As filed with the Securities and Exchange Commission on December 1, 2004.
Registration No. 333-_________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
NITTANY FINANCIAL CORP.
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(Name of Small Business Issuer in its charter)
Pennsylvania 6035 23-2925762
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(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
116 EAST COLLEGE AVENUE, STATE COLLEGE, PENNSYLVANIA 16801
(814) 234-7320
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(Address and telephone number, including area code, of principal
executive offices and principal place of business)
DAVID Z. RICHARDS, JR., PRESIDENT
NITTANY FINANCIAL CORP.
116 EAST COLLEGE AVENUE, STATE COLLEGE, PENNSYLVANIA 16801
(814) 234-7320
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(Name, address and telephone number of agent for service)
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
JOAN S. GUILFOYLE, ESQ.
MALIZIA SPIDI & FISCH, PC
1100 NEW YORK AVENUE, NW, SUITE 340 WEST,
WASHINGTON, D.C. 20005
(202) 434-4660
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
__________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each
Class of Securities Shares to be Proposed Maximum Proposed Maximum Amount of
To Be Registered Registered Offering Price Per Unit Aggregate Offering Price Registration Fee
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Common Stock,
$0.10 Par Value 150,000 $26.00 $3,900,000 $494.13
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
[NITTANY FINANCIAL CORP. LOGO]
PROSPECTUS
UP TO 115,000 SHARES OF COMMON STOCK
$26 PER SHARE
Nittany Financial Corp. is offering to sell up to 115,000 shares of its
common stock at $26.00 per share. Nittany intends to sell the shares through its
directors and officers, who will use their best efforts to sell the shares. The
common stock will be offered at a price of $26.00 per share, first to existing
stockholders for 20 days (i.e., until 2004) and then to the public (to the
extent, if any, stock is not purchased by existing stockholders). The minimum
purchase is 100 shares. The stock is being offered to stockholders of record as
of November 26, 2004. To the extent the stock is not purchased by existing
stockholders, a preference will be given to current customers of Nittany Bank,
as described herein. The offering is not underwritten and is not subject to the
sale of any minimum number or dollar amount of shares. Our directors and
executive officers plan to purchase at least _____ shares in the offering.
The common stock is quoted on the OTC Electronic Bulletin Board under the
symbol "NTNY." Nittany's common stock began trading on the OTC Electronic
Bulletin Board on October 23, 1998 and Nittany issued a 10% stock dividend in
January 2001, a 10% stock dividend in January 2002, a 20% stock dividend in
February 2003 and a 20% dividend in March 2004. Since January 1, 2004, the sales
prices have generally ranged from approximately $23 to $28 per share.
The offering price does not necessarily reflect the price at which the
common stock currently trades, nor does the offering price necessarily reflect
the price at which Nittany's common stock will trade following the offering.
Because the offering is expected to take place over a period of approximately 30
to 90 days, the market price could vary during the offering.
On November __, 2004, the last reported sales price of the common stock on
the OTC Electronic Bulletin Board was $_____ per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE ___.
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR
DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE SAVINGS ASSOCIATION FUND OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROCEEDS, BEFORE
PRICE TO PUBLIC EXPENSES, TO NITTANY
--------------- --------------------
PER SHARE:(1) $26.00 $26.00
TOTAL MAXIMUM(1) $2,990,000 $2,990,000
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(1) Although we are offering 115,000 shares, we have filed a registration
statement covering 150,000 shares. If we find that demand for the shares at
the offering price is sufficient, we may sell some or all of the additional
35,000 shares to current customers of Nittany Bank, as described herein. If
we sold all of the additional shares, gross proceeds to Nittany would
increase to $3,900,000.
We plan to keep the offering open for approximately 20 to 90 days, but we
may terminate it early or extend it. The offering will terminate no later than
June 30, 2005. We will conduct sequential closings on approximately a bi-weekly
and/or monthly basis. We intend to deliver certificates representing shares for
accepted subscriptions within approximately 10 days after each sequential
closing.
THE DATE OF THIS PROSPECTUS IS DECEMBER __, 2004.
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THE HISTORY OF NITTANY
July-August 1997 Chairman Samuel J. Malizia and President David Z. Richards meet to form Nittany Bank. Assemble
original board and create business plan.
December 1997 Nittany Financial Corp. is incorporated as a Pennsylvania corporation.
March 1998 Nittany Financial Corp. board of directors move forward with the formation and regulatory filings to
organize Nittany Bank. Original board of directors include Samuel J. Malizia, Chairman; David Z.
Richards, President and Chief Executive Officer; William A. Jaffe, Secretary; D. Michael Taylor and
Donald J. Musso.
March 1998 Agreement is signed with First Commonwealth Bank to assume the deposits and acquire certain assets of
two First Commonwealth branch locations in central State College.
July 1998 SEC declares effective final prospectus and initial public stock offering of Nittany Financial Corp.
begins.
August 1998 Richard C. Barrickman and John E. Arrington join the Nittany Bank executive management team. David
Goodman and J. Garry McShea join the Board of Directors.
September 1998 Conditional regulatory approvals are received for approval of the holding company, FDIC insurance and
a federal banking charter.
October 1998 Final closing of stock offering. Nittany Financial Corp. is capitalized with $5.7 million in capital.
October 1998 Nittany Bank opens its doors as State College's hometown bank. The slogan of "The Right Bank, The
Right Time" is adopted.
November 1998 Nittany Bank issues its first digitally imaged bank statement. Customers can conveniently store all
statements for a year in a Nittany Bank binder. 24 Hour Telephone Banking,"The Nittany Line," is
introduced.
June 1999 Nittany Bank holds first meeting of Community Advisory Board of Directors to evaluate needs of the
community and solicit comments.
December 1999 Nittany Financial Corp. approaching $50 million in assets.
March 31, 2000 Nittany Financial Corp. completes secondary common stock offering, raising approximately $1.5 million
in gross proceeds.
August 2000 Third branch office and ATM are opened at Hills Plaza. Fourth ATM is opened on Sowers Street,
downtown, State College.
January 2001 Nittany Financial Corp. issues a 10% stock dividend.
April 2001 Nittany Bank launches to its customers internet banking services, which offers personal and business
online banking and bill payment services.
October 2001 Nittany Financial Corp. completes secondary common stock offering, raising approximately $2.4 million
in gross proceeds.
December 2001 Nittany Financial Corp. approaching $125 million in assets.
January 2002 Nittany Bank opens Financial Center at the former Zimms Restaurant at 2541 East College Avenue (Route
26), State College.
January 2002 Nittany Financial Corp. issues a 10% stock dividend.
December 2002 Nittany Financial Corp. approaching $180 million in assets.
January 2003 Nittany acquires Vantage Investment Advisors, LLC with approximately $146 million under management.
February 2003 Nittany Financial Corp. issues a 20% stock dividend.
March 2003 Nittany Financial Corp. attains $200 million in assets.
May 2003 Nittany Financial Corp. completes fourth common stock offering, raising approximately $2.4 million in
capital.
August 2003 Relocation of Hills Plaza branch office to larger building with four drive-up windows at former Shoney's
Restaurant at 1900 South Atherton Street, State College.
March 2004 Nittany Financial Corp. issues 20% stock dividend.
January 2005 Approximate time anticipated to open fifth office in Bellefonte, Pennsylvania.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary..............................................................
Risk Factors....................................................................
Use of Proceeds.................................................................
Capitalization..................................................................
Determination of Offering Price.................................................
Trading History and Dividends...................................................
How to Subscribe................................................................
Business........................................................................
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................
Regulation......................................................................
Management......................................................................
Description of Capital Stock....................................................
Certain Anti-Takeover Provisions................................................
Legal Matters...................................................................
Experts.........................................................................
Available Information...........................................................
Index to Financial Statements...................................................
Financial Statements.........................................................F-1
Subscription Agreement.......................................................A-1
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION NOR TO MAKE ANY
REPRESENTATIONS OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF THE COMMON STOCK OF NITTANY FINANCIAL CORP.
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF NITTANY FINANCIAL CORP. SINCE THE DATE AS
OF WHICH INFORMATION IS FURNISHED HEREIN.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Nittany Financial Corp. and the common stock being sold in
this offering and our financial statements and the notes to the financial
statements appearing elsewhere in this prospectus. References in this document
to "we", "us", and"our" refer to Nittany Financial Corp. In certain instances
where appropriate, "we", "us", and "our" refer collectively to Nittany Financial
Corp., Nittany Bank, Vantage Investment Advisors, LLC, and Nittany Asset
Management, Inc. References in this document to "Nittany" refer to Nittany
Financial Corp.
NITTANY FINANCIAL CORP.
Nittany is a holding company organized in 1997 for the purpose of
establishing a de novo community bank in State College, Pennsylvania. The
business operations of Nittany include the following three operating
subsidiaries:
o Nittany Bank commenced banking operations or October 26, 1998 as a
federally-insured federal savings bank headquartered at 116 East
College Avenue. It currently operates three additional branch offices
at 1276 North Atherton, 2541 East College Avenue and 1900 South
Atherton in State College. A fifth office is expected to open in
historic Bellefonte, Pennsylvania in approximately January 2005.
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 acquired Vantage Investment Advisors, LLC.
Vantage is a registered investment advisor headquartered in State
College that as of September 30, 2004 managed investments totaling
approximately $250 million for nearly 1,000 clients.
Our business is conducted principally through Nittany Bank. Nittany Bank
provides a full range of banking services with emphasis on residential and
commercial real estate lending, consumer lending, commercial lending, and retail
deposits. At September 30, 2004, we had consolidated assets of $295.2 million,
loans receivable (net of reserve) of $226.5 million, deposits of $246.6 million,
and stockholders' equity of $16.8 million. Net income for the year ended
December 31, 2003 was $1.6 million, or $1.01 per diluted share. Net income for
the nine months ended September 30, 2004 was $1.9 million or $.93 per diluted
share.
Our telephone number is (814) 234-7320. We maintain a website and investor
relations information at http://www.nittanybank.com. Any information on our
website is not part of this prospectus.
1
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THE OFFERING
Shares of common stock offered................. 115,000 shares
Offering price................................. $26.00 per share
Shares of common stock outstanding at 1,933,294 shares
November 26, 2004..............................
Shares of common stock to be outstanding
after the offering (if all 115,000 shares
are sold).................................... 2,048,294 shares (1)
Purchase guidelines............................ The common stock will first be offered to the shareholders of Nittany
as of November 26, 2004. If any shares are not purchased by existing
shareholders, the stock will be offered to the general public, with a
preference given first to current customers of Nittany Bank and then
to persons residing in the State College area. Our directors and
executive officers plan to purchase at least _____ shares in the offering
and reserve the right to significantly increase or decrease the number of
shares to be purchased. See page __.
Use of proceeds................................ We intend to use the proceeds for general corporate purposes including the
possible repayment of borrowing and/or further capital contributions to
Nittany Bank, which in turn would use such proceeds to increase its working
capital and total regulatory capital.
OTC Electronic Bulletin Board symbol........... NTNY
Minimum subscription........................... 100 shares (2)
Maximum subscription........................... [5,750] shares (2) This applies to all purchases individually
and jointly.
Minimum to be sold in the offering............. No minimum
Plan of distribution........................... Nittany plans to offer shares of common stock, through its officers
and directors, first to shareholders of record as of
November 26, 2004. The stock will be offered only to
shareholders for 20 days (i.e., until 200_). Shares remaining,
if any, will be offered to persons and businesses in the
State College area and elsewhere in the Commonwealth of
Pennsylvania. A preference will be given to savings and lending
customers of Nittany Bank. NITTANY MAY, IN ITS SOLE DISCRETION,
ACCEPT OR REJECT ANY SUBSCRIPTION, IN WHOLE OR IN
PART. Funds received by Nittany from a subscriber will be
available to Nittany upon the acceptance of the subscription.
We intend to conduct the first closing on or before [DECEMBER
31, 2004] and subsequent sequential closings on approximately
a bi-weekly and/or monthly basis. Between closings, all funds
will be placed in an escrow deposit at Nittany Bank. If Nittany
elects not to accept a subscription, all funds received from
the subscriber will be returned within 10 business days, without
interest. See pages 11 to 13. If existing stockholders subscribe to over
the maximum of the offering during the first 20 days, orders
will be pro rated among existing stockholders according to their
relative percentage of beneficial ownership on November
26, 2004.
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(1) These figures do not include any of the additional 35,000 shares that we
have registered and may issue. See the footnote on the cover page of this
prospectus. These figures also do not include ______ shares issuable upon
exercise of outstanding stock options to executive officers and directors.
(2) The minimum and maximum subscription may be waived on a case-by-case basis
by the Board of Directors. In addition, the total number of shares that any
person may purchase, when added to his existing ownership, may not equal or
exceed 10% of the shares outstanding at the completion of this offering,
without first obtaining regulatory approval.
2
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SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and notes to those
financial statements included elsewhere in this prospectus.
For the
Nine Months Ended
September 30, For the Year Ended December 31,
------------- ------------------------------------------------------------
2004 2003 2002 2001 2000 1999
------ ------ ------ ------ ------ -----
(Dollars in Thousands)
INCOME STATEMENT DATA:
Total interest and dividend income...... $10,199 $11,219 $8,896 $5,862 $4,172 $2,449
Total interest expense.................. 3,953 4,853 4,492 3,607 2,491 1,455
------ ------ ----- ----- ----- -----
Net interest income..................... 6,246 6,366 4,404 2,255 1,681 994
Provision for loan losses............... 442 593 543 321 157 99
------ ------ ----- ----- ----- -----
Net interest income after
provision for loan losses........... 5,804 5,773 3,861 1,934 1,524 895
------ ------ ----- ----- ----- -----
Total non-interest income............... 2,386 1,800 596 462 264 171
Total non-interest expenses............. 5,197 5,120 3,158 2,171 1,638 1,293
------ ------ ----- ----- ----- -----
Net income (loss) before
income taxes........................ 2,993 2,453 1,298 225 150 (227)
Income taxes............................ 1,061 827 411 -- -- --
------ ----- ----- ----- ----- -----
Net income (loss)....................... $ 1,932 $1,625 $ 887 $ 225 $ 150 $ (227)
====== ===== ===== ===== ===== =====
3
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At or for the
Nine Months
Ended
September 30, At or for the Year Ended December 31,(1)
------------- -----------------------------------------------------------------------
2004 2003(2) 2002(2) 2001(2) 2000(2) 1999(2)
------ --------- --------- --------- --------- --------
(Dollars in Thousands, Except per Share Amounts)
BALANCE SHEET DATA:
Total assets...................... $295,155 $248,587 $179,659 $124,782 $69,420 $50,045
Investment securities (includes
available for sale and held to
maturity)...................... 45,686 43,320 43,844 40,984 19,387 17,072
Loans receivable, net............. 226,462 184,480 125,432 73,787 43,416 27,979
Intangible assets (goodwill)...... 1,763 1,763 799 799 847 894
Total deposits................... 246,559 220,893 156,852 98,521 53,875 35,783
Borrowings........................ 31,029 12,194 11,757 16,528 8,600 8,600
Total stockholders' equity........ 16,760 14,828 9,905 8,962 6,360 5,231
Total stockholders' equity
before accumulated other
comprehensive loss............. 16,768 14,840 9,914 9,028 6,509 5,777
PER SHARE DATA:
Net income (loss) - basic........ $1.00 $0.91 $ 0.54 $ 0.16 $0.12 $(0.23)
Net income (loss) - diluted..... 0.93 0.84 0.50 0.15 0.12 (0.23)
Book value (end of period)(3)(4). 8.71 7.70 6.03 6.59 5.14 4.57
Weighted average number of
shares outstanding -- basic... 1,924,621 1,924,621 1,640,533 1,439,909 1,224,428 1,006,126
Weighted average number of
shares outstanding -- diluted. 2,078,490 1,937,513 1,767,898 1,459,470 1,229,570 1,006,126
SELECTED ASSET QUALITY RATIOS:
Net loans charged-off as a
percentage of average loans.... 0.04% 0.02% 0.04% 0.03% 0.02% 0.06%
Total non-performing loans to
net loans...................... 0.01% 0.03% 0.13% 0.28% 0.09% --
Allowance for loan losses to
total loans.................... 0.92% 0.94% 0.94% 0.87% 0.79% 0.66%
PERFORMANCE RATIOS:
Equity to assets................. 5.68% 5.96% 5.51% 7.18% 10.13% 12.29%
Return on average equity......... 16.29% 12.94% 9.47% 3.07% 2.56% (4.84)%
Return on average assets......... .96% 0.75% 0.57% 0.25% 0.26% (0.60)%
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(1) Nittany Bank commenced operations on October 26, 1998.
(2) Per share data was adjusted for a 10% stock dividend issued in January
2001, a 10% dividend issued in January 2002, a 20% dividend issued in
February 2003 and a 20% dividend issued in March 2004.
(3) Book value per share, excluding accumulated other comprehensive loss, was
$8.71, $7.71, $6.04, $6.64, $5.26, and $5.11, respectively. (4) Cash book
value per share, excluding accumulated other comprehensive loss and
intangible assets, was $6.58, $6.85, $5.56, $5.04, $4.58 and $4.27,
respectively.
4
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For the
Nine Month
Period
September 30, At or for the Year Ended December 31,
------------- -----------------------------------------------
2004 2003 2002 2001 2000 1999
------ ------ ------ ------ ----- ----
PERFORMANCE RATIOS:
Return on average assets (net income divided by
average total assets)................................ 0.96% 0.75% 0.57% 0.25% 0.26% (0.60)%
Return on average equity (net income divided by
Average equity)...................................... 16.29 12.94 9.47 3.07 2.56 (4.84)
Net interest rate spread................................ 3.09 2.89 2.67 2.11 2.38 2.05
Net interest margin on average interest-earnings assets 3.26 3.07 2.93 2.59 3.06 2.71
Average interest-earning assets to average interest-
bearing liabilities.................................. 108.31 107.93 108.73 111.52 115.06 116.51
Efficiency ratio (Non-interest expense divided by the sum
of net interest income and non-interest income)...... 60.21 62.70 63.17 79.92 84.21 110.99
Non-interest expense to average assets.................. 2.47 2.35 2.03 2.37 2.83 3.38
ASSET QUALITY RATIOS(1)
Non-performing loans to total loans.................... 0.01 0.03 0.13 0.28 0.09 N/A
Non-performing assets to total assets.................. 0.01 0.02 0.09 0.17 0.06 N/A
Net charge-offs to average loans outstanding........... 0.04 0.02 0.04 0.03 0.02 0.06
Allowance for loan losses to total loans............... 0.92 0.94 0.94 0.87 0.79 0.66
Allowance for loan losses to non-performing loans...... 239.43 3,101.79 713.33 309.52 816.67 N/A
CAPITAL RATIOS:
Average equity to average assets ratios (average equity
divided by average total assets)................... 5.90 5.78 6.01 7.99 10.13 12.29
Equity to assets at period end......................... 5.68 5.96 5.51 7.18 10.13 10.45
Tangible equity to tangible assets at period end....... 5.11 5.29 5.09 6.58 8.04 8.82
NUMBER OF OFFICES:
Offices (including offices acquired in mergers)........ 4 4 4 3 3 2
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(1) Asset quality ratios are period end ratios.
5
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RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, together with all the other information included in this
prospectus, before you decide whether to purchase shares of our common stock.
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our financial condition; or (3) state other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this prospectus
could have a material adverse effect on our business, results of operations and
financial condition.
RISKS RELATED TO THE OFFERING
THE OFFERING PRICE DOES NOT NECESSARILY REPRESENT CURRENT MARKET VALUE.
Nittany's common stock began trading on the OTC Electronic Bulletin Board on
October 23, 1998 and Nittany issued a 10% stock dividend in January 2001, a 10%
stock dividend in January 2002, a 20% stock dividend in February 2003, and a 20%
stock dividend in March 2004. Since January 1, 2004, the sales prices have
generally ranged between approximately $23.00 to $28.00 per share. The offering
price does not necessarily reflect the price at which the common stock currently
trades, nor does the offering price necessarily reflect the price at which
Nittany's common stock will trade following the offering. No underwriter
assisted us in determining the offering price. See "Trading History and
Dividends" on page __.
WE HAVE NOT ENGAGED AN UNDERWRITER AND MAY NOT SELL ALL OF THE SHARES
OFFERED. The offering is not underwritten, so we can provide no assurance that
we will sell all or any of the shares offered. We may sell any number of shares
in the offering without any minimum. We may terminate the offering after
accepting subscriptions for any number of shares less than the maximum. Once you
submit a subscription, we can hold your subscription funds in an non-interest
bearing account and accept or reject your subscription for any reason or no
reason.
PRICE SIGNIFICANTLY IN EXCESS OF BOOK VALUE. At September 30, 2004 Nittany
had a book value per share of $8.71 (based upon 1,924,621 shares outstanding) or
$8.06 on a diluted basis (based upon 2,080,438 shares outstanding). Assuming the
sale of 115,000 shares, Nittany will have a book value per share of $9.63, well
below the offering price.
6
RISKS RELATED TO OUR BUSINESS
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN CERTAIN PROVISIONS WHICH
MAY DISCOURAGE NON-NEGOTIATED TAKEOVER ATTEMPTS AND MAY LIMIT YOUR VOTING POWER.
Certain provisions included in our articles of incorporation and bylaws are
designed to encourage potential acquirors to negotiate directly with our board
of directors and to discourage takeover attempts. These provisions, which
include restrictions on stockholders' ability to call special meetings, require
an 80% vote for certain business combinations and amendments to our certificate
of incorporation and bylaws and do not permit cumulative voting in the election
of directors, may discourage non-negotiated takeover attempts. These provisions
also tend to perpetuate management. You may determine that these provisions are
not in your best interest in as much as they may substantially limit your voting
power. See "Certain Anti-Takeover Provisions" on pages __ to __.
FUTURE CHANGES IN INTEREST RATES MAY REDUCE OUR EARNINGS. Our ability to
make a profit largely depends on our net interest income, which could be
negatively affected by changes in interest rates. Net interest income is the
difference between (1) the interest income we earn on interest-earning assets,
such as mortgage loans and investment securities and (2) the interest expense we
pay on our interest- bearing liabilities, such as deposits and amounts we
borrow.
If more interest-earning assets than interest-bearing liabilities reprice
or mature during a time when interest rates are declining, then our net interest
income may be reduced. Conversely, if more interest- bearing liabilities than
interest-earning assets reprice or mature during a time when interest rates are
rising, then our net interest income may be increased.
Decreases in interest rates can affect the average life of loans and
mortgage-backed and related securities. A reduction in interest rates results in
increased prepayments of loans and mortgage-backed and mortgage-related
securities, as borrowers refinance their debt in order to reduce their borrowing
cost. This causes reinvestment risk, because we are generally not able to
reinvest prepayments at rates that are comparable to the rates we earned on the
prepaid loans or securities. Thus, a reduction in interest rates may cause our
net interest rate spread to shrink because the decrease in the rates we pay on
deposits and borrowings may be less than the decrease in the yields on our
securities and loan portfolios. This could cause a decrease in our earnings,
sometimes referred as an "earnings squeeze." At September 30, 2004, 64% of our
loan portfolio was comprised of one- to four-family mortgage loans, which have
recently experienced a very high prepayment rate as mortgage rates declined from
historic levels.
Fluctuations in interest rates are not predictable or controllable. We have
attempted to structure our asset and liability management strategies to mitigate
the impact of changes in market interest rates on our net interest income.
However, there can be no assurance that we will be able to manage interest rate
risk so as to avoid significant adverse effects in our net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk and Net Portfolio Value."
OUR LENDING BUSINESS IS GEOGRAPHICALLY CONCENTRATED WHICH COULD REDUCE OUR
EARNINGS AND EFFECT OUR FINANCIAL CONDITION. Our loan portfolio consists almost
entirely of loans to persons and businesses located in Pennsylvania and, in
particular, Centre County. The collateral for many of our loans
7
consists of real and personal property located in the same county. During recent
periods, a large number of jobs in manufacturing have been eliminated in our
area due to a weakened national economy. This lack of geographic diversification
in the loan portfolios could have a material adverse effect on our financial
condition and results of operation if a cyclical downturn or natural disaster
affected the local economy.
THE LENDING BUSINESS HAS INHERENT RISKS. Nittany Bank is engaged primarily
in real estate mortgage lending and commercial real estate lending. A
significant amount of the loans are secured by local commercial real estate
(i.e., 22% at September 30, 2004), which is considered to have a higher risk
than home mortgages. The risk of nonpayment of loans is inherent in the lending
business. The ability of borrowers to repay their obligations can be adversely
affected by factors beyond our control, including local and general economic and
market conditions. A substantial portion of our loans are secured by real
estate. These same factors may adversely affect the value of real estate
collateral. We maintain an allowance for loan losses and periodically make
additional provisions to the allowance to reflect the level of losses determined
by management to be inherent in the loan portfolio. However, the level of the
allowance and the amount of these provisions are only estimates based on our
judgment, and we can provide no assurance that actual losses incurred will not
exceed the amount of the allowance or require substantial additional provisions
to the allowance.
WE HAVE A SHORT OPERATING HISTORY. As of November 26, 2004, Nittany Bank
has been operating for approximately six years. We cannot assure you that we
will continue to increase in asset size at the rate we have grown since
inception on October 26, 1998, or that results of future operations can be
predicted.
WE DO NOT PAY CASH DIVIDENDS. Our ability to pay cash dividends in the
future will depend on our profitability, growth, capital needs and compliance
with regulatory capital requirements. The Board of Directors currently intends
to retain earnings, if any, to support growth and has no intention of paying
cash dividends in the foreseeable future. We cannot assure you when or whether
we will pay a cash dividend or the amount of the dividend.
WE FACE STRONG COMPETITION. Competition may have an adverse effect on us.
In Centre County, Pennsylvania, large regional financial institutions
headquartered outside of the area dominate the banking industry. These large
regional financial institutions have greater resources for marketing,
development of services and products than we have, and they may enjoy greater
economies of scale. In addition, during the past three years, four
small-to-mid-size FDIC-insured institutions headquartered out of State College
have opened offices in State College.
THE AMOUNT OF COMMON STOCK HELD BY OUR EXECUTIVE OFFICERS AND DIRECTORS
GIVES THEM SIGNIFICANT INFLUENCE OVER THE ELECTION OF OUR BOARD OF DIRECTORS AND
OTHER MATTERS THAT REQUIRE STOCKHOLDER APPROVAL. A total of approximately
932,613 shares of our common stock (including vested stock options), or 43.7% of
the common stock outstanding (assuming 2,134,644 shares) was beneficially owned
by our directors and executive officers as of November 26, 2004. Our directors
and executive officers are expected to purchase a moderate amount of this
offering. Therefore, if they vote together, our directors and executive officers
have the ability to exert significant influence over the election of our Board
8
of Directors and other corporate actions requiring stockholder approval,
including the adoption of proposals made by stockholders. See page ___.
AN ACTIVE AND LIQUID TRADING MARKET FOR OUR STOCK DOES NOT EXIST, AND THE
LIQUIDITY AND PRICE OF OUR STOCK MAY BE ADVERSELY AFFECTED BY A LIMITED TRADING
MARKET. Our common stock trades on the over-the-counter market with quotations
available on the OTC Bulletin Board. Due to the relatively small amount of stock
outstanding, an active market for the stock does not exist. This means that
there may be limited secondary market liquidity for our stock, which may
negatively affect the price of the stock and cause significant volatility in the
price of our stock. The liquidity of the trading market for our stock is also
affected by the amount of stock held by our directors and executive officers.
USE OF PROCEEDS
If we sell all of the shares offered, gross proceeds will be $2,990,000. We
estimate expenses of the offering at approximately $100,000 leaving maximum net
proceeds of $2,890,000. If we sell less than all of the shares offered, proceeds
will be lower. If we sell some or all of the additional 35,000 shares
registered, proceeds will be higher. Additionally, due to the timing of the
offering and other factors, expenses may be significantly greater. The offering
is not subject to the sale of any minimum number or dollar amount of shares. See
"How to Subscribe - General" on page __.
Nittany intends to use the proceeds for general corporate purposes
including the possible repayment of borrowings and/or further capital
contributions to Nittany Bank. The funds would be used to increase Nittany
Bank's working capital, total regulatory capital and loans-to-one borrower
limit.
Proceeds retained by Nittany will initially be invested in government
securities or other permitted investments and ultimately used in the discretion
of the Board of Directors. We cannot assure you that we will succeed in selling
all or any portion of the shares being offered.
9
CAPITALIZATION
The following table sets forth the capitalization and capital ratios of
Nittany at September 30, 2004, and as adjusted to give pro forma effect to the
offering assuming sale of the 115,000 shares being offered.
At September 30, 2004
----------------------------
As Adjusted
Actual for the Offering
-------- ----------------
(Dollars in Thousands)
Preferred stock, 5,000,000 shares authorized; none outstanding............... $ - $ -
Common stock, $0.10 par value, 10,000,000 shares authorized;
shares outstanding: 1,924,621 at September 30, 2004 and
2,039,621 as adjusted..................................................... 192 204
Additional paid-in capital................................................... 14,288 17,166
Retained earnings ........................................................... 2,288 2,288
------ ------
Accumulated other comprehensive (loss) (1)................................... (8) (8)
------ ------
Total stockholders' equity .................................................. $16,760 $19,650
====== ======
-------------------
(1) Represents unrealized loss on securities available for sale.
Capital Ratios for Nittany Financial:
Tangible capital ......................................................... 5.1% 6.0%
Core capital.............................................................. 9.9% 11.6%
Total risk-based capital.................................................. 11.3% 13.0%
The table above assumes that Nittany will immediately pay estimated
expenses of $100,000 and invest the net proceeds in U.S. Treasury securities
with a 0% risk factor for regulatory capital purposes. The table above does not
reflect shares of common stock that would be issued upon exercise of outstanding
stock options. See "Management - Stock Option Plan." The table also does not
reflect the additional 35,000 shares that we have registered and may sell as
described in the footnote on the cover page of this prospectus.
DETERMINATION OF OFFERING PRICE
The Board of Directors of Nittany determined the offering price for the
shares of common stock offered after considering several factors, including
historical trading prices of the common stock, book value per share, earnings
per share, historical results of operations, assessment of our management and
financial condition and market activity of stock for other financial
institutions. The offering price does not necessarily reflect the price at which
the common stock currently trades, nor does the offering price necessarily
reflect the price at which the common stock will trade following the offering.
Because the offering is expected to take place over a period of 20 to 90 days,
the market price for the common stock could vary during the offering. The
offering will terminate no later than June 30, 2005.
10
TRADING HISTORY AND DIVIDENDS
TRADING HISTORY
Nittany's common stock is quoted on the OTC Electronic Bulletin Board under
the symbol "NTNY." E.E. Powell & Co., Hill Thompson Magid, L.P., Knight
Securities, L.P., Monroe Securities, Inc., Pershing Trading Company, L.P. and
Ryan Beck & Co. have all recently acted as market makers for the common stock.
These market makers have no obligation to make a market for Nittany's common
stock, and they may discontinue making a market at any time.
The information in the following table indicates the high and low closing
prices for the common stock, based upon information provided by the market
makers. These quotations reflect inter-dealer prices, without retail mark-up,
markdown, or commission, do not reflect actual transactions, and do not include
nominal amounts traded directly by shareholders or through other dealers who are
not market makers.
Nittany issued a 10% stock dividend in January 2001, a 10% stock dividend
in January 2002, a 20% stock dividend in February 2003 and a 20% stock dividend
in March 2004. Market prices set forth in the table below have been adjusted for
the stock dividends.
High ($) Low ($)
--------- -------
2004
Third Quarter ............................................................... 26.00 23.50
Second Quarter .............................................................. 25.10 22.50
First Quarter................................................................ 25.83 20.25
2003
Fourth Quarter .............................................................. 19.16 15.46
Third Quarter ............................................................... 15.96 13.42
Second Quarter .............................................................. 14.17 13.67
First Quarter................................................................ 15.00 11.46
2002
Fourth Quarter............................................................... 11.81 10.07
Third Quarter................................................................ 12.63 8.99
Second Quarter............................................................... 12.85 7.98
First Quarter................................................................ 9.20 7.08
11
High ($) Low ($)
-------- -------
2001
Fourth Quarter............................................................... 7.10 5.72
Third Quarter................................................................ 6.63 5.72
Second Quarter............................................................... 6.48 6.00
First Quarter................................................................ 7.58 5.70
2000
Fourth Quarter............................................................... 6.63 4.88
Third Quarter................................................................ 5.88 4.88
Second Quarter............................................................... 5.88 5.31
First Quarter................................................................ 6.03 4.88
The cost of the original stock issued in October 1998 was $5.73 per share
(as adjusted for stock dividends). On November __, 2004, the last reported sale
price of the common stock on the OTC Electronic Bulletin Board was $_____ per
share. As of November 26, 2004, we had approximately _____ shareholders of
record, which does not include the number of persons or entities who hold stock
in nominee or "street" name through various brokerage firms.
DIVIDEND POLICY AND HISTORY
As stated above, we have paid four stock dividends and no cash dividend.
Payment of stock and cash dividends is conditioned on earnings, financial
condition, cash needs, the discretion of the Board of Directors and compliance
with regulatory requirements. Our ability to pay dividends to stockholders is
dependent upon the dividends we receive from Nittany Bank. Nittany Bank may not
declare or pay a cash dividend on any of its stock if the effect of such payment
would cause its regulatory capital to be reduced below the regulatory
requirements imposed by the OTS.
HOW TO SUBSCRIBE
GENERAL
To invest, you must purchase at least 100 shares for a minimum investment
of $26.00 (unless waived on a case-by-case basis by the Board of Directors).
Once you submit a completed subscription to us, you may not withdraw it. We
reserve the right to accept individual subscriptions for fewer than 100 shares
in our discretion. The offering is not underwritten and is not conditioned on
the sale of any minimum number of shares. Our directors and executive officers
intend to purchase at least ______ shares in the offering. However, they reserve
the right to significantly increase or decrease the number of shares they plan
to purchase.
Only the directors and officers of Nittany and its subsidiaries have the
authority to solicit subscriptions for shares. Our directors and officers intend
to solicit by means of personal and telephone contact with prospective
subscribers and by direct mailing of the prospectus. We may reimburse our
12
directors and officers for their reasonable expenses, if any, incurred in
connection with the selling of shares. If necessary, we may enter into an
agreement with a registered broker dealer to assist in the sale of shares,
without notice to subscribers. Fees to the broker dealer may range from 1% to 3%
of the total shares sold. At the time of printing this prospectus, we currently
have no plans to enter into such an arrangement.
PURCHASE GUIDELINES
In connection with this offering, Nittany has generally established the
following guidelines.
1. For a period of twenty days (i.e. until __________, 2004) stockholders
of record of Nittany as of November 26, 2004 will be given the
opportunity to purchase stock. In the event of an oversubscription by
shareholders, orders will generally be filled in proportion to the
amount of their percentage of relative beneficial ownership as of
November 26, 2004.
2. Any remaining shares will be offered to the general public, with a
preference given first to savings and/or depositor customers of
Nittany Bank and then to persons residing in the State College area.
"Customers" will be deemed to be persons or entities with a loan from
Nittany Bank of at least $5,000 or a deposit of least $1,000 as of the
date of the stock order.
NOTWITHSTANDING THE ABOVE GUIDELINES, NITTANY RESERVES THE RIGHT TO REJECT
ANY ORDER IN PART OR IN WHOLE.
RESTRICTIONS
Only persons who have received a copy of this prospectus may subscribe. In
addition, for stockholders of record as of November 26, 2004 we have only
registered or otherwise complied with the state securities or "blue sky" laws of
the following jurisdictions: Arizona, California, Colorado, Florida, Kansas,
Kentucky, Maryland, New Jersey, Michigan, Missouri, New York, North Carolina,
South Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Virginia,
Washington DC, and Wisconsin. For persons who are not stockholders of record we
have registered only in Pennsylvania. Only residents of these jurisdictions may
subscribe. Please contact us if you have any questions regarding this
limitation. No investor may purchase, directly or indirectly, shares which
together with any shares previously held by the investor equal or exceed 10% of
the Nittany common stock to be outstanding immediately following completion of
the offering. In addition, except with our consent, no investor may purchase in
the offering, individually or jointly, more than [5,750] shares of our common
stock in the offering. This means that if Mr. Smith purchases 5,000 shares, Mr.
and Mrs. Smith cannot purchase more than 750 shares.
APPLICATION FOR COMMON STOCK
The prospectus includes as Appendix A, the Stock Subscription Application,
and is accompanied by a Stock Subscription Application. You may subscribe to
purchase shares by mailing or delivering to us:
o a completed and signed application; and
13
o a check payable to "Nittany Bank, Escrow Agent for Nittany Financial
Corp." in the amount of the purchase price.
We can accept or reject applications in whole or in part for any reason. We
will notify you in writing whether we have accepted your application within ten
business days after receipt of your application. If we reject your application
in whole or in part, we will return your unaccepted funds.
We will deposit all subscription funds in a non-interest-bearing escrow
account at Nittany Bank. Any funds in the escrow account are insured by the FDIC
up to a maximum of $100,000 per purchaser; however, our common stock is not
insured by the FDIC or any other agency.
The first closing is expected to occur on or before [DECEMBER 31, 2004].
Thereafter, on approximately a monthly basis, we will conduct a closing at our
premises. At each closing, at our request Nittany Bank will release to us funds
in the escrow account attributable to accepted applications. Within 10 business
days after each closing, we will mail to each of you whose application we have
accepted a stock certificate, registered in your name or as directed by you, for
the shares you have purchased.
We plan to keep the offering open for 20 to 90 days, but we may terminate
it early or extend it until June 30, 2005. If for any reason we terminate the
offering without accepting any applications, we will send to each of you who has
submitted an application a written notice and a refund of the amount you
submitted on those funds while on deposit in the impound account.
BUSINESS
NITTANY FINANCIAL CORP. We were incorporated under the laws of the
Commonwealth of Pennsylvania on December 8, 1997, primarily to own all of the
outstanding shares of capital stock of Nittany Bank. On September 14, 1998, the
Office of Thrift Supervision, referred to herein as the "OTS", granted us the
necessary approvals to acquire the capital stock of Nittany Bank and to become a
savings and loan holding company of Nittany Bank. Nittany Bank opened for
business on October 26, 1998, and currently has four offices and five ATMs in
State College, Pennsylvania. A fifth office and sixth ATM are expected to open
in historic Bellefonte, Pennsylvania in early 2005.
We initially issued 29,998 shares of common stock at $10.00 per share in a
private offering in order to pay our pre-opening costs and offering expenses of
our initial public offering in August 1998. The initial public offering was
primarily for the purpose of raising the funds necessary to capitalize Nittany
Bank. We sold a total of 537,438 shares of common stock in the initial public
offering and issued 10,000 shares to First Commonwealth Bank in connection with
the acquisition of Nittany Bank's first two offices. Effective as of October 23,
1998, we purchased, with all of the proceeds received in the initial public
offering, all of the capital stock of Nittany Bank.
On March 31, 2000, we completed a stock offering in which 131,953 shares of
common stock were sold to existing shareholders of Nittany, customers of Nittany
Bank, and the general public, and approximately $1.5 million in gross proceeds
was raised. On October 24, 2001, we completed a stock
14
offering in which 250,000 shares of common stock were sold to existing
shareholders of Nittany, customers of Nittany Bank, and the general public, and
approximately $2.4 million in gross proceeds was raised. In May 2003, we
completed a stock offering of 157,515 shares of common stock to raise
approximately $2.4 million.
We are a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage provided that Nittany Bank retains a specified amount of its
assets in housing-related investments. We currently conduct no significant
business or operations of our own other than owning all of the outstanding
shares of capital stock of Nittany Bank, Vantage Investment Advisors, LLC. and
Nittany Asset Management, Inc.
NITTANY ASSET MANAGEMENT INC. On May 24, 1999, Nittany Asset Management was
formed and incorporated as a Pennsylvania corporation. Nittany Asset Management
commenced operation in November 1999 as a wholly-owned subsidiary of Nittany to
provide investment advisory services to high net worth or emerging affluent
clients, with an emphasis on establishing fee based asset management accounts.
Nittany Asset Management will continue to explore various services to generate
increased non- interest income. However, there is no assurance whether it will
be successful in its efforts.
NITTANY BANK. In April 1998, the organizers of Nittany filed an application
with the OTS to organize a federal stock savings bank. In September 1998, the
OTS conditionally approved the application, and the organizers obtained all
necessary regulatory approvals to commence banking operations. In October 1998,
the organizers sold their capital stock to Nittany and commenced banking
operations on October 26, 1998. Nittany Bank's deposit accounts are insured by
the Federal Deposit Insurance Corporation and it is a member of the Federal Home
Loan Bank System.
Nittany Bank commenced operations in October 1998 with two offices located
at 116 East College Avenue and 1276 North Atherton Street, which were acquired
from First Commonwealth Bank. In addition to such branch offices, Nittany Bank
also acquired from First Commonwealth Bank certain assets and assumed certain
deposit liabilities, primarily related to such branch offices. On August 7,
2000, a third branch office was opened at 129 Rolling Ridge Drive, State
College, Pennsylvania. On January 14, 2002, a fourth branch office was opened in
the former Zimms Restaurant at 2541 East College Avenue in State College,
Pennsylvania. This building operates as a full service branch office of Nittany
Bank, and serves as an office of Nittany Asset Management, Inc. and Vantage
Investment Advisors, LLC. Additionally, in August 2003 Nittany Bank relocated
its existing office at 129 Rolling Ridge Drive, State College, Pennsylvania to a
new location at 1900 South Atherton Street, at the location of the former
Shoney's Restaurant. In early 2005, Nittany Bank expects to open a fifth office
in the nearby historic town of Bellefonte, Pennsylvania.
Nittany Bank is a community-oriented financial institution. Our business is
to attract retail deposits and to invest those deposits, together with funds
generated from operations and borrowings, primarily in one- to four-family
mortgage loans and business real estate loans. Nittany Bank also invests in home
equity loans, construction loans, commercial business loans and consumer loans.
Its deposit base is comprised of traditional deposit products including checking
accounts, statement savings accounts, money market accounts, certificates of
deposit and individual retirement accounts.
15
VANTAGE INVESTMENT ADVISORS, LLC. On January 1, 2003, Nittany acquired
Vantage Investment Advisors, LLC ("Vantage"). Nittany acquired Vantage for
consideration consisting of cash, the assumption of Vantage debt and 36,000
shares of Nittany Financial Corp. stock. Vantage is a registered investment
advisor headquartered in State College, Pennsylvania that, as of September 30,
2004, managed investment assets totaling approximately $250 million for nearly
1,000 clients.
MARKET STRATEGY. Our objective has been to create a customer-driven
financial institution focused on providing value to customers by local board
members and officers and by delivering products and services matched to the
customers' needs. We believe that customers are drawn to a locally owned and
managed institution that demonstrates an active interest in its customers and
their business and personal financial needs.
The banking industry in our market area has experienced substantial
consolidation in recent years. Many of the area's locally owned or managed
financial institutions have either been acquired by large regional bank holding
companies or have been consolidated into branches. This consolidation has been
accompanied by increasing fees for bank services, the dissolution of local
boards of directors, management and personnel changes and, in the perception of
management, a decline in the level of customer service. This type of
consolidation is expected to continue.
OPERATING STRATEGY. We believe that the following attributes make us
attractive to the local business people and residents:
o Direct and easy access to our President, officers and directors, by
members of the community, whether during or after business hours.
o Local conditions and needs are taken into account by us when deciding
loan applications and making other business decisions affecting
members of the community.
o A personalized relationship banking approach that is supported by
decision making that is local and responsive to customer needs.
o Offering competitive interest rates and fees on savings and checking
accounts.
o Prompt review and processing of loan applications.
o Depositors' funds are invested back into the community.
o Our positive involvement in the community affairs of State College.
o Technology-based services that enhance the convenience for our
customers to conduct business, including internet banking and free
internet bill paying.
16
o Availability of a wide array of financial services coordinated by a
team of personal bankers dedicated to meeting customer needs.
COMPETITION. We experience substantial competition both in attracting and
retaining deposits and in making loans. Our most direct competition is in our
market area of Centre County (which includes the borough of State College and
the surrounding townships of College, Ferguson, Halfmoon, Harris and Patton)
which is a highly competitive market for financial services. We face direct
competition from a significant number of financial institutions operating in its
market area, many with a state-wide or regional presence and in some cases a
national presence. Many of these financial institutions have been in business
for many years, have established customer bases, are significantly larger and
have greater financial resources than we have and are able to offer certain
services that we currently are not able to offer. In particular, Centre County,
is served almost entirely by large, regional financial institutions, almost all
of which are headquartered out of the area. Nittany Bank is the only
FDIC-insured financial institution headquartered and operated solely in State
College. We also compete for deposits and loans from non- bank institutions such
as brokerage firms, credit unions, insurance companies, money market mutual
funds and mortgage banking companies.
17
LENDING ACTIVITIES
ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating to
the composition of the Company's portfolio by type of loan and in percentage of
the respective portfolios at the dates indicated.
At September 30, At December 31,
------------------------ ---------------------------------------------------
2004 2003 2002
------------------------ -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Type of Loans:
- --------------
Real Estate Loans:
One- to- four family................. $145,788 63.76% $116,315 63.02% $ 80,163 63.89%
Home equity.......................... 12,357 5.41 9,965 5.40 6,341 5.05
Commercial........................... 50,082 21.90 37,918 20.54 26,701 21.28
Construction......................... 6,659 2.91 8,737 4.73 2,224 1.77
Commercial............................. 11,828 5.18 9,826 5.32 8,001 6.38
Consumer .............................. 1,923 .84 1,808 .99 2,048 1.63
------- ------- ------- ------ ------- -------
Total............................. $228,637 100.00% $184,569 100.00% $125,478 100.00%
------- ====== ------- ====== ------- ======
Less:
Deferred loan (costs) fees, net........ 68 89 46
Allowance for possible loan losses..... 2,107 1,737 1,177
------- ------- -------
Total loans, net.................. $226,462 $182,743 $124,255
======= ======= =======
At December 31,
--------------------------------------------------------------------------------
2001 2000 1999
--------------------- -------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Type of Loans:
- --------------
Real Estate Loans:
One- to- four family................. $44,498 59.75% $25,115 57.39% $15,490 54.98%
Home equity.......................... 4,763 6.40 9,249 21.13 6,504 23.09
Commercial........................... 15,463 20.77 3,078 7.03 2,377 8.44
Construction......................... 1,236 1.66 1,606 3.67 747 2.65
Commercial............................. 5,971 8.02 2,799 6.39 1,638 5.81
Consumer .............................. 2,531 3.40 1,923 4.39 1,417 5.03
------ ------ ------ ------ ------ ------
Total............................. $74,462 100.00% $43,770 100.00% $28,173 100.00%
------ ====== ------ ====== ------ ======
Less:
Deferred loan (costs) fees, net........ 25 10 7
Allowance for possible loan losses..... 650 344 187
------ ------ ------
Total loans, net.................. $73,787 $43,416 $27,979
====== ====== ======
18
LOAN MATURITY TABLES
The following table sets forth by scheduled repricing dates or the
contractual maturity dates Nittany's loan portfolio at December 31, 2003. The
table does not include prepayments or scheduled principal repayments.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
Real Estate Loans:
One- to- four family........... $ 1,065 $ 1,826 $113,424 $116,315
Commercial..................... 2,072 4,129 31,717 37,918
Construction................... 1,673 - 7,064 8,737
Home equity.................... 374 1,222 8,369 9,965
Commercial....................... 2,727 1,988 5,111 9,826
Consumer ........................ 627 1,086 95 1,808
----- ------ ------- -------
Total amount due................. $8,538 $10,251 $165,780 $184,569
===== ====== ======= =======
The following table sets forth the dollar amount of all loans at
December 31, 2003, due after December 31, 2004, which have fixed interest rates
and floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rate Total
----------- --------------- -----
(In thousands)
One- to- four family................... $46,400 $68,850 $115,250
Commercial real estate................. 5,702 30,144 35,846
Construction........................... - 7,064 7,064
Home equity............................ 5,533 4,058 9,591
Commercial............................. 2,589 4,510 7,099
Consumer............................... 957 224 1,181
------ ------- -------
Total......................... $61,181 $114,850 $176,031
====== ======= =======
ONE- TO- FOUR FAMILY LENDING. Nittany's one- to- four family
residential mortgage loans are secured by property located in its market area.
Nittany generally originates one- to- four family owner occupied residential
mortgage loans in amounts up to 90% (80% for non-owner occupied) of the lesser
of the appraised value or selling price of the mortgaged property without
requiring mortgage insurance. Additionally, Nittany generally originates and
retains fixed rate and adjustable rate loans for retention in its portfolio.
Currently, Nittany's one- to- four family owner occupied loan portfolio consists
of 15-year
19
fixed rate loans and adjustable rate loans with fixed rate periods of up to 7
years (three or five years for non-owner occupied), with primarily, principal
and interest calculated using a maximum 30 year (owner occupied) or 25 year
(non-owner occupied) amortization period.
Nittany Bank also provides access to the secondary market for 15 and 30
year fixed rate owner occupied residential mortgages.
All of the one- to- four family mortgages include "due on sale" clauses,
which are provisions that give Nittany the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party.
Property appraisals on real estate securing Nittany's one- to- four family
residential loans are made by state certified and licensed independent
appraisers approved by the Board of Directors. Appraisals are performed in
accordance with applicable regulations and policies. At Nittany's discretion,
title insurance is either obtained or, more commonly, an attorney's certificates
of title is obtained on first mortgage real estate loans originated. In some
instances, a fee is charged equal to a percentage of the loan amount (commonly
referred to as points).
COMMERCIAL REAL ESTATE AND COMMERCIAL BUSINESS LOANS. Nittany originates a
significantly higher percentage of commercial real estate loans than the average
savings bank. Commercial real estate loans are loans secured by commercial real
estate (e.g., shopping centers, medical buildings, retail offices) in Nittany's
market area. Commercial real estate loans are generally originated in amounts up
to 80% of the appraised value of the property and are secured by improved
property such as residential rental properties, office buildings, retail stores,
warehouse, church buildings and other non-residential buildings, most of which
are located in Nittany's market area. Commercial real estate loans are generally
made at rates which adjust above the treasury interest rate and cost of funds
rate or are balloon loans with fixed interest rates which generally mature in
three to five years with principal amortization for a period of up to 25 years.
Commercial business loans are underwritten on the basis of the borrower's
ability to service such debt from income. Commercial business loans are
generally made to small and mid-sized companies located within Nittany's primary
lending area. In most cases, additional collateral of equipment, accounts
receivable, inventory, chattel or other assets is required before the Company
makes a commercial business loan. Nittany Bank is an approved Small Business
Administration (SBA) lender.
Loans secured by commercial real estate and commercial business loans are
generally larger and involve a greater degree of risk than one- to- four family
residential mortgage loans. Of primary concern, is the borrower's
creditworthiness and the feasibility and cash flow potential of the project.
Loans secured by income properties are generally larger and involve greater
risks than residential mortgage loans because payments on loans secured by
income properties are often dependent on successful operation or management of
the properties. As a result, repayment of such loans may be subject to a greater
extent than residential real estate loans to adverse conditions in the real
estate market or the economy.
20
CONSTRUCTION LOANS. Nittany originates loans to finance the construction of
one- to- four family dwellings. Generally, construction loans to individuals are
made only if Nittany also makes the mortgage loan on the property. Construction
loans to individuals are underwritten similar to those for residential mortgage
loans. Nittany makes construction loans to builders on a limited basis.
Construction loans to builders generally are lines of credit with terms of up to
one year and interest rates which are adjusted with the Wall Street prime rate.
These loans generally are adjustable rate loans.
Construction financing is generally considered to involve a higher degree
of risk of loss than long- term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, Nittany
may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, Nittany may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
CONSUMER. Nittany's consumer loan portfolio includes various types of
secured and unsecured consumer loans including home equity lines of credit, home
equity term, personal loans, and automobile loans (new and used). Consumer loans
generally have terms of one year to ten years, some of which are at fixed rates
and some of which have rates that adjust periodically.
Consumer loans are advantageous to Nittany because such loans generally
have higher rates of interest and shorter terms, but they also involve more
credit risk than residential mortgage loans because of the higher potential of
defaults and the difficulties involved in disposing of any collateral.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. Nittany has established various
lending limits for its officers and also maintains a loan committee. The loan
committee is comprised of the Chairman of the Board, the President, and two
Executive Loan Officers and two non-employee members of the Board of Directors.
The President has authority to approve applications for mortgage loans up to
$350,000, secured loans up to $200,000 and unsecured loans up to $10,000. Two of
the Executive Loan Officers have authority to approve mortgage loans up to
$350,000, secured loans up to $150,000 and unsecured loans up to $10,000.
Additionally, any two of the four Executive Loan Officers have authority to
approve applications for real estate loans up to $500,000, secured loans up to
$300,000 and unsecured loans up to $50,000. Personal banking officers generally
have authority to approve loan applications up to $75,000, depending upon the
loan collateral and type of loan. The loan committee considers all applications
in excess of the authorized lending limits of the employee officers up to $1.5
million. The entire Board of Directors ratifies all such loans and approves
amounts in excess of $1.5 million.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are processed by independent fee
appraisers. Borrowers
21
also must obtain fire and casualty insurance. Flood insurance is also required
on loans secured by property that is located in a flood zone.
LOAN COMMITMENTS. Commitments to extend credit are arrangements to lend to
the customer as long as there is no violation of any condition established in
the loan agreement. These commitments are comprised primarily of available
personal and commercial lines of credit, undisbursed construction funding, and
various loans approved but not yet funded. At September 30, 2004, loan
commitments totaled $11.1 million.
NONPERFORMING AND PROBLEM ASSETS
LOAN DELINQUENCIES. When a mortgage loan becomes 15 days past due, a notice
of nonpayment is sent to the borrower. If such payment is not received by month
end, an additional notice of nonpayment is sent to the borrower. After 60 days,
if the mortgage loan continues to be delinquent, a notice of right to cure
default is sent to the borrower giving 30 additional days to bring the loan
current before foreclosure is commenced. If the mortgage loan continues in a
delinquent status for 90 days past due and no repayment plan is in effect,
foreclosure proceedings will be initiated.
Loans are reviewed and are placed on a non-accrual status when the loan
becomes more than 90 days delinquent or when, in Nittany's opinion, the
collection of additional interest is doubtful. Interest accrued and unpaid at
the time a loan is placed on nonaccrual status is charged against interest
income. Subsequent interest payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
22
NON-PERFORMING ASSETS. The following table sets forth information with
respect to Nittany's non-performing assets for the periods indicated. Nittany
has no loans categorized as troubled debt restructurings within the meaning of
the Statement of Financial Accounting Standards ("SFAS") 15 and no impaired
loans within the meaning of SFAS 114, as amended by SFAS 118. For the nine
months ended September 30, 2004, interest income that would have been recorded
on loans accounted for on a nonaccrual basis was not material.
At At December 31,
September 30, -----------------------------------------
2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
(In Thousands)
Loans accounted for on a non-accrual basis
Consumer.............................................. $14 $ -- $ -- $ -- $ -- $ --
One-to-four-family.................................... -- 56 165 -- 42 --
---- --- --- ----- --- -----
Total non-accrual loans................................. $ 14 $ 56 $165 $ -- $ 42 $ --
=== === === ===== === =====
Accruing loans which are contractually past due 90
days or more:
One-to-four family.................................... -- $ -- $ -- $210 $ -- $ --
Commercial real estate................................ -- -- -- -- -- --
Home equity........................................... -- -- -- -- -- -
Construction.......................................... -- -- -- -- -- -
Commercial............................................ -- -- -- -- -- --
Consumer.............................................. -- -- -- -- -- --
---- ---- ----- ------ ----- ------
Total................................................... $ -- $ -- $ -- $210 $ -- $ --
==== ==== ===== === ===== =====
Real estate owned....................................... -- $ -- $ -- $ -- $ -- $ --
---- ---- ----- ----- ----- -----
Total non-performing assets............................. $ 14 $ 56 $165 $210 $ 42 $ --
=== -== === === === =====
Total non-accrual and accrual loans to
net loans............................................ 0.01% 0.03% 0.13% .28% 0.09% --%
==== ==== ==== ==== ==== ====
Total non-performing assets to total assets............. 0.00% 0.02% 0.09% .17% 0.06% --%
==== ==== ==== === ==== ====
CLASSIFIED ASSETS. Management, in compliance with regulatory guidelines,
has instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful management is required to establish a general valuation
reserve for loan losses in an amount that is deemed prudent. General allowances
represent loss allowances which have been established to recognize inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When management classifies a
loan as a loss asset, a reserve equal to 100% of the loan balance is required to
be established or the loan is to be charged-off.
An asset is considered "substandard" if it is inadequately protected by the
paying capacity and net worth of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions, and
23
values. Assets classified as "loss" are those considered "uncollectible" and of
such little value that their continuance as assets without the establishment of
a specific loss reserve is not warranted. Assets which do not currently expose
the insured institution to a sufficient degree of risk to warrant classification
in one of the aforementioned categories but possess credit deficiencies or
potential weaknesses are required to be designated "special mention" by
management.
The following table sets forth Nittany's classified assets in accordance
with its classification system.
At At December 31,
September 30, ------------------------------------------------------
2004 2003 2002 2001 2000 1999
------ ---- ---- ---- ---- ----
(In thousands)
Special Mention............. $1,628 $2,366 $1,911 $1,697 $ 42 $ --
Substandard................. -- -- -- -- - --
Doubtful.................... -- -- -- -- -- --
Loss........................ -- 56 165 -- -- --
----- ----- ----- ----- ----- -----
$1,628 $2,422 $2,076 $1,697 $ 42 $ --
===== ===== ===== ===== ===== =====
ALLOWANCES FOR LOAN LOSSES. Nittany's allowance for loan losses is
intended to be maintained at a level sufficient to absorb all estimable and
probable losses inherent in the loans receivable portfolio. In determining, the
appropriate level of the allowance for loan losses and, accordingly, the level
of the provision for loan losses, management reviews its loans receivable
portfolio on at least a monthly basis, taking into account: (i) known and
inherent risks in the portfolio, (ii) adverse situations that may affect the
borrower's ability to repay, (iii) the estimated value of any underlying
collateral, and (iv) current economic conditions.
Nittany monitors its allowance for loan losses and makes additions to
the allowance as economic conditions dictate. The allowance for loan losses is
maintained at a level that represents management's best estimates of losses in
the loan portfolio at the balance sheet date. However, there can be no assurance
that the allowance for losses will be adequate to cover losses which may be
realized in the future and that additional provisions for losses will not be
required.
24
The following table sets forth information with respect to Nittany's
allowance for loan losses at the dates indicated.
At At December 31,
September 30 -----------------------------------------------------------
2004 2003 2002 2001 2000 1999
--------- ------ ------ ------ ------ -------
(Dollars In Thousands)
Total loans outstanding........................ $228,637 $184,569 $125,478 $74,462 $43,770 $28,173
------- ======= ======= ====== ====== ======
Average loans outstanding...................... $205,669 $154,404 $ 98,013 $54,324 $35,560 $17,127
======= ======= ======= ====== ====== ======
Allowance balance at beginning of period....... $ 1,737 $ 1,177 $ 650 $ 343 $ 187 $ 99
Provision:
Real estate loans.............................. 442 593 543 273 126 89
Commercial..................................... -- -- -- 35 11 6
Consumer....................................... -- -- -- 13 20 4
------- ------- --------- ------- ------- -------
442 593 543 321 157 99
------- ------- ------- ------- ------- ------
Charge-offs:
Real estate loans.............................. (64) (8) (2) -- -- --
Commercial..................................... -- (10) (5) -- -- --
Consumer....................................... (35) (18) (22) (14) (3) (11)
------ ------ ------- ------- ------ -------
(99) (36) (29) (14) (3) (11)
------ ------ ------- ------- ------ -------
Recoveries:
Real estate loans.............................. 25 -- -- -- -- --
Commercial..................................... -- -- -- -- -- --
Consumer....................................... 2 3 13 -- 2 --
------- ------- ------- --------- ------- --------
27 3 13 -- 2 --
------- ------- ------- --------- ------- --------
Allowance balances at end of period............ $ 2,107 $ 1,737 $ 1,177 $ 650 $ 343 $ 187
======= ======= ====== ======= ====== =======
Allowance for loan losses as a percent of total
loans outstanding.............................. 0.92% 0.94% 0.94% 0.87% 0.79% 0.66%
====== ====== ====== ====== ====== ======
Net loans charged off as percent of average
loans outstanding.............................. 0.04% 0.02% 0.04% 0.03% 0.02% 0.06%
====== ====== ====== ====== ====== ======
25
The following table illustrates the allocation of the allowance for loan
losses for each category of loan for the dates indicated. The allocation of the
allowance to each category is not necessarily indicative of future loss in any
particular category and does not restrict Nittany's use of the allowance to
absorb losses in other loan categories.
At December 31,
At September 30, -----------------------------------------------
2004 2003 2002
--------------------------- -------------------- --------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars In Thousands)
Type of Loans:
Real Estate Loans:
One- to- four family........... $1,318 63.76% $1,083 63.02% $ 575 63.89%
Commercial..................... 453 21.90 327 20.54 360 21.28
Construction................... 80 2.91 102 4.73 21 1.77
Home equity.................... 92 5.41 94 5.40 72 5.05
Commercial......................... 90 5.18 93 5.32 66 6.38
Consumer........................... 17 .84 17 .99 16 1.63
Unallocated........................ 57 -- 21 -- 67 --
----- ------ ----- ------ ----- ------
Total................... $2,107 100.00% $1,737 100.00% $1,177 100.00%
===== ====== ===== ====== ===== ======
At December 31,
--------------------------------------------------------------------------------
2001 2000 1999
-------------------------- -------------------- --------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars In Thousands)
Type of Loans:
Real Estate Loans:
One- to- four family........... $298 59.75% $133 57.39% $103 54.98%
Commercial..................... 138 20.77 106 21.13 47 23.09
Construction................... 10 1.66 19 3.67 -- 2.65
Home equity.................... 36 6.40 23 7.03 16 8.44
Commercial......................... 66 8.02 28 6.39 12 5.81
Consumer........................... 23 3.40 34 4.39 9 5.03
Unallocated........................ 79 -- -- -- -- --
---- ------ ---- ------ ---- ------
Total................... $650 100.00% $ 343 100.00% $187 100.00%
==== ====== ==== ====== ==== ======
26
INVESTMENT ACTIVITIES
Nittany is required under federal regulation to maintain a sufficient level
of liquid assets (including specified short-term securities and certain other
investments), as determined by management and defined and reviewed for adequacy
by the OTS during its regular examinations. The level of liquid assets varies
depending upon several factors, including: (i) the yields on investment
alternatives, (ii) judgment as to the attractiveness of the yields then
available in relation to other opportunities, (iii) expectation of future yield
levels, and (iv) projections as to the short-term demand for funds to be used in
loan origination and other activities. Investment securities, including
mortgage-backed securities, are classified at the time of purchase, based upon
management's intentions and abilities, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent and
ability to hold to maturity are classified as held to maturity and are stated at
cost and adjusted for amortization of premium and accretion of discount, which
are computed using the level yield method and recognized as adjustments of
interest income. All other debt securities are classified as available for sale
to serve principally as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities require Nittany to categorize securities as "held to maturity,"
"available for sale" or "trading." As of September 30, 2004, Nittany had
securities classified as "held to maturity" and "available for sale" in the
amount of $43.5 million and $2.2 million, respectively, and had no securities
classified as "trading." Securities classified as "available for sale" are
reported for financial reporting purposes at the fair market value with net
changes in the market value from period to period included as a separate
component of stockholders' equity, net of income taxes. At September 30, 2004,
Nittany's securities available for sale had net unrealized losses of $13,000.
These net unrealized gains/losses reflect normal market conditions and vary,
either positively or negatively, based primarily on changes in general levels of
market interest rates relative to the yields on the portfolio. Changes in the
market value of securities available for sale do not affect Nittany's income. In
addition, changes in the market value of securities available for sale do not
affect the Bank's regulatory capital requirements or its loan-to-one borrower
limit.
At September 30, 2004, Nittany's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) local municipal
obligations, (iv) mortgage-backed securities, (v) collateralized mortgage
obligations, (vi) banker's acceptances, (vii) certificates of deposit, (viii)
equity securities, and (ix) investment grade corporate bonds, commercial paper
and mortgage derivative products. The Board of Directors may authorize
additional investments.
As a source of liquidity and to supplement Nittany's lending activities,
Nittany has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages. Principal and
interest payments are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors, like
Nittany. The quasi- governmental agencies guarantee the payment of principal and
interest to investors and include the Federal Home Loan Mortgage Corporation
("FreddieMac"), Government National Mortgage Association ("GinnieMae"), and
Federal National Mortgage Association ("FannieMae").
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have
27
varying maturities. The underlying pool of mortgages can be composed of either
fixed rate or adjustable rate mortgage loans. Mortgage-backed securities are
generally referred to as mortgage participation certificates or pass-through
certificates. The interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed rate or adjustable rate) and the prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Expected maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. Mortgage-backed securities issued by FreddieMac and
GinnieMae make up a majority of the pass-through certificates market.
Nittany also invests in mortgage-related securities, primarily
collateralized mortgage obligations ("CMOs"), issued or sponsored by GinnieMae,
FannieMae, FreddieMac, as well as private issuers. CMOs are a type of debt
security that aggregates pools of mortgages and mortgage-backed securities and
creates different classes of CMO securities with varying maturities and
amortization schedules as well as a residual interest with each class having
different risk characteristics. The cash flows from the underlying collateral
are usually divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest repayment
of the underlying mortgages and mortgage- backed securities as opposed to pass
through mortgage-backed securities where cash flows are distributed pro rata to
all security holders. Unlike mortgage-backed securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. CMOs attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity.
SECURITIES PORTFOLIO. The following table sets forth the carrying value of
Nittany's securities portfolio at the dates indicated:
At At December 31,
September 30, ---------------------------------
2004 2003 2002 2001
---- ---- ---- ----
(In Thousands)
Securities available for sale:
U.S. government agency securities.......................... $ -- $ -- $ -- $3,137
Corporate securities....................................... 668 1,648 1,628 1,674
Collateralized mortgage obligations........................ -- -- 220 2,792
Mortgage-backed securities................................. 1,449 2,357 4,082 5,513
Equity securities.......................................... 106 69 94 72
Securities held to maturity:
U.S. government agency securities.......................... 14,630 8,762 13,068 4,777
Collateralized mortgage obligations........................ 1,515 1,130 3,464 8,018
Corporate Securities....................................... 509 500 511 --
Mortgage-backed securities................................ 11,976 13,570 20,777 15,001
Obligations of States and Political subdivisions.......... 14,833 15,284 -- --
------ ------ ------ ------
Total investment securities.................................. $45,686 $43,320 $43,844 $40,984
====== ====== ====== ======
28
The following table sets forth information regarding the scheduled
maturities, amortized cost, estimated fair values, and weighted average yields
for Nittany's investment securities portfolio at September 30, 2004 by
contractual maturity. The following table does not include equity securities nor
takes into consideration the effects of scheduled repayments or the effects of
possible prepayments.
As of September 30, 2004
-------------------------------------------------------------------------------
Within More than More than
One Year One to Five Years Five to Ten Years
--------------------- ----------------------- ----------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
U.S. government agency
securities................. $ -- --% $4,009 2.29% $ 9,621 3.65%
Corporate securities............ -- -- -- -- 509 2.00
Collateralized mortgage
obligations................ -- -- -- -- 871 4.47
Mortgage-backed
securities................. 66 4.76 1,850 4.18 4,965 4.58
Obligations of States and
political subdivisions.......... -- -- -- -- 5,293 4.57
--- ---- ------ ---- ------ -----
Total investment
securities................. $ 66 4.76% $ 5,859 2.89% $21,259 4.09%
=== ==== ====== ==== ====== ====
As of September 30, 2004
-----------------------------------------------------------------
More than Ten Years Total Investment Securities
------------------- -------------------------------------
Amortized Average Amortized Average Market
Cost Yield Cost Yield Value
---- ----- ---- ----- -----
U.S. government agency
securities................. $ 1,000 6.25% $14,630 3.45% $14,694
Corporate securities............ 680 2.77 1,189 2.44 1,175
Collateralized mortgage
obligations................ 644 5.08 1,515 4.73 1,537
Mortgage-backed
securities................. 6,551 3.00 13,432 3.75 13,524
Obligations of States and
political subdivisions.......... 9,540 4.72 14,833 4.67 14,740
------ ---- -------- ----- ------
Total investment
securities................. $18,415 4.13% $45,599 3.95% $45,670
====== ==== ====== ==== ======
29
SOURCES OF FUNDS
Deposits are Nittany's major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within Nittany's market area through the offering of a selection of deposit
instruments including checking and savings accounts, money market accounts, and
term certificate accounts. IRA accounts are also offered. Deposit account terms
vary according to the minimum balance required, the time period the funds must
remain on deposit, and the interest rate.
The interest rates paid by Nittany on deposits are set at the direction of
senior management. Interest rates are determined based on Nittany's liquidity
requirements, interest rates paid by Nittany's competitors, and Nittany's growth
goals and applicable regulatory restrictions and requirements. At September 30,
2004, the Company had no brokered deposits.
The following table indicates the amount of certificates of deposit of
$100,000 or more by time remaining until maturity as of September 30, 2004.
Certificates
Maturity Period of Deposits
- --------------- --------------
(In thousands)
Within three months $ 844
Three through six months 586
Six through twelve months 911
Over twelve months 1,921
------
$4,262
======
BORROWINGS. Nittany may obtain advances (borrowings) from the FHLB of
Pittsburgh ("FHLB") to supplement its supply of lendable funds. Advances from
the FHLB are secured by investments held in safe keeping at the FHLB. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. If the need arises, Nittany may also access the Federal
Reserve Bank discount window to supplement Nittany's supply of lendable funds
and to meet deposit withdrawal requirements. Nittany also enters into cash
management arrangements with commercial deposit customers and places those
liabilities on the balance sheet in the form of repurchase or "sweep accounts."
At September 30, 2004, there were $3.0 million in these accounts.
30
The following table sets forth information concerning short-term borrowings
during the periods indicated.
For the Nine
Months Ended At or For the Periods Ended
September 30, December 31,
---------------------------------------
2004 2003 2002 2001
---- ---- ---- ----
(Dollars in Thousands)
Cash Management Repos and FHLB advances:
Ending balance ....................................... $20,016 $2,364 $1,141 $8,715
Average balance during the year....................... 6,538 3,018 8,450 4,764
Maximum month-end balance during the year............. 20,016 6,869 9,232 8,715
Average interest rate during the year................. 1.31% 1.97% 2.35% 2.51%
Weighted average rate at year end..................... 1.86% 1.96% 2.64% 3.20%
RETURN ON EQUITY AND ASSETS RATIOS
For the Nine
Months Ended At or For The Periods
September 30, Ended December 31,
-------------------------------------
2004 2003 2002 2001
---- ---- ---- ----
Equity to Asset Ratio................................... 5.68% 5.96% 5.51% 7.18%
Return on Average Equity................................ 16.29 12.94 9.47 3.07
Return on Average Assets................................ 0.96 0.75 0.57 .25
Dividend Payout Ratio................................... -- -- -- --
31
DESCRIPTION OF PROPERTY
Nittany operates from four offices and five ATMs: Set forth below is
information about our offices.
Year Leased or
Locations Leased or Owned Acquired
--------- --------------- --------------
Main Office:
- ------------
116 East College Avenue Leased 1999
State College, Pennsylvania
Branch Offices:
- --------------
1276 North Atherton Leased 1999
State College, Pennsylvania
1900 South Atherton Leased 2003
State College, Pennsylvania
2541 East College Avenue Owned 2002
State College, Pennsylvania
125 North Allegheny Street Leased 2004
Bellefonte, Pennsylvania
(In process)
EMPLOYEES
At September 30, 2004, Nittany had 58 full-time equivalent employees. None
of the employees are represented by a collective bargaining group. Nittany
believes that its relationship with its employees is good.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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.
32
CRITICAL ACCOUNTING POLICIES
Nittany's accounting policies are integral to understanding the results
reported. The accounting policies are described in detail in Note 1 of the
consolidated financial statements. Our most complex accounting policies require
management's judgment to ascertain the valuation of assets, liabilities,
commitments and contingencies. We have established detailed policies and control
procedures that are intended to ensure valuation methods are well controlled and
applied consistently from period to period. In addition, the policies and
procedures are intended to ensure that the process for changing methodologies
occurs in an appropriate manner. The following is a brief description of our
current accounting policies involving significant management valuation
judgments.
Other Than Temporary Impairment of Securities
---------------------------------------------
Securities are evaluated periodically to determine whether a decline in
their value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than temporary. The
term "other than temporary" is not intended to indicate that the decline is
permanent. It indicates that the prospects for a near term recovery of value are
not necessarily favorable, or that there is a lack of evidence to support fair
values equal to, or greater than, the carrying value of the investment. Once a
decline in value is determined to be other than temporary, the value of the
security is reduced and a corresponding charge to earnings is recognized.
Allowance for Loan Losses
-------------------------
Arriving at an appropriate level of allowance for loan losses involves a
high degree of judgment. Nittany's allowance for loan losses provides for
probable losses based upon evaluations of known, and inherent risks in the loan
portfolio. Management uses historical information to assess the adequacy of the
allowance for loan losses as well as the prevailing business environment; as it
is affected by changing economic conditions and various external factors, which
may impact the portfolio in ways currently unforeseen. The allowance is
increased by provisions for loan losses and by recoveries of loans previously
charged-off and reduced by loans charged-off.
Goodwill
--------
Nittany must assess goodwill and other intangible assets each year for
impairment. This assessment involves estimating cash flows for future periods.
If the future cash flows were less than the recorded goodwill and other
intangible assets balances, we would be required to take a charge against
earnings to write down the assets to the lower value.
33
Deferred Tax Assets
-------------------
We use an estimate of future earnings to support our position that the
benefit of our deferred tax assets will be realized. If future income should
prove non-existent or less than the amount of the deferred tax assets within the
tax years to which they may be applied, the asset may not be realized and our
net income will be reduced.
MARKET RISK AND NET PORTFOLIO VALUE
Market risk is the risk of loss of income from adverse changes in prices
and rates that are set by the market. Nittany Bank is at risk of changes in
interest rates that affect the income it receives on lending and investment
activities, as well as the costs associated with its deposits and borrowings. A
sudden and substantial change in interest rates may affect earnings if the rates
of interest that Nittany Bank earns on its loans and investments does not change
at the same speed, to the same extent, or on the same basis as the interest
rates Nittany Bank pays on its deposits and borrowings. Nittany Bank makes it a
high priority to actively monitor and manage its exposure to interest rate risk.
Nittany Bank seeks to manage interest rate sensitivity through its asset
and liability committee (ALCO) which is comprised of members of management and
the board of directors. The committee accomplishes this by first evaluating the
interest rate risk that is inherent in the makeup of Nittany Bank's assets and
liabilities. The committee then considers Nittany Bank's business strategy,
current operating environment, capital and liquidity requirements, as well as
Nittany Bank's current performance objectives, to determine an appropriate level
of risk. The Board of Directors has adopted guidelines within which Nittany Bank
manages its interest rate risk, trying to minimize to the extent practical its
vulnerability to changes in interest rates. These strategies include focusing
Nittany Bank's investment activities on short and medium-term securities,
emphasizing shorter-term loans and loans with adjustable rate features, and
maintaining and increasing the transaction deposit accounts, as these accounts
are considered to be relatively resistant to changes in interest rates and
utilizing deposit marketing programs to adjust the term or repricing of its
liabilities.
Nittany Bank also monitors its interest rate sensitivity through the use of
an asset/liability management (ALM) model which estimates the change in its net
portfolio value ("NPV") in the event of a range of assumed changes in market
interest rates. Net portfolio value is defined as the current market value of
assets, less the current market value of liabilities, plus or minus the current
value of off-balance sheet items. The change in NPV measures Nittany Bank's
vulnerability to changes in interest rates by estimating the change in the
market value of its assets, liabilities and off-balance sheet items as a result
of an instantaneous change in the general level of interest rates (i.e. shock
analysis). At December 31, 2003, Nittany Bank had $5,098,000 of off-balance
sheet items.
As market interest rates remained at historically low rates during 2004,
the average maturities of loans and investment securities shortened due to
quicker prepayments, causing an increase in their value. Deposit accounts have
only relatively minor movements in a declining interest rate environment, since
they are primarily short term in nature, resulting in the value of deposits
decreasing more quickly than the value
34
of assets increase. If market interest rates begin to increase, the average
maturities of loans and securities will lengthen as prepayment decrease.
Decreases in the value of these loans and securities occur at a more rapid rate
in Nittany Bank's NPV model than increases in the value of its deposits.
The following table lists the percentage change in our net portfolio value
(NPV) assuming an immediate change in interest rates of plus or minus up to 300
basis points from the level at June 30, 2004 (the most recent date which data is
available).
Changes in Interest Estimated Amount of Amount of NPV Change
Rates in Basis Points NPV ($) Changes ($) Changes (%) Ratio (%) (Basis Points)
--------------------- ------- ----------- ----------- --------- --------------
(Rate Shock)
+300 28,306 (11,733) (29)% 9.89% (325)
+200 32,850 (7,189) (18)% 11.29% (212)
+100 36,802 (3,237) (8)% 12.47% (94)
0 40,039 - - 13.41% -
-100 41,470 1,431 4% 13.80% 40
-200 N/A N/A N/A N/A N/A
-300 N/A N/A N/A N/A N/A
(1) Represents the excess (deficiency) of the estimated NPV
assuming the indicated change in interest rates minus the
estimated NPV assuming no change in interest rates.
(2) Calculated as the amount of change in the estimated NPV
divided by the estimated NPV assuming no change in interest
rates.
(3) Calculated as estimated NPV divided by present value of total
assets.
(4) Calculated as the excess (deficiency) of the NPV ratio
assuming the indicated change in interest rates over the
estimated NPV ratio assuming no change in interest rates.
The NPV model, shown above, which is prepared by the OTS, has certain
shortcomings. Based on the model, certain assumptions are made that may or may
not actually reflect how actual yields and costs will react to market interest
rates. For example, the NPV model assumes that the makeup of its interest rate
sensitive assets and liabilities will remain constant over the period being
measured. Thus, although using such a model can be instructive in providing an
indication of Nittany Bank's exposure to interest rate risk, Nittany Bank cannot
precisely forecast the effects of a change in market interest rates, and the
results indicated by the model are likely to differ from actual results.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004
GENERAL. At September 30, 2004, we had consolidated assets of $295
million, loans receivable (net of allowance for loan losses) of $226 million,
deposits of $247 million, and stockholders' equity of $16.8 million. Net income
for the quarter ended September 30, 2004 increased $340,000 to $798,000 or $.38
per diluted share from $458,000 or $.23 per diluted share for the same period in
2003. This included an income tax expense of $427,000 for the quarter compared
to $206,000 for the 2003 quarter.
35
Total assets increased $46,568,000 to $295,155,000 at September 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
$43,719,000 which were primarily funded through growth in Nittany Bank savings
deposits, Federal Home Loan Bank short term borrowings, and matured securities.
Total assets included $1.8 million of intangible assets from the acquisition of
Vantage and Nittany Bank's original core deposits. These intangibles are not
currently being amortized.
Cash and cash equivalents decreased $523,000 at September 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 Nittany are satisfied by the current balance of cash and cash
equivalents, readily available access to traditional funding sources, FHLB short
term advances, and the portion of the investment and loan portfolios which
mature within one year. These sources of funds will enable Nittany to meet cash
obligations and off-balance sheet commitments as they come due.
Investment securities available for sale decreased to $2,224,000 at
September 30, 2004 from $4,074,000 at December 31, 2003 and investment
securities held to maturity increased to $43,462,000 at September 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 $43,719,000 to $226,462,000 at September 30,
2004 from $182,743,000 at December 31, 2003. The increase in net loans
receivable resulted from the strong real estate market in Nittany's market area,
and low market interest rates. At September 30, 2004, one to four family
residential mortgage balances grew by $27,248,000 to $151,595,000 from
$124,347,000 at December 31, 2003 and commercial real estate loans grew by
$10,761,000 during the same time period. Management attributes the increases in
lending balances to continued customer referrals, the economic climate within
the market area, and competitive rates. As of September 30, 2004, Nittany had
additional commitments to fund loan demand of $11,091,000 of which approximately
$4,293,000 relates to commercial customers.
At September 30, 2004, Nittany's allowance for loan losses increased by
$370,000 to $2,107,000 from $1,737,000 at December 31 2003. The increase
resulted from an additional loan loss provision of $442,000 needed for the
growth in loans during the quarter which were offset by charge-offs net of
recoveries.
The additions to the allowance for loan losses are based upon a careful
analysis by management of loan data. Because Nittany has incurred very little
loan losses in its five-year history, management must base its determination
upon such factors as Nittany'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 Nittany 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 September 30, 2004, there
can be no assurance that additional losses will not be incurred in future
periods.
36
The table below outlines Nittany's past due loans as of September 30, 2004:
> 90 DAYS PAST > 90 DAYS PAST
TOTAL LOAN DUE - NUMBER DUE - BALANCE
# OF LOANS BALANCE OF LOANS OF LOANS
---------- ---------- -------------- --------------
Personal Loans 351 $8,215,000 1 $14,000
Credit Line Loans 447 $5,553,000 -- --
Business Loans 172 $11,798,000 -- --
Real Estate Loans 1,223 $203,003,000 -- --
Total 2,193 $228,569,000 1 $14,000
Total deposits increased by $25,666,000 to $246,559,000 at September 30,
2004 as compared to $220,893,000 at December 31, 2003. The Nittany Bank savings
deposit account comprises approximately 63% of total deposits at September 30,
2004. Nittany Bank savings account 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 relatively low short-term interest rates
during the quarter, Nittany Bank savings account has remained popular with local
depositors and has helped to increase our deposit base. Non-interest bearing
demand deposits increased to $10,212,000 at September 30, 2004 from $7,880,000
at December 31, 2003 as all our checking and money market accounts grew at a
steady pace.
Stockholder's equity increased to $16,760,000 at September 30, 2004 from
$14,828,000 at December 31, 2003 because of net income of $1,932,000 and minor
fluctuations in the market value of available for sale securities.
AVERAGE BALANCE SHEET FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004.
The following tables set forth certain information relating to Nittany'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. Nittany believes
this measure to be the preferred industry measurement of net interest income and
provides relevant comparison between taxable and non-taxable amounts.
37
a. Nittany Financial Quarterly Average Balance Sheet and Supplemental
Information:
For the three months ended September 30,
---------------------------------------------------------------------------------
2004 2003
----------------------------------------- ----------------------------------
(3) (3)
Average Annualized Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ------------ ---------- ------- ------------ ----------
(Dollars in thousands)
Interest-earning assets:
Loans recievable............................ $222,148 $3,267 5.88% $166,200 $2,601 6.26%
Investments securities...................... 46,768 372 4.27% 55,976 328 2.63%
Interest-bearing dep - other banks.......... 10,355 24 0.93% 7,743 9 0.46%
-------- ------ ---- -------- ------ ----
Total interest-earning assets................. 279,271 3,663 5.43% 229,920 2,938 5.18%
------ ------
Noninterest-earning assets.................... 6,413 1,679
Allowance for loan losses..................... (2,029) (1,522)
------- --------
Total assets 283,655 $230,077
======= ========
Interest-bearing liabilities:
Interest - bearing demand deposits.......... $21,652 47 0.87% $18,753 37 0.80%
Money market deposits....................... 37,679 196 2.08% $35,120 194 2.21%
Savings deposits............................ 155,610 790 2.03% 115,886 646 2.23%
Certificates of deposit..................... 21,051 153 2.91% 23,516 174 2.97%
Advances from FHLB.......................... 20,366 179 3.52% 12,659 147 4.65%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities............ 256,358 1,365 2.13% 205,933 1,199 2.33%
-------- ------ -------- ------
Noninterest-bearing liabilities...............
Demand deposits............................. 10,022 6,962
Other liabilities........................... 705 3,250
Stockholders' equity.......................... 16,569 13,933
-------- --------
Total liabilities and stockholders' equity.... $283,655 $230,077
======== ========
Net interest income........................... $2,298 $1,740
====== ======
Interest rate spread (1)...................... 3.30% 2.85%
Net yield on interest-earning assets (2)...... 3.47% 3.10%
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 108.94% 111.65%
- ---------------
(1) Interest rate spread represents 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.
38
b. Nittany Financial Year-To-Date Average Balance Sheet and Supplemental
Information:
For the Nine Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003
-------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost (3) Balance Interest Yield/Cost (3)
------- -------- -------------- ------- -------- --------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable............................. $205,669 $ 9,034 5.86% $145,605 $7,012 6.42%
Investments securities....................... 47,818 1,115 3.64% 48,345 1,074 3.26%
Interest-bearing deposits with other banks... 9,776 50 0.68% 8,960 49 0.73%
-------- ------- ---- -------- ------ ----
Total interest-earning assets.................. 263,264 10,199 5.26% 202,910 8,135 5.42%
------- ------
Noninterest-earning assets..................... 7,193 8,867
Allowance for loan losses...................... (1,886) (1,347)
-------- --------
Total assets................................... $268,570 $210,430
======== ========
Interest-bearing liabilities:
Interest-bearing demand deposits............. $ 20,489 131 0.85% $ 17,526 127 0.96%
Money market deposits........................ 35,910 560 2.08% 33,265 614 2.46%
Savings deposits............................. 150,639 2,323 2.06% 104,053 1,887 2.42%
Certificates of deposit...................... 21,454 478 2.97% 22,002 544 3.29%
Borrowings................................... 14,566 461 4.22% 9,276 434 6.23%
-------- ------- ---- -------- ------ ----
Total interest-bearing liabilities............. 243,059 3,953 2.17% 186,123 3,605 2.58%
-------- ------- -------- ------
Noninterest-bearing liabilities
Demand deposits.............................. 8,939 6,738
Other liabilities............................ 719 5,519
Stockholders' equity........................... 15,854 12,050
-------- --------
Total liabilities and stockholders' equity..... $268,570 $210,430
======== ========
Net interest income............................ $ 6,246 $4,530
======= ======
Interest rate spread (1)....................... 3.09% 2.83%
Net yield on interest-earning assets (2)....... 3.26% 3.05%
Ratio of average interest-earning assets to
average interest-bearing liabilities......... 108.31% 109.02%
- ------------
(1) Interest rate spread represents 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.
39
RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2004
Net income was $798,000 for the three months ended September 30, 2004, an
increase of $340,000 as compared to the same period ended 2003. The increase is
primarily due to increases in net interest income and noninterest income of
$559,000 and $458,000, respectively, which were offset by increases in
noninterest expense and taxes. Basic and diluted earnings per share increased to
$.41 and $.38 per share, respectively for the three months period ended
September 30, 2004 compared to $.24 and $.23 per share, respectively, for the
three month period ended September 30, 2003. All "per share" data has been
adjusted for the 20% stock dividend issued in March 2004.
Net income for the nine month period ended September 30, 2004 was
$1,932,000 as compared to $1,113,300 for the same period in 2003. Basic and
diluted earnings per share increased to $1.00 and $.93 per share, respectively
for the nine months period ended September 30, 2004 compared to $.64 and $.59
per share, respectively, for the nine month period ended September 30, 2003.
Net interest income for the three months ended September 30, 2004 was
$2,299,000 as compared to $1,740,000 for the same period ended 2003. Interest
income increased $725,000 for 2004 as compared to the prior year period and was
influenced mainly by increases in interest earned on loans receivable of
$666,000. The increase in interest income was the result of an increase of
$49,351,000 in average balances of interest-earning assets that primarily
resulted from a $55,948,000 increase in the average balance of loans receivable.
The yield on interest earning assets increased to 5.43% for the three months
ended September 30, 2004 from 5.18% for the same period ended 2003 due to
increasing interest rates during the quarter. Although there were significant
increases in residential real estate lending, the yield on the loans receivable
decreased 38 basis points in 2004 as compared to 2003. Year to date, the net
interest income was $6,246,000 as compared to $4,530,000 for the same period
ended 2003, as the $60,354,000 increase in average balance of interest earning
assets was offset by a decrease in yield on these assets of 16 basis points and
a decrease in the cost of interest bearing liabilities of 41 basis points.
Interest expense increased by $166,000 for the three months ended September
30, 2004 as compared to the prior year period and was influenced primarily 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 $42,718,000.
The average balances of savings deposit accounts increased $39,724,000 as a
result of customer service, referrals, and marketing efforts and competitive
rates of the Nittany Savings product. The cost of funds decreased to 2.13% for
the three month period ended September 30, 2004 from 2.33% for the same period
ended 2003 as a result of a reduction in market interest rate levels, a decrease
in the rates paid on deposits, and a greater use of our Federal Home Loan Bank
overnight borrowing capabilities. Interest expense for the nine-month period
ended September 30, 2004 increased by $348,000 as lower rates were offset by a
$46,586,000 increase in the average balance in the Nittany Savings product.
As a result of decreases in the average cost of total interest bearing
liabilities, the Bank's quarterly net interest margin increased by 37 basis
points to 3.47% from 3.10% at September 30, 2003, a period of interest rate
volatility. Year to date, the net interest margin has increased by 21 basis
points.
Total noninterest income for the three months ended September 30, 2004
increased $458,000 as compared to the same period ended 2003. Noninterest income
items are primarily comprised of service charges and fees on deposit account
activity, overdraft privilege fees, along with fee income derived from asset
management services and related commissions. Service fees on deposit accounts
increased $53,000 and have progressively increased during each quarter as the
number of accounts and volume of related transactions have increased.
Additionally, for the three-months ended September 30, 2004, commissions and
management fees from Vantage and Nittany Asset Management increased by $382,000
over the same period of 2003. Year to date, noninterest income increased to
$2,386,000 from $1,222,000 for the same period ended 2003 due primarily to the
growth in assets under management at Vantage as well as increased fees on
deposit accounts and the overdraft privilege product. Also included in year to
date noninterest income is a capital gain of approximately $33,000 on an equity
security sold at the holding company.
40
Total noninterest expenses increased $550,000 for the three months ended
September 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 last year 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 $382,000 of independent investment
solicitors' fees for the quarter as compared to $90,000 for the same period in
2003 due to the growth in assets under management. Year to date, noninterest
expenses increased to $5,197,000 from $3,576,000 for the same period ended 2003
primarily because of the increase of $561,000 in compensation related expenses
and the $735,000 increase in commission expense, mainly at Vantage.
Income tax expense of $427,000 was recognized in the third quarter of 2004,
compared to $206,000 for the same period of 2003. Year to date the income tax
expense increased from $554,000 for the nine months ended September 30, 2003 to
$1,061,000 for the same period in 2004. 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 earlier this year,
have helped to reduce our effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management for Nittany is measured and monitored on both a short-
and long-term basis, allowing management to better understand and react to
emerging balance sheet trends. After assessing actual and projected cash flow
needs, management seeks to obtain funding at the most economical cost to
Nittany. Both short- and long-term liquidity needs are addressed by maturities,
repayments, and sales of investments securities, and loan repayments and
maturities. The use of these resources, in conjunction with access to credit,
provide the core ingredients for satisfying depositor, borrower, and creditor
needs.
Nittany's liquid assets consist of cash and cash equivalents, and
investment securities classified as available for sale. The level of these
assets is dependent on Nittany's operating, investing, and financing activities
during any given period. At September 30, 2004, cash and cash equivalents
totaled $14.4 million or 4.9% of total assets while investment securities
classified as available for sale totaled $2,224,000. Management believes that
the liquidity needs of Nittany 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 that mature
within one year. These sources of funds will enable Nittany to meet cash
obligations and off-balance sheet commitments as they come due.
Operating activities provided net cash of $2.9 million for the nine month
period ended September 30, 2004, generated principally from net income of $1.9
million. Also contributing to operating activities was provision for loan losses
and depreciation, amortization, and accretion of $442,000 and $541,000,
respectively.
Investing activities consist primarily of loan originations and repayments
and investment purchases and maturities. These cash usages primarily consisted
of loan originations of $44.2 million for the nine months ended September 30,
2004, as well as investment purchases of $42.3 million for the same time period.
Partially offsetting the usage of investment activities is $39.6 million of
proceeds from investment security maturities and repayments for the same time
period.
41
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, and proceeds from the sale of common stock.
During the nine month period ending September 30, 2004, net cash provided by
financing activities totaled $44.5 million, principally derived from an increase
in deposit accounts in general, and savings deposits specifically. Also
contributing to this influx of cash was proceeds from other borrowings of $14.6
million.
Nittany's primary source of capital has been retained earnings.
Historically, Nittany has generated net retained income to support normal growth
and expansion. Management has developed a capital planning policy to not only
ensure compliance with regulations, but also to ensure capital adequacy for
future expansion.
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 September 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 11.3%, 9.9%, 5.1% and 13.5%, 12.1%, 6.2%, respectively, at September
30, 2004.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003
Asset growth for the period continued to remain strong. Total assets
increased $68,928,000 to $248,587,000 at December 31, 2003 from $179,659,000 at
December 31, 2002. Additionally, the growth in assets for the quarter ended
December 31, 2003 represented an increase of $9,403,000 from September 30, 2003.
Nittany 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 $9,101,000 to $14,953,000 at
December 31, 2003 as compared to $5,852,000 at December 31, 2002. For the
quarter ended December 31, 2003, cash and cash equivalents increased by
$8,404,000 from September 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 $1,950,000 to
$4,074,000 at December 31, 2003 as compared to $6,024,000 at December 31, 2002.
Additionally, investment securities held to maturity
42
increased $886,000 to $39,246,000 at December 31, 2003 from $38,360,000 at
December 31, 2002. During the current period, we purchased $48,196,000 of held
to maturity securities that were funded by $46,628,000 of proceeds received from
principal repayments and maturities of held to maturity securities. Due to the
level of taxable earnings, Nittany began purchasing municipal investment
securities during 2003. Such securities now account for approximately 35% of the
investment portfolio. For the quarter ended December 31, 2003, investment
securities available for sale decreased $361,000 and investment securities held
to maturity increased $5,043,000 as compared to September 30, 2003.
For the quarter ended December 31, 2003, loans receivable, net of
allowance for loan losses, increased $6,628,000 from September 30, 2003. Of such
increase, 1-4 family residential loans increased $4,597,000. Year to date, loans
receivable, net of allowance for loan losses, increased $58,488,000 to
$182,743,000 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 December 31, 2003, we had additional
commitments to fund loan demand of $5.1 million of which approximately $1.9
million 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 December 31, 2003, our allowance for loan losses increased
$560,000 to $1,737,000 from $1,177,000 at December 31, 2002. The increased
allowance resulted from a loan loss provision for the year ended December 31,
2003 of $593,000 offset by loan chargeoffs of $36,000 and recoveries of $3,000.
For the quarter ended December 31, 2003, we increased the allowance for loan
losses by $85,000.
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,
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 significant additional provisions will not be required
in future periods.
Total deposits increased $64,041,000 to $220,893,000 at December 31,
2003 from $156,852,000 at December 31, 2002. At December 31, 2003, the Nittany
Bank savings deposit account added to our deposit base $136,274,000, an increase
of $13,717,000 from September 30, 2003. The Nittany Bank 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 Bank's
checking and savings products continue to be the primary source of core deposit
growth.
Stockholder's equity increased $4,924,000 to $14,828,000 at December 31,
2003 from $9,904,000 at December 31, 2002, as a result of net income of
$1,625,000, an increase 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. Also during 2003,
Nittany acquired Vantage for 36,000 shares of common stock, which resulted in
the recognition of approximately $1.0 million of goodwill. 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.
43
RESULTS OF OPERATIONS FOR PERIOD ENDED DECEMBER 31, 2003
Net income for the three months ended December 31, 2003 increased
$211,000 to $512,000 from $301,000 for the same 2002 period. Net income for the
year ended December 31, 2003 increased $738,000 to $1,625,000 from $887,000 for
the same 2002 period. The increases in net income for both the three month
period and year 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
Nittany in January 2003. These increases were more than offset by increases in
noninterest expense and income taxes. Basic and diluted earnings per share
increased to $1.09 and $1.01 per share for the year ended December 31, 2003 as
compared to $.65 and $.60 for year 2002.
Net interest income for the three months ended December 31, 2003
increased $511,000 to $1,836,000 as compared to $1,325,000 for the same 2002
period. Interest and dividend income increased $550,000 to $3,084,000 for the
three months ended December 31, 2003 from $2,534,000 for the same 2002 year
period. Increased interest and dividend income for the current three months
ended December 31, 2003 was influenced primarily by increases in interest earned
on loans receivable of $628,000. The average yield on interest earning assets
increased to 5.12% for the three-months ended December 31, 2003 from 5.11% for
the same period ended 2002. The average yield on loans receivable decreased for
the three months ended September 30, 2003 by 28 basis points as compared to the
same 2002 period. These declines in yields, however, were more than offset by
continued strong growth in earning assets. At December 31, 2003, the three month
and yearly average balances of interest earning assets were $241,107,000 and
$211,030,000, respectively, compared to $229,920,000 and $150,081,000 for the
comparable 2002 periods.
Net interest income for the year ended December 31, 2003 increased
$1,962,000 to $6,366,000 from $4,404,000 for the same 2002 period. Interest and
dividend income increased $2,323,000 to $11,219,000 for the year ended December
31, 2003 from $8,896,000 for the same 2002 period. The increased interest and
dividend income was primarily a result of increases in interest earned on loans
receivable of $2,690,000. The average yield on interest earning assets declined
to 5.37% for the year ended December 31, 2003 from 5.93% 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 87 basis
points in 2003 as compared to 2002.
Interest expense for the three months ended December 31, 2003 increased
$39,000 to $1,248,000 from $1,209,000 for the same 2002 period. During this
period, there was an increase in the average balance of interest bearing
deposits of $10,767,000 while the average cost of funds for interest bearing
liabilities held steady at 2.33%. Additionally, the average cost of funds for
deposits increased 2 basis points to 2.20% from 2.18% for the current three
month period as compared to the same 2002 period.
Interest expense for the year ended December 31, 2003 increased $360,000
to $4,853,000 from $4,493,000 for the same 2002 period. This increase was caused
by an increase in interest expense on deposits of $470,000 offset by a decrease
in interest on short term borrowings of $138,000. Average cost of funds for
interest bearing liabilities decreased 78 basis points to 2.48% for the year
ended December
44
31, 2003 from 3.26% for the same period ended 2002. Additionally, average cost
of funds for deposits decreased 76 basis points for the current year as compared
to the same 2002 period.
For a detailed analysis of interest income and interest expense, see
"Average Balance Sheet and Rate/Volume Analysis" below.
45
AVERAGE BALANCE SHEET. The following table sets forth certain
information for the years ended December 31, 2002 and 2001. The average yield
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.
For the Year Ended December 31,
---------------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable.............................. $154,404 $ 9,711 6.29% $ 98,013 $7,021 7.16%
Investments securities........................ 48,310 1,451 3.23% 41,508 1,743 4.20%
Interest-bearing deposits with other banks.... 8,315 57 0.69% 10,560 133 1.26%
-------- ------- ---- -------- ------- ----
Total interest-earning assets................... 211,029 11,219 5.37% 150,081 8,896 5.93%
------- ------
Noninterest-earning assets...................... 8,467 6,576
Allowance for loan losses....................... (1,435) (900)
-------- --------
Total assets.................................... $218,061 $155,757
======== ========
Interest-bearing liabilities:
Interest-bearing demand deposits.............. $ 17,726 165 0.93% $ 13,766 227 1.65%
Money market deposits......................... 33,819 810 2.40% 19,429 609 3.13%
Savings deposits.............................. 110,070 2,600 2.36% 68,597 2,076 3.03%
Certificates of deposit....................... 22,087 720 3.26% 21,689 912 4.21%
Borrowings.................................... 11,818 558 4.72% 14,552 668 4.59%
-------- ------- ---- -------- ------ ----
Total interest-bearing liabilities.............. 195,520 4,853 2.48% 138,033 4,493 3.25%
-------- ------- -------- ------
Noninterest-bearing liabilities
Demand deposits............................... 6,758 5,066
Other liabilities............................. 3,178 3,294
Stockholders' equity............................ 12,605 9,364
-------- --------
Total liabilities and stockholders' equity...... $218,061 $155,757
======== ========
Net interest income............................. $ 6,366 $4,404
======= ======
Interest rate spread (1)........................ 2.89% 2.67%
Net yield on interest-earning assets(2)......... 3.07% 2.93%
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 107.93% 108.73%
- --------------
(1) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
46
RATE/VOLUME ANALYSIS. The following table sets forth certain information
regarding changes in interest income and interest expense of Nittany Bank for
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (changes in average volume multiplied by old rate) and
(ii) changes in rate (changes in rate multiplied by old volume). Increases and
decreases due to both rate and volume, which cannot be separated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Nine Months Ended
September 30, Year Ended December 31,
------------------------------ -------------------------
2004 vs. 2003 (1) 2003 vs. 2002 (1)
------------------------------ -------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------ -------------------------
Volume Rate Total Volume Rate Total
------------------------------ -------------------------
(In Thousands)
INTEREST INCOME:
Loans receivable .............................. $ 2,676 $ (654) $ 2,022 $3,414 $ (724) $2,690
Investment securities ......................... (96) 137 41 706 (998) (292)
Interest-bearing deposits at banks ............ 4 (3) (1) (24) (52) (76)
------- ------- ------- ------ ------- ------
TOTAL INTEREST INCOME ....................... $ 2,584 $ (520) $ 2,064 $4,096 $(1,774) $2,322
======= ======= ======= ====== ======= ======
INTEREST EXPENSE:
Interest-bearing deposits
NOW accounts.................................. $ (849) $ 853 $ 4 $ 121 $ (183) $ (62)
Money market accounts......................... 45 (99) (54) 295 (94) 201
Savings deposits ............................. 753 (317) 436 822 (299) 523
Certificates of deposit ...................... (16) (50) (66) 17 (209) (192)
------- ------- ------- ------ ------- ------
Total interest-bearing deposits................ $ (67) $ 387 $ 320 $1,255 $ (785) $ 470
Borrowings..................................... 195 (168) 27 (130) 20 (110)
------- ------- ------- ------ ------- ------
TOTAL INTEREST EXPENSE......................... 128 219 347 $1,125 $ (765) $ 360
======= ======= ======= ====== ======= ======
Increase (decrease) in net interest income .... $ 2,456 $ (739) $ 1,717 $2,971 $(1,009) $1,962
======= ======= ======= ====== ======= ======
_________
(1) The portion of the total change attributable to both volume and rate
changes during the year hs been allocated to volume and rate components
based upon the absolute dollar amount of the change in each component prior
to allocation.
Total noninterest income increased $432,000 and $1,215,000, respectively
for the three month and year ending December 31, 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 $685,000 and $1,973,000 for the
three months and year ended December 31, 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. In addition, a supplemental retirement plan was
implemented for certain members of senior management that resulted in an
additional expense of approximately $47,000
47
for 2003. For the year ended December 31, 2003, Vantage and Nittany Asset
Management operations contributed approximately $672,000 of total noninterest
expense.
For the three month and year ended December 31, 2003, Nittany incurred
income tax expense of $273,000 and $828,000 respectively, compared to $179,000
and $412,000, respectively, for the three month and year ended December 31,
2002. The higher income tax expense during 2003 periods reflects Nittany's
increased earnings during 2003 plus the use of remaining loss carryforwards in
2002. Nittany's effective tax rate for the year ended December 31, 2003 was 34%
compared to 32% for the 2002 period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management for Nittany is measured and monitored on both a
short- and long-term basis, allowing management to better understand and react
to emerging balance sheet trends. After assessing actual and projected cash flow
needs, management seeks to obtain funding at the most economical cost to
Nittany. Both short- and long-term liquidity needs are addressed by maturities,
repayments, and sales of investments securities, and loan repayments and
maturities. The use of these resources, in conjunction with access to credit,
provide the core ingredients for satisfying depositor, borrower, and creditor
needs.
Nittany's liquid assets consist of cash and cash equivalents, and
investment securities classified as available for sale. The level of these
assets is dependent on Nittany's operating, investing, and financing activities
during any given period. At December 31, 2003, cash and cash equivalents totaled
$15.0 million or 6.0% of total assets while investment securities classified as
available for sale totaled $4.1 million or 1.6% of total assets. Management
believes that the liquidity needs of Nittany 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 that mature within one year. These sources of funds will enable
Nittany to meet cash obligations and off-balance sheet commitments as they come
due.
Operating activities provided net cash of $2.2 million and $2.1 million
for 2003 and 2002, respectively, generated principally from net income of $1.6
million and $900,000 in each of these respective periods. Also contributing to
operating activities was the provision for loan losses and the annual
depreciation, amortization, and accretion of $593,000 and $973,000 for 2003 and
$543,000 and $564,000 for 2002.
Investing activities consist primarily of loan originations and
repayments and investment purchases and maturities. These cash usages primarily
consisted of loan originations of $59.1 million and $51.0 million for 2003 and
2002, respectively, as well as investment purchases of $48.2 million and $40.2
million for 2003 and 2002, respectively. Partially offsetting the usage of
investment activities is $48.5 million and $36.5 million of proceeds from
investment security maturities and repayments for 2003 and 2002, respectively.
Financing activities consist of the solicitation and repayment of
customer deposits, borrowings and repayments, and proceeds from the sale of
common stock. During 2003, net cash provided by financing activities totaled
$67.2 million, principally derived from an increase in deposit accounts,
particularly savings deposits. Also contributing to this influx of cash was
proceeds from other borrowings of $2.5 million and proceeds from the sale of
common stock of $2.4 million. Partially offsetting these amounts was $2.1
million of repayments of borrowed funds in 2003. During 2002, net cash provided
by financing
48
activities totaled $53.6 million, principally derived from an increase in
deposit accounts, and savings deposits specifically. Offsetting this amount was
the net repayment of borrowed funds of $4.8 million.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, and similar matters. Management
monitors projected liquidity needs and determines the level desirable, based in
part on Nittany's commitment to make loans, as well as management's assessment
of Nittany's ability to generate funds. Nittany anticipates that it will have
sufficient liquidity to satisfy estimated short-term and long-term funding
needs.
Nittany's primary source of capital has been retained earnings.
Historically, Nittany has generated net retained income to support normal growth
and expansion. Management has developed a capital planning policy to not only
ensure compliance with regulations, but also to ensure capital adequacy for
future expansion.
Nittany is subject to federal regulations imposing minimum capital
requirements. Management monitors both Nittany's and Nittany Bank's Total
risk-based, Tier I risk-based and Tier I leverage capital ratios to assess
compliance with regulatory guidelines. At December 31, 2003, Nittany Bank's
Total risk-based, Tier I risk-based and Tier I leverage ratios were 11.2%, 9.9%,
and 5.3%, and 12.8%, 11.6%, and 6.2%, respectively.
OFF BALANCE SHEET ARRANGEMENTS
In the normal course of business, Nittany makes various commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
Consolidated Balance Sheet. Nittany's exposure to credit loss in the event of
nonperformance by the other parties to the financial instruments is represented
by the contractual amounts as disclosed. Nittany minimizes its exposure to
credit loss under these commitments by subjecting them to credit approval and
review procedures and collateral requirements as deemed necessary. Commitments
generally have fixed expiration dates within one year of their origination.
THE OFF-BALANCE SHEET COMMITMENTS COMPRISES THE FOLLOWING:
2003 2002
------ -------
Commitments to extend credit:
Fixed rate $ 673 $ 2,511
Variable rate 3,255 11,250
------ -------
3,928 13,761
Letters of credit 1,170 -
------ -------
Total $5,098 $13,761
====== =======
The range of interest rates on fixed rate loan commitments was 5.85
percent to 6.75 percent at December 31, 2003.
49
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the loan
agreement. These commitments consist of undisbursed residential construction
loans, available commercial and personal lines of credit, and loans approved but
not yet funded. Fees from the issuance of the credit lines are generally
recognized over the period of maturity.
Standby letters of credit are conditional commitments issued by Nittany
to guarantee the performance of a customer to a third party. The coverage period
for these instruments is typically a one-year period with an annual renewal
option subject to prior approval by management. Fees earned from the issuance of
these letters are recognized over the coverage period. For secured letters of
credit, the collateral is typically bank deposit instruments or customer
business assets.
Nittany is committed under three noncancelable operating leases for
Nittany Bank's office facilities with remaining terms through 2008. At December
31, 2003, the minimum rental commitments under these leases are as follows:
(In Thousands)
2004 $ 239
2005 239
2006 239
2007 192
2008 144
------
Total $1,053
======
Occupancy and equipment expenses include rental expenditures of
$221,000 and $144,000 for 2003 and 2002, respectively.
IMPACT OF NEW ACCOUNTING STANDARDS
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 September 30, 2003, except as stated below and for hedging
relationships designated after September 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 September 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 September 30,
50
2003. The adoption of this statement did not have a material effect on Nittany's
financial position or results of operations.
In December 2003, the FASB issued a revision to Interpretation 46,
Consolidation of Variable Interest Entities, 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.
Application of this Interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers must
apply this Interpretation to all other types of VIEs at the end of the first
reporting period ending after December 15, 2004. The adoption of this
Interpretation has not and is not expected to have a material effect on
Nittany's financial position or results of operations.
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of Nittany and Nittany Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
REGULATION OF NITTANY
GENERAL. Nittany is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, Nittany is required to register and
file reports with the OTS and is subject to regulation and examination by the
OTS. In addition, the OTS has enforcement authority over Nittany and its
non-savings association subsidiaries, should such subsidiaries be formed, which
authority also permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of Nittany Bank and not for the benefit of stockholders of Nittany.
As a unitary savings and loan holding company, Nittany generally is not
subject to any restrictions on its business activities. While the
Gramm-Leach-Bliley Act (the "GLB Act") terminated the "unitary thrift holding
company" exemption from activity restrictions on a prospective basis, Nittany
enjoys grandfathered status under this provision of the GLB Act because it
acquired Nittany Bank prior to May 4, 2000. As a result, Nittany's freedom from
activity restrictions as a unitary savings and loan holding company was not
affected by the GLB Act. However, if Nittany were to acquire control of an
additional savings association, its business activities would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if Nittany were in the
future to sell control of Nittany Bank to any other company, such company would
not succeed to Nittany's grandfathered status under the GLB Act and would be
subject to the same activity restrictions. The continuation of Nittany's
exemption from restrictions on business activities as a unitary savings and loan
holding company is also subject to Nittany's continued compliance with the
Qualified Thrift Lender ("QTL") test. See "- Regulation of Nittany Bank -
Qualified Thrift Lender Test."
51
RECENT LEGISLATION TO CURTAIL CORPORATE ACCOUNTING IRREGULARITIES. On
July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Act"). The Securities and Exchange Commission (the "SEC") has promulgated
certain regulations pursuant to the Act and will continue to propose additional
implementing or clarifying regulations as necessary in furtherance of the Act.
The passage of the Act and the regulations implemented by the SEC subject
publicly-traded companies to additional and more cumbersome reporting
regulations and disclosure. Compliance with the Act and corresponding
regulations may increase Nittany's expenses.
REGULATION OF NITTANY BANK
GENERAL. Set forth below is a brief description of certain laws that
relate to the regulation of Nittany Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, Nittany
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. Nittany Bank
is also subject to certain reserve requirements promulgated by the Federal
Reserve Board.
The OTS regularly examines Nittany Bank and prepares reports for the
consideration of Nittany Bank's Board of Directors on any deficiencies that are
found in Nittany Bank's operations. Nittany Bank's relationship with its
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of Nittany Bank's mortgage documents.
Nittany Bank must file reports with the OTS concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
savings institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
INSURANCE OF DEPOSIT ACCOUNTS. The deposit accounts held by Nittany
Bank are insured by the SAIF to a maximum of $100,000 for each insured member
(as defined by law and regulation). Insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
Nittany Bank is required to pay insurance premiums based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the risk-based system established by the FDIC for setting
deposit insurance premiums, for the first six months of 2004, the insurance
assessment rates for SAIF-member institutions is from 0% to .27% of insured
deposits on an annualized basis, with the assessment rate for most savings
institutions set at 0%. Nittany Bank currently qualifies for the lowest
assessment rate under the risk-based assessment system and, accordingly, did not
pay any deposit insurance assessments during the past fiscal year.
52
In addition, all FDIC-insured institutions are required through 2017 to
pay assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. For calendar 2003, the average
annual assessment rate was .0155% of insured deposits.
LOANS TO ONE BORROWER. A savings association may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of the
associations's unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of the unimpaired capital and surplus, under certain circumstances.
At September 30, 2004, Nittany's lending limit for loans to one borrower was
approximately $2.7 million and Nittany had no outstanding commitments that
exceeded the loans to one borrower limit at the time originated or committed.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets for savings institutions that receive the highest supervisory
rating for safety and soundness and 4% of total adjusted assets for all other
thrifts, and (3) risk-based capital equal to 8% of total risk-weighted assets.
At September 30, 2004, Nittany Bank was in compliance with its regulatory
capital requirements.
For purposes of the OTS capital regulations, tangible capital is
defined as core capital less all intangible assets, except for certain mortgage
servicing rights, and less certain investments. Core, or Tier 1, capital is
defined as common stockholders' equity, noncumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less nonqualifying intangible
assets, certain mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital equals the sum of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets, and up
to 45% of unrealized gains on equity securities. Overall, supplementary capital
is limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
In addition to the above regulatory capital requirements, the OTS's
prompt corrective action regulation classifies savings associations by capital
levels and provides that the OTS will take various corrective actions, including
imposing significant operational restrictions, against any thrift that fails to
meet the regulation's capital standards. Under this regulation, a "well
capitalized" savings association is one that has a total risk-based capital
ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a
leverage capital ratio of 5%, and is not subject to any capital order or
directive. A thrift is deemed "adequately capitalized" category if it has a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4%, and a leverage capital ratio of at least 4%. Institutions with
lower capital levels are deemed to be "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," depending on their capital
levels. A thrift that falls within any of the three undercapitalized categories
is
53
subject to severe regulatory sanctions under the prompt corrective action
regulation. At September 30, 2004, Nittany Bank was classified as "well
capitalized."
DIVIDEND AND OTHER CAPITAL DISTRIBUTION LIMITATIONS. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association, such as Nittany Bank, that is a subsidiary of a
savings and loan holding company must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
Nittany Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
QUALIFIED THRIFT LENDER TEST. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at
least 65% of its "portfolio assets" in certain"Qualified Thrift Investments".
Qualified thrift investments consist primarily of an institution's residential
mortgage loans and other loans and investments relating to residential real
estate and manufactured housing and also include student, credit card and small
business loans, stock issued by a Federal Home Loan Bank, the FreddieMac and the
FannieMae, and other enumerated assets. For purposes of the statutory QTL test,
portfolio assets are defined as total assets minus intangible assets, property
used by the institution in conducting its business, and liquid assets equal to
10% of total assets. A savings institution must maintain its status as a QTL on
a monthly basis in at least nine out of every 12 months. A failure to qualify as
a QTL would result in a number of sanctions, including certain operating
restrictions. At September 30, 2004, Nittany Bank was in compliance with its QTL
requirement, with 72% of its assets invested in Qualified Thrift Investments.
FEDERAL HOME LOAN BANK SYSTEM. Nittany Bank is a member of the FHLB of
Pittsburgh which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
54
As a member, Nittany Bank is required to purchase and maintain stock in
the FHLB of Pittsburgh in an amount based on maximum borrowing capacity as
determined by FHLB and Nittany Bank's advances from the FHLB. At September 30,
2004, Nittany Bank was in compliance with this requirement.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
September 30, 2004, Nittany Bank was in compliance with these Federal Reserve
Board requirements.
MANAGEMENT
The following sets forth information with respect to Nittany and
Nittany Bank's directors and executive officers.
BOARD OF DIRECTORS
DAVID K. GOODMAN, JR., 51, is the President and Chief Executive Officer
of D. C. Goodman & Sons, Inc., a Huntingdon based contracting firm. The firm
specializes in construction for industry, institutions, and commercial customers
in the fields of fire protection sprinkler systems, mechanical, and electrical
contracting. Mr. Goodman is a member of the board of directors of Huntingdon
County United Way, Huntingdon County Business & Industry Council and is an
emeritus member of the board of directors of J. C. Blair Memorial Hospital. He
is also a Trustee of Juniata College. Mr. Goodman received his education at
Juniata College and holds numerous professional memberships in fire protection
and contracting organizations.
WILLIAM A. JAFFE, 66, is the President and owner of The Jaffe Group, a
Human Resource Consultancy, headquartered in State College, Pennsylvania, which
he established in January 1996. Previously, he was Compensation and Human
Resource Practice Leader for the Mid-Atlantic Region of Alexander & Alexander
Consulting Group and a Vice President of Towers Perrin. Mr. Jaffe received his
Bachelor of Arts degree in journalism from Penn State University and Master of
Science degree in Management from the University of Illinois. He is past
President of The Mount Nittany Conservancy, President of the Penn State College
of Communications Alumni Society, and is the past chair of the Penn State Hillel
Foundation. He is a member of the executive committee and board of directors of
the Chamber of Business and Industry of Centre County; and, as a community
volunteer, serves on the boards of the Centre County Community Foundation,
Centre County United Way, Pennsylvania Centre Stage, Penn State All Sports
Museum and Knight Foundation's State College Community Advisory Board.
Additionally, Mr. Jaffe served as an adjunct associate professor at The George
Washington University from 1991 to 1995, and is currently an adjunct lecturer in
management at Penn State. In 1996, Mr. Jaffe was named a Penn State Alumni
Fellow.
DONALD J. MUSSO, 45, is the founder of FinPro, Inc., a consulting and
investment banking firm which specializes in providing advisory services
nationally to the financial institutions industry. Mr. Musso has a Bachelor of
Science in Finance from Villanova University and an MBA in Finance from
Fairleigh Dickinson University. Mr. Musso's corporation has represented hundreds
of financial
55
institutions nationally in connection with business plans, appraisals, asset
liability management, mergers and acquisitions, branch acquisitions and de novo
financial institutions. Prior to establishing FinPro, he had direct industry
experience, having managed the Corporate Planning and Mergers and Acquisitions
departments for Meritor Financial Group, a $20 billion dollar institution in
Philadelphia. Prior to that, he was responsible for the banking, thrift and real
estate consulting practice in New Jersey for DeLoitte, Haskins and Sells. Mr.
Musso is an instructor of strategic planning and mergers and acquisitions for
the Stonier Graduate School of Banking. He also teaches planning at the Graduate
School of Banking at Colorado and provides director training for several state
organizations.
SAMUEL J. MALIZIA, 50, is the Chairman of the Board and co-founder of
Nittany and Nittany Bank. Mr. Malizia is a founding partner of the law firm of
Malizia Spidi & Fisch, PC, a law firm with offices in Washington, DC and State
College, Pennsylvania. For over 23 years, Mr. Malizia has specialized in
transactional, securities and regulatory matters for financial institutions and
related entities. He received a Bachelor of Science Degree with Distinction in
accounting from the Pennsylvania State University and a Juris Doctor Degree from
the George Washington University. He served as Attorney Advisor to Special Trial
Judge Francis Cantrel at the United States Tax Court and attended the Masters of
Law in Taxation program at the Georgetown University where he was associate
editor of the Tax Lawyer. He is a member of the Pennsylvania and District of
Columbia bars, the U.S. Tax Court, U.S. Claims Court, U.S. Court of Appeals for
the District of Columbia and a member of the Federal Bar Association and
American Bar Association. He is an alumnus of several Penn State University's
organizations, including Lions Paw, Skull and Bones Honor Society, Beta Alpha
Psi and Omicron Delta Kappa. He is a member of the board of directors of Mercer
Insurance Group, Inc. and Mercer Mutual Insurance Company. He has also served on
the board of directors of the Lions Paw Alumni Society, the Mount Nittany
Conservancy and the Centre County Theatre for the Performing Arts. Mr. Malizia
is also an active member of Our Lady of Victory Catholic Church in State
College, Pennsylvania, where he coaches the OLV school football teams.
DAVID Z. RICHARDS, JR., 44, is one of the founders of Nittany and
Nittany Bank and serves as President and Chief Executive Officer of both
entities. Richards began his community banking career in 1977, working part time
at the First National Bank of Danville, PA during high school and college. He
continued with the bank upon graduation from Susquehanna University with a BS in
Finance in 1982 and served the bank in various capacities, including Vice
President and Financial Officer. While at the Danville bank, Richards helped to
pioneer many new innovations such as the bi-weekly mortgage and began one of the
nation's first discount brokerage operations in a community bank. In 1986,
Richards became the youngest graduate of the ABA's Stonier Graduate School of
Banking. In 1990, he joined the 118 year old Mifflinburg Bank and Trust Company,
Mifflinburg, PA ($90 million in assets). As President and CEO of Mifflinburg
Bank, the company enjoyed strong growth to approximately $200 million in assets
when he left to start Nittany Bank in 1997. Richards has served and chaired
various committees for both the Pennsylvania Bankers Association (PBA) and the
American Bankers Association (ABA). Currently he is a member of the FURST Board
of Directors for the Kirchman Corporation and the Enterprise Technology Alliance
board of directors, a multi-bank owned data processing consortium. He is active
in a number of local charitable organizations, including serving as treasurer of
the State College Area YMCA and resides in State College.
J. GARRY MCSHEA, 50, has been owner and founder of the J.G. McShea
Construction Company, Boalsburg, Pennsylvania since 1978. McShea Construction
specializes in custom home construction, remodeling projects,
commercial/residential rental properties and land development. Prior to this,
Mr. McShea was employed by Certain Teed Corporation, Valley Forge, Pennsylvania,
as a Residential Building Material Specialist. Mr. McShea is a past President
and 25 year member of the Builders
56
Association of Central Pennsylvania. He is a Director of the Tussey Mountain Ski
Corporation and served on the Harris Township Planning Commission. Mr. McShea
received a Bachelor of Science Degree in Marketing from the Pennsylvania State
University College of Business.
D. MICHAEL TAYLOR, 63, is an architect, real estate developer and
entrepreneur, who has resided in the State College area for 33 years. Mr. Taylor
has a Bachelor of Architecture degree from Kansas State University. Upon
graduation, he spent six years in commercial architecture for Phillips Petroleum
Company and several years working directly in the construction business. From
1978 to 1988 Mr. Taylor was part owner of Whitehill Lighting and Supply Company
and Village Hardware located in State College. From 1988 to present Mr. Taylor
has specialized in the design, construction and rental of several office
buildings in the State College area.
EXECUTIVE OFFICERS
RICHARD C. BARRICKMAN, 53, was appointed Senior Vice President of
Nittany and Nittany Bank upon completion of the formation of Nittany Bank on
October 23, 1998. Mr. Barrickman was employed by PNC Bank, N.A. ("PNC") and its
predecessors through mergers. Prior to merger with PNC and its predecessors in
1982, Mr. Barrickman was the President of Mt. Nittany Savings and Loan
Association. Mr. Barrickman is a native of State College, Pennsylvania.
JOHN E. ARRINGTON, 40, was appointed Vice President of Nittany and Vice
President of Retail Banking upon completion of the formation of Nittany Bank on
October 23, 1998. He is also President of Nittany Asset Management, Inc.
Previously, Mr. Arrington was employed by PNC and its predecessors, serving in a
variety of capacities, most recently as Vice President. Mr. Arrington is active
in youth sports programs and serves on the board of several local non-profit
agencies.
GARY M. BRADLEY, 53, joined Nittany in February 2002 and serves as the
Chief Accounting Officer. Prior to joining Nittany Financial, he was employed as
a Vice President and Auditor of Promistar Financial Corporation. He is a
Certified Public Accountant licensed in the State of Pennsylvania and a
Certified Bank Auditor. He is chairman of the Cresson Township Municipal
Authority, treasurer of the Allegheny Highlands Regional Theatre, and a trustee
board member of the Cresson Public Library.
COMMUNITY ADVISORY BOARD OF DIRECTORS:
Nittany Bank has created a Community Advisory Board of Directors to
help evaluate the needs of the community and to solicit ideas and comments from
the business community and general populous. The members of the Community
Advisory Board are selected on a yearly basis and meet at least every calendar
quarter. The Community Advisory Board serves by an appointment from the Board of
Directors of the Bank. Set forth below are the names of the members of the
Community Advisory Board along with a brief description of their occupation.
Beginning in November 2003, members of the Community Advisory Board received
$100 per meeting attended.
CRAIG AVEDESIAN is the President and part-owner of Federal Carbide Co.
located in Tyrone, Pennsylvania. Mr. Avedesian is a resident of State College,
Pennsylvania.
57
D. PATRICK DAUGHERTY is the owner of the Tavern Restaurant located in
State College, Pennsylvania.
DR. RICHARD DOERFLER is in private practice as an orthodontist in State
College, Pennsylvania. He is also an Associate Professor in the Department of
Orthodontics at the University of Pittsburgh's School of Dental Medicine. Dr.
Doerfler is a resident of State College, Pennsylvania.
KELLY GRIMES is the President of five Wendy's restaurants headquartered
in State College, Pennsylvania. Ms. Grimes is a resident of State College,
Pennsylvania.
CHRISTOPHER KUNES is the owner of Christopher Kunes General Contractor,
State College, Pennsylvania.
JAMES MEISTER recently retired as a Special Assistant to the Athletic
Director of the Pennsylvania State University, State College, Pennsylvania. He
also is a retired vice president of ALCOA. Mr. Meister is a resident of State
College, Pennsylvania.
LORI PACCHIOLI is a freelance marketing/public relations consultant
working from her home in State College while raising a toddler. She is the
former director of Outreach/Marketing for Penn State Public Broadcasting. For
ten years prior, Ms. Pacchioli was the Director of Public Relations for
Brookline Village.
ANNE RILEY, State College, Pennsylvania, is an English teacher. She is
a Penn State Trustee and a past president of the Penn State Alumni Association.
In the College of Communications she serves as chair of the Board of Visitors
for the new center for Sports Journalism. She also serves on the boards of the
State College YMCA, the Mt. Nittany Conservancy and the Renaissance Fund.
RICHARD SHORE is Senior Vice President of Development for Tele-Media
Corporation of Delaware, Pleasant Gap, Pennsylvania. Mr. Shore is also a member
of the State College Area School District Community Advisory Board of Finance.
Mr. Shore resides in State College, Pennsylvania.
DONN WAGNER is President of Alleghenies Analysis, Boalsburg,
Pennsylvania. Mr. Wagner is a resident of Boalsburg, Pennsylvania.
WILLIAM UPDEGRAFF is the owner of Updegraff & Updegraff, an accounting
firm located in State College, Pennsylvania. Mr. Updegraff is a resident of
Harris Township, Pennsylvania.
NEIL HERLOCHER is President of Herlocher Foods, Inc., State College,
Pennsylvania. Mr. Herlocher resides in State College, Pennsylvania.
CHARLES F. WILD is a partner in the firm of R.H. Marcon, Inc., State
College, Pennsylvania. He also holds the position of Secretary/Treasurer of the
Marcon Corp. Mr. Wild is a resident of State College, Pennsylvania.
58
DENNIS J. RALLIS is the owner of the Lion's Den and Old State Clothing
Company located in State College, Pennsylvania. He is a partner of Nittany
Embroidery & Digitizing, Inc., Pleasant Gap, Pennsylvania. Mr. Rallis resides in
Centre Hall, Pennsylvania.
PHILIP BOSAK is President of Bosak Construction, Inc., Centre Hall,
Pennsylvania. Mr. Bosak is a resident of Centre Hall, Pennsylvania.
JAY LUTZ is President of Preferred Staffing Solutions in State College,
Pennsylvania. Mr. Lutz is a resident of State College, Pennsylvania.
DIRECTOR COMPENSATION
Each director is paid an annual retainer of $10,000 per year plus $100
for each committee meeting attended except for the Chairman of the Board who has
requested Nittany to donate his fees to local charities. Nittany Bank paid a
total of $59,300 in directors' fees for the year ended December 31, 2003.
Nittany does not pay any additional compensation for membership on its Board of
Directors.
OPTION PLAN
Under the 1998 stock option plan, as amended (the "Option Plan"), which
was approved by shareholders on May 24, 1999, each director was granted stock
options. During fiscal 2001, under the Option Plan, each non-employee director
was awarded additional stock options to purchase 10,692 shares of common stock,
exercisable at the rate of 25% per year beginning on October 25, 2001. Messrs.
Richards, Barrickman and Arrington were each granted stock options to purchase
19,800 shares of common stock, exercisable at the rate of 20% per year beginning
on October 25, 2001. Mr. Lamb was granted stock options to purchase 13,464
shares of common stock, exercisable at the rate of 20% per year beginning on
October 25, 2001.
EXECUTIVE OFFICER COMPENSATION
Nittany has no full time employees, but relies on the employees of
Nittany Bank for the limited services. All compensation paid to officers and
employees is paid by Nittany Bank.
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
non-cash compensation awarded to or earned by the chief executive officer and
each executive officer of Nittany who received total cash compensation in excess
of $100,000. No other executive officer of either Nittany Bank or Nittany had a
salary and bonus that exceeded $100,000 for services rendered for the years
presented.
59
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Name and Fiscal Underlying Other
Principal Position Year Salary($) Bonus($) Options(#)(1) Compensation
- ------------------ ---- --------- -------- ------------- ------------
David Z. Richards, Jr. 2003 138,000 53,544 -- 25,041(2)(3)
President and Chief Executive Officer 2002 118,000 56,875 -- 4,056(4)
2001 112,500 40,725 19,800 2,153(5)
Richard C. Barrickman 2003 88,000 34,144 -- 15,968(2)(3)
Senior Vice President 2002 83,250 40,216 -- 2,654(4)
2001 80,000 28,000 19,800 2,072(5)
John E. Arrington 2003 74,500 28,906 -- 13,518(2)(3)
Vice President 2002 70,000 33,740 -- 2,406(4)
2001 65,000 23,530 19,800 1,760(5)
Scott R. Lamb 2003 74,500 28,906 -- 2,980(3)
Vice President 2002 71,500 26,169 -- 1,192(4)
2001 70,000 7,420 13,464 --
- ----------------------
(1) See "-- Stock Awards."
(2) At December 31, 2003 includes $21,418, $13,658, and $11,562 of accrued
benefits under the SERP.
(3) At December 31, 2003 includes $3,623, $2,310, $1,956, and $2,980 of
matching contributions under Nittany Bank's 401(k) Plan.
(4) At December 31, 2002 includes $4,056, $2,654, $2,406, and $1,192 of
matching contributions under Nittany Bank's 401(k) Plan.
(5) At December 31, 2001 includes $2,153, $2,072, $1,760, and $0 of matching
contributions under Nittany Bank's 401(k) Plan.
EMPLOYMENT AGREEMENT. Nittany Bank and Nittany entered into separate
employment agreements with Messrs. Richards, Barrickman and Arrington,
respectively (the "Agreements"). The Agreements each have a term of three, two
and one years, respectively, and may be renewed annually by the Board of
Directors upon a determination of satisfactory performance within the Board's
sole discretion. If Messrs. Richards, Barrickman and Arrington should become
disabled during the term of the Agreements, each shall continue to receive
payment of 80% of the base salary for a period of 3 months and 50% of such base
salary for a period of 12 months, but not exceeding the remaining term of the
Agreements. Such payments shall be reduced by any other benefit payments made
under other disability programs in effect for Nittany Bank's employees. Under
the Agreements, Messrs. Richards, Barrickman and Arrington may be terminated for
"just cause" as defined in the Agreements. If Messrs. Richards, Barrickman or
Arrington are terminated without just cause, each will be entitled to a
continuation of his salary from the date of termination through the remaining
term of his agreement. The Agreements contain a provision stating that in the
event of the termination of employment in connection with a change in control of
Nittany or Nittany Bank,
60
Messrs. Richards, Barrickman and Arrington will be paid a lump sum amount equal
to 2.99, two, and one times, respectively, their five year average annual
taxable compensation. If such payments had been made under the Agreements as of
December 31, 2003, such payments for Messrs. Richards, Barrickman and Arrington
would have equaled approximately $412,530, $192,445, and $77,739, respectively.
CHANGE IN CONTROL SEVERANCE AGREEMENT. Nittany Bank has entered into a
change in control severance agreement with Scott Lamb. The Agreement has a term
of three years, and may be renewed annually by the Board of Directors upon a
determination of satisfactory performance within Nittany Bank's sole discretion.
If Mr. Lamb's employment is terminated in connection with a change in control of
Nittany or Nittany Bank, Mr. Lamb will be paid twelve times his monthly base
salary. If such payment had been made under the Agreement as of December 31,
2003, Mr. Lamb would have received $74,500.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Nittany Bank has adopted a
Supplemental Executive Retirement Plan ("SERP") for the benefit of David Z.
Richards, Jr., Richard C. Barrickman and John E. Arrington. Nittany Bank makes
an annual accrual equal to not less than ten percent of the annual bonus award
under the Nittany Bank Bonus Plan. In addition, Nittany Bank will contribute an
additional accrual each year equal to the interest rate payable on the 10-year
Treasury bond, as adjusted quarterly. Further, Nittany Bank may within its
discretion elect to make an additional contribution to the participant's
account. For 2003, Nittany Bank made an additional contribution equal to 400% of
the participant's deferral. The additional contribution made by Nittany Bank
vests over a five-year period beginning on the one-year anniversary of such
contribution. The accumulated deferred compensation account for each participant
will be payable to such participant at any time following the retirement at age
65, early retirement at age 60, disability, death or termination of employment
following a change in control of Nittany Bank or Nittany.
STOCK AWARDS. The following table sets forth information concerning
previously awarded stock options pursuant to the Option Plan to the named
executive officers in the Summary Compensation Table and the year end value of
such outstanding options. There were no additional grants of options to the
named executive officers during fiscal year 2003. No stock appreciation rights
are authorized under the Option Plan.
61
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Values
-------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options
Shares Acquired Value FY-End(#) at FY-End($)
Name on Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------------- ----------- ------------------------- -------------------------
David Z. Richards, Jr. 29,040(1) 344,414(1) --/-- --/--
Richard C. Barrickman -- -- 12,196/-- 140,864/--(2)
John E. Arrington -- -- 10,454/-- 120,744/--(2)
Scott R. Lamb -- -- --/-- --/--
- ------------------
(1) Such options were exercised on October 28, 2003 and do not reflect the
stock dividend paid on March 31, 2004.
(2) Based upon an exercise price of $5.74 per share and estimated price of
$17.29 at December 31, 2003.
(3) Based upon an exercise price of $5.31 per share and estimated price of
$17.29 at December 31, 2003.
(4) Based upon an exercise price of $5.84 per share and estimated price of
$17.29 at December 31, 2003.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based upon the records of Nittany's transfer agent, the following table
sets forth, as of September 30, 2004, persons or groups who own more than 5% of
the common stock, all directors of Nittany, the named executive officers, and
the ownership of all executive officers and directors of Nittany as a group. All
share amounts in the table below were adjusted for stock dividends. Other than
as noted below, management knows of no person or group that owns more than 5% of
the outstanding shares of common stock at that date. Our directors and executive
officers intend to purchase at least ______ shares in the offering. However,
they reserve the right to significantly increase or decrease the number of
shares they plan to purchase. Shares intended to be purchased are not included
in the table below. Assuming a total of approximately _______ shares of our
common stock (including vested stock options), or ____% of the common stock
outstanding (assuming 115,000 shares are sold in this offering resulting in
_________ shares outstanding), is expected to be beneficially owned by our
directors and executive officers following this offering.
62
Before Offering
---------------
Percentage of
Amount and Nature Shares of
of Beneficial Common Stock
Name of Beneficial Owner Ownership (1) Outstanding
------------------------ ------------- -----------
David K. Goodman, Jr.(2) 180,432 9.3%
William A. Jaffe 39,712 2.0
Samuel J. Malizia(2) 237,671 12.0
J. Garry McShea(2) 175,368 9.1
Donald J. Musso(2) 109,975 5.6
David Z. Richards, Jr. 63,625 3.3
D. Michael Taylor 43,253 2.2
Richard C. Barrickman 41,232 2.1
John E. Arrington 39,617 2.0
Gary M. Bradley 1,728 *
All directors and executive officers 932,613 43.7
as a group (10 persons)
- ----------------
* Less than 1% of the outstanding common stock.
(1) Includes shares of common stock held directly as well as by spouses or
minor children, in trust and other indirect ownership, over which shares
the individuals effectively exercise sole voting and investment power,
unless otherwise indicated. Also, includes shares of common stock that the
following persons have a right to purchase pursuant to exercisable stock
options within 60 days of September 30, 2004, as follows: Samuel J. Malizia
- 47,545 shares, David Z. Richards, Jr.- 16,605 shares, J. Garry McShea -
18,822 shares, D. Michael Taylor- 19,729 shares, David K. Goodman, Jr.- 150
shares, William A. Jaffe - 19,760 shares, Donald J. Musso - 28,905 shares,
Richard C. Barrickman - 25,264, John E. Arrington - 27,022, and Gary M.
Bradley - 48 shares.
(2) A business address for each beneficial owner that owns more than 5% of
Nittany's common stock is 116 East College Avenue, State College,
Pennsylvania 16801.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Nittany Bank, like many financial institutions, has followed a policy
of granting various types of loans to officers, directors, and employees. The
loans have been made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with Nittany Bank's other customers, and do not
involve more than the normal risk of collectibility, or present other
unfavorable features.
Samuel J. Malizia, Nittany's Chairman, is a partner in the law firm of
Malizia Spidi & Fisch, PC which performs legal work for Nittany and Nittany Bank
in the normal course of business.
DESCRIPTION OF CAPITAL STOCK
Nittany is authorized to issue 10,000,000 shares of the common stock,
$0.10 par value, of which 1,930,794 shares were issued and outstanding as of
September 30, 2004. Along with the common stock, the authorized capital of
Nittany includes 5,000,000 shares of serial preferred stock, of which none were
issued and outstanding as of September 30, 2004. The following is a summary of
all material terms of the common stock and is subject to and qualified in its
entirety by reference to our articles of incorporation and bylaws which are
filed as exhibits to the registration statement of which this prospectus forms a
part.
63
COMMON STOCK
VOTING RIGHTS. Each share of the common stock will have the same
relative rights and will be identical in all respects with every other share of
the common stock. The holders of our common stock will possess exclusive voting
rights, except to the extent that shares of serial preferred stock issued in the
future may have voting rights, if any. Each holder of the common stock will be
entitled to only one vote for each share held of record on all matters submitted
to a vote of holders of the common stock and will not be permitted to cumulate
their votes in the election of our directors.
DIVIDEND RIGHTS. Each share of Nittany's common stock participates
equally in dividends on common stock, which are payable when, as, and if
declared by the Board of Directors out of funds legally available for that
purpose.
LIQUIDATION. In the unlikely event of the complete liquidation or
dissolution of us, the holders of the common stock will be entitled to receive
all our assets available for distribution in cash or in kind, after payment or
provision for payment of (i) all our debts and liabilities (including all
savings accounts and accrued interest thereon); (ii) any accrued dividend
claims; (iii) liquidation preferences of any serial preferred stock which may be
issued in the future; and (iv) any interests in the liquidation account.
RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Certain
Anti-Takeover Provisions" for a discussion of the limitations on acquisition of
shares of the common stock.
OTHER CHARACTERISTICS. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the Board of Directors may sell shares of our
capital stock without first offering such shares to our existing stockholders.
The common stock is not subject to call for redemption, and the outstanding
shares of common stock when issued and upon receipt by us of the full purchase
price therefor will be fully paid and non-assessable.
SERIAL PREFERRED STOCK
Nittany is authorized to issue 10,000,000 shares of preferred stock.
The Board of Directors may create one or more classes or series of preferred
stock and may determine the rights, preferences, privileges and restrictions of
any class or series without any further approval or action by the shareholders.
The effects of issuing preferred stock on the holders of common stock
could include, among other things:
o reducing the amount otherwise available for payments of dividends
on common stock if dividends are payable on the series of
preferred stock;
o restricting dividends on common stock if dividends on the series
of preferred stock are in arrears;
64
o diluting the voting power of common stock if the series of
preferred stock has voting rights, including a possible "veto"
power if the series of preferred stock has class voting rights;
o diluting the equity interest of holders of common stock if the
series of preferred stock is convertible, and is converted, into
common stock; and
o restricting the rights of holders of common stock to share in
Nittany's assets upon liquidation until satisfaction of any
liquidation preference granted to the holder of the series of
preferred stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The following discussion is a general summary of our material
provisions of the articles of incorporation, bylaws, and certain other
regulatory provisions, which may be deemed to have such an anti- takeover
effect.
ARTICLES OF INCORPORATION AND BYLAWS OF NITTANY
ELECTION OF DIRECTORS. Certain provisions of our articles of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. Our articles of incorporation provides that the Board of Directors
will be divided into four staggered classes, with directors in each class
elected for four- year terms. Thus, it would take three annual elections to
replace a majority of our board. Our articles of incorporation provide that the
size of the Board of Directors may be increased or decreased only if two- thirds
of the directors then in office concur in such action. The articles of
incorporation also provide that any vacancy occurring in the Board of Directors,
including a vacancy created by an increase in the number of directors, shall be
filled for the remainder of the unexpired term by a majority vote of the
directors then in office. Finally, the articles of incorporation and the bylaws
impose certain notice and information requirements in connection with the
nomination by stockholders of candidates for election to the Board of Directors
or the proposal by stockholders of business to be acted upon at an annual
meeting of stockholders.
The articles of incorporation provide that a director may only be
removed for cause by the affirmative vote of at least a majority of our shares
entitled to vote generally in an election of directors cast at a meeting of
stockholders called for that purpose.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. Our articles of incorporation
provide that a special meeting of stockholders may be called only pursuant to a
resolution adopted by a majority of the Board of Directors.
ABSENCE OF CUMULATIVE VOTING. Our articles of incorporation provide
that stockholders may not cumulate their votes in the election of directors.
PROCEDURES FOR BUSINESS COMBINATIONS. Our articles of incorporation
require the affirmative vote of at least 80% of our outstanding shares for any
merger, consolidation, liquidation, or dissolution or any
65
action that would result in the sale or other disposition of at least 50% of our
tangible assets, unless the transaction has been approved by two-thirds of the
Board of Directors. Any amendment to this provision requires the affirmative
vote of at least 80% of our outstanding shares.
AMENDMENT TO ARTICLES OF INCORPORATION AND BYLAWS. Amendments to our
articles of incorporation must be approved by our Board of Directors and also by
a majority of the outstanding shares of our voting stock, provided, however,
that approval by at least 80% of the outstanding voting stock is generally
required for certain provisions (i.e., number, classification, election and
removal of directors; amendment of bylaws; call of special stockholder meetings;
director liability; business combinations; power of indemnification; and
amendments to provisions relating to the foregoing in the articles of
incorporation).
Our bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of the holders of at least 80% of our outstanding shares
entitled to vote in the election of directors cast at a meeting called for that
purpose.
ACQUISITION OF CONTROL. Federal regulations prohibit a person, other
than a company from acquiring 10% or more of the outstanding equity securities
of a bank holding company without prior notice to and approval of the OTS. No
corporation may acquire 25% or more of the outstanding shares of a bank holding
company without obtaining the prior approval of the OTS.
LEGAL MATTERS
Our counsel, Malizia Spidi & Fisch, PC, headquartered in Washington,
D.C. with a State College, Pennsylvania office, will give an opinion that the
shares of common stock covered by this prospectus are valid.
EXPERTS
We have included Nittany's audited statements at December 31, 2003 and 2002
in this prospectus upon reliance on the report by S.R. Snodgrass, A.C.,
independent registered public accounting firm, given on the authority of that
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We are registered under the Securities Exchange Act of 1934, as
amended, and file periodic reports and other information with the SEC. You may
inspect or copy these materials at the Public Reference Room at the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices
of the SEC located at 233 Broadway, New York, New York 10279 and Suite 1400,
Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
For a fee, you may also obtain copies of these materials by writing to the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are
also available to the public on the SEC's website at www.sec.gov or through the
Investor Relations section of our website at www.nittanybank.com.
-------------------
66
We have filed with the SEC a registration statement on Form SB-2
(together with all amendments and exhibits thereto, the "Registration
Statement") with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all of the information included in
the Registration Statement. For further information about us and the shares of
common stock offered by this prospectus, please refer to the Registration
Statement and its exhibits and to the documents incorporated by reference into
the Registration Statement. The statements contained in this prospectus as to
the contents of any contract or other document filed as an exhibit on Form SB-2
are, of necessity, brief descriptions and are not necessarily complete; each
statement is qualified by reference to such contract or document. You may obtain
a copy of the Registration Statement through the public reference facilities of
the SEC described above. You may also access a copy of the Registration
Statement by means of the SEC's website at http://www.sec.gov.
67
NITTANY FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm.................. F-1
Consolidated Balance Sheets as of December 31, 2003 and 2002............. F-2
Consolidated Statements of Income for the Years Ended December
31, 2003 and 2002.................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2003 and 2002..................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003 and 2002........................................................ F-5
Notes to the Consolidated Financial Statements........................... F-6
Consolidated Balance Sheet (Unaudited) as of September 30, 2004
and December 31, 2003.................................................. F-29
Consolidated Statement of Income (Unaudited) for the Three and Nine
Months ended September 30, 2004 and 2003............................... F-30
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Nine Months ended September 30, 2004.......................... F-31
Consolidated Statement of Cash Flows (Unaudited) for the
Nine Months ended September 30, 2004 and 2003......................... F-32
Notes to Unaudited Consolidated Financial Statements.................... F-33
All schedules are omitted because they are not required or applicable
or the required information is shown in the financial statements or the notes
thereto.
68
Snodgrass
Certified Public Accountants
and
Consultants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Stockholders
Nittany Financial Corp.
We have audited the consolidated balance sheet of Nittany Financial Corp. and
its subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nittany Financial
Corp. and its subsidiaries as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
January 9, 2004
F-1
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
December 31,
2003 2002
------------- -------------
ASSETS
Cash and due from banks $ 805,812 $ 618,937
Interest-bearing deposits with other banks 14,147,474 5,233,136
------------- -------------
Cash and cash equivalents 14,953,286 5,852,073
Investment securities available for sale 4,074,095 6,024,009
Investment securities held to maturity (estimated
market value of $39,168,895 and $38,727,563) 39,246,289 38,359,925
Loans receivable 184,480,012 125,431,701
Less allowance for loan losses 1,737,475 1,177,141
------------- -------------
Net loans 182,742,537 124,254,560
Premises and equipment 2,570,953 1,941,009
Goodwill 1,763,231 799,217
Accrued interest and other assets 3,236,922 2,428,239
------------- -------------
TOTAL ASSETS $ 248,587,313 $ 179,659,032
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 7,880,177 $ 6,159,204
Interest-bearing demand 21,902,355 18,717,951
Money market 34,237,951 27,517,955
Savings 136,273,936 86,498,462
Time 20,598,238 17,958,397
------------- -------------
Total deposits 220,892,657 156,851,969
Short-term borrowings 2,363,887 1,141,104
Other borrowings 9,829,866 10,615,650
Accrued interest payable and other liabilities 673,159 1,145,853
------------- -------------
TOTAL LIABILITIES 233,759,569 169,754,576
------------- -------------
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, 1,603,960 and 1,367,230 issued and outstanding 160,396 136,723
Additional paid-in capital 14,323,021 11,045,912
Retained earnings (deficit) 356,344 (1,268,694)
Accumulated other comprehensive loss (12,017) (9,485)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 14,827,744 9,904,456
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 248,587,313 $ 179,659,032
============= =============
See accompanying notes to the consolidated financial statements.
F-2
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
2003 2002
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 9,710,520 $ 7,020,575
Interest-bearing deposits with other banks 57,304 132,997
Investment securities
Taxable 1,207,356 1,715,512
Exempt from federal income tax 209,174 --
Other dividend income 34,607 27,192
----------- -----------
Total interest and dividend income 11,218,961 8,896,276
----------- -----------
INTEREST EXPENSE
Deposits 4,294,545 3,824,151
Short-term borrowings 59,594 198,191
Other borrowings 498,806 470,277
----------- -----------
Total interest expense 4,852,945 4,492,619
----------- -----------
NET INTEREST INCOME 6,366,016 4,403,657
Provision for loan losses 593,000 543,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,773,016 3,860,657
----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 487,332 468,644
Investment securities gains 30,130 7,450
Asset management fees and commissions 1,223,376 97,149
Other 59,505 22,627
----------- -----------
Total noninterest income 1,800,343 595,870
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 2,280,552 1,569,018
Occupancy and equipment 646,825 503,213
Professional fees 220,413 143,731
Data processing 397,312 250,884
ATM and debit card processing and supplies 132,541 131,221
Stationery, printing, supplies, and postage 140,726 127,573
Solicitor fees 650,198 --
Advertising 140,424 123,038
Other 511,458 309,587
----------- -----------
Total noninterest expense 5,120,449 3,158,265
----------- -----------
Income before income taxes 2,452,910 1,298,262
Income taxes 827,872 411,749
----------- -----------
NET INCOME $ 1,625,038 886,513
=========== ===========
EARNINGS PER SHARE
Basic $ 1.09 $ 0.65
Diluted 1.01 0.60
See accompanying notes to the consolidated financial statements.
F-3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Retained Other Total
Common Paid-in Earnings Comprehensive Stockholders' Comprehensive
Stock Capital (Deficit) Income (Loss) Equity Income
--------- ------------ -------------------------- ------------- -------------
Balance, December 31, 2001 $ 113,329 $ 11,069,804 $ (2,155,207) $ (66,110) $ 8,961,816
Net income 886,513 886,513 $ 886,513
Other comprehensive income:
Unrealized gain on available for sale securities
net of reclassification adjustment,
net of taxes of $29,170 56,625 56,625 56,625
Comprehensive income $ 943,138
=============
Exercise of stock options 17 1,353 1,370
Twenty percent stock split, effected in the form
of a stock dividend (including cash paid for
fractional shares) 23,377 (25,245) (1,868)
--------- ------------ ------------ ---------- -------------
Balance, December 31, 2002 136,723 11,045,912 (1,268,694) (9,485) 9,904,456
Net income 1,625,038 1,625,038 $ 1,625,038
Other comprehensive loss:
Unrealized loss on available for sale securities
net of reclassification adjustment,
net of tax benefit of $1,304 (2,532) (2,532) (2,532)
-------------
Comprehensive income $ 1,622,506
=============
Exercise of stock options 4,322 350,979 355,301
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 2,335,730 2,351,481
--------- ------------ ------------ ---------- -------------
Balance, December 31, 2003 $ 160,396 $ 14,323,021 $ 356,344 $ (12,017) $ 14,827,744
========= ============ ============ ========== =============
2003 2002
---------- -------------
Components of other comprehensive income (loss):
Change in net unrealized gain on
investment securities available for sale $ 17,354 $ 61,542
Realized gains included in net income, net of taxes of $10,244 and $2,533, respectively (19,886) (4,917)
---------- -------------
Total $ (2,532) $ 56,625
========== =============
See accompanying notes to the consolidated financial statements.
F-4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,625,038 $ 886,513
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 593,000 543,000
Depreciation, amortization, and accretion, net 972,982 564,027
Investment securities gains (30,130) (7,450)
Increase in accrued interest receivable (210,007) (264,491)
Decrease in accrued interest payable (4,918) (23,737)
Increase (decrease) in accrued income taxes payable (555,721) 318,505
Deferred income taxes (131,919) (240,592)
Other, net (72,962) 344,655
------------ ------------
Net cash provided by operating activities 2,185,363 2,120,430
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (19,826) --
Proceeds from sale 78,144 37,450
Proceeds from principal repayments and maturities 1,868,817 7,140,496
Investment securities held to maturity:
Purchases (48,195,957) (40,191,128)
Proceeds from principal repayments and maturities 46,628,442 29,334,515
Net increase in loans receivable (59,081,005) (50,984,005)
Acquisition of subsidiary (370,014)
Purchase of regulatory stock (311,900) (464,700)
Purchase of premises and equipment (896,320) (814,671)
Sale of premises and equipment 31,000
------------ ------------
Net cash used for investing activities (60,268,619) (55,942,043)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 64,040,688 58,330,733
Net increase (decrease) in short-term borrowings 1,222,783 (7,573,450)
Proceeds from other borrowings 1,300,000 4,000,000
Repayment of other borrowings (2,085,784) (1,198,125)
Exercise of stock options 355,301 1,370
Proceeds from sale of common stock 2,351,481
------------ ------------
Net cash provided by financing activities 67,184,469 53,560,528
------------ ------------
Increase (decrease) in cash and cash equivalents 9,101,213 (261,085)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,852,073 6,113,158
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,953,286 $ 5,852,073
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and borrowings $ 4,857,863 $ 4,516,356
Income taxes 1,500,000 119,000
See accompanying notes to the consolidated financial statements.
F-5
NITTANY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
----------------------------------------------
Nittany Financial Corp. (the "Company") was incorporated under the laws of
the State of Pennsylvania for the purpose of becoming a unitary savings and
loan holding company. The Company presently has three operating
subsidiaries, Nittany Bank (the "Bank"), a federal stock savings
institution, and Nittany Asset Management, Inc. ("Nittany"), an investment
products and services company, and Vantage Investment Advisors, LLC
("Vantage"), a registered investment advisory firm providing fee based
investment management services. The Bank's principal sources of revenue are
derived from its commercial, commercial mortgage, residential real estate,
and consumer loan financing, investment portfolios, deposit services, and
investment services offered to its customers. The Company's business is
conducted by its wholly owned subsidiaries, the Bank, Nittany, and Vantage,
all located in State College, Pennsylvania. The Company and Nittany are
subject to regulation and supervision by the Board of Governors of the
Federal Reserve System, while the Bank is subject to regulation and
supervision by the Office of Thrift Supervision ("OTS").
The consolidated financial statements of the Company include the accounts
of its wholly owned subsidiaries, the Bank, Nittany, and Vantage. All
intercompany transactions have been eliminated in consolidation. The
investment in subsidiaries on the parent company's financial statements is
carried at the parent company's equity in the underlying net assets.
The accounting principles followed by the Company and the methods of
applying these principles conform with accounting principles generally
accepted in the United States of America and with general practice within
the banking industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the Consolidated Balance
Sheet date and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Investment Securities
---------------------
Investment securities, including mortgage-backed securities, are classified
at the time of purchase, based upon management's intentions and ability, as
securities held to maturity or securities available for sale. Debt
securities acquired with the intent and ability to hold to maturity are
classified as held to maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using
the level yield method and recognized as adjustments of interest income.
All other debt securities are classified as available for sale to serve
principally as a source of liquidity. Unrealized holding gains and losses
on available-for- sale securities are reported as a separate component of
stockholders' equity until realized. Realized securities gains and losses
are computed using the specific identification method. Interest and
dividends on investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank of Pittsburgh ("FHLB") and
Enterprise Technology Alliance represents ownership in institutions that
are wholly owned by other financial institutions. These equity securities
are accounted for at cost and classified with other assets on the
Consolidated Balance Sheet.
F-6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
----------------
Loans receivable are stated at their unpaid principal amounts, net of the
allowance for loan losses. Interest on loans is recognized as income when
earned on the accrual method. Interest accrued on loans more than 90 days
delinquent is generally offset by a reserve for uncollected interest and is
not recognized as income.
The accrual of interest is generally discontinued when management has
doubts about further collectibility of principal or interest, even though
the loan may be currently performing. A loan may remain on accrual status
if it is in the process of collection and is either guaranteed or well
secured. When a loan is placed on nonaccrual status, unpaid interest is
charged against income. Payments received on nonaccrual loans are either
applied to principal or reported as interest income, according to
management's judgment as to the collectibility of principal.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as adjustments of the related loan's
yield based on the interest method. The Company is amortizing these amounts
over the contractual life of the related loans.
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for probable losses inherent in its loan
portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance, and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses which is charged to operations. The
provision is based on management's evaluation of the adequacy of the
allowance for loan losses which encompasses the overall risk
characteristics of the various portfolio segments, past experience with
losses, the impact of economic conditions on borrowers, and other relevant
factors. The estimates used in determining the adequacy of the allowance
for loan losses, including the amounts and timing of future cash flows
expected on impaired loans, are particularly susceptible to significant
changes in the near term.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate
loans by major risk classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on nonaccrual
status due to payment delinquency or uncertain collectibility, while not
classifying the loan as impaired if the loan is not a commercial or
commercial real estate loan. Factors considered by management in
determining impairment include payment status and collateral value. The
amount of impairment for these types of impaired loans is determined by the
difference between the present value of the expected cash flows related to
the loan, using the original interest rate, and its recorded value, or as a
practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the
loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all consumer
loans are large groups of smaller-balance homogenous loans and are measured
for impairment collectively. Loans that experience insignificant payment
delays, which are defined as 90 days or less, generally are not classified
as impaired. Management determines the significance of payment delays on a
case-by-case basis taking into consideration all circumstances concerning
the loan, the creditworthiness and payment history of the borrower, the
length of the payment delay, and the amount of shortfall in relation to the
principal and interest owed.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
----------------------
Premises, leasehold improvements, and equipment are stated at cost less
accumulated depreciation and amorti-zation. Depreciation and amortization
are calculated using the straight-line method over the useful lives of the
related assets, which range from three to ten years for furniture,
fixtures, and equipment and forty years for building premises. Leasehold
improvements are amortized over the shorter of their estimated useful lives
or their respective lease terms, which range from three to five years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Costs of major additions and improvements are capitalized.
Goodwill
--------
Goodwill is the excess cost over the fair market value of assets acquired
in connection with business acquisitions and was being amortized on the
straight-line method over 20 years, prior to January 1, 2002. On January 1,
2002, the Company adopted Statement of Financial Accounting Standards
("FAS") No. 142, Goodwill and Other Intangible Assets, which changed the
accounting for goodwill from an amortization method to an impairment-only
approach. This statement eliminates the regularly scheduled amortization of
goodwill and replaces this method with a two-step process for testing the
impairment of goodwill on at least an annual basis. This approach could
cause more volatility in the Company's reported net income because
impairment losses, if any, could occur irregularly and in varying amounts.
In addition, the Company performed its annual impairment analysis of
goodwill and other intangible assets and determined that the estimated fair
value exceeded the carrying amount.
Income Taxes
------------
Income tax expense consists of current and deferred taxes. Deferred tax
assets or liabilities are computed based on the difference between the
financial statement and income tax basis of assets and liabilities using
the enacted marginal tax rates. Deferred income tax expenses or benefits
are based on the changes in the deferred tax asset or liability from period
to period.
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with these
temporary differences, such as the tax operating loss carryforward, will be
realized. A valuation allowance is recorded for those deferred tax assets
for which it is more likely than not that realization will not occur in the
near term.
Comprehensive Income
--------------------
The Company is required to present comprehensive income and its components
in a full set of general purpose financial statements for all periods
presented. The Company's other comprehensive income comprises net
unrealized holding gains and losses on the available-for-sale securities
portfolio. The Company has elected to report the effects of other
comprehensive income as part of the Consolidated Statement of Changes in
Stockholders' Equity.
Earnings Per Share
------------------
The Company provides dual presentation of basic and diluted earnings per
share. Basic earnings per share is calculated utilizing net income as
reported in the numerator and average shares outstanding in the
denominator. The computation of diluted earnings per share differs in that
the dilutive effects of any stock options, warrants, and convertible
securities are adjusted in the denominator.
Advertising Costs
-----------------
Advertising costs are expensed as the costs are incurred.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options
-------------
The Company maintains a stock option plan for directors, officers, and
employees. The Company accounts for its stock option plan under provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Under this Opinion, no compensation expense has
been recognized with respect to the plan because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the grant date.
Had compensation expense for the stock option plan been recognized in
accordance with the fair value accounting provisions of FAS No. 123,
Accounting for Stock-Based Compensation, the net income applicable to
common stock and the basic and diluted net income per share for the years
ended December 31 would be as follows:
2003 2002
---------- ----------
Net income as reported $1,625,038 $ 886,513
Less pro forma expense related to options 107,533 162,733
---------- ----------
Pro forma $1,517,505 $ 723,780
========== ==========
Basic net income pro forma per common share:
As reported $ 1.09 $ 0.65
Pro forma 1.02 0.53
Diluted net income per common share:
As reported $ 1.01 $ 0.60
Pro forma 0.94 0.49
For purposes of computing pro forma results, the Company estimated the fair
values of stock options using the Black-Scholes option pricing model. The
model requires the use of subjective assumptions that can materially affect
fair value estimates. Therefore, the pro forma results are estimates of
results of operations as if comp- ensation expense had been recognized for
the stock option plans. The fair value of each stock option granted was
estimated using the following weighted-average assumptions for grants in
2001 and 2000: (1) risk-free interest rate of 5.03 and 6.68 percent; (2)
expected volatility of 28.52 and 6.22 percent; and (3) expected lives of
options ranging from eight to ten years.
Cash Flow Information
---------------------
Management has defined cash equivalents as "Cash and due from banks" and
"Interest-bearing deposits with other banks."
Pending Accounting Pronouncements
---------------------------------
In December 2003, the Financial Accounting Standards Board ("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 adoption of this statement did not
have a material effect on the Company's disclosure requirements.
F-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pending Accounting Pronouncements (Continued)
---------------------------------
In August 2001, the FASB issued FAS No. 143, Accounting for Asset
Retirement Obligations, which requires that the fair value of a liability
be recognized when incurred for the retirement of a long-lived asset and
the value of the asset be increased by that amount. The statement also
requires that the liability be maintained at its present value in
subsequent periods and outlines certain disclosures for such obligations.
The 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.
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 September 30, 2003, except as stated below and for hedging
relationships designated after September 30, 2003. The guidance should be
F-11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pending Accounting Pronouncements (Continued)
---------------------------------
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 September 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 September
30, 2003. The adoption of this statement did not 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 beginning after September 15, 2003. The adoption of this statement
did not 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 December 2003, the FASB issued a revision to Interpretation 46,
Consolidation of Variable Interest Entities, 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. Application of this Interpretation is required in financial
statements of public entities that have interests in special-purpose
entities for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of VIEs is
required in financial statements for periods ending after March 15, 2004.
Small business issuers must apply this Interpretation to all other types of
VIEs at the end of the first reporting period ending after December 15,
2004. 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.
F-12
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification
----------------
Certain items in the prior year financial statements have been reclassified
to conform to the presentation of the current year amounts. Such
reclassifications did not affect stockholders' equity or net income.
2. EARNINGS PER SHARE
There are no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statements of Income will be used as the
numerator. The following table sets forth a reconciliation of the
denominator of the basic and diluted earnings per share computation.
2003 2002
--------- ---------
Weighted-average common shares used
to calculate basic earnings per share 1,493,050 1,367,111
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 121,544 106,137
--------- ---------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,614,594 1,473,248
========= =========
F-13
3. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows:
2003
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for sale Cost Gains Losses Value
---------- ---------- ----------- -----------
Corporate securities $1,683,910 $ 5,634 $ (41,729) $1,647,815
Mortgage-backed securities 2,368,566 10,650 (21,806) 2,357,410
---------- ---------- ---------- ----------
Total debt securities 4,052,476 16,284 (63,535) 4,005,225
Equity securities 39,826 29,044 -- 68,870
---------- ---------- ---------- ----------
Total $4,092,302 $ 45,328 $ (63,535) $4,074,095
========== ========== ========== ==========
2003
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- -----------
Held to maturity
U.S. government agency
securities $ 8,761,819 $ 73,152 $ (59,841) $ 8,775,130
Obligations of states and
political subdivisions 15,283,852 66,282 (253,736) 15,096,398
Corporate securities 500,558 919 -- 501,477
Collateralized mortgage
obligations 1,130,066 7,632 -- 1,137,698
Mortgage-backed securities 13,569,994 117,374 (29,176) 13,658,192
----------- ----------- ----------- -----------
Total $39,246,289 $ 265,359 $ (342,753) $39,168,895
=========== =========== =========== ===========
F-14
3. INVESTMENT SECURITIES (Continued)
2002
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for sale Cost Gains Losses Value
---------- ---------- ----------- -----------
Corporate securities $1,704,304 $ 12,906 $ (89,268) $1,627,942
Collateralized mortgage
obligations 219,537 795 -- 220,332
Mortgage-backed securities 4,046,525 35,345 (75) 4,081,795
---------- ---------- ---------- ----------
Total debt securities 5,970,366 49,046 (89,343) 5,930,069
Equity securities 68,014 25,926 -- 93,940
---------- ---------- ---------- ----------
Total $6,038,380 $ 74,972 $ (89,343) $6,024,009
========== ========== ========== ==========
2002
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- -----------
Held to maturity
U.S. government agency
securities $13,607,822 $ 56,872 $ (16,995) $13,647,699
Corporate securities 511,294 6,534 -- 517,828
Collateralized mortgage
obligations 3,463,799 33,787 (3) 3,497,583
Mortgage-backed securities 20,777,010 289,531 (2,088) 21,064,453
----------- ---------- ----------- -----------
Total $38,359,925 $ 386,724 $ (19,086) $38,727,563
=========== ========== ========== ===========
The following table shows the Company's gross unrealized losses and fair
value, aggregated by investment category and length of time that the
individual securities have been in a continuous unrealized loss position,
at December 31, 2003:
Less than Twelve Months Twelve Months or Greater Total
--------------------------------------------------------------------------------
Estimated Gross Estimated Gross Estimated Gross
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
----------- ------------ ------------ ----------- ----------- ----------
U.S. government agency
securities $ 3,086,819 $ 59,841 $ -- $ -- $ 3,086,819 $ 59,841
Obligations of states and
political subdivisions 8,735,329 253,736 -- -- 8,735,329 253,736
Mortgage-backed securities 6,534,758 42,536 1,392,310 8,446 7,927,068 50,982
Corporate securities -- -- 638,010 41,729 638,010 41,729
----------- ----------- ----------- ----------- ----------- ----------
Total $18,356,906 356,113 2,030,320 50,175 20,387,226 406,288
=========== =========== =========== =========== =========== ==========
The Company's investment securities portfolio contains unrealized losses of
U.S. government agencies, including mortgage-related instruments, issued or
backed by the full faith and credit of the U.S. government or are generally
viewed as having the implied guarantee of the U.S. government, debt
obligations of a U.S. state or political subdivision, and corporate
entities.
F-15
3. INVESTMENT SECURITIES (Continued)
On a monthly basis, the Company evaluates the severity and duration of
impairment for its investment securities portfolio unless the Company has
the ability to hold the security to maturity without incurring a loss.
Generally, impairment is considered other than temporary when an investment
security has sustained a decline of 10 percent or more for six months.
The Company has concluded that any impairment of its investment securities
portfolio is not other than temporary but is the result of interest rate
changes that are not expected to result in the noncollection of principal
and interest during the period.
The amortized cost and estimated market value of investments in debt
securities available for sale at December 31, 2003, by contractual
maturity, are shown below. The Company's mortgage-backed securities and
collateralized mortgage obligations have contractual maturities ranging
from four to thirty years. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity
------------------------- -------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
Due in one year or less $ 1,004,171 $ 1,009,805 $ 500,558 $ 501,477
Due after one year through
five years 444,678 449,883 3,939,086 3,954,029
Due after five years through
ten years 117,917 123,176 16,897,648 16,919,668
Due after ten years 2,485,710 2,422,361 17,908,997 17,793,721
----------- ----------- ----------- -----------
Total $ 4,052,476 $ 4,005,225 $39,246,289 $39,168,895
=========== =========== =========== ===========
The proceeds from the sales of investment securities available for sale and
the gross gains realized were $78,144 and $30,130 for the year ended
December 31, 2003, and $37,450 and $7,450 for the year ended December 31,
2002, respectively.
Investment securities with amortized cost and estimated market values of
$5,214,854 and $5,215,398 at December 31, 2003 and $3,826,749 and
$3,893,013 at December 31, 2002, were pledged to secure borrowings, public
deposits, and other purposes as required by law.
F-16
4. LOANS RECEIVABLE
Loans receivable consist of the following at December 31:
2003 2002
------------ ------------
Real estate loans:
Residential $116,315,573 $ 80,162,731
Home equity 9,965,344 6,340,945
Commercial 37,917,984 26,700,842
Construction 8,736,837 2,223,986
Commercial 9,825,925 8,001,343
Consumer loans 1,807,791 2,048,248
------------ ------------
184,569,454 125,478,095
Less:
Deferred loan fees, net 89,442 46,394
Allowance for loan losses 1,737,475 1,177,141
------------ ------------
Total $182,742,537 $124,254,560
============ ============
Aggregate loans of $60,000 or more extended to executive officers,
directors, and corporations in which they are beneficially interested as
stockholders, executive officers, or directors were $2,466,678 at December
31, 2003. An analysis of these related party loans follows:
2002 Additions Repayments 2003
--------- ----------- ----------- -----------
$ 843,841 $ 2,980,699 $ 1,357,862 $ 2,466,678
The Company's primary business activity is with customers located within
its local trade area. Mortgage, consumer, and commercial loans are granted.
Although the Company's loan portfolio is diversified at December 31, 2003
and 2002, the repayment of these loans is dependent upon the local economic
conditions in its immediate trade area.
F-17
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31
is as follows:
2003 2002
---------- ----------
Balance, January 1 $1,177,141 $ 649,565
Add:
Provision charged to operations 593,000 543,000
Recoveries 3,497 13,629
Less loans charged off 36,163 29,053
---------- ----------
Balance, December 31 $1,737,475 $1,177,141
========== ==========
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
2003 2002
---------- ----------
Land $ 375,000 $ 375,000
Leasehold improvements 1,821,310 1,292,718
Furniture and equipment 1,017,442 742,282
---------- ----------
3,213,752 2,410,000
Less accumulated depreciation and amortization 642,799 468,991
---------- ----------
Total $2,570,953 $1,941,009
========== ==========
Depreciation and amortization expense for the years ended December 31, 2003
and 2002, was $242,730 and $217,925, respectively.
7. GOODWILL
A summary of goodwill at December 31 is as follows:
2003 2002
---------- ----------
Gross carrying amount, beginning of period $ 941,886 $ 941,886
Acquisition of Vantage 964,014 --
---------- ----------
Gross carrying amount, end of period 1,905,900 941,886
Less accumulated amortization (142,669) (142,669)
Less impairment losses -- --
---------- ----------
Net carrying amount $1,763,231 $ 799,217
========== ==========
On January 1, 2003, the Company acquired a subsidiary, Vantage, for cash
and 36,000 shares of stock, which resulted in additional goodwill of
$964,014 for 2003.
The gross carrying amount of goodwill was tested for impairment in the
fourth quarter, after the annual forecasting process. Due to an increase in
overall earning asset growth, operating profits and cash flows were greater
than expected. Based on fair value of the reporting units, estimated using
the expected present value of future flows, no goodwill impairment loss was
recognized in the current year.
F-18
8. FEDERAL HOME LOAN BANK STOCK
The Company is a member of the FHLB. As a member, the Company maintains an
investment in the capital stock of the FHLB of Pittsburgh, at cost. The
amount of investment, as determined by the FHLB of Pittsburgh, is based on
a percentage of outstanding home loans and unused borrowing capacity.
9. DEPOSITS
Time deposits at December 31, 2003, of $7,470,859, $5,860,680, $2,044,067,
$2,364,385, $879,774, and $1,978,473 mature during 2004, 2005, 2006, 2007,
and beyond 2008, respectively.
Time deposits include certificates of deposit in denominations of $100,000
or more. Such deposits aggregated $5,607,572 and $4,557,406 at December 31,
2003 and 2002, respectively. Deposits in excess of $100,000 are not
federally insured.
The scheduled maturities of time certificates of deposit in excess of
$100,000 as of December 31, 2003, are as follows:
Within three months $1,387,102
Three through six months 500,987
Six through twelve months 638,619
Over twelve months 3,080,864
----------
Total $5,607,572
==========
10. SHORT-TERM BORROWINGS
Short-term borrowings consisted of draws on the Bank's "RepoPlus" line of
credit, fixed-rate, fixed-term advances through the FHLB, and repurchase
agreements. The RepoPlus line carries an adjustable rate that is subject to
annual renewal and incurs no service charges. All outstanding borrowings
are secured by a blanket security agreement on qualifying residential
mortgage loans, certain pledged investment securities, and the Bank's
investment in FHLB stock.
The following table sets forth information concerning short-term
borrowings:
2003 2002
---------- ----------
Balance at year-end $2,363,887 $1,141,104
Maximum amount outstanding at any month-end 6,869,483 9,231,709
Average balance outstanding during the year 3,018,152 8,449,857
Weighted-average interest rate:
As of year-end 1.96% 2.64%
Paid during the year 1.97% 2.35%
F-19
11. OTHER BORROWINGS
The following table sets forth information concerning other borrowings:
Weighted Stated interest
Maturity range average rate range At December 31,
Description from to interest rate from to 2003 2002
- ---------------------- -------- -------- ------------- -------- ------- ----------- -----------
Line of credit 07/09/07 08/14/07 3.12% 3.12% 3.12% $ 2,425,000 $ 2,000,000
Mid Term Repo Fixed 06/27/05 06/27/05 3.71 3.71 3.71 2,000,000 2,000,000
Fixed rate 12/08/05 12/04/08 5.92 5.23 6.19 3,500,000 4,500,000
Fixed rate amortizing 12/08/10 12/08/10 6.21 6.21 6.21 1,904,866 2,115,650
------------ ------------
$ 9,829,866 $ 10,615,650
=========== ============
Maturities of other borrowings at December 31 are summarized as follows:
2003
-----------------------------
Year Ending Weighted-
December 31, Amount Average Rate
------------ ----------- ------------
2004 $ 224,253 6.21%
2005 4,738,583 5.14
2006 253,828 6.21
2007 2,695,047 3.43
2008 1,287,302 5.45
2009 and after 630,853 6.21
-----------
$ 9,829,866 4.83%
===========
The Company entered into two unsecured line of credit arrangements with
other financial institutions that require monthly interest payments. The
first line of credit has a borrowing limit of $3.0 million at an adjustable
rate based on 30-day LIBOR plus 200 basis points and matures July 9, 2007.
The second line of credit has a borrowing limit of $1.5 million at an
adjustable rate based on 30-day LIBOR plus 200 basis points and matures
August 14, 2007. At December 31, 2003, the Company had outstanding balances
of $950,000 and $1,475,000, respectively, on these lines of credit. The
fixed rate amortizing borrowing with the FHLB requires monthly payments of
principal and interest of $28,020 through December 2010. The remaining
borrowings represent fixed rate advances from the Federal Home Loan Bank.
Borrowing capacity consists of credit arrangements with the FHLB of
Pittsburgh. FHLB borrowings are subject to annual renewal, incur no service
charges, and are secured by a blanket security agreement on certain
investment and mortgage-backed securities, outstanding residential
mortgages, and the Bank's investment in FHLB stock. As of December 31,
2003, the Bank's maximum borrowing capacity with the FHLB was approximately
$153.8 million.
F-20
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company makes various commitments and
contingent liabilities that are not reflected in the accompanying
consolidated financial statements. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the Consolidated Balance Sheet. The Company's exposure to
credit loss in the event of nonperformance by the other parties to the
financial instruments is represented by the contractual amounts as
disclosed. The Company minimizes its exposure to credit loss under these
commitments by subjecting them to credit approval and review procedures and
collateral requirements as deemed necessary. Commitments generally have
fixed expiration dates within one year of their origination.
The off-balance sheet commitments comprises the following:
2003 2002
----------- -----------
Commitments to extend credit:
Fixed rate $ 673,000 $ 2,510,985
Variable rate 3,255,080 11,250,309
----------- -----------
3,928,080 13,761,294
Letters of credit 1,170,118 --
----------- -----------
Total $ 5,098,198 $13,761,294
=========== ===========
The range of interest rates on fixed rate loan commitments was 5.85 percent
to 6.75 percent at December 31, 2003.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the loan
agreement. These commitments consist of undisbursed residential
construction loans, available commercial and personal lines of credit, and
loans approved but not yet funded. Fees from the issuance of the credit
lines are generally recognized over the period of maturity.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The coverage
period for these instruments is typically a one-year period with an annual
renewal option subject to prior approval by management. Fees earned from
the issuance of these letters are recognized over the coverage period. For
secured letters of credit, the collateral is typically bank deposit
instruments or customer business assets.
The Company is committed under three noncancelable operating leases for the
Bank's office facilities with remaining terms through 2008. At December 31,
2003, the minimum rental commitments under these leases are as follows:
2004 $ 239,148
2005 239,148
2006 239,148
2007 191,574
2008 144,000
-----------
Total $ 1,053,018
===========
Occupancy and equipment expenses include rental expenditures of $220,934
and $143,842 for 2003 and 2002, respectively.
F-21
13. STOCK SPLIT
On January 17, 2003, 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 January 31, 2003, payable on February 15, 2003. As a result,
233,772 additional shares of the Company's stock were issued, common stock
was increased by $23,377, and surplus was decreased by $25,245.
Fractional shares were paid in cash. All average shares outstanding as of
December 31, 2002, and all per share amounts as of December 31, 2002,
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.
14. REGULATORY MATTERS
Restriction on Cash and Due From Banks
--------------------------------------
The Bank is required to maintain reserve funds in cash or on deposit with
the Federal Reserve Bank. As of December 31, 2003, the Bank had required
reserves of $674,000, comprised principally of vault cash and a depository
amount held with the Federal Reserve Bank
Dividend Restrictions
---------------------
The Bank is subject to a dividend restriction that generally limits the
amount of dividends that can be paid by an OTS-chartered bank. OTS
regulations require the Bank to give the OTS 30 days notice of any proposed
declara-tion of dividends to the Company, and the OTS has the authority
under its supervisory powers to prohibit the payment of dividends by the
Bank to the Company.
Regulatory Capital Requirements
-------------------------------
Federal regulations require the Company and the Bank to maintain minimum
amounts of capital. Specifically, each is required to maintain certain
minimum dollar amounts and ratios of Total and Tier I capital to
risk-weighted assets and of Tangible and Core capital (as defined in the
regulations) to adjusted assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should
any institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly
restrictive regulatory actions.
As of December 31, 2003 and 2002, the FDIC categorized the Company and the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be classified as a well-capitalized financial
institution, Total risk-based, Tier 1 risk-based, and Core capital ratios
must be at least 10 percent, 6 percent, and 5 percent, respectively.
Management believes, as of December 31, 2003, the Bank met all capital
adequacy requirements to which they are subject.
F-22
14. REGULATORY MATTERS (Continued)
Regulatory Capital Requirements (Continued)
-------------------------------
The following table reconciles the Bank's capital under accounting
principles generally accepted in the United States of America to regulatory
capital:
2003 2002
------------ ------------
Total stockholders' equity $ 15,964,295 $ 11,624,650
Unrealized loss on securities 31,186 26,596
Goodwill (799,217) (799,217)
------------ ------------
Tier I, core, and tangible capital 15,196,264 10,852,029
Allowance for loan losses 1,639,642 1,177,141
------------ ------------
Total risk-based capital $ 16,835,906 $ 12,029,170
============ ============
The following table sets forth the Ba nk's capital position and minimum
requirements for the years ended December 31:
2003 2002
---------------------- ----------------------
Amount Ratio Amount Ratio
----------- ------- ----------- -------
Total Capital (to Risk-Weighted Assets)
---------------------------------------
Actual $16,835,906 12.8% $12,029,170 12.4%
For Capital Adequacy Purposes 10,485,885 8.0 7,779,280 8.0
To Be Well Capitalized 13,107,356 10.0 9,724,100 10.0
Tier I Capital (to Risk-Weighted Assets)
----------------------------------------
Actual $15,196,264 11.6% $10,852,029 11.2%
For Capital Adequacy Purposes 5,242,942 4.0 3,889,640 4.0
To Be Well Capitalized 7,864,414 6.0 5,834,460 6.0
Core Capital (to Adjusted Assets)
---------------------------------
Actual $15,196,264 6.2% $10,852,029 6.1%
For Capital Adequacy Purposes 7,398,108 3.0 5,363,529 3.0
To Be Well Capitalized 12,330,179 5.0 8,939,214 5.0
Tangible Capital (to Adjusted Assets)
-------------------------------------
Actual $15,196,264 6.2% $10,852,029 6.1
For Capital Adequacy Purposes 3,699,054 1.5 2,681,764 1.5
F-23
15. EMPLOYEE BENEFITS
Profit Sharing Plan
-------------------
The Company maintains a noncontributory profit sharing plan (the "Plan")
for officers and employees who have met the age and length of service
requirements. The Plan is a defined contribution plan, with contributions
based on a percentage of participants' salaries. In conjunction with the
Plan, an integrated 401(k) salary reduction plan was also implemented.
The Company may make matching contributions equal to a discretionary
percentage determined annually by the Board of Directors. Employee
contributions are vested at all times, and the Company contributions are
fully vested after six years. The Company recognized profit sharing and
matching contributions for the years ended December 31, 2003 and 2002, of
approximately $31,944 and $19,278, respectively.
Stock Option Plan
-----------------
The Board of Directors adopted a stock option plan for directors, officers,
and employees in which the number of shares with respect to which awards
may be made available to the plan may not exceed 257,766 shares. These
shares may be issued from authorized but unissued common stock, treasury
stock, or shares purchased in the market. The stock options have expiration
terms of ten years subject to certain extensions and terminations. The per
share exercise price of a stock option is equal to the fair value of a
share of common stock on the date the option is granted. Options are
exercisable in annual installments ranging from 25 percent to 33 1/3
percent for directors and ranging from 20 percent to 25 percent for
officers and employees, primarily using the award date as the anniversary
date.
The following table presents share data related to the outstanding options:
2003 2002
-------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
Outstanding, beginning of the year 252,469 $ 6.93 253,406 $ 6.93
Granted -- -- -- --
Exercised (43,220) 6.89 (198) 6.92
Forfeited (1,078) 6.99 (739) 7.01
------- -------
Outstanding, end of the year 208,171 $ 6.94 252,469 $ 6.93
======== =======
Exercisable at year-end 165,686 $ 6.93 180,965 $ 6.91
======== =======
F-24
15. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
-----------------
The following table summarizes characteristics of stock options outstanding
and exercisable at December 31, 2003:
Outstanding Exercisable
----------------------------------- -------------------
Average Average
Average Exercise Exercise
Exercise Price Shares Life Price Shares Price
-------------- -------- ------- -------- -------- --------
6.89 83,742 5.40 6.89 83,742 6.89
6.37 4,853 6.46 6.37 4,853 6.37
7.01 119,576 7.82 7.01 77,091 7.01
------- -------
208,171 6.56 6.94 165,686 6.93
======= =======
16. INCOME TAXES
The components of income taxes for the years ended December 31 are
summarized as follows:
2003 2002
---------- ----------
Current payable:
Federal $ 831,398 $ 556,435
State 128,393 95,906
--------- ---------
959,791 652,341
Deferred taxes (132,417) (108,737)
Adjustment to valuation allowance
for deferred tax assets 498 (131,855)
--------- ---------
Total $ 827,872 $ 411,749
========= =========
The following temporary differences gave rise to the net deferred tax
assets:
2003 2002
-------- --------
Deferred tax assets:
Net unrealized loss on securities $ 6,190 $ 4,886
Allowance for loan losses 555,830 357,346
Organization costs 62 11,424
Loan origination costs 28,261 14,413
Supplemental executive retirement account 15,857 --
Net operating loss carryforward 18,626 18,128
-------- --------
Total gross deferred tax assets 624,826 406,197
Less valuation allowance 18,626 18,128
-------- --------
Deferred tax assets after allowance 606,200 388,069
-------- --------
Deferred tax liabilities:
Premises and equipment 94,362 30,971
Goodwill 58,355 36,838
-------- --------
Total gross deferred tax liabilities 152,717 67,809
-------- --------
Net deferred tax assets $453,483 $320,260
======== ========
F-25
16. INCOME TAXES (Continued)
The reconciliation of the federal statutory rate and the Company's
effective income tax rate is as follows:
2003 2002
--------------------- -------------------
% of % of
Pre-Tax Pre-Tax
Amount Income Amount Income
--------- ------- --------- -------
Tax at statutory rate $ 833,989 34.0% $ 441,409 34.0%
State income, net of
federal tax 84,739 3.5 54,426 4.2
Tax-exempt income
tax assets (70,762) (2.9) (104,074) (8.0)
Other, net (20,094) (0.8) 19,988 1.5
--------- ---- --------- ----
Actual tax benefit
and effective rate $ 827,872 33.8% $ 411,749 31.7%
========= ==== ========= ====
The Bank is subject to the Pennsylvania Mutual Thrift Institution's tax
that is calculated at 11.5 percent of earnings based on accounting
principles generally accepted in the United States of America with certain
adjustments. At December 31, 2003, the Company has available a net
operating loss carryforward of approximately $270,000 for state income tax
purposes which will expire in the years 2008 to 2012.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
2003 2002
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 14,953,286 $ 14,953,286 $ 5,852,073 $ 5,852,073
Investment securities 43,320,384 43,242,990 44,383,934 44,751,572
Regulatory stock 1,311,300 1,311,300 1,175,400 1,175,400
Loans receivable 182,742,537 188,261,923 124,254,560 129,361,611
Accrued interest receivable 1,138,695 1,138,695 928,688 928,688
Financial liabilities:
Deposits $220,892,657 $221,372,657 $156,851,969 $157,594,969
Short-term borrowings 2,363,887 2,363,887 1,141,104 1,141,104
Other borrowings 9,829,866 10,345,866 10,615,650 11,399,650
Accrued interest payable 447,727 447,727 452,645 452,645
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract which creates an obligation or right
to receive or deliver cash or another financial instrument from/to a second
entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties other than in
a forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.
F-26
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
If no readily available market exists, the fair value estimates for
financial instruments are based upon manage-ment's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses, and other factors as determined through various
option pricing formulas. As many of these assumptions result from judgments
made by management based upon estimates which are inherently uncertain, the
resulting estimated fair values may not be indicative of the amount
realizable in the sale of a particular financial instrument. In addition,
changes in the assumptions on which the estimated fair values are based may
have a significant impact on the resulting estimated fair values.
As certain assets, such as deferred tax assets and premises and equipment,
are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Company.
The Company employed estimates using discounted cash flows in determining
the estimated fair value of financial instruments for which quoted market
prices were not available based upon the following assumptions:
Cash and Due From Banks, Interest-Bearing Deposits with Other Banks,
---------------------------------------------------------------------------
Accrued Interest Receivable, Short-Term Borrowings, and Accrued Interest
---------------------------------------------------------------------------
Payable
-------
The fair value is equal to the current carrying value.
Investment Securities and Regulatory Stock
------------------------------------------
The fair value of investment securities is equal to the available quoted
market price. If no quoted market price is available, fair value is
estimated using the quoted market price for similar securities. Regulatory
stock represents ownership in institutions that are wholly owned by other
financial institutions. These equity security's fair value are equal to the
current fair value.
Loans Receivable, Deposits, and Other Borrowings
------------------------------------------------
The fair value of loans is estimated using discounted contractual cash
flows generated using prepayment estimates. Discount rates are based upon
current market rates generally being offered for new loan originations with
similar credit and payment characteristics. Savings, checking, and money
market deposit accounts are valued at the amount payable on demand as of
year-end. Fair values for time deposits and the other borrowings are
estimated using a discounted cash flow calculation that applies contractual
costs currently being offered in the existing portfolio to current market
rates being offered for deposits and borrowings of similar remaining
maturities.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment, and the fair value, determined by discounting the remaining
contractual fee over the term of the commitment using fees currently
charged to enter into similar agreements with similar credit risk, are not
considered material for disclosure. The contractual amounts of unfunded
commitments are presented in Note 12.
F-27
19. PARENT COMPANY
Following are condensed financial statements for Nittany Financial Corp.:
CONDENSED BALANCE SHEET
December 31,
2003 2002
----------- -----------
ASSETS
Cash $ 199,845 $ 80,947
Investment securities available for sale 68,870 93,940
Investment in subsidiaries 16,976,265 11,660,607
Other assets 24,798 104,590
----------- -----------
TOTAL ASSETS $17,269,778 $11,940,084
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other borrowings $ 2,425,000 $ 2,000,000
Other liabilities 17,034 35,628
Stockholders' equity 14,827,744 9,904,456
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,269,778 $11,940,084
=========== ===========
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
2003 2002
----------- -----------
INCOME $ 33,406 $ 8,664
EXPENSES 158,599 76,764
----------- -----------
Net loss before income tax benefit (125,193) (68,100)
Income tax (benefit) expense (23,989) 3,269
----------- -----------
Income before equity in undistributed net
earnings of subsidiaries (71,369) (101,204)
Equity in undistributed net income of subsidiaries 1,726,242 957,882
----------- -----------
NET INCOME $ 1,625,038 $ 886,513
=========== ===========
F-28
19. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income $ 1,625,038 $ 886,513
Adjustments to reconcile net income to net cash used for operating
activities:
Equity in undistributed net income of subsidiaries (1,726,242) (957,882)
Investment securities gains (30,130) (7,450)
Other, net 63,738 (26,544)
----------- -----------
Net cash used for operating activities (67,596) (105,363)
----------- -----------
INVESTING ACTIVITIES
Purchase of investment securities available for sale (19,826) (28,429)
Sale of investment securities available for sale 78,144 37,450
Capital contribution to subsidiary bank (3,003,606) (1,978,800)
----------- -----------
Net cash used for investing activities (2,945,288) (1,969,779)
----------- -----------
FINANCING ACTIVITIES
Proceeds from stock offering 2,351,481 --
Exercise of stock options 355,301 1,370
Proceeds from other borrowings 1,300,000 2,000,000
Repayment of other borrowings (875,000) --
----------- -----------
Net cash provided by financing activities 3,131,782 2,001,370
----------- -----------
Increase (decrease) in cash 118,898 (73,772)
CASH AT BEGINNING OF PERIOD 80,947 154,719
----------- -----------
CASH AT END OF PERIOD $ 199,845 $ 80,947
=========== ===========
F-29
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2004 2003
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 6,842,808 $ 805,812
Interest-bearing deposits with other banks 7,586,726 14,147,474
------------- -------------
Cash and cash equivalents 14,429,534 14,953,286
Investment securities available for sale 2,223,971 4,074,095
Investment securities held to maturity (estimated
market value of $43,552,160 and $39,168,895) 43,462,209 39,246,289
Loans receivable (net of allowance for loan losses
of $2,107,244 and $1,737,435) 226,462,486 182,742,537
Premises and equipment 2,519,408 2,570,953
Federal Home Loan Bank stock 2,223,300 1,311,300
Intangible assets 1,763,231 1,763,231
Accrued interest and other assets 2,071,117 1,925,622
------------- -------------
TOTAL ASSETS $ 295,155,256 $ 248,587,313
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 10,212,041 $ 7,880,177
Interest-bearing demand 24,488,842 21,902,355
Money market 38,062,725 34,237,951
Savings 155,711,676 136,273,936
Time 18,083,354 20,598,238
------------- -------------
Total deposits 246,558,638 220,892,657
Short-term borrowings 20,016,622 2,363,887
Other borrowings 11,012,985 9,829,866
Accrued interest payable and other liabilities 807,428 673,159
------------- -------------
TOTAL LIABILITIES 278,395,673 233,759,569
------------- -------------
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 2,288,082 356,344
Accumulated other comprehensive loss (8,444) (12,017)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 16,759,583 14,827,744
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 295,155,256 $ 248,587,313
============= =============
See accompanying notes to the unaudited consolidated financial statements.
F-30
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Three-Months Ended September 30, Nine-months Ended September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 3,266,905 $ 2,601,103 $ 9,034,114 $ 7,011,893
Interest-bearing deposits with other banks 24,473 8,898 49,679 48,803
Investment securities 371,767 328,101 1,114,783 1,074,435
----------- ----------- ----------- -----------
Total interest and dividend income 3,663,145 2,938,102 10,198,576 8,135,131
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,185,689 1,051,561 3,492,226 3,171,166
Short-term borrowings 41,023 19,023 65,037 44,011
Other borrowings 137,524 128,013 395,720 389,654
----------- ----------- ----------- -----------
Total interest expense 1,364,236 1,198,597 3,952,983 3,604,831
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,298,909 1,739,505 6,245,593 4,530,300
Provision for loan losses 138,000 230,000 442,000 508,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,160,909 1,509,505 5,803,593 4,022,300
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 177,863 124,980 498,231 370,437
Investment security gain 32,707 - 32,707 6,691
Asset management fees and commissions 614,209 231,764 1,773,425 721,434
Other 26,709 36,125 81,375 123,070
----------- ----------- ----------- -----------
Total noninterest income 851,488 392,869 2,385,738 1,221,632
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 730,611 544,768 2,168,606 1,607,880
Occupancy and equipment 186,363 180,397 540,492 473,618
Professional fees 49,290 55,676 144,088 157,425
Data processing fees 121,146 112,338 351,317 285,599
Supplies, printing, and postage 39,084 35,300 104,015 103,975
Advertising 37,721 42,594 115,849 104,386
ATM processing fees 36,191 34,635 106,044 97,257
Commission expense 381,639 90,385 1,120,476 385,508
Other 205,537 142,138 545,706 360,610
----------- ----------- ----------- -----------
Total noninterest expense 1,787,582 1,238,231 5,196,593 3,576,258
----------- ----------- ----------- -----------
Income before income taxes 1,224,815 664,143 2,992,738 1,667,674
Income taxes 427,000 205,691 1,061,000 554,390
----------- ----------- ----------- -----------
NET INCOME $ 797,815 $ 458,452 $ 1,931,738 $ 1,113,284
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.41 $ 0.24 $ 1.00 $ 0.64
Diluted 0.38 0.23 0.93 0.59
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,924,621 1,873,078 1,924,621 1,749,564
Diluted 2,080,438 2,024,416 2,078,490 1,897,362
See accompanying notes to the unaudited consolidated financial statements.
F-31
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
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 1,931,738 1,931,738 $1,931,738
Other comprehensive income:
Unrealized gain on available for sale securities
net of reclassification adjustment,
net of taxes of $1,841 3,573 3,573 3,573
----------
Comprehensive income $1,935,311
==========
Twenty percent stock dividend (including cash
paid for fractional shares) 32,066 $ (35,538) (3,472)
-------- ----------- ---------- -------- -----------
Balance, September 30, 2004 $192,462 $14,287,483 $2,288,082 $ (8,444) $16,759,583
======== =========== ========== ======== ===========
See accompanying notes to the unaudited consolidated financial statements.
F-32
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine-months ended September 30,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,931,738 $ 1,113,284
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 442,000 508,000
Depreciation, amortization, and accretion, net 540,818 772,963
Investment security gain (32,707) (6,691)
Increase in accrued interest receivable (105,747) (198,645)
Decrease in accrued interest payable (34,839) (293,164)
(Increase) decrease in taxes payable 51,757 (689,419)
Other, net 75,762 (55,722)
------------ ------------
Net cash provided by operating activities 2,868,782 1,150,606
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (80,881) (19,826)
Proceeds from sale 52,707 26,637
Proceeds from principal repayments and maturities 1,903,792 1,555,738
Investment securities held to maturity:
Purchases (42,268,481) (44,424,200)
Proceeds from principal repayments and maturities 37,711,838 37,940,573
Net increase in loans receivable (44,150,543) (52,370,615)
Purchase of FHLB stock (912,000) (373,600)
Acquisition of subsidiary - (370,014)
Purchase of premises and equipment (147,330) (849,686)
Sale of premises and equipment - 31,000
------------ ------------
Net cash used for investing activities (47,890,897) (58,853,993)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 25,665,981 49,183,640
Net increase in short-term borrowings 17,652,735 6,521,026
Proceeds from other borrowings 1,350,000 500,000
Repayment of other borrowings (166,881) (156,858)
Exercise of stock options - 1,108
Cash paid in lieu of fractional shares (3,472) -
Proceeds from sale of common stock - 2,335,730
Issuance of common stock - 15,751
------------ ------------
Net cash provided by financing activities 44,498,363 58,400,397
------------ ------------
Increase (decrease) in cash and cash equivalents (523,752) 697,010
CASH & CASH EQUIV. AT BEGINNING OF PERIOD 14,953,286 5,852,073
------------ ------------
CASH & CASH EQUIV. AT END OF PERIOD $ 14,429,534 $ 6,549,083
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 3,987,822 $ 3,897,995
Income taxes 1,151,500 1,095,000
See accompanying notes to the consolidated unaudited financial statements.
F-33
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. 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ------------- --------------
Net income, as reported: $ 797,815 $ 458,452 $ 1,931,738 $ 1,113,284
Less proforma expense related
to stock options 29,747 43,886 89,241 131,658
----------- ----------- ------------- -------------
Proforma net income $ 768,068 $ 414,566 $ 1,842,497 $ 981,626
=========== =========== ============= =============
Basic net income per common share:
As reported $ 0.41 $ 0.24 $ 1.00 $ 0.64
Pro forma 0.40 0.22 0.96 0.56
Diluted net income per common share:
As reported $ 0.38 $ 0.23 $ 0.93 $ 0.59
Pro forma 0.37 0.20 0.89 0.52
F-34
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, 2004 and 2003, the diluted
number of shares outstanding from employee stock options was 155,817 and
151,338, respectively. For the nine-months ended September 30, 2004 and 2003,
the diluted number of shares outstanding from employee stock options was 153,869
and 147,798, 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, 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 September 30, 2004, comprehensive income totaled
$802,587. For the three and nine-months ended September 30, 2003, comprehensive
income totaled $455,167 and $1,116,931.
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 September 30, 2004, and all per share
amounts as of September 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.
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.
F-35
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.
In March 2004, the Financial Accounting Standards Board ("FASB") reached
consensus on the guidance provided by Emerging Issues Task Force Issue 03-1
("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. The guidance is applicable to debt and
equity securities that are within the scope of FASB Statement of Financial
Accounting Standard ("SFAS") No. 115, Accounting for Certain Investments In Debt
and Equity Securities and certain other investments. EITF 03-1 specifies that an
impairment would be considered other-than-temporary unless (a) the investor has
the ability and intent to hold an investment for a reasonable period of time
sufficient for the recovery of the fair value up to (or beyond) the cost of the
investment and (b) evidence indicating the cost of the investment is recoverable
within a reasonable period of time outweighs evidence to the contrary. EITF 03-1
cost method investment and disclosure provisions were effective for reporting
periods ending after June 15, 2004. The measurement and recognition provisions
relating to debt and equity securities have been delayed until the FASB issues
additional guidance. The Company adopted cost method investment and disclosure
provisions of EITF 03-1 on June 30, 2004. The adoption did not have a material
impact on the consolidated financial statements, results of operations or
liquidity of the Company.
F-36
APPENDIX A
STOCK SUBSCRIPTION APPLICATION
NITTANY FINANCIAL CORP.
BY EXECUTING THIS STOCK SUBSCRIPTION APPLICATION,
I ACKNOWLEDGE RECEIPT OF A COPY OF THE PROSPECTUS.
I hereby subscribe for and offer to purchase the number of shares of common
stock, $0.10 par value, of Nittany Financial Corp. ("Common Stock") shown below,
upon the terms and conditions specified in the prospectus at a purchase price of
$26.00 per share. All subscriptions must be for a minimum of 100 shares and no
more than [5,750] shares, unless waived by Nittany. No fractional shares will be
issued.
I acknowledge and agree that this Application constitutes an irrevocable offer
and may not be withdrawn without the consent of Nittany Financial Corp. If
Nittany accepts any subscription only in part, I understand that Nittany will
return any portion of funds not required for the partial subscription, with no
interest earned on this portion. If Nittany declines any subscription, I
understand that Nittany will return my subscription funds at that time, with no
interest earned on the funds.
If Nittany Financial Corp. cancels the offering in its entirety or rejects the
Application, this offer to purchase and subscribe shall become void, and Nittany
will return any payments received from in full with no interest earned on the
amount returned. I understand that Nittany will mail my funds within 10 days
upon termination of the offering or rejection of my Application.
Subscriptions may be made by completing and signing this stock subscription
application and delivering to: Nittany Bank, Escrow Agent for Nittany Financial
Corp., 116 East College Avenue, State College, Pennsylvania 16801, (or, to
Nittany Financial Corp., P.O. Box 10283, State College, Pennsylvania 16805, if
mailing this stock subscription application). In its discretion, Nittany
Financial Corp. may terminate the offering at any time. However, the offering
period will terminate no later than June 30, 2005. THE STOCK SUBSCRIPTION
APPLICATION MUST BE DELIVERED TOGETHER WITH THE FULL AMOUNT OF THE PURCHASE
PRICE FOR THE SHARES SUBSCRIBED, IN UNITED STATES DOLLARS, BY CHECK, BANK DRAFT,
OR MONEY ORDER, MADE PAYABLE TO "NITTANY BANK, ESCROW AGENT FOR NITTANY
FINANCIAL CORP."
Upon each closing, all funds received for subscriptions that are accepted by
Nittany Financial Corp. shall become capital of Nittany Financial Corp. together
with interest thereon. THESE SHARES OF COMMON STOCK BEING OFFERED ARE NOT
DEPOSITS AND ARE NOT INSURED BY THE FDIC.
A-1
NITTANY FINANCIAL CORP.
STOCK SUBSCRIPTION APPLICATION
Number of Shares ________ x $[26.00] per share = Amount of Subscription $____________________ __
Are you currently a shareholder of Nittany Financial Corp.? Yes [ ] No [ ]
Are you currently a customer of Nittany Bank? Yes [ ] No [ ]
(Note: Shareholders and customers may receive preference in the event of an over subscription.)
State of residence ____________________________________________
REGISTRATION INFORMATION:
PLEASE CHECK AS APPROPRIATE AND WRITE OUT THE WAY IN WHICH SHARES ARE TO BE
REGISTERED:
Name(s) in which shares are to be registered:
__________________________________________________________________________________________
Social Security Number or Tax ID Number __________________________________________________
Address of Subscriber
City ________________________________ State _____________ Zip Code _____________________
Telephone Number: Day: ___________________ Evening: ______________________________________
[ ] INDIVIDUAL
[ ] JT TEN -- as joint tenants with right of survivorship and not as tenants in common
[ ] TEN COM -- as tenants in common
[ ] OTHER ____________________
[ ] Uniform Transfers to Minors Act ___________________________________________________
(custodian)
Custodian for ___________________ under Uniform Transfers to Minors Act, State of
(minor)
____________________
(state)
[ ] IRA, SEP or KEOGH Account #________________________________________________________
Note:If the Subscription Application is on behalf of an IRA, SEP or
KEOGH, the registration name above must read exactly as does the
name of the IRA, SEP or KEOGH account.
Brokerage Firm ______________________________________
Broker ___________________________
Broker's Phone No. ________________ Custodian Firm _____________________________
Mailing Address of Broker or Custodian
________________________________________________________________________________
________________________________________________________________________________
STOCKHOLDER/CUSTOMER:
CHECK HERE IF YOU ARE A STOCKHOLDER [ ] CUSTOMER [ ]
I HAVE READ AND RECEIVED A PROSPECTUS, DATED ___________, 200_, AND HEREBY AGREE
TO THE TERMS OF THIS APPLICATION.
Signature of Subscriber _____________________________________ Date: _____________________
A-2
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH THE OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE AFFAIRS OF NITTANY
FINANCIAL CORP. AND ITS SUBSIDIARIES MAY CHANGE AFTER THE DATE OF THIS
PROSPECTUS. DELIVERY OF THIS DOCUMENT AND THE SALES OF SHARES MADE HEREUNDER
DOES NOT MEAN OTHERWISE.
NITTANY FINANCIAL CORP.
[LOGO]
UP TO
115,000 SHARES
COMMON STOCK
-------------------
PROSPECTUS
-------------------
DATED _________________, 2004
THESE SECURITIES ARE NOT DEPOSITS OR
ACCOUNTS AND ARE NOT FEDERALLY
INSURED OR GUARANTEED.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Sections 1741 through 1747 of the Pennsylvania Business Corporation Act
sets forth circumstances under which directors, officers, employees and agents
may be insured or indemnified against liability which they may incur in their
capacities as such.
Provisions regarding indemnification of directors, officers, employees or
agents of the Company are contained in Article 10 of the Company's Articles of
Incorporation.
Under a directors' and officers' liability insurance policy, directors and
officers of the Company are insured against certain liabilities, including
certain liabilities under the Securities Act, as amended.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
* Legal services.............................................$ 45,000
* Accounting fees............................................ 12,000
* Registration fees ......................................... 1,000
* Postage and Transfer Agent................................. 6,000
* Printing and engraving..................................... 17,000
* Blue Sky expenses.......................................... 5,000
* EDGAR expenses............................................. 5,000
* Miscellaneous.............................................. 9,000
-------
TOTAL .....................................................$100,000
=======
- ---------------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
II-1
ITEM 27. EXHIBITS:
The exhibits filed as part of this Registration Statement are as
follows:
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.*
5 Opinion of Malizia Spidi & Fisch, PC
10.1 Employment Agreement between Nittany Financial Corp. and David Z.
Richards*
10.2 Nittany Financial Corp. 1998 Stock Option Plan**
23.1 Consent of Malizia Spidi & Fisch, PC (included in Exhibit 5)
23.2 Consent of S.R. Snodgrass, A.C.
99.1 Form of Subscription Agreement (included as Appendix A to the
prospectus)
_____________
* Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-57277) declared effective
by the Securities and Exchange Commission on July 31, 1998.
** Incorporated by reference to the identically number exhibit to the December
31, 1999 Form 10-KSB filed on March 28, 2000.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 ("Securities Act");
(ii) Reflect in the prospectus any facts or events which individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, the undersigned
registrant shall treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling
II-2
person of the small business issuer in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(5) (i) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(ii) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of State
College, Commonwealth of Pennsylvania, on November 29, 2004.
NITTANY FINANCIAL CORP.
/s/ David Z. Richards
---------------------------------------
David Z. Richards
President, Chief Executive Officer and
Director
We the undersigned directors and officers of Nittany Financial Corp. do
hereby severally constitute and appoint David Z. Richards our true and lawful
attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said David Z. Richards may deem
necessary or advisable to enable Nittany Financial Corp. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the registration
statement on Form SB-2 relating to the offering of Nittany Financial Corp.
common stock, including specifically but not limited to, power and authority to
sign for us or any of us, in our names in the capacities indicated below, the
registration statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that David Z. Richards
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of November 29, 2004.
/s/ Samuel J. Malizia /s/ David Z. Richards
- --------------------------------- --------------------------------------------
Samuel J. Malizia David Z. Richards
Chairman President, Chief Executive Officer and
Director
(Principal Executive Officer)
- --------------------------------- --------------------------------------------
William A. Jaffe David K. Goodman, Jr.
Director and Secretary Director
/s/ Donald J. Musso
- --------------------------------- --------------------------------------------
J. Garry McShea Donald J. Musso
Director Director
/s/ D. Michael Taylor /s/ Gary M. Bradley
- --------------------------------- --------------------------------------------
D. Michael Taylor Gary M. Bradley
Director Vice President and Chief Accounting Officer
(Principal Accounting Officer)