. The increase in net loans receivable resulted
from the strong real estate market in the Company's market area, and low market
interest rates. At June 30, 2004, 1 to 4 family residential mortgage balances
grew by $17,871,000 to $142,218,000 from $124,347,000 at December 31, 2003.
Management attributes the increases in lending balances to continued customer
referrals, the economic climate within the market area, and competitive rates.
As of June 30, 2004, the Company had additional commitments to fund loan demand
of $12,628,000 of which approximately $5,010,000 relates to commercial
customers.
10
At June 30, 2004, the Company's allowance for loan losses increased by $167,000
to $1,985,000 from $1,818,000 at March 31, 2004. The increase resulted from an
additional loan loss provision of $194,000 needed for the growth in loans during
the quarter, which were partially offset by a few minor charge-offs.
The additions to the allowance for loan losses are based upon a careful analysis
by management of loan data. Because 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 June 30, 2004, there can be no assurance
that additional losses will not be required in future periods.
The table below outlines the Company's past due loans as of June 30, 2004:
- ---------------------------------------------------------------------------------------------------------
> 90 Days Past > 90 Days Past
Total Loan Due - Number Due - Balance
# of Loans Balance of Loans of Loans
- ---------------------------------------------------------------------------------------------------------
Personal Loans 361 $8,914,000 1 $5,287
- ---------------------------------------------------------------------------------------------------------
Credit
Line Loans 428 $4,456,000 0 0
- ---------------------------------------------------------------------------------------------------------
Business Loans 168 $11,453,000 0 0
- ---------------------------------------------------------------------------------------------------------
Real
Estate Loans 1,158 $190,768,000 1 $81,433
- ---------------------------------------------------------------------------------------------------------
Total 2,115 $215,591,000 2 $86,720
- ---------------------------------------------------------------------------------------------------------
Total deposits increased by $22,222,000 to $243,115,000 at June 30, 2004 as
compared to $220,893,000 at December 31, 2003. The Nittany Savings deposit
account made up approximately 63% ($152,444,000) of total deposits at June 30,
2004. Non-interest bearing demand deposits increased to $11,843,000 at June 30,
2004 from $7,880,000 at December 31, 2003. The Nittany Savings deposit is a
competitive deposit account with a tiered annual interest rate of 2.05% for
balances over $2,500 for the current period. Due to the continuation of
historically low short-term interest rates during the quarter, the Nittany
Savings deposit has remained popular with local depositors and has helped to
increase our deposit base.
Stockholder's equity increased to $15,957,000 at June 30, 2004 from $14,828,000
at December 31, 2003 primarily as a result of net income of $1,134,000 and minor
fluctuations in the market value of available for sale securities.
11
Average Balance Sheet for the Three- Month Period Ended June 30, 2004
The following tables set forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from average daily balances.
The yield on earning assets and the net interest margin are presented on a fully
taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax
benefit of income on certain tax-exempt loans and investments using the federal
statutory tax rate of 34% for each period presented. The Company believes this
measure to be the preferred industry measurement of net interest income and
provides relevant comparison between taxable and non-taxable amounts.
a. Nittany Financial Quarterly Average Balance Sheet and Supplemental
Information:
For the three months ended
--------------------------------------------------------------------------------------
6/30/04 6/30/03
------------------------------------------- -----------------------------------------
(3) (3)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans recievable $206,055 $3,009 5.84% $142,259 $2,303 6.48%
Investments securities 47,951 352 3.47% 50,855 377 2.97%
Interest-bearing deposits
with banks 10,542 10 0.38% 7,385 13 0.70%
-------- ------ ------ -------- ------ ------
Total interest-earning assets 264,548 3,371 5.19% 200,499 2,693 5.37%
------ ------
Noninterest-earning assets 6,383 6,034
Allowance for loan losses (1,876) (1,309)
-------- --------
Total assets $269,056 $205,224
======== ========
Interest-bearing liabilities:
Interest - bearing
demand deposits $20,658 44 0.85% $18,013 41 0.91%
Money market deposits 35,573 181 2.04% 33,435 210 2.51%
Savings deposits 151,911 761 2.00% 103,739 630 2.43%
Certificates of deposit 21,671 160 2.95% 21,504 176 3.27%
Advances from FHLB 13,467 139 4.13% 8,673 143 6.60%
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 243,281 1,285 2.11% 185,364 1,200 2.59%
-------- ------ -------- ------
Noninterest-bearing liabilities
Demand deposits 9,122 7,081
Other liabilities 808 505
Stockholders' equity 15,845 12,274
-------- --------
Total liabilities &
stockholders' equity 269,056 205,224
-------- --------
Net interest income $2,086 $1,493
====== ======
Interest rate spread (1) 3.08% 2.78%
Net yield on interest-earning
assets (2) 3.25% 2.98%
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.74% 108.17%
(1) Interest rate spread is the difference between the avg. yield on
interest-earning assets and the avg. cost of interest-bearing liabilities.
(2) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(3) Average yields are computed using annualized interest income and expense
for the periods.
12
b. Nittany Financial Year-To-Date Average Balance Sheet and Supplemental
Information:
For the period ended
--------------------------------------------------------------------------------------
6/30/04 6/30/03
------------------------------------------- -----------------------------------------
(3) (3)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans recievable $197,362 $5,767 5.84% $135,181 $4,411 6.53%
Investments securities 48,352 743 3.60% 48,565 747 3.07%
Interest-bearing deposits
with banks 9,477 25 0.53% 9,566 39 0.84%
-------- ------ ------ -------- ------ ------
Total interest-earning assets 255,190 6,535 5.22% 193,312 5,197 5.38%
------ ------
Noninterest-earning assets 7,587 8,792
Allowance for loan losses (1,814) (1,259)
-------- --------
Total assets $260,963 $200,846
======== ========
Interest-bearing liabilities:
Interest - bearing
demand deposits $19,900 84 0.84% $16,901 89 1.05%
Money market deposits $35,018 365 2.08% 32,324 420 2.60%
Savings deposits 148,129 1,532 2.07% 98,063 1,241 2.53%
Certificates of deposit 21,654 325 3.00% 21,229 369 3.48%
Advances from FHLB 11,650 282 4.84% 10,964 287 5.23%
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 236,351 2,588 2.19% 179,482 2,406 2.68%
-------- ------ -------- ------
Noninterest-bearing liabilities
Demand deposits 8,394 6,170
Other liabilities 725 3,783
Stockholders' equity 15,494 11,410
-------- --------
Total liabilities &
stockholders' equity 260,963 $200,846
-------- --------
Net interest income $3,947 $2,791
====== ======
Interest rate spread (1) 3.03% 2.70%
Net yield on interest-earning assets (2) 3.19% 2.89%
Ratio of average interest-earning assets to
average interest-bearing liabilities 107.97% 107.71%
(1) Interest rate spread is the difference between the avg yield on
interest-earning assets and the avg cost of interest-bearing liabilities.
(2) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(3) Average yields are computed using annualized interest income and expense
for the periods.
RESULTS OF OPERATIONS
Net income was $638,000 for the three months ended June 30, 2004, an increase of
$282,000 as compared to the same period ended 2003. The increase is due to
increases in net interest income and noninterest income of $593,000 and
$456,000, respectively, which were offset by increases in noninterest expense
and taxes. For the six month period ended June 30, 2004, net income was
$1,134,000 as compared to $655,000 for the same period in 2003. Basic and
diluted earnings per share increased to $.33 and $.31 per share, respectively
for the three months period ended June 30, 2004 compared to $.21 and $.19 per
share, respectively, for the three month period ended June 30, 2003. Basic and
diluted earnings per share increased to $.59 and $.55 per share, respectively,
for the six months ended June 30, 2004 compared to $.39 and $.36 for the six
month period ended June 30, 2003. All "per share" data has been adjusted for the
20% stock dividend issued in March 2004.
13
Net interest income for the three months ended June 30, 2004 was $2,086,000 as
compared to $1,493,000 for the same period ended 2003. Interest income increased
$679,000 for 2004 as compared to the prior year period and was influenced mainly
by increases in interest earned on loans receivable of $707,000. The increase in
interest income was the result of an increase of $64,049,000 in average balances
of interest-earning assets that primarily resulted from a $63,796,000 increase
in the average balance of loans receivable. The yield on interest earning assets
decreased to 5.19% for the three months ended June 30, 2004 from 5.37% for the
same period ended 2003 resulting from a continuous drop in interest rates for
the quarter. Although there were significant increases in residential real
estate lending, the yield on the loans receivable decreased 64 basis points in
2004 as compared to 2003. Year to date, the net interest income was $3,947,000
as compared to $2,791,000 for the same period ended 2003, as the yield on
interest earning assets dropped 16 basis points during the time period.
Interest expense increased by only $85,000 for the three months ended June 30,
2004 as compared to the prior year period and was influenced mainly by an
increase in interest expense on deposits as increases in deposit balances were
essentially offset by lower rates. This increase was primarily attributable to
an increase in the average balance of interest-bearing deposits of $53,123,000.
The average balances of savings deposit accounts increased $48,172,000 as a
result of customer service, referrals, and marketing efforts and competitive
rates of the Nittany Savings product. The cost of funds decreased to 2.11% for
the three month period ended June 30, 2004 from 2.59% for the same period ended
2003 as a result of a general reduction in market interest rate levels and a
decrease in the rates paid on deposits. Interest expense for the six-month
period ended June 30, 2004 increased by $183,000 as lower rates were offset by a
$50,066,000 increase in the average balance in the Nittany Savings product.
Management's constant attention to loan rates, deposit rates, and the liquidity
position of the Bank has been successful as the Bank's net interest margin
increased by 27 basis points to 3.25% from 2.98% at June 30, 2003, a period of
interest rate volatility.
Total noninterest income for the three months ended June 30, 2004 increased
$456,000 as compared to the same period ended 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. Service fees on deposit accounts increased $47,700 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
June 30, 2004, commissions and management fees from Vantage and Nittany Asset
Management increased by $442,000 over the same period of 2003. Year to date,
noninterest income increased to $1,534,000 from $829,000 for the same period
ended 2003 due to the growth in assets under management at Vantage.
Total noninterest expenses increased $611,000 for the three months ended June
30, 2004, as compared to the same period ended 2003. 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 $361,000 of solicitors' fees for the quarter as compared
to $223,000 for the same period in 2003 due to the growth in assets under
management. Year to date, noninterest expenses increased to $3.409,000 from
$2,338,000 for the same period ended 2003 primarily because of the increase of
$375,000 in compensation related expenses and the $444,000 increase in
commission expense mainly at Vantage.
14
Income tax expense of $339,000 was recognized in the second quarter of 2004,
compared to $189,000 for the same period of 2003. All of the Company's operating
loss carry-forwards were fully utilized during the 2003 tax year. However, the
purchase of approximately $15 million in high quality municipal bonds in 2003
and 2004, and the formation of a Delaware investment company during the quarter,
have helped to reduce our effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, interest-bearing deposits
with other banks and, funds provided from operations. While scheduled repayments
of loans and mortgage-backed securities and maturities of investment securities
are predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions, and
competition. We use our liquid resources principally to fund loan commitments,
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry and similar matters. Management monitors projected liquidity
needs and determines the level desirable based in part on the Bank's commitments
to make loans and management's assessment of the Bank's ability to generate
funds.
Management monitors both the Company's and the Bank's total risk-based, Tier I
risk-based and tangible capital ratios in order to assess compliance with
regulatory guidelines. At June 30, 2004, 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
10.5%, 9.2%, 5.5% and 12.9%, 11.6%, 6.4%, respectively, at June 30, 2004.
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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in securities and Small Business Issuer Purchases of Equity
Securities
None
Item 3. Defaults by the Company on its 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 21,
2004:
Election of a Director for term to expire in 2008:
David K. Goodman Jr. was elected by the following vote:
For: 1,332,490
Votes Withheld: 14,734
William A. Jaffe was elected by the following vote:
For: 1,328,927
Votes Withheld: 18,297
S.R. Snodgrass A.C. was selected as the Company's independent
auditors for the fiscal year 2004 by the following vote:
For: 1,244,323
Against: 120
Votes Withheld: 2,781
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 **
10.3 Supplemental Executive Retirement Plan ***
16
31.1 Certification Pursuant to Section 302 of the Securities
Exchange Act of 1934 - David Z. Richards
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.
*** Incorporated by reference to the identically numbered exhibit to the
December 31, 2003 Form 10-KSB filed with the SEC on March 30, 2004.
(b) Reports on Form 8-K.
(1) A Report on Form 8-K was filed on August 10, 2004 pursuant to
Items 7 and 12 in accordance with Release No. 34-47583 to report
earnings for the quarter ended June 30, 2004.
17
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 13, 2004 By: /s/David Z. Richards
-------------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: August 13, 2004 By: /s/Gary M. Bradley
-------------------------------------------
Gary M. Bradley
Vice President and Chief Accounting Officer
18